Mercury Rising 鳯女

Politics, life, and other things that matter

U(nlimited) S(cams) A(pproved)! USA! USA!

Posted by Charles II on August 22, 2011

The limited government crowd should spend some time over these stories:

Peter Gorenstein, Daily Ticker, on a story by Tom McGinty and Carrick Mollencamp that appeared in the WSJ:

The story is about growing scandal in the banking industry centered around banks allegedly overcharging pension funds for currency transactions.

“Attorneys general in Virginia and Florida filed civil suits against BNY Mellon alleging that the bank cheated pension funds in those states by choosing improper prices for currency trades the bank processed for the funds,” …

In addition to Virginia and Florida, California and Tennessee are also suing BNY Mellon and State Street Corp. over the alleged fraud.

Markopolos says BNY Mellon and State Street we’re taking about “three tenths of a percent from every forex transaction for pension funds” by back-timing the trade to benefit banks at the detriment of their pension fund clients.

Henry Blodget at DailyTicker, on a story provided by Business Insider (no link):

We’ve included highlights of Harrington’s story below. Here are some key points:

* Moody’s ratings often do not reflect its analysts’ private conclusions. Instead, rating committees privately conclude that certain securities deserve certain ratings–and then vote with management to give the securities the higher ratings that issuer clients want.

* Moody’s management and “compliance” officers do everything possible to make issuer clients happy–and they view analysts who do not do the same as “troublesome.” Management employs a variety of tactics to transform these troublesome analysts into “pliant corporate citizens” who have Moody’s best interests at heart.

* Moody’s product managers participate in–and vote on–ratings decisions. These product managers are the same people who are directly responsible for keeping clients happy and growing Moody’s business.

* At least one senior executive lied under oath at the hearings into rating agency conduct. Another executive, who Harrington says exemplified management’s emphasis on giving issuers what they wanted, skipped the hearings altogether.

Harrington’s comments to the SEC are here. He would have done better to lay off the snark, but I am grateful that people willing to tell the inside story do come forward.

For those with the patience to read it, it shows the fundamental flaw in corporations that government to some degrees does not have: in corporations, all functions ultimately report to the President/CEO. Therefore, if the President/CEO is corrupt, the whole company is corrupt. Furthermore, the only enduring guiding principle of a corporation is delivering profit to shareholders. Following the law or even common sense is optional.

Click to read more

Harrington describes how it happened in Moody’s, but the principle applies more widely.

1. The corporation is reliant for its revenues on customers who are, in this case, financial institutions. 2. The financial institutions want their products to be rated as highly as possible, since that makes them more valuable.
3. The ratings industry is an oligopoly, so a limited degree of competition exists. If one ratings agency delivers low ratings, the others will take its business. However, there is so little competition that tacit collusion between the ratings agencies is possible (and does in fact occur).
4. Committees exist in a manner that allows likely deficiencies to be discussed, but for the final rating to differ from the discussion. (this is important, because it allows Moody’s to figure out how to evade liability when things go wrong).
5. No consistent methodology is applied across ratings.
6. Management sets up sham “quality control,” which actually works as an enforcement mechanism to ensure that big customers get the ratings they want.
7. Both S&P and Fitch actually fired some of the people responsible for the credit ratings mess. Moody’s has not.

This is what so-called “conservatives” want to keep intact, not just in financial ratings agencies but across corporate America. I know of similar stories from a Fortune 500 technology company, from a pharmaceutical company, etc. All through corporate America, corruption and second-rate work is becoming the norm.

If lower-level employees have a say in what happens in a corporation, then they will often do the right thing. But how do lower-level employees gain power? Ultimately they must be able to point to a law or regulation and say, “If we do this, then we are not upholding the law/regulation.” This applies as much to a restaurant cook who knows that the refrigerator needs to be replaced as to the HMO doctor who knows that her patient should receive a certain test or treatment.

Well-written laws and regulations support corporate democracy and high-quality products and services. Poorly-written laws and regulations encourage the growth of government bureaucracy, and even government corruption.

Furthermore, a strong employment market, which is fostered by what is known as industrial policy, is essential to empower employees to do the right thing. Industrial policy ranges from minimum wage to support for unions to tariffs to subsidization of research and frontier industries to Social Security/Medicare to allow people to leave the labor force when they get tired. Again, well-conceived industrial policy sustains a strong labor market

Modern day “conservatives” (who are actually Bolsheviks and anarchists) are in favor of desperate employees willing to do anything to keep their jobs. They want corruption. Ultimately, they want the United States to fail, because who wants to buy substandard goods and services except other corrupt companies? Just as the Japanese devastated our auto industry by producing reliable cars at a reasonable price, our foreign competitors can do across the board.

The choices really are Bedford Falls vs. Pottersville.

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