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Friday, December 20, 2013

The Underbelly of Corporate Charity as Corporate Social Responsibility

Why do corporate managements spend corporate money on charities? The obvious reason is to reduce the amount of corporate income tax due. Yet another motive, not as transparent, has to do with reputational capital, and that motive may also explain corporate social responsibility.
At the end of 2013, the American news media reported that Bernie Madoff had donated a lot of money to charity. In 2004, the Ponzi man claimed $3,918,347 as “gifts to charity” in 2004. His taxable income for the year was $12,912,498.[1] He owed just $2.8 million in income taxes, a 12.6% tax rate on his adjusted gross income of $22.2 million. “That’s really low by anyone’s standards,” Adam Fayne, a lawyer practicing in Chicago, said.[2]
  Bernie Madoff, surrounded by police, after having been arrested. Wikimedia Commons

Achieving the low 12.6% effective tax rate was undoubtedly on Madoff’s mind in making his charitable contributions. This rationale was by no means unusual at the time.  Additionally, Madoff would not have been above using charity in order to display himself as a very wealthy person. According to Martin Press, a tax attorney, “If [Madoff] actually gave the money to charity, it is a common theme of Ponzi scheme people to make large charitable contributions to show people how wealthy they are.”[3] The perception of Madoff as a financially successful personally rendered him trustworthy in being capable of making investors rich, and the apparent charitable giving gives the impression of trustworthiness in its normative sense (e.g., honesty and integrity).
Similarly, moreover, corporate strategies may include programs under the rubric of corporate social responsibility as a means of cultivating the impression that the corporation itself is financially successful and trustworthy both in terms of competence and fairness. In other words, corporate social responsibility may be more about amassing reputational capital for the corporation than any acknowledged responsibility to society (other than to provide consumers with effective products). Perhaps the real question is why we are so gullible.

1.  John Waggoner, “Madoff ‘Donated’ a Lot to Charity,” USA Today, December 13, 2013.
2. Ibid.
3. Ibid.

Tuesday, December 17, 2013

Obama and Goldman Sachs: A Quid Pro Quo?

Obama nominated Timothy Geithner to be Secretary of the Treasury. While president of the New York Federal Reserve Bank, he had played a key role in forcing AIG to pay Goldman Sachs’ claims dollar for dollar. Put another way, Geithner, as well as Henry Paulson, Goldman’s ex-CEO serving as Secretary of the Treasury as the financial crisis unfolded, stopped AIG from using the leverage in its bankrupt condition to pay claimants much less than full value. At Treasury, Mark Patterson was Geithner’s chief of staff. Patterson had been a lobbyist for Goldman Sachs.
To head the Commodity Futures Trading Commission—the regulatory agency that Born had headed during the previous administration—Obama picked Gary Gensler, a former Goldman Sachs executive who had helped ban the regulation of derivatives in 1999. Born had pushed for the securities to be regulated, only to be bullied by Alan Greenspan (Chairman of the Federal Revere) and Larry Summers, whom Obama would have as his chief economic advisor. To head the SEC, Obama nominated Mary Shapiro, the former CEO of FINRA, the financial industry’s self-regulatory body.
In short, Obama stacked his financial appointees during his first term with people who had played a role in or at least benefitted financially from financial bubble that came crashing down in September 2008. Put another way, Obama selected people who had taken down the barriers to spreading systemic risk to fix the problem. Why would he have done so? Could it have been part of the quid pro quo the president had agreed to when he accepted the $1 million campaign contribution from Goldman Sachs (the largest contribution to Obama in 2007)? Might Goldman’s executives have wanted to hedge their bets in case the Democrat wins. Getting Goldman alums in high positions of government would essentially make the U.S. Government a Wall Street Government—that is, a plutocracy with the outward look of a democracy. It is no accident, we can conclude, that the spiraling economic inequality increased during the Democrat’s first term of office.


Inside Job, directed by Charles Ferguson