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Friday, October 12, 2012

2012 Nobel Peace Prize Winner: The European Union

In the modern world of organizations and the members who inhabit them, it perhaps makes sense that the Nobel peace prize would go to a government rather than to a particular official thereof. One immediate problem was figuring out which officials in the E.U. would accept the award. Martin Schulz, the president of the European Parliament, immediately issued a statement indicating that his institution expected to be part of the award ceremony. Herman Van Rompuy, president of the upper chamber, and Jose Barroso, president of the E.U. Commission, could also be said to have had legitimate claims in receiving the award on behalf of the E.U. itself. The absence of an “overall” figurehead in the E.U. is likely a result of Europe’s unhappy experience with “one man rule.” Indeed, the E.U. itself can be said to be a check on such nationalist excesses. In this regard, the peace prize provided Europeans with a change to catch their breath and take in the big picture amid an austerity/debt crisis.

                                  Thorbjoern Jagland announces the E.U. as the winner of the 2012 Nobel Peace Prize

Thorbjorn Jagland, the former Norwegian prime minister who was chairman of the panel awarding the prize in October 2012, gave as the rationale for the decision a “deep concern about Europe’s destiny as it faces the debt-driven woes that have placed the future of the single currency in jeopardy. ‘There is a great danger,’ he said in an interview in Oslo. ‘We see already now an increase of extremism and nationalistic attitudes. There is a real danger that Europe will start disintegrating. Therefore, we should focus again on the fundamental aims of the organization.’” Asked if the euro currency would survive, he replied: “That I don’t know. What I know is that if the euro fails, then the danger is that many other things will disintegrate as well, like the internal market and free borders. Then you will get nationalistic policies again. So it may set in motion a process which most Europeans would dislike.” This is exactly what the EC and then the E.U. were intended to obviate.

Noting an 80 year period in which France and Germany had been at war (including WWI and WWII), Jagland emphasized the “stabilizing part played by the E.U. has helped to transform most of Europe from a continent of war to a continent of peace.” Most notably, the Union was able to capitalize on the fall of the Berlin Wall to unify Eastern and Western Europe within a federal system. He pointed futuristically in particular to the accession of Croatia as a state in 2013, the opening of accession negotiations with Montenegro, and the granting of candidate status to Serbia—“all strengthen the process of reconciliation in the Balkans.” In the quotidian worries of a debt and austerity crisis bearing down on the Union, it is easy to forget that the European Coal and Steel Cooperative had been established to keep an eye on a re-emerging militaristic Germany, and that the EC’s common market had been theorized to make war between the states less more costly economically to any aggressor.

Moreover, the momentary costs in bailing out even a profligate state or two that had become too ensconced in debt and consumption can be forbidding even as the long-term benefits from obviating war in Europe can be difficult to perceive and measure. Especially in the context of debating fundamental questions on the eventual shape of the Union, it is in Europe’s best interest not to let this larger perspective lapse or succumb to more immediate political concerns either at the state or federal level. This is why it would not be a bad idea for Europeans to elect delegates to a convention isolated from the day’s passing trees, being oriented instead to the big picture. Rather than angle for the best spot on the awards platform, E.U. leaders could have used the Nobel announcement as momentum for a congress or convention specifically geared to the broad outlines of an evolving, more perfect union, “from a continent of wars to a continent of peace.” Europeans would be wise to keep their eyes on the prize rather than become too distracted or absorbed in the moment.


Alan Cowell and Walter Gibbs, “Mired in Crisis, European Union Wins Nobel Peace Prize,” The New York Times, October 12, 2012.


Thursday, October 11, 2012

A "Bronx Upbringing" Out-of-State: Tolerance in a Federal Empire

Typically, the American empire is assumed to refer to the hegemony of the U.S. in the world. “Imperialism,” in other words, is thought to refer to a major power imposing on lesser ones around the world—the influence being directed externally. I contend that the United States of America is itself an empire, even apart from its external influence, as the Union is composed of republics having distinctive cultures and on the scale of early-modern European kingdoms (e.g., United Kingdom, Switzerland, the Netherlands—which had been “international” in medieval times).

The complete essay is at "Is the E.U. a Federal System?"

Wednesday, October 10, 2012

Conflicts of Interest: Relying on a Wall Street Bank’s Safeguards

In October 2012 the Wall Street Journal reported, “the Financial Industry Regulatory Authority is examining how major investment banks and brokerage firms define and manage conflicts of interest between themselves and their clients.” Prime facie, defining and managing such conflicts between oneself and others can be regarded as itself a conflict of interest. It is perhaps a bit like the wolf negotiating with itself on its new job guarding the hen-house. I suspect that the regulators were going too far in attempting to translate “regulating” into managerial terms. The Journal goes on to ponder, “Will the first systematic look at conflicts on Wall Street in years make a difference for investors?” In my view, investors have good reason to be skeptical of the FIRA’s “manageralizing” approach.

