Government Intervention Isn't the Answer

At a real company, the CEO is extraordinarily busy, making difficult decisions, visiting customers, meeting with senior management and constantly assessing the marketplace. These are highly compensated individuals whose efforts yield actual economic productivity, not mere symbolism.

Yet in the bizarre world now known as corporate America, CEOs of the Big Three auto makers are asking for billions of dollars in taxpayer aid by promising to work for $1 a year in salary and driving to Washington in fuel-efficient hybrid vehicles that, with gas prices now back under $2 a gallon, seem rather fruitless. This entire exercise is a colossal waste of time.

Just like the misdirected anger over AIG's (AIG) sales junkets, the political outcry that has prompted such theatrics adds insult to injury for taxpayers soon to be on the hook for even more of the auto makers' poor decisions. Even as the free market shuns these companies, lawmakers plan to make us all involuntary investors, just as they have with Freddie Mac (FRE), Fannie Mae (FNM), AIG, Citigroup (C) and others.

Nobody cares about private jet travel for a profitable company. Yet now that taxpayers are subsidizing years of poor decision-making, suddenly we've all got to be aware of the room-service tab for every trip General Motors (GM) CEO Rick Wagoner makes.

If driving cross-country was all it took to get $9 billion, than Jack Kerouac and Clark Griswold would both have been billionaires. In a capitalist society, values are achieved not by failure, but by success. The fact the auto makers' overtures will likely result in these failed companies being given billions in taxpayer dollars illustrates the dangerous era in which we live. Crucial decisions regarding your hard-earned dollars are being made for "symbolic" purposes rather than economic ones. Needless to say, this is not how great American companies have historically been built. 

The Spectrem Millionaire Investor Index, created by Chicago-based Spectrem Group, tracks the investment outlook of wealthy individuals with portfolios greater than $1 million. The index dropped to a record low in November, making the biggest one-month decline in the index's history. More worrisome, the data indicated that almost 50% the wealthy investors were not putting money to work in investments like stocks and bonds.

If the $7 trillion pledged by the government thus far to prop up the financial markets was working, you'd expect those indicators to be moving in the opposite direction. Not surprisingly, the government's response to an ineffective and expensive program designed to restore investor confidence is simply to spend more and hope the situation changes.

Earlier this week, the Federal Reserve announced plans to extend three emergency-loan programs, originally intended to end Jan. 30, to April 30 in an effort to (you guessed it) shore up confidence in the economy and financial sector. The Primary Dealer Credit Facility, Term Securities Lending Facility and Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility were designed to prop up money-market funds and provide below-market-rate loans to banks and Wall Street dealers.

Of course, as I've been pointing out for months, the effect of all these "temporary" interventions has been to exacerbate and deepen the crisis.

Has confidence improved? According to the credit-default-swaps market, the cost of protecting corporate debt from defaulting has risen to record or near-record levels in the U.S., Europe and Asia. The Markit LCDX index, which tracks the market's perception of risk on leveraged loans, is also trading at record lows.

Now Secretary Hank Paulson and the Treasury Department are temporarily considering using newly nationalized Freddie and Fannie to push down mortgage rates to as low as 4.5% in an effort to spur home buying. This is in addition to a program announced last week in which the Fed plans to buy up to $600 billion of Freddie/Fannie debt to push down borrowing costs.

The problem with temporary market intervention from Uncle Sam is that it tends to work up until the point that Uncle Sam stops intervening. Witness what happened with the short-sale ban enacted earlier this year. As I wrote, the ban initially prompted stocks to jump sharply. Yet most of the stocks on the list ended up dropping anyway in the following weeks, a process which accelerated once it was finally repealed a few weeks later. Turns out that in the real world, markets actually do move on supply and demand rather than government edict.

It's likely only a matter of time before many of the temporary measures enacted to boost the economy become permanent, further damaging the free market's ability to function and progress. The more government has done to "fix" the crisis, the worse it has become. Why will this latest intervention be any different?

In the 1980s, Barry Minkow perpetuated the ZZZZ Best stock fraud, which eventually cost investors $100 million. Since then, this hyper ex-con has turned Church-going crusader, co-founding the Fraud Discovery Institute and uncovering over $1 billion of alleged financial fraud in the process.

Recently, Minkow launched DegreeFraud, which focuses on uncovering the misrepresentation of academic credentials by executives at public U.S. companies. Minkow claims to have unearthed inconsistencies or inaccuracies in the backgrounds of several execs including Vahid Manian of Broadcom (BRCM), James Peterson of Microsemi (MSCC), Robert Lazarowitz of Knight Capital (NITE) and Owen Kraz of Helix Energy (HLX).

It's my belief that, just as it is on Main Street, fraud on Wall Street is a fact of life, not a way of life. Still, Minkow's devotion to uncovering nefarious conduct serves not only to redeem his own checkered past, but provides a true public service to today's investor that mere regulation can't.