Business Law Prof Blog

More Readings on Capitalism

Steve recently put up a helpful list of "Readings on Capitalism."  Since I am agnostic when it comes to the assertion that capitalism is the least worst system possible, and because I believe that even if we all agreed on that point we'd still have much to debate about as to the details, I asked Frank Pasquale and Kent Greenfield for a quick list of books identifying some of the shortcomings of capitalism.  Here it is:

• 23 Things They Don't Tell You About Capitalism (Pasquale: "Ha-Joon Chang's LSE and RSA podcasts are on iTunes; highly recommended")

• The Predator State: How Conservatives Abandoned the Free Market and Why Liberals Should Too

• The Illusion of Free Markets: Punishment and the Myth of Natural Order

• The Fifteen Biggest Lies about the Economy: And Everything Else the Right Doesn't Want You to Know about Taxes, Jobs, and Corporate America

• Wealth and Democracy: A Political History of the American Rich

• The Spectre at the Feast: Capitalist Crisis and the Politics of Recession

• New Capitalism

• The Confiscation of American Prosperity: From Right-Wing Extremism and Economic Ideology to the Next Great Depression

• Zombie Economics: How Dead Ideas Still Walk among Us

• Business as Usual: The Roots of the Global Financial Meltdown (Possible Futures)

• Wall Street at War: The Secret Struggle for the Global Economy (Pasquale: "particularly valuable as a testament to the ways in which finance capital has undermined productive enterprise")

SJP

Reporting Back From the Ohio Securities Conference

Yesterday, I had the privilege of participating in a panel discussion at the 2011 Ohio Securities Conference entitled, "Dodd-Frank: One Year Later."  A complete list of the panelists, along with a link to related material follows:

Barbara Black: How to Improve Retail Investor Protection After the Dodd-Frank Wall Street Reform and Consumer Protection Act

Eric Chaffee: The Dodd-Frank Wall Street Reform and Consumer Protection Act: A Failed Vision for Increasing Consumer Protection and Heightening Corporate Responsibility in International Financial Transactions

Stefan Padfield: The Dodd-Frank Corporation: More than a Nexus of Contracts

Geoffrey Rapp (moderator): Legislative Proposals to Address the Negative Consequences of the Dodd-Frank Whistleblower Provisions: Written Testimony Submitted to the U.S. House Committee on Financial Services

SJP

Defining the Rights and Responsibilities of Corporations

The Supreme Court has agreed to hear the appeal of KIOBEL V. ROYAL DUTCH PETROLEUM, 621 F.3d 111 (2d Cir. 2010).  One of the questions presented is as follows:

Whether corporations are immune from tort liability for violations of the law of nations such as torture, extrajudicial executions or genocide, as the court of appeals decisions provides, or if corporations may be sued in the same manner as any other private party defendant under the ATS for such egregious violations, as the Eleventh Circuit has explicitly held.

Over at the Huffington Post, Mike Saks opines:

[I]t would ... be quite odd for the Court, which found in Citizens United that the Framers intended the First Amendment to apply to corporate persons, to reject the concept when it comes to corporate liability for crimes against humanity under a Founding-era statute.

SJP

"Poker for Law Students" Course Update

I've previously written about my desire to teach a "Poker for Law Students" course (here).  To that end, I am always on the lookout for supporting documentation and course materials (as I've also previously blogged about here).  So, just in case this sort of thing interests you I thought I'd pass on a couple of additional items I've come across recently:

1. A PokerNews item on "Poker Players and Entrepreneurs: A Compatible Match"

2. A Texas Hold'Em Guide to Winning in Business

Somewhat relatedly, the American Gaming Association recently released a white paper that many feel is the best articulation yet of why and how the U.S. should legalize and regulate online poker.

SJP

Manesh on Contractual Freedom Under Delaware Alternative Entity Law

Mohsen Manesh has posted “Contractual Freedom under Delaware Alternative Entity Law: Evidence from Publicly Traded LPs and LLCs” on SSRN.  Here is the abstract:

Notwithstanding the ongoing academic debate, little is known empirically about how unincorporated alternative entities - LLCs and LPs - actually utilize the contractual freedom afforded under Delaware law. To what extent do alternative entities take advantage of contractual freedom to wholly eliminate fiduciary duties? And to what extent do alternative entities employ so-called “uncorporate” substitutes - certain contractual devices designed to discipline and incentivize mangers - in lieu of fiduciary duties? In response to calls for empirical evidence on this issue, this study analyzes the operating agreements of every publicly traded Delaware alternative entity in existence as of June 2011. This study, the first of its kind, provides a snapshot of contractual freedom as it is applied under Delaware alternative entity law.

