Oh, boy.
Hedge funds, i.e., multi-billion dollar investment firms created just to sell exotic stuff to institutional and very rich individual investors (you can't sell such things to the general public, see), are themselves going public.
This means that management won't be on the hook when that exotic stuff makes losses -- rather, those losses will be spun off to shareholders. I expect that the hedge fund management, meanwhile, will get fixed salaries on top of bonuses for profits made.
This presents something of a moral hazard, to say the least. This is the now-familiar "private gain, public losses" problem. Otherwise known as "betting with someone else's money, but keeping the winnings." Or, as known by more serious writings, "excessive risk-taking."
Theoretically, hedge funds can sell exotic assets, i.e., assets that are non-public and therefore not subject to the SEC's reporting and transparency requirements, to institutional investors and rich people because those folks are savvy enough investors to watch out for their own interest. At least according to the law. So issuers cooking up these assets don't need to publish their financial statements (and prepare them in accordance with GAAP), nor distribute 10-Ks and 10-Qs to the market.
Of course, these investors didn't do such a bang-up job avoiding the subprime mortgage-based assets. They have their own moral hazards to deal with -- nevermind that anyone might be ill-equipped to deal with the kind of complexity that characterizes capital markets lately.
And nothing's changed to expect they'd do a better job in any other new-fangled, and risky, security to spin around the market.
Add on top of that the hedge fund's reduced incentives to monitor risk itself, due to going public.
I sure hope your pension fund isn't a one of these hedge funds' clients.
Wednesday, May 18, 2011
Tuesday, May 17, 2011
Goldman's Diverse Shareholders
Goldman, it seems, is about to shed the last vestiges of its old partnership form.
The New York Times suggests this might be good news, leading to increased transparency as the firm prepared more thorough 10-Ks and 10-Qs for its shareholders.
One could also argue, of course, that the removal of the last 5-10 guys with any "skin in the game" as far as the success in the firm will only increase its risk-taking activities.
Partners tend not to gamble with firm assets, because losses come out of their own pockets.
On the other hand, directors, executives and management who get paid base salaries and bonuses based on profits (with no downside for losses, other than the loss of bonuses) might be more willing to wager the house on the dream of a hefty short term profit.
Of course, this all depends on the fact that Goldman couldn't figure out how to spin-off risk to a bunch of chumps to begin with.
It's good to be a middleman.
The New York Times suggests this might be good news, leading to increased transparency as the firm prepared more thorough 10-Ks and 10-Qs for its shareholders.
One could also argue, of course, that the removal of the last 5-10 guys with any "skin in the game" as far as the success in the firm will only increase its risk-taking activities.
Partners tend not to gamble with firm assets, because losses come out of their own pockets.
On the other hand, directors, executives and management who get paid base salaries and bonuses based on profits (with no downside for losses, other than the loss of bonuses) might be more willing to wager the house on the dream of a hefty short term profit.
Of course, this all depends on the fact that Goldman couldn't figure out how to spin-off risk to a bunch of chumps to begin with.
It's good to be a middleman.
Schneiderman Exploits Civil Discovery
It can't be anything other than good news that NY AG Eric Schneiderman picked up the ball that now-governor Cuomo dropped. He's started to investigate (again? finally?) Wall Street's involvement in formulating toxic mortgage loan portfolios.
Yet, it's not the government that's actually doing its job. It's the government free riding off the lawsuits brought by institutional investors against big banks for selling them crappy pooled loans:
For anyone out there complaining that American culture is too litigious -- well, it's not like the cops on the beat are doing their job. Someone has to.
Meanwhile, one can see the power that ordinary folks have because of their pension funds. It is without a doubt that Schneiderman had a fire lit under his butt by these funds -- and not by anyone else.
Yet, it's not the government that's actually doing its job. It's the government free riding off the lawsuits brought by institutional investors against big banks for selling them crappy pooled loans:
“Part of what prosecutors have the advantage of doing right now, here as elsewhere, is watching the civil suits play out as different parties fight over who bears the loss,” said Daniel C. Richman, a professor of law at Columbia. “That’s a very productive source of information.”
For anyone out there complaining that American culture is too litigious -- well, it's not like the cops on the beat are doing their job. Someone has to.
Meanwhile, one can see the power that ordinary folks have because of their pension funds. It is without a doubt that Schneiderman had a fire lit under his butt by these funds -- and not by anyone else.
Sunday, May 15, 2011
Citizens United Fallout: Will Shareholders Step Up to the Plate?
And will Congress help them?
Yesterday in the NYT, a former Vanguard chairman stressed the necessity that shareholders, in the wake of Citizens United, really begin to assert themselves when it comes to corporate political speech.
