A way out of America's financial mess

September 27, 2008|By ROBERT GARY

For at least three years before Sept. 15, 2008, many of those in the mortgage and banking industry referred to the sub-prime loans as "liar loans." "Oh sure, I've got the money to pay for this house, it's in my lockbox down at the airport."

"In that case sir, just step this way, here's your mortgage document to sign, and we've got a pen for you right here. Hey, Bill, we got another guy signed up, tell the mortgage derivatives re-packers upstairs that we've got 527 now instead of 526 in the package."

It wasn't just the liar in the liar loans that had something at stake. A lot of other people turned blind eyes because it served their purposes. They were facilitators because their jobs depended on it and they made money.

When the liar came back a couple of years later and said "I've got nothing, I know nothing and how did this happen to me?" the ones who got hurt were not the facilitators. They were the folks whose money was in the pension funds and the overseas investor groups that bought up the derivatives and re-packaged mortgages which had now been securitized into globally saleable commercial paper. And now if the $700 billion is made available, the final victim/owner of all that toxic financial trash paper will be the U.S. taxpayer.


Then came Sept. 15 and the loss of about 25,000 jobs on Wall Street. Government's first priority, of course, was to pour cash into Wall Street investment banks to pay off the severance packages for the senior management of the firms that made, or re-packaged, or globally re-sold the liar loans. As long as they don't go to jail, they come out way ahead, regardless of the effect of their conduct on every other person on this planet. Here's what to do about it.

First, the golden parachutes should be struck from their contracts as null and void ab initio (to be treated as invalid from the outset) because they are contrary to public policy. They create exorbitant risk-taking by senior managers, who either hit the jackpot bigtime if their risky plays win and their stock options get valuable, or, if they crash the firm, and it has to be taken over by the federal government, then they get the mini-jackpot built in to their golden parachutes - several million or tens of millions of dollars given to them, unconditionally, when they leave the firm on any basis other than voluntary quitting.

There couldn't be an incentive scheme more obviously contrary to the interests of society in publicly held companies, especially in the financial-services business.

Stock options are OK, but unconditional huge suitcases full of cash that will be given to departing executives no matter what happens to the firms, the clients, the employees, the shareholders, society, or the world, are not OK. If your company goes bust and you bring on financial Armageddon, then ... no ... no ... you are not going to get a big suitcase full of money.

Second, let's create honest cloth parachutes for the 25,000 employees who have or will lose their jobs. Set up Small Business Investment Companies in all 50 states with the specific intent to make debt capital and equity capital available to the non-senior-management refugees of the Wall Street Financial Services Debacle of 2008.

This would be beneficial in five ways:

1. It would show that the government cares about ordinary employees.

2. It would re-deploy the talent of those 25,000 highly educated, financially trained persons to the 50 states where their small businesses would boost the American economy and create hundreds of thousands of new jobs across the U.S.

3. It would prevent a domino effect from the personal evictions and bankruptcies and great suffering of Americans who have done no wrong.

4. The SBIC Program (started in 1958) allows venture capital, not just debt capital, to be made available. This means that if 4,000 small firms were started that used the skills of individuals or teams of people coming out of the Wall Street catastrophe, and half those firms were marginal (2,000 businesses), a quarter were total losers (1,000 businesses), and a quarter were big winners (1,000 businesses), the equity value recovered by publically selling off the shares of the 1,000 big winners would pay for the whole program, the taxpayer would get zeroed out in about 10 years, no net gain or loss.

The big-winner new small businesses get turned into 1,000 initial public offerings (IPOs) and sold off in the stock market to private investors. The cash raised cleans up and allows orderly liquidation of the total losers.

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