Archive for December, 2009

Are Strange-Bedfellows Alliances the Way to Cut the Big Banks Down to Size?

Thursday, December 17th, 2009

glass-steagall-actBipartisanship is rare these days, and rarer still are cases in which Democrats and Republicans come together to urge new restrictions on business. Yet here we have Democratic Senator Maria Cantwell of Washington joining Arizona Republican John McCain to propose a reinstatement of the Glass-Steagall Act. The long shot idea would turn back the clock on a key facet of ruinous financial deregulation.

In case you have forgotten, Glass-Steagall was one of the signature reforms of the New Deal era, signed into law by FDR as part of the Banking Act of 1933 (photo).  Reacting to Wall Street’s excesses of the 1920s and the stock market crash, the law mandated a separation between the speculative world of investment banking and the supposedly more prudent business of commercial banking. This forced big institutions such as J.P. Morgan to spin off their securities operations, leading to the formation of firms such as Morgan Stanley.

While many credited Glass-Steagall with promoting financial stability, by the 1980s commercial banks began clamoring to get back into the more exciting (and potentially more profitable) game of underwriting corporate securities and providing other investment services. Little by little, the Federal Reserve gave in, which only emboldened the big players. In 1998 wheeler-dealer Sandy Weill directly defied Glass-Steagall by arranging a merger of Travelers Group and Citicorp, thus creating the behemoth we know today as Citigroup. What was left of Glass-Steagall was repealed by the 1999 Gramm-Leach-Bliley Act.

The near-meltdown of the financial system has engendered new interest in the principles that had been embodied in Glass-Steagall. McCain and Cantwell are not the only ones talking about reviving the 1930s legislation. Several progressive members of the House made a similar proposal earlier this month. The idea has also been endorsed by former Federal Reserve Chairman Paul Volcker and prominent economist Joseph Stiglitz.

Glass-Steagall redux would not, by itself, solve the problems of the U.S. financial system, and it is not a substitute for wide-ranging reform. But it would put a significant crimp in the casino culture that has taken root throughout the banking world. Another advantage is that it would by necessity bring about a reduction in the size of many mega-institutions that are now considered “too big to fail” and thus must be bailed out when they screw up in a spectacular way.

The McCain-Cantwell bill, for example, would require the likes of Citigroup and Bank of America to decide within a year whether they wanted to focus on lending or securities. B of A, for instance, would have to give up its branches or its ownership of Merrill Lynch. At the same time, a purer investment bank such as Goldman Sachs could no longer pretend to be a bank holding company, the designation it adopted last year to qualify for TARP funds.

If the bill proceeds, it could also serve as the foundation for an aggressive left-right response to the financial mess. Ever since the Bush Administration and the Federal Reserve started on the road to bank bailouts last year, many progressives and many conservatives have expressed outrage at the practice but have generally talked past one another. This has helped the banks avoid having any serious strings put on their rescue packages. And it let them sidestep the most obvious solution to the problem of having financial institutions deemed too big to fail: cutting them down to size.

The biggest obstacle to restoring Glass-Steagall and otherwise curtailing the power of the big banks may turn out to be not the financial lobby but rather the Obama Administration, whose chief economist, Larry Summers, championed the final repeal of Glass-Steagall while heading the Clinton Administration Treasury Department a decade ago. Despite Obama’s recent swipe at “fat cat” bankers, he and his advisors seem to think that it’s preferable to let the financial leviathans remain in place while putting some modest restrictions on their operations.

The problem is that the giant banks have become increasingly addicted to activities such as trading — the main source of the supposed rebound in the sector — and show less and less interest in mundane matters such as lending to businesses and consumers. The Obama Administration thus comes across as a defender of aloof Big Finance while the country struggles to finance an economic rebound. The fact that progressives can find more common ground on this issue with someone like McCain suggests that strange-bedfellows alliances may accomplish more than toeing the pro-business centrist line.

Needed: A New Contract with Big Finance

Friday, December 11th, 2009

banksA widely circulated rumor that Goldman Sachs executives were loading up on firearms to protect themselves against a populist uprising turned out to be spurious, but the leaders of the bank are clearly worried about rising discontent over Goldman’s prosperity amid continuing economic distress for most everyone else.

The announcement that Goldman’s top 30 executives will be denied cash bonuses this year is one of the most significant concessions Wall Street has ever made to public outrage. The members of Goldman’s management committee won’t be denied bonuses entirely but will receive them in the form of “shares at risk” – stock that cannot be sold for five years and is subject to recapture if the recipient engages in “materially improper risk analysis” or fails “sufficiently to raise concerns about risks.”

It is unclear whether these rules, which would require prudence rarely seen in the casino culture of investment banking, will be applied stringently. Goldman’s announcement that it will allow a shareholder advisory vote on compensation practices will make it a bit more difficult to flout the rules entirely.

While the ultimate impact of the Goldman move is uncertain, Britain and France are putting a real and immediate dent in bloated banker pay by imposing a 50 percent windfall tax on bonuses. Financiers in London and Paris are up in arms over the moves, with one investment banking chief telling the Financial Times that as a result of the tax the “contract between government and business is broken.”

