Archive for the ‘Securities Regulation’ Category
Corporate Pay Conference June 3
posted by Lawrence Cunningham
Those interested in executive compensation are cordially invited to attend a half-day conference on the subject in New York June 3, sponsored by GWU Law’s Center for Law, Economics and Finance (C-LEAF).
To be held at the Century Club (7 W. 43rd St.), featured speakers are Treasury’s pay expert, Ken Feinberg (pictured at right), and institutional investor advocate, AFL-CIO Special Counsel, Damon Silvers, along with a pair of likewise distinguished panels.
Highlights follow. More information is here and registration can be made here. Attendance is limited but we’d like to have as many interested persons join us as possible. Read the rest of this post »
May 12, 2010 at 5:02 pm
Posted in: Administrative Announcements, Corporate Law, Securities Regulation
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Analogies in SEC v. Goldman Case
posted by Lawrence Cunningham
Goldman Sachs told customers the terms of a bet would be set by an independent agent but the SEC alleges a competing customer actually played a significant role setting the terms, which may have been more favorable to it. Consensus emerges that the legal issue is whether it is important to the original customers that terms were set by an independent agent or the competing customer, given that they could inspect the terms for themselves.
It can be useful but difficult to find suitable analogies to help think about this. Yesterday on this blog Deric Ortiz asked whether this is akin to any buyer and seller of securities who simply have different views of the bet, whoever set its terms, which are available for all to see; today in The New York Times Binyamin Appelbaum sees a rough equivalence to alleging that an antiques dealer “lied about the provenance, but not the quality, of an old table.”
I’m not sure either of those analogies work. I’ve come up with other candidates posted below, most of which also seem off for various reasons. I’d like to invite interested creative readers to take a few minutes to contribute additional nominees. Read the rest of this post »
April 20, 2010 at 12:24 pm
Posted in: Current Events, Securities Regulation
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SEC v. Goldman as a Simple Case
posted by Lawrence Cunningham
Despite a complex context and heated rhetoric on all sides, the core of the SEC’s complaint against Goldman Sachs is simple: Goldman sold to investors a bet based on a list of securities it said would be hand-picked by an independent expert when the list was allegedly picked in part by a Goldman client with interests diametrically opposed to the investors. The only successful defense to this allegation is that the independent expert did in fact hand-pick the list and neither Goldman nor its other clients played a role in it.
Picking the list is vital and related disclosures or non-disclosures material within the meaning of federal securities laws. If investors are told a list is chosen by an independent party, they are told that the bet will be a fair game—knowing, of course, that other investors will have different views and either refuse to buy the same device or even take short positions against it. But if investors are told that a list will be chosen by someone who will make money only if its value declines, rational investors will eschew such a game as rigged, not fair.
Since the incubation of the asset-backed securities markets decades ago, when I helped to design them, selection of the pool or reference securities has always been seen as vital. In original deals consisting of a bank’s mortgage loans, for example, the selection is to be made using a haphazard selection protocol from across the bank’s entire mortgage loan portfolio. Banks cannot cherry pick their overall portfolio and dump only the worst-performing loans into a pool. Investors would not buy it if they knew that were happening. Read the rest of this post »
April 19, 2010 at 2:13 pm
Posted in: Current Events, Securities Regulation
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SCOTUS Chides Posner/Easterbrook in Jones v. Harris
posted by Lawrence Cunningham
In a gentle rebuke to two famous academic judges, Richard Posner and Frank Easterbrook, today the US Supreme Court told them a debate they were airing in a recent case was not for federal judges but for Congress.
The Court, in Jones v. Harris, unanimously vacated as erroneous Easterbrook’s opinion that went out of its way to disagree with well-settled judicial interpretations of a relatively simple federal statute. Posner’s contending opinion engaged directly with the economic and market theories on which Easterbrook drew, both judges wrongly making debate out of the wisdom rather than the meaning of the statute.
