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Corporate Leadership, Values, and Decision-Making at Harvard Business School

Updated on April 11, 2017
Is that a knife in JP Morgan's left hand? More likely the chair's arm rest.
Is that a knife in JP Morgan's left hand? More likely the chair's arm rest. | Source


Coincident with the the trial and conviction of Harvard Business School alumnus, Jeffrey Skilling, and major hits on the business community over sleazy practices uncovered by Eliott Spitzer in the mutual fund, investment banking, brokerage and insurance industries, Harvard Business School instituted a required MBA course in business ethics. [To be fair to HBS this is not the first time corporate ethics has been a course topic. In the 1950s and sixties the first-year required curriculum included a course entitled Business Responsibilities in American Society.]

The course challenges students "to analyze business problems from three overlapping perspectives--economic, legal and ethical--and to understand that enterprises can be sustained only when aligned with all three criteria. That triple-lens framework is perhaps the LCA course's defining intellectual feature."

A description of the new HBS course and articles describing some of the recent big settlements by big banks that preceded the announcement, if not the development, of a new required course at Harvard Business School are linked below.

Improprieties, conflicts, questionable, illegal and fraudulent practices uncovered in the past several years involve accounting practices, late trading and market timing of mutual funds, back-dating stock option grants to executives, and the use of corportate funds as a personal piggy bank as in the case of Tyco's Dennis Kozlowski and American International Group's Hank Greenberg. The list of such unethical conduct is quite long and sordid.


If you were to look for one ingredient that binds together the nation’s chief executives, top managers and boards of directors, you’d find a remarkably consistent commonality, now and in generations past: A disproportionate number of them are graduates of Harvard Business School.

An M.B.A. from H.B.S., as those in the know refer to it, has long been the ultimate Good Housekeeping stamp of approval on any résumé. Jamie Dimon of JPMorgan Chase, Jeffrey Immelt of General Electric, Sheryl Sandberg of Facebook — and the list goes on and on. The number of Fortune 500 chief executives who earned their business degrees at Harvard is three times the total from the next most popular business school, the Wharton School at the University of Pennsylvania.

It is hard to overstate the school’s influence on corporate America.

That’s why a new, exhaustive history of the school is causing a stir before it is even out. The book, “The Golden Passport,” by the veteran business journalist Duff McDonald, is a richly reported indictment of the school as a leading reason that corporate America is disdained by much of the country.

“The Harvard Business School became (and remains) so intoxicated with its own importance that it blithely assumed away one of the most important questions it could ask, which was whether the capitalist system it was uniquely positioned to help improve was designed properly for the long term,” Mr. McDonald writes in the book, to be released in two weeks.

Continue reading the main story

His answer? “With economic inequality at a hundred-year high and meaningful progress on climate change and other social and environmental issues embarrassingly paltry, the answer to that question is obvious. It is not.”

Citing a report from the Aspen Institute, Mr. McDonald explains that “when students enter business school, they believe that the purpose of a corporation is to produce goods and services for the benefit of society.”

“When they graduate,” he continues, “they believe that it is to maximize shareholder value.”


Hewlett-Packard Settles Lawsuit Over Spying on Reporters

Hewlett Packard settled a lawsuit involving it's improperly obtaining telephone records of Business Week and N.Y. Times reporters in order to discover the sources of their reporting on the company. The amount of the financial settlement was not disclosed.

The New York Times said it sued H-P in part to send the message that "corporate misconduct aimed at silencing the press is not acceptable and will not be tolerated." The Times pursued the suit on it's reporter John Markoff's behalf. Mr. Markhoff did not seek compensation. The Times donated its settlement money to groups including the Center for Investigative Journalism Program at the Journalism school of the University of California, Berkeley.

[From a report by Matt Richtel in the NY Times, February 14, 2008.]

Leadership, Values and Decision-making--WorldCom settlements

2-18-06 WorldCom settlement tops $6 billion from

Citigroup- $2,575 billion

JP Morgan $2.0 billion

Bank of America $460 million

DeutchBank $325 million

Plus 11 other banks.





On successive days this week the Justice Department eased up on prosecution procedures for corporate officials, and the Securities and Exchange Commisssion relaxed its interpretation of Sarbanes-Oxley requirements for smaller companies and issued a rule permitting communications with investors via the Internet. These moves were made in response to a clamor from business over the cost and competitive disadvantage resulting from Sarbanes-Oxley and Justice Dept procedures.

Justice Department Curbs Prosecutors

SEC Relaxes Requirements


Floyd Norris, NY Times' lead finance writer's column today and his on-line blog question the objectivity of the recent report by the Committee on Capital Markets Regulation formed at the request of Treasury Secretary Henry Paulson (former Goldman Sachs CEO). Norris's column pointed out that the unofficial report which recommends a number of steps which would reduce government regulations and lawsuits against accounting firms was financed in part by contributions from former AIG CEO Hank Greenberg who was ousted from AIG due to issues raised by NY attorney general, Elliot Spitzer about legally and ethically questionable practices by Greenberg's company. The committee that produced the study recommending reduced regulation was co-chaired by Harvard Law School professor Hal Scott and former chairman of Bush's council of economic advisers, Glen Hubbard, Columbia University economist. Norris's column questions the objectivity of the regulatory rollback report based on the composition of the committee which prepared it and questions the propriety of its financing by Hank Greenberg and another donor who requested anonymity. Professor Scott told Norris that Greenberg's Starr Foundation's gift for the project was approved by Harvard, not by him. Perhaps the people at Harvard who accepted the grant should sit in on Harvard Business School's new course in business ethics!

