Archive for the ‘Corporate Finance’ Category
Does the Secured Transactions Course Make Sense?
posted by Dave Hoffman
I’ve never taught Secured Transactions, so I’ll start by saying that the following is purely speculative and subject to correction.
We had a job candidate come through at some point this Fall who generally is interested in the field of commercial law. That person mentioned in passing that although they were more than willing to teach the traditional secured transactions course, in their opinion it wasn’t well structured. Why? Not, as the navel-gazer might imagine, because the field of commercial law is supposedly intellectually dead. Rather because the traditional secured transaction course is too narrowly conceived — it usually is limited in coverage to personal property security interests under Article 9. But many security interests that matter to lawyers aren’t held on movable property. Since secured is ordinarily the foundational course for the commercial curriculum, students are left starting on too narrow a footing in understanding bankruptcy and bank regulation. It’s even worse than having a corporations course that excludes LLCs. Because of its technicality, ST is traditionally so difficult to teach that many students are turned off to the idea of commercial law practice at all.
Again, I don’t know much about this area of law. I never took ST in law school, I haven’t taught it, and (worse) I haven’t even read a ST syllabus at my current institution. But it struck me as an interesting thought, at least worth airing. It’s related to concerns I have about the general corporate curriculum — is “corporations” really a subject that ought to be taught in a single course, or is it really a merger of too many (or too few) legal principles that have glommed together over time. It’s also related to concerns that one might have about continuing to use the increasingly outdated, purportedly uniform, UCC to teach when States’ adopted versions are moving ever-further-away from that ideal.
December 2, 2011 at 11:54 pm
Posted in: Bankruptcy, Contract Law & Beyond, Corporate Finance, Corporate Law, Law School (Teaching)
Print This Post
15 Comments
Buffett and B of A
posted by Lawrence Cunningham
In today’s Financial Times, Dan McCrum cites one of my books and quotes me when portraying Warren Buffett as the investor of last resort in the US. Inspired by Buffett’s investment in preferred stock and warrants of Bank of America (in which I have owned stock for 20 years, through predecessors), it is interesting to think of Buffett as rescuer of troubled American financial institutions: from Salomon Brothers in the late 1980s through Goldman Sachs in the 2008 crisis and B of A today.
But please note that it is not altruism or patriotism that induces the rescues. Instead, Buffett’s value investing philosophy leads him to show up when the chips are down. Value investing means to commit private capital only when the price you may is substantially below the value you get. “Be greedy when others are fearful and fearful when others are greedy,” Buffett has written.
In the depths of the 2008 crisis, Buffett shrewdly negotiated great investment deals at Goldman Sachs, with a 10% dividend rate, and at General Electric. He made a calculation that what he paid was way less than what he got. (And he was correct.)
Buffett, a friend of mine for 15 years whom I admire greatly, also turned down other opportunities presented to him during the crisis, including at AIG. He found the price insufficiently below the value.
He also proposed an investment opportunity in 1997 in Long Term Capital Management, giving the firm an hour to accept, but they balked. He offered a steep discount, which he insisted on and they could not accept.
The Bank of America position today is likewise a shrewd value proposition: preferred stock with a hefty 6% dividend, along with warrants (options) to buy common shares at the bargain basement price of $7.14. Notably, that price was above the trading price when the deal was inked but, foreseeably, the market shot up on news of Buffett’s investment and is now in the money—an instant profit.
So Berkshire is certainly a fortress (a kind of Fort Knox in American folklore) and Buffett, a patriot and altruist, is as beloved as Will Rogers for all his folksy home-spun wisdom and “tax me and other billionaires” populism. But Buffett is an investor first and foremost and you see him stepping up in these big ways in times of stress because that’s where value investing takes him.
Photo Credit: Cardozo Law School (Buffett guest teaching my class in 1998).
August 27, 2011 at 5:20 am
Posted in: Corporate Finance, Current Events
Print This Post
No Comments
Treasury’s AIG Gag Order
posted by Lawrence Cunningham
Top business executives in the United States regularly contact Members of Congress to lobby on legislation and other matters of public policy. But since the September 2008 government takeover of AIG, executives of that company have been forbidden to do so, unless they first get the Treasury Department’s permission, and the Treasury Department refuses to grant it.
