Center for Ethics and Leadership

Saturday, September 20, 2008

Financial Messes and Corporate Welfare II

That was quite a ride, wasn't it? Like one of those newer roller coasters designed to scare you to death, Wall Street took us way up and then way down. Or was it the other way around? In any event, banks and governments around the world joined together to enable the market to regain self-control.

It is far from over, I know, but the drop of nearly 1,000 points early in the week followed by a concomitant rise at week's end provided more thrills to this only-ten-years-from-retirement college professor than he cares to have.

Some have been quick to blame Bill Clinton in the way that they like to make everything that goes wrong his fault. It was during his administration that the bill deregulating the mortgage market was passed, but deregulation has been a passion since Richard Nixon took the country off the modified gold standard in 1972 at the behest of financial interests. Ronald Reagan of course was the apostle of deregulation. Both parties did this. And if I knew more about economics, I would probably have something to say about Alan Greenspan.

There may have been a time when markets thrived without regulation. We do not live in that world. We do not live in Adam Smith's industrializing British Empire. The fundamental philosophy may be sound, but the world has changed.

An econ prof at my place said to me that the financial markets are based on three things -- note that none of these is material -- rationality, honesty, and trust. How long until the trust is restored? Or have we learned the lesson that humans do not always keep trusts? Where were the ethics? Where was the leadership?

3 Comments:

  • Even twenty years from retirement these kinds of fluctuations with six weeks remaining before the election are discomforting. Reflecting on deregulation, not so long ago the big buzz was 'privatizing social security'. No one is talking about that anymore. At the time critics claimed that it was just the government's way of routing more money into Wall Street. If that was the case, it looks like, although that legislative push failed, a back door has been found, and the massive funds will get transferred anyway.

    One of the closing questions is "Where is the leadership?" The leadership is pursuing their own personal interests, and because so much is at stake, their mismanagement will be more than adequately compensated because none of the benefits they have reaped while the market climbed are available to buffer the fall, that is interesting to a person that received minimal benefit at best from the recent run-up.

    As for rationality, honesty and trust, rationality has been questioned formally by Rawls, Hauser, Kahneman & Tversky and the like. It is possible that there is no such thing. Honesty has been usurped by legality offering us at best behaviors at the legal minimum rather than at the moral maximum. That leaves trust; I was once told by several of my peers, "Never trust anyone over 30", maybe they were right.

    As for leadership, not all leadership is good leadership. Certainly, someone pioneered the deregulated territory and many followed. Is there a formal opposite of utilitarianism, something that covers the greatest happiness for the few, that isn't called unbridled capitalism?

    By Blogger kobe2, At September 27, 2008 4:47 PM  

  • In today's local paper it a headline in the Business section reads "Banks Owe Billions to Executives" - the article goes on to explain, deferred compensation owed to top executives at Goldman Sachs & Morgan Stanley is over $10 billion and JP Morgan/Chase $8.5billion. I am reminded of the phrase - we socialize losses and privatize gains. So if I understand this correctly, the government invests taxpayer money into failing financial institutions and in exchange receives preferred stock. Taxpayers become stockholders, that if the business model I was taught still holds - are compensated out of dividends, paid at the discretion of the board - usually AFTER secured and non-secured creditors are compensated.

    It was oh so urgent to come up with a bailout bill to avert the pending financial collapse that I would not be the least bit surprised if deferred compensation limits were overlooked when trying to come up with public oversight guidelines. The advantage of deferred-pay accounts is a cash savings to the company and a tax savings to the individual, obviously the executive and not us.

    Can't wait to learn what other perfectly legal and ethically questionable bookkeeping practices are still waiting to be discovered or disclosed.

    By Blogger kobe2, At November 1, 2008 9:35 AM  

  • It would be difficult to argue the need for values and ethics in many companies today. Case and point is the current unfolding story of AIG Insurance that I will summarize. There is recent disturbing news regarding AIG insurance, who, because of faulty business decisions associated with greed, received a $123 billion bail-out package last month, of taxpayers money, in exchange for 80% of the company to the government. Following this action, AIG executives were found at a luxury retreat in California, for a cost of $440,000, plus $23,000 in spa expenses. Wanting more of taxpayers’ bailout money, CEO Edward Liddy, expressed not an apology but acknowledgement of an insensitivity of this spending. However, within recent weeks, another group of AIG executives went on a lavish partridge hunt in England for $86,000. There is no doubt that this scenario points to unacceptable and irresponsible business practice. This example may be extreme, but is certainly not unique and points to the absolute necessity for ethics and values, along with a sense of responsibility, among business leaders such as in AIG. I do not suggest that these are bad people and I might even argue that they would say they want the same four items laid out in Ian Mitroff’s study (full potential, interesting work in an ethical company with fair compensation), but they used bad judgment under the protective umbrella of the corporation.

    By Blogger Tammy Gore, At November 2, 2008 7:10 AM  

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