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To put a matress under a falling giant pales in comparison to placing a sign on Wall Street, reading “No giants allowed.”

In April of 2010, President Obama gave a speech in New York City to counter what he called “the furious efforts of industry lobbyists” trying to weaken or kill new financial regulations that he claimed are needed to stave off a second Great Depression.  It is telling that the banks that contributed to the financial crisis of 2008 were trying to diminish any new regulation. The President wanted more consumer protections, limits on the size of banks and the risks they can take, reforms on executive compensation and greater transparency for controversial securities known as derivatives.  He maintained that each of these areas must be in any bill that he signs. In giving the speech with some of the banking titans in the audience, the President wanted to confront the financial industry more directly through a sharp speech. After castigating their “failure of responsibility” in recent years, he called on them to stop resisting tighter regulation through the army of lobbyists now staked out on Capitol Hill. The president’s address at Cooper Union in Lower Manhattan circled back to another speech he had given at the same location in March 2008 warning of financial manipulation, market bubbles and the concentration of economic power.

Analysis:

At the time of his speech, the President was supporting the bills coming out of the House and Senate, neither of which forestall or minimize market bubbles and reduce the concentration of economic power.  Regarding the latter, it is my understanding that nothing in either bill limits the the size of the big banks.  For the President to say that the bill reaching his desk must include something limiting the size of institutions in the US financial sector yet also say that he supports the bills coming out of Congress does not make sense as it involves a contradiction. On the eve of the President’s speech, Fox News pointed out that the President’s chief of staff had met behind closed doors with reps of Wall Street firms. The message was reportedly: we’ve got to trash you in public, but know that we will take care of you in private.  While Fox News was at the time certainly no friend of the President, the account would explain why the President would contradict himself concerning the size issue.   Given the inevitable lag of regulators amid the fast pace of innovation in product development on Wall Street, simply regulating existing products would not forestall another crisis; the concentration of private capital in the form of large banks must be reduced for “too big to fail” to be effectively mitigated.  Sadly, the President will probably get away with demanding limits on the banks’ size while signing bills that do not contain such language.  That he received just under a million dollars from Goldman Sachs in his Presidential campaign is just part of the story, for once elected the President was undoubtedly focused on 2012.  Recalling Andrew Jackson, who successfully took on the bank of the US by refusing to fund it in 1832, and Theodore Roosevelt, who supported the Sherman Anti-trust Act in 1911, I must admit to thinking that Barak Obama does not have their guts to take on the big guys. How many of us in the twenty-first century remember Jackson or Roosevelt?  We are more likely to make our current President the default from which we measure.  I submit that this is a mistake.  If we ignore or are ignorant of the strong points in our history, we cannot benefit from them and we are doomed to repeat the weak points.

Source: http://www.nytimes.com/2010/04/23/business/economy/23prexy.html?hp

As BP was wrestling with stopping the oil leak in the Gulf of Mexico and cleaning up the oil, a controversy broke out between the company’s stockholders and the  US Government on whether any dividends should be declared and paid before the company has taken care of the Gulf.  BP earned more than $16 billion in 2009. Based on higher oil prices, in the first quarter of 2010 the company’s profit more than doubled to $6.08 billion from $2.56 billion  in the first quarter of 2010.  BP’s dividend payment accounted for about £1 of every £8 handed out by British companies in 2009. Given the higher profit in the first quarter of 2010, stockholders were expecting more in dividends.

The question was how much the company’s costs in regard to the Gulf would or should cut into the dividents; the political question was whether any surplus wealth should be paid to investors before the company’s legal and moral obligations were taken care of in the Gulf region.  Although not suggesting that their company was not obligated to stop the rupsure and fund the clean up, BP officials claimed that their company had already paid in other ways.

Already by mid June, 2010, BP shares had fallen more than 40 percent since the fatal explosion at the Deepwater Horizon drilling rig in April, wiping more than £50 billion, or $73 billion, from the company’s market value. The drop came after lawmakers in Washington called on BP to suspend its dividend and advertising campaign to pay for the cleanup, and a senior official said the Justice Department was “planning to take action.” Most shareholders rejected concerns that the costs of a cleanup and possible damages could force BP into Chapter 11 bankruptcy protection, and said the drop in the share price is not justified by the value of BP’s assets.  BP officials indicated the company’s executives would decide in July whether to keep the quarterly dividend at 14 cents a share for the second quarter. In 2009, the company paid about $10.5 billion in dividends.

By June 10 2010, the company’s cost in regard to the oil spill had reached about $1.43 billion. A BP official said it was “too earlier to quantify other potential costs and liabilities associated with the incident.”  Earlier in June, BP officials told investors that the company had $5 billion cash on hand and that it was generating “significant additional cash flow” as the price of oil remained above $60 a barrel. BP had 18 billion barrels of proved reserves and 63 billion barrels of resources at the end of 2009 that it could draw on.

Iain Armstrong, an analyst at investment manager Brewin Dolphin in London agreed with BP that the company had enough money to pay for the cleanup efforts and also rejected any potential concern that the company might not be able to pay for its debt. “It’s gotten completely out of hand,” Mr. Armstrong said. “It’s a totally overpoliticized situation. There is a disconnect between reality and BP being totally lambasted… . Ironically, by being extremely strong financially, BP has become a target here,” he said. I contend, however, that BP became a target because of its atrocious safety record and its culpability at Deepwater Horizon.

BP falsified regulatory documents by indicating that there was zero percent risk of an off-shore rig accident creating a rupsure and that the company had the technology to stop and clean up such a problem.  Tony Hayward admitted after the explosion that BP lacked the “tools you would want in your tool kit” to close a blown deep-water well.  In other words, the earlier claim to have had the technology was a lie (which MMS never bothered to disconver, as the agency had been captured).  Lest it be said that no group of people is perfect, BP’s history attests to justifiable blame.

In 2005, a blowdown drum overfilled with liquid hydrocarbons at BP’s Texas City refinery killed 15 and wounded 170.  BP was cited for old equipment, overworked and unsupervised employees and contractors, and managerial inattention to safety. The US Chemical Safety Board put the cause as “organizational and safety deficiencies at all levels.”  Meanwhile, a shoddy ballast system was found at BP’s offshore platform Thunder Horse.  In 2006, a corroded pipeline in BP’s Purdhoe Bay field in Alaska leaked thousands of barrels. In the following year, Tony Hayward became the CEO. He promised to make safety his priority. Yet in 2009, the Occupational Safety and Health Administration fined BP a record $87.4 million for more than 700 safety violations at the Texas City refinery. Nonetheless, David Nicholas, a BP spokesman, wrote, “Safe, reliable operations have been and continue to be our number one priority.”  Not only has this not been the case, BP managers (and lawyers) have been more interested in minimizing liability than being responsible for the consequences of the lapses.

