Lawless Capitalism

Professor Steven Ramirez

As teased earlier this week, the NYU Press has just announced the release of blog contributor Professor Steven Ramirez's new book "Lawless Capitalism."  This book offers an insightful and surgical examination of the subprime crisis of 2008, and more than simply identifying causes, offers a new economic rule of law suggesting a fairer and more economically just way forward.

From the Back Cover:  "Professor Steven Ramirez's Lawless Capitalism is a tour de force. The pages are virtually crackling with urgency and deeply considered alternatives to the wayward capitalism currently practiced in the United States. Ramirez, in his critical contribution to the ongoing debate in connection with free markets and governmental regulation, envisions a new and different kind of capitalism. Ramirez's capitalism  respects individual potential and human capital, considers equality and fairness, and promotes the abilities of all people, rather than focusing on deeper entrenchment of the elite. Lawless Capitalism meticulously weaves the best thinking of dozens of economists, law professors, sociologists and philosophers into a new conceptualization of an economic rule of law, one that Ramirez fully develops, that offers a better economic way for our nation and the world. Lawless Capitalism is an important book, representing a powerful new voice that literally demands to be heard."
-andré douglas pond cummings, Indiana Tech Law School

"Capitalism and the profit motive can stimulate human productivity and innovation.  But they can also lead to corruption, shady politics, and self-dealing. This brilliant book shows how intelligently designed laws and lawsuits can facilitate the former and discourage the latter. . . . Steven Ramirez is the new Andrew Hacker.  He wields statistics, numbers, and concepts like a scalpel."
-Richard Delgado, co-author of Critical Race Theory

"Ramirez catalogues the many ills and failures in the American economic system, casting a broad net that implicates governing institutions, political and corporate elites, and their policy agendas. He provides a valuable contribution to discussions on reforming capitalism and restoring the foundations of middle class prosperity through a renewed commitment to transparency, economic democracy, and the rule of law."
-Timothy A. Canova, Nova Southeastern University

From the NYU Press abstract: "The subprime mortgage crisis has been blamed on many: the Bush Administration, Bernie Madoff, the financial industry, overzealous housing developers.  Yet little scrutiny has been placed on the American legal system as a whole, even though parts of that system, such as the laws that regulate high-risk lending, have been dissected to bits and pieces.  In this innovative and exhaustive study, Steven A. Ramirez posits that the subprime mortgage crisis, as well as the global macroeconomic catastrophe it spawned, is traceable to a gross failure of law.


The rule of law must appropriately channel and constrain the exercise of economic and political power.  Used effectively, it ensures that economic opportunity isn't limited to a small group of elites that enjoy growth at the expense of many, particularly those in vulnerable economic situations.  In Lawless Capitalism, Ramirez calls for the rule of law to displace crony capitalism.  Only through the rule of law, he argues, can capitalism be reconstructed."

Available here:  Lawless Capitalism: The Subprime Crisis and the Case for an Economic Rule of Law

Election 2012: Death of the Southern Strategy?

Originally posted at NYU Press, From the Square Blog, on November 21, 2012.

 

For many decades the GOP played the politics of racial divisiveness to further the cause of tax cuts, deregulation and a more limited federal government. The election of 2012 promises to end this ugly chapter in American politics. The ultimate outcome will change our political landscape in far-reaching ways.

Surprisingly, Republican leaders openly admit that their party used race to appeal to white voters (particularly in the old Confederacy) disaffected with the perceived embrace of racial equality within the Democratic Party. Republican strategist Kevin Phillips openly admitted to seeking out the votes of “negrophobe whites” in the New York Times in 1970. The Nation very recently posted the actual audio recording of Reagan Administration Official Lee Atwater articulating how the GOP implemented the Southern Strategy in sordid (and highly offensive) detail in 1981. Atwater unabashedly ties the politics of race to economic issues such as tax cuts. Two Republican National Committee Chairs actually apologized for the Southern Strategy.

In my book Lawless Capitalism, I argue that the politics of racial division led directly to the subprime debacle through massive financial deregulation beginning in the Reagan Administration. Deregulation of mortgage lending, the basic structure of globalization, and financial consolidation all find their roots in the Reagan Administration. Indeed, the fundamental explosion in American debt started in 1980.

To be fair, the Democrats contributed much to the crisis too. The crisis resulted from longstanding and bipartisan policies. Nevertheless, the Southern Strategy dominated the political scene in the decades preceding the subprime debacle.

The election of 2012 may spell the end of the Southern Strategy, at least as a means of GOP success. African American and Latino voters turned out in record numbers. Asian American voters supported President Obama over Mitt Romney by 73-26, a margin that exceeds Obama’s advantage among Latino voters.

The viability of the GOP’s Southern Strategy will continue to fade. Asian Americans form the fastest growing minority group in the nation. A recent study by the Pew Hispanic Research Center projects that the voting power of Hispanics will double by 2030—to nearly half of the electorate. If the Democrats continue to run candidates of color to energize this base, then these growing voting groups will constitute a formidable foundation for a durable Democratic majority. Meanwhile, the GOP base still today favors discriminatory practices, such as anti-immigration laws and legislation designed to suppress the vote of minority communities.

On issues relating to immigration, education, voting rights, the war on drugs, and many others, a fundamental change in political calculus is afoot. I contend the change may be even more monumental than such core issues. Ultimately, without the ability of governing elites to use the politics of racial division to further their interests, the very high level of economic inequality currently burdening our nation may be unsustainable.

Steven A. Ramirez is Professor of Law at Loyola University of Chicago, where he also directs the Business and Corporate Governance Law Center. His book, Lawless Capitalism: The Subprime Crisis and the Case for an Economic Rule of Law, will publish in December 2012.

Corporate Sponsorships and the Power of the Boycott

Extraordinarily interesting news out of England and the Premier League last month:  Several members of the Newcastle United Football Club may refuse to wear the corporate logo of Wonga, a short-term, pay day loan company, on their game jerseys because Wonga's company practices are an affront to their religious beliefs.  Newcastle United FC recently announced a corporate sponsorship agreement with Wonga.

