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Saturday, February 28, 2009

Can financial institutions exist under unbridled capitalism?

Events on Wall Street and resulting hearings in Congress in the past several months have made manifest the fact that the financial institutions and others cannot exist under unbridled capitalism. Perhaps Citicorp is the best example. They are the recipients of billions of dollars in aid and judged to be too big to fail. Sandy Weill, former CEO, is said by Charlie Gasparino of CNBC to have treated this one-time great corporation like his own personal playpen. He was also instrumental in appointing Bob Rubin, former Secretary of the Treasury under President Clinton, to the position of Chairman of the Executive Committee of the Board of Directors of Citicorp. Rubin is quoted as saying, in effect, that he wasn't interested in becoming part of management but would like to serve in an advisory role to the Board of Directors and CEOs. In this position he is said to have okayed the leveraging of assets 39:1. If that had worked he would have been a hero. It didn't work and Rubin suffered no ill consequences.

What is evident now is that after the smoke clears, the congress should and will enact regulatory statutes. These should include, but not be limited to the following:

1. Limit the size of banks
2. Limit the exposure to risk
3. Reinstate Glass-Steagall (legislation which separates commercial and investment banking)
4. Limit the types of monetary instruments, e.g. derivatives, etc, which can be employed
5. The stockholders should have the power to vote on executive salaries should they exceed a certain multiple of the salaries of non-management employees

In the last 16 years, under Presidents Clinton and Bush, we have seen the largest transfer of wealth from the producers to the parasites.

It will be interesting to watch the swing of the pendulum as new bills are taken up in Congress to regulate and somehow rein in Wall Street.