Here are links to Norris's article and blog.


Coincident with the the trial and conviction of Harvard Business School alumnus, Jeffrey Skilling, and major hits on the business community over sleazy practices uncovered by Eliott Spitzer in the mutual fund, investment banking, brokerage and insurance industries, Harvard Business School instituted a required MBA course in business ethics. [To be fair to HBS this is not the first time corporate ethics has been a course topic. In the 1950s and sixties the first-year required curriculum included a course entitled BRAS--Business Responsibilities in American society.]

The course challenges students "to analyze business problems from three overlapping perspectives--economic, legal and ethical--and to understand that enterprises can be sustained only when aligned with all three criteria. That triple-lens framework is perhaps the LCA course's defining intellectual feature."

A description of the new HBS course and articles describing some of the recent big settlements by big banks that preceded the announcement, if not the development, of a new required course at Harvard Business School are linked below.

Improprieties, conflicts, questionable, illegal and fraudulent practices uncovered in the past several years involve accounting practices, late trading and market timing of mutual funds, back-dating stock option grants to executives, and the use of corportate funds as a personal piggy bank as in the case of Tyco's Dennis Kozlowski and American International Group's Hank Greenberg. The list of such unethical conduct is quite long and sordid.


Texas open pit coal mine and electrict power company TXU is rushing to build 11 dirty coal-firned power plants, ignoring concernes over global warming.

10-24 Jeffrey Skilling of Enron sentenced to 24 years for fraud, but he maintains his innocence and will appeal. Some say his arrogant demeanor contributed to the long sentence. [Article linked below.]


Another type of ethics issue which I imagine may become a case for Harvard Business School's corporate ethics course is the recent resignation of Hewlett Packard's CEO, Patricia Dunn over snooping to discover a leaking board member. Articles on the HP imbroglio are linked below.

[Ms. Dunn is perhaps too young to recall the scandal at GM in the 1960s when the Corporation's chief counsel. Al Power, authorized a private detective to try to dig up dirt on Ralph Nader. GM's chairman Jim Roche, accompanied by Ted Sorensen, JFK adviser and speech writer, appeared before a Senate committe to apologise to the committee and Nader. Reportedly, Roche and Power, friends and Bloomfield Hills neighbors, hardly spoke again after Power refused to acknowledge his error in having Nader tailed.]

11-1 According to Ben Stein's column today in the NY Times, Treasury Secretary, Henry Paulsen, former CEO of Goldman Sachs has convened a blue ribbon committee of business friendly academics to study whether the law should be changed to lighten up on corporations like Enron which defraud their stockholders. His column is entitled "Has Corporate America No Shame? Or No Memory." It's well worth reading.

10-27 Halliburton and Kellog Brown and Root abused regulations in Iraq.


The NY Times article linked below details how, through layers of smaller and smaller investigation subcontractors, money can buy telephone, medical, driver's license, credit and virtually any other personal information on any of us.

9-19 The Wall Street Journal reported today that a former FBI agent and computer crimes specialist in Hewlett's global security office in Roseville, California, emailed his superiors this year warning that the company's investigation of board leaks--then still in progress--was being conducted in a manner that could be illegal...Specifically,...he wrote that acquiring people's phone records through false pretenses could be against the law....H-P has since admitted tht investigators working for the company used such a obtaining phone records of its directors, two H-P employees, nine journalists and an unspecified number of outsiders...(From WSJ article by Peter Waldman and Steve Stecklow 9-19-06)

9-19-06 Apparently none of our personal records are safe from scrutiny by whomever has the money to pay to get them--credit records, bank records, medical records, phone records, driver's license records, and just about anything else you might imagine. Shame on Hewlett Packard!

Another thought on the H-P snooperama: From what I've read about the H-P scandal and others, the primary concern of many top executives and their lawyers appears to be whether or not I can go to jail for doing this if I get caught. And perhaps, what are the odds of getting caught. There's nothing wrong with checking on the law, but what about going a bit farther, using the Harvard Business School "triple lens" and asking whether or not the particular action is morally right or wrong; whether or not the action is dishonest or misleading although legal; whether or not it is wise policy likely to assure the economic success of the company in the long run; what would be the result if everybody acted similarly; and would I resent being spied on (or misled, swindled or whatever).

CEOs and their lawyers, more and more, seem not to be bothering with going beyond asking whether a particular action or policy is legal. That is, they seem to equate morality and sound policy only with legality. Whatever they can get away with under the law is okay. The Golden Rule is apparently not considered in these days of accounting tricks, underfunded pensions, strategic bankruptcies and other decisions designed to make a killing in the short run.

9-20 The NYTimes reports that H-P hatched a plan to plant spies disguised as cleaning employees in the San Francisco offices of the Wall Street Journal and CNET. It is not clear whether the company implemented the plan.

In another article, the NYTimes reports that some H-P lawyers and managers knew about the investigative tactics "as early as January 2006 when a second phase began." Kevin T. Hunsaker, a senior counsel in Hewlet-Packard's legal department and the company's chief ethics officer, "in supervising the operation, communicated frequently with Patricia C. Dunn, the company's chairwoman, about it's progress. But they said It was not clear when Ms. Dunn, who ordered the investigation learned of the methods used." [The NYT article is linked below.]

9-21--H.P. INVESTIGATORS SOUGHT MEETING WITH TOP LEADERS--Feedback Wanted on Search for Leaks

"Internal investigators in the Hewlett-Packard spying case sought in January to meet with and describe the particulars of their operation to the company's chief executive and chairwoman, according to e-mail messages between the investigators and a senior company lawyer...

