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Friday, September 30, 2011

Executive Compensation (Part II): Paying Failure

In late September 2011, Léo Apotheker was fired after 11 months as CEO at Hewlett-Packard. As a reward, he walked with $13.2 million in cash and stock, in addition to a sign-on package worth about $10 million, according to the New York Times. A month earlier, Robert P. Kelly received severance worth $17.2 in cash and stock when he was fired as CEO of Bank of New York Mellon. Even his clashing with board members and senior managers did not obstruct his nice severance package. A few days later, Carol Bartz was let go as CEO of Yahoo with nearly $10 million in spite of the company’s poor performance. Back in April 2011, John Chidsey, the CEO of Burger King, had departed with a severance package worth almost $20 million in the fact that McDonalds had been outcompeting Burger King. Baxter Phillips, the CEO of Massey Energy, got a package worth over $34 million in spite of “presiding over a company barraged with accusations of reckless conduct and with legal claims stemming from one of the deadliest mining disasters in memory,” according to the New York Times. Unfortunately, the list goes on and on. Is this a system of pay-for-failure? Moreover, do chief executives, who seem to outward appearances to be almost exclusively motivated by what they can get in additional compensation, have too much leverage over boards, and thus over even the owners as well? If so, is corporate governance itself severely broken? I answer in the affirmative.

“We repeatedly see companies’ assets go out the door to reward failure,” Scott Zdrazil, the director of corporate governance at a major bank’s investment fund that sought to tighten the restrictions on severance packages at three oil companies in 2010. He claims that investors are frustrated that boards of directors have not prevented such windfalls. Even the Dodd-Frank financial reform law has its mandated “say on pay” stockholder votes on a non-binding basis. It is as though stockholders have given up their property rights in favor of the “rights” having been taken or assumed by their agents—the directors and upper echelon managers. It is as though the business judgment rule trumps property rights even where the compensation of executives who typically control their boards is at issue. The conflict of interest here is extraordinary even as it is assumed to be obviated by the fiction of board independence from management. To be sure, a board of directors is supposed to hold management accountable.

Don’t look to public policy to shore up the property rights of stockholders any time soon. Eric Dash of the New York Times avers that the Obama administration “seemed to lose its bully pulpit for compensation reform after most of the nation’s biggest financial companies repaid their government loans.” Never mind that the administration allowed at least four of the mega-banks to repay early based on the bankers’ desire to avoid limitations on their own compensation.

The bottom line is that CEOs are not really all that interested in serving the owners of the companies; the top executives are primarily interested in their own gain, be it in terms of position/power or compensation. Structuring the latter in stock options with vesting periods and looking to outside directors for accountability are not sufficient checks on the single-minded pursuit of CEOs of their narrow self-interest. Even when a bank is in dire circumstances, such as Merrill Lynch was on September 15, 2008, a CEO can be obsessed with “letters”—statements on his or her compensation (as well as that of other top execs) being honored by the acquiring company.

As negotiations dragged on into the wee hours of Monday morning, Ken Lewis of Bank of America was utterly disgusted with John Thain’s fixation on what he and others at Merrill would get as bonuses (for a year of losses, by the way), even as Merrill and its stockholders held in the balance after midnight (when Lehman filed for bankruptcy). Lewis could only look over at Thain and think to himself, The only thing these Wall Street guys are concerned about is themselves. Even in the midst of a financial system collapse, Thain was focused on getting what he thought he deserved in spite of the huge losses. In fact, he had put off even talking to Lewis at Bank of America—repeatedly rebuffing his president’s (Fleming) lobbying—because the CEO did not like the idea of having to work for Lewis! Do you suppose the Merrill stockholders wanted to risk their entire investment in the bank because Thain didn’t want to end up working for someone else? The board of directors left the contingency plans up to him, so he didn’t have to worry about any pressure to start merger talks. Merrill’s stockholders were at best an afterthought to him, and yet the directors, who had been elected by the owners, had hired him. The eventual $29 per share price, by the way, was a result of Fleming’s negotiating for the stockholders; Thain was still looking for a line of credit from Goldman—risking an entire loss to stockholders so he could retain control of Merrill rather than turn it over to Lewis.

Even after Merrill Lynch had announced a $5.1 billion loss ($5.56 per diluted share) for the third quarter of 2008, Thain was insisting on a cash bonus of $40 million. Fleming and McCann were to get $25 million, while two other senior managers would get $15 million a piece. Thain subsequently admitted that a $20 million cash bonus for himself would be more "realistic." Given Merrill's losses in 2008 and the fact that the bank had to be sold, it is crazy that any cash bonuses would be paid for any senior manager. Thain's suggestion to the board's compensation committee that the bonuses be viewed as "success fees" for the top managers' efforts in putting together the sale of Merrill to Bank of America is nothing less than bizarre, if not comical. Failure as successs? What planet was Thain from? That a man like him ever got to be the CEO of a major bank (one too big to fail!) suggests that major flaws exist in how business practitioners view and value leadership and in how corporate governance is designed and operates.

