Category: Corruption

Labor Day Links

Just a few points of interest on Labor Day:

1) Alan Hyde, The Idea of the Idea of Labour Law: A Parable.

2) Yves Smith, The Decline of Manufacturing in America: A Case Study.

3) Mark E. Anderson, $500 a Month Less.

4) John Bowe, Nobodies: Modern American Slave Labor and the Dark Side of the New Global Economy.

5) Liza Featherstone, Selling Women Short: The Landmark Battle for Worker’s Rights at Wal-Mart.

6) Robert Reich on the great regression.

7) Kyle Leighton, Less Fruits Of More Labor.

8. Andrew Leonard, The Big Squeeze on Labor.

9) Washington Post, Breakaway Wealth.

10) But don’t worry, CEOs are doing something to stanch the flow of such disheartening news:

Here’s one financial figure some big U.S. companies would rather keep secret: how much more their chief executive makes than the typical worker. Now a group backed by 81 major companies — including McDonald’s, Lowe’s, General Dynamics, American Airlines, IBM and General Mills — is lobbying against new rules that would force disclosure of that comparison.

The lobbying effort began more than a year ago. It involved some of the biggest names in corporate America and meetings with members of both parties on the House Financial Services Committee and Senate banking committee. The companies and their Republican allies in Congress call comparisons between the chief and everyone else in the company “useless.”

But some Democrats and investors say the information should be issued to highlight the growing income disparity in the United States. They add that opponents of disclosure merely want to hide the outrageous scale of executive pay packages.

Opaque pay is a big problem in the UK, too. In pay-without-performance world of corporate titans, expect a lasting war against disclosure.


More Secret Money Went to Goldman

Kept secret by the U.S. government until today, Goldman Sachs borrowed $15 billion from the U.S. Federal Reserve on December 9, 2008 to stay afloat.

That was the largest sum taken that day by a coterie of 19 favored Wall Street and foreign banks in a furtive $80 billion capital infusion to the banks that created the crisis.

Today’s astonishing disclosure, and the strenuous efforts of officials to keep it quiet for nearly three years, raises still more questions about the integrity of the government kingpins who called the shots during the financial crisis of 2008.

Especially compromised are Henry Paulson, Goldman’s former CEO who ran the U.S. Treasury at the time, and his chief lieutenant, Tim Geithner, who has run the U.S. Treasury since.  Read More


Geithner Wistful for Goldman Sachs

Treasury Secretary Tim Geithner is eyeing the exits from his wonky Washington post. Rumors about what he’ll do next swirl on Wall Street.

Heavy betting is on Goldman Sachs, though taking a job there would cut very close to the bone of revolving door piracy in the Washington-New York corridor. After all, Goldman owes its existence to Geithner.

In late 2008, when Geithner was President of the New York Federal Reserve Bank, he co-engineered, along with his Treasury predecessor and former Goldman CEO, Henry Paulson, the clandestine bailout of Goldman that rescued the investment bank from oblivion.

Earlier that year, Paulson and Geithner provided billions of government money to rescue Goldman’s peer, Bear Stearns, but took enormous heat for doing so; late in that year, the duo capitulated to the pressure by allowing Lehman Brothers, another Goldman peer, to disintegrate in bankruptcy. They promptly took heat for that too.

To avoid both fates in the case of Goldman Sachs, Paulson and Geithner decided to nationalize American International General. They bought 80% of that company with $85 billion in government money.

They then furtively transferred nearly $20 billion of that money to Goldman, and other banks, to prop them up. The transfers settled financial contracts between AIG and Goldman the two companies had been renegotiating for months.

Rather than complete those negotiations, in which both sides would have taken losses, the government-appointed leadership at AIG paid them out one-hundred cents on the dollar. That injected badly-needed liquidity into Goldman in a way that did not hurt its balance sheet. Of course, it killed AIG.

Geithner and Paulson hid these details from the public for months, until the press and Congressional committees unearthed the truth.

Geithner might love to land a job at Goldman, and senior folks there may welcome this chance to repay their man in Washington. But given this background, it may be too shocking even for a man who did such things to take such a job.


Treasury’s AIG Gag Order

Top business executives in the United States regularly contact Members of Congress to lobby on legislation and other matters of public policy. But since the September 2008 government takeover of AIG, executives of that company have been forbidden to do so, unless they first get the Treasury Department’s permission, and the Treasury Department refuses to grant it.

Since AIG executives are afraid to speak out, disclosure of this un-American provision was left to Maurice (“Hank”) Greenberg, former chair and until 2008 the largest shareholder of AIG. He disclosed it yesterday on CNBC.

This is yet another example of the dubious tactics used in Sept. 2008 by Hank Paulson and Tim Geithner when they wrested control of AIG for the U.S. government. Besides having scant legal authority for their takeover actions, the successive Treasury Secretaries tried to keep from the public how the government funds injected into AIG did not support it or its shareholders or employees but were funneled as a backdoor bailout of Goldman Sachs and other Wall Street firms.