Since AIG executives are afraid to speak out, disclosure of this un-American provision was left to Maurice (“Hank”) Greenberg, former chair and until 2008 the largest shareholder of AIG. He disclosed it yesterday on CNBC.
This is yet another example of the dubious tactics used in Sept. 2008 by Hank Paulson and Tim Geithner when they wrested control of AIG for the U.S. government. Besides having scant legal authority for their takeover actions, the successive Treasury Secretaries tried to keep from the public how the government funds injected into AIG did not support it or its shareholders or employees but were funneled as a backdoor bailout of Goldman Sachs and other Wall Street firms.
It is thus par for the course—but equally outrageous—that we now learn that when Paulson and Geithner imposed this straightjacket on AIG, they also made the company (a) adopt a policy suspending all lobbying and then (b) sign a loan agreement prohibiting it from changing that policy without Treasury’s consent—which apparently may be withheld for any reason or no reason. Read the rest of this post »
June 21, 2011 at 2:37 pm
Posted in: Administrative Law, Civil Rights, Contract Law & Beyond, Corporate Finance, Corruption, Current Events, Politics
Print This Post
No Comments
Call for Papers: Dodd-Frank
posted by Lawrence Cunningham
Call for Papers:
Financial Institutions and Consumer Financial Services Section
AALS Annual Meeting – January 2012
Rubber Hits Road: Implementing Dodd-Frank amid Reform Fatigue
This program will take place one and a half years after the Dodd-Frank Act was signed into law. The law left many of the details of financial reform to be filled in by regulators, raising the risk of capture. Some of the most important rule makings have begun in earnest; others have stalled as reform fatigue sets in. Meanwhile, reform efforts in Europe and international regulatory initiatives remain works-in-progress.
What lessons can we draw from the implementation of Dodd-Frank so far? What have been the greatest achievements and the greatest disappointments as the legislative process has given way to the administrative? What devils have lain hidden in the details of the Federal Register? What aspects of reform have been largely forgotten? What does the path of financial reform say about legislative and regulatory process? What lessons can be drawn from the reform efforts in Europe and elsewhere? Does the focus on regulating institutions detract from a focus on regulating financial instruments, markets or economic functions and risks?
More ominously, is the crisis truly over? Are we at grave risk of fighting the last war? Has reform missed the mark altogether? This meeting is part of a project to engage the legal academy in sustained theoretical and policy contributions to financial regulation. It also presents an opportunity to look at specific rulemakings in detail, as well as to address larger questions about the course of reform after laws are made.
Call for papers:
Law teachers and other scholars are invited to submit manuscripts or abstracts dealing with any aspect of the foregoing topics. Junior faculty members are particularly encouraged to submit manuscripts or abstracts. A review committee consisting of Section officers will select one or more papers or proposals and will invite the author(s) of each selected submission to present their work at the program session in Washington, D.C. in January 2012.
Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Please send manuscripts or abstracts to the Program Chair (Erik Gerding, University of Colorado) at profgerding@gmail.com no later than August 30, 2010. Please place the name and contact information of authors only on the cover page of submissions.
Please forward this Call for Papers to anyone who might be interested.
June 15, 2011 at 7:54 am
Posted in: Administrative Announcements, Conferences, Corporate Finance, Corporate Law, Current Events, Securities, Securities Regulation
Print This Post
No Comments
Deceptive by Design: Derivatives as Secret Liens
posted by Frank Pasquale
Secretive practices and institutions are common in contemporary finance. For those who’ve ceased the search for long-term value creation, temporary information advantage is key. Even commonplace practices can be reinterpreted as havens of hiddenness. My colleague Michael Simkovic’s article “Secret Liens and the Financial Crisis of 2008” exposes the role of derivatives and securitization as secretive borrowing strategies, designed to keep the naive or trusting from discovering the fragility of the institutions they loan funds to. His work has been presented to the World Bank Task Force on the Bankruptcy Treatment of Financial Contracts, and is relevant to both private and sovereign debt risks.