In particular, this study finds that the use of fiduciary waiver and exculpation provisions among publicly traded Delaware alternative entities is widespread. Yet, despite the widespread use of such provisions, this study also finds that publicly traded alternative entities have either failed to adopt uncorporate substitutes or adopted uncorporate substitutes that only trivially constrain managerial discretion. Thus, this study suggests that publicly traded alternative entities have largely utilized the freedom of contract to reduce managerial accountability to investors without committing to significant offsetting constraints on managerial discretion.

SJP

How North Dakota Became Saudi Arabia & How to Keep It That Way

The Wall Street Journal's recent Weekend Interview was of particular interest to me, and I thought it worth mentioning.  The article was titled, How North Dakota Became Saudi Arabia: Harold Hamm, discoverer of the Bakken fields of the northern Great Plains, on America's oil future and why OPEC's days are numbered.

It's an interesting interview with Harold Hamm, who is the founder and CEO of Continental Resources. Mr. Hamm is certainly a leader in the U.S. oil resurgence, and his views carry a lot of weight in many circles. His facts are hard to refute, though I might put a little different spin on it.  Here's a key part of the article:

One reason for the [U.S. oil industry] renaissance has been OPEC's erosion of market power. "For nearly 50 years in this country nobody looked for oil here and drilling was in steady decline. Every time the domestic industry picked itself up, the Saudis would open the taps and drown us with cheap oil," he recalls. "They had unlimited production capacity, and company after company would go bust."

This is certainly true. OPEC cannot dictate the market in the same way as they once could, because the market for oil has increased so dramatically, especially in India and China. As such, increased production will simply lead to modestly lower prices, as emerging markets take all the oil the market is willing sell. The article continues: 

Today OPEC's market share is falling and no longer dictates the world price. This is huge, Mr. Hamm says. "Finally we have an opportunity to go out and explore for oil and drill without fear of price collapse." When OPEC was at its peak in the 1990s, the U.S. imported about two-thirds of its oil. Now we import less than half of it, and about 40% of what we do import comes from Mexico and Canada. That's why Mr. Hamm thinks North America can achieve oil independence.

This is true, too, although there is an implication here that OPEC is no longer a factor.  That's not true, just because their market share had dropped. Most certainly, OPEC's ability to impact price in the ways it did in the 1970s, 1980s, and 1990s, has been diminished.  Still, OPEC is a power player, and the revenues U.S. oil companies are seeing are coming into OPEC, too.  After all, it's nice to have 80% market share of a $1 million industry, but it's better to have 20% of $10 million market.  Of course, here were talking about a lot more zeroes than that.  

Further, oil independence has its appeal, certainly, but it's not all it might seem.  In this instance, the only reason we might be able to achieve independence from foreign-sourced oil is because oil prices are so high.  Are we really better off being energy independent with oil at $90 per barrel, or would the U.S. economy be better served with Saudi oil at $25 per barrel?  At $25 or even $50 per barrel, the broad-scale U.S. oil industry can't compete with other world producers.  

But the market has changed. Mr. Hamm is right that the U.S. oil industry doesn't need to worry about the boom-and-bust cycle of years past because the price is not going back to $25 per barrel.  The new market is great for him, great for those with new jobs, and great for those cashing royalty checks. And it's been great for many parts of North Dakota. I appreciate all of that, and I think regulators, politicians, and citizens should be looking at these facts as they consider energy and other economic policy.

Mr. Hamm finally argues that taxes are likely to stop drilling.  He explains:

The White House proposal to raise $40 billion of taxes on oil and gas—by excluding those industries from credits that go to all domestic manufacturers—is also a major hindrance to exploration and drilling. "That just stops the drilling," Mr. Hamm believes. "I've seen these things come about before, like [Jimmy] Carter's windfall profits tax." He says America's rig count on active wells went from 4,500 to less than 55 in a matter of months. "That was a dumb idea. Thank God, Reagan got rid of that."

Here's where we diverge. I am not arguing that President Carter's windfall profits tax had an impact -- it was not good policy at the time.  But that was in part because of OPEC's market power.  The U.S. oil industry was operating in the zone where the profit margin was such that the tax rate could impact drilling.  From what I understand, most North Dakota oil drilling is profitable with oil at about $65-$70 per barrel. Thus, at $85 per barrel, there's a lot of room to increase taxes without having an impact on the drilling. I'm not suggesting that a large new tax would be a great move, but it's not likely to have the dire consequences it could have had in years past. I'm at least okay with the status quo here. Perhaps we would get more drilling if we added more incentives to oil exploration, but my suspicion is that we would be rewarding people for doing what they were going to do anyway. 

