Monday, June 20, 2011

Inside Job


Last night I finally got around to watching the academy award winning documentary "Inside Job." I had been planning to watch it for some time, but somehow ended up finding other things to watch instead. I enjoyed it and found it to be very interesting, but I imagine that readers of prawfs might be split on its merits. A good number of professors (primarily business/economics ) get skewered pretty well in the interviews.

Here are some of my favorite quotes from the movie:

Andrew Sheng: Why should a financial engineer be paid four times to 100 times more than a real engineer? A real engineer build bridges. A financial engineer build dreams. And, you know, when those dreams turn out to be nightmares, other people pay for it

Michael Capuano: You come to us today telling us "We're sorry. We won't do it again. Trust us". Well i have some people in my constituency that actually robbed some of your banks, and they say the same thing.

(My paraphrase) "As I recall I was revising a textbook." (You'll have to watch the movie for context on this one)

Posted by Jeff Yates on June 20, 2011 at 03:09 PM in Corporate, Criminal Law, Culture, Current Affairs, Film, First Amendment, Information and Technology, Law and Politics | Permalink | Comments (1) | TrackBack

Monday, April 25, 2011

The Market Myth

For initiates, as Fox shows, the idea of the rational market seems to have arrived with the force of revelation:  “After about ten minutes it just hit me, this has got to be true.  The idea for me was so powerful; I said to myself, ‘This is order in the universe.’” (105) (quoting Rex Sinquefield, MBA student at the University of Chicago circa 1970 and former Catholic seminarian).

To the extent that the idea of the rational market is not just an ordinary factual proposition but a framework for ordering experience—something that “has got to be true”—then it becomes difficult to evaluate.  Perhaps this is why Fox’s title describes the rational market as a “myth.”  The word choice suggests that the rational market is more than a false belief.  When faced with a myth, we are more likely to ask whether it is useful than whether it is literally true.  A myth is a way of explaining a natural or social phenomenon that makes it part of a broader world view, investing it with symbolic value that can legitimate and reinforce norms of behavior.  The interpretation of myth, therefore, cannot be separated from the human context in which it arises.

Fox appears to take this approach.  He observes that the straightforward problem with the theory of the rational market is that it was clear all along “that price movements also sometimes reflected false information, incorrect interpretation, and plain old mood swings.” (102)  Yet, rather than dismissing the rational market idea as utopian economics, Fox maintains that the “unwillingness to give up on theories even when their underpinnings had been largely demolished was, like so many things about rational market finance, not entirely crazy.” (235)  As Fox recounts, economists have made important advances using the rational market as a guide, even if their fundamental assumptions were shaky at best.

In the end, Fox concludes mildly that the rational market can help shape individual judgment but should not “substitute” for it.  There is more to say about the relationship of myth, financial theory, and markets, and it is a sign of the quality of Fox’s book that it rewards the reader’s attention and invites further inquiry.  Given space limitations, I will simply close with a question:  does the rationality of the market depend upon who is asking?  Finance scholars, investors, government regulators, bankers, and taxpayers may have different perspectives.  After all, a theory that usefully motivates academic research can still prove destructive if let loose in the world.

Posted by Benjamin Means on April 25, 2011 at 08:31 PM in Books, Corporate | Permalink | Comments (1) | TrackBack

Wednesday, March 02, 2011

Language Arts 101

Thank you to Dan and the PrawfsBlawg community for giving me the opportunity to share in your discussions and for inviting me onto your desks (or desktops), laps (or laptops) or into your hands (or handheld electronic devices). It is indeed a great honor, and I hope we can stimulate discussion and have some fun.

Speaking of fun, I thought I would start with a little snark.

Yesterday, the Supreme Court unanimously shot down AT&T's argument that corporations have "personal privacy" that allows them to withhold information under one of the exceptions to the Freedom of Information Act (FOIA). The opinion, available here, is notable not for its unanimity (Justice Kagan did not participate), but for its nod to everyone who did well in language arts as a child and to those who like to see some humor -- sarcastic or genuine -- in court decisions.

Some linguistic flair and Chief Justice Roberts's sense of humor AFTER THE JUMP.

Confronted with a FOIA request from its competitors, AT&T wanted to withhold some documents under FOIA Exception 7(C) as protected by the "personal privacy" rights of the corporation. It argued that since a corporation is a "person," a corporation has "personal" rights; after all, the adjectival form of a defined word should refer to the defined word. The Third Circuit agreed.

