Since Monday, the “Paulson Plan” has been thrust into intense debates at Senate hearings as Democrats and Republicans unite in their dislike of this mind-numbing $700 billion bailout of the nation’s financial system.
I find such actions amusing, if not hypocritical. Here the congressmen are, riding on a high horse, harping taxpayers’ interest and wanting to put safeguards into this bailout. But none were as outspoken during the roaring bull run. In fact, many of them supported investment bankers in their quest for deregulation and free market economics.
US capitalism was held up as a shining beacon for increased growth and prosperity to developing nations. Whether it be through coercing or cajoling, countries like China and Russia fell in love with these principles. However, when the party is over, lines were drawn clearly and the most ardent fans turn into stern critics.
This situation is eerily familiar to previous crisis. Since the investing public tends to forget recession pains easily, let’s just turn the clock back a few years. At the start of the millennium, we saw the cataclysmic burst of an internet bubble followed by business scandals which rocked the financial markets.
The business fiasco in 2001 which exposed fraud, accounting scandals and weak corporate governance in A-listers like Enron, Tyco, Global Crossing, World Com shocked a lot of Americans. More importantly, the ethics of investment banks was blown out of the water.
Investigations launched by then Attorney General, Eliot Spitzer, revealed that biased research and illegal commission kickbacks was systemic among investment banks. A rampant process of “spinning and laddering” was utilized to attract extra business from clients and to trick the gullible public into paying for overvalued IPO shares.
Fury erupted when the truth emerged. The media turned against the investment banks and labels of corruption were strewn about liberally. Talk show hosts distanced themselves and denounced star analysts who had pulled in the crowds for them previously. Investment banks were hauled up before congressional committees and good old President Bush joined in the fray with this theme called corporate responsibility.
Bush pledged to “end the days of cooking the books, shading the truth, and breaking our laws” and emphasizing that “stock analysts should be trusted advisers and not salesmen with a hidden agenda.”
I highlight here some of his other choice words which I feel are particularly important.
1. Yet, when a company uses deception, executives should lose all their compensation, gained by the deceit. Corporate leaders who violate the public trust should never be given that trust again.
2. Responsible leaders do not take home tens of millions of dollars in compensation as their companies prepare to file for bankruptcy, devastating the holdings of their investors.
3. The burden of leadership rightly belongs to the chief executive officer who set the ethical direction.
4. The pay package sends a clear signal whether a business leader is committed to creation of wealth for shareholders, or personal enrichment.
5. Shareholders also need to make their voices heard. They should demand an attentive and active board of directors. They should demand truly independent directors. They should demand that compensation committees reward long-term success, not failure.
Excellent, you can’t get any more ethical than this speech which was given in 2002. If all these points were effectively implemented, pray tell, why are we staring at an unprecedented $700 billion bailout in 2008? The situation in 2002 was as bad as today; credit dried up, stock volume shrivelled, mergers withered, IPOs were untouched. Falling revenues led to pay cuts and downsizing. Investment bankers were forced to work twice as hard for half the pay…
But the bulge-bracket investment banks survived by making the best out of the lean years, nobody had to bailout anybody back then.
Yet today, after the supposed clean up of bad practices 6 years ago, the investing public ended up worse off, not only losing much of their investments in virtually everything (from stocks, bonds, commodities, housing) but also having to pay higher taxes many years down the road when these toxic assets gets flushed down the drain.
Why has the investment banks again been allowed to go on a rampage? It is quite clear that Bush has reneged on his promises to reform the industry. I am sure Bush can spin a nice story but apparently he lacks the will to get tough.
If truth be told, I couldn’t care less if the bailout package involves $500 billion, $700 billion or $1 trillion dollars. By the burst of the next bubble, American taxpayers will be slapped with bigger tabs to pick up. That much is clear so long as investment bankers spell deregulated wrongly as unregulated.
If American voters do not choose the next President as one who exhibits resolve in tackling bitter but necessary financial reforms, there will be more bailouts in future and most likely, they will put this Paulson Plan to shame with their enormity.
So once again, my message is clear. It is pointless to quibble over the details of this bailout. Looking forward, the wrongdoers have to be brought to justice. Adequate laws and supervision have to in place to protect the investment banks from themselves. Whistle-blowers should also be encouraged to speak out on bad corporate practices to protect the investing public.
Despite all these scandals, bankruptcies, and bailouts, my main concern is that everybody falls head over heels with the free-for-all free market principles again when the good years are here. If we don’t learn from past mistakes, we should get ready for more blank checks. In fact, I believe we can look back on this $700 billion bailout a few years later, and congratulate ourselves that this is nothing but pittance.