Archive for the ‘Regulation’ Category

Regulators Draw Flak Meant for Corporate Perps

Thursday, August 9th, 2012

When a mobster or street criminal declares “I was framed” and expresses disdain for police and prosecutors, we dismiss it as part of their sociopathic tendencies. Yet when corporate transgressors do essentially the same thing by criticizing government regulators, they are taken much more seriously. All too often, business perps succeed in portraying themselves as the victims.

This charade is being played out yet again amid the current wave of scandals involving major U.S. and British banks. In the latest case, Britain’s Standard Chartered has been accused by New York State banking regulator Benjamin Lawsky of scheming with the Iranian government to launder billions of dollars in funds that might have been used to support terrorist activists.

Rather than being outraged by the fact a major financial institution may very well have provided substantial material support to a regime that the governments of the United States and other western countries spend so much time vilifying, most of the criticism seems to be aimed at Lawsky.

Some of this criticism, not surprisingly, is coming from Standard Chartered itself, which insists that 99.9 percent of its dealings with Iranian parties were legitimate and that it was already cooperating with other regulatory agencies in investigating the matter. Those other agencies, including the Federal Reserve and the Office of Foreign Assets Control, seem to be siding with Standard Chartered. An article in the New York Times served as a conduit for allegations by unnamed federal officials seeking that Lawsky’s case was seriously flawed.

The accusations against Standard Chartered are hardly unprecedented. Only two months ago, the Justice Department announced that the Netherlands-based ING Bank had agreed to pay $619 million to settle charges of having violated federal law by systematically concealing prohibited transactions with Iran and Cuba. Last month, the Senate Permanent Subcommittee on Investigations issued a report of more than 300 pages on the poor record of the British bank HSBC in avoiding money-laundering transactions linked to terrorism and drug dealing.

The unfriendly response to the Lawsky allegations is not just a matter of the usual tension between federal and New York State regulators when it comes to financial sector investigations. Disapproving comments have also come from officials in Britain, with one member of parliament making the ridiculous suggestion that anti-British bias was involved.

There’s something much larger at stake. We’re in the midst of an ongoing corporate crime wave, with major banks among the most prominent perpetrators. As the Times points out, large corporations are on track to pay as much as $8 billion this year to resolve allegations of defrauding the federal government, a record amount and more than twice the amount from last year.

We should be focusing our criticisms on the companies involved in these and other cases that have not yet reached the settlement stage—not the regulators and prosecutors trying to control the corporate misconduct.

If there is any criticism to be made of regulators, it is that too few of them resemble Lawsky. They are more likely to treat corporations with kid gloves, given that too many of them either come from the private sector or end up there after their stint in government. Or else they simply fail to take decisive action. In the other major financial scandal of the day—the manipulation of the LIBOR interest rate index by Barclays and other major banks—regulators such as the Federal Reserve Bank of New York knew of the abuses years ago and were slow to do anything. The inaction was brazenly used by former Barclays CEO Bob Diamond as a way of spreading the blame for the rate-rigging.

No discussion of regulation would be complete without mentioning the problem that many of the rules are too weak to begin with. The individual most responsible for this during the Obama Administration—Cass Sunstein—recently announced that he will be leaving the Office of Information and Regulatory Affairs to return to academia. An indication of the damage inflicted by Sunstein can be gauged by the fact that both the Business Roundtable and the U.S. Chamber of Commerce bemoaned his departure. Hopefully, Sunstein’s successor will make it harder for corporate malefactors to ply their trade.

How to Succeed in Business

Thursday, July 26th, 2012

It’s only a few months to the presidential election, and the economy is still a mess, yet the candidates have been arguing over the secret of success in business.

This is an old and tired debate, and neither side is saying anything novel. Romney is reciting the chamber of commerce fairy tale that business achievement is the result purely of hard work and risk-taking on the part of lone entrepreneurs. Obama mostly accepts that narrative but meekly points out that business owners also depend on government-provided infrastructure and thus should pay a slightly larger share of the taxes needed to fund those roads, bridges and the like.

Both men talk as if we were still in an early 19th Century economy of small enterprises that live or die based on individual effort and minimal government activity—rather than the century-old reality that megacorporations are what dominate American commerce.

When the candidates do acknowledge the existence of big business, it is mainly to offer competing proposals on how to serve its needs. For the Republicans, this means further weakening of regulation and the dismantling of the corporate income tax. While the Democrats make some noise about controlling business excesses, nothing much comes of this, and their main goal seems to be that of bribing large corporations with incentives so they don’t abandon the U.S. economy entirely.

What both sides forget is that corporations exist at the behest of government—in nearly all cases state governments, which authorize their creation. The original ones were established to enlist private participation in government initiatives such as building canals. Before the Civil War, corporations were allowed to engage only in designated activities and could not grow beyond a certain size. It was to get around these limitations that robber barons such as Rockefeller created the trusts that came to control so much of American industry, prompting the passage of the Sherman Act and other antitrust efforts.

