Monday, December 22, 2014

The Fed Lets Banks Continue Risky Trades: Too Big To Fail Ensconced

In December 2014, the U.S. Federal Reserve Bank granted banks an extra year past the July 2015 deadline to comply with a major provision of the Volcker Rule requiring the banks to unwind investments in private equity firms, hedge funds, and specialty securities projects.[1] The Fed also announced that it would give the banks yet another year to hold onto their positions. The Fed’s rationale points to an underlying conflict of interest facing the Fed, a banking regulator arguably  too vulnerable to the banks’ lobbying muscle.

Banks pled that dumping holdings quickly would mean having to accept discount prices. “There’s considerable pressure the Fed is feeling in that they don’t want institutions to have a bloodbath trying to divest funds,” Kevin Petrasic, a partner in a global banking practice, said.[2] At the time, Goldman Sachs had $7 billion invested in private equity that the bank might have had to sell for a loss had the extension not been granted.[3] For Morgan Stanley, $2.5 billion is said to have been vulnerable to being sold at a loss. These figures presumably come from the banks themselves, and reliance on the regulated for information is part of what goes into regulatory capture of an agency by the firms being regulated.

Dennis Kelleher, of Better Markets, claimed the “Street has had years of notice to unwind these investments, and it appears that their self-serving complaints have been accepted fairly uncritically without a real analysis for the basis of the claim.”[4] That is to say, relying on both the information provided by the regulated and their interpretation puts the Fed’s regulatory function at risk—and hence the financial system itself at risk. Interestingly, Kelleher sounds more like a regulator than the Fed in observing, “If you can’t get out of a trade in seven years, it’s probably not the kind of trade you should be doing.”[5] The “regulators” at the Fed seem to have rolled over, taking the “self-serving complaints” at face value—ignoring the obvious problem in doing so. At the very least, regulators at the Fed should have assumed that the information would naturally be skewed; from such a perspective, a critical examination would have been an obvious necessary step prior to any decision to give the banks another year.

In short, the Fed comes off looking rather naïve, though underneath the reality could actually involve the banks having too much control over top Fed officials—the banks having a significant role in the appointing process. As a result, eight years after the financial crisis of 2008, risky proprietary trading was alive and well on a street populated by banks even more so too big to fail. Beyond the question of cozy relationships between the Fed and the banks that it regulates, the lack of any public outcry points to a problematic learning-curve societally in the U.S., with disturbing implications on the ability of a people to self-govern. Yet the alternative would seem to be more cronyism divested of any risk of being made transparent.

1. Zach Carter, “Fed Delays Volcker Rule, Giving Wall Street Another Holiday Gift,” The Huffington PostDecember 18, 2014.
2. Jesse Hamilton, Ian Katz, and Cheyenne Hopkins, “Goldman Needs Volcker Delay to Avoid Private-Equity Losses,” Bloomberg, December 5, 2014.
3. Ibid.
4. Carter, “Fed Delays Volcker Rule.”
5. Ibid.

Monday, December 15, 2014

Police Power Exceeding the Capacity of the Human Brain: Some Countervailing Measures

“Power tends to corrupt and absolute power corrupts absolutely.” Lord Acton’s timeless statement is applicable to legal and illegal power alike, for each is subject to abuse. The victims are those whose wills are bent through either harm or the threat of injury. Put another way, the human brain may lack sufficient cognitive, emotional, and perceptual machinery to check the instinctual plus socialized power-aggrandizing urge. This vulnerability is particularly apparent in viewing video showing a police employee violently over-react in a situation that quite obviously should not have involved violence. Although anger doubtlessly plays a crucial role in the trigger that unleashes the police violence, the more subtle suspension of cognition and warping of perception is also in the mix.

In December 2014, a 23 year-old policeman in Victoria, Texas, pulled over Pete Vasquez, aged 76, because Vasquez’s car did not show an inspection sticker. As Vasquez was trying to explain that his car was exempt—a point that the police chief later confirmed—the policeman grabbed the old man, pushed him to the ground, and used a tazer gun twice. “What the hell are you doing? This gentleman is 76 years old,” a sales manager watching the incident cried.[1] Clearly very angry at Vasquez, the policeman yelled at the onlooker, who seems to have suddenly feared for his own safety.

