Comments on naked capitalism: "Character and Capitalism"

Good post .increasingly common to use credit repor...

2008-03-25T14:31:00.001-04:00

Good post .

increasingly common to use credit reports as part of the new hire screening process...

When I first heard of this practice , I thought that for most jobs , it's downright silly . Does it ever occur to anyone that a bad credit rating might be tied to being UNEMPLOYED?. In other words, it's a Catch-22 situation , that this practice can further perpetuate.

... it has become common practice to put vendors to large corporations through a formal approval process..

I can attest to the folly of that . I worked for a landscaping/garden center/sod farm business. We recieved a request from Lowe's to sell them sod . They sought us out, not the other way around . Most of our larger sod sales were based on a handshake deal, or even more commonly, just a phone call . If somebody wasn't a good customer , they got no more sod . The next closet grower was > 100 miles away , and had the wrong soil , which caused problems . Suffice it to say , there was a substantial penalty for bad behavior . For our part , any poor performance (not that we would) could hurt other aspects of the business , through word-of-mouth criticism.

Along comes the BigBoxMarts. They were offering sod that was grown far away, on a different soil than our area , of poorer quality ( less care and younger age) that cost more to ship, that spent more time in transit . Even though he was skeptical of the long trem effect on our business, my boss, the owner agreed to become a vendor . That is , until the vendor agreement arrived . It was a twenty-page booklet . Even so he started to fill it out . Then, as he got further into it ,my boss got more and more irritated , until he threw it across the room , into the garbage .
The deal was one-sided, intrusive, insulting and we wouldn't get paid for 90 days . Also if they mishandled it, and killed it , they wouldn't have to pay. Lowe's could have had a better product, at less expense, with a same-day (3-4hrs) response time for more , but process trumped everything else .

Good post .increasingly common to use credit repor...

2008-03-25T14:31:00.000-04:00

Excellent thinking. One aspect that might be worth...

2008-03-16T17:46:00.000-04:00

Excellent thinking. One aspect that might be worth discussing further is the fact that the Fair Credit Reporting Act, which regulates to some degree the use and sharing of FICO scores (among other credit bureau info), uses language that explicitly identifies the character concern.

It defines a "credit report" as being "any written, oral, or other communication of any information...bearing on a consumer's credit worthiness, credit standing, credit capacity, CHARACTER, general reputation, personal characteristics, or mode of living..." (emphasis mine).

Is it possible that this has misled lenders into believing that FICO is a stand-in for character?

E

Trult fine post, thank you!It is interesting how d...

2008-03-16T08:00:00.000-04:00

Trult fine post, thank you!
It is interesting how discussion about morality nowadays always involves rationality. Rationality seems to say one should always be selfish. And being moral means you sometimes do something that's not selfish. And, horror of horrors, that's not rational! What if the deal is that being moral means being irrational? Contributing something without expecting anything in return certainly is irrational, but without that, what would life be like?

But it is indeed an interesting drama to watch the profit-seeking crowd sing the hymns to morality - as they perceive that strange and beautiful creature.

anonymous 3/15;12:04pmi don't need anonymity for w...

2008-03-16T03:08:00.000-04:00

anonymous 3/15;12:04pm
i don't need anonymity for what i wrote. yes, there have been other 'bubbles'. but not so expertly 'engineered'. and if the building and bridges begin collapsing then the engineers who designed them and those who trained them should be interrogated. not merely asked for solutions to the current problem.
this current situation was created by people with very good educations and pedigrees. not mother nature or the carpenter's union.
but at least class is still in session and some real lessons are on the way. there will be a test.
the assinine is in your mirror.

Refer to Max Weber:Protestant Ethic and Capitalism...

2008-03-16T02:13:00.000-04:00

Refer to
Max Weber:

Protestant Ethic and Capitalism

yves, try this:The July 2005 Report of the Counter...

2008-03-16T02:12:00.000-04:00

yves, try this:

The July 2005 Report of the Counterparty Risk Management Policy Group II draws a distinction between financial disturbances and systemic or potentially systemic "financial shocks." An excerpt from the report follows:

“Financial disturbances arise with some frequency and can have their origins in a number of factors ranging from a geopolitical event such as September 11 to a failure of a specific financial or nonfinancial corporation. However, financial disturbances do not exhibit the very rapid contagion effects present in financial shocks. The absence of rapid and far reaching contagion effects may be due to any number of factors including: (1) the event was widely discounted in the first place, (2) public or private policy responses are swift and decisive, and/or (3) the event does not raise broad-based concerns about potential or actual credit losses that could compromise the ability of financial counterparties to perform in a manner consistent with their obligations. Credit-related problems, as discussed below, are of special concern because — as we have seen on many occasions — financial markets have a remarkable capacity to cope with financial disturbances so long as widespread credit problems are not seen as an imminent threat. Experience also shows that the fact or the fear of large credit losses is often the key variable through which financial disturbances become financial shocks.”

Oh, fantastic, that's the article.

2008-03-16T01:47:00.000-04:00

Oh, fantastic, that's the article.

