tag:theconversation.com,2011:/global/topics/bank-of-america-12352/articlesBank of America – The Conversation2024-03-05T16:34:19Ztag:theconversation.com,2011:article/2245632024-03-05T16:34:19Z2024-03-05T16:34:19ZEarly Hollywood was financed by Italian immigrants – as our new documentary shows<figure><img src="https://images.theconversation.com/files/578288/original/file-20240227-16-oa1sag.jpg?ixlib=rb-1.1.0&rect=12%2C4%2C2862%2C1612&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">A. P. Giannini photographed in March 1927, and the Hollywood sign.</span> <span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:M._A._P._Giannini,_président_de_la_Banque_d%27Italie.jpg">Agence Rol. Agence photographique/Shutterstock</a></span></figcaption></figure><p>What do Charlie Chaplin, Walt Disney and Frank Capra have in common? The same Italian banker.</p>
<p>Early Hollywood movies have been widely studied and investigated. But surprisingly little is known about their financing, and how the contributions of low-income immigrants helped shape the Hollywood film industry – especially Italians.</p>
<p>Approximately <a href="https://www.proquest.com/openview/df00972512508ffd6e0cd72cb6826337/1?pq-origsite=gscholar&cbl=1819447">4 million people</a> from disadvantaged backgrounds had arrived in the US via Ellis Island by 1920. They have <a href="https://www.cambridge.org/core/journals/urban-history/article/abs/black-hands-and-white-hearts-italian-immigrants-as-urban-racial-types-in-early-american-film-culture/895A19920CDD8E55120426314ACFC5C9">often been portrayed</a> in film as delinquents of New York’s Lower East Side. This stereotypical character assigned to Italians persisted for decades, and was revived by the popularity of <a href="https://books.google.it/books?hl=it&lr=&id=2482tWkpfpQC&oi=fnd&pg=PA19&dq=mafia+movies+italians+in+america&ots=QgNWfZMFT1&sig=zA9LZ9WOs8DMg3KG-p6TWuhlwSM&redir_esc=y#v=onepage&q=mafia%20movies%20italians%20in%20america&f=false">mafia movies</a> and TV shows such as <a href="https://www.tandfonline.com/doi/abs/10.3200/JPFT.32.2.49-73?casa_token=xkSBo6cXC4sAAAAA:vt_Va3IVhP9pvawmG8e08i3yRlQtleZzSf7ARzYoY3y9wu_9ma1BIk4XKjMDM0mxpO8uq4BmpNc">The Sopranos</a>.</p>
<p>These portrayals have progressively influenced <a href="https://www.jstor.org/stable/467405?saml_data=eyJzYW1sVG9rZW4iOiJmNTc4OWJiMi1kMGEzLTQ0ZjQtODAzNy02ZmZkMWY5NGMyZjYiLCJlbWFpbCI6InpvcHBlbGNAd21pbi5hYy51ayIsImluc3RpdHV0aW9uSWRzIjpbIjhhYzIyMzA2LTAzMjMtNGE0OS1hZTFlLTUwNzE1YjVmMjY4YSJdfQ">public perceptions and attitudes</a> toward Italian immigrants and their descendants. But in reality, early Italian immigrants were central to the establishment and growth of the American economy. One visionary financier, whose name is not (yet) as well known as it should be (and that our <a href="https://www.daitona.it/projects/feature/a-p-giannini-bank-to-the-future/">upcoming documentary research</a> aims to spotlight) saw an opportunity to change the narrative.</p>
<h2>AP Giannini</h2>
<p>Amadeo Peter Giannini (1870-1949), commonly known as AP, was a popular figure in San Francisco. He was the son of Italian immigrants and the founder of the Bank of Italy, which he progressively grew into the Bank of America. Through this institution, Giannini contributed to the birth of projects such as the <a href="https://www.pbs.org/wgbh/americanexperience/features/goldengate-gianini/">Golden Gate Bridge</a> (1937), the 1948 <a href="https://www.imf.org/external/np/exr/center/mm/eng/mm_dr_03.htm#:%7E:text=In%20the%20end%2C%20a%20total,exceeded%2C%20their%20prewar%20production%20levels/">Marshall Plan</a> (in which the US provided western European countries with economic aid following the second world war). He was also an important player in the birth of Hollywood.</p>
<p>Sometimes known as the <a href="https://books.google.co.uk/books/about/A_P_Giannini.html?id=agBGtAEACAAJ&redir_esc=y">“people’s banker”</a> or the <a href="https://www.newacademia.com/books/the-gentleman-banker-amadeo-peter-giannini-a-biographical-novel/">“gentleman banker”</a>, Giannini started out working in agriculture through his small family business. Having inherited some shares from his father-in-law in a small bank he was able to see that the system was constructed by and for the wealthy. </p>
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<img alt="A US national bank note issued by the Bank of Italy in 1927." src="https://images.theconversation.com/files/578300/original/file-20240227-20-bw4usc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/578300/original/file-20240227-20-bw4usc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=258&fit=crop&dpr=1 600w, https://images.theconversation.com/files/578300/original/file-20240227-20-bw4usc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=258&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/578300/original/file-20240227-20-bw4usc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=258&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/578300/original/file-20240227-20-bw4usc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=325&fit=crop&dpr=1 754w, https://images.theconversation.com/files/578300/original/file-20240227-20-bw4usc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=325&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/578300/original/file-20240227-20-bw4usc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=325&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">US national bank note issued by the Bank of Italy in 1927.</span>
<span class="attribution"><a class="source" href="https://commons.wikimedia.org/wiki/File:US_$5_National_Bank_Note_from_Bank_of_Italy_NT%26SA,_San_Francisco.jpg">The Bureau of Engraving and Printing</a></span>
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<p>Giannini believed that immigrants chasing the American dream, like his own father and mother from Liguria, could be an important resource for the US. He believed that ethical banking would allow general social mobility, and with it the opportunity to finance young industries – such as cinema.</p>
<p>Giannini founded the Bank of Italy in 1904 as a small bank in San Francisco. There, minorities who were traditionally excluded from any form of financing, such as Italian, Chinese, Irish, Mexican and Portuguese people, could deposit their savings – no matter how modest. The bank was more than a place where to put your salary. It was an entry way into American institutions enabling such migrants to borrow money ethically, often on a handshake, and grow. </p>
<p>Not only did these deposits allow the migrant community to settle and flourish, but it meant that employment could be created by investing in immigrant businesses.</p>
<h2>Changing the game</h2>
<p>The most promising of these businesses was the movie studio system. The Bank of Italy began to lend money to young filmmakers and producers in Hollywood. Many of these filmmakers didn’t qualify for business loans, but as Giannini believed in building not only an industry, but a community, the bank would extend personal loans. </p>
<p>Producer Sol Lesser, best known for his Tarzan movies, is a case in point. While still a minor, he received a private loan undersigned by Giannini himself to buy seats for his first Nickelodeon movie theatre. This was the beginning of his path towards becoming an influential producer.</p>
<p>Giannini’s little bank figured out the lending system that has since become the industry standard. As Warren Sherk of the Margaret Herrick Library at the Academy of Motion Pictures Arts and Sciences explains in our upcoming documentary <a href="https://www.youtube.com/watch?v=Vd-2KOQ6Mqg">AP Giannini: Bank to the future</a>, banks initially used film negatives as collateral, believing they held value since they could be used to make sellable prints and therefore allow them to recover their investment were the producers unable to fulfil the loan payments. But this approach prevented filmmakers from accessing, printing and distributing their own films. </p>
<p>As a solution, Giannini instead came up with a new protocol for film loans where the bank would secure the rights and distribution income of two films that had already been produced as security for the loan of the film financed by the bank. He also began what is now known as “attachment” – the practice of having a star attached to a film in order to secure ticket sales</p>
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<iframe width="440" height="260" src="https://www.youtube.com/embed/Vd-2KOQ6Mqg?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">The trailer for our documentary, AP Giannini - Bank To The Future.</span></figcaption>
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<p>With this new financing model, the bank’s risk was minimised, the filmmakers were able to meet the conditions and the Hollywood industry thrived. Classics such as The Tramp (1915), Snow White and the Seven Dwarfs (1937) and Gone With the Wind (1939) were financed through Giannini. Filmmakers including Charlie Chaplin, Frank Capra, Walt Disney and Alfred Hitchcock, and organisations such as United Artists and even the Academy itself were backed by Giannini’s revolutionary vision.</p>
<p>The transparency of Giannini’s bank was central to his success and saved it during some of the most challenging financial times of the 20th century. Its stability was nourished by the constant influx of immigrant money, deposited by those yearning to become respected American citizens with a bank account, a privilege that was extended to women in 1920 when Bank of Italy opened the first women’s department in the country. </p>
<p>So much so that, <a href="https://www.youtube.com/watch?v=Vd-2KOQ6Mqg">as Sherk explains</a>, it was immigrants’ nickels and dimes, deposited in Bank of Italy and Bank of America, that funded the early Hollywood film industry. </p>
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<img alt="" src="https://images.theconversation.com/files/536131/original/file-20230706-17-460x2d.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/536131/original/file-20230706-17-460x2d.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/536131/original/file-20230706-17-460x2d.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/536131/original/file-20230706-17-460x2d.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/536131/original/file-20230706-17-460x2d.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/536131/original/file-20230706-17-460x2d.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/536131/original/file-20230706-17-460x2d.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<p class="fine-print"><em><span>The authors do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>How the son of Italian immigrants created the Bank of America, and funded early Hollywood in the process.Valentina Signorelli, Associate Professor in Film and TV, University of GreenwichCecilia Zoppelletto, Visiting lecturer in film studies, University of WestminsterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/2055372023-05-16T17:34:27Z2023-05-16T17:34:27ZWar rooms and bailouts: How banks and the Fed are preparing for a US default – and the chaos expected to follow<figure><img src="https://images.theconversation.com/files/526339/original/file-20230515-21691-8klpm5.jpg?ixlib=rb-1.1.0&rect=53%2C80%2C3534%2C2308&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">'Default doomscrolling' again, Mr. Powell?
