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.


Government to INCREASE Credit Limit to Fund BAILOUT – Does That Make Sense?

September 27, 2008

McCain, Obama, Bush and other leading lawmakers are talking about a bailout of our credit markets – and with some exception all seem to feel that it is needed.  Perhaps!  But does it make sense to increase out debt ceiling in order to fund non-government bad debt?

According to CNN – “Rep. Barney Frank, a high-ranking Democrat, said he is convinced that by Sunday, lawmakers will reach a deal on the proposed $700 billion bailout of the nation’s financial system.”

The source said that when a plan is reached, Congress will not authorize a full $700 billion expenditure at once. Instead, it will be broken into a series of smaller transactions. The amount of the initial allotment continues to change, the source said.

The talks had stalled after House Republicans said they couldn’t go along with plans devised by the White House. Later, congressional leaders on both sides said they would send representatives to take part in negotiations.

Regardless of comments from private citizens, it appears that we, as a country, are hooked on debt and this bailout will happen.  The concept of paying for what you consume is dead.  The increase in the debt ceiling would make it such that (if it had to be paid back) each American would shoulder some $38,000 each to pay the debt.  Nothing is free and make no mistake that a bail out is nothing more than the Government propping up failed private business failures.  The whole process is much like maxing out your credit cards – having collection agents call – and solving the problem by getting a new card with a higher limit.  The problem isn’t solved…it’s only an illusion.

It’s not a Republican problem or a Democrat problem – the problem is we don’t have, as a nation, the will to be fiscally responsible and until we do so – we will continue to burden ourselves and our children with debt.

As a business ethics speaker I often say: Every choice has a consequence.  That is true for individuals, company’s and governments.  Debt must someday be paid or we will be owned by the lender.  Maybe someday our politicians will have the ethics to stop our policies that continue to increase our debt and begin to operate in a manner that respects those who are governed.

Your comments are welcome!


Massive Government Bail-Out … Good Business or Bad Ethics? Ethics Speaker Chuck Gallagher Comments…

September 19, 2008

Unless you are on an island somewhere disconnected from society…you are no doubt aware that we are in the midst of one of the most massive government bail outs in US history!  While I wasn’t around during the great depression – from everything we read what is taking place now is second only to that and, folks, that is amazing.  I was around during the massive savings and loan scandal and, like most who read, know that we are far from over with this one.  In fact, I don’t know of many institutions (Savings and Loans that is) who did survive.  

If the past is to be repeated, our financial climate or landscape will be dramatically different in several years.  Further, seldom does the government estimate a number that is right.  You can count on the cost being several times what is proposed today.  200 Billion will likely be a drop in the bucket when it is all said and done.  

For months I have been reporting on mortgage frauds and the number seems to keep increasing.  Clearly, the “greed is good” mentality went far beyond the crooks who are being prosecuted today and spread far and wide.  The net is being cast wide for this financial disaster and many will not survive.

The question, however, here is – should the government being doing what it is doing.  Many popular writers of financial books say – YES.  “What took them so long?”  Yet others claim that the government has no business getting involved in private business – especially when there are companies who perhaps engaged in unethical behavior – knowing full well that the products they were selling would result in financial disaster for many.  When you loan money to someone who cannot afford to make the payments you are committing a financial unethical act.  Sure there is short term profit, but at what cost?   

What’s your opinion:  (1)  Were the financial institutions unethical in their actions related to the sub-prime mortgage issue? (2)  Should the government have taken the actions that are now underway?  (3) Would it have been better to let the free market take it’s own corrective action and let the chips fall where they may?

Good business or bad ethics – what’s your call?