4 Dismembering the Octopus TOWARD A RADICAL MARKET IN CORPORATE CONTROL
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BlackRock, Vanguard, Fidelity, State Street.
Note:TUTTI LE CONOSCONO...MA COSA FANNO?...QUALCOSA NELLA FINANZA
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institutional investors.
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rarely discussed outside the specialized financial press,
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Together, they control more than a fifth of the value of the US stock
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JP Morgan, United Airlines, Verizon, Google.
Note:COMPAGNIE CONTROLLATE DA....
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How can these asset managers fly so securely under the radar
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they are diversified and many of their investments are held somewhat passively.
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they own stock in a wide range of companies
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Passivity means that they do not frequently buy and sell
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They also often manage the assets that are technically owned by workers
Note:SONO ISTITUZ
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Vanguard has been rightly praised for pioneering low-cost index funds,
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avoid the hazards of stock-picking.
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institutional investors have harmed a wide range of industries, raising prices for consumers, reducing investment
Note:SONO SOGGETTI CHE INCIDONO SULL ECONOMIA
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This outcome is not, as far as we know, the result of any deliberate conspiracy
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MA ATTENZIONE
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giving institutional investors more control over companies—but over individual companies rather than over industries.
Note:LA SOLUZIONE X RIPRISTINARE LA COMPET
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The Monopolist with a Thousand Faces
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The word “monopoly” was coined by Aristotle
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the state,
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well-connected individuals or groups
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the monopolistic control of the British East India Company over the trade in tea.
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local banks
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Large enterprises or projects, like the construction of canals,
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advances in technology and developments in the law eventually allowed entrepreneurs to form business enterprises large enough to undertake vast industrial projects.
Note:POI...TECNO E LEGGE
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entrepreneurs sold stocks and bonds
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the possibility that the businesses could restrict competition, becoming monopolies without any aid from the state
Note:PREOCCUPAZ...LA LEVA DELLA BORSA
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monopolies’ incentives to impede trade and reduce production in order to raise the price
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primary impediment to the operation of free markets and the central cause of inequality,
Note:IL MONOPOLIO X WALRAS
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about the last thirty years of the nineteenth century.
Note:ROBBER BARON...USA
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transportation, energy, manufacturing, finance.
Note:IN TUTTI I SETTORI
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one company would buy up others.
Note:CRWAZIONI X ACQUISIZIONE
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The company then bought up its competitors.
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U. S. Steel and the American Tobacco Company.
Note:ALTRI MONOP
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They contributed to the economic and political inequality of the Gilded Age
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novels of F. Scott Fitzgerald.
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In 1890, Congress passed the Sherman Act
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the new law became a powerful tool in the hands of the Progressive movement
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The first great Progressive president, Theodore Roosevelt,
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spread the fixed costs of production over many more consumers
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lower prices,
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eliminate local monopolies
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It would thus never have made sense simply to abolish big business.
Note:INSOMMA
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“horizontal” concentration
Note:LA PIÙ XICOLOSA
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The Clayton Act of 1914 strengthened antitrust law
Note:SOTTO WILSON
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It took a Great Depression and the rise of Franklin Roosevelt’s New Deal to establish an activist antitrust
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Regulators and courts became more aggressive
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prohibiting firms from buying the stock of other firms.
Note:CLAYTON ACT
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the “Red Queen” phenomenon,
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“Now, here, you see, it takes all the running you can do, to keep in the same place.”
Note:ALICE...FATTA LA REGOLA GABBATO LU SANTO
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work-around used by business,
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getting new laws
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Beginning in the 1970s and accelerating from the 1980s onward, antitrust authorities lost track of the ways in which capital markets reconfigured themselves
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we must examine the evolution of the corporate form
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Acephalous Cephalopods
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public stock corporation
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its stock and debt typically trade on an
Note:IL VANTAGGIO CHIAVE NELL EFFICIENZA
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Ownership became liquid:
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liquid public ownership also created a paradox
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Adolf Berle and Gardiner Means
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“ownership” of a corporation was very different from ownership of ordinary property.
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If you own your car, you both control it
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The problem goes back to voting,
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your vote is unlikely to make a difference.
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you are unlikely to pay much attention to how Google is operated
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you are in no position to exercise your vote in an informed way.
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stock ownership is beneficial only because it gives you the ability to enjoy gains
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So, who does control corporations? Usually the managers.
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CHI CONTROLLA?
