YDS: The Clare Spark Blog

August 30, 2010

Growth or Redistribution? excerpt from Third Point LLC letter to investors 8/27/10

 [To my readers: I am neither an economist nor an economic historian, so I thought that this collage and analysis of where our country is headed under the Obama administration, remarkable for its clarity and forthrightness, would be a welcome addition to the website. I thank Dan Loeb for giving me permission to quote from his letter, the full content of which can be accessed on the internet. Also see the front page of the Business section of the New York Times today, August 31, 2010: http://dealbook.blogs.nytimes.com/2010/08/31/sorkin-why-wall-st-is-deserting-obama/?scp=1&sq=Daniel%20Loeb&st=cse]

Daniel S. Loeb

All, too, will bear in mind this sacred principle, that though the will of the majority is in all cases to prevail, that will to be rightful must be reasonable; that the minority possess their equal rights, which equal law must protect, and to violate would be oppression.

– Thomas Jefferson, First Inaugural Address, 1801

 A wise and frugal government, which shall leave men free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned – this is the sum of good government.

– Thomas Jefferson, Writings, 1743-1826

 I predict future happiness for Americans if they can prevent the government from wasting the labors of the people under the pretense of taking care of the people.

– Thomas Jefferson, Letter to Thomas Cooper, 1802

 One of the traditional methods of imposing statism or socialism on a people has been by way of medicine. It’s very easy to disguise a medical program as a humanitarian project. Most people are a little reluctant to oppose anything that suggests medical care for people who possibly can’t afford it.

– Ronald Reagan, http://www.youtube.com/watch?v=fRdLpem-AAs, 1961

 You know, there’s a lot of talk in this country about the federal deficit. But I think we should talk more about our empathy deficit – the ability to put ourselves in someone else’s shoes; to see the world through the eyes of those who are different from us – the child who’s hungry, the steelworker who’s been laid-off, the family who lost the entire life they built together when the storm came to town. When you think like this – when you choose to broaden your ambit of concern and empathize with the plight of others, whether they are close friends or distant strangers – it becomes harder not to act; harder not to help.

– Barack Obama, Xavier University Commencement Speech, 2006

 It is that fundamental belief, I am my brother’s keeper, I am my sister’s keeper that makes this country work. It’s what allows us to pursue our individual dreams and yet still come together as one American family. E pluribus unum. Out of many, one.

– Barack Obama, Democratic National Convention Speech, 2004

 I think when you spread the wealth around it’s good for everybody.

–Barack Obama’s Comments to Joe “the Plumber” Wurzelbacher, 2008

The secret of US success is neither Wall Street nor Silicon Valley, but its long-surviving rule of law and the system behind it… American system is said to be “designed by genius and for the operation of the stupid.”

– General Liu Yazhou, Phoenix Magazine, August 2010  

Review and Outlook

As we entered the second quarter of 2010, many measures of confidence and economic activity were showing consistent improvement, leading us to increase our exposures in select undervalued companies which we thought would benefit from a favorable economic environment. Most pundits initially attributed the subsequent turn in the markets and investor sentiment to the Greek crisis, concern over the Euro, the Oil Spill in the Gulf, and vague rumors concerning faltering Chinese growth. However, it is apparent to us that the turning point in both investor and consumer confidence came on April 16th, with the filing of the government’s suit against Goldman Sachs over its mortgage CDO activities. 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.

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.

 For example, a well-intentioned government program gone awry is the new CARD Act that restricts banks from repricing interest rates on borrowers who fail to meet their revolving credit obligations. The effect of this legal prohibition has been to force the banks to raise the interest rate paid by all borrowers, to compensate for losses they are now being forced to take on delinquent borrowers. The effect is a redistribution of wealth from people who pay their debts on time to those who do not.

 Laws and regulations such as these justifiably raise questions about this government’s commitment to free-market capitalism and the articulated rule of law. Arguably unconstitutional Bills of Attainder, such as the special “Enterprise Tax” proposed to be levied on hedge fund managers and other managers of private partnerships who wish to sell their management companies (ostensibly in order to extend unemployment benefits beyond the current 99 weeks) send a vivid message that this Administration is operating from a playbook quite different from the one we are used to as American business people; a thought that chills all participants in these free markets.

 On the other hand, it is not hard to understand the source of the popular distrust in capitalism today. Many people see the collapse of the sub-prime markets, along with the failure and subsequent rescue of many banks, as failures of capitalism rather than a result of a vile stew of inept management, unaccountable boards of directors, and overmatched regulators not just asleep, but comatose, at the proverbial switch. 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 that the entire system is rigged.  

This crisis of trust in our system is not limited to inept executives in regulated financial institutions who bury their shareholders and then walk away with ill-gotten sacks of loot. Having analyzed hundreds of proxy statements from the outside and having had the “pleasure” of sitting on several corporate boards, giving me a 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.

 Not all boards are bad, of course. Private equity firms have a terrific model of appointing energetic members of their firms and outside experts to oversee the affairs of the companies they govern. They tend to have real “skin in the game”, spend days reviewing strategy and other matters, and have their own staffs to analyze numbers produced by the company. Board fees tend to be irrelevant to the members of such firms as they are keenly focused on strategies to deleverage and to create long/medium term shareholder value. Even some public companies have similarly engaged corporate boards.

 However, many of the boards we have come across are populated by individuals who rely on the stipends they receive from numerous corporate boards and thus appear motivated primarily to ensure continuing board fees, first-class air travel and accommodations, and a steady diet of free corned beef sandwiches until they reach their mandatory retirement age. We are therefore encouraged by the recently finalized proxy rules, which will ease the nomination and election of directors by shareholders.

 All of the above leads us to conclude that America faces not only a crisis of confidence among consumers unwilling to spend and businesspeople unwilling to invest, but also a crisis of leadership. 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. One can hope only that this Administration, composed of brilliant academics that have had experience in creating the very regulation and overseeing the very institutions that have failed, has learned from its mistakes and will set us down the right path. Perhaps our leaders will awaken to the fact that free market capitalism is the best system to allocate resources and create innovation, growth and jobs. Perhaps they will see the folly of generating greater deficits by “investing” in programs that lead to corruption and distortions of the system.

Advertisements

2 Comments »

  1. Thanks for sharing this. I have been worrying lately about the death of rational discourse in the US. It’s encouraging to see a level-headed statement from an organization that, per your Corporate Liberal post, probably has more interest in maintaining the existing hierarchy and more self-interest in not advocating an ambiguous position with it’s shareholders.

    Comment by Seth Paskin — September 12, 2010 @ 2:02 am | Reply

    • I think that Third Point is about creativity, innovation, and growth, rather than “maintaining the existing hierarchy,” parts of which Dan Loeb has been famously irritating with his demands for competence and transparency. The statement speaks for itself.

      Comment by clarespark — September 12, 2010 @ 2:45 am | Reply


RSS feed for comments on this post. TrackBack URI

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Create a free website or blog at WordPress.com.

%d bloggers like this: