Find Insurance Online

In 2010, Richard Fuld, the former CEO of Lehman Brothers, told a congressional committee that he had "absolutely no recollection whatsoever of hearing anything" about Repo 105 at the time of the transactions. Lehman's demise, he claimed, was caused by "uncontrollable market forces" and the U.S. government's unwillingness to rescue the firm. Of course, Henry Paulson, the U.S. Treasury Secretary in 2008, had tried in vain to get Fuld to accept a buyer offering a reasonable price; Fuld had been holding out for more in spite of the financial condition of Lehman. It is stunning that a man who had been allowed to reach such a pristine and lofty office in the business world would not even permit himself to acknowledge any contributory role in the downfall of the organization he had run. Such an attitude alone seems worthy of a prison sentence (and the return of his salary and bonuses); how he and his "team" had manipulated the books to make the bank look wealthier than it was would seem to make such a sentence inevitable.

However, as of March 15, 2011, no high-profile executives involved in the finacial crisis of 2008 had been successfully prosecuted. In Feburary of the same year, for example, a federal criminal investigation of former Countrywide Financial Corp. Chief Executive Angelo Mozilo had been, according to The New York Times, "closed without charges." Regarding "the battered real-estate portfolio and an accounting move known as Repo 105," the paper reported that SEC officials were growing more worried in the early months of 2011 that "they could lose a court battle if they bring civil charges that allege Lehman investors were duped by company executives. The key stumbling block: The accounting move, while controversial, isn't necessarily illegal." This is an extremely important point, for it means that FASB, the non-profit quasi-regulatory body that promulgates generally accepted accounting principles (GAAP) in the United States, is too permissive--too accommodating of how executives of publicly-held corporations want to value assets and liabilities.

Punctum saliens, the means by which accounting standards are determined is too susceptible to influence from CPA firms and their clients, the public corporations being audited.  The structural conflict of interest existing between the "independent" auditors and their clients is magnified to the extent that either of the two parties have inordinate influence on FASB.  Even if a government agency such as the SEC were to set the regulations, there would still be the risk that the accounting firms and/or public corporations could gain leverage over the regulators, in what is called regulatory capture. The root problem behind both allowing the conflict of interest and being too accommodating in terms of GAAP is that Americans, and thus the values in American culture, are too conducive to business--meaning not sufficiently realistic concerning the possibility of greed and any resulting harm. An examination of why the Lehman executives could manipulate their books unfairly and yet legally points to this proclivity manifested through a too-flawed and friendly accounting regulatory system.

The New York Times reports that in March of the same year in which Richard Fuld testified before Congress to disavow any responsibility in the failure of the bank he had run, "the Repo 105 transactions were condemned by court-appointed examiner Anton R. Valukas, who said in a report that they enabled Lehman to 'paint a misleading picture of its financial condition.' . . . In the transactions, Lehman swapped fixed-income assets for cash shortly before the securities firm reported quarterly results, promising to buy back the securities later. The cash was used to pay down the company's debts. Emails sent by executives at the company referred to Repo 105 as a 'drug' and 'basically window dressing.'" Valukas concluded there were "colorable," or credible, legal claims against Ernst & Young, Fuld and former Lehman finance chiefs Ian Lowitt, Erin Callan and Christopher O'Meara. Indeed, when he was the Attorney General of New York, Andrew Cuomo criticized the Repo 105 transactions as a "house-of-cards business model, designed to hide billions in liabilities in the years before Lehman collapsed."  The implication is that Fuld and his subordinate managers had committed fraud.

Even so, Ernst & Young "had concluded that the accounting in the Repo 105 transactions was acceptable."  In a statement, Ernst & Young "said," we stand "behind our work on the Lehman audit and our opinion that Lehman's financial statements were fairly stated in accordance with the U.S. accounting standards that existed at the time." (italics added) Fairness, in other words, depends solely on whether the books of a company are in line with the accounting standards, rather than on whether the values recorded on the books reflect the values of the underlying assets and liabilities. In terms of the repos at Lehman, The New York Times reports that SEC officials generally concluded that "the transactions were consistent with accounting standards." Successfully prosecuting former Lehman execcutives for making misleading statements about the bank's financial condition is an uphill battle, according to the paper, because the executives relied on legal and accounting opinions. Furthermore, in his report, Valukas wrote that he didn't find "sufficient evidence to support a colorable claim for breach of fiduciary duty in connection with any of Lehman's valuations." Also, SEC officials were not "convinced that Lehman shareholders suffered material harm, since executives were trading one type of highly liquid asset for another." However, the apparently lower debt levels might have influenced existing and potential investors in their decision-making regarding their level of exposure from investing in Lehman. In other words, their risk was being deliberately understated by Lehman's management. Even if particular investors were not actually harmed, showing an apparent lower risk than would be the case without the repos (and cost valuations on the real estate investments) was not in the investors' interest. Moreover, it just isn't fair, even if it is legal because it is allowed by GAAP. The problem, in other words, extends from Fuld and his sycophants at Lehman to the FASB.

The wrench in the works with my thesis is the fact that there are indeed different ways in which an asset or liability can be valued fairly. There are different viable assumptions, for example, regarding whether an asset should be valued at cost or market. Each assumption has a downside. Showing a real estate investment at cost, for instance, has the downside that the market-value of the asset, if significantly lower, is not shown. That is, the transactions-value of the asset at the time is ignored. Even if the firm intends to hold the asset, the lower market value would determine what the firm could do with that asset in covering for any needed debt payments. On the other hand, if market values fluctuate substantially, changes in an asset's value may not make much difference to the underlying value of the asset, and thus to the firm, especially if the firm intends to hold the asset long term.  To the extent that speculators can artificially push up or short an asset's market price, the latter does not reflect the underlying, or fundamental, value of the asset or even the real supply and demand (e.g., oil price hikes in the wake of the Libyan disruptions in 2011). Unfortunately, the companies being regulated and the accounting firms they hire can use such authentic debates to open GAAP up wider than a sloppy whore so they can have their way with her in order to look better than they are. That such selfishness, deceitfulness and greed can be accommodated by GAAP, and thus the FASB, and ultimately the American electorates, is the real problem, and unfortunately there is not an easy solution because the basic problem lies in values and assumptions held by a population.

