So, Steve Forbes thinks that Rudy Giuliani is the best free market candidate in the upcoming U.S. Presidential election.
Forbes is wrong. As noted in earlier posts here and here, Giuliani has a legacy of dubious prosecutions of businesspeople — most prominently Michael Milken — to further his own career. Forbes’ failure to mention Giuliani’s duplicity in the prosecution of one of the most important and productive businesspersons of the latter part of the 20th century reflects a troubling blindspot and a very short memory.

Gretchen Morgenson may be a credit snob, but U of Chicago economist Austan Goolsbee isn’t:

. . . When Senator Christopher J. Dodd, Democrat of Connecticut, gave his opening statement last week at the hearings lambasting the rise of ìrisky exotic and subprime mortgages,î he was actually tapping into a very old vein of suspicion against innovations in the mortgage market.
Almost every new form of mortgage lending ó from adjustable-rate mortgages to home equity lines of credit to no-money-down mortgages ó has tended to expand the pool of people who qualify but has also been greeted by a large number of people saying that it harms consumers and will fool people into thinking they can afford homes that they cannot.
Congress is contemplating a serious tightening of regulations to make the new forms of lending more difficult. New research from some of the leading housing economists in the country, however, examines the long history of mortgage market innovations and suggests that regulators should be mindful of the potential downside in tightening too much.
A study conducted by Kristopher Gerardi and Paul S. Willen from the Federal Reserve Bank of Boston and Harvey S. Rosen of Princeton, Do Households Benefit from Financial Deregulation and Innovation? The Case of the Mortgage Market (National Bureau of Economic Research Working Paper 12967), shows that the three decades from 1970 to 2000 witnessed an incredible flowering of new types of home loans. These innovations mainly served to give people power to make their own decisions about housing, and they ended up being quite sensible with their newfound access to capital. [. . .]
Also, the historical evidence suggests that cracking down on new mortgages may hit exactly the wrong people. As Professor Rosen explains, ìThe main thing that innovations in the mortgage market have done over the past 30 years is to let in the excluded: the young, the discriminated against, the people without a lot of money in the bank to use for a down payment.î It has allowed them access to mortgages whereas lenders would have once just turned them away. [. . .]
And do not forget that the vast majority of even subprime borrowers have been making their payments. Indeed, fewer than 15 percent of borrowers in this most risky group have even been delinquent on a payment, much less defaulted.
When contemplating ways to prevent excessive mortgages for the 13 percent of subprime borrowers whose loans go sour, regulators must be careful that they do not wreck the ability of the other 87 percent to obtain mortgages.
For be it ever so humble, there really is no place like home, even if it does come with a balloon payment mortgage.

Read the entire op-ed. And then think about the controlling mindset of the folks who decry the beneficial innovation that resulted in the subprime mortgage market. Are those the ones who we really want setting policy for the creation of jobs and wealth in America?

EGL chairman and CEO Jim Crane’s proposed private equity-financed buyout of Houston-based EGL, Inc is generating some interesting bidding action.
In an unusual move for a private-equity firm, Apollo Management LP sued EGL, Crane and the EGL board on Tuesday in Houston in an attempt to block the proposed sale of the company to Crane’s group and to seek access regarding due diligence inforamation that it contends that the company has refused to divulge to Apollo. At the same time, Apollo also raised its buyout offer by $1 a share to $41.
In a letter sent on Tuesday to a special committee of EGL’s board, Apollo complained that Crane had meddled in the sale process and said that the suit was an action “unprecedented in the almost 20-year history of our firm.” The new Apollo offer, valued at $1.9 billion, tops a $38-a-share bid from Crane’s group that the company accepted last week. It is conditioned on access to the information demanded in the suit and the elimination of a $30 million breakup fee that is a part of the Crane-led deal. Apollo contends that it is interested in EGL so it can combine the Houston-based company with another logistics company that it owns, CEVA Logistics.
Given that EGL’s stock price has increased by over 30% since Crane’s initial management-led bid for the the company spurred all this bidding, I wonder what Ben Stein would say about that?

