Wal-Mart: Political Contributions as Bribery

In September 2005, “a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country. . . . Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: ‘There is reasonable suspicion to believe that Mexican and USA laws have been violated.’”[1]

 Critics protesting a new Wal-Mart store after the bribery scandal    John Moore/Getty

The full essay is in The full essay is in Cases of Unethical Business: A Malignant Mentality of Mendacity, available in print and as an ebook at Amazon.com.

1. David Barstow, “Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top-Level Struggle,” The New York Times, April 21, 2012.

Obama Caved to the Agribusiness Lobby

Faced with political pressure from Republicans and farming groups, the White House decided in April 2012 not to go ahead with rules that would have prevented children from “operating heavy machinery, handling tobacco crops, working in grain silos or performing other jobs considered potentially dangerous.”[1] The Labor Department issued a statement indicating it was withdrawing the rules due to concern from the public over how they could affect family farms. “The Obama administration is firmly committed to promoting family farmers and respecting the rural way of life, especially the role that parents and other family members play in passing those traditions down through the generations,” the department announced.[2] I contend that this rationale was a ruse intended to cover up the true source of the political pressure. Family farms were actually exempted from the proposed rules.

"Although family farms were actually exempted from the proposed rules, many opponents cast them as an assault on family farms and rural traditions, saying the White House wanted to keep children from doing even small chores. In fact, the rules would only have affected minors who were formally employed and on farm payrolls.”[3] To get at why Republicans would have stressed the family farm ruse, it is necessary to go to the funding—for motivation tends to follow it.

From 1996 through at least 2012, agribusiness has given much more to Republicans than to Democrats.[4] The disproportionate giving gave Republican lawmakers a financial (and political) incentive to protect agricultural corporations from regulations they do not want. Because the family farm has a much better reputation in society, it makes political sense that Republicans (and even the farm groups) would claim to be protecting the family farm when the real intent is to keep agribusiness free of unwanted regulations. What is surprising is not the subterfuge; rather, the surprise lies with the Democrat in the White House who caved into the agribusiness interest in spite of where that sector was directing its political contributions. Given the political maxim that perception can become reality, it is likely that the family farm subterfuge worked and Obama felt he had to acquiesce to it or be viewed as against the rural family in the midst of his re-election campaign.

See Related Essay: “Oil and Gas Companies: Citizens Buying Government”

1. Dave Jamieson, “Child Labor Farm Rules Scrapped by White House under Political Pressure,” The Huffington Post, April 27, 2012.
2. Ibid.
3. Ibid.
4. Dan Froomkin, "Corporate Campaign Contributions Show Some Industries Giving Up Appearance of Bipartisanship,”  The Huffington Post, April 26, 2012.

The E.U.: The Growth Union

In relying only on austerity and cheap bailout loans, the German-led strategy has proffered a false sense of European integration in the E.U. Even as expanding the bailout funds to roughly 800 billion euros and strengthening the E.U.’s means of enforcing limits on state deficits and debt are along the line of continued incremental shifts of governmental sovereignty from the state governments to that of the E.U., the related austerity (and recession) sparked a populist backlash in several states. At the state level (and this level has a major role at the E.U. level—unlike in the U.S.), the state-rights (i.e., anti-E.U.) parties have been the beneficiaries even if they could not gain outright majorities. The National Front in the state of France is an obvious example, as it captured 18% of the vote in the run up to the general election in 2012.  Other things equal, such a spike translates into brakes on further European integration in the medium term.

Different takes on the E.U. and austerity: Sarkozy, Hollande, and Le Pen of France    NYT

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

Oil and Gas Companies: Citizens Buying Government

“Corporate campaign contributions have historically been split among incumbents of both political parties, with a decided advantage for whichever controls Congress and the White House.”[1] From 2008 to 2012, however, “companies in some major industries that [saw] a threat from federal regulations—most notably the energy sector—[appeared] to have deepened bonds with the Republican Party, with which they share increasingly indistinguishable goals.”[2] One implication is that the party would block regulations to protect the regulated even at the expense of the public safety.

For example, the disproportionate donations by the oil and gas industry to the Republican Party could explain why Republicans in Congress argued for deregulation of deepwater oil drilling even in the wake of the BP Deepwater Horizon explosion and oil leak in the Gulf of Mexico. Financial contributions can explain why the obvious reaction for greater regulation was ignored by those members of Congress. In other words, financial incentive can create blindspots or lapses that are seemingly inexplicable.

