Wednesday, May 05, 2010
Emory Transactional Skills Conference - Reminder!
Just a quick reminder that Emory Law School's conference, Transactional Education: What’s Next?, is being held on June 4 and June 5. Additional information is available by following the link or contacting Edna Patterson at (404) 727-6506 or email@example.com.
Friday, April 02, 2010
"Hot News" Misappropriation: Implications for Bloggers? for Bloomberg News?
What happens when the interests of newsgatherers and news aggregators collide? That was the issue before District Court Judge Denise Cote last month in Barclays Capital Inc. v. Theflyonthewall.com (S.D.N.Y., 3/18/10), and the opinion in the case arguably has negative (dare I say ominous?) implications for bloggers and for anyone who republishes truthful information about a matter of public concern, even if that information has already leaked into the public domain.
The plaintiffs in the case were the financial services firms Barclays Capital, Merrill Lynch, and Morgan Stanley. They sued Theflyonthewall.com (Fly) for misappropriation and copyright infringement for redistributing their stock analysts' investment recommendations "through unauthorized channels of electronic distribution." Fly is an Internet subscription service that aggregates and distributes "relevant, market-moving financial news and information." Fly often obtained research reports and recommendations via leaks from plaintiffs' employees or clients. Fly would then quickly distribute the recommendations before the New York Stock Exchange opened, thereby undercutting the plaintiffs' abilities to profit from their reports.
After a bench trial, District Judge Cote entered judgment against Fly for copyright infringement, and awarded statutory damages, a permanent injunction against direct copying and republication of the reports, and attorneys' fees for the portion of the litigation expenses associated with pursuing the copyright infringement claim. She also held that Fly had engaged in "hot-news misappropriation" when it redistributed the recommendations from the plaintiffs firms' investment reports before the opening of the New York Stock Exchange and crafted a "time-delay" injunction requiring Fly to delay future distributions for a specified period after the firms released their reports to remedy the problem.[Full details below.]
The theory of "hot news" misappropriation stems from International News Service v. Associated Press, 248 U.S. 215 (1918), in which the Supreme Court held, under federal common law, that "hot" news is "quasi-property." That case involved a claim by the Associated Press against a competing news service that was obtaining and then redistributing on the West Coast AP battlefront news releases during World War I. The Court's decision reflects the notion that "time is property", or as my colleague Michael Wolf puts it, the decision protects the "money value of time" as opposed to the "time value of money." It also protects the "labor value" that AP invested in newsgathering, at least for a limited time. The "hot news" misappropriation doctrine was criticized by no lesser lights than Justice Brandeis and later Judge Learned Hand. In fact, Justice Brandeis wrote in dissent in INS v. AP that "the general rule of law is that the noblest of human productions--knowledge, truths ascertained, conceptions,and ideas--become, after voluntary communication to others, free as the air to common use." Despite the pedigree of its critics, the hot news misappropriation tort nonetheless caught on.
Indeed, Judge Cote relied on a Second Circuit decision, National Basketball Ass'n v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), to define the contours of the tort. There, the NBA sued the maker of a hand-held pager that provided real-time information about basketball games. The Second Circuit held that a "narrow" hot news misappropriation claim could survive preemption by the federal Copyright Act when "extra elements" were present. The extra elements are: "(i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendants use of the information constitutes free riding on plaintiff's efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened."
Applying this test, Judge Cote held that Fly had misappropriated the research reports of the financial services firms when it distributed them to its subscribers before the opening of the New York Stock Exchange. Judge Cote wrote: "Fly's core business is its free-riding off the sustained, costly efforts by the Firms and other investment institutions to generate equity research that is highly valued by investors. Fly does no equity research of its own, nor does it undertake any original reporting or analysis . . . [Fly's] only cost is the cost of locating and lifting the Recommendations and then entering a few keystrokes into its newsfeed software. Although Fly does attribute each of the Recommendations to its originating firm, if anything, the attributions underscore its pilfering."
Alarmingly, Judge Cote absolutely rejected the argument that Fly had a right to redistribute truthful information that had already made its way into the public domain. "[I]t is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it." The judge found it of no moment that the "actors in the marketplace repeat news of Recommendations to their friends and colleagues, such that the word inevitably gets out. Rather, it is that Fly is exploiting its self-described 'hefty relationships with people in the know' to gather information from the rumor mill and run a profitable business dedicated, in large part, to systematically gathering and selling the Firms' Recommendations to investors."
Judge Cote also found that the plaintiffs were in direct competition with Fly even though they were not themselves in the news business. As to the final factor of the NBA test--whether the plaintiffs would have a reduced incentive to invest in research--Judge Cote found that the plaintiffs' investments in research had diminished because Fly and other news services had published their leaked recommendations. Significantly, and quite interestingly, Judge Cote found that the "unauthorized redistribution of [analyst] Recommendations" was a "major contributor to the decline in resources that each Firm devotes to equity research." (emphasis mine) To be fair, the judge did concede that there were other factors in play during this time that might have affected analyst staff and budgets. She observes, for example, that "[s]ince 2008, the world has experienced an economic cataclysm." Still, it is richly ironic that these firms are concerned about protecting the "integrity" of their equity research.
In crafting a remedy for Fly's misappropriation, Judge Cote took into account "public policy considerations" but made no mention of the First Amendment. Specifically, she observed that the production of equity research "is a valuable social good" that will be "underproduced unless the Firms can achieve an economic return on their investment." She also noted that there is an "important" public interest in "'unrestrained access to information', particularly when the information is heavily fact-based." She therefore enjoined Fly from unauthorized redistribution of Plaintiffs' research recommendations released when the market is closed "until one half-hour after the opening of the New York Stock Exchange or 10 a.m., whichever is later." She enjoined Fly from publishing recommendations issued when the market is open until two hours after their release by the Plaintiffs.
From a media lawyer's perspective, there are compelling interests on both sides of the case. On one hand,the newsgatherers and content generators wish to turn a profit (and stay in business), and their ability to do so is threatened by online news aggregators. On the other, this case involves a prior restraint preventing republication of newsworthy information, even if that information has already entered the public domain. It also involves the imposition of tort liability for the publication of lawfully obtained truthful information. Given this conflict, surely the district judge should have at least considered how to reconcile her decision with First Amendment cases like Near v. Minnesota, Florida Star v BJF, and Bartnicki v. Vopper. Fly evidently plans to appeal the district court decision, so perhaps the appellate court will do a better job of reconciling the conflicts present in this case.
Posted by Lyrissa Lidsky on April 2, 2010 at 04:18 PM in Blogging, Constitutional thoughts, Corporate, First Amendment, Information and Technology, Intellectual Property, Torts, Web/Tech | Permalink | Comments (3) | TrackBack
Tuesday, March 30, 2010
Carney's Firing: The Other Side of the Story?
Larry Ribstein and the good Professor Bainbridge are bemoaning last week's firing of John Carney from Business Insider. Ribstein, Bainbridge and others are all citing this story by Foster Kamer as to the reason for the firing:
Blodget wanted more sensational, pageview-grabbing posts and click-friendly features like galleries, while Carney wanted to put forth breaking news scoops that told a longer narrative. It was also speculated that Carney, one of the highest paid members on the Business Insider staff, wasn't bringing the traffic numbers to sufficiently satisfy Henry Blodget, given his high profile within the financial reporting world, but that Clusterstock's homepage had the highest traffic of all the verticals at Business Insider during Carney's tenure, and that his own stories generated "tons of [unique visitors]."
This version of the story is obviously highly sympathetic to Carney; he wanted "breaking news scoops that told a longer narrative," while Blodget wanted "more sensational, pageview-grabbing posts." But from my perspective, Carney's problem was that "longer narrative": he consistently tried to bend news stories around to an extremely conservative/libertarian perspective. The latest example is this bit of regulatory nihilism: "Sorry America, The Latest Round Of Financial Regulation Reform Won’t Fix Anything." And frankly, that post seems rather restrained when compared with "Lying Government Humiliated In The Very First Backdating Conviction" and "How The Government Used The CRA To Push Crappy Lending Standards."
Just to be clear, I'm not saying Carney should have been fired. And I'm not saying he won't come back and be very popular at another site -- he probably will. I'm just pointing out that some readers may have been turned off by the overly-politicized message, as commenters at Felix Salmon opined:
Even with Carney’s thousand word essays on Lehman, I found most of what he wrote to be knee jerk, ad hoc advocacy that was “shallow and vapid.” Clusterstock may be less of a resource without him, but that doesn’t necessarily imply that it was much of a resource with him. I can’t imagine where Blodget is headed if Carney was his upside connection to quality journalism…
UPDATE: Professor Bainbridge responds: "He's the John Stossel of financial news and that's a very good thing."
Thursday, January 21, 2010
Two small thoughts on Citizens United
Just wanted to add these minor notes to the growing agglomeration of commentary:
- For a terrific take on the legitimate uses of corporate money to advocate for policy positions, see Jill Fisch's How Do Corporations Play Politics?: The FedEx Story, 58 VAND. L. REV. 1495 (2005). Fisch does a great job of showing how corporations need to play politics in order to manage their businesses. I think the same applies to unions, as I argued here.
- I predict Citizens United will lead to a new round of shareholder proposals designed to limit corporate political spending. Shareholders -- particularly institutional shareholders -- will want to limit the money that flows out through theoretically "non-business-related" expenses.
These two points are semi-contradictory. Here's an effort to reconcile them: those companies whose contributions seem more ideological (more populist? more conservative?) will find themselves targeted by institutional shareholders, whereas those who play both sides of the street, in a low-key manner, will probably not be.
Friday, January 08, 2010
Apple, Google, and Nexus One: The Role of Eric Schmidt
If you stopped reading fake steve jobs when he went on hiatus as Dan Lyons for a while, it's time to go back. Perhaps "Operation Chokehold" was not as successful as fsj had hoped, but it did point up AT&T's weaknesses with its network. There was even some interesting discussion of shareholders vs. customers -- perhaps fodder for Vic Fleischer's consumer primacy.
Now fsj is all over the Nexus One, Google's attempt to eat into the cell phone (and the iPhone) market. You may remember the fanfare when Eric Schmidt, Google's Chairman/CEO, joined the Apple board. He even worked for free! Well, he's no longer on the board -- he resigned in August. At the time, the real Steve Jobs said in a press release: "Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest."
