The private equity practice of buying out a firm and restructuring its operations — often involving job layoffs at the target company — has been criticized for its negative effects on human lives and communities but also praised for improving businesses and making them more efficient and profitable. Past research has tried to weigh and assess these dynamics, but it has often been limited by such factors as incomplete data sets and a failure to compare employment changes at comparable firms during that same period, according to researchers at the University of Chicago Booth School of Business, Harvard Business School, the University of Maryland and the U.S. Census Bureau.

Their 2011 study for the National Bureau of Economic Research, “Private Equity and Employment,” uses comprehensive data from the U.S. Census Bureau’s Longitudinal Business Database between 1980 to 2005 to assess the average outcomes of private equity buyouts. The researchers study some 3,200 U.S. companies bought by private equity firms and the effects on 150,000 “establishments” — “specific factories, offices, retail outlets and other distinct physical locations where business takes place.”

The study’s findings include:

-- Relative to comparable businesses in the same industry — and with similar profiles in terms of size, age, and prior growth — establishments bought by a private equity firm will see, on average, a decline of “about 3% of initial employment over two years and 6% over five years.” Moreover, “gross job destruction at these target establishments outpaces destruction at controls [comparable industry businesses] by a cumulative 10 percentage points over five years post buyout.” This means that turnover of workers is indeed accelerated by private equity buyouts.

-- However, many bought-out firms either grow establishments in fresh directions or create new establishments — so-called “greenfield establishments” — in the wake of a private equity sale. Indeed, analysis “reveals that target firms create new jobs in greenfield establishments at a faster pace than control firms.” Taking these total effects into account, the employment growth differential is only about 1% less for bought-out firms compared to similar firms in the first two years.

-- Private equity’s impact on jobs varies widely among industries and by the nature of the buyout; it can indeed be net neutral or positive, depending on the case. The greatest losses are typically evident in the retail sector and for publicly-traded firms that are taken private: “Public-to-private deals, which tend to be highly visible, also involve large employment losses at targets relative to [other comparable firms]. In contrast, independently owned firms exhibit large employment gains relative to controls in the wake of buyouts, mainly due to greater acquisitions.”

-- Overall, “the sum of gross job creation and destruction at target firms exceeds that of controls by 13 percent of employment over two years. In short, private equity buyouts catalyze the creative destruction process in the labor market, with only a modest net impact on employment. The creative destruction response mainly involves a more rapid reallocation of jobs across establishments within target firms.”

Despite the study’s finding of a modest overall impact on employment at firms, the research does support the idea that “pre-existing employment positions are at greater risk of loss in the wake of private equity buyouts.”

John Wihbey is a Policy Journalist and Editor at Journalist's Resource, a project of the Harvard Kennedy School's Shorenstein Center and the Carnegie-Knight Initiative. This article is republished under terms of a Creative Commons license.

Executives responsible for sustainability and corporate social responsibility (CSR) programs at large companies are overwhelmingly optimistic that those initiatives will be part of the “core strategies and operations” of global businesses in the next five years, according to a new survey.

Top sustainability and CSR priorities for those companies in the year ahead, the survey found, were human rights and workers’ rights, climate change, and the availability and quality of water on a global basis.

The survey was based on data from 498 professionals representing more than 300 member companies of BSR, a non-profit global membership and consulting organization that focuses on CSR and sustainability issues; some two-thirds of BSR members are large firms with annual revenue of $1 billion or more.  The results were released in San Francisco at the organization’s annual conference, with about 1,000 participants from more than 30 countries in attendance.

Despite a poor economy, large global businesses “are maintaining, if not extending, their commitments to sustainability,” said BSR President and CEO Aron Cramer.  According to Cramer, corporate managers are concluding that sustainability initiatives help cut costs and save money, particularly in environmental programs; drive “innovation” of new products and business models; and help to “future-proof” overall corporate strategy.

Executives polled in the survey said their biggest current leadership challenge is the integration of sustainability into core business functions.  While more than two-thirds reported that their companies’ communications functions (corporate communications and public affairs) were engaged in CSR/sustainability, far fewer reported engagement by critical operational functions such as investor relations (38%), human resources (37%) and finance (18%).

According to the survey, executives continue to acknowledge that the public does not have a high degree of trust in business, with only 2% sensing “a great deal of trust” from the public. To improve that situation, executives said, the two most important actions their companies should take are to “increase transparency of business practices” (55%) and “measure and demonstrate positive social and environmental impacts” (51%).

Among top subject area priorities, the survey found “a sizeable increase” in interest around water availability and quality over the past 12 months, with 54 percent noting it as a priority, up from 47 percent last year.  Other top priorities were human rights (65%), climate change (63%) and workers’ rights (61%).  BSR’s Mr. Cramer said increased interest in human rights and worker’s rights this year may have been driven by the release in July of the UN’s Guiding Principles on Business and Human Rights.

When asked to "rate your outlook regarding the extent to which global businesses will embrace CSR/sustainability as part of their core strategies and operations in the next five years," 22 percent of the executives said they were "very optimistic" and 62 percent "somewhat optimistic" that would happen.

I have noticed an interesting correlation. As the economy worsens and the job cuts intensify there is an increase in anger, irritation and anti-social actions.

I am not referring to riots or violence. I refer to the gradual eroding of the basic social niceties.

Calls are not returned. Conversations are strained. Raises and bonuses are decreased with expectations of longer hours.

As the global economy stagnates and seemingly worsens, and job cuts are announced daily, tensions continue to rise. Frustration, irritation and the loss of common decency pervades. It has truly become a dog-eat-dog environment.

As an executive recruiter in the field of compliance, I find that the expectations of hiring managers and those of candidates are often incongruous. Candidates have become increasingly disillusioned and aggravated by their treatment during the job search process. Calls are not returned, conversations are strained, and the potential for raises and bonuses become fewer and far between, coupled with the additional gift of much longer and more intense hours.

If this weren’t bad enough, external factors are making life even more unpleasant. Fewer jobs equal less overall tax revenue and therefore decreased social services. Our infrastructure, school systems and law enforcement agencies, to name just a few examples, are all suffering. The decline in the stock market means that 401ks are now 201ks. Houses are increasingly underwater, both figuratively and literally. We are seemingly bombarded with bad luck everywhere we turn.  This spills over to the job market.

Firms are cautious, perhaps even afraid to hire. They interview more people over a longer period of time, and typically do not give much feedback, if any. Of course, this makes a certain amount of sense if the firm is not interested in the candidate. This is not because firms are inconsiderate, but rather because they are overwhelmed with applicants. The crazy development is that now it is common for firms to not even contact ideal candidates. More and more, firms are closing searches out of fear of what the future may bring. Conversely, they may put searches on hold until the next cycle of layoffs, hoping that maybe they can find someone better for cheaper, someone who will be desperate for any opportunity. Of course, the firms will not reveal this to the candidate, unfortunately leaving the poor individual in the dark.

On the other side of the table, candidates seek more money than firms are willing to offer because they are afraid to move to the next Bear Stearns.

We’ve come to an impasse, where the worker loses out. Though everyone ponders the frightening thought of working more hours for less pay for more years, they are absolutely terrified of making a potential career move should the new opportunity turn out to be a dud. Meanwhile, their “secure” jobs may be cut or relocated to Mumbai. There is really no recourse in this economy.