                                                                                                   The prowess on Wall Street: How can it be contained?    source: healthlifepro.com
In a speech in 2003, Stephen Cutler, then director of enforcement at the Securities and Exchange Commission (and then general counsel of J.P. Morgan Chase—if having been anticipated, the move could itself have been a conflict of interest for the regulator) set in motion what can be called the “managerial approach” to reducing conflicts of interest “from within.”
Specifically, Cutler called on “every financial services firm to undertake a top-to-bottom review of its business operations with the goal of addressing conflicts of interest of every kind. No one is in a better position than you to identify the conflicts that arise from a financial services firm's efforts to pursue business profitability. I encourage you to approach the task systematically. You should search for those business practices that have the potential to sacrifice the interests of one set of customers in favor of the interests of another. You also should identify any situations in which the firm could place its or its employees' interests ahead of the firm's customers. Both types of conflicts need to be eliminated or disclosed.”
In short, Cutler encouraged every financial firm to run a "top-to-bottom review" that would seek to correct "conflicts of interest of every kind." Unfortunately, this language can be read as wildly idealistic concerning financial service firms and even human nature itself (perhaps even more than Marxism!). Even though he added, "No one is in a better position than you to identify" such conflicts, it is not necessarily the case, with all due respect to Plato, that knowing the good is sufficient to being good. The “burn baby burn” emails of Enron energy traders in the midst of California wildfires come to mind as a counterexample to the assumption that identifying an unethical practice is necessarily an obstacle to unethical conduct. In fact, identifying the harm can even provide some in business with added enjoyment.
To be sure, Cutler did try to remind the Wall Street financial wonks in his audience of their own financial interest in “unwinding” any conflicts of interest. After citing the conflict of interest in providing both investment banking and “research” services, he added more generally that “when conflicts are exposed, the costs to the industry are enormous - in dollars, in reputation, and in investor confidence and trust.” This assumes, however, that investors are wise to getting the short end of the stick as another party benefits. In his written version of his speech, Cutler cites Judge Pollack, who has claimed it should be obvious to the general public that research analysts’ recommendations often are driven by the preferences of their firms’ investment banking clients. The fact that such conflicts of interest have not been at all obvious suggests that financial managers may wager that their firms could get away with a conflict of interest long enough to justify even any long-term resulting losses especially if just in reputational capital (e.g., Goldman Sachs).
Moreover, it may be that it is impossible for Wall Street to obviate its own conflicts of interest. According to Cutler, “Conflicts of interest are inherent in the financial services business. When you are paid to act as an intermediary, like a broker, or as another's fiduciary, like an investment adviser, the groundwork for conflict between investment professional and customer is laid.” This is because the intermediary has one eye on the client’s financial interest and the other on that of his or her firm. Part of that which constitutes being a professional (which a financial service practitioner is not) is the obligation to put the interest of the client or patient before one’s own financial interest. Lawyers, CPAs and physicians are so bound, whereas business practitioners are not. It is legitimate, in other words, for a banker at Goldman Sachs to operate in the financial interest of his or her firm, and clients are presumably aware of this fact. The problem, which is not latent in the financial intermediary position itself, is when bankers lie to their customers in a conflict of interest.
For example, Goldman’s salesmen acted unethically in a conflict of interest when they told even good clients that a traunch of sub-prime-mortgage derivative securities were good when internal emails indicate that the salesmen viewed the securities as “crap” and the bank had a “big short” against the bonds. Contrary to my assertion here is the view that conflicts of interest are exploited largely unknowingly. "There's plenty of people who sell bad stuff knowingly," says Robert Seawright, chief investment officer at Madison Avenue Securities, a financial-advisory firm in San Diego, "but I think the far bigger problem is inappropriate sales that are well-intended. I've seen people who sell bad stuff to their moms, because they thought it was the right thing.” As cited above, Enron and Goldman Sachs provide strong counter-examples suggesting that good intentions may not be that common in the exploitation of others from a conflict of interest. In other words, people tend to know what they are doing, and may even revel in it at the expense of their victims. In looking at whether to regulate financial firms in terms of institutional conflicts of interest or merely let the banks manage their own conflicts, we as a society should not be so naïve concerning Wall Street, the conflicts, and even human nature itself.
Therefore, even though Cutler's speech, according to the Wall Street Journal, “led to an outpouring of submissions to the SEC in which firms laid out the conflicts they had identified and the safeguards they had put in place to control them,” investors and the general public should not put a lot of stock in this “favorable” reaction.
Investors should bear two things in mind, the Journal advises. “First, conflicts of interest aren't a part of how Wall Street does business; conflicts are its stock-in-trade. Even as they were professing their purity to the SEC in response to . . . Cutler's call, many firms turned out to be enticing ignorant borrowers into taking out mortgages they couldn't afford, unloading portfolios of toxic debt on unsuspecting clients and manipulating one of the world's most widely used interest rates for their own benefit.”
The Journal adds that one study reports that “doctors were outraged that financial advisers might accept pens, coffee mugs, free meals or educational junkets from investment companies. Yet the physicians rejected the idea that accepting pens, coffee mugs, free meals or educational junkets from drug companies could ever compromise the integrity of doctors. The financial planners wanted doctors to be barred from accepting gifts from pharmaceutical companies, lest their objectivity be compromised—but thought the same restrictions in their own profession would be unnecessary and onerous.” It is easy, in other words, to see the splinter in the other guy’s eye even as one misses the plank in one’s own. Such a blind spot is apt to result in taking potential conflicts of interest too lightly, even in the safeguards that one devises in advance.
Rather than relying on industry self-regulation (which, to be sure, should not be thrown out as a supplement), the SEC should take an active role in using regulation to obviate even potential conflicts of interest. The regulated cannot replace effective regulatory agencies that are not captured by their respective industries. That the industry of CPA firms was still left at the mercy of a conflict of interest even after the Dodd-Frank Act was passed in 2010 suggests that members of Congress and the SEC have not taken conflicts of interest seriously enough. It is not as though a CPA firm’s “guidelines” can be relied on to overcome the structural conflict of interest when the lucrative fees from a big client are at risk. Likewise, firewalls within a Wall Street investment/commercial bank should not be relied on to evade the force of financial gravity after the “procedures” have been massaged and circulated as a memo. Memo to the regulators: best not to act too much like those you are regulating. As a general principle, government is fundamentally different than business.


