If corporations are “people,” as the U.S. Supreme Court and the Republican Party would have us believe, then perhaps they should be held to account for their lack of human propensities? As former President Bill Clinton observed in the video linked in the previous post, the American public has been treated to an interesting combination of corporate amorality and corporate public relations for the last three decades.
While corporations have made it abundantly clear that stock prices and short term profitability are the twin gods of industry at the moment, corporate public relations campaigns seek to mollify our discomfort with notions that energy giants are seeking new technologies. The uncomfortable truth is that energy giants have been reducing the percentage they spend on research and development. See the research and graphs here.*
Banks are now “friendly” again. One even changed its retail banking division’s name to “Main” as in Main Street. One became “Ally,” what could be friendlier than an ally? This goes nowhere toward explaining why such practices as Robo-signing, and deceptive foreclosure practices are common knowledge in our law enforcement communities. The advertising campaigns are a thin papering covering economic sectors the control of which is held by those who have little interest in corporate citizenship and a great deal more interest in corporate image.
When Image becomes more important than Identity we can reasonably assume that the divide between public relations and public interests has increased, along with the distance between the reality of public perception about corporate behavior and the actuality. If a positive image is the goal then we can also assume much of what we’re seeing and hearing is Bogus.
Examples from the Bogus Hall of Shame
#1. “Corporations aren’t expanding because of burdensome regulations.” Bogus. The energy corporations have trumpeted their claim that regulations “kill jobs,” but the facts don’t fit their portrayal:
“…at the macro level, existing research does not support the claim that regulation impairs the job market or job growth. According to John Irons and Isaac Shapiro, the paper’s authors, regulation generally has no significant impact on the labor market as a whole. If anything, regulations, particularly environmental regulations, hold the potential to create jobs. (Pollution control standards create work for the pollution abatement industry, for example.” [OMBWatch]
House Leadership has gotten into the act, with such repetitions of the corporate line as this from Representative Eric Cantor (R-VA):
“House Majority Leader Eric Cantor has characterized many of these new EPA rules as “regulatory burdens to job creators” and has scheduled a series of votes, beginning this week, aimed at halting them. This latest research from EPI explains that Cantor’s characterization of these rules is inaccurate. EPI’s research finds that the dollar value of the benefits of the major rules finalized or proposed by the EPA so far during the Obama administration exceeds the rules’ costs by an exceptionally wide margin. Health benefits in terms of lives saved and illnesses avoided will be enormous. EPI also finds that the costs of all finalized and proposed rules total to a tiny sliver of the overall economy, suggesting that fears that these rules together will deter economic progress are unjustified.” [EPI] (emphasis added)
#2. “Banks aren’t lending because of federal regulations, or ‘uncertainty’ over federal intrusion into the financial sector.” Bogus. It is true that banks are wary of leveraging themselves as they did during the Housing Bubble and the Derivative Creation Spree in which they indulged before their houses of asset backed securities collapsed on them in the Fall of 2008. However, that doesn’t fully explain their reluctance to make retail and small business lines of credit more available.
One problem for the commercial or retail borrower is that banks are still trying to squirm free of the excesses of their Housing Bubble and its consequences. As of February 2009, Forbes reported that banks were hoarding cash (with excess reserves of $1.7 billion) while toting up their toxic assets. “Banks are trying to unload troubled assets, for starters, while at the same time, they are being forced to hold loans on their balance sheets they normally would have sold off as packaged securities, and they have had to pick up the slack in the commercial paper market when borrowers were frozen out.”
A GAO study of the proprietary trading conducted by 6 large banks and hedge funds reported:
“In 13 quarters during this period, stand-alone proprietary trading produced revenues of $15.6 billion–3.1 percent or less of the firms’ combined quarterly revenues from all activities. But in five quarters during the financial crisis, these firms lost a combined $15.8 billion from stand-alone proprietary trading–resulting in an overall loss from such activities over the 4.5 year period of about $221 million. However, one of the six firms was responsible for both the largest quarterly revenue at any single firm of $1.2 billion and two of the largest single-firm quarterly losses of $8.7 billion and $1.9 billion.”
