Politics and Leverage

Leverage is a fact of life which all successful people employ to maximize their benefits and minimize their costs. To the extent that Republicans leveraging the debt ceiling is surprising (it is, in fact, routine for both parties), it’s only because control of the House provides only so many points of procedural advantage.

In a legal context, an agreement produced by negotiation without the use of leverage is often far more suspect than the opposite. Courts are likely to mistrust the motivations of parties to a contract the terms of which are unreasonably generous under the circumstances. These agreements may be seen not to have been negotiated at “arms-length,” which implies a conflict of interest.

For example, where Party A, who owns corporation X and owns the majority of the shares of corporation Y, effects a merger between X and Y, arranging for Y’s minority shareholders to be compensated significantly below the market value of their shares. If process by which Y’s board of directors approved this transaction does not entail procedural safeguards to ensure that they acted independently of A’s influence, the board may be liable for breach of its fiduciary duty of loyalty.

Tax law, alternatively, is replete with provisions designed to prevent people from disguising e.g., gifts as negotiated transactions in order to reduce tax liability.

Leverage is part of any functioning market.

But moreover, the Democrats in this situation have as much, if not more leverage than the Republicans, which is why Obama feels secure in his “no negotiation” stance.

The reason for this is that Republicans are almost certain to bear the lion’s share of blame if anything really catastrophic happens.


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