Financial reform is a political charade

By DAVID MOON, Moon Capital Management, LLC
June 20, 2010


This past Tuesday, House and Senate conferees began meeting to reconcile their separate versions of financial industry reform. This process will be great theater, with rising oratory, lead characters, villains, heroes and a conclusion. Like theater, we, the audience, will pay the cost of this grand production, watch the play, then return to our normal lives, with the actors having had no real impact on our real lives.

And like the theater, the cost of this charade is also underwritten by corporate sponsors, although their names and identities aren’t so prominently featured in our playbill.

The broad goals of financial reform (or Wall Street reform, depending on which character’s script you are reading) are laudable. According to the White House web site, these goals include: protect consumers; protect American families from unfair, abusive financial practices; hold Wall Street accountable; and provide a foundation for stable economic growth.

Sounds good to me.

I’ve actually read the bills passed by the House and Senate – more than 3,000 pages of them. It’s a lot more complicated and convoluted than that.

During the negotiation process this spring, senators and congressmen (mostly republican) proposed hundreds of unrelated amendments to these bills, including the construction of a US-Mexican border security fence and a provision that would make it easier to train lead paint removal contractors.

If the goal is to hold Wall Street executives and other financial industry participants accountable, it’s simple; hold them accountable. It doesn’t require thousands of pages of laws. Uphold bankruptcy law, contract law and debt covenants. Hold directors responsible for their actions. Let businesses fail.

Don’t bail out AIG because it owes Goldman Sachs billions of dollars. Don’t continue to feed Fannie Mae and Freddie Mac hundreds of billions of dollars.

Shareholders of companies like Bear Stearns should be sacrificed by regulators in order to favor the management of JP Morgan. One class of unsecured General Motors creditors must not be allowed to leapfrog another – simply to benefit a politically favored constituency.

Do the same thing with people. Quit worrying about the guy who pays 24 percent on his credit card when you think he should only pay 18 percent.

Most of the so-called consumer protection, however, is provided in the form of increased disclosure.

In the world of government, “disclosure” means businesses filling out official-looking forms that no one reads. Mutual fund prospectus include significantly more data about expenses than they did a few years ago.

No one reads them.

No amount of disclosure will protect a consumer from himself. If you don’t know the interest rate on your credit card today, you won’t know it in the new, supposedly enlightened world of Wall Street accountability.

If you can’t figure out how much debt you can afford to carry now, no law will make you manage your budget better. If you are the kind of person who makes poor financial decisions, it may be possible to keep you from getting a stupid mortgage, but you will likely find some other way to separate yourself from solvency.

Like a bankrupt Wall Street firm, people must be allowed to fail too. That’s true reform.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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