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The separation of ownership and control gives rise to what economists call “agency costs.”
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use the corporation to enrich herself
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stock markets gave investors the power to obtain liquidity, but the price to be paid was loss of control
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a market for takeovers
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current thinking focuses on corporate compensation
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CEOs should be paid with stock,
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Governments have tried to encourage firms to adopt “best practices”
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none really resolves
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Effortless Capitalism
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economists developed financial ideas that came to be known as “portfolio theory”
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it makes more sense to buy shares in a diverse group of corporations mimicking the whole economy
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Investors can avoid these stock-specific risks by diversifying widely
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The so-called efficient capital markets hypothesis
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anyone trying to pick an “undervalued” stock is deluding herself.
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that there is little point in stock-picking in the first place, certainly for amateur investors.
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ordinary investors often act irrationally.15
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The cheapest way to do this is via low-cost mutual funds (especially index funds) that track broad market indices.
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mimic the index of interest (e.g., S&P 500).
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Index fund operations are relatively mechanical, so their costs are low;
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institutional investors has risen dramatically, starting roughly in 1980 at about 4% control and leveling out around the Great Recession at 26%.
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This contrasts sharply with the heft of institutional investors.
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they became the largest owners of the firms in which they invested.
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institutional investors might provide the market discipline
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Vanguard, for example, owns more than 6% of Delta Airlines,
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when Vanguard calls, Delta’s CEO will answer the phone
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antitrust enforcement aimed to prevent any single corporation from dominating an entire market.
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institutional investors behave much as trusts
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these institutions have the potential to eliminate competition
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it was not until 2012 that a brilliant young economist, José Azar, put together the puzzle.
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What’s Wrong with Indexing?
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we need to return to the basic theory of competition
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Suppose that GM and Ford are the only two automobile manufacturers in the US
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lowering the price
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But as we have seen, most firms are not independently owned—instead, they are dominated by institutional investors who own large stakes in rival firms.
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imagine first that a single shareholder owns 100% of Ford and 100% of GM.
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The shareholder would direct the CEOs of Ford and GM not to engage in price competition
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act as if the two firms were merged.
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Real institutional investors own only about 5–10% of the companies, but the same logic holds.
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Each institutional investor wants GM and Ford to forgo price competition
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It doesn’t matter whether their stake is 100%, or 7%, or 6%,
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On the other hand, CEOs often hold concentrated shares in the firms they manage.
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The supporting evidence is supplied by the work of Azar, Martin Schmalz,
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One study considers the airline industry.
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Another study reaches a similar conclusion for the banking industry.
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if firms coordinate their political activities, they are likely to be more effective in lobbying for their interests
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The logical end point of institutional investment and diversification is the coordination of all capital
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Restoring Competition
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ban institutional investors from diversifying their holdings within industries
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We would also allow institutional investors to remain diversified within, as well as across, industries as long as they did not grow too large.
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No investor holding shares of more than a single effective firm in an oligopoly and participating in corporate governance may own more than 1% of the market.
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how to define “oligopoly
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how to address firms that operate in multiple markets,
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GOVERNANCE
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Institutional intermediaries compete and are rewarded on the basis of “relative performance”
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it has gained nothing relative to its own competitors in the financial services industry.
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these incentives are greatly dampened relative to the case in which each corporation is mostly controlled by a single institutional investor.
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concentrating the interests
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That competition at present centers primarily on fees, services, and the illusory ability of fund managers to “pick” stocks.
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By creating dominant, large, concentrated shareholders, our policy might disadvantage minority shareholders,
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DIVERSIFICATION
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The major objection to our strategy is that it could limit the diversification available
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if our policy did limit diversification within an industry, the size of this effect would be small.
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If savers truly want that last bit of diversification, they can simply invest some of their money in many different institutional investors.
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index fund exception in our policy.
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never communicates with the operational firms;
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Law on Our Side
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Beyond Monopolies
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large firms pose a problem of monopsony as well with respect to workers.
Note:ALTRO PROB DEL MONOP
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hold down the wages of workers who could not find good jobs outside of the industry they specialized in.
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government introduced laws to support labor unions and protect workers from being overworked,
Note:LA SOLU ZIONE FINORA
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antitrust has a powerful role to play in preventing monopsony
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Luigi Zingales makes a forceful case in his 2012 book, A Capitalism for the People, that antitrust law should be used to block mergers that result in the acquisition of political influence
TO BIG TOO FAIL
