WEBVTT

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Prof: Okay let's get
started.

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It occurred to me over the
break that Goldman Sachs gets

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some bad press.

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Is there--has anybody read the
piece in Rolling Stone?

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Okay can--these--where are the
hand microphones?

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Do we have the hand microphones?

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Student:  Yeah,
Matt Taibi of Rolling Stone

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called Goldman Sachs a--
I might get this quote wrong,

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but it's something along the
lines of "A great vampire

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squid relentlessly jamming its
blood funnel into anything that

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smells like money."

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Prof: I think that's an
exact quote.

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Student:  Yeah.

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Prof: We should have
tried that out on Paolo.

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Now it also reminds me of the
passage in Richard Posner's

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book,
to the effect that we can no

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more blame the financiers for
the wreckage of the credit

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markets than we could blame a
lion for eating a zebra,

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and there's an odd
discontinuity here.

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When you look at Goldman Sachs
internally, through the eyes of

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one of its very senior partners,
the ethical component is big.

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There's a huge component about
integrity and meeting one's

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obligations and delivering the
highest quality product on the

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market,
and at the same time,

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Goldman is vulnerable to the
view that it took inordinate

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advantage of the taxpayers in
the recent debacle.

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Now how would they defend
themselves?

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They would say--one thing they
would say is,

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"We didn't want to take
the money.

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Hank Paulson told us we had to
take the money,"

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because the stigma which would
otherwise fall on the banks

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which took the money would cause
further disruption and meltdown;

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that's one thing they would say.

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Another thing--well,
have you noticed what they're

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doing to--in the way of
charitable activities just

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lately?

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Anybody notice the announcement?

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$500 million dollars in help to
10,000 small businesses.

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Does that strike you as a big
gesture or a little gesture?

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Tal, what do you think?

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Student:  Well as a
percent of their revenues,

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profits, or even just the
amount they pay out in bonuses

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every year,
I would say that's a very

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little gesture.

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Prof: That's a very
little gesture.

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I agree.

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From a public relations point
of view, if they multiplied it

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by ten so it's five billion,
would it do them more good?

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Them, not the world,
not the country,

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them.

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Student:  I think that
adding a couple more zeroes

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would probably make a bit of a
difference in public opinion,

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but I don't know if it would
fully make up for the perceived

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damage that they caused in the
public's consciousness.

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Prof: Okay so my own
intuition is that it wouldn't do

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them a lot of good.

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That the public doesn't think
quantitatively,

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some opinion leaders do,
but most people $500 million

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sounds like an awful lot of
money and five billion doesn't

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sound like ten times as much,
so they're probably not far off

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in the number they chose if the
object is public relations,

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which I think it is.

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How many--are there people here
who think that the government

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ought to compel them to give
back a bigger chunk of capital,

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put it out there in some
charitable way or give it back

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to the taxpayers.

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Anybody of that view?

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Okay so you're unanimous which
is rare in a group this size.

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Does that mean that you think
there's no ought to it,

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or does it mean that the
process by which the government

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would do that strikes you as not
a good one?

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Who's got a--rescue me here
guys I'm drowning.

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Student:  There is a big
difference between what you

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should do and what the
government can make you do.

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I don't think that there's any
reason any large corporation

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should be forced to donate to
charity,

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unless it's like a sort of ad
hoc tax randomly applied to

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them,
and that seems like a

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>

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and we don't want to go there.

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Prof: Okay so it
probably would violate the

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Constitution if we created The
Goldman Sachs Retribution Act.

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I agree with that.

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So we're coming to the end of
the course,

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and what I want to do is today
to add one more case,

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one which allows us to look at
the interface between capital,

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the environment,
and government in the TXU

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v.
EDF case which you've

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all looked at and which is
structured so that you could

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invest a whole week in it if you
were willing to trace out every

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strand in the web page.

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Then on Wednesday I'm going to
do a recap of the course,

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as if on a motorcycle,
and finish with a central case

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which will form the basis for
your final exam essay,

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and since it's going to count
for 70% of the final,

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I'm sure we'll have 100%
attendance during the last

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twenty minutes of class,
and I'll give you the reading

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assignment in advance.

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It is the--Leasing the Rain,
it's the--

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the reading is the William
Finnegan piece from The New

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Yorker about the
privatization of the water

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supply of Cochabamba,
Bolivia by an American

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corporation known as Bechtel.

