Capital Markets

Don't miss Digital Society's Bret Swanson's outstanding op-ed in the Huffington Post that spotlights the huge disconnect between the White House's top priority of creating jobs, and the FCC's Open Internet regulation plans that are obviously big net job killers. 

Common sense dictates that heavily regulating a healthy and economic broadband sector with unnecessary and intrusive restrictions and red tape will destroy profits, investment and tens of thousands of good-paying jobs.    

In one of the best, most strongly-worded and serious letters to the FCC that I have read in my 18 years following FCC issues closely, the united broadband industry's letter to FCC Chairman Genachowski is simply a must-read; it explains why the FCC's serious interest in reclassifying unregulated broadband information services as regulated telecom services is among the worst and most destructive ideas the FCC has ever seriously considered.

The letter characterized Title II reclassification as:

• "a radical new direction,"
• "regulating the Internet,"
• "a profound mistake,"
• "betraying decades of bipartisan support for keeping the Internet unregulated,"
• "misguided regulatory overreach," and a
• "Pandora's Box."

A particularly strong summary statement was:

As the first expert witness to testify before Congress on what went wrong with Enron, the worst U.S. fraud/bankruptcy ever at that time, Google's announcement that it has applied to the Federal Energy Regulatory Commission (FERC) for "blanket authorization...  to make sales of electric energy, capacity and ancillary services," and for "certain exemptions" from reporting and accountability... is eerily reminiscent of Enron Broadband's disastrous efforts to bring swash-buckling, gee-whiz technology to the energy futures market over a decade ago. 

• The hair standing up on the back of my neck tells me this latest scheme by Google to become an unregulated market maker in energy services could end very badly.

What's different between Enron and Google is that Enron was an energy company that entered into the tech and energy auction businesses, whereas Google is a tech and ad-auction business entering the energy business.

Deja Vu: What's eerily similar?

How could American taxpayers get stuck with a multi-trillion dollar tab that they weren’t even aware that they were running up? How could that huge tab still be allowed to run up unchecked today? For the Financial Crisis Inquiry Commission, the sad answer is one of the biggest root causes of last fall’s devastating financial crisis and one of the biggest continuing systemic risks to the financial system and the economic recovery.  

A decade ago, in what may prove to be the most expensive bipartisan legislative mistake in U.S. history, a bipartisan policy became law that effectively ensured that no Federal regulator had oversight or enforcement jurisdiction over derivative financial instruments. The Commodity Futures Modernization Act of 2000 (CFMA) created “legal certainty for excluded derivative transactions.” That law allowed a shadow derivative overlay system to be built literally on top of the public financial system, with none of the inherent accountability of the underlying financial system.  In other words, a deliberate bipartisan U.S. government policy change a decade ago unwittingly created an unaccountable “black hole” market that sucked enormous value out of public markets, (Bear Stearns, Lehman, AIG, Fannie, Freddie, securitized sub-prime mortgages, etc.) while laundering the risk to the U.S. taxpayer.

When Investment News asked John Bogle, Vanguard's founder and the father of indexing, about my "Indexing into the Ditch" thesis (that indexing is one of the root causes of the financial crisis) he said: it “is nuts! Last time I looked, index funds accounted for about 0.4% of all stock trading ... Just perhaps the other 99.6% might bear a teeny-weeny bit of the responsibility.”

Let me first respond to Mr. Bogle's points in order.

The thesis "is nuts! "I must admit I smiled at the ad hominum implication that my thesis was "nuts" and not worth listening to; I remembered that Bernie Ebbers called me the "idiot Washington analyst" because my research was the first to charge that WorldCom's business simply did not add up.

With all due respect to Mr. John Bogle, legendary founder of Vanguard and de facto leader of the American index fund movement that now manages ~$1.5 trillion, I must respectfully challenge, on the merits, Mr. Bogle's, and others, ongoing mischaracterization of indexing as "investing."