Simkovic argues that 80 years of erosion of classic commercial law doctrine ensured that “complex and opaque financial products received the highest priority in bankruptcy.” Products like swaps and over-the-counter derivatives were not adequately disclosed (either by banks in their consolidated financial statements or by their counterparties in publicly accessible transaction registries). By concealing those debts, these already overleveraged financial institutions were able to attract ever more credit and investment, at better rates than those who reported their overall financial health more accurately. (All other things being equal, it’s safer to lend to an entity that owes 10 billion rather than 100 billion dollars.) The genius of Simkovic’s article is to show how “fundamental causes of the financial crisis are relatively old and simple,” even as an alphabet soup of instrument acronyms (CDO, CDS, MBS, ad nauseam) and government programs (TARP, TALF, PPIP, et al.) makes our time seem unique.
Read the rest of this post »
June 8, 2011 at 8:54 am
Posted in: Bankruptcy, Corporate Finance, Corporate Law, Corruption, Financial Institutions
Print This Post
4 Comments
Transactional Lawyering at the Movies
posted by Dave Hoffman
I’m looking for some good examples of movie clips from recent films in which the presence (or absence) of transactional lawyering is key to the action. The best example I’ve got so far is from the Social Network. Recognizing that showing clips of business lawyering isn’t for everyone, I’d still appreciate your tips. Negotiation scenes, drafting discussions, closings — anything that would motivate student excitement about transactional practice.
June 2, 2011 at 2:12 pm
Posted in: Contract Law & Beyond, Corporate Finance, Corporate Law
Print This Post
5 Comments
Invisible Hand or Hidden Fist?
posted by Frank Pasquale
In his press conference last week, Ben Bernanke concluded on an upbeat note. He had high hopes for a US recovery, since he believed that the Great Financial Crisis (GFC) of 2008 hadn’t taken from the US any of its basic productive capacity.
Whatever the merits of that view, the GFC did highlight debilitating trends in US finance infrastructure that have been intensifying for years. In this week’s Businessweek, Hernando de Soto (with Karen Weise) highlights one of the most important: the opacity of key markets and relationships. With scant exaggeration, de Soto warns that the US is on its way to levels of uncertainty more common in developing and communist countries:
During the second half of the 19th century, the world’s biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. . . . The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.
To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. . . . The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, [etc]), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts.”
April 30, 2011 at 4:49 pm
Posted in: Bankruptcy, Corporate Finance, Economic Analysis of Law, Financial Institutions, Insurance Law, Property Law
Print This Post
3 Comments
Targeting Odious Top Pay Contracts
posted by Lawrence Cunningham
Cross-posted at Harvard Law School’s Corporate Governance blog, this summarizes in some detail my new paper on applying simple contract principles to police odioius executive pay contracts:
Executive pay has skyrocketed in recent decades, in absolute terms and compared to average wages. The area of largest growth has been in stock-based components, including stock options, often tending to focus on the short-term, with associated risks we’ve seen. A vigorous academic debate has run for more than a decade, becoming a popular political discussion amid the financial crisis exposing arcane debate to public scrutiny.
Growth could be laudable, explained as creating proper incentives to align manager interests with shareholder interests and to promote optimal risk taking. In this view, if there is a problem, it is narrow and limited. Critics are skeptical whether this story holds up. They worry that managerial power has strengthened to enable top executives to control setting their own compensation. In this view, the problem is pervasive and warrants a comprehensive response—and proposals abound.
I come down in the middle. There are problems in at least an important number of cases, and current proposals to redress them are unlikely to work. So I seek a new approach—contract unconscionability—to police extreme cases. The proposal must surmount some hurdles but isn’t as radical as it sounds.
A good way to summarize the debate highlights a three-pronged theory that promotes much of prevailing executive compensation, especially stock-based components, and contrasts it with limits on each prong.
First: in optimal contracting theory, boards design manager contracts to minimize agency costs. But when managers dominate the process, the managerial power thesis suggests this ideal may not be met.
Second: with efficient stock markets, stock price is a good proxy for the shareholder interest and a mirror of managerial performance. But stock price can differ from business value for sustained periods, fogging both.
Third: stock-based pay could align managerial incentives with shareholder interests if designed right and markets work well. But otherwise they create perverse effects. Read the rest of this post »
April 13, 2011 at 12:09 pm
Posted in: Contract Law & Beyond, Corporate Finance, Corporate Law, Securities, Securities Regulation
Print This Post
One Comment
Law & Econ’s Influence on Law & Accounting
posted by Lawrence Cunningham
The hottest book of the century, on corporate law, is in production, thanks to editors Brett McDonnell and Claire Hill, both of Minnesota. As part of a series investigating the economics of particular legal subjects, overseen by Richard Posner and Francesco Perisi, this Research Handbook on the Economics of Corporate Law, promises a comprehensive canvass of the broadest definition of this field of law as it has been structured by economic theories over the past forty years.
