In his column in the Wall Street Journal in reaction to the CEOs of the Business Roundtable’s averring that they would place stakeholders above stockholders, Holman Jenkins remarks:
Widely cited is the 1970 article by the late Milton Friedman, arguing that a public company’s purpose is to increase its profits legally and nothing else. Supposedly his wisdom is now obsolete. But his most important words, in the same article, may be a conditional statement questioning whether any corporate sloganeering to the contrary should ever be taken “seriously.â€
After all, CEOs will still be hired by boards who are elected by shareholders; they will still be rewarded under contracts that pay them for producing sustainable increases in the stock price (that’s what those vesting requirements are for). Before this week’s statement, CEOs boasted freely about their employee-happiness ratings, their sustainability programs, their diversity efforts, as if these were perfectly consistent with shareholder wealth-maximization duties. What changed?
My reaction was that I’ll believe it when I see it. IMO they’re engaging in self-defense against the prospect of an Elizabeth Warren presidency, hoping to be eaten last.
However, it does raise the possibility of a wonderful opportunity. Boards of directors should stop giving corporate CEOs stock options as part of their compensation packages in favor of compensating them by some evaluation of how well they look out for the concerns of stakeholders. Indeed, CEOs should demand it. Then I’ll believe they’re sincere.
Update
Better yet, take a page from China’s book. Put the CEOs under 24 hour video surveillance and have their actions reviewed by representatives of various stakeholders’ groups who will assign each a social score. Compensate them based on their social scores.
C’mon, guys. Be part of the wave of the future!
I can’t take anyone seriously who advocates for all stakeholders who doesn’t also demand they put up capital. Come to think of it, employees should not be able to leave employment without compensating all stakeholders for training and experience gained. I know slavery has been outlawed, but stakeholders you know. Communities must pay taxes for power generation stations but not charge for power. Suppliers can only sell to the nearest producers……at a discount. It’s all for the communal good you know.
I would remind people that one of the reasons the ESOP craze ended, happy crap about stakeholders notwithstanding, is that they were run for the benefit of employees. Funny thing that.
If a company can legally sell a defective product, is there fiduciary responsibility to sell it? If not, why?
If a company can generate more legal revenue from defective products than the payouts from lawsuits, is there fiduciary responsibility to sell the defective products? If not, why?
If a company can make political contributions, is there fiduciary responsibility to contribute to candidates who will work to legalize the illegal activity? If not, why?
If a company can generate more profit illegally than legally, is there fiduciary responsibility to operate illegally? If not why?
If a company is generating profit legally but knows it will soon become illegal, is there fiduciary responsibility to generate profits until the legal becomes illegal? If not, why? (This would include winning a court case where it is highly likely it will be overturned.)
If a defective product can be sold legally in one place but not another, is there fiduciary responsibility to sell a known defective product in the legally allowed place? If not, why?
If any illegal action can become legal by changing the law, should “legally” there is no objective method to determine absolute legal and illegal,? Why is “legally” a constraint at all?
Some pathogens can have a symbiotic relationship with their host, and both profit from it. Fast acting pathogen can kill the host too quickly, and it does not have time to jump to a new host. It does not maximize profits., and it dies
In order to maximize profits, a businesses has a fiduciary responsibility to ensure the health of its host ecosystem. For a profitable relationship, a business has a fiduciary responsibility to maximize the host government and citizen ability to support it.
Like a pathogen, any company that contributes to the deteriorating health of its host is a parasite, and for the overall good of its host, it must be eradicated. There is fiduciary responsibility for non-parasite companies to contribute as much as is legally profitable to the destruction of these parasite companies.
By extension, , there is fiduciary responsibility for companies to maximize profits by preventing these parasite companies entry into their host.
By Nobel Laureate Dr. Milton Friedman’s maxim, the vast majority of companies today are neglecting their fiduciary responsibility.
