ProfessorBainbridge.com

Delaware Needs Democrats

Steven Taylor runs some numbers and concludes that the combination of (a) Beau Biden's decision not to run for the Delaware's open US Senate seat and (b) GOP Congressman Michael Castle decision to run for the Senate means "that the Republican’s chances for the seat have substantially increased."

Marc Ambinder reports that there are analysts "moving Delaware to the 'solid' Republican side," although Ambinder himself views it as "a lean-Republican seat."

This matters a lot for those of us who toil in the corporate governance vineyards. Until quite recently, corporate governance consisted mainly of state corporation law rules and generally accepted best practices. Because Delaware is the dominant choice as state of incorporation for publicly held corporations, Delaware law long has dominated corporate governance.

Since 2002, however, we have seen a creeping federalization of corporate governance (as I detailed in this Regulation article).

Hence, while it used to be assumed that Delaware competed with other states to set corporate governance rules, it is now the case that Delaware's principal competitor is the federal government. In the past decade, when a corporate governance issue has national ramifications, the federal government has been increasingly willing to nationalize the relevant legal regime or, at least, to threaten to do so in oder for force Delaware to do the “right thing.”

In this environment, it behooves Delaware to elect Democrats to the US House and, especially, the Senate. Here's my logic:

1. Delaware senators of either stripe are likely to understand how critical it is to the state budget that Delaware remain the dominant choice as state of incorporation (up to 20% of the state budget comes from corporate franchise taxes).
2. Delaware senators of either political stripe are therefore likely to oppose federalization or, at least, to mitigate its effects on state corporate law. As our friend Francis Pileggi noted, for example, "There’s no question that [former Biden used his position and influence] to protect Delaware or look out for Delaware’s interests," in the corporate governance area.
3. All else equal, Democratic Senators are more likely to favor federalization than are Republicans.
4. Having 2 Delaware members in the Senate Democratic caucus thus provides the maximum voice against federalization in the caucus otherwise most likely to favor it.
5. Maximizing the number of Delaware Democrats thus mitigates the risk of federalization of corporate governance.

In an ideal world, I'd like to see a GOP majority in the Senate but have two members of the Democratic minority come from Delaware.

Why Corporations Play Politics

In his rather transparent effort to shift into a populist campaign mode, President Barack Obama today devoted his Saturday radio address to slamming the Supreme Court's decision in Citizens United v. FEC:

A hundred years ago, one of the great Republican Presidents, Teddy Roosevelt, fought to limit special interest spending and influence over American political campaigns and warned of the impact of unbridled, corporate spending. His message rings as true as ever today, in this age of mass communications, when the decks are too often stacked against ordinary Americans. And as long as I’m your President, I’ll never stop fighting to make sure that the most powerful voice in Washington belongs to you.

It might be worth spending a moment to ponder why corporations spend money on politics. Is it because they're antisocial? Is it because they're being used by corrupt managers to spout some chosen line of propaganda?

Or is it because the ever-increasing burden of regulation requires corporations to include lobbying regulators and legislators as part of their overall business strategy? If so, it is to be expected that corporations will seek to manage politics in much the same way as they manage other business risks.

Several years ago, Jill Fisch made an important contribution to this debate with a case study "examining the political involvement of one company, FedEx, in a series of regulatory reforms over a forty year period."

Drawing upon the business context, the legislative record, campaign finance materials and interest group analysis, the Article demonstrates that political activity has been an integral component of FedEx's business growth and operations. FedEx has successfully used its political influence to shape legislation, and FedEx's political success has, in turn, shaped its overall business strategy. Moreover, in identifying the specific components of FedEx's political activity, the Article highlights the range of mechanisms that corporations use to engage in politics, revealing that the exercise of political influence is far more complex than the purchase of political favors in a spot market.

Regulation is becoming an increasingly important factor for United States businesses. As a result, corporations must integrate political activity into their overall business strategy and must develop and manage their political capital in the same way that they manage other business assets. The FedEx story demonstrates the importance of politics to business and explains the growing investment by corporations in political capital. It further explains how the business world has responded, and will continue to respond, to regulatory restrictions by developing alternative mechanisms for exerting political influence.

In other words, when corporations play politics, they're just playing self-defense against Leviathan.

I firmly believe that in doing so, corporations contribute to the public good. In my article, Community and Statism: A Conservative Contractarian Critique of Progressive Corporate Law Scholarship, I argued that:

Most people belong to a host of communities with the potential to inculcate virtue and other communal values: churches, schools, fraternal organizations, and the like. While it may be unrealistic to think of a large multinational corporation as constituting such a community, it is perfectly plausible to think of the corporation as an intermediary institution standing between the individual and Leviathan. In other words, while virtuous citizens are developed by smaller institutions with roots in the local community, the corporation still can act as a vital counter-vailing force against the state. Resistance to expanding the realm of mandatory corporate law rules thus responds to the “notion that the prevailing moral threat in our era may not be the power of the corporations, but the growing power and irresponsibility of the state.”

Sphere sovereignty assumes that a limited state is an essential attribute of ordered liberty. In a society premised on sphere sovereignty, private property and freedom of contract are thus important not just in their own right, but rather because they provide essential limitations on the power of the state. As Russell Kirk observed, conservatives are persuaded that “freedom and property are closely linked: separate property from private possession, and Leviathan becomes master of all.” In the present context, we must amend this sentiment to encompass freedom of contract, but the point remains the same.

As a societal decisionmaking norm, the economic freedom to pursue wealth does more than just expand the economic pie. A legal system that pursues wealth maximization necessarily must allow individuals freedom to pursue the accumulation of wealth. Economic liberty, in turn, is a necessary concomitant of personal liberty—the two have almost always marched hand in hand. The pursuit of wealth has been a major factor in destroying arbitrary class distinctions, moreover, by enhancing personal and social mobility. At the same time, the manifest failure of socialist systems to deliver reasonable standards of living has undermined their viability as an alternative to democratic capitalist societies in which wealth maximization is a paramount societal goal. Accordingly, it seems fair to argue that the economic liberty to pursue wealth is an effective means for achieving a variety of moral ends.

In turn, the modern public corporation has turned out to be a powerful engine for focusing the efforts of individuals to maintain the requisite sphere of economic liberty. Those whose livelihood depends on corporate enterprise cannot be neutral about political systems. Only democratic capitalist societies permit voluntary formation of private corporations and allot them a sphere of economic liberty within which to function, which gives those who value such enterprises a powerful incentive to resist both statism and socialism. Because tyranny is far more likely to come from the public sector than the private, those who for selfish reasons strive to maintain both a democratic capitalist society and, of particular relevance to the present argument, a substantial sphere of economic liberty therein serve the public interest. As Michael Novak observes, private property and freedom of contract were “indispensable if private business corporations were to come into existence.” In turn, the corporation gives “liberty economic substance over and against the state.”