I am guilty as well. I receive more and more resumes each day, with heartbreaking stories behind every page. I’d like more than anything to be able to place each and every one of the hundreds of traders, brokers and the vast array of other financial services professionals trying to move into compliance because their jobs are sent abroad or replaced by computer models, but I simply cannot. And that’s just it; these candidates are professionals, all very intelligent, hard working and certainly capable individuals. Yet it is impossible to keep up with the demand, so much so that I often cannot find the time to even chat with some of these individuals let alone find them jobs.

It is a challenging time. While I do not have all the answers, I am confident in the bright prospects for Compliance professionals in an otherwise dark environment. In light of the new rules and regulations, backlash against Wall Street, and past scandals, there is and will continue to be a demand for their services. Although the road may be rocky, long, and not always straight forward there are opportunities.

Jack Kelly is Managing Director of Compliance Search Group and Publisher of CompliancEX, a web site where this article was first published.

Widespread demonstrations in support of Occupy Wall Street have put the financial crisis back into the national spotlight lately.

So here’s a quick refresher on what’s happened to some of the main players, whose behavior, whether merely reckless or downright deliberate, helped cause or worsen the meltdown. This list isn’t exhaustive -- feel welcome to add to it.

.

.Mortgage originators

Mortgage lenders contributed to the financial crisis by issuing or underwriting loans to people who would have a difficult time paying them back, inflating a housing bubble that was bound to pop. Lax regulation allowed banks to stretch their mortgage lending standards and use aggressive tactics to rope borrowers into complex mortgages that were more expensive than they first appeared. Evidence has also surfaced that lenders were filing fraudulent documents to push some of these mortgages through, and, in some cases, had been doing so as early as the 1990s. A 2005 Los Angeles Times investigation of Ameriquest – then the nation’s largest subprime lender – found that “they forged documents, hyped customers' creditworthiness and ‘juiced’ mortgages with hidden rates and fees.” This behavior was reportedly typical for the subprime mortgage industry. A similar culture existed at Washington Mutual, which went under in 2008 in the biggest bank collapse in U.S. history.

Countrywide, once the nation’s largest mortgage lender, also pushed customers to sign on for complex and costly mortgages that boosted the company’s profits. Countrywide CEO Angelo Mozilo was accused of misleading investors about the company’s mortgage lending practices, a charge he denies.  Merrill Lynch and Deutsche Bank both purchased subprime mortgage lending outfits in 2006 to get in on the lucrative business. Deutsche Bank has also been accused of failing to adequately check on borrowers’ financial status before issuing loans backed by government insurance. A lawsuit filed by U.S. Attorney Preet Bharara claimed that, when employees at Deutsche Bank’s mortgage received audits on the quality of their mortgages from an outside firm, they stuffed them in a closet without reading them. A Deutsche Bank spokeswoman said the claims being made against the company are “unreasonable and unfair,” and that most of the problems occurred before the mortgage unit was bought by Deutsche Bank.

Where they are now: Few prosecutions have been brought against subprime mortgage lenders. Ameriquest went out of business in 2007, and Citigroup bought its mortgage lending unit. Washington Mutual was bought by JP Morgan in 2008. A Department of Justice investigation into alleged fraud at WaMu closed with no charges this summer. WaMu also recently settled a class action lawsuit brought by shareholders for $208.5 million. In an ongoing lawsuit, the FDIC is accusing former Washington Mutual executives Kerry Killinger, Stephen Rotella and David Schneider of going on a "lending spree, knowing that the real-estate market was in a 'bubble.'" They deny the allegations.

Bank of America purchased Countrywide in January of 2008, as delinquencies on the company’s mortgages soared and investors began pulling out. Mozilo left the company after the sale. Mozilo settled an SEC lawsuit for $67.5 million with no admission of wrongdoing, though he is now banned from serving as a top executive at a public company. A criminal investigation into his activities fizzled out earlier this year. Bank of America invited several senior Countrywide executives to stay on and run its mortgage unit. Bank of America Home Loans does not make subprime mortgage loans. Deutsche Bank is still under investigation by the Justice Department.

Mortgage securitizers

In the years before the crash, banks took subprime mortgages, bundled them together with prime mortgages and turned them into collateral for bonds or securities, helping to seed the bad mortgages throughout the financial system. Washington Mutual, Bank of America, Morgan Stanley and others were securitizing mortgages as well as originating them. Other companies, such as Bear Stearns, Lehman Brothers, and Goldman Sachs, bought mortgages straight from subprime lenders, bundled them into securities and sold them to investors including pension funds and insurance companies.

Where they are now: This spring, New York’s Attorney General launched a probe into mortgage securitization at Bank of America, JP Morgan, UBS, Deutsche Bank, Goldman Sachs and Morgan Stanley during the housing boom. Morgan Stanley settled with Nevada’s Attorney General last month following an investigation into problems with the securitization process.

As part of a proposed settlement with the 50 state attorneys general over foreclosure abuses, several big banks were offered immunity from charges related to improper mortgage origination and securitization. California and New York have withdrawn from those talks.

The people who created and dealt CDOs

Once mortgages had been bundled into mortgage-backed securities, other bankers took groups of them and bundled them together into new financial products called Collateralized Debt Obligations. CDOs are composed of tiers with different levels of risk. As we’ve reported, a hedge fund named Magnetar worked with banks to fill CDOs with the riskiest possible materials, then used credit default swaps to bet that they would fail. Magnetar says that the majority of its short positions were against CDOs it didn’t own. Magnetar also says it didn’t choose what went its own CDOs, though people involved in the deals who spoke to ProPublica contradict this account.

American International Group’s London-based financial products unit was among the entities that provided credit default swaps on CDOs. Though the business of insuring the risky securities made AIG large short-term profits, it eventually brought the company to the brink of collapse, prompting an $85 billion government bailout.

Merrill Lynch, Citigroup, UBS, Deutsche Bank, Lehman Brothers and JPMorgan all made CDO deals with Magnetar. The hedge fund invested in 30 CDOs from the spring of 2006 to the summer of 2007. The bankers who worked on these deals almost always reaped hefty bonuses. From our story:

Even today, bankers and managers speak with awe at the elegance of the Magnetar Trade. Others have become famous for betting big against the housing market. But they had taken enormous risks. Meanwhile, Magnetar had created a largely self-funding bet against the market.

When banks found CDOs hard to sell, some of them, notably Merrill Lynch and Citibank, bought each other’s CDOs, creating the illusion of true investors when there were almost none. That was one way they kept the market for CDOs going longer than it otherwise would have. Eventually CDOs began purchasing risky parts of other CDOs created by the same bank. Take a look at our comic strip explaining self-dealing, and our chart detailing which banks bought their own CDOs.

Goldman Sachs and Morgan Stanley also made similar deals in which they created, then bet against, risky CDOs. The hedge fund Paulson & Co helped decide which assets to put inside Goldman’s CDOs.

Where they are now: Overall, the banks and individuals involved in CDO deals haven’t been convicted on criminal charges. The civil suits against them have produced fines that aren’t very big compared to the profits they made in the leadup to the financial crisis. JP Morgan paid $153.6 million to settle an SEC suit alleging they hadn’t disclosed to investors that Magnetar was betting against Morgan’s CDO. Citigroup just agreed to pay a $285 million fine to the SEC for betting against one of its mortgage-related CDOs. The lawsuit doesn’t mention dozens of similar deals made by Citi.

Magnetar is still thriving (the deals they made weren’t illegal according to the rules at the time). In 2007, Magnetar’s founder took home $280 million, and the fund had $7.6 billion under management. The SEC is considering banning hedge funds and banks from betting against securities of their own creation. As of May 2010, federal prosecutors were investigating Morgan Stanley over their CDO deals, and Goldman Sachs paid $550 million last year to settle a lawsuit related to one of theirs. Only one Goldman employee, Fabrice Tourre, has been charged criminally in connection to the deals.

