Regulator is a proponent of crony capitalism

By DAVID MOON, Moon Capital Management, LLC
April 3, 2011

The FDIC is finalizing its definition of a “safe” home loan and the requirements that bank lenders must meet when originating, packaging and selling home mortgages. In a March 17 press conference with FDIC Chair Sheila Blair, US Treasury Secretary Timothy Geithner described negotiations that would require homeowners to make down payments of either ten or twenty percent in order to qualify for the lowest-risk category of loan.

Sounds great. Of course, so did the other regulations and business practices in place prior to 2008. The regulations where bad loans were supposed to result in losses to the people holding those loans. The same regulations where people who didn’t pay their loans had the loan covenants enforced.

This collection of new rules and regulations will have no better impact on the long-term health of the economy if exemptions are as freely granted to these rules as they typically are at the first sign of trouble or at the request of friends of the regulators.

Alexander Hamilton first described the phenomenon of crony capitalism in the late 1700s when he described his vision of “The American System.” It has been around that long.

Secretary Geithner, the regulator who believes that imposing strict new rules on US companies and citizens, is an obvious proponent of crony capitalism. And not just in believing that the US tax code applies selectively and can be applied in arrears to Treasury nominees.

In continuing to bail out Fannie Mae and Freddie Mac, the US Treasury is not supporting the US housing market. It is supporting the outstanding bonds previously issued by those agencies.

Who is the largest external holder of those bonds? The Chinese government.

Is this an isolated example of east-west crony capitalism?

On June 1, 2009, Chinese money manager Lou Jiwei met with Geithner and asked that he persuade the Federal Reserve to waive the customary two-week review process for certain investments, such as Jiwei’s planned investment in Morgan Stanley. The Chinese manager argued that the opportunity was immediate and wouldn’t last the two weeks.

Two days later, Jiwei announced a $1.2 billion investment in Morgan Stanley. No application for an exemption was ever made with the Fed.

I have not attended the Glenn Beck Institute of Conspiracy, but I assume it is just coincidence that Geithner, a life-long government bureaucrat, who speaks Mandarin; spent most of his childhood in the far East; has an A.B. degree in Asian studies and a Masters in East Asian studies; and attended both Peking and Beijing Normal universities. And his father was the head of Asian programs at the Ford Foundation.

I am not such an idealist that I believe that regulations shouldn’t exist. Regulations should exist to protect property rights, including intellectual property. They should protect the agreed-upon rights of parties in a contract. They should be relatively stable, free from political influence. (Okay; this is fairy tale stuff.)

And they should be applied consistently, regardless of who you know.

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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