At Deepwater Horizon, when an employee discovered that one pod of the blow-out preventer was leaking, a manager simply shut it down and used the other pod (rather than fixing the leak). Another worker found such low hydrolic pressure in the device that he knew it was time to leave.  In Congressional testimony, Tony Hayward said BP regarded the equipment as the fail-safe mechanism, even as blow-out preventers in general have a 44% failure rate and the device at Deepwater Horizon was known to have a broken pod. Furthermore, after the well fire, the company low-balled the estimated volume of oil going into the Gulf in order to minimize its future liability.  During the first week after the explosion, the company’s estimate was 1000 barrels per day.  During the second week, the company estimated 5000.  Meanwhile, company documents show an estimate of 100,000 per day as a worse-case scenerio. That the wider society would not be sufficiently informed of the magnitude of the clean-up required did not seem to bother the managers at BP, whose concern was mainly to minimize the company’s liability (and thus maximize their stockholders dividends).  Selfishness among the culpable is telling. At the very least, responsibility can be defined as paying for the harm consequent to one’s mistake.  Satisfying such responsibility has priority over dividends, which are residual, after all. In making the protection of dividends (and the stock price) a priority, BP’s managers evinced a reversal of priorities that was ahistoric for the modern corporation.

It is for these reasons, not because BP is a giant corporation or is British, that BP was the target of such scathing rebuke by the American public and the American governments. Mr. Armstrong said that President Obama should not forget that 40 percent of BP shares are owned by United States shareholders. “So he’s not doing them any favors either,” he said. Again, I beg to differ. Acting in the public interest, Barak Obama is doing us all a favor.  Of course, the politics of this matter were no doubt different in Europe.

London’s mayor, Boris Johnson, said Thursday that the drop in BP’s shares was slowly becoming a political issue in Britain. “When you consider the huge exposure of British pension funds to BP and the BP share price and the vital importance of BP then I do think it starts to become a matter of national concern if a great British company is being continually beaten up on international airwaves,” he told BBC Radio on June 10th. However, Reuters quoted Prime Minister David Cameron as saying, “This is an environmental catastrophe. BP needs to do everything it can to deal with the situation, and the U.K. government stands ready to help. I completely understand the U.S. government’s frustration.”

In a general sense, the governments are relatively oriented to the public interest, whereas BP, as a private corporation, has a fiduciary obligation to its stockholders.  Robert Reich referred to this obligation as a company’s “corporate social responsibility” on the Countdown with Keith Obermann show on MSNBC on June 14, 2010.  “Social” can admittedly be in reference to stockholders’ social concerns (though “social concerns” is rather vague); however, the term can also refer to society, which is larger than any group of stockholders. To BP’s management, it makes perfect sense in terms of corporate governance to declare and pay dividends as long as the company has enough resources to cover its actual and contingent liabilities related to the gulf.  Considering the billions that the company has in oil reserves, it could satisfy both. In an economic sense, the dichotomy may not make sense.  However, politically, there is resistance to the declaration and payment of dividends, and this “irrational” element is ignored by BP to its economic peril.  Essentially, the political reaction is challenging the right of the company to continue to exist. At the very least, the objection is that the company should not be run as normal.  In other words, the political claim is ultimately that BP has broken the social contract that legitimates its right to conduct business within the US.

Lest we have become too ahistoric, it might be worth our while to study the history of the modern corporation.  Originally, the modern joint-holding company was delegated a function to do for the public by a government.  If the company had enough left over after performing the function, it could give the surplus to the stockholders.  Through the twentieth century, the interests of the stockholders became increasingly central, eclipsing even the “delegated public function” aspect of the charters.  Essentially, a society gives a group of people permission to do a function. This implies that doing the function, and taking care of any adverse consequences caused by the company, are primary.  The political demand of the American governments is that dividends not be declared or paid until BP has rectified the Gulf region as required by law, societal norms, and ethical standards. From the standpoint of BP having been granted permission to operate in the US (leaving aside the billions in contracts from the US Government), the demand is not so much the product of irrational exuberance.

In effect, BP’s managers ignored systemic risk.  In being the closest we have to anyone able to solve the problem, BP is too big to fail. Managers at the company lied about being able to handle a major rupture. The MMS regulatory agency went along, having been coopted by the industry it was to regulate.  This is a failure of business as well as government.  All the emphasis on BP taking orders from the US Government in the wake of the rupture can be interpreted as “reaction formation” given the powerlessness felt in government having been so dominated by private interests ahistorically oriented to their stock price.  If the Gulf of Mexico seemed broken, this condition could be read as a symptom of a political-economic rupture.  I suspect that big business has gotten too big—taking too big risks, capturing governments, and acting with impunity.  As if the financial crisis of 2008 was not enough of a warning call, the oil spill of 2010 depicts too big to fail in very concrete terms.  Whether governments have sufficient power to reassume the driver’s seat in delegating public functions to private commercial associations depends on whether legislators have enough backbone to limit the size and wealth of big business.

Sources: http://www.nytimes.com/2010/06/11/business/11bp.html?hp
Countdown with Keith Obermann, MSNBC TV, June 21, 2010; Byran Walsh, “The Spreading Stain,” Time (June 21, 2010), pp. 51-59.

The EU and US can be seen to differ markedly in the degree to which the interests of big business are etched in the respective societies and polities.  That is to say, the difference goes beyond the question of the relative influences of the lobbyists. I contend that the relative proclivity toward business in the American states tilts the political playing field in the direction of the financial interests. This difference reflects a more basic subterranean difference on how much wealth and its manifestation as business are valued.  That is to say, it is easier for financial sector lobbyists in the United States because the societal values lean in their favor. This can be seen from the respective financial reforms in the EU and US after the financial crisis of 2008. This case bears strongly on my thesis because in both economies the financial sector was viewed as culpable. So one would expect the ensuing laws to come down on the banks rather than be conducive to their interests, unless a societal value on the profit-motive were still in force.

On March 10, 2010, the EU Parliament adopted a Resolution (536 votes in favour to 80 against) calling for the financial sector to contribute fairly towards economic recovery since the costs of the crisis are being borne by taxpayers. On 25 March, Members of Parliament’s special “Financial, Economic and Social Crisis Committee” debated the rationale behind a possible financial transaction tax. Stephan Schulmeister of the Austrian Institute for Economic Research in Vienna said short-term financial transactions can make short-term prices of currencies and other financial products such as derivatives and shares vary wildly. Schulmeister claimed that a tax on financial transactions of just 0.05% would eliminate these short-term transactions, bring greater stability and bring €300 billion of additional revenues to the EU. While the tax would undoubtedly bring in revenue, it is not clear to me that short-term transactions would be eliminated, as they can be worthwhile even with such a tax. Moreover, the financial crisis of 2008 shows us that the volitility can come from the market mechanism itself (in so far as it magnifies irrational exuberance). At any rate, even as there has been division on the matter of such a tax in the parliament, that the proposal has been made distiguishes the legislative body of the EU from the Congress in the US, where such a proposal would undoubted by blocked. Indeed, the EU Parliament has gone ever further.

