Who watches the watchers?

By DAVID MOON, Moon Capital Management, LLC
February 2, 2014

Following the 2008 credit crisis, regulators became increasingly concerned about companies that were so large and interconnected to the entire financial system that their failure would be devastating to the economy; that the government would have no choice but to rescue them.

The argument is that the management of these so-called "too big to fail" businesses have an incentive to take otherwise extraordinary risks, knowing that the federal government will ultimately protect both the company and the economy from poor management decisions.

Sort of a “heads I win; tails you lose” scenario.

Using this rationale, the government injected billions of taxpayer funds into companies such as AIG.

According to a Bloomberg report last week, the US Financial Stability Oversight Council is now scrutinizing Berkshire Hathaway to determine whether or not the holding company is "systemically important" to the US economy and should require Federal Reserve supervision to protect the US from haphazard use of leverage and other poor management decisions.

The entity that has created $4 trillion from thin air to prop up the US bond market is concerned that Warren Buffett might borrow too much money?

If not for that $4 trillion the US government created to buy its own bonds, the US federal government would likely be paying a higher interest rate for its debt than Warren Buffett.

The Fed is concerned about what could happen if a company misprices a massive amount of liabilities, creating unintended downstream consequences throughout the financial system.

Think AIG. Or USA.

The US government and related quasi-public entities are the largest net nominal debtors in the history of mankind. Who watches the watchers?

Since the late 1930s, Congress has invoked the Commerce Clause of the US Constitution to exercise almost unlimited control over the economy, including retroactively examining any successful business and deciding that the company has created something so valuable that society has some claim to it.

There is a relatively simple way to discourage business executives from taking asymmetrical risks. Don't bail out their poor decisions.

As long as the politically connected enjoy socialized failures and privatized successes, no amount of additional government regulation will inspire them to be any more ethical or competent.

Why is Lehman allowed to fail but not AIG? Why does General Motors require or deserve taxpayer support that Ford does not?

In a satire of the execution of Royal Navy Admiral John Byng, Voltaire wrote that it is good to kill an admiral from time to time, in order to encourage the others.

In the US we shoot our best Admirals, providing negative incentive for achievement.

Warren Buffett, while infinitely human, has demonstrated more tangible financial and intellectual competence than the combined 530 or so elected officials at Tuesday’s State of the Union Address. Yet they are concerned about whether or not Berkshire Hathaway requires supervision from the Federal Reserve?

I would prefer to have Janet Yellen report to Buffett, instead


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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