Who Guards the Guards When Guards are let down?


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The perplexing events that led US economy to brink of collapse, vanquished trillions of US wealth and subjugatedmillions of Americans are end result of pathologicaldemeanor and the politico institutional meddling. Thisarticle examines causal factors including antecedents of thisunprecedented financial collapse and presents simpleformulation to end systemic conflicts at organizational,financial and societal level.

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Who Guards the Guards When Guards are let down?

  1. 1. WHOGUARDS THE GUARDSWHEN GUARDS ARE LETDOWN? Dhiman Deb Chowdhury The perplexing events that led US economy to brink of collapse, vanquished trillions of US wealth and subjugated San Jose, CA millions of Americans are end result of pathological Email: dhiman.chowdhury@yahoo.com demeanor and the politico institutional meddling. Thishttp://www.dhimanchowdhury.com article examines causal factors including antecedents of this Fax: 619-330-0662 unprecedented financial collapse and presents simple formulation to end systemic conflicts at organizational, 12/9/2011 financial and societal level. ©2011. All rights Reserved.
  2. 2. I had a bigger problem to comprehend – the systemic conflicts at organizational, financial, societal and ecological level; an abstraction that often ignored in Corporate Sustainability and Sustainable development. Little I discerned, such exploration of my inquisitive mind, will stumble upon yetanother perplexing topic.As I dig further in my quest to find solution to otherwise convoluted “Corporate Sustainability”(Chowdhury, 2011) premise, a perceived thinner yoke seems to emerge as stronger and matted. Theenigmatic events that led to the unparalleled and apparent financial collapse in USA are the attributionof muted yet sturdy coagulates of pathological demeanor. Such detrimental condition was evidentproviding the antecedents of increased politico-institutional meddling and unsustainable disposition atorganizational, societal and financial level. The issue here is that – “Who guards the guards when guardsare let down?”. I find that obscured within this simple yet powerful question is the clues to America’sunprecedented financial debacle.It’s odd to learn that so many at the helms of our financial and political systems have let their guardsdown. The end result devastated America’s economy, vanished America’s household wealth (awhopping sum of $11Trillions) and languished 26 million of Americans out of job (FCIC, 2011).I made the phenomenological observations of a pathological demeanor in late 1990s that was ostensiblyone of the causal factors of endogenous decline in many entities as we begin to witness the demise ofmany of technology giants in later years. Little I knew then that the observed failures of fewcorporations are just the symptoms and perhaps the prelude of bigger things to transpire. It was notclear until I began my doctoral study. A pathological demeanor that I observed at entity level has beenso prevailing and collectively so devastating that negating it’s impact to industrial decline would be agross underrate. This immensely detrimental behavior also exhibits a conniving attitudinal dimensionleading to systemic discord in “Sustainability approaches” at organizational, financial, societal andecological level (Chowdhury, 2011b). Contradictory to the perceived notion of corporate led “greenwash” strategy, “sustainability approach” is about building viable and responsible corporations. Myempirical study to this abstraction led me to a conjecture about perennial exit of corporations. Is it dueto “industrial decline” or human driven collapse? From Enron to Nortel, phenomenological observationsapparently suggest the later.This postulation finds significant quantitative and qualitative substantiation in the financial crisis reportof the “National Commission on the Causes of the Financial and Economic Crisis” (FCIC, 2011) whichalleged human actions and inactions for the unprecedented economic collapse of 2008.The National Commission on financial crisis made the following concluding remarks in it’s publishedreport (FCIC, 2011): 1. “We conclude this financial crisis was avoidable”. 2. “We conclude wide spread failure in financial regulation and supervision proved devastating to the stability of nation’s financial market”. 3. “We conclude dramatic failures of corporate governance and risk management at many systematically important financial institutions were a key cause of this crisis”.