Newcastle footballers Demba Ba, Papiss Cisse, Cheick Tiote and Hatem Ben Arfa are all practicing Muslims. "Under Sharia law, Muslims must not benefit from either lending money or receiving money from another person - meaning that interest is prohibited. Interest is not paid on Islamic bank accounts or added to mortgages." Because Wonga is seen by many in the UK, much like pay day loan companies in the United States, as established to prey on the poor and the unbanked, Ba, Cisse, Tiote and Ben Arfa may refuse to promote its practices by refusing to display the Wonga logo on their jerseys.

From the story in the Daily Mail:  "Shaykh Ibrahim Mogra, assistant secretary general of the Muslim Council of Britain, told The Independent: 'There are two aspects to this. We have the rulings of the religious law and we have the individual’s choice and decision on how they want to follow or not follow that rule. 'The idea is to protect the vulnerable and the needy from exploitation by the rich and powerful.' 'When they [Wonga] are lending and are charging large amounts of interest, it means the poor will have short-term benefit from the loan but long-term difficulty in paying it back because the rate of interest is not something they can keep up with. The Islamic system is based on a non-interest-based system of transaction.'"

Demba Ba, Newcastle United FC

In fact, on some short-term loans, Wonga charges an interest rate that would annually exceed 4,000%. "Should a Newcastle fan accept a loan to buy a £50 club shirt, they would have to repay £71.92 after a month with a rate equivalent to 4,212 per cent per year."  Local politicians in Newcastle were aghast to learn that Newcastle United had partnered with a corporate sponsor such as Wonga: "Nick Forbes, the leader of Newcastle City Council, said: 'I’m appalled and sickened that they would sign a deal with a legal loan shark. It’s a sad indictment of the profit-at-any-price culture at Newcastle United. We are fighting hard to tackle legal and illegal loan sharking and having a company like this right across the city on every football shirt that’s sold undermines all our work.'"

Boycotting a corporate sponsor would be deemed a hugely controversial move in the United States. In fact, the activist athlete has been discussed on the Sports Law Blog many times over the years, and has seemed to be in decline since the advent of the corporate endorsement and the potential to profit in the dozens of millions of dollars. That said, there appears to have been a rise in athlete activism in recent months . . . .

In addition, pay day loan companies have been harshly criticized in recent months as predatory lenders and are typically found only in poor or run down communities.  The Consumer Financial Protection Bureau, the brainchild of new Massachusetts Senator Elizabeth Warren, has vowed to rein in and regulate pay day loan shops in the United States.  Clearly, pay day lenders are controversial "across the pond" as well.


cross-posted on the Sports Law Blog
(photo of Demba Ba courtesy of Creative Commons and Egghead 06)  

Why President Obama Must Deal with the Megabanks

The megabanks threw President Obama and the Democrats under the bus during the election of 2012 and doubled down on the GOP. With virtually zero hedge, they were all in with Mitt Romney. All of Romney's top 6 supporters were megabanks, as were 9 of his top 12. Three of his top 12 supporters were foreign megabanks. Further, the financial sector spent over $52 million supporting Mitt Romney. The securities industry spent $20 million supporting Romney. So, big finance was Mitt Romney's biggest supporter.

President Obama, on the other hand, owes the megabanks nothing. Not a single megabank was among his top 15 supporters. Finance spent three to one in favor of Romney. The megabanks also strived mightily to deny the Democrats the senate. They spent millions supporting GOP candidates against Elizabeth Warren and Sherrod Brown. So, one major consequence of this election is that President Obama and the Democrats owe the megabanks nothing.

The megabanks still threaten our economy and still play with excessively risky derivatives as proven by the recent multi-billion dollar derivatives loss suffered at JP Morgan Chase and the failure of MF Global arising from excessively risky bets on Eurozone debt. The essential problem is that because they are perceived to be too big to fail creditors lend them money on cheaper terms and management is thereby enticed to take on more risk. Further, since they gorge on cheap debt they naturally become ever larger and too complex to manage. Only fragmenting the megabanks will cut off their supply of cheap capital. 

As NYU economist Nouriel Roubini puts it: "The only solution to to break up too big to fail banks.There is no other alternative. We have to go back to Glass-Steagall. I would have thought after the worst global financial crisis in a generation, the decision would have been made. Maybe we need another big financial crisis." 

MIT economist Simon Johnson states: "There are large implicit government subsidies available if your financial institution is perceived as too big to fail. These subsidies -- in the form of implicit downside protection or guarantees for creditors -- drive up size and exacerbate complexity." 

These are two of the finest economists of our time and each boasts huge credibility. Johnson is the former Chief Economist of the IMF and author of the definitive study of the hazards of an excessively large financial sector, Thirteen Bankers. Roubini famously predicted the financial meltdown in great detail as early as 2005.

Nor are these two outstanding economists alone in recognizing the threat posed by the megabanks. University of Maryland economist Peter Morici: "The real solution in the banks is not all of this excessive regulation, but to bust up the big banks. The fact is not only are they too big to fail, but because they're too big to fail, they're too big to effectively regulate. That's why there's no lending and they continue trading." Even former Fed Chair Alan Greenspan, who actually presided over much of the growth of the megabanks, now recognizes that they must be allowed to fail. Mainstream economics has achieved rare consensus: too big to fail banks present a clear and present danger to the economy and must be eliminated from the system.

I cannot count the number of posts on this blog protesting the socialization of financial risk in our economy under the guise of too big to fail. I have also written numerous law review articles criticizing the continuation of too big to fail. But, without the right political context all the academic analysis is meaningless.

