Business Ethics Alive in Small Banks – Strong Ethics Equal Healthy Banks

October 18, 2008

It’s easy to become cynical when all you hear in the media is bad news.  But not all news is bad.  In a recent CNN article there was some refreshing comments from small, but healthy, banks.  They were making loans and, for the most part, it was business as usual.

Here are some comments from the article:

Conservative lending practices seem to be a common denominator among banks that have remained strong and stable during the current banking crisis, and those banks are still making loans.

Peoples Bank President Todd McKee, left, chats with customer Tommy McVay on Friday in Lubbock, Texas.

Peoples Bank President Todd McKee, left, chats with customer Tommy McVay on Friday in Lubbock, Texas.

The failures of behemoths such as Washington Mutual and IndyMac have drawn media attention, but not all big banks are in trouble — and smaller banks are not immune.

For sometime, as a business ethics speaker, I have said that the underlying problem related to the economic crisis we’re facing today has been founded in a lack of business ethics.  For those comments I have been the brunt of criticism.  But, if ETHICS is choosing good from bad with a moral obligation and duty…then I submit that what is reported in the CNN report supports my position.

“Our underwriting standards have tightened a little bit,” said Ronald Heaton, president of the Cedar City, Utah, bank. “… Our standards haven’t changed drastically, and we’re still loaning … but we’re watching our underwriting standards closely so that people are able to repay their loans.”

Mortgages that didn’t require borrowers to prove their income or make a down payment got many lenders into trouble, but his bank never offered those: “Didn’t make sense,” he said.

Some would-be borrowers “wanted us to do everything, and we said, ‘We don’t do everything. We have standards,’ ” Heaton added.

Nonbank mortgage lenders were able to generate substandard mortgages because they were not adequately regulated by the federal government, Heaton said.

Now those bad loans have come home to roost, the nonbank lenders are out of the game, and State Bank of Southern Utah’s mortgage business is picking up, Heaton said.

Folks…that’s just plain ole good ethics.  Heaton (whom I’ve never spoken to or met) is 100% accurate.  If you have standards (founded by sound business ethics) you won’t find yourself in major financial trouble.  I contend that lending practices, that were not founded with sound ethical principles, are in large part the root cause of why we are where we are today.

Another part of the CNN report states:

In Texas, the state Department of Banking says state-chartered institutions wisely stayed out of the subprime game.

“That’s not what we do. We’re not in the subprime market whatsoever,” said Todd McKee, president of Peoples Bank in Lubbock. “Lending here is the same as it’s always been.”

The way it’s always been is up close and personal. McKee said his bank’s customers prefer to do business with tellers face-to-face rather than through the drive-up window.

“I’m president of the bank, and I sit right by the front door, so I wave at every single soul that walks in the bank. Everybody has access to me,” he said. “My partner [Larry Allen] is the CEO. … He sits at the other door. So we know everybody that comes in the door.

May sound “hokey” but that is banking the way it was meant to be.  I recall my first loan when I was 18 years old (I’m now 51) was made – not by a credit score – (funny I don’t think they existed then), but rather the loan was made on character and the fact that the bank president trusted me to repay (and knew where my mama was if I didn’t).  I paid the loan back and was proud to do business with them.

This last comment from the article states it best – “You can look at credit all day, you can look at collateral, but if they can’t make that payment, there’s no sense in making that loan. And we’ve always done that. We’re all supposed to do that.”  That is business ethics!


Business Ethics – Fraud Awareness: There Is Definitely A Link!

October 17, 2008

My how times change.  Just a few short years ago the economy could do no wrong.  People commented about the large movement in the housing market “caused” by the Baby Boomers.  Baby Boomers were buying second homes, downsizing, and making room for the next wave of new home buyers – or so we thought.  But hind sight is 20/20.

Perhaps less of that was true that what we thought.  Looking back there were many artificial factors in play that were, in my opinion, a clear violation of what most people would say are sound business ethics.  As a business ethics speaker, I know as I consult with companies frequently who want to know how to get out of some of the messes that have been created.

No where is this more evident than in the mortgage and banking industries.  And let me be clear – WHERE THERE IS A BREACH OF BUSINESS ETHICS – THERE IS FRAUD.  When companies turn their back on maintaining a strong ethical foundation for themselves and their employees, they run the very real risk of exposing themselves to fraud.  And, no one that I know of wants to be on the back end of a very messy fraud investigation.

As an example, the Dallas Independent School District has been dragged through the mud with all that has taken place – FBI investigations for fraud and all.  Now the DISD is not a bad organization, in fact, it does good work and should be proud of its place in the community.  But, with lax controls and an environment that did not fully promote ethical behavior, it was clear that when temptation was presented the obvious outcome would be fraud.