</span> <span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/JapanG7Finance/c9f9b3cb0a3542858fc79ab85ea9d5f7/photo?Query=Jerome%20powell&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=2123&currentItemNo=20">Kimimasa Mayama/Pool Photo via AP</a></span></figcaption></figure><p><a href="https://www.bloomberg.com/news/articles/2023-05-11/jpmorgan-convenes-weekly-war-room-over-us-debt-ceiling-standoff?srnd=premium">Convening war rooms</a>, <a href="https://www.axios.com/2023/04/19/fed-debt-ceiling-default-playbook">planning speedy bailouts</a> and <a href="https://www.reuters.com/markets/us/how-wall-street-is-preparing-possible-us-debt-default-2023-05-15/">raising house-on-fire alarm bells</a>: Those are a few of the ways the biggest banks and financial regulators are preparing for a potential default on U.S. debt.</p>
<p>“You hope it doesn’t happen, but hope is not a strategy – so you prepare for it,” Brian Moynihan, CEO of Bank of America, the nation’s second-biggest lender, <a href="https://www.cnn.com/2023/02/06/investing/bank-of-america-ceo-brian-moynihan-debt-default/index.html">said in a television interview</a>. </p>
<p>The doomsday planning is a reaction to a <a href="https://apnews.com/article/debt-limit-biden-mccarthy-white-house-meeting-c613984327ba0fc039853c057878f7e7#:%7E:text=WASHINGTON%20(AP)%20%E2%80%94%20House%20Speaker,raise%20its%20legal%20borrowing%20limit.">lack of progress</a> in talks between President Joe Biden and House Republicans over raising the US$31.4 trillion debt ceiling – <a href="https://www.nytimes.com/2023/05/16/us/politics/biden-mccarthy-debt-ceiling.html">another round of negotiations</a> took place on May 16, 2023. Without an increase in the debt limit, the U.S. can’t borrow more money to cover its bills – all of which have already been agreed to by Congress – and in practical terms that means a default.</p>
<p>What happens if a default occurs is an open question, but economists – <a href="https://www.bakerinstitute.org/expert/john-w-diamond">including me</a> – generally expect financial chaos as access to credit dries up and borrowing costs rise quickly for companies and consumers. A severe and prolonged global economic recession would be all but guaranteed, and the reputation of the U.S. and the dollar as beacons of stability and safety <a href="https://theconversation.com/link-198395">would be further tarnished</a>. </p>
<p>But how do you prepare for an event that <a href="https://www.nytimes.com/2023/03/07/us/politics/debt-default-economy.html">many expect would trigger</a> the worst global recession since the 1930s? </p>
<h2>Preparing for panic</h2>
<p>Jamie Dimon, who runs JPMorgan Chase, the biggest U.S. bank, told Bloomberg he’s <a href="https://www.bloomberg.com/news/articles/2023-05-11/jpmorgan-convenes-weekly-war-room-over-us-debt-ceiling-standoff?srnd=premium&sref=Hjm5biAW">been convening a weekly war room</a> to discuss a potential default and how the bank should respond. The meetings are likely to become more frequent as June 1 – the date on which the <a href="https://www.reuters.com/markets/us/us-may-run-short-cash-after-june-1-without-debt-limit-hike-treasury-2023-05-01/">U.S. might run out of cash</a> – nears. </p>
<p>Dimon described the wide range of economic and financial effects that the group must consider such as the impact on “contracts, collateral, clearing houses, clients” – basically every corner of the financial system – at home and abroad. </p>
<p>“I don’t think it’s going to happen — because it gets catastrophic, and the closer you get to it, you will have panic,” he said.</p>
<p>That’s when rational decision-making <a href="https://www.brookings.edu/blog/ben-bernanke/2018/09/13/financial-panic-and-credit-disruptions-in-the-2007-09-crisis">gives way to fear and irrationality</a>. Markets overtaken by these emotions are chaotic and leave lasting economic scars.</p>
<p>Banks haven’t revealed many of the details of how they are responding, but we can glean some clues from how they’ve reacted to past crises, such as the <a href="https://www.federalreservehistory.org/essays/great-recession-and-its-aftermath">financial crisis in 2008</a> or the <a href="https://www.bakerinstitute.org/research/reflecting-budget-control-act-2011-and-its-relevance-now">debt ceiling showdowns of 2011</a> and <a href="https://www.nytimes.com/2013/10/17/us/congress-budget-debate.html">2013</a>. </p>
<p>One important way banks can prepare is by <a href="https://www.bloomberg.com/news/articles/2022-10-10/the-most-powerful-buyers-in-treasuries-are-all-bailing-at-once">reducing exposure</a> to Treasury securities – some or all of which could be considered to be in default once the U.S. exhausts its ability to pay all of its bill. All U.S. debts are referred to as Treasury bills or bonds. </p>
<p>The value of Treasurys is likely to plunge in the case of a default, which could weaken bank balance sheets even more. The recent bank crisis, in fact, was <a href="https://www.npr.org/2023/03/19/1164531413/bank-fail-how-government-bonds-turned-toxic-for-silicon-valley-bank">prompted primarily by a drop</a> in the market value of Treasurys due to the sharp rise in interest rates over the past year. And a default would only make that problem worse, with close to 190 banks <a href="http://dx.doi.org/10.2139/ssrn.4387676">at risk of failure</a> as of March 2023.</p>
<p>Another strategy banks can use to hedge their exposure to a sell-off in Treasurys is to buy <a href="https://www.investopedia.com/terms/c/creditdefaultswap.asp">credit default swaps</a>, financial instruments that allow an investor to offset credit risk. Data suggests this is already happening, as the cost to protect U.S. government debt from default <a href="https://www.bloomberg.com/news/articles/2023-05-10/us-default-insurance-cost-eclipses-brazil-mexico-as-x-day-nears">is higher than that of Brazil, Greece and Mexico</a>, all of which have defaulted multiple times and have much lower credit ratings. </p>
<p>But buying credit default swaps at ever-higher prices limits a third key preventive measure for banks: keeping their cash balances as high as possible so they’re able and ready to deal with whatever happens in a default. </p>
<figure class="align-center ">
<img alt="Four white men sit on white couches in a large office filled with presidential portraits." src="https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/526341/original/file-20230515-31621-7oogjm.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Little has come out of fiscal negotiations between Mitch McConnell, left, Kevin McCarthy, second from left, President Joe Biden, second from right, and Chuck Schumer.</span>
<span class="attribution"><a class="source" href="https://newsroom.ap.org/detail/CongressDebtLimit/96a3bb6abb544bc98158ccfb77f4c61d/photo?Query=biden%20mccarthy&mediaType=photo&sortBy=arrivaldatetime:desc&dateRange=Anytime&totalCount=666&currentItemNo=1">AP Photo/Evan Vucci</a></span>
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<h2>Keeping the financial plumbing working</h2>
<p>Financial industry groups and financial regulators have also gamed out a potential default with an eye toward keeping the financial system running as best they can.</p>
<p>The Securities Industry and Financial Markets Association, for example, <a href="https://www.reuters.com/markets/us/how-wall-street-is-preparing-possible-us-debt-default-2023-05-15/">has been updating</a> <a href="https://www.sifma.org/wp-content/uploads/2018/01/SIFMA-Treasury-Payment-Disruption-Playbook-December-2021.pdf">its playbook</a> to dictate how players in the Treasurys market will communicate in case of a default. </p>
<p>And the Federal Reserve, which is broadly responsible for ensuring financial stability, has been pondering a U.S. default for over a decade. One such instance came in 2013, when Republicans <a href="https://theconversation.com/a-brief-history-of-debt-ceiling-crises-and-the-political-chaos-theyve-unleashed-205178">demanded the elimination</a> of the Affordable Care Act in exchange for raising the debt ceiling. Ultimately, Republicans capitulated and raised the limit one day before the U.S. was expected to run out of cash. </p>
<p>One of the biggest concerns Fed officials had at the time, according to a <a href="https://www.federalreserve.gov/monetarypolicy/files/FOMC20131016confcall.pdf">meeting transcript recently made public</a>, is that the U.S. Treasury would no longer be able to access financial markets to “roll over” maturing debt. While hitting the current ceiling prevents the U.S. from issuing new debt that exceeds $31.4 trillion, the government still has to roll existing debt into new debt as it comes due. On May 15, 2023, for example, the government <a href="https://home.treasury.gov/news/press-releases/jy1460">issued just under $100 billion</a> in notes and bonds to replace maturing debt and raise cash. </p>
<p>The risk is that there would be too few buyers at one of the <a href="https://www.treasurydirect.gov/auctions/upcoming/">government’s daily debt auctions</a> – at which investors from around the world bid to buy Treasury bills and bonds. If that happens, the government would have to use its cash on hand to pay back investors who hold maturing debt. </p>
<p>That would further reduce the amount of cash available for Social Security payments, federal employees wages and countless other items the <a href="https://fiscaldata.treasury.gov/americas-finance-guide/#">government spent over $6 trillion on</a> in 2022. This would be nothing short of apocalyptic if the Fed could not save the day. </p>
