“Well written and an interesting perspective.” Clan Rossi --- “Your article is too good about Japanese business pushing nuclear power.” Consulting Group --- “Thank you for the article. It was quite useful for me to wrap up things quickly and effectively.” Taylor Johnson, Credit Union Lobby Management --- “Great information! I love your blog! You always post interesting things!” Jonathan N.

Saturday, June 18, 2011

Political Staying Power: Ethanol Subsidies

“A broad bipartisan majority of the Senate voted [on June 15, 2011] to end more than three decades of federal subsidies for ethanol. . . . [At the time,] Gasoline blenders [received] a tax credit of 45 cents for every gallon of ethanol they blend[ed] with motor fuel. The amendment would have repealed that as well as a tariff of 54 cents a gallon on imported ethanol. . . . The tax breaks . . . cost about $6 billion a year. The House [was] expected to reject the repeal as unconstitutional because tax bills must originate in that chamber, and the White House opposes it. But the 73-27 vote signals that once-unassailable programs could be vulnerable.  [The intent was] to end subsidies for wealthy interest groups and [to make some] cuts before slashing social-welfare programs. [Thirty three] Republicans joined 40 Democrats and Independents in supporting [the] repeal. (E)thanol has come under increasing fire from diverse groups, including food industry groups concerned about rising corn prices and environmentalists who had concluded corn ethanol wasn't an effective way to reduce greenhouse gas emissions.”

At the time of the vote, much of the gasoline sold at service stations across the U.S. contained up to 10% ethanol, in part because of federal regulations that effectively require it. The Obama administration “proposed pushing the blend limit to 15%, despite objections from auto makers worried that higher ethanol levels would damage engine components in cars. Auto makers design many so-called ‘flex fuel’ vehicles to run on ethanol blends up to 85%. But few service stations outside the Midwest offer such fuels.”

“The ethanol industry and its supporters, who have been bracing themselves for an end to the tax break, were critical of the vote. ‘We need a glide path, and not a cliff, for the only alternative to oil,’ said Sen. Amy Klobuchar (D., Minn.). ‘We're talking about pulling the rug out from an industry that provides 10% of the nation's fuel supply.’ . . . The Renewable Fuels Association, an ethanol industry group, criticized the action, noting that the Senate ‘voted less than one month ago to preserve billions of dollars in taxpayer handouts to the oil industry.’ . . . The tax break benefits the ethanol industry, which is dominated by commodity giants” such as Archer-Daniels-Midland “by sweetening the financial incentive for gasoline retailers to use ethanol.”

“Repeal supporters said the $6 billion-a-year subsidy amounts to wasteful support for a fuel whose promises of cost savings, lower pollution and energy efficiency have not materialized. ‘This industry has been collecting corporate welfare for far, far too long,’ said Sen. John McCain (R., Ariz.), who's been fighting the subsidy for years. Mr. McCain offered another measure, to block federal funding for ethanol pumps and storage facilities, which failed 41-59. The House adopted a similar amendment.”

“Food companies and livestock farmers “have complained that their costs have exploded as five billion bushels, or 40% of all the corn grown in the U.S. last year, was consumed in ethanol production. The price of corn has traded above $7 a bushel for much of the spring [of 2011], twice the year-ago level. Some economists doubt that the tax credit is now crucial for the industry. The ethanol industry only began to grow rapidly five years ago when new energy legislation required gasoline retailers to use corn ethanol: 12.6 billion gallons [in 2011], moving to 15 billion gallons in 2015. The tax credit is part of the reason the gasoline industry buys more than one billion gallons a year than required by federal mandate. But if it expires, ethanol demand wouldn't fall below the mandate, preventing financial calamity for producers, said Bruce Babcock, an Iowa State University economist. ‘The ethanol industry doesn't need the tax credit anymore,’ he said.”


Naftali Bendavid and Stephen Power, “Ethanol Suffers Rare Loss in Senate,” The Wall Street Journal, June 17, 2011.


It is remarkable that even though the ethanol industry did not need the tax credit, it could still count on the White House and the U.S. House of Representatives to keep the benefit around. This was in spite of the inefficiency of ethanol, the negative impact of ethanol on food prices, the existence of the duplicative mandate, a U.S. budget deficit of over $1 trillion, and a contentious budget-cuts/debt-ceiling debate going on in which cuts were being sought by legislators. The size of the deficit alone (and the accumulated U.S. debt) should have made the affordability of the tax credit a foregone conclusion, yet astonishingly denial seemed sufficient to enable the status quo to continue unabated. That is to say, if a current U.S. Government deficit of over $1 trillion didn’t make the non-essential subsidy a non-starter, what could suffice to do so? To be sure, that the U.S. Senate voted by a substantial margin of senators to end the credit was notable. Politically, however, it merely reflected the split of the agricultural interest on the issue due to the impact of ethanol on the price of corn.

Even considering the U.S. Senate’s action, the staying-power of the status quo in the face of the unsustainable U.S. Government debt of over $14 trillion is truly remarkable in what it says about the ability of a political union based on representative democracy and federalism to deal seriously with dire problems. In other words, one might reasonably ask whether a republic is capable of change sufficient to avoid a train-wreck. Can a people govern themselves when it really counts, or is democracy a matter of convenience? Perhaps part of the problem lies in priorities.

As the U.S. Senate was voting on the ethanol subsidies, the U.S. House was simultaneously rejecting attempts to reduce farm subsidies while cutting the Women, Infants and Children program, “which offers food aid and educational support for low-income mothers and their children,” by $868 million (which represents a 13% cut), and an international food programs that provides emergency aid and agricultural development by $50 million (which represents a 33% drop), according to USA Today. In a governmental context in which budget cuts were very much in the air, the staying power of the ethanol subsidies in the House even as food for the hungry was deemed expendable reveals questionable priorities in terms of budget policy, unless it is the case that large corporations are more in need than women and children. That is to say, if House Republicans were voting in line with an ideological preference for less government, wouldn’t that proclivity apply to corporate subsidies as well as food aid?

Ethanol subsidies, international food-aid, and aid to impoverished people domestically can be prioritized in terms government. For example, it can be argued that feeding citizens (or residents) who are otherwise without enough food is more of a government’s responsibility than is either giving corporations subsidies or sending food aid abroad in exchange for influence in foreign governments. The distinctions between foreign and domestic and necessity and profit are useful in isolating core from peripheral functions of government. In times of budget-cutting, the core should be treated differently than the peripheral. Additionally, it might be asked whether in a federal system the subsidies and food-aid are properly federal or state domains. It could be that federal food aid should be cut completely in order to be picked up differentially at the state level.


The Associated Press, “House Spares Farm Subsidies, Targets Food Aid,” USA Today, June 17, 2011.

Real or Incremental Change?

On October 13, 2010, Fox News reported a poll that found that women are turning on Obama.  The reason cited was that they feel there has been too much change—that it has been “jarring.”  I was stunned—wondering if I was listening to a broadcast from another planet. I remembered that when I had been sampling a food item in a grocery store and the old woman who gave me the sample, said, “We have lots of devils here.”  She was referring to the array of food samples in the store that day.  My reaction, which I charitably did not share with her, was to wonder what century she was from (probably Calvin's, I concluded privately as I downed a “devilish” olive). At the time, I wondered, moreover, why some people can’t seem to let go of what is to the rest of us so utterly antiquated and get with it. That is, why are some people so resistant to change? Why do they perceive small, incremental changes as somehow momentous—even jarring?
In a preface to one of his books, Milton Friedman wrote, "Only a crisis—actual or perceived—produces real change. When the crisis occurs[,] the action taken depends on the ideas that are lying around.” That is to say, human nature is not exactly designed in favor of substantial change—being more inclined to the incremental variety. When a culture says that real change is to be feared and people don’t bother to come up with a broad array of ideas, even a crisis may not result in real change. Such can be said of modern American society, even as “change” shows up consistently in American political campaigns.

