Category: business ethics

Rating Agencies Were Part Of The Disaster On Wall Street

On By southwerkIn business ethics1 Comment

Rating Agencies Were Part Of The Disaster On Wall Street

If the rating agencies were key players in the financial mismanagement that destroyed eight million jobs and threatened the world’s economy, why are they not included in the financial reform bill now before the Senate? Alain Sherter wants to know why. So do I.

This is a report from “Now” – a PBS program. In this particular episode an insider from a credit rating agency explains what happened.

Here is Alain Sherter explaining more about this ratings disaster –

The ratings agencies business model is based on a flagrant conflict of interest — they’re paid by the firms whose credit they evaluate. That makes them vulnerable to pressure from investment banks and securities issuers, which naturally want a bullet-proof rating in order to attract investors.

In the years leading up to the housing bust, Moody’s, S&P and Fitch passed out AAA ratings like candy bars at Halloween. In mid-2007 and early 2008, with the real estate market in free-fall and mortgage delinquencies soaring, they suddenly started downgrading scads of formerly top-rated securities. In January of ‘08, for instance, S&P lowered ratings on more than 6,300 and 1,900 CDOs — in a single day. Then, the deluge. The bottom fell out of the secondary market for subprime loans, and the rest is history.

Without the credit rating industry giving triple A ratings to these risky investments, the tragedy that has engulfed and continues to damage the lives of so many Americans would not have been possible.

What are these people not being called on the carpet or prosecuted for conduct that seems to many observers to look very similar to fraud?

James Pilant

Madoff and Shapiro, Ponzi Schemes?

On By southwerkIn business ethics

Madoff and Shapiro, Ponzi Schemes?

Ponzi Scheme (from Wikipedia)

A Ponzi scheme is a fraudulent investment operation that pays returns to separate investors, not from any actual profit earned by the organization, but from their own money or money paid by subsequent investors. The Ponzi scheme usually entices new investors by offering returns other investments cannot guarantee, in the form of short-term returns that are either abnormally high or unusually consistent. The perpetuation of the returns that a Ponzi scheme advertises and pays requires an ever-increasing flow of money from investors to keep the scheme going.

The system is destined to collapse because the earnings, if any, are less than the payments to investors. Usually, the scheme is interrupted by legal authorities before it collapses because a Ponzi scheme is suspected or because the promoter is selling unregistered securities. As more investors become involved, the likelihood of the scheme coming to the attention of authorities increases. While the system eventually will collapse under its own weight, the example of Bernard Madoff’s investment scandal demonstrates the ability of a Ponzi scheme to delude both individual and institutional investors as well as securities authorities for long periods: Madoff’s variant of the Ponzi scheme stands as the largest financial investor fraud committed by a single person in history. Prosecutors estimate losses at Madoff’s hand totaling roughly $21 billion, as estimated by the money invested by his victims. If the promised returns are added the losses amount to $64.8 billion, but a New York court dismissed this estimation method during the Madoff trial.

Nevin Shapiro is accused of stealing around 80 million dollars from investors. Like most Ponzi scams, everyone wanted to believe. Read the article.

Shareholders Gain Influence

On By southwerkIn business ethics

Shareholders Gain Influence

Loren Steffy writing in the Houston Chronicle has hopes that this year might be the year of the shareholder.

And it’s about time. The corporation is supposed to be controlled by those who put money into the operation, the investors. Yet, as far as I can tell, the shareholders are marginalized and ignored almost all the time. Only when a single shareholder controls a large block of stock do we see any element of corporate democracy.

The federal government should act to make corporations accountable to the people that own them. It’s ridiculous to live in a nation that talks about democracy and preaches it to other countries continue the rank hypocrisy of ownership without power.

James Pilant

Matt Taibbi Is Right Again

On By southwerkIn business ethics

Matt Taibbi Is Right Again

You can’t cheat an honest man. Right, you can’t shoot a defenseless man or rape a woman who defends herself. All the financial rip-offs that netted billions of dollars over the last decade couldn’t have worked if Americans weren’t greedy “mothers” without a twinge of conscience. Who invents this crap?

