August 6, 2011
Work-Life Balance: Another Reason to Unplug
Scott Adams writes in the WSJ today that our loss of "boredom" (that thing that arises when you're not glued to your smartphone, Xbox, Kindle, iPad, etc.) may be directly correlated with a loss of creativity. What would a world look like where leaders and innovators lack "boredom"? In addition to "people acting more dogmatic than usual" and "the economy flat-lin[ing] for lack of industry-changing innovation," the money quote for me was:
You might find that bloggers are spending most of their energy writing about other bloggers.
August 5, 2011
Missing Some Points on Oil and the Economy
U.S. dependence on foreign oil is decreasing, according to this article. This reduced dependence comes from new ways of measuring the amount of oil imported, as well as increased production of U.S. oil, increased use of biofuels, and a drop in demand.
The main reason oil production is up, and U.S. consumption of oil is up, is that prices are high. At $4 per gallon, there's lots of oil available in this country. And continued consumption of oil as our primary transportation fuel simply defers our dependence on foreign-sourced oil, unless there is some way to link increased U.S. oil production with transitioning to a new fuel source. (I'm not away of any such link.)
The article also asserts:
No one is saying that the United States will be able to avoid importing petroleum. But there is a chance to replay what Jay Hakes, author of “A Declaration of Energy Independence,” describes as a forgotten victory.
In 1977, the United States imported enough oil to meet 47 percent of demand. Five years later, the country needed only enough to meet 28 percent of demand, in part because of better automotive fuel economy standards, rising Alaskan oil production and cuts in the amount of fuel oil used to generate electricity.
The problem, of course, is that U.S. oil consumption is often a measure of economic strength. Notice the other parallel between 1977 and 2011? Perhaps, the economy? If this parallel holds true, it's going to be a long five years.
August 4, 2011
A Celebration of Business Failure
I meant to blog this earlier but other news intervened. Anthony Gregory of the Independent Institute has posted an excellent piece on the collapse of Borders. [Link: ] (My thanks to Mark Perry at Carpe Diem for pointing this out.)
Capitalism sometimes seems to be all about the winners—Google, Apple, Amazon, Walmart. We sometimes forget that the death of businesses is just as important a part of capitalism as the birth and growth of businesses. Businesses that can’t efficiently satisfy consumer needs fail, and that capital gets reallocated elsewhere. It isn't always pretty, and there are casualties in the transition, but it’s business failure that allows for economic progress. The alternative is stagnation.
Gregory points out that,
for the consumers, the downfall of Borders is glorious, much as was its climb to success. In the rearrangement of resources to serve customers we see the beautiful actions of the market economy reconfiguring the world to provide the goods and services that are most wanted and needed in the most effective way. To ignore the upside to Borders’ downfall is as fallacious as to focus only on the downside of its upswing, as did most of the anti-corporate left in the last decade. But today we see that it was not government, nor socialist agitation, that brought the axe down on this big company. It was the matrix of demand provided by customers. It was the consumer base, acting in a manner much more democratic in the good sense of the word, and much more peaceful and socially productive, than anything we see in the political process. Thank goodness there is no doctrine of “too big to fail” in the book store industries. If the government bailed out Borders as it has so many financial institutions, surely the customers would suffer.
Know Your Market: A Director's Guide to Getting Along
1. You can oversee the complete failure of your company and emerge essentially unscathed. From Steven Davidoff:
Do the former directors of the institutions that collapsed during the financial crisis have anything to worry about? If the experience of Enron is any example, the answer is a resounding no…. [W]hile some Enron executives paid a price for the scandal, it is a different story with Enron’s former directors — the people charged with overseeing the company. A search of their current whereabouts shows that they have recovered nicely from the scandal…. The experiences of the Enron directors over the last decade would appear to offer great hope to the directors of Bear Stearns and Lehman Brothers. Indeed, many of these directors remain not only as directors of public companies from before the financial crisis, but they have joined new boards…. In all, 6 of the 12 Bear directors at the time of the investment bank’s collapse are still directors of public companies. None of the Bear directors have appeared to have career difficulties…. It is the same for Lehman Brothers, …. So the Bear and Lehman directors are returning to public company service even quicker than the Enron directors. In part this reflects the old boy network on Wall Street, which keeps people in the same positions because of friendships…. The trend also underscores the decline in the importance of reputation on Wall Street — even since the time of Enron. Prior bad conduct simply is often not viewed as a problem.
2. But don't bite the hand that feeds you. From Mary-Hunter McDonnell and Brayden King:
Corporate governance scholars across disciplines continue to disagree about whether the market for independent directors rewards directors who align themselves with corporate shareholders or corporate managers. In this paper, we empirically test this question by employing a unique database that tracks the careers of a cohort of independent directors in order to see how the market reacts when they oust an underperforming CEO. Using a longitudinal empirical model, we find evidence that directors who oust a corporate CEO suffer multi-faceted adverse consequences in the market for corporate directors. They are likely to win seats within fewer boards and the boards that do recruit them are likely to be significantly smaller and less reputable than those that recruit their peers. Thus, even in this era of investor capitalism and the rising ubiquity of formally independent directors, our findings suggest that symbols of elite affiliations and pro-managerialist selection criteria continue to undergird the market for corporate directors, especially among America’s larger and more reputable organizations.
