Saturday, March 31, 2012

Private Prison Profiteering

In the past few months, I've been thinking a lot about the prison industrial complex and the role of private prison corporations in locking up American citizens. Over at the Concurring Opinions blog, I posted several times in February [2012] connecting the principal of corporate profit maximization with the responsibilities of executives and Board members of private prison companies.

Nobel laureate economist Paul Krugman in the New York Times has just weighed in on the privatization of prisons (amongst others areas, including education), describing the role of lobbyists in influencing and creating legislative policies that impact our lives. In his opinion piece Lobbyists, Guns and Money, Krugman details the activities of ALEC (American Legislative Exchange Council), a purported "non-partisan" corporate backed lobbying organization and its massive emerging influence. Krugman writes:

"What is ALEC? Despite claims that it’s nonpartisan, it’s very much a movement-conservative organization, funded by the usual suspects: the Kochs, Exxon Mobil, and so on. Unlike other such groups, however, it doesn’t just influence laws, it literally writes them, supplying fully drafted bills to state legislators. In Virginia, for example, more than 50 ALEC-written bills have been introduced, many almost word for word. And these bills often become law.

Many ALEC-drafted bills pursue standard conservative goals: union-busting, undermining environmental protection, tax breaks for corporations and the wealthy. ALEC seems, however, to have a special interest in privatization — that is, on turning the provision of public services, from schools to prisons, over to for-profit corporations. And some of the most prominent beneficiaries of privatization, such as the online education company K12 Inc. and the prison operator Corrections Corporation of America, are, not surprisingly, very much involved with the organization."

Predictably, based on the last sentence above "And some of the most prominent beneficiaries of privatizations, such as . . . the prison operator Corrections Corporation of America, are, not surprisingly, very much involved with the organization," Krugman received a bullying response letter from the Corrections Corporation of America (CCA) trying to force a retraction for things that Krugman did not SAY, but may have implied.

The CCA claims that it does not, and never has lobbied for increasing prison sentences or developing new areas for detention (like criminalizing immigration). The CCA letter claims that "CCA does not and has not ever lobbied for or attempted to promote any legislation anywhere that affects sentencing and detention — under longstanding corporate policy."

Krugman is dubious about this claim, as am I. CCA employs dozens of lobbyists and spends millions of dollars per year lobbying legislatures around the United States in connection with promoting its business interests. To believe CCA's claim that it does not seek to influence sentencing policy or detention legislation requires one to believe that it disciplines its lobbyists to argue for and on behalf of policies that only impact privatization efforts. CCA was in the news last month because it sent letters to 48 states offering to buy the state's prisons in exchange for a 20 year agreement to pay the company to warehouse its prisoners and contractually agree to keep the prison filled at 90% capacity. A state agreeing to keep its prisons filled at 90% capacity seems to me to be an attempt to influence sentencing and detention.

I respond to CCA's claim by asking readers to consider the following question:

“Is it possible, that the Board of Directors of private prison companies . . . are literally strategizing ways to increase the prison population in the United States? To effectively increase profits for shareholders, are private prison companies not only cutting services to prisoners as a way to increase profits, but are they now drafting policies, lobbying politicians, and actively debating ways to ensure that a steady stream of “clients” continues into the private prisons that are proliferating across the United States (now over 25% of prisoners are housed in private prison facilities)?”

Wednesday, March 28, 2012


Forty-eight years after the passage of the Civil Rights Act of 1964, prohibiting racial and gender discrimination in American business, the picture of the boardroom in public firms remains remarkably monolithic. According to the Alliance for Board Diversity, three-quarters of all directors within the Fortune 500 are White men, even though people of color comprise 33 percent of US population and women comprise over 50 percent. The picture gets even grimmer when leadership positions are considered: White men constitute 94 percent of board chairs; 85 percent of lead directors; 79 percent of audit chairs; and, 83 percent of compensation committee chairs.

