Exhibit A

Big Pharma closing up shop in the UK to appease shareholders by cutting fixed costs, rolling out a hefty share buy-back program with future intent to pilfer rely on the R&D efforts of small firms, academia and... the government.  Moving from the development of drugs to... vitamins.

And the world becomes a better place for all.

The Next Generation

In the 1980s, Germany didn't have a stock exchange to speak of.

Now, its exchange is going to buy out NYSE.

And there's a stock market in almost every country in Africa.

This stuff is getting really important.

Lessons from Enron on those Social Impact Bonds

David Cameron and Barack Obama are rolling out plans to privatize certain social programs: a "nonprofit" will run it, and if the program hits certain canned benchmarks, they get their investment back from the tax payer, plus interest -- and bonuses if they overachieve.  If they do well enough -- and this is the end game -- they'll lure the big bucks of private investors.

Problem is, all investors care about is the return on their investment.  And we know what happens when pressure to deliver that return drowns out everything else -- Enron, anyone? Toxic asset financial crisis? The folks running the store stop paying attention to the quality of the goods they deliver and starting honing in on those quarterly earnings reports.

In other words, there's a big difference between product market discipline (regarding the quality of the goods landing in hands of consumers) and equity market discipline (regarding the value of the bonds and shares landing in the hands of investors). 

The programs, therefore, are only as good as their supervisors and regulators are strong and smart.  Given recent events, I'm not hopeful.  Especially as we rely on the private sector (like ratings agencies and accounting firms) to do most of it for us.  Lately, that portion of the private sector has been letting us down big time.  And ironically, the reason that Obama et al. want to do this to begin with is because the public sector, allegedly, is lousy at oversight:

Programs that fail to make a difference — like many of those that train workers for new jobs — endure indefinitely. Often, policy makers don’t even know which work and which don’t, because rigorous evaluation is rare in government. And competition, which punishes laggards in the private sector, is typically absent in the public sector.

So we're back to square one: we need better government regulation.  So what's the point? Given the spectacular success of the defense-contractor industry, one can only suspect it's just another space for the pigs to feed at the government trough. 

Meanwhile, instead of workers getting laid off and pensions biting the dust, it's the folks who most need government assistance that feel the pain.

Wish We Had This Problem

VW agrees to wage increase for German workers.

Catching Up With the Crowd

Well, I suppose it's got an excuse, as it's been fumbling around the basement getting its books and records together, but the SEC has finally caught up with the plaintiffs' firms.

Finally -- finally -- the SEC is launching a securities fraud investigation into the banking industries' disclosures (or misdisclosures) regarding the mortgage-backed securities they were selling everyone.

The funny thing is, most of the folks complaining about fraud are the big sophisticated type.  Freddie Mac, Allstate, and the NY Fed Reserve, for example, going after BofA.

Given all the short-selling and CDS involved, one might wonder whether some of this is just a childish tattletale.  One sibling fingering the blame at the other when both are culpable.  Undoubtedly, this suspicion will be presented as a defense.  Still, bad behavior is bad behavior, whether or not someone else behaved badly, too.

So, hopefully the plaintiffs' firms will make them pay.  As, given the SEC's wet-noodle-treatment of Goldman, the government isn't likely to.

Banbridge on CSR: Fawlty Assumptions

Prof. Bainbridge criticizes Obama on "preaching" corporate social responsibility.

Don't really have time right now to write (and I'm sure no one has the time to read) a lengthy criticism.  A few points, though:

One.  He assumes that employees can contractually avoid exploitation of "quasi rents" through job mobility.

Point: Job mobility ain't so great lately, in case you haven't noticed, and, if everyone turns into independent contractors, like he wants, where will our healthcare benefits to come from? Ever try to make a budget when you don't know where/how much next week's paycheck is going to be?

Two.  He assumes that employees can protect themselves through negotiation and collective action better than shareholders. 

Point: Last I checked, only 7% of America was unionized.  Meanwhile, more and more investors are the institutional kind or the wall-street proprietary-trading kind.  You know any day traders? So why, exactly, are shareholders less able to protect themselves from managerial misconduct through collective action?

