Does a Sophisticated Theory Miss the Facts?

Michael Greve introduces “adversarial corporatism,” a new conceptual lens through which to view the growing and contentious collaboration of industry and government. Adversarial corporatism takes the conventional story of crony capitalism and regulatory capture—a story appealing to critics on the left and the right alike—and adds a dose of a starker reality: the cooperation is there, unquestionably, but so is a mutual antagonism that exists side-by-side and sometimes symbiotically with that cooperation. If Greve’s oxymoron confuses a reader coming at this literature for the first time, it clarifies a dynamic that administrative law scholars have been watching for many years. (Indeed, along these very lines, work bythe historian Gabriel Kolko—an avowed Marxist often mistaken for a libertarian—is useful and underappreciated by legal scholars.) Regulatory capture and crony capitalism are useful but incomplete conceptions of the relationship between government and industry. Adversarial corporatism adds nuance to the narrative.

I have one small but important challenge to the example of financial regulation, and one deeper challenge to the overall theory. Knowing Greve, this thoughtful essay is a first pass at fleshing out what will be a fascinating theoretical contribution. I look forward to the more fully developed theory that will follow, and offer here a few challenges to puzzle through on the way to the comprehensive theory.

The small challenge is to the very concept of “capitalization” that Greve uses as the basis for his primary example. The idea that transfers from financial institutions to the government in response to specific criminal or civil enforcement actions constitute “decapitalization” is incorrect, at least from the perspective of corporate finance. Recapitalization under the Troubled Asset Relief Program (TARP) and its related programs was an effort to force, with government sponsorship, a massive deleveraging of the largest financial institutions in the economy. This occurred not through the extension of loans to the banks that had to be repaid, but the infusion of equity that had to be repurchased. The difference is far from semantic—the difference between bank debt and equity is at the heart of perhaps the most important debate in banking regulation of the past thirty years. And indeed, the equity infusions that occurred under TARP were extremely controversial: the Act was sold by the Bush Treasury as an authorization for the purchase of “troubled assets,” rather than the infusion of equity—and, explicitly, ownership—of the banks themselves. The Paulson Treasury was savvy enough to slip in the statutory language that would authorize equity infusions, but many saw this as a misleading about-face. But however TARP was sold to Congress and to the American people, the consequence was governmental ownership of bank equity. For that reason, the term “bailout” is something of a misnomer: for a period of months in 2008 and 2009, the financial system of the United States was effectively nationalized.

Now, once the nature of the banks’ capital structure was changed, what banks do with that money is an entirely separate question. Indeed, a common and damaging fallacy among even the most sophisticated of bankers, economists, and other observers, has it that bank capital is the paper currency stashed in vaults only deployed during a rainy day. On that view, the money-in, money-out approach to the government’s relationship to the banks looks counter-intuitive to say the least.

But the capital infusions under TARP, or the mandated private equity infusions under the so-called “stress tests” (in the few cases, indeed, where the stress tests required more equity infusions), were not deposits of money into the vaults that were then removed from those vaults to satisfy an enforcement regime. (Anat Admati and Martin Hellwig explain these concepts persuasively and readably in their book and in a thorough follow-up.) In the first instance, equity infusions represented a change in the banks’ capital structure such that the money claims on the banks’ revenues came from equity shareholders rather than debt-holders. Because debt-holders are nearly always at the heart of a financial crisis, this focus on debt is crucial. Payment to cover all other costs of business—including costs of breaking federal law—that comes from equity infusions rather than borrowed money impose less of a cost on the financial system generally.

Thus, it’s simply not the case that equity infusions and money depletions under an enforcement order are at cross-purposes, as these depletions are not decapitalizations at all.

But, as I say, this is a relatively small point: while Greve’s theory starts with this example, it doesn’t end here, and there is much that remains intriguing about actions that, to the general public at least, seem inconsistent or incompatible. In many other instances, we appear to have regulatory approaches disfavored by the banks on the one hand and other results that they seem to control on the other. Does corporate adversarialism explain this apparent tension?