It's not surprising this kind of comment comes from Vanguard -- it, unlike other private fund managers, operates more like a credit union than like your typical wall street investment bank. Not to do a corporate plug but, if you're lucky enough to have money to invest for retirement, Vanguard, unlike most money managers, is more likely to take your concerns seriously.
Anyway, institutional investors, using their new powers of proxy access, can submit bylaw proposals requiring, for example, that corporations seek the approval of a majority of shareholders before contributing corporate assets to political campaigns. This sort of reform pulls the rug out of under (at least partially) Citizens United -- in the end, it's the actual people who decide what kind of speech they make.
The problem is, of course, is that it's difficult to get your Fidelity Funds investment manager to get off his tush to represent shareholders actively. Either he doesn't care, has too short term of an an attitude, or is more worried about pissing off the same corporate management he relies upon to hire him to run its employees' retirement funds.
And, according to this NYT piece, these sorts of managers represent about 70% of American shareholdings.*
But not all institutional investors are so lazy. Public union pension funds regularly submit bylaw proposals to change corporate policy.
So what makes public union pension funds so different?
First: they're not governed by the part of Taft-Hartley that requires that employers get equal (or greater than equal) say on pension fund investment practices. Needless to say, this makes it a lot easier for public union funds to swing their weight around on the policies and practices of the companies in which they invest.
Second, public union employees tend to be more aware of where their collective money's going.
These observations give us some simple how-tos to encourage the shareholder franchise in American politics.
First: repeal that part of Taft Hartley.
Second: Promulgate more robust disclosure laws that require fund managers to reveal to their beneficiaries what they're doing about political spending -- and other investment policies. This movement is already well underway in Europe.
Third (and a little pie-in-the-sky): start educating people regarding the role corporations play in their life -- if they realize that their choices are equally, if not more constrained, by the actions of companies as they are by the actions of government, perhaps they'll take their franchise rights more seriously.
* Note: no one, as far as I can tell, has ever done a serious and comprehensive study on the type and size of various different kinds of investors, both institutional and individual, what kinds of companies they invest in, and what kind of policies they pursue in connection with their shareholdings. And I've already asked the folks at OECD. Any ambitious grad students out there???
Yesterday in the NYT, a former Vanguard chairman stressed the necessity that shareholders, in the wake of Citizens United, really begin to assert themselves when it comes to corporate political speech.
It's not surprising this kind of comment comes from Vanguard -- it, unlike other private fund managers, operates more like a credit union than like your typical wall street investment bank. Not to do a corporate plug but, if you're lucky enough to have money to invest for retirement, Vanguard, unlike most money managers, is more likely to take your concerns seriously.
Anyway, institutional investors, using their new powers of proxy access, can submit bylaw proposals requiring, for example, that corporations seek the approval of a majority of shareholders before contributing corporate assets to political campaigns. This sort of reform pulls the rug out of under (at least partially) Citizens United -- in the end, it's the actual people who decide what kind of speech they make.
The problem is, of course, is that it's difficult to get your Fidelity Funds investment manager to get off his tush to represent shareholders actively. Either he doesn't care, has too short term of an an attitude, or is more worried about pissing off the same corporate management he relies upon to hire him to run its employees' retirement funds.
And, according to this NYT piece, these sorts of managers represent about 70% of American shareholdings.*
But not all institutional investors are so lazy. Public union pension funds regularly submit bylaw proposals to change corporate policy.
So what makes public union pension funds so different?
First: they're not governed by the part of Taft-Hartley that requires that employers get equal (or greater than equal) say on pension fund investment practices. Needless to say, this makes it a lot easier for public union funds to swing their weight around on the policies and practices of the companies in which they invest.
Second, public union employees tend to be more aware of where their collective money's going.
These observations give us some simple how-tos to encourage the shareholder franchise in American politics.
First: repeal that part of Taft Hartley.
Second: Promulgate more robust disclosure laws that require fund managers to reveal to their beneficiaries what they're doing about political spending -- and other investment policies. This movement is already well underway in Europe.
Third (and a little pie-in-the-sky): start educating people regarding the role corporations play in their life -- if they realize that their choices are equally, if not more constrained, by the actions of companies as they are by the actions of government, perhaps they'll take their franchise rights more seriously.
* Note: no one, as far as I can tell, has ever done a serious and comprehensive study on the type and size of various different kinds of investors, both institutional and individual, what kinds of companies they invest in, and what kind of policies they pursue in connection with their shareholdings. And I've already asked the folks at OECD. Any ambitious grad students out there???
