Everyone remembers the term “Too big to fail” (TBTF) which, once again, gained prominence in the early years of what we now call the Great Financial Crisis of ’08 (GFC). It evolved shortly after into a catch phrase used by all sides when arguing about what responsibility, along with further repercussions “Big Banks” (and brokerage houses now called “banks”) had in creating the conditions for such financial turmoil now warranting its own historical moniker.
TBTF was used as both a defense to save them, as well as slur against that defense. “We have to save them or we’ll all go down!” was pretty much the rallying cry screamed in the front chambers and back rooms throughout the political strata for massive, never before thought possible, government intervention.
The other side of that argument went something akin to: “If you save them you’re just rewarding bad behavior. Too big to fail proves that they are just that: too big and should fail!”
This was pretty much the call and warning decried by free market capitalists everywhere. Yes, we understood that there would be consequences for such action or, non-intervention if you like. But the consequence going forward would endeavor to create circumstances for more perilous to the underlying principle and understanding of what free market capitalism truly means or, is. Especially when not only was it not the one and done type of proposal that was at first proposed, but rather, still going in many other ways.
For the last decade we have not lived in a free market economy, and there are far too many that think we do. The stock markets (globally) now warrant their own identifier when trying to discuss business valuations. i.e., Are we talking markets, or “markets?”
The reason is simple – free market capitalists are fully cognizant that the latter has nothing in common with the former, except spelling. We (e.g., governments) abandoned the concept in 2008 and have never, repeat, never returned. What we currently have is the illusion of free markets.
For those that believe this is hyperbole, may I remind you of one of the most damaging statements (as well as follow-thru) ever to pass the lips of any politician, let alone, the one holding the highest office in the land of free market capitalism. To wit:
“I’ve abandoned free market principles to save the free market system.” –George W. Bush 2008 exit interview with CNN™.
To reiterate: We have never returned.
If you believe that is a false argument or hyperbole? May I remind you (because I know you’re not watching as the ratings prove) that the daily diatribe via the mainstream financial/business media reports are void of any useful information unless they include “The Federal Reserve announced….” “The ECB’s Mario Draghi just announced….” Japan’s Central Bank just purchased…” “China’s central bank injected…” etc., etc., etc.
This is what now (and has for the last 10 years) drives “markets.” Period.
Today what we call “markets” is nothing more than momentum trades perpetuated by front running algorithmic programs that were created and indirectly (or directly for that matter) financed by the Federal Reserve with its myriad of Quantitative Easing programs, (e.g., QE 1, 2, 3, Twist, et cetera) along with its assembly of other central banks around the globe. Hint: Just look at the Swiss National Bank™ alone, for clues)
Anyone, and I mean just that: anyone (especially those of the Ivy League business school Ph.D. set) that takes to a microphone, camera, or keyboard and has the gall to start talking about P/E’s or other such trite as “fairly priced compared to historic norms” and more – should lose their “shingle” and be sent out into the world to forage in the wilderness of having to earn a living not dependent on enslaving more and more students with debt that would make even Keynes blush. For where we are today is history – nothing compares to it, for we are writing (as well as making it all up) as we go.
And now since I mentioned “making it all up” the segue writes itself.
During the GFC there were calls emanating from the populace that the leadership at many of TBTF banks were not being held accountable. As a matter of fact, there were many instances that seemed to warrant criminal charges, but were never brought forward. This is where the term “Too big to jail” came into the lexicon when then Atty. General Eric Holder appearing before a Senate Judiciary Committee in 2013 stated the following in reference to that precise term.
Via Market Watch™, to wit:
“I am concerned that the size of some of these institutions becomes so large that it does become difficult for us to prosecute them,” Holder said.
He continued: “When we are hit with indications that if you do prosecute — if you do bring a criminal charge — it will have a negative impact on the national economy, perhaps even the world economy. I think that is a function of the fact that some of these institutions have become too large.”
Enter Silicon Valley.
(Too be clear: I am not arguing for charges or anything of that sort in regards to anyone or company. What I am arguing is what was once interpreted as “the rules” seems to no longer apply to anything connected to the “markets” of today and using its glaring examples of the moment for comparison.)
Today there’s an unrelenting brouhaha about election manipulation and more when it comes to social media giants like Facebook™ and Twitter™, et al.
Congressional hearings have been called, CEO’s have been brought forward, and the results are always the same. i.e., “Gee golly whiz, it’s not anything we’re doing per se – it’s the algos!”
The question that seems to be never asked, but is the most important of all the follow-ups that could be asked, is this:
“I see. Well then, let me ask you this way: who’s creating said algos, and more precisely, who’s signing off for their implementation, along with continuance?”
This is a question very similar in-kind that is always (well, used to be) asked when banking executives are called up before congress. The reasoning is simple: Who’s in charge there if not the CEO? i.e., the CEO is the ultimate authority to a business. If they aren’t, then why are they paid (as well as demand) the highest wages or incentives?
Banks today seem to face draconian type measures when compared to anything related to the Silicon Valley narrative. e.g., Big Tech in general.
