Egyptian Court Overreached in Declaring a Legislature to be Unconstitutional

In 1803, the U.S. Supreme Court decided Madison v. Marbury, which established the authority of the court to declare a law to be unconstitutional, and thus invalid. A basic principle underlying this authority is that a constitution is on a level superior to a statute. An entity established in a constitution to interpret it can thus invalidate a law passed by another body established in the constitution. Invalidating that other body itself would be an entirely different matter, as it would involve one constitutional body dissolving another of equivalent grounding.

Accordingly, the constitutional court in Egypt overreached on June 14, 2012 in declaring the parliament dissolved. To treat a legislative body as akin to a law established by such a body evinces a category mistake with respect to level. Whereas a law is subject to decisions by governmental bodies, the latter themselves are subject to constitutional amendment rather than governmental action (including that of the judicial branch of government). General speaking, basic law such that creates governmental bodies (whether in constitutional language or not) trumps that which is created by those bodies. Put another way, a court must take the existence of the extant government institutions as a given.

By loose analogy, the Egyptian court was treating a sibling as if it were an offspring. Whereas brothers and sisters of the same generation are “on the same level,” their kids are on another level. One does not treat one’s brother and nephew similarly. So too, sibling governmental institutions should not treat each other as if they were that which they produce.

The judicial breach in Egypt was particularly suspect because the justices had been appointed by Mubarak, whose last prime minister was running for president against the candidate of the opposition party, which dominated the parliament as a result of a democratic election. Fittingly, that party disputed the court’s ruling and its authority to dissolve the legislature. Saad el Katatni, the Parliament’s majority leader, accused the military-led government of orchestrating the ruling. Although it was politically suspect and thus not credibly judicial, my point is that for the justices even to have thought that a court could dissolve another governmental body points to a basic ignorance concerning the difference between a constitution, governmental institutions, and laws.

A constitution (or basic law) creates and thus is superior to governmental bodies, which in turn make, execute or interpret (and thus are superior to) laws. That this basic hierarchy was somehow lost on the Egyptian justices suggests a basic incompetence that nullifies the court’s decision as that of a constitutional court. In other words, the decision can be interpreted as a coup rather than a judicial ruling merely on account of the ignorance. The error is that glaring, and yet somehow the jurists presented the ruling as legitimate nonetheless.

Faced with the real likelihood that the nescient democracy was being snuffed out by the partisan power-play made under judicial auspices, Egyptian citizens of all stripes had to decide whether to put a democratic Egypt above even partisan advantage. I suppose the matter of democracy in an autocratic context depends ultimately on how badly the body politic wants political self-determination, for the forces that are dominant in the status quo do not just go softly into the night. Rather, they have to be shown the door more than once, until they finally get the message.

Source:

David Kirkpatrick, “Forces Surround Parliament in Egypt,Escalating Tensions,” The New York Times, June 15, 2012. 

Addressing Systemic Risk: Beyond the Dodd-Frank Act of 2010

After the U.S. financial crisis in September 2008, the former chairman of the Federal Reserve, Alan Greenspan, admitted to a Congressional committee that his free-market notion that a market will automatically self-correct itself had a major flaw. He had come to this realization because the financial market for mortgage-backed bonds had failed to correct in terms of price for the dramatic increase in risk. Instead, that market, and that of overnight commercial paper, had seized up rather than simply adjust price to the decreased demand. Fear had paralyzed what had hitherto been thought to be a self-correcting market. The failures of Bear Stearns and Lehman Brothers introduced us to the concept of systemic risk, wherein the failure of a bank (or company) causes a market to collapse. Such a bank is thus too big to fail. If actualized, such risk interferes with even the basic operation of a market, not to mention its self-correcting feature. One question is whether banks that are too big to fail should merely be more adequately regulated or broken up, as the U.S. Supreme Court broke up Standard Oil in 1911.

