On Banking, Philanthropy and Excess

ThinkProgress has compiled a concise condemnation of the latest bankers-on-holiday scandal, this time from Northern Trust.

Northern Trust received $1.6 billion in bailout funds and announced in December that it was eliminating 450 jobs because “the macroeconomic environment has been extraordinarily difficult.” But as TMZ reports, that hasn’t stopped the bank from spending “a fortune last week in L.A. hosting a series of lavish parties and concerts with famous singers.”

The article references an ABC News item on the subject:

The Chicago-based Northern Trust bank may have received $1.6 billion in federal bailout funds, but that did not dampen the lavish long weekend featuring a golf tournament and headliner music the bank threw in Los Angeles last week, much of which was caught on tape by the celebrity news outlet TMZ. Critics are up in arms over yet another apparent boondoggle hosted by a bank that received federal bailout funds.

TMZ lists the highlights of the event:

- Wednesday, Northern Trust hosted a fancy dinner at the Ritz followed by a performance by the group Chicago.

- Thursday, Northern Trust rented a private hangar at the Santa Monica Airport for dinner, followed by a performance by Earth, Wind & Fire.

- Saturday, Northern Trust had the entire House of Blues in West Hollywood shut down for its private party. We got the menu -- guests dined on seared salmon and petite Angus filet. Dinner was followed by a performance by none other than Sheryl Crow.

There was also a fabulous cocktail party at the Loews. And how's this for a nice touch: Female guests at the Chicago concert all got trinkets from ... TIFFANY AND CO.

Northern Trust is a well-known - and generally highly-respected - financial institution, which caters to the millionaire set and up. I've dealt with them before, and I know several employees there, so I have an idea of the scale of their investments and the nature of their clientele.

The golf tournament is perhaps defensible. In these days of withering funding for all but the most necessary of expenditures, any effort to support the arts, athletics of any kind or any other obviously philanthropic effort deserves at least a little praise.

The parties, on the other hand, may be what NT's clients have become accustomed, but then again they have also been accustomed to regularly increasing wealth and profit, much of it from real estate. With the property market still tumbling, these same people should be feeling at least a little discomfort, and it reflects poorly on those who should be attending to their investments putting on such an extravagant display with their profits. Clearly somebody is getting fleeced. And while I will not say that any business that can make obscene profits off the obscenely wealthy doesn't deserve some applause, those same obscenely wealthy folks ought to start thinking twice about what's being done with their money and at what cost if those they trust with it can put on such displays.

The doubly offensive component of this particular situation is this: at the same time NT was celebrating with the bigwigs, it was at once taking in substantial Federal bank bailout dollars and laying off 450 of its staff as a cost-cutting measure. NT may protest that it never asked for the funds and only agreed to participate in the financial system stabilisation efforts the Treasury advocated, but that hardly excuses the bank from leveraging decreased personnel overhead to engage in spendthrift entertainment for its clients.

As for the Federal funds NT received, that too is cause for concern. NT is, due to its investment practices and preferred clientele, probably among the financial institutions most insulated from the lending crisis. The funds it received were not, however, intended to stabilise the institution: they were intended to promote lending and backstop the risk involved. NT is showing no inclination to increase its lending, and has instead apparently reserved the funds as a safety net so it can go on treating its preferred clients to the same round of glitz they have come to expect.

The layoffs themselves might make for sound business in some world, but again with employment skyrocketing adding to the problem is counterproductive. It's also hard to deny given the current evidence that those employees might still have their jobs if NT valued their ongoing work as much as it did the impact of and evening with Chicago or Sheryl Crow. And again, those with investments in NT might wonder at the wisdom of those they trust if they think a night of music is worth more than the people they're depending on to keep their investments safe and productive.

The thing that bothers me the most is that NT isn't even abashed at the bad publicity from their reaction to date. They took Federal dollars intended to unfreeze the credit markets (dollars they likely did not need) and used them to bolster their reserves. They let go several hundred staff even as unemployment is skyrocketing, which only worsens the employment outlook, and in spite of their new safety cushion. And they spent millions on entertaining their clientele even after similar excess began bringing intense scrutiny to other similar businesses and even after others in their own field cut back on such spending to bolster their bottom line and public image. Yet their public statements on the matter can be boiled down to "We always do this, we didn't use bailout money to do it, and the folks we let go - well, those were just the costs of doing business in a bad market, so there's really nothing here to discuss." Rarely is this sort of fiscal solipsism so clearly or crassly enunciated.

