December 16, 2014
The Political Economy and the Regulatory Sine Curve
Posted by Usha Rodrigues

The answer to David's question, Will The Swaps Pushout Rule Die In The Cromnibus?,!

Here's the bill itself.  A short-and-sweet 5 pages, it exempts from Dodd-Frank's Section 716 all "non-structured finance swap activities," and any structured finance swap that are for "hedging or risk management purposes" or later exempted by the relevant agencies in rulemaking.  So there's still some room for industry lobbying at the agency rulemaking level, although it is a one-way ratchet that will only exempt more swaps from regulation.

Here is some commentary, via banking colleague and friend Mehrsa Baradaran:

I've been thinking a lot about the political economy, of which more later.  In The Political Economy of Dodd-Frank, John Coffee basically responds to Steve Bainbridge, Roberta Romano, and the late, great, Larry Ribstein's fretting over bubble laws and quack federal intervention into corporate governance and securities laws by saying: "don't worry, folks.  Even if post-crisis regulation goes overboard, the regulators will inevitably step in and modulate."

I am no banking expert, but my sense of Dodd-Frank is that Coffee's so-called Sine Curve of agency-level deregulation has in fact occurred (e.g., the Volcker rule).  Business as usual.

So why the banking industry's power play of asking for regulatory relief at the congressional level?  American Banker above suggests it was a mistake to deviate from the standard playbook of fighting at the less-public agency level:

Observers said the fight was a public relations nightmare for Citigroup and the big banks.  "They've taken a lot of reputational hits now, a lot of people saying, 'You're trying to blackmail us and not fund our government until you get your way,'" said Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., in an interview on CNBC before the House vote.

My takeaway is that there's a tradeoff to the political economy.  Legislation is attractive because it's virtually immune from judicial review--as opposed to time-consuming, D.C.-Circuit-vulnerable agency rulemaking.  But lobbying at the agency level flies largely under the radar, and that's a very good thing post-crisis.  My hunch is the banks calculated they could fly the Section 716 provision under the radar--just 5 pages in a big, big bill! 

If so, clearly they were wrong--the question is whether the gain to their bottom line is worth the reputational hit.  And Elizabeth Warren's reputational gain.

 Update: Stefan Padfield wonders if the banks' calculus included the changed composition of the D.C. Circuit.

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August 07, 2014
New Directions in Corporate Disclosure: Politics, Environment, and Religion
Posted by Eric Orts

Corporate disclosure, especially in securities regulation, has been a standard regulatory strategy since the New Deal. Brandeisian “sunlight” has been endorsed widely as a cure for nefarious inside dealings. An impressive apparatus of regulatory disclosure has emerged, including annual and quarterly reports enshrined in Forms 10K and 10Q. Other less comprehensive disclosures are also required: for initial public offerings and various debt issuances, as well as for unexpected events that require an update of available information in the market (Form 8K).

For the most part, corporate disclosure has focused on financial information: for the good and sufficient reason that it is designed to protect investors – especially investors who are relatively small players in large public trading markets. Some doubts have been raised about the effectiveness of this kind of disclosure and, indeed, the effectiveness of mandatory disclosure in general. A recent book by Omri Ben-Shahar and Carl Scheider, More Than You Wanted to Know: The Failure of Mandated Disclosure, advances a wide-ranging attack on all mandatory disclosure. (I think that their attack goes too far: I’ll be coming out with a short review of the book for Penn Law’s RegBlog called “Defending Disclosure”).   Assuming, though, that much financial disclosure makes sense, what about expanding it to include other activities of business firms?

Consider three types of nonfinancial information that might usefully be disclosed: information about a business firm’s activities with respect to politics, the natural environment, and religion.