Now the question is – what does the Dallas Independent School District have to do with mortgages and banking?  NOTHING!  Rather, it serves only as an easy example of how an otherwise good organization can be featured in a negative light – and that is because of the choices they made.

The larger question is – with the economy where it is today, which banking institutions will survive and which will implode under the weight of the poor choices made during what appeared to be more “healthy” times?  There wil be bank failures as this “recession” and, yes I called it a recession picks up steam.  We are no where close to the end with more unpleasant news to come.

WHAT NOW?

Frankly, that is the question that the business community should be asking!  It has been said over and over, only the strong will survive.

When there is an economic downturn there will be FRAUD.  Make no mistake that is a given.  There are three elements involved in most frauds: (1) need; (2) opportunity and (3) rationalization.  When the economy goes south…there is NEED!  That is the first step and if ever there has been a time when NEED is growing – it is NOW!

Here where the ethics equation comes into play.  NEED alone does not create fraud – it is just one component.  If the opportunity is eliminated then the fraud cannot happen.  That’s where a commitment to ethics and fraud awareness come into play.  As a business ethics speaker and fraud prevention consultant, I (and certainly I am not the only one) help businesses understand how to create a culture that supports “doing the right and ethical thing” – I call it MOTIVATIONAL ETHICS; and, looks carefully at methods to eliminate opportunity.  If the business promotes ethics and reduces opportunity there will a strong chance that it will survive and become stronger – even during poor economic times.

MORTGAGE FRAUD TWISTS:

CNN did a great article on several new twists in the ever changing mortgage fraud arean.  Bank and financial instititutions be aware.  The mortgage industry is in a state of disarray and as such there is definitly a NEED (one of the components of fraud).

Here are the three that CNN reported:

(1) under-appraising property values:

These schemes involve short sales, which come up when a struggling homeowner is “underwater,” or owes more on his mortgage than the home is worth.

When done legitimately, the owner sells the home for the lower market value, and the lender agrees to accept just that amount and forgive the difference.

When illegitimate, fraudsters fake very low appraisals for the homes and use those appraisals to justify low short-sale prices – well below true market values.

If busy bankers don’t check the appraisal closely, they may agree to sales of homes that should be worth $200,000, for $150,000 or even less.

The buyers – in cahoots with the owner – then flip them for a big profit.

Over the past four months I have seen, through my consulting work, a tremendous increase in “short-sale” interest – and that is something that many financial institutions are ill prepared to deal with.  It is new to them and an area ripe for fraud.

(2)  Liar Loans:

“Liar loans are now fully documented – but with really good fraudulent documents,” according to the CNN article.

In one case investigated by Interthinx, a New York man buying an investment property in Georgia provided documents that showed double his actual salary.

Advanced information technology and photocopying equipment have gotten so accurate that very convincing papers, including income statements, savings accounts and tax returns can be produced on demand.

Scams that misrepresent income or employment are still the most common type of fraud.

(3)  Buy and bail:

Example: You’re underwater on your mortgage and want a new, cheaper home down the block. You could just bail on the existing home, but no lender would give you a mortgage for the new one.  So you tell the bank you plan to rent out the current home – even though you have no intention of doing so.

“This is a very difficult scam to pin down,” said Jennifer Butts, a spokeswoman for MARI, because the rental agreements that borrowers proffer may not be scrutinized by lenders.

The Federal Home Administration announced in late September that it hoped to head off many buy-and-bails by no longer insuring mortgages if the homeowners had existing loans – unless they could show enough income to pay off both loans simultaneously.

Now, just because a home is rented does not mean a scam is taking place.  For example, my wife and I just sold a home in Dallas, TX and moved to Raleigh.  It is a “buyers” market there, so rather than make a hasty decision, we elected to rent a home.  Turns out that the landlord bought another home and was unable to easily sell the one we rented.  This is an example of a legitimate transaction.  However, the action by the FHA may add undue stress on an otherwise tight market – just in an effort to eliminate opportunity (the second part of the fraud equation).

WHERE FROM HERE?

(1)  Honestly evaluate you and/or your company’s commitment to ethics.  Everyone says they beleive but the real question is – what have you done to set the right tone?  By that question, I don’t mean what have you done to comply with the law, but is there a tone of ethics in the company?

(2)  Have you or the company done anything within the past year to raise ethics awareness or fraud awareness?  Seminars, workshops, team meetings, on-line awareness programs – to name a few – are visible symbols of a company’s commitment to a foundation of solid business ethics.

(3)  Has an evaluation been done to consider what opportunities for fraud may exist and more importantly – how to eliminate or reduce them?

Now is the time for businesses who want to survive to take action.  Failure could be catastrophic as the “perfect storm” is rising for business fraud and ethics failures.  One thing is true…YOU DON’T WANT TO BE IN THE HEADLINES ON CNN TOMORROW FOR AN ETHICS FAILURE!


