Author: ken

Have We Learned Anything From 2007?

The financial analysts who rank public offerings for the ratings agencies, such as Standard & Poor’s and Moody’s, like to think they can be objective.

Their reliability is what they sell, really, along with expertise in puzzling out balance sheets. And no doubt they are acutely embarrassed by the role they played in the credit bubble that led up to the 2007 crash, when it turned out that they gave AAA ratings to many bonds based on worthless mortgages.

In retrospect, it has become clear that their mistakes were largely based on the fact that few analysts really understood the complex derivatives they were being paid to rate. Those new financial products ingeniously repackaged countless mortgages, slicing and dicing them, so that it became virtually impossible to grasp the risks.

But there was another factor that contributed to their failure: they were not fully motivated to puzzle it out. The very banks issuing the bonds paid their fees and wanted the best ratings for their products. The agencies, for their part, wanted the banks’ business. Moreover, the competitive frenzy that drove the market left little room for reflection and investigation. The virtually insatiable demand for the bonds, as money poured into America seeking safe returns, allowed so little time to study the risk that whatever reservations or qualms the analysts might have had about them were brushed aside.

Today, no doubt, with a better grasp of the financial complexity of these bonds, the analysts are in a better position to assess their risk. But do they grasp the psychological risk of their own complicity? Do they overvalue their ability to be objective?

The New York Times reported recently that the pressure of competition in the financial industry seems to be pushing the largest of the agencies, S. & P., to repeat the pattern: “industry participants say it has once again been moving to capture business by offering Wall Street underwriters higher ratings than other agencies will offer. And it has apparently worked. Banks have shown a new willingness to hire S. & P. to rate their bonds, tripling its market share in the first half of 2013. Its biggest rivals have been much less likely to give higher ratings.”

The return of the “ratings game,” as The Times called it, suggests that S. & P. doesn’t grasp the more insidious risk to its own credibility – not to mention to investors – of ignoring its vulnerability to unconscious collusion.

“In its response to the government lawsuit, the company said that its ratings had always been ‘uninfluenced by conflicts of interest.’” (See, “Banks Find S. & P. More Favorable in Bond Ratings.”) That is a particularly strong and unequivocal statement to make, especially in the light of its past failures.

No doubt, their statement was crafted by lawyers mindful of the on-going investigations into its behavior, up to and including 2007. But it is also likely that S. & P. proud of its new sophistication in analyzing risk, post 2007, is beginning once again to ignore the dangers posed by their own unconscious motivation. They place their faith entirely in numbers.

Psychologists know that it is impossible to be “uninfluenced by conflicts of interest,” especially when you keep denying it. Countless studies have shown how the mind unconsciously adjusts its perceptions to accommodate its interests and needs.

The best one can do is to acknowledge the conflicts and try to correct for them. In the long run, that will make the ratings agencies more credible, investors safer, and help protect the economy from new bubbles.

Awkward News

Obviously we are all part of one economic system, but to look at the news it seems as if there are at least two different constituencies out there – if not two realities or two classes.

“MarketBeat,” The Wall Street Journal’s column on market news noted: “Yes, it’s that time again, folks. It’s the first Friday of the month, when for one ever-so-brief moment the interests of Wall Street, Washington and Main Street are all aligned on one thing: Jobs.”

The breezy tone tries to minimize the obvious fact that most of the time everyone’s interests are not aligned. To be sure, more jobs can mean more cash in the hands of consumers and that, in turn, can mean eventually more profit for business, which ultimately can lead to profits for investors – but the link is not direct. In fact, just as often, cutting jobs leads to greater immediate profits for business and gains for investors.

Moreover, the kinds of jobs being filled affect the economy as well. As The Huffington Post reported: “we have become a nation of hamburger flippers, Wal-Mart sales associates, barmaids, checkout people and other people working at very low wages,” quoting a managing partner of a New York investment bank. That’s why job growth is “not increasing consumption or the ability to go out and buy stuff.” (See, “July Jobs Report Masks Real Problems In U.S. Labor Market.”)

One has to dig down into the data to get a better idea of how things really are. The Wall Street Journal did note: “Friday’s report also said that average earnings fell by 2 cents to $23.98 an hour, while the average workweek decreased 0.1 hour to 34.4 hours.” The Journal drew the obvious conclusion: “Lower wages and fewer hours mean less money in consumers’ pockets.” (See, “U.S. Adds 162,000 Jobs, Continuing a Tepid Run.”)