Brad Smith on Citizens United

My friend and fellow Salvatori Fellow Brad Smith (former Chair of the Federal Elections Committee) has a WSJ op-ed on this week's SCOTUS decision in Citizen United v. FEC. Money quotes (very weak pun intended):

To truly appreciate the stakes in Citizens United, one must remember the government's legal position in the case. Implicit in its briefs but laid bare at oral argument, the government maintained that the Constitution allows the government to ban distribution of books over Amazon's Kindle; to prohibit a union from hiring a writer to author a book titled, "Why Working Americans Should Support the Obama Agenda"; and to prohibit Simon & Schuster from publishing, or Barnes & Noble from selling, a book containing even one line of advocacy for or against a candidate for public office. As David Barry would say, "I am not making this up."

The Court said "no," and the only shocking thing about the decision is that the four liberal justices said "yes." Hopefully, this ruling marks an end to 20 years of jurisprudence in which the Court has provided less protection to core political speech than it has to Internet pornography, the transmission of stolen information, flag burning, commercial advertising, topless dancing, and burning a cross outside an African-American church.

Unfortunately, some in Congress are using this decision to push for a government takeover of political campaigns through the misnamed "Fair Elections Now Act," which has over 100 sponsors (all but three of them Democrats) in the House. This legislation would use tax dollars to fund congressional campaigns. ...

The next time you download a book on Kindle, buy a Michael Moore screed at Barnes & Noble, or order up a political movie from video on demand, remember that it is the Supreme Court's decision in Citizens United that guarantees you the right to do so.

Smith goes on to tackle some very interesting corporate governance aspects of the case that may be of special interest to regular readers of this blog:

The dissenting justices in Citizens United see corporations as organizations in which people are trapped. They bemoan the allegedly lost rights of shareholders who may not personally support the candidates a corporation might choose to support. The justices who joined Anthony Kennedy's majority opinion, on the other hand, regard this as no different than any other question of corporate governance.

Corporations frequently take action that some shareholders do not like, including, for example, making charitable contributions. Stockholders are free to leave the corporation if their disagreements become too strong. Meanwhile, why should the majority be prohibited from voicing their views as a corporate enterprise?

In general, one expects corporations to spend campaign finance dollars in ways that increase their profits. So why should shareholders be expected to object?

On the other hand, we know that unions often use their campaign finance dollars in ways that many of members find objectionable. As the WSJ reported, for example:

Republican Scott Brown's victory in the Massachusetts Senate race was lifted by strong support from union households, in a sign of trouble for President Barack Obama and Democrats who are counting on union support in the 2010 midterm elections.

A poll conducted on behalf of the AFL-CIO found that 49% of Massachusetts union households supported Mr. Brown in Tuesday's voting, while 46% supported Democrat Martha Coakley. The poll conducted by Hart Research Associates surveyed 810 voters.

The case for allowing union members to opt out of having their dues used for political expenditures thus has long seemed far more plausible than that for allowing shareholders to opt out of corporate political expenditures.

Chicken Marsala

Lately I've been cooking a lot out of Essentials of Slow Cooking. Tonight I made a modified version of its Chicken Marsala recipe in my Cuisinart PSC-350 3-1/2-Quart Programmable Slow Cooker. Because I found it necessary to make some modifications, I pass along my version:

• 2 whole boneless (skin on) chicken breasts
• ½ cup all purpose flour
• ¼ teaspoon garlic powder
• ¼ teaspoon onion powder
• ¼ teaspoon ground white pepper
• ¼ teaspoon sea salt
• ½ tablespoon dried Italian herb mixture
• 1-½ tablespoons unsalted butter
• 1-½ tablespoons olive oil
• 1 tablespoon chopped shallots
• ½ tablespoon minced garlic
• 2 ounces diced pancetta
• 2-¼ cups Marsala wine
• 1 cup chicken broth
• 1 ounce dried porcini mushrooms
• 8 ounces cremini mushrooms, sliced thinly
• pinch dried thyme
• pinch dried oregano
• pinch dried marjoram
• salt and pepper
• ½ cup mascarpone cheese
• 1 tablespoon corn starch dissolved in 2 tablespoons cold water
• chopped fresh chives for garnish

I've added porcinis because I think they add an extra blast of flavor and tweaked the spices and herbs. I used skin on chicken breasts rather than skinless for the same reason.

Pour the chicken broth into a microwave safe container and zap for 3 minutes. Add the porcinis and steep them until they soften (about 30 minutes). Remove the porcini mushrooms, roughly chop them, and set aside. Strain the broth through an unbleached coffee filter to remove any grit and, if necessary, top up with additional chicken broth to make a total of 1 cup. Set aside.

Combine the flour, garlic powder, onion powder, salt, white pepper, and Italian herbs. Pour onto a large plate. Dredge the chicken breasts in the seasoned flour and shake off excess.

I melted the butter in my Calphalon One Nonstick 12-Inch Fry Pan over medium high heat. When the butter stopped foaming, I added the olive oil.

Saute one chicken breast for about 3 minutes per side or until golden brown. Repeat with the other breast. Transfer the breasts to the slow cooker. Add broth.

Add the cremini and porcini mushrooms to the pan, which should have plenty of fat left. Add thyme, oregano, marjoram, and salt and pepper. Saute over medium high heat until the mushrooms begin to brown (about 5-7 minutes). Remove the mushrooms with a slotted spoon and set aside.

Add the pancetta and shallots to the pan and saute for 3 minutes. Add the garlic and saute an additional minute. Add 2 cups of the Marsala wine to the pan, raise heat to high, bring to a boil, reduce heat to a rolling simmer, and cook 7 minutes. Pour Marsala mixture over chicken breasts in slow cooker. Set slow cooker to high and cook 2 hours.

Add mushrooms to slow cooker and cook an additional 30 minutes.

This is KEY. The cookbook does not call for degreasing the sauce, but I think it is essential. Using tongs, remove the chicken breasts from the slow cooker and remove skin. Place in a heat proof glass dish. Using a slotted spoon, transfer mushrooms and other solids to same dish. Cover with aluminum foil and place in a warm (150°) oven.

