Wesentliche Grundsätze für IWF - Kredite

Aufgrund seines Mandats muss der IWF in der Lage sein, seinen Mitgliedern mit Zahlungsbilanzschwierigkeiten in Zeiten, in denen die internationalen Anleihemärkte nicht bzw. nur zu sehr hohen Zinssätzen zur Kreditvergabe bereit sind, finanzielle Mittel zur Verfügung zu stellen. In diesem Zusammenhang werden drei wesentliche Grundsätze angewandt, um die Finanzposition des IWF zu schützen und die Rückzahlung der Finanzhilfen sicherzustellen.

 

Der erste wesentliche Grundsatz zur Vergabe von IWF - Krediten sieht vor, dass der Fonds nur dann Finanzhilfen bereitstellt, wenn die Verschuldung des Mitgliedstaats unter Berücksichtigung des von den nationalen Behörden erstellten Anpassungsprogramms tragfähig ist. Aus diesem Grund wird eine Schuldentragfähigkeitsanalyse durchgeführt, um festzustellen, ob der Mitgliedstaat seine Verbindlichkeiten ohne unrealistisch große politische Anpassungen bedienen kann. Seit 2002 hat der IWF ein formales Rahmenwerk zur Schuldentragfähigkeitsanalyse etabliert, das komplementäre Analysen der Tragfähigkeit der gesamten Staats- und Auslandsverschuldung des Mitgliedstaats umfasst. Da eine mechanische Interpretation der Schuldentragfähigkeit nicht möglich ist, sind die Ergebnisse anhand der länderspezifischen Gegebenheiten, einschließlich der besonderen Merkmale der Verschuldung des Mitgliedstaats, seiner bisherigen Politik und des politischen Spielraums, zu beurteilen.

 

Der zweite wesentliche Grundsatz besteht darin, dass das Anpassungsprogramm vollständig finanziert werden muss (da der IWF im Allgemeinen nur einen Teil der gesamten Programmfinanzierung übernimmt). Die Schließung der Finanzierungslücke eines Landes wird durch eine Kombination folgender Maßnahmen erreicht: 

 

a) inländische Anpassung,

b) Finanzhilfe vom IWF und möglicherweise von anderen öffentlichen Gläubigern und

c) Beteiligung des privaten Sektors.

Dabei wird von Fall zu Fall entschieden, auf welche Maßnahmen wie stark zurückgegriffen wird. Maßgeblich ist auch die Beurteilung der Größe der Finanzierungslücke des Staates, seine Fähigkeit zur wirtschaftlichen Anpassung sowie sein Marktzugang und die Schuldentragfähigkeitsaussichten.

In den meisten Fällen reicht zur Wahrung einer tragfähigen öffentlichen Verschuldung eine Kombination aus politischer Anpassung und Finanzierung durch öffentliche wie private Mittel aus. Dabei wird davon ausgegangen, dass dem Vorliegen eines glaubwürdigen, vom IWF unterstützten Anpassungsprogramm eine Katalysatorfunktion zukommt und dieses die Beteiligung privater Gläubiger an der notwendigen Finanzierung begünstigt. Die Beteiligung erfolgt meist in Form der Aufrechterhaltung des finanziellen Engagements und / oder der Bereitstellung zusätzlicher Mittel zu Bedingungen, die im Einklang mit der mittelfristigen Tragfähigkeit der öffentlichen Finanzen stehen (entweder freiwillig oder infolge offizieller moralischer Appelle).

In Ausnahmefällen kann der IWF zu dem Schluss kommen, dass die Schuldentragfähigkeit nicht über politische Anpassungen erzielt werden kann. In diesem Fall kann der IWF ohne die Zusicherung, dass das Land einen umfassenden Umschuldungsplan mit seinen privaten Gläubigern aushandelt, keine weiteren Finanzierungsmittel bereitstellen. Allerdings obliegt die Entscheidung, ob ein Schuldnerland eine Umschuldung vornimmt, einzig und allein dem Land selbst und nicht dem IWF oder einem anderen Gläubiger. In diesen Ausnahmefällen erfolgt die Beteiligung des privaten Sektors über eine Umschuldung, die den Schuldendienst des Staates durch eine Verlängerung des Tilgungszeitraums, ein Absenken des Zinssatzes oder ein Verminderung des ausstehenden Kapitalbetrags verringert. Um seiner potenziellen Rolle, die ordnungsgemäße Restrukturierung internationaler Staatsanleihen zu erleichtern, gerecht zu werden, unterstützt der IWF die Verwendung von Umschuldungsklauseln in internationalen Staatsanleiheverträgen.

Der dritte wesentliche Grundsatz betrifft den De-facto-Status des IWF als bevorrechtigter Gläubiger. Dieser bezieht sich auf die Bereitschaft der Mitgliedstaaten mit Verbindlichkeiten gegenüber dem IWF, zunächst ihre Verbindlichkeiten beim Fonds und dann erst bei den anderen Gläubigern zu tilgen, sowie auf die diesbezügliche Zustimmung oder Einwilligung der anderen Gläubiger. Zwar entbehrt dieser Status einer expliziten Rechtsgrundlage, doch wird das Konzept im Pariser Club angewendet, in dessen Rahmen sich die Gläubigerregierungen bereit erklärt haben, den IWF von einem Umschuldungsprozess auszuschließen. Der Status des bevorrechtigten Gläubigers ist für die Finanzierungsrolle des IWF entscheidend. Durch die Verringerung des Risikos in Bezug auf die Kreditvergabe kann der IWF Schuldnerländern leichter Finanzhilfen zur Verfügung stellen, wenn die privaten Gläubiger dazu nicht bereit sind. Gleichzeitig werden dadurch die beim IWF verwahrten Währungsreserven der Gläubigerstaaten geschützt. IWF - Schuldnerstaaten respektieren seit Langem den bevorrechtigten Gläubigerstatus des IWF, was unter anderem damit zusammenhängt, dass die Einhaltung der Tilgungszahlungen an den IWF entscheidend für den Erhalt weiterer Finanzhilfen bzw. den Schuldenerlass von anderen Gläubigern wie etwa dem Pariser Club ist. Öffentliche wie private Gläubiger erachten das Vorliegen eines vom IWF unterstützten Anpassungsprogramms oftmals als wichtige Zusicherung, dass das betroffene Land in der Lage ist, mittelfristig seine (umgeschuldeten) Verbindlichkeiten zurückzuzahlen.

(EZB, Monatsbericht Juli, S. 84-86)

 

Obama's Urgent Call to Action

The Presidents Statement:

Good morning, everybody.  I want to speak about the ongoing and increasingly urgent efforts to avoid default and reduce our deficit.

Right now, the House of Representatives is still trying to pass a bill that a majority of Republicans and Democrats in the Senate have already said they won’t vote for.  It’s a plan that would force us to re-live this crisis in just a few short months, holding our economy captive to Washington politics once again.  In other words, it does not solve the problem, and it has no chance of becoming law.  

What’s clear now is that any solution to avoid default must be bipartisan.  It must have the support of both parties that were sent here to represent the American people -– not just one faction.  It will have to have the support of both the House and the Senate.  And there are multiple ways to resolve this problem.  Senator Reid, a Democrat, has introduced a plan in the Senate that contains cuts agreed upon by both parties.  Senator McConnell, a Republican, offered a solution that could get us through this.  There are plenty of modifications we can make to either of these plans in order to get them passed through both the House and the Senate and would allow me to sign them into law.  And today I urge Democrats and Republicans in the Senate to find common ground on a plan that can get support -- that can get support from both parties in the House –- a plan that I can sign by Tuesday. 

Now, keep in mind, this is not a situation where the two parties are miles apart.  We’re in rough agreement about how much spending can be cut responsibly as a first step toward reducing our deficit.  We agree on a process where the next step is a debate in the coming months on tax reform and entitlement reform –- and I’m ready and willing to have that debate.  And if we need to put in place some kind of enforcement mechanism to hold us all accountable for making these reforms, I’ll support that too if it’s done in a smart and balanced way.   