Given the increasing political power of public corporations in America and the economic stakes for our entire society in sound corporate governance this reality should be deeply disturbing to anyone who believes in a representative democracy where those holding the levers of power reflect our society generally or an egalitarian meritocracy where competitive mettle rules over entrenched power. The issue of the legitimacy of the process by which economic and political power is allocated through the public corporation is more crucial than ever, and is exponentially more important than in 2000, when I published Diversity and the Boardroom. Simply put, an "old boys club" dominates the apex of our economy, and due to Citizens United, our political system too. This is no meritocracy; this is crony capitalism. In 2004, I argued that the homosocial reproduction that dominates board selection process resulted from CEOs (and their friends) gaming the system to attain enhanced compensation through the exploitation of cultural affinity. Since 2004, progress has stalled and boards are getting less diverse.

Meanwhile, the empirical evidence in favor of board diversity as a means of achieving superior governance outcomes generally strengthened since 2004. Thus, "subprime lenders had boards that were busier, had less tenure, and were less diverse with respect to gender" than financial firms that avoided more risky subprime lending.  Another recent study found that firms with more gender and ethnic diversity achieved superior reputation outcomes and superior innovation outcomes. While the evidence does not always find statistically significant gains from diversity in the boardroom, on balance the record is clear: board diversity pays. In particular, diversity is one means of addressing weak corporate governance. Firms that broadly embrace diversity (such as in senior management) also achieve superior outcomes.

One cause for some hope lies in recent SEC rulemaking which requires that firms disclose the role of diversity in director selection. On the other hand, given the DC Circuit's ruling in Business Roundtable v. SEC, and the SEC's subsequent determination to leave board selection up to current management, homosocial reproduction may persist far into the future. Notably, recent studies show that both of these events caused a loss of shareholder value in firms most likely to be affected.

Friday, March 23, 2012

Banks Hoarding Cash (Still)

Corporate Justice Blog contributor Steve Ramirez has chronicled (for going on three years now) the refusal of U.S. banks to lend cash on hand preferring instead to hoard cash for purposes of balance sheet vitality and deliverance of record executive compensation. This hoarding has been particularly galling when viewed against the backdrop of government corporate welfare in the form of TARP funds distributed to many of these banks and the backdoor lending of trillions of dollars to these banks from the Federal Reserve bank. A new report from Bloomberg indicates that this hoarding of cash continues by Wall Street banks as credit continues to be tight and lending has not been freed up for consumers.

From Bloomberg's report Following the Corporate Cash Hoard:

Thursday, March 22, 2012

Are Executives Overboarded?

The Wall Street Journal asked recently whether corporate executives are overboarded. In a report by research firm Equilar Inc., the Wall Street Journal reports that approximately 118 Fortune 1000 CEOs sit on at least three boards of other corporations, including there own. This “overboarding” purportedly overstresses CEOs and makes it truly difficult for the leaders to concentrate on their day jobs. Board positions last year required an average commitment of 228 hours, with pay exceeding $232,000 in 2010.

From the Wall Street Journal: "With stricter regulations and greater legal scrutiny increasing the time a board seat demands, certain investors are questioning the value of CEOs serving on multiple boards. Critics say many senior executives are too "overboarded" to do their jobs and monitor management elsewhere. 'Boards are facing unprecedented challenges, and we need CEOs to focus on their day job,' says Anne Simpson, head of corporate governance for the California Public Employees' Retirement System, the nation's biggest public pension fund. 'We do not like to see a CEO getting overloaded.'

In a related story, critics of Disney's recent move to elevate CEO Robert Iger to Chairman of the Board indicates that institutional shareholders are concerned with not only overstressing CEOs, but with concentrating too much power in one leader. Some Disney shareholder are aghast to see the Disney board return Iger to the same position that was held by Michael Eisner (CEO and Chair of the Board) when he entered into the infamous Michael Ovitz employment contract that led to so much pain for Disney and its shareholders.

After Disney announced its strategic decision to give Iger the additional role as chair, while also paying him over $31 million dollars for 2011, some of its shareholders cried foul, including Institutional Shareholder Services Inc. Disney nonetheless believes this move is in the company’s best interest. However, Institutional Shareholders Services issued a report disputing that combining so much power in Iger was in the shareholders’ best interest because, in 2004, the company decided to end this practice of dual responsibilities after the shareholders protested this structure, causing Michael Eisner to give up his chairmanship. ISS alleges this latest reversal compromises the independent board leadership.