I believe that President Obama faces an historic opportunity to address the scourge of the megabanks. This is a compelling economic issue. He is a lame duck who owes the big banks nothing. Huge popular support would back any move to end too big to fail. Here are the most promising and straightforward mechanisms available to tame the megabanks: 

1)  Amend section 121 of Dodd-Frank to allow the government to more easily break up the megabanks. Specifically, change the requirement of 2/3 approval of the Fed Board of Governors to a simple majority. Further, allow the Fed to order divestiture of operating divisions of megabanks without having to show that other alternatives would be inadequate. Finally, delete the term "grave" and allow the Fed to break-up any megabank that threatens the financial stability of the US. (They all already pose a grave threat).

2) Amend section 203 of Dodd-Frank to allow the FDIC to take a megabank into orderly liquidation (i.e., receivership) solely based upon a determination by the Treasury Secretary that the firm faces a high risk of default. This would eliminate the need to get a 2/3 vote by the Fed and the FDIC.  It would also help to short-circuit any judicial review.

3) Appoint a truly tough minded financial expert as Secretary of Treasury. The best appointment would be Sheila Bair. As a Republican, she would bring immediate bipartisan credibility on a range of important economic issues. As former FDIC Chair, she understands banking and was a consistent voice for tough reforms. She has a new book out that pulls no punches. Her appointment as the first woman to head Treasury would also help the Democrats to continue to earn the support of women politically.

Of course, perhaps the reinstatement of the Glass-Steagall Act would be the most certain means of taming the megabanks.

In any event, President Obama holds a huge opportunity to impose rational policy and achieve a superior political outcome for Democrats, all at once. He must get tough on the megabanks. My next post will further this basic point in the specific context of corporate governance.

“The real solution in the banks is not all of this excessive regulation, but to bust up the big banks. The fact is not only are they too big to fail, but because they're too big to fail, they're too big to effectively regulate. That's why there's no lending and they continue trading. You know with their profits down, bonuses will be up again for CEOs.”

Read more: Morici: Big Banks Are ‘Too Big to Effectively Regulate’
Important: Can you afford to Retire?

“The real solution in the banks is not all of this excessive regulation, but to bust up the big banks. The fact is not only are they too big to fail, but because they're too big to fail, they're too big to effectively regulate. That's why there's no lending and they continue trading. You know with their profits down, bonuses will be up again for CEOs.”

Read more: Morici: Big Banks Are ‘Too Big to Effectively Regulate’
Important: Can you afford to Retire?

http://www.businessinsider.com/roubini-says-break-up-the-banks-2012-10#ixzz2CeEk8bCk

The only solution to to break up too big to fail banks. There is no other alternative. We have to go back to Glass-Steagall. I would have thought after the worst global financial crisis in a generation, the decision would have been made. Maybe we need another big financial crisis.

Read more: http://www.businessinsider.com/roubini-says-break-up-the-banks-2012-10#ixzz2CeEk8bCk

The only solution to to break up too big to fail banks. There is no other alternative. We have to go back to Glass-Steagall. I would have thought after the worst global financial crisis in a generation, the decision would have been made. Maybe we need another big financial crisis.

Read more: http://www.businessinsider.com/roubini-says-break-up-the-banks-2012-10#ixzz2CeEk8bCk

Election Outcomes

Several frightening outcomes have surfaced following last week's presidential election.  Of course, many very positive takeaways have emerged as well, with Professor Steve Ramirez writing about two of them in this Corporate Justice space.  Yet, the frightening outcomes appear to show that our nation remains deeply divided along racial and class lines.

Following the election, statisticians and social media analysts got busy and turned up the following two charts, which should give Americans everywhere pause. First, the chart below shows that we are most definitely not a post-racial place, as evidenced by the number and intensity of racist tweets that were sent on election night following President Obama's re-election.

The next chart shows how the state's with the most educated populations voted, versus how the state's with the least educated populations voted for president.  How "educated" a state is was determined by percentages of citizens 25 years of age and older with a college degree or more.

These two charts seem to evidence that our nation remains deeply divided, both on issues of race and of class.  Racist tweets in the deep south were prevalent, most obviously in Mississippi and Alabama following President Obama's re-election success.  Still, racist tweets were evident throughout the nation.  Further, if "education" level is to be measured by college degree, then those states with the most college graduates voted overwhelmingly for President Obama, where those states with the fewest college graduates were nearly as overwhelmingly in support of Mitt Romney.  We must continue to try to bridge divides in the United States by honestly confronting issues of festering racism and poverty.

Why President Obama Should Get Behind Weed

A recent poll shows that a clear majority of American voters support legal and regulated marijuana by a margin of 56 to 36. Other polls show similar results, but even weaker opposition. Further, some of President Obama's key constituencies favor legalized marijuana by even greater majorities: 69% of liberals favor legalization; 62% of younger voters favor legalization; and, 57% of moderates, independents and Democrats favor legalization. Only southerners, the elderly, and conservatives strongly oppose legalization. In Colorado both women and Latino voters supported legalization last Tuesday. Medical marijuana consistently enjoys even stronger support of up to 80% of voters.

Moreover, it appears that including ballot initiatives relating to marijuana enhances voter turnout, particularly among young voters. "In the three states with marijuana legalization initiatives on the ballot, Colorado, Oregon and Washington State, there was a significant surge in the voters age 18-29. In 2008 young people made up just 14 percent of the vote in Colorado but this year it was 20 percent. Even more incredibly, in Washington State the youth vote went from just 10 percent of the electorate last election to 22 percent this time." In Massachusetts, voters "turned out in droves" to approve a medical marijuana ballot initiative.

President Obama should immediately reverse his hardline stance on the War on Drugs and instead return the issue of marijuana to the states to determine democratically. According to Rolling Stone: "the Obama administration has quietly unleashed a multi­agency crackdown on medical cannabis that goes far beyond anything undertaken by George W. Bush." In 2010, President Obama renominated a Bush holdover to head the DEA. Ever since the administration has aggressively use a variety of federal sanctions to shutter medical marijuana dispensaries. Recently, the Feds sentenced a medicinal pot provider to 80 years in prison.


