From Regulations, to QEs and Distorporations

Fred Smith, CEO at FedEx, talks with Sara Eisen about regulation in the United States, why it hurts competitiveness with the rest of the world and why he is optimistic about the budget committee.

Mohamed El-Erian, chief executive and co-chief investment officer at Pimco, explains why the United States is coming to and important turning point in the economy and how corporate cash can help lead the way.

Avenue Capital Group Chairman and CEO Marc Lasry discusses Federal Reserve monetary policy.

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The Fed was expected to wind down its third round of quantitative easing, known as QE3, at the end of this year. But most predictions are now well into 2014, with some as far out as June. 

Economists largely believe the government shutdown and debt ceiling debate have forced the Fed's hand, creating a weaker economic outlook and muddying the data the central bank relies on to make decisions. 

Given this environment and the leadership transition as Ben Bernanke's term ends in January, the Fed will likely continue its current stimulus program at full blast -- buying $85 billion in bonds each month -- until at least March 2014. 

That means QE3 could total around $1.6 trillion, calculates Paul Ashworth of Capital Economics. That's more than either of its two predecessors. In contrast, QE1 totaled $1.5 trillion and the second round of stimulus added up to about $600 billion.

Reference: This could be the largest Fed stimulus yet.

Our correspondents discuss the evolution of a new breed of company in America and whether these organisations are tax and finance scams, or if they can actually contribute to the economy.

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All these structures rest on special provisions and waivers of law, they survive on the whims of Washington. Their attempt to escape the reach of politically motivated changes in governance and taxation inevitably tends to hinge on lobbying and cronyism somewhere along the line. It is, in short, an example of how the system can be rigged to favour the connected. It may seem odd, then, that the shift has not produced more of an outcry. 

In part, this is because its complexity shields it from scrutiny, and because, unlike politicians who seek to publicise their attempts to regulate business, business tends to keep quiet about its successful acts of resistance. But it is also because the questions it raises do not fit into the established world views of either the left or the right. The left typically responds to concerns about business with a belief in antitrust actions to break up size and with strengthened regulation. The conservative alternative has been to emphasise corporate governance, level playing fields and best practices. Neither approach offers much in this case. 

But if the shift prompts genuine concerns, it is also specifically and broadly virtuous—because it enables capital to be channelled to where it can have a return, rather than sitting in the roach motel of retained earnings on which C corporations are based. That may, in the end, be the most compelling component of whatever defines the American system and enables it to be productive and innovative. For all the inequities, when vast wealth has been made through these structures, it has been in cases where the underlying assets produced more cash, not less.

Reference: Rise of the distorporation (emphasis, added).

I greatly appreciate the evolution of media and technology, particularly how we top leaders and business people consume news.  Years ago, a segment on TV aired, and then it passed away.  Now, we can go back to that segment, watch it again to study it, post it and share it.  So it was with the foregoing segments and articles.

You see, from Bloomberg to The Economist, the news I clearly gravitated to this morning had to do with US economy and Federal policy.  The government shutdown earlier this month was nothing short of an embarrassment to what is arguably the most sophisticated, powerful country in the world.  Moreover, in one press conference, President Barack Obama took a decidedly partisan (Us versus Them) tact with the Republicans, instead of, as I had hoped, a more facilitating, reconciling, bi-partisan leadership.  

There is quite a lot of complexity to these issues, which the foregoing segments and articles speak to, but in concept I believe I understand the quandary that the government is in.  Here are what I think and what I wonder about:  The economic crash in October 2008 gave the message, loudly and clearly, that more regulatory oversight was needed in business affairs, government transactions, and market dealings.  This is one point.

The second point is, the government needed to inject big cash into the remnants of this economic crash, that is, companies, agencies and programs.  This injection came under the rubric of "stimulus package" and even "bailout."  We're talking about hundreds of billions of dollars, so no small injection this.  In the Marc Lasry interview, one correspondent remarked "Enough QEs, enough QE."  I learned that that meant "quantitative easing" and that we're now in the third such Federal stimulus efforts.

But I gather that regulatory oversight, along with quantitative easing, are a double-edged sword: Too much or too little is a problem.  Five years after that crash, has the proverbial pendulum swung to the too much side?  Fred Smith agrees that regulations have become oppressive to business growth and job creation.  Mohammed El-Esrian cautious the US is now approaching a critical T-juncture.  

My third point is, this economic, political and regulatory landscape has fueled a resurgence of the so-called distorporation, which Tom Easton explains in his interview with The Economist.  From my working grasp, it is a legal entity that can largely circumvent regulations, especially in regards to capital influx and tax liability.  For example, Easton argues that the US needs to invest in risky ventures, I gather, for the purposes of innovation, growth and jobs.  Business development companies, under the distorporation umbrella, can lend to start-ups or projects without the necessary constraints or scrutiny of banks.  This is the good part.

Companies and organizations haven't just adapted to Federal efforts but have also evolved in ingenious, complicated ways.  I remember, early last decade, investigations revealed that Enron created sham organizations, essentially to "cook the books."  Its former CEO Jeffrey Skilling engineered corporate structures that allowed for this.  So the bad part is, that proverbial pendulum, at least for some, seems to have swung back to the Wild, Wild West of too little oversight, accountability and regulation.  

So I wonder if we're staring into an Enron all over again with these distorporations.

Thank you for reading, and let me know what you think!

Ron Villejo, PhD