Though recorded phone calls suggest that former AIG CEO Joseph Cassano misled investors about the credit default swaps that contributed to his company’s troubles, the evidence wasn’t airtight, and federal probes against him fell apart in 2010. Cassano’s lawyers deny any wrongdoing.

The ratings agencies

Standard and Poor’s, Moody’s and Fitch gave their highest rating to investments based on risky mortgages in the years leading up to the financial crisis. A Senate investigations panel found that S&P and Moody’s continued doing so even as the housing market was collapsing. An SEC report also found failures at 10 credit rating agencies.

Where they are now: The SEC is considering suing Standard and Poor’s over one particular CDO deal linked to the hedge fund Magnetar. The agency had previously considered suing Moody’s, but instead issued a report criticizing all of the rating agencies generally. Dodd-Frank created a regulatory body to oversee the credit rating agencies, but its development has been stalled by budgetary constraints.

The regulators

The Financial Crisis Inquiry Commission [PDF] concluded that the Securities and Exchange Commission failed to crack down on risky lending practices at banks and make them keep more substantial capital reserves as a buffer against losses. They also found that the Federal Reserve failed to stop the housing bubble by setting prudent mortgage lending standards, though it was the one regulator that had the power to do so.

An internal SEC audit faulted the agency for missing warning signs about the poor financial health of some of the banks it monitored, particularly Bear Stearns. [PDF] Overall, SEC enforcement actions went down under the leadership of Christopher Cox, and a 2009 GAO report found that he increased barriers to launching probes and levying fines.

Cox wasn’t the only regulator who resisted using his power to rein in the financial industry. The former head of the Federal Reserve, Alan Greenspan, reportedly refused to heighten scrutiny of the subprime mortgage market. Greenspan later said before Congress that it was a mistake to presume that financial firms’ own rational self-interest would serve as an adequate regulator. He has also said he doubts the financial crisis could have been prevented.

The Office of Thrift Supervision, which was tasked with overseeing savings and loan banks, also helped to scale back their own regulatory powers in the years before the financial crisis. In 2003 James Gilleran and John Reich, then heads of the OTS and Federal Deposit Insurance Corporation respectively, brought a chainsaw to a press conference as an indication of how they planned to cut back on regulation. The OTS was known for being so friendly with the banks -- which it referred to as its “clients” -- that Countrywide reorganized its operations so it could be regulated by OTS. As we’ve reported, the regulator failed to recognize serious signs of trouble at AIG, and didn’t disclose key information about IndyMac’s finances in the years before the crisis. The Office of the Comptroller of the Currency, which oversaw the biggest commercial banks, also went easy on the banks.

Where they are now: Christopher Cox stepped down in 2009 under public pressure. The OTS was dissolved this summer and its duties assumed by the OCC. As we’ve noted, the head of the OCC has been advocating to weaken rules set out by the Dodd Frank financial reform law. The Dodd Frank law gives the SEC new regulatory powers, including the ability to bring lawsuits in administrative courts, where the rules are more favorable to them.

The politicians

Two bills supported by Phil Gramm and signed into law by Bill Clinton created many of the conditions for the financial crisis to take place. The Gramm-Leach-Bliley Act of 1999 repealed all the remaining parts of Glass-Steagall, allowing firms to participate in traditional banking, investment banking, and insurance at the same time. The Commodity Futures Modernization Act, passed the year after, deregulated over-the-counter derivatives – securities like CDOs and credit default swaps, that derive their value from underlying assets and are traded directly between two parties rather than through a stock exchange. Greenspan and Robert Rubin, Treasury Secretary from 1995 to 1999, had both opposed regulating derivatives. Lawrence Summers, who went on to succeed Rubin as Treasury Secretary, also testified before the Senate that derivatives shouldn’t be regulated.

It’s worth noting the substantial lobbying efforts that accompanied the deregulation process. According to the FCIC [PDF], between 1999 and 2008 the financial industry spent $2.7 billion lobbying the federal government, and donated more than $1 billion to political campaigns. While deregulation took place mainly under Clinton’s watch, George W. Bush is faulted for not doing more to catch the out-of-control housing market.

As president of the New York Fed from 2003 to 2009, Timothy Geithner also missed opportunities to prevent major financial firms from self-destructing. As we reported in 2009:

Although Geithner repeatedly raised concerns about the failure of banks to understand their risks, including those taken through derivatives, he and the Federal Reserve system did not act with enough force to blunt the troubles that ensued. That was largely because he and other regulators relied too much on assurances from senior banking executives that their firms were safe and sound.

Henry Paulson, Treasury Secretary from 2006 to 2009, has been criticized for being slow to respond to the crisis, and introducing greater uncertainty into the financial markets by letting Lehman Brothers fail. In a 2008 New York Times interview, Paulson said he had no choice.

Where they are now: Gramm has been a vice chairman at UBS since he left Congress in 2002. Greenspan is retired. Summers served as a top economic advisor to Barack Obama until November 2010; since then, he’s been teaching at Harvard. Geithner is currently serving as Treasury Secretary under the Obama administration.

Executives of big investment banks

Executives at the big banks also took actions that contributed to the destruction of their own firms. According to the Financial Crisis Inquiry Commission report [PDF], the executives of the country’s five major investment banks -- Bear Stearns, Goldman Sachs, Lehman Brothers, Merrill Lynch, and Morgan Stanley – kept such small cushions of capital at the banks that they were extremely vulnerable to losses. A report compiled by an outside examiner for Lehman Brothers found that the company was hiding its bad investments off the books, and Lehman’s former CEO Richard S. Fuld Jr. signed off on the false balance sheets. Fuld had testified before Congress two years before that the actions he took prior to Lehman Brothers’ collapse “were both prudent and appropriate” based on what he knew at the time. Other banks also kept billions in potential liabilities off their balance sheets, including Citigroup, headed by Vikram Pandit.

In 2010, we detailed how a group of Merrill Lynch executives helped blow up their own company by retaining supposedly safe – but actually extremely risky –  portions of the CDOs they created, paying a unit within the firm to buy them when almost no one else would.

The New York Times’ Gretchen Morgenson described how the administrative decisions of some top Merrill executives helped put the company in a precarious position, based on interviews with former employees.

Where they are now: In 2009, two Bear Stearns hedge fund managers were cleared of fraud charges over allegedly lying to investors. A probe of Lehman Brothers stalled this spring. Merrill Lynch was sold to Bank of America in the fall of 2008. As for the executives who helped crash the firm, as we reported in 2010, “they walked away with millions. Some still hold senior positions at prominent financial firms.” Dick Fuld is still working on Wall Street, at an investment banking firm. Vikram Pandit remains the CEO of Citigroup.

Fannie Mae and Freddie Mac

The government-sponsored mortgage financing companies Fannie Mae and Freddie Mac bought risky mortgages and guaranteed them. In 2007, 28 percent of Fannie Mae’s loans were bought from Countrywide. The FCIC found [PDF] that Fannie and Freddie entered the subprime game too late and on too limited a scale to have caused the financial crisis. Non-agency-securitized loans had an increased share of the market in the years immediately preceding the crisis.

Many believe that The Community Reinvestment Act, a government policy promoting homeownership for low-income people, was responsible for the growth of the subprime mortgage industry. This idea has largely been discredited, since most subprime loans were made by companies that weren’t subject to the act.

