Find Insurance Online

In an executive meeting at Lehman in the summer of 2008, Skip McGee told Richard Fuld and the other top executives that the market was demanding “that we hold ourselves accountable.”  Essentially, he was pushing for Gregory’s outster.  What strikes me is what he didn’t say–namely, something like, “the stockholders are holding us accountable!”  Had he said this, Fuld might have laughed. Of course, Richard Fuld was a major stockholder, so he might have viewed it as “holding myself accountable to myself.”  Given the inherent ethical conflict of interest in such a statement, I don’t think we can rely on corporate governance as a check on excessive managerial risk-taking when executives hold a substantial share of the stock.  Therefore, in including stock options in executive compensation to align executives' incentives with medium and long-term firm performance, boards should add institutional safeguards or accountability mechanisms to corporate governance. In business-speak, there is a cost incurred that boards may not be aware of in aligning executive compensation (and firm ownership) with future profitability.

I believe the Lehman example demonstrates how corporate governance can fail rather clearly.According to a report by Anton R. Valukas, an examiner for the bank, Lehman used “materially misleading” accounting gimmicks involving repos to mask the perilous state of the bank’s financial condition. According to the report, Lehman utilized what amounts to financial engineering in order to temporarily shuffle $50 billion of troubled assets off the bank's books in the months before its collapse in September of 2008. The intent here was to conceal the bank's dependence on leverage, or borrowed money. Lehmans’ senior managers appear to have structured transactions such that they would sell securities at the end of a quarter, only to buy them back again days later. These assets were mostly illiquid real estate holdings, meaning that they were hard to sell in normal transactions. The effect of the accounting flash-of-hand was to artificially and temporarily lower the bank’s debt levels to hit certain targets, making the firm look healthier than it really was.

Lehman's managers managed to “shed” about $39 billion from the bank's balance sheet at the end of the fourth quarter of 2007, $49 billion in the first quarter of 2008 and $50 billion in the second quarter. At that time, Lehman managers sought to reassure the public that the bank's finances were fine. Herbert McDade, a senior exec at Lehmans, wrote, “I am very aware … it is another drug we r on,” in an April 2008 e-mail cited by the examiner’s report. Senior Lehman executives, as well as the bank’s accountants at Ernst & Young, were aware of the moves, according to Mr. Valukas.  In certifying the “actionable balance sheet manipulation,” Richard Fuld was “at least grossly negligent.” Other executives named in the examiner’s report in connection with the use of the accounting tool include three former Lehman chief financial officers: Christopher O’Meara, Erin Callan and Ian Lowitt.  Notably, Lehman’s directors were not aware of the accounting engineering.  That not even the board’s audit committee was aware is telling from the standpoint of corporate governance–especially if the report is correct in its claim that the bank’s public accountants from Ernst & Young were in the loop.

The Lehmans case suggests that board audit committees ought not to rely exclusively on their public accountants.  The structural conflict of interest wherein CPA firms rely on the firms they audit for continued business was not obviated or solved after the Arthur Andersen case.  Years before that case (and computers), “as per comptroller, discrepancy resolved” was a regular “tick mark” on green CPA audit sheets. I can still remember the actual tick mark I used (a check with a line through the stem) as a young public accountant at one of the Big Eight.  We were so big.  Senior audit managers simply included the tick mark without any fanfare in going over the standard tick-marks in training. During audits, the tick-mark was simply thought of as a technical matter. New auditors fresh out of college would have no basis to question the check-mark because ethical considerations do not enter in when a technical language of business normalizes all practices. Accordingly, the conflict of interest issue was essentially below the radar when I was a public accountant.  It is difficult to spot something as sticking out from among the normal that is treated as typical. I suspect the partners in the firms knew of the obvious conflict of interst in "as per controller, discrepancy resolved," but I don’t know whether the tick-mark was intentionally portrayed as simply one technical matter among others in "how to do an audit."  Therefore, transparency had to come from outside of the industry–from the media in the wake of a major scandal--not from a government too involved with industry's lobbyists. One might wonder where (or whether) we can expect corporate governance reform.