Alan Greenspan, former chairman of the U.S. Federal Reserve Bank

In March 2013, Alan Greenspan said in a TV interview that banks like JPMorgan that are too big to fail should be allowed to fail. “[What] we ought to do is to allow banks to fail, go through the standard Chapter 11 type of process of liquidation, and allow the markets to adjust accordingly,” said the 87-year-old Greenspan. “That has worked for a very long time.” Had he forgotten his own Congressional testimony in which he had admitted that markets may not “adjust accordingly” to irrational exuberance and systemic risk? Decades of the central banker’s experience had not prepared him for the “financial cliff” that the financial system nearly went over in the fall of 2008. Apparently for Greenspan at least, old habits (of thinking) die hard.

Greenspan said that the Dodd-Frank Act of 2010, which was oriented to saving the banks from their own risky excesses and providing such banks with an orderly liquidation process should they declare bankruptcy, had been a failure. He said the “too big to fail” problem was getting worse, not better. Banks such as JPMorgan had been “gaming” the new regulations, attracted by the high profits gained from risky trades outlawed by the Volcker Rule. That FDIC deposits were used at JPMorgan to make the trades suggests that the taxpayers have been underwriting the continued high risk, at least in part. In other words, free-market capitalism does not completely account for the risk that banks willfully assume even though it can cause the financial sector to suddenly seize up as a big bank goes under.

Greenspan’s answer to the failure of Dodd-Frank involves a return to his faith in the free market, as if the freezing of commercial paper had not occurred in September 2008 after Lehman failed. A year after that crisis, the former central banker had urged the break-up of the big banks too big to fail. “If they’re too big to fail, they’re too big,” Bloomberg News reports Greenspan said in October of 2009. “In 1911 we broke up Standard Oil -- so what happened? The individual parts became more valuable than the whole. Maybe that’s what we need to do.” One might add that the sheer existence of a bank with over $1 trillion in assets is too big for not only the financial markets, but also the republic as well. Even after the banks’ culpability had been made transparent in the financial crisis, Wall Street still had considerable lobbying pull over Congress—enough to get lawmakers to scrap Sen. Dick Durbin’s amendment that would have allowed judges merely to adjust mortgages that are in foreclosure. The allure of large contributions is simply too overpowering to a candidate or elected official for such concentrations of private wealth to be compatible with representative democracy. One or the other must inevitably give way. Relying on chapter 11 bankruptcy and market re-adjustment does not even begin to touch such ramifications.

In short, Dodd-Frank can be viewed as a piece of legislation that did not go far enough. This is perhaps no coincidence, given the power of the banks in Congress. Furthermore, as the $6.2 billion trading loss at JPMorgan demonstrates, bankers are able to evade and obstruct whatever incremental strengthening of financial regulation that lawmakers and regulators are able to enact over the objections of the bankers. The Volcker Rule, which bars the risky proprietary trading of banks, is no match for the wizzes on Wall Street. Systemic risk demands public policy beyond some additional regulation, or even a return to New Deal regulation. Going back to the Glass-Steagall Act of 1933, which had separated investment from commercial banking, would be insufficient, as banks had been gaming that law for decades before it was repealed in 1998 by Bill Clinton and Sen. Phil Gramm. Systemic risk and risks to democracy warrant public policy that changes the economic map, rather than merely giving the existing players some additional instructions or letting them fail and hoping the market will not collapse as a result. Addressing systemic risk warrants a systemic rather than an incremental or laissez-faire approach. I suspect that in addition to the obvious vested powerful interests, an aversion to substantive change and an associated preference for incrementalism account societally for much of the aversion to breaking up the big banks, as they had become ensconced in the system as part of the status quo.

Caroline Fairchild, “Greenspan Says Too Big To Fail Problem ‘Is Getting Worse, Not Better’,” The Huffington Post, March 15, 2013.

For more essays on that financial crisis, see Essays on the Financial Crisis: Systemic Greed and Arrogant Stupidity, available at Amazon.

