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"Too Big to Fail" Vs. "Too Big to Be Responsible"

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6.1% unemployment rates, 604,000 jobs lost since January, record foreclosure rates, near $4.00 per gallon gas prices, stagnate real wages, record prison population rates, and increasing food prices are just a few of the problems that plague American people in today's economy. As we all wait patiently for housing prices to stabilize and the dollar to climb back from oblivion, which many say could signal the end of this "slowdown", the United States and the entire world hold their breath. Can the American people catch a break? Is there a light at the end of the tunnel for the consumer?

One would say that both individuals and corporations are feeling the pain of this slowing economy...and they would be correct. The Dow Jones within the past year has gone from 14,280 and is hovering a little higher than 11,000 because corporations are suffering as well. Even though corporations and individuals suffer the same, does the government treat them the same? Logic would say that because they are all a part of the economy, there should be some equality in the treatment and assistance provided to them...doesn't it? If the people are too broke to shop at Walmart won't Walmart suffer? One would think so. However, with the expression "too big to fail" being sounded off on all news stations this year I have to admit to being very worried. I think that the expression "too big to fail" should be altered to "too big to be responsible". It seems as if as long as an entity is large enough, the personal responsibility and accountability argument gets thrown out of the window.

Let's examine a few events of just this year. Bear Sterns goes crazy purchasing high risk securities, gets excited when the dollars begin to roll in, and forgets all about the basic Finance 101 principles of asset allocation and diversification. James Cayne, CEO of Bear Sterns who was at the helm of this madness, was compensated a meager $132.14 million over the last five years of his career just to purchase poorly allocated investments! I think that a monkey and a dart could have done better for free! Not only was he heavily compensated but $29 Billion of YOUR tax dollars went to saving him from his irresponsibility because U.S. Treasury Secretary Henry Paulson stated that Bear Sterns was too big to fail.

Have you, as an individual, ever been bailed out when you have made some bad investments? The government did step in on April 20, 2005 with some assistance to individuals. After the internet bubble burst in 2000 many people who were heavily invested in stocks were hurt by the depreciation of the market. This resulted in a period of recession to the entire market. Real wages decreased, disposable income decreased, and consumer debt levels were at an all time high. People were using their credit cards just to pay for everyday necessities. What was the assistance in 2005, you ask? Was it a bailout just like Bear Sterns received? No! On April 20, 2005 George Bush passed into law the Bankruptcy Abuse Prevention and Consumer Protection Act! Due to the abnormally high amount of bankruptcies that were being filed, and the ensuing lack of tax revenues being received by the US Government from credit card companies, individuals like you and me were forbidden to file for bankruptcy without taking a course! Now that is protection!

I know because I actually created a personal financial literacy course for the US Department of Justice. It is very involved and significantly teaches individuals how to manage their resources more responsibly. I wonder if Lehman Brothers CEO Richard Fuld had to take a similar course before he declared bankruptcy for Lehman on September 14, 2008. Just as many individuals invested poorly in 2000 which lead to a complete fiscal breakdown, Lehman also was guilty of investing irrationally in securities collateralized by high risk debt within subprime markets (he was paid $354.03 million over the past five years of his tenure to select poor investments and run his 158 year old company into the ground).

Some of you might be asking, "What about the $300 billion legislation that was passed to allow those in foreclosure to refinance into FHA loans?" That is a very valid question. However, this legislation was not passed for you...it was passed for the corporations as well. If you analyze how the legislation is written you will see that there are many things written into the legislation that are in favor of the banks. One, the banks can choose which loans they can allow to refinance and which ones they cannot. Many of the loans that they will end up choosing are those which are so far delinquent that there was no hope in recovering its value. Whenever a bank goes through the timely and costly foreclosure process, it creates another item of debt that they are certainly not going go recover. Many banks have loans on the books which are nearly a year delinquent and in many cases the house has been abandoned for quite some time. It is worth it for the banks to choose only those loans to refinance into the FHA program.