As useful as flexibility is in accommodating different assumptions and plans regarding assets and liabilities, the refusal of FASB to fortify its sanctioned accounting methods with conditions so investors are not misled--a refusal that I contend is from inordinate influence from the regulated and their public accountants--means that managers running publicly-held companies like Lehman Brothers are enabled to do practically-speaking whatever they want to show the public (and the owners) only the asset values and debt levels that they want. Allowing only cost to value real estate, for instance, could be conditioned not on whether the firm intends to hold the asset (a subjective matter that a manager could manipulate and even falsify), but rather on the extent of difference in percentage terms between the market value and cost. An accounting breed of relativism unchecked allows for and enables greed. Lest we want to succumb to such decadence, fairly stated ought not be tied to conforms to GAAP if the latter is too tolerant. The regulated will always prefer relativism in regulation.  Even if GAAP is tightened, fairly stated ought not to be determined solely in terms of those standards. Additionally, CPA firms ought to be on the look out for fraud or misleading practices even if they are allowed by the FASB's standards.  The latter are means rather than ends in themselves. According to Kant, beings of a rational nature must be treated as ends in themselves (as well as means). GAAP are not rational beings.

Beyond changes in GAAP and what CPA firms are charged to look at, the friendliness of the FASB to the business world, or at the very least the extent of the organization's accommodation, should convince the American people and government officials that more government regulatory involvement is warranted. While some government regulators could come from industry to contribute their technical knowledge, they should be checked by superiors who have a healthy skepticism of business and a salient regard, or value, for the public interest. Ultimately, it is up to the American people, operating through our elected officials and the related governmental agencies, to stand up to the temptation to have regulation esssentially by the regulatees. However, this requires esteeming values that are sufficiently realistic concerning the role that greed and selfishness can play in those of us who run the world of business. Power as well as money can be intoxicating, especially in high doses. Lest the value of economic liberty blind us to this subterranean all-too-human propensity, we as a society could pay more attention to the societal blind spot of structural or institutional conflicts of interest implicit in the very design of some of our most important regulatory systems.
Source: http://online.wsj.com/article/SB10001424052748703597804576194871565429108.html

Click to add a Comment or Question (or View Posted Comments) on business ethics at Lehman Brothers.


On greed, see related essay, "Godliness and Greed": http://thewordenreport.blogspot.com/2011/02/godliness-greed-how-effective-is.html

On Lehman's corporate governance, see: http://thewordenreport.blogspot.com/2011/02/godliness-greed-how-effective-is.html

Under the Dodd-Frank financial reform law of 2010, Goldman Sachs had to break up its principal strategies group, the trading unit that had been very profitable. Goldman was considering several options, including moving the traders to another division or shutting the unit altogether. Morgan Stanley was considering ceding control of its $7 billion hedge fund firm, FrontPoint Partners. At Citigroup, executives had sold hedge fund and private equity businesses and were discussing reducing proprietary trading, which relies on a bank’s own capital to make bets in the financial markets. JPMorgan Chase had already begun dismantling its stand-alone proprietary trading desk and was modifying the structure of some investments of One Equity Partners, its internal private equity business. “This is the real stuff,” said Brad Hintz, an analyst at Sanford C. Bernstein & Company. “It shows that if you squeeze Wall Street, like a balloon it will come out somewhere else, and we really are squeezing Wall Street. Their business models are changing.”

However, loopholes in the legislation may enable the banks to continue to trade on their own books, even apart from serving as a counterparty for client transactions. Citigroup and others, for instance, are considering moving proprietary traders to desks that handle trades for clients, although the traders would still be able to make their own bets in the markets. The Volcker Rule’s definition of proprietary trading is open to interpretation. At first blush, it looks watertight: the rule forbids banks from buying and selling financial products for their “trading account.” That, in turn, is defined as an account meant to profit in the “near term” from “short term” movements in prices. Besides not covering such long term bets as shorting in anticipation of a fall in the housing market, the rule states that banks can still trade government and agency securities for their own account. Some of the problems at the hedge fund Long-Term Capital Management stemmed from trying to arbitrage prices between Treasuries of different terms. And the Carlyle Capital Corporation, a heavily leveraged debt fund, crashed in 2008 when prices of Fannie Mae and Freddie Mac mortgage bonds dropped. So in allowing for continued proprietary trading apart from serving as a short-term counterparty for a client’s transaction, the Dodd-Frank Financial Reform law may not change Wall Street’s landskip all that much. This is hardly surprising, as members of Congress allowed the banking lobby to participate in the writing of the legislation in spite of the industry’s culpability in the financial crisis of 2008.

Click to add a question or comment on proprietary trading and financial reform.

Sources:
http://www.nytimes.com/2010/08/06/business/06wall.html?_r=1&scp=2&sq=wall%20st%20faces%20specter%20of%20lost&st=cse
http://www.nytimes.com/2010/08/06/business/06views.html?scp=1&sq=anthony%20currie%20christopher%20swann&st=Search

On May 11, 2010,  U.S. Dept. of the Interior Secretary Ken Salazar announced that he would separate the public safety and environmental enforcement side of the Minerals Management Services (M.M.S.) agency from its leasing and revenue collection function. While this move eliminateed the structural conflict of interest in the agency, it might not do enough to protect the regulatory function of the agency’s public safety and environmental enforcement roles.  The regulator can all too easily be coopted, or captured, by the firms it is regulating.

