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Lincoln Institute


The Way Ahead - A Nation in Crisis

by Frank Ryan
 

Whenever a nation's government tells its citizens, either business or labor, that they can run your operations better than you can, that government's credibility is shaken.

As a response to the business crises with Worldcom, Enron, and Adelphia, the legislative branch passed and the President signed the Sarbanes-Oxley bill intended to clamp down on corporate fraud by using the full weight and power of the SEC to enforce this mandate. However, the Government Accountability Office has again cited the SEC for seven straight years for the SEC's own material weaknesses in systems and control in its own financial reporting systems.
Sarbanes —Oxley did little to prevent the financial crisis of 2008 yet it has cost corporations, their employees, and shareholders dearly.

Recently the FDIC voted by a margin of 3-2 to impose higher fees on those banks whose compensation plans encourage risky behavior. The agency is interested in encouraging (read force) banks to compensate managers with long term payments in the form of restricted stock.

While one can easily argue the merits of the Sarbanes-Oxley Bill and the wisdom of the scrutiny of pay systems for banks, the seriously and potentially fatal flaws in enacted laws to the health of our economy warrant exposure. The very destructive nature of many of our laws actually rewards companies and labor for the very behavior the regulators are seeking now to discourage.

The FDIC complains of risky behavior by banks and I do not disagree. What the FDIC does not mention though is that the risky behavior came about because of federal legislation which made home ownership a right rather than a right AND a responsibility.

Anyone with experience in the banking industry can tell you that the Freddie Mac and Fannie Mae structures of buying loans after pre-approving the loans through the banks made mortgage lending a mechanical exercise rather than a financial exercise. If the prospective purchaser qualified for the loan with the government, the mortgage lender made the loan frequently only looking at the closing costs as the greatest source of income for the lender. Fannie Mae and Freddie Mac would purchase the loans and seek financing in the secondary market for the mortgages that they just acquired. And so the system evolved.

The real problem however is not the process of approving mortgages but it is the process of appraising homes. The use of the comparable value concept for home valuation is silly at best and not academically reasonable to produce true long term values of the home. The use of the current appraisal process virtually guarantees that in good times values will be shown as higher and in bad times lower neither of which is accurate.

These two examples are but samples of what happens when government attempts to "correct" a market and make it into its own image and likeness.

The purpose of government is to provide the rule of law, a framework for commerce.

Governments do not create jobs. Taxes are an expense.

As fast as government tackles a problem it thinks it understands, the market responds with its own corrective action thereby mitigating the irrational behavior caused by the attempt to regulate to begin with.

To thwart the economic crisis that government has brought about, the legislature must take action now. The actions include:

Establish only a framework of commerce. Establish principles of ethics, integrity, uniform commercial code and the like. Anything more is interfering and likely to have horrible unintended consequences.

Get the federal spending under control. Cosmetic actions of reducing a planned deficit of over $1.4 Trillion by $100 Billion are disingenuous at best. Putting a band aid on a hemorrhage is counterproductive and fatal.

Make substantive changes to the regulatory environment. Sarbanes-Oxley does not work. A system of internal controls demanded by the market place does.

Eliminate agencies that do not add value to an economy. The Department of Education and Energy Department are two places to start. Both have failed miserably.

Hold all federal agencies to the same standards as industry and labor unions. I would love to see an accurate set of federal government financial statements properly audited.

Audit the Federal Reserve.

Review the authority and responsibilities of the FDIC. Either allow it to function as an insurance agency with audit capability or move it to the private sector.

Eliminate the TSA and solve the terrorism problem by confronting it head on.

End deficit financing.

Our nation is in crisis. Cosmetic actions will not work. Until our elected leaders understand the severity of this crisis, the dangers to our very stability and functioning as a world class economy are threatened.
Bureaucracy kills! If the SEC cannot live by its own rules and if the FDIC does not solve the real problem behind the financial crisis we are only delaying the inevitable depression.

Solve the problem! Follow the Constitution!

Frank Ryan, CPA specializes in corporate restructuring and lectures on ethics for the state CPA societies. Frank is a retired Colonel in the Marine Corps Reserve and served in Iraq and briefly in Afghanistan. He is on numerous boards of publicly traded and non-profit organizations. He can be reached at FRYAN1951@aol.com


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