It is thus par for the course—but equally outrageous—that we now learn that when Paulson and Geithner imposed this straightjacket on AIG, they also made the company (a) adopt a policy suspending all lobbying and then (b) sign a loan agreement prohibiting it from changing that policy without Treasury’s consent—which apparently may be withheld for any reason or no reason. Read More

Deceptive by Design: Derivatives as Secret Liens

Secretive practices and institutions are common in contemporary finance. For those who’ve ceased the search for long-term value creation, temporary information advantage is key. Even commonplace practices can be reinterpreted as havens of hiddenness. My colleague Michael Simkovic’s article “Secret Liens and the Financial Crisis of 2008” exposes the role of derivatives and securitization as secretive borrowing strategies, designed to keep the naive or trusting from discovering the fragility of the institutions they loan funds to. His work has been presented to the World Bank Task Force on the Bankruptcy Treatment of Financial Contracts, and is relevant to both private and sovereign debt risks.

Simkovic argues that 80 years of erosion of classic commercial law doctrine ensured that “complex and opaque financial products received the highest priority in bankruptcy.” Products like swaps and over-the-counter derivatives were not adequately disclosed (either by banks in their consolidated financial statements or by their counterparties in publicly accessible transaction registries). By concealing those debts, these already overleveraged financial institutions were able to attract ever more credit and investment, at better rates than those who reported their overall financial health more accurately. (All other things being equal, it’s safer to lend to an entity that owes 10 billion rather than 100 billion dollars.) The genius of Simkovic’s article is to show how “fundamental causes of the financial crisis are relatively old and simple,” even as an alphabet soup of instrument acronyms (CDO, CDS, MBS, ad nauseam) and government programs (TARP, TALF, PPIP, et al.) makes our time seem unique.
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The War Against Disclosure

Three remarkable recent lobbying campaigns go beyond the normal bounds of partisan sniping over “markets vs. regulation.” They threaten our capacity to understand how society is ordered: whom it serves, for what purposes, and at what costs. Consider these attacks on basic disclosure norms in politics and business:

1) Campaign Finance Disclosures: Regardless of ideology, almost everyone used to agree that campaign funding sources and amounts should be disclosed. 92% of Americans had that position in 2010. Justice Scalia has eloquently insisted that such disclosure laws violate no one’s rights. But thought leaders in the Republican party are now vigorously resisting disclosure, as Norm Ornstein observes:

The 2010 mid-term elections showed clearly how legal loopholes involving non-profit groups called 501(c)4s, and the failure to adopt clear regulations surrounding campaigns, can result in hundreds of millions of dollars of spending to influence campaigns that masked the identity of huge donors. In response to these realities, the Federal Communications Commission is considering requiring robust disclosure by TV stations of the major donors of political ads; the Securities and Exchange Commission is considering requiring public corporations to disclose to stockholders their spending on politics, and the White House has drafted an executive order to require companies applying for federal contracts to disclose their spending on political campaigns. . . .

Last month, Mitch McConnell [said] he views disclosure as “a cynical effort to muzzle critics of this administration and its allies in Congress.” . . . The Wall Street Journal’s full-throated support for transparency has disappeared as well; it blasted the FCC recently for considering requiring TV stations to put donors of campaign spots on the Internet . . .

John Yoo has also joined the debate, arguing that presidential power stops just short of the prerogative to require federal contractors to disclose their political donations.

2) Conflict Mineral and Extractive Industry Disclosures: One of the surprising victories for decency in the Dodd-Frank Act last year was a provision requiring certain disclosures from mining and resource extraction companies, and companies using “conflict minerals” from in or around the Congo. If you’re a consumer with preferences for certain industrial processes (say, those that don’t create incentives for rape, murder, and starvation), you want to be able to see which companies are fueling conflict and corruption and which are not. But intense corporate pressure is now delaying the rulemaking process needed to implement the disclosure provisions. According to Gerry Fay, “it is estimated that going ‘conflict free’ would cost companies just one penny per product.” But apparently that is too high a price to end corporate complicity in one of Africa’s bloodiest wars.
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Ag-Gag: A Black-Boxed Food Supply

I recently discussed the OIRA’s contribution to some terrible incidents in egg safety. Denis Sterns has written a challenging article on the bigger picture, explaining “Why Food in the United States May Never be Safe:”

This article . . . interrogates the idea of food safety by opening the question of whether a rational economic actor in a free market for food can reasonably be expected to invest in improving the safety of the food products he makes and sells. It is precisely the lack of (cr)edibility in the market – i.e., the absence of reliable quality signals, the lack of traceability, the high degree of anonymity, and the destruction of trust – that creates the structural impediments and powerful disincentive for improving the quality and safety of food. . . . Recall the huge public uproar, and swift policy changes, that followed the release of video of “downer” cattle being abused at a California meat plant. To obtain the video, the Humane Society had to sneak someone inside the plant to secretly record the offending conduct.

