Friday, January 16, 2009

Time to choose: The Country or the Stock Market

Americans love the stock market. If you say "the Dow", everyone knows what you are talking about, and the index is prominently mentioned in every news broadcast in all sorts of media. You can say that the equity culture is as American as the fireworks on the 4th July, both may have been invented elsewhere, but they have never been as adored as they are here.

An why not? The stock market is supposed to be this wonderful mechanism that allows anyone to become rich and pursue lofty goals like giving to charity and paying for our kids' education. In addition, the stock market can give us the sense of being wise investors like Warren Buffet or those guys from Yale.

Anyone who thinks a bad year can change this fails to understand the profound optimism embedded into the American psyche. "Stocks always come back," say the experts, leaving out the fact that they could take 30 years to come back and that statement would still be true.

Bonds? nobody buys bonds, unless you are some kind of insurance company. Most people who own bonds through some kind of mutual fund don't even know that they do.

The problem is that, over the past 25 years, we have taken this approach to the extreme. Employees at every level have gotten used to being compensated with stock and/or options. This in turn means that management is more concerned with "the stock" than with the long term viability of the business. In addition, "the market" gets its information about the companies from "the analysts" who mostly extrapolate management assumptions using Excel.

This fixation is now leading our government to the utterly nonsensical behavior of using your money to bail out every kind of company without first wiping-out the equity. The managers, who usually hold large amounts of equity and options are very happy with this. If the company survives, they may be able to recover their wealth. In the meantime, they can keep collecting their large salaries (and bonuses) and, maybe, issue themselves more stock and options at current prices. Meanwhile, the American public, is treated to the argument that "letting [insert bailout recipient] FAIL would be worse for all of us."

Forgive me for pointing out the obvious, but erasing GM or Citigroup's common and preferred equity in exchange for backing up all or part of their debt WOULD NOT hurt the company in any way. Not only that, but it would restore in the public mind the sense that people who made lots of money in the past by riding the credit-driven bull market can lose money by the unraveling of the same market. The latter is not a minor point if we want to entice people to invest in the future as a general sense of a rigged game does not generate confidence in the average investor.

It is time the politicians realize that our money is a scarce resource. If we need to put a safety net under a few companies to save jobs, so be it. However, insisting on saving the equity will not only discredit our financial markets, but significantly increase the size of the total bailout. They can't save everyone so it is time to choose.

No comments:

Post a Comment