Global Warming Reaches Critical Threshold

Sources:

Background Picture: hherbzilla on Flickr
Stats and "before/after" picture: Brian Merchant, "This Is Life in a 400 PPM World," Motherboard, May 16, 2013.

See related essay: "Half of the American Population Disagrees with 97% of Climate Scientists on Global Warming."

Hollande Proposes Economic Government for Euro-Zone: Muddying the Water?

At a press conference marking French President Francois Hollande’s first year in office, the powerful head of the large E.U. state called for an economic government for the euro zone.  One might be tempted to ask, what exactly is an economic government? By definition, a government is a political entity. Show me a government without politics and I’ll pack up and head to the Himalayas for a life of other-worldly contemplation. What, pray tell, is an economic government exactly?

           President Francois Hollande of France proposing an economic government for the euro-zone. What exactement is an economic government?    Source: Reuters

In his remarks, Hollande proposed that the euro-zone government would have its own budget, the right to borrow, a harmonized tax system, and a full-time president. Continuing its reportage, Reuters adds, “Hollande said a future euro zone economic government would debate the main political and economic decisions to be taken by member states, harmonize national fiscal and welfare policies, and launch a battle against tax fraud.” In his own words, "ce gouvernement économique débattrait "des principales décisions de politique économique à prendre par les Etats membres." Debating political rather than only economic decisions would seem to render the proposed government both political and economic, rather than merely economic. But would it be a government at all?

Debating decisions that would be “taken by member states” (à prendre par les Etats membres) suggests more of an alliance or cartel than a government. If the European Parliament is involved with only representatives from euro-zone states voting, the decisions would not just be taken by the state governments. The same holds if the European Commission is involved.

Generally speaking, one of the things that the E.U. suffers from is linguistic confusion. By this I don’t mean bad translations. Rather, politically charged terms including federalism, union, member, and network are bandied about rather carelessly at times and with serious political agendas at other times. Government being applied to the E.U. is another such word. In his remarks, Hollande seems to have been trying to tweak the word by specifying it as economic only even though political decision would be debated in the proposed government. In trying to have it both ways—an economic regime and a political union—Hollande was being political at the expense of that which he proposed. Dancing around terms—even changing their respective meanings—in order to get something past detractors who pay too much attention to words comes at a price  in terms of E.U. institutions whose respective natures and proper functioning are ambiguous. This is perhaps the real crisis facing the E.U.—one of identity—and state leaders such as Hollande are not exactly clearing up the muddy water.

Sources:

Mark John and Ingrid Melander, “France’s Hollande Urges Euro Zone Government,” Reuters, May 16, 2013.  

"Conférence de François Hollande : les principales annonces et declarations," Le Huffington Post, May 16, 2013.

Half of the American Population Disagrees with 97% of Climate Scientists on Global Warming

Thomas Jefferson and John Adams concurred on the following preference—namely, a natural aristocracy of virtue and talent over the artificial sort of birth and wealth. Talent here is not merely skill, but also knowledge. Hence the two former U.S. presidents agreed that citizens ought to be given a broad basic education in free schools. The corollary is that as a citizenry lapses in virtue and knowledge, decadence will show up in public discourse and consequently public policy. If kept unchecked, the tendency is for the republic to fall.

Therefore, as governor of Virginia, Jefferson proposed a Bill for the More General Diffusion of Knowledge in 1779. His rationale was that because even “those entrusted with power” who seek to protect individual rights can become tyrants, popular education is necessary to render a republic secure. Jefferson’s hope was that by teaching “the people at large” examples of despots in history, the electorate would be more likely to recognize despots in their own time and throw the bastards out on their noses. As for those whom voters put in public offices, Jefferson believed that “laws will be wisely formed, and honestly administered, in proportion as those who form and administer them are wise and honest.” Hence, “those persons, whom nature hath endowed with genius and virtue, should be rendered by liberal education worthy to receive, and able to guard the sacred deposit of the rights of their fellow citizens.” This is why, beginning at around 1900, law schools in the American states began to admit applicants to the undergraduate degree in law (LL.B. or J.D.) who had already earned an undergraduate degree in the liberal arts and sciences. It was not as though the undergraduate degree in law had been promoted to graduate status.

Having had largely self-governing, popularly-elected colonial legislatures for much of the seventeenth century, the nascent American republics would stand on the two pillars of virtue and talent (including knowledge) instilled in the self-governing peoples themselves as well as their elected and appointed public officials. It is said that the only constant is change, as in the extent to which an electorate is virtuous and generally knowledgeable, as well as in the related rise and fall of republics. One notable example is ancient Rome, which went from being a republic to a dictatorship under the purported exigencies of war. Lest the rise and fall of republics seems a bit too dramatic to be considered realistic, I offer the more modest thesis that a decline in virtue and knowledge among an electorate renders the public policy increasingly deficient in dealing with contemporary problems. The matter of climate change is a case in point.

According to a study at Yale in April 2013, Americans’ conviction that global warming was happening had dropped by seven percentage-points over the preceding six months to 63 percent. The unusually cold March—quite a reversal from the previous March—explains the drop, according to the poll’s authors. The cold may actually have resulted from a loosening in the artic jet-stream southward—like a rubber-band whose elasticity has been compromised—due to more open water in the arctic ocean and thus less temperature differential in the air. Even so, only 49% of Americans believed that human activities were contributing to global warming. In fact, only 42% of Americans believed at the time that most scientists had concluded that global warming is really happening. Thirty-three percent of Americans were convinced that “widespread disagreement” exists among scientists.

In actuality, a study showed of more than 4,000 articles touching on human-sourced climate change, 97% of the scientists having written the articles conclude that human-caused change was already happening. Less than 3% either rejected the notion or remained undecided. “There is a gaping chasm between the actual consensus and the public perception,” one of the study’s authors remarked. “It’s staggering given the evidence for consensus that less than half of the general public think scientists agree that humans are causing global warming. This is significant,” the author concludes, “because when people understand that scientists agree on global warming, they’re more likely to support policies that take action on it.” Going back to Jefferson and Adams, ignorance among the electorate in a republic can be sufficient to divert enough political will that legislation sufficient to deal with the problems facing that republic is thwarted.