Saturday, May 14, 2011
Today I asked a electrical workers' union member, who's actively involved in a local chapter of a national socialist party, why his union didn't pay more attention to what its pension fund was doing and think more about what it could be doing. He responded:
Two points here. One: American unions don't pay enough attention to a source of power and leverage they already have -- the tens of billions of dollars of corporate equity they own. This could be made even more powerful if there's a movement to get rid of the part of taft-hartley that lets corporate execs have a hand in fund management.
Two: How to handle the perverse incentive of owning a company and wanting to make a profit from it --- while still staying true to labor reform? Making profits as a shareholder, after all, can mean cuts to wages and benefits.
I know we own a big chunk of blue cross. But they haven't done shit for us. Our benefits keep getting worse. Our pension fund managers don't do shit and then the union bureaucracy. And then we also own a big chunk of the philly inquirer -- brilliant investment, that, in this internet age.
Two points here. One: American unions don't pay enough attention to a source of power and leverage they already have -- the tens of billions of dollars of corporate equity they own. This could be made even more powerful if there's a movement to get rid of the part of taft-hartley that lets corporate execs have a hand in fund management.
Two: How to handle the perverse incentive of owning a company and wanting to make a profit from it --- while still staying true to labor reform? Making profits as a shareholder, after all, can mean cuts to wages and benefits.
Tuesday, May 10, 2011
Legal Personalities and Evildoers
There isn't any bourgeoisie anymore. If there ever was. It is the corporation that uses capital now. And those companies are owned by diversified shareholders -- who often include among their ranks the workers themselves.
Except "ownership" isn't really the right word. Diversified shareholders don't look and act like owners. They don't use their property, don't monitor it, and, in fact, don't really care much what happens to it, so long as they get dividends and can sell their shares for a profit.
In fact, it's fair to say that no one really owns the corporation. The people who run the corporations, meanwhile, the managers and directors, well, they get paid wages, too. And the people who decide where capital gets allocated -- they're on wall street, and have motives altogether different than whether a particular business succeeds or not.
So who's the bourgeoisie, then?
When one goes to think about a Marxist kind of political economy, one has to remember Marx's most important point -- it's concentrating on dialectic relationships. it's concentrating on materialist history.
It's the economic system, not the evil, amorphous, unidentified "theys." It's the social and economic forces that lead to the formation of corporations -- which are, in their essence, social and economic relations among workers and among capital providers (who are, in this age of public corporations, also workers).
So why do socialists hold up banners screaming in outrage that "GE paid no taxes!!!" when GE isn't, in fact, a real person. It's a group of people doing stuff in concert, hopefully to make a profit. This entity that didn't pay taxes, well, it's just a social machine. A machine that hires workers. And pays dividends to its shareholders -- who are also workers.
Rather, what is more despicable about corporations is that they make public messes and they don't pay for the clean up. Those costs are distributed among all of society, while the profits are kept by the corporation's specific constituencies -- workers, executives, shareholders, and creditors.
The activists, however, aren't the only people who like to personify business organizations. Our laws treat corporations like they're people, too. They enter into contracts and they pay taxes. Recently, our supreme court even granted them free speech rights.
It's time to get back to the nuts and bolts. We all need to acknowledge what's really going on, so we have a prayer of changing things. This means we can't string up some goldman sachs insider trader and stone him and call it finished business.
This goes much deeper.
Except "ownership" isn't really the right word. Diversified shareholders don't look and act like owners. They don't use their property, don't monitor it, and, in fact, don't really care much what happens to it, so long as they get dividends and can sell their shares for a profit.
In fact, it's fair to say that no one really owns the corporation. The people who run the corporations, meanwhile, the managers and directors, well, they get paid wages, too. And the people who decide where capital gets allocated -- they're on wall street, and have motives altogether different than whether a particular business succeeds or not.
So who's the bourgeoisie, then?
When one goes to think about a Marxist kind of political economy, one has to remember Marx's most important point -- it's concentrating on dialectic relationships. it's concentrating on materialist history.
It's the economic system, not the evil, amorphous, unidentified "theys." It's the social and economic forces that lead to the formation of corporations -- which are, in their essence, social and economic relations among workers and among capital providers (who are, in this age of public corporations, also workers).
So why do socialists hold up banners screaming in outrage that "GE paid no taxes!!!" when GE isn't, in fact, a real person. It's a group of people doing stuff in concert, hopefully to make a profit. This entity that didn't pay taxes, well, it's just a social machine. A machine that hires workers. And pays dividends to its shareholders -- who are also workers.
