Macro Economics
Food for Thought

Related Links
Discussion Boards

By washcomp
January 15, 2009

Posts selected for this feature rarely stand alone. They are usually a part of an ongoing thread, and are out of context when presented here. The material should be read in that light. How are these posts selected? Click here to find out and nominate a post yourself!

Not a rant, but what I think is an objective observation (and wish, without getting political, to be told that I'm wrong):

OK, so you've decided to buy stock issued by a firm. WHY? Well, you expect the value of the stock to rise and you may expect excess profits to be spun off as dividends. The executives of the firm are supposedly your employees and should be paid according to how well they do in protecting your interests.

There has been a well documented movement toward boards of directors (who, frequently form an incestuous group in that the members are executives at other firms and apparently birds of a feather ... and all that) granting excessive compensation packages to "keep" high level executives from going elsewhere. This is like paying gifted sports stars high salaries, but good executives are not as unique as good sports stars. While they are not a dime a dozen, they are not a rare breed either.

While, on a philosophical level, many of us support the union labor movement, from a shareholder's perspective, every dollar paid to labor which does not translate into an equivalent increase in productivity is that much less that the shareholders can re-coup.

For the heck of it, let's talk financial institutions. For the past decade, these firms have been raping/pillaging/burning to amass huge gross profits. Much of that money never reached their shareholders as it was paid as bonuses - not only to high executives, but also to what we might call salesmen/saleswomen. OK, the $hit has hit the fan and the money has dried up. The firms are insolvent and begging the government for largess. Should the shareholders receive the benefit of this largess? That is the $64,000 (or more) question.

The shareholders during the times of plenty, while making money, probably did not make what they should have if the boards of directors didn't drop the ball. There is also no guaranty that the current share holders were the ones holding the ball while the abuses were carried out over the past decade.

I am not trying to defend or indict any of these groups, but the government's approach of making the shares of our financial system essentially worthless by denying the current shareholders any chance to profit, while in the apparent best interests of the taxpayer, will turn these firms into shells with no prospect of attracting new equity capitalization.

The current situation "is what it is" and this scenario will play out with the bank shareholders as whipping boys (and maybe rightly so in the respect that they did not exercise the control they could have over their management team). I just want to point out that the trust, transparency and credibility of the investor when evaluating future government actions will have been sorely damaged.

Facing taking government funds (for instance under TARP) to acquire, at the government's request, failing firms which have to be funded with taxpayer dollars, puts a financial firm in the unenviable position of destroying the valuation held by its owners. It would be a better strategy to liquidate and split the funds between the owners (assuming the financial firm was solvent - if not solvent, why weaken it by piling on someone else's problems/mistakes).

I don't want to get into the "socialism" thing as I think these ideology labels are so loosely used today as to be meaningless, but the government (or FED), by the actions currently being floated, will, by default, end up as owning our financial system (as there will be no incentive for anyone else to own the shares).

If this process extends out to other industries (automotive, infrastructure, porn), while the government can exact more control over wage rates and monetary policy, it changes the landscape in a direction which does not parallel what we have been taught in school to call capitalism.

End of story,