San Jose, CA Email: [email protected] http://www.dhimanchowdhury.com Fax: 619-330-0662 12/9/2011 Dhiman Deb Chowdhury The perplexing events that led US economy to brink of collapse, vanquished trillions of US wealth and subjugated millions of Americans are end result of pathological demeanor and the politico institutional meddling. This article examines causal factors including antecedents of this unprecedented financial collapse and presents simple formulation to end systemic conflicts at organizational, financial and societal level. WHO GUARDS THE GUARDS WHEN GUARDS ARE LET DOWN? ©2011. All rights Reserved.

Who Guards the Guards When Guards are let down?

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The perplexing events that led US economy to brink of collapse, vanquished trillions of US wealth and subjugatedmillions of Americans are end result of pathologicaldemeanor and the politico institutional meddling. Thisarticle examines causal factors including antecedents of thisunprecedented financial collapse and presents simpleformulation to end systemic conflicts at organizational,financial and societal level.

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Page 1: Who Guards the Guards When Guards are let down?

S a n J o s e , C A

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Dhiman Deb Chowdhury

The perplexing events that led US economy to brink of

collapse, vanquished trillions of US wealth and subjugated

millions of Americans are end result of pathological

demeanor and the politico institutional meddling. This

article examines causal factors including antecedents of this

unprecedented financial collapse and presents simple

formulation to end systemic conflicts at organizational,

financial and societal level.




©2011. All rights Reserved.

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had a bigger problem to comprehend – the systemic conflicts at organizational, financial, societal

and ecological level; an abstraction that often ignored in Corporate Sustainability and Sustainable

development. Little I discerned, such exploration of my inquisitive mind, will stumble upon yet

another perplexing topic.

As I dig further in my quest to find solution to otherwise convoluted “Corporate Sustainability”

(Chowdhury, 2011) premise, a perceived thinner yoke seems to emerge as stronger and matted. The

enigmatic events that led to the unparalleled and apparent financial collapse in USA are the attribution

of muted yet sturdy coagulates of pathological demeanor. Such detrimental condition was evident

providing the antecedents of increased politico-institutional meddling and unsustainable disposition at

organizational, societal and financial level. The issue here is that – “Who guards the guards when guards

are let down?”. I find that obscured within this simple yet powerful question is the clues to America’s

unprecedented financial debacle.

It’s odd to learn that so many at the helms of our financial and political systems have let their guards

down. The end result devastated America’s economy, vanished America’s household wealth (a

whopping sum of $11Trillions) and languished 26 million of Americans out of job (FCIC, 2011).

I made the phenomenological observations of a pathological demeanor in late 1990s that was ostensibly

one of the causal factors of endogenous decline in many entities as we begin to witness the demise of

many of technology giants in later years. Little I knew then that the observed failures of few

corporations are just the symptoms and perhaps the prelude of bigger things to transpire. It was not

clear until I began my doctoral study. A pathological demeanor that I observed at entity level has been

so prevailing and collectively so devastating that negating it’s impact to industrial decline would be a

gross underrate. This immensely detrimental behavior also exhibits a conniving attitudinal dimension

leading to systemic discord in “Sustainability approaches” at organizational, financial, societal and

ecological level (Chowdhury, 2011b). Contradictory to the perceived notion of corporate led “green

wash” strategy, “sustainability approach” is about building viable and responsible corporations. My

empirical study to this abstraction led me to a conjecture about perennial exit of corporations. Is it due

to “industrial decline” or human driven collapse? From Enron to Nortel, phenomenological observations

apparently suggest the later.

This postulation finds significant quantitative and qualitative substantiation in the financial crisis report

of the “National Commission on the Causes of the Financial and Economic Crisis” (FCIC, 2011) which

alleged human actions and inactions for the unprecedented economic collapse of 2008.

The National Commission on financial crisis made the following concluding remarks in it’s published

report (FCIC, 2011):

1. “We conclude this financial crisis was avoidable”.

2. “We conclude wide spread failure in financial regulation and supervision proved devastating to

the stability of nation’s financial market”.

3. “We conclude dramatic failures of corporate governance and risk management at many

systematically important financial institutions were a key cause of this crisis”.


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4. “We conclude a combination of excessive borrowing, risky investments and lack of transparency

put the financial system on a collision course with crisis”.

5. “We conclude the government was ill prepared for the crisis, and its inconsistent response added

to the uncertainty and panic in the financial markets”.

6. “We conclude there was a systemic breakdown in accountability and ethics”.

7. “We conclude collapsing mortgage-lending standards and the mortgage securitization pipeline

lit and spread the flame of contagion and crisis.

8. “We conclude over the counter derivatives contributed significantly to this crisis”.