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And the essay question--I'll
formulate it at the end of class

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Wednesday,
asks you to work through that

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story as somebody who has
learned something about

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capitalism in this course.

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Okay so now,
marrying the devil and the one

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difficulty with this case is
that it's full of acronyms,

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and these are the most
important, or most immediately

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important of the acronyms,
and can anybody here quickly

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recite the full names of every
one of these?

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Who wants to be a show off?

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I'm sure there are fifty people
who can do it.

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Okay I'll--let's put them into
three bins.

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This is the most obscure,
Texas Climate Initiative,

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and Jim Marsden who is the
video star of the case is

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president of that,
and he is the regional head of

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EDF,
The Environmental Defense Fund

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for Texas,
and The Natural Resources

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Defense Council is a--
is parallel to the EDF;

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a little harder edge and
important--then in the gray box

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in the middle we have the target
firms in the private equity

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takeover.

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It's just one firm really,
it's TXU, but the focus

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strategically is on TXU plus.

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It is on the expanded
generation capacity that TXU has

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announced,
and that expanded generation

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capacity is on the lower edge
from an environmental point of

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view.

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It relies on conventional
technology,

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which no one thought at the
time, was the best available

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technology for coal-fired
generation of electric current.

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While we're at it,
the parts of an electric

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utility company are three:
generation, transmission,

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and sales or distribution.

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Transmission is the long lines,
and distribution is the last

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mile of lines,
and the financial connection,

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the contractual connection with
the customer.

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Then on the right we've got KKR
and TPG and these are both large

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and very aggressive private
equity firms.

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KKR is most famous for the
Reynolds/Nabisco,

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RJR Nabisco takeover,
which is characterized at

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length in Barbarians at the
Gate, and Texas Pacific is

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actually the more interesting of
the two,

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from the point of view of this
case.

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Is there anybody who can snap
to an obvious conclusion about

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the difference between the two?

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Okay we'll draw it out in a few
minutes.

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The TXU expansion 8,600
megawatts added,

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that's a--just under a 50%
increment to the firm's total

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generating capacity.

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Ten or $11 billion dollars in
costs,

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somewhere between $50 billion
and $2 billion of that are

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budgeted to controls of
pollution,

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and it's pretty murky in the
case and pretty murky in fact

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just how much of it--
how much of the capital can be

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construed as pollution control.

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They promise a 20% cut in
emissions--what do they mean by

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that?

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Who thought that one through?

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20% cut in emissions,
we're going to add 47% to our

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total generating capacity,
and we're going to cut

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emissions by 20%,
what exactly is the claim?

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Does it mean--yes.

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Student:  I'm not sure
what TXU promised exactly,

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but there are two ways you can
do that.

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You can artificially--you can
buy carbon credits and reduce

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your emissions,
like, technically on paper.

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You can also retrofit some coal
plants and see--

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so that emissions are kind of
sequestered underground,

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like there are certain
technologies that allow you to

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do that,
so that's some ways that you

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can cut emissions.

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Prof: Okay.

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Those are both valid points,
but I'm still a little unclear

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about how much soot is going to
come out the end of the pipe.

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Yes.

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Student:  I guess the
other potential difference is

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whether the 20% cut is in total
emissions or if it's per unit

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generated,
so if it's per unit generated

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there would still be a larger
final percentage of emissions,

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but it would be like less per
unit.

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Prof: Yeah I think it
has to be normed in that way.

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It has to be a unit rate of
emission so that these plants

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are,
on average, quite a lot better

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than the old plants,
though still not state of the

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art, and the claim is that we're
going to drive the aggregate

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emission rate per megawatt down
by 20%.

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They're using old sites.

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They plan to use old sites
where they've already got a

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plant.

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Anybody figure out why they
would say a thing like that?

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Well--yes.

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Student:  If you're
building a new site it requires

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a lot more regulatory approval
to a green field site I guess.

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Prof: Yeah.

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A green field site,
you've got a whole round of

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permitting, and there are a
couple of other advantages.

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One is that the NIMBY politics,
"not in my backyard

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politics,"
are over in those areas.

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You've already been through it,
and if you can come back to

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people and say,
"This is a less disruptive

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plant than the old one,"
that's a pretty good start,

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and even if people aren't much
taken by that,

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if you've been--if the
management has been intelligent

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they will have built a network
of local relationships,

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which they would have to build
anew on a green field site.

