Bank Profits Hit Record as Wages Stagnate in the U.S.: A Tale of Two Cities

In the United States, executives have been compensated much more than their own non-supervisory workers. This has been so in not only absolute terms, but also relative to other countries. As a first step to getting to an explanation, the sheer magnitude of the gap in the U.S. must be digested.

          The magnitude of the difference between the U.S. and all the other countries listed here suggests that the ratio of 475 to 1 is artificial rather than natural.  Moreover, the different ratios point to differences in underlying cultural values. Image Source: www.politifact.com

According to the Associated Press, American “banks earned more from April through June [2013] than during any quarter on record, aided by a steep drop in losses from bad loans.”[1] The Federal Deposit Insurance Corp. reported that the banking industry earned $42.2 billion in that quarter, up 23 percent from the second quarter of 2012. Banks' losses on loans decreased 30.7% from a year earlier to $14.2 billion, the lowest in six years, and lending increased 1 percent from the first quarter. Losses on loans fell to the lowest level since the third quarter of 2007. Home equity loans showed the greatest declines in losses.[2]

CNNMoney reported that the nation’s biggest banks were expected to hand out more in compensation (including $23 billion in bonuses) in 2013 than they had done in 2009. The total compensation of CEOs had increased by 876 percent between 1978 and 2012.[3] The FDIC report shows that the largest banks continued to drive the industry's profits while smaller institutions have struggled. Banks with assets exceeding $10 billion, including Bank of AmericaCorp., Citigroup Inc., JPMorgan Chase & Co. and Wells Fargo, accounted for about 82 percent of the industry's earnings in the second quarter of 2013. Most of them had recovered in part from federal bailout money and record-low borrowing rates—neither one warranting higher compensation. For instance, the Fed’s bond purchases had been keeping long-term interest rates low.

On the very same day the FDIC announced the record profits, fast food workers across the U.S. walked off the job to protest low wages and poor treatment. Roughly “200 protesters including employees from McDonald's and Wal-Mart and members of the Chicago Teachers Union and the Service Employees International Union gathered outside the Rock N' Roll in downtown Chicago. Sixty cities joined in with their own protests. "It's not livable," Tyree Johnson, who said he's been a McDonald's employee for 21 years, charged. "I've been dedicated to McDonald's for the past 21 years. I still make $8 an hour. "I'm tired of choosing between paying rent and eating," said worker Tamara Best-Watkins to the crowd. "I'm tired of choosing between taking my daughter out and paying rent." Speaking at the protest, U.S. House representative Jan Schakowsky (D-Ill.) noted that McDonald’s CEO “makes in two or three hours at work what his employees make in a year.”[4]

With the federal minimum wage of $7.25 per hour having remained unchanged since 2009,  the demonstrators demanded a $15-per-hour minimum wage and protections against retaliation for joining a union.[6]  Hourly wages for nonfarm workers had fallen 3.8 percent in the first quarter of 2013; that drop surpassed any other since the Bureau of Labor Statistics began keeping track of wages in 1947.[7] Hourly worker pay had risen just 1.9 percent in 2012, even as the consumer price index increased 1.8 percent. That was the third-weakest annual increase in hourly pay since 1947, topping only the 1.4 percent gain in 2009 and a 1.8 percent gain in 1994.[8]

Jean-Jacques Rousseau, an eighteenth-century European philosopher, would label such fiscal inequality as artificial, rather than natural. Even though artificial inequalities are not hard-wired into human nature, we may have made them virtually impossible to expunge from the American political economy. Perhaps just viewing the widening gap as artificial could be a first step back from the brink of social instability and maybe even revolution, in spite of the odds established and enforced by the military-industrial complex.

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1. The Associated Press, “Bank Profits Hit Record $42.2 Billion in Second Quarter,” The Huffington Post, August 29, 2013.

2. Ibid.

3. Ibid.
4. Kim Bellware, “Fast Food Workers Protest in Chicago for Living Wages, Better Treatment Amid Nationwide Strikes,” The Huffington Post, August 29, 2013.

5. The Associated Press, “Bank Profits Hit Record $42.2 Billion in Second Quarter,” The Huffington Post, August 29, 2013.