The statute says an adviser to mutual funds is “deemed to be a fiduciary with respect to the receipt of compensation for services.” For thirty years, virtually all federal courts take that to mean adviser fees cannot be so disproportionate to services rendered as to indicate lack of an arms-length sort of bargain. Testing that requires considering all relevant factors.
The Court affirmed that interpretation and test as correct, in an opinion written by Justice Samuel Alito. Easterbrook erred when instead saying the fiduciary duty language required only that advisers disclose fees and that no other factor is relevant. The Court indicates that his dissertation on competition in the mutual fund industry and theories of market behavior is irrelevant to federal court business in the case.
Posner’s opinion, in the form of a dissent from the Circuit’s refusal to rehear the case en banc, engaged Easterbrook directly on economic theories and views of market efficacy, including debating empirical academic studies reaching opposite conclusions. The Supreme Court rebuked both, saying their job was to apply the statute not debate its wisdom. Read the rest of this post »
March 30, 2010 at 2:53 pm
Posted in: Corporate Finance, Corporate Law, Economic Analysis of Law, Jurisprudence, Securities, Securities Regulation, Supreme Court
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You, Lehman’s Re-Po Magic, and Ernst & Young
posted by Lawrence Cunningham
Ernst & Young, one of four remaining large auditing firms, allegedly botched its financial audits of Lehman Brothers, the bankrupt investment banking firm. E&Y responds that its audits met legal and professional requirements.
My view, reported in today’s New York Times, wonders, suggesting E&Y offers a “technical compliance defense,” when what’s needed is an objective judgment, based on professional skepticism, of whether financials provide a fair presentation.
Though the allegations sound esoteric, it is easy to translate them into simple terms. When considering the following analogue between Lehman’s deals and your personal finance, think about how an independent accountant would assess what I suppose you are doing.
March 15, 2010 at 11:56 am
Posted in: Accounting, Corporate Finance, Current Events, Securities Regulation
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SEC Should Calm Markets, Ahead of Possible Audit Crisis
posted by Lawrence Cunningham
If you thought the 2008 credit crisis that temporarily froze global debt markets wrought havoc, watch out for the next shoe to drop. At stake is the viability of global equity and other financial markets that could freeze if one of the four large auditing firms goes extinct.
And the existence of one of them, Ernst & Young, is threatened, as it faces the prospect of billion dollar liability for botched audits of Lehman Brothers, the defunct investment bank struggling in bankruptcy. It is an eerie echo of the fate of erstwhile big auditing firm Arthur Andersen, which dissolved after its culpability in 2001’s Enron fraud emerged.
Today, only four auditing firms have the resources and expertise to audit the vast majority of thousands of large public corporations. If one of those dissolved, its clients would have to scramble to find a replacement. Some of the remaining three lack requisite expertise for some of those corporations and others would be disqualified from auditing due to consulting work they do for them.
The result would be hundreds, possibly thousands, of large corporations who could not get their financial statements audited as required by US federal securities law. Stock markets could go berserk, along with other financial markets. The costs now, of moving from four firms to three, would dwarf those incurred when Andersen’s dissolution moved the total from five to four.
It does not appear that the US government, specifically its Securities and Exchange Commission, has any plans to deal with this prospect. It should. And it should announce them promptly to get ahead of any market crisis the failure of E&Y, or of the other three, would wreak.
If not, the credit crisis of 2008 will look mild in comparison. After all, the credit crisis was readily addressed by government pumping enormous amounts of capital to rejuvenate liquidity; an auditing crisis cannot by solved by throwing money at it. Read the rest of this post »
March 15, 2010 at 9:22 am
Posted in: Accounting, Bankruptcy, Corporate Finance, Current Events, Securities Regulation
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The Globalization of Securities Regulation: Competition or Coordination?
posted by Robert Ahdieh
Thanks to Danielle, Dan, and entire Concurring Opinions team, for having me back for a return stint.
I write from the University of Cincinnati Corporate Law Center’s 23rd Annual Symposium, on the subject of The Globalization of Securities Regulation: Competition or Coordination?
