ProfessorBainbridge.com

Democrats want SEC to flout spirit of the law on campaign contributions

A rider in the omnibus spending bill bans the SEC from using any funds “to finalize, issue, or implement” rules “regarding the disclosure of political contributions, contributions to tax exempt organizations, or dues paid to trade associations.” But 94 Democrat Senators and Congressmen--but no Republicans--have petitioned the SEC to go forward with "discussing, planning, investigating, or developing plans or possible proposals for a rule or regulation relating to the disclosure of political contributions.” If that doesn't violate the letter of the omnibus bill, it certainly violates its spirit. But when has that stopped Democrats?

Once again, we see the intensely partisan nature of the campaign disclosure fight. So the next time some academic tries telling you that this debate is just about good public policy and sound disclosure rules, tell them to stuff it. It's about politics. 

"The Dodd-Frank Act Five Years Later: Are We Freer?" In short, no.

Todd Zywicki posts an essay carrying the above title:

This is congressional testimony provided to the United States House of Representative Committee on Financial Services at a hearing entitled, “The Dodd-Frank Act Five Years Later: Are We Freer?” Although much has been said on the impact of Dodd-Frank on the economic and financial system, little has been observed on the impact of Dodd-Frank on individual liberty. Yet the freedom of the financial system is intertwined with the ability of individuals to pursue their goals in life: to gain access to capital to start and grow a business, freedom to buy a home and provide for your family’s financial security, freedom to choose those whom you entrust with your hard-earned money provide the means for pursuing the American dream. 

The massive bank bailouts taken in 2008 shredded the rule of law and replaced the system of market competition with a system of crony capitalism in the banking industry. Instead of reversing and resolving those issues of arbitrary government discretion and political favoritism on behalf of well-connected special interests, however, Dodd-Frank reinforces the system of crony capitalism and entrenches those movements away from the rule of law. The result has been to further entrench the concept of “Too Big to Fail” in the American financial system, to increase the arbitrary discretion of government regulators (such as the Consumer Financial Safety Bureau), and to disadvantage community and other smaller financial institutions in the competitive marketplace.

In short, Dodd-Frank entrenches the system of picking winners and losers in the financial system and reinforces the market power of large banks that are of sufficient size and influence to deal with the cost and uncertainty of the current financial regulatory regime.

Here's what I think is the money quote:

The freedom to plan your financial future, buy a home, or open a bank account, is being crushed under an avalanche of costly and arbitrary rules and a regulatory system so complex that only well- lawyered multi-billion dollar banks can survive. On issues ranging from which financial insitutions are considered “Too-Big-To-Fail” to the loan terms of your new car, a handful of unelected Washington bureaucrats are prying into your wallet and bank account to make those decisions for you.

If you want to understand why everything Liz Warren says about financial regulation is wrong, you need to read this essay.

Who should pick corporate directors?

Yvan Allaire and François Dauphin cogently analyze the costs and risks of proxy access, arguing that "Anyone believing that this process is likely to produce stronger boards in the long run needs to consider anew the calculus of current and prospective board members, the actions, likely dysfunctional, of people facing the humiliation (and economic loss) of an electoral rejection."

How Ethan Allen beat the hedge fund activists and how much it cost

Here's a great essay on how Ethan Allen stood up to the hedge fund activists. It will probably become a leading case study.

What struck me was the way hedge fund activists tried to undermine Ethan Allen in their effort to impose their own model on the company and all its other investors:

In our case, it was primarily the activist investor and Institutional Shareholder Services, and those shareholders who outsource their proxy governance voting to them, who supported financial engineering to fund large share buybacks and so fuel short-term financial returns.

While we were talking to our shareholders, the activist hedge fund pressure on Ethan Allen and its people was coordinated, personal, local and immense. For our CEO and CFO, in a very flat management operating company structure, responding to the hedge fund activist diverted more management time and resources than our prior initial public offering or managing through the early years of the great recession. The activist publicity campaign against Ethan Allen was intended to create business uncertainty and inevitably created questions from our key business relationships and associates in considering whether to continue making long-term commitments to our company. These typical activist tactics risk our Ethan Allen business and so our shareholder values. It’s very difficult to see how this disruption improves Ethan Allen now or in the long term for the benefit of our shareholders. Some of our investors acknowledged the typical immense Wall Street advisor costs and how they might be isolated and reported as an unusual expense, and more generally acknowledged to us, that it’s not worth it in the long term, you should exit the U.S. public stock markets, just as almost half of U.S. public companies have done so in the recent decade.

