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Wednesday, March 28, 2012

Batting Better Than Goldman Sachs on Corporate Governance

Companies differ on how they handle personal and institutional conflicts of interest. This difference may reflect disagreement over whether a conflict of interest is inherently unethical, or whether one must be exploited for any conduct to be unethical. I take the former position: that to be in a conflict of interest is indeed inherently unethical. At the very least, being in a conflict of interest can trigger or spawn additional conflicts of interest. I point to Goldman Sachs’ response to an institutional stockholder’s corporate governance proposal as a case in point. That case can be contrasted with how the BATs board reacted in terms of corporate governance to bad public relations and a failed IPO.

BATs Global Markets’ directors voted on March 27, 2012 to remove Joe Ratterman as chairman, while allowing him to continue as CEO of the company. The vote came after a collapse of the electronic exchange operator’s initial public offering. The board decided to split the roles of chairman and CEO “in keeping with its goal of setting best corporate practices,” according to a company spokesman. In other words, the vote was in line with an “enhanced corporate governance structure.” According to the Wall Street Journal, the “separation of chairman and CEO roles follows general corporate-governance trends among small and midsize companies.” Might it be, therefore, that the managements of large companies are relatively powerful over their respective boards, and thus able to keep a CEO as chair of the board tasked with holding management accountable?

Also on March 27, 2012, Goldman Sachs announced that it would appoint a lead director independent of the management. On April 3rd, the Wall Street Journal reported that Goldman Sachs had named James Schiro to the position. In its piece, the Journal does not specify who within Goldman made the appointment. Unless it was a group of independent directors on the board, the appointment constitutes a conflict of interest. In other words, if the bank’s upper management had been involved in selecting who would occupy a position responsible for the CEO evaluation, such influence would be unethical (and counter-productive for corporate governance).That Schiro had been on the board since 2009 and was chairman of the board’s audit committee since the fourth quarter of 2010 suggests that a more independent choice could have been made by appointing someone new to Goldman’s board. In other words, if the board had been insufficiently independent, then choosing a preexisting director would not suffice.

I suspect that in not getting a chance to vote at the shareholders’ meeting on a proposal to prohibit the same person from being both CEO and chairman as a result, the shareholders had been duped, in effect, by the “compromise.”  The proposal by the American Federation of State, County and Municipal Employees, which as of September of 2011 had 7,101 shares, would have removed Lloyd Blankfein as chairman while allowing him to remain as CEO. It is likely that Blankfein’s power over the board was sufficient to get the proposal removed before being voted on, and Schiro appointed as lead director. No doubt Blankfein and many of his epigones viewed his slick power-play with admiration without paying much regard to the costs to the firm.

According to the Wall Street Journal, the “union had claimed stripping [Blankfein] of his chairman powers would help Goldman repair its reputation and reduce the potential for conflicts of interest.” I contend that the dual-position is itself a conflict of interest, rather than a potential for one, because one of the main functions of a board of directors is to hold the management, which includes the CEO, accountable. To have the person to be held accountable in charge of the body tasked with the making accountable is not only logically a contradiction, but also counter-productive and inherently unethical. It is unethical for any person to be in charge of that which is to render one accountable.

Accordingly, institutional shareholders “have prodded companies to separate the posts of chairman and chief executive, contending that such moves increase the independence of boards and make CEOs more accountable to directors.” This description understates the sordid nature of the duality, for a board headed by the CEO is not independent and the CEO is not accountable to it. It is not a matter of more or less. It is not like a slope on an economic graph showing supply or demand relative to price.

In short, duality is an inherent conflict of interest. Irrespective of what directors or a CEO does, the institutional (or positional) conflict of interest is inherently unethical. One must think structurally here, for it is the design itself that is unethical. This is akin to an unethical corporate policy. A policy to refuse to pay black employees, for example, is inherently unethical (because it is unfair). Even if the company has not acted on the policy, you can bet there would be demands from the public (and rightfully so) for the company to get the policy off its books. Product boycotts would not wait for the policy’s implementation. In fact, I don’t think Al Sharpton and Jesse Jackson would step away from their megaphones unless the company CEO had already renounced the policy as utterly squalid in nature and been thrown into a vat of jello for good measure (and good TV).

