Published in CommPRO.biz 2014.01.16

The Earnings Culture

Public companies are driven by the need to show earnings. The path they follow to that end determines their corporate culture. Horace Greeley, the dominant editor and publisher of the 19^th century, commented, “The darkest hour in any man's life is when he sits down to plan how to get money without earning it.” Problem is, some corporate leaders see any action to increase “earnings” as fully justified. Too many CEOs seek “earnings” by any means. They look at the fines and legal penalties incurred as -“oops”- no more than the cost of doing business.

Investors too often are not concerned how “earnings” are achieved. While the ethical business model is the proven best source of high earnings, some see the concern for employees, communities, vendors, and the environment that model requires as taking money out of their pocket. Some even see a focus on treating customers fair and square as a missed opportunity to increase profits.

We saw this in the run up to the current recession. The monster banks pushed the pipeline to produce more and more mortgages, ignore the details, don’t fret about income verification. Once in hand they threw together these shaky mortgages (“Crap” was the term they used), put a few good ones on top of the pile and sent them off to the rating agencies. The bankers were not hesitant to point out that as paying clients, the rating better be AAA.

These bundles of sure-to-fail “crap” were sold as if the triple A ratings were real. Adding insult to injury these banks placed bets that the “crap” they created and sold would fail. They bet against their own customers. They made money coming and going; money they called “earnings.” The shareholders loved it. J.P. Morgan Chase, Goldman Sachs and a handful of monster banks deliberately created financial products designed to fail.

When they were caught off guard by the collapse of their whole scheme, they turned to the taxpayers for help. While necessary, the bailout was designed by Bush Secretary of the Treasury, Hank Paulson, former CEO of a monster bank. He gave his mates the needed money but failed to attach any conditions. We the taxpayers continue to provide interest free funds to these banks believing that they will lend it to small businesses and create jobs.

Wrong! They are back to gambling with our money, this time boosting prices on basic commodities that folks strapped for cash have enough trouble paying for. As long as the banks’ “earnings” look good, the stock market booms. We are hard pressed to see these “earnings” passing the standard Horace Greeley set. The bank CEOs’ plans are obviously designed to get money without earning it. They set the culture and drove it down through the ranks. The people paid mightily these last five years for the sins of these arrogant banksters. They, however, are above the law. At least the Attorney General of the United States says they are.

Published 2013.02.22 in CommPRO.biz

3,800 to Zero
 
Following the Savings & Loan Crisis a couple decades ago, roughly 3,800 bank executives were jailed. The more severe crisis we are slogging though, has for all intents and purposes, produced zero convictions, no jail time for the Wall Street executives who triggered it. You may have heard that one of three financial rating agencies that awarded AAA ratings to the toxic mortgage packages the big banks referred to as “Crap,” Standard & Poor’s, faces $5 billion in Securities Exchange Commission (SEC) fines. However, not one S&P executive faces prosecution.

The appalling failure of federal and state entities to hold responsible those who threw us into the most damaging recession in seven decades is shameful. In reviewing the litany of excuses offered for this travesty, this much is clear: it is difficult to prove fraud. And, George W. Bush’s Treasury Secretary Hank Paulson created a bailout atmosphere seemingly designed for the ethically challenged monster banks. Our leaders, Treasury Secretary Jack Lew, Attorney General Holder, and the President himself, can’t seem to deal with the legal challenges. It’s a situation crying out for creativity.
 
Al Capone, whose criminal “Creds” ran from hooch to hookers with lots of killings thrown in, laughed in the faces of the authorities just as the bankers have been laughing since the bailout. The banks sucked up the taxpayers’ bucks in billion dollar gasps, like the dying beasts they were. Once they were on sound footing, instead of using our money to help the economy, they went right back to the same crazy risky stuff that caused the recession. And why not? They know they can stick the taxpayers with their losses. When the authorities couldn’t pin Capone’s criminal activities on him they got creative and tried him for tax evasion, netting Capone 11 years in Alcatraz.
 
Senator Carl Levin watched Goldman Sachs CEO, Lloyd Blankfein, smirk his way through testimony before his Senate Committee and then turned his findings over to the Justice Department. Levin, a Harvard Law graduate and experienced prosecutor, was clearly disturbed when Justice failed to take action. The DOJ also declined to prosecute egregious criminal behavior on the part of HSBC, citing a fear that to do so might take the bank down and threaten our economy.
 
It’s time for creativity. The Supreme Court says corporations are people, so let’s prosecute their living parts. Let’s charge top executives and boards of directors who know –or have a fiduciary responsibility to know– what their corporation is up to. Sending the Board and the “C” Suite off to the slammer is not going to sink the ship. One thing we know for sure: there are lots of topnotch managers who could take over and probably do a better job than those they replace, especially when replacing the nitwits who green-lighted the HSBC mess. Unlike a massive fine that becomes a “Cost of Doing Business,” the prospect of a jail term should put a halt to the greed-fueled behavior all too common in our banking sector.