Whatever progress started to be made in thwarting the hyper-concentration of business was undermined when New Jersey and then Delaware rewrote their corporation laws to allow companies to do pretty much whatever they pleased and to become as big as they  wished in the process. Eventually, other states followed suit. The corporate form, once a privilege granted for special purposes, became an entitlement for any pool of money seeking to make a profit behind the shield of limited liability.

What presidential candidates should be debating is whether the time has come to tighten state corporation laws or replace them entirely with a federal system of chartering, as Ralph Nader and his colleagues argued in the 1970s.

Nader’s effort was prompted by a wave of revelations about corporate misconduct that came out of the Watergate investigations. Today we have our own corporate crime wave: recent cases of foreign bribery (Wal-Mart), illegal marketing of prescription drugs (GlaxoSmithKline and others), manipulation of interest rates (Barclays) and pipeline negligence (Enbridge Energy) come on the heels of the Wall Street mortgage securities fiasco, the BP spill in the Gulf of Mexico, and the Massey Energy coal mining disaster.

If we have to talk about success in business, the question we should be considering is whether any large company succeeds without engaging in illegal, or at least unethical and exploitative, behavior. In spite of all the talk about corporate social responsibility, it is difficult to find a major firm that does not cross the line in one way or another.

Take the most successful company of recent years: Apple. Thanks to a series of investigative reports, we now know that Apple’s business achievements are based on a foundation of underpaid workers, both in its foreign factories and its domestic retail stores. On top of that, the company engages in flagrant tax avoidance, and despite its gargantuan profits, it forces state governments to hand over big subsidies when it builds data centers.

Sure, Apple made use of the type of public infrastructure President Obama likes to talk about. Yet the biggest benefit it and other large companies receive from government is the unwillingness to engage in serious regulation and to prosecute corporate crime to the fullest, which would mean an end to the current practice of deferred prosecutions and other forms of wrist-slapping.

Forget about roads and bridges: the real secret of business success is government tolerance of corporate misconduct.

Through A Corporate Glass, Darkly

Thursday, July 19th, 2012

Conventional wisdom has it that we live in an age of hyper-transparency. That’s true if you look at what people are willing to reveal about themselves to Facebook, but it’s another story for large corporations and the 1%.

The Republican filibuster of the DISCLOSE Act and Mitt Romney’s reluctance to release more of his income tax returns are strong reminders of how those at the top of the economic pyramid seek to hide the ways they accumulate their wealth and influence public policy.

The current preoccupation with disclosure issues makes this a good time to step back and review the state of corporate transparency. Do we know enough about the workings of the huge private institutions that dominate so much of modern life?

Of course, the answer is no. Yet the quantity and quality of disclosure vary greatly depending on the structure of a given company and the aspect of its operations one chooses to examine. Depending on which piece of the business elephant we touch, corporations may seen somewhat translucent or completely opaque.

It’s also worth remembering that there are two main forms of disclosure: information that companies, especially those whose stock is publicly traded, are compelled to reveal and the data that government agencies collect about firms and release to the public. What corporations release on their own initiative is, given its selective nature, self-serving spin rather than disclosure.

Most of what U.S. companies are required to disclose is contained in the financial filings required by the Securities and Exchange Commission. It’s great that the SEC makes these documents readily available via its EDGAR online system, but the information required from companies is meant to serve the needs of investors rather than those of us concerned with corporate accountability. There is thus an abundance of data on financial results and a meager amount on a company’s social impacts. Here’s a rundown and critique of disclosure practices regarding the latter.

LEGAL PROCEEDINGS. Each company filing a 10-K annual report has to include a section summarizing significant litigation and other legal proceedings in which it is involved. For some companies, these sections can go on for pages, which says a lot about the corporate tendency to run afoul of the law. Even so, these sections are often incomplete, since companies are given discretion in deciding which cases are “material,” meaning that fines and other penalties could have a significant impact on earnings.  To get a fuller picture of corporate legal entanglements, you need to search the dockets on the PACER subscription service, which for large companies will be voluminous, or use the free summaries on the Justia website.

EXECUTIVE COMPENSATION. The annual proxy statements filed by publicly traded companies provide exhaustive details on the salaries, bonuses and other compensation received by top executives (and directors).  Designated in the EDGAR system as Form DEF14A, these documents seem to try to drown the reader in details to downplay the impact of lavish pay packages. Note that what is called the Summary Compensation Table does not include essential information such as the amount (shown elsewhere) that an executive realized from the exercise of stock options.

EMPLOYMENT ISSUES. Companies are required to disclose their total number of employees but do not have to provide a geographical breakdown. Some do so voluntarily, but many others can hide the tendency to create many more jobs in foreign cheap-labor havens than at home. Because the penalties are usually small, companies tend not to disclose violations of federal rules regarding overtime pay, the minimum wage and other Fair Labor Standards Act issues.  Fortunately, the Department of Labor has included wage and hour compliance information in its new enforcement website.

