The Fourteenth Banker Blog

July 29, 2010

Oligarchs Pass On Costs

Filed under: Running Commentary — thefourteenthbanker @ 7:29 AM

John Stumpf goes boldly where no man has gone before.  He announces widespread price increases in the mainstream media.

“I can’t guarantee that we won’t pass on some of those costs,” Stumpf, 56, said in an interview at his San Francisco office. “We’ll try to tighten our belt and absorb some of the costs of compliance, but some costs may change and customers might pay for their financial services in new ways.”

Stumpf’s comments add to evidence that new rules mean new expenses for consumers as banks make up for lost revenue and increased costs. JPMorgan Chase & Co. CEO Jamie Dimon said July 15 the legislation may translate into higher fees and credit- card rates, and Bank of America Corp.’s Brian T. Moynihan told shareholders a day later he’s looking for ways to soften the impact on annual revenue, which the lender said could be $2.3 billion.

Wells Fargo, with the biggest U.S. branch network, is already passing on costs by charging for checking accounts and raising interest rates on credit cards and loans, said Richard Bove, a banking analyst at Rochdale Securities LLC. The bank ended free checking last month by adding a $5 monthly fee for customers who don’t meet certain conditions.

“This bank does not intend to sit there and get nailed,” said Bove,

I think that last comment really says it all. The bank does not intend to get nailed. Bove captures the spirit of unconscious capitalism. It is about who makes the most money and who gets nailed.

There is nothing in here, no hints of ways that the banks can contribute innovation and come up with new product bundles to meet the needs of consumers (citizens), who have a new austerity ethic brought on largely by uncertainties about the future and strong doubts about the safety of either their primary asset, their home, or the financial markets which provide dwindling and volatile returns.

Only an oligarch, with so dominant a market position, can so boldly announce that they intend to stick it to the little guy, the commoner, what I will describe in future posts as the Third Estate.


July 26, 2010

Facing Reality II

Filed under: Running Commentary — thefourteenthbanker @ 7:57 AM

From Mish, the budget and economic perspective in one of our most beautiful states. Go West Young Man!

The only way out, they say, is to make dramatic, permanent changes. The choices that lie ahead affect not only the state budget, but the kind of place Oregon will become: What kind of schools will we have? Which criminals will go to prison? Who gets help when they need it? What kind of business climate do we want? And how much do we all pay in taxes?

“The public is going to have to understand that we will have a very different Oregon in 2020 than we did in 2010,” says John Tapogna, president of ECONorthwest, one of the state’s top economic consulting firms.

There is much more in the article including a lengthy discussion of four problems Oregon faces.

  • Problem 1: Our income is shrinking
  • Problem 2: We have more people in need
  • Problem 3: We’ve locked up a lot of money
  • Problem 4: We can’t grow our way out

These are deep, deep problems. Personal Income must grow. Budgets must work. Long term imbalances must be fixed. Higher taxes can be a partial solution, made less painful if personal income is growing. But Civil Servants must shoulder their share also. Fix Problem number 1 and the rest gets easier. To do that you must have financial intermediation in the public interest.

July 25, 2010

Facing Reality

Filed under: Running Commentary — thefourteenthbanker @ 4:03 PM

While I do not support all the points of view in this post, I do find it a pretty clear reality check and agree with the premise that we need a multi party system rather than our two party system. The revenue source and expenditure graphic at the start of the post is from official budget numbers and does not address the activities of the Fed, which will soon come to more light, or the shadow activities of the Treasury, which claims to have made a profit on TARP, no mention being made of the many banks that are not even paying their TARP Preferred Dividends. Who is trying to collect on those by the way? It smells of a propping up operation.  That is enough to tell you that the books are cooked. We do need truthful leaders to address real issues.

In my prior post I linked an article pointing out that multinational companies are not paying their share of taxes. In this linked post, the suggestion is make that Marijuana be legalized and taxed heavily. Illegal drug sales are just one part of an underground economy that does not pay its share of taxes. That puts the narco industry on par with Exxon Mobil. Neither pay their taxes. Not being a tax expert, I don’t know that a VAT is the best solution, but it is from a category of solutions that increase the tax base. That must be done. Hedge Fund managers, multinationals, drug pushers, cash intensive businesses, and general tax cheats are screwing the rest of the tax payers and primarily W-2 employees that are already squeezed. So let’s get a share from everyone by revamping the tax system.

I like John Hussman and agree with both these ideas:

John Hussman had a creative solution to help the housing market. He came up with this idea in October 2008. Of course, the Bush and Obama idiots would never consider such a logical solution:

  • Congress can efficiently mute the impact of the mortgage crisis on “Main Street” by allowing a small change in foreclosure law. Specifically, in foreclosure proceedings, judges should have the ability to reduce the amount of principal on a mortgage loan, provided that the original mortgage lender receives a “Property Appreciation Right” or “PAR” from the homeowner. The PAR would be an obligation to repay the mortgage lender out of future appreciation on the home (including property subsequently purchased, until the obligation was relieved). Payment would occur either when the home was sold, or through an equity-extraction refinancing at some later date. In that way, homeowners would surrender some amount of future appreciation in return for an equivalent reduction in the mortgage principal. This would result in an immediate lowering of mortgage payments, yet the original mortgage lender would still stand to be made whole. To account for time-value, the amount of the PAR obligation could be allowed to increase at a small rate of interest. The homeowner would be able to keep the house. Importantly, there would be no need to continue major write-downs on mortgage securities, since only the character of the payments, not the value of the mortgage obligation itself, would change.