I think the energy industry, including traditional resources, is vital to U.S. economic interests, and I think our policies should support the current growing and evolving oil and gas industry. I happen to think there is room for everyone.  My biggest worry for the oil and gas industry is that someone gets careless with their new drilling methods and causes a major environmental disaster. The harm to the environment would be a major concern, of course, but I think most people want that protected.  This is not news.

The greater harm to the industry, and the economy, though, of such a disaster is often missed.  The economic key to this oil and gas boom is to keep it going -- and the biggest threats are no longer OPEC, taxes, or the electric car.  It's an environmental disaster that leads to a large-scale shutdown.  That would be the ultimate lose-lose situation. 

--JPF

The Failure to Regulate as Success

H.R. 2308, the “SEC Regulatory Accountability Act,” would establish a significant number of additional specific standards for cost-benefit analyses for Commission rules and orders.  Said SEC Chairperson Mary Shapiro:

My fear about this legislation is that it layers so much analysis on top of what we already do that we’re set up to fail.  There is no way this agency or any other agency could do all of these things, some of which conflict.

Well, perhaps not so much “fail” as “fail to regulate.”  To some that’s failure, to others that’s success.

SJP

If you love corporations, you might want to start taking the protesters a bit more seriously.

Yesterday, Stephen Bainbridge explained why he loves corporations.  In the course of his post he referenced "The Company," by John Micklethwait and Adrian Wooldridge.  I, too, am a fan of that book--though not because (as Bainbridge notes) the authors identify the corporation as "the best hope for the future of the rest of the world."  (I am at best agnostic on that point.)  Rather, my recollection of the book (which I admit may well be distorted by the passage of years since I last read it) is that the authors did a decent of job of acknowledging that the history of corporations is marked by evil as well as goodness, including "imperialism and speculation, appalling rip-offs and even massacres" (p. xx).  Of course, the authors do note that corporations "pillage the Third World less than they used to" (p. 188).

What I liked about the book is that the authors recognized that "[t]o keep on doing business, the modern company still needs a franchise from society, and the terms of that franchise still matter enormously" (p. 186).  Furthermore, they acknowledged that "[t]here is a widespread feeling that companies have not fulfilled their part of the social contract: people have been sacked or fear that they are about to be sacked; they work longer hours, see less of their families--all for institutions that Edward Coke castigated four hundred years ago for having no souls" (p. 188).  (Note that these are all pre-financial crisis quotes.)

All of which leads me to conclude that if you love corporations you might want to start taking the "Occupy" protesters a little more seriously.  You may think they are "illiterates," silly and absurd--but they are growing in number and they may well end up having something to say about the nature of the franchise corporations need in order to survive.

SJP

Davidoff on Britain’s new takeover rules

Over at DealBook, Steven Davidoff provides some excellent analysis of Britain’s new takeover rules, which went into effect this past Monday.  The title of his post sums up his predictions:  “British Takeover Rules May Mean Quicker Pace but Fewer Bids.”

If this sort of thing interests you, you’ll definitely want to read the entire post—but I’ll note some of the highlights here.  First, Davidoff reports that a wide array of rules were originally considered by the Takeover Panel of Britain, but the most controversial of these (requiring a two-thirds vote, requiring disclosure upon acquisition of 0.5 percent, and disenfranchising shareholders who acquired shares after the offer was announced) were rejected.  Second, the rules that were adopted, “set up a nice dichotomy with the American takeover scheme”:

In the United States, targets can agree to large termination fees and provide extensive deal protections to an initial bid. Targets can also adopt a shareholder rights plan, or poison pill, which can prevent a company from acquiring the target. But in Britain none of these devices are allowed.

As mentioned above, Davidoff sees the net result of these new rules being less initial bids (because bidders will be entering the fray subject to more risks), but more competition for targets once bids are launched.