This is a significant source of costs that you never hear hedge fund academic apologists acknowledging. It's why I believe limits on shareholder power have become essential. 

Christmas Dinner w/ Ridge Monte Bello (Santa Cruz Mts) 1995

For Christmas dinner this year it was just Helen and I, so I wanted a meal that would not generate a lot of leftovers. I ordered a couple of Wagyu ribeye steaks from D'Artagnan, which I prepared using Alton Brown's recipe. I served them with honey-glazed carrot coins and potatoes au gratin.

I poured a 1995 Ridge Monte Bello, which is a blend of 69% Cabernet Sauvignon, 18% Merlot, 10% Petit Verdot, and 3% Cabernet Franc, and for which I provided a detailed note on my blog in December 2013.

The cork on this bottle disintegrated upon opening and I ultimately had to push the remnants through the neck into the wine, which necessitated decanting through an unbleached coffee filter in a funnel. In short, an even worse mess than the 2013 bottle.

In 2013, I thought this wine was still too young. Tonight, however, it was drinking very well. To be sure, it's still very youthful in appearance--a deep ruby. The intense bouquet suggests cassis, blackberries, and blueberries. On the palate, the tannins have softened quite a lot, making it much more pleasant to drink. There are still a lot of red and black fruit associations, but there are now also maturity markers like leather and tobacco. I think it has at least another decade of potential improvement, but I would not blame you if you opened it tonight. Grade: 95

 

Christmas Eve Dinner w/ 2006 Domaine Lignier-Michelot Les Chenevery

For Christmas Eve dinner, I made roast chicken with root vegetables from the latest edition of Cook's Illustrated (still my favorite food magazine). I sprung for an air cooled, free range, organic bird. I used baby Yukon Gold potatoes, baby golden beets, and heritage multi-color carrots as the root veggie mixture. I tweaked the brine by adding 1 tablespoon each of garlic powder, onion powder, and paprika, as well as 1 lemon (quartered), 10 black peppercorns, and a couple of sprigs each of fresh rosemary and thyme. I also tripled the brine time to 3 hours. After the chicken had finished roasting, I poured off and defatted the pan juices to use as an au jus for the chicken. Highly recommended.

With it I poured a 2006 Domaine Lignier-Michelot Morey St. Denis Premier Cru Les Chenevery. This red Burgundy was a perfect match for the roast chicken. Medium ruby with a small amount of light sediment. Huge bouquet. The first thing you notice on both the nose and the palate is a blast of cherry cola followed by earthy and leafy notes, some vanilla-ish oak, and roses. Grade: 91

Is hedge fund activism sustainable?

Hadiye Aslan and Praveen Kumar's analysis of industry-wide effects of hedge fund activism ends with an interesting conclusion about the long-term sustainability of the phenomenon:

The analysis of the product market effects of HFA also generates some interesting hypotheses on the future of activist investor intervention. If firms become more efficient through pro-active responses to the threat of intervention, and if the number of activist investors keeps increasing, then the returns to HFA should come down over time. Furthermore, there can be a backlash to HFA from a variety of directions. Access to hedge funds is limited because the average individual investor does not have the financial wherewithal to invest in them. If HFA reduces the returns of the competitors to HFA targets (as shown by our analysis), then HFA is likely to adversely affect average investors, who are more likely to hold equity in the competitors than the target. That is, HFA is not a positive-sum game in terms of generating higher equity returns for all investors. In that case, there will be increasing pressure on mutual and pension funds (which is how most individual investors participate in stock markets) to put pressure on the management of firms they own. In this case, again, activist investors could lose their edge in return performance and could even become redundant.

Is this likely to result in industry-wide improvements? They also suggest some reasons to doubt it:

... we do not find support for the view that activist investors have industry-wide benefits, for example, through the introduction of best practices that are emulated by industry firms. Indeed, our analysis indicates that the post-HFA economic pressure on industry competitors lowers their capital investment and productivity on average, which may hasten the exit of weaker peers from the industry. And in ongoing research, we find that target firms improve profits by extracting price concessions from their suppliers. Of course, exit by economically inefficient firms is central to a dynamically efficient economy. Consistent with this, we find that the threat of activist investor intervention remains a potent incentive for firms to make pro-active improvements; such firms are generally able to compete effectively with target firms. Nevertheless, we have little knowledge today of long run economic effects of HFA on industry competition and innovation. For example, if HFA encourages “industry consolidation,” such as seen recently in the pharmaceutical industry, then there may be long run detrimental effects on R&D investment and innovation. In light of the positive industry- and economy-level externalities of R&D spending, such reductions in corporate research spending could have long run negative consequences for an economy built on continuous technological advancement. In a similar vein, there may be social costs from reduced employment if the pressured competitors and suppliers of HFA target firms are forced to lay off workers.