Three.  The double-standard on the "take it or leave it" contract.  Banbridge thinks the "market" will correct any bad terms in an employee's "take it or leave it" contract.  Therefore, this should not serve as an excuse that the employment contract isn't sufficient to protect employee interests. 

Point: But he doesn't apply the same thinking to the "take it or leave it" shareholder contract, where shareholders have to live with residual risk.  Instead, we've got to have the govenrment step in and babysit directors by imposing fiduciary duties.  Why won't the "market" correct their like it corrects workers?

Four.  Shareholders and stakeholders alike can constrain corporate behavior by "constraining their inputs." In English, this means that management won't treat them so badly they'd quit or invest elsewhere.

Point: Workers can't "constrain their input" in as much as, well, they have to make a living to feed themselves.  So the "constraint on input" pressure from workers isn't as strong.  They can't choose not to input.  And lately, the choices of where you get to put that input are pretty restrained!  Ever wonder why a woman would refuse to leave a job when her boss is a sexually harassing pervert? Because she likes it there? Bottom line: the cost to workers of withholding their input from corporations is much greater than the cost to investors. 

Five.  "Many nonshareholder constituencies have substantial power to protect themselves through the political process.  Public choice theory teaches that well-defined interest groups are able to benefit themselves at the expense of larger, loosely defined groups by extracting legal rules from lawmakers that appear to be general welfare laws but in fact redound mainly to the interest group’s advantage."

Point: Because investors aren't a "well-defined interest group" that is "able to benefit [itself] at the expense of the larger, loosely defined groups."  Right.  Imagine Fidelity telling the world it hasn't got any well-defined interest group, or the wherewithal to fund one. 

Six.  "Collective bargaining obviously does not protect nonunionized workers, but they receive comparable protections from both legal and market forces. Various market mechanisms have evolved to protect employee investments in firm specific human capital, such as ports of entry, seniority systems, and promotion ladders. As private sector unions have declined, moreover, the federal government has intervened to provide through general welfare legislation many of the same protections for which unions might have bargained. The Family & Medical Leave Act grants unpaid leave for medical and other family problems.  The Occupational Safety & Health Administration (OSHA) mandates safe working conditions. Plant closing laws require notice of layoffs. Civil rights laws protect against discrimination of various sorts. And so on."

Point.  "And so on" ? Unless I've been living on mars for the past 30 years, seems like worker protections are going down the drain when it comes to social welfare programs and benefits. 

Overall, Prof. Bainbridge wants us to protect stakeholders through "external" regulation.  Let's let corporations do whatever they like (so long as they're taking care of share price) and let the broader public eat the costs by providing social welfare benefits -- without benefitting from much of the corporate profits. 

Of course, the business community fights any proposal to impose such "external" regulation tooth and nail.  Meanwhile, the same pesky "collective action" problem bedevilling shareholders in exercising their corporate franchise bedevils the rest of us when it comes to getting Congress off its ass.  Corporate America, on the other hand, doesn't have such a collective action problem.  And less and less, likewise, do investors.

The result? Industry has the most political power.  And the only responsibility that it pays attention to, thanks to our corporate laws, is the one that forces them to inflate share prices -- to the point that it hurts everyone else.  Think layoffs, outsourcing, opening offices overseas, downsizing, etc.

Meanwhile, no good reason manifests itself as to why directors can't have fiduciary duties to everyone, not just shareholders.  Sure, their interests may collide; this is why we rely on directors' "business judgment." 

The bottom line:  Shareholders shouldn't get more protections under corporate law than do any of the other corporate constituencies.  Any failure to realize this indicates that you've had your head up your ass since the advent of supply side economics.

From Your Pocket to Theirs

Goldman etc. are doing so well they don't know what to do with all their cash.  Maybe they'll give it back to their investors via share buy-backs.  Or maybe they'll buy more distressed assets -- if they can even find them.  Apparently toxic assets are (again) the new black. 

Wait.  Haven't we been here before?  So... we bailed them out so they could buy more crap?  Or so they could just pocket the money and walk away?

Delicious Irony

Bankers' eating their own medicine.

Now they've got pressure to outsource.

Don't suppose now they'll think twice before pressuring their corporate investments to do the same?

Nah.