Clearly there is a great deal of anxiety in our system over these trends, as stock prices are reaching record levels. Sometimes the jobs news is trumpeted as a sign of continuing recovery, sometimes as disappointingly slow. And the fragmentary nature of the overall economic news keeps us confused.

We now are all aware of out growing income disparity and the risk we run of becoming an unequal nation, without the chances for advancement that have been the hallmark of “the land of opportunity.” But reading the press and scanning the media it seems as if we don’t really want to know. An occasional OpEd article tries to put the pieces together. The President refers to the problem. But we are avoiding some obvious conclusions.

One might be that nothing can actually done to change these trends. Another might be that we could actually do something about it but our system lacks the capacity to make any significant changes. Finally, there is the threat of looming class warfare. The rich exert unequal influence over the political process as election campaigns become more and more costly. But in the end it is the poor who have more votes.

America has a rich history of populism, and it is not impossible to imagine a movement arising in response to these trends. But could it be repressive and authoritarian? Could the threat of terrorism be invoked to clamp down on popular discontent? Or could we actually become a more equal society?

The Case of Fnu Lnu

It stands for “First name unknown, Last name unknown” and is used for legal purposes when the real identity of an individual is unknown. “At any given time there can be hundreds of Fnu Lnus in the court system,” noted The New York Times. A temporary place holder, “the designation, at once mysterious and common, has taken on a life of its own in courts around the country.”

Names are distinctive ways we have of recognizing and knowing who we are. Part of our informal identities, they are borrowed from parents, grandparents and other family members, from revered public figures, celebrities and actors, and sometimes they are made up because they just sound impressive or nice. They are not only individual but also personal — and because of that they often have meaning for those who carry them.

But the scale, complexity and mobility of the modern world demand more rigorous and reliable ways to discriminate and track individuals. So we have social security numbers, photo ID’s, fingerprints, passports, credit cards, pass codes, etc. But the more formal and efficient IDs have become, the easier they are to manipulate. As a result, we now have unprecedented problems such as “identity theft,” hacking, multiple forms of verifications, security codes, mistaken identity, etc.

Unique and inalterable forms of identity try to ensure not only that we can always be discriminated from others, but they also help to make us accountable for our actions. It has been argued that we should have ID’s assigned at birth, perhaps even computer chips implanted in our bodies. That would make it clear that we are indeed the ones doing the things we do.

Even those who suffer from multiple personality disorder can’t evade their responsibilities. Although arguably they suffer the most from their identities and make the most heroic efforts to escape their pain, they are accountable for what they do.

On the other hand, we change. Mercifully we can alter and shift who we are. More and more people change careers throughout their lives. They move through multiple roles, develop different sides of themselves. Even gender identity turns out to be more malleable than we had ever thought. And we can play with alternate identities. Sherry Turkel argued in Life on the Screen that the ability to assume different identities on the internet is beneficial to many. The exploration of different identities can lead to a richer sense of self.

The Times gave an account of a man who passed though the court system as a “Fnu Lnu,” someone “who claimed to be Ricardo Hernandez, who prosecutors said had applied for a Social Security card in Mr. Hernandez’s name in 1983 and had largely assumed his identity over the next 30 years.”

His lawyer argued that he had actually come to think he was Hernandez. But the prosecuting attorney rebutted: “In real life, people know who they are. People know what their names are. They know who their parents are. They know when they were born.” Not so fast. (See, “Who Is Fnu Lnu?“)

Yes, we usually do know and need to know because we are responsible for our acts. On the other hand, we also need identities that are flexible and fluid. We don’t need to steal someone else’s identity, but we can occasional imitate, impersonate, copy, and create new combinations.

Perhaps we could all benefit from the opportunity to be “Fnu Lnu” for a while.

Millionaires, Billionaires, and the Rest

Long ago, when I was growing up in post WWII America, a “millionaire” was a very rich person. What could he possibly want that he couldn’t buy?

Many of us took some comfort from the fact that, as a popular song of the day put it, “the best things in life are free.” If we couldn’t buy a fancy car, a “mansion,” a yacht, or a country “estate,” we could aspire to the simpler and cheaper pleasures of ordinary life: the love of our families, a beautiful day, grass, trees and flowers. “The moon belongs to everyone,” went the song, even to the rich.

