Essays on the E.U. Political Economy: Federalism and the Debt Crisis

The collection of essays comprising The E.U. Political Economy looks broadly at the E.U.'s federal system, with particular attention to the states, including the matter of "Brexit," which refers to the secession of Britain from the Union. The text then turns more narrowly to the government-debt and banking crisis that occurred in the wake of the financial crisis of 2008. The backdrop of federalism is meant to convey the point that weaknesses in that political system hampered the E.U.'s handing of its states and banks that were in trouble with debt. Lastly, several essays are presented on some more general aspects of the E.U.'s political economy. Rather than being heavily theory-oriented, the essays draw on contemporaneous news reports to quote from practitioners from business and government.

Essays on the E.U. Political Economy is available at Amazon.

U.S. Senators: Falling Short in Representing their States

Like the European Council of the E.U., the U.S. Senate has polities rather than citizens as represented members. That is to say, in both cases, the states are represented. In the case of the E.U., the chief executives of the respective states represent them. In the U.S. case, the citizens of the states elect senators directly, who in turn are tasked with representing their respective states. From the standpoint of representing the polities, the E.U. case is tighter, for a U.S. senator is susceptible to the temptation to vote in the interests of the state’s citizens who voted rather than of the state itself. The two interests may overlap, but they are not identical, for citizens of a member-state may or may not be interested in protecting the prerogatives of the state (government). The Republican legislative responses to the Affordable Care Act (i.e., “Obamacare”) are a case in point.

Under the Act, state governments could expand their Medicaid programs to cover anyone with incomes less than 138% of the federal poverty level, with the federal government picking up the tab through 2018 and 90% thereafter. Even Republican-controlled state governments saw that the deal was in their fiscal interests even if it meant giving up some sovereignty in the domain of health-care to the federal government. Nevertheless, a Republican electorate could vote for one of its U.S. Senators based on the sentiment that poor people should not get “free money.” Behind this is a sort of “survival of the fittest” philosophy wherein the weak should not be propped up. Additionally, prejudice or even animosity towards the drudge of society could be in the mix. From a European standpoint, such a sentiment must seem rather odious, and foreign. In any case, the majority of a state’s voters may at some point vote contrary to their state government’s interests. Being selected by the voters rather than the government, who do you think a U.S. senator is going to pay attention to, other than institutional campaign-contributors, in deciding how to vote on whether to retain Obamacare?

On July 17, 2017, Sen. Mitch McConnell, the Republican majority leader in the U.S. Senate, announced that his second attempt to repeal and replace Obamacare had failed for lack of votes. Back in March, the Kansas legislature had voted to expand Medicaid. Nevertheless, Sen. Moran of that state said in July, “There are serious problems with Obamacare, and my goal remains what it has been for a long time: to repeal and replace it.”[1] In coming out against the proposed replacement, he said it “fails to repeal the Affordable Care Act or address health care’s rising costs.”[2] By omission, we can discern from his statement that he was not opposed to rescinding the expansion of Medicaid even though his own state’s government had approved it.

Because the states as polities are members of the U.S. Senate, I submit that a senator’s discretion should not extend to such a point that it goes against the will of his or her state’s government. Accordingly, a state government should be able to direct the state’s U.S. Senators to take particular positions. A senator’s discretion would come into play when a government is of mixed opinion. For instance, the legislative chambers may disagree, or the legislature and governor may differ on the state’s interest on a proposed piece of federal legislation. State governments could of course legislate which offices (e.g., governor) and legislative chambers would have a voice in directing the senators on particular legislative measures before the U.S. Senate. Without such a tie to a state’s government, a U.S. senator could undercut the state’s representation in the U.S. Senate with impunity. This may in part be why the states have lost so much governmental sovereignty to the federal institutions, thus unbalancing American federalism at the expense of its checks and balances in defense of liberty and justice for all.

For more on the U.S. Senate and the E.U. Council, see the book: Essays on Two Federal Empires

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[1] Thomas Kaplan, “Health Care Overhaul Collapses as Two Republican Senators Defect,” The New York Times, July 17, 2017.