So there are plenty of ways out of this mess.  But we are almost out of time.  We need to reach a compromise by Tuesday so that our country will have the ability to pay its bills on time, as we always have -- bills that include monthly Social Security checks, veterans’ benefits and the government contracts we’ve signed with thousands of businesses.  Keep in mind, if we don’t do that, if we don’t come to an agreement, we could lose our country’s AAA credit rating, not because we didn’t have the capacity to pay our bills -- we do -- but because we didn’t have a AAA political system to match our AAA credit rating.

And make no mistake -– for those who say they oppose tax increases on anyone, a lower credit rating would result potentially in a tax increase on everyone in the form of higher interest rates on their mortgages, their car loans, their credit cards.  And that’s inexcusable.

There are a lot of crises in the world that we can’t always predict or avoid -– hurricanes, earthquakes, tornadoes, terrorist attacks.  This isn’t one of those crises.  The power to solve this is in our hands.  And on a day when we’ve been reminded how fragile the economy already is, this is one burden we can lift ourselves.   We can end it with a simple vote –- a vote that Democrats and Republicans have been taking for decades, a vote that the leaders in Congress have taken for decades.

It’s not a vote that allows Congress to spend more money.  Raising the debt ceiling simply gives our country the ability to pay the bills that Congress has already racked up.  I want to emphasize that.  The debt ceiling does not determine how much more money we can spend, it simply authorizes us to pay the bills we already have racked up.  It gives the United States of America the ability to keep its word. 

Now, on Monday night, I asked the American people to make their voice heard in this debate, and the response was overwhelming.  So please, to all the American people, keep it up.  If you want to see a bipartisan compromise -– a bill that can pass both houses of Congress and that I can sign -- let your members of Congress know.  Make a phone call.  Send an email.  Tweet.  Keep the pressure on Washington, and we can get past this.

And for my part, our administration will be continuing to work with Democrats and Republicans all weekend long until we find a solution.  The time for putting party first is over.  The time for compromise on behalf of the American people is now.  And I am confident that we can solve this problem.  I’m confident that we will solve this problem.  For all the intrigue and all the drama that’s taking place on Capitol Hill right now, I’m confident that common sense and cooler heads will prevail.

But as I said earlier, we are now running out of time.  It’s important for everybody to step up and show the leadership that the American people expect.

Thank you.

Gerrit Brösel verstärkt die FernUniversität in Hagen

Gerrit BRÖSEL hat wichtige Beiträge zur Entwicklung der Unternehmensbewertung geleistet. Er ist jetzt Inhaber des neuen Lehrstuhls "Betriebswirtschaftslehre, insbesondere Wirtschaftsprüfung" an der FernUniversität in Hagen:

Für Prof. Gerrit Brösel ist die Tätigkeit an der FernUniversität eine „neue Herausforderung“, denn kamen bisher – zuletzt an der TU Ilmenau als Professor für Allgemeine Betriebswirtschaftslehre, insbesondere Rechnungswesen und Controlling – Studentinnen und Studenten zu ihm in die Vorlesung, so „muss ich jetzt ‚zu ihnen gehen’“. Vor Ilmenau war Gerrit Brösel von Oktober 2007 bis März 2009 an der Hochschule Magdeburg-Stendal (FH) ebenfalls Professor für Rechnungswesen.

1972 wurde Brösel, der verheiratet ist und einen Sohn hat, in Greifswald geboren. Nach zwei praktischen Ausbildungen zum Instandhaltungsmechaniker mit Abitur und zum Bankkaufmann studierte der mehrfache DDR-Jugendmannschaftsmeister im Badminton in seiner Heimatstadt an der Ernst-Moritz-Arndt-Universität Betriebswirtschaftslehre mit den Spezialisierungsrichtungen: „Betriebliche Finanzwirtschaft und Unternehmensbewertung“, „Rechnungswesen“ und „Steuerrecht“. Anschließend war er vier Jahre lang bei einer internationalen Wirtschaftsprüfungsgesellschaft tätig. 2002 wurde er in Greifswald promoviert, 2006 habilitierte er sich in Ilmenau. Brösel war zudem als von Industrie- und Handelskammern öffentlich bestellter und vereidigter Sachverständiger für Unternehmensbewertung tätig.

Stipendien erhielt Gerrit Brösel von der Rheinstahl-Stiftung, Essen, und dem Deutschen Akademischen Austauschdienst. 1998 wurde seine Diplomarbeit als Beste im wirtschaftswissenschaftlichen Bereich der Greifswalder Universität ausgezeichnet. Für seine Promotion erhielt er 2002 einen Preis der Commerzbank-Stiftung.

(Quelle: http://fernuni-hagen.de/universitaet/aktuelles/2011/07/13-am-broesel.shtml, aufgerufen am 28.07.2011)

Verzeichnis der Publikationen

 

Transformation marktorientierter Bewertungsmodelle

Noch vor wenigen Jahren wurde die angelsächsische Bewertungslehre in Deutschland akribisch verteidigt, wie der KRUSCHWITZ / LÖFFLER - BALLWIESER - Konflikt anschaulich zeigt. Spätestens die Finanzkrise hat jedoch diese idealisierte Modellwelt demaskiert:

Die angelsächsische Bewertungslehre hat sich seit Anfang der 1990er Jahre vor allem mit dem Shareholder – Value - Ansatz in der Wirtschaftspraxis weitgehend durchgesetzt. Der Beitrag "Demaskierung der angelsächsischen Bewertungslehre" entlarvt das dahinter stehende realitätsferne Gedankengebäude als eine der bedeutendsten Ursachen der jüngst auf den internationalen Kapitalmärkten zu beobachtenden Finanzkrise.

In der Praxis der angelsächsischen Bewertungslehre nimmt man sich - wenn auch sehr vorsichtig und zögerlich - diese Kritik zu Herzen. 

Aswath DAMODARAN, ein Vordenker der angelsächsischen Bewertungslehre hat damit begonnen, über den Unterschied von Wert und Preis nachzudenken. Er räumt ein, dass Wert und Preis eines Unternehmens begrifflich voneinander zu trennen sind: 

Thoughts on Value and Price

Eine der großen Schwächen der marktwertorientierten (Gleichgewichts-) Modelle zur Unternehmensbewertung liegt in ihrer Intransparenz, weil sie das Risiko im Kalkulationszinsfuß verdichten. Diesen Mangel versucht Klaus SPREMANN durch ein Bewertungsmodell zu beheben, dass den Unternehmenswert bei so genannten bivalenten Zahlungsüberschüssen berechnet: 

Ein Bivalenz - Modell zur Unternehmensbewertung

 

 

Auch das HANDELSBLATT hat sich durch einen Gastbeitrag von Christian WEIBRECHT dieser Problematik angenommen:

 

 

Wie Sie Finanzierungsrisiken richtig einpreisen

Erhebliche Schwankungen

 

Bei der Beta-Ermittlung zeigte sich ebenfalls, dass diese deutlich schwankten. Je nachdem, ob ein längerer oder kürzerer Zeitraum zugrunde gelegt ist, konnte der Einfluss verstärkt oder abgeschwächt werden, was Auswirkungen auf den Wert hat. Die bisherige Praxis, ein Beta nur im Rahmen der Eigenkapitalkosten zu berücksichtigen, gilt darüber hinaus mittlerweile ebenfalls als zu kurz gegriffen. Aufgrund genannter Aspekte ist für die Ermittlung des Unternehmenswertes von einem Debt-Beta auszugehen, welches zusätzlich zu berücksichtigen ist.

Es hat sich daher gezeigt, dass im Rahmen der Unternehmensbewertung – neben der Berücksichtigung der originären Risiken des jeweiligen Unternehmens – auch in erheblichem Maße Markt- und Finanzierungsrisiken einzupreisen sind. Diese können, selbst bei operativ gesunden Unternehmen ein erhebliches Risiko bis hin zur Insolvenz darstellen. Zum vollständigen Artikel.

 

 

Der Beta-Faktor in der Unternehmensbewertung

 

Wert und Preis in der Unternehmensbewertung

 

Der "Marktpreis des Risikos" in der Unternehmensbewertung

 

Der "Marktpreis des Risikos" in der Unternehmensbewertung

 

Fundamentals of Functional Business Valuation

 

 

 

 

 

 

 

 

 

 

 

Second "Fair" Opinions?