OCCUPATIONAL SAFETY AND HEALTH. Companies also rarely mention violations of occupational safety and health, for which penalties are also meager. The U.S. Occupational Safety and Health Administration, to its credit, makes available a database of all workplace inspection results going back to the creation of the agency; the DOL enforcement website provides access to this as well. Unfortunately, there are no summaries of the compliance records of large companies across their various establishments.

LABOR RELATIONS. Companies are required to report on labor relations issues only if there is a likelihood of a work stoppage that could affect corporate profits. With the decline of unions in the U.S. private sector, many companies do not bother to mention labor relations at all. Disputes that result in a formal ruling by the National Labor Relations Board will show up on that agency’s website.

ENVIRONMENTAL COMPLIANCE. Companies frequently discuss environmental regulation in the 10-K filings and will mention major enforcement actions. Yet these accounts are usually incomplete.  The Environmental Protection Agency fills in the gaps with its Enforcement and Compliance History Online (ECHO) database.

TAXES. Buried in the notes to the company’s financial statements is a section with details on how much it paid (or in many cases did not pay) in the way of taxes. This information is presented with a high degree of obfuscation, so it is fortunate that Citizens for Tax Justice publishes reports that summarize the extent to which large U.S. companies engage in flagrant tax avoidance.

SUBSIDIES. Corporate filings usually say little or nothing about the subsidies received from government, and it is often impossible to learn from other sources what those amounts may be when it comes to subsidies that take the form of federal tax breaks. There is much more company-specific data available on subsidies from state governments. In my capacity as research director of Good Jobs First, I have collected that data and assembled it in the Subsidy Tracker database.

GOVERNMENT CONTRACTS. Companies will report on government contracts only if they make up a substantial portion of their total revenue. Thanks to the work of OMB Watch in creating the FedSpending database, which the federal government adapted for its USASpending tool, it is possible to learn a great deal about how much business a given firm is doing with Uncle Sam. Data on contracts with state governments can often, though not always, be found via state procurement websites.

LOBBYING AND POLITICAL SPENDING. Corporations are not eager to disclose their efforts to shape public policy, and the SEC does not require them to do so. The Center for Political Accountability, on the other hand, was created to put pressure on companies to be more open about their political spending. The group has succeeded in getting about 100 corporations to adopt political disclosure. The inadequate information that gets disclosed at the behest of the Federal Election Commission can be found on websites such as Open Secrets, while state-level electoral data is summarized on the Follow the Money site. Both also provide access to the available data on lobbying.

Inadequate political disclosure by corporations is not limited to the United States. A recent study by Transparency International on 105 of the world’s large companies found that only 26 engaged in satisfactory reporting of political contributions. That was just one component of an analysis that looks at a variety of transparency measures that relate broadly to anti-corruption initiatives. Some of the worst results concern the simple matter of whether firms provide full country-by-country data on their operations and financial results.

The latter shows how disclosure issues of concern to investors and financial analysts can intersect with those relating to corporate accountability. When a company is allowed to use excessive forms of aggregation in its reporting, it may be hiding either poor management or corporate misconduct or both.

Note: The information sources discussed above as well as many others are discussed in my guide to online corporate research.

The Permanent Corporate Crime Wave

Thursday, July 12th, 2012

For an issue that concerns a technical feature of global finance, the LIBOR scandal has had a surprisingly strong impact. There is speculation that banks could face tens of billions of dollars of damages in lawsuits that have been filed over their apparent manipulation of the interest rate index.

What makes the situation even more unusual is that the efforts by bankers to depress LIBOR not only worked to their benefit but also inadvertently helped millions of consumers by lowering rates on financial products such as adjustable-rate mortgages. Some individuals experienced lower returns from certain investments, but the big victims were municipal governments that were prevented from taking full advantage of the interest rate swaps many had purchased at the urging of Wall Street.

Apart from the direct financial impacts, the scandal has triggered a new crisis of confidence in major corporations and financial institutions. The New York Times just ran an article headlined The SPREADING SCOURGE OF CORPORATE CORRUPTION that poses the question: “Have corporations lost whatever ethical compass they once had?”

Citing academic research, the piece considers whether corporate wrongdoing may be cyclical or may be growing as a side effect of globalization. The article ends by bemoaning the damage to “Americans’ trust in the institutions that underpin the nation’s liberal market democracy.”

There is good reason for that trust to be eroding. The LIBOR controversy comes on the heels of a series of discomfiting revelations about the behavior not only of financial institutions but also that of other sectors of big business. For instance, GlaxoSmithKline recently had to pay a record $3 billion to settle charges of illegal marketing of prescription drugs. The federal Pipeline and Hazardous Materials Safety Administration just issued a scathing report on Enbridge Energy’s handling of a pipeline accident that spilled more than 800,000 gallons of oil in Michigan two years ago.

As troubling as this spate of cases may be, is it really anything new?

While the current scandals have been erupting, I’ve been reading a six-decade-old book that turns out to be surprisingly relevant. Edwin Sutherland’s White Collar Crime, published in 1949, was the first systematic assessment of the degree to which large corporations and those who work for them are inclined to break the law.

