Friday, March 20, 2015

Cowardly* Chronicle of Higher Education Refuses to Publish an Idea that Could Save Colleges from Failure and End Runaway Tuition Hikes!

3/20/2015 at 4:03 pm 
Dear Prof. Wright,

Thank you for sending us your article. Several of us have read it, and we regret to say that we are unable to publish it. Because we receive dozens of manuscripts each week on all sorts of topics, we have to make some tough choices. And, unfortunately, that large number also precludes us from responding to each in depth. But we appreciate your thinking of us and hope you will keep us in mind for articles in the future.

Sincerely yours,
The Editors 

Small Colleges as Professional Partnerships by Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD
Higher education in America is yet again engulfed in crisis. On the rise for decades, tuition and borrowing appear to be approaching their natural limits. Small colleges are closing or merging and intrusive federal regulations loom. It is time to experiment, especially at the most fundamental level.
            I’ve argued in two books (including one, Fubarnomics,  published in the U.S. in 2010) that the sector’s root problems are ownership structure and incentive alignment. For-profit schools (whether proprietary or publicly-traded) have proven themselves venal: they lure students into taking out federal loans while leaving most to drop out or to earn degrees with little marketplace value. State-owned schools vary greatly in quality and cost-effectiveness. So, too, do private colleges and universities. The problem with both public and private schools is that they are non-profit entities. Nobody owns them, so nobody in particular has an interest in making them more efficient. Some are blessed with talented administrators, caring trustees, generous alumni, and so forth, but none are owned by the people who create most institutional value, faculty members.
            It is high time that one or more colleges, struggling or recently failed ones, reorganize as professional partnerships, along the lines of a law firm or business consultancy such as McKinsey. Such a college’s assets (tangible and intangible) would be owned by faculty members according to a formula of their own agreement, likely based on variables like term of service, pre-partnership salary, and so forth. Professors who dislike the agreement would be free to leave or to try to negotiate better terms. Presumably those professors who push for more than their objective worth would be allowed to leave while others would receive reasonable recompense for their expected contributions to the partnership.
            Once bound together in professional partnership, faculty members would be free to establish their own governance rules, policies, and so forth within the general guidelines of partnership law. Partners’ ownership stakes, for example, are not like shares in a public company as they cannot be sold or transferred but only insured against death or disability. The goal of such a rule is to tie the long-term incentives of partners (professors) to that of their firms (colleges). Some flexibility is necessary, however, so in their partnership agreement faculty partners can establish rules governing the “cashing out” of faculty members who wish to leave before retirement, or who the faculty partners wish to be rid of. (Instead of being an absolute, in other words, tenure could be “priced,” as in other types of partnership.)
A professional partnership college would be a for-private entity but one where the interests of the two main constituencies, faculty and students, are more closely aligned over the long term than in current for-profit and non-profit ownership models. Publicly-traded and proprietary colleges sometimes make ruthless cuts in their pursuit of quarterly profits. Non-profit public and private colleges, by contrast, often spend too much, i.e., more than strictly necessary to achieve a pedagogical goal, because that can be easier than making difficult decisions. Presumably, professional partners would search out the happy median as they would have no incentive to endanger their own future by slashing expenditures too much or by spending more than they have to in pursuit of specific goals. Surely mistakes will be made in execution of their long-term interests but that is a far better state of affairs than the structurally mis-aligned incentives of traditional non-profit and for-profit colleges.
Moreover, I suspect that many professional partnership colleges would soon conclude that their capital would be best employed by lending it to their students or, if they have insufficient reserves to do that, by guaranteeing their students’ college-related debt. Traditional lenders cannot readily discern good student borrowers from risky ones, but colleges certainly can and in fact can make students lower-risk borrowers by increasing their human capital and improving their attachment to their alma mater. Colleges can therefore lower student borrowing costs by lending to their students directly or by guaranteeing student loans made by traditional lenders and in the process tie their long-term interests much more closely to those of their students.
Professional partnership colleges could bring other improvements to U.S. higher education as well. If barriers to entry were reduced, we might see increased competition and hence innovations not currently fathomed. The more venal for-profit colleges might be run out of the industry and burdensome federal regulations avoided.
Of course, I may have overestimated the beneficial qualities of professional partnerships but, at this critical juncture, we need data more than we need debate. Let the experiment begin and the professional partnership model spread if it works in practice as well as it appears to in theory.

*In hindsight, maybe the editors at the Chronicle are not cowards. Maybe they just aren't very bright.

