What's not in Chevron's annual report
Posted by Cameron Scott on May 26th, 2009
Originally posted at http://www.sfgate.com/cgi-bin/blogs/green/detail?entry_id=40674
When people with strong ideological perspectives are often outraged
by media coverage of their pet issues. When both sides are mad, you
know you're doing something right. But how often do you hear
corporations furious about they way they are covered in the business
section? The section seems to lend itself to favor-currying and
In the lead-up to Chevron's annual shareholders meeting tomorrow in San Ramon, the company landed a puff piece on KGO focusing on its efforts to decrease its water usage. No mention of the Amazon controversy, and no mention of outside pressure on Chevron, EBMUD's largest water user.
I'm disappointed to say that a Chronicle interview
with the company's top lawyer also softballs the issues, while giving
Chevron the opportunity to present its side of the story with no
opportunity for response from the company's many critics. [Update: Chron editors tell me there will be more coverage of Chevron later in the week.]
Well, Chevron's opponents, including San Francisco's Amazon Watch, have taken matters into their own hands, releasing an alternate annual report that presents the externalities
not listed in the company's balance sheet, which shows a record profit
of $24 billion, making the company the second most profitable in the
Did you know that Chevron's Richmond refinery was built in 1902 and emitted 100,000 pounds of toxic waste in 2007, consisting of no less than 38 toxic substances? The EPA ranks it as one of the worst refineries
in the nation. With 17,000 people living within 3 miles from the plant,
you'd think the San Ramon-based company would take local heat from more
than just a couple dozen activists.
Chevron has sought to brand itself an "energy" company, one eagerly pursuing alternatives to petroleum. Its aggressive "Will You Join Us?"
ad campaign asked regular folks to reduce their energy consumption,
suggesting that Chevron was doing the same. In actuality, the company
spent less than 3 percent of its whopping capital and
exploratory expenditures on alternative energy. And it has refused to
offer better reporting on its greenhouse gas emissions, despite strong
shareholder support for it. (The aggressive, and misleading, ad
campaign seems to have ired the report's researchers as well: The
report is decorated by numerous parodies, and some have been
wheat-pasted around town.)
It's a very well researched report, written by the scholar Antonia Juhasz,
clearly divided into regional issues, and it's a much needed
counterbalance to the friendly coverage Chevron is otherwise getting.
(Juhasz was interviewed on Democracy Now this morning.)
For information on protesting the shareholder meeting early tomorrow morning, click here.
The IDB—50 Years, Zero Reflection
Posted by Laura Carlsen on April 3rd, 2009
Americas Policy Program, Center for International Policy
At the end of
March, the Inter-American Development Bank (IDB) celebrated its 50th
anniversary in Medellin. The occasion presents an opportunity to revise
concepts and move toward a fairer development model. It is logical to
think that among the festivities, a process of evaluation and
self-critique would begin regarding the bank's actions and work in the
The circumstances demand it. The continent has been plunged into a
grave economic crisis, in part because of the string of structural
reforms, deregulation, foreign market dependence, and privatization
that the IDB has supported in the region. Limits on the use of
non-renewable fuels have become more and more obvious while climate
change threatens to affect the production of basic foods and increase
the frequency of natural disasters. Forced migration characterizes
modern life and growing inequality has become the most important
challenge faced by all the countries in the region.
| Medellin: site of the 50th anniversary of the IDB. Photo: www.skyscraperlife.com.
In spite of this gray outlook, it seemed that until now everything
suggested that the IDB would prescribe more of the same medicine. They
predicted an increase in loans to the region for the record figure of
US$18 billion for 2009 as a response to the crisis. This will generate
a new wave of debt in the recipient countries, while at the same time
the development model behind the loans faces a crisis of credibility
due to its dubious results. For the IDB, development is seen as a
process of ensuring the transnational mobility of capital, enabling
foreign investment, the transfer of goods, and access to natural
resources. In recent years, this model has been imposed on regions that
were previously closed off due to their geographical location or
because of little interest from big business. Now that the value of
natural resources is increasing and national economies have opted for
exports, mega-projects including transportation infrastructure and
hydroelectric power plants, among others, have become attractive again.
They generally target regions with a low population density, and, in
many cases, significant indigenous populations. While these communities
are often forgotten by their national governments and suffer high
levels of marginalization, at the same time their territories are rich
in both culture and biodiversity.
The IDB has been a major promoter of infrastructure mega-projects
designed to drive this vision. Two mega-project master plans have been
of particular interest to the IDB: The Plan Puebla-Panama (also known
as the Mesoamerican Integration and Development Project) and the
Initiative for the Integration of Regional Infrastructure in South
America (IIRSA). These plans include the construction of
super-highways, dams, electricity networks, and more. The projects
signal a drastic change in the use of land and resources. Local,
regional, and national markets—which generate more jobs and constitute
the majority of food distribution—are seen as a hindrance, and natural
resources—conserved by indigenous communities—are considered the spoils
of transnational business.
Among its objectives, the IDB aims to generate development in these
regions. However, a recent study revealed that the mega-projects
financed by the IDB in many cases end up displacing thousands of people
who are supposed to be the beneficiaries. The construction of dams is
the clearest example because it entails the involuntary displacement
through the flooding of vast areas which often include pre-existing
communities. One example is the La Parota hydroelectric dam in
Guerrero, Mexico which would displace around 25,000 people and has
currently been halted due to popular resistance. A group of 43
grassroots organizations met prior to the IDB meeting in Medellin. They
presented studies and testimonies on the impacts of these projects in
an effort to change the IDB's policies. Through the campaign known as
"The IDB: 50 years financing inequality," these groups argue that,
rather than alleviate the issue of poverty, mega-projects channel the
profits gained from natural resources into the hands of the private
sector and destroy the social fabric and community networks necessary
for indigenous survival.
The solution to poverty that the IDB fundamentally proposes would
seem to be: reduce poverty by expelling the poor. The two meetings—that
of the IDB authorities and that of the organizations which question its
practices—present an opportunity to revise the concept of development
and move toward a fairer development model.
Originally posted on April 1, http://americas.irc-online.org/am/6008.
Who Will Determine the Future of Capitalism?
Posted by Philip Mattera on March 13th, 2009
Amid the worst financial and economic crisis in decades, the U.S.
business press tends to get caught up in the daily fluctuations of the
stock market and, to a lesser extent, the monthly changes in the
unemployment rate. By contrast, London’s Financial Times is looking at the big picture. It recently launched a series
of articles under the rubric of The Future of Capitalism. In addition
to soliciting varying views on this monumental question, the paper
published a feature this week presuming to name the 50 people around the world who will “frame the way forward.”
Kicking off the series, the FT’s Martin Wolf was blunt in asserting
that the ideology of unfettered markets promoted over the past three
decades must now be judged a failure. Sounding like a traditional
Marxist, Wolf writes that “the era of liberalisation [the European term
for market fundamentalism] contained seeds of its own downfall” in the
form of tendencies such as “frenetic financial innovation” and “bubbles
in asset prices.”
in the series by Gillian Tett casually notes that “naked greed, lax
regulation, excessively loose monetary policy, fraudulent borrowing and
managerial failure all played a role” in bringing about the crisis.
Richard Layard of the London School of Economics weighs in with a piece
arguing that “we should stop the worship of money and create a more
humane society where the quality of human experience is the criterion.”
Did editorial copy intended for New Left Review mistakenly end up in the FT computers?
Wolf finished his initial article
with the statement: “Where we end up, after this financial tornado, is
for us to seek to determine.” Yet who is the “we” Wolf is referring to?
Following the damning critique of markets and poor government
oversight, the last ones we should turn to for leadership are the
powers that be. Yet that is exactly the group that dominates the list
of those who, according to the editors of FT, will lead the way
forward. The 50 movers and shakers include 14 politicians, starting
with President Obama and Chinese Prime Minister Wen Jiabao; ten central
bankers; three financial regulators; and four heads of multinational
institutions such as the IMF and the WTO. Also included are six
economists, including Paul Krugman and Obama advisor Paul Volcker, and
three prominent investors, among them George Soros and Warren Buffett.
The list also finds room for three chief executives (the heads of
Nissan, PepsiCo and Google) and, amazingly, the chiefs of four major
banks: Goldman Sachs, JPMorgan Chase, HSBC and BNP Paribas. It even
includes two talking heads: Arianna Huffington and Rush Limbaugh.
