"The greatness and the genuine trait of your thought and writings lie on the fact that you positively and interestingly make use of philosophical thoughts and thoughtfulness in order to deeply and concretely cogitate about America's social issues. . . . This does not mean that your thought is reducible to your era: your thought, being inspired by issues characterizing your era . . . , overcomes your era and will still likely be up to date even after your era, for future generations." Bruno Valentin

Tuesday, July 29, 2014

Bad Boy Banks Enabling Inversion: Can a Firm Be Patriotic?

The “corporate citizenship” literature has it that companies in the private sector can indeed be “good citizens.” Even though a company cannot vote or be drafted, citizenship is said to fit as an apt description of what is organizationally speaking a profit-seeking machine. To say that a company is a good or bad citizen is, moreover, to anthropomorphise (i.e., apply human characteristics to a non-human). Furthermore, in their managerial capacities, the people who run companies are duty-bound to act in the financial interest of the stockholders, and only then in the broader societal interest. Even so, an ethical basis does exist on which some of the banks can be viewed as culpable.

Between 2011 and 2014 when Goldman Sachs made nearly $210 million in “inversion fees” for helping companies based in the U.S. shift their headquarters overseas to obviate a relatively high U.S. corporate tax, asking whether the executives at the bank were patriotic is tantamount to making a category mistake. A person can without contradiction be patriotic away from work while focusing on increasing inversion fees in his or her managerial role. Hence, Jamie Dimon could sincerely look at those fees earned by JPMorgan Chase and claim, “I’m just as patriotic as anyone.”[1] Were he to have put his personal patriotism into force at the bank at the expense of the stockholders’ financial interests and the chartered function of the bank, he would have been unethically disregarding his fiduciary duty. From a Kantian standpoint, we can ask what would happen if every manager at every bank had as his or her own “personal project” as a patriotic U.S. citizen trump the duty. Patriotism, after all, is hardly monolithic, but involves interpretation in discerning the applications and the proper choices therein. Banks could hardly function that way, so to say every manager should put patriotism first would not make sense (for the banks would fail under such a mandate). This, by the way, is the first formulation of Kant’s categorical imperative. If universalizing your maxim doesn’t work because of a contradiction in the reasoning or logic, the maxim is unethical.

The argument that banks that had been in trouble in 2008 and subsequently received loaned funds from the U.S. Government are obliged ethically not to turn around and profit by depriving that government of corporate tax revenue presents us with a stronger case, for it rests on an implicit contract, or quid pro quo, rather than patriotism. Social contract theory, of which Kant was an advocate, includes implicit contracts, rather than being limited to the ones where both parties sign on the dotted line. In fact, as regards any historical agreement establishing government and citizens, Kant idealizes the notion to say that such an agreement would be what people would agree to in a state of nature—not that such an agreement was literally made as man first stepped into complex living arrangements. From this interpretation of the theory, it makes sense to say that in return for being bailed out—even from the tailwind of irrational exuberance aided and abetted by a “big short”—a person naturally would expect an obligation not to double-cross the hand that had helped at the time of crisis.

This ethical argument applies to Goldman Sachs, Morgan Stanley, and Citigroup, each of which made sizeable profits from inversion fees and had needed the government bailout. JPMorgan Chase, on the other hand, avoided the greedy temptation to get into mortgage-based derivatives and insurance swaps based on the securities, and thus that bank did not face the implicit obligation. Jamie Dimon need not have jumped to defend his patriotism after all, or even an implicit obligation that his bank put the revenue of the U.S. Government before stockholder profits.

Regarding Goldman Sachs and Citigroup, dismissing the implicit obligation was, say we say, par for the course (i.e., in keeping with the banks’ respective cultures), for in both banks clients were lied to regarding what the traders knew were “crap.” I’m referring of course to the bonds based on sub-prime mortgages. Such fraud is also a disregard for an implicit social contract (as well as a very public legal one). Societally, people have a general expectation that people working at a bank will not exploit them through dishonest means. That’s not how business is done, the average Joe would rightly say. So perhaps the utility of this case of inversion fees lies in what it says about the intractability of a mentality in a corporate culture: the dysfunction is very difficult to remove, and thus it is likely to perpetuate itself in a pattern.

1. Mark Gongloff, “’Patriotic’ Big Banks Profit Helping U.S. Companies Dodge Taxes,” The Huffington Post, July 29, 2014.