Chief Justice Roberts must have found this amusing. For the next few pages, he gives AT&T and the Third Circuit a lesson in the complexity and nuance of American English:

Adjectives typically reflect the meaning of corresponding nouns, but not always. Sometimes they acquire distinct meanings of their own. The noun “crab” refers variously to a crustacean and a type of apple, while the related adjective “crabbed” can refer to handwriting that is “difficult to read,” Webster’s Third New International Dictionary 527 (2002); “corny” can mean “using familiar and stereotyped formulas believed to appeal to the unsophisticated,” id., at 509, which has little to do with “corn,” id., at 507 (“the seeds of any of the cereal grasses used for food”); and while “crank” is “a part of anaxis bent at right angles,” “cranky” can mean “given to fretful fussiness,” id., at 530.

Hilarious. And, a welcome lecture to those of us who have argued the plain meaning of statutory, regulatory or constitutional terms before panels of judges. One of the many things that makes the study of law so incomprehensible to the average American is our oft incomprehensible (mis)use of the English language. We create terms of art that do not always mean what they sound like they should mean and make seemingly arbitrary liguistic distinctions that have great impact. At least when it comes to the strange notion of corporate privacy, common sense wins out.

But, it is worth discussing the importance of FCC v. AT&T not only for the language it includes, but for the words it omits. The word "citizens" never appears, which means that the Chief Justice never referenced Citizens United, the widely criticized decision that used the personhood of the corporation to allow for unlimited election spending. When the Court handed down Citizens United, many scholars wondered what kind of effects that decision's broadening of corporate free speech rights might have. But, Chief Justice Roberts avoided that lightning rod with his linguistic analysis. There was less a discussion of the legal nature of "corporate personhood" than an English professor's discussion of the differences between "person," "personal" and "personhood." Also omitted from the discussion was any analysis of the intent of Congress when passing FOIA, but perhaps that was a strategic omission to obtain unanimity and bring on board those justices who find legislative history as awkward as multivariable calculus.

Some commentators have already suggested that AT&T is the Court taking a step back from Citizens United. I disagree. The fact that we are not required to ascribe all "personal" rights to a "person" -- however that word is defined -- does little damage to the Court's free speech analysis in Citizens United.

Your thoughts?

Posted by Ari Ezra Waldman on March 2, 2011 at 11:19 AM in Constitutional thoughts, Corporate, Current Affairs | Permalink | Comments (0) | TrackBack

Tuesday, February 22, 2011

Is "Intellectually Vacuous" the Right Expression for Veil-Piercing Doctrine?

Over at his blog, Steve Bainbridge endorsed a view, inspired by comments from Steve Bradford (Nebraska) at Business Law Prof Blog to the effect that every time he got to teaching "veil-piercing," he was reminded again how "intellectually vacuous" the doctrine was.

I sympathize.  I have the same reaction when I teach veil-piercing.  Why?  It's the tempest in a teapot problem that affects much of what commercial and business lawyers learn in school, on one hand, and what they practice, on the other.   Were you inside the teapot of an idiosyncratic case that ends up as an appellate decision on veil-piercing, it would seem like a Category 5 hurricane.   You read five or six cases with outrageous facts and try to reconcile how the doctrine for why corporations legitimately exist (individual use them to shield themselves from liability) is exactly the same as the doctrine under which individuals can be tagged (individuals used them to shield themselves from liability).  Blow winds and crack your cheeks, rage, blow!  But piercing cases are rare, idiosyncratic, and usually marked by some outrageous conduct that makes the decision, in retrospect, not particularly surprising.

Slide1 But I disagree that the proper description of the problem is intellectual vacuity.  The problem is trying to reduce to propositions something that propositions can't reduce.   I've been teaching first year contracts and I've encountered this same "vacuity" problem every time the standard is "justice" (as in promissory estoppel), unconscionability, or mistake.  Analogical reasoning doesn't work because it is inductive analogy - the cases are supposed to describe a rule - rails in a Wittgensteinian sense - that point you to the next result, and there are no rails, or there are too many rails, or they aren't parallel (metaphorically speaking).   The better way to approach this is to understand that (a) we have a non-propositional conception of the prototypes of corporate legitimacy and corporate legerdemain, (b) the prototypes sit in polar opposition on a continuum, and (c) the rationalizing propositions follow the non-propositional and intuitive metaphoric leap from the specific case before us to a prototype.  Another in my series of Venn representations of this kind of polarity is at left - this on unconscionability.

