Tension between Wall Street and Main Street: A Case beyond the Reach of Corporate Social Responsibility

In October 2011, Gerald Seib wrote that political and economic pressures in the wake of the financial crisis were “pushing business leaders into the public cross hairs.”[1] I submit that the very existence of the largest American banks was becoming an issue. In such a case in which a gulf between business and society is so fundamental or deep, corporate social responsibility programs do not suffice and may even backfire. While it is normal for the norms and values of a business sector to differ from those of the wider whole (i.e., society), it is uncommon for a rupture to be so deep that corporate marketing and CSR are not sufficient business responses. I submit that in such cases and where corporations have a lot of power over government officials, CEOs extend their toolset to government to fill in the trench. The "Occupy Wall Street" protests is a case in point. 

From the corporate standpoint, the time was ripe for the field of business and society, whose topics include corporate social responsibility, corporate citizenship, and stakeholder management. The fundamental matter to be “managed,” or assuaged, in that field of business concerns divergent norms as well as values between the individual corporations or the business sector and the wider society. Tension is not always or invariably present, but the fact that a corporation and even the business sector is a part of a wider whole (i.e., a society) suggests that the respective interests, perspectives, norms, and values are likely to differ. Generally speaking, the interests of a part are not identical to the interests of the whole of which the part is a subunit or part. An externality such as from dumping chemicals in a river or polluting the air means that a company's interest, norms, and values can differ from those of a society. 

Self-interest can obviously affect norms and values. A powerful corporation's executives and board may believe that the company's power over members of the U.S. Congress is normal and right because such dominance is in the corporation's financial interest. Meanwhile, voters may feel that such a distended dominance by the moneyed interest harms democracy and is thus a norm that should not exist. 

According to Seib, societal populists and corporate executives were not on the same page in 2011. In as much as the executives were utilizing corporate social responsibility to create the impression that the corporate norms and values being espoused were in line with societal norms and values, the field of business and society may not have been equipped to deal with divergent talking points that are grounded in antipodal, or antithetical, social realities. In short, corporate social responsibility as marketing or "window-dressing" can be detected as fake, thereby increasing the rift rather than reducing it. Indeed, it can be said that the topic began as an ideal  to bridge the gap between corporations and societies only to end up in marketing.[2] Foisting the illusion of convergent corporate and societal values can backfire by illuminating boardrooms as places where only a narrow perspective of short-term profit pervades.

In the context of the “Occupy Wall Street” protests spreading across the U.S. during the Fall of 2011, Seib pointed to the existence of “a radical disconnect between the picture populist critics paint from the outside, and the one business leaders describe from inside.”[3] This disconnect had gone back to September 2008, when bankers viewed the collapse of the housing market (and those of related financial products, such as CDOs) as a result of over-reaching, dishonest and languid mortgage borrowers. 

Meanwhile, the wider society saw greedy and fraudulent mortgage originators and investment bankers behind the adjustable-arm steep mortgages and the "crap" bonds that were based on those risky mortgages. This disconnect infuriated the general public, especially because contrition would not come from Wall Street. Greed refuses any constraint, including even acknowledging even some responsibility. Banks would engage in mass foreclosures without a hint of guilt for having misled people into going for oversized houses. The mortgage producers at Countrywide and other companies conveniently made the bad assumption that a few years of mortgage payments would enable the mortgage borrowers to shift from step-wise increasing-rate to fixed 20-year mortgages so as to avoid the higher interest payments. This flawed assumption was no doubt helped out by the fact that more mortgages would be sold, and thus higher bonues received. The interest of the economy, not to mention society as a whole, was of lesser concern. Hence the clash in norms and values between the part and the whole. 

In the populist protests, the crowd also saw American companies with enough profit and cash to create jobs domestically yet without the will to do so. In the first decade of the twenty-first century, American corporations had cut their work forces in the U.S. by nearly 3 million, while increasing employment abroad by almost 2.5 million. In the fall of 2011, Standard & Poor predicted corporate earnings growth of 13.5% for the third quarter, which, according to Seib, suggested “to Wall Street protesters that companies were hoarding profits without creating work.”[3] Saving money by moving factories "off shore" fits the business value of efficiency, and even the maxim in trade that goods should be produced where doing so is cheapest (e.g., where the goods are most plentiful). The cost of such a norm of and value on going abroad is externalized to the host country, which is left with the impaired social contract between a large corporation and the society. 

