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Friday, May 25, 2012

Eurobonds for Stimulus Spending

Meeting on May 23, 2012, the E.U.’s European Council failed to come up with a plan to offset the recessionary aspect of Greece’s budget cuts. The pressure was on; the OECD had just warned that the E.U. go back into recession. Interest rates on state debt-namely that of Spain—had reached an unsustainable level the week before due to concern regarding banks based in the state. Besides the debt and banking vulnerabilities at the state level, the E.U. itself was struggling with its political weakness, which can be attributed to the states’ rights (or euro-skeptic) ideology that was not exactly going away in the context of the debt-contagion that had prompted the establishment of a permanent E.U. bailout fund for states in over their heads on debt. In this context, the European Council was at the intersection of debt, banking and political problems.

First off, we need to disabuse ourselves of some of the linguistic games that dissemble and obscure matters. The euro is not a “currency union,” as the New York Times claims. The E.U. is a union, whereas the euro is a currency. Seventeen of the twenty-seven states of the union use the currency. Accordingly, were the state of Greece to stop using the currency, the term “secession” would not apply. One does not secede from a currency. The use of such terms is so out of place that one cannot help but wonder whether there is an ulterior agenda pushing the usage. For instance, David Cameron of the state of Britain referred to the E.U. as merely one of the networks to which Britain belongs. In this view, I suppose the euro is another network. Even so, it does not make sense to say that a state can secede from a network, for secession applies to states leaving unions. It would seem that the euro-skeptic ideology had become twisted up like a pretzel.

In the early U.S., the states maintained their own currencies. When the dollar was established as the currency for all of the states, whether the debt of the states (from the revolutionary war) should be converted into debt commonly-held by the states at the U.S. level. The decision was reached that the various debts would be assumed even though doing so essentially penalized states that had done comparatively well in managing their debt. I heard chords from that debate taking place in the E.U. over two hundred years later as some of that union’s states teetered on the brink of default. On the table was the issue of whether Eurobonds should be issued. In addition to each state raising money by issuing its own bonds, each state would put at least some of its debt into a common pool. These pooled bonks would be issued by a debt agency at the E.U. level, with all of the states that use the euro essentially sharing responsibility for repayment.

At the time of the European Council’s meeting, such “collectivized debt” was not allowed by the union’s basic law. Were it constitutional, such as if an amendment were proposed and ratified, state law and constitutions would have to give way to the new E.U. competency, according the European Court of Justice. Like the U.S., the E.U. has a supremacy clause—albeit through court decisions (in 1963 and 1964) rather than as an amendment unanimously passed by the states. Unlike the U.S., the E.U. requires unanimity on the ratification by the states of a proposed amendment. Even though qualified majority voting (QMV) means that the states had become semi-sovereign (like their sisters in the U.S.), the unanimity still required for amendments means that one state could enforce its interest at the expense of the whole.

Even though the OECD and the IMF were in favor of the E.U. issuing Eurobonds to (and by) states using the euro, the state of Germany could singlehandedly stop any proposed amendment simply because the German interest opposes it. To Germany (as well as Finland and the Netherlands), issuing Eurobonds “would be a lot like co-signing a loan for a deadbeat brother-in-law.” The question is whether the states that are comparatively well-off should be able to trump any proposed E.U. amendment that is not in their short term financial interest.

It should be noted that a conflict of interest exists should a state with a relatively good credit rating veto the issuance of federal bonds. The state’s officials may willingly ignore the good of the whole (i.e., the E.U. economy) out of fear that the “jointly issued” Eurobonds would effectively enable other states to tap the state’s creditworthiness rather than face up to their own wasteful public patronage systems and corruption. Thomas Steffen, a deputy finance minister in Berlin, remarked regarding Eurobonds, “It is clear who wants what from whom.” In other words, “A lot of people want something from us.” This rather provincial attitude could trump the common good of the E.U. (or its “Eurozone”).

