Friday, August 7, 2009

Corporate Behavior in the Face of Reform

Treasury Secretary Timothy Geithner has been aggressively peddling the Obama Administration’s plan to reform the financial industry in recent weeks. We as a nation, have a habit of experiencing an economic crisis and then passing reform after the fact in order to try to protect against its recurrence. Interestingly, we often fail to heed the calls for common sense reform or regulation prior to a devastating meltdown (I wrote a law review article warning against unregulated over-the-counter trading of derivatives back when Greenspan was telling Congress that large institutional investors would never leverage themselves to the point of financial failure), waiting instead to clean up the carnage after the fact. In fact, as criticized on this Corporate Justice Blog, often the carnage clean up rescues the malfeasors (recently in the form of government bailout and continuing excessive executive compensation) and leaves taxpayer citizens (the innocent party) shouldering the burden of the economic crisis.

To wit, the Securities Act of 1933 and the Securities Exchange Act of 1934 were both enacted in wake of the Great Depression. Sarbanes-Oxley was enacted in the wake of the Enron, WorldCom, Tyco scandals. Today, the momentum to pass regulatory reform is strong in wake of the devastating market crisis that we continue to feel and attempt to overcome. Still, the broken models that have proved ineffective continue to be used as the baseline for these reform efforts.

In response to the subprime mortgage meltdown, the Obama administration’s reform effort will seek regulatory control that includes (1) broadening the Federal Reserve’s authority to assess risks and overleveraged positions taken by financial firms and taking action to divert failure and (2) the creation of a consumer watchdog type of agency that would oversee mortgages, credit cards and other financial products. So, with Wall Street reform on the table, leaving aside the value or quality of the suggested reforms, what response can we expect from Wall Street and the financial industry in the face of these proposed reforms?

If history is any indicator, the response driven by corporate interests will be forceful and coordinated in an effort to defeat any new regulation or to significantly weaken it if the force of majority is too strong for reform (see Sarbanes Oxley, etc.).

As a point of comparison, Corporate behavior in recent weeks in response to health care reform and climate change legislation has been breathtaking in its audacity and truly underhanded in its application:

Corporate interests in the health care industry have undertaken a strategy of near mob mentality in coordinating efforts to hijack Congressional town hall meetings through astro turf lobbying firm “marching orders” designed to squelch conversation and open debate. As Congresspersons use the recess to openly debate and honestly describe the efforts to reform U.S. health care, a group of citizens will show up with the express purpose to shout down any attempts at an open conversation about changing a health care industry that works extraordinarily well for insurance companies (and their investors) but that is broken for large segments of American society.

Corporate interests in the energy industry hired lobbying firms that have recently forged letters from civil rights groups in an effort to defeat environmental reform. Several Congresspersons received letters ostensibly from the NAACP and a Hispanic Civil Rights organization pressing the representative to vote against climate change legislation, only to later learn that these letters were forgeries sent from a Capital Hill lobbying firm hired by industry corporations to defeat reform.

Corporate justice? With corporations in the insurance and energy industries using scorched earth tactics to defeat reform? The mountaintop (of reaching corporate justice) seems to be extraordinarily steep.


  1. i do not get all of the comparisons between health care reform and nazi germany? what is that? and where is it originating? and what about palin's reference to the "death panel"? what is that?

  2. For what it's worth, this series of posts is good reading if you're interested in "regulatory capture" and more generally reform of the financial/corporate arena:

    Matt Titolo---WVU

  3. While I recognize the need for regulatory reform for those banks leveraging investments I cant help but feel theres another issue nobody wants to regulate. How about all those investors with E trade or other $7 trade brokers or those investors who just dump money into a 401 k thinking its safe? Isn't somewhat of a poetic justice when uninformed investors find out they lost money not when a company reports bad earnings but when the statement comes in the mail? I move for a smarter investor and more professional brokers. It was Warren Buffet who said" if you think a professional is expensive, wait until you use an amatuer."