It is likely that some of the apparent ignorance on global warming could actually be partisan aggression. If President Obama favors policies predicated on the assumption that human-sourced global warming is underway, his support could be enough for some Republicans to hold firm in their denial of even other-sourced global warming. In holding knowledge hostage to score cheap partisan points, those citizens are not evincing much virtue. James Madison in particular would say that the partisanship itself should be counted as a vice.

If Jefferson and Adams were correct that a virtuous and knowledgeable citizenry is vital to the continuance of a republic, the extent of ignorance and partisan vice related to global warming in spite of the nearly unanamous scientific conclusion and the huge stakes involved may suggest that the American republics and the grand republic of the Union may be on borrowed time (and money). Moreover, that the ignorance and vice pertains to global warming enlarges the implications to include the continuance of the species. That is to say, a virtuous and educated species may be necessary for its very survival.

See this PSA on global warming: http://www.thewordenreport.blogspot.com/2013/05/global-warming-psa.html


Academic Sources:

Philip Costopoulos, “Jefferson, Adams, and the Natural Aristocracy,” First Things, May 1990.

Yale Project on Climate Change Communication, “Americans’ Global Warming Beliefs and Attitudes in April 2013,” Yale School of Forestry and Environomental Studies, 2013.

John Cook, Dana Nuccitelli, Mark Richardson, et al, “Quantifying the Consensus on Ahthropogenic global warming in the scientific literature,” Environmental Research Letters, 8 (2013) (2), pp.

Press Source:

Tom Zeller, “Scientists Agree (Again): Climate Change Is Happening,” The Huffington Post, May 16, 2013.

A "Banking Union" or Coordinated State Laws and Regulations?

A subtle though important difference exists between American and European federalism, each of which covers both the "kingdom" (i.e., early modern, now mostly republics) and "empire" (i.e., ancient and early modern, now usually huge federal systems) scales. So I am referring to federal systems like the U.S., E.U. and Russia (and U.S.S.R), rather than to federal systems within any of their respective political subunits (e.g., Belgium, the Netherlands, and Germany). The difference between the E.U. and U.S. that I discuss here can be grasped by looking at the two competing proposals for federal bank regulation in the European Union. The crucial question facing the E.U. finance ministers concerns which system of government--the federal or state--should take the lead legislatively and in enforcement. Under one of the proposals, the regulations would begin as a broad directive formulated at the E.U. level. The state legislatures would then translate the general (i.e., shared) principles into statute law and hand enforcement over to state regulatory agencies.  With both federal and state legislative bodies involved, this type of coordinated federalism could be an improvement on the American model. The other proposal is more in line with that model, with E.U. legislative and regulatory bodies constructing the "banking union."  Although the motivations doubtlessly have much to do with money, the question of whether the E.U. will become more European or American is also relevant.

The "American-type" proposal, supported by Jörg Asmussen, Germany’s representative at the European Central Bank, favors “a single resolution regime, a single resolution fund, which is paid for by bank levies, and a single resolution authority.” In other words, the regime, fund and bank resolution authority would be at the E.U. level, just as the Dodd-Frank Act is implemented at the U.S. level rather than by the states in a coordinated fashion. Both cases include having money redistributed across state lines.

Because the state governments have relatively more power at the E.U. level than is the case in America, a large state such as Germany that would be paying out can be expected to object, and it has. Wolfgang Schäuble, Germany’s finance minister, complains that the proposal would require changes to the treaties that serve as basic law of the E.U. As if passing an amendment to the U.S. Constitution were not arduous enough, the comparable process in the E.U. includes referendums in some of the states that would hold the process up. The market will want stability before the treaties could be ratified by enough states in the "euro-zone," Schäuble argued.

 

      This picture depicts the distinctive European model of modern federalism wherein the state governments play a salient role in implementing (and modifying) federal law.   source: mapperywordpress.com

 

Accordingly, Schäuble proposed a more European approach to federalism. "Current treaties don't give enough foundation for a European restructuring authority," he told reporters. "You can do the same thing very well with a network of national authorities." What he had in mind is the directive, a legislative device at the E.U. level that sets a broad policy that the state legislatures put into more specific law. The policy language in the directive is supposed to result in states laws that are coordinated even if not directly. No such devise is known to the American Congress, which alone legislates federal law, and thus without particular regard to the differing circumstances of the several states. Even though Schäuble's proposal is more distinctively European, not all European officials are climbing aboard. 

Specifically, not everyone is convinced that changes to the treaties would be necessary for a so-called “banking union” to be legislated and run at the federal level. Jeroen Dijsselbloem, the Dutch finance minister, and European Commission economics chief, Olli Rehn, have pointed to the division of opinion over the issue of treaty change. According to the Wall Street Journal, Olli Rehn “said the commission, the EU's executive branch, believes the agreed elements of the banking union, including the common bank-resolution mechanism and fund, could be implemented within the existing legal framework but said legal experts were looking into the issue for a definitive answer.” In other words, the question of whether a single federal regulatory agency or multiple (coordinated) state regulators should be adopted depends at least in part on whether treaty changes would be necessary.

Of course, the government officials could decide to go for  a single banking regime rather than 27 coordinated regimes even though the treaty-amendment process would be slow and cumbersome. Schäuble’s stated point is that the extra effort could be obviated without sacrificing on the regulatory performance by choosing his proposal. His real point has been that the state of Germany does not want to contribute to a common bank-resolution fund that would involve German money being used to bail out inefficient banks in corrupt states, like Greece and Spain. So I suspect Schäuble would object to a federal banking resolution regime even if legal experts were agreed that no treaty changes would be necessary. Of course, at that point, he could simply point out that his proposal is less like American federalism, and he would instantly become the man of the hour in Europe.

In my view, the E.U. has been too obstructed by an excessive amount of power being held by the state governments at the expense of federal governing institutions. That German reluctance to pay for banks in poorer states could sink any "banking union" in the E.U. demonstrates just how counter-productive and contrary to the common good a state-centric federal system can be.

