Wednesday, December 31, 2003

On Power - a comment on Bertrand de Jouvenel 

The importance of Bertrand de Jouvenel’s “Du Pouvoir” (Treatise on Power) can be compared to John Locke’s Two Treatises on Government.

The book, published originally in French by Bourquin in Geneva in 1945 is available in english as a hard-to-find edition (see amazon: http://www.amazon.com/exec/obidos/tg/stores/offering/list/-/031322515X/all/ref=sr_pb_a/104-6795681-2051919).

Why is Jouvenel’s book so relevant? It is a comprehensive review from a philosophical perspective of the increase of the extent of Power over the course of the last centuries, to which corresponds the broadening of war, as the Power (whichever Government embodies it) has been able to mobilize all the resources of the society in the pursuit of its goals, including war. Quoting from the book: “ Francois premier had less than 50 000 soldiers at Marignan, Louis XVI had 180 000, Frederic the Great had 195 000 and Napoleon 240 000. Three million people were armed at the end of the Napoleonic wars, the first world war killed or maimed five times more. We end up where barbaric tribes started: we rediscovered the lost art of starving civilians, annihilating cities and dragging captives in servitude. We do not need barbaric invasions, we are our own Huns!” (op. cit, pp. 28-31). In my opinion, this is very pertinent to the techniques adopted by the US Government in its interpretation of “total war”, which encompasses suspending US citizens habeas corpus rights and includes killing civilians and assassinating enemy chiefs. Such behavior had beeen long banished as barbaric since the Renaissance, but has been re-discovered by the Germans in the XX Century, forcing others to follow in the escalation, culminated in the deliberate extermination of civilians ordered by Truman at Nagasaki.

Jouvenel’s main topic is not war, but a thorough analysis of the metaphysical theories underpinning the legitimation of Power: civil obedience, theories of Sovereignity (divine and of the people), organicist theories. Here Jouvenel notes convincingly that all theories originally intended to limit the extent of Power have been over time abused to justify its expansion.

The key point is the observation that to the extent Power was supposed to be delegated from a divine Sovereign to a specific regime (even monarchical) as agent with a finality (such as the common good) , then abuses of Power or its corruption could be a valid reason for opposing or even replacing a specific government or regime. Under the Rousseauvian "volonte generale" and subsequent holistic theories where the Sovereign is identified with the People, there cannot be such a limit to Power. It is a dire prediction, but sadly true that People's sovereignity is the origin of an enormous extension of political Power and tyranny.

He reviews the positions of Thomas Aquinas, Bellarmin, Necker, Hobbes, Rousseau, Hegel, among others.

He underlines the fundamental distinction between the individualistic foundations of classical political theories and the holistic modern theories, starting from Hegel and the socio-biologists or organicists such as Comte and Spencer. There is a very nice quotation from the De Republica of Cicero: “Res Publica, res populi, populus autem non omnis hominum coetus quoquo modo congregatus, sed coetus multitudinis juris consensu et utilitatis communione sociatus”.

The analysis of the history and development of Political Power is by itself quite important in its comprehensiveness. Jouvenel – who is considered a Liberal in the European sense – does not subscribe to the Austrian theories (e.g. Hayek’s) of the market catallaxis as an effective social cordination and discovery insitution. He laments the weakness of the “intermediate social corps”, the backbone of civil society, between individuals and the State which is characteristic of contemporary Society. In my opinion this may be very true of Europe, but to a much lesser degree in America, where private associations and churches always had – as noted by Tocqueville – a much greater importance in organizing the civil society.

Jouvenel is very pessimistic in its conclusion, but fundamentally correct, in my view, when he observes that in the final analysis what matters in a civilized society are the “mores” (moeurs in French), which cannot be developed by the political process and even less by the State, but by civil society alone.

Saturday, December 06, 2003

Institutional Competition is Good - but this is puzzling 

The following is a column published by Ann Woolner for Bloomberg News. It discusses the competition among courts for accepting corporate reorganizations (so-called Chapter 11 or Chapter 7) in the US.

