Schumer drinks the Kool-Aid

I saw that the Wall Street Journal ($) yesterday was heralding the fact that New York senator Chuck Schumer, a Democrat, has "seen the light," so to speak, about tort reform. Schumer has endorsed the ridiculous study commissioned by Mayor Bloomberg that declares tort reform the single biggest key to retaining U.S. dominion of global finance.

I don't want to beat a dead horse here, but as I've noted before, I find it very hard to believe that the threat of a lawsuit is the biggest fear foreign companies have of doing business on U.S. soil, especially when you consider all the other factors like, say, the health care system. In any event, just as a reminder, the latest research on securities litigation suggests that the CEO's concern about shareholders' suits cited in the now-famous McKinsey study is wildly overblown.

Not only has the rate of shareholder suit filings plummeted 44 percent over the past decade, but the risk of getting sued has also fallen such that the average American corporation has less than a 2 percent chance of getting hit by a shareholder suit in any given year. If that's enough to scare off foreign companies, we have a lot bigger problems than the tort system. Oh, and before you start writing in about the "lawsuit lottery" and the risk of that one big, ship-sinking verdict, let me just point out here that no company ever settles a lawsuit for billions of dollars unless it actually did something really mean or really stupid to deserve it (and yes, Enron does come to mind here), in which case, the lawsuits are working exactly like they're supposed to...

Comments

[Ted]

Are you so ignorant of the global financial system that you think a country's health care system has any relevance to the decision whether a Hong Kong company retains New York or London investment bankers for a market listing? Fortunately, Senator Schumer isn't. But perhaps you can bolster your baseless assertion that it's really the health-care system that's at issue rather than the justice and regulatory system by explaining what happened to the health care system in the last five years such that the US had 90% of the share of the international IPO listings market just before Sarbanes-Oxley and 16% in the last two years.

SM writes: "no company ever settles a lawsuit for billions of dollars unless it actually did something really mean or really stupid to deserve it"

That's simply not true. Dozens of innocent bystanders were sued in the Enron and Worldcom litigation, and, under joint and several liability and the threat of punitives, were threatened with tens of billions of dollars of liability--even though many of the defendants lost millions or more in the collapse of those two companies.

Might I ask what trial lawyer ever settles a meritorious case for 2 pennies on the dollar against a deep pocket capable of paying the full judgment? That sort of billion-dollar settlement sure looks like extortionate "insurance" against an insanely erratic justice system rather than a defendant paying the price for "doing something really mean or stupid"--especially when the mere cost of defending oneself in such a litigation can quickly rise to the hundreds of millions of dollars without hope of recouping that amount. If one is on the hook for several hundred million dollars even if you win, one might as well pay a few more hundred million to avoid the tiny risk of losing tens of billions. The question is why the plaintiffs are letting the banks off so easy if the banks actually did something mean or stupid (or, more importantly, illegal).

[Webdude]

*** Ted Frank Writes: Are you so ignorant of the global financial system that you think a country's health care system has any relevance to the decision whether a Hong Kong company retains New York or London investment bankers for a market listing? ***

Yes, I'm every bit as certain that she's ignorant as I am convinced that you didn't open your remarks with yet another of your trademark personal attacks.

Perhaps you didn't notice the change of subject. The comment was "I find it very hard to believe that the threat of a lawsuit is the biggest fear foreign companies have of doing business on U.S. soil, especially when you consider all the other factors like, say, the health care system." You are certainly aware that it is possible to do business on U.S. soil whether or not you are listed on the NYSE.

Back on the subject of IPO's though, you suggest that Hong Kong companies are choosing to go public in London over New York. Perhaps you aren't aware of the fact that Chinese companies (including Hong Kong companies) are going public in Hong Kong. Crazy, isn't it, that the Chinese government chose Hong Kong for the largest IPO in history, that of the Industrial & Commercial Bank of China?

*** Ted Frank Writes: But perhaps you can bolster your baseless assertion that it's really the health-care system that's at issue rather than the justice and regulatory system by explaining what happened to the health care system in the last five years such that the US had 90% of the share of the international IPO listings market just before Sarbanes-Oxley and 16% in the last two years. ***

It is refreshing to hear you back away from the tort reform prattle that health care costs, driven by litigation, are ruining the U.S. economy and endangering African-American babies. Baseless? I hadn't expected such a dramatic retreat, but I guess you're full of surprises today.

Let's see what that leftist rag, Fortune Magazine has to say about this crisis....

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Each week, it seems, brings fresh protestations that the sky is falling on the U.S. capital markets. Nobody wants to list on U.S. exchanges anymore, goes the argument, because Sarbanes-Oxley has poisoned the well, because the U.S. regulatory climate is too onerous, because selling out is a far more favorable alternative than the tedium of going public.

