[R-G] [BillTottenWeblog] Crony capitalism has taken root in America

[Bill Totten]

by Sin-ming Shaw

The Japan Times (May 19 2009)


For twenty 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. It is no
surprise that stock markets liked the results of the 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
a grade.

The tests were supposed to reveal the true conditions of banks saddled
with unaudited "'toxic assets" in housing loans and 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 Volker 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 adviser, share Wall
Street's culture as proteges 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.

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. Markets had already 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 Bush 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 to allow banks to report essentially whatever they want. 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. Few financial professionals have been fooled.

Like swine flu, crony capitalism has migrated from corrupt Third World
countries to America. Is it any wonder, then, that China is perceived as
an increasingly credible model for much of the developing world?

_____

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. He blogs at sinmingshaw.blogspot.com.

(c) 2009 Project Syndicate (www.project-syndicate.org)

(c) The Japan Times. All rights reserved

http://search.japantimes.co.jp/rss/eo20090519a2.html


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