October 13, 2014
The Marmon Group: A Mini-Berkshire?
Posted by Usha Rodrigues

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.

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October 06, 2014
Book Review: Berkshire Beyond Buffet
Posted by Usha Rodrigues

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":

  • Budget-conscious 
  • Earnest
  • Reputation
  • Kinship
  • Self-starters
  • Hands Off
  • Investor Savvy
  • Rudimentary
  • Eternal

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.

 

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September 03, 2014
Autonomy At Berkshire Hathaway, A Guest Post From Larry Cunningham
Posted by David Zaring

Larry's book on Berkshire Beyond Buffett is due in a month, and we'll be reading it on the Glom. Here's a taste, prepared by Larry, and if you follow the link, you can see a full chapter of the book.

Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.   

Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.

Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.   

There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.

Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.

The more important—and more difficult—question is the price of autonomy.  Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs: 

We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.

Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock.

(The above is an excerpt from Chapter 8, Autonomy, from Lawrence Cunningham’s upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free here.)

[To read the full chapter, which can be downloaded for free, click here and hit download]

 

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August 29, 2014
Are the Reports of the Cupcake Craze Death Greatly Exagerated?
Posted by Lisa Fairfax

Last month when Crumbs, America's first public cupcake company, announced it was closing most of its stores after its stock was delisted by Nasdaq, and it had defaluted on some $14.3 million in financing, many viewed the annoucement as a sign that the cupcake industry bubble had finally burst.

In the past decade, cupcakes appeared as if they were taking over with businesses sprouting up everywhere.  Not only had cupcakes come to replace traditional cakes at weddings and birthday parties, but people were willing to stand in ridiculously long lines and pay sometimes as much as $5 for a single cupcake or between $30 and $50 for a dozen.  A 2012 story on Georgetown Cupcakes in DC suggested that sometimes the lines could take up to an hour to get through.

Some view the apparent demise of Crumbs as a sign that the cupcake craze was a trend that had finally run its course.  Or put differently, an unsustainable business model.  In addition to concerns about potential market saturation and over exposure, some indicated that pricing was a problem.  Indeed, while cupcakes were touted as an "affordable luxury," some note that at $3.50-$6 each, cupcakes seemed more like an overpriced snack.  As this article suggests, these cupcakes were not something middle America could afford.  Another problem was low cost of entry--potentially reflected in the many people who thought they could give the cupcake business a try.  Still another was diversity--could an industry based on a single food really survive with competitors that offered more than just cupcakes?  And then there was the problem of potentially swimming against the health trend.  Cupcakes seem like a healthier option than your large slice of cake or pie, but alas as a Forbes article points out "your typical large frosted premium cupcake can have as much as 500 calories," and lots of people eat more than just one.

Of course others note that the demise of Crumbs may reflect issues unique to Crumbs.  Indeed, there are some cupcake businesses that continue to thrive.

And even the Crumbs story is not over.  Just this week it was annouced that Crumbs would begin reopening it stores because, as the Wall Street Journal notes, a court signed off on a sale of Crumbs to "self-styled turnaround guru Marcus Lemonis and Dippin Dots owner Fischer Enterprises."  Apparently, part of the turnaround strategy will be moving away from reliance on just cupcakes and incorporating other desserts.

So while the cupcake bubble has certainly gotten smaller, it may be too soon to tell if we can really call the cupcake craze a bust.

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June 09, 2014
Uber Skepticism
Posted by Usha Rodrigues
Gordon recently blogged about Uber's sky-high valuation.  I'm skeptical for 2 reasons.  First, regulation could put Uber out of business fast (I'm lookin at you, airbnb).  Allied against it are taxicabs and limousine services, and these folks have a lot of money to lobby in state capitols.  I'm not saying that the Forces of Technological Disruption are doomed, but my current research is making me much more cynical about money's influence on politics--and that's saying something.  I do think Uber is playing it smart by getting big fast--the path for regulatory survival will be to be so widespread that it becomes normal.  If everyone has an aunt or college grad or cousin who's an Uber driver, then regulating it out of existence seems downright unamerican.  
 
My second reason for skepticism people's tendency to mistake their world for the whole world.  Call it Bobo Blinders.  Uber is big in places where venture capitalists flourish: New York, Northern Cali, Chicago.  I see a scenario where venture investors use this service, all their friends and family, everyone they know uses this service, and they think: This is going to be huge!  Everyone will use this service! 
 
