If a human being, as a citizen, does not obey the laws of the country, he ends up in prison. What
happens when a corporation does the same thing? It is mostly a monetary punishment coming out
of the pockets of the shareholders. Where is the responsibility of senior management or Board of
directors? Exxon-Valdez, BP-Gulf, Union Carbide-Bhopal, Enron are not the only examples but there
are too many to mention. My point is what is the exact responsibility of the corporate citizenship?
Corporations are vested with the full rights of the constitution. Do the corporations have any social
responsibility beyond donating a few million dollars? In these days of economic crisis, Corporations are
sitting on huge piles of unused cash. That is 1.8 trillion dollars. Granted these corporations may have
wanted to save for a rainy day. The question is whether you need one umbrella or dozens of them! The
sound economic practice is to have cash or the equivalent reserves of 1.5 or 2 times of your liabilities.
Beyond that, Corporate assets are considered unused i.e. unproductive. Excessive cash holdings are
considered damaging to the national economy. My radical solution is to force the corporations to use
these excessive reserves.
Any corporation holding excessive cash reserves must find one of following solutions. (1)
Declare dividends of excessive reserves, this can release almost a trillion dollars or (2) pay 25% tax. This
can release $ 450 billion in to economy or (3) invest same amount in innovations, research or finance
start ups, small and medium size businesses related to their activities. Since money circulates nine times
the effect would be pumping several trillion dollars into the economy. The rising economy will reduce
deficits and perhaps help to reduce the debt burden. Republican will love this solution as the
corporations have an option to pay tax or pay dividends or invest in a productive economy.
All we are asking corporations to do is to take their citizenship seriously and be socially
responsible. Put your food where your mouth is. Your existence depends on the society- nay… say on
the well being of the society. The trillion dollars corporations put into society will return to them many
times in the form of more revenue and profit. Cash reserves of $ 1.8 trillion are derived from the
consumers who spent on their products. By restricting the flow of money, corporations have stymied
the recovery of the economy- ultimately to their detriment for loss of job markets. It is a very short
sighted approach. Let me end this with what Thomas Jefferson had to say in 1802. “I believe that
banking institutions are more dangerous to our liberties than standing armies. If the American people
ever allow private banks to control the issue of their currency…….., the banks and corporations that will
grow up around the banks will deprive the people of all property- until their children wake- up
homeless on the continent their fathers conquered.”
Occupy Wall Street protests are spreading across the nation. Occupy Wall Street protests will
mean little in the long run unless the movement turns into Occupy Boardrooms. Consider this:
We are fed up with the way Washington works. Hardly any legislation passes without approvals
from the lobbyists. Moneyed Lobbyists are key players as money is the mothers’ milk of politics.
These moneyed lobbyists are “employees” of the big corporations. Big corporations mean
Board of directors of big corporations. Does anyone have doubts to this extension of logic?
Our concept of managing corporations is an 18th century concept. Since then much water has
passed into the Potomac and Hudson rivers. Gone are the days when the influence of the
large corporation was limited. In the days of global economics with a global presence, many
corporations’ revenue is larger than the GNP of many countries. These corporations have
conflicting interests. One decision by a multinational company affects the lives of millions of
people across the world. My question is how should a responsible corporation act?
A concept that propagates that the Corporation is responsible to stockholders only is very old
and outdated. Free economy ideas subscribe that only Capital produces a profit. Communism
professed that labor matters. Today both ideas are proven wrong. Today we are coming to
the conclusion that no corporation can exist without the contribution of the capital, labor and
society at large. The last element, society, is becoming more and more important. Consider
this: If no one had bought IPods, tablets or smart phones, where would Apple be today? Had
these devices not been invented by the geniuses of the employees what would be the value of
the stock of Apple? At last count, Apple is sitting on a pile of 76 Billion in cash without using it.
There are many ways Apple could have used this money to help society while not hurting itself.
The election of the Board of Directors is a system of insiders’ play. Practically the shareholders
have very little say unless a proxy fight is going on. Millions of directors of thousands of
corporations in the last 100 years were elected. How many times have shareholders had a
real influence? Millions of customers who make a corporation alive, thousands of employees
who keep the wheels running, millions of small shareholders of thousands of vendors form the
substratum basis of a successful corporation. These are the stakeholders. Every decision by the
Board of directors affects each one of them.
The present system of the election of a Board of directors must be discarded. It should be
replaced by the Board of trustees. The management of a corporation must be restricted from
nominating the board. Each stakeholder category, i.e. shareholders, employees, vendors,
society at large, should have a proportionate representation in the appointment of trustees.
