Tuesday, March 30, 2010

Today, our Congress is effectively trying to wrest decision-making power away from free-market forces in the name of protecting investors from risk. But in doing so, it is undermining the fundamental principles of capitalism and its potential to continue generating domestic wealth and prosperity, as it has done for at least the past 60 years.

The United States has long been regarded as a shining example of the power of a market economy. The system is largely self-governing: Economic decisions and the pricing of goods and services are guided by the aggregate interactions of a country’s citizens and businesses. Ideally, there is little government intervention or central planning. For more than six decades, we have enjoyed unprecedented economic growth built on these principles.

One of the disadvantages of this type of freedom is that it allows excessive risk-taking, usually with other people’s money, at times with no personal responsibility. In recent years, some of our largest institutions engaged in such “Casino capitalism” - making vast speculative bets for their own short-term profits and incentive compensation. In doing so, they brought our financial system to the verge of collapse and sparked a global recession from which it will take many years to recover.

In response to the crisis, our government has decided that it must intervene - excessively - to prevent such gambling in the future. This move has resulted in a spate of legislative proposals (designed to punish the “bad guys” - that is, banks) that would, among other things, limit executive compensation and prohibit banks from engaging in a variety of trading and investment activities, regardless of whether they are speculative or pose inordinate risk to shareholders. These proposals promise to add to the burden imposed on businesses after the last economic crisis: extensive new accounting, reporting and auditing requirements and new rules to make it harder for companies to offer regular employees risk-based compensation, such as stock options.

Certainly, there have been times in our nation’s history when large-scale government intervention prevented financial disaster. But until the early 2000s, such intervention was temporary by design and resulted in an equitable balance of power between market forces and government oversight. It added incremental protection for investors without gutting the system that, by and large, has served investors very well.

The current approach to such intervention has a decidedly permanent feeling and seems designed to keep investors from harm by eliminating risk. New regulation blunts the power of the market economy by placing significant burdens on all companies and limiting their power to regain economic footing, while providing no meaningful protection for investors. The bloated “risk factors” section of any public company’s periodic Securities and Exchange Commission filings offers a glimpse into the problem. While the discussion of risk factors theoretically exists to inform investors, it has become a means for companies to protect themselves from investor lawsuits by identifying every potential risk, no matter how unlikely or nonspecific.

Consider this example from the recent annual report of a large financial services company: “We may incur losses as a result of unforeseen or catastrophic events, including … pandemic, terrorist attacks or natural disasters.”

This disclosure is meaningless. Reasonable investors know that “unforeseen or catastrophic events” are bad for business. Yet such disclosures have become the norm in corporate filings, covering a host of seemingly obvious hazards such as economic downturns, incompetent or dishonest management, and customers who don’t pay their bills.

The paranoia behind this risk-factor bloat is just one result of ineffective and overreaching government policies putatively designed to protect consumers from “risk” by putting an excessive burden on business. These policies reveal a deeply held belief on the part of our Congress that risk is bad. Nothing could be further from the truth. Risk is good. It’s essential. Without risk, there is no reward. By naively trying to eliminate risk and relieve investors (and themselves) of any personal responsibility for their investment decisions, Congress promises to prolong our economic ordeal. Even worse, it threatens to gut the market system that gave rise to our economic power, and ensure that future generations of Americans will know economic growth and prosperity only as a distant memory.

Ken Wilcox is president and chief executive of SVB Financial Group.

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