The War on Drugs is a dismal failure that disproportionately penalizes communities of color. Even though whites use marijuana at rates that exceed usage among Latinos and African Americans, people of color are arrested at rates that can only be termed outrageous. In Colorado, Latinos were arrested at 1.5 time the rate as whites and African Americans at 3 times the rate as whites. In California, minorities are arrested at up to 12 times the rate of whites. In New York City, the War on Drugs has become a War on Weed--waged primarily on minorities--as shown in the chart at right.

This war is an economic catastrophe. If weed were legal and taxed like alcohol or tobacco it would lead to total government savings of about $7 billion and another $7 billion in revenues.  If marijuana were the same size as the alcohol industry it would amount to $150 billion per annum--and that means jobs.

In terms of costs, even the government's own studies suggest that costs are low or zero, and certainly less than those associated with tobacco and alcohol use. Moreover, there is little evidence that making pot illegal reduces usage. In fact, in the Netherlands, where marijuana is legal, usage is a fraction of that in the US. Therefore, a policy of allowing states to determine whether marijuana should be legal, illegal, or somewhere in between could be costless.

President Obama holds the power to issue a New Emancipation Proclamation with respect to marijuana. As president he can direct the Attorney General to remove marijuana from the list of Schedule I narcotics (which includes drugs like heroin and LSD) under 21 U.S.C. §811. This would immediately pave the way for medicinal marijuana which is now legal in 20 states and the District of Columbia. He should also direct a multi-agency review to assure the federal government's policies accommodate state medical marijuana laws. Finally, he should mandate an in-depth study on whether the federal government needs to regulate marijuana at all, as opposed to leaving it up to the states.

There are around 50,000 Americans in prison for pot-related offenses. The American taxpayer pays over $30,000 per year per inmate to incarcerate these citizens. Countless others have been disenfranchised for marijuana offenses. It makes no sense to continue this prohibition economically, politically or morally.

President Obama and the Democrats generally need to end the War on Drugs, starting with medical marijuana.

Election 2012: Obama 332 and Romney 206

Tuesday's election heralds a fundamental shift in our democracy. The map above shows the shrinking electoral base of the GOP. Even an incumbent facing 8 percent unemployment and a population still riddled with racism won handily.

Four years ago, I reported from Grant Park that: "The Grant Park crowd was one of the most diverse crowds I have ever seen, from all demographic perspectives. On the way to the party we passed a Young Republican event. It was perfectly white and 85% male. Barack took 95% of the Black vote; 66% of the Hispanic vote; 56% percent of the female vote; 69% of new voters; and 66% of voters 18-29.  That adds up to a historic coalition that could prove durable for many election cycles yet to come.  Indeed, the one age group McCain won was voters over 65."

At Tuesday's celebration at McCormick Place, a more powerful demonstration of that reality displayed itself. The energy and determination of Obama's supporters saved the Democrats and not even a hurricane of big money could stop them. In fact, the big money back-fired as people voted against the candidates most supported by big money, which I will be writing about soon. I met middle class people who scraped to the bottom of their monthly budget to give money to President Obama's campaign.

But the big story of the night was the diversity of the President's supporters. It was a beautiful crowd. The only Americans I did not meet there were wealthy, old, white males. They apparently had monopolized the Romney gathering in Boston.

In sum, I saw intense energy and diversity on display Tuesday at McCormick Place. This election provides a virtual road map to future Democratic victory.

Here are the hard facts of the power of diversity for the Democrats: Obama won woman voters by a 55-44 margin; African Americans by 93-7; Latinos by 71-27; and Asian Americans by 74-25. He also carried the youngest voters by 23 percentage points. Notably, Obama also won the votes of the highly educated by 55-42. This coalition is not going away and the GOP should come to grips with this reality, although they utterly failed to see its implications after 2008.

Indeed, looking at the map above, Texas seems poised to become the next  battleground state that used to vote solidly Republican. In Texas, Latinos now comprise 25% of voters. Texas also includes major urban areas, a demographic that voted overwhelmingly for Obama.

In coming days, I will write about many dimensions of all of this, including: the need for the GOP to abandon its collapsing Southern Strategy (particularly its voter suppression efforts); its manifest hostility to Latino voters; its excessive reliance on big oil and big finance; and the opportunities for a new progressive coalition that puts broad-based economic growth front and center.

Today, the emphasis is the power of diversity at the polls. As former GOP Chair Michael Steele put it: "Every month 50,000 Hispanics turn 18 years old, what is the Republican Party going to do about that?"

Obama, Romney and Mancur Olson

I posit that today in America the debates, the stump speeches and the TV ads all have almost nothing to do with how a given candidate actually governs. The stakes are simply so high that one should expect that what is really important is not the hyper-marketing that each candidate projects (now very often differing from audience to audience) but rather commitments made to those expending large sums to propel "their" candidate into office. The voting public has no ability to force elected officials to respect campaign rhetoric and promises. In today's money driven political system the best way to determine what a candidate intends to do if elected is to focus on the money behind the candidate. Large contributors hold enforcement mechanisms that the public does not.

First, almost always politicians must return to the money trough again and again. On the other hand, the public has a notoriously short memory and 85-90 percent of the vote is locked-in to either the GOP or the Dems. So, most voters will stick with their guy regardless of whether the candidate is an etch-a-sketch.

Second, over time these candidates become more dependent upon big money interests than mere campaign contributions may reveal. Their entire social and professional network will ultimately consist of those who will help them most--and that inevitably means well-connected wealthy people like CEOs. After all, its fun to hob-knob with wealthy folks, and who wants to alienate their rich friends?

Third, it hard to overstate the impact of the Citizens United decision. For example, Chevron just gave a pro-GOP Super PAC $2.5 million. Corporate titans can now make or break politicians, their friends, their family and their followers. Few would risk the wrath of the new potentates.  They now have the power to crush opponents right up to election day.

All of this gives our so-called leaders powerful incentives to tell the voting public whatever they want to hear while doing what is needed to assure the continue flow of corporate patronage for themselves and their pals.