At the time of the resignation, there was some speculation that "[t]he two companies may genuinely dislike each other now." I would say that's a yes. FSJ has a great (hypothetical) conversation between Jobs and Schmidt in the aftermath of N-O:
I’m like, Dude, do you not remember all that stuff you told me about not making a phone, back when you were still not recusing yourself from iPhone discussions during board meetings? You swore, and I mean you looked me in the eye and swore, that you would never make a phone. He says, We’re not making a phone. HTC is making it.
I told him if he wanted to use that line on the retards in the hackery that’s one thing but please don’t insult me with it. He goes, Okay, it’s our phone.
So I guess my underlying legal question is: any possibility that Apple has claims against Schmidt? I would assume not, since this stuff had to have been lawyered up so extensively on both sides that there's no room for illegality. Still, it does seem fairly -- um, unusual -- that two competitors would have been working together so closely. Or does this just mean that boards are a lot less important than corporate law makes them out to be?
Friday, December 18, 2009
Tiger Woods and the Wall Street Journal
There's a fascinating story in the WSJ about efforts by Tiger Woods to hide past indiscretions. However, this paragraph within the story reminded me that Tiger is not the only one who made a deal with the tabloids:
The woman purportedly photographed with Mr. Woods in 2007, a Florida restaurant employee named Mindy Lawton—along with at least one of her family members—was recently promised an undisclosed sum in return for telling her story exclusively to News of the World, a London-based tabloid owned by News Corp., which also owns The Wall Street Journal. The agreement blocks her from discussing her alleged relationship until after Dec. 20—two weeks after it was first published in the U.K., according to people familiar with the matter.
I found it a little odd that News of the World refused to lend out a source to a sibling news organization. Seems to show a lack of synergy -- but perhaps that's a good thing.
Wednesday, December 16, 2009
Mack Brown's $2 million raise
Having complained about Jim Calhoun's $1.6 million salary, I think I'm obligated to take issue with a raise that dwarfs Calhoun's entire salary. Mack Brown is now making $5.1 million a year as a football coach through the year 2016 (or until the next raise). A resolution of the UT Faculty Council said the deal was "unseemly and inappropriate." This resolution has drawn its own share of criticism. The UT president pointed out that the athletic program, under Brown, has had no subsidies or deficits and has channeled $6.6 million into academic programs in recent years. This is the same version of the argument used to support Calhoun's salary -- namely, the athletic programs more than pay for themselves, so they can pay their people in the millions of dollars. Just today I heard ESPN personalities Mike Greenberg & Tony Kornheiser accuse the UT professors ("eggheads," in Kornheiser's parlance) of being completely wrong on the economics.
What the commentators are missing -- or, at least not talking about -- is that the "market" for college coaches is a grossly distorted one. There is a lot of money floating around college sports -- primarily through TV contracts, but also ticket sales, team endorsements, licensing, and advertising. But that money has nowhere to go, other than to the schools and the coaches. The NCAA places strict limits on what players can get from their university -- only a scholarship. And NBA and NFL rules essentially require that players spend time in college before entering the pros. So what we have are athletes who must spend time in college to pursue their profession but cannot get paid for it. So the money goes instead to the coaches.
If you have any doubt about this, just look at baseball. Baseball has a thriving minor league system; there is college baseball, but you need not go to college to get into the pros. How much do college baseball coaches get? This article says they make about one-sixth what football coaches make. This one (from 2007) says that the highest paid college baseball coach makes $600,000. Or look at pro football. Only four NFL coaches made more than Mack Brown last year (according to this estimation). Thirteen made less than $3 million; five made less than his raise.
If we are going to keep the system we have, let's be honest about it. We now take talented young athletes and use their skills to fund our universities. The coaches help facilitate this -- and they are taking more and more off the top. There are reasons to support this system, but saying that coaches "deserve" this money because of a distorted market is not one of them.
Friday, December 04, 2009
Those who generally refrain from strong opinionating have more force when they step into that role for a moment. David Zaring provides one such example.
Monday, October 26, 2009
The Truth on the Merger Guidelines
Our friends over at the Truth on the Market have organized an online symposium on the recent Department of Justice and Federal Trade Commission announcement that they will solicit public comment and hold joint workshops on the Horizontal Merger Guidelines (”HMG”). The symposium will run today and tomorrow, and the line-up includes a bunch of terrific folks, including Joe Farrell from the FTC.
Tuesday, September 15, 2009
Judge Rakoff and Judicial Meddling
Judge Jed Rakoff (SDNY) rejected the settlement proposed by the SEC and the Bank of America for allegations that the Bank of America lied to shareholders during its merger with Merrill Lynch. Specifically, the SEC claimed that Bank of America falsely told shareholders that Merrill would not be permitted to pay its executives year-end bonuses when, in fact, BoA had given Merrill approval to pay up to $5.8 billion in bonuses. Here is the key graf:
In other words, the parties were proposing that the management of Bank of America -- having allegedly hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had driven the company nearly into bankruptcy -- would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money.
This could be characterized as a Howard Beale moment for Judge Rakoff -- a cri de couer against the system. After all, his criticism could be leveled against every SEC settlement in which a corporation (opposed to individuals) pays the fine. Seasoned observer David Zaring reacts with outrage of his own against officious judicial meddling. But instead of viewing this as grandstanding or obstreperousness, I think it's a useful opportunity to reconsider the basics of securities regulation. After all, it does seem somewhat absurd to have the "victims of the violation pay an additional penalty for their own victimization." Perhaps Judge Rakoff's opinion will prompt a reexamination of this basic facet of the system.
Judge Rakoff's opinion is a brief but wide-ranging discussion of executive compensation, corporate wrongdoing, the TARP bailout (see n.1), and the role of the SEC. Judge Rakoff wants individual accountability, and he thinks the settlement is an effort to evade it. It remains to be seen whether this is merely an interesting blip or a catalyst for further action. But I hope it's more than merely some extra work for the SEC.
Saturday, August 15, 2009
Here's an interesting tidbit from this weekend's New York Times magazine profile of Bruce Bueno de Mesquita, a political scientist who uses game theory to predict political and corporate outcomes. The Times reports that Bueno de Mesquita offered to use his predictive software for Arthur Andersen
"to predict which of Arthur Andersen's clients - including, at the time, Enron - were likely to engage in financial fraud. But the firm's lawyers, Bueno de Mesquita says, didn't want to use the tool for fear it would put them in awkward legal positions."
No kidding. The Times then quotes a former Arthur Andersen partner: "'Had I been able to convince the firm' to use the model... I think that Andersen would be alive today."
Wednesday, August 12, 2009
Recouping Bonuses From Innocent Executives
This post, the second in a series about recouping executive compensation, looks at the SEC's recent action to recoup bonuses from an executive who was not charged with misconduct. This SEC action is the first to use the SOX 304 clawback provision this freestanding way. The story has started to make the rounds of the blogs and op eds and many (Ribstein, WSJ) but not all (Conglomerate) criticize the move for penalizing innocent executives. I explore two slightly different questions after the jump: How much does the same debate apply to the legislation implementing TARP, which also has a clawback provision? and How does agency law fit in?
"The Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance" including "a provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate." EESA 111
Tuesday, August 11, 2009
Recouping Executive Bonuses
Executive bonuses are in the news again, with the SEC complaint against Bank of America for allowing Merrill Lynch to pay up to $5.8 billion in discretionary bonuses, despite proxy statements suggesting that no bonuses would be paid. Bank of America and the SEC agreed to a settlement, but these settlements are subject to judicial approval for being "fair, reasonable and adequate." Judge Rakoff of the SDNY refused to approve it without a hearing, held yesterday, in which he called for more information. A few thoughts:
First, the coverage seems to focus on whether TARP money was used to pay the bonuses, and outrage because $33 million seems small in comparison to the billions paid out. But we should also be asking the usual question about corporate penalties: Where is that $33 million coming from and where is it going? Is the penalty being paid with TARP funds? (Is there any way to distinguish the source of money?) Who gets the money? In other words, maybe the cash is going from taxpayers to the Treasury, minus administrative costs. Or the penalty could be distributed to injured shareholders through a Fair Fund. It complicates the "bigger is better" account.
Tuesday, July 21, 2009
Monitoring External and Internal Corporate Security
The WSJ law blog has a new story up about a corporate security scandal at Deutsche Bank, wherein the Bank's private detectives engaged in a number of acts that, in retrospect, sound either loopy (sending a dead microphone hidden in flowers to the COO to see if he would notice it) or more serious (spying on a board member suspected of leaking information to a journalist). Similar to the Hewlett Packard pretexting scandal, which I discuss here, Deutsche Bank relied on private detectives to do much of its "security work" (although the head of internal corporate security has reportedly left the company in light of the scandal). As was the case with HP, the Deutsche Bank scandal demonstrates some of the problems with corporate -- private -- policing. The company's internal security apparatus is asked to investigate a problem and then relies on external investigators to do its dirty work. As a result, the company has to monitor both its internal security and external security to ensure that both ethical and legal norms are met. This can be extremely difficult when some of the company executives are unfamiliar (as was the case in the HP scenario) with the techniques that the security professionals are using.
In any event, this all occurred in the past, between 2001-2007, when corporations - and corporate security departments -- had more money to spend. Now, in a world of vastly reduced resources, corporate security (along with corporate compliance) may well get the short shrift. In this case, reduced resources promises mixed consequences. On one hand, companies may have fewer resources to identify internal theft and fraud. On the other hand, it may spell an end to the corporate "surveillance" measures that are, at best, unethical and at worst, plainly illegal.
Friday, July 03, 2009
Thinking Like an Entrepreneur or a Lawyer?
If you are interested in the intersection of entrepreneurship and the law, the Kauffman Foundation, the leading sponsor of entrepreneurship development in the country, has funded an Entrepreneurship Law resource on its website, www.entrepreneurship.org. This includes teaching materials. (I think I contributed something, but I just registered myself so I'm not sure.)
For many of the same reasons expressed in my last post (and based on a fair amount of experience in the area), my reaction to "entrepreneurship law" is something like my reaction to my own travails as an athlete, which is that I think too much (this is known as "paralysis by analysis"). For a short sample of my contrarian view on this subject, see Why the Law of Entrepreneurship Barely Matters, the gist of which can be boiled down to this excerpt:
The entrepreneur . . . sees the world as a moveable feast of phenomena, posing danger and opportunity to be seized and exploited, and choices to be made, over and over again. One entrepreneurship scholar sees the entrepreneur's mode of reasoning as effectual rather than causal: while causal reasoning posits a goal and seeks means to the goal, effectual reasoning "begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with."
