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Saturday, January 28, 2012

A Future of Regulators at Fault?

The typical case in the U.S. is that the industry being regulated resists being regulated, while the regulators insist on enforcing the regulations. To be sure, particularly strong firms in an industry may propose incremental regulations for strategic advantage—knowing that smaller or less profitable firms in the industry would have more trouble complying financially. The strategic use of regulation is an under-appreciated phenomenon in the de-regulation movement. Perhaps even more bizarre is the case of an industry complaining about lax enforcement of existing regulations and demanding even more. What industry might fit this bill? As a hint, look for a major scandal that did reputational harm to an industry.

In the industry, the firms’ calls for a crackdown must contend with a legacy of a light regulatory touch.” People in the industry question whether regulators have been “too gentle” on the firms. If a firm “runs afoul of the rules, regulators largely rely on the firms to report their own wrongdoing.” It sounds like Andy Taylor’s jail in Mayberry—the keys are hanging on the wall, help yourself Otis (he was the drunk). From 1996-2011, regulators penalized only ten firms, letting scores of others off the hook “because [the] regulators deemed their violations accidental.” The sounds like the work of Andy’s deputy, Barney—find the loot only to lose the criminal.

I am describing the futures industry, whose firms, “ordinarily loath to accept regulation,” decided in the wake of MF Global’s collapse and loss of $1.2 billion of customer money to spearhead efforts for “new oversight as they try to heal the black eye.” In its article, the New York Times describes the existing regulations as nearly non-existent. For example, “firms need not inform customers of the whereabouts of their money.” It is no wonder that prospective customers would be hesitant to enter that arena—hence the firms’ financial interest in additional regulations. The question is perhaps why the regulators had not recommended any to Congress.

Without the usual vested interests thwarting prospective regulations bearing on themselves while Congress stands by and takes the contributions, any additional regulations “spearheaded” by the industry can be expected to be enacted. The question, I suppose, is whether the regulators will feel like enforcing them. With no headwind from the industry, lax enforcement would be an interesting nut to crack. Could it be that regulators exist who don’t believe regulations are very important? Such a mentality would be the opposite of public service—something like agnosticism in religion, only as held by clerics. Such a thing simply is not expected, hence it is worth investigating.

The most likely explanation is that the regulatory agency was “captured” by its industry, and ultimately it was in the interest of the industry itself to come up with something stronger. If so, might it be that once the new regulations are up and running, particular firms or the industry as a whole might want to capture the agency again? Even in following the industry’s “spearheading,” the agency is essentially “captured.” Is it the case in the American system more generally, that agencies are captured by their regulatees whether in increasing or decreasing enforcement? In other words, might the business and financial sectors be too powerful over government for their own good—like children telling their parents when to discipline them and when to let them get away with something?  The sectors—and in particular their largest firms—may be too powerful for a viable republic: TBTG, meaning too big to govern. TBTF might not be the biggest elephant in the living room after all.

Ben Protess and Azam Ahmed, “Insiders Call For Oversight of Futures,” The New York Times, January 26, 2012. http://dealbook.nytimes.com/2012/01/25/futures-industry-sees-chance-to-shape-oversight/

Wednesday, January 25, 2012

Reining in Corporate Pay: Europe as a Model of Fairness for America

Corporate compensation—executive pay in particular—represents a “clear market failure,” so said Vince Cable, the business secretary in the E.U. state of Britain. While suspected, the sheer explicitness, or blatant manner, of this verdict is itself noteworthy. Moreover, it stands as an opportunity for the E.U. to surpass the U.S. on economic fairness, which is a type of justice (see John Rawls). That is to say, Europe had an opportunity at the time of Cable’s statement to set the E.U. on a trajectory that would make the unfairness in the American system more transparent.

The business secretary, a Liberal Democrat in a coalition government with the Conservative Party, told the British House of Commons in January 2012 that business and investors “recognize that there is a disconnect between top pay and company performance and that something must be done.” In New York at the time, the disconnect was generally taken as a fact of life, given the power of the managerial elite in corporate capitalism (as well as American legislatures). As if attempting to pop this stygian balloon filled with the noxious air of denial, Vince Cable continued, “We cannot continue to see chief executives’ pay rising at 13 percent a year while the performance of companies on the stock exchange languishes well behind . . . (a)nd we can’t accept top pay rising at five times the rate of average workers’ pay as it did [in 2010].” The unfairness, in other words, is at the expense of not just the corporation’s owners, but also the (other) employees—executives being employees too.