That the reasonable reaction from a third-party triggered more anger instead of any second-guessing, at least visibly, suggests that the policeman was not in control of his faculties. Crucially, he was not in sufficient control of himself to handle the power that he had been given by law. Psychologically, he evinced a weakness in handling the power in the context of not understanding why the car was exempt from having to show an inspection sticker. An arrogance in not wanting to admit even to himself that he did not understand what he himself had flagged, and a cognitive lapse in assuming that he could not be wrong likely contributed to his need to be in charge and thus his anger at Valsquez for trying to correct him. The anger itself was too much for the policeman, for it eclipsed reason and even perception whose impairment rendered any internal mechanism of self-regulation insufficiently operative.  In short, he used power beyond the capacity of his brain, emotionally, cognitively, and perceptually.

It may be that the authority given to police employees generally is not in keeping with the capacity of the human brain to process and handle power exercisable over other people. Compounding the problem, the police chief talked only about taking “a real hard look at some of the actions that occur within the department,” rather than arresting the aggressor even though the latter action would befit a person who had lost control of his faculties and acted out violently without reason. That the policeman was shifted to an administrative duty is itself an indication that official accountability would come up short within the police department. The implication is that the general public (and city officials) should not rely on departments’ internal-affairs departments to impartially investigate such cases and render sufficient punishment to “their own.” Put another way, the conflict of interest in the very nature of an internal-affairs department is inherently unethical because it can be expected to result in compromised investigations and decisions. To hold a police employee accountable, we must look beyond police departments.   

Although the district attorney said the policeman could face charges including official oppression, injury to elderly, aggravated assault and assault, the grand jury stage may be rigged to favor police employees. That is to say, the system itself may enable the propensity of the human brain to over-react with violence when in a position of power over another person without a sufficient internal check. Given the risk of aggrandized uses of power by police employees, candidates for local offices not only in Texas, but in each of the forty-nine other member-states in the U.S., might consider proposing institutionally and personally independent agencies to hold lapsing police employees accountable. Additionally, legislation changing the instructions to grand juries making it less difficult to indict an employee of a police department could be pursued. Especially if scientists find that the human brain is in fact ill-equipped to handle the power typically given to police employees, then either some of that power should be taken away, which may not be practical, or countervailing changes to grand-jury instructions enacted.

[1] Ed Mazza, “Texas Cop Nathanial Robinson Uses Stun Gun on Elderly Man Over Inspection Sticker,” The Huffington Post, December 15, 2014.

Saturday, December 13, 2014

Advise and Consent: Does Politics Have a Limit?

A film that centers on the U.S. Senate’s role in confirming executive nominations made by the president, Advise and Consent (1962) is arguably about whether moral limits pertain to power.  Put another way, should we expect no-hold barred efforts to manipulate others in the political arena? Personal lives and personal pasts being fair game?  Moreover, is the aim power for its own sake, or the manipulation of others for the sake of a public policy and ultimately the good of the country? 

The full essay is at “Advise and Consent” 

Friday, December 12, 2014

Wall Street Writing Its Own Laws on Risky Derivative Trading

In just four years, Wall Street got away with weakening a part of the Dodd-Frank financial reform law, which became law in 2010 to protect the financial system from the excesses that led to the financial crisis in 2008. Wall Street bankers and their lobbyists accomplished their feat by luring members of Congress into a formidable conflict of interest, which I submit could have been obviated.

The full essay is at "Writing Its Own Laws."

Monday, December 8, 2014

Private Interests Over the Public Good: Energy Companies Capture an Attorney General

In Wealth of Nations, Adam Smith argues that the aggregation of the preferences of consumers and producers for a given good is in the public interest for the product or service. Often overlooked is Smith’s Theory of Moral Sentiments, in which the famous economist wraps a moral sentiment around the individual preferences, hence hopefully constraining them, albeit voluntarily. Herein lies the rub, for it is shaky to assume that a preference that seeks to maximize itself will voluntarily restrain itself when it rubs up against an ethical limit that is felt. Such a moral constraint is like a semi-permeable membrane in that the sentiment naturally triggered when a person comes on an unethical situation or person can be ignored or acted on.

