Regulation to help the OPM addiction

Gruver’s article on the OPM addiction reminded much of the game of monopoly. The whole time I was reading, I could only think of how exciting and fun it was. But in the end the fun part of the game is taking the risks. It’s exciting to take on a big mortgage and honestly not know whether you will be able to pay it off (as you can tell I’m not very good at monopoly because of this). This is not the case with real life, and because of this I agree with Gruver.

The problems with OPM arise in the risk profile. The people making the decisions seem to have less personal invested and therefore have little self-imposed restrictions. Private ownership might have been a better option because the risks then were born by participants and the risk tolerance was restrained. Now it seems that a combination of complex financial instruments, massive corporations, creative accounting, and increased leverage have the public being lost and confused.

I agree with Gruver’s views that using other people’s money does create additional complications; however, I’m not sure eliminating public ownership is the best approach. I think regulation has helped a lot to keep decision makers true to the people whose money they are using. We’ve learned a lot from financial crisis like Enron, AIG, and the housing bubble. For the most, I’d say the public is starting to ask more questions. Before Enron’s fall, people didn’t feel comfortable questioning their complex business plan and strange financial reporting. Now, people realize that if they don’t understand something it is probably because there is something wrong. A business should be able to fully, confidently, and accurately explain why things are the way they are (especially to the people whose money is at stake).

This entry was posted in Uncategorized. Bookmark the permalink.

4 Responses to Regulation to help the OPM addiction

  1. Jordi says:

    Edit: Less personally invested

  2. Jordi says:

    Great title! But what sort of regulations do you have in mind? Were regulations at Enron and AIG part of the problem or solution?

    Gruver is imagining a voluntary return to partnership, not a ban on public ownership. Did you think he was advocating the former?

  3. knr004 says:

    No I don’t think that’s what he was advocating, but he gives the impression that private ownership is favored over public ownership which I don’t agree with. I understand that from a risk prospective, private ownership is favorable because people have more of a personal stake in the effects of their decision making. But I think there are many more pros for going public that outweigh this. So I agree that the OPM addiction is a problem, but I do not agree that the solution might be to have corporations voluntarily return to partnership. My solution would be to further regulation. I think we’ve started down this path with recent developments after cases like Enron. For Enron an official example of this would be Sarbanes-Oxley Act which led to more disclosure benefiting market participants. In another example, it might be something like the Dodd-Frank. This article in Businessweek from 2001:
    seems to share the opinion that furthering regulation will help. After Enron’s issues came to light it looks to furthering regulation in financial regulation, in a specific industry (like the electricity market), and in a business practice. It basically says that even in a capitalist economy, some major sectors of the economy demand regulation. It also talks about regulation of the pension system. In the article it stated “Enron employees were coerced or compelled to put the bulk of their tax-subsidized retirement savings into–guess what?–Enron stock. When the stock collapsed, so did their retirement dreams. Diversification is the first rule of prudent investment. It is unconscionable for a corporation to force its employees to put all their retirement eggs in one basket.” It is continual regulatory advancements such as these that I think will help with OPM addiction.

  4. eeewald says:

    I like the point you make about the OPM. I think it also ties into the “too big to fail” issue. If someone is working with someone else’s money he doesn’t have a lot of incentive to take care of it. The only thing keeping him from blowing it on something risky is the possibility of losing his job. But if the government is there waiting to bail him out if he makes really bad business decisions and loses all of the capital, then he is really going to take stupid risks with it.

What do you think?

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s