Affluence and Democracy in China: A Complicated Relationship

The Financial Times reported in 2013 that there was “no great clamour in China for western democracy.”[1] The assumption in the West that prosperity in China will someday inevitably usher in democracy may unduly privilege Western political values in an exogenous context. The newspaper suggested that prosperity can be the source of rising pressure for political change rather than an antidote to it. In other words, the power shift between the state and individual that is unleashed by rising incomes does not necessary privilege the individual. Time and again, China’s leaders have refused to shift power to the individual at the expense of the state; social harmony, and power, are just too important. To be sure, cronyism and corruption, while endemic in China, are not esteemed cultural values, and the rising middle-class may demand that the state clamp down on the unfairness of government officials “wetting their beaks.” This would be particularly problematic if the growing upper-middle-class demand more transparency in government and more rule-of-law to instill fairness over the personal aggrandizement of government officials. However, President Xi, at least publically, would hardly object, as he set out to come down hard on corruption even in the state. At the very least, the matter of increasing wealth and democracy in China can only be complex, yet we can come to some conclusions based on Chinese history and the Chinese view of democracy being Western.

The relationship between economic development and political democracy in China is more complex than is typically presumed in the West. Put another way, the rest of the world is not made in the West’s image. That the newly affluent in China (except for in Hong Kong) would not necessarily demand democracy would strike most Westerners as bizarre. Why would not enhanced choice given the greater buying-power translate into choice in politics too? It is very possible that the Chinese newly rich would want a breed of change in government that does not reflect Western democracy. Certainly the extant ruling elite would favor such a force over one that is pro-democracy.Rather than a change of system, rising incomes may fuel a power struggle between different power-centers—one being the old and the other(s) being the new. This sort of thing happened in the Salem witch trials in seventeenth-century New England. Newly-propertied women were literally burned-to-death by city officials who favored the established landed gentry. The religious subterfuge belied the more earthly battle between old and new centers of power based at least in part on economic change.
Similarly, contending centers of power held within the Communist Party widen to include the rich and professional classes (i.e., upper and upper-middle). With the exception of the two short-lived republics attempted at the end of the Qing dynasty in the early twentieth century, China has no history of democracy, so it would not be likely that the ruling party expands to include a democratic faction.

Because the two brief republics occurred just after the Qing dynasty fell, and, moreover, because the history of China contains cycle after cycle of dynasties rising and falling, real change that includes a democratic system would most likely be possible only after the fall of the Communist Party dynasty. Considering that the Qing dynasty went from 1644 to 1910, I wouldn't look for this kind of change any time soon. Yet within the current dynasty, more pockets of limited democracy, perhaps similar to Hong Kong's, may be established, or, more to the point, allowed by the power in the status quo.

