Last Friday evening I was a guest on FOX Business and was asked if I thought whether the Paulson Plan (which had just been approved by the House of Representatives) would improve confidence. The answer is an unconditional NO. Confidence is an expression of trust in the integrity and wisdom of our system and its leaders. There is a confidence crisis because we don’t trust the institutions and people that are in positions of authority.
Frankly, I found the question I was asked on FOX surprising. The Paulson Plan, recent Treasury tax changes and the extraordinary Fed policy that was unveiled this week are specifically targeted at getting money moving through fiscal and monetary policy. But confidence cannot be bought with money. Confidence must be earned through an everyday commitment to smart and ethical behavior. The restoration of confidence will only happen when the President and his administration make it a priority to restore integrity to our banking system and capital markets.
Until confidence in our financial system is restored, the economy will continue circling the drain. So let’s hope the next President moves quickly once elected.
But what will it take to restore confidence? Set forth below are my top five suggestions for what our leaders can do. I would like to hear your suggestions. Once all of the comments are collected, I will forward this article and your suggestions to senior representative from both the Obama and McCain campaigns. Let’s hope we can give the new administration some good ideas for getting America back on the right track.
My suggestions for restoring confidence are:
1. Enforce the law! White collar criminals in banking and Wall Street need to be prosecuted aggressively by Federal officials, state and local prosecutors and regulatory authorities. By the way, merely announcing a law enforcement initiative isn’t enough. A coordinated and funded effort led by the SEC, Treasury Department and Justice Department is needed. Follow-through is important. Government officials must accept and understand that self regulation doesn’t work (and never has) and that it is the duty of regulators to actually enforce the laws and regulations that have been passed by Congress. Enforcement of laws and regulations today stops tomorrow’s abuses. The U.S. has plenty of laws and regulations but a shortage of officials who have the willpower to enforce them.
2. Stop giving lawyers and accountants a “free pass” from liability for participating in frauds. They aren’t “sacred cows” that need protection. Lawyers and accountants aid and abet their corporate clients and employers in “doing bad stuff”. These professionals hide behind “professional responsibility” and “confidentiality” to protect themselves from criminal and civil liability. But let’s be clear, in every large business failure that has the taint of fraud or reckless management behavior, the enablers are lawyers and CPAs. Take away the enablers, and corporate behavior will change immediately. At a minimum, license suspensions and revocations should be a real risk for lawyers and CPAs who facilitate fraud.
3. Force the Federal Reserve to do its job as the primary regulator of bank holding companies.
Surprise! The Federal Reserve is the primary regulator of bank holding companies and this isn’t a new responsibility. Since forever the Federal Reserve has been responsible for making sure that bank holding companies operate in a safe and sound manner and that bank holding companies are adequately capitalized. However, when was the last time that anyone heard of the Federal Reserve, in its regulatory capacity, taking action against a bank holding company for being inadequately capitalized or acting in an unsafe and unsound manner? It’s time for the Fed to do its job as a regulator.
4. Fix the accounting rules so that they reflect reality, are understandable by the normal people and are conservative. Have you ever read accounting rules like, for example, the mark to market rules? Try it. It will be and eye opener and will make clear that the Financial Accounting Standards Board is out of control. By the way, whenever I ask four accountants for an interpretation of mark to market accounting or employee stock option accounting, I usually get six opinions. So what is the little guy supposed to do when trying to understand financial statements? Accounting rules that are too complicated to understand don’t encourage confidence.
5. When in doubt, government needs to protect the little guy and not big business. There is no equality of resources, negotiating position or power between individuals and corporations. One of the principal roles of government is to protect the little guy and make sure that unethical and illegal behavior of large institutions is discouraged. Just to be clear, I am not a big believer in government acting as “big brother” to protect individuals from their bad decisions. But when banks and brokers lie to their customers, when companies lie to their shareholders, when corporations violate antitrust laws and when companies manipulate markets, the government needs to protect the little guy and go after fraudsters.
I look forward to hearing your ideas.