Generally speaking, a government says, in effect, to a company: We'll let you incorporate and even expand into multinational corporations but we expect you to provide jobs in addition to benefiting your customers with goods and services. This version of the social contract that includes the obligation to provide as many jobs as possible (i.e., while still allowing for a reasonable profit, and thus dividends) is controversial, however, because CEOs could retort that providing goods and services that reduce suffering and increase happiness is sufficient. From a utilitarian standpoint, therefore, such CEO's could even claim an ethical justification. Such a justification would likely merely be marketing to craw back some of the lost reputational capital, a long-term intangible asset. 

According to Seib, business leaders cited more practical factors that more easily fit into the traditional business calculus. From the business perspective, third-quarter expectations were less than expected. The managers pointed to the benefits of an artificially weak dollar that had already strengthened at the expense of exports. More broadly, businesses were looking at weak consumer demand and increasing costs with government regulations, which make augmenting the domestic work force more costly. Seib juxtaposes this business view of a hostile business environment with the societal view that looked angrily at unpatriotic and greedy corporate chieftains. 

I submit that when a divide is so gaping, depating the factors in the business environment doesn't fit. Corporate social responsibility programs, such as having employees volunteer at soup kitchens, are not restorative. Firstly, the benefit from such programs would not come close to the original costs borne by society from the reckless and even fraudulent banking practices. Secondly, the people hurt from those practices are not necessarily helped by a program. This is especially true if the "restorative" program in oriented to another society problem, such a disease. Thirdly, corporations benefit from the good public relations from a CSR program. An angry populist is not likely to be pleased that one of the selfish, reckless banks is actually benefiting as it makes contrition. Fourthly, the gap between the business sector (or an industry, but not likely an individual company) and a society can be so deep enough that capitalism itself is severely questioned at large. Filling in such a deep trench goes beyond what CSR can do; a bulldozer rather than some shovels are needed in such cases. I contend that the "Occupy Wall Street" protests that took place three years after the financial crisis deepened or perhaps only exposed such a trench. I suspect this is why the U.S. Government, which was refusing to hold mortgage producers and investment bankers criminally accountable for the fraud--protecting the powerful financial sector--took an active role in stopping the protests. To have the very legitimacy of corporate America, or even just the banking sector, even questioned in such a public way was likely too much for a government whose elected officials could receive unlimited campaign contributions. 

1. Gerald F. Seib, “Populist Anger Over Economy Carries Risks for Big Business,” The Wall Street Journal, October 11, 2011. More generally, see Skip Worden, Essays on the Financial Crisis.

2. William C. Frederick, my doctoral professor in the field of Business & Society, came to this conclusion, as did I. When upon retirement from teaching he turned to the application of the natural sciences to economizing and power-aggrandizement in relation to societal "ecologizing" forces, and then to management, I truly became one of his students (for twenty years). I gave a conference paper, for example, on how a company could be run on ecologizing rather than profit-maximizing principles. The field of Business & Society is indeed wider and more abstract than the CSR topic. 

3. Seib, “Populist Anger Over Economy Carries Risks for Big Business.”

Homelessness in the U.S.: A Reflection of American Values

According to a report by the National Center on Family Homelessness in 2014, nearly 2.5 million American children were homeless at some point in 2013.[1] The U.S. Department of Education had reported that 1.3 million homeless children were going to school. California, which accounted for one-eighth of the U.S. population at the time, had one-fifth of the 2.5 million, which comes out to nearly 527,000. The relatively high cost of living and shortage of low-income housing, along with a largely stagnant minimum wage, are the more visible factors behind the gap.

