MONETARY: Re: Think tank stuff and reality

[Norman Kurland <thirdway@cesj.org>]

Mike,

When there were abuses of the defined benefit pension system, Congress 
established a Pension Benefit Guarantee Insurance Corporation to monitor the 
system and insure beneficiaries against the risk of unfunded pension 
liabilities.  There is a practical insurance concept to monitor and avoid the 
abuses of future Enrons, short of limiting legitimate ESOPs from investing 100% 
in company shares.  Here are some specific suggestions excerpted from my paper, 
"The Federal Reserve Discount Window,"
that COG should offer to avoid the potentially disasterous tho well-intentioned 
reforms offered by senators Corzine and Boxer:

9. Risk Insurance as the Solution to the Collateralization Barrier

                 People without savings or assets who seek a loan to acquire 
capital assets
                 are faced with a Catch-22 situation. Lenders typically require 
that a
                 borrower have savings or assets to put up as collateral in the 
event of loan
                 default. How, then, can someone without savings or assets gain 
sufficient
                 capital credit to acquire a viable, income-producing capital 
stake? A
                 Kelsonian monetary system solves that conundrum and the 
related problem
                 of "risk" by collateralizing bank loans through commercial 
capital credit
                 insurance.28

                 The Capital Credit Reinsurance Corporation and Commercial
                 Capital Credit Insurance Companies

                 A Capital Credit Reinsurance Corporation (CCRC) would be 
established
                 as a backup insurer of last resort, wholly on a self-financed 
basis, with no
                 taxpayer funds or government underwriting involved except 
possibly for
                 start-up organizational funds. Thereafter, its operational 
costs would be
                 covered by premiums on the insurance programs the CCRC would 
offer to
                 commercial capital credit insurers of banks and other lenders 
to ESOPs
                 and other pure credit vehicles.

                 The major insurance the CCRC would reinsure would be capital 
credit
                 loan default insurance. This would be similar to that offered 
by the FHA
                 home mortgage insurance agency and later copied in the private 
sector by
                 the Mortgage Guarantee Insurance Corporation. The CCRC would 
charge
                 participating lending institutions an annual voluntary 
premium-0.5% or
                 higher-to insure an amount between 75% to 90% of their losses 
on loans
                 offered to ESOP, CSOP, CIC, and ISOP borrowers, and producer 
and
                 marketing cooperatives.

                 This would cover the eventuality that companies issuing the 
shares did not
                 earn enough profits to service the debt. The premium would be 
included in
                 the annual interest charged by the lenders. Naturally, the 
sounder the share
                 issuing company, the lower the premium.

                 Differential risk categories, with adjustable premium rates, 
could be set up
                 for grouping participating corporations, based on their 
maturity, their
                 earnings history, the quality of their management, the nature 
and special
                 risks of their industry, and so on, somewhat along the lines 
of the bond
                 rating services of Moody's and Standard & Poor's.

                 The CCRC could also offer portfolio reinsurance issued by 
private
                 insurers, similar to the pension insurance the Pension 
Guarantee Insurance
                 Corporation offers employers. For an additional premium 
charged to the
                 new capital owners, commercial insurers would insure assets 
accumulating
                 in capital homesteading accounts against the "downside risk." 
Upon
                 retirement, a worker would thereby be guaranteed a high 
percentage-say
                 75% to 90%-of the initial values of all company shares 
purchased through
                 his ESOP account.

                 This type of insurance is useful for offsetting the lack of 
diversification in
                 most ESOPs. This is a common complaint raised against ESOPs, 
which by
                 design do not have the same level of diversification as within 
defined
                 benefit pension plans and other conventional retirement 
programs (or the
                 proposed ISOP described above). If a company failed, capital 
credit
                 insurance would protect worker-shareholders against the loss 
of all their
                 retirement assets before they had a chance to diversify. 
Commercial
                 portfolio insurance could be kept at relatively low premiums 
if limited to
                 shares in companies that had been profitable for at least 
three years. The
                 premium costs to cover shares in high-risk, start-up companies 
would be
                 astronomical compared to those for mature companies with a 
solid track
                 record of earnings.

                 Commercial lenders making loans to ESOPs, CSOPs, CICs, and 
ISOPs
                 (subject to guarantees of high pretax dividend payouts by 
companies
                 issuing the new equity), would have the option first to 
arrange for CCRC
                 loan default insurance on the loan paper. (Otherwise, the 
lenders would be
                 self-insuring the risk of loan default.) Once insured, the 
loan paper could
                 be brought to the discount window of the nearest Federal 
Reserve bank.
                 For a discount fee covering the Federal Reserve overhead in 
administering
                 the "pure credit" system (0.5% or less), new currency would be 
issued or
                 the bank's reserves would be correspondingly increased to 
cover its
                 expanded liquidity needs. No taxpayer funds, no interest 
subsidies, and no
                 Treasury borrowings would be involved.

In addition, by spreading ownership and ownership rights out broadly workers 
and other Capital Homesteaders (and the unions and associations that represent 
them) will democratize the accountability systems of companies like Enron, 
forcing greater transparency over corporate executives than exist under today's 
Wall Street model of capitalism.  That's the ultimate check on the abuse of 
concentrated corporate power, a check that neither political party is examining.


Norm Kurland
Center for Economic and Social Justice
Web site: http://www.cesj.org

Mbindnerdc@aol.com wrote:

> Enron is an interesting situation.  Yesterday morning ABC's This Week 
>featured it.  I fear that many in the policy community are drawing the wrong 
>lesson, however.
>
> Many are now calling for legislation to limit the exposure of employee stock 
>ownership in 401(k) plans.  They ignore the real reason for the Enrol debacle.
>
> For decades many have been decrying the size of executive compensation, which 
>include large stock option awards and stock grants to executives.  Enron 
>points to why these are not only unfair but a bad idea.  Such excessive awards 
>in effect reinforce the mindset of  executives that they are set apart from 
>the other employees of the firm.  By giving executives more than their share 
>firms reward them for cheating lesser employees out of their fair share.  They 
>provide executives a direct financial incentive to look out for their own 
>interests at the expense of the employees and even the share holders.  There 
>is not much moral distance from taking more than you are entitled to cooking 
>the books and making deals from self-interest rather than the interest of the 
>firm.
>
> In the case of Enron, does anyone doubt that the books would not have been 
>cooked had the executives been the servants of their fellow employees rather 
>than their masters?  Would the fraud at Enron have occurred absent the 
>overcapitalization of the executives?  Hardly.  There would have been no 
>incentive to cook the books or to hide liabilities.
>
> The answer then, is more employee-ownership, not less.  This is why I favor 
>equal stock grants (rather than stock options) to each employee, regardless of 
>salary, on a monthly basis (with the reinvestment of dividends to reward 
>longevity).  Broad based employee ownership with factional representation on 
>the board (professionals, unions, management, outside investors each 
>represented in proportion to their holdings) would prevent the excess 
>executive compensation now awarded in many firms - and without specific 
>government regulation of executive pay (which the conservatives would never 
>allow).
>
> Michael Bindner
> Virginia