To be sure, increasing the involvement of the state governments beyond their role in the European Council to include legislating federal policy into more specific state law that reflects not only a state's particular context, but also  the general principles set in the directive at the federal level captures the distinctive benefit of federalism--namely, being united generally yet diverse locally. However, the danger facing the European project even after fifty years is that the preponderance of power lying with the state governments relative to federal officials and bodies not consisting of state leaders could ultimately result in dissolution of the Union. Schäuble’s proposal implies a fear of consolidation even though the opposite is much more likely, given where the center of gravity exists in the E.U. solar system.

Therefore, Schäuble's more "European" proposal would be preferable, both in terms of federalism and as an alternative to the American model, were the European state governments not already so powerful even at the E.U. level. Schäuble's proposal of having the state governments actively involved in legislating federal policy at the state level could provide a stronger, more integrated federal system than is the case in the U.S., whose states had already been nearly relegated to local matters. Of course were the Europeans to achieve more of a balance of power federally (including reducing the power one state to stand in the way of federal legislation), the European version of modern federal could be an improvement on the earlier American model.

Source:

Matina Stevis and Tom Fairless, “Euro Zone Grapples With Banking Union,” The Wall Street Journal, May 13, 2013.

Bloomberg News "Speed" Journalists Exploiting Terminal Subscribers: On the Failure of Firewalls

In 2012, I was stunned to hear an official of Deloitte place all his faith in the internal firewalls that he had constructed in the CPA firm to inhibit the exploitation of the conflict of interest that exists between the auditing and consulting divisions. A year later, Matt Winkler of Bloomberg apologized because reporters in the news division had used clients’ proprietary information from the Bloomberg terminals to report financial news stories before other news organizations. The firewall between selling terminals and reporting news had not been sufficient to prevent exploitation of the conflict of interest. There is a lesson here for any multi-divisional company or bank that is relying on firewalls.

 

The New York Times reported in May 2013 that reporters at Bloomberg News had been “trained to use a function on the company’s financial data terminals that allowed [the journalists] to view subscribers’ contact information, and, in some cases, monitor login activity in order to advance news coverage.” Login activity includes email, the content of which could be quite valuable to a hungry journalist. Even though Bloomberg News is a separate division at the company founded by Michael Bloomberg, who went on to be mayor of New York City, reporters were “nonetheless told to use the terminals to get an edge in the competitive world of financial journalism where every second counts.” The journalists’ training “included informal tips on how to use a function called UUID to locate sources who were also subscribers.” In terms of understanding why internal firewalls are insufficient to prevent the exploitation of structural conflicts of interest for gain, the mention of “informal tips” is significant. The overcoming of the walls can be “informal,” and thus beyond the radar screens of the firewalls’ enforcers. It need not be that a company official of sufficient rank over both divisions involved in a conflict of interest sanctions one side to jump over. The people on one side can seep through the semi-porous walls informally, and thus without prodding.

 

Simply stated, some journalists at Bloomberg News “favored breaking news over strict subscriber confidentiality.” Those journalists, not being based in the division selling terminal subscriptions, had little regard for the subscribers, or at least less regard for them than being the first to break a news story. Like speed-trading, the focus on breaking news at Bloomberg News has been oriented to splicing seconds to gain an advantage over the competition. Whereas the speed-trades are at the expense of individual investors who do not have access to the technology, the “speed-journalism” at Bloomberg has been at the expense of the customers who were subscribing to the company’s financial-information terminals. This is ironic because the news division at Bloomberg had been established to increase terminal subscriptions.

 

Ethically, both the speed-trading and Bloomberg’s speed-journalism are unethical in that gain is achieved by harming others who do not deserve to be harmed thusly. In Kantian terms, the people harmed are not being treated as ends in themselves, as any rational being should be treated due to the absolute value of reason itself as the assigner of value. Put another way, were every journalist in Bloomberg to exploit terminal subscribers, they would unsubscribe and Bloomberg itself would go out of business, in which case the journalists could not invade subscribers’ privacy because there would no longer be any subscribers (or Bloomberg).

 

In Humean terms, the exploitation of confidential information could be expected to give a normal bystander a sentiment of disapprobation, or feeling of disapproval, which to Hume is the moral judgment. In utilitarianism terms, the harm to subscribers would probably outweigh the benefit to the relatively few journalists and to the company itself from being the first to break a story. In terms of the company, the loss of subscribers would likely cost more than the company would gain from beating out other news organizations by seconds in breaking news.

 

With the exploitation of the conflict of interest being unethical, so too is relying on an insufficient firewall. In other words, such reliance is not only naïve, but also unethical. Ethically, companies in which firewalls are being considered would do better in selling off one of the two divisions that are involved in the potential conflict of interest. Admittedly, at Bloomberg this would involve giving up a means of promoting the terminals, but as we have seen, that means could also be used in such a way as to deflate the number of subscriptions. Even if there were no financial downside, giving up the means of promoting the other division’s product could be a good investment, ethically speaking, as the internal firewall could not really be relied on to forestall exploitation of the conflict of interest. Put another way, the investment would pay off in keeping the company’s reputational capital from falling.  

 

Source:

Amy Chozick, “Bloomberg Admits Terminal Snooping,” The New York Times, May 13, 2013.

Obama Mimics Cameron's View of the E.U.

President Obama has said he “wants a strong UK in a strong EU.” In his joint news conference with David Cameron of the EU state of Great Britain on May 13, 2013, the president elaborated on his earlier statement in a way that reveals his view of the EU as an entity. In short, he shares Cameron’s view that the EU is essentially a number of economic relationships rather than a political union of states.

                                                                      President Obama's remarks on Great Britain in the E.U. were particularly interesting.   

