14 Ways for Occupy Wall Street to Legitimize Itself in Week Four

Occupy Wall Street has been all over the map in its messaging.  As a result, it's drawn the ire of some.  Here are 14 ways to do a better job next week.

Read the full post in Forbes

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Free Market Capitalism Needs Clear and Enforced "Rules of the Game"

Appreciate all the Seeking Alpha comments I've received on my article on "It's time to champion real free market capitalism."

Several have said that "real" free market capitalism should have no government involvement.

First, I don't believe that either Friedman or Rand would agree with that statement.

See this clip of Ayn Rand and Mike Wallace from 1959 (watch all 3 clips but the business/free market aspects are in the 2nd clip of the interview).

Wallace specifically asks her if all she cares about is protecting the "robber baron" (i.e., monopolist or oligopolist) capitalists. She clearly says she doesn't want to see monopolies and is favor of breaking them up. She also, of course, played an influential role in the 1st term of the Reagan administration when they (among other things) broke up Ma Bell.

I am not sure she wouldn't have supported keeping Glass-Steagall or breaking up Too Big To Fail Banks.

Friedman and Rand clearly saw a role for government for police, defense, and our legal system. Clearly, an extension of those agencies would touch business. After all, why else would she support the break-up of AT&T?

But let's all -- as proponents of free markets -- think for ourselves instead of only speculating about what Rand would have thought. After the last 2 years, to me, it's clear that government's primary role in relation to a healthy free market system is to set and enforce the "rules of the game" such that the entire game isn't at risk of stopping... as it almost did last year.

Rules of the game means preventing monopolies that inhibit choice. It means -- to me, and I don't care what Friedman or Greenspan used to think on this -- you prosecute no-talent fund managers who cheat their investors by illegally trading on insider information. It means giving shareholders -- the true owners of the corporation -- the right and freedom to toss out under-performance directors.

On the other hand, I don't think the government should be setting pay, deciding that Bear should get bought and Lehman should go under. They also shouldn't be saying that more sub-prime borrowers have the right to own a home as part of "the American Dream."

Strong "rules of the game" set and enforced by the government allows 'real' free market capitalism -- and they would have the secondary benefit of also removing crony capitalists who have stopped competing on ability and instead compete on lobbyist dollars spent.

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It’s Time to Champion Real Free Market Capitalism

By Eric Jackson

November 10, 2009

Market commentators and the White House have been quick to blame last year’s economic meltdown on a free market run amok. And they’ve used that false assumption to justify their unprecedented response of government intervention and increased regulation.

But we’ve never really had free market capitalism in this country. The last 30 years of America’s market system is better described as “mixed crony capitalism” – one part capitalism, one part government intervention through various programs, and one part corporate cronyism where officers and directors of big businesses pay themselves more, lobby politicians on both sides of the aisle and gain more power through favorable governmental regulations including mergers.

In such a three-way shared system, it shouldn’t surprise anyone that true free market capitalism always appears to be outnumbered by the interests of the government and corporate cronies.

For example, despite the billions in taxpayer dollars that have helped prop up a slew of “too big to fail” banks, and unprecedented government ownership of them, the powerful bank lobby has somehow convinced the current administration that little needs to be changed about how those banks operate. It’s as if the bankers and politicians are saying “let’s just call last year a mulligan and move on.” Not surprisingly, most of the CEOs and directors the banks that drove their institutions over a cliff are still in place.

If Standard Oil or Ma Bell existed today, it’s hard to imagine there would be the political will to break them up. Instead, politicians and their corporate donors would argue that what’s good for Ma Bell, GM, Bank of America, Citibank, or any other company is good for America. Politicians would never support programs that curtail spending, because it would give them nothing to go back home and talk about to get them re-elected.

There are many critical thinkers arguing why even more government intervention is needed today than ever before. Unfortunately, there are no critical thinkers arguing why our system needs more emphasis on free markets with clear “rules of the game” and less state involvement in our economy and less protections for corporate cronies. This paucity of ideas is something that greatly troubles me and other investors I know.

Milton Friedman and Ayn Rand are no longer around to argue for their vision of free market capitalism. Instead, we only hear alarmist libertarian rantings of Ron Paul or populist sloganeering to “keep the government out of our business” providing no clear direction for what changes should take place.

We need a renewed focus on the ideas of individual choice championed by Friedman and Rand. Both argued for a free market system built by entrepreneurship and small business and against abuse of power by “robber baron” CEOs. Government’s role in their eyes should be limited to police, defense, and the legal system. The importance of a market system following enforced rules is critical. The ideal market system the US should be striving to attain here is not Russia but Hong Kong.

