Cracking Down on Collective Bargaining - Institutional Investor Style

After Dodd-Frank's corporate governance reforms, it appears that the opposition to governing corporations in the interests of anything else except short term profits and executive insiders isn't content to merely challenge the SEC's proxy access rules before SCOTUS.

Now, a movement to reign in proxy advisory firms. 

Institutional investors like pension funds hire these companies to monitor corporate performance and to provide advisory services on upcoming shareholder votes.  As most institutional investors are heavily diversified (often required by law to be so), they need this sort of service to do their jobs properly.  Think of it as enabling collective action.

Certainly, reforms that require these advisory firms to be transparent and to refrain from entering into conflict-of-interest transactions (when they're hired by a firm who invests on its own behalf, as well as by the firm's own investors) make sense.   After all, it makes sense for Moody's and S&P, who get paid by the very same firms whose securities they are rating.

The thing is: oversight failure over Moody's & S&P leads to unacceptable systemic risk.  People bought AAA rated securities toilet assets on Moody's good recommendation.

Riskmetrics, ISS et al don't tell investors to buy trash.  They don't tell investors how to invest their funds.  Rather, they tell investors where executive compensation is out of whack, when getting rid of a staggered board would make sense.  Their services, in other words, are to help investors after they've bought securities.

So it would make sense, given their different purposes, that they would be subject to different regulations. 

Don't let the hubbub coming out confuse you.  Advisory services aren't the same villain as the credit ratings agencies.  And so they should be punished as if they are.

The other governments we should pay attention to

FT Editorial Page:

Shareholder values

How shareholders choose to vote is above all a private matter. Investors are free to tell the companies they own to pursue goals besides profit. One goal can be concern for safety and the environment: complaints from faith-based and other investors in BP have grown louder since the Deepwater Horizon explosion and oil spill. Another is fair pay: the Church Investors Group wants pay ratios between top executives and the lowest-paid tenth of employees to fall below 75 .

Is such shareholder activism also in the public interest? It could be. If more owners thought, like some faith-based investors, that they had a duty of stewardship, they could provide a useful check on managers. No lofty motives are needed for this to be in the interest of shareholders, whose money is after all the first to be lost to overly risky strategies or to remuneration that extracts more value from a company than it adds.
Whether it is good for society at large, too, depends on what shareholders use their activism for and to what degree they succeed. As to the former, taking a stand on executive pay is a healthy change from the usual apathy. Depending on the warmth of relations between executives and pay committees, “pay for performance” often turns into pay without the performance. Incentives are easy to game and can undermine people’s intrinsic motives for doing a good job.
If more institutional investors join the activist game it could even have an effect. Crude caps on pay multiples may not be the best solution. But they would hardly scare executives away. Most institutions are “universal investors” and if the same rules apply to all their holdings, managers feeling under the thumb would have nowhere else to go. Unless it is where ethical investors fear to tread: tobacco, alcohol and pornography. Perhaps it is all a divine plan to put greedy executives on the wages of sin.

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So, Carl Levin's Read Michael Lewis

Today's FT reports that Carl Levin's senate investigation committee is referring a few cases to DOJ for prosecution.  Namely, cases based on the fact that banks like Goldman and Deutsche were selling toxic assets while at the same time going short on those assets.

It reads straight out of The Big Short.  With even a shout-out to Greg Lippman.

Good to know that the Senate investigations' committee is has just as many investigative resources as a single author.

Auction-Rate Securities Settlements - Paying off the Richies, but not Your 401(k)

Another comment on the Morgenson/Story piece in today's NYT:

In one of the SEC's rare prosecutions of the shenanigans leading up to the financial crisis, the SEC extracted compensation from banks that hoodwinked investors into buying "acution-rate securities" by promising that they were liquid and safe.  But only for retail investors, i.e., investors rich enough to trade on their own accounts.  The rest of us -- anyone with a pension fund or 401(k), got screwed:

But Mr. Alvarez suggested that the S.E.C. soften the proposed terms of the auction-rate settlements. His staff followed up with more calls to the S.E.C., cautioning that banks might run short on capital if they had to pay the many billions of dollars needed to make all auction-rate clients whole, the people briefed on the conversations said. The S.E.C. wound up requiring eight banks to pay back only individual investors. For institutional investors — like pension funds — that bought the securities, the S.E.C. told the banks to make only their “best efforts.”

This shift eased the pain significantly at some of the nation’s biggest banks. For Citigroup, the new terms meant it had to redeem $7 billion in the securities for individual investors — but it was off the hook for about $12 billion owned by institutions. These institutions have subsequently recouped some but not all of their investments. Mr. Alvarez declined to comment, through a spokeswoman.

Perhaps the SEC was hoping the pension funds would fulfill their fiduciary duties and sue these banks themselves for securities fraud.  We should look forward to a wealth of new caselaw in the coming years.  

Financial Crisis Prosecution: Elephants in the Room, Farting yet still invisble

The NYT's Gretchen Morganson and Louise Story posted an "expose" today about the embarassing dearth of financial crisis criminal prosecutions.  Pointed is their description of the cosy, crony-capitalistic structure of banks and other financial isntitutions and the so-called regulators that ostensibly babysit them -- as well as their identification of the anti-regulatory cultural consciousness that herded regulators into inaction.

The  excuse offered up by regulators that has the most purchase, though, is the fact that even should they get money from these companies, that money would come straight out of the accounts holding taxpayer-funded bailouts.  Or, worse yet, would undermine financial stability.

Even if that's true and salient -- which assumes, of course, that financial engineering, especially to this degree, has some sort of overall social benefit:

Clawing back the hefty paychecks of the individual financial executives, traders, and dealers wouldn't implicate such issues.  And they're the individuals whose risky behavior the regulators are supposed to regulate to begin with.  Financial institutions aren't just some giant non-human hive-mind that has a life of its own.  It's the people working for them that do the bad things.

Moreover, the law does not limit fraud actions to corporate behavior.  The individuals involved in the fraud, theoretically, are liable too.  In fact, corporations only face liability for fraud because the law holds them, as employers, vicariously liable for the acts of their employees. 

Certainly, the securities laws don't offer the same kinds of claims as plain vanilla common law fraud -- execs, for example, aren't always individually liable for misstatements in the company's 10-Ks -- but there are other tools in the toolbox.

Meanwhile, wall street pay is through the roof.  Still.