Matt is right to be outraged but how come the rest of us aren’t? What does the financial industry have to do, crucify us individually, before we get the idea that we’ve been had?

Where do the networks find people like Rick Santelli? What septic tank do you have to dive into? In 2008, retirement funds lost 2 trillion dollars. Apparently they are not honest men. Yet to the Rick Santelli’s of the world, it’s all the fault of the people who bought mortgages. In Santelli’s world, there is the elite that makes value and the besotted masses that slow them down. In the world of Santelli, unless you are a banker or a financial speculator, you’re like a vermin that needs extermination for slowing down the really talented people.

Yeah, the industry is innocent of wrong doing. – or is it?

You want a look at some of the individuals screwed out of their money? Let’s have a browse. Sometimes they get mad.

Don’t let it bother you. America is ONLY in trouble because some people can’t pay their mortgages. Some people got in over their heads.

If you believe that, you’ll believe anything. You have to want to believe that kind of perverted narrative because the fact that the great financial institutions of this country acting like predators with a subservient Congress protecting their every move is too hard to take.

James Pilant

Alain Sherter

On By southwerkIn business ethics1 Comment

Alain Sherter’s work appears on BNET. He is a great writer and thinker whose work often points in original directions. His outrage over the ethical shortcomings of American business mirrors my own.

Here’s a sample of his writing –

Banks that foreclose on a home must first prove they own the mortgage. So affirmed the top Massachusetts court today in ruling against U.S. Bancorp (USB) and Wells Fargo (WFC) in a decision could boost homeowners fighting foreclosure and end up costing banks billions.

One financial expert told Bloomberg the ruling could “open the floodgates” to similar suits in the state and bolster cases around the nation. Financial pundit Barry Ritholtz also called the ruling a victory for the rule of law and property rights, noting in a related post discussing the case:

This is more than a technical issue; at risk is whether we, as a nation, are going to allow corporate entities to violate existing law, or even worse, attempt to create their own, extra-legal, non democratic policies.

Certainly investors seem worried. U.S. Bancorp and Wells shares immediately dipped on the news, with broader bank stocks also tumbling. It’s no secret why. As the “robo-signing” furor has shown, banks for years have flouted legal requirements to document their right to seize homes. Foreclosure affidavits were rubber-stamped or even faked. Local laws regarding property transfers were ignored. Financial firms eager to mince mortgages up into securities violated rules intended to establish a clear chain of title in foreclosure cases.

Alain Sherter’s regular column, Financial Folly, is an invaluable guide to the shenanigans of the financial world. I recommend him to you.

James Pilant

Risky Lending and Lobbying – Connection?

On By southwerkIn business ethics

 

Risky Lending and Lobbying – Connection?

An International Monetary Fund report entitled: A Fistful of Dollars, Lobbying and the Financial Crisis, reports that those lenders pursuing high risk lending practices did the most lobbying.

The actual report is found here: http://www.dnb.nl/binaries/Deniz%20Igan_tcm46-223260.pdf

Perhaps we should think of the risky lenders on Wall Street less like ivy league educated scum individuals and more like bold Western heroes. Here let me provide some music.

However, some of you may not feel that the mantle of Western hero does not fit them well. How about this one?

Well, now that I’ve got that off my chest. Let’s discuss the issue. First a quote from the actual study:

We find that, after controlling for unobserved lender and area characteristics as well as changes over time in the macroeconomic and local conditions, lenders that lobby more intensively (i) originate mortgages with higher loan-to-income ratios, especially after 2004; (ii) securitize a faster growing proportion of loans originated; and (iii) have faster growing mortgage loan portfolios.

This is research language, an arcane format similar in many ways to spell casting in Lord of the Rings. Let me translate: We worked hard to do a fair study and we discovered that lenders who did a lot of lobbying made stupid decisions.

So, here we come to the meat of the matter. The more lobbyists you hire, the more money you spend on influencing the government; the more likely you are to take risks.