Except for Olivier Besancenot of France’s New Anticapitalist Party,
who is included among the politicians in a way that seems a bit
condescending, there is not a single person on the list directly
involved in a movement to challenge corporate power or even to
significantly alter the relationship between business and the rest of
society. There is not a single labor leader, prominent environmental
advocate or other leading activist. The editors at FT seem never to
have heard of civil society.
Then again, the problem may not be thickheadedness among FT editors.
Perhaps the voices for radical change have simply not been loud enough
to earn a place on a list of those who will play a significant role in
the shaping capitalism’s future. In fact, one of the articles in the FT
that in Europe neither the Left nor the labor movement has taken a
leadership role in responding to the crisis, even as spontaneous
protests have erupted in numerous countries.
In the United States, where those forces are weaker, anger at the
crisis has to a great extent been channeled into support for the
Keynesian policies of the Obama Administration. That’s unavoidable in
the short term, but it doesn’t address the need for fundamental
alteration of economic institutions. If, as the Financial Times suggests, the future of capitalism is up for grabs, let’s make sure we all join the fray.
Originally posted at: http://dirtdiggersdigest.org/archives/341
The City Within
Posted by Mark Floegel on February 26th, 2009
Before his execution, Socrates was visited in prison by his friend
Crito, who told him the bribes for the guards were ready and Socrates
could escape whenever he wished. Socrates refused to go.
Crito, angered, argued Socrates would a) leave his children orphans
and b) bring shame on his friends, because people would assume they
were too cheap to finance his escape. (Apparently, this sort of thing
was common in Athens in those days.)
Socrates replied that in his imagination, he hears the Laws of
Athens saying, “What do you mean by trying to escape but to destroy us,
the Laws, and the whole city so far as in you lies? Do you think a
state can exist and not be overthrown in which the decisions of law are
of no force and are disregarded and set at naught by private
In short, either Socrates or the rule of law had to die. Socrates
chose to die rather than diminish his city. Now, as then, he’d be a
lonely guy. His notion that the city lay within him – that he was the city of Athens – is striking.
All failure to enforce law – or to work
around it – is bad. This applies equally to speed limits, armed robbery
and banking regulations. Failure to enforce our agreed-upon standards
weakens our social bonds and undermines faith in both our justice
system and our government. If the police will not apprehend or the
courts will not prosecute or the legislatures draw protective circles
around certain elements in society, then society as a whole suffers.
There is within all of us an affinity for justice. The majority of
citizens have no training in law or political science, but we possess
intuitive notions of right and wrong. We’re willing to tolerate some
discrepancy on either margin of the page, but when things are pushed
too far out of balance on either side, then the door to vigilantism,
riot and revolution is opened.
This great imbalance – and we’re getting strong whiffs of it now –
is a failure by our institutions to enforce the terms of the American
“America is a classless society.” “All citizens stand equal before
the law.” Blah, blah, blah. It’s illegal to rob a convenience store.
It’s illegal to defraud investors. The accused robber, who flashed a
knife and made off with eighty or a hundred bucks, sits behind steel
bars and waits for his overburdened public defender to get around to
speaking with him.
The accused fraudulent investment fund manager, who flashed a phony
set of books and made off with eight or fifty billion dollars, sits in
his cosmopolitan penthouse and consults a million-dollar legal team,
which he pays with ill-gotten dosh.
If we vigorously enforce laws on the working class and make only
half-hearted attempts to do so with the managing class, then the class
warfare Republican politician are always whining about comes closer to
Worse, by allowing Ken Lays, Bernie Madoffs and Allen Stanfords to
get off easy, it destroys real opportunity for people in the working
classes to realize the American dream for themselves and their
children. The crimes of the managing class – unlike the convenience
store robber – have the real effect of depriving millions – both here
and abroad - of their livelihoods and homes when the financial system
In the news and before Congressional committee, we hear that
regulators were specifically warned for years that Bernie Madoff and
Allen Stanford were violating regulations.
While the beltway talkers argue over whether Wall Street bankers
should be allowed to keep their bonuses and exorbitant salaries, the
discussion that had yet to start is: why were these highly leveraged
instruments and securitized debt transactions legal in the first place?
We’re told incessantly that the Wall Street banking transactions were
so complicated that “no one really understands them.” There is,
however, the easily understood principle that one’s debts should be
balanced by one’s assets. Or one’s at least one’s assets should be
within shouting distance of one’s debts.
We have speed limits not because driving 110 is inherently evil, but
because it is unsafe and anyone who does shows reckless disregard for
themselves and others. And yet, a legion of reckless drivers loosed on
the interstate for a decade could not have wrought as much misery as
this handful of bankers, brokers and hedge fund managers.
We will now suffer for years. These will be hard times, but within
this hardship will be opportunities to rediscover the extent to which
our society lives within in us, as Socrates would have said.
Originally published at:
Norway finds Canada's largest publicly-traded company, Barrick Gold, unethical
Posted by Sakura Saunders on February 2nd, 2009
Norway's Ministry of Finance announced Friday that it would exclude mining giant Barrick Gold and U.S. weapons producer Textron Inc from the country's pension fund for ethical reasons. This is an especially significant judgment for Canada, as Barrick Gold is currently Canada's largest publicly traded company.
While the Norwegian Council of Ethics full recommendation mentions conflicts involving Barrick in Chile, Tanzania, and the Philippines, the panel acknowledged that, "due to limited resources," it restricted its investigation of Barrick to the Porgera mine in Papua New Guinea. The Porgera mine has been a prime target for criticism for its use of riverine tailings disposal, a practice banned in almost every country in the world.
"It's unbelievably embarrassing," admitted Green Party deputy leader Adriane Carr. "It's got to be bad news for Canada when a foreign government says it's going to sell its shares in a Canadian company they figure is unethical."
This isn't the first time that Norway's Fund has divested from a gold mining company. In fact, looking at a list, the fund – with the notable exception of Walmart – divests exclusively from mining (primarily gold mining) corporations and corporations that produce nuclear weapons or cluster munitions... an interesting juxtaposition highlighting the comparable nature of mining to the production of weapons of mass destruction, especially in terms of long-term environmental consequences.
Compare that to Canada's treatment of gold mining companies. Just this last December, Peter Munk, the chairman and founder of Barrick Gold, received the Order of Canada, Canada's highest civilian honor. Additionally, within Toronto he is honored as a philanthropist, with the Peter Munk Cardiac Center and the Munk Centre for International Studies at the University of Toronto both adorning his name. Similarly, Ian Telfer, the chairman of Goldcorp, the world's second largest gold miner behind Barrick, has the Telfer School of Management at the University of Ottawa bearing his name.
These symbolic gestures, along with the fact that several Canadian Pension funds and even Vancouver-based "Ethical Funds" are still heavily invested in Barrick Gold, show that Canada has a long way to go in demanding that its companies honor human rights and halt its colonial-style, exploitative economic regime. In fact, by its own admittance, Canada's Standing Committee on Foreign Affairs and International Trade stated that "Canada does not yet have laws to ensure that the activities of
Canadian mining companies in developing countries conform to human
rights standards, including the rights of workers and of indigenous
peoples." Since the date of that landmark confession, Canada has yet to adopt any intervening structures (like an ombudsperson) or develop any mandatory regulations for Canadian companies operating abroad.
Gold mining produces an average of 79 tons of waste for every ounce of gold extracted, 50 percent of it is carried out on native lands, and about 80 percent of it is used for jewelry, according to the "No Dirty Gold" campaign, a project of Oxfam and Earthworks. It is no wonder that in a portfolio with plenty of human rights abuses, the Norwegian Pension Fund decided to concentrate on gold miners, cluster munition manufacturers and nuclear weapon producers first. It is time that the rest of the world catch up.
Popular Uprising Against Barrick Gold in Tanzania sparked by killing of local
Posted by Sakura Saunders on December 14th, 2008
Why would "criminals" set fire to millions worth in mine equipment?
How was it that these "intruders" had an estimated 3,000 - 4,000 people backing them up?
In what appears to be a spontaneous civilian movement against Barrick Gold, the world's largest gold miner, thousands of people invaded Barrick`s
North Mara Gold Mine this week in Tarime District and destroyed equipment worth
$15 million. Locals say that the uprising was sparked by the killing of a local, identified as Mang'weina Mwita Mang'weina. According to a Barrick Public Relations officer (as reported by the Tanzanian Guardian newspaper), "the intruders stoned the security personnel relentlessly until they
overpowered them. The guards abandoned their posts and retreated to
Barrick implies that "high levels of crime" are the cause of this
recent outbreak, recent reports suggest a different picture.
