Peter Firestein - Crisis of Character: Building Corporate Reputation in the Age of Skepticism

CRISIS
of character

Building Corporate Reputation
in the Age of Skepticism

PETER FIRESTEIN

New York / London
www.sterlingpublishing.com

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Library of Congress Cataloging-in-Publication Data

Firestein, Peter.

Crisis of character: building corporate reputation
in the age of skepticism / Peter Firestein.
p. cm.

Includes bibliographical references.

ISBN 978-1-4027-6246-8

1. Business ethics. 2. Industrial management. I. Title.
HF5387.F564 2009

658.408--dc22

2009013960

10 9 8 7 6 5 4 3 2 1

Published by Sterling Publishing Co., Inc.

387 Park Avenue South, New York, NY 10016

2009 by Peter Firestein

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Manufactured in the United States of America
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Sterling ISBN 978-1-4027-6246-8

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for
Sheree

AND IN MEMORY OF
Eleanor Firestein

Inclusion is Everything

JOSCHKA FISCHER

T he conduct of corporate life provides one of the defining characteristics for any age. In postWorld War II America, business virtually carried the country on its back as corporations translated the organizing principles they had developed in the war effort to create one of the greatest bursts of growth and productivity ever. As shareholders became well-to-do, unions also flourished. The opportunity to create healed many of the wounds of the generation that had endured the depression of the 1930s and the war.

That was then.

The publication of this book comes amid one of the greatest financialand therefore humancrises in the history of the modern world. What began as a normalization of inflated home prices in the U.S. exposed unimaginable abuse of the financial system by some of its managers. The creation of mortgage-based derivative securitiesmost with no underlying collateral except their reference to each otherhad reached staggering proportions. While no one knew the exact figure, the total face value of these and other derivative products far exceeded the worlds annual economic outputperhaps by a factor of ten.

Remarkably few saw the disaster coming. Many people were making a great deal of money, and examining the source of these riches was not only inconvenient, but clearly a waste of time. Emblematic of the spirit of the age were a number of the investors in funds offered by Bernard Madoff, who allegedly bilked clients out of approximately $50 billion. Some of those investors had long thought Madoff was engaged in illegal activities. They believed he was abusing his role as a broker dealer, misappropriating privileged information to trade ahead of his customers in that business. They saw themselves as beneficiaries of such misdeeds. None considered that they might be victims of a Ponzi scheme.

Madoffs investors who suspected him, but remained invested, offer insight into the psychology of the age. Financial markets had become a secular religion, centered on the belief that government regulation limited progress and that markets and their participants were best qualified to regulate themselves. The tragic result of this absence of accountability was a financial system gone haywire.

When markets for many derivative securities dried up in mid-2008, there was no way to tell what they were worth. So it became impossible to know what the banks who held those securities were worth. Unable to determine their own solvency, these banks became incapable of lending. Businesses of all kinds withered for lack of credit, forcing millions out of work. Rises in unemployment tracked credit card defaults almost exactly. To make up for those losses, many banks raised interest rates on cardholders who were still paying their bills, forcing them into more dire straits. Rates of home foreclosures multiplied. People cut back on spending and purchased only the things they needed, imposing further stress on consumer goods companies already starved for credit.

The U.S. financial crisis spread across the globe like an epidemic. European institutions began to suffer the same solvency problems as their U.S. counterparts. U.S. and European demand for manufactured goods plummeted, forcing thousands of Asian exporters out of business with near-catastrophic effects on employment there. President Obamas new CIA director testified within weeks of taking office that global unrest due to unemployment had surpassed terrorism as the primary threat to the U.S. In countries that had moved toward free-market economic modelsas in Eastern Europe after the fall of the Soviet Union and Latin America in the wake the Washington Consensus, which promoted democratic reforms and open marketspressures toward protectionism gained ascendancy. Globalization, which had created enormous economic power and wealth over the prior two decades, seemed in danger of shifting into reverse.

Public bitterness raged against both the bankers whose smoke-and-mirrors path to personal wealth had caused this crisis, and against the outgoing administration of George W. Bush that had let them do it. As President Obama began to implement plans to save what was salvageable of the banking system, reduce the rate of home foreclosures, and stimulate economic activity, Americans glanced back at the Great Depression and wondered whether they were doomed to live it again. We had considered the 1930s an experience far in the past, from which our modernity had made us immune. Yetfew dared say itif those times werent repeating themselves now, what we were experiencing veered uncomfortably close to them. Could it possibly be as bad this time?

The writer Stetson Kennedy, who lived through the depression of the 1930s, pointed out that we may have been more poorly prepared to survive a depression in the early 21st century than wed been in the 1930s. Contemporary life had moved us light years from the skills that would enable us to survive in tough circumstances. Steinbecks Okies loaded everything they had on a truck and went to California. We couldnt fit more than a fraction of what wed come to rely on in even the largest SUV. And besides, there were no more promised lands to go to.

Had we progressed at all over the last seven or eight decades? Or was our experience telling us that real progress is a nonsensical idea? Were we, instead, trapped in a long-wave cycle that contained the best and worst of times, but always returned us to places wed been before? Was the economic cycle written in our DNA?

One of our more impressive combinations of ideas and technology may reside in the software weve designed to analyze and manage financial risk. It has become complex almost beyond belief. But its sophistication has not enabled us to identify real risk, and so we have to ask ourselves whether our ability to create such complexity has actually taken us anywhere at all. It seems that the technology we design contains our faults. Commentary after the meltdown by those who understood risk programs told us that they were limited by the array of possible results with which theyd been programmed. If a program designer wanted to include every outcome that had occurred since 1960and four decades or so might have seemed a long timelessons learned from the collapse of the banking system in the early 1930s would have been excluded. That programmer may have seen such data as so far from his or her experience as to be irrelevant. The problem, of course, was that the possibility of such a collapse had remained with us.