I am not recommending the role of the government but proposing the recognition of the
interests various stakeholders of the corporation in a comprehensive format. There are too
many corporate disasters where Board of directors failed in their due duties. What would have
happened if a human being had been found solely guilty of a BP-gulf like disaster? He would
probably be behind the bars. Corporations are treated as unnatural legal entities with the full
rights of the constitution. Corporations must be asked for the corresponding responsibilities.
This brings us to an entirely new topic of corporate responsibility. I will be posting it on
www.divinereflections.org.
One of the problems in the housing recover us higher credit requirements impose by FHA and other financial giants. 620 Fico score is bar set by FHA. Banks even have higher requirements. 50 million Americans have credit problems due to this recession. There are uncounted millions of small business owners struggling to keep their businesses afloat damaging their personal credit in the process. FICO is not a guarantee of unfailing loan. It is score of probability based mathematical formulas based upon certain factors. It is an attempt to predict the human behavior under certain stress factors. No two humans are equal in behaviors. Each one of us is different in thinking, culture, make up and barriers, ability to sustain the stress, family values and host of other factors. My point is we are working with an unperfected tool to perfect a situation. Since the tool is imperfect, we are willing to accept imperfections to a certain degree. What is our tolerance level of imperfect loans?
Most of us are honest and want to honor our obligations. When we are asked to fight the nuclear war with swords we give up and surrender. Take the case of strategic defaults. The studies found that as the percentage of negative increases percentage of likelihood of defaults raises sharply. The translation is: in unequal war, lender will eat the losses. Can we find a better solution? Yes, we can.
Use the FICO as one of the tools but not the final determinant. Provide the substitute options for the weaker FICO score. These could be done in many ways – such as (1) provide additional insurance against general decline values in neighborhood (2) provide job/ income insurance for longer period of 2-3 years (3) to share with losses in case of recession of economy. This is already happening in form of short sales (4) determine loan balance different from acceptable FICO to available FICO and unsure such difference to make viable in different was such as (a) non-interest bearing additional loan (b) secondary security by other assets or third party-friends-family guarantee for the difference (c)allow seller carried financing (d) buy a blanket insurance for the amount of difference between 620 score and 580 score, We need to think out of the box now. Old approaches are not working. Lenders do not want to consider new ideas. Borrowers are too frustrated and media is too occupied with past problems. My prayers: God save our mortgages and bless new investments.
How many of you will bet with me that subprime will come back with a new name? There are needy borrowers and the greedy lenders.
Some arm-chair economists say it will take year 2030 to return to peak prices in California. My bet is 5 years.
The economy is moving along hesitatingly. I believe, it is taken off life support and feeding tubes. Multifamily market is the beneficiary of current home foreclosure waves. It is time to buy multifamily in first tier markets- if you are in market. Hospitality market is another market to get your dollars worth now. If you are a small investor, stay away from trophy properties. Like trophy wives, they are expensive and are show pieces. I like to stay with man market-middle tier. Properties between 5-10 million ranges are good bets. Single family market is not going to be speculative in near future. Employment market is the blood of single family housing. We lost 9-10 million jobs during this economic play by Wall Street. Greed is the blood lines of Wall Street players. You can bet your dollar on recovery of subprime, no matter how fed devises the rules. Human nature of agreed and need will prevail.
Obama administration is afraid to tell tiger a tiger, but a cat. Regulators are proposing $20 billion settlement and distressed home owners to settle claims against the lenders. $20 billion may sound a big like a big number but it appears the administration needs to hire a statistician to work on the numbers. $20 billion dollars divided by 7.5 million homeowners comes out to a little over $2,675 per home. When home values have dropped by 30% or more, how do you expect one to accept 1-2% settlement? Who is afraid of the tiger?
The sep/case – shriller index for the housing fell in February for most Metro areas, except Washington D.C market. Hotel and other commercial sectors of real estate are showing signs of revival. Housing still remains weaker link of economy. It is unlikely to rebound until lost jobs are recovered. It means a longer waiting period. Fed is not going to come up with another stimulus package for the housing. If the rental rates re cheaper than your mortgage payment, you are a candidate for the strategic default. People do not have patience to wait five years to recoup the losses. Obama administration needs to understand human psychology-i.e. what motivated the person. Unless mortgage payments are brought to the market level, homeowners will continue to default for own economic well-being. Lenders need to understand the monthly payment of any mortgage not only depends upon economic health of the borrower but also on the state of general economy and you as the lenders also too some serious risks. If the person is sick, you can give the medicine but if it is dead, you have to pay for casket. Lenders make your choices wisely.