Wednesday, March 18, 2015

***Consumer Alert*** Nagel Property Management Inc., Sioux Falls, SD ***Consumer Alert***

***Consumer Alert*** Nagel Property Management Inc., Sioux Falls, SD ***Consumer Alert***

On occasion, I exercise my First Amendment right to warn friends and neighbors about potentially shady businesses, including hotels and auto dealers who have ripped off my family. That time has come again. Renters and property owners thinking of listing property with Nagel Property Management Inc. of Sioux Falls should beware. Just this afternoon I tried to rent a property through the company only to learn that its leases contain some onerous terms. The company did not send out the lease beforehand so I arrived at the office cashier's check in hand and ready to sign. Several parts of the document and behavior of the company, however, put me on guard. Most importantly, the terms for contract violation were very heavy and breaking the lease inadvertently would be easy to do because it contains sweeping definitions, like banning all forms of "business" activity from the premises. Another clause limits guests to a 2 week stay. The first was easily negotiated but required positive action on my part. The company acted very strangely on the second. We negotiated a change in language from an absolute ban to "written permission" and then to "written notification." Nevertheless, the company tried to sneak a document changed to "authorization" by me, as if I don't know the difference between authorization and notification or that authorization is virtually synonymous with permission. Moreover, it tried to foist on us a second document with many of the same stipulations as the first, including the 2 week guest rule! We had already signed some documents re: security deposit and so forth, so I ripped them up when it became clear that the company was not going to budge on the rule, citing a bunch of bizarre irrelevancies, because I no longer felt I could trust it with my signature. Perhaps worst of all, the company tried to make all sorts of oral, side agreements about the guest rule although its lease clearly states, as it should, that only the written agreement binds.

Of course no one should make a decision about renting a property from, or with, Nagel on the basis of my experience alone but do look over all documents VERY CAREFULLY, know what you are signing, and don't be afraid to walk away if things don't look/feel right.

UPDATE 3/19/15: I've already received interesting feedback on this. I'm not alone in having doubts about Nagel. The most interesting comment so far has been the suggestion that property management companies work in the interests of owners rather than renters because without any properties to list there would be no renters. True, but without any renters there will be no demand for listed properties. So *quality* property management companies will balance the interests of both sides instead of just trying to suck renters into the maw.

Thursday, March 12, 2015

Remarks Made at Book Launch of Genealogy of American Finance

The launch of Genealogy of American Finance was very well attended. Below please find the comments I made at the launch, which was held at the Museum of American Finance on the evening of 10 March 2015:

