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Thursday, December 22, 2011

Leadership vs. Management: Change vs. Constancy?

In the "leadership vs. management" dichotomy, "management focuses on getting work done on time, on budget, and on target--in other words, steady execution and control--while leadership focuses on change and innovation." However, this contrast of implementation and innovation is a different dichotomy. Abstractly speaking, a category mistake may be involved in this false dichotomy. Change would be occurring in the execution of an innovative vision. In the realm of change alone, formulating and selling it can be distinguished from making the change. Therefore, the “leadership vs. management” distinction does not reduce to “change vs. status quo."

Material from this essay has been incorporated into The Essence of Leadership: A Cross-Cultural Foundation, which is available in print and as an ebook at Amazon. 

Thursday, December 15, 2011

Leadership in Europe: A Recipe for Reducing Legal Uncertainty

Concerning the legal environment of business, the lawyers who teach as full-time instructors in American business schools affirm that managers would rather have a challenging environment that they know than one that is characterized by headlines such as, “Legal Uncertainty Imperils EU Agreement.” At the E.U.’s parliament, which represents the E.U.’s citizens, the president of the European Council, Herman Van Rompuy, said in the wake of the agreement, “An intergovernmental treaty was not my first preference, nor that of . . . most of the member states . . . It will not be easy, also legally speaking. I count on everybody to be constructive, bearing in mind what is at stake.” Meanwhile, the Wall Street Journal was also reporting that investors were “largely dismissive” of the Council meeting  at which the extra-E.U. agreement on strengthening the enforcement mechanism of state deficit and debt limits had been reached at the end of the previous week. Alan Brown, chief investment officer at Schroders Investment Management, which had at the time almost $300 billion under management, said of the results of the Council meeting, “Yes, it was what I expected, and yes, I was disappointed.” Schroders was backing up this view with a modest bet against the euro. Relatedly, Barclays was forecasting the currency to fall from $1.30 on December 13, 2011 to $1.25 by June 2012. Besides the pessimism on the “intergovernmental treaty” as well as a possible increase of funds from the $500 billion cap on the agenda at a Council meeting in March 2012, the sheer uncertainty described by Van Rompuy lowers the value of the announced agreement and the outlook concerning the viability of the euro as well as the E.U. itself.



              Federalismus in Action: Jose Barosso of the E.U. Commission and Angela Merkel of Germany / NYT

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Monday, December 12, 2011

The Visible Hand: Markets Forging a Stronger E.U.

Joschka Fischer, a former foreign minister of the state of Germany, said the agreement under which 17 state governments accept more oversight and control of their budgets by the European Union “was a big step, which was pushed on the Europeans by the markets.” Such pressure was necessary, given the conflict of interest bearing on state officials working at the federal level on a deal that would add a new competency to the E.U. “(I)n the end,” Fischer added, “the markets have limited the options of the political leaders, especially of Merkel, and pushed her into giving more support for the euro.” Giving more support for the euro meant giving more power to the E.U. at the expense of the state-level where Merkel has most of her power. From this vantage point (i.e., the power that state officials have at the E.U. level), it is amazing that the E.U. has been able to acquire any additional competencies.


The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Monday, December 5, 2011

The Democracy Deficit in Nominating Presidential Candidates

“Newt Gingrich is up, Herman Cain is out, and the attacks are getting sharper as the GOP primary campaign enters the final month.” The final month, that is, before “Iowa launches the contests that will choose the challenger to President Obama.” This has the ring of before time began, or before the beginning. That anything is decided before the beginning may seem metaphysically impossible even if it applies politically. One might demur, claiming that anything without a foundation ought not to be able to exist, let alone to stand. Can Americans borrow anything from the E.U.'s presidents that might improve how the U.S. president is selected?

The full essay is at Essays on Two Federal Empires.


Sunday, December 4, 2011

A Dilemma for the E.U.: A Convention or an Amendment?

In November 2011, European leaders began to talk about amendments to the E.U. that would “change the fundamental structure of the union.” Complicating the talks was ambiguity concerning the nature of the E.U. itself at the time. Foremost among the changes being discussed was the idea of a form of centralized oversight of the budgets of the state governments, with “sanctions for the profligate.” The existing E.U., while more than the American Articles of Confederation, was at the time found to be insufficient in keeping the debt crisis from spreading from state to state and engulfing the union itself and its currency. “The survival of the euro zone is in play,” one senior European official said. “So far it’s been too little, too late.” In this respect, the pressure for “ever closer union” was like that facing the Americans in the mid-1780s. Because the nature of the union was itself an issue, a convention composed of delegates—not state officials—directly elected by the people for the purpose might seem best suited. However, I contend that while rethinking the E.U. was not without merit at the time, the specificity of the planned amendment argues against the idea.


Thursday, December 1, 2011

Decadent Management: Burger King Dethroned

When a major company like Borders or Pan American declares it is going out of business—bankruptcy being all too often just a way to force creditors and unions to renegotiate—the public is often stunned. Indeed even a week before such an announcement, managers can assure customers under the veneer of an expressionless face or even a comforting smile—that the company is focused on “driving strong expansion in its many markets around the world” and will “strongly position” its brand. Driving expansion? Strongly positioning? An astute person will instinctively detect the scripted, vacuous jargon as the patina of a rather strange, if conformist, mentality that presumes to invent or misuse words with impunity, as if from a superior position in society. The quoted expressions are from Miguel Piedra, a spokesperson of Burger King, reported in a Wall Street Journal piece on Wendy’s being “positioned” to replace “the King” as number two in sales. If Piedra’s bureaucratic response is not enough of a red-flag, a visit to a Burger King restaurant might give the impression of a company that—absent the cushions of name recognition and capital—is on the verge of going out of business.

The full essay is in The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available at Amazon.com.