Allan Cedillo Lissner, a photojournalist who recently documented mine life near the North Mara mine, explains:
Ongoing conflict between the mine
and local communities has created a climate of fear for those who live
nearby. Since the mine opened in 2002, the Mwita family say that they
live in a state of constant anxiety because they have been repeatedly
harassed and intimidated by the mine's private security forces and by
government police. There have been several deadly confrontations in
the area and every time there are problems at the mine, the Mwita
family say their compound is the first place the police come looking.
During police operations the family scatters in fear to hide in the
bush, "like fugitives," for weeks at a time waiting for the situation
to calm down. They used to farm and raise livestock, "but now there are
no pastures because the mine has almost taken the whole land ... we
have no sources of income and we are living only through God's wishes.
... We had never experienced poverty before the mine came here." They
say they would like to be relocated, but the application process has
been complicated, and they feel the amount of compensation they have
been offered is "candy."
Evans Rubara, an investigative journalist from
Tanzania, blames this action on angry locals from the North Mara area
who are opposed to Barrick's presence there. "This comes one week after
Barrick threatened to leave the country based on claims that they
weren't making profit," comments Evans after explaining that Barrick
does not report profit to avoid taxes in the country. "This is a sign
to both the government of Tanzania and the International community
(especially Canada) that poor and marginalized people also get tired of
oppression, and that they would like Barrick to leave."
Only one week prior, Barrick's African Region Vice President, Gareth Taylor threatened
to leave Tanzania due to high operating costs, claiming that the company did not make profits there. Barrick's Toronto office
quickly denied this report, stating that "the company will work with
the government to ensure
the country's legislation remains 'competitive with other
jurisdictions so that Tanzanians can continue to benefit from
Interestingly, Taylors threat came shortly after he attended a workshop to launch the Extractive Industries Transparency Initiative (EITI) in Dar es Salaam.
One thing is clear, though; these reports of hundreds, backed by thousands, of villagers attacking mine infrastructure reflects a resentment that goes beyond mere criminal
action. And this surge in violence should be examined in the context of
the on-going exploitation and repressive environment surrounding the
Public Ownership -- But No Public Control
Posted by Rob Weissman on October 21st, 2008
Originally posted Tuesday, October 14. 2008 -- It is an extraordinary time. On Friday, the Washington Post ran a front-page story titled, "The End of American Capitalism?" Today, the banner headline is, "U.S. Forces Nine Major Banks to Accept Partial Nationalization."
There's no question that this morning's announcement from the Treasury
Department, Federal Reserve and Federal Deposit Insurance Corporation
(FDIC) is remarkable.
It was also necessary.
Over the next several months, we're going to see a lot more moves like
this. Government interventions in the economy that seemed unfathomable
a few months ago are going to become the norm, as it quickly becomes
apparent that, as Margaret Thatcher once said in a very different
context, there is no alternative.
because the U.S. and global economic problems are deep and pervasive.
The American worker may be strong, as John McCain would have it, but
the "fundamentals" of the U.S. and world economy are not. The
underlying problem is a deflating U.S. housing market that still has
much more to go. And underlying that problem are the intertwined
problems of U.S. consumer over-reliance on debt, national and global
wealth inequality of historic proportions, and massive global trade
Although it was enabled by deregulation, the financial meltdown merely
reflects these more profound underlying problems. It is, one might say,
Nonetheless, the financial crisis was -- and conceivably still might be -- by itself enough to crash the global economy.
Today, following the lead of the Great Britain, the United States has announced
what has emerged as the consensus favored financial proposal among
economists of diverse political ideologies. The United States will buy
$250 billion in new shares in banks (the so-called "equity injection").
This is aimed at boosting confidence in the banks, and giving them new
capital to loan. The new equity will enable them to loan roughly 10
times more than would the Treasury's earlier (and still developing)
plan to buy up troubled assets. The FDIC will offer new insurance
programs for bank small business and other bank deposits, to stem bank
runs. The FDIC will provide new, temporary insurance for interbank
loans, intended to overcome the crisis of confidence between banks.
And, the Federal Reserve will if necessary purchase commercial paper
from business -- the 3-month loans they use to finance day-to-day
operations. This move is intended to overcome the unwillingness of
money market funds and others to extend credit.
But while aggressive by the standards of two months ago, the most
high-profile of these moves -- government acquisition of shares in the
private banking system -- is a strange kind of "partial
nationalization," if it should be called that at all.
Treasury Secretary Henry Paulson effectively compelled the leading U.S.
banks to accept participation in the program. And, at first blush, he
may have done an OK job of protecting taxpayer monetary interests. The
U.S. government will buy preferred shares in the banks, paying a 5
percent dividend for the first three years, and 9 percent thereafter.
The government also obtains warrants, giving it the right to purchase
shares in the future, if the banks' share price increase.
But the Treasury proposal specifies
that the government shares in the banks will be non-voting. And there
appear to be only the most minimal requirements imposed on
So, the government may be obtaining a modest ownership stake in the banks, but no control over their operations.
In keeping with the terms of the $700 billion bailout legislation,
under which the bank share purchase plan is being carried out, the
Treasury Department has announced guidelines
for executive compensation for participating banks. These are
laughable. The most important rule prohibits incentive compensation
arrangements that "encourage unnecessary and excessive risks that
threaten the value of the financial institution." Gosh, do we need to
throw $250 billion at the banks to persuade executives not to adopt
incentive schemes that threaten their own institutions?
The banks reportedly will not be able to increase dividends, but will
be able to maintain them at current levels. Really? The banks are
bleeding hundreds of billions of dollars -- with more to come -- and
they are taking money out to pay shareholders? The banks are not obligated to lend with the money they are getting. The banks are not obligated to re-negotiate mortgage terms with borrowers -- even though a staggering one in six homeowners owe more than the value of their homes.
"The government's role will be limited and temporary," President Bush said in announcing today's package. "These measures are not intended to take over the free market, but to preserve it."
But it makes no sense to talk about the free market in such
circumstances. And these measures are almost certain to be followed by
more in the financial sector -- not to mention the rest of economy --
because the banks still have huge and growing losses for which they
have not accounted.
If the U.S. and other governments are to take expanded roles in the
world economy -- as they must, and will -- then the public must demand
something more than efforts to preserve the current system. The current
system brought on the financial meltdown and the worsening global
recession. As the government intervenes in the economy on behalf of the
public, it must reshape economic institutions to advance broad public
objectives, not the parochial concerns of the Wall Street and corporate
Robert Weissman is managing director of the Multinational Monitor.
Getting Wall Street Pay Reform Right
Posted by Robert Weissman on September 30th, 2008
There's mounting talk on Capitol
Hill that a Wall Street bailout will include some limits on executive
compensation, as well as contradictory reports about whether a deal on
controlling executive pay has already been reached.
Four days ago, such a move seemed very unlikely. But the pushback from
Congress -- from both Democrats and Republicans -- has been
surprisingly robust, thanks in considerable part to a surge of outrage
from the public.
Will restrictions on CEO pay just be a symbolic retribution, as some have charged?
The answer is, it depends.
Meaningful limits not just on CEO pay, but also on the Wall Street
bonus culture, could significantly affect the way the financial sector
does business. Some CEO pay proposals, by contrast, would extract a
pound of flesh from some executives but have little impact on incentive
There are at least five reasons why it is important to address executive compensation as part of the bailout legislation.
First, there should be some penalty for executives who led their
companies -- and the global financial system -- to the brink of ruin.
You shouldn't be rewarded for failure. And while reducing pay packages
to seven digits may feel really nasty given Wall Street's culture of
preposterous excess, in the real world, a couple million bucks is still
a lot of money to make in a year.
Second, if the public is going to subsidize Wall Street to the tune of
hundreds of billions of dollars, the point is to keep the financial
system going -- not to keep Wall Street going the way it was. Funneling
public funds for exorbitant executive compensation would be a criminal
appropriation of public funds.
Third, the Wall Street salary structure has helped set the standard for
CEO pay across the economy, and helped establish a culture where
executives consider outlandish pay packages the norm. This culture, in
turn, has contributed to staggering wealth and income inequality, at
great cost to the nation. We need, it might be said, an end to the
culture of hyper-wealth.