Still, Fannie and Freddie engaged in reckless behavior and sustained heavy losses as a result. The SEC slammed Fannie Mae for improper accounting under the leadership of Frank Raines in the years preceding the financial crisis. A report by the Office of Federal Housing Enterprise Oversight found that Fannie and Freddie didn’t accurately disclose the risks they were taking and “deliberately and intentionally manipulat[ed] accounting to hit earnings targets.” [PDF]

Richard Syron and Daniel Mudd were at the helm of Freddie and Fannie, respectively, when they began to buy large numbers of subprime loans. Current and former Freddie Mac employees have accused Syron of ignoring warnings about the health of the loans the company was buying. Syron and Mudd maintain they could not have foreseen the rapid decline in the housing market.

Where they are now: As borrowers defaulted on mortgages they’d insured, Fannie and Freddie received a nearly $200 billion federal government bailout, and the government took over their operations. They are close to a settlement in an SEC lawsuit, and will neither admit nor deny that they failed to inform investors about risks of exposure to subprime mortgages. The Dodd Frank financial reform law stated that serious reforms of Fannie and Freddie are needed, but didn’t address how they should be carried out. A report from Treasury Secretary Geithner called for the government to “ultimately wind down” the two mortgage giants. [PDF] In the meantime, taxpayers have been shouldering their legal fees. Former Freddie and Fannie executives Richard Syron and Daniel Mudd received Wells notices this spring, a sign that the SEC is considering legal action against them.

Photo: David Shankbone via Wikimedia Commons

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Unlike doctors, architects, dentists, building contractors, journalists and a wide range of other professions and trades, economists do not have a code of professional ethics.

That would seem more of an internal matter for the profession if it weren’t for the fact that journalists rely on academic and applied economists as sources. Economists are viewed as credible, authoritative experts. Their words carry weight. So should the lack of an ethical code change the way journalists deal with economists? Or is it irrelevant to the quality of commentary and information they provide?

There’s a scene in “Inside Job,” the 2010 documentary about the financial crisis, in which Frederic Mishkin, a former member of the Board of Governors of the Federal Reserve System and a professor at Columbia Business School, is rendered speechless.

It comes after director Charles Ferguson questions Mishkin about his co-authorship of a 2006 report, “Financial Stability In Iceland,” which painted a very positive picture of the country’s banking system. Ferguson notes that Mishkin was paid six figures by the Icelandic Chamber of Commerce to deliver the document — yet nowhere in the text is this information disclosed. The exchange is captured in this clip, which concludes with Mishkin fumbling for a response.

It’s a damning few minutes of cinema, and has become a frequently-cited piece of evidence in a growing debate about the lack of formal ethical requirements of economists.

George DeMartino, a professor in the global, finance, trade and economic integration program at the University of Denver, said in an email interview that the lack of a code poses a problem for journalists:

“Up until now (and by now, I mean up until the release of Ferguson’s film and the subsequent reporting and studies), journalists tended to presume that academic economists have no significant interests outside of their university appointments — no financial entanglements that might in any way affect their judgments. …

[I]t’s now clear that leading economists can and do make substantial sums from consulting, lectures, service on boards of directors and the like. And yet, when they give testimony before Congress, say, or take other positions on pressing policy matters, they do not routinely make full disclosure of their financial entanglements. That’s a problem — for our profession, and for those who rely on economic expertise.”

Advocating for a code

DeMartino isn’t alone in thinking the lack of a code is a problem for his profession. Earlier this year a letter signed by roughly 300 economists was sent to the president of the American Economic Association. It called upon the AEA to adopt a code of ethics. The organization responded by creating an Ad Hoc Committee on Ethical Standards for Economists, which Nobel laureate Robert Solow is leading.

When contacted, the AEA said it could not provide additional details about the committee’s work. But AEA associate treasurer-secretary Peter L. Rousseau said in an email that a draft report will be sent to the AEA Executive Committee for its January meeting.

“This draft will be for internal discussion only,” he said. “When the report is finalized it will be made available on the association’s website. At this time we do not know when exactly this will occur but we anticipate sometime by late Spring of 2012.”

In the meantime, economists operate without a code of ethics. At the very least, it’s something journalists need to be aware of, according to Stephen Ward, director of the Center for Journalism Ethics at the University of Wisconsin-Madison.

“Without a code, the public has trouble knowing how to keep professionals accountable because they can’t cite specific principles and standards that the professionals accept and have violated,” Ward said by email. “Unethical practitioners have great space in which to operate if rules are never written down. So codes are not everything in ethics, but they are not nothing, either.”

When I contacted Reuters financial blogger Felix Salmon to offer an opinion about the lack of a code, he answered my questions in a blog post. Salmon offered a blunt assessment of the problems posed by the lack of a code, and the way sources deal with disclosure.

All too often economists and other professionals feel comfortable with lies of omission when talking to journalists, simply not mentioning a fact that they know is germane … A good code of ethics should address this: even if there’s a disclosure somewhere about a conflict, the onus should not be on the journalist to find it, but rather on the economist to proactively mention that conflict to the journalist.

Ward said the job of every journalist is to “make sure they know who their sources are, what political perspectives they may have, and what conflicts of interest may be hidden in the background; and to convey that understanding to the public.”

As a result, he said we have a responsibility to perform due diligence on our sources, rather than expecting them to speak up about any potential conflicts.

“Journalists should investigate the integrity, expertise and possible biases of their expert sources in the same way that they investigate any other source of information,” he said. “In fact it may be more important to investigate economists and other experts given their power in shaping public discourse.”

Warren Watson, executive director of the Society of American Business Editors and Writers and a former business journalist, said in a phone interview that his organization’s code of ethics has become an important touchstone for members. However, he doubts business journalists consider whether a source is bound by a similar code.

“I don’t think business journalists would routinely ask a source if he or she has a code of ethics,” he said. ”… It might be one of those questions that come up at an awkward time in an interview, and it might be off-putting [to the source].”

Watson said codes of ethics are important for all professionals, and it’s key to keep them current.

“I think we all need something like this,” he said. “This kind of stuff is good to have and good to freshen up from time to time and make sure it’s still applicable and relevant.”

Questioning the need for a code

While the movement toward a code for economists appears to have momentum, some prominent economists question the utility and importance of having one.

Lant Pritchett made the argument in an online discussion hosted by “The Economist” that a person’s clients, race, gender or other characteristics should not be a defining factor in evaluating the value of their arguments.

“People should be able [to] put ideas, arguments and evidence into the public sphere of economics discourse to be evaluated on their disciplinary merits, not based on their author and his/her peculiar bundle of biases,” wrote Pritchett, professor of the practice of international development and faculty chair of the masters in public policy in international development program at Harvard’s Kennedy School of Government. “To help readers fairly assess my ideas, arguments, and evidence I should voluntarily disclose about myself … nothing.”

In an Economist article earlier this year, economist Tyler Cowen questioned the utility of a code. As evidence, he said he believes ethical codes for journalists have little impact.

“Newspapers already have conflict of interest policies for many (or all) of their writers, but I don’t see they are much enforced or have much improved the quality of most op-ed pages as policy advice,” wrote Cohen, author of “The Great Stagnation.” (He didn’t respond to a request to expand on that thought.)

Of course, journalists can be guilty of making poor ethical decisions, but that doesn’t mean ethics codes don’t help. The challenge is making sure newsrooms talk about the codes they have and put them into practice — not just when an ethical issue arises but in their day to day reporting.