6. Mark Gongloff, “U.S. Suffers Biggest Pay Drop on Record, as Workers Squeezed Tighter,” The Huffington Post, June 5, 2013.

7. The Associated Press, “Bank Profits Hit Record $42.2 Billion in Second Quarter,” The Huffington Post, August 29, 2013.

8. Mark Gongloff, “U.S. Suffers Biggest Pay Drop on Record, as Workers Squeezed Tighter,” The Huffington Post, June 5, 2013.

Political Protests in Wisconsin and the Middle East: A Common Denominator?

Imagine some of the blue-collar unionists in Wisconsin's Capitol in February, 2011 suddenly "losing it," insulting officers of the Capitol Police keeping an eye on the protest going on in the rotunda. Due to a video made public (and related news stories), a clan of officers taking down just one protester, who was actually there merely to observe a protest two years later, we don't have to imagine such a scene, albeit "downsized" from that of protesters en masse being attacked.   

     From the video: The young man being thrown to the floor and jumped on had last made reference to his right of peaceful protest, which the police presumably punished him for anyway. How much power do rights have if force refuses to recognize them?  Image Source: thenorthwestern.com

Had there been a full-blown confrontation in February, 2011, imagine how quickly the barefoot dancers would have run in horror past all the blood, open wounds, and death. The distance between Madison and Manama back in February, 2011 would have been significantly narrowed, but not eliminated. A common denominator does indeed exist: the propensity of human nature to abuse a monopoly of power and to view other people as objects rather than ends in themselves.

The entire essay is at "Political Protests"

All-You-Can-Eat Buffets: An Unethical Sandwich?

Restaurant chains that advertise their “all you can eat” buffets, such as Golden Corral and Old Country Buffet, present us with an interesting case in human resource management and business ethics. The structure of the system is particularly interesting from an ethical perspective.

                         Locations of Golden Corral restaurants in the U.S. Hardly an insignificant chain. Image Source: Find.mapmuse.com

The full essay is in The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.com.

U.S. Justice Department Opposes American-US Air Merger: Justice as Fairness?

After a decade of “rapid consolidation” in the U.S. airline industry, the U.S. Department of Justice filed a lawsuit in mid-2013 to block the proposed merger between American Airlines and US Airlines. The question I investigate here is whether the government’s opposition to this merger is fair to the stockholders and employees (including managers) of the two airlines. Given the undoubted proliferation of empirical studies on the probable impacts of the merger on the industry (e.g., competition), the ethical question of justice as fairness may have slipped between the cracks.

At the time, the merger was expected to create the world’s largest airline, not to mention the largest American (or US) airline. Even though the government had blocked the merger of AT&T and T-Mobile two years earlier and forced Anheuser-Busch InBev to significantly change the terms of its takeover of the brewer of Corona earlier in 2013, the New York Times characterized the antitrust division of the U.S. Justice Department as having “a newly aggressive approach.”[1] The division had allowed a “nearly unfettered run of mergers in recent years.”2] Even the regulators were on board.
 

                                                  Should these two airlines merge?   Image Source: NYT

Beginning in 2008—the year of the financial crisis—the Justice department approved the mergers of Delta and Northwest, United and Continental, and Southwest and AirTran. “While those mergers helped the industry return to profitability and brought more stability, they also led to higher fares, regulators said. A union between American and US Airways would take the consolidation too far, . . . hurting consumers and leading to substantially less competition and higher airfares and fees, and to less service to many airports.”[3] Eric Holder, the U.S. Attorney General, said his department was determined to ensure “robust competition in the marketplace.”[4]

According to the Justice Department, the merger would result in four airlines controlling more than 80 percent of the U.S. market for commercial air travel. Whether there has been much real competition in what may actually be oligarchic markets in the U.S. is a question for another day. Here, the question is whether being the last in line, reaching the counter just after closing, is fair. Of course, the analogy breaks down in part because American and US Airways did not have to wait for the other mergers to have been approved. The question, better stated, is whether being the merger likely to reduce competition below a threshold is fair to the owners and employees of the two airlines, given the fact that the Justice Department had approved other mergers in the industry in the preceding five years.

