Showing posts with label business and government. Show all posts
Showing posts with label business and government. Show all posts

Monday, April 11, 2011

The Nineteenth-Century Eclipse of Democratic Governance by Capitalism. Part I: Jacksonian Democracy over Capitalism

0 comments Posted by Find Insurance Online at 12:34 AM

I contend that a trajectory wherein capitalism came to eclipse or capture democratic governance occurred in the nineteenth century in the United States. President Andrew Jackson’s actions in the early 1830s can be viewed as a benchmark wherein government officials were still willing to relegate the interests of capitalists for the good of the whole. 

According to Brands, “Andrew Jackson embodied the democratic ethos, by both his humble origins and his reverence for the people as the wellspring of political legitimacy. Jackson waged political war on the pet projects of the big capitalists of his day, smashing the Bank of the United States, vetoing federal funding on roads and canals, and beating down tariff rates.” (1)  Actually, Jackson’s object was not to reduce the capitalists of his day; rather, he was attempting to protect the balance between the general and state governments in the federal system.

For example, President Jackson vetoed federal funding for the Mayville road because it was confined to the territory of Missouri. That is, the road did not cross state lines, so it did not involve interstate commerce directly. The state itself had jurisdiction. Had Jackson not vetoed the funding, then interstate commerce “regulation” as spending would have opened the floodgates to Congressional power. Jackson was also rejecting the argument that spending for the general welfare goes beyond the enumerated power domains. In refusing to fund the public works project, Jackson was not acting in the interest of the potential private construction bidders. Hence as a byproduct the president was standing up to capitalists in his effort to contain federal power from encroaching on the state governments.

Second, Jackson feared that having a bank of its own would give the general government in Washington too much power relative to the state governments. For example, the Second Bank of the United States could conceivably print an unlimited number of bank notes to fund its government’s spending “for the general welfare”—eviscerating the enumerated powers in the process. Jackson refused to fund the bank before his re-election. Thus he risked having the financial sector turn against him in an election season. The long term viability of the American federal system was worth more to him than his own continuance in office.

Notably, Jackson was willing to cross Wall Street (something notably absent in President Obama’s financial “reform” law) for the good of the republic’s governance system. Put another way, the president’s protection of the system of democratic governance wherein governments check and balance governments in federalism trumped the particular financial interests of capitalists. By the time of Lincoln’s tight re-election race in 1864, capitalists would find a president willing to use (and defraud) the government to benefit them financially.  The balance of power between capitalism and democracy had already shifted.

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1.      Henry W. Brands, American Colossus: The Triumph of Capitalism 1865-1900 (New York: Doubleday, 2010), p. 5

 

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The Nineteenth-Century Eclipse of Democratic Governance by Capitalism. Part II: Wartime Exploitation of Government by Lincoln and the Railroads

0 comments Posted by Find Insurance Online at 12:28 AM

By the time of Lincoln, the capitalists had amassed sufficient capital that they could literally write federal laws concerning them and exploit the government beyond their own statues for additional profits. In 1869, the first transcontinental railroad was completed. Brands notes that “the capitalists commanding the road recruited the institutions of government to share the risk and costs of construction.” (1) In other words, the capitalist investors (not the workers) get the rewards while the taxpayers take on the risk. Capitalism might thus be called convenience by another name. To be sure, a political ideology came into play that was highly conducive to this arrangement.

By the Civil War, “(a)mong the Republicans, support for a Pacific railroad fitted a general belief that government could benefit the American people by helping American business.” (2)  This was an early version of what is good for GM is good for America. The fallacy in this assertion is that what is good to a part is necessarily good for the whole. For example, a part benefits from exclusion (e.g., not paying for externalities), which is not in the interest of the whole.

In any case, the fashioning of the first transcontinental railroad during the Civil War involved Lincoln, Stanford (the Governor of California and a partner of the Central Pacific Railroad),
and the two railroads in some shady dealing and related conflicts of interest. Generally speaking, the capitalist capture of democratic government can be expected to spin off various unethical twisters.

Funding by the U.S. Government for the railroad would entice California, which might have adopted a pro-Confederate independence otherwise, to remain in the union. (3) It was also not lost on Lincoln that the western republic had gold. Accordingly, the new party adopted into its platform the plank of government financial assistance in the undertaking. Brands reports that “Californians’ brave talk of self-sufficiency suddenly ceased when they heard the Republican offer.” (4) For the plank to be converted into legislation favorable to California, as well as to the railroads, the remnants of democracy had to be overcome in the Congress. This required “the concerted efforts of small armies of lobbyists.” (5) This experience gave capitalists a “way in” to the halls of the national government, which they could exploit in the future. In other words, the Republican policy involved a shift in government with respect to the influence of capitalists. American government would never be the same.

Specifically, Durant’s Union Pacific Railroad bribed members of Congress. Not to be outdone, Theodore Judah brought shares of the Central Pacific Railroad to Congress to disperse as he saw fit. (6) The result was the Pacific Railway Act of 1862, which was essentially written by the railroads even though they had vested interests in the project. (7) The federal government would offer the railroads loans financed by 30 year bonds held by the taxpayers and grants of land. If the project failed, the certificates would be worthless.

To be sure, private capital markets could not attract investors willing to risk large sums on such a long-term (and risky) payoff. (8) The interest of the U.S. Government in integrating the union such that new western states would not follow the example of the Confederacy made it worthwhile to make up for the shortfall in those markets. The problem is that the precedent risked giving capitalists access to the Treasury—a new source of food for the new feeding machines. It is not as though the cats would have one taste of the tuna only to never come back for more. Once on the scent of the government money, the capitalists would surely follow up in the halls of Congress. The case was the same in California.

Leland Stanford (the namesake of Stanford University) was elected governor of California without having to reduce his participation in the Central Pacific. His brother Philip distributed gold coins to voters. As if there were no conflict of interest between his office and his business interests, he got the California legislature to contribute $15 million to get the transcontinental railroad started on the California end. (9) In general, the capitalist capture of democratic government makes use of the public’s proclivity to ignore conflicts of interest. This continued to be the case for Governor Stanford.

In July 1864, the Pacific Railway Act of 1862 was amended so the U.S. Government would bear most of the risk (giving up first lein) and the railroads would get even more from the government. Even though the railroads had written the original act, only with the amended act did the capitalists find the railroad to be “a most attractive investment.” (10)  It was no concern to them that in 1864 the U.S. Government was nearly bankrupt on account of the war. Nor did the sacrifices being made on the battlefields in the wilderness intimate to the capitalists that they too should sacrifice so the U.S. Government could add more resources to the war effort. The matter was one solely of risk and profit calculations—the railroads leveraging the government until the investment was sufficiently sweetened for enough potential investors to come on board. Duty, or ethics more generally, does not compute in business terms. Business ethicists would be wise to remember this.

In any case, the U.S. Government would pay the railroads $48,000 per mile in the mountains and $32,000 per mile on the flat land away in the desert. The self-written terms not be enough for the Central Pacific railroad, Governor Stanford used California’s geologists to claim flat land as mountainous. With a difficult election approaching, Lincoln overruled his own secretary of the Interior in favor of his railroad allies in California. (11) Lincoln himself had been a railroad lawyer. The preserver of the union was inadvertently making the task more difficult for the U.S. Government by bowing to the new capitalist might at the expense of his own government. In other words, he was willing to acquiesce in the defrauding of his own government even when it was fighting a rebellion. Such is the allure of capitalists at the expense of public governance in the name of democracy.

