Posts Tagged: greed

American Society / Banking / Corporate Behavior / Financial / Regulation — 0 Comments
17
Oct 10

Millions for Design, Not One Cent for Administration

Shortly after the American Revolution, France began seizing Americans ships and demanding payment for their return.  CC Pinckney, one of three members of the American delegation to France, memorably replied:  “Millions for defense sir, but not one cent for tribute.” XYZ Affair

In the modern world of corporations, let’s modify this quote to: “millions for design, but not one cent for administration.”

Brilliant Wall Street “masters of the universe” have designed elegant and sophisticated mortgage backed securities.  Exactly what are these financial instruments?  The designers instructed that a mortgage be underwritten, conveyed to a trust (REMBIC), and then placed in a mortgage backed security to be sold to investors.  Even more appealing to investors is that they could select various tranches (levels of risk) of the final product to invest with higher or lower expected default rates.

As we now learn, mortgage notes may never have been actually conveyed to the trusts.  Further, the banks are having difficulty locating the original mortgage notes. To muddy the water further, we have allegations of fraud, faked documents, mass notarizations, and false affidavits. See This Magic Moment

How did we get to this current state of affairs?

After the Big Launch

It is intriguing to imagine being the star chef, the center ring performer, the creator of something special.   Far less interesting is the job of cleaning the kitchen, sweeping out that center ring, or making the complicated creation actually work.  Somehow the follow up has less, or little, dignity.

Corporations operate the same way, and corporate behavior reflects all human behavior.  When a company launches a new financial product, service or program, the accolades go to the designers: the star lawyer, finance official, actuary or business executive who originates and sells the idea to high level management.  The designers get big bonuses, exposure to the CEO or board, and promotions to the inner sanctum. They give scant thought to how a new financial product or service will be administered.  And corporations allocate few budget resources to administration.

The Tragic Stepchild:  Administration

How do corporations or banks repetitively get to this state of affairs?  Some probable reasons:

  • Greed – Rewards flow to the designers, not the administrators.
  • Elitism – The designers tend to be from elite schools and hold fancy sounding titles in the corporation. Administrators, on the contrary, hold high school diplomas and maybe some college courses from somewhere.
  • Lack of Funding – Once the thrill of design has worn off, management wants to control costs so the administration function, a/k/a overhead, gets short shrift.
  • Program or Product Complexity – Many programs are devilishly complex, yet need to be flexible.  The combination is expensive and requires well trained personnel.  And complexity is an excellent way to hide cost and pricing.
  • Poor Training – Closely allied with lack of funding and complexity is poor training.  Designers may prepare rote scripts for administrators, but they are inadequately trained to exercise judgment or handle non-standard questions or errors.
  • Fear – Job insecurity and low corporate status make program administrators reluctant to report problems or errors to their superiors.  They are even more fearful of being “whistleblowers” and reporting actual malfeasance.
  • Neglect – Corporate headquarters are in or near tonier places like New York, Los Angeles or Chicago.  Administrative operations are either in rural areas or overseas.  Other than brief flyovers, headquarters management has little time or interest in being where the administrators and their problems are.

Clean Hands and Dirty Programs

Previously, I have written about the reluctance of our elite college graduates to seek jobs in manufacturing. See Clean Hands and a Weak Economy. Administration is a close analog.  It is populated by non-elite individuals, in remote locations with little promise of promotion for a job well done.

We are now seeing the fallout from this corporate disdain and distaste for administration.  Reports are now legion of hairdressers and Wal-Mart employees with little or no training being pressed into service working for foreclosure mills.  They have no idea what a mortgage note or affidavit is, much less what to do with it. See Meet the Foreclosure Experts

America 2010:  millions for design, not one cent for administration.  Where were the regulators? We should never have been in this mess.

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American Society / Banking / Executive Compensatio / Financial / Political / Regulation — 0 Comments
2
Mar 10

Goldman and the Winner Take All Society

Finally, Goldman Sachs has gone too far.  In A Reputation as Good as Goldman?  Part I, we discussed Goldman’s selling of mortgage backed securities, and its role in the current Greek budget crisis.  These activities clearly contributed to its self-inflicted reputational damage.

Perhaps the hubris went further.   Does Goldman believe that its status as a favored Federal Reserve “too big to fail” firm will insulate it from government investigation? Last week Ben Bernanke put a dent in Goldman’s Teflon shield:

Ben S. Bernanke, the Federal Reserve chairman, told Congress Thursday that the Fed was ‘looking into a number of questions relating to Goldman Sachs and other companies and their derivatives arrangements with Greece.’

Mr. Bernanke said the Securities and Exchange Commission was also concerned about how derivatives — financial instruments that are largely unregulated and do not trade on public exchanges — have contributed to Greece’s problems. ‘Obviously, using these instruments in a way that intentionally destabilizes a company or a country is counterproductive,’ he said. See In Greece’s Crisis, Fed Studies Wall St.’s Activities.

In Is Goldman Finally About to Be Leashed and Collared? Yves Smith observes and analyzes Goldman’s corporate culture.  As a former employee, she reports on colleagues’ piggish and overly aggressive behavior. But in an otherwise excellent post, I believe she overlooks the role of current compensation systems.

Pay Practices and Reputation

In previously discussing the banking crisis, we pointed out a fundamental principal: you get what you incent.

Banks were interested in generating upfront fees. Incentives were predicated on “making the deal.”  The best way to make a deal was to ignore the creditworthiness of the borrower.  The banker who made the bad loan suffered no personal financial penalty.  There was no “skin in the game.” Why not write as many loans to poor credits as possible? See Hard Truths from the Banking Crisis.

The Goldman culture incents a “winner take all” mentality.  Since it is a public corporation rather than a partnership everyone is an employee.    A highly mobile employee rather than an owner is far less concerned about the firm’s long term reputation.  That employee wants to maximize current compensation; worrying about future consequences is for suckers.  Drawing on this paradigm, we are not shocked by headlines excoriating the firm for trading against its clients’ interests, shorting the municipal bonds it helped underwrite, skirting EU rules, or tanking the housing market.

Goldman operates in a larger Wall Street and indeed general culture that encourages greed at the expense of overall civic good:

  • Successful hedge funds report individual earnings in the hundreds of million dollars per employee.
  • Loyalty is dead.  Employees change firms. Highly paid athletes change teams without a second thought.
  • The media treats great wealth as reason for great celebrity.
  • Compensation validates individual worth.
  • Government backstops losses and allows gains to remain private.
  • The zeitgeist promotes: “I better grab as much as I can now before the economy implodes.”

Does It Have To Be This Way?

Any alert Board of Directors should be asking some difficult questions.  Why aren’t we concerned about the long-term firm reputation?  What do we want the corporate culture to be? Just because we can legally do a transaction should we be doing it?  How do we blend partnership-based personal accountability with a public corporation structure?   How do we get employees to care about the long-term view?  How do we meet the competitive threat of hedge funds and private equity without damaging corporate reputation? How does our compensation system comport with these concerns?

Yves Smith noted that it was as dangerous for anyone to get in the way of a Goldman employee and a profit making opportunity as it was to get between a predatory animal and its kill.  Goldman has managed to get itself between a very worried Obama Administration and a very angry public.  How ironic if the Goldman predatory lion becomes the Administration sacrificial lamb.

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