Besides the compromised public safety, the financial largess of an industry going predominantly to one party can distort the political “playing board” such that the competition between parties (and between incumbents and challengers) is compromised or distorted. In other words, baleful effects on democracy itself may be part of the mix.

Lastly, the “right” of companies to make political contributions, as if they were “corporate citizens,” can be challenged on the basis that a company is an association rather than a citizen. Lloyd Avram, a spokesman for Chevron, claimed in a written statement that "Chevron exercises its fundamental right and responsibility to participate in the political process. We make political contributions where permitted by law and, consistent with Company policy, to support political candidates, political organizations and ballot measures committed to economic development, free enterprise and good government." Rather than being a fundamental right and responsibility for a company to participate in the political process, it may be an overreach.

On one level, the “fundamental right and responsibility” evinces anthropomorphism: the projecting of human qualities onto non-human entities. Humans exercise their rights of citizenship. It does not necessarily follow that what holds for human beings also applies to our associations themselves. Even though a company consists of people, the entity itself is an organization with its distinct interests. It is not necessarily so that those interests have the rights and responsibilities enjoyed by citizens. To the extent that the interests between a company and its members do not diverge, the citizens in the company have a multiplied influence that other citizens do not have. The principle of fairness is thus relevant too.

In short, giving corporations the fundamental rights and responsibilities of (human) citizens opens the political system up to significant risks. In being able to buy a political party thereby made hegemonic, large concentrations of private capital can effectively protect their interests in staving off regulation at the expense of the public interest. In effect, one faction is able to buy a government. Beyond the conflict of interest in having the regulated be in a position to use its public agents to obviate unwanted regulation and the democracy deficit in the polity as a whole, the attribution of the rights and responsibilities of citizenship on companies evinces a fallacy or category mistake caused, most likely, by the usual suspect of corporate political contributions. Unlike corporations, (human) citizens don't buy themselves citizenship. The concept naturally applies to human beings rather than to our associations. That we have freedom of association does not somehow turn our associations into citizens themselves.

1. Dan Froomkin, “Corporate Campaign Contributions Show Some Industries Giving Up Appearance of Bipartisanship,” The Huffington Post, April 26, 2012. 
2. Ibid.

Spanked by Stockholders: Citigroup

In April 2012, Citigroup’s shareholders voted against the bank’s proposed $15 million compensation for the CEO, Vikram Pandit. This was the first time a majority on a stockholder vote—in this case, 55 percent—united in opposition to what was considered “outsized compensation at a financial giant.”[1] Shortly thereafter, a major stockholder sued Citigroup for breach of fiduciary duty (owed to the stockholders) for excessive executive compensation. Nevertheless, the prognosis is not so bad for the “top brass” on Wall Street; they need not worry unless the votes were to become binding and managements were barred from voting proxies.

For one thing, the vote, taken as required by the Dodd Frank Financial Reform Act of 2010, was non-binding. “After the vote, Richard D. Parsons, who is retiring as Citigroup chairman, said that he takes the vote seriously and Citi's board will carefully consider it.”[2] It is odd, to say the least, that the agents of the owners would just “carefully consider” a majority vote of stockholders. Anything less than binding contradicts principal-agent theory. Lest it be argued that the business judgment rule ought to trump property rights, the question of the total compensation for the “top five” positions at the bank does not hinge on technical expertise in management. Moreover, it could be argued that in a economic system based on private property, that the property rights trump even the expertise of hired managers.

Secondly, the problem for stockholders voting no may have had more to do with the relationship to performance than that the pay level itself was too high. “The company has been flatlining,” said Mike McCauley, a senior officer at the Florida State Board of Administration, which voted its 6.4 million shares against the plan. “The plan put forth reveals a disconnect between pay and performance,” he continued. Calpers, the California state pension fund, also voted against the plan. The issue for Calpers “was whether pay was linked to performance and whether those targets were spelled out and sustainable over the long term,” said Anne Simpson, director of corporate governance for Calpers, which owns 9.7 million Citigroup shares. “Citi was found wanting on both,” she said. “If you reward them for focusing on high-risk, short-term profits, that's what you get, and that's how the financial crisis caught fire.”[3] In other words, the issue was not necessarily excessive pay on Wall Street; rather, the perceived culprit was a reckless design of compensation incentives resulting in excessive risk.

Therefore, I do not relate the negative vote at Citigroup to the wealth-inequality protests in the Occupy Wall Street movement. That American CEOs continued to make far more proportionately than workers than was the case in Europe was besides the point. The majority of Citigroup’s shareholders were trying to make sure that Citigroup would not go the way of Bear Stearns and Lehman Brothers.