The essence of thinking like a lawyer is causal reasoning, and not surprisingly, lawyers and entrepreneurs tend to be ships passing in the night. (For a far more scathing assessment of the constricted scientific paradigm - in a Kuhnian sense - of legal academia, see Pierre Schlag's essay on spam jurisprudence and air law, and Richard Posner's bemused but ultimately mild concurrence.)
The scholar referred to in the block quote is Saras Sarasvathy (pictured, left), who is at the Darden School of Business at the University of Virginia, and who established her chops working with Nobel Prize winner Herbert Simon (he of behavioral economics fame). I had the pleasure of chatting with Professor Sarasvathy for a few minutes when she was in Boston last December, and I was delighted to find a couple days ago that a site to which I subscribe, Big Think, had a series of online interviews with her. Enjoy!
Thursday, July 02, 2009
Complexity, Judgment, and the Subprime Crisis - The Hedgehog's View
At the end of April, Dave Hoffman and two of his colleagues at Temple, Jonathan Lipson and Peter Huang, organized a fascinating day-long colloquium on issues of complexity arising in the current financial crisis. Among other presentations, Barry Schwartz from Swarthmore gave a talk on "the paradox of choice" (i.e., more choice, or more complex choice, doesn't necessarily make consumers happier), and Joe Grundfest gave a luncheon keynote. One of the questions that kept occurring to me was the context of the complexity issue - what exactly were we trying to fix, if anything? My analogy was this: if law is a "science," and something about the financial crisis (whether complexity or something else) reflects a disease, then what is the relationship between what we know about the disease and the regulatory medicine we would want to prescribe? I liken financial boom-and-bust to bipolar disorder - is there a regulatory equivalent of lithium that we are assured will tamp down the peaks and valleys? And even if there is, do we want to prescribe it? Maybe we like the booms enough to bear the busts! To keep the analogy going, there's a good chance Tchaikovsky and Van Gogh were bipolar - would we have their art if they had been medicated?
More on the hedgehog below the fold.
One of my most treasured Suffolk colleagues has suggested that I am a hedgehog, in the sense of the Greek saying (appropriated by Isaiah Berlin) that the fox has many clever ideas, but the hedgehog has one big one. My big one (such as it is) is placing the canard "thinking like a lawyer" into the broader category of how people make sense of the world. (This comes, I think, from spending so much of my professional life as a lawyer not surrounded by other lawyers.) Nothing provokes this kind of reflection like great calamities, whether they are oceanic or financial tsunamis. In a nutshell, the question is how we assess what happened against two very different kinds of "oughts": (a) the normative "ought" of our sense of the way a just world should work, and (b) the descriptive "ought" that a scientist imagines when she comes up with a hypothesis of explanation that has yet to be borne out by experiment. My working thesis is that thinking like a lawyer - somewhere between advocacy and truth-seeking - gets this all jumbled up. What lawyers do mostly is look backwards and assess cause-and-effect in a particular way, and make implicit (and not necessary correct) assumptions about predicting the future from what happened in the past. To put it otherwise, my hedgehog concern deals with difficulties in forward-looking judgment, namely, the difference between looking backward and assessing causation as a matter of attributing blame, and understanding what is going on as a descriptive matter sufficient to make a good forward-looking decision in real time under conditions of significant uncertainty.
The result (how I spent my summer vacation) is The Epistemology of the Financial Crisis: Complexity, Causation, Law, and Judgment, in which I've argued this is mostly an epistemological crisis - a crisis of faith in science and algorithm as against the ongoing irreducibility of judgment, whether our own or those to whom we delegate it. In short, it's scary when we thought we had it nailed, and it turns out we don't know what we don't know. (I apologize for the use of the word "epistemology" but I like it, despite the warning of a good friend that it's a signal of a high "crap factor.") There's a little something for theorists of all kinds in there, including a critique of Michael Moore's new book Causation and Responsibility (the first extended treatment of causation in the law since Hart and Honore), Adrian Vermeule's Judging Under Uncertainty, and Richard Posner's A Failure of Capitalism.
Wednesday, July 01, 2009
The Vacuous Private Law of Homeowners' Associations (Below the Fold) After Vacuous Reflections About My Vacuous Life
Here we are, back for the fourth summer stint on PrawfsBlawg. It's hard to believe, when Dan first invited me to do this, in July, 2006, I was an outsider to the legal academy looking in (per Bob Uecker, "gosh, they're having fun in there.") Also, Twitter was unknown. Twitter has done a lot to focus my blogging, because, call me an old whatever, but I can't believe anybody gives two hoots about the mundane details of my life, whether by blog entry or tweet, something I wasn't considering back in 2006 while in a New Orleans carwash watching what looked like melted rainbow sherbet ooze all over my car. Steve Bainbridge seems to be able to get away with food and wine, but he seems to know what he's talking about. I try to maintain a connection to something legal (or, if not legal, funny).
If I were inclined to vacuous reflections about life, however, I would extol the pleasures of not of litigating, but of home brewing beer, a subject touched upon in these parts recently. My son, Matthew, and I are on our third batch of the summer, having invested $100 in the basic tools of the trade. Our first 43 bottles were an Irish stout recipe, which we named "Max and Annie's Jewish Stout," after our two dogs. We've since moved on to "Max and Annie's Michigan Porcupine Pale Ale" (a Sierra Nevada Pale Ale recipe), and "Charlevoix Steam Beer," which is presently fermenting in the crawl space where it is cool. Our plan is to lay down a carboy full of mead for a full year in a few weeks. This is a stretch but the legal connection is that I can't post the labels, because I am positive at least the second two violate a whole raft of copyright and trademark rights.
But enough of me. Let's go below the fold where YOU can hear me whine about the governance of homeowner's associations.
We spend the summers in Charlevoix, Michigan, where we bought a lot sixteen years ago, and built a house twelve years ago. In Michigan, there is something called a "site condominium," which is basically another way of imposing regulations in a subdivision of free-standing homes, and that's what we have. There are thirty-six lots, and common elements, which consist of two roads and landscaping, and a beach lot with a removable "Brock Dock" through which residents not on the lakeshore itself have access to the lake. You own your own lot and house in fee simple absolute, but the lot is established pursuant to a master condominium deed, which contains the property rules, and which incorporates a set of recorded bylaws, which establish the five-person Board of Directors (classified board - two and three seat classes, elected for two years) and the architectual review board, empower the collection of assessments for the maintenance of the common elements, and set use restrictions such as no short-term leasing, no open garage doors, and no boats, trailers, RVs, etc. left in the driveways.
If you want to experience the thrills of corporate governance in a microcosm, do as I have done and be a member of the condominium association Board of Directors for going on fifteen years. I would have resigned long ago, except that nobody is as anal about the record-keeping as I am, and so I've been the secretary (and now webmaster) for all these years. The lesson I take from the experience, as a legal theorist, is the tenuous (vacuous?) relationship among (a) the actual private law of the association as reflected in its governing documents, (b) what people think their actual rights are, and (c) how, when it comes to asserting and defending one's interests as between the law and the lore (or custom), a foolish consistency is the hobgoblin of little minds (see Prawfs guest blogger Brian Tamanaha on Law as a Means to an End). Take, for example, a matter of no small interest: the ability to see the lake from your living room if you have a house that is not on the lakeshore. There are local zoning rules that define setbacks, as well as an architectural review board within the condominium association, but it has been almost impossible to restrain the lakeshore residents from building setback to setback (i.e., very large homes on relatively small lots), so that the space between the houses is a mere sixty feet, filled with fast growing (and kind of ugly) white pines that the original developer planted at the lot lines to keep the place from looking like a landing strip. But there is no legal right anywhere in the documentation that says you have a property right in your view of the lake. The only way to control this is through community controls on landscaping (which doesn't help with the stuff that was here before) or an appreciation of the Prisoner's Dilemma we find ourselves living in, and the ensuing need to cooperate. Nevertheless, I find myself educating a neighbor every year on the fact that there is no legal right to a "view corridor" as it has come to be known. If there were, I would have already done something about the forest of scrubby white pines that block my view.
Then there is the question of the separation of ownership and management. We just issued a rule to the effect that there were to be no permanent firepits built on the beach. You can have fires, but you have to use a portable firepit (they exist), which means that you clean up after yourself, and there's no lingering hot embers for a kid to fall into. My publication of this rule prompted the following "Berle and Means" response from a neighbor (otherwise, a very nice person - beware the pitfalls of the inference one draws from e-mail): "Does the board act and make rules based on the good of the people that live here?"
Well, I could go on, but there is shameless self-promotion yet to be written.
Tuesday, June 09, 2009
The Chrysler Bailout: Who Wins with Failure?
David Zaring offers up his as-always savvy analysis on the Supreme Court's grant of a stay in the Chrysler bailout. Here are some quick thoughts:
- Fiat can pull out if the deal is not wrapped up by June 15. Would Fiat pull out? It's unclear what has changed. Perhaps the continuing toll of bankruptcy uncertainty would weaken Chrysler too much. Or perhaps Fiat's having buyer's remorse.
- It is assumed that the failure of this deal would be a blow to the Obama Administration. But who wins and who loses, at this point, if the deal blows up now? Ford and GM are better off without Chrysler around. The Chrysler creditors would lose their deal and fall back into the morass of a liquidation. This might chasten the GM creditors. Moreover, the Obama administration would be able to say it had tried its hardest to save Chrysler without incurring the expense and risk of actually bailing out the company. So perhaps the best thing for the administration would be a stay that gives Fiat an out. Fiat walks away, the deal blows up, and the Supreme Court then dismisses the case as moot, at least until the GM bankrupcty is resolved. And maybe those creditors get a bit more of a buyout -- just enough to persuade them not to appeal. This theory was influenced by Mickey Kaus, who wrote on Saturday: "You have to wonder if the Obama team knows the FIAT deal it promoted won't work, and arranged it simply as a way to delay the inevitable--while it actively avoided a merger that would foist Chrysler on GM, because GM does have at least a chance to survive after bankruptcy and doesn't need Chrysler's baggage. (Why make Chevy responsible for the Sebring?)"
The big losers if the deal blows up would be Chrysler workers and management. The shutdown of the Studebaker factory is widely regarded as a catalyst for the creation of ERISA. Might the collapse of Chrysler, and its devastating impact on its employee and retiree health care coverage, serve as a catalyst for national health care reform?
Monday, June 01, 2009
The Chrysler bankruptcy case & Indiana's "takings" lawsuit
Last night, Bankruptcy Judge Arthur Gonzales approved the section 363 sale of Chrysler to Fiat. This morning, Judge Gonzales refused to transfer Indiana's constitutional claim against the deal to federal district court. Here's a question for the prawfs interested in takings: Is there any merit to the Indiana pension funds' claim that, by ignoring the absolute priority of secured creditors, the bankruptcy court has "taken" those creditors' security interest without just compensation in violation of the Fifth Amendment?