Checkup Prompts Search For Second Opinions

 

 

As Regulators Heighten Scrutiny Of Wall Street 'Fairness' Views, Outside Merger Assessments Gain

By ANN DAVIS and DENNIS K. BERMAN
Staff Reporters of THE WALL STREET JOURNAL
January 24, 2005; Page C1

Wall Street hopes second opinions will be just the right remedy for the latest regulatory malady it faces.

U.S. regulators are ratcheting up scrutiny of the value and independence of so-called fairness opinions, which companies seek from their banking advisers to show that a planned merger or acquisition is "fair" to shareholders. Such opinions have become the standard tool used by corporate boards to protect against lawsuits and investor criticism of a deal's terms. But the job of writing the opinion typically falls to the bankers already hired for the main duty of putting a deal together. In such cases, bankers make the lion's share of their fees only if a deal gets done.

Now, some Wall Street firms that perform both duties are rethinking their approach. They are requiring or recommending second opinions in certain transactions where they have heightened incentives to see a deal go through.

The move is aimed, in part, at warding off potentially more-far-reaching changes amid an escalating probe by the National Association of Securities Dealers into the conflicts of interest in the lucrative fairness-opinion business. Some critics of fairness opinions say fee-hungry bankers rubber-stamp the deals their clients want, sometimes acquiescing to ill-conceived transactions that ultimately erode shareholder value or force thousands of unnecessary layoffs.

The NASD has said it is considering requiring bankers to publicly state whether the company executives they are working for might be biased toward a deal because they will receive juicy postmerger bonuses. In addition, it is considering policing how bankers settle on valuation methods to evaluate a company. The NASD hasn't suggested Wall Street deal advisers should abandon the fairness-opinion business and only use outside opinions.

Many on Wall Street are open to more disclosure of potential conflicts but defend current practices. "The reason you don't see unfairness opinions is that those deals won't get done," says James C. Morphy, head of mergers and acquisitions at Sullivan & Cromwell. "In fact, bankers do tell their clients that they can't get to fairness at a given price, and that deal either gets renegotiated or doesn't happen."

While the opinions themselves generate tidy sums -- as much as several million dollars each -- Wall Street makes a great deal more on overall advisory fees along with often getting extra fees for providing the financing for an acquisition.

At least one firm, the Credit Suisse First Boston unit of Credit Suisse Group, has quietly changed its policy on certain transactions to protect both the bank and the client from accusations of conflicts of interest. It now asks its clients to seek second opinions in situations where CSFB is working both sides of a transaction -- advising the seller while also providing financing to the buyer -- say people familiar with its practices. This happens when the seller's bank also finances the buyer's purchase. Known as "staple financing," it has become much more common in the past two years. Other banks are considering a similar policy involving such transactions. A CSFB spokesman declined to comment.

In these staple deals, the investment bank has extra incentives to push the transaction forward: It often will pocket a percentage of the deal's total as the seller's adviser, a separate fee for writing the fairness opinion and still another fee for handling the staple financing.

As recently as a year ago, many Wall Street firms maintained that they could objectively opine on such deals while playing the dual role of the seller's adviser and the buyer's lender, say several mergers-and-acquisitions bankers. They were trying to avoid the risk that corporate boards would farm out part of their work and fees to a competitor or that an outside firm taking a second look might raise issues that could delay or block a deal.

An exception is Goldman Sachs Group Inc., which ordinarily declines to provide the fairness opinion when it both advises the seller and does financing for the buyer. Instead, say bankers familiar with the company's practices, it asks its client to bring in an outside opinion provider. A Goldman spokeswoman declined to comment.

Firms also are being cautious on some complex deals. In October, steelmaker Ispat International NV agreed to merge with LNM Holdings NV to form Mittal Steel Co. The Mittal family controlled the two companies. CSFB advised the special committee of Ispat's board and also provided a fairness opinion.

But given the involvement of the family in both companies, the bank suggested that Ispat receive a second fairness review, in this case provided by investment-banking boutique Houlihan Lokey Howard & Zukin. Such an arrangement wouldn't have happened a few years ago, say people familiar with the matter.

Pledges by firms to address some of the more blatant conflicts involving fairness opinions could shape what is expected to be one of the next big battlegrounds between securities firms and regulators. The NASD is questioning Wall Street firms about how they handled conflicts in recent deals and is soliciting public comments through Feb. 1 on possible reforms. The Wall Street Journal first reported the NASD probe June 11.

The securities industry is gearing up to resist some potentially significant changes to the deal-vetting process while embracing more disclosure. In recent weeks, teams of lawyers advising the Securities Industry Association and an M&A committee of the Association of the Bar of the City of New York have been forging comment letters to the agency. Among the issues that Wall Street firms worry about, says Thomas W. Christopher, a mergers-and-acquisitions attorney for the law firm Kirkland & Ellis LLP, are whether they will be asked to change their valuation methods. The NASD has said it may set out procedures to determine "whether the valuation analyses used are appropriate for the type of transaction and the type of companies" in a deal, though it is unclear how far it will go.

"The NASD is in no position to determine what the right fairness analysis is...that's really invading the province of the investment bank's right to do the analysis itself and the boards of directors to rely on the analysis that they think is right," says Mr. Christopher.

Getting two fairness opinions is more expensive for companies. But the trend is good news for one group: smaller deal-advisory boutiques. Sheryl Cefali, head of Duff & Phelps's fairness-opinion practice on the West Coast, says her firm produced 30% more fairness opinions in 2004, in part because of increased requests for second opinions.

Still, there is a long way to go. Standard & Poor's Corporate Value Consulting, a unit of McGraw-Hill Cos. that does fairness opinions, analyzed deals greater than $500 million in 2004 and found that, in cases where the advisers' roles were disclosed, only 7% identified a separate fairness-opinion provider from the main adviser. That was up from 3% in 2003.

Write to Ann Davis at ann.davis@wsj.com and Dennis K. Berman at dennis.berman@wsj.com

What's fair about Fairness Opinion?

 

 

  

What's fair about Fairness Opinion?

 

 

 

Opinions Labeling Deals 'Fair' Can Be Far From Independent
Banks That Do Them Often Are Advisers on Transactions And Have Fees at Stake
A High-Profit-Margin Item

 

 

By ANN DAVIS and MONICA LANGLEY
Staff Reporters of THE WALL STREET JOURNAL
December 29, 2004; Page A1

In the biggest U.S. merger this year, J.P. Morgan Chase & Co. announced last January it would acquire Bank One Corp. To assure investors it was paying a fair price, J.P. Morgan told them in a proxy filing it had obtained an opinion from one of "the top five financial advisors in the world."

Itself.

The in-house bankers at J.P. Morgan endorsed the $56.9 billion price -- negotiated by their boss -- as "fair."

But during the negotiations, Bank One Chief Jamie Dimon had suggested selling his bank for billions of dollars less if, among other conditions, he immediately became chief of the merged firm, according to a person familiar with the talks. That suggestion wasn't accepted by J.P. Morgan.

To some J.P. Morgan shareholders who are now suing over the deal, it raises the question: Did Morgan's in-house evaluators endorse a higher price to keep CEO William Harrison in power longer? "Only by retaining a conflicted financial adviser could Harrison control the process and justify paying more than was necessary for Bank One," the investors said, in a pending suit in Delaware Chancery Court.

J.P. Morgan denies that assertion, according to a spokesman, who said that executives at the bank would have no comment. J.P. Morgan, which had disclosed its use of an in-house advisory team, says it made sense to use bankers intimately familiar with its business, and that the board's lawyers said it wasn't necessary to get another opinion. The bank says it negotiated the best deal possible given that it didn't want to hand immediate control to a newcomer. It also says that other shareholders -- from Bank One -- have sued claiming the price was unfairly low.

Boards of directors get "fairness opinions" to show they've independently checked out the price of a deal, thus giving themselves some legal protection from unhappy shareholders. But it is an open secret on Wall Street that fairness opinions can be anything but arm's-length analyses.