It could be argued that the 13% annual increases in executive pay are a function of an increasing proportion of company stock options in the compensation. If the profits are languishing, the theory goes, the value of the options should be zero (i.e., unexecuted). However, what if the next group of executives, or even the economy over all, “performs” such that the options held by the previous executives then become valuable? Moreover, what do options cost non-management stockholders in terms of dilution? I suspect that options are “an easy way out” relative to cash compensation. The question is thus whether the practice can be reined in.

Under Vincent Cable’s proposals, shareholder votes on executive pay would be binding. Seventy-five percent, rather than a mere majority, would be needed for approval. I have never understood why the American states limit such votes to “non-binding,” as if the business judgment rule trumps property rights on compensation. Given that CEOs typically control their boards, whose job it is to oversee the executives for the stockholders, treating the property owners of the corporate wealth as if they were a focus group or a meaningless straw poll in Iowa seems misguided at best—and supportive of an institutional conflict of interest centered on the executives. To be sure, the suggestion made by Chuka Umunna, Vincent Cable’s counterpart in the Labour Party, to have employees as part of executive compensation committees also incurs a conflict of interest—one centered on the employees who have an interest in wanting “payback” for the decades of unfair compensation. Conflicts of interest can work both ways—inflating and deflating deserved compensation.

My main point is the following: Were Europe to strengthen investors’ property rights—including disallowing proxies held by managements for such votes on account of the conflict of interest—the fault running through American political economies and civil societies would become more transparent (i.e., more obvious). “We have  been clear that executive pay must always be fair and transparent, and that high pay must be for outstanding, not mediocre, performance,” John Criby of the Confederation of British Industry—a business lobby group—said. “Millions [of pounds] for mediocrity does a disservice to the reputations of hard-working businesses.” Indeed, it does a disservice to the society as a whole—particularly in terms of what it stands for. Can you imagine the U.S. Chamber of Commerce coming up with such a statement? It is a pity, particularly in terms of systemic risk, that a lack of enlightened self-interest in the vested interests on such a “clear market failure” exists in America. For this reason, “Europe as a Model” is not such a bad thing, certain rhetoric (of the usual suspects) to the contrary.

In Vermont and Wisconsin at the time of Vincent Cable’s speech in Britain, movements were underway to amend the respective constitutions (as well as that of the U.S.) to make it clear that corporations are not “legal persons.” I believe it would follow that money is not speech, though the amendments ought to make this explicit, given the tendency of justices to invent legal doctrines and the sway of money in legislative halls. Polls at the time showed 71% of the people across the United States were opposed to the Citizens United (unlimited corporate political contributions) decision of the U.S. Supreme Court two years before (almost to the day). Lest those movements get cocky, their leaders should be aware that huge corporate “war chests” used to buy politicians, commentators, and air time may mean that even such a supermajority’s popular will may not be sufficient. If so, it is unlikely that anything like Vincent Cable’s proposals would see the light of day in America. Accordingly, I have pointed out here the value in merely having an alternative displayed in Europe, even if the benefit is limited to wakening Americans up to the grip of corporate capitalism in American societies.

Julia Werdigier, “British Government Works to Rein in Corporate Pay,” The New York Times, January 23, 2012. http://dealbook.nytimes.com/2012/01/23/british-government-looks-to-rein-in-executive-pay/

The European Debt Crisis: Europe's Leaders in Pictures

                                          Can you identify the narrative in the video?

Tuesday, January 24, 2012

Free Speech in Europe: Criminalizing Denials of Genocides

While the world continued to look on—like an impotent rich man who cannot afford Viagra—as a genocide was taking place in Syria (i.e., the systemic killing of a group—in this case, of pro-democracy demonstrators), France’s state senate approved a bill on January 23, 2012 criminalizing the denial of officially recognized genocides, which according to the state includes the Nazi Holocaust and the Turkish killing of Armenians beginning in 1915. In the twenty-first century, fining people and putting them in prison for not wanting to remember things so horrible evinces the same kind of nationalist thinking that had led the twentieth to be the bloodiest century. In contradistinction to that decadent century, turning a new leaf following the Arab spring in the twenty-first is a far better strategy.

