Morgan Stanley economist Steve Roach is just back from the global captialist confab at Davos and he can’t quite accept the violin music he kept hearing – to him it sounded more like Nero fiddling while Rome burns. To wit, in Roach’s view the U.S. and Chinese economies are still dangerously overheated while the stars of Davos retain their misplaced faith in Alan Greenspan and the Central Committee of the Chinese Communist Party! This is a pretty odd pair on the global scene. The bottom line, according to Roach, is that Greenspan remains unwilling to raise interest rates high enough to choke off U.S. consumer demand. Americans keep extracting cash from their homes with low mortgage rates and buying cheap labor consumer goods from Asia, particularly China. The result is ballooning consumer debt and unsustainable export led “growth” in China. If Roach is right this economic tsunami will make it all the way across the Pacific Ocean.

Morgan Stanley

I was interviewed yesterday by the Financial Times regarding the proposed acquisition of IBM’s laptop division by China’s PC giant Lenovo. Their most recent story on the deal is linked below. My quotes may have fallen on the editor’s floor or may appear in a future article, but as the FT indicates my major point is affirmed: politics continues to influence the global markets.

This is anathema to strong advocates of globalization but is a theme I have highlighted in my research, most notably in my article on the IPO of Chinese oil giant PetroChina (scroll down for a link). I have identified four different political forces that are jostling for influence in the financial markets and the cross border mergers and acquisition markets:

1) neo-liberal advocates of a laissez faire, or “invisible hand,” approach to corporate transactions;

2) national interest advocates (like Rep. Duncan Hunter quoted in the FT) who want the U.S. government to be more aggressive in reviewing deals for their impact on national security;

3) neo-mercantilists who largely operate in the government bureaucracies of developing countries (and are likely the forces behind the push by Chinese companies into the global marketplace); and

4) the new internationalists that includes labor, environmental and other NGO type forces attempting to reshape globalization to take account of the larger social cost of market forces.

All but the last are present in the IBM-Lenovo deal and thus the fortunes of this deal merit close attention.

FT.com / Business / Asia-Pacific – IBM’s $1.7bn China deal could threaten American security, say US politicians

Here is a link to a useful summary of the current debate inside the AFL-CIO about its future. And below that is my comment submitted in response to the article. This debate will likely simmer for the next few months and, hopefully, emerge in a constructive discussion at the AFL-CIO convention this July in Chicago.

The Fight for Our Future — In These Times

Christopher Hayes mars an otherwise useful summary of the current debate in the AFL-CIO by concluding that the point is not keeping the AFL-CIO together. This is a naieve and dangerous sentiment. It echoes the threat made by the SEIU to withdraw from the federation if Andy Stern did not get his way in the current debate – an odd sentiment considering he is at the same time arguing for more centralization in organized labor. Opening the door to such centrifugal forces threatens one of the core strengths of American labor – which with 13 million members remains the largest best organized independent isntitution in American political life and thus, by definition, a crucial force for strengthening democracy in an era of global multinational capital and unprecedented exercise of state military power.

This is a moving portrait of women workers on strike in China at a Japanese owned plant that supplies cell phones for WalMart. The women labor 11 hours a day to earn less than $60 a week and because they are forced to live in government controlled “company” towns they save very little of that money for even poorer relatives back home in China’s rural areas. This story vividly demonstrates what I am calling the “two souls of global capitalism”: a high tech wonder in the advanced countries underpinned by desperate living conditions in the developing world – a picture tragically enhanced by this week’s tsunami disaster in southeast Asia.

In China, yearnings for unions stir

China is engaged in a vast socio-economic experiment – the transformation of an authoitarian state owned economy into something resembling western capitalism. The restructuring and privatization of state-owned enterprises, or SOE’s, is a central feature of this process. This paper examines the creation of PetroChina, one of China’s largest oil companies. When PetroChina conducted its IPO in the spring of 2000 it sparked significant controversy and institutional investors in the U.S. boycotted the listing. Now the SEC requires special attention by issuers of securities when human rights concerns are raised. The paper was published in the Journal of Corporation Law earlier this year.

Here is the URL: PetroChina Syndrome

And here is my abstract of the article:

This article argues that the process of globalization has generated a legitimation deficit that can be the source of wasteful, even destructive, social and political conflict. I stylize this outcome as “the PetroChina Syndrome,” after a leading example of the kind of activity generated in response to globalization, the PetroChina Campaign, where a coalition of labor, human rights, environmental, anti-slavery and religious groups worked together to oppose the initial public offering of a major Chinese oil company led by Goldman Sachs. The article begins with a discussion of this important but largely unexplored dimension of the anti-globalization era triggered by the 1999 demonstrations in Seattle against the World Trade Organization. The Campaign and its impact are discussed in detail. I then examine three possible arguments that shed some light on this development, including traditional securities law approaches, the broader political context and, finally, structural changes in corporate finance. These three arguments, I argue, are helpful but not sufficient. Recent work by the economist Massimo De Angelis on John Maynard Keynes and Milton Friedman helps us shape an alternative explanation rooted in understanding changes in the institutional mechanisms of the global labor and capital markets. The displacement of the trade union and collective bargaining by globalization has pushed organized labor and other groups to look to political intervention in the capital markets as an alternative means to establish legitimacy. This intervention should be encouraged to develop new institutions to respond to the growing legitimation crisis of global capitalism.