I think in that passage and in your comment more generally you touch upon something I’ve complained about in modern corporations. I’ve told the story before. I went to my boss with facts and figures, pointing out that what we were doing was actually costing the company money. My boss responded, “Dave, that’s long term thinking. My performance is measured on whether I make my numbers this quarter not in the long term. If I start thinking in the long term and not making my numbers this quarter as a consequence, next quarter there will be somebody else in this chair who is only thinking about making his numbers next quarter.”
Great companies have never been built by goosing the stock value by a quarter of a point but great fortunes can be made that way. That’s our problem. Incentives need to be aligned with larger goals.
None of that is actually relevant to the issue of stockholder benefit vs. stakeholder benefit. You can benefit both stockholders and stakeholders, benefit stockholders but hurt stakeholders, or benefit stakeholders but hurt stockholders. The first alternative is the optimum. The last, if pursued persistently, will lead to failure of the company. Short term thinking has gotten us stuck with the second alternative. I’m betting that won’t change despite the pronouncements of the CEOs in the Business Roundtable because they’re just trying to sell somebody a bill of goods.
If it has not been evident, I have been leading up to this. I saw an opening and took it.
Before anybody gets their panties in a twist, there is an argument where company is replaced with community and host with companies. The parasites are the government and citizens who act badly.
These two arguments are not opposed. They work in tandem. Each requires the other’s good actions and faith. The stakeholders become the government and citizens rather than the individual workers, and both are responsible to maximize the other. This can also be used to address short term vs. long term thinking.
Good schools, healthcare, roads, utilities, legal system, regulations, taxes, etc. are required for stakeholders and stockholders to maximize profits. Home ownership should be for those willing and able to bear the responsibilities of home ownership, but this applies to lenders as well.
(There is no such thing as a “liar’s loan”. This is a lie created by a pudit for a political agenda, and it is perpetuated as a means to a political goal. Alt-A loans have specific requirements. By the way, President Obama’s Secretary of the Treasury the esteemable Mr. Timothy Geithner was a primary facilitator of predatory lenders.)
The way I phrased it is that he is the Forrest Gump of the financial crisis.
“https://en.wikipedia.org/wiki/Stated_income_loan
A stated income loan is a mortgage where the lender does not verify the borrower’s income by looking at their pay stubs, W-2 (employee income) forms, income tax returns, or other records. Instead, borrowers are simply asked to state their income, and taken at their word. These loans are sometimes called liar loans or liar’s loans.[1] Stated income loans were originated by Ameriquest.[2]
“In August 2006, Steven Krystofiak, president of the Mortgage Brokers Association for Responsible Lending, in a statement at a Federal Reserve hearing on mortgage regulation, reported that his organization had compared a sample of 100 stated income mortgage applications to IRS records, and found almost 60% of the sampled loans had overstated their income by more than 50 percent”
Steve
As I have stated here and on other blogs the only way CEO’s can run their companies in a ‘socially responsible’ way is if a significant chunk of their shareholders allow them to do so. One of these big shareholders is CALPERS. Who is a big investor in CALIPERS? The Han Empire. Who do the Han want as President? Not Trump. The Empire is cashing in their chips and taking their economic lumps in order to put their political allies in this country back in full power, in order to resume the economic bleed-out of the USA and forward the inevitable world hegemony of the Middle Kingdom. Be careful. Xi is watching.
@steve
The link supports what I stated. Liar’s loans, stated income loans, or stinky-face loans are a political term for an Alt-A loan. If you would prefer, you an call them non-conforming loans.
The paragraph you cited is meaningless, but let’s use it anyway. Banks are required to adhere to banking regulations and capital requirements, and they are not allowed to be insolvent. Regulators (Timothy Geithner) are required to ensure that the banks they oversee remain solvent and adhere to banking regulations.
If Mr. Krystofiak was aware of illegal activity, he should have reported it to the appropriate regulating body, as long as it wasn’t Regulator Geithner.
You either do not know or refuse to acknowledge that the problem was the GSEs buying every piece of garbage conforming mortgage. They kept the good mortgages for their books and sold the trash into MBSs.
Since the GSEs are not allowed to purchase non-conforming mortgages, the mortgages they were dumping into MBSs were the result of predatory lending. What you should be worked up over are GSE predatory lending MBSs, but I am not holding my breath.