We'll see.

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June 07, 2014
Uber
Posted by Gordon Smith

Uber just raised $1.2 billion at a valuation of $18 billion.

Let that sink in for a moment: a valuation of $18 billion! If that doesn't look like much, you must be thinking about Facebook's pre-IPO valuation of $50 billion, but Uber just landed the second largest private valuation on record. See here.

I have used Uber's service only once, with Vic Fleischer and Christine Hurt in Seattle, and I spent the whole ride quizzing the driver on the business model. Of course, I could have just googled it, but it was nice to see the business through the driver's eyes. It looks a lot like franchising, but with lower investment costs for the franchisees (drivers).

Why all the fuss? This is not just about replacing taxis. This is about displacing UPS and FedEx. See here for more on that possibility. Exciting stuff.

P.S. For those of you invested in the SharesPost 100 Fund, congratulations! Uber is on the list

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June 06, 2014
NBA showdown with Donald Sterling as Contracts Case Study
Posted by Erik Gerding

The ugly Donald Sterling episode seems to be moving to resolution with a pending sale of the L.A. Clippers to Steve Ballmer.  The sordid story makes for a great case study in a Contracts course, not least because of the wealth of material that is publicly available, particularly one of the central contacts – the NBA “Constitution and Bylaws.”  Often the key contracts in the most notorious disputes are kept confidential, with only snippets of the agreements available even via court dockets.

Under the terms of the Constitution and Bylaws, the NBA Commissioner position that Sterling could be forced to sell his team was strong but not (pardon the pun) a slam dunk (see Michael McCann’s early analysis here and an analysis of Sterling’s response here).

The Commissioner and Sterling each were aiming to persuade a motley group of NBA owners, who may have been concerned with, among other things, the outrage of players and fans towards Sterling, the damage to their league of having Sterling continue as owner, and the precedent of forcing an owner to sell.

Layered on top of this were the family law and tax considerations of Sterling transferring ownership whether to his estranged wife or to a buyer.

In the end, economics pushed Sterling to sell.  He was faced with a stark choice of trying to hang on to an asset that was damaged goods just by remaining in his hands versus over a billion dollar profit from selling. 

In teaching this episode, students should be cautioned against jumping immediately to the “of course he will sell” conclusion.  The hard work of analyzing the contracts helps explain the negotiating positions of the NBA commissioner, the various NBA owners, Sterling, and his wife as they bargained in the shadow of the law.  The contractual language also will help prepare for any post-sale litigation;Sterling has already initiated one suit and threatened more . Sterling's wife apparently agreed to indemnify the NBA against legal challenges by her husband, which adds yet another teaching wrinkle. One puzzle for students: what was the strategy behind declaring Sterling incompetent?  

Too bad I am not teaching Contracts in the fall.

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February 25, 2014
Could Your Holdings Survive the Failure of the NYSE?
Posted by Greg Shill

This morning, the Wall Street Journal is reporting that Mt. Gox—until this month the world's leading market for buying and selling Bitcoin—has "disappear[ed]" from the web:

The Bitcoin exchange Mt. Gox appeared to be undergoing more convulsions Tuesday [February 25], as its website became unavailable and trading there appeared to have stopped, signaling a new stage in troubles that have dented the image of the virtual currency. . . .

Investors have been unable to withdraw funds from Mt. Gox since the beginning of this month. The exchange has said that a flaw in the bitcoin software allowed transaction records to be altered, potentially making possible fraudulent withdrawals. No allegations have been made of wrongdoing by the exchange, but the potential for theft has raised concern that the exchange wouldn't be able to meet its obligations.

The apparent collapse of Mt. Gox is just the latest shock to hit Bitcoin, the price of which is now off more than 50% from its December 2013 peak:

Coindesk-bpi-chart

For those better acquainted with the dead-tree/dead-president variety of money, Bitcoin is a virtual currency not backed by any government. Rather than being printed or minted by a central bank, Bitcoins are created by a computer algorithm in a process known as "mining" and are stored online or on your computer. They are bought and sold on various exchanges, including until recently Mt. Gox (whose troubles have been reported for a few weeks now).