Wednesday, March 21, 2012

2012 SE/SW People of Color Legal Scholarship Conference to be Hosted by Samford University Cumberland School of Law

Samford University Cumberland School of Law in Birmingham, Alabama, will be hosting the 2012 Southeast/Southwest People of Color Legal Scholarship Conference from March 29th through April 1st. The theme or title for this year's conference is "Transformative Advocacy, Scholarship, and Praxis: Taking Our Pulse." You may access information about the conference at the following link:

Monday, March 19, 2012

Attorney General Defends Efforts to Combat Financial Fraud

In a recent speech at Columbia University, Attorney General Eric Holder Jr. touted the work of the Justice Department in its pursuit Wall Street criminals. While the Justice Department has been under intense criticism for its failure to pursue wrongdoers that perpetuated the 2008 financial crisis, Holder’s comments come on the heels of President Obama’s announcement during his State of the Union Address in January that the government is committed to bringing justice to Wall Street through a newly created task force. Holder opined at Columbia that the Justice Department struggles to arrest Wall Street wrongdoers because on its face, executives’ conduct has been unethical and reckless, just not criminal. According to the New York Times DealBook Holder said: “We found that much of the conduct that led to the financial crisis was unethical and irresponsible,” said Mr. Holder, who earned his undergraduate and law degrees at Columbia. “But we have also discovered that some of this behavior — while morally reprehensible — may not necessarily have been criminal.” That said, Holder assured that he “will not hesitate to bring prosecutions” when criminal wrongdoing is evident.

While Justice has had some recent setbacks, the Department’s task force has issued civil subpoenas to eleven financial companies that it claimed played a role in the housing crisis. Holder assured that, with several investigations ongoing, to expect more subpoenas to follow.

Wednesday, March 14, 2012

More Goldman Sachs Drama

Goldman Sachs continues to be dogged by accusations and charges that besmirch the venerable investment bank's once sparkling reputation. The latest is a resignation letter published by the New York Times wherein a mid-level company Vice-President (Greg Smith) claims that Goldman has lost its way, that the culture at has become "toxic and destructive," and now the "morally bankrupt" firm cares much more about firm and individual profit than it does about its clients. In response to this resignation swipe, Goldman Sachs executive leadership including CEO Blankfein and President Cohn have scrambled over the past few days to respond. The most explosive of Smith's claims follow (from the NY Times):

"When the history books are written about Goldman Sachs, they may reflect that the current chief executive officer, Lloyd C. Blankfein, and the president, Gary D. Cohn, lost hold of the firm’s culture on their watch. I truly believe that this decline in the firm’s moral fiber represents the single most serious threat to its long-run survival. . . .

. . . I attend derivatives sales meetings where not one single minute is spent asking questions about how we can help clients. It’s purely about how we can make the most possible money off of them. If you were an alien from Mars and sat in on one of these meetings, you would believe that a client’s success or progress was not part of the thought process at all.

It makes me ill how callously people talk about ripping their clients off. Over the last 12 months I have seen five different managing directors refer to their own clients as “muppets,” sometimes over internal e-mail. Even after the S.E.C., Fabulous Fab, Abacus, God's work, Carl Levin, Vampire Squids? No humility? I mean, come on. Integrity? It is eroding. I don’t know of any illegal behavior, but will people push the envelope and pitch lucrative and complicated products to clients even if they are not the simplest investments or the ones most directly aligned with the client’s goals? Absolutely. Every day, in fact."

Pretty serious allegations.

In response, Blankfein, Cohn and others have responded (from the Goldman Sachs website):

"By now, many of you have read the submission in today’s New York Times by a former employee of the firm. Needless to say, we were disappointed to read the assertions made by this individual that do not reflect our values, our culture and how the vast majority of people at Goldman Sachs think about the firm and the work it does on behalf of our clients.

In a company of our size, it is not shocking that some people could feel disgruntled. But that does not and should not represent our firm of more than 30,000 people. Everyone is entitled to his or her opinion. But, it is unfortunate that an individual opinion about Goldman Sachs is amplified in a newspaper and speaks louder than the regular, detailed and intensive feedback you have provided the firm and independent, public surveys of workplace environments.

While we expect you find the words you read today foreign from your own day-to-day experiences, we wanted to remind you what we, as a firm – individually and collectively – think about Goldman Sachs and our client-driven culture. . . .