Tuesday, November 29, 2011

An American President Meets the E.U.: Corrective Exigencies of a Debt Crisis

Political protocol can take some time to catch up to changed political realities. For over two hundred years, it has been assumed that U.S. presidents have met with their counterparts in E.U. states such as Britain, France, and Germany. During the European debt crisis, the New York Times reported, “in numerous private conversations and increasingly forceful public statements, [American] policy makers are urging their European counterparts to take big steps and move fast to reassure markets.” It was undoubtedly assumed that the counterparts were at the state level in the E.U., rather than in E.U. governmental institutions. So how are we to situate Barak Obama’s meeting on November 27, 2011 with José Manuel Barroso, president of the European Commission; Herman Van Rompuy, president of the European Council; and Catherine Ashton, the European foreign policy chief? 

                                                                   Doug Mills/NYT


Monday, November 21, 2011

The African Customs Unions and the E.U.: On Currencies

The East African Community (EAC) is Africa’s “most advanced regional trade bloc,” according to the Wall Street Journal. As of the journal’s report in late 2011, the EAC was already a customs union that guaranteed the movement of goods and the right to work across Kenya, Uganda, Rwanda, Burundi and Tanzania. The parliaments were working at the time on synchronizing immigration and tariff laws. “We want to develop this corridor vigorously and collectively,” Mugo Kibati, director of a Kenyan government program, said. The journal notes, however, that the EAC and other trading blocs in Africa, such as the Southern African Development Community, were “backing away from one prominent aspect of Europe’s economic union: a common currency.” Aside from any vague similarities that the fiscal differences between Greece and Germany may have to those between Zimbabwe and South Africa, the currency question itself is out of place for a NAFTA-like trade agreement.


The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Should the E.U. Represent Its States at the UN?

In 2010, it was proposed that the E.U. have an increased role at the UN in order to boost Europe’s profile as major player at the international level. One proposal would have given the E.U. the powers enjoyed by fully-fledged UN members, such as the right to make proposals and submit amendments, the right of reply, the right to raise points of order and the right to circulate documents. While there is no demand in the draft for a more prominent seating position for the EU, it was possible that the E.U. could have been moved to the center of the UN’s assembly chamber. Wherever the E.U. would have been situated, additional seats alongside a new European UN ambassador would have been made available for High Representative Catherine Ashton, the E.U. Foreign Minister, and her staff. Experts believed at the time of the proposal that such a role for the E.U. in the General Assembly would not significantly enhance the E.U.’s ability to influence policy at a UN level; instead, the proposal would have provided an opportunity for the E.U. to portray itself as a unified power on the international stage.
 

The complete essay is at Essays on Two Federal Empires.

Saturday, November 19, 2011

On the Role of the European Central Bank in Ending the Debt Contagion

According to the Wall Street Journal, “That the [ECB] has been forced to step into the power vacuum left by a fractious political class underscores the increasing centrifugal forces unleashed by the debt crisis.” Yet that pressure was being applied to the central bank to issue Eurobonds and buy more state government bonds in spite of the objections of German officials suggests that there were also centripetal forces acting on the center at the expense of the state capitals, even Berlin. It is important to view the E.U.’s “management” of its debt crisis through the prism of the history of European integration since the Shuman Plan in 1951, which called for ever closer union so as to obviate war and give Europe a stronger economic and diplomatic power in the world. The history of the European project can be characterized as a series of fits and starts, punctuated by momentary crises—each proffering potential ruin to the union itself. For example, France’s veto of Britain’s accession as a state must surely have struck some people as portending the end of the EC—the forerunner to the E.U. Yet from the vantage point of 2011, the conduct of the accession seems a mere hiccup on a much longer road of hills and valleys. Regarding the extent of integration by 2011 (e.g., monetary union), the question is whether European efforts to come to grips with the contagion of over-burdened state debt signify merely another valley, or an inherent contradiction or fault-line in the E.U. itself. Whatever the answer, the outcome will no doubt come about incrementally, as one might expect from E.U. history.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Tuesday, November 15, 2011

The Market Mechanism: Complicit in E.U. Debt Crisis

According to the New York Times, “How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.” In going through these culprits and how they interrelated, it should not be lost that the market mechanism itself can be held as suspect, for at the very least it enabled the furtive games to be played for far too long. Indeed, the market itself did not do a good job for years in providing accurate risk-return relationships.

The full essay is in, "Essays on the E.U. Political Economy," available at Amazon. 


Monday, November 14, 2011

Monti and Papadernos in the E.U.: Leadership in Technical Expertise or Democratic Deficit?

“The moment of truth has come.” This was said by the head of state of the E.U.’s third largest state, Italy, in a televised address just after Berlusconi had resigned as the prime minister. Although the statement could be interpreted as referring to the need to reign in the Italian profligate system of public-sector patronage (which includes private contractors), Giorgio Napolitano could also have been referring to the credibility of his state at the E.U. level. “We need to restore confidence with investors and European institutions,” he continued before turning to the more tangible point that the state would need to refinance nearly 200 billion euros in government bonds before May, 2012.



                             Monti and Barroso                                    John Thys/Agence France-Presse/Getty

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Thursday, November 10, 2011

Industry Self-Regulation: Too Idealistic for Futures

At the time of MF Global’s collapse amid hundreds of millions of dollars in lost customer funds, commodities and futures trading had for decades been “largely policed by the exchanges where they trade, setting up a potential conflict of interest,” according to the New York Times. The paper continues by pointing out that those exchanges, including profit-making companies such as CME Group, the parent company of the Chicago and New York Mercantile Exchanges and the clearing house used by MF Global, “oversee the very futures firms they rely on for business.” The Times refers to this conflict of interest as one centered on industry self-regulation. 
 
The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

The Essence of Leadership

According to DePree (1989, p.19), the first responsibility of a leader is to define reality. This might seem metaphysically esoteric, but I believe DePree hit the nail on the head. Even though far less has been written in leadership research about the importance of viewing reality and interpreting it than about traits, styles and situational factors, defining reality is the fundamental task distinguishing leadership as a phenomenon (Caldwell, Bischoff & Karri, 2002, p. 153).