Of course, you could turn it around. The more money and lobbyists financial institutions send to Washington, the more Washington protects them from laws and regulations while simultaneously shielding them from the effects of their ridiculous decisions.

We all learned in civics class that bankers and financiers are careful to protect their investors from loss while our Senators, Representatives and President would never fail to protect us from financial sector decisions that could destroy millions of jobs and damage the economic fabric of the planet.

We all know that a new Democratic President wouldn’t appoint all of his economic advisors from the very firms receiving bailout money. We all know that no Congress would give hundreds of billions of dollars of loans to private companies without setting up a mechanism to get the money back. We all know that should by some mischance all our protections fail and our financial system comes within a matter of minutes of total collapse that new rules and regulations would be put in place to stop that from happening again.

I guess I’m just cranky. I am getting older. Of course, I do teach Business Ethics and watching these event unfold hits me in the gut. It’s like teaching medicince in a place where they just kill the patients to save money.

But I’m probably just cranky.

James Pilant

 

President John Kennedy – Ask Not

On By southwerkIn business ethics

President John Kennedy – Ask Not

What would Kennedy say about the greed and shorsightedness on Wall Street? I don’t know. But his repeated calls to national service still resonate (Peace Corps).

More importantly, do you think a financier from one of the “great” investment banks ever thinks of the interests of this county when making any kind of decision. Let’s remember for a moment a President who called on the best of our nature and judgment, not our greed and self interest.

Watch the video

Settlement Conferences In Arkansas?

On By southwerkIn business ethics, Teaching

I sent the following message to Robbie Wills, the Speaker of the Arkansas House.

I was reading an article on BNET about home foreclosures. Let me quote:
Under a New York state law passed in 2008, banks and mortgage services must meet with subprime mortgage holders in a “settlement conference” before a foreclosure case goes to trial. The goal is for lenders and borrowers to come up with an equitable way to keep people in their homes without breaking the bank.
http://industry.bnet.com/financial-services/10005770/lenders-flout-law-aimed-at-saving-homeowners-from-foreclosure/

I like that idea. I have many students who have mortgage problems and none have ever mentioned a settlement conference so I assume Arkansas has no such law. Could we do something like that? Those people could use some help.
James Pilant

Should Virtue Be Rewarded?

On By southwerkIn business ethics1 Comment

Should Virtue Be Rewarded?

This is another one of those stories. I am always reading them. Another company discarded ethics, fired those who would practice it and promoted those who “aggressively sought profit.”

According to McClatchy, Moody’s Investor Services, fired employees who warned the company of problems with their ratings of mortgage based investments and actively promoted those who helped create the second largest economic crisis in American history after the great depression.

When the company went public in 2000 it granted its middle managers stock options. This had a corrosive effect on the integrity of the rating process. To quote from the article:

“It didn’t force you into a corrupt decision, but none of us thought we were going to make money working there, and suddenly you look at a statement online and it’s (worth) hundreds and hundreds of thousands (of dollars). And it’s beyond your wildest dreams working there that you could make that kind of money,” said one former mid-level manager, who requested anonymity to protect his current Wall Street job.

Now, what do you say? As a teacher of business ethics, this is one of those real life examples, it might be best your students never heard about. After all, when the hero in the white hat is unceremoniously dumped and those who have damaged the economic fabric of modern civilization are promoted and enriched(from what I can tell, apparently very enriched). Given the example, you have to wonder why anyone would take business ethics seriously.

The article indicates that if you were willing to give investments whatever their actual value a good rating, in many cases a triple A rating, you were promoted and given more money. Thousand of people relied on these ratings to determine what to invest in. Those unfortunate enough to rely on these credit rating agencies lost large sums of money. We are talking about minimally billions of dollars. These are inconsequential investors like retirements funds, endowments for educational institutions, and charitable organizations.

Can you doubt for a moment that our civilization is damaged by this kind of behavior. Can you doubt that those who did these things and profited should be punished so that others might be deterred? I see an investigation in progress by the Securities and Exchange Commission but aren’t they the ones who didn’t see a problem in the first place?