In addition, a subtler underlying contributor—more paradigmatic—renders sustainable shelter insecure and even elusive for many people who go from paycheck to paycheck. What I have in mind here is the assumption that housing is and should be a commodity. That is to say, we use the market mechanism to allocate houses, condos, and apartments. To be sure, matching supply to demand is in itself helpful to low-income people, the assumption that the prices they pay—for example, more money due to speculators—must vary accordingly is problematic, as well as unnecessary. The Section Eight housing program, for example, separates the amounts that low-income people pay for rent from the rents that property-owners accept.

We can go even further and question whether the rents (and housing prices) determined by the market should be acceptable to society. For example, speculators bought up foreclosed properties in the U.S. during the housing slump that began in 2007. The cost of houses (and thus rents) in such markets was higher than would otherwise have been the case. Low-income families that might otherwise have had shelter may have gone homeless as a result. In the tradeoff here between speculators and homelessness, societal values can be seen. Put another way, tolerating homelessness so economic liberty can encompass residential housing reflects a value judgment.

In summary, the relatively large number of homeless children reflects a tacit societal judgment of priorities premised on the assumption that housing should be a commodity fully subject to the market mechanism. That speculators can take advantage of it to profit at the expense of people going homeless suggests that the American collective judgment may be too extreme—meaning that it accepts a high marginal pain at one pole (i.e., homelessness) in order to be able to hug the other pole. This can explain why shelter as a basic human right is virtually absent from the public discourse in the United States.

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[1] David Crary and Lisa Leff, “Number of Homeless Children in America Surges to All-Time High: Report,” The Associated Press, November 17, 2014.

The Federal Reserve’s Housing Bubble

During one of his lectures to a class at George Washington University in March of 2012, Ben Bernanke, the chairman of the Federal Reserve, claimed that the central bank’s lower interest rates did not trigger the housing bubble that began in the late 1990s and ended in 2006. For one thing, the Fed did not start cutting interest rates until a few years into the twenty-first century. Also, home prices rose after the Fed later began raising interest rates. Bernanke also cited Europe, where housing booms have not been associated with either tight or loose monetary policy.

                         Ben Bernanke lecturing at Washington University       European Pressphoto Agency

The full essay is at "Essays on the Financial Crisis".

Fraudulent Foreclosures

Looking at foreclosures from 2008 to 2010 of federally-backed mortgages serviced by five major banks, federal investigators at the Department of Housing and Urban Development (HUD) found that bank managers “ignored widespread errors in the foreclosure process, in some cases instructing employees to adopt make-believe titles and speed documents through the system despite internal objections.” Generally, the banks engaged “in a pattern of unfair and deceptive practices.”[1] This finding contradicts the self-serving statements by managers at the banks that blamed low-level employees. The investigation found that the managers had actually been the active agents. That is, the shortcuts were in many cases formulated and directed by managers. The inspector general at HUD pointed to “simple greed” to explain how so many people could have participated in the misconduct.[2] Considering that millions of Americans were tossed out of their homes as a result, I would sociopathic indifference or even callousness to the mix. Additionally, the rush to sign documents may have undercut the banks’ own positions with respect to both the foreclosure process and the homeowners—adding incompetence to the mix.

                  Four million foreclosures in the US during the 2007-2011 period.      Spencer Platt/Getty

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

1. Nelson Schwartz and J.B. Silver-Greenberg, “Bank Officials Cited in Churn of Foreclosures,” The New York Times, March 13, 2012.

2. Ibid.

Moral Hazard in Mortgages

“The cherished American ideal of self-reliance has a flip side”[1]  Before getting to the implications, or flip side, I want to fill out what informs this ideal. One could add to it the ideological stance that came into its own in 1980 with the election of Ronald Reagan, who declared that government is the problem. This implies that government should be minimized, and otherwise corrected as much as possible. Government is hardly to be viewed as the solution. This is the legacy of the Kennedy assassinations of the 1960s, the Vietnam War, and Watergate as well as Ford’s pathetic “WIN” buttons and Carter’s micromanagement and failure in regard to the hostages in Iran. I was not old enough for the Kennedys’ truncated optimism (and that of Martin Luther King) to resonate; I knew the political (and economic) pessimism of the 1970s and the energizing “fix it” mentality of the early 1980s. Of course, Reagan’s “new federalism” failed, as did his aim to balance the federal budget, and the jury is still out on whether “peace through strength” pushed the USSR off the cliff.