[2] Ibid.

Essays on the Financial Crisis

The financial crisis that peaked in the United States during the fall of 2008 is an excellent case study of what can go wrong with leadership and corporate governance in business, financial ethics, government regulation directed both to the firm level and that of the financial system itself, and legal accountability for the culprits. The collection of essays begins with a series of essays on Lehman Brothers, with particular attention on its last CEO, Richard Fuld. Given the fraud surrounding subprime-mortgage bonds at numerous banks, the second part of the book looks at why legal accountability was so elusive in the United States. Weaknesses in the financial regulation, with particular attention to whether agencies had been captured by their respective regulated firms, comprises the third part. The fourth part examines the culpability of the Federal Reserve Bank, which had perhaps been too close to its regulated banks to anticipate the crisis. The book concludes with essays on why business ethics had been so very weak. The careful reader will take from the book a sense that the financial system remained vulnerable even after government attempts to reduce the systemic risks of a big bank going under. 

The book: Essays on the Financial Crisis

Essays on Two Federal Empires

This collection of essays suggests that the E.U. and U.S. are both cases of modern federalism at the empire political-level and scale. Distinct attributes and dynamics apply, which do not apply at the state level. Unfortunately, too often today, people treat a state in one union as equivalent to the other union rather than to one if its own states. This category mistake ignores vital differences, and thus is apt to result in sub-optimal public policy and even governmental design. To be sure, each union faces its own risks--dissolution being a threat for the E.U. and consolidation for the U.S. Though correcting for the passage of time, dissolution is/was a risk for both the early E.U. and the early U.S. Such a basis of comparison is optimal. Americans and Europeans can indeed learn from each other, with more perfect unions resulting. 

The book: Essays on Two Federal Empires

Bribery at Barclays: Can an Unethical Culture Be Changed?

Amid the financial crisis in 2008, Barclays raised $15 billion from Qatar and other investors. The infusion of capital saved the European bank from needing a government bailout. Unfortunately, the bank may not have disclosed the $390 million paid to the Qatari government for “advisory services” as part of the fund-raising, and the $3 billion loan facility that Barclays made available to that government.[1] The bank, along with three of its executives at the time were charged in 2017 with conspiracy to commit fraud by false representation, and providing unlawful financial assistance—in other words, paying a bribe to avoid needing an E.U. or state-level bailout. According to Amanda Staveley, a European financier, Barclays improperly favored the Qataris in the fund-raising. The relationship between the bank and the Qatari government rings of “mutual back-scratching.” Admittedly, any business deal involves both parties benefiting, and in much of the world bribery is de facto necessary cost of doing business. Nevertheless, Barclays may have had an organizational culture similar to that of Wells Fargo in which anything goes in pursuit of profit.

The full essay is at "Bribery at Barclays."

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1. Chad Bray, “Former Barclays Executives Appear in Court Over Qatar Deal,” The New York Times, July 3, 2017.

The E.U. Goes After Google: Where Was the U.S.?

In fining Google a record 2.4 billion euros (2.7 billion dollars) in June, 2017, for unfairly favoring its advertisers in its online shopping service, E.U. officials went “significantly further than their American counterparts.”[1] At the time, Google held more than 90 percent of the online search market in the E.U. Why would the E.U. go further than the U.S. in pressing anti-trust violations against a technology company that could be expected to gain monopoly profits? Presumably Google was favoring its advertisers on searches in the U.S. as well. Americans would mind too when an advertiser’s higher-price product comes up rather than a comparable product at a better deal. Was the E.U. more interested in protecting consumers and less concerned about pleasing a large company? The company’s sordid, self-serving practice nullifies any contending claim that the government’s motive was to go after a foreign company. I submit that the E.U. government’s action unwittingly points to a pro-business bias in the corresponding American government.

