I'm looking forward to seeing some of you at the meat market, Wharton is interviewing (and the deadline for applications is yet to come!). We're not the only business law place, and I like to post the hiring notices of our competition for those inclined to peruse them. After the fold, a few more, all in quite desirable locations.
When I was a "young adult," books geared toward me dealt with parental divorce, mothers dying of cancer, anorexia and the occasional unwanted pregnancy. But everyone knowns now that YA novels must have a dystopian future (or a wizard). (See, e.g., Catching Fire and Divergent et seq.) Two recent movies jump on tha tbadwagon, adapting two other YA novels that depict a dystopian, totalitarian future: The Giver and The Maze Runner.
I will have to admit that I may be one of the very few moms out there with kids that have gone through middle school who has not read The Giver (1993) by Lois Lowry. Sorry. But I get the feeling from watching the movie that the book may have a little more to offer. The NYT Magazine interviewed Lowry here about watching the book be made into a movie twenty years after writing it. There has to be something weird about writing a book (a single book) decades ago about a totalitarian future where everyone is made to believe that a regimented life with people being organized into work and life by a supreme authority is optimal and then see some young whipper-snappers copy that idea into zillions of dollars (See, eg., Catching Fire and Divergent, mostly Divergent). LIke Tris in Divergent, Lowry's Jonas begins to sense that life isn't supposed to be about just doing life the way it has been done, organized into familes, occupations, etc. Very similar to the ceremony in Divergent in which young people are sorted into "factions," young people in The Giver are sorted into occupations. Jonas is left to the end, and he begins to think there is something wrong with him (divergent, possibly?) But no, he is given the position of "receiver of memories," which is held only by one person in a generation. He is to be the memory laureate of the community -- he alone will hold the history of mankind, with its tragedies and blessings, wars and creative accomplishments, weapons and musical instruments. The trick is though, that the outgoing "receiver/giver" has to give Jonas all of this accumulated knowledge (through some sort of forearm-mindmeld thing) without Jonas balking and deciding that this form of government is completely whack, as the young people say. As you might imagine, Jonas does exactly that. Watching the movie, I felt that I wasn't really understanding everything because I did not read the book. Maybe the book is meant to be a small allegory or cautionary tale and not a summer blockbuster. Anyway, when you watch the next Divergent movie, just know that Lois Lowry did that first, without as much violence.
Speaking of violence, The Maze Runner does not flinch from modern depictions of a totalitarian future. I also did not read this book, though my children did. As far as violence goes, this movie is more along the Divergent and Catching Fire lines than The Giver. The beginning is very existential -- our hero, Thomas, wakes up in a metal elevator, which is rising to an unseen destination. The elevator ("box")stops when it emerges from underground into "the glade." This green space is fairly large, with groves of trees, grass, and a really bizarre stone or metal wall surrounding the green space and extending high into the sky. Thomas cannot remember who he is and has no idea why he is here or what "here" is. And neither do the other teen-age boys that greet him. They also arrived via the box, one a month for three years. They were expecting another arrival in the box, along with supplies. Someone or some thing sends the box once a month, but no one knows who. The supplies are marked with "wckd." The boys have created a type of community with three rules: do your work, don't hurt anybody, and don't go into the maze. The maze is on the other side of the tall wall, and there is a door that opens during daylight hours. Of course Thomas, being our hero, immediately wants to go into the maze. And early on, you get the sense that this ok-topia that the boys have worked out over time (apparently with some rough patches) is not going to stable for too long. The Lord of the Flies seems imminent.
The rest of the movie (obviously just a first installment) poses one central tension: is it better for the boys to continue on and live in a sort of harmony in the glade, living off the land and the necessary supplies that come once a month or to risk this sort-of-acceptable existence to find a way out through the maze, past the "grievers" (gross robot giant spider things), and see what is outside? Should they cash everything in and risk death to find out who they are and why they are there?
Because this is the first installment, we get to see the gladers trade what they have for something, but we aren't sure what the something is. As my daughter said to me on the way out: "Everyone is lying." Yikes! Maybe I should read the book.
On Saturday, our whole family met another whole family to go see Alexander and the Terrible, Horrible, No Good, Very Bad Day. Because we were in Provo, we were one of only three families who were not going to see Meet the Mormons. Even though we were meeting Mormons to go see Alexander, there was a moment of shame that we weren't going to see the documentary. Next week. But this week, we saw Alexander.