In terms of the jarring change being reported on Fox News, the journalist pointed to the health-insurance reform law as a case in point.  In spite of its purported “socialism,” the law relies on private health-insurance companies, whose lobby pressured Obama into dropping his “public option” requirement and adding a mandate that requires Americans to become customers of those companies.  If relying on extant private companies—giving them a guaranteed and vastly enlarged customer base—is somehow “jarring” change, I have to start wondering about whether some people have a pathological issue with change itself.

One need only point to the Dodd-Frank financial regulation law of 2010, which subjects banks deemed too big to fail to additional capital requirements and requires the banks to develop liquidation contingency plans. This “change” pales in comparison to breaking up the banks having $1 or more trillion in assets so they do not pose a danger while extant. That some people might find increasing capital requirements as jarring boggles the mind. Are such people familiar with real change—even if they voted for it in 2008? I suspect they would not recognize it if it jumped up and bite them on their asses, and yet political campaigns are ostensively all about change—or the illusion thereof—but just enough to tell people what they want to hear.

Not surprisingly, much of the campaigning in the 2010 midterm elections was oriented to incremental change on a variety of issues, rather than to real change, even though the latter would have been more fitting given the systemic negative effects of the financial crisis of 2008. Even in states bordering on bankruptcy, like California, Florida and Illinois, campaigning as usual belied any purported crisis. 

For example, I watched a candidate forum that was being held in Illinois and one of the main questions was why a candidate’s business was so successful.  Meanwhile, the last governor had been impeached and removed from office by a nearly-unanimous vote in the legislature, and the government was borrowing $18 billion in 2010 alone.  The forum struck me as an exercise in “rearranging the deck chairs on the Titanic” as if the ship of state was not on the verge of sinking.  In other words, it was business as usual in a context that demanded substantial change. Clearly, the candidates knew of Illinois’s fiscal (and corrupt) condition. It occurred to me that they were either bereft of ideas or too accustomed to going along on the track of status quo to proffer any real alternatives. Lest one heap all the blame on the candidates at the forum, it is important to note that it was a citizen of Illinois who asked about the candidate’s business. Perhaps the society in Illinois is too entranced by custom and thus insufficiently equipped for real change—ironically even as one of Illinois’ former U.S. senators was serving as the “real change” president of the United States.

Lest the pallid phenomenon be presumed to be limited to the heartland, the California Governor’s race between Jerry Brown and Meg Whitman also evinced politics as usual. The two candidates had a chance in their debates to persuade a California-wide audience that they could turn around the economically-troubled republic. Instead, they resorted—at least in their third debate—“to many of the personal attacks that have dominated the last few weeks of the campaign,” according to MSNBC, whose verdict can be said to apply to American politics even in the wake of a crisis: “Neither candidate presented any new ideas.”

Click to add a question or comment on whether Americans are averse to real change.


Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011).

Obama and the War Powers Act: On Libya

In June 2011, a bipartisan group of members of U.S. House of Representatives objected to the refusal of the Obama administration to obtain Congressional approval in line with the War Powers Act of 1973 for the U.S. military’s continued involvement in Libya. On June 17th, The New York Times ran a story which indicated that Barak Obama had gone against the views of the top lawyers at the Justice Department and the Pentagon in his decision not to seek Congressional approval.

“Jeh C. Johnson, the Pentagon general counsel, and Caroline D. Krass, the acting head of the Justice Department’s Office of Legal Counsel, had told the White House that they believed that the United States military’s activities in the NATO-led air war amounted to ‘hostilities.’ Under the War Powers Resolution, that would have required Mr. Obama to terminate or scale back the mission after May 20 [2011].” The president went instead with the view of the White House counsel, Robert Bauer, and the State Department legal adviser, Harold H. Koh , “who argued that the United States military’s activities fell short of ‘hostilities.’ Under that view, Mr. Obama needed no permission from Congress to continue the mission unchanged.”

According to the Times, “Presidents have the legal authority to override the legal conclusions of the Office of Legal Counsel and to act in a manner that is contrary to its advice, but it is extraordinarily rare for that to happen. Under normal circumstances, the office’s interpretation of the law is legally binding on the executive branch.”

The U.S. House speaker, John A. Boehner, said. “The White House says there are no hostilities taking place. Yet we’ve got drone attacks under way. We’re spending $10 million a day. We’re part of an effort to drop bombs on Qaddafi’s compounds. It just doesn’t pass the straight-face test, in my view, that we’re not in the midst of hostilities.”


It is indeed difficult to imagine that dropping bombs does not constitute or contribute toward hostilities. To parse the War Powers Act as not applying to dropping bombs does not give one much faith that the president has much common sense (or aptitude as a constitutional lawyer). Also raising concern is the possibility that Barak Obama had succumbed to the lust for power. Furthermore, ethically speaking, it is troubling that he would be fine with the conflict of interest wherein the commander-in-chief has the power to decide whether the U.S. military and those of the states (i.e., the militias) will be drawn into a new action. The commander-in-chief has a power-interest in making the policy decision in a direction favoring military activity. The War Powers Act was designed to prevent this conflict of interest. “Hostilities” is simply one way of referring to the military doing what it is designed to do, whether as troops on the ground, ships, or planes (or drones). To split hairs like a micro-managing lawyer not only enables the conflict of interest, it also falls short of the big-picture presiding role of a U.S. president. In other words, Obama's parsing makes him look small and self-serving.

Much more statesmanlike would have been for the president to have addressed Congress in a joint session at the beginning of the involvement of the U.S. military in Libya and asked for a resolution. In other words, the War Powers Act should never have been allowed to become an issue. In standing for the Union, the president could have presided over the question by asking Congress for its yea or nay, proffering his view as a secondary consideration for the Congress. To be sure, acting on a human rights basis to stop a brutal dictator is a worthy cause. I can emphasize with the president for wanting to carry through this agenda. Even so, he should not have allowed what he wanted to eclipse his role in presiding and Congress’ role in forestalling his conflict of interest and representing the people.

I suspect that the typical American on the street read the story and concluded that Barak Obama had succumbed to the elixir of power—not an uncommon occurrence in official Washington. To get a president who is immune from this drug of choice, the Electoral College would have had to draft a duty-bound citizen into serving in the office for a term rather than select among the candidates chafing at the bit to get it. There is something unseemly about someone tooting his or her own horn in order to gain the office, particularly if a lot has to be done to get it. We ought not to be surprised, therefore, when such a candidate gets attached to the power while in office.


Charlie Savage, “2 Top Lawyers Lost to Obama in Libya War Policy Debate,” The New York Times, June 17, 2011.

Friday, June 17, 2011

British Banking Regulation in the E.U.