The claim has inspired the usual outrage or applause from the usual suspects: George Will praises Indiana's lawsuit as plucky opposition to Obama's confiscatory Leviathan, and the Daily Kos praises the Chrysler deal as a bold move to save rust belt industry. But suppose that, just for the heck of it, one gave the ideological hand-waving a rest and instead analyzed the legal merits of Indiana's claim: is there anything to it?
For what it is worth (not much, as I am no bankruptcy scholar), my first instinct is to agree with David Zaring's analysis: Since 1937, takings-based objections to bankruptcy dispositions are generally doomed. And rightly so: After all, the essential assumption of bankruptcy is that creditors, secured or otherwise, are going to lose property. The question of how much, in what order of priority, is a matter of policy for the discretion of policy-makers, not judges.
But here is one reason to pause: In the usual post-1937 bankruptcy case in which creditors raise takings claims, the federal government itself is not one of the creditors, no? The bankruptcy disposition, therefore, is the result of an impartial referees' arbitrating between rival claimants. After TARP's investment in Chrysler, this is no longer the case (right?) Should the analysis, therefore, be different and more rigorous, when the feds themselves or their proxies budge ahead of other creditors?
The classic analysis of this distinction is Joseph Sax's old article, Takings and the Police Power, 74 Yale L. J. 36 (1964), in which Sax distinguishes between exercises of the police power that enhance the government's own entrepreneurial enterprises and exercise of the police power that impartially arbitrate between rival private parties. The former should be regarded with more skepticism than the latter, according to Sax.
I do not automatically endorse the analogy between regulatory takings of real property and claims that security interests have been taken: I have not given the question enough thought. Nor do I suggest that TARP automatically puts the feds in the position of an interested party or that the actual 363 disposition constitutes self-interested action by the feds (whatever that means). But I have an uneasy feeling that Zaring's analysis might be missing Sax's distinction. When the rest of the creditors are arguably bought off with TARP funds and when the feds themselves retain an equity interest in the firm that results from a section 363 sale, then there is a sense in which the takings claim becomes a bit more powerful to my mind. Given that the statutory merits of this section 363 seem a bit shaky, I'd be interested in hearing a more informed person explain to me whether and to what extent Indiana's taking claim is bunk.
Tuesday, April 28, 2009
Online Antitrust Symposium at Truth on the Market
The folks over at the Truth are having a three-day online symposium entitled: "Section 2 and the Section 2 Report: Perspectives and Evidence." Here's the relevant info:
The proceedings will begin on May 4 and continue officially through May 6. We’ve organized the symposium across the three days so that each day will have a different emphasis. The first day, Monday the 4th, we’ll discuss some introductory themes and set the context with some more-broadly-oriented perspectives on the Section 2 Report, including the enforcement perspective from inside the antitrust agencies and economists’ views, among others. The second day, Tuesday the 5th, we’ll devote to the general Section 2 standards debate. And we’ll finish up on Wednesday the 6th focusing on specific substantive areas, tracking the Section 2 Report and its substantive content in greater depth and detail.
The participants are: Alden Abbott, FTC; Tim Brennan, University of Maryland; Dan Crane, Cardozo/Michigan Law; David Evans, LECG/UCL/Chicago Law; Herbert Hovenkamp, Iowa Law; Keith Hylton, BU Law; Bruce Kobayashi, George Mason Law; William Kolasky, WilmerHale/former DAAG; Thom Lambert, Missouri Law/Truth on the Market; Tad Lipsky, Latham & Watkins/former DAAG; Geoffrey Manne, LECG/Lewis & Clark Law/Truth on the Market; Howard Marvel, Ohio State; Bill Page, Florida Law; Michael Salinger, BU/LECG/former Director, Bureau of Economics, FTC; and Josh Wright, George Mason Law/former Scholar-in-Residence, FTC/Truth on the Market.
It's a terrific group of participants -- congrats to Geoff and Josh on putting together a great event.
Tuesday, March 31, 2009
Lyondell Chemical Co. v. Ryan and Delaware's (Counter-)Cyclical Jurisprudence
Larry Cunningham has posted on the recent Lyondell Chemical Co. v. Ryan opinion from the Delaware Supreme Court. (The title of his post reminds me of this.) He calls the opinion "refreshingly lucid and terse" and states that "for now, Lyondell puts the notion of good faith in something of a coma. Not dead, but nary alive."
There has been lots of great commentary on the opinion: I'll crib from Larry and point you to Steve Bainbridge; Jeff Lipshaw; Gordon Smith; and Andrew Lund's paper on the subject. There's one angle that I haven't yet seen mentioned, however, and that's the counter-cyclical nature of the opinion.
There's a standard meme in corporate law that Delaware courts are worried about encroachment from federal law, and so their jurists are motivated to shape the law in accordance with the prevailing political winds. As the abstract for Mark Roe's Delaware's Competition explains:
Delaware's chief competitive pressure comes not from other states but from the federal government. When the issue is big, the federal government takes the issue or threatens to do so. Delaware players are conscious that if they mis-step, federal authorities could step in. These possibilities of ouster, threat, and consciousness have conditioned Delaware's behavior.
The Disney case is often held up as an example of this, as sketched (in simplified form) by this timeline:
1998 [pre-Enron]: Chancery Court dismisses claims
2000 [pre-Enron]: Supreme Court affirms as to most counts, but remands for dismissal without prejudice
2003 [post-Enron]: Chancery Court finds good faith claim has been stated and rejects motions to dismiss
2005 [post-post-Enron]: Chancery Court criticizes Eisner but finds no violation of good faith
2006 [post-post-Enron]: Supreme Court affirms
Of course, this simplification does no justice to the actual opinions and their complexities. But it is an illustration of the (cynical) explanation of Delaware's relationship with D.C.: Delaware judges do what they need to do to satisfy the feds but no more.
Recent cases from the Chancery Court have been somewhat in harmony with this thesis. In the AIG case, Vice Chancellor Strine called AIG a "criminal enterprise" (under the facts as alleged in the complaint) and allowed the case to move forward. In Citigroup, Chancellor Chandler dismissed the Caremark claims but did allow a excessive compensation-waste claim to go forward - a fairly unusual event. (But cf. Jay Brown's criticisms of Citigroup here.)
However, Lyondell seems like a pretty clear victory for the deregulatory side. It cuts back on the fiduciary duty of good faith in straightforward and dramatic terms, using adverbs like "completely" and "utterly" that provide little wiggle room. Moreover, this near-elimination of good faith was arguably unnecessary to the resolution of the case. (See Andrew Lund's comment here.) Given the regulatory mood in Washington and across the country, Lyondell seems to be radically out of step with the prevailing political winds.
So does this mean that the "federal competition" explanation of Delaware jurisprudence is wrong? Maybe it was right before but the equilibrium has changed? Or is this case just an exception?
Wednesday, March 25, 2009
Do Cities Have Any Role in Regulating Executive Comp?
A combination of recent headlines and Richard Schragger's recent piece "Mobile Capital, Local Economic Regulation and the Democratic City" (which suggests, among other things, that "[t]he new 'regulatory localism' challenges the proposition that industrial policy, redistribution, and other responses to global economic restructuring must be addressed at the national level") prompt me to wonder about the role of cities in economic regulation.
I'm sure the answer depends on a rigorous definition of "economic regulation," which I don't claim to offer here. So let me just raise a specific question I'm intrigued by: the role of the city in regulating executive compensation. Should it or can it have any role at all? At the very least, we can say that the interests of the different levels of government as to executive compensation may be different. The AIG bonus example plays out on the national stage (e.g., 90% taxation of the bonuses) and at the state level (the New York Daily Newssuggestively quotes Attorney General Andrew Cuomo as saying that "If a person returns the money, I don't believe there's a public interest in releasing their name."). At the city level, though, Mayor Bloomberg apparently warned that "[e]ven if you think that it's fair to take [the bonuses] away, just recognize that we're going to have to make up that tax gap, that reduction, by taxing the rest of us."
Tuesday, March 10, 2009
Will the "Systemic Risk Authority" be the new sheriff in town?
Proposals for regulatory consolidation are not new - our multiple financial regulators can be thought of as chaotic, redundant and burdensome or as an beneficial source of regulatory competition and an experimental laboratory. But Bernanke's speech to the Council on Foreign Relations today is potentially a bid to emerge as a new macro-regulator, a "systemic risk authority."
[B]ecause the goal of any systemic risk authority would be to have a broader view of the financial system, simply relying on existing structures likely would be insufficient. For example, a systemic risk authority would need broad authority to obtain information--through data collection and reports, or when necessary, examinations--from banks and key financial market participants, as well as from nonbank financial institutions that currently may not be subject to regular supervisory reporting requirements. A systemic risk authority likely would also need an appropriately calibrated ability to take measures to address identified systemic risks--in coordination with other supervisors, when possible, or independently, if necessary. The role of a systemic risk authority in setting standards for capital, liquidity, and risk-management practices for the financial sector also would need to be explored ....
Notice echoes of pre-financial-meltdown consolidation proposals in the Treasury's Blueprint for a Modernized Financial Regulatory Structure....
Tuesday, March 03, 2009
Shareholder Pandering and the End of the Economy
I just read this interesting paper by Larry Mitchell that seems particularly on point these days. As a former denizen of Wall Street (Morgan Stanley Public Finance & Chemical High Yield), I can report that just about everyone I worked with knew that the stock market created an irrational focus on the price of equity in the short term -- whining stockholders are the bane of every good business executive with a decent long-term business plan. But most of us assumed that was the price corporate America had to pay for all the equity that stockholders pumped into the market. They'd made their deal with the devil and, well, at least the devil paid pretty well. Right? Wrong.
With extensive historical data, Mitchell demonstrates that shareholders are actually bringing increasingly little to the table -- in fact, they haven't brough much for a long, long time. Here's a particularly nice graph from the paper:
Modern industry runs on debt, not equity. In fact, Mitchell argues, the decline of equity is one of major untold stories of the last century. If he's right -- and I'll believe him until someone shows me better data -- then this turns the standard model of modern markets on its head. Shareholder empowerment not only has major downsides, it has little or no upside, and the irrationality of our focus on equity is a lot worse than most of us imagined. The takeaway: shareholder empowerment actually hurts both business and the serious investor, all for the sake of short-term speculation. (As this is one of the few really good fights in corporate law, I'll be very curious to see how Bebchuck and other defenders of shareholder empowerment respond to this new data.)