In the news conference, Obama said, “With respect to the relationship between the UK and the EU, we have a special relationship with the United Kingdom, and we believe that our capacity to partner with a United kingdom that is active, robust, outward looking and engaged with the world is hugely important to our own interests as well as the world, and I think the UK’s participation in the EU is an expression of its influence and its role in the world as well as obviously a very important economic partnership.” Interestingly, the EU is portrayed here as an economic partnership, tantamount to being a number of trade treaties between sovereign countries acting in their respective national interests.

In terms of Britain’s place in the EU, Obama referred to it as a relationship, implying that the UK and EU are partners. Specifically, he said, “You probably want to fix what is broken in “a very important relationship.” Finally, stressing the EU as an alliance of sorts, the president pointed to the “tough negotiations” in the EU, as “you have a lot of countries involved.” That is, the EU is essentially a number of countries negotiating to reach deals on multilateral treaties.

Barak Obama’s construal of the E.U. ignores the vital point that the states have ceded significant governmental sovereignty to the Union. It is therefore not simply a nexus of relationships between countries. Unlike NAFTA, the E.U. has a supreme court, the European Court of Justice, a parliament, and an executive branch. Considering these institutions and the dual sovereignty qualifying the E.U. as a modern federal system, Obama’s decision to mimic Cameron’s view of the EU can indeed be subjected to criticism. Obama's antiquated view of the E.U. and one of its states is ironic, given that the U.S. itself is an empire-scale federal system.

Source:

“Joint News Conference with PM David Cameron,” CSPAN, May 13, 2013. Accessed on May 13, 2013.

Big Banks Opposing Anti-TBTF Regulations: A Conflict-of-Interest

Being able to count on a person or company thereof having sufficient motivation to provide a self-defense is no feat, for self-interest is a staple—perhaps the staple—in human nature.  It should be no surprise, therefore, that after raking in $102 billion in subsidies, including lower lending costs due to the general perception that the government would bail them out, and repaying the TARP money, the biggest American banks were sufficiently re-energized (i.e., self-motivated) to go on the offensive to protect their places on the perches under fire. Specifically, they planned a lobbying campaign to fend off increasing Congressional calls to break up the banks to solve the too big to fail problem (which includes the subsidy problem that exacerbates the wider problem). There are problems with the lobbying itself—problems caught in America’s blind-spot even as they subtly undermine the body politic.

To begin with, the banks’ lobbyists suffer from a conflict of interest in providing credible “facts” that support the financial interests of the banks being represented. Sadly, regulatory agencies often get into the habit of relying on such information. Congressional committees even allow such lobbyists and even particular corporations to write the very law that will impact them. It is no accident that those lobbyists and corporations make huge campaign contributions. In addition to the influence that they purchase, bankers (and business practitioners in general) have an amazing ability to scare elected representatives and appointed government officials. I submit that greater awareness of the conflict of interest ought to reduce the fear factor.

As an example of how fear enervates governmental efforts to hold banks accountable, U.S. Attorney General Eric Holder claimed that some banks were too big to jail because prosecuting such large and interconnected banks could harm the economy. All a banker executive of such a bank need tell prosecutors is that a judgment against the bank would trigger a run on the bank and a resulting industry-wide credit-freeze  and the U.S. Department of Justice lays off the bank in spite of the probable criminality. Should such a dire warning from a banker of such a bank simply be accepted at face value by the department, given the bankers’ conflict of interest? It is in the bankers’ interest that the prosecutors back off out of fear of systemic risk, and the bankers know this. The prosecutors should not take the “fact” of probable catastrophe at face value, and yet they often do. Where a subterranean motive exists, the existence of a subterfuge should be suspected not relied on.

As banks such as Morgan Stanley, Bank of America, and Goldman Sachs were “shedding lucrative assets that would have required them to hold more capital to compensate for their risk” in 2013, bankers from the big banks were “telling members of Congress that every additional dollar in capital they are required to hold translates into $8 to $10 less to lend.” Because it is so much in the banks’ financial interests to make such a claim, it should be treated as a problem rather than a given. Back in the days of the TARP bailout, the big banks did not use the cheap money to lend more. Therefore, self-serving claims about future likely lending should not be swallowed whole.

The issue is the validity of self-serving claims in a debate. Ken Bentsen Jr, head of the Securities Industry and Financial Markets Association, said that the expected cumulative effects of the changes on the system are enough for the banking industry to have “legitimate concerns that it will be hard to make loans and raise capital for businesses.” Just because an official of a financial sector association claims that the concerns are legitimate does not mean that the public and its legislative represenatives should assume the legitimacy as an assumption in determining how to reduce the risk of banks that are too big to fail.

    The banking lobby snagged the ethos of "external authority" by hiring Tony Fratto, a former Bush aide. Besides getting his government contacts, the lobby's claims can have greater credibility societally and in Congress.    AP

 

That several banks and the Financial Services Forum hired Tony Fratto, a former Bush administration official, to provide “rapid response” to claims that the biggest banks are too big indicates that the bankers realize that the credibility of their claims has a certain currency. So too does making public the fact that Stephanie Cutter, a former advisor to President Obama, and Ed Gillespie, a former Bush official, have been giving the banks advice on Congressional efforts like the legislation co-sponsored by Sens. Vitter and Brown that would significantly increase capital cushions so large banks would be forced, in effect, to shrink.

The external ethos of former government officials is intended to add authority, and thus credibility, to the bankers’ self-serving retorts. An implicit assumption in making the hires is that the self-interested position of the banks could compromise the validity of their responses to the criticism of banks still instantiating too much systemic risk. External observers ought to be aware of this assumption themselves in order not to be manipulated. As Richard Davis, CEO of US Bancorp, said after his attempt at broadening the coalition to include regional and community banks, “If just the big banks oppose it, it will be a problem.” The other CEOs of the big banks rejected his proposal, preferring to have the Financial Services Forum, which represents only the 19 largest American financial institutions, handle the threat of additional legislation. This demonstrates that the bankers themselves do not adequately appreciate the compromising nature of their banks’ financial interest on their collective responses.