Rather, what is more despicable about corporations is that they make public messes and they don't pay for the clean up. Those costs are distributed among all of society, while the profits are kept by the corporation's specific constituencies -- workers, executives, shareholders, and creditors.
The activists, however, aren't the only people who like to personify business organizations. Our laws treat corporations like they're people, too. They enter into contracts and they pay taxes. Recently, our supreme court even granted them free speech rights.
It's time to get back to the nuts and bolts. We all need to acknowledge what's really going on, so we have a prayer of changing things. This means we can't string up some goldman sachs insider trader and stone him and call it finished business.
This goes much deeper.
It's illegal for everyone to steal bread...
... but you never find any rich folks in jail.
Thus, a law perceived to be neutral, e.g., against the stealing of bread, actually hammers down on certain people harder than others and fails to take into account the mitigating circumstances that would lead most people, on further reflection, to conclude that the stealing of bread by poor people ought to be decriminalized or, at the very least, carry punishments less severe than we are wont to apply.
It's been argued that this aspect of our legal order reflects and mitigates class conflict. Specifically, its implementation illustrates class conflict (only poor people go to jail) while, on its face, it appears completely neutral (it's not a class thing, it applies to everyone equally). Thus the law, because of its superficial neutrality, serves to quell moral outrage at the disparate way we treat rich people and poor people.
Well, that's a bit drastic -- there's not some cabal of evildoers sitting around a board table on the 100th floor of some high rise plotting this stuff out. But there's something to it.
For example. This phenomenon reveals itself most explicitly when we consider that rich folks who steal stuff -- by peddling assets worth pennies for thousands -- usually get away scott free. They certainly don't go to prison. Why's that? Well, the law against stealing stuff doesn't apply to what they're doing. The laws that apply to this kind of behavior are embedded into our labrynthine codex of securities regulation.
This tendency to apply the same legal standard to vastly different circumstances, or to apply different legal principles to similar circumstances, depending on what those circumstances happen to be and who they happen to most often -- also reveals itself in the securities fraud context.
In plain vanilla commercial litigation, breach of disclosure cases are more common than Applebees chains in strip mall suburban communities. In these cases, where one company buys another, there's usually a claim that the seller breached its represesntations and warranties about its financial condition.
Usually there's nothing very nefarious going on. Usually, there's no outright fraud. Sure, you get seller representatives "spinning" bad situations, and perhaps not emphasizing the weaker part of their business. Inevitably, however, when the buyer finds out that its new company isn't as spiffy as it thought it would be, it sues to get some or all of its money back.
It's sort of the same thing as a consumer going to the grocer's to buy a diet drink that promises to remove the extra bags on the saddle. When, lo and behold, not all the bags are gone after a few weeks, the consumer marches back into the store, with guns blazing and trumpets sounding, to waste a good part of the weekend afternoon stewing in a customer service line.
But really, no one ever expected the bags to really disappear.
So it is in deal litigation. Except that in the M&A case, the buyer hires an army of pricy lawyers and spends a couple million bucks litigating the deal before courts.
And courts and the law expect commercial parties, like the diet drink consumer, to figure out what kinds of representations are just commercial fluff and spin, and which are supposed to be hard facts. You can't lie about those hard facts -- especially if you warranted, in your contract, that you provided all of them, and all of them accurately.
Does this work the same when it comes to misrepresentation in securities fraud cases?
Well, the courts certainly think it does. So you get shareholders and bondholders suing because their broker sold them a bunch of toxic assets. And you get courts saying, well, so long as those brokers didn't make any hard promises and turned over all their balance sheets, you're on your own when it comes to protecting your interests. you've got to do your own due diligence to figure out if it's a good deal. The only caveat: the broker can't outright lie. But they don't have to point out for you the weak parts of their P&Ls for you.
It seems logical or, at least, consistent.
Until one considers that investors, in reality, trust their brokers to fish out good deals for them. Add on top of that the fact that the "investors" are really just a bunch of working stiffs who rely upon their investment managers to do a good job avoiding risk and fishing out productive investments. Of course, those managers -- who get paid via bonuses based on short term performance -- perhaps don't pay as much attention to what they're buying with other peoples' money as they ought.
And suddenly the "buyer beware" mentality, when it comes to securities fraud, maybe isn't such a neutral and objective rule. The "buyer" -- the auto factory worker with the pension plan -- physically *can't* beware. He likely doesn't know that his pension fund was even looking to buy anything. And the two intermediaries standing between him and the bad investment deal -- the broker and the investment manager -- aren't "bewaring" either.
And "buyer beware" works only if there's a buyer actually, um, capable of "bewaring."
