November 24, 2010

This rule also does nothing to benefit people such as Mr. Kane, who deals in statistical trades rather than long-term investments. There is an entire class of hedge-fund operators that exists to remove the most egregious examples of executive graft and incompetence. If Kane’s plan were put into effect, a lot of these guys would be put out of business. The fact that there’s a fairly large and profitable set of funds which do nothing but buy these companies and fire their overpaid incompetent executives indicates that there is something dreadfully wrong with American capitalism. As the great predator capitalist and prose stylist Robert L. Chapman put it:

…modern capitalism is characterized by pervasive oligopoly and the separation of management from ownership. For a decade now, I have lamented publicly via Schedule 13D filings how fragmented equity ownership converts capital-risking “€œOwners”€ into un-concentrated, faceless, DTC-coded “€œshareholders.”€ In this conflicted world of “€œAgency Capitalism,”€ a board and its hired hands (together, the “€œAgents”€) conveniently lose sight of the most important fact of their corporate lives: the Agents work for the Owners….

The second quant idea is too late to implement now, but it is likely to come up again as long as our banks remain lunatic casinos rather than, you know, banks. Why was TARP handed out to a bunch of gambling failures? Think about this for a moment. While the financial system was broken and the consequences were terrifying, handing money to the same clowns who broke the system in the first place was…monstrous. Famed Wall Street Nerd David Leinweber and Salman Khan (of Khan Academy fame) had a different idea while this was going on. Why not use the money to start 30 new banks? Since the money comes directly from taxpayers, everyone who pays taxes can be given shares in the new banks. These new banks can be staffed by regional bankers rather than the numskulls who crashed the financial system in the first place. No government ownership, no bureaucratic meddling, no moral hazards: just plain old capitalism.

You might argue that many Americans wouldn”€™t want their tax dollars funding such an enterprise. I can tell you one thing: Nobody wanted their tax dollars to fund the bailout of wealthy bankers who immediately awarded themselves giant bonuses. At least the Leinweber/Khan plan allows you to sell your stock if you think they’re being idiots. TARP turned out reasonably well so far, but if the poop hits the prop again, a plan like this would be much more salubrious than simply forking the money over to yet another moronic zombie bank. The plan’s genius is that, while TARP injected $700 billion in liquidity into a financial system which desperately needed liquidity to continue doing business, using the money to capitalize banks would actually inject a lot more, since banks are only required to have a fraction of reserves on hand.

It also brings to light another thing which nobody seems to care about, which I’ll claim as my own: Why are these enormous “€œtoo big to fail”€ companies allowed to continue operations as they were before the collapse? If they are “€œtoo big to fail,”€ they need to be broken up into smaller companies which are not too big to fail. The nation doesn”€™t exist as a pool from which banks siphon wealth. Banks exist to make commerce possible. If these banks are “€œtoo big to fail,”€ we don’t need to guess at new regulations which may or may not tame these beasts. We need to make them smaller. Anti-trust acts already make this possible. All we need is someone willing to stand up to the oligarchs.


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