Rather than thinking of politicians as autonomous agents with the power to unilaterally change the fundamentals of our society, we should understand that the higher they reach on the political ladder the more likely it is that they succumb to clear incentives to guard the interests of the most privileged in our society, especially under conditions of high inequality. This is the basic teaching of Mancur Olson. As more wealth is concentrated in fewer hands the costs of organizing politically plunge because fewer numbers means lower organizational costs and less temptation toward free riding. Notably, Olson suggested that in a democracy the voters can resist the tendency of special interests to subvert law and regulation for profit (and incidentally destroy capitalism by rigging the system). Voters need only to recognize the negative economic influence of concentrated interests, and vote against the candidate most beholden to such interests.

We live in the age of a new corporatocracy dominated by CEOs. And, as the chart below makes clear, today CEOs of large public firms make more money and control more wealth than any class of royalty from our feudalist past:

Basically since the mid-1980s, CEO compensation has increased by a factor of 10 in real terms. In 2011, executive compensation set new records. So, the real question facing voters today s whether they vote for candidates supported more by big money or candidates supported less by big money. Or, stated differently, the question is which candidate is beholden to which CEOs.

I made this very argument on the NYU Press blog where I tied my forthcoming book, Lawless Capitalism, in a concrete way into the election. My argument there focused on the financial sector which expended $52,000,000 to elect Mitt Romney (compared to $19 million for Obama). So, big finance is behind Romney loud and clear. All voters in favor of more lax financial regulation and letting the megabanks run amok again should definitely vote for Romney.

The next most important difference in funding sources is Big Oil. Here, Romney holds a 5 to 1 fundraising advantage. So what would Big Oil CEOs want? High gasoline prices lead to high CEO compensation. Naturally then CEOs of big oil companies want price spikes in gasoline.

Obama's number one industry is education where he holds a 6 to 1 fundraising advantage over Romney. Both Harvard and the University of California rank on Obama's top 5 sources of support. (Romney's top 5 supporters are all megabanks). Does this mean more money for basic research, more financial aid for students, loan forgiveness programs or something else? Hard to say. It could just be a bunch of professors expressing their own political preferences.

But one thing is certain. Romney is funded more by large contributors and Obama is funded more by small individual contributors, as is clear from this Opensecrets.org webpage.

Further, it is certain that President Obama will not need to raise any more money after November 6.

It is therefore fair to say that Governor Romney is the candidate of big corporate money, especially the megabanks and Big Oil. He is the candidate of the CEOs.

Private Prison Industry Shenanigans in Florida

Protesting private prison profiteering

The Corporate Justice Blog has taken up the issue of the privatization of the U.S. prison industry repeatedly in the past several months.  Now news from Florida, as lawmakers and private prison company executives together have attempted to circumvent the law in order to see a massive privatization effort expand to many more of the state's prisons.  In a wide-ranging and lengthy exposé, David Reutter on Prison Legal News has painstakingly detailed the incredible conflict between private prison companies CCA and the GEO Group together with Florida lawmakers, and the public prison union as they grapple furiously in state court seeking control over the state's prisoners.

Sadly, no party to these proceedings seems to be advocating on behalf of ending the failed system of mass incarceration in the nation or in Florida in particular, as all involved parties seek their own economic interests above all else.

Essentially, Florida lawmakers, bankrolled by the private prison lobby, attempted to massively privatize the prison system in Florida by quietly attaching a prison proviso to an appropriations bill, efforts which were recently found to be against the law by a state trial court judge.  Why attempt to hugely increase the percentage of private prisons in Florida in the dark of the night?

From the article, several very unsettling themes emerge:

First, the privatization attempt was manufactured without careful Florida legislature consideration:

"State Senator Mike Fasano, who chairs a Senate Budget Subcommittee in charge of prison spending, applauded the court’s decision striking down the wholesale prison privatization plan. 'This is a perfect example of why we should not be making major policy changes in provision language that did not go through substantive committees, debated, and taken testimony pro and con,' he stated.  'It didn’t go through the appropriate committee process. It wasn’t heard in criminal justice committee in the Senate. It wasn’t heard in my committee that oversees the Department of Corrections budget,' Fasano noted. 'You would think that if we were doing such a major policy change, it would have gone through those two committees. It wasn’t a stand-alone bill and that’s what, if I’m not mistaken, the court has said, that it should have been a stand-alone bill because it’s a single subject issue.'

Second, claims that private prisons save taxpayer money in the long run have proven false or elusive:

"Senate Budget Committee Chairman J.D. Alexander responded to criticism about the failure to perform due diligence and follow proper legislative procedures regarding the prison privatization plan by saying his committee had received testimony that the plan would save around $22 million annually. That estimate was based on the minimum 7% cost savings required by statute for private prison contracts, though such savings have not been proven. . . . Despite being almost two decades into its prison privatization experiment, Florida has been unable to show that private prisons have been a solution to the state’s ever-expanding prison system. 'Florida’s experience with privatized prisons raises serious questions about whether the taxpayers are getting their money’s worth,' concluded an April 2010 report by the Florida Center for Fiscal and Economic Policy (FCFEP), an independent research organization. . . .  'The FCFEP found there was no evidence that prison privatization had saved Florida taxpayers money, as required by law, because “the procedure to establish a 7% cost savings is flawed.' Additionally, there is virtually no difference in recidivism rates of prisoners released from private or public prisons, so savings have been elusive in that respect as well."

Third, prison privatization efforts simply function as a lawmaker channeling of taxpayer funds from the public sector into the hands of private prison executive friends and donors:

"Prior to representing FDOC employees, on September 12, 2011 the Teamsters filed an ethics complaint against Governor Scott. The complaint alleged that the prison privatization plan was tainted by almost $1 million in political contributions from CCA and GEO Group that went to Scott, state lawmakers and the Republican Party.  According to the Teamsters, during the last election cycle GEO and its executives gave $829,665 to political parties and candidates in Florida, while CCA donated $138,494. Additionally, both CCA and GEO made contributions to Governor Scott’s inaugural fund in the amounts of $5,000 and $25,000, respectively. GEO had also paid its team of Florida lobbyists between $220,000 and $360,000 to influence state officials, and the company reportedly said it would spend $3 million to compete for the Region IV private prison contract.  'The governor’s privatization scheme smacks of political payback, pure and simple,' said Wood.  'It all comes down to politics and the big donors,' noted Senator Fasano. 'GEO and the other private companies that run prisons are very big donors to the party here in Florida and to the elected officials, both past and present.'