Shameless self-promotion alert:  I discuss this cognitive process at length (giving credit where credit is due - I didn't make this stuff up) in three recent papers:  Metaphor, Models, and Meaning in Contract LawThe Financial Crisis of 2008-09:  Capitalism Didn't Fail But the Metaphors Got a "C" (Minn. L. Rev., forthcoming), and The Venn Diagram of Business Lawyering Judgments (46 Seton Hall L. Rev. 1 (2011), forthcoming).

Posted by Jeff Lipshaw on February 22, 2011 at 01:33 PM in Corporate, Deliberation and voices, Legal Theory, Lipshaw, Teaching Law | Permalink | Comments (1) | TrackBack

Wednesday, February 09, 2011

Employees, the Firm, and the Corporation

Last week you may have seen the 2010 productivity numbers from the Bureau of Labor Statistics.  Overall nonfarm business productivity was up 3.6 percent for 2010, almost identical to 2009's 3.5 percent growth.  Wages, however, were fairly stagnant -- real hourly compensation was up only 0.3 percent.   These most recent numbers are just the latest instantiation of the growing gap between productivity and employee compensation -- a trend that began in the 1970s.  For a nice series of graphical illustrations of this divergence, check out BLS's The compensation-productivity gap: a visual essay.  A similar trend can be seen in this rising share of GDP attributable to corporate dividends.  Karl Smith at Modeled Behavior breaks this down: since the late 1980s, dividends as a share of GDP have more than doubled.

These trends illustrate, in my view, another societal development: the corporation has become the perfect legal machine for separating workers from the firm.  In Employees and the Boundaries of the Corporation, I argue that our legal construction of the corporation has diverged quite significantly from our theoretical conception of the firm.  It's actually quite striking: whenever we think of a firm--whether it be Coase, respondeat superior, or the work-for-hire doctrine--we think of employees.  But employees are nowhere to be found in corporate law.  The result has been a "firm" that consists mainly of employees and a "corporation" that consists of shareholders, directors, and officers.  Labor and employment law seeks to redress the vulnerability of employees left outside corporate boundaries, but these can only go so far.

"Employees and the Boundaries of the Corporation" is a contribution to Elgar's forthcoming Research Handbook on the Economics of Corporate Law (Claire Hill & Brett McDonnell, eds.).   (David Walker is also contributing The Law and Economics of Executive Compensation: Theory and Evidence).  I would love to hear your thoughts.

Posted by Matt Bodie on February 9, 2011 at 06:44 PM in Corporate, Workplace Law | Permalink | Comments (1) | TrackBack

Monday, February 07, 2011

Applying SOX (or something like it) to law schools

comment that I saw on Steve Bainbridge's blog sounds like an interesting way to respond to the claim that law schools all too commonly mislead students about the schools' employment data:

[A]pply Sarbanes-Oxley to college admissions, bursar, and career placement offices, with university presidents having to certify the data.

Now, I'm not a university president, so I suppose it's easy for me to get behind this idea.  It has a lot of appeal to me, and not in the snarky way that it did to the commenter, whose full comment evinces glee at the idea of academics being hoisted by a (bad) law that they support being imposed on businesses.

Lots has been written recently about law school debt and declining job prospects for JDs.  Indiana (Bloomington) law Professor William Henderson was quoted as saying:

Enron-type accounting standards have become the norm.  Every time I look at this data, I feel dirty.

His solution?

Solving the J.D. overabundance problem, according to Professor Henderson, will have to involve one very drastic measure: a bunch of lower-tier law schools will need to close. But nobody inside of the legal establishment, he predicts, has the stomach for that. “Ultimately,” he says, “some public authority will have to step in because law schools and lawyers are incapable of policing themselves.”

I'm not sure this solution necessarily follows from the diagnosis.  If the problem is that there is a bunch of misleading information being put out there by law schools, including misleading or even false employment data, why isn't the more narrow solution to penalize dissemination of such false or misleading information?

Congress could presumably enact a law that requires law schools to provide accurate and detailed data about the employment prospects of their students (for the summers) and graduates, and to have those reports certified by the university president, chancellor, etc., with violations punishable by fines and other penalties.

By focusing on the quality of the data, this approach would, if successful, render law schools more accountable to the market.  No more sending survey letters to graduates that say, "if we don't hear from you by X date, we will assume that you have found fulltime employment" (not something that took place at the two institutions I've been employed by, but which I've heard about elsewhere).  No more lumping all non-law work with legal employment.  (To be sure, there may well be JDs who by their own choice take non-law-related work, but that's still useful information to law school applicants.)