1. Politics. One good candidate for enhanced corporate disclosure concerns business activities in politics. Lobbying laws require various disclosures, and various campaign finance laws do too. It is possible to obscure actual political spending through the complexity of corporate organization. (For a nice graphic of the Koch brothers’ labyrinth assembled by the Center for Responsive Politics, see here.) Good reporters can ferret out this information – but they need to get access to it in the first place. My colleague Bill Laufer has been an academic leader in an effort to encourage public corporations to disclose political spending voluntarily, with Wharton’s Zicklin Center for Business Ethics Research teaming up with the nonpartisan Center for Political Accountability to rank companies with respect to their transparency about corporate political spending. The rankings have been done for three years now, and there are indications of increased business participation.  Recently, even this voluntary effort has been attacked by business groups such as the U.S. Chamber of Commerce for being “anti-business.” See letter from U.S. Chamber of Commerce quoted here.  Jonathan Macey of Yale Law School has also objected to the rankings in an article in the Wall Street Journal, arguing that the purpose of political disclosure is somehow part of “a continuing war against corporate America.” These objections, however, seem overblown and misplaced. What is so wrong about asking for disclosure about the political spending of business firms? One can Google individuals to see their record of supporting Presidential and Congressional candidates via the Federal Election Commission’s website, yet large businesses should be exempt? Political spending by corporations and other business should be disclosed in virtue of democratic ideals of transparency in the political process. Media, non-profit groups, political parties, and other citizens may then use the resulting information in political debates and election campaigns. Also, it seems reasonable for shareholders to expect to have access to this kind of information.

In Business Persons, I’ve gone further to argue (in chapter 7) that both majority and dissenting opinions in Citizens United appear to support mandatory disclosure as a good compromise strategy for regulation. One can still debate the merits of closer control of corporate spending in politics (and I believe that though business corporations indeed have “rights” to political speech these rights do not necessarily extend to unlimited spending directed toward political campaigns). It seems to me hard to dispute that principles of political democracy – and the transparency of the process – support a law of mandatory disclosure of corporate spending in politics.

2. Natural environment. Increasingly, many large companies are also issuing voluntary reports regarding their environmental performance (and often adding in other “social impact” elements). Annual reports issued under the International Standards Organization (the ISO 14000 series), the Global Reporting Initiative, and the Carbon Disclosure Project are examples. The Environmental Protection Agency (EPA) has also established a mandatory program for greenhouse gas emissions reporting, which is tailored to different industrial sectors. One can argue about whether these kinds of disclosures are sufficiently useful to justify their expense, but my own view is that they help to encourage business firms to take environmental concerns seriously. Many firms use this reporting to enhance their internal efficiency (often leading to financial bottom-line gains). As important, however, is the engagement of firms to consider environmental issues – and encouraging them to act as “part of the solution” rather than simply as a generating part of the problem.

One caveat that is relevant to all nonfinancial disclosure regimes:   The scope of firms required to disclose should be considered.  I do not believe that the case is convincing that only public reporting companies under the securities laws should be included.  (For one influential argument to the contrary, see Cynthia A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency,”  112 Harvard Law Review 1197 (1999)).  Instead, it makes to sense for different agencies appropriate to the particular issue at hand to regulate:  the Federal Election Commission for political disclosures and the EPA for environmental disclosures.

3. Religion? In the wake of the Hobby Lobby case, some have called for greater disclosure about a firm’s values on this score both with respect to employment and investors. See, e.g., Joan Heminway’s piece here. Stephen Bainbridge has also called attention to this question here.  Probably it makes sense to consider disclosure as a partial solution, though the idea of mandatory government disclosure of religious characteristics makes me nervous on “separation of church and state” grounds. It might be better to “wait” (as Frank Partnoy advises us often to do in his recent book) and see how the Hobby Lobby line of cases develops. My guess is that some tensions will become apparent that may result in keeping Hobby Lobby limited to the context of close and usually small corporations (though Hobby Lobby itself is an exception, having more than 10,000 employees).
But a rule of disclosure might not be the best approach with respect to religion and firms. Better in this context perhaps to bite the bullet and ascertain when for various legal purposes a business firm “crosses the line” from a private organization (with rights of self-organization and self-determination with respect to many internal business practices) to a public-facing organization (with duties to treat public customers, employees, and business partners in a non-discriminatory manner). These issues are not easy. As I suggest in Business Persons (chapter 3), a central problem in business theory concerns “the public/private distinction” which I conceive as involving “two faces of the business enterprise.” Here, the religious preferences of private owners require balancing with the public role undertaken when holding out one’s shingle in public markets. Drawing legal lines isn’t always easy, but often it’s necessary.  And disclosures alone will not always be sufficient.