Wells Fargo™ past CEO, John Stumpf suffered far worse treatment and ridicule for his “I wasn’t aware” styled defense when it came to the misdeeds under his watch. And many still feel he should have been doled out criminal charges for what has been (and still!) brought to light since.
Facebook? It seems to go something like this: Congressional Panel: “We look forward to your replies to our request.”
Response? Some several hundred page baffle’-m-with-bullsh#t techno garble, along with statements from all of management singing in chorus Mark’s kumbaya plea of “We can do better, and will!” As they sell their shares in record amounts.
This type of activity, at one time, would be nearly all the proof that was needed to bring forth charges under current business law for some form of negligent or deceitful corporate governance. Just blaming “algos” while top management sells its shares at a furious pace right before an investigation used to warrant such calls. Today? (insert cricket sound here)
It’s quite possible their sheer size and ties to 401K retirement accounts everywhere, along with many a government backed pension plan, has now offered much in-kind as what former AG Holder implied. i.e., They’re too big and would cause great disruption of the “markets.”
I find it just fascinating (as well as a bit disturbing) that congressional leaders now feel the need to bring up before a committee a company (e.g., Twitter CEO Jack Dorsey) that many are claiming has the potential to sway elections when its CEO, along with its Board, doesn’t take the company itself serious enough to warrant the idea that the CEO must be a full-time participant.
Bots and/or algorithms are supposedly being purged by the millions as of today. Yet, it is those very “algos” that were parading as “users” not all that long ago that were counted as the metrics for enticing investors to either buy in, or stay in. Fair assumption is it not?
Again: so what we’re all now supposed to take as gospel is that all the “bad algos” are what are being purged. What creates a “bad?” What metric is used to calculate the algos that supposedly purge “bad” ones? Do any remaining provide “click revenue?” If not, what is the metric to prove such? How many times has it shown to be incorrect in previous attempts? Who makes these calls? What metrics are used to make those calls? How many of these now purged were previously included in prior earnings reports? How many times previous has such a purge been done before, and what metrics were used then? Why and how, has this been allowed to happen in the first place? And on, and on, and on…
These are the types of questions that would be demanded to be answered by any CEO that was in control of a $10’s of BILLIONS of dollars corporation just 10 years ago, let alone, one that’s just recently been included into the coveted S&P 500™.
Today? It’s CEO can’t even be bothered or, its Board just can’t seem to attract someone capable of filling the gig full-time. It seems the company itself just ain’t all that important to either.
Think about that.
Let me ask you this dear reader, ponder the following: If the Board, along with its CEO, felt that they could be held accountable – criminally – for actions taken (or not taken when appropriate) for corporate malfeasance or, other such things: Do you think there would be a full-time CEO at the head of such a company?
It used to be when CEO’s were dragged before congressional panels: heads would roll. Why?
The assumptions were always clear via the reaction. Share holders would demand change via the selling of shares. (i.e., Sell first ask questions later.) until the Board and management proposed believable, remedial solutions. Today? Shares barley budge if they budge at all.
Next case in point? Elon Musk.
For those unaware, Tesla™ CEO Elon Musk committed what many call the most egregious, as well as possibly criminal, violation that the CEO of a public company can do. He stated publicly that he had “secured” funding to take his company private – and – at a sale price that would all but annihilate even the most well-disciplined short sellers. e.g., $420.
This one statement (or tweet if you will) caused Tesla shares to skyrocket, wiping out many a short sellers account while rewarding others with ill-gotten gains.
Acts like this coming via the CEO of one of the most heavily shorted companies, with a tendency to publicly taunt those very shorts with ridicule and scorn (along with thinly veiled threats) would almost immediately have the Fed’s swarming into his offices and himself probably led in some televised “perp walk” by the agencies first, as they then try to sort out the details after.
All conjecture of course, but when placed against what used to be the backdrop (or norm) of how the Fed’s and other agencies dealt previous with just your run of the mill “insider trading” type arrests. A CEO even allowing for such an idea to stay in his head would be cause for that CEO to step down on his own.
There used to be an innate, as well as thoroughly understood corporate responsibility (aka fiduciary responsibility) of understanding to what the ramifications of anything remotely resembling such would entail, and were far too onerous to take any chances of doing something so foolish. But those days seem long past. Now it’s all “the medications fault” defensive posturing.
It is of a wonder too me that all we seem to hear over these ensuing days has been something akin of: “The SEC is currently looking into it.” i.e., No big deal, it’s just Elon being Elon, maybe there’ll be a fine or something, emphasis on “maybe.”
The only thing that causes my “wonderment” to enter the “rabbit hole of Wonderland” is the fact that Tesla’s share price as of this writing are still hovering within spitting distance of its all time highs!
There was a time when saying that the Fed’s or, any other form of government enforcement agency, were launching into an investigation would immediately cause markets to react. Today?
All that makes these “markets” react is what The Fed. (e.g., Federal Reserve) will or won’t do in regards to interest rates or, balance sheet moves. All else of what used to be regarded as possible “white-collar crime,” is now simply regarded by these “markets” as: white-collar noise.
Who knew “it’s different this time” could have so many connotations.
© 2018 Mark St.Cyr