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Finally there's an
infrastructure reason,

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that the transmission lines
required to transport the

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current produced will already be
in place,

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and that's both an economic and
a political plus.

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Then at the end of this they
throw in a 10% discount to their

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customers,
and that discount is a

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non-sequitur in the
environmental discussion,

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but it's not a non-sequitur in
the actual case,

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because TXU is in trouble on
two political fronts at once.

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It is a monopoly seller of
current and it has--

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it is--it has wired the state
of Texas politically,

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and there is a populist revolt
against that,

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and the populist revolt takes
the form of criticizing the

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ultimate pricing at the
household level.

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Now if we look at the case from
Austin,

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Texas we've got all these small
things,

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upper right,
that are federal government,

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and we've got all these big
things locally that are state

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politics and government.

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You've got Texas state
government where--how's TXU

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doing with Governor Perry during
all this?

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Is Perry a populist who wants
to beat up on them?

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No, they own Perry.

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I may overstate a little but
they pretty much own Governor

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Perry.

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The Texas Business for Clean
Air is a not all together

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surprising alliance of business
groups which are opposed to TXU

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on this,
on environmental grounds,

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sometimes for self serving
business reasons and other

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times,
I think, because it's what

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senior management thinks is
right.

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You've got Texans for Public
Justice and they're not so much

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about the environment as about
the rates.

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You've got a state senator
named Troy Frazier who is making

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a name for himself statewide by
attacking TXU on the,

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mostly on the rate side,
but he's also willing to take

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up the environmental side.

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You've got The Texas Climate
Initiative and the EDF,

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which are closely intertwined
in the personality of Jim

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Marston.

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What did you think of Marston?

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If you went all the way through
the case you've heard him,

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I don't know,
five or seven times in video,

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seem like an able guy?

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Thumbs up if you think that,
thumbs down if you don't think

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that.

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Hmm...we've got ninety-five
abstentions.

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He's an able guy,
he's a very able guy,

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but he is a--he has a very soft
style of argument.

19:20.250 --> 19:24.700
He never seems to be a jump
ahead of you in the argument.

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He's also, in a very laid back
way,

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asking your opinion,
as if he hadn't really figured

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out where he wanted to go,
and that may be partly for our

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benefit because he was working
for the school of management in

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preparing for the case,
but it's also probably part of

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his natural style.

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PUCT, Public Utility Commission
of Texas, and Texas Commission

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on Environmental Quality;
I almost missed that one myself.

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These are the two principle
regulatory bodies in the case

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and Association of Electric
Companies of Texas;

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you can imagine who they are
and what the TXU's role is.

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It's a classic interest
association and then you got

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populist--[Video 20:35-22:50.]
Okay so any of you guys ever

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done a protest of that type?

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You just don't look like street
theatre types.

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Do you think that's effective?

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You're shaking your heads and I
think there are two sides to the

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question.

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Let's start in the negative
here.

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Student:  I mean,
I just feel as though it's not

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going to get the companies to
change their positions really,

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so what's--I mean,
yes, it might stir up a little

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public disapproval for a couple
of days,

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but that's not really going to
change behavior.

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Prof: Okay so as a
direct strategy for changing the

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behavior of companies,
it goes nowhere.

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We agree.

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Is there any other way in which
it might be of service to the

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cause these people are pursuing?

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Here and then here.

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Student:  If you can get
media coverage of it,

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it tends to have a more
dramatic effect on public

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opinion.

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I was working on a political
campaign where we sent out

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something that was short enough,
a picture in The Washington

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Post, and so I at least from
personal experience,

24:08.750 --> 24:11.320
think that it does have the
potential.

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Probably not to affect the
direct response of the people

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who you're calling out,
but that there can be larger

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implications for how other
people view the situation.

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Prof: Okay so the
clear--the media are the target

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and then who would we most
likely influence with this sort

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of thing?

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Anybody want to elaborate
further?

24:40.059 --> 24:42.469
Yes, Sasha.

24:42.470 --> 24:45.610
Student:  I think what
the companies really worry about

24:45.613 --> 24:48.453
is that they're clients are
going to be sensitive to the

24:48.448 --> 24:50.508
negative press and change
companies.

24:50.509 --> 24:52.089
Prof: Absolutely.