1. Jessica Greenberg and Nelson Schwartz, “Shareholders in Citigroup Reject Executive Pay Plan,” The New York Times, April 18, 2012.

2. Ibid.

3. Ibid.

U.S. President Obama on Executive Power

In February 2011, U.S. President Barak Obama directed the U.S. Justice Department to stop defending the Defense of Marriage Act, which bars federal recognition of gay marriages, against constitutional challenges. “Previously, the administration had urged lawmakers to repeal it, but had defended their right to enact it. In the following months, the administration increased efforts to curb greenhouse gas emissions through environmental regulations, gave states waivers from federal mandates if they agreed to education overhauls, and refocused deportation policy in a way that in effect granted relief to some illegal immigrants brought to the country as children. Each step substituted for a faltered legislative proposal.”[1] While not defying Congressional statutes, the use of executive power to thwart defending a statute violates the enforcement function of the executive branch. The other matters—enacting environmental regulations, granting relief to some illegal immigrants, and issuing state waivers presumably were under broader statutes that permit administrative action by the executive branch. The danger, however, is that the enforcement branch or arm could become a legislative branch or arm of the U.S. Government.

The irony is that Barak Obama had criticized George W. Bush’s use of signing statements. The New York Times points out that the institutional incentives of the presidency had come to affect even Obama. This is an extremely significant point, for it suggests that “elections have consequences” is buffered by the institutional trappings of the particular office.

For example, as the E.U. was struggling to manage the debt of some large states by pressing for austerity budget cuts at the state level, it was feared that state office-holders would be elected who had promised to leave the euro and reject the austerity. From the example of Obama on executive power, we can say that such fear was over-stated.  A Euroskeptic once in office is subject to pressure from other states as well as from E.U. officials. The consequent backtracking is typically viewed as political fear. I contend that it is merely a natural reaction to the incentives of a given office and institutional placement (i.e., as a state in the E.U.).

Rather than being hypocrites,  office-holders who said one thing on the campaign trail but then modified their position once in office can be said to be shifting from campaigning to governing—the latter being subject to the institutional incentives of the office. The breadth of campaign proposals is almost necessarily to be wider than the actual conduct of office-holders because the “mandates” of an office have a converging effect because the office itself does not change.

Obama could have campaigned as an anti-executive candidate, but once he was sworn in he became an executive and thus had to function as one. His anti-executive campaign promises would translate at best on the margins of his governing decisions.  Hence, “real change” on the campaign trail is one thing, but change by office-holders is notoriously incremental by nature of the continuance of the respective offices. In other words, the status quo is the clear favorite where a government of offices has already been established. For “real change,” governmental change must also be included, and that cannot come from extant offices.

Generally speaking, what we take as change—what we expect in this regard from our elected office-holders—is only a very moderated sense of change. Put another way, we expect too much out of existing offices. If we want “real change” in terms of policy, we must also look at structural change of the government.

1. Charlie Savage, “Shift onExecutive Power Lets Obama Bypass Rivals,” The New York Times, April 22, 2012. 

Banks Coopting the Consumer Protection Agency

According to the Credit Card Act, which took effect in February 2010, credit-card issuers cannot charge fees equal to more than 25% of the borrower’s credit limit in the first year after the account is opened. A question confronting the Consumer Financial Protection Bureau was whether up-front fees charged before the account is open count toward the limit. The new agency decided against subjecting such fees to the limit. The question is why.

Bankers at First Premier bank, which issues credit cards to people with low credit-ratings, claimed that the bank’s “very existence” would be threatened on account of “the loss of millions of dollars in profits.”[1] That the threat was self-serving should at the very least make it questionable. However, if true, it could mean that the bank was depending on taking advantage of customers for its own survival—in which case it should not continue to exist. The bank was charging a $95 processing fee before an account is opened, plus a $75 annual fee. The annual fee itself is questionable, given the credit limit was $300. It is highly doubtful that the cost to the bank of processing a credit card application was $95. It can thus be argued that the bank was taking advantage of people who needed a credit card in order to rebuild their credit history. Depending on such a business model is not viable, at least ethically-speaking.

For an agency whose entire raison d’etre is to protect consumers to enable such charges by exempting them from the law’s limits for first year charges raises the question of whether “regulatory capture” had occurred.  Hardly unknown among regulatory agencies, the phenomenon occurs when the industry being regulated “captures” its regulators. Whether through the power of information that the agency needs or outright political pressure, industries can coopt or subvert their respective regulatory agencies from their formal missions. That the banks objected to Elizabeth Warren and she was replaced as the proposed director by Richard Cordray may suggest that his loyalties were not entirely behind the consumer. That is to say, the banks may have had too much influence on the selection of the director tasked with protecting consumers.

