Thursday, May 31, 2012

A Shining Illustration of a Dangerous Truth: London 2012

Christopher Dekki, a 2012 St. John's Law School graduate, has written an excellent essay on corporate influence and the Olympic Games.  I've posted Chris' insightful observations below.

Essay by Chris Dekki

The imagery is powerful. The symbolism is deeply imbedded in countless minds. The victories are an unmatched source of pride for millions of people. There are few things in the world more alluring than a grand competition where athletes (although no longer vying for dominance in the nude and to the exclusion of women) come together from every region of the world under the banner of the colorful Olympic rings. Undoubtedly, the Olympic games are important events both throughout history and in the present. Their existential purpose is to remind governments about the unshakeable unity of the single human family. Even the most cynical person cannot deny being moved by the sight a young athlete beaming with pride as he or she holds up a gold medal for the entire world to see. Yes, whether played out in the warmth of the summer or the cold of a snowy winter, the Olympic games are truly a spectacle to be experienced. Now, keeping all of this excitement and pride in mind, there is one reality that logically follows from the abundant Olympic hoopla: audience. The Olympics attract a massive, truly global audience that is ready to be mesmerized by feats of strength, skill, and courage. Thus, wherever there are willing consumers ready to submit to the pleasures of entertainment, there is businesspeople lying in wait, prepared to pounce on the lucrative whims of the masses. To many people, the Olympics are much more than simply an opportunity for humanity to come together in peace and harmony for some innocent athletic amusement. To the business-minded, the Olympics are an unmatched golden opportunity upon which only a fool would elect not to capitalize.

This year’s summer Olympics in London are no exception to previous tried and true business models. A quick glance at the list of “partners” of the 2012 Olympics demonstrates the critical function of corporations in the development of the games. These corporations have served as promoters, supporters, and goods and services suppliers to the organizers in London. Without their assistance, the games would most likely not be as cost-effective, profitable, or ostentatious. Nevertheless, entrenched in this major corporate position in the London games, is a reflection of the role corporations play in the everyday lives of human beings throughout the globe. As the recent revolts of the Occupy Wall Street movement have revealed, corporations wield outsized influence over the decisions of lawmakers in parliaments and legislatures from North America to Asia. Thanks to the corrupting nature of money, leaders in government, desperate to retain their tenuous elected positions, have transformed into pawns in which wealthy corporate players can buy and sell their political loyalties. In this modern era of complex local, national, regional, and international governance, it is the wealthy who have the capacity to play the biggest part in the world’s intricate political game. Undoubtedly, because of this global reality, it is the international corporate elites who surely exert the greatest authority over the international system.

Certain areas of the law have been especially affected by the financial might of corporations. In terms of public health law, corporations have been particularly successful in swaying the development of legislation. As the latest nutritional policy debacle in the United States Congress has shown, not even school children are safe from the power of lobbyists and corporate interest groups. Due to the efforts of organizations like the American Frozen Food Institute (AFFI), federal dietary regulations now promote the consumption of pizza as part of a child’s healthy daily school meal plan. Truly, this logic-defying state of affairs can best be understood by this horrifying statement: “‘This agreement [in Congress] ensures that nutrient-rich vegetables such as potatoes, corn and peas will remain part of a balanced, healthy diet in federally funded school meals and recognizes the significant amounts of potassium, fiber and vitamins A and C provided by tomato paste, ensuring that students may continue to enjoy healthy meals such as pizza and pasta,’ said Kraig Naasz, president of the American Frozen Food Institute.” Yes, thanks to the noble efforts of men like Kraig Naasz and his colleagues at the AFFI, children can now enjoy healthy servings of pizza and pasta at school. Truly, there is no better brain food for developing minds than a greasy helping of frozen cheese pizza topped with a mere smudge of antioxidant packed tomato paste. Notwithstanding the negligent health benefits of a spoonful of canned tomato paste, there is a serious connection between government frozen food regulations in the United States and the numerous corporate sponsorships of the 2012 Summer Olympics in London. At the very pinnacle of health and fitness stands the greatest athletic competition in the history of mankind: the Olympics. In promoting the value of sport and physical vigor, the Olympics should theoretically transcend the mighty vice grip of corporations over the direction of national and international public health policy. Nevertheless, some of the very corporations that have greatly affected public health have managed to secure a position of influence over the London Olympics. Some of the guiltiest of these corporate offenders are Coca Cola, McDonalds, Dow Chemical, BP, and several others. Yet these corporations are featured partners in what is supposed to be the greenest, most environmentally friendly, most sustainable games in history. Some of these corporate entities are not only swaying public health policy for the worst, they are also guilty of highly destructive environmental disasters that have had long-lasting effects on human health and environmental sustainability.