<p>To mitigate that risk, the Fed said it could could immediately step in as a buyer of last resort for Treasurys, quickly lower its lending rates and provide whatever funding is needed in an attempt to prevent financial contagion and collapse. The Fed is likely having the same conversations and preparing similar actions today.</p>
<h2>A self-imposed catastrophe</h2>
<p>Ultimately, I hope that Congress does what it has done in every previous debt ceiling scare: raise the limit. </p>
<p>These contentious debates over lifting it have become too commonplace, even as lawmakers on both sides of the aisle express concerns about the growing federal debt and the need to <a href="https://www.nytimes.com/2023/01/19/us/politics/republicans-democrats-debt-ceiling.html">rein in government spending</a>. Even when these debates result in some bipartisan effort to rein in spending, as they did in 2011, <a href="https://www.bakerinstitute.org/research/reflecting-budget-control-act-2011-and-its-relevance-now">history shows they fail</a>, as energy analyst Autumn Engebretson and I recently explained in a review of that episode. </p>
<p>That’s why one of the most important ways banks are preparing for such an outcome is by speaking out about the serious damage not raising the ceiling is likely to inflict on not only their companies but everyone else, too. This increases the pressure on political leaders to reach a deal.</p>
<p>Going back to my original question, how do you prepare for such a self-imposed catastrophe? The answer is, no one should have to.</p><img src="https://counter.theconversation.com/content/205537/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John W. Diamond does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Major players in the financial system are pondering the unthinkable as the US inches closer to an unprecedented default.John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1739652022-01-25T14:42:24Z2022-01-25T14:42:24ZRenewable energy: US tax credits for wind and solar mostly benefit big banks<p>How can countries build renewable energy at the scale and rate needed to prevent dangerous climate change? The plan so far has been to try and make the cost of generating electricity from renewable sources cheap enough to compete with fossil fuels. Governments have offered support to renewable generators in other forms too, by requiring utility companies to <a href="https://www.nrel.gov/state-local-tribal/basics-portfolio-standards.html">build or buy</a> renewable power or <a href="https://www.gov.uk/government/publications/contracts-for-difference/contract-for-difference">guaranteeing attractive prices</a> for that power. </p>
<p>The monetary incentives that governments provide directly to companies which own or invest in renewable energy tend to be grants, low-cost loans or tax breaks. These subsidies cut some of the cost of developing projects like wind or solar farms, and as a result, make the power they produce cheaper. </p>
<p>But in <a href="https://journals.sagepub.com/doi/10.1177/0308518X211062601">a recent study</a>, I examined the US government’s main monetary incentive for renewables – a decades-old set of federal tax credits – and found it wasn’t working at all how it should be. As President Biden hopes to revive a diluted version of his administration’s Build Back Better Act, which includes <a href="https://www.theguardian.com/us-news/live/2022/jan/21/joe-biden-build-back-better-democrats-us-politics-live-updates">tax reform</a> and <a href="https://www.vox.com/2022/1/21/22892382/joe-manchin-climate-change-biden-negotiations-bbb">US$550 billion</a> (£409 billion) in clean energy incentives, my findings shed some light on the pitfalls that climate policy in the world’s biggest historic polluter should aim to avoid. </p>
<p>Investors who fund US renewable power projects can significantly lower the federal taxes they’re obliged to pay. The Production Tax Credit has qualified them for as much as US$0.025 in tax breaks per kWh of power that a project produces, while the Investment Tax Credit has permitted them to claim back as much as 30% of the funds they put into a project. Over the last 15 years, these tax credits have helped grow US renewables into major industries: from 2005 to 2020, national wind and solar power production <a href="https://www.eia.gov/totalenergy/data/monthly/pdf/sec10_3.pdf">grew nearly 18-fold</a>.</p>
<p>Nonetheless, there is a fundamental problem with the way US renewable tax credits are designed. Tax breaks are supposed to go to companies that develop renewable energy projects, but these developers rarely owe any taxes when they start building a wind or solar farm because most begin as a new company, with no pre-existing tax bills. If developers want to get any value out of government incentives, they must try to bring on third-party financial partners – typically massive banks like JP Morgan and Bank of America.</p>
<p>Developers effectively sell their tax breaks to these banks in return for the upfront funds that banks invest in a project. This practice is known as tax equity. If wind or solar farm developers cannot attract tax equity partners then they may never be able to use the tax credits they’re nominally entitled to, and so the project may never get built.</p>
<p>Renewable tax credits were never intended as a backdoor subsidy for Wall Street. Yet they now provide major tax shelters for banks; ones that need highly complex partnership forms to be legal at all. The renewable tax equity market was worth as much as <a href="https://www.projectfinance.law/publications/2021/february/cost-of-capital-2021-outlook/">US$18 billion</a> in 2020 alone. </p>
<h2>Renewable tax equity</h2>
<p>How did US renewable energy financing come to adopt this peculiar form, which is not used elsewhere? Attempting to answer this question led me to tax equity’s origins in Reagan-era tax breaks and waves of tax-driven investment, which included the world’s first modern wind boom (and bust) in California. That boom collapsed in the mid-1980s under allegations of wasteful tax sheltering by fly-by-night developers. Wall Street banks revived tax investment in renewables in the 2000s in the form of tax equity.</p>
<p>Since the mid-2000s, developers have relied on tax equity partnerships to make wind and solar farms viable, but they have had very few partners to choose from. Tax equity partnerships are complex and expensive to set up. This means that tax equity systematically diverts a share of intended federal support for renewables to banks, lawyers and other middlemen needed to set up deals. In 2020, the top five tax equity players – again, mostly big Wall Street banks – made up as much as <a href="https://www.ft.com/content/f54cd9b7-eee8-4a45-b0bb-f441960a5359">80% of the market</a>. </p>
<p>The pool of tax equity investors is scarce compared to the number of renewable power projects seeking their capital. Frequently, banks make developers pay them sizeable fees for their participation. They also command outsize power in determining which projects get developed, and by which developers. Because banks profit more from big deals, they prefer the largest private developers and mega-projects. The average renewable tax equity deal is <a href="https://news.bloombergtax.com/daily-tax-report/insight-tax-equity-remains-an-under-utilized-tool-for-corporate-tax-strategy">US$150 million</a>, and offshore wind developers may soon require as much as <a href="https://www.jdsupra.com/legalnews/renewable-energy-finance-forum-wall-26532/">US$800 million per project</a>. Meanwhile, smaller competitors and projects often get no deal at all. </p>
<figure class="align-center ">
<img alt="Countless wind turbines in a desert." src="https://images.theconversation.com/files/442244/original/file-20220124-17-yzbqlu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/442244/original/file-20220124-17-yzbqlu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/442244/original/file-20220124-17-yzbqlu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/442244/original/file-20220124-17-yzbqlu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/442244/original/file-20220124-17-yzbqlu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/442244/original/file-20220124-17-yzbqlu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/442244/original/file-20220124-17-yzbqlu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Vast wind farms are more likely to be funded than smaller, community-based projects.</span>
<span class="attribution"><a class="source" href="https://www.shutterstock.com/image-photo/wind-farm-palm-springs-california-106386089">Joseph Sohm/Shutterstock</a></span>
</figcaption>
</figure>
<p>Even with the extra costs developers need to set up tax equity deals, wind and solar farms are still (barely) cheaper to develop with federal subsidies than without. This may not be the case for long, however. Solar and wind farms increasingly beat fossil fuels on the <a href="https://www.theguardian.com/environment/2021/jun/23/most-new-wind-solar-projects-cheaper-than-coal-report">cost of power delivered</a>, and developers can get conventional private loans more and more cheaply. </p>