Lest this information on Lincoln be deemed as counter-productive by Lincoln fans, pointing out the president’s faults makes him “all the more beloved because they discourage us from turning him into a plaster saint. His greatness, without the flaws, would make him unapproachable and remote — a canonization made even more probable by his martyrdom.” (12)  Made human, all too human in fact, Lincoln can stand for us as a marker on the trajectory of capitalism over democracy that occurred during the nineteenth century.

Speaking on the capitalist inroads in democratic government already by the end of the Civil War, Rep. Elihu Washburne, interestingly a Republican lawyer from Illinois and the chairman of the U.S. House Commerce Committee, said, “I have no faith in the noisy patriotism of shoddy contractors and none in the men who in these times of trial and tribulation through which the country is passing are scheming and plotting to fill their own pockets while the nation is verging toward bankruptcy. The sublime and unselfish patriotism of our people, . . . a people suffering, bleeding, dying for their country, is in magnificent contrast to the flaunting counterfeit everywhere to be seen.” (13) Worse still were those contractors who had paid gold coins to gain public office only to engage their government in the service of their capitalist ventures. Of the “flaunting counterfeits” who would avoid government office, the richest would become the robber barons of the Gilded Age. Government would be theirs for the taking, such that holding office would no longer be necessary.

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1.      Henry W. Brands, American Colossus: The Triumph of Capitalism 1865-1900 (New York: Doubleday, 2010), p. 40.
2.      Ibid., p. 42.
3.      Ibid.
4.      Ibid.
5.      Ibid.
6.      Ibid., p. 44.
7.      Ibid., 48.
8.      Ibid., p. 45.
9.      Ibid., p. 47.
10.  Ibid., p. 49.
11.  Ibid., p. 49.
12.  Ross Baker, “Lincoln—Like All of Us—Had his Flaws,” USA Today, April 10, 2011 (on-line).
13.  Congressional Globe, 38th Congress, 1st session. June 21, 1864, 3150-152. Quoted by Brands, American Collosus, p. 48.

 

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Wednesday, April 6, 2011

On the Birth in 1869 of Corporate Social Responsibilty amid Excessive Corporate Power in Government

0 comments Posted by Find Insurance Online at 12:51 PM

Referring to the speculation in gold that was engineered by Jay Gould and others in 1869 to enrich themselves and the Erie Railroad, Henry Adams (1838-1918), a grandson of John Quincy Adams and great grandson of John Adams, wrote at the time:

“For the first time since the creation of these enormous corporate bodies, one of them has shown its power for mischief, and has proved itself able to override and trample on law, custom, decency, and every restraint known to society, without scruple, and as yet without check. The belief is common in America that the day is at hand when corporations far greater than the Erie [Railroad] — swaying power such as has never in the world’s history been trusted in the hands of mere private citizens  . . . — will ultimately succeed in directing government itself. Under the American form of society, there is now no authority capable of effective resistance.” (1)

Gould had wanted the price of gold to rise not only because he had bought some to sell at a higher price, but also because as a stockholder of the Erie, he would benefit from the railroad transporting more wheat from the Midwest to the east coast for export. A higher price in gold meant a lower dollar. Wheat being based in dollars, a lower dollar meant more exports. The strategy was essentially to devalue the dollar, which Gould assured President Grant would be in the national interest economically. As the price of gold rose to $165 in 1869, Grant, fearing a bubble, pulled the plug by having the Treasury sell $4million in gold.  The collapse in the gold market triggered a drop in the stock-market. Even if it might have been in the short term interest of the speculators and railroads, the manufactured bubble was not in the national interest after all. Gould’s bribes of administration officials had been in vain.

Henry Adams saw the imprint of corporate power eviscerating both societal norms and democracy in the scandal.  In other words, the new-found corporate power eventuated in the birth of the need for corporate social responsibility amid capitalism eclipsing democracy. In academic terms, corporate social responsibility and (corporate) business & government, although discrete fields, were both first publicly recognized in 1869.

The corporate power occasioning Adam’s recognition was a novelty at the time, according to Brands, because the large corporation had only come into being as the railroads incorporated in the 1850s. Looking back after the Civil War, Henry Adams observed, "The last ten years had given to the great mechanical energies — coal, iron, steam — a distinct superiority in power over the old industrial elements -- agriculture, handwork, and learning." (2)  The power of steam in particular translated into large, publicly-held, corporations first in the railroad industry.

On account of their size and scope, and the associated equity capital requirements given the risk faced by lenders, the railroads were the first large American corporations to be publicly traded. The diffusion of ownership — a consequence of the large capital demands — led to a separation of ownership from control and to a new ownership interest: that of the short-term-oriented speculator. A short-seller, for example, seeks lower corporate earnings in the future, while a long-term investor hopes for higher dividends, and thus profits. Managers can exploit this difference in order to pursue their interests in the name of the corporation at the expense of societal norms and democratic governance.

Undergirding the managerial basis in skill, the railroads were the first companies to develop the methods of corporate administration. For example, there were supervisors over supervisors—in other words, multilayered organizational charts. Furthermore, dovetailing with the need for safety and efficiency (given the competition), the railroads developed precise management of their operations, including the development of standards for measuring performance. In short, the railroads were the first to develop a cadre of managers specialized in administration in the particular industry. (3)

Regarding the private power based on technique (i.e., managerial power), Henry Adams announced in 1869 that there was no authority, whether in society or government, capable of resisting it. The normative call for corporate social responsibility and the political call for a resurgence of democracy amid the encroaching capitalism were born. In other words, with great power came a recognition of a need for great responsibility. The corporate social responsibility movement began as precisely this recognition even as the modern large corporation was in its second decade.

Punctum Saliens, the large corporate type of commercial organization itself is inherently powerful relative to societal norms and even potential governmental or regulatory restraints. That is to say, the invention of the large corporation may have been inherently problematic, essentially involving systemic risk to the republic itself on account of the private power of the managements. To paraphrase Nietzsche, power cannot be but powerful. To unleash an inherently powerful feeding machine and expect it not to eat the grass is naive, if not patently irresponsible. To expect the managements of extremely wealthy corporations to be willingly socially responsible when their economizing and power-aggrandizing nature is to run through such non-constraints is simply ideological, if not fanciful. Fundamentally, the problem with corporate management is its inherent proclivity to bristle at any external constraint. It is the underlying maximizing egoism that is innately antithetical to the limiting natures of government regulation and corporate social responsibility.

Footnotes:

1.      Henry Adams, “The New York Gold Conspiracy,” in Charles F. Adams, Jr. and Henry Adams, Chapters of Erie (Ithaca: Cornell University Press, 1956), pp. 135-36.
2.      Henry Adams, The Education of Henry Adams (1907; Boston: Houghton Mifflin, 1961), p. 238.  
3.      H. W. Brands, American Colossus: The Triumph of Capitalism 1865-1900 (New York: Doubleday, 2010), pp. 22-23.


