Crony Capitalism On Live TV: Host Hotels CEO Offers Pathetic Excuse For Taxpayer Bailout Of Lodging Industry Terrorism Insurance

America is sinking under the deadly weight of crony capitalism, but not merely because beltway politicians have become servitors of the PACs and K-Street. An even more insidious cause is that the nation's leading corporations are now being run by financial engineers who could not give two hoots about the American taxpayer and who are clueless about the essential principles and disciplines of free market capitalism. Instead, its all about quarterly earnings, however gotten or concocted, in order to goose an ever-rising stock price and payday of stock option gains.

To be sure, America's CEOs have been conscripted into this baleful occupation by the unrelenting and often vicious pressures from the fast money traders and so-called "shareholder" activists who dominate the Wall Street Casino. But even in the worst case the long-good bye of a CEO ousted by the Board results in a fulsome golden parachute. And at the end of the day, the Wall Street Casino, in turn, is the handiwork of the Fed's deplorable "wealth effects" doctrine and its conceit that it can improve jobs and GDP by tricking the folks into thinking they should spend freely from an transient gains in paper wealth.

Still, we are not dealing with Thomas Piketty style inherent defects of capitalism---or even the greed and avarice of human nature. There was a time, as I documented in The Great Deformation, that business leaders consistently {adinserter 1}opposed bailouts and Washington interventionism and insisted that free market verdicts had to be abided by impacted players and Washington meddlers alike.  The great American businessmen like George Humphrey, who was Ike's intrepid partner in balancing the Federal budget and Bill Simons, Gerald Ford's Secretary of the Treasury, who campaigned incessantly against Keynesian macro-management and Washington bailouts, come to mind. They were both immensely successful businessmen who came to Washington with deep principles and left with them in tact.

Fast forward to the present era and you have the pathetic episode of America's #1 crony capitalist, Jeff Immelt of GE, blatantly demanding a bailout for the commercial paper market from Treasury Secretary Hank Paulson during the post-Lehman panic in September 2008. Its seems that Immelt was not prepared to accept the earnings dilution that would have resulted from paying a few hundred basis points of higher market rates on CP or issuing stock and long-term debt to fund his massive pile of maturing commercial paper. He got the bailout almost instantly, and, bonus and stock options in tact, proceeded to thank Wall Street's then plenipotentiary in the Treasury Building profusely.

Now comes one Ed Walton, CEO of Host Hotels, who actually gets a real question during today's normal soft-ball post earnings release interview. The CNBC host had the temerity to ask  why the lodging industry and he personally has been lobbying Washington about extending the soon to expire Federal terrorism insurance backstop program that was hastily adopted by the crony capitalist coddlers in the Bush White House in 2003.

Self-evidently, there was never any case whatsoever for this program----which basically dumps on taxpayers all the losses of another terrorist incident above a modest threshold of first losses. But the obvious point is that a giant loss due to a ultra-low frequency event like the terrorist attack of 9/11 is a binary event. Most of the time---and hopefully all of the time---no losses occur at all, but when they do, losses soar far beyond the first loss threshold.

And that's why market pricing is so essential. The global insurance and reinsurance industry have become efficient experts at pricing catastrophic loss events like major hurricanes, earthquakes, tsunamis and tornadoes.  The large tail loss simply gets priced into the on-going premium structure. There is no reason whatsoever that America's hotel chains and other exposed commercial entities should not carry the freight. Its a cost of doing business just like repairing the plumbing and paying the marketing staffs.

No, the reason the industry is lobbying so strenuously for an extension is the same one that motivated Jeff Immelt in his disgraceful extraction of a commercial paper bailout from Washington: Namely, the desire to avoid the substantial increase in insurance premiums that would result from market pricing of the terrorism risk, and the hit to earnings that would result.

Indeed, a report by the insurance industry association makes crystal clear what would happen in the event of expiration:

Meanwhile, pricing for other areas of terrorism insurance could increase dramatically in a number of metropolitan areas and for numerous venues around the U.S. As a result, without the TRIPRA backstop, policyholder needs with regards to terrorism insurance would not be met and many would be left to self-insure the entire risk or portions of the risk...

So listen to Walter's double-talk and pettifoggery and know why crony capitalism's destructive reign rolls on unabated. Nearly the entire corporate leadership of America sings from the same hymnal being recited below.


via Host Hotels CEO: West Coast outperformed East Coast.

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