SJP

Westbrook on the 100th anniversary of the first “blue sky” law

Amy Westbrook has posted “Blue Skies for 100 Years: Introduction to the Special Issue on Corporate and Blue Sky Law” on SSRN.  Here is the abstract:

Kansas enacted the first state securities law in the United States on March 10, 1911, thereby ushering in a new era of financial regulation. House Bill 906, entitled “An Act to provide for the regulation and supervision of investment companies and providing penalties for the violation thereof” (1911 Act), was the product of disparate forces, including the ongoing struggle over Kansas’ new bank guarantee act, progressive pressures within the Republican Party, strong agricultural markets, the increasing prevalence of traveling securities salesmen, and the work of the charismatic Kansas Commissioner of Banking, Joseph Norman Dolley. This year marks the 100th anniversary of the Kansas “blue sky” law, and this issue of the Washburn Law Journal uses the occasion to look back on the genesis of securities regulation and to think about its future. It is true that the financial markets in 2011 are profoundly different from the markets in 1911. Moreover, the 1911 Act was passed under a specific combination of politics, economics, technology and social forces at work in Kansas in 1911. Although a lot has changed in 100 years, the persistence of the regulatory systems established during the early twentieth century, with respect both to securities and to corporate governance more generally, suggests that era may have more to interest us than “mere” history.

SJP

Is our current system "benefiting the few instead of the many"?

A Reuters column by Peter Apps (here) identifies the widening wealth gap as central to growing discontentment and possible increased political instability.  He quotes U.S. counterinsurgency specialist Patricia DeGennaro, a senior fellow at the World Policy Institute and professor at New York University, as seeing a wider "global uprising" or "worldwide insurgency," with the rising wealth gap as key:

"That is at the root of the insurgency.  In essence, people are tired of how the system is benefiting the few instead of the many ….”

William Galston, a former policy adviser to President Bill Clinton and now a senior fellow at the Brookings Institution in Washington, is also quoted:

“[W]hen you have a large middle class that is shrinking and where you have alarm and despondency over the future, that is where politics can become very volatile and even dangerous. That's what we saw in Europe in the 1930s.”

Apps cites the rise of the right-wing Tea Party as being “widely seen as part of a trend toward extremes and volatility.”

As I've noted recently (here), whatever rising tide there is left--it appears to no longer be lifting all boats.  And, as I've also noted previously (here), it has been written that: "REVOLUTIONS arise from inequalities . . . ." 

SJP

A rising tide?

The Economic Policy Institute reports (here) that "the richest 5 percent of households obtained roughly 82 percent of all the nation’s gains in wealth between 1983 and 2009."  Meanwhile, "[t]he bottom 60 percent of households actually had less wealth in 2009 than in 1983."

SJP

Coates and Lincoln on Fulfilling the Promise of Citizens United

John Coates and Taylor Lincoln have posted “SEC Action Needed to Fulfill the Promise of Citizens United” over at the Harvard Forum.  Here’s a brief excerpt:

[T]he Supreme Court’s Citizens United decision to let corporations spend unlimited sums in federal elections was premised on a pair of promises: Corporations would disclose expenditures, and shareholders would police such spending. Those promises remain unfulfilled …. The best chance to fulfill those promises may now rest with the SEC, which was recently petitioned to begin a rule-making process to require disclosure of political activity by corporations.

SJP

Related Stories

• U.S. Poverty at Record High; Uninsured Hits 20-Year Peak

• Small Business and Skills Shortage: “In August, 33% of small businesses reported having few or no qualified applicants for job openings ….”

• SAT Reading, Writing Scores Hit Low

• With New Technology, Start-Ups Go Lean: “New businesses are getting off the ground with nearly half as many workers as they did a decade ago, as the spread of online tools and other resources enables start-ups to do more with less.”

SJP

Remembering 9/11

 

SJP

Awrey on Complexity, Innovation and the Regulation of Modern Financial Markets

Dan Awrey has posted his paper, “Complexity, Innovation and the Regulation of Modern Financial Markets,” on SSRN.  Here is the abstract:

The intellectual origins of the global financial crisis (GFC) can be traced back to blind spots emanating from within conventional financial theory. These blind spots are distorted reflections of the perfect market assumptions underpinning the canonical theories of financial economics: modern portfolio theory; the Modigliani and Miller capital structure irrelevancy principle; the capital asset pricing model and, perhaps most importantly, the efficient market hypothesis. In the decades leading up to the GFC, these assumptions were transformed from empirically (con)testable propositions into the central articles of faith of the ideology of modern finance: the foundations of a widely held belief in the self-correcting nature of markets and their consequent optimality as mechanisms for the allocation of society’s resources. This ideology, in turn, exerted a profound influence on how we regulate financial markets and institutions.

