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Wednesday, July 25, 2012

Foe of Glass-Steagall: Break Up the Big Banks!


A few years after the financial crisis of 2008, Sanford Weill, the man behind the $70 billion merger of Travelers and Citigroup in 1998, urged the separation of investment banking from commercial banking. “Have banks be deposit takers, have banks make commercial loans and real estate loans, have banks do something that’s not going to risk the taxpayer dollars, that’s not going to be too big to fail.” Even though banks had been able to exploit loopholes such that Glass-Steagall had essentially been eviscerated by the mid-1980s, Weill’s lobbying helped take down the law formally in 1999.

Weill might be illustrative of the saying, “be careful of what you wish for; you might just get it.” By enabling Citigroup to be a financial supermarket, he also made the bank “too unwieldy to manage, hunched over by the weight of disparate businesses with little in common and with byzantine corporate structures that made running the behemoth incredibly difficult,” according to the New York Times. In such a condition and yet too big to fail, the bank needed bailouts by the U.S. Government in September 2008. Referring to breaking up banks like Citigroup, Morgan Stanley and Goldman Sachs, Weill told CNBC on July 25, 2012, “I’m suggesting that they be broken up so that the taxpayer will never be at risk, the depositors won’t be at risk, the leverage of the banks will be something reasonable.” Why this thinking had not gone into the Dodd-Frank Act of 2010 may point to the inordinate influence of the regulated on law-making affecting them.

In other words, the public interest in U.S. law may be dependent on business coming to the realization that additional regulation is in the firms’ own financial interest. This does not bode well for the public interest, being so conditioned. For the regulated do not normally have such an enlightened self-interest. In the case of Weill, he may have realized that especially with the incentives in Dodd-Frank, banks could be more profitable were they smaller. For example, the law requires additional capital reserves for the biggest banks. Nevertheless, greater profitability can result from losing the disproportionate costs of integrating disparate businesses in a huge financial supermarket or combination (this was Rockefeller’s name for Standard Oil Co, as it replaced competition with coordination via a monopolistic organization). Dodd-Frank comes up short even in terms of why being big may not pay.

So why, one might ask, did Weill want a financial empire in the first place? Even if empire-building does not pay off financially in proportional terms, running a bigger company can pay off in terms of experiencing the pleasure of power over others. Moreover, one can feel that one’s hackneyed managerial tasks (even as a  CEO) are somehow significant, if only in terms of getting into the headlines. In explaining big business, more than a financial calculator is necessary. In the end, the bankers’ resistance to Dodd-Frank breaking up the biggies may have come down not just to ignorance, but also to the lust for power (rather than merely for money). Whatever the dominant motive, it is pretty clear that Congress has been following in its wake rather than molding or channeling it from out in front.

Source:

Michael J. De La Merced, “Weill Calls for Splitting Up Big Banks,” The New York Times, July 25, 2012. http://dealbook.nytimes.com/2012/07/25/weill-calls-for-splitting-up-big-banks/

Tuesday, July 24, 2012

South Korea’s President: Emblematic of a Culture of Corruption


Mired in corruption, President Lee Myung-bak of South Korea reflected on the matter on television in July 2012. “The more I think about it, the more it crushes my heart,” he said. “But whom can I blame now? It’s all because of my negligence . . . . I bow before the people in apology.” He had offered a similar apology the previous January during his New Year’s speech. Although Kim himself was not as of July implicated, three relatives, four senior staff, and several former senior officials in the cabinet and government-run companies had been indicted or convicted.

According to the New York Times, “The president’s brother, a former lawmaker, has been charged with accepting bribes from two bankers. Prosecutors said the bankers asked him to help prevent regulators from shutting down their banks. The bankers have been charged with embezzlement and bribery, and their banks’ operations have been suspended.” Moreover, Kim was just the latest in a series of South Korean presidents politically damaged by corruption scandals. It would appear that personal profiting from one’s governmental (or business) position was at the very least a part of the South Korean culture, if not tacitly accepted in government circles.

In my albeit rather limited association with South Korean business, I have found the organizational culture to be extremely hierarchical in the sense that officials at the top have near carte-blanche (i.e., near absolute) power from the perspective of their subordinates. Additionally, the underlings tend to cover up any mistakes or failures from their bosses, whose world is thus held as though in the clouds. In such a context, corruption can be rife.

It should be noted that the extreme psychological distance in the organizational world in South Korea is not without a basis in fact. The mentality of an employee at a customer service call center is oceans away from that of even a mid-level manager, who in turn can be distinguished from an organizational leader. Often times, only the latter has the maturity to relegate the red tape by prioritizing common sense and even just that which is natural in human-to-human interaction. It is not uncommon, for instance, for people used to a certain height to instinctively sense and relegate the gate-keeping games of the herd. I suspect that in South Korea, the latter know they are eons away from their superiors. The latter can use this natural distance to their own advantage in covering up bribery and kick-backs. To this extent, the distance assumed by the underlings is unjustified, even if on a general mentality basis it is fully natural (and justified).

Therefore, even though the corruption in South Korean government and business is hardly justified from an ethical standpoint, a Nietzschean would quickly point out that distance is natural, even necessary, for the strong such that they not become infected by the narrowness of the herd. In the West, the organizational creature can be rather insistent that its mentality must be binding even on those above. In South Korean culture, by contrast, a lower mentality may have a better sense of its place, and thus of the inherently limited nature of its reach. That is to say, the presumptuousness of the herd animal is checked, whereas it roams like an undisciplined child in the West. The question regarding South Korea is thus how corruption may be checked without tossing the baby out with the bathwater. 

Source:

Choe Sang-Hun, “South Korean President Apologizes for Corruption Scandals,” The New York Times, July 24, 2012. http://www.nytimes.com/2012/07/25/world/asia/lee-myung-bak-of-south-korea-apologizes-for-corruption-scandals.html?ref=world


Sunday, July 22, 2012

Facebook Selling Users’ Personal Data: Unethical?


With advertising accounting for more than 85 percent of its revenue, Facebook has faced great pressure in the wake of its lackluster IPO to translate its unique asset, the pile of personal data it collects from 900 million users, into advertising revenue. I contend that Facebook’s handing over that data without first grouping it is unethical on a gut level.

The full essay is at "Taking the Face Off Facebook."