Jason Zweig, “Conflict of Interest? Moi?” The Wall Street Journal, October 5, 2012.

Monday, October 8, 2012

Canada Takes On the United States: The War of 1812 as Propaganda

Two centuries after the War of 1812, the Canadian government sought to commemorate the “fact” that Canada had thwarted the invasion of troops of the American republics to the south.  “Two hundred years ago, the United States invaded our territory,” a narrator says over dark images and ominous music in the government’s ad. “But we defended our land; we stood side by side and won the fight for Canada.” However, the New York Times points out that “because Canada did not become a nation until 1867, the War of 1812 was actually a battle between the young United States and Britain.” The fight was not for Canada, as the British troops were fighting for the British empire rather than for a few colonies in North America.

                                         The British are coming! A British hero in "Upper Canada."         rpsc.org

The real question is why the young American empire sought to take on the British empire, and the northern British colonies fall by the wayside as soon as this question is brought into focus.
The other correction that comes with shifting the question to why a young empire would challenge an older one involves the distinction between a colony, state or host kingdom on the one hand and an empire thereof on the other. In the case of the American colonies, a very large one (e.g., Virginia) as well as several of them (e.g., New England) and even the United Colonies of North America as a whole were referred to as an empire, though by the time of American independence that term was generally used with the United Colonies and then United States. In contrast, the few colonies north of that “empire within an empire” were not viewed as an empire, but, rather, as a few members of the British empire. In the context of the meaning of empire as a combination of kingdom-level polities (including colonies as such polities) of sufficient scale, four or five colonies fall short. Even in the twenty first century, the amount of usable land and the population of Canada (i.e., 34 million in 2011—only a few million more than California’s) is equivalent to one of the large United States. To be sure, the cultural differences by province in Canada are similar to what one would find in an empire, but the scale and number of republics are not sufficient for Canada itself to be considered to be on the empire-level alongside the U.S., E.U., China, India, and Russia (at least not until global warming renders much of Northern Canada habitable such that the population and number of states in Canada increase dramatically).
Accordingly, the U.S. Constitution allows for Canada to enter the Union as a state. To be sure, the ten Canadian provinces (and three territories) could come in as a few medium-sized states or several small ones rather than altogether as one big one like California, but it would not be a case of two empires uniting “in partnership.” Rather, one or a few republics would be joining an empire of such states. No European would say that Turkey joining the E.U. would be a merger of two equals. “That would be like Mexico becoming a state in the U.S.,” a European official once put the matter. That is to say, the “United States of” Mexico would translate into one big state (or a few smaller ones) rather than as another United States of America.
There is thus a category mistake in the following statement by James Moore, who as minister of Canadian heritage was in charge of the advertising (or propaganda) campaign on the War of 1812. “Canada was invaded, the invasion was repelled and we endured, but we endured in partnership with the United States,” he said. The British Empire was invaded, and the accession of Canada would not be a matter of partnership. To take a few maple leaves and consider them to be commensurate to a branch is to make a category mistake that cannot but lead to erroneous conclusions.
Ian Austen, “Canada Puts Spotlight on War of 1812, With U.S. as Villain,” The New York Times, October 8, 2012.