On July 7, 2010, the EU Parliament approved some of the strictest rules in the world on bankers’ bonuses.  In the legislation, caps are imposed on upfront cash bonuses and at least half of any bonus will have to be paid in contingent capital and shares. MEPs also toughened rules on the capital reserves that banks must hold to guard against any risks from their trading activities and from their exposure to highly complex securities. “Two years on from the global financial crisis, these tough new rules on bonuses will transform the bonus culture and end incentives for excessive risk-taking. A high-risk and short-term bonus culture wrought havoc with the global economy and taxpayers paid the price. Since banks have failed to reform we are now doing the job for them”, said British MEP Arlene McCarthy. Upfront cash bonuses are capped at 30% of the total bonus and to 20% for particularly large bonuses.  Between 40 and 60% of any bonus must be deferred for at least three years and can be recovered if investments do not perform as expected. Moreover at least 50% of the total bonus would be paid as “contingent capital” (funds to be called upon first in case of bank difficulties) and shares. Bonuses also have to be capped as a proportion of salary. Each bank must establish limits on bonuses related to salaries, on the basis of EU wide guidelines, to help bring down the overall, disproportionate, role played by bonuses in the financial sector. Finally, bonus-like pensions are also covered. Exceptional pension payments must be held back in instruments such as contingent capital that link their final value to the overall strength of the bank. This is to avoid situations, similar to those experienced in the wake of the financial crisis of 2008 in which some bankers retired with substantial pensions unaffected by the crisis their bank was facing. The rules apply to foreign banks operating in the EU and to subsidiaries of EU banks operating abroad. The law gives state regulators in the 27 EU states binding powers to take action against banks that fail to comply with the new rules (contrast this with the US Gov’t going after Arizona for trying to enforce US immigration law).

Clearly, the US financial reform does not go this far. Notably, it does not put much of a crimp in the American bankers’ life. This is no accident. The feeling among big bankers in the US is that they dodged a bullet concerning what could have been in the bill. That is to say, there was no “too big to fail” limit put on a bank’s capital or size generally speaking, or on the bankers’ compensation. The American media and President Obama have been strangely silent on why.  Perhaps it is as in the case of the health reform, where the President removed his objection to an insurance mandate and dropped his desire for a public option after the lobbyist for the American health insurance companies told him that her support was contingent on these changes. My point is simply this: Were not American society leaning in a pro-business direction (e.g., economic liberty being salient in how liberty itself is viewed), the President might not have felt the need to be bent in the lobbyist’s direction. That is to say, the lobbyist would not have had so much leverage. Wall Street no doubt had massive influence in the crafting of the financial reform as it was making its way through Congress (even though the banks were culpable in the financial crisis—which is itself telling). I submit that the reasons go beyond the sheer power of money. Fortunately, we can look across the pond for a better look at ourselves.

Sources: http://www.europarl.europa.eu/news/public/story_page/044-71441-088-03-14-907-20100329STO71433-2010-29-03-2010/default_en.htm
http://www.europarl.europa.eu/news/public/focus_page/008-76988-176-06-26-901-20100625FCS76850-25-06-2010-2010/default_p001c011_en.htm
http://www.dw-world.de/dw/article/0„5769943,00.html

See related:http://euandus3.wordpress.com/2010/06/23/regulating-financial-and-commercial-derivatives/ (for a look at the US financial reform—esp. derivatives) and http://euandus3.wordpress.com/2010/07/01/immigration-and-federalism/ (contrast this federalism with that of the EU wherein the states are to enforce the bank bonus limits passed by the EU Parliament).

One of the perks of corporate office is the presumption of stature and legitimacy.  In other words, the general public typically brings all sorts of assumptions along when reading about the behavior of a CEO.  I contend that the reality of the person behind the curtain is far different from what is portrayed.  That is to say, at least with respect to how CEO's typically want to be viewed in terms of corporate responsibility, I suspect that the reality in the executive suites is far different.  In fact, the reality can be downright childish.  Richard Fuld, who was the CEO at Lehman Brothers, may well have behaved like a six year old when upset. Had the general public been given a view of Fuld's antics, we would have shaken our heads not simply out of utter disbelief that such immaturity could be in such a position, but also in recognition of the gap between public and private persona.  Such a gap is dangerous in a republic wherein the electorate is to hold the government in check (and the government in turn is charged with protecting the public and the market system itself from being compromised from firms too big to fail). 

One might argue that Richard Fuld was an exception--protected at Lehman by an enervated or compromised corporate governance system. One could point as well to Mark Thain, the CEO of Merrill Lynch, who in over-extended early morning merger talks with Ken Lewis, the CEO of Bank of America, was preoccupied with the matter of executive compensation. Merrill Lynch would have gone bankrupt at the open of business that morning, and Thain was pressuring Lewis to sign off on large bonuses for himself and his colleagues at the defunct Merrill Lynch. Even so, one could argue that Thain simply evinced a particularly selfish and greedy CEO who didn't have a good sense of priorities. What, then, if a group of Wall Street CEO's shrunk from responsibility even when the financial system itself may have hung in the balance?  It would not be a case of a rogue CEO acting narrowly in contradistinction to the example of J.P. Morgan in the panic of 1907.  Might it be that the age of corporate statemen had passed by the time of the crisis in 2008?  If so, might we be occastioned to taking mice to be men?  Such a practice would point to the need to recalibrate our standards.

On the weekend of September 13-14, 2008 before the Monday when Lehman Brothers declared bankrupcy and Bank of America agreed to purchase Merrill Lynch, Treasury Secretary Henry Paulson and the New York Federal Reserve President Tim Geithner summoned the CEO's of the major Wall Street banks (except Fuld) to the Federal Reserve building in New York City.  Paulson and Geithner told the assembled executives that they needed to figure out how to save Lehman because if that bank were to go under, the financial market itself would stand a good chance of collapsing.  He reminded the assembled CEO's that the process would entail a domino effect wherein their respective banks would fall, one by one in quick succession. Incredibly, the CEOs were in denial on whether their established institutions could indeed fall; the status quo has such staying power. Furthermore, the CEOs were slow to view the viability of the financial market itself as their responsibility, in spite of the fact that their own self-interest depended on it.  Incredibly, on the Friday night and Saturday, they tried to figure out how their firms could profit from picking over Lehman's remaining assets.  On the Saturday morning, they resorted to doing impressions of Paulson and Geithner and betting on a computer game on one of their blackberries (you might want to re-read this last sentence, as it is so incredible that men of such power and responsibility would behave like teenagers--and at a time of crisis no less!).  Finally on Sunday, Barclays offered to buy the financially viable part of Lehman and proposed a consortium funded by the other banks in the meeting to support Lehman's debt.   Even though Barclays should perhaps have agreed to join the consortium, the other banks were on the brink of agreeing to contribute at least a billion each to the consortium--essentially propping up the mistakes of one of their rivals while letting another rival (Barclays) to walk away with the "good" Lehman.  The British government ended up refusing to allow Barclays to buy even the "good" Lehman, making the CEO's look good in comparison.

I have to give the CEOs credit for agreeing to the consortium. They would have been acting as a group as J.P. Morgan had acted in 1907.  However, the antics of the modern day CEOs during the first half of the weekend evince a childish behavior that is difficult to reconcile with men making millions a year and running firms too big to fail.  The financial system hung in the balance and the CEO's of the banks too big to fail were literally behaving like teenagers until Jamie Dimon of JP Morgan exercised some statesmanship (similar to JP himself in 1907) by stepping up to the plate and asking the other bankers to contribute a billion each too.