So, any reader will understand that my criteria for a good movie would not make me a good film teacher or film critic. I like movies that my whole family can watch, that make me laugh, don't have too much potty humor or gross-out jokes, and have some sort of intelligence. I would say that Alexander fits the bill.
Obviously, the movie does not track the book other than the general gist (sort of like Cloudy with a Chance of Meatballs). Alexander's bad day takes place in the first 15-20 minutes of the movie. He gets gum in his hair, falls down in front of his 6th grade crush, finds out the most popular boy in his class is having a blow-out bash the same night as his 12th birthday party, etc. Alexander's angst comes not because he had a bad day, but because his family doesn't seem to care in their self-centered busy-ness: Big brother crowing about his prom the next day; big sister preening about her big theater debut the next day; mother worrying about her big book launch the next day; dad cautiously optimistic about his big interview the next day. As you can see "the next day" has a lot of potential for the other family members. You can brace yourself for what happens next. At midnight on his birthday, Alexander wishes that his family could have a bad day (I'm sorry -- a terrible, horrible, no good, very bad day) so that they could know what it is like and maybe empathize with him more. And beginning the next morning, that is what happens.
What separates Alexander from a number of movies (family and not) where a series of things go horribly wrong is that the movie never loses its sweetness. The awful, cringe-worthy things that happen are followed swiftly by an epiphany, a shared moment with a family member, a recommitment to optimism and family togetherness. Hokey? Maybe, but exactly the kind of movie that I like to see with my family, which is not too different from Alexander's family. (I was sitting by my 12 year-old, and he definitely empathized with Alexander's middle child angst.)
As I blogged a few days ago, I've been reading Larry Cunningham's Berkshire Beyond Buffett: The Enduring Value of Values. The thesis is that Berkshire Hathaway's value will endure beyond its founder, Warren Buffett, because of the larger values of the organization. After making his case he argues (like a good lawyer) that a precedent and analogous case already exists: the Pritzger's Marmon Group.
You know you're a corporate law geek if the mere mention of the Marmon Group made you sit up and take notice. The Marmon Group plays a role in 2 classic corporate law stories. Larry mentions one: every student of corporate law should remember the Marmon Group as the bidder in the infamous corporate law case Smith v. Van Gorkom. If you don't remember the 1985 Delaware Supreme Court case, you didn't have me as a Corporations professor. Spoiler alert: the directors are found to have breached their fiduciary duty and are thus personally liable for potentially millions of dollars in damages.
What many casebooks omit--but not Klein, Ramseyer, Bainbridge, which I am happily using this term--is that the case settled for $23 million. $10 million came from D&O insurance, and "almost $11 million came from the Pritzkers." The Pritzkers had no legal duty to pay for the directors' settlement--but they did it because they felt it was the right thing to do.
The Marmon Group's second corporate law claim to fame is as a player in Barbarians at the Gate, thhe father of corporate tick-tocks. The Marmon Group backed one of the bidders, the First Boston Group. There's this great scene where in a second round of the auction they need to raise more money. First Boston makes a 45-minute presentation to a British sugar company, S& W Berisford, on a Saturday night. First Boston hoped that Berisford could make a decision by Tuesday. 20 minutes later, the company committed $125 million.
One of First Boston's advisors asks "Do these people have any idea what they're doing?... I mean, they're going to commit $125 million. Why should they do it."
Handelsman stared at Finn as if it was the silliest question he'd ever heard. "Jay [Pritzker] asked them to."
The common theme from these two stories? Sophisticated businesspeople regularly act for motivations other than money. Again and again in Berkshire Beyond Buffett, either Berkshire itself or one of its subsidiaries demonstrates that money is not ultimately what drives them. Most notably, many of Berkshire's current subsidiaries turned down higher offers from other acquirers because they valued the reputation for hands-off management that Berkshire promises.
Here's a concrete example I used with my Corporations class when discussing conflicting interest transactions. One of Berkshire's subsidiaries was operated by a devout Mormon whose stores were closed on Sundays. He wanted to expand out of the state, but Buffett was skeptical. He thought the model could work in highly religious Utah, but not beyond. Here is Cunningham quoting Buffett:
Bill then insisted on a truly extraordinary proposition: He would personally buy the land and build the store--for about $9 million as it turned out--and would sell it to us at his cost if it proved to be successful. On the other hand, if sales fell short of his expectations, we could exit the business without paying Bill a cent.