If anything, it seems to me there's arguably a stronger call for enforcing these sorts of disclosure and accuracy provisions on law schools (and universities in general) than on corporations. After all, the cost of corporate malfeasance with regard to balance sheets and the like is diffused across a huge number of investors, who are presumably not taking out huge loans with which to invest in said corporate stock.  (I guess there are margin traders, but really, they seem a less sympathetic group for concern than poor students with huge education debt.)  The cost of law school malfeasance in terms of misleading or false employment data is visited upon a (relatively) small number of students who are saddled with $50,000 or more in student debt.  Shouldn't they be entitled to at least the same level of informational protection that stock investors now get?

Posted by Tung Yin on February 7, 2011 at 05:15 PM in Corporate, Life of Law Schools | Permalink | Comments (2) | TrackBack

Thursday, December 09, 2010

Why Allowing States to Go Bankrupt is a Horrible Idea

At the end of November, an article by David Skeel in the Weekly Standard got many conservative folks a-chattering about letting states go into bankruptcy.  The new meme apparently has already had policy ramifications, as James Pethokoukis reports:

Congressional Republicans appear to be quietly but methodically executing a plan that would a) avoid a federal bailout of spendthrift states and b) cripple public employee unions by pushing cash-strapped states such as California and Illinois to declare bankruptcy. This may be the biggest political battle in Washington, my Capitol Hill sources tell me, of 2011.

That’s why the most intriguing aspect of President Barack Obama’s tax deal with Republicans is what the compromise fails to include — a provision to continue the Build America Bonds program.  BABs now account for more than 20 percent of new debt sold by states and local governments thanks to a federal rebate equal to 35 percent of interest costs on the bonds. The subsidy program ends on Dec. 31.  And my Reuters colleagues report that a GOP congressional aide said Republicans “have a very firm line on BABS — we are not going to allow them to be included.”

In short, the lack of a BAB program would make it harder for states to borrow to cover a $140 billion budgetary shortfall next year, as estimated by the Center for Budget and Policy Priorities. The long-term numbers are even scarier. Estimates of states’ unfunded liabilities to pay for retiree benefits range from $750 billion to more than $3 trillion.

It's clear that states like California and Illinois are much closer to financial default than anytime in the recent past.  But allowing states to go bankrupt -- i.e., creating a mechanism which would allow a court to restructure a state's future financial commitments -- is a bad idea with terrible consequences.

Why is bankruptcy necessary?  As Skeel makes clear throughout the article, the main culprits are overpaid public employees:

California—recently dubbed the “Lindsay Lohan of states” in the Wall Street Journal—has a deficit that could reach $25.4 billion next year, and Illinois’s deficit for the 2011 fiscal year may be in the neighborhood of $15 billion. There is little evidence that either state has a recipe for bringing down its runaway expenses, a large portion of which are wages and benefits owed to public employees. . . .

With liquidation off the table, the effectiveness of state bankruptcy would depend a great deal on the state’s willingness to play hardball with its creditors. The principal candidates for restructuring in states like California or Illinois are the state’s bonds and its contracts with public employees. . . .

California’s most important creditors are its bondholders and its unionized public employees.  . . . 

Are public employees overpaid?  Well, it depends what you mean.  If you mean that they are paid more than the states can afford, given the current tax revenue, the answer seems to be "yes" in many states.  But are they paid more than they negotiated?  No.  Are they paid more than comparable private employees?  The evidence is mixed.   For example, look at this article in the Oregonian about public employee pay:

Yet one fundamental question underlying the debate is whether Oregon's public employees are overpaid. 

The objective answer is generally no. Not yet anyway. 

It's true that on average, state employees make more than private-sector workers. But the average says more about the professional-type jobs dominating the public work force, and the vast number of unskilled, low-paying jobs in the private sector, than it does about state pay practices. 

When the analysis focuses on comparable jobs and education levels, the total compensation of state employees is slightly less than their private-sector counterparts and slightly more than public employees at other levels of government and in neighboring states. That conclusion is consistent whether the data comes from the state's compensation surveys, academic and private-sector analyses, or federal data.

Moreover, look at this graph from the Oregonian:


The highest point on the graph -- the 2004 pay and benefits to the average employee -- is $61,301.  That's the highest point on the graph.  Average 2009 salary is $41,200.  The average California public employee salary is $57, 536.  By the way, click on that link and you'll see that the five highest paid public employees are two head coaches (each making over $2 million) and three med school professors.