Diamond notwithstanding, I have to conclude that what we are led to believe concerning the men and women behind the CEO label is far too convenient for them may be inaccurate, and perhaps even manufactured as though a sort of brand management. Just as candidates for elected office are sold like shinny products, we may be under an illusion with regard to business "leaders."  Andrew Sorkin, author of Too Big to Fail, which is my source here (see pp. 330ff), said on a television interview that he (and we) didn't know much about what was going on in the banks during the crisis "because they didn't want us to know" (Tavis Smiley Show, PBS, 11/9/09).  That is, it is no accident, kein zufall, that we will likely remain asleep or ignorant to the nature of the man behind the curtain.  It is in the Wizard's interest that the curtain remain closed from our view. However, thainks to glimpses, we can investigate just who the people are who run firms too big to fail. It can perhaps be said that promotional processes from middle to upper management should be re-examined from outside of the executive suite.  I suspect that the extant promotions are too often simply matters of connections, friendships and power within management, rather than of maturity.

The financial reform bill approved in December, 2009 by the US House of Representatives proposed to regulate the financial industry and keep firms from growing “too big to fail.” The bill can be likened to a ship made of Swiss cheeze, yet seemingly seaworthy. A key intention of the bill was to gain control over the vast market in “over the counter” derivatives by forcing trading onto open exchanges, where regulators can monitor it. Unregulated derivatives were behind much of the havoc that nearly brought down the financial system in 2008, including the subprime-mortgage-backed securities that put many firms underwater and the credit default swaps sold by AIG, the giant insurance company that sucked up about $180 billion in bailout money. The $592 trillion global market in these mostly unmonitored derivatives remained in 2009 among the most profitable businesses for the biggest banks—Goldman Sachs, JPMorgan Chase, Citigroup, Bank of America, and Morgan Stanley—and Wall Street doesn’t want Washington tampering with it. Early versions of Frank’s bill allowed many derivatives to continue trading off exchanges. The bill, Frank wrote, “could be subject to manipulation” by “clever financial firms” seeking to evade a requirement that they trade derivatives on open exchanges.

The story of how those loopholes got into the derivatives bill, even with Frank at the helm and the wind of public outrage at his back, shows just how powerful the Wall Street banking lobby remained nonetheless—and just how complex Wall Street’s financial instruments had become. Many of the key lobbyists were in 2009 in the same gang that helped get us into this mess before, and they were spending huge sums a year after the near meltdown. In the first three quarters of 2009, financial-industry interests  spent $344 million on lobbying efforts, putting them on pace to break all records. This did not include political donations and issue ads. Even more impressive was the lobbying strategy that money was buying. The banks sought to stay in the background and put their corporate customers—a who’s who of American business, including Apple, Whirlpool, and John Deere—out in front of the campaign. “This is an orchestrated, well-funded effort by the banks to manipulate our legislation and leave no fingerprints,” says a congressional staffer involved in drafting the legislation. The financial industry argued that curbs on derivatives do hurt just Wall Street, but also the corporations in Main Street America—the “end users” —that need them to hedge risks.  However, the more custom-made and out of public sight a derivative is, the harder it is for investors—and regulators—to assess its fair value and real risk. This makes it easier for the banks to charge a large “spread” and earn big profits. Frank heatedly denied that he'd been fooled, though he conceded he was catching up on some of the details of the bills he was pushing through. “I’ve become responsible for dealing with a lot of things that are new to me. I didn’t have a great deal of knowledge. I’ve been relying on a whole lot of people,” Frank said. In allowing some exemptions from exchange trading, Frank said he was merely accommodating the corporate end users—not Wall Street—who want to continue doing these private trades in derivatives.  The Wall Street lobby didn’t give up. After Frank had toughened up his stance on derivatives, the lobby tried to redefine what certain kinds of exchanges do.

The money that the industry can use to mollify congressional critics and bolster allies was not the only problem. The problem was even more intractable. Both Frank and his staff (and the corresponding committee in the US Senate) relied on the expertise of the banking industry in the fashioning of regulation for the industry.  Frank admitted that he didn’t know enough to keep on top of the drafts submitted by the industry (and end-users).  Additionally, it was difficult for him and his staff to assess where the industry’s “recommendations” were more “convenient” (meaning self-serving for the banks) than informational.   The financial instruments (e.g., derivatives based on mortgages) were at the time so complicated that congressional staffers who wrote the legislation depended on drafts submitted by the industry itself without being able to adequately screen them for bias.  There is an inherent conflict of interest in an industry even providing information. Therefore, I wonder whether the practice was worth its benefits to congressional staffers. 

The case seems to me like that of having a wolf provide the sketches for the design of the chicken koop, as if the design were an objective plan without any holes.   Even so, without the information from the industry with the vested interest, legislative staffs often do not feel competent to legislate on the complex markets of modern finance.  Indeed, they may not be, given the complexity out there.  But that is not a given.  We miss this point. To reduce the informational asymetry, Congress could direct that the markets be simplified to what they and the regulatory agencies could understand and thus regulate effectively. Opponents of the House bill claimed that the changes ensuing from the bill would limit consumer choice and stunt financial market innovation. Shortly after the House bill passed, President Obama suggested these risks are worth taking.

While applauding House passage of overhaul legislation, the President expressed frustration with banks that were helped by a taxpayer bailout and even as they were “fighting tooth and nail with their lobbyists” against new government controls.  The bank lobbyists spent more than $300 million in 2009 trying to scuttle the bill.  This alone should be enough to shut every congressional office to the lobbyists.  How widespread is the fecklessness!  As the wake of the bill’s passage, Obama said the economy was only then beginning to recover from the “irresponsibility” of Wall Street institutions that “gambled on risky loans and complex financial products” in pursuit of short-term profits and big bonuses with little regard for long-term consequences. “Americans don’t choose to be victimized by mysterious fees, changing terms and pages and pages of fine print. And while innovation should be encouraged, risky schemes that threaten our entire economy should not,” he said. “We can’t afford to let the same phony arguments and bad habits of Washington kill financial reform and leave American consumers and our economy vulnerable to another meltdown.”

So where were our legislators on this point?  Missing in action, most of them.  However much Obama's remarks can serve as a palliative, it must be admitted that the President could have gotten on the banks and refuse to sign a final bill containing deflating loopholes gained by the efforts of the lobby with a vested interest in the legislation.   I don’t believe the President would have risked his re-election contributions from Wall Street by telling Congress to be firmer in resisting the banker taskmasters.  Hence, the U.S. Government is unlikely to take on the very existence of the banks too big to fail even as the most profitable of them quickly returned to risky trading on their own accounts.

Too often, congressional legislators (and the President) wince when it counts, ignoring the inherent conflict of interest in the industry’s warning of Armegeddon.  We need to accept the fact that ery reform has a cost, and that “reform” does not mean “catastrophe.”  If we capitulate to the wolves because there might be a cost otherwise, we miss the greater cost in capitulating.  That cost is not only economic, for it includes the selling of ourselves and our government to the highest bidder and the loudest bully.  When I look around the world, I see fecklessness at home.

