December 10, 2019 1:28PM

Judge Rules Against New York in Exxon Securities Fraud Case

New York's attorney general has sustained an embarrassing defeat in the state's securities-fraud case against Exxon Mobil over its communications on climate change, a case that never should have been brought.

The case got off on the wrong foot from the start when since-disgraced NY AG Eric Schneiderman signaled that he wanted to use it as a vehicle against wrongful advocacy of bad public policy positions. I and others strongly criticized his moves to use subpoenas for that purpose, and editors at places like USA Today and the Washington Post were troubled by the likely chilling effects such tactics would have on advocacy, and the First Amendment implications of that.

At the last minute Schneiderman's successor as New York attorney general, Letitia James, dropped two counts that would have required a showing of intent by the oil company. That still left the state's elastic, ultra-broad Martin Act, which any defendant would have to fear: it gives the state's AG unusual powers that are hard to square with due process protection.

But even the Martin Act charges failed, for reasons foreshadowed by Prof. Merritt Fox in this Columbia Law School post. Over the course of the trial, Judge Barry Ostrager also chided the state -- to quote the New York Post's account -- "for being unprepared, for indulging in 'agonizing, repetitious questioning about documents that are not being disputed'; for pretending a witness was an expert when she wasn’t” and much more. This morning, in a scathing opinion, Judge Ostrager ruled that the state had not shown Exxon investors to have been misled. Unless the state is rash enough to appeal, that should be that for this misbegotten case.

The damage, however, is real. If a state like New York can bend and twist legal concepts like that of securities fraud to carry on an essentially political vendetta against a corporate enemy, how safe are other businesses? Not very, suggests Prof. John Baker.

This is not a question of one's views on climate, but of whether all sides, including businesses, ought to remain free participants in the arena of public discussion and advocacy. That's why it continues to surprise me that organizations that should know better bought into the premises of the New York suit.

December 10, 2019 12:26PM

Fannie and Freddie Need Fixing — Urgently: A Response to Joe Nocera

Yesterday, Joe Nocera penned an extraordinary column expressing his bafflement at the Trump administration’s drive to release Fannie Mae and Freddie Mac, two firms that purchase and guarantee around half of single-family mortgages in the United States, from government conservatorship. Nocera argues against such a move, writing that “if it ain’t broke, don’t fix it . . . Fannie Mae and Freddie Mac ain’t broke.”

The piece is disconcerting from start to finish. Nocera writes that Fannie and Freddie make the 30-year fixed-rate mortgage, a product common only in the U.S., possible and thereby “help more people attain the American dream of homeownership.” Nocera neglects to mention that the U.S. homeownership rate, at 64 percent, is the same as it was in the late 1960s, long before mortgage securitization. This rate is lower than those of other Western countries (Table 1) and particularly low for minority Americans.

Table 1. Homeownership Rate, Selected Countries

Country Homeownership Rate
Canada 67.8%
France 65.1%
Germany 51.5%
Japan 62.0%
Italy 72.4%
Netherlands 68.9%
Spain 76.3%
United Kingdom 65.1%
United States 64.8%

Source: Eurostat; Statistics Canada; Statistics Japan; U.S. Census Bureau. 2013 data for Japan, 2016 data for Canada, 2019 data for all other countries.

Nocera is correct that the 30-year fixed-rate mortgage probably wouldn’t exist without Fannie and Freddie, which are only (barely) going concerns today thanks to U.S. taxpayers. But countries without this product seem to do a better rather than worse job of promoting homeownership.

Nocera also repeats the dubious assertion that the U.S. government earned a “healthy return” on its bailout of Fannie and Freddie. Yes, since it funneled around $190 billion into the two firms in 2008, the government has collected around $300 billion in dividend payments. But those dividends are contingent on an essentially unlimited government backstop. Furthermore, Fannie and Freddie have had virtually no capital since 2008 and continue to operate merely because the government stands behind them. In short, were Fannie and Freddie private concerns, they would have been forced into receivership long ago.

The bailout of Fannie and Freddie was not a good investment. The Congressional Budget Office, in fact, estimated a return adjusted for the enormous risk Uncle Sam took on when it rescued the two firms of minus $311 billion. Other, more recent, academic evaluations also show a negative return.

