Saturday, March 23, 2019

Weak Corporate Governance at UBS Amid a $2.3 Billion Trading Loss in 2011

UBS chief executive Oswald Gruebel resigned on September 24, 2011 over the $2.3 billion trading loss by one of the Swiss bank’s traders, Kweku Adoboli. Kaspar Villiger, UBS's president, said the board regretted Gruebel's decision but had decided to accept it. "Oswald Gruebel feels that it is his duty to assume responsibility for the recent unauthorized trading incident," Villiger was quoted as saying in the statement. "It is testimony to his uncompromising principles and integrity."[1[ In presumably not pushing for the CEO’s resignation because of the magnitude in the lapse of risk management in the system, the bank’s board of directors did not take the initiative in holding the management accountable. Accordingly, shareholders have reason to be concerned about the protection of their owner’s equity, at least in terms of corporate governance providing accountability on the management. The culprit may be corporate governance itself, which as structured may proffer too much power to the CEO.
In the case of UBS, the shareholders ultimately had to rely on Gruebel’s  integrity rather than corporate governance for accountability. To be sure, the resignation of the CEO does not necessarily mean that the management itself has been held accountable. Ethical leadership thus has its limits in this respect. Where a problem is systemic in a company and has been allowed to perpetuate itself by many people in upper- and middle-level management, the resignation of the CEO is not sufficient in terms of accountability. Had the CEO embezzled over $2 billion, the resignation would have been sufficient, but relying on the CEO’s integrity would be foolhardy in such a case.  
In short, the case of UBS suggests that corporate governance ought to be strengthened or fortified with respect to enforcing accountability on a management so as to protect stockholder interests. Villiger said Gruebel, who was brought in to help revive the fortunes of the Zurich-based bank, had achieved "an impressive turnaround and strengthened UBS fundamentally." But surely there must have been some lapse in Gruebel’s oversight of the bank’s system; for over $2 billion to be lost by one trader is itself a red flag concerning the bank itself and its management as a whole. Depending on ethical leadership at the top to step aside in the interest of the design and implementation of a new system does not go far enough.

1. “UBS CEO Oswald Gruebel Resigns Over Rogue Trading Loss,” The Huffington Post, September 24, 2011. 

Structural Reform and Economic Sustenance in European Austerity

Speaking at the World Economic Forum in Davos, Switzerland on January 25, 2013, Mario Draghi, president of the European Central Bank(ECB), said the bank’s program to buy the bonds of heavily indebted E.U. states had been “very helpful” in reducing the perception that the euro was on the verge of collapse. He also pointed to the structural reforms that heavily indebted states had enacted as “now bearing fruit.”[1] He urged those governments to continue to implement structural reforms so those states could take advantage of the ECB’s low interest rates and easy credit to banks. In short, the strategy of the ECB was to use monetary policy as leverage for long-term-oriented structural reforms at the state level. Political risk analysts listening to the central bank official likely came away with a more optimistic stance on the long term prospects for the E.U. economy.
Even though the progress achieved already on the debt crisis provided “light at the end of the tunnel,” the matter of structural reforms at the state level was subject to politics and was thus more uncertain. Also, economic conditions could worsen, hence making it politically and economically more difficult to make the needed structural changes. Chancellor Angela Merkel of the state of Germany warned the governors of heavily-indebted states such as Greece and Spain against the impulse to reduce the pace of structural reform in the face of economic stagnation. She pointed to the record unemployment numbers announced in Spain on January 24, 2013 as fodder for the anti-austerity political forces there. She further observed that “experience tells us that often pressure is required to enable structural reform.” The obstacles could have come from political officials or bureaucrats at the state level, and even from the people, upset at the economic austerity cut-backs hitting themselves and even the poor who depend on funding for sustenance. Advocates for those people were doubtlessly contesting that survival in the short run should not be sacrificed for long-term structural reform. 
Interestingly, making a qualitative (i.e., difference in kind) distinction between government programs that keep people alive on a daily basis and all the other budget items could actually permit more budget cutting because so much would be found to be subject to cuts without risking lives. In the U.S. at least, the qualitative difference has typically been made between domestic and military spending. This dichotomy has enabled huge increases to military programs even as cuts to food assistance have been proposed. Of course, the unemployment caused by a cancelled defense contract could put people in danger of losing their house or going without food. However, such individuals would be covered by the continuance of the programs providing sustenance as long as they were held apart from the other spending categories. Having an indirect effect on sustenance, such as military contracts can, does not render a particular budget item itself in the category of vital programs for sustenance, such as building more halfway houses for the mentally ill who are homeless.  This reflects the American culture more, wherein much more is deemed conditional than in Europe, where the principle of solidarity has been and is still more salient politically.
In short, long-term fiscal reform need not be at the expense of people eating and having shelter as well as medical care. Based on the firm foundation of human rights, programs primarily geared to sustenance can be isolated and protected such that the structural reform can be implemented more smoothly. Buffering sustenance programs from the massive cuts everywhere else would significantly reduce the vehemence of the protests and soothe the path of structural reform by isolating the entrenched officials and bureaucrats as the only primary obstructionists. 