Strain sauce through a Chinois Fine Strainer into a 3-Cup Fat Separator and stash in the refrigerator for 20 minutes.

Pour sauce into a All-Clad Copper Core 1-Quart Saucier Pan, leaving fat behind in the separator. Add remaining ¼ cup Marsala wine and mascarpone cheese. Bring to a boil, reduce to a simmer and cook for 5 minutes. Add cornstarch and boil for 1 minute. Pour over chicken-mushroom mixture. Top with chives and serve.

I served it with my souped-up version of Alessi Funghi Risotto, a green salad, and a bottle of 10-year old Tignanello.

Yum, if I do say so myself.

Obama's Proposal to Take the Moral Hazard out of Banking

From the WhiteHouse.gov blog:

This morning the President proposed what he called "the Volcker Rule," named after one of the fiercest advocates for financial reform over the past year, and who has been particularly focused on addressing the issue of banks being "too big to fail." He also proposed addressing one of the clearest issues leading to the financial crisis of the past years, namely banks that stray wildly from their core mission: serving their customer. ...

For obvious political reasons, President Obama has decided to frame the debate in highly populist terms. His announcement included both threats and a call to arms:

... if these folks want a fight, it's a fight I'm ready to have. And my resolve is only strengthened when I see a return to old practices at some of the very firms fighting reform; and when I see soaring profits and obscene bonuses at some of the very firms claiming that they can't lend more to small business, they can't keep credit card rates low, they can't pay a fee to refund taxpayers for the bailout without passing on the cost to shareholders or customers -- that's the claims they're making. It's exactly this kind of irresponsibility that makes clear reform is necessary.

Whatever, dude, as we say out here in California.

When one sets aside the President's rhetoric and looks at the specifics, however, things start to look potentially quite reasonable. As the accompanying press release explains:

The proposal would:

1. Limit the Scope - The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.

2. Limit the Size - The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.

As regular readers know, I'm not a big fan of Obama. But let's give credit where credit is due. Both of these ideas make sense as a general concept, although the devil will be in the details.

Let's start with # 2. We are in the mess we're in today in large part because some banks were thought to be too big to allow them to fail. Investors, depositors, and managers of these banks figured that the government wouldn't let them go belly up if they got into big financial trouble. They acted as though they were getting an implicit subsidy from the taxpayer. Accordingly, they acted as though some substantial portion of the risks they took were being externalized onto the taxpayer. In effect, they were betting that they could gamble with the taxpayers money, which meant they took on risks that they would not have taken if they were playing with their own money. As we know, they were right. They were deemed to be too big to fail, they got bailed out, and that created a precedent confirming that the taxpayer will always subsidize risk taking by big banks.

One way of dealing with that problem would be to simply let the big banks fail. Unfortunately, some banks really are so big that their failure would have devastating systemic effects. I reluctantly supported the first round of bank bailouts precisely because the credit system really did come within a hairs breadth of seizing up. Constricting the size of banks so that none get too big to fail thus strikes me as a sensible plan.

Turning to part 1 of the proposal, deposit insurance creates a moral hazard. The presence of deposit insurance reduces the incentives of depositors to monitor the riskiness of the decisions bankers make. If the bank takes on risky trading for its own account, the depositors won't care, because the taxpayer will step in via the FDIC and make them whole (up to a very generous cap). Bank management won't care because, if the deal is profitable, they and the bank's stockholders reap the benefits, while if the deal fails, the taxpayer steps in to clean up the mess. When decision makers face only the consequences of a risk paying off and not those of the risk going south, they take too much risk.

Just as a private insurer has an economic incentive to restrict the risks its policyholders take (notice that your auto insurance policy probably doesn't cover accidents caused by racing), the government thus has an incentive to constrain risk taking by the banks it insures.

Part 1 of the proposal is commendable because it doesn't restore the Glass-Steagall rules that banned banks from engaging in securities underwriting. Those rules did little to protect the FDIC. Instead, they served mainly to insulate Wall Street's underwriting business from competition. Instead, Part 1 seems likely to focus on proprietary trading, which doesn't raise the same degree of concern about preserving competition.

My only hesitation about the proposal in Part 1 is that the rule extends to any "financial institution that contains a bank." The Bank Holding Company Act recognized that one could solve the moral hazard created by deposit insurance by requiring that diversified financial institutions set up a holding company structure in which insured banks and uninsured risky lines of business be held in separately incorporated subsidiaries. In theory, the limited liability of both parent and the bank subsidiary should insulate it from the debts of the risky subsidiary. In practice, however, I suspect things may not be that simple. Before making up my mind about the proposal, I'll need to go back and look at cases like AIG to determine whether limited liability could have insulated the parent from the bad subsidiary's misdeeds.

In any case, while there are lots of details to be ironed out, the President's proposal is a good starting point.

Even the WSJ's editorial board thinks so:

Phony populism aside, yesterday Mr. Obama introduced his first serious idea into the debate on reforming the financial system. In calling for an end to proprietary trading at firms with a federal safety net, the President showed that he now understands an important principle: Risk-taking in the capital markets is incompatible with a taxpayer guarantee. ...

Yesterday's announcement is a critical departure from the reform plan Mr. Obama introduced last year—largely incorporated in the House and Senate bills written by Barney Frank and Chris Dodd. Those plans all sought to expand the universe of too-big-to-fail companies eligible for taxpayer rescue. Mr. Obama has at last joined the most important policy discussion: How to eliminate the moral hazard now embedded in the U.S. financial system. Political assaults on banker compensation have done nothing to address this core problem that enables gargantuan bonuses.  ...

The Democrats appear to finally realize that too-big-to-fail is a problem to be solved, not the foundation of a modern banking system.

Obama's proposal now becomes an important test for the Republicans. Are they the nihilistic party of no that Andrew Sullivan accuses them of having become? Or are they prepared to step up to the plate and help govern? The GOP response to Obama's proposal will tell us a lot about those questions.

This is a good start on one of the most important issues facing the economy. The GOP should meet Obama halfway. Failing to do so will be strong evidence that they are not yet ready to be trusted with the reins of government.

Citizens United v. FEC: Stevens' Pernicious Version of the Concession Theory

In his dissent in the Citizen United v. FEC case, Justice Stevens reveals a rather pernicious understanding of the reason society validates the corporate form:

Unlike other interest groups, business corporations have been “effectively delegated responsibility for ensuring society’s economic welfare ....