The 2012 London Olympics are a lens through which the pervasiveness of corporate influence over national and international public health law and policy can be analyzed. The London games are a microcosm of a larger international problem that has reared its ugly head on every continent. As the world struggles with the harmful effects of oil spills, chemical catastrophes, and decadent fast food, the corporations at the helm of selfish political activism have now successfully conquered London. They have shamelessly inserted themselves into an event that is meant to showcase some of humanity’s greatest attributes. Now, the Olympics are nothing more than free advertising for a group of corporations that have done little in the recent past besides earn exorbitant profits at the expense of human welfare. So as the world sits back, bites into a Big Mac, sips on a coke, and remains fixated on the Olympics, hopefully more people will recognize the sheer hypocrisy of it all.

(photo of London Olympic Clock by Chitrapa courtesy of Wikimedia Commons)

Tuesday, May 29, 2012

Eurozone Crack-up Will be Worse than Lehman

Athens is burning and the whole world fiddles. In fact, the crisis seems to have confirmed rumors of the decline of the west.  The Euro hit a 2 year low today, reflecting real economic dislocation afoot in the Eurozone. S&P downgraded five Spanish banks last week. And, late today, the ECB turned down a request from Madrid to assist in bailing out its financial sector. The Eurozone crisis may well be the worst managed financial crisis in history. After all, Europe has the resources to grow out of this crisis.

In any event, a split has emerged: some commentators think a Grexit will lead to financial chaos; but, some think it can be managed.

The problem is that a Greek exit from the Eurozone would disrupt trade, impede investment, and cause massive cash hoarding as depositors, businesses and financial institutions all would try to move rapidly out of Greek denominated assets and into safe havens like Germany, Great Britain and the US.  Soon Spain and Italy would be suspect and they would follow Greece down the tubes into debt-deflation. The volume and speed of risk aversion and capital flows would make Lehman Brothers look like a walk in the park.

Saturday, May 19, 2012

Progress for Female CEOs?

2012 represents a highwater mark for female CEOs among the Fortune 500.  For the first time in history, 18 of the Fortune 500 corporations are headed by women.  This however, only relates to 3.6% of all CEO jobs at the world's largest firms.  This blog has consistently highlighted the lack of diversity amongst corporate leadership maintaining that effective corporate governance increases when diversity is present amongst corporate leaders.

Female CEOs are weighing in on why the paucity of female leadership continues and how a woman can target and achieve leadership goals in corporate America.  Heather Bresch, the CEO of Mylan Pharmaceuticals believes that a strong work ethic remains the most critical element. "'I had a very strong work ethic,' adds Heather Bresch, CEO of Mylan 'and was willing to do whatever it takes to get the job done. There is simply no substitute for hard work when it comes to achieving success.'"  Further, when detailing how best to deal with obstacles including gender bias, Bresch continues:  "'My experiences with gender bias are probably the norm,' says Ms. Bresch of Mylan. 'What I found was that expectations of women were simply lower, and this resulted in being overlooked for certain opportunities. Now as a leader, I strive to create an environment different than the one I faced, an environment where good ideas can come from anyone—young, old, men, women, assistant, executive—and opportunities are open to everyone.'"

Additionally, Maggie Wilderotter, CEO of Frontier Communications also observes in the Wall Street Journal, that "[u]nless you're delivering value, there is no right to move forward. I do disagree that all is fair in the workplace. . . . Men selectively listen,' Ms. Wilderotter says. She recalls making points in boardrooms, then watching the group take note of a male later saying the same thing. 'When that happened, I'd stop the conversation and say, 'Do you realize I said that 10 minutes ago?' Women have to take responsibility for the dynamic around them; you can't just say 'Woe is me.'"

While obstacles remain, including gender bias, the good old boys network, and stereotyping, amongst others women are making progress in the boardroom, albeit slowly.  With 18 female CEOs showing the way, perhaps a sea change is under way.