Our host is Professor Barbara Black, and other panelists include Bill Bratton, Chris Brummer, Hannah Buxbaum, Eric Chaffee, Andrea Corcoran, Steve Davidoff, Jim Fanto, Robert Patterson, and my colleague, Fred Tung.
I mention all this because, for those who may be interested, the symposium is being webcast as I type (and listen to Hannah’s presentation, on The ‘Global Enterprise’ in Cross-Border Securities Litigation). You can find it here:
https://www.uc.edu/ucvision/event.aspx?eventid=245
And if you have questions you’d like raised, you can e-mail them to Barbara here: corporatelawsymposium@law.uc.edu.
Hope you can join the discussion!
March 5, 2010 at 9:08 am
Posted in: Accounting, International & Comparative Law, Securities Regulation
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A Greek Tragedy
posted by Kristin Johnson
A Greek Tragedy
Finance markets defend derivative contracts by pointing to their long history. One of the oldest recorded references to a derivative contract appears in ancient Greek literature. In Chapter 9 of Aristotle’s Politics, a philosopher gains a handsome profit by agreeing to place a deposit on olive presses one year in advance of the next olive harvest. In securing rights to the presses prior to the harvest, the buyer, Thalus ensures that if the harvest is bountiful, he will have access to the presses at the lower negotiated rate that press operators are grateful to receive in advance of the harvest.
Investigations reveal that derivatives played a critical role in Greece’s recent credit woes, threatening to collapse the country’s economy and de-stabilize neighbors. (See here.) Financial markets use the term derivative to describe a transaction that derives its value from an independent reference asset. Finance literature identifies four basic types of derivatives contracts –futures, forwards, options and swaps. Futures and forwards involve agreements to deliver goods at a stated contract price on a specified future date. Thalus’s right (assuming he has no obligation to exercise the right but may suffer the loss of the deposit if he does not exercise the right) to elect to access the olive presses at a price negotiated in advance, illustrates features of a classic option contract. Swap agreements allow counterparties to exchange a series of cash flows over time. The market classifies derivatives based on the reference asset used to determine the value of the agreement. For example, we refer to a swap agreement for which the reference asset is an agricultural product (corn, soybeans, cotton, grain) or a raw material (copper, crude oil, natural gas) as a commodity swap. The reference asset for a financial swap likely involves one of the following: foreign currencies, bonds, stocks, and other financial assets and liabilities. Thus, the jargon evolves and we have foreign currency swaps, interest rate swaps and equity swaps among the many varietals.
While commodity derivatives may date back to Mesopotamia (see here), the Dojima rice futures exchange in shogunate Japan (see here), or the tulip bubble in Holland, financial derivatives are the product of financial innovation. In the 1980’s, derivatives traders at Salomon Brothers engineered a foreign currency swap. The transaction allowed the World Bank and IBM to swap risk exposure to foreign currency exchange rates; the two entities exchanged bond payment obligations and bond earnings denominated in Swiss Francs and German Deutsche marks, respectively, in a $210 million transaction. Parties using derivatives attempt to limit their exposure to or predict future movements in the price of the reference asset.
Futures and options trade on registered exchanges. Other derivatives are privately negotiated, bi-lateral agreements that trade over-the-counter among dealers and financial intermediaries. There is often little or no record of the parties originating the instruments. The ability to originate and trade these instruments in the shadows may have motivated some actors to make bad bets.
Greece’s concerns stem from the use of interest-rate and foreign currency swaps. These instruments serve useful and important functions in allowing parties to manage their exposure to volatile interest rate and foreign currency markets. The complexity of pricing the instruments and the opacity of the market, however, engendered grave concerns. According to reports, Greece used derivative transactions that involved securitized rights to cash flows from national projects to conceal mounting debt. Greece’s current troubles exemplify the need for greater transparency and accountability in derivative markets.
The Greek debacle with swaps illuminates the need to address oversight of derivatives from a global perspective. The markets for derivatives involve financial services firms that may be domiciled in the United States or Europe but whose influence and relationships are undeniably international. The financial instability of systemically significant private institutions (investment banks or international insurance firms or sovereign debtors) threatens global market disruptions. We are left pondering the effectiveness of any domestic derivative market reform that lacks international collaboration. (See here.)