So, why use Bitcoin—which may well implode (see, e.g., herehere, herehere)—instead of a traditional state-backed currency, which in many ways is clearly superior?

There are many reasons, some of them even lawful. Bitcoins can be regarded as a medium of exchange, an investment, a political statement...or a way of avoiding capital controls and other pesky laws like bans on drug trafficking and human smuggling.

But the criminal potential of Bitcoin is probably overstated. The Chinese have gotten wise to its use for avoiding capital controls. Using Bitcoin for criminal or fraudulent activity would be difficult at scale (PDF). The Walter White method is still far and away the best way to ensure your criminal proceeds retain their value and anonymity.

I don't share the utopian fervor for Bitcoin expressed in tech and libertarian circles (see, e.g., this supposedly non-utopian cri de coeur), but it may have some positive potential as a decentralized and lower-cost electronic payments system. We'll see if that ever gets off the ground.

In the meantime, the Mt. Gox collapse is pretty huge news for Bitcoinland. Unlike the NYSE (the failure of which would be hard even to imagine), Mt. Gox does not benefit from any systemic significance and thus is unlikely to receive a lot of official-sector help. The situation has some early adopters running for the Bitcoin exits, like this leading Bitcoin evangelist.

Despite (because of?) my agnosticism on the currency, I'll be writing more about Bitcoin soon. (Mainly, I wanted to stake a claim to being the first to write about Bitcoin on The Conglomerate.) If your Palo Alto cocktail party can't wait, however, this explainer (PDF) from the ever-impressive Chicago Fed should tide you over.

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August 06, 2013
The Son & The Post
Posted by David Zaring

If you'll excuse two barely business-related observations:

  • The Son, by Philipp Meyer, might do as a novel about business - it's about 170ish years of a Texas family, with a basic theme that getting frontier-rich required fraud and evil-doing.  But it's not an anti-business book at all.  Recommended, if you like your epics dark.
  • When I was a sprightly young lawyer in Washington in the late nineties, I got the Washington Post and New York Times delivered to my door every morning ... and I read the Post first, because it was more fun than the Times.  I knew Post reporters, too, young, interesting, and not at all embarrassed that they weren't lawyers (we hadn't really heard of finance back then in DC).  It is amazing how much that paper changed, and changed for the worse - and yet it's still the best single source on how business regulation gets done.  I'm hoping it has a rennaisance with new ownership.

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April 02, 2013
Henry Blodget Seeks Reinstatement
Posted by David Zaring

If you like worrying about the future of business news, you might like this profile of Henry Blodget in the New Yorker, with the Times take here.  Business Insider is so, so dumb, and yet the new model for content, where good writing appears to be discouraged (see also Huffington Post, eHow, LiveStrong, Amalgamated Content, etc, etc).  That said, I'm generally impressed with Blodget, who was a pretty sympathetic defendant during the Eliot Spitzer era, and who completely reinvented himself as a journalist, and then as a content entrepreneur.  He's a pretty good journalist, too (his eye for talent, though...I'm just going to assume he's excellent at paying low).

The newsy bit is that he's contemplating seeking to have his lifetime bar overturned.  And the question to me is "why bother?"  You'd only want to do it if he's looking to sell BI asap, and if - and this could be true - it isn't very profitable, meaning he'd prefer to be back in finance.  That would be yet another career change, and in its own way depressing from the perspective of consumers of business journalism too - a field so unprofitable that it does not even pay to do it poorly.

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March 05, 2013
A CEO's Farewell Memo, Annotated By Venture Capitalists
Posted by David Zaring

Andrew Mason, the CEO of Groupon, wrote a pretty nice exit letter when the board fired him.  But the annotation by Marc Andreesen and Bo Horowitz is also illuminating, if you like that tech start-up kind of thing.

HT: Felix Salmon

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January 02, 2013
Zipcar to Avis
Posted by Gordon Smith

Avis is buying Zipcar for $500 million. That's a hefty premium over Zipcar's current stock price, but a hefty discount on the 2011 IPO price for Zipcar. Way back in 2003, when I first heard about Zipcar, I wrote: "this does not look like it has the potential to be a big business, and it will not survive as a small business." It took 10 years to play out, but I was right.