” Put the CEOs under 24 hour video surveillance and have their actions reviewed.”
Truck drivers have had to get used to cameras in the cab. If you scratch your balls they want to know why you didn’t pull over and set the park brake first. CEOs should welcome that. Never lonely.
As you suggest, TastyBits, regulatory capture was a major factor. There were regulations in place and regulators empowered and with the resources to prevent the crisis. They just didn’t do it.
That can’t be corrected through additional regulations. The incentives of the regulators must be changed.
You are being silly, Tasty. You might as well ask if the speed limit is 55 and a driver drives 60 shouldn’t they be thrown in jail?
We have tort law. We have some reasonable regulation. And we don’t generally have crooks providing capital. And markets have a way of throwing crappy or unpopular producers into the scrap heap of history.
Apparently what we do have is people who demand that of the various stakeholders only capital must be paragons of altruism. The others get a pass. Absolutist demands of capital, and naive assumptions about, say, virtuous labor or consumers, should be reserved for high school sophomores. Clinging to them will lead to a bitter life.
” Banks are required to adhere to banking regulations and capital requirements, and they are not allowed to be insolvent. ”
Yet hundreds of banks were insolvent and failed, and liars loans really did exist. Alt-A loans had no real clear definition, though I would agree that you could consider liars loans a sort of Alt-A loan, but the fact remains they did exist and they made up a large percentage of loans in the mid aughts. They, along with other subprime loans, were opposed by a number of the state attorneys Generals, but they were overruled by the Bush admin (FTC?). (Part of the capture Dave alluded to above.)
So what we had were banks, actually mostly shadow banks, passing out billions of dollars without verifying if people had any income. It really happened. As to the GSEs, they largely avoided these kinds of loans until 2007 when they announced they would accept essentially all Alt-A loans. The market was starting to deteriorate and this was an effort to keep it from collapsing, which didnt work.
If you want mohave a separate discussion about the GSEs someday that is fine. I think it is a m mistake to have a “private” entity like this have public backing like it does. It had corruption issues in the Aughts, and I wish it hadn’t been used to help bail out the big banks. Yet another way we socialized losses, BUT we still had liars loans. The most basic job of a bank is to assess risk and distribute capital. The banks did not assess risk at all. They actually increased it. They did not do this because they were forced to do so, they did it because they could make lots and lots of money handing out liars loans. So go ahead and bit*h about the GSEs and I will probably agree with 75% of it, but if banks are handing out thousands of loans without even assessing risk, we are bound to have a banking crisis regardless of what happens with those loans after they are made. It is inevitable that those loans will fail.
https://www.reuters.com/article/freddiemac-alta-idUSN1524793720070815
Steve
IMO the track record for GSEs is pretty bad. Other than as vehicles for corruption in which case it’s pretty good.
Dave- Probably best to get rid of them. Hard to fix something like that which has been around too long. If you cant get rid of them then make them entirely public or private.
Steve
IMO anything backstopped by the federal government is the federal government and the people who work for that entity should be paid according to the General Schedule. Using GSEs as a device for having all of the power and wealth of the federal government at your disposal but getting paid a multiple of the GS is inherently corrupt.
@steve
Many banks regulated by the FDIC are shut down every year, and in the past, the FDIC has been aggressive in keeping them honest. In an economic downturn, the number goes up, and there is always some fraud among the mismanagement. When the economy is doing well and expanding, risk is not the same as when it is doing poorly and contracting.
For a years, Alt-A has been the industry standard for non-conforming loans. You would make a better case calling them non-conforming. The reason that they are called non-conforming is because they do not conform to the regulations the GSEs must follow.
Most mortgages are not held by banks, and the ones that keep are part of a loan portfolio that is regulated. Having a loan portfolio with the vast majority of risky loans will result in the FDIC shutting down the bank.
You are getting your information from people who are ignorant or liars. They must live under the same solvency regulations as all banks, and to keep their loan portfolio risk low, they sell the garbage into MBSs.