Before the financial crisis of 2008, the British government was light on banking regulation compared to other E.U. state governments. Oddly, some Europeans imagined an “Anglo-American” connection or likeness, as the American states had been on a deregulation kick since Carter’s airline and thrift deregulatory laws in the late 1970s. Reagan and the second Bush in particular extenuated the movement, which applied to the entire U.S. common market. After the crisis, however, even as Republicans in the U.S. House of Representatives, which is commensurate to the E.U. Parliament, were still voicing support for still more deregulation as though 2008 had not happened, the regulatory tussle in the E.U. reflected the greater involvement of the state governments (i.e., the stronger federalism than the lop-sided variety in the U.S.), with the British government in particular pushing for stronger banking regulation—if not at the E.U. level, then in the state of Britain. “British officials are waging an increasingly aggressive fight to impose banking regulations as they see fit, even if they go further than rules elsewhere in the European Union,” according to The Wall Street Journal. From this quote, we can unpack two distinct though interrelating strains: a desire for tougher banking regulation and an anti-federalism wherein the state governments of the E.U. can go beyond the federal government in terms of the regulation. Both of these points are significant.

The complete essay is at "E.U. & U.S."

Long Term Capital Management

By 1997, “after three years of strong profits for LTCM, the opportunities were drying up. There was too much money chasing the same investments. . . . In early 1998, LTMC decided to give a large portion of its capital back to its original investors because profitable opportunities were so hard to find. At the end of 1997, LTCM had nearly $7.5 billion under management, compared to $1 billion when it started, and it now returned $2.7 billion of that to investors. The partners also figured that they could, if necessary, simply leverage their portfolio further to compensate for the loss of capital, which would compound their personal gains. Greed was at the heart of what turned out to be a disastrous decision. . . . Unable to reproduce the returns of the first three years, LTCM took increasingly more risk, abandoning its purer arbitrage for the kinds of ‘directional’ investments Soros made and LTCM had so long disdained—such as trying to forecast interest rate and currency movements. More and more of these trades were unhedged.” Furthermore, “LTCM’s risk models—VAR and related statistical tools . . . –were misleading.” For example, diversification was little protection if there was a run on the banks. When Russia defaulted on August 17, 1997, LTCM’s hedges against its Russian investments were worthless. Furthermore, because all fixed income assets fell sharply in value, “diversification, it turned out, did not matter. The finely calculated relationships on which LTCM was built and which the firm always believed would hold started to come apart. VAR could  not account for such an unlikely but sweeping event—an event in which everyone wanted out at the same time and almost all investments fell significantly in price. The use of VAR itself precipitated much of the selling. Commercial banks under the jurisdiction of the Basel Agreements, which . . . set capital requirements based on the level of VAR (the lower the VAR, the lower the capital required), were forced to sell assets to raise capital.” LTCM lost $1.9 billion that August. Eventually, fourteen banks, organized by the Fed, put together loans of more than $3.5 billion to purchase 90 percent of the firm.” LTCM “did manage to sell down assets in an orderly fashion and by early 2000 it was essentially out of business” (Madrick, pp. 277-81).


Among the fourteen banks pushed by the Fed to loan LTCM $3.5 billion, there was a conflict of interest because even as they counted on being paid back by the hedge fund, they had a financial incentive to capitalize on LTCM’s vulnerability by front-loading—that is, selling ahead of LTCM (knowing beforehand its assets to be sold). LTCM could have reasonably objected to opening up to its competitors, who in turn were being pushed in a conflicted position by the Fed (which could have obviated the banks’ conflict of interest by examining the books itself and relating only general information to the banks, though they might not have agreed to lend). In other words, the Fed could have done more to recognize and evade an institutional conflict of interest.

In terms of LTCM, the drying up of arbitrage opportunities due to increased competition meant that the hedge fund’s purpose was effectively drying up. Ordinarily, once a project’s purpose is over, the project is ended.  The business world, however, is somehow under the illusion of that it is of perpetual activity rather than projects of finite duration. In other words, the problem is not merely wanting more (i.e., greed).

The partners of LTCM were certainly rich enough to end the fund and take a break. Perhaps Meriwether might have come up with another business model and gone on to start another project. This dynamic of “project—rest—project” is in line with human nature as well as the finite nature of projects and even companies.  To treat a human being and a company as a machine of ongoing activity is to foist an artificiality contrivance on both. Meriwether’s arbitrage model had run its course; it would have been a good time for him to return to his horses and let his mind wander over the pastures in search of another idea, which in turn he could have germinated into another project. Instead, he went to Soros’ riskier model—one that Meriwether had assiduously avoided.  Increasingly, he dropped the “hedge” from hedge fund under the erroneous assumption that diversification would keep his ship from going down in a hurricane in which all ships sink. His toxic cocktail of leverage and VAR unhinged from his arbitrage model left his hedge fund vulnerable to a major external shock, which came in the form of a Russian default.

Although Madrick points to greed, I contend that the basic desire for more is more or less a fixture in human nature so something more must be involved in this case. Added to the mix for Meriwether was a failure to view LTCM as a project that would naturally have ended as his arbitrage model could no longer be profitably employed. To be sure, giving $2.7 billion of $7.5 billion back to the original investors because profitable opportunities were so hard to find was a step in the right direction. Had he returned the entire $7.5 billion to himself, his partners and the investors with a note indicating that the purpose of the fund no longer existed so here are its returns, a nice closure would have been accomplished. He could have written, “We set out to do X, we did it handsomely, and here are the results. Thanks!” Such a message, I contend, reflects the nature of business if it is in line with human nature as well as the nature of our ideas and even our projects.

It was not merely greed that trumped Meriwether and his LTCM project; additionally, he misapplied the long-term element in his arbitrage model to LTCM itself as a going-concern.  As such, LTCM would presumably shift to another purpose, and then another, as changing conditions render a given business model obsolete. Although this is the conventional view of business typically taken for granted without any reservation, I contend that it is fundamentally flawed because it is out of step with human nature and thus with our artifacts as well. In other words, systemic risk can also be read as referring to the possibility that our operating paradigm of the business firm wherein we assume it to be a going-concern rather than a project is fundamentally flawed. Our business system can thus be expected to be subject to recurrent system-failures until we refashion our notion of organizational mission to fit with our own nature—which is not immortal—and that of a project, whose duration is associated with purpose rather than ad infinitum. LTCM as a project would have ended rather than been forced to be winded down by competitors exploiting a conflict of interest.

This is not to say that a business practitioner ought not to innovate. Improvement and adaption can be done within a purpose, within a business plan, within a storyline.

One need only distinguish between television shows like Seinfeld, which ended on top out of Jerry’s sense that the arbitrage on jokes had effectively run its course, from shows that have been cancelled long after they had become embarrassments to their respective networks. Whereas Jerry Seinfeld put a recognition of the completion of his purpose ahead of money (although there was still syndication), most shows are used to squeeze out the last bit of revenue. Either a purpose is overextended, or another one contrived; “the show must go on,” as though it were no longer subject to the natural law of three acts: the beginning, the middle and the end. As any good screenwriter knows, how one ends a story is very important. Indeed, ending a story, rather than have it ended, is of no small difference in whether a story as a whole is good or bad.


Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (New York: Alfred A. Knoff, 2011).