  3. 3. 4. “We conclude a combination of excessive borrowing, risky investments and lack of transparency put the financial system on a collision course with crisis”. 5. “We conclude the government was ill prepared for the crisis, and its inconsistent response added to the uncertainty and panic in the financial markets”. 6. “We conclude there was a systemic breakdown in accountability and ethics”. 7. “We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline lit and spread the flame of contagion and crisis. 8. “We conclude over the counter derivatives contributed significantly to this crisis”. 9. “We conclude the failures of credit rating agencies were essential cogs in the wheel of financial destruction”.It is evident from the “National Commission” report that our financial system oversight failed and ofteninfluenced by our political system allowing toxic mortgage securitization to continue. However, at thecore of all these was the immensely detrimental behaviors of few who cared their self interest andindulgence above the nation and societies.Figure 1. Politico-institutional meddling facilitated detrimental behavioral pathology to foster at institutional level leadinginstitutional malpractice.The picture above depicts a bird eye view of the events that aided in the economic collapse. It is evidentfrom the diagram above that the situation that led to the unprecedented economic meltdown of ourtime was fueled by detrimental behavioral pathology. Such behavioral pathology is certainly curable and
  4. 4. unless action related to behavioral competence is enforced, any preventive measure or formulationthereof would be ineffective.To this abstraction a brief about my research is imperative; I began my conception on sustainability(http://www.dhimanchowdhury.com/research.html ) drawing pragmatic and qualitative assumption onthe behavioral competence but little I knew that our very economic system in which to basis our survivalis plagued by unsustainable practices (Chowdhury, 2011a, b & c). At the helm of this politico-institutional medley, cultism controls senses, behaviors and attitudes. Those could have preventedAmerica’s financial debacle and those who are privileged by our trust did not take into considerationhow their pretty indulgences have been hurting the Nation and her people.A Nation that was built by bloods and sweats of so many pioneers, honest, humble, noble and brilliantminds came so close to lay in shamble, “thanks-a lot” to the behavioral pathology of cults of politico-institutional medley. Though corruption did not spill over in the streets of America, it was deep andprevailing in our financial system very early. The gradual abolishment of static banking system paved theway for questionable governance and unsustainable practices to take root in our financial system.Figure 2. The history of American Banking System.American Banking system in the early 1800s depended on cyclic practice of collecting consumer depositsand lending to consumer from that deposited money pull – a static model. The lending practice wasconstrained by deposited money pull and when increase number of consumers drawn their money forone reason or the other, banks ended up in runs. A series of Bank runs in 1873, 1884, 1890, 1899 and1907 forced US Congress to establish Federal Reserve in 1913 as the lender for bank guaranteeingmoney reserve (FCIC, 2011). However, such guarantee of printing money and allowing banks to continueproven futile attempt as bank runs continued in 1920s and 1930s (figure 1). The situation of greatdepression in 1920s and 1930s has many accounts. The worldwide depression begin in 1920s but its’affect to USA was significant and continued in 1930s removing 25 percent of all workers from job by1933 (Smiley, n.d.). Without discounting worldwide depression as the reason, some scholars argue that
  5. 5. deflation was catalyst of the great depression (Cole & Ohanian, 2001) in 1920s and 1930s. However, theenactment of Glass-Steagall Act (Gup, 2007) in 1933 depicts something different than that of deflationas the causal factor of great depression. The Glass-Steagall’s findings revealed questionable governanceand behavioral pathology in banking industry from speculative financing to high risk securitization thatproven to be devastating for American economy (Gup, 2007; Investopedia, 2011; Francis, Trimble &Chekwa, 2010). The GSA (Glass-Steagall Act) was a necessary step (Francis, Trimble & Chekwa, 2010) toprotect Nation’s economy as it created barrier walls, separated commercial Banking and InvestmentBanking. The “Investment Banking” which led to the creation of shadow banking system in 1970s wasthen and still considered risk undertaking. Another aspect of GSA was that it allowed formation of FDIC(figure 1) asserting that depositor’s money at commercial bank and not at the investment bank will beprotected under FDIC under certain guidelines. In addition, the separation of commercial andinvestment banks was intended to lessen the powers that would otherwise allowed underwriting firmsto intensify competitions and supersede commercial banks through unfair competitive practices(Jackson, 1987). The GSA also paved the way for Bank Holding Company Act of 1956 (PBS, 2003)extending further restrictions on banks including bank holding companies owning two or more banks(see figure 2).However, Bank found many ways to go around doing their questionable business practices through theloophole of GSA and also started behind the scene lobbying against GSA. Banks even created asubculture against GSA to influence congressional representatives. The result came in the form of aseries of act designed to loosen GSA restrictions. The first in this series was DIDMC (DepositoryInstitution Deregulation and Monetary Control Act) of 1980 that repeal the limit on interest for depositsamong other things and gradually phased-out “Regulation Q” that restricts interest ceilings undersection 11 of GSA (Gilbert, 1986; PBS, 2003) by 1986. In 1982, congress enacted Garn-St. GermainDepository Institutions Act (GSGDI) divulging yet another attempt towards deregulation and allowingthrift institution to offer among other things the adjustable mortgage rate (ARM) loan. This was one ofthe two major revisions of US financial system and the other was DIDMC (Cornett & Tehranian, 1990).In 1994, congress further allowed banks to effectively expand beyond state lines and also made itpossible for bank holding companies to acquire banks anywhere in the nation (McLauhlin, 1995).In 1999, congress enacted yet another law known as “Gramm-Leach-Bliley Act” that repeal GSA andabolished most the restrictions imposed by it. As many legislations began to undercut GSA, a new groupof Industry sprung up in 1970 when a group of investing firm initiated money market fund (please viewfigure 2).
