The Problem of Twelve: When a Few Financial Institutions Control Everything

by John Coates

Overview

The forces behind an economic and political crisis in the making

A “problem of twelve” arises when a small number of institutions acquire the means to exert outsized influence over the politics and economy of a nation.

The Big Four index funds of Vanguard, State Street, Fidelity, and BlackRock control more than twenty percent of the votes of S&P 500 companies—a concentration of power that’s unprecedented in America. Then there’s the rise of private equity funds such as the Big Four of Apollo, Blackstone, Carlyle and KKR, which has amassed $2.7 trillion of assets, and are eroding the legitimacy and accountability of American capitalism, not by controlling public companies, but by taking them over entirely, and removing them from public discourse and public scrutiny.

This quiet accumulation in the last few decades represents a dramatic transformation in how the American economy operates—a sea change that few of us have noticed and all of us need to consider. Harvard law professor John Coates forcefully calls our attention to what is sure to be one of the major political and economic issues of our time.

Product Details

ISBN-13:	9798987053546
Publisher:	Columbia Global Reports
Publication date:	08/15/2023
Pages:	190
Sales rank:	189,803
Product dimensions:	4.90(w) x 7.40(h) x 0.60(d)

About the Author

John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School, where he also serves as Deputy Dean and Research Director of the Center on the Legal Profession. He has served as General Counsel and Acting Director of the Division of Corporation Finance of the Securities and Exchange Commission; before joining Harvard, he was a partner at Wachtell, Lipton, Rosen & Katz, specializing in financial institutions and M&A. He has testified before Congress and provided consulting services to the Department of Justice, the Department of Treasury, and the New York Stock Exchange. He lives in Newton, MA. 

Editorial Reviews

Power without accountability, Coates argues, is always dangerous. And he is right.” —New York Times

“A fascinating insight into a paradox at the heart of liberal democracies.” —Financial Times

“A powerful argument for thoroughly revising how the chief players in the financial world are regulated.” —Kirkus Reviews

“Capitalism is determined by who controls capital. John Coates draws on a lifetime of experience and study to make a compelling case that American capitalism part way into the twenty-first century is dominated by a dozen insufficiently accountable institutions. His pathbreaking analysis and recommendations deserve the attention of all who care about our economic future.” —Lawrence H. Summers, Frank and Denie Weil Director of the Mossavar-Rahmani Center for Business and Government, Charles W. Eliot UniversityProfessor, Harvard Kennedy School

“The political dangers arising from concentrated economic power are a recurrent theme in American history. Coates’ book provides an essential tutorial on the influence of a small number of private financial institutions, and the answers needed for our own reckoning with concentrated financial power.” —Tim Wu, author of The Curse of Bigness, and former special assistant to President Biden for technology and competition policy

“The problem of concentrated power in a few hands is one that we should all be deeply worried about. John Coates provides a compelling account of how the growing influence of index funds and private equity is making this problem much worse in ways that most of us do not even realize, not least because the activities of the key players are shrouded in mystery. The book is a wake-up call for all who are concerned about the future of American capitalism.” —Oliver D. Hart, Lewis P. and Linda L. Geyser UniversityProfessor, Harvard University, winner of the Nobel Memorial Prize in Economic Sciences

“In this concise but broad-ranging exposition of how index funds and private equity funds are changing the nature of American capitalism, John Coates unpacks the complex economic and political effects of these financial intermediaries. He offers some sensible first steps in what he explains will be the long-term challenge of containing their negative effects without losing the substantial benefits that index funds, in particular, have produced for American households.” —Daniel K. Tarullo, Nomura Professor of International Financial Regulatory Practice at Harvard Law School, and former member of the Federal Reserve Board

“This is a must-read for policy makers and policy influencers on both sides of the aisle. Coates lays out—with deeply informed, thoughtful, and near-forensic precision—the complicated balance of financial and political power in America, as well as ways to address the increasing concentration of wealth and the problems that presents for a thriving economy and democracy.” —Allison Herren Lee, former SEC Acting Chair and Commissioner, now Senior Research Fellow, NYU School of Law

“The Problem of Twelve provides a beautifully crisp and clear framing of both the economic issues and policy options surrounding two of the giants of the modern financial landscape—index funds and private equity funds. Whatever your own leanings are in this area, you will find much here to challenge and inform your thinking.” —Jeremy Stein, Moise Y. Safra Professor of Economics at Harvard University, former member of the Board of Governors of the Federal Reserve

From the Publisher

2023-05-23
Harvard Law School professor Coates looks inside the financial microcosm that exercises outsize influence on the economic landscape.

The “problem of 12” is a term of art that describes the capture of some aspect of commerce, governance, or the like by a small number of the participating players. In this instance, it’s a handful of index funds, entities such as Vanguard, Fidelity, State Street, and BlackRock, “which now own as much as 20 percent of corporate America.” Given that the S&P 500 is made up of companies in which a huge number of shareholders hold a tiny number of votes apiece—“no one person owns more than 1 percent of a company’s shares”—this enables these funds to exercise undue authority over the firms in question: CEOs have to listen to them perhaps even more closely than they do their own boards of directors. Sometimes, Coates allows, this can be to the good, as when the funds, responding to their own shareholders, press for companies to be more attentive to diversity hiring, climate change, and other issues of the day. More often, it has negative consequences. Especially damaging is the capture of a large sector of the economy by private equity funds. The private is a complicated term, but for the author’s purposes, one meaningful aspect is that these funds need not be as transparent in their reporting as other investors. Furthermore, they can acquire companies, dissolve pension funds, lay waste to payrolls, and engage in all sorts of rapacious mischief without being held to account in an ethos of “heads I win, tails you lose.” In this short report, Coates proposes “greater antitrust management of index and private equity funds and the companies they own,” which would involve thorough change in the face of massive lobbying efforts calculated to keep such change from happening.

A powerful argument for thoroughly revising how the chief players in the financial world are regulated.

Kirkus Reviews