According to The New York Times, M.M.S. agency has routinely overruled its staff biologists and engineers who raised concerns about the safety and the environmental impact of certain drilling proposals in the gulf and in Alaska, according to a half-dozen current and former agency scientists. Those scientists said they were also regularly pressured by agency officials to change the findings of their internal studies if they predicted that an accident was likely to occur or if wildlife might be harmed.  “M.M.S. has given up any pretense of regulating the offshore oil industry,” said Kierán Suckling, director of the Center for Biological Diversity, an environmental advocacy group in Tucson, which filed notice of intent to sue the agency over its noncompliance with federal law concerning endangered species. “The agency seems to think its mission is to help the oil industry evade environmental laws.” One scientist who has worked for M.M.S. for more than a decade, said, “You simply are not allowed to conclude that the drilling will have an impact. If you find the risks of a spill are high or you conclude that a certain species will be affected, your report gets disappeared in a desk drawer and they find another scientist to redo it or they rewrite it for you.” For one thing, the regulators rely on information from the firms–data that is hardly provided in an objective fashion.  But such reliance pales in comparison with the political muscle of the oil companies–their campaign contributions being just the tip of the iceberg.  Moreover, large concentrations of capital are inherently a threat to a viable republic.

It should be no surprise that the government would welcome the cooperation from the companies involved in the accident in the Gulf; it reduced the pressure on the officials to go after the companies (and hence risk alienating their future contributions).  According to The New York Times, “Under federal law, even in the case of a major accident, the company responsible for the oil well acts in concert with government in cleanup activities and can help put out information about the response effort.”  Shortly after the spill, government agencies and BP set up a joint information center and a Web site detailing remediation efforts. BP started to promote its attempts to “stop the bleeding” (i.e., cut off the leaking oil in the Gulf).  With a restored image, the company could resume lobbying for less regulation, even though the accident demonstrates insufficient enforcement.

Source: http://www.nytimes.com/2010/05/12/us/12interior.html?ref=us ; http://www.nytimes.com/2010/05/14/us/14agency.html?hp

In the process whereby financial reform legislation made its way through Congress after the financial crisis of 2008, the U.S. House and Senate had different approaches concerning who would be required to go through a clearing house to buy or sell deriviative securities. According to Michael Masters, "The clearing house would stand in the middle of the transaction and guarantee both sides of the trade. If one counterparty to the transaction fails, then the central counterparty absorbs those losses, protecting the system as a whole from collapse."  Masters claims that "Wall Street firms hate this idea because their prodigious profits will dwindle when derivatives are traded in the light of day, letting their counterparties see the true costs. So Wall Street is pushing hard to exempt as many transactions as possible."  Given the culpability of Wall Street in the financial crisis, they were in no position to "push hard." That they did nonetheless is a telling sign of the underlying character, or lack thereof, "on the street."  Furthermore, that the representatives and senators were listening to them ought to cause the voters some concern.  Yet because of the reality of the banks' muscle on the hill, the power of the banks to exploit any loopholes in the final legislation should have been salient as the legislation made its way through Congress. This can be seen in whether to favor the House or Senate version.

According to Masters, "The Senate version of the clearing house requirement, which is currently the base text for the bill, includes a narrow, well-defined exemption that allows commercial end-users a complete exemption from clearing, while denying this exemption to financial players. The House language, however, would exempt anyone hedging "balance sheet risk." Since every financial player has a balance sheet, it is estimated that more than 50% of the outstanding derivatives would go uncleared under the House plan, compared to just 10% under the Senate version."  One might say: Ah, 50% is a pretty wide door--better go with the Senate version (assuming it could resist threats and favors from the banking lobby).

Masters explains the rationale for the Senate's version. There "is a critical policy distinction that must be made between commercial end-users like airlines, and financial entities like hedge funds. For a commercial end-user, risk arises naturally out of the ordinary conduct of business. For a financial entity, pricing and managing risk is their core business. As an example, an airline cannot fly without incurring the risk of wildly gyrating jet fuel prices. Allowing them to hedge their jet fuel exposure without a clearing requirement would provide stability for the airline, confidence for airline investors and ensure that the broad U.S. economy benefits from reliable airline service. A hedge fund, however, starts with no inherent risk. Its mission is to evaluate investment options, balancing risk and reward. If a hedge fund enters into a jet fuel derivatives contract on a bet that prices will increase, then it's nonsense to say that they are "hedging" when they subsequently enter into an offsetting deal to reduce the risk they voluntarily took on in the first place. These semantic charades can easily be carried to such extremes that every transaction a hedge fund enters is "hedging" something. An exemption for hedge funds serves no social purpose and, in fact, it puts our entire financial system at risk."  In other words, there are good business reasons for non-financial companies to be able to use derivatives to hedge for risk related to price volitility even if the companies cannot meet the clearing requirements. Of course, it could be asked what proportion of commercial use should but would not occur were such use subject to the clearing house requirements.  I don't know the answer to this question. I contend, however, that even if it is significant, the danger that the loophole would be exploited such that the financial system would once again be at risk outweighs any such inconvenience.  In other words, in reaching too far for perfect efficiency, we could unwittingly be inviting the irrational exuberance of the market to destroy the market mechanism itself.  We ought not fly too close to the sun or we might get burnt and fall to the ground. Masters concludes that the Senate language is "superior to the House's simply because it forces far more derivatives into the open." This may be so, but what would prevent a financial player from using a commercial user as a front to bypass the clearing requirements? Furthermore, there might be legislative language in the exemption that allows financial firms to obviate the clearing houses without even needing such a front.

In short, I contend that having any loopholes, or exeptions, is an unwise practice when we know (as Sen. Dick Durbin said) that the banking lobby owns Congress. We also know that managers and their lawyers are oriented to exploiting loopholes.  To expect otherwise is to tell a shark that it should not be a feeding machine.  That is, we must accept the nature of business for what it is, and not do what can reasonably be assumed to be taken advantage of.  It is like saying to sharks: those of you who do not eat any swimmers can go through the hole in the net and into the shore area.  It is just too dangerous to have a hole in the first place, even if there are some benefits to having it.