So, just like a law against stealing bread, the law that governs mispreprentation and disclosure cases reflects something about our society. Its implementation harms working stiffs more than it harms corporate M&A counterparties, and thus reflects a difference between the way our society values workers versus corporations. And its superficial neutrality -- applying equally to both securities fraud cases and to M&A litigation -- mitigates that tension.
Thus, a law perceived to be neutral, e.g., against the stealing of bread, actually hammers down on certain people harder than others and fails to take into account the mitigating circumstances that would lead most people, on further reflection, to conclude that the stealing of bread by poor people ought to be decriminalized or, at the very least, carry punishments less severe than we are wont to apply.
It's been argued that this aspect of our legal order reflects and mitigates class conflict. Specifically, its implementation illustrates class conflict (only poor people go to jail) while, on its face, it appears completely neutral (it's not a class thing, it applies to everyone equally). Thus the law, because of its superficial neutrality, serves to quell moral outrage at the disparate way we treat rich people and poor people.
Well, that's a bit drastic -- there's not some cabal of evildoers sitting around a board table on the 100th floor of some high rise plotting this stuff out. But there's something to it.
For example. This phenomenon reveals itself most explicitly when we consider that rich folks who steal stuff -- by peddling assets worth pennies for thousands -- usually get away scott free. They certainly don't go to prison. Why's that? Well, the law against stealing stuff doesn't apply to what they're doing. The laws that apply to this kind of behavior are embedded into our labrynthine codex of securities regulation.
This tendency to apply the same legal standard to vastly different circumstances, or to apply different legal principles to similar circumstances, depending on what those circumstances happen to be and who they happen to most often -- also reveals itself in the securities fraud context.
In plain vanilla commercial litigation, breach of disclosure cases are more common than Applebees chains in strip mall suburban communities. In these cases, where one company buys another, there's usually a claim that the seller breached its represesntations and warranties about its financial condition.
Usually there's nothing very nefarious going on. Usually, there's no outright fraud. Sure, you get seller representatives "spinning" bad situations, and perhaps not emphasizing the weaker part of their business. Inevitably, however, when the buyer finds out that its new company isn't as spiffy as it thought it would be, it sues to get some or all of its money back.
It's sort of the same thing as a consumer going to the grocer's to buy a diet drink that promises to remove the extra bags on the saddle. When, lo and behold, not all the bags are gone after a few weeks, the consumer marches back into the store, with guns blazing and trumpets sounding, to waste a good part of the weekend afternoon stewing in a customer service line.
But really, no one ever expected the bags to really disappear.
So it is in deal litigation. Except that in the M&A case, the buyer hires an army of pricy lawyers and spends a couple million bucks litigating the deal before courts.
And courts and the law expect commercial parties, like the diet drink consumer, to figure out what kinds of representations are just commercial fluff and spin, and which are supposed to be hard facts. You can't lie about those hard facts -- especially if you warranted, in your contract, that you provided all of them, and all of them accurately.
Does this work the same when it comes to misrepresentation in securities fraud cases?
Well, the courts certainly think it does. So you get shareholders and bondholders suing because their broker sold them a bunch of toxic assets. And you get courts saying, well, so long as those brokers didn't make any hard promises and turned over all their balance sheets, you're on your own when it comes to protecting your interests. you've got to do your own due diligence to figure out if it's a good deal. The only caveat: the broker can't outright lie. But they don't have to point out for you the weak parts of their P&Ls for you.
It seems logical or, at least, consistent.
Until one considers that investors, in reality, trust their brokers to fish out good deals for them. Add on top of that the fact that the "investors" are really just a bunch of working stiffs who rely upon their investment managers to do a good job avoiding risk and fishing out productive investments. Of course, those managers -- who get paid via bonuses based on short term performance -- perhaps don't pay as much attention to what they're buying with other peoples' money as they ought.
And suddenly the "buyer beware" mentality, when it comes to securities fraud, maybe isn't such a neutral and objective rule. The "buyer" -- the auto factory worker with the pension plan -- physically *can't* beware. He likely doesn't know that his pension fund was even looking to buy anything. And the two intermediaries standing between him and the bad investment deal -- the broker and the investment manager -- aren't "bewaring" either.
And "buyer beware" works only if there's a buyer actually, um, capable of "bewaring."
So, just like a law against stealing bread, the law that governs mispreprentation and disclosure cases reflects something about our society. Its implementation harms working stiffs more than it harms corporate M&A counterparties, and thus reflects a difference between the way our society values workers versus corporations. And its superficial neutrality -- applying equally to both securities fraud cases and to M&A litigation -- mitigates that tension.
Subscribe to:
Posts (Atom)