John Hussman has a fantastic idea regarding Social Security. This idea would benefit the working class and stick it to the rich. ”Drop the rate substantially, but include all income – wage and non-wage. Three-quarters of Americans pay more in payroll taxes than in income taxes. By reducing the wedge between the hourly amount earned by employees and the hourly cost paid by employers, this strategy would create immediate incentives for employment. Moreover, it would raise more revenue because at present, even Warren Buffett only pays Social Security taxes on the first $106,800 of income.” This idea would be an immediate boost to the economy as the average worker would take home more pay. Revenue from Social Security would increase by $200 billion.

On this one we do need to calculate a break-even point of income and make sure that it is not a tax increase too far down the economic continuum. That Social Security is a savings program is simply a fraud. So while some years ago I would not have supported decoupling payments from individual taxes, now is the time to do that.

July 24, 2010


Filed under: Running Commentary — thefourteenthbanker @ 4:10 PM

In this Huffinton Post piece, Senator Bernie Sanders is actually, get this, Senatorial. He rails against that part of capitalism that undermines democracy, the accumulation and misuse of power and it’s effect on the well being of the greater population.

And while the Great Wall Street Recession has devastated the middle class, the truth is that working families have been experiencing a decline for decades. During the Bush years alone, from 2000-2008, median family income dropped by nearly $2,200 and millions lost their health insurance. Today, because of stagnating wages and higher costs for basic necessities, the average two-wage-earner family has less disposable income than a one-wage-earner family did a generation ago. The average American today is underpaid, overworked and stressed out as to what the future will bring for his or her children. For many, the American dream has become a nightmare.

This is a shocking statement. The average two earner family has less disposable income than the single earner family of a generation ago. Over decades, the second earner has been absorbed into the economy as a factor of production, and used like cattle, with the dramatic productivity growth going to the ownership class.

Meanwhile, they have taxed the working class while giving themselves a free ride.

Last year, the top 25 hedge fund managers made a combined $25 billion but because of tax policy their lobbyists helped write, they pay a lower effective tax rate than many teachers, nurses, and police officers. As a result of tax havens in the Cayman Islands, Bermuda and elsewhere, the wealthy and large corporations are evading some $100 billion a year in U.S. taxes. Warren Buffett, one of the richest people on earth, has often commented that he pays a lower effective tax rate than his secretary.

And have abused globalism to take the profits from workers while paying little or nothing for the infrastructure, national security, and public services that make this all possible.

But it’s not just wealthy individuals who grotesquely manipulate the system for their benefit. It’s the multi-national corporations they own and control. In 2009, Exxon Mobil, the most profitable corporation in history made $19 billion in profits and not only paid no federal income tax — they actually received a $156 million refund from the government. In 2005, one out of every four large corporations in the United States paid no federal income taxes while earning $1.1 trillion in revenue.

Even government employees sometimes get in on the act.   Congratulations to the citizens of Bell for getting some of the bums thrown out. We need to throw all the bums out, wherever they may hide.

July 21, 2010

A Word From William James

Filed under: Running Commentary — thefourteenthbanker @ 8:50 PM

If there is anything which human history demonstrates, it is the extreme slowness with which the ordinary academic and critical mind acknowledges facts to exist which present themselves as wild facts with no stall or pigeonhole, or as facts which threaten to break up the accepted system.

July 20, 2010

Back to BP

Filed under: Running Commentary — thefourteenthbanker @ 7:18 PM

It seems like a waste of time to discuss BP these days. What has not already been said?  But let me take up my sad refrain one more time. According to this ProPublica piece, in testimony today about the actions on the rig leading up to the blowout, BP pumped fluids into the well in an attempt to effectively “dump” them without normal environmental restrictions.

BP had hundreds of barrels of the two chemicals on hand and needed to dispose of the material, Lindner testified. By first flushing it into the well, the company could take advantage of an exemption in an environmental law that otherwise would have prohibited it from discharging the hazardous waste into the Gulf of Mexico, Lindner said.

The procedure mixed two substances. “It’s not something we’ve ever done before,” Lindner said.

So, someone decided to pump this junk into the well in advance of the clearing of the well bore of drilling mud. It would seem that the flooding of sea water would then have blown this stuff right back out into the ocean??  Or it would seep out at some point?  Jerry, can you help on this point?  This chemical dump would have to have been either done in accordance with company practices to externalize costs, or would have been the rogue action of an employee. If the rogue action of an employee, which I find unlikely, we should ask what incentives and pressures that employee was under that would cause them to callously contaminate the environment further. Perhaps the contamination of the environment at these sites is already so extreme that it makes no difference.  Comments welcome.  I suspect that a few hundred barrels of a toxic chemical does make a difference.

