The Fourteenth Banker Blog

December 27, 2010

On Corruption

Filed under: Running Commentary — thefourteenthbanker @ 11:57 AM

Perhaps it is time to explain the tone of my Holiday Greeting, in which I expressed optimism.

Happy Holidays to all. It has been an eventful year. This is the season of hope and, despite all the matters that we have criticized over this past year, I am full of hope. There are well-meaning people all around us. Those that are not well-meaning, are generally uninformed, misinformed, or unskillful in their thinking. All of these things can change. We are in an evolutionary process. At times it will seem like we are stepping back. Yet we are moving forward.

While I have been enjoying the presence of friends and family and relaxing in the spirit and ambiance of the season, the media and blogosphere have continued to do heavy lifting.  We will get to that in a minute.  But first, my reason for optimism. Given the religious nature of Christmas itself, it is entirely appropriate to look to our spiritual traditions to consider the circumstances of our present day. The trend that encourages me has been a theme of all major spiritual traditions, which emphasize the ideas of “light” and “truth” as essentially redemptive. They are redemptive in our present day lives in two ways. The first is that the realization of truth is essentially healing inwardly (spiritual world). The second is that the truth moves us to action and provides impetus to heal ourselves and others outwardly (material world). And these two are synergistic. Inward strength enables outward action.

(As an aside, I would invite readers to share along these lines from their spiritual traditions or personal reflections)

So while I have rested, others have reported. The steady exposure of corruptions in our system, the light that shines unwavering on the regimes of corruption, will have its effect. There is developing a common understanding that the system we have today is broken and that we must find the means to make it constructive.  Here are some of the worthy stories of the last 10 days.

First off, on the theme of corruption, it would be silly to assume that they corruption we see in the financial system is anything other than a reflection of the corruption of power more generally. Here are two examples. In this first, it is reported that the revolving door between government and industry is as active in the realm of the military as in the financial realm. The Boston Globe highlights that the normal path for retiring senior military officers, whose pensions are already generous, is to go to work in influential and non-transparent ways for defense contractors.

The Globe analyzed the career paths of 750 of the highest ranking generals and admirals who retired during the last two decades and found that, for most, moving into what many in Washington call the “rent-a-general’’ business is all but irresistible.

From 2004 through 2008, 80 percent of retiring three- and four-star officers went to work as consultants or defense executives, according to the Globe analysis.

The article goes on to illustrate how these retiring officers have inside tracks into the Pentagon and wield influence without disclosure of their financial conflicts of interests. This does remind me of one aspect of the banking business, which is that “don’t ask, don’t tell” is much more than a policy regarding gays in the military. It is the practice of people who know that there are ethical issues or conflicts of interest and consciously choose to do nothing about them because of mutual benefit.

A second example of corruption generally is in relation to academia and industry.  This is a video interview so I can’t quote it here, but the gist is that economists that opine on regulatory matters, have undisclosed financial conflicts of interest with the companies that would be affected by regulation.

Another outstanding piece from recent days is this written interview with Bill Black, from Parker and Spitzer. It is succinct and readable. The emergence of Black as a very articulate and visible critic of the culture of fraud is significant. One feature of our system of media is that for messages to get out, they have to be repeated over and over. Many academics do their research, publish a paper, perhaps write a book, and then their voice fades. Black is showing an endurance which provides hope that he can move the needle of perception. What is different about Black’s approach is that he is very clear and specific in his charges. He does not generalize. He is very specific about how certain frauds work. This will make general denials less effective.

There was also a meaningful judicial ruling against Wells Fargo. Hat tip Naked Capitalism.

What makes this ruling interesting is that although it set aside a minor part of the jury award, a $1.6 million issue, to be subject to a new trial, is that it was punitive as a result of the judge’s determination that the fraud was systematic. It is unusual to award the payment of the plaintiff’s attorney’s fees, or to order disgorgement of fees paid for services (the other component of the additional $15 million plus is interest on the $29.9 million). The basis for awarding attorneys’ fees? The bank is such a menace to society that having counsel root it out is a public service. From the Minneapolis Star Tribune (hat tip reader Ted L):

The judge said that the nonprofits’ lawyers, led by Minneapolis litigator Mike Ciresi, provided a “public benefit” by bringing the bank’s wrongdoing to light. Thus, Monahan said, the bank must pay the plaintiffs’ attorneys fees and costs, which Ciresi’s firm estimated at more than $15 million…

Terry Fruth, a Minneapolis attorney who has been watching the case closely on behalf of his clients, said Monahan’s post-trial order could help other investors prove similar claims against the bank.

“The judge didn’t just find that Wells Fargo acted with disregard to the rights and interests of the particular plaintiffs,” Fruth said of Monahan. “He said the way it ran the program was with disregard to the rights of the customers. … He has made a finding that is going to bind Wells Fargo in other cases.”

The judge also seems to understand full well how banking works in America:

…Wells Fargo Chairman and CEO John Stumpf and retired Chairman Richard Kovacevich… said they knew nothing about problems in the securities-lending program in 2007. Stumpf said he didn’t know the bank even had such a program.

