August 16, 2008
Posner and Easterbrook Disagree on Mutual Fund Fees
In a series of opinions that law professors will love, Judges Richard Posner and Frank Easterbrook of the Seventh Circuit disagreed over the legal standard that ought to apply to an assessment of fees paid managers of mutual funds. In the first opinion, a 2-1 panel decision, Easterbrook wrote for the majority and held that the primary protection against excessive fees paid fund managers were market forces and decisions by fund trustees. "The trustees (and in the end investors, who vote with their feet and dollars), rather than a judge or jury, determine how much advisory services are worth." Judge Posner, who was not on the panel, pushed for a en banc review of the decision and failed 5-5 (one judge abstained). Posner wrote an opinion on the decision not to review and cited evidence of "rampant ... abuses" in the mutual fund industry where trustee incentives to police compensation of fund managers were "feeble." The dispute, between two very well known judges from the same jurisprudential school -- law and economics, has it all -- clear writing, an important economic issue, a spat over academic studies by high powered financial economists and even a claim of internal irregularity (Posner claims Easterbrook did not circulate the panel decision to the full court before it was issued). What I find in the panel decision is too light a focus on the facts of the case before it and too heavy a focus on "industry wide" studies and conclusions. In the facts of the case, the plaintiffs had presented a stark contrast between fees charged for similar services by Harris Associates, a manager and creator of the Oakmark family of mutual funds, to its own mutual funds (funds it had created) and to funds created and run by others. Was Harris improperly influencing the trustees of its own funds to pay it more?? The plaintiffs claimed yes. Judge Easterbrook rejected the comparison as telling, citing many possible reasons for the difference. Sounds like a dispute over evidence in a specific case for a judge too me. I must not have the heart of a great theorist.
August 15, 2008
A Box for Abstain
The just completed election for seats on the Yahoo board of directors featured a contest between “yes” votes and “abstain” votes on the Yahoo proxy forms. There was no alternative candidate on the proxy or any other proxy and there was no box for a “no” vote. Notably, the CEO of Yahoo, who had successfully blocked an acquisition by
Microsoft, collected over a thirty percent abstain vote from all shareholders voting. This is a remarkably high number and a statement by a substantial number of shareholders that they were displeased with the CEO’s performance. In uncontested elections the normal percentage of abstain votes is less than three percent.
The abstain vote was all the more startlingly because it came on the heels of a settlement of a dissident shareholder proxy contest. Carl Icahn, one of our longest-engaged and best known activist hedge fund operators, had field a slate of candidates for the board and was soliciting votes. A few weeks before the election, Icahn withdrew his challenge and accepted the management’s agreement to nominate him and two delegates to Yahoo board seats. Shareholders who would have voted for Icahn dissident slate were left only with “abstain” votes for incumbent insiders who had blocked the Microsoft deal.
The Yahoo dissident shareholders were upset that the Yahoo CEO and board had not accepted a Microsoft acquisition offer that was, in value, considerably higher than the trading price of Yahoo stock, unaffected by rumors of the merger.
Those who ridicule a “just say no” campaign with only an “abstain” vote note that one yes vote out weighs any number of “abstain” votes.. One check in the yes box on one proxy and 999 checks in abstain boxes on all other proxies puts an incumbent back on the board for a year. They overlook the power of the poll on stock prices, all abstain voters are potential sellers of the stock, and on the next annual election (when a hedge fund may be encouraged to run a dissident slate).
Faced with an election for President of the United States in November I am in the uncomfortable position of not being able to vote for any candidate running when I show up to vote. And I will show up; voting is important to me. I can simply leave the President line (or box) blank and vote for others. But this is an admission of defeat; I want to vote. Or I can attempt a write-in, which will test my patience and the patience of the poll workers who must handle my ballot specially.
I would relish the chance to vote formally for “abstain” on the Presidential line on the ballot. I suspect that I can not alone. I would vote. I could be heard. And it would be the vote I want recorded. I do not want to absence of a recorded mark to be my vote.
France provides an option to vote “no” and Russia, until recently, provided a similar an option to vote “no.” The Russia option, crafted in a single party state, forced a new election if a majority voted “no” and no votes were a signal of the fall of the Soviet Union in 1990. Prime Minister of Russia, Vladimir Putin, has abolished the option.