Business Ethics be Damned…A Receipe for Disaster Led To This Banking Bailout Bandaid!

October 16, 2008

We ain’t seen nothing yet!  As a business ethics speaker, as I write those words I feel tension building in my shoulders and neck.  Stress for sure.  But unfortunately the worst is yet to come and for many, especially younger adults, it will be the first time you will have witnessed a severe financial correction.  This will not be a mild recession but a full blown catagory 4 storm, if you will.

Recessions:

Let’s first explore a little of the history of recessions.  A great article that is simple to read an understand was written not long ago which outlines the recessions in our past and the depth of their pain in months.  A portion of that article is reprinted here for reference:

The National Bureau of Economic Research, or NBER, is considered the official arbiter of recessions, but it doesn’t define a recessions by the school book measure of two or more consecutive quarters of economic contraction as measured by GDP. It states that “a recession is a significant decline in economic activity spread across the economy, lasting more than a few months.

The last recession, so declares NBER, was from March 2001 through November 2001.   Now most of us remember that time but not because of a declared recession, but because of 9/11.  The tragedy of 9/11 was so focused that we forgot how the economy felt and where we were before then – assuming that all that happened economically was a direct result of the 9/11 incident.

Now, when a country is in a recession there is a cry from the population to get it over with an get back on the track to economic health.  That is, in essence, just what we attempted to do.  However, we got so caught up in HEALTH that we looked past practical sensible medicine and pushed too hard.

What We Did:

Just like a doctor has skill, training, and tools to help restore health, from an economic perspective so does the government along with the Federal Reserve.  So, Dr. Fed to the rescue.  Surely we could not and would not stay in this ’91 recession long.  Our pride was hurt along with our pocket books and we needed fast action.

#1 – in response to the 9/11 attacks our country went to war.  Now, within reason, up to that point there was a widespread concern about the national deficit.  However, that disappeared from the political scene, as we elected to go to war.  Do not assume I am against this action, I am looking at it, however, from an economic standpoint.  War changes perspectives and allows the government to increase spending and debt without much cry from the populous.   War increases productivity and we all witnessed many companies showing record profits.  Government spending changed dramatically – essentially an economic stimulus.

#2 – the Federal Reserve reached in its bag of goodies and began a systematic dramatic and unprecedented drop in interest rates.  Never in its history had the Fed dropped the interest rate to 1% – NEVER.  Over time it almost became “free” money.  Artificially low interest rates became a powerful economic stimulus.

#3 – not only does the Federal Reserve have the ability to set interest rates, but they also control the flow of money.  In other words, they control the printing press or just how much money is in circulation.  Another powerful tool to fight “recession” – access to money makes economic growth easier.  More money in circulation became an economic stimulus.

#4 – tax law change was also a factor that changed the face of our economic growth.  In the past when a person sold their home, they were taxed on the gain unless it was reinvested into something of equal or higher value.  In the mid nineties, that changed effectively eliminating tax on most home sale gains.  No taxes proved to be another economic stimulator.

How We Responded:

Now, while some would disagree – that is where the breech of ethics occurred. Let me us an example:  If you are a star baseball player and practice everyday – honing your skills and lifting weights, etc. in order to be your best, well that would be ethical.  Agree?  If, however, you do all of those things and take performance enhancing drugs, that would be unethical.  Agree?

How we responded was in a sense like doing all the right things, but too excess and assuming that there would be no consequence.  That assumption is unethical stupidity.

So we:

(1) took our eye off of living with a balanced budget, allowing the government to stimulate the economy through the war effort;

(2) we borrowed at a record pace (after all if there is free money wouldn’t you take it)?  We, as consumers, increased our credit card debt dramatically falling for most ever zero percent offer that was placed before us.  And, with that new found credit, we bought items that in the prior decade we might have postponed.  In fact, we believed that we didn’t have to pay the borrowed money back, all we had to do was “transfer balance” it.; and

(3) we used our homes as a credit card.  Up until then, there were reasonable rules in place for borrowing to buy a home.  But during that time, with lots of money in circulation and low rates, we were encouraged to borrow…borrow…borrow believing that our home was safe.

(4) now the straw that broke the camels back was unrealistic appreciation.  In many (not all) parts of the country we saw home prices skyrocket.  Heretofore, home prices increase at a steady 1% to 3% per year.  Our home was sacred.  Now, with double digit increases, homeowners and builders began to believe that with no taxes on the gain, there could not be a better investment.

Every choice has a consequence:

The example of the ball player up above ties into this perfectly.  If he/she had done the right things in moderation, they would have an outstanding career and perhaps make it in the baseball hall of fame.  But, once discovered for performance enhancing drugs, they would likely be banned from the sport or suffer some humiliating consequence that would cost them dearly.