July 19, 2010

Believe in synchronicity?

Filed under: Running Commentary — thefourteenthbanker @ 1:34 PM

This hearing is tomorrow at 10am in the Science and Technology Oversight and Investigations Subcommittee in the House. It is an investigation into the ‘science’ of economics, and how it does or does not comport with the real world.

But you already knew that, because you have perfect information.


Building a Science of Economics for the Real World

Hearing charter:

Witness statements (click on the name to view the statement):
Dr. Robert M. Solow
Dr. Sidney G. Winter
Dr. Scott E. Page
Dr. David C. Colander
More hearing info:

About Nothing

Filed under: Running Commentary — thefourteenthbanker @ 1:06 AM

The news cycle is a little dictator. Constantly streaming forth stories, facts, opinions, statistics. A thousand linear streams of thought. I appreciate so much how I can throw a topic out there and you bring your comments and take discussion to a deeper level.

I am reading Yves Smith’s Econned.  The subtitle is “How Unenlightened Self Interest Undermined Democracy and Corrupted Capitalism.” So far, through the first three chapters, she runs through some of the history of recent (last 50 years) economic thought and how mainstream economists have been captured by their models, academic rituals and scientific wannabe-ness. I will write more on the book but my first impression is that you can add most economists to the top Wall Street predators and Washington power brokers doing us no favors.

Two interesting summaries of the recent statistics/developments in the economy are here and here. This is serious business. There is a contraption ticking. Our financial markets are Improvised Explosive Devices. The Geithner/Summers/Bernanke team are turning their wrenches and stripping the bolt head.

I looked at running for Congress, just to see about stirring up some real debate in a political process. Of course, nominating for the two parties is done. Also, in my state, I suspect in all states, you can’t even get on the ballot anymore. The ballot is closed. An independent candidate must file early. Isn’t that a statement on our corrupt entrenched power structures? The two party system is alive and well. Of course, my gerrymandered district would not have a competitive election anyway. But, a little political scrap would be worth having, just to annoy the powers that be. Does anyone know of a single congressional challenger that would be capable of making a good argument on the economy, financial reform, and corporate values?

So all this talking, writing, debating is good. It is foundational for something to follow. What do you think that should be? What do you think it will be? How does our little movement do something about the NY/Washington power axis? Any ideas? What about our little banking system? Any ideas?

July 17, 2010

Elizabeth Warren in Treasury Crosshairs Again (Update/Correction: Treasury Disputes Media Reports) « naked capitalism

Filed under: Running Commentary — thefourteenthbanker @ 2:09 AM

Elizabeth Warren in Treasury Crosshairs Again (Update/Correction: Treasury Disputes Media Reports) « naked capitalism.

This is getting really interesting. Is White House seeing the threat in Simon Johnson’s assessment or is this an effort to insulate Geithner from a decision already made to name a compromise candidate that is more acceptable to the industry?

July 14, 2010

Follow up Post – Small Business Lending – Misallocation of Resources

Filed under: Running Commentary — thefourteenthbanker @ 6:23 AM

From Hussman’s weekly letter:

Question. Why do workers in developing nations earn a fraction of the wages American workers earn? While protective and regulatory factors such as trade barriers, unionization, and differences in labor laws have some effect, the main reason is fairly simple. U.S. workers are, on average, more productive than their counterparts in developing countries. While the gap between U.S. and foreign wages can make open trade seem very risky, it is simply not true that opening trade with developing nations must result in a convergence of wages. The large difference in relative wages is in fact a competitive outcome when there are large differences in worker productivity across countries.

The main source of this difference in productivity is that U.S. workers have a substantially larger stock of productive capital per worker, as well as generally higher levels of educational attainment, which is a form of human capital. This relative abundance of physical and educational capital has been a driver of U.S. prosperity for generations. Neither advantage in capital, however, is intrinsic to American workers, and it will be impossible to prevent a long-term convergence of U.S. wages toward those of developing countries unless the U.S. efficiently allocates its resources to productive investment and educational quality. This is where our policy makers are failing us.

There is little question that we have, for more than a decade, squandered our productive resources in the pursuit of bubbles. Almost unbelievably, real private gross domestic investment is lower today than it was 12 years ago, and much of the gross domestic investment that we have made in the interim has been destroyed in mispriced speculative activity such as residential construction and commercial real estate development.

Until we get back to allocating resources to productive use, there will not be lasting general prosperity nor perhaps general adequacy of resources for basic needs.

July 13, 2010

Notice how BP and Banking are not getting much press? Wait.

Filed under: Running Commentary — thefourteenthbanker @ 6:10 AM

Alan Grayson To The Fed: ‘We’ll Be Back’

The Wall Street reform package currently awaiting the return of Congress from the Fourth of July recess is packed with provisions that will remake the financial landscape. One element, though, which has gotten relatively little attention in the media, is a wild card: the authorization of a far-reaching audit of the Federal Reserve for the first time in the central bank’s history.