Most of the MBSs were filled with garbage from Fannie and Freddie, and since most of the garbage was from them, this garbage were o people who never should have gotten loans.
People who proudly refer to the GSE’s loan portfolio as proof that the problem was not sub-prime have no idea of how the market works. Since the GSEs cannot usually purchase Alt-A loans, these loans are held by the primary lender or are sold through non-GSE entities.
What they can purchase is sub-prime, and as @Drew has noted, this was encouraged by politicians.
Sub-prime loans are a legitimate segment of the mortgage industry. They are for people who have documentation but do not have a good credit score. They may be low or high income, but for some reason their credit score is not good – bankruptcy, laid off, fired, medical bills, former deadbeats etc.
What I call sub-sub-prime are home owners that should never have obtained a loan. Home ownership costs more, and in some cases much more, than the mortgage note. During a downturn, most prime and many sub-prime borrowers can find a way to keep paying their mortgage note – less spending, personal loans, second job, etc.
During an economic or personal downturn, sub-sub-prime borrowers cannot continue paying their mortgage note. Now, the only way to make these people home owners is to lower lending standards, and this requires relaxed regulations. Not only do lending standards need to be lowered, but since banks cannot carry a loan portfolio of garbage, there needs to be a place to dump this garbage.
Enter the GSEs which are governed by the same politicians who demand substandard lending which is the only way to make home owners out of the truly undeserving, but even with Congress loosening the laws, the GSEs cannot load-up their loan portfolio with garbage.
Enter the secondary mortgage sector, and the same politicians encouraged loose regulations to ensure their political goals could be met, and guess where the substandard mortgages they demanded ended-up.
No matter how well engineered, garbage MBSs still have a problem. They are garbage, but not to worry, Congress fixed that problem by requiring them to be rated by specific credit agencies, and wait for it, these credit agencies are regulated. Bet you did not see that coming.
What political pundits term ‘liar’s loans’ are like sub-prime a legitimate sector of the mortgage industry, but like sub-prime, there is fraud. When the economy is doing well and expanding, all of these borrowers can be expected to continue making their mortgage payments.
Additionally, they can be expected to become more financially secure. Alt-A borrowers will either obtain a documented income, or for contractors ‘flipping property’, they will sell the property. For the ‘flipper’ borrowers, the selling price can be expected to increase. For the sub-prime borrowers, their credit score can be expected to become prime.
There is no separate discussion of GSEs, and not understanding that explains a lot.
“You are getting your information from people who are ignorant or liars.”
Then I guess the same goes back at you. It is clear that Alt-A loans were actually poorly defined, but that is mostly relevant if you are just wanting to be pedantic about definitions. There really were a lot of liars loans, or since the term seems to offend you, stated income loans. It was inevitable that they would not be paid back. Most of those did not go to the GSEs in the early aughts. (Yes, there are some unusual Alt-A loans where they make a large down payment, their credit score is over 800 and they could document income but they dont want to do so. That is not what was happening in the aughts with he huge number of liars loans.)
Steve
@steve
This is the best you can do? Now, you are just throwing shit at the wall and seeing what sticks. It does not matter. I keep my Pocket Hose handy at all times. It is time to clean the shit splattered walls.
Risk for existing loans increase as the economy is decreasing. This Banking 101, and if you ask nicely, Professor @Drew will surely give you a few free lessons. In the advanced course, you will learn that the most risky loans increase their risk factor faster than less risky loans.
I suspect that an unhealthy person will become sicker faster than a healthy person, but I am not a doctor.
In Psychology 101, you will learn that most people believe that the future will be better than is possible. In Economics 101, you will learn that most people substantially overestimate the upside and substantially underestimate the downside.
In a good economy, most people who want to buy a house believe that the price will increase, that they will not be laid off, that they may get a raise, that the future potential buyers will also be better off, and that everybody confirming these assumptions are correct. Now, replace buyer with lender.
Furthermore, most people will stop paying the mortgage last. This goes back to estimating upside vs downside. Most people believe that they will be able to work something out before they are thrown out on the streets, and again, lenders think the same thing.