In general terms, corporate senior managements have much too much leverage over stockholders and the boards that are meant to oversee the management.  Proposed reforms from the White House do not make a dent.  For example, requiring a “non-binding” stockholder vote on executive compensation strikes me as a declaration of surrender to the titans.  “Non-binding.”  Why waste our representatives’ time with such window-dressing designed to look like it is correcting for another kind of window-dressing.  Everyone, it would seem, is busy polishing windows and nobody has guts enough to come up with structural reforms with teeth.  No one is willing to take the drugs away from the children playing will millions and sometimes billions of dollars.  We, and our governments, are enablers, and we settle for far too little…then we are surprised when the kids are caught with their fat ruddy hands in the cookie jar again. Ultimately, we, the American People, are to blame…and as Lehmans shows, our financial system and economy may hang in the balance.

Sources:
Andrew Sorkin’s Too Big to Fail
 http://www.nytimes.com/2010/03/12/business/12lehman.html

See also: http://money.cnn.com/2010/03/12/news/companies/lehman_examiner/index.htm?hpt=T1

While in the U.S. Senate, Paul Kirk, the interim U.S. Senator who took Ted Kennedy’s seat, said, “Without a legitimate and credible Afghan partner, that counterinsurgency strategy is fundamentally flawed. The current Afghan government is neither legitimate nor credible. . . . We should not send a single additional dollar in aid or add a single American serviceman or woman to the 68,000 already courageously deployed in Afghanistan until we see a meaningful move by the Karzai regime to root out its corruption.” 

Kirk was essentially arguing that the U.S. was enabling (i.e., in the sense that one enables an alcoholic) President Karzai, who had been reelected by widespread fraud. Whether the U.S. Government was trying to have it both ways, or was utterly unwilling to put its money where American principles are, the perception around the world was probably that the United States had sold itself out for short-term strategic/military advantage. 

How resilient are principles that are upheld only when they don't cost anything?  Could it be that standing more on principle--insisting on fair and free elections as a precondition for any American aid and military involvement--would mitigate the need for a surge? Such thinking runs against the grain in the modern world, which is actually rather primitive in its insistance on knee-jerk force.  An eye for an eye and the world will be blind (Gandhi).  September 11, 2001: we must hit back.  There is no other option. They must pay. Ironically, practicing Christians were not only cheering, but also leading the charge.  An eye for an eye.

“Be realistic!” you might say.  "It's a real world out there!" Ok, how about this: the U.S. Government could have concentrated its military force in Afghanistan on the actual culprits, rather than on rebuilding the country or taking on the Taliban.  Is it really so idealistic to cut off U.S. aid to autocratic governments? I suspect that we are limited by the status quo as a normative and descriptive limitation that is actually quite dogmatic in the sense of being arbitrary.  In other words, we believe our self-constructed walls are real; we don't see how rigid we have become.

Given the emphasis on force, does it make all that much difference who is occupying the U.S. Presidency? President Bush invaded Iraq. President Obama criticized this policy then led a surge of his own in Afghanistan.  Eisenhower warned of the military-industrial complex, and both Bush II and Obama played ball with these pay-masters.  Meanwhile, we were mollified with the government's “scoldings” of Wall Street banks (the strongest of which went back to their old ways anyway).  Can we blame the bankers for ignoring government officials whose principled leadership is so contingent? People, especially powerful people--like Wall Street bankers and Karzai--can sniff hypocrisy and automatically reduce the respect given.

The United States is like a giant machine, or a very fat person, who can only move slowly…turning woefully slow with a rudder that is too small.    Meanwhile, we vaunt our ship as the biggest ever made: A city on the hill, from Puritan lore. We can’t sink, we assure each other.  But our ship of state is made of iron. I assure you, it can sink, and all the more because we have drifted out into deep water without realizing how far we have gone…how far off course.  Our rudder is too small for our mechanized monstrosity--our Titanic laden with $14 tillion in federal debt alone (not counting those of the states). Our primative knee-jerk reactiong after 911 suggests that everything we know is wrong, even as we presume we can’t be wrong.   So as we rearrange the deck-chairs at our mascurade dance, we order more champaigne and congraduate each other on having the biggest ship.  Meanwhile, is anyone looking ahead for icebergs?  We are so sure of our ship, and thus so vulnerable.

