Tag Archives: finance

Capital Investment– Fuel for Innovation, Engine for Growth, Fixes the Economy: More Investment Means More Prosperity…

Capital investment that companies make today in new product lines, new equipment and other assets… will determine the valuation of the companies in the future… This leads to a very fundamental objective within capital investment management, i.e., maximize value of the company through astute capital investment, which fuels innovation that propels the growth engine, which is good for the economy…

According to Standard & Poor’s (S&P); despite a modest recovery in capital investment following the financial crisis– capital investment slowed again in 2012 and is expected to contract by 2% in real terms in 2013. Initial forecasts for 2014 are for capital investment to continue to slip, falling by 5% year-on-year. A modest post-crisis recovery appears to be stalling before it has really begun. This downward trend is especially prevalent in Western Europe, which has seen its share of global capital investment fall to just 24% in 2012, and its forecasted to remain steady in 2013 before inching up to 25.4% in 2014…

According to S&P; the emerging markets also look fragile, especially Latin America where the region is expected to experience the weakest growth in business investment of all regions in 2013, in part because of its heavy reliance on the energy, materials and utility sectors… North America, however, is one region S&P expects to increase its share of global corporate capital investment from a low of 24%e in 2009, to 35.6% in 2013 and 36% in 2014… Many economists consider capital investment a vital part of the economy, which generally means that the overall mood of business has a considerable impact on the pace of capital investment and thus impacts the trend of economic growth…

The prime objective of making capital investment in any business is to obtain satisfactory return on capital invested. Hence, the return on capital employed is used as the measure of success of a business in realizing this objective. Return on capital employed establishes the relationship between profit and capital employed. It indicates the percentage of return on capital employed in businesses and shows the overall profitability and efficiency of business… in addition, it becomes a key indicator for the health of the economy: When businesses are profitable, growing, innovating, investing… that’s a vital sign for the economy…

capital imagesCA00SC94

In the article Capital Management: A High-Wire Balancing Act by ATKearney writes: A tightrope walker daringly takes on a task that is magnified by the possibility of a great fall. A small misstep can have disastrous consequences. However, the performer has a secret: Focus on a few basic principles and follow them perfectly to reduce the chances of making a mistake. Managing multibillion-dollar capital investment is also a balancing act where it’s easy to lose sight of the basics.

People often get distracted by the intricacies of the allocation process, the internal politics, or the complexity of the business case. This last distraction is almost always dealt with by quantifying every aspect of the business case, which may give the impression of managing all the details but in reality often results in at least three symptoms of poor capital management:

  • Failure to prioritize: When capital investments are not linked to corporate strategy and financial targets, it’s almost impossible to capture the required level of returns across the portfolio.
  • Loss of accountability: When accountability are not clearly defined, followed, or enforced, and reviews are not conducted (either while in progress or post-implementation), no one owns the outcome.
  • Poor visibility: Without a corporate-wide reporting structure there is limited visibility into spending and even less control of the investment portfolio. As cost overruns mount and projects slow-down, the economics of the original investment case are      often lost.

In the article Managing Capital by ey writes: Capital is the lifeblood of every fast-growth business. As you continue your journey to market leadership, a strong grasp of what we call the capital agenda should inform all of your important business decisions: Should you restructure your business? Is now the time to sell some of its assets? How can you seize the premium acquisition opportunities? The capital agenda model helps to address these type questions and is based on four key dimensions: Preserving, Optimizing, Raising, Investing:

  • Preserving capital: Fast-growth companies needs to preserve capital. So continuously evaluate your balance sheet, strategy and markets. Look for strengths and weaknesses. Seek opportunities, but identify risks and guard against value erosion. Your ability to access liquidity, manage and release cash, control costs and engage with key stakeholders is essential to preserving capital.
  • Optimizing capital: Capital is precious. Fast-growth companies need a tight grip on the drivers of efficient capital allocation. Greater operational efficiency can release excess cash and working capital. More companies are taking an active approach to business asset management. Such rigor can uncover poor capital deployment, leading to better capital preservation and allocation.
  • Raising capital: Fast-growth companies need to keep their capital needs under constant review. Even if your balance sheet appears strong, external shocks can delay your journey to market leadership. Review your business through the lens of the investment and lending communities. Whether you are refinancing debt or planning for an IPO, you can reduce your cost of capital if you understand the ratios and covenants they favor.
  • Investing capital: Use your capital wisely. Potential backers expect fast-growth companies to make investment decisions supported by in-depth and varied scenario      analyses. Show them you have considered the alternative uses of capital. Communicate a compelling value proposition and focus due diligence on the drivers that matter most.

capital 2013-04-15-chinavcmarket

In the article Investment Is Understated by Edward Conard writes: An increase in investment by one economy relative to another will likely affect their relative rates of discovery (innovation) and implementation. Successful risky investments in innovation will grow the economy faster than less risky investments and that enlarges the existing business capacities. Also, successfully commercializing good ideas is as important as discovering them and, generally, that requires similarly risky investments…

Innovation expands the economy and benefits consumers by providing better value… As risk takers grow increasingly optimistic; asset values rise. This makes investors and consumers grow increasingly willing to take risks. As risk taking grows, the economy expands, increasing the amount of investment and the value of assets relative to the economy…

A fast-growing company with higher profit margins that is pouring more money into investment than its competitors looks much more attractive to investors, and thus garners a higher valuation. Business investment is good for innovation; innovation is good for business investment…

U.S. companies will make capital investment totaling roughly $2 trillion in 2013, according to research by McKinsey. These capital investments are critically important to future of their companies and the economy; over 50% of corporate growth is directly attributable to capital investment. The companies that manage their capital investment well, significantly outperform their rivals…

Booz Allen found that companies that employ best practices in capital investment management earn 25% higher profits than their peers. With respect to capital investment, today’s top performers are focused on the three key dimensions: Accountability, Visibility, Efficiency. Accountability has many dimensions... Yes, the numbers do have to be right. Having a clean electronic audit trail of all approval decisions and demonstrating that proper controls are in place to ensure compliance with corporate policies is critical…

According to David Straden; real measure of performance in capital investment is ROI. It sounds obvious, yet most companies fail to track and report on actual ROI… If you don’t know how you did on the most important capital investment metric, than what are the chances of driving sustained improvement over time? The simple act of announcing that actual ROI will be tracked will often lead project management to be more realistic with their estimation of potential benefits… Formalizing the capital investment process and imposing rigorous methodology over project evaluation is a step in the right direction…