Investment bankers frequently write fairness opinions for clients with whom they have longstanding business ties and with whom they hope to continue having relationships. Indeed, an opinion is commonly written by the very bank that suggested the merger or acquisition in the first place -- and that now is acting as adviser on that deal.

In such cases, the investment bank stands to collect a far larger fee if the deal goes through than if it does not. If it goes through, the advisory bank will collect a "success fee" that dwarfs the opinion fee. And, in a further incentive to bless high-priced deals, the success fee is usually tied to the deal's price.

As if these potential conflicts weren't enough, when the merging parties are financial firms, the parties typically get their fairness opinions not from outsiders but from folks right down the hall.

Now, securities regulators may weigh in. The National Association of Securities Dealers has launched an enforcement inquiry into conflicts that can arise with fairness opinions. The NASD is also seeking comment on potential new rules requiring more disclosure of the financial incentives that bankers and their clients have for endorsing deals. There isn't any move to do away with the opinions.

Fairness opinions often vet prices that were set by company executives who, the bankers know, have strong financial incentives to push through a deal. The opinions often are crafted at the last minute, as bleary-eyed bankers scramble to cobble together projections to justify the final price at an impending board meeting or news conference.

In the case of Bank of America Corp.'s recent purchase of FleetBoston Financial Corp., Bank of America called in Goldman Sachs Group as adviser the weekend before the deal was announced. Goldman got $25 million for providing advice, including $5 million for a fairness opinion. Morgan Stanley, which advised Fleet, also collected $25 million, an undisclosed part of it for its fairness opinion. The $47.7 billion deal closed April 1.

"Fairness opinions are one of the highest profit margin businesses on Wall Street. In the BofA-Fleet deal, profitability must surely be setting new heights," said Thomas Brown, a hedge-fund manager with a Web site that follows bank stocks, in a column after the deal was announced. Believing that BofA overpaid, Mr. Brown contended that "the large dollar payment was necessary to get the names of two prestigious firms to provide fairness opinions on a questionable transaction."

A spokeswoman for Bank of America says it paid a premium for Fleet because "we saw value in Fleet that wasn't reflected in its market price," adding that "investors have also seen this value." The spokeswoman says BofA believes Goldman was compensated fairly. Representatives of Goldman and Morgan Stanley declined to comment. Goldman bankers familiar with the deal say the fee reflected years of efforts to help BofA identify acquisition candidates.

Investment banks defend fairness opinions, noting that their own interests sometimes are aligned with those of shareholders. For example, in cases where the bank is advising a takeover target, it and the shareholders both benefit from a high price. The bank's fee is based on the deal's price.

The opinions "are a very useful tool for boards of directors," says Marjorie Bowen, national director of investment bank Houlihan Lokey Howard & Zukin's fairness-opinion practice. Though "there is perception that they are rubber-stamped, people who are not involved in the procedural aspect of processing and reviewing a fairness analysis don't understand how seriously the investment banking community takes them."

NASD Vice Chairman Mary Schapiro says investors place trust in the opinions without realizing how conflicts may have colored the authors' judgment. The NASD's scrutiny of the opinion process comes as mergers-and-acquisition activity is robust; December saw the highest dollar volume of deals world-wide of any month in more than four years.

Fairness opinions became more common after the Delaware Supreme Court said in 1985 that they could help a board demonstrate its "duty of care" in evaluating a transaction. Companies involved in deals now feel they need to get a fairness opinion as legal protection.

Bankers who write the appraisals don't work from scratch. They typically use financial projections supplied by the client and don't vouch for the data. That's one reason attempts to sue securities firms that provide fairness opinions have often failed. Courts have noted that they don't constitute formal recommendations to shareholders.

To say whether a deal is fair, bankers compare it with others of similar size in the same industry. They may look at the price as a multiple of earnings, of book value (assets minus liabilities) or of measures particular to an industry. The banker has plenty of leeway in choosing how to make the analysis. The method is usually explained in a proxy statement. The letter itself merely says the price is fair.

If bankers find it hard to conclude that a deal is fair, they'll often have private discussions with the client.

Here are some issues that have sparked controversy over fairness opinions.

The Numbers Game

Fairness reviews can be quite subjective, and bankers have many ways to slice the data. Consider the projections Piper Jaffray Cos. used to declare a valuation fair in a battle over Best Lock Corp., founded before the Depression by a janitor who had invented locks with a master key and an interchangeable core. Controlling shareholder Russell Best, a grandson of the founder, bought out minority shareholders of Best Lock in 1998, triggering a long legal battle.

The board -- Mr. Best and his wife -- said they had the right to buy out other shareholders without a vote because they controlled the company. They used a value for the whole company of $58 million. They said this was on the "highest point of the recommended ranges" presented by Piper Jaffray.

Shareholders sued Best Lock and its board. They alleged in a Delaware Chancery Court that Piper had agreed to consult with Best Lock's attorney about the valuation method and not to investigate further what others might be willing to pay.

Best Lock gave Piper several sets of projections to set a price. The most pessimistic put future revenue growth at 7%, according to the suit. That is what Piper used, the suit said, even though Best's auditors had provided data to a lender describing 10% annual growth in the 1990s, and even though net income for 1997 was running ahead of projections.

The suit said Piper wouldn't get the last $325,000 of an advisory fee if it didn't justify the price Mr. Best was willing to pay. Piper declined to comment. It wasn't a defendant in the shareholder suit.

In 2002, long after Mr. Best had completed the buyout and just before a trial was set to begin, he sold the company to Stanley Works. The price was $310 million, of which, according to people familiar with the matter, about $100 million went to repay Best's debts. Mr. Best said at the time that the business was more valuable because it had grown through an acquisition. He settled shareholder litigation for an estimated $52 million. In total, the minority shareholders got about triple the compensation that had been endorsed as fair four years before. Mr. Best couldn't be reached to comment.

Side Deals

Fairness opinions frequently ignore deals the client company is simultaneously doing with its executives.

A year ago, BSB Bancorp Inc. of Binghamton, N.Y., announced it would be acquired by a smaller competitor for $337.6 million. Just before the announcement, BSB's board amended "change-of-control" agreements for executives. The result was that its chief executive, Howard Sharp, collected a "severance" package of about $1.64 million, in addition to his retirement benefits of $2 million, according to the acquiring bank -- even though the acquirer hired him at a $450,000 annual salary.

Some critics cried foul, including John Cheevers, an independent stockbroker in nearby Endicott, N.Y., who had put clients into BSB stock. He protested to BSB's board that it was selling the bank for a little over two times book value, while other banks were being sold for more than three times "book." In addition, the premium BSB shareholders got was reduced by the fact that part of it was in cash, triggering a tax bill.

One unhappy BSB shareholder was Rudy Cechanek, an 83-year-old retired engineer who had about $300,000 in BSB stock. He thought BSB could have fetched a higher price, and he was livid when he learned that top executives of BSB would get millions of dollars.

BSB got a fairness opinion from investment bank Keefe, Bruyette & Woods, with which it had an existing relationship. In finding the sale fair, Keefe Bruyette didn't discuss the payments to BSB's chief executive. Keefe was able to collect the largest part of its $2.7 million advisory fee only if the deal went through.

"The fairness opinion really bothered me," Mr. Cechanek says. "The words were there, but the shareholders weren't being treated very fairly. It was written more to protect the executives who were more interested in getting the deal done."

Keefe Bruyette declined to comment. Mr. Sharp didn't return messages left at his home and office. The acquiring bank, Partners Trust Financial Group Inc. in Utica, declined to comment but told analysts the deal would over time greatly improve the combined company's growth prospects. A bank analyst at Ryan Beck & Co., Anthony Davis, says the price was "discounted for a reason" -- BSB's history of having poorly performing loans -- and was arguably a good price.

Close Ties

Peter Siris, a hedge-fund manager and longtime investor and corporate director, says he was blindsided by a bad fairness opinion when he served as a director of Crown American Realty Trust, a real-estate investment trust in Johnstown, Pa.