The store was "an instant success", and Berkshire wrote the Bill a $9 million check. Bill refused to take a penny of interest. It's a good example of insider transactions that benefit the firm. It also suggests Larry might actually be right about Bershire's staying power. I can't help thinking there is a lot of value in offering businessmen like this the combination of liquidity and autonomy Berkshire provides, insulating them from the demands of Wall Street.
For our last guest post, Robert and I would like to share our experiences using the five pathways in the classroom to teach legal strategy to business students. Overall, applying this research in the classroom has been a rewarding experience that has challenged us to improve the framework’s conceptual foundation and demonstrate its relevance in the business world.
When we first experimented using the five pathways in our respective graduate business courses three years ago, we were unsure about how well it might be received. To our relief, the framework was well received from the start. In a recent end of year survey that I give to my MBA students, several of them mentioned that the framework was one of the learning highlights in their required business law course. Various students mentioned that the framework allowed them to view the law in a different way and also helped them appreciate the opportunities and benefits of engaging attorneys to help solve business problems. This is in contrast to the viewpoint, held by some managers, that law is an external, dense and static force that constrains business behavior as opposed to enabling value creation.
Robert and I introduce the framework early in our courses, and then apply it to examples and cases throughout the term. To drive home the framework’s applicability, we created a specific team-based homework assignment (Download HW 1) that asks students to choose a recent news story involving a business law issue that follows the prevention, value or transformation pathway, and to analyze the issue from a law and strategy perspective. The articles that students recently have chosen to analyze include stories about NFL contract negotiations, the FCC’s review of the Comcast Time Warner merger, and Airbnb’s legal fight against the New York Attorney General. These cases provide plenty of material for discussion in class, and serve as potential research topics.
Although the framework has yet to be applied in the context of a law course, we think it could potentially engage law students and attorneys who seek to understand how the law strategically relates to their clients’ business.
Ultimately, we’d like to see the framework applied in diverse learning environments, so we encourage you to make use of the framework and contact us if you have any questions or ideas about how to apply it. If you decide to use the five pathways in your classroom or company, we’d love to hear about your experiences.
We’d like to conclude by extending a warm thanks to The Conglomerate and its readers for allowing us this opportunity to share our ideas related to law and strategy. We’ve greatly enjoyed participating as guest bloggers in such a distinguished collaborative space.
David and Robert
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So, I have thought a lot during my teaching career about the Bluebook. I wrote down some of my thoughts here and here, and even co-authored a book and some online exercises here. So, when I saw a headline on my feedly feed today that reads "Is The Bluebook About To Be Killed Off?" that was link teaser I couldn't ignore.
Almost 15 years ago, the Association of Legal Writing Directors attempted to kill off the Bluebook with the ALWD Manual. Like the Maroon Book before it, the ALWD did little to knock the student-edited Bluebook off its lucrative pedastal. The newest challenger is not a competitor, but its own Tenth Edition. (As an unabashed collector, I have my own copy, pictured here.)
According to ATL, Professor Christopher Sprigman (NYU) has sent a letter to the holder of the Bluebook copyright, the Harvard Law Review Association, asserting that the copyright of the Tenth Edition (1958) has fallen into the public domain. Furthermore, Publicresource.org is planning on making electronic copies of the Tenth Edition available to everyone.
Will the availability of the 124-page Tenth Edition kill sales of the Nineteenth or the upcoming Twentieth Edition? Hard to say. Most folks who practice law or who produce legal scholarship have already internalized the basic rules found in this volume. I would hazard a hypothesis that law graduates turn to the modern edition for the hard questions, the esoteric sources, which the Tenth Edition doesn't cover. Another reason I pick up the Nineteenth Edition is to check the appendices -- what's the form of the statutes in [insert state here]? The Tenth Edition doesn't have those appendices, listing every reporter and statutory publication in every jurisdiction ever. That is why the Tenth Edition is only 124 pages long. I also pick up the modern edition to see if I need to abbreviate words in my case name, etc. according to T.6. The Tenth Edition "Table 6" is embedded into Rule 1:1:3 and basically one short page. But, if you are dealing with a "steamship" or a "Telegraph," it can really help you out.
