For America to recover, the federal government must stop treating American businessmen as criminals and start trusting us again.
America was founded on the principles of individual liberty and personal responsibility. This formula served us well up until the Great Depression and FDR’s massive expansion of government in a bid to appear to be doing something to stimulate economic recovery. Prior to FDR, business panics and economic cycles were managed privately without government interference, and were usually cleared up fairly quickly. However, FDR’s meddling in private business affairs had its seeds sown in the progressive policies of his cousin Theodore Roosevelt who went after big business trusts in an effort to promote the nebulous idea of fairness. Granted, there were conditions that needed to be addressed, but the Progressives used government to break up legal companies in the public interest whose only crime was their size.
A series of Supreme Court rulings in the last century ceded ever more power to the federal government through expansion of the Commerce Clause and the 14th Amendment. In the wake of the Enron scandal, Congress passed the Sarbanes-Oxley Act forcing companies to expend resources on a vast new array of reporting requirements. A lax and cozy regulatory climate combined with the general inability to recognize or even search for problems during flush times allowed Enron to hide massive debt by moving it off balance sheet into shell companies created specifically to hide the debt. When the scheme unraveled, Enron was bankrupt and thousands were unemployed and wiped out when their 401k investments consisting entirely of Enron stock became worthless.
Federal regulators who had missed the details of Enron’s regulatory filings were embarrassed, and Congress, ever ready to pass legislation addressing past sins, rushed Sarbanes-Oxley into existence over the objections of small businesses who complained about the massive compliance costs. Enron had abused a technique of Generally Accepted Accounting Principles, or GAAP, which allowed companies who owned less than fifty percent of another entity to keep that entity’s balance sheet separate from the balance sheet of the owning firm. Enron engaged in fraud by doing this, and its actions were already illegal and punishable. Enron was punished severely by the market when its share price collapsed to nothing, driving it to bankruptcy and out of existence. Its shareholders lost their investments, its employees lost their jobs, and its corporate officers were prosecuted with many going to jail. The esteemed accounting firm Arthur Andersen was also punished by the market into dissolving for its part in hiding the accounting irregularities at Enron through cozy business arrangements.
Even though the market sufficiently punished these miscreant firms out of existence and current laws were utilized to punish the actions of their officers, American business was saddled with the rushed and flawed Sarbanes-Oxley legislation to mitigate the government’s embarrassment at having failed to properly perform its oversight functions. This costly legislation forces all publicly traded companies to report in nauseating detail anything remotely resembling the Enron situation so boldly that even federal regulators can’t miss noticing now, shifting the presumption of innocence away from firms and the burden of proof onto them. Under Sarbanes-Oxley, the vast majority of firms in compliance with the law and stringent business ethics are now punished for the sins of the few whose actions were already illegal under existing law.
The result of Sarbanes-Oxley was to force firms considering IPOs to remain private, encourage firms to go private in hedge fund takeovers, and drive some firms offshore to avoid the compliance cost and naked transparency involved. Investors lose by not having the chance to buy into successful revenue streams, and consumers lose because skittish companies become less aggressive at developing and introducing new products due to being forced to shift development funds into regulatory compliance.
Then, along comes the housing bubble created by Barney Frank through the Community Reinvestment Act which forced banks to extend mortgages to those unable to repay in a bid for housing fairness with the government buying these distressed mortgages through Fannie Mae and Freddie Mac, thus putting the American taxpayer on the hook as cosigner. Predictably, after the government removed the risk to banks by agreeing to buy all of these distressed mortgages, bankers went wild extending the government’s credit to anyone who walked through the door. In a bid to mitigate future foreclosures, the government began bundling these distressed mortgages with viable mortgages and selling shares in the revenue streams. Corporate greed overcame common sense as bankers began investing in these bundled mortgages mistakenly thinking that the risk had been properly mitigated. Investors got antsy and started asking uncomfortable questions as to the validity of the securities underlying these bundles that no one could answer and the whole house of cards came tumbling down with the government forced to cough up a couple of trillion dollars for its sins as cosigner.
Caught red-faced and unwilling to admit he had made a colossal mistake when the housing bubble collapsed, Barney Frank shifted the blame to Wall Street bankers and rushed the Dodd-Frank Act into existence to prevent the very situation he had created from occurring in the future. So, now we have the federal government owning the very businesses they were supposed to just regulate because they fell asleep at the switch. The politicians who created the original mess have managed to tar every honest banker in the country through their blame shifting as being vile, corrupt, and greedy abusers of the public trust.
Even though the market was prepared to sufficiently punish these reckless lenders out of existence, current laws were sufficient for protecting the public, and the original mess was created through meddlesome Congressional action, American banks are saddled with the rushed and flawed Dodd-Frank legislation to mitigate the government’s embarrassment at having failed to properly perform its oversight functions. This costly legislation forces all publicly traded banking companies to report in nauseating detail anything remotely resembling the housing crisis situation so boldly that even federal regulators can’t miss noticing now, shifting the presumption of innocence away from banks and the burden of proof onto them. Under Dodd-Frank, the vast majority of banks in compliance with the law and stringent business ethics are now punished for the sins of the few whose actions were already illegal under existing law.
The result of Dodd-Frank has been to dive up the costs of banking for consumers as witnessed through Bank of America’s new $5 fee on debit card transactions. And, in casting Wall Street as evil, the politicians are directly responsible for the insipid Occupy Wall Street protests where protesters protest for the sake of protesting without a clue as to what or why they are protesting much like their parents did in the 1960s.
In an effort to purge criminal financial behavior which has always existed and always will with criminals finding clever ways to skirt even the most detailed and stringent laws, the federal government has managed to destroy the illusion that business firms are innocent until proven guilty and created burdensome regulations that shift onto firms the presumption of guilt and burden to prove their innocence. Both Sarbanes-Oxley and Dodd-Frank should be repealed at the earliest opportunity as they do nothing more than punish the innocent for the sins of the guilty to hide the incompetence of government regulators. Criminals, by definition, break the law and aren’t worried about how many laws they break. Neither of these burdensome regulations will stop the determined criminal intent on defrauding his fellow man for the sake of profit, but they do punish those honest businessmen who already abide by the law and practice the highest ethics to insure the quality of their good reputations in the market.
Neither of these laws prevented Bernie Madoff from swindling millions of dollars in a classic Ponzi scheme, or prevented Raj Rajaratnam, founder of the Galleon Group hedge fund, from engaging in illegal insider trading to profit himself and his clients, and they won’t prevent future financial crimes. Government regulators must be diligent in performing their oversight functions, and no legislation will force criminals to actually divulge the activity they are hiding, but the increased reporting requirements will made it harder for regulators to sift through the mountains of paperwork to uncover the details of fraudulent activity. In fact, increased paperwork actually makes it easier to hide financial crimes deep in the details reported to regulators.
Much has been said by the Republican candidates in explaining how they will go about restoring the American economy if elected. One thing they mostly agree on is the need to repeal Sarbanes-Oxley and Dodd-Frank to decrease the regulatory burden on American business. It’s time to start trusting American business so it can get back to the business of America.