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Saturday, May 4, 2013

Gilding the Dandelion: Management as Leadership

Wendy Lea, the CEO of a customer “experience” start-up, discusses her leadership approach in an interview with the New York Times. I contend that what she takes to be leadership is actually management. Put another way, she is gilding the leadership lily. Unfortunately, that practice is ubiquitous in the business world. 

Material from this essay has been incorporated in The Essence of Leadership, also available at Amazon in print and as an ebook.


Adam Bryant, “A Leader’s Test: Balancing Drive andCompassion,” The New York Times, May 3, 2013.

Friday, May 3, 2013

Can the Federal Reserve Handle Banks Too Big To Fail?

The biggest banks operating in the U.S. reaped an estimated $13 billion of income by taking advantage of the Federal Reserve’s below-market rate of .001% on $7.7 trillion in emergency loans in the wake of the credit freeze in September 2008. Rather than using the additional funds to increase lending, the banks fortified reserves and paid bonuses out to executives. Had member of Congress had been able to anticipate all this, it is possible that they would have prescribed stronger medicine, perhaps even including breaking up the banks with over $1 trillion in assets.
As Shakespeare has Marcellius say in Hamlet in reference to moral and political corruption, “something is rotten in Denmark.” One might add the line, “Out, out damn spot!” from Macbeth. Bloomberg News reports that “the Fed and its secret financing helped America’s biggest banks get bigger and go on to pay employees as much as they did at the height of the housing bubble.”
Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data reported by Bloomberg. Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. “The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.”
When members of Congress were voting on the $700 billion TARP, they were being kept in the dark on the Fed’s loans. The general public was out of the loop as well. Ted Kaufman, a former U.S. senator from Delaware, said that if Congress had been aware of the extent of the Fed rescue, the knowledge “could have changed the whole approach to reform legislation,” He claims he “would have been able to line up more support for breaking up the biggest banks. More than three years after the financial crisis, Sen. Sherrod Brown of Ohio observed, “There are lawmakers in both parties who would change their votes now [i.e., in December, 2011].” Byron L. Dorgan, a former senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking. Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse.”
The government’s response to the crisis has not significantly reduced systemic risk, even with the higher reserves requirements for the biggest banks. According to Bloomberg, “Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system.” For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate,” he continued. “I’m in favor of breaking them up and slimming them down.” Oliver William, an economist, concluded that the “banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process.” A conflict of interest may be part of the underlying cause.
It could be that the bankers at the Federal Reserve Bank have been overly friendly to the bankers getting the funds. This conflict of interest could expose the Fed to losing lent funds should one or more of the troubled banks become insolvent and with insufficient collateral. Therefore, in an attempt to make the Fed accountable in regard to its emergency lending,  Congress included in its Dodd-Frank legislation (2010) requirements stipulating that the Fed develop and submit guidelines regarding selection criteria to be applied to banks seeking emergency loans and requirements by which bank collateral is to be reckoned as sufficient.
The publication of selection criteria would reduce the risk of moral hazard. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard—the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.” Jeremy Stein, a Fed governor, has spoken of moral hazard, according to the New York Times, as “the belief that government support can subsidize banks and make them less careful about the dangers inherent in their businesses.” Depending how strict the selection criteria are, “the banks might then realize that the Fed will not be a pushover in times of market stress.” At least as of April 2013, the Fed had not followed through on the mandate in Dodd-Frank that the Fed promulgate rules.
The Fed might have good reason to stave off rules that could restrict the Fed’s flexibility in a crisis. “The Fed might be thinking, ‘We don’t want to make a lot of rules that might hinder us from acting in an emergency situation that we can’t anticipate,’” Michael Bradfield, a former general counsel at the Fed, remarked. “I think the Fed should have reasonably broad discretion to deal with systemic issues,” he continued, “(b)ut then the question is, What’s systemic and what’s really needed, and what conditions ought to accompany that lending?” Demanding too much in collateral, for example, might mean that some very big banks that are hemorrhaging capital might not qualify for an emergency loan and go under as a result. If those banks are too big to fail, the entire financial system could follow suit.
Unfortunately, discretion at the Federal Reserve could enable the “insider” conflict of interest to be exploited. Such exploitation is likely from the banking lobby as well as from the Federal Reserve. Bloomberg reports that “(l)obbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up—a gain of 33 percent, according to OpenSecrets.org, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate.
In a rare glimpse of how the banking lobby operates, there is evidence that the lobbying firm Clark Lytle Geduldig & Cranford sent a memo to the American Bankers Association expressing worry that the Occupy movement and the Tea Party movement might find common ground and become a potentially potent threat by joining forces. Tellingly, the memo’s writers reveal how even potential threats to big business are relegated: “If we can show they have the same cynical motivation as a political opponent it will undermine their credibility in a profound way.” Using the media outlets, the “messengers” of powers vested in the status quo can quickly discredit others, as if from a popular wave of mass opinion. Meanwhile, the matter of the very existence of the banks too big to fail continued to float below the radar—the media dutifully transmitting the transparent issue of tents and evictions in various cities. In other words, even the occupiers—the anarchists outside the system!—allowed themselves to be played. Perhaps we are all being played.