The economic problems are country face are great, but they won’t improve by further deteriorating our federal balance sheet by short-term spending and tax breaks. Instead, we need to:

· reduce excessive government spending and restore fiscal balance to the federal and state governments

· break up companies that are “too big to fail” including the big banks

· force over-leveraged banks to undergo debt-to-equity conversions that allow them to get credit out to real entrepreneurs sooner

· bring back Glass-Steagall that separates commercial and investment banks,

· prosecute insider trading and other white collar crimes when they occur,

· get the government out of the business of setting executive pay in favor of giving shareholders more direct powers to remove directors not doing this appropriately and

· eliminate special tax breaks for homeowners and cars which only prolong the pain of an inevitable correction until later.

The heroes of free market capitalism are the entrepreneurs who create real value and real businesses. Those people are the antithesis of “fat cat” capitalists who ensconce themselves in money, power, with government protection. We need more people championing well articulated pro-market, pro-entrepreneurship policies in Washington.

Eric Jackson is Founder and Managing Member of Ironfire Capital and the General Partner and Investment Manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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What Galleon Teaches Us

By Eric Jackson
11/04/09 - 06:00 AM EST

Stock quotes in this article: AMD , INTC , IBM

The government's case against Raj Rajaratnam, founder of hedge fund Galleon Group, on the charge of insider trading alleges that the hedge fund manager's primary competitive advantage for investors was a web of connections close to or inside technology companies feeding him illegal tips on future directions of the companies' stock prices.

What's shocking is how Rajaratnam is accused of having, over at least 10 years, cultivated a network of insiders feeding him nonpublic information about future earnings announcements from public companies like AMD(AMD Quote) (including its former CEO), IBM (IBM Quote) Intel(INTC Quote) and some of their most prestigious advisers like McKinsey & Co.

Why would so many bright, high-ranking people at such successful companies get caught up in such activities? Perhaps they craved access to a man whom Forbes recently ranked as the 262nd richest American, worth $1.8 billion and in the top 40 of hedge fund managers.

In a recent PBS "Frontline" episode on Alan Greenspan, the program made the allegation that the former Federal Reserve chief and acolyte of free marketer Ayn Rand had once joked with former head of the CFTC, Brooksley Born, that the two of them would never get along because she believed in prosecuting capital markets crimes and he didn't. He supposedly went on to explain that his strong faith in free markets made him believe that it was unnecessary to go after white-collar criminals through any kind of enforcement program.

Instead, Greenspan believed that market participants would ferret out ill-gotten gains and punish those people for their crimes by starving them of future capital. Such efficiencies would likely occur before the governmental regulatory body even knew something nefarious was going on.

Although I'm a proponent of unencumbered free markets, this point of view, whether Greenspan held it or not, is laughable. Bernie Madoff has blown this argument out of the water. And now we have the case of Rajaratnam, his decade old hedge fund, and his alleged 10 years of generating alpha through profiting on illegal insider information.

As a hedge fund manager, I look positively on this development. If illegal activity is going on by fund managers, it deserves to be highlighted and prosecuted. Investors will learn to ask tougher questions as part of their due diligence, and capital will ultimately flow away from managers posting false performance numbers to those who are truly generating alpha.

The hedge fund industry has to be one of the most Darwinian industries of any in the world. You don't get to keep your job by being the boss' son or being friendly with the right managers above you. You get to keep your job (and paid well if you do it consistently) by beating the market. You lose your job otherwise.

Perhaps because of the big potential rewards for success, it shouldn't be surprising that some aspiring and existing managers would try to bend the rules to get or stay on top. What this case shows is that ethical managers and investors are better off with a strong enforcement office at the SEC. The industry itself is not going to highlight the next cheater and investors -- even very sophisticated ones -- cannot do this themselves.

I know many hedge fund managers who've expressed mixed feelings about the Galleon case. They're happy that illegal activities by their competitors are being halted, but they worry the case will inspire more unnecessary red tape and heavy-handed oversight. The SEC is faced with a challenge in keeping ahead of the latest and greatest tricks employed by some managers to gain a performance edge.

However, the agency appears to have been pretty creative in coming up with some ways of identifying and tracking alleged illegal behavior in the Galleon case. Hopefully, it will begin to hire more people in the enforcement division with real-world Wall Street experience and not just more bureaucratic lawyers, as was criticized by Harry Markopolos in the Madoff case.

