Thursday, May 1, 2014

Hitting Too Close To Home

Hitting Too Close To Home

Don Sterling’s banishment from the NBA shared the front page with a story that the US Department of Justice may indict Credit Suisse and BNP Paribas.[1]  Credit Suisse is being probed for offering illegal tax shelters to Americans, and BNP is being examined for conducting business with countries blacklisted by the United States.  These investigations represent a stepped-up effort by the government to bring criminal charges against financial institutions.  I find it curious that the government has decided to go after Swiss and French institutions as the first cases under their new enforcement program.

Recently Warren Buffet failed to vote against a compensation plan proposed by the board of Coca Cola.  Mr. Buffet has long been a critique of excessive corporate compensation.  However, Coke is Berkshire Hathaway’s largest holding, Mr. Buffet’s son sits on the board, and Mr. Buffet said he wa uncomfortable opposing his friends at the beverage giant.  As a result, Berkshire abstained on the matter.  Joe Nocera, columnist for The New York Times has written two fine pieces exploring the inconsistency in Mr. Buffet’s words and actions.[2]

Public pension plans follow the same pattern.  They often rail against excessive compensation, predatory lending practices of financial institutions, and corporate impropriety.  However, they tend to choose their targets with the same care as the Department of Justice and Mr. Buffet.  Principle is all fine and good until it hits too close to home.  Thus, pension trustees tend to target out-of-state companies.  They prefer to be lead plaintiffs in class actions that don’t involve companies with headquarters or major facilities in their state.

During my tenure at the North Carolina pension plan, we went after the pay practices of Disney.  Burbank and Orlando aren’t in our state.  When mutual funds engaged in a series of improper trading and pricing practices, we focused on Alliance Capital in New York, not Bank of America or First Union (later Wachovia and then Wells Fargo).  The brokerage and mutual fund units of both banks had engaged in the same practices as Alliance, but Charlotte is in North Carolina.  We got to express our outrage without incurring the wrath of major political powers in the state or appearing to jeopardize jobs.  

The Justice Department is taking a step in the right direction.  We’ll see if they are willing to move on US financial institutions, and more importantly bring actions against senior executives.[3]  I’m guessing the last step will hit too close to home.

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