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Wednesday, March 30, 2011

Mass Foreclosures as Fallout from Regulatory Capture: Banks in a Conflict of Interest at Treasury

0 comments Posted by Find Insurance Online at 11:34 AM

During the summer of 2010, the Obama administration unveiled a $1 billion program to offer loans to help the jobless pay their mortgages until they could find work again. Even as it was to take effect before the end of that year, by April of the next year the program had yet to accept one application. The New York Times avers that this “could be an epitaph for the administration’s broader foreclosure prevention effort, as tens of billions of dollars remain unspent and hundreds of thousands of homeowners have been rejected.” By April of 2011, the existence of the main program, the Home Assistance Modification Program, had become a target of the Republican-controlled U.S. House.  On March 29th, the House voted to end the foreclosure relief program. Even though the Democratic-controlled U.S. Senate vowed to pursue a rescue, even the Democrats there considered the program to be badly flawed. To be sure, the administration had failed to stem the wave of foreclosures.
There were 225,000 foreclosure filings in February of 2011, according to RealtyTrac. About 145,000 homeowners were in trial modifications under the Obama program. The New York Times adds that “an examination of federal documents and lawsuits, and interviews with legislators, state attorneys general, housing counselors, homeowners and regulators, reveal a federal mortgage modification program crippled by weak oversight, conflicts of interest, mind-numbing complexity and poor performance by many participating banks.” Lest we be consigned to accept the thesis that the executive branch is simply incompetent, we might take a look below the radar to the forces that had been actively working to enervate the administration’s attempt to deal with the foreclosures. “The banking industry fought us tooth and nail, and we ended up with a program that is failing homeowners,” said Representative Zoe Lofgren, a Democrat from California. In other words, the combination of “mind-numbing complexity and poor performance” by many of the banks and “weak oversight” of the government’s program may not be a coincidence.
Specifically, the paper reports that “(t)he companies that service mortgages, typically large banks, continually lose homeowner paperwork and incorrectly tell homeowners that they must be delinquent to qualify. Treasury officials have not fined any servicers, and the government-controlled company hired by the Treasury to oversee the program has expressed reluctance to crack down on banks.”  The behavior of the banks attests that the bankers do not want to help their borrowers facing foreclosure. I suspect the bankers, ignoring their own role in approving sub-prime mortgages, have been projecting the responsibility exclusively on to the less-knowledgeable mortgage holder. That Treasury officials had not fined any of these bankers for their foot-dragging points to possible influence of the banking lobby in the executive branch.  Treasury officials bowing to the banks, perhaps on the presumption that the bankers have superior information or maybe that ignoring their wishes could obstruct future job offers, evinces a conflict of interest because the banks are the regulated in this case.

That Treasury didn’t take more strident action at the expense of the banks when they were down suggests just how much influence the banks have in Washington. “The banks were so despised, and TARP was so front and center, you could have actually done something,” said Katherine M. Porter, a visiting law professor at Harvard. “In the midst of real boldness in bailing out the banks, we get this timid, soft, voluntary conditional program.” The New York Times adds that “Treasury officials argue that the mortgage program has kept more than half a million American homeowners out of foreclosure and has pressured banks to offer in-house modifications. These private modifications, however, typically offer terms significantly less favorable to homeowners than what the government program offers. . . . Michael S. Barr, who was a top Treasury official involved with the program, says  . . . ‘We tried to bring some order out of the chaos . . . Taxpayer money was only used for successful modifications. I think that was directionally the right thing to do.’” Directionality? Better said, taxpayer money was only used when  banks signed off on the modifications. This ignores the very real possibility that taxpayer money should go to homeowners even though their bankers are not willing to agree to a modification.

The justification for the expanded use the program is that bankers were indeed guilty of at least contributory negligence when they signed off on the bad mortgages.  Treasury should therefore not make taxpayer funding contingent on what the bankers are willing to accept in terms of modification. The government, rather than the bankers themselves, should be in charge of the modifications precisely because the bankers are one of the parties in the disputes and had been negligent in too many instances (the sub-primes).

That the Treasury department had not been willing to stand up to the banks results in this case in people losing their homes. There is perhaps nothing more personal than this, yet that government officials have apparently felt that limiting taxpayer money to modifications already agreed to by the banks is satisfactory nonetheless indicates just how sordid greed and the lust for more power can be.  Moreover, the fact that there have been so many foreclosures in the wake of the financial crisis of 2008 even as Wall Street banks received hundreds of billions in TARP and Federal Reserve funds while Treasury officials have restricted the use of taxpayer money for distressed homeowner is perhaps the clearest picture of the operative values among the elite in American society. Huge banks whose very existences connote being too big to fail (i.e., systemic risk) were saved so the financial system itself would not collapse. Meanwhile, millions of Americans lost their homes. 

The impact of the greed and its callous disregard for the basic human rights of the downtrodden was for society itself to be blind to the alternative of saving two birds with one infusion. That is, had the TARP and Fed Reserve funds have gone to homeowners in trouble, the mortgage-based securities would not have been toxic because the mortgage payments would have been made (also, the ARM feature of the subprime mortgages could have been reduced to decrease the payment increases to what is fair). With the securities no longer toxic, the banks’ balance sheets would not have been toxic. Hence those banks would not have needed TARP to avoid the risk of going bankrupt.  That we as a society overlooked this better solution without even debating it testifies to the clutching nature of greed among the elites. In short, the powerful took care of their contributors while not even considering that saving the little guy would also have sustained the political donors. In other words, our societal values are not optimal even from the standpoint of the best interest of Wall Street and Washington. The picture of Wall Street bankers getting near-record bonuses in 2010 as millions of homeowners faced foreclosure while their banks refused to modify in spite of having been part of the problem and the Treasury department stood back at the behest of the culpits should be a wake-up call to all of us.  

Click to add a Comment or Question (and View Posted Comments) on foreclosures, banks and the U.S. Treasury. 

Source: http://www.nytimes.com/2011/03/30/business/30foreclose.html?hp

 

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Thursday, March 17, 2011

An Ethical Meltdown in Japan: On the Toxicity of Tepco's Nuclear Power

0 comments Posted by Find Insurance Online at 5:35 AM

According to The Wall Street Journal, Japan’s largest power provider, Tokyo Electric Power Co. (Tepco), faced the biggest challenge of its 50-year-history in "recovering from the damage done to its nuclear facilities and power systems by a devastating earthquake and tsunami." The New York Times reported on March 17, 2011, that "foreign nuclear experts, the Japanese press and an increasingly angry and rattled Japanese public are frustrated by government and power company officials’ failure to communicate clearly and promptly about the nuclear crisis. Pointing to conflicting reports, ambiguous language and a constant refusal to confirm the most basic facts, they suspect officials of withholding or fudging crucial information about the risks posed by the ravaged Daiichi plant."

According to The Wall Street Journal, when Tepco said early in the morning of March 16th "that a fire had broken out at the Daiichi plant’s No. 4 reactor, a reporter naturally asked how the fire had begun, given that just the day before the company had reported putting out a fire at that same reactor. The executive’s answer: ‘We’ll check. . . . We don’t have information here,’ he explained. After about two hours, the Tepco epresentative had the information: Turned out the smoke was coming not from reactor No. 4, but from reactor No. 3. If Tepco’s information had been delayed and vague, the reporters’ response was quick and direct. ‘You guys have been saying something different each time!’ one shouted. ‘Don’t tell us things from your impression or thoughts, just tell us what’s going on. Your unclear answers are really confusing!’"

