Thursday, September 18, 2008

Lehman Brothers, Merrill Lynch, AIG - what might it all mean?

Markets are unforgiving; they expose truth and drive out chaff. As the Tao Te Ching says of Heaven itself, markets “treat all things as straw dogs”. They have no emotions, shedding no tears for losers and taking no pride in winners, for today’s winner may be tomorrow’s loser. And, markets refuse to subsidize idealisms.

Over time, free markets reject fraud, abandon products that have no sound purpose or accommodating price, and undermine false or misleading valuations.

That Bear Sterns with balance sheet assets worth $80 pre share was sold for $2 and then for $10 per share, that Lehman Brothers with billions in assets nonetheless went bankrupt, wiping out owner’s equity, and that Enron as an enterprise was gone within months of revelation regarding its true debt obligations and real income flows, testify to the cruel discipline of markets at work.

True, markets create liquidity and asset bubbles; but then they turn and destroy them if they are bubbles. Bubbles can’t last forever. Only well-supported valuations are sustainable.

It is better, I think, to say that market makers create bubbles and also that market makers break bubbles. Perhaps market makers are more irresponsible in making than in breaking bubbles for the breaking can only occur if bubbles have been created. And, the breaking gets us back closer to the reality of sustainable values, a salutary step towards truth.

But, in the breaking of bubbles, people get hurt as we see happen all around us in the continued destruction of wealth and value flowing from the subprime mortgage/CDO/credit default swap bubble and bust of the past 5 years.

The teaching of market makers when they lose faith in valuations and so refuse to buy more at that price, or sell to unload risk, or suddenly refuse to extend credit or guarantee an obligation, is that the valuations at play in the market have become unreliable. Prices will thereafter drop until valuations become more acceptable.

The bubble stretches credulity about valuations (“irrational exuberance” some call it) until confidence is lost and the search for “quality” and security begins.

So, in some sense the current crisis of American financial institutions is necessary and just. It is correcting a past injustice. Only, the pain of correction does not fall fairly on those who made the mistakes in the first place. They have most likely taken the money and run.

Prices go down, wealth is un-created, and the economy contracts. People lose jobs; families suffer.

The lesson of this current financial retraction is perhaps keener still. It may be telling us that the share of global cash flows appropriated by the financial services industry in general was excessive and unsustainable.

The value of the mortgage brokers, the investment banks, insurance companies like AIG, depended on their making hay while the cash was flowing. High fees, charges for all kinds of intermediation, huge bonuses, were converted into capital values. But such substantial and systematic extraction of commissions from the economy could not last if the financial intermediaries collectively were not providing real value-added to investors and players in the real economy.

And, perhaps the failed Wall Street intermediaries were not contributing enough to justify their returns. So, losing them – in the long run – is just treating them like “straw dogs” - useless playthings that will burn and disappear.

Some coldness is required to let companies and their fortunes decline and fade away as casualties of poor risk management and imprudent forethought.

Over time, market makers turn to second thoughts about values, then to third thoughts, and then to an endless series of different thoughts. It takes real worth to survive all these market-maker changes of attitude and desire more or less intact as Goldman Sachs and Morgan Stanley seemed to have done. Though they too were shopping themselves to avoid liquidation and loss of equity for their owners.

But the un-creation of value is not what we want from free markets and capitalism. We should hold the system and its leaders to the powerful capitalist standard of wealth creation on a grand scale so that the positive synergies of investment and production will flow throughout the economy improving lives for all.

The first Principle of the Caux Round Table Principles for Business sets this standard:
the purpose of a business is to create wealth, not destroy it. Other CRT Principles and stakeholder considerations add ethical obligations to the manner in which such wealth is to be created and its benefits distributed.

I would assert that the titans of financial intermediation which took the lead in building the investment bubble in subprime mortgages and subordinate contracts did not live up to this CRT ethical principle. Had they done so, the bubble would have been smaller and so its bursting would have caused less harm to society and far fewer financial losses to investors and owners.

If the CRT Principles for Business are to be assiduously implemented, there should be no bubbles at all – not ever - just a sustainable rise in valuations as a rising tide floats all boats. Such a sustainable rise would rest on sound, real value-adding, business activities of tangible, non-illusory benefit to stakeholders.