That the “vast majority of domestic airline routes were already highly concentrated” suggests that maybe the Justice Department should not have gone on a sort of spending spree in allowing all of the preceding mergers.[5] Put another way, if the overwhelming number of existing routes were already highly consolidated, why all of a sudden was another merger too much due to its impact on competition? Is there much competition in a highly concentrated market? If not, then why didn’t the government draw the line earlier, opposing one or two of the earlier mergers? Robert Mann, a former airline executive, has characterized the Justice Department as “late to the game with concerns over airline industry consolidation.”[6] Given that American sought the merger to avoid bankruptcy, should the stockholders and employees of American as well as US Airways suffer from the government hitting the brakes because it had been speeding?

On the other hand, consequentially speaking, the proposed merger was expected to harm consumers, perhaps even more than the previous mergers had. The consequences of the last guy putting a card on top of a house of cards are very different than the preceding consequences—hence the last guy. In this sense, having a threshold of risk makes sense. The risk to competition had become too great, even if this was due to the preceding mergers. That the government should probably have raised the hurdles higher for those mergers does not mean that government should stand aside as consumers have to pay “hundreds and hundreds of millions of dollars” more as a result of the proposed merger, according to William Baer, the assistant U.S. attorney general in charge of the anti-trust division.[7]

Who should pay—the consumers or the stockholders and employees of American and US Airways? Is there a third option that is not averse to the financial interests of any of these groups? If not, who should pay? If the airline industry was already heavily consolidated, presumably at the expense of competition, implementing Holder’s aim would entail going beyond disapproving the proposed merger to pro-actively break up all of the existing major airlines based in the United States. The airlines coming out of such an act would have different ownerships as well as managements and boards of directors. All of the mega-airlines would be treated the same in being broken into two or three airlines each.

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1.  Jad Mouawad, “U.S., Filing Suit, Moves to Block Airline Merger,” The New York Times, August 13, 2013.

2. Ibid.

3. Ibid.

4. Ibid.
5. Ibid.
6. Ibid.

7. Ibid.

Rousseau on Inequalities in Society: An Instance of Kantian Enlightenment?

Kant defines enlightenment as “man's emergence from his inability to use one's own understanding without the guidance of another.”[1] By making public use, Kant means “that use which anyone may make of it as a man of learning addressing the entire reading public."[2] By sufficient freedom, Kant has in mind that the ideas that threaten the power of the guardians or institutional/societal rules are not barred.  

For example, an enlightened Roman Catholic priest would publish ideas questioning and even criticizing Church dogma when he is acting as a scholar, even though he would fulfill his duty in his conduct as a priest by defending those very teachings. A priest could thus go public as a heretic as long as he does so on his own time as a scholar and member of society, and an enlightened bishop would tolerate the scholar’s freedom to think and publish outside the box.

                                                                                       Image Source: builddiscipline.com

Rousseau would object to Kant’s prescription for how to become enlightened and Kant would object in turn to Rousseau's preference for the state of nature over society and the associated expansion of reasoning. Does Rousseau fit Kant's concept of enlightenment even though Kant would object to some of Rousseau's ideas? 

To read the entire essay, including whether Kant would have to admit that his notion of enlightenment applies to Rousseau, please click on "Rousseau as Enlightened?"

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1. Immanuel Kant, AnAnswer to the Question: What is Enlightenment? (World ebook Library).

2. Ibid.

Day of Rage

Friday, August 16, 2013: A day of anger as proclaimed by Morsi supporters in Egypt. A day of death and carnage. A day of intransigence on both sides. Just a day earlier, the U.S. government had cancelled planned joint military exercises. Besides being largely symbolic rather than real sanction, the exercises were due to be downsized anyway due to the ongoing, across-the-board, sequester of the U.S. Government’s budget. Can something so convenient be counted as even “sending a signal?” Meanwhile, American foreign aid to Egypt, $1.3 billion—second only to what the U.S. gives Israel—continued, as if there were no sequester. As a direct result of the financial complicity, thousands of protesters in Turkey were shouting anti-American slogans. The protesters were so well informed that they were protesting the decision of the Obama administration not even to decide whether there had been a coup in Egypt when the military deposed Morsi. Turkey had emerged as one of the fiercest critics of what it has called an “unacceptable coup.”[1]

It is not as though the American aid gives the U.S. much leverage with the Egyptian military; aid from Middle East states, including Saudi Arabia (whose statement on the Day of Rage voiced support for the military), dwarfs that of the United States. Meanwhile, the U.S. Government, fearful of something worse (for the U.S.) in Egypt than its military, was not fooling the Turks or the rest of the world. The sad truth is that Americans could be harmed as a direct result of their government’s attempt to hold onto whatever leverage existed.

