1,194 research outputs found

    Structural Corporate Degradation Due to Too-Big-to-Fail Finance

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    The 6billiontradinglossatJPMorganChase—duetotheover−sizedtradingpositionstakenbythebank’sLondontrader,colorfullycalledtheLondonWhale—inducedSenateinquiriesandhearingsearlierthisyear,embarrassingthebankanditsotherwiserespectedchief,JamieDimon.Severecriticssawthebank’smassivelossasshowingthatbanksstilldonothavetheirhouseinorderafterthe2007–2009financialcrisis,butmostviewedthetradingdebacleascautionary,notonefundamentallyimplicatingregulatorypolicy.Afterall,thelosseswereonlyafractionofJPMorgan’s6 billion trading loss at JPMorgan Chase — due to the over-sized trading positions taken by the bank’s London trader, colorfully called the London Whale — induced Senate inquiries and hearings earlier this year, embarrassing the bank and its otherwise respected chief, Jamie Dimon. Severe critics saw the bank’s massive loss as showing that banks still do not have their house in order after the 2007–2009 financial crisis, but most viewed the trading debacle as cautionary, not one fundamentally implicating regulatory policy. After all, the losses were only a fraction of JPMorgan’s 20 billion annual earnings. The setback was one for the bank’s shareholders and managers and, hence, one for ordinary corporate governance. Hence, the standard view is that the loss was no major public policy problem, as public funds were never really at risk. This set-up induces us to analyze the corporate governance of the too-big-to-fail American financial firm — analysis that has not yet been systematically done. For industrial conglomerates that have grown too large, internal and external corporate structural pressures arise to re-size the firm. External activists press the firm to restructure to raise its stock market value. Inside the firm, boards and managers see that the too-big firm can be more efficient and more profitable overall if restructured via spinoffs and sales. But for large, too-big-to-fail financial firms (1) if the value captured by being too-big-to-fail lowers the firms’ financing costs enough and (2) if a resized firm after spin-offs and break-ups would lose that funding benefit , then a major constraint on industrial firm over-expansion breaks down for too-big-to-fail finance. I argue in this paper that both propositions (1) and (2) have been true and, consequently, a major retardant to industrial firm over-expansion has been missing in the large financial firm. Debt cost savings — the implicit subsidy — in the too-big-to-fail financial sector have a magnitude amounting to a good fraction of the big firms’ profits. Directors contemplating corporate simplification and spin-offs at a too-big-to-fail financial firm face the problem that the spun-off, smaller firms would lose access to cheaper too-big-to-fail funding. Hence, they will be reluctant to push for break-up, for spin-offs and for slowing down firm expansion. They would get a better managed group of financial firms if their restructuring succeeded, but they would lose the too-big-to-fail subsidy embedded in the lowered funding costs. Subtly and pervasively, the internal corporate counterpressures that resist excessive bulk, size, and growth are absent. This problem of corporate degradation due to too-big-to-fail finance burdens the economy. In addition to the well-known cost of bailouts, too big-to-fail finance induces a hidden but pervasive degradation of financial firm efficiency from the best possible. The analytic here also has policy implications beyond just reducing too-big-to-fail risks. Most post-crisis financial regulation has been command-and-control rules on capital and activities. The corporate governance analytic points us to incentives as unused policy tools. Incentives toward corrective corporate measures degrade, so policymakers could seek to reverse that degradation. By mimicking an effective market with mechanisms offsetting the too-big-to-fail subsidy and, subtly but with long-run staying power, by reproducing the incentives of private parties to make more efficacious market choices,policymakers could harness incentives that too-big-to-fail finance degrades and often destroys in large financial firms. Lastly, the corporate degradation analytic has on-the-ground corporate dealmaking implications: if the command-and-control regulation succeeds, it should lead to sharp corporate restructurings in financial firms. I outline the mechanisms and implications

    Dodge v. Ford: What Happened and Why?

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    Behind Henry Ford’s business decisions that led to the widely taught, famous-in-law-school Dodge v. Ford shareholder primacy decision were three industrial organization structures that put Ford in a difficult business position. First, Ford Motor had a highly profitable monopoly and needed much cash for the just-begun construction of the River Rouge factory, which was said to be the world’s largest when completed. Second, to stymie union organizers and to motivate his new assembly-line workers, Henry Ford raised worker pay greatly; Ford could not maintain his monopoly without sufficient worker buy-in. And, third, if Ford explicitly justified his acts as in pursuit of the monopoly profit in the litigation, the Ford brand would have been damaged with both his workforce and the car buyers. The transactions underlying Dodge v. Ford and resulting in the court order that a very large dividend be paid should be reconceptualized as Ford Motor Company and its auto workers splitting the “monopoly rectangle” that Ford Motor’s assembly line produced, with Ford’s business requiring tremendous cash expenditures to keep and expand that monopoly. Hence, a common interpretation of the litigation setting-—that Ford let slip his charitable purpose when he could have won with a business judgment defense-—should be reconsidered. Ford had a true business purpose to cutting back the dividend—spending on labor and a vertically integrated factory to solidify his monopoly and splitting the monopoly profit with labor-—but he would have jeopardized the strategy’s effectiveness by boldly articulating it. The existing main interpretations of the corporate law decision and its realpolitik remain relevant—-such as Ford seeking to squeeze out the Dodge brothers by cutting the Ford dividend to deny the Dodge brothers cash for their own car company. But those interpretations must take a back seat, as none fully encompasses the industrial setting-—of monopoly, incipient union organizing, and a restless workforce. Without accounting for Ford Motor’s monopoly, the River Rouge construction, and the related labor tensions, we cannot fully understand the Dodge v. Ford controversy. Stakeholder pressure can more readily succeed in a firm having significant economic rents, a setting that seems common today and was true for Ford Motor Company in the 1910s

    Some Differences in Corporate Structure in Germany, Japan, and the United States

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    Stock Market Short‐Termism’s Impact

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    The Voting Prohibition in Bond Workouts

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