Reagan is perhaps best known to historians and political theorists for having formally shifted the political paradigm’s default to “government is the problem” after at least a decade of political and economic paralysis. Dovetailing with the American ideal of self-reliance, the default on government was still a headwind for Barak Obama as he found he had to capitulate even on a “public option” for health insurance—relying instead on the same private insurers who had been excluding pre-existing conditions and otherwise cancelling policies at the advent of a new illness. In other words, that the health-insurance lobby could still call the shots at the White House suggests the continuance of the headwind running against government. Relatedly, in the 1990s Bill Clinton had to give up on his vision of using government for grand purposes because the American people were “not there.” Clinton found in the presidency instead a plethora of smaller accomplishments, such as adding to local police forces and otherwise acting as the mayor of an empire as if it took a village. He had figured out how to avoid the headwinds.

With this background in mind, we can now get to the matter of the implications of self-reliance and “government is the problem” as regards moral hazard. In economic terms, it refers to “the undue risks that people are apt to take if they don’t have to bear the consequences. In other words, if the money is free, why not spend it on a designer purse?”[2] Because of moral hazard, backed up by the ideal of self-reliance and the default of “government is the problem,” there is significant discomfort with the idea of bailouts and safety nets in American society. The notion that even a small portion of aid even to homeowners who are “under water” (i.e., they own more on their mortgages than their houses are now worth in terms of equity on the market) might find its way to the undeserving (or cheats) “can be enough to scuttle support, or restrict help so drastically that few can use it.” Adding to this sentiment, typically by vested interests, is the sanctity of contract dogma. This means that a mortgage borrower is obligated to pay whatever he or she had agreed to pay regardless of changed circumstances either of the borrower or the housing market.

Bankers “say that generously easing loan terms or reducing mortgages outright would only encourage homeowners who can pay to pretend they can’t. It would also, the bankers say, send a dangerous message: a financial commitment isn’t really a commitment.”[3] Additionally, homeowners “who keep paying their mortgages, even if their homes have lost value, reasonably wonder why neighbors who weren’t as responsible are getting help.”[4] Behind both of these concerns is resentment that someone else might get something too easily (i.e., beyond that which is deserved and what one can get oneself). It is not a very laudable mentality, psychologically and ethically. In other words, it is rather small. Even worse, bankers who themselves received bonuses paid for in part from bailouts were keeping borrowers from also being bailed out. It is as if the financial crisis of 2008 hit only one side of the ledger.

Shaun Donovan, the secretary of the Department of Housing and Urban Development, said that although there is was a “nugget of truth” to the moral hazard argument, “only about 10 or 15 percent of Americans who can still pay their mortgages try to walk away from their debt. Most troubled homeowners, like the Katrina victims, are genuinely hard up.”[5] Accordingly, the bank bailout should have been oriented to them. Had it been, the banks’ balance sheets would not have been toxic and “two birds” would have been “killed” with “one stone.”

The “specter of moral hazard haunts a basic tension in American life: to what extent are people responsible for their own problems? The more trouble you’re in, moral hazard suggests, the less we should help.”[6] This relationship is the inverse of what it should be. That is, moral hazard should not apply as if survival itself were conditional. I am perhaps as innately American as they come, being born and raised in the Midwest, or “heartland of America.” Even so, when I hear politicians or others refer to others’ survival as somehow conditional (typically as based on a work history), I sense that the ideological belief is distinctly American. I revolt at the sheer self-centeredness of the people expressing the view and I reject the validity of the claim itself. For a society in which survival is deemed to be inherently conditional (as defined by people whose survival is not an issue) is no society at all. Put another way, if we all knew in the back of our heads that were we to fall on hard times and not be able to provide for our own shelter and food without taking them from others (i.e., remaining in society), life for all of us would be a little lighter and less existentially anxious. This is not to say that everyone has a right to a t-bone steak once a week or a mansion. The moral hazard argument conflates these with sustenance needs.