Let us say for example that an individual has abandoned a home for 7 months and has not made a payment for even longer. I am the bank owner and I track down the owner and offer him a deal. The deal is that I will pay him $4,000 to enter into a new contract with the FHA. The FHA loan will be 90% of the previous loan value and you will essentially own 10% equity in the new loan. The individual will say yes because they now have $4000 in their pocket, 10% equity in a home, and a fresh new start with a new loan. The bank is happy because they have successfully, with a menial $4000 payment, put the loan off of their books and onto the books of the Government (i.e. your tax paying dollars). Many estimates have stated that as many as 50% of these new loans will go into default and you, John Q. Taxpayer, will be picking up the bill! Yes, they got us again!

Likewise, Fannie Mae and Freddie Mac is yet another example of Paulson stating that they are too big to fail. When Andrew Cuomo was the head of HUD in 2000 he was very influential in getting Fannie Mae and Freddie Mac into the "Alt-A", interest only, and specialty loans market. Both Fannie Mae and Freddie Mac saw a lot of potential in these markets because it was largely an untapped market. Individuals who typically could not get a traditional fixes loans were now able to afford loans and purchase homes. Within the specialty loan market, lenders were able to charge higher interest rates because of the lower credit scores. These higher rates lead to higher profits for Fannie Mae and Freddie Mac who would either manage these loans or bundle them to sell in secondary markets. Money began to flow, risk began to increase, loan to value statements were disregarded, greed settled in, and now we are in the midst of one of the largest financial market credit collapses since S & L. Again, to the tune of $200 to $300 billion we have to pick up the bill! If you were wondering, Fannie Mae CEO Daniel Mudd received $12.2 million in 2007 and Freddie Mac CEO received $19.8 million to run our economy into the ground with irresponsible investments. However, do not worry because the Federal Housing Finance Agency director, James Lockhart stated that the new CEO's compensation will be "significantly lower than the outgoing CEO's". Maybe they will only be paid $3 million or something modest (according to John McCain they will still not be considered rich). Don't you think that is fair? I need to ask you because it is now your taxpayers dollars that will be paying their salaries. Oh, one more thing...those CEOs who did such as fabulous job will be remaining as consultants in the new entity. I guess that if you are the center of a natural disaster it really does not merit you to be completely fired. Certainly, you know I am being facetious.

The hypocrisy goes on and on. We can look at the court case where Delphi sued the UAW to void a signed labor contract because it was too expensive. Have you ever been able to take your credit card company to court because you felt that the bill was too expensive for you to pay? I wish! Also, let's analyze the purpose of the federally funded Pension Benefit Guarantee Corporation (PBGC). If a corporation is unable to pay their pension obligation, the PBGC steps in to fund a "portion" of the underfunded portion of the pension plan. If John Q. Worker is promised to be paid a yearly rate of $50,000 in retirement and the corporation (because of a misuse of funds) is only able to pay John $30,000 per year, what happens? The PBGC steps in and may pay an additional $10,000 to John from your taxpayer dollars. (Yes, this is you helping out the corporations again). What happens to the balance of John's pension? It is wiped away and he does not receive it! Is there a PBGC for individuals who need help paying their debt just as corporations need help? Absolutely not!

John McCain, Ward Connerly, and the rest of the libertarian, accountability philosophers must only be referring to the individuals and not corporations. PBGC, tax breaks, bailouts, bankruptcy leniency, poor regulation...time and time again it seems as if all I have to do to get a helping hand in this country is to form a corporation! Maybe one day they will realize that all entities in this economy, both individual and corporate, are connected. It does no good if corporations are doing well but people are too poor to shop. It does not do any good if people are doing well but corporations are too poor to operate and drive economic growth. I agree with certain aspects of George Bush's bankruptcy legislation...I do think that before people declare bankruptcy they should take a course to make sure that they have explored all options. However, corporations need stricter regulation and monitoring. I believe in the free market economy, but once an entity becomes "too big to fail" it introduces the possibility that government intervention is a justifiable remedy. If it is possible for me to have to use my tax dollars to bail out an entity then I want the Government to step up and monitor those entities to make sure that they are properly capitalized and not operating irrationally while procuring risk. I would rather have cautious socialism than destructive capitalism any day of the week. If we have to bail them out when times are bad, but get nothing but the pleasure of seeing "record bonus" headlines when times are good then something has got to change!