Tension between Wall Street and Main Street: A Case beyond the Reach of Corporate Social Responsibility

In October 2011, Gerald Seib wrote that political and economic pressures in the wake of the financial crisis were “pushing business leaders into the public cross hairs.”[1] I submit that the very existence of the largest American banks was becoming an issue. In such a case in which a gulf between business and society is so fundamental or deep, corporate social responsibility programs do not suffice and may even backfire. While it is normal for the norms and values of a business sector to differ from those of the wider whole (i.e., society), it is uncommon for a rupture to be so deep that corporate marketing and CSR are not sufficient business responses. I submit that in such cases and where corporations have a lot of power over government officials, CEOs extend their toolset to government to fill in the trench. The "Occupy Wall Street" protests is a case in point. 

The full essay is at "Wall Street and Society Diverge at the 'Occupy Wall Street' Protests." 

1. Gerald F. Seib, “Populist Anger Over Economy Carries Risks for Big Business,” The Wall Street Journal, October 11, 2011. More generally, see Skip Worden, Essays on the Financial Crisis.

Undermining the Dodd-Frank Act: An Incessant Desire for Profit

In the Dodd-Frank financial reform Act of 2010, financial firms in the U.S. are required to set aside higher reserves to cover losses on trades of securities, including those that “swap” the risk of default of a given security, such as bonds based on subprime mortgages. Almost immediately, the Wall Street bankers set about minimizing the new hindrance.  

The full essay is at "Undermining the Dodd-Frank Act."

Jack Lew at his confirmation hearing for U.S. Treasury Secretary. Lew had been the chief operating officer at units at Citibank.     NPR

Faster, Higher, Bigger: A Rationale for Regulation

The death of a Georgian luge athlete on the opening day of the 2010 Winter Olympics occurred amid concerns about the speed of the record-setting track at the Whistler Sliding Center. “There were some questions asked by other athletes even before this tragic accident,” said Nikolas Rurua, Georgia’s deputy minister for culture and sports. He added that there had been several crashes in the same area of the track. This is like looking back in a financial crisis to point out that several had preceded that one. It does seem like financial crises may be part of a larger pattern that is based in human nature. I contend that just such an innate propensity to recklessness at the expense of the public good (and one's own!) serves as a rationale for regulation in any country.

Airlander 10, the largest aircraft in the world, crashed on its second test-flight on August 24, 2016.

The full essay is at "Faster, Higher, Bigger!" 

Mass Foreclosures as Fallout from Regulatory Capture: Banks in a Conflict of Interest at Treasury

During the summer of 2010, the Obama administration unveiled a $1 billion program to offer loans to help the jobless pay their mortgages until they could find work again. Even as it was to take effect before the end of that year, by April of the next year the program had yet to accept one application. The New York Times avers that this “could be an epitaph for the administration’s broader foreclosure prevention effort, as tens of billions of dollars remain unspent and hundreds of thousands of homeowners have been rejected.” By April of 2011, the existence of the main program, the Home Assistance Modification Program, had become a target of the Republican-controlled U.S. House.  On March 29^th, the House voted to end the foreclosure relief program. Even though the Democratic-controlled U.S. Senate vowed to pursue a rescue, even the Democrats there considered the program to be badly flawed. To be sure, the administration had failed to stem the wave of foreclosures.

The full essay is at "Essays on the Financial Crisis," available at Amazon. 