Studies and conferences hammer home the point. Shortly after the New Year it was a McKinsey study prepared for New York's Mayor Bloomberg and Senator Schumer. (Question: Has McKinsey ever produced a report that contradicts the assumptions of its client? May I read it?)

This week the parent company of the New York Stock Exchange and Stanford University's Rock Center for Corporate Governance presents a seminar: "Can Our Capital Markets Be Saved and Do They Need Saving?"

The second question hits the mark: Of course they don't need saving. All they need are good companies, well informed investors and a robust economy. The proof is provided by the companies that choose, even in this supposedly horrible environment for public companies, to go public.

After all, 56 companies backed by venture capitalists went public in 2006 in the United States, raising a total of $3.72 billion, the highest number and largest amount raised since 2004, the year of Google, according to Dow Jones VentureOne. More broadly, a Thomson Financial survey of all U.S. IPO activity shows that the 189 IPOs last year raised nearly $43 billion, more than the $41.4 billion raised by 558 deals in 1997. In other words, there were fewer but higher-quality deals. More are on the way.

(Fortune, IPOs still love U.S. markets, Jan. 30, 2006).
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The author suggests that people "Stop whining about SarbOx," observing that VC funding is at its highest level since 2001. The New Yorker, similarly, takes on the Cassandras of Wall Street,

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To businessmen weary of compliance officers and internal controls, this seems like a compelling narrative. But it’s a radically oversimplified explanation of what’s been happening. To begin with, many of the world’s biggest I.P.O.s in recent years have been privatizations of state-owned companies in Europe and China, which for political reasons were never likely to happen in the U.S. Also, corporate executives prefer to take their companies public in bull markets, which improves their chances of getting a high price for their shares, and foreign markets have lately done better than the U.S. market. London and Hong Kong are also cheaper than New York: the commissions that investment banks charge to take companies public there can be about half what they are in the U.S. More broadly, globalization—a force that Wall Streeters applaud when it comes to textile plants and call centers—has increased competition. Many foreign exchanges, like Hong Kong’s, are now far more liquid and open, and they also have much tougher regulations (often modelled, ironically enough, on those of the U.S.) than they once did. All this has made investors more willing to invest in them.

(New Yorker, Over There, January 29, 2007.
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Your last paragraph doesn't address the point about multi-billion dollar settlements. The point was not about nuisance settlements, even apocryphal ones in the tens of millions. Should we take your non-responsive remarks as an admission, however tacit, that Ms. Mencimer was correct in her actual assertion?

[Ted]

The Schumer/Bloomberg/Spitzer report is not about "doing business on US soil," it's about doing business in US financial markets. So if there is a dishonest change of subject, it is Mencimer's, not mine, though it's at least as likely that it stems from Mencimer's ignorance of the subject rather than a deliberate attempt to deceive.

Webdude's cherry-picked data shows a 5% increase in IPO activity in nine years as the world economy grew by several times that rate, which supports my claims. If he had used the full spectrum of data, rather than the cherry-picked points, and had used real dollars rather than nominal dollars, it would support my claims further. Kate Litvak's empirical work provides additional support.

My last two paragraphs were about billion-dollar-plus settlements in Enron and Worldcom litigation, which I have written about several times elsewhere, including in Congressional testimony. Citibank, a $260 billion company, was sued for over $50 billion plus punitive damages and settled for $2 billion. Shall we take Webdude's failure to address what I actually said and once again lie as a tacit admission that I am correct?

[Webdude]

Gosh, Ted... Mencimer was "disonest" in making an accurate statement, and if only she had made the statement you fabricated and stuck into her mouth you would be right? And by making an accurate statement she proves herself ignorant, whereas your abject ignorance of the subject proves that you... what? What a compelling defense you present for yourself.

I'm sorry if presenting a lot of facts, and referencing two pretty thorough articles by people who (unlike you) know what they are talking about constitutes "cherry picking" in your mind. Darn those facts, after all. You were having so much fun with your ignorant, inaccurate rant, and now all you're left with is your petulant prevarication and ad hominem attacks.

If your last paragraph was supposed to be about Enron and Citiban, you were couching it in terms which were intended to make its scope seem much broader. That's one of your standard tools, isn't it? Write something you know is misleading then, when confronted on the obvious implication of your statement, complain that you "never said that"? It's tiresome. When people figure out the misrepresentation or falsehood you intend to propogate - that you are paid to propogate - you have no right to complain that they are misrepresenting or misstating your intentionally deceptive statement. If you wish to avoid this problem, as everybody here knows, you're smart enough to write clearly if you choose. Your choice.

You once attacked Ms. Mencimer with the accusation that all of her errors are one-sided. What's your excuse?