The audit measure is retroactive — it requires unprecedented disclosure of the identity of businesses, banks, hedge funds, foreign central banks or any other entity that was on the receiving end of Fed largess, and will reveal how much they got and on what terms. The information is required to be posted online within 30 days of the law’s enactment.

Depending on what the audit turns up, the Fed could find itself back in the public eye and could face growing calls for reform. “I think once people see what the first audit discloses, they’re going to want to see more,” said Rep. Alan Grayson (D-Fla.), who, along with Rep. Ron Paul (R-Texas), shepherded the audit bill through the House. “We’ll be back.”

Paul first got involved in the effort to audit the Fed in the 1970s, he said, signing on to bills by Texas Democrat Henry Gonzalez, whose chief investigator has since written the definitive book on Fed opacity.

“It was one of the motivating factors for me to be involved in politics,” Paul said of Fed secrecy. Grayson, meanwhile, was in his first term. “I did know when we started this that this was a bill that had been introduced over and over again for 26 years,” said Grayson.

Popular interest in the Fed, which flowed from Paul’s insurgent GOP presidential primary bid and was stirred by the central bank’s expansive role staving off a financial-system collapse, which flooding banks with billions of dollars. Grayson’s committee interrogations of Fed officials, from Chairman Ben Bernanke on down, have garnered millions of views online.

“It wasn’t me lobbying that got all those signatures,” said Paul. “It was the issue, how well it was popularized. I think certain Web pages were of tremendous help, both coming from the left and the right and the middle.”

Story continues below

The key moment, said Grayson, came in the Financial Services Committee, when he and Paul were able to fend off a Fed-backed alternative in November from Democrat Mel Watt (D-N.C.) that was exposed as reducing Fed transparency rather than expanding it. Watt’s camp sent around a letter backing his amendment signed by what they called a “political cross-section of prominent economists.”

Seven of those eight economists, however, turned out to be affiliated with the Federal Reserve.

“We got the vote in committee, which was the crucial decision point,” Grayson said. “The vote in committee was only possible because so many people had decided beforehand that they supported an audit.”

Grayson had been lobbying his colleagues hard, passing around articles laying out the differences between the amendments and a letter of support from unions, liberal bloggers and conservative activists.

When the final committee vote came, Paul thought they’d been defeated because the top two rows of Democrats – the most senior members – were casting no votes. “The first one and a half [rows], we had no supporters,” Paul told HuffPost. “I though, ‘Oh, we’re not getting any Democrats here.’ But then when we got to the new Democrats, that’s when we picked up our supporters.”

Paul credits Grayson for whipping up support in the House. “I think he probably did more one-on-one than I did,” he said. “I didn’t do a whole lot more than I’ve done in the past, because most of the things I do are very philosophic and symbolic. But this one I probably did a little more asking, but I would say that not too many [members of Congress] came up to me on the floor and said, ‘Sign me up’–a few did–but most of them it was they heard from their constituents and they called over and they got their name put on.”

Once the debate moved to the Senate, the Fed and Treasury — led by Tim Geithner, who was head of the New York Fed during the time the audit will review — had the upper hand, said Grayson, because little work had been done to lay the ground. It didn’t help that one of the lead sponsors was Sen. David Vitter, a Louisiana Republican who is intensely disliked by Democrats and has few friends on the GOP side. Sen. Bernie Sanders (I-Vt.) took the lead from the other side and eventually worked out a compromise with Sen. Chris Dodd (D-Conn.), who opposed an expanded audit. A vote that had been in question in the morning turned into a 99-0 route by the afternoon, as both the left and right backed Sanders’ measure, leaving the center no cover to oppose it.

Assuring that Sanders’ compromise got into the Senate bill meant that Fed audit backers would at least get something in conference, if not everything they’d gotten in the House.

The compromise only allowed one audit, but introduced the disclosure requirement. In conference, the House was able to beat back efforts to kill it and expand the provision to allow for ongoing disclosure. “We adopted the Senate’s thinking about a need for a continuing disclosure requirement. And that was a constructive and, I think, potentially very productive element to what we’ve done,” said Grayson.

Despite the compromise, Paul said he’s supportive of the final measure. “The supporters who really, really want the whole thing all at once, a lot of them will probably be disappointed,” he said. “I think PR-wise we get an ‘A’ for actually getting real exposure.” On the specifics of the provision, he said: “We probably get a C-minus, because even with some of those provisions in there, where they’re going to have to turn over some information, that doesn’t mean it’s going to be automatic… But they’ve agreed, and at least it’s on the books, that they’re supposed to tell us where they sent the money.”

Grayson and Paul are worried about one loophole in the Senate’s language that the House voted to fix, but the Senate rebuffed. The final language provides for disclosure of information about a lending program after the facility has been closed. The Fed argues that the facilities are temporary, so there will be no extreme delay, but Grayson wonders if they’ll keep facilities open just to keep from disclosing information. Fed officials have insisted to Grayson they will not — and notethatmany have already closed.

“If there is any indication that the Fed is actually doing that, you will very quickly see legislation to prevent them from taking advantage of that loophole,” Grayson said.

