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.

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

2. I
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”.

3. 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
destruction”.
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

4. 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

5. 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).

6. 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

7. 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 .
Reference
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8. Jackson, William D., 1987. Glass-Steagall Act: Commercial vs. Investment Banking. Congressional
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