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.


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?


Dallas Chiropractors Indicted in Staged Accident Health Care Fraud – Fraud Speaker Chuck Gallagher Comments

September 20, 2008

Every honorable profesison has it’s “bad apples.”  I can speak those words as truth – as I too have brought shame to my former profession.  But, as I say often in my speaking presentations – EVERY CHOICE HAS A CONSEQUENCE!

According to the US Attorney in the Northern District of Texas, two chiropractors, who operated clinics in Arlington and Haltom City, Texas, were indicted this week on charges related to their participation in a staged accident scheme.  Minh Huynh, also known as Michael Huynh, 37, was charged with three counts of health care fraud, one count of conspiracy to commit mail fraud and one count of mail fraud. Thien Tuan Vo, also known as T.T. Vo, also 37, is charged with one count of health care fraud.

According to the indictment, participants in staged accidents, or “accident clients,” would enter into an agreement with a law firm for that law firm to process and submit claims to insurance companies arising from the staged accidents. The law firm would refer the accident clients to chiropractors, including Huynh and Vo, who would create false and fraudulent treatment and billing records for the accident clients that would falsify and inflate the number of treatments the accident clients received. Huynh and Vo would submit the bogus treatment and billing records to the firm for submission to insurance companies. When a settlement check was received, the firm would issue checks to itself, the chiropractors and the accident clients.

In most frauds the guilty party gets involved slowly.  There are three components to most any fraud: (1) need; (2) opportunity and (3) rationalization.  While I don’t know these men, my guess (from years of experience) is that they started small and found out that others would collude to make the fraud work.  Staged accidents frauds are common and most are discovered.

The indictment further alleges that Huynh paid kickbacks to a legal assistant at a law firm for each client referred to him. It was agreed that the amount of the kickback would be a portion, ranging from 30% – 50%, of the settlement funds paid to the chiropractor from the law firm. Huynh would routinely inflate billings to compensate for the kickbacks he agreed to pay for the referrals. The Settlement Disbursement form the firm provided to its clients, along with their settlement check, concealed and failed to disclose the kickback arrangement and deprived the clients of their full recovery from the settlement.

While an indictment is an accusation and a defendant is presumed innocent until proven guilty, rarely does a grand jury issue an indictment without a guilty verdict.

Every choice has a consequence.  It’s sad that these two taint the profession, but it is important to not that they (if guilty) are not the norm.  Unfortunately health care fraud is rampant.  Choices and consequences – you do reap what you sow.

For information on business ethics or fraud awareness presentations visit my web site – www.chuckgallagher.com