24:52.088 --> 24:59.818
That's--TXU customer voter base
is part of this and both of

24:59.816 --> 25:06.016
those nouns are important,
and they are both voters and

25:06.018 --> 25:09.238
customers,
and they may not have many

25:09.244 --> 25:12.844
places to go as customers but as
voters,

25:12.838 --> 25:18.358
the perception within
regulatory and legislative

25:18.359 --> 25:24.819
groups in Austin would be an
important consideration.

25:24.818 --> 25:29.918
I personally don't think that
this kind of demonstration is

25:29.921 --> 25:34.101
hugely effective,
but it does kind of raise the

25:34.096 --> 25:38.676
temperature of the issue and
make it salient to decision

25:38.680 --> 25:40.680
makers in government.

25:40.680 --> 25:45.890
Now in--on the--if we switch
from Austin to Washington,

25:45.890 --> 25:52.640
the actors get to be different
and the EPA,

25:52.640 --> 25:56.370
and The Federal Energy
Regulatory Commission,

25:56.368 --> 26:03.488
and the key people in Congress
like Henry Waxman or Senators

26:03.486 --> 26:09.726
Bingaman and Boxer,
become big players,

26:09.729 --> 26:17.899
and the EDF and the NRDF,
Natural Resource Defense Fund,

26:17.900 --> 26:20.050
become well staffed.

26:20.048 --> 26:25.268
They would each have fifty or
so staff people in Washington

26:25.269 --> 26:33.059
and become a major presence,
and the question in front of

26:33.060 --> 26:39.850
KKR and Texas Pacific hinges on
what?

26:39.848 --> 26:43.778
Why do they--why are they
messing around with all these

26:43.777 --> 26:45.447
environmental groups?

26:45.450 --> 26:49.450
It would sound like,
from a purely economic point of

26:49.452 --> 26:52.662
view,
to be a waste of time and yet

26:52.656 --> 26:57.186
from an entirely rational
economic point of view,

26:57.190 --> 26:59.660
it isn't a waste of time.

26:59.660 --> 27:05.990
Why not?

27:05.990 --> 27:08.890
Well let's look--let's go to
Wall Street.

27:08.890 --> 27:15.450
The private equity business in
2007 there were 794 large

27:15.451 --> 27:21.181
private equity transactions
during that year,

27:21.180 --> 27:24.780
adding up to about $800
billion, so they average about

27:24.781 --> 27:26.211
$1 billion a piece.

27:26.210 --> 27:34.540
Explosive growth,
they're up about 450% to 500%

27:34.544 --> 27:40.724
from 2000 to 2007,
and it's a period when capital

27:40.715 --> 27:46.165
is abundant and cheap,
so the--it is in every sense

27:46.166 --> 27:49.976
boom time for private equity.

27:49.980 --> 27:58.690
The--you've got three sets of
players as seen from Wall

27:58.688 --> 28:00.138
Street.

28:00.140 --> 28:04.630
You've got private equity
firms, the target firms,

28:04.630 --> 28:07.860
and the business services
organizations,

28:07.858 --> 28:16.418
mainly investment banks which
catalyze transactions of this

28:16.423 --> 28:23.073
kind and the takeover of TXU is
a megadeal.

28:23.068 --> 28:30.528
It is the biggest transaction
of its kind ever so it gets a

28:30.525 --> 28:37.205
lot of attention and offers to
be very profitable.

28:37.210 --> 28:43.040
The institutional investors,
shown upper left in the blue

28:43.040 --> 28:47.470
box,
are limited partners in the

28:47.474 --> 28:55.714
funds created by organizations
like KKR and Texas Pacific,

28:55.710 --> 29:01.980
and from their point of view,
this is one of the highest

29:01.984 --> 29:07.124
yielding asset classes in their
portfolio,

29:07.118 --> 29:11.458
and David Swenson,
for example of Yale,

29:11.460 --> 29:16.090
one of the things he did with
the Yale portfolio which made it

29:16.085 --> 29:20.405
grow so much faster after he
came then it had grown at any

29:20.407 --> 29:23.287
time in the university's
history,

29:23.288 --> 29:28.888
was to shift a great deal of
capital away from publicly

29:28.887 --> 29:35.107
traded securities into private
equity funds which differ--

29:35.108 --> 29:40.238
they differ--the biggest
difference between how well

29:40.240 --> 29:45.770
investment companies do with
stocks and bonds on the one

29:45.772 --> 29:48.862
side,
and private equity on the

29:48.856 --> 29:53.756
other, is the difference between
the smart money and average

29:53.760 --> 29:54.510
money.