That is just where we are today.  Ethically, the Fed knew better.  The economy needed to be stimulated only so much.  Those are sharp folks and I don’t believe for a minute that they could not have seen this coming.  Fairly enough, they did begin to raise rates several years ago, but by then the bubble was set to pop.  And pop it did!

Likewise, our financial institutions knew better.  You don’t make loans to people that you honestly know can’t repay them, just to turn a quick profit in order to meet analystists expectations on Wall Street.  That, to me, is unethical.  Nonetheless, it was done – DAILY!

Builders, gorged with profit, continued to build knowing that the supply was outstripping the demand based on any reasonable demographic study.  In one area in NC near Raleigh, on average 1.5 homes were sold per month, yet 6 new builders flocked to the area and began building multiple spec homes.  There were no buyers and today they sit on them – some having been on the market well over 600 days.  That is greed outstripping ethical sense.

What Now?

#1 – the government is scrambling to figure out what to do.  My prediction is the $700 Billion dollar bailout is more like $2 Trillion.  The US Government will use our money (wrong borrowed money) to buy up bad loans (doesn’t give me the warm and fuzzies inside) and they will buy equity interests into our banks.  To me that is historic – it appears almost like a nationalization of the banks -scarry…!

#2 – the Federal Reserve, will once again, lower interest rates in hopes that they will stimulate BORROWING so the economy will again move forward.  Sorry, but I don’t think we need more debt!

#3 – the housing market will see double digit declines in home prices.  What goes up must come down (at least to reasonable levels) and many home owners who bought at the top will find themselves foreclosed on and have ruined credit.

#4 – builders will go belly up and banks will be in the physical real estate business – something they no little about.

#5 – credit will freeze.  No longer will you see the “free money” ads from your credit card company.  In fact, when you pay your card off…they may reduce your credit limit – taking a more conservative approach.

#6 – Consumers faced with increased medical costs, gas costs and utility cost, will spend less and this Christmas buying season will be dismal.  Retailers will be forced out of business and the pain will be heard world wide.

#7 – many smaller banks will shut their doors with the FDIC taking them over; and

#8 – the market will go much lower than it is today.  There will be minor up turns, but the down will outweigh the up and we will see another loss of 20% before it is over.  As a result, we will be less wealthy as our retirement funds decrease.

Conclusion:

Every choice has a consequence.  We chose the route of performance enhancing programs to stimulate our economy (an unethical choice in my opinion) and today and for the near term we will face the consequences – painful as they may be.


AIG’s Financial Crisis – Forget Business Ethics – We Need More Money!

October 8, 2008

$700 Billion for the banking bailout – $85 Billion for AIG (a private company) – these amounts are only a drop in the bucket of what it will truly cost before this financial fiasco is complete in the history books.  The sad thing is – in order to clean up the mess, the goverment will have to “borrow” money to correct – OVERBORROWING!

Now AIG says it needs more – almost $38 billion more!  Talking about missing a projection.  And the biggest question of all, where will it end?

Read the following according to CNN:

The New York Federal Reserve is lending up to $37.8 billion to American International Group to give the troubled insurer access to much-needed cash.

In exchange, AIG is giving the New York Fed investment-grade, fixed-income securities that it had previously lent out to other institutions for a fee. Those institutions are now returning these securities and want their money back.

The new program, announced Wednesday, is on top of the $85 billion the federal government agreed to lend to AIG last month to prevent the global company from collapsing. AIG said last Friday it had drawn down $61 billion.

To be sure none of us want to see a financial collaspe, but $38 billion on top of $85 billion – the question seems to be where will it end?  And what seems amazing is the magnitude of which the federal goverment is being the backbone of private “for profit” financial institutions.  Frankly put, if the issue were just you or I “Joe Citizen” and we were about to go under – we’d drown.  So why on the back of the taxpayers is the federal goverment backing institutions that have apparently thrown ethics to the wind when making financial desisions?

As a business ethics speaker, I am told daily that my phone should be ringing off the hook – “apparently Washington and Wall Street need your help.”  I can’t disagree with the sentiment, but they needed the help before they made poor business choices that have a clear unethical smell to them.

In a Forbes Article the following was stated:

AIG’s problems stemmed primarily from its insurance of mortgage-backed securities and other risky debt.

On Tuesday former top executives at AIG testified before the House Oversight Committee blaming everything but themselves for the company’s problems and subsequent bailout that cost taxpayers billions of dollars. (See “‘Wasn’t Us’ Former AIG Execs Say)

“Wasn’t us” my ass.  Sorry for the language, but if you’re an exec with a firm like AIG the buck stops with you.  Any person who runs a company has the power to make decisions that “should” be in the best interest of the shareholders.  With an equity decline of 95.4% – YES THAT IS 95.4% – who else to blame but the execs who set the course for the company.  Sure the market has changed, but it changed because “unethically” corporate executives have placed short term quarterly profits above common business sense.