                                           The Egyptian military's "No Tolerance" in action on the Day of Rage.  AP/Hassan Ammar 

It is not as though cutting off foreign aid to Egypt would be so “radical” that the option was not realistic. On the Day of Rage, Germany, ein Land—wirklich Staat—auf die Europäische Union, suspended $25 million in aid to Egypt for climate and environmental protection projects.[2] Meanwhile, Germany, Egypt’s largest trading partner, joined with the French Government in calling for a federal response from the E.U.’s Council of Ministers and presumably the E.U.’s Foreign Minister. Indeed, one of the reasons for creating the E.U. had been that the states would have more influence together than separately. The states’ rights ideology was yet again obstructing Europe from attaining that goal.

I suspect that the difference in the respective reactions of the E.U. and U.S. with respect to foreign aid have to do with the power of the Israeli lobby being greater in the U.S. than the E.U. The U.S. Government was thus vulnerable to the accusation of hypocrisy on its democratic principles out of a rather obsessive concern for Israel’s safety. Had both unions withheld both foreign aid and trade with Egypt, the question would be whether the foreign aid from within the Middle East would be sufficient to sustain the Egyptian military in power. Ich weiß es leider nicht. At any rate, it is unfortunate that democracy and human rights can be so eclipsed by politics in the U.S. and even the E.U., the latter behaving as though it had one arm tied behind its back.

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1. Clare Richardson, “Hundreds in Turkey Protest Against Egyptian Crackdown,” Reuters, August 16, 2013.

2. Associated Press, “Germany Suspends Egypt Aid As World Continues To React To Crisis,” The Huffington Post, August 16, 2013.

Business, Government, and Society: Making Humans Less Humane?

Richard Rinaldi, an innovative photographer in New York City, devised an interesting photo series, titled "Touching Strangers." It provides an answer to the following question: If brought together literally through touch, will two people who have never met begin, after some initial discomfort, to feel comfort, even a feeling of caring for the other person? Richard traversed the streets of Manhattan looking for pairs to put together. Seeing one person, and then another, who together would make an interesting picture, he would ask them simply to stand together. The  resulting picture would depict any initial reluctance. Then, he would arrange the two so they are touching each other in a friendly way.

A curious thing came out in the resulting pictures: a feeling of caring. Astonished, the subjects invariably reported that merely from the touching they actually had actually begun to care about a stranger! Reflecting on this feedback, Richard said in an interview that his “experiment” reveals humanity that lies within us, that we wish there were more of in the world, and that existed in the past. By “the past,” the photographer was referring to the photo shoots.

                                                            Jean-Jacques Rousseau (1712-1778)  Source: Wikimedia Commons 

If we are willing to go a bit farther back in our reflection, say to the state of nature, whether mythic or historical, we can profit from the theory of Jean-Jacques Rousseau, which can explain why we do not feel more caring and compassion as we inhabit great edifices of modern business, government, and society. Indeed, it may be that those tremendous artifacts within which we work, argue, and live may have gradually changed human nature itself—and not for the better.
 

Essay Applying Rousseau: Inequality and Warfare in Business, Government & Society

Corporate Social Responsibility and Reputational Capital: JPMorgan Facing Criminal Investigation

After years of claiming that no criminality had been involved in the securitization and sales of subprime-mortgage-based bonds, the U.S. Department of Justice began to change its tune by mid-2013. The Justice Department was investigating the $2.6 trillion-in-assets JPMorgan Chase bank over its sale of mortgage securities from 2005 to 2007. The government was investigating other large financial institutions too, but the damage to JPMorgan’s reputation could easily dwarf such impacts on the other big banks. For this reason, JPMorgan’s executives, rather than having no comment as the bank released the news in quarterly filings, should have “taken the bull by the horns” by acting proactively in terms of corporate social responsibility.