29:54.509 --> 29:58.379
In the stock market the
difference between very smart

29:58.383 --> 30:02.633
money and fairly dumb money is a
few percentage points.

30:02.630 --> 30:06.660
The difference in private
equity between the smartest

30:06.657 --> 30:09.987
money and fairly dumb money is
enormous,

30:09.990 --> 30:15.490
and so if an institutional
investor like Yale,

30:15.490 --> 30:20.780
Harvard, or the big pension
funds, can get into private

30:20.782 --> 30:25.952
equity with smart money,
hire smart management,

30:25.946 --> 30:31.436
invest with people like Texas
Pacific and KKR,

30:31.440 --> 30:38.530
the opportunity to beat the
market in a big way is a very

30:38.530 --> 30:44.230
ripe one and that's the heart of
this deal.

30:44.230 --> 30:47.790
Now from a sociological point
of view,

30:47.788 --> 30:56.708
the people who run these
companies are pretty far away

30:56.710 --> 31:02.830
from the green world,
which centers in major

31:02.826 --> 31:09.916
metropolitan areas,
and is populated by well to do

31:09.916 --> 31:14.856
activists,
and their 501(c)(3)

31:14.857 --> 31:21.567
corporations,
of which the ones in play today

31:21.568 --> 31:24.008
are examples.

31:24.009 --> 31:31.029
Now, the Pacific Group is a
little different from KKR in its

31:31.030 --> 31:37.790
relationship to those groups,
because it has one key player

31:37.788 --> 31:43.228
in William Riley,
who had been the head of the

31:43.230 --> 31:50.500
EPA before and who is agreeing,
and he gave--he gives Texas

31:50.503 --> 31:57.123
Pacific a relationship to this
world which KKR pretty much

31:57.122 --> 31:58.982
doesn't have.

31:58.980 --> 32:03.220
David Bonderman,
who is one of the founders of

32:03.217 --> 32:07.447
Texas Pacific,
is Harvard educated and kind of

32:07.453 --> 32:09.623
part of this world.

32:09.618 --> 32:13.928
If you begin tracking
personalities in these funds,

32:13.930 --> 32:20.210
Frances Beinecke,
she of Yale fame,

32:20.210 --> 32:27.410
is the head of Natural
Resources Defense Fund--

32:27.410 --> 32:29.480
I don't know why I put C's
instead of F's on the end of

32:29.481 --> 32:31.401
this--
the slides.

32:31.400 --> 32:38.670
She's the head of that,
and a terrifically potent

32:38.665 --> 32:42.235
leader,
and the reason the privileged

32:42.238 --> 32:46.708
access to do this case came to
the Yale School of Management,

32:46.710 --> 32:52.180
has something to do with that
particular connection.

32:52.180 --> 32:58.670
There is a cultural divide
here, it is--

32:58.670 --> 33:06.130
these are quite different views
of the world and if we compare

33:06.127 --> 33:13.707
501(c)(3) corporations with
regular public or not publicly--

33:13.710 --> 33:17.110
publicly traded or not publicly
traded corporations,

33:17.109 --> 33:20.379
we get some sharp contrasts.

33:20.380 --> 33:25.180
The business corporations are
pursuing profit.

33:25.180 --> 33:31.500
The 501(c)(3)'s are pursuing a
cause.

33:31.500 --> 33:38.050
The attitude to risk is far
more aggressive among the

33:38.050 --> 33:39.690
businesses.

33:39.690 --> 33:44.540
The boards are accountable to,
mainly to major investors on

33:44.535 --> 33:51.265
the business side,
and to donors on the 501(c)(3)

33:51.271 --> 33:59.911
side except that in the really
big old 501(c)(3)'s;

33:59.910 --> 34:03.220
they're accountable to no one
because the donor is dead.

34:03.220 --> 34:05.430
The Carnegie Corporation,
for example,

34:05.430 --> 34:08.070
where my wife is a chief
investment officer,

34:08.070 --> 34:11.620
Andrew Carnegie hasn't paid any
attention to their ledgers in

34:11.619 --> 34:15.469
some time,
and it actually creates an

34:15.472 --> 34:23.182
enormous amount of free play at
top management and board levels.