No. They haven't. It is true that a corporation must have a certificate of incorporation from the state to obtain legal recognition as such. We might reasonably infer from Stevens' comment, however, that he accepts some version of the old concession theory, pursuant to which the corporation was regarded as a quasi-state actor exercising powers delegated by the state. It has been over half-a-century since corporate legal theory, of any political or economic stripe, took the concession theory seriously. In particular, concession theory is plainly inconsistent with the contractarian model of the firm, which treats corporate law as nothing more than a set of standard form contract terms provided by the state to facilitate private ordering.

The state provides the corporate form not so the corporation can ensure social welfare, but solely as a means of facilitating private ordering amongst people.

The point goes directly to Stevens' argument that the corporation had no First Amendment rights that were infringed by the law at issue in Citizens United. When the state wrongfully interferes with how those people have ordered their relationships, those people need the protections of the Constitution. Collective action problems of various sorts may prevent them from banding together to vindicate their rights. Accordingly, the law allows the corporation--under the control of its board of directors--to seek the necessary Constitutional protections on behalf of the community of stakeholders (and, especially, the shareholders who hold the residual claim).

In contrast, the logic of Stevens' view would allow the state to hijack the corporation whenever it feels like it.

Citizens United v. FEC in the Corporate Blawgosphere

Jonathan Adler summarizes the case:

The Court held 5–4 that restrictions on independent corporate expenditures in political campaigns are unconstitutional, overruling Austin v. Michigan Chamber of Commerce and parts of McConnell v. FEC, and it upheld the disclosure requirements 8–1 (Thomas dissenting). Justice Kennedy explained that the Court was overruling some of its prior decisions because it was not possible to rule in favor of the petitioners on narrower grounds without chilling protected political speech. According to Justice Kennedy, the Court is re-embracing the principle that a speaker’s corporate identity is not a sufficient basis for suppressing political speech, as held in pre–Austin cases. It would appear this holding applies equally to unions. While disclosure requirements may also burden political speech, Justice Kennedy explained, such requirements may be justified by the government’s interest in ensuring that the electorate has information about spending on elections and campaigns, and the specific disclosure requirements at issue are constitutional as-applied to Citizens United. The opinion also includes a substantial discussion of stare decisis, and why such considerations counseled overturning prior precedents.

Tom Smith:

I have long thought the idea that just because people decided to speak about politics through a juridical entity as opposed to say just a plain old club, that they could not spend much money to actually reach people doing so, to be utterly baffling and unpersuasive, and probably just a product of dusty progressive thinking of the sort that animated the Yale Law Journal in the 1930's.  Alas, in faculty lounges across the country today, jowly faces of men in tweed jackets and too tight button downs will be inflating like infurated toads, gasping Corporations!  Other people's money!  Incorporation is a privilege!  Wise ethicists counsel us not to enjoy this too much.  Much wailing and gnashing of teeth too is to be anticipated no doubt from younger persons at various lefty blogs, and I sympathize. It takes a lot of legal and political theory to explain why in the larger and profoundly understood scheme of things a bunch of people who have filed some papers cannot spend their money to talk politics the way a bunch of people who have not filed some papers can, and it would seem these ideas have not sold to our nine person speech planning panel.  

There is hardly anything more irritating than the political speech of persons, natural or artificial, with whom one disagrees.  In my own defense, however, I will note it does not occur to me that I should be able to use the power of the state to shut these irritants up, even if they are, oooh scary, hiss hiss, Big Corporations.  Or as was the case in this case, a very little one, laws to regulate speech being so notoriously hard to get right, even when they are wrong.  Business corporations will doubtless use their influence to lobby for candidates who are most likely to grant them monopoly privileges, regulate their competitors, and subsidize their inputs, as they do now, only perhaps even more so. Some will no doubt see the tractors of ADM scything down wheat fields, when what ought to shown are them scything down tax dollars, and think, oh, neat tractors, I better vote for that guy.  If you think there are no voters this stupid, you are not buying enough lottery tickets.  The marketplace of ideas can be a pretty sordid place and if you don't believe me, just try googling random words and see how long it takes you to find a sex practice you have never heard of before.  Still, better that than than having a bunch of political hacks decide what is and is not permitted into our brains.

Matt Bodie:

I predict Citizens United will lead to a new round of shareholder proposals designed to limit corporate political spending.  Shareholders -- particularly institutional shareholders -- will want to limit the money that flows out through theoretically "non-business-related" expenses. 

CE Petit:

Corporations are not "citizens" for purposes of voting (except, perhaps, in Chicago... and the reality of modern campaign finance). Neither, for that matter, are unions. Instead, corporations and unions represent a broad delegation of authority by investors to managers (capital in corporations, labor in unions) who, in turn, are supposed to represent the limited best interests of that delegation. Whether one accepts the "nexus of contracts" model of corporations or uses some other model (and similarly for unions), the key point is that it is a delegation related to a limited interest; and in that sense, the real problem is not the "forced speech" meme that dominates the 180ish pages of opinions in this matter, but the Rawlsian problem of the initial position. In this instance, corporations (and unions) have a preferred initial position, and Citizens United fails to acknowledge that governmental preference for an initial position constitutes an intensely ideological prejudgment... which, in turn, is inconsistent with the values of free speech both explicitly and implicitly at the core of the First Amendment.

I do not claim that this means that one must disfavor corporate/union speech; I only deny that mere expenditure constitutes expressive speech, when mere expenditure (and the accumulation of resources to engage in mere expenditure) has been granted a favored initial position. And, in turn, that's why the artificial distinction requiring use of PACs and other artificial devices to separate expenditures on political speech from general treasuries (of artificial "persons") makes a great deal more sense than does the Court's action this morning. It's not a perfect solution, but it is the least-intrusive means... unless, of course, one denies that the favored initial position has even the capability of distorting the marketplace of ideas. In short, unless one would apply neoclassical microeconomics to a postmodern macroeconomic context without any regard for the problems created by monopoly and oligopoly pricing. To paraphrase Ursula Le Guin, free speech does not consist of handing one party a bullhorn and open venue in a public park while simultaneously allowing a party with inconsistent views to hold forth in a public lavatory near that park... without a bullhorn.

Citizens United, Corporate Personhood, and Nexus of Contracts Theory

The Supreme Court's decision today in Citizens United v. FEC (slip op here) strikes down 2 USC sec. 441b, which "prohibits corporations and unions from usingtheir general treasury funds to make independent expenditures for speech that is an 'electioneering communication' or for speech thatexpressly advocates the election or defeat of a candidate." The syllabus summarizes the majority's analysis:

Although the First Amendment provides that “Congress shall make no law . . . abridging the freedom of speech,” §441b’s prohibition on corporate independent expenditures is an outright ban on speech, backed by criminal sanctions. It is a ban notwithstanding the fact that a PAC created by a corporation can still speak, for a PAC is a separate association from the corporation. Because speech is an essential mechanism of democracy—it is the means to hold officials ac-countable to the people—political speech must prevail against laws that would suppress it by design or inadvertence. ...

