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Corporate Misdeeds and the Role of Government

Barclay's Bank branch

Flickr/Some Driftwood

In Wednesday’s New York Times, business columnist Eduardo Porter probes what he calls “The Spreading Scourge of Corporate Corruption,”in the wake of the scandal in which Barclay’s Bank admitted trying to manipulate key interest rates to its benefit (at a cost to consumers, businesses and investors), and implicated other banks.

Porter says misconduct in the financial industry has become so commonplace that it seems to have lost its shock value:

Perhaps the most surprising aspect of the Libor scandal is how familiar it seems. Sure, for some of the world’s leading banks to try to manipulate one of the most important interest rates in contemporary finance is clearly egregious. But is that worse than packaging billions of dollars worth of dubious mortgages into a bond and having it stamped with a Triple-A rating to sell to some dupe down the road while betting against it? Or how about forging documents on an industrial scale to foreclose fraudulently on countless homeowners?

Porter debates whether corporations have become less ethical in recent years or whether their misdeeds are just more visible to us lately. He suggests ”the temptation to bend the rules is probably highest toward the end of an economic upswing, when executives must be most creative to keep the stream of profits rolling in.” And he ticks off some of the forces that can lead to corruption:

  • Complex balance sheets at big companies make it easier to hide fraud;
  • Government’s urge to bail out banks that are “too big to fail,” can encourage them to take self-serving risks;
  • Globalization can spur “tooth and claw” competition for new markets;
  • The surge of corporate cash into the political process (see: Citizens United) can influence politicians to make laws friendlier to business desires.

Whatever the case, the United States at this point is no beacon of ethical behavior, Porter asserts. He cites an international watchdog agency:

In 2001, Transparency International’s Corruption Perceptions Index ranked the United States as the 16th least-corrupt country. By last year, the nation had fallen to 24th place. The World Bank also reports a weakening of corruption controls in the United States since the late 1990s, so that it is falling behind most other developed nations.

Weakening corruption controls… what are those controls? They’re the laws and regulations that require transparency and fair dealings… and the regulatory agencies that enforce those rules. California’s “Homeowners Bill of Rights,” which Gov. Jerry Brown will sign into law Wednesday, is an example.

An accompanying article on the New York Times business page reports that regulators with the Commodity Futures Trading Commission have just approved new rules aimed at reining in the derivatives industry and “preventing a repeat of the financial crisis.” The Securities and Exchange Commission last week approved similar rules, which are a key part of enacting the Dodd-Frank financial regulatory law.

But the same article points out that one member of the commodity futures commission voted against the plan because he said “the fine print created loopholes wide enough for Wall Street to exploit,” and it said the commission wrote exemptions to the new rules “after months of frenetic corporate lobbying.”

On the one hand, it seems we need regulation to keep business and finance operating on the up-and-up to protect consumers and investors. On the other hand, businesses argue that regulation can become unwieldy and put them at a competitive disadvantage. So what’s the proper balance? And who will get us there? To help you understand the philosophies about regulation of presidential candidates Mitt Romney and Barack Obama, the National Journal recently came up with this explainer.

The whole debate brings to mind a 2008 radio piece produced jointly by NPR News and This American Life. Called “The Giant Pool of Money,” it does a good job explaining the mortgage meltdown and connecting the dots between the world of high finance and the homeowners who lost their homes to foreclosure. The program is an hour long, but it’s clear and entertaining.

Here’s reporter Adam Davidson describing what happened to an Iraq war veteran and to others like him:

Richard actually qualified for a Veterans Administration Loan at a really good rate. And he had money to put down. But the broker convinced him to take a mortgage that turned out to be much worse, but did have a much higher commission.

Mortgage brokers were walking around east Flatbush knocking on doors, telling just about anybody, hey, we can get you a house. If you have a house, we can get you a big home equity line of credit. This happened in poor neighborhoods all over the country.

And while the FBI and other law enforcement folks say they don’t have the exact numbers, it’s clear that fraud, like that fraud on Richard’s application, was ubiquitous.

What’s at stake when business regulation fails? Eduardo Porter ties it to a broader breakdown in trust, a fraying of the social compact that underlies our whole democracy:

It’s hard to fathom the broader social implications of corporate wrongdoing. But its most long-lasting impact may be on Americans’ trust in the institutions that underpin the nation’s liberal market democracy.

An overstatement? A mis-reading? Or grimly accurate? What do you think?