My contribution addresses the influence of law and economics on the sub-field of law and accounting, which I suggest takes the form of “two steps forward one step back.” You can read a draft of my chapter (comments welcome!), available free here, accompanied by the following abstract:
Theory can have profound effects on practice, some intended and desirable, others unintended and undesirable. That’s the story of the influence the field of law and economics has had on the domain of law and accounting. That influence comes primarily from agency theory and modern finance theory, specifically through the efficient capital market hypothesis and capital asset pricing model. Those theories have forged considerable change in federal securities regulation, accounting standard setting, state corporation law, and financial auditing. Affected areas include the nature of disclosure, the measure of financial concepts, the limits of shareholder protection, and the scope of auditor duty.
Analysis reveals how agency theory and finance theory often but not always point to the same policy implications; it reveals how finance theory’s assumptions and limitations are often but not always respected in policy development. As a result, while these theories sometimes produced policy changes that were both intended and desirable, some policy changes were both unintended and undesirable while others were intended but undesirable. Examination stresses the power of ideas and how they are used and cautions creators and users of ideas to take care to appreciate the limits of theory when shaping practice. That’s vital since the effects of law and economics on law and accounting remain debated in many contexts.
Other contributions to the book similarly available in draft form are by Matt Bodie (St. Louis), David Walker (BU) and Charles Whitehead (Cornell). The following scholars are also contributing chapters: Bobby Ahdieh (Emory), Steve Bainbridge (UCLA), Margaret Blair (Vandy), Rob Daines (Stanford), Steve Davidoff (Ohio State), Jill Fisch (Penn), Tamar Frankel (BU), Ron Gilson (Stanford/Columbia), Jeff Gordon (Columbia), Sean Griffith (Fordham), Don Langevoort (GT), Ian Lee (Toronto), Richard Painter (Minnesota), Frank Partnoy (SD), Gordon Smith (BYU), Randall Thomas (Vandy), and Bob Thompson (GT).
March 4, 2011 at 9:46 am
Posted in: Accounting, Behavioral Law and Economics, Corporate Finance, Corporate Law, Jurisprudence, Legal Theory, Securities Regulation
Print This Post
No Comments
GW’s Junior Scholars Finalists
posted by Lawrence Cunningham
Thanks to my colleague, Lisa Fairfax, GW has finalized the program for this year’s Junior Faculty Business and Financial Law Workshop and Prize (detailed here). Of the more than 100 papers submitted, the following dozen presenters were chosen. [Commentators appear in brackets; I've shortened some paper titles.]
The workshop will take place at GW on April 1 and 2, 2011. We are delighted by the submissions, congratulate those chosen, and stress that making the selections was difficult because of the volume of amazing papers. We encourage everyone interested to attend and look forward to the weekend.
Adam Leviton (Georgetown), In Defense of Bailouts [George Geis (Virginia) & Art Wilmarth (GW)]
Jodie Kirshner (Cambridge), A Transatlantic Perspective on Regional Dynamics and Societa Eurpoea [Francesca Bignami (GW) & Theresa Gabaldon (GW)]
Alan White (Valparaiso), Welfare Economics and Regulation of Small-Loan Credit: Lessons from Microlending in Developing Nations [Michael Pagano (Villanova) & Lawrence Mitchell (GW)]
Nicola Sharpe (Illinois), Corporate Board Performance and Organizational Strategy [Deborah Demott (Duke) & Michael Abramowicz (GW)]
Julie Hill (Houston), The Rise of Ad Hoc Bank Capital Requirements [Anna Gelpern (American) & John Buchman (E*Trade Bank & GW Adjunct)]
Michael Simkovic (Seton Hall), The Effects of Ownership and Stock Liquidity on the Timing of Repurchase Transactions [Richard Booth (Villanova) & Henry Butler (Mason)]
Michelle Harner (Maryland), Activist Distressed Debtors [Donna Nagy (Indiana Bloomington) & Lisa Fairfax (GW)]
Saule Omarova (UNC), The Federal Reserve Board’s Use of Exemptive Power [Patricia McCoy (Connecticut) & Arthur Wilmarth (GW)]
Heather Hughes (American), Suburban Sprawl, Finance Law and Environmental Harm [Scott Kieff (GW) & Lawrence Cunningham (GW)]
Robert Jackson (Columbia), Private Equity and Executive Compensation [Norman Veasey (Weil Gotshal) & William Bratton (Penn)]
Brian Quinn (BC), Putting Your Money Where Your Mouth Is: Post Closing Price Adjustments in Merger Agreements? [Gordon Smith (BYU) & John Pollack (Schulte Roth)]
Mehrsa Baradaran (BYU), Reconsidering Wal-Mart’s Bank [Heidi Schooner (Catholic) & Renee Jones (BC)]
This is one of many events sponsored by GW’s Center for Law, Economics and Finance.