Fourth, as Dean Baker of the Center for Economic and Policy Research
says, the bailout package must be, to some extent, "punitive." If the
financial firms and their executives do not have to give something up
for the bailout, then there's no disincentive to engage in unreasonably
risky behavior in the future. This is what is meant by "moral hazard."
If Wall Street says the financial system is on the brink of collapse,
and the government must step in with what may be the biggest taxpayer
bailout in history, says Baker, then Wall Street leaders have to show
they mean it. If they are not willing to cut their pay for a few years
to a couple of million dollars an annum, how serious do they really
think the problem is?
Finally, and most importantly, financial sector compensation systems
need to be changed so they don't incentivize risky, short-term behavior.
There are two ways to think about how the financial sector let itself
develop such a huge exposure to a transparently bubble housing market.
One is that the financial wizards actually believed all the hype they
were spreading. They believed new financial instruments eliminated
risk, or spread it so effectively that downside risks were minimal; and
they believed the idea that something had fundamentally changed in the
housing market, and skyrocketing home prices would never return to
Another way to think about it is: Wall Street players knew they were
speculating in a bubble economy. But the riches to be made while the
bubble was growing were extraordinary. No one could know for sure when
the bubble would pop. And Wall Street bonuses are paid on a yearly
basis. If your firm does well, and you did well for the firm, you get
an extravagant bonus. This is not an extra few thousand dollars to buy
fancy Christmas gifts. Wall Street bonuses
can be 10 or 20 times base salary, and commonly represent as much as
four fifths of employees' pay. In this context, it makes sense to take huge risks. The payoffs from benefiting from a bubble are dramatic, and there's no reward for staying out.
Both of these explanations may be true to some degree, but the
compensation incentives explanation is almost certainly a significant
part of the story.
Different ideas about how to limit executive pay would address the
multiple rationales for compensation reforms to varying degrees.
A two-year cap on executive salaries would help achieve the first four
objectives, but by itself wouldn't get to the crucial issue of
One idea in particular to be wary of is "say on pay" proposals,
which would afford shareholders the right to a non-binding vote on CEO
pay compensation packages. These proposals would go some way to address
the disconnect between executive and shareholder interests, reducing
the ability of top executives to rely on crony boards of directors and
conflicted compensation consultants to implement outrageous pay
packages. But while they might increase executive accountability to
shareholders, they wouldn't direct executives away from market-driven
short-term decision making. Shareholders tend to be forgiving of
outlandish salaries so long as they are making money, too, and -- worse
-- they actually tend to have more of a short-term mentality than the
executives. So "say on pay" is not a good way to address the multiple
executive compensation-related goals that should be met in the bailout
The ideal provisions on executive compensation would set tough limits
on top pay, but would also insist on long-term changes in the bonus
culture for executives and traders. Not only should bonuses be more
modest, they should be linked to long-term, not year-long, performance.
That would completely change the incentive to knowingly participate in
a financial bubble (or, more generously, take on excessive risk),
because you would know that the eventual popping of the bubble would
wipe out your bonus.
Four days ago, forcing Wall Street to change its incentive structure
seemed pie in the sky. Today, thanks to the public uproar, it seems
eminently achievable -- if Members of Congress seize the opportunity.
Robert Weissman is managing director of the Multinational Monitor.
The Dangers in Outsourcing the Bailout
Posted by Philip Mattera on September 30th, 2008
Originally posted at Dirt Digger's Digest on September 23, 2008 -- A number of leading Democrats and Republicans expressed strong
misgivings last Monday about the autocratic plan for bailing out Wall
Street that Treasury Secretary Henry Paulson wants to ram through
Congress. It remains to be seen whether this is mere posturing or
Critics are focusing on vital issues such as cost and oversight, but
a lot less attention is being paid to the mechanics of Paulson’s
proposal – specifically, the question of who would carry out the
federal government’s purchase of $700 billion in “troubled” securities
from banks. As I noted in my post a week ago Sunday, the draft legislation
circulated over the weekend includes a provision that seems to allow
Treasury to contract out the process. Treasury then put out a fact sheet
making it quite clear it intends to use private asset managers to
manage and dispose of the assets it acquires, though the document does
not specifically allude to the purchasing. Paulson himself referred to the use of “professional asset managers” during an appearance on one of the Sunday morning talk shows.
It amazes me that there is not more outrage over this aspect of the
plan. Paulson seems to be leaving open the possibility that the same
firms that are being bailed out could be hired to run the bailout. This
would mean that institutions receiving a monumental giveaway of
taxpayer money could turn around and earn yet more by acting as the
government’s brokers. Aside from the unseemliness of this arrangement,
this would be an egregious conflict of interest.
The alternative proposal
floated by Senator Chris Dodd, which accepts Paulson’s language on
contracting out, includes a section on conflict of interest. But rather
than stating what the rules should be, the draft leaves it up to the
Treasury Secretary to do so. There were reports last Monday night that Treasury would go along with the inclusion of a conflict-of-interest provision.
Paulson’s approach to the Big Bailout, particularly the insistence
that there be no punitive measures for the banks, shows he is not the
right party to oversee ethical issues. Paulson apparently can’t help
himself. He still has the mindset of a man who spent more than 30 years
working on Wall Street, at Goldman Sachs. He is a living example of the
perils of the reverse revolving door: the appointment of a
private-sector figure to a key policymaking position affecting his or
her former industry.
The weak conflict-of-interest provisions Paulson is likely to impose
would probably not address the inherent contradiction in having
for-profit money managers running the bailout program. Even if Treasury
chooses managers whose firms are not getting bailed out, there is still
the danger that they will use their inside knowledge to benefit their
non-governmental clients (and themselves) or will collude with buyers
to the detriment of the public.
A Reuters story of last Monday reported that a leading contender for a federal
money management role is Laurence Fink and his firm BlackRock, which
was involved in managing the portfolio of Bear Stearns when that firm
was sold to JPMorgan Chase as part of an earlier bailout. Last March,
BlackRock, which is 49-percent owned by Merrill Lynch (now part of Bank
of America), announced
it was forming a venture to “acquire and restructure distressed
residential mortgage loans.” Will Paulson see that as a conflict of
interest – or more likely as a credential?
Letting financial firms that have profited from the mortgage crisis
manage the bailout gives the impression that we are permanently in the
grip of Big Money. To Paulson’s way of thinking, that’s not a problem,
but it could make a bad plan much worse.
Dirt Diggers Digest is written by Philip Mattera, director of the Corporate Research Project, an affiliate of Good Jobs First.
The Financial Re-Regulatory Agenda
Posted by Robert Weissman on September 23rd, 2008
As the Federal Reserve and
Treasury Department careen from one financial meltdown to another,
desperately trying to hold together the financial system -- and with
it, the U.S. and global economy -- there are few voices denying that
Wall Street has suffered from "excesses" over the past several years.
The current crisis is the culmination of a quarter century's
deregulation. Even as the Fed and Treasury scramble to contain the
damage, there must be a simultaneous effort to reconstruct a regulatory
system to prevent future disasters.
hyper-complexity of the existing financial system makes it hard to get
a handle on how to reform the financial sector. (And, by the way,
beware of generic calls for "reform" -- for Wall Street itself taken up
this banner over the past couple years. For the financial mavens,
"reform" still means removing the few regulatory and legal requirements they currently face.)
There is more urgency to such an effort than immediately apparent. If
the Fed and Treasury succeed in controlling the situation and avoiding
a collapse of the global financial system, then it is a near certainty
that Big Finance -- albeit a financial sector that will look very
different than it appeared a year ago -- will rally itself to oppose
new regulatory standards. And the longer the lag between the end (or
tailing off) of the financial crisis and the imposition of new
legislative and regulatory rules, the harder it will be to impose
meaningful rules on the financial titans.
But the complexity of the system also itself suggests the most
important reform efforts: require better disclosure about what's going
on, make it harder to engage in complicated transactions, prohibit some
financial innovations altogether, and require that financial
institutions properly fulfill their core responsibilities of providing
credit to individuals and communities.
(For more detailed discussion of these issues -- all in plain, easy-to-understand language, see these comments from Damon Silvers of the AFL-CIO, The American Prospect editor Robert Kuttner, author of the The Squandering of America and Obama's Challenge, and Richard Bookstaber, author of A Demon of Our Own Design: Markets, Hedge Funds, and the Perils of Financial Innovation.)