July 12, 2010

Small Business Loans Restricted, Why?

Filed under: Running Commentary — thefourteenthbanker @ 7:49 PM

This Naked Capitalism piece highlights the fact that SBA lending declined and that this may indicate tight credit conditions for Small Business Lending overall. Let’s dissect this a bit.  First,

a New York Times business blog post that discussed how Small Business Association loans fell sharply in June as provisions to make programs more attractive to both borrowers and banks expired:

Total approved loans in the S.B.A.’s guaranteed loan programs fell to just $647 million for the month, down two-thirds from $1.9 billion in May, according to figures provided by the agency. It was the worst month for S.B.A. lending in years, perhaps decades. Even during the credit crisis that began in the fall of 2008 the S.B.A. approved more loan dollars than it did last month.

Bankers who work with the S.B.A. blamed the steep drop-off on the absence of stimulus measures that raised the guarantee level on general business, or 7(a), loans from 75 percent to 90 percent and also eliminated borrower fees on both 7(a) loans and so-called 504 loans, which are used primarily to finance capital investments such as real property. These provisions largely expired at the end of May….

Barry Sloane, chairman and chief executive of Newtek Business Services, a large S.B.A. lender that is not a bank, said that the lower guarantees meant that his company would itself have to borrow more money to make the same amount of loans. (A bank uses its deposits to fund loans; a non-bank lender has to find other sources of capital to lend.) The higher guarantee, he said, “is key to being able to lever borrowed capital.”….

Mr. Sloane said that because loans are typically funded 30 to 60 days after they’re approved, “if this continues, you’re likely to see a lot of businesses that don’t have funding in September and October.”

Interesting. Banks have made the argument that the precipitous drop in Small Business Lending is a function of loan demand. Is this logical? Is loan demand so elastic that it drops off dramatically when the guarantee percentage drops? Is the drop in SBA loans a proxy for all Small Business Lending? I don’t know. There is no transparency in Small Business Lending. Banks do not report it and the government relies on weak survey data to try to give an indication. More information about Small Business Lending comes from advertisements than from anywhere else and how reliable can that be?

Next, credit spreads on Small Business Loans are at high levels. This means that banks either believe these loans to have greatly increased risk, or they are gouging because of market conditions. In either case, this will serve to restrict credit or be indicative of restricted credit conditions.

Regarding spreads:

The Financial Times reports tonight that small businesses are paying the highest risk spreads on record:

The Fed’s data show that in early May interest rates on small commercial and industrial loans, on average worth about $500,000, were 3½ per cent higher than the federal funds rate, the widest gap since the series began in 1986.

Banks do not charge high spreads and also issue a large volume of loans. Simple supply and demand tells you that high spreads go with restricted supply relative to demand. So, the claim that demand is the driver of low loan issuance does not hold. Credit is still tight.

Why is this? Because capital must be allocated to bank risk taking activities and the profit in other segments relative to the capital employed is generally better. Did legislation do anything to change this? We will see. I think not much.

Perhaps the wider spreads will be reason for greatly increased lending activity. If this is the case and it spurs more capital available for entrepreneurship, maybe the spreads are a good thing. But, I think not.

The editorial comment is that banks need to be banks. Deposits should by and large fund on balance sheet lending up to perhaps 60%-70% of the balance sheet. You see this in some banks. You don’t see it in others. Consumers and businesses should decide who is using their deposits well. Then put the deposits in those places. There is nothing more democratic than this.

Even Bernanke can figure this out that Small Business lending is crucial to our economic future. What Bernanke did not figure out is that if you leave the candy dish out, the wholesome food won’t get eaten. He and the Treasury department watered down reform as much as possible to protect TBTF banks, leaving capital to be deployed in non core areas. If Congress cannot reign in the aggregation of deposits at banks that don’t lend much to Small Business, the people must take the issue into their own hands.

July 9, 2010

Adverse Selection in the Talent Review Process

Filed under: Running Commentary — thefourteenthbanker @ 12:01 PM

Every major bank does talent review and succession planning. Here is a quote from John Stumpf of Wells Fargo. It is not meant to denigrate the named individual, it is just to point out the mentality and hubris regarding how corporations select managers. I will debunk the mentality.

“We have a very robust talent review process here,” he (Stumpf) says. “Avid has a wonderful future here and so do a lot of people.”

So let’s examine this. Stumpf makes a congratulatory self declaration. What he says shows the same kind of self certainty that I’m sure he felt when making all those mortgage loans and buying Wachovia Bank over a weekend. Second, he prophesies about the future. Of course a lot of people have a wonderful future at Wells. That is just a function of the bell curve. But to predict that a specific individual has a wonderful future is another matter. That is a thinking error. There is no certainty about any one individual.

Every bank, every corporation, claims to have a robust and effective talent review process. I would argue that it is just the opposite, that their talent review processes cause adverse selection. This paper was recommended by Bill Black. In it, Gintis and Khurana argue that the business educational system detracts from corporate honesty. This should be self evident to us by now. Corporate honesty is an oxymoron. There are exceptions of course, somewhere.

