The problem of twelve When a few financial institutions control everything

Much has been said about the financial industry since the collapse of the housing market and the ensuing recession of 2008--2010. Researchers and pundits alike have tried to pinpoint the underlying systemic cause. In his recent book, Coates (law and economics, Harvard Univ.) addresses the consolidation of power in the financial industry. While this consolidation of power may not be entirely to blame for the collapse of 2008, the finance industry has certainly grabbed more power since the recession. The Problem of Twelve outlines the events that created opportunities for fund managers to consolidate power. A thorough read of the text will help students and market participants understand the forces behind the housing bubble collapse and perhaps even current events. Summing Up: Recommended. Undergraduates through faculty; professionals. --Todd Chesebro, University of Mary Hardin Baylor

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. Copyright (c) Kirkus Reviews, used with permission.