Here are a dozen steps to restrain and redirect Wall Street and Big Finance:
1. Expand the scope of financial regulation. Investment banks and hedge
funds have been able to escape the minimal regulatory standards imposed
on other financial institutions. Especially with the government safety
net -- including access to Federal Reserve funds -- extended beyond the
traditional banking sector, this regulatory black hole must be
2. Impose much more robust standards for disclosure and transparency.
Hedge funds, investment banks and the off-the-books affiliates of
traditional banks have engaged in complicated and intertwined
transactions, such that no one can track who owes what, to whom.
Without this transparency, it is impossible to understand what is going
on, and where intervention is necessary before things spin out of
3. Prohibit off-the-books transactions. What's the purpose of
accounting standards, or banking controls, if you can evade them by
simply by creating off-the-books entities?
4. Impose regulatory standards to limit the use of leverage (borrowed
money) in investments. High flyers like leveraged investments because
they offer the possibility of very high returns. But they also enable
extremely risky investments -- since they can vastly exceed an
investor's actual assets -- that can threaten not just the investor
but, if replicated sufficiently, the entire financial system.
5. Prohibit entire categories of exotic new financial instruments.
So-called financial "innovation" has vastly outstripped the ability of
regulators or even market participants to track what is going on, let
alone control it. Internal company controls routinely fail to take into
account the possibility of overall system failure -- i.e., that other
firms will suffer the same worst case scenario -- and thus do not
recognize the extent of the risks inherent in new instruments.
6. Subject commodities trading to much more extensive regulation.
Commodities trading has become progressively deregulated. As
speculators have flooded into the commodities markets, the trading
markets have become increasingly divorced from the movement of actual
commodities, and from their proper role in helping farmers and other
commodities producers hedge against future price fluctuations.
7. Tax rules should be changed so as to remove the benefits to
corporate reliance on debt. "Payments on corporate debt are tax
deductible, whereas payments to equity are not," explains Damon Silvers
of the AFL-CIO. "This means that, once you take the tax effect into
account, any given company can support much more debt than it can
equity." This tax arrangement has fueled the growth of private equity
firms that rely on borrowed money to buy corporations. Many are now
8. Impose a financial transactions tax.
A small financial transactions tax would curb the turbulence in the
markets, and, generally, slow things down. It would give real-economy
businesses more space to operate without worrying about how today's
decisions will affect their stock price tomorrow, or the next hour. And
it would be a steeply progressive tax that could raise substantial sums
for useful public purposes.
9. Impose restraints on executive and top-level compensation. The top
pay for financial impresarios is more than obscene. Executive pay and
bonus schedules tied to short-term performance played an important role in driving the worst abuses on Wall Street.
10. Revive competition policy. The repeal of the Glass-Steagall Act,
separating traditional banks from investment banks, was the culmination
of a progressive deregulation of the banking sector. In the current
environment, banks are gobbling up the investment banks. But this
arrangement is paving the way for future problems. When the investment
banks return to high-risk activity at scale (and over time they will,
unless prohibited by regulators), they will directly endanger the banks
of which they are a part. Meanwhile, further financial conglomeration
worsens the "too big to fail" problem -- with the possible failure of
the largest institutions viewed as too dangerous to the financial
system to be tolerated -- that Treasury Secretary Hank Paulson cannot
now avoid despite his best efforts. In this time of crisis, it may not
be obvious how to respect and extend competition principles. But it is
a safe bet that concentration and conglomeration will pose new problems
in the future.
11. Adopt a financial consumer protection agenda that cracks down on abusive lending practices.
Macroeconomic conditions made banks interested in predatory subprime
loans, but it was regulatory failures that permitted them to occur. And
it's not just mortgage and home equity loans. Credit card and student
loan companies have engaged in very similar practices -- pushing
unsustainable debt on unreasonable terms, with crushing effect on
individuals, and ticking timebomb effects on lenders.
12. Support governmental, nonprofit, and community institutions to
provide basic financial services. The effective governmental takeover
of Fannie Mae, Freddie Mac and AIG means the U.S. government is going
to have a massive, direct stake in the global financial system for some
time to come. What needs to be emphasized as a policy measure, though,
is a back-to-basics approach. There is a role for the government in
helping families get mortgages on reasonable terms, and it should make
sure Fannie and Freddie, and other agencies, serve this function.
Government student loan services offer a much better deal than private
lender alternatives. Credit unions can deliver the basic banking
services that people need, but they need back-up institutional support
to spread and flourish.
What is needed, in short, is to reverse the financial deregulatory wave
of the last quarter century. As Big Finance mutated and escaped from
the modest public controls to which it had been subjected, it demanded
that the economy serve the financial sector. Now it's time to make sure
the equation is reversed.
Robert Weissman is managing director of the Multinational Monitor.
The SEC’s Risky New IDEA
Posted by Philip Mattera on September 3rd, 2008
When you go to the Securities and Exchange Commission website these days, the first thing you see is an animation that looks like something out of The Matrix films or the TV show Numb3rs.
It seems the agency’s accountants and lawyers are trying to look cool
as they move toward the creation of a new system for distributing
public-company financial information on the web.
Recently SEC Chairman Christopher Cox (photo) unveiled
Interactive Data Electronic Applications (IDEA, for short), the
successor to the EDGAR system that corporate researchers have relied on
since the mid-1990s for easy access to 10-Ks, proxy statements and the
like. The big selling point of IDEA is tagging. Companies (and mutual
funds) will be required to prepare their filings so that key pieces of
information are electronically labeled—using a system called XBRL—and
thus can be easily retrieved and compared to corresponding data from
other companies. The first interactive filings are expected to be
available through IDEA late this year. EDGAR will stick around
indefinitely as an archive for pre-interactive filings.
“With IDEA,” the SEC press release
gushes, “investors will be able to instantly collate information from
thousands of companies and forms, and create reports and analysis on
the fly, in any way they choose.”
I just finished watching the webcast
of Cox’s press conference earlier this week and came away with mixed
feelings about IDEA. In one respect, it will be great to be able to
readily extract specific nuggets of information. My concern is the
emphasis being placed on disclosure as simply a collection of pieces of
data. This may serve the needs of financial analysts and investors, but
as a corporate researcher, I find that some of the most valuable
portions of SEC filings are narratives rather than
numbers—for example, the descriptions of a company’s operations, its
competitive position and its legal problems that appear in 10-Ks.
As Cox finally mentioned about an hour into the press conference,
tagging can be applied to text as well as numbers. Yet I can’t help
worry that the direction the SEC is going in will tend to reduce
narratives to bite-size portions that serve to diminish the full scope
of disclosure. It was not comforting to hear William Lutz, the outside
academic who is advising the SEC on a complete overhaul
of its entire disclosure system, suggest during the press conference
that the forms (10-K, 10-Q, etc.) companies are currently required to
file will be phased out. Perhaps it was unintentional, but the
impression Lutz and Cox gave is that future disclosure will be mainly
This shift in focus from text to numbers would, I believe, increase
the risk that company reporting on social and environmental matters,
already inadequate, will be scaled back. That may not mean much for
short-sighted investors, but it would be a major setback for corporate
Dirt Diggers Digest is written by Philip Mattera, director of the Corporate Research Project, an affiliate of Good Jobs First.
Giant Mining Firm’s Social Responsibility Claims: Rhetoric or Reality?
Posted by Philip Mattera on August 1st, 2008
The recent decision by the U.S. Supreme Court to slash the damage
award in the Exxon Valdez oil spill case and the indictment of Sen. Ted
Stevens on corruption charges are not the only controversies roiling
Alaska these days. The Last Frontier is also witnessing a dispute over
a proposal to open a giant copper and gold mine by Bristol Bay, the
headwaters of the world’s largest wild sockeye salmon fishery. Given
the popularity of salmon among the health-conscious, even non-Alaskans
may want to pay attention to the issue.
The Pebble mine project
has been developed by Vancouver-based Northern Dynasty Ltd., but the
real work would be carried out by its joint venture partner Anglo
American PLC, one of the world’s largest mining companies. Concerned
about the project and unfamiliar with Anglo American, two Alaska
organizations—the Renewable Resources Coalition
and Nunamta Aulukestai (Caretakers of the Land)—commissioned a
background report on the company, which has just been released and is
available for download on a website called Eye on Pebble Mine (or at this direct PDF link). I wrote the report as a freelance project.
