By James Kwak
You may have noticed that my blogging has tailed way off over the past few months—to, well, just about nothing. You probably noticed that it was pretty spotty for a long time before that. The main reason is that I’ve been busy with a new teaching job, which requires some effort on academic publications, and raising two small children. The other major factor is that I often just find I don’t have much that’s original to say. Financial regulation is a pretty heavily covered field, and I don’t have the time to be a real expert on, say, derivatives clearinghouses, and—believe it or not—I generally try to avoid posting if I don’t have something new to add. I tried to get back into the flow in the spring semester, when I was only teaching one class, and that worked for a while. But at the beginning of the summer I started doing some part-time consulting for my old company (I’m on unpaid leave from my law school this semester), and that’s made it impossible to keep up with the news, much less write something interesting about it.
That said, I still like to write. I’ve started posting occasionally on Medium, which I like both for the gorgeous interface and because it isn’t organized as a reverse-chronological list—which means that I don’t have to worry as much about saying something newsworthy before the moment passes. This week I wrote about playing Minecraft with my daughter (OK, it’s mainly about the Microsoft acquisition) and one of my favorite topics, why megabanks run on bad software.
I don’t know how long I’ll be keeping this up, but in the meantime my plan is to write an occasional post here summarizing things that I write on Medium or elsewhere on the web. As usual, I’ll also post new articles to Twitter more or less immediately after publishing them.
Thanks for reading.
By Simon Johnson
These days, almost everyone likes to complain about institutional corruption – and various forms of intellectual capture of government orchestrated by big corporate interests. But very few people are willing to do anything meaningful about it.
Zephyr Teachout is an exception. Not only has she written about the history of political corruption in the United States, both in long form (her recent book) and in many shorter versions (e.g., see this paper), she is competing for the Democratic nomination to become governor of New York.
In many countries, Ms. Teachout would sweep to victory. She has smart ideas about many dimensions of public policy (here are her economic policies), she has assembled a strong team, and – most of all – she represents exactly the kind of responsible reform that we need at this stage of our republic.
Elizabeth Warren offered exactly the same sort of promise to the people of Massachusetts in 2012 – real reform through pragmatic and effective politics. She has delivered on this promise and there is every indication that her influence will only grow in the years to come. Continue reading
By James Kwak
That’s one of the subplots of Big Money, by Politico reporter Kenneth Vogel, a book that I reviewed for yesterday’s issue of the New York Times Book Review. You can read that review, so I won’t re-review it here, except to say that if you were wondering how political operatives get rich people to part with their money, you’ll find out here.
By James Kwak
In an earlier paper (blog post here), I argued that corporate political contributions can in many cases be challenged by shareholders as conflicted transactions that further insiders’ personal interests (e.g., lower individual income taxes) rather than the best interests of the corporation. The argument (to simplify) was that if a political contribution is in the CEO’s individual interests, the resulting conflict of interest should make the business judgment rule inapplicable, placing on the CEO the burden of proving that the contribution was actually in the best interests of the corporation.
In a new paper, law professor Joseph Leahy has outlined a new theory under which shareholders can contest corporate political contributions. He argues that such contributions in many cases will constitute bad faith, since they have a motivation other than serving the best interests of the corporation. This line of reasoning exploits the vagueness of the concept of good faith as it has been established by the Delaware courts in Disney (the case over Michael Ovitz’s $140 million severance package) and later cases. Of course, that is only what the Delaware courts deserve for making such a hash out of the concept. In effect, they first said that any action not motivated by the best interests of the corporation constitutes bad faith, but then in specific cases tried to absolve any actual board of directors of ever actually acting in bad faith.
It is far from clear that a lawsuit brought on these grounds would have much chance of success in court. But by the letter of the case law, they should have a chance. And the more that plaintiffs contest corporate political contributions, the more likely it is that companies will decide that they aren’t worth the trouble. Or, even better, they will decide that they should only make contributions that are actually good for the bottom line and for shareholders—which is the way things should be.
By James Kwak
I think some people didn’t understand the point I was making about the question of whether the government made money on TARP in my earlier post. Summers said, “The government got back substantially more money than it invested.” This is true, at least if you give him some slack on the word “substantially.” The money repaid, including interest on preferred stock and sales of common stock, exceeded the money invested.
My point begins with the observation that, as of late last year, the government had earned an annual return of less than 0.5%. My point itself is that it is silly to evaluate an investment by whether or not it has a positive return in nominal terms. You can only meaningfully evaluate an investment by comparing it to some benchmark. Saying that a nominal return of 0.5% is greater than 0% is meaningless, since the 0% benchmark is meaningless. Most obviously, it doesn’t account for inflation; since inflation has been about 1–2%, the government lost money in real terms.
By James Kwak
Larry Summers is well on his way to rehabilitating his public image as a brilliant intellectual, moving on from his checkered record as president of Harvard University and as President Obama’s chief economic adviser during the first years of the administration. Unfortunately, he can’t resist taking on his critics—and he can’t do it without letting his debating instincts take over.
I was reading his review of House of Debt by Mian and Sufi. Everything seemed reasonable until I got to this passage justifying the steps taken to bail out the financial system:
“The government got back substantially more money than it invested. All of the senior executives who created these big messes were out of their jobs within a year. And stockholders lost 90 per cent or more of their investments in all the institutions that required special treatment by the government.”
I have no doubt that every word in this passage is true in some meaninglessly narrow sense or other. But on the whole it is simply false.
By James Kwak
I’m giving a talk at the UConn Law School reunions tomorrow, and one of my closing points is about the plethora of banking crimes/scandals/whoopsies that we’ve seen in the past few years—even those having nothing to do with the financial crisis. This is the slide I created to illustrate the point:
I know I’m forgetting a few, but I figured that was enough. It does really take your breath away.