"One exchange, from the company's chief ethics officer to a lead investigator, also underscored that those overseeing the new phase of the operation were worried their efforts could invite legal scrutiny..[NYTimes article linked below.]


"A British scientific group, the Royal Society, contends that Exxon Mobil is spreading 'innacurate and misleading' information about climate change and is financing groups that misinform the public on the issue.

"The Royal society, a 1,400-member organization that dates back to the 1600s and has counted Isaac Newton and Albedrt Einstein as members, asked Exxon Mobil in a letter this lmonth to stop financing these groups and to change its public reports to reflect more accurately the opi9nions of scientists on the issue.

"There is a 'false sense somehow that there is a two-sided debate going on in teh scientific community' about the origins of climate change, said Bob Ward, the senior manager for policy communication at the Royal Society.

"The reality is that 'thousands and thousands' of scientists around the world agree that climate change is linked to greenhouse gases, he said, with 'one or two professional contrarians' who disagree."

[NYTimes article by Heather Timmons linked below.]


"Sir Richard Branson, the British magnate and adventurer, said yesterday that his personal profits from airlines and a rail company that he controls--a sum estimated at $3 billion over the next 10 years--would be invested in developing energy sources that do not contribute to global warming. [NY Times article by Andrew Revkin and Heather Timmons linked below.]


"Pressure is mounting on Hewlett-Packard's cheif executive, Mark V. Hurd, to explain what appears to have been a greater role in the company's spying operation than was intitally indicated....In the meantime, H-P lawyers, Ann O. Baskins, General Counsel, and Kevin T. Hunsaker, ethics officer, have hired criminal defense attorneys." [From a NY Times article by Damon Darlin and Matt Richtel 9-22-06 linked below.]

H-P's spy program was apparently instituted by now resigned chairwoman Patricia Dunn who is on the advisory boards of the UC Berkeley Haas School of Business and the Conference Board's Center for Corporate Governance.


Pharmaceutical and medical device company payments to doctors and hospital administrators in order to promote their products is a fertile field for scrutiny. Free lunches for doctors and their entire office staffs, payments for giving speeches written by the companies, paid trips to meetings in Hawaii, paid consultancies, etc., have long corrupted the health care industry in this country.

An article in today's NY Times by Barry Meier reports that "Ela Medical, a small producer of implantable heart devices, said this week that it had received a subpoena from federal health care fraud officials seeking information about possible inducements paid by the company to doctors using its products.

[Article linked below.]


9-23 One of my favorite financial writers, Gretchen Morgenson, has an interesting article in this morning's NYTimes entitled "Dangers of a World Without Rules," linked below. The article was prompted by this weeks meltdown of the Amaranth hedge fund's position in natural gas futures.


9-26 As two individuals are subpoenaed to testify before a House committee, and others were invited including Patricia Dunn, Ann O. Baskins, Frederick Adler, and Larry Sonsini CEO and General Counsel and CEO Mark Hurd who are testifying voluntarily, the Hewlett-Packard spy scandal is sounding more and more like General Motors' embarrassing experience over the hiring of detectives by it's general counsel, Al Power, to try to dig up dirt on GM critic, Ralph Nader. On that occasion, GM's chairman, James Roche, accompanied by former Kennedy adviser Ted Sorensen, apologized for the company's action in testimony before a Senate committee. Roche was rumored inside the company to have hardly spoken to Al Power, his friend and neighbor after the incident because Power refused to acknowledge the impropriety of his action.

[NY Times article by Damon Darlin and Matt Richtel dated 9-28-06 is linked below.]


9-25--The NY Times reports that a huge spy equipment and technology exposition in San Diego is attracting many corporate and private individuals as well as government intelligence agency and military people.

[NY Times article dated 9-25-06 linked below.]

9-27 Patricia Dunn denies she was supervisor of illegal spying. She was assured information would be obtained by legal means.

[NYT article linked below.]


Anne O. Baskins who supervised the spying operation has resigned and will not testify before the House committee today.

[NYTimes article linked below.]

10-9-06--Patricia Dunn & Carly Fiorina Lash Out at Hewlett-Packard Board

[NYTimes article linked below.]


[NYTimes article linked below.]

10-20-06 INCENTIVES FOR THE DEAD, op-ed by Paul Krugman

"...In the 1960s and 1970s, E.E.o.s of the largest firms were paid, on average, about 40 times as much as the average worker. But executives wanted more--and professors at business schools provided a theory that justified much high

"They argued that a chief executive who expects to receive the same salary if his company is highly profitable that he will receive if it just muddles along won't be willing to take risks and make hard decisions. 'Corporate America,' declared an influential 1990 article by Michael Jensen of the Harvard Bushiness School and Kevin Murphy of the university of Southern California, 'pays its most important leaders like bureaucrats. Is it any wonder then that so many C.E.o.s act like bureaucrats?'

"The claim, then, was that executives had to be given more of a stake in their companies' success. And so corporate boards began giving C.E.o.s lots of stock options.

The result was..."In the 1990s, executive stock options proliferated--and executive pay soared, rising to 367 times the average worker's pay by the early years of this decade.

"But the truth was that in many--perhaps most--cases, executive pay still had little to do with performance. For one thing, the great bull market of the 1990s meant that even companies that didn't do especially well saw their stock prices rise.


"Then there were the tricks that companies used to ensure lavish executive pay even if the stock simply seesawed up and down. For example after a sownward move in the stock price, EXECUTIVE STOCK OPTIONS WOULD OFTEN BE REPRICED OR SWAPPED (emphasis added)--that is the price oat which the executive had the right to buy stocks would be reduced to the new market price. Heads the C.E.O. wins, tail he gets another chance to flip the coin.