Anglo American—which is best known as the company that long
dominated gold mining in apartheid South Africa as well as diamond
mining/marketing through its affiliate DeBeers—has assured Alaskans it
will take care to protect the environment and otherwise act responsibly
in the course of constructing and operating the Pebble mine. The
purpose of the report is to put that promise in the context of the
company’s track record in mining operations elsewhere in the world.
The report concludes that Alaskans have reason to be concerned about
Anglo American. Reviewing the company’s own worldwide operations and
those of its spinoff AngloGold in the sectors most relevant to the
Pebble project—gold, base metals and platinum—the report finds a
troubling series of problems in three areas: adverse environmental
impacts, allegations of human rights abuses and a high level of
workplace accidents and fatalities.
The environmental problems include numerous spills and accidental
discharges at Anglo American’s platinum operations in South Africa and
AngloGold’s mines in Ghana. Waterway degradation occurred at Anglo
American’s Lisheen lead and zinc mine in Ireland, while children living
near the company’s Black Mountain zinc/lead/copper mine in South Africa
were found to be struggling in school because of elevated levels of
lead in their blood.
The main human rights controversies have taken place in Ghana, where
subsistence farmers have been displaced by AngloGold’s operations and
have not been given new land, and in the Limpopo area of South Africa,
where villagers were similarly displaced by Anglo American’s platinum
High levels of fatalities in the mines of Anglo American and
AngloGold—more than 200 in the last five years—have become a major
scandal in South Africa, where miners staged a national strike over the
issue late last year.
Overall, the report finds that Anglo American’s claims of social
responsibility appear to be more rhetoric than reality. Salmon eaters
Dirt Diggers Digest is written by Philip Mattera, director of the Corporate Research Project, an affiliate of Good Jobs First.
An Afternoon with L-3 Communications/Titan
Posted by Tonya Hennessey on April 30th, 2008
A funny thing happened on the way to exercising my presumed right, as a shareholder, to attend yesterday’s annual shareholder meeting
of private military contractor
L-3 Communications, held at the Ritz-Carlton Hotel in
Manhattan’s financial district.
I was one of a group including a translator, Marwan Mawiri, who worked for
a year and ½ for Titan, now an L-3 subsidiary, in
Iraq. Marwan has witnessed first-hand numerous problems with the way
interrogation and translation contracting is being handled in Iraq – a
practice that may be putting at substantial risk the national security and
lives of the Iraqi people, of U.S. and multinational troops, officials
and contractors, and of the United States itself.
The problem is clear: inadequate and downright bad vetting and hiring practices for analysts, interrogators and linguists. Indeed, the U.S. military has recently cancelled Titan’s translation contract due to poor practices along with waste, fraud and abuse.
What is also crystal clear is that the war in Iraq can neither be won,
effectively prosecuted, nor competently withdrawn from until these
problems are solved and until proper oversight is in place.
If people hired to translate in critical battlefield and other situations
are not even fluent in at least Arabic and English; if screeners
monitoring the entry and exit of people to U.S. military bases at times
have no more qualification and training than having been a baggage
screener at a U.S. airline (see CorpWatch’s new report [note: updated December 2008] "Outsourcing Intelligence in Iraq":); if
interrogators are not qualified, experienced and trained to the highest
standards possible, how can we ensure that we avoid future travesties due
to bad intelligence? Such as the bad intelligence around the supposed
Iraqi weapons of mass destruction program (which was, of course, Bush/Cheney and neocon-driven, not L-3-driven), that got the U.S. into this war
in the first place? (And remember, even when U.S. soldiers start coming
home from Iraq, large numbers of private contractors will stay, making proper
oversight all the more crucial.)
It turned out that L-3’s management wasn’t so happy to see us, and that my co-worker, Pratap Chatterjee and I, were supposed to have received a
certain admission ticket to attend the meeting. The same went for our companions from the Iraq Campaign 2008 – a major coalition to oppose the war, which is now taking on private military contractors as part of their broader campaign on the high cost U.S. taxpayers are paying for the war in Iraq – and Foreign Policy in Focus, who were holding proxies. Funny that.
Looking out at the Statue of Liberty from the hotel lobby downstairs, where we gathered to figure out how to proceed, I pondered the damage this
war has done to the liberties of so many Iraqi people, and to so many
U.S. liberties and values that I hold dear. Like respect for human
rights, compliance with the Geneva Conventions around torture, appropriate
security that is handled with skill and integrity. I wasn’t surprised that
L-3/Titan didn’t want to hear our message; though I sincerely hope some of the shareholders, managers, directors, staff and financial analysts do
take the time to read our report and to talk to current and former contractors like Marwan. We didn’t go in malice.
We went in genuine concern over business operations that, while they may
be earning a pretty profit for large shareholders, pose a genuine
reputational risk to the company for future liability. And are causing harm on the ground, to real people. We challenge L-3 Communications
to become a truly ethical leader in business
practices, not just in products and sales. Surely the sixth-largest U.S. defense industry company (according to their website) has the intelligence to recognize bad
practices and the ability to change them for the better.
Or are we simply destined for years more, as Huffington Post blogger
Charlie Cray put it, of companies and investors milking a “Baghdad Bubble
as a result of the Bush administration's refusal to hold them accountable”?
As the meeting ended, and the muckety-mucks began leaving the Ritz-Carlton
to be chauffered away in their Lincoln Town cars and limousines, we gave
these decision makers another opportunity to take a copy of CorpWatch’s
report, or even to talk to us directly. The vast majority kept their
blinders on and marched resolutely past.
Suddenly we saw General Carl Vuono
(ret.). Vuono is former chief of staff of the U.S. Army, and long-time president of private military
consulting firm MPRI, which is now
also an L-3 subsidiary. Pratap and Marwan rushed to try and speak with him, while a reporter and cameraman from Al-Jazeera English filmed and stood at the ready for the general’s reply. The general didn’t want to
talk, but you can see some of the footage on YouTube. You can also watch Pratap and Marwan describe their experiences on Democracy Now!, where they were interviewed live this morning.
Pratap gave the general a copy of “Outsourcing Intelligence In Iraq” – maybe
he’ll decide to have one of his staffers give it a read. We’d love to
talk, and welcome any dialogue with officials of L-3.
Paulson Blueprint Promotes Insurance Industry Shell Game
Posted by Philip Mattera on April 5th, 2008
There’s something peculiar in the report on
financial market regulation issued March 31 by Treasury Secretary Henry
Paulson. The plan, touted by some as a bold expansion of federal
control over capital markets and dismissed by others as a mere
rearranging of the deck chairs on the financial Titanic, includes an
incongruous section on the insurance industry.
While insurance is a financial service, it hasn’t been at the center
of the implosion of the housing market or (aside from the bond
insurance crisis) linked to the instability on Wall Street. The Paulson
plan, nonetheless, provides a resounding endorsement of a “reform” that
key players in the insurance industry have been seeking for at least 15
years—allowing large national carriers to do an end run around the
current state-based insurance regulatory system. Such carriers would be
permitted to adopt an “optional federal charter” and thereby put
themselves under the supervision of a federal regulatory agency that
does not yet exist.
Big Insurance has not sought federal oversight because it wants more regulation.
After all, this is the industry that pioneered offshoring when some
carriers moved their official headquarters to tax havens such as
Bermuda. While it is true that many state regulators have been
toothless watchdogs, other states have been aggressive in protecting
the interests of policy holders and the public.
In fact, the Paulson proposal comes just a couple of weeks after
insurers were celebrating the downfall of New York Gov. Eliot Spitzer
in a prostitution scandal. During his time as New York’s attorney
general, Spitzer pursued major insurance companies such as Marsh &
McLennan and American International Group for offenses such as bid
rigging. Marsh ended up settling for $850 million in 2005, and AIG paid
a whopping $1.6 billion the following year. While it is true that
Spitzer went after the industry as a prosecutor rather than a
regulator, he did so in the overall context of state oversight.
The insurance industry swears that it supports the optional federal
charter in the name of modernization (as does the Paulson report), but
it is significant that the reform has been supported by groups such as
the Competitive Enterprise Institute and the American Enterprise Institute that
are no friends of regulation (some Democrats in Congress are also in
favor). When word of Paulson’s insurance proposal leaked out over the
weekend, the American Insurance Association rushed out a press release
hailing it, saying that the optional federal charter “will be more
efficient, effective and rational given the ‘increasing tension’ a
state-based regulatory system creates.”Throughout its history, the insurance industry has avoided “tension”
by trying to minimize government interference in its affairs. In 1945
the industry supported the McCarran-Ferguson Act, which responded to a
Supreme Court ruling by affirming the regulatory role of the states. In
recent times, the industry has wanted the option of federal oversight
on the assumption that it would be less onerous. I’ll let the legal
scholars decide whether state or federal regulation is inherently more
appropriate. The issue is whether an industry not known for generous
treatment of its customers (think of Katrina victims denied coverage)
is going to be subjected to some strict oversight somewhere.
