Accountability on Malfeasant Corporate Boards. US Govt

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There's (one of many) disconnects in the financial bailout.

The responses are from people who were surprised, removed, and unable to manage the risk:

QUESTION: Does today's action mean that the conservatorship hasn't worked as you wanted?

And also, now, you only have $20 billion left in TARP. Will you go to Congress and ask for the last part -- tranche?

PAULSON: I would say two things.

First of all, the conservatorship has worked out as we had hoped.

Why should we believe they have better information about progress? There's little given to justify confidence that the conservatorship has worked; or that they have better information about the risks to know whether the real (still TBD) problems are getting solved.
It's useful to look at the implicit argument. The question is the risk analysis of a given CEO, CFO, Corporate Board, and company.

Paulson is implicitly asking us to believe that the people who lost track of -- or never paid attention to -- the risks can (somehow) tell us the status of the solution. That defies reason.

Further, it's an absurd leap to believe that the (admitted) still-unknown risks are logically linked with a coherent solution.

It's useful to look at the disconnect in terms of information management. That which is knowable should be applied; but when we are surprised, it takes time to (a) understand what problem are are trying to solve, 9b) develop a solution, then (c) monitor what progress we're making.

Some of the smokescreen relates to the risks related to these financial instruments. One three-part argument goes something like this:

Part 1. No responsibility: "The management cannot be responsible for the unexpected results because the financial instruments they were using were too complicated, and the real risks levels were hidden."

Part 2. Appeal to confusion: "They had no way of really knowing what was going to happen. It's too difficult to track these kinds of risks."

Part 3. Trust Us: "But despite us not knowing this, you can be sure that the solution is going to work just fine."

Huh?

Let's stsart at the end of the argument: That a solution -- to a set of factors and risks management says they do not understand -- is [wait for it] understandable, or going to work.

What a a load of non-sense.

First, managers are the ones who are in charge and supposed to be responsible for knowing what their business are doing. If they "can't track the real risk" then what were they doing allowing funds into these investments?  They can't answer that.

Someone made a decision to approve the transfer of funds, start a project, or transfer assets from one place to another. Those are called internal controls.  The problem is the manager's internal controls -- and the board's oversight of that management system -- was out of control. The wrong solution is to throw money at a management system that is out of control.

The board and management cannot argue "this was all automated" when there are sampling procedures for the board and managers to have in place to monitor what is going on. This didn't happen either.

Second, putting aside their confusion, it doesn't appear as though they have a plan to attempt to track what the real risks. IT defies reason to believe -- in the middle of this mess -- that their ability to track data will increase. Its the opposite. The existing failed "risk management detection and tracking systems" are going to get overloaded as more of these financial instruments unwind.

Firms don't have enough time midtream to improve information tracking system. 

Whatever failed during the bubble to track the risks will continue to fail as the bubble undwinds.  During the lazy days of the bulbble they were too lazy to develop a system that would reliable tell them the risks. They certainly don't have time to develop a modernized information management system to track the risks as they unwind.

They appealed to confusion as a defense. That is not a strategy.

No Basis For Historical Actions

Some are saying that the money somehow squirreled its way into these "unknowables". Then what was the basis for the rating companies and lenders to assess risk? Answer: They had no clue despite being paid to know. The market is punishing them for doing things they didn't understand.

Untrackable Risks, Unknowable Progress

Third, if they can't track the risks, they certainaly cannot justify a solution to the risks they are not able to track. Simplistically, a solution to a problem (in the form of a bailout) must be linked with a known problem. But this is where the problem is: A situation as we have now where managers are openly asserted "ConfusioN" (as a defense) cannot have it both ways:

Either, they were confused, despite a duty not to be confused; and there's no basis for their plan;

Or, they were not confused, and the risks are known, but they decided to invest anyway; and we (ares supposed to) have confidence that their solution is linked with a known risk they ignored.

We have no reason to trust this management or leadership. They either didn't do what they were supposed to do; or, despite knowing what they should have done, ignored it.