                Tepco executives leave one of the many press conferences held during the disaster in 2011

The Wall Street Journal reported that "the fire confusion followed Tepco’s failure to confirm that the water level in at least one of its fuel-rod storage pools had plummeted, which the media had started reporting citing government sources. Only after several hours, by which point it had started pumping in new water, did the company finally confirm that the level was low. . . . (W)hen the company changed its explanation of conditions at the reactor, one frustrated reporter said, ‘You guys think we’re ignorant [about nuclear operations] so you can make your explanation very vague, but we are not!’ The government may not be any more satisfied than the press is with Tepco’s disclosure practices. Local media reports say the prime minister scolded the company’s executives for not calling him after an explosion at the plant. He had to learn about it from the TV.” On March 20th, The New York Times reported that questions had arisen on whether Tepco executives had "waited too long before pumping seawater into the plant, a measure that would ruin a valuable investment."

Analysis:

Tepco evinces an ethical meltdown, which is to say, a toxic lack of credibility caused by a series of unethical actions long enough to be viewed as a pattern indicative of a sordid psychology. Secondarily, the company illustrates the dangers to Japan in the incestuous nature of Japanese business and government relations, otherwise known as amakudari, wherein regulators retire to better-paid jobs in the very industries they once policed. This system operates in private advantage at the expense of the Japanese people, whose fortitude and self-restraint in the wake of the earthquake and tsunami provide the world with an enduring model. Any residual resentment among descendants of the allies in World War II against the Japanese people must surely have melted away in the early spring of 2011 along with the last remaining dirty snow from the arduous albeit non-nuclear winter. In other words, the Japanese have the respect and admiration of the world, even if we are critical of the Japanese officials in business and government who have repeatedly forsaken the public good for their own private advantage. According to what Susum Hirakawa, a professor of psychology at Taisho University, told The New York Times on March 17th that the Japanese people were just as skeptical: “The mistrust of the government and Tepco was already there before the crisis, and people are even angrier now because of the inaccurate information they’re getting.” In other words, an ethical meltdown had occurred--its toxic radiation infecting the polite, patient people  just when the situation at the Daiichi plant was most dire.

The New York Times remarked on the Ides of March that “the confusion is emblematic of days of often contradictory reports about what is happening at the plant.” Tepco “cannot know for sure what is happening in many cases because it is too dangerous for workers to get close to some reactors.” With 750 workers evacuated, a skeleton crew of a mere 50 workers were stuggling “to keep hundreds of gallons of seawater a minute flowing through temporary fire pumps into the three stricken reactors, Nos. 1, 2 and 3, where overheated fuel rods continued to boil away the water at a brisk pace.” As the small crew of technicians braved radiation and fire, they “became the only people remaining at the Fukushima Daiichi Nuclear Power Station on [March 14th] — “and perhaps Japan’s last chance of preventing a broader nuclear catastrophe.” They could hardly be blamed for not being at the world’s beck and call for information; they were literally putting their lives at risk “to prevent full meltdowns that could throw thousands of tons of radioactive dust high into the air and imperil millions of their compatriots.”  That is, they were tasked with diverting a catastrophe and thus saving Japan (and perhaps even the American republics downwind). At the same time, were their bosses at a safe distance intentionally manipulating the data and delaying the use of seawater to save money and minimize blame, the verdict would be different in spite of their workload and stress at the time, especially given Tepco’s mixed track record when it comes to self-aggrandizing behavior (e.g., lying).

Contributing to the frustration were undoubtedly memories of Tepco’s checkered past with regard to being truthful with the public regarding safety precautions and even when the company had been culpable.  For example, The New York Times reports that in the summer of 2003, Tepco “was forced to close all 17 of its nuclear plants temporarily after admitting that it had faked safety reports for more than a decade.” Back in August of 2002, according to The Japan Times, MITI had “found evidence of falsified records from the late 1980s to early 1990s regarding cracks at Tepco's Kashiwazaki-Kariwa nuclear plant in Niigata Prefecture, and the No. 1 and No. 2 Fukushima nuclear plants in Fukushima Prefecture.” The Economy, Trade and Industry minister Takeo Hiranuma reacted to the news by telling reporters that “Tepco should take seriously the fact that it betrayed the people's confidence in nuclear power. . . . It is absolutely abominable that this incident caused the people's confidence to be largely lost in nuclear energy, which is a pillar of the nation's energy policy." More than being a pillar, nuclear energy is inherently so dangerous that that industry ought to be the last to tolerate fabrication—particularly on safety! In any industry, nothing undercuts credibility more than a series of lies, for the latter points to the involvement of sordid personalities that are tenaciously and notoriously intractable. For such a personality to be invested with power in the nuclear power industry is something the human race can ill afford. To the extent that the Japanese government has not pressured Tepco's board to replace upper management, and has even enabled Tepco by keeping accidents from the public, the government officials (and parties) should be held accountable. In short, the rest of the world was justified in holding the Japanese government, and ultimately the people, responsible for Tepco being allowed to continue in its furtive ways.

"Everything is a secret," said Kei Sugaoka, a former Tepco nuclear power plant engineer in Japan who has since moved to California. "There's not enough transparency in the industry." CBS News also reports that in 1989 Sugaoka had "received an order that horrified him: edit out footage showing cracks in plant steam pipes in video being submitted to regulators. Sugaoka alerted his superiors in the Tokyo Electric Power Co., but nothing happened -- for years. He decided to go public in 2000. Three Tepco executives lost their jobs." Even in spite of this belated (and all too rare) societally-induced accountability, company executives refused to allow the International Atomic Energy Association (IAEA) to conduct inspections after a 6.8 earthquake hit the nuclear plant at Nigata in July of 2007. Such a defensive stance could be expected from persons who lie to cut corners. It took the prefecture, or county, to insist that the inspection be done despite Tepco’s objection.

Actually, according to The Japan Times, “The government was initially reluctant to let the IAEA inspect the plant but changed its stance after receiving petitions from local officials eager for a third-party assessment to ease public concern over the safety of Japan's nuclear plants.” According to CBS News, the nuclear power industry in Japan has been "in a comfy relationship with government regulators often willing to overlook safety lapses." This is why the firing of the three top executives had undoubtedly been societally rather than governmentally induced. Had Tepco not gotten away with lying about its safety reports for years, the local officials urging the IAEA inspection (probably themselves pressured by worried citizens) might not have been so adamant that the prefecture intervene even if officials at that level were too cozy with Tepco.  

