Category: Society

The Battle Lines Are Being Drawn

Some of the most senior and respected figures in American banking are lining up to support financial reform.  Paul Volcker, Chair of the President’s Economic Recovery Advisory Board and former Chairman of the Federal Reserve, “signed up the support of nearly a dozen peers whose average age is north of 70 and whose pedigrees on Wall Street and in banking are impeccable,” as The New York Times put it, “giants like George Soros, Nicholas F. Brady, John S. Reed, William H. Donaldson and John C. Bogle.”

Volker has focused on reinstating restrictions on banks buying and selling securities for their own accounts.  But “most of his prominent supporters see that as a starting point in a broader return to regulation. And most do not hesitate to speak up in interviews.” Mr. Bogle, the founder of Vanguard, said: “I am a believer that the system has gone badly awry and needs massive reform.”  (See, “Elders of Wall Street Favor More Regulation.”)

On the other side, the younger generation, still active in managing Goldman Sachs, JPMorgan Chase, Morgan Stanley, Citigroup and the like, are fiercely lobbying Congress against such regulation.

Such generational splitting is far from unusual.  To begin with, older generations tend to be critical of the short-sightedness of their successors.  It is one of the few sources of leverage left to them.  In this case, we have the additional factor that the younger generation is in charge.  Still accountable for the profitability and competitive success of their firms, it is difficult if not impossible for them to detach from those interests and obligations without arousing a storm of criticism from those they are currently leading.  They run the risk of being seen as disloyal and, perhaps, even being fired.

What is unusual here is the public attention these conflicts are beginning to generate.  No longer speaking privately, they reveal the urgency of the issues, and the growing possibility that nothing will be done to reform the financial industry.  It is looking more and more like war.

Another sign of the growing conflict comes from Gary Gensler, the chairman of the Commodities Futures Trading Commission and a former Goldman Sacks partner.  An article in BusinessWeek details his aggressive stance on the need for regulation, along with his informed understanding of just how complex the problems are — and how determined his former associates are in fighting any attempt at regulation.

Gensler is particular effective because he was on the other side.  At first that made many suspicious of his motives, but the fact of the matter is that effective reform requires inside, detailed knowledge.  Moreover, as BusinessWeek noted:  Gensler can take on the banks without fear of annoying potential employers. “I don’t see myself going back to Wall Street,” he says. “That’s very liberating.”  (See, “A Goldman Guy Turns on the Street.“)

That’s the issue in a nutshell.  The senior bankers mobilizing in support of Volker are not going back to Wall Street either.  That frees them to speak their minds.  They may lose a few friends, but clearly they think it is worth that risk to make the changes to our financial system that need to be made.

How Bad Is It?

Many now believe our governmental system no longer works.  According to a new poll, eighty-six percent of people questioned say that our system of government is broken.  (See “CNN/Opinion Research Corporation Poll.”)

Clearly, the major reason is the stalling of health reform legislation in Congress, following the loss of Senator Kennedy’s seat.  Reform of the financial industry may also be the victim of the Democrats loss of their filibuster-proof majority.

Last week, Senator Evan Bayh, explaining his decision not to run for reelection in Ohio, noted: “There is too much partisanship and not enough progress — too much narrow ideology and not enough practical problem-solving. Even at a time of enormous challenge, the people’s business is not being done.”  As The New York Times put it, summarizing Bayh’s view:  Congress is “frozen by partisan politics and incapable of passing even basic legislation.”

Thoughtful observers of the political process have become increasingly worried about the polarization of debate and the increasing the role of lobbyists.  There is a strong argument to be made that our political process has become hostage to special interests.  Given their power to prevent change to the status quo, it seems that no substantial initiatives stand a chance of being passed. And it looks like the major goal of the Republicans at the moment is to thwart the President.

Is this just the view of the chattering classes, the new conventional wisdom of Washington pundits?  Possibly.  But there are other, more ominous sources of evidence for those who look beneath the surface.

The tea party movement is energized, growing fast.  A chaotic jumble of grass-roots, anti-government sentiment, refusing to be co-opted by Ultra conservative Republicans, it expresses the frustrated rage and mistrust of genuine protest.  More than anything, it reveals the profound alienation of its members from our political process. (See, “Tea Party Movement Lights Fuse for Rebellion on Right.”)

Then, there is the reappearance Dick Cheney.  Claiming Obama projects weakness, Cheney criticizes his lax security efforts, insufficient prosecution of terrorists, the use of civilian trials, etc.  Asserting that the President doesn’t seem to realize we are at war, his rhetoric implies we need a strong man to take charge.

Cheney, the authoritarian curmudgeon who did more than anyone in recent history to undermine our constitutional guarantees of liberty, is just speaking his mind.  But the encouragement and coverage he is getting suggests a widespread longing for someone to take over, to protect us by imposing order.

And then last week, a seemingly normal Texan slammed his plane into the office building housing the Internal Revenue Service.  He left a somewhat incoherent note, but his suicide bombing points to the fact that it is not just Islamic terrorists abroad who hate our government and are willing to die for the sake of revenge.

We could look at all of these events as isolated from each other, but their concurrence suggests a real crisis of faith in our system.  Pundits and politicians state the theme, but these other events give it more credibility and punch.

Is It Possible?

The new CEO at Xerox “wants its 130,000 employees to get over the past, take more initiative, become more fearless and be more frank and impatient with one another to ratchet up performance.”  Good luck.

She is not the only executive who has wanted to energize their company’s employees, make them more independent and outspoken.  In this case, she has the advantage of not asking others to do what she can’t do herself, according to an account in Sunday’s New York Times.  Her own history at Xerox demonstrates the boldness and courage she wants to develop in others. But does she know how hard it is to get others to change? (See “Xerox’s New Chief Tries to Redefine Its Culture.”)