Amtrak’s Conflict of Interest

On June 15, 2011, U.S. House Republicans called for the breakup of Amtrak’s de facto monopoly of intercity and interstate passenger-rail transport in the United States. Specifically, Republican lawmakers proposed that the lucrative northeast routes be opened to private providers. For example, Richard Branson’s Virgin Trains had been seeking to provide service between Boston and Washington. Of course, letting one of the providers build and own the tracks even as other providers use the tracks would put that owner-provider in a conflict of interest in charging the other providers for their use of the track, so it would be preferable to have the U.S. Government supply the tracks and charge all of the private providers of train service.

Whereas Amtrak’s fastest train, the Acela, only goes an average of 85 miles per hour, high-speed trains in Europe and Asia routinely travel at 220 miles per hour. On the trip from Boston to New York, the Acela is only about twenty minutes shorter than the regular Amtrak train, if I remember correctly. I do remember being surprised at the small difference, given the marketing campaign on the new “high speed” train (and the difference in price). Amtrak has functioned as a typical government-owned (i.e., socialist) monopoly in the Northeast Corridor; for the railroad to contend otherwise would have to be taken as a red-flag that something is not quite up to speed with the company (at the very least, its veracity, as well as its velocity).  Perhaps a relatively slow velocity in transport carries with it a lack of veracity.

As one might expect, Amtrak’s management rejected the Congressional proposal as vague and unrealistic. Such a rebuttal is itself so vague it is hardly worth printing. In fact, the “response” can be interpreted as pointing to Amtrak’s conflict of interest on the proposal, as the northeast coastal routes are the most profitable for the publically-owned railroad.  In other words, of course Amtrak would oppose the proposal.  That should be expected, and, I submit, sufficient to remove the railroad from the discussion. Given Amtrak’s conflict of interest, we can expect the railroad’s management would try to derail the proposal without looking to the public interest. That is, we can expect the managers to lie to save their jobs and company. I’m actually surprised that their reply was so wan, given their vested interest in rebutting the proposal.

For example, The Wall Street Journal reports that “Amtrak said that privatizing the Northeast Corridor would, in essence, spell the end of the company, which relies on profits from that route to offset the costs of running its long-distance lines.” According to Amtrak’s spokesman Steve Kulm, “This bill will take Amtrak apart.” However, the company can be said to rely not on its own profits, but, rather, on the U.S. Government. In 2011 alone, taxpayer subsidies were expected to reach $1.48 billion for the year. Although ridding the company of its most lucrative route could add to the subsidies needed for the long-distance routes, it is not true that the company would automatically fall apart for lack of profit in the Northeast Corridor.

The problem with believing claims by a vested interest put in a conflict of interest as it claims to represent a broader interest is insurmountable, so such a party should be sidelined from participating in the decision. Even its claims ought to be instantly relegated. So when Kulm says, “Amtrak believes that we are a very good steward of the [Northeast] corridor today,” we can pat him on the head and tell him to go off and play with his trains and leave the decision to the grown-ups. Lest this be objectionable to him, I would counter that Amtrak’s willful ignoring of its own conflict of interest and the related lack of candor are themselves rather squalid and counter-productive in advancing the public interest.


Josh Mitchell, “GOP Seeks Bidders for Amtrak’s Rail Lines,” The Wall Street Journal, June 16, 2011, pp. B1 and B2.

Banks on Reserve Requirements: An Institutional Conflict of Interest

As regulators were getting close to an international agreement on how much additional capital large banks that are deemed too big to fail should hold. In 2010, international policy makers met in Basil and agreed to 7 percent. The Dodd-Frank law passed in that same year in the U.S. meant that the Federal Reserve Bank would have to “impose tougher capital standards on ‘systemically important financial institutions’,” according to The Wall Street Journal.  Hence, American officials wanted “to coordinate with global regulators so that U.S. firms aren’t put at a disadvantage.” Not wanting to divert more capital to protect themselves from losses, banks were busy lobbying the regulators to reject the proposed 2.0 to 2.5 percentage points above the 7 percent set at Basil.

For example, a group of nine banks put together a white paper on the anticipated impact of the new capital requirements, including “negative consequences” for the American economy, according to The Wall Street Journal. The white paper also argues that American banks were already well-capitalized and better positioned to withstand losses should another credit freeze occur.

In addition, the Clearing House Association, which includes the largest American commercial banks, including J.P. Morgan Chase, Citibank, and Bank of America, wrote a letter to banking regulators as well as legislators warning, according to The Wall Street Journal, “that imposing a surcharge . . . would be premature and damaging to the still-fragile economic recovery.” The Association also had McKinsey do an analysis of the impact of the proposed surcharge on American banks. Such a “study” could be used by legislators who receive campaign contributions from the financial sector to justify their “concern” regarding the Fed’s intention to increase the capital percentage above 7 percent.

Rep. Jeb Hensarling (R-TX), chairman of the U.S. House Republican Conference, said that although he agrees that capital standards had been insufficient going into the financial crisis of 2008, he cautioned that a “surcharge” (a loaded term, to be sure, and not accurate) might have a baleful impact on employment numbers. Of course, were there another crisis and a bank too big to fail went down, employment figures would surely drop precipitously.  Accordingly, Tim Geithner said there is “a very strong case for requiring the largest firms, those whose failure could cause the greatest damage to the economy, to hold more capital relative to risk, than smaller institutions.” That is, there is good reason for going above 7% even in terms of unemployment.

I have presented the positions of Geithner and the banking lobby as two sides of a debate, but this symmetry is misleading. The banks’ position is inherently compromised due to their conflict of interest in presenting reasons and a “study” on a proposal that is detrimental to their daily financial interests. Therefore, the “study” produced by the hired consulting firm should not be taken at face value, as it was done for a vested interest. Additionally, the claims given by the banks, such as that there would be a detrimental impact on the American economy, ought also to be red-flagged, given the banks’ conflict of interest.

This is not to say that a party in a conflict of interest cannot provide valid arguments. The Congressman funded by Wall Street could conceivably find a credible public-interest argument even though it is not the real reason for the representative’s opposition to a “surcharge.” I contend that the McKinsey “study” had been intended by the banks to give “friendly” legislators cover in pressuring regulators to lay off the banks.

Even so, the existence of a conflict of interest ought to immediately flag for us, the public, as well as government officials who have not been bought, any asseverations and “studies” proffered by the party in the conflict of interest. Particularly if the claim is vague, such as that increasing the capital requirements would harm the economy, we ought to see right through the conflict of interest and demand support not linked to the suspect party.

In fact, taking an ethically strict approach to conflicts of interest would involve not accepting claims made by parties in a conflict of interest if the claims are in line with the vested interest. In the case, of the capital requirement increase, we would admit any arguments by the banks in favor of the increase—arguments to the contrary being rendered invalid (or at the very least unseemly) pretenses. Any attempted influence by the vested interest would be arrested. Essentially, such an ethical approach to a conflict of interest obviates it. A downside to this ethical stance is that good arguments could be missed, though presumably neutral parties can come up with good arguments (as well as to hire independent expertise for information) in place of parties with vested interests “claiming” to support the public interest. We as a society and polity need not depend on the expertise of parties in a conflict of interest to drive or support one side of a debate. Indeed, were we to take this approach, I suspect that the unethical exploitations of conflicts of interest would be all the more easy for us to detect.

Therefore, on the question of the additional capital requirement mandated by law, we ought to tell the bankers that they are sitting out on the matter on account of their vested interest. Thanks, but no thanks, guys—why don’t you get back to your banking and give the subterfuge a rest. We’ll take it from here (and thanks for the checks!).  