Dirt Diggers Digest is written by Philip Mattera, director of the Corporate Research Project, an affiliate of Good Jobs First.
The New Business Watergate: Prosecution of International Corporate Bribery is on the Rise
Posted by Philip Mattera on December 18th, 2007
Philip Mattera is director of The Corporate Research Project,
an affiliate of Good Jobs First. The Project is a non-profit center that assists
community, environmental and labor organizations in researching and
analyzing companies and industries. Philip is also author of The Corporate Research E-Letter, and this blog is a re-posting of the November-December 2007 edition.
Chevron has recently been spending heavily on a public relations campaign titled “the Power of Human Energy” to depict itself as a leader in environmental and social responsibility. This image-burnishing effort faced a setback last month when the company was forced to pay $30 million to settle federal charges that it made illegal kickback payments to prewar Iraq in connection with crude oil purchases under the United Nations Oil-for-Food Program.
Chevron is just one of dozens of corporations that have been caught up in a move by the Securities and Exchange Commission and the Department of Justice to step up enforcement of a law prohibiting overseas bribery by U.S.-based corporations. The law—the Foreign Corrupt Practices Act or FCPA—can also be applied to foreign companies with a substantial presence in the United States. There have been reports that electronic and engineering giant Siemens, which recently paid a fine of around $300 million in a global bribery investigation by a German court, may soon be hit with FCPA charges as well.
The rise in FCPA enforcement emerged just as the prosecution of the wave of accounting scandals starting with Enron was winding down. In fact, the limited reforms enacted in response to those scandals—especially the Sarbanes-Oxley Act—have helped bring to light much of the information on which the recent FCPA cases are based. Business apologists who hoped that the public was forgetting about corporate crime now have to deal with new reminders of the sleazy aspects of commerce.
THE “BUSINESS WATERGATE”
It is often forgotten that the Watergate scandal of the 1970s was not only about the misdeeds of the Nixon Administration. Investigations by the Senate and the Watergate Special Prosecutor forced companies such as 3M, American Airlines and Goodyear Tire & Rubber to admit that they or their executives had made illegal contributions to the infamous Committee to Re-Elect the President.
Subsequent inquiries into illegal payments of all kinds led to revelations that companies such as Lockheed, Northrop and Gulf Oil had engaged in widespread foreign bribery. Under pressure from the SEC, more than 150 publicly traded companies admitted that they had been involved in questionable overseas payments or outright bribes to obtain contracts from foreign governments. A 1976 tally by the Council on Economic Priorities found that more than $300 million in such payments had been disclosed in what some were calling “the Business Watergate.”
While some observers insisted that a certain amount of baksheesh was necessary to making deals in many parts of the world, Congress responded to the revelations by enacting the FCPA in late 1977. For the first time, bribery of foreign government officials was a criminal offense under U.S. law, with fines up to $1 million and prison sentences of up to five years.
The ink was barely dry on the FCPA when U.S. corporations began to complain that it was putting them at a competitive disadvantage. The Carter Administration’s Justice Department responded by signaling that it would not be enforcing the FCPA too vigorously. That was one Carter policy that the Reagan Administration was willing to adopt. In fact, Reagan’s trade representative Bill Brock led an effort to get Congress to weaken the law, but the initiative failed.
The Clinton Administration took a different approach—trying to get other countries to adopt rules similar to the FCPA. In 1997 the industrial countries belonging to the Organization for Economic Cooperation and Development reached agreement on an anti-bribery convention. In subsequent years, the number of FCPA cases remained at a miniscule level—only a handful a year. Optimists were claiming this was because the law was having a remarkable deterrent effect. Skeptics said that companies were being more careful to conceal their bribes, and prosecutors were focused elsewhere.
Any illusion that commercial bribery was a rarity was dispelled in 2005, when former Federal Reserve Chairman Paul Volcker released the final results of the investigation he had been asked to conduct of the Oil-for-Food Program. Volcker’s group found that more than half of the 4,500 companies participating in the program—which was supposed to ease the impact of Western sanctions on Iraq—had paid illegal surcharges and kickbacks to the government of Saddam Hussein. Among those companies were Siemens, DaimlerChrysler and the French bank BNP Paribas.
THE REBIRTH OF FCPA PROSECUTIONS
The Volcker investigation, the OECD convention, the Sarbanes-Oxley law and other factors together breathed new life into FCPA enforcement. Stricter internal controls mandated by Sarbanes-Oxley have made it more difficult for improper payments to be concealed, prompting numerous companies to self-report FCPA violations in the hope of receiving more lenient treatment.
In 2005 the number of FCPA prosecutions started to pick up and reached double digits the following year. This year the number of investigations has reportedly been in the dozens, and the resolved cases have gained higher visibility. Among these have been the following:
* Three subsidiaries of British oil services company Vetco International pleaded guilty to FCPA violations in Nigeria and agreed to pay a total of $26 million in criminal fines. This was the largest criminal penalty the Justice Department had ever obtained in an FCPA case.
* Oil & gas distributor El Paso Corporation settled FCPA charges in connection with the Oil-for-Food Program and agreed to disgorge $5.5 million in profits and pay a civil penalty of $2.2 million.
* Dow Chemical paid a $325,000 civil penalty to settle FCPA charges relating to improper payments made by an Indian subsidiary in the late 1990s.
* A subsidiary of oil services company Baker Hughes pleaded guilty to FCPA charges involving bribery in Kazakhstan and paid a criminal fine of $11 million. In related SEC charges, Baker Hughes agreed to pay more than $44 million in criminal fines, civil penalties and disgorgement of profits. This became the new record for FCPA-related penalties.
* Textron Inc. paid more than $3.5 million to settle FCPA charges relating to kickback payments made by a subsidiary to obtain contracts for the sale of humanitarian goods to Iraq under the Oil-for-Food Program.
* Industrial equipment company Ingersoll-Rand agreed to pay more than $4.2 million to settle FCPA charges that four of its subsidiaries made kickback payments in connection with the Oil-for-Food Program sale of humanitarian goods.
FOREIGN COMPANIES IN THE FCPA NET
While the recent rash of FCPA cases has drawn little attention in the United States, the Siemens case has generated a major scandal in Europe. Last year, more than 200 police officers participated in a raid of company offices and homes of managers. Prosecutors in Italy and Switzerland joined in the investigation, which focused on suspicious transactions at the company’s telecommunications equipment unit reportedly totaling more than $2 billion.
The outcry over the bribery charges (and separate controversies over matters such as price-fixing) forced both the chief executive of Siemens and the chairman of its supervisory board to announce their resignation. In October the company agreed to a $300 million fine, hoping that the controversy would die down. But in November the Wall Street Journal gained access to the unpublished court ruling in the case, which provided embarrassing details about the payment of bribes in Nigeria, Libya and Russia. Subsequently, Business Week Online reported that FCPA charges in the United States could generate penalties for Siemens much harsher than what it experienced at home.
Siemens is not the only European company whose bribery problems are becoming an issue in the United States. Earlier this year there were reports that U.S. prosecutors have been investigating improper payments by major military contractor BAE Systems (formerly British Aerospace), including some reportedly involving Prince Bandar bin Sultan, former Saudi ambassador to the United States and a close ally of the Bush Administration, as well as other members of the Saudi royal family.
A quarter century after the Watergate investigation revealed a culture of corruption in the foreign dealings of major corporations, the new wave of FCPA prosecutions suggests that little has changed. There is one difference, however. Whereas the bribery revelations of the 1970s elicited a public outcry, the recent cases have generated little comment in the United States. Companies like Chevron pay their fine and go right on using their ad campaigns to present themselves as paragons of virtue. It took years for the reputation of Richard Nixon to recover from the taint of Watergate in the eyes of mainstream observers. Corporate America seems to be able to purchase instantaneous redemption.