Each step in the Northern Trust progression shows just how removed from the realities of modern US life the upper financial tier and their support institutions have become. Once again, we have an illustration that the moral obligation to do what's best for the market, without the legal requirement to back that up, gets ignored by the same financial professional cadre that created the crisis in the first place. And once again we see that, for some, the drive to behave as if nothing has changed overrides fiscal responsibility and common sense.

What Would You Suggest?

There is growing demand for accountability from the prior [mal]administration. Congress is finally hinting that it may investigate the Bush policies of the past and assess whether charges should be preferred. After the spectacular failures, missteps and overextension of authority and expenditures, something surely needs to be done.

But apparently not everyone thinks that accountability is a valuable component to public service.

David Rivkin and Lee Casey have penned a remarkable opinion (on TBO.com and credited as published in the Washington Post though it does not appear in that publication) claiming that an investigation such as those being considered is harmful to US institutions. Titled "Pouring Acid On Democracy," the article details consequences such as international criminal prosecution for those indicted by the proposed inquiries, and claims that the investigations would be counter to US democratic processes and theory of government.

The article goes to great lengths to imply broadly that the investigations are bad and should not be allowed to proceed. The authors invoke two demons: international prosecution and the legal circus of the special investigation. Yet they make little mention of the causes for public concern here, and their twin terrors have proven remarkably toothless.

The article makes absolutely no mention of what the authors would consider appropriate processes to address the horrific record of the Bush administration. There is no mention of conventional investigation, available legal processes or indeed any remedy of any kind. Apparently the authors think we're all better off simply forgetting the last eight years and moving forward, allowing the precedents set to stand unchallenged.

International criminal proceedings against those found culpable is a clear fear the authors share. Yet the International Criminal Court is at present weak and without solid enforcement, in no small part because of the US' failure to recognize the body and provide it support. The Obama administration and the current Congress seem inclined to change that stance, but at the present there is no means for a US citizen to be brought to ICC justice, and more than a few laws on US books allowing extraordinary intervention in ICC affairs to protect accused US citizens. Even if it were possible, the article makes no allowance for assertion of US jurisdiction or national sovereignty, which would almost certainly be preferred in this case; and as the US would be investigating and prosecuting its own citizens, that would take precedence over ICC proceedings even if such would carry weight in the present domestic climate.

Also, the authors are obsessed with the bogeyman of the Special Prosecutor. Without mentioning the Starr prosecution by name, they recall the specter of the fruitless efforts of that commission to find fault with the Clinton administration, and imply that such an experience is what the US should expect from any such investigation. The Starr investigation, whatever its origins, devolved into a witch hunt: the determination to find something wrong with the Clinton administration overrode the legal aspects and its own moral imperative. Given the apparent wealth of evidence to assail Bush with war crimes, illegal and unconstitutional acts and general incompetence and negligence in perfoming the duties of the various offices, the likelihood that we would see such again is small. And with the only alternative being a discredited Department of Justice still paralyzed by its ideological evisceration of late, alternatives to such a process are at best very hard to find. Again, the authors seem to think that messy processes that threaten to spin out of control are counter to the democratic tradition.

Democracy is many things, including both robust and messy. The US has survived multiple constitutional crises, trials, disagreements and upsets, going back to the Jay court and the concept of judicial review. Rivkin and Casey seem to think that US democracy is too fragile to go through the indignities of investigation, and too weak on the global stage to assert jurisdiction in criminal matters with global implications.

The tone of their opinion suggests they would prefer to forget everything and move forward, and they bring up false examples of nebulous political horrors as proofs for halting the proposed investigations. Yet their examples are toothless: the one is a recourse for states where the offending persons or institutions are not brought to justice by their own nations (and even so are not as yet recognised by the US); the other a blatantly partisan effort, allowed to exceed its mandate out of petty political ambition, and not likely to be repeated.

US democracy does, however, depend on two things: transparency and accountability. For the nation to function properly its workings must be as public as possible, and those in positions of authority must be held responsible for that authority and disciplined if necessary. Rivkin and Casey would deny these two requirements, preferring ignorance and immunity to the real responsibilities of citizens in a democratic nation. The article is the eloquent complaint of the educated bully: the writers are apparently afraid that the mean-spirited bloodthirsty methods of the Right might be used against them now that real crimes are in evidence, and rather than face that they prefer to forget everything and behave as if nothing untoward happened in the last eight years.

Stimulating the South

A handful of articles in the news recently have highlighted how careful we need to be with what qualifies for stimulus money.

