America’s Crony Capitalism
by Sin-ming Shaw
Buenos Aires –
For 20 years, Americans have denounced the “crony capitalism” of Third World
countries, especially in Asia. But, just as those regions have been improving
their public and corporate governance – Hong Kong just witnessed a breakthrough
court decision against a telecom tycoon who is the son of the province’s
richest and most powerful man – crony capitalism is taking root in the United
States,
a country that the world long considered the gold standard of a level playing
field in business. The recently completed “stress tests” of US banks are but
the latest indication that crony capitalists have now captured Washington, DC.
It is no surprise
that stock markets liked the results of the stress tests that US Treasury
Secretary Timothy Geithner administered to America’s big banks, for the general
outcome had been leaked weeks before. Indeed, most professional investors
trashed the tests as dishonest even as their holdings benefited from a rising
market.
Even The
Wall Street Journal , usually financial markets’ loudest cheerleader,
openly disparaged the tests’ integrity. The government had allowed bankers to
“negotiate” the results, like a student taking a final examination and then
negotiating her grade.
The tests were
supposed to reveal the true conditions of banks saddled with unaudited toxic
assets in housing loans and financial derivatives. The reasoning behind the
tests seemed unimpeachable. But was it?
As any seasoned
banker knows, a well-managed bank should undertake internal “stress tests”
regularly as a matter of good housekeeping. The financial crisis should have
mandated a running stress test to keep senior management up to date daily. Why,
then, did the US need the government to conduct a financial exercise that
bankers themselves could and should have done far better and faster?
The truth is
that the tests were not designed to find answers. Both Wall Street’s chieftains
and the Obama administration already knew the truth. They knew that if the true
conditions at many big banks were publicly revealed, many would have been
immediately declared bankrupt, necessitating government receivership to stop a
tsunami of bank runs.
But the Obama
administration did not want to be tagged as “socialist” for nationalizing
banks, however temporarily, even though experts such as former US Federal
Reserve Chairman Paul Volcker had recommended just that. Moreover,
nationalizing banks would have required dismissing Wall Street captains and
their boards for grossly mismanaging their firms.
Wall Street’s
titans, however, had convinced Obama and his team that their continued
stewardship was essential to getting the world out of its crisis. They
successfully portrayed themselves as victims of a firestorm, rather than as
accessories to arson.
Geithner and
Larry Summers, Obama’s chief economic advisor, share Wall Street’s culture as
protégés of Robert Rubin, the former treasury secretary who went on to serve as
a director and senior counselor at Citigroup. Neither man found it difficult to
accept the bankers’ absurd logic.
The stress
tests were meant to signal to the public that there was no immediate threat of
bank failures. This message, it was hoped, would stabilize the market so that
prices for “toxic” assets could rise to a level at which bankers might feel
comfortable selling them. After all, senior bankers had been claiming that
these assets were “mispriced,” and that pricing them at market levels would
penalize the banks unnecessarily.
So far,
Geithner seems to have succeeded in his “tests,” as the stock market has indeed
more than stabilized, with prices of bank shares such as Citigroup and Bank of
America quadrupling from their lows. The feared implosion of Wall Street seems
to have been avoided.
But no one ever
seriously thought that the US would allow Citigroup and Bank of America, to
name just two, to fail. In fact, the stock market bottomed out last winter.
Markets had factored into share prices the belief that the US government would
not allow any more banks to collapse.
What the world
wanted was an accurate picture of what the banks were worth and
“mark-to-market” valuations to guide investors as to how much new capital they
needed.
The world also
wanted to see the US retaking the high road in reinforcing business ethics and
integrity – so lacking under the last administration. As taxpayers had already
put huge sums into rescuing failing banks, with the prospect of more to come, a
transparent process to reveal how the money was being used was imperative.
Substantial
public rescue funds have reportedly been siphoned off to foreign banks, Goldman
Sachs, and staff bonuses for purposes unrelated to protecting public interests.
None of this was either revealed or debunked by Geithner’s tests. Instead,
public servants now appear to be in cahoots with Wall Street to engineer an
artificial aura of profitability.
Moreover, the
value of toxic assets remains as murky as ever. Once sacrosanct accounting
principles
have been amended at Wall Street’s behest in order to allow banks to report
essentially whatever they want. And now negotiated stress test results have
been released to “prove” that the banks are a lot healthier. Calling this a
Ponzi scheme might be too harsh. But few financial professionals have been
fooled.
Meanwhile, Wall
Street chieftains and their boards of directors have nothing to fear from
government. On the contrary, they are now the government’s partners in a joint
venture to manage this dishonest scheme.
Like swine flu,
crony capitalism has migrated from corrupt Third World countries to America,
once the citadel of sound public and private governance. Is it any wonder that
China is perceived as an increasingly credible model for much of the developing
world, while the US is now viewed as a symbol of hypocrisy and double
standards?
** Sin-ming Shaw, a former founding chairman of
a hedge fund and a private equity fund in Asia, has been a visiting scholar at
Columbia, Harvard, Princeton, and Oxford, and remains an active private
investor. He blogs at sinmingshaw.blogspot.com.
Copyright:
Project Syndicate, 2009.
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