Global Accounting Standards
Posted by Pratap Chatterjee on October 18th, 2007
The world of global accounting is girding up for a trans-Atlantic battle. Last month L'Oreal, Royal Dutch Shell, and Unilever, all gigantic companies, asked the U.S. Securities and Exchange Commission (SEC) to allow them to choose which accounting standards they want to use. (The companies belong to the European Association of Listed Companies, who delivered the letter.)
The reason is that U.S. Generally Accepted Accounting Principles (GAAP) is 25,000 pages long (which are based on very specific rules) and they don't like it. By comparison, the International Financial Reporting Standards (IFRS), is just one tenth the length (which are based on principles which can be more open to interpretation).
There are other good arguments for using the global rules - there are now more than 100 countries either using or adopting international financial reporting standards, or IFRS, including the members of the European Union, China, India and Canada.
But L'Oreal, Royal Dutch Shell, and Unilever, don't just want the easier rules, they want to choose which version of IFRS they can use - a European Commission version that allows them to choose how they value certain assets.
Financial Week, an industry magazine, in New York is up in arms.
" Imagine signing a contract and not having to hold up your end of the bargain. Or being able to say "I do" at the altar when you might sometimes mean "I don't." Having it both ways in such matters sure provides flexibility, to put it charitably. Yet that's exactly what a group of European companies want when it comes to accounting standards for global companies tapping the U.S. capital markets," editors of Financial Week, wrote earlier this month. (see "Converging on Chaos")
Another industry magazine, Accountancy Age in London, has also been critical of companies that use the more flexible European Commission rules. A couple of years ago, Taking Stock, the magazine's blog, asked Rudy Markham, the finance director of Unilver, why he was using flexible IFRS rules in reporting for the company, but he refused to comment, leading them to poke fun at him:
" TS understands that the biggest accounting change for a generation can be a complete turn off. We assume the numbers involved didn't mean that much to Markham anyway - a billion off the top line there, a billion on the bottom line there. He did, after all, personally take home just over £1.1 million last year. Money, money, money, as Abba used to sing... "
The good news is that the U.S. which has long insisted on using its own complex rules, may be open to using the global standard. SEC chairman Christopher Cox has agreed to allow U.S. companies to use the IFRS but has cautioned against local versions of the rules, like the European Union version. Financial Accounting Standards Board chairman Robert Herz has also said that this is a bad idea.
Today the International Accounting Standard Board, which drew up the IFRS, appointed a new chairman, Gerrit Zalm, a former Dutch finance minister, who has already announced that he would try to prevent local variations of the global rules: "One of my first priorities will be no new carve-outs in Europe and trying to get rid of the existing carve-out, because if Europe is doing this, other countries could get the same inspiration and then all the advantages of the one programme fade away," Zalm told the Financial Times. "The fragmentation of standards is costly for the enterprise sector and it doesn't help in creating clarity for investors."
We look forward to his efforts to create a single global standard. Stronger global rules are always welcome, especially if they are easier to follow, but weaker ones that cater to nationalistic interests are not.
Accounting for Errant Auditors
Posted by Pratap Chatterjee on September 14th, 2007
The U.S. Securities and Exchange Commission (SEC) brought charges against 69 accountants for failing to register with the Public Company Accounting Board (PCAB) earlier this week. This somewhat obscure action is the latest ripple in the wave of crackdowns that followed the Enron accounting scandals in 2001 -- to break up the all too cozy relationship between auditors and the multinationals that they are supposed to be policing.
Governments allow companies to close their financial books at the end of the fiscal year, if a qualified accountant has signed off on it. The problem is that both the companies and the auditors are private entities whose ultimate motive is to make a profit, so there is potential for one or both of the two not to report any cooking of the books, unless they know that a regulator might catch them and discipline them. And in the last two decades, as favored accountants have been rewarded with multi-million dollar non auditing consulting gigs (such as tax planning or management consulting), the worry was that they were looking the other way in order to win more business.
Following the Enron scandal, which showed that Arthur Andersen, the company's auditor, had failed in its public duty, the U.S. Congress passed the Sarbanes-Oxley law in 2002 that replaced the accounting industry's own regulators with the Public Company Accounting Board with subpoena and disciplinary powers. Auditors are supposed to register with the board, but clearly not everyone took this seriously.
The SEC's enforcement director, Linda Chatman Thomsen, said that Thursday's action showed that the agency "is committed to ensuring compliance with the regulatory framework Congress established for auditors of public companies." A total of 50 of the errant accountants settled the charges with the federal agency the very same day.
This action is an important warning shot across the bows to let the auditors know that the SEC is checking up on them. But the jury is still out as to whether the SEC will go one step further and prosecute auditors who fail to report companies that are cooking their books.
In related news, a new study from the University of Nebraska suggests the whistle-blowers who report violations of the Sarbanes-Oxley Act to agencies like the PCAB are not properly protected. The study looked at 700 cases where employees experienced retaliation from companies for whistle-blowing and found that a mere 3.6 per cent of cases were won by employees.
Richard Moberly, the study's author, argues the findings "challenge the hope of scholars and whistle-blower advocates that Sarbanes-Oxley's legal boundaries and burden of proof would often result in favourable outcomes for whistle-blowers."
The Financial Times reports that Louis Clark, president of the Government Accountability Project, a non-profit organization that lobbies for whistle-blowers, calls the law "a disaster." Jason Zuckerman, a lawyer at the Employment Law Group, a law firm that represents Sarbanes-Oxley whistle-blowers, says: "Part of the problem is that investigators misunderstand the relevant legal standards and believe that a complainant must have a smoking gun -- that is, unequivocal evidence proving retaliation."
The debate is still on
over whether Sarbanes-Oxley is effective five years after the law was
passed, although all appear to agree it was a step in the right
direction. The proof of the pudding, they say, will be in the eating,
so we eagerly await the day that SEC puts errant accountants behind
Remembering Oil Spills, Old and New
Posted by Sakura Saunders on February 13th, 2007
The week opened with the start of a four month trial against France's oil giant, Total, by groups like Friends of the Earth France.
The Paris tribunal will examine the 1999 Erika tanker disaster that poured 20,000 tonnes of oil into the sea, polluted 250 miles of coastline and caused $1.3 billion in damage. At least 150,000 seabirds were found dead on the coast and up to 10 times as many were probably lost in the oil-blackened seas. Observers say this may also turn into a trial of the "globalized" international shipping system as the Erika was crewed by Indians, sailing under a Maltese flag, chartered by a shipping company registered in the Bahamas for a French oil company.
Meanwhile, a lawsuit between the state of New York against Exxon and four other companies has recently been announced. This suit addresses an oil spill from the 1950's that was several times the size of the Exxon Valdez oil leak in Alaska, but lay undiscovered until 1978. According to New York state attorney Andrew Cuomo, Exxon has been slow to clean up, with an estimated eight million gallons of oil and petroleum byproducts still underground and toxic vapors from the ground threatening neighborhood health.
A Bloomberg article quotes local residents:
"There are people who live above this that still don't know about it,'' said Basil Seggos, chief investigator for Riverkeeper, an environmental group that sued in 2004 to try to force Exxon Mobil to clean up the creek. Others in Greenpoint have become spill experts, according to Seggos, and they say the fumes that rise from basements and sewers are especially bad when the barometer drops before a storm. "The locals tell you they know when it's going to rain because they can smell the oil.''
In other oil spill news, Lagos' Vanguard newspaper reported today that ten Ijaw communities had been displaced and 500 made homeless by a Chevron Nigeria oil spill.
The report quotes Gbabor Okrika, the councilor representing the affected communities:
"Chevron is not bothered about the health of the people they are only concerned about their operations and they have now started a process that can only divide the people and create further division among them."
Also, last month's massive leak in the Chad Cameroon Pipeline caused a storm of criticism regarding the environmental safety of this project. This Exxon-managed pipeline extends from landlocked Chad through Cameroon and extends 11 kilometers off the coast into the Atlantic. This project, which is overseen by the World Bank, has already received much criticism due to money from this project fueling conflict in Chad.
IRIN News quoted Kribi Mayor Gregoire Mba Mba:
"Our town lives on fishing and tourism. If more incidents like this or worse occur it is the economic future of the town that is threatened."
Environmental groups are warning that a similar spill could happen in the Baku-Ceyhan pipeline operated by BP that transports crude 1750 kilometers from the Caspian to the Mediterranean Sea. On Monday, a coalition of Azeri, British and US watchdog groups leaked a report from the U.S. Overseas Private Investment Corporation, which says that cracks and leakages in the coating of the pipeline will need to be monitored closely.