Thursday, May 17, 2012

How to Fix the US Debt Problem--In Two Simple Pictures

The current debt problem, while serious, and certainly requiring broad-based sacrifice in both spending and higher taxes, is hardly a new challenge. After World War II, US debt levels were much higher than today--topping out at 120 percent of GDP. But over the next thirty years bi-partisan efforts led to a debt level that was only 25 percent of the peak, as shown on the chart above (from here). How did 6 Republican and Democratic presidents successfully and dramatically reduce the national debt?

Simple, they raised sufficient revenue through high taxes to cover all government expenditures and pay-off the Word War II debt. As the chart below (from here) demonstrates governing elites imposed marginal tax rates that reached as high as 92 percent to accomplish this.

What a difference responsible and farsighted governing elites that are willing to sacrifice for the betterment of their nation can make.

Tuesday, May 15, 2012

Eurozone Meltdown (Redux) and the Failure of Austerity

Things in Europe recently deteriorated dramatically. Austerity failed miserably to resolve the Eurozone crisis. The chart at right, from Bloomberg, shows the added risk premium of Spanish government debt relative to safe haven German Bunds has reached a new high--the highest since the crisis over there started and the highest in Eurozone history. Thus, the prior peak, on November 22, 2011, reached 4.69 percent--meaning that Spain paid nearly five percent more to compensate bond investors for the additional risk of holding Spanish bonds for 10 years. Today, as shown above, the spread now stands at 4.88 percent. Given that German Bunds yield a near record low of under 1.5 percent, Spain bears more than four times the interest expense of Germany to borrow funds.

This record high risk premium arose from political chaos in Greece, which this blog first reported on in May of 2010. Essentially, the recent May 6 elections in Greece ushered in fringe groups that make an exit from the Eurozone more likely. The austerity imposed as a cost of EU bailouts drove unemployment to 21%--thus the European "rescue" of Greece failed economically as well as politically. New elections for mid-June appear necessary to form a new government and this vote will determine if Greece will abide by the outrageous austerity imposed by Berlin and others or throws in the towel on the Euro. This is why more and more mainstream voices recently shifted their focus to the rather grim reality of the economic consequences of a Greek exit from the Eurozone monetary union--or the consequences of a Grexit.

The bottom line here is "cascading defaults, banks runs and catastrophic risk," as this blog reported last fall. No firm or individual would want to hold any asset or deposit that is subject to being re-denominated in new Drachmas rather than Euros. So all Greeks would desperately pull all Euros out of the Greek banking system rather than wait for bank deposits to be shifted into Drachmas which would rapidly fall in value. Meanwhile no firm would want Drachma assets and would retain many Euro denominated obligations--threatening massive and unknown risks of insolvency. There already are reports from Greece that bank runs are brewing.

Soon Spanish, Irish, Italian and Portugese investors would fear that those countries too may exit the Euro and capital would flow to safe havens such as Germany, the UK, and the US. The chart above illustrates that very dynamic. Money is rushing toward Germany lowering the yields on German debt as investors bid up the price of Bunds. Germany would lose access to its major export markets as the soaring cost of capital throughout the Eurozone crushes buying power and investment. Unemployment, already at a record high, in the Eurozone would soar.

So, how does all this add up for the USA? Initially, expect the cost of debt for the US to plunge. But, ultimately our economy would suffer great harm and deep distress from at least four channels:

First, if Europe suffers a depression from this financial meltdown, demand for US exports will decline as will export-related jobs.

Second, who knows what derivatives exposure our megabanks have to Greek, Spanish, Italian, Irish and Italian sovereign debt. After all, MF Global went belly-up on Greek debt and JP Morgan recently showed how inept the megabanks are at managing derivatives exposure.  

Third, beyond sovereign debt, our megabanks no doubt have huge exposure to Eurozone megabanks, through derivatives and otherwise, and if the Eurozone descends into full-blown depression it is hard to fathom their grossly undercapitalized banks surviving in the absence of government support which is not likely in a sovereign debt crisis for most Eurozone nations.

Fourth, a crisis over there means massive asset fire sales over here. US equities, commodities, real estate, and anything that can be sold for quick cash would invariably be called back into Europe to meet massive liquidity needs over there.

All in all, if Greece exits the Eurozone, in my view it will have more negative consequences for ordinary Americans than the failure of Lehman Brothers in September of 2008.