Defying the prevailing principles of criminology, which held that lawbreaking was a reflection of the personal and social pathologies of the lower classes, Sutherland marshaled a mountain of evidence to show that respected business executives regularly and unhesitatingly violated a wide range of civil and criminal statutes. His book focuses first on a sample of 70 large manufacturers and retailers and then on 15 major utility companies.

In his original manuscript, Sutherland identified companies in discussing their transgressions, but under pressure from a publisher worried about libel suits he removed the names. It was not until 1983 that an unexpurgated version of the book was issued.

Sutherland and his publisher had good reason to worry about corporate legal harassment. The book concludes that every one of the 85 companies was crooked one way or another. Using an expansive definition of criminality, Sutherland looks at both outright fraud and price-fixing as well as offenses such as securities violations, false advertising, food and drug adulteration, patent infringement, unfair labor practices and infringement of wartime price regulations.

The 70 manufacturers and retailers were found to have had a total of 980 offenses, or an average of 14 per company. The companies with the most were meatpackers Armour and Swift, with 50 each. As striking as all these numbers are, Sutherland argues that they probably do not reflect the full extent of misconduct, given the limitations of the information sources that were available to him and his researchers.

He concludes that the business world has a serious problem with recidivism: “None of the official procedures used on businessmen for violations of law have been very effective in rehabilitating them or in deterring other businessmen from similar behavior.” Sutherland also finds that many of the types of violations he examined were pervasive in various industries, and given that they often involved collaboration of people from different companies, they were the equivalent of organized crime.

Sutherland anticipates many of today’s discussions about corporate capture of regulatory agencies and the role of the revolving door between the public and private sectors in weakening government oversight of business. As is also the case today, he shows that “businessmen customarily feel and express contempt for law, for government, and for government personnel.” Whereas this view is now taken for granted, Sutherland regarded it as anti-social, saying it showed that in this respect corporate executives are “are similar to professional thieves, who feel contempt for law, policemen, prosecutors and judges.”

As new business scandals continue to surface, it’s important to retain a sense of outrage while also remembering that widespread corporate wrongdoing is nothing new and will not disappear anytime soon.

The Unlikley Regulator

Thursday, June 28th, 2012

Since the Citizens United ruling in January 2010, it has appeared that the U.S. Supreme Court was doing everything possible to increase the dominion of corporations. Yet in its astonishing ruling on the Affordable Care Act (ACA), the Court, among other things, affirms the right of the government to put far-reaching restrictions on one of the country’s most powerful industries.

Even more remarkable is that the majority decision was written by Chief Justice John Roberts, a former corporate lawyer thought to be firmly in the anti-regulatory camp.

What made the healthcare case so unusual is that, strictly speaking, none of the parties were overtly opposing the provisions of the ACA regulating the heinous practices of the private insurance industry, such as discriminatory pricing, denial of coverage to those with “pre-existing conditions” and cancellation of coverage after a subscriber gets seriously ill. Both the oral arguments and the written opinions were filled with pro-regulation comments by normally laissez-faire-minded Justices.

Opponents of the law chose instead to focus their attack on the constitutionality of the individual mandate, which was at the heart of the deal the Obama Administration and Congressional Democrats made with the insurance industry under which the companies agreed not to fight the regulations in exchange for which they were guaranteed millions of new compulsory customers paying subsidized premiums.

Thanks to the defection of the Chief Justice based on a narrow interpretation of the mandate, the stratagem of the anti-healthcare reform camp turned out to be a colossal miscalculation. It also looks like the insurance companies have been snookered about the extent to which they will benefit from the law.

It will be of some consolation to conservatives that the Roberts opinion contains a strident rejection of the idea that Congress was justified in imposing the individual mandate through its constitutional power to regulate interstate commerce. The Chief Justice devotes many pages of his decision to a recitation of the argument that the mandate was in this sense an overreach, in the course of which he even reprises the broccoli analogy used by Justice Scalia during the hearings on the case.

Yet he then pivots and embraces, along with the Court’s four liberal justices, the secondary argument that the mandate was justified as an exercise of the taxing power of Congress, the tax being the financial penalties contained in the ACA for those without coverage who refuse to purchase individual policies.

What’s interesting is that in order to depict the penalties as a legitimate tax, Roberts has to argue that they are not overly punitive. In doing so, he writes that “for most Americans the amount due will be far less than the price of insur­ance, and, by statute, it can never be more. It may often be a reasonable financial decision to make the payment rather than purchase insurance.”

Roberts is thus highlighting one of the rarely discussed features of the ACA’s individual mandate: the penalties for disobeying it are far from draconian. Overheated rhetoric by the Right notwithstanding, no one will ever be thrown in jail for not having health coverage, nor will the penalties drive anyone into penury. In fact, it is not clear that the requirement will ever be enforced to any significant extent.

Moreover, any penalties that are collected will go to the Treasury, not to the private insurers missing out on premium payments from scofflaws. If enough of the defiantly uninsured realize the relatively low risks of non-compliance, the individual mandate may not create as many new customers as the insurance industry had hoped.