If we also took Logic 101, we can deduce that without any fraud or any ill intentions when things go wrong, they will go very wrong, and in Econ 102, we learn that eventually the economy will go wrong.
In Psych 102, we learn that some people do have ill intentions and will commit fraud, but we also learn that these are not the majority of people. We learn that people can be influenced, and in many cases, people will justify away bad behavior.
With little fraud, good intentions can quickly create a seemingly great future which can become as bad even faster, and when it occurs in the financial industry, the entire country pays the price.
Glass-Steagall was the mechanism to prevent another financial collapse, and it worked it was repealed. In 10 years, 65 years of stability was undone in a week. The reason why it was undone was because the much hated CRA could not do what the haters claim it did, and it is why the people who want everybody in America to own a home.
G-S and the other banking regulations were designed to prevent everybody from being a homeowner. This is not the intention of Dodd-Frank. D-F is designed to keep the evil bankers from committing evil but allow the good bankers to keep committing good.
Lending to people who are unqualified to borrow is a bad idea no matter their race, religion, ethnicity, gender, sexual orientation, political party, hair style, shoe size, or any of the other inane objections to lending standards.
The idea that there were millions of people willing to commit fraud to approve mortgages is ludacris and does not comport with reality. Likewise, the idea that there were tens of millions of people willing to commit fraud to obtain mortgages is ludacris and does not comport with reality.
But as a political talking point, it does not get much better. I realize that you refuse to accept reality as much the leading Bigfoot experts, but please, no more projecting your tenuous connection to reality onto your political opponents.
This comment is a response to one minor thing in TastyBits’s comment above. Most people are blithely unaware of it but under conditions of stable population and population movement, houses should depreciate rather than appreciate in real terms just as cars do. In other word homes are only an investment if a) the population is growing or b) your local population is growing by inmigration.
Homes may be a store of value like any real asset but, unless you live somewhere to which people will always be flocking (is there such a place?), they are not an investment. That’s an illusion.
TB- Total BS. Guess it makes you feel good. Not willing to accept reality is why you cant accept what really happened. Thousands of people really did commit fraud, though they were most likely coached to do so by the lenders. (There are a goodly number of podcasts featuring loan officers who were hired to do this.) They advised borrowers to forecast an “optimistic” future income. This was OK to do since housing prices never drop. That is how we ended up with 40%-50% of our loans in the mid aughts becoming liars loans.
https://www.forbes.com/2010/07/02/return-liar-loans-personal-finance-no-doc.html#61b53b964088
Steve
Steve
One more and then I quit since you cant accept reality. Just look at WaMu. They were committing fraud on the scale you claim couldn’t happen. They knew they were committing fraud. They kept doing it.
https://www.cnbc.com/id/36431859
Steve
@steve
I do not have the links or resources anymore, but I was not using second, third, fourth, … nth hand sources. Every link that you have posted is for a pundit’s column quoting another pundit’s column, and they all intentionally or unintentionally misrepresent the subject matter.
I barely skimmed the link, but this genius has conflated no-doc and sub-prime under the rubric of “liar’s loans”. I see why you think throwing shit at the wall is a legitimate logic technique.
Reading this and the other tripe in your links is worse than nails across a chalkboard. Beside the lack of subject matter knowledge, most of them are internally inconsistent. They conflate concepts and use political terms rather than technical ones because they have no idea of what they are.
I understand that it can be difficult to use exact terms. I use the word “bank”, but there are numerous types of regulated lending and their names. I use “credit” instead of the multitude of financial products, but I have at least a working understanding of these words.
It has been a long time, and I have lost most of the links I acquired over the years. (I have tried to start printing pdf’s.) The one I do remember was Calculated Risk and Tanta. Her UberNerd post is still up. It is an excellent starting point, but it is just the start. The specifics have probably changed, but it was applicable at the time.
You may also note that she died in 2006, and you may recognize that 2006 pre-dates 2008. The idea that nobody knew is total bullshit. If I remember correctly, she does not go into the GSE aspect or shadow banking. If you really want to have some fun, there is the foreign financial aspect.