To be sure, the combined debt of the E.U. states using the euro was 87% of the GNP of that part of the E.U., whereas U.S. debt (federal and state) was above 100% of the GNP (the Eurozone of the E.U. and the fifty U.S. states having roughly comparable populations…330 million and 310 million, respectively). It could therefore be argued that the E.U. economy was sufficient to handle even a Greek default. Furthermore, German officials have raised the legitimate point that euro bonds could essentially federalize Europe's over-reliance on debt. The U.S.'s own $16 trillion in federal debt was doubtless a baleful sign of where federal debt could lead.

Additionally, according to the New York Times, for Eurobonds to get the sort of low interest rate that U.S. Treasuries did at the time, the “commonly-issued” Eurobonds would still need to be backed by a central treasury, or at least an agency with direct access to tax revenue from each state. Such talk has some “experts” going over the top, suggesting that such a change could lead to “political union” (i.e., as if the E.U. were at the time merely a network that just happened to have a parliament, two presidents, an executive branch, and a supreme court). Such is precisely the kind of talk that keeps the E.U. mired in fearful paralysis. The change that would be necessary for Eurobonds is merely incremental, the E.U. already having achieved some governmental sovereignty.

Of course, it could be that Eurobonds could be avoided by the use of alternative devises to help Greece. Specifically, the New York Times reports that less controversial measures than Eurobonds, such as increased funding for the European Investment Bank, the repurchasing of existing European structural funds, and even “project bonds” issued by the ECB could be used. The last option would seem to violate the E.U.’s own prohibition of collectively-issued bonds, though perhaps there is an exception in the fine print for project-specific funding. Even so, the use of such “project bonds” to stimulate a state’s economy would likely result in a case before the European Court of Justice (likely with the German state government as the plaintiff).

Even if the need for Eurobonds could be obviated, implicit in Steffen’s outlook is a lack of concern for the good of the whole—meaning the overall economy of the European Union (and especially in the regions of the union where the euro is used). In a federal union (and generally), the good of the whole should not be held ransom to the good of each part. In other words, the immediate interest of a part should not be allowed to paralyze the whole from being able to make answer to problems that threaten the viability of the whole. The inordinate power of state governments at the federal level can thus be seen to be problematic for the good of Europe. Also problematic was the apparent lack of acknowledgement that being in a union means that your state’s interest is no longer necessarily primary because there is a greater good that should not succumb to such a partial good.

Thanks to the efforts of state officials to maintain the ability of each state to veto a proposed E.U. amendment, the E.U.’s enumerated domains of authority (i.e., competencies) were insufficient at the time of the debt crisis to support a common currency (i.e., the euro). The lack of competency to issue Eurobonds translated into a lack of authority to fund and direct stimulus spending to Greece in over that that state might stave off more severe recession and thus probably default (which would harm German banks). Part of the problem of a part being allowed to trump the collective good of the whole is that the part could wind up getting stung by its own veto. In other words, it could be a case of “be careful of what you wish for—you might just get it!”

For Germany, getting what it wanted (before the Greek election in May 2012) meant a future of more budget cuts in other E.U. states (e.g., Greece) triggering recession in them. Given the absence of any counter-balancing stimulus spending, the resulting austerity-induced recession could make default more likely not only because of the increased debt needed to finance rising entitlement payments, but also because the political reaction in the state to the “austerity-only” approach could result in the state being cut off from the existing bailout funds because the deal is off on the austerity itself. Both politically and economically, the problem facing the E.U. and its states has been a lack of balance. As the New York Times put it, the talk of Eurobonds “inevitably raises fundamental questions about the nature of the European Union.” The imbalance therein suggests that the Europeans have been dodging such questions rather than facing them straight-on.