The number of “abstain” votes in any given election would provide a real choice for voters and also provide real information for political parties, election statisticians, and pundits. So I offer another “no chance” academic recommendation. Add an “abstain” box to the ballot in all elections, for all candidates, and on all ballot issues.
August 13, 2008
New Short Sale Rule Fades Without a Wimper
The new SEC short sale rule died Monday without much of a notice. It was, from the beginning, only a technical change, applied only to 17 companies. The creation and death were political, giving something showy to Congressmen and women that were complaining about speculators. We need markets to clear -- readjust quickly to new price levels as a result of changes in information--and short seller clear markets. Fraud is fraud, on the upside (false tauting) or downside (bear raids), although we seem less angry when it is on the upside-- and should be prosecuted.
August 11, 2008
DHL/UPS Vendor Agreement Hits the National News
The New York Times ran a feature on the DHL/UPS vendor agreement that will close the package sorting operation at a privately owned airport in Wilmington Ohio, costing Ohio 6,000 to 8,000 jobs. As noted here, McCain helped broker a 2003 deal that brought DHL to Wilmington (DHL brought a struggling air freight company located in Wilmington). Democrats are trying to tag McCain with the job losses. The Governor, lt. governor, and state attorney general are attacking the deal on state anti-trust grounds. The attack is totally absurd. 1) McCain bought a significant number of jobs to Ohio with the initial deal and saved others. Apparently we should not work to bring jobs to Ohio because we might lose them down the road. 2) Any anti-trust claim is nutty. DHL was losing money big time on the Ohio operation. Does the government now force DHL to lose money rather than close down or seek operation savings? 3) If the government wins, DHL will close rather than what it wants to do, which is continue to operate with cost savings, competing with UPS on truck delivery charges. Which is better DHL competing with UPS at some level or out of the North American market altogether?
In any event, McCain has bailed. He is also asking federal anti-trust authorities to check the deal.
The governments efforts, well-intentioned, to cushion the current economic situation have a side effect -- they obscure the bottom. Market participants are sitting on the sidelines with cash waiting for a clear indication that the market has bottomed so they can get back in. When the bottom is established, the market will clear, new money will get in and we should be growing again. So where is the bottom? Mortgage foreclosures are down. Bottom? Wait, the government is retarding foreclosures and the number may not represent the bottom. Consumer spending is up. Wait, the government gave cash to consumers and the uptick may be temporary. Where is the bottom??
Government Tinkering with the Student Loan Market
The federal government is now running the student loan market. How's it doing? Private sector lenders have left the market in droves and private-sector lending has dried up. In for a penny, in for a dollar. We are in danger of the government being the sole sponsor of student loan money--a very, very expensive and politicized proposition.
Sherrod Brown and the Old Byrd Amendment
My Senator, Sherrod Brown, is sponsoring a bill to return the disgraced Byrd Amendment to law. The the WTO declared illegal in 2006 the Byrd Amendment to a federal trade bill passed in 2000. The Amendment gave American businesses an economic stake in "anti-dumping" prosecutions brought in the United States against foreign companies. American companies claimed absurd amounts of damage, unchecked by anyone when they lose market share to foreign rivals, and took cash whenever an anti-dumping prosecution won. Timkin Roller Bearings, an Ohio company, alone accounted for 20 percent of the total Byrd Amendment proceeds distributed from 2000 to 2006. So an Ohio Senator, well known for is "respect the International Community and International Law arguments in foreign policy," is anti-international community when it comes to protectionism for local constituents. Raw politics or principles?
Corporate Boards and Environmentalism Subcommittees
Twenty-five percent of the the Fortune 500 companies now have a subcommittee of the their board of directors overseeing environmental concerns. Environmental activists are delighted. The debate is over whether these subcommittees are seriously engaged or just marketing (window dressing) to relieve shareholder sponsored initiative pressure (which lose but are costly). In any event, private equity portfolio companies (with smaller boards focused on cash flow) do not have such subcommittees. Any wonder why "going private" is popular? [By the way, for those of you in environmental departments of universities this is a rhetorical question.]