When times were good, the finance crowd had lauded Thain as a “superman” for modernizing the NYSE. The business world tends to invent “superheroes”--even calling them rockstars!--while ignoring the more ignoble underbellies of its idols. In other words, leadership is worshipped without any clear grasp of the leaders' real contributions, while failure at the top is generally underplayed or ignored, at least financially speaking. This lack of proportion and balance is not by accident, as it is fully in the financial interests of the so-called "leaders." As for the followers and bystanders, these incredulous groupies--retarded court jesters wearing grizzled suits--happily allow themselves to get played as fools. They are dominated, not led, for the weak can dominate but not lead the herd animals.

Besides pointing to the utter bankruptcy and banality of business leadership, the case of Thain demonstrates that the system of corporate governance in the U.S. is broken even as it continues on as the status quo. Sadly, stockholders as a group are severely over-exposed to risk as a result. As long as top executives get what they believe they are worth, they will see to it, in a “by the way” fashion, that stockholders do not lose everything, but is this enough? Must stockholders (and society itself) settle for this? Are they even aware of the risk to their wealth as CEOs risk all to make sure they are taken care of? In academic terms, the system of corporate governance is incurring huge agency costs, yet I suspect we (and stockholders) are blind to their magnitude. As a society, Americans have a bad habit of taking the word of vested interests, who get away with making excuses or simply opining that there is no problem, after all. We assume that executive compensation is set by the invisible hand of the marketplace because it is in the executives’ financial interest that we take this bait and swim along with it in our gullible mouths. We are like fish that do not even realize that there are hooks in our mouths!

It does not occur to us, or to stockholders, that competent managers are out there who would gladly take top management positions for much, much less. Corporate executives have engineered a coup of sorts, having separated ownership from control at the expense of stockholders and even systemic risk in the financial system. The suits have even captured the government, such that stockholder votes on compensation are legally non-binding. This is not the invisible hand connecting demand and supply in the labor market; rather, it is a result of a rich velvet coup under the subterfuge of capitalism and democracy—with the electorate completely beguiled. Let’s not pretend this is the free market doing this, or that the governments in the U.S. are oriented to protecting the interests of stockholders and the public at the expense of the corporate managerial class.

See Part I Executive Compensation: Systemic Risk

Click to add a question or comment on paying CEOs for failing.


Eric Dash, “The Lucrative Fall from Grace,” New York Times, September 30, 2011. http://www.nytimes.com/2011/09/30/business/outsize-severance-continues-for-executives-even-after-failed-tenures.html

Gred Farrell, Crash of the Titans (New York: Crown Business, 2010). On Thain's bonus, see chapter 16.

Executive Compensation (Part I): Systemic Risk

In the wake of the financial crisis, according to the Huffington Post, “a number of the nation's largest banks were excused from the government's rescue program before they had returned to a position of complete financial security -- in part because they wanted to avoid restrictions on how much their executives would get paid, according to a new report from the program's government overseer. Citigroup, Wells Fargo, PNC and Bank of America successfully lobbied to leave the federal bailout program early in 2009, even though the Federal Reserve Board and the Federal Deposit Insurance Corporation had recommended they take additional steps to shore up their assets, according to a new report from the Special Inspector General for the Troubled Relief Asset Program, a government watchdog office. Regulators, including the Treasury and the Federal Reserve Board, eventually ‘relaxed’ their criteria for letting the banks out of the program, the report says, leaving questions about whether the banks had strengthened their holdings enough to be able to withstand another systemic crisis.”

The Huffington Post reports that according to SIGTARP, in 2009, the “four banks repeatedly tried to leave the bailout program, also known as TARP, ahead of schedule, claiming that the stigma attached to the bailout would damage investor confidence in their stability. Bank of America was especially persistent, submitting 11 separate exit proposals to the Federal Reserve Board in less than a month. The banks, particularly Citigroup and Bank of America, also expressed concern that if they stayed in TARP, they would be subject to the program's restrictions on executive compensation.

"Ultimately, the federal banking regulators ended up bowing to pressure" to let the banks leave early, said Christy Romero, Acting Special Inspector General for TARP and the author of the report. Romero added that in the event of another shock, many banks could be left with too little capital to endure, raising the possibility that "it could potentially trigger an avalanche of severe consequences to the broader economy." As a result of the regulators’ lenience, Romero told The Huffington Post, the financial system is still carrying considerable systemic risk from huge, interconnected banks, well after the meltdown of 2008. "The institutions that were 'too big to fail' ... are bigger than they were before," said Romero. "It's very critical that regulators remain vigilant to banks' demands to relax capital requirements."

In short, the U.S. Government and its central bank, the Federal Reserve, acquiesced on bank executive’s desire for more (i.e., greed) at the expense of reducing systemic risk. That the bankers presumed themselves as being in a position to lobby—especially to obviate compensation restrictions —given the roles played by the banks in the mortgage securities crisis, is astounding, as is the obsequious reaction of the regulators. The dynamic itself evinces the U.S. as a plutocracy rather than as representative democracies. Furthermore, the motive of the bankers demonstrates a continued fixation on gain at the expense not only of the system (i.e., systemic risk), but also of stockholders.  In Part II, Executive Compensation: Paying Failure, I discuss the lack of accountability on executive compensation from the perspective of stockholders.