34:23.179 --> 34:27.289
The management culture on the
business side is far more

34:27.286 --> 34:31.156
aggressive than on--
among the non-profits and top

34:31.159 --> 34:36.609
management compensation in--
particularly in private equity

34:36.614 --> 34:40.634
is high and variable and Jim
would--

34:40.630 --> 34:45.250
Jim pointed out to me that--Jim
Alexander pointed out to me this

34:45.246 --> 34:49.856
morning that when I say high and
variable the variability may or

34:49.864 --> 34:53.314
may not be well-tied to actual
performance.

34:53.309 --> 34:57.019
You can get a lot of
compensation for just sitting in

34:57.023 --> 35:01.313
the right chair during a bull
market and many people have.

35:01.309 --> 35:06.669
On the non-profit side it--the
compensation is relatively

35:06.668 --> 35:11.738
modest and more or less
invariant with performance.

35:11.739 --> 35:15.739
Take for instance,
Beinecke, there was a to do in

35:15.744 --> 35:19.504
this same year because somebody
published--

35:19.500 --> 35:24.170
their top salaries are also
published and her salary of

35:24.170 --> 35:29.400
$252,000 was published,
and there was a populist outcry.

35:29.400 --> 35:35.860
Now by private equity standards
that's not a lot of money.

35:35.860 --> 35:39.790
Even by not--people on the
investment side in organizations

35:39.791 --> 35:43.801
like this make three or four,
or ten times that,

35:43.795 --> 35:47.975
but the general norm in
non-profits is--

35:47.980 --> 35:52.690
how many--are there people here
who plan to become

35:52.686 --> 35:54.316
non-profiteers?

35:54.320 --> 35:55.960
Maybe?

35:55.960 --> 36:01.820
Okay, well the one thing you
have to do is take a zero off

36:01.824 --> 36:05.534
when you think about
compensation.

36:05.530 --> 36:11.260
More or less it's--that's about
the ratio and its considerable,

36:11.257 --> 36:16.707
so these are two very different
classes or organizations.

36:16.710 --> 36:23.070
Here we have Fred Krupp of The
Natural Resources and Henry

36:23.068 --> 36:29.978
Kravitz, and I'll bet not one of
you is in doubt about which is

36:29.983 --> 36:31.103
which.

36:31.099 --> 36:37.309
The pictures are--they get the
point across,

36:37.306 --> 36:46.106
and why on earth would people
on this side be so interested in

36:46.112 --> 36:52.322
participation from people on
this side?

36:52.320 --> 36:59.190
Sasha, again.

36:59.190 --> 37:02.030
Student:  If you ask
them to do something with the

37:02.025 --> 37:04.345
business that makes them more
money ultimately,

37:04.353 --> 37:05.673
then it's a good deal.

37:05.670 --> 37:10.720
Prof: You nailed it,
and not one iota of direct

37:10.715 --> 37:16.235
concern for the environment is
required to back that up.

37:16.239 --> 37:18.379
Right?

37:18.380 --> 37:21.440
So what's the biggest problem
about TXU?

37:21.440 --> 37:26.990
Why is it--what--if you're
going to sit down and calculate

37:26.987 --> 37:32.237
the risks from KKR and Texas
Pacific's point of view of

37:32.242 --> 37:38.392
taking over this firm,
what would the main risks be?

37:38.389 --> 37:42.109
They would be--would they be
that the technology will fail?

37:42.110 --> 37:48.570
Would they be that consumer
demand for electric power will

37:48.574 --> 37:50.734
suddenly go away?

37:50.730 --> 37:54.910
Would they be that a new
entrant will come in;

37:54.909 --> 37:59.709
a large new entrant will come
in, and begin to compete with

37:59.708 --> 38:00.948
lower prices?

38:00.949 --> 38:05.559
None of those things are
imaginable.

38:05.559 --> 38:08.139
None of those are imaginable.

38:08.139 --> 38:12.629
So why isn't this just a
license to print money?

38:12.630 --> 38:19.370
The answer to that is that the
regulatory risk is substantial

38:19.373 --> 38:23.873
at both the federal and state
levels,

38:23.869 --> 38:27.559
much more substantial at the
federal level,

38:27.559 --> 38:38.199
and that the process by which
the environmental groups would

38:38.201 --> 38:49.201
in effect bless or kosher the
transaction is a way of limiting

38:49.202 --> 38:52.632
political risk.