February 14, 2010 at 11:24 am
Tags: derivatives
Posted in: Corporate Finance, Corporate Law, International & Comparative Law, Securities, Securities Regulation
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Asking new questions or at least hoping for more useful answers
posted by Kristin Johnson
From 1933 to 1934, Senator Ferdinand Pecora, the senior lawyer for the Senate Banking Committee, led an examination into securities market abuses that inspired the regulatory framework set out in the Securities Act of 1933 and the Securities Exchange Act of 1934. The legislation noted the predatory practices that motivated its consideration and adoption:
“Alluring promises of easy wealth…freely made with little or no attempt to bring to investor’s attention those facts essential to estimating the worth of any security. High pressure salesmanship rather than careful counsel was the rule in this most dangerous enterprise.” H.R. Rep. No. 85, 73d Cong., 1st Sess. 2 (1933).
More than seventy years later, as the Financial Crisis Inquiry Commission begins to hold hearings to unravel the causes of the recent financial crisis, Congress again takes up the task of addressing the accuracy of disclosure regarding valuation of complex financial instruments sold to the public (pension funds and other institutional investors). Throughout the hearings, we can anticipate accusations of greed and retorts equating greater federal government intervention with paternalism. As regulators, independent experts and senior management of the largest financial services firms arrive in Washington DC, however, we should take this opportunity to consider carefully the broader weaknesses in the structure and substance of federal securities market regulation.
The testimony solicited publicly and privately prior to the commission’s inaugural meeting suggests that disclosure will present a critical point of departure for inquiries about the recent crisis. For example, Congress is likely to challenge the practices of banks that sold clients financially engineered products like collateralized debt obligations which involve the sale of interests in bundles of residential and commercial mortgages. While the same banks encouraged credit rating agencies to assign strong, positive ratings to these products to increase revenues, they contemporaneously entered into short position contracts on these investments which rewarded the banks when the CDOs declined in value.
While important, questions or legislation focused exclusively on increasing the quality and quantity of disclosure are myopic and solutions arising out of this approach will prove insufficient to address broader market concerns. Questions or legislation should also address financial innovation or the development of new financial products or uses of products or processes not previously available and the ethical obligations of the firms that develop and distribute these products, the fragmentation among securities market regulators and the absence of consistent, effective inter-agency collaboration and the influence of international economic interdependence and regulatory competition on the development of U.S. regulation and the regulation in foreign jurisdictions. As often is the case in the securities regulation debates, there are many challenging questions and far too few effective answers.
January 12, 2010 at 10:24 am
Posted in: Consumer Protection Law, Corporate Finance, Corporate Law, History of Law, International & Comparative Law, Securities, Securities Regulation
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The Irrelevance of Legal Thought
posted by Nate Oman
I suspect that one of the depressing truths of being a law professor is that much of our thinking on how to solve social problems is irrelevant at best and pernicious at worse.
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January 11, 2010 at 9:44 am
Posted in: Bankruptcy, Consumer Protection Law, Contract Law & Beyond, Corporate Finance, Current Events, Economic Analysis of Law, Legal Theory, Securities Regulation
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Junior Faculty Workshops: GW in Business Law
posted by Lawrence Cunningham
For ages, academic institutions have promoted scholarly inquiry by younger faculty members, especially through the junior faculty workshop. Scores of US law schools host these regularly during terms; both the AALS and Law & Society run programs at their annual meetings; the Yale/Stanford junior faculty forum boasts wonderful annual draws; and now regional junior faculty workshops are rising, like that in the southwest next term, hosted by Arizona State.
Though these ventures focus on career stage, not field, more recent, school-sponsored forums add substantive focus. Junior faculty workshops appeared recently in environmental law (arranged jointly by Harvard, Berkeley and UCLA); family law (at Washington & Lee); national security law (at Texas); and federal courts (hosted alternately by American University and Michigan State).
