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Friday, May 27, 2011

Earmarks and Congressional Campaign Fundraising: A Structural Conflict of Interest

In 2009, Congress appropriated $16 billion in earmarks. In March of the following year, the U.S. House of Representatives eliminated earmarks to for-profit companies. However, enterprising managers soon found a way to get around the new obstacle by creating related non-profits. As long as companies can make political contributions to Congressional campaigns, there will be a structural conflict of interest in the legislators legislating on earmarks.

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

A Structural Conflict of Interest in Deutche Bank: Beyond Proprietary Holdings

While creating and selling mortgage-based securities to some of its clients, Deutsche Bank AG was not only advising other clients to bet the other way, but also sometimes doing it itself, according to the Wall Street Journal. A trader at the bank would help create an index that made it easy for the bank to bet against housing even as sales people at the bank were selling the securities as if there were no downside to the American housing market. Then some of the tax-payer money was paid by the US Government to AIG to reimburse Deutsche’s hedge-fund clients who had bought the mortgage securities. American regulators looked at whether there were misrepresentations made to the hedge fund managers who bought the mortgage-backed securities even as Deutsche Bank was betting against the housing market.

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

When Corporate Governance Gets Cozy: Chair/CEO Combo as a Structural Conflict of Interest

Eric Jackson, an activist investor and hedge fund manager, charged Goldman’s board as being too cozy and too lacking in financial know-how to diligently oversee the top management. He claimed the board was packed with honchos who led companies that had paid large fees to Goldman. Allowing clients representation on a board is itself a structural conflict of interest because the client role is not in line with acting in the stockholders’ interest on the board. The hedge fund manager pointed to Indian steel magnate Lakshmi Mittal and former Fannie Mae chief James Johnson as cases in point. Related to the client orientation is an affinity to the management, whose managerial decisions bear on the clients. Indeed, Jackson noted that “these people seem to be favorably disposed to senior management’s way of thinking,” and are therefore unlikely to act as a check on CEO Lloyd Blankfein and his team.

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

An Institutional Conflict of Interest at the New York Federal Reserve

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.

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

Rating Moody’s and S & P: A Structural Conflict of Interest

For years, banks and other issuers have paid rating agencies to rate their securities. This is a bit like restaurants paying food critics to write on their food.  In the wake of the SEC’s charge that  people at Goldman Sachs built the Abacus investment to fall apart so a hedge fund manager, John A. Paulson, could bet against it, the Senate’s Permanent Subcommittee on Investigations questioned representatives from Moody’s and Standard & Poor’s about how they rate risky securities. Carl M. Levin, the Michigan Democrat who heads the Senate panel, said in a statement: “A conveyor belt of high-risk securities, backed by toxic mortgages, got AAA ratings that turned out not to be worth the paper they were printed on.” Throughout the testimony, the institutional conflict of interest was salient whereby credit-rating agencies put market-share considerations foremost in rating securities presented by the banks that are paying the agencies.

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

Paper Tigers: Firewalls Forestalling Institutional Conflicts of Interest

Structural, or institutional, conflicts of interest are of great significance in applied ethics, even though they often play second fiddle to the conflicts centered on a person’s particular interests. An organizational or institutional conflict of interest, whether within one organization or in the arrangements between organizations, is not any less unethical than a personal conflict of interest.  Therefore, when we take the claims of vested organizational interests that their internal firewalls are more than just paper tigers at face value, our foolhardiness can really be at our detriment. I present a few cases to suggest that “firewalls” in an organization to prevent it from a conflict of interest are, in general, insufficient and thus ought not be relied on. Instead, the public (or government regulatory agencies) should insist that one of the two interests in an institutional conflict of interest be given up.

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

A Structural Conflict of Interest in BP

Mark Bly, BP’s head of safety and operations, released on September 7, 2010 an internal report blaming not only the company, but also its partners for the Deepwater Horizon rig explosion and oil spill. A spokesman at Transocean quickly lashed out, calling it a “self-serving report” that minimized what was critical: BP’s “fatally flawed” well design. Behind the self-serving aspect was a larger conflict of interest—one premised on the structure of two functions: an “objective” investigation and efforts to minimize legal damages.

