Column
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.
Please subscribe to my blog and visit this site often. And, while you’re here, I urge you to post your own comments and observations. I encourage a lively dialogue on this issue and thank you in advance for participating.
Tags: account, economic crisis, power, responsibility, risk, sub-prime loans, Wall Street
December 27th, 2008 at 4:17 pm
Hi Doug,
You’re right - the analogy comparing the banking system with explicit music lyrics doesn’t work.
We got in trouble because bankers and hedge fund managers were lazy and greedy. Self-regulation doesn’t fix that.
The most disturbing part of your blog is the true statement that people bundling mortgages KNEW it was bad but went to the trough like hogs just to make money, knowing they would create terrible suffering for others when the party stopped.
We got in trouble because the Republicans stripped away even basic oversight and got the regulators in bed with the finance folks (please don’t blame Clinton because the Bush gang had 8 years to FIX any of his mistakes - and didn’t).
The legacy of unregulated free markets is a collapse in truly moral behavior (do the right thing without talking about it) and the substitution of Sunday best morality - where religious catch phrases replace true moral action (The spend and pray Republicans so beloved by the Wall Street Journal were the prime vectors of this phony morality).
As long as ‘finance’ experts can cheat the average person and face few (if any) real consequences, self-regulation won’t work. I look forward to your suggestions about how we can get real accountability if the fox is in charge of the henhouse.
January 11th, 2009 at 1:01 am
Although I know that the Republican’s contribution to this mess over the last eight years is enormous, the blame can and should be spread around. I don’t see this as a Democrat vs Republican issue, and both have been complicit over the decades. In order for this dialogue to have value, I think it must be elevated above partisanship and focus on the destructive habits and practices that have become ingrained in our system of government and business.
They say that, in human nature, the easiest time to get someone to change is when they’ve hit bottom. Well, our economy has hit bottom, and there will probably never be a better time to administer that “wake up” slap in the face. Doug, I appreciate that you’ve started this conversation and hope that it becomes an important part of addressing these complex issues.
One final thought - how do you think this crisis will affect consolidation? Is it more likely that some of these international mega-corporations will swallow each other up, or that they will sell off pieces to form more controllable entities? Consolidation in the radio industry, for example, has promoted the FreePasser philosopy. What happens if these giant media companies are forced to divest themselves of assets, and those assets are acquired by smaller companies? Do they revert to more responsible practices?
January 18th, 2009 at 2:08 pm
John,
Thank you for posting. I believe that given the right incentive structure, Wall Street can self-regulate to a large degree. I will be discussing this in my next post and look forward to your response.
January 22nd, 2009 at 9:37 pm
The system needs to be fixed and fixed now. The founders of all of these formerly great firms must being weeping in heaven right now at what these greedy and unethical men have done to enrich themselves at the expense of the country and the world. My greatest fear is that the concept of these people who traded (no pun intended) on their firms’ reputations is a microcosm for what our current government and citizenship in general is doing based on the reputation of the United States. Great and honorable men and women formed this country as great and honorable people formed Merrill Lynch and AIG and many other companies. It can take generations to earn respect and only a day or year to lose it. We’ve lost a lot in the past year. It’s time to start getting it back.
March 2nd, 2010 at 11:23 am
The government was “trapped” only because it refused to cut spending during the Depression. Today, government feels equally “trapped” because politicians have a very strong preference for buying votes with borrowed dollars. The entire Western world is now discovering that it is not possible to borrow ad infinitum; eventually the piper demands to be paid. A sound currency would make it much more difficult for politicians to consign our children and grandchildren to debt slavery; such constraints are not a bad thing, - unless one values the ease of politicians over that of our children.