Geoffrey Graber, who is heading up a mortgage fraud task force for DOJ, is motivated by Glengarry Glen Ross, and the results have evinced an ouch from the banking community:
The surge of settlements engineered by Graber in the past year has helped neutralize some of that criticism and rehabilitate a key piece of Holder’s legacy. Still, the settlements have been controversial. Critics such as Roy Smith, a professor at New York University’s Stern School of Business, say prosecutors were driven by “political fever” to extract massive penalties from Wall Street.
“They have to deliver something, so they come up with this,” said Smith, a former Goldman Sachs Group Inc. (GS) partner. “The fact that it’s unfair never really gets considered. The banks have no choice but to hunker down and accept it.”
A bracing corollary to those capture stories, though notice that it's the enforcement officials who win headlines for big settlements, and the bank examiners who are subject to the expose about go along get along.
Larry Cunningham's Berkshire Beyond Buffett is the kind of book I might expect to see produced by a business school academic; it is unsurprising to see that it has been published by an excellent business school press. The book is oriented around an extremely interesting question: does Berkshire offers some sort of competitive advantage beyond that provided by its once-in-a-generation-brilliant chairman Warren Buffett?
Berkshire has invested in a vast array of businesses; in each of those businesses Buffett looks for a "moat." That is, he looks for a market position that will deter competitors from appearing, prevent customers from disappearing, and retain contracting advantages over suppliers, workers, and other inputs.
But what is Berkshire’s moat? Is it the fact that it is good at finding moats? Or is it something else? Larry answers this question in a way that gets at a division in business schools between management-oriented approaches to scholarship and finance-oriented ones. Financial analysis would focus on the existence of barriers to entry (moats); it might also focus on the low cost of capital that Berkshire Hathaway enjoys, given, among other things, its stellar track record. Management departments might look to something else: a strong corporate culture. In this case, Larry reads more as a management scholar than a finance scholar. Larry's describes, through case studies on a number of Berkshire’s subsidiaries, an ethos that focuses on:
- long time horizons
- an approach to management that is hands off but investor-oriented
- an eschewal of complicated financial engineering
- a preference for straightforward products and quiet but respected branding.
In his view, it is this ethos that makes Berkshire a better manager of firms than most.
Can corporate culture explain business success? It is difficult to measure, but obviously it must play some role. If culture was meaningless we could evaluate the quality of a workplace without setting foot inside it, and nobody does that. In my mind, the more difficult question is this: is Berkshire’s culture replicable? Although Larry has developed a translatable story about what works for Berkshire, implementing it may require a certain set of special skills that most managers simply do not enjoy or possess – to describe, in this view, would not result in the ability to do.
Along the way I learned some interesting things about Berkshire. For example, and for what's it worth:
- The firm is not secretly an insurance company with a hobby in acquiring other firms. Insurance revenues form a minority of the revenues of the conglomerate.
- Nor is it a hedge fund, although it does take positions in numerous companies that it does not own. Those revenues, however, are dwarfed by the revenues provided by the firms it does own.
- Nor is Berkshire a story about a few winning companies saddled to a bunch of modest losers, or, at least, it does not seem to be. In its extremely diversified way, the company has enjoyed productivity from almost unit.
GW Law professor Larry Cunningham has a new book coming out, Berkshire Beyond Buffett: The Enduring Value of Values. Two caveats before I begin my review. First, I received a review copy for free. Second, we own shares of Berkshire Hathaway. Don't get excited, people, I'm not rolling in Class A. My husband likes to dabble in stock picking with a little "fun money, and" right out of college, one of the first stocks he bought was Berkshire Class B.
When talk over the dinnertable turns to investments, we've often speculated as to how much our shares will drop in value with the death of Warren Buffett--who is now 84. Cunningham's thesis is that it should not drop much at all, because there is much more to Berkshire Hathaway than the Oracle of Omaha. So I was definitely interested to start this book.
A word about organization: The challenge of organizing a coherent story around a conglomerate is large, composed of 50 subsidiaries. Larry says that the teacher in him organized the traits at issue as a mnemonic spelling out "Berkshire":
- Hands Off
- Investor Savvy
This framing seemed a little forced to me at times. But I understand its motivation: trying to make sense of commonalities among the the many diverse businesses that comprise Berkshire Hathaway.