See related essay: "Institutional Conflicts of Interest"

Mr. Goldman Goes to Washington

After watching hours of the US House Government Affairs committee on Investigations’ hearing on Goldman Sachs in 2010,  I concluded--totally contrary to the disavowals by the Goldman managers who testified--that there was indeed a conflict of interest between Goldman’s proprietary and market-making functions.  By proprietary, I mean a bank trading on its own books beyond simply being the counter-party in its market-making transactions. In their testimony, Goldman managers presumed that all of the bank’s proprietary transactions are part of its market-making role. However, I contend that the bank has been both a market-maker and a player in those markets, and furthermore that the latter function has affected the former in ways that are intended to benefit the bank. That is to say, Goldman Sachs’ financial interest has been put before that of its customers. In some cases, Goldman’s employees refused clients’ requests for shorts related to the housing market so Goldman’s own profits in shorting the market  could be preserved. Sen. Susan Collins (R-ME) said, “There is something unseemly about Goldman betting against the housing market as it is selling housing-related products to its customers.” Sen. Conrad, a more conservative Republican, echoed this sentiment.  The fact that Republicans on the subcommittee joined with Democrats rather than joined in Goldman’s paradigm points to a major disconnect between Wall Street “speak” and the discourse of the general public.  In other words, the financial managers and the politicians were largely talking past each other.  Even so, the two “worlds” can be translated into a common language that nonetheless finds Goldman culpable, while acknowledging some of the managers’ points.  In what follows, I discuss a number of the points raised in the hearing to bear out my contentions here.

The full essay is at "Essays on the Financial Crisis," available at Amazon. 

Bank of America: Downsizing From Smallness

Three years after the near-meltdown of Wall Street in September 2008, Bank of America announced that 30,000 jobs would be eliminated. That amounts to nearly 10% of the bank’s total work force. Over all, BOA was planning to cut $5 billion in annual expenses. The reason is transparent: continued losses stemming from the bank’s acquisition of Countrywide in January 2008 in spite of the fall of the U.S. real estate market and the related losses on sub-prime mortgage-backed CDOs. What could Ken Lewis have been thinking? At least in the case of his acquisition of Merrill Lynch, which was agreed to in principle in September 2008, the investment bank had already sold its $30 billion of toxic assets for over $7 billion in July 2008.

The full essay is at "Bank of America."  

The Banking Lobby Amid Goldman Sachs' Culpability: A Danger to the Republic?

To simplify how Goldman Sachs got into trouble with the SEC: According to Annie Lowrey, the hedge fund Paulson & Co. handpicked mortgage-backed securities that were doomed to stop performing, being backed with subprime mortgages, and Goldman packaged them into a kind of bond. Paulson & Co. bet against the bond by buying short-sales, with Goldman acting as the broker. At the same time, Goldman sold the bond to other clients without disclosing that Paulson had engineered the bond to fail. The SEC filing notes that those other clients lost $1 billion. Goldman had no direct stake in the success or failure of the CDO. It made money either way. “This litigation exposes the cynical, savage culture of Wall Street that allows a dealer to commit fraud on one customer to benefit another,” Chris Whalen, a bank analyst at Institutional Risk Analytics, said in a note to clients on April 16, 2010. Someone at Goldman said on the same day that “the SEC’s charges are completely unfounded in law and fact.” If the SEC charges hold up (and it is doubtful that the agency would bring such charges without supporting documentation; it is more apt to miss something than go overboard), I am astonished that the people at Goldman simply dismissed the matter out of hand. It might make sense as their legal defense, but if the bankers are convicted, those lying ought to be fired even if they were not a party to the scheme. It also appears that the bankers lied about whether they made money in betting against the housing market. “The 2009 Goldman Sachs annual report stated that the firm ‘did not generate enormous net revenues by betting against residential related products,’ ” Senator Levin, chairman of the US Senate’s committee on investigations, said in a statement in April, 2010. “These e-mails show that, in fact, Goldman made a lot of money by betting against the mortgage market.” When a spokesperson for the bank says something in the future, a rational person will be wont not to trust him or her. Lying has (or ought to have) consequences rather than being dismissed as harmless PR or a legal defense. The bank’s credibility is at issue here. The SEC has accused Goldman of outright lying to customers in order to make money both ways on a deal. Even though this ought to reflect negatively on Goldman’s future business, bigger issues involved that ought to consume more of our attention than how Goldman fares.

The full essay is at "The Banking Lobby and Goldman Sachs."