In anticipation of selling Crown, its chairman and chief executive, Mark Pasquerilla, asked Wachovia Corp.'s investment bankers in 2002 to structure certain transactions with the CEO and his family. Crown retained another investment bank, Ferris, Baker Watts Inc. in Washington, D.C., to render a fairness opinion on these transactions. They included property swaps and certain cash-flow obligations that Mr. Pasquerilla owed to Crown. They needed to be resolved before Crown could be sold.

"The bankers gave us a big fancy book detailing that everything was fair," Mr. Siris says, and in a telephone board meeting, directors gave preliminary approval to execute the complex transactions. But after the vote, Mr. Siris says, he was bothered that "the deal seemed to benefit the CEO more than the company" by giving him favorable terms.

Mr. Siris and other outside directors retained a lawyer and notified the Crown CEO they wouldn't give final approval without additional analyses. These directors, says the lawyer they hired, James Spitzer, "were concerned about the impartiality of the investment bankers, who stood to gain $4 million on the deal and had allegiance to the CEO."

Mr. Spitzer told Wachovia he saw a conflict because one of its bankers had handled other work for a Pasquerilla family company. Wachovia would get only a fraction of its $4 million advisory fee if the deal didn't go through, said someone familiar with the arrangements.

Wachovia offered a new investment-banking team that hadn't done past work for the family. Mr. Siris, acting as the lead director at Crown, says he gave this new team a fresh mandate: "You report directly to the board, not to the CEO. I want an honest fairness opinion, not one that justifies a bad deal."

Ferris Baker defended its process. "We go through a rigorous quality-control process on our fairness opinions, and this is the first I've heard that there was a problem. I'm not conceding there was a problem," said Ferris Baker's head of investment banking, Richard Prins.

Wachovia helped restructure transactions with the CEO's family and wrote a fairness opinion declaring the revised terms "fair" to Crown shareholders. Crown had meanwhile been negotiating to be sold to a rival shopping-mall owner, Pennsylvania Real Estate Investment Trust. The terms of this sale also were revised, and Wachovia declared the new ones "fair" as well. They provided about a 25% better price than before, according to Mr. Siris. In May 2003, Crown's board approved the sale of the company to Pennsylvania REIT.

"It would have been so easy to be seduced by a fairness opinion that cheated shareholders," Mr. Siris says. "It took a lot of work to get the right opinion."

Mr. Pasquerilla, the former Crown CEO, declined to discuss the deals' specifics but said, "We were all in agreement at the end of the day. Our board was a tough board; they did the right thing. This has been a good transaction."

PASSING MUSTER

A 'fairness' opinion tells a company's board that a deal's terms are fair to shareholders.

Purpose: Legal protection from an investor claim that a deal was done without due care.

Cost: A few hundred thousand dollars to a few million.

Potential conflicts:

• Bankers may have incentive to call a deal fair because most of their advisory fee is paid only if deal closes.

• Bankers' fee is tied to the deal's price.

• Bankers may support a deal where executives will personally profit, in hopes of securing future work.

• Bankers use financial data supplied by client that wants deal to go through.

• When deal maker is a bank, its own bankers often write the fairness opinion.
 

Source: WSJ research

Write to Ann Davis at ann.davis@wsj.com and Monica Langley at monica.langley@wsj.com

Euro Zone: Changing the Rules of the Game

Now, added to that and that makes it even more comprehensive is clearly the fact that the members of the Zone have decided that they together were committed to improving their governance. And that’s a point on which various the leaders of the Euro Zone have insisted. Changing the rules of the game, making sure that there was economic governance, that there was effectively a government of the Euro Zone when it comes to economic and financial matters, and that is also clearly something that reduces the level of uncertainty which the markets have not especially appreciated over the last few months.

Transript of  a Press Conference of International Monetary Fund Managing Director Christine Lagarde following the European Summit

Brussels, Belgium

July 21, 2011

SPEAKER: Hello everyone, and good evening. Thank you for coming to this press conference being held on behalf of the IMF. It’s my pleasure to introduce the managing director of the IMF, Madame Christine Lagarde and let me just mention that Madame Lagarde has already released the statement which you can find on imf.org, on our website. And I believe we have some copies circulating in the room also.

This press conference is on the record. I would ask you to keep the questions short; given the lateness of the hour we don’t have a great deal of time. And could you please identify yourself by name and affiliation when asking the questions. Again, thank you very much. Madame Lagarde.

MS. LAGARDE: Thank you very much, Gerry. And good evening to all of you. [In French.] At the start of this press conference, let me say how happy I am to catch up with some of you again, my journalist friends, photographer friends, with whom I’ve worked for so many years now here in the (inaudible) Council of the Euro Group. Very happy to see you again, very happy to be back in Brussels. All the more so because I was able to meet with some of the heads of government of the Euro Zone dealing with very important issues this evening. Back to English now.

It was a great pleasure to be back in Brussels and to be able to spend quite a great deal of time actually arriving from Washington this morning on the critical issue which I believe has been handled in a very comprehensive fashion and very constructively. If I had to take away two specific characterizations it would be that: comprehensive, constructive. It’s comprehensive in that it addresses both the issue of Greece, again in a comprehensive fashion and also the rest of the Euro Zone.

 Christine Lagarde, IMF Managing Director

If I was to only concentrate on Greece, and I’m sure that you’ve had your ears full of what the overall package for Greece is, but what seems critical to me, number one, the fact that Euro Area member states have agreed to significantly improve the financing terms with Greece by, number one, extending the maturity of the loans that will be granted by the EFSF, and number two, by reducing significantly, again, the interest rate at which such loans will be granted going forward. And that is clearly a major improvement.

It is worth noting actually that these terms and conditions, extension of maturity and reduction of interest rate, will be also extended to the two other countries in the program, which are both Portugal and Ireland. What to me is critical, and that’s really a game changing decision that in my view has been made by the member states, is their commitment, their determination, to provide support to countries under program until they have regained market access, provided that they successfully implement their programs. This is critical because it means that the member states are committed to support other member states under program.

That’s as far as those three countries are concerned. Now, obviously in addition to that, to compliment this comprehensive package, there is obviously the famous PSI which has been negotiated but which has really been the result of the voluntary decision by the financial sector. They have been representative as I understand of the IIF, who’ve been negotiating with the Greece authorities and they came up with a proposal that I’m sure you have had plenty of time to examine and to assess.

So we welcome all that. A comprehensive and constructive package that addresses, number one, the maturity of the loans; number two, the interest rates; number three, the continued support until the country regains market access. And for the very specific case of Greece which is unique in and of itself the fact that PSI is also contributing to the burden. Now this is as far as Greece and other countries under programs are concerned.

The other key element in the view of the IMF is the fact that the member states have decided to make the financing instruments much more flexible. And here I’m clearly thinking about the European Financial Stability Fund; later on the European Stability Mechanism. By introducing the ability to use those instruments to guarantee, to eventually go to the secondary market, to eventually use those instruments as precautionary. Under certain conditionalities this is really, really important and I’m sure will be appreciated by the markets.

Now, added to that and that makes it even more comprehensive is clearly the fact that the members of the Zone have decided that they together were committed to improving their governance. And that’s a point on which various the leaders of the Euro Zone have insisted. Changing the rules of the game, making sure that there was economic governance, that there was effectively a government of the Euro Zone when it comes to economic and financial matters, and that is also clearly something that reduces the level of uncertainty which the markets have not especially appreciated over the last few months.

So all in all, it was a long afternoon, no doubt about it. But it was all worth it and I believe that with this constructive and comprehensive package, which reduces the level of uncertainty, we go away with a much more solid view of the confidence that the Euro Zone members have in their own destiny.

Now, clearly the International Monetary Fund is going to participate in that process. This is not a done and final deal. As you know, the IMF has its rules and clearly there is no new program unless and until that program has been requested by the country in question. Greece as not yet at this point in time requested a program. It is also indeed subject to the review by the Board of the International Monetary Fund. So I’m not going to tonight give you the estimate of how much, under what terms and conditions, beginning on which date because it’s a matter that will be reviewed, determined, in conjunction with the Board and as we are able to assemble the various components of the financing packages that will result from the PSI as has been proposed by the International Institute of Finance and negotiated with Greece.