When David Cowen called me two years ago, almost to the day, to ask if a history of bank mergers in the United States could be done, I more or less asked him how much time and money he had available. When he told me, I picked myself up off the floor and said, “yeah, I can do something with that.” Today, I’m very pleased with my response. A year ago, when I was entering almost 2,500 bank and bank holding company mergers for one of our larger banks into an Excel spreadsheet, I fear I would have given a different response, one laden with four letter expletives. But Dick, I think fully half of the Museum’s staff, various unsung heroes at Columbia University Press, and in a few cases bank archivists, did a wonderful job bringing all my work, which ranged from grueling to titillating, to heel. To do so, we had to answer questions like how do we truncate 100s or 1000s of mergers so they fit, not only legibly but elegantly, on a few pages, how do we find images for banks that literally no one involved in the project had ever heard of before the project began, and what does ahorro mean?
It means saving in Spanish and it came up because of the methodology we employed to bring the subject matter under control. In an ideal world, with a decade or two to work and a seven figure budget, the project would have traced the history of every bank, commercial, savings, and investment, to ever receive a charter in the United States. A few voluntarily wound up their affairs and some outright failed -- though not as many as you might think. We actually track the aggregate percentages of banks that failed annually from 1790 until 2010 in Table 5. Most banks, in fact, exited by merging with others and mostly in a series of waves driven by momentous economic and/or regulatory changes. Because we could not follow all of the nation’s hundred thousand plus banks forward through time, we opted for the next best alternative, which was to trace mergers backwards from banks still in existence today, much as genealogists do when constructing a family tree. Hence the first part of the book’s title. As there are still thousands of banks in operations in the United States today, writing the histories and recording the mergers of even that population would have taken too long. So we decided to take a page from the Federal Reserve, literally a webpage that unfortunately the Fed has since discontinued, and tackle the fifty largest bank holding companies in the United States as of 2013. I’m very happy that we chose fifty instead of just ten or twenty because the book shows that beneath the big banks that have become to varying degrees famous or infamous over the last few decades there remain sizable, quality institutions with histories just as long and just as interesting as the biggest, hoariest banks you can think of. Hoary just means old, by the way, but I tend to overuse it so the term was completely expunged from the book in editing.
Looking at the fifty biggest bank holding companies also took far us away from Wall Street and into our two newest states, Alaska and Hawaii, and two future states, Puerto Rico and Canada. Seriously, our big fifty also includes some big foreign banks with significant U.S. holding companies, world class banks headquartered in places like Spain and Scotland, and Germany and Japan, as well as our very financially stable neighbors to the North.
America’s largest 50 bank holding companies include some surprising institutions, including a bank started by the Mormon Church, a giant Dutch cooperative bank, and arguably the world’s best auto insurance company, which is also a mutual. Two other of the BHCs we cover began as insurers and three began their corporate existence as the credit arms of giant manufacturers. Two began as transportation companies and one as a water utility. Another seven started out in finance, though not as commercial banks, including two brokerages, two credit card issuers, two investment banks, and one finance company. That’s why the second part of the book’s title is American Finance instead of Wall Street or the U.S. banking industry.
Of course the real world is not as cut and dried as I’ve implied. With but few exceptions for mutuals and relative newcomers, all of the big fifty bank holding companies essentially have multiple points of origin. We did our best to stay with the main strands in the genealogical charts and in the narrative histories but it is not always easy to tell the difference between a merger and an acquisition, especially in older sources, which liked to use general terms like amalgamation instead. Even discerning the target from the acquirer can be difficult. For combinations that took place in recent decades, for example, the Federal Reserve database sometimes indicates that A acquired B while the FDIC database says with equal authority that B acquired A. And what to do when A definitely acquired B but then A changes its name to B? Dick, who has a memory like a steel trap for the full third of American history to which he has been a personal witness, thankfully called me out on at least one of those and we corrected it. But then there were cases where A acquired B and kept A its name but the executives of B took over A’s management. We discuss these subtleties in the narrative histories, of course, but they are not always easily or fully reflected in the genealogical charts or the listings of founding industry or date.
The narratives are so rich and plentiful that undoubtedly anyone with an axe to grind or a thesis to promote will find some support in the book’s 300 plus pages, but Dick and I did not come to any grandiose conclusions. Instead we posed a series of questions about economic and regulatory trends. If I had to pick out one underlying theme, though, I’d say that America’s banking system is like a rain forest but instead of providing the biosphere with biodiversity it provides the economy with let’s call it bancodiversity. America’s largest bank has assets roughly 1,000 times the value of the smallest bank in the study but it is arguably no more successful, unless one measures success solely by size. The fact is, a certain portion of America’s depositors and borrowers prefer the smaller bank to the bigger one and the competition makes them both better. If history shows us anything, it is that change is a constant. What works today may utterly fail tomorrow, so it is nice to have alternative models around to fall back upon when financial Armageddon strikes, as we know from recent events it can.
We also know from relatively recent events that Wall Street faces physical risks. Thankfully, our nation’s bancodiversity is geographic as well as cultural, organizational, and technical. America’s big bank human capital spreads from Portland, Maine to San Juan, Puerto Rico to Honolulu, Hawaii and from San Francisco to Minneapolis to Houston to Boston and surprising places in between, including Tulsa, Oklahoma; Des Moines, Iowa; Birmingham, Alabama; Columbus, Ohio; Bridgeport, Connecticut, and even my old stomping grounds in Buffalo, New York. Maybe an interest in bancodiversity is what induced the Fed to replace its top fifty bank holding company page with a page listing holding companies with assets greater than $10 billion, which throws big mutuals like Teacher’s Insurance & Annuity Association and State Farm into the mix as well.
Since we have gone to press, some real world changes have also taken place. American Express is struggling again, a recurrent theme in its history. Royal Bank of Scotland spun off Citizens, which is now Citizens Financial Group, Inc. and the nation’s 23rd largest BHC. Unionbancal changed its moniker to MUFG Americas Holdings Corporation and moved its headquarters to New York. M&T and Hudson City Bancorp still want to merge but find their marriage blocked by the Fed. And so forth. 
This is all fodder, perhaps, for a second edition of this book but of course that will depend on how the first is received. I think every bank executive, regulator, financial policymaker, and financial journalist in North America and Europe should have a copy handy, but that’s just me. Thanks!

Thursday, March 05, 2015

Business History > Piketty

I just posted this to SSRN. To download the full (short) paper, click here.

Business History > Piketty

Robert E. Wright

Augustana College - Division of Social Sciences

March 2, 2015

Piketty's Capital in the 21st Century has attracted more attention than it perhaps deserves given that its main empirical claim, that wealth inequality is bound to occur in "capitalist" economies because the rate of return r is greater than the rate of economic growth g (r > g), is not rigorously shown and explicitly excludes capital losses. Over the last few centuries, returns in the United States have varied greatly by asset class and often been highly negative. Moreover, while the book correctly maintains that recent increases in income inequality in the United States are due to poor corporate governance, it calls for a general wealth tax rather than governance reform.

Number of Pages in PDF File: 11

Keywords: Thomas Piketty; Capital in the 21st Century; wealth inequality; income inequality; corporate governance; rates of return 
JEL Classification: D63, G3, N11, N12, N21, N22 , O15, P1