Is this the paper of Bhide that was mentioned:With...

2008-03-16T01:45:00.000-04:00

Is this the paper of Bhide that was mentioned:
With Howard Stevenson, "Why Be Honest if Honesty Doesn't Pay," Harvard Business Review, V 68, N 5: pp. 121-129, September-October 1990.

Countrywide Financial (CFC) is trying to block a f...

2008-03-16T01:06:00.000-04:00

Countrywide Financial (CFC) is trying to block a federal inquiry into the way it treats bankrupt borrowers, according to the Wall Street Journal on Friday. Reportedly, the Justice Department is leading the inquiry. The Office of the U.S. Trustee is also suing the troubled mortgage lender on similar issues in Florida, Georgia and Ohio.

The investigation is looking to allegations against Countrywide Financial about possible securities fraud and checking whether the company made misrepresentations about its financial state as well as the condition of its mortgages in its filings.

The Countrywide probe was first reported by the Wall Street Journal on Saturday, identifying it as one of the fourteen companies under investigation by the FBI as part of a larger investigation into the mortgage crisis. In late January, the FBI announced that it was probing 14 loan agencies for accounting fraud, insider trading, and various other violations in relation to subprime mortgage loans.

Yves,Then you would really enjoy the work of Ernst...

2008-03-15T17:50:00.000-04:00

Yves,
Then you would really enjoy the work of Ernst Fehr. Do a Google search and you'll get to his website(s) which have a wealth of information on fairness, cooperation and social norms. He is widely published in main stream economics journals so he is a "serious" economist. He also collaborates with cultural anthropologist to look at the evolution of fairness and norms across cultures. One of his basic points is that you only need a few good apples to keep certain markets alive and create trust. Then even the selfish bastards will conform because they want to appear trustworthy as well. So having a few good apples can actually create a self-enforcing mechanism in the marketplace. Of course, this research is still somewhat in its infancy so a lot more needs to be done to understand the interaction between institutions, formal enforcement and self enforcement, but it's a start.

Thanks for all the great comments and pointers. An...

2008-03-15T17:29:00.000-04:00

Thanks for all the great comments and pointers.

Anon of 10:23,

I'd love to get to the papers (which all these financial implosions, the news du jour has become overwhelming). I get quite annoyed when I read the "rational economics" crowd. Yes, incentives matter, but the literature on cognitive biases is so deep that their premise bothers me.

As for "social preferences don't exist" I suggest they visit Japan, or even much of Europe and Australia, where people like a high lever of social services and accept the corresponding higher tax rates.

Values in industries also shift over time; is this not a social preference?

Indeed, one of the things that makes me so disturbed about the current state of affairs is the contrast between Wall Street now and in the 1980s. Yes, people were greedy then too, they had an idea of where the lines were and they'd go to the edge often. But the industry operated on the philosophy that Goldman called "long term greedy." You didn't screw customers or investors (or if you did, only in teeny ways around the margin) because they were your meal ticket. You understood this was a symbiotic relationship.

Deregulation helped undo this (I think Rule 415, shelf registration, had more to do with this than anyone realizes. It shifted the relationship away from underwriters to deal counsel). The LBO wave was another big nail in the coffin, since some blue chip IBs supported raiders (suddenly companies couldn't trust their banker). So customer interactions became more transactional, and the bankers became less interested in the client's well being and more fixed on how each deal worked for them in isolation.

Lune,

The last time business schools became worried about ethics (I think this was circa 2002, in the wake of Enron and numerous accounting scandals), Harvard Business School concluded (based on some research as I recall) that ethics couldn't be taught, you had to select for it. They allegedly changed their admissions policies.

I'm not certain business schools exhorting ethics in the absence of a bigger cultural shift in attitudes will work. Unfortunately, people judge actions more than words, and when you see the head of a criminal enterprise like Angelo Mozilo get cash and prizes, it's hard not to discern how the game really works.

But if we were to see more miscreants going to jail, more excessive comp clawed back (I'm not holding my breath) then the B-schools could play a very useful reinforcement role.

What does it profit a man, if he gain the world bu...

2008-03-15T17:19:00.000-04:00

What does it profit a man, if he gain the world but loose his soul?

Sometimes financial considerations should not be the only ones when we make financial decisions.

"I highly recommend reading "The Origins of Virtue...

2008-03-15T17:02:00.000-04:00

"I highly recommend reading "The Origins of Virtue" by Matt Ridley" - he's a good writer, is Dr Ridley. He was less successful as Chairman of a bank - Northern Rock. What conclusion to draw from that is entirely unclear to me.

Let me chime in with the compliments as well. It's...

2008-03-15T16:03:00.000-04:00

Let me chime in with the compliments as well. It's rare to find a financial blog talk about something so quaint as character.