See also Essays on the E.U. Political Economy, available at Amazon.  

1. “Davos: ECB’s Draghi Says ‘Real’ Economy Still Stagnant,” Deutsche Welle, January 25, 2013.

Friday, March 22, 2019

Pruning Back an Ideological "Re-Definition" of Socialism

Should language lose its integrity for ideological purposes? On Fox News in the wake of the passage of Obamacare, Brit Hume and Newt Gingrich, a former Speaker of the U.S. House of Representatives, both (re)defined socialism as “government control of private property.” Their rendering falls short, however. According to the Random House Dictionary (via Dictionary.com), socialism is “a theory or system of social organization that advocates the vesting of the ownership and control of the means of production and distribution, of capital, land, etc., in the community as a whole” (italics added). Whereas government regulation of privately-owned means of production and distribution involves some of the control being in the hands of the community as a whole through its government, socialism includes the vesting of both ownership and control with the government. 
Hume and Gingrich doubtless believed that words can be redefined to suit ideological objectives. Public discourse is difficult enough in a democracy. The dialogue "across the aisle" becomes more difficult when one or both sides decide that language can (and even should!) be subordinated to ideology to the extent that dictionary definitions (and common usages) are presumed to be changeable simply by applying a new meaning to the words on the public airwaves or speeches. Ideologically akin people will doubtlessly follow along, and soon the word has a meaning that contradicts the dictionary definition.  
Going further, to intentionally scare people by redefining a word in such a way that the word appears worse than it actually is nothing short of misleading manipulation. Even in such a case, not even the opposing partisans alert the people through the media or speeches that X means Y rather than Z according to dictionary definitions. No one stands up for language, so ideology can have its way and prey on words.
If government control via regulation is not convenient to the business sector and its advocates, what about government ownership without control! As per the definition of socialism, government ownership without formal control does not constitute socialist enterprise. Ownership and control can indeed be separated. Bearle and Means, in their classic treatise, The Modern Corporation and Private Property, point to the separation in modern large corporations, wherein stockholders as a group are the owners and control is maintained by managers. Theoretically, a government could own a company that is controlled by its management. Perhaps public policy would be served by the ownership alone, or the managers could have taken de facto control away from the government officials.
Therefore, the definition of socialism is more delimited than typically thought. To be sure, the meaning of words can change naturally, but such shifts are gradual as per changing times and thus uses, rather than sudden, as from being artificially interlarded for short-term political use. In the case of socialism, the term has historically applied to an entire economic system, such as those of the U.S.S. R. and China before capitalism made such inroads. A person would not say that healthcare is socialism, or even that taxes are socialistic. In Arizona, the dominant ideology has viewed taxes as theft.
With the fall of the command-and-control economic systems of the U.S.S.R. and China, socialism has come to be increasingly applied to governments owning and controlling particular enterprises rather than every means of production and distribution. Hence a capitalist economic system can contain socialist enterprises. For example, the Green Bay Packers’ football team in Wisconsin has been socialist because the citizens of the Green Bay together have owned the team. The community need not transfer ownership formally to a government for an enterprise to be socialistic. So too has the China National Tobacco Corp. 
In short, socialism can be distinguished from government regulation of privately-owned economic enterprise. Conflating the two by effectively redefining the word, socialism, muddies the public discourse and sows confusion, neither of which is helpful to viable republic. Furthermore, socialism can be applied to particular enterprises as well as to an entire economy whose means of production and distribution are owned and controlled by the community as a whole (often through its government). The application to particular enterprises does not reduce socialism to control alone. 

Tuesday, March 19, 2019

Including Voter Judgments on Broad Policies in Elections: An Expansion of Active Popular Sovereignty