A second key capital investment management dimension is visibility: The only constant in today’s world is change. In a world where everything is moving faster and faster, the best companies use speed as a competitive advantage. Given the long lead times required for larger investment, it’s arguably even more critical to be flexible and responsive managing capital investment. New opportunities continually present themselves, whether from merger and acquisition activity, new product developments or competitor difficulties…

New threats also unfortunately abound, whether it’s diminished liquidity, fluctuating exchange rates, market forces, competition, political upheaval… To move both quickly and intelligently decision makers must have real-time access to the necessary information… The best companies are proactive in establishing process to give themselves informational context and be prepared to adapt quickly to changing circumstances…

An efficient capital investment approval process is the basic building block: The best companies focus on capital investment efficiency. Doing more with less is a key imperative and being lean means putting capital investment to the highest and best use… It’s not about being smarter it’s about having a better process; one that enhances productivity and leads to greater effectiveness…

Start tracking actual ROI on capital investments, year over year.; that’s the ultimate key performance indicator (KPI) to assess progress in improving performance.. Improving efficiency is the ultimate weapon in a challenging world. Having less doesn’t have to mean achieving less. If you institutionalize accountability, increase visibility and enhance productivity, you can do more with less: More growth, higher profits, and better economy are worthy objectives…

Leverage– Business Valuation– Know It, Understand It, Apply It: It’s a Pre-Requisite for Intelligent Decision-Making…

Business Valuation: Most business people know the value of their home, automobile… but have no idea on the value of their business.

Most business management rely on simple formulas or multipliers that do not take into consideration many business variables, such as– industry trends, technology, revenues, profitability, receivables, equipment and much more… But, quite simply, business valuation is a process and a set of procedures used to determine what a business is ‘worth’– it’s a measure of the worth of the business…

The premise of business valuation is that– we can make reasonable estimates of value and determine the worth of all types of assets, even intangibles… Some assets are easier to value than others and the details of the valuation varies from asset to asset; similarly the uncertainty associated with each value estimate is different for different assets, but the core principle remains the same…

There are those who are disingenuous enough to argue that value is in the eyes of the beholder, and that any price can be justified if there are other people willing to pay the price. That is patently absurd: Perceptions may be all that matter when the asset is a painting, sculpture… but we do not and should not buy most assets for aesthetic or emotional reasons; we buy business-financial assets for the cash flows we expect to receive from them.

Consequently, perceptions of value must be backed up by reality, which implies that the price paid for any asset should reflect the cash flow it’s expected to generate– various valuation models attempt to relate value and levels of uncertainty about the expected growth in cash flow. There are two extreme views of the valuation process: At one end are those who believe that valuation, done right, is a hard science, where there is little room for analyst views or human error.

At the other end are those who feel that valuation is more of an art, where savvy analysts can manipulate numbers to generate whatever result they want; but in reality, the truth lies somewhere in the middle…

valution1 thCA9KTQ3Z

Business Valuation Methods: Business Valuation has become an intrinsic part of the corporate landscape. The corporate landscape has witnessed dynamic changes in recent years as– mergers and acquisitions, corporate restructurings, and share repurchases are happening in record numbers, both in the U. S. and abroad. At the core of the dynamics of all these activities stands some notion of business valuation.

The valuation methods are not only necessary for accounting purposes, but they also serve as roadmaps for– capital investors, venture capitalists, corporate acquirers… in order to know an estimated value of a company’s assets… Four standard business valuation approaches are:

  • Asset accumulation: This approach is based on the premise that it’s generally possible to liquidate the property, plant and equipment (PP&E)… assets of a company and after paying off the company’s liabilities the net proceeds would accrue to the equity of the company. Valuation of assets based on liquidity does not yield better results, if the fair market value of assets is in excess of the value of its assets on a liquidated basis.
  • Discounted cash flow method: This valuation method based on cash flow is  considered a strong tool because it concentrates on cash generation potential of a business. This valuation method uses the future cash flow of the company discounted by the firm’s weighted average cost-of-capital, plus a risk factor measured by Beta (measure of volatility or systematic risk); since risks are not always easy to determine precisely…
  • Market Value: This valuation method is applicable for public companies only. The market value is determined by multiplying the share price of the company by the number of issued shares. This valuation reflects the price that the market, at a point in time, is prepared to pay for all shares, and that determines the value of the company…
  • Price Earnings Multiple Valuation: The price-earnings ratio (P/E) is simply the price of a company’s share of common stock in the public market divided by its earnings-per-share. By multiplying this P/E multiple by the net income, the value for the business could be determined…

In the article Myths in Valuation by Aswath Damodaran writes: Myth–Valuation is a science that yields precise answers…

Reality 1: Valuations are always biased…

  • Truth 1.1: All valuations are biased. The only questions are how much and in which direction.
  • Truth 1.2: The direction and magnitude of the bias in valuation is directly proportional to who pays you and how much you are paid.

Reality 2: Equity valuations are always imprecise, but they are most valuable when they are most imprecise.

  • Truth 2.1: There are no precise valuations.
  • Truth 2.2: The payoff to valuation is greatest when valuation is least precise.

Reality 3: Complex valuations do not yield better estimates of value.

  • Truth 3.1: One’s understanding of a valuation model is inversely proportional to the number of inputs required for the model.
  • Truth 3.2: Simpler valuation models do much better than complex ones.

In the article Business Valuation: Three Approaches by ValuAdder writes: Quite simply, business valuation is a process, and a set of procedures used to determine what a business is worth. While this sounds easy enough, getting your business valuation done right takes preparation and thought.

Business valuation results depend on assumptions: For one thing, there is no one way to establish what a business is worth. That’s because business value means different things to different people… For example; business management may believe that the business connection to the community it serves is worth a lot, and an investor may think that the business value is entirely defined by its historic income… Traditionally, there are three fundamental ways to  measure what a business is worth:

  • Asset approach: The asset approach views the business as a set of assets and liabilities that are used as building blocks to construct the picture of business value. The asset approach is based on the so-called economic principle of substitution which addresses this question: What will it cost to create another business like this one that will produce the same economic benefits for its owners?
  • Market approach: The market approach, as the name implies, relies on signs from the  actual market place to determine what a business is worth. Here, the so-called economic principle of competition applies: What are other businesses worth that is similar to your business?
  • Income approach: The income approach takes a look at the core reason for running a business– making money. Here the so-called economic principle of expectation applies: If I invest time, money and effort into the business; what are the economic benefits and when will they be available?