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May 16, 2013
Political Science Hires A Lobbyist: Can Rational Actor Models Permit This?
Posted by David Zaring
Given some recent unpleasantness over federal grant funding, it won't surprise everyone that the American Political Science Association has hired a Washington lobbyist.  But you have to wonder if it shouldn't surprise the class of people who think that advertising and get-out-the-vote ground games don't really matter, that campaign strategy doesn't make a difference, and that public interest groups can only exert a fleeting, at best, influence on public policy.  Assuming that APSA isn't enacting some sort of Judith Butlerian performance, you have to think that it is hoping to shape some consciousnesses in Washington.  We can only hope that's okay with the tit-for-tat portion of its membership.

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April 23, 2013
In re News Corp., Duty of Loyalty, D&O Insurance and Political Contributions
Posted by Christine Hurt

Yesterday, attorneys for the shareholders of News Corporation announced an agreement in principle to settle derivative claims filed in various U.S. jurisdictions, including Delaware, against officers and directors of the corporation for $139 million (minus attorney fees, TBD).  The payment will be made to the corporation from the various D&O insurance policies.  The Memorandum of Understanding is here.  The amended complaint is here.  The parties agreed to file a stipulation with the Delaware Chancery Court within 14 days for approval.  Kevin La Croix's expert commentary on the D & O issues is here.

So, what were the claims?  The claims fall roughly into two big groups, both under the Duty of Loyalty:  (1) the conflicted $615 million acquisition by News Corp. of an entity owned by (controlling shareholder, CEO and Chair) Rupert Murdoch's daughter; and (2) lack of oversight related to the illegal surveillance scandal involving News Corp.'s 100% owned subsidiary, News of the World.  Sprinkled around these claims are accusations of Murdoch using the corporation as a vehicle for supporting his political agenda.  The overarching thesis of the complaint is that the board allowed Murdoch to use News Corp. for his own personal purposes:  family and political.

Historically, conflict-of-interest claims have teeth; oversight (Caremark) claims do not: waste claims don't even have a mouth.  Something here had a lot of teeth given that the parties agreed to go to mediation prior to a ruling on a motion to dismiss and given the $139 million figure.  For those of us waiting to see a winning Caremark claim, failure to oversee an ongoing pattern of illegal news-gathering activity that was well-known internally might be it.  But, we may never know if the settlement is all about the acquisition or a little bit of both.  Perhaps the oral argument for the motion to dismiss last year held some clues that the court thought the oversight claim was not going to be dimissed, at least.

The remedy section of the MOU has not only the monetary award but also positive remedial changes, such as more compliance, a compliance officer, an independent Chairman of the Board, and new definitions of "independent" for board members, etc., that might match up to oversight if the money merely lines up with the acquisition.  And, interestingly, a new "Political Activity Policy": 

2. The Company has or will implement a policy requiring annual public disclosure to its shareholders of political conributions made directly by the Company to state or local candidates, political party committees, political committees (e.g., PACs) or other political organizations exempt from federal income taxes under Section 527 of the IRC; payments to any other entity that is earmarked to be used for independent expenditures for a candidate or political party; or to a ballot measure committee. . . .

3. The Company will notify the Board (for its information and not approval) on an annual basis of payments in excess of $25,000 (including special assessments) that are not deductible under Chapter 162(e) of the IRC . . . and are. . .made to any US-based trade association, Section 501(c)(4) organization, or Section 501(c)(3) organization that coordinates directly with the Company in drafting proposed legislation or grassroots lobbying activities. . . .

Stay tuned to see if this is a throw-away provision (like most remedial changes in derivative settlements, or something to see.

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November 15, 2012
Disclosure of Corporate Political Spending
Posted by Gordon Smith

The proposed SEC rule. The pushback. The new study. The editorial pitch.

Interesting stuff. I favor the proposed rule because I believe that information about corporate spending on politics is important to shareholders, and although some of that spending is currently disclosed, the proposal rule would provide more coherent and easily accessible disclosure.

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September 21, 2012
Campaigning to the 53%: Do We All Vote Our Interest?
Posted by Christine Hurt

So, Mitt Romney's off-the-cuff remarks about the 47% are now part of social media history.  He has responded this (Friday) afternoon by releasing his tax returns.  (Politics are nothing if not fascinating.)

But what intrigued me by Mr. Romney's statements was the underlying assumption that we all vote our economic interest.  And not just that, but we all vote our short-term, bottom-line interest.  In short, we vote for the guy who lowers our tax bracket next year.  Perhaps on K Street, this is common knowledge in all campaign offices, Democrat or Republican.  But it was startling to me.

