I’ve spent my lunchbreak checking in on the latest government acquisition; AIG. I don’t know a whole lot about the regulatory environment for insurance, but once again, we have a situation where a company got so big that it could wreak havoc on the financial system. Hence, USA-AIG Inc.
The problem here is Wall Street. I don’t mean the caricatures that are getting thrown around in the media. It’s way too easy to imagine evil Wall Street tycoons twirling their mustaches. McCain is especially playing this up. After all, it’s pretty easy to invent a villain but much harder to explain how things actually work. Witness recent republican electoral victories (including the forthcoming republican victory).
Many managers at publicly-traded firms earn their compensation through the share price or some derivative thereof. Wall Street does not reward companies that do not grow. Traders are looking for the next Google or Microsoft.
This creates a clear and strong message for managers - GROW OR DIE. And the easiest way to grow is through acquisitions. In the olden days there were regulatory limits on acquisitions. Growth was regulated either through government agency or statutory limits. Under the Sherman Antitrust Act (and many others) certain types of mergers and acquisitions have to be approved by the federal government.
The other kind of regulation are statutory limits. These laws expressly forbade certain kinds of companies from engaging in certain kinds of business. An example I’ve talked about before is the Glass-Steagall Act which separated commercial and investment banks.
Over the past thirty years banking and many other industries have become increasing deregulated. Managers have taken advantage of this and turned Mergers & Acquisitionsinto big business. Toss in a few CEO’s who want to build global empires and well, here you go. We’ve seen massive consolidation in all kinds of industries most notably banking and insurance.
Hence we have a collection of companies that are all too big to fail. And now the federal government is spending money faster that it’s presses can keep up.
There’s a point to all this rambling. E.F. Schumacher said it best, Small is Beautiful. We need to get back to a time when regulation actually existed and companies were smaller. There is scant evidence that any good is derived from acquisitions and business history is littered with failures. AOL-Time Warner, and DaimlerChrysler come to mind.
Despite this scant evidence, mergers and acquisitions continue to happen. As long as compensation is tied to stock price, there will be a strong institutional push to acquire. Companies will not police themselves. They will continue to M&A themselves to death. The short term rewards of massive bonuses and stock options are too great.
This is why government intervention is needed.
We have massive market failures when the government abdicates it’s responsibility. Examples? Savings and Loan crises, California Energy Crisis of the early 2000’s, the housing crisis, the credit crunch…all of these have their origins in some kind of deregulation.
Go ahead, call me a socialist, but what do you call the current administration? We have deregulated ourselves right into full-bore socialism. Karl Marx would be so proud.
As a postscript, I will agree with hardline free marketers that our regulatory state is very fragmented and confused. It should be made simpler and clearer, but that’s the topic for another post.