Alexander Eichler, “BofA, Wells Fargo, Citigroup Left TARP Early to Avoid Restrictions on Executive Pay,” The Huffington Post, September 30, 2011. http://www.huffingtonpost.com/2011/09/29/banks-tarp-bailout_n_988148.html

U.S. Government: Education Over Immigration

On page A16 of the New York Times issue of September 29, 2011, two stories read side by side make an interesting point concerning the plight of American federalism. Campbell Robertson reports that Alabama won a ruling by a federal judge on the republic’s immigration law. Across the page, Mark Landler reports on Barak Obama’s visit to a local high school in Washington, D.C.

“Our country used to have the world’s largest proportion of young people with a college degree,” the president said. “We now rank 16th. I don’t like being 16th; I like being No. 1.” The last sentence in particular is revealing if one takes it in a broader sense. Barak Obama likes being No. 1. He likes being the center of it all—I suppose like New York City relishes being in the center of the universe. So it is of little consequence to the president that education is not among the federal government’s enumerated powers.  Even by going to a local school, Barak Obama instantiates the federal government’s encroaching nature, albeit for a good cause. He did not stop with education policy; he lapsed onto a parental role of sorts, saying, “I want all of you to set a goal to continue your education after you graduate.” Interlarding himself in the students’ families, he told the students how they should react to their parents. “Don’t give them a hard time when they ask you to turn off the video games, turn off the TV and do some homework,” he urged. Lest it be thought that this is simply some good-natured remarks by a father who undoubtedly cares about kids, it was the second day in a row that he had spoken at a school. In other words, the over-reach involves an opportunity cost.

It is not as though the president of the United States has a lack of things needing his attention within the enumerated powers of the U.S. Government. In fact, state officials have felt the need to step in to take up the slack concerning the U.S. Government’s failure to adequately enforce immigration law. But in what would be a twisted character flaw in a person, the federal government has fought such assistance while continuing to encroach in domains such as education. It is as if the person in charge of an association’s club house were resisting cleaning help by some of the members while going into their houses to take over their roles there. It is not as though the Obama administration were so consumed with visiting local schools that it would not have time or resources to resist state-level assistance on immigration. Moreover, it is not as though the administration were so focused to improve its own enforcement efforts that it didn’t have time or resources to involve itself in education and fight the states on immigration. The administration is making things far too difficult for itself as well as for others.

So while the president was acting as parent in chief at a local school, his administration lost a case in federal court against Alabama’s immigration law enforcing the federal law. Among other things, the Alabama law “nullifies any contracts entered into by an illegal immigrant.” Another section “forbids any transaction between an illegal immigrant and any division of the state,” and still another section “requires elementary and secondary schools to determine the immigration status of incoming students.” Nothing here violates or nullifies federal law; in fact, Alabama is helping said law. The motivation that resists help can and ought to be questioned. It is not as though states implementing federal law is unheard of. In the E.U., it is common for the states to be required to implement E.U. directives. If states cannot be trusted to implement federal law, why have a union at all? With respect to immigration, the orientation of every government in the American federal system ought to be to minimize illegal aliens within these United States. Fighting among ourselves, governmentally, only gives the law breakers more wiggle room to get through and live within the United States illegally—even enjoying benefits of citizenship without being citizens.

So rather than being educator in chief or parent in chief, the U.S. President ought to keep to his knitting—especially as there are some holes in it! Nor is he in a position to refuse help. Otherwise, the resultant encroaching nature of the general government will totally eviscerate American federalism with a one-size-fits-all imposition at the expense of the inherent diversity that exists in an empire-scale union.

Click to add a question or comment on Obama on education and immigration, and Alabama on immigration.


Campbell Robertson, “Alabama Wins in Ruling On Its Immigration Law,” New York Times, September 29, 2011. http://www.nytimes.com/2011/09/29/us/alabama-immigration-law-upheld.html

Mark Landler, “Obama Urges Students to Set Their Sights on College,” New York Times, September 29, 2011. http://www.nytimes.com/2011/09/29/us/politics/president-obama-urges-nations-students-to-set-sights-on-college.html

When Police Are the Criminals

Might the personality type most excited by inflicting pain on others be drawn to “serve” on a police force?  Might force itself be an allurement to such a personality? Moreover, might organizations populated by the personality be inclined to set up defenses against being held accountable either internally or by other organizations? At the very least, deference ought to go to the victims rather than the “officers.”

The New York City police department and the district attorney’s office set investigations in motion after video surfaced of Anthony Bologna of the police department using pepper spray against protesters of Wall Street greed and the lack of accountability there. Even as the department’s own investigation was yet to commence, the chief publically questioned whether the video offered enough context to evaluate the inspector’s actions. To the chief, merely protesting in a way that blocked traffic justifies the use of pepper spray without warning. The inspector’s union boss claimed the motive had been to restore order—though the video shows that the victims were not disorderly or resisting arrest. Indeed, the police did not attempt to arrest those sprayed. It is not difficult to see where the police investigation of its own will go.

Beyond the hypocrisy involved in those sworn to protect actually attacking and the anti-Americanism involved in trying to curtail a protest, it might reasonably be asked whether Bologna was acting on his own, or whether Wall Street money was ultimately behind the aggression. In the protest’s first four days, the mega media companies scarcely covered the protest; Bologna’s unprovoked aggression came after the news networks could no longer viably ignore the movement. So was the case simply that of American banks using the police state to keep a movement from spreading to their detriment? Were there actual accountability on Bologna, might the bird sing, affording us some transparency concerning any such hidden relationships?