Generally speaking, determining the public interest (the common good) ought not depend on, or involve, particular parties in a conflict of interest. That is to say, we can all participate where we are not in such a conflict; otherwise, we sit out the inning. This ethical position, I submit, is consistent with business ethics as well as a healthy system of business and government.


Deborah Solomon and Victoria McGrane, “Lenders Dig in on Rules,” The Wall Street Journal, June 16, 2011.

Wednesday, June 15, 2011

Pandora: An IPO Eclipsing Fiscal Gravity?

Pandora, an internet-based radio company oriented to music, sold its initial public offering at $16 per share late on June 14, 2011. The shares opened the next day at $20 and rose as high as $26, only to fall into the teens before market close. At $26, the company had a market value of $4.2 billion, more than the value of AOL at the time. Just two weeks earlier, Pandora’s management had been looking at the $7 to $9 range.  Despite offering only 9 percent of its shares to the public, the company raised twice as much money as it had expected.

Astonishingly, Pandora had not made a profit in its 11 year history. On June 15th  when the share price was over $20,  Pandora’s CEO, Joe Kennedy, refused to say whether the company would make a profit in the next five years. Instead, he pointed to the operating margin and cash flow, and to the business model, as reasons to invest long-term in the company. "Our focus has always been to build a great company. That’s our dream, that’s our passion, that’s our focus," he said, according to CNBC. It can be asked whether investors were engaging in irrational exuberance or on the rational expectation that it can take time for a company to begin showing profits.  


With all the attention typically paid to quarterly earnings, it is refreshing to hear a CEO stress the long-term nature of investing in his company. It would be nice if Pandora’s owners also had a passion in Pandora as a going concern pushing along the technological wave by providing music tailored to individual listeners’ tastes. Such long-term investment would bode well for corporate governance as owners take more of an interest in holding their management accountable through directors and stockholder referendums.

At the same time, Pandora’s reliance on advertising revenue even as an increasing proportion of use is on smart phones may suggest a flawed business model. For internet companies in general (as well as bloggers!), it is difficult to turn non-paying users into subscribers. At the time of its IPO, Pandora had 94 million registered users, most of which were non-paying customers. "The excitement for Pandora is driven by people's usage of the service and the enjoyment of the service," said Richard Greenfield, an analyst with BTIG Research. "But in order to justify a high valuation, they need to get far more advertising, and they need to get more people paying for the service." But this can be difficult in a marketplace where users can simply switch to a free service. While a nice set-up for us users, I’m not sure the business model is viable, given how much internet advertisers pay for clicks of their ads (which in turn is a reflection of users being able to ignore ads).

My understanding is that the phenomenon wherein a very high proportion of customers can use a product for free is pretty much limited to the internet. Tangentially, free wifi at coffee shops and even some restaurants (e.g., McDonalds) has given rise to customers “camping out” for hours to use the free service long after finishing their drink.  Incidentally, as I write this essay, I’m using Starbucks’ wifi long after my ice tea and slice of coffee cake. I’m watching the 100-minute full lunar eclipse live (just showed the video feed to the store’s manager and another customer—both of whom are amazed) as I contemplate Pandora’s business plan relative to fiscal gravity here on earth. It is just such amazement at the marvels of technology that a long-term investor in a company like Pandora can have while participating in the innovation; but lest we lose too much perspective, it is well to observe that a business model is trite, artificial and even profane next to the translucent liminality of the eclipsed rock otherwise known as our moon.

                             The Lunar Eclipse on June 15, 2011                                  The Huffington Post

If Pandora’s advertising revenue is not sufficient to pay for the rights to the music the station plays, then not being allowed by the market to charge most users can mean eventual financial ruin for the company, especially given the extent of the competition facing the company. According to msnbc.com, “Pandora is going up against traditional radio companies, satellite radio provider Sirius XM, music services such as Rhapsody, not to mention services from Apple, Google and Amazon that allow users to access music from anywhere.” The internet platform itself can mean not only relatively low advertising rates, but also low barriers to entry for future competitors.

According to The New York Times, Pandora had just 3 percent of the market at the time of the company’s IPO and had lost $92 million cumulatively since it began. In 2010, revenue of $137.8 million was more than double from the previous year, but the company’s 2010 loss was at $1.8 million. Most significally, the company had never earned a profit and yet investors were rushing to invest in the company’s IPO. "I think it's heavily overvalued," Anupam Palit, an analyst with GreenCrest Capital, said according to msnbc.com. "It's a great company but what we're seeing right now is incredible investor demand for Internet IPOs and a lot of dollars chasing very little supply." In rushing to invest, investors may have been ignoring a fundamentally flawed business model—in effect defying fiscal gravity.

An unsustainable imbalance between relying on on-line advertising revenue rather than subscribers and having to pay labels substantial fees for content mean that Pandora may never earn a profit. According to The New York Times, “the fees [Pandora] pays to record labels for songs remain its largest expense. The cost to acquire content more than doubled last year to $69.4 million. ‘As the volume of music we stream to listeners increases, our content acquisition expense will also increase, regardless of whether we are able to generate more revenue,’ the company warned.” According to The Wall Street Journal, “The company faces hefty payments to music labels and publishers, similar to traditional radio companies, and has yet to offset such expenses with advertising revenues and user fees.” It would seem that the labels and publishers were not making a sufficient allowance for the discounted nature of internet-advertising revenue relative to that of brick-and-mortar radio stations.

I would be remiss if this business analysis did not place Pandora in historical context. In the closing years of the twentieth century and during the first decade of the twenty-first century, managers of “dot.coms” grasped at how to monetize the internet wherein the norm was free content. That norm had such gravitas and the internet itself was so new that business practitioners had trouble simply grasping how to get a handle on the platform. Indeed, the internet itself was changing—prodded along by the likes of companies such as The New York Times that led the way to confining their internet-users to a subscription-basis. At the time, no one knew whether the momentum would shift to this basis across the internet; no one knew whether the free access to stuff on the internet would continue unabated or suffer a decline.

Theoretically, a movement toward “subscription-only” access could pass a threshold-point beyond which businesses (and bloggers) could discount the impact of alternative free venders and the monetization trend would be irreversible. The more traditional, more financially-solid business model could then be applied by internet companies. By the end of the first decade of the twenty-first century, internet-company managers could not even be sure that such a threshold would be crossed. At the same time, relying on advertising revenue seemed to be an insufficient basis for sustained profitability.
In other words, the uncertainty in the air at the time of Pandora’s IPO was not limited to the company. Fundamentally, the world was still grappling with how to make money using a completely new platform. It takes years for such novelty to be understood and thus ably used, even if in hindsight it seems simple. The human mind is indeed quite finite, particularly as it struggles to make sense of a new environment.

 Those people willing to invest in Pandora in its IPO on the ides of June 2011 were indeed taking a risk, and the CEO was correct to stress the long-term (which is the best perspective for stock-ownership anyway). Unless or until the monetization threshold point is hit on the internet as a whole, Pandora’s management (and investors) ought to have been taking seriously the possibility that the company’s business model was not in balance. Content should be in balance with ad revenue, and negotiating with labels and publishers ought to reflect such a balance as even the suppliers cannot earn money from defunct distributors such as Pandora. A viable business model is indeed possible for internet companies before the threshold point unless they face an overwhelming amount of free-content by competitors and ad revenue is miniscule (e.g., blogging). The question at the time of Pandora's IPO was whether the company would go down this route or be able to adjust its business model even without the internet itself reaching a monetization threshold-point. 