Of course, the ACA will create new customers from among the ranks of the uninsured who want coverage but have not been able to afford it without the subsidies the law will create. But many of these will be families who will make significant use of the coverage, as opposed to the young invincibles who never go to the doctor. In other words, the industry will end up with more of the less profitable end of the market.

Reading the Roberts opinion, one gets the impression that he was grasping for a way to uphold the ACA and rise above the unalloyed conservative partisanship that has tainted the recent history of the Court. While history may look kindly on his decision, in the shorter term he is bound to become a whipping boy for disappointed opponents of healthcare reform. Back in the 1960s rightwing fringe groups campaigned to have then-Chief Justice Earl Warren impeached for his supposedly pro-Communist rulings. Calls to “Impeach John Roberts” are already emerging from Red State America.

Whatever the Roberts legacy turns out to be, the bigger question is what will become of the U.S. healthcare system. It is encouraging that the most egregious insurance company behavior will be outlawed, but who knows what other tricks the industry will devise to torment its customers. The uproar over the ACA does not change the fact that the only real solution is to take the profit out of health coverage.

Will Big Pharma Remain Above the Law?

Thursday, May 10th, 2012

The recent announcement that a corporation agreed to pay $1.6 billion to settle regulatory violations would normally be considered significant news, but because the company involved was a drugmaker there was not much of a stir. That’s because Abbott Laboratories is only the latest in a series of pharmaceutical producers to pay nine- and ten-figure amounts to settle charges that they engaged in illegal marketing practices.

Abbott’s deal with federal and state prosecutors involves Depakote, which was approved by the Food and Drug Administration to treat seizures but which Abbott was charged with promoting for unauthorized uses such as schizophrenia and for controlling agitation in elderly dementia patients. The company admitted that for eight years it maintained a specialized sales force to market Depakote to nursing homes for the latter unauthorized use. In other words, it systematically violated FDA rules and encouraged doctors and nursing homes to use the drug in potentially unsafe ways.

Abbott follows in the footsteps of other industry violators:

  • In November 2011 GlaxoSmithKline agreed to pay $3 billion to settle various federal investigations, including one involving the illegal marketing of its diabetes drug Avandia.
  • In September 2010 Novartis agreed to pay $422 million to settle charges that it had illegally marketed its anti-seizure medication Trileptal and five other drugs.
  • In April 2010 AstraZeneca agreed to pay $520 million to settle charges relating to the marketing of its schizophrenia drug Seroquel.
  • In September 2009 Pfizer agreed to pay $2.3 billion to settle charges stemming from the illegal promotion of its anti-inflammatory drug Bextra prior to its being taken off the market entirely because of concerns that it was unsafe for any use.
  • In January 2009 Eli Lilly agreed the pay $1.4 billion—then the largest individual corporate criminal fine in the history of the U.S. Justice Department—for illegal marketing of its anti-psychotic drug Zyprexa.

The wave of off-label marketing settlements began in 2004, when Pfizer agreed to pay $430 million to resolve criminal and civil charges brought against Warner-Lambert (which Pfizer had acquired four years earlier) for providing financial inducements and otherwise encouraging doctors to prescribe its epilepsy drug Neurontin for other unapproved uses.

Soon just about every drugmaker of significance ended up reaching one of these agreements with prosecutors and shelled out what appeared to be hefty penalties. In fact, the amounts were modest in comparison to the potential revenue the companies could rake in by selling the drugs for uses far beyond what the FDA review process had deemed safe. A 2009 investigation by David Evans of Bloomberg noted that the $2.3 billion penalty Pfizer paid in connection with Bextra was only 14 percent of the $16.8 billion in revenue it had enjoyed from that drug over the previous seven years.

The company’s 2004 settlement should have been a deterrent against further off-label marketing, but, according to Bloomberg, Pfizer went right on doing it. Seeking maximum sales, regardless of restrictions set by the FDA, was an ingrained part of the company’s modus operandi. When the 2009 settlement was announced, John Kopchinski, a former Pfizer sales rep turned whistleblower, was quoted as saying: “The whole culture of Pfizer is driven by sales, and if you didn’t sell drugs illegally, you were not seen as a team player.”

Compared to other forms of corporate misconduct, such as securities violations, the drug companies are much more likely to have to admit to criminal violations in the off-label marketing cases. And the penalties are far larger than those imposed for most environmental and labor violations.

Yet these seemingly harsher enforcement practices appear not to have been very effective in putting an end to the illegal activity. In fact, the willingness of the drug industry to flout the drug safety laws raises serious questions about the effectiveness of FDA regulations and the federal criminal justice system in general. If a group of companies know that they can repeatedly break the rules and face consequences that fall far short of the potential gains from the illegal behavior, enforcement has little meaning.

What makes the situation even more outrageous is that off-label market is just one of numerous ways that the drug industry regularly violates the law—whether by defrauding federal programs such as Medicare or by covering up safety risks related to the approved uses of certain drugs.