They write that the B-school motivational models are based on mis-application of simplified economic theories that do not necessarily bear on human behavior. Economic theory and behavioral economics are different Arts. We actually have a lot of good information concerning behavioral economics. Unfortunately the current generation of corporate leaders by and large have already been conditioned by faulty assumptions that defy logic. For example, we know that among individuals there are many that place high value on things other than economic incentives. Nevertheless, few corporate leaders factor this into processes. To quote:

In particular, many individuals place high value on such character virtues as honesty and integrity for their own sake, and are more than willing to sacrifice material gain to maintain those values. We suggest business schools develop and teach a professional code of ethics similar to those promoted in law, education, science, and medicine, that the staffing of managerial positions be guided by considerations of moral character and ethical performance, and that a corporate culture based on character virtues, together with the stockholder-managerial relationships predicated in the part on reciprocity and mutual regard, could improve both the moral character of business and the profitability of the corporate enterprise.

Please note that the authors have previously compared the shortcomings of existing B-school ethics approaches and contrasted them with courses taught in the other listed professions.

Even if business schools change their curricula, it is  A) too late for current corporate managers and  B) new graduates will come into already corrupted cultures and are likely to lose their values before they rise to seniority.

So back to talent review processes. These are founded on alignment of individual incentives to short term shareholder value. The incentives become the proxy for value creation (book profits). There are both carrots and sticks for performance relative to these proxies. The metrics can always be manipulated in many ways including by the natural delay between bad decisions and the corrosive impact of those decisions. The most manipulative and ruthless managers generate the “best” metrics. As we have discussed before, the corporation protects the individual from consequence for such decisions and the externalities foisted on the commons.

To quote again:

…if the health system, scientific research, or higher education were run on the principle that the highest-level decision makers are motivated solely by material reward, and if the training of individuals in these fields stressed that there are no binding ethical rules, and obeying laws should be subject to cost-benefit calculation, there is little doubt but that such systems would fail miserably.

The end result is the managers most sold-out to corporate interests and least wise or humane are the ones promoted higher into management. They play the game to win, and do, and we lose.

July 7, 2010

Gonzalo Lira: Why Corporations Matter, Part I

Filed under: Running Commentary — thefourteenthbanker @ 10:00 PM

Gonzalo Lira: Why Corporations Matter, Part I.

This is a good piece.  I’m looking forward to the next post, which I think is foreshadowed in these paragraphs at the end:

…once corporations came into existence in 1602 in Europe, we have had the smooth uninterrupted material progress I spoke of earlier, and which we enjoy today.

This is why corporations matter. This is why they are an essential part of our current civilization—above any religion, second only to the individual and the state.

In fact, the relationship between that triumvirate is the main issue in our current society—how corporations, individuals and the state can and should interact.

But that’s for another post.

I’m quite confident that the writer will call for a new balance of power between the individual, the state, and the corporation.

July 5, 2010

More on Money Laundering

Filed under: Running Commentary — thefourteenthbanker @ 2:13 PM

From Barron’s article of March, 2009:

Woods started seeing traveler’s checks arrive at his London branch from Mexican currency exchanges in 2006 — sequentially numbered, improperly endorsed, large denomination — he became suspicious.

Under laws aimed at fighting flows of dirty money, his job was to report such activity to Britain’s Serious Organised Crime Agency. Within a year of his report, Woods’ suspicions proved warranted. Mexican prosecutors raided one of the exchange companies and alleged that the cutthroat Sinaloa Cartel had used it to buy jet planes for drug-smuggling. The U.S. Drug Enforcement Agency had Wachovia freeze the exchange’s accounts in Miami and London as part of a still-ongoing investigation.

But in a whistle-blower suit filed with an employment tribunal in London, Woods says Wachovia executives resisted his scrutiny of the bank’s dealings with the Mexican exchanges. He alleges that his bosses bullied and demoted him, then withdrew his reports of other suspicious activities in Eastern Europe. His complaint alleges that Wachovia staff may have even tipped off Mexican-exchange clients about his laundering suspicions. Last June, Woods told the bank that he feared for his safety.

Skipping ahead…

Woods joined Wachovia in 2005 as its U.K. anti-money-laundering officer, after a career fighting financial crime for the British government. As a cop, he helped secure the year 2000 convictions of executives at the Bank of New York who laundered billions of dollars for the Russian mob.

But, according to Woods’ employment-court claim, his Wachovia bosses fought him when he filed reports in October 2006 about suspicious traveler’s checks originating from Mexican exchanges like the Casa de Cambio Puebla, which delivered business valued at hundreds of millions of dollars to Wachovia’s Miami office. Wachovia compliance executives scolded him, Woods alleges, for nosing into the activities of the bank’s American operations. A few months later, Woods noticed that the Mexican casas de cambio simultaneously stopped routing traveler’s checks through London. He asked his American counterparts if they had seen a similar routing change. Instead of obtaining assistance, says Woods’ court filing, he was confronted by Wachovia’s Miami manager of Latin American banking, Carlos A. Perez, who asked why Woods had problems when traveler’s checks were sent to London and problems when they weren’t. Perez didn’t respond to Barron’s inquiries.