Shareholders' Interests and Incentive-Based Exec Compensation: An Abusive Relationship

The entire executive compensation debate over the past few years boiled itself down into a pretty simplistic talking point, namely, "greedy corporate boards are stealing our money, internalizing the upside and publicizing the downside! shady buggers!!"

So now we get say-on-pay advisory votes for shareholders.  And government regulators encouraging banks to stave off bonuses for a few years and institute clawback clauses.  Some pretty sad looking balloons.

But incentive-based compensation was supposed to help investors.  An increase of stock price helps shareholders.  So tying the paydays of corporation leadership to stock price would, in theory, would encourage them to help shareholders.

Obviously it got a bit derailed.  The pressure to chase short-term share performance overwhelmed sustainable investment policies that would minimize systemic risk.  Thus, the importance of tying compensation to long-term and sustainable performance cannot be underestimated.   This modified incentive-based compensation scheme is what our regulators are after now.

Of course, such involves a value judgment about the relative moral standing of long-term investors vs. short-term investors.  Short-term investors will make less money vis-a-vis long term investors, under the modified scheme.  I'm comfortable with that -- for so many reasons -- but many people won't be.

Regardless, as we untangle ourselves from the compensation crisis, though, a new worrisome movement.

A movement to tie the compensation of mutual fund brokers and advisors to ... mutual fund share performance.  Proposed by... mutual fund investors themselves.

Are we doomed to repeat history?

Contemplating the chain reaction of this is scary.  mutual funds clamoring for faster, higher profits because of incentive-based compensation, will begin to place more pressure on corporate boards to start doing the same.  And thus we find ourselves landing in the same miasma we're wallowing in now.

Is this the outcome of short term memory? Or is it a red herring, supported by financial institutions who make money off both their own mutual funds and broker/advisor services?

Or maybe, just maybe, the problem with risk-taking isn't really about executive compensation.   Maybe it has something to with what we think our corporations and pension funds are supposed to be doing in the first instance.  Their raison d'etre.

And maybe their raison d'etre doesn't have so much to do with making money for investors.  Maybe it's time to start reconsidering the purpose for which we should govern our collective assets.

More on Jamie Dimon's Fragile Ego

It's been observed recently that it's just not simply enough that the Very Rich remain Very Rich.  They need to be Loved, too.

Well, here's them earning some of that Love -- underwriting the Government's sale of it's bailout-bought toxic assets, even though they could make more money elsewhere.

Their Kind Hearts.

Oh, wait.  One of 'em wants to run for public office:

Dimon’s Legacy Elinor Comlay and Matthew Goldstein profile Jamie Dimon: “if Dimon seems unusually thin-skinned, many industry insiders say, it is an indication of the importance the 54-year-old Queens, New York native places on his legacy — and how that will affect his ability to forge a life beyond finance.” That life will include politics, if Mr. Dimon listens to Bill Clinton, who thinks the JPMorgan chief would be “really good” at it. Reuters

Perhaps five years ago, the prospect of Governor Dimon would have induced shutters of fear.  Now, well, we realize that the government is already chock full of his type.

It's All Relative

Many may snort at the whining of Chrysler Chief Sergio Marchionne about the exorbitant interest rates he's got to pay for the government bailout loans received by his company.  Given that no one else would lend.

But, who can blame him? When the Big Banks got free government money -- which helps fund big bank bonuses.  I'd moan and groan about it, too.  At least Chrysler makes things and employes workers.  That's certainly more than one can say about the Big Banks.

Why Risk Reduction Needs More Than Compensation Reform

There will always be a way for bank leadership to skim off the top.  The only solution, therefore, is to either (1) make sure failure hurts by refusing to dole out bailouts; or (2) make sure they stop taking risks by increased capital reserve requirements, regulation, and separating -- again -- their commercial and investment functions.  For only then will banks' competition-induced risk-taking be effectively cordoned off from the rest of our economy.

"Tiering," Cramdown, Legal Myth, and Mediation

The law is chock full of tiered laws.  One set of laws for the sophisticated rich types, another set for the rest of us.  In securities laws, for example, "sophisticated" investors get one set of regulations, the rest of us, another.  "White collar" crime -- fancy prison, or no prison at all.  Robbing the bodega -- Felony, hard time at Rikers Island. 

But still, above all this, stealing stuff is still supposed to be a crime. 