You can soon add to that list business/financial law (including corporate, securities and banking) at George Washington. Next year, GW will inaugurate a series of Junior Faculty Workshops and Junior Faculty Prizes, seeking submission of papers in Fall 2010, for a celebratory academic event to be held in Spring 2011. This is one part of GW’s forthcoming Center for Law, Economics and Finance (C-LEAF), which also includes GWNY (posted about here).
While further details about these C-LEAF programs and descriptions of others must await a formal grand announcement, these Junior Scholar endeavors are ripe and time-sensitive enough to warrant advance notice.
December 18, 2009 at 11:12 am
Posted in: Corporate Finance, Corporate Law, Law School, Law School (Scholarship), Securities, Securities Regulation
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Lawyers: Don’t Trade on Inside Information!
posted by Lawrence Cunningham
In my corporations classes, I urge my students planning a career in corporate and securities law to resist the ubiquitous opportunities and occasional temptations to trade on the basis of material non-public information. I offer in terrorum encouragement by emphasizing that all trades are tracked and that enforcement authorities periodically review them for unusual patterns. Those are traced back to professional advisors, including law firms, having been involved in related deals. It is not difficult for authorities to catch these violations.
Along with dozens of others apparently caught up in the ongoing insider trading scandal at Galleon, today, an associate at the prestigious firm, Ropes & Gray, is alleged to have violated securities laws by using confidential information obtained from clients to profit in securities trades. Lawyers, as fiduciaries, who obtain material information through client representation, violate their fiduciary obligations and hence federal securities laws when they trade on it. See United States v. O’Hagan, 541 U.S. 642 (1997).
Over at the Wall Street Journal blog, Ashby Jones is asking how common insider trading is among lawyers. This is obviously a difficult empirical question. I can add, however, that (a) in the four years that I practiced law at Cravath, Swaine & Moore, one of my fellow-associates engaged in this activity (with his brother) and authorities prosecuted him (in 1995) for it and (b) during the two years before that when I was a paralegal at Skadden, Arps, one of the associates for whom I worked did so (with his sister) and he was likewise caught (in 1990).
In addition, the famous case embracing the so-called misappropriation theory of insider trading, United States v. O’Hagan, 541 U.S. 642 (1997), involved a lawyer—a partner at Dorsey & Whitney, representing Grand Met in its acquisition of Pillsbury, who generated nearly $4 million in unlawful trading gains from the knowledge.
I repeat to my students, past and present, and all lawyers: do not do this!
November 5, 2009 at 3:50 pm
Posted in: Current Events, Law Practice, Legal Ethics, Securities Regulation
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House Financial Committee Busy
posted by Lawrence Cunningham
The Staff of the House Financial Services Committee is extremely busy and doing a very good job of keeping its role in the legislative process transparent. A reasonable run down of current activity in financial regulation reform appears here. (You can even sign up to get email alerts.)
These bills are elaborate, complex and defy tidy characterization. All are likely to change, some significantly, as the legislative process grinds along. The Senate Banking Committee is unlikely to produce anything equivalent until well into November.
In general, however, together the House FSC’s work would make for sweeping change. The bills would:
(1) create three new federal agencies: a Federal Oversight Council, a Consumer Financial Protection Agency and an Office of Federal Insurance;
(2) considerably expand powers of the Securities Exchange Commission, including by subjecting rating agencies to considerable regulation and oversight by the SEC plus eliminate an exemption to the Investment Company Act of 1940 for private financial advisors.; and
(3) expand the mandate and powers of the Commodity Futures Trading Commission concerning regulation of derivative securities.
These pending Committee steps, of course, are in addition to bills the House passed earlier this year, including the summer’s Corporate and Financial Institution Compensation Fairness Act of 2009, embracing shareholder say on executive compensation to a certain extent.