If a person is seriously under water, the sheer depth naturally dwarfs any consideration of culpability. If someone is barely breathing or starving, a natural sentiment of sympathy orients others to the question of how the plight may be quickly assuaged. I submit that the bailed out banker actively resisting any assistance for homeowners near foreclosure has a rather unnatural “hardness of heart,” or hardness more generally. To make aid conditional where basic necessities like shelter, food and medical care hang in the balance is to apply moral hazard beyond its ken. This overreach operates at the expense of human rights.

Essentially, applying moral hazard conditionality where survival itself is at issue for others is to presume a godlike position for oneself. In other words, the propensity to judge others’ extent of deservingness is premised on self-idolatrous pride. Given the nature of self-idolatry, it is no surprise that bankers who have benefited themselves (as well as their banks) would apply moral hazard to their counterparties but not to themselves. The conditionality does not apply to those bankers, whose lobby—which Sen. Durbin said owns Congress—makes sure of it. The resulting asymmetry can be interpreted as a reflection of the bias in the “self-reliance” and “government is the problem” default—a game-board that is tilted toward the rich because they can afford to be self-reliant and scoff at government as part of any solution to societal ills.

Ideally, a social contract, and thus a society, should be in balance, with basic human rights being beyond the reach of the inevitable swings in the political-ideological pendulum (i.e., the headwinds). Where the latter are definitive (and exclusive), sustenance needs, being an inherent human right, become valid outside of societal limits. In other words, where moral hazard is applied to basic shelter and food needs, people needing them have the inalienable human right to take them without regard to societal rules bearing on them. Even in political theory, possession of property is salient. Thomas Hobbes refers to the right of self-preservation as going beyond any law. Is extending moral hazard to cover necessities worth making society (and its laws) conditional?

1. Shaila Dewan, “Moral Hazard: A Tempest-Tossed Idea,” The New York Times, February 26, 2012. 
2. Ibid.
3. Ibid.
4. Ibid.
5. Ibid.
6. Ibid.

Sanctity of Contract Breached on Mortgages

An audit in 2012 by San Francisco county officials of about 400 foreclosures “determined that almost all involved either legal violations or suspicious documentation. . . .  The improprieties range from the basic — a failure to warn borrowers that they were in default on their loans as required by law — to the arcane. For example, transfers of many loans in the foreclosure files were made by entities that had no right to assign them and institutions took back properties in auctions even though they had not proved ownership. . . . About 84 percent of the files contained what appear to be clear violations of law, it said, and fully two-thirds had at least four violations or irregularities.”[1] The problem seems to be systemic, suggesting that judges should be able to modify mortgages on the basis of nullified contract.

The full essay is in Cases of Unethical Business, available in print and as an ebook at Amazon.com.  

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1. Gretchen Morgenson, “Audit Uncovers Extensive Flaws in Foreclosures,” The New York Times, February 16, 2012.

Conflicts of Interest at the Federal Reserve

In 2011, “(m)ore than a dozen members of the regional Federal Reserve boards have had ties to banks or companies that received emergency funds during the [2008 financial] crisis, according to [a GAO report]. The report highlights a close relationship between the Fed's regional banks and many of the institutions they were lending to, adding credence to concerns that the financial sector enjoyed a largely consequence-free rescue in the wake of the crisis, thanks to its connections with the federal government.”[1] Meanwhile, mortgage borrowers with houses “under water” got hammered. From the crisis to the release of the GAO report in October 2011, there were millions foreclosures in the United States, with very little in the way of mortgage modifications or refinancing for those homeowners who needed relief. In other words, the bankers had connections in the banking regulatory agency while Congress left the troubled homeowners—constituents—at the mercy of the bankers. Their agency having their backs, the bankers could afford to take a hard line on the mortgages. The playing field, in other words, is not at all level. 


Material from this essay has been incorporated into "The Federal Reserve" in  Institutional Conflicts of Interest, which is available in print and as an ebook at Amazon.  

1. Alexander Eichler, “Conflicts of Interest Abound at the Federal Reserve, Report Finds,” The Huffington Post, October 19, 2011.