In the article Valuation Myths by Lewis Schiff writes: Since valuation is part science and part art, it’s very easy to fall into misconceptions of the business valuation process… Two valuation experts recently identified common myths that could lead to poor management of intangible assets, and could also cause confusion:

  • Myth 1: Valuation is a well-defined and well-understood term.
  • Myth 2: Valuation of intangible asset is equal to price someone is willing to pay.
  • Myth 3: Valuation is equal to the cost of creating an item.
  • Myth 4: Each intangible should have only one official value.
  • Myth 5: Balance sheet provides good information about the value of intangibles.
  • Myth 6: Fair market value is a good construct for use with intangibles valuation.
  • Myth 7: There should be only one accepted method for valuing intangibles.
  • Myth 8: Current estimate of the future price must equal the eventual transaction price, in order to be considered accurate.
  • Myth 9: Patents cannot be valued credibly because each one is unique.
  • Myth 10: Value of company’s intangibles is the difference between its market value and the value of its tangible assets.

Determining the value of a business is a complicated and intricate process. Even valuation experts have referred to it as more of an art than a science. Valuing a business requires the determination of its future earnings potential, the risks inherent in those future earnings, an analysis of its mix of physical and intangible assets, and the general economic and industry conditions…

A business valuation is not just for a businesses preparing for a sale: In fact, there are numerous business and legal situations that require a detailed valuation. First, a detailed valuation is needed when a seller is considering merger, sale, acquisition, or shareholder wishes to buy-out other shareholders… Second, government or judicial authorities often require a business valuation for legal matters such as; shareholder disputes, divorce proceedings, eminent domain takings; employee stock ownership plans (ESOPs), S-corporation election, or breach of contract disputes… Third, taxable events, such as; estate and gift planning or charitable giving also necessitate a valuation…

Finally, a detailed valuation can help identify what’s needed– to increase the value of the business, attract new capital, project potential proceeds from an initial public offering (IPO)… With this many potential situations requiring a business valuation, it’s important to have an up-to-date estimate of the value of business. However, unlike fine wine, valuations do not age well. Sales can go up-or-down, demand for products and services can go up-or-down, the economy can go up-or-down: The state of a business can change pretty quickly… and a valuation becomes out of date, quickly– perhaps even by the time it’s done…

But, a valuation can be very useful when there is a specific reason for it, and a time frame within which to use it… Learn to understand the principles of valuation and what a valuation is trying to achieve, and then harness what the valuation provides to– identify strengths, weaknesses, opportunities, and threats in the business…

Changing Face of Money and Money-Like Instruments: How Money Is Created-Valued-Devalued… Future of Money…

Anyone can create money, the problem is getting someone else to accept it ~Hyman Minsky

As important as money is to most people, most take it for granted without giving thought to what it really is, where it comes from, or how it works. We earn it, we spend it, we save it, and some may complain they don’t have enough of it, but few really know much about it. For most people, money, finances, monetary policy… are pretty confusing… 

Many assume the paper bills stuffed in their wallet is money. But, is it? Throughout history, money has taken on many forms and there hasn’t been much agreement on what ‘object’ money is: It really is nothing more than a symbol that represents the value of something: Practically speaking, the value of money represents what it will buy – or its purchasing power. Whatever form it takes, it’s used as an intermediary for trade – or medium of exchange, in order to avoid inefficiencies of barter systems.

Money is generally considered to have the following four characteristics: medium, measure, standard, store. That is, money functions as– medium of exchange, unit of account, standard of payment, and store of value. Money is a vague term and, technically, anything can serve as money.

Historically, many things have served as money, but modern forms of money have evolved to become more complex and institutionalized. In this regard, it’s best to think of money as being the social tool with which we primarily exchange goods and services. In the modern monetary system– fiat money (or paper money) is the form of money we utilize on a daily basis. In strict sense, this paper money is largely a creature of law, e.g., in U.S. paper money takes form of U.S. dollars…

But, what gives these pieces of paper value? It’s helpful to break the demand for fiat money down into two components: First is acceptance value and second is quantity value. Acceptance value represents the public’s willingness to accept something as the nation’s unit of account and medium of exchange. Quantity value describes the medium of exchange’s value in terms of purchasing power, inflation, exchange rates, production value… While acceptance value is generally stable and enforceable by law, quantity value can be quite unstable and result in currency collapse in a worst case scenario…

According to John Keynes; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like– confusing a theatre ticket with the performance…

Money Is Not Wealth Money is simply a tool that allows citizens to exchange and transact in the underlying goods and services. If  government spends money in excess of a nation’s underlying productive capacity it will devalue their money and generate destructive inflation. This would result in too much money chasing too few goods and a potential decline in real living standards.

So, the key for government is to balance the amount of money in the system in order to keep the temperature just right– not too hot and not too cold. For example, visualize the economic system is a machine. Metaphor of a car is useful to understand how all the pieces fit together. Monetary policy is akin to the brake and accelerator pads.

When the central bank raises the ‘Federal Funds Rate’ it does so, typically, to suppress inflationary pressures and, in effect, slows or braking economic activity. Vice versa when the Fed lowers the ‘Federal Funds Rate’, typically, to counteract a swelling in number of underemployed, this decreases borrowing costs across the spectrum of credit products (e.g., loans made on shorter-term basis), thus accelerating economic activity.

Monetary policy is mainly about manipulating short-term interest rates though there are other factors… Modern monetary theory distinguishes among different ways to measure the money supply, reflected in different types of monetary aggregates, using a categorization system that focuses on liquidity of the financial instrument used as money.

Most commonly used monetary aggregates (or types of money) are conventionally designated– M1, M2, M3. These are successively larger aggregate categories: M1 is currency (coins and bills) plus demand deposits (such as checking accounts); M2 is M1 plus savings accounts and time deposits under $100,000; and M3 is M2 plus larger time deposits and similar institutional accounts. M1 includes only most liquid financial instruments, and M3 relatively illiquid instruments…

Market liquidity describes how easily an item can be traded for another item, or into the common currency within an economy. Money is most liquid asset because it’s universally recognized and accepted as common currency. Thus, money gives consumers the freedom to trade goods and services easily without having to barter.

Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (e.g., gold). Instead, it has value only by government order (fiat). Usually, the government declares the fiat currency (e.g., central bank…) to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private...

In the article How Money Is Created… And How It Dies by Tyler Durden writes:  The concept of money used to be simple; items of recognized value– initially in form of shells, livestock… then precious metals. At some point, someone decided to print paper currency, but it was widely understood that it had to be backed by something of real value, e.g., gold, silver…

This is oversimplified, but it illustrates the central truth: Money that is created at will, rather than– grown in field, mined from earth, or otherwise subject to supply limits, can be easily degraded. What, then, determines value of money? For some, the worldview and ethics of those in charge of printing presses are obvious answers that are often overlooked. Another is confidence of the people who hold and trade money or claims that are denominated in money…

Fast forward to the modern era– featuring central banks, which allow commercial banks to create money by making loans while keeping other reserves on hand… However, as money market funds, bank CDs… like instruments were created– and became a sizeable portion of the global financial system– then, things got even more complicated. Also, add modern derivatives, which entered the scene in significant way only some 30 years ago, and the picture becomes even murkier.

