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.

Credit-Card Companies in a Conflict of Interest

On April 12, 2012, Hawaii sued Bank of America, Chase, Citi, Barclays, Capital One, Discover, HSBC, and their subsidiaries, “claiming that the banks ‘slammed’ Hawaii credit card customers, charging them for products customers didn't need and that the companies never provided.”[1] The Hawaiian government alleges that the banks used “‘predatory tactics to sign up customers for services they either don’t want or don't qualify for,’ and the companies charged their customers ‘without their knowledge or consent,’ according to a press release issued by the Hawaii attorney general's office.”[2] According to the Attorney General, David Louie, “You don't know that you're enrolling, but they say, 'Oh you just enrolled,' okay, and now they've put a charge on your credit card.”[3]  The banks’ telemarketing departments may have charged customers an average of $150 in the form of small charges.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

1. Bonnie Kavoussi, “Hawaii Sues Bank of America, Chase, Citi, Others For DeceptiveCredit Card Marketing,” The Huffington Post, April 13, 2012.

2. Ibid.

3. Ibid.

Justice as Fairness: Writing Down Greek Debt

In 2012, 80% of Greece’s private creditors agreed to “voluntarily” convert their Greek debt into debt of a bit less than half the face-value (plus a lower interest rate). With such a proportion having agreed to the swap without triggering credit default swap insurance payouts, Greece could get the E.U. to agree to force the remaining 20% to involuntary write-downs. That would trigger the credit default swaps, at least in theory.

Because any write down of Greek debt by other E.U. states or the E.U.’s central bank (equivalent to the Federal Reserve) would be tantamount to additional aid to Greece, the E.U.’s basic law would again need to be amended (which must be unanimous). So the E.U. (and the international IMF) exempted themselves even as they pushed for “voluntary” write downs by private debt-holders. This hardly seems fair. Moreover, any pressure from the E.U. could have been sufficient for the credit default swaps to be triggered. To be truly voluntary, the write downs would have to have come from the private bondholders themselves rather than from governmental pressure. Even so, that 80% agreed, it is only fair that the remaining 20% be forced to capitulate. Otherwise, holding out could be a strategic competitive advantage financially. Refusing to compromise while other similar parties do is unfair whether between private creditors or governments.

In my view, Greece should have secured the E.U.’s approval on instituting the collective bargaining statute in order to get all of the state’s private holders of Greek bonds to take a write down. It would have triggered the credit default swap insurance claims, so the bondholders might actually have preferred being forced even if more of their Greek debt was written off. Furthermore, E.U. officials should have subjected the E.U. states to join the private bondholders. At the time of the 80% voluntary agreement in 2012, Greek debt in 2020 was forecasted to be at 120% of Greece’s total economic activity.[1] This is still quite high, particularly given the recessionary impact of the continued Greek austerity. Unfortunately, the (excessive) power of state officials at the E.U. level meant that a conflict of interest interfered with amending the E.U.’s basic law to permit the state governments and the ECB to take write downs.

In terms of ethical theory, one could apply John Rawls’ Theory of Justice here. In this theory, there is a veil of ignorance concerning where one will be in the system for which one is making rules. Not knowing whether one would represent a government or private bondholder, for example, one would not be likely to add the rule in which only the private bondholders write off their Greek bonds. Not knowing which E.U. state one would represent, one would not add a rule favoring Germany and France over Greece. Not knowing whether one is an official of the E.U. Commission or a member of a state legislature such as the Bundestag, one would not make a rule allowing the states to protect their interests at the expense of the E.U. Rawls adds that because of the veil, any rule would see to it that the position of the least well situated is improved. So it would not be the case that Germany could dictate to the E.U. or so successfully protect German interests at the expense of Greece. Indeed, the bias would be in seeing that the people least well off in the least well off state are not further downtrodden as a result of any proposed rule. This might be part of Rawls penchant for redistribution, however. At the very least, we could say that the rules enacted under justice as fairness would be in the interest of the system itself rather than any particular part thereof. In terms of the writing down of Greek debt, the E.U. could have been fairer in how it went about designing its rules. There was not exactly a veil of ignorance on the vested interests that were in a position to protect themselves at Greece’s expense.

1. Charles Forelle, Stelios Bouras, and Alkman Granitsas, “Greece Passes Key Debt Test,” The Wall Street Journal, March 9, 2012.

Plato’s Justice: On the Conflict of Interest in Google’s Search Engine

“Google’s popularity was built on its ability to help people find just the right Web pages. Then came the social Web, led by Facebook.”[1] Then came the “fledgling Google Plus social network,” the content of which Google then included among other search results at its search engine. The idea, ostensibly, is to “personalize” internet searches.[2] In addition to expertise on a given topic, relevant comments and even pictures posted at Google’s social network may be listed, especially if from a friend. The added utility is debatable, however, particularly as content from other social media sites such as Facebook and Twitter is more in demand, according to Danny Sullivan of Search Engine Land. I question the relevance of even that content to a search on Google, given my searches up to now, though of course it is possible that someone’s post on X could be helpful if information on X is otherwise hard to come by. At the very least, Google ought to make it very easy for users to turn off the feature while at the search site.


The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

1. Claire C. Miller, “Google Adds Social Network to Search Results,” The New York Times, January 11, 2012.

2. Ibid.