The one thing that makes drug industry executives a bit nervous is that federal prosecutors have begun to show interest in reviving what is known as the responsible corporate officer doctrine, a provision of U.S. food and drug laws that could be used to hold executives personally and criminally responsible for violations. So far, the doctrine has been applied to only a few small fish. But if Big Pharma CEOs start appearing in perp walks, the industry may finally realize it is not above the law.

Neither Social Darwinism Nor Paternalism

Wednesday, April 4th, 2012

President Obama’s critique of the Republican budget plan as “thinly veiled social Darwinism” is a refreshingly blunt statement about the retrograde features of contemporary conservative thinking.

The efforts of House Budget Chair Paul Ryan and his colleagues to accelerate the upward redistribution of income and the unraveling of the social safety net deserve all the scorn that Obama served up.

While invoking a phrase that has a grand history in the critique of laissez-faire ideology, Obama failed to mention how social Darwinism was originally embraced not just by philosophers such as Herbert Spencer but also by leading industrialists such as Andrew Carnegie and John D. Rockefeller (a fact noted by Richard Hofstadter in his seminal work on the subject, Social Darwinism in American Thought).

Rather than pointing out how social Darwinist ideas can still be found in corporate boardrooms (especially those of Koch Industries) as well as in House hearing rooms, the purportedly socialist Obama went out of his way to sing the praises of business: “I believe deeply that the free market is the greatest force for economic progress in human history.”

Obama also used his speech to extol Henry Ford, specifically for the auto magnate’s policy of paying his workers enough so that they could afford to buy the cars they were assembling. Higher wages are a good thing, but it is misleading to cite Ford without putting his practices in some context.

Henry Ford gained fame as the man who instituted the Five Dollar Day for his workers in the 1910s. The facts were somewhat more complicated: not all workers at Ford Motor qualified for that amount, which in any event was not the base pay. A large part of the $5 consisted of a so-called “profit-sharing” bonus that had to be earned — by working at a high level of intensity on the job, and by living in a style that Ford considered appropriate off the job.

To enforce the lifestyle regulations, Ford created a Sociological Department with inspectors who visited the homes of workers and interviewed family members and neighbors. The company wanted to be sure that workers were not spending their share of Ford profits in a frivolous or irresponsible manner.

Ford’s practices were also designed to discourage unionization. When workers nonetheless tried to organize, Ford’s paternalism quickly dissolved. In 1932 a protest march to the company’s River Rouge plant in Dearborn, Michigan was met with tear-gas and machine-gun fire, which killed four persons. Dearborn police officers were supplemented by members of the Service Department, Ford’s own security force. Headed by Harry Bennett, the Service Department became notorious for its surveillance of workers both on and off the job. In a 1937 confrontation known as the Battle of the Overpass (photo), union organizers were attacked by Bennett’s security force and freelance thugs when they attempted to distribute leaflets outside the Rouge plant. Ford was the last of Detroit’s Big Three to give in to unionization.

It is telling that the word “unions” was not uttered a single time during Obama’s speech. Instead, Obama seems to want us to believe that the alternative to deregulation and trickle-down economics is a return to some kind of government and big business paternalism.

The first problem is that big business, despite giving frequent lip service to corporate social responsibility, has almost completely abandoned paternalism in favor of the human resources principles of Wal-Mart. As for government paternalism, Obama himself felt compelled to say in his speech that “I have never been somebody who believes that government can or should try to solve every problem.”

Even if the prospects for paternalism were more promising, it would not be the most effective way of responding to neo-social Darwinism. As the story of Henry Ford illustrates, paternalism is simply another form of social control by the powerful, and when necessary it is quickly abandoned in favor of repression and austerity. Collective action of the type that was put aside after Obama took office and recently revived by the Occupy Movement is the only real way forward.

Con JOBS

Thursday, March 22nd, 2012

Bipartisanship in Washington is back from the dead, at least for the moment, but its reappearance illustrates what happens when the two major parties find common ground: Corporate skullduggery gets a boost under the guise of helping workers.

That’s the story of the bill with the deliberately misleading acronym — the JOBS Act — which emerged from the cauldrons of the financial deregulation crowd and has now been embraced not only by Republicans but also by the Obama Administration and many Congressional Democrats. An effort by Senate Democrats to mitigate the riskiest features of the bill has failed, and now the legislation seems headed for final passage.

More formally known as the Jumpstart Our Business Startups Act, the bill is based on the dubious premise that newer companies are having difficulty raising capital and that weakening Securities and Exchange Commission rules—including those contained in the Sarbanes-Oxley law enacted in the wake of the Enron and other accounting scandals of the early 2000s—would allow more start-ups to go public, expand their business and create jobs. The outbreaks of financial fraud in recent years have apparently done nothing to shake the belief that less regulated markets can work miracles.

For many, that notion may be more of a fig leaf than an article of faith. One clear sign that the JOBS Act is trying to pull a fast one is that the “emerging growth companies” targeted for regulatory relief are defined in the bill as those with up to $1 billion in annual revenue. This is just the latest example of an effort purportedly designed to help small business that really serves much larger corporate entities. (What proponents on the JOBS Act don’t mention is that the SEC already has exemptions from some of its rules for companies that can somewhat more legitimately be called small—those with less than $75 million in sales.)