 Material from this essay has been incorporated into The Essence of Leadership: A Cross-Cultural Foundation, which is available in print and as an ebook at Amazon. 


Sources:

Caldwell, C, S.J. Bischoff, and R. Karri: 2002, “The Four Umpires: A Paradigm for Ethical Leadership,” Journal of Business Ethics 36, 153-163.
De Pree, M.: 1989, Leadership Is an Art (Doubleday: NY).

Tuesday, November 8, 2011

Greco-Roman Achilles’ Heel: Democracy or Leadership?

In assessing the abilities of the E.U. states of Greece and Italy to manage their respective debt-loads as expected by E.U. leaders, the impacts from the governance systems can be distinguished from the impact from compromised or failed leadership. In general terms, a forceful, visionary leader can leverage an existing governance system to “produce.” However, it is also true that a faulty system can make transformational leadership difficult if not nearly impossible.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.


Monday, November 7, 2011

Greece & Italy: Undercutting Market Confidence in the E.U.

As a federal system, the E.U. can be expected to contain a certain amount of economic disparity. The state bond yields in October 2011, for example, were—one could say—“diversified.” Investors relishing high risk-return could partake in Greek bonds while retired investors could safely stick to the German variety. A healthy federal system proffers something for nearly every taste, while constraining the outliers for the sake of unity.


The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Sunday, November 6, 2011

On the E.U. Debt Crisis: Lessons from the Early U.S.

In the March 2, 2010 issue of the New York Times, Roger Cohen illustrates how useful EU-US comparisons can be. He is careful to compare the E.U. of his time not to the contemporaneous U.S., but, rather, to it a few decades into its founding. In other words, he corrects for the impact of time on political development. This is not to say that the E.U. in 2010 was akin to the U.S. under its Articles of Confederation. The Articles treaty evinced far less integration politically and economically. For example, whereas the Articles sported only a common council of delegates from the states, the E.U. in 2010 had a presidency (the European Council, whose president was Van Rompuy), an executive branch (the E.U. Commission, whose chief executive was Barroso), a bicameral legislature (the E.U. Council (of Ministers) and the E.U. Parliament), and a supreme court (the European Court of Justice, or ECJ). In fact, whereas under the Articles the American republics held governmental sovereignty, the ECJ held in 1963 and again in 1964 that E.U. law is supreme over state law and state constitutions. In short, whereas the Articles did not split the atom of governmental sovereignty, the E.U. in 2010 was a federal system of dual sovereignty. Like that of the U.S., the E.U.'s federal system is itself on the empire level; its republics being commensurate with the early modern kingdoms.


The complete essay is at Essays on Two Federal Empires.

Friday, November 4, 2011

GlaxoSmithKline: Born Again Ethically?

GlaxoSmithKline, a drug company based in the E.U., agreed in 2011 to pay $3 billion to settle the U.S. Government’s civil and criminal investigations into the company’s Medicaid pricing practices and sales practices, including illegal marketing of Avandia, the diabetes drug linked to coronary problems. The settlement amount surpassed the previous record of $2.3 billion paid by Pfizer in 2009. Even so, it is doubtful that $3 billion proffered enough of a punch to motivate either Glaxo’s board or CEO to do what would be necessary to extirpate a corporate culture perhaps too comfortable with cutting corners.

The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.

Tuesday, November 1, 2011

Europe's Political Elite Takes on Popular Sovereignty in Greece

As October 2011 was coming to an end, George Papandreou, prime minister of Greece, “stunned Europe by announcing a referendum” on the latest bailout from the E.U. and set the vote for January 2012. Shocked E.U. leaders were doubtless shaking their heads with a mix of incredulity and frustration, as they had not even been consulted on the prime minister’s proposal. Meanwhile, the yields on Italy’s bonds continued to increase, as did the spread between German and Greek 10-year bonds. The world was left to whether the Greek voters would reject their government’s austerity plans and, relatedly, whether the E.U. would augment its bailout of the state as per the agreement reached only days before the prime minister’s announcement.


                                     Greek Prime Minister George Papandreou announcing the referendum    AP

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Saturday, October 29, 2011

European Banks’ 50% Write-Down: Discounting Debt Insurance (CDS)?

In “Europe’s Rescue Plan,” The Economist (October 29, 2011) opines on the “fixes” that had been announced just days before by E.U. leaders on the public debt crisis. I find three points of note that are particularly worth elaboration. "Bond markets may be suspicious of guarantees made by countries that would themselves be vulnerable if their over-indebted neighbours suffered turmoil." This downside is that of systemic risk. When Wall Street banks began to tank as the value of their CDOs declined, so too did AIG, which was to fund the insurance policies (CDSs) on those CDOs. In other words, we tend to discount the possibility that the entire ship could tank.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Thursday, October 27, 2011

Hedge Fund Lobby: Breaching Ethics

In a rule adopted by the SEC on October 26, 2011, hedge funds over a certain size must report information—the amounts required depending on the fund’s size. The devil, as it were, is in the details. In this case, they reflect the intense lobbying of hedge funds and their advocates. As a result of the lobbying, according to The New York Times, the “changes call for only the largest funds to report the most detailed information, eliminate any penalty of perjury for misleading reports and delay for six months the initial reports for all but the largest funds.” Whereas the matter of the amount (and type) of information required involves or potentially puts at risk the funds’ secret strategic competitive advantages and the matter of a start date involves technical points such as how much effort is needed to cull the required information, the elimination of any penalty for perjury does not correspond to any legitimate business concern. Indeed, it makes on sense to require information if it can be misleading with impunity. It is as if the SEC regulators had told the hedge funds, You will have to submit information to us but it can be misleading. The fund managers would be apt to reply, Oh, ok.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  


Tuesday, October 25, 2011

Britain at a Crossroads?

