Business Law Prof Blog

The Recession Scare

Now that the preliminary first quarter GDP data is in showing positive but small growth and the markets have indicated we have bottomed in all but housing prices (under which Congress is trying to put an artificial floor, a mistake)  those who were screaming about a recession since last summer should be contrite. They are not, of course.  Some continue to claim recession (the data is misleading... it will be corrected...unemployment is the real problem... and so on). Others are quietly disappointed!!  (Shucks, we are not all going to starve; we are doing better than I thought.")  My favorite group, the blamers, just pretends the data did not happen and is still screaming recession (they profit by blaming a targeted "bad" group).  The exaggerated claims of recession serve to many constituencies:  1) political candidates who want to oust incumbents by scaring voting, 2) media outlets who want to get viewers and readers by creating false crises that give enhanced incentives to view or read, 3) left wing theorist who are fundamentally uncomfortable with capitalism and claim that it needs to be "softened" to minimize income inequality (and , fill in the blank with any other political claim of exploitation), 4) and, a new group, government officials who can claim to have solved the crises (those who put together the Bear Stearns bailout, for example, and the fed that lowered interest rates precipitously).  Many of those in one group are also in another.  This cultural pathology is added by our lack-of-pluck.  We are not worried about food we are worried about whether we can upgrade our television sets (84 million were discarded last year) or drive our pickup trucks cross country.  In the face of minor setbacks we wine and moan; what would happen if we truly faced a major setback??  Would we collapse in a puddle of urine??   

Freddic Mac: What a Mess

Freddie Mac, one of two United States chartered companies that own or guarantee the bulk of home mortgages, recorded a net loss for the quarter that was reduced by accounting gimmickry.  The true loss is close to $2 billion.  Freddie Mac is 1) hemorrhaging money, 2) overleveraged, 4) gone through recent management behavior problems, and 4) will desperately need new capital soon to survive.  In other words, this company is on the edge of insolvency.  Yet Congress has increased Freddie Mac's ability to guarantee "gumbo" mortgages (the upper limit has been increased from $420,000 to $625,000 (or so) and Ofheo, its regulatory authority is considering lowering its capital requirements.  Even more astonishingly the stock is trading at around $28 a share.  The market is anticipating that Congress will bailout the company if it struggles even though there is no explicit promise or understanding that Congress must do so.  This is a case study in moral hazard.  Congress has two ways out of the mess -- neither of which it will take.  Slaughter the pig rather than dress it up; or open its mortgage guarantee program up to any financial institution that wants to get in the market (make the pig compete for its supper). 

GE Starts its Bust Up

GE, a company that should go through a classic series of spin-offs to focus on its core business, has started the process of divesting some of its units.  The problem? It is divesting its appliance unit, its best known consumer brand.  Many, many shareholders associate GE with appliances, even though the unit is a small part of its overall business.  This could get interesting folks.

Three SEC Chairs for Obama

Three ex-Chairs of the SEC for Obama, the headlines scream.  Two were Democratic appointees -- so what-- they are frontrunners. But one Donaldson, was a Republican appointee--is Obama better for the markets than McCain.  No. Donaldson was a Republican appointee who on every major critical vote sided with the two Democratic Commissioners to outvote the two other Republican Commissioners.  He is a major sufferer of "Guilt from Being Rich".

Univ. of Colorado and the new "Chair for a Conservative"

My old place of employment made the front page of the Wall Street Journal yesterday by announcing a new Chair for a Conservative Thinker.  There are so few conservatives on campus that the provost has decided to use reverse affirmative action to recruit one to have around.  The faculty is upset, for the wrong reasons, of course.  There are very few conservative tenured professors on campus and those that do exist are not really true conservatives, they are moderates.  Any real conservative -- anti-affirmative action, anti-abortion, Evangelical, anti-social programs -- would suffer constant abuse there.  I was labeled a conservative when there and I was not -- I happened to be for smaller government.  A real conservative, articulate and outspoken, would blow the place up.  The solution is not affirmative action for conservatives, no good conservative would take the chair, but a re-evaluation of the slanted hiring process that brings only soft and hard left candidates to the faculty.   The faculty has suggested that the Chair could hold a liberal who "studies conservatives" like Margret Mead studied the Samoans.   Isn't that precious.

Colorado is not alone.  My niece goes to a school on the east coast that had an announced "Be Good to a Conservative This Week" campaign.  The general population has an inkling of the problem on many college campuses but no sense of its depth.

Icahn and Yahoo

Carl Icahn is threatening a proxy fight for some seats on the Yahoo board in an effort to restart the deal with Microsoft.  The sad part is that he ought not to have to use the proxy fight avenue.  He ought to be able to mount a takeover.  But the country's state legislatures and state courts have effectively stopped hostile takeovers and we continue to pay for it.

Thanks Cox for Helping Me

I hold stock in Goldman Sachs, an investment bank that despite not getting caught holding bad mortgages has been hammered in the stock market (dropping from a high of 210 to a low of 165 or so).  Recently sanity has prevailed and the stock has been climbing (up to 195 or so), until Cox and the SEC decided to help me.  Apparently I do not have enough information on the bank. So in my best interest, Cox announced more investment bank disclosure rules. My stock dropped immediately on his speech and has flat lined ever since.  If asked he will still no doubt tell me I am better off somehow. 

Exxon Not Well Managed?

Exxon, a company that had over 12 billion dollars in profits last year (perhaps the highest in real dollars in modern history for any private company), raising howls of protest from Congress and the left, is apparently not well managed.  By the way, Exxon paid 30 billion in federal taxes, more that the aggregate paid by close to forty percent of the country's entire population.  Shareholders are sponsoring resolutions to separate the positions of chairman and chief executive officer (CEO) and to give them a vote on executive compensation.  Apparently the company is --- not making enough in profits?? Who'd a thought it.

Foreign Companies Not Registering in the US

Wayne Carnall, Chief Accountant in the Securities and Exchange Commission of Corporation Finance confirmed May 1 what we all have suspected.  Fewer foreign based companies are registering in the United States.  Moreover, over many foreign companies listed in the United States are leaving.  Over two-thirds of the European companies listed as of five years ago have left.  Carnell attributed the losses to a change in exchange listing requirements that make it easier to leave.  The SEC has hoped the change would encourage more to come as the decision to list in the United States would be less binding.  Old companies left and new companies did not come.  The new gainers??  Israel and the Cayman Islands!  The SEC's solution, a new rules proposal (FIRE) that adds regulations for "large accelerated" foreign filers.  Not good folks.

Congress to Regulate Oil "Speculators"

Congress is considering a bill that will apply CFTC regulations on oil futures speculators to a London based futures trading market -- the Intercontinental-Exchange (ICE). There are two problems: First, any regulations of this type will not affect international market prices, but will cut off United States traders from directly participating in foreign exchanges.  Second, Congress ought not regulate "speculators" at all, other than to enforce rules against fraud (wash sales, touting and the like).  Congress, if it gets involved, will damage United States futures markets.