My sense is – it will be a long cold financial winter that may practically last several seasons, if not years.  Your comments are always welcome!


Business Ethics, Bank Failures and Government Bailouts – Are They Compatable?

October 5, 2008

Just last night I was having dinner with with the head of a company and two retired physicians, none of whom I knew before my wife and I were seated.  As one might expect, the conversation turned to career as we played the get to know you game.

“What do you do,” one of the retired physicians asked?

“I speak across the country to businesses and associations on ‘ethics’,” I replied.

“Well,” the business exec at the table spoke up immediately, “you should be booked solid now.  I’ve never seen it so bad.  Seems that those guys on Wall Street and in Washington need your service desperately.”

With those comments the table broke into a sad sort of laughter, although the comment made was no laughing matter.  Rarely, if ever, in my lifetime (and I’m 51) have we seen a time in our country where the choices that have been made have had the potential for a more disastrous outcome.

Before the month of October begins in earnest the headline late on a Sunday night on CNN is: U. S. bank failures almost certain to increase in next year. Based on all that we’ve seen in the short scope of the last two months I tend to agree.  And here’s what is more baffling – people much smarter than I must have known that we would one day face this outcome.  The writing was on the wall.  You can’t extend credit to someone who can’t afford to pay you back and assume that everything will somehow work out.

Every choice has a consequence.  That is a universal law (although it seems that many people would prefer to ignor its existence).  All we heard for the past several years is how robust the US economy was.  The housing market was strong in most sectors of the nation and it would appear that we were set to continue to enjoy long term economic prosperity.  Really?  Here’s a segment of the CNN story:

Weakened by huge losses on risky home loans, the banking industry is now on the shakiest ground since the early 1990s, when more than 800 federally insured institutions failed in a three-year period. That was during the clean-up phase of a decade-long savings-and-loan meltdown that wound up costing U.S. taxpayers $170 billion to $205 billion, after adjusting for inflation.

Now, like many who read this, I was around during the Savings and Loan crisis.  It wasn’t pretty and friends, I hate to say this, but this is no savings and loan crisis.  That economic hardship pales in comparison to what we could face based on bad choices and business ethics gone awry.  The government bailout – hum, let me rephrase – the taxpayer bailout may preserve some of the “stronger” institutions, but there is a substantial belief that many more will fail, buried under the weight of their poor choices.

The following quote from the CNN article is very accurate:

“I don’t see why things will be that much different this time,” said Joseph Mason, an economist who worked for the U.S. Treasury Department in the 1990s and is now a finance professor at Louisiana State University. “We just had a big party where people and businesses overborrowed. We had a bubble and now we want to get back to normal. Is it going to be painless? No.”

I think it is interesting his choice of words, “people and businesses overborrowed.”   That statement is factual, but the more significant underlying question is how did that occur and why?  The answer to that is where – ETHICS – comes into play.

Now let me simply define ETHICS for the purpose of this discussion:  “Ethics is the discipline dealing with what is good and bad and with moral duty and obligation.”

So let me get back to the comment “people and businesses overborrowed.”  While the comment is true neither people or businesses had control of the purse strings.  People were “unethically” encouraged to overborrow.  Rarely a day would go by without the mailbox being filled with credit offers.  “Zero percent this and transfer balance that.”  We saw big burley viking men touting Capital One and God knows my college aged son received more offers for credit than he could count – even though he had no source of income.

While there is plenty of blame to go around, YOU CAN’T BLAME THE PEOPLE.  People did what people do – they responded to effective marketing campaigns and accepted offers made by many of those very banks who soon will be buried in the business grave yard of failure.  Poor business choices combined with poor business ethics will equal business failure.

We hear all too much about the mortgage crisis again with many stating that people over borrowed.  That may be true, but the bank or financial institution again controlled access to the money.  Now if a bank is so overzealous to prop up growth and earnings that they make loans to unqualified individuals or loan against property that is overvalued, I contend that is unethical.

Banks have more than a duty to earn money and grow, their greater duty is to do both of those things and (most importantly) survive!  Their moral duty and obligation (their ethical duty) is to survive while achieving success.  I agree with my dinner mates, if there is ever a time for ethical reflection it is now!

Another comment from the article that has alarming numbers attached:

Using statistics from the S&L crisis as a guide, Mason estimates total deposits in banks that fail during the current crisis at $1.1 trillion. After calculating gains from selling deposits and some of the assets of the failed banks, Mason estimates the clean-up this time will cost the FDIC $140 billion to $200 billion.

The FDIC’s fund currently has about $45 billion, a five-year low. But the agency can make up for any shortfalls by borrowing from the U.S. Treasury and eventually repaying the money by raising the premiums that it charges the healthy banks and S&Ls.