Critics ranging from the AARP to state securities regulators have focused on provisions of the JOBS bill that would allow start-up companies to solicit investors on the web, warning that this will pave the way for more scams.

I want to zero in on another issue, which is central to the mission of the Dirt Diggers Digest: disclosure. In the name of streamlining the rules for the so-called emerging growth companies, the JOBS Act would erode some of the key transparency provisions of the securities laws.

This is fitting, given that the original sponsor of the bill, Rep. Stephen Fincher of Tennessee (photo), has been embroiled in scandals involving gaps in his personal financial disclosure and last year was named  one of the “most corrupt” members of Congress by the watchdog group CREW.

The first problem with the JOBS bill is that it would allow firms planning initial stock offerings to issue informal marketing documents and distribute potentially biased analyst reports well before they have to issue formal prospectuses with thorough and candid descriptions of their financial and operating condition. In other words, the bill would postpone real disclosure until after the company has used a bogus form of disclosure to generate a quite possibly misleading image of itself.

When the company does have to file with the SEC, it would have to provide only two years of audited financial statements rather than three and would be exempt from reporting requirements such as the disclosure of data on the ratio of CEO compensation to worker compensation mandated by the Dodd-Frank Act. It would also be exempt from having to give shareholders an opportunity to vote on executive pay practices.

What’s worse, the JOBS bill also seems to opening the door to a broader erosion of disclosure provisions for all publicly traded companies. The bill would order the SEC to conduct a review of the Commission’s Regulation S-K to determine how it might be streamlined for “emerging growth” companies.

Yet it also calls for the SEC to “comprehensively analyze the current registration requirements” of the regulation, which could mean a weakening of the rules for all companies, no matter what their size. Regulation S-K is the broad set of rules determining what public companies have to include in their public filings on issues ranging from financial results to executive compensation and legal proceedings.

It is bad enough that the JOBS bill exploits the country’s desperate need for relief from unemployment to push changes that might mainly benefit stock scam artists. The idea that it could also allow unscrupulous corporations to conceal their misdeeds is truly infuriating. We just finished celebrating Sunshine Week; now Congress is hard at work promoting darkness.

The Price of a U.S. Manufacturing Revival

Thursday, February 23rd, 2012

A few decades ago, U.S. factory jobs began moving offshore to countries that lured corporations with the prospect of weak or non-existent unions, minimal regulation, lavish tax breaks and other profit-fattening benefits. Workers in those runaway shops enjoyed little in the way of a social safety net, thus making them all the more dependent on whatever dismal employment opportunities foreign firms had to offer. Much of the U.S. manufacturing sector was left for dead.

Now, we are told, U.S. manufacturing is undergoing a resurrection. “Manufacturing is coming back,” President Obama told a group of blue-collar workers at a recent public event. “Companies are bringing jobs back.” Obama earlier used the State of the Union address to tout the recovery of the U.S. auto industry in the wake of the bailout he championed. One of the bailed-out firms, Chrysler, aired a Super Bowl commercial called “It’s Halftime in America” in which Clint Eastwood hailed the country’s industrial recovery.

It’s true that manufacturing employment has been on the rise after many years on the decline. But is this something calling for unqualified celebration?

Boosters of the industrial resurgence would have us believe it is a reflection of improved U.S. productivity, entrepreneurial zeal or, as Obama put it in the State of the Union, “American ingenuity.” In the case of Chrysler, that should be Italian ingenuity, given that the bailout put the company under the control of Fiat.

But it can just as easily be argued that domestic manufacturing is advancing because the United States has taken on more of the characteristics of the countries that hosted those runaway shops. Deunionization, deregulation, corporate tax preferences, excessive business subsidies and a shriveled safety net are more pronounced than ever before in the U.S. economy. If any of the Republican Presidential candidates get in office, those trends will only accelerate.

Even the Obama Administration is on the bandwagon to a certain extent. Its Office of Information and Regulatory Affairs has obstructed a slew of new environmental and workplace safety regulations. Now the President has legitimized years of conservative rhetoric claiming that companies are overtaxed by introducing a corporate tax reform plan that would reduce statutory rates in general and create an even lower rate for manufacturers. The plan has some good intentions—such as ending special giveaways to Big Oil and other loopholes while encouraging corporations to bring jobs back home—but it ignores years of evidence from groups such as Citizens for Tax Justice showing that big business will exploit any softening of the tax code to bring its actual payments down to the absolute lowest levels.

The perils of joining the manufacturing revival chorus can be seen by looking at heavy equipment producer Caterpillar. The company has been getting a lot of attention lately for expanding its domestic employment through moves such as the planned construction of a $200 million plant in Athens, Georgia that is projected to employ about 1,400.

This needs to be put in some context. According to data in Cat’s 10-K filings, the company’s workforce outside the United States soared from around 13,000 in the early 1990s to more than 71,000 last year, growing to some 57 percent of the firm’s total employment. The number of foreign workers in 2011 was greater than the company’s total head count in 2003.