I do think that such notions of character and ethics can return to the field of business. But it has to be inculcated and taught from the very beginning. To look at another field, people entering medicine aren't all angels. But students in medical school are taught from the first day about the need to put their patients' interests first. Whether explicitly through courses and discussions or implicitly through subtle social pressures and being surrounded by good rode models, students gradually internalize the ethos of medicine. And it works. While there is plenty of abuse within the medical field, there's still plenty of that character still around (how many MBAs would rush to the hospital in the middle of the night to operate on a blood-soaked HIV+ patient with no insurance?)

I think business schools need to look at themselves and realize that character matters, and that it can and should be a part of their educational goals. It can be taught. Perhaps that would start the process of rebuilding a profession that is uniformly reviled by the public right now (I'm hearing far more Wall St. jokes than lawyer jokes right now :-)

I once had the chance to study mortgage applicatio...

2008-03-15T15:58:00.000-04:00

I once had the chance to study mortgage applications in Chicago from the early 70's. The only thing that mattered on the application was the racial profile of the neighborhood of the house. Not income, not net worth, only race. (This was part of my stats M.S. program).

I believe reliance on objective measures such as FICO scores has been a tremendous advancement in removing racism and discrimination from the "know and be friends with the person you are lending to (and have the same skin color as)" system.

One of the best posts ever - can't say thank you e...

2008-03-15T15:43:00.000-04:00

One of the best posts ever - can't say thank you enough for this.

On a related point, as the owner of a small business I've found the same intrusive garbage in negotiating contracts with big investment companies. I refuse on principal to agree to that level of intrusion into my employees' lives, and eventually the client backs down on some kind of technicality, such as the condition that we not be onsite for more than two consecutive days (not an issue for us). Silly, but it does seem to work, FWIW.

"Character and morality lead you to the poorhouse,...

2008-03-15T15:10:00.000-04:00

"Character and morality lead you to the poorhouse, while deceit and leverage lead you to the Hamptons."

njdoc,

There comes a time where the trip to the Hamptons can be diverted to a jail cell.

Posts like these are the reason why I make sure th...

2008-03-15T14:59:00.000-04:00

Posts like these are the reason why I make sure that your blog is part of my daily reading.

Truly outstanding...and sorely needed.

Memo to Wall Street and Corporate America: doing the right thing brings the best long-term profits. It is also the best way to stave off the urge for more and more regulations, while far more economical than paying lobbyists.

How about this for slogan?
"Our behavior is our best lobbysit."

What reason is there for character and morality wh...

2008-03-15T14:54:00.000-04:00

What reason is there for character and morality when you can make as much money as you can now, and have the government bail you out later. Character and morality lead you to the poorhouse, while deceit and leverage lead you to the Hamptons. The fish rots from the head down!

This is the best post Yves! Wall Street seems to t...

2008-03-15T14:37:00.000-04:00

This is the best post Yves! Wall Street seems to think they can screw everybody all of the time.

A wonderful post - I'll do my part to ensure a wi...

2008-03-15T14:25:00.000-04:00

A wonderful post - I'll do my part to ensure a wider audience.

On an anecdotal and personal note this struck me:

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Where is there opportunity for character to enter into either of these interactions? Even if someone goes the extra mile for you, you might never see that person again. Their effort will probably go unrewarded, or worse, might be against policy.
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I completely relate to that - Someone at a peanut processing plant in a not-so-Southern state really went out of the way to ensure that I made the contacts so that I got "green peanuts" - a particular delicacy for me since I live in arid, cold Colorado.

I'd have LOVED to have written to the CEO telling them of the wonderful customer service I got when it struck me - she was, while still carefully obeying the rules of database privacy and of USDA regs still definitely going to the edge - for all I knew the CEO might get pissed, not pleased ! It would have the height of stupidity if my best wishes for her turned out to be a nightmare. So I just quietly ensured some money went her way.

Sad state of affairs...

-K

rexl,You are a perfect example of the point of the...

2008-03-15T12:04:00.000-04:00

rexl,
You are a perfect example of the point of the post. When things are anonymous and your reputation doesn't matter, you can make asanine comments.

You mean to tell me that bankruptcies, recessions, bubbles and busts didn't occur prior to the advent of business school professors and their alumni? Let's see, economics was born with Adam Smith in 1700s. Modern economics was born in the 20th century. So who "caused" the Tulip bubble in Holland in the 1600s? Who caused the South seas bubble in 1711?

We live in an age of litigation. As a defensive m...

2008-03-15T11:37:00.000-04:00

We live in an age of litigation. As a defensive measure, companies must turn primarily to blindly quantifiable and objectively impartial measures, however silly or irrelevant. If you turn down one applicant and accept another, and on paper they both look equally qualified, good luck defending the lawsuit by arguing intangible issues of "character". Don't blame corporations for adapting as they must to the society they exist within.

the opinions of various high ranking business scho...

2008-03-15T11:24:00.000-04:00

the opinions of various high ranking business school professors, feldstein, bernanke, et al, are constantly aired. while a lot of the fraud and financial machinations currently causing the chaos in the markets is created and perpetuated by their former students. what did they teach them? when the little monsters win the nobel prize, all the academies trip trying to take credit, so why not give it to them when their alumni cause bankruptcy, recession and worse?