Fannie and Freddie owe their continued existence to a gigantic and ongoing taxpayer subsidy. There are beneficiaries, of course, including large asset managers who deal in the mortgage-backed securities Fannie and Freddie issue. As of 2019, there are close to $10 trillion such securities outstanding, with $1.3 trillion issued in 2018 alone. Asset managers therefore have a large economic stake in our subsidized mortgage market. But claiming that this sweet deal benefits all Americans, as Nocera does, is of no service to the public interest.

“Any objective observer,” says Nocera, “would have to concede that Fannie and Freddie have done a very good job since the 2008 crisis.” Yet an examination of the evidence suggests otherwise. Conservatorship was designed to be a temporary (read: 6-month) arrangement, not an 11-year-long commitment with no end in sight. During this time, Fannie and Freddie’s role in the mortgage market has actually increased, and they’ve expanded their purchases of high-risk mortgages as the credit cycle matures. These facts supply ample grounds for concern.

Finally, concerning what caused Fannie and Freddie to go belly-up in 2008, Nocera writes:

What got Fannie and Freddie in trouble was not the government mandate, but their public company impulses. In the years before the crisis hit, they abandoned their historically sound underwriting standards because they were losing market share to the mortgage originators that were writing all those subprime loans that came a cropper when the bubble burst. As government wards, Fannie and Freddie no longer have any incentive to act foolishly.

Famous last words, as they say. In any event, and while there’s a debate around the relative role of government intervention and speculative frenzy in the last years of the housing boom (2004-2006), Fannie and Freddie’s ill-fated lowering of underwriting standards began much earlier, in the late 1990s. The government played a key role in fomenting this decline of credit standards by steadily ratcheting up the share of high-risk mortgages that Fannie and Freddie must purchase. Fearing that failure to comply would prompt Congress to allow competitors to challenge their duopoly, Fannie and Freddie obliged, with terrible consequences for vulnerable homeowners, and the U.S. economy as a whole.

Housing finance in America is a tangled web of cross-subsidies, public guarantees, government mandates, and competitive restrictions. Those features make it exceptional around the world, but not in a good way. Those who believe Fannie and Freddie are the best invention since sliced bread might ask themselves why, after so many decades, no other country has been inclined to look to the United States for inspiration about how to run its mortgage market.

[Cross-posted from]

December 10, 2019 10:35AM

Vox Misses Mark on Institutional Primacy in Contemporary Federal Policymaking

Yesterday, Vox's Ian Millhiser posted an interesting article on how President Trump's judicial nominees are changing the federal courts.

I've no argument with Millhiser's underlying thesis: A lot of (great) judges have been appointed during Trump's administration.

The causes for this are obvious. There’s a Republican in the White House, and Republicans control the Senate, so the appointment process is well-oiled. In addition, past Senates (under both parties) changed the body’s rules so as to ease the confirmation of a president’s nominees.

Where I take issue with Millhiser is with his understanding of the judicial power. He writes:

In an age of legislative dysfunction, whoever controls the courts controls the country . . . [Judges] have become the most consequential policymakers in the nation . . . The judiciary is where policy is made in the United States.

This can’t be right.

By its nature, the judiciary is weaker than either of the political branches. As Hamilton wrote in Federalist 78, courts have “no influence over either the sword or the purse,” unlike Congress and the president. Approvingly, Hamilton quotes Montesquieu’s assertion that “Of the three powers . . . the judiciary is next to nothing.”

Millhiser might reply: “Well, ‘next to nothing’ in the judiciary is more than ‘doing-nothing’ in Congress.”

And, perhaps, he’d have a point. But he’d still be mistaken overall, because the president is the undisputed policymaker-in-chief in modern American government.

Last week, in The Hill, I used the ongoing impeachment proceedings to make this very point:

Why have the House and Senate, through the impeachment process, become willing cogs in the oily machinery of the 2020 presidential contest?

The answer involves a tectonic shift in American government, from a functioning separation of powers to one that is out of whack . . . Over the last century, Congress has given away, or “delegated,” much of its policymaking initiative to the executive branch . . . Through these grants of authority, Congress created an alphabet soup’s worth of regulatory agencies collectively known as the administrative state.