At this link, you can access pending bills totaling just about 1,000 pages. Following is an additional breakdown: Read the rest of this post »
October 28, 2009 at 2:22 pm
Posted in: Consumer Protection Law, Corporate Finance, Current Events, Securities, Securities Regulation
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GW Fin Reg Conference Nov. 6
posted by Lawrence Cunningham
As financial regulation reform reaches its apogee, we at GWU are delighted to host a roundtable on Friday Nov. 6 at the Law School (2000 H Street, NW, Washington, DC). An outline of the Program, co-sponsored by the Institute for Law and Economic Policy, follows, along with how to register. Note that participation of some panelists is subject to the legislative calendar. Read the rest of this post »
October 26, 2009 at 11:22 am
Posted in: Current Events, Law School (Scholarship), Securities Regulation
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Smart or Not So Smart Money; The Limits on Derivatives and Regulating Them
posted by Deven Desai
The New York Times op-ed by Calvin Trillin, Wall Street Smarts, has a parable-like quality with the two characters meeting and exchanging wisdom. The lesson offered by the wiseman: “The financial system nearly collapsed,” he said, “because smart guys had started working on Wall Street.” The piece goes on to explain why that is a good explanation. It seems that the not-so-smart sat at the top of the heap and ran the companies: “Guys who didn’t have the foggiest notion of what a credit default swap was. All our guys knew was that they were getting disgustingly rich, and they had gotten to like that.” There is also an claim about what is enough and what is greed in this tale. I leave it to others to debate or verify these ideas (our own Mr. Cunningham has been a favorite for me on these issues). Now, a paper by some folks at Princeton may show that not even the smart guys knew what they were doing.
As Andrew Appel explores in his post Intractability of Financial Derivatives, the computer science world’s Intractability Theory may better explain the derivative world than other theories. (the theory is used for DRM, cryptography, and more). The paper is Computational Complexity and Information Asymmetry in Financial Products (pdf) by Sanjeev Arora, Boaz Barak, Markus Brunnermeier, and Rong Ge.
For those who are interested in the topic and/or understand the math and theory behind the risk shifting involved in this area, check out Andrew’s post. He does a great job explaining how the paper applies to a CDO (collateralized debt obligation). If you need a little more to understand why this paper and its ideas are important, consider Andrew’s take away
In principle, an alert buyer can detect tampering even if he doesn’t know which asset classes are the lemons: he simply examines all 1000 CDOs and looks for a suspicious overrepresentation of some of the asset classes in some of the CDOs. What Arora et al. show is that is an NP-complete problem (“densest subgraph”). This problem is believed to be computationally intractable; thus, even the most alert buyer can’t have enough computational power to do the analysis.
Arora et al. show it’s even worse than that: even after the buyer has lost a lot of money (because enough mortgages defaulted to devalue his “senior tranche”), he can’t prove that that tampering occurred: he can’t prove that the distribution of lemons wasn’t random. This makes it hard to get recourse in court; it also makes it hard to regulate CDOs.
UPDATE: It appears from the comments to Andrew’s post that CDO and derivatives are not precisely the same thing. In addition, the comments explore the limits of the study. It is a good discussion.
ALSO check out the FAQ for the paper. It addresses many issues that the initiated may want to probe.
October 18, 2009 at 9:17 am
Tags: computer science, derivatives, securities law
Posted in: Corporate Finance, Corporate Law, Securities, Securities Regulation
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Bernie Madoff and the Unfortunate Consequences of Celebrity Bias
posted by Danielle Citron
Celebrity is intoxicating. We have long been willing to play the fool to the rich and powerful, even if that means turning a blind eye to signs of trickery. In the late 1980s, a 37-year-old con artist convinced Duke University administrators and students that he hailed from the wealthy Rothschild family of France despite the fact that he spoke no French, drove a run-down car, and offered clipped out magazine articles to show his family’s homes. During a two-year charade, the imposter borrowed (stole) thousands of dollars from Duke and joined a fraternity. (I was an Duke undergraduate at the time, but alas did not know him). More recently, Christopher Chichester tricked many into believing that he was a Rockefeller despite his gauche manners and outrageous claims (e.g, that he owned “the key to Rockefeller Center”). As Clark Rockefeller, he gained admission to exclusive clubs and married a partner at McKinsey Consulting. Only after Mr. Chichester kidnapped his daughter from his ex-wife did the police discover his true identity and connection to unsolved murders.