Unless these people are punished, do jail time, have their profits taken from them and be socially stigmatized, there is no reason for my students and the rest of the public to say the right things to me and other do-gooders; and then take the money. After all, isn’t that what the “real world” says to do?

This is the link to the McClatchy story: http://www.mcclatchydc.com/economy/story/77244.html?storylink=MI_emailed

This is the link to the book, A Colossal Failure of Common Sense, by Lawrence McDonald.

http://www.amazon.com/Colossal-Failure-Common-Sense-Collapse/dp/0307588335

I recommend you visit Lawrence McDonald’s web site at:

http://www.lawrencegmcdonald.com/

Can Ethical Decisions Be Life or Death Choices?

On By southwerkIn business ethics

Can Ethical Decisions Be Life or Death Choices?

ABC news reports that Consumer Reports, the magazine, has released a new study that reports the following:

The bad news from a new study is that two thirds of store-bought chicken was found to be contaminated with potentially harmful bacteria.

This is a clear situation where ethics and morality have a role to play. Okay, now, ask yourself, can you ethically sell chickens contaminated with bacteria? Let’s be clear about the consquences. We are talking about food poisoning. Let me quote from wikipedia:

However, foodborne illness can result in permanent health problems or even death, especially for people at high risk, including babies, young children, pregnant women (and their fetuses), elderly people, sick people and others with weak immune systems.

So, we are talking about dead people and serious illness for thousands of others and since food poisoning can mimic other diseases like the flu, the numbers reported are too low.

Now, back to our moral dilemma. The bacteria from your chicken will kill some people often the elderly or the very young. On the other hand, you are participating in busines worth billion of dollars a year. (Tyson sold 26 billion dollars worth of food in 2005.) If your competitors do not act to fix the problem, they can sell chicken for less than you. You will lose market share and thousands of people might lose their jobs.

Now, you might say, “James, you have to draw the line here, we are talking about people’s lives.” I agree that lives are at stake, but I can’t help but point out that it doesn’t look like anybody is drawing a line.

Should we wait for industry to act? A study two years ago showed 80 percent of all chicken contaminated with bacteria. We’ve gone from 80 percent to 2/3 of all chicken sold. Isn’t that movement in the right direction? Don’t you know that incremental change is the responsible way to accomplish these kinds of goals? If you were to impose radical changes on the industry, everyone in American would have to pay a lot more for chicken. Don’t you want even the poorest in this country to have access to meat and the nutritional benefits it brings?

So, we come down to the usual questions. What are you willing to do as an employee of such a company? Where do you draw the line? What’s worth losing your job for? What’s the “right” thing to do?

Futher, as a society, what social costs are we willing to incur for low levels of bacteria in chicken: loss of jobs, increases in foreign competition and a greater price at the supermarket? What’s the social value of cheap chicken?

My conclusion is the following.

Selling chicken which you know to be contaminated with bacteria when you have the technology to eliminate some or all the bacteria is murder. I’m sorry about all the jobs. I’m sorry about the lost profits and danger of competition from foreigners but I just get upset about dead people, a personal weakness of mine, perhaps.

Since, it does not appear any chicken selling company is willing to make the first move to eliminate bacteria and endanger its bottom line, the government will have to mandate new standards.

Now, I realize that given time the free market will solve this problem. After all companies that sell chicken that kill will undoubtedly lose market share. Or will they? Reported levels of 80% didn’t stop people from continuing to buy chicken. On the other hand, this information does not appear to be common knowledge. It appears that the free market doesn’t function well when the consumers do not all have the same information. If death from chicken were certain instead of sporadic it would be easier for the public to make a good decision but food poisoning takes as long as a week to manifest itself. It’s hard to figure out what you ate over a seven day period and of course you might think it’s the flu. What do you think? Could this be an example of the free market yielding illogical or tragic results? Does the free market unfettered by government interference solve all problems?

James Pilant