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.

The Fed Whitewashes Citibank: Systemic Risk Understated

As reported by Reuters in March 2013, “The newest stress tests for U.S. banks produced scores that are at odds with other measures of lenders' safety, in another sign that some institutions may be too big for regulators to understand and executives to manage. For example, Citigroup Inc, which has been bailed out multiple times by the U.S. government, showed up on the score sheets posted by the Federal Reserve . . . as being clearly safer than JPMorgan Chase & Co. That conclusion is at odds with the views of investors, bond analysts and credit-rating agencies, as well as when measured by a yardstick regulators themselves want to use in the future.” Kathleen Shanley, a bond analyst at GimmeCredit, a research service for institutional investors, said "I wouldn't say that Citi is safer than JPMorgan, for a variety of reasons, including its track record.” Citigroup has lower credit ratings than JPMorgan, and prices for credit default swaps suggest that the market views JPMorgan as safer.

The full essay is at "Fed Whitewashes Citibank."

S. & P. Sued for $5 Billion: Breaking a Conflict of Interest?

In sending a message to S & P as well as Wall Street more generally regarding the excesses in the securitization of subprime mortgages that contributed materially to the financial crisis of 2008, the U.S. Government and several state governments announced in early 2013 that they would sue S & P for $5 billion as a penalty and to cover damages to state pension funds and federally-insured banks and credit unions.  The operative assumption was that such a monetary figure would have considerable force as a disincentive to profit by means of fraud.  Would $5 billion be sufficient for the message to be delivered not only S. & P. but also to Wall Street? 

The full essay is at Essays on the Financial Crisis, and
 Institutional Conflicts of Interest, both available at Amazon.

The U.S. Sues Bank of America: A Spanking or Slap-on-the-Wrist?

In late October 2012, federal prosecutors in New York formally accused Bank of America of “carrying out a scheme, started by its Countrywide Financial unit, that defrauded government-backed mortgage agencies by churning out loans at a rapid pace without proper controls. In a civil suit, prosecutors seek to collect at least $1 billion in penalties from the bank as compensation for the behavior that they say forced taxpayers to guarantee billions in bad loans.” The guarantee can be considered a moral hazard, in that Bank of America (or Countrywide) was not the party on the hook. In other words, the mortgage service company had an artificial incentive to produce mortgages riskier than would otherwise be the case because they would be guaranteed by another party (i.e., American taxpayers).

The full essay is at "U.S. Government Sues Bank of America."

No Guilt at Citibank

In the days leading up to Labor Day 2012, Citigroup announced that the bank would pay $590 million to settle a class-action lawsuit by stockholders who contended that the bank’s management as well as some directors had misled the stockholders about the bank’s exposure to subprime mortgage debt in 2007. The bank had used improper accounting practices to show an inflated asset base. The shareholders claim that the bank assured them that it had sold billions of dollars in collateralized debt obligations based on subprime mortgages. However, the bank had actually guaranteed the securities against any losses. To further disguise the risks to the stockholders, the bank moved the guarantees to separate entities. Unfortunately, the settlement is insufficient as a means to thwart banks such as Citibank from misleading investors. Legislators might want to look at two reforms in particular.

The full essay is at "No Guilt at Citibank."

See: Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

A Fifty-Percent Write-Down: Discounting Debt Insurance?

In “Europe’s Rescue Plan,” The Economist (October 29, 2011) opines on the “fixes” that had been announced just days before by E.U. leaders on the public debt crisis. I find three points of note that are particularly worth elaboration. 

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Nietzsche on Bank of America

The positive correlation between incompetence and unethical conduct at companies is striking, for, theoretically at least, a person can be talented or smart and of questionable character. Of course, it could be that cutting corners is a survival strategy of people who are not competent. However, shirking seems to reflect a sordid character, which, like personality, is relatively constant throughout one’s life—though character flaws could manifest more when times are tough (as in when incompetence has eventuated in a dire balance sheet). One might investigate, moreover, whether a firm’s culture can become more tolerant of unethical conduct when the finances are going south—or do unethical cultures tend to be like fixtures in organizations irrespective of financial condition?

