Main Street always pays for the wild parties Wall Street throws and the cleanup required afterwards.
Do you have your ticket for the Great American Boardroom Bailout Sweepstakes? Probably not. You need a special pass to get to the front of the line. Angelo Mozilo, CEO of Countrywide Financial, once the largest mortgage lender in the United States and now the poster child for financial ruin for itself and millions of homeowners, has one. And it’s a beaut. While steering his company into a Titanic-like credit collision and foisting loans on the most vulnerable and least able to handle them, the king of subprime mortgages has pulled in hundreds of millions in salary, bonuses and stock options since 2000 alone. (more…)
We have been saying for a while now that the U.S. Federal Reserve needs a better pair of glasses. Its ability to see even the obvious seems to have been severely challenged, beginning with Alan Greenspan’s era and carrying on with his successor, Ben S. Bernanke. Over a period of several years, the Fed failed to understand the destructive dimensions of the subprime trend or the need to regulate these faulty investment instruments. The New York Times details some of the background to this troubling performance in a major piece today. It paints an unsettling picture during a time of growing economic uncertainty and one that should prompt many observers to ask what else might the Fed be missing.
Here is an excerpt from the piece. (more…)
On top of its disturbingly myopic reading of the subprime contagion, the Fed now thinks handing out billions more in loans to the players that created the crisis is really just a private affair. Washington, we have a problem.
When financial institutions were riding a wave of fee-generated euphoria, creating their toxic sludge of subprime investment vehicles, the U.S. Federal Reserve registered few, if any, concerns. The Fed was happy to buy into the idea that the banks and investment houses were headed by shrewd successors to the J.P. Morgan mantel who had discovered a new world of financial instruments that were producing untold wealth –at least for their creators. Even when things started to unravel, official disquiet was muted. Earlier this year, Fed chairman Ben S. Bernanke told a committee of the U.S. Congress that he didn’t expect the meltdown would spread. (more…)
Merck pays out nearly $5 billion to settle Vioxx claims, Yahoo incurs the wrath of legislators, and another poisoned child’s toy made in China is recalled. The growing credit market implosion threatens recession. These are the predictable consequences of the subprime leadership and ethics in our boardrooms and in our institutions of government over the past number of years.
The Outrage generally prefers to focus on a single event. This week, however, there was a common theme among several events. There was the Merck $4.85 billion settlement over its Vioxx debacle. Next, there was the appearance of Yahoo CEO Jerry Yang before the U.S. House Foreign Affairs Committee to answer questions about his company’s turning over information that led to the arrest and imprisonment of Shi Tao, a Chinese journalist and political activist.
The week ended with revelations that yet another toy made in China contained toxic chemicals and with officials ordering that Aqua Dots, distributed in North America by Toronto-based Spin Master, recall more than four million units.
What these incidents share is a betrayal on the part of the companies and leaders who could have done better, but failed miserably in their ethical performance. Merck is one of the world’s leading drug companies, yet it continued to market this highly profitable product even after company officials were warned by their own medical researchers of serious problems.
The company pulled Vioxx off the market in 2004, citing increased cardiac risk. But, as the Wall Street Journal reported at the time, Merck had earlier indications of serious problems. A March 2000 internal email shows company research chief Edward Scolnick warning that cardiovascular events “are clearly there.” Still, Merck continued to deny any link between heart attacks and Vioxx.
Yahoo is a company founded and headed by a brilliant billionaire who one might have thought had enough money and youth to still have a social conscience. But doing business in a multi-billion consumer market headed by a corrupt authoritarian regime was too tempting to resist, it seems. And so it was that Yahoo became an adjunct of the Chinese secret police –spying and snitching on its customers and thereby poisoning a name and a brand that had become known world-wide for its sense of innovation and exploration of the limitless knowledge held in cyberspace.
We don’t know who is really behind this latest toxic threat to our children. And maybe that’s the real problem here. Distant manufacturers operating under opaque regulations and dubious enforcement, vague distributors, off-shore companies and the lure of huge profits all conspire to put health and safety way down the line and out of the mind of any responsible entity. These kinds of incidents have happened too often in recent months to be a mistake. They reflect a cultural and ethical deficit endemic to the way global business is being done with despotic regimes.
Among the factors that are causing a crumbling of the pillars of confidence, the subprime mortgage scandal also figures prominently. Here, once again, the too-clever-by-half characters who concocted these elaborate schemes and got paid a sultan’s treasure for their efforts have turned out to be not quite as clever as they wanted us to think. It is unlikely they will have to repay any of the stratospheric bonuses they were receiving while creating these artifices that, like the dot.com bubble and the Enron-era accounting shenanigans, foolishly attempted to defy the rules of basic economics and common sense as only those infused with the curse of hubris will do.
