Category: Financial Institutions


Buffett’s Evolution: From Stock-Picking Disciple of Ben Graham to Business-Building Devotee of Tom Murphy

While everyone knows that Warren Buffett modeled himself after Ben Graham for the stock picking that made Buffett famous in the latter 20th century, virtually no one knows a more important point for the 21st century: he has modeled himself after Tom Murphy in assembling a mighty conglomerate.   Murphy, a legendary executive with great skills in the field of acquisitions that resulted in the Capital Cities communications empire, engineered the 1985 $3.5 billion takeover by Capital Cities of ABC before selling it all to to Disney a decade later for $19 billion.  You did not hear that explicitly at Saturday’s Berkshire Hathaway annual meeting, but Warren mentioned it to me at brunch on Sunday and, when you think about it, it’s a point implicit deep in the meeting’s themes and many questions.

In fact, Berkshire mBBB COvereetings are wonderful for their predictability.   Few questions surprise informed participants and most seasoned observers can give the correct outlines of answers before hearing Buffett or vice chairman Charlie Munger speak. While exact issues vary year to year and the company and its leaders evolve, the core principles are few, simple, and unwavering.  The meetings reinforce the venerability and durability of Berkshire’s bedrock principles even as they drive important underlying shifts that accumulate over many years.  Three examples and their upshot illustrate, all of which I expand on in a new book due out later this year (pictured; pre-order here).

Permanence versus Size/Break Up. People since the 1980s have argued that as Berkshire grows, it gets more difficult to outperform. Buffett has always agreed that scale is an anchor. And it’s true that these critics have always been right that it gets harder but always wrong that it is impossible to outperform.   People for at least a decade have wondered whether it might be desirable to divide Berkshire’s 50+ direct subsidiaries into multiple corporations or spin-off some businesses.  The answer has always been and remains no.  Berkshire’s most fundamental principle is permanence, always has been, always will be. Divisions and divestitures are antithetical to that proposition.

Trust and Autonomy versus Internal Control. Every time there is a problem at a given subsidiary or with a given person—spotlighted at 2011’s meeting by subsidiary CEO David Sokol’s buying stock in Lubrizol before pitching it as an acquisition target—people want to know whether Berkshire gives its personnel too much autonomy. The answer is Berkshire is totally decentralized and always will be-another distinctive bedrock principle. The rationale has always been the same: yes, tight leashes and controls might help avoid this or that costly embarrassment but the gains from a trust-based culture of autonomy, while less visible, dwarf those costs.

Capital Allocation: Berkshire has always adopted the doubled-barreled approach to capital allocation, buying minority stakes in common stocks as well as entire subsidiaries (and subs of subs).  The significant change at Berkshire in the past two decades is moving from a mix of 80% stocks with 20% subsidiaries to the opposite, now 80% subsidiaries with 20% stocks.  That underscores the unnoticed change: in addition to Munger, Buffett’s most important model is not only Graham but Murphy, who built Capital Cities/ABC in the way that Buffett has consciously emulated in the recent building of Berkshire.

For me, this year’s meeting was a particularly joy because I’ve just completed the manuscript of my next book, Berkshire Beyond Buffett: The Enduring Value of Values (Columbia University Press, available October 2014). It articulates and consolidates these themes through a close and delightful look at its fifty-plus subsidiaries, based in part on interviews and surveys of many subsidiary CEOs and other Berkshire insiders and shareholders.   The draft jacket copy follows. Read More

The Symbols of Government, SEC Edition

SEC Commissioner Kara Stein “played an integral role in drafting and negotiating significant provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act.” She was Staff Director for the Senate Banking Subcommittee of primary jurisdiction over the SEC. She’s a very well-respected professional with extraordinary experience in the law of financial regulation. And here’s what she had to say today on the SEC’s 3-2 vote to “overturn the automatic disqualification of Royal Bank of Scotland Group from eligibility as a “Well-Known Seasoned Issuer:””

Among the many disqualification and bad actor provisions enacted by Congress and the Commission, loss of WKSI status may have the fewest ramifications. Nevertheless, when, as here, a subsidiary of a large financial institution is convicted for committing a crime that helped skew the value of trillions of dollars’ worth of financial instruments and contracts worldwide, we still grant relief. Say what you will about how isolated or insignificant this conduct was within the context of the entire institution, it still managed to wreak havoc on financial markets across the globe. Yet we provide our implicit “Good Housekeeping Seal of Approval,” and tell the investing public that this issuer is still deserving of reduced Commission review and subject to fewer investor protections.