To be sure, a sentiment, such as that which a person naturally feels when he or she learns of an innocent person being killed, can be written into law and applied as a new regulation; the individual preferences otherwise triggering the sentiment of disapprobation would thus be constrained involuntarily from doing so. It follows that if a private actor, such as a company’s management, with a preference (which is inherently self-maximizing) can emasculate a restraining regulation without any concern for people’s moral sentiments, then we are back to trusting in voluntary restraint—only now that actor has political power rather than merely being one of many participants in a competitive market. I contend that trusting in the regulated to regulate its regulator is unethical not least because of the underlying conflict of interest.

To illustrate the problem, I discuss the influence of certain energy companies on certain attorneys general in some of the American States. In late 2014, The New York Times reported that Oklahoma Attorney General Scott Pruitt wrote a critical letter to the U.S. Environmental Protection Agency. In particular, he claims that the regulators were grossly overestimating the amount of air pollution caused by companies drilling new natural gas wells in Oklahoma.[1] The public good is salient here because methane, a gas having ten-times the greenhouse effect of carbon, had been shown by independent tests to be leaking from natural gas wells and urban pipe systems.[2]

So the public interest in keeping global warming to within limits palatable to human survival may have been put at risk were Pruitt wrong in his charge. That the letter had actually been written by lawyers for Devon Energy, one of Oklahoma’s biggest oil and gas companies—the attorney general’s staff copied it onto government stationery with only a few word changes and Pruitt signed it as if it was his own—raises serious doubts as to Pruitt’s claim of overstatement.  That is to say, a government  may have been colluding with a private vested interest in a regulation at the expense of the public interest.

An email exchange from October 2011 between attorneys general and large energy producers “offers a hint of the unprecedented, secretive alliance . . . to push back against the Obama regulatory agenda,” according to The New York Times.[3] The newspaper had “reported previously how individual attorneys general have shut down investigations, changed policies or agreed to more corporate-friendly settlement terms after intervention by lobbyists and lawyers, many of whom are also campaign benefactors.”[4] Shutting down investigations is particularly suspect, as it cannot be said that concluding them would run counter to the public good. Moreover, for the regulated to also be campaign benefactors places both the regulated and the regulators and attorneys general in conflicts of interest.

For the energy companies, their roles as the regulated and benefactors conflict because the temptation to obligate regulators and attorneys general to remove a certain regulation goes against being regulated, which implies that government regulation is a viable rather than voluntary constraint. I submit that it is unethical for a society (via its government) merely to allow the regulated to have the other role because of the latent lure of the temptation to obligate government officials to remove unpleasant regulations that are nonetheless in the public interest.

For government officials, taking the campaign contributions from companies whose regulations the officials can relax or expunge creates a conflict of interest between acting on a private interest’s behalf at the expense of the public interest and protecting the public good through non-voluntary constraints on private interests. According to The New York Times, attorney generals “in at least a dozen are working with energy companies and other corporate interests, which in turn are providing them with record amounts of money for their political campaigns, including at least $16 million” in 2014.[5] Also in that year, the U.S. president, Barak Obama, admitted publicly that the federal elected-representatives must take the huge contributions in order to compete in elections “and that obligates us.”[6] We can fill out the president’s point by adding that the large contributions, such as the $1 million from Goldman Sachs to Obama ’08, obligates elected representatives to put particular private interests over the public interest even though being a law-maker or enforcer-of-law carries with it the duty to protect the public interest from otherwise maximizing private interests.

If enough parts of a ship are allowed to go their own way at the expense of the ship itself, steering a steady course and maintaining speed are impeded. Similarly, if powerful private interests in a republic are allowed to obviate measures that restrict them so the republic may remain viable over the long term, then the whole will weaken as if leaking energy. Put another way, prick enough tiny holes in a flat balloon and inflating it will not last very long. Even though a particular pin-prick does not deflate the whole over time, a system enabling such hole-making enables enough tiny holes that a slow deflation becomes a mathematical certainty.

[1] Eric Lipton, “Energy and Regulators on One Team,” The New York Times, December 7, 2014.
[2] The E.P.A. had taken the industry’s own “estimate” of 1 percent as the leakage rate, whereas independent tests showed leak rates up to 18 percent. Cities tested include Washington, D.C., Denver, and Los Angeles.
[3] Lipton, “Energy and Regulators.”
[4] Ibid.
[5] Ibid.
[6] Barak Obama at a news conference in late 2014.