But that no longer seems to be the case. In an age of extreme and growing disparities of wealth, it is getting harder and harder to see how the overwhelming advantages and privileges of the wealthy, the poverty and suffering of the poor, and the shrinking middle classes all fit together. According to Forbes there are 1,426 billionaires in the world and their wealth totals, collectively, $5.4 trillion. No one bothers to count millionaires, there are so many, but on the other hand, there are eloquent if understated statistics on the poor and unemployed.

What does this do to us all?

Wealth has exploded our social space so we no longer see the connections or feel the links between us, except through highly mediated and manipulated images. Not only do we not inhabit the same spaces, we don’t follow the same rules.

Andrew Ross Sorkin recently reported in The New York Times on a new study showing that there are also fewer moral scruples among those who lead our corporations. Among 250 industry insiders included in the study, “traders, portfolio managers, investment bankers, hedge fund professionals, financial analysts, investment advisers, among others — 23 percent said that ‘they had observed or had firsthand knowledge of wrongdoing in the workplace.’”

And they saw it as built into our system: “26 percent of respondents said they ‘believed the compensation plans or bonus structures in place at their companies incentivize employees to compromise ethical standards or violate the law.’” As a result, many make it clear that violations go unreported, meaning, of course, that they are condoned and covered up. (See “On Wall St., a Culture of Greed Won’t Let Go.”)

Most of us lack the incentives and the opportunities to cheat on such a scale. We read about the scandals that are detected and prosecuted, and we find little surprising in the results of the survey, apart, perhaps, from the frankness of the opinions expressed.

The rest of us may feel a surge of anger when hearing about a new case of insider trading, bribery, or political corruption, but typically we settle into a kind of passivity and absence of hope. I don’t mean “hopelessness,” but more a sense of what’s the point? If you are inside a system where possibilities are skewed, why try? Instead, I think, we tend to immerse ourselves in our increasingly sophisticated digital gadgets and let our minds drift away.

Something also happens to the emotions that are suppressed. As a psychoanalyst I have a lot of thoughts about what that must be. But I do know that they go someplace – and disconnected from their source they continue to haunt us.

The Case for Leaks

In an article on how financial derivatives have helped banks deceive the public, Floyd Norris in The New York Times indirectly made a good case for why we need leaks – and, of course, leakers.

“The Financial Times said it appeared that Italy had used derivatives in the 1990s to allow it to make its budget deficit seem smaller, thus enabling it to qualify for admission to the euro zone.” The evidence for this high level chicanery came from “government documents leaked this week to two European newspapers, La Repubblica and The Financial Times.”

Derivatives based on unsound mortgages played a major role in the credit bubble that produced the Great Recession from which our world is still struggling to recover. Earlier, derivatives played a major role in the rise and collapse of Enron. The ingenious repackaging of assets and liabilities was and still is largely designed to help companies raise money but that is often by disguising their debt — if not just whisking it away as something else, a fact that led Warren Buffett to call them “weapons of mass deception.”

But such exploitation of derivatives is just the tip of the iceberg. The larger implication is that so long as corporations and governments deceive and lie, we need people who are willing to hack into their files and expose their true contents. Imagine if hackers had gotten into Enron’s secret files 15 years ago, of if someone had blown the whistle on the ratings agencies who were giving out AAA approvals to the mortgage bonds without really bothering to investigate them.

This is not to defend illegal acts so much as to acknowledge the bigger picture. If we had adequate regulation in the financial industry, for example, we might not need whistle blowers. If there were strictly enforced rules governing investment banks, investigative journalists might not need secret sources. If we had reliable internal policing of our government’s espionage programs, we might not have needed Edward Snowden. But we if fail to establish legitimate oversight or we allow it to lapse, we invite in others in to do the dirty work.

Floyd continues: “The banks have done an excellent job of persuading the Financial Accounting Standards Board, which sets the rules, not to mess with them. Rather than force the banks to put the assets and liabilities on their balance sheets, as is required in most other countries, the board has proposed additional disclosures,” disclosures, he points out, that allow odd and deceptive practices to continue. (See “Wielding Derivatives as a Tool for Deceit.)”

If government agencies collude in allowing banks of hide their liabilities, this means, in effect, that we are outsourcing the work of oversight to outraged leakers, spies, hackers, malcontents and good citizens who are willing for their own motives to take up the slack – and to risk being persecuted for their services.

To put it another way, under political pressure from influential banks and the national security establishment, we have privatized regulation. The results are uneven, and we often don’t seem to like what we get. But as if often the case in a free market economy we get some of what we need – and sometimes what we deserve.