Here is the plucked-out quote:

There are 47 percent of the people who will vote for the president no matter what. All right, there are 47 percent who are with him, who are dependent upon government, who believe that they are victims, who believe that government has a responsibility to care for them, who believe that they are entitled to health care, to food, to housing, to you name it. That that's an entitlement. And the government should give it to them. And they will vote for this president no matter what. And I mean, the president starts off with 48, 49, 48—he starts off with a huge number. These are people who pay no income tax. Forty-seven percent of Americans pay no income tax. So our message of low taxes doesn't connect.


So, this statement could mean many things.  First, it could just be hyperbole.  There are a whole lot of people out there who aren't interested in lowering their taxes or keeping more of their own money.  Thousand points of light wouldn't resonate; you are a better director of your money than the government wouldn't resonate.  But his other statements about entitlements sugests that's not the gist.  The gist is more about net "takers" and "givers."  Only net "givers" want less taxes.

So second, it could be a description (whether one that is considered unfortunate or one that's embraced) of reality as Romney (and maybe all politicians, whichever party) sees it:  Americans who vote will only vote their short-term bottom-line interest.  So, if you aren't going to lower my income taxes or capital gain taxes or the entity-level taxes on my small business, I'm not voting for you.  If you raise those taxes, I really won't vote for you.  In essence, my vote is for sale.  Whether with tax breaks or vouchers or whatever.  If I'm a busienss, I won't vote for you unless you give my industry a tax break.  So, if I pay no taxes, you can't pander to me by lowering taxes, only by giving me more handouts.

But government spending (vouchers) or anti-spending (tax cuts) should be based on a greater good that is embraced by the majority:  lower taxes spurs innovation or economic growth or R&D or something.  Vouchers improve education nationwide.  [Name your government program] improves society.  Eliminating or limiting [name your government program] improves society.  Voters vote to improve society.  Right?  So, even if you raise my taxes, I should vote for you if I think raising taxes to pay down debt or improve social programs is a good idea.  And, there may be many reasons to vote for someone that are noneconomic short-term -- civil rights, reproductive freedom, etc.

I am bracketing here problems in the statement that others have pointed out -- many in the 47% pay other types of taxes; many are retired and have paid taxes before; many are retired but have grown children that pay taxes; many net "takers" have cognitive dissonance about the government subsidies they receive and don't often vote their interest.  So, to say that the entire 47% is already voting Democrat is wrong, just as the next conclusion that only a small percentage of folks that pay taxes ever vote Democrat is wrong.

What I'm more interested in is the surrendering of all pretense that a citizen's interest in government lies only in how many cents per dollar it is taxed -- not what government leaders do with those cents or what policies government leaders implement as they live off your cents. 

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July 18, 2012
"You Didn't Build That": Ambiguous Pronoun or Ideological Divide?
Posted by Christine Hurt

Yes, we try to stay away from hot political topics here at the Glom, but the "You Didn't Build That" meme jumps into our territory.  President Obama is being quoted as saying, "If you've got a business -- you didn't build that" as part of a speech on how even the most successful of us achieve that success with the help of other individuals and government institutions that provide infrastructure, an educated work force, etc.  This speech is similar to ones he has given before, and to Elizabeth Warren's speech, but it's a slow news cycle and that sentence has gone viral.  Here is the whole section from which the quote is taken:

If you were successful, somebody along the line gave you some help. There was a great teacher somewhere in your life. Somebody helped to create this unbelievable American system that we have that allowed you to thrive. Somebody invested in roads and bridges. If you’ve got a business -- you didn’t build that. Somebody else made that happen. The Internet didn’t get invented on its own. Government research created the Internet so that all the companies could make money off the Internet.

So, the "that" may refer not to "business," but to "roads and bridges" or "this unbelievable American system." But, if my Facebook friends are any indication, small business owners are not giving Obama the benefit of the grammar doubt.  Commentators are arguing that Obama's slipup reveals his hatred of capitalism and disdain for entrepreneurship.  Here at the Glom, we tend to be proponents of both of those things, but I'm not jumping on that bandwagon.  Here are two responses, theoretical and practical.