1. Philip Stephens, “Political Cracks Imperil China’s Power,” The Financial Times, January 24, 2013.

Protecting Minority Stockholder Rights: On a Conflict of Interest at Revlon

The principle of majority rule is a staple of democratic theory. Typically the victor of a close election is quick to proclaim that “the people” have spoken. That “the people” corresponds to 51% of those who voted is beside the point. What about the 49% who voted against the victor? What about the minority’s rights? In the U.S. Senate, the fact that it takes 60 out of 100 votes to end a filibuster means that a large minority can halt a majority’s bill. In the European Council, the qualified majority rule means that for a bill to pass, the states in the majority must be at least 55% of the total number of states and must have at least 55% of the E.U.’s population between them.  A large minority can therefore stop a small majority. In both of these “intergovernmental” bodies, the implication is that 51% of a vote is not as significant as the principle of majority rule suggests. What about the rights of a minority of shares of stock in corporate governance? When a majority stockholder has control of management, the interests of the minority stockholders can be shirked. This is particularly true when a majority stockholder proposes a going-private transaction with the aid of management.
“Going-private transactions create opportunities for shareholder abuse and can have coercive effects on minority shareholders,” Antonia Chion, a director in the S.E.C.’s enforcement division insists. A majority shareholder can propose a buy-out that is unfair to other stockholders, and a collusive management can keep those shareholders in the dark concerning independent assessments. This is not the case of a CEO who is controlling the board at stockholder expense; rather, the majority stockholder uses the management to circumvent the board and other stockholders at their expense and even that of the company.
On June 13, 2013, Revlon “agreed to pay an $850,000 penalty to settle accusations that it deceived shareholders and its independent directors in connection with” Ronald Perelman’s attempt to get the other stockholders to convert their common stock to preferred in what is called an exchange transaction.[1] As in the case of Perelman’s earlier attempt to take the company private, an independent assessment found that the other stockholders as well as the company would lose out in the deal. Perhaps because the other stockholders had had access to the information to reject the first proposal, Revlon, undoubtedly at Perelman’s urging, “went to great lengths to hide” the bad news of the assessment on the exchange transaction from the minority stockholders.[2] In fact among “other deceitful maneuvers,” Revlon “altered the agreement with the trustee to ensure that the trustee would not share the advisor’s opinion with” the minority stockholders.[3] In its filings with the S.E.C., the management lied that the board’s process had been “full, fair and complete.”[4] In actuality, the company’s board was “unable to fairly evaluate the adequacy of the exchange offer.”[5] The controlling stockholder, Ronald Perelman, had used the management of the company to go against the company’s own interest! That is, the company was acting against its own best interest simply because doing so was in the controlling stockholder’s interest. Surely this suggests that the majority stockholder had too much influence. Given the conflict of interest, having such influence at the expense of other stockholders and the board can be regarded as unethical.
Perhaps it could be argued that because Perelman’s investment firm, MacAndrews & Forbes, controlled about three-quarters of Revlon’s shares at the time, the company’s management had a fiduciary duty to act in Perelman’s interest even if it was not in the company’s interest. Stockholders are the owners, after all.
However, Perelman’s investment firm did not control all of the stock. It cannot be assumed that the interests of the other stockholders mirrored that of the stock Perelman owned or controlled. Furthermore, that the exchange transaction would have helped Revlon pay off a loan to Perelman’s investment firm only added to the majority stockholder’s conflict of interest. According to the New York Times, because “Perelman stood on both sides of the deal, there was a question about the transaction’s fairness.”[6] This is the reason the company asked its independent board members to assess the exchange transaction in the first place. For the company to turn around and require the independent assessor to hide the findings from the board is utterly contradictory, as well as unfair to the independent directors (as well as the other stockholders).
Therefore, even if the principle of majority rule applied to corporate governance supports Perelman’s influencing the management to the benefit of the stock that he controls, the conflict of interest suggests that the principle should not completely shut down the property rights of the other stockholders. Interestingly, not even the U.S. Senate’s 60 votes or the European Council’s qualified majority voting applied to corporate governance could have stopped the 75% of the shares that Perelman controlled at the time from directing the company’s management. Because the independent directors are designed to be free of pressure from management, they could be controlled by a majority stockholder in such a case.
Perhaps independent directors ought to be tasked with not only checking the corporation’s management, but also protecting the interests of the minority stockholders when those interests differ from that of the majority. At the very least, a majority stockholder should not be permitted to be situated in a conflict of interest with regard to the company. Merely being so situated can be argued to be unethical because even having the opportunity to exploit a conflict of interest causes harm (e.g., anxiety) to those who would be harmed financially. Additionally, the temptation is just too great, given the influence that the majority stockholder has over the company’s management. Even in terms of democracy, majority rule is not an absolute.

For more on conflicts of interest in business (and government), see Institutional Conflicts of Interest, available at Amazon.

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1. Peter Lattman, “To Perelman’s Failed Revlon Deal, Add Rebuke From S.E.C.,” The New York Times, June 14, 2013.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.

6. Ibid.