If we are going to abrogate our own automatic disqualification provision on these facts, then we should consider discarding these disqualification and bad actor provisions entirely, along with the pretense that they have any real meaning.

Various agencies in American history have slipped into “vestigial” status. The ICC, for instance, had little reason for being after shifts in policy reduced its regulatory role. One has to wonder how much “Seals of Approval” from the SEC are worth if they can persist in cases like this.


Economic Dynamics and Economic Justice: Making Law Catastrophic, Middling, or Better?

Contrary to Livermore,’s post,  in my view Driesen’s book is particularly powerful as a window into the  profound absurdity and destructiveness of the neoclassical economic framework, rather than as a middle-ground tweaking some of its techniques.  Driesen’s economic dynamics lens makes a more important contribution than many contemporary legal variations on neoclassical economic themes by shifting some major assumptions, though this book does not explore that altered terrain as far as it might.

At first glance, Driesen’s foregrounding of the “dynamic” question of change over time may, as Livermore suggests, seem to be consistent with the basic premise of neoclassical law and economics:   that incentives matter, and that law should focus ex ante, looking forward at those effects.   A closer look through Driesen’s economic dynamics lens reveals how law and economics tends to instead take a covert ex post view that enshrines some snapshots of the status quo as a neutral baseline.  The focus on “efficiency” – on maximizing an abstract pie of “welfare”  given existing constraints —  constructs the consequences of law as essentially fixed by other people’s private choices, beyond the power and politics of the policy analyst and government, without consideration of how past and present and future rights or wrongs constrain or enable those choices.  In this neoclassical view, the job of law is narrowed to the technical task of measuring some imagined sum of these individual preferences shaped through rational microeconomic bargains that represent a middling stasis of existing values and resources, reached through tough tradeoffs that nonetheless promise to constantly bring us toward that glimmering goal of maximizing overall societal gain (“welfare”) from scarce resources.

Driesen reverses that frame by focusing on complex change over time as the main thing we can know with certainty.  In the economic dynamic vision, “law creates a temporally extended commitment to a better future.” (Driesen p. 52). Read More

Law and Economics: The Flow of Ideas is a Two-Way Street

Raul Carrillo and Rohan Grey have recently argued that “law students need macroeconomics…and macroeconomics needs us”—and I couldn’t agree more. They have launched several initiatives at Columbia to build on the excellent finance curriculum offered there:

As Professor Robert Jackson opined in The Modern Money Network’s recent seminar, “The way we talk about money systems in law school has been blocked in a way, because we’re not really honest with each other about the fact that our money system is a legal choice… We may have covered, in legal academia, microeconomics in reasonable depth, but we need to do much more work in macroeconomics.”

When we “do economics” in law school, we customarily confine it to the scale of individual entities, say, firm transactions in Contracts and Corporations. Broader discussion of political economy rarely creeps into the curriculum…. Whether you eventually practice or make policy, negotiate deals or craft legislation, every student can benefit from further integration of political economy into the curricula. This is why The Modern Money Network, a newly recognized student organization, exists. It is a transdisciplinary hub for learning about the interactions between money, finance, law, and the broader economy.

Carrillo has also observed that the Fed used to have far more input from attorneys, but has since become an intellectual monoculture of economists. That, too, has to change. We can only hope to reform the finance sector by addressing power dynamics among boards, CEOs, traders, and investors—the types of dynamics lawyers are expert at creating and manipulating. Moreover, attorneys need to understand the overall effect of finance on the broader economy, and not simply think of ourselves as mere hired guns for the highest bidders. I’ll be closely following the work of Carrillo and Grey, and suggesting some fruitful directions for political economy and law.

