Author: Lawrence Cunningham


Odds on Corporate Pardons

Talk in Washington at the end of any President’s term turns to the unbridled power that US presidents have to pardon people for having committed crimes. This year, chatter debates whether President Bush will give a pass to convicted former corporate executives, despite a national mood unlikely sympathetic to redemption for financial deception.

Executives seeking pardons reportedly include criminals from the technology-sector financial scandals that erupted during President Bush’s first term. The most infamous applicant is Bernie Ebbers, now serving a 25-year federal prison term for crimes he committed at the fraud-infected telecom giant, WorldCom. That company imploded in 2002 amid $10 billion worth of deceptions that were a primary catalyst of the Sarbanes-Oxley Act of 2002, the law designed to reduce the likelihood of similar large scale corporate accounting fraud.

Other corporate criminals seeking pardons from President Bush come from yet earlier periods. They include the disgraced publishing magnate Conrad Black, and the 1980s-90s junk-bond king-pin, Michael Milken.

The Presidential pardon power can strike the ordinary civics student as bizarre. No doubt, President-elect Obama’s putative nominee for Attorney General is having second thoughts for supporting President Clinton’s late-term pardon of the tax-evading financier, Marc Rich. But Presidents face little risk of rebuke for such decisions.

The betting on whether President Bush will grant pardons to these corporate wrongdoers hedges two competing observations. On one hand, President Bush’s record on just use of law is weak (or mixed, at best), increasing the odds that pardons will be forthcoming. On the other, the country, in the early grip of a deepening recession with roots in perceived corporate financial deception, is unlikelyin in the mood to forgive or offer redemption to crooked business executives.

Net: the smart money is on pardons, for all three of these fellows–and perhaps thousands more.


List of Financial Regulation Conferences?

Financial regulation conferences are regularly held year in and year out by numerous organizations, including universities, throughout the world. But the current economic crisis seems to have caused a spike in the number and diversity of these gatherings. This may reflect how complex the current situation is.

A complete account of the precise causes of the ongoing crisis remains elusive. True, unregulated financial instruments seem to have contributed to excessive liquidity that fueled a speculative price bubble in many housing markets. But exact contours of the dynamics and the role of other forces remain uncertain.

In addition, the full consequences of these precipitating causes have not yet even manifested let alone been resolved. Billions of dollars of unregulated financial instruments remain outstanding, un-matured, and prospects for increasing default levels remain.

Efforts to mitigate or reverse the costs of the crisis, including the Treasury-Congress’s various interventions, are not working well or quickly. Additional support for the auto industry remains a political and economic challenge. Ultimately, therefore, most policy reforms designed to prevent or alleviate recurrences are necessarily made cautiously.

It is not surprising that there should be a proliferation of conferences probing the fundamental issues underlying all of this. It could be helpful to have a complete list of upcoming conferences. A short list appears below (concentrating on those with US, academic and/or law attributes). It would be wonderful if readers would use the comment feature to mention any other scheduled conferences with such attributes.

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2009 Looking up for Large Law Firms

Despite what appears to be a challenging economic environment for lawyers, including at large law firms, 2009 may bring additional work flow. According to an extensive annual survey of corporate directors and general counsel at thousands of large public companies, 80% expect to retain outside counsel in 2009 to address important legal matters. Almost of all of these cite needs in mergers, compliance, intellectual property, labor matters and contract disputes.

Demand for non-legal consultants also appears less strong, with 61% of respondents citing need to retain outside experts in those same fields plus in risk management. The survey is the 8th annual one undertaken by Corporate Board Member and FTI Consulting. The survey report also summarizes leaders’ views on topics seen as of greatest importance to corporate America and corporate governance in 2009.


Professional Ethics Rankings

Lawyers continue to receive relatively low public ratings for professional honesty and ethics, according to the annual Gallup poll on the subject. The poll, by telephone of 1,010 adult Americans, asked people to assess the standards of honesty and ethics in 21 professions as very high or high/average/low or very low.

