Friday, May 15, 2015

Review of The Godfather by Mario Puzo

Mario Puzo was the Jane Austen of wealth and power. As good as the Godfather movies are, the Godfather book is so much richer.

Wealth and power have decoupled in our civilization. How else could a 84 year old who can't bench press his weight have the ability to order hundreds of thousands of people around? It reminds me of a Paul Graham essay about wealth:

Making wealth is not the only way to get rich. For most of human history it has not even been the most common. Until a few centuries ago, the main sources of wealth were mines, slaves and serfs, land, and cattle, and the only ways to acquire these rapidly were by inheritance, marriage, conquest, or confiscation. Naturally wealth had a bad reputation.
The Godfather can have anything he wants in the world, but he doesn't have a phone number, a wallet, or a bank account. Think about that.

The coupling of wealth and power also reminds me of the oligarchs in Russia:
"[Berezovsky] liked to say that in Russia, the first treasure to be privatized would be profit, then property, and finally debt. He meant that the first thing he wanted to take in a company was its cash flow, and only later would be be interested in owning it, and perhaps never. [...] When he first won Yukos, Khodorkovsky sent three hundred of his best security men to Siberia to physically take over the company's wells and refineries."
In other words, the abstract claims like common stock shares there were a joke (like in China), and what mattered is power. Measuring the minority ownership discount in public companies is measuring civilization.

But the combination of a weak, bought-off legal system and organized crime is not the only combination that can devalue abstract, minority stakes. Remember what happened to the GM and Chrysler bondholders in 2009?:
Of the two proceedings, Chrysler's was clearly the more egregious. In the years leading up to the economic crisis, Chrysler had been unable to acquire routine financing and so had been forced to turn to so-called secured debt in order to fund its operations. Secured debt takes first priority in payment; it is also typically preserved during bankruptcy under what is referred to as the 'absolute priority' rule — since the lender of secured debt offers a loan to a troubled borrower only because he is guaranteed first repayment when the loan is up. In the Chrysler case, however, creditors who held the company's secured bonds were steamrolled into accepting 29 cents on the dollar for their loans. Meanwhile, the underfunded pension plans of the United Auto Workers — unsecured creditors, but possessed of better political connections — received more than 40 cents on the dollar.
What happened to the auto company bondholders in 2009 was a scary precedent, and it is one that has been completely forgotten.



CP said...

"This creates a market niche for intermediaries, who can become entrepreneurs of trust, supporting relationships between buyers and sellers who otherwise would not trust each other. Again, the Sicilian Mafia provides a precedent. Gambetta finds that they began as brokers of trust between buyers and sellers in a rural society without effective laws. The Mafia made money by guaranteeing transactions, threatening cheaters, and sometimes cultivating a general atmosphere of paranoia in order to ensure demand for their services. In other words, it built an informal order of its own, inimical to conventional laws, that gradually began to supplant the traditional state."

CP said...

"Puzo repeatedly emphasizes the similarities rather than the differences between Mafia leaders and conventional politicians and public officials. Both force people to pay for 'protection,' both are portrayed as corrupt and self-serving, and both cover their crimes with a veneer of moralistic rhetoric."

CP said...

"A group of hedge funds that were among Chrysler's creditors initially objected to the bailout plan that preferred the UAW at their expense. In a now-infamous speech in April 2009, President Obama publicly attacked these investors — who were merely standing up for their contract and property rights — as profiteers, criticizing them for their unwillingness to make the same sacrifices as other investors (but not, of course, UAW members, who received a windfall). In response to this public browbeating from the president of the United States, the hedge funds caved and agreed to the terms. In the end, only one group of Chrysler bond holders — the Indiana state teacher and police pension funds — continued to object. Indeed, they objected at every stage of the process, but the Supreme Court declined to hear their case."

CP said...

"By using his political power, Obama has forced the bankruptcy court to put aside longstanding settled principles, especially the rule that secured creditors get priority in receiving assets from a defunct entity. Worse yet, Obama abused his power to benefit his supporter and benefactor, the UAW. What if every president did this sort of thing? Would any legal system that gave citizens equal protection under the law even be possible? Hardly."

CP said...

Private Benefits of Control: An International Comparison by Alexander Dyck and Luigi Zingales

"We estimate private benefits of control in 39 countries using 393 controlling blocks sales. On average the value of control is 14 percent, but in some countries can be as low as –4 percent, in others as high a +65 percent. As predicted by theory, higher private benefits of control are associated with less developed capital markets, more concentrated ownership, and more privately negotiated privatizations. We also analyze what institutions are most important in curbing private benefits. We find evidence for both legal and extra-legal mechanisms. In a multivariate analysis, however, media pressure and tax enforcement seem to be the dominating factors."

CP said...

"We find a striking relationship between corporate governance and stock returns. An investment strategy that bought the firms in the lowest decile of the index (strongest shareholder rights) and sold the firms in the highest decile of the index (weakest shareholder rights) would have earned abnormal returns of 8.5 percent per year during the sample period."

CP said...

"In America, you don’t need to belong to a family-based mafia for protection because the state will enforce your contracts with some degree of equality before the law. In Mexico, though, as former New York Times correspondent Alan Riding wrote in his 1984 bestseller Distant Neighbors: A Portrait of the Mexicans, 'Public life could be defined as the abuse of power to achieve wealth and the abuse of wealth to achieve power.'"

CP said...

"At early common law, a holder of even a single share of a corporation's stock could veto any fundamental corporate change proposed by other shareholders."

Mr. Gotham said...

The Chrysler deal was even worse than you have portrayed. It was common knowledge that the hedge funds that held out for first priority treatment were threatened with IRS audits if they did not relent. As we have seen, that was just the tip of the iceberg with regard to using the revenue collecting arm of the state for nefarious partisan purposes.

It was also just a foretaste of Obama's disregard for the rule of law as we have seen in the implementation of Obamacare and in the foreign policy realm.

It is remarkable to consider how complicit the press has become in all of this. In the days of Watergate, the press saw itself effectively as a defender of the constitution. Today, it sees itself in the role of helping Obama engineer a liberal transformation of the country with rules and laws of little consequence if they stand in the way of that goal.

While the campaign has barely started, it appears that Clinton is receiving the same treatment. Running a personal email server to flout the government's record keeping laws is just mind boggling, but no one in the media called for her to stand aside. Likewise, the chief political correspondent for ABC contributes $75K to the Clinton family's foundation, and he still has his job.

Liberals now feel they have such cover from the press that they don't even have to worry about appearances.

Anonymous said...

I had GM bonds that became worthless. Trust me - I'll never lend money buy a bond of a heavily unionized business again.