Monahan said that he found the executives’ statements “to be almost childlike” and that he accepts “that one of the primary functions of subordinates in today’s corporate America is to shield their ultimate superiors from accumulating embarrassing information….

“Wells Fargo was fully aware of the increased risk it was injecting into the securities lending program, that its line managers were not reasonably managing that risk, and that its actions and inactions had the potential for inflicting enormous harm on plaintiffs.”

When the program got into trouble, the judge said, “Wells Fargo’s attitude and conduct … was primarily to shield itself, and its favored customers, from the consequences.”

The judge made very astute observations about how business works these days. Executives create the environment in which unethical business practices can flourish, but want to keep a level of plausible deniability. That is a pretense.

Finally for today, this article about how the FinReg was effectively diluted. The source is a Barron’s article but Yves Smith provides the commentary. Here’s a quote to whet your appetite.

But since there has been a singular lack of appetite to do adequate forensics into what caused the crisis, since it might prove to be embarrassing to people still in powerful positions, regulators can follow the inertial course of listening to the palaver that the financial services industry puts forward to allow it to continue looting.

So back to my original premise, all this bad news is reason for hope, in that it shines light in dark, hidden places. This light will shape the common understanding, and the common understanding will shape future choices. However, it will be up to us to make those choices. If there is any unifying theme to these articles, it is that those in positions of power are not the ones that will support change in the system. Rather change in the system can only come through action on the part of the vast majority of citizens who do not have a stake in the status quo.





  1. Millions of people and financial managers of multitudes more in places like pension funds have been horribly burned. That will count for a great deal of long term distrust . Big finance will have a very hard time living this loss down . Very obviously too, the wolves are smelling out riches from recovery of plaintiff loss awards. Gaming the system is always a two way street… now Wall Street sqirms. The plantiff adversary system too has enormous clout . That is especially true in the legal system of the fifty states. Now the losers will find their Luca Brasi’s …. already have and the phenomenon will only grow.

    Comment by Jerry J — December 27, 2010 @ 11:50 PM | Reply

  2. My daughter gave me Krugman’s “Return of Depression Economics and the Crisis of 2008”, for Christmas. As usual, Mr. Krugman sheds some of that much-needed light. (What I really like about his work is he can put abstract, arcane information into language I can understand, but more importantly, he puts it all in historical and sociological context).
    Fourteen’s post weaves together several disconnected threads that have been wafting through my life lately. On spirituality, I’ve been re-watching “God in America”, which helps explain why and how the “American Exceptionalism” took hold and how we went from Enlightenment thinking to “every man for himself and God for us all”. Watching the hypocrisy of our “leaders” as they tell us one thing and do another. The report on NPR today about India’s corruption scandals, and the comments made about how India, like the US, has no way to control the money that floods into elections. and tangentially, how donors don’t go through political parties (as they are doing less of here, too), but give money directly to the politicians or, in our case, the 527Bs and other “advocacy groups”.
    I don’t know how one would characterize my spiritual stance, but I know my bottom line is about justice. And I don’t mean in an “eye for an eye” type justice; I mean in a “am I my brothers’ keeper” type of justice. While recognizing that we can’t orchestrate or legislate, equality of outcome, we are no longer even pursuing the dream of providing equal opportunities.
    Our new incoming state legislature is saying two of their goals are to increase the number of charter schools and to pass a $1250 tax credit per child for parents to send their kids to private schools. The rise of private religious schools here is scary, because many, if not most, are not accredited and don’t have qualified teachers. (And we wonder why 40% of Americans believe in creationism?) Add to that the recent report of the disparity between the rural and urban areas of the country- where broadband is a given, and where it’s impossible (or hideously expensive) to get, and we see yet another way in which large swatches of our population are being under served, or not at all. Which can only exacerbate the news from today’s Huffington Post article about the growth of jobs overseas within American companies. snip….The Economic Policy Institute, a Washington think tank, says American companies have created 1.4 million jobs overseas this year, compared with less than 1 million in the U.S. The additional 1.4 million jobs would have lowered the U.S. unemployment rate to 8.9 percent, says Robert Scott, the institute’s senior international economist……snip
    Hmmm, I was looking for light…..I’m still (for now) employed. And grateful for it.

    Comment by Sandi — December 28, 2010 @ 3:17 PM | Reply

  3. Synchronicity is a wonderful thing. Naked Capitalism today had just the kind of info I was looking for to follow up on the off-shoring of American jobs. Thanks, Yves.
    The Deficit Commission has stirred up the hornet’s nest about revamping Social Security to keep it solvent. If we are going to subsidize American companies to create jobs overseas we won’t have enough workers contributing to SS to keep it afloat anyway. So, the conservatives will finally get their wish; the death of Social Security.
    Now all I have to do is suss out the numbers on how many “small businesses” are large enough, or pay enough, to support a middle class. My guess is we don’t have enough. The only kind of “trickle down” that worked, near as I can tell, was the kind where a town or region had a main employer that paid high enough wages that their workers could then support the service industries of that area. Do none of our policy makers ever connect the damn dots?
    BWTFDIK? I don’t have an MBA.

    Comment by Sandi — December 29, 2010 @ 11:38 AM | Reply

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