The interesting observation concerns the tendency of courts to favor the parties that decide where to file: the lawyers (higher fees) and the management of the debtor companies (approval of reorganization plans friendly to the incumbent management). The result is startling: the failure rates of reorganizations in Manhattan and Delaware is very high (almost 30%).

For a supporter of liberty and institutional competition, the answer must be in expecting that lenders and creditors in general will stipulate in contracts and loan agreements in advance either arbitration or the court of reorganization.

A legislative solution or fixed rules for locating jurisdiction have merit, but are unfair because create monopolies locally. If your local court is biased you are stuck...


Who Wants FAO? Enron? WorldCom? Bankruptcy Courts: Ann Woolner

Dec. 5 (Bloomberg) -- Something is wrong when FAO Schwarz, America's most stylish toy store, files for bankruptcy protection for the second time in a year and this time just as Christmas shopping revs up.

Surely something is amiss when companies like Enron and WorldCom deceive investors, go broke and then trot off to bankruptcy court with their lawyers charging $600 to $800 an hour.

Disparate developments? Maybe not. Evidence grows that they are symptoms of the same, disturbing problem: bankruptcy judges eager to lure the big cases into their courts.

Competition among bankruptcy courts doesn't get the sort of attention lavished on, say, the Olympics or the Masters golf tournament. But for more than a decade it's been just as real.

The problem with this sport is that to reel in the truly big cases, judges curry favor with the ailing companies and the lawyers who represent them.

``Cases are not going to be filed in courts that are not liberal with fees,'' says Gerald Munitz, a Chicago bankruptcy lawyer.

Astronomical hourly rates can be blamed on lots of causes, but competitive judging means that friendly courts offer no meaningful curb.

Beyond fees, eager-to-please courts are more likely to grant debtors important advantages, refrain from appointing trustees and agree to reorganization plans, say critics.

Courts in Competition

``It is corrupting the bankruptcy courts,'' says Lynn LoPucki, a University of California at Los Angeles law professor who studies bankruptcies. ``Now that the courts are in competition, companies that are filing and their lawyers have control.''

His research shows that the big winners of the bankruptcy competition, the courts in Wilmington and Manhattan, are also the courts where Chapter 11 reorganizations are most likely to fail. There, reorganized companies come back for another try.

``For FAO Schwarz to file a Chapter 11 twice in one year is absurd,'' Munitz said. ``It suggests a complete breakdown in the system.''

FAO, in fact, filed in Wilmington. Both times.

There was a time when bankruptcy petitions were filed in the company's hometown, quaintly enough. Congress changed the law in 1978 to let companies file where they had even the tiniest of assets or in the locale where they incorporated.

New Freedom

Lawyers didn't fully realize this new freedom until Eastern Air Lines took famous advantage of it in 1989. In a classic case of tail wagging dog, Eastern's lawyers used the company's airport hospitality operation, the New York-incorporated Ionosphere Club, to file in Manhattan and escape a hostile environment in hometown Miami.

And while the Manhattan bankruptcy bench was building its docket of mega-cases, so was Wilmington's.

Delaware had no big bankruptcies from out-of-state companies until 1990, when Continental Airlines and United Merchants and Manufacturers filed there, says LoPucki.

Seven years later, it had landed 13 of the 15 reorganizations filed by large, publicly traded U.S. companies in 1996, he says.

As for reorganizations of all sizes, the Manhattan court had 924 for the 12 months ending Sept. 30, while tiny Delaware came in second with 475, according to federal court statistics.

Streamlined Procedures

Competition is not always bad, of course. The Delaware bench worked to streamline its procedures and let lawyers know they could get a quick hearing on crucial ``first-day'' filings, for example.

``Because it's a specialized court, there's predictability as to what's going to happen in the case,'' says Bankruptcy Court Clerk David Bird. Now the Delaware court, with only two judges and a request for four more stuck in Congress, is so overwhelmed that it calls in visiting judges from around the country to help and, ironically enough, would welcome requests to shift cases elsewhere, Bird says.

Especially worrisome about intra-court competition are cases in which the alleged miscreants are still running the show. During Enron's first eight weeks in bankruptcy court in Manhattan, Kenneth Lay was still chief executive officer.