Bob Ivry, Bradley Keoun, and Phil Kuntz, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” Bloomberg Markets Magazine, November 27, 2011.

Peter Eavis, “Fed Still Owes Congress a Blueprint on Its Emergency Lending,” The New York Times, April 23, 2013.


Tuesday, April 30, 2013

“No Loans” on Gun Sales: G.E. as Socially Responsible or Financially Savvy?

In the wake of the Sandy Hook school shooting in Newton, Connecticut that took place in late 2012, General Electric announced that the company would no longer finance consumers’ gun purchases. Russell Wilkerson, a G.E. spokesman, wrote in an email that the new policy was being adopted “in light of industry changes, new legislation and tragic events that have caused widespread re-examination of policies on fire-arms.”
                                                               Do business principles mandate treating this product like any other?  Source: NBC News
In other words, the policy shift was not simply a reaction to Sandy Hook. Rather, the company’s executives were adapting to changes in the organization’s environment, including the industry itself. This opens up the question of whether the new policy can be classified under the rubric of corporate social responsibility (CSR). Perhaps the adaptation was simply good business, with the appearance of “CSR” adding some reputational capital through a good public-relations campaign.
Well-meaning moralists in particular may have a tendency to project their own salient sense of obligation onto other people, and even pets. Rather than feeling a sense of loyalty, for example, your dog may simply be keeping close by because it is hungry and is accustomed to being fed by you. Once while I, a mere ten-year-old in the forest behind my house, was setting up what I optimistically thought could be a rabbit trap out of a waist-high old wire cage, my first dog walked up to me holding a rabbit in its mouth. I have no idea how to explain that—certainly not by positing any moral obligation. Perhaps my dog had merely been hungry. An organization can be similarly thought of as an economizing organism.
Generally speaking, an organization, like an organism, must adapt to its changing environment, or risk being replaced by a competitor that has achieved a better fit and thus can operate more efficiently in order to survive. Does such adaptation, which renders a company more fit by means of a sort of competitive natural-selection process, involve obligation manifested as responsibility to that environment?
After all, to do one’s duty is not typically said for what a person wants to do anyway. You would quickly see through my claim that it is my duty to eat the remaining chocolate sundae (so not to waste food). “Someone should eat the ice-cream before it melts; I suppose I’ll have to force myself.” People do not typically fall over themselves to do something out of a feeling of responsibility. For the sense of obligation or responsibility to be the primary motivator, the person (or persons, as in the case of a company) must not otherwise be inclined, as from the anticipation of a benefit, to act. When stimulated, self-interest tends to eclipse the felt-duty of responsibility. This thesis can be applied to GE’s policy on financing firearm purchases. Can the policy fall under the rubric of corporate social responsibility if the costs and nugatory next to the benefits? In other words, what if marketing the policy is simply good business?
As for the costs, GE Capital Finance had already stopped providing consumer financing for new gun-shop customers in 2008. The policy change in 2013 merely extended the ban to existing customers. It is not as though potentially new customers would be discouraged. Even if new and existing gun customers had been eligible for financing before the policy change in 2013, we would still be talking about a small fraction of GE’s revenue. It might simply be good business to end such a small revenue stream. Wells Fargo had stopped financing gun purchases in 2004 “for business reasons,” according to company spokeswoman Lisa Westermann. Perhaps it was just good business behind GE’s decision to extend its ban in such a way that the policy would be good publicity without much cost in the sense that the company could still make money lending to firearms purchasers in spite of the ban!
According to USA Today in 2013, GE’s “decision affects fewer than 75 retailers, which GE says is about 0.001% of all gun retailers.” This is because the policy “affects only retailers that sell firearms exclusively.” General merchandise stores, which sell other products as well as guns, are excluded from the company’s lending ban. Walmart is such a store. This represents a gaping loophole, making the policy as publicized misleading, and therefore suspicious as to the motive behind it. Put another way, GE would still be financing guns—just not through stores that sell only guns. Were the executives at GE really feeling a responsibility not to encourage gun sales after what had happened at Newtown, Connecticut, they would not have made the distinction unless they were legally obligated with retailers like Walmart to cover any big-ticket item. In that case, GE should have objected to storylines such as the one in USA Today, “GE Won’t Make Loans to Buy Guns.” Especially if the company was making this misleading claim, the gap between the publicized CSR and the actual policy could mean that the intent had been to use “marketed CSR” for reputational capital with little cost (i.e., good business).  
If most of GE’s lending on gun purchases was through multi-merchandise retail stores, GE could capitalize on sympathy from the school shooting without having to give up much financially. Interestingly, the shooter’s father, Peter Lanza, was a GE executive at the time—the company being based in Fairfield, Connecticut. If GE executives had felt obligated, being at such close range to the tragedy, to stop contributing to gun sales, why then the loophole and misleading storyline? Something is not quite right here. Taking rather than using a difficult decision on the basis of CSR would not involve manipulation. Were extant contracts a temporary obstacle, this would have been noted publically because the objective would have been to stop lending on gun purchases rather than to grab as much good public relations as possible without much cost.
If risk or cost is of concern, being socially responsible may not be the best option. As in the case of gun control, entering a controversial debate puts a company at risk for being negatively viewed by the “other side.” A USA Today poll taken at the time of the policy change in 2013 found public support for new gun-control legislation “slipping below” 50 percent. GE risked many people agreeing with John Meek, the owner of a gun store in Illinois, who called GE’s policy “an injustice” because the instrument rather than the user is being blamed. In other words, being socially responsible may not be as “politic,” and thus as good in terms of cost (i.e., lost non-gun-purchasing customers who disagree with the company’s position on gun control) and reputational capital as managers may suppose. Where to executives’ motive is based on a societal obligation, these hits are willingly taken, but where CSR is being used for image purposes, unanticipated costs are highly relevant.
Put another way, a company whose policy is forged out of CSR principles “puts its money where its mouth is,” whereas a company whose policy is good business including the marketing of CSR does not depart from business principles. There is reason to suppose that GE falls in with the latter rather than the former category, given the loophole, the “CSR marketing” benefits, and what little the company stood to give up. GE’s policy decision can be characterized as ethically misleading, likely not primarily motivated by a sense of social responsibility to curtail gun sales, and good business. I suspect that the vast majority of corporations are like this, rather than being truly socially responsible, and yet are viewed as such by good-meaning mortals who innocently project their own moral values on to what is actually effective, rather than “good,” marketing.