<p>Meanwhile, tax equity faces other problems. Even the biggest banks only have so many tax dollars to shelter, and fast-growing renewable power increasingly demands more capital than tax equity investors can provide. Major corporate tax cuts, like the one <a href="https://www.theguardian.com/business/2019/oct/09/trump-tax-cuts-helped-billionaires-pay-less">introduced under President Trump</a>, can unexpectedly shrink the entire market. And having to rely on tax equity worsens the pain of economic crises like that caused by COVID-19 for energy developers, as corporate profits and tax bills tumble and eliminate the need for tax equity among banks. This leaves many projects short and allows remaining investors to charge developers even higher fees.</p>
<p>Meanwhile, both of the federal tax credits for renewables in the US are set to fall in value or expire unless they are reapproved by the Biden administration. This has happened frequently in the past, and tax credits have usually been retained. But the <a href="https://newrepublic.com/article/162444/wall-street-profiting-clean-energy-tax-credits">growing controversy</a> surrounding tax credits and tax equity is provoking calls for reform. Proponents of the <a href="https://theconversation.com/uk/topics/green-new-deal-40625">green new deal</a> envisage even bigger changes in how the US government supports renewable energy development, like ushering in a new era of <a href="https://www.climateandcommunity.org/a-new-era-of-public-power">publicly owned power</a>. </p>
<p>The developers, projects and people that US government incentives have traditionally excluded and denied the full benefits of a low-carbon energy transition stand to gain the most from reform. These include <a href="https://insideclimatenews.org/news/11062020/inside-clean-energy-racial-inequity-solar/">communities of colour</a> struggling with fossil fuel pollution and <a href="https://www.nature.com/articles/s41560-020-00763-9">more expensive</a> energy. They also include smaller private developers and community-scale projects, as well as tax-exempt entities like non-profit organisations and public power authorities. </p>
<p>Can government incentives for renewables be wrestled from Wall Street to support more egalitarian visions of decarbonisation instead?</p>
<hr>
<figure class="align-right ">
<img alt="Imagine weekly climate newsletter" src="https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=600&fit=crop&dpr=1 600w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=600&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=600&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=754&fit=crop&dpr=1 754w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=754&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/434988/original/file-20211201-21-13avx6y.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=754&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
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<p><strong><em>Don’t have time to read about climate change as much as you’d like?</em></strong>
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<p class="fine-print"><em><span>Sarah Knuth is affiliated with the Climate and Community Project (CCP).</span></em></p>Wind and solar developers have to woo investors before they can get the tax credits they’re entitled to.Sarah Knuth, Assistant Professor in Geography, Durham UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/1362142020-04-16T12:18:57Z2020-04-16T12:18:57ZLeading in wartime: 5 ways CEOs should communicate with their workers during coronavirus<figure><img src="https://images.theconversation.com/files/328105/original/file-20200415-153326-vsp2k3.jpg?ixlib=rb-1.1.0&rect=309%2C316%2C4492%2C2843&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Microsoft's Satya Nadella urged his employees to show empathy for one another.</span> <span class="attribution"><span class="source">AP Photo/Elaine Thompson</span></span></figcaption></figure><p><a href="https://abcnews.go.com/Politics/trump-coronavirus-task-force-economic-public-health-steps/story?id=69646672">President Donald Trump</a> and <a href="https://www.cnbc.com/2020/04/06/chief-surgeon-at-top-ny-hospital-likens-this-week-of-coronavirus-outbreak-to-war.html">others</a> have likened the coronavirus pandemic to fighting a war. </p>
<p>As <a href="https://scholar.google.com/citations?user=697eQncAAAAJ&hl=en&oi=ao">someone who studies how leaders communicate</a>, I believe that’s an apt description. But the president isn’t the only general in this battle. America’s CEOs also have important leadership roles to play as the crisis poses a test of their ability to help their workers not only endure and stay healthy but keep them motivated and engaged as well. </p>
<p>What’s the best way to do that? </p>
<p>To find an answer, I reviewed <a href="https://www.dropbox.com/home/Temporary/CEO%20Communication%20Literature">21 academic studies</a>
on executive leadership communication and conducted a textual analysis of <a href="https://instituteforpr.org/covid-19-resources-for-pr-professionals/">12 industry studies</a> related to <a href="https://www.ickollectif.com/covid-19">organizational and leadership communication</a> during the pandemic.</p>
<p>I discovered five key themes that may provide some insights for how CEOs should communicate with their employees during the COVID-19 pandemic.</p>
<h2>1. Be transparent</h2>
<p><a href="https://doi.org/10.1016/j.pubrev.2019.04.012">Transparency</a> requires leaders to openly and proactively share relevant information to employees in a timely, frequent and digestible manner; give accurate information regarding what is happening, what the impact is and how the company is handling it; and offer clear guidance on what workers should be doing. </p>
<p>It also means encouraging employees to speak up and share their feedback and concerns. This kind of openness <a href="https://doi.org/10.1016/j.pubrev.2019.04.012">fosters trust</a>and reduces uncertainty – especially important in a <a href="https://www.doi.org/10.1080/1062726X.2013.795869">crisis</a>. </p>
<p>In a video message to the employees, <a href="https://www.inc.com/jason-aten/marriotts-ceo-shared-a-video-with-his-team-its-a-powerful-lesson-in-leading-during-a-crisis.html">Marriott CEO Arne Sorenson</a> demonstrated this when he didn’t try to sugarcoat the losses his company has suffered in the crisis.</p>
<h2>2. Convey authenticity</h2>
<p>Authentic leadership is not a new concept to the business community and its effectiveness in generating positive employee outcomes has been supported by a bulk of <a href="https://www.doi.org/10.1177/0093650215613137">academic</a> and industry <a href="https://www.doi.org/10.1080/1062726X.2014.908720">research</a>. </p>
<p>While CEOs are wired to take action, tough times like the pandemic cast monumental challenges to leading an organization. In an era where uncertainties outweigh the certainties, sometimes they simply don’t know what to do. </p>
<p>That’s okay. CEOs that authentically share vulnerability can actually demonstrate the human side of leadership. Employees look up to leaders for assurance and support. They do not necessarily expect CEOs to be superheroes. </p>
<p>To communicate in an authentic manner, CEOs should stay true to their values and beliefs and keep their promises. They need to also be self-aware of what they’re capable of, and genuine in their communication with employees – even when they don’t know what’s going on. </p>
<p>Jeff Bezos, CEO of Amazon, <a href="https://blog.aboutamazon.com/company-news/a-message-from-our-ceo-and-founder">exhibited this trait</a> when he acknowledged to employees, “There is no instruction manual for how to feel at a time like this,” and added his own list of worries, such as the safety of his family and colleagues. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/328441/original/file-20200416-192749-1ldy9r4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/328441/original/file-20200416-192749-1ldy9r4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/328441/original/file-20200416-192749-1ldy9r4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/328441/original/file-20200416-192749-1ldy9r4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/328441/original/file-20200416-192749-1ldy9r4.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/328441/original/file-20200416-192749-1ldy9r4.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/328441/original/file-20200416-192749-1ldy9r4.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Amazon CEO Jeff Bezos conveyed authenticity in his letter to employees.</span>
</figcaption>
</figure>
<h2>3. Show empathy</h2>
<p>The value of empathy was perhaps the most recurring theme in my analysis of best practices.</p>
<p>In my own <a href="https://doi.org/10.1016/j.pubrev.2019.04.012">recent study</a> that examined leadership communication during a planned organizational change – such as a merger – I found that communicating with empathy enhanced employee trust and drove commitment and acceptance to that change. </p>
<p>The COVID-19 pandemic poses similar challenges because employees face enormous uncertainties and unpleasant emotions, such as fear, sadness, anxiety and frustration. CEOs can help reduce worker anxiety and form a bond with them by <a href="https://www.doi.org/10.1108/01437730610692425/full/html">showing sympathy</a> and standing in their shoes. </p>