Biased Advice for Directors on Political Spending

Bruce F. Freed of the Center for Political Accountability and Constance E. Bagley (a Senior Research Scholar in Law at Yale Law School) offer what purports to be friendly advice for corporate directors with regards to corporate political spending. But do not be taken in. This advice comes from folks with a partisan agenda. As The Center for Competitive Politics (a right-leaning, pro-free speech think tank) reports:

... those supporting CPA have shown little interest in promoting the maximizing of pro ts by corporations, and more o en view corporations as political and ideological adversaries that should be denied the right to speak out in the political process. is makes it difficult to accept that CPA’s true mission is to advance the interests of shareholders and improve returns for investors.

Nor are CPA’s leadership and activities neutral. Bruce Freed, the president and founder of CPA and a former Democratic congressional staffer, has worked closely with shareholding activists to push a particular policy agenda. As just one example, Mr. Freed joined Walden Asset Management in an August 2010 letter to corporations sitting on the U.S. Chamber of Commerce’s board, urging them to distance themselves from the Chamber because of its policy positions concerning global warming. Mr. Freed signed that letter in his role with CPA, and not in a private capacity. That letter had nothing to do with good governance, or political transparency: it was instead an attempt to in uence corporate behavior in a way which, regardless of its merits, is not fundamentally concerned with shareholder value or aimed at boosting investment returns.

CPA’s Associate Director, Valentina Judge, previously worked as a Research Analyst at the Service Employees International Union. CPA’s General Counsel is Karl Sandstrom, a former counsel to the Democratic National Committee who chaired the Department of Labor Administrative Review Board under President Clinton. CFO Michael P. Novelli served as Maryland coordinator for Senator John Kerry’s 2004 presidential campaign. CPA Staff Associate Aaron Stanley joined CPA from the Government Accountability Project, a non-pro t funded by George Soros and other foundations and founded to “promote... corporate accountability by protecting whistleblowers.” CPA’s Editor, Peter Hardin, also works for Justice at Stake, a Soros-funded non-profit that has been highly critical of business efforts to promote state-level tort reform and involvement in judicial elections. His web site states that his purpose is “to use the power of story telling for social change.”

Nothing is inherently wrong in any of these activities or beliefs. But it should be clear that while CPA claims to represent a considered approach to maximizing shareholder value, it in fact supports a partisan ideology, and seeks to enlist corporate support for particular political causes.

I've joined the Washington Legal Foundation Legal Policy Advisory Board

The WLF announced:

Washington Legal Foundation (WLF) and the Chairman of its Legal Policy dvisory Board, Jay B. Stephens, are pleased to announce that R. Hewitt Pate, Vice President and eneral Counsel of Chevron Corporation, Professor Stephen M. Bainbridge of the UCLA School of Law, Katharine R. Latimer of Hollingsworth LLP, and Allyson N. Ho of Morgan, Lewis & Bockius LP have joined WLF’s Board. ...

Professor Bainbridge is the William D. Warren Distinguished Professor of Law at UCLA, where e teaches Business Associations as well as Mergers and Acquisitions. He is a prolific scholar ho has authored over 90 law review articles and casebooks, and he edits the award-winning blog ProfessorBainbridge.com.” ...

"We are honored that Hew, Steve, Kate, and Allyson have joined our Advisory Board,” said WLF resident and CEO Constance Larcher. “WLF has been fortunate to feature each of these professionals’ expertise over the past decade as authors of our publications and speakers at our programs, and we look forward to further engaging them in our critical public interest law work.”

