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.

The Great Wall Street Bailout - End of Capitalism?

So much for capitalism on Wall Street. Like any other group of businesses, there is strong resistance to any government regulation, but considerably less resistance to a bail out when it's inevitable that the CEOs have blundered and endangered the entire economy.

According to those who amass such statistics, the American public opposed a bail out of Wall Street by 99 to 1. After the president, the Fed. chief and the Secretary of the Treasury explained to the public the severity of the situation, those opposed dropped from 99 to 90. One California congressman said that his e-mails and phone calls were running 300 to 2 in opposition. This is because there is probably no other group in our economy that would be likely to be on the receiving end of such a huge bail out except the financial sector.

Forget the fact that the cause of this problem is attributed to several factors:

A. The lax standards for mortgages – no doc. loans, ARMS with no right of pre- payment, 125% loan to market ratios, etc.
B. Arcane and complicated instruments surrounding these mortgages.
C. Exceptionally low interest rates for a long period of time.
D. The repeal of Glass-Steagall. (The Banking Act of 1933)
E. Mark to market accounting.
F. Exceptional leveraging by many institutions, and more.


The American public knows little about these factors. They do know, however, that this mess was caused primarily by greed and avarice, coupled with a great deal of incompetence on the part of the executives involved. They also know that these executives are not held responsible for their actions, but are, instead, handsomely rewarded by contracts they negotiated with very friendly Boards of Directors.

Carl Icahn (the ultimate raider) likens the bail out to a laboratory run by mad scientists who concoct a batch of chemicals, which when united, blow up the building. After the dust settles and the debris is hauled away, the laboratory is back in business with the same mad scientists in charge.

If one likens it to an addict, there are even those on Wall Street who think that we should keep feeding the addict (Wall Street) more uppers. But, allowing the addicted ones to withdraw with all the necessary pain could be a better course to follow.

The smart people who set our fiscal and monetary policy may be making a huge mistake by not letting the market forces take hold and run their course. There is much debate that the constant tinkering and intervention during the Great Depression, in fact, only served to prolong the Depression making it last for 12 long years (See The Great Depression in the United States from a Neoclassical Perspective - Cole and Ohanian).