<p><a href="https://www.linkedin.com/pulse/coming-together-combat-covid-19-satya-nadella/">Microsoft CEO Satya Nadella</a> demonstrated this and emphasized the value of empathy in his message to employees, urging them to show “understanding for each other’s situations.”</p>
<h2>4. Put people first</h2>
<p>The novel coronavirus is <a href="https://www.nytimes.com/2020/04/14/business/economy/coronavirus-corporate-earnings-stocks.html">hammering companies’ bottom lines</a>, from productivity to profits. CEOs that put employees’ safety and health first are demonstrating their humanity. </p>
<p>This people-centered mindset is crucial for the organization’s survival and long-term development as employees are the backbone of the organization and eventually create the organization’s <a href="http://connection.ebscohost.com/c/articles/15905241/breakthrough-organization-performance-competitive-advantage-through-employee-centered-management">competitive advantage</a>.</p>
<p>We have seen many examples of this during the current crisis, such as the CEOs of Bank of America, Citigroup, FedEx and Visa <a href="https://www.forbes.com/sites/jackkelly/2020/03/27/prominent-ceos-promise-that-they-will-not-layoff-workers-in-2020/#f613cd9a61d5">pledging not to lay off any workers</a> as a result of the pandemic.</p>
<h2>5. Demonstrate optimism</h2>
<p>Conveying positivity or optimism is an especially important leadership quality during challenging times, when it is easy for people to experience negative feelings and frustrations. Leaders who portray an optimistic outlook in the tone of their communications and foster positive thinking motivate and inspire employees. </p>
<p>A good example of this is Levi Strauss CEO Chip Bergh, who <a href="https://sourcingjournal.com/denim/denim-business/levi-chip-bergh-coronavirus-heritage-denim-employees-201735/">wrote a letter to employees</a> encouraging them to focus on the crisis’ silver lining. </p>
<p>“One of the things motivating me through this difficult time is the idea that we can learn and adapt and adjust so we emerge stronger as a result of this test,” he wrote. The crisis “will pass. We will get through this together and be a better and stronger company as a result of it.”</p>
<p>And at my own school, University of Florida <a href="https://gatorswire.usatoday.com/2020/03/11/university-of-florida-president-kent-fuchs-issues-statement-on-covid-19/">President Kent Fuchs</a> reminded students and staff of their “tradition of pulling together and rising to meet major challenges with optimism and determination.”</p>
<p>During extraordinary times like the COVID-19 pandemic, leaders need effective communication skills like these to instill trust, confidence and hope in their workers – essential ingredients to winning the war. </p>
<p>[<em>You need to understand the coronavirus pandemic, and we can help.</em> <a href="https://theconversation.com/us/newsletters?utm_source=TCUS&utm_medium=inline-link&utm_campaign=newsletter-text&utm_content=upper-coronavirus-help">Read The Conversation’s newsletter</a>.]</p><img src="https://counter.theconversation.com/content/136214/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Rita Men does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A scholar of how leaders communicate offers five key traits CEOs should use when communicating with their workers about coronavirus.Rita Men, Associate Professor of Public Relations, University of FloridaLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/652912016-10-19T16:09:38Z2016-10-19T16:09:38ZHow Western companies can succeed in China<p>Not too long ago, when Western CEOs pondered China’s fast-growing market and billion-plus potential customers, their eyes would fill with dollar signs. But these days, thoughts of China are more likely to elicit serious soul-searching, as some of the companies that eagerly dove into China have withdrawn.</p>
<p>Earlier this year, the car-hailing service Uber <a href="http://www.wsj.com/articles/china-s-didi-chuxing-to-acquire-rival-uber-s-chinese-operations-1470024403">surrendered</a> its China operations to arch competitor Didi Chuxing in exchange for a 17.7 percent stake in the combined company. Later this month, Yum Brands, the owner of KFC and Pizza Hut, <a href="http://www.yum.com/press-releases/yum-brands-names-expected-board-of-directors-of-yum-china-holdings/">plans</a> to spin off its China unit amid growing competition in the food delivery business. Even Coca-Cola has <a href="http://www.coca-colacompany.com/press-center/press-releases/the-coca-cola-company-announces-plans-to-significantly-accelerate-bottler-refranchising">announced</a> its intention to refranchise its company-owned bottling operations in China. </p>
<p>Was the <a href="https://theconversation.com/ubers-didi-deal-dispels-chinese-el-dorado-myth-once-and-for-all-63624">China dream just a mirage</a> with Beijing simply using foreign ventures to import Western technologies and skills? Or is there a way to make money in the People’s Republic of China without giving away the store? </p>
<p>While finding success in the People’s Republic can be tricky, several Western companies have prospered – and even some of the companies that have “retreated” in recent years have profited handsomely from their China operations.</p>
<h2>Partnerships and profits</h2>
<p>While some research on joint ventures <a href="https://hbr.org/1994/07/collaborative-advantage-the-art-of-alliances">has tended to see success</a> in terms of harmony, longevity and the “ability to create and sustain fruitful collaborations,” other research has focused more on the <a href="https://hbr.org/1989/01/collaborate-with-your-competitors-and-win">benefits</a> of <a href="https://hbr.org/1991/11/the-way-to-win-in-cross-border-alliances">participation</a> in a joint venture and company profits. </p>
<p>Unduly attached to the longevity of a partnership as a measure of success, several recent articles seem dismayed by the retreat of some American companies from China. Reconsidering the activities of such companies from a profit perspective, however, reveals a somewhat different picture than the one <a href="http://www.economist.com/news/business/21703409-chinas-didi-chuxing-and-americas-uber-declare-truce-their-ride-hailing-war-uber-gives-app">suggested</a> by the <a href="http://www.smh.com.au/business/china/yum-brands-mcdonalds-look-for-buyers-as-chinese-tastes-shift-20160804-gqkzk3.html">headlines</a>. </p>
<p>Of course, the idea that China is a dangerous place for outsiders has been around for a while. Jack Perkowski, a Wall Street veteran who founded a Chinese investment firm, <a href="http://www.wsj.com/articles/SB1013037331816672480">famously dubbed</a> China “the Vietnam War of American business” – because so many promising young careers were lost there.</p>
<p>In the 1990s, international brewers arrived in China like “stampeding wildebeest,” <a href="https://www.amazon.com/China-Dream-Quest-Untapped-Market/dp/0802139752">according to journalist Joe Studwell</a>, opening 60 breweries and operating another 30 via licensing agreements. Not one of those 90 foreign breweries, however, is believed to have turned a profit. </p>
<h2>Not so fast</h2>
<p>The picture, however, is more mixed than the above stories and anecdotes suggest. While Bank of America, Yahoo and Uber all engaged in well-publicized retreats, such moves were far from disastrous.</p>
<p>Bank of America, for example, made headlines when it sold the remainder of its stake in China Construction Bank in 2013 after once owning as much as almost a fifth of the Chinese lender. The <a href="http://www.wsj.com/articles/SB10001424127887324432404579052401692576092">move was seen as a retreat</a> at the time, but the eight-year relationship was <a href="http://www.wsj.com/articles/SB10001424127887324432404579052401692576092">certainly profitable</a> for Charlotte, N.C.-based Bank of America, producing an annual return of over 10 percent.</p>
<p>Yahoo had a similar experience with Alibaba. Yahoo invested US$1 billion in Alibaba in 2005 and handed over all of its China operations in return for a 40 percent equity stake. It <a href="https://www.yahoo.com/news/yahoo-closes-7-6-billion-deal-alibaba-group-161614948--finance.html">sold half back</a> for about $7.6 billion in cash and preferred stock in 2012. Considering Yahoo still owns a sizable stake, its return looks pretty impressive. </p>
<p>Even Uber’s retreat is less than a total rout. Assuming a $35 billion valuation of the combined Uber-Didi Chuxing entity that remains, Uber’s 17.7 percent stake is worth about $6.2 billion. While this represents a haircut of nearly 25 percent from the <a href="http://www.reuters.com/article/us-uber-china-valuation-idUSKCN0UT0C9">$8 billion value</a> placed on Uber’s China operations before the surrender, Uber stands to make more from its investment. In the two years before Uber decided to fold its operations into Didi’s, Uber <a href="http://www.economist.com/news/business/21703409-chinas-didi-chuxing-and-americas-uber-declare-truce-their-ride-hailing-war-uber-gives-app">lost $2 billion in China</a>. Now, with the Uber – Didi price war in the rearview mirror, the future seems fairly promising for Didi shareholders like Uber. </p>
<p>On top of that, for a favored few, China has been a gold mine, and both Coca-Cola and GM represent examples of American companies that have achieved some version of the China dream.</p>
<h2>Coca-Cola: From ‘bourgeois’ to dominance</h2>