But it’s clearly the intention of the International Monetary Fund to be an active participant in this program going forward with a view to clearly restoring growth, making sure that Greece can return to market and that there is a significant improvement of that sustainability.

So voila. I’m sure you’ll have a few questions and then we’ll all be happy to go and have something to eat.

QUESTION: Can you tell us -- give us a measure of how much that sustainability of Greece has improved, your -- the figures in the last IMF report were sort of worried and worrying, and indeed, if I remember correctly, suggested that a mere reduction of interest rate would not make that much difference to the debt sustainability there, for how much has actually been achieved for Greece tonight.

Secondly, will the IMF participate in this great lowering of the interest rate down to about 3.5 or 4 percent, or will it maintain its own interest rates on its loans to Greece?

MS. LAGARDE: Well, the IMF operates at its usual calibrated interest rates, so it is not a party to the interest rate reduction program that has been put together by the Euro Area members, there’s no question about it. What really is critical to me at this point in time is not so much by what -- tens or hundreds of percentage points the debt sustainability analysis is improved. And I’m sure it improved but we will be proceeding to appropriate calculations. What’s really important to me tonight is the fact that the member states have determined that they will continue to financially support countries under program until they regain market access.

And as you know because you are a good journalist belonging to a good magazine that we all read very carefully, and I’m sure that you properly informed one of the components taken into account by the Fund and by the Board of the Fund, is return to market. You know, we have two key objectives: its stability, return to market. And by the same token obviously we measure the debt sustainability. But the debt sustainability is definitely improved and what matters to me tonight is the fact that the member states are determined to continue support until the country under the program regains access to market.

QUESTION: Thank you Madame Lagarde. I know you said that there has been no request from Greece yet to the IMF. The European heads of state and government however have lumped you into the program already. Can I ask you –

MS. LAGARDE: I kind of suspect that that will be coming but at this point in time; today, tonight, there has not yet been such a request.

QUESTION: Very good.

MS. LAGARDE: But I’m sure it will be coming shortly.

QUESTION: But can I ask you as a matter of principle, there’s been some discussion that because of the amount invested by the IMF in the Euro Zone, that this 1/3, 2/3rds ratio perhaps should be tilted stronger towards the Europeans and away from the IMF because the IMF is overcommitted in Europe. Can you address that issue?

Secondly, I have forgotten my second question. Oh, I’m sorry, if I can ask -- in the last report on the Fifth Tranche there is a second -- the discussion of PSI and whether it’s a beneficial thing. Now the IMF does come out in support of PSI in that -- my understanding is that report was largely compiled before you took your current job. Can you discuss in your own view whether PSI is a good thing for Greece or is it something to be -- that you would personally not have pursued?

MS. LAGARDE: I’d fully stand by the report that I had the honor and privilege to present to the Board, okay? And I forgot what you’re first question was. Now that’s a joke, I know what your first question is. [Laughter.] You know, 1/3, 2/3, it all depends on what basis you start from. And I think that that’s exactly the discussion that we will be having if and when Greece requests for a new program. Because there is clearly still disbursement to come with, as you said, approved the disbursement of the Fifth Tranche. We had so far dispersed roughly 18 billion Euros. There is still 12 to come.

And as far as the new program is concerned, I’ll wait to see exactly what the request will be but we will be proceeding in accordance with our standard practice, which does not necessarily mean to say that it will be 1/3 or that it will be a little less or a little more. It will be a matter of overall appreciation by the Board and by the Management as to the solidity of the program, and we have good reasons to believe under the current terms of the communiqué that has been released by the Euro group that it is solid.

QUESTION: Madame Lagarde, can I -- are you happy with the range of banks that have agreed and signed up to the IF statement? There aren’t any American banks, there are a couple of big U.K. banks that haven’t signed up. And secondly, can you just address this -- I mean do you consider this to be selectial temporary default? Are you worried about what the credit agencies might -- their view on this?

MS. LAGARDE: I’m happy and not worried. That’s by natural temper that I’m so. It’s not for me to characterize. People will determine; it’s not my job to do so. And as far as the banks are concerned, from the list that I have seen that was showed to me by the Greek Prime Minister, there are a lot of those banks that we know are holding Greek government bonds. Now if more are prepared to come and to join the group the better, but I think that it’s important to have the key players included in that commitment and undertaking. That seems to be the case. But if more are coming, you know, the merrier the better.

QUESTION: Madame Lagarde, can I ask you two questions? One, as a European, do you consider that the decision to allow the stability from going to the secondary market is a step towards Euro bonds, which is considered by many as the final solution for all this? And second question, did I understand well that the European Central Bank will be able to ignore a possible definition as selective default of some of these measures in accepting collaterals from the Greek debts when they are guaranteed by the stability fund?

MS. LAGARDE: I think it is a question that you should have addressed to the person just before me. As you know, the European Central Bank is very keen to be independent and would not stand for me to be the spokesperson for the Bank. So I would not dare to go into those territories.

Now, if you look at the -- I don’t know if you had a copy of the communiqué that was released by the Euro members, but as far as the secondary market, it’s on the basis of an ECB analysis recognizing the existence of exceptional financial market circumstances and risks to financial stability and on the basis of a decision by mutual agreement.

So it’s not as if it was a Euro bond. It’s very, very much constrained under particular conditions and circumstances. So I think it’s good -- a good element of flexibility, but it’s obviously constrained under particular conditions which in my view do not qualify the ability to purchase on the secondary market as a Euro bond.

QUESTION: In French, if I may. What leads you to think that if there were to be contagion after a selective financial default might have been (inaudible)? If there were a contagion do you think that dying (inaudible) would hold? Might there not still yet be a missing part?

MS. LEGARDE: Well, we’re still ever optimistic. I think the important thing today in the meeting was the collective determination here and there, concerns were expressed about different positions, citizen views, parliament, but over all there was a very strong collective commitment to build together.

Now, (inaudible) contagion -- well first of all we’re talking about intervention capacity of the European Central Bank, but you should have asked Mr. Trichet about that. And the other type of (inaudible) is the EFSF’s increased capacity for intervention, increased flexibility. Although I hope it doesn’t come to that.

Final Question?

QUESTION: Good evening, Madame Lagarde. Many politicians and journalists of both pointed out that this is not a magic bullet, this is not the big bang, this is the start of a process. As somebody who knows both sides, did you sit there this evening and look at your former colleagues and say, My God, I think they’ve finally got it.

MS. LAGARDE: They’re my new colleagues, if I may say, because I was very humbly a minister of finance and I was clearly admitted thanks to President Van Rompuy and President Junker, and President Barroso’s invitation in the circle of the heads of the Euro Zone. But as I just mentioned to your colleague in French, there was definitely a collective determination.

They were all together driven by the desire to keep it together and to make sure that they had the tools to actually resist. That was a bit of a first, if I may say, yes. Thank you.

Verity

Is the Market a Test of Truth and Beauty?

In the Quarterly Journal of Austrian Economics of Spring 2000, Robert Tollison joins David Laband in reiterating a stretched conception of market test. Laband and Tollison recommend grading academic performance by the sorts of statistics that Laband compiles, which involve article and page counts, impressions of journal quality, and citations. As I said in the 1997 article that Laband and Tollison attack (the preceding chapter here), not even the actual commercial market is a test of truth and beauty or excellence. Granted, if the quantity produced of some good or service finds willing buyers at a price at least covering all costs, that fact implies that resources have not been diverted from alternative outputs that consumers would have valued more highly. Losses are a retrospective sign of waste (apart from a quasi exception for business owners who derive satisfaction from using their own wealth even in money-losing ways). Such a market test exerts healthy discipline.

Furthermore, social cooperation through the market and in other ways itself has moral value. The market method of organizing economic activity is indeed better, by the standard of human happiness, than alternative methods. But financial success in some broad or narrow market niche has no deeper philosophical significance; in itself, it is no further sign of excellence or virtue. (The lesson of Hayek 1960, chap. 6, is well worth taking to heart.) Market success does not prove that the tastes catered to, the goods and services provided, or the providers themselves are admirable. Facts alone do not yield appraisals (you can't get an "ought" from an "is").