Thursday, January 15, 2009
Down goes Geithner?
TaxProf has been all over the Geithner tax-payment story, which has morphed from a Zoe-Baird-esque household-help issue into a much bigger catastrophe. His failure to pay taxes from his IMF income seems more and more troubling as details come out. These revelations from Byron York seem particularly damning:
Documents released by the Senate Finance Committee strongly suggest that Geithner knew, or should have known, what he was doing when he did not pay self-employment taxes in 2001, 2002, 2003, and 2004. . . .
The IMF did not withhold state and federal income taxes or self-employment taxes — Social Security and Medicare — from its employees’ paychecks. But the IMF took great care to explain to those employees, in detail and frequently, what their tax responsibilities were. First, each employee was given the IMF Employee Tax Manual. Then, employees were given quarterly wage statements for the specific purpose of calculating taxes. Then, they were given year-end wage statements. And then, each IMF employee was required to file what was known as an Annual Tax Allowance Request. Geithner received all those documents.
. . .
At the end of the tax allowance form were the words, “I hereby certify that all the information contained herein is true to the best of my knowledge and belief and that I will pay the taxes for which I have received tax allowance payments from the Fund.” Geithner signed the form. He accepted the allowance payment. He didn’t pay the tax. For several years in a row.
. . .
In a conversation today with sources on Capitol Hill who are familiar with the situation, I asked, “Was Geithner made whole for tax payments that he didn’t make?”
“Yes,” one source answered. “He was getting the money. He was being paid a tax allowance to pay him for tax payments that he should have made but had not.”
As the New York Times opined: "As much as Mr. Obama and his team may wish it, however, the disclosures cannot be dismissed so easily, or papered over. The just-the-facts report of Mr. Geithner’s tax transgressions, compiled and released by the Senate Finance Committee, paints a picture of noncompliance that is considerably more disturbing than his supporters are acknowledging." Lest anyone forget, here is the organizational chart of Treasury -- notice the little agency on the lower left. (It's next to the Bureau of Engraving and Printing.)
Despite these problems, the Intrade market seems unfazed; when I last looked, Geithner shares were trading at around 93. Perhaps Geithner's special skills are enough to outweigh the obvious concerns about his tax compliance.
Sunday, January 11, 2009
The Difficulties of Law and Finance: An Update from Roberta Romano
In a 2005 article entitled After the Revolution in Corporate Law, Roberta Romano said that an economics Ph.D. was not the "best match" for business law scholarship. Romano argued that finance, not economics, was the future for corporate law scholarship, and that empirical work was more important than modeling. She wrote:
[T]he building blocks of the revolution in corporate law originate most prominently in modern finance, which (as hopefully is clear) is a specialized field of economics. As a consequence, there is a highly imperfect match between the body of knowledge imparted in an economics Ph.D. program and that which is critical for analyzing corporate law issues, and particularly for the direction in which the field has been moving, using quantitative methods.
To this end she discussed a new Yale program, combining a J.D. with an accelerated finance Ph.D. program, as a way for the next generation of corporate scholars to get that training. A brief blurb about the program can be found here.
This past Saturday, at a fascinating AALS Business Associations panel, Romano provided an update on the Yale program. Romano had been disappointed, she confessed, about participation in the program. While she had initially hoped for one or two students a year, it appeared that only one student would be graduating from the first few years of the program. Although three students had signed up, two had subsequently dropped out. Romano mentioned the difficulties of being a lone law student in a class of finance Ph.D students, many of whom had foreign training. The rigors of the math, together with the attraction of law school "extracurricular activities," had made the joint JD/Finance Ph.D less popular than expected.
Romano's comments added an intriguing subplot to the panel, which was on the potential for synergies between finance and corporate law. The finance folks on the panel lamented the failures of their models, while the law professors talked about the problems of regulating without reliable empirical findings. Bankruptcy and Madoff featured prominently. Despite the gloomy tone, however, the panelists remained upbeat about the potential for collaboration between the two disciplines. I'd love to hear thoughts from folks out there. After fall 2008, are we now in the post-post-revolution period?
Monday, November 03, 2008
SEIU & Election Politics
If you have a hankering for election-related content, here is a story you might have missed. It's a traditional story about union politicking for a particular candidate -- in this case, SEIU's work for Barack Obama. Some details from SEIU's website:
Through October 30, SEIU's members have:
- Knocked on 1,878,421 doors.
- Made 4,405,136 phone calls.
- Sent 2,562,689 pieces of mail.
- Registered 85,914 voters.
- Helped more 10,982 people vote early.
- Distributed 52,005 workplace flyers.
- Made workers' voices heard by investing $13 million in independent expenditure ads that have run more than 10,000 times
The website clains: "No single organization has done more than SEIU to make sure that Barack Obama is our next president." (Even the Democratic Party?)
It makes sense for SEIU to be making noise about its role in Obama's election. The union is hoping for support for the Employee Free Choice Act (EFCA), which would allow employees to join unions by signing cards rather than requiring a secret ballot. Politicos seem to think that the EFCA would be among the first pieces of legislation passed by an Obama administration and Democratic Congress. Perhaps because of this, EFCA opponents have ratcheted up their public campaign against it. (See George McGovern inveighing against it here.)
If you're interested in reading more about SEIU and union politics, I just have posted the final version of my paper, Mother Jones Meets Gordon Gekko: The Complicated Relationship between Labor and Private Equity (forthcoming Colorado Law Review). The paper discusses how SEIU's political influence is part of its overall bargaining strategy -- particularly in its recent dealings with private equity. One of the article's overall normative claims is that unions should be allowed to play politics like other businesses. The effect of this election on the EFCA's chances is solid proof, in my view, of the importance of politics to the business of unions.
Wednesday, October 29, 2008
"Run on the Bank"
A radio interview describing the creation of the FDIC has me thinking about runs on banks. (NPR interview with author Timothy Egan here.) In 1933, Roosevelt closed banks for a five-day "bank holiday" to slow panicked withdrawals. FDIC insurance was part of the response to bank closures and runs on banks. Apparently Roosevelt later said that, if there had been a widespread run, the insurance could not have covered all of the deposits. The (unsurprising?) lesson may be that public perception - even when unrealistic - is central to fixing our financial problems (or at least avoiding new ones).
Roosevelt and his aides seem to have recognized that investor confidence was key. In his first "fireside chat," in 1933, Roosevelt said that "[a]fter all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people." And, as one of his advisors put it: "We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that public confidence had in assuring solvency."
One more tidbit on "runs on the bank": the phrase - and probably the accompanying fear - has been around since the late 1600s. A 1697 text said that "Any jealousie or suspicion that they shall not have Money for such Bills on Demand, will occasion a general run." And the phrase pops up again over the years. My favorite is from Adam Smith, The Wealth of Nations: "When a run comes upon them, they sometimes endeavor to gain time by paying in sixpences." A practical solution. (More from the OED here.)
Tuesday, October 28, 2008
Who Are Investors?
In the context of possible new regulation in the financial markets, it's worth asking an old and fundamental question: who are the investors? The type of regulation we choose turns in part on the answer. Our current financial woes put pressure on this question, but so does the longer-term trend of institutionalization or "deretailization" of the US markets. In other words, while our system is rooted in protection of retail investors and much of the political rhetoric reflects this ("mom-and-pop" investors), institutions such as mutual funds, pension funds, etc. increasingly play a role.
My modest aim here is to point you to some "food for thought." First, identifying the investors comes up even in the most mundane of contexts. Take the SEC website. Featured at the top of the page these days is the headline "SEC Protecting Investors, Markets During Credit Crisis" and a link to the "SEC Actions During Credit Crisis." What audience does this target? Sophisticated investors don't need to read it. I suspect Congress has heard it in other forms. The press? Do retail investors really read it or care?
Second, Donald Langevoort has a paper called The SEC, Retail Investors, and the Institutionalization of the Securities Market recently posted to SSRN. In a passage that is almost an aside, he complicates the debate over how institutionalization should influence regulatory choices:
I am convinced that part of the motivation for the substantive and procedural disclosure requirements of US securities regulation increasingly is disconnected from shareholder or investor welfare per se, and instead relates to the desire to impose norms that we associate with public governmental responsibility - accountability, transparency, openness and deliberation - to institutions that have comparable power and impact on society. It is a familiar point that many large corporations have more economic power than many counties and cities, perhaps even a handful of states.
Monday, October 27, 2008
Greg Mankiw threatens work stoppage if Obama is elected
From Greg Mankiw's blog:
Here is a question that you may have been thinking about: How do the different candidates' tax plans affect Greg Mankiw's incentive to work?
* * *
Let me start with my personal situation: I am a pretty lucky guy. I have a comfortable, upper middle class life style that includes one house, two cars, three kids, a wife, and a dog. I am fortunate enough that I don't have trouble keeping that going. I am also fortunate enough that I don't crave much more than I already have. I don't particularly want to own multiple houses or drive a Ferrari or wear Armani suits. You might say that I am close to being sated.
On a regular basis, I am offered opportunities to make some extra money. It could be giving a talk, writing an article [ed. note - !], editing a journal, and so on. What incentive is there to put forward that extra work effort?
To a large extent, the beneficiaries of that extra effort are my kids. My lifestyle is, as a first approximation, invariant to my income. But if I make an extra few dollars today, I will leave more to my kids when I move on. I won't leave them enough so they can lead lives of leisure, but perhaps I will leave them enough so they won't have to struggle too much to afford a downpayment on their houses or to send their own kids to college.
Do you notice a rather big part of Mankiw's income that isn't discussed here? Isn't he a professor somewhere? I imagine if the H decided to cut all professors' income by half or decided to fire the good professor, he would find that his "lifestyle" is perhaps not so " invariant to [his] income." But that couldn't happen, could it? He's tenured at a very wealthy university. The chances that this economic downturn will affect him directly are pretty slim. Nice!
Anyway, he continues.
Let me try to put each tax plan into a single number. Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years?
The answer depends on four tax rates. First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids.
Notice how he slips the corporate tax rate in there, because he assumes that he will invest all of his children's future money in stocks. T-bills too safe, huh?
Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids:
I guess he assumes that he'll do no estate planning.
For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years.
If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.
Ah, yes. They should really get the $28. Anything less is socialism.
Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.
Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.
The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.
Is this tongue-in-cheek? I hope so. The fact that he's writing this on a blog that has no advertising only increases the sense of irony. (Perhaps his blog header should be: "I'M BLOGGING AWAY MY CHILDREN'S INHERITANCE.") But if this is all a joke, apparently Instapundit isn't in on it.