"What the BACKDATING SCANDAL (emphasis added) reveals is that for many executives even that wasn't enough. lto ensure that executives profited from newly issued options, COMPANIES WOULD PRETEND THAT THE OPTIONS HAD IN FACT BEEN ISSUED AT AN EARLIER DATE

"What's wrong with backdating stock options? There's a tax evasion aspect, but the main point is the bait-and-switch. The public was told that gigantic executive paychecks were rewards for exceptional performance, but in parctice exec utives were lavishly paid simply for showing up at the office.



(Emphasis added.)

Comment: Harvard Business School would have performed a greater public service had it followed the theories of its great organizational behavior pioneers Elton Mayo and Fritz Roethlisberger who demonstrated that there are many complex factors in human motivation in organizations rather than the simplistic motivational theories handed to us by traditional economists. I wonder if Professors Michael Jensen and Kevin Murphy are well grounded or have even read Mayo, Roethlisberger, George Homans ("The Human Group") or William Foote Whyte ("Money and Motivation")? If they had, they might not have been so quick to sell us such a bill of goods.

An additional pernicious effect of stock options not specifically mentioned in Krugman's piece quoted liberally above is that they provide a great temptation for companies to "cook the books" to pump the stock price thus assuring a high payout on their executives' options.

Dennis Kozlowski, TYCO CEO

Hank Greenberg & Eliott Spitzer

Ken Lay Under Arrest

Ken Lay, under arrest
Ken Lay, under arrest


HBS grad, Jeff Skilling Under Arrest

Jay Gould, the most unethical Robber Baron

Joe Nacchio

Kozlowski drives 130-ft Endeavour (Before going to prison for 8 to 25 years)



Richard Grasso, Blue Ribbon Corporate Hog

Richard Grasso
Richard Grasso | Source

Skilling Gets 24 Years for Fraud

Skilling gets 24 yearsEx-Enron CEO sentenced for his role in the grand-daddy of corporate frauds.By Shaheen Pasha, staff writerOctober 24 2006: 9:32 AM EDT

HOUSTON ( -- Former Enron Chief Executive Jeffrey Skilling, who gained infamy as the man who orchestrated the largest corporate fraud in history, was sentenced to more than 24 years in jail Monday.

The 52-year-old Skilling stood stoically, his hands clasped before him, as presiding Judge Sim Lake handed down his sentence. His wife Rebecca, however, sobbed quietly in her seat as victims of Enron's collapse watched the proceedings stone-faced.

Famous faces in corporate crime

Speaking to reporters outside of the courthouse, Skilling said he was disappointed by the judge's sentence but was hopeful that "if we review this in a calmer atmosphere," the appellate judges may find in his favor.

Skilling and his attorneys have maintained that he couldn't receive a fair trial in Houston - the epicenter of Enron's implosion. "I'm not happy about it but I believe deep down - and this is not an act - I believe I am innocent," he asserted.

Enron on Trial

Judge Lake ordered Skilling to remain on house arrest until the Bureau of Prisons determined his date of incarceration. He denied the government's motion for Skilling to be taken into custody immediately.

In addition, Judge Lake denied defense attorney Daniel Petrocelli's request to lower the sentence by 10 months in order to allow Skilling to serve his sentence at a lower security- level penitentiary.

Instead, Lake recommended that Skilling served his sentence at a Federal Bureau of Prisons facility in Butner, N.C.

Where Skilling could end up

Skilling was also ordered to pay about $50 million into a restitution fund for Enron's victims, rather than monetary damages to the government.

Legal experts had estimated that Skilling could receive between 20 and 30 years behind bars. Skilling was convicted in May of 19 counts of fraud, conspiracy, insider trading and lying to auditors.

"Skilling got the equivalent of a life sentence," said Thomas Ajamie, a securities lawyer at Ajamie LLP. "His prime years have been taken from him but if you take into consideration how many people lost everything, it's a fair sentence."

Skilling issued a statement before the court prior to hearing his sentence in which he said he felt remorse about the losses incurred by the victims of Enron's collapse as well as the pain suffered by his family and community.

But to the end he had maintained he did nothing wrong and blamed outside factors for Enron's implosion.

"I am innocent of these charges. I am innocent of every one of these charges," he said.

"We will continue to pursue my constitutional rights."

It's a mantra that he maintained throughout the trial earlier this year. But there was a noticeable difference in the courtroom as Skilling stood alone before the judge clad in a somber dark blue suit. Skilling was originally slated to face sentencing alongside his co-conspirator, Enron found Kenneth Lay. Lay was convicted of 10 counts of fraud and conspiracy.

Lay passed away in July of heart problem. With his death, Lay's conviction was legally vacated. Even so, some of Lay's family members were present in court in support of Skilling. His daughter Elizabeth Vittor -- who also served on their legal team -- embraced Skilling's family, seated in the front rows and Lay's sister tearfully hugged Skilling's wife Rebecca before court was in session.

Victim disappointment

After the sentence was rendered, former Enron jurors who attended Monday's proceedings said they thought the decision was fair but were disappointed Skilling still appeared to not take responsibility for his actions.

"He'll deny it till the end" said juror Freddy Delgado in an interview. "He was paid big bucks to be the CEO and the buck stopped with him."

And some victims felt that no amount of jail time was enough to punish Skilling for his crime.

"If it had been me, I would have given him more time," said Charles Prestwood, who lost $1.3 million when Enron collapsed. "I guess you can't win them all."