Tuesday, September 16, 2008

Catholic and Muslim Moral Commonalities

How infrequently it seems that people find common ground across lines of religion, race and ethnicity. What do you suppose drives members of our species to accentuate the differences? To build walls and fight off whoever is on the “other side”.

Is this a recessive trait of primitive tribalism where the other is presumed to be taboo and a threat to our totems and our ancestors?

Even in the 21st century the fault lines within humanity are many and active: Tibet and China, Israel and Palestine, Christian and Muslim, Sunni and Shi’a, Basques and Spaniards. In the United States we have cultural trench warfare between the Blue states and the Red states. Muslim immigrants in France, many excellent speakers of French, don’t feel welcome in the land of liberty, equality and fraternity. Barach Obama’s candidacy for president in the United States only highlights the pervasive power of racism there for over 200 years. Jesus had a parable about the “good” Samaritan to set before us the issue of who deserves honor is it group loyalty or individual character?

We give privileges and rights to those we like and trust, mostly people who are like us. Modern jurisprudence gave us the concept and status of “citizen” where all who lived under a common sovereign authority were considered equal and the principle of non-discrimination would apply across the board.

Now we really can’t homogenize all humanity’s different value patterns, cultures, foods, styles of dress, modes of music, languages, senses of humor. And we shouldn’t. That would be discrimination and degradation of what is precious in individual lives. Our identities as persons are bound up in our ties to small communities of kin, religion, region, clan, trade, avocation, or what-have-you.

So how can we square the circle? How do we get to non-invidious discrimination? Can we live in paradox where differences abound but, at the same time, they aren’t really so serious as grounds for fear, suspicion, rejection, alienation, prejudice, or subordination?

Isn’t it a mark of the mature human person that wisdom and good sense prevail over thoughtless stereo-typing and self-referential standards of right and wrong?

I always like a plea of Oliver Cromwell when faced with a contumacious parliament. He exploded: “Gentlemen, I beseech thee; in the bowels of Christ, consider that ye may be mistaken.”

An admirable trait taught by so many religions is self-command and humility. Religion, which ties us to that which is more important than our own daily passions, irritations, quarrels and diversions, puts in context our tendency to think that we are more important than we are, or more righteous than reality can tolerate.

This past weekend I had the good fortune to participate in a surprising seminar at the International Institute of Islamic Thought and Civilization here in Kuala Lumpur.

In the presence of a Cardinal from the Roman Catholic Church, a number of distinguished Islamic scholars discussed with great erudition and much good humor the substance of Islamic ethics. It turned out that such Islamic ethics were really not very far from some core principles of Catholic Social Teachings.

Catholic ideas about the dignity of the human, the moral obligation to use private property responsibly, the need to trust family and social and civil organizations and not subject them to an all-powerful state, and the solidarity with others that is necessary to protect and promote their dignity resonate with many points of guidance given by the Holy Qur’an.

In our discussions it turned out that Catholic social thought and Islamic social thought are not that far apart.

This is a discovery of great importance for the world. Where we can see common concerns among different faith traditions, believers in one religion need not be so resentful of those who follow a different liturgy or read a different scripture.

In fact, both Catholics and Muslims share basically the same understanding of human purpose in that both faiths see human persons as created from God’s spirit and so animated with something transcendent in order to make this a better world.

We far short of what we are intended to perform and much suffering results from our failures to be our best. But the common teaching of both Catholics and Islam that we should aspire to do our duty as God intends could become a point of mutuality and solidarity between the faithful of both religions.

Great efforts must be made to inspire and guide humanity towards a future that will demonstrate greater submission to the fact of human dignity. But those efforts are well worth making. And the sooner the better.

Monday, September 1, 2008

thoughts in the Roman Forum

Last Friday and Saturday I was in Rome. Not Rome New York, but the real Rome, the original Rome, the Rome that gave us so much of Western Civilization from words like “republic” and “senate” to the traditions of the Holy Roman Catholic Church.