  6. 6. Figure 3. The role of Shadow Banking System in America’s financial crisis.Whether regulation is good or bad for the economy that’s a different type of debate altogether,however, what has transpired through deregulation redux is matter of grave concern. Many scholars(Kacperczyk & Schnabl, 2010; Grogan & Fisher, 2010) questioned shadow banking practices specificallyin commercial papers, repurchase agreements and mortgage securitization. Kacperczyk & Schnabl(2010) went as far as claiming that commercial paper played central role in financial collapse from 2007-2009. FCIC (2011) also indicated that commercial are often sold without adequate collaterals and muchof these money are drawn from money market fund which grew from USD$3 Billions in 1977 to USD$1.8trillions by 2007. Though many other factors contributed to economic meltdown of 2007-2009, role ofShadow banking industry remain elusive. A report published by Grogan & Fisher (2010) claimed ShadowBanking industry contributed to the financial crisis in “unprecedented ways”.Figure 1, 2 & 3 above (red lines indicates adverse impacts of certain measure), however, depict a yetmore complex issue, a sure sign that politico-institutional medley are counterproductive, as itdetrimental to nation and common goods so do to the very institutions who sponsored such action tobegin with.It’s the behavioral pathology that we need to consider putting a barrier on and not the progress. I sincelong contended that regulatory measures sometimes help and other times counter productive. What is
  7. 7. needed a formulation that puts barrier in the development of behavioral pathology and my formulationof OCBS (Organizational Citizenship Behavior towards Sustainability) would be of great tool to thisaspect. Should you be interested, please visit my website at http://www.dhimanchowdhury.com .ReferenceChowdhury, D., 2011a. Organizational Citizenship Behavior towards Sustainability (OCBS). AberdeenBusiness School, The Robert Gordon University.Chowdhury, D., 2011b. Corporate Sustainability Survey: 2011. Available online athttp://www.dhimanchowdhury.com/research.html.Chowdhury, D., 2011c. What is the root cause of Corporate failure? – A linkedin Poll. Available online athttp://www.linkedin.com/osview/canvas?_ch_page_id=1&_ch_panel_id=1&_ch_app_id=80&_applicationId=1900&_ownerId=2665170&osUrlHash=fKaa&trk=hb_side_appsCole, L.H. & Ohanian, E.L., 2001. Re-Examining the Contributions of Money and Banking Shocks to theU.S. Great Depression. NBER Macroeconomics Annual 2000, Volume 15. MIT Press. Available online athttp://www.nber.org/chapters/c11057.pdf .Cornett, M.,M. & Tehranian, H., 1990. An Examination of the Impact of the Garn-St. Germain DepositoryInstitutions Act of 1982 on Commercial Banks and Savings and Loans. The Journal of Finance, Vol. XLV,NO. 1; March, 1990.FCIC, 2011. The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes ofthe Financial and Economic Crisis in the United States. Official Government Edition. The Financial CrisisInquiry Commission. Superintendents of Documents. USGPO.Francis, C., Trimble, A. & Chekwa, C., 2010. Changes in Financial Institution Regulations Associated withthe Repeal of the Glass-Steagall Act of 1933. 2010 IABR & ITLC Conference Proceedings, Orlando,Florida.Gilbert, A.R., 1986. Requiem for Regulation Q: What It Did and Why It Passed Away. Federal ReserveBank of St. Louis.Gup, E.B., 2007. Corporate Governance in Banking: A Global Perspective. Edward Elgar Publishing Ltd.Grogan, J., & Fisher, I., 2010. The financial Crisis: 2010.Investopedia, 2011. What Was The Glass-Steagall Act? Available online athttp://www.investopedia.com/articles/03/071603.asp.
  8. 8. Jackson, William D., 1987. Glass-Steagall Act: Commercial vs. Investment Banking. CongressionalResearch Service Report IB87061. Available online athttp://digital.library.unt.edu/ark:/67531/metacrs9065/m1/1/high_res_d/IB87061_1987Jun29.pdf .Kacperczyk, M. & Schnabl, P., 2010. When Safe Proved Risky: Commercial Paper during the FinancialCrisis of 2007–2009. Journal of Economic Perspectives – Volume 24, Number 1.McLaughlin, S., 1995. The Impact of Interstate Banking and Branching Reform: Evidence from the States.Current Issues in Economics and Finance. Federal Reserve Bank of New York.PBS, 2003. The Long Demise Glass-Steagall: A chronology of tracing the life of Glass-Steagall Act, from itspassage in 1933 to its death throes in the 1990s, and how Citigroup’s Sandy Weil dealt the cope degrâce. WGBH Educational Foundation. Available online athttp://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html.Smiley, G, n.d. The concise Encyclopedia of Economics: Great Depression. Library of Economics andLiberty. Available online at http://www.econlib.org/library/Enc/GreatDepression.html .