August 2, 2011
Laby on the Investment Advisers Act
Arthur B. Laby has posted SEC v. Capital Gains Research Bureau and the Investment Advisers Act of 1940 on SSRN with the following abstract:
This paper was prepared for a conference entitled The Role of Fiduciary Law and Trust in the Twenty-First Century: A Conference Inspired by the Work of Tamar Frankel, held at Boston University School of Law in October 2010. SEC v. Capital Gains Research Bureau was the Supreme Court’s first interpretation of the Investment Advisers Act of 1940 and it still stands as a leading case under the Act. The opinion is often cited for the proposition that the Advisers Act imposed a federal fiduciary duty on investment advisers. Yet a careful reading of the case and the underlying statute reveals that neither was intended to create a federal fiduciary standard. Rather, the doctrine developed through statements in subsequent Supreme Court decisions, which misread or disregarded Justice Goldberg’s disquisition in Capital Gains. This article reviews the history of the Capital Gains case and then explains when and how it was misinterpreted to state that Congress established a federal fiduciary duty in the Advisers Act. The last part of the paper discusses implications of this development, including the confusion provoked as Congress and the SEC grapple with whether to impose a fiduciary duty on broker-dealers commensurate with the duty imposed on advisers.
-- Eric C. Chaffee
August 1, 2011
Digital Securities Law Supplement
Forgive me for a little self-promotion, but I publish an e-book called Digital Securities Law: Statutes and Regulations. It is available for free to students, faculty members, and anyone else who wants to use it for non-commercial purposes. (Obviously, it's not an official source of the law and you shouldn't rely on it for actual legal work.) I began publishing it a few years ago because I didn’t think students should have to pay $30, $40 or more for non-copyrighted material.
It is in PDF format, so no special software is needed. It includes a collapsible hyperlinked index that allows you to quickly navigate to a particular section. You can highlight and underline (in multiple colors), add notes and comments, cut and paste, and search for particular terms, using only the free Adobe Reader software.
Digital Securities Law includes the following materials:
- Securities Act of 1933
- Securities Exchange Act of 1934
- Investment Company Act of 1940
- Investment Advisers Act of 1940
- the regulations under each of those statutes
- Regulation FD
- Regulation S-K
- a variety of SEC forms
- the SEC standards of professional conduct for attorneys
If you’re interested, the Fall 2011 edition is now available here.
July 31, 2011
Ramirez on Dodd-Frank
Steven A. Ramirez has posted Dodd-Frank as Maginot Line on SSRN with the following abstract:
The Dodd-Frank Act will prevent a future debt crisis arising from subprime mortgage debt. The Act will fail, however, to prevent other future debt crises leading to future financial crises because the Act fails to address the distorted incentives to accumulate excessive debt and the distorted incentives for large financial firms to gamble on debt instruments. The Act preserves the power of the government to bailout financial firms deemed too-big-to-fail. The Act preserves the ability of such firms (at least over the short and medium term) to speculate in debt instruments through derivatives, securities and hedge fund activities. The Act also fails to assure the disruption of CEO primacy, as a matter of corporate governance law. In short, the Act constitutes a limited response to the crisis of 2007-2009, at best. CEOs still retain the power and still face incentives to saddle their firms with excessive risks at the expense of shareholders and society in general.
-- Eric C. Chaffee
Arewa on the Credit Crisis
Olufunmilayo Arewa has posted Risky Business: The Credit Crisis and Failure on SSRN with the following abstract:
The credit crisis represents a watershed event for global financial markets and has been linked to significant declines in real economy performance on a level of magnitude not experienced since World War II. Recognition of the crisis in 2008 has been followed in 2009 and 2010 by a plethora of competing proposals in response to the credit crisis. The result has been a cacophony of visions, voices, and approaches. The sheer noise that has ensued threatens to drown out the fundamental core questions that should be asked about the credit crisis. Among the most important are questions about the relationships between risk, regulation, and failure. The credit crisis can be viewed as a type of financial market network failure. The credit crisis underscores the complex and linked nature of contemporary financial markets, as well as the inherent difficulties regulators and industry participants face in managing complex and interconnected risks. The credit crisis also demonstrates that neither industry participants nor regulators fully apprehended underlying financial market risks. In recent years, financial products and financial markets have become increasingly complex and global. Although public commentary and policy discussions in the credit crisis aftermath focused on the implications of financial services firms that are "too big to fail," existing commentary devotes less attention to the network-like characteristics of financial markets and the implications of complex networks for financial markets. The impact of financial market networks is heightened by the pervasive cultures of trading and risk-taking that now characterize many market segments.
-- Eric C. Chaffee
A Market Cure for Too-Big-to-Fail?
Over at DealBook, Jesse Eisinger writes:
One of the most remarkable aspects of the debate about overhauling the financial system after the great crisis was the absence of serious contemplation of breaking up the largest banks…. Lawmakers and regulators have failed to remake our system with smaller, safer institutions. What about investors? Big bank stocks have been persistently weak, making breakups that seemed politically impossible no longer unthinkable…. [However, e]ven in the face of investor pressure, there are forces that would hold bank breakups back. Mainly pay. “The biggest motivation for not breaking up is that top managers would earn less,” Mr. [Mike Mayo, an analyst with CLSA] said. “That is part of the breakdown in the owner/manager relationship. That’s a breakdown in capitalism.” Institutional investors — the major owners of the banks — are passive and conflicted. They don’t like to go public with complaints. They have extensive business ties with the banks. The few hedge fund activist investors who aren’t cowed would most likely balk at taking on such an enormous target.
You can read the full post here.