Even if no such conspiracy existed, there is obviously a need for stronger instruments of accountability that could be imposed externally on police departments and their employees. In the wake of Bologna’s attacks, the media reported that such incidents are not uncommon. Indeed, I have witnessed them. While in Pittsburgh, for example, I witnessed how the police treated black teenagers who were simply walking along the sidewalks in the university area of town (Oakland). It was evident to me at the time (as a bystander leaving a restaurant) that the police employees believed they did not face any meaningful accountability. So I was not surprised to see video surface of Anthony Bologna’s sadism on full display in New York.

Thomas Hobbes writes that in the state of nature, and even in society, each person has the right to protect his or her person, as per the right of self-preservation. A sovereign cannot take this inalienable right away. When Bologna acted outside of the law, and thus outside of the social contract, his victims had the right to defend themselves, even in using pepper spray against the attacker. In other words, Bologna could and should have been treated as a criminal attacker by his victims and bystanders. Perhaps in the future protestors ought to carry pepper spray in case any criminals show up and attempt any aggressive attacks. It could be that the offending attackers are imprisoned while the self-preserving protestors are exonerated. Then maybe police departments will recognize that accountability applied to their own employees is in the departments’ interest. Legitimate force goes only so far before it lapses into criminality, and we all have an obligation as citizens to thwart crime as it is happening by whomever. If police employees do not want other citizens to be put in the position of making this judgment, then perhaps those employees might want to reassess their attitude and habits. In the meantime, citizens need to be on guard against criminals even and especially where they are least expected and perhaps most commonly found.

Click to add a question or comment on accountability regarding police brutality.


Al Baker and Joseph Goldstein, “Officer’s Pepper-Spraying of Protesters Is Under Investigation,” New York Times, September 29, 2011. http://cityroom.blogs.nytimes.com/2011/09/28/police-department-to-examine-pepper-spray-incident/

Tuesday, September 27, 2011

Bank of America: Downsizing From Smallness

Three years after the near-meltdown of Wall Street in September 2008, Bank of America announced that 30,000 jobs would be eliminated. That amounts to nearly 10% of the bank’s total work force. Over all, BOA was planning to cut $5 billion in annual expenses. The reason is transparent: continued losses stemming from the bank’s acquisition of Countrywide in January 2008 in spite of the fall of the U.S. real estate market and the related losses on sub-prime mortgage-backed CDOs. What could Ken Lewis have been thinking? At least in the case of his acquisition of Merrill Lynch, which was agreed to in principle in September 2008, the investment bank had already sold its $30 billion of toxic assets for over $7 billion in July 2008.
While the $29 per share price for Merrill seems excessive given that the investment bank was trading at only $17 at the time of the agreement, Fleming’s negotiating strategy (stressing the long run value over the short term market volitility) on Merrill’s side, Thain’s preference for a 10% stake/$30 billion line of credit from Goldman, and the sheer strategic fit between BOA and Merrill can explain Lewis’s offer-price being at a premium over the market price. Even so, with Lehman poised to file, the Goldman option would have been insufficient (or would likely have dissolved on the Monday of Lehman’s filing as the market tanked) and Thain would have taken $17 (or even down to $10) in the wake of Lehman’s filing.

According to reporter Greg Farrell (p. 183), Bank of America tended to deal with problems “by finding the quickest, near-term solution and lunging in that direction.” BOA “was not an organization that had the patience for deep, strategic thinking. It was an opportunistic company that preferred action of any kind to inaction.” Although much of the bank’s empire-building had taken place under McColl, the preceding “legendary” CEO, Ken Lewis’s acquisitions of LaSalle, Countrywide and perhaps even Merrill Lynch (to some extent) evince the sort of short-sighted and opportunistic lunging-without-thinking that can go with empire-building. Cutting 10% of the work force may be interpreted as a response to the market’s implicit verdict on Lewis’s shopping spree following Fleet. The losses stemming from Countrywide are evident enough; the case of Merrill Lynch is a bit harder to weigh.

Although Merrill proffered great synergy with BOA and could be picked up on the cheap, Lewis’s rushing to a deal over a weekend (with only about 12 hours for due diligence!) can also be considered as excessively risky, especially considering the history of hidden CDOs at Merrill (Semerci hid $30 billion then unfairly blamed them on his predecessor at Fixed Income). Had Merrill unloaded all of its toxic assets back in July? If so, what caused the $15.31 billion loss of Merrill Lynch announced only after the BOA shareholder vote on the acquisition in December 2008? Furthermore, did Lewis knowingly keep the mounting losses at Merrill from his shareholders as they were preparing to vote? At the very least, failing to disclose the mounting losses in real time was risky, even reckless, given what could be expected—namely,  the $50 billion potential liability that would face the bank from a stockholder suit. Even if Lewis decided not to disclose “non-material” losses because they were in line with Merrill’s results in 2007, was the CEO manipulating his stockholders while puffed up in the vainglory of empire-building? Furthermore, the condition of the market in September 2008 was not exactly ripe for making a deal to acquire a major financial institution. Lewis and Thain knew Lehman would go belly up when signed their agreement at 1am on Monday, September 16, 2008.