It’s hard to change one individual.  Personal habits are ingrained, stubborn.  But a culture, that web of assumptions, values, ideologies and manners that provide stability and orientation to a multiplicity of lives, what hope is there for changing that?  Typically, we are born into a culture.  One by one, we learn to adapt to it.  How can we make it responsive to new demands?

The key is encountering our need for security.  For a new culture to work, it has to offer the promise of eventually making us feel more secure than the old culture did.  Those who move from one country to another obviously have to adapt and change to the new culture they find – or they will not succeed.  And those who find things rapidly changing around them, as in a revolution or an ecological disaster, also must change to survive.  What will motivate a group of employees to relinquish a familiar source of security for a new, as yet untested one?

No doubt the need to change is what underlies the quest at Xerox.  The business world demands it.  But to take that change seriously, the old culture of the corporation has to start to feel unstable, unworkable, a source of insecurity.  Workers must feel that they have to give up familiar ways of doing business.  If the change does not come to feel essential, inescapable, the whole effort will stall.  Carrots alone won’t work.  It will take sticks.

Otherwise, the fledgling new culture will die a thousand tiny deaths.  Unreturned phone calls, misplaced memos, forgotten directives, raised eyebrows, late meetings, neglected bits of information, rumors, misunderstandings – these will accumulate until the initiative gradually disappears.

Inexorably, the established forces of tradition and security will defeat her.  The old culture will prevail, seamlessly binding individuals into its web, as it was designed to do.

Our National Ritual

As a nation, we have become preoccupied with the weather.  As The New York Times noted the other day:  “No one remembers precisely when it happened, when the weather — or more often than not, the mere prospect of weather — automatically became a top story on local newscasts.”

But why?

“Robert J. Thompson, a professor of popular culture at Syracuse University, said weather coverage, not to mention the promise of weather coverage at the opening of a local news program, was ‘absolutely’ driven by ratings.” (See, “Forecasting a Snowfall:  The Bigger the Better.”)

That’s true, no doubt.  There is an economic dimension for everything.  But then the ratings wouldn’t go up if people didn’t want to watch.  We still need to explain why weather has become so important, why we care about it as much as we do?

It can’t be because we are more vulnerable to it than in the past.  With improved road clearing equipment, more accurate forecasts, more salt and better tires, each year we are increasingly armed to combat it.  Nor is it actually getting worse.  It can seem that way. With warnings of the dire effects of global warming coming from scientists, bad weather stirs up thoughts of Armageddon – or as the Washington media put it recently “snowmageddon.”  But meteorologists tell us that the “extremes” we experience from time to time are normal fluctuations in long-term patterns.

One clue is that the weather has always been the easiest topic we have to talk about. Moreover, the effects are impartially and arbitrarily distributed. It happens equally to us all, rich or poor, black or white, old or young. Today, in fact, it may be one of the very few things we still all have in common.

With income inequality growing, with the “haves” trying to hold on to their jobs and benefits and not fall out of the middle class, with Wall Street and Main Street increasingly at odds, with intensifying polarization between political parties and mounting fragmentation within each party – the weather provides us with a common enemy, at least a common threat.

The nightly news reports about what the weather gods have in store for us may be virtually the only thing we all still share.  It has become the nightly ritual that binds us together.

Greece Replays Our Problems

At first, the similarities were striking between our domestic financial crisis and what is happening with governments abroad, especially in Greece.  It seemed as if everyone got into the habit of running up debts that became harder and harder to pay off – much less keep financing.  We could think about it as human nature run amok, especially in a highly competitive globalized economy.

But now it seems clear that it wasn’t just similar – it was exactly the same.  Greece and other European countries were under the same pressure to spend money they didn’t have, but also they engaged in the same psychological processes of collusion to deny the risks being faced.  Identical tricks were employed to make debt disappear off the books, identical language was used to describe it, and even the very same cast of characters was at hand, ready to make the deceptive deals.

Last weekend, The New York Times reported:  “In dozens of deals across the Continent, banks provided cash upfront in return for government payments in the future, with those liabilities then left off the books.” (See, “Wall St. Helped Greece to Mask Debt Fueling Europe’s Crisis.”)

Moreover: “Instruments developed by Goldman Sachs, JPMorgan Chase and a wide range of other banks enabled politicians to mask additional borrowing in Greece, Italy and possibly elsewhere.”

That’s just what banks did here, up through 2008, securitizing mortgages to make the liability of mortgage debt disappear, replaced by financial instruments that could then be marketed and reappear on the books as assets.  The Times put it blandly: “such deals, because they are not recorded as loans, mislead investors and regulators about the depth of a country’s liabilities.”  Having such instruments classified AAA by rating agencies, no doubt, also helped to mislead investors, a process paralleled in Europe by regulators willing to look the other way to bring about the unification of European currencies and markets.

“In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money. . . .  Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 . . . devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics.”

Greece, of course, is “too big to fail.”  If it goes bankrupt, so will other European countries –- and perhaps even the idea of Europe. No doubt that’s why Germany felt obliged to step in.  On the other hand, perhaps Germany and other European countries were aware that they were part of the collusion from the start.

Such deals cannot occur without prolonged deliberation.  The ministers, the banks, and the European agencies knew what they were doing.  But it does seem that what they didn’t consider the extent of the long-term risks they were running.

At the moment, no doubt, they felt those risks worth taking – but they allowed themselves to neglect not only the extent of the danger but also the interconnectedness of the problems.  They didn’t know they knew how bad it could get.