38:52.630 --> 39:01.000
The EDF is all about the cause
of the environment and their

39:00.998 --> 39:09.218
claim is that lobbying work
they've done in the years from

39:09.224 --> 39:17.304
2001 to 2008 will diminish
diesel pollution by nearly 90%

39:17.304 --> 39:21.974
by 2030,
and that's their business.

39:21.969 --> 39:31.619
Their business is to get the
government to compel companies

39:31.623 --> 39:34.623
to pollute less.

39:34.619 --> 39:37.449
Fred Krupp at Davos in the year
of the case,

39:37.449 --> 39:40.639
this is not in the case:
"The smartest companies

39:40.639 --> 39:44.259
can see over the horizon and
anticipate consumer demands.

39:44.260 --> 39:47.110
That's why the EDF has been
able to team with--

39:47.110 --> 39:50.220
team up with ALCOA,
DuPont, Caterpillar,

39:50.219 --> 39:53.919
GE, Duke Energy,
BP America, and others on a

39:53.920 --> 39:59.090
plan that could cut greenhouse
gas emissions by 60% to 80% by

39:59.085 --> 39:59.855
2050.

39:59.860 --> 40:02.790
The plan is a jobs winner as
well as an environmental

40:02.793 --> 40:03.643
winner."

40:03.639 --> 40:11.049
So organizations like these are
brokers in which they cut deals

40:11.048 --> 40:16.018
with businesses,
and the businesses they cut the

40:16.023 --> 40:21.523
deals with are ones which have a
higher than average capacity to

40:21.518 --> 40:24.308
withstand tighter regulation.

40:24.309 --> 40:27.429
For example,
GE with Eco Imagination,

40:27.434 --> 40:29.784
you've all heard of that?

40:29.780 --> 40:34.400
If you watch television for any
period as long as an hour you

40:34.396 --> 40:39.316
have been saturated with that
message, and why can GE do that?

40:39.320 --> 40:41.240
Well why does it have to do it?

40:41.239 --> 40:46.689
What's GE's long-term
reputation for environmental

40:46.686 --> 40:48.016
pollution?

40:48.018 --> 40:51.298
It is that they filled the
Hudson River with PCB's fifty

40:51.295 --> 40:53.995
years ago,
and it's important to them to

40:54.001 --> 40:57.731
get us off that topic and to
think of them in a different

40:57.733 --> 40:58.203
way.

40:58.199 --> 41:01.939
Second, they compete in Europe
for the manufacture of

41:01.936 --> 41:05.816
electrically powered equipment,
and the regs in Europe are much

41:05.820 --> 41:08.840
tighter than they are here from
an environmental point of view,

41:08.840 --> 41:13.090
so they have developed a
technology to meet much higher

41:13.094 --> 41:14.044
standards.

41:14.039 --> 41:19.339
They've got it already in the
kit, and so from their point of

41:19.342 --> 41:24.822
view, it is actually a corporate
strategy play to encourage the

41:24.822 --> 41:27.122
feds to raise the bar.

41:27.119 --> 41:31.739
Cap and trade,
I'm running out of time here,

41:31.739 --> 41:37.959
cap and trade diagram--the
interesting side fact that cap

41:37.956 --> 41:42.506
and trade in the EU basically
fizzled,

41:42.510 --> 41:49.890
and it fizzled because the caps
that were put on the countries

41:49.894 --> 41:57.164
were not low enough to make
people go out and buy credits.

41:57.159 --> 42:03.109
They were set in a very gentle
political way and the market for

42:03.108 --> 42:09.148
cap and trade depends on people
having to break the caps and buy

42:09.152 --> 42:16.192
credits to make up for that,
and the caps were set so high

42:16.193 --> 42:21.943
that it didn't produce the
desired effect.

42:21.940 --> 42:24.320
I don't know why that slide is
there.

42:24.320 --> 42:32.320
Now let's think about outcomes.

42:32.320 --> 42:34.120
We've got on the vertical
dimension,

42:34.119 --> 42:37.879
Green World,
and on the horizontal dimension

42:37.878 --> 42:42.498
Green Paper,
and the four big quadrants--the

42:42.503 --> 42:48.493
four quadrants of this space
define points we could think

42:48.489 --> 42:54.799
about in looking at what the
risks and possibilities of this

42:54.797 --> 42:59.927
are for these two classes of
organizations.

