11/01/2011 12:35 pm ET | Updated Jan 01, 2012

Capitalism 2012: Rewriting the Rules of the Game

To paraphrase the late Senator Daniel Patrick Moynihan, "[Capitalism] may not be a perfect system, but show me a better one." To date, there isn't one. But in the wake of the widening economic inequity in America and around the world, the old rules of capitalism are long past due for a drastic 21st century overhaul.

In a conversation with the CEO of a $14 billion dollar hedge fund (Chapter 4 in my new book: Conversations with Wall Street), he states that, "Capitalism has been responsible for creating more prosperity than any other system, but people are beginning to believe the system is rigged." From outside looking in since the unprecedented bailouts began 3 ½ years ago, as unemployment and the housing crisis continue unabated, the system looks increasingly "rigged."

For all practical purposes, from March 14-16, 2008 when the Federal Reserve, NY Fed and the U.S. Treasury under former Goldman CEO Hank Paulson orchestrated a $30 billion rescue for the fifth largest investment bank in the world and set the share price at $2 that had been trading at $98 a month before, capitalism in all its Friedmanesque Randian glory suffered a quick and brutal death. "Raw Capitalism," as Paulson termed it, and we once knew it, was over. Dead on Arrival and a new day for finance was born.

Government-sponsored capitalism is an oxymoron. The extraordinary government intervention revealed it was something else entirely. Not "crony capitalism" as has been improperly reported, but rather a system that resembles a socialist model more than anything else. The "sale" of a shareholder-owned financial institution to another firm with a massive infusion of publicly guaranteed funds broke the fundamental rule of capitalism: If you sink, there will be no one there to save you. Well, they did and there was.

The rest as they say is history. The bailouts that began with Bear, paused briefly with the industry's sacrificial lamb Lehman, and continued with Fannie, Freddie, AIG, Goldman Sachs, Morgan Stanley, Countrywide, Citigroup, Bank of America, every foreign and regional bank under the sun, car companies, and secret taxpayer infusions into non-endemic companies like Dell Computers and MacDonald's. Let me ask you a question: If Dell and Micky D's went bankrupt would the American financial system still be standing? Would a restructuring of MacDonald's debt have devastated the taxpaying public? It might have affected their waistlines, but not their wallets. So here's another question: What in the name of "money" were they thinking? Not capitalism, that's for sure.

The Rigged Game

So the view of the outraged American public voiced by groups of growing influence like Occupy Wall Street is that the game is definitely rigged. A former member of the Treasury Department, who was there throughout the "rescues" and a key member in the banking bonus talks explained very simply: "The American government made a decision that any bank that was too big-to-fail would be supported for the good of the country. The potential systemic damage to the general public was too great." I said, "Okay, I get that. But how come there weren't any rules or conditions attached? Why did the government not take over the banks and nationalize them until they came out of insolvency? This way they could fire inept management, reckless producers, monitor expenses and bonuses, and establish lending practices from a direct position and not have to beg the firms to do the right thing?" He said, "We didn't want to move away any further from the capitalist model than we already had."


FYI: Capitalism says if you break it, you own it. When taxpayers are forced to support a $700bn--ultimately trillions in backdoor bailouts--they/we own it. The public is screaming: "It isn't yours to keep anymore boys, we paid the bill."

So perhaps this whole history lesson is jogging our memory and letting us in on a little secret about the increasing public discord: "You broke it," says the general public to govies and the Street, "We fixed it. Then you said, 'Thanks for nothing. We didn't need your help anyway. I am taking the ball back.' The Feds said, 'Yes, Street go ahead. And taxpayers no more guff from you, take your marbles and go home.'" If any of you follow football, it would be like the quarterback throwing the ball, the other team intercepting it and running for the touchdown. The referee stops the game saying, "Sorry, that touchdown doesn't count, because the QB was having a bad day. We're going to do that over." Let's face it, there would be blood.

So that brings us to where we are in America today: a growing public rebellion against a rigged system, a deep-seated belief by diehard capitalists that the basic tenets of the system have been violated, and the rest of us in the middle saying, "You know they have a point." Basically, the far left and far right in the economic conundrum are expressing what is becoming more and more the cry of the moderate mainstream, "Show me the money: Where is it, what did you do with it, and how come we didn't get any of it?"