Beyond the obvious matter of free speech, which admittedly is not absolute even in America, it should be asked whether law is an efficacious means of barring or changing thoughts. On the day of the vote, a study was released at the Bundestag in Berlin reporting that twenty percent of that state’s population was still anti-sematic. I don’t believe penalizing that prejudice itself (i.e., as a belief apart from any conduct) by the state’s police power forces any change at that level. At most, people would simply hide it—and how would such repression burst out in conduct? I submit it would be better simply to ignore the thoughts and concentrate on conduct.

Europe has had a tendency to codify thoughts as if they belong to the state. In America, that realm is province of the “thought police” that sprang up (as self-appointed) during the 1990s as “political correctness.”  At least with political correctness (such as in saying humankind rather than mankind, and Native American rather than American Indian), the self-appointed enforcer can be told to go to hell. The natural reaction to being accosted in such a presumptuous and pernicious way is to say precisely that which is not desired by the aggressor. Adding the police power of the state to enforce certain beliefs by penalizing others is dangerous not only for society itself, but also for individuals in terms of our quality of life free from anxiety. The over-reaching may even be immoral; it is certainly weakness.

A person may be able to control one’s own conduct more than one’s ideas or beliefs. Besides the futility of law in going after a person’s interior mental life, that domain is inherently beyond the unwanted control of another person. The French law would include up to a year in prison and a fine of about $58,000 for anyone who denies an officially-recognized genocide. Is the reach of the law limited to public speeches or published writings, or are people of France to feel anxious at private parties in their own home? In terms of general anxiety, the law could cost the state’s entire population. Is effectively adding the Turkish killings nearly a century before to the German Holocaust worth this in France? It is not as if that E.U. state borders Turkey.

Therefore, behind the 127 to 86 vote is a rather basic category mistake with respect to jurisprudence. Taking the law beyond its native domain to enforce one’s agenda using the police power of the state undercuts law itself, and thus contributes to the downfall of its legitimacy, even in its proper realm. In other words, in over-reaching, a government can wind up with even less influence over its people through even criminal law.

Additionally, a refusal to respect another’s inalienable right to have certain ideas or beliefs is to treat the rational nature (i.e., thoughts or beliefs) itself as merely a means to one’s own designs, rather than as an end in itself. According to Kant, this is immoral because of the value that is rightfully in reason because it is the assigner of value and thus has absolute value. Treating that which has essentially undefined value (as the source thereof) as having value only in so far as it fits with one’s own ideas or beliefs is wrong.

Might it be, Nietzsche would surely add, that modern moralizers are immoral rather than what we take ourselves to be? Who are the aggressors—les esprits méchants et perniceux? Might it be that human beings are far too presumptuous in what we think we know to venture into any other man’s head with impunity? Am I understood? This medicine is not meant for the weak, Nietzsche warns, who nonetheless have an uncontrollable urge to dominate. These new birds of prey are not entitled to dominate, and yet they somehow convince the strong—through thou shalt not—to be ashamed of those thoughts come out of their innate, self-confident strength. Be ashamed of who you are. The strong self-overcome their most willful instincts in order to experience the pleasure of power that naturally goes with their strength. The weak who seek to dominate, on the other hand, are driven by their instinct to overcome the resistance of others by passive aggression (owing to the weakness of the instinct, which they can’t seem to resist anyway) and cruelty (including genocides). Hitler was weak, but so too is the presumption to punish others for their beliefs in retaliation. Birds of a feather, these new birds of prey most certainly are. It is amazing they can even fly.

“By aiming at more [in pride],” Augustine proclaims in City of God (bk 14, ch.13), “a man is diminished.” Pride, by the way, is not self-confident strength, for self-overcoming is blocked by self-idolatry. Perhaps expressing the belief in over-reaching, which is an idea of the immoral and weak, should itself be punishable by a year in prison. This would probably only strengthen the belief, which in turn would weaken the believer even as he or she presumes to be more moral as a self-denying martyr. Lest the advocates of victims become ourselves victimizers (e.g., the Crusaders), it is a good policy for a general population to keep an eye on us too, for we can get quite carried away as moral zealots without realizing how we are affecting others (i.e., rational nature of others). That there have been (and will be) victims of horrible things in the world, does not give anyone the right to punish others for their thoughts or beliefs, for such intangibles are our inner castles, not to be treated like sand by pushy waves.