Like a racist policy, formally being the chair of the group tasked with holding one accountable is in itself unethical, whether or not a particular chair/CEO has subverted his or her board into accepting a compromise that is convenient for him or her. Removing that sordid design need not wait for a failed public offering or a bad reputation, or even for a chair/CEO’s unethical use of his or her board. Because an institutional conflict of interest is inherently unethical, its being unethical is not conditional on a particular use. It would appear that BAT got the message while Goldman Sachs was still cutting corners in a path of least resistance—to the management, that is.


Jacob Bunge and Scott Patterson, “BATS Chairman Will Give Up Post,” The Wall Street Journal, March 28, 2012.

 Liz Rappaport, “Goldman Bows to Pressure on Board,” The Wall Street Journal, March 28, 2012. http://online.wsj.com/article/SB10001424052702303816504577307871991956472.html

Liz Moyer, “Lead Director Named at Goldman,” The Wall Street Journal, April 3, 2012.

The Federal Reserve’s Housing Bubble

During one of his lectures to a class at George Washington University in March of 2012, Ben Bernanke, the chairman of the Federal Reserve, claimed that the central bank’s lower interest rates did not trigger the housing bubble that began in the late 1990s and ended in 2006. For one thing, the Fed did not start cutting interest rates until a few years into the twenty-first century. Also, home prices rose after the Fed later began raising interest rates. Bernanke also cited Europe, where housing booms have not been associated with either tight or loose monetary policy.

                         Ben Bernanke lecturing at Washington University       European Pressphoto Agency

However, the Wall Street Journal reports that the loosening of standards for underwriting mortgages that facilitated the housing bubble was enabled by low interest rates. At Countrywide, for example, the lies written into the mortgage applications by the mortgage sales force made a joke of the underwriting process for sub-prime mortgages (i.e., mortgages for people who would not normally qualify). Indeed, subprime mortgages had very low interest rates for the first few years in part due to the Fed’s low open-window rates. Of course, the ARM (adjustable rate mortgage) format contained much higher rates in the out years, which forced millions of homeowners to miss payments and ultimately face foreclosure. Essentially, the artificially low interest rates skewed the risk-return trade-off, such that very risky mortgage borrowers could pay very low interest and never wind up paying the higher ARM rates in the out years (having left or faced foreclosure by then).

So although the monetary policy may not be responsible for the housing bubble itself, the low interest rates can be tied to the growth in the subprime mortgage phenomenon, which nearly brought the entire financial system and economy down with it. The key to understanding how monetary policy affected the housing bubble is to distinguish the different segments of the bubble—noticing in particular which segment grew inordinately. Even if monetary policy were not a contributing factor in the growth of a vulnerable segment, the Fed, and its chair, failed to anticipate the crash beforehand. From this vantage point alone, it is risky to add to the Fed as a regulatory body.

Kristina Peterson and Jeffrey Sparshott, “Bernanke Says Low Rates Didn’t Fuel Bubble,” The Wall Street Journal, March 23, 2012.

Tuesday, March 27, 2012

Efficiency and Ethics: On the Fairness of High-Speed Trading

Two months into 2012, the SEC announced that it had been examining the trading activities of high-frequency trading firms.  According to the Wall Street Journal, the SEC was “examining, among other things, whether high-frequency firms benefit from delays in the dissemination of prices from various corners of the markets. . . . High-speed firms use direct feeds from exchanges that can give them a leg up on slower traders.” High-frequency traders “can access prices a split second faster through their access to direct feeds.” This is accomplished by placing the trading computers in the same data center that houses the exchange’s computer servers. Just over a year later, the Wall Street Journal reported that high-speed traders were using “a hidden facet” of the Chicago Mercantile Exchange’s computer system “to trade on the direction of the futures market before other investors get the same information.” Even getting the confirmation of a high-speed trade just one to ten milliseconds faster can enable a computer to know the direction a commodity is going and trade on it. According to the Wall Street Journal, the “ability to exploit such small time gaps raises questions about transparency and fairness amid the computer-driven, rapid-fire trading that increasingly grips Wall Street and confounds regulators.” Both the increasing use of high-speed trading and the problem of accountability from a regulatory point of view raise the stakes in determining the ethics of the practice.  

                              Has the increasing role of high-speed trading rendered the individual investor a "second-class citizen" in the stock market?