Nicholas Kulish and Paul Geitner, “Euro Zone Crisis Boils as Leaders Fail to Signal New Steps,” The New York Times, May 23, 2012. http://www.nytimes.com/2012/05/24/world/europe/euro-crisis-intensifies-as-leaders-bicker.html?pagewanted=1

Jack Ewing, “Facing a Teetering Greece, Europe Plans for the Worst,” The New York Times, May 24, 2012. http://www.nytimes.com/2012/05/25/world/europe/risk-of-greek-euro-exit-has-europe-making-plans.html?ref=world

Jack Ewing and Paul Geitner, “As Euro Bond Wins Supporters, Details Remain Vague,” The New York Times, May 27, 2012. http://www.nytimes.com/2012/05/28/business/global/in-euro-zone-a-debate-over-bonds.html?pagewanted=1&ref=business

Tuesday, May 22, 2012

Facebook’s IPO: Morgan Stanley’s Conflict of Interest

Morgan Stanley’s underwriting of Facebook’s IPO has been thought by some of the bank’s rivals to be incompetently managed.  According to the New York Times, “(r)ival bankers and big investors have complained that Morgan Stanley botched the I.P.O., setting the price too high and selling too many shares to the public.” Interestingly, the incompetence is positively correlated with unethical policy decisions at the bank. Even as the bankers as underwriters were eager to sell lots of shares, they may have given some of their institutional customers—albeit only the most preferred, as per the bank’s other services—some privileged information. If this charge is true, the conflict of interest at the bank should be closely examined by Congress and any relevant regulators.

According to the New York Times, “(o)ne prospective investor was told that second-quarter revenue could be 5 percent lower than the bank’s earlier estimates. Another analyst warned that revenue could be light for the next two years. . . . While some big institutions chose not to buy the stock, others placed large orders. And retail investors, who weren’t necessarily privy to the same information, continued to clamor for shares.” As the IPO was underway, I was wondering why GM’s earlier announcement that the auto company was pulling out from advertising on Facebook (for insufficient resulting sales) was not being touted more as a red flag. On the following trading day, The Huffington Post was busy trying to get the attention of potential readers by calling a 10% drop from the issue price a “plummet” (actually the Post was using the IPO day’s high of $45 to come up with 25 percent—just to add to the dramatique flair in lieu of natural talent).

It turns out the “plummet” would have been far worse had Morgan Stanley shared its concerns more broadly. In other words, the irrational exuberance would have been far more tempered. In terms of Facebook’s actually ability to gain sustained revenue from advertising, I suspect that even the underwriter’s privileged customers overbought. Certainly this would be so of the unsuspecting buyers. At least some of Facebook's stockholders agree with me, as they filed suit accusing Facebook (and its CEO, Mark Zuckerberg) of concealing from investors during the IPO marketing process "a severe and pronounced reduction" in revenue growth forecasts, resulting from increased use of its app or website through mobile devices. This charge is similar to that  of the Bank of America stockholders who claimed that Ken Louis had hid massive holes in Merrill Lynch's real-estate-based portfolio in December 2008 before the stockholder vote on the merger. In New York, Facebook shareholders said research analysts at several underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were "selectively disclosed by defendants to certain preferred investors" rather than to the public generally. If this is true, the bank’s conflict of interest in seeing to its best customers’ interests at the expense of an IPO customer (i.e., Facebook) and the unsuspecting buyers ought to be of interest to regulators, including the SEC and the Federal Reserve.

Given the ability of Goldman Sachs to get away with knowingly selling “crap” to customers interested in subprime mortgage-based derivatives (CDOs) without much fallout from the market in terms of distrusting customers walking, it was unlikely that Morgan Stanley’s “less-preferred” customers would walk after learning that other customers had been informed of Facebook’s vulnerability on revenue. Furthermore, given the track-record of Congress and regulatory agencies in tolerating conflicts of interest in public accounting firms (e.g. Andersen at Enron) and rating agencies—the Dodd Frank Act looking the other way—it was unlikely that the innate conflict in an underwriter having other lines of business in banking would be disabled anytime soon after Facebook’s IPO. So it was unlikely that Congress or a regulator would specify that IPO underwriting firms be licensed to provide that and no other conflicting service to other clients