It's hard for capitalists to conceive of government-sponsored infusions put directly into public hands. These are called "entitlements." But cash infusions into institutional hands are called, "necessary." Non capisco. That does not compute.

It's easy to understand the theory that we cannot violate capitalist rules of sink or swim; but the truth is we already have. In fact, given the mess left behind, we shouldn't have stopped there. We should have saved Lehman and restructured all of the national mortgage debt too. From most professional views, the bailouts to these big investment and commercial banks were needed to stave off a worldwide depression. But you know what? We actually have one. For the millions of unemployed who can't afford to feed their families, small business owners who can no longer hold on, struggling homeowners and consumers who are mercilessly oppressed by unrelenting debt and the kids sleeping in Zuccotti Park, this is a Depression. That is why they are crying out for help. As a civilized enlightened society, all of us should be listening. They speak a truth we cannot ignore: In Justice We Trust and injustice we cannot abide.

Personally, I don't blame "Wall Street," because I know the majority of the industry was not part of the banking collapse. But the biggest lesson is, we rise or fall together. I do hold those firms, firm managers, government leaders and reckless professionals who brought us to our knees responsible for our current economic divide and the continuing hardship for millions of hard-working people who took the fall for a gluttonous few. Yet perhaps there is something we all need to take a look at in the "raw" capitalism model itself.

This model claims that "profits at any cost" is not only okay, but encouraged. This model declares that anything we do in the name of the almighty buck is acceptable--even if it takes the country down with it. For most of us, that old dinosaur is dead. To create profits at the expense of other people is no longer acceptable, nor even realistic. Clearly, this myopic view of finance doesn't work. Just take a look at the unemployment lines. If it doesn't work for you, it doesn't work for me.

I was chatting with an international banker recently. He is a major shareholder of a small investment bank, part owner of an asset management company, senior board member of several international investment companies, former top manager at a large commercial bank and a Wharton grad. Basically, a capitalist's capitalist.

Since his was a particularly informed view, I asked, "What do you think? How did we get into this mess? Do you think the public has a reason to be outraged?" He surprised me and said simply, "We should never have bailed Bear Stearns out. And yes, public anger is justified."

I said, "What would you have done?" He replied, "I would have let all the investment banks fail. Because it sent the wrong message--that you can do anything, completely mismanage your firm, shortchange your shareholders and get away with it. Every manager at the five investments banks should have been fired. None of them should have been paid anything."

He used this analogy: "If you were going bankrupt, would you go out on a spending spree, take a vacation and pay yourself a bonus? Or would you figure out a way to pay your debts first? Why were these firms allowed to do this? They were investment banks, not commercial banks. The average person would have not have been hurt by their collapse. And to say that there was no one else qualified to do a better job is absurd."

I thought about that for a moment. It made sense, although the magnitude of such economic failure was unfathomable to me. I asked, "Wouldn't we be far worse off now than before?" He answered, "The proof is in the fact that the problem isn't fixed. The hole is still there and bigger than ever. Unemployment is over 9%, really more like 14 or 15%. The Feds thought the problem would miraculously fix itself. They thought housing would bounce back on its own without any change in job creation or the mortgage model."

I asked, "What would you do now, if anything, to change it? Would you help the unemployed and homeowners directly?" The banker said simply, "We have to. We should put $100bn into small business directly. Here it is, free with no interest. Only condition is you must hire, and then you get the money. Then we make a direct infusion into mortgages at the corporate level. We tell banks to write down the interest, principal and payments say 30% and with that condition put the money directly into the firms holding the mortgages. Maybe everyone, homeowner, lender, investor takes a small haircut, shared by all, but is made whole for the most part by the Fed. It's the only way to solve the problem now. If we don't do this, it's going to get much worse."

It was a lot to chew on, but I knew he was right. Capitalism in its former 20th century primitive state is dead. The rules have been rewritten by the chief capitalists themselves at the Federal Reserve in Washington, in New York and at all the top firms that participated in the government rescues. America was ready for the new rules of capitalism to be applied at all levels of the economic system. A kind of socially enlightened capitalism that serves the needs of citizens along side of private interests and not a barbaric survival-of-the-fittest capitalism that thrives at the expense of society.

As the capitalist banker explained, "The money is perched at the top. It has to be forced down." Yes indeed...and soon.