As risky and perhaps even foolhardy as the Merrill acquisition may have been for Lewis, his acquisition of Countrywide defies any good sense. That he was being paid millions of dollars at the time suggests that the dysfunction at Bank of America may include corporate governance. Specifically, deferring too much to the CEO at the expense of the shareholder interest evinces a lack of accountability. Although BOA had a history of duality—splitting the chairman and CEO positions between two people—still the CEO may have too much influence.

Finally, a vital matter of public policy should not be ignored. Although it could be argued that Bank of America is being forced by its own history and the market to downsize, the question can legitimately be raised whether the market can or should be relied on to take faulty banks too big to fail down a notch. The very existence of Bank of America may involve more systemic risk than we should be prepared to accept. Relying exclusively on the market for the correction is, I contend, insufficient. The market can be insufficient in downsizing to a suitable size, or irrational exuberance can take hold such that a 10% reduction becomes a free-fall. That a bank such as Bank of America of over $1 trillion in assets is allowed to exist as a concentration of capital is itself a systemic risk. In other words, something is seriously wrong with the market mechanism for a bank such as BOA to have been able to become so big in spite of its modus operendi or corporate culture.

Click to add a question or comment on Bank of America or Ken Lewis.


Greg Farrell, Crash of the Titans: Greed, Hubris, the Fall of Merrill Lynch, and the Near-Collapse of Bank of America (New York: Crown Business, 2010).

Steven M. Davidoff, “For Bank of America, a Looming $50 Billion Claim of Havoc,” New York Times, September 28, 2011. http://dealbook.nytimes.com/2011/09/27/for-bank-of-america-a-looming-50-billion-claim-of-havoc/live-updates/

The Debt Crisis: A Conflict of Interest Hampers the E.U.’s Response

“As the European Union enters a financial crisis in slow motion,” a Huffington Post reporter avers, “the fragile American economic recovery hangs in the balance. With Greece almost certain to default on its debt, European political leaders need to take decisive action to prevent a resultant string of bank runs and government defaults, which could precipitate double-dip recessions in Europe and the United States.” If Greece suddenly defaults, Kavoussi reasons, other E.U. states “could leave the European Union to flee higher interest rates and to enable themselves to pay down their debt more easily by devaluing their currencies.” Such an outcome, she claims, “would almost certainly plunge Europe into a recession.” She observes, moreover, that “European politicians may lack the political will necessary to prevent the sovereign debt crisis from mushrooming into a global economic slowdown.”
Kavoussi reports that “(E)conomists have said that to prevent a Greek default, European politicians need to restructure Greek debt by cutting the payouts to bondholders by as much as 60 percent while guaranteeing the remaining amount with higher-quality European bonds.” The prospect of a Greek default was very real at the time Kavoussi filed her report. "Greece can't pay its debts," Behravesh said. "Period." The E.U. a lot of power to officials of the state governments—politicians whose primary job it is to protect the interests of their respective electorates. As a result, the E.U. has not acted with sufficient financial resources to stave off a financial collapse stemming from a string of state bankruptcies starting with Greece.

Restructuring Greek debt would cost the European Union just over $100 billion, according to NYU economist Nicholas Economides. Behravesh said that in addition, the European Union and European Central Bank need to guarantee the sovereign debt of troubled states such as Spain, Ireland, Portugal and possibly Italy, while pouring money into European banks. That could cost as much as $2 trillion to $3 trillion. As if defying the gravitas of these numbers, politicians in the state governments have been reacting to crisis after crisis without stepping ahead of the curve, Behravesh said.

According to Kavoussi, the “European response to the sovereign debt crisis has been halfhearted” because state-level political leaders must answer to their own residents in elections—not to the European citizens over all. People in wealthier states, such as Germany, “have protested against making concessions to save their less fortunate” neighboring states. The E.U. itself, as a federal system, was not as of Kavoussi’s report sufficiently balanced between the states and the federal government, and it was unlikely that a sufficient number of state politicians would tackle this matter of governance, particularly when the E.U. debt crisis was demanding so much attention. "It's hard to find a European leader with any long-term vision," said Harvard economist Richard Cooper. "They're actually more interested in the next election than they are in doing what needs to be done." Brookings Institution economist Gary Burtless “compared the European Union's decision-making process to the chaos that would ensue if 20 states in the U.S.—ranging from healthy states to those battered by the burst of the housing bubble—had to coordinate their economic policy.” Burtless is exactly on the mark concerning comparing apples with apples. Typically states in the E.U. are likened to the U.S. as a whole (whereas U.S. states are never compared to the E.U. as a whole).

As unlikely as it may be that E.U. state officials bite the bullet in rectifying the imbalance in the E.U. federal system, Kavoussi reports that “some economists held out hope that European policymakers eventually would act to prevent the disintegration of the European Union, even if at the last minute.” Even as the perception of disintegration motivates needed restructuring of the federal system, it does not mean that state defaults or even the collapse of the euro would necessarily mean the collapse of the E.U. itself. Even if some “euro” states were to walk away from the currency, it does not mean that they would leave the E.U. The union is not predicated on the euro. Indeed, the common currency was a relative late-comer. The common market and anti-competitive directives and regulations, as well as the social and justice planks, could survive without the euro.