To take one example illustrative of the relevance and value of ethical analysis, the SEC was also investigating the fees that the exchanges pay out to draw high-speed trading orders. The fact that the exchanges are paying fees for high-speed orders while the high-speed firms are able to use the same data-base centers as the exchanges use points to a possible conflict of interest for the exchanges. At the very least, some mutual back-scratching seems to have been going on. One could argue, on the other hand, that in spite of the conflict of interest (i.e., an exchange giving the high-speed firms a benefit in exchange for more high-speed orders), the gains to the market itself in terms of pricing efficiency more than make up for the ethical lapse in the conflict of interest. However, the high-speed firms profit on the sheer volume rather than on huge pricing differentials over a fraction of a second. That market liquidity would suffer from a loss of such a small differential is the main argument used by the proponents of speed-trading.  

Essentially, the question is ethical. Is the unique access, even if for a fraction of a second, fair? While the access may seem to be nugatory, the profits made from it are not. Furthermore, can any high-speed firm have such close proximity to the exchanges’ data-bases, or is the back-scratching limited to “just between friends?” Fairness as an ethical principle could therefore be applied to the high-speed segment alone. A more obvious ethical question is whether the benefit obtained from the enhanced access comes at the expense of traders who are not high-speed. Generally speaking, if someone is trading at a gain, someone else is not—and some other guy is presumably on the losing side.

Generally speaking, a market should be fair and transparent to be not only ethical, but also fully efficient—and one might say, “fully functional” as well. The tremendous wealth and therefore power of Wall Street firms intimates that the financial markets may not be as ethical and functional as the general public assumes. All too often, the wise guys on the street can run circles around their regulators at the SEC.  Madoff is just one example. The more ubiquitous cases are the financial-technology guys in lower and mid-levels who can design processes and products that effectively skirt around the SEC watchdogs. To the extent that the political power of Wall Street can capture the regulators via lobbying Congressional offices and even putting “alums” in the agencies (e.g., an ex-CEO of Goldman Sacks as U.S. Treasury Secretary in 2008), it can be all the easier to keep one step ahead of the regulations. In the case of high-speed trading, I would not be surprised were their people at the trading firms working on other ways to reap large profits on seemingly small advantages based on technology and exclusive access.

The market mechanism is not solely mechanical. In other words, it depends on “soft stuff” like trust. For there to be trust, there must also be a sense of fairness. If individual investors come to believe that the stock or commodities market is rigged against them because high-speed institutional investors have a sustained competitive advantage, the market itself will suffer. If the credit-freeze in the commercial paper (i.e., overnight lending between banks) market that took place in September 2008 taught us anything, it is that trust in the other participants and the market itself is vital to capitalism. So it might be worth giving up some efficiency or liquidity to conform to the societal norm that a market is fair.  


Scott Patterson and Jean Eaglesham, “SEC Probes Rapid Trading,” The Wall Street Journal, March 23, 2012.

Scott Patterson, Jenny Strasburg, and Liam Pleven, “High-Speed Traders Exploit Loophole,” The Wall Street Journal, May 1, 2013.

Monday, March 26, 2012

Getting the Seasons Officially Wrong

Joel Achenbach of the Washington Post has not quite turned the corner with respect to spring, and the seasons in general. You see, “season” is used in two distinct though related ways in English. It can refer to four distinct weather/plant-life conditions or to the four parts of the earth’s orbit around the sun. Given the tilt of the Earth, the two are related but they do not occur together. While Achenbach acknowledges that the vernal equinox typically on March 21st “is a moment of time specified by the motion of the Earth around the sun,” he refers to this as the official start of the meteorological spring. In actuality it is not. In the Northern Hemisphere, meteorologists record data from December, January and February as winter and March, April and May as spring. So in March 2012, meteorologists could already conclude that the preceding winter had been the fourth warmest since the record-keeping began.

Consider the insanity in claiming on December 19th in the Northeast, the Northern Midwest, or on the Northern plains or further west that it is still fall. Yet even television weather people make the mistake of representing the winter solstice—the shortest day of the year in the Northern Hemisphere—as meteorological and botanical rather than astronomical in nature (to say nothing of the sheer stupidity in ignoring the obvious winter conditions of snow and ice). Meanwhile, still other people render the astronomical event as religious in nature. The ascendancy of the evergreen on the longest night is religious for those people even as it is botanical to others.

