Daily Archives: 01/29/2011

My Other Blog is …

About movies and entertainment.

Given my small readership this may seem a little audacious.  But I blog mostly for myself anyway, and I wanted a place for entertainment oriented material than I would see as the focus of this blog.  Also, I wanted to experiment with bloggers as a platform (no I don’t think I’ll leave wordpress).  At blogger you can edit your templates without paying for an upgrade.  If that seems worth it, I might pay for the upgrade here.

You’ll find the new blog at:


Come visit. Not a lot to see yet though.

The Financial Crisis Inquiry Commission's Report and Corporate Governance


This from Stephen Bainbridge.

The Financial Crisis Inquiry Commission’s report repeatedly identifies corporate governance failures as a causal factor in the crisis of 2007-2008. At page 19, for example, the report opines that:

We conclude dramatic failures of corporate governance and risk management at many systemically important financial institutions were a key cause of this crisis.

It’s probably the case that there were corporate governance breakdowns at some specific firms. Lehman and AIG spring to mind. On close examination, however, the evidence is hardly conclusive.

Yet, on close examination, the evidence turns up some very curious findings. First, the U.K.’s corporate governance regime is generally regarded as more shareholder empowering than is the U.S., which in the minds of many governance activists makes it superior. If governance failures were a key factor in the crisis, one thus would expect the U.K. to have been less susceptible than the U.S. Yet, the U.K. went through essentially the same financial crisis as the U.S. at about the same time. Accordingly, while governance practices “such as independent board chairs and ‘say on pay’ votes have been available to U.K. shareholders for years,” they apparently did “did little to prevent the crisis or mitigate its effects on the U.K. financial system.” Christopher M. Bruner, Corporate Governance in a Time of Crisis 25 (2010), http://ssrn.com/abstract=1617890.

Second, there is some evidence that corporate governance standards widely regarded as best practice were actually associated with poorer performance during the crisis. A study by USC business school professors Erkens, Hung, and Matos of 296 financial institutions in 30 countries found that board independence and high institutional investor ownership, which we’ll see in chapters that follow are usually assumed to be good practices, were associated with poor stock performance during the crisis. They further found that financial institutions with more independent boards were more likely to raise equity capital during the crisis, which ultimately resulted in a wealth transfer from shareholders to creditors. As for institutional ownership, higher levels thereof were associated with greater risk taking, which ultimately resulted in greater losses. David Erkens et al., Corporate Governance in the 2007-2008 Financial Crisis: Evidence from Financial Institutions Worldwide (Sept. 2010), http://ssrn.com/abstract=1397685.

A study by Beltratti and Stulz found no evidence that banks with higher scores on the Institutional Shareholder Services’ Corporate Governance Quotient performed better than lower-scoring firms. Beltratti and Stulz attributed the crisis to flawed bank capital structures, instead of corporate governance failures. Banks that relied on long-term sources of capital fared better than those that relied on short-term funding. Andrea Beltratti & Rene M. Stulz, Why did some banks perform better during the credit crisis? A Cross-Country Study of the Impact of Governance and Regulation (ECGI Finance Working Paper No. 254/2009), http://www.nber.org/papers/w15180.

We can draw a couple of important conclusions from this evidence. First, what constitutes good corporate governance depends on which constituency’s interests one is seeking to advance. Governance regimes that advantage shareholders may not be good for taxpayers. Yet, virtually all of the reforms mandated after the financial crises of the last decade were designed to empower shareholders. The risk thus is that the reforms may make the next crisis more likely and potentially more severe.

Second, one size does not fit all in corporate governance. The problems of Wall Street and Main Street are quite different and may require quite different solutions. Yet, the reforms of the last decade almost without exception are one size fits all mandates from which derogation by private ordering is not allowed.

The Financial Crisis Inquiry Commission’s Report and Corporate Governance
Steve Bainbridge
Thu, 27 Jan 2011 23:14:50 GMT

The end of the Arab exception?

From John Quiggin


Looking at the downfall of the dictatorship in Tunisia, and the exploding protests against the Mubarak regime in Egypt, it’s obviously hard for Western/Northern commentators to say much about what is happening now and will happen. In part that reflects the cultural and political distances involved, and in part the opaqueness of political and cultural life that is inevitably associated with dictatorship and censorship. But it seems clear that some basic premises of US policy towards the region have been rendered invalid.

Most obviously, the Mubarak regime is finished in its role as the key US ally in the Arab world. If the regime survives at all, it will be through brutal repression which makes it clear once and for all that the dictatorship is held in place solely by military force. That in turn will make the provision of substantial economic or military aid politically untenable (the Republicans were already keen to cut aid to Egypt). But without continuing aid, there is little reason for any Egyptian government to support US foreign policy in the region.

