Bankers or the Bank: Which Is Responsible?

Along with paying $2.6 billion to settle criminal and civil charges for having “failed, and failed miserably” to notify the SEC of warning signs that could have short-circuited Bernie Madoff’s $17 billion Ponzi operation, J.P. Morgan Chase only had to acknowledge that its actions were improper.[1] No criminal prosecution ensued. The electronic evidence against Madoff's operation was too damning for JP Morgan Chase to have missed it. Indeed, according to USA Today, “JPMorgan had suspicions about Madoff’s operation as early as December 1998, when a bank fund manager warned the investment returns were ‘possibly too good to be true.’”[2] Without submitting any “suspicious activity reports” to the U.S. Government as required by law, the bank had pulled $275 million of its own “feeder funds” from Madoff’s fund two months before Madoff’s financial services firm collapsed.[3] In other words, the bankers connected the dots well enough for the bank's financial interest and perhaps even their own, yet strangely  enough no one at the bank could manage to let the outside world  know, even though federal law mandated reporting the suspicions to the SEC.  and responsibility urged it.

Does being strenuously pressured into making a public acknowledgement of impropriety accomplishes any internal improvement in a bank's corporate culture, including the pervasive attitude toward responsibility relative to profits? JPMorgan Chase had to acknowledge the impropriety of the bank's failure to keep the SEC informed, but this admission does not, in itself, mean that the bankers came to realize a sense of responsibility to the other investors (and potential ones) so they would not continue in Madoff's scheme. A formal acknowledgement is external, and all to amenable to business, whereas a sense of responsibility is internal; it is either there or its not. It is not something that a person can get by attending a training class. I'm always amazed, by the way, when a supervisor tells a customer that an employee's attitude can be "retrained," as if all the values and beliefs that a person has acquired even from upbringing can suddenly be changed by attending a workshop on proper employee attitude. 

In fact, it is not clear to me whether a corporate acknowledgement of guilt or failure even makes sense. Stated in terms of organizational theory, I want to challenge the popular presupposition that an organization itself can admit to criminal or improper actions. If so, must we assume that a firm is more than the sum of its parts and that this more has human attributes? Just because human beings are members of organizations does not mean the organizations are themselves human in some respect, such as in having a sense of responsibility.

Anthropomorphism, the projection of human characteristics or attributes onto non-human animals or things including collectives such as a company, government, or religious organization, is the underlying problem behind the justice in this case being insufficient. Did JPMorgan acknowledge that its actions were improper? Can it even be said that a bank has actions, since only people can act. You might retort that a bank has people who act for the bank, but this is not the same as the bank having acted. Did JPMorgan have suspicions? Human minds have suspicions. An organization does not have a mind (and thus not a memory). In spite of the legal fiction of “personhood,” a company made up of people and things such as money and buildings has neither a consciousness nor mind. 

J.P. Morgan hitting a man. Was he demonstrating that criminal law applies to human beings in organizations?  Image Source: Wikimedia Commons

Dennis Kelleher (of Better Markets) answered the JPMorgan settlement by observing, “Banks do not commit crimes; bankers do.”[4] Kelleher made the dogmatic statement in support of his criticism of the lack of charges against the bank managers who decided to, and went along with, keeping their suspicions from the SEC and thus the outside world. Who decided to pull the money in the bank’s feeder funds from Madoff’s fund two months before Madoff himself informed government officials? Were those JPMorgan employees aware of the refusal to inform the SEC? If so, they, not "the bank," had some explaining to do, and from that perhaps some external accountability was needed. Ironically, five former Madoff employees charged with aiding that fraud were on trial at the time. 

To be sure, it could also be asked whether the SEC should have needed to depend on reports from suspicious institutional investors such as JPMorgan to discover Madoff's scheme? It was so big that the SEC came off looking rather badly. If that regulatory agency has suffered from inadequate staffing (or experience, do to the higher compensation on Wall Street), part of the larger problem is that political contributions and lobbying from financial institutions convince elected and appointed officials of the federal government to keep the SEC too lean to do any damage to those particular institutions. Of course, damage to the financial system itself, or even the wider economy, as occurred in the financial crisis of 2008, is apparently not within the purview of responsibility. Again, the outsiders be damned, or, insiders at the expense of others. The lack of sense of responsibility in the bank thus mirrored that of the politicians and their paymasters. It is an inner circle of power and money that forsakes the public good.  

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1. This was according to Manhattan U.S. Attorney Preet Bharara.Tim Mullaney and Kevin McCoy, “JPMorgan to Pay $2.6 billion in Madoff Case Settlements,” USA Today, January 8, 2014.

2. Ibid.

3. Ibid.

The Underbelly of Corporate Charity as Corporate Social Responsibility

Why do corporate managements spend corporate money on charities? The obvious reason is to reduce the amount of corporate income tax due. Yet another motive, not as transparent, has to do with reputational capital, and that motive may also explain corporate social responsibility.
Achieving the low 12.6% effective tax rate was undoubtedly on Bernie Madoff’s mind when he made his firm's charitable contributions. This rationale was by no means unusual at the time.  Furthermore, Madoff would not have been above using charity in order to display himself as a very wealthy person. According to Martin Press, a tax attorney, “If [Madoff] actually gave the money to charity, it is a common theme of Ponzi scheme people to make large charitable contributions to show people how wealthy they are.”[3] The perception of Madoff as a financially successful personally rendered him trustworthy in being capable of making investors rich, and the apparent charitable giving gave the impression of trustworthiness in its normative sense (i.e., honesty and integrity).

Similarly, moreover, corporate strategies may include programs under the rubric of corporate social responsibility as a means of cultivating the impression that the corporation itself is financially successful and trustworthy both in terms of competence and fairness. That is, corporate social responsibility may be more about amassing reputational capital for the corporation than any acknowledged responsibility to society (other than to provide consumers with effective products). 
Lastly, charitable giving can be motivated by the wrong assumption that it can make up morally for unethical policies. In the case of Bernie Madoff, the firm's business was inherently unethical as a ponzi scheme. Besides providing merely a patina of morality, therefore, charitable giving can also be "rationalized" in corporate boardrooms or CEO offices as making up for any unethical policies or conduct. Like any patina, charitable giving specifically and corporate social responsibility more generally cannot make up for a sordid company culture and any unethical policies or conduct within a company. Put another way, fighting the temptation to have an unethical company when expedient is worth more ethically than having a corporate-responsibility program. Theoretically speaking, such a program is not primarily ethical; rather, it narrows the gap between existent corporate and societal norms, whereas an ethical policy or conduct is so because it survives critique of the underlying ethical justification. The difference here is between the is and the ought. To get ought out of is (i.e., business ethics out of a CSR program) is, according to David Hume, the naturalistic fallacy. Norms exist, and therefore are, whereas ethical policies and conduct pertain to what should be. 

Sources:

1.  John Waggoner, “Madoff ‘Donated’ a Lot to Charity,” USA Today, December 13, 2013.

2. Ibid.

3. Ibid.