Source: http://money.cnn.com/2010/06/23/news/economy/congress_derivatives/index.htm

In the U.S. Constitutional Convention, James Madison in particular stressed the nepharious quality of faction in relation to the public good. He argued that if a republic is extended in scope sufficently that there are more factions, none of them would be able to dominate and the public good would emerge. In a republic in which there are only a few major parties, the people's perspectives can become delimited by the parties' paradigms in an either-or dual macro-framework. That is to say, societal blind-spots can exist. To the extent that both BP and the relevant U.S. Government regulatory agency, MMS, were both culpable in the Deep Water Horizon rig explosion in 2010, both the Republican defense of business and the Democratic defense of government fall short. Even so, these respective defenses went on undaunted in the wake of the disaster and in the next year. To be sure, old paradigms die hard.

Albeit an oversimplification, it can be said that the Democratic party in the United States stresses the power of business as the problem, whereas the Republican party there views the problem as being government.  In campaigning for President in 1980, Ronald Reagan bluntly said that government was indeed the problem.  Deregulation ensued and industry self-regulation was like a fad. The idea was that the checks and balances in goverment that protect the liberties of the citizens could be applied at the industry level such firms would provide a check on eachother automatically. Lost in the buzz was the extent to which an industry would be willing to sacrifice its own long-term viability in order to protect even the bad among its own.

In 2010, the Republican paradigm whereas business is good and government is bad resulted in some Republican office holders defending a piriah (BP) and continuing to urge deregulation in order to excoreate against the US Government and frustrate the Obama Administration.  The ranking Republican on the US House Energy and Commerce committee apologized to BP’s CEO for the “shakedown” by Obama in extracting a $20 billion fund for the claims in the Gulf region. Meanwhile, Democrats were hard-pressed to admit that a goverment regulatory agency, namely MMS, could be so inept and corrupt.  It was not so much a matter of more regulations being needed; rather, the problem was government regulation itself.

Democrats could point to the encroaching nature of big business over the regulators, but absent a shakedown in the size of the biggest companies, the wherewithal of the regulators not to “partner up” with the regulatees may be an intractable problem in government regulation.  The traditional argument in capture theory that regulators depend on their respective industries for information doesn’t even break a sweat in what is needed to explain the extent of the power of big business over government regulatory agencies.  The imbalance of power is systemic: government officials being too feckless and corrupt. and big business being too powerful for the good of the republic.  In their letters, Jefferson and Adams agree on the need for a natural aristocracy of virtue and talent, rather than the artifical sort of wealth and birth.  Absent a natural aristocracy, systems whether business or government, cannot but be ineffective and corrupt.

In 2010, BP’s sordid safety record and its explosion in the Gulf of Mexico challenged the paradigms of both parties.  In actuality, business and goverment, as well as business and government, contain problems that exceed and transcend a particular paradigm. In treating the two party paradigms as a dichotomy, we miss the interaction effect that exists among the respective sectors’ problems.  It might be that the founders were correct in their suspicion of factionalism, as it does indeed detract from the common good.  Where a paradigm keeps one from acknowledging problems that are in the radar of an “opposing” paradigm, a person is not apt to serve the public interest.  In other words, both paradigms are limited.  The BP-MMS interaction and the subsequent explosion and responses exposed the delimited nature of the partisan paradigms.

According to The New York Times, Wall Street bankers were busy working on how to weaken the regulations or otherwise profit from them before the ink was dry on the financial reform law of 2010 . First, regarding trying to profit from the new regulations, BOA, Wells Fargo and other big banks that were faced with new limits on fees associated with debit cards were imposing fees on checking accounts. Compelled to trade derivatives in the daylight of closely regulated clearinghouses rather than in murky over-the-counter markets, titans like J.P. Morgan Investment Bank and Goldman Sachs were building up their derivatives brokerage operations. Their goal was to make up any lost profits — and perhaps make even more money than before — by becoming matchmakers in the vast market for these instruments. That critics were pointing to them as a principal cause of the financial crisis made no difference to those bankers. Even when it comes to what is perhaps the biggest new rule — barring banks from making bets with their own money — banks found what they thought was a solution: allowing some traders to continue making those wagers as long as they also work with clients.

Lest one conclude from the banks’ stretegic responses that the new law passed in the wake of the financial crisis of 2008 goes strongly against their interests, it is important to remember that the reform is more geared to giving government officials adequate power to mop up a future mess than to enabling them to prevent one in the first place by clamping down on the banks. The devil is in the details. This in itself can be an opportunity for banking lobbyists to work over regulators who depend on information from the industry and can be swayed by legislators who have received campaign contributions and fund-raisers from the bankers. Regulators are tasked under the new law with writing the specific rules of the road governing limits on risk-taking by financial firms and previously unregulated trading. By leaving so much to the discretion of existing regulators, the new law is “a boon to Wall Street lobbyists, who will now be working behind the scenes to influence the regulators,” according to John Taylor, president & CEO of the National Community Reinvestment Coalition. Furthermore, in enforcement, there is evidence that regulators are apt to look the other way. The wave of predatory lending that sank the housing market, for example, could have been largely prevented if the Federal Reserve had enforced existing rules on mortgage lending, according to Cornelius Hurley, director of the Morin Center for Banking and Financial Law at Boston University.

Under the financial reform law of 2010, banks and other financial institutions are overseen by a council of  regulators. That group is charged with identifying the kinds of “systemic” risks that spun out of control in the collapse of Bear Stearns and Lehman Bros. in the financial panic of September 2008. But there’s little to be gained by entrusting that task to the same regulators who failed to spot the causes of the panic the first time, said Isaac, the former FDIC head. “If a bank went to the regulators and said, ‘We’ve got a good idea: we’re going to put our lending officers in charge of risk management,’ that bank would be put out of its misery immediately,” said Isaac. “That’s what the government just did. It put the regulators in charge of assessing their own performance. It’s a very bad system.” While the law creates a separate agency with a single consumer mandate, even it remains beholden to those regulators, who retain the power to veto its regulations and enforcement actions. That setup, said Taylor, could seriously hamper the board’s effectiveness. “That club of regulators is very insular, and usually in agreement,” he said. “They can kill serious reform, and the financial lobby remains much more influential with regulators than consumer advocates.”