The large Wall Street banks would never limit themselves to one service. Nor would they agree to give underwriting up to specialized firms. In other words, the large banks on Wall Street would never agree to let their Congress funnel such a lucrative line away to other firms specializing in it. Wall Street is used to having its cake and eating it too; conflicts of interest are too much a way of life in the financial sector for any business to be given up to solve one such problem. Moreover, we as a society have a tremendous will to look the other way when it comes to institutional conflicts of interest, while jumping on individuals in businesses who exploit personal conflicts of interest. Perhaps for all our institutions, we don’t yet think institutionally when we think about business ethics. Our large companies, banks, and even regulators exploit our blind spot to our disadvantage and others’ private gain.


Evelyn Rusli and Michael De La Merced, “Facebook I.P.O. Raises Regulatory Concerns,” The New York Times, May 22, 2012. http://dealbook.nytimes.com/2012/05/22/facebook-i-p-o-raises-regulatory-concerns/?hp

Reuters, "Facebook, Mark Zuckerberg, Banks Sued Over IPO," The Huffington Post, May 23, 2012.

Wealth and Happiness American-Style

The Organization for Economic Co-operation and Development released an up-dated version of its Better Life Index in May 2012. The U.S. ranked first in income, with average household wealth at $102,000, as well as in housing (Americans spending about 20% of their disposable income on it—the OECD average being 22%). These figures for the U.S. could have been pushed upward by the fact that at the time, the very rich were richer than their counterparts in other countries, for the gap between rich and poor was relatively high in the U.S. For example, 30 million Americans were without health insurance and a record number of Americans were receiving a governmental subsidy for food. Rather than assume that the middle and lower economic segments in the U.S. were better off than their counterparts in other regions of the world, I suspect that the statistics reflect the higher relative pay of American executives and professionals (lawyers, physicians and CPAs). The typical CEO in the E.U., for example, made less than his or her counterpart in the U.S.  This caused trouble in the Chrysler-Daimler merger because the Chrysler executives enjoyed higher compensation even though Daimler was in charge.

Interestingly, the rank of the U.S. in life satisfaction was above average, with 76 percent of people reporting having more positive than negative experiences in an average day (the average in the OECD index being 72%). In other words, the gap between the rich and poor does not appear to have gotten in the way of life-satisfaction. Although economic reductionism is particularly salient in the U.S., such satisfaction does not reduce to dollars and cents. Even in economic terms, the large gap between the rich and poor includes geographic distance. For example, court-orders have had to be used to force some cities and towns to allow subsidized (low-income) housing. Meanwhile, it is not uncommon, particularly in Florida, for people with money to live in gated communities. With the rich out of sight, the poor are less likely to be aware of the economic inequality, which could otherwise put a damper on their life-satisfaction.

As a final observation, my reference to Florida suggests that the OECD should not generalize all of the American states into one figure. For example, life-satisfaction is likely to be higher in Hawaii than in Alabama or Michigan for climatic or economic reasons (or in North Dakota during the winter even considering the economic boom). Housing in New Hampshire is, in general, better than in Mississippi. Income in Connecticut is higher on average than in Arkansas. For states, whether in the U.S. or E.U., to be in a union is not to say that they are identical and thus readily grouped together. In other words, a general statistic in housing or income has less real meaning when applied over such a large area. It is like saying that the average temperature in the U.S. in 2011 was 56 degrees (I don’t know the real figure). It is unlikely that figure applies in any state—certainly not in Florida, Hawaii, Alaska, or Maine. The figure has no real meaning, other than relative to other such figures over time (e.g., to assess global warming). For the OECD to compare the U.S. as a whole to E.U. states such as Denmark, Belgium and Spain suggests that the organization is content to engage in category mistakes. If the figures are relevant on the state level, the OECD should be consistent rather than selectively over-generalize.