To be sure, the banking executives have been getting away with quite a bit of credibility on claims that are self-serving with respect to the banks. Members of Congress, and even the general public, typically take the bankers’ warnings at face value and relent in holding the bankers accountable. I suspect that the bankers exploit this naivety; otherwise, they would have felt the need for a broader coalition. The result of the manipulation is that bankers have been able to weaken or circumvent new regulations such that the risk to the public remains excessive. For this pattern to break, the conflict of interest would have to be made transparent societally and in the political discourse.

Sources:

Deborah Solomon, Robin Sidel, and Aaron Lucchetti, “Big Banks Push Back Against Tighter Rules,"
The Wall Street Journal, May 8, 2013.

Mark Gongloff, “Too-Big-To-Fail Banks Have Raked In $102 Billion in Subsidies Since 2009: Report,” The Huffington Post, May 10, 2013.

 

Jamie Dimon as Chair and CEO: A Conflict of Interest in Corporate Governance

Chairman of JPMorgan since 2006 and CEO a year longer, Jamie Dimon faces a stockholder vote on May 21, 2013 on whether he should be allowed to retain both roles, given the bank’s $6.2 billion trading loss, deeply flawed risk-management oversight, and “credibility issues” with regulators. After two shareholder advisory firms issued statements recommending the split due to questions about the independence and qualifications of several board members, directors and executives went into campaign overdrive in contacting major stockholders. The board put out a statement strongly endorsing Dimon continuing as chairman and CEO. Two directors, Lee Raymond and William Weldon, went as far as to write a seven-page letter urging the stockholders to oppose the split. The “most effective structure” for the bank is to have Dimon “serving as CEO and chair. . . . It would be a mistake to change it now.” Not only would it be a mistake, the two directors assert, a vote to permanently bar the same person from serving concurrently in both capacities “could be disruptive to the company and is not in shareholders’ best interests.” Lest stockholders cave in utter panic, the directors (and the executives, including Dimon) had more than enough incentive to manufacture a doomsday scenario. This does not mean that it has any basis in fact. Put another way, the operative conflict of interest should be more transparent to the stockholders as well as in society.

 

The party-line of the executives and directors at JPMorgan has been that the bank is lucky to have Jamie Dimon, one of the best bankers in the world. Perhaps to up the ante, Dimon let it be known that of the downsides to a vote relieving him of the chairmanship, “one thing would be I might leave.” He might as well have said he would take all his marbles and stomp away mad. Such is the attitude in having to have it all. Besides holding himself ransom to manipulate the stockholders, Dimon was implying that if he couldn’t control the board whose main function is to hold the management (including the CEO!) accountable, he couldn’t do his job.

 

It is common for CEO/Chairs to maintain that it is necessary for the CEO to have all the reins, lest there be a power-struggle. Many years before Jamie Dimon's quagmire, I asked Mike Armstrong, CEO and chairman of ATT before his broadband strategy failed, why he opposed having someone else as chair of the board. He replied that he needed all of the authority for his broadband strategy to be implemented. “The buck has to stop with me for me to complete the broadband strategy.” Because he used President Truman’s saying about the U.S. Presidency, it occurred to me that the buck stopped with Truman even though he shared power with, and was restrained by Congress and the U.S. Supreme Court. In contrast, Armstrong assumed that consolidating all authority was necessary for the success of his plan. “With a separate chair,” he added, “the resulting strategy might not be all mine, so it would not be clear who is responsible should the strategy not succeed.” Armstrong was assuming that a chair and CEO occupy the same turf—that both come up with the strategy and therefore compete with each other.

 

The relation between a chair and CEO is vertical, not horizontal. Moreover, those roles are fundamentally different rather than overlapping. A CEO is in charge of implementing, or managing, the broad strategy decided by a board. Put another way, the board sets the general direction and the CEO sets about setting the course in terms of business strategy. Just as the CEO is not rightfully to be held responsible for the general direction, the board can rightfully hold the CEO accountable for the strategy within the general direction. A CEO being held accountable by a board chaired by another person is vested with sufficient authority to formulate and implement the business strategy and thus can be held accountable for it. Similarly, the stockholders can hold their board’s directors accountable for the success of the general direction even though the chair is not also the CEO.

 

                    Jamie Dimon, CEO and Chair of JPMorgan Chase.  The duality of roles can benefit him both personally and institutionally. NYT
 

Whether from a bloated or arrogant sense of entitlement or a fear of not being able to perform well enough or be fairly evaluated otherwise, insisting on being both CEO and chair of the board that holds the management accountable involves a conflict of interest, which, if exploited, is not in the interest of stockholders. “There’s a fundamental conflict in combining the roles of chairman and C.E.O.,” Anne Simpson, director of corporate governance at Calpers, said. One of the main tasks of a corporate board is to oversee the corporation’s management. If the CEO, who heads the management, is also heading the board tasked with overseeing management, the CEO is institutionally and personally tempted to influence the board to go easy on the management. Re-nominating and actively campaigning for the directors could be the quid pro quo that completes the tight, cozy circle of the dominant board-management coalition.

From the standpoint of systemic risk, a board easing up in holding the management of a bank too big to fail accountable or even looking the other way represents a danger to the entire financial system and even the global economy. “It’s all thrown into stark relief when you’re dealing with a company that’s too big to fail,” the New York Times observes. Lest this assertion seem like fear-mongering, JPMorgan had lost $6.2 billion the year before on a risky trade mislabeled as a “hedge” against risk. In its report, Institutional Shareholder Services (ISS) cites “material failures of stewardship and risk oversight” by the board and upper management. Glass, Lewis points its criticism at the directors on the board’s risk policy and audit committees. “We believe that shareholders may justifiably expect that the audit committee of one of the nation’s largest banks, and one of the largest participants in the global capital and derivative markets, should act to ensure that the bank’s traders cannot obfuscate the values of their positions with as much ease as evidently occurred in the London Whale matter.”  The report raises questions about the independence of several board members. Accordingly, the reduction in Dimon’s compensation should not be regarded as a sufficient remedy and safeguard.