The prime minister of the state of Britain faced a “rebellion” in his own party on October 24, 2011 as eighty conservatives backed a nonbinding referendum on whether the state should secede from the union. “I don’t vote against the government lightly, but I think when there is a matter of principle then that must come first,” Nick de Bois said. “We have a considerably changing dynamic [in the E.U.] and given that . . . and the fact that anybody under 54 has not had a chance to vote on [whether Britain should secede from the E.U.], it is appropriate to set in motion that opportunity,” he said. De Bois’ sentiment mirrors that of Thomas Jefferson, who argued that each generation should have the opportunity to affirm or cancel the social contract of the generation before.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Friday, October 21, 2011

Conflicts of Interest at the Federal Reserve

The Huffington Post reports that “(m)ore than a dozen members of the regional Federal Reserve boards have had ties to banks or companies that received emergency funds during the [2008 financial] crisis, according to [a GAO report]. The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government.” Meanwhile, mortgage borrowers with houses “under water” got hammered. From the crisis to the release of the GAO report in October 2011, there were millions foreclosures in the United States, with very little in the way of mortgage modifications or refinancing for those homeowners who needed relief. In other words, the bankers had connections in the banking regulatory agency while Congress left the troubled homeowners—constituents—at the mercy of the bankers. Their agency having their backs, the bankers could afford to take a hard line on the mortgages. The playing field, in other words, is not at all level. 


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.  

Thursday, October 20, 2011

E.U. Agenda: Taming Bloated Greek Patronage

As E.U. leaders wrestled in the fall of 2011 with how to bail out those state governments that had been amassing relatively large semi-sovereign debt loads, residents in relatively solvent states such as Germany were frustrated with what they perceived as profligate over-spending in Greece. It is possible that even the Germans did not realize how engrained the excessive politically-based Greek bureaucracy had become. I suspect that for many Greeks, news of their living beyond their means was met more with denial and utter disbelief than an attitude-adjustment. In other words, a vast disparity in perspective exists on the ground as the E.U. struggled to come to grips with the debt crisis. The “ever closer union” necessary for the E.U. to rise to the occasion has as its foremost obstacle the disparate perceptions existing within the union (and enforceable by state governments).

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Limited Tenure For CPA Firms?

Arthur Levitt, who headed the Securities and Exchange Commission from 1993 to 2001, “sought to root out conflicts of interest at audit firms in 2000, and urged Congress to adopt auditor term limits in 2002 after the Enron and WorldCom scandals.”  The Wall Street Journal also reports that Levitt did not buy the argument made by companies that it would cost them a lot of money to change audit firms. To be sure, he acknowledged that some added cost would be entailed in a system of mandatory auditor “term limits,” but a long auditor relationship “raises the perception,” he maintained, “that the auditor is very much beholden to the company and not totally independent. An environment of skepticism should trump the fraternal environment that tends to occur after a relationship has developed over a period of years.” Indeed, Arthur Andersen’s people were well ensconced at Enron by the time the energy giant went bust. In fact, the auditors even approved the questionable “partnership” accounting (used to hide debt).  Nor did the auditors communicate any misgivings to the audit committee of the company’s board of directors. The auditors were “in” with a rancid management. 


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.  

Tuesday, October 18, 2011

Deloitte: A Culture of Least Resistance

On October 17, 2011, the Public Company Accounting Oversight Board issued a statement saying audits should protect investors. “The board therefore takes very seriously the importance of firms making sufficient progress on quality control issues identified in an inspection report in the 12 months following the report,” the statement said. Not having seen such progress at Deloitte, the board made its 2008 report on the firm public. The report “cited problems in 27 of the 61 Deloitte audits it reviewed, including three where the issuing company was forced to restate its financial statements.” This was “an unprecedented rebuke to a major accounting firm,” according to The New York Times. “In too many instances,” the report stated, inspectors from the board “observed that the engagements team’s support for significant areas of the audit consisted of management’s views or the results of inquiries of management.” In some cases, according to the Times, “Deloitte auditors did not bother to even consider whether accounting decisions made by companies were consistent with accounting rules. Instead, auditors accepted management assertions that the accounting was proper, the board’s report said.”

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

Thursday, October 13, 2011

Morgan Stanley: Systemic Mistrust or Bad Financials?

Morgan Stanley by any measure is a safe and solid investment bank. Except for one: The amount of trust people have in the whole financial and political system. It's just about zero,” according to Jesse Eisinger of The New York Times in October 2011. Even as there is undoubtedly an element of hyperbole in his conclusion—for zero trust in the financial system and governments would occasion far greater problems than the world faced at the time of Eisinger’s report—his broader point that bankers would be held accountable one way or the other for not having learned their lesson on derivatives (and risk more generally) is valid. The subtext is that even though banks like Morgan Stanley were in actuality in solid financial shape, they deserved the negative repercussions from the systemic skepticism that the banks themselves brought about by virtually ignoring risk analysis in preference to a run of profits and (not coincidentally) bonuses.

Eisinger points out that, at least as of October 2011, Morgan Stanley “has almost $60 billion in common equity, compared with $36 billion before September 2008, and its ratios are stronger. Its trading book - which is volatile and where any bank can take sudden, large losses - is smaller than it was. Morgan Stanley has more long-term debt and higher deposits, both of which stabilize its finances. The bank has more cash available in case there's a crunch and a smaller amount of Level III assets, which don't have an independently verifiable value and so must be estimated by the bank. Hedge funds have parked a smaller amount of assets at Morgan Stanley. That's good because in the financial crisis, they pulled them from the bank.” But because all of this could be easily wiped out by a run on the bank occasioned or fueled by a wider mistrust of the financial sector, Eisinger brings up the topic of derivatives as a way of showing that the bankers did not in fact learn their lesson (i.e., all the improved stats may be for naught). Accordingly, the bankers deserved the systemic mistrust even at the expense of any effort having resulted in added financial strength.  

According to the reporter, Morgan Stanley had a face value of $56 trillion in derivatives in October 2011. He notes that JP Morgan Chase had more: a face value of $79 trillion. This is the GNP of some countries. Even though the bankers insisted at the time that they had adequately hedged their long positions, the hedges themselves could fail, especially if the derivatives are positively correlated, as in September 2008 when AIG was completely overwhelmed due to the housing-based derivatives caving in virtually all at once.