42:59.929 --> 43:05.069
Down here, emissions are high
and profits are low is a

43:05.074 --> 43:10.804
catastrophe on both dimensions
and the likelihood of both of

43:10.800 --> 43:14.780
those things happening is very
small.

43:14.780 --> 43:22.830
The story where you have both
high emissions and high profits,

43:22.833 --> 43:30.233
this is the most worrying
category from the point of view

43:30.228 --> 43:32.208
of the EDF.

43:32.210 --> 43:36.860
This would constitute green
washing which has become a

43:36.856 --> 43:42.376
really important epithet in the
politics of the environment,

43:42.380 --> 43:46.870
where they're blessing
something which is a pretend

43:46.873 --> 43:52.213
benefit to the environment,
and here is the disaster from

43:52.210 --> 43:56.310
the point of view of KKR and
Texas Pacific,

43:56.309 --> 44:02.979
where you have both low
emissions and low profits and do

44:02.981 --> 44:10.141
you think KKR and Texas Pacific
enter into this relationship

44:10.137 --> 44:17.167
fearing the risk that EDF and
The Natural Resources Defense

44:17.173 --> 44:23.003
Fund will encourage the
imposition of standard so

44:22.996 --> 44:28.816
Draconian that they can't make a
living?

44:28.820 --> 44:34.900
Well no, they wouldn't have
chosen EDF as the lead agency if

44:34.896 --> 44:41.386
EDF were of the same temperament
as the street theatre we saw in

44:41.387 --> 44:42.827
the video.

44:42.829 --> 44:48.169
They chose EDF because they
think they can cut a plausible

44:48.172 --> 44:52.862
and constructive bargain with
them which leads,

44:52.860 --> 44:56.080
not upper left but upper right
in the diagram,

44:56.079 --> 45:08.109
for emissions decrease in a
substantial degree and profits

45:08.106 --> 45:11.056
remain high.

45:11.059 --> 45:15.709
This slide is in the--is from
the case and it's the full

45:15.713 --> 45:20.963
inventory of exactions that Jim
Marston and EDF people consider

45:20.960 --> 45:25.820
in looking at the case,
and they call it the blue sky

45:25.818 --> 45:28.648
concessions,
because it's perfectly clear

45:28.646 --> 45:30.966
they're not going to get all of
these,

45:30.969 --> 45:35.429
but they want some of them and
they get some of them,

45:35.429 --> 45:40.339
and they also get quite a lot
of symbolic buy in so that by

45:40.342 --> 45:44.432
the current year 2009,
KKR is offering an investment

45:44.425 --> 45:47.605
portfolio which it calls the
green portfolio,

45:47.610 --> 45:52.610
and this consists not of
companies that are going to

45:52.614 --> 45:58.214
devote themselves to producing
environmental products,

45:58.210 --> 46:01.690
but rather to companies which
produce other products.

46:01.690 --> 46:05.550
For example,
in Biomet, produce medical

46:05.548 --> 46:11.848
devices but where they sign onto
the proposition that they will

46:11.846 --> 46:18.546
make their production process
far greener than it was before,

46:18.550 --> 46:23.500
so that I as an investor can
buy into the green fund,

46:23.500 --> 46:29.250
and expect market rates of
return and think that on the

46:29.251 --> 46:35.431
side I'm doing a little bit of
good for the environment.

46:35.429 --> 46:57.819
[Video 46:37-47:08.]
Okay so--and they all went to

46:57.822 --> 47:15.192
the beach and had a swell
afternoon.

47:15.190 --> 47:21.630
The--okay so that's the last
case we're going to do,

47:21.630 --> 47:26.430
except the one for your final,
and what I hope you'll do for

47:26.427 --> 47:30.817
Wednesday is read the Finnegan
piece with some care.

47:30.820 --> 47:32.950
He's a brilliant writer.

47:32.949 --> 47:36.279
I got to know him personally
when he came to write about

47:36.282 --> 47:39.072
violent kids in New Haven twenty
years ago,

47:39.070 --> 47:45.330
and it's a beautifully written
piece and it's a compelling

47:45.331 --> 47:48.491
story,
and also begin reviewing your

47:48.485 --> 47:51.915
notes for the big picture flow
of the course.

47:51.920 --> 47:58.000