Circling back to the topic of subprime mortgages, Marginal Revolution’s Alex Tabarrok cleverly notes that credit snobs such as the NY Times’ Gretchen Morgenson and the Houston Chronicle’s Loren Steffy have redefined the definition of loan shark:

Old definition:
A loan shark is a scumbag who charges the poor obscenely high rates of interest.
New definition:
A loan shark is a scumbag who charges the poor obscenely low rates of interest.

It’s certainly not for investors who are faint of heart, but private equity powerhouse The Blackstone Group is selling a portion of its equity in a widely-discussed initial public offering. Who better to dissect the delicious irony of a firm that specializes in taking public companies private making its own public offering than Larry Ribstein, who has been predicting for quite some time that partnership-type business entities would evolve to reshape the modern corporate entity. In this American.com piece, Professor Ribstein notes the implications of the Blackstone IPO for the future of the public corporation:

. . . [W]e shouldnít be surprised [by the Blackstone IPO]. The public offering is a glimpse into a business that is fundamentally transforming, and perhaps replacing, the modern corporation.
As Blackstone emphasizes in its offering materials, its proposal would create a different kind of public firm. Blackstone is not so much going public as going ìprivlic.î Initial public offerings once transferred control from entrepreneurs to dispersed public investors. Blackstoneís IPO doesnít transfer a smidgeon of control. . . . If all this seems confusing, the prospectus is at least clear about the bottom line: the real power at Blackstone lies above and below the publicly held entity thatís being inserted in the middle. The public investors can’t elect or replace the manager of their own firm, let alone those of the lower-level holding companies and the still lower level operating companies in Blackstoneís gigantic portfolio. Any voting power the new limited partners have amounts to a right to be outvoted by the existing owners. [. . .]
While the business columnists prate about ìshareholder democracy,î this prospectus shows us where business is really headed. These partnerships make publicly held corporations, which activists disparage as dictatorships, look like New England town meetings. The owners are not protected by voting, shareholder proposals, majority voting for directors, or any of the other paraphernalia of the publicly held firm. Rather, the ownersí solace lies in the regular distributions of cash, the managers’ high-powered incentive compensation, and the portfolio companiesí debt load, which concentrates their managersí attention producing enough cash to avoid bankruptcy. [. . .]
In short, vast chunks of corporate America are devolving back into the partnership form from which they grew back in the 19th century. This should not be so surprising. There were always tradeoffs between the benefits of diffuse public ownership of firms and the costs. Public markets enabled entrepreneurs to capitalize their ideas, owners to diversify risk, and information to be rapidly discounted in the price of firmís securities. But since thousands of diffuse owners cannot easily watch over their firms, managers are left free to serve themselves. Devices like independent directors, auditors, and takeovers might mitigate the problems, but they have costs and weaknesses, too. Hence the repeated calls for more managerial accountability, coupled with escalating regulation and criminal and civil liability. Blackstone and other private equity firms replace this whole structure with a new approach to accountabilityóexpert monitors, strong incentive compensation, and a commitment to distribute excess cash.

Read the entire piece, which is an example of how the blogosphere and the Internet are changing the way in which specialized information is processed and distributed. As recently as just a few years ago, this type of analysis would be found buried in the op-ed pages of a bricks and mortar publication such as the Wall Street Journal or Forbes, and even then the op-ed would likely come weeks after the announcement of the corresponding event. Now, the Blackstone IPO is announced last week and, by this week, multiple experts around the blogosphere and the Internet have provided extensive analysis and discussion of the legal and business issues raised by the IPO for all the world to see. Business law academics such as Professor Ribstein and Stephen Bainbridge have been at the forefront of this remarkable development, which is literally redefining the way in which the informed public will come to understand and act on important issues of our day and the future.
That’s a pretty darn good legacy in my book.