Money has gotten complex in the modern banking and derivatives era, and old model of money (i.e., mainly product of bank reserves, loans…) is woefully inadequate… More global leaders must know-understand– value of sound economic policy, necessity of sound money, difference between government actions that enable growth and economic stability and those that risk abject ruin. Unfortunately, it appears that few leaders do, currently…

In the article Monetary Policies for a Modern World by Gene Chan writes: There is a lot of misinformation that simply does not reflect the current state of monetary world and misinformation is correspondingly causing a gigantic misallocation of private capital to non-productive uses, and overblown distrust in government’s monetary policies. The best framework for describing system of fiat currencies is ‘modern monetary theory’ (MMT).

The theory itself is actually not very modern– the first iteration was formed in 1920s and called Chartalism– and it’s currently experiencing a revival since it more accurately explains and predicts what is actually being observed in many modern economies... The euro-zone (EU) is an exception– they don’t have a fiscal union at the ‘federal’ level: In other words, the arm of government that spends most of the money (e.g., EU’s national governments– Ireland, Greece…) doesn’t have power to print money (euros).

These countries cannot monetize their euro-denominated debt, which arbitrarily forces them into constraints that regular households and private enterprises experience everyday– need to balance budget and fund expenditures with income. However, in  the current ‘modern monetary system’ (e.g., U.S., Canada, Japan, UK, Switzerland…), the government has no obligation to balance revenue and expense.

In fact, it can spend-on deficits forever, with the only ceiling being the economy’s ability to produce-inflation. In these economies, the government never actually ‘owes’ money in the traditional sense, since they can just print more money… Essentially, the following assumptions hold true for all major developed economies outside the euro-zone:

a) Money is not physically backed by any commodity or pegged to any foreign currencies.

b) Government is sole issuer of money.

c) Government has power to maintain the legal tender status of money (through taxation and court system).

d) Fiscal and monetary arms of the government effectively work as a single unit.

Money has gone from– seashells to gold to paper bills to digits in a computer. Now money is about to evolve again as ‘mobile Internet’ unlocks new consumer behaviors, business opportunities and new concepts of value that are redefining the future of money. Within next decade, smart mobile devices will gain mainstream acceptance as a method of payment and could largely replace cash and credit cards for most online and in-store purchases.

In survey by Elon University and Pew Research; security, convenience, and other benefits of ‘mobile wallet’ systems will lead to widespread adoption of technology for everyday purchases by 2020. But, other experts– expect this process to unfold much slower due to a combination of– privacy fears, desire for anonymous payments, demographic inertia, lack of infrastructure to support widespread adoption, resistance from those with financial stake in existing payment structure…

According to Jerry L. Jordan; just as fiat money replaced specie-backed paper currencies, electronically initiated debits and credits will become the dominant payment modes, creating the potential for private money to compete with government-issued currencies According to James A. Dorn; there is certain inertia in the current fiat money regime: even though persistent inflation has eroded the value of the money over the past 50 years, e.g., 1947 U.S. dollar is now worth only 14 cents…

In the future, however, government fiat money may be placed on the endangered species list as people shift from paper currency to electronic money. Stored-value cards may become a customary circulating medium along with privately supplied digital money stored in computer devices and used over the Internet to facilitate electronic commerce.

The transition from a paper-based monetary system to an electronic payments system– reduces transactions costs, expand markets, empowers people… The speed of that transition and expected benefits, however, will depend on creating an effective legal and secure  infrastructure…

The rules that govern the new monetary universe must be– more transparent, equally applied, consistent with individual freedom… if people are to have trust and confidence in cyber-money…

Dodd-Frank– Monster or Slayer in the World of Financial Business Reform: Its So Complex, No One Knows…

Two years after the sweeping Dodd-Frank Act was signed into law, banks are paring operations and ramping up compliance, regulators are drafting mountains of new rules, and observers still doubt the financial system is any safer than it was after the 2008 financial crisis. ~Dennis Kelleher

The Dodd-Frank ‘Wall Street Reform and Consumer Protection Act’ (Dodd-Frank) is U.S. federal law that places regulation for the financial industry in the hands of government. One main goal of Dodd-Frank is to reduce federal dependence on banks by subjecting them to a myriad of regulations, and breaking-up of any companies that are ‘too big to fail’.

The act created the ‘Financial Stability Oversight Council’ to address persistent issues affecting the financial industry and prevent another recession. By keeping the banking system under a closer watch, the act seeks to eliminate the need for future taxpayer-funded bailouts. According to Robert Kulak; the problem with Dodd-Frank is that it’s so long and ponderous that anyone can say anything about it and be right.

Consider the fact that the Act is 2,319 pages long. Republicans have attacked Dodd-Frank, in part accurately and in part from a partisan perspective. Democrats have defended Dodd-Frank, in part accurately and in part from a partisan perspective. That’s a pretty good debate for an act that neither side understands completely. A particularly contentious issue between banks and the Dodd-Frank is the ‘Volcker Rule’, which prohibit banks from risking depositors’ money on risky investments.

From 1933 to 1999, depositors were protected by ‘Glass-Steagall Act’ (formally, ‘Banking Act’ of 1933). In 2009, ‘Paul Volcker’ described how the ‘Volcker Rule’ should work, in the current economic environment, in a three-page memo. After Dodd-Frank became law, federal banking regulators expanded Volcker’s three-page memo to 298 pages covering 400 topics with 1,300 questions. Then, to provide further clarification, Sullivan & Cromwell, an 800 lawyer law firm, produced a 41 page synopsis (by contrast, the original ‘Glass-Steagall Act’ was 37 pages long, double spaced).

In fact, in their introduction, Sullivan & Cromwell said ‘… the Volcker Rule affects; larger U.S. banking organizations, non-U.S. banking organizations, other financial organizations with trading operations, asset management business or other operations’. Did they say non-U.S.? Did they say other financial organizations? Yes, they did… Also, Dodd-Frank identifies a new acronym– SIFI (systemically important financial institution).

