Home > finance, rant > Corporations don’t act like people

Corporations don’t act like people

December 24, 2012

Corporations may be legally protected like people, but they don’t act selfishly like people do.

I’ve written about this before here, when I was excitedly reading Liquidated by Karen Ho, but recent overheard conversations have made me realize that there’s still a feeling out there that “the banks” must not have understood how flawed the models were because otherwise they would have avoided them out of a sense of self-preservation.

Important: “the banks” don’t think or do things, people inside the banks think and do things. In fact, the people inside the banks think about themselves and their own chances of getting big bonuses/ getting fired, and they don’t think about the bank’s future at all. The exception may be the very tip top brass of management, who may or may not care about the future of their institutions just as a legacy reputation issue. But in any case their nascent reputation fears, if they existed at all, did not seem to overwhelm their near-term desire for lots of money.

Example: I saw Robert Rubin on stage well before the major problems at Citi in a discussion about how badly the mortgage-backed securities market was apt to perform in the very near future. He did not seem to be too stupid to understand what the conversation was about, but that didn’t stop him from ignoring the problem at Citigroup whilst taking in $126 million dollars. The U.S. government, in the meantime, bailed out Citigroup to the tune of $45 billion with another guarantee of $300 billion.

Here’s a Bloomberg BusinessWeek article excerpt about how he saw his role:

Rubin has said that Citigroup’s losses were the result of a financial force majeure. “I don’t feel responsible, in light of the facts as I knew them in my role,” he told the New York Times in April 2008. “Clearly, there were things wrong. But I don’t know of anyone who foresaw a perfect storm, and that’s what we’ve had here.”

In March 2010, Rubin elaborated in testimony before the Financial Crisis Inquiry Commission. “In the world of trading, the world I have lived in my whole adult life, there is always a very important distinction between what you could have reasonably known in light of the facts at the time and what you know with the benefit of hindsight,” he said. Pressed by FCIC Executive Director Thomas Greene about warnings he had received regarding the risk in Citigroup’s mortgage portfolio, Rubin was opaque: “There is always a tendency to overstate—or over-extrapolate—what you should have extrapolated from or inferred from various events that have yielded warnings.”

Bottomline: there’s no such thing as a bank’s desire for self-preservation. Let’s stop thinking about things that way.

Categories: finance, rant
  1. December 24, 2012 at 9:18 am

    Corporations don’t face consequences like people do. When was the last time a corporation was put in jail or put to death? Corporations are now treated like super people with all of the benefits of a legal system that treats them like people and none of the downside of that legal system (a fine of five weeks of profits is not a downside).

    When a corporation can be put in jail (i.e. suspend all trading on its stock on the exchange for years) or put to death (i.e. revoke its operating charter and zero out its stock on the exchange instantly leaving the shareholders to grieve over the corpse (worthless stock certs) then those people that move the body of the corporation will think more about doing the right thing not the profitable thing.

    A virus will drain the host and leave a dead husk, but real organs in a body (if there is no cancer) will keep the body alive and well.

    Right now the banks (and many government econ advisers) are acting like a virus.

    • Richard Séguin
      December 24, 2012 at 10:59 pm

      I recently overheard a caller to a public radio talk show remark with a heavy drawl, “I’ll believe corporations are people when Texas executes one.”

  2. JJ
    December 24, 2012 at 5:13 pm

    And, of course, once we give up that fiction, we can deflate the market fundamentalists whose faith founders once there is no automatic feedback mechanism from corporate profitability to market behavior. The problem here is that economists and policymakers tend to act as though their models are not simply fictions that are useful to think with – supposing, that is, the the conditions demanded by the model obtain in the world.

  3. Larry Headlund
    December 26, 2012 at 4:53 pm

    Check out William K. Black, author of The Best Way to Rob a Bank is to Own One, on the misalignment of the interests of the controlers of a corporation and the interests of the owners of that corporation and others.

  4. Bobito
    December 27, 2012 at 11:33 am

    The most important differnence between big corporations and ordinary people is that ordinary people (the sort that have chosen not to work in banks) have consciences.

  5. araybold
    December 28, 2012 at 8:44 am

    When investment banks were privately owned, there was much more incentive for the partners to think for the future. Now that investment banking is largely conducted within publicly-traded companies, it is predominately someone else’s money on the line.

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