By comparison, the British and French states of the E.U. set a 50% windfall tax on ALL banker bonuses within their respective states.   Throughout the U.S., it has been difficult simply dealing with the bonuses of the bankers at the banks that were bailed out; we were so afraid that the credit markets would collapse from a tax or that we shouldn’t touch the other bonuses.  Treasury limited the cash compensation for executives at companies that received the largest taxpayer bailouts to $500,000 and delayed some other payouts. The 25th through the 100th top earners at Citigroup, GMAC, American International Group and General Motors had to take more than half their compensation in stock, and at least half had to be delayed for three or more years. About 12 executives were granted exemptions to the $500,000 cash cap because they were necessary for the companies to “thrive, be able to compete, and not lose key people.”  The European industry-wide approach was stronger, and less apt to result in “talent poaching” that was likely to occur where only TARP reciprients are targeted.

Why is that we were convinced that we couldn't or shouldn’t go beyond the TARP reciprients in limiting exorbitant executive compensation?  Is imposing compensation (in all its forms) limits to protect the market from firms too big to fail really beyond the pale?  Is it really so much a threat to economic freedom? Certainly, it is a legitimate role of a government to protect the viability of the market.  The lack of any enacted windfall tax on bank bonuses (or compensation) in the Congress in 2009 or 2010 intimates the subterranean power of Wall Street in Washington.  Indeed, according to The New York Times, “heeding complaints from banks, the House rejected an effort to allow bankruptcy judges to restructure mortgage payments, a plan that has passed the House before but not the Senate.”  When the same thing happened in the U.S. Senate, Sen. Dick Durbin said publically that the banking lobby owns Congress.  House members also agreed to relax some of the proposed new controls on trading in derivatives. Rather than subject all over-the-counter derivatives to open trading, the bill would have subjected such derivatives only if they were traded between Wall Street firms, or with a major player like AIG. But the transactions between dealers and customers will remain largely hidden, so customers will not be able to compare the prices they are being charged with the prices charged to other customers.  That’s nice for the banks.  We miss this point, paying attention instead to speeches.  Words.

We are not keeping our eyes on the ball, folks; rather, we all too easily allow ourselves to get distracted.  In watering down financial reform, we agree to construct fake walls  on what reform is viable and constructive.  We convince ourselves that we must play inside the pen because insiders have told us that we should. We take harsh words against the pen on our behalf as tantamount to tearing it down.   In actuality, the words are a subterfuge meant to assuage us so we don’t vote differently in the future.  The wolves know that mere words can’t tear down the walls they have directed our representatives to observe.  We have become like herd animals, and our leaders like subterfuges.  It is no wonder that “real change” contrary to the vested interests has been restrained at best.  If a new consumer protection agency is the high-water mark of reform (i.e., banks too big to fail being allowed to go on…even as they have returned to risky trades for much of their 2009 income), we really do deserve the next financial crisis.  …or can a speech going after the financial industry obviate such a thing from happening again?

Sources: http://www.newsweek.com/id/225781 ; http://www.nytimes.com/2009/12/11/business/global/11bonus.html?_r=1&ref=world ; http://www.msnbc.msn.com/id/34380551/ns/business-us_business/ ; http://www.nytimes.com/2009/12/12/business/12regulate.html?_r=1&ref=business ; http://www.msnbc.msn.com/id/34393630/ns/politics-white_house/

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 Beirut, gunfire broke out and crowds of people waved Egyptian flags. In Yemen, they gathered in front of the Egyptian Embassy chanting, 'Wake up rulers, Mubarak fell today.' In Gaza, they fired shots in the air and set off fireworks. . . . [However,] in a telling sign of the divide between the rulers and the ruled, the region’s leaders, presidents and monarchs remained largely silent." This depiction by The New York Times of ripple effects across the Middle East in the wake of the resignation of Egypt's Mubarak in February, 2011 intimates the hoped-for and feared possibility that the popular unrest could spread.  Moreover, the entire world, which had been been glued to the events unfolding in Cairo, wondered if a domino effect might be in store in countries under autocratic rule. Indeed, The New York Times wrote of a possible domino effect quite explicitly: "The popular uprising that started . . . in Tunisa had claimed its second autocratic government, this time in the largest country in the Arab world. With more protests planned in coming days, some governments were clearly worried they could be next." But do autocratic governments fall like dominos?  That is, is revolution contagious? Fawaz Traboulsi, a prominent Lebanese writer and columnist, thought so in the days following Mubarak's resignation. “All the regimes are shaking now . . . They are becoming more and more fragile. This is just the beginning.” In Bahrain, King Hamad Bin Isa al-Khalifa apparently thought so too, for he ordered the equivalent of $2,650 be given to every Bahraini family a few days before a planned "Day of Rage" protest. “Arab people discovered their ability to make change,” said Nabeel Rajab, a human rights activist in Bahrain. “And with Egypt in the leadership once again, the change will reach all the Arab world.” In Yemen, President Ali Abdullah Saleh announced he would suspend constitutional amendments that allow him to remain in his office for life. He also raised salaries for the military and civil servants and cut income taxes in half. In Algeria, the government promised to lift the state of emergency that had been in effect since 1992. To be sure, nineteen years is a rather long time for an emergency.  Such efforts can be likened to building up wetlands or widening a beach to take the wind out of the hurricane out at sea should it hit. In other words, it appears that there was "revolution watch" in effect for the Middle East in the wake of the fall of the Egyptian regime. One might reasonably question, however, whether revolutions are contagious.

It could be that autocracy itself had been weakened by the success of the protests in Egypt.  On the other hand, there had been revolutions before and dictatorship was not evicerated from the face of the earth. The belief that the Tunesian and Egyptian revolutions were the start of a wave that would flood all autocratic powers in the Middle East (or the world) might also consider that even autocratic states differ in their respective internal conditions. To use the hurricane analogy, some beaches are better protected than others. If the unrest in Tunesia and Egypt were linked in such a way that other countries could be impacted internally, the ensuing domino effect could perhaps be compared to that among Wall Street banks in September 2008.  The collapse of Bear Stearns, Lehman Brothers, and Merrill Lynch as independent or viable going concerns contained a momentum that was beginning to bring down Morgan Stanley and threaten even Goldman Sachs when the ex-CEO of Goldman Sachs at Treasury effectively pushed for the construction of a fortified sand-dune (TARP) a.k.a. an infusion of funds into the remaining banks from the U.S. Government and the Federal Reserve.  As a result, the force of the strengthening winds ceased to intensify and began to diminish, leaving the economy in a long rainy season (i.e., a recession and a subsequent nearly jobless recovery).

In the wake of the fall of the Egyptian regime, were the other regimes in the Middle East like Morgan Stanley and Goldman Sachs after Lehman Brothers declared bankrupcy?  In other words, are autocratic regimes subject to a "run on the bank" in another? If so, there would still be a notable difference between the big banks and the governments.  Namely, the banks were deemed too big to fail, while the autocratic rulers were deemed too powerful to rule. That is to say, the continued viability of the Wall Street pillars was deemed essential to the world economy, while it was thought in the wake of the Egyptian regime of Mubarak that the world was better off less one autocratic regime. Hence there would not be likely to be a TARP program arranged to prop up dictators. Even with this difference noted, I contend that both big banks and big dictators are too big to exist in a world that values freedom and individual rights. Perhaps we ought to have been cheering the domino effect on Wall Street just as we cheered the fall of the Tunesian and Egyptian dictators. In both cases, destabilization that could lead to the collapse of the global economy and civic order would of course need to be avoided.  However, I contend that the U.S. Government could have intervened to maintain order on Wall Street by assisting as the big banks split into pieces, none of which being too big to fail and thus more in the public interest than retaining the big banks as such.  In the case of public autocratic regimes, their demise and replacement can typically be handled domestically, as in the cases of Tunesia and Egypt, rather than by an international organization such as the U.N.