The GAO report highlights the fact that there is much profit to be gained from proprietary trading — but also much to be lost, and if the banks and hedge funds are still trying to recoup in the wake of the Housing Bubble collapse it may be a while before lending opens up again.
There’s also the matter of clearing those toxic mortgages to be considered, especially by Bank of America. BofA’s ReconTrust lost a round in a Utah court concerning fraudulent non-judicial foreclosures, [KCSG] and the Nevada Attorney General put BofA on notice that action may be taken in regard to foreclosure practices in Nevada. [Vegas, Inc]
What appears to be uncertain is not anything included in the Dodd-Frank Act, but whether banks will be able to (1) clear toxic assets off their own books; and, (2) figure out what to do with questionable Level 3 securities that are still looming in the bankers’ vision:
“…the top 10 U.S.-owned banks had $13.8 billion in “unrealized losses” that have lasted at least a year in their investment portfolios as of Sept. 30, according to a Wall Street Journal analysis. Such losses are baked into banks’ book value, but don’t get counted against earnings as long as the banks believe the investments will later rebound. If those losses were assessed against earnings, it would have reduced the banks’ pretax income for the first nine months of 2010 by 21%, according to the Journal analysis.” [WSJ]
Those pesky “Level 3” securities have declined by 24% recently but they are still on the books, still difficult to value, and still part of the problem.
“One problem centers largely on “Level 3” securities, illiquid investments that can’t be easily valued using market prices. According to the Journal analysis, as of Sept. 30, the top 10 banks had $360.7 billion in “Level 3″ securities. That amounts to 42.6% of the banks’ shareholder equity, a pile of assets whose value is hard to verify.” [WSJ]
There is another issue for bankers — demand. Standard & Poor reported lagging demand for commercial loans and “muted” interest from banks in the subject as of May 2011. Lending for “spec” housing and real estate development is still dormant as of September 2011. [BizJournal] No surprise therein. There are a couple of pink clouds in this otherwise gray panorama — small and medium sized businesses are increasingly interested in upgrading infrastructure and this bodes well for commercial lending, which was up 6.2% in August 2011. [MarketWatch]
This brings us to a question of priorities, would a banker be more uncomfortable making more loans because of some nebulous anxiety over the application of the provisions of financial reform legislation — or more likely to be uncomfortable because there are approximately $360.7 billion (42% of equity) still on the books as “Level 3” securities? Which would make a banker more anxious: Statutory limitations on proprietary trading or limitations on demand in the housing sector?
There are explanations enough to illustrate the tenuous financial status of banking and corporate expansion in the United States at the moment, but sound-bite expressions of ideological tenets aren’t the answers — they don’t even address the right questions. In short, they are bogus.
References and Resources: *Kammen and Nemet “The Incredible Shrinking R&D Budget,” Access Almanac, Fall 2005. (pdf) U.S. Banks Offered Deal on Robo-Signing, CNBC, September 5, 2011. “60 Minutes Exposes Major Lenders’ Deceptive Foreclosure Practices,” CBS News, April 7, 2011. Shapiro and Irons, “Regulation, Employment, and the Economy: Fears of Job Loss Are Overblown, EPI (pdf) April 12, 2011. OMBWatch, “Regulations Benefit Job Market,” April 12, 2011. NREL, “Alternative Energy: Solar, Wind, Geothermal,” (pdf) October 23, 2007. Shapiro, “Tallying up the impact of new EPA Rules,” EPI, May 31, 2010.
Moyer, “Banks Promise Loans But Hoard Cash,” Forbes, February 3, 2009. GAO: “Proprietary Trading: Regulators Will Need More Comprehensive Information…” July 13, 2011. Wall Street Journal, “Risky Assets Still Lurk At Banks,” February 2, 2011. Seeking Alpha, “U.S. Commercial Lending Lags,” June 2011.