One of the reasons the Dow Industrials index rose 936 points and the broader indices rose more than 11% in one day was because on a global scale governments decided to inject capital into banks and financial institutions. As I read today’s Wall Street Journal, the credit markets had become so dysfunctional that the only institution left with enough capital, or any capital for that matter, was the government.
How scary is this? Our government has agreed to invest taxpayer dollars, in the form of preferred stock, in banks and financial institutions, healthy and unhealthy, so that order could be restored to the marketplace.
As a taxpayer, I’m not concerned because preferred stockholders are among the first to be paid in the event of a bankruptcy, so there’s very little risk here. What concerns me is that if governments take an ownership stake in banks and financial institutions, they will be able to dictate how they’re run. It would not be inconceivable to have people like Senator Chuck Schumer and Rep. Barney Frank, two of the guys most responsible for our current crisis, to be on the Board of Directors of Citigroup, Bank of America and Wells Fargo. I only have to look at the bang-up job they did overseeing Fannie Mae and Freddie Mac to come to an appreciation for what kind of disaster this could bring.
Here’s my evidence: in an editorial piece in today’s Wall Street Journal, Chuck “IndyMac Killer” Schumer writes, “This means that under any capital injection plan that Treasury pursues, dividends must be eliminated, executive compensation must be constrained, and normal banking activities must be emphasized. There needs to be a clear stipulation for any institution receiving capital–these are public funds to be used to restore the capital position of banks and foster lending, not to be hoarded or to be used for exotic financial activities.”
Thank you Senator Schumer for removing the moral hazard of any financial institution. What in heavens name do you know about any of this? Who are you to dictate how these entities are to be run? If you eliminate dividends, why would anybody want to invest, since dividends represent a return of profits back to the investor? If you constrain executive compensation, how are these businesses going to attract and retain talent? This may come as a shock to you, Senator Schumer, but the brightest minds in America do not go into politics or government service (Paulson and Bernanke aside), because they have to deal with people like you.
Senator Schumer goes on to say “trust needs to be restored”. Here’s a newsflash, Chuck, we don’t trust you. This is why Congress has a 15% approval rating. Before you lecture us about trust being restored, perhaps you should work on your own trustworthiness. That, of course, would require you to look in the mirror, and what you find there could be scary indeed.