With the demand that Apple repay $14.5 billion in back taxes in the E.U. state of Ireland, an investigation into Amazon’s tax practices in the E.U., and “concerns about Facebook’s gathering and handling of data,” the E.U.’s anti-trust division was “laying down a marker for more hands-on control of how the digital world operates.”[2] Why no such marker in the U.S.’s anti-trust division? Clearly, concerns about Facebook were not uncommon there. The E.U. “is setting the agenda,” Nicolas Petit said at a European university.[3] Suddenly America looks like the Old World.

Especially after the Citizens United decision by the U.S. Supreme Court in 2010 allowing unlimited spending by companies on political campaigns, the question of the power of large companies in the halls of Congress as well as in the White House at the expense of consumers became more important even if the media kept the issue largely off the public’s radar screen. Is what is good for GM good for America? The fallacy that what is good for a part is necessarily good for the whole is enough to settle that question. The problem, therefore, lies in certain parts having inordinate influence over the whole—more specifically, on the rules by which the whole operates. Insufficient regard for the public good by public officials who don’t want to risk offending corporate chieftains is like the captain of a ship steering according to the desires of certain wealthy passengers instead of looking out ahead.

So it is telling, I submit, that the E.U.’s anti-trust division essentially shamed its American counterpart in being willing to stand up to very powerful private interests. The “proof in the pudding” lies, I suppose, in the dearth of cases in which the U.S.’s government (and those of the member states) has spoken truth to the powers behind the throne and gone on to act on that truth in enacting laws and regulations that protect the public. All too often, American regulatory agencies are captured by the very companies that are to be regulated. Beyond the agencies’ reliance on their respective regulatees for market information and the regulatees’ ability to hire former regulators for lucrative jobs, a company’s monetary influence in electoral campaigns gives elected representatives a powerful incentive to pressure the regulatory agencies to go easy on even an entire industry. From a company’s standpoint, unwanted regulations can be softened or averted outright, or new regulations can be used strategically at the expense of typically smaller competitors that are less able monetarily to comply with stiffer mandates. So it is not simply more regulations that attest to a willingness to “speak truth to power.” Government officials with the courage (and fortitude) to protect the public cannot simply enact laws and regulations that are in a dominant company’s interest. Clearly, the E.U. passed this test in being willing to stand up to Google.

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[i] Mark Scott, “Google Fined Record $2.7 Billion in E.U. Antitrust Ruling,” The New York Times, June 27, 2017.

[ii] Ibid.

[iii] Ibid.

Hedge Fund Set to Hack Nestlé Up: A Case of Sensationalistic Over-Kill

Does the fact that an earnings-per-share figure has not meaningfully improved over, say, five years justify an overhaul pushed by a hedge-fund activist investor?  Put another way, is a steady earnings-per-share tantamount to failure? Especially for an established company, steady numbers do not evince bad performance. An airline would only foolishly fire a pilot for not climbing once having attained a cruising altitude. Maintaining such an altitude during a flight is hardly a reason to turn a plane around or set it in a radically different direction.

With 40 million shares, which amounts to about $3.5 billion, in Nestlé, Third Point hedge fund urged the company’s management in June of 2017 to “sell its stake on L’Oréal and sell off nonessential operations as part of a broad shake-up.”[1] The conglomerate’s shares had appreciated nearly 15% over the preceding 12 months—behind Unilever but better than Mondelez and Kraft Heinz. So why a shake-up? 

Dan Loeb of Third Point.  Relax, Dan, Nestle is not on a nose-dive. 

To be sure, the conglomerate structure is itself arguably too much of a strain on the extant science of management, especially in the United States given the penchant for specialization over “big-picture” management. Selling L’Oréal thus may make sense so the management can concentrate on food. It was not as if such a focus would leave corporate managers with nothing to do.