9. “We conclude the failures of credit rating agencies were essential cogs in the wheel of financial


It is evident from the “National Commission” report that our financial system oversight failed and often

influenced by our political system allowing toxic mortgage securitization to continue. However, at the

core of all these was the immensely detrimental behaviors of few who cared their self interest and

indulgence above the nation and societies.

Figure 1. Politico-institutional meddling facilitated detrimental behavioral pathology to foster at institutional level leading institutional malpractice.

The picture above depicts a bird eye view of the events that aided in the economic collapse. It is evident from the diagram above that the situation that led to the unprecedented economic meltdown of our time was fueled by detrimental behavioral pathology. Such behavioral pathology is certainly curable and

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unless action related to behavioral competence is enforced, any preventive measure or formulation thereof would be ineffective. To this abstraction a brief about my research is imperative; I began my conception on sustainability

(http://www.dhimanchowdhury.com/research.html ) drawing pragmatic and qualitative assumption on

the behavioral competence but little I knew that our very economic system in which to basis our survival

is plagued by unsustainable practices (Chowdhury, 2011a, b & c). At the helm of this politico-

institutional medley, cultism controls senses, behaviors and attitudes. Those could have prevented

America’s financial debacle and those who are privileged by our trust did not take into consideration

how their pretty indulgences have been hurting the Nation and her people.

A Nation that was built by bloods and sweats of so many pioneers, honest, humble, noble and brilliant

minds came so close to lay in shamble, “thanks-a lot” to the behavioral pathology of cults of politico-

institutional medley. Though corruption did not spill over in the streets of America, it was deep and

prevailing in our financial system very early. The gradual abolishment of static banking system paved the

way for questionable governance and unsustainable practices to take root in our financial system.

Figure 2. The history of American Banking System.

American Banking system in the early 1800s depended on cyclic practice of collecting consumer deposits

and lending to consumer from that deposited money pull – a static model. The lending practice was

constrained by deposited money pull and when increase number of consumers drawn their money for

one reason or the other, banks ended up in runs. A series of Bank runs in 1873, 1884, 1890, 1899 and

1907 forced US Congress to establish Federal Reserve in 1913 as the lender for bank guaranteeing

money reserve (FCIC, 2011). However, such guarantee of printing money and allowing banks to continue

proven futile attempt as bank runs continued in 1920s and 1930s (figure 1). The situation of great

depression in 1920s and 1930s has many accounts. The worldwide depression begin in 1920s but its’

affect to USA was significant and continued in 1930s removing 25 percent of all workers from job by

1933 (Smiley, n.d.). Without discounting worldwide depression as the reason, some scholars argue that

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deflation was catalyst of the great depression (Cole & Ohanian, 2001) in 1920s and 1930s. However, the

enactment of Glass-Steagall Act (Gup, 2007) in 1933 depicts something different than that of deflation

as the causal factor of great depression. The Glass-Steagall’s findings revealed questionable governance

and behavioral pathology in banking industry from speculative financing to high risk securitization that

proven to be devastating for American economy (Gup, 2007; Investopedia, 2011; Francis, Trimble &

Chekwa, 2010). The GSA (Glass-Steagall Act) was a necessary step (Francis, Trimble & Chekwa, 2010) to

protect Nation’s economy as it created barrier walls, separated commercial Banking and Investment

Banking. The “Investment Banking” which led to the creation of shadow banking system in 1970s was

then and still considered risk undertaking. Another aspect of GSA was that it allowed formation of FDIC

(figure 1) asserting that depositor’s money at commercial bank and not at the investment bank will be

protected under FDIC under certain guidelines. In addition, the separation of commercial and

investment banks was intended to lessen the powers that would otherwise allowed underwriting firms

to intensify competitions and supersede commercial banks through unfair competitive practices

(Jackson, 1987). The GSA also paved the way for Bank Holding Company Act of 1956 (PBS, 2003)

extending further restrictions on banks including bank holding companies owning two or more banks

(see figure 2).

However, Bank found many ways to go around doing their questionable business practices through the

loophole of GSA and also started behind the scene lobbying against GSA. Banks even created a

subculture against GSA to influence congressional representatives. The result came in the form of a

series of act designed to loosen GSA restrictions. The first in this series was DIDMC (Depository

Institution Deregulation and Monetary Control Act) of 1980 that repeal the limit on interest for deposits

among other things and gradually phased-out “Regulation Q” that restricts interest ceilings under

section 11 of GSA (Gilbert, 1986; PBS, 2003) by 1986. In 1982, congress enacted Garn-St. Germain

Depository Institutions Act (GSGDI) divulging yet another attempt towards deregulation and allowing

thrift institution to offer among other things the adjustable mortgage rate (ARM) loan. This was one of

the two major revisions of US financial system and the other was DIDMC (Cornett & Tehranian, 1990).

In 1994, congress further allowed banks to effectively expand beyond state lines and also made it

possible for bank holding companies to acquire banks anywhere in the nation (McLauhlin, 1995).

