A New Approach in Trying to Resolve the Financial Crisis:
Three Commandments
Article written by Lou Iacobelli (Family Matters / Book Report program host)

      Governments all over the world have been asked to rescue a number of national and global financial institutions from the brink of bankruptcy.  In the United States, Citigroup and Bank of America have each received $45 billion to try to make sure they stay afloat. Taxpayers are on the hook for $700 billion from the Troubled Asset Relief Program to back up bad mortgages and uncertain assets. The total government cost could easily add up to trillions of dollars.

    If the average person goes to a bank and gets a mortgage on a house, and then finds for whatever reason that he cannot make the payments, the bank, in most cases, will quickly repossess the property.  However, if big institutions and companies cannot meet their financial obligations, we no longer hold them accountable because the new investment mantra is that they’re too big to fail.  So the little guy, it seems, always loses.  It’s beginning to look like the taxpayer will pay the bill to clean up the world’s financial mess.  What has happened to the conservative position, much cherished by President George Bush and his supporters, that deregulation is in the best interest of a free market society?

    General Motors of Canada has used its website to launch a campaign titled, “A Call to Action.” It’s an effort to get retirees, dealerships and employees to phone, write or email government representatives to put pressure on Ottawa and Queen’s Park to give the auto companies financial support.  Suddenly the government has an important role to play in the industry.  George Cope, GM director of communications, in a memo to retirees and employees sounds the alarm this way, “I need to stress that inaction is not an option.  If the liquidity crisis in the automotive industry is left to run its course, I could be out a job (my pension could be in jeopardy). The choice is between supporting the auto sector with repayable loans so it can lead Canada out of this recession or denying support which could result in a severe depression impacting hundreds of thousands of jobs and communities.”

    This is the same company that for the last seven years has been paying Tiger Woods six million dollars a year to do testimonials. This is the same company that scrapped its first electric car after having spent millions of dollars on research and development.  This is the same company that has continued to produce many cars that aren’t fuel efficient and thus have not sold well.                                                                                                                                         

    The big three auto makers GM, Ford and Chrysler will receive from Washington $25 billion dollars and here in Canada the figure is $4 billion dollars.  The automobile industry and the banks have now accepted huge amounts of cash. However, the one thing which remains certain so far is that handing out money to save banks, mortgage lenders, insurance brokers and car companies has not restored confidence in the system. It looks as if governments, in trying to restore trust and abate suspicions, will need to keep money flowing and may have to support every major financial institution as well as other industries which could financially flounder.

    Since September 2007, there have been a number of times that the American taxpayers, through their government, have been asked to save the big institutions. It began with the two huge mortgage companies Freddie Mac and Fannie Mae. This was followed by nationalization of the biggest insurer, American International (AIG) and JPMorgan Chase and Co. merging with Bear Stearns Companies Inc. The consolidation continued with Wachovia being taken over by Wells Fargo, while Bank of America bought out Merrill Lynch & Co.  All this has happened with the supervision and approval of the American government.

     However, one of the problems that refuses to go away is that banks continue to fear each other’s balance sheets and so are hesitant to lend out money. This of course affects the all businesses because they cannot get funds, as well as the ordinary citizens who need to borrow money to buy a house, a car or anything else. The solution proposed by the clever minds at the Federal Reserve and the U.S. Treasury, together with many to top CEOs of financial institutions, both in America and from other countries, seems to be for governments to either own or invest in every company facing financial straits.

    But even after the American government earmarked over a trillion dollars in loan guarantees, why are banks still reluctant to lend money?  The answer, I suspect, is that they don’t trust each other.  After all, each bank knows how the banking system works and they are afraid that the other institution in all likelihood isn’t telling the whole truth.  Nobody wants to be stuck with the so called “toxic waste”, and since these institutions have not been transparent (honest) on the issues, there is no certainty as to how many of these bad assets are still on their books.  Recall how the once mighty technological giant Nortel had to redo its books numerous times to calculate exactly how much money it had lost. And in the end, it has filed for bankruptcy protection. Who will be next?

    In Canada, both the Toronto Dominion Bank and the Bank of Nova Scotia had claimed all along that they had no exposure to bad loans, but finally admitted that they, too, were going to claim hundreds of millions of dollars in losses from troubled assets.  The public has been repeatedly re-assured that the accounting rules are rigorous, but the facts seem to point out that like Swiss cheese the standards of preparing balance sheets must have many holes.

    George S. Moore, once head of Citibank, now Citigroup Inc., in his memoir, The Banker’s Life, offers a possible solution to the present financial crisis. He does it in this observation: “I have to say that banking is the surest, easiest business I’ve ever seen or known. If you’re not actually stupid or dishonest, it’s hard not to make money in banking.” There you have it: to bring back trust in the banking world and get the flow of cash flowing again we need to inject the system with honesty and intelligence. If some lending institutions are bankrupt or have come close to financial insolvency, it must be because they have a surfeit of dishonesty and stupidity.

    What’s even more disturbing is that some financial architects were able to construct paper investments (junk assets), and the rest of the world’s top banking experts, were either fooled about these inflated investments or refused to stop the dishonest scheme. While many people have lost money during this crisis, others have probably made millions and some will, no doubt, make millions as we try to emerge from the crisis.

    The Social Doctrine of the Church makes this insightful statement that applies to the free market system: "One of the fundamental tasks of those actively involved in international economic matters is to achieve for mankind an integral development in solidarity" (No. 373).

The key word solidarity implies that every citizen must share in the responsibility of the fair distribution of a nation’s wealth. The recent extravagant executive salaries on Wall St., at a time when the government has approved a huge corporate bailout package, indicate a total disconnect with the harsh difficulties being experienced by people who have lost their jobs, their houses and are facing an uncertain future. The three CEOs of America’s biggest rating agencies collected over $80 million dollars in compensation for the last six years. It’s hardly the way a nation’s economic leaders will ever meet the important requirements for developing solidarity and building the common good.

