True they have tried, but their efforts have been cast in the pat-tern of an outworn tradition. Faced by failure of credit they have proposed only the lending of more money. Stripped of the lure of profit by which to induce our people to follow their false leadership, they have resorted to exhortations, pleading tear-fully for restored confidence. They know only the rules of a generation of self-seekers. They have no vision, and when there is no vision the people perish.
A quote that easily could be said today, in fact was given by Franklin D. Roosevelt in his first inaugural address, speaking of the cause of the crisis he was facing—the status of current events indicates we did have a vision—the same one that led to the first Great Depression. Roosevelt continued:
The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.
It appears we indeed failed to apply values more noble than monetary profit. The solutions, however, are not to throw out the capitalist system because of the failure of the people, consolidate power into the hands of a few, and bury the people with debt for the next several generations.
We have started the slide down the slippery slope of deception. We find ourselves in a time steeped in diversion and deception. The “truth mingled with a lie” is offered in elevated levels throughout global communications for the express purpose of stirring human emotions and attention away from the true cause of the turmoil.
Following the media blitz of President Barack Obama’s campaign slogan: “Change You Can Believe In,” Rahm Emanuel (White House Chief of Staff) declared, “Rule 1: Never allow a crisis to go to waste; they are opportunities to do big things.” The speed with which “change” can now be achieved is startling.
One of these changes was the revelation in April that Washington broke all the rules in the merger of Bank of America and Merrill Lynch. In documents released by New York Attorney General Andrew Cuomo, we learned that Bank of America CEO Ken Lewis wanted to pull out of the proposed merger with Merrill Lynch when the bank’s true financial health be-came clear.
Lewis testified that Treasury Secretary Paulson and Federal Reserve Chairman Bernanke tacitly threatened to fire him and his entire board of directors if they tried to back out of the merger or disclose to his shareholders how troubled Merrill Lynch truly was.
Unfortunately, Lewis chose to keep his job, violate his dis-closure obligations, and sacrificed Bank of America’s share-holders and the American taxpayers. The results of this shot-gun merger:
• Bank of America reported 4th Quarter 2008 losses in January of $2.4 billion;
• Merrill Lynch reported 4th Quarter 2008 losses in January of $15 billion;
• Washington followed up with a $20 billion bailout to cover these losses—again, the merger created a corporation that was “too big” to let it fail.
• As of April, all of these decisions to save the merged corporation have cost the shareholders as much as 43 percent of their money in just over four months.
This precedent of deception indicates how panicked Washington truly is when dealing with this economic crisis behind closed doors. While the public and shareholders waited for the published results of the government’s bank stress tests, sleight-of-hand reporting requirements were quietly being re-worked by the Financial Accounting Standards Board (FASB).
On April 3, the FASB altered the “mark-to-market rule.” This rule mandated that all assets of the institution have to be valued as if they would be sold on the day they were being valued. The book value has to represent the true market value of an asset. In the wake of the sub-prime mortgage crisis, any asset-backed security was in essence untradeable. This disastrously adjusted their value downward.
FASB’s modification to the mark-to-market rule allows the asset holders to ignore the rule if they are not planning to sell the asset immediately. Instead, the assets can be assigned a value based upon a “predicted” future value.
With the stroke of a pen, these new rules allowed banks to:
• Inflate the value of toxic assets they own;
• Vaporize liabilities they are responsible for;
• Erase billions of losses in their quarterly reports as if they had never happened.
Following the application of the new reporting rules, the assumption was that the government’s stress tests would show healthier banking institutions—pointing to the fact that the bailouts are working. Unfortunately, this did not produce the desired results.
Regulators have reported that Bank of America needs to raise roughly $35 billion in capital based on the results of the government’s stress tests. As of the writing of this report, the final figure has not been released and regulators are also in the process of notifying the 19 financial companies involved in the tests.
Currently, Bank of America is the nation’s largest bank in assets and they are struggling to determine how they are going to make up the capital deficit required by regulators. In total, Bank of America has already received $45 billion in capital from the government—just under half of it to cover the losses associated with the Merrill Lynch merger.
If, in fact, the amount of capital needed by Bank of America exceeds what the bank can raise by selling assets or more shares to the public, it may be forced to convert the government’s preferred shares into common stock.
This would raise the capital required by regulators, but would also leave the U.S. government as Bank of America’s largest shareholder.
This is an outcome that should cause everyone to stop and reflect upon what appears to be the erosion of our free market system. We always assumed this would be how America worked. It may not be true much longer.
Until very recently, New York City was considered the world’s financial capital. That distinction may be falling to Washington, D.C., where the members of the executive branch and Congress make decisions on a scale not seen since the 1930s.
In his article, State Capitalism Comes of Age: The End of the Free Market?, Ian Bremmer reports,
For the sake of the United States’ and the world economy’s long-term prospects, defending the free market remains an in-dispensable policy. And there is no substitute for leading by example in promoting free trade, foreign investment, transparency, and open markets, in order to ensure that the free market remains the most powerful and durable alternative to state capitalism.
I could not agree with him more. The free market is alive, but fighting for its life. If the battle is lost, we may be seeing the forerunner of the final world economic system—state capitalism.
Let us be ever in prayer for the soon return of our King, and for the change we can truly believe in.
Franklin D. Roosevelt, Inaugural Address, March 4, 1933, as published in Samuel Rosenman, ed., The Public Papers of Franklin D. Roosevelt, Volume Two: The Year of Crisis, 1933 (New York: Random House, 1938), 11–16.
Ian Bremmer, State Capitalism Comes of Age: The End of the Free Market?, Foreign Affairs, May/June 2009.