Thus, it appears that Dodd-Frank also sets the stage for not only bailing out banks that are deemed– too big to fail, but also any other SIFI, e.g., insurance companies, real estate companies, Fannie Mae and Freddie Mac, and non-U.S. financial institutions– all would be regulated by Federal Reserve. According to ‘Richard Fisher’ at Dallas Federal Reserve Bank, said; If you are ‘too big to fail’, then ‘you’re too big’. It’s not that we don’t need to better regulate financial industry, we do. But Dodd-Frank, not with standing any positive aspects, is not the way…

In the article Two Years Later, Dodd-Frank Law Largely Stalled  by Bobby Caina Calvan writes: Nearly two years after the signing of the landmark Dodd-Frank legislation, many of the rules meant to restore public trust in the country’s financial institutions have yet to be enacted. Squads of lobbyists, lawyers, and accountants have overwhelmed the rule-making process, in minutia, with blizzards of paper, and hundreds of meetings.

As a result, regulators have missed more than half the rule-making deadlines, with just 120 of the 398 regulations enumerated by law; according to a tally by Wall Street law firm ‘Davis Polk’. Key provisions are still months away, most notably the so-called ‘Volcker Rule’ meant to rein in banks’ appetite for risky investments and prevent repeat of 2008 meltdown that led to the public bailout of some of the country’s largest financial institutions.

To complicate the matte, at least two lawsuits are pending, challenging various aspects of the law’s rule-making process: One filed by Texas community bank and another by several financial industry associations. The Dodd-Frank was a major victory for Democrats, in 2010: an offensive against what they viewed as free-wheeling culture of Wall Street.

Supporters envisioned stronger protections for consumers against predatory lenders, stricter rules for protecting bank deposits from being used for high-risk investments, and transformation of Wall Street into more accountable and responsible public citizen. But, even when finished, we still won’t have resources or people to implement it’, said ‘Gary Gensler’, commission chairman.

He likened the challenges to a football game without enough referees. According to ‘Cornelius Hurley’; to the extent that the purpose of this entire exercise is to restore confidence in the financial system, then that objective is far off… a deeply flawed statute is being implemented haltingly under very difficult circumstances’.

In the article Five Myths about Dodd-Frank by Christopher Dodd (co-author of the bill) writes:  Even though the Dodd-Frank is only beginning to take effect, critics are launching false attacks against the law in an effort to undermine it. Whether they are intentionally misleading or misguided; they are wrong about the law’s purpose and impact. Now, to debunk five of the myths:

  • Dodd-Frank is deepening the economic slowdown: Even though only 10% of Dodd-Frank’s provisions are implemented, so far, critics claim that the law perpetuates ‘job-killing’. In fact, it was the uncertainty inherent in a non-transparent and reckless financial system that made Dodd-Frank necessary in the first place.
  • Dodd-Frank hurts small businesses and community banks: The law is squarely aimed at better regulating the largest and complex Wall Street firms– ones that were most responsible for the crisis and still present the most risk.
  • Dodd-Frank failed to truly reform Wall Street: Dodd-Frank fundamentally transforms the financial system. Requires banks to keep more capital on hand as buffer against bad loans. Establishes process for unwinding firms, if they fail and prohibits Federal Reserve from bailing them out. Brings more transparency and accountability to derivatives market. Shuts down ineffective regulators and insists remaining ones share information to expose next financial trouble spots. Establishes single agency whose mission is to protect consumers.
  • Congress didn’t fix Fannie Mae and Freddie Mac: The issues  with the housing market– as well as, the debate over the future roles of Fannie and Freddie– remain complex and contentious, but they have hardly been ignored.
  • It’s time to repeal Dodd-Frank: In short, repealing Dodd-Frank would invite disaster, putting working families, U.S. businesses and the global economy at risk of an even worse meltdown.

In the article Morning Bell: Dodd-Frank Financial Regulations Strangling Economy by Amy Payne writes: There’s a reason the financial regulation law has been called ‘Dodd-Frankenstein’. This monstrous creation will swell the ranks of regulators by 2,849 new positions, according to ‘Government Accountability Office’ (GAO). It created yet another new bureaucracy called ‘Consumer Financial Protection Bureau’ (CFPB) that has truly unparalleled powers.

This bureau is supposed to regulate; credit and debit cards, mortgages, student loans, savings and checking accounts, and most consumer financial product and service: It’s not even subject to congressional oversight. Frighteningly, the CFPB’s regulatory authority is just as vague as it’s vast. More than half of regulatory provisions in Dodd–Frank state that agencies ‘may’ issue rules or ‘shall’ issue rules as they ‘determine are necessary and appropriate’. Congress avoided making real law with Dodd-Frank, and passed the responsibility for ‘fixing’ the financial sector to these newly minted bureaucrats… which hasn’t been going well.

As Heritage’s ‘Diane Katz’ explains in a two-year checkup of the law: As of July 2012, implementation of Dodd-Frank is behind schedule with 63% of target deadlines missed, which has intensified the cloud of uncertainty surrounding the finance sector and the economy, since passage of the law. Thousands of businesses do not know what the law demands– that they do differently or when they must do it.

The results of this haphazard regulation are dire; Katz says, consumers will have tighter credit, higher fees, and fewer service innovations. Job creation will suffer… financial firms of all sizes are shelling out hundreds of millions of dollars for regulatory compliance officers, accountants, and attorneys rather than making loans for new homes and businesses’. In effect, the law that was supposed to fix the financial sector is hurting consumers rather than ‘protecting’ them…

Scope and structure of Dodd-Frank are fundamentally different than those of its precursor laws, notes ‘Jonathan Macey’, at Yale Law School: Laws classically provide people with rules. Dodd-Frank is not directed at people… It’s a ‘law outline’ directed at bureaucrats, and it instructs them to make still more regulations and to create more bureaucracies.

According to ‘Ron Ashkenas’, HBR blog network; Dodd-Frank passed in the wake of the financial crisis, has the potential to be classic example of ‘controls’ imposed to ‘fix’ a problem, and ‘fix’ becomes so complex that it create other problems. This leads to increasing bureaucratic cycles of more breakdowns, more complex fixes, and more breakdowns. This law’s various sections deals with– bank bailouts, derivatives and swaps markets, mortgage reform, consumer protection, and other issues.

According to ‘Daniel Horowitz’; Dodd-Frank regulations are so complex that most of them have not been formally drafted; causing thousands of businesses to halt expansion and new hiring until the government provides them with some clarity. It’s nothing short of wholesale takeover of financial services and the banking industries; much like Obamacare to healthcare industry.

One of law’s most vocal critics is ‘Jamie Dimon’, who cites not only the cost of compliance, but also difficulty of actually making the regulations work effectively. Another critic ‘Karen Petrou’, says; ‘Dodd-Frank’s implementation is creating ‘complexity risk’ for the financial system. If we don’t understand cross-cutting effects and inherent contradictions in all of the stringent standards now being written into final form, we risk doing real damage.