The problem can be broadened by considering that President Obama brought to head his economic team people like Larry Summers, who while in the Clinton Administration lobbied against regulating derivatives, and Tim Geithner, who had been appointed as President of the New York Federal Reserve at the urging of Citigroup and its major stockholder. In other words, it is not just a matter of relying on the same regulators; the construction of the law involved the same advisors.  Indeed, that members of Congress listened to the banking lobby at all even as the banks were complicit in the financial crisis of 2008 can be viewed as going back to the same. At a fundamental level, the banking industry may have too much leverage over top government offiicals, whether legislators or regulators.

Sadly, according to Newsweek, “the bill does more to help regulators detect and defuse the next financial crisis than to actually stop it from happening. In that way, it’s like the difference between improving public health and improving medicine: The bill focuses on helping the doctors who figure out when you’re sick and how to get you better rather than on the conditions (sewer systems and air quality and hygiene standards and so on) that contribute to whether you get sick in the first place.” This might be because it is in the big bankers’ interest that the government come in and clean up, but not restrict them in the meantime.  In the 1980s, the financial sector’s share of total corporate profits ranged from about 10 to 20 percent. By 2004, it was about 35 percent. According to Newsweek, “What you get for that money is favors. The last financial crisis fades from memory and the public begins to focus on other things. Then the finance guys begin nudging. They hold some fundraisers for politicians, make some friends, explain how the regulations they’re under are onerous and unfair. And slowly, surely, those regulations come undone.”

In the wake of the financial crisis, the American people had a chance to brake up the banks too big for our republics, but even then the bankers were able to quietly get this option off the airwaves. I contend that the too big to fail systemic risk is actually greater with respect to the viability of the US than to the financial system. That is to say, the ability of Wall Street to dodge the bullet even when it was culpable for a near melt-down of the financial markets may mean that we are living in a plutocracy rather than a democracy—the latter being mere window-dressing. Even when Wall Street is “bad,” it owns Congress, according to Sen. Dick Durbin of Illinois.  This ought to tell us that the game is over, yet with regard to the regulators I suspect the games will go on for some time.

Sources:
http://www.msnbc.msn.com/id/38266914/ns/business-eye_on_the_economy/  http://www.newsweek.com/2010/07/15/five-problems-financial-reform-doesn-t-fix.html  http://www.cnbc.com/id/38272518

See Related:
http://euandus3.wordpress.com/2010/07/09/is-the-us-too-banker-friendly-relative-to-the-eu/
http://euandus3.wordpress.com/2010/06/23/regulating-financial-and-commercial-derivatives/

When he was running for US President, Barak Obama said that the financial crisis provided an opportunity for financial system reform beyond that which is in the interest of the big banks because the power of the latter is temporarily eclipsed and the US Government can take advantage of that.  His assumption is that during normal times, the banking industry essentially owns the Congress (Sen Dick Durbin’s statement just after the banking lobby defeated a foreclosure bill in the US Senate in 2009).  Sadly, the government did not use the eclipse; rather, it has been using the appearance of power and direction in the relumed post-crisis period to engage in window-dressing to assuage populist anger at the banks.

 Asserting that it “is among the strongest banks in the industry,” Citigroup announced in December, 2009 that it would soon repay $20 billion of federal bailout money. This from a bank that was in the red for most of the preceding two years, that was expected to limp through 2010 amid a torrent of loan losses, that saw its stock price close after the announcement at a measly $3.70 a share — and that, like other big banks, was still reluctant to lend. Citigroup’s planned exit from the bailout — like Bank of America’s earlier this month — would be welcome if the banks were the picture of health. But their main motive was to get out from under the bailout’s pay caps and other restraints. Perhaps the bankers were motivated to attract talent;  perhaps they were acting in their personal financial interests.  The Treasury Department’s approval was a grim reminder of the political power of the banks, even as the economy they did so much to damage continued at the time to struggle and the banks have benefited from taxpayer money.

Big bank profits, for instance, still came mostly courtesy of taxpayers. Their trading earnings were financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets were collateral. They benefitted from immense federal loan guarantees, but they were not lending much. Lending to business, notably, was very tight.  Barak Obama’s “urging” the banks to lend more to small business was not apt to be taken seriously by the big banks, given their financial power.   To exort banks to be good “corporate citizens” is only to twist “citzen” beyond its pale.

Let’s be clear. Organizations are not citizens.  For one thing, they can’t vote.  Exxon can’t mail in its ballot for president.  Nor can it be drafted to fight (rather, it can receive military contracts; its lobby knows how to procure those).  Moreover, they are designed (real citizens are not “designed”) to retain income without limit.  Extrinsic normative claims on the organizational machines do not register in the corporate calculus unless there is a financial cost.

Being called to the “woodshed” at a White House meeting is mere political theatre—something the bankers who bothered to attend in person must have known was something merely to sit through.  Some of the biggest recipients of taxpayers’ money, including Citigroup and Goldman Sachs, didn’t even bother making the extra effort to get there ahead of time to avoid the predictable winter weather that grounded their flights.  The acela train from NYC was running on time, yet the CEOs cited flight delays as making it impossible for them to attend in person.  Perhaps the CEOs correctly determined that Barak Obama’s meeting was mere political theatre.  The banking lobby was surely not being distracted from the financial reform legislation making its way through Congress.  That lobby has gained significant loopholes in the House’s passed bill (see my post on the House bill).  Aside from the loopholes (such as derivatives still not subject to regulation!), the apparently “strong” provisions of that bill are vulnerable to being gamed. The Senate, which is unlikely to pass its version of the deal until next year, should explore more direct measures, like banning banks beyond a certain size, measured by their liabilities. If we have learned anything over the last couple of years, it is that banks that are too big to fail pose too much of a risk to the economy. Any serious effort to reform the financial system must ensure that no such banks exist.  But can you imagine our elected officials having the guts to split up Goldman Sachs?  Can you imagine what that bank would do to avoid such a fate?  … and yet such private power is not a threat to a republic?   As voters, we are asleep at the wheel, too easily taken in by the theatrics of impotent politicians.