"The market" is a metaphor. It makes no appraisals. "Choices are made only by humans rather than by personified abstractions such as 'the market'" (James M. Buchanan 1995, quoted in Lee 1996, p. 787; here and in his article of 2000, Lee makes the point eloquently). Overreaching claims for the market, especially as a transpersonal arbiter of truth, decency, and excellence, tend to discredit the valid and quite different case for a free society. (On backlash from exaggerated claims of market perfection, compare Heyne 2000, first full paragraph of p. 138.) He is a poor champion of the market system who cannot defend it as it really is, "warts and all." It is sad to see public understanding of the case for the market undercut by the market's would-be friends.

Laband and Tollison invite such backlash, unintentionally. They identify their own position on "secondhandism and scientific appraisal" with "the free-market side of the discipline"; they impute belief in "market failure" to their critics (2000, p. 43). The market system, far from being a substitute for good judgment and morality, presupposes morality. Yet secondhandism has morally questionable aspects in some of its applications (cf. McCloskey 1992, commenting on Laband and Taylor 1992).

 If the fairly literal test of the commercial market has limited (though great) significance, even less significant is its supposed analogue in the metaphorical market for science and scholarship. There, truth, not marketability, is the goal — and truth as such, not different, incompatible brands of truth for different consumers. (In the commercial market, by contrast, businesses do cater to widely divergent tastes and do, appropriately, satisfy even demands for inexpensive goods of relatively low quality.) To speak of truth is not to traffic in metaphysics about Truth with a capital T. I mean merely that scientific endeavor is the pursuit of propositions of generality and depth corresponding to the way things actually are (to borrow words from Peter Bauer and George Will separately).

Truth and Games

Scientific or scholarly or academic life has at least two strands. First is trying to find and communicate truth or knowledge. Second is the academic game itself — the pursuit of prestige, admiration, and money. Self-promotion and gamesmanship enter in. Of course, the two aspects of academic life overlap. Even someone overridingly concerned with truth desires admiration, wants to deserve it, and cares about its sources and reasons. Furthermore, hope for fame and fortune can indeed be a strong and respectable incentive to the pursuit of scientific truth (as well as a temptation to politicking and the like).

Still, how closely the two aspects of scientific activity correspond is affected by the tone and policies prevailing in the academic world. The preachings of Laband and Tollison, if heeded, would impair the correspondence and increase tension between the two aspects.

"The truth is not relevant if it is not a shared truth," they write (Laband and Tollison 2000, p. 43). I am not sure just what they mean by "relevant" or in how broad or how narrow a context they apply their remark. Perhaps they mean relevance to scoring well in the academic game. Their remark does sound like relativism. Yet reality is what it is, regardless of how many or how few people share a correct perception of it. Being influential or enjoying prestige may sometimes carry a presumption that one's ideas are right, but it is not the same as their actually being right.

Sharing truth — communicating ideas — is important, of course. Curiously, Laband and Tollison seem to value communication only in a narrow "market" associated with a notion of prestigious journals. But how narrow or how broad a market properly "counts" — how small or large a set of persons addressed? No market answers that question by itself. Does the appropriate market include all employers and potential employers of economists or all actual and potential consumers of economic information? Or is it a much narrower set of appraisers, people inclined to receive and transmit bandwagon effects relating to the supposed frontiers of the discipline? More comes later about questions like these.

Standards and Ersatz Standards

I want to forestall misinterpretation. If we had to rank economists of the past, if all copies of their writings and of others' discussions of their writings had been irrecoverably lost, if no information about them survived other than statistics of the kinds that Laband compiles, and if we waive the question of what purpose a ranking under such circumstances might serve, then I do suppose that consulting those statistics would be more plausible than any alternative that comes to mind. Saying so is not much of a concession. Acting on a hunch with some slight basis is more plausible than acting at random. Actually, we do not have to rank economists under such circumstances and by such a method.

Two other points, which are not even semi concessions, already appeared in my 1997 article. First, some standards must apply in science and scholarship; not all scribblings can command equal respect and attention. Partly in unavoidable consequence, unfashionable ideas face an uphill battle. Second, life requires much reliance on secondhand knowledge. Wholly firsthand appraisals (as of academic candidates' qualifications, accomplishments, and characters) are scarcely possible; often one's own direct knowledge must be supplemented by the judgments of other people.

Laband and Tollison's ersatz standards partly crowd out sounder ones. Far from being apologetic, Laband and Tollison make an actual virtue of exaggerated secondhandism and their stretched conception of market test. Such thinking and attitudes, to the extent that they have influence, worsen the defects of the already weak analogy between the academic quasi market and the real market. Academe is not immune from fads and bandwagon effects such as occur in many areas of life — for example, the adulation of celebrities. Analogues of the Keynesian beauty contest appear in economic research and styles of exposition under pressures to do not so much what the individual economist thinks best as what is thought to win acclaim. Such tendencies tilt the playing field more steeply against unfashionable ideas.

Laband and Tollison make much of citations as indicators of influence or fame. Admiring influence so registered, even independently of substance, is analogous to admiring the political "realism" justly attacked by Clarence Philbrook (1953) — admiring perceived influence on policy even when obtained by the advisor's compromising with his own honest judgments. Citations properly serve any of several purposes: They steer the reader to facts and arguments supporting the author's points or to supplementary discussions. They give credit to other authors for ideas or findings or particularly apt formulations. When one researcher is criticizing another's ideas or results, citations give the reader a chance to check the attacked work and see whether it is being dealt with fairly. Less admirably, citations may be used as moves in the academic game — to borrow the prestige of the other writers cited, to signal that one's own work is à la mode, on the supposed frontier of the discipline, or to signal familiarity with recondite sources or areas of knowledge. If an author expects citations to be put to the uses of Laband and Tollison, he might even give or withhold them for that reason. The parasitic use of citations can corrupt their primary use.

Laband and Tollison even claim more for citations as they use them than for the actual market (2000, p. 46):

 dollar votes are an imprecise measure of value. More accurately, they reflect minimum expected value. Citations, by contrast, clearly reveal that the academic consumer received value from the product cited, irrespective of whether the citation was positive or negative. This is because the citations are issued only after purchase and consumption of the product. Thus, a case can be made that the academic market conveys product information even more accurately through citations than do markets for goods and services using dollar voting.

The terminology and the whole analogy are strained; the claim is bizarre. I know someone whose idea of economic research — as I have told him — is to ransack the literature for passages that express or can be interpreted as expressing fallacies, then triumphantly to pounce on and demolish those fallacies. According to the Laband and Tollison test, even perpetrators of crude fallacies, far from deserving scorn for cluttering up the literature, deserve the positive points that their citations bring them; for the fallacy-hunters have "received value" from the works cited.

Laband and Tollison make excuses for assessing people by Labandian numbers. Some such method is a practical necessity. It possesses objectivity (or so Laband and Tollison seem to suggest on p. 47). Yet personal judgment necessarily enters into constructing the numerical indexes. Conformably with their secondhand nature, the indexes fail to show who judged whose work up or down and for what reasons. Furthermore, publication indexes cannot realistically be the sole measure of academic performance. Professors have other duties, even teaching; and subjective judgment unavoidably enters into assessing and weighting various kinds of performance.

In Laband and Tollison's view, "the alternative to relying on markets to assign value to scientific contributions is that we must rely on the ostensibly firsthand knowledge of some central authority, such as Yeager" (p. 46). Never mind the insinuation that I aspire to the role of central authority. Notice again the notion that "markets," impersonal markets, make judgments and that some mechanism or statistical process should "assign value to scientific contributions." Yet such value does not exist in the abstract. A researcher learns from the actual substance of his colleagues' work, not from mere summary numbers pertaining to journal quality and citations. Writings have value for the persons who use the reported facts and ideas, such as other scientists, engineers and technicians, consumers who ultimately benefit from technological progress, and citizens in general who benefit from progress in economic knowledge (to the extent that such knowledge is actually heeded in policymaking).