Some perspective is thus necessary. The European Union may simply have stepped to far forward too quickly in adopting monetary union before achieving the requisite fiscal competencies in the E.U. Government. Many Europeans are even loath to admit the very existence of an “E.U. Government” even though it has institutions of the three governmental branches. Yet faced with the collapse of the euro, even the state politicians might step up to the plate and lead as statesmen, just as members of Congress did in 2008 in enacting TARP to stave off another depression.

"It's like when the Congress voted on TARP in 2008. They voted no, and the world economy blew up in their face. And the next week, they voted yes," Eichengreen said. "That's the consciousness-raising exercise the European leaders are going through now." Well, I would not hold my breath on that eventuating into any fundamental reform, at least for several years from 2011 when Kavoussi filed her report. While the debt crisis has made Europeans aware of the imbalance in their federal system wherein the states wield too much power at the expense of the E.U.’s competencies, achieving real change in Europe, as in America, is another matter. It is entirely possible that European state officials will allow several states to go bankrupt, the euro itself to collapse, and even the E.U. to dissipate (though this doesn’t necessarily follow from the first two!) rather than cede more governmental sovereignty from the states to the E.U. Government (even though the state officials are active in that government via the E.U. Council and the European Council). The conflict of interest in the state officials giving up power (even if they would share part of it via the councils at the E.U. level) lies at the root of the insufficient E.U. response to the semi-sovereign debt crisis facing a few of the states.

The conflict of interest has also come into play as the E.U. has relied on state officials to enforce the E.U. limits on state deficits and debts relative to GNP. According to Stephen Castle of the New York Times, the “culture of European Union politics discourages [states] from being tough on one another because every [state] knows that it might one day need to call in favors.” That is to say, relying on the state governments to enforce E.U. law against one of their own is inherently problematic.

Europeans seem in utter denial as to the drawbacks that come with relying on state officials to drive the E.U. Many Europeans are content to go on as if the E.U. itself were merely a confederal alliance like NATO or ASEAN, wherein the states are sovereign rather than semi-sovereign. For example, Steven Erlanger writes in the New York Times (6 October 2011) that the E.U.’s “collective decision making” is more factious than that of the U.S. because the E.U. states that use the euro “are a collection of sovereign states that all must agree on any painful steps, which may even be harder than getting Congress to do the same.” While Erlander is correct to compare the E.U. to the U.S. as they are of the same genre (modern federal government) and scale, the E.U. states are not sovereign, as they have already given up portions of governmental sovereignty to the E.U. institutions—with the ECJ having issued Europe’s version of the supremacy clause concerning state law and constitutions that conflict with E.U. basic or statute law. Indeed, unanimity pertains mostly to constitutional amendments, while qualified majority voting (something akin to the supermajority needed in the U.S. Senate), which itself involves a transfer of sovereignty, pertains in most of the E.U.’s competencies. Unfortunately, Erlander perpetuates the sort of denial that makes it more difficult for Europeans to come to grips with their collective problems in a spirit of solidarity rather than states’ rights. The denial is itself enabled by the conflict of interest that exists in the E.U., given the salient role of state officials at the union level. The state officials' know it is in their short-term political interest to perpetuate the illusion that the states are sovereign even as they have given up significant governmental sovereignty to the E.U. Besides the sordid nature of self-serving denial and ignorance, it is sad that Europeans and the world may have to pay a huge economic price as a result if the debt crisis and related banking problems spiral out from under the E.U.’s grasp.

Click to add a question or comment on the E.U. and its state governments in solving the debt crisis.


Bonnie Kavoussi, “European Sovereign Debt Crisis Threatens American Economy,” The Huffington Post, September 27, 2011. http://www.huffingtonpost.com/2011/09/26/european-union-sovereign-debt-crisis_n_981859.html

Stephen Castle, “Europe Set to Vote on Tougher Rules for Currency,” New York Times, September 28, 2011. http://www.nytimes.com/2011/09/28/business/global/eu-moves-to-toughen-rule-book-for-euro-membership.html

Steven Erlanger, “Europe Tries To Stave Off A Reckoning,” New York Times, October 6, 2011. http://www.nytimes.com/2011/10/06/world/europe/europe-tries-to-stave-off-a-reckoning.html?pagewanted=all

Monday, September 26, 2011

A Trader Dreams of Economic Collapse

Call it over-confident bravado or perhaps a lapse into utter transparency; trader Alessio Rastani’s comments on BBC give the rest of us a glimpse of the power behind the world’s thrones and how prone “the system” is to collapsing without a sufficient force geared to the viability of the system itself. In other words, it is amazing that the financial/governmental systems go on without more attention to them as systems rather than to micro self-interests. One might ask whether powerful self-interests are sufficient to keep the system from hitting the rocks. Apparently the answer is yes, though this is astonishing nonetheless. It is like a car somehow making its way down the street with one person in the car looking at pedal, another at the steering wheel, and still another at the speedometer. It is amazing if the car does not crash, yet somehow it managing to stay on the road.

As for a dash of reality, Rastani said on September 26, 2011 on BBC TV that Goldman Sachs rules the world and the Euro zone is poised to crash. "This is not a time right now for wishful thinking that governments are going to sort things out," Rastani said. "The governments don't rule the world, Goldman Sachs rules the world." Beyond the disciplining of egos within the bank, Goldman’s reach is multiplied by forays made by its alumni into governments and other banks. For example, when Merrill Lynch executives were finally facing the prospect of needing to sell to Bank of America in September 2008, John Thain relied on his fellow Goldman alums who he had lured to Merrill—sidelining Merrill’s own. In the U.S. Government, both Henry Paulson and his assistant at Treasury who ran TARP were Golden. It can therefore be surmised that the Eurozone was poised to crash because Goldman’s execs had determined that they could profit from it. The state-heavy E.U.’s government only appeared to be capable of protecting the viability of the euro financial system.