First, there's the disinterest in public transit funds Florida seems have where the new stimulus package is concerned. The 'blog Jacksonville Transit covers just how much - or rather, how little - Florida has requested for this item.

Second, there's a related item on how developers have pressured Tallahassee to repeal the roadbuilding requirement for new developments. It's a lot easier and cheaper, after all, if the folks building all those new communities don't have to worry about getting access to them.

So far, Florida's reaction to the stimulus seems to be helping build more new spread-out subdivisions while freeing the folks building them from worrying about how the residents will get to work, shopping - pretty much anything but the clubhouses. This of course leaves a cash-strapped state on the hook for all the related infrastructure - roads, sewers, etc. - for all that new construction. This despite the still-plummeting real estate values and the skyrocketing foreclosure rate. What makes it worse is that Florida's House representation, being largely Republican, opposed the stimulus even though their own constituents believe the package is needed.

Never mind that the state is being set up for some absolutely ugly expenditures filling in all those gaps. Never mind that adding to already-barely-controlled urban sprawl is, in the current climate, a bad idea. And never mind that the state's population figures - driven largely by transplants moving here from other states - is leveling off and may actually begin dropping, reducing demand for all those shiny new subdivisions. There's one teensy additional problem: there may not be sufficient natural resources remaining to provide for all those new residents.

Tampa is implementing tighter water restrictions in the face of a drought that is worsening. The report is but one of many in recent months on the problem that now affects most of the state. Water in Florida has always been an issue: now, it seems, the local resources are failing to sustain even the current population.

Florida is already in the middle of a water war with Alabama and Georgia. Georgia wants to turn off the taps to downstream states to keep Atlanta awash with local water, mostly from Lake Lanier, its tributaries and the aquifers in the other states fed by that resource. Instate resources are either drying up or becoming contaminated as salt water from the Atlantic Ocean and Gulf of Mexico intrudes into local wells.

So just as the resources are beginning to fail locally, and the developments from the last real estate boom are either sitting empty or being foreclosed, the state is looking to stimulus dollars to refuel the housing boom of the last decade. That's right: the same housing boom that helped bring Florida to its knees when the market tanked is being trumpeted as the state's economic salvation. Only this time the local natural resources may run out before the stimulus dollars, and the state will be left to provide all the infrastructure not included in all the new building boom. At the same time, projects that could actually shore up the development from the last boom, restoring its value and marketability, and actually improve the lives of the citizenry, are being virtually ignored.

This is why stimulus spending needs to be carefully planned and closely observed. It is also why blanket block grants without constraints in situations like these run the very real risk of doing nothing but line the pockets of the people and businesses least in need of the assistance.

Quote Of The Day

"But they're going to have to pay for it, as well."

- William Brown, the special agent in charge of the DEA's aviation division, on why the DEA spent $123,000.00 to charter a private plane for the DEA chief for travel to Colombia last year, and whether it would have been more cost-effective to borrow a plane from another agency.


The excursion is catching quite a bit of heat these days, and it isn't pleasing everyone:

Government watchdogs, however, question whether the trip could have been rescheduled or whether Leonhart could've taken a commercial flight.

Steve Ellis, the vice president of the nonprofit group Taxpayers for Common Sense, said that although the flight consumed a small fraction of the DEA's budget, the charter raised a red flag, especially because the agency paid an outside company to arrange it.

"It looks bad," Ellis said. "Clearly, the DEA or any federal agency should be watching their budgets more closely in these difficult times."

Read the whole thing here.

Why Just-In-Time Won't Work For Detroit

The concept of "just-in-time" manufacturing, which minimizes warehousing as a cost-savings and efficiency measure, has been with industry for some time now. JIT as it is known to the economists, began with Ford Motors in the 1920s and was rediscovered after World War II, becoming industry standard within the last 20 years.

But JIT won't work for the Big Three automakers - indeed for any automaker selling cars in the US - and here's why.

Americans can buy virtually anything over the Internet these days -- sex, booze, houses -- everything, that is, but a new car. If you want to buy a new Ford Fusion, you have to go down to your local dealership and haggle with the car salesmen, an unpleasant and daunting task. The process usually subjects consumers to hours in the dealership hotbox and can add hundreds, if not thousands, of dollars to the price of the car. Wouldn't it be nice if you could cut out the middleman and just order your Prius straight from Toyota?