The GFC has exposed the folly of this market fundamentalism as a driver of public policy. It has also exposed conventional financial theory as fundamentally incomplete. Perhaps most glaringly, conventional financial theory failed to adequately account for the complexity of modern financial markets and the nature and pace of financial innovation. Utilizing three case studies drawn from the world of over-the-counter (OTC) derivatives – securitization, synthetic exchange-traded funds and collateral swaps – the objective of this paper is thus to start us down the path toward a more robust understanding of complexity, financial innovation and the regulatory challenges flowing from the interaction of these powerful market dynamics. This paper argues that while the embryonic post-crisis regulatory regimes governing OTC derivatives markets in the U.S. and Europe go some distance toward addressing the regulatory challenges stemming from complexity, they effectively disregard those generated by financial innovation.

SJP

Movie Trailer: "The Flaw"

 

SJP

A "Win-Win" for Unemployment Numbers

The Wall Street Journal reports (here) that "President Barack Obama ... asked the Environmental Protection Agency on Friday to withdraw an air-quality rule that Republicans and business groups said would cost millions of jobs." 

Well, it looks like the deregulation will not only improve unemployment numbers by saving/creating jobs, but also by reducing job applicants: "The EPA had estimated the tighter standard would save 12,000 lives each year ...."

SJP

Troubling Numbers

Bloomberg recently reported on "The Slow Disappearance of the American Working Man":

The portion of men holding a job … fell to 63.5 percent in July … the lowest numbers [since] 1948…. Men who do have jobs are getting paid less. After accounting for inflation, median wages for men between 30 and 50 dropped 27 percent—to $33,000 a year— from 1969 to 2009 …. What is going on here? For one thing, women, who have made up a majority of college students for three decades and now account for 57 percent, are adapting better to a data-driven economy that values education and collaborative skills more than muscle…. The economic downturn exacerbated forces that have long been undermining men in the workplace …. Corporations have cut costs by moving manufacturing jobs, routine computer programming, and even simple legal work out of the country. The production jobs that remain are increasingly mechanized and demand higher skills. Technology and efforts to reduce the number of layers within corporations are leaving fewer middle-management jobs…. While unemployment is an ordeal for anyone, it still appears to be more traumatic for men. Men without jobs are more likely to commit crimes and go to prison. They are less likely to wed, more likely to divorce, and more likely to father a child out of wedlock.

SJP

Gooses, Ganders, and the Many Facets of Monetary Policy

Bloomberg reports that the Fed gave $1.2 trillion in "secret loans" to the largest banks in the United States and around the world.  Bloomberg provides a cool liquidity chart here, that allows comparisons of the borrowers and their peak amounts borrowed.

I share frustration that, during the crisis, massive loans were available to the largest borrowers, while small businesses and individuals who posed reasonable credit risks were shut out of the loan market. And just because the Fed's massive loan program appears to have served its purpose without any significant harm to taxpayers, it doesn't mean that it was a risk-free endeavor.  Still, I'm of a mixed mind as to whether its a good idea to ensure the Fed can't make such loans.

Note the following, from an Allan Sloan article I posted earlier:

Adding to the current sense of foreboding, at least for me, is the fact that the Federal Reserve, which rode to the rescue last time, is legally constrained by provisions of Dodd-Frank legislation little recognized outside the world of regulators and financial techies. Back in 2007, the Fed could invent programs to bail out solvent but illiquid institutions. It could also turn investment banks like Goldman Sachs and Morgan Stanley (MS) into bank holding companies with access to unlimited Fed funding -- and even infuse cash into nonbank basket case AIG (AIG) directly and indirectly to forestall an uncontrolled collapse, which could have made the Lehman Brothers disaster look like a mere rounding error.

Sometimes, banks, businesses, and individuals are solvent, but not liquid, and access to credit is the only thing that can keep the banks, businesses, or individuals from going under.  We see this at the largest banks, as the Fed program seems to demonstrate, and we see it at the individual consumer level, where there is some indication that restricted access to expensive payday lending can have a negative impact on consumers. (Zinman, 2008) 

At a minimum, this is another instance where it is not clear to me whether the large government bailout (or bailout-like) program is the problem, though I remain skeptical of the bailout programs.  What is clear to me is that the implementation of the program for only the largest and most powerful among us again creates an inequity that warrants questioning.  As the Bloomberg report explains: "$1.2 trillion of public money [is] about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages."  

There is clearly some interest in shutting down the Fed's (and government's) ability to make large loans and expenditures.  Maybe that's right, but I happen to like the idea that the government can choose to help in the face of disasters, whether they are financial or natural disasters. (Note that I maintain my view that government does a terrible job of planning for and mitgating such diasasters, but that's a different matter.)  I just want government to make good choices and to recognize that's what's good for the very wealthy goose, may also be good for the very modest gander.

--JPF