Days after the 2018 Congressional elections in the U.S., the Minority Leader and soon-to-be Speaker of the House of Representatives, Rep. Nancy Pelosi, declared, “Healthcare was on the ballot and healthcare won.”[1] As the new Democratic-controlled House worked on a budget the next Spring, Pelosi was still insisting that healthcare was what that election was about. Perhaps she based her statement on exit polls in which most voters claimed that they had voted chiefly the basis of candidate positions on healthcare. This does mean, however, that the voters voted on healthcare, for as only a choice of candidates could be made, the voters were left with inferring or even hoping that the favored candidate would act on, or at least stay with, his or her position on the issue. I contend that the next leap in the theory and practice of representative democracy could be to no longer keep an electorate, the popular sovereign, limited to selecting among candidates.
I don’t believe that the American voters, as a group—perhaps just of the minority of eligible voters who cast votes—do very well in assessing candidates and making a judgment. According to CNN, “Who the candidate is, really, plays an absolutely critical role in the presidential decision.”[2] Did the voters who had voted for Richard Nixon have even a clue regarding who the man really was (i.e., a criminal)? Did the voters who voted for Don Trump know enough about his personality to make a good judgement? I am not qualified to assess the mental health of those men. I doubt that voters who have very limited, even superficial information on a candidate via the media, and perhaps a bit more information, albeit mostly on policy, from listening to a full speech, can viably include whom the candidates really are in the voting judgment. Not even U.S. Senator Elizabeth Warren’s sharing of a bad economic experience during her childhood tells us much about whom she is underneath. At the time, an editor at CNN referred to the personal sharing as a glimpse into Warren herself and what was motivating her to run for the federal presidency. “At root,” the editor continues, “people usually vote for president based on a belief that the person they are choosing ‘gets’ them in some fundamental way.”[3] Can we assume that Warren identified with, or had compassion for, poor people several decades after her family’s economic plight? Time and a drastically changed financial situation can both change a person. It was possible that the emotional sharing on prime-time television before a live audience could have been impacted by the nature of this medium of delivery (i.e., by enabling acting). After all, “that retelling of [Warren’s] childhood [was] a staple of Warren’s stump speech,” which, by the way, the vast majority of the presidential electorate will not have heard by election day. So to just get nominated by a major party, a candidate, at least in the 2020 campaign season, had “to be able to perform when the bright lights come on and everyone is watching.”[4] What an audience gets from a candidate under the bright lights is likely to be superficial from the standpoint of whom the person really is.
From the Nixon-Kennedy debates in 1960, even Nixon’s pale, sweaty face was not enough for the audience to conclude much about the man himself. Could all of his crimes in office have been predicted? That his “checker’s speech” was generally deemed to clear him of corruption in voters’ eyes suggests that even in the face of a candidate’s checkered past, the American electorate (and the media) was naïve. Is it asking too much to suppose that voters watching the Trump-Clinton debates in 2016 could have suspected how Trump would behave personally while in office (putting aside the question of corruption)? I think so.
So why has the American electorate been limited to selecting candidates, giving them the power to go back on policies that they have advocated during a campaign? In other words, if the electorate has not known the candidates (e.g. what makes them tick), it seems foolish for elections to rely so much on voters selecting candidates, who, because they are unknowns underneath, cannot really be relied on to follow through on their campaign platforms.
Because popular sovereignty, the authority of a people as a whole, supersedes a government’s sovereign in a representative democracy, the people should be able to expand their active use of their sovereignty over that of their government by including their judgments on major public policies, or “issues,” in voting.  For example, the voting electorate could say yea or nay on whether Medicare should be expanded to all as a single-payer system, and whether health insurance should be entirely private. Hopefully the American electorate would not be schizophrenic in answering yes on both!  Whereas the private health-insurance industry may have an inordinate influence on elected legislators due to lobbying and campaign contributions, even on policies in which a clear conflict of interest exists, an electorate could restore its primary influence by expanding ballots to include decisions on broad policies, which the elected representatives would then implement. Should Congress and the president implement a tax cut (the details to be worked out by the officeholders)? Should taxes be raised or spending cut, or both, to reduce budget deficits? Congress and the president would still have substantial power (i.e., discretion) in implementing such broad policies. The American electorate could even have re-elected George W. Bush in 2004 and voted to end the war in Iraq. The president would have had to abide by the vote on his prize issue.  So the expansion in the exercise of popular sovereignty would need the protection of law—most properly a constitutional amendment.
The reduced reliance on voters assessing candidates and judging between them would be beneficial in itself, given the difficulties in knowing the candidates themselves, and the expansion in the electorate’s sovereignty would re-prioritize the electorate over its representatives tasked with implementing broad policy directives. I would even say that American voters would be better at making broad policy judgments than picking candidates. I submit that American democracy has been designed to counter or even block what an electorate is best at, while funneling all of its influence through what it is worse at!
Especially in cases in which the electorate is large, the proportion of which that really knows the candidates is small. Hence the Electoral College in the U.S., where the electorates of the states elect a small number of electors to vote for president. Unfortunately, that has not worked since the beginning, as parties took over the College. The Anti-federalist stance that most governance should be done at the state level where the districts are smaller than at the federal level was justified by the belief that voters in a small district tend to know the candidates better than do voters in a very large district. The U.S. went on to become a very large district, with over 310 million people by 2015. How many of those people could possibly have the real story on Hilary Clinton or Don Trump?
By the twentieth century, even the state level could have been considered to be too big, yet no state adopted a federal system made up of what Europeans call regions or provinces. Interestingly, the E.U.’s principle of subsidiarity pushes decisions to the state or local level if feasible; the people are literally closer to their state governments that that of the E.U. The states in both empire-scale unions could improve democracy by federalizing themselves. Meanwhile, federal elections in both unions could be widened both conceptually and in practice to include judgments on policies, which voters are able to make, so as to take the pressure off the importance of selecting the better candidate. The percentage of eligible voters might even increase if voting on policies is found to be more interesting than just voting on candidates. If I am correct, the office-holders have been allowed to have too much power at the expense of their respective electorates, which have had too little, whether unwittingly, voluntarily, or beguiled/pressured by their own agents.