So yeah, let's allow states to go bankrupt.  The bondholders would likely get killed -- and who knows what the interest rates on state bonds would go up to.  Skeel is sanguine: "The bond market wouldn’t be happy with a California bankruptcy, but it is already beginning to take account of the possibility of a default."  Um -- I think the possibility of bondholders losing money is MUCH greater once Congress allows states to go bankrupt, and I think the bond market would "take account" of that much differently.  Oh -- "And bondholders can’t pull their funding the way a bank’s short-term lenders or derivatives creditors can."  So that's nice -- they're trapped like rats, so what they do about it doesn't really matter.  And state bondholders are usually older folks who need "safer" holdings, but I guess that only means they won't be around so long to complain about it!

What about that other group of creditors?  

As for California’s public employees, there is little reason to suspect they will be running anywhere.

Do I hear a little chuckling after that?

If the public thinks it's overpaying its public employees, there's an easy remedy -- elect representatives who won't pay as much.  Of course, this is when the same folks who defend Citizens United will bemoan the awesome political power of public unions -- like this, perhaps:

During his recent campaign, Governor-elect Jerry Brown promised to take a hard look at California’s out-of-control pension costs. But it is difficult to imagine Brown taking a tough stance with the unions. Even in his reincarnation as a sensible politician who has left his Governor Moonbeam days behind, Brown depends heavily on labor support. He doesn’t seem likely to bring the gravy train to an end, or even to slow it down much.

So the only answer is to cut off federal assistance.  And rather than raising taxes or slashing expenses, the current leadership of states like California and Illinois can take the state into bankruptcy and tell its bondholders and employees to go jump off a pier.

I'll give Skeel one point for consistency -- he was against the AIG and Bear Stearns bailouts; he thought they should have gone bankrupt, too.  But they didn't.  To me, the case for a federal bailout of a state is much stronger than a bailout of a financial institution.  The state isn't going anywhere.  The feds can get their money back in a variety of ways.  And whereas a bankrupt business cannot get more money out of non-existent customers, a state can always raise taxes or even sell off public holdings.  It may not be pretty, but the money is there.

One final note -- a point that shows the absurdity of where we are.  If this federal government bails out AIG so that Goldman can get a $1 for every $1, but then lets states restructure their debts so that a 65-year-old ex-cop get $0.25 on the dollar, there may in fact be rioting in the streets.  And that would be bad for the economy, no?

UPDATE:  Felix Salmon also thinks the bond market would freak out.

Posted by Matt Bodie on December 9, 2010 at 11:56 AM in Corporate, Current Affairs, Tax | Permalink | Comments (9) | TrackBack

Friday, October 15, 2010

Will the deal get done in time?

Follow the LFC's fate (discussed yesterday) here at the Guardian's Friday live blog.

UPDATE:  from the Guardian blog:

3.58pm: LIVERPOOL FC HAVE BEEN BOUGHT BY NEW ENGLAND SPORTS VENTURES, Owen Gibson confirms that the deal is done.

Posted by Matt Bodie on October 15, 2010 at 10:16 AM in Corporate, Current Affairs, Sports | Permalink | Comments (1) | TrackBack

Thursday, October 14, 2010

International Corporate Warfare in Real Time

Whether or not you are a scouser, I would encourage you to go to this page right now -- now! -- to experience the thrill of international corporate warfare in real time.  Yesterday a British court ruled that the board of Liverpool Football Club had the power to go through with its sale of the club to the folks who own the Boston Red Sox.  I say the "board," although that was part of the dispute, as the owners -- two Americans, including the former owner of the Texas Rangers -- had changed the composition of the board in breach (as the U.K. court found) of an agreement with UBS, who had lent them £200m.  If this is all a bit much to figure out, then add in a late-breaking TRO from a Texas trial court judge enjoining the sale!  Today the parties are back in U.K. court, and there could be a verdict as I am writing this now.  If the sale doesn't go through today, UBS can take over the club tomorrow, which will cripple LFC's standings in the Premier league.  So check out David Zaring's piece from yesterday for background, and keep hitting "refresh" at the Guardian's site.  And feel free to email the Guardian's reporters if you have any in-depth knowledge about Texas civil procedure.

UPDATE:  Mr Justice Floyd is back, but a decision is still pending.  Tough to take!  And I'm wholeheartedly in the board's camp.  I've been brainwashed, perhaps, by things like this.

UPDATE 2: From the Guardian blog:

5.21pm: Judge rules that anti-suit injunction wanted by RBS and other parties (board) against owner's action in Texas is granted. "This case has nothing to do with Texas."

If anyone with international civil procedure expertise would like to weigh in on what happens next, I'd be much obliged.