My takeaway was this: as I tell my students, successful entrepreneurs face two choices for exit: sale and IPO. If you sell, you lose your autonomy. If you go public, Wall Street expects certain returns and will punish you for failing to deliver.
What if you have a family business and are pretty happy with the way things are, but are worried about looming tax problems when the founder dies? Berkshire Hathaway offers the right kind of firm a third path, one that allows the founders to cash out and yet keep the business running as a BH subsidiary just as it had been independently. Nothing is free, of course, and companies regularly accept a BH bid which is less than competing bids, because they know that they will be able to run the company as they choose. But these select firms use the freedom, shelter from the market, and capital that Berkshire provides to flourish.
I was particularly interested to see the book's account of David L. Sokol's departure from the firm. Sokol, a senior Berkshire exec, bought $10 million in shares in the Lubrizol Corporation and then recommended the company as an acquisition target to Buffett. Cunningham, while obviously a Buffett fan, did not sugarcoat his account of Berkshire's initial missteps in handling what burgeoned into a scandal. Although the SEC failed to prosecute Sokol (which he claimed as vindication), the larger point Cunningham underscores is that Berkshire Hathaway's reputation is its chief asset.
I'll have more to say about that in another post. For now, I'll conclude by saying that this was a timely and accessible book, chock-full of insights and enjoyable to read.
Steven Davidoff Solomon and I opine on a recent opinion dismissing cases brought by Fannie and Freddie shareholders against the government in DealBook. A taste:
In one Washington court, Maurice R. Greenberg, the former chief executive and major shareholder of A.I.G., is suing the United States government, contending that the tough terms imposed in return for the insurance company’s bailout were unconstitutionally austere.
In another closely watched case in a different Washington court, the shareholders of Fannie Mae and Freddie Mac, led by hedge funds Perry Capital and the Fairholme Fund, lost a similar kind of claim.
Parsing what the United States District Court did in the Fannie and Freddie litigation offers a window into the ways in which the government’s conduct during that crisis might finally be evaluated.
There are three main points to the decision. For one, the court held that the government’s seizure of Fannie’s and Freddie’s profits did not violate the Administrative Procedure Act’s prohibition on “arbitrary and capricious” conduct. It also found that the Housing and Economic Recovery Act barred shareholders of Fannie and Freddie from bringing breach of fiduciary duty suits against the boards of the companies and that the government’s seizure of profits was not an unconstitutional “taking.”
In an exciting day for the University of Georgia, PepsiCo's CEO Indra Nooyi spoke on campus yesterday. Her remarks were titled "The Role of the Corporation in the Modern Age," and she spoke to our business and law students about Pepsi's "Performance with Purpose" initiative. She drew a sharp contrast between two visions of corporate social responsibility. The first, dominant in the 90s when she joined Pepsi, focused on "what we do with the money we make" (corporate philanthropy, volunteering at local organizations). The second type of corporate social responsibility focuses on "how we make our money," and has led Pepsi towards acquisitions like Tropicana and Quaker Oats, to diversifying their offerings with more nutritious foods, and to working towards water conservation in its manufacturing around the globe. Of course, there are limits to diversification: the public seems to be moving away from fruit juices. And Nooyi stressed that Quaker Oat's Gatorade was for athletes, not "people sitting on the couch watching athletes."
One student asked about the NFL domestic violence controversy, and she said she's said publicly all she would about that. But then she said that they were a corporate partner and held them to high ethical standards, and they were waiting to see the results of the Mueller investigation.
Asked for advice about becoming a CEO, Nooyi said this (I'm paraphrasing) "Don't go in thinking you want to be a CEO--that guarantees you won't ever become one. If you have an office with two windows, don't be thinking about how to get one with three. Instead, be brilliant at the job you're doing. Ask for the hard jobs. You might think you want the easy jobs, but you don't get noticed if you do an easy job well."
Interestingly, Nooyi said she had never asked for a promotion, but instead had always been recognized for doing a good job and tapped for the next level. The standard advice to women in the corporate world used to be to ask for raises and promotions, like men do. But recent studies suggest there is a social cost to women who do negotiate.
All in all, a great day for UGA. It's not every day the world's 13th most powerful woman visits campus.
