The Financial Crisis of 2008: On the Role of Negligence Breaching Fiduciary Obligation

Roger Lowenstein laments that “New York Times columnist Joe Nocera lamented that ‘Wall Street bigwigs whose firms took unconscionable risks … aren't even on Justice's radar screen.’ A news story in the Times about a mortgage executive who was convicted of criminal fraud observed, ‘The Justice Dept. has yet to bring charges against an executive who ran a major Wall Street firm leading up to the disaster.’ In the same dispassionate tone, National Public Radio's All Things Considered chimed in, ‘Some of the most publicly reviled figures in the mortgage mess won't face any public accounting.’ New York magazine saw fit to print the estimable opinion of Bernie Madoff, who observed that the dearth of criminal convictions is ‘unbelievable.’ Rolling Stone, which has been beating this drum the longest and with the heaviest hand, reductively asked, ‘Why isn't Wall Street in jail?’”

Lowenstein interprets these sentiments as implying “that the financial crisis was caused by fraud; that people who take big risks should be subject to a criminal investigation; that executives of large financial firms should be criminal suspects after a crash; that public revulsion indicates likely culpability; that it is inconceivable (to Madoff, anyway) that people could lose so much money absent a conspiracy; and that Wall Street bears collective guilt for which a large part of it should be incarcerated.”

Lowenstein argues that “(t)hese assumptions do violence to our system of justice and hinder our understanding of the crisis. The claim that it was ‘caused by financial fraud’ is debatable, but the weight of the evidence is strongly against it. The financial crisis was accompanied by fraud, on the part of mortgage applicants as well as banks. It was caused, more nearly, by a speculative bubble in mortgages, in which bankers, applicants, investors, and regulators were all blind to risk. More broadly, the crash was the result of a tendency in our financial culture, especially after a period of buoyancy, to push leverage and risk-taking to the extreme.”

Lowenstein also ticks off a loose monetary policy (i.e., extremely low interest rates), unaccountability at Fannie Mae and Freddie Mac, weak financial regulation, and an overconfidence in “risk management” methods in arguing that we should not be reductionist in ascribing the crisis to fraud alone or even primarily.  

Analysis at "Negligence in the Financial Crisis of 2008."

Starbucks Takes a Hit for Supporting Gay Marriage

In January 2012, Starbucks joined Microsoft and Nike in publicly supporting the same-sex marriage bill in the U.S. state of Washington. Two months later, the National Organization for Marriage began a “Dump Starbucks” boycott as a result of Starbucks' support of gay marriage. David Barton, whose sermon on May 19, 2013 on “pious caffeine consumption” was posted on the internet, said, “The question is, ‘Can a Christian give money to a group he knows will use it to attack what God supports?’ . . . You can’t drink Starbucks and be Biblically correct on this thing. It’s just a real simple principle.”[1] Barton had earlier likened being gay to smoking and gay marriage to dogs marrying horses. In spite of these rather extreme claims, the boycott gained some traction. At the next Starbucks’ stockholder meeting in March 2013, Tom Stauber, a stockholder, suggested that the company’s sales and earnings were a “bit disappointing” in the quarter after the boycott had begun precisely because of the issue. Whereas the stock and dividends had risen 38% from October 2011 to September 2012, the rise was only 7.6% from March 2012 to March 2013.[2]  If indeed the causal attribution is correct, then it can be asked whether the management (and/or board) of a company taking a political stand on a controversial societal issue that is not expected to save the company money and in fact could result in lost revenue breaches the fiduciary duty to the stockholders unless a majority of shares are voted in support of the position.

Starbucks typically relies on young adults to both work in and manage the stores. Even an excellent vetting process in hiring does not mean that effort is not needed to fortify the mechanism of accountability.  Source: wikimedia.  

The full essay is at "Starbucks: A Shaky Management Wades into Social Issues."

See also, Bucking Starbucks' Star, available at Amazon.

---

[1] Meredith Bennett-Smith, “Christians Can’t Drink Starbucks Because Company Supports Gay Marriage, Evangelical Says,” The Huffington Post, June 3, 2013.

[2]Aaron Smith, “Starbucks CEO Holds His Ground on Gay Marriage,” CNN Money, March 28, 2013.

JP Morgan Chase on the NY Fed's Board

The New York Fed allows private bankers to sit on its board, even while it crafts bank policy and puts together financial industry bailouts. "There's a conflict of interest here. You serve two masters. You can't draw this extraordinary salary from JPMorgan Chase and, at the same time, say, 'Oh, I'm out here acting in the public interest.' You can't do both." So said Elizabeth Warren, who came up with the idea that became the Consumer Financial Protection Bureau as part of the Dodd-Frank Financial Reform Act of 2010. Referring to Jamie Dimon, the CEO of JP Morgan who presided over a $2 billion trading loss, she added, "He says he wants to take responsibility. Then show some responsibility. Show you get it. Putting Wall Street bankers on the Federal Reserve Board is like finding the guys who torched the entire town and putting them on the fire advisory board. It makes no sense." 

The full essay is at "JPMorgan: An Unethical Monstrosity?"

Spanked by Stockholders: Citigroup

In April 2012, Citigroup’s shareholders voted against the bank’s proposed $15 million compensation for the CEO, Vikram Pandit. This was the first time a majority on a stockholder vote—in this case, 55 percent—united in opposition to what was considered “outsized compensation at a financial giant.”[1] Shortly thereafter, a major stockholder sued Citigroup for breach of fiduciary duty (owed to the stockholders) for excessive executive compensation. Nevertheless, the prognosis is not so bad for the “top brass” on Wall Street; they need not worry unless the votes were to become binding and managements were barred from voting proxies.

The full essay is at "Spanked by Stockholders."

1. Jessica Greenberg and Nelson Schwartz, “Shareholders in Citigroup Reject Executive Pay Plan,” The New York Times, April 18, 2012.

Corporate Social Responsibility Countering Rush Limbaugh

On February 29, 2012—Leap Day—Radio political-commentator and entertainer Rush Limbaugh called a female law student at Georgetown a “slut” and “prostitute” simply because she had said that Georgetown’s student health insurance should cover birth-control—a staple for even 98% of sexually-active married and single Catholic women as of 2012. On the following day, Limbaugh went on to offer to pay for aspirin that the women at Georgetown could “put between their knees” in lieu of birth-control. If you are wondering how that even makes sense, I am with you on that one. What strikes me in particular is the extreme to which Limbaugh went in his rhetoric or appeal for a larger audience for his radio show (and attention on himself). That corporate social responsibility would function as the corrective also surprised me, for CSR is typically merely marketing, window-dressing, or for better public relations.

The full essay is at "Corporate Social Responsibility Countering Rush Limbaugh."

Business Ethics in the Business World: A Glimpse from Goldman Sachs

Goldman Sachs’ ethics code reads in part, “[We] expect our people to maintain high ethical standards in everything they do. . . . From time to time, the firm may waive certain provisions of this Code.”[1] The explicit conditionality is notable and significant. I contend that among other reasons, a negative impact on the bank’s financial position and/or profits is apt to trigger such a waiver not only at Goldman Sachs, but from the business standpoint more generally.


The full essay is in Cases of Unethical Business, available at Amazon.com.

1. William D. Cohan, Money and Power: How Goldman Sachs Came toRule the World (NY: Doubleday, 2011).