And the figures touted for their wisdom and vigilance who are supposed to be monitoring the actions of these other bright fellows whom history has shown to have gotten carried away with themselves on more than a few occasions, seem not to have been as wise and as vigilant as advertised. Having underestimated the effects of these toxic credit toys before with assurances that the subprime mortgage defaults would not intrude into the broader economy, one wonders if they are any better prepared for the wider economic crisis that seems to be looming.
There will be many casualties before the full extent of the great unfolding 21st century credit debacle is over. There have already been a few CEOs who are taking a very well paid early retirement. More will follow. Some companies will not survive. The stock market will continue to experience unsettling jolts, like its more than 600 point drop this week. But, unfortunately, it will be the ordinary consumer —not the central bankers or the treasury luminaries or the credit agency raters or the boardroom directors who permitted this fiasco and were blind to its early signs— who will suffer most from the turmoil and set backs that lie ahead. So too will the idea that we can look to the icons at the top to do the right thing because their wealth and privilege bestow on them a higher level of accountability to do the right thing. That moral touchstone seems to have vanished, along with the primacy of the common stakeholder —something that has been a recurring theme at Finlay ON Governance.
These events have been the predictable consequence of what has amounted to decidedly subprime leadership and ethics in our boardrooms and in our institutions of government over the past number of years. They are a harbinger of the further crumbling of the pillars of public confidence and trust, which make them our choice for the Outrage of the Week.
Alan Greenspan, whose selective vision we have written about before, appears to have been “shocked, shocked” that tax cuts were contributing to the mounting deficit in the Bush administration. That is, if you believe his just released autobiography The Age of Turbulence. This is a man who, as head of the Fed until just 18 months ago, had nothing but praise for these same deep tax cuts when asked about them before Congress on several occasions. He wanted them made permanent, in fact. He also seemed to have lost his tongue when it came to raising red flags about other aspects of deficit spending that took hold of Mr. Bush and his fellow Republicans the likes of which no liberal would have dared attempt. Now both figure prominently as a source of outrage in the mind of the once revered oracle of U.S. monetary policy.
I recall Dr. Greenspan having a similar change of heart when it came to Sarbanes-Oxley legislation, which he initially supported along with the White House and both houses of Congress. More recently, however, private citizen Greenspan, who consults regularly to American business, expressed chagrin at the dampening effects of such legislation.
There is a very old toy, still popular with children, called Silly Putty. It is remarkably malleable and can be molded into just about any shape. It is an amusing property for a toy, but not so much for the character of those who hold high office. The public is entitled to expect that its leaders will be forthright in their views when it comes to the responsibilities they hold —not hold back their real thoughts for the best seller list.
How many other momentous events will later turn out to enjoy less support than met the eye at the time? What faulty decisions are being made today in Washington and around the world by figures who could stop them if only they had the courage to speak out. The lessons of Vietnam, and now Iraq, are painful testimony to the consequences of the voices unraised, the silent doubters and those who just could not bother to ask the tough questions.
The world needs leaders who are on the job today, when it matters and when they can effect change for the better, not in the book store telling us about what they really, really sincerely felt —tomorrow.
Last March we expressed concerns about the Fed’s failure to anticipate the subprime mortgage meltdown. As we said at the time:
We don’t expect the Fed to be omniscient. But we can expect it to see and act on the obvious. It failed to react to the looming subprime disaster. Which begs the question: What else is the Fed missing?
We got the answer last week, when the world’s central bankers led by the Fed’s own $62 billion injection, poured hundreds of billions into the global economy following huge reversals on key North American stock markets and the unraveling of portfolios deep into mortgage backed securities.
This is the largest amount central bankers have put out since the terrorist attacks in 2001 and it comes in the wake of major fears for the stability of the world’s economy. The injections are a substantial gift to banking and investment institutions which, by the way, make huge fees from the sale of securities to central bankers. They are also a lifeline to hedge funds and LBO firms, which need billions in low interest loans to complete their deals and where the payout to their partners is astronomical. What is being done for the homeowners who are the real casualties of these events is less immediately clear.
Several months ago Fed chairman Ben S. Bernanke told a committee of the U.S. Congress that he didn’t expect the meltdown would spread to other parts of the economy. It’s a good thing he isn’t in the business of forecasting the weather, or we might be dealing with snowstorms in August. One concern is that these highly unusual moves suggest a larger problem that has not been disclosed to the public and that some players are cleaning up even from the mess they helped to create. The other is that the Fed lacks the foresight to know what is really happening now, just as it did a few months ago.