The Wall Street Journal reports that the board of JP Morgan Chase reduced the compensation of James Dimon by 50% for 2012 because of the “London Whale” trading loss. In its decision, the board stressed that he bore “ultimate responsibility” for the trading failure. Dimon himself referred to the trading loss as “one huge embarrassing mistake.” Accordingly, the board set Dimon’s pay for 2012 at $11.5 million, down from $23.1 million in 2011. This decline was in spite of the bank’s record profit in 2012 of $21.3 billion. For the 4th quarter, the bank reported net income of $5.69 billion, up from $3.73 billion in the last quarter of 2011. The rationale for the reduced compensation lies in the fact that 2012’s profit would have been even more had the $6.2 billion loss not occurred.

Moreover, oversight, which failed in regard to the trade, is closer to the CEO’s function than is the change in profit. For example, a CEO should not receive a bonus for profit due to circumstances behind the firm’s control. Additionally, the board also delayed the vesting on 2 million stock options that had been awarded to Dimon in January 2008, pending “remediation relating to the CIO matter.” An internal investigation had found that the CIO unit’s judgment and handling of risk management were poor in regard to the trading loss. Dimon bore oversight responsibility on that unit. It is unlikely, however, that delaying vesting would matter at all to an already-rich person.

It is difficult to see how receiving $11 million represents a hardship. Were an American CEO’s compensation ten or eleven times that of the average worker, rather than over three hundred times, perhaps reductions in compensation would have greater impact on an executive’s subsequent performance. Moreover, the linkage between cutting the CEO’s compensation and achieving systemic improvement in the CIO unit is indirect at best. To have more confidence that such wholesale change will be accomplished, changes in the corporation’s governance are also necessary. The magnitude of the turnaround in terms of the culture, policies, processes and personnel dwarf what a compensation committee can do.

JPMorgan’s stockholders can ill-afford a compromised board protecting an entrenched management rather than the stockholders’ interests. Because part of the question before the stockholders is whether their board is independent of the management, allowing that board to serve as the ultimate decider on the split is problematic due to the conflict-of-interest. The bank’s corporate governance “basic law” is flawed, therefore, in that the shareholder vote on the split (and even on specific directors!) is nonbinding. Although the Wall Street Journal notes that directors “could face pressure to act if more than half of all shareholders want the positions divided,” relying on pressure—particularly if the board has been contaminated—is naïve and woefully unfair to the stockholders’ property rights. Whether on a plurality or majority basis, stockholder votes should be binding on the board and management—both of which are the agents of the stockholders (e.g., fiduciary duty).

It is astonishing (and telling), therefore, that Dimon said that whether or not to split his two roles is “a policy decision” that should be made by the board rather than the stockholders. His stance assumes that the board would be acting in the stockholders’ interest rather than that of the management. With Dimon serving as chair of that board, the board’s decision would likely be made in his interest rather than that of the stockholders or even the bank itself.

Whereas Dimon was likely contending that the “policy decision” should be made by the board looking after the stockholders’ interest rather than by the stockholders themselves because the directors have more business or banking expertise, I contend that managerial expertise is not requisite to evaluating proposed changes to a system of corporate governance. That is to say, the business judgment rule should not trump property rights on corporate governance proposals. Governance is not management. Political theory and judgment are more salient in governance, hence business or managerial expertise does not enjoy the prerogative.

In the sphere of public governance, constitutions (i.e., basic law) are not written as statutes. Therefore, citizens need not be lawyers in order to make a judgment on a proposed constitutional amendment. When amendments are written in legalize, as was the case in Florida’s 2012 election, the fault lies with the legislators who wrote the amendments rather than the voters who could not understand it. That is, the use of technical writing does not give lawyers the prerogative in the matter of adoption.  The voters would rightfully object were lawyers to demand that they should vote on the electorate’s behalf, for the good of the electorate. The right to vote trumps a lawyer’s expertise even if legalize is erroneously used on questions put on the ballot.

In terms of corporate governance, writing a proposal to be put before the stockholders in technical business language does not justify having the directors or executives rather than the stockholders make the decision. Being of “basic law,” governance proposals are not so esoteric. Even if they were, the increased role of institutional investors as activist stockholders deflates Dimon’s self-serving argument that the board knows best how to decide a “policy” on corporate governance. The fact that ISS recommended voting against three of the bank’s eleven directors while Glass, Lewis urged stockholders not to vote for six of the directors suggests that the two firms had analyzed particular directors from the standpoint of independence rather than merely saying making a broad statement, such as that the board lacks sufficient independence to act on behalf of stockholders rather than the management.

Even with a board composed of corporate governance experts, decisions on a corporation’s system of governance are rightfully the prerogative of the owners rather than their agents, even if those agents would make better choices on behalf of the stockholders. To subvert a principal-agent relationship because an agent has expertise puts effectiveness above rights. Add in the conflict of interest and upholding the rights becomes even more important. Until these principles are grasped by investors and business managers, the practitioners will continue to have an unwarranted advantage over the owners.

 

 

Sources:

Susanne Craig and Jessica Silver-Greenberg, “Small Firm Could Turn the Vote on Dimon,” The New York Times, May 7, 2013.

Dan Fitzpartrick and Kirsten Grind, “Amid Vote, Dimon Has Considered Departure,” The Wall Street Journal, May 11, 2013.

"Florida Ballot 2012: Legalize Disenfranchising Voters"

 

 

 

 

 

 

 

 

Does Austerity Work?

Does raising taxes and cutting government spending reduce a government’s deficits and thus debt? Confine consideration to more tax revenue and less spent and the theoretical answer is yes; it being a simple matter of mathematics. Include the impacts of raising taxes and cutting spending and the answer become far less straightforward. More paid in tax means less disposable income, which means less consumption and thus less produced (i.e., GNP). A government spending less also means less consumption in the economy, and therefore even less to be produced to meet demand. In short, austerity is recessionary. Whether the ratios of deficit and debt to GDP increase depends on how much the numerators drop relative to the decrease in GDP. We can look at the E.U. for some empirical evidence.

