Stressed over AIG & Lehman Brothers? Learn before you burn!

Kurt's Briefs  > Corporate governance, Securities >  Stressed over AIG & Lehman Brothers? Learn before you burn!

“Sue them, jail them, make them pay,” cries Ann Woolner. “I’d fire Chris Cox,” shouts John McCain. Floyd Norris chimes in, “Had the S.E.C. gone over the records of Lehman and Bear Stearns with the vigilance it now promises for the shorts, we might not be in this mess.” Steve Covey: “Seek first to understand.” Whoa! How’d Covey get in there?

Too many pundits and politicos over the past couple of days have rushed to condemn what they simply do not understand. Woolner’s piece offers a nice illustration:

As it stands, the rest of us will be paying much money over a long time for the greed and bad judgment of those who melted down the economy.

Hundreds of billions of taxpayer dollars are propping up firms that a relative few money lenders and Wall Street wizards ruined.

If that weren’t enough, the crisis is shrinking the money that Americans diligently socked away for retirement, down payments on first homes, college for the kids or this winter’s heating bill. We might as well have opened our windows and tossed out cash.

Woolner echoes widespread, ill-informed emotionality. We don’t even know at this point whether the market has or will “melt down.” As I write, the DOW industrials are up 442 points over Thursday when they were up 400 points over Wednesday. If this is a melt down, give me some more. But let’s assume that the market does melt down at some point. Then what?

People are understandably worried and confused over market volatility stemming from the failure, buyout or bailout of banking and insurance giants like Merrill Lynch, Lehman Brothers and AIG. Responsible commentators — and political candidates — would lead best by not fanning the flames. First, do no harm.

Internal inconsistencies in Woolner’s article — in which she demands that “executives who inflicted all this financial pain” be jailed or sued but confesses there’s no way to accurately assign blame for such a widespread event — reflect the factually conflicted, complex nature of what has happened not to mention what may yet take place:

Toss the rascals in jail. Criminal prosecution allows the government to seize ill-gotten gains. Snip the straps off those golden parachutes and grab them. Take over bank accounts, investment accounts, mansions, private planes and yachts.

Assuming that the market crashes, will “rascals” be responsible? Is every market downturn the result of a criminal or negligent act? I think not. Greed, perhaps. But mere greed is neither criminal nor cause for a civil action. Greed is a social ill, but not all social ills must be remedied in court.

Moreover, if we assume rascality at the outset, before any real fact-finding, don’t we run the risk of creating an environment that will send innocent people to jail or wrongly take property from innocent members of a stereotyped class? I think so. Woolner admits as much in quoting former prosecutor Robert Mintz:

“These are broad, sweeping market failures that have swept up so many individuals and so many institutions that prosecutors will have a hard time singling out any entity, much less any institution, and hold them responsible,” says Mintz, a partner in McCarter and English in Newark, New Jersey.

Woolner’s response? “OK, so file civil suits.” Huh? If we can’t fairly and accurately place blame, why make just anyone pay for what may turn out to be a perfect storm created by everyone?

Some, like Woolner, want to pretend they have the answers. Others, like U.S. Senate Majority Leader Harry Reid have been more circumspect. Yesterday, Reid was quoted as saying that “no one knows what to do”. Hence, the Senate, recognizing its own considerable limitations, will adjourn and let the “experts” unravel the mess. Good for Reid. Truth be told, Reid probably also realizes that Democrats have as much as Republicans to lose from hasty hearings and legislation. The list of Democrat investors in AIG and Merrill Lynch is fairly long.

Meanwhile, those who really want to understand — rather than just start a riot or get elected President — might want to get educated before shooting off their mouths. One article that offers valuable insight into the role of credit default swaps in the AIG debacle is this one by Jesse Eisinger. Hint: Accounting standards a regulation had nothing to do with this. Excerpt:

The markets are inundated with zombie myths. No matter how many times you stab them through the heart, you just can’t kill them.

What’s taking down these grand financial icons such as Lehman and AIG? It couldn’t possibly be that the companies themselves made stupid and shortsighted decisions. So it must be a conspiracy of the short-sellers. It must be some wrong-headed accounting rules and bad regulation.

In the wake of the demise of AIG, we are hearing them [the zombie myths] again. If only the insurer didn’t have to mark its positions to market, this foolishness would have been avoided and we’d all be celebrating how wonderful the economy is. The SEC has rushed to put up restrictions against short-selling again.

And in the Wall Street Journal today, Zachary Karabell writes that the “root cause” of the current meltdown is “bad regulation.” His evidence? That AIG had to mark its positions to the market even though it issued a statement saying that the market was getting it wrong.

It issued a statement! Well then! Case closed.

Not so fast. It seems we must review the case of AIG What exactly went wrong at the insurance behemoth? . . .

Give it some thought, folks. Take a deep breath. The market may yet recover. Yes, the U.S. government will have to spin off AIG. But it’s a little early to declare that the sky is falling and that someone should hang for it. If we want to enjoy the upside potential of free markets, we must have sufficient personal discipline to endure the inevitable downside.

If we insist on driving risk out of the system through increased regulation or draconian white-collar prosecutions, we’ll soon enough end up reading Granma, driving a Trabant, and drinking bad coffee in gray government-owned tenements. Some members of society might enjoy that. But I have a feeling that the majority still have enough courage and entrepreneurial spirit to take a market drubbing every now and then with good grace and long-term optimism.