There is an old-fashioned way that companies used to win business—by taking it from someone else. Yesterday, the U.S. government penalized a variety of insurers and other financial institutions who behaved with intelligence, shrewdness, and honor towards their shareholders and customers.
By 'doing the right thing' (a passé concept in Washington?), these companies rightfully deserve to win customers from a company whose balance sheet resembled more a highly leveraged hedge fund than a well-run insurer. To those who would argue that derivative counterparties would have been "unfairly" penalized by AIG's (NYSE:AIG) collapse, let us be clear—we are not talking about innocents, we are talking about highly sophisticated (but clearly not very bright) players in the derivatives markets.
Traditional theory in Economics of the Law posits that it is most efficient for actors best able to exercise a prudent standard of care to bear the liability of loss. Simply put, it costs less money for derivative counterparties to examine a company's balance sheet and refuse to do business with any companies they deem imprudently run than to bail out the derivative counterparties later. If they do choose to do business with companies that are badly run [such as AIG], they should bear the full risk of loss, without any government "affirmative action" for such sophisticates.
What has been lost in all of this is that there is no shortage of capital in the financial world. The main assumption behind government intervention and capital infusions is that money is the problem. That problem is not a lack of capital—it is a shortage of managers who will not squander it.
Insurers such as Berkshire Hathaway (BRK-A), Progressive (NYSE:PGR), CNA Surety (NYSE:SUR), and my favorite, the tiny Fremont Michigan Insuracorp (OTC:FMMH), have behaved honorably. They deserve to win the spoils of war—the business of a behemoth competitor who has behaved foolishly.
By bailing out AIG, the U.S. government is threatening to destroy the very competition that has led to our nation's glory during the American Century.
If business is a morality play, and the government helps write the script, every character, in the end, should get what they deserve. This has been the central American cultural value since the founding of our republic. It has been the driving force behind democratically elected government, an independent judiciary, and progress itself. If everyone gets what they deserve, good behavior is rewarded. It has been precisely the rest of the world's failure to adopt such an ethos until recently that has made our way of life the envy of the world.
Ironically, countries such as India and China are starting to embrace many of the values that have made the US great, while we turn our backs on those values. Other countries are discovering something central to what the US is, even as we risk forgetting it. Free markets, vigorous competition, and capitalism are not systems—they are values.
Indeed, such terms are merely a name we give to actors engaging in commerce with one another of their own free will. Choosing winners and losers is not the government's job in a free society, but the beginning of the end of the American way of life.
Parents let their children bear the effects of their behavior out of love, not indifference. We let companies fail, because we want or country to succeed. Otherwise, we will be no better than Japan whose permissiveness and propping up of failed banking enterprises after their own real estate collapse has only lead to pain and to stagnation, not success. Can we expect to take similar actions and expect success?
Just as every American generation looks to immigrants to rediscover the truth of the American dream, let us look to China and to India to rediscover everything that was once great about us which we are so casually throwing away.
AIG, in the full view of the world, became a great enterprise, and then destroyed itself with greed and stupidity. It is the last firm in the world that deserves one cent of taxpayer money. But in a free society, no firm does. We are left then, with our goodwill, which we should reserve for the countless other firms which did the right thing. At the very least, they should have had AIG's business.
Disclosures: Harry Long owns FMMH shares directly, through partnerships, and through trusts. To the best of his knowledge, certain of his family members own FMMH shares through partnerships and trusts. Harry Long and certain of his family members own shares in SUR, a CNA Financial company. Such ownership may change at any time.