"Ok, I lied to clients about the bonds, but we had a deal: No Jail Time!"  Image Source: serenity-international.com

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

Recommended Reading: "A Systemic and Ethical Analysis of the Financial Crisis"

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Halliburton: Organizational Culture and Ethics

Human beings are moral agents. Generally speaking, we have consciences and a sense of ought, which according to David Hume is not derived from what is. In other words, ethical principles are not obtained from describing some object or situation. Organizations consisting of human beings do not have consciences; nor are companies able to have a sense of ought that is not reduced to monetary terms. Such terms being empirical, they cannot get to ought anyway. The illusion that corporations are themselves moral agents comes from the failure to distinguish an organization itself from not only its human members, but also its culture. While it may seem that an organizational culture is distant from the people who inhabit the organization, as if culture were somehow based at the organizational level, culture is simply a way of saying that most people in a group share certain basic beliefs, values and ways of behaving. Beliefs, values and conduct pertain to persons. Physiologically, the brain thinks, values, and conducts the rest of the body. There is no “organizational brain.” Rather, culture refers to a critical mass proportion of persons having something in common. This does not mean that the “something” exists apart from, or "above," the persons.

The full essay is in The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.com.

The Financial Crisis: A Systemic and Ethical Analysis

According to a study by the Dallas Federal Reserve, the financial crisis of 2007-2009 “was associated with a huge loss of economic output and financial wealth, psychological consequences and skill atrophy from extended unemployment, an increase in government intervention, and other significant costs.”[1] The study’s abstract goes on to “conservatively estimate that 40 to 90 percent of one year’s output ($6 trillion to $14 trillion, the equivalent of $50,000 to $120,000 for every U.S. household) was foregone due to the 2007-09 [sic] recession.”[2]

 

Interestingly, the Huffington Post “reports” the study’s finding in the following terms:  “a ‘conservative’ estimate of the damage is $14 trillion, or roughly one year’s U.S. gross domestic product. This is based on how much output was lost during the crisis and Great Recession, along with all the damage done to potential future economic growth.”[3] In fact, the article’s title claims that the crisis cost more than $14 trillion! Lest it be thought that the reporter and editor suffer from a learning or reading disability, the gilding here is notably in the direction of “selling more papers.”

 

Ironically, the Huffington Post also published an article pointing to the lack of accountability in that “the executives that [sic] were in charge of Bear’s headlong dive into the cesspool of subprime mortgage lending hold similar jobs at the most powerful banks on Wall Street: JPMorgan, Goldman Sachs, Bank of America and Deutsche Bank."[4]

 

The upshot is that those stakeholders who played a role in the crisis, most significantly the people running the government, the media, and the banks, have gone on, relatively unscathed, while the systemic risk remained or has actually become even greater.  As a first step toward recovery, a systemic map depicting the interrelated parts in the systemic failure and a related ethical analysis can provide a basis for reforms sufficient to thwart another major financial crisis.

 

 The systemic and ethical analysis

 

                                                         

1. Tyler Atkinson, David Luttrell, and Harvey Rosenblum, “How Bad Was It? The Costs and Consequences of the 2007-09 Financial Crisis,” Staff Paper No. 20, Federal Reserve Bank of Dallas, July 2013.

2. Ibid.
3. Mark Gongloff, “The Financial Crisis Cost More Than $14 Trillion: Dallas Fed Study,” The Huffington Post, July 30, 2013.

4. Lauren Kyger and Alison Fitzgerald, “Former Bear Stearns Executives Seemingly Unscathed by Financial Crisis They Helped Trigger,” The Huffington Post, July 31, 2013. The article was originally published by the Center for Public Integrity.

 

Wall Street As More of the Economy: Unjust and Riskier?

The financial sector, which includes banks like JPMorgan and insurance companies like AIG, had the fastest earnings growth in the Standard & Poor’s 500 in 2012.[1] As of mid-2013, the sector comprised 16.8% of the S&P 500, almost double the percentage back in 2009. With the technology sector weighing in at 17.6 percent in 2013, the financial sector was poised to become the largest sector in the S&P 500. The traditional critique of the financial sector having a larger share of the economy is that the sector doesn’t “make” anything. As this argument is well-known, I want to point to two others.