Sunday, October 7, 2012

A Separate “Eurozone” Budget: Two-Track Federalism

A separate E.U. budget of €20 billion, 0.2 percent of the GDP in the “eurozone” of the E.U., was proposed in the midst of the debt crisis to be spent in E.U. states that have adopted the euro. At the time of the proposal, the budget for the entire E.U. totaled around €130 billion, which was just over 1 percent of the E.U.’s GDP. While adding 0.2 percent to a federal budget that is just over 1 percent of GDP might seem insignificant to Americans, one might recall the first century of the U.S. (through 1860, and then from roughly 1870 to World War I), when the U.S. budget as a percent of GDP was roughly the same as a percent of GDP.
                                      The US Govt Budget as a percent of GDP      Source: Gordon Tulluck

The complete essay is at "Is the E.U. a Federal System?"

Homer on Heroic Leadership in Business

Can a merchant be a hero?  A manager in the grips of the business-leadership fad, which began in the 1980s, might reply, “yes, of course.” A hero in the corporate context is said to be a “champion,” “servant leader,” “coach,” or “visionary leader.” Hero and leader are typically conflated in society, moreover, without any real thought on whether heroes are necessarily leaders. A hero might rescue a damsel in distress without having any followers. It could be countered that Odysseus in Homer’s Odyssey is both a hero and a leader on his journey. However, of such a hero-leader, being a merchant would be excluded. Describing the attributes of Homer’s notion of the hero figure is instructive, for while the characteristics seem especially oriented or applicable to merchants, Homer takes pains to exclude the business caste from Odysseus’ heroic leadership.

                                                                                                                  Odysseus leading his men.  A business likeness?     Source: Maudandoscar.org

Odysseus suffers much on his long journey home to Ithaca, yet his strength of character is evinced as he endures the pain rather than passively blaming the gods for his misfortune. With intelligence, experiential knowledge, and efficacious skill oriented to getting things done, it would seem prime facie that Homer’s conception of the heroic leader is particularly well-suited to business. Were the application allowed by the ancient poet, business practitioners might surprised to learn that the hero is not particularly moral or selfless. Odysseus’s good craftsmanship is for his own survival, rather than for others. Odysseus is a good liar, as when he is with the Poenicians and then incognito back in Ithaca. The goddess Athena actually enjoys it when Odysseus lies his pants off. Furthermore, Odysseus is also rather crafty, as when he makes alliances with the Poenicians. Rather than being for the greater good or to save someone else, the networking is for his own survival. So were Homeric heroic leadership applicable to business, we might be surprised how such leadership would manifest. Fortunately, Homer distances Odysseus from the business world.

The poet has the hero regard the attribution of “merchant” to be an insult; Odysseus is well-equipped on the battlefield, which is different from corporate “warfare.” Therefore, for a newspaper to refer to a CEO’s subordinate as a “lieutenant” is to misapply the term.  The ancients would surely laugh at such an attempt to gild the lily. I suspect that Homer has Odysseus be insulted at another man’s assumption that he must be merchant because the courage, strength of character, and even “hands-on” skill (i.e., good at getting things done; being practically-oriented), lived-through experience and even craftiness of a hero-leader such as Odysseus are superior to the sort of craftiness and craftsmanship that go with being a merchant. By implication, a self-vaunting manager who wants to be called a “champion” or even “hero” in an organizational setting may be claiming something more than he or she is entitled to presume concerning the nature of a hero in its true sense. In terms of Homer’s Odyssey, the merchants are closer to those suitors occupying Odysseus’s court than to Odysseus himself.

Accordingly, if leadership does indeed apply in some sense to business, the notion of the hero should at the very least be used sparingly, or even expunged entirely from the business vocabulary. To risk money, for example, is not to act heroically. That Odysseus takes the attribution of merchant to be an insult really should not be so easily disregarded or dismissed by the modern manager/executive simply because modern society marvels at the bewindowed corporate temples downtown and even enables the priests thereof to gain much materially.


Homer, The Odyssey.