In May, Nestlé announced a joint-operation with Amazon to offer a cooking companion with recipe instructions and other help for customers. At the same time, Nestlé set to work eliminating unpopular ingredients to its Maggi line. The company had been working to remove preservatives from its ice creams. Lastly, the company announced in June that it was the lead investor in a $77 million in Freshly, a subscription meal service. Such adaption to changing consumer tastes and changes in the industry is a solid means by which an established company improves its profitability. Slogans like “a bold strategy” and a “broad shake-up” make for good press, but they do not fit with a company that has achieved cruising altitude. In other words, severing arms and legs should only be attempted in the more dire of cases, rather than as business as usual.

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[1] Michael Merced, “Third Point, a Hedge Fund, Sets Its Activist Sights on Nestlé,” The New York Times, June 26, 2017.

Apparent Gains in Corporate Governance Accountability as the U.S. Economy Shifts

In 2016, Sacred Heart University purchased G.E.’s headquarters in Fairfield, Connecticut for $31.5 million. Gone were the Persian rugs and lavish artwork. The property acquired included the “Guest House,” the company’s 28-room hotel “to serve visiting executives and others, with no expense spared on the parquet floors, wood-burning fireplaces and a Steinway piano.”[1] Jack Welsh oversaw the ornate construction, leading to the obvious question of just what his sense of fiduciary duty to the company’s stockholders was. An artificial distinction between managers—only some being styled “executives”—was doubtless behind the luxuriant excess only for those certain employees “in the club.” From the standpoints of a board and its stockholders, “executives,” managers, and other employees are all employees. Why then should some of them be associated with luxury while they are at work? Historically, the aristocratic luxuriated precisely because those people didn’t have to work, and more importantly, they viewed work (and even their own money) as not worthy of much attention—there being finer things in life. “Executive” employees are not aristocratic, for they labor even when they could live off their accumulated wealth and pursue loftier aims, such as aiding humanity, furthering knowledge, or engaging in the arts with an eye toward advancing civilization. Bill Gates got this memo; Warren Buffett did not.

The presence of extremely rich people in the executive ranks of large corporations interferes, I submit, with the accountability that corporate governance is designed to deliver for stockholders. Lavish business expenses run counter to such governance and the very notion of a corporation as the stockholders’ combined wealth.  In the era of American industrialization, the huge profits in the industrial sector gave cover to managers such as Jack Welsh, who felt free to exploit the obvious conflict of interest in spending lavishly for the upper-echelon managers themselves, as if the company were their own country club rather than a business. Doubtless managers themselves assumed that paid country-club memberships were necessary to get and even retain (well qualified?) fellow “executives.” The underlying conflict of interest was somehow invisible to sycophantic boards and even large stockholders who looked the other way. In the succeeding high-tech era, the same obliviousness has surely existed in that sector in spite of the rise of activist stockholders.

To be sure, indications can be found that suggest more activist pressure. Even as stockholder activists’ assets were increasing from 1997 to 2015, the number of publically traded U.S. companies decreased from 7,507 to 3,766.[2] Meanwhile, the activists were getting more, well, active, and they were finding it easier to win board seats as fewer companies staggered their elections over three-year cycles. More than 300 U.S. companies were targeted in 2015, up from about 100 in 2010.[3] Boards were better positioned, at least formally, to hold C.E.O.s accountable as the percentage of joint C.E.O.-Chair positions decreased. “In 2001, more than half of new C.E.O.s also assumed the position of chairman when they took over. By 2016, only 10 percent occupied both roles.”[4]

Yet the actual impact from activist stockholders may have only been in decreasing the average tenure of the C.E.O’s. Boards were “still willing to dole out huge golden parachutes to C.E.O.’s, even if they fail.”[5] Furthermore, even though G.E.’s swanky executive suites went from 44,000 square feet in Fairfield to 7,800 square feet in Boston, C.E.O.s of high-tech companies were under less activist scrutiny in spending from soaring profits and stock prices.[6] A study looking at shareholder proposals from 2003 through 2015 concludes that “managers often seek to avoid the implementation of legitimate shareholder interests.”[7] In 2017, the U.S. House of Representatives passed the Financial Choice Act, a deregulatory bill that would require a shareholder to own at least 1% of a company’s shares for three years to get a proposal on a proxy ballot. At the time, a stockholder needed to own only $2,000 worth of stock for at least a year. Clearly, the power of activist stockholders was quite far away from Congress, whereas that of corporate managements was very close by.