As . . . Congress lost the capacity to oversee its delegations . . . modern presidents have seized undisputed supremacy over the administrative state by increasing control over agency budgets and regulatory management.

Policy now flows from the White House.

Congress couldn’t pass immigration reform, but President Obama achieved the same results with DACA. Congress denied President Trump funding to build a border wall, but then he exercised his delegated authority to declare an “emergency” and funded the wall unilaterally.

In this context—where the president calls the shots and Congress is beholden to party leadership—half the legislature always is unbothered with unbound executive authority whenever “their guy” occupies the White House.

It’s a vicious feedback loop. The more powerful the president becomes, the more our party-centric Congress rationally believes that the Oval Office is the most efficient means to implement the planks of a given party’s platform.

The full article, titled “This Isn’t Your Founding Fathers’ Impeachment,” is available here.

December 10, 2019 10:30AM

NDAA 2020: Congress Neglects Its Responsibility Once Again

There’s much to hate in the National Defense Authorization Act (NDAA) for FY2020, which passed out of conference committee late yesterday evening (story here, summary in .pdf here). I suspect my colleagues will unpack or attack some of the details, but I’m generally annoyed by the top line – $738 billion – at a time when the annual federal budget deficit surpasses $1 trillion. The utter failure of elected officials in both parties to come to grips with our fiscal catastrophe, and align our overly ambitious strategy with our obvious resource constraints is frustrating in the extreme. If this NDAA passes, which seems all but certain, it will be yet another sign of how U.S. foreign policy is writing checks that Americans dare not cash.

But another part of the NDAA is utterly infuriating – the decision by the conferees to strip out two provisions that would have compelled Congress to revisit the 18-year old Authorization for Use of Military Force (AUMF) passed after 9/11, and the Iraq war AUMF of 2002, and a separate but related provision stipulating that that authority did not grant the White House carte blanche for initiating a war with Iran, something that senior Trump administration officials have suggested. Both measures were passed in the House version of the NDAA, and with bipartisan support. The Senate, however, especially Senate Republicans, refused to consider such measures.

The oath of office that every member of Congress takes is not so dissimilar to that taken by members of the military: most importantly, they pledge to "support and defend the Constitution." And that Constitution clearly states that the nation’s war powers are vested in the Legislative branch, not the Executive. In short, members of Congress who have refused to revisit the AUMF are, in effect, engaged in a dereliction of duty. But those who have blocked any consideration of the question, as has just happened, are guilty of a far greater breach of trust: they are actively subverting the Constitution. Shame on them.

This brazen attempt to prevent public oversight of America's longest war might again pass unnoticed, were it not for the shocking revelations contained in a blockbuster Washington Post report yesterday. The report reveals that U.S. officials have been engaged in a protracted campaign to mislead the American people. Under three successive presidents -- George W. Bush, Barack Obama, and Donald Trump -- who all promised to avoid getting sucked into an open-ended nation-building mission, civilian and military leaders, writes the Post's Craig Whitlock “failed to tell the truth about the war in Afghanistan..., making rosy pronouncements they knew to be false and hiding unmistakable evidence the war had become unwinnable.”

Such revelations are not all that surprising, sadly. Drawing on an important Cato study that he co-wrote with John Mueller earlier this year, John Glaser explains how U.S. leaders, “have rather persistently depicted a rosier picture than the facts warranted,” and he concludes that "this dishonesty, in fact, is a big part of why the war persists.”

There may be a ray of hope on the horizon, however. While at least some of their fellow senators are actively engaged in a campaign to thwart meaningful oversight of this never-ending war, New York Senator Kirsten Gillibrand and Connecticut Senator Richard Blumenthal yesterday declared that the Post’s revelations compelled public hearings. They are correct. But, as minority members on the Armed Services Committee, they can't force such an inquiry. Who among the many GOP senators who have, in the past, spoken eloquently about the need to claw back the war powers will take up the mantle? Who else in the Senate believes that the American people deserve to know the truth about the war in Afghanistan? Who is this generation's J. William Fulbright?

December 10, 2019 8:43AM

Why There Has Been No Great Reversal in U.S. Banking

Thomas Philippon’s The Great Reversal is an important book in which he warns of the decline of competition in many U.S. product markets. Not having studied antitrust issues for some time, I will leave criticism of his general thesis—that competition has indeed declined and that this is owing to lax antitrust enforcement—to my Cato colleagues writing about that issue. (You can start here.)