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

Thursday, May 26, 2011

The U.S. Supreme Court Deciding Federalism Cases: A Structural Conflict of Interest

Regarding the US Supreme Court being the decider of last resort, Madison’s Report of 1800 reads in part, “this resort must necessarily be deemed the last in relation to the authorities of the other departments of the government; not in relation to the rights of the parties to the constitutional compact, from which the judicial as well as the other departments hold their delegated trusts.”  The government being referred to is the U.S. The parties to the compact are the states.  Therefore, the theory here is that the U.S. Supreme Court can have its say after the U.S. President and the Congress, but not as binding on the States.  John Breckinridge, who sponsored the Kentucky Resolutions in the Kentucky House, wrote, “Who are the judiciary? Who are they, but a part of the servants of the people created by the Federal compact?” (Kilpatrick, p. 75). The Federal Courts are part of the US Government that was created by the states, so those courts can’t be the final deciders with respect to the states.

The complete essay is at Essays on Two Federal Empires.


Thomas Woods, Nullification: How to Resist Tyranny in the 21st Century (Regency, 2010).

James J. Kilpatrick, The Sovereign States: Notes of a Citizen of Virginia (Chicago: Henry Regnery, 1957).

Institutional Conflicts of Interest

Although conflicts of interest do not inevitably lead to unethical conduct, they raise the probability that it will occur. Just as a tornado watch indicates that conditions are favorable to the formation of a twister, a conflict of interest evinces conditions favorable to unethical decisions. Interests conflicting in a conflict of interest pit an obligation against either another obligation or self-interest. That is to say, such conflicts tend to involve deontology and egoism.

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

Religious Sources of Business Ethics: How Far Along Are We?

If Business Ethics for Dummies is any indication, the topic of religious sources for business ethics must have gained steam through the first decade of the twenty-first century. Increasing interest in such a topic in the midst of modernity is ironic, or counter-intuitive. For philosophers without any degrees in religion, the temptation might be to dilettante over to this topic in order to proffer an opinion. The result for the rest of us could well be a false sense of the extent of knowledge on the topic.

The entire essay is at "Religious Sources of Business Ethics"

Wednesday, May 25, 2011

Writing an Original Screenplay in Film

Jay Fernandez of The Hollywood Reporter asks, “Who’s to blame for the lack of original movie projects being submitted to film studios these days?” He points to vertical integration and a bottom-line reliance on pre-branded franchises, plus diminished film slates, producer deals, and writing jobs. Indeed, in early 2011, spec submissions were down by more than half.

Given the increased competition and the pressure of the studios, writers and agents “looking to maintain careers and commissions” have been “abandoning original screenplays to deliver template-fitting material.” As one lit agent said, “It’s the system that’s at fault, not the writer.” Of course, it could also be argued that studios have been going for known commodities, such as in multiple sequals, because the writers have run out of material. According to one studio head, writers “can’t get themselves up to write something original.”

I must admit I have looked at all the formulaic films and wondered whether narrative itself had been exhausted. The rigidity of a screenplay’s structure and format, for instance, must surely narrow the sort of narrative that can come through the pipeline.

For example, having an inciting event 10 to 12 pages in and a critical event about 10 pages from the end means that the narrative’s tension runs from 10-12 pages in until 10 pages from the end. Having a regularity akin to Joseph Campbell’s journey of the hero, a screenplay’s protagonist is bound to be seeking to restore equilibrium from 10-12 pages in until 10 pages from the end. Would it kill a narrative if the protagonist is seen in his or her new world for more than ten pages? Might the viewers enjoy seeing the protagonist in his or her original world for more than 10-12 pages? Furthermore, how might film narratives differ if the instigating event were to happen up front?

As tempting as it might be to loosen up the screenplay format (assuming it is arbitrary from the standpoint of what makes good narrative), it is worth asking whether original narratives are still possible even within the screenplay box. If they are possible, it is worth investigating how writers can come up with original plots. I suspect the answer lies in the writer becoming aware of the assumptions in his or her extant stories so as to be able to relax or change paradigms or frameworks so as to come up with novel narratives.

Also, a writer could do worse than study classic myth so as to get a deeper sense of basic themes that could be woven into new fabric for today. By this I do not mean that modern writers should simply pour old wine into new bottles; rather, the ancient ingredients—once known—can be interwoven in new ways to create new plot structures.  Simply engaging in thought-experiments in coming up with innovative short stories can be like weight-lifting for the writer interested in going out and playing in game of screenwriting.