More than 4,000 Enron employees lost their jobs - and many their life savings - when the company declared bankruptcy in December 2001. Investors lost billions.

Still, government officials are hailing the sentence as a win.

"Today's sentence is a measure of justice for the thousands of people who lost their jobs and millions of dollars in investments when Enron collapsed under the weight of the fraud perpetrated by the company's top executives," said Assistant Attorney General Fisher in a statement. "Jeffrey Skilling will now spend more than 24 years in prison for committing one of the largest frauds in the history of corporate America."

Enron's collapse marked the first of the high-profile corporate scandals that rocked the nation after the 1990s economic boom, followed by WorldCom, Global Crossing, Adelphia and Tyco (Charts).

The wave of fraud led to passage of the Sarbanes-Oxley law that tightened oversight of how American companies are audited.

Ken Lay's conviction tossed out by judge

But the Enron saga is unlikely to end with the bang of the gavel this week.

Since Enron's implosion almost five years ago, Skilling has insisted that he committed no crimes at the company - even taking the stand in his own defense during the long-awaited Enron trial earlier this year.

Speaking to reporters outside of the courthouse, Skilling said he didn't regret the decision not to reach a settlement with the government, adding that he would not admit to a crime he didn't commit in order to receive a lighter sentence.

Former Enron CFO Andrew Fastow pled guilty and received a sentence of 6 years while former accounting chief Richard Causey also cut a deal with prosecutors. He is scheduled for sentencing in November and could face up to 7 years behind bars.

Skilling's attorney Petrocelli said he was optimistic that a successful appeal in another Enron-related case would help Skilling's appeal.

In that case, lawyers for four Merrill Lynch (Charts) employees convicted of helping Enron defraud the public were able to convince an appeals court that the four were simply doing their jobs.

Skilling is hoping to convince the judge that he didn't do anything to deliberately profit from Enron's demise and that he tried to perform his duties to the best of his abilities.

Legal experts, however, think Skilling may be overreaching in his bid to remain free.

"It looks to me to be a very, very long shot," Sheldon Zenner, head of the white-collar crime practice at Kattan Muchin Rosenman, a Chicago law firm, said before the sentencing. "To use a football analogy, it's a Hail Mary pass with no time left on the clock."

For one thing, Skilling was the leader of the company, putting him at the helm making decisions that later resulted in Enron's collapse.

"He's the one that set policies and, according to the evidence, he masterminded the fraud," Jacob Zamansky, a lawyer and expert on securities law, said before the sentencing. "He's in a much different position from someone levels below [who was] just following orders."

But while legal observers see a very small chance of Skilling's conviction getting overturned based on that issue, some expect that Skilling may stand a better chance on appeal on other grounds.

"The appellate courts will look long and hard at the verdict on this case," Jacob Frenkel, a partner at the Maryland law firm Shulman Rogers, said before the verdict. "And the appellate courts haven't been shy about sharing their disagreement with Enron-related convictions in the past."

He noted that instructions to the jury may be one area for a successful appeal.


Skilling--A Picture of Corporate Arrogance and Greed

The Looters by David Leonhardt in the New York Times

Economic Scene

The Looting of America’s Coffers

By DAVID LEONHARDT Published: March 10, 2009

Sixteen years ago, two economists published a research paper with a delightfully simple title: “Looting.”

The economists were George Akerlof, who would later win a Nobel Prize, and Paul Romer, the renowned expert on economic growth. In the paper, they argued that several financial crises in the 1980s, like the Texas real estate bust, had been the result of private investors taking advantage of the government. The investors had borrowed huge amounts of money, made big profits when times were good and then left the government holding the bag for their eventual (and predictable) losses.

In a word, the investors looted. Someone trying to make an honest profit, Professors Akerlof and Romer said, would have operated in a completely different manner. The investors displayed a “total disregard for even the most basic principles of lending,” failing to verify standard information about their borrowers or, in some cases, even to ask for that information.

The investors “acted as if future losses were somebody else’s problem,” the economists wrote. “They were right.”

On Tuesday morning in Washington, Ben Bernanke, the Federal Reserve chairman, gave a speech that read like a sad coda to the “Looting” paper. Because the government is unwilling to let big, interconnected financial firms fail — and because people at those firms knew it — they engaged in what Mr. Bernanke called “excessive risk-taking.” To prevent such problems in the future, he called for tougher regulation.

Now, it would have been nice if the Fed had shown some of this regulatory zeal before the worst financial crisis since the Great Depression. But that day has passed. So people are rightly starting to think about building a new, less vulnerable financial system.

And “Looting” provides a really useful framework. The paper’s message is that the promise of government bailouts isn’t merely one aspect of the problem. It is the core problem.

Promised bailouts mean that anyone lending money to Wall Street — ranging from small-time savers like you and me to the Chinese government — doesn’t have to worry about losing that money. The United States Treasury (which, in the end, is also you and me) will cover the losses. In fact, it has to cover the losses, to prevent a cascade of worldwide losses and panic that would make today’s crisis look tame.

But the knowledge among lenders that their money will ultimately be returned, no matter what, clearly brings a terrible downside. It keeps the lenders from asking tough questions about how their money is being used. Looters — savings and loans and Texas developers in the 1980s; the American International Group, Citigroup, Fannie Mae and the rest in this decade — can then act as if their future losses are indeed somebody else’s problem.

Do you remember the mea culpa that Alan Greenspan, Mr. Bernanke’s predecessor, delivered on Capitol Hill last fall? He said that he was “in a state of shocked disbelief” that “the self-interest” of Wall Street bankers hadn’t prevented this mess.