The Bubble Insulated Management

This isn't management. The people making decisions to "solve" this problem were the ones who aren't managing risk; but coasting. They riding a bubble, but deluded themselves to believe they were expert managers. No they're not. They have no clue what to do now that the (foreseeable) down-side of that bubble has arrived..

People who are in management positions didn't get there because of expertise in managing risk; but in riding the bubble. They're the wrong people to keep in place to manage the long-ignored risks.

Unknowable Risks, Dubious Solutions

Fourth, a credible solution must be one that solves the problem, in this case: The risks. Yet, the management has contradicted itself claiming they didn't know about the problem, but to trust them with the solution to something they still do not understand.

That' s convoluted thinking. Again, the solution is to fire the people who have ridden the bubble, and who are entrenched with stale thinking. They're experts at making excuses. The were rewarded for staying with the flawed status quo. They're not leaders, but sheep.

They made excuses to ignore the risks, and not manage them. They did not develop their management skills because they were not rewarded for leading, but acting like sheep.

Lessons Applicable To Congressional Inaction on Impeachment, War Crimes

The same crew making excuses then will continue making excuses. That's the importance of having an impeachment. It forces people to take notice and accept that the failure must be confronted.

Throwing money at a problem isn't the needed confrontation, nor a credible way to ensure the facts surface.

The non-sense that somehow Congress or the US government is going to "oversee" this transition process defies reason. The very people closest to the problem appear to be way of their head. Congress is one step-removed, but acting as if it going to sort out a mess. No, Congress like the boards let this bubble build. As it let the FISA violations, war crimes, and impeachable offenses.

Modernized Congressional, Corporate, Legal Services Oversight

The public needs to discuss a credible oversight system that will effectively challenge and work better than what has failed with the current committee process. The smokescreen is for Congress to throw money at the financial-business institutions, but without conducting an independent review of what broke down in the Congressional oversight process.

Before we can talk about a credible solution -- that will address the real problems -- we need some time for the dust to clear. The absurdity is to continue using a committee-board process (which failed) to solve problems still not understood.

What new oversight structure is required; and how will the board-committee processes in place be transformed; or what new institutional mechanisms are required to ensure that this doesn't happen again, and that going forward -- in this disater -- we have a credible, alternative system that is going to address what really failed.

Yet, in the wake of the (ongoing) confusion, some would have us believe that they can be trusted. These people still aren't clear on what was going on; they can't be expected to give us a straight story on what is still unwinding. It takes time to understand.

It's reckless for management to not know the risks; nor have the tools to monitor those risks; but then appeal to that uncertainty as an excuse for no accountability; but then not have a plan to mange the (still not understood) risk.

The real solutions need to discuss modernizing not just the financial and regulatory systems, but the mechanisms charged with monitoring those systems. Congress must be modernized. Congress must be put on notice: If they refuse to embrace the change -- as they refused after 2006 -- then in 2010 they are at risk of more transformation.

The public needs to see something credible that is going to track:

A. This is the problem

B. This is how the solution we propose is going to addres that problem

C. This is how we are going to monitor progress along these benchmarks

D. This is how we're going to have confidence that the information we're using to make decisions is based on reality.

The problem is they didn't have the information (D) before to track the emerging problem; there's no reason to believe more money -- with the attached complicated problem of monitoring that moeny -- will solve a problem while still ignoring the failed information-monitoring systems.

While things were going well, they didn't have the time interest or resources to mange risks and protect their intetests. Now that their interests are in jeopardy, there's no reason to believe that they'll now develop a tracking sytem to monitor the (originally ignored) risks, much less how the new plan is going to perform along new indicators.

Whatever got in the way of monitoring the original risks is still there: Management. The wrong answer is to throw them a lifeline. These firms need to take responsibility for this disaster in the form of a bankruptcy, reorganization, and change in board leadership.

The appropriate discussion is to openly discuss what failed in both the corporate boards and the Congressional committee-oversight systems. Ultimately, it means challenging the legal services industry to embrace the change, or have it lawfully imposed.