Fortunately, good sense prevailed and the French Constitutional Council struck down the law that would have criminalized the denial of the Armenian genocide by the Ottoman Turks. “We consider the annulment of the legislation by the Constitutional Council as a step that complies with the principles of freedom of expression and research, the rule of law and international law in France,” the Turkish Foreign Ministry said after the Council’s decision. This statement is ironic, given that the accession of Turkey into the E.U. had been held up in part out of concern in Europe that Turkey was not yet sufficiently ensconced in Western values. Perhaps it should have been asked whether France should be a state of the E.U.

Scott Sayare and Sebnem Arsu, “Genocide Bill Angers Turks as It Passes in France,” The New York Times, January 23, 2012. http://www.nytimes.com/2012/01/24/world/europe/french-senate-passes-genocide-bill-angering-turks.html

Scott Sayare, “French Council Strikes Down Bill on Armenian Genocide Denial,” The New York Times, February 29, 2012. http://www.nytimes.com/2012/02/29/world/europe/french-bill-on-armenian-genocide-is-struck-down.html

Monday, January 23, 2012

Extrapolating from the Arab Spring to CSR

Richard Branson, founder of Virgin Atlantic and a myriad of other companies, sees a natural extension or follow-through from the pro-democracy protests in the Middle East and North Africa to more corporate social responsibility. As much as I would like to think that the twenty-first century proffers a new world, I think we have to acknowledge the weight of the political, economic and social strictures that we have uncritically inherited.

According to USA Today, “Branson says it took him seven years to realize businesses are part of the problem as they focus narrowly on profit and exhaust natural resources. Now, he believes the world has changed in the last several months, with revolutions in the Middle East, the earthquake and tsunami in Japan, riots in London, famine in East Africa, and debt crises around the world. He quotes the band REM: "It's the end of the world as we know it … and I feel fine." Seven years? Branson has been thinking on all cylinders. Even if businesses are not part of the problem, the default of business is to make profit by turning resources into products to be consumed. This is the raison d’etre (i.e., the reason for being) of the modern corporation. Viewing its inherent function, as per its design, as part of “the problem” may simply be due to the sheer magnitude of a large corporation’s operations. In other words, a large foot is apt to leave a large footprint.

Moreover, changes in government, protests, natural disasters and a systemic overreliance on debt-financing by governments do not necessarily mean the end of the world as we know it. I wish this were so, but people in power have a nasty habit of retaining it, even if under subterfuges if necessary. For example, the military rule in Egypt at least as of the beginning of 2012 may put the “revolution” in 2011 in perspective. That is to say, the old guys are still in charge, so how much of a revolution was it? Furthermore, it would be naïve to believe that the corrupt relationship between business and government in Japan has been expunged by the post-tsunami clean-up. It is doubtful, for example, that TEPCO has been born-again as if baptised by the tsunami.

The larger point Branson is making in his statement is that corporations will no longer be part of the problem because the world as we know it is no more. He cites several instances of corporate social responsibility to make his point. However, the business of business is still to make money, and much of CSR is still essentially marketing writ large. Without changing the design in corporate law, it is foolhardy to believe in a brave new world of corporate capitalism. It is at the very least a stretch to assume that pro-democracy protests or changes in government will somehow convince business executives to engage in CSR. Even in terms of corporate or “stakeholder” democracy, the linkage is tenuous because the expectation that governments should be democratic does not extend to corporations because the two are typically viewed as different domains. So to Branson, I would say, nice job with your companies and even on CSR, but let’s not get carried away on some jet to nirvana. As much as we would like to see the world remade rather than carrying on with baggage from the twentieth-century, we would get further toward this goal by keeping our legs on the ground.

Kathryn Caravan, “Branson’s ‘Screw Business As Usual’ Has High Points,” USA Today, January 23, 2012. http://www.usatoday.com/money/books/reviews/story/2012-01-22/richard-branson-screw-business-as-usual-book/52745386/1

Sunday, January 22, 2012

Credit Downgrades in the E.U.: Blaming the Messenger?