<p>Coca-Cola had an auspicious start in China a century ago, some trouble with Communists in the mid-20th century, and enormous success in more recent years. </p>
<p>The soft-drink maker <a href="http://fortune.com/2014/09/11/opening-happiness-an-oral-history-of-coca-cola-in-china/">had been successful</a> in China as early as the 1920s. But Mao Zedong, who <a href="http://fortune.com/2014/09/11/opening-happiness-an-oral-history-of-coca-cola-in-china/">deemed</a> the company’s fizzy brown drink a “<a href="http://thesilkinitiative.com/5-things-to-learn-from-cokes-brand-building-story-in-china/">bourgeois concoction</a>,” nationalized the bottling companies after the Communist takeover in 1949. The company would have to wait nearly thirty years for another crack at the market. </p>
<p>That came in 1978, when efforts to reach out to state-owned import-export companies led to a meeting with the China National Cereals, Oils and Foodstuffs Corporation. After that, <a href="http://www.coca-colacompany.com/stories/celebrating-35-years-of-coca-cola-in-china">things moved quickly</a> and rapidly led to a deal, helped by the Carter administration’s <a href="http://millercenter.org/president/carter/speeches/speech-3935">normalization of diplomatic relations</a> around the same time. </p>
<p>Things did not, however, always go smoothly. Initially, Coca-Cola <a href="http://www.coca-colacompany.com/stories/celebrating-35-years-of-coca-cola-in-china">only received permission to sell</a> to international visitors in foreign hotels and “friendship” stores in three cities, and the company <a href="http://fortune.com/2014/09/11/opening-happiness-an-oral-history-of-coca-cola-in-china/">lost a lot of money</a> in the first two or three years shipping Coke from Hong Kong. In the early 1980s, the company was <a href="http://fortune.com/2014/09/11/opening-happiness-an-oral-history-of-coca-cola-in-china/">barred from selling</a> its products in the country for a year.</p>
<p>Over time, however, restrictions on company sales were loosened, and the company began to see real growth in the market. From a shipment of <a href="http://www.coca-colacompany.com/stories/celebrating-35-years-of-coca-cola-in-china">20,000 cases in January 1979</a>, Coca-Cola was <a href="http://www.joc.com/maritime-news/coca-cola-uncaps-plan-build-bottling-plants-chinese-venture_19930721.html">operating 13 bottling plants</a> in China by 1993 and controlled 23 percent of the country’s carbonated soft-drink market by 1996. By 2010, it <a href="http://www.wsj.com/articles/SB10001424053111903596904576515553953471040">held a 60 percent share</a> and <a href="http://www.coca-colacompany.com/stories/celebrating-35-years-of-coca-cola-in-china">owned 43 bottling plants</a> in 2014. Today, the country is now Coca-Cola’s <a href="http://www.coca-colacompany.com/stories/coke-breaks-ground-on-45th-plant-in-china-as-part-of-4-billion-investment">third-largest market</a> in the world after the U.S. and Mexico.</p>
<h2>GM’s late start</h2>
<p>In contrast to Coca-Cola’s long history in China, General Motors is a relative newcomer to the People’s Republic – even compared with other foreign automakers.</p>
<p>While Jeep formed its first joint venture in China in 1984 and Volkswagen entered in 1985, GM didn’t make <a href="http://articles.latimes.com/1992-01-16/business/fi-377_1_auto-markets">its first investment</a> until January 1992. Even less auspicious, GM <a href="http://www.nytimes.com/1998/06/23/business/gm-to-expand-investment-in-building-trucks-in-china.html">abandoned</a> that investment three years later, before local production had even begun.</p>
<p>In retrospect, the <a href="http://www.bloomberg.com/news/articles/1995-11-05/how-gm-got-the-inside-track-in-china">key to GM’s long-term success</a> in China would have to wait until the fall of 1995, when China’s leading car maker, Shanghai Automotive Industry, <a href="https://history.gmheritagecenter.com/wiki/index.php/1995,_GM_Links_with_SAIC">picked the company</a> as its foreign partner in a billion dollar project to build sedans. </p>
<p>The deal was significant enough that then-Vice President Al Gore and Chinese Prime Minister Li Peng presided over the signing ceremony of the 50/50 joint venture in 1997, and by 1999, Shanghai GM <a href="http://www.wsj.com/articles/SB940882358599254880">was selling Buicks</a> as fast as it could make them.</p>
<p>Since then, GM’s partnerships in China have thrived. In 2015, GM’s automotive China joint ventures <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=231169&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwNzA4NjE4JkRTRVE9MSZTRVE9NzMmU1FERVNDPVNFQ1RJT05fUEFHRSZleHA9JnN1YnNpZD01Nw%3d%3d">generated</a> roughly $45 billion in net sales and nearly $4.3 billion in net income, and the country accounted for <a href="http://phx.corporate-ir.net/phoenix.zhtml?c=231169&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTEwNzA4NjE4JkRTRVE9MSZTRVE9NSZTUURFU0M9U0VDVElPTl9QQUdFJmV4cD0mc3Vic2lkPTU3">37 percent of its total vehicle sales</a>. Despite being late to the party, the Shanghai partnership put GM on top of the pack.</p>
<h2>How to understand China</h2>
<p>Despite this kind of success, there have been frequent concerns raised in the press about the long-term costs of doing business in China, ranging from fears of regulatory fallout to the common allegation that Western businesses get pushed out once domestic companies are able to acquire and master key technologies. </p>
<p>Back in 1998, The Wall Street Journal <a href="http://www.wsj.com/articles/SB887147472543929500">reported</a>: </p>
<blockquote>
<p>“While the world’s biggest auto maker wants access to what one day may become the world’s biggest auto market, China wants the technology and training to build its own cars – and possibly compete with GM.</p>
</blockquote>
<p>And others have gone further, <a href="http://www.wsj.com/articles/SB10001424127887324482504578451410328454302">suggesting GM</a> – through its technical partnership with its Chinese partners – is gradually transitioning from a company that wraps its cars and trucks in the patriotism of "Old Glory” to one selling vehicles with “Made in China” stickers affixed on the bumper.</p>
<p>Having thought about China’s <a href="http://thediplomat.com/2016/10/the-race-to-chinas-19th-party-congress/">politics</a> and <a href="http://www.fletcherforum.org/2014/11/14/brookfield/">business environment</a> for a number of years, I think that being in China, when done right, can yield significant benefits. Moreover, if one believes that China’s renminbi is only going to get stronger, then there may be no better time than the present to invest in China. The tuition for learning about the place will never be smaller, the cost of mistakes will never be lower, and a long-term presence in the country may open the door to increasingly valuable sales over time.</p>
<p>Of course, there are many different factors that go into a successful investment decision, and it may be that Clint Eastwood’s character Harry Callahan was on to something. At a certain point, a CEO has got to ask him or herself one question: “Do I feel lucky?” Well, do you?</p>
<figure>
<iframe width="440" height="260" src="https://www.youtube.com/embed/bwSxtPEZz9A?wmode=transparent&start=0" frameborder="0" allowfullscreen=""></iframe>
<figcaption><span class="caption">Feeling lucky?</span></figcaption>
</figure><img src="https://counter.theconversation.com/content/65291/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonathan Brookfield does not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Uber’s ‘retreat’ from China has led to soul-searching about whether the country is worth it. Don’t tell that to Coca-Cola and GM, however, which have found great success in the People’s Republic.Jonathan Brookfield, Adjunct Associate Professor, Tufts UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/416352015-05-12T11:27:06Z2015-05-12T11:27:06ZWe need to protect the whistleblowers who save our skins but pay the price<figure><img src="https://images.theconversation.com/files/81243/original/image-20150511-19566-1d4qvq1.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Approach with caution.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/pinti1/5271233914/">Holly Occhipinti</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The <a href="http://www.midstaffspublicinquiry.com/">recent Francis Report</a> into how poor care at Mid-Staffordshire Foundation Trust was allowed to happen, was another lesson in just how valuable whistleblowers are to society. And yet as a society, we don’t seem to care that many struggle to survive. </p>