Ridge Monte Bello (Santa Cruz Mountains) 1993

It being my birthday, we ordered steaks from Craig's and opened one of my favorite wines: a 1993 Ridge Monte Bello. Medium ruby color, having thrown a fair bit of sediment. After decanting and breathing for 45 minutes, it presented a complex bouquet of leather, cedar, dried currants, and prunes. Ditto the palate. Still surprisingly tannic on the finish, with gripping acidity. Good, but probably slightly past peak. Grade: 90

Qupé Ibarra-Young Vineyard Syrah (Santa Ynez Valley) 2012

Having given my Business Associations exam today and with my birthday tomorrow, I decided to open a nice bottle of wine with dinner tonight. This Qupé Syrah was a great match for carry out Pappardelle Cinghiale from Ago Trattoria. Medium to deep purple-ruby. Presents a clean, attractive bouquet of dark red and black fruits. On the palate, it is full of sweet, juicy blackberry and black cherry with a touch of pepper and spice on the finish. Not a vin de grade, but a lovely choice for drinking over the next couple of years. Grade: 90

Reading in an electronic age: Weight still matters for me

In an interesting post on the role of "willing suspension of disbelief" in science fiction and fantasy, Charles Stross has a throw away line that caught my attention:

Certain patterns are guaranteed to make me throw a book at the wall these days (or they would, if I wasn't doing almost all my reading these days on an iPad), or at least stop reading on the spot.

I do virtually all of my pleasure reading in digital formats. Professional and devotional reading less so, although I increasingly ponder a digital missal.

But I do almost no reading on my iPad. Instead, I use either a computer or a Kindle PaperWhite. Why? Because I find the iPad--even the current generation--too heavy and awkward to hold for extended periods of time without wrist and hand strain. Days when I use my iPad to do a lot of reading, emailing, recipe hunting, Angry Birding, tweeting, and FBing can lead to severe shoulder, elbow, and/or hand pain.

I could see using an iPad if you can't afford a dedicated e-reader. But otherwise, I would think the smaller and lighter Kindle would be much superior. (Or the Nook if you really hate Jeff Bezos.)

But maybe I'm doing something wrong. Any advice?

How I'd fix Hillary Clinton's plan to "fix" Wall Street

In today's NYTimes, Hillary Clinton lays out her plans to reform Wall Street. As you may have expected, I am not (for the most part) a fan:

Right now, Republicans in Congress are ... attempting to defund the Consumer Financial Protection Bureau.

She says that like it is a bad thing. But the CFPB is seriously flawed, as a summary from the House Financial Services Committee explains:

Established by the Dodd-Frank Act, the CFPB's radical design is unique among financial and consumer regulators, including those responsible for consumer and investor protection. Not only does it evade the traditional system of checks and balances championed by James Madison in Federalist #51, it also lacks the internal controls Congress built into other regulatory agencies.   

... the CFPB escapes congressional budgetary oversight, obtaining its funding directly from the Federal Reserve instead of through the regular appropriations process. This end-run around Congress leaves no check to ensure the CFPB director is spending the people’s money effectively to promote consumer protection, much less efficiently in this time of runaway debt and deficits. In fact, we've already begun to see the result of this lack of oversight in the CFPB's egregious headquarters renovation costs. 

Unaccountable to Congress, we see that the CFPB eludes even the power of the president. The bureau's director, once appointed and confirmed, can only be removed by the nation's chief executive for cause. And don't count on the president to enforce spending discipline or regulatory restraint at the CFPB; the bureau is neither subject to the Office of Management and Budget nor the Office of Information and Regulatory Affairs. 

The most glaring difference between the CFPB and other regulators in the chart above, however, is the bureau's shocking lack of judicial oversight. Section 1022 of the Dodd-Frank Act provides that where the bureau disagrees with any other agency about the meaning of a provision of a federal consumer financial law, a reviewing court must give deference to the bureau’s view under the Chevron Doctrine.

... the CFPB is unaccountable even to itself since there is fundamentally no ‘it,’ no ‘they’ – only a he. Be he our credit czar, national nanny or benevolent financial product dictator, the CFPB director's authority is unilateral, unbridled and unparalleled. Without the check of a bipartisan commission, the director can declare virtually any financial product or service as ‘unfair’ or ‘abusive,’ at which point Americans will be denied that product or service even if they need it, understand it and want it.  

Finally, the CFPB lacks a dedicated inspector general (IG) to root out waste, fraud and abuse at the bureau. Given the findings by the Housing and Urban Development IG we highlighted last month, taxpayers should be outraged by this complete lack of accountability, oversight and transparency in the way the CFPB spends the people's money. 

We have seen the mischief Obama appointees can get up to on agencies with bipartisan commissions (e.g., SEC and NLRB). The lack of constraints on the CFPB is thus truly appalling.

