Expansion at Volkswagen: Minimizing Risk in E.U.?

It is perhaps common among gigantic corporations, such as the major automobile manufacturers, to assume that current profitability is likely to be augmented by expansion. Economies of scale are presumed to outpace diseconomies as even a large company expands. At a more basic level, it is generally assumed that if a company is not expanding, it is necessarily facing its downfall. The notions of equilibrium and steady state are fundamentally at odds with the more, more, more mantra of mammon. Accordingly, it can be asked whether efforts to strengthen a company’s equilibrium are more in line with long-term profitability. The very expression, strengthening an equilibrium is étranger or foreign to business parlance.


The full essay is at "Volkswagen in 2012: Minimizing Risk in the E.U."

Is Modern Banking Fundamentally Flawed?

Jamie Dimon, CEO of JP Morgan Chase and board member of the New York Federal Reserve (a banking regulatory body), advocates not only that financial regulation reform is not necessary, but also that deregulation is the best course for the American financial sector. Meanwhile, JP Morgan lost $2 billion in an effort to reduce risk. President Obama quickly pointed out that if one of the smartest bankers in the room can preside over such a massive loss, then a deregulated financial sector would likely present us with an unacceptably high level of risk to the entire financial system (and economy). Elizabeth Warren suggested that relying on bankers to regulate themselves would not reduce the systemic risk. The alternative would seem to be strengthening financial regulation, even though—according to Sen. Dick Durbin—“the banks own Congress.”

The full essay is at " Banking as Flawed."

The Downfall of MF Global: Implications for Banks Too Big To Fail

Here is an alphabet-soup of regulatory agencies that let MF Global, a financial services company that specialized in futures-trading, engage in much, too much, risk: SEC, CME, CFTC and FINRA. On one level, regulators will never be able to stop practitioners from making risky or simply bad decisions; a business system populated only by firms above average is by definition impossible. As long as their managers have any freedom of movement at all, some firms, including some in the financial sector, will inevitably fail. The question I want to pose is whether this means that firms too big to fail (TBTF) should be allowed to exist at all. In short, although MF Global itself was not TBTF, the risk Corzine (who had been chairman of Goldman Sachs) permitted suggests that human nature might be insufficiently disposed to support mammoth concentrations of private capital whose fall could mean the collapse of the financial system itself. Ultimately, I suppose, human nature can only go so far, organizationally speaking.

The full essay is at "The Downfall of MF Global."

Reinsurance as a Shell Game: Another Bailout to Come?

In the stock market, investors can be quite fastidious in demanding a certain quarterly profit or internal rate of return. The increasing activism of institutional investors exacerbates this trend, as they have the wherewithal to investigate the companies in which they hold stock and the incentive given the number of shares they typically hold in a certain company. This pressure can tempt managements to “go outside the box” in developing novel ways to inflate revenue or hid expenses and risk. In theory at least, companies owned by their employees or customers do not have to contend with that sort of pressure, and thus can manage their books with more transparency and honesty. Has managerial capitalism become too reductionistic in relying so much on the corporate form of ownership? Have we as societies been opening ourselves up to too much financial risk as a result? Further, if shifting more regulatory authority from the state to the federal level in the US (and presumably in the EU as well), what would be the cost to the federal system? The answers for the U.S. and E.U. could differ, given where each union is in its development. The insurance industry in New York is a case in point.

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

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.

Fuld’s Arrogance at Lehman: Systemic Risk

Documents released in May 2012 regarding Dick Fuld at Lehman Brothers prove that he was aware of the high risk involved in holding so much real estate (and related security derivatives). This means definitively that “the ‘forces-out-of- our-control’ argument we hear from Wall Street leaders is [self-serving] bunk. It is the ill-advised behavior of one banker after another, day in and day out, that leads to the sort of devastating financial crisis we are only now emerging from.”[1]

The full essay is in Essays on the Financial Crisis, available in print and as an ebook at Amazon.

1. William Cohan, “Lehman Docs Show Wall Street Arrogance Led to Financial Collapse,” The Huffington Post, May 7, 2012.

Hollywood on Risk: Snubbing Lucus’s “Red Tails”

When George Lucus showed Red Tails to executives from all the Hollywood studios, every one of the execs said no. One studio’s executives did not even show up for the screening. “Isn’t this their job?” Lucas said, astonished. “Isn’t their job at least to see movies? It’s not like some Sundance kid coming in there and saying, ‘I’ve got this little movie — would you see it?’ If Steven (Spielberg) or I or Jim Cameron or Bob Zemeckis comes in there, and they say, ‘We don’t even want to bother to see it.”[1] According to one newpaper, the snub implied that “Lucas’s pop-culture collateral — six ‘Star Wars’ movies, four ‘Indiana Jones’ movies, the effects shop Industrial Light and Magic and toy licenses that were selling (at least) four different light sabers . . .  — was basically worthless.”[2] As a result, Lucas paid for everything, including the prints, to enable the film’s opening. What can explain this bizarre snub?

The full essay is at "Hollywood on Risk." 

1. Byran Curtis, “George Lucus Is Ready to Roll the Credits,” The New York Times, January 17, 2012. 
2. Ibid.