Finally, fourth, why privatize an industry that is clearly a governmental function?  For efficiency?  Cost saving due to competition?  Hardly.  Not in the prison industry:

"Considering there is scant evidence that private prisons in Florida have saved the state money, and that prisoners released from privately-operated facilities have the same or higher recidivism rates as those released from public prisons, the repeated efforts by the state legislature to privatize FDOC Region IV can best be explained as political payback for campaign contributions from private prison firms.  While companies like CCA and GEO Group will profit from expanded prison privatization contracts, and politicians will benefit from those companies’ continued lobbying efforts and financial largess, should the legislature prevail in its private prison plan the loser will be Florida’s taxpayers, as public funds will be diverted from the FDOC into the coffers of for-profit prison firms with no discernable benefit to the state.  As the battle to expand prison privatization in Florida continues, one expert has recommended that everyone slow down. 'In what will be the largest correctional privatization contract in U.S. history, a more deliberate process would be prudent,' said Professor Hallett. 'Assuming you accept the logic of market forces controlling costs, then why would you bias the process in favor of an already monopolized industry, which itself lowers cost efficiency and accountability?"

The privatization of the prison industrial complex has been and will continue to be a terrible failure, for all parties involved, except perhaps, for the executives and shareholders of the private prison companies.

Justice Department Sues Bank of America for $1 Billion

The Department of Justice announced today that it is suing Bank of America for fraud.  In seeking $1 billion from BofA, Justice claims that the bank (and predecessor Countrywide Financial before it) engaged in widespread mortgage fraud through a program known inside the banks as "The Hustle."  The Hustle references Bank of America and Countrywide's effort to fraudulently sell streamlined mortgages to Fannie Mae and Freddie Mac, which were originated through the banks on a streamlined basis, wherein common banking procedures and regulations were ignored.

According to CNN:  "The suit alleges that 'the Hustle' was a nickname for the bank's 'High-Speed Swim Lane' or HSSL program, designed to streamline the mortgage origination process. But the government alleges it was 'intentionally designed to process loans at high speed and without quality checkpoints, and which generated thousands of fraudulent and otherwise defective residential mortgage loans.' The government says the program was started by mortgage lender Countrywide Financial, but continued after it was purchased by Bank of America in 2008."

As the nation continues to struggle under the burden of the mortgage crisis of 2008, the Justice Department in 2012, four years later, is still attempting to sort through the banking fraud that seized the industry during the run-up to the mortgage meltdown.  That a program designed by bankers to streamline the mortgage origination process was nicknamed "The Hustle" by the very bankers that engaged the process is telling.

According to the charge, The Hustle led to "widespread falsification" of mortgage numbers and data by Countrywide Financial.  Further, top federal prosecutor Preet Bharara described the practices of Countrywide executives as "spectacularly brazen in scope."


(photo courtesy of Senseiich, Wikimedia Commons)

University of Washington Hosts Risk Management Symposium

On October 5, 2012, the University of Washington School of Law hosted an outstanding symposium entitled Managing Risk in a Complex World. The program provided the broadest overview of business risks conceivable. The keynote speaker, Bill Ayer, Chairman, Alaska Air Group, articulated a rationalized vision of risk-management that should be a model for CEOs. Professor Anita Krug organized this excellent and timely program.

My contribution focused on risk management failures in the financial sector leading to the financial crisis. More specifically, I focused on whether the Fed's new proposed rules requiring enterprise-wide risk management committees (promulgated under the Dodd-Frank Act) address the underlying causes of those risk management failures. (See video above).

In general, the Fed's rules are a positive step. Nevertheless, the rules would benefit from improvements such as a more robust definition of independence for members of the new risk management committee required for all systemically important firms. I argue that the board of every systemically important firm should certify (under penalty of SEC disbarment from service on boards) that the members of the risk management committee have no substantial personal, familial, social or business relationship with senior management or the firm (other than serving as director). I expand on these points in a forthcoming law review article entitled Enterprise-Wide Risk Management after the Financial Crisis, which is outlined in this PowerPoint presentation.  

Given the role of risk mismanagement in driving and amplifying the financial crisis, Dodd-Frank lights the way for superior corporate governance outcomes in the future (both within and outside the financial sector). Unfortunately, the proposed Fed rules are still suboptimal.

Judge Decertifies Class of African-American Borrowers

A federal judge recently decertified a previously certified class action based on the Supreme Court's Wal-Mart opinion that we've discussed previously on the Corporate Justice Blog.  In a real opportunity to examine predatory lending in the wake of the mortgage crisis of 2008, the Supreme Court's limiting Wal-Mart holding has now made it much more difficult for plaintiffs to proceed on claims of discriminatory and predatory lending.

From the National Law Journal:

"A Boston federal judge has decertified a class of African-American mortgage borrowers, finding that evidence of their statistically higher payments isn't enough to establish commonality in light of the Supreme Court's ruling in Wal-Mart v. Dukes.  On September 18, [2012], Judge Rya Zobel of the District of Massachusetts granted the defendants' motion to decertify the class in Barrett v. Option One Mortgage Corp.  [Judge] Zobel had previously certified the plaintiff class of African-American borrowers who obtained a mortgage loan from one of the defendants, in March 2011.

Three months later, in June 2011, the Supreme Court ruled in Wal-Mart. In its 5-4 ruling, the high court held that the plaintiffs in a class action on behalf of more the 1 million female current and former workers failed to prove a companywide policty of discrimination.  Justice Antonin Scalia, writing for the court, found that evidence of such a policy was necessary for the plaintiffs to show the commonality needed to certify a class under Federal Rule of Civil Procedure 23(a)(2).