In this post, which follows our earlier discussion of legal strategy, we’ll offer examples of companies situated within each of the five pathways. As Robert and I mentioned in our article, most companies follow the compliance pathway. Such companies insource legal compliance through their in-house legal department, or they may choose to partner with an external compliance verification service. A firm such as ISN, for example, has built a business handling compliance issues for corporations and their subcontractors. According to the Society of Compliance and Corporate Ethics, compliance is a thriving industry due to the increased legal penalties and regulations that companies face in today’s heightened legal environment.
The avoidance pathway is less frequent, given the high stakes and liability attached to this type of strategy. General Motors may have engaged in avoidance if it misled regulators about its faulty ignition switches. Avoidance issues tend to be costly to deal with, given the loss of trust and enhanced penalties that arise from this behavior.
The more interesting and rare pathways involve prevention, value, and transformation. An interesting and controversial prevention legal strategy involves trademark policing, which, in its most egregious form, devolves into the unethical and legally dubious practice of trademark bullying. For example, Chik-fil-A employs an aggressive strategy that targets large and small companies alike and uses the threat of trademark litigation to prevent anyone from encroaching upon its trademarked brands and brand equity. Setting aside the overreaching and legally dubious aspects of this approach, some companies legitimately use a preventive legal strategy that involves cease and desist letters, litigation, and U.S. Patent and Trademark Office administrative oppositions to protect the value of their brands and advertising. The Chik-fil-A case serves as a useful reminder, however, that aggressive legal strategies may push the boundaries of ethical behavior, sound legal argument, and public opinion.
Two recent examples illustrate how employing a legal strategy in the value pathway can generate positive and tangible financial returns. The first instance involves hedge funds investing in a corporate acquisition target and then filing suit in Delaware to challenge the valuation and seek an appraisal from the court. This legal strategy is referred to as appraisal arbitrage. Many of these cases either settle or result in substantially higher prices for the party seeking the appraisal.
Another value strategy that has been in the headlines recently involves tax inversions. Burger King’s recent decision to acquire Canada’s Tim Horton’s will yield business synergies, but it also exploits a legal maneuver allowed under current tax law permitting a company acquiring a foreign entity to reincorporate in the foreign jurisdiction. By reincorporating in Canada, Burger King will effectively lower its tax rate from 35% to 15%.
The last and rarest of legal strategies is transformation. This occurs when the top executives in a corporation integrate law as a core aspect of the firm’s business model to achieve sustainable competitive advantage. Few companies are able to achieve this strategic pathway, and it’s certainly not for everyone. One company that notoriously used law to achieve abnormally large market share and margins in the ticket processing industry was Ticketmaster. The ticket service provider used venue ticket licensing contracts that included several key provisions such as long term renewable exclusivity terms (up to 5 years), and more infamously, fee sharing provisions. Ticketmaster’s business model was, essentially, to take the bad rap for charging exorbitant convenience fees and sharing those fees with the venue, thus contractually locking them into a highly profitable and exclusive business system. It didn’t hurt that Ticketmaster’s pioneering CEO Fred Rosen was a Wall Street attorney turned impresario.
Another company that is showing signs of attempting to pursue a transformative legal strategy is Tesla Motors. Tesla’s recent announcement to offer open licensing terms for its battery and charging station patents illustrates a pioneering mentality that seeks to build a business ecosystem with other auto manufacturers. By doing so, Tesla has made a major legal bet that giving up patent exclusivity rights in the short term will yield long-term competitive advantage by helping to diffuse electric battery and recharging technology. The other legal strategy Tesla has pursued relates to its pioneering distribution model of direct sales to the consumer, bypassing the traditional dealership model established for conventional automobiles. To achieve this direct-to-customer model, Tesla has engaged state regulators to achieve exemptions from state dealership franchise laws. Tesla is clearly strategizing and innovating along many fronts that involve business, technology and law. It remains to be seen, however, whether these legal strategies will offer Tesla a long-term sustainable competitive advantage.
In our next and last post, we’ll discuss our experience teaching the five pathways of legal strategy to business students and how it has been a valuable resource in the classroom.
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This American Life has a banking supervision story (!) that turns on secret recordings made by a former employee of the New York Fed, Carmen Segarra, and it's pretty good, because it shows how regulators basically do a lot of their regulating of banks through meetings, with no action items after. That's weird, and it's instructive to see how intertwined banking and supervision are. There's a killer meeting after a meeting with Goldman Sachs where Fed employees talk about what happened, and - though we don't know what was left on the cutting room floor - the modesty of the regulatory options being considered is fascinating. Nothing about fines, stopping certain sorts of deals, stern letters, or anything else. The talk is self-congratulation (for having that meeting with Goldman) and "let's not get too judgmental, here, guys."