A code is not a panacea, be it aimed at economists, journalists or anyone else. DeMartino, author of “The Economist’s Oath: On the Need for Content of Professional Economic Ethics,” acknowledged that while some people will violate a code, its existence provides important guidance and increases the overall level of ethics and disclosure.

Would some people still cheat? Of course. But my sense is that most economists want to do good work, work with integrity, and to do it honestly; and this alone would lead most economists to make full disclosure, were they simply asked to do so. And for the rest — their self-interest would also have them give full disclosure, since failure to do so would imperil their standing in the halls of power, and with the media.

Economists want influence — and so they are apt to be careful to conduct themselves in ways that allow them to stay in the game, so to speak. Right now, there are no rules for them to follow, and so each economist is left to figure out when to make a disclosure, and how forthcoming to be in doing so.

Not surprisingly, DeMartino added one last item before signing off by email.

“BTW: I receive no salary outside of the university, and have no outside financial earnings other than occasional honoraria for giving lectures, paltry book royalties, and my 403b earnings (and losses!),” he said. “See? That wasn’t hard…”

Three tips for interviewing economists

1. For academic economists, check the CV listed on his or her university profile page. For applied economists, find a detailed biography. Review these documents prior to the interview. Focus on the boards they sit on, the companies or organizations they advise and the entities that sponsor their research and retain them for consulting. Who pays them for their expertise, and do they have any financial arrangements related to the topic you want to discuss? “My sense is that it would be good to check CVs and the like (though not all financial entanglements might be listed there),” DeMartino said.

2. Ward suggests checking economists’ previous public statements and their books or major articles to get a sense of who they are and what their perspectives are. Coverage of their work may include information that helps place their perspective in context.

3. During interviews, ask if they have any experience — such as sitting on boards or consulting — that helped form their opinions on this topic. You can then follow up their response with a direct question about whether they have any engagements or relationships that should be disclosed. “It is perfectly legitimate for a journalist to ask economists directly whether they have any potential conflicts to disclose,” Ward said. “In academia and elsewhere, experts are asked to disclose any potential conflicts.”

Craig Silverman is a journalist, author and media critic in Montreal, Canada.  He serves as editorial director of OpenFile, an online news startup, and also writes weekly columns for Columbia Journalism Review and the Toronto Star. He is the founder and editor of Regret the Error, an award-winning site that tracks and reports on accuracy and media corrections. This article was first published on Poynter.org and is re-published with permission.

It’s become a mantra on Capitol Hill and a rallying cry for industry groups: Get rid of the job-killing regulations. In recent days, with nearly every one of the GOP presidential candidates repeating that refrain, the political echo chamber has grown even louder. Earlier this month, President Obama also asked the Environmental Protection Agency to back off more stringent ozone regulations, citing the "importance of reducing regulatory burdens" during trying economic times.

But is the claim that regulation kills jobs true?

We asked experts, and most told us that while there is relatively little scholarship on the issue, the evidence so far is that the overall effect on jobs is minimal. Regulations do destroy some jobs, but they also create others. Mostly, they just shift jobs within the economy.

“The effects on jobs are negligible. They’re not job-creating or job-destroying on average,” said Richard Morgenstern, who served in the EPA from the Reagan to Clinton years and is now at Resources for the Future, a nonpartisan think tank.

Almost a decade ago, Morgenstern and some colleagues published research on the effects of regulation [PDF] using ten years’ worth of Census data on four different polluting industries. They found that when new environmental regulation was applied, higher production costs pushed up prices, resulting in lost sales for businesses and some lost jobs, but the job losses were also offset by new jobs created in pollution abatement.

“There are many instances of regulation causing a specific industry to lose jobs,” said Roger Noll, co-director of the Program on Regulatory Policy at the Stanford Institute for Economic Policy Research. Noll cited outright bans of products—such as choloroflorocarbons or leaded gasoline—as the clearest examples.

That’s supported by recent data from the Bureau of Labor Statistics, which shows employers attributing a small fraction of job losses to governmental regulations. In the first half of 2011, employers listed regulations as the cause of 0.2 to 0.3 percent of jobs lost as part of mass layoffs. But the data doesn’t track the other side of the equation: jobs created.

“The key point is that regulation affects the distribution of jobs among industries, but not the total number,” said Noll.

That point is also echoed by Richard Williams, a former FDA official who’s currently Director of Policy Research for the free-market oriented Mercatus Center at George Mason University. (The center has ties to Koch Industries, an energy conglomerate that’s spent tens of millions lobbying against regulations. Koch’s chairman and CEO, Charles Koch, sits on the Mercatus Center’s Board of Directors.)

Earlier this year, Williams sent a letter [PDF] to Rep. Darrell Issa, who’s been soliciting opinions from businesses, trade groups, and experts on which regulations kill jobs. Williams wrote: “The economic literature suggests that the effect of regulations is likely small at the macro level. However, at the micro level, the effect of regulations on job creation and sustainability of particular businesses can be great.”

In a phone conversation, Williams expanded on his point. “It’s certainly true, as people say, that regulation does create jobs,” he said. “It requires firms to do something that they’re not doing now, so often they need to hire.”

But according to Williams, the more important question is whether the jobs created by regulation are good jobs or more valuable jobs—a question he says hasn’t been adequately addressed by government analysis or by academic research.

Susan Dudley, the former White House regulatory chief under President George W. Bush and now director of the George Washington University Regulatory Studies Center, reiterated that point.  Regulations can be counterproductive even if they result in more hiring.

“It would be easy to think of a regulation that ‘created jobs’ that didn’t benefit society,” Dudley said via email, such as “requiring that all construction be done with a teaspoon.”

In other words, counting jobs gained or lost is too narrow a prism through which to evaluate whether a regulation is good or bad. The real question is whether it improves waterways or lengthens lives or protects the public as promised.

“The issue in regulation always should be whether it delivers benefits that justify the cost,” said Noll. “The effect of regulation on jobs has nothing to do with the mess we’re in. The current rhetoric about regulation killing jobs is nothing more than not letting a good crisis go to waste.”

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

One of my ongoing professional amusements involves what I call “The Name Game” – trying to reach agreement with colleagues on what to call the field in which we work.

Michael Porter

Corporate Social Responsibility (CSR) is the longest-standing and still most commonly used term, certainly on a global basis.  For lots of reasons, I prefer a variant of that: Corporate Responsibility.  Still other colleagues, especially in the U.S., embrace Corporate Citizenship.  Sustainability has gained in popularity in recent years.  And then there’s ESG – representing Environmental, Social and Governance issues.

New terms, and variations of existing terms, emerge with regularity.  Individuals and organizations embrace a particular definition because that definition suits their unique culture and goals.

Most terms, however, have one thing in common.  They hold that business and societal interests are not mutually exclusive; in broad terms, what’s good for society is good for business.  Therefore, business has a vested interest in addressing society’s challenges.

You might call it “shared value” – in fact, that’s exactly the term coined and suggested by Harvard Business School professor Michael Porter and Mark Kramer, co-founder with Porter of the FSG social impact consulting firm.

In the cover story of the current issue of the Harvard Business Review – The Big Idea: Creating Shared Value - Porter and Kramer urge business leaders to recognize that shared value is not "about ‘sharing’ the value already created by firms—a redistribution approach. Instead, it is about expanding the total pool of economic and social value.”

Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a “social responsibility” mind-set in which societal issues are at the periphery, not the core.

The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.