They are also looking to expand their approach to other law schools—so try to contact them (@ramencents for Carrillo, @rohangrey for Grey) if you’re interested. It’s great to see the legacy of Robert Lee Hale endure at Columbia!

Economic Growth and Legal Regularity

Izabella Kaminska is one of the most insightful writers at the Financial Times. In a recent post, she helps us understand the paradoxical relationship between legal regularity and economic growth. She first quotes from a recent work by Katharina Pistor, entitled “A Legal Theory of Finance,” which crystallizes the tensions at play:

Law lends credibility to financial instruments by casting the benevolent glow of coercive enforceability over them. But the actual enforcement of all legal commitments made in the past irrespective of changes in circumstances would inevitably bring down the financial system. If, however, the full force of law is relaxed or suspended to take account of such change, the credibility law lends to finance in the first place is undermined.

Kaminska applies this logic to explain why the shutdown threat eventually dissipated:

[In the] Tea Party shutdown standoff . . . . [i]t soon became clear that while upholding the debt ceiling and risking system collapse may have made a lot of sense to those without savings, lots of gold and many guns (i.e. those the Tea Party was representing) it did not serve the interests of the Tea Party’s wealthy benefactors who had a vested interest in seeing the system survive.

[For the middle class Tea Partiers,] the law, by yielding on bailouts and debt ceilings, is already failing them, so the step to outright lawlessness is hardly a step away. All they need is enough smarts (gold!), muscle (guns!) and divine favour (the constitution!) to survive the apocalypse, and re-establish the law on their terms. And this is how the apocalypse mindset arguably comes into play. Luckily for the markets, those in the apex of power are more likely to be aware that their wealth is symbiotically dependent on a functional and cohesive system anyway and that no man is an island.

I have to wonder, though, if the benefits of disorder are not greater for some very powerful players near the top of the system. Isn’t a classic recipe for financial success buying assets “on the cheap” in the midst of crisis?


UCLA Law Review Vol. 61, Discourse

Volume 61, Discourse Discourse

Fighting Unfair Credit Reports: A Proposal to Give Consumers More Power to Enforce the Fair Credit Reporting Act Jeffrey Bils 226
A Legal “Red Line”? Syria and the Use of Chemical Weapons in Civil Conflict Jillian Blake & Aqsa Mahmud 244
Alleyne v. United States, Age as an Element, and the Retroactivity of Miller v. Alabama Beth Colgan TBD

A Nobel for Shiller

When I read Robert Shiller’s Finance and the Good Society last year, I had a sense the author treated the work as the penultimate step in a scholarly cursus honorum, to culminate in the Nobel. Thus my cautionary note in this review:

[Shiller] has eloquently analyzed the role of human psychology in markets, and he predicted both the tech and housing bubbles. He has been a methodological trailblazer, introducing behavioral science to the ossified academic discipline of finance. Time’s Michael Grunwald has called him a “must-read” among wonks in the Obama Administration. Shiller’s past books command respect and repay close reading. Given his sterling career, it is deeply disappointing to see Shiller divert the “behavioral turn” in economics into the apologetics of Finance and the Good Society.

As I explain in the review, in Finance and the Good Society Shiller engages in the cardinal sin of celebrity economists: he presumes to comment authoritatively on legal, poltical, and moral matters far from his real domain of expertise. As for co-winner Eugene Fama’s contributions, Justin Fox’s work is useful (as summarized in this 2009 review):

Eugene Fama . . . promulgated the efficient markets hypothesis in its most widely recognised form by combining it with the capital asset pricing model that portrays investing as a trade-off between risk and return. . . . [I]n the early 1990s, Fama and Kenneth French published a large empirical survey of stock market returns since 1940 and found several ways in which returns were not random and which could not be explained by [Fama’s theory]. In aggregate, smaller companies did better than larger ones, while “value” stocks, which are cheap compared with the book value on their balance sheet, also outperformed. There was even a “momentum” effect – stocks that had been doing well for a while tended to continue to do so. . . . . Fox makes clear that this was tantamount to the founder of efficient markets admitting his theory was wrong and quotes the judgment of one critic: “The Pope said God was dead.” He is also scathing about Fama’s attempt to rescue the theory by categorising all these effects as “risk factors”. . . . All of this came more than a decade before last year’s implosion. So why did regulators continue to enshrine assumptions of efficiency in the rules they set?