Ah, a name is named. Carlos A. Perez. I know nothing about this man except what is conveyed here about his attitude in the matter. Both condescending and dismissive. Maybe he is incidental to the matter. Who knows. We don’t. This case is investigated and settled behind closed doors.

How does Wachovia keep it behind closed doors?  Non disclosure agreements.

Although a Non-Disclosure Agreement prevents him from speaking publicly about his experiences at Wachovia, Woods will offer advice to bank compliance officers about what to do when confronted with evidence of illegal activity when he speaks at the 8th Annual OffshoreAlert Financial Due Diligence Conference, in association with Grant Thornton, which will be held at The Ritz-Carlton, South Beach in Florida on May 2-4, 2010. He will also talk about the emotional turmoil that he has gone through as a result of his whistleblowing.

I wonder if this matter can be investigated more fully under Freedom of Information Act requests. Anyone know?

Our Vichy Regime Regulators.

Filed under: Running Commentary — thefourteenthbanker @ 1:41 AM

A few days ago a news story broke about Wachovia (now part of Wells Fargo) laundering money for Mexican Drug Cartels.  Mish adds color commentary in this piece.

From the original news story:

Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history — a sum equal to one-third of Mexico’s current gross domestic product.

“Wachovia’s blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations,” says Jeffrey Sloman, the federal prosecutor who handled the case.

And here’s the rationale for the kid gloves treatment:

No big U.S. bank — Wells Fargo included — has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

‘No Capacity to Regulate’

Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

“There’s no capacity to regulate or punish them because they’re too big to be threatened with failure,” Blum says. “They seem to be willing to do anything that improves their bottom line, until they’re caught.”

There are consequences for some however:

Twenty million people in the U.S. regularly use illegal drugs, spurring street crime and wrecking families. Narcotics cost the U.S. economy $215 billion a year — enough to cover health care for 30.9 million Americans — in overburdened courts, prisons and hospitals and lost productivity, the department says.

“It’s the banks laundering money for the cartels that finances the tragedy,” says Martin Woods, director of Wachovia’s anti-money-laundering unit in London from 2006 to 2009. Woods says he quit the bank in disgust after executives ignored his documentation that drug dealers were funneling money through Wachovia’s branch network.

“If you don’t see the correlation between the money laundering by banks and the 22,000 people killed in Mexico, you’re missing the point,” Woods says.

So now I suppose we can say that TBTF in addition to all the other economic damages and risks, adds additional dimensions of suffering. This is just one small part of the human cost. Imagine the money laundered for human trafficking, prostitution, illegal arms sales, protection rackets, and other organized and disorganized crime.

These kinds of press reports leave bloody hands as clean.  In allowing the corporations to take the blame and provide legal amnesty for the culpable individuals, we fail to address the most basic causal factors. I can surmise several things. One, the individuals that allowed the funds to be laundered were paid handsomely to do so through their incentive plans. Some were probably recognized as top performers in their firm. In producing all this business, they also earned their managers bonuses and recognition. As the excerpt shows, people knew. People higher than the individual producers and their managers. Someone higher in the organization listened to Mr. Woods and then disregarded his recommendations. These people have blood on their hands as surely as terrorist front organizations funneling money abroad.

The bonuses paid and recognition provided folks doubtlessly known as ethically challenged among peers also sets up a cognitive dissonance to which other employees will act in a predictable variety of ways. Some will learn to cheat. Some will leave in disgust. Some will live with it and seek escape in addiction. Some will become depressed. These management decisions are a betrayal of the employees in organizations that are supposed to be about trust.

Our regulators and prosecutors also fail us when they do not bring stern cases against the corporation and both front line and senior bank officers that participate. These officers continue with reputations unsullied in their communities. Further, when regulators fail to expose the cognitive systems that underlie such crime they ensure that these episodes will be repeated. We can do better.

What is the Vichy regime? During WW II, the Vichy regime was the official government of France under German control. The regime actively collaborated with the Nazis, even to the extent of participating in their racial policies. Meaning, they supported the denouncing of Jews and French resistance with the inevitable consequences. Frenchmen were in an intolerable situation and had to choose sides. Some chose wrongly.

July 3, 2010

The American Century

Filed under: Running Commentary — thefourteenthbanker @ 6:07 PM

The 20th century was The American Century. Let’s face it. This century has been a flop, a dud, and it does not show much promise. Following our second major recession in this short century, the nascent recovery is foundering. After the worst terrorist attack on US soil, we have spent a decade at war and accomplished what? Personal standards of living are falling, yet we remain a materialistic society.

We need American jobs. Here are some stats updated from the latest employment reports, courtesy of Calculated Risk.

So the percentage of job losses and the duration of the job recession exceeds any post war recession.

The percentage of our population that is employed is falling towards post war lows. Job creation is not sufficient for the growth of our population, so this graph will continue to trend down until we see an exponential increase in new employment.

The level of desperately unemployed is off the charts. If we double dip, this number will continue its trajectory. In addition, even among those employed, the quality of employment is down. More people are working part time or below their historical income levels.