Theoretical.  The knee-jerk response to Obama's poor sentence structure exposes the fact that travelers along this journey of life can be sorted along a 2 X 2 grid. (Bear with me).  Along life's defeats and successes, one may greet them with an attitude of gratitude, recognizing the hand of fortune, good or bad, or one may greet them with an attitude of desert, ascribing the outcome to one's own contributions.  However, few of us greet both bad and good results the same -- mostly we greet good outcomes with feelings of desert, and bad outcomes with feelings of anti-gratitude (result as caused by bad fortune).  And the truly human among us ascribe our own good results to our own actions, or own bad results to bad fortune, others' good results to fortune and others' bad results to their own poor choices.  A more humanitarian response would be to be grateful for our own successes, take responsibility for our poor choices for our own actions, give others respect for their successes, and sympathize with others' poor outcomes by recognizing the hand of fortune.  Cultivating gratitude does not take away from our successes, and I think we can still honor individualism while also recognizing the role of other forces.

Practical.  Like many others (including Obama and Romney), I've spent time in a country where there is no "unbelievable American system."  We tend to believe that good roads, a postal delivery system, telephone lines, free schools, police officers, and firefighters are a floor.  A government isn't helping you by providing these things; one needn't be thankful for these things.  My daughter also believes that I'm not a good mom even though I do a million things a day for her.  Because she has known no other mom, she thinks that's what all moms do as a starting point.  The American system isn't a baseline; it's a wonder.  I now realize that even if you are an amazing entrepreneur with the best intellect and work ethic, it is very hard to succeed in a country with no free public schools (or very poor ones with no materials), no roads to get your goods to market, no system of delivering parts for your goods, no educated workforce for your business, etc.  No easy way to communicate.  No way to protect your business from vandals. 

Commentators have pointed out that all Americans enjoy good roads, public schools, etc., yet not everyone is a successful entrepreneurs.  Therefore, the successful got that way by virtue of their own hard work alone.  The climate is the constant, their industriousness the deciding and only factor.  I think this is odd logic.  If I built a ten-foot platform from which individuals could to try to jump to catch a prize twelve feet in the air, not all will obtain the prize.  The ones who do can jump higher than the others; however, they did not obtain the prize all on their own.

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April 09, 2012
New President in Malawi!
Posted by Christine Hurt

While most folks in the U.S. probably had a relatively relaxed weekend, perhaps a holiday weekend for some, the past four or five days have been fairly expectant (ok, tense) in Malawi. The conclusion to the story is that today Malawi has a new President, Joyce Banda.

Thursday morning, the then-President Bingu wa Mutharika, collapsed of cardiac arrest.  For a day or so, no official would confirm his death, though it was widely rumored.  Some officials claimed he had been flown to South Africa for emergency treatment (a two-hour jet plane flight) while others claimed he was perfectly fine.  Finally, the government confirmed that Mutharika, 78, had passed away.  On Saturday afternoon, the Vice-President, Joyce Banda, was sworn in as President.

But that bland description does not capture the uncertainty of the past few days and of the future.  Following Thursday's news of Mutharika's possible death, tensions were very high over who would be the next President.  Under the Malawi Constitution, should the President become incapacitated or die, the office of President, until the next election, falls to the Vice-President.  However, two possible problems could have arisen.  First, it was not completely clear whether the rule of law would prevail.  Malawi is a young democracy, and the past year had seen a reversal in respect of some principal democractic concepts, if not the rule of law.  Banda, as I will explain further in a moment, was in opposition to Mutharika, and quite recently opposition leaders had been arrested.  So, a peaceful transition of power could not be completely assumed.

Second, members of Mutharika's party, the Democratic Progressive Party (remember that joke about the Holy Roman Empire not being Holy, nor Roman, etc.?), had claimed that Banda was not legally the V-P.  Though Banda and Mutharika had run as members of the DPP, Mutharika had later expelled Banda from the party because of her "anti-party" activities.  Banda then organized her own party, the People's Party, and was going to run for President in 2014.  (Mutharika was constitutionally banned from running because of term limits, but his brother, Peter, would have been the party nominee.).  However, she could not be fired as V-P, though her duties were reassigned.  So, supporters braced for a court battle over whether Banda was the legal V-P and would legally be the successor.