The full essay has been incorporated into On the Arrogance of False Entitlement: A Nietzschean Critique of Business Ethics and Management, available at Amazon.

Weakened U.S. Federalism as a Cause of the Financial Crisis

Weakening federalism in the name of preemptive deregulation played a major role in enabling the financial crisis of 2008. Specifically, Carter’s Depository Institutions Deregulation and Monetary Control Act of 1980 abolished Regulation Q (over time), which had limited thrifts’ deposit interest rates, and preempted “the many state usury laws that placed a ceiling on mortgage and credit card rates.”[1] Consolidation at the expense of federalism thus contributed as a risk factor.

The complete essay is at Essays on Two Federal Empires, available at Amazon.

1. Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred Knopf, 2011), p. 360.

On the Arrogance of Power: Greenspan, Rubin, and Summers in the Clinton Administration

Over two years after the financial crisis of 2008, a commentator on Fox News said that the banks should not stop the foreclosure process because that would not be good for the free market. He said that people who cannot afford their houses should lose them. Another commentator remarked that there was still too much government in the financial sector. This, according to the commentator, is “the problem.” It is particularly striking that Alan Greenspan’s stark admission to a U.S. House committee in 2008 that the deregulated laissez faire market paradigm contains a fundamental flaw was lost on the two commentators. In May 2011, House Speaker Boehner charged that business is over-regulated. This comment too is remarkable given Greenspan’s realization. If a people disowns its own lessons, history is destined to repeat itself.

The full essay is at Essays on the Financial Crisis.

Wall St. Bonuses and TARP: A Tale of Two Cities

Wall Street profits totaled $21.4 billion during the first three quarters of 2010. The prior year's record of $61.4 billion was fueled by the bailout financed by American taxpayers. Wall Street paid out $20.3 billion in bonuses on the 2009 profits. According to New York City Comptroller John Liu, "The astounding recovery of financial firm profitability in 2009 has been followed by a mixed year in 2010, yet total compensation in the industry is expected to be up modestly once year-end bonuses are paid." Goldman Sachs’ CEO Lloyd C. Blankfein and his top subordinate executives collected about $111.3 million in stock in January 2011. It was a delayed payoff from 2009 and the bank’s record-setting 2007 bonuses, according to a Bloomberg News report. Within a year after the bonuses had been approved, Goldman Sachs took $10 billion from the U.S. Treasury, converted to a bank and was borrowing as much as $35.4 billion a day from Federal Reserve emergency programs, Bloomberg reported. In 2010, the bank paid $550 million to settle U.S. regulators’ fraud charges related to a mortgage-security company sold in 2007.

The full essay is at "Bonuses and TARP."

Fraud as Fair: Lehman as Beneficiary of Society's Pro-Business Cultural Values

In April, 2010, Richard Fuld, the former CEO of Lehman Brothers, told a congressional committee that he had "absolutely no recollection whatsoever of hearing anything" about Repo 105 at the time of the transactions. Lehman's demise, he claimed, was caused by "uncontrollable market forces" and the U.S. government's unwillingness to rescue the firm. Of course, Henry Paulson, the U.S. Treasury Secretary in 2008, had tried in vain to get Fuld to accept a buyer offering a reasonable price; Fuld had been holding out for more in spite of the financial condition of Lehman. It is stunning that a man who had been allowed to reach such a pristine and lofty office in the business world would not even permit himself to acknowledge any contributory role in the downfall of the organization he had run. Such an attitude alone seems worthy of a prison sentence (and the return of his salary and bonuses); how he and his "team" had manipulated the books to make the bank look wealthier than it was would seem to make such a sentence inevitable.

The full essay is at "Essays on the Financial Crisis."