Thursday, May 10, 2012

Christopher Peterson to Join the Consumer Financial Protection Bureau

Professor Christopher Peterson has agreed to join the enforcement unit of the Consumer Financial Protection Bureau (CFPB).  The CFPB was formed as part of the Dodd-Frank Act of 2010 and stands to play a significant future role in protecting American consumers. 

According to the Salt Lake Tribune:  "Chris Peterson will take a leave from the U[niversity of Utah] law school to join the enforcement unit of the new bureau, charged with regulating everything from credit cards to mortgages.  He has called for a warning label on payday loans that would mark them as "predatory," and he has been critical of the Mortgage Electronic Registration System, or MERS, a mega-company created by mortgage bankers that owns more than half of all residential mortgages and has been actively foreclosing on thousands of Americans.  'This appointment manifests the bureau’s willingness to appoint senior staff members who have staked out strong positions on the merits of highly contentious issues the bureau will be facing,' wrote Alan Kaplinsky, who writes the CFPB Monitor blog and represents companies involved in consumer lending."

Sunday, May 6, 2012

Too Big to Jail?

My spouse, Mary Kreiner Ramirez, recently posted an important law review article that every lawyer, law student and citizen should read, about a new lawlessness taking hold in our society that is yet another symptom of life in a crony capitalism state or our corporatocracy. Entitled Criminal Affirmance: Going Beyond the Deterrence Paradigm to Examine the Social Meaning of Declining Prosecution of Elite Crime, here is the abstract:

Recent financial scandals and the relative paucity of criminal prosecutions against elite actors that benefited from the crisis in response suggest a new reality in the criminal law system: some wrongful actors appear to be above the law and immune from criminal prosecution. As such, the criminal prosecutorial system affirms much of the wrongdoing giving rise to the crisis. This leaves the same elites undisturbed at the apex of the financial sector, and creates perverse incentives for any successors. Their incumbency in power results in massive deadweight losses due to the distorted incentives they now face. Further, this undermines the legitimacy of the rule of law and encourages even more lawlessness among the entire population, as the declination of prosecution advertises the profitability of crime. These considerations transcend deterrence as well as retribution as a traditional basis for criminal punishment. Affirmance is far more costly and dangerous with respect to the crimes of powerful elites that control large organizations than can be accounted for under traditional notions of deterrence. Few limits are placed on a prosecutor’s discretionary decision about whom to prosecute, and many factors against prosecution take hold, especially in resource-intensive white collar crime prosecutions. This article asserts that prosecutors should not decline prosecution in these circumstances without considering its potential affirmance of crime. Otherwise, the profitability of crime promises massive future losses. 

Prof. Ramirez persuasively argues that pursuing elite crime vindicates far more weighty interests than mere street crime entails. Elite crime simply garners more attention than a typical grand theft auto or possession of marijuana. By definition elites hold more power than street criminals, meaning their continued incumbency at the apex of our financial system promises more harm than the continued freedom of, say, a shop lifter. As such, traditional notions of deterrence fail to account for the unique compulsion in favor of punishing elite crime.

The party line here from the administration is: "We’ve found that much of the conduct that led to the financial crisis was unethical and irresponsible, but we also have discovered that some of this behavior, while morally reprehensible, may not necessarily have been criminal." Yet, Goldman Sachs settled securities fraud claims with the SEC for $550 million--the largest securities fraud settlement in the SEC's history. Other banks also paid hundreds of millions to settle securities fraud charges brought by the SEC. Angelo Mozilo paid a settlement of $67 million (the most ever by an officer of a pubic firm) to the SEC for his role in securities fraud at Countrywide. The DOJ could have pressed criminal charges of securities fraud in any of these cases, and allowed a jury to determine if criminal securities fraud had occurred.

Instead, the message of the Obama Department of Justice is that crime does pay. Further, these firms my have paid large fines, but they otherwise retain the profits of their crimes and their positions of power in our economy. For example, Angelo Mozilo paid $67. 5 million; but, his firm paid $45 million and he made over $500 million from 2003 to 2008 while at the helm of Countrywide. Yet, the DOJ declined to prosecute.

This historic run of lawlessness at the heart of our economy means that for first time ever in our history a class of individuals stands immune to criminal sanctions.