He shouldn’t have been. The looting theory explains why his laissez-faire theory didn’t hold up. The bankers were acting in their self-interest, after all.

The term that’s used to describe this general problem, of course, is moral hazard. When people are protected from the consequences of risky behavior, they behave in a pretty risky fashion. Bankers can make long-shot investments, knowing that they will keep the profits if they succeed, while the taxpayers will cover the losses.

This form of moral hazard — when profits are privatized and losses are socialized — certainly played a role in creating the current mess. But when I spoke with Mr. Romer on Tuesday, he was careful to make a distinction between classic moral hazard and looting. It’s an important distinction.

With moral hazard, bankers are making real wagers. If those wagers pay off, the government has no role in the transaction. With looting, the government’s involvement is crucial to the whole enterprise.

Think about the so-called liars’ loans from recent years: like those Texas real estate loans from the 1980s, they never had a chance of paying off. Sure, they would deliver big profits for a while, so long as the bubble kept inflating. But when they inevitably imploded, the losses would overwhelm the gains. As Gretchen Morgenson has reported, Merrill Lynch’s losses from the last two years wiped out its profits from the previous decade.

What happened? Banks borrowed money from lenders around the world. The bankers then kept a big chunk of that money for themselves, calling it “management fees” or “performance bonuses.” Once the investments were exposed as hopeless, the lenders — ordinary savers, foreign countries, other banks, you name it — were repaid with government bailouts.

In effect, the bankers had siphoned off this bailout money in advance, years before the government had spent it.

I understand this chain of events sounds a bit like a conspiracy. And in some cases, it surely was. Some A.I.G. employees, to take one example, had to have understood what their credit derivative division in London was doing. But more innocent optimism probably played a role, too. The human mind has a tremendous ability to rationalize, and the possibility of making millions of dollars invites some hard-core rationalization.

Either way, the bottom line is the same: given an incentive to loot, Wall Street did so. “If you think of the financial system as a whole,” Mr. Romer said, “it actually has an incentive to trigger the rare occasions in which tens or hundreds of billions of dollars come flowing out of the Treasury.”

Unfortunately, we can’t very well stop the flow of that money now. The bankers have already walked away with their profits (though many more of them deserve a subpoena to a Congressional hearing room). Allowing A.I.G. to collapse, out of spite, could cause a financial shock bigger than the one that followed the collapse of Lehman Brothers. Modern economies can’t function without credit, which means the financial system needs to be bailed out.

But the future also requires the kind of overhaul that Mr. Bernanke has begun to sketch out. Firms will have to be monitored much more seriously than they were during the Greenspan era. They can’t be allowed to shop around for the regulatory agency that least understands what they’re doing. The biggest Wall Street paydays should be held in escrow until it’s clear they weren’t based on fictional profits.

Above all, as Mr. Romer says, the federal government needs the power and the will to take over a firm as soon as its potential losses exceed its assets. Anything short of that is an invitation to loot.

Mr. Bernanke actually took a step in this direction on Tuesday. He said the government “needs improved tools to allow the orderly resolution of a systemically important nonbank financial firm.” In layman’s terms, he was asking for a clearer legal path to nationalization.

At a time like this, when trust in financial markets is so scant, it may be hard to imagine that looting will ever be a problem again. But it will be. If we don’t get rid of the incentive to loot, the only question is what form the next round of looting will take.

Mr. Akerlof and Mr. Romer finished writing their paper in the early 1990s, when the economy was still suffering a hangover from the excesses of the 1980s. But Mr. Akerlof told Mr. Romer — a skeptical Mr. Romer, as he acknowledged with a laugh on Tuesday — that the next candidate for looting already seemed to be taking shape.

It was an obscure little market called credit derivatives.


Wells Fargo--An Example of Corporate Responsibility in Action!

I have a dream house

By Elizabeth Jacobson

From an affidavit by Elizabeth Jacobson, a former loan officer at a Maryland branch of Wells Fargo, submitted in support of a federal lawsuit brought by the city of Baltimore against the bank. The city filed the lawsuit in January 2008, claiming that Wells Fargo targeted African Americans in Maryland for high-interest subprime mortgages, which have since forced many homeowners into foreclosure. The affidavit was submitted in June. Asked for comment, Wells Fargo said that it believes the “lawsuit lacks merit” and stated that “race is not a factor in the pricing and products we offer.”

I worked directly with loan applicants to make subprime loans. Much of my business came from referrals from Wells Fargo loan officers who were on the prime-loan side of the business. These loan officers were known as “A reps.” For several years I was the top subprime-loan officer at the company. My pay was based on commissions and fees from making these loans. In 2004, I grossed more than $700,000 in sales commissions.

The commission and referral system at Wells Fargo was set up in a way that made it more profitable for a loan officer to refer a prime customer for a subprime loan than make the prime loan directly to the customer. I knew that many of the referrals I received could qualify for a prime loan. It was in my financial interest to figure out how to qualify referrals for subprime loans. Moreover, in order to keep my job, I had to make a set number of subprime loans per month.

There were various techniques that were used to qualify the A-rep referrals for subprime loans. One way was to tell customers not to put any money down on the loan and borrow the entire amount, even if they could afford a big enough down payment to qualify for a prime loan. Another technique would be to tell the customer that the only way to get the loan closed quickly would be to submit it as a subprime loan. Some A reps actually falsified loan applications in order to steer prime borrowers to subprime-loan officers. One means of falsifying loan applications that I learned of involved cutting and pasting credit reports from one applicant to another. I was also aware of subprime-loan officers who would cut and paste W-2 forms. I reported this conduct to management and was not aware of any action taken to correct the problem.