Therefore, the Japanese media and people had more than sufficient reason in the wake of the tsunami in March of 2011 to suspect that the dearth or confused nature of information from the plant nearing meltdown might have been more than confusion or unobtainability. The New York Times reported on March 17th that government officials were "almost completely reliant" on Tepco for information on the Daiichi plant. If the government officials need not have been reliant, they may have been guilty of mistaken, and perhaps even negligent complicity, or at least naivete, given Tepco's track-record in distorting and falsifying information submitted to the government. Tepco’s reputational capital had suffered such a meltdown by 2011 that even the mere possibility of subterfuge naturally claimed the high ground in the public’s eye; the record of lies had deprived the company of the benefit of the doubt, even as its employers were risking their very lives heroically to save Japan. Such is the severity of the toxicity of an ethical meltdown—even diverting a natural catastrophe and saving millions of people is not enough to undo it. Once credibility has been lost, it is extremely difficult to build it back up.  Even if expedient strategic choices seem convenient in the short term, they can be very costly in the long term.

Lest business practitioners around the world looking back at Tepco’s trajectory feel secure in complacency, knowing that their respective companies could not suffer a similar ethical meltdown because they have instituted codes of ethical conduct and ethical procedures, it should be pointed out that Tepco had instituted a rather sophisticated system in 2002. One might remember, moreover, the delegates’ discussion in the U.S. Constitutional Convention regarding the feebleness of mere parchment in holding power back when it is not checked against itself in a separation of power as interest pitted against interest. The mere existence of a corporate code of ethics and an “ethics line” in a company with a squalid corporate culture is no check on unethical conduct. In fact, the PR use of such an apparatus can actually enable sordid, narcissistic managers to be even more unethical because the window-dressing can absorb the slack. For a time, the public's perception of a company's commitment to "corporate citizenship" can act as a default having its own momentum in blocking recognition of the onslaught of unethical conduct. Unfortunately, unsavory executives know all too well how to take advantage of this sociological phenomenon of group-think. In the cas of Tepco, lies over decades had depleted any such PR from the company's organizational ethical-infrastructure. Accordingly, it made no difference to the frustrated people in Japan (and around the world) who instinctively doubted the executives’ willingness to deliver information rather than self-serving propaganda even in the face of a catastrophic nuclear meltdown. What kind of a person is that self-absorbed in such a context? Can a corporate code of ethics stand up to such a psychology?

Even if not intended as mere window-dressing, corporate ethical statements, procedures and organizational design are enervated or even impotent relative to a corporate culture formed by people all too comfortable taking the road easiest travelled when the travelling gets bumpy. According to TEPCO’s web-site, “In September 2002, TEPCO implemented countermeasures to guard against a reoccurrence of incidents with regard to inspection and maintenance operations at our nuclear power stations. At the same time, the Company announced four commitments in the interest of creating a ‘Corporate system and climate of individual responsibility and initiative.’ The actualization of the four commitments has been adopted as our social mission, and the entire Company is deeply involved in the effort.” This includes the following imperative, according to the company: “Disclose information on the management and operation of our nuclear power stations, so the public is able to confirm that our plants are being operated safely” and “Creating systems to ensure the observance of ethics.”
                            From Tepco’s web-site announcing the company's ethical system in 2002.

Tellingly, Tepco’s corporate ethical system, although organizational in design and formal extent, was to be geared to individual responsibility—meaning that individual employees should take responsibility for their actions; nothing is said about corporate responsibility—executives and the company spokespersons taking responsibility for corporate mistakes.  Moreover, as the company’s record attests, simply having a formal ethical code and a “social mission,” and even a formal intent to disclose even inconvenient information, does not necessarily have any actual bearing or impact in flesh and blood terms where motives at the moment are in line with power.  That is to say, the tendency to hide bad information from the public out of fear is real because it is felt, whereas the existence of something written down on plaque or in an organizational structure chart is mere parchment.  The challenge is to deal with the way top executives individually and as a group deal with fear and discomfort when the company itself screws up or performs badly, financially or otherwise, because they typically have the power to act in moments of crisis as they will. In the end, it may come down to the type of people that are hired (ultimately by the board of directors).  It is unlikely that a company with a bad habit of ethical slights can change without a wholesale change in management, at least at the top and middle levels, and in the people who have done the hiring for those levels.

Punctum saliens, it should not be presumed that the systemic risk of an ethical meltdown is only catastrophic in the case of nuclear energy. The additional examples of BP executives lying about safety and Lehman managers using Repo 105 to understate the bank’s debt and cost-based real estate valuations to essentially overstate the value of of the bank's real estate-based assets even after the real estate market had tanked strongly suggests that mankind entered a new era in the twenty-first century. Specifically, the wherewithal or puissance of big business to cause large-scale or systemic devastation from ethical meltdowns had arrived. Ultimately, beyond even the question of whether regulatory agencies have been captured by industries too big to fail, the human race is perhaps ready to confront the possibility that we have allowed private capital to reach such immense concentrations that its organizations can sport such inherently large and systemically-dangerous tasks as holding highly radioactive bars on the shore, drilling deep water wells going far beyond human reach, and inventing sophisticated toxic derivatives of unknown depth--the collapse of which possibly giving rise to the end of the global financial system “by Monday.” Has the human mind yet adjusted to, let alone comprehend, what catostrophic damage its elongated artificial arms can produce even without being fueled by the hydraulic fluid of ambition and greed? The sheer scale of mankind's modern ventures warrants much greater trepidation and humility than is the case, especially given the lessons that humanity is capable of learning from looking systemically at what occurred during September of 2008, April of 2010, and March of 2011. Lest we have faith in our written parchments to prevent ethical meltdowns as in such cases, we have only to look at the presumptuousness inherent in human nature to motivate us as a species to redouble our efforts to protect ourselves from ourselves by restraining our appetite for more, bigger, and larger. Plus haut, plus loin, plus fort! Sans fin? Vraiment?  Si oui, quel dommage pour nous . . . notre petite humanité. Parfois, moins est plus.

Click to add a Comment or Question (or View Posted Comments) on Tepco and the Japanese government.

Sources:

http://www.nytimes.com/2011/03/16/world/asia/16nuclear.html?pagewanted=1&sq=tokyo electric power company&st=cse&scp=6
Je déteste (I detest) untranslated quotes too. Here is an English translation of the sentences in French at the end of the essay: "Higher, farther, stronger! Without end? Really? If yes, too bad for us . . . our small human race (humanity). Sometimes, less is more."

FIN


 

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Thursday, March 10, 2011

The Volcker Rule: Taking in Water on Proprietary Trading

0 comments Posted by Find Insurance Online at 5:42 AM

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

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

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

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

 

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A Conflict of Interest at the New York Federal Reserve

0 comments Posted by Find Insurance Online at 3:26 AM

According to The New York Times, even after taxpayers rescued Citigroup, regulators at the New York Federal Reserve failed to monitor the company adequately. The regulators, although adequately staffed and proficient in training, failed to move swiftly as the bank’s financial condition deteriorated from as early as 2005, and were overly optimistic about the bank’s prospects as late as December, 2009. From 2006 to 2007, decisions on poorly underwritten loans were changed from “turned down” to “approved.” As many as 80 percent of the loans that Citigroup sold to Fannie Mae, Ginnie Mae and other investors were defective. “Although the dedicated supervisory team is well-qualified and generally has sound knowledge of the organization, there have been significant weaknesses in the execution of the supervisory program,” according to one excerpt of the 2009 review. Tim Geithner, who as president of the New York Fed from 2003 to 2008 was in charge of overseeing Citigroup, went on to become the US Secretary of the Treasury.