 

For the states that have adopted the euro currency, government spending exceeded tax revenue by 3.7% in 2012, down from 4.2% in 2011. Add in the remaining E.U. states and those figures are 4 and 4.4 percent. In fact, 2012 was the fourth straight year of deficit reductions in the European Union. So far, everything looks to be in line with the theory: adding revenue and reducing what is spent reduces a deficit. Lower deficits in turn mean that the government debt does not increase as much from year to year than would be the case were the deficits larger.

 

Unfortunately, as the excess spending was reducing in percentage terms over the revenues collected, the debt burden, which is simply the government debt relative to GDP, was increasing. In the states that use the euro, government debt as a percentage of total economic output, or GDP, increased to 90.6% in 2012 from 87.3% in 2011. Include the remaining states and public debt rose to 85.3% from 82.5 percent. Interestingly, the difference between the “euro-zone” and the entire Union was around 5% in both years. Relative to the E.U. as a whole, the euro-zone debt burden had not improved or worsened. Both the euro-zone and all of the E.U. states together saw a roughly 3% debt-burden increase. Why is that?

 

For the states undergoing austerity, decreases in GDP exceeded the decreases in the deficits. Although exogenous factors such as a dip in global trade could have played a role, it is also possible that the recessionary impacts of the austerity exceeded the decrease in the deficits. Austerity reduces demand in the economy and increases unemployment, which in turn puts pressure of governments to increase social spending—either by raising taxes or increasing the deficit, and thus debt. It can be a rather vicious cycle, with the most vulnerable people put most at risk. Even if GDP contracts without any increase in the deficits, we would expect to see the total debt-burden in the euro-zone worsen relative to the combined debt-burden of all the E.U. states, unless a number of non-euro-zone states were also undergoing austerity.

 

                                           If austerity kills dignity, then pressure on governments to relax spending cuts can be expected.   source: rt.com

In any case, at least some experts have concluded that austerity in practice is less stellar than its advocates have admitted. Ben May, an economist at Capital Economics, argues that “the fact that most economies’ deficits have fallen by less than expected and that the consolidation has coincided with deeper than anticipated recessions confirms that the costs have been large.” He noted that the state of Germany, which posted a budget surplus in 2012, accounted for 60% of the improvement. Yet how is it then that the debt-burden of the euro-zone did not change in percentage terms relative to all of the states put together?

Source:

David Jolly, “E.U. Austerity Shrinks Deficits, If Not Debt,” International Herald Tribune, April 23, 2013, p. 15.

Gilding the Dandelion: Management as Leadership

Wendy Lea, the CEO of a customer “experience” start-up, discusses her leadership approach in an interview with the New York Times. I contend that what she takes to be leadership is actually management. Put another way, she is gilding the leadership lily. Unfortunately, that practice is ubiquitous in the business world. Motivating the subterfuge, I submit, is a tacit admission that managing is actually pretty boring.

Bryant begins the interview discussing her entrepreneurial drive as “a combination of adventure quest and problem-solving.” Synthesizing the various elements, she comes up with a vision for the start-up and comes to believe fervently in the potential of the vision even as she must deal with a myriad of problems. This distinction between having a lofty vision above the daily fray and having to deal with hackneyed problems “on the ground” is a good way of distinguishing leadership from management. Unfortunately, she gets confused on the implications.

For example, she distinguishes her ambition, vision and concern for people as if all three were under the rubric of leadership style. But in distinguishing empathy and compassion, she advocates applying only the latter to relating to her subordinates. “I have had to teach myself to be simply compassionate,” she explains, “so that I can hear the problems of one of my employees is having and not lose myself and try to be them. That allows me to lead more effectively.” However, under her own general distinction between holding a vision as an ideal and having to deal with concrete problems on the ground, the problems of her employees are of the latter and thus not of leadership (or leading more effectively).

                                                         A sea of managers, each yearning to be reckoned as a leader.   Source: treehugger.com
 

What, then, does it mean to lead more effectively if it is not another name for supervising? From Bryant’s own broad description of leadership in terms of vision, it follows that leadership effectiveness involves remaining committed to one’s vision and effectively communicating it to others, whether they are inside or outside of one’s organization, such that they come to value the vision. In the end, leadership effectiveness is measured by the extent to which the vision has become actual. The source of the “management as leadership” category mistake may be the extending of leadership to include the implementation of the change “on the ground.” Just because administration can serve leadership does not mean that that which is administration is therefore leadership. Equating or assuming identity between two related but distinct things is known as the equivalence fallacy. Furthermore, extended to include dealing with virtually any problem, the concept of leadership would not be able to retain a distinct meaning that is clearly delimited. In other words, the term would become ambiguous, and, as such, it would be vulnerable to being twisted to serve personal or occupational agendas. Distended still more, it could become a tautology—covering virtually anything and thus losing all meaning. As used in the field and perhaps even by some corporate sycophants in the classroom, the concept of leadership will continue to follow this trajectory unless the definitional relativity is resisted and confronted.  

In conclusion, having to deal with banal problems on a daily basis, "putting brush fires out," is admittedly not the most exciting job on Earth. Even so, the dislike or boredom does not justify grouping problem-solving together with “leadership vision” and “leadership style” under the rubric of leadership. Alternatively, it might be asked whether so much management is really necessary in modern business. Capitalism has not always manifested as the managerial or corporate sort that is populated by gigantic organizations. The many levels of management in a large company can be viewed as a diseconomy of scale both in terms of integration costs and work satisfaction. If so, optimality may be found in a smaller, less complex organization than is typically assumed. In other words, rather than make management into something it is not, the emphasis on management can be lessened.

Source:

Adam Bryant, “A Leader’s Test: Balancing Drive andCompassion,” The New York Times, May 3, 2013.

 

Can the Federal Reserve Handle Banks Too Big To Fail?

The biggest banks operating in the U.S. reaped an estimated $13 billion of income by taking advantage of the Federal Reserve’s below-market rate of .001% on $7.7 trillion in emergency loans in the wake of the credit freeze in September 2008. Rather than using the additional funds to increase lending, the banks fortified reserves and paid bonuses out to executives. Had member of Congress had been able to anticipate all this, it is possible that they would have prescribed stronger medicine, perhaps even including breaking up the banks with over $1 trillion in assets.

