The Paulson Plan…2.0

by Jacob Zamansky on September 23rd, 2008 at 4:34 pm : Comments 001

Two years ago, if you mentioned “The Paulson Plan,” you would be referring to Wall Street’s attempt to further deregulate themselves under the cloak of patriotism.

“We need less rules or else America will be less competitive,” they told us.

Today, we are again debating “The Paulson Plan,” and indeed, America’s competitiveness is at stake but this time, universally it is acknowledged that Wall Street’s unbridled greed put us here in the first place.  Secretary Paulson, with his $500 million Goldman Sachs pedigree, is unarguably a member of the club.

And so at this juncture, I believe it is appropriate that we ask ourselves, can we trust this man with a trillion dollar blank check when he’s singing such a different tune on regulatory reform?  Mind you, this is not a critique of the band-aid solutions Secretary Paulson has orchestrated to date - that’s what history books are for - but rather hand raised on behalf of investors.

As an investor advocate, I see nothing in this bail-out that addresses the systematic fraud that was committed against investors.  As I’ve written about before, many investors are still holding distressed securities that were pitched to them as cash equivalents, conservative long term securities and any number of other ways contrary to the truth. Therefore, as a condition to unloading toxic debt onto the taxpayers - as is The Paulson Plan 2.0 - Wall Street should be required to make their customers whole.  Whether its an investor that bought auction rate securities, Citigroup’s ELKS (derivatives), short-term bond funds, preferred stock of financial firms, hedge funds or whatever the case may be, if an investor was mislead they should get their money back.

Frankly, it’s shameful that investor protection is even still an issue after the tech-bubble destroyed millions of investors’ net worth.  The systemic problem can be summed up in an email uncovered from a Merrill Lynch executive as she prodded her brokers to sell more auction rate securities: “Let’s move these microwave ovens!!!” she said.

Well, if Wall Street considers its products like microwave ovens, then they deserve to be regulated as such.  Which is why I subscribe to the idea of a consumer protection agency for investors.  As Yale professor and predictor of the real estate bubble Robert Shiller suggests, the financial services industry should be “democratized.”  He recommends a consumer advocate akin to the Consumer Products Safety Commission to look after the little guy, ensure disclosures are prominent and clear, and perhaps most importantly identify inherent conflicts of interests.

I hear the cat calls…what about the SEC?  Isn’t that what they are there for?

The SEC was created in 1934 as a result of the stock market crash of 1929.  Given its performance since then, it’s only fitting that it should be replaced as the guardian of the individual investor in the midst of the greatest financial disaster since those dark days.

It’s also no coincidence that the phrase “white-collar crime” was coined during the Great Depression.  In the aftermath of every financial crisis, there are those that have paid the price for their roles.  This was true during the S&L crisis and the dot-com bubble. Similar fallout is justified today.

So a little comeuppance is in order for the Wall Street’s C-suite executives that either knowingly or unknowingly stuck their head in the sand while the American financial system was destroyed.  Lehman Brothers, for example, should not get a free pass for the rosy assessment of its balance sheet and for saying that short-seller David Einhorn’s comments about their valuations “had no basis in fact.”

Simply put, I’m not comfortable with the fact that financial services industry executives who have put the United States in grave danger should only have net-worths of $5 million instead of $500 million.  It would be one thing if these individuals put their own money at stake - something entrepreneurs should receive tax incentives for doing - but these people gambled with other people’s money and lost.

Its sometimes said that the best way to rob a bank is to own one.  Wall Street did that and much, much more.

Finally, there’s a lot of discussion about executive compensation on Wall Street.  You won’t get an argument from me that its out of control, but socializing incentives sets an awfully distressing precedent.  Rather, as I’ve advocated before, Wall Street should be compensated over prolonged periods during which time it can be assessed whether their performance had long-term benefit to shareholders.  Brokers and the mad-scientists behind the structured products movement would be measured according to how many customers filed arbitration cases.  Investment bankers would be held accountable for the client’s performance after an M&A transaction.  And CEOs would have to show sustained increases to shareholder’s equity.

These considerations arguably are only the beginning.  So again let’s ask ourselves, is the former CEO of Goldman Sachs who we want crafting the biggest financial bail-out in history?

Filed under CEOs, Uncategorized
and Paulson Plan, Wall Street Bail-out