Dienstag, Mai 19, 2009

Corruption, Crony Capitalism and the US Image Abroad...

This is disturbing.

Sin-Ming Shaw, a former fund and private equity founding manager ins Asia, writes in the Japanese Times that he's making the connection between what the Obama Administration is doing and the kind of crony capitalism you see in the Third World.

Put simply, crony capitalism is a system where financial success is determined by close personal relationships between those in power and those who benefit from those in power. It can take the form, in its simplest version, of simple collusion in the marketplace; such crony capitalism is exemplified by keiretsu and chaebol systems, as well as the kind of family-owned systems in South America. One thing that aids crony capitalism is deliberate ambiguity in laws, either in text or enforcement, so that enforcement becomes arbitrary and, in order to survive by not being called to account, dependent on being on the good side of those who makes such decisions.

Starting to sound familiar?

What the Democrats did with Fannie Mae and Freddie Mac is a classic example of crony capitalism: politicians took the government backing of both to bring them to dominate mortgage underwriting, sent the party faithful to earn banker's salaries while running the companies into the ground, whilst turning them into major campaign contributors as well, preferably to favored constituents, all based on who you knew and what you did for them.

Mr. Shaw's article points to the fact that crony capitalism is increasingly alive and well in the US.

This is how it starts:

The recently completed "stress tests" of U.S. 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 U.S. 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 U.S. 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.

These stress tests and the fact that the banks "passed" is the fundament of the collusion between the banks and the politicians: the collusion is to create the appearance of viability for these banks when, in fact, they were bankrupt. The payoff isn't going to be immediate, nor terribly obvious at first: however, it will take the form of political contributions and political influence-taking on where the banks do business and whom they hire.

The Democratic Party, in pursuing this path to .. fame and glory, is, if anything, abandoing any pretext of being for the common man and being the party of the working stiff. They haven't been that for a very, very long time (if, indeed, ever).

The key thing is what this does to the US image abroad: it cheapens the image of the US as the world's leading capitalist system, devoid, largely, of this kind of corruption. This damage is long-term and will take literally decades to repair.

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