Time to Dismantle the 'Corporatocracy'?

by: Dear John Thain November 18, 2008 | about stocks: AIG / C / F / GM / LEH / SPY    

Dear John Thain

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

With all these bailouts (banks, AIG, Bear Stearns, and, coming soon, autos!) it’s a wonder how we got to this point. Well, I found an interesting statistic.

Taken from the history of the S&P 500’s top components and GDP data we find out that the growth rate of the largest companies (AIG and Citi (C) were part of this group in 2006) has outpaced our economy by 6% annually. Stated another way, the market cap of the top 10 components of the S&P 500 has grown by, on average, 9.4% per year and the economy, as measured by GDP, has grown by around 3% per year. This data covers 27 years.

Now, I’m no math genius, but when you have a subset of the economy growing much faster than the economy, it points to a super-concentration of risk. Especially when the system is so inter-connected, perhaps the issue is that some companies became too big, ya think?

This sort of growth is a perfectly natural corollary to pay issues and other things. If I’m an executive, and I make money based on earnings, and I get paid in stock, then why not buy my competitors to enlarge my company and increase earnings, eliminate competition to expand margins and create more room for error in execution of business strategies, and use my newly-created larger company to invest even more in the business lines that are producing the best quarterly results? Well, I would! And they did.

But, if we are looking for stability in the system, and we really want the market to work wonders, then we want something different. We want lots of smaller, nimble competing businesses that are constantly keeping margins low and product innovations high.

We do not want two or three super-sized businesses that are stable in their market share and merely looking to increase earnings through incremental improvements, and not innovation (GM? Ford (F)? Chrysler? I’m looking at you). We don’t want an entire industry to consolidate to the point where they all start following each others' innovations so that they can all go down with the ship if any one of them is wrong (Investment banks? Bear? Lehman (LEH)? I’m looking at you now).

And, as a taxpayer, I wouldn’t want a decline in the economy, when all businesses suffer, to jeopardize a set of companies that are too big to fail and not drag the economic state down with them–I would have to bail them out when I’m hurting most.

Those of you that are math geniuses know what comes next …  “=><=” (or “⊥”).

I guess we know who won out now. Maybe our leaders should figure out how to prevent this kind of consolidation. They do it with banks (obviously they took a very narrow view there).

Related Articles

This article has 6 comments:

  •  
    Nov 18 08:49 AM
    DJT says:

    "Now, I’m no math genius, but when you have a subset of the economy growing much faster than the economy, it points to a super-concentration of risk. Especially when the system is so inter-connected, perhaps the issue is that some companies became too big, ya think? "

    Yup, I agree that some companies have become too big, however; you've left out the most important thing: accounting fraud. With size comes the ability to obfuscate and mislead through complex and fraudulent accounting procedures.
    Reply | Link to Comment
  •  
    Nov 18 11:49 AM
    We must also consider that none of these companies are concerned with excellence any longer, and have not been for a long time. There is also the government regulation that has come down hard, especially on the auto companies, and the ridiculous demands of the unions. The weak kneed executives of the big three have sucked the toes of the unions for far too long. Let them go bankrupt, rebuild, retool, reinvent, and for the love of money be excellent this time. Excellent blog by the way, I think you have really nailed it!
    Reply | Link to Comment
  •  
    Nov 18 02:10 PM
    Corporations are the biggest welfare recipients in this country... yet we complain about a poor mother getting welfare to feed her children. We bail out the super rich banks at the expense of tax payers who are loosing their homes. Yes, its time to Dismantle the Corporatocracy.
    Reply | Link to Comment
  •  
    Nov 18 02:57 PM
    yep, I agree. you are not a math genius. The companies that grew large grew profits ... that has nothing to do with GDP.
    Reply | Link to Comment
  •  
    Nov 18 03:14 PM
    This is "dangerous" talk, not in the sense that the Supreme Court ruled during the 1930's and 1950's when they ruled (absurdly) that the American Communist Party was a revolutionary party who wanted the violent overthrow of the United States government, and therefore a danger to The American Way of Life.

    Ironically, these Supreme Court rulings themselves were dangerous because they prevented Americans from having the freedom to thrash these ideas around, try them out and find out for themselves, as Europe did, that (mostly or at least very often) THEY CAUSE MORE PROBLEMS THAN THEY SOLVE.

    America is a pragmatic country and we should be allowed to try just about anything, even socialism but it is going to be a frustrating and in my opinion "dangerous" experiment.

    It will be interesting to see if 1) America tries once more to take the path to socialism that Roosevelt started in the 1930s and 2) if the Supreme Court will live up to its very reactionary history (Dred Scott Decision, etc. etc.) and will strike down the decisions of the Congress and the President again.

    It looks like we might be entering "interesting"... times again.
    Reply | Link to Comment
  •  
    Nov 18 05:57 PM
    AMEN !!!

    Tell One Tell All !!!

    This Lobby system is a farce.

    When you can create money out of thin air you can buy governments.
    Reply | Link to Comment
More Comments on AIG »
Top Rated Comment Streams:

Numbers are net rating-

See all Top 100 »
More by Dear John Thain

Investment Resources
Money Management
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Government Policy
Insurance
Major & Intl. Banks
Autos