Reading Daniel S. Loeb’s second quarter investor letter (PDF) one way, one could surmise he believes the financial crisis and the nation’s economic problems began shortly after Barack Obama and his administration of, as Loeb puts it, “brilliant academics that have had experience in creating the very regulation and overseeing the very institutions that have failed” took office in January 2009. Which is interesting given that Loeb is a Democrat who supported Obama.
Loeb’s letter, dated Aug. 27, is on one level discouragingly banal in hitting the predictable “blame-the-government” and “Obama is a wealth redistributing socialist” themes. Elsewhere, Loeb comes almost eloquently describes the role that abdication of personal responsibility and leadership played, and continues to play, in the problems we face today.
In his letter, Loeb traces the current crisis of investor confidence not to the collapse of Bear Stearns, or Lehman Brothers, or AIG, or subsequent revelations of massive fraud and mismanagement at all levels of finance and investment banking. What is his breaking point? The government suing Goldman Sachs over alleged misrepresentations to investors about its mortgage CDOs. “This politically laced lawsuit was a tipping point for shaky investor confidence against an increasingly worrisome landscape of new laws and proposed regulations that are perceived by many market participants to promote ‘redistribution’ rather than growth, and are contrary to free market ideals,” Loeb writes.
And here I thought the new U.S. financial reform legislation, as misguided and useless as the final product turned out to be, was a response to the pillaging of the free market system by a gang of investment banking insiders who created financial products only they understood that, while intended to transfer risk, actually just multiplied risk times greed and added the perversion of the “American Dream”-as-home-ownership and then spread the resulting toxic garbage around.
Loeb continues: “As every student of American history knows, this country’s core founding principles included non-punitive taxation, Constitutionally-guaranteed protections against persecution of the minority, and an inexorable right of self-determination. Washington has taken actions over the past months like the Goldman suit that seem designed to fracture the populace by pulling capital and power from the hands of some and putting it in the hands of others.”
OK. So? Tax policy is about taking money from some and giving it to others. The yowls of protest are loudest when they come from those with the means to project them the farthestâ€”those with the most wealth. When the perception is that money is being taken from the wealthy and given to the poor, hear the wealthy scream. When it’s reversed, for example when my tax money goes to bail out an AIG run into the ground by bad decision making and risk controls, and then AIG executives head to a resort, or the company pays out bonuses to the guys manning the ship when it hit the iceberg, and I complain, I’m told I just don’t understand how the system works. Those resort trips are important for planning and the bonuses are necessary rewards to keep talented people. Or so I’ve been told, not by Loeb, but by others who equate tax breaks for the wealthy with “capitalism” and leaving companies to police themselves with the “free market.”
Loeb himself reserves plenty of venom for the corrupt and lazy board members of badly run companies. “When we hear the chorus of former executives and regulators exclaim that the crisis was “impossible to see coming”, while at the same time walking away with millions or going on to greater levels of responsibility in government, it is both puzzling and demoralizing. It is easy to see why so many people have concluded the entire system is rigged.” You go, Dan.
“Having analyzed hundreds of proxy statements from the outside and having had the ‘pleasure’ of sitting on several corporate boards, giving me the chance to walk the sausage factory floor, I have personally witnessed the incompetence of many boards of directors. One can only conclude that the incentive systems put in place for directors reward luck and station more than they do talent, skill or creation of shareholder value.” Eloquently put.
We are experiencing a crisis of leadership at all levelsâ€”civic, corporate, family. Loeb is getting down to it in his letter, digging at the tick below the surface, where it lives. But then, he shifts back to the easy target: the government.
“So long as our leaders tell us that we must trust them to regulate and redistribute our way back to prosperity, we will not break out of this economic quagmire.”
There are two sides to this sword, as I see it. We can’t just define “leaders” as elected officials, and especially elected officials we don’t like, or even “the administration” or “the government.” The individuals who make up these institutions must be held to account, sure. But we must also hold to account corporate leaders, who are charged by their position with safeguarding capitalism.
And we must hold ourselves to account. The mortgage crisis, and the resulting credit and economic crises, were brought on as much by irresponsible personal borrowing in the pursuit of easy money as they were by housing policy, tax policy, economic policy, monetary policy, lax government oversight or too much government intervention.
Loeb is a smart guy who has done well by his investors. Which is precisely why it would be so refreshing for him to bypass the convenient “government” bogeyman. Who is the government, anyway? We have seen the enemy, and it is us.
Apart from that, Loeb lays out in his letter his rationale for the investment decisions he has made for Third Point, which Clusterstock sums up succinctly: he doesn’t trust the government and is no longer investing in companies affected by public policy.
In any case, whatever motivations Loeb had for backing Obama in 2008, that worm has apparently turned. As DealBook’s Andrew Ross Sorkin wrote on Tuesday, Loeb’s widely distributed letter looks like more evidence that Obama’s supporters in the financial industry are deserting him.