In general terms, it is ironic that the banks too big to fail may be even more of a risk after the financial crisis.  What profits the banks have been making have come mostly from trading. Many big banks were happy to depend on the lifeline from the Fed and hang onto their toxic assets hoping for a rebound in prices.  Crucially in terms of the systemic risk in “too big to fail,” the whole system has grown more concentrated since the crisis. Bank of America was considered too big to fail before the meltdown. Since then, it has acquired Merrill Lynch. Wells Fargo took over Wachovia. And JPMorgan Chase gobbled up Bear Stearns.  If the goal is to reduce the number of huge banks that taxpayers must rescue at any cost, the US Goverment has been moving in the wrong direction. The growth of the biggest banks ensures that the next bailout will have to be even bigger. These banks will be more likely to take on excessive risk because they have the implicit assurance of rescue.  In short, there is even more systemic risk after the financial crisis of 2008.  Creating a new consumer protection agency is a feckless attempt by the US Government to show some muscle to face entrenched (and even more powerful) financial interests on Wall St.  Even giving the government the power to deal with banks deemed too risky to the financial market itself does not guarantee that the power will be used.  Consider, for example, the lack of enforcement of anti-trust law.  For a comparison, look at the EU—not only in terms of going after big companies like Microsoft, but big banker bonuses.   In the US, we much face the fact that the big banks are on top.  If what is good for Goldman Sachs or Citigroup is not necessarily good for us, the American people, then there is a tremendous systemic risk for us in being appeased by Barak Obama’s public “scolding” of Wall Street and by the Swiss-cheeze financial reform bill making its way through Congress.  Neither branch is taking seriously the question of the existence itself of the banks too big to fail.  Moreover, the question of whether large concentrations of private power have become a threat to our republic—on account not only of the ability of a big bank to shaft its customers, but also of the relative power of the banks and their lobby over our government—has effectively been sidelined.   It as as though popular sovereignty here means charting a ship’s course without looking beyond the bow.   Some of the wealthy passenagers have told us: don’t look out there!  Don’t ask the real questions!  And we, being reduced to unconscious herd animals, happily comply and stiffle our anguish because we feel the big banks have already won.

Adapted from: http://www.nytimes.com/2009/12/15/opinion/15tue1.html

In early February, 2011, the Los Angeles city council voted unanimously to draft an ordinance that would require condoms to be used on the set of every pornographic movie made within city limits. “We can’t keep our heads in the sand any longer,” City Councilman Bill Rosendahl said. “These people should be using condoms. Period.” According to The New York Times, the "city law would be the first to impose safety standards specifically on the pornographic film industry, which has largely been allowed to police itself." Until the late 1990s, the industry went unregulated. On the heels of lawsuits filed against production companies by several actresses who had contracted H.I.V., the industry created the Adult Industry Medical Healthcare Foundation in 1998. The nonprofit clinic was financed by contributions from production companies and offered STD tests for the talent. Producers agreed not to hire performers who had not been tested within thirty days. Even though the county health department accused the industry's self-regulation of failing to protect the talent and their sexual partners, the production companies claimed that the system worked well. “This has been working for years,” said Steven Hirsch, founder of Vivid Entertainment. “If we saw people getting sick, we would go to mandatory condoms.” However, STDs remained rampant among pornographic film performers. Rates of chlamydia and gonorrhea are seven times higher than those in the general population.  Taking Steven Hirsch's own statement, it could be argued that waiting until an actor looks sick to require him to wear a condom is a bit like waiting until the horse has left the barn. “Testing just acts as a fig leaf for producers, who suggest that it is a reasonable substitute for condoms, which it is not,” said Michael Weinstein, president of the AIDS Healthcare Foundation.

As with most business ethics cases, this case pits the public good against the financial interests of particular firms and employees. The self-regulatory testing system often left the talent weighing financial needs against their own safety (and one could add the public health). “At first, I would ask about condoms, and they told me I’d never be able to find work,” one actress said. “You do worry about the risk, but any girl desperate for money, like I was, is still going to do it.” It is also not in the financial interest of the production companies to make condom use mandatory. “I tried many years ago to get everybody to go to condoms,” said Jim South, a longtime talent agent for sex-film performers. “Quite a few companies did, but sales fell severely. The switch would be very difficult.”

Ethically, both the talent and the companies have been risking harm to others (and in the case of the talent, themselves as well) in order to gain financially.  It is essentially egoism at the expense of others' well-being. To the extent that AIDs is still fatal, the trade off is between killing someone (and oneself, in the case of the talent not wanting to wear condoms) and losing money. I have written a novel in which I juxapose frauduent sub-prime mortgage banker with gay college students who carelessly risk others' health (and lives) by having unprotected sex, moving from guy to guy in "hook-ups."  The harm in being kicked out of one's home onto the street may seem qualitatively different than the harm in being infected by a possibly fatal disease.  However, I contend that the callous disregard for others among the two kinds of violators renders the two as the same "type." Moreover, I submit that this "type" is increasingly salient in the make up of modern society.  In other words, modern culture, at least in the West, is increasingly taking on their attitude. In terms of M. Scott Peck's theory in People of the Lie, the self-centeredness at the expense of others is malignant narcissism.  Peck theorizes that such narcissism is actually a protective or defensive shield around a feeling of emptiness at one's core.  The evil, Peck argues, is the emptiness rather than the defense mechanisms of selfishness and lack of empathy.  The increasingly "bubble" quality of modern society, wherein people drive in their own cars, listen to their own music, and even watch movies alone on their laptops, may perpetuate the "me vs. everyone else," which in turn reinforces the attitude of malignant narcissism.