Now the question turns to this: is car-sharing a viable business for the large car rental companies? While car sharing has a constituency -- "we live in a Zipcar world right now" -- it's still small. The hoped-for synergy in this alliance is that Zipcar and Avis have different usage cycles

Zipcar utilization is low during weekdays but spikes during weekends, resulting in excess fleet vehicles during the week that often aren't used. Avis, meanwhile, has utilization that peaks during the midweek commercial-travel period and has excess capacity on the weekends.

That makes sense, and Avis investors are applauding.

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October 24, 2012
A Diversification Strategy in Government Subprime Lawsuits?
Posted by Erik Gerding

Today saw yet another big ticket government lawsuit against yet another large financial conglomerate alleging deceptive conduct in selling either mortgages or mortgage-backed securities. What is truly interesting is not the similarities among the October lawsuits, but the differences. The various recent lawsuits against Wall Street firms have been brought by both federal and state officials using an arsenal of different statutes and targeting different pipes in the mortgage market plumbing.  Instead of using federal securities laws, federal and state prosecutors have looked to older statutes like the Civil War era False Claims Act and New York's pre-New Deal Martin Act in bringing the three big October cases.

Here is a rough rundown of these three big headline-grabbing cases from October as well as another cluster of suits brought last September by the Federal Housing Finance Agency (the conservator that took control of Freddie and Fannie): (David Zaring has summarized and analyzed the individual October cases as they have come out):

Date

Defendant

Government Entity Bringing Suit

Principal Statutes Used

Today

Bank of America/

Countrywide

U.S. Attorney SDNY suing for loans sold to  Freddie Mac and Fannie Mae; (FHFA and TARP also involved).

Federal False Claims Act; FIRREA

Oct. 9

Wells Fargo

U.S. Attorney SDNY suing based on FHA insured mortgages (HUD also involved in suit).

Federal False Claims Act; FiRREA

Oct. 1

JPMorgan/Bear Stearns

New York AG

NY Martin Act

Sept. 2012

17 Banks

FHFA as conservator of Freddie and Fannie

Mix of federal and state securities antifraud provisions

Each lawsuit involves a fairly discrete set of causes of action. In each case, the government theory is slightly different.

What explains this? Why not bring a similar suit against every bank or throw in the kitchen sink of claims in each case? The federal and state actions have become much more coordinated – as witnessed by the federal mortgage task force involvement in New York state's JP Morgan suit.

It could be that the conduct of different banks, their different business models, and their interactions with different entities in the federal mortgage universe merited different causes of action or legal theories. That explanation doesn’t seem to offer a complete explanation given the breadth of mortgage operations at large financial conglomerates and the likelihood that any deceptive conduct that occurred would be unlikely to be concentrated in only one corner (whether FHA-insured mortgages or sales of mortgages to Freddie/Fannie or representations to MBS investors).

Perhaps the federal/state coordination created a division of labor strategy or a move to share the litigation risk and reward.

Or these lawsuits might involve a diversification strategy. Rather than putting all the litigation eggs in the basket of one statute or legal theory, the prosecutors and government lawyers involved might look to try different causes of action against different firms. If one theory fails, the whole litigation enterprise doesn’t go up in smoke. If one theory appears to be sticking, perhaps it can be copied against other banks (assuming the statute of limitations hasn’t run out and other legal hurdles can be cleared).

A number of targeted suits may allow for quicker and cleaner litigation and make a case easier to present to a judge or jury than a kitchen-sink of multiple claims. One could take the idea of a “theory of the case” seriously and see this approach to litigation as a series of experiments – where individual causes of action are tested.

This more targeted approach is not free from criticism. It doesn’t offer a cathartic Ragnarök. However, that view of litigation is more a construct of Hollywood. More importantly, this diversity of cases opens federal and state officials up to criticisms of the potential unfairness and waste of multiple lawsuits brought by multiple parties.

Another question lingers: why did it take so long for these October lawsuits to be brought?

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October 16, 2012
Pandit, Citi and Shadow Banking
Posted by Erik Gerding

At midnight, several hours before Vikram Pandit resigned, Bloomberg ran a story about a speech in which Pandit criticized federal regulators for not addressing the shadow banking system.  I have previously expressed some views on shadow banking.  I told Bloomberg about the irony of the CEO of a global investment bank calling for more regulation of a system in which investment banks not only actively participate but, moreover, serve as central hubs.

Events in Mr. Pandit's career today overtook the story.