In questioning a panel testifying before the Financial Crisis Inquiry Commission on April 7, 2010, Brooksley E. Born, the former regulator in the Clinton administration who had lost the battle over derivatives regulation to Alan Greenspan, Robert Rubin, and Larry Summers, called on Greenspan in his testimony to defend his longtime deregulatory bent. “The Fed utterly failed to prevent the financial crisis,” she said. She went on to claim, “The Fed and the banking regulators failed to prevent the housing bubble. They failed to prevent the predatory lending scandal. They failed to prevent our biggest banks and bank holding companies from engaging in activities that would bring them to the verge of collapse without massive taxpayer bailouts… . Didn’t the Federal Reserve fail to meet its mandates, fail to meet it responsibilities?” Greenspan replied that there was a failure: an underestimation of the “state and extent” of financial risks and the ability of private counterparties to assess them, but he added that, “(t)he notion that somehow my views on regulation were predominant and effective at influencing the Congress is something you may have perceived,” he said. “But it didn’t look that way from my point of view.” However, according to other accounts, the trioka of Summers, Rubin and Greenspan had gone after Born for wanted to regulate the derivatives (see, for example, Sorkin’s Too Big To Fail). The three did indeed lobby Congress in an effort to sabatage Born’s proposal. Besides reporting this, Sorkin also points out that Citigroup’s CEO and its major stockholder were instrumental in getting Geithner appointed as President of the New York Fed. A coincidence with the overly optimistic view of the Fed’s regulators regarding Citi?

In questioning Robert Rubin on April 8th, Born (and other commissioners) asked why derivatives were kept unregulated. Rubin replied that the bankers were strongly opposed to such regulation, and they were able to effect their stand in Congress. Rubin did not go into the efforts of him, Summers and Greenspan to lobby Congress to keep the instruments unregulated; instead, he claimed that he favored regulating the derivatives even when he was at Goldman Sachs supervising the bank’s trading desk, and that when at Treasury he was merely concerned that regulating the instruments under the existing regulatory structure could cause delaying legal challenges. While Rubin’s frankness concerning the influence of the bankers in the US Government is useful, his testimony regarding himself seems less than forthcoming. Presumably he could have lobbied Congress as the Treasury Secretary for a new regulatory authority to regulate the derivatives on a solid legal basis. Instead, he lobbied against Born’s efforts to get the instruments regulated. He admitted that the financial sector would have been strongly opposed to such a regulatory authority. Also, he had been on the board of Citigroup and an executive at Goldman Sachs. The conflict of interest is too strong in his case for his asseverations that he had always acted in favor of regulating the instruments to be believable. His “worry of legal challenges” strikes me as a technical excuse that he was using as a subterfuge to “explain” his opposition to Born’s efforts to regulate the derivatives. Doubtless he could count on the American public and its media for not digging sufficiently to expose his duplicity. That is to say, it is likely that Rubin got away with protecting his ex-bank’s interests when he was Secretary of the Treasury and was strategically able to come off as having advocated the public interest all along. Hence, in general, the culpits were able to maintain their credibility and position themselves to be the officials we turn to to fix the problem.

The influence of the bankers in the halls of government (and its central bank) is perhaps the cause of the Fed’s deficiencies in regulating Citigroup (and in the Clinton Administration’s position against regulating the sub-prime mortgage derivative securities). In the case of the New York Fed, the board that appoints the NY Fed President consists of Wall Street bankers. There is a structural conflict of interest in having the regulated appoint the regulator. This structural conflict of interest manifested itself materially in the case of Tim Geithner and Citigroup. This is a textbook example of a conflict of interest, and yet it went under the radar screen. The focus in regulatory deficiency is typically instead on whether the regulators are sufficiently staffed and trained, and perhaps on whether they are relying too much on information from the regulatees. The more basic structural conflicts of interest are rarely made transparent, yet we will continue to see regulatory “deficiencies” manifest from them unless structural or institutional reforms are made. I am continually amazed at how such glaring institutional conflicts of interest are ignored by the public and the media. I would expect the politicians and the business practioners to try to keep it hush hush, but the inability of the American people to grasp the problem confounds my attempt to explain it.

Sources: http://www.nytimes.com/2010/04/08/business/08panel.html?ref=us ; CSPAN.

 

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The Banking Lobby Amid Goldman Sachs' Culpability: A Danger to the Republic?

0 comments Posted by Find Insurance Online at 3:18 AM

To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

Given the strength of the financial sector’s lobby in Washington, this case involving Goldman suggests that we, the American electorate, were unwittingly putting our financial system and our republics in danger by enabling the lobby to have such effect in watering down the regulatory reform in the wake of the financial crisis of 2008.

In the election cycle in which the US Senate’s agricultural committee took up legislation that would regulate all derivatives (2010), people and organizations affiliated with financial, insurance and real estate companies gave members of the committee $22.8 million. Wall Street firms raised $60,000 at two fund-raisers for the committee’s chair’s re-election campaign in the cycle before the committee took up the legislation. Many of the chairs constituents want a crackdown on the speculation. This put Blanche Lincoln in a difficult situation, ethically speaking. At the very least, accepting money from the firms that would be subject to the legislation involves the appearance of a conflict of interest. I contend that given human nature, even such an appearance ought to be avoided or even outlawed. At the very least, it is unseemly in a republic, and I would argue dangerous to its viability.

Furthermore, as if the banks’ culpibility in the crisis was not sufficient to cancel their reservations at the regulatory table, the Goldman case strongly suggests that the banks ought not to be trusted as contributors to regulatory reform. And yet they push ahead to reduce the regulatation, in spite of it all. A child who drops his milkshake doesn’t turn around and tell his mother that she better not clean it up and that she had better not get involved if it happens again. Rather, such a child stands back. As if there is not enough of a natural feeling of shame at having made a mess, there is, or ought naturally to be, an even greater sense of shame in presuming to be in a position to direct the clean-up according to one’s self-interest over objections that the person who caused the problem is not the one best suited to fix it. Even if corporations can enjoy the legal fiction of personhood, there are actual human beings running them, and it is telling when those people dismiss their innate shame in their presumption–even pretending that it is not presumption! We are to blame in not calling them on it, and relegating them. We must relegate them if they won’t do it for themselves, as would be natural for them to do. In other words, we ought to call the artiface for what it is and relegate it as a parent would naturally tell a spoiled and misbehaving yet dogmatic child to go to his room. We, the American people, are enablers; bad parents. We ought to look toward solving the bigger problem, which the case of the Goldman children intimates.

The theory of regulatory capture points to the government’s need for information that the industry being regulated can provide. This theory ignores the broader power-base that an industry is apt to have in lobbying the government (and supporting candidates). In other words, information is just small change from the standpoint of an industry’s ability to influence a government. A better theory would have its primary focus on the macro level, asking the question, in effect, whether (and how) a republic is compromised by its moneyed corporations and banks. Besides looking at campaign finance law and uncovering actual lobbying practices, we ought to look at how much the society in question values money, commerical gain, wealth and economic freedom. We ought not be limited to the managerial or technocrat perspective in ascertaining whether our financial system and indeed our very republics are in danger from being used by unscrupulous firms or industies according to that which fits their peoples’ desires. Once we have uncovered the real problem, we really won’t have any excuse for not fixing it, and we would be bad parents indeed if we let the children fix it.