On January 13, 2012, “S&P stripped France and Austria of their prized triple-A credit ratings and reduced the ratings of seven other [states in the euro-zone], including Italy, Spain and Portugal. Germany, Finland, the Netherlands and Luxembourg were spared, along with Belgium, Estonia and Ireland,” according to the Wall Street Journal. Italy was downgraded from single-A to triple-B-plus. "We think there are elements missing in their analysis … when it comes to the growth strategy … there is no space for maneuver for fiscal impetus but we believe that a growth strategy will have to rely mainly on structural reforms," Olivier Bailly, an E.U. Government spokesman, told reporters. The Journal also reports, “Bailly also called the timing of the S&P decisions ‘very odd’ citing fiscal policies adopted to weather the crisis in the downgraded countries as well as the two successful debt auctions in Spain and Italy last week. ‘We think that there is a strange timing in this announcement considering the signals from the markets,’ Mr. Bailly said.” The “very odd” and “strange timing” reference a tacit political motive behind S&P, which the European officials point out is an American company.

The Finance Minister from the state of Germany, Wolfgang Schäuble, “sharpened his tone” toward credit-rating firms in the wake of Standard & Poor's sweeping euro-zone downgrade, questioning its rationale and impartiality and predicting a fresh political offensive to reduce their clout. The Wall Street Journal continues, “Schäuble suggested the downgrade was motivated by political and business interests, accusing the agencies of competing for attention. S&P expressed reservations about the predictability and effectiveness of European political efforts to contain the region's chronic debt crisis.” In short, he claimed that the American rating agency wasn’t giving Europe enough credit. "We know that there is uncertainty about the euro zone," he said. "I don't think that S&P really has understood what we have already accomplished in Europe."

Similarly, the incoming President of the European Parliament—an office roughly equivalent to the Speaker of the House in the American Congress—railed against the credit agency in his opening speech. Even though this strategy earned him some easy political capital in Europe, it could ultimately undercut his credibility. Moreover, political biases may have been a part of the European reaction rather than S&P’s credit downgrade of some E.U. states (as well as lowering the rating of the E.U.’s bailout facility a notch to AA).

On January 16th, the Wall Street Journal reported that French leaders “assailed the S&P” for focusing on France and letting the U.K., which retained a top rating even though its deficit was one of the highest in Europe at the time, off the hook. Questioned about that, Moritz Kraemer, an S&P managing director in Europe, “cited as factors in the U.K.'s favor its independent central bank and the government's ambitious deficit reduction plan.” Rather than S&P having been motivated by politics, the assailing could be a case of European sibling rivalry, or jealousy, obscuring the Europeans’ own perception of S&P’s downgrades. Indeed, the “facts on the ground” in Europe were not so bright that S&P could realistically be accused of being out of touch or politically motivated.

For example, on the same day as the Journal’s article, the New York Times reported that reforms were “flagging” in Greece amid unproductive negotiations between Greece and its creditors. Indeed, talks had broken off two days before S&P’s action. The E.U. and Greece were pushing for private bond-holders to take a 50% loss in exchanging their bonds and agree to a lower interest rate (3-4%). Greece had the option of forcing the terms by subjecting the existing bonds to collective bargaining, while bond-holders, including hedge funds, could sue Greece based on sanctity of contract, and, if unsuccessful, even take the case to the European Court of Human Rights—property rights being considered a human right in the Europe. However, were such a right to apply to the speculators who bought Greek bonds at 40% of their value, the application of right could be questioned by a court. Moreover, if such bondholders were exploiting Greece’s financial bind for a quick profit, it stands to reason that the European people and their representatives would have little sympathy for the rights of Greek bond-holders. Do the property rights of private parties dwarf measures by a government to forestall default on semi-sovereign debt (Greece being semi-sovereign as an E.U. state)?  Were the bondholders unaware of Greece’s fiscal condition when they purchased the bonds? It seems to me that the public good as represented by the government (both of the E.U. and Greece) trumps private financial interests when the currency, financial system, and economy hang in the balance.