Responding to criticisms, ‘Treasury Secretary Geithner’ argues; ‘Wall Street is suffering from amnesia about the recent financial crisis… if banks and other financial institutions don’t follow regulations, we’ll have another meltdown’... In fact, we do need effective controls to close gaps that allowed financial systems to fall apart. However, if regulations are unreasonably complex, they will not only create unnecessary costs, but are likely to be unenforceable and eventually ineffective.

What’s clearly needed is something in the middle– simple and practical controls that banks can understand and regulators can enforce. Getting there– requires dialogue, compromise and coordination. Wall Street institutions, government regulators, and other parties need to get together in constructive forums and create realistic and workable practices that fulfill the spirit and intent of Dodd-Frank guidelines. Leaders on both sides should convene key parties, map out, and streamline the regulatory process…

Crowdfunding or Crowdfrauding: The Real Winners– Entrepenueurs, Startups, Small Business…, or Accountants, Lawyers, Consultants…

Crowdfunding is an emerging way of funding; startups, new ideas, projects… by borrowing funding from a crowd (many people), e.g., family, friends, fans, connections….

Crowdfunding is the collective practice of people using the Internet to network and pool their money for a variety of purposes, including funding an early-stage company. Another aspect of crowdfunding is tied into the ‘Jumpstart Our Business Startups’ (JOBS) Act which allows for a wider pool of smaller investors with fewer regulatory restrictions.

The Act was signed into law on April 5, 2012, and the Securities and Exchange Commission (SEC) has approximately 270 days from the enactment date to set forth specific rules and methods to ensure that funding actually take place. The JOBS Act adds a new equity crowdfunding exemption to the registration requirements of the Federal securities law. In other words, follow the rules and regulations that the SEC and other regulatory agencies hand down, then you will be able to use the Internet to raise money for your company.

Crowdfunding allows; startups, ideas, projects… which do not fit the conventional venture investment pattern to attract funding through the participation of a crowd– you need a crowd (many people) to participate, e.g., family, friends, fans... According to the ‘Daily Crowdsource’; crowdfunding has gone from $32 million market to $123 million market in the past two years. In 2011, crowdfunded businesses and projects raised $102 million on rewards-based platforms, including $85.4 million raised by projects that reached their total funding goal… this signifies 266% increase in the total amount donated and 263% increase in the amount donated to projects that received their full funding.

This explosion is attributed to the increase in the number of projects that are being posted online. More than 31,000 projects sought crowdfunded donations in 2011, up from just under 12,000 in 2010. The ‘Daily Crowdsource’ report says; not only are more projects being launched, but the number of projects achieving their full funding goal is also increasing, indicating the market is becoming more efficient at allocating resources…

In the article “Crowdfunding: What it Means for Investors” by Bill Clark writes: The crowdfunding feature of the JOBS Act will not only impact startups, it will also affect investors. That’s because the law allows almost anyone to invest in a startup, however, there is one catch: In the amended Senate bill, the SEC has 270 days to interpret and issue the rules for the public. That means potential investors may have to wait until 2013 before it’s legal to make an investment.  In about 90 days the ‘Access to Capital for Jobs Creators Act’ should go into effect, allowing companies to tell the public that they are raising capital.

In the past, this type of solicitation was illegal and could exempt the company from raising money privately. Now, startups will be able to solicit their deal, which could mean that more investors will hear about it.  The caveat is that only accredited investors can participate in those deals where the company is soliciting. In other words, this will only apply to investors who fall into the following categories.

  • Your net worth is more than $1 million, excluding your home.
  • You have $200,000 in new income for the last two years and reasonable expectation to make $200,000 in the current year.
  • You have $300,000 in household income for the last two years and reasonable expectation to make $300,000 in the current year.

If you don’t fall into these brackets, then you have several options: 1. Review campaigns on crowdfunding platforms, such as; Kickstarter, Indiegogo, Rockethub… Here, while you can’t make an actual investment in company, you will get something for your contribution. For example, if you invest in a video game you might get a copy of the game. 2. You can sign-up on a startup listing platform, e.g., Angellist, where you can check out startups for potential investment. Or, if you choose to wait until 2013, then as a new investor you will need to fill out a suitability questionnaire which will ensure that you understand the risks associated with investing…

A recent ‘Crowdfunding Industry’ report reveals incredible potential for equity-based crowdfunding, saying: ‘After collecting data from more than 170 crowdfunding platforms (CFPs) and other sources, the results revealed that CFPs raised almost $1.5 billion and successfully funded more than one million campaigns in 2011.

As of April 2012, there were 452 crowdfunding platforms active worldwide; and there will be more than 530 projects by the end of 2012′. The report also found that the crowdfunding market is growing at the rate 63% CAGR (compounded annual growth rate) for total amount funds raised. The report identifies four categories of crowdfunding platforms:

  • Equity-based (for financial return): Platforms grew 114% CAGR, primarily in Europe, and raised largest sums of funds per campaign; over 80% raised $25,000+.
  • Donation-based (motivated by philanthropic or sponsorship incentive): Platforms raised the most funds at $676M, but the slowest-growing at 43% CAGR.
  • Lending-based (P2P, P2B, and social): Platforms represent the second largest category raising $552M, and grew at 78% CAGR faster than donation-based.
  • Reward-based (for non-monetary rewards): Platforms  show very high growth at 524% CAGR, but from a low base of about $1.6M  in 2009.

Surprisingly, it’s the reward-based model that currently accounts for the most amount of money in the crowdfunding industry (79%) at the moment (probably due in large part to Kickstarter’s model for success). Lending-based is currently the category with the smallest share, but that may change with the new crowdfunding bill. One determining factor in the growth of equity-based crowdfunding will be the ability for CFP’s to successfully satisfy SEC rules and become registered, then equity-based crowdfunding offerings are expected to rise exponentially.

Another highlight of report concerned the rate at which fundraising takes place. The popular theory is; the first 25% of funds take longer to rise than the last 25%. However, according to ‘crowdsourcing.org’, it takes approximately 2.84 weeks to raise the first 25%, then 3.18 weeks to raise the last 25%, on average. The lending-based take less time than equity-based or donation-based campaigns. These figures could be important when considering crowdfunding strategies.

In the article Before You Crowdfund, Read This by Mark J. Mihanovic writes: The JOBS Act legislation is sweeping in nature, and it contains various provisions crafted to ease capital raising for privately held companies. The provision that has generated perhaps the most buzz is a new securities exemption that allows companies to raise up to $1,000,000 per year from large numbers of investors through funding portals.