Source: http://www.cnn.com/2009/POLITICS/12/01/afghanistan.liberals/index.html

Despite the weak U.S. economy, 2010 could be the second most profitable for New York City's securities industry, and the average bonus may top last year's because so many bankers and brokers have been laid off. Wall Street earned $21.4 billion during the first three quarters of 2010. The prior year's record of $61.4 billion was fueled by the bailout by the U.S. Government. Wall Street paid out $20.3 billion in bonuses on the $61.4 billion in profits. According to New York City Comptroller John Liu, "The astounding recovery of financial firm profitability in 2009 has been followed by a mixed year in 2010, yet total compensation in the industry is expected to be up modestly once year-end bonuses are paid," Meanwhile, Goldman Sachs’ Chief Executive Officer Lloyd C. Blankfein and his top deputies will collect about $111.3 million in stock in January, 2011, in a delayed payoff from 2009 and their record-setting 2007 bonuses, according to a Bloomberg News report. Within a year after the bonuses were approved, Goldman Sachs took $10 billion from the U.S. Treasury, converted to a bank and was borrowing as much as $35.4 billion a day from Federal Reserve emergency programs, Bloomberg reported, adding that in 2010 the firm paid $550 million to settle U.S. regulators’ fraud charges related to a mortgage-security the company sold in 2007.

Analysis:
Three points come to mind from this report from MSNBC.  First, the disjunction between Wall Street and Main Street means that any recovery underway in 2010 was not uniform through the U.S. economy. In other words, the "jobless" recovery did not hurt bonuses in the financial sector.  Secondly, the dictum that the fraudulant must inevitably pay is effectively countered by the example of Goldman Sachs.  Blankfein testified before Sen. Levin's Investigations committee that Goldman Sachs had merely been a market-maker even as the bank had traded on its own books to short against the mortgage derivatives even as it was selling them to its clients. In other words, the bank was profiting both ways even as it was contributing to the financial crisis.  After an infusion of government cash, the bank has made off quite well. Lest I be accused of envy, it is the unfairness involved that has inspired this post. Lastly, the positive impact of the bank bailout on the industry (and its bonuses) can be distinguished from the lack of help from the U.S. Government to the millions of homeowners who have lost their homes.  I say "homes" rather than houses to extentuate the point that foreclosure extolls rather severe costs in addition to the financial kind. I distinguish the luxuriating bankers from the plight of the foreclosed in order to point to Barak Obama's priority. His chief economic advisor until the end of 2010, Larry Summers (whose high school economics teacher is one of my mother's cousins), had been involved in obstructing efforts to regulate derivatives in 1998 (Summers was one of Rubin's deputies in Treasury under Clinton at the time).  Furthermore, Tim Geitner, Obama's Treasury Secretary, had been appointed as President of the New York Federal Reserve by a board with the urging of Citibank).  In other words, Obama's leanings toward Wall Street can be understood both from the directionality of the bailout and whom he has appointed. We should not really be surprised that the big banks and their employees whom the banks have not let go came back to vigor so quickly while the general recovery has been jobless.  Those who have, get more, while those who don't have, remain stuck.  The impact on the viability of our republics can not be good. Increasing inequality exascerbated by government policy cannot but render us even more a plutocracy (i.e., rule by the wealthy). To reply that any effort to tamper with this increasing inequality threatens property rights and economic liberty ignores the disparate impact of government policy (e.g., the bank bailout) on the wealthy. Moreover, when economic inequality threatens the viability of representative democracy, that democracy has a right to correct that which threatens it. One might call the policy-driven inequality a systemic risk that cannot be allowed to continue to exist without threatening the viability of the system. To put it plainly, a person does not have the right to riches if they risk the entire system coming down or even being compromised.  An absolute right to property, like an absolutist conception of sovereignty, is simply irresponsible and ultimately selfish. The 2010 bonuses coming out of Wall Street so soon after the crisis of 2008 and the subsequent bailout suggest that the extent of economic inequality in the U.S. is neither an accident nor natural.

FYI: If any of this post is significant enough to be logged in memory and reflected on later, it might be that the bank bonuses occurred during a jobless "recovery." This juxtaposition is in itself indicative of something troubling going on.

Source: http://www.msnbc.msn.com/id/40681578/ns/business-stocks_and_economy/%22%3Ehttp://www.msnbc.msn.com/id/40681578/ns/business-stocks_and_economy/%3C/a%3E%3C/p