The Downside of Social Responsibility

(Note from Jeremy: the author of this post, Julian Friedland, is a friend of mine and a Business Ethics professor at Eastern Connecticut State University. He writes at the blog Business Ethics Memo, and I will be reposting his commentary here from time to time.)

Cross-posted here.

The NYT just ran an interesting report on an interview with Jeffrey M. Peek, CFO of CIT, a bank on the brink of bankruptcy in part because it acted more responsibly during the mortgage bubble:

Perhaps Mr. Peek’s real failing was that he didn’t take enough foolish risks. Although Mr. Peek was a former top Merrill Lynch executive, he didn’t lead CIT into bundling mortgages into toxic derivatives, he didn’t get into credit-default swaps, he didn’t create a trading desk that swung for the fences and he didn’t build a company that was so big that it posed systemic risk. In other words, he acted a little too responsibly. So when CIT’s moment of crisis arrived, the F.D.I.C. looked it over and decided it wasn’t too big to fail. To Mr. Peek’s surprise, it turned out to be too small to save.

That is deeply ironic. And explains much on the roots of the economic crisis. Banks it would seem–that are still standing–gambled shrewdly that even under a collapse, they would remain (if not become) too big too fail. It’s not clear that even with this attitude CIT would have become too big to fail, but this is a sobering reminder of how smaller and more responsible companies get left out of the bailouts. The Fed should step in at times like this.

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