Thursday, October 23, 2008
Jeff Lipshaw has a great post on the value of lawyers in business deals. He posits (in part) that lawyers are not making the pie bigger in many cases, and that if lawyers always made the pie bigger then we would see them used more often on smaller deals. He sees a different and interesting reason for lawyers:
My equally non-testable theory is that lawyers sometimes add value to deals, sometimes subtract value, and appear most of the time during the deal for the same reason neckties do: it's part of the ritual. There is no intrinsic reason they have to be there. Lawyers, like neckties, have value, not because they necessarily make the pie bigger, any more than neckties make the pies bigger, but because somebody values the lawyer enough to pay more for her to be there than it cost for her to get there (marginally speaking, of course).
I think his theory has legs, perhaps in big business deals where he has experience. For example, he notes that representations and warranties often expire at closing, significantly limiting their value in comparison with the lawyering cost of negotiating those clauses.
That said, I think the cockfighting necktie theory goes a bit far - lawyers can add real value in ways I discuss after the jump.
I'll admit that I have very little experience on large public company deals, though I have worked on a few. Most of my experience comes from working on smaller deals (big company down to individual) and also litigating such deals when they go bad. And that, I think, is where lawyers can add the most value - foreseeing how deals might sour.
Two specific points:
First, good lawyers have a wealth of experience on a variety of transactions. They know contract language that worked and didn't work, they know business terms that worked and didn't work, they know representations and warranties that are likely to give problems, they can recognize assets that need examination (for example, in intellectual property). Even the most experience business person likely works on a fraction of the number of transactions that a lawyer will work on, and certainly not with the same variety of transactions, parties, and industries. When good lawyers quibble over seemingly small terms, it is because they have seen the small terms turn into large future costs.
This leads to second, just because small deals didn't involve lawyers doesn't mean that a lawyer wouldn't have added value. Having worked in litigation and transactions, I can say with a certainty that a large percentage of business disputes I saw in litigation could have been avoided if a good lawyer had been involved in the transaction. It is true that most deals don't sour, but enough do that I wouldn't write off the importance of a quick contract review to minimize risk if things go bad. I think that lawyers are often not used not because they don't bring value, but because a) potential clients don't know they won't bring value, b) potential clients have not had good lawyers in the past, or c) attorney access is limited due to cash, status, retainer, etc.
Note that I use the proviso "good lawyers." There are plenty of bad lawyers, who negotiate just for the sake of minor victories, who use cookie cutter forms without modification rather than understanding why provisions are needed, and who don't recognize when the cost of the negotiation is exceeding the value of the requested change. I would definitely agree that these lawyers are not making the pie bigger or decreasing transactions costs. Perhaps there are more bad lawyers than good, and maybe that's the difference between fact and theory.
Monday, October 13, 2008
Macey on Corporate Governance
Jonathan Macey's new book Corporate Governance: Promises Kept, Promises Broken arrives this week. It is available now on Amazon. Here is the publisher's blurb.
In the wake of the Enron meltdown and other corporate scandals, the United States has increasingly relied on Securities and Exchange Commission oversight and the Sarbanes-Oxley Act, which set tougher rules for boards, management, and public accounting firms to protect the interests of shareholders. Such reliance is badly misplaced. In Corporate Governance, Jonathan Macey argues that less government regulation--not more--is what's needed to ensure that managers of public companies keep their promises to investors.
Macey tells how heightened government oversight has put a stranglehold on what is the best protection against malfeasance by self-serving management: the market itself. Corporate governance, he shows, is about keeping promises to shareholders; failure to do so results in diminished investor confidence, which leads to capital flight and other dire economic consequences. Macey explains the relationship between corporate governance and the various market and nonmarket institutions and mechanisms used to control public corporations; he discusses how nonmarket corporate governance devices such as boards and whistle-blowers are highly susceptible to being co-opted by management and are generally guided more by self-interest and personal greed than by investor interests. In contrast, market-driven mechanisms such as trading and takeovers represent more reliable solutions to the problem of corporate governance. Inefficient regulations are increasingly hampering these important and truly effective corporate controls. Macey examines a variety of possible means of corporate governance, including shareholder voting, hedge funds, and private equity funds.
Corporate Governance reveals why the market is the best guardian of shareholder interests.
Wednesday, October 08, 2008
Reports of the Death of Big Government Have Been Greatly Exaggerated
Thursday, October 02, 2008
Why We Need the Bailout
We, as a nation, are facing a critical choice: Should we give Wall Street something in the neighborhood of a trillion dollars so that it can continue doing the outstanding job it’s doing? Or should we let Wall Street collapse and see if the rest of America can get by without all those "financial services" that Wall Street provides?
To help you, and all Americans, understand why we need this bailout package – and we urgently do – I’ve decided to answer all your questions. Right here, right now.
Why should we give this money to Wall Street? I mean, if the economy needs to be spurred by an injection of billions of dollars, why not give it to us?
That’s a funny question. You already have it! Ha ha! What sense would it make to take money from taxpayers and give it straight back to taxpayers? That’s just silly. The whole point is to take the money from taxpayers and give it to someone else – preferably some hedge-fund manager who doesn’t pay taxes at all thanks to his tax-sheltered yacht parked off Antigua. I know it’s hard for you to understand, but the fact is that, after all is said and done, the money actually will come back to you, the taxpayer. How? As a result of rescuing Wall Street, banks and yacht captains will be able to extend loans to people on Main Street. That way, Main Street businesses will be able to make the investments that are needed to keep the economy going.
If the problem is that people on Main Street need loans, then why don't we just loan the money directly to them, instead of giving away it to the people on Wall Street?
You need to look at the broader picture. Farmers need to buy seed for their fields, ranchers need to buy feed for their cattle, and bankers need to buy drinks for their congressmen. Everybody plays their part. That’s how the economy works.
I completely fail to understand why it helps anything to buy bad loans from banks. If banks made bad loans, shouldn’t the banks suffer the losses?
The problem, with all due respect, is that you simply don’t understand enough about economics and finance to form your own judgment about these sorts of things. Don’t forget that officials in the Bush administration have carefully thought this through. Do you think you could have done a better job evaluating pre-war intelligence from Iraq? Or deciding exactly how many days to wait before sending help to New Orleans after Hurricane Katrina? I’m sure you don’t.
More importantly, you need to realize that this situation is not the fault of the bankers. Everybody thinks they can Monday-morning quarterback the whole situation, but that’s unfair. It’s easy now to say, “Well, you shouldn’t have accepted loan applications filled out in crayon.” Or, “It was a mistake to give five mortgages to a single 19-year-old who listed his employment as ‘watching Flip That House! on cable tv.’” The fact is, it’s not productive to look backward. We need to reject the impulse to lay blame, and we need, instead, to figure out how we are going to solve this crisis.
Hmmm. Let me see. Um. Oh! I’ve got it! How about we keep our money and just see how things go?
That may seem like a tempting course. But we simply cannot wait. As the Bush administration has explained, without the bailout, Wall Street will collapse, and the misery will quickly spread to Main Street.
How? How exactly will the misery spread from Wall Street to Main Street?
Think about it this way: If Wall Street collapses, tens of thousands of investment bankers, stock brokers, and other financial-industry professionals will be out of a job. While they will retain their education, skills, and knowledge, the companies they work for will no longer be able to pay their salaries. At that point they will be forced to leave Wall Street and come to your town looking for work.
Do you really want them to set up a hedge fund inside your local Wal-Mart between the optical center and the portrait studio? I didn’t think so. You wouldn’t be able to get from the self-checkout to the greeter table without some pinstriped MBA trying to sell you a collateralized derivative-backed forward-swap debenture. And believe me, you don’t want that. It’s worth however many hundreds of billions we have to pay to keep these people in lower Manhattan, where they just sell these things to each other.
Okay, you’ve convinced me. How can I help?
Please, support the bailout by writing or calling your congressional representatives as soon as you read this. Do it first thing in the morning. If you wait until 3 p.m. in the afternoon, they’ll probably have already left to go drinking with the bankers.
[cross-posted on The Backbencher]
Wednesday, September 24, 2008
"Bad Apples" and the Financial Meltdown - Does the SEC Have a Role Absent Fraud?
Financial meltdowns often seem to lead media and regulators to look for illegal activity, which is why I was not surprised to read that the FBI is investigating Fannie Mae, Freddie Mac, Lehman and AIG for potential fraud. (New York Times story here). This focus on illegal activity has happened elsewhere - in the wake of rising gas prices, for instance, the CFTC investigated price manipulation and fraud. And here an anonymous government official told the Times that it was "logical to assume" that these companies would be investigated, given the questions surrounding their collapse.
Two thoughts on this. First, the danger of focusing on "bad apples" is that it excuses us from rethinking the system and potential regulation. To date, the focus seems to have been on systemic problems and on greed, without linking that to illegal behavior. Let's not get distracted by the FBI.
Second, what are the roles of the various government actors? The FBI's actions seem like a reasonable expression of its responsibilities, although I'm willing to be told differently. But where is the SEC? In the context of the recent collapses and bailouts, the SEC's announcement of a "sweeping investigation ... into possible market manipulation in the securities of certain financial institutions" seems besides the point. As David Zaring points out in excellent posts here and here, the SEC is MIA. Does this mark a shift from looking to lawyers for expertise to looking to economists? Is the SEC like the FBI in that prosecution is its main tool? The SEC has been examining and reporting on credit rating agencies, which could be a hook for SEC action. Or maybe just the basis for another critique....
Wednesday, September 17, 2008
Hey You! Yes, You. You own AIG!
Congratulations! You are now a proud owner of AIG stock. You might want to start learning more about your investment. Here's AIG's website. Here's the Yahoo financial page; hey, it looks like the stock is starting to go back up! You also might want to learn a little something about credit default swaps; here's a brief primer (including economic models!).
You say you wanted to avoid equity investments in this unsettled time? Well, sorry -- the Fed has purchased a 79.9% stake in the insurer on your behalf. Trust us -- it's for your own good.
Too Big to Be Illegal?
David Zaring, the legal blogosphere's expert on the Fed, has been all over the developments in the financial markets of the last few days. His latest post on the AIG bailout/takeover/bridge loan is a must read. In questioning the legality of the discount-window-loan-for-equity deal, he writes:
There's really no statutory authority for the AIG takeover (the Fed and Paulson went to the Hill, and got nothing, not that they possibly could have in a couple of Tuesday evening hours). I won't bother noting that the DC Circuit, were it to sit in judgment on whether the Fed could buy the world's largest insurer, would undoubtedly conclude that the plain language of its governing statute (which is to make emergency loans, not require takeovers in exchange) would not permit the takeover under Chevron USA v. NRDC.