Posted by Matt Bodie on October 14, 2010 at 11:45 AM in Corporate, Current Affairs | Permalink | Comments (3) | TrackBack

Tuesday, October 12, 2010

Greg Mankiw is threatening to stop working (again)

Two years ago, Greg Mankiw threatened to stop working if Obama was elected, basically on the theory that his tax rates would go up and his incentives would thereby go down.  It was one of those "Going Galt" threats that looks ridiculous in retrospect.  Mankiw, of course, is still a professor at Harvard.  But he has stopped working in one respect -- he's recycled that old blog post into an op-ed for the New York Times.  A few thoughts:

  • First, if you're looking for reasons why the print media continues to lose importance and market share, compare this and this.  The New York Times essentially ran a two-year-old blog post in its Sunday edition.  I can't even really blame Mankiw for this -- where are the editors?  In fact, I think Mankiw's op-ed is an elaborate inside joke on his part.  "Two years ago, I threatened to stop working.  And I made good on that threat!  Of course, if people want to pay me for not working, I'm happy to accept it, even with higher taxes.  I just won't do any new work."
  • I'm willing to offer the Times this two-year-old blog post, which was my response to Mankiw's original post.  I could summarize it here, but I'm not getting paid for it, so what's the point?  You can read DeLong, Ezra Klein, etc., etc.  Frankly, they take his argument far too seriously.  I still think Mankiw's blog should have the banner headline, "I'M BLOGGING AWAY MY CHILDREN'S INHERITANCE."
  • The man still needs a course in basic taxation.  Can I recommend this one next spring, with Louis Kaplow?  You can learn about tax goodies.
  • Todd Henderson got a ton of grief for a blog post that was far more open and personal about the effect of the tax cuts than Mankiw's op-ed.  I disagree with Todd's perspective, but at least he was being honest about his personal concerns.  Mankiw should get a lot more grief for this pseudo-threat to stop making the world a better place because he will lose some small percentage of any additional income he brings in.  Mankiw admits: "Paying an extra few percent in taxes wouldn’t create a lot of hardship."  And yet he claims that percentage will dictate whether he gives a guest lecture, takes on consulting work, or writes an article.  That, my friends, is someone with a strange set of utility curves.

Posted by Matt Bodie on October 12, 2010 at 02:49 PM in Blogging, Corporate, Current Affairs, Tax | Permalink | Comments (3) | TrackBack

Friday, July 16, 2010

Dispatches from the front, circa 1989

From Fred S. McChesney, "Economics, Law, and Science in the Corporate Field: A Comment on Eisenberg," 89 Colum. L. Rev. 1530, 1530 (1989):

As American history demonstrates, the colonization of one territory by inhabitants of another creates at least two problems. First, the colonizers and colonized usually do not speak the same language, and thus must learn to communicate. Ordinarily, the language of the colonizers comes to dominate, a development rarely pleasing to the colonized. Second, patterns of property ownership will likely be disrupted, as colonizers acquire (often by force) rights previously held by the colonized.

The colonization of some fields of law by economic analysis fits this historical pattern. Economics provides a powerful “tool kit” with which to analyze law. It has proven difficult, however, for some adherents of more traditional approaches to law to come to understand the different form of analysis that the use of economic methods entails. Moreover, the economic approach has reduced the value of lawyers' more traditional but less powerful methods of legal analysis. Not surprisingly, many lawyers have objected to the intrusion of economic analysis into law on both grounds.

Posted by Matt Bodie on July 16, 2010 at 07:43 PM in Corporate | Permalink | Comments (1) | TrackBack

Wednesday, May 19, 2010

Ideoblog Merges With and Into Truth on the Market

Images Larry Ribstein, pictured left, whom I joined as a co-author on the fourth edition of Unincorporated Business Entities, the world's premier casebook on non-corporate business associations (note that I didn't simply say "my co-author Larry Ribstein" because it would unfairly reflect our respective contributions), has announced that heImages-1 is shutting down his six-year old blog and joining Truth on the Market.  Terms of the deal were not announced, but sources reported that TOTM paid a significant (some might even say infinite) premium over Ideoblog's current market cap.  The rumors are also that Larry will continue moonlighting in television and motion pictures under his stage name, James Rebhorn (known for his recurring role as a sleazy (other than Tovah Feldshuh's character, Danielle Melnick, aren't they all?) defense lawyer on Law & Order and the wimpy defense secretary in Independence Day, pictured right). 

