Author: ken

No One Wants To Do It

“Wake up, gentlemen,” Paul Volcker is reported to have said to bankers in London a month ago. “Your response is inadequate.”

It is easy to understand that the banking industry doesn’t want more oversight.  Who does?  But are they really convinced it’s not necessary?  Can they think the near disaster of last year’s credit crisis and the long lingering aftermath of unemployment and economic stagnation are acceptable prices for unregulated markets?  Perhaps they are fatalists who think the system can’t be improved without being destroyed?

Or could they be thinking only about themselves?  After all, the ones who are attending conferences and listening to speeches now are among the survivors of the last debacle.  Like professional gamblers, they know the risks of losing big, but they seem raring to go again.  That’s what they do.  That’s who they are.  That how life goes in our casino economy.

An article in this Sunday’s New York Times Magazine sheds light on how bankers are thinking.  Describing Kenneth Feinberg’s effort to rein in corporate salaries, the “pay czar” for the seven companies who took in TARP funds, the article makes clear that no one seems to believe he or she deserves a paycut.  (See, “What’s a Bailed-Out Banker Really Worth?”)

For one thing the culture of excessive pay is so firmly entrenched that it has now come to be expected that top executives will receive compensation undreamed of 20 years ago.  The article notes: “Over the last 50 years, the ratio of top pay to average pay at public companies has multiplied roughly 11 times (24:1 to 275:1). That’s more pay in one workday for the chief executive than his average employee makes in a year.”

For another, the blunders and mistakes were always made by somebody else.  Virtually all the executives were rated by their companies in the top 25% of performers.  Many now are enraged to think that they will be punished for sins they did not commit.

The conclusions are dispiriting:  “the clearest lesson that has emerged so far from [Feinberg’s] nine months of tortured choreography is that if it’s this hard to inject even a limited measure of common sense into the way executives are paid at companies that taxpayers partly own and control, broader change requires a boardroom upheaval.

And “upheaval” here may be the operative work, as boards don’t want to do it either. Prof. Jonathan Macey of Yale Law School notes: “It’s not that people in charge don’t know how; it’s that they don’t want to.”

We’re Bored, They’re Bored

Like anything that has become routine, screening for explosives and weapons at our airports has become all too predictable.  I’m sure I am not the only one who wonders if anything actually dangerous has been confiscated lately — apart from water bottles, shampoos, and skin creams – anything a real terrorist might use.

Clearly, there is a deadly serious problem we are trying to address, as we were reminded by the near miss on the Northwest flight to Detroit last week.  But the routine screening we are all subject to at airports seems one of the most frustrating and inept links in the chain of national security.

We need some better ideas.  One of the nuttiest appeared on The Daily Beast this week, a suggestion that passengers be trained in fighting back.  (See “Passengers Fight Back.”)  That proposal speaks more than anything to the frustration we all feel as we snake through long lines, take off our shoes, unpack our computers and so on.  Wouldn’t it just feel better if the government trained us to be vigilantes?  We could at least imagine ourselves poised to attack the attackers and vent our frustration?

On the other hand, one of the better ideas came from my friend, Charles Kadushin, a Sociologist who often travels to Israel.  He reminded me that at Ben-Gurion airport, security guards actually talk to passengers waiting to board their flights, while they look though their possessions.  They informally test out the consistency and accuracy of their narratives, size up their honesty, their motives for travel, while asking dozens of “innocent” questions.  It strikes me that such a conversation might well have detected something odd or worrisome about Umar Farouk Abdulmutallab, the Nigerian man traveling alone who reportedly bought his ticket with cash and checked no luggage.

We have spent billions on sophisticated equipment, and seem poised to spend even more now that we understand the lethal potential of passengers’ underwear.  We do seem to prefer expensive technological solutions.

Sophisticated talk, on the other hand, doesn’t come cheap, as interrogators would need to be carefully trained.  They would have to learn to notice things that just don’t add up, that most of us just let pass, picking up the unconscious clues that conversations provide, while avoiding the pitfalls of their own projections and naïve assumptions.  But we do have lots of psychologists and a robust mental health industry that would be more than equal to the job.