The person who can answer that last question truly deserves a Nobel.


Credit Card Merchant Fee Settlement — Injunctive Relief

Credit Card CroppedPrior installments in this series addressed the background leading up to the credit card merchant fee class action and the damages provisions in the b(3) opt out class action.  This post addresses the injunctive relief provisions that the settlement in In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation styles as a mandatory b(2) non-opt out class action.  An upcoming final installment in this series will address the release provisions in the settlement.

B(2) classes are appropriate where the nature of the injunctive relief is such that it will necessarily affect every class member.  After setting out the relief proposed in the settlement, I’ll provide some thoughts on whether b(2) is really an appropriate device for this case.  Perhaps class action experts out there could weigh in on this issue in the comments.

The injunctive relief set out by the settlement is notable for what is not provided.  Nothing in the settlement addresses the core concerns in the complaint about (1) the collective setting of a default interchange fee; (2) the rule prohibiting merchants from rejecting the cards of, surcharging the card transactions of, or otherwise discriminating against some card-issuing banks, but not others; or (3) the rules making it impossible for merchants to route transactions over the least expensive network.

Read More


Credit Card Merchant Fee Settlement – Damages Provisions

Credit Card CroppedThis post will evaluate the settlement’s damages provisions.  You can find my first post providing background on the litigation here.  The settlement provided that upon the court’s preliminary approval, the card networks would pay $6.05 billion, 2/3 from Visa and 1/3 from MasterCard into a settlement fund.  Depending on how many merchants chose to opt out, however, the defendants retained the right to reduce the fund through take down payments of up to 25% of the total and to kill the deal if opt outs exceeded that amount.  Opt outs exceeded that amount, but the defendants have not abandoned the settlement.  In addition to the flat fee award, Visa and MasterCard agreed to cut their applicable interchange fees by 10 basis points for eight months.  Rather than actually reducing the fees paid by merchants, however, Visa and MasterCard would withhold 10 basis points from collected fees that would otherwise have been paid to card issuers.  This amount would then be contributed into the settlement fund within 60 days from the expiration of the eight-month period.  This contribution would be non-refundable, regardless of opt outs.

Read More


The Credit Card Merchant Fee Litigation Settlement

I’d like to thank Concurring Opinions for inviting me to blog about In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.  This eight-year-old multi-district litigation has produced the largest proposed cash settlement in litigation history  ($7.25 billion) along with what is perhaps the most extraordinary release from liability ever concocted.  It may also be the most contentious.  Over half the name plaintiffs and over 25% of the class, including most large merchants (think Walmart, Target) and most merchant organizations, have objected.  On September 12, Eastern District of New York Judge John Gleesaon held a fairness hearing to consider the settlement, and the parties are awaiting his decision.  An appeal is a virtual certainty.

This post will provide background on the credit card industry pricing mechanisms that led to this litigation, the legal issues in the case, and the structure of the settlement.  (You can read more about the history of the credit card industry’s relationship to the antitrust laws here.)  In subsequent posts, I’ll separately analyze the damages and relief provisions in the settlement.  (If you can’t wait 😎 my working paper analyzing the settlement is here.)  If there are particular issues that you’d like to read more about, let me know in the comments and I will respond in subsequent posts.

The credit card industry is atypical, but not unique, in that it competes in a two-sided market, i.e., one that serves two distinct customer bases.  A card system like Visa provides both a purchasing device (credit cards) to consumers and a payment acceptance service to merchants.  (By way of comparison, the legal blogging market is also two-sided.  Concurring Opinions provides both an information forum to its readers and a platform to its advertisers.)

Read More