“OECD Launches Updated Version of Your Better Life Index,” OECD. http://www.oecd.org/document/52/0,3746,en_21571361_44315115_50407156_1_1_1_1,00.html

Monday, May 21, 2012

Facebook’s IPO: A Plummet?

On the day of its IPO, Facebook issued at $38 and went to a high of $45 before returning to near its issue price (closing at $38.23). On the next trading day, the price fell to about $34 in the early afternoon. This represents about 10% off the issue price. The Huffington Post headlined “Stock Plummets,” which must have been irresistible to anyone who had bought the stock. The Post was using the $45 high as its benchmark, from which the $34 price represents a 25% drop. As if that were a plummeting, using the 10% off figure would have made the self-aggrandizing headline too obvious. At the very least, the headline detracts from the credibility of the Huffington Post.

The full essay is at "Taking the Face Off Facebook."

Inside the Gates: Lobbyists in the White House

The Washington Post reports that visitor logs for January 17, 2012 show that the lobbying industry that Obama had vowed to constrain was nonetheless a regular presence at 1600 Pennsylvania Ave. Even though the president barred recent lobbyists from joining his administration or even serving on its advisory boards and forbid federal employees from accepting free admission to receptions and conferences sponsored by lobbying groups, records suggest that lobbyists with personal connections to the White House enjoyed the easiest access. The principle of fairness (not to mention consistency) seems to have been sacrificed for political (and campaign finance) expediency.

Lobbyist Marshal Matz, for example, who served as an unpaid adviser to Obama’s 2008 campaign, gained access to the White House roughly two dozen times through May 2012. He brought along the general council for the Biotechnology Industry Organization, the chief executive of cereal maker General Mills and pro bono clients, including advocates for farmers in Africa. It seems that the “Wall Street needs reform” president was rather pro-business behind the gates.

Another such lobbyist with close ties to the White House was former New York congressman Tom Downey, who at the time was married to Carol Browner. Until 2010, she was Obama’s energy czar. Downey was the head of Downey McGrath Group, a lobbying firm whose clients include Time Warner Cable and Herbalife, which sells nutrition and dieting products. As of January 2012, he had been to the White House complex for meetings and events 31 times. On Dec. 10, 2010, Downey held a meeting with economic adviser Lawrence H. Summers and just happened to bring along Bill Cheney, the head of the Credit Union National Association and one of Downey McGrath’s clients. John Magill, the top lobbyist for the association, said that the group was pushing to lift the cap on the percentage of assets its members can lend out.

“A lot of folks,” Obama said in April 2012, “see the amounts of money that are being spent and the special interests that dominate and the lobbyists that always have access, and they say to themselves, maybe I don’t count.” That is also the inevitable reaction from reading the Post’s analysis of the White House visitor log. Even members of Congress may conclude that they don't count.

According to U.S. Sen. Ron Wyden (D-Oregon), for example, the U.S. Trade Representative was sharing draft negotiation documents on the Trans-Pacific trade deal with the governments of other countries and American corporate executives who serve on advisory boards, no such access was being provided to the majority of Congress or most nonprofit groups. "The majority of Congress is being kept in the dark as to the substance of the TPP negotiations, while representatives of U.S. corporations--like Halliburton, Chevron, PhRMA, Comcast and the Motion Picture Association of America--are being consulted and made privy to details of the agreement," Wyden. A subsidiarity of Halliburton had been accused by the U.S. military of charging it $1.6 billion for fake services. The Motion Picture Association had former U.S. Senator Chris Dodd (D-Conn.) as its head. 