CRT Chair Lord Brennan and I were there to call on Jean Paul Cardinal Tauran, the president of the Pontifical Council on Inter-religious Dialogue. A member of our World Advisory Council, Theodore Cardinal McCarrick had suggested the meeting so that we might brief the Council on our very exciting and constructive work on Qur’anic guidance for good governance with scholars at the International Islamic University Malaysia.

After our call on the Cardinal, John Dalla Costa very kindly came down from Tuscany where he is writing so that we could visit and catch up. John has been very helpful to the CRT and has written wonderfully insightful books on ethics and business.

John took me to see a bronze statute of St Francis of Assizi near the Basilica of St John in the Lateran. Then we went to walk around the old Forum of Rome. John wanted to see the mural on the Arch of Titus where Roman soldiers after sacking Jerusalem are marching off with a sacred menorah. We reflected on all the sadness that has flown from that event, down to today’s bitterness, violence, and intransigence in the Holy Land.

We walked along the Via Sacra towards the Capitoline hill and stood by the Senate building. We walked where Cicero had walked and Ceasar, Pompey, Crassus, Cato, Brutus and Mark Antony too. In that building Cicero had called out Catiline and delivered his damning speeches on Antony’s brutal vulgarity and excessively covetous ambition.

We stood where, the story goes, Ceasar’s body was burned and riots broke out seeking vengeance against his assassins.

We stood where the Roman Republic was born and where it died.

Cicero in a casual letter to his friend Atticus put his finger on the cause of death. It was July 59 BC; the Republic was not yet dead, but the political cancer of military dictatorship that would finally kill it was already metastasizing among the Romans. Cicero in writing to Atticus pointed to a cultural change that opened the door to the growth of that cancer. He said that Romans were still free in their thoughts and words to criticize abuses of power, but that their “virtue was in chain” – virtutem adligatatem.

They had lost efficacious will and the resolve to stand up and do what needed to be done. The energy nourishing civic virtue was evaporating.

Loss of virtue is a disease of our time as well. The WTO can’t get agreement on elimination subsidies for agriculture; the G8 leaders can’t act on global warming; the EU is powerless in front of Russia’s hegemony over Abkazia and South Ossetia. Financial intermediaries have given us another round of turmoil, losses, and crisis in global credit markets.

Lord Brennan said to me in Rome that the developed world seems overcome by greed and the developing world by corruption.

So, how do we invigorate civic virtue? How do we keep our own personal virtue “unchained”?

The Caux Round Table can only succeed in a world where such virtue counts for something. Interest and material prosperity can only go so far as moral causes and they must, by the nature of their superficiality, fall short of giving us a foundation for genuine leadership.

Rome gave me some needed clues about the source of virtue. We get it through religion.

In the Forum John and I passed the temple of Vesta, the cult of a patroness founded by Numa Pompilius, Rome’s founding king who grounded community identity and culture on something divine. Religion, a cult, liturgy, prayers, flames guarded day and night by virgins from elite families, confidence, something to value and protect – Numa set in place a complex of reassurance, motivation, guidance through the use of religious inspiration and imagery.

So too the Athenians in their heyday had the cult of Athena in the Parthenon; Hammurabi grounded his code of laws on divine inspiration. More and more examples of similar human dynamics came to my mind as I looked at the surviving ruins of Numa’s little round temple.

Later Roman religiousity sustained the theme. Walking back to my hotel, I popped in and out of several great churches, including St Peter’s. Statues and pictures of Christian martyrs glorified in these churches somehow stood out in my mind. It was their religious faith that gave them purpose, courage and sustaining willfulness. The tomb of the founder of the Jesuit order seemed another case in point on the link between faith and dedication to service.

This conclusion is far from satisfactory. Religion is divisive; it gives rise to intolerance, to obscurantism, to the eclipse of reason and common sense; it seduces us into pride and hubris that we are righteous and select – saints chosen by our God to do his or her work here on earth.

Moreover, today, conversations about religion are uncomfortable and avoided. For some good reasons, may I add. Those who need virtue in lay and secular undertakings – say, business, politics, government, journalism, academia – are more and more cut off from public affirmation of the deepest and best source of meaning and purpose. We live with disenchantment and suffer for it.

I wonder what Cicero would recommend under the circumstances? After all, his efforts to save his republic came to naught.