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1. Alex Barinka and Whitney Kisling, “Banks Poised to Lead S&P 500 as JPMorgan Beats Microsoft,” Bloomberg, July 29, 2013.

Obama: Egyptian Coup? What Coup?

In late July 2013, the Obama administration decided that it was not legally required to determine whether the Egyptian military had led a coup in ousting President Morsi. The decision permitted the administration to continue $1.5 billion annually in American aid to Egypt. One senior official said only, “The law does not require us to make a formal determination as to whether a coup took place, and it is not in our national interest to make such a determination. We will not say it was a coup, we will not say it was not a coup, we will just not say,” the official said.”[1] I’m reminded of one of Captain Renault’s famous lines in the film, Casablanca. “I’m shocked, shocked to find that gambling is going on in here!” Coup? What coup? To be sure, the administration had its reasons, strategic of course, yet a bigger picture perspective could be helpful here, considering that an effort to violate at least the spirit of a law is involved here.

 

 

Administration officials said the U.S. Government would continue to use financial aid as a lever to pressure Egypt’s new government to push through a transition to democracy. Yet what cost to the U.S. Government would this intent to manipulate the Egyptian military exact?

 

                                                                                            A Coup or a Book-Signing?

                                                                 Refusing even to decide if this is a coup reflects on the refuser.

 

On July 3, 2013, Egyptian generals deposed President Morsi, put him under arrest, and suspended the constitution. “Under the terms of the Foreign Assistance Act, no aid other than that for democracy promotion can be given to ‘any country whose duly elected head of government is deposed by military coup d’état.’ The law does not allow a presidential waiver, and stipulates that aid cannot be restored until ‘a democratically elected government has taken office.’”[2] Refusing to decide whether a coup took place is essentially refusing to enforce the law, given the events in Egypt on July 3, 2013.

 

 

Fittingly, one of Morsi’s senior advisors, Wael Haddara, accused the administration of “verbal acrobatics,” and asked, “With the entire world calling this a coup, why isn’t the American administration calling it so?”[3] The reference to “verbal acrobatics” is particularly important, for it hints on the discrediting long-term impact on the U.S. Government by its president’s decision to take an easy out. Generally speaking, political convenience can come back to bite even if the pain is not ever felt directly. In other words, the Obama administration sacrificed some of the U.S. Government’s credibility to be able to manipulate another government through money.

 

 

A similar trade-off existed at the time in Europe regarding the matter of Turkey’s possible accession an E.U. state. Turkey would be the largest state by population, and thus would have tremendous influence in the E.U. Government. The added cultural and political diversity to the E.U. could cause it added strain, if not compromise the very viability of the Union. So why would the E.U. admit Turkey when doing so could put the E.U. itself at risk internally? Similar to the Obama administration’s desire to have more influence in the Egyptian military, the European Commission would like to use Turkey as a “way in” to influence Middle East international relations.

 

 

Both cases evince putting one’s own federal government at risk in order to manipulate other governments. At the very least, the strategy of undercutting oneself to extend one’s influence seems counterproductive. That the influence comes well before “the bill comes due” creates the illusion of a costless choice. Looking out for the long-term governing of a union of diverse states, whether in Europe or North America, is easily shirked when the opportunity to pull more levers externally presents itself. A federal government willingly undercutting its own credibility or ability to govern for a short-term advantage is not only short-sighted; it is also indicative of a certain lack of character. The question is perhaps whether that lack of character is societal in nature or merely in ruling elites.

 

See the video made to accompany this essay: http://youtu.be/_1yuvnOq5YE

 

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1. Mark Landler, “Aid to Egypt Can Keep Flowing, Despite Overthrow, White House Decides,” The New York Times, July 25, 2013.

2. Ibid.
3. Ibid.

Financial Reform: Did Congress Shoot a Blank?

On the third anniversary of the Dodd-Frank Act, former U.S. Senator Ted Kaufman (D-DE) penned an excellent yet concise critique of the law’s efficacy over three years. The news is not good. I submit that it is worse than Kaufman is willing to admit—worse in the sense that Congress had mishandled the writing of the bill before it became law. I will get to this matter after summarizing Kaufman’s points.