Porter and Kramer first addressed the theme of “shared value” in a December 2006 article in the Harvard Business Review, Strategy & Society: The Link Between Competitive Advantage and Corporate Social Responsibility.

In their current article, Porter and Kramaer say there are three distinct ways to create shared value: “by reconceiving products and markets, redefining productivity in the value chain, and building supportive industry clusters at the company’s locations.”

“The concept of shared value resets the boundaries of capitalism,” they write. “By better connecting companies’ success with societal improvement, it opens up many ways to serve new needs, gain efficiency, create differentiation, and expand markets.”

Companies employing shared value strategies, according to the authors, include Unilever, Nestlé, Walmart, GE and Johnson & Johnson.

Shared value is a provocative take on what’s happening – and, more importantly, what could happen – when the interests of business and society are aligned.  Porter and Kramer’s article probably won’t resolve the perennial corporate responsibility “Name Game” question, but it is a challenging and valuable analysis, well worth the read.

Photo courtesy of the World Economic Forum.

This article was first published on January 12, 2011.

Just months after fights to limits labor rights in Wisconsin and other states grabbed national attention, another messy labor dispute is getting headlines.

787 Dreamliners in final assembly facility in Everett, Wash.

One of the nation’s largest manufacturers, Boeing, has been sued by the government for allegedly punishing union workers by shifting a proposed new plant to another state. Republicans and other critics have charged that the government is overstepping its authority and creating a dangerous precedent.

The dispute has taken over congressional hearings, prompted more than a dozen states to chime in on Boeing’s side, and has even become a talking point for Republican presidential candidates. Tim Pawlenty compared the case to “the Soviet Union circa 1970s or 1960s or ‘50s .”

Amid all the rhetoric, we’ve decided to step back and lay out the facts.

What the controversy’s about

The National Labor Relations Board has alleged that Boeing scrapped its plans for a new plant in Washington state to punish union workers there for going on strike. The company opened up a nonunion plant in South Carolina last Friday. If the claims are true, Boeing broke federal labor law.

The complaint was originally brought by the machinists union in 2010. The NLRB investigated and ultimately decided that the allegations were well-founded, and it sued. Cases like this often settle before going to a judge. That hasn’t happened here. And this week, Boeing and the NLRB faced off in court for the first time.

The administrative hearing this week is a hearing on the facts. If the decision is appealed, it will go to the NLRB’s board, which serves as a quasi-judicial body and acts independently of the agency’s general counsel. (As the agency explains it, the general counsel functions as a prosecutor, and the board functions as a court.)

Though the issue hasn’t yet come before the board, Republican critics have worried that it will rule in favor of the union because it has a Democratic majority at the moment.

Why the law’s simple, but the facts in the case aren’t

Federal labor law—specifically, the National Labor Relations Act—protects workers from retaliation or threats of retaliation for exercising the right to form a union, bargain collectively, or go on strike.

“There’s nothing particularly extraordinary about this case as a matter of the legal principles at stake,” said Catherine Fisk, a University of California-Irvine law professor and former Justice Department attorney. Fisk has written extensively about labor law and the NLRB.

According to Fisk, the question is whether the labor board can prove that the dispute with the workers in Seattle was Boeing’s primary reason for moving its planned plant. Companies may legally shift work for reasons such as labor costs, but they may not do so out of retaliation against workers for past strikes or to prevent future strikes.

But at least two former NLRB chairmen have said that the case is unprecedented and have taken issue with the agency’s conclusion about Boeing’s motive.

Why establishing motive is tricky

In an interview last year with the Seattle Times, Boeing executive Jim Albaugh said the following about the decision to relocate: “The overriding factor was not the business climate, and it was not the wages we’re paying people today. It was that we can’t afford to have a work stoppage every three years.”

NLRB’s general counsel took that statement—and others—to mean that Boeing was trying to avoid the union, which had a history of strikes dating back to the 1970s.

However, the company has argued that Albaugh’s quote was taken out of context and have noted that his full statement went on to say more: “We can’t afford to continue the rate of escalation of wages as we have in the past. You know, those are the overriding factors. And my bias was to stay here but we could not get those two issues done despite the best efforts of the Union and the best efforts of the company.”

The Seattle Times had this take on Albaugh’s statements about the work in Seattle:

He repeatedly made clear that those two things—first, no strikes; second, lowered escalation of wages in the future—remain deal breakers for placing future work here.

Here’s the NLRB’s complaint against Boeing, filed in April [PDF]. Boeing has argued that it did not make the decision to open the plant in South Carolina out of retaliation against unionized employees . The company has also argued that the workers in Seattle weren’t adversely affected by the opening of the South Carolina factory because no jobs in Seattle were lost.

What’s happening now

An administrative law judge will have to decide whether the NLRB’s lawsuit against Boeing has merit. That hearing began Tuesday in Seattle.

Boeing kicked off the hearing by asking the judge to dismiss the case. Judge Clifford Anderson urged Boeing and the NLRB to work out a settlement, stressing that the case could take years if the decision keeps getting appealed: “I’ll be retired or dead,” he said.

How the process has become politicized

What was initially a dispute between one company and its workers has ballooned into a broader political fight. Republican politicians on both the state and congressional level have criticized the NLRB and rushed to Boeing’s defense, framing the NLRB’s action as an attack on what are known as right-to-work states, or states that bar employers or unions from making union membership a condition of employment. South Carolina is a right-to-work state.

Last week, Rep. Darrell Issa, chairman of the House Oversight committee, announced that his panel would investigate whether the NLRB was overreaching and trying to force workers into unions. Several House Democrats said the investigation was an attempt to influence a legal proceeding, but Issa said such hearings “are not inherently improper by virtue of exploring a pending administrative matter.”

South Carolina politicians—from the state’s attorney general to its governor to its congressional representatives—have also sought to influence the court. The state’s governor, Nikki Haley, is slated to testify tomorrow at Issa’s hearing. “There’s no secret that I don’t like the unions,” she has said. Haley has vowed to keep up the political pressure in order to stop the lawsuit.

Sen. Lindsay Graham of South Carolina has threatened to block the Obama administration’s Commerce Secretary nominee until President Obama supports Boeing: “Tell the country we think Boeing’s a good, ethical company and they’ve done nothing wrong,” Graham said this week. (Obama’s pick for Commerce Secretary happens to be a former Boeing board member.) Graham’s colleague, Sen. Jim DeMint, also filed a public records request last week for any communications the agency had with the union and Obama administration officials. DeMint had previously called the labor board “a bunch of thugs.”

And South Carolina’s attorney general—joined by the attorneys general of 15 other states—filed an amicus brief [PDF] last week alleging that the NLRB’s action against Boeing could harm job growth in the United States.

Even Republican presidential contenders have weighed in on the issue. As The Hill notes, Mitt Romney, Newt Gingrich, and Tim Pawlenty have all criticized the labor board.

The White House meanwhile, has mostly stayed quiet about the matter. A White House official told Fox News that the case is “an independent agency’s enforcement action,” and “the White House does not get involved in particular enforcement matters.”

But the White House did tell the NLRB to back off in March when the agency issued a statement criticizing House Republicans’ proposed cuts to the NLRB budget. An official from the Office of Management and Budget ordered the labor board to remove the statement from its website. “Administration positions on proposed legislation are provided by the White House,” an OMB spokeswoman told Huffington Post.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

Early last year, as they weighed whether to bar banks from speculative trading with their own money, congressional staffers turned to a key regulator for advice.