The bigger casualty is the ‘Arab exception’: the idea that the concept of democracy is not really applicable in Arab countries and that foreign policy therefore amounts to a choice of which dictator to support. [1]

The autonomous emergence of democratic governments in Tunisia and Egypt would fatally undermine this exception, and leave the remaining dictatorships and monarchies in the region as anomalies, for which the question about the end of the regime would be “when?” rather than “if?”. A traditional foreign policy based on the presumed continuance of the status quo would become highly problematic, with high potential costs when the crash came[2]

More generally, the whole approach of US foreign policy towards the “Middle East” rests on assumptions that will be hard to sustain when the existing dictatorships are gone. Most fundamentally, how can the idea that the US has “strategic interests” in the region be justified? In some sense, this idea rests on the assumption that the existing governments are less than legitimate, and can be dealt with in terms of traditional Great Power politics, with spheres of influence, secret deals and so on. Even weak democratic states display much more effective resistance to external interference in their domestic affairs than do typical autocratic regimes.

The point applies most obviously in relation to oil. The idea that the US can legitimately use its military power to ensure continued access to oil resources rests, in large measure, on the (not entirely unfounded) assumption that those controlling the resources are a bunch of sheikhs and military adventurers who happened to be in the right place, with guns, at the right time. Without the Arab exception, the idea of oil as a special case, not subject to the ordinary assumption that resources are the property of the people in whose country they are found, will also be hard to sustain.

Finally, of course, there is the Israel-Palestine dispute. The current crisis may well have a direct impact here. But the indirect impact of the emergence of democratic governments in the Arab world (if this happens) will be even greater. Without the special status that comes from being the only real democracy in a region full of autocracies, the idea that Israel can continue indefinitely over subject peoples and expropriate their land will be even harder to sustain, as will any attempt by the US to back that claim. On the other hand, you don’t have to believe strong versions of democratic peace to conclude that the long-term prospects for a just and sustainable peace would be enhanced by the emergence of democracy. Whether this is right or wrong, the end of the Arab exception would surely undermine the idea that the US has some special role to play in all this.

Finally, the EU is much nearer to the action than is the US, and I think it’s clear that all kinds of debates within the EU (over migration, the admission of Turkey, further integration with the Mediterranean and so on) have been colored by the Arab exception in one way or another.

Those are some strong claims, and not fully worked out, so feel free to set me straight.

fn1. There was a shadow debate on this topic under the Bush Administration, which issued a lot of pro-democracy rhetoric as part of its case for . In practice, however, the Bushies continued to rely on friendly dictatorships in the Arab world (and beyond, in Pakistan and the former Soviet Union) as leading allies in the Global War on Terror. For these allies, token gestures towards democracy were encouraged, provided there was no possibility that they would actually give rise to governments responsive to popular opinion. The reasoning behind the Iraq war embodied yet another version of the exception, namely the idea that democracy would never arise from the ‘Arab street’. Instead, democracy had to be exported by armed US missionaries, with the happy side-effect of ensuring that the grateful beneficiaries would elect a pro-US government.

fn2. Iran being the paradigm case. That said, Iran is something of an outlier. In many places where US-backed dictators have been overthrown, the subsequent level of anti-American sentiment has been surprisingly modest.Looking at the downfall of the dictatorship in Tunisia, and the exploding protests against the Mubarak regime in Egypt, it’s obviously hard for Western/Northern commentators to say much about what is happening now and will happen. In part that reflects the cultural and political distances involved, and in part the opaqueness of political and cultural life that is inevitably associated with dictatorship and censorship. But it seems clear that some basic premises of US policy towards the region have been rendered invalid.

The end of the Arab exception?
Sat, 29 Jan 2011 07:13:34 GMT

Boehner backs off Social Security cuts

From Ezra Klein

The big concern that progressives had going into the State of the Union address was that President Obama would propose cuts to Social Security. That didn’t happen. And now, a few days after the State of the Union, John Boehner is backing off the cuts he’d previously proposed to Social Security.

Before the election, Boehner had said we should raise the retirement age to 70; he now says that proposing cuts was putting the cart before the horse. "I made a mistake when I did that because I think having the conversation about how big the problem is is the first step," Boehner told CNN’s Kathleen Parker. "And once the American people understand how big the problem is, then you can begin to outline an array of possible solutions." I take this as another example of the GOP’s flight from specificity.

Boehner backs off Social Security cuts
Ezra Klein
Thu, 27 Jan 2011 17:19:07 GMT


This doesn’t auger well for serious addressing of our fiscal situation.  I’m disappointed in Obama.  As a liberal, if he chose he has more potential to seriously address this than a right wingers.  It’s just like how Nixon could go to china.