Beyond the ethical dimension, that industry self-regulation allowed for others to be harmed in the sex film industry and perhaps has even killed talent or their partners indicates a justification for government regulation. The New York Times reports that enforcement has been a problem, and that the threat of loss of the industry might undercut the regulator's power to enforce a new law. "Even if the law is enacted, city regulators may face similar problems of enforcement that have dogged state occupational safety and health officials. And some filmmakers have grumbled about moving their operations, which bring in as much as $13 billion annually, to other states." An industry can "capture" a regulatory agency not only because the latter depends on the former for information, but also because of the industry's power. This power can be exercised through government officials, even legislators and governors, who have influence over agencies. 

In the end, it is the lack of value that talent and the production companies put on human life (especially that of others, but also that of the talent themselves) that is telling in this case study. Sex itself is oriented to an instant of sheer pleasure that a peson can enjoy in him or herself. It is therefore not surprising that people in an industry involving sex are oriented to their own interests at the expense of others. Whether through industry self-regulation or government regulation, it is difficult to get around, or change, an attitude. This is the intractable problem that this case puts before us. One might ask whether the malignant narcissism is simply human nature or an instance of decadence therein.  Weakness may be difficult enough to treat; whether human nature itself can be changed so as to mitigate the squalid effects of malignant narcissism may be a question for the psychological, biological and medical sciences as the twenty-first century progresses.

Source: http://www.nytimes.com/2011/02/10/health/policy/10porn.html?_r=1&ref=todayspaper

On February 28, 2010 on CNN’s State of the Union, Nancy Pelosi, Speaker of the US House of Representatives, said that the health insurance companies didn’t want a government-financed and operated insurance option for American citizens so it was off the table.  Her statement reminds me of the earlier one by Richard Durbin of the US Senate, who remarked after his forclosure-assistance amendment failed that the banking lobby owns Congress.   Would there have been the hyperbole of “socialism!” associated with the public option for health insurance were that proposal in the interest of the industry at issue (i.e., at fault)?  If so, it is interesting in a sad sort of way that a culpable person would have the gall to use exaggeration (there would still be private insurance so the sector would not be socialist…meaning owned and controlled by the state).  We have seen the same thing from the banking lobby in fighting reform efforts in the wake of the financial crisis of September, 2008.   In other words, we can isolate a pattern here: even when companies (or an industry) are at fault, they can still own Congress when their interests are at stake.

It is particularly disconcerting to me that so many citizens fall for the self-interested exaggerations when it would be more natural for people to be angry at the culpable people for continuing their unethical business practices (and going on to stop reform that is at least in part due to their bad practices).  Take for example, Representative Dennis Cardoza, Democrat of California in the US House. The husband of a family practice doctor, he is intimately familiar with the failings of the American health care system. His wife “comes home every night,” he said, “angry and frustrated at insurance companies denying people coverage they have paid for.” Even so, he is on the fence on the Democratic health-care reform proposal because he wants stronger anti-abortion language and more cost control.  Were he really angry like his wife, he would be pushing not only for the bill, but for the public option or for real restrictions on the insurance companies, rather than allowing secondary issues to block him.  In other words, I don’t believe he is really that angry at the companies refusing to fuffill their responsibilities to their customers who have paid the premiums.  Also, he is allowing himself to succumb to the self-interested manipulation of the same firms that he is ostensively angry at.  It is in the health insurance companies interest that costs be reduced because then their expenses are reduced (and their profits, which were very high in 2009…even as they were denying treatment to some).  If he were really angry like his wife, he would not be so willing to do something that would benefit them so much; rather, he would be working to take power and money away from them.

Unfortunately, the problem kids are able to thwart our efforts to clean up after them.  America’s Health Insurance Plans, a lobby for insurers, announced in March, 2010 (as Congress was considering health-insurance reform) that it was buying more than a million dollars’ worth of television advertising time to explain why insurance premiums had been rising. The week before, the White House had indicated that the industry’s rationale for the raised premiums was unconvincing.  Too many of us are letting industries get away with their mis-representations geared to thwart reform.   The health insurance industry’s ads convince us that the companies really aren’t sharks; we ignore Sen. Rockefeller’s likening of the companies to sharks—you don’t know there is a shark until you see its fin and feel its sharp teeth.  In other words, our anger is too easily (and conveniently…for the sharks, which want to continue feeding) dissipated.  We let the bad kids off the hook and go on as if the problem were somehow no longer out there.  This puts the misbehaving kids in a position to thwart any parenting.   In short, too many of us are unwittingly being manipulated by the bullies (who are therefore getting away with murder).   I suppose I shouldn’t be surprised that spoiled  kids would not feel culpable for their own bad behavior, but I am.  I am perhaps even more disappointed in the parents (i.e., the American people) who let themselves be manipulated by such kids.  It is like watching the parent of an alcoholic teenager be in denial and thereby enable the kid to continue drinking even though the kid beats up other kids when he or she drinks.  “Oh, Tommy didn’t mean it; he is really a good kid.  I don’t think we need to look at a group home or jail. He will be good if he can relax with a beer.  Here Tommy…” 

Whether in dealing with the people at the health insurance companies who are in denial or the representatives and their supporters among the public who are also in denial and are enabling them, it is an exercise in futility and utter frustration to see this dynamic and want to shape it up because the sickness has strong defense mechanisms against real change.  So I ask: can a dysfunctional system be fixed?  Can it fix itself?  Probably not.  So are there enough people in the US outside of the dysfunction who could fix it above the screams of the sick who do not want the shot?   Imagine a physician acquiescing to a kid’s demand that the shot not be given.  In a physcian’s office, the sick kid does not get to decide—or to put it another way, there are enough adults in the room that the shot is given over the kid’s objections.  So where are the adults?