<p>Whistleblowers perform a vital role in today’s world. They alert the public to <a href="https://www.sec.gov/whistleblower">financial fraud</a>, <a href="http://www.theguardian.com/healthcare-network/2015/jan/29/francis-review-nhs-whistleblower-report">abuse in institutions</a> and potential environmental disasters. For years, the NHS ignored attempts by whistleblowers to raise concerns about care that was <a href="https://freedomtospeakup.org.uk/wp-content/uploads/2014/07/F2SU_Executive-summary.pdf">“substandard, and sometimes unsafe”</a>, while we now know that the Deepwater Horizon disaster of 2010 could have been prevented had BP listened to just one of the many warnings coming from <a href="http://www.newsweek.com/what-bp-doesnt-want-you-know-about-2010-gulf-spill-63015">whistleblowers inside the company</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=300&fit=crop&dpr=1 600w, https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=300&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=300&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=377&fit=crop&dpr=1 754w, https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=377&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/81380/original/image-20150512-22586-g83y1v.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=377&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Delivering a clearer picture. NHS whistleblowers.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/jamin2/3555151084/in/photolist-6qa5ym-7Wu65B-49Jq6-5T8jXr-suP5E-ntrXJg-sKzMJ-cZEZrh-hgAm6v-bCWhDp-bpbRBL-97bQqz-8HS4FM-aYKWJi-hgBAEB-aYKVVZ-8bNSbx-nr21vh-aYKXSF-aYKXaR-aYKWXH-9nLAXL-aYKVga-aAFdYp-7Us9Fk-a8azsX-8b1dAN-7Czew1-24DCfR-91dcEq-7m5bc-7X3a9m-fFT5ta-9FpR14-7Us3vm-sxfK5-9v3wWc-cNKaoo-7UoL1X-7Lopqo-8e4AVW-e7TPHb-aYKXD6-cPELM9-9rvomT-7UwUjw-7Z5KhX-9nLjGy-7Ym1Ph-7Uvm77">Benjamin Ellis</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
</figcaption>
</figure>
<p>As well as preventing damaging incidents like these, whistleblowers can also save companies and organisations some serious cash. In recent years, private sector whistleblowers have alerted their bosses to more serious economic crimes than were spotted by all the “official” fraud-spotters combined – the internal auditors, corporate security personnel and law enforcers – <a href="http://blog.transparency.org/2012/10/01/corporate-whistleblowers-gain-new-rights-and-opportunities-in-the-us">saving on average $3m per case</a>. </p>
<p>So these people prevent disasters and save money; what’s not to admire? In fact, 80% of people in the UK report that they would speak out if they witnessed serious corruption in their organisation.</p>
<h2>Safety net?</h2>
<p>While we may admire whistleblowers and celebrate their bravery, we don’t seem to want to help those who struggle for years. The message for many who are forced to go outside their organisation is clear: you may never work in your industry again because of your disclosure, and there is zero financial support available to help you.</p>
<p>How does this happen? We know that whistleblowers who go public tend to experience a subtle, informal kind of blacklisting in their industry. Organisations tend not to want to hire well-known whistleblowers, and in the age of Google, it is easy to find out who these people are when a CV arrives on the desk of the Human Resources manager. This means that a whistleblower who goes public has a <a href="http://www.uk.sagepub.com/fineman/Reading%20On/Chapter%2012d%20-%20Rothschild%20and%20Miethe.pdf">high chance of never being re-hired</a> in their area of expertise. </p>
<p>In the UK, the careers of senior and successful doctors and nurses <a href="http://www.telegraph.co.uk/news/health/news/11403069/Whistleblowing-NHS-crushes-those-who-speak-out-Sir-Robert-Francis-QC-warns.html">“were left on the scrapheap”</a> after they attempted to let NHS managers know about dangerous practices, many of which risked patients’ lives. Well known examples from the financial services sector include Eileen Foster, award-winning whistleblower who disclosed mortgage fraud at Countrywide, now Bank of America, and was the subject of a <a href="http://www.cbsnews.com/news/prosecuting-wall-street/">60 minutes documentary</a> that received great acclaim. Despite her stellar credentials, not one of her first <a href="http://www.publicintegrity.org/2011/09/22/6687/countrywide-protected-%20fraudsters-silencing-whistleblowers-say-former-employees">145 job applications received a response</a>. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=399&fit=crop&dpr=1 600w, https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=399&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=399&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=502&fit=crop&dpr=1 754w, https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=502&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/81237/original/image-20150511-19560-730wvx.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=502&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Eileen Foster, receives the 2012 Ridenhour Prize for Truth-Telling.</span>
<span class="attribution"><a class="source" href="http://www.ridenhour.org/press_room_prizes_images.html">Ridenhour Prizes</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Martin Woods’ disclosures to the U.S. Department of Justice led to the <a href="http://www.theguardian.com/world/2011/apr/03/us-bank-mexico-drug-gangs">biggest ever action</a> to be brought under the US Bank Secrecy Act against his ex-employer Wachovia for its facilitation of money-laundering. He thought he had got lucky when he secured a new job with a leading UK private bank. As it turned out, the new firm didn’t yet know who he was. When they found out that he was a whistleblower, they withdrew their offer immediately <a href="http://www.ianfraser.org/rbs-accused-of-withdrawing-job-offer-to-mexico-drug-deals-whistleblower/">and fought off a court case</a>. As Woods’ experience demonstrates, the legislation that exists to prevent potential employers from discriminating against whistleblowers at the recruitment stage, is often ineffective.</p>
<h2>Paying a price</h2>
<p>So these brave individuals are often left with no job, no income and a mounting pile of bills, including for legal and medical costs that typically accompany a lengthy and usually stressful whistleblowing campaign against a retaliatory organisation. It doesn’t help that whistleblowers who disclose serious and systemic wrongdoing tend to be in senior positions, and often have families to support. The cost of disclosing, it seems, can be bankruptcy. Would four out of five Britons really speak up in the case of serious wrongdoing, if they knew the full extent of the sacrifice that might be required? The situation is dangerous; we can assume that this fact is currently discouraging the many would-be whistleblowers who have taken the time to consider the likely outcomes for themselves and their families.</p>
<p>What can be done about this? Legislation exists that grants whistleblowers some compensation if they can prove that they have been let go from their organisation <a href="http://www.pcaw.org.uk/guide-to-pida#overview-of-the-provisions">as a result of their disclosures</a>. However not everyone is successful in bringing a case, and it costs money to get the legal help needed to pursue this. </p>
<p>To remedy the situation, <a href="http://www.wbuk.org/">advocacy groups like Whistleblowers UK</a> have proposed that a support fund be created, generated from the fines paid by organisations when they are penalised for wrongdoing, and <a href="http://www.wbuk.org/pdf/whistleblowing-commission.pdf">administered by an independent “Office of the Whistleblower”</a>. This is one solution. The <a href="http://www.forbes.com/sites/billsinger/2012/08/21/first-sec-whistleblower-bounties-awarded-and-denied/">bounty system in the US</a>, by which successful whistleblowers receive a payout based on a percentage of the money that their disclosure has saved the US government, is another. Similar schemes have been <a href="http://www.kluwerlawonline.com/abstract.php?id=EUCL2012032&PHPSESSID=os4b69bhe5fgmasm9t4m10mb36">mooted in Europe</a>, to some <a href="http://www.25bedfordrow.com/news-pdfs/whistleblowing.pdf">controversy</a>.</p>
<p>Whatever your view, it is clear that something needs to change. First, we need to know more: about the full costs of whistleblowing for those who leave their organisation, and about the kinds of interventions that might help to rehabilitate people’s careers if they find themselves in this situation. Once we have this knowledge, then we can begin to plan how we can help people to survive, after they have risked their lives and incomes for our sakes.</p><img src="https://counter.theconversation.com/content/41635/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Kate Kenny receives funding from the British Academy and JE Safra Centre for Ethics at Harvard University.</span></em></p>When employees of dodgy companies or slipshod institutions put it all on the line to do the right thing, why do we hang them out to dry?Kate Kenny, Reader in Management, Queen's University BelfastLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/311512014-09-17T05:15:50Z2014-09-17T05:15:50ZBanks pay a heavy price for the crisis, but fail to count the cost<figure><img src="https://images.theconversation.com/files/59027/original/wdzjw38d-1410777477.jpg?ixlib=rb-1.1.0&rect=136%2C99%2C795%2C513&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Why is the City keeping its suffering under wraps?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/robhawkes/2685795580/in/photolist-nFZ5sv-9D3MJo-56kpsm-e3b4yr-gMeZjQ-bB7S5W-bQ2wu8-heMWfy-g1pJP-e3gU1W-g1u1u-e3gR7o-e3b2Jp-e3gPij-e3b3Gt-e3gVJA-e3gNuu-e3gQfJ-g62gw-g1m5y-g1vUc-g1guV-e3gUGf-g1mwc-g1gXo-g1nyp-g1uBp-g1nbJ-e3b21c-e3h11q-e3gXkf-e3gWfb-g68q9-g63vE-g6cSJ-g6epK-e3gXL9-e3gZjy-g62KU-dofmHT-g1sA3-g66hm-g68aA-g63KB-g1sPq-g1qiT-g1rta-e3gVdy-g1qUG-9q813t">Robin Hawkes</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>The major international banks are being lumbered with more and higher fines as the fallout from the financial crisis continues. Our research as part of the Conduct Costs Project at the CCP Research Foundation is providing evidence of the escalating financial penalties, but the banks remain mute and there needs to be much more to the sector’s renaissance than a simple shaming through sanctions.</p>