Even the increased power of activists to pressure the firing of a C.E.O. of an underperforming blue chip company may actually be a manifestation of frustration over stagnant revenue and profits in the sagging industrial sector; the real question, still unanswered in 2017, is whether activist stockholders would ever go after the lavish spending of “executives” of profitable companies. Even those managements, such as of Amazon, Apple, Google, and Facebook were obliged even in their hay-day by the legal doctrine of fiduciary duty to not be profligate, and to authorize spending for legitimate business reasons because cost management is in the stockowners’ financial interest. This interest, rather than those of “executives,” is legally hegemonic, rather than to be dismissed or even rebuffed. Luxury, in other words, does not go with the work inside a corporation, but, rather, with the ownership of wealth, even if some of the employees are themselves extremely rich. Their independence and association of themselves with luxury does not fit with the corporate model, especially as concerned the ability of corporate governance to exert accountability in the interests of stockholders. As for the apparent strengthening of corporate governance in the industrial sector, the alleged improvement may actually have been a function of a major sectoral shift within the American economy. It is only natural that the old guard would be frustrated at the shift, so what looks like better accountability may only be infighting. To gauge real accountability, we would need to look at the newly hegemonic sector: Are the “executives” in it taking liberties at their stockholders’ expense?  

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[1] Nelson D. Schwartz, “The Decline of the Baronial C.E.O.,” The New York Times, June 17, 2017.

[2] Ibid.

[3] Ibid.

[4] Ibid.

[5] Ibid.

[6] Ibid.

[7] Gretchen Morgenson, “Meet the Legislation Designed to Stifle Shareholders,” The New York Times, June 16, 2017.

ECB Poised to Approve Italian Bailout of Monte dei Paschi Bank: An Instance of Federal-State Collusion?

Under the E.U.’s banking law enacted after the 2008 financial crisis, the state governments “are not supposed to inject fresh taxpayer money into a bank if it is deemed insolvent. When a bank gets into financial trouble, shareholders and bondholders, assumed to be sophisticated investors aware of the risks, are supposed to take the hit and bear the losses.” Much of the banking reforms were intended, moreover, “to prevent banks from becoming so big and so risky that they could hold the global economy hostage. Politicians and policy makers didn’t want taxpayers to be on the hook for the banks’ mistakes.” What about a mid-sized bank whose financial plight puts a state’s economy and reigning political elite in jeopardy? Should the E.U.’s central bankers look the other way and allow the state’s government to finance a bail-out so stockholders and bondholders need not feel the brunt?

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Goldman Sachs’ Venezuelan Bonds: Power Behind the Throne

Goldman Sachs paid about $865 million for $2.8 billion worth of bonds in May, 2017. This represents 31 cents on the dollar and translates into an annual yield of more than 40 percent.[1] The high yield is due to the high risk that is involved, for the bonds had been held by Venezuela’s central bank in what “the government’s opposition decried as a lifeline” to the regime then in power.[2] Indeed, the central bank’s foreign-currency reserves increased by $442 million to $10.8 billion the day the bond deal was completed, and the government needed to raise money it owed to key allies like Russia and China.[3] In indirectly aiding that government, Goldman Sachs risked the ire of the opposition. Writing to Goldman Sachs, Julio Borges, head of Venezuela’s opposition-controlled legislature, indicated that he would “recommend to any future democratic government of Venezuela not to recognize or pay on these bonds.”[4] Hence, the high risk, high return. Though I submit that the risk might have been considerably less than meets the eye on account of the influence of the bank on the U.S. Government.