For my purposes here, it is sufficient to note that astronomy is distinct from  meteorology and botany. The latter two are relatively coincident as phenomena. To make meteorology and botany wait on an astronomical mark conflates different categories that do not cohere. It is not surprising that such thinking results in some rather obvious mistakes.

I argue that the same sort of cognitive flaw takes place in comparing a state in one empire-scale union (e.g., France) with another entire empire-scale union (e.g., the U.S.). The respective unions’ states are equivalent both in scale and politically in being semi-sovereign. Citizens in California could just as well say, “In California we do X (that really could be just about anything), while in the E.U. you do Y.” This statement seems strange on both sides of the pond, yet no one bats an eyelid at: “In the Netherlands we do X, while in the U.S. you do Y.” The asymmetry is based on European states’ rights (i.e., the antifederalist movement in American terms) and (frankly) American ignorance at America’s expense. So too, there is ignorance in a meteorologist announcing changes in the weather seasons based on astronomical bench-marks in the Earth’s orbit even as meteorologists do not use those bench-marks in recording data.

I suppose it is in reaction to the meteorologists’ inexcusable carelessness in conflating meteorology and astronomy (they are meteorologists, after all) that I note the beginning of a season by the actual shift in weather conditions. That is, I go from the empirical conditions on the ground. March of 2012 was warm even for spring across the Northeast, Mid-Atlantic and Midwest. A day or two into the warmth, I naturally started referring spring having arrived. Sure, winter could have returned and then it would have been winter for those days, so the seasons can refer to particular weather conditions (being meteorological). Yet the seasons can also refer to more long-standing clusters of botanical/meteorological conditions. In that March, as soon as the flowers and buds were visible, that only added to my determination to say to folks, “Well, spring has arrived”—meaning on a more long-standing basis than just a warm spell. No one even put up a fight—even as the weather folks on television were still marveling that spring was still weeks away. They just made themselves out to be stubborn idiots, frankly. When they finally “celebrated” the arrival of the astronomical event of there being no tilt in the Earth’s relationship to the sun as if the event were meteorological, the weather “personalities” resembled people who get to a party hours late and announce that the party has officially begun. People at the party obviously know it has been going on for hours, and naturally look confused and ask the host, “who invited those idiots.”  Unfortunately, it doesn’t do any good to talk to a television set; the talking heads keep right on going, completely sure of themselves.

In March of 2012 in many of the northern republics of the U.S., it would have been crazy not to refer to the conditions on the ground, which included daffodils and even tulips flowering and bushes and even trees budding, as spring. Insisting that weeks in the 70s and even 80s are still winter just points to the fault in using the names of the weather/plant seasons to refer to the astronomical quadrants of the Earth’s orbit. There is no “spring” in outer space. If anything, it is a perpetual winter, though even this analogy fails. Furthermore, spring arrives at different times in North America, depending on how far north one happens to be. It really is a regional affair.

The standardization of record-keeping (e.g., spring as March, April and May) is entirely reasonable, but the category mistake with astronomy goes too far, cognitively/logically as well as empirically. Sticking to such a mistake even while making such obvious blunders (such as that 80 degrees with flowers blooming is still winter, or 25 degrees with snow is still fall) is a strange choice that suggests a certain mentality, given that the weather person could simply stay mum on the issue rather than say something that can easily be anticipated as looking stupid. Why even announce that it is still winter while standing outside in shorts among flowers? Why go to the trouble of announcing a category mistake as if it were valid? I suspect that part of the answer is an over-valuing on things being official. Besides the artificiality in such hypertrophy, the mentality involves the flaw of denial. “It doesn’t matter whether it is pouring outside, if there is no rain in my gauge it is not raining.” In a way, this is a version of lying. Refusing to admit an empirical observation on account of an ideological value one holds (excessively), one is willing to lie.

It is not as if the meteorological and astronomical change together. At the very least, the distinctly astronomical nature of the vernal equinox in March (when the earth has no tilt relative to the sun—which happens also at the equinox in September) should be specified rather than implying that the matter is meteorological in nature. Even though the days are getting longer in March (an astronomical matter), it takes time for the air to warm. Accordingly, the meteorological and botanical are not coincident with the astronomical. Treating an astronomical event as if it were meteorological is thus an error; it is at the very least misleading. To willingly mislead just to be official is the sordid mentality that perpetuates this ongoing category mistake.