Furthermore, ABC News reported in 2011 that employees of Comcast had "contributed more money to President Obama's reelection bid than employees from any other organization, according to [an] analysis of the Federal Election Commission data by the Center for Responsive Politics."  It appears that the Obama administration was being quite responsive to Comcast in enabling the company to "buy" the access to the trade negotiations. In fact, Obama attended "an intimate fundraiser at the home of Comcast executive vice president David Cohen in Philadelphia in June [2011] and a private 'social reception' at the Martha's Vineyard estate of Comcast CEO Brian Roberts [in August 2011]. Cohen put together more than $500,000 in contributions to the Obama campaign and the DNC for the 2012 election. Nonetheless, the president’s press secretary—speaking as if tone-deaf—said, “Our goal has been to reduce the influence of special interests in Washington — which we’ve done more than any Administration in history.” 

It seems to me that the Obama administration's mutual back-scratching with big business can explain why Obama caved on the "public option" in his health-insurance reform law--essentially handing the existing private insurance companies tens of millions of new customers financed by the U.S. Government without any competition from a public insurer. The close ties can also explain why Obama backed off from his statements that Wall Street banks too big to fail should be broken up preemptively (rather than merely having the government get involved to help out on the liquidation after a bank has gone bankrupt as is the case in the resulting law). Even though the positive correlation of campaign contributions and favorable access and legislation (and trade negotiations) does not in itself prove the existence of a quid pro quo, the fingerprints are all over the darkened windows of Obama's White House. Rather than attacking capitalism, Obama was wallowing in it even as he occasionally threw red meat to his anti-corporate base to get it out to the polls. 

Moreover, both the matter of White House access and access to trade deal negotiation point to the partisan nature of the office of the U.S. Presidency. With regard to the White House access, the Post reports that “Republican lobbyists coming to visit are rare, while Democratic lobbyists are common, whether they are representing corporate clients or liberal causes.” This suggests that the presidency itself may be more partisan than is consistent with representing the United States itself (i.e., the figure-head role of the office).

In general terms, it would be naïve to suppose that powerful figures in Washington, D.C. could somehow be immune from lobbyists when the clients have so much money (i.e., economic power). In other words, concentrated wealth must needs eventuate in pressure on public policy. To restrict lobbyist access at the White House would thus only plug a hole that is a symptom. While doing so might assuage our frustration at such blatant favoritism bought with campaign (or SuperPac) donations, it is that money and the related mammoth size and power of modern corporations that must ultimately be challenged for there to be any change in substance. However, we should not be so naïve as to expect that barring lobbyists from the People’s House or even outlawing corporate political campaign contributions would reduce the influence. Where there are deep pockets of concentrated private wealth, the public weale must needs be so oriented. 


Devin Dwyer, "Comcast Employees Top Donors to Obama Campaign Accounts," August 25, 2011.

Zach Carter, "Trans-Pacific Partnership: Key Senate Democrat Joins Bipartisan Trade Revolt Against Obama," The Huffington Post. 

T. W. Farnam, “White House Visitor Logs Provide Window into Lobbying Industry, The Washington Post, May 21, 2012.

Sunday, May 20, 2012

Unions and States at the G-8

At the G-8 summit at Camp David in May 2012, E.U. and U.S. leaders met with the leaders of four E.U. states (Italy, Germany, France and Britain). As this picture illustrates, the qualitative differences between looking after a union of states and a state can show up unintentionally in informal seating arrangements. In the context of the European debt crisis—in particular, whether to give one state (i.e., Greece) stimulus cash or just insist on the austerity programs already agreed to—the governors of the E.U. states have particular agendas (given the financial interests of the respective states) whereas the federal officials are oriented to the good of the whole (i.e., the E.U.). President Obama of the U.S. was by the time of the summit used to taking such a perspective over and above the interests of particular U.S. states. Such a commonality of federal, empire-level interests as distinct from the relatively particularized interests of E.U. (and U.S.) states could be reflected in the seating arrangement in the picture taken by the White House, wherein Obama, Barroso (sitting next to Obama), and Van Rompuy (in the sweater) seem to be facing the four governors. The seating arrangement could just as easily have been a circle. It probably was, originally, and I suspect that the federal v. states distinction operated unconsciously on the participants such that the three federal officials came to be as though a line facing the four governors of E.U. states.

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