Congratulations to Larry, and thank goodness Ideoblog wasn't organized as an LLC in which another member might sue him in a derivative lawsuit and incur his wrath not because of the merits but because of the form of the action. (That's an inside "Agency, Partnership, and LLC" reference.)

Posted by Jeff Lipshaw on May 19, 2010 at 04:19 PM in Blogging, Corporate | Permalink | Comments (0) | TrackBack

Tuesday, May 18, 2010

Lawyers as CEOs

The May 2010 edition of the ABA Journal has as its cover story a feature on the nine lawyers who happen to be CEOs of Fortune 50 companies.  The article, I think, wants to argue that there's something systemic about this in the growth of regulation of businesses beyond the traditional home of lawyer-CEOs - financial, insurance, and pharmaceutical industries.  That answer seems too simple to me, and I'm inclined to think it's more the result of the evolution of the lawyer's in-house role as I've observed it over the thirty plus years that I've been a lawyer.  The respect afforded to the general counsel and to the in-house legal staff has grown steadily; I can remember the general disdain outside big firm lawyers had for their in-house counterparts (this was back in the Analog Age). 

Now top notch lawyers tend to be intimately involved with the business and the legal affairs of the company.  Indeed, I coached the lawyers I supervised was not to be passive about the business side of any management discussion but, whenever in a meeting, mentally to anticipate and predict the business decision.  The article quotes David Steiner, the CEO of Waste Management:  "I don't think these boards of directors are turning to lawyers because they are lawyers but because these lawyers also happen to be very good business people."  I think that's a lot closer to the truth.

A list of the lawyer CEOs in the Fortune 50 below the break.

Bank of America, Brian Moynihan (Notre Dame)
Kroger, David Dillon (SMU)
Home Depot, Frank Blake (Columbia)
State Farm, Edward Rust, Jr. (SMU)
WellPoint, Angela Braly (SMU)
MetLife, C. Robert Hendrikson (Emory)
Goldman Sachs, Lloyd Blankfein (Harvard)
Pfizer, Jeffrey Kindler (Harvard)
Sears Holdings, W. Bruce Johnson (Duke)
[Source:  ABA Journal, May 2010, p. 35]

Posted by Jeff Lipshaw on May 18, 2010 at 05:03 PM in Corporate | Permalink | Comments (0) | TrackBack

Tuesday, May 11, 2010

A Corporate Insider's View of Political Funding: A Response to Katrina

I started to write a comment in response to Katrina's question in the preceding post, and it began to take on a life of its own (possibly because I am now into full-fledged grading procrastination mode, and taking a break after doing a dozen or so exams).  I'll also take the bait.

Katrina's question is about the strategy/tactic of using shareholder proposals to affect the ability of corporations to involve themselves in the political process following Citizens United.  I want to offer a corporate insider's somewhat "yawn" view of the whole issue (not Katrina's post, which is very interesting).  

First, as to the shareholder proposal strategy.  There's little doubt this is always going to be a matter of a precatory proposal, at least under Delaware law, because the decision whether or not to contribute politically will be a matter wholly within the board's purview under Del. GCL §141(a).  As to the filing of a precatory shareholder proposal in the proxy, I don't think the "relevance" exception would permit exclusion of the proposal, which is designed to keep "tail of the dog" business issues out of the proxy statement (e.g., if General Electric has a $1,000,000 business in Burundi, it's simply too dinky for this much effort).  This proposal indeed goes to an overall corporate operational issue.  If a corporation really wanted to exclude the proposal, the most likely candidate in 14a-8 is the "ordinary business operations" exclusion.  But (a) I don't think the SEC would agree that a proposal going to a significant policy issue like this would be within the scope of the exclusion, and (b) I don't think most companies would even bother trying to exclude it rather than addressing it on the merits.

No, the real issue here is the appropriate of the proposal on the merits, and were I still the GC of a public corporation, I'd be writing a response encouraging the shareholders to reject even the precatory proposal as inimical to the best interests of the shareholders.  Citizens United didn't change the ability of corporations to involve themselves in the political process; it simply changed the directness of the funding.  Corporations have long been able to organize and support PACs, and to direct PAC money to candidates whose views the corporation sees as being in the best interest of the shareholders.  As long as the Supreme Court has held that it's legal for corporations to fund political interests under the First Amendment, no rational corporation ought to adopt a blanket policy that ties one arm behind its back, so long as others are able to channel their entrepreneurial efforts (business or social) into strategic political moves ultimately designed to obtain competitive or social advantage. (Compare on the other hand bribery to foreign officials that is illegal under the Foreign Corrupt Practices Act.  U.S. corporations simply cannot respond in kind even if it puts them at a competitive disadvantage to companies domiciled in countries without such restrictions.)