I suspect that Rastani was overplaying his hand. The financial interest of the rich states of the E.U. (and their respective banks) cannot not be written off in favor of a Golden hegemony unless Goldman Sachs controls the European banks. To be sure, at the time of Rastani's interview, there were players poised to benefit financially from the collapse of the Eurozone. Even so, powerful vested financial interests not limited to Europe surely had a financial interest in the continued viability of the Eurozone. Of more value to us than Rastani's crystal ball is his mentality and values, which were on full display during his interview. We have a rare snapshot of what sort of people rule the world in terms of real power. 

The crash will be good news for traders, Rastani told stunned BBC anchors. "For most traders we don't really care about having a fixed economy, having a fixed situation, our job is to make money from it," he said. "Personally, I've been dreaming of this moment for three years. I go to bed every night and I dream of another recession." Rastani said traders aren't the only ones who can benefit from the crisis. "When the market crashes . . . if you know what to do, if you have the right plan set up, you can make a lot of money from this." Whether or not such opportunities rule the day, Rastani’s mentality itself is startling (or should be). In other words, we should also be stunned.

 Rastani's dreaming of a recession (like Bing dreamt of a white Christmas?) even as he was predicting that the “savings of millions of people are going to vanish” in less than a year might strike us as insensitive, even sadistic—and at the very least, rather selfish. Would he cheer the death of an uninsured man who could not afford medical treatment if money could be saved by a hospital in Rastani’s portfolio?  If so, could we give any credence to his “deathbed conversion” should he fall on bad times? Beyond the obvious moral questions, does the child deserve his amassed power, wealth and position? Moreover, can we continue in good conscience to respect him now? The respect that we give to offices or positions may be exaggerated, and thus due an "adjustment." Just because a Wall street player has power on account of his or her position (and wealth) does not mean that he or she is due respect accordingly.

In fact, if traders such as Rastani have a financial interest in the collapse of an economic system, it could be asked whether they have enough power to make that catastrophe happen. If Wall Street bankers—the real power-brokers—are focused on such financial payoffs, is anyone of sufficient power looking out for the system itself? Again, Rastani may have been overplaying his hand.

In 2008, the U.S. Government enacted TARP to stave off financial collapse. Of course, even Goldman was vulnerable, so it was in its own financial interest that Treasury contain the contagion. The experience demonstrated that the American federal government is capable of safeguarding the financial system, but what if Goldman were to face no downside from a collapse and would in fact benefit from it? Could Goldman alums in strategically-placed government offices sabotage the government’s own efforts to protect the system? As Sen. Dick Durbin said in 2010, the banking lobby owns Congress. The U.S. Government acting against the interests of Wall Street might be akin to that government putting some air between itself and Israel. Elected representatives and their appointees know enough not to screw the sacred cows.

So the trader has a point, though beyond the content of his predictions, the transparency of his mentality and the mentality itself warrant reflection by the rest of us. I suspect that we have a naïve view of the type of people pulling the strings. Were we to get to know those people (even the CEOs), an obvious question might be whether they deserve the power, position and wealth that they have gained. In a plutocracy, there is unfortunately little that we can do about it, as they hold the strings. In a republic, on the other hand, the financial and business sectors are subordinate to the public good, and the representatives of that good can reform the selection and promotion rules in those sectors. In saying that the rest of us will have no other choice but suffer because it is in his financial interest, Rastani was essentially informing us that our so-called democratic republics are actually plutocracies. Our systems depend, in other words, on the particular financial incentives of the Golden traders. This is even worse than the prospect of a recession.

It means nothing that you or I might conclude that the system itself is broken, as we do not pull the strings; we merely pull the levers on election-day, lulled by the illusion that popular sovereignty lies with us. Even if Rastani’s interview wakes some of us up, little difference can be expected short of a major shift in power—but how can the less powerful overcome the kings of the hill to gain the hill itself? That would be like water flowing upstream as if gravity no longer held. Yet somehow, for people such as Rastani to be so respected and powerful in spite of the kind of persons they are seems to go against gravity itself. Like ignorance that is arrogant, one must wonder how the thing manages to stand at all. Perhaps all that is necessary is a gust of realization by us that the emperors are indeed trading in the nude, and are thus unworthy as de facto rulers. But can we act on the basis of a new awareness?

Click to add a question or comment on Rastani’s views and mentality in particular or on the power of Wall Street over governments.


“Trader Alessio Rastani To BBC: ‘Governments Don’t Rule the World, Goldman Sachs Rules the World’,” The Huffington Post, September 26, 2011. http://www.huffingtonpost.com/2011/09/26/trader-to-bbc-goldman-sachs-goldman-sachs-rules-the-world_n_981658.html

Is Obama the Antichrist?