So far, things look cautiously optimistic.  But Banda inherits more problems than we can even fathom.  Almost a year ago, Mutharika expelled the British ambassador from the country, prompting the U.K. to withhold aid from the country.  That aid constituted 40% of the budget of the government of Malawi, so this cut in aid, which had ripple effects throughout the aid community, threw an already incredibly impoverished country in to severe economic crisis.  Last week, the country's currency, the kwacha, was trading on the black market at almost twice its official rate.  The IMF had called upon Malawi repeatedly to devalue the kwacha, but the government refused.  Severe shortages of fuel and other commodities are everyday occurrences.  (If you can find petrol, it's at least $10/liter.)  A ten-day mourning period has been announced for the late President, but then a lot of hard work will need to be done.

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February 09, 2012
The STOCK Bill's Sideline In Political Expert Networks
Posted by David Zaring

It is interesting to see the House sweat over whether they have to act on a bill that passed the Senate 96-3.  But part of the reason may be because the expert networks about which the SEC is so suspicious, at least if they are the political variants of the same, will have to register as lobbyists.  Can't imagine the hedge fund industry expected that.  Anyway, this Times piece is pretty interesting.

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January 28, 2012
Charitable Contributions and Taxes
Posted by Gordon Smith

Mitt Romney's tax returns have inspired a national conversation about charitable giving and taxes. Romney deserves kudos for his charitable giving, which extends well beyond the LDS Church.

While charitable contributions and taxes are sometimes portrayed as substitutes, we think of charitable giving as "generous" and we think of paying taxes as a necessary cost of living in a civil society. Thus, Learned Hand aptly described our attitude toward the payment of taxes: "any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes." Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).

Despite this widespread view toward the payment of taxes, Romney is still criticized for not paying (or wanting to pay) more taxes. In a WaPo piece from earlier today, for example, Rabbi Sharon Brous of Los Angeles observes, "On one hand, I really admire his sense of obligation to his immediate community, but I would offer that perhaps he might adopt a more expansive notion of what community is." This, despite the fact that Romney was not using the most tax-advantageous method of making his charitable contributions. (Thanks, Miranda.)

Rather than blaming Romney for paying too little in taxes, perhaps we should encourage more charitable giving. Again from the WaPo story:

Overall, Americans give between 2 and 3 percent of their income to charity, according to the Philanthropy Roundtable, but in the first few years of the recession, that number dropped, too. Newt Gingrich gave just $81,000 — 2.58 percent of his $3.1 million income and a fraction of his 2005-06 tab at Tiffany’s — to charity in 2010....

The more individuals and corporations give, the less the government has to. Giving, and giving until it hurts, forces you to recognize that, like a parent, you’re responsible for other people — whether in your own community or around the world. When you lay down your money, you say, “This (church sanctuary, child, environmental hazard) is my problem.” Providing a sense of interconnected obligation is traditionally what religious communities have done best, and it is no surprise that the religious groups that are growing fastest in America — Mormons, Pentecostals, certain sects of Jews — are those that make demands on their members' time and money.

Rather than comparing effective tax rates, perhaps we should compare rates of charitable contributions plus taxes to reveal who is really supporting society. 

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January 16, 2012
The Republican Debate on Twitter
Posted by Gordon Smith

The Republican debate in South Carolina was the most entertaining of this election cycle. Just for some extra fun, I was following the Twitter chatter. The only person from the debate who is trending on Twitter: Juan Williams.

If you ever want confirmation that beauty is in the eye of the beholder, follow a debate on Twitter. Still, looking at the debate grades, lots of people seemed to agree that Newt Gingrich and Rick Perry did well, while Rick Santorum lagged behind. The effort to "unite the conservatives" has been a failure, so far.

Before the debate, Romney was threatening to run away with the nomination, but he did not help himself tonight, and he may have hurt himself. The Twitter traffic was not kind. The candidates have another debate on Thursday, so it's hard to say how this weak performance will affect the voters of South Carolina, but the non-Romneys are energized and Mitt looked confused.

Fox used Twitter traffic to evaluate the winners and losers in the debate. One of the big winners in the Twitterverse was Ron Paul, even though most of the people issuing grades had him dead last. Who are these people tweeting away during the debate? Are they representive of anything?