The Court has recognized that the First Amendment applies to corporations, e.g., First Nat. Bank of Boston v. Bellotti, 435 U. S. 765, 778, n. 14, and extended this protection to the context of political speech, see, e.g., NAACP v. Button, 371 U. S. 415, 428–429.

We've already discussed the concept of corporate personhood in today's earlier posts The Corporation is a Legal Person. Get Over It. and Citizens United v FEC: The First Amendment Rights of Corporate "Persons".

In the course of his dissenting opinion, Justice Stevens argued that:

... corporations have no consciences,no beliefs, no feelings, no thoughts, no desires. Corporations help structure and facilitate the activities of human beings, to be sure, and their “personhood” often serves as a useful legal fiction. But they are not themselves members of “We the People” by whom and for whom our Constitution was established.

There are a couple of problems with Stevens' argument. First, whatever the views of the original framers may or may not have been (and Scalia and Stevens square off on that issue in an interesting way), the framers of the 14th Amendment included corporations within the meaning of "person" in that provision. See Citizens United v FEC: The First Amendment Rights of Corporate "Persons".

Second, as I note in my book Corporate Law:

As a legal person, a corporation has most of the constitutional rights possessed by natural persons. See, e.g., First Nat’l Bank of Boston v. Bellotti, 435 U.S. 765, 784 (1978) (corporation has First Amendment right of free speech); Hale v. Henkel, 201 U.S. 43 (1906) (corporation gets Fourth Amendment protection against unreasonable searches and seizures but not protected by Fifth Amendment privilege against self-incrimination); Blake v. McClung, 172 U.S. 239 (1898) (corporation not covered by the privileges and immunities clause of the Fourteenth Amendment or of the comity clause of Article IV); Minneapolis & St. Louis Ry. Co. v. Beckwith, 129 U.S. 26, 28 (1888) (corporation entitled to due process of law under the Fifth and Fourteenth Amendments); Santa Clara County v. Southern Pacific Railroad Co., 118 U.S. 394, 416 (1886) (corporation entitled to equal protection of the law under the Fourteenth Amendment).

If Stevens wants to exclude the corporation from having First Amendment rights, he's got to explain why the Corporation gets all these other rights. If he wants to exclude the corporation from having any constitutional rights, he's engaged in a striking act of judicial activism entailing overturning countless precedents handed down over many decades (which, in fairness, is what he accuses the majority of doing).

In a philosophical sense, however, Stevens is at least partly right. Edward, First Baron Thurlow, put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?" The corporation is simply a nexus of contracts between factors of production. How do we square the constitutional legal fiction of corporate personhood with that reality?

I addressed that issue in my post, Sonia Sotomayor and the Corporate Personhood, in which I argued that:

Although the corporation’s legal personality obviously is a fiction, it is a very useful one. Consider a large forestry company, owning forest land in many states. If the company were required to list all of its owners—i.e., every shareholder—on every deed recorded in every county in which it owned property, and also had to amend those filings every time a shareholder sold stock, there would be an intolerable burden not only on the firm but also on government agencies that deal with the firm. Hence, for example, it is useful for the law to allow the corporation to sue and be sued in its own name and to own and deal in property in its own name.

Likewise, the corporation's legal personhood is a useful fiction in constitutional law. Government regulation of corporations obviously impacts the people for whose relationships the corporate serves as a nexus. (You see how hard it is to even talk about the corporation without reifying it?) It's useful to allow the corporation to provide those persons with a single voice when seeking constitutional protections.

Indeed, doing so is not just useful, it is necessary to protect the rights of the parties to those various contracts. As Larry Ribstein explains in Corporate Political Speech, 49 Wash. & Lee L. Rev. 109, because "a corporation is a nexus of contracts, these contract rights should be constitutionally protected to the same extent as other contract rights. Thus, the state must show why intervention in the corporate contract is constitutionally justified given the availability of self-protection through private contracting." He continues:

The Court must begin to base its decisions on well-developed modern economic theory rather than on unsupported assertions about corporations and the political process. It is particularly important to understand that any regulation of corporate speech or of the electoral process can have far-reaching consequences in terms of both the costs of governing the firm and the deadweight costs of effecting wealth transfers among interest groups. Until the Court understands these consequences, its decisions may be the proverbial bull in the china shop, particularly as pressure builds for more extensive reform of campaign financing and of corporate political activity.

While it may be useful to allow the corporation "person" standing to assert collective rights, however, it is very important to remember that this is still a fiction that we embrace to facilitate protection of the rights of individuals. As Ribstein recently blogged:

In a nutshell, viewing the corporation as an entity for First Amendment purposes actually serves to push the speech rights of owners and managers under a rug. Abandoning entity reasoning would focus on what matters for the First Amendment analysis. My article and blog post just linked show that once you do that, and put the arguments for limiting speech rights under an analytical spotlight, they look pretty weak.

The Corporation is a Legal Person. Get Over It.

In a Slate column prompted by Citizens United v. FEC, entitled The Pinocchio Project: Watching as the Supreme Court turns a corporation into a real live boy, Dahlia Lithwick complains that the Supreme Court struck "down century-old restrictions on corporate spending in federal elections." She then cites approvingly to Justice Steven's wheezing complaints:

Stevens hammers, more than once this morning from the bench on the principle that corporations "are not human beings" and "corporations have no consciences, no beliefs, no feelings, no thoughts, no desires." He insists that "they are not themselves members of 'We the People' by whom and for whom our Constitution was established."

Of course, as we saw in my earlier post Citizens United v FEC: The First Amendment Rights of Corporate "Persons", the proposition that the corporation is a legal person with (most of) the same rights as natural persons has been settled as a matter of constitutional law since at least 1885 and, as a matter of common law, for centuries before that.

The Bank Tax and the Attainder Clause

John Carney thinks President Obama's bank tax (the "Financial Crisis Responsibility Fee") violates the constitution's rule against bills of attainder. Given how little time I've devoted to study of the Attainder clause (maybe 5 minutes lifetime), I'll refrain from offering an opinion. Suffice it to say that I learned more about the Attainder Clause from his article that I ever expected to do.