So is there any legal rationale for the Fed's actions? Well, he tries: "emergencies are emergencies, and when that happens the rules go out the window, and hopefully regular elections mean that the officials the people trust are dealing with the emergency. Abraham Lincoln adopted that reasoning, and he won the Civil War. " Umm, so we're saying that the Fed's bailout is the equivalent of the suspension of habeas corpus?
Meanwhile, on CNBC John Snow is comparing the U.S. economy to New England quarterback Tom Brady. He also says "we" were "too loose" with lending, saying "We forgot to ask the fundamental question: How will we get repaid?" Indeed. Let's hope the Fed didn't forget to ask that question.
Monday, September 15, 2008
Neighborhood Shocked as Feds Let Family Slip Into Bankrupcty
The neighborhood of Shady Groves was shocked this morning when it learned that the Lemon family was going to slip into bankruptcy based on massive mortgage debt. Although the Lemons' financial troubles were well known throughout the neighborhood, the community expected the Federal Reserve to step in to save the family with last-minute financing. Instead, the family will now be forced to declare bankrupcty and will likely lose their home.
"We all figured they were too big to fail," said Helga Humphrey, who lives next door to the Lemons. "They are the only four-bedroom house on this block. I can't believe Bernanke let this happen."
The community was particularly surprised that the Fed failed to step in after it had helped save the home of the Smith family just a few months ago. In March, the Fed provided an emergency loan to the Smiths and helped them restructure their mortgage by guaranteeing their debt. Ultimately, the Smiths were forced to move from their neighborhood, but they avoided bankruptcy.
However, Fed watchers are not surprised by the Reserve's tougher stance. Analysts predicted that the Fed did not want the Smith bailout to be seen as a precedent. President George W. Bush has also signaled that the government would not continued to bail out Shady Groves residents, saying only that "we are working to reduce disruptions and minimize the impact of the Lemons' difficulties on the rest of Shady Groves."
This tough talk did not sit well with Shady Groves residents. "It's clear we're one step away from a financial meltdown," said Ariel Hamer, a neighbor of the Smiths. "Can't they see that we need emergency funding to prevent a global crisis?"
The news for Shady Groves was not all bad, however. The Fed did announce that it would be opening its discount window to Shady Grove homeowners. Many are looking forward to shoring up their financial positions, especially in light of their adjustable-rate mortgages. "You know, I'm thinking of getting an emergency loan to help with that kitchen addition we've been considering," said J.P. Grable. "I think it will really help the neighborhood's confidence to see new construction taking place in this economic climate."
Thursday, September 11, 2008
Efficient Capital Markets -- Now Automated for Your Convenience
The WSJ has a fascinating follow-up to the story about the United Airlines phantom bankruptcy (discussed here). It seems that the 2002 Sun-Sentinel story that resurfaced might not have fooled humans, but rather automated search robots that troll for stock information. As the WSJ reported:
The damage was exacerbated by the growing use on Wall Street of automated programs that trigger stock trades without any human interaction. The so-called algorithmic trading mechanisms, which buy and sell stocks based on news headlines and earnings data, were responsible for roughly a quarter of New York Stock Exchange trades in the last week of August.
From a legal perspective, this raises all sorts of questions about causation. The Sun-Sentinel story could be characterized as misleading, since it did not have a date on it and arguably implied the bankruptcy discussions were taking place now. Is it a misrepresentation if the story was literally untrue, but any human would have picked up on the error? More important, perhaps, are the ramifications for market theory. If 25% of NYSE trades are triggered by the findings of computer programs, are the markets becoming more efficient or less?
HT: Sam Blumoff
Monday, September 08, 2008
Efficient Capital Markets?
From Reuters (via Yahoo):
A nearly 6-year-old news story on the 2002 bankruptcy filing of UAL Corp (UAUA.O) resurfaced on the Internet on Monday, clobbering the airline's shares briefly as some traders mistook the report as current and plausible news. . . .
UAL shares fell 76 percent to $3 after the article was posted on the Bloomberg financial news service. The magnitude of the decline may underscore the lack of confidence investors have in UAL and the troubled airline industry in general.
Apparently, the article appeared on the Florida Sun-Sentinel web page and was then posted on Bloomberg by investment advisory firm Income Securities Advisors. So which of these entities might be sued: the Sun-Sentinel, Bloomberg, ISA, all of the above, or none of the above?
And what does this say about efficient markets? Are investors really that quick to jump on a Bloomberg report?
One additional angle: the Sun-Sentinel has not yet determined why the article appeared, leading the ISA president to opine: "It's very suspicious."
Tuesday, September 02, 2008
Who "owns" airport access?
The brawl among administrative agencies over who controls valuable airport access continues. (See my prior post about Auctioning Airport Slots here .) Part of the story's attraction is that it pits local/regional authorities against federal ones - the Port Authority of New York and New Jersey against the Federal Aviation Administration.
The latest moves include the FAA's announcement that slots at Newark Airport will be auctioned on September 3 - tomorrow - with bids accepted immediately. The Port Authority has moved to intervene in an existing suit filed against the FAA to stop the auction. It argues that the FAA lacks congressional authority and that it started but didn't complete a rulemaking process proposing slot auctions. The FAA seems to be relying on procurement statutes and regs that allow it to lease property. But whose property?
Tuesday, August 26, 2008
Why are non-profits, well, not for profit?
I've started a few blog posts on non-profits and politics, but it's hard to get far into that swamp before you end up asking the question, "Hey, what's the point of having these non-profits around, anyway?" So maybe it makes more sense to start at that end. The classic economic account, per Henry Hansmann, is that some firms must find a device for credibly signaling that they will not shirk. For example, since no one can tell easily whether health care is of high or low quality, customers will be reluctant to pay for it unless they have some guarantee the hospital won't cut corners in order to maximize revenues. So non-profit status is a commitment device for providers of credence goods. Since the pledge makes it hard to raise capital, these goods can only be provided if they come with a subsidy.
Recently, Malani and Posner have cast some doubt on Hansmann's story by pointing out that many non-profits seem uninterested in advertising their non-profit status. They then leverage this insight into a claim that the subsidy for charitable works should be open to for-profit firms. One could quibble with Malani & Posner's premise here. For example, their big example is hospitals, but it may be that hospitals were overwhelmingly non-profit for so long that customers now assume they are for-profit, or that hospitals choose names, like "City Hospital" or "University Hospital" or "St. Jude's" that themselves signal a commitment to health care over profit.
In any event, there are a couple of other strong economic justifications for the non-profit sector, and I think they both demand that subsidy recipients be non-profits. Neither would be undermined by the Posner/Malani claim that non-profits do not signal their status. Both are, like Hansmann, market failure stories. The first is a coordination problem.
What do I mean, coordination problem? Well, as Acemoglu et al. point out in their neat LEO piece from last year, "Incentives in Markets, Firms, and Governments," there are times that a firm would actually prefer that the incentives it offers its employees be low-powered -- that is, produce only weak motivation. Their key example is the Freakonomics tale of teacher testing -- give teachers strong reasons to improve test scores, and they teach to the test or cheat. This "bad" effort in response to incentives may crowd out or swamp any beneficial effects from increasing "good" effort.
Here's the problem (as I see it; Acemoglu et al. are a little sketchy on this part). It's hard for a firm acting alone to offer only low-powered incentives. If my rivals can offer a share of profits, I'm likely to be outbid for the best talent; high performers will want to get large rewards for doing better than others, so that my low-powered compensation scheme selects for workers who see themselves as less able. In order for anyone in the industry to offer low-powered incentives, they all have to commit to that compensation scheme.
The U.S. scheme for subsidizing and regulating the non-profit sector could be a way of getting to that result: a whole industry committed to low-powered (e.g., not profit-based) compensation. And, as it turns out, the sectors where this tactic is necessary look a lot like Hansmann's description of what should be a non-profit, because a key component of the "bad" incentives dilemma is that we're trying to produce goods where the quality is hard to measure, so we have to use imperfect incentive schemes.
Is this making sense to anyone so far?
Friday, August 22, 2008
PCAOB is constitutional
Thursday, August 21, 2008
Boilerplate in Law Enforcement Contracts (Part Two)
I want to follow up on my last post on boilerplate by suggesting that boilerplate in law enforcement may function as an alternative to rulemaking and as a way to avoid more formal processes.
Below are the two SEC settlement provisions that first sparked my interest. Here's the problem these provisions address: since 2002, money penalties collected by the SEC can be distributed to injured investors in the form of "Fair Funds," raising the possibility that the money will be treated as damages rather than civil fines. The category matters because it affects rules about offsetting against private damages, how the money is taxed, whether claimants to the fund have a say in distribution, etc. In other words, there's real money at stake.
The SEC responded through recurring provisions in settlement agreements, including:
“Regardless of whether any such Fair Fund distribution has been made, amounts ordered to be paid as a civil penalty ... shall be treated as a penalty paid to the government for all purposes, including all tax purposes.”
“To preserve the deterrent effect of the civil penalty, Defendant shall not ... argue [in any related civil action] that he is entitled to ... offset or reduction of such compensatory damages award by the amount of any part of Defendant's payment of a civil penalty in this action.”
On the one hand, these seem perfectly sensible. They protect the deterrent effect of the penalties by preventing deduction and offset and they anticipate issues that are bound to come up. Moreover, using these terms is fast and flexible. After all, boilerplate can be abandoned in future agreements if the situation or policy changes. On the other hand, these provisions make rulemaking unnecessary or at least less pressing, so using boilerplate may be a way to avoid the contention inherent in more formal processes. In terms of content, it also seems odd to me that the SEC can determine tax treatment, although tax scholars may know better.
Tuesday, August 12, 2008
Executive Compensation and the NFL
In a story that mixes sports, tax, non-profits, agencies, executive compensation, and questions about federalism, the New York Times reports today that the NFL is lobbying Congress for an exemption from a new IRS requirement that salaries over $150,000 be publicly disclosed. This requirement is part of a larger move to apply Sarbanes-Oxley-type corporate governance measures to the non-profit sector, raising questions about the purposes of disclosure in the two contexts and whom the non-profit serves. (Dana Brakman Reiser and others have written in this area.)
