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Financial Planning > Behavioral Finance

How Corporations (and Countries) Collapse

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Portugal is the latest of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) whose oinking has roiled financial markets. The total of its public and private debt is greater than fully two years of the output of its $247 billion economy.

While the twanging a-comin’ to Portugal will be significant, it doesn’t come close to the slop in Wall Street’s trough. Already one year ago, author and financial analyst Nicole Gelinas estimated U.S. government support of the financial industry — whether through the Fed, the Treasury, the FDIC, or the TARP fund — exceeded $20 trillion. That’s some 40 percent more than the entire U.S. GDP — an amount Wall Street could never repay.

This month’s cover story by Janet Levaux looks back on the emergency M&A that adversely impacted the corporate structure and working conditions of the wirehouse firms. They will be far worse if we fail to avoid the next calamity. The pattern seems to be that a financial entity, be it Merrill Lynch or Ireland, takes big risks; a larger financial entity, be it BofA or the USofA, bails it out; then that larger entity imposes a solution that is politically expedient but ultimately not that helpful (e.g. Dodd-Frank).

We’ve seen this before: The post-Enron imposition of Sarbanes-Oxley legislation did not put an end to financial fraud. Sarbox is estimated to have cost U.S. corporations more than $1 trillion. Yet its principal effect may have been to keep executives focused on compliance rather than excellence.

It is remarkable that a culture of extreme risk taking placidly coexists with narrow legal risk avoidance. The latter does not cure the former; it permits it. What is missing across American society is a broader ethical awareness and social responsibility.

People in Hollywood make movies modeling behavior they would not want their own children to adopt. Some folks sell guns to anyone — even Jared Loughner. Tobacco execs have long sold products that are addictive and deadly. Journalists report “news” that is just malicious gossip. Unethical financial advisors sell products they themselves would not buy. But all of these do so with the permission of their compliance departments.

Sociobiologist Rebecca Costa in her new book, The Watchman’s Rattle, explains how civilizations collapse. Despite the technological sophistication of the Mayans, 3,500 years of a civilization known for advanced mathematics, writing and a highly developed infrastructure yielded to extinction when they could no longer solve basic problems.

The troubles at Wall Street firms, the troubles of the PIIGs, indeed the troubles the U.S. and its states are experiencing suggest this kind of paralysis. Faced with obvious dangers, like the Mayans we simply kick the can down the road. We’ve long known our entitlement programs are unsustainable, for example, yet have taken no serious precautions.

Former Citigroup CEO Charles Prince had famously remarked that as long as the music is playing, you’ve got to get up and dance. That’s not leadership. At whatever capacity we have, we need to know when to turn off the music, remove the punchbowl and make sure there are no regrets tomorrow.

Gil Weinreich

[email protected]


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