Nurses receive the highest scores (84/14/<2), followed by pharmacists, high school teachers, doctors, cops, clergy, funeral directors and accountants. Lobbyists receive the lowest: (<9/27/64). Lobbyists are preceded in their cohort by labor union leaders (16/45/35), followed by lawyers (18/45/37), then business executives (12/49/37), advertising professionals, stockbrokers, Members of Congress, car sales-people, and telemarketers in dead last. In the middle cohort are journalists (25/44/31), bankers (23/53/23), building contractors and real estate agents.

Results for most professions were roughly constant this year compared to last. But two points stand out. First, bankers took a beating this year, the first time since 1996 they registered below 30% in the very high + high category and, at 23%, the lowest they’ve received in the poll’s history. The pollsters attribute the results to the economic crisis, natch. Second, business executives last year registered 14% in the very high + high category which, while not a huge drop to 12% this year, is the lowest they’ve received in the poll’s history—having hit highs of 25% in both 1990 and 2001. The economic crisis, again.


Fact, Voice, Blogs and the Times

Debate within the New York Times over longstanding distinctions between editorial opinion and journalistic reporting prompt reflection upon two parallel issues: (1) do blog readers prefer opinion to reporting and (2) do academic bloggers maintain distinctions like that and distinctions between scholarly presentation and essayistic voice?

Clark Hoyt, Public Editor at the Times, wrote in Sunday’s paper about business journalists/columnists both reporting stories and expressing prescriptive opinions on them. He instanced recent cases, including Joe Nocera and Andrew Ross Sorokin (both covering General Motors and opining strongly on whether bankruptcy versus federal financial support is the better policy) and Gretchen Morgenson (covering Congressional hearings on credit rating agencies and separately opining on the credibility of the agency witnesses).

Those writers, along with the paper’s editors, say they are evaluating applicable policies concerning the division between reporting and opinion. But, in general, all seem to suggest that there is little or nothing wrong with reporters also expressing opinions. They do recognize the importance of clearly distinguishing when one is reporting versus opining. An example of a policy they would support is that writers could not publish a news story and an opinion column on the same subject the same day.

Mr. Hoyt, essentially the public’s watchdog at the paper, expresses more serious reservations. He sees a profound problem of blurring the lines between news and opinion at the paper. The current business section’s activities are a continuing manifestation of a practice that puts the paper’s credibility at risk, he worries.

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KPMG-BCE: Auditor Conflict in Huge LBO Deal?

Green Eyeshade.jpg As one of the largest leveraged-buy out deals in history verges on collapse, much attention is being paid to a central condition in the agreement, the target’s solvency; little attention has been given to conflicts of interest facing the firm, KPMG, deciding whether the condition is met.

The deal is a $28 billion LBO for BCE, Canada’s largest telecom firm. A principal lender in the proposed deal is Citigroup, the struggling commercial bank. BCE has made clear it wants the deal to close as scheduled on December 11; Citigroup, like other lenders amid the current financial crisis, may prefer that it does not.

The agreement contains a condition to the lenders’ obligation to close that BCE shall have obtained an opinion from KPMG, or another public accounting firm, attesting to the solvency of the post-LBO company. This may be difficult to deliver, given the considerable debt being used in the LBO and terrible market and economic conditions.

Trouble is, KPMG is the outside auditor for both BCE and Citigroup, presenting it with a potential conflict of interest. One arm of KPMG may wish to bless the deal, to promote favorable relations with BCE, while another may wish to scotch it, to promote favorable relations with Citigroup.

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The Fancy Dining Barometer

During the early 2000s, capital flourished, Wall Street prospered and it was hard to get reservations at top New York restaurants, except months in advance; today, as capital flows contract, and finance is paralyzed, you can get reservations at some of the best New York restaurants with a mere one week’s notice—or less.

In that earlier period, you could get reservations at any restaurant in Washington DC less than a month in advance, and at many on shorter notice. Today, top DC restaurants are booked solid, no tables available—at least not until late January, after President-elect Obama is inaugurated.

What gives? Probably some version of C + I + G, part of the famous Keynes/Samuelson formula defining aggregate economic demand as the sum of consumption, investment, and government spending. In a simplified picture of the US today, I happens in New York; G happens in Washington; and C happens nationwide.

