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[Date Prev][Date Next][Thread Prev][Thread Next][Date Index][Thread Index] Re: Think tank stuff and reality
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
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