In other words, those of us capable of learning lessons know that we should not trust hedges in so far as systemic risk is concerned; the system itself can be overwhelmed by the sheer momentum of a really big wave. So we are back to the issue of trust in the entire financial system, which is and ought to be a drag on even stellar financials until the broader lesson is learned. Unfortunately, that lesson may not be in the immediate financial interest of particular banks due to externalities occasioned by moral hazard (e.g., the possibility of being rescued while another bank, such as Lehman, fails).

Even though governments can step in to protect the broader system (unless captured by the regulated), legislators and regulators cannot force bankers to learn their lesson. A mentality to safeguard even one’s own bank as a going concern cannot be imposed; it must be felt and valued from the inside. All too often, bankers are engaged in “managing” regulations as impediments to be minimized rather than stepping back to ask why the regulations exist in the first place. They might exist for the banks’ own good. If so, the banking lobby trying to water down the Volcker Rule might have been working at odds with those institutions that the lobby ostensibly represents. Be careful what you wish for, Wall Street bankers. You might just get it, especially if you have the gold and therefore can make the rules. It would be ironic if the protesters rather than yourselves had your back, even as you ridicule the masses marching below your towering be-windowed edifices of greed.


Source:

Jesse Eisinger, “Between the Lines, Wall St. Banks Face a Deficit of Trust,” The New York Times, October 12, 2011. 






On the E.U. Banking Proposal: Comparative Context

“Under proposals outlined by the European Commission president, José Manuel Barroso, banks would be required to temporarily bolster their protection against losses. . . . Extra capital for European banks should be raised first from the private sector, then from [the state] governments, according to the proposal. Only when those avenues have been exhausted should a euro zone bailout fund be tapped, it said. Banks should not be allowed to pay dividends or bonuses until they have raised the additional capital, according to the proposal” (NYT 10/13/2011).

After Lehman Brothers failed in September 2008, the U.S. took “swift action to ensure its banks had a strong cushion of capital,” according to The New York Times. The same logic is said to be in the European proposal. Perhaps in general terms this is true, but a major difference is worthy of note. Specifically, the American banks receiving TARP funds were allowed to pay dividends and bonuses. To be sure, executive compensation faced limitations, but this constraint pales in comparison to that in the E.U.’s proposal, wherein no dividends and bonuses would be permitted. Also, the U.S. Treasury allowed banks to pay back the funds earlier than perhaps advisable because the bankers wanted to be free to pay whatever bonuses they saw fit to sanction for themselves (assuming they controlled their boards, which generally holds, given the separation of ownership and control).

The difference on whether dividends and bonuses should be allowed at troubled banks reflects a rather basic cultural difference between the E.U. and U.S. concerning whether economic liberty ought to be limited even at the extreme. The difference also reflects a different historical experience (and thus value-set) with respect to comfort and convenience.

I contend that dividends and bonuses are inherently “extras.” Admittedly, the bonus system on Wall Street has made its way into calculations of standard or basic compensation. However, if a bank itself is at risk, the need to increase reserves should trump any compensation that depends on the bank’s performance. Otherwise, the implication is that large profits in the short run are to be sought even at the expense of ignoring the impact on systemic risk.

I suspect that the culture of Wall Street has come to embrace surfeit compensation as an entitlement regardless of performance. The aspect of entitlement is particularly disturbing, even if it has become akin to an ingrown toenail (i.e., difficult to eradicate once it has become ensconced—like a house-guest after a week or so). A similar mentality inheres in the dynamic wherein private companies profit while the taxpayers are presumed liable in covering any losses. An entitlement exists, in other words, to enjoy the benefits without having to face the risk of suffering a loss. As the generation that lived through the Great Depression undoubtedly knows, this sunny-side up mentality is a manifestation of being too accustomed to comfort (i.e., having it too good for too long).

The bloody twentieth century in Europe gave Europeans a more realistic perspective on the entitlement of comfort at the turn of, and even a decade into, the next century. Accordingly, European officials have an easier time saying no to dividends and bonuses as long as the banks are at risk. It is a pity that the Americans have such a hard time with this; they unwittingly fall into the hands of the vested interests on Wall Street that have had it too good for too long (especially as investment bankers are “paper entrepreneurs” or middlemen rather than producers).


Source:

Stephen Castle, “Europe Tells Its Banks to Raise New Capital,” The New York Times, October 13, 2011.

Wednesday, October 12, 2011

Wall Street Writing the Volcker Rule

On Columbus Day 2011—pretty much a non-holiday by the second decade of the twenty-first century—The New York Times observed that the regulations known as the Volcker rule, “intended to limit trading when the bank's money is at risk, a sweet spot for banks, is seen as a centerpiece of the sprawling financial overhaul of the Dodd-Frank Act of 2010. In anticipation, the nation's biggest banks, like Goldman Sachs and Bank of America, have already shut down their stand-alone proprietary trading desks.” OK, but hold on—the long and tortuous route by which any regulation is written was leaving its own mark in the sense that promising loopholes were finding their way into the rule.

Regulators were leaving room for “significant changes,” according to the Times. Wall Street was “lobbying furiously to tame the Volcker Rule, holding roughly 40 meetings with various regulators, warning that the changes will eat into profits at a difficult time for banks.” Those banks were undoubtedly threatening to charge more to their customers if the rule weren’t weakened. “In essence, the [rule] would upend the banking industry's lucrative, yet risky trading system, forcing powerhouse investment banks to resemble sleepier brokerage firms.” It is difficult to see Morgan Stanley and Goldman Sachs readily becoming mere market-makers and deposit and loan banks without a fight. To be sure, Lloyd Blankfein did insist that his bank was only a market maker when he testified before Sen. Levin’s Senate committee after the credit freeze of 2008.

