Sense on Cents

Long term financial health and well being is predicated on fiscal discipline, core values, and strong management. These principles are necessary for major corporations and also individual family units. The market has a means of rewarding corporate units that practice these principles and punishing those that don’t. Enter into the world of finance 2009 when a number of financial units (Citi, AIG, Freddie, Fannie) are kept alive despite not practicing those principles.

Both shareholders and employees of these companies bear the risk of being connected to such institutions. It remains a challenge as to how to operate these institutions in the context of truly free and open markets. In light of these challenges, it is no surprise why other organizations would not want to have Uncle Sam as a partner. 

Who needs a Washington bureaucracy dictating business principles? Who needs a Washington bureaucracy involved with lending decisions? Who needs a Washington bureaucracy influencing compensation practices? Isn’t the market supposed to figure out these practices on their own?

Stuart Varney, highly regarded commentator and a native of the U.K., offers chilling commentary on this topic and why the government is not accepting repayment of money that had been provided to banks against their wishes. In the WSJ Varney writes:

The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell ’em what to do. Control. Direct. Command.

It is not for nothing that rage has been turned on those wicked financiers. The banks are at the core of the administration’s thrust: By managing the money, government can steer the whole economy even more firmly down the left fork in the road.

The government may indicate that they do not look to control the banks. Is there any doubt, though, as to the desires of those controlling Congress? I think all we needed to see was their performance during the AIG bonus fiasco to understand their controlling and vindictive nature.

I do not condone or promote excessive pay for government employees. Make no mistake, the employees of Citi, AIG, Freddie Mac and Fannie Mae are government employees and should be paid as such. Beyond that, private companies should have strong corporate boards that are held accountable to promote responsible compensation practices.

As an example of what should not happen in a free and open market that promotes capitalism, Varney offers:

Here’s a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons. It wanted to recapitalize the banks to halt a financial panic.

Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He’s been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists. That’s politics talking, not economics.

Markets badly need strong rules and regulations. Markets do not need excessive political interference. Why hasn’t the Pay for Performance Act received more coverage? Varney sheds further light:

Which brings me to the Pay for Performance Act, just passed by the House. This is an outstanding example of class warfare. I’m an Englishman. We invented class warfare, and I know it when I see it. This legislation allows the administration to dictate pay for anyone working in any company that takes a dime of TARP money. This is a whip with which to thrash the unpopular bankers, a tool to advance the Obama administration’s goal of controlling the financial system.

Varney’s analysis reminds me of something I wrote on February 3rd in a piece entitled Be Careful What You Wish For:

“Be careful what you wish for!” I make this statement because if government is actively involved in establishing compensation practices throughout an industry, then do not be surprised if they look to use that precedent across other industries and other situations. Some may view that as unlikely, but I have already been hearing about situations that would question the validity of contracts, the belief in private business, and results of corporate negotiations. If government intervenes in areas they deem as in the public interest, where does one draw the line?

Varney concludes:

After 35 years in America, I never thought I would see this. I still can’t quite believe we will sit by as this crisis is used to hand control of our economy over to government. But here we are, on the brink. Clearly, I have been naive.

LD

This entry was posted on Saturday, April 4th, 2009 at 8:45 PM and is filed under American Consumers, Banking Institutions, Congress, Wall Street. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.