The Business of Life

A New Kind of Pawn Shop? That's Our Government.

Is it possible that our Federal Government, in a mad rush to stop the bleeding on Wall Street, is actually reversing the age-old concept of a pawn shop? Pawn shops have been around at least since the pharaohs in Egypt and they operate on a pretty simple principle. You have a need for some quick cash and have something of value to put up as collateral. The pawn shop owner agrees to lend you some cash based on a fractional or discounted value of your item (gold watch, golf clubs, diamond ring etc...) assuming you pay it back in the agreed upon timeframe. If you don't, the pawn shop owner can sell your collateral for whatever the market will bear. It's ALWAYS more than what you received as a loan because that's the only way the owner makes any money and it makes the risk worthwhile.

Now let's take a look at the current machinations in Washington. A bloated and distressed CEO from a Wall Street investment bank walks into the government pawn shop looking for a loan to keep his company afloat. Under his arm is a bundle of mortgage-backed securities that no one else will buy for a price even close to what he needs to meet payroll. After very little discussion the government pawn shop owner agrees to pay the CEO far more than what the current market says these securities are worth. What's more the pawn shop owner doesn't really even have a say in how the CEO might use or repay the loan! And even more incredible, the next CEO through the door may not get the same deal for the same collateral because it all depends on when he gets in line! To top it all off, the pawn shop owner is already upside down on a number of other bad bets and is sweating bullets that this investment somehow appreciates and the market comes back!

I know it's a pretty simplistic way to look at this deepening crisis and I'm certainly no ostrich when it comes to taking action. But isn't it about time that we quit rewarding blatant greed and stupidity? Popular wisdom will say that there are some companies that are just too big to fail. I say that's a cop-out. There have been shake-outs, corrections and bubbles that burst ever since we've had commerce. This is a function of scale... pure and simple. And it scares us to contemplate the failure of venerable investment banks and insurance companies. But the fact is these companies violated every principle known to even a college freshman sweating through Economics 101. Namely, leverage must be managed, markets are cyclical and no investment goes up forever.

So, what is the solution? Far be it from me to pretend to be smarter than all the caretakers of our government pawn shop, but here are a few ideas:

• Make sure we get a strong position on the board of every company that accepts a loan and be an activist (maybe even majority) shareholder demanding accountability.


• Fire the leaders and their lackeys who put the company into "receivership" requiring such a loan and attendant outside oversight.


• Recognize that the real turnaround pros don't live in Washington and use the bully pulpit and clout as the "new sheriff" to bring in proven business fixers. If you want to make a better mousetrap, it's doubtful that the mice will tell you how.


• Be prudent yet ruthless in your expectations that this "loan" will be repaid with interest and it will reflect the severity of the mistakes that put us here in the first place.


• Take care of the everyday workers who kept their noses to the grindstone and did their best to help the company survive. They should not be collateral damage sacrificed at the altar of greed.

I have been fortunate to enjoy a varied business career. In all of my experiences, however, I haven't seen such a rush to compensate irrational behavior and incomprehensible arrogance. If the government wants to be a pawn shop fine... but be the best pawn shop ever. Tough negotiation of value, aggressive repayment terms and heavy oversight needs to be hallmarks of our pawn shop. To do anything less is a sure way to have a storefront full of loser items and bad debts.

Labels: bailout, financial crisis, investment bankers, mortgage-backed securities, pawn shops, Wall Street, Washington

posted by Tom Hagerty @ 11:42 AM