Cat’s love affair with places such as China blossomed as the company was trying to escape its U.S. unions, which it had unsuccessfully tried to destroy. Cat’s hard-line approach to collective bargaining soured relations with its workers, resulting in a series of strikes and other confrontations, including a dispute in the 1990s that lasted for more than six years.

It appears that unions have no role in Cat’s limited back-to-the-USA plan. The company’s new domestic facilities tend to be located in “right to work” states. After recently trying to impose huge pay cuts at a factory in Ontario (photo), Cat first locked out the workers, then shut down the plant and is now reported to be shifting the work to a facility in Muncie, Indiana, the latest state to adopt a “right-to-work” law to hamstring unions.

By locating the Athens plant in a labor-unfriendly state such as Georgia, Cat is expected to be able to pay wages far below those in its unionized plants. It is also worth noting that Cat agreed to build the plant in Georgia only after it received $75 million in tax breaks and other financial assistance, one of the largest subsidy packages the state has ever offered.

The message of all this seems to be that the U.S. can enjoy a renewal of manufacturing if we are only willing to put up with a few minor inconveniences such as union-busting and big tax giveaways to corporations. That’s apparently what is really meant by American ingenuity.

Fighting for the Right to Be a Weak Regulator

Thursday, January 5th, 2012

The conservatives fulminating about the Consumer Financial Protection Bureau and President Obama’s recess appointment of Richard Cordray to head it may feel outmaneuvered at the moment.  But if history is any guide, the bureau will not be too big a threat to the financial powers that be.

The federal government is filled with regulatory agencies whose main mission seems to be to protect the interests of the largest companies they are charged with regulating. There’s always the possibility that the CFPB will be the exception to the rule of regulatory capture, but the fledgling entity would have to clear some high hurdles.

Cordray and his colleagues would do well to study the track record of the federal agency that has supposedly served as a financial watchdog for the past seven decades: the U.S. Securities and Exchange Commission. The CFPB is getting off the ground just as the SEC is embroiled in a dispute that reveals its cozy relationship with the big banks and its feckless approach to enforcement.

Back in October, as part of its belated and half-hearted response to the chicanery that led to the financial meltdown of 2008, the SEC announced that giant Citigroup had agreed to pay $285 million to settle charges that it had misled investors about a $1 billion issuance of housing-related collateralized debt obligations that Citi knew to be of dubious value and had bet against with its own money. As is typical in such SEC cases, Citi neither admitted nor denied doing any wrong.

That would have been the end of a typical case if the judge overseeing the matter, Jed Rakoff the Southern District of New York, had not done something remarkable. He declined to rubberstamp the settlement and raised a host of questions about the size of the settlement—which was well below the estimated $700 million lost by investors—and the failure of the SEC to get Citi to admit guilt.

Rakoff (illustration), who had questioned settlements in several other SEC cases, rejected the deal the agency made with Citi and ordered a trial on the matter. In his November  28 order (which I retrieved, along with other case documents, from the PACER subscription database), Judge Rakoff called the amount of the settlement “pocket change to any entity as large as Citigroup” and said it would have little deterrent effect. He also pointed out that the SEC’s decision to charge Citi with mere negligence and allow it to avoid admitting guilt “deals a double blow to any assistance the defrauded investors might seek to derive from the S.E.C. litigation in attempting to recoup their losses through private litigation, since private investors not only cannot bring securities claims based on negligence.” In other words, Rakoff was accusing the agency of protecting the interests of the big bank.

Calling the deal “neither reasonable, nor fair, nor adequate, nor in the public interest,” Rakoff thundered:

An application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous. The injunctive power of the judiciary is not a free roving remedy to be invoked at the whim of a regulatory agency, even with the consent of the regulated. If its deployment does not rest on facts – cold, hard solid facts, established by admissions or by trials -it serves no lawful or moral purpose and is simply an engine of oppression.

Finally, in any case like this that touches on the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives, there is an overriding public interest in knowing the truth. In much of the world, propaganda reigns, and truth is confined to secretive, fearful whispers. Even in our nation, apologists for suppressing or obscuring the truth may always be found. But the S.E.C., of all agencies, has a duty, inherent in its statutory mission, to see that the truth emerges; and if fails to do so, this Court must not, in the name of deference or convenience, grant judicial enforcement to the agency’s contrivances.

Instead of using Rakoff’s powerful order as leverage to extract a larger settlement from Citi, the SEC went on the attack against the judge. It appealed Rakoff’s order to the federal court of appeals, arguing that its enforcement process would be crippled if it had to hold out for admissions of guilt. Rakoff fired back with a charge that the agency had misled the appeals court and had withheld key information from him.

As the pissing match continues, one could only imagine the satisfaction felt by Citi at being able to sit on the sidelines and watch its regulator do battle with the judiciary to preserve its ability to handle financial misconduct with kid gloves. The SEC has suddenly become aggressive—not in fighting fraud but in defending its right to be a weak regulator. Richard Cordray, take heed.