Joel Achenbach, “A Warm, and Official, Embrace of Spring,” The Washington Post, March 20, 2012.

Sunday, March 25, 2012

Cardiologists as Ethicists: On Cheney’s Heart Transplant

The Huffington Post reports that “(f)ormer Vice President Dick Cheney had a heart transplant [on March 24, 2012], after five heart attacks over the past 25 years and countless medical procedures to keep him going. Cheney, 71, waited nearly two years for his new heart, the gift of an unknown donor.” At the time, more than 3,100 Americans were on the states’ waiting list for a heart. Of the roughly 2,300 heart transplants performed in 2011, 332 were over sixty-five. On average, heart failure was killing 57,000 Americans a year at the time, so just a fraction of those who could use a heart get one. One might question, therefore, whether the 332 recipients who were over 65, and Cheney, who was 71, should have been allowed to avail themselves of the relatively short supply of available hearts.

                                   Dick Cheney was noticeably thinner after his 2010 heart attack. 
“The ethicists will get into this case.” Eric Topol, a cardiologist in California, wrote this line in reference to the question of age. Specifically, should someone who could be expected to have ten years left take a heart that could otherwise allow someone else to live twenty or thirty more years?  Over 70% of heart-transplant recipients live at least five years. It could be argued that Cheney had been able to live 71 years so it is not fair for someone who is 50 or 60 to not be able to do likewise for lack of a transplant because someone Cheney’s age has it. On the other hand, Cheney could argue that because people were living into their 80s and even 90s, he could expect to do so as well. In other words, he could look at someone who is 81 and say, “it is not too much to ask to try to live that long.”

To be sure, my primary applications of ethical theory are in business, government, society, and religion. I do not have the background in biology and medicine to be an expert in medical ethics. So this essay can only be cursory. It is odd to me, therefore, when someone who has not even studied ethical theory wades in as a pseudo-ethicist. An undergraduate degree from a medical school (e.g., the M.D.) does not qualify a cardiologist as an ethicist.

Yet William Zoghbi, the incoming president of the American College of Cardiology at the time of Cheney’s transplant, said on that very day concerning Cheney’s age, “It is not too old. Age is really not a factor.” To be sure, he was referring to the medical condition of the patients. However, he went on to overreach, opining “I don’t see any ethical issues here,” given how weak Cheney’s heart had been. Just because a non-ethicist does not think there are any ethical matters involved does not mean that this is so.

From my standpoint as a business ethicist, I believe an ethical issue is indeed involved in hospitals, as businesses, giving hearts to older applicants, especially if they are powerful or wealthy people who can “skip” in line by having a dedicated donor. More generally, using the utilitarian ethical theory of Bentham, it could be argued that giving hearts to older applicants violates the greatest good (in terms of pleasure) for the greatest number. Older recipients tend not to live quite as many years on a new heart, and they have already lived to be a ripe old age while someone with heart disease at 50 has not. Enabling as many people as possible to reach 71 would go a long way in terms of the greatest good for the greatest number.

Admittedly, I must qualify my conclusion due to my lack of medical knowledge. For instance, I do not know how the older recipients fare medically relative to younger ones. Ideally, a doctor of ethics who has an undergraduate degree from a medical school should be decisive here. For a cardiologist without any formal education in ethical theory to venture an ethical conclusion suggests a certain educational immaturity, if not arrogance. I doubt that William Zoghbi had even heard of Bentham’s utilitarian theory and yet the cardiologist presumes that no ethical issues are involved in Cheney’s case.

In a society in which the profession of medicine is valued a lot, people might enable medical practitioners to get away with such an over-reach with impunity. No doubt Dick Cheney really wanted to keep living. This natural urge—the life instinct—can easily succumb to a medical practitioner’s artificial desire to over-reach in terms of what is entitled by the undergraduate degree granted by medical schools.


Kasie Hunt, “Dick Cheney Heart Transplant: Former Vice President Recovering After Undergoing Surgery,” The Huffington Post, March 24, 2012.