And, what do our people think about how we interact with our clients? Across the firm at all levels, 89 percent of you said that the firm provides exceptional service to them. For the group of nearly 12,000 vice presidents, of which the author of today’s commentary was, that number was similarly high."

Saturday, March 10, 2012

An Even Weaker Volcker Rule

A recent New York Times editorial contends that the Dodd-Frank’s Volcker rule, which limits banks from engaging in speculative and risky proprietary trading, is in jeopardy of being further eviscerated. In late 2011, after consistent lobbying from the banking industry, regulators have now proposed rules that open the door for the industry to further remove the remaining teeth from the rule.

Per the New York Times op-ed: "The banks hate the rule because less speculation means less profit and lower bonuses for traders and bank executives. And ever since it was signed into law in mid-2010, they have pressed Congress and regulators to weaken it. Sure enough, in late 2011, regulators issued proposed rules that are ambiguously worded and lack the teeth to rein in the banks. Paul Volcker — the former chairman of the Federal Reserve for whom the rule was named — and other reformers have rightly urged significant changes before the rule becomes final in mid-July. Regulators need to listen."

The opinion piece argues for greater specificity in the language of the rule. For example, the proposed rules do not adequately specify between "non-proprietary trading" and "proprietary trading." The Times specifies that because banks should "continue to serve customers, the law instructs regulators to allow certain forms of nonproprietary trading, including 'market making,' in which banks can buy and sell securities, but only for the purpose of facilitating transactions for clients. The proposed regulations fail to adequately distinguish between the two types of trades. That could allow banks to engage in proprietary trades under the guise of market making."

Further, the Times advocates for additional bans of the type of trading that led to the mortgage meltdown of 2008. "To limit speculation, the proposed regulations advise banks to avoid short-term trading. But they fail to specifically ban broader trading strategies, like the high-frequency trading that was implicated in the infamous flash crash of 2010 and that has become a profitable source of banks’ proprietary trading."

Finally, the op-ed argues for firmly defined penalties. "The proposed regulations lack clear, stiff penalties, beyond threats that banks found to be engaged in proprietary trading will be forced to stop. They also need to clearly define and punish conflicts of interest that arise when banks cross the line into proprietary trading while at the same time purporting to serve as a middleman for clients."

With the banking industry lobbying aggressively for the ability to continue to engage in proprietary trading, the Volcker Rule continues to stand at a precipice. Already watered down prior to passage in Dodd-Frank, it remains to be seen whether the Volcker Rule will have any gravity at all once the rules are approved.

Sunday, March 4, 2012

Million-Dollar Foreclosures Rise as the Wealthy Strategically Default

Many wealthy homeowners are making a business decision: foreclosure. This strategy is commonly referred to as “strategic default.” In 2011, RealtyTrac revealed that over 36,000 homes with values exceeding $1 million were foreclosed on, and although these foreclosures constitute only 2% of the total U.S. foreclosures, this number is much higher than in years past. Since 2007, foreclosures for homes valued at $1 million has jumped 115%; for homes worth $2 million, foreclosures have skyrocketed to 273%.

Typically, these types of homeowners have been able to delay foreclosures because they either have the financial wherewithal to delay or lenders have cooperated with them. However, this latest strategic default trend showcases that wealthy homeowners that can still pay their mortgage are simply making a cost-benefit business decision and are walking away from their obligation. With a foreclosure process that takes a year or more—allowing essentially free rent—and with their debt exceeding their home’s value, wealthy homeowners simply quit paying.

According to CNNMoney: "‘In the lower-priced houses you’ll see more people defaulting because they can’t afford the payments and it’s a choice between feeding their family and paying the mortgage on a home that’s under water,’ said Stuart Vener, a national real estate and mortgage expert with the Florida-based Wilshire Holding Group. ‘In million-dollar homes, you're looking at people who can afford it, but they have to make a business decision: Does it make sense to make payments on a mortgage when the home is worth less than they owe?’ he said. In many cases, it often makes more financial sense to walk away."

While 98% of distressed homeowners are foreclosed upon more rapidly, and are often left simply trying to figure out ways to feed their family and find shelter, the 2% are “strategically defaulting” and often have more than 340 days to live rent-free before they are evicted from their homes.