The IRS requirements about executive compensation likely come in for some of the same critiques as the increased SEC requirements on the for-profit side, including:
- That disclosure has the perverse effect of escalating salaries as employees use the available information to negotiate salary and raises.
- That executive compensation is not just a salary figure. In the for-profit world, at least, and in the high-profile Richard Grasso/NYSE non-profit case, much of the "compensation" comes from complex formulas of retirement income. So it matters how these figures are disclosed and what counts as compensation.
- And, more generally, that these rules federalize corporate governance, traditionally the domain of states, moving corporate governance to the SEC (for-profit) and IRS (non-profit).
So far, it looks like the NFL has argued that it's a trade association rather than a charity. The NFL's lobbying memo apparently says that "We believe that people who need to know about salaries paid to N.F.L. staff are the owners, who already can access that information. No valid purpose is served to supply the same information to the general public.” True?
Thursday, August 07, 2008
Public Agencies and High Stakes ($7 Billion) Investor Compensation
The New York Times reports today that Citigroup is on the brink of settling claims that it misled clients about investments in auction-rate securities. According to the Times, the settlement is with state and federal regulators and includes a buy-back of more than $7 billion of these securities from individual investors. How to handle institutional investors is apparently still up in the air or at least has not been leaked/reported. The settlement also includes civil fines: reportedly a $100 million fine to the New York attorney general and $50 million each to twelve state regulators, led by the Texas State Securities Board.
This strikes me as a good example of a growing role of public agencies in investor compensation (here through the buyback and possibly the fines) that I pointed to in my article Fair Funds and the Compensation Conundrum. There I introduced the concept of "public class counsel" - the public counterpart to the private attorney general - to describe public actors concerned with compensation as well as deterrence. My focus was on the SEC's role in investor compensation, which has intensified in recent years as the Sarbanes-Oxley "Fair Fund" provision allows it to distribute money penalties to injured investors. Whereas this Citigroup settlement does not involve an SEC penalty - according to the Times, the SEC participated but any SEC penalty is on hold pending the agency's own investigation - it does provide a good example of public class counsel at work. This in turn suggests that, as the story develops, we should keep our eyes not just on the interesting consortium of regulators negotiating the settlement, but also on who gets the penalty money down the line.
Tuesday, August 05, 2008
Auctioning Airport Access
Anyone who has flown into a New York airport knows that getting stuck in a traffic jam is not just a problem for ground transportation. Moreover, the ripple effects of New York delays make them a national concern. In response, the Department of Transportation has proposed auctioning slots for landing and take-off at some of the country's busiest airports, as a recent New York Times article reports. Port Authority, the owner and operator of the airports, just made a proposal to block these auctions by excluding airlines that use an auctioned slot.
I'm intrigued by this story in part because auctions seem to be touted as the free market solution to sometimes intractable problems. I wonder if the romance with auctions sometimes masks thornier issues of allocation and, in this case, agency power. As I suggested in my post last week, "Markets for Space in Law School Classes", sometimes auctions are just one of several possible market solutions or even an alternative to an existing market. In the NYU law students case, students generated an informal market in classroom slots. The reason to replace it with an auction system was not because the auction was the only market solution. Instead, it was likely because of concerns with fair access and a law school's policing of student activity. In the airline case, some market in slots may already exist: the Port Authority talks about slots that airlines acquire from each other by "sale, trade, lease or transfer transaction." So the question is not what is the one market solution. The big underlying question may simply be who gets the money.
It's also worth keeping an eye out for litigation, which will likely raise messy questions about the relative powers of these agencies. The list of players (and potential litigants) is large, and includes the airline carriers, the Port Authority of New York and New Jersey, Congress, the U.S. Department of Transportation and the Federal Aviation Administration. Some directions for litigation are suggested by the Port Authority's notice of proposed action, which sometimes reads like a legal brief. It considers the auction plan illegal absent congressional authority and claims "proprietary right and responsibility to allocate gate and terminal facilities." The Senate has also stepped in, with a provision of the transportation appropriations bill that would ban slot auctions. Keep tuned.
Monday, August 04, 2008
Why tax entities?
Over at Conglomerate this week, they're discussing Heather Field's fine and ambitious new paper, "Checking in on Check the Box." One of the many tough questions Heather takes on is whether there should be a separate layer of tax for entities -- that is, whether we should tax corporations at all. (In contrast, partnerships and certain small corporations are generally not taxed directly -- their equity holders pay tax as individuals on their share of profits). Corporate tax is complicated, as the intricacy of Heather's other arguments shows, and most economists would tell you the corporate tax inefficiently influences business decisions. So why bother? It's hard to improve on the work Reuven Avi-Yonah has done on this, but let me throw out a couple of other possibilities.
(Ok, this is tax greek central, but you'll find it strangely interesting, I promise. Go ahead and click for more...)
One reason I see is precisely to influence business decisions. If, as seems likely, there's slack in shareholder control over managers, the managers won't be fully concerned with individual-level taxes. This suggests that, if we want to use tax as a corporate regulatory tool with maximal effectiveness, we need a corporate tax. For example, one might think of the entire regime of the federal law of nonprofit organizations as a corporate regulatory tool that can exist only because of the threat of a corporate tax for noncompliance. It's possible that the welfare gains from using tax as market-failure corrective, rather than the second-best regulatory regime exceed the welfare losses of the corporate tax.
Next, and sticking with efficiency, consider corporate-form neutrality. (This point is inspired by Chris Sanchirico's work on "carried interest"). Our tax system doesn't count as income goods and services that a person -- or an entity -- provides to herself or itself. If Beyonce sings in the shower, she doesn't have to pay tax on the price of a front-row ticket. When integrated firms exchange information, pass a product along from factory to retailer, or do their own books, they (generally speaking) don't report any of that value as income. The value does get taxed later, as corporate revenue, but revenue gains often arise long after the value was first generated. This means there is a tax advantage -- the time value of this implicit income -- in integrating the function, rather than contracting with a third part. Tax therefore may distort the basic Coasian decision whether to contract or incorporate. The corporate tax should, at a minimum, be set at a level that would leave firms tax-indifferent between the two choices.
But, as Larry Solum would say, read Field! (Also, I admit, this post wasn't strangely interesting. But was the Beyonce example at least a little funny? Funny for tax?)
Sunday, August 03, 2008
Corporate charter competition through the mirror
Why don't non-profit firms reincorporate in other states? We know, of course, that states compete to offer the most enticing set of corporate law rules (along with fees for incorporating) to for-profit firms, who can "charter" in any state. There's a long-standing debate about what drives the competition -- is it market pressure for efficient rules, producing a "race to the top" for the best state laws, or something else, such as self-serving managers? I tend to agree with Bebchuk and others that the second story makes more sense, given available evidence.
But how can we reconcile this result with the fact that (as OSU's Garry Jenkins described last year) non-profit firms do not appear to shop around for favorable state laws? The efficient market hypothesis looks like a much better description of the non-profit sector. After all, non-profit managers can be just as self-serving as managers in for-profit firms. Unless there's something a lot different about the non-profit sector we're overlooking, it seems like the absence of charter competition undermines the managerial rents story. Plus, n/p's aren't as subject to market pressures, so the absence of competition in that sector is consistent with the efficiency theory. Of course, there are lots of other things that are unique to the n/p sector that could explain the difference. More after the jump...
1. The supply side. Maybe states don't bother producing attractive n/p law because, by definition, they cannot extract tax from the tax-exempt sector. I'm not sure I buy this. There's nothing that requires states to exempt n/p's from all taxes (and, for instance, lots of n/p's pay sales tax, fees, and the like). If state law can add to firm value, why wouldn't a state try to get some of that value back? But maybe, given the small revenues of many n/ps, the added value is small, so that the likely revenues would be smaller than the costs (including legislators' opportunity costs) of developing new laws. Also, many legal innovations are easy for other jurisdictions to copy (about which, more next week); unless there are big returns, there might be little incentive for any one jurisdiction to innovate. So perhaps races like the competition for charters are rarer and more fragile than we've thought.
2. The demand side. Why don't n/p managers seem to seek out laws favorable to them, whatever the benefit to their firm? If managers can offer large enough rents to officials, then their demand should generate an incentive to supply laws, too. One possible answer here is that state n/p law is already almost meaningless. Most states do not permit suits against managers and board members except by the board or the state attorney general. (And there seems little market for more expansive standing rules, probably for the reasons I just mentioned above.) AG's are notoriously disinterested enforcers. So maybe the substantive law just doesn't matter often enough to be worth paying rents, and explaining transaction costs to other stakeholders. Also, it's possible that federal tax law is the dog and state law the tail, or even just the fleas -- but there, too, enforcement is exceedingly rare.
Bottom line, I think it's hard to say that the evidence from the n/p sector clearly tells us anything about the for-profit sector. But these are testable hypotheses. For instance, if the managerial rent-seeking theory is right, then n/p's should seek new charters in those rare instances where the managers might plausibly face suit.
Monday, July 21, 2008
Yahoo's board has reached an agreement with investor-advocate Carl Icahn. Icahn will drop his proxy challenge, and he and two others will join the Yahoo board. One member of the current board will exit and two new board slots will be created, moving the board from nine members to eleven. Icahn and former AOL CEO Jon Miller have been tabbed to join, leaving a slot for one of Icahn's original slate of ten.
Silicon Alley Insider tries to put a good spin on the move:
If you're so inclined, you could view this as Jerry and co caving: If they were ultra-confident that they were going to win the proxy vote next month, they wouldn't have given Carl a thing. On the other hand, they can now go back to the business of trying to fix/save Yahoo, and get an experienced Internet mind (Miller's) to offer some advice. That seems like a pretty good trade to us.
Plus, they hopefully can keep Icahn from his officious meddling. To me, that's the best reason for the deal -- quiet things down and get the spotlight off of management. Also, Icahn won't be looking to sell his big stake as soon as possible. But the move may also signal Yahoo's willingness to sell itself.
Regardless, I'm disappointed that Icahn's inept proxy battle has ended with him on the board. What message does that send? It must be demoralizing to Yahoo employees. They have no real voice in the company's future, but they have to sit on the sidelines and watch as a wealthy investor buys some stock, trashes the company, and gets put on the board -- all in the space of two months. And he doesn't even use email.
Of course, the question now becomes: who from the slate of Icahn directors will take the one remaining spot? As a professor, I hope Lucian Bebchuk is the nominee. But part of me hopes it's Mark Cuban. After all, I'd love to keep using this quote: "Is there anything more fun than sitting around, growing your hair, drinking a Bud while listening to Jethro Tull and pondering how to change the balance of power in the search world and unseat Google ?"