Business Law Prof Blog

Alice Rivlin Scares Me: Good Intentions Ought Not to Excuse Folly

In an editorial in todays NYT's Alice Rivlin showed why she should never have been a government official, much less the former vice chairman of the Federal Reserve and the Clinton's director of the Office of Management and Budget.  Consider her argument:  the government's (ie. the President's) job is to "protect" the country and "indeed the world" from a financial market meltdown.  Translated -- this means the President's job is to run the economy and make sure there are no economic downturns.  Rebuttal (that a high school student in economics should be able to make):  1) The President's job is not to run the economy.  If given the job he/she would fail miserably.  2)   All free market economies have cycles that include periodic downturns: it is as natural as birth and death; as spring and winter; as a liberal who wants to increase government regulation whenever an excuse is handy.   The government cannot stop he economic cycles and but it can make them much worse (witness the 30s).  With every economic downturn we get cries for the government to "do something" and if we listen to the Rivlins and the government "does indeed do something" we will have a ratchet upwards of increasing regulation that stifles market activity over the long term.  Rivlin's solution?  "ease the renegotiation of mortgages" "more regulatory scrutiny of financial institutions" outlaw "financial instruments... that mainly reflect the efforts of traders to outsmart each other."  Translated -- change negotiated contracts to bailout those who cannot pay; give the Fed discretionary regulatory power over all financial institutions not just commercial banks (this would include brokerage firms and investment banks as well as hedge funds and private equity funds), and outlaw any investment instrument that government officials do not understand.  Rebuttal:  1) How do we find government officials that are this smart? Is Rivlin this smart?  She is the classic Monday morning quarterback claiming she could have coached the team to victory.   2) Note the lack of detail in any of these solutions -- they all float on a cloud of well-intentioned goals (there should be no poverty, no economic pain, no death) with little or no practical sense of whether they are possible to do in practice or whether the government has informational or decision-making limits.  3)  So now all new financial instruments must pass by a bureaucrat's potential veto. Discretionary government approval of financial instruments will drive the whole business offshore.  We might as well hang up a sign saying "closed, moved to London" to the financial communty.  Good grief.  This women was at one time a senior official in the Fed?? Our best solution is to enforce the laws all ready on the books -- exact penalties for fraud and force accurate public disclosure of current asset valuations -- and let the market penalize those who have made poor market decisions.  The market needs to clear and bottom.  Government regulation that does more than penalize fraud and force public disclosure of current positions will retard us from finding the bottom.  [With the possible exception of government buyout programs such as the one used in the S&L crisis, implemented under a heavy burden of justification.]  Once the market bottoms the government can alleviate some of the suffering with means based grant in aid programs that are priced and transparent.

GE Should Bust Itself Up

General Electric reported that its first-quarter net income fell 6% to $4.3 billion, or 43 cents a share, from $4.57 billion, or 44 cents a share, a year earlier. GE also lowered its 2008 guidance substantially.  The company is one of the very few old-fashioned inefficient conglomerates that survived the bust-up days of the 80s LBOs which state anti-takeover legislation halted by 1990.  Too bad.  With hostile takeovers still practicable, GE would have long ago been busted-up.  Its board of directors should do the honorable thing (and that which they have a fiduciary duty to shareholder to do) and bust the company up to benefit its shareholders.

Protectionist Canada: Ohio has a new shinning example

Canada invoked the rarely used Investment Canada Act of 1985 to block a negotiated acquisition of a Canadian company, MacDonald Dettwiller, by an American company, Alliant Technsystems.  The Canadian company is in the satellite business.  On the announced of the block, the stock in the Canadian company dropped immediately about 9 percent on the Toronto stock exchange.  The Investment Act allows the Canadian government to block any foreign acquisition of a Canadian company worth more than $295 Canadian dollars if the acquisitions does not provide "net benefits'' to the Canadian economy, such as increased productivity and research and development. This is a version of the first generation state anti-takeover statutes that first appeared in the United States in 1969.  Ohio was second in line to adopt one.  The United States Supreme Court declared them unconstitutional in Edgar v Mite in the early eighties.  Ohio still has it, in a substantially diluted form so as to satisfy the opinion.  We are moving in the direction of the Investment Act, with new modifications of our foreign anti-takeover legislation and rules, but our federal system is light years away from the Canadian act (we have more stringent requirements for a threat to "national defense" or "critical infrastructure").   The current Congress, of course, would pass the Canadian language it if could get away with it.  The Canadian Act is very, very shortsighted, making every foreign acquisition a political question handled by a government bureaucrat. The Act has sat on the books usued for twenty-five years and now has been rediscovered by Canadian politicians.  We, of course, must now threaten to block all Canadian acquirers of United States companies until we get reciprocity.  Wonderful.

National City Corp. on the Block

National City Corp, the ninth-largest U.S. bank, is looking to sell itself and is in talks with more than one potential buyer.  Fifth Third Bancorp and KeyCorp are interested.. A sale to a bank such as Fifth Third, which is based in

Cincinnati

, would help a combined company cut costs in a difficult environment, said Terry McEvoy, an analyst at Oppenheimer & Co.  The housing downturn has forced National City Corp to boost credit reserves and write down bad loans. The bank lost $333 million in the fourth quarter and sold $1.4 billion of convertible notes in January.  The deal with KeyCorp could include a capital infusion from private equity firm Kohlberg Kravis Roberts & Co.  One wonders whether the National City Corp board of directors will pay any attention to the Ohio statute that allows the board to include and balance the interests of numerous corporate constituencies other than shareholders in any deal decision or whether the board will just go for the best price per share.

Novartis Buys Alcon From Nestle

After tight-lipped negotiations which started in December, Nestle and Novartis inked the $39 billion sale of Nestle-owned Alcon to Novartis. The Alcon deal is the first such deal of its kind, according to A&O partner Daniel Cunningham, who worked on it. In the first stage, Novartis will pay $143 a share for 25% of Alcon, for a total of $11 billion. Under the second part of the deal, Novartis has put and call option rights on Nestlé’s remaining Alcon shares beginning Jan. 1, 2010 and expiring July 31, 2011. The call grants Novartis the option to buy Nestlé's remaining Alcon shares for $181 per share. Nestlé has a put option to sell its remaining Alcon shares to Novartis at the lower of Novartis’s call price of $181 per share or at a 20.5 percent premium above the market price of Alcon shares, which will be calculated as the average price of Alcon shares during the week before the exercise date of the put option.  The call/put feature of the second stage is novel and clever.  The call/put prices the second stage of the deal at market plus 20% with a cap at $181 per share.

Top Ten Hedge Funds

The Trader Monthly has data out on the top pay for hedge fund managers for last year.  The top manager, John Paulson in New York, made $3 billion, more than the GDP of Rwanda. If he made $3 billion, his funds showed a gross return of around $14 billion.  Not a bad year. Four of the top ten earners were in London.  Chris Hohn, of the London based "Children's Investment Fund" make $900 million and donated much of it to an affiliated charity.