The secrecy of some food suppliers is very troubling. Stearns proposes constant surveillance of their actions: “With video cameras always in place . . . one can only expect that most of the shocking conditions that are found after the fact of an outbreak would be less likely to occur in the first place.” Stearns also criticizes FDA’s “wholly voluntary and largely ineffective” traceback regulations, which would make it easier to find the source of contaminated food. (Maybe the FDA is too busy chasing down raw milk co-ops.)

Unfortunately, Big Meat appears all too eager to hide their actions from both concerned citizens and animal rights activists. Consider the rash of legislation designed to deter actions like the Humane Society’s:

The animal advocacy group Mercy for Animals sent an undercover investigator to E6 Cattle Company in Texas, where he filmed calf abuse over a two-week period. To prevent such whistleblowing, several states have passed so-called “Ag-gag” laws that would make it illegal to clandestinely film inside slaughterhouses, sparking what animal rights activists fear will be a nationwide trend. . . . “They’re trying to criminalize someone being an eyewitness to a crime,” Jeff Kerr, [PETA]’s general counsel, said.

One of Chinese dissident Ai WeiWei’s biggest “offenses” against the Chinese government was trying to publicize the names of the children killed when shoddy schools collapsed after an earthquake. Criminalization of exposes of contamination and animal abuse in America’s heartland could be one more step toward the convergence of Chinese and US politico-economic structures. Read More


Power, Power, Power

In Washington, banking is known as one of the most powerful lobbies.  So this is an important call from an American Banker editorial “Big-Bank CEOs Need a Bigger Policy Profile in DC:”

The industry should enlist the help of its largest customers to make the case that big US companies need big US banks. Imagine the impact of having the CEOs of Boeing or Cisco testifying next to a couple of large financial firm CEOs.  The timing is ripe.  The Obama administration has adopted a more open attitude toward big business with the president hiring former JPM executive Bill Daley as his chief of staff and selecting GE chief Jeff Immelt to advise him on job creation. . . . Doors in Washington are opening.  Bankers should capitalize on the opportunity.

Thank goodness some things in America never change!  Best wishes to Prof. Elizabeth Warren and anybody else in Washington trying to help anyone other than those who can help themselves.  

Hat Tip: Lynn Turner


Some Thoughts on DC Corruption

I’d like to thank the good folks at Concurring Opinions for inviting me to guest blog. The CoOp team has always been tremendously generous to me over the years–advising me on the teaching market (Dan, Frank), reading and commenting on draft  law review articles (Dan), and reposting some of my thoughts (Danielle).  And they’ve been kind enough to let me guest-blog for two months, as I was working through a law review article (grandly titled First Amendment Architecture–someone please publish it).

I tend to write about free speech and technology–like policies to ensure net neutrality, Internet access for all, or online innovation without permission. I am interested in media and the Internet because they are among our dominant means of speech, and speech is a basic input into all the decisions of our democracy. To the extent we design our speech systems more or less democratically, that affects all our policy decisions. I spent a few years in DC, working on media reform and network neutrality, among other issues.

I will write about technology soon. Today: corruption.

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Creating Value

I’ve talked in previous posts about a “closed circuit” economy among the wealthy. A plutonomy at the top increasingly circulates buying power (be it luxury goods, real estate, gold, or securities) among itself. The middle class used to dream that a rising Wall Street tide would lift all boats; as Felix Salmon shows, that hope is fading. Whatever innovations arise out of these companies aren’t doing much for average incomes.

On the other hand, financial innovation has done wonders to extract purchasing power from the broad middle into the closed circuit at the top. Here, for example, is how one of our leading firms created enormous value in 2006:

Consider the tale of Travelport, a Web-based reservations company. [A] private equity firm and a smaller partner bought Travelport in August 2006. They paid $1 billion of their own money and used Travelport’s balance sheet to borrow an additional $3.3 billion to complete the purchase. They doubtless paid themselves hefty investment banking fees, which would also have been billed to Travelport.

After seven months, they laid off 841 workers, which at a reasonable guess of $125,000 all-in cost per employee (salaries, benefits, space, phone, etc.) would represent annual savings of more than $100 million. And then the two partners borrowed $1.1 billion more on Travelport’s balance sheet and paid that money to themselves, presumably as a reward for their hard work. In just seven months, that is, they got their $1 billion fund investment back, plus a markup, plus all those banking fees and annual management fees, and they still owned the company. And note that the annual $100 million in layoff savings would almost exactly cover the debt service on the $1.1 billion. That’s elegant—what the financial press calls “creating value.”

The corporate geniuses at Boeing offer another display of modern-day business acumen.

The more stories like this you read, the more you realize that massive unemployment isn’t a bug in our economic system; it’s a feature. A country can’t have legal rules that permit these moves without expecting to hemorrhage jobs. All the Michael Porter homilies in the world can’t put this Humpty Dumpty back together again.