Of course, context matters, and studios having allowed themselves to be more dependent on remakes and reinventions has translated into “creative stagnation,” according to Fernandez. Working within the confines of prefab projects, writers are given the house in order to decorate it. As one writer observed, “You can’t build your own house, and you can’t change the house.” That is hardly the sort of context in which the narratives that can generate real interest in cinema are likely to be purchased, let alone written.

As the field of writers narrows and the studios become increasingly risk-averse as the costs of producing a film increase, creativity must be reckoned as collateral damage.Yet even in this eye of the needle, even just those few writers who have gained entry can think outside the box and make alliances with the talent to lobby producers for relatively small-budget projects. More ideally, actors and even producers could use the social media and explore blogs in order to look beyond the usual suspects if only to get an inkling of the alternative stories out there in small electronic ponds called blogs (perhaps one all-too-imaginative writer will write a screenplay on the blog-pond monster that eats up the radiation in Japan and saves the day--the antithesis of Godzilla).

In short, there are indeed fruitful alternatives to deconstruction (e.g., the New Wave, Neo-Realism). We need not eclipse narrative, as if the human race has outlived story-telling. We need not give up on the possibility of rich, new stories that have not hitherto been thought and told.


Jay A. Fernandez, “Crisis at the Movies: No New Ideas,” The Hollywood Reporter, May 20, 2011, pp. 8-9.

Tuesday, May 24, 2011

Lehman's Dick Fuld as the Antagonist in the film, "Too Big to Fail"

The reporter-author of Too Big to Fail, Andrew Ross Sorkin, expressed the following fear as his 600-plus-page book was being made into a movie: "I went into the process I think worried – as I imagine most writers would be – that it would be sexed up and hollywoodized in some other way." To be sure, putting the Dick Fuld (CEO of Lehman Brothers) character into any sort of sex scene would have been counterproductive at best.

As it was, the director of the tv-movie based on Sorkin’s book let the drama inherent in the historical events to lead the narrative. The only quibble I may have with the historical veracity has to do with Bart McDade replacing Joe Gregory as President of Lehman. According to Larry McDonald, a former distressed-bonds trader at Lehman, the replacement also relegated Fuld even as he remained as CEO only to quell the markets. Specifically, on June 11, 2008, “Fuld was effectively deposed,” according to McDonald, “by Bart McDade with the support of the executive committee” (McDonald, p. 297). In the movie, however, Fuld was still in charge even in September of that year, with McDade still bowing to him in front of the Koreans.

While it could be that Sorkin and McDonald have different sources of information on whether there was a coup within Lehman, the film’s director and screenwriter could have kept Fuld in charge to maintain the character as the principal antagonist. Even so, McDonald’s description of McDade confronting Fuld in Fuld’s office and the subsequent decision of Gregory in the conference room to take the stunned CFO, Erin Callan, down with him in front of the executive committee would have made excellent scenes in the movie.

The other change I would have made to the screenplay would give the viewers an improved insight into how the sub-prime crisis could have been allowed to get so bad. Specifically, the Fuld character could have had a flashback to Mike Gelband’s warning on June 7, 2005 in defiance of Fuld that Lehman should get out of the housing-related CDO market; the bank was then leveraged twenty-two times its net worth (McDonald, p. 136). Meeting with Gelband and other senior executives on the 31st floor on that day, Fuld and his allies insinuated that Gelband had some kind of attitude problem that needed to be changed “real fast” (McDonald, p. 138).  As a flashback, this scene would have shown the viewer Fuld’s recklessness in terms of risk (and leverage), and thus how the financial system could have been put in such peril by the “experts”. In fact, in the spring of 2007 Fuld decided to bully and belittle Gelband publically at the bank in order to get him to take on even more risk (McDonald, p. 235). This could have been fused into the “attitude problem” meeting, showing the viewer Fuld’s pathology, which goes beyond a bad temper.

Whether one points to Jim Cayne at Bear Stearns or Dick Fuld at Lehman, the role of pathology in the near-demise of Wall Street could uncover for us how recklessness could have gained such traction. In other words, HBO’s Too Big to Fail could have delved into Fuld’s character beyond having him drop some F-bombs. Speaking on Charlie Rose on the evening of the movie’s premiere, Sorkin marveled that it must be difficult for actors to convey their respective characters in just a few scenes. That is true; however, the director and screenwriter could have brought out Fuld’s pathology (beyond his anger) by a few well-chosen additional scenes. Sometimes what a character says, and to whom, can be more damning than how loud he or she says it. Concerning Fuld, the viewers could have been shaking their heads in utter disbelief rather than simply concluding that the guy is arrogant and has a temper.