At the time the Volcker Rule was being proposed, it was already apparent that there would be some wiggle-room for the banks. "Unfortunately, this initial proposal does not deliver on the promise of the Volcker Rule or the requirements of the statute," said Marcus Stanley, policy director of American for Financial Reform, an advocacy group. In the proposal, “a number of controversial exemptions emerged. While the regulation prevents big banks from placing bets on many stocks, corporate bonds and derivatives, it exempts trading in government bonds and foreign currencies. The proposal also provided a path for getting around the ban, for instance, when banks hedge against risk that comes from carrying out a customer's trade. Market-making and underwriting are excused, too, though the line is often fuzzy between these pure client activities and proprietary bets.” Lastly, the proposal would allow “banks to hedge against theoretical or ‘anticipatory’ risk, rather than just clear-and-present problems.” Armed with their lawyers and astute financial wizards, Wall Street banks could conceivably continue with business as usual.

Trading in government bonds and foreign currencies, and hedging even theoretical risk presumably with anything constitute an obstacle course that any Wall Street banker could run without breaking a sweat. With so much on the line and public scrutiny less potent at the regulatory stage, the financial-sector lobbyists could be expected to achieve just enough and then some. Once again, systemic risk would not be a factor, and history could repeat itself.


Source:

Ben Protess, “Banking Industry Revamp Moves Step Closer to Law,The New York Times, October 12, 2011. 

Slovakia Stands Up, Caves to the E.U.

On October 11, 2011, Slovakia’s Parliament failed to approve the expansion of the euro rescue fund, a development, the New York Times reports, that “brought down the government.” Although the vote makes good copy, it was not at all as dire as the headline suggests. According to the Times, the state’s “leading opposition party said after the government fell that it would be willing to discuss support for the fund, pointing to the eventual approval of the deal. European officials in Brussels were counting on a political solution, but also weighing the possibility of some kind of messy workaround if Slovakia failed to pass the measure.” In other words, the vote had to do with state politics as well as resistance to bailing out a richer state. Once the state government fell, pressure from the E.U. and the new politics in the state government quickly coalesced by the next day to produce a deal in support of expanding the bailout fund. According to the Washington Post, "opposition leader Robert Fico, head of the Smer-Social Democracy party, announced he had struck a deal with the remnants of Radicova’s coalition, promising to back the fund in exchange for early elections that analysts say Fico’s party is well positioned to win." Doubtless that pressure from the E.U. was also in the mix, as E.U. officials were already hinting that the bailout fund could be expanded over the tiny state's objection. “We call upon all parties in the Slovak parliament to rise above the positioning of short-term politics and seize the next occasion to ensure a swift adoption of the new agreement,” European Council President Herman Van Rompuy and European Commission President Jose Manuel Barroso said in a joint statement, according to the Washington Post. In other words, hey guys, get your act together over there in Slovakia or else.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.


Tuesday, October 11, 2011

Wall Street and the Populists: A Disconnect

In October 2011, Gerald Seib observed that political and economic pressures were “pushing business leaders into the public cross hairs.” From the corporate standpoint, the time was ripe for the field of business and society, whose topics of corporate social responsibility, corporate citizenship, and stakeholder management had emerged as means by which managers could interface with the broader society. The fundamental matter to be “managed” or assuaged could be said to be divergent norms or values, which in turn can eventuate in antithetical perspectives. Seib was essentially noting that the societal populists and corporate executives were not on the same page. In being geared to creating the impression that the values espoused in a given corporation are in line with societal norms, the field of business and society may not have been equipped to deal with divergent talking points that are grounded in antipodal social realities. Indeed, being invested in one social reality can prevent someone from even being aware of threats from another social reality. Under that scenario, the cues for value-congruence are missed by boundary-spanning managers on the corporate side, which in turn solidifies the discordance between the two social realities. In other words, the pressures mount from the outside, and the validity of the corporate social reality is itself in the cross hairs. To effectively “unwind” this dynamic, the field of business and society must deepen to include the basics of how to see things from a very different perspective without discrediting it from the outset. Value-congruence, and thus the continued legitimacy of the corporate form in modern society depend on this rather-basic yet arduous ability as a precursor.

In the context of the “Occupy Wall Street” protests spreading across the U.S. in the fall of 2011, Seib pointed to the existence of “a radical disconnect between the picture populist critics paint from the outside, and the one business leaders describe from inside.” This disconnect went back to September 2008, when bankers viewed the collapse of the CDO market as a result of over-reaching, dishonest and languid mortgage borrowers and the wider society saw greedy and fraudulent mortgage originators and investment bankers behind the liars loans. This disconnect infuriated the general public, as the business perspective meant that expected contrition would never come from the bankers. In fact, the latter would engage in mass foreclosures without a hint of guilt even as the general public was dumbstruck that people could be so clueless as to inflict injury on insult without realizing it. In short, pressure actually builds from such a disconnect.

In the populist protests, the crowd saw American companies with enough profit and cash to create jobs on-shore yet inexplicable without the will to do so. In the first decade of the new century, American corporations had cut their work forces in the U.S. by nearly 3 million, while increasing employment abroad by almost 2.5 million. In the fall of 2011, Standard & Poor predicted corporate earnings growth of 13.5% for the third quarter, which suggested “to Wall Street protesters that companies were hoarding profits without creating work.” Seib goes on to observe that business leaders saw the inverse. From the business perspective, third-quarter expectations were less than expected. The managers pointed to the benefits of an artificially weak dollar that had already strengthened at the expense of exports. More broadly, businesses were looking at weak consumer demand and increasing costs with government regulations, which make augmenting the domestic work force more costly. Seib juxtaposes this view of a hostile business environment with that of unpatriotic and greedy corporate chieftains.