This allows companies  using crowdfund equity financing to greatly expand potential sources of capital. However, crowdfunding comes with some potential pitfalls. So if you are an entrepreneur forming a startup, you will want to map out your near-term and long-term financing strategies before you decide whether to go the more traditional route of friends-family, VC financing, crowdfunding. Here are a few points to keep in mind:

  • The crowdfunding provisions of the JOBS Act legislation include various requirements and complexities that your early-stage company must adhere to, including (a) specified disclosure obligations, (b) rules regarding which funding portals and brokers you can use in crowdfunding financings and (c) per-investor caps on investment amounts, which could prove difficult to navigate. The SEC will announce its regulations within the next several months, and that could have a significant impact on the utility of the crowdfunding option.
  • It could cost you significant time and expense to do the administrative work associated with record-keeping and potential contractual arrangements with large numbers of stockholders. Further, a greater number of stockholders could translate into a greater number of disgruntled stockholders, further translating to more potential stockholder lawsuits. This in turn could lead to, among  other bad things, higher directors liability insurance costs.
  • It might be difficult to obtain venture capital once you have taken a round of crowdfunding, so it’s likely crowdfunding will become an alternative route, rather than a stepping-stone to venture capital financing. In short, if you are considering near-term crowdfunding, be aware that the transaction might foreclose venture capital investment down the road.

In the articleCrowdfunding Mistakes that Can Kill a Campaign by Scott Steinberg writes: The biggest misconception people have about crowdfunding sites is that once they post their project up, things will fall into their laps with little effort. That is not true folks. ‘All growth depends upon activity. There is no development physically or intellectually without effort, and effort means work’.

Here are some fun facts that will help you reach success; 75% of crowdfunding projects use well crafted video to help gain more support, 65% posting users shoot video themselves, and 80% users share post on their Facebook, Twitter, personal blog and other media outlets that will help raise awareness.

Projects with clever and enticing giveaways have 70% higher success rate, and if blogs or large publications pick’s up your post, the project will experience significant boost. There are many ways to success; it just depends on what steps you take, hard work, and a lot of  marketing…

Business startup activity is at its lowest point on record– a point worth paying attention to since, historically, startups have created an average 3 million jobs annually, while existing firms lose 1 million jobs each year. As a ‘Kauffman Foundation’ report puts it: Startups aren’t everything when it comes to job growth. They’re the only thing.

According to the ‘Silicon Valley Watcher’, the latest report on trends in U.S. venture investments shows a massive decline of 40% in seed investments in U.S. startups in the final quarter of 2011, and a much larger drop of 48% for the entire year.  According to Dane Stangler; the U.S. badly needs to encourage a ‘producer’ economy– in which more people create companies and entrepreneurial opportunities– instead of the current ‘consumption economy’.

Proponents of the crowdfunding say that it will increase startup activity, whereas, critics argue that it will create– or exacerbate– a kind of speculative attitude. Also, the concern that lowering the barriers for entrepreneurs… to raise money will also make it easier for fraud artists… to take advantage of individual investors.

For many companies (in particular, those unable to get venture capital whether due to size, business sector, or geography), crowdfunding will make a great deal of sense… although, it’s highly unlikely that crowdfunding will change the game plan for companies that would otherwise be able to secure venture capital financing.

Crowdfunding might just be the answer that will allow for a consistent flow of funds for startups… but, until SEC releases regulations it’s anyone’s guess on the potential impact. In the meantime, a prudent approach for startups, entrepreneurs… and investors, alike, is to sit back and wait until we get a bit more clarity.

The crowdfunding alternative is new, evolving and subject to the securities laws and related liability. As such, you will probably need advisors– accountants, lawyers… to help navigate the regulations, disclosures and ongoing compliance.

Companies Too Big to Fail or Too Big to Exist: Dilemma– Morton Fork, Hobson Choice, Darwin Rule…

Once you lose your freedom to fail, you also lose your freedom to succeed and you cease to be a free society. ~Jeb Hensarling

Too big to fail (TBTF) is a phrase used in regulatory economics and public policy and describes certain enterprises and institutions that are so large and so interconnected that their failure will be disastrous to the economy. Therefore, the federal government has a responsibility to support them when they face difficulty, so goes the logic.

Proponents of the theory believe that the importance of some institutions means they should become recipients of favorable financial and economic policies from governments or central banks. Some economists, such as, Nobel Laureate Paul Krugman hold that economy of scale in banks and in other businesses are worth preserving, so long as, they are well-regulated in proportion to their economic clout; therefore, the too big to fail status can be acceptable.

In addition, the global economic system must also deal with sovereign states (countries) that are too big to fail. Critics see the policy as flawed and large banks or other institutions should be left to fail, if their risk management is not effective. Critics, such as, Alan Greenspan, believe that such large organizations should be deliberately broken up: If they’re too big to fail, they’re too big.

In the article Too Big to Fail by Kimberly Amadeo writes:  The phrase too big to fail arose during the financial crisis to describe why the government needed to bailout some companies. Big banks, insurers…  improved their profitability by creating, then selling, complicated derivatives…

When economy was booming, they derived an unfair competitive advantage, took over smaller firms, and became even bigger. When their investments started going south, they knew the taxpayers would be forced to bail them out– or risk global economic collapse. An example is AIG, one of the world’s largest insurers. AIG was too big to fail because, if they went bankrupt it could trigger the bankruptcy of many other financial institutions…

Lehman Brothers, investment bank, was also too big to fail but the government refused bailout and it filed for bankruptcy, triggering a deep-drop in the stock market… The mortgage giants, Fannie Mae and Freddie Mac, were also too big to fail because they guaranteed 90% of all home mortgages.

The government guaranteed $100 million in their mortgages, in effect, returning them to government ownership. If Fannie and Freddie had gone bankrupt the housing market decline would have been much worse, since banks were not lending without their guarantees...

Enter the Dodd-Frank Wall Street Reform Act, which is the most comprehensive financial reform since the Glass-Steagall Act. It sought to regulate the financial markets and make another economic crisis less likely. It set-up the ‘Financial Stability Oversight Council’ to prevent any more banks from becoming too big to fail. How? It looks out for risks that affect the entire financial industry. It also oversees non-bank financial firms like hedge funds.

If any of these companies get too big, it can recommend they be regulated by the Federal Reserve, which can ask it to increase its reserve requirement. The Volcker Rule, another part of Dodd-Frank, also helps end too big to fail. It limits the amount of risk large banks can take. It prohibits them from trading in stocks, commodities or derivatives for their own profit, however, they can do so only on behalf of customers, or to offset business risk.