There's been a lot of discussion of getting hedge funds to register with the SEC as an important way for the agency to keep tabs on the potential risk these funds pose to the financial system. It's important, therefore, to realize that Galleon was registered -- its assets under management at one point last year topped $3 billion. More budget resources targeted towards enforcement would be taxpayer money better spent than registration for registration's sake.

Finally, a word of caution on the Galleon case. Although criminality ought to always be prosecuted to the fullest extent, Galleon and Rajaratnam deserve the right to defend themselves in court. What if they are innocent, after having announced they would be winding down the firm two business days after news of the arrests first broke? Could they ever truly be made whole by the SEC if that happened? That Orwellian possibility should send shivers down the spines of hedge fund managers everywhere.

Mark Cuban has never run a hedge fund, but what if he had when the SEC came after him last year for purportedly trading on insider information in the small-cap stock Mamma.com? If he'd had a hedge fund at the time, it likely would have also had to be wound down when details of his arrest first emerged. The SEC later dropped the charges, although it recently made some noise about bringing them back.

Wrong-doing deserves to be regulated and prosecuted by the SEC. The government should devote more resources to enforcement with the best qualified people involved. A few correct convictions will have a ripple effect throughout the hedge fund industry and discourage illicit behavior.

However, the SEC needs to realize it is playing with people's lives and livelihoods here. Investors will -- understandably -- redeem first and ask questions later when the agency launches actions against a fund or fund manager. They have a responsibility to do their jobs to the best of their abilities, as do hedge fund managers and senior executives within public companies.

Jackson's fund holds no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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How Can a Free Market Capitalist be Against Management?

In response to my recent criticisms of Carol Bartz, her management team, and board at Yahoo!, I've had some people ask me "How can you be against management? Don't you support business and capitalism?"

When did it became assumed that anyone pro-management was pro-capitalist and anyone pro-shareholder rights was pro-socialist?

When I respond that I'm a free market capitalist in the vein of Milton Friedman and Ayn Rand, they seem surprised. I suppose they think that any CEO or executive would be a supporter of Friedman's conservative views - not a pro-shareholder person. Typically, on SEC votes, Republicans line up on the side management and Democrats on the side of shareholders. Isn't that the way it works? No.

I think that any individual -- CEO or shareholder (or Republican/Democrat for that matter) -- is self-interested. That's the whole basis of Friedman's views on the power of individual choice. Yet I don't think of most CEOs/boards/execs in America today as true free market capitalists -- at least in how they govern themselves and hang on to power. I think of them as crony capitalists -- not unlike the robber-barrons.

I don't think any of these individuals are inherently good or bad people, but they operate in a system in which they have found how it can be exploited for their self-interest -- especially when it comes to compensation and keeping the system for nominating replacements to the board as closed as possible. Welcome to Club Crony.

Since the beginning of the corporation, the board of directors was to have supposed to represent the will of shareholders. Yet Berle & Means showed that this intent quickly got side-tracked by management self-interest over the interests of the shareholders. The board was always supposed to take the long-view for the interests of its shareholders -- not do the work of management or make executives decisions by frequent referenda of shareholders. If the board wasn't taking the interests of shareholders in mind, the intent was to allow replacing directors until they did properly represent shareholders' interests. Both Friedman and Rand both recognized this.

Yet, in practice, what's happened is that board members became selected by CEOs (who often revamped the board when they took the job in order to be governed by "their people"). If I put my friend on the board, then promote him to the Compensation Committee, he might qualify for whatever definition of "independent director" you like, but he's still going to be my buddy and probably more generous to me in my compensation than if he was some 3rd-party.

Besides picking my directors to govern me as CEO, I can influence the compensation they receive. Therefore, if I wish, I can ensure they get paid a lot. If they're happy with receiving a lot of comp, maybe they will keep paying me a lot. It becomes a mutual admiration and back-scratching society.

The slate of directors runs every year unopposed. Most shareholders (especially retail) are apathetic and don't vote anyway.

If a shareholder wants to run a proxy contest against us, they have to pick up the tab for doing so, while we can use our shareholders' money. If a shareholder wants to sue us, our D&O insurance protects us from any liability (paid for again by shareholders) and the shareholders will also pay our top drawer NY lawyer fees.

This wasn't how it was supposed to be. Management's insulation from being held accountable to shareholders promotes waste, not efficiency; mediocrity, not innovation; wealth-destruction, not wealth-creation.

The solution before the SEC on proxy access isn't perfect, but it will probably do more to bust up crony capitalism and promote truer free market capitalism than any other piece of regulation they've introduced in the last 30 years. Let's hope it passes as is.

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