Debating the respective variables misses the point (or does not go far enough). The underlying disconnect may itself be a threat to American corporations. Indeed, the perspectival disconnect could mean that corporate capitalism could itself be the target of popular angst and dissatisfaction. While the field of business and society has been geared to the corporate “unit of analysis,” it is not clear that the managerial tools used to assuage perceived differences concerning norms (and thus values) will suffice when the corporate form itself has a target painted on its ass. In other words, the bastards may not see the arrows coming until it is too late, due to the rather basic disconnect in perception. Of course, it could be argued that the mega corporations have so much potential power that even a few arrows wouldn’t do much damage that could not be repaired. In other words, corporate capitalism may be so entrenched that it could easily survive being made a target without having to change the way managers view their refined domain of excellence and the broader society of sore-losers.  Even so, it couldn’t hurt to deepen the field of business and society to address the disconnect and how to manage it. Foremost, I would advocate the development of a skill-set that is devoted to being able to see things from a very different perspective without immediately falling over in supercilious laughter that only makes matters worse.

Source:

Gerald F. Seib, “Populist Anger Over Economy Carries Risks for Big Business,” The Wall Street Journal, October 11, 2011. 


Thursday, October 6, 2011

Foreclosing on Freddie and Fannie

Three years after the financial crisis of 2008, nearly half of the people in Arizona with mortgages owed more than their homes were worth; those people were “underwater.” Only three homeowners had been approved for debt reduction since the debt-reduction program in Arizona began in September 2010. “It is extremely difficult for the principal reduction program to be successful” when Fannie and Freddie opt out, according to Shaun Rieve of the Arizona Department of Housing. Even though Arizona would pay up to half of the principal reduction, up to $50,000 of a $100,000 principal reduction, the two housing entities that were taken over by the U.S. Government have been obstructing taxpayers from re-emerging from “underwater.”

The full essay is at "Foreclosing on Freddie and Fannie."

Wednesday, October 5, 2011

The Tyranny of the Veto: Syria’s Friends at the U.N.

Russia and China vetoed a U.N. Security Council resolution on October 4, 2011, effectively tossing a life preserver, according to the New York Times, to Syria’s president. The toothless proposal would have condemned the Syrian government for its violent crackdown of popular protests in which more than 2,700 had been killed. The proposal’s language had been softened from targeted financial sanctions; the council would merely have been charged with considering unspecified measures after a 30-day period. Two reasons can be cited for the two vetoes: commercial ties and a vested interest in forestalling any more threats to the doctrine of national sovereignty.

The veto-provision itself of the Security Council can be questioned here, as it allows allies to protect even a government that has, in the words of Gérard Araund of the E.U., lost its legitimacy in the world. The New York Times reports that the arms contracts that Russia had with the Syrian government at the time of the vetoes were valued at $4 billion. “Beyond jet fighters and tanks, Russia has varied interests in Syria, like oil and gas and cement.” Russia is Syria’s fifth largest trading partner. Accordingly, Russia’s foreign minister issued a statement condemning extremists in Syria who were engaging in “open terror” through violence. Russia was betting on Assad. Aleksandr Shumilin, director of the Center for the Analysis of Middle East Conflicts, told the media that as “soon as it seems that the opposition has become comparable to [Assad] in strength and there appears a possibility they will win, Russia will change its behavior.” One could add that such a change would occur if and only if Russia’s commercial interests with Syria are threatened. This approach is known as realism in international relations. States pursue their own strategic interests internationally, taking for granted rather than challenging the system of sovereign nation-states that permits realism to be the driver even though it does not take into account the broader public good.

The continued hegemony of the nation-state system and the impact of realism are both evident from the fact that even such a weak proposal could successfully be blocked against a government that had killed over 2,700 unarmed protesters. The message being sent by the U.N. is that a government can use its claim to legitimate force pretty much any way it wants. Put another way, an implication from realism in a nation-state system is that the U.N. is merely a conference, or discussion, without much attention to the broader (i.e., international) system of governance, at least in so far as the Security Council is concerned. We are thus left in a Bodinian/Hobbesian world wherein every government is looking out for its own narrow interests, which allow for governments to turn against their people.

To be sure, opponents of the resolution did have a leg to stand on. They claimed that the no-fly-zone resolution on Libya had been abused by NATO bombing pro-Gadhafi positions even when no civilians were in danger. There was a sense in both Moscow and Beijing that the West had been using economic sanctions and military actions under U.N. auspices to further Western-friendly regime change. According to the New York Times, there “is a sense in both capitals that the West in general, and the United States in particular, is feeding the protest movements in the Arab world to further its own interests.” Both Russia and China are “determined to reassert their long opposition to anything that smacks of domestic meddling by outside powers.” Lest it be thought that this is for the protection of other governments or for national sovereignty as a virtue or ideal, Russia faced outside pressure concerning Chechnya and China has Tibet. In other words, the national sovereignty doctrine is a manifestation of realism, wherein international consensus is the result of narrow national interests rather than a view of the good of the whole.

In defending Assad with the doctrine that ultimately protects them, Russia and China must also deal with the inconsistency in letting Assad get away with his killing spree while Gadhafi had killed less yet been stopped. In other words, why does Gadhafi’s opposition deserve help while those against Assad are “extremists”? If abuse of the Libya resolution by NATO were really the problem, then Russia and China could have insisted that U.N. officials oversee any action to defend Syrian protesters and report regularly to the Council, wherein Russia and China could nullify the resolution by a veto if either government suspected any abuse taking place. In fact, the U.N. Secretary General could designate Russia and China as coordinating the operation. The U.N. should not have delegated the Libyan operation so much to NATO, but this does not mean that the same thing would have to be accepted in an operation against Assad.

Going beyond the strategic interests esteemed in realism, the question of international governance can be broached, particularly as there are several truly global issues (e.g., global warming). The development of communications technology means that wholesale human rights abuses occurring on the other side of the world can be instantly seen. Out of this greater awareness, a greater groundswell of opposition to unfettered national sovereignty can be expected, with implications for how international governance is structured.