Back to Hillary:

My plan proposes legislation that would impose a new risk fee on dozens of the biggest banks — those with more than $50 billion in assets — and other systemically important financial institutions to discourage the kind of hazardous behavior that could induce another crisis.

This is basically a tax on bigness. I'm not entirely opposed to limiting the size of banks as a prophylactic means of preventing government bailouts, although I'd prefer a ban on bailouts. But I don't see how this fee would target specific risky behavior.

I would also ensure that the federal government has — and is prepared to use — the authority and tools necessary to reorganize, downsize and ultimately break up any financial institution that is too large and risky to be managed effectively. No bank or financial firm should be too big to manage.

Why would we think federal bureaucrats are well positioned to decide which banks as "too big to manage"? Or that they would be able to "reorganize, downsize and ultimately break up" a bank in an equitable and efficient way. 

My plan would strengthen the Volcker Rule by closing the loopholes that still allow banks to make speculative gambles with taxpayer-backed deposits. 

There's never been any evidence that the Volcker rule--even in most extreme form--would have prevented any of the conduct that resulted in the financial crisis. On top of which, drafting the Volcker Rule proved to be a nightmare. It is simply not possible to develop a version of the rule that is simultaneously fair, effective, and administrable.

Hillary then turns to "the 'shadow banking' sector, including certain activities of hedge funds, investment banks and other non-bank institutions":

My plan would strengthen oversight of these activities, too — increasing leverage and liquidity requirements for broker-dealers and imposing strict margin requirements on the kinds of short-term borrowing that also played a major role in spurring the financial crisis.

I'm actually okay with some of this. But what I'd really like--limiting hedge fund shareholder activism--is unlikely to come from Hillary.

Second, I would appoint tough, independent regulators and ensure that both the Securities and Exchange Commission and the Commodity Futures Trading Commission are independently funded — as other critical regulators are now — so that they can do their jobs without political interference.

See the discussion of the CFPB above. The concern here is that insulating agencies from political interference insulates them from accountability.

I would seek to impose a tax on harmful high-frequency trading, which makes markets less stable and less fair.

I'm not intrinsically opposed to clamping down on high frequency trading. It's the "how high is too high" that is the problem. How do you come up with an administrable tax that is not purely arbitrary in the cut-off between taxable and non-taxable levels of trading. And how did you make sure that you aren't cutting too deep, so as to ensure you don't reduce market liquidity. In addition, of course, given the global nature of markets, it won't do much good if the effect of the text is to simply move high frequency trading off shore.

And we need to reform stock market rules to ensure equal access to information, increase transparency and minimize conflicts of interest.

Equal access? Really? You will never achieve equal access and it would be a bad idea to try. 

Finally, executives need to be held more accountable. ... And it shouldn’t just be shareholders and taxpayers who feel the pain when banks make bad decisions; executives should have skin in the game. When a firm pays a fine, I would make sure that the penalty cuts into executives’ bonuses, too. 

I'm good with half of that. In fact, I have been advocating individual rather than enterprise liability for a long time. My complaint is that retaining enterprise liability is a bad idea.

And I would fight to close the carried interest loophole that gives some fund managers billions of dollars in tax breaks: They should be taxed like every other citizen.

Fine by me.

The proper role of Wall Street is to help Main Street grow and prosper.

The trouble is that Clinton hasn't made one proposal -- not one -- to encourage capital formation. Likewise, she hasn't made one proposal -- not one -- to reform the regulatory burdens that currently discourage capital formation. 

If you like 2% annual growth as the ceiling of our economic potential, you'll probably be okay with Hillary. But if you think 2% is tepid, you've got to vote for somebody who will care about capital formation more than red tape.

Waging lawfare against the BDS movement

Eugene Kontorovich and Steven Davidoff Solomon argue that organizations embracing the boycott, divestment, and sanctions movement frequently do so illegally:

The moral myopia and academic perversity of these boycotts have been widely discussed. Less well understood is that in many cases they also are illegal. Under corporate law, an organization, including a nonprofit, can do only what is permitted under the purposes specified in its charter. 

Boycott resolutions that are beyond the powers of an organization are void, and individual members can sue to have a court declare them invalid. The individuals serving on the boards of these organizations may be liable for damages.

I'd give a few bucks to a crowdfunded lawsuit challenging these boycotts.

Conglomerate's holding a book club on How the Other Half Banks

The Conglomerate blog is holding a book club on Mehrsa Baradaran's book How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy. The initial post links to various reviews the book has already received.