1. Tara Bernard, “Consumer Bureau Declines to Resist Upfront Credit Card Fees,” The New York Times, April 13, 2012.

Credit-Card Companies in a Conflict of Interest

On April 12, 2012, Hawaii sued Bank of America, Chase, Citi, Barclays, Capital One, Discover, HSBC, and their subsidiaries, “claiming that the banks ‘slammed’ Hawaii credit card customers, charging them for products customers didn't need and that the companies never provided.”[1] The Hawaiian government alleges that the banks used “‘predatory tactics to sign up customers for services they either don’t want or don't qualify for,’ and the companies charged their customers ‘without their knowledge or consent,’ according to a press release issued by the Hawaii attorney general's office.”[2] According to the Attorney General, David Louie, “You don't know that you're enrolling, but they say, 'Oh you just enrolled,' okay, and now they've put a charge on your credit card.”[3]  The banks’ telemarketing departments may have charged customers an average of $150 in the form of small charges.

The full essay is at Institutional Conflicts of Interest, available in print and as an ebook at Amazon.

1. Bonnie Kavoussi, “Hawaii Sues Bank of America, Chase, Citi, Others For DeceptiveCredit Card Marketing,” The Huffington Post, April 13, 2012.

2. Ibid.

3. Ibid.

Facebook Devours Instagram: Buying a Product

Reporters can easily get carried away in characterizing mergers and acquisitions in business.Regarding eBay buying PayPal in 2002 for $1.5 billion, Google purchasing YouTube in 2006 for $1.65 billion, and Facebook acquiring Instagram in 2012 for $1 billion, expanding in the technology sector can be viewed as buying technology as a product rather than acquiring another company. Accordingly, the fact that Instagram had not earned any revenue is irrelevant. 

The full essay is at "Taking the Face Off Facebook."

A Lawyer Comes Up Short on Obama on the U.S. Supreme Court

As president, Thomas Jefferson campaigned against the U.S. Supreme Court in the pivotal 1800 election after the court let the Alien and Sedition Acts stand. The law criminalized criticizing government officials of the U.S. Government. Lincoln announced during his 1860 campaign that he would not enforce the court’s Dred Scott decision upholding slavery in U.S. territories. In saying that invalidating the Affordable Healthcare Act would represent an unprecedented act of judicial activism, Obama was not going nearly that far. In other words, he was not saying he would ignore the decision. Nor did Obama announce anything like Roosevelt’s unsuccessful court-packing scheme.

Even so, a lawyer who teaches law at Samford University in Alabama opined, “It’s virtually unprecedented for a president to criticize the institutional powers of the Supreme Court. I don’t know of any other instance where a president has publically questioned the legitimacy of judicial review.”[1] Apparently the lawyer had not heard of Lincoln’s announcement or Roosevelt’s court-packing.

This example of commentary by the lawyer illustrates why law schools hiring lawyers to teach law classes is fundamentally different than hiring legal scholars to be law professors. A lawyer can become an expert on the technical nuances of a statute or judicial opinion, as well as how to argue such points in a court of law. This is not the same as having scholarly expertise on jurisprudence, which includes constitutional philosophy and history. The difference can be expressed as that which exists between examining individual trees and grasping the contours of the forest. Ironically, as a graduate student in law progresses in the LLM and JSD degrees, the seminars become more specific in coverage (the dissertation of the doctoral candidate in a JSD program being incredibly specific), the level of abstraction increases so a wider perspective is proffered though the narrowing disciplinary focus.

Were law school deans in the U.S. republics to hire scholars as professors rather than lawyers as instructors, the students would benefit immensely from the standpoint of learning the knowledge of law, rather than simply how to practice it.

1. Richard Wolf, “Other Presidents Took on High Court before Obama,” USA Today, April 6, 2012. 

Wen and Obama: Breaking Up the Banks

Chinese Premier Wen Jiabao told a radio audience on April 3, 2012 “that China’s state-controlled banks are a ‘monopoly’ that must be broken up.”[1] He also urged other businesses to get into the financial sector. “Let me be frank,” he said. “Our banks earn profit too easily. Why? Because a small number of large banks have a monopoly. To break the monopoly, we must allow private capital to flow into the financial sector.”[2] This included raising the total amount foreigners can bring into China under the Qualified Foreign Institutional Investor program to $80 billion.