February 28, 2011 at 8:53 pm
Posted in: Corporate Finance, Corporate Law, Law School, Law School (Hiring & Laterals), Law School (Law Reviews), Law School (Scholarship), Law School (Teaching), Law Talk, Securities, Securities Regulation
Print This Post
One Comment
Brazil’s First Insider Trading Conviction?
posted by Dave Hoffman
I find it hard to believe, but apparently so:
Two former executives of Sadia SA, the foodmaker that BRF Brasil Foods SA bought to form the world’s biggest poultry exporter, were sentenced and fined in the country’s first insider trading court ruling.
Former Chief Financial Officer Luiz Gonzaga Murat Jr. was sentenced to 21 months in prison and fined 349,712 reais ($210,100), Brazil’s securities regulator said today in an e- mailed statement. Romano Ancelmo Fontana Filho, a former board member, was sentenced to 17 months and fined 374,941 reais. Both can serve community service in lieu of prison.
Murat, who was Sadia’s CFO for 12 years until resigning in 2006, and Fontana were charged with illegally purchasing American depositary receipts of Perdigao SA before Sadia made a hostile bid to buy the rival in 2006. Murat and Fontana settled similar allegations of insider trading with the U.S. Securities and Exchange Commission in 2007.
The student who passed this along to me seemed relatively confident that the ruling would be overturned on appeal. If anyone out there knows something about Brazilian securities law, sufficient to explain how the market there functioned without a rigorous enforcement regime, please drop on by and comment. Otherwise, lots of L&E folks will be made very, very happy.
February 23, 2011 at 4:51 pm
Posted in: Corporate Finance, Corporate Law
Print This Post
2 Comments
Creating Value
posted by Frank Pasquale
I’ve talked in previous posts about a “closed circuit” economy among the wealthy. A plutonomy at the top increasingly circulates buying power (be it luxury goods, real estate, gold, or securities) among itself. The middle class used to dream that a rising Wall Street tide would lift all boats; as Felix Salmon shows, that hope is fading. Whatever innovations arise out of these companies aren’t doing much for average incomes.
On the other hand, financial innovation has done wonders to extract purchasing power from the broad middle into the closed circuit at the top. Here, for example, is how one of our leading firms created enormous value in 2006:
Consider the tale of Travelport, a Web-based reservations company. [A] private equity firm and a smaller partner bought Travelport in August 2006. They paid $1 billion of their own money and used Travelport’s balance sheet to borrow an additional $3.3 billion to complete the purchase. They doubtless paid themselves hefty investment banking fees, which would also have been billed to Travelport.
After seven months, they laid off 841 workers, which at a reasonable guess of $125,000 all-in cost per employee (salaries, benefits, space, phone, etc.) would represent annual savings of more than $100 million. And then the two partners borrowed $1.1 billion more on Travelport’s balance sheet and paid that money to themselves, presumably as a reward for their hard work. In just seven months, that is, they got their $1 billion fund investment back, plus a markup, plus all those banking fees and annual management fees, and they still owned the company. And note that the annual $100 million in layoff savings would almost exactly cover the debt service on the $1.1 billion. That’s elegant—what the financial press calls “creating value.”
The corporate geniuses at Boeing offer another display of modern-day business acumen.
The more stories like this you read, the more you realize that massive unemployment isn’t a bug in our economic system; it’s a feature. A country can’t have legal rules that permit these moves without expecting to hemorrhage jobs. All the Michael Porter homilies in the world can’t put this Humpty Dumpty back together again.