Click to add a question or comment on Pandora’s business model and IPO.


Margo D. Beller, “Pandora Soars, Then Falls in Market Debut,” CNBC, June 15, 2011.

Pandora Shares Surge at Their Debut,” msnbc.com, June 15, 2011.

Lynn Cowan and Don Clark, “Pandora IPO Is High Note,” The Wall Street Journal, June 15, 2011.

Evelyn M. Rusli, “Pandora Prices Its I.P.O. at $16 a Share,” The New York Times, June 15, 2011.

Tuesday, June 14, 2011

On the Ethics of Legislating

The means by which a bill becomes a law are sometimes referred to “how sausage gets made” because they are not suited for public display.  The belief is that were the citizens to see what goes on in the process, they would demand that it be changed. Perhaps this means that it should be changed.

For example, Rep. David Dreier, R-California, argued in March, 2010 in the US House that while “the process of lawmaking should be ugly, I have never seen it as ugly as it seems to be coming before us this week. … I think that [James] Madison would be spinning in his grave at the fact that there is absolutely no accountability to what is taking place here.” He was referring to the Speaker’s attempt to bypass a direct vote on the US Senate’s health-care bill by voting on a rule that would deem that bill passed in the House.  More generally, the ugliness in passing legislation refers to the horse-trading, which can include special favors and even payoffs.  For example, the U.S. Senate’s health-care reform bill of 2010 included a “Louisiana Purchase” and a special deal for Nebraska—both were engineered to obtain the votes of the two states’ senators. 

In horse-trading, a representative votes against the preference of a majority of his or her constituents because they will get something else out of it.  The official judges that the typical constituent would agree to vote against his or her preference on the given issue because of the payoff to the district.  “I’ll go ahead and vote for health-care reform with a significant government role because we’ll get a new bridge.”  If the representative’s judgment matches those that the majority of his or her constituents, the sausage-making is ethical because the representative is indeed representing.

If most of the representative’s constituents would say no to the deal, then the yes vote would only be ethical if the representative judges correctly that the deal would be in their best interest.  Being a representative can justifiably depart from polls to act in his or her constituents’ best interest because this too represents them.  Were there no value in this, we would have a direct rather than a representative democracy.  There is in the latter a check on the passions of the people; the strength of check depends on the length of the term because an election further off gives the representative more time for the “in your best interest” to become evident.

The ethical waters darken appreciably the more the deal benefits the representative rather than the constituents.  A friend or relative getting a judgeship, for example, does not justify a vote that is at odds with the preference (or best interest) of the majority of the constituents.  This is essentially a principal-agent problem, where the representative is the agent who is not acting in the interest of his or her principal.  It is unethical because the agent has agreed to the duty of acting in the principal’s interests.

So sausage-making is not necessarily as sordid for the individual representative as it might seem overall.  An ethical representative need not fear discussing it.  In fact, making it transparent as part of the political discourse (through the media) would permit him or her to inform the constituents why he or she is making the deal.  There might be feedback ensuing that leads the representative to revise his or her assessment. 

Of course, the representative might fear that the deal would unravel were it made public. However, it is unethical to include stealth deals in a public legislation.  A deal that is not agreed to in the light of day should not be part of a given bill because the majority voting for a bill should know what they are voting on.  There is nothing shameful in a deal that is in the interest of one’s constituents, and such a deal might be in the interest of the other representatives who want the bill to pass.  “We will give your people the bridge that is in their interest in exchange for their support on our bill here.”   This is essentially a recognition of legitimate priorities.  However, it can also be argued that a bill should stand on its own merits.

 Strictly speaking, if a majority of the representatives do not support the health-reform, for example, the bill should not be passed.  Proponents of a bill overreach in looking for deals to put them over the top because the majority vote with the deals does not match the merits of the bill apart from the unrelated deals.  Bad public policy can be enacted because some districts care more about other things.  In this sense, it would be ethical for the proponents to admit that they don’t have a majority and that therefore the bill ought not to pass.  Behind such a normative constraint is the selfishness of “I want it my way anyway.”  This too ought to be part of the public dialogue when a majority is to be achieved only by the horse-trading. 

However, the horse-traders could argue that including the deals reflects the priorities in the society, and these ought to be reflected in a legislature.  Ethically speaking, a legislature should design its sausage-making in such a way that such priorities are reflected even as they do not enable legislation that only a minority want on its merits apart from the priorities.  How to distinguish priorities from overreaching is the difficult problem facing us both ethically and in terms of legislative process.  Ah, but there’s the rub; what reforms would institute this messy ethical distinction?  Applied ethics may not be sausage-making, but it is messy nonetheless.

Click to add a question or comment on the ethics of legislating.

For Rep. Dreier’s quote, pls see:

The Tea Party on Congress & Popular Sovereignty

Mark Meckler, a co-founder of Tea Party Patriots, characterized the lame-duck session of the Congress at the end of 2010 as presumptuous because the Democratic-controlled House would be controlled by the Republicans in the upcoming session. In other words, the Democrats had just lost the right to control the House in the elections, so their continued control of the House was at odds with the “will of the American people.” According to Meckler, "For them to legislate when they've collectively lost their mandate just shows the arrogance of the ruling elite. I can't imagine being repudiated in the way they were and then coming back and saying 'Now that we've been repudiated, let's go pass some legislation. . . . I'm surprised by how blatant it was."

Meckler was undoubtedly reflecting a view of human nature with respect to the urge to power that was expressed by Anti-federalist opponents of the U.S. Constitution as it was being ratified in the several states.  Brutus, for example, writes, “This principle, which seems so evidently founded in the reason and nature of things, is confirmed by universal experience. Those who have governed, have been found in all ages ever active to enlarge their powers and abridge the public liberty” (Brutus, Letter 2, 2.9.25).  Brutus continues, "power, lodged in the hands of rulers to be used at discretion, is almost always exercised to the oppression of the people, and the aggrandizement of themselves; yet most men think if it was lodged in their hands they would not employ it in this manner" (Brutus, Letter 4, 2.9.54). In other words, there is not only a tendency in human nature to overextend political discretion; there is a built-in presumption whereby the drive is blind to itself. Presumption may be hardwired in human nature, such that we unknowingly walk on stilts made of empty straws.

Therefore, it is essential in a republic that the elected representatives be accountable to popular sovereignty. The Anti-federalist Brutus wrote back in 1788, "Perhaps no restraints are more forcible, than such as arise from responsibility to some superior power.—Hence it is that the true policy of a republican government is, to frame it in such manner, that all persons who are concerned in the government, are made accountable to some superior for their conduct in office.—This responsibility should ultimately rest with the People" (Brutus, Letter 16, 2.9.197, p. 187). Even so, the results of an election are not retroactive.