Besides combined earnings of a bit over 632 billion yuan ($99 billion) in a slowing economy, the largest banks—Industrial & Commercial Bank of China, Bank of China, Agricultural Bank of China, and China Construction Bank—were able to raise fees indiscriminately, sparking the popular resentment that Wen was able to tap on the radio. Beyond the unfairness of the windfall profits, the artificially low cost to the banks in borrowing from domestic savings accounts meant that investment has proceeded at the expense of consumption. Given that the current account surplus stood at just 2.7% of GDP in 2011 due to slackening demand in Europe and North America, the imbalance regarding consumption could already be seen as a potential constraint to economic growth.

Therefore, Wen’s strategy in going after the unpopular banking oligopoly was wise both politically and economically. The question at the time was whether anything would come of his remarks. “The major question is whether increasing rhetoric and new initiatives toward economic revisions will lead to broader reform. Prior efforts have faltered amid Beijing’s drive to keep a tight rein on the economy and opposition from interest groups.”[3] That Wen made his remarks as he was preparing to leave office may mean that they should be regarded as akin to President Eisenhower’s “Beware the military-industrial complex” farewell speech. A swan song is not apt to be followed by still another act.

In terms of lessons from a comparative approach, it would be ironic, to say the least, were the Chinese government willing and able to break up the four largest banks while the Dodd Frank Act of 2010 in the U.S. let the banks too big to fail remain intact in spite of the plights of Bear Stearns and Lehman Brothers in 2008. That is to say, if the Chinese government could have taken on its powerful banks, the U.S. government would have looked comparatively weak as against the American banking sector.

Lest it not be forgotten, however, President Andrew Jackson’s defunding of the Second Bank of the United States at around 1830 was daring even bank then when the financial sector was smaller relative to the U.S. economy as a whole. Five or six years later, Congress finally got around to ending the bank’s charter altogether. Jackson’s argument was that having a bank would make Congress, and thus the U.S. Government, too powerful in the American federal system. The dangers to the American republics in having a powerful moneyed interest were also not lost on the nineteenth-century president.

Therefore, we can view the Dodd Frank Financial Reform Act of 2010 through the lenses both of China, assuming something comes of Wen’s remarks, and of American history. President Obama barely broached the subject of breaking up Wall Street banks even though they had been culpable in the derivative mess. Congress would hear nothing of it.  The Chinese government may not be so constrained by the self-serving interests of its banking oligarchy.

Similarly, claims that President Obama’s reliance on private health-insurance companies rather than a state-owned entity in his Affordable Healthcare Act of 2010 was somehow socialism (i.e., ownership by the state of means of production) can also be viewed relative to a Wen’s criticism of the state-owned banks (which favor state-owned enterprises in terms of lending). Obama caved to the private health-insurance company lobby on even a public option, whereas Wen suggests that the Chinese government might break up the four biggest banks. Is the Chinese state stronger than the U.S. Government relative to the interests of private capital?

Relative to the “socialist” leader’s distancing himself from a bias toward state-owned banks (and enterprises in general) in China, President Obama’s support of both the Dodd-Frank and Health-care Affordability laws can be seen in retrospect as anything but advocating U.S. Government ownership of means of production/services. Wen’s remarks show a movement away from socialism, toward Obama’s stance, though perhaps with government rather than banks in the driver’s seat.

1. Dinny McMahon, Lingling Wei, and Andrew Galbraith, “Chinese Premier Blasts Banks,” The Wall Street Journal, April 4, 2012.

2. Ibid.

3. Ibid.

The E.U. Bailout Fund: The IMF of Europe?

One of the benefits of being in a federation—as distinct from an international organization—is that states in fiscal trouble can benefit from redistribution through a federal center. In other words, federalism provides a safety buffer that is lacking at the international level. E.U. finance ministers agreed on March 30, 2012 to create a permanent bailout fund for states that have adopted the euro. The New York Times reports that questions persisted “about whether the fund, even at about $1 trillion, will be sufficient to deal with crises” in large states like Spain and Italy, which are comparable to Illinois and California in the U.S.[1] Mudding the water, the Times incorrectly refers to the bailout fund as the E.U.’s IMF: “(T)he “bailout mechanism . . .  is meant to be a European equivalent of the I.M.F.”[2] However, the term “bailout fund” itself comes from the TARP, which was not the U.S.’s IMF.

The complete essay is at Essays on Two Federal Empires, available in print and as an ebook at Amazon.

1. James Kanter, “Europe Agrees to Bailout Fund for Euro of Over $1 Trillion,” The New York Times, March 30, 2012. 

2. Ibid.