February 20, 2011 at 10:45 am
Posted in: Accounting, Corporate Finance, Corporate Law, Corruption, Economic Analysis of Law
Print This Post
One Comment
The Rule of Flaw: Ibanez and the Too-Big-to-Succeed Problem
posted by Jonathan Lipson
The Massachusetts Supreme Judicial Court’s recent ruling in U.S. Bank v. Ibanez is the latest and loudest salvo in what may be the most engaging and gruesome legal aspect of the credit crisis yet: The day of reckoning for the staggering sloppiness that infected virtually every step of the mortgage-securitization process.
Ibanez held that, according to well-established Massachusetts precedent, a mortgagee cannot foreclose unless — surprise, surprise — it actually isthe mortgagee, or a legitimate assignee thereof. In Ibanez, lenders or servicers had foreclosed mortgages prior to completing (or commencing) the process of taking assignment of the note and mortgage on which they foreclosed. When they later sought to clear title, Massachusetts courts balked. “Utter carelessness,” Justice Cordy scolded the plaintiffs.
mistakes were made
This is potentially a huge problem for mortgage servicers (among others), given the long and convoluted chains of title through which mortgages may have passed in order to create mortgage-backed securities (MBS). Not surprisingly, many observers are apoplectic, warning that this will lead to the end of the financial markets as we know them.
How did this happen?
There are probably several answers, but I think one is that the elite financial services sector (EFSS) that created the MBS is (or believes itself to be) a unique institutional force, unchallengeable by the ordinary legal or political mechanisms that keep institutions in check. It is immune from the rules and norms that apply to the rest of us. But we know that spoilt children often lack discipline, so persistent failures of scrutiny have led inevitably to failures of competence. The drip, drip, drip of deregulation left us with firms that are not only too big to fail: they’re also too big to succeed.
What will happen next?
January 10, 2011 at 5:40 pm
Posted in: Bankruptcy, Corporate Finance
Print This Post
One Comment
Bubble Warning on Facebook, Groupon
posted by Lawrence Cunningham
The mysterious ways of financial valuation manifest daily. One mystery: Facebook, the social network business, and Groupon, the buying network company, both generate annual revenues of about $1 billion. Yet reported private stock trading indicates that traders are pricing Facebook at about 50 times that while pricing Groupon at about 5 times that.
Perhaps this is attributable to analytical factors, such as observed user growth rates, potential market and revenue sources, perceived capacity to convert the revenue into earnings, competitive threats—or negotiating skill in trading of privately-held shares. But given the wildly varying pricing traders give enterprises like this in recent years, it could be a sign of a bubble.
Financial bubbles recur as a natural, inherent product of human behavior in capitalist economies—from the recent real estate bubble, to the dot-com bubble a decade earlier, and stretching back to the tronics bubble of the 70s and back to Amsterdam tulip bulbs centuries ago. (I wrote a trade book about this after last decade’s bubble burst.) By definition, a critical mass cannot recognize the bubble as it is in inflating, though invariably some pessimists detect something. Read the rest of this post »
December 31, 2010 at 11:59 am
Posted in: Behavioral Law and Economics, Corporate Finance, Culture, Current Events, Technology
Print This Post
3 Comments
All That is Liquid Freezes in a Panic
posted by Frank Pasquale
Argue against a complex financial practice, and you’ll hear it sooner or later: the liquidity trump card. Promoters of virtually every form of securitization, leverage, collateralized debt obligations, credit default swaps, swaptions, you name it—will insist that, if their activity is regulated or limited, the markets will lose liquidity. For example, as John Cassidy quotes John Mack, ‘subprime-mortgage bonds . . . “give[] tremendous liquidity to the markets.’” Another private equity executive tells Cassidy, ““Part of the value in a stock is the knowledge that you can sell it this afternoon. Banks provide liquidity.’”
Having authored the perceptive book How Markets Fail, Cassidy looks behind the liquidity talisman and finds it tends to melt into cliche:
“Liquidity” refers to how easy or difficult it is to buy and sell. A share of stock in a company on the Nasdaq is a very liquid asset: using a discount brokerage such as Fidelity, you can sell it in seconds for less than ten dollars. A chocolate factory is an illiquid asset: disposing of it is time-consuming and costly. The classic justification for market-making and other types of trading is that they endow the market with liquidity. . . .