The advantage of doing your own research is that you can spot pundits pushing a political agenda. I have forgotten more about this crap than they know about it. You can believe whatever you want, but you do not have enough knowledge to know what is reality or which pundit to trust.
@steve
RE: CNBC link
I sent a link from 2006 detailing how the industry worked. Unfortunately, it is a list of other links, and none of it is light reading.
You send me a link from 2010 at a network that denied any of the things detailed in 2006 were happening, but in any case, it was not that bad. (I watched CNBC at the time.) The article is about Senator Levin investigating the very behavior he facilitated.
As I have stated for years, fraud and unethical lending was occuring with actual predatory lend taking place. The cause of the Financial Collapse of 2008 was sub-prime not “liar’s loans”, whatever the definition is this week.
I have neither the time nor inclination to Fisk the article, but I do wonder what are “Wall Street profits” since according to the article, one lender’s “quest” lead to the Financial Collapse.
The ultimate culprit was Congress, President, and regulators. The system was put in place by them for the exact purpose of creating homeowners out of those who never should have. The cause was not middle and upper income borrowers ‘flipping homes’. It was the political goal of turning low income people from renters into homeowners.
It was an abject failure, but the Democrats are starting again. The problem will again be that the people they want to turn into homeowners cannot qualify for conventional loans, and they will again loosen regulations to obtain their political goal.
Now, banks want to lend to borrowers without a credit score. I will hold my breath waiting for you or your fellow Democrats to denounce this or any loosening of lending standards.
Of course I read Tanta, who didnt at that time? There were a few others writing about the coming mortgage collapse, but not many and not many so well. Like you I suspect, I had lots of archived articles and lots of Congressional testimony. Had my laptop hard drive die. (As much as I love Apple laptops have had 2 hard drives go down, and I am not especially good about backing up. I will confess to just not having the energy to try to Google search back to find that stuff. It is hard to find a lot of it. But, you are bound and determined to blame the government. I think that when fraud is involved, and there was clearly a lot of fraud, you follow the money trail. Who made the money? Clearly it was the finance sector. Also if you know your history, then you know that the banks have tried to engage in accounting fraud with similar schemes in the past, but they got shut down. In this case the banks were again making money had over fist (40% of growth in the country during the aughts was in the finance sector). This time the government did not step in and stop it. If anything, where I would agree with you, it encouraged it.
Among the pages I have lost are the testimony by leading right wing economists testifying that the GSEs, and government in general, were not doing enough to help hand out money to less that prime lenders. Of course it was kind of funny that some of those same people testified years later that the GSEs should not have bailed out the banks by taking all of those less than prime loans late in the cycle.
To babe clear, when I say liars loans, it isn’t blaming that all on the borrowers. Most of the blame goes to the lenders. They were the ones encouraging and coaching people to “forecast” their future earnings. They were the experts who were supposed to be assessing risk. So while it makes sense that we have a small percentage of no doc loans in the mortgage mix at any given time, there are people who are good credit risks who dont get a regular W-2, it made no sense that 40%-50% of all mortgages were of that sort. The banks own internal audits showed these were flawed loans, and they kept handing them out. Besides WaMu I am sure you remember Countrywide.
As part of what I do for a living I have to analyze every bad outcome in the OR in all 10 of our network hospitals. My partner and I do this for other networks also. This has given me an interest in disaster analysis. What i have learned, and see over and over again is that very few disasters occur due to one error. It almost always takes many. So in the case of the mortgage collapse I think ti is multifactorial. Yes, Congress played a part, but if the ratings agencies had done their job it wouldn’t have happened, if the FTC had listened to the state attorney generals it would have been stopped, if the quants hadn’t “proved” that you could eliminate risk by mixing bad loans with good, we would have been OK, if the banks had listened to their own risk management people instead of firing the ones who said anything we might have been OK. Still, every disaster starts with the first step. For that Just follow the money trail. The banks knowingly gave out liars loans which were much different than the Alt-A loans they usually gave out and that made up a small percentage of the mortgage market.
Steve