Creditor Rights Against Selling Shareholders

A friend and colleague posed the following question:

Are you aware of situations where selling shareholders who engage in a stock or membership sale of their ownership interests are held liable to creditors of the company before, at or after the sale? What theories other than veil piercing would be asserted to impose liability?

I'm afraid I wasn't able to be much help. I recall from my practices days back in the dark ages (the 1980s) that some creditors tried to use fraudulent conveyance law to recover the allegedly fraudulent transfers from the shareholders. Plus, I suppose in some cases there might be successor liability.

The problem is that, absent veil piercing, there are very few situations--whether in a sale context of not--in which shareholders face liability to creditors.

The following commentary is adapted from my book Corporate Law:

Watered stock is one potential claim. If a corporation claimed that it had sold 2,000 shares of stock with a par value of $100 per share, for a total capital of $200,000, the trust fund concept necessitated some mechanism for ensuring that the full value of the purported capital in fact had been paid into the corporation. Suppose Shareholder bought 100 shares of the corporation’s stock. Shareholder should have paid at least $10,000 for her shares. If Shareholder paid less than that amount, her stock was said to be “watered.” If Shareholder actually paid only $4,000, for example, she could be held liable to the firm’s creditors for the $6,000 “water.”

Failure to pay in full for shares probably was rare. Because corporation statutes allowed corporations to issue stock in return for noncash forms of consideration, such as property or services rendered, however, disputes over the valuation of such consideration were not uncommon. Suppose the board accepted an offer from a prospective shareholder to exchange an acre of land for 500 shares of stock having a par value of $100 per share. The corporation later became insolvent and creditors claimed that the acre of land in question was really worth only $20,000. If true, the shareholder’s stock was watered to the tune of $30,000.

Several factors combined to effectively eliminate the watered stock problem. One was the decline of par value as a meaningful concept. Par value always was an arbitrary figure. With the development of secondary trading markets for corporate stock, the market price (and thus the value) of outstanding corporate stock rarely coincided with its par value. As a result, par value simply had no relation whatsoever to the price shares would command on a secondary trading market or the price at which shares subsequently might be issued by the corporation. States began to permit corporations to issue low par value stock (such as shares with par value of a penny) and most states eventually permitted corporations to issue shares having no par value whatsoever. Consequently, today, watered stock is largely a dead issue. Corporations issue no par or low par stock and sell it at the highest price the shares will bring in the primary market. As long as the investor pays something for his shares, the par value requirement will be satisfied.

The trend away from par value was taken to its logical conclusion in the MBCA, under which par value has no legal significance. The MBCA, moreover, goes even further than Delaware law towards eliminating concerns about the propriety and adequacy of consideration for shares. Section 6.21(b) allows the corporation to accept just about any form of consideration: tangible or intangible property, cash, promissory notes, services performed, contracts for future services or other securities of the corporation. Section 6.21(c) then provides that the board must determine whether the consideration is adequate. If the board so determines, their conclusion is conclusive. Once the corporation receives the agreed consideration, the shares are regarded as fully paid and nonassessable.

Improper dividends is the other example that comes to mind, but in Delaware it’s pretty much meaningless. DGCL § 174 provides that if there is a willful or negligent illegal dividend payment the directors under whose administration the payment occurs are jointly and severally liable to the corporation or directly to its creditors in the event of dissolution or insolvency. A director can avoid liability by timely causing his dissent to be noted on the corporation’s books. Section 172 also protects a director who in good faith relies on reports of corporate officers, legal counsel or accountants. The amount for which directors can be held liable is the amount of the dividend that was improperly paid plus prejudgment interest. There is no express provision for holding liable those shareholders who receive the improper dividend, although directors are entitled to contribution from shareholders who knowingly received the illegal dividend. Worse yet, from the creditor’s perspective, standing under § 174 is limited to the corporation (and, presumably, shareholders suing derivatively). Creditors are given standing only where the corporation is insolvent. In effect, creditors are limited to their fraudulent conveyance remedies.

MBCA § 8.33(b) provides that a director who is held liable for an unlawful distribution is entitled to contribution from (1) any other director who voted for or assented to the distribution and also failed to live up to the standards of section 8.30, and (2) from each shareholder who accepted the distribution knowing that it was improper. Although the MBCA imposes a contribution obligation on shareholders who knowingly receive an improper distribution, it does not otherwise impose any liability on shareholders. If a creditor wishes to recover the amount of the unlawful distribution from the shareholders, its remedy lies in the fraudulent conveyance laws, not the MBCA. This is a significant change from the common law rule that all shareholders had corporate law liability for improper distribution.

It is noteworthy that under MBCA § 8.33, the cause of action for an unlawful distribution belongs to the corporation. A shareholder therefore could bring a derivative action against the responsible directors. Because creditors generally have no standing to sue derivatively, however, only rarely will they be able to bring suit under MBCA § 8.33. The MBCA’s distribution rules thus provide creditors with few protections.

How and Why Kraft is Evading Shareholder Voting in the Cadbury Deal

As I explain in my book, Mergers and Acquisitions, transaction planners generally want to avoid letting shareholders vote on a proposed merger or other acquisition:

Avoiding shareholder voting is the goal of most transaction planners most of the time. In the case of public corporations, the process of obtaining shareholder approval is cumbersome and expensive. Proxies must be solicited, which requires preparation of a proxy statement. Accountants must prepare financial statements and give an accounting opinion. Lawyers must prepare opinion letters on corporate, securities and tax law questions. The lawyers will also draft, or at least review, the proxy statement. The firm typically will hire a proxy solicitation firm to run the shareholder meeting and to solicit proxies. Senior corporate officers must expend time going over documents and gathering materials. And so on. As a result, the cost of the shareholder approval process easily can run well into seven figures. In a straight two party merger, approval by both company's boards and by both company's shareholders is required.

It is difficult to structure a transaction in a way that eliminates voting rights on the part of the target's shareholders. A short form merger will do the trick, but works only as to parent-subsidiary mergers in which the parent already owns 90% or more of the target's stock. A tender offer followed by a freeze-out merger to eliminate any remaining minority shareholders eliminates a meaningful target shareholder vote, but introduces fiduciary duty complications.