November 24, 2010 at 2:53 pm
Posted in: Corporate Finance, Economic Analysis of Law, Uncategorized
Print This Post
No Comments
Treasury’s Prime Directive: Protect the Banks
posted by Frank Pasquale
Adam Levitin has been one of the most courageous and compelling commentators on the financial crisis. So it’s not much of a surprise to see this report on his latest testimony before the Senate Banking Committee:
First off, he lamented the fact that we have been holding hearings like this since 2007. “Every year we have another set of hearings, and you can add 2 million foreclosures” to the bottom line. Nothing gets fixed, despite all kinds of documented evidence that the banks and servicers have committed fraud. Levitin’s position is that the servicers should be banned from the loan modification business entirely, because they don’t have any interest in it except as a profit-maximization scheme, and they have massive conflicts of interest that cut against doing right by the borrowers (and even the investors for whom they work).
Levitin said that we don’t have the full data sets from the servicers, or any comprehensive data to see whether there is a full-on crisis of unclear title and improper mortgage assignment. In other words, we don’t quite know the full extent of the problem. Levitin said, essentially, “The federal regulators don’t want to get info from servicers, because then they’d have to do something about it.” They don’t want to recognize the scope of the problem because it would require them to act. And Levitin in particular singled out the Treasury Department. “The prime directive coming out of Treasury is ‘protect the banks’ and don’t force them to recognize their losses.”
While I’m sure the FCIC will issue a nuanced report on the web of causes behind the foreclosure crisis, Levitin sees the spider. It looks like courts are beginning to identify it, too. As Kate Berry reported in the American Banker,
Read the rest of this post »
November 20, 2010 at 1:50 pm
Posted in: Bankruptcy, Corporate Finance, Economic Analysis of Law, Securities, Uncategorized
Print This Post
No Comments
Mad Glee-actica: The Virtues of Extreme Recycling
posted by Jonathan Lipson
I don’t watch much TV. So, I am hardly the person to make strong claims about its quality or trends. That said, I find it fascinating that three of the best shows of the past few years—Battlestar Galactica, Madmen, and Glee—share a really odd structural feature: They have all taken ridiculously bad ideas from cringe-able eras and turned them around completely, made them not only fresh, but evocative, disturbing, intriguing.
Where's the goo?
They are, in short, evidence of the virtues of extreme recycling.
Just imagine the pitch meeting for Galactica: We’ll take what has to have been one of the dumbest pop-culture packing peanuts ever and make it stronger, faster, better: How about an allegory about civil liberties and faith after 9/11 using Cylons and vats of goo?
Or what about Madmen: Let’s explore the most virulent cancers on our culture with lovingly pornographic attention to detail, to demonstrate the complex symbiosis among banality, beauty, evil and exculpation. Madmen is the money shot of commodity fetishism, proving once again the truth of Chomsky’s admonition that if you want to learn what’s wrong with capitalism, don’t read The Nation, read the Wall Street Journal.
And Glee? Well, all I can say is: Don’t Stop Believing.
Which may lead you to this question: No one really takes the “and everything else” part of CoOps’s desktop mantra seriously, so what the frak does this have to do with law? Read the rest of this post »
November 2, 2010 at 10:25 am
Tags: Bankruptcy, battlestar galactica, Corporate Finance, Corporate Law, dodd-frank, glee, good faith, lender liability, madmen, shadow bankruptcy
Posted in: Bankruptcy, Contract Law & Beyond, Corporate Finance, Just for Fun, Movies & Television
Print This Post
One Comment
Rule of Law in Russia
posted by Frank Pasquale
This presentation by Bill Browder at the Stanford Graduate School of Business is a pretty astonishing account of the Russian economy over the past two decades. I am familiar with the usual story of oligarch profiteering, but Browder’s experience shows how even the ostensibly sound legal arrangements of today can quickly unfold into a nightmare for investors. As the Stanford GSB news puts it,
Browder soared to fame and fortune investing in Russian equities amid the chaos and corruption of the post-Soviet economy. His hallmark: finding hidden values in Russian companies and driving up their share prices by exposing corporate malfeasance and mismanagement. His widely publicized campaigns for shareholder rights and corporate governance helped propel the Hermitage Fund from $25 million in 1996 to $4 billion a decade later. But eventually the U.S.-born financier ran afoul of the Russian government, which banned him from the country in 2005 as a threat to national security.