Moreover, the "yawn" comes from an insider's perspective that understands just how much the spending of money for any purpose inside a corporation is a zero-sum game.  Even under the PAC rules, companies could do all sorts of things to encourage employee PAC contributions, including social events, raffles, making charitable donations to non-political causes in exchange for PAC contributions (I'm pretty sure on this one, but it's been a while.)  Nor did anything restrict the amount of money that companies could spend on lobbying efforts, as long as the lobbying efforts were appropriately registered and otherwise transparent.  And in a number of states (e.g. Indiana), there were no restrictions on corporate contributions directly to candidates.  Nevertheless, as far as I know, no corporation interested in producing returns to shareholders, just for the sake of global hegemony or some such, ever adopted for political influence what the former chairman of IBM once said about his law department:  "Every year I give them an unlimited budget and every year they exceed it."  (See also commenter Ron's comments after Katrina's post, which make sense to me.)

Finally, at the end of the day, it's a political issue.  As long as the source of funds in a campaign is transparent, a candidate will be accountable for his or her acceptance of the funds.  If the candidate appears to be beholden to corporate interests, other candidates or interest groups point that out, and the voters don't care, they'll get exactly the government they deserve.  And I'm unpersuaded that corporate funding will be so endemic as to crowd everyone else out of the process - Obama's micro-donation campaign as Exhibit A.

Posted by Jeff Lipshaw on May 11, 2010 at 09:54 AM in Corporate | Permalink | Comments (2) | TrackBack

Monday, May 10, 2010

Wise (and Nuanced) Advice on Corporate Governance

The problem with nuance is that it is boring.  It's far more exciting to hop on the availability heuristic (prediction of the frequency or prevalence of an event or characteristic based on how easily examples can be brought to mind, not the actual data) bandwagon, particularly when the targets are well-paid, like corporate executives (full disclosure:  I was one, so take this appeal to wishy-washiness FWIW).  Indeed, I think I could make an argument that the availability heuristic is the primary driver of social and political discourse today:  see, well, every cable news outlet.  My own heuristic for wisdom tends to be some acknowledgment of nuance or counter-intuitive position:  such as when a conservative acknowledges some merit in a liberal position or vice-versa (in academia, it's where the author says, "to be sure...")

So l liked the "hey, it's not so bad, but it could be better" view of corporate governance today in the Wall Street Journal, coming from John J. Brennan, the chairman emeritus of Vanguard, as he describes it, "one of the largest index fund providers in the world" and therefore "at a minimum, a 2% owner of just about every public company in the United States."  Moreover, Vanguard views itself as a long-term holder, not a day- or even quarterly- trader, which I think is important.  I've made the point before that making universal pronouncements (or rules for that matter) based on the pathologies of the worst examples of corporate leadership, even if there are 100 examples, is operating on the availability heuristic, given that there are 9,000 publicly-traded companies (I'm pretty sure that's about right) in the U.S. alone.  Brennan observes from his broad perspective that there's been a steady progress in board performance over the last twenty-five years, but nevertheless offers a list of conceptual suggestions for additional improvement:  focus on the directors' roles as stewards of shareholders who really don't want to be involved in the management of the company; collaborative rather than confrontational relationships between management and shareholders; and self-reflection and self-evaluation that goes beyond current stock price and earnings to matters such as succession planning, strategy, and big picture goals.

Brennan offers a number of concrete suggestions as well, one of which I like a lot.  He suggests that every director of a public company should hold a minimum amount of equity in the company equivalent to a five times multiple of board pay.  The problem, which he recognizes, is that making directors buy their way onto boards would mean that only very wealthy people would serve because the purchase of the shares would not be a significant percentage of the director's net worth.  Indeed, I'd question the business savvy of somebody who bought her way onto a board by violating basic concepts of diversifying one's own holdings!  Brennan proposes, and I concur:  pay directors solely in equity (I would amend this to equity and enough cash to pay the taxes on the equity) until they've reached the threshold.  I don't see it writ in stone anywhere that directors, who ought to be compensated, should get cash for their work.

Brennan's observations are consistent with my own trafficking in the availability heuristic (and, hence, as subject to revision by the data as the opposite view):  what I've seen personally is that "cultural change [from insider to shareholder focus] has been driven by board members themselves."  I also think he's correct in believing that that leading directors and leading boards changing the