The New Rules of Government Capitalism

To My Fellow Citizens:

Please be advised that effective immediately (i) the economic system heretofore known as "Capitalism" in the United States of America shall now be known as "Government Capitalism", and (ii) the following rules, to the extent not already in effect, shall be implemented immediately.

1. Any person who purchased a home or other real property without sufficient income to afford the mortgage payments and/or without sufficient documentation of his income, and/or who was advised by a mortgage broker or lender that his mortgage could be refinanced in the future because real estate values always go up in value (and without question accepted such assumption as valid because of greed, stupidity or ignorance), shall be entitled to a modification of his mortgage to the extent necessary to ensure that the owner will not only be able to make the modified loan payments based on a reduced principal amount, but also will be entitled to realize all of the profit generated from a future sale of the property without having to repay the amount of the reduction of the mortgage. The cost of the mortgage reduction shall be absorbed by such person's neighbors and other taxpayers, who have continued to pay their mortgages without government assistance and who only purchased properties they could actually afford based on their incomes.

2. All banks and other financial institutions that failed to properly manage their risk and instead sought to increase their profits by use of excessive leverage that was based on a continued increase in the value of real estate, and whose failure would cause "systemic risk", as arbitrarily defined by the Treasury Department and the Federal Reserve (since no written definition thereof exists, or if it does nobody knows how to apply it except arbitrarily), shall be entitled to billions if not trillions of dollars of government bailouts to create the artifice of solvency. The U.S. Government will increase the deficit by up to or exceeding $2 trillion in the next fiscal year (and trillions more in subsequent fiscal years) by borrowing money from the OPEC nations, China and Japan and other countries that currently maintain massive trade surpluses with the U.S.

3. In addition to U.S. Government borrowings, the Federal Reserve will print money to the extent necessary to fund any shortfall from the aforesaid borrowings. In addition, the Federal Reserve shall continue to loan trillions of dollars to the mismanaged financial institutions to guarantee that they make profits in the future at the expense of the American taxpayers and of retirees and other individuals who prudently saved money ("Risk-Averse Investors") on which they were anticipating a reasonable rate of return to fund their ongoing living expenses without having to deplete their principal balances.

4. Any financial institution that was insolvent based on FASB mark-to-market accounting rules in effect until FASB buckled under political pressure and quickly changed them, and which received U.S. Government and Federal Reserve assistance shall remain in existence. Shareholders whose interests were actually worth nothing and were not entitled to retain an ownership stake in such insolvent institutions without infusion of additional capital from them, will nevertheless continue to own their shares in such institution on a diluted basis. Such dilution shall be as little as possible even though private investors in such institutions received or would receive a much higher percentage ownership of in exchange for the same level government assistance in such institutions, whether in the form of bailouts or continuing policies to funnel money to such institutions by the manipulation of interest rates by the Federal Reserve at the expense of, among others, the Risk-Averse Investors.

5. If a federally-chartered bank is sufficiently large so as to possibly cause said systemic risk, the FDIC will not declare the bank insolvent under any circumstances. The U.S. Government via the Treasury Department, in conjunction with the Federal Reserve and and the FDIC will devise a plan to manipulate the bond market and the stock market to benefit those parties who are the least deserving of assistance.

6. In accordance with Rule 5 above and as alluded to elsewhere above, the U.S. will never wipe out shareholders and become the 100% owner of in an insolvent bank because to do so would require the exercise of honest judgment and transparent economic policies and equal treatment amongst all banks.

7. Any secured lender of an automotive company filing for bankruptcy protection such as Chrysler or General Motors, shall not be entitled to a greater return as a result of its secured position as compared to unsecured lenders or trade unions possessing unsecured claims. In fact, such a secured creditor requesting a greater return on account of its secured interest shall be ostracized by the Federal Government and shall be treated as a scapegoat by an over-reaching Executive Branch.

8. Any automotive company filing for bankruptcy due, in part, to rising health care costs, exorbitant union benefits as compared to non-bankrupt automotive companies and excessive corporate taxes, all of which costs impede the ability of U.S. car manufacturers to compete effectively in the global market, shall be entitled to sell all of their viable assets via a government-sponsored sale, the end result of which will ensure either majority control of the reorganized entity by the U.S. Government or the United Auto Workers or some combination of both.

9. Any government-sponsored bankruptcy sale in an automotive bankruptcy case shall not be required to distribute the proceeds thereof or such other value obtained for the bankrupt's assets pursuant to the the various contracts and agreements of the subject automotive company or the priorities established by the Bankruptcy Code and longstanding legal precedent unless the government, in its sole discretion, decides to abide by the law.

10. Any Risk-Averse Investor or responsible banking institution shall be required to bear the cost of the foregoing policies along with the American taxpayers. No Wall Street executive or other highly-compensated individual of those institutions shall be required to disgorge any bonus payments made with respect to highly speculative transactions which ultimately contributed to the insolvency of those institutions absent government bailouts.

11. In addition to the recent change of the FASB mark-to-market accounting rules that required an institution to write-down the value of real estate to the best estimate of its current market value based on actual real estate transactions occurring in the marketplace, all new accounting rules and regulations by FASB shall permit irresponsible banks to reflect real estate assets on their books based upon a fantasy model of the value of such assets in the future and the assumptions underlying such fantasy valuations shall remain within the sole discretion of such financial institutions that were unable to manage their risk properly in the first place.

12. The term "Generally Accepted Accounting Principles" shall be changed to "Sometimes We Feel Like A Nut And Sometimes We Don't Accepted Accounting Principles. The organization called the Financial Accounting Standards Board or FASB, as referred to above, shall hereafter be referred to as the Insipid Financial Board of Standards or "IF-B.S.".