With multimillion dollar bonuses paid to executives just before the filing, and with evidence of continuing paper- shredding, Enron's situation called for an immediate appointment of a trustee to make sure assets weren't being shoveled out the back door, says LoPucki.

Angry Former Workers

If Enron had filed in its hometown of Houston, which is full of angry ex-employees and Enron investors, there would have been ``a much greater likelihood that a trustee would have been appointed,'' says Hugh Ray, a Houston bankruptcy lawyer, who has a piece of Enron's legal work.

Was something lost to creditors before Lay's resignation? Maybe not. Enron named a chief executive officer, Stephen Cooper, a few days after Lay left, and five months later the court appointed an examiner to investigate what happened at Enron.

WorldCom, likewise, had a choice of venues. Its lawyers chose Manhattan ``because of the experience of the court with large, complex cases,'' says Marcia Goldstein, a WorldCom lawyer with Weil, Gotshal & Manges.

As for lawyers' pay, ``Fees are not an issue in most of the venues that handle big cases,'' says Goldstein.

No surprise there.

Choosing Locations

A debtor's lawyer with a choice of places to file considers ``what's going to have a better result for the client, not what's going to have a better result for the attorneys,'' she says.

No surprise there, either.

And yet, LoPucki determined that reorganization failure rates are higher in Manhattan -- where 23 percent of large public companies must refile -- and in Delaware, where the number is 30 percent. This compares with 5 percent for all other courts.

There could be lots of reasons for this, beginning with the fact that the most complex bankruptcies are the ones most likely to land in Delaware or Manhattan.

We do know that when bankruptcy courts compete, the debtors and the lawyers who represent them benefit, one way or the other.

Representing some of Enron's creditors, Aaron Cahn was among the lawyers who asked U.S. Bankruptcy Judge Arthur Gonzalez in New York City to move the case to Houston. It came as no surprise that Gonzalez declined.

Cahn says he believes more was at work than the law.

``I'm willing to assume that Judge Gonzalez was anxious to keep the case at any cost,'' says Cahn. ``For anybody who's anxious to make a mark in this profession, being associated with this case is an attractive opportunity.''

Last Updated: December 5, 2003 12:24 EST


Corporate Governance in America 

At Disney, Stanley Gold and Roy Disney have resigned protesting the cronyism of Eisner, who has used the pretext of corporate governance guidelines to pack the board and its committees with personal friends. The stratagem employed by Eisner to disenfranchise shareholders are "independent directors", an elitist concept devised by Fabian socialists requiring directors not to have an economic interest in the business at hand. This has the perverse effect of banning directors who are also shareholders to be active in board committees and deliberations! The folly of this principle, which is codified in most of European stock exchange regulations has been denounced by only a few voices, notably Claude Bebear or AXA and Warren Buffett.
As Bebear noted, when a large shareholder is not deemed independent, then the only directors chosen will be golf buddies and personal friends of the Chairman. Exactly as it happened at Disney. I would argue that on the contrary, directors must have a personal stake in the business to align theis interest with all the investors. Otherwise corporate directors will become a cabal just like the EU technocrats, appointed by their peers and accountable to no one.
With the stock market surge of the current year, a new puzzle arises: will the shareholders clamor to enforce proper aligment of interest and stop cronyism at companies like Disney even when the share price rises? The Economist of December 4th, 2003 puts it best:

<<(At Boeing) didn't the board do the right thing, and prompt the firm's boss, Phil Condit, to fall on his sword? Yes, but not for reasons that would necessarily cheer fans of stronger governance—if by that is meant stronger exercise of ownership rights by shareholders. Boeing's big shareholders appear indifferent to Mr Condit's sudden departure. It remains to be seen whether Disney's shareholders will be moved by the complaints of Messrs Gold and Disney. The reason for shareholder complacency at both firms seems to be their share prices, which since March have shot up by 53% at Disney and 52% at Boeing.

Mr Condit may have gone because his biggest customer, the Pentagon, finally lost patience with all those stories about naughty behaviour at Boeing. Despite his many governance failings, Mr Eisner seems more secure at Disney than he has been for a long time—at least until Disney's performance begins to falter again. If they want real reform, America's biggest shareholders will have to learn how to get angry when they are making money, not just when they are losing it.>>

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