That is to say, the 2009-2010 Congress was not beholden to the election of 2010. Rather, the repudiation applied to the next Congress. Besides, the Democrats did not concur that their partyh had been totally repudiated.  It could be argued, for instance, that the moderate or conservative Democrats lost while the liberal Democrats such as Barney Franks and Dennis Kucinich survived. Nancy Pelosi was handily re-elected. Was she to view her votes in the lame duck session as inherently presumptuous? In other words, the foray of the Democratic Party onto Republican turf was pushed back--the Republicans taking back more of the Red states. To be sure, the Democratic Party certainly did not gain ground. At the same time, the resulting party may well be more coherent and thus on message.

In short, while Meckler is undoubtedly correct that elected representatives are beholden to their constituents, who can “toss the bums out,” he errs in holding the special session in 2010 to the election for the next Congress and he overstates the repudiation "message" of the 2010 midterm election. In general, so many factors go into elections that it is difficult to gleam one message from the outcome, especially if there are many races. Voters vote for a variety of reasons, even in one race. Superimposing one as a mandate may well be artifice.  Even so, Meckler can be forgiven for responding on the basis of the view of human nature espoused by the Anti-federalists, for it is only human nature to try to get as much passed as possible before losing control of a legislative body.


Kate Zernike, "As New Congress Begins, Actions of G.O.P. Leaders Anger Tea Party Activists," The New York Times, January 2, 2011, p. 13.

Brutus quotes are from Herbert J. Storing, ed., The Anti-Federalist (Chicago: University of Chicago Press, 1985).

The Veto Power of the U.S. President

On September 12, 1787, in the U.S. Constitutional Convention, Gerry claimed that the "primary object of the revisionary check on the President is not to protect the general interest, but to defend his own department" (Madison, Notes, p. 628). Gerry was stressing the value of maintaining the separation of power that was to exist between the three branches of the U.S. (General, or federal) Government. I believe he was inordinately fixated on his point--missing the presiding function of the U.S. President. Also on September 12, Madison averred that the "object of the revisionary power is twofold. 1. to defend the Executive Rights 2. to prevent popular or factious injustice" (Madison, Notes, p. 629). In addition to be an advocate of the separation of power within the U.S. Government, Madison was concerned that a large faction in the majority might oppress a minority faction and he viewed the expanded republic of the union as a means to minimize such tyranny. He too was slighting the presiding role of the president. 

At the end of the convention, George Washington, who had been presiding over it as one controversial point after another were debated, noted the problems inherent in both presiding and advocating on particular issues. Madison reports that when "the PRESIDENT rose, for the purpose of putting the question [of the Constitution], he [Washington] said that although his situation had hitherto restrained him from offering his sentiments on questions depending in the House, and it might be thought, ought now to impose silence on him, yet he could not forbear expressing his wish that the . . . smallness of the proportion of Representatives [in the U. S. House] had been considered by many members of the Convention an insufficient security for the rights &; interests of the people. . . . he thought this of so much consequence that it would give [him] much satisfaction to see it adopted. No opposition was made . . . it was agreed to unanimously" (Madison, Notes, p. 655). Washington believed that as he was presiding over the Convention it was necessary for him to remain silent on all of the particular points being debated throughout the Convention; even on the last day he hesitated in expressing his desire that there be no less than 30,000 people per House Rep. rather than 40,000 as the Convention had decided. 

The silence of a presider places him or her in good position to weigh in on a point "of so much consequence."  In other words, a presider literally sits before, rather than participates, so as to be able to protect the whole from dangers from points of large consequence.  Weighing in on every partisan point, such as most U.S. Presidents have done, not only keeps them from seeing the forest through the particular trees, but also detracts from their credibility with which they could push through the few matters of such consequence that the system would succumb otherwise. 

It follows that the veto should be used not to give the President a share in every piece of legislation, but to enable him or her to stop bills that would otherwise compromise the system as a whole.  In the U.S. Constitution as it was drafted by the Convention, the U.S. House was the only democratically elected body or branch in the U.S. Government.  Neither the U.S. Senators nor the U.S. President were elected by the people. The Senate represented (and protected) the state governments, and special electors were chosen by the state legislatures to select the U.S. President.  The quality of representative democracy in the U.S. House was therefore vital to the Government having a balance within which democracy was a part. Compromise democracy in the House and the U.S. Government might become an aristocracy or monarchy.  These terms were used by many of the convention's delegates. 

George Washington understood the nature of presiding, which can be gleamed from Madison's report of what the PRESIDENT said on the last day of the convention. It is a pity that his example has been lost on so many U.S. Presidents.

Click to add a question or comment on the U.S. President’s Veto.

Source: James Madison, Notes in the Federal Convention of 1787 (New York: Norton, 1987).

Monday, June 13, 2011

A Judicial Conflict of Interest: Walker on Prop. 8

 In 2010, Chief Federal District Judge Vaughn Walker issued a ruling that declared Proposition 8 (against gay marriage) an unconstitutional violation of gay Californians’ civil rights. After retiring in February of the next year, the judge revealed that he was in a 10-year-old relationship with a same-sex partner. The question is whether a reasonable belief that the judge would stand to benefit from the ruling means that there was a personal conflict of interest sufficient to have the judge’s ruling vacated. Amid the emotions swirling around issues such as gay marriage that involve the uneasy mix of personal matters and public scrutiny, an urgent need exists for ethicists and jurispruds to isolate the pernicious problems inherent in the conflict of interest phenomenon so we all can have faith that such issues are decided impartially in substance as well as appearance.

                          Judge Vaughn Walker                                     Elaine Thompson/AP

Andrew Pugno, one of the lawyers defending Proposition 8, has stated that the Judge Walker’s long-term relationship “creates this unavoidable impression that he was just not the impartial judge that the law requires.” That the judge withheld the information until well after his ruling suggests that even he may have thought the very existence of his relationship (even aside from any intention to wed) would be sufficient to trigger claims of a conflict of interest because he could stand to benefit personally from the ruling, according to the lawyer. Therefore, the conflict of interest lies not in the judge’s sexual orientation or in his particular state of mind, but, rather, in his being in a long-term relationship that could benefit from the option to marry. Obviating a personal conflict of interest based solely on one’s sexual orientation would be too general and it would constitute prejudice. Likewise, deciding another’s intentions is too subjective a basis for a judicial ruling on a conflict of interest.

A reasonable conclusion that a person stands in a particular position to gain a specific benefit can carry muster in a legal ruling dealing with a person’s conflict of interest. According to Pugno, it is “all about the fundamental principle that a judge really can’t sit to hear their own case when they have an interest in the outcome.”  

In deciding on whether Walker should have recused himself, Judge Ware conflates particular and general interests, arguing in effect that the former do not constitute a conflict of interest because the latter should not. "The presumption that Judge Walker, by virtue of being in a same-sex relationship, had a desire to be married that rendered him incapable of making an impartial decision, is as warrantless as the presumption that a female judge is incapable of being impartial in a case in which women seek legal relief," Ware wrote in his decision. Ware treats the specific connection of benefit between being in a 10 year same-sex relationship and having same-sex marriage legalized as equivalent to the general connection between a woman ruling on a case involving a woman.

Similarly, Ted Olson, whose wife died in 9-11, has argued that requiring judges to reveal elements of their personal lives sets a dangerous precedent. “What would a judge do who was Mormon knowing the Morman Church took such an active role” in campaigning for Proposition 8? What would a judge who had a nephew or niece or son or daughter who was gay or lesbian do? We have an unlimited number of permutations of what a judge might be asked to disclose.” In short, Olson sees a slippery slope toward a most undesirable outcome wherein recusals could be commonplace and at times for rather intimate reasons.