A good conversation would not eliminate the need for baggage scanners and other methods to detect explosives, but it can be an invaluable aid in detecting dangerous passengers with something to hide.  It is an approach that has proved its usefulness in Israel, on the frontline of the war against terror.   In this case, we have good reason to suspect it would have worked as well.

For Whom Do They Work?

“You might think that board members overseeing businesses that cratered in the credit crisis would be disqualified from serving as directors at other public companies,” writes Gretchen Morgenson in last Thursday’s New York Times.  (See, “What Iceberg? Just Glide to the Next Boardroom.”)

She has a point.  Board members have a legal and moral responsibility to serve the interests of shareholders, those who actually own the companies they serve.  Their duty is to ensure that their companies are run soundly and profitably.  But recent experience suggests that there is, in fact, little if any accountability.

She quotes Paul Hodgson, senior research associate at the Corporate Library, a corporate governance research firm:  “None of these directors have stood up and said, ‘We made a mistake here by not calling management to account.’”  He adds, “They have certainly avoided the limelight as far as blame is concerned.  Moreover, they continue to get work as directors at other companies.”

One reason for this is that it the rules governing the selection and retention of board members are stacked in their favor.  It takes a massive effort to challenge an official slate of board members.  And there seems to be no interest within boards themselves to establish accountability – for several reasons.

It is generally in their interest to go along with management and continue receiving the perks they enjoy.  Morgenson offers an amusing quote from Frederick E. Rowe, president of Investors for Director Accountability: “Here’s a conversation you’ll never hear: ‘Yes, I get paid $475,000 a year. I play golf with the C.E.O.; he’s a personal friend. I go to interesting places for board meetings, I am around interesting people, and I would never say one word that would jeopardize my position on the board.’”

But there is a group culture as well that instills conformity.  Board members are often drawn from similar backgrounds and maintain outside relationships with each other through other corporate boards as well as country clubs, charities, and national associations.  Collectively they form a kind of national community, with strong common interests and identities, a point that was established by Michael Useem’s research at Wharton 25 years ago.

Moreover, it is easy for “groupthink” to flourish among board members. Usually small in size, operating in secrecy, they receive limited information, and are prone to maintaining cohesiveness and preserving their established business identities along with their self-esteem. They want to support the CEO they selected as long as they can.  As a result, they will often collude in ignoring disturbing information, in accepting excuses, stifling criticism.  Certainly, they have little motivation to blame each other – or themselves.

John Gillespie, co-author with David Zweig, of “Money for Nothing,” a forthcoming book on board failures, notes that the culture of boards “doesn’t allow directors to do an effective job even if they wanted to.”

They are intelligent, experienced and accomplished people so there can be little doubt that they know about their responsibilities as board members, even if they don’t always know they know it.  In this case, they don’t seem to want to know about their failure to ask tough questions and provide strict oversight.

As we are thinking about reforming the financial industry, is there anyway to get them to take their jobs more seriously?

What is Happening To Us? And Why?

The health care debates have revealed bitter political divisions, but the signs of polarization, both big and small, litter our entire political landscape.  Why is this happening?

Ross K. Baker, a professor at Rutgers University and an expert on the history of the Senate, noted in The New York Times: “It has gotten so bad now that Republicans don’t want to be seen publicly in the presence of Democrats or have a Democrat profess friendship for them or vice versa.” (See, “In Senate Health Care Vote, New Partisan Vitriol.”)

Even the careers of Supreme Court clerks reveal this polarization.  “Until about 1990 . . . there was no particular correlation between a justice’s ideological leanings and what his or her clerks did with their lives.”  But now, “Clerks from conservative chambers are now less likely to teach. If they do, they are more likely to join the faculties of conservative and religious law schools. Republican administrations are now much more likely to hire clerks from conservative chambers, and Democratic administrations from liberal ones.” (See, The New York Times, “In Supreme Court Clerk’s Careers, Signs of Polarization.”)