Goldman Sachs had been “steadily increasing its Venezuelan holdings in recent months, betting that a change in government could more than double the value of the debt if the country, which sits atop the world’s largest oil reserves, reforms its economy.”[5] The American bank could arguably dismiss Borges’ ominous threat because of the bank’s formidable influence, or power, in the U.S. Government. Besides the lavish political-campaign contributions that the bank no doubt extended to members of Congress, prospective candidates, and to the sitting president at the time, the bank had an insurance policy of sorts in that one of its alums, Steve Mnuchin (formerly a partner at Goldman) was serving as U.S. Treasury Secretary and another, Gary Cohen (who had resigned from being the President at Goldman), was the U.S. President’s Chief Economic Advisor (i.e., head of the National Economic Council). Additionally, Steven Bannon, the chief strategist in the Trump administration, had worked in the bank. Ex-Goldman bankers thus held very senior positions in the U.S. Government as the bank was betting that future regimes in Venezuela would recognize the validity of the debt owed to the bank.

The expression, “power behind the throne,” expresses the underbelly of power that has existed without doubt since the dawn of human organization. The advent of the large corporation, whose astonishing accumulation of wealth stems from principles of the Industrial Revolution, meant that private power could trump publicly held power to an unprecedented extent. The governmental discretion of lawmakers and even heads of governments may actually be diminished because of the sheer power behind the strings. In spite of the dubious democratic legitimacy and the horrendous human-rights record of the regime in power in Venezuela when Goldman Sachs bought the bond that had been issued by the state oil company Petroleos de Venezuela, the policy of the U.S. Government could easily be to “look the other way” and even prop up that regime or support any prospective regime that agrees to “toe the line” on repaying the debt owed to Goldman. The power behind the American throne, in other words, might reduce to the bottom-line financial transactions of the large American banks, which, by the way, are too big to fail yet sufficiently powerful to vanquish even public debate on whether the banks should be broken up for the overall interest of the U.S. economies and financial system. In short, follow the money, not the ideals or even enlightened self-interest. The world, moreover, may be in a driverless ship—one whose route is simply a matter of large financial transactions. Those transactions themselves may be the true power, for not even the CEO at a major bank can realistically deviate from seeing them through; the shareholders would have his head.

The discretion, whether in the large corporations or in the halls of government, may really only reside at the point at which the decisions are taken to proceed with a given large transaction. Only an investment banker would know how much discretion is truly present in the decision of whether to commit funds to an investment. In the case of Goldman’s purchase of the Venezuelan state-related bonds, the anticipation of the artificial risk-reduction by means of financial-to-political power could mean the allure of a 40% return on investment is too much to resist (i.e., greed). Yet such a prospect being deemed realistic could mean that Goldman’s managers faced a de facto fiduciary duty to the stockholders to make the non-bet “bet.” The availability of alternative profitable uses of the funds available for a bank like Goldman Sachs could give the bank’s managers some leeway in line with not propping up a regime that suffers democratically and in terms of human rights. It is only on the margins, I suspect, that ideals can get a glimpse of sunlight in a political economy in which large financial transactions hold sway in terms of both financial and political power. Yet the greed leaning strongly toward the 40% return, which crucially is made so realizable only by the bank’s power over political power in the U.S. Government, is hard for human nature to resist, especially that which is well ensconced in the culture on Wall Street. Accordingly, large financial transactions may take on a deterministic hew.

In any case, once a transaction is committed to, power goes to the transaction itself, with its private and public defenders feeling they have little practical choice but to act in the transaction’s own interest. Indeed, bank managers can be fired and government officials can be turned out if they don’t “play along.” The logic of the existing financial transactions may be determinative for the ship of state as well as an economic system. It is no wonder, therefore, that the general public should fear the prospect of a distant iceberg coming unawares over the bow, and that ideals for a better world should fall off along the way like ice melting off the rails. 

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1. Kejal Vyas, Anatoly Kurmanaev, and Julie Wernau, “Goldman Sachs Under Fire For Venezuela Bond Deal,” The Wall Street Journal, May 30, 2017.

2. Ibid.

3. Ibid.

4. Ibid.

5. Ibid.