In general terms, the "run on the bank" in Tunesia and Egypt may or may not be contagious in its nature, yet a consideration of the possibility of a domino effect can remind us of the domino effect that we witnessed in September of 2008 on Wall Street. Making this connection might prompt us to ask whether autocratic governments and big banks aren't both too big to exist. In other words, the collapse of one badly run bank after another and the subsequent need to deal with the question of such banks as going concerns can perhaps be likened to the collapse of one badly run government after another.  Was the world finally noticing around the end of the first decade (and the beginning of the second) of the twenty-first century that enormous concentrations of private capital (and thus power) and of public autocratic authority were not necessarily givens, and thus could, and perhaps should, be taken down? In other words, were long-standing givens finally seen as replacable?  The world was stunned when huge investment banks that had been around for more than a century were suddenly collapsing, just as the world was stunned when the government of the largest Middle Eastern country suddenly fell after two weeks of popular protests. Pillars, even those that are thought vital, can indeed fall, and the world can discover through the experiences that they are not essential--and they might even be bad for the public good. Surely this is the sense of the free world concerning autocratic governments, yet we are less convinced concerning the danger in continuing to allow banks too big to fail to continue to exist as they have for decades. In both cases, the domino effect may be natural and good, provided it is managed so public order does not collapse in the process. 

Source: http://www.nytimes.com/2011/02/12/world/middleeast/12arabs.html?_r=1&ref=todayspaper

The Securities Industry and Financial Markets Association claims that the bank tax proposed by the Obama Administration as part of the Financial Reform Act of 2010 might be unconstitutional because the levy would unfairly single out and penalize big banks.  For his part, President Obama urged the financial lobby to stand down when he introduced the tax proposal. “Instead of sending a phalanx of lobbyists to fight this proposal or employing an army of lawyers and accountants to help evade the fee," he said, "I suggest you might want to consider simply meeting your responsibilities.” The banks had tried to head off criticism by starting new charitable programs and by structuring executive bonuses in line with principles set by the federal pay adviser, like paying bonuses mostly in stock instead of cash and deferring the payout of some bonus money in case business declines again.  However, new charities and stock compensation should not obfuscate the fact that banks too big too fail precipitated the financial crisis of 2008 and returned soon thereafter to trading on their own equity (e.g., Goldman Sachs), thanks in part to the TARP funds from Teasury.  That the bank lobbyist organization was oriented nevertheless to void the new tax through lobbying and litigation, claiming it would hurt the big banks disporportionately, demonstrates that the bankers just didn't "get it." They should be glad that the resulting Reform Act left undisturbed the very existence of banks too big to fail. 
 
Source: http://www.nytimes.com/2010/01/18/business/18bank.html?ref=politics

Andrew Cuomo, who was the Attorney General of New York in February of 2010, filed suit then against Bank of America and two of the bank’s employees, Ken Lewis and Joe Price.  In his complaint, Mr. Cuomo said that the bank first chose not to disclose the losses involving Merrill Lynch, which topped $16 billion, to its shareholders who were voting to approve the deal. Then, the bank told federal officials that those same losses had persuaded bank executives to consider backing out of the deal, unless the government provided a second bailout. “Throughout this episode, the conduct of Bank of America, through its top management, was motivated by self-interest, greed, hubris and a palpable sense that the normal rules of fair play did not apply to them,” Mr. Cuomo said. “Bank of America’s management thought of itself as too big to play by the rules and, just as disturbingly, too big to tell the truth.”

While “too big to play by the rules” and “too big to tell the truth” are striking  and warrant serious reflection in an economy wherein corporations are allowed to continue to operate even though they are too big to fail, my eyes are caught on something else in the quotes that is apt to be missed by many readers in the present era of corporate capitalism.  Consider “the conduct of Bank of America, through its top management…”  Does anything seem odd to you about this phrase?  In the wake of the US Supreme Court’s decision that corporations’ “free speech” is protected by the US Constitution’s first amendment, the debate on whether corporate entities should be considered legal persons has emerged from law school classrooms into the public square.  Reading “the conduct of Bank of America, through its top management,” I wanted to rewrite it as “the conduct of Ken Lewis and others in their capacities in working at Bank of America”.  This would be more accurate.  That corporate conduct must be through human beings means that corporate entities cannot themselves act or have conduct.  Accordingly, to say that a corporation apart from its human beings is a person does not make sense (because conduct applies to persons).  To say that BOA conducts itself through people is really to say that the conduct is done by the (human) persons.  

Besides questioning the corporate legal person judicial decision and the related decision that corporate “persons” have the same right to free speech as human beings have, I would argue based on my analysis here that the individual employees who were involved in the alleged understatement of losses and overstatement of an intent (and ability) to pull out of the deal (i.e., holding the economy hostage to get the feds to pony up in the deal) should be viewed as the recipients of the punishment.  Because a corporation is wealth rather than a person (i.e., it cannot go to jail), a fine could also be imposed on it even as the guilty employees go to prison for their conduct (regardless of the size of the fine on the bank).  But this wouldn’t mean that the corporation is being punished.  Rather, the stockholders (and anyone else who could otherwise draw on the retained earnings) would be punished  for lax corporate governance. If the employees’ fraud circumvented reasonable corporate goverance, however, perhaps the stockholders should not be punished/fined.

My point is that we should hold the individual decision-makers (and implementers) accountable (if they committed fraud) because they are persons.  Human beings commit fraud—not corporations.  So we should not fall under the illusion that some corporate entity greater than the sum of its human parts is somehow responsible (i.e., as if a corporation could make decisions apart from the human beings working in it).   A corporation doesn’t have hubris; persons do, which is to say human beings.  Projecting human qualities onto legal entities may feel good and be convenient for those who want to evade responsibility; what concerns me is when the rest of us unthinkingly go along with the illusion and take it for real, writing statements like ”the conduct of Bank of America.”  Reading this, one ought to think to herself, ”that doesn’t even make sense.”  Unfortunately, the lapse is so ubiquitous that few of us object to it, not to mention notice it.  When something that does not make sense comes to be routinely taken as a given, something is really wrong in a society.  The problem is particularly lethal when it is not even transparent because it is akin to flying blind.  Let’s just say that it is the financial interest of those human beings who benefit from corporate wealth that we continue to fly blind.