But I do want to take issue with Philippon’s argument that finance is one of the industries in which competition has declined. Philippon devotes a whole chapter of the book to the financial services industry, giving it the punchy title, “Why Are Bankers Paid So Much?,” while Martin Wolf, in his Financial Times review of the book, called finance a “rent-extraction machine.”

There are two serious problems with this view of U.S. finance. The first is that two central pieces of evidence Philippon cites in support of his general thesis, high concentration and rising profit rates, are simply missing in the financial sector. Another popular symptom of market power, namely slowing entry, is present in banking but directly attributable to regulators’ actions following the financial crisis.

The second problem is that Philippon’s argument on finance relies heavily on a 2015 paper reporting that the costs of financial intermediation had been largely unchanged for 130 years. From this, Philippon concludes that “improvements in information technologies do not appear to have led to a significant decrease in the unit cost of intermediation.” But because the 2015 paper does not break costs by category, it is not clear whether the mix of costs has also remained stable over the years, or whether (as I suspect) there has in fact been a decline in “market operating” costs, thanks to technology and economies of scale, that has been offset by rising regulatory (including lobbying) costs.

Philippon’s diagnosis of uncompetitive markets may therefore be accurate for U.S. finance, but for reasons to do with government intervention rather than the absence of competitive enforcement by government.

Read the rest of this post »
December 9, 2019 4:05PM

Special Inspector General for Afghanistan: “The American People Have Constantly Been Lied To.”

The Washington Post has obtained a huge cache of internal government documents containing hundreds of interviews with U.S. officials on the war in Afghanistan. The documents reveal a broadly shared official view that America’s longest war has been a failure, essentially from the start. Over the years, official assessments of the war were consistently positive, optimistic, hopeful, and confident in the progress being made on the ground. But behind closed doors, official assessments were starkly different. Post reporter Craig Whitlock writes:

Several of those interviewed described explicit and sustained efforts by the U.S. government to deliberately mislead the public. They said it was common at military headquarters in Kabul — and at the White House — to distort statistics to make it appear the United States was winning the war when that was not the case.

“Every data point was altered to present the best picture possible,” Bob Crowley, an Army colonel who served as a senior counterinsurgency adviser to U.S. military commanders in 2013 and 2014, told government interviewers. “Surveys, for instance, were totally unreliable but reinforced that everything we were doing was right and we became a self-licking ice cream cone.”

…[The] interviews contain numerous admissions that the government routinely touted statistics that officials knew were distorted, spurious or downright false.

A person identified only as a senior National Security Council official said there was constant pressure from the Obama White House and Pentagon to produce figures to show the troop surge of 2009 to 2011 was working, despite hard evidence to the contrary.

“It was impossible to create good metrics. We tried using troop numbers trained, violence levels, control of territory and none of it painted an accurate picture,” the senior NSC official told government interviewers in 2016. “The metrics were always manipulated for the duration of the war.”

I would like to say that I was surprised by such shameless and cynical manipulation, but I wasn’t. Earlier this year, I published a Cato Policy Analysis with my co-author John Mueller, entitled Overcoming Inertia: Why It’s Time to End the War in Afghanistan. National leaders, we wrote, “have rather persistently depicted a rosier picture than the facts warranted.” This dishonesty, in fact, is a big part of why the war persists “despite the telltale signs of mission failure.” Our paper also included criticisms of the very issues – aid distribution, corruption, the failure of the train and equip mission, confusion about objectives, etc. – at which these mostly anonymous officials took aim.

The Post story draws on interviews conducted by the Office of the Special Inspector General for Afghanistan Reconstruction (SIGAR). John Sopko, the Special Inspector General, admitted to the Post that the documents show “the American people have constantly been lied to.” When asked why he refused to include the damning interviews in SIGAR reports, Sopko explained, “My job and my people’s job was to try to get the information to try to come up with best practices.” In other words, he viewed his job as scrutinizing the war effort only in the service of informing policymakers on how to better carry it out, not whether it should be, or even could be, carried out.