The evidence is everywhere, but why is this happening ?  And why now?

Two reasons, I think.  The first has to do with the psychology of politics in a post cold war era, the other with emergent real differences in society.

Following the collapse of communism, we no longer have a common enemy to unite against.  All the frustrations and petty annoyances that tend to get displaced onto politics now cannot be exported so easily into hatred of the Evil Empire.  They are being forced into our local arenas.  As in spectator sports that have always provided outlets for the passions and disappointments in the daily lives of fans, we are lining up in opposing political camps.  That not only provides more opportunities to vent our frustrations, but also, given the lack of a common danger, we have less incentive to moderate and soften our conflicts with each other.

Here is where real, underlying social issues come into play, the second reason for our increasing polarization.  The gap between the rich and the poor has been growing.  This is reflected in one way by the growing disparity between workers salaries and the lavish compensation packages of top executives, but more generally in the increasing erosion and fragmentation of the middle class.  As a result, two increasingly distinct and identifiable interest groups are emerging.

This is not simply the rich versus the poor, of course, those who have and those who don’t.  If that were so, the rich would not stand much of chance.  It is a matter of identification and aspiration, those who do not want their opportunities diluted by taxes to provide social safety nets for the poor, those who emphasize the importance of sacrifice and discipline in getting ahead, who are convinced they will succeed and are motivated by the achievements of others, the stories of hyper-successful geeks and those who have worked their way up the ranks.

On the other hand, there are those at the margins of our national prosperity who tend to be left out, those sinking in status, and those troubled by our unequal access to security and protection against suffering.  Many also don’t like the picture that is emerging and want a more equal society, but they, too, increasingly have no choice but to side with the underdogs.

There are plenty of exceptions, but we are gradually separating out into two teams, each with their diverse complement of fans.  And they are engaged in a desperate battle to claim the future.

Can We Redraw a Distinction?

It is easy to get confused about banks.  It’s not just that one word is being applied to a huge range of organizations, but legal distinctions have been abolished or blurred as well, adding to the confusion.

I am sure many, like me, remember neighborhood banks.  In the days before “relationship managers” we may even have known people who worked in one.  On the other hand, the names of the big investment banks J.P.  Morgan and Lehman Brothers were also familiar, though from a different world.  Congress firmed up the distinction in the wake of the financial collapse of 1929-1931, providing deposit insurance for customers of local banks after a disastrous rash of bank failures in which many lost their savings.

Financial deregulation in the 1990’s abolished the firewall between the two, and then in last year’s “great panic,” the Fed allowed the giant investment banks to become like the others, so they could gain access to federal credit.   Now they are all the same – except, of course, they’re not.

Robert Wilmers, Chairman and CEO of M&T bank, reminded us recently in The Wall Street Journal of the distinction:  “five firms have swung from an aggregate loss of $14.0 billion in 2008 to $30.1 billion of net income through September 2009. The remainder of the industry, which earned $4.4 billion in 2008, is now showing $9.7 billion in red ink through this year’s third quarter.”  This is the difference between banks that focus primarily on trading and those that “serve the public,” as Wilmers put it.

He added: “These large institutions operate in a different world than that of traditional, community-oriented banks,” and suggested Congress “should consider requiring that financial institutions account separately for their trading and their traditional banking businesses, so the public can see what’s going on.”   (See, “Not All Banks Aree Created Alike.”)

We probably can’t put humpty-dumpty back together again, but it is not just a matter of guarding against a banking system that is bloated and out of control.  It is also about restoring some common sense distinctions in the mind of the public.  We make sense of the world through the categories we use, and the category of “bank” has lost much of the meaning it had.  As things stand, we will continue to be suspicious and bewildered by the banking brands that compete for our attention and trust.

It’s not that our “community-oriented banks” have been blameless, by any means.  They were pushing sub-prime mortgages like everyone else, and extending home equity loans without adequate regard for the ability of lenders to pay.  But at least we stood the chance of understanding how they worked.