Perhaps such celebrity bias had some role in the SEC’s bungling of the Bernie Madoff fiasco. On Thursday, the S.E.C.’s Inspector General’s Report explored why the agency missed so many “red flags” about Madoff since 1992. The report discussed missed leads, bureaucratic snafus, and investigators’ inexperience. Investigators were far too believing because they were simply awed by him. One investigator described Madoff as “a wonderful storyteller” and a “captivating speaker.” As with the faux Rockefeller and Rothschild incidents, Madoff’s ruse worked for so long despite the clues of foul play perhaps because investigators and investors could not shake their sense of Madoff as a rich, powerful, and trusted financial guru. Madoff’s celebrity reputation anchored their thinking, permitting Madoff to get away with his scheme for far longer than it should have. As Madoff’s victims’ stories attest, celebrity bias had profoundly destructive consequences.
StockXchange Image; Wikimedia Commons Image
September 5, 2009 at 3:39 am
Posted in: Behavioral Law and Economics, Corporate Law, Culture, Current Events, Psychology and Behavior, Securities Regulation, Uncategorized
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“A great vampire squid wrapped around the face of humanity”
posted by Kaimipono D. Wenger
That’s how Matt Taibbi describes Goldman Sachs in the opening paragraph of his 12-page Rolling Stone article (which, as far as I can tell, is available online only here, in moderately annoying scanned form). From there, Taibbi picks up steam. For instance, we learn that:
The bank’s unprecedented reach and power have enabled it to turn all of America into one giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where its going.
Yikes!
Is this just another crackpot conspiracy theory? (Paging Mr. Stein, Mr. Ben Stein.) Nay — Taibbi has give us proof of Goldman’s nefari-iety. It goes more or less along these lines: 1. Goldman survived the Great Depression. 2. Goldman made some savvy bets in the past ten years. 3. Goldman pays really big bonuses. Read the rest of this post »
June 26, 2009 at 11:51 am
Tags: financial crisis, goldman sachs, market, money, securities law
Posted in: Corporate Finance, Corporate Law, Current Events, Securities, Securities Regulation
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Washington Backwards on Fin Reg
posted by Lawrence Cunningham
If Treasury Secretary Timothy Geithher has his way, two big mistakes appear to be forthcoming from the Obama Administration on financial regulation, born of an atmosphere in which any kind of reform seems possible. A quick quiz illuminates:
1. Suppose someone you put in charge of overseeing banks did a terrible job supervising them while someone you put in charge of mutual funds did a reasonably good job supervising them. If banks failed while mutual funds prospered, would you (a) increase the power of the bank supervisor and decrease that of the fund supervisor or (b) correct the failings of the bank supervisor and reward and maintain the fund supervisor? The correct answer is (b) but the Administration is about to propose (a), by stripping the Securities and Exchange Commission of power and expanding the Federal Reserve’s power.
2. Suppose a system-wide financial crisis spread across the land that gave you an opportunity to revise the prevailing oversight system of relevant financial institutions. Would you (a) authorize a formal investigation of the source of problems to identify tailored solutions and follow up with legislative corrections or (b) begin with legislative overhauls followed by a formal investigation? The correct answers is (a) but the government is choosing (b). The House and Senate have approved legislation now heading to the President’s desk for signature to start the investigation, while simultaneously writing legislation to be enacted long before investigation is complete.
The case to expand the Fed’s powers will be made under the fashionable heading of the need to have a single super-senior risk regulator able to oversee all institutions posing systemic risk. Participants should not be misled. In effect, what appears to be happening is the banking industry exercising its considerable influence to regain market share it has lost to the mutual fund industry in recent decades. Read the rest of this post »
May 20, 2009 at 6:44 am
Posted in: Current Events, Securities Regulation, Uncategorized
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Hello Ms. Schapiro
posted by Lawrence Cunningham
The Senate on Thursday confirmed President Barack Obama’s nomination of Mary Schapiro as Chair of the Securities and Exchange Commission. In Ms. Schapiro’s written answers to questions posed by Senator Carl Levin, she indicates a refreshingly sharp break with many policies of her predecessor, Chris Cox.