Given the greater need for international governance, the U.N. should be reformed from a confederation to a modern federation such that a few friends do not have sufficient influence to block a resolution against an abusive government. The veto itself should be eliminated, though this might require that a new organization be formed in lieu of the U.N. Otherwise, we will be left with a world in which Hobbesian sovereigns are allowed to violate their citizens’ basic human right to life while friendly government officials attend to their countries’ respective financial and political interests at the expense of the system as a whole and the general good. I contend that enabling violent, abusive dictators is not in our good, so their friends ought not be allowed to prevent the international community from policing its basic standards. National sovereignty should be limited, just as international governance itself would be subject to constraints.

Sources:

Joe Lauria, “Russia, China Veto U.N.’s Syria Move,” Wall Street Journal, October 5, 2011. http://online.wsj.com/article/SB10001424052970204524604576611443084688006.html


Neil MacFarquhar, “With Rare Double U.N. Veto on Syria, Russia and China Try to Shield Friend,” New York Times, October 6, 2011. http://www.nytimes.com/2011/10/06/world/middleeast/with-united-nations-veto-russia-and-china-help-syria.html

Tuesday, October 4, 2011

Deficit Reduction and Tax Breaks: Rhetoric and Priorities

Actions speak louder than words. A tree is known by its fruit. Where your treasure is, therein lies your heart. These three sayings each have at their root a value on integrity or authenticity that cuts through purported assertions designed to manipulate or otherwise mislead. Integrity here is consistency between word and deed.

When members of Congress cry that the sky is falling under the weight of the deficits and accumulated debt of the U.S. Government, one might ask whether the representatives and delegates really view the fiscal imbalances as so dire. If someone calls a friend to say that his house is about to explode but does not act accordingly, such as in running out of the house rather than finishing dinner, it is reasonable to doubt that the homeowner really believes that a blast is imminent. In protecting tax breaks even amid a deficit of over $1 trillion, members of Congress belie their own warnings concerning the American public debt crisis. For a crisis does not admit the luxury of granting the status quo a continuance. In other words, if the elected officials really did view the trajectory of deficits as unsustainable, continuing the tax breaks would be off the table. In protecting constituent interests by them, a member of Congress is saying that the deficit/debt problem is not really a crisis. Similarly, by the way, in insisting that spending but not revenues should be the only avenue, a legislator is saying that the deficit is not so much of a threat that all means should be engaged to reduce it.

So when the U.S. Senate Republican leader, Mitch McConnell said he is open to ending tax breaks for special interests, he undermined his own statement as well as any claim that the deficit must be significantly reduced when he argued that the tax break that he secured in 2008 for the owners of thoroughbred racehorses is essential for the protection of jobs in Kentucky. Of course, the financial interests of racehorse owners are not necessarily in line with—or reduce to—the protection of jobs. So even here, subterfuge may be the name of the game. The same can be said of Senator John Kerry, Democrat of Massachusetts, who claimed to want to eliminate tax breaks except for a proposal for a tax cut for small breweries, such as Samuel Adams in Boston. The deficits must not be such a big problem if we can afford additional tax cuts. The New York Times points out that mega-wealthy “operations like oil refineries, Hollywood productions and hedge funds have all profited.” The tax breaks for industries in general add up to an estimated $123 billion a year—hardly chicken feed.

The New York Times claims that the “disconnect between the lawmakers’ words and deeds reflects the hurdles that Congress and the White House face as they look to cut at least $1.2 trillion from the nation’s debt. Talk of cutting tax breaks to raise money and reduce the debt has become a mantra in Washington, but it threatens sacred ground: such breaks are a favorite tool among both Republicans and Democrats to reward supporters and economic interests in their home states.” Given Fed chief Ben Bernanke's remarks on October 4, 2011 before the Joint Economic Committee of Congress that even reducing the debt by $1.2 trillion would not be enough, talk of protecting favorite tax breaks undercuts any claim that the public debt is a dire problem. To be sure, obviating another recession was also on Congressional minds. However, even as he was urging Congress to act in order to avoid a double-dip recession, Bernanke said of deficit-reduction efforts, "More will be needed to achieve fiscal sustainability." That is to say, the U.S. Government could lose even its AA rating. Risking this by protecting local interests is short-sighted; it is like a biker accelerating down a hill while looking only a few feet ahead. We might save a few deck chairs for weary passengers, but what about that iceberg ahead? Is anybody even looking?

I contend that we, the electorate, ought to accord claims of crisis as valid if sacred ground is given up. “Whether any of [the tax breaks] are scrubbed from the books may ultimately prove how serious Congress is about reducing the debt.” It is the price of admission, as it were, to having a legislator’s claim of a serious problem being recognized as authentic rather than as possibly just hyperbolic, attention-getting rhetoric.

Without a verifiable indication of some actual give on a sacred cow, a legislator should be told, “prove it!” regarding his claim on the “need” to reduce the deficit in order to avert a crisis. If no such sacrifice is proffered and made, then the politician ought to be ignored as if he or she were crying wolf. Otherwise, we enable two-faced Janus behavior that undermines public confidence in the government and misleads us into being too confident that the serious problems are being solved. The American electorates as well as the media companies are perhaps too accustomed to letting our elected legislators off the hook by taking their words at face value as if they were self-validating. In the case of the U.S. Government’s continuing deficits and accumulated debt, the United States can ill-afford other priorities (even in terms of presumed GNP and job increases) coexisting antithetically with the baleful platitudes of crisis if the imbalances truly are unsustainable and a danger to the American union and its republics. That is to say, given the magnitude of the problem, the members of Congress should be held closer to account in terms of deeds matching words. Priorities, the making of which is part of the job of a legislator, should match the rhetoric in front of the cameras.



Sources:

Ron Nixon and Eric Lichtblau, “In Debt Talks, All Tax Breaks Are Not Alike,” New York Times, October 3, 2011. http://www.nytimes.com/2011/10/03/us/lawmakers-want-to-end-tax-breaks-if-they-can-agree-what-they-are.html

Jon Hilsenrath and Luca Di Leo, "Bernanke Issues Warning, Urges Action on Economy, Wall Street Journal, October 5, 2011. http://online.wsj.com/article/SB10001424052970204524604576610712269716064.html