July 25, 2009

The Downside of Social Responsibility

The NYT just ran an interesting report on an interview with Jeffrey M. Peek, CFO of CIT, a bank on the brink of bankrupcy in part because it acted more responsibly during the mortgage bubble:

"Perhaps Mr. Peek’s real failing was that he didn’t take enough foolish risks. Although Mr. Peek was a former top Merrill Lynch executive, he didn’t lead CIT into bundling mortgages into toxic derivatives, he didn’t get into credit-default swaps, he didn’t create a trading desk that swung for the fences and he didn’t build a company that was so big that it posed systemic risk. In other words, he acted a little too responsibly. So when CIT’s moment of crisis arrived, the F.D.I.C. looked it over and decided it wasn’t too big to fail. To Mr. Peek’s surprise, it turned out to be too small to save."

That is deeply ironic. And explains much on the roots of the economic crisis. Banks it would seem--that are still standing--gambled shrewdly that even under a collapse, they would remain (if not become) too big too fail. It's not clear that even with this attitude CIT would have become too big to fail, but this is a sobering reminder of how smaller and more responsible companies get left out of the bailouts. The Fed should step in at times like this.

3 comments:

  1. Very interesting!

    But I'd like to play devil's advocate regarding the premise of this posting, which is that Peek's behaviour warrants the "social responsibility" label. I don't know enough about the case, really, but from the above it looks like Peek was merely conducting careful, prudent business. He doesn't seem to have been aiming at any social objectives: he was adopting a cautious approach to profit-making. Of course, that's "responsible" (as opposed to "irresponsible") but I wonder whether it makes sense to identify this as a case of *social* responsibility.

    Regards,
    Chris.

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  2. Shrewd point Chris. Thanks! I'm playing fast and loose with that title, which should have read something more like "The downside of ethical investment banking."

    Still, in a time in which so many other banks were acting irresponsibly, and Peek knew he could join the movement and reap serious personal rewards, it seems to overlap with a kind of social responsibility toward protecting the banking system as a whole, i.e. the greater good.

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