Perhaps next is the issue of Goverment Ethics.  By all accounts, Alan Greenspan reported to Congress many years back – talking in “Greenspeak” about what was likely to happen and how it could be avoided.  Did the government take action?  NO!  The concern, it seems, for most politicians is staying elected or getting elected, not making ethical decisions.  The moral duty and obligation that our elected officials have (or should have) is to represent those they govern and protect them from the disaster we are now facing.

And, not to be a cynic, but when have you known any financial projection to come in at or under the budget or estimate.  In my lifetime – never!  So by guess is the $700 billion will be more like $2 trillion when it is over.  The bailout here and proping up the FDIC there, not counting what else will arise that is undisclosed at this time.  It all adds up and is dumped on our shoulders.  In reality all we, as a nation, are doing is on a bigger scale exactly what the “people and businesses” did – borrow to pay off what we could not afford in the first place.

So back to the question – Bank Failure and Government Bailouts – are they compatable?  Neither represent good business ethics and yet both will happen.  Perhaps the comment was right at dinner, I need to camp out in Washington and NY – although now it might be too little too late.

For information about my presentations visit my web site.  Your comments, by the way, are welcome.


President Bush: Government Bailout Necessary…!

September 24, 2008

…but as the President speaks and says that “our entire economy is in danger” – unless you pass my $700 billion bailout proposal – the question I ask is – is it really $700 billion or will it (in the end) be more like 3 Trillion?

According to CBS News: Speaking in dire terms, President Bush on Wednesday warned Americans and lawmakers reluctant to pass a historic financial rescue plan that failing to act fast risks wiping out retirement savings, rising foreclosures, lost jobs, closed business and “a long and painful recession.”

Now by no stretch of the imagination am I making light of one of the most serious financial issues of our time, but I keep hearing Forrest Gump in my head saying, “Now I know I’m not a smart man, but…”  Well the “but” is when has a government financial projection ever been what they projected it will be – ever?

Bush is right in that we may not only be facing a recession but the possibility of a full fledged depression is not that unlikely.

He spoke just after inviting Democrat Sen. Barack Obama and Republican Sen. John McCain, one of whom will inherit the mess in four months, and key congressional leaders to an extraordinary White House meeting Thursday afternoon to hammer out a compromise.

“Without immediate action by Congress, American could slip into a financial panic and a distressing scenario would unfold,” Mr. Bush said in a prime-time address from the White House East Room that he hoped would help rescue his tough-sell bailout package.

The question remains – is the actions that are proposed too little too late.  Every presentation on ethics I make has one central theme – EVERY CHOICE HAS A CONSEQUENCE.  We, as a country, relished in the glow of a robust economy balanced on the back of an illusion.  We had leadership from both parties and substantial financial institutions who seemed to be more concerned about growing a false economy than taking the measures that all agree today would have made sounder financial sense.

As an example – today I had a conversation with a Realtor (as I am in the housing market as I write this).   He suggested that mortgage rates would never be lower and that after the bailout – the housing market pricing would stabilize hence home prices are at their bottom.  I must admit (while he may be right – guess there is always that possibility) I had to laugh.  Now, I don’t know about the interest rates, but this I believe – housing prices will continue to slide for two very clear reasons:

(1) the number of people who can qualify for a mortgage is shrinking even as we speak.  Fewer people are finding increases in their income and many should not have qualified in the first place – hence a smaller population of potential buyers.

(2) an over abundance of inventory.  Now I just sold my home in Texas within three days after it was listed for above asking price.  For that I am thankful to God and feel blessed.  But, as I moved to a different part of our country I found that it is a buyers market.  More homes than buyers makes that true.  The other part that I have found is builders and Realtors are having a difficult time adjusting their thinking about pricing – they still think it is worth what they thought it was.  Yet, I’ve seen homes on the market for now over 600 days with no purchase prospect in sight.

But – the realtor told me that we have to pass this “bailout” otherwise, we will face a disaster.  Afterall, he stated, “our economy is built on the ability to borrow against our house.  If you need to buy something new or put a kid through college – you use the equity in your home as a second mortgage to pay for it.  Otherwise, how else would you get the money?”  He made that statement and ask that question with sincerity.  What was amazing was – he could not conceive of another way to meet financial obligations.

Perhaps we have forgotten sound financial principles.  As a business ethics speaker, I admit I forgot those principles in my past and the price that I paid was significant.  We should pray that the bailout works – for the cost of failure will be much higher than most of us would care to dream.

QUESTION: Do you support the “bailout” and why?


FBI Mortgage Fraud Investigation – Too Little Too Late? Is This Smoke and Mirrors or the Real Thing?