However, the slippery slope argument may be overdrawn, and it may be surmountable altogether, especially if one distinguishes between specific and general connections. Vikram Amar, a law instructor in California, argues that a recusal should be required because of “a specific and imminent benefit” rather than “some abstract and future benefit.”  According to Amar (and Ware), Judge Walker does not meet this test. I disagree.

That the judge was in a long-term relationship and was sufficiently old to retire means that the benefit would be both specific (i.e., him getting married) and imminent (i.e., given his age). For a couple discussing marriage, the discussion is not abstract. In fact, it can get down to whether a joint checking account would be opened and whether there would be a pre-nuptial agreement. Furthermore, couples who discuss marriage do not typically say, “maybe in ten or twenty years, we might get hitched.” The time frame is usually months or a few years, with a realistic expectation that a decision to marry would result in marriage.

One might counter that an intention must also exist—that it is not sufficient for a specific and imminent benefit to be possible.  For instance, in hearing the recusal case on June 13, 2011, Judge Ware asked the Prop. 8 lawyer, “I’m asking you to tell me what fact you would have the court rely on to suggest that Judge Walker wanted to change, not maintain, his relationship?” The mere fact that Judge Walker had been in a serious relationship “does not put him in the shoes of what the plaintiffs were doing, unless you cite to me some facts that he was desirous of the relief they were seeking,” Judge Ware said.

However, pegging desire is a tricky business, and far too subjective to serve as the linchpin of a judicial ruling; someone in a personal conflict of interest would only need to deny having been interested in one of the interests in conflict. When a conflict of interest is observed, the two interests involved are viewed as standing in themselves, rather than being conditional on being desired. That is, in recognizing a conflict of interest, the very existence of the interests is sufficient. Therefore, a recusal ruling should not stand on whether an intention or a desire was present. Given human nature, standing to gain is sufficient to make a conflict of interest situation sufficiently baleful that it should be eviscerated. Judge Walker stood to gain specifically and imminently even if he did not intend to marry. Therefore, we need not inquire as to his personal views or plans in order to conclude that his ruling ought to be vacated on account of his particular conflict of interest.

I would add, moreover, a criterion to Amar’s test for a personal conflict of interest in order to better counter the squalid slippery slope argument. Specifically, it is significant whether the benefit is to the person himself (or herself) or to a person or organization related to the person. To be sure, even having a relative or friend standing to benefit can be sufficient to give rise to a personal conflict of interest.

Indeed, on the very day of the recusal hearing on Judge Walker, the U.S. Supreme Court handed down a unanimous decision that state ethics rules that bar public officials from voting on matters because of a conflict of interest do not violate free-speech rights because voting is not the representative’s speech, but, rather, “a mechanical function of government.” In my view, treating voting (or  money) as speech evinces a category mistake, so Scalia’s opinion for the Court is “spot on” in this regard. For our purpose here, it is significant that the ruling approved the disputed Nevada law, which prohibits officials from “voting on an issue when their judgment could be affected by a relationship to someone in their household, a relative, business partner, or a person ‘substantially similar’ to those specified.” That is, a personal conflict of interest is assumed to extend to benefits to people bearing a significant relation to the person in the conflict.

The vagueness in the “substantially similar,” which was left to the state court to evaluate, may evince the possibility of a slippery slope in extending beyond benefit to the person himself. That is to say, extending the personal conflict of interest to include other people standing to benefit introduces a problem not present in a specific and imminent benefit to the person himself. Therefore, I contend that “benefit to the person” should be added to Amar’s criteria of specificity and temporality, with “benefit to others in a significant relation to said person” being added too, though secondarily and with receding importance as per the significance of the relation.

Even aside from the vague language, no clear boundary line exists between “significant” and “insignificant.” Nevada would have done better in using “significant relation to” and cited examples such as relative, friend, and business associate. Furthermore, a specific and imminent benefit to oneself can be localized, whereas one’s affinities to other people and organizations can be wide-open. Generally speaking, the bigger or broader the group/organization, the less an individual is apt to be invested in a benefit to it. For this reason, and because benefits to others are not as motivating as benefits to oneself (given the salience of self in self-interest, and self-interest in turn in human motivation), a distinction between “benefit to others” and “benefit to self” can and should be made in reference to personal conflicts of interest. To be sure, both are worthy of note in terms of personal conflicts of interest, but “benefit to self” ought not be held back due to problems associated with invoking “benefit to others.”

Therefore, in cases in which the person in a personal conflict of interest stands to benefit in a specific and imminent way, the slippery slope argument that can apply to “benefit to others” should not be invoked. In other words, “benefit to the person” should be added to Amar’s criteria, while “benefit to others” should be tailored so as to obviate any such slope and applied differentially depending on the degree of significance in the relation. Cases in which a spouse or close relative stands to benefit would come after “benefit to self” in importance, followed by cases involving friends and business associates. Similarly, a hierarchy can be established based on organizational affinities. For instance, a Republican would have more interest in a benefit to the Republican Party than to a more general organization such as the United Nations. My point is that discerning degrees of significance need not detract from the applicability of the “benefit to the person” criterion, or even from the secondary “benefit to others.”

Judge Walker himself stood to gain something specific and imminent that could reasonably be expected to benefit him even if he didn’t desire it at the time of the case on Proposition Eight. His standing to benefit is of more importance than had a significant relation to him, such as a gay son or daughter, stood to benefit. That is, he had a material vested interest in the ruling sufficient for him to have recused himself, given a judge’s deontological (duty-based) interest (i.e., responsibility) in being impartial—including having the appearance thereof. The latter is particularly important given the importance of legitimacy in judicial rulings (courts not having their own police force to enforce their rulings). Therefore, I contend that Vaughn Walker should have recused himself and that the Prop 8 advocates have a case in having his ruling vacated on the grounds of a conflict of interest particular to him.

Lest it be suggested that Walker should merely have made his conflict of interest known before the case, merely announcing a conflict of interest is not sufficient to nullify its force or appearance. Better than knowing that a judge has a personal conflict of interest, another can be assigned without such a conflict. As there are presumably other federal judges in California, the conflict of interest could have been easily obviated. That it was not tells me that we as a society discount the problems inherent in the conflict of interest phenomenon.

I suspect that we do not realize sufficiently the ethical problems that conflicts of interest can cause. Even if people do not always act unethically when in a personal conflict of interest, I contend that such conflicts are inherently unethical. Society seems not to agree. As a result, we do not do enough to avoid or otherwise deconstruct them. We believe that somehow such conflicts do not really matter, or that they lose their power if they are made transparent. In other words, we are a bit too naïve for our own good, and then we are surprised when someone in a conflict of interest acts unethically.

Click to add a question or comment (as well as to view the substantial comments already posted) on the judicial personal conflict of interest in regard to Proposition 8 in California.


The Associated Press, “Gay Judge Targeted for Same-Sex Marriage Ruling,” msnbc.com, June 13, 2011.

The Associated Press, “Judicial Bias Is Alleged in a Ruling on Marriage,” The New York Times, June 14, 2011.

Joan Biskupic, "High Court Says Ethics Rules Don't Violate Speech," USA Today, June 14, 2011.

Lisa Leff, “Gay Judge’s Same-Sex Marriage Ruling Upheld,” Associated Press, June 14, 2011.