The borrowers in Barrett sued H&R Block Mortgage Corp. and subsidiaries Option One, Ada Services Corp. and San Canyon Corp. They claimed the defendants' policy, which gave brokers the discretion to add charges unrelated to a borrower's creditworthiness, had a disparate impact on African-American borrowers. Brokers could set a higher interest rate than a borrower's minimum based on creditworthiness and charge loan origination and processing fees."

Fisher v. Texas: Affirmative Action for Whites Only?

On September 19, I had the great privilege of speaking at Kansas State University as the Dorothy L. Thompson Lecturer on Civil Rights. KSU is one of the finest universities in the nation (with one of the most attractive college campuses I have seen). KSU students are simply top-notch. So, it was a great opportunity to have a serious conversation about civil rights in America today, with a more conservative audience than the norm in Chicago.

My topic was Fisher v. Texas, the upcoming Supreme Court Case re-addressing affirmative action programs designed to achieve a diverse learning environment. The Supreme Court settled this issue in 1978, in Board of Regents of the Univ. of California v. Bakke, and again in 2003, in Grutter v. Bollinger. In both cases, conservative appointees ruled that diversity in higher education is a compelling state interest justifying narrowly-tailored measures that consider race or ethnicity, in careful and balanced decisions. Justice Powell wrote the key opinion in Bakke and Justice O'Connor wrote the key opinion in Grutter.

The video of my lecture is available here, and includes shots of my entire PowerPoint presentation.

Here is a summary of my key points:

1) The drafters of the Equal Protection Clause of the Fourteenth Amendment, which the Supreme Court uses to limit affirmative action, intended to protect former slaves, not to protect those with the resources to attain equal protection on their own. According to the Supreme Court in 1880 the purpose of the clause was:

"to assure to the colored race the enjoyment of all the civil rights that under the law are enjoyed by white persons, and to give to that race the protection of the general government, in that enjoyment, whenever it should be denied by the States."

It is historically incorrect to read the clause to limit the power of the government to address continuing racial oppression in our country. For example, 40 percent of African American children live in poverty as do 35 percent of Hispanic children.

2) The meritorious contributions diverse students make to a diverse learning environment constitutes a compelling state interest as demonstrated by the continuing accumulation of empirical data of the educational benefits of diversity, as well as the manifest needs of our business sector and military for more diverse leaders. Because we still live in a highly racialized society, using race as one factor (in accordance with the Grutter mandate of an individualized and holistic analysis of diversity contributions) for unlocking those diverse contributions is a narrowly tailored means of achieving the compelling state interest in diverse leadership and diverse educational environments.

3) The most non-meritorious and morally suspect affirmative action benefits rich and powerful whites. As The Economist states:

"No less than 60% of the places in elite universities are given to candidates who have some sort of extra “hook”, from rich or alumni parents . . . . The number of whites who benefit from this affirmative action is far greater than the number of blacks. The American establishment is extraordinarily good at getting its children into the best colleges. In the last presidential election both candidates—George Bush and John Kerry—were “C” students who would have had little chance of getting into Yale if they had not come from Yale families. Al Gore and Bill Frist both got their sons into their alma maters (Harvard and Princeton respectively), despite their average academic performances. Universities bend over backwards to admit “legacies” (ie, the children of alumni). Harvard admits 40% of legacy applicants compared with 11% of applicants overall. Amherst admits 50%. An average of 21-24% of students in each year at Notre Dame are the offspring of alumni. When it comes to the children of particularly rich donors, the bending-over-backwards reaches astonishing levels. Harvard even has something called a “Z” list—a list of applicants who are given a place after a year's deferment to catch up—that is dominated by the children of rich alumni."

This 60 percent set-aside does not contribute to enhanced learning environments but instead just populates our elite universities with scions of privilege--almost always white privilege.

If the Supreme Court overturns the affirmative action plan of the University of Texas (involving 3 percent of entering slots) while remaining willfully blind to the 60 percent of the slots that entrench white privilege at our elite universities, they will effectively re-write the Fourteenth Amendment to mean: "When it comes to affirmative action, whites only need apply." That would pervert the whole purpose of the Fourteenth Amendment.

4) While one may speculate that race neutral measures may suffice to secure classroom diversity (such as living in poverty or a low income household), such measures are virtually never implemented. Indeed, the fact that so many universities use race or ethnicity as a "plus factor" suggests that it holds some degree of political plausibility that other alternatives do not. Conjuring-up other mechanisms of achieving diversity when such mechanisms enjoy little or no political viability hardly furthers the compelling state interest identified in Grutter.

5) Stare Decisis matters. The principle that courts should be guided by precedent in resolving disputes (and therefore restrained from indulging their personal preference, political goals and ideological preferences) forms the bedrock of our common law system. Judges are appointed, not elected, and in a system that values democratic rule-making they should say what the law is, not rewrite the law. Bakke and Grutter extend back 35 years. Only an activist Court pursuing politics rather than law would reverse such longstanding precedents. In the end, it is not appropriate for unelected judges to destabilize the rule of law and render it up for grabs based upon transient political preferences of the judiciary, unless the precedent is egregiously wrong or times have changed to such an extent that the precedent is simply too costly to maintain. Bakke and Grutter do not fit that bill.

Consequently, it seems extreme to just reverse 35 years of precedent and eliminate all affirmative action seeking to diversify American universities through the consideration of race or ethnicity. The students at Kansas State largely agreed with the idea that expanded educational opportunity for disadvantaged students made sense; yet, they evinced real discomfort with the use of race to address this concern or as a means of achieving educational diversity. At the end of the evening an informal poll found support for continued affirmative action based upon race (but in accordance with Grutter) by nearly a two to one ratio.

As part of the lecture event, I also did an interview with Richard Baker of KSU, for his outstanding Perspective series on Kansas Public Radio, which also summarizes the key points of the lecture: Play Interview

Will Obama Finally Stop the Scourge of the Megabanks?

