What You Permit, You Promote

Since hearing a parenting expert utter that phrase on the radio, my wife has had the saying prominently posted on our refrigerator.

And, as she noted today, it applies as equally to managing or regulating a business as it does to raising a child.

Yesterday I commented on the fact that AIG, having received a bailout in the form of an $85 billion loan from the Fed, celebrated by holding a $440,000 boondoggle at a posh resort, including $23,000 worth of spa treatments. (Okay, not really; they already had the event planned, but they still lacked the judgment to cancel it. Or at least cut back on the perks.)

Late yesterday, after the market closed, I watched in disbelief as Bubblevision announced the Fed's reaction to learning of its new beneficiary's spendthrift ways:

They loaned AIG an additional $37 billion.

Let's put this in parenting terms. Your kid gets a job mowing lawns - very enterprising. But he doesn't maintain his lawnmower, and he squanders his money on video games and thus can't buy gas, let alone pay to fix the machine.

So you give him money to fix it, and the first thing he does is go out and buy more video games. When he brings them home, you give him more money to fix the mower and buy gas.

What you permit, you promote.

So what news did we get this morning?

Junior was headed to the video game store again.

Yes, AIG's execs announced they had another boondoggle planned next week at the posh Ritz-Carlton resort at Half Moon Bay in California. (At least they're doing their part to stimulate the beleaguered California economy. Maybe Arnold won't need that $7 billion loan from Paulson after all.)

The highlight of the Bloomberg story about the planned second junket was this gem:

"AIG considered buying advertisements to explain its position, only to be told by its public-relations consultant, George Sard, that it would be 'a really bad idea.'"

No kidding.

Sard went on: "To spend the taxpayer's money on an expensive ad campaign to apologize for how you used taxpayer money leaves you open to further attacks."

Forget the boondoggles or the proposed ad campaign. That the guys in charge at AIG have to hire a PR consultant - using taxpayer money - to explain this to them is wretched excess enough. They should be summarily canned, not for the boondoggles, but for not being smart enough to run a business.

Later this morning, the upcoming conference was canceled "after a re-evaluation of the costs under the new circumstances." AIG's CEO told Hank Paulson yesterday that management would "rethink expenses," according to Bloomberg. But apparently it took the backlash from this morning's annouced second boondoggle to make them think hard enough to make a good decision. Sheesh.

This is also an object lesson in government intervention, and why it is always, always wrong.

Part of AIG's problem all along - as with the other institutions that find themselves on the brink of failure these days - is that they spent too lavishly. To cover the spending, they took on too much risk. They made money off a bubble. Times were good. So they spent even more.

Then the bubble burst.

But they didn't stop spending. Had we not bailed them out, they'd have either failed, in which case the lavish over-spending would have stopped, or they'd have been forced to slash spending to survive. Either way, the bad behavior ends.

However, when we bailed them out, they continued their errant ways, then we gave them more money, so they saw no reason to change their behavior. Until they got spanked for it.

What you permit, you promote.

That's why you have to let poorly-run businesses, who've taken excessive risks and ignored prudent expense management, to fail. Just as you'd let your kid fail if he was being irresponsible. (Okay, in some instances you'd bail your kid out. But you love your kid. You don't "love" a company.)

On a related note, sometimes intervening isn't the right thing to do because it doesn't address the root problem. Let's use another parenting analogy. Your kid develops a thyroid problem and begins to gain weight. You think it's because he must be eating too much, so you starve him, and he gets really, really sick.

That's somewhat similar to the short-selling ban that the SEC extended three days past the passage of the bailout bill. Their "thinking" was that it was short-sellers that were driving down the stock prices of the financials, threatening their failure.

The ban expired at midnight last night, so the short sellers were back in the market today.

In the three trading days that the ban was in effect, the Dow shed about 1,500 points. So with the short sellers out of the market, stocks tanked.

Today, the Dow is down again, but by the least amount since the bailout was passed, at least as of mid-afternoon.

Gee, with the short sellers back in the market, you'd think it would be down a million points.

Short sellers did not cause bank stocks to tank. Crappy balance sheets full of still-overvalued crappy securities caused bank stocks to tank.

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A couple of random thoughts for the day. Britain's bank bailout will entail the UK government buying equity stakes in banks, effectively infusing them with much-needed capital to make loans. Instead of just buying their crappy bonds at prices above market value and sticking taxpayers with the losses when they sell them.

Sound like a better plan than ours? Hank Paulson thinks so, too. He announced this morning that that is exactly what he's going to do with at least part of the bailout money.

This guy is running around like a chicken with its head cut off, without the foggiest notion what to do about this mess or how much it'll cost. Then, when somebody else does it right, he sees the light, and copies them.

He should be fired. Now. Let Britain's Exchequer run the US Treasury Department too. He's apparently a pretty smart guy.

So a friend of mine who's a private wealth manager, hearing the news that the US taxpayer will now be buying into the banking sector, e-mailed me and said that he's been trying to keep his clients out of bank stocks all year, and now his efforts have proven futile.

The other thought for the day is a grim one. I've said before that we're in uncharted waters. Never in my life have I seen or heard things like the comment a while back from S&P that if the government keeps taking on debt, it might have to review the credit ratings on US Treasuries.

Speaking of that, I also saw last night that the Treasury is going to revive some of the maturities that were retired back when we were running a surplus. I think the specific headline on the news ticker was something like "Treasury to bring back certain security structures to address borrowing needs."

What does that obtuse statement mean?

It means they don't think there's enough demand for the current line-up of three-, six-, and twelve-month bills, two-, five-, and ten-year notes, and 30-year bonds to entice enough buyers for all the debt the US is going to have to take on to fund all these bailouts. So they're throwing the kitchen sink at the market, hoping they'll bring some more buyers out of the woodwork.

Oh, they will. But at much higher interest rates. Risk is being priced appropriately these days, for the first time in a very long time. And the US as a nation is becoming an increasingly risky investment. Looking more like subprime every day, in fact. Could somebody with a 90% debt-to-income ratio get a loan today? Of course they couldn't. So how does the US government expect to?

Final thought along these "I never thought I'd hear this" lines. An article from Reuters today led with this ominous line (emphasis added):

"The United States moved closer to taking equity stakes in banks on Thursday ahead of a G7 meeting of economic powers trying to stave off world financial ruin."