According to Browder, “Anyone who would make a long-term investment in Russia right now, almost at any valuation, is completely out of their mind. . . .My situation is not unusual. For every me, there are 100 others suffering in silence.” And for a “bigger picture” presentation about the “disembedded markets” and the types of forces Browder was a victim of, Nancy Fraser’s Storrs Lecture podcast on “Predatory Protections, Tragic Tradeoffs, and Dangerous Liaisons: Dilemmas of Justice in the Context of Capitalist Crisis” is also well worth listening to.
October 28, 2010 at 10:16 am
Posted in: Corporate Finance, Corporate Law, Corruption, Economic Analysis of Law, Law and Inequality, Securities Regulation
Print This Post
One Comment
Will Charles Ferguson be Our Ferdinand Pecora? (Review of Inside Job)
posted by Frank Pasquale
In his post on Michael Perino’s book Hellhound of Wall Street, Lawrence Cunningham observes that “Our predecessors were fortunate to have someone like Ferdinand Pecora to uncover top-secret financial shenanigans. No such person appears in our midst.”
It’s a tragic situation, especially because there are some real truth tellers out there—Yves Smith, Mike Konczal, Michael Greenberger, and many affiliates of the Roosevelt Institute come to mind. The difference between Pecora’s time and ours is a fragmented and manipulated media that a) can barely follow a complex financial story for more than a few hours, and b) fastidiously counterbalances every account of a Wall Street misdeed with some “expert” assuring us that it’s just business as usual in an industry that’s way too complicated for ordinary people to understand.
Charles Ferguson’s compelling film Inside Job steps in for a phantom mass media. Every citizen should be conversant with the basic narrative Ferguson puts together. Andrew Sheng, Chief Advisor to the China Banking Regulatory Commission, puts it in a nutshell: there was massive private gain in the US financial sector leading to massive public loss. Looking back, we might have all been better off if the finance tycoons profiled in the film had simply demanded hundreds of millions of dollars directly from the government back in 2000, and retired to Capri.
Instead, these deci- and centimillionaires helped build up the Rube Goldberg contraption of derivative deregulation, CDO’s, and CDS’s Ferguson describes. Fortunately, the film concisely explains that farrago in a way that will both educate the uninitiated and intrigue those who’ve read some books on the crisis. The film’s real contribution lies in four arguments it makes.
Read the rest of this post »
October 11, 2010 at 12:30 am
Posted in: Corporate Finance, Corporate Law, Corruption
Print This Post
4 Comments
On the Colloquy: The Credit Crisis, Refusal-to-Deal, Procreation & the Constitution, and Open Records vs. Death-Related Privacy Rights
posted by Northwestern University Law Review
This summer started off with a three part series from Professor Olufunmilayo B. Arewa looking at the credit crisis and possible changes that would focus on averting future market failures, rather than continuing to create regulations that only address past ones. Part I of Prof. Arewa’s looks at the failure of risk management within the financial industry. Part II analyzes the regulatory failures that contributed to the credit crisis as well as potential reforms. Part III concludes by addressing recent legislation and whether it will actually help solve these very real problems.
Next, Professors Alan Devlin and Michael Jacobs take on an issue at the “heart of a highly divisive, international debate over the proper application of antitrust laws” – what should be done when a dominant firm refuses to share its intellectual property, even at monopoly prices.
Professor Carter Dillard then discussed the circumstances in which it may be morally permissible, and possibly even legally permissible, for a state to intervene and prohibit procreation.
Rounding out the summer was Professor Clay Calvert’s article looking at journalists’ use of open record laws and death-related privacy rights. Calvert questions whether journalists have a responsibility beyond simply reporting dying words and graphic images. He concludes that, at the very least, journalists should listen to the impact their reporting has on surviving family members.
September 5, 2010 at 1:15 pm
Tags: Antitrust, Constitutional Law, copyright, discrimination, financial crisis, free speech, Intellectual Property, Privacy, trademark
Posted in: Antitrust, Bioethics, Civil Rights, Constitutional Law, Corporate Finance, First Amendment, Intellectual Property, Privacy, Securities, Securities Regulation
Print This Post
No Comments