                                                                                                     Former Sen. Ted Kaufman

  
Kaufman points out that the big banks can still take high-risk gambles with FDIC-insured deposits. Essentially, the U.S. taxpayer is underwriting the additional risk. The mammoth $6.2 billion “London Whale” loss at JP Morgan in 2012 suggests that the banks are indeed taking advantage of the loophole. Kaufman points to a second loophole. Although Dodd-Frank contains new regulations on the financial derivatives that had played such a dramatic role in the near-meltdown in September 2008, the big banks can simply move their financial derivatives to “off shore” offices. Citigroup alone has more than 2,000 foreign subsidiaries.[1]

As for the dysfunctional Fannie Mae and Freddy Mac, Kaufman points out that they are not even mentioned in Dodd-Frank! Nor can any solution to the structural conflict of interest facing the rating agencies, which are still “bought and paid for by the entities they rate.”[2] Nor, I might point out, does the law do anything to obviate the “client-pays” conflict of interest facing public accounting firms (e.g., Arthur Andersen as the “permissive” auditor of Enron). I would generalize to suggest that American lawmakers and the general public are woefully ignorant of the harm just in looking the other way rather than deconstructing an institutional conflict of interest. In fact, I submit that such a conflict is inherently unethical, rather than being so only if it is exploited.

As for the “ordered liquidation” feature of Dodd-Frank, Kaufman’s critique portrays the mechanism as if it were a sand castle sitting just above a rising tide. Although making actual sand castles on some beach might teach members of Congress how to get along, an orderly liquidation of one bank is not likely to be sufficient to stop the contagion of fear and short-selling from spreading to other banks, as they are so interconnected. Would an orderly liquidation procedure invoked for all of the large banks stave off the collapse of the financial system? 

Kaufman cites an analysis by Thomas Hoenig, vice chairman of the Federal Deposit Insurance Corp., which finds that JPMorgan Chase, Citibank, and Bank of America had become the three largest banks globally during the three years of Dodd-Frank’s existence. Add in Wells Fargo and those four banks have combined assets of 97% of the U.S. GDP in 2012.[3] Given the continued high-risk trades and possibility of off-shore financial derivative “bundling” and selling, the “too big to fail” problem has grown more perilous, not less. Meanwhile, only 155 of the 389 rule makings required by Dodd-Frank were finalized during the law’s three years of existence.[4] Put another way, a law that is utterly insufficient to eliminate the “too big to fail” systemic risk was after three years still “half baked.” The obvious question is why, and in Washington that question is answered in terms of power.

Kaufman points to the legislators in Congress who “passed the buck” to the regulators, who would have to face the powerful Wall Street lobbyists. However, he doesn’t include the impact of those lobbyists on the members of Congress themselves. That is to say, the law may have been watered down as it was being written, or “marked up,” as lawmakers gave too much influence to the financial interests that would face stiffer regulation. It is not uncommon for legislative aides to use legislative clauses written by the regulated entities themselves. Here we have stumbled on yet another tolerated structural conflict of interest!

Therefore, we can generalize perhaps in concluding that the Dodd-Frank law is insufficient even in theory, let alone practice, to solve the problem of systemic risk because of the excessive influence of Wall Street over lawmakers. As Sen. Dick Durbin said in the wake of the banks' culpability in 2008, the banks still "own" Congress.[5] That is, the endurance of excessive systemic risk has in great part been due to Congress having become more of a plutocracy than a house of the people. Consider, for example, how much chance the proposal by Sens. Warren and McCain to break up the megabanks has in the U.S. Senate (not to mention the House!), and it will be clear just how much power Wall Street actually has in Washington. This is the real problem, any solution to which is sadly not even on the horizon, and this is, kein Zufall, no accident either.

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1. In a “slip of the tongue,” Kaufman wrote “subsidies” instead of “subsidiaries.” Might he have been wanting, at least unconsciously, to tell us more?

2. Ted Kaufman, “Happy Birthday to Dodd-Frank, A Law that Isn’t Working,” Tedkaufman.com. Accessed July 22, 2013.

3. Ibid.

4. Ibid. Kaufman cites the Davis Polk law firm as coming up with the numbers.

5. U.S. Sen. Dick Durbin (D-IL) said “Congress is owned by the banks” after they stopped his amendment that would have allowed judges to modify contested mortgages in foreclosure.