The same is true, of course, in bankruptcy.  While corporate debtors* can pay pennies on the dollar on most other forms of debt -- bankruptcy courts can force all their creditors to take haircuts, so long as they abide by the laws of debt priority, of course -- individual debtors don't get the same benefit.

We can't, for example -- and depsite President Obama's profuse promises -- reduce our homeowner mortgages.  And we can't, for example, reduce our student loan debts. 

But, again, above all this, in both instances we're supposed to avoid the use of debtors' prison while apportioning debt-reduction fairly among creditors.

All I can say -- thank goodness we have one standard for important rights like free speech.  Wait a mintue -- no, that's tiered too.

How do we get away with this stuff, operating under a single theory of what justice is supposed to look like, but then dividing up the nuts and bolts of it so unfairly?

Prof. Douglas Litowitz suggested the following, an argument that resonates:

For Marx, the law was similar to other cultural institutions in that it arose in a mediation of the underlying contradictions of the capitalist system, particularly the conflict between classes (bourgeois versus proletarian).  To explain how class conflict played out within the legal system, Marx devoted an entire chapter of Capital to the legal battles over the length of the working day, which he described as “protracted civil war, more or less dissembled, between the capitalists and the working class.” In other words, this was a physical and material struggle over working hours and conditions, a struggle that might otherwise have been fought in the streets and factories, that was instead sublimated to a more abstract level and played out in the court system.

The underlying contradiction simmering beneath the surface (the poor want limits on the working day while capitalists do not) are then glossed over with the enactment of a single legislative decree that is wrapped in the mantle of universality and reason, cloaked with abstract rationalizations about freedom, autonomy, democracy, and equality. The resulting legislation does not, on the surface, bear the marks of a class struggle; to the contrary, it appears as the product of deliberation by a representative assembly in the finest tradition of democracy. In other words, the surface of legal doctrine gives no indication of its class bias.

Perhaps the best illustration of this is Anatole France's quip: “The majestic equality of the law . . . forbids the rich as well as the poor [from] sleep[ing] under bridges, to beg in the streets, and to steal bread” his point being that such laws are meant to apply only to the poor (since the rich have no need to sleep under bridges) but they are couched in universal terms as applying to all people rich and poor, since a law that too clearly betrays its class bias would offend the sensibilities of the ruling class. Therefore, the law is the product of mediation between classes, but this mediation is skewed by the imbalance of power between the classes and then camouflaged by the surface universalism of the law which seems to apply equally to all persons of all classes.

So the overarching "theme" of the law (e.g., stealing is bad, debts should be forgiven while preventing moral hazard, free speech is important) is just a story.  The reality is the nuts and bolts, the tiering.  Just hopefully the public doesn't notice. 

*Note that corporate debtors can do this without actually having to be insolvent.  The blessings of Chapter 11.

"A Realistic Path Towards Employability"

So, according to a new Harvard study, the reason why colleges are dumbing down so much is because we're sending too many dumb kids to college.

Well, in the event you were harboring stereotypes about the priggish elitist attitudes of ivy league northeast liberals, you've just been validated.  They are also, apparently, the type that haven't ever heard of "personal responsibility." Of the type that would have them own up to the fact that there is something very wrong with our universities, and it's not because of students' study habits.

Anyway.  I don't see the point.  The way things are going, college *is* becoming a big fat expensive bloated vo-tech school.  And half of the graduate schools too.  As employers no longer feel the need to train their own employees.  But why would they -- they're all temps anyway.

Bait and Switch, Part XXXIV

Bankers' wailing to "stop hittin' on me!" at Davos is accompanied by their finger-pointing at the ostensibly fiscally irresponsible behavior of governments facing rising sovereign debt-to-GDP ratios.

Simon Johnson, former head economist of the IMF, makes a good and obvious point, one that you'd think more people would pick up on:

Government deficits wouldn't be so high if,  oh, they didn't have to bail out banks.

Nevermind that the recession only happend becaused of the banks -- and recession means lower tax revenue.  Which means budget deficits.

One wonders if these people had mothers.  Who would spank them when they tried to wiggle out of trouble by laying blame on their siblings.

Probably not.  Probably raised by disaffected, foreign, illegally-employed nannies.