But it is useful to remember the key role that shadow banking markets (asset-backed securities, asset-backed commercial paper, money-market mutual funds, repos, credit derivatives) played in the financial crisis and in Citi's operations.  These markets served many of the same economic functions as traditional depository banks (providing credit and theoretically safe and liquid investments).  The crisis revealed that these markets suffered the same types of crises as banks (shadow bank runs).  The federal bailouts then deployed the same conceptual tools that governments historically used to address banking crises (government as lender-of-last-resort and effective deposit insurance).  Now the question is whether these markets should be regulated to reduce moral hazard, just like banks are.

Pandit's abrupt resignation may have deprived us of having a clearer sense of what shadow banking is and the risks it poses.  It is not a rhetorical device to hint at some unspecified set of institutions that sit outside regulation.  Shadow banking is actually very much about investment banks and regulated entities at play in less regulated markets. 

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August 16, 2012
CSR: The Chick-fil-A Controversy and a Masters Forum on Corporate Social Responsibility
Posted by Erik Gerding

We have decided to convene a late summer forum of the Conglomerate Masters -- our roster of distinguished corporate and financial law professors -- to discuss the current state of corporate social responsibility.  In particular, we wanted to address the controversy over Chick-fil-A's corporate stance against same sex marriage and to use this Economist blog post as a jumping off-point. 

The Economist blogger contends that Chick-fil-A's culture is in fact a prime example of a firm embracing corporate social responsibility (or "CSR") - albeit not with the politics that one traditionally associates with that movement.  The blogger concludes that the Chick-fil-A example demonstrates that matters of social policy should best be left to democratic institutions.  He or she writes:

Matters of moral truth aside, what's the difference between buying a little social justice with your coffee and buying a little Christian traditionalism with your chicken? There is no difference. Which speaks to my proposition that CSR, when married to norms of ethical consumption, will inevitably incite bouts of culture-war strife. CSR with honest moral content, as opposed to anodyne public-relations campaigns about "values", is a recipe for the politicisation of production and sales. But if we also promote politicised consumption, we're asking consumers to punish companies whose ideas about social responsibility clash with our own. Or, to put it another way, CSR that takes moral disagreement and diversity seriously—that really isn't a way of using corporations as instruments for the enactment of progressive social change that voters can't be convinced to support—asks companies with controversial ideas about social responsibility to screw over their owners and creditors and employees for...what? 

It is a provocative argument.  Although one wonders if the author would have made this same series of arguments in the 1960s: would the author have encouraged civil rights protesters to abandon lunch-counter sit-ins and lobby state legislators instead?

Still, the Chick-fil-A example raises some disquieting questions for CSR, which our Masters may address.  These include:

Is corporate law the most effective or legitimate tool for social change?  If we are worried about environmental degradation, is the solution to broaden the stakeholders to whom a corporation must answer?  Or shouldn't we look instead to environmental law?

Is CSR viewpoint neutral?  When covering CSR in a Corporations course, I ask students whether social activists who are lobbying a corporation to change what they see as immoral employment practices, should be able to put their views to a shareholder vote?  Then I ask whether the answer would or should change based on whether the activists are looking to end racial or gender discrimination or whether they are lobbying a company to stop offering benefits to partners in same sex couples.

At the same time, the current state of legal affairs raises some disquieting questions for opponents of CSR too.  The conclusion in the Economist blog -- leave social policy to democratic institutions and public law -- has a long lineage.  It harkens back to Milton Friedman's arguments that corporations and the states do and should exist in separate spheres; if citizens want to change corporate policy, the argument goes, they should act through the political process and push through public regulation.

But, the separate spheres argument looks more and more outdated, as corporations influence and permeate the sphere of government.  Do arguments to leave regulating the public dimension of corporate behavior out of corporate law and governance -- and leave it to traditional legislative and regulatory bodies -- appear naive in a post-Citizens United (and post-public choice)world?

Also, do these same questions for proponents and critics of CSR apply in equal measure to the growing field of social entrepreneurship?  Can entrepreneurs do well while doing good?  Should we expect them too?  Is social entrepreneurship a workable, stable, and viewpoint neutral concept?  If so, what does it entail?  Does/should CSR apply equally to small businesses and startups as to global corporations?

We look forward to hearing from our Masters...

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