The response from Julie Williams, the chief counsel of the Office of the Comptroller of the Currency, was startling, according to people familiar with the conversations. Williams insisted new rules were unnecessary since this type of trading did not play a major role in the financial meltdown.

President Barack Obama signs the Dodd-Frank Wall Street Reform and Consumer Protection Act alongside members of Congress, the administration and US Vice President Joe Biden. July 21,2010.

Congressional Democrats went ahead and wrote the trading prohibition into Dodd-Frank, the sweeping overhaul of the nation's financial rules pushed through last July.

But now, behind closed doors, financial agency powerbrokers are jockeying over how to implement the law, a process turning out to be as bitterly contentious and politicized as passing Dodd-Frank in the first place.

Government officials -- including Williams and the OCC -- are inserting exemptions as they formulate rules to enforce the law. Some regulators, facing severe budget constraints, caution that they may not be able to carry out some of its key provisions. Foes of the law in Congress, and even some former friends, are voicing concern that aspects of the law could erode American competitiveness. Wall Street is mounting a determined lobbying campaign to blunt provisions it failed to defeat on the floors of the House and Senate.

To some, the emerging roadblocks reinforce a fear that Dodd-Frank, which was intended to touch on almost every aspect of the American financial system, may never provide the sweeping reform it promised.

"It was doomed at the outset and nothing can possibly salvage it. We might even have been better off without it," said Arthur Levitt, a former chairman of the Securities and Exchange Commission.

Dodd-Frank is so sprawling -- the legislation runs to more than 2,000 pages -- that the law firm Morrison & Foerster dubbed the tracker it created to monitor the implementation process "FrankNDodd."

The law laid out principles but often left it to regulators to write the actual rules. Those would be the same regulatory agencies that failed to prevent the financial crisis and that, in some cases, view the banks they oversee, not taxpayers, as their primary constituents.

Dodd-Frank requires 387 different rules from 20 different regulatory agencies. The Byzantine, tedious rulemaking process has occasionally pitted regulator against regulator and proved a bonanza for lobbyists.

"The decisions that are coming down are not promising," said Ted Kaufman, the former Democratic senator from Delaware who worked on the legislation. "The regulators are not making the hard decisions. If the Congress would not make the hard decisions, how can you expect the regulators to make them?"

Regulatory agencies also are caught between Republicans who complain they are moving too fast and Democrats who urge them to comply with the deadlines set in the law.

Congress set aggressive deadlines for regulators to make rules to enforce the law, and, unsurprisingly, they are failing to meet them. The agencies missed each of the 26 deadlines they were supposed to meet for April . So far, regulators have finalized 24 rules and missed deadlines on 28, according to the law firm Davis Polk.

Treasury officials are sanguine about the delays. "If we have to sacrifice a little bit of time to get to the right answer, that's the right thing to do," said Mary Miller, the assistant secretary for financial markets.

The law's defenders say most aspects of the implementation process are going well. Among the successes they point to: The Consumer Financial Protection Bureau, a new agency created to protect consumers from dangerous financial instruments they don't understand, is coming together, though the Obama administration has yet to appoint a person to head the agency. Rules have been agreed upon for portions of Dodd-Frank that give shareholders a say on executive pay, register municipal advisers and create a program to reward whistle-blowers.

"The first set of rules are going to be good ones," said the law's namesake, Rep. Barney Frank, D-Mass. "These regulators are on the right side."

Still, while the process is far from complete, the early signs suggest that several of Dodd-Frank's most critical elements are in danger, an outcome that could increase the chances of another financial crisis.

"I am concerned that we are not putting in place the things that we need to do to prevent this from happening again," says Kaufman.

Here are a few areas where followers of the process see the most cause for concern:

The Volcker Rule

What Dodd-Frank does: Colloquially named after Paul Volcker, the former head of the Federal Reserve who championed it, the rule bars banks from an activity known on the Street as "proprietary trading" -- making investments on their own behalf, rather than for clients.

The reason for the rule: During the credit bubble, highly leveraged investment banks speculated heavily in mortgage-backed securities. When those securities went bad, banks like Merrill Lynch and Citigroup were crippled. A report by the United States Senate Permanent Subcommittee on Investigations detailed how proprietary trading "led to dramatic losses in the case of Deutsche Bank and undisclosed conflicts of interest in the case of Goldman Sachs."

To comply with the law, Morgan Stanley and Goldman Sachs and other banks have jettisoned their internal hedge funds and private equity firms.

Stumbling blocks: Regulators are haggling about complicated, but vitally important, definitions.

The OCC is pushing for banks to have wider latitude in making trades to balance and manage their assets and liabilities. Dodd-Frank specifies Treasury securities as suitable for this purpose; the OCC has suggested in private negotiating sessions with fellow regulators that banks be allowed to invest in other securities as well, according to people familiar with the talks.

As currently written, the Volcker rule allows banks to trade in securities for existing clients but blocks them from doing so for future clients. The OCC has advocated lifting that restriction in the negotiating sessions, according to people familiar with the conversations.

Critics fear that adding the provisions sought by the OCC would mean banks could make almost any trade and claim an exemption, rendering the rule meaningless.

Last year, Volcker himself reached out to Acting Comptroller of the Currency John Walsh to express worry that Julie Williams, the agency counsel, was trying to weaken the rule. Walsh took umbrage at the suggestion, according to a person familiar with the conversation.

Frank said he and other lawmakers were so concerned about Williams, who has held her position since 1994 and has served as the acting comptroller twice, that they inserted a provision in the financial reform legislation that strips her job of civil-service status. "I disagree with her very strongly," Frank said. "Her job tenure was eliminated, and a new comptroller can appoint new counsel. That was deliberate."

OCC officials would not comment specifically about the agency's efforts in regard to the Volcker rule. The agency didn't respond to detailed questions about Williams' role and declined to make her available.

"We're working on an interagency basis to implement the Dodd-Frank Act in a way that is faithful to congressional intent," an OCC spokesman said. "It would not be appropriate to discuss confidential interagency deliberations regarding the formulation of pending rulemaking."

Derivatives

What Dodd-Frank does: Aiming to remake this multitrillion-dollar shadow arena into a transparent, regulated market, the law calls for most derivatives to be traded on exchanges.

Reason for the rules: Congress had prevented regulation of derivatives, which involve side bets on anything from currencies to commodities to corporate bonds, which exacerbated the losses at AIG and other banks during the financial crisis.

Stumbling blocks: Bringing order to the unregulated derivatives market has turned into one of the most difficult challenges in Dodd-Frank implementation. The rulemaking process has sparked a barrage of opposition, even from previously supportive legislators.

In late April, the Treasury Department proposed that some foreign exchange derivatives be exempted from the requirement that derivatives trade on exchanges. This could allow many transactions in the derivatives market to remain out of easy sight of participants, possibly encouraging banks to structure noncurrency trades to fit the definition of a foreign exchange swap in order to qualify for the exemption.

Treasury Department officials defend the exemption, which isn't final. "Just to say everything should be painted with the same brush is not effective," said Miller, the assistant secretary for financial markets. This part of the market "worked very well through the financial crisis."

On May 17, New York lawmakers -- including Democratic Sens. Charles Schumer and Kirsten Gillibrand, who voted for the original law -- wrote a letter to regulators and the Federal Reserve warning that aspects of the new derivatives rules impose "significant competitive disadvantages" on U.S. banks.

Another area where regulators have lagged is in the creation of data repositories mandated by the law. These repositories are supposed to make the industry less opaque to regulators and, thus, easier to oversee.