In the article “Big Banks: Now Even Too Bigger to Fail” by David J. Lynch writes:  Two years after the Obama administration vowed to eliminate the danger to the economy from financial institutions that are too big to fail; those same institutions, the nation’s largest banks are bigger than they were before the financial meltdown. Five banks: JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, and Goldman Sachs– held more than $8.5 trillion in assets at the end of 2011, equal to 56% of the U.S. economy, according to the Federal Reserve, and that’s up from 43% five years earlier.

These banks, today, are about twice as large as they were a decade ago relative to the economy, meaning trouble at a major bank would leave the government with the same Hobson’s choice it faced earlier: let a big bank collapse and perhaps wreck the entire economy or inflame public ire with a costly bailout. ‘Many believe that nothing has changed, that too big to fail is fully intact, says Gary Stern. Giant institutions sheltered under an invisible government umbrella pose ‘a clear and present danger to the U.S. economy’.

This isn’t what the president had in mind two years ago when he vowed to prevent the further consolidation of the banking industry. The sprawling Dodd-Frank financial regulation bill that he signed in July 2010 was designed to avoid a repeat of the government’s frantic rescue of failing banks. Yet credit-rating companies Standard & Poor’s and Moody’s aren’t convinced that the too big to fail threat has been vanquished.

According to Richard Spillenkothen, former Fed’s director. ‘Probably the only way you can be 100% sure you’ve solved too big to fail,’ he says, ‘is by doing away with banks that are too big.’

In the articleToo Big to Fail – Too Big to Govern – Too Big to Manage.” by John W Rodat writes: The recent news that JP Morgan Chase had incurred a $2 billion trading loss reminds us again of the risks, to the rest of us, of organizations that are not only too big to fail, but too big and complex to be effectively managed.

Professor Simon Johnson, economist, puts it in simple terms:  The lessons from JP Morgan’s losses are simple. Such banks have become too large and complex for management to control. The breakdown in governance is profound. Conventional regulation will not protect either the economy or society because regulators have even less information and what information they do have is even more delayed than in the organizations they presume to regulate. 

The only effective solution is to reduce the size and perhaps the complexity of organizations that are so interlinked with the economy and society that the economy and society cannot afford to let them fail. According to Johnson; while information processing capabilities have grown to an extraordinary degree over recent decades, they have still not kept up with the growth in the size and complexity of large financial institutions. When too big to manage meets too big to fail; disaster – or another bailout – is inevitable.

In the article If It’s Too Big to Fail – Is It Too Big to Exist?” by Eric Dash writes: Nearly a century ago, the jurist Louis Brandeis railed against what he called the ‘curse of bigness’. He warned that banks, railroads and steel companies had grown so huge that they were lordingit over the nation’s economic and political life. ‘Size, we are told, is not a crime,’ Brandeis wrote. ‘But size may, at least, become noxious by reason of the means through which it is attained, or the uses to which it is put.’ Brandeis worried that the corporate giants of his day would imperil democracy through concentrated economic power.

His essays, published in 1914 under the title, ‘Other People’s Money and How the Bankers Use It’, helped drum up support for the creation of the Federal Reserve System, antitrust laws, and trust busting.  Devotees of economic Darwinism insist that corporate size, and its accompanying economies of scale, brings progress and benefit to consumers.

But how big is too big to fail? And how would you measure it anyway? In the case of big organizations, policy makers argue that interconnection of modern finance, as much as the size of the players, is the real issue. Frederic S. Mishkin, former Fed director, said; ‘there could be no turning back on too big to fail. You can’t put that genie in the bottle again. We are going to have to deal with it’.

In the article Too Big to Fail or Too Big to Change by Chad Johnson, Bernstein Litowitz Berger & Grossmann LLP write:  Pundits have criticized the Securities and Exchange Commission (SEC) and the Department of Justice (DOJ) as capitulating to the interests of big finance; citing the characterizations of SEC settlements as mere slaps on the wrist and the DOJ’s failure to convict a single executive responsible for creating the great recession despite significant evidence of misconduct. 

While the SEC has reached several settlements in connection with misconduct related to the financial meltdown, those settlements have been characterized as cheap, hollow, bloodless, and merely cosmetic, as noted by John C. Coffee, law professor. The relative lack of prosecutions stemming from this financial meltdown stands in sharp contrast to the government’s response to past corporate malfeasance.

The criminal cases arising from the ‘Savings and Loan’ scandals of the 1980s and 1990s, where some of the biggest kingpins– including Charles Keating of ‘Lincoln Savings & Loan’ and roughly 3,800 other bankers– were thrown behind bars, as well as, the Enron and WorldCom accounting debacles in the early 2000s where Jeffrey Skilling, Kenneth Lay and Bernard Ebbers were jailed, demonstrated that executives would be held accountable for their crimes.

As David Einhorn, hedge fund manager, told The New York Times; ‘since there have been almost no big prosecutions, there’s very little evidence that the government has stopped bad actors from behaving badly.’ Simply put, without forcing executives to answer for their misconduct, no amount of financial reform will restore public trust in government or the markets…

Too big to fail (TBTF) has no clear guidelines and thus any large organization can claim; it’s vital to the health of the economy, because its failure would have a domino effect on suppliers. For example, large oil companies going out of business would have a terrible impact on supplies of gasoline and heating fuel…

Big pharma that produce antibiotics and vaccines… which are essential and an interruption in their supply could have catastrophic consequences, from a public health point of view… According to Michael Heberling; TBTF is problematic, because it indirectly influences how companies are managed. If there is a real, or implied, government safety-net, management might be inclined to take on more risk for greater profit… Expecting a government bailout if things go wrong creates an incentive for a company to take on risk and enjoy the associated increase in return’, said Gregory Mankiw.

According to Thomas Sowell, ‘the hybrid public-and-private nature of these activities amounts to privatizing profit and socializing risk since taxpayers get stuck with the tab when high-risk finances don’t work out.’

In other words, it is a travesty to say or imply that current crisis stems from market failure. The most troubling aspect of ever-increasing number of government bailouts is the subtle change overtaking the entire country.

The mindset of companies and individuals today is shifting away from self-responsibility. We blame everyone else for our mistakes and look to others (the taxpayer) to come to the rescue. When it comes to handouts and bailouts the government is no longer simply on the slippery slope– it’s in free-fall. Every bailout makes it harder to say no when the next TBTF request comes forward…

If you put all your eggs into one basket, you better watch that basket. ~Mark Twain