Federal Housing Administration (FHA) loans, like other government-insured loans, offered lower interest rates that are closer to prime rates. Subprime-loan officers were required to have a subprime borrower sign a “Benefit to Borrower” statement that stated that the borrower may qualify for a government-insured loan but did not want it because it was too much paperwork. In fact, subprime-loan officers were never trained in how to make FHA or government-insured loans. We asked for this training, but Wells Fargo refused to provide it.

I know that Wells Fargo Home Mortgage tried to market subprime loans to African Americans in Baltimore. I am aware from my own personal experience that one strategy used to target African-American customers was to focus on African-American churches. Wells Fargo had a program that provided a donation of $350 to the nonprofit of the borrower’s choice for every loan the borrower took out with Wells Fargo. Wells Fargo hoped to sell the African-American pastor or church leader on the program because Wells Fargo believed that church leaders had a lot of influence over their ministry and in this way would convince the congregation to take out subprime loans with Wells Fargo.

I remember being part of a conference call that took place in 2005 where Wells Fargo sales managers discussed the idea of going into black churches in Baltimore to do presentations about our subprime products. On that call we were told that we “have to be of color” to come to the presentation. The idea was that since the churchgoers were black Wells Fargo wanted the loan officers to be black. I was told that I could attend only if I “carried someone’s bag.” Subprime-loan officers did not target white churches for subprime loans. When it came to marketing, any reference to “church” or “churches” was understood as code for African-American or black churches.

I complained many times about what I thought were unethical or possibly predatory loan practices that Wells Fargo was engaged in. Managers never took any action to respond to my concerns. In my office we morbidly joked that we were “riding the stagecoach to Hell.”


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      4 years ago

      Yay google is my queen heelpd me to find this great internet site ! . The worst sin perhaps the only sin passion can commit, is to be joyless. by Dorothy L. Sayers.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      5 years ago from Birmingham, Michigan

      10-10-13NYTimes "Suit Revives Goldman Conflict Issue"

      Doin' the Lord's Work at Goldman

      “Goldman does not have a conflicts-of-interest policy, not firmwide, and not for any divisions,” Ms. Segarra wrote to Michael F. Silva, a senior executive at the New York Fed. “I would go so far as to say they have never had a policy on conflicts.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan


      Not too long ago, JPMorgan Chase and its chief executive, Jamie Dimon, were celebrated for navigating the 2008 financial crisis, which brought other big banks to their knees. Now this one-time darling of federal regulators, long thought to be the best managed of all the big banks, is in trouble or apparently headed there on multiple fronts. While the outcome of the various investigations into the bank’s dealings remains unclear, they raise the obvious question of whether banks have become not only too big to fail but too big to manage.

      In the past month alone, JPMorgan paid $410 million to settle accusations by federal regulators that it had manipulated energy markets in California and Michigan. Federal prosecutors are pursuing criminal and civil investigations into mortgage securities that JPMorgan sold to investors before the housing bust.

      Meanwhile, two JPMorgan employees have been criminally charged in the London Whale fiasco. The Securities and Exchange Commission is investigating whether the bank’s hiring practices in China violated federal bribery laws. California is investigating the bank’s mortgage business; New York is investigating JPMorgan’s retail banking practices; and two federal agencies are reportedly on the verge of seeking damages for the bank’s alleged abuses of its credit card customers. All this and more comes on top of earlier settlements over allegations of abusive foreclosures and tainted tactics in a municipal bond deal.

      The question now is whether federal officials can be persuaded by evidence that the government is gathering to make fundamental changes to America’s banking landscape. Even Mr. Dimon must know that the underlying problem is not only this or that violation, but the fact that the sheer size and scope and complexity of the banking behemoths defy controls, encouraging speculation and bad behavior.

      Administration officials, lawmakers and regulators know this, too. But they remain at odds over the Volcker Rule and other reforms that, done properly, would curb the size and complexity of banks. For their part, prosecutors have consistently balked at seeking criminal prosecutions of big banks and their senior executives, or even at extracting admissions of wrongdoing in civil settlements, even though deterrence and accountability are impossible without prosecutions and admissions.

      For the investigations of JPMorgan and other banks to make a real difference, the federal authorities would have to show a willingness that has thus far been lacking to get tougher with banks and bankers and move from there to carry out broader reforms of the nation’s financial system.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan

      5-19-13NYTimes--Another HBS Alumnus Bites the Dust

      Rajat Gupta’s Lust for Zeros -

      Why the difference between a personal fortune of $100 million and $1 billion meant the world to the former McKinsey director.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan

      4-3-13NYTimesDealbook "JPMorgan Caught in Swirl of Regulatory Woes"

      JPMorgan Caught in Swirl of Regulatory Woes -

      The nation’s biggest bank, which faces several federal investigations, was warned by energy regulators about “manipulative schemes” it used in California and Michigan.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan

      2-7-13NYTimesDealbook--"Emails Imply that JPMorgan Knew Some Mortgage Deals Were Bad"

      JPMorgan Accused of Fraud in SubPrime Mortgage Derivatives

      E-mails and employee interviews filed as part of a lawsuit show that JPMorgan Chase flouted quality controls as it bundled mortgages into complex financial instruments.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan

      1-23-12NYTimes DEALBOOK--"Financial Crisis Lawsuit Suggests Bad Behavior at Morgan Stanley"

      Financial Crisis Suit Suggests Bad Behavior at Morgan Stanley -

      Documents released as part of a lawsuit against Morgan Stanley shed new light on what bankers knew at the height of the housing bubble and what they did with that secret knowledge.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan

      1-6-13NYTimes "Surprise! Surprise!: The Banks Win" Gretchen Morgenson

      Bank Settlement May Leave Tiny Slices of a Smaller Pie -

      For borrowers, a proposed settlement with big banks over foreclosure practices is likely to mean tiny slices of a shrunken pie.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan

      12-13-12NYTimes "A Longstanding Walll Street Custom of Favoring Performance Over Ethics" by Jesse Eisinger

      When Wall Street Investors Favor Performance Over Ethics -

      Another former employee of SAC Capital Advisors has been accused of insider trading, but the author says investors don't seem to mind, as they continue to put new money into the hedge fund in search of great returns.