But you can't. And there's one reason why: the car-dealer lobby, which has worked hard to ensure that this will never happen. Since the late 1990s, car dealers have used their considerable political clout to pass or better enforce state franchise laws that in many cases make it a criminal offense for an auto manufacturer to sell a new car to anyone but a state-licensed car dealer. The laws governing who can sell new cars are among the most anti-competitive of any domestic industry. By creating local monopolies for dealerships and prohibiting online sales for new cars, they constitute a major restraint on interstate commerce; in 2001, the Consumer Federation of America estimated [pdf] that the laws added at least $1,500 to the price of every new car.

These parochial state laws also make the distribution system for new cars incredibly inefficient and expensive, one factor in the financial problems facing the Big Three in Detroit. Online sales would help companies like GM and Chrysler align production to sales better by allowing more people to buy their cars built-to-order from the factory, rather than having Detroit send out truckloads of vehicles to sit around on dealer lots for months in the hopes that a rebate offer will finally entice someone to buy them.

Attempts to repeal the laws that require this, or to make exceptions, have been soundly thrashed by the dealers' lobby. Even the Big Three - who have seen the benefit of online ordering and JIT production - have been sent home by their own dealership industry.

JIT for Internet purchases could revolutionise the auto industry just as it has apparel, computers and other manufacturing sectors. But the local dealership won't let them: it'd rather hang on to its monopoly status and hefty commission/fee schedule. Which means that, rather than adopting a build-to-order model for cars, Detroit is forced to produce masses of vehicles that then sit at distribution centers or dealers' lots until the dealers can coax someone into buying. This isn't good for consumers, and it isn't good for the Big Three which have enough troubles. Yet somehow this archaic business model has been allowed to persist.

Strings and Arrows

Bankers on both sides of the Atlantic are having second thoughts about public involvement, mostly because they're facing tough questions about how they do business.

In the US, several TARP recipients are looking into returning the bailout funds. Not that they don't need the capital, mind you: they just don't like Washington watch them carry on business as usual.

“We just think that operating our business without the government capital would be an easier thing to do,” said David A. Viniar, the chief financial officer of Goldman. “We’d be under less scrutiny, and under less pressure."

It was in large part a lack of oversight that brought us to this point. Now the oversight is being applied, the big players not unsurprisingly are squirming in the spotlight. It's little wonder that they'd prefer less scrutiny: it's a lot harder to buy that sixth jet for your fleet or host a lavish conference when you have the government looking over your shoulder. With appearances before Congress only days away the discomfort must be substantial.

It's unlikely that they have much choice, though: none of the TARP recipients are in a particularly good position to simply hand the money back, and the TARP programme specified that recipients repay Washington in stock before cash.

Across the pond, the UK is looking at similar stringent constraints on the banking sector, and are already holding inquiries. Royal Bank of Scotland and Halifax Bank (the latter now part of Lloyds Group) were grilled unmercifully by Parliament yesterday for continuing to pay bonuses following government assistance. At least the Brits are willing to state outright that substantial public assistance to an enterprise equates to substantial public ownership, and are seeking to exercise governance over what is now public property.

The British member of Parliament fixed a withering eye on Frederick A. Goodwin, the former chief executive of the Royal Bank of Scotland, now government-owned, and put the question to him: “Do you have a different moral compass from other bankers?” he asked.

...[The bank executives'] defense drew angry responses from lawmakers, who accused them of blaming their problems on the collapse of the markets.

“But are you culpable?” asked Nicholas R. Ainger, a Labor representative who interrupted a meandering explanation by Mr. Goodwin.

“It’s just too simple to blame it all on me,” Mr. Goodwin replied.

The sad thing is that, in a way, Goodwin was right, and the MP posing the ethical question was wrong. From all appearances the problem has become systemic, which of course means that the behaviour shows a common - and misdirected - moral compass among finance professionals. The crisis as it has unfolded indicates it is the entire banking culture that suffers from this malaise, which makes blaming key players and ignoring the industry as a whole perilous. After all, the current woes weren't created by a single business unit or a single institution: they were the product of the entire finance industry and were sanctioned by the regulators (themselves largely industry insiders), which makes the sudden demands for propriety and accountability for the executives sound dangerously close to scapegoating. On the other hand, following the old models for doing business while the current crisis continues to deepen appears more and more like lemmings following their leaders over a cliff: this hardly qualifies as effective leadership in today's business climate.

I'm waiting until someone in one of these hearings has the audacity to claim that it's all those people who died owing a balance on their credit cards that's really the root of the problem.

UPDATE: It seems Congress is taking its turn at having grilled Big Cheese sandwich for lunch.