Earlier this decade, I was the biggest factor in the formula and you had to wait months for a reservation at Manhattan’s revered Gramercy Tavern. Now, with the New York Stock Exchange reeling while Congress lets the US Treasury dole out nearly a trillion dollars—and Congress discusses handing out more—G is the big factor in the formula, and you have to call months in advance for a table at West End’s Blue Duck Tavern.

Between Wall Street’s I and K Street’s G, of course, is C, the consumption component of the formula, the ultimate reality measure, capturing what’s going on in America, beyond New York and Washington. Today, the answer is not much. In all but a few big cities, Americans can get a reservation anywhere, today for tonight. But, alas, outside the Beltway and the Apple, many are eating tuna fish sandwiches at home.

An old quip says a recession occurs when your neighbor is out of work; a depression occurs when you are out of work. Hundreds of millions of people—including those in Manhattan—know that the United States is in a serious economic vise. But you would never know that here in Washington DC (at least not in the northwest quadrant of this city), where restaurants catering to the lobbying crowd are packed, and money flows freely.


The Coming Capital Flood

dollar sign.jpgExcesses in the financial sector have spilled into all sectors of the economy and are spelling global recession. The worst, most say, is yet to come, as the manufacturing, retail, housing and other sectors reel from the fallout, with more layoffs, generally rising unemployment, curtailed consumer and business spending, slashing asset values and so on—all on a global scale.

Nor have the financial sector causes of these real economy consequences ended: there remain trillions of dollars of financial instruments, created in the period 2004-06, outstanding, whose settlement upon maturity or other triggering events will have additional consequences.

Those consequences may either continue to add to the economic crisis or just possibly resolve it, not only by providing capital to the financial sector but possibly by reversing the consequences infecting the real economy.

This is the interesting analysis offered by Australian financial columnist, Alan Kohler, in Business Spectator, entitled A Tsunami of Hope or Terror?

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SEC Schizophrenic on Global Accounting

SEC Seal.gifWith surprising absence of fanfare, the Securities and Exchange Commission released over the weekend a 165-page document outlining its delayed and long-awaited proposals for how the US might switch from using its own generally accepted accounting principles to new international financial reporting standards. The release bears a schizophrenic quality. It offers one unsurprising and one surprising proposal.

The unsurprising portion reflects what the Commission reluctantly came to accept last summer: the US is not ready for such a switch and is not likely to be until 2014 at the earliest. Accordingly, the release principally outlines the many obstacles to such a switch and lays out milestones that would have to be met before considering such a radical move.

The surprising portion contemplates allowing selected US issuers voluntarily to make the switch as early as the year after next—2010. This radical proposal would be limited to US issuers whose industry uses IFRS as the basis of financial reporting more than any other set of standards. The release struggles to explain why this special approach for such issuers overcomes the many obstacles facing other US issuers.

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Explanation Option on Multiple Choice Exams

Teaching Hours Burden Post.jpgLaw professors may struggle to determine optimal exam format, especially between essays and multiple-choice questions or a combination. Student appetite varies. But many students prefer essay exams. They may express concern that multiple choice questions limit ability to identify and explain ambiguities.

Teachers may find a multiple-choice format optimal for many reasons, including psychometric evaluation, the nature of substantive material to test (e.g., statutory versus common law), or simple time budgeting to grade exams (e.g., a professor teaching both Contracts and Corporations in a single term to large enrollments simply cannot grade 200+ written exams within deadline).

One way to offer multiple-choice exams while meeting that student concern is to give students a limited option to address perceived ambiguities. This can be done for a limited number of questions on a separate attachment to the multiple choice exam. I’ve done this for years, using an approach passed on to me by Bernie Black years ago when he was at Columbia and I taught a course there.

The mechanism is easiest to explain by excerpting below the related instruction that appears on the general instructions page to my exam; it is followed by the form of explanations page I attach to the exam booklet. I always circulate the instruction and sample form of explanations page in the weeks before the end of the term and explain the method in the beginning of the term when summarizing the course evaluation method.

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