In 1999, congress enacted yet another law known as “Gramm-Leach-Bliley Act” that repeal GSA and

abolished most the restrictions imposed by it. As many legislations began to undercut GSA, a new group

of Industry sprung up in 1970 when a group of investing firm initiated money market fund (please view

figure 2).

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Figure 3. The role of Shadow Banking System in America’s financial crisis.

Whether regulation is good or bad for the economy that’s a different type of debate altogether,

however, what has transpired through deregulation redux is matter of grave concern. Many scholars

(Kacperczyk & Schnabl, 2010; Grogan & Fisher, 2010) questioned shadow banking practices specifically

in commercial papers, repurchase agreements and mortgage securitization. Kacperczyk & Schnabl

(2010) went as far as claiming that commercial paper played central role in financial collapse from 2007-

2009. FCIC (2011) also indicated that commercial are often sold without adequate collaterals and much

of these money are drawn from money market fund which grew from USD$3 Billions in 1977 to USD$1.8

trillions by 2007. Though many other factors contributed to economic meltdown of 2007-2009, role of

Shadow banking industry remain elusive. A report published by Grogan & Fisher (2010) claimed Shadow

Banking industry contributed to the financial crisis in “unprecedented ways”.

Figure 1, 2 & 3 above (red lines indicates adverse impacts of certain measure), however, depict a yet

more complex issue, a sure sign that politico-institutional medley are counterproductive, as it

detrimental to nation and common goods so do to the very institutions who sponsored such action to

begin with.

It’s the behavioral pathology that we need to consider putting a barrier on and not the progress. I since

long contended that regulatory measures sometimes help and other times counter productive. What is

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needed a formulation that puts barrier in the development of behavioral pathology and my formulation

of OCBS (Organizational Citizenship Behavior towards Sustainability) would be of great tool to this

aspect. Should you be interested, please visit my website at http://www.dhimanchowdhury.com .


Chowdhury, D., 2011a. Organizational Citizenship Behavior towards Sustainability (OCBS). Aberdeen

Business School, The Robert Gordon University.

Chowdhury, D., 2011b. Corporate Sustainability Survey: 2011. Available online at


Chowdhury, D., 2011c. What is the root cause of Corporate failure? – A linkedin Poll. Available online at



Cole, L.H. & Ohanian, E.L., 2001. Re-Examining the Contributions of Money and Banking Shocks to the

U.S. Great Depression. NBER Macroeconomics Annual 2000, Volume 15. MIT Press. Available online at

http://www.nber.org/chapters/c11057.pdf .

Cornett, M.,M. & Tehranian, H., 1990. An Examination of the Impact of the Garn-St. Germain Depository

Institutions Act of 1982 on Commercial Banks and Savings and Loans. The Journal of Finance, Vol. XLV,

NO. 1; March, 1990.

FCIC, 2011. The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of

the Financial and Economic Crisis in the United States. Official Government Edition. The Financial Crisis

Inquiry Commission. Superintendents of Documents. USGPO.

Francis, C., Trimble, A. & Chekwa, C., 2010. Changes in Financial Institution Regulations Associated with

the Repeal of the Glass-Steagall Act of 1933. 2010 IABR & ITLC Conference Proceedings, Orlando,


Gilbert, A.R., 1986. Requiem for Regulation Q: What It Did and Why It Passed Away. Federal Reserve

Bank of St. Louis.

Gup, E.B., 2007. Corporate Governance in Banking: A Global Perspective. Edward Elgar Publishing Ltd.

Grogan, J., & Fisher, I., 2010. The financial Crisis: 2010.

Investopedia, 2011. What Was The Glass-Steagall Act? Available online at


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Jackson, William D., 1987. Glass-Steagall Act: Commercial vs. Investment Banking. Congressional

Research Service Report IB87061. Available online at

http://digital.library.unt.edu/ark:/67531/metacrs9065/m1/1/high_res_d/IB87061_1987Jun29.pdf .

Kacperczyk, M. & Schnabl, P., 2010. When Safe Proved Risky: Commercial Paper during the Financial

Crisis of 2007–2009. Journal of Economic Perspectives – Volume 24, Number 1.

McLaughlin, S., 1995. The Impact of Interstate Banking and Branching Reform: Evidence from the States.

Current Issues in Economics and Finance. Federal Reserve Bank of New York.

PBS, 2003. The Long Demise Glass-Steagall: A chronology of tracing the life of Glass-Steagall Act, from its

passage in 1933 to its death throes in the 1990s, and how Citigroup’s Sandy Weil dealt the cope de

grâce. WGBH Educational Foundation. Available online at


Smiley, G, n.d. The concise Encyclopedia of Economics: Great Depression. Library of Economics and

Liberty. Available online at http://www.econlib.org/library/Enc/GreatDepression.html .