Time to Return Control of Capital Markets to Capital Owners

[The following is excerpted from Bill Cara's Daily Report]

Anybody in the world who is aware that something called the stock market exists is now mouthing the words Lehman Brothers (LEH).

Big Bank. Big Bankruptcy. Which one is next, people are asking.

The first point I’d like to make is that Lehman Brothers is big, but not as big as AIG (AIG), until recently the world’s largest insurance company, or Merrill Lynch (MER), until recently the world’s largest broker-dealer, or Fannie Mae (FNM) and Freddie Mac (FRE), until recently the world’s largest lenders of mortgage funds. All are kaput; yet Lehman is the first to actually declare bankruptcy in the legal sense.

So, how big is the Lehman bankruptcy? Would you find it shocking to discover that the Lehman bankruptcy is bigger than the top 100 corporate bankruptcies in history, combined? Yet Lehman was not as big as the four other financial companies that died this week, or as big as some that will die in the next month.

That is a scary thought, but let’s be reasonable here. When the dust settles, you will be able to buy a mortgage, buy insurance, and buy financial products and services from a wide selection of vendors. Life will go on.

Yes, the losers today are the stockholders, bondholders, vendors, and employees of the bankrupted companies. Hopefully you are not among them. The expression “There but for the grace of god go I” comes to mind – but bankruptcy is not an Act of God and its occurrence should not ever be a surprise to vigilant stakeholders.

There is no question in my mind that conflict of interest combined with self-regulation is at fault here. Anybody who has been a follower of this blog knows that I have been warning of this crisis. Now that it is a fact that the system is broke, it is time for legislators to put a new one in place that puts the control of the capital markets back into the hands of the owners of capital, and at the same time to remove all conflicts of interest from those who create and sell financial products and services.

If there are no lessons learned from our mistakes, there will never be social equity. There will always be bullies and gorillas like Paulson and Fuld to beat on us. We deserve better.

Comments

[Madagascar:]

Two things at least. A public exchange for CDO's and other derivatives. A legal limit on leverage; no more 30:1 x 30:1 = 900:1, etc. These are simple and non intrusive, and would not be driven by bureaucrats with discretionary power, engendering legislative lobbyists and favor seekers and political payola dispensers.

2008 Sep 17 02:41 AM

[Steven Hansen:]

bill, who are these 'capital owners'? i hope you were not thinking of the hedge funds or the 'little' guy who is stocked up on shorts.

i hope you were thinking of me - the small investor trying to go long. i want shorts only on stock you own in your portfolio. i want a return to the up-tick rule.

2008 Sep 17 04:00 AM

[carey_jim:]

The American Political system is firmly in place and seems to be reform proof.

Washington insiders are in control but I shudder to think what would happen if John McCain and Sarah Palin actually found a way to sidestep them.

It might possibly be that the American political/economic system is heading for a crash, at which point radical reform will become necessary.

Sad prospect.

Our forefathers must be rolling over in their collective graves and Alex Hamilton is probably spinning like a top.

2008 Sep 17 10:36 AM

[nukldrager:]

Alexander Hamilton spinning like a top indicates exactly the kind of vacuum nature abhors which is why a moosehunter/stateswoma... is being drawn onto the scene.

2008 Sep 17 12:13 PM

[nukldrager:]

publishing error hmmm. Stateswoman turned into stateswoma...

2008 Sep 17 12:16 PM

[ArcticFox:]

I have been writing my congressmen and senators also about this problem for quite some time. And I agree with the hand, "Who are you talking about", because with rampant short selling and naked short selling by powerful investment firms who manipulate the markets, you risk your investments even on good companies. I lost money with the dot com bust, a pyramid scheme by investment companies that only succeeded because of the massive shorting during the collapse. The same is occuring now, except instead of running a scheme with gulible small investors, they run the scheme with our pension funds through regulations provided by the federal government. I started taking my money out of securities from my 401k when Goldman Sachs announced their first big bonus a couple of years ago, and completely when out of securities when a few months ago when the feds ran the prime rate so low there was little room for further rate cuts. Because the government won't let me take my money out of the funds without a stiff penalty, I am still stuck in money market funds which get hurt by low interest rates and a devalued dollar from bailouts for these criminals. What bothers me is that Goldman Sachs and J.P. Morgan, the apparent masterminds behind the subprime crisis are creating a monopoly with the results.

2008 Sep 17 12:32 PM