Politicians in Washington are struggling for deficit reduction plan. Every lawmaker has his pet plan or not so pet project or issue to save or destroy. The law of contradictions tells us that you can argue anything for anything. Lawyers will gladly affirm this truth. Even every citizen will have own choices where to reduce and where not to. When we look at the tree rather than the forest, this is likely to happen. My suggestion is to treat the federal budget like households will do it. These are the facts:
• More than half of our working time is spent to pay for the taxes – be it federal, state, or local.
• More than half of our taxes are paid for the debt service, when you include state and local debt services.
• Thirty cents out of each dollar goes for the defense spending.
• What is left now? No wonder law makers have very few choices.
What does an average household do in such circumstances? Bankruptcy or renegotiate the debt. He feeds his family first, and then keeps the roof over head and rest is negotiable. He feeds his family first, and then keeps the roof over head and rest is negotiable. Since long, I am asking for the federal bankruptcy. Russia defaulted few years ago. Germany did it and many European countries are on the verge of it. This will allow us to clean up our mess for the next 50-70 years or so.
• Dollar will lose the status of the world currency. So what! It is happening any way beyond the control of USA. On the contrary, in a short time, us dollar will emerge as the strongest currency.
• Government securities holders including foreign nations will renegotiate the debt and its terms.
• Entitlements and other mandatory spending will be brought down to reasonable levels or eliminated.
• Taxes will be reduced to a level that people will realize real income which itself will boost the economy and consequently federal treasury.
Finally, to the defense hawks, which country is likely to attack USA in next 10-15 years on US soil? Russia – China – Germany – Japan? If you cannot name one country, bring the troops home, dismantle far away bases, let each nation take care of our defenses. What is the use of sophisticated technology when you cannot educate your own children, when your elderly cannot have sufficient food or prescribed medications. You must get our house in order before you play a decisive role on a world theatre.
Let us take away the power to budget from the politicians!
Hey! What’s up with the economy? Numbers are down again. It seems we are back to square one. Politicians are trying to fix the roof when the foundation is cracking. Congress and president are trying to treat the symptoms while the cause Is the cancerous. Unless you are over in your seventies, you need to wrong about the health of our national finance. Next recession will be much more severe than what we just passed through. If US dollars is going to be one of the several world currencies (or a new world unit consisting of several major currencies), sovereign investor will not buy our industries or will buy at higher interest rates. In simple terms, we will have fewer and fewer choices to fix our structural problems. If we are good students, we should learn from what happened to other countries in the last 50 years. Germany, Russia, Mexico, Greece and many others had to swallow bitter pills. United world can save smaller countries but to save United States is another matter. I am not pessimistic but reading the writings on the wall. I do not see political will to fix the real issue. Both parties have their constituencies to satisfy. What we will see will be mixed bag of the nuts that each politician sell to his or her constituents. We have trusted politicians to fix our problems, but they never delivered for the lat 60 years or more. Enough is enough. Distributing the money gives them power. They will never give up the power easily, until the people revolt or the world market will force United States to place in real reforms.
We can devise an independent forum of the non-affiliated economists, finance managers, common persons who will be empowered to institute real reforms of budgeting. Such panel must be free from the special interest groups and worries of re-elections. It should have a minimum life of six years so it can plan the long term effects. More on this later.
Pundits are now saying, it will take 5 years to recover lost home values. In that case, it will never happen. Why?
• You can’t predict the consumer behavior for five years in advance. Your assumptions will go wrong.
• World economic forces are threatening US dollar to replace it as a world currency.
• If not officially, but practically, a new world currency unit is likely to be in effect. In five years. This will not happen if US begins to implement required changes with the federal budget – a less likely event.
• If a new unit of world currency (WC) is devised, US debt burden from other sovereign nations will be doubled, making it impossible to manage.
• Result will be higher taxes, less services, inflation etc.
Am I wrong? Check what happened to British pound when it lists the states as a world currency.
• In case of the hyper-inflation, check what happened in Germany, Mexico and other euro countries. Is that not a default?
• I am advocating a systematic restructuring is us debt now to avoid the calamities. Initially it will look bad, but it will make the US dollar stronger and we can avoid calamities of dollar not being a world currency.
God Bless America
*note
• 42 million on food stamps 13%
• Even retaining 50-60% of world currency mean doubling gas prices to $8, pay interest 6-7% US doubling of all chemicals – massive inflation.
- Wages and salaries most hurt
• 46 states have deficits. States are selling states assets to balance budgets RLZ prisoners
Purandar Amin is a hands-on multi-faceted honor Graduate in Accounting, Economics and Laws, Author and a Public Speaker. He is a 30 year veteran of the real estate business, a broker, an attorney, and a Chartered Accountant.