Differences appear on numerous particular subjects. These reflect a general orientation to re-dedicate the agency to its primary mission of investor protection. Examples from Ms. Schapiro’s letter follow (with full text available here from Investment News):
1. Corporate Governance. Ms. Schapiro favors (a) rules letting shareholders (at least significant, long-time holders) nominate candidates for corporate boards of directors; and (b) rules allowing shareholders to express advisory opinions and votes on executive compensation .
2. International Accounting. Ms. Schapiro, unlike Mr. Cox: (a) does not believe that the International Accounting Standards Board meets US legal criteria and is not prepared to delegate authority to it; and (b) believes that US authorities must oversee foreign auditing firms auditing financial statements of companies with securities listed in the US.
3. Internal Controls. Ms. Schapiro, unlike Mr. Cox, would enforce laws requiring internal controls as to small and large public companies alike.
4. Accounting. Ms. Schapiro also believes in: (a) maintaining the independence of the US accounting standard setter, the Financial Accounting Standards Board; (b) cracking down against abuses of off-balance sheet accounting; and (c) continuing the requirement that stock options be accounted for as compensation expense.
5. Regulatory Scope. Ms. Schapiro favors: (a) regulating hedge funds; (b) strengthening capital requirements for securities brokers; and (c) strengthening regulation of rating agencies.
So far so great.
January 24, 2009 at 3:20 pm
Posted in: Accounting, Securities Regulation
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Good Bye Mr. Cox
posted by Lawrence Cunningham
Yesterday was Christopher Cox’s last day of a 3.5 year term as Chair of the Securities and Exchange Commission, the United States federal agency charged with investor protection. Investors may be tempted to feel some relief. He leaves the agency weakened and its staff demoralized. But he also leaves its continued existence in doubt, given its manifest failures and contributions to the global financial crisis. It may be undiplomatic to say, but it is possible that his tenure was among the worst in the agency’s history.
Despite the agency’s primary mission of investor protection, Mr. Cox mostly ignored or subordinated that mission in preference to elevating other goals, such as promoting capital formation and engagement with technology and globalization. Headline dramas illustrating these problems include how, during Mr. Cox’s tenure, the SEC:
• failed to interdict Bernard Madoff’s Ponzi scheme despite warnings, costing investors billions, with Mr. Cox later saying he was “deeply troubled” that he didn’t catch it;
• failed in its oversight of the investment banking industry, which led to its extinction, costing investors hundreds of billions more (with multiplied costs for the rest of the economy and probably permanently impairing the economy of New York City, the country’s center of investment capital), with Mr. Cox later describing the SEC’s oversight program as a total failure;
• reduced enforcement intensity for securities law violations (measured by year-to-year reductions in fines and restitution of about 2/3), with uncertain but probably significant future costs for investors from reduced deterrence; and
• reversed major parts of the 2002 Sarbanes-Oxley Act’s implementation concerning corporate internal controls, the costs and fallout from which will not be known for months or years when accounting scandals emerge as a result of the increased opportunities for fraud, although the costs may again run to billions of dollars.
In addition, as Chair of the SEC, Mr. Cox concentrated considerable personal and institutional resources on two subjects that subordinated investor interests to pursue projects that Mr. Cox believed in for some other reasons. In particular, Mr. Cox and the SEC Staff at his direction:
• spent thousands of hours and enormous other resources pushing an ill-advised campaign to eliminate US accounting standards in favor of global ones, although this was fortunately delayed in the final months of his term in response to investor and academic criticism; and
• spent considerable resources promoting policies to let non-US enterprises access US capital markets, without any US regulatory oversight or legal enforcement, so long as they are overseen at home by authorities deemed comparable, also an idea that luckily has gained little traction and may die on the vine.
January 21, 2009 at 11:10 pm
Posted in: Securities Regulation
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