Lawrence McDonald, Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers (New York: Three River Press, 2009).

Monday, May 23, 2011

Too Big to Fail: The Trillion Dollar Club

Banks with assets over $50 billion are considered “systemically important” according to the Dodd-Frank law of 2010. The act is geared to shoring up protection against systemic risk. The U.S. Goverment deems certain banks (and companies) systemically important if they are big enough to threaten the entire financial system should they fail. Such enterprises are subject to higher capital standards and stricter rules. Roughly three dozen banks in the U.S. had been classified as systemically important by mid-May 2011.

A major flaw in the law is its failure to sufficiently distinguish the banks having assets at just over $50 billion (the floor of systemically important) from the banks with assets over $1 trillion. For example, Bank of America ($2.28 trillion), J.P. Morgan Chase ($2.2 trillion), Citigroup ($1.95 trillion), and Wells Fargo ($1.24 trillion) can be clustered and distinguished from Huntington Bancshares ($52.95 billion), CIT Group ($50.85 billion), Zions Bancorp ($50.81 billion), and Marshall & Ilsley ($49.68 billion). If just one of the institutions in the over $1 trillion club fails, the financial system worldwide could be toast. In contrast, the system would be more likely to remain viable if just one of the banks with assets of around $50 billion were to fail.

Of the $50 billion club, Stephen Steinour, chair and CEO of Huntington, stresses, “We are not vital to the economic system of the U.S.” The chair and CEO of Bank of America could not make the same claim. However, Steinour is ignoring the possibility that Huntington could be a domino in a line of similar banks whose failures altogether could challenge the viability of the financial system; yet even this risk can and should be distinguished from the inherent systemic risk in just one of the banks in the $1 trillion plus club.  Furthermore, those big banks have grown even larger since before the financial crisis—meaning that their systemic risk is higher rather than lower after the crisis. At the end of 2010, the top ten banks in U.S. had 77% of the banking assets in the U.S.

In 2007, Bank of America had assets of $1.54 trillion; by 2011 that number had moved to $2.28 trillion. J.P. Morgan Chase had gone from $1.46 trillion to $2.20 trillion, and Wells Fargo went from $539 billion to $1.24 trillion. Citigroup bucks this trend, moving from $2.22 trillion down to $1.95 trillion. Generally speaking, this cluster of banks represents more rather than less systemic risk after the crisis of 2008.  Were one of these banks to founder, a government-arranged orderly liquidation as per the Dodd-Frank law might not be sufficient to keep credit markets from freezing up. The very existence of a bank with more than $1 trillion in assets should be questioned. Ironically, efforts to evade financial catastrophe in the fall of 2008 contributed to the increase in size. That is to say, staving off the crisis may have made another more likely in the future.

So especially after the scare in 2008, it is incumbant on us to question the sheer existence of the banks that have been allowed and in fact encouraged to get bigger. If a bank having more than $1 trillion in assets is deemed necessary for corporate capitalism to function in spite of such a bank's inherent systemic risk, one might ask how the system got along without them before they had grown so big. After all, it is not unheard of for a syndicate of banks to package financing on a mega-LBO (leveraged buy-out); one mega-bank is not necessary. Indeed, mega-LBOs themselves may result in unacceptable systemic risk. Finance itself, and particularly the increasing role of leverage, can also be subjected to question. 

Although distasteful from the vantage-point of the financial interests vested in the status quo, the trillion-dollar-plus club of banks could be treated differently than the banks of around $50 billion. Whereas the latter could be more strictly regulated, the former could be broken up not only in terms of management, but also in ownership (rather than the spin-offs having the same fractional owners, as was the case with Standard Oil after its “break-up”).  Considering that obviating financial collapse in 2008 included the byproduct of even larger banks, a second systemic-risk law delimiting a maximum size could complement existing anti-trust laws. Unfortunately, the Dodd-Frank law does not address this point, and is thus insufficient from the standpoint of obviating the systemic risk of firms being too big to fail.


Robin Sidel and Jean Eaglesham, “Vital? Not Us, Say Small Banks,” The Wall Street Journal, May 13, 2011, p. C1.

2007 Bank Assets, ForbesAdvice.com.

Goldman's Ethical Conflict of Interest: Obviated or Enabled?