Avoiding acquiring company shareholder voting, however, is easy. In a purchase of all or substantially all of the target's assets, the acquiring company shareholders get no vote. In a triangular merger, as Mergers and Acquisitions explains:

the acquiring corporation sets up a shell subsidiary. The shell is capitalized with the consideration to be paid to target shareholders in the acquisitionCsuch as cash or securities of the acquiring corporation. The shell is then merged with the target corporation. In a forward triangular merger, the shell is the surviving entity. In a reverse triangular merger, the target survives. The point is the same in either case. The target company ends up as a wholly owned subsidiary of the acquirer. The former target shareholders either become shareholders of the acquirer or are bought out for cash. In a triangular merger, nothing changes from the target's perspective. Exactly the same approval process must be followed. From the acquiring corporation's perspective, however, much has changed. Only shareholders of a constituent corporation are entitled to vote or to exercise appraisal rights. In a triangular transaction, the constituent parties are the target and the shell. As a result, the parent acquiring corporation is not a formal party to the transaction, and its shareholders are entitled neither to voting nor appraisal rights.

The one potential hitch comes when the acquiring company intends to use its own stock as consideration for the target shares. The state corporate law rules discussed above don't change. If the acquirer does not have enough authorized shares in its certificate of incorporation to effect the deal, it will need a shareholder vote to amend its articles of incorporation to authorize issuing new shares. Although that's technically not a vote on the merger, shareholders will be voting on the amendment will full knowledge that the amendment is necessary to effect the deal as structured. So it's a de facto referendum on the deal.

For NYSE-listed corporations, however, there is a further complication. A transaction that results in a 20-percent or more increase in the number of shares outstanding requires shareholder approval. This is so because NYSE Listing Standard 312.03 provides that:

(c) Shareholder approval is required prior to the issuance of common stock, or of securities convertible into or exercisable for common stock, in any transaction or series of related transactions if:

(1) the common stock has, or will have upon issuance, voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of such stock or of securities convertible into or exercisable for common stock; or

(2) the number of shares of common stock to be issued is, or will be upon issuance, equal to or in excess of 20 percent of the number of shares of common stock outstanding before the issuance of the common stock or of securities convertible into or exercisable for common stock.

In a merger, where stock is the consideration, and the requisite 20 percent threshold is met, the acquiring company shareholders thus get to vote on the issuance of the stock. technically, that's note a vote on the merger. But if they vote down the issuance, the deal is sometimes impossible.

Why is all of this newsworthy? In Kraft's forthcoming acquisition of Cadbury, Kraft will be using its own stock as the consideration. Famed investor Warren Buffet is Kraft's largest shareholder and opposes the deal. Buffet planned to vote against the issuance of stock that was an essential part of the deal. What were Kraft's options at that point?

Steven Davidoff explains that Kraft had a number of ways by which to end run the shareholder approval requirement:

In its recently concluded hostile offer for Terra Industries, CF Industries Holdings offered to issue preferred shares without voting power to avoid triggering this rule. Only after the Terra acquisition’s completion would CF then put to its shareholders the vote required by the N.Y.S.E. to let those preferred shares be converted into voting common shares. If the offer had been accepted, CF would then have been able to present the acquisition as a fait accompli when its shareholders cast this vote.

Companies can also avoid triggering the rule if “delay in securing stockholder approval would seriously jeopardize the financial viability of the enterprise.” Bear Stearns relied on this exception to issue shares with a 39.5 percent voting interest to JPMorgan Chase. Wachovia acted similarly in its sale to Wells Fargo.

In both cases, Bear and Wachovia were doing the N.Y.S.E. a favor by claiming this exemption, since they could have just as easily ignored it: the only penalty for violations is a delisting. So if companies have no requirements to maintain a listing – like debt covenants or other contractual obligations – and are willing to bear shareholder approbation, this is another possible, if extreme, alternative.

Of course, companies’ easiest way around the rule is to offer cash or less than 20 percent of their outstanding shares.

Initially, Kraft would have been caught up in Rule 312, since it proposed issuing an amount of shares above the 20 percent threshold. It therefore called a shareholder meeting and even circulated a proxy statement to obtain this approval. It was this solicitation that Berkshire Hathaway initially rejected.

Now, Kraft has taken the easy way out. It has simply reduced the amount of new stock in its bid to below the 20 percent level. Kraft could do this because of the rejuvenated debt markets and the availability of additional financing to replace stock. ...

Then there’s the option of making one company or other the acquirer to avoid a shareholder vote. The seminal example of this is the late-1980s merger of Time and Warner. In the face of a hostile takeover bid by Paramount in the middle of the merger, Time became the acquirer and paid enough cash to obviate the need for a shareholder vote. Time initiated this deal restructuring after the N.Y.S.E. rejected its request for a reprieve from the shareholder vote rules.

The deal led to a substantial destruction of Time shareholder value as the company borrowed billions of dollars to finance the deal and over-leveraged itself. Nevertheless, the acquisition passed muster in Delaware court.

Davidoff goes on to note the policy issues at stake:

As part-owner of Kraft, he deserves the right to reject the Cadbury acquisition. His case is enhanced by management’s tendency to overbid in the heat of a takeover contest. A shareholder vote can serve as an important check on management overreaching – though to be fair, shareholders can also make mistakes. After all, investors approved the AOL-Time Warner deal.

The response to the shareholder empowerment argument is that while Mr. Buffett is a shareholder, Kraft is run by a board of directors better situated to judge whether a major transaction is appropriate. So long as the deal does not significantly dilute Mr. Buffett’s holdings, he should defer to the directors’ judgment.

I come down firmly on the latter side. As I explain in Mergers and Acquisitions:

Allocating the principal decisionmaking role to the board of directors reflects the general deference corporation law gives board decisions. It also makes good sense from a governance perspective. The board knows much more than its shareholders about the company’s business goals and opportunities. The board also knows more about the extent to which a proposed merger would promote accomplishment of those goals. The board is also a more manageable body. The familiar array of collective action problems that plague shareholder participation in corporate decisionmaking obviously preclude any meaningful role for shareholders in negotiating a merger agreement. Rational shareholders will expend the effort to make an informed decision only if the expected benefits of doing so outweigh its costs. Because merger proxy statements are especially long and complicated, there are unusually high opportunity costs entailed in attempting to make an informed decision. In contrast, shareholders probably do not expect to discover grounds for opposing the proposed transaction in the proxy statement. Frequently there are none, and even where grounds exist they will often be very difficult to discern from the proxy statement. Accordingly, shareholders can be expected to assign a relatively low value to the expected benefits of careful consideration. As a result, negotiated acquisitions are likely to be approved even where approval is not the decision an informed shareholder would reach.

Citizens United v FEC: The First Amendment Rights of Corporate "Persons"

I'm about 25 pages into the 190+ page (including dissents) Citizens United v. FEC opinion on corporate speech. Thus far, the Court has been mainly concerned with explaining why the case morphed from a narrow challenge to a particular section of election law into a facial challenge to the broad prohibition on corporate and union independent expenditures. I'll leave that for the con law and election law types.