      The operating standard is to allow fund managers — or affiliated businesses or employees — to go as far as they can until the moment they are caught doing something wrong. Through their actions, Citigroup, Blackstone and the others are sending a message that they will forgive rotten ethics for great returns.

      This is a long-standing Wall Street custom. Citigroup and JPMorgan played handmaiden to help Enron commit fraud, according to the Securities and Exchange Commission. The two banks didn’t admit or deny guilt in settling with the regulator...

      There is a point where willful blindness turns to complicity. Investors profit from any added juice that SAC might gain, whatever its source. And if Mr. Cohen were to face charges, they would pay no price.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      6 years ago from Birmingham, Michigan

      12-8-12 New York Times "Insider Trading is Common and Hard to Detect"

      Insider Trading Persists, and Gets Stealthier -

      As potential rewards have soared, the tactics and technologies available to inside traders today are more sophisticated and more difficult both to detect and to prove.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      8 years ago from Birmingham, Michigan

      Whatever. The point remains that the company is going to pay little or nothing in federal income taxes for 2010. And the unambiguous reason for this is that G.E. took full advantage of the various tax loopholes in the U.S. tax code that are available to it. Wouldn’t you? The real villain here isn’t G.E. for gaming the corporate tax system. Rather, the villain is a political system that makes the corporate tax system so easy to game...

      The second tax break, though, called the active financing exception, is a whole different kettle of fish. According to Robert Willens, a corporate tax expert, this tax break was first enacted in 1997. It allows companies to avoid paying U.S. taxes on overseas profits — if those profits were derived by “actively financing” some activity or deal. (The rationale is that this is supposed to help “equal the playing field” with foreign multinationals that get the same tax breaks from their home countries. Yadda, yadda, yadda.)

      The active financing exception was never supposed to be a permanent part of the tax code. Indeed, it still isn’t. But every year or two — after the usual campaign contributions and arm-twisting — it winds up back in the tax code “temporarily.” The Treasury now estimates that it costs the government $5 billion a year.

      Is G.E. one of the companies that lobbies for the active financing exception? You bet it is. As Willens nicely puts it, “They are taking advantage of a loophole they helped create.”

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      8 years ago from Birmingham, Michigan

      Goldman suffered a brutal year, paying a $550 million fine to settle federal claims of civil securities fraud and being vilified at a Senate hearing. Even the $15.38 billion the firm has set aside for compensation in 2010 wasn’t enough to salve the pain. Goldman would like our love, too. And so the powerful investment bank has embarked on a journey of self-improvement, a great American ritual from Ben Franklin to Elizabeth Gilbert. Goldman’s report should have been titled “Eat, Pay, Trade.”...

      The therapeutic gospel is all about me and my problems. Goldman thinks its problems stem, if not from psychological issues, then from attitudinal ones. Significant management and operational changes are starkly missing from Goldman’s leaf-turning exercise. Instead, Goldman has decided that its troubles emanate from not having treated clients nicely. Or, more likely, Goldman thinks its problem is that the world thinks Goldman didn’t treat its clients nicely.

      But that wasn’t the problem with Goldman Sachs in the fall of 2008. Creating collateralized debt obligations and betting against their clients was unseemly, but it wasn’t the cause of the global financial crisis. Goldman’s leverage — and the leverage at other major financial institutions — was the real issue....

      Unfortunately, despite a hulking financial reform law, the American financial system still has largely the same structural issues that it had before the crisis. Neither Goldman nor the government shows any inclination to face these issues. What about investors?

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      9 years ago from Birmingham, Michigan

      NYTimes 8-11-10

      Barely visible to any but a few inside Merrill, Pyxis was created at the height of the mortgage mania as a sink for subprime securities. Intended for one purpose and operated off the books, this entity and others like it at Merrill helped the bank obscure the outsize risks it was taking.

      Accounting legerdemain at Merrill Lynch

      The Pyxis story is about who knew what and when on Wall Street — and who did not. Publicly, banks vastly underestimated their exposure to the dangerous mortgage investments they were creating. Privately, trading executives often knew far more about the perils than they let on.

    • Ralph Deeds profile imageAUTHOR

      Ralph Deeds 

      9 years ago from Birmingham, Michigan

      Chris Hayes in The Nation 5-17-10--Until last week, I'd never heard of "IBGYBG." But during the Senate Permanent Subcommittee on Investigations' eye-opening hearings into ratings agency malfeasance, former Moody's senior credit officer Richard Michalek introduced me to it while testifying about the perverse incentives that dominated the industry. On the investment bank side, he said, bankers were looking to score the one-time fee from whatever securitization deal they were asking the agency to rate, and move on to the next deal. The incentives for the bank, Michalek said in prepared testimony, were clear: "get the deal closed, and if there's a problem later on, it was just another case of IBGYBG—I'll be gone, you'll be gone."


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