Sources: http://www.msnbc.msn.com/id/35628488/ns/politics-the_new_york_times/ ; http://www.nytimes.com/2010/03/10/health/policy/10health.html?ref=us

Goldman Sachs, which played a role in enabling Greece to hide its public debt, urged investors in March, 2010 to buy shares in two big health insurance companies, UnitedHealth Group and Cigna because their rates were sharply up and competition was down. According to the NYT, the White House claimed, “ the Goldman Sachs analysis shows that while insurers can be aggressive in raising prices, they also walk away from clients because competition in the industry is so weak.”  Rate increases ran as high as 50 percent, with most in “the low- to mid-teens” — far higher than overall inflation.  Kathleen Sebelius, the secretary of health and human services, stated on March 10, 2010, that she was left unconvinced after meeting with health insurance company execs at the White House the previous week because medical cost increases could not justify the rate increases. Furthermore, she pointed to the profit increases, some as high as 50%, in 2009 over 2008, and large executive salaries as evidence that the firms could have absorbed more of their cost increases than they did.  Cutting off customers when it is time for a firm to pay up while recording higher salaries and profits indicates that something is structurally wrong with the industry (and with the firms, ethically speaking).  If the execs lied at the White House, citing costs that “had to be passed on,” we ought not be so gullable at the managers’ claims in the future.  Also, if they were lying, we might recall Senator Rockefeller’s description of the insurance companies as sharks…feeding machines that are often not seen until their fins break the water-surface and their teeth are coming down on you.  Otherwise, the water is calm.

In February, 2010, the US House of Representatives passed a bill that would repeal the anti-trust exemption for the industry.  Armed with fresh retained earnings, the oligarchic industry was in a good place to fight that bill in the Senate.  In other words, the bill abruptly stalled. That the repeal was so difficult, if not impossible, to achieve is itself telling.  Once an industry has such clout and power that it can effectively veto legislation it doesn’t want—even as the firms cut customers off when they get sick (not to mention pre-existing condition abuses)—our republic itself is in danger.  In the regulatory literature, this is called “capture theory.”  The pubic good is captured by concentrated (and vested) business interests. The plight of financial sector regulatory reform in the wake of the financial crisis of 2008 is another case in point.   In short, cleaning up these messes should be easier, even given the encumbering checks and balances in the US Government.  The fact that it is not should give us great pause.

Source: http://www.nytimes.com/2010/03/07/health/policy/07health.html?ref=politics

The "ardent glow of freedom gradually evaperates;--the charms of popular equality . . . insensibly decline;--the pleasures, the advantages derived from the new kind of government grow stale through use. Such declension in all these vigorous springs of actions necessarily produces a supineness. The altar of liberty is no longer watched with such attentive assiduity;--a new train of passions succeeds to the empire of the mind;--different objects of desire take place:--and, if the nation happens to enjoy a series of prosperity, volumptuousness, excessive fondness for riches, and luxury gain admission and establish themselves--these produce venality and corruption of every kind, which open a fatal avenue to bribery. Hence it follows, that in the midst of this general contageon a few men--or one--more powerful than all others, industriously endeavor to obtain all authority; and by means of great wealth--or embezzling the public money,--perhaps totally subvert the government, and erect a system of aristocratical or monarchic tyranny in its room. What ready means for this work of evil are numerous standing armies, and the disposition of the great revenue of the United States! . . . All nations pass this parokism of vice at some period or other;--and if at that dangerous juncture your government is not secure upon a solid foundation, and well guarded against the machinations of evil men, the liberties of this country will be lost--perhaps forever!"

Source: The Impartial Examiner, Essay (March 5, 1788), 5.14.15, in Herbert J. Storing, ed., The Anti-Federalist, Chicago: University of Chicago Press, 1985, p. 290-91.

President Obama's chief of staff, William Daley, was a top executive at JPMorgan Chase, where according to The New York Times,  he was paid as much as $5 million a year and supervised the Washington lobbying efforts of the nation’s second-largest bank. Daley also served on the board of directors at Boeing, the giant military contractor, and Abbott Laboratories, the global drug company, which "has billions of dollars at stake in the overhaul of the health care system." Although some argue that the White House needed someone on the inside who has the ear of business, the conflict of interest in having someone so tied to vested commercial interests decide who gets into the Oval Office and determine the President's agenda ought to be troubling. Just one year earlier, a Wall Street reform bill had been passed that sidestepped the question of whether banks too big to fail should be allowed to exist.  Also, the enacted health-care reform law both included a mandate and excluded a public option...as per the interests of the heath insurance lobby.  Rather than worry that well-financed private interests might already have too much clout in Washington, some people suggest the need for more corporate influence in the West Wing.

In terms of the Obama administration, the appointment of Mr. Daley represents "staying the course."  Larry Summers, for example, had been instrumental in the Clinton Administration in keeping derivative securities from being regulated. Like Clinton, Obama is a pro-business Democrat, at least in practice--the charges of socialism notwithstanding. I contend that the fear over socialism is overplayed, while the ease with which corporate executives (such as Hank Paulson--Bush's Treasury Secretary and former CEO of Goldman Sachs--and William Daley) encase themselves in the White House is cause for concern.  Yet there appears to be a societal blind spot with respect to some rather obvious ways in which corporations can capture our federal government. For instance, no one suspects a tie between Daley coming on board leading up to the re-election campaign and his corporate ties. It may be that Obama did not press "too big to fail" and the public option more because he knew he would draw on corporate campaign contributes. I suspect that we are blind to this possibility because our values are largely in line with corporate interests. 

Whether corporate capture is from design or not, our corporate-friendly societal-orientation provides a bedding of sorts for structural conflicts of interest that must seem strange elsewhere in the world. William Daley is a beneficiary of a friendly American culture that enables looking the other way, or even cheerleading on behalf of greater corporate influence in Washington.

Source:http://www.nytimes.com/2011/01/07/us/politics/07daley.html?ref=politics