Sources:
http://washingtonindependent.com/82571/sec-charges-goldman-sachs-over-subprime-tied-product  http://opinionator.blogs.nytimes.com/2010/04/16/goldmans-stacked-bet/?ref=opinion
http://money.cnn.com/2010/04/16/news/companies/sec.goldman.fortune/index.htm?postversion=2010041616 ; http://money.cnn.com/2010/04/16/news/companies/goldman_sachs_questions.fortune/index.htm?postversion=2010041615 ; http://www.nytimes.com/2010/04/20/business/20derivatives.html?hp
http://www.nytimes.com/2010/04/25/business/25goldman.html?ref=us

 

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Wednesday, March 9, 2011

Was Goldman Sachs Really Politically Impotent amid Public Scrutiny in the Wake of the Financial Crisis?

0 comments Posted by Find Insurance Online at 4:47 AM

If the American financial houses on Wall Street are among the most powerful forces in American politics-- powers, as it were, behind the throne--does it make sense that the strongest bank would be politically impotent?  In other words, can a public blemish nullify the power of all that capital?

According to The New York Times, Goldman Sachs employs perhaps the country’s most well-connected stable of Washington lobbyists, and it spent $2.8 million [in 2009] to bend the ear of federal officials and lawmakers. Goldman executives and its political action committee gavve more than $24 million to federal candidates in the first decade of the twenty-first century, including nearly $1 million to Obama’s 2008 presidential campaign. Even so, the pounding in the media that Goldman Sachs took in April, 2010 left it sidelined — at least in public — as Congress moved toward a decision that could reshape the very industry it rules.  In particular, the SEC filing of charges and eleven hours of grueling testimony before Sen. Levin’s Investigations Committee left the bank a lobbyist persona non grata, if only for a day.  However, even then, the reality behind the scenes was doubtlessly very different.  Even as politicians publicly vilified the bank, they were picking up lucrative campaign contributions sourced in the bank, even if through intermediaries; any large scale electorate is notoriously bad at tracing links.  To be sure, The New York Times was reporting that Goldman Sachs was trying to find a way to influence the debate, even if it could not play as visible a role as it otherwise could have.

Goldman Sachs managers declined to comment the day after the hearing before Carl Levin's committee at the U.S. Senate. The question that the bankers were refusing to answer was on the impact that the bank's legal and public relations troubles were having on its Washington lobbying operations. Even so, one person briefed on its plans spoke on condition of anonymity because of the firm’s continuing legal and political troubles. He or she said it was still trying to push its agenda. The New York Times reported that according to industry officials, the bank had been “largely relying on trade groups, like the Securities Industry and Financial Markets Association. However, this could have been a smoke screen. The real deals could have been made behind closed doors, even by industry standards.  According to the paper, “More often, the firm — whose lobbyists and outside lawyers include such Washington luminaries as Richard A. Gephardt, the former House majority leader, and Ken Duberstein, the former Reagan administration official — has relied largely on intermediaries because politicians are worried about being associated with it, government and industry officials said.”  Members of Congress were worried about public association, but willing to be influenced through intermediaries. Therefore, even though Sen. Blanche Lincoln, who was in a tight race at the time, canceled a fund-raiser at the bank’s New York offices after the SEC filed its lawsuit, I would not be surprised that she accepted contributions by an intermediary.

Most voters are too far away from Washington to get the real scoop, and journalists who want to continue with their career are not apt to dig too deep. We are left with the surface, and can only guess as to the subterranean dynamics.  It seems to me that traces of the underground rumblings can be discerned in lines such as “at least in public.”  We are left wondering how deep the wells of gold run.  Perhaps only the goldman knows.  The actuality can be far different than appearances.  If possible, a study on the real influence of Wall Street in Washington would be very helpful. For this reason, it is apt to be a difficult task with many self-interested obstacles.  In any case, we ought not be so incredulous as to rest on the public appearances. Even as Lloyd Blankfein was testifying, senators turned increasingly friendly to him–with the exception of Carl Levin and perhaps John McCain.  The Democratic side in particular almost made excuses for the CEO, saying that any number of firms should be there with him. Those senators had given their soundbites to be picked up at home; it was time to make sure they were not cutting off one of the ruddy fat hands that feeds them. This expression comes from Nietzsche’s description of businessmen and their propensity to overreach. 

To be sure, Nietzsche is no advocate of modern morality; he viewed it as a defense of weakness.  Weakness cannot be other than weakness, he writes. So too, strength, he writes, cannot be other than strong.  So I contend that we ought to take reports of the political impotence of Goldman Sachs with a rather large grain of salt (or gold, in this case).  He or she who has the gold makes the rules. There is no natural law stating that this process must be transparent.  My question is: can we, the American public, get to it, or does the well of gold run too deep for our patience and perseverance?

Source: http://www.nytimes.com/2010/04/29/business/29lobby.html

 

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A Critique of the Corporate Legal Persons Doctrine: The Case of Corporate Taxation

0 comments Posted by Find Insurance Online at 4:30 AM

In his commentary in The Wall Street Journal  on May 6, 2010, Michael Boskin went over the disadvantages in levying an income tax on corporations. Within his argument, he observes, “Of course, the corporation is a legal entity; only people pay taxes.”  In so doing, he transcends, if only for a moment, his own approach that is oriented to pros and cons.  His observation is significant, and it gives us a launching pad of sorts by which we can approach the corporate income tax as a phenomenon (rather than simply assessing its utility).  To be sure, utility or the lack thereof can lead us to this level.  For example, double taxation (i.e., taxation of a corporation’s earnings, and then of dividends on investors’ incomes) suggests that only people should pay tax.  Treating a “legal entity” as if it were a tax-payer is unnatural, and thus gives rise to the double taxation problem.  It is interesting that Boskin uses the word “entity,” which is not the same as “person.”  That is, to argue that corporations should not be taxed directly, he seems to assume that he needs to deny the legal person doctrine.  To be sure, it would be harder to argue that human rather than only legal persons should be taxed; to treat corporations as entities expands the distinction and thus is more permitting of Boskin’s argument.

I contend that Boskin was correct in referring to corporations as legal entities.  To treat or consider a corporation as a person in any sense is to anthropomorphise an abstraction.  Put another way, an association of human beings does not constitute in itself a person even writ large. To presume otherwise is to make a category mistake.  This error is evident when someone says, “GM says X,” or “Ford is doing Y.”  Only human beings can talk (at least in a human language).  Furthermore, an organization does not “do” things; rather, people within it are the agents.  So too, an organization cannot be a moral agent.  This statements might as be ignored, for all the sloppy anthropomorphism going on. It is no wonder that corporations are typically regarded as taxpayers.  As long as we limit our arguments to pros and cons (i.e., utility), we will miss our deeper errors or category mistakes.  Even if such faults are covered over by societal blind spots, the errors are nonetheless errors.