As I have long argued, the most important question of this election is who will stop the scourge of the megabanks. By any measure more money is at stake here than any other issue in this campaign, as evidenced by non-partisan tallies of the cost and damage of the last financial crisis--ranging from up to $13 trillion (primarily in lost GDP) to nearly $30 trillion (in government outlays).

As discussed in my last two posts Mitt Romney is the candidate of the megabanks, including the foreign megabanks. For Romney to stop the megabanks, he would need to turn on his base. But, he would need their continuing support for reelection. Romney cannot be expected to stop the megabanks. Simply put, Romney is no Jon Huntsman, who was the one major party candidate who got this issue right. Romney gets an "F" on likelihood of stopping the megabanks.

Historically, there is clear reason to be skeptical of President Obama. But, Obama has been cut off from Wall Street support this election cycle. Mr. Wall Street--Timothy Geithner--has already announced his expectation of exiting after the election. The President will be a lame duck, empowered to follow his instincts on the megabanks--and according to Ron Suskind in Confidence Men Obama ordered Geithner to bust up Citigroup. President Obama gets a "B-" and for the first time in years we may have a political  reality conducive to real reform in the financial sector.

Of course, much can change in the next 6 weeks, and the debates in particular will shed light on the position of Romney and Obama on this critical issue. Domestic issues will be the focus of the October 3rd debate.

Government guarantees for the megabanks guarantees failure. The megabanks become too insensitive to risk because their managers know that government will make good any losses. They will gorge on too much credit because creditors know that the government guarantees megabank debt. Thus, banks backed by the government will naturally take on too much leverage and too much risk at the same time, all but insuring their demise. Further their government guarantee makes them attractive derivative counter-parties. So they will naturally be tempted to push the envelope on the extent to which they can generate illusory profits and hide risks in fundamentally dark derivatives markets. For an excellent overview of the economic hazards of Too Big To Fail banks, see this outstanding publication from the Federal Reserve Bank of Dallas.

The stakes here could not be larger. It boils down to this: Is the USA prepared to once again transfer trillions in bank welfare to a handful of megabanks at the expense of all other government services ranging from fire protection to teachers to Pell Grants to Defense? We are one financial crisis away from such bailouts. This is the reality in the Eurozone today. The federal government would become a vassal state of the banks and state and local government would be consigned to an even more dramatic contraction in resources. We are literally talking a huge portion of American economic wealth.

How much money? Since the crisis began in late 2007, the US government debt to GDP ratio increased from under 60 percent of GDP to over 100 percent of GDP, or by about 45 percent of GDP--representing an additional debt burden of about $6.75 trillion. So, if we add the additional debt burden to the $7.6 trillion in forgone GDP, as quoted above, we end up pushing nearly $15 trillion in lost GDP plus additional debt burden. Then, US household net worth took an additional $7.7 trillion hit between its 2007 peak and the beginning of 2011. So the last crisis easily cost Americans $20 trillion.

We as a society simply cannot afford to spend another $20 trillion saving the megabanks.

Stout on "Increasing Shareholder Value" as Injurious

Professor Lynn Stout, Cornell Law School

Professor Lynn Stout at Cornell Law School argued last week in the Los Angeles Times, that the corporate law maxims of "profit maximization" and "increasing shareholder value" have taken on lives of their own in the past thirty years and in so doing have visited positive harm on corporations, employees, and the public at large.  In her Op-Ed "'Maximizing Shareholder Value' Is Ill-Conceived Concept," Stout essentially argues that prior to the 1980s, corporate leaders focused on promoting long-term growth for the benefit of employees, shareholders, the community at large and society as a whole.  But she posits, dating back to Milton Friedman and the rise of the Chicago School of free-market economists, the idea that shareholders "owned" corporations and that businesses existed solely to maximize shareholder profit began to take root.  Stout writes that the federal government has now embraced maximizing shareholder value as near religion today.  This embrace, per Stout, has led to calamity and disappointment:  "It's now become clear, however, that a relentless focus on share price can hurt not only employees, taxpayers and society, but shareholders too. Managers who are pressured to raise stock price quickly often resort to tricks — selling assets, cutting payroll and investment, draining cash through dividends and share repurchase programs — to bump up stock price for a year or two. But such strategies often hurt a company's long-term ability to grow and prosper."


Is it possible that the "profit maximization" maxim which has taken hold in corporate law can actually harm taxpayers, shareholders, employees and society in general?  Stout supports this by arguing that: "In 1993, Congress changed the tax code to require companies to link executive pay to 'performance' (typically stock price). The Securities and Exchange Commission over the last two decades has adopted rules to make corporate directors ever more 'accountable' to shareholders. And hedge funds have used these rules to harass companies into selling assets, cutting expenses and paying out large dividends to 'unlock shareholder value.'   How has this worked out for American investors and the American economy? Not well."

Stout continues:  "In the name of increasing shareholder value, public companies have sold key assets (Kodak's patents), outsourced jobs (Apple), cut back on customer service (Sears) and research and development (Motorola), cut safety corners (BP), showered CEOs with stock options (Citibank), lobbied Congress for corporate tax loopholes (GE) and drained cash reserves to repurchase shares until companies teetered on the brink of insolvency (much of the financial industry). Some corporations even used accounting fraud to raise share price (Enron and WorldCom). Public companies employed these strategies even though many executives and directors felt uneasy about them, sensing that a single-minded pursuit of higher share prices did not serve the interests of society, the company or shareholders themselves."

Stout concludes:  "It's time to recognize that the philosophy of 'maximize shareholder value' is just such a defunct economist's idea. Let's throw off our intellectual chains so our corporate sector can do a better job for shareholders — and the rest of us too."

Law professors and corporate practitioners would do well to re-consider what they are teaching and/or practicing when they support the "new-ish" legal principle of "profit maximization."  Surely a corporation exists to do more than simply provide profits for its shareholders.


And finally today, we wish to take a moment to reflect on and remember those who lost their lives and those who continue to grieve their losses of 9.11.01.