At the heart of modern capitalism is a fundamental structural divide: between senior inside managers responsible for the day to day operations of the corporation, on the one hand, and outside investors who own shares in a large number of corporations. According to standard corporate law theory this creates an inevitable conflict between shareholders, the principal, and managers, the agent.

Seen this way, managers should serve at the behest of shareholders – if, indeed, shareholders are principals. But to watch the counter-attack on post-Enron corporate reform now taking place in Washington, D.C., it appears as if the managers have overthrown the principals.

Of course, in reality this principal-agent model radically misstates the structure of modern capitalism. Managers are capitalists – they earn their income from the profits of the corporation; and shareholders are capitalists – they also earn their income from corporate profits. So managers, in the form of their representatives at the U.S. Chamber of Commerce and Business Roundtable, ought to be able to understand the value of reforms such as expensing of stock options and allowing shareholders opportunities to place their nominees for corporate boards on corporate proxy statements. These reforms should improve the ability of the market as a whole to function more efficiently.

A conference next month in Delaware could help turn the corner in this debate. The International Corporate Governance Network is bringing together representatives from various corporate constituencies, including managers and institutional investors, to discuss potential reforms in Delaware law with members of the Delaware judiciary that might make it easier for shareholder nominees to get elected to corporate boards. Here is a link to a recent story in the Financial Times on the conference and on the new agenda of the ICGN.

https://64.23.39.67/Delaware%20could%20boost%20investors.doc

https://64.23.39.67/Activist%20targets%20US%20investor%20rights.doc

This blog aims to be an information hub for people interested in new developments in corporate law, securities law, and corporate finance with an emphasis on the impact of globalization on business.

The Financial Acccounting Standards Board has finally stepped up to the plate and issued a new rule requiring public companies to expense stock options. FASB faced an intense lobbying campaign on Capitol Hill to block the proposed change. One Wall Street figure told me the campaign against expensing stock options was more intense than the campaign in favor of the North American Free Trade Agreement! Nonetheless, FASB has done the right thing.

Here is a link to a story on the change, a link to the FASB site where the full text of the new rule can be found, and a link to the testimony I delivered to a U.S. Senate Committee last spring supporting the FASB proposal.

FASB Issues New Rule on Stock Options



FASB

Diamond testimony: There is no free lunch

In my work on the PetroChina IPO (scroll down the page for a link) I found out an interesting bit of information: China is now a net oil importer and thus dependent on foreign supplies for its rapidly growing industrial economy. To date, western oil companies have had a limited role in the Chinese oil industry. China has preferred to retain tight state control of oil – only allowing foreign investors and oil companies minority stakes in the newly privatized parts of the industry. Instead of letting foreign companies provide the oil they need, China is sending its own China National Petroleum Corporation, parent of PetroChina, around the world on an oil buying spree. A key target is Africa where CNPC has a deal with the Sudanese which has led many to accuse China and the Sudan of human rights violations in areas where oil is being drilled. This article in Newsweek is a useful summary of the larger geopolitical picture – it turns out the United States sees Africa as crucial to ITS effort to move away from heavy dependence on mideast oil. This suggests the possibility of renewed tension with the United States.

https://64.23.39.67/The%20New%20Great%20Game.doc

With the recent indictment of aging former Chilean dictator, Augusto Pinochet, the Chilean people are finally getting a chance for justice to prevail years after the military, with the backing of the CIA, Henry Kissinger and Richard Nixon, overthrew the democratically elected socialist Salvador Allende.

In light of efforts here in the United States to reform Social Security one can only hope that the truth about the reform of Chile’s national pension system put in place by the notorious “Chicago boys” during the Pinochet dictatorship also comes to light (this group lobbied Pinochet, successfully, to install an early version of free market reforms that are now known as “shock therapy”). This article by independent journalist Greg Palast is a good place to start:

https://www.gregpalast.com/detail.cfm?artid=16&row=2

It turns out that Jose Pinera, Pinochet’s labor and social security secretary and thus one of the architects of the Chilean shock therapy, is now a Cato Institute fellow in Washington D.C. (a city where Pinera’s Chilean boss General Pinochet allegedly directed assassins to murder Orlando Letelier, Allende’s ambassador to the United States, who was killed along with his colleague American Ronni Moffit, by a car bomb in 1976).

(For the record it should be noted that although many of the economic advisors to the Chilean dictatorship studied at the University of Chicago, Pinera got his training in the wonders of the free market at Harvard.)

Pinera and Cato are leaving no stone unturned in an effort to pay back his former boss’s American backers with support for the Bush Administration’s proposal to privatize the U.S. social security system.

While free marketeers brag about the alleged success of the Chilean program, two recent reports note significant problems. A World Bank report notes that poorer citizens pay a disproportionate share of contributions as commissions to financial players who manage the funds. And a report by the New York Federal Reserve Bank notes that many retirees in Chile must still work to make ends meet. The link below is to the excellent site sponsored by the Social Security Network where Greg Anrig of the Century Foundation summarizes these two studies.

https://www.socsec.org/commentary.asp?opedid=799