The takeaway of the story, which is blessedly not an example of the "me mad, banksters bad!" genre, is that this kind of regulation isn't very effective. It clearly hasn't prevented banks from being insanely profitable until recently, in a way that you'd think would get competed away in open markets.
But here's the case for banking regulation:
- Imagine what it would be like if Alcoa and GE had EPA officials on site, occasionally telling them to shut down a product line. That's what bank regulators do, and, more broadly, did with things like the Volcker Rule (with congressional help).
- Since the financial crisis (and that's the time that's relevant here), regulation has made banking less profitable, not more, share prices are down, so are headcounts, etc.
- Regardless of how it looks, regulators that essentially never lose on a regulatory decision - that includes bank supervisors, but also broad swaths of agencies like Justice and DoD - don't experience themselves as cowed by industry. Kind of the opposite, actually. So what you really worry about is the familiarity leading to complacency, not fear. Regulators can fine any bank any number they like. If they want someone fired, they could demand it without repercussion.
The fact that TAL pulled off this story, given that it was centered around an employee who lasted at the Fed for 7 months before being fired, who made secret recordings of her meetings with colleagues (who does that?), who mysteriously and obviously wrongly alleged during her time at the Fed that Goldman Sachs did not have a conflict of interest policy, whose subsequent litigation has gone nowhere, and whose settlement demand was for $7 million (so that's one million per month of working as a bank examiner, I guess), is impressive. But that's the former government defense lawyer in me, your mileage may vary.
Morover, even skeptical I was persuaded that maybe the Fed could do with a more ambitious no-holds-barred discussion among its regulators, at the very least.
UConn's James Kwak has joined Medium's Bull Market, a collection of interesting business writers doing long and semi-long form work. His first post is here, on the Silicon Valley no-poaching litigation. Welcome to the blogosphere! If that's the right term for this. Anyway, Medium has that cool design thing going on, so it will be nice to class the law professor writing on the internet median up a bit.
Earlier this week, the SEC announced that it would award $30 million to a whistleblower in an enforcement action. Here is the press release and here is the more interesting order. If you are like me, it may be hard to wrap your mind around a one-time payment of $30 million for anything short of selling your start-up or single-handedly producing an Avengers movie, but I guess that is what happened. But, I think I'm not convinced this kind of award is an awesome idea. Here are a few reasons.
First, to preserve the anonymity of the whistleblower, which may not be possible anyway, all facts of the case are not disclosed. Any information that could have been provided to other companies or to the public are unknown. Other companies receive no guidance on what sorts of behaviors were problematic and I suppose the investors in that company aren't told. (I would think that the enforcement action would need to be disclosed to shareholders, which is another reason anonymity may be delayed if not illusory).
Second, this is $30 million we are talking about. If we believe that the optimal level of whistleblowing is higher than the current level, is this much money really necessary to achieve that level? The standard is 10-30% of the penalty received, and I guess the theory is that the SEC would never have uncovered the fraud but for the whistleblowing, so the SEC is up $270 million? Are we over-incentivizing whistleblowing? (Since enacting the whistleblower program, the SEC has given 14 awards, but has received over 6500 tips.) I heard someone on NPR arguing that those in the position of being whistleblowers for reporting companies make so much money that the carrot has to be worth losing their job. The speaker argued that if the average salary of someone on Wall Street is $26 million, then the carrot has to be bigger than that. I'm not sure that most SEC whistleblowers average seven figure salaries, but we can't know because of the anonymity! Surely this is a large carrot to incentivize people to be honest. If honesty is that expensive, wow.
Third (really Second - A), money is fungible. The SEC emphasizes that this money does not come from taxpayer funds or investor recoveries. But, the money is going out the door, so it could be used for other things, like more personnel, really good enforcement work, etc.
Fourth, let's think who we are giving the $30 million to. The whistleblower argued to the SEC that the $30 million was too low. (That's some chutzpah.) The SEC countered that the $30 million may have been lower than the average whistleblower fee paid as a percentage because of the whistleblower's unreasonable delay in reporting. So, our whistleblower doesn't exactly have clean hands. But they are full of money.