As Shakespeare has Marcellius say in Hamlet in reference to moral and political corruption, “something is rotten in Denmark.” One might add the line, “Out, out damn spot!” from Macbeth. Bloomberg News reports that “the Fed and its secret financing helped America’s biggest banks get bigger and go on to pay employees as much as they did at the height of the housing bubble.”

Total assets held by the six biggest U.S. banks increased 39 percent to $9.5 trillion on Sept. 30, 2011, from $6.8 trillion on the same day in 2006, according to Fed data reported by Bloomberg. Employees at the six biggest banks made twice the average for all U.S. workers in 2010, based on Bureau of Labor Statistics hourly compensation cost data. “The banks spent $146.3 billion on compensation in 2010, or an average of $126,342 per worker. That’s up almost 20 percent from five years earlier compared with less than 15 percent for the average worker. Average pay at the banks in 2010 was about the same as in 2007, before the bailouts.”

When members of Congress were voting on the $700 billion TARP, they were being kept in the dark on the Fed’s loans. The general public was out of the loop as well. Ted Kaufman, a former U.S. senator from Delaware, said that if Congress had been aware of the extent of the Fed rescue, the knowledge “could have changed the whole approach to reform legislation,” He claims he “would have been able to line up more support for breaking up the biggest banks. More than three years after the financial crisis, Sen. Sherrod Brown of Ohio observed, “There are lawmakers in both parties who would change their votes now [i.e., in December, 2011].” Byron L. Dorgan, a former senator from North Dakota, says the knowledge might have helped pass legislation to reinstate the Glass-Steagall Act, which for most of the last century separated customer deposits from the riskier practices of investment banking. Had people known about the hundreds of billions in loans to the biggest financial institutions, they would have demanded Congress take much more courageous actions to stop the practices that caused this near financial collapse.”

The government’s response to the crisis has not significantly reduced systemic risk, even with the higher reserves requirements for the biggest banks. According to Bloomberg, “Kaufman says some banks are so big that their failure could trigger a chain reaction in the financial system.” For so few banks to hold so many assets is “un-American,” says Richard W. Fisher, president of the Federal Reserve Bank of Dallas. “All of these gargantuan institutions are too big to regulate,” he continued. “I’m in favor of breaking them up and slimming them down.” Oliver William, an economist, concluded that the “banks that were too big got even bigger, and the problems that we had to begin with are magnified in the process.” A conflict of interest may be part of the underlying cause.

It could be that the bankers at the Federal Reserve Bank have been overly friendly to the bankers getting the funds. This conflict of interest could expose the Fed to losing lent funds should one or more of the troubled banks become insolvent and with insufficient collateral. Therefore, in an attempt to make the Fed accountable in regard to its emergency lending,  Congress included in its Dodd-Frank legislation (2010) requirements stipulating that the Fed develop and submit guidelines regarding selection criteria to be applied to banks seeking emergency loans and requirements by which bank collateral is to be reckoned as sufficient.

The publication of selection criteria would reduce the risk of moral hazard. The cost of borrowing for so-called too-big-to-fail banks is lower than that of smaller firms because lenders believe the government won’t let them go under. The perceived safety net creates what economists call moral hazard—the belief that bankers will take greater risks because they’ll enjoy any profits while shifting losses to taxpayers.” Jeremy Stein, a Fed governor, has spoken of moral hazard, according to the New York Times, as “the belief that government support can subsidize banks and make them less careful about the dangers inherent in their businesses.” Depending how strict the selection criteria are, “the banks might then realize that the Fed will not be a pushover in times of market stress.” At least as of April 2013, the Fed had not followed through on the mandate in Dodd-Frank that the Fed promulgate rules.

The Fed might have good reason to stave off rules that could restrict the Fed’s flexibility in a crisis. “The Fed might be thinking, ‘We don’t want to make a lot of rules that might hinder us from acting in an emergency situation that we can’t anticipate,’” Michael Bradfield, a former general counsel at the Fed, remarked. “I think the Fed should have reasonably broad discretion to deal with systemic issues,” he continued, “(b)ut then the question is, What’s systemic and what’s really needed, and what conditions ought to accompany that lending?” Demanding too much in collateral, for example, might mean that some very big banks that are hemorrhaging capital might not qualify for an emergency loan and go under as a result. If those banks are too big to fail, the entire financial system could follow suit.

Unfortunately, discretion at the Federal Reserve could enable the “insider” conflict of interest to be exploited. Such exploitation is likely from the banking lobby as well as from the Federal Reserve. Bloomberg reports that “(l)obbying expenditures by the six banks that would have been affected by the legislation rose to $29.4 million in 2010 compared with $22.1 million in 2006, the last full year before credit markets seized up—a gain of 33 percent, according to OpenSecrets.org, a research group that tracks money in U.S. politics. Lobbying by the American Bankers Association, a trade organization, increased at about the same rate.

In a rare glimpse of how the banking lobby operates, there is evidence that the lobbying firm Clark Lytle Geduldig & Cranford sent a memo to the American Bankers Association expressing worry that the Occupy movement and the Tea Party movement might find common ground and become a potentially potent threat by joining forces. Tellingly, the memo’s writers reveal how even potential threats to big business are relegated: “If we can show they have the same cynical motivation as a political opponent it will undermine their credibility in a profound way.” Using the media outlets, the “messengers” of powers vested in the status quo can quickly discredit others, as if from a popular wave of mass opinion. Meanwhile, the matter of the very existence of the banks too big to fail continued to float below the radar—the media dutifully transmitting the transparent issue of tents and evictions in various cities. In other words, even the occupiers—the anarchists outside the system!—allowed themselves to be played. Perhaps we are all being played.

Sources:

Bob Ivry, Bradley Keoun, and Phil Kuntz, “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress,” Bloomberg Markets Magazine, November 27, 2011.

Peter Eavis, “Fed Still Owes Congress a Blueprint on Its Emergency Lending,” The New York Times, April 23, 2013.