A senior National Security Council official fleshes this out a bit: “Bad news was often stifled. There was more freedom to share bad news if it was small — we’re running over kids with our MRAPs [armored vehicles] — because those things could be changed with policy directives. But when we tried to air larger strategic concerns about the willingness, capacity or corruption of the Afghan government, it was clear it wasn’t welcome.”

Again, minor tactical criticisms were acceptable. Raising questions about “larger strategic concerns,” not so much.

Apparently, two considerations outweighed the public’s interest in knowing the truth about the war. According to the NSC official, lying about the progress of the war “went on and on for two reasons…to make everyone involved look good, and to make it look like the troops and resources were having the kind of effect where removing them would cause the country to deteriorate.”

To review: (1) narrow self-interest discourages anyone from blowing the whistle; (2) only operational criticism, not strategic criticism, is welcome; and (3) the U.S. government’s top priority is to uphold the erroneous idea that withdrawing from Afghanistan is not a viable option. Together, these imperatives made systematic lying about the war a virtual inevitability.

On Afghanistan policy, as on many issues in Washington, DC, people often talk past each other. On the one hand, the publicly available evidence has long convincingly demonstrated that the war cannot be won and is in many ways illegitimate. And yet, critics of the war tend to face an impenetrable wall of reality-denying officials and their non-governmental counterparts, most of whom toe the line about how we’re making progress. They are willing to continue to expend taxpayer dollars and human life for a lost cause. It doesn’t make for constructive policy debate.

CNN’s Jim Sciutto called this latest document reveal “a Pentagon Papers moment.” In a sense, he’s right. The Pentagon Papers revealed that government officials systematically lied to the American people about the Vietnam War and the prospects for victory. But as Micah Zenko put it in reaction to the Post story: “US civilian and military officials have misled the public for every war I’ve studied (Kosovo, Iraq, Afghanistan, Libya, Syria, ‘non-battlefield’ drone wars).” Which is to say, the key lesson here is not just that officials consistently lied to the public in order to continue a war in Afghanistan that they privately acknowledged looked like a failure, but rather a broader point: credulously accepting official justifications for war goes against the advice of history.

December 9, 2019 2:48PM

Nevada’s T‑Mobile Deal and the State of Antitrust Law

T-Mobile and Sprint, the #3 and #4 wireless carriers, would like to combine so as to more effectively compete with Verizon and AT&T, the two dominant players in the cellular service market. Various states went to court against the merger, arguing (dubiously) that the combination would harm consumers and drive up prices. And now, via Reuters, this:

Also on Monday, Nevada said it would withdraw from the lawsuit in exchange for early deployment of the next generation of wireless in the state, creation of 450 jobs for six years and a $30 million donation to be distributed by Nevada Attorney General Aaron Ford and aimed at helping women and minorities, Ford’s office said.

How blatant can you get? The best touch, of course, is the $30 million fund with which to ingratiate lucky beneficiaries around the state. (“The recipients of these grants for the use of the charitable contribution will be at the discretion of Nevada’s attorney general” — that is, the same AG Ford who filed and settled the state’s case, and from whose press release is excerpted that sentence.) It looks a lot like the familiar cozytown set-up in many cities in which permission to build a large development or win a public contract just might call for a hefty donation to a local nonprofit with ties to the mayor and council.

Notwithstanding the best efforts from some quarters to develop per se rules in hopes of generating clear and predictable legal outcomes, antitrust law remains a world of subjective interpretation in which government office-holders are left with great discretion regarding how and against whom to wield enforcement power. Whether you want to call it logrolling or use a less flattering term like “extortion,” the temptation is to trade off antitrust leniency for some of the other sorts of favors business might be able to render government actors.

All of which brings us to presidential candidate Elizabeth Warren’s and other candidates' new proposals for antitrust, which a CNBC headline accurately reports (as to Warren's) “would dramatically enhance government control over the biggest U.S. companies.” In particular, the proposals would invite the government far more deeply into oversight of business practices, including refusal to share “essential” facilities with competitors, pricing goods below the cost of production, and much more, as well as mergers and acquisitions.

It’s hard to know whether Sen. Warren sees all this new arbitrary discretion as a bug, or a feature, in her enormous plan. Either way, an accumulation of power that tempting will sooner or later attract appointees seeking either a political whip hand over the U.S. corporate sector, a source of payouts like that in Nevada, or both.