Source: http://www.nytimes.com/2010/02/05/business/05cuomo.html?hp

He who has the gold makes the rules.  I suspect this is the operating mantra at Goldman Sachs even after the bank’s near-death experience (when Solomon Bros stock was taking a hit, Blankfein knew his bank could be next).  As it turns out, the bank was involved in enabling Greece to stealthily spend beyond its means. According to The New York Times, in 2001, just after Greece was admitted to Europe’s monetary union, Goldman helped the government quietly borrow billions, people familiar with the transaction said. That deal, hidden from public view because it was treated as a currency trade rather than a loan, helped Athens to meet Europe’s deficit rules while continuing to spend beyond its means. Additionally, in late November, 2009— three months before Athens became the epicenter of global financial anxiety — a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting. The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

Lest it be forgotten, half of Goldman Sach’s 2009 revenues came from trades on its own books—even as the bank had become a bank holding company and thus supposedly more not less risk averse.  In general terms, my concern is that the bankers at Goldman might be overly in love with leverage and thus be blind to the risks.  Were this contagion limited to Goldman Sachs, it would be a question of whether the bank is too big to fail; that the bank has actively enabled one of the EU’s states to secretly take on more debt suggests that the systemic risk that is involved is political as well as economic.

According to The New York Times, “bankers enabled Greece and other governments to borrow beyond their means, in deals that were perfectly legal. Few rules govern how nations can borrow the money they need for expenses like the military and health care. The market for sovereign debt — the Wall Street term for loans to governments — is as unfettered as it is vast.”  This is a condition that American and European citizens have allowed to happen; the market for sovereign debt (and the enabling banks) could be better regulated. Indeed, the government of Iceland floundered economically and politically due to its holdings in valueless subprime mortgage derivative securities; its perilous fiscal condition prompted it to apply to the EU to become a state. Enlargement itself was flagged in the EU as entailing risks for the union. So Wall Street banks whose managers believe in debt and minimizing or avoiding market regulation present the world with not just economic systemic risk, but added political risk as well. That is to say, Wall Street can reach across the Atlantic, with European governments hanging in the balance. To push for banking deregulation in the U.S. can entail political risks abroad. In other words, banking regulation can be viewed as a social responsibility and a matter of good foreign policy.

Even though they had contributed to political instability in Europe, Goldman Sachs managers received near record bonuses in 2010. The payouts were more than a sufficient incentive for the economic alcoholism to carry on in abject denial.  "We're not at fault! We're just market makers." The problem here is that the alcoholic has the gold, and thus can make (or at the very least dance around) the rules.  As Richard Durbin of the U.S. Senate said in 2010 after he tried to allow bankruptcy judges to be able to modify home mortgages, the banking lobby owns Congress. The amazing point here is: the lobby could still call the shots in Congress even in the wake of the industry's sordid role in the financial crisis of 2008. This ought to be a red flag for anyone who values the republic as a form of government in the U.S.

Ultimately, it is the American people who are to blame—that's right, you and me—because too many of us are sufficiently credulous to elect and re-elect representatives who cave in to the banking lobby’s pressure.  There are too many “professional” pols seeking to perpetuate themselves; there is hardly a citizen statesman left serving as a matter of duty rather than power and vocation.  We have stood by and let the banks too big to fail get even bigger (and thus more powerful over our governments). We have not put sufficient pressure on our representatives in Congress to remove the too big to fail problem.  It is all too easy to point our fingers at the managers of Goldman Sachs, especially on the bank’s role in the Greek debt problem, but it is ultimately ourselves who are responsible for enabling the elephant in our living room.  Now that that elephant is breaking furnature in other houses, perhaps we might find the time to get our own house in order.  As the Germans would say, alles ist nicht in Ordlung.  We continue to think and act otherwise. Crucially, this is to our own peril.  In other words, denial is not a viable survival mechanism, even if it is more comfortable.

Source: http://www.nytimes.com/2010/02/14/business/global/14debt.html?hp

I  ran across a poll that showed the ranks of the independents growing.  Not coincidentally, movements independent of the two major US parties seem to be springing up.  The Tea Party amd the Coffee Party are just a few.  Remembering back to Ross Perot’s movement in the early 1990’s, I must admit to a tendency to consign the movements of 2010 to a similar “wave” pattern.  However, there might be enough independents relative to the two parties that one or more of them could be around for awhile and make a difference beyond one or two election cycles.  My sense is that they will not, but independents factor could mean that my projection is too pessimistic.

In any case, there are doubtlessly many American citizens annoyed at the office-holders representing the two major parties for being inordinately interested in serving the moneyed interests at the expense of the public good and too interested (relatedly) in getting reelected.

The question is perhaps whether We the People can muster enough power to change the equation.  We are far-flung and each making up our own minds, while the moneyed interests are getting ever more concentrated (and this reflects on their ability to influence our representatives).  The deck, as it were, is stacked against us.  Yet somehow my faith still lies with the little guy—that if enough of us stand up to greed and power we will be able to exercise our own and take back the government for the People.

Of course, there are citizens whose beliefs and values dovetail with the entrenched moneyed interests, so it is not so simple as to claim that the People are alienated from our government.  I think perhaps the US is rather unique in the world for the proportion of its citizens who support the interests of the financial elite.  There was even a book whose thesis was that what was good for GM was good for America.  The citizens whose ideologies match that of the major corporations and banks, the two parties are probably performing just fine.  Even some of the independent movements, such as the Tea Party, might have an agenda that dovetails with the corporate interests (e.g., lower business taxes and less government spending on the People).

So I don’t think I can generalize my position to say that “the People” are frustrated with the influence of the moneyed interests in our government.   Even so, I look back to US Presidents like Andrew Jackson and Teddy Roosevelt, the former taking on the banking interests and the latter taking on the giant trusts such as Rockefeller’s Standard Oil, and I wonder where those leaders are today and whether a sufficient number of supporters exist to put such leaders into office again.  It would be presumptuous of me to claim that such a mandate would be that of “the People,” though I do think it would be in line with “We the People.”

So here are some questions for your consideration. Do the entrenched vested interests of the status quo (i.e., those in line with the moneyed interests) have an exaggerated following among citizens in the US?  If so, how real, or deep, is the support?  Are those people simply being manipulated without them realizing it?  If their concurrence is superficial, can it be made transparent?  If we do not awake to the danger of “systemic risk” and “too big to fail” after having experienced the financial crisis of September, 2008 and its after-shocks, will we ever?  Or will the financial consolidation just have to take its course, capturing the US Government as it gains even more power?  We may well have a sizeable “the business of America is business” electorate that is not so because we are being manipulated by ads.  If so, it will be difficult for movements independent of the two major parties to wrestle the government from the grips of the titans.

Testifying before the Financial Crisis Inquiry Commission on September 2, 2010, Ben Bernanke, chairman of the Federal Reserve, observed, “As of 2003 and 2004, there really was quite a bit of disagreement among economists about whether there was a bubble, how big it was, whether it was a local or a national bubble. We certainly were aware it was a risk factor, but frankly by the time it was clear it was a bubble” it was too late to address it through monetary policy. The NYT also reported that he spoke favorably of forcing huge banks to hold much more capital, particularly if they were systemically important — so much capital, indeed, that being big would be costly. He advocated that the increased capital requirements should include capital that is more aligned with risk and able to absorb losses more effectively, and that works in a countercyclical manner, so that banks have more of it during times of stress. Given the difficulty involved in recognizing a bubble even as it crests, Bernanke’s statements on capital-holding changes make sense. Absent breaking up banks too big to fail, making it very costly for them to be big is the next best option. The regulators would be wise to be on the look out, however, for bankers who try to hide their banks’ true sizes (and risk). Given the empire-building proclivity in the business world, designing a system that makes bigness more costly could result in an overall balance of forces. The key is to make being big sufficiently costly so that the drive to empire-build is sufficiently checked.