13. This is just a preliminary list of the rules of new Government Capitalism that will go into effect. Additional rules will be adopted and implemented if and when any of either the U.S. Government, Treasury Department, Federal Reserve or FDIC have a wild hair up their respective posterior.

We welcome suggestions for further changes to the previous system of Capitalism in order to conform more closely with the principles and philosophical foundations of Government Capitalism. We look forward to working with you to develop as many regulations as possible so as to undermine the principles of Capitalism that have led to the unprecedented and unequalled economic success of the U.S. since its formation.

Good luck on surviving the new Government Capitalism without filing for bankruptcy, losing your job or the value of a substantial portion of your net worth due to massive inflation in the coming years,

Uncle Sam

Obama's Blame of Hedge Funds in Chrysler Affair Sends Ambivalent Message

In announcing the collapse of negotiations to stave off a Chrysler bankruptcy filing, President Obama yesterday squarely blamed a "small group of investment firms and hedge funds" for the impasse. After commending the efforts of Chysler's management, the United Auto Workers, the Task Force of Autos and the substantial majority of lenders, he singled-out the hold-out creditors that were unwilling to accept the Government's offer to resolve approximately $6.9 billion of outstanding loans for $2.25 billion. In doing so, he chastised the recalcitrant lenders for failing to act in their own best interest and those of the other parties who had contributed and sacrificed to achieve a global resolution.

What Obama failed to mention is that the supposedly "unwilling" creditors consisted of 20 lenders owed $1 billion possessing the highest secured interest in Chrysler's assets and are first in-line to be paid in the event of liquidation. So, what Obama was really saying is that even if, in actuality, a not-so-small group of creditors negotiated an arm's-length lending arrangement with Chrysler granting it a superior right of repayment, such creditors should voluntarily relinquish that right because everyone else would be better off it they did. This is a shocking statement, fundamentally contrary to property and contract rights and to principles of capitalism and smacks of Western Europe's Socialist tendencies.

Let's take a basic "garden-variety" secured transaction for comparison's sake. A person buys a home or other piece of real estate, subject to financing. The lender, after reviewing the credit-worthiness of the borrower and the underlying assets to be financed, agrees to loan the balance of the purchase price secured by the property. In the event, the loan is paid according to the terms negotiated, the lender continues to receive payments during the life of the loan until satisfied in full. On the other hand, if the borrower is unable to make the required payments, the lender is able to foreclose its security interest in the property, become the owner of the property and to sell it to satisfy some or all of its remaining debt. Without such a financing mechanism, the vast majority of people would never be able to afford a home or only be able to purchase a home up to the amount of his available cash resources. In that instances, the value of real estate and the corresponding market would collapse due to a lack of qualified purchasers.

The same is true of commercial finance. Many borrowers would not be able to obtain loans to finance inventory, payroll and other operating expenses without granting a lender a security interest in its assets. Other loans may be made on an unsecured basis, but usually at a higher rate of interest than a secured creditor because of the increased risk of non-payment. Such lenders understand the increased risk is due to the fact that there is senior lender ahead of them that must be repaid before they receive anything. So, when Obama was complimenting the "majority of lenders" going along with a debt-reduction repayment plan, this was nothing more than pure political posturing. Essentially, Obama was complimenting lenders who agreed to receive more than they had otherwise initially negotiated to receive when making loans to Chryslers, being fully aware of their junior payment priority status. He, instead, chose to criticize the very lenders who negotiated for a higher priority of repayment in the event of default.

Why is this troubling? Because our entire commercial financing system is based upon a basic understanding of borrowers and lenders as to what rights they possess in the event of non-payment of a loan according to its contract terms. The lenders understand how they will be treated in relation to other lenders and price the risk via the interest rate charged on the loan plus any additional fees such as up-front points on a typical home mortgage. The borrower also understands that certain lenders have a priority right of payment and others may possess a lower priority security interest and still other may not possess any security at all for their loans. In the commercial world, as pointed out, these greater or lesser risks of repayment are priced according to relative risk.

Suggesting that the senior creditors agree to receive a lower amount than they would be entitled to in the event of liquidation or, worse yet, an amount equal to or similar to the rate of return of junior creditors, has no basis in the law. It was merely an attempt to demonize creditors for exercising their rights, where their rights were substantially superior to other lenders. Vilification should be reserved for unconscionable or abhorrent behavior fundamentally at odds with acceptable moral behavior, none of which is even remotely present here. It should be used even more rarely as a political tactic especially by The President of the United States.

We are a country of laws and for someone to exercise his rights, especially those rights no one has seriously challenged as of yet as valid, is alike to purposely poisoning a jury pool before a trial begins. This is not behavior to be celebrated; rather, it should be scorned. For if anyone is bludgeoned into foregoing his legitimate rights due to political pressure or for the betterment of the "whole", we are taking a great stride away from the premises upon which our legal and financial system depends.

While President Obama may have been disappointed in the outcome forcing Chrysler into bankruptcy court, a substantial portion of the work to reorganize the company has already taken place. He and his administration and the other parties contributing to those efforts should be praised. But, now is the time for the court to decide the legitimacy of the claims asserted by the unfairly castigated lenders. If they succeed in the end, they deserve an apology, not only because they will have been right but because they correctly resisted intimidation coming from the most powerful person in the world.

Whether the actions of these lenders will have adverse political consequences on hedge funds or the like in the form of increased regulation or tax policy should be judged on their merits. But it would truly unfortunate to penalize a group of individuals or entities simply because they chose to exercise their rights as every American citizen should feel equally free to do.

May 1, 2009 (Updated)