Paul Davidson, “GE Won’t Make Loans to Buy Guns,” USA Today, April 25, 2013.

Monday, April 29, 2013

Should Icelanders Push for E.U. Statehood Anyway?

In late April 2013, a slight majority of Icelanders who voted in the parliamentary election went for a return to the center-right Independence and Progressive parties even though they had been responsible for the banking crisis that bankrupted Iceland. The two parties promised to forgive or renegotiate the Icelanders’ personal debt and end the four years of austerity by lowering taxes, ending capital controls and stimulating foreign investment, according to the New York Times. The center-left governing parties, including the Social Democrats, had cut spending and raised taxes, making the carrots being offered by the center-right parties all that more alluring. Although not the main issue of the election, the prospects for Iceland becoming a state in the European Union lessened significantly with the ousting of the center-left government. Unlike that government, the center-right parties voiced skepticism and advocated a referendum before any the government would take any further steps. In the wake of the election, it might be helpful to reflect on whether Iceland should become a state. After going over some economic and political factors, I want to highlight subtler factors whose influence is typically understated in newspaper headlines.

The complete essay is at Essays on Two Federal Empires.

From this perspective, it can be said that Britain are Ireland are part of Europe, but what about Iceland? Source: luventicus

Sunday, April 28, 2013

Return of the Mortgage-Based Bonds: Another Bubble in the Making?

In case it has been a while since you have been entertained by going around in circles while sitting on a painted wooden horse, permit me to re-introduce you to the Merry-Go-Round, a staple at virtually any amusement park.

The world itself might just be such a ride, with us mere earthlings playing out our respective roles while spinning around and around as the world goes by once and then again, and again. Lest it seem monotonous to go around in circles, it is possible—at least in principle—to learn something new on each pass.  Weighing against a learning-curve that might thwart an eternal recurrence of past failures are other, less salubrious proclivities of the mind. These include (but are not limited to) avarice, power, and even the force of habit. More damning still may be the arrogance of pride—the hubris of presumption. 

The full essay is at Another Bubble.