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January 13, 2012
"How can I get through to both of her?"
Posted by Gordon Smith
January 12, 2012
America Doesn't Understand Private Equity
Posted by Usha Rodrigues

..and that's the problem Mitt Romney's got right now.  You can argue that it's hard to feel too sorry for private equity types: they certainly tend to live up to their name, keeping their name and doings out of the limelight (unless they're going public this year, and have to reveal that their top 3 execs made $402 million).  It's that privacy that's hurting Romney now.

The mystery of private equity is something I confront each spring as I being my Life Cycle of the Corporation course.  As the title suggests, it covers a corporation's life, from founding through venture financing, going public, and being public (and M&A and bankruptcy, time permitting).

Fully a third of the substantive classes focus on venture financing.  That because it takes a while for the students to grasp what venture capitalists do.  We watch a movie.  We discuss term sheets and Series A financing documents.  We have a negotiation exercise, pitting company counsel against investor counsel.  By the end of the unit, they really do get it.  But it takes three weeks.

Most of America hasn't done this.  So maybe when they hear, as the Journal reported yesterday, that of the 77 companies Bain invested in during its tenure, 22% filed for bankruptcy or stopped operations by year 8, or that "most of the 50-80% of annual gains" Bain produced came from "a relatively small number of deals, and some of these winning companies later ended up filing for bankruptcy protection", that sounds scandalous.  To me, it sounds like Bain hit it out of the park.  But I know the odds are against a successful exit, even for a venture-backed corporation.  I know it's normal for a few "home-runs" in a fund to make up for a lot of ho-hum investments and some real stinkers.  Most Americans don't know that.

Like Gordon, I think Perry's "vulture capitalist" label is unfair and misplaced.  But there aren't really any venture capitalist household names--Gordon Gekko is one popular image of private equity, and he plays a villain.  Steve Jobs may be an entrepreneur-hero, but the public doesn't lionize the VC funds that got Apple off the ground. 

Gordon says this issue "should be a winner for Mitt, if he can make the connection to average voters."  The question for me, is whether  Romney is going to try to explain venture capital and private equity to the average American in soundbites.  My experience tells me that might be a tall order. 

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"When Mitt Romney Came to Town"
Posted by Gordon Smith

The "King of Bain" video by Invest in America is here. If you are inclined to embrace the Romney-as-Raider narrative that Newt Gingrich has been developing, you might find this film effective, but it's hard to imagine independent-minded voters being persuaded. 

One problem is that many of the claims and insinuations in the film are facially ridiculous. For example, the first case study of Romney's rapaciousness is about a company called UniMac. According to the film, this was the Bain formula: buy a great company, degrade the products, fire the employees, and sell the company at a huge profit to the Canadians. In that order.

The bigger problem is that the tone and rhetoric of the film are well-designed to affirm preexisting beliefs, but not likely to persuade those who are independent or inclined to favor Romney. Romney buys big houses, and he makes them bigger! He is rich, and he likes money! He says crazy stuff like, "everything corporations earn ultimately goes to people"! His own firm took "foreign seed money from Latin America"! And in case you missed the fact that Mitt isn't like you, look at a clip of him speaking French!

It's just over the top.

"More ruthless than Wall Street," Romney apparently coined the term "creative destruction." (Sorry, Mr. Schumpeter.) For Newt Gingrich, this film is just about destruction. Ultimately, I think it will be self-destruction

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January 08, 2012
Romney at Bain Capital
Posted by Gordon Smith

The WSJ has a story about Mitt Romney's time at Bain Capital. Lots of Bain's investments failed, but that's no surprise for a venture capital/LBO firm. The firm had some home runs, too, which is also no surprise. Neither the failures nor the home runs are entirely attributable to Mitt, of course, so I am not sure this report will get much traction among voters. One thing we know for sure, and that is the investors in Bain profited handsomely:

The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.... The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.

I have known a number of people who worked with Mitt at Bain, and, if memory serves, all of them had good things to say about Mitt. I am not sure any of them thought that he was the world's greatest businessman, but he was no slouch, either.

Does this matter in choosing a President? Mitt certainly thinks it matters. He keeps pressing his experience at Bain, partly as evidence of his leadership and partly as evidence of his understanding of how to create jobs. I don't find this part of his leadership narrative all that compelling because he was the investor -- a sounding board with money -- not the entrepreneur. On the jobs issue, however, I think this is an angle worth exploiting. Building successful companies is a theoretical exercise for most politicians, including President Obama, but Mitt has been part of the process.

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