November 30, 2010

WikiLeaks Prepares U.S. Banking Megaleak

Could it be on Goldman Sachs? Promises to be fascinating. Here's a key excerpt from this Forbes interview with Julian Assange:

"These megaleaks, as you call them, we haven’t seen any of those from the private sector. 

No, not at the same scale as for the military.

Will we?

Yes. We have one related to a bank coming up, that’s a megaleak. It’s not as big a scale as the Iraq material, but it’s either tens or hundreds of thousands of documents depending on how you define it.

Is it a U.S. bank?

Yes, it’s a U.S. bank.

One that still exists?

Yes, a big U.S. bank.

The biggest U.S. bank? 

No comment.

When will it happen? 

Early next year. I won’t say more.
 
What do you want to be the result of this release?

[Pauses] I’m not sure.

It will give a true and representative insight into how banks behave at the executive level in a way that will stimulate investigations and reforms, I presume.

Usually when you get leaks at this level, it’s about one particular case or one particular violation. For this, there’s only one similar example. It’s like the Enron emails. Why were these so valuable? When Enron collapsed, through court processes, thousands and thousands of emails came out that were internal, and it provided a window into how the whole company was managed. It was all the little decisions that supported the flagrant violations.

November 21, 2010

Capital Punishment for Corporate Crooks?

Looks like Matt Taibbi's visit with David Sirota in Denver last week was a raucous time. Here's an idea that came from it, excerpted from Sirota's syndicated column:
"Deterrence — it’s the vaunted idea behind “tough on crime” sentences for violent offenses. Lock the door, throw away the key, and the theory says that heinous acts will be prevented. However, things haven’t worked out that way because the toughest “tough on crime” policies are most focused on crimes of passion, derangement and destitution — crimes that are often not calculated and therefore not deterrable. This is probably one of the reasons why the murder rate has been higher in death penalty states than in non-death penalty states, leading most criminologists to conclude that capital punishment does not hinder conventional homicide.
But what about crimes of economic homicide? These are the opposite of crimes of passion. When, say, a speculator securitizes bad mortgages and peddles them to pension funds as safe investments, that fraud involves exactly the kind of calculation that might be deterred via the prospect of harsh punishment.
“What if a bank CEO was given life without parole?” I asked Taibbi. “What if instead of country club jail, one of these guys was shown experiencing prison like a regular convict? That would have to stop some of the worst stuff, right?”
“Right, and go a step further,” Taibbi countered. “How about putting a few of them in the electric chair? Are you telling me Goldman Sachs execs aren’t then going to change?”
Provocative.

November 17, 2010

The Dark Side of Microcredit

Personally, I've always been suspicious of the ethics of for-profit microlending. Its defenders claim that if it were limited to non-profit philanthropy, there would be much less money available to aid the myriad poor villagers in the developing world where it is desperately needed. Capitalism begets capital.

That sounds like a decent utilitarian argument. Trouble is, from a more principle-based position, there is something unseemly about saddling the working poor with interest rates so high they would be considered usurious in the U.S. Indeed, several U.S. states have regulated payday lending rates to below half (24%-36%) of what is common in international microcredit (80%-100% or more). The Federal government makes it illegal to sell payday loans to military personnel at higher than 36% interest.

As with payday debtors, microloan-debtors pressured to repay profit-driven creditors can find themselves drowning in debt very fast. And that's exactly what is happening now in India. Here's an excerpt from this NYT report:
Responding to public anger over abuses in the microcredit industry — and growing reports of suicides among people unable to pay mounting debts — legislators in the state of Andhra Pradesh last month passed a stringent new law restricting how the companies can lend and collect money.

Even as the new legislation was being passed, local leaders urged people to renege on their loans, and repayments on nearly $2 billion in loans in the state have virtually ceased. Lenders say that less than 10 percent of borrowers have made payments in the past couple of weeks.

If the trend continues, the industry faces collapse in a state where more than a third of its borrowers live. Lenders are also having trouble making new loans in other states, because banks have slowed lending to them as fears about defaults have grown.

Government officials in the state say they had little choice but to act, and point to women like Durgamma Dappu, a widowed laborer from this impoverished village who took a loan from a private microfinance company because she wanted to build a house.

November 14, 2010

Inside Job?

This looks like a worthwhile documentary on the causes of our great financial collapse. Reliable sources tell me it's a must-see. [Update: It's the this year's Academy Award Winner for Best Documentary]:



As I blogged and commented last year on this, there are two schools of thought on what the causes were. Some say it was shortsightedness and lack of adequate regulation, especially regarding the ratings agencies.

Others, such as this film blame widespread corruption at the highest levels of finance. For example, Matt Taibbi provides a compelling argument for this view, which he elaborates in a courageous new book that is as refreshing as it is sobering. His skewerings of Alan Greenspan in chapter two and of Goldman Sachs in chapter seven are masterful. And there's more. He was recently interviewed by Eliott Spitzer on his new program--on whom I also wrote (to much dismay) in the Wall Street Journal.

My view is that the collapse was surely a bit of all three, namely, shortsightedness, lax regulation, and corruption. But the corruption was (and perhaps still is) not so deep and widespread that the collapse would have happened without the more systemic problems that helped engender the shortsightedness and under-regulation. If there is a policy lesson to be learned here, I think it's that business needs to be incentivized  to do the responsible thing. But this is very difficult for the government to accomplish in an atmosphere hostile to regulation.