Count me an intrigued and open-minded skeptic. The primary challenge to the concept as Greve has outlined it is whether, in fact, the two halves of antagonism and cooperation “converge on a single phenomenon,” or whether that connection is spurious. Rather than “a strategy of re- and de-capitalizing firms at the very same time,” what if the phenomena we observe occur instead quite separately (or if connected, connected in a very different way)? Let me, very briefly, air out two alternative theories with the second hinging on the observation that the coalition enforcing governmental policy is itself fractured.

First, consider for argument’s sake that the governmental actions—at least in the financial regulatory context—are coherent when refracted through a lens of ex ante crisis prevention and ex post crisis mitigation. (I go into more detail here on some of these points.) If all agree that these ex ante and ex post policies are generically desirable—that is, we want to prevent financial crises before they occur, and mitigate their harm after they occur—then our theoretical inquiry into the motivation of legislation and regulations that result from that process is essentially over. There is, of course, much more to explore about the specific policies adopted under this shared goal, but leave that aside. If there is near universal agreement that these are the right policy goals—as opposed to enriching banks and bankers at the expense of the rest of the economy, or to enriching politicians at the expense of banks and bankers—then we have a workable theory of governmental action that doesn’t really depend on corporate adversarialism. The regulation is “public-interested,” as Stephen Croley argues, and claims of regulatory capture or corporate shakedowns start to sound instead like the rhetoric of losing coalitions. “We lost that legislative battle because they are all corrupt!”). Can the eye-popping fines for mortgage manipulations, the London Whale risk mismanagement, alleged fraud in the construction of collateralized-debt obligations, and money laundering for terrorists simply follow from a desire to follow the law and serve the public? Can the equity infusions and the other actions by the Fed and the Treasury be the same? Rather than “resemble[ing] a protection racket that exacts payment and then invites rival gangs to open fire on the local saloon,” as Greve colorfully puts it, are these actions of a cloth toward ex ante crisis prevention and ex post crisis mitigation? I leave them as questions. I think there is significant evidence from the Dodd-Frank legislation and implementation to suggest something other than public-interested regulation, but the messiness of the details is essential before we can recline into the certainty of theory.

Second, forget public-interested regulation. Suppose instead that the term “government” is a metonym that describes not a single monolith, but a number of pulsing, unstable factions loosely coalesced every four years but in fact representative of deep-rooted interests that are deeply hostile to each other. We may indulge the lawyer’s conceit of referring to an executive president incarnate—President Obama—or slightly more modestly, the administration he oversees—the Obama Administration. But the reality is that nearly every president in history is elected by a coalition. And in the present context, the Democratic coalition shows real fissures. One need only read Secretary Geithner’s and Senator Warren’s recently released memoirs for a view of those fissures crystalized in amber. In the coalitional view, we see not corporate adversarialism, but a call and response between rival factions muscling for prominence, supervised by the individual or individuals hoping to ride herd long enough to win reelection or seal a legacy or do whatever else politicians facing the judgment of a national electorate or the opinions of posterity hope to do.

If the coalitional theory explains the phenomenon of sometimes-banks-win, sometimes-banks-lose, then what we see may be not because of a rough and unsteady relationship between the government and regulated industry, but the uneasy relationship within governmental officials themselves.

What to make of these three (or really five, if we include crony capitalism and government shakedowns as viable alternatives) theories is a complicated affair. My own view is that history’s instances of past collaborations and past antagonisms—even when they occur during the same presidential administration—make even the most elegant of theories inapplicable. Indeed, Greve’s effort to reconcile apparent cross-purposes adds needed complexity to what is often a caricature of actual governmental action. The goal, then, shouldn’t be theoretical elegance and universal applicability, but a fine-grained analysis of the individual action that represents either side of the corporate adversarialism coin. As Daniel Carpenter has recently argued, the systemic measurement of regulatory capture—isolating the governmental action that is plainly contrary to public interest, and plainly dictated by special interest—is actually an exceptionally difficult enterprise. So, too, does the challenge exist for those who see law-breaking racketeering where others see the enforcement of banking and securities laws.

After that historical and technical work is accomplished, the theoretical puzzles will remain open for easier analysis than would be possible without the preliminary work. When that happens, Greve’s theory of corporate adversarialism will be an important part of that discussion.