In grading academics for appointments, promotions, and so forth, the alternative to Laband's approach is not reliance on some supposed central authority, such as me. No, the alternative is that the decision-makers and their informed consultants frankly lay out their own judgments, for which they take responsibility, and the reasons for them. Let them not hide behind some sort of statistical precipitate of the anonymous judgments of other people. Let these appraisers discuss their tentative judgments with one another and possibly revise them. An academic department might name a committee to actually read candidates' writings, perhaps seeking supplementary information from outside, and to report its members' assessments and reasons to the broader decisionmaking group.

Further Worries

Economists should understand that people, including academics, respond to incentives and that inappropriate incentives can bring unintended consequences. Responses to "success indicators" in the Soviet planned economy provided examples. As caricatured in the humor magazine Krokodil, if a nail factory's output was measured in number of units, the factory would produce very many tiny nails; but if total weight counted instead, it would produce few but huge nails. (Compare Tullock 1965, chap. 23, on how bureaucrats react to attempts to measure their performances numerically.) Standardized tests of school children reportedly elicit "teaching to test"; certain measures of performance steer the attention of the police to violators easy to catch.

The individually sensible response of young professors under Laband-and-Tollison-type pressures may well be to toil away in some prevalent fad on one of the supposed frontiers of the discipline, which may well involve work addressed to some small in-group, resistant to informed evaluation by outsiders and enjoying scant wider relevance — all in hopes of being prestigiously published. (There is no necessary contradiction in identifying both faddism and narrow specialization. Numerous small modish topics may exist, as well as methodological, rhetorical, and stylistic fads infecting many specialties at once.)

It is perverse to push academics lacking a comparative advantage in modish work to waste their energies on it anyway. Why prod them to write articles in which few people are really interested (except perhaps as a basis for brownie points or as inputs to more such work by other similarly motivated academics)? They might make more solid contributions in other ways; the principle of opportunity cost applies even in academe. Even within an academic department, diversity of talents and specializations has value.

Let's face it: few economists are capable of frequently finding important new knowledge. At the same time, widespread ignorance prevails about the core of economics, the very logic of a market economy. Long-exploded errors persist among policymakers and the general public. The quasi market works less well for knowledge in economics than for knowledge in the natural sciences (especially than for industrially applicable, as distinct from politically applicable, scientific knowledge). Even economists far apart on the ideological spectrum do agree on important issues about which the general public and even noneconomist intellectuals are ignorant.

If economics has much of value to teach, the persistence of ignorance and error over the decades and centuries suggests a lapse of communication worth trying to remedy. Room remains for devising improved ways to make economic principles clear and to communicate them widely. Why should such efforts be disdained? Proficiency in some advanced technique or work on the frontier of some narrow specialty may indeed be valuable, but it is no proof in itself of understanding the very basics of economics. (I have encountered a few economists who constitute examples of this point.)

These thoughts make me wonder how consistent Laband and Tollison are in their faith in the market test. Are they prepared to rank publications by their circulation numbers? Or, as in some circles, do skillfully written contents and wide readership affect appraisals negatively?

As for appraising persons, it is one thing to make appraisals responsibly when choices must be made, as among candidates for employment, promotion, and professional honors. It is another thing to make appraisals in a vacuum, out of the context of necessity — secondhand appraisals that may even be abused for thirdhand appraisals. Turning academic economics into its own subject matter is narcissism. I wonder whether the apparent popularity of articles ranking departments and journals and persons traces to their appeal as material for gossip, like the appeal of tabloids sold at supermarket checkouts. (Similar thoughts come to mind about some strands of economic imperialism, as in writings that strain to attribute rent-seeking motives to ever more institutions and officials.)

Is Laband-and-Tollison-Type Thinking in Fact Influential?

So far I have been worrying about the Laband and Tollison market test to the extent that it is applied. But do Laband and Tollison in fact have influence? I do not know. Conceivably, almost everybody ignores them; on the other hand, they are not unique in thinking as they do. What I do know is that they try to have an impact. Their numerical systems of rating persons and departments and journals are intended to affect what people do. Even in their article, they preach at economists. They preach about publishing in prestigious journals, which implies (perhaps unintentionally) preaching about research on topics considered most acceptable to prestigious journals, preaching about what to emphasize and what not, preaching about research methods, preaching about styles of exposition (sometimes even involving strategic obscurity), and preaching about trying to associate oneself (as by judicious citations) to current fashions in the profession.

The message, in short, is: compromise your standards. Put less effort into the kinds of work that you consider important, in which you have a comparative advantage, and that you enjoy. (Joy is a legitimate incentive, but one eroded by Laband-and-Tollison-type attitudes and practices.) Switch toward catering to editors and referees (who themselves operate under similar pressures to the extent that Laband and Tollison prevail).

Such preaching distresses me not merely because it is or might become influential but because it is officious and repellent in itself.

Style or Argument

Laband and Tollison beg the question they purportedly discuss: as unabashed secondhanders, they simply assert or assume that their supposed market test is indeed the correct measure of excellence. But what justification is it of certain criteria that the players try to satisfy them when they are applied? Laband and Tollison, citing earlier papers coauthored by Laband, argue, for example, that journal editors try to publish "high-impact papers." Well, it is no surprise that people respond to incentives, but to offer this fact as justifying a particular structure of incentives is circular reasoning.

A further sign of the weakness of Laband and Tollison's case is their resort to emotive words like "sour grapes" and "crybabyism." Such name-calling hardly applies to the eminent economists, including Nobel laureates, who have expressed concern about the state of much of the academic literature, including what might be called its narcissistic or incestuous aspects. What opinion of the literature may we infer, by the way, precisely among economists who excuse neglecting actually to read the work even of candidates being appraised?

The personal nature of Laband and Tollison's attack further appears in how they characterize an alternative to secondhand appraisals, namely, reliance "on the ostensibly firsthand knowledge of some central authority, such as Yeager." Yet this is not the alternative, as I have explained above. Further, Laband and Tollison make a snide remark about "the literature that Professor Yeager dotes on" — the literature of a cult for which "up is down and down is up," for which "failing a market test is really passing it," and whose members are content just to chat among themselves, forgoing Wimbledon in hopes of winning the Austrian Open (p. 45). How do they know that I "dote" on such literature or that I "dote" on any literature? As I made clear in 1997,1 am no spokesman for any particular school or sect. I have a low opinion of much Austrian literature, as well as a high opinion of some of it, opinions that I have formed myself and have not taken over secondhand. Of course much crummy work, along with excuses for it, is knocking around in economics, as in other fields. What does that fact have to do with the issue under discussion — appraisal by a supposed market test?

Are Laband and Tollison willing to let their remark about what I "dote" on remain as an example of their standards of accuracy and relevance? Their analogy with tennis tournaments reflects, by the way, their obsession with the game aspect of academic life.

Conclusion

Let me be clear about what I am not saying. I never questioned the need for standards, nor the uphill battle that unpopular ideas necessarily and even appropriately face, nor the necessity of secondhandism of some kinds and degrees and for some purposes. I am not sweepingly condemning the literature of academic economics. Economists continue making solid contributions despite everything.

I regret the perversion of standards through glorification of secondhandism. When appraisals are necessary, they should be kept as close as practicable to persons who have the most direct knowledge and who bear responsibility for their judgments. I regret the strengthening of incentives to jump onto bandwagons. I implore readers to learn lessons from the characters in Ayn Rand's novels who either are secondhanders themselves or exploit other people's secondhandism and their susceptibility to intellectual intimidation. (Rand provides insights into the craving for prestige that I could scarcely hope to reproduce here.)

We should beware of relativism about truth. Beyond the game-like or fame-and-fortune side of academic careers, the truth-and-beauty side deserves cultivation. Communication is important, even including skillful communication of knowledge to students and to the broad public.

Above all, I warn against discrediting the valid case for the free society by misconstruing the market as an entity in its own right that transcends the mere men and women who trade on it, an entity that makes superior judgments even about good and bad. Obstacles to understanding the logic of a market economy are great enough already. A spurious linkage in people's minds between a twisted version of free-marketry and the serious, valid, and quite different case for the free market can only harm the cause of freedom. Overreaching boomerangs.

(Leland B. Yeager: Is the Market a Test of Truth and Beauty? Chapter 7. Kindle-Edition 2011)