According to U.S. Senator Carl Levin, Goldman Sachs “profited by taking advantage of its clients’ reasonable expection[s] that it would not sell products that it did not want to succeed and that there was no conflict of economic interest between the firm and the customers that it had pledged to serve.” (Cohen, p. 19). Not only was the bank secretly betting against housing-related securities while selling them to clients, in at least one case a client shorting such a security was allowed to have a hand in picking the bonds. What is perhaps most striking, however, is how little Goldman Sachs has had to pay for acting at the expense of some of its clients. One might predict on this basis that the unethical culture at the bank is ongoing.

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

Sunday, May 22, 2011

Business Ethics in the Business World: A Glimpse from Goldman Sachs

Goldman Sachs’ ethics code reads in part, “[We] expect our people to maintain high ethical standards in everything they do. . . . From time to time, the firm may waive certain provisions of this Code.” (Cohan, p. 18). The explicit conditionality is notable and significant. I contend that among other reasons, a negative impact on the bank’s financial position and/or profits is apt to trigger such a waiver not only at Goldman Sachs, but from the business standpoint more generally.

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

On Newt Gingrich's Contradictory Comments: Hume and Kant on the Culprit

Newt Gingrich said on May 15, 2011 that people should be required to buy health-insurance. He added that he would like to see the mandate implemented at the state rather than the federal level. These comments unleashed a torrent of criticism from Republicans, so the former Speaker of the U.S. House of Representatives spent the following week “walking” his comments back by denying that he had said that he was for a mandate.  The media was in a feeding frenzy, astounded that the former Speaker could simply deny that he might get away with the contradiction. However, in such cases, is it the person or logical contradiction itself that gets us so steamed?

Although we tend to point to the person who has made a contradiction without acknowledging it, ascribing possible sordid motives, it could be that the logical contradiction itself lies at the source of the angst in the beholder. More specifically, the logical contradiction itself may be in its substance an uncomfortable emotion rather than reason. In other words, violating logic may be an emotion that appears in the form of twisted reason.

Otherwise, it would be a case of reason causing an emotion. For example, “You logically contradicted yourself and that makes me mad” is typically taken as something of reason causing a particular emotion. It is difficult to link reason and emotion because we take them to be different things. It is a bit like Descartes’ mind-body problem.  Were logical contradiction itself an emotion, however, then to say that a contradiction caused anger might be easier to explain as one emotion would be giving rise to another—both being of the same type of thing (i.e., emotion).

Going even further, the observation that logical contraction is an emotion distinct from the anger may be an illusion.  Because the anger comes so quickly and naturally, it could be that what we take as the anger is simply part of the complex emotion of experiencing a logical contradiction. Similarly, when a person says that he feels confused, a cognitive condition is really an emotion because it is felt. Like confusion, experiencing logical contradiction does not feel good.

In general terms, talking about logical contradiction as an emotion of disapprobation reconciles Kant’s first formulation of his categorical imperative to Hume’s psychological theory of morality.  To Kant, moral principles are universal because of the role of universality and necessity in reason, so maxims that involve a logical contradiction if they are universalized cannot be moral. To Hume, moral judgment just is the sentiment of disapprobation.

Typically, Kant’s ethical theory is viewed as rationalist, whereas Hume’s is portrayed as psychological. However, if logical contradiction is itself an emotion having the form of reason, then it could be said that the moral sentiment of disapprobation applies to the uncomfortable emotion that the experience of logical contradiction. Reason turned against itself only seems to be cognitive rather than emotion. If what we have in a logical contradiction is essentially an emotion (or even an emotional reaction), then Kant’s rationalism and Hume’s sentimentalism are no longer antipodal. To say that logical contradiction is unethical is to say that it gives a rational and emotional being a sentiment of disapprobation. Logical contradiction itself naturally gives us a bad feeling; indeed, the contradiction may simply be a way of labeling a particular emotion.

So when we say that Newt Gingrich should not have contradicted himself (or he should own up to having contradicted himself), the basis of our moral judgment could be the emotion that we feel when we are confronted with a logical contradiction—the contradiction being that sentiment of disapprobation.


See Kant’s Groundwork of Metaphysics and his Critique of Practical Reason.  See also David Hume’s Treatise of Human Nature.

Naftali Bendavid and Jonathan Weisman, “Medicare Revamp Exposes Divisions Within the GOP,” The Wall Street Journal, May 17, 2011, p. A6.