    In addition, the three CEOs of the big car companies flew to Washington with private jets costing around $20,000 per flight to ask for taxpayers’ money to save their companies. The part they left out is that a dole out will also save their huge salaries and stock bonuses, added to the fringe benefits that go with the positions. Could they not reduce their salaries to reasonable levels and share some of the pain and sacrifice faced by the average citizen faces? Will Wall St. ever meet Main St.?

    We need to also ask, where is the solidarity in behaviour that aims to cheat and take advantage of others? How can we build a decent society when it rewards people best when they lie and take advantage of the average citizen? Listen to the silence coming from the so called world-class university business schools, like the Schulich and Rotman Schoos in Toronto, during this financial crisis.  If they teach students in the MBA programs courses on leadership and ethics, they should now be examining why the very people they educate have deceived each other and in the process crippled the world banking order. Surely, an analysis of this question belongs in a business course outline, how did the rich people on Wall St. end up needing a financial rescue package from the government?

    In Romeo and Juliet, Shakespeare, well before expressions such as portfolio management and investment advisors where commonplace, has something relevant to say on the issue.  He does this by defining man as a being who needs to control his will so as not to be ruined by his own vices.  The insightful observation is found in Friar Laurence’s soliloquy, immediately before Romeo enters the scene to tell him of his predicament in having fallen madly in love with Juliet. In revealing to the audience his knowledge of plants and herbs, the Friar talks about the power inherent in plants.  They have both medicinal and destructive uses.  Plants can heal, but they can also kill.  In his words:               
“Within the infant rind of this weak flower Poison hath residence, and medicine power: For this being smelt, with that part cheers each part; Being tasted slays all senses with the heart. Two such opposed kings encamp them still.  In man as well as herbs, grace and rude will; And where the worser is predominant, Full soon the canker Death eats up that plant.” (Act II, Scene 3)

    According to Shakespeare then, when a vice such as making money at all cost, is seen as a virtue and dishonest actions are rewarded with profits and fringe benefits, the results can only bring bad news.  Vices, on the one hand, only serve to weaken and destroy our trust in the very institutions that have been developed to help our civilization.  On the other hand, virtuous actions would strengthen and purify both our intellect and willpower.

    The capitalistic economies are now experiencing the reverberations from a survival of the “fittest” mentality as governments try to deal with the fallout.  We’re suffering from the flight from virtues mentality.  Alexandre Havard puts it best in book called, Virtuous Leadership when he states, “Willpower does not stem from self-discipline alone, but also from a moral sense rooted in the heart and giving rise to virtuous action: a sense of good stimulates prudence; a sense of honour stimulates courage; a sense of shame stimulates self-control; a sense of compassion stimulates justice; a sense of beauty stimulates beauty; a sense God stimulates humility.” (Page 124)

    The abandonment of these virtues makes us more jaded and more distrusting of one another. We can begin to think that everyone is out to take advantage of us. One wonders what this atmosphere of fear and mistrust is creating in the minds of our young people. They too must suspect adult motives and achievements. As a result, they can easily adopt Machiavellian attitudes of behaviour all the while rationalizing them by pointing to the unravelling of falsehoods in the world’s financial system: the adults do it so why can’t we.

    But the problem goes much deeper. One important question that should and has not been asked during this world financial crisis is, why did the central watchdogs, the regulating agencies like Moodys, Standard  and Poor’s and Fitch Ratings give triple A ratings, the top evaluation possible, to all the packaged asset-backed commercial paper, sub-prime mortgages and collateralized debt obligations (CDOs)? The regulators have a conflict of interest because they are paid for issuing high ratings from the very companies they assess.

    These so-called structured investments were in fact neither properly nor honestly rated because as new evidence comes out, in most instances, they have greatly declined or have no value. What this suggests is that some institutional financial advisors, with the help of professional regulators, were able to invent an investment scheme that amounted to financial hocus pocus. This was too good to be true and should not have been believed, but greed all too often gets in the way of the truth.
 
    When all is said and done, these financial wizards have managed for a long time, with their make-believe assessments, to fool the experts by selling junk investments in order to legally get fees from individuals and institutions to the tune of millions of dollars.  How could this happen in Canada, in America and the rest of the world?  It’s simple. We neglected to practice at least three Commandments:  One, Seven and Eight.  Where’s the love of God?  Where is the concern and respect for our fellow citizen?  How can you build a free market economy on lies, reckless behaviour and outright disregard for the well being of others and the entire global banking network?

    David Johnston, an investigative reporter for the New York Times, and author of, Free Lunch: How the Wealthiest Americans Enrich Themselves at the Expense of the   Government was recently interviewed by PBS on an edition of the program NOW covering the rescue package. Here’s how he characterized the situation, “Rules define a civilization and we have allowed our civilization’s economy to be controlled by a place that has no rules.” This need for rules is nothing new, but it’s refreshing and a rude awakening to hear the statement in the midst of so much fear and mistrust swirling in the media.  No doubt too this is why we’ve been given the Ten Commandments: they’re the rules to on which to build ethical behaviour and a good society.

    This financial meltdown could be viewed as a test case to see if we’re smart enough to realize that religious principles and the many good virtues that they espouse do belong front and centre in the public square. Of course we need to fix this financial collapse, but here’s the more pressing question: can we fix our moral bankruptcy? People can surely solve the first issue, but only by humbling ourselves and turning to God can we address the second and more serious ethical question.

Lou Iacobelli,
HMWN Radio Maria
louiac@hotmail.com