FreePassers and the Salvation of Capitalism
I’m not an opportunist by nature. Although the current economic crisis seems the appropriate time to launch my FreePassers.com blog, I assure you that my study of this phenomenon has been ongoing, and its contribution to today’s state of affairs was predictable. I can tell you without qualification that the reform of the FreePasser mentality is crucial to the viability of capitalism as we know and love it. This is not one of those things that will “blow over.” We will either fix it ourselves or government will do it for us and, well, we know how that ends up.
What is a FreePasser?
In business and government, a FreePasser (sometimes known as a FreeRider) is a person or group of people with the power to make important decisions that have the potential to increase their own wealth, advancement and/or power, but bear little or none of the long term responsibility for the results of those decisions. Sound familiar? I know, you’re thinking Lehman Brothers, Bear Stearns, AIG, General Motors… and you’d be right. But the FreePasser mentality is pervasive in our culture, permeating the executive offices, boardrooms and halls of American government. I saw it firsthand during my many years on Wall Street as an Analyst and an Investment Banker, and nothing has changed – it’s only gotten worse.
FreePassers and the Current Economic Crisis
The current credit crisis offers a perfect example of the FreePasser. Its roots lie in the packaging of sub-prime loans for sale to other entities. Many of those who originated these loans had doubts about the ability of the borrowers to repay them. However, since the fees were collected up front and the loans were then passed off as investment vehicles to third parties, the originators incurred no risk so it was not their problem.
This is quite different from an earlier time in our history when the local bank held the loan on its books and, therefore, was deeply concerned about the borrower’s ability to repay. The institution’s survival depended upon strongly considering the long term consequences of its lending policy, an incentive far more important than booking some short term gains.
Rules vs. Regulations
In the 1990s the music industry was besieged by criticism for the proliferation of X-rated lyrics in songs being sold to minors. The problem escalated to the point where the wife of our former Vice President made it her cause to press government to intervene. But some smart music industry executives knew that government oversight would be far too onerous and would have a negative effect on sales. Instead, they acted in the best interests of the long-term viability of their industry and instituted a self-imposed ratings system. If you will remember, the film industry did something similar many years earlier.
I know that this analogy pales in comparison to repairing our broken economy, but the long-term solution lies in learning a lesson from the music industry’s actions. If you don’t fix it yourself, government will do it and will do it poorly.
Nationalization of American Business: the Canary in the Coal Mine
The government bailouts we hear about on a daily basis are frightening, but there is no other course of action this late in the game. Without the extensive intervention we are seeing, it is doubtful that the economy would be able to obtain the capital necessary to function. The last time we saw such a situation was the Great Depression, which is obviously not an acceptable outcome.
In essence, the government is acting like a doctor performing emergency procedures to stabilize the patient and allow it to survive. Then, once the patient is no longer in danger, there will be time for the healing process. It is this healing process that I will address in this blog. Yes, I will continue to reinforce the overwhelming need to end the FreePasser mentality and change our business practices and goals. I will also bring to light examples of FreePassers who continue to do damage to our country despite the lessons of the past few months. But, mostly, I will offer a well researched prescription for American business and government, with accountability as my mantra.
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