Friday, January 23, 2009

Why Capitalism is Failing

Or perhaps, "Why the Bailout will not Work."

There is something much deeper that is wrong with our financial system today. It goes far beyond anything that can be treated with a healthy dose of more money.

Yesterday, I saw this headline: Former Merrill CEO Thain resigns from BofA. That's curious.

He was headed to great things with BOA after the BOA Merrill merger on January 1. Heck, he barely had time to remove the protective wrapping from his new name plate. It seems that while Merrill was posting a $15.45 billion loss, its CEO, John Thain, was greasing the pole to the company's financial hell.

Note:

1. Just prior to the merger, this past December, Thain passed out $3-$4 billion dollars in bonuses to employees. This is customarily done in January, but by then, Merrill would be owned by BOA. I guess Thain wanted to make sure the money was paid out before someone else could stop him. Of course, if you're posting a huge loss, why are you handing out bonuses?

2. Thain became CEO in December 2007. Since he took over, shares dropped over 70%, and his company continued to tank. In his defense, this was not all his fault. The month he took over, Merril Lynch would have tallied $12.2 billion loss in the second half of 2007. How did he celebrate his new job? By spending $1.22 million redecorating his new office.

3. Then, last month, with his company still heading down the porcelain commode, and just having been rescued by BoA, Thain asked his compensation committee for a $10 million bonus. I want whatever he's drinking.

This reminds me of names like Tyco, Enron, etc..., where the leaders have lost their minds. Let's not stop there! What about lending institutions that ignored sound lending practices just to make bonus. Credit card companies that continued to strangle the borrowers, just because they could, knowing full well they were merely padding their losses. Rather than look out for the best of the company, investors, and customers, these leaders have looked out for themselves, sacrificing their companies at the altar of greed.

That is why Capitalism is failing. Not because of the theoretical system, but because we have subverted its principles for our own selfish gain. Financial leaders have thrown rules and morality out the door. They have justified their decisions with nonsensical, self-serving explanations, all the while pulling the rug out from under their employees and investors.

You can pour in all the money you want, whether you call it TARP or TRASH. Unless the morals and character of our financial leaders change, the situation will continue to worsen. A bailout will not suddenly convert selfish CEOs into business school angels. And no, Congress is no better. So I take no comfort in the fact that Congress will be looking over their shoulders.

Let's let Capitalism truly work. Let these companies fail. They are going to fail anyway. We either take the losses now, or our children will in the future. Let's take it now. Let the badly managed companies fall by the side of the road. Then, the remaining companies can take their cue from them.

Nah, let's just throw more money at them. There are bonuses yet to be paid, perks yet to be financed.

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