And what exactly is that contract? As far as the financial sector is concerned, the traditional contract was that banks were expected to provide the capital needed for the “real” economy, and government did not regulate the market too strictly.  A decade ago, financiers got the regulatory regime loosened even more, which in the United States meant an end to the separation between commercial banking and investment banking. The new contract seemed to be that a fully liberated financial sector would magically create wealth to make up for the travails of the productive portion of the economy.

The crisis of the past two years put an end to that notion, and the contract we’ve been left with seems to be little more than an obligation by government to prop up a teetering financial sector with bailouts and access to virtually free funding. There is no quid pro quo imposed on bankers, who are allowed to deny credit to businesses and individuals alike and use their cheap money to rack up trading profits. And those profits serve mainly to pay for outsized bonuses for the bankers themselves.

It’s always been questionable whether big finance capital served a legitimate social purpose. Now it is clear that the big banks exist mainly for the enrichment of their own executives. About half of total revenue at these banks is set aside for compensation of executives and other employees.

That’s why Bank of America and Citigroup are so eager to repay their bailout money and free themselves from the constraints of the federal pay czar. And it’s why the big banks have felt no compunction about opposing the financial regulatory reforms now before Congress.

While financial industry lobbyists twist arms behind the scenes, Goldman is playing good cop with its bonus restrictions and the quasi-apology its CEO Lloyd Blankfein issued in November. Yet neither voluntary actions by the likes of Goldman nor modest regulatory reforms are sufficient. The current “contract” between big finance and not just government but all of society needs to be rewritten, and this time we shouldn’t let bank lawyers draft the document.

When Malfeasance Becomes a Corporate Mission Statement

Thursday, December 3rd, 2009

BhopalForbes loves to compile lists;  in fact, for many people the magazine is synonymous with its annual ranking of the 400 richest Americans. Recently, the publication allowed its list mania to overwhelm its other obsession — defending big business — when it came out with a feature on “The Biggest CEO Outrages of 2009.”

Writer Helen Coster frames the story as an assessment of how corporate malfeasance has been faring since the arrest of world-class Ponzi schemer Bernard Madoff a year ago. She finds that “nobody managed to top Madoff’s crimes in 2009, but 10 executives showed enough greed, hubris and chutzpah to give him a run for his (stolen) money.”

Her list ranges from other alleged fraudsters such as R. Allen Stanford to accused insider trader Raj Rajaratnam of the Galleon Group hedge fund to convicted tax evader Robert Moran. She also includes Edward Libby of AIG and former Merrill Lynch head John Thain for their role in enabling questionable bonuses. Also on the list is Lloyd Blankfein of Goldman Sachs, whose main sin, according to Coster, seems to have been his comment that he was just a banker doing “God’s work.”

All of these individuals deserve some disapprobation, but Coster manages to gloss over a major distinction with regard to executive misbehavior: the difference between improper actions taken to benefit oneself and those undertaken to benefit the corporation.

Individual fraud, embezzlement, tax cheating and other forms of self-dealing are reprehensible, but do they begin to compare in their impact to major misdeeds committed in the name of advancing corporate interests? This point is especially relevant given that these days we are marking not only the first anniversary of the Madoff scandal but also the 25th anniversary of the Bhopal disaster.

Madoff brought financial ruin to numerous individuals and non-profit organizations, but what critics charge was systematic negligence on the part of executives of Union Carbide (now part of Dow Chemical) killed or seriously injured thousands of residents in Bhopal, making it the worst industrial accident ever. Madoff pleaded guilty to his crimes, but Warren Anderson, the CEO of Union Carbide, remained a fugitive rather than face criminal charges brought against him in India, and Dow Chemical has refused to take responsibility for providing adequate compensation to the Bhopal victims.

Over the past year there have been various instances of outrageous acts committed to advance corporate goals that do not begin to compare with Bhopal but have caused considerably more harm than the ones catalogued by Forbes.

Take, for example, the case of Stewart Parnell and his now defunct Peanut Corporation of America, accused earlier this year of knowingly shipping salmonella-tainted food products from a filthy plant in Georgia, thereby contributing to one of the country’s worst outbreaks of food poisoning, including about nine deaths.

Then there’s the case of the managers at Bayer CropScience, who, according to a Congressional report released in April, withheld critical information from emergency responders during an accident at a plant in West Virginia that nearly resulted in the release of methyl isocyanate, the same chemical involved in the Bhopal catastrophe.

Or what about the executives at pharmaceutical giant Pfizer who illegally marketed the painkiller Bextra, causing the company to have to agree in September to pay $2.3 billion to settle civil and criminal charges brought by federal prosecutors?  One Pfizer sales rep told prosecutors: “If you didn’t sell drugs illegally, you were not seen as a team player.”

It’s one thing for an individual executive to go bad. The real harm comes when the misbehavior becomes, in effect, the mission statement of the corporation. That, dear Forbes, is what is truly outrageous.