Though Dodd-Frank requires that most derivatives trade on exchanges there is an exception: Trades can also be conducted on another platform, known as a "Swap Execution Facility." Watchdogs worry that such facilities wouldn't make information on the prices at which some investors were offering to buy and sell, known as bids and offers, available to all participants. Nevertheless, the Securities and Exchange Commission has issued an initial rule, subject to finalization, that such facilities can conduct derivatives trades if they have the capacity to show participants that information, not that they do so.

"It seems like some of the regulators accepted the argument from many market participants that they should be able to continue business as usual," said Heather Slavkin, the senior legal and policy adviser for the AFL-CIO's Office of Investment. Some regulators have said that they "don't want to disrupt current market practice -- but hold on a second. The purpose of Dodd-Frank was to change market practices."

Credit Rating Agencies

What Dodd-Frank does: Creates a new regulatory structure to oversee credit ratings agencies.

Reason for the rule: Credit rating agencies were compromised by their relationships with their paying customers -- investment banks -- and issued unduly optimistic ratings on mortgage-backed securities. When the ratings proved erroneous, investors who had relied on them suffered billions of dollars in losses.

Stumbling blocks: The SEC has yet to fully staff a new office to oversee credit rating agencies. Instead, for budgetary reasons, it has opted to add personnel to existing offices to perform examinations on the rating agencies.

The SEC has created a special part of its website just to list elements of Dodd-Frank that "were deferred due to budget uncertainty, and are currently being reassessed in light of the [Fiscal Year] 2011 budget."

The SEC also has indefinitely tabled a provision that holds credit rating agencies legally liable for their ratings if they are included in securities offering documents.

The full credit rating agency reform envisioned under Dodd-Frank is turning out to be difficult to put into practice. Credit ratings have been hardwired into legislation governing everything from pension funds to municipal bonds. The law calls for more disclosure on how ratings are created, stricter supervision of the agencies by regulators and the scrubbing of legislation or rules that mandate them. But credit ratings are integral to so many investment products that it may take some time to strip from applicable laws the requirement that they be used and find suitable replacements. "[Congress] should have done the work on the front end," says Barbara Roper, director of investor protection for the Consumer Federation of America.

Resolution Authority

What Dodd-Frank does: Gives regulators the power to seize and unwind "too big to fail" financial institutions that are on the brink of failure.

Reason for the rule: Regulators hope to avoid another economically disruptive situation like the collapse of Lehman Brothers, where government officials contend their only option was to put the company into bankruptcy.

Stumbling blocks: Some wonder if Congress ordered regulators to do more than they could feasibly and legally accomplish.

Take Citigroup. It has more than 260,000 employees, operations in 160 countries and jurisdictions, over 200 million clients, and more than 170 subsidiaries worldwide. It's the poster child for the classic "too big to fail" institution. Unwinding a company the size and complexity of Citigroup in a way that preserves value and does not harm the economy may well be impossible.

"How do you put together resolution authority for these banks that have $2 trillion in assets? How do you do it across country lines?" Kaufman said.

Frank and Treasury Department officials acknowledge the potential difficulty in successfully winding down these huge institutions, but they argue that there is no other alternative.

"It's not easy, but it's not optional," Miller said.

Jesse Eisinger and Jake Bernstein were awarded the Pulitzer Prize for National Reporting in April 2011 for a series of stories on questionable Wall Street practices that helped make the financial crisis the worst since the Great Depression.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.

by Jesse Eisinger, ProPublica

Later this month, the Federal Reserve is going to let banks know how they did on its most recent round of “stress tests.”

Banks are eager to bring doctors’ notes to their meetings with investors, displaying their bills of health. They want regulators to allow them to start paying, or increasing, dividends to investors or to initiate stock buyback programs.

This set of exams, announced in November, is Son of Stress Test 2009, a follow-up to the tests the Fed conducted in the wake of the financial crisis.

But something seems different this time around. It’s almost as if the banks knew their results, even before the testing was complete.

Since the end of last year, banks have been bragging about their rude health. Bank of America’s chief executive, Brian T. Moynihan, suggested that the bank would raise its dividend above its current token amount. Jamie Dimon, JPMorgan Chase’s leader, did the same. Warren E. Buffett suggested in his shareholder letter that Wells Fargo was about to pass with flying colors.

Of course, banks ought to have a good idea of the results. They came up with the questions — and the answers.

The Fed gave the banks one economic assumption — a recession — to test their books against, but otherwise the measures were chosen by banks themselves. The Fed just vetted them. Seems like a low bar.

“It’s a take-home exam where you supply the math and then it’s pass/fail,” said Joshua Rosner, an analyst with the independent research firm Graham-Fisher & Company.

Though the Fed isn’t labeling these exams an official banking system stress test, it could be every bit as consequential. Just as the 2009 tests required some banks to raise money — and the most fragile improved their capital to the tune of about $77 billion — this Stress Test Lite could allow some banks to slough off capital.

Unfortunately, declarations of banking system vigor seem premature. Housing has resumed its fall, and many analysts expect national prices to fall on average this year. Commercial real estate is a looming problem. Unemployment remains obdurately high.

In 2009, critics complained that the stress tests were driven by appearances and that the government’s true, and thinly disguised, goal was to shore up confidence in the markets. The conclusion — that, over all, the system was sound — was inevitable.

“The stress tests were designed to reassure the capital markets that the government was not going to restructure the banks,” said Damon A. Silvers, who serves on the Congressional Oversight Panel, which monitors the Troubled Asset Relief Program. “But the capital raises compared to the problem assets were not that big.”

In the first round, the Fed disclosed the economic assumptions, a baseline and an “adverse” situation, which the banks had to test against. (In that event, even the adverse situation for 2009 wasn’t as dire as reality.)

Unfortunately, the central bank didn’t disclose enough information to actually judge the results. The Congressional Oversight Panel enlisted two University of California, Berkeley professors who specialized in banking and risk assessment to judge the tests. They had to throw up their hands.

The two “were interpreting shapes on the wall,” said Eric Talley, a professor of law at Berkeley, who worked on the project. “We couldn’t see what the shapes were, so had to look at residue to see if those were the shapes you would normally want to use.”

This time, the Fed hasn’t made even that cursory amount of criteria public.

The first round of tests was based on self-reported data of asset quality and loss estimates. This time around, that weakness is squared. Now the banks are reporting on their own internal capital plans based on their own asset assessment.

“It could be that banks have been really assiduous about own risk portfolios,” Professor Talley said. “Or it could be that too much control over the process has been handed over to banks. It’s hard to tell.”

While the Fed got hammered by critics who assailed the tests as too deferential to the banks, the central bank was doing something unprecedented and holding the banks to what it viewed as a solid capital standard.

Inevitably, though privately, banks screamed to the regulators about how harsh they were. They were reluctant to do so publicly because we were still in that fleeting period when bankers displayed a modicum of chagrin for the debacle they had caused. That moment has passed.

It would be alarming if the regulators had internalized their complaints. The operating theory of supervision from the Treasury secretary, Timothy F. Geithner, and the banking regulators continues to hold: we can push banks to restructure, without forcing them. Banks can be made to raise capital and reduce their risky activities, largely through encouragement and moral suasion. They can please shareholders and be safe at the same time.

We had better hope that the banks actually are healthy. The banks say ‘Trust us,’ and the Fed is doing just that.

ProPublica is an independent, non-profit newsroom that produces investigative journalism in the public interest.   This article is republished with permission under a Creative Commons license.