In the twentieth century, Christian apocalypticism thought it saw the end of days in the midst of baleful signs, including historical biblical criticism, the return of the Jews to the Holy Land, evolutionary science, and the United Nations. In the United States, the consolidation of power in the federal government at the expense of federalism (and, theoretically, liberty as well) was apocalyptically taken as a precursor to the end. According to Matt Sutton, “As the government grew in response to industrialization, fundamentalists concluded that the rapture was approaching.” The trajectory, in other words, was viewed as headed toward a global super-state under the thumb of a seemingly benevolent ruler. Franklin D. Roosevelt’s “consolidation of power across more than three terms in the White House, his efforts to undermine the autonomy of the Supreme Court, his dream of a global United Nations and especially his rapid expansion of the government confirmed what many fundamentalists had feared: the United States was lining up with Europe in preparation for a new world dictator. This “leader would ultimately prove to be the Antichrist, who, after the so-called rapture of true saints to heaven, would lead humanity through a great tribulation culminating in the second coming and Armageddon.”

Thanks to Obamacare and the Dodd-Frank financial regulation law of 2010, some of the anti-state apocalyptic voters viewed Barak Obama during his first few years as president as possibly being the antichrist. Questions about Obama’s birth only fueled the speculation. According to Sutton, the “specious theories about his place of birth, his internationalist tendencies, his measured support for Israel and his Nobel Peace Prize fit their long-held expectations about the Antichrist. So does his commitment to expanding the reach of government in areas like health care. In 2008, the campaign of Senator John McCain, the Republican nominee, presciently tapped into evangelicals’ apocalyptic fears by producing an ad, ‘The One,’ that sarcastically heralded Mr. Obama as a messiah.” On the Fox News network, one host regularly referred to Obama as “the anointed one.” This reference was not lost on evangelical apocalyptic voters.  


The sheer paradigmatic distance between twenty-first century secularists and evangelical apocalyptics may go a long way in explaining the blockages between the U.S. House Republicans and the U.S. Senate Democrats (and the president). In other words, the voters represented by the two parties are not only on different pages—the two groups are reading different books. Indeed, beyond having radically different theological assumptions and beliefs, the two groups may differ even on whether religion is legitimate. For example, a modernist secular voter might characterize the apocalyptics as superstitious. The voter could point to the failure of the world to end in the twentieth century in spite of all the signs of the impending rapture and period of tribulation. Indeed, “the sky is falling” Christian reading goes back to the pre-Constantine persecutions. The Gospels have Jesus himself saying that the generation then alive would still be living (i.e., in the world) when the Son of Man comes on clouds (i.e., the second coming).

In spite of the problems with the apocalyptic interpretation (which seems to have been applied in any decadent or disruptive period in the history of Christianity), definite trends can be identified, such as the U.S. Government’s increase of power at the expense of the several states. Furthermore, increasing global interdependence—such as in regard to health, nuclear weapons, and climate—has indeed increased pressure on politicians to increase the power of the U.N. The proliferation of empire-scale federal unions beyond that of the U.S.—as evinced by the E.U. and even the A.U.—can also be viewed as a trend toward globalized governance (i.e., a federation of regional federations, which themselves are made up of kingdom-level states).

How such trends are interpreted is what triggers the gulf between the apocalyptics and the secularists (and even the mainline churches). My main point is that political intransience can be expected with such divergent views of social reality and its basis. For instance, does society (and government) result from a social contract (e.g. Hobbes, Locke, Kant) or a divine decree (e.g., Augustine and Aquinas)? Is increasing statism a sign of the Antichrist or simply a response to problems of industrialization? The interpretations go beyond whether the trends are good or bad. Accordingly, discourse itself can be expected to be extremely difficult. It is not, however, impossible, and solutions are possible.

For example, federalism can accommodate such divergent views as long as the federal units have enough autonomy from the general government. The E.U. is in a better condition in this respect than is the U.S., though the European Union risks dissolution (e.g., the state debt crisis) because the E.U. Government does not have enough competencies to effectively manage the integration already accomplished.  However, federalism should not be viewed as a panacea. It is possible that the fundamentally disparate differences between the apocalyptics and the secularists regarding the role of government are such that political separation is the only suitable solution. This may be why Texas under Rick Perry flirted with succession in Obama’s early years. In any case, as difficult as discourse between the representatives of the two groups may be, being in political union demands tolerance and discussion, which in turn require humility (including a recognition that one can be wrong). Yet even here, Biblical inerrancy throws in a wrench, making discourse tortuous for both sides.

The distance between the parties is indeed formidable and perhaps even intractable. Even deciding whether to separate would be daunting. A union containing a very deep cleft is thus what we Americans suffer to manage amid political paralysis, finger-pointing, and shouting. God must surely be diverting his eyes in utter disgust and ultimately sadness—not about the signs or trends necessarily, but, rather, concerning the sheer anger being evinced in such tight quarters. Were there any adults willing to come to the fore, a secular voter might lightheartedly proffer in generosity, God shines His light on this city on a hill. Otherwise, we are together in quite another place.

Click to add a question or comment on the impact of apocalyptic Christianity on American politics.

See related essay: Can Satanism Do Without God?


Matthew A. Sutton, “Why the Antichrist Matters in Politics,” The New York Times, September 25, 2011. http://www.nytimes.com/2011/09/26/opinion/why-the-antichrist-matters-in-politics.html?_r=1&ref=opinion