There are no easy solutions. However, as this article points out, we have created some of this mess ourselves. We have outsourced and off shored too many jobs. Our corporations have elected to save money by employing cheaper foreign labor or by maximizing product content purchased from overseas. We have seeded the rest of the world with employment and technology that has made it easier for them to build industries that compete with our own. We have believed the myth of our own invincibility. We were smarter, better, more industrious. We could keep the high skill high pay jobs here and enjoy the benefit of low cost employees and resources overseas. So we thought.

I am not a protectionist. I do not believe in trade barriers except where there are grossly disparate trade policies. I do believe it is long past time for American corporations to step up to the plate. Corporations must make voluntary choices to share the prosperity. Our shareholder first philosophy is self destructing. By not taking care of the American worker, our shareholders are now reaping the domino effects of deflationary pressures, weakened consumers, insecure retirees, unemployed teens that can’t build valuable skills for future employment, environmental degradation from safety shortcuts, a future higher tax environment from diminished national income, and a spiral towards global mediocrity.

When will we we wake up?

July 2, 2010

Goldman FCIC Hearing – “Just Take The Fifth”

Filed under: Running Commentary — thefourteenthbanker @ 7:24 AM

Given my rant yesterday concerning the Goldman hearing at the FCIC, I am obligated to present you two more thorough analysis of the same exchange.   Each arrives at somewhat different conclusions but both are supportive of the idea that Goldman is using its superior knowledge and cleverness to attempt to outsmart and defeat the FCIC. They view it as an adversarial proceeding and do not want the Commission to understand the details of the transactions and therefore have some input on how they might be regulated.  Further, they are obfuscating to prevent data which might be used in civil or criminal trials from coming out.  That is my opinion and is based on my understanding of the culture of such organizations, not on intimate knowledge of the specific facts of these matters.

Naked Capitalism Post Zero Hedge Post

July 1, 2010

Financial Crisis Commission Turns Up Heat On Goldman Sachs: Nobody Here Believes You

Filed under: Running Commentary — thefourteenthbanker @ 7:12 PM

Financial Crisis Commission Turns Up Heat On Goldman Sachs: Nobody Here Believes You.

This is completely self explanatory.  The answers given the commission are preposterous and the individuals should be prosecuted for perjury.  FBI should raid the offices of Goldman, camp out there, and examine every file and computer drive.  Counter parties should be rolled up to provide evidence to incriminate Goldman and put them out of business like Arthur Anderson.  Then these people should go to jail.

The Ritual of Reform

Filed under: Running Commentary — thefourteenthbanker @ 9:47 AM

On the last day of June the House voted in the much modified FinReg. Perhaps sometime in July it will become law. My last posts have already made it clear that I believe the impact to be limited and much delayed. We must continue to address the critical problems that Dodd-Frank does not address. Among these are a pathological social deviancy, opportunism and plundering by many of our corporate persons.

In psychology, the term ritual is used in a technical sense for a repetitive behavior systematically used by a person to neutralize or prevent anxiety. Dodd-Frank might fulfill the psychological ritualistic function. We have a problem, real wounds, real outrage, real need of solutions. Our well greased democratic process spits out an Act. We have relief from anxiety, healing, justice, and solutions. Or do we?

This Act seems impotent in the face of plundering financial institutions like Goldman Sachs. Naked Capitalism discusses a NYT piece that reveals another layer of the stinky onion pulled back.

When the government began rescuing it from collapse in the fall of 2008 with what has become a $182 billion lifeline, A.I.G. was required to forfeit its right to sue several banks — including Goldman, Société Générale, Deutsche Bank and Merrill Lynch — over any irregularities with most of the mortgage securities it insured in the precrisis years.

The post and article go on to detail the web of interrelationships, conflicts of interest, and pandering by starstruck regulators, no doubt awed by the wealth and power of Blankfein and his type.

Can these type of institutional managers be trusted by individual citizens? Corporate profits are on the rise, so much so that Goldman’s Abby Cohen is predicting a 16% rise in the stock market in the second half of the year. Yet, corporations are not hiring in any quantity and opportunistically lag in restoring 401K benefits cut back during the crisis. Recall with me that the 401K is the new retirement plan for most working Americans. Defined benefit plans are virtually gone for non-union, non-government employees. Those that remain are grossly underfunded. Cash Balance Pension Plans pay paltry returns and compound slowly. Some firms have also cut back on Cash Balance Pension Plan contributions. So they are not defined benefit plans, and can’t be counted on to be defined contribution plans.

So have our corporate persons become a threat engendering angst? Are they rogues or products of our society? Given the pervasiveness, I posit that we can only tag them as “fat tail” outposts of corruption on a bell curve that supports that fat tail. So the only solution is to change the underlying structures which allow such a fat tail to exist.

To do so, we as a society must operate with a reciprocity that includes altruistic punishment. That is, the level of cooperation in society requires some players to punish bad actors, even at some cost to themselves. So far there is no movement to do this.

Therefore our reform exercise serves a more ritualistic than practical purpose.

Blog at