Source: http://www.nytimes.com/2010/09/03/business/03commission.html?_r=1&ref=business

Negotiations between “the European Parliament, the EU government and the EU’s executive commission [are paving] the way for the new supervisory system” in banking. Four new EU regulatory agencies have been proposed, including a European Systemic Risk Board. Relatedly, the US has legislated for a systemic risk board and for additional powers to the Federal Reserve to regulate banks (and other firms deemed too big to fail).  In other words, the regulatory responses to the financial crisis of 2008 are happening on the US and EU levels. The EU allows for more active state government. For example, regarding the failure of a large bank in more than one state of the EU, the EU officials will have the power to step in if the relevant states are in disagreement. Presumably if each of the relevant state governments agree on how to deal with a given large bank, the EU regulators would not get involved. Herein lies an important distinction between the EU and US—the US Government getting involved even where relevant states agree. That is to say, there is a better balance of federalism in the EU.  That the new regulators are at the EU and US level means that they (i.e., the regulatory bodies) can be compared without needing to correct for them being at different levels.

Source: Europe’s 4-Regulator Solution, WSJ, September 3, 2010, p. C2.

On October 13, 2010, Fox News reported a poll that found that women are turning on Obama.  The reason cited was that they feel there has been too much change—that it has been “jarring.”  This reminded me of when I was sampling a food item in a grocery store and the old woman who gave me the sample, said, “We have lots of devils here.”  She was referring to the array of food samples in the store that day.  My reaction, which I did not act on, was to ask her what century she was from. I wondered why some people can’t seem to let go of what is so antiquated—why they are so resistant to any change. In terms of the jarring change being reported on Fox News, the journalist pointed to the health-insurance reform law as a case in point.  In spite of its purported “socialism,” the law relies on private health-insurance companies, whose lobby pressured Obama into dropping his “public option” requirement and adding a mandate that requires Americans to become customers of those companies.  If relying on extant private companies—giving them a guaranteed and vastly enlarged customer base—represents “jarring” change, I have to start wondering about whether those Americans have some sort of pathological issue with change itself.  I have to wonder whether there isn’t in the American culture—and I am an American—some sort of pathology in which any change is felt to be traumatic.  If so, we could add this pathology to that which involves denial in relying on companies (both insurance companies and banks too big to fail) that we know have been culpable. The extreme aversion to change and the tacit willingness to rely on problematic institutions can be expected to result in stagnation and continued systemic failures.  The source of the problem is in us.

Not surprisingly, much of the campaigning in the 2010 midterm elections has been oriented to incremental change on given issues, rather than to real change. Even in states bordering on bankruptcy, like California, Florida and Illinois, it is campaigning as usual.  I watched a candidate forum from Illinois and one of the main questions was why a candidate’s business was so successful.  Meanwhile, the last governor had been impeached and removed from office by a nearly-unanimous vote in the legislature, and the government was borrowing $18 billion in 2010 alone.  The forum made “rearranging the deck chairs on the Titanic” look like an everyday phenomenon.  Lest one blame the candidates alone, it is important to note that it was a citizen who asked about the candidate’s business. In the California Governor’s race, Jerry Brown and Meg Whitman had a chance in their debates to persuade a statewide audience they could turn around the economically troubled state. Instead, they resorted—at least in their third debate—“to many of the personal attacks that have dominated the last few weeks of the campaign,” according to MSNBC. “Neither candidate presented any new ideas.” A poll released two weeks before the third debate found about half the respondents were dissatisfied with both candidates. No wonder.

In contrast to status quo campaigning amid major systemic governmental problems, my inclination regarding either republic would have been to discuss drastic tax increases and non-sustenance budget cuts in that state, as well as to suggest that the two states both adopt a federal system—their respective regions becoming states.  Germany is the size of Montana and is a federal state with 15 regions. As soon as it is realized that Germany as a EU state is federal, federalism can be recognized to be applicable to any large US state.  Comparing apples to apples enables new insights!  However, if we are afraid of “jarring” change, we will be apt to resist adjusting our comparisons for any errors; we will continue to see the world just as it has been seen, and this will make it difficult for us to envision change.

A commentator on Fox News said that the banks should not stop the foreclosure process because that would not be good for the free market. He said that people who cannot afford their houses should lose them. He was apparently unaware that putting a large number of houses on the market would cause home values to decline further, and that the market mechanism itself had been part of the problem in the financial crisis of 2008.  Protecting the free market is not our goal, yet he took it as the assumed telos, or final end. Lest it not be obvious he was also displaying a blatant disregard for the suffering of others. The possibility of people going homeless is apparently not of concern to the market advocates whose only concern is the market itself—a mechanism that Alan Greenspan has admitted contains structural flaws.

On another day, I heard another commentator on Fox News say that too much government in the financial sector is “the problem,” I was dumbfounded because one of the lessons of the financial crisis…wherein the global financial system almost collapsed…has been that the market and its firms can actually increase volatility from unregulated bubbles (and fraud).  To say that too much government caused the crisis has is completely opposite!  To be sure, Freddie Mac and Fannie Mae contributed to the problem, but the source was that the private-sector bankers wrote unsustainable sub-prime mortgages and sold them to private investment bankers who turned them into securities (which were then rated by private rating companies…some as AAA!).  To say that “too much government” in the economy was the cause is to warp reality to one’s own ideology.  That is to say, ideology can be amazingly resistant to change in the face of the facts on the ground. That the Republicans are doing well at all in the wake of the crisis, given their deregulation platform (and that government is the problem, not business), is remarkable except for the fact that we averted crisis.  Had Democrats on the Hill refused to save the banks (though they should have been just as interested in saving troubled home-owners!), the financial system would have collapsed.  The commercial paper market had already frozen. To be sure, the aid should come with the requirement that exec compensation would be limited (the banks should have been deemed legally bankrupt but for the government bailout and thus their exec comp contracts declared null and void), and strict anti-foreclosure rules set.  That these things didn’t happen attests to the power of even a complicit industry’s lobby in Washington. Had the financial system tanked, I bet the pro-business republicans would be facing a 1932-like Democratic landslide.  Ironically, the Democrats’ averting a disaster in which banks were complicit has benefited the Republican party, which is avidly pro-business and anti-government even in the wake of what Alan Greenspan admitted to be a flaw in the market mechanism itself (concerning volatility and bubbles—irrational exuberance). What amazes me is that such an admission is lost on an ideology that remarkably still have staying power.  That the Republicans are able to avert losing seats in Congress suggests to me how strong that party is. Ultimately, the lessons from the financial crisis of 2008 would…one would think…seep into the Republican platform to moderate it, just as Alan Greenspan (former Federal Reserve Chair) has recognized that his paradigm contains a fatal flaw.  In other words, I would expect that how we would look at the market mechanism itself (including private enterprise and commodities) would change following the crisis.  Perhaps one of the lessons from the midterm elections of 2010 is that this might not happen, at least for awhile.