Of more interest for our purposes is the majority's reaffirmation of corporate first amendment rights:

The Court has recognized that First Amendment protection extends to corporations. ... This protection has been extended by explicit holdings to the context of political speech. ... Under the rationale of these precedents, political speech does not lose First Amendment protection “simply because its source is a corporation.” The Court has thus rejected the argument that political speech of corporations or other associations should be treated differently under the First Amendment simply because such associations are not “natural persons.”

The idea that a corporation is a legal person with constitutional rights is, of course, a controversial one. Some commentators argue that it's bad policy. In my view, however, it is a well-settled principle of US constitutional law and justifiably so.

On the one hand, the courts have never empowered corporations with "privileges of citizenship." The second clause of the 14th Amendment - the so-called Privileges and Immunities - states that: "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States." But it is settled that the Privileges and Immunities Clause does not protect corporations, because corporations are not deemed citizens for purposes of the 14th Amendment. Western and Southern Life Ins. Co. v. State Bd. of Equalization of California, 451 U.S. 648, 656 (1981). Conversely, however, "It is well established that a corporation is a 'person' within the meaning of the Fourteenth Amendment." Metropolitan Life Ins. Co. v. Ward, 470 U.S. 869, 881 (1985).

The common law had long recognized the legal personality of corporate bodies. See Book I, Chapter 18 of Blackstone, Commentaries on the Laws of England (1765-1769). But what of the Constitution?

The key case for constitutional law purposes is Santa Clara County v. Southern Pacific Railroad, 118 U.S. 394 (1886). Curiously, if one carefully reads Justice Harlan's decision in that case, one will find neither a clear statement nor a citation of authority concerning whether corporations are "persons." That point, instead, is made in the syllabus by the Reporter, who related that at oral argument the Chief Justice had stated that:

The court does not wish to hear argument on the question whether the provision in the Fourteenth Amendment to the Constitution, which forbids a State to deny to any person within its jurisdiction the equal protection of the laws, applies to these corporations. We are all of the opinion that it does.

Despite it's somewhat odd parentage, the principle is sound.

The legislative history of the Fourteenth Amendment suggests that Congress substituted the word ''person'' for the word ''citizen'' precisely so that the provisions so affected would protect not just natural persons but also legal persons, such as corporations, from oppressive legislation. We see this view further confirmed Roscoe Conkling's recounting of the relevant legislative history in Conkling's arguments in San Mateo County v. Southern Pac. R.R., 116 U.S. 138 (1885). Conkling had been a member of the Joint Congressional Committee that drafted the 14th amendment and in Southern Pacific argued to the Justices that it had been the intent of Congress for the word "person" to include "legal" persons (corporations) as well as "natural" persons within the protective scope of the due process and equal protection clauses of the amendment. The Court accepted Conkling's argument.

As Larry Ribstein argues, this development made policy sense:

... corporations are people – the owners and others the corporation represents in litigation. These people have speech rights, rights not to be discriminated against, and so forth. I’ve written on this ...:

The Constitutional Conception of the Corporation, 4 Supreme Court Economic Review 95 (1995); Corporate Political Speech, 49 Wash. & Lee L. Rev. 109 (1992) and in my book with Henry Butler, The Constitution and the Corporation (1995) ....

So the African-American owners of this SBA-certified minority-owned contractor shouldn't lose their civil rights because they chose to do business in the corporate form. They might be required to sue as a corporation, as in this case, because that’s a convenient way to handle litigation, but that doesn’t determine their individual rights.

But courts also should recognize that, by the same principle, people shouldn't lose their speech rights just because they exercise these rights though the corporation in which they have invested.

A point that seems to have been vindicated in Citizens United.

Citizens United v. FEC

In the Citizens United v. FEC case, the Supreme Court today overturned longstanding rules restricting corporate spending in political campaigns. The Wa Po reports:

The Supreme Court ruled Thursday that corporations may spend as freely as they like to support or oppose candidates for president and Congress, easing decades-old limits on business efforts to influence federal campaigns.

By a 5-4 vote, the court overturned a 20-year-old ruling that said companies can be prohibited from using money from their general treasuries to produce and run their own campaign ads. The decision, which almost certainly will also allow labor unions to participate more freely in campaigns, threatens similar limits imposed by 24 states.

It leaves in place a prohibition on direct contributions to candidates from corporations and unions. ...

The justices also struck down part of the landmark McCain-Feingold campaign finance bill that barred union- and corporate-paid issue ads in the closing days of election campaigns. ...

The decision removes limits on independent expenditures that are not coordinated with candidates' campaigns.

I'll get my hands on the opinion and have more comments ASAP. I'm curious to see if there's any theorizing about the nature of the corporation in the opinion. I'm also curious to see why independent expenditures are allowed, but direct contributions are not.

If Obamacare Goes Down, Whither Obamanomics?

Larry Ribstein sees the President and the Democrats turning even more to a populist anti-Wall Street emphasis in the wake of their loss in Massachusetts:

The accepted wisdom is that much of the Obama agenda is now in peril, including financial regulation. But don't bet on having seen the last of it, particularly the bank tax. ...

The bank tax has the political "virtue" of simultaneously tarring the banks and showing that the Democrats are "doing something" about it.

There are several layers of rich irony here. First, the public is mad because of the Obama administration's stupid decision to waste billions of unnecessary and much needed government cash on bailouts, as I've detailed from the beginning in my "dismantling capitalism" archive.

Second, the bank tax is counterproductive. In commenting on this stupid tax I noted John Carney's criticism that "handing out the TARP money and then levying a punitive tax is a bit like throwing a steak on the floor and then beating the dog when he eats it."

Third, and more broadly, although the tax is intended to divert blame and attention from the real problems causing voter angst, it actually contributes to these problems by increasing the deadening climate of uncertainty that hangs over business. ...

As I discussed recently, there's a strong argument that the uncertainty connected with a massive government takeover has contributed a lot to the joblessness of the recovery. How can firms expand when they don't know which limb the government is going to lop off next? Indeed, it's at least a reasonable guess that the market's gain yesterday was not just about health care, but about a hope that the government cloud will lift after the Democrats lose the 60^th seat. Unfortunately, this hope may be premature.

The Republicans' response to all this should be clear. Don't give into the Democrats' political games just because populism seems right now to be popular, as Erik Gerding argued yesterday.