Failure is Contagious...Wash your hands, Clear your mind, Start over

I appreciate as much as anyone else all of the rage associated with bonus payments paid to Sr. management within taxpayer subsidized companies. AIG is providing us with the current outrage. Each and every financial institution and auto manufacturer that has received TARP funding, has dispersed bonus payments after taking the funds. I have a record. It is true. The outrage is warranted and should have been anticipated by all of these companies who used to only have to answer to their board and shareholders, but now have a slightly larger, aggravated, wounded and unwilling group to address.

Rewarding far reaching failure is distasteful, and if you stay with me on this you’ll see that it is material to our correction and our recovery.

Some of the people who work for these “bailed out” firms who have received bonuses are not responsible for their company’s failure let alone the failure of our financial system, but unfortunately for them, they were in the wrong place at the wrong time. They should not expect bonuses at the expense of the taxpayer. They should be thankful to retain their jobs, and work toward doing them better.

One of the reasons why we are so outraged, beyond the obvious, is that in all of our national efforts to stem further financial decline, to correct and to avoid collapse, none of these public forums or gov’t appointed financial “fix it” people have addressed our resentment. The grief, worry, and resentment felt by the American people has generally been dealt with privately. AIG Bonuses opened the curtains a little, but I fear the windows of our private frustrations are about to burst open and shatter. Yes, we have heard Obama say that he understands our frustration and anger. He warns us that we will not make significant progress if our governance is strictly reactive and guided by our anger Vs proactive and guided by our drive to succeed and rebuild. His words are comprehensible. You can hardly argue with their logic and correctness, but they just are not all that instructive or reassuring.

It would have helped me tremendously if someone within a failed financial institution, “voluntarily” stood up at the public pulpit, acknowledged the widespread pain, and owned up to the failure. I would have listened to Liddy if he had bought 60 minutes of airtime to address the public. All I needed to hear in layman’s terms was this:

1. This is the business model of AIG
2. This is how we add value to our customer base
3. This is how we make money
4. This is how many businesses/consumers we touch
5. This is our size - $ value and market penetration

That should take 15 minutes…no debate or discussion warranted, simple statements of fact regarding their business.

The next 45 minutes would be more painful, but instructive and potentially calming to the general public. In the next 45 minutes he could have broadly chronicled the failure to help us understand :

1. What happened
2. How it happened
3. How to fix it. At lease how to attempt to fix it
4. How to adjust business practices, regulation, oversight, markets - so that it can never happen again

Don’t role your eyes. This financial collapse is widespread and complex but it can be traced. In his statements, I would not have expected Liddy to chronicle every detail, I am just interested in the predominant infractions that allowed the house of cards to be built, and subsequently to fall. I don’t even need him to shoulder all of the blame, I just needed him to acknowledge the risk, miscalculation and resulting massive failure .

And I will say this. I would rather have heard this explanation from a private citizen, active and scholarly regarded in the business world, than from a career government official. Through all of this, I have come to believe that George Soros is right, and has been all along, Alan Greenspan is naive and probably complicit, and Henry Paulson is a greedy, narcissistic thief.

Obviously there is plenty of blame to go around. Government contributed to this mess, so it should be leaned on to help clean it up. The problem is that the only support government has access to, is taxpayer support….and this financial mess has destroyed governments’ tax base…. All of this we know, too well…what I didn’t understand fully before this week is that there are 3 primary financial instruments and/or structures that are largely credited with our global financial demise:

CDS – Credit Default Swaps
Hedge Funds & the practice of shorting as an investment tool
Sub prime mortgages

All of these are 1. Largely unregulated, 2. Risky 3. Propelled through loss vs gain.

You are probably ahead of me on this, but I have just recently sifted though all of the divergent and widespread financial carnage to arrive at this, the core of the problem. Profoundly interesting to me is that each of these financial principals relies on failure of companies, industries, and/or markets to be profitable. We have been betting on failure. We have engaged ourselves in predicting failure and have been rewarded for failure. Not unlike the bonus activity that has so enraged us.

This is dangerous when you consider that the stock market, the cornerstone of wealth accumulation in a capitalistic society is based on the future prosperity and profits of public companies. Prosperity we can all take part in and gain from as we participate in the stock market, buying and selling shares of public companies. If we, as a majority, place bets on failure of companies, and get rewarded financially when they fail, we are creating a self fulfilling prophecy. When we short a company, we effectively loan that company money at what we believe to be an inflated share value….when the value falls to its appropriate market value, the company has to payback the difference to those that shorted it . This propels failure. Credit Default Swaps, a big business for AIG require that buyer and seller “swap” degrees of failure. If they fail less than the buyer predicts, they make money. If they fail more than predicted, money is lost. Companies that have Credit default values on their books have to maintain a certain amount of cash to back them up. If they unload some of the credit default holdings, via “CDS”, they can operate with less cash….

Are you with me here….

Everything is risky, we ignored a reasonable risk ratio, took on too much debt, miscalculated. Money was lost. The loss started to spiral, cash reserves were depleted….and here we are….Comforting isn’t it !

Surprisingly, it is somewhat comforting for me, to merely understand the journey to the fall. If we don’t understand or acknowledge how we fail, we are doomed to failure. We have got to face it, analyze it, get angry at it , and then fix it….Obama is on point in his forward, corrective persistence. His team needs to keep their heads down, their minds open and do their diligent best to fix this mess. You as an individual need to do the work to face it, try to understand it and find a way to be productive while you are uncertain and fearful.

Remember the crash has already happened. Now we are looking for some level of reassurance that this mess can actually be fixed before we all go broke. Part of our resentment is rooted in our disbelief in how it could get this bad, part of it is appropriately directed to our disgust in the greed, and the rest represents our fear. If we are honest with ourselves…and here I will speak strictly for myself, I am scared…I am hopeful but I am also afraid.

Afraid, yes. Desperate, no. I will figure out how to survive and prosper. My financial situation may change drastically, but my perspective on prosperity will stretch beyond the narrow boundary of financial security to a broad landscape of interrelationships, depth of character and just plain pleasure derived from a number of different sources, many of which will be free.