 

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Regulatory Capture Realized: The Oil Industry and the MMS Regulatory Agency

0 comments Posted by Find Insurance Online at 3:50 AM

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

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

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

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

 

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Tuesday, March 8, 2011

Business & Society: BP Clipped Societal Norms

0 comments Posted by Find Insurance Online at 6:24 AM


In Senate testamony on May 11th, 2010,  the three companies did their best to point the finger at each other, with the result that neither BP, Transocean or Halliburton would admit, undoubtedly for liability purposes, any contributory role. In the midst of such liability evasion, those of us in the wider society want to get to the bottom of the accident so future such accidents can be prevented. In pointing the finger at the other guy while ignoring one’s own role, the managers of the three companies are added insult to injury.  The BP executive did not mention that several days before the explosion on the Deepwater Horizon oil rig, BP officials chose, partly for financial reasons, to use a type of casing for the well that the company knew was the riskier of two options, according to a BP document. Specifically, BP managers opted for a “long string” pipe for the well rather than a liner tieback that would have cost $7 million to $10 million but would have added barriers to prevent gas from reaching the surface.  BP managers were not unaware of this risk. The concern with the method BP chose, the document said, was that if the cement around the casing pipe did not seal properly, gases could leak all the way to the wellhead, where only a single seal would serve as a barrier. As another instance of cutting corners to save time and money, BP engineers used just six “centralizers,” rather than twenty-one as recommended by Halliburton, to stabilize the well before cementing it. According to an April 16, 2010 email from BP’s well team leader, the problem was that the extra centralizers would have taken ten hours to install. Another official wrote of the decision: “Who cares, it’s done, end of story, will probably be fine.”   BP managers also decided not to take twelve hours to completely circulate the heavy drilling fluid in the well that would have enabled detection and removal of any leaking gas. BP also skipped a test to determine if the cement had properly bonded to the well and rock formations. A petroleum engineer independent of BP told a congressional committee that the decision was “horribly negligent.”



Workers from the rig and company officials said that hours before the explosion, gases were leaking through the cement, which had been set in place by the oil services contractor, Halliburton, which Dick Cheney once ran. But it was not merely the casing and cement that were problematic. On 60 Minutes on May 16, 2010, a worker who was on the rig when the accident happened spoke of a BP manager overruling a Transocean manager to cut corners, such as beginning to drain the pressure fluid from the well before the third “cork” was installed.  The methane was able to reach the rig’s engines because there was insufficient pressure to keep the gas down in the well.  Also, a BP manager had earlier ignored the worker’s warning that there were shreds of rubber coming up in the drilling–the rubber being from the device that was supposed to take pressure readings (e.g., whether there is gas in the well).  Nevertheless, the BP manager who testified before the Senate blamed Transocean and Halliburton managers, and on the morning after the 60 Minutes interview BP’s COO said he was just focused on the clean-up and knew nothing of such “details” even though his specialty was in development and exploration. Both in cutting corners and in ignoring his job description, BP’s COO demonstrates a willful disregard for societal norms wherein society itself is protected and accountability is accepted.  Sadly, this attitude is not uncommon in the business world.

Perhaps as business operations expand in businesses too big to fail, the societal dangers in the attitude are magnified because more damage can result. In other words, it becomes increasingly dangerous to a society to allow such an attitude to exist.  Where societal norms are ignored by business managers, perhaps the societal norm that allows for their authority should be rescinded as well. This is a social contract reading of society, wherein if one side of the norms are broken, the other side is deemed invalid as well.  The problem is that social contracts unravel rather slowly or incrementally, such that a dangerous attitude can be allowed to remain in a position of authority.  It is worth investigating whether violating societal norms is actually detrimental to a company’s bottom line. 

To the extent that a social contract has a certain inertia, it may be that the bottom line can survive long enough to allow the attitude to survive and perhaps even prosper.   These matters are distinct from questions of justification, which lie in the field of business ethics, and from those of whether more government regulation is needed, which lie in the field of business and government. We can define corporate social responsibility as meeting the general expectation in a society that people admit to their wrong-doing or mistakes and make amends.  This is different from the ethical question of whether people should admit to their wrong-doing or mistakes and if so why.  It is also distinct from the question of the proper relationship between business and government.  Business and society involves the relationship of business interest and societal norms.  To treat the latter (or the former, for that matter) as ethical requires ethical justification, which is more than simply aligning business and societal norms.  In other words, a societal norm is not in itself ethically justifying (consider Nazi Germany as a case in point).  With these distinctions in mind, I turn now to the field of business and society.

I contend that the people at BP (and Halliburton) admitting to their role and paying for economic damages incurred by third parties would be more important than BP’s charitable giving, even if some people in the wider society may have let BP off the hook for the accident if the company’s managers had decided to announce a new philanthropical project unrelated to the accident. Working on another society problem does not make up for having not admitted to BP managers' negligence.  Culpability, on other words. cannot be obviated or transferred so easily.

Too often, business managers use the term “responsibility” even as they are evading it for financial reasons. BP initially estimated the daily output of the leaks at between one and fourteen thousand barrels a day; BP picked the low end-point because the amount of fines the company would pay was tied to the volume. That the company managers were misleading the wider society didn’t seem to factor into their financial decision. As a result, the anticipated damage to the Gulf (and the world) was not sufficiently appreciated in the wider society. The convenient use of  the term “responsibility” can be gleemed from the Senate testamony of Lamar McKay of BP.  “As a responsible party under the Oil Pollution Act,” he said, ”we will carry out our responsibilities.” But he quickly added that Transocean “had responsibility for the safety of the drilling operations.”  That is to say, he acknowledged the obligation to be responsible for his mistakes while conveniently ignoring the mistakes made at his company. By pointing the finger at people at another company, McKay was contradicting his own asseveration on being responsible.  It is like he was lying even as he insisted that people shouldn’t lie.

Pointing the finger is childish, even if it is done for financial reasons. Steven L. Newman, president and chief executive of Transocean, did no better that the BP executive when he said that the accident had to have arisen from elements of the work done by other companies. “Were all appropriate tests run on the cement and the casing?” he asked, apparently implicating Halliburton. Tim Probert of Halliburton said in turn that all work on the casing by his company was carried out “as directed by the well owner,” meaning BP.  Suggesting that the men act like adults and take responsibility for what their coworkers had done (or failed to d0), the ranking Republican minority member on the Senate Energy and Natural Resources Committee, Lisa Murkowski of Alaska, told them to stop the finger-pointing. “I would suggest to all three of you that we are all in this together,” she said. Notice that she is pointing to a societal norm, rather than using an ethical rationale. She is essentially asking the executives to step up to societal standards. Unfortunately, there was no sign that the three boys would take responsibility for their actions, as they continued on, still oriented to the other guy.  The cost to society includes a more difficult route to uncovering the cause of the accident and possible accidents to come from BP. The company’s clean-up efforts do not address the cause of the accident; the spending does not go far enough. In other words, BP can’t spend its way out of it…or can it?  Are there societal norms that allow it to suffice?  My question is this: why hasn’t the social contract unravelled that has allowed the managers at BP to continue to hold their jobs (and BP to remain in business)?  Is economic liberty at play here–society saying that there is room in such liberty for a shirking attitude?

Sources:
http://www.nytimes.com/2010/05/27/us/27rig.html?hpl
“Congress Says BP Crew Focused on Costs,” The Wall Street Journal,  June 15, 2010, p. A5.

 

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