September 24, 2008

For some time I have been writing and speaking about white collar crime, business ethics and the issue of mortgage fraud.  Then we have the issues that have surfaced over the past several weeks culminating with the President’s address tonight.  A major recession (I’d call it a depression) is facing us if we don’t do something now.

Now just may be too late.  Many individuals and firms have either gone under or become the target of a massive FBI investigation into mortgage fraud over the past several years.  But at the heart of this entire mess is the government and their failure to provide oversight and accountability.  It seemed that a robust economy balanced on the back of home ownership was more important than practical long term ethical decisions that fall on the backs of our elected officials.  (And for anyone who feels that I am leaning one way or the other politically – I feel there is plenty of blame for all elected officials).

Now we find in published reports that the FBI is expanding it’s investigation of major institutions whose names have been at the heart of the meltdown we are today witnessing.

According to CNN:

The FBI is investigating Fannie Mae, Freddie Mac, Lehman Brothers and AIG – and their executives – as part of a broad look into possible mortgage fraud, sources with knowledge of the investigation told CNN Tuesday.

Two officials with knowledge of the FBI investigation into the mortgage crisis said “the investigation is all very preliminary”. They said there is a lot of anger and people want someone held accountable.

Officials are looking into whether any criminal activity occurred, but the Bureau said the investigation will take some time. They said the investigation is in the preliminary stages, and so far it is a broad look at the companies involved.

“From what I’ve seen so far, I really don’t believe we’re going to find widespread fraud,” according to one of the officials. They said they have to go where evidence and facts lead. Just because an investigation has been opened doesn’t mean there will be charges.

Trust me – there will not be charges.  The FBI investigation (done by well meaning people) is just a political smoke screen so that those who want accountability will feel that something is being done.  Frankly, nothing substantive will be done to hold those most accountable for this financial failure responsible.

As reported in my prior blog entries, FBI Director Robert Mueller told Congress that 1,400 individual real estate lenders, brokers and appraisers are now under investigation in addition to two dozen corporations.  What is of most interest is that the focus is on small time fish and a big sea of corruption.

Greenspan told Congress sometime in the recent past that something must be done with Freddie Mac and Fannie Mae or we would face a meltdown and grave financial crisis.  His prediction has come true.  What’s sad is that our politicians from both sides of the isle did not have the fortitude to step up and do the right thing.  Rather, they buried their head in the sand and now find that they are drowning in a sea of financial misfortune.

ENRON’s leaders were held criminally liable for their financial misdeeds.  This collapse makes the ENRON mess pale in comparison.  Yet, since government backed Freddie Mac and Fannie Mae are at the heart of the problem – both backing poor loans and selling them to the market – there will be nothing criminal to come from this.  The government doesn’t have the will or courage to regulate itself – nor the ethical wisdom to do what is right.

Cynical – well not really.  Practical – yes.  This $700 billion dollar plan will in the end cost $3 TRILLION…just wait and see.  Meanwhile, there is a long winter ahead and the chill we will feel won’t just be the weather.

QUESTION:  Do you believe the FBI will find anyone in any major institution recently names held criminally liable?


Financial Meltdown? Where Were Our Government Leader’s Ethics? Comments by Ethics Speaker Chuck Gallagher

September 23, 2008

The words are “urgent action” as uttered by those in financial leadership in our country.  Action needs to be taken in order to avoid a financial meltdown.  Somehow, I would suspect that words similar to that were uttered immediately before the Great Depression.  Have we learned nothing from past history?

According to CNN:

“You know, I share the outrage that people have,” said Paulson. “It’s embarrassing to look at this, and I think it’s embarrassing to the United States of America.”

“There is a lot of blame to go around – a lot of blame with big financial institutions that engaged in this irresponsible lending … blame to the people who made loans they shouldn’t have made, people who took out loans they shouldn’t have taken out,” said Paulson, who served as CEO of Wall Street giant Goldman Sachs for seven years before he became Treasury Secretary in 2006.

Now I’m confused.  Treasury Secretary Paulson is a smart man…otherwise he would not have lead Goldman Sachs and been named Treasury Secretary.  Yet, now we face one of the most significant financial crisis of our generation and times and at the heart of the issue are actions taken by aggressive financial institutions.

“Blame to the people who made loans they shouldn’t have…”  Secretary Paulson shame.  Blame to the people.  The people don’t have control over what loans are available and which loans are marketed to them.  I agree there should be blame, but to blame people who responded to sophisticated marketing campaigns that were promulgated by financial institutions who have huge profits to earn is absurd!

The “people” bought what you sold and only by the grace of the federal reserve is your former company – Goldman Sachs still in business.  The sad reality is – we are where we are due to misguided efforts and actions by those institutions (financial and government) who should have known better.

Fed Chairman Ben Bernanke is reported to have said that the central bank would prefer that the government not have to take an active role in raising capital needed by financial firms. But he said there was no alternative given current market conditions.

“Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy,” Bernanke said.

Ethics are defined as the discipline dealing with what is good and bad and with moral duty and obligation.  As an Ethics Speaker, I feel that those who lead have not only a moral duty but a supreme obligation to do what is good and in the best interest of those they serve.  At this moment the debate in Washington, DC directly relates to doing what is in the “good and best interest” of those they serve.  Sad that we had to arrive on the brink of a financial disaster in order for our leaders to take notice.

We can all make mistakes.  Leaders are not perfect.  But as I say in ever Ethics presentation I make – Every Choice Has A Consequence.  This is no different.  The self-serving profiteering choices of the past – loaning money to those who could not afford it and driving an economy on the back of those who are now blamed – is unethical and wrong.  I submit that had the same actions been made on a small scale – the government would have charged those involved with fraud and it would have been a “white collar crime” example.  But this is too big and now it is called a mistake with our top financial leaders and institutions being bailed out.

What do you think – Goldman, Merrill, Lehman, AIG, Freddie Mac and Fannie Mae – the government’s oversight – ethical or unethical?

An interesting commentary by Ron Paul can be found here…you might want to take a look.


Goldman Sachs and Morgan Stanley Survive! On The Back of Taxpayer Deposits?

September 21, 2008

Now let me state from the outset – I don’t claim to be a financial wizard, but I find it curious that in order for the last of our country’s investment banks to survive they must become – well – regular banks.

If somehow we haven’t gotten it thus far – AMERICA IS IN FINANCIAL CRISIS!  The scope of the crisis is truly unknown to the average citizen and while I am no doomsayer – it is not over.

The borderline unethical financial practices of these institutions are the root cause of their demise.  When you loan money to people who can’t practically pay it back in the interest of profits – you are, in my opinion, acting without sound business ethics.  But here’s the deal – if it were you or I, we would be conviced of some fraud or conspiracy.  That would mean jail time.  But when your crime (yes I said crime) is so large that it shakes the foundation of our financial markets – you get bailed out and make no mistake the Fed’s action today (on a Sunday) is a bail out.

Think about it – over the course of the past three weeks our government in one form or another has spent up to nearly 1 TRILLION of our taxpayer dollars to shore up our financial institutions so that we would not experience another GREAT DEPRESSION.  Wise or not remains to be seen.  All I report on here are the facts.

Goldman Sachs and Morgan Stanley are the remaining two investment backs surviving.  Lehman Brothers filed for bankruptcy and will be sold to Barclays and Merrill Lynch was purchased by Bank of America.  Fascinating that little NCNB (former North Carolina National Bank) became Bank of America and now is the largest bank in the US with the Merrill acquisition.  Who said the South would not rise again.  But I digress.

According to a report by CNN:

The Fed announced that it had approved the request of the two investment banks. The change in status will allow them to create commercial banks that will be able to take deposits, bolstering the resources of both institutions.

It is clear that this change of status is designed to use “deposit” as a means of leverage giving them a stable source of funding.  The question is – who would want to deposit funds into either institution.

Answer:  In the surprise announcement late Sunday, the central bank said that to provide increase funding support to Goldman (GS, Fortune 500) and Morgan (MS, Fortune 500) during the transition period, they would be allowed to get short-term loans from the Federal Reserve Bank of New York against various types of collateral.

So let me get this straight in my mind – the federal reserve is going to make loans to both Goldman and Morgan giving them cash to offset their poor loan portfolio making them appear to be safe.  To me that is like paint a rotten fence with white paint and calling it new.  This is nothing more than a disguised bail out.

According to MSNBC: After the collapse of Bear Stearns and its forced sale to JP Morgan Chase last March, the Fed used powers it had been granted during the Great Depression to extend its emergency loans to investment banks as well as commercial banks. However, that extension was granted on a temporary basis.

But as commercial banks, Goldman Sachs and Morgan Stanley will have permanent access to emergency loans from the Fed, the same privilege that other commercial banks enjoy.

So here are some questions to ponder – and feel free to respond!

Question 1: Should the Fed have taken the actions to allow Goldman and Morgan to survive by allowing “normal” banking deposits?

Question 2: Do you feel that the actions by the “investment banks” have been ethical or unethical?  Why?

Question 3: With the massive actions taken over the course of the past three or so weeks, do you feel more or less confident in our nations economy?

As a business ethics speaker, I can say that there has never been a time in my lifetime that demands more thought, focus and ethical consideration of actions taken than now.  Business is good and business done with right ethical intention can grow and prosper.  But, as I say in practically every presentation I make – Every choice has a consequence.  Now we are reaping the consequences of choices made – not so long ago.

For all our sakes let’s hope that we can weather the economic storm ahead.

Your comments are welcome!