See Essays on the E.U. Political Economy and Essays on Two Federal Empires. Both are available at Amazon.



[1] Kimberly Leonard, “Nancy Pelosi: ‘Healthcare was on the ballot and healthcare won,” The Washington Examiner, November 7, 2018.
[2] Chris Cillizza (CNN’s Editor-at-large), “Elizabeth Warren Just Had Her Best Moment of the 2020 Campaign,” CNN.com, March 19, 2019 (accessed same day).
[3] Ibid.
[4] Ibid.

Monday, March 18, 2019

Saudi Arabia Going After Dissenters Abroad: On the Egregiousness of Concentrated Power

After having been selected by his father as the crown prince, Mohammed bin Salman of Saudi Arabia “authorized a secret campaign to silence dissenters—which included the surveillance, kidnapping, detention and torture  of Saudi citizen—over a year before the killing of Jamal Khashoggi, according to American officials” with access to the classified reports.[1] The killers of Khashoggi had been involved in at least 12 other such operations starting in 2017. The sheer egregiousness of the operation under the crown prince says something about not only dictatorship, but also the nature of power itself.
According to the American officials, “(s)ome of the operations involved forcibly repatriating Saudis from other Arab countries and detaining and abusing prisoners in palaces belonging the crown prince and his father, King Salman.”[2] Although Saudi law forbids torture as it is considered an abuse of power, and confessions made under duress are inadmissible in Saudi courts, dictators can easily ignore the force of law as if it were just a moral imperative. Furthermore, Saudi officials acknowledged after Khashoggi’s murder “that Saudi intelligence service had a standing order to bring dissidents home.”[3] Hence the torture and murders involved international relations, a fact that points to not only the extent of the crown prince’s use of power to go after dissent, but also the sheer brazenness and even the underlying mentality.
Extending the reach to include Saudis in other countries points to the egregious extent to which the crown prince went to stifle dissent. “Saudi Arabia has a history of going after dissidents and other Saudi citizens abroad, but the crackdown escalated sharply after Prince Mohammed was elevated to crown prince in 2017, a period when he was moving quickly to consolidate power. Since then, Saudi security forces have detained dozens of clerics, intellectuals and activists who were perceived to pose a threat, as well as people who had posted critical or sarcastic comments about the government on Twitter.”[4] That writing a critical or even sarcastic comment on a blog or on Twitter could justify being kidnapped in another country and killed there or brought back to Saudi Arabia points back to a dictator’s attitude toward power—that a person cannot have too much of it, and thus that any external (or even internal!) constraint is to be regarded as not only pliable, but easily pushed aside altogether.
When a Saudi group linked to the crown prince killed and dismembered with a bone saw inside the Saudi Consulate in Istanbul, Turkey’s government was using surveillance video and audio recordings to uncover the crime.” According to Bruce Riedel a former CIA analyst, “the team’s sloppiness showed that it was used to operating freely inside the kingdom and not under the watchful eye of an adversary’s intelligence service.”[5] The brazenness may suggest that as condensed in a dictator, power warps the mind’s perspective. 
By analogy, gravity warps time and space. As the mass of power increases, perhaps past a threshold point, the normal perception and judgment of having gone too far may be skewed by the power itself. Perhaps similar to additions, the high from the intense pleasure from having a lot of power occasions the warping of perception and judgement regarding one’s own power and the illusion that complete control over other people, hence with zero dissent politically, is achievable. Other operative mental defense-mechanisms doubtlessly include denial. If so, then checks on substantial power being held by political officials (as well as religious, educational, and business officials) are grounded in what having a lot of power does to the human mind. Put another way, a limit exists as to how much power is compatible with human biology.


[1] Mark Mazzetti, “Saudi Prince Ran Brutal Campaign to Stifle Dissent,” The New York Times, March 18, 2019.
[2] Ibid.
[3] Ibid.
[4] Ibid.
[5] Ibid.