<p>For the five years to the end of 2012 the conduct costs for ten key banks were at just under £150 billion. For the five years to the end of 2013 they were just under £160 billion. The figures for the period ending 2014 cannot be produced yet, of course, but this year has already seen record costs <a href="http://dealbook.nytimes.com/2014/08/21/bank-of-america-reaches-16-65-billion-mortgage-settlement/">imposed on Bank of America</a> – $16.65 billion (£10.3 billion) – for mis-selling mortgage-backed securities (MBS) and a <a href="http://www.bbc.co.uk/news/business-28099694">massive $8.9 billion fine</a> slapped on BNP Paribas (much to the consternation of the French government) for violating US sanctions against doing business with some pretty unpleasant regimes.</p>
<p><a href="http://dealbook.nytimes.com/2014/07/14/citigroup-and-u-s-reach-7-billion-mortgage-settlement/">Citigroup took a $7 billion hit</a> over MBS and <a href="http://www.ft.com/cms/s/0/23a009e6-1713-11e4-8617-00144feabdc0.html#axzz3DNJxOcGF">UBS took around $300m on the chin</a> to settle a German case about assisting tax evasion. Space is tight, but there are plenty more: <a href="http://blogs.reuters.com/financial-regulatory-forum/2014/09/09/standard-chartereds-aml-lapses-provide-crucial-lessons-on-internal-controls/">Standard Chartered’s money-laundering issues</a>; <a href="http://www.bbc.co.uk/news/business-28528349">Lloyds and LIBOR</a>….</p>
<h2>Measuring the pain</h2>
<p>We started the Conduct Costs Project, around two years ago, because no one was keeping a log of these massive fines, compensation payments and other costs associated with misconduct. No national regulator or international body, seemed to think it would be of interest to the public or relevant to how we assessed banks’ post-crisis behaviour. </p>
<p>However, at a time when banks are telling the public that they want to regain our trust, surely the track record of those facing regulatory action is an important indicator as to just how trustworthy they actually are? And our net is spreading; the study will cover more than 20 international banks by the end of this year. </p>
<figure class="align-left zoomable">
<a href="https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/59026/original/zqd2cyz8-1410776399.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Banks take note.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/siggichurchill/2513243382/in/photolist-4Q62Gs-58HULC-L47CE-6WiDQg-5HURN9-cp5rn9-e3S3J2-aWsAc-aVv7e-aWswM-ovZe1B-7SgSdu-L47Gm-4RhNLL-RDtHo-37GwC6-6ziANS-6zewKe-9bQiyS-5AxiC4-5AxixM-5zjWKK-5z8FDf-5zhj4Y-4RR7Ab-5Axi8i-5zd2W2-9fGHUb-81HJvg-HK3zi-5sfuwD-4KLmu8-5zd2kX-aweXuC-5zhjTd-5zd1Vc-5ABykW-5zhjqA-5AxhTc-5ABxY9-5zoF79-5zhinw-5zhiZw-5zhiBu-5zd2FR-5zhiq7-5zhjkm-5zhium-5ABxeS-enqbiF">Siggi Churchill</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>It amounts to more than just the airing of banks’ dirty laundry and it is not something that they should approach with antipathy. There are lessons here in respect of the link between conduct and culture; the benefits of ethics-led decision making; the best practice for bank governance and conduct risk management; the unintended consequences of regulatory enforcement trends; and a means by which the restoration of trust and confidence in banks can be measured and compared. </p>
<p>It is clear, for a start, that investors and other stakeholders are beginning to take seriously the implications of conduct risk and to understand just how useful it can be to have a transparent approach to the costs involved. The industry, however, is lagging behind: banks on the whole are not making use of the intelligence and trends available from their own data. They are not sharing their experiences or discussing the grey areas that, contrary to what appears to be prevailing policy, should not be approached in a proprietary way, but should be part of an industry-wide debate. Effectively managing conduct risk and building stakeholder trust and confidence is not a matter for competitive advantage. </p>
<h2>Be damned and publish</h2>
<p>The authorities are beginning to catch on. The European Banking Authority is reported to be about to publish <a href="http://www.bloomberg.com/news/2014-08-20/eba-to-show-bank-losses-from-fines-in-stress-test-results.html">at least some information about EU bank fines</a> when it publishes the results of its “stress tests” later this year. This, we hope, might shed some much needed light on a very shady area in respect of misconduct disclosure – the fact that Eurozone regulators are being very secretive about how and when they discipline their banks. In the UK, the Banking Standards Review has acknowledged that conduct costs can serve as a “metric” for measuring a bank’s success in operating as a more professional, ethically based institution. </p>
<p>It is true that some of the conduct costs data relate to “legacy issues” and at least some of the banks may have a case for saying they are now better than they used to be. Even a very large fine recorded in 2014 may not be a wholly reliable indicator of how good or bad a bank is in 2014. However, the task of interpreting the numbers is not helped by the banks’ habit (to some extent, encouraged by regulators) of refusing to give the public any meaningful comment about fines when they are levied. In most cases, all we hear is: “thank heavens that’s all over and done with; now we can put it behind us and move on”. </p>
<p>You can’t help feeling that a bank which provides the public with such glib, virtually empty announcements after parting with humongous sums of money due to misconduct has not yet really got the message.</p>
<h2>Getting trust up</h2>
<p>So what exactly is the message? Banks could perhaps begin by asking themselves, individually and as a sector, some of the questions that seem to keep being ignored. Try this. If you are genuine in your protestations that you want to regain public trust, what would you say you need to do to earn it? Is it just a question of “keeping a clean sheet” and staying out of trouble for as long as possible? Or do you need to show that you have actually changed in a more tangible, evidence-based way? How would your employees describe their duty of care to your bank and to your retail clients – and to the institutions on the other side of your deals. How about the duty of care to the broader market or the public?</p>
<p>Here’s a scenario that might give a banker some food for thought. Supposing the institution on the other side of a deal has made a fundamental error in its understanding of a transaction’s documentation, such that, if it is not alerted, it will lose (and you will gain) a very large sum of money. Do you tell them? Is it really just tough luck if they don’t spot the problem? </p>
<p>Would your answer be different if the counter party was represented by a friend of yours? You know that if you don’t say anything they might lose their job and have to sell the family house. Happy to stay silent? If you give a different answer to the two scenarios, how do you rationalise that? Is it because you have a greater duty to a friend than to a relatively “anonymous” counter party? How does this reflect on your broader duties to the market, bearing in mind your CEO’s statements about your integrity and ethical awareness? </p>
<p>We don’t have the answers to all questions of this kind but what we do know from conversations with market participants is that banks need to think more deeply about them than they have been. And this needs to be done in a manner visible to the public; not only individually but across the sector.</p>
<p>Collective discussion and agreement on how to respond to the “difficult” grey areas in ethics is a hallmark of “professional” behaviour that we see across all the classical professions. The banks need to think about how this should translate to problem areas as a matter of urgency. Faced with the drama and public flogging of massive fines, the greatest danger is complacency as to the size of the tasks that still have to be undertaken. The banking business model is changing, as is the standard of behaviour that the public expects. The message, in short, is that we want to see real change for the better: fine words (and fines) will not be enough.</p><img src="https://counter.theconversation.com/content/31151/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Roger McCormick is affiliated with the Conduct Costs Project at the CCP Research Foundation. He has no other relevant affiliations or funding.</span></em></p><p class="fine-print"><em><span>Chris Stears is affiliated with the Conduct Costs Project at the CCP Research Foundation. He has no other relevant affiliations or funding.</span></em></p>The major international banks are being lumbered with more and higher fines as the fallout from the financial crisis continues. Our research as part of the Conduct Costs Project at the CCP Research Foundation…Roger McCormick, Visiting Professor, London School of Economics and Political ScienceChris Stears, PhD Candidate, Institute of Advanced Legal Studies, School of Advanced Study, University of LondonLicensed as Creative Commons – attribution, no derivatives.