After collapsing, the talks did resume in hopes of avoiding “the sort of uncontrolled default that many experts fear could threaten the global financial system.” The negotiators were not out of the woods by any means, for the talks soon stalled again. According to the New York Times, if Athens cannot “secure concessions from the bondholders or the bailout money it needs,” (E.U. leaders were saying the next payment of 30 billion euros was contingent on an agreement), “Greece could default by March 20, when 14.5 billion euros in debt comes due and must be repaid.” With this as a rather pressing risk, plus the projection that even if the private bondholders were to agree to Greece’s terms, the state’s debt as a percent of its GDP would still stand at 120% rather than 140% in 2020, S&P may actually have been overly optimistic on its downgrades in Europe. The uncertainty alone could be expected to destabilize the state as well as the entire E.U. financially.

A week or so after one senior executive of Goldman Sachs in London dismissed the prospect of Greece dropping the euro, Ken Rogoff of Harvard and the IMF said it would be “unwise and preposterous” to think that “no one would drop out of the euro, or that the euro’s troubles are over.” The New York Times adds that with “Greece on the brink of a default, a number of business leaders, economists and policy makers predicted that a breakup of the euro zone was still in the cards, beginning with the exit of Greece and possibly moving toward other weak [states] like Portugal.” George Soros “even said that Greece might well be pushed out of the euro zone [in 2012].” The diametrical opposition of the two views expressed in the New York Times on January 26th must have been worrying to investors well beyond those who held Greek bonds. Back on January 17, 2012, the paper had reported that the “specter of a disorderly default, rather than the voluntary losses [that were] being negotiated [at the time], unnerved stock markets around the world [the previous fall] and could prompt renewed selling [during the negotiations].” The chance that Greece could actually default and set in motion a chain reaction would surely have magnified the impact of the divergence of opinion on the matter. How could S&P be expected to ignore the risk in all this?

Claiming instead that business leaders were not recognizing the progress in Europe (particularly in Ireland and Spain, according to Angela Merkel of the state of Germany), European officials in general sought to reduce the market’s reliance on decisions made by rating firms altogether. "We want to 'downgrade' the reliance of EU financial institutions on credit agencies," Bailly said, adding that "the general aim here is to not depend on credit-ratings agencies' analysis and if we had that, we would have had a different reaction [to the downgrades] from financial institutions on Friday [January 13th]." The problem is, the reaction could have been worse. Creating a non-profit European rating agency would not alter this, unless such an organization, unlike S&P, were subject to political pressures. The officials’ protests notwithstanding, perhaps such a rating agency is precisely what the European “leaders” wanted.

Even in speculating on Van Rompuy’s stated objective that the E.U.’s enforcement mechanism on state deficit and debt limits would be approved in a few months and operational in six, one could easily waiver in having faith in the venture, even from Van Rompuy’s description of the strengthening of enforcement as a “fiscal compact.” He might as well have admitted that it had the force of a straw man in the midst of a Kansas storm. Schäuble didn’t exactly encourage confidence by saying that the E.U. was not even political. Private capital tends to run for the hills in the face of such denial. Therefore, the salience of the rating agencies was not Europe’s problem at the time. Rather than trying to discredit the messenger of credit, E.U. and state officials would have been wiser in concentrating on the threats to “ever closer union”—namely, themselves.


Christopher Emsden, Matina Stevis, and Bernd Radowitz, “E.U. Leaders Focus on ‘Progress’,” The Wall Street Journal, January 16, 2012. http://online.wsj.com/article/SB10001424052970204468004577164420401608382.html

Rachel Donadio and Niki Kitsantonis, “As Reforms Flag in Greece, Europe Aims to Limit Damage,” The New York Times, January 16, 2012. http://www.nytimes.com/2012/01/16/world/europe/europe-now-doubts-that-greece-can-embrace-reform.html

Nelson Schwartz, “Euro Woes Could Revive Bout of Market Volatility,” The New York Times, January 17, 2012. http://www.nytimes.com/2012/01/17/business/global/euro-woes-could-revive-bout-of-market-volatility.html

Landon Thomas, “Hedge Funds May Sue Greece If It Tries to Force Loss,” The New York Times, January 19, 2012. http://www.nytimes.com/2012/01/19/business/global/hedge-funds-may-sue-greece-if-it-tries-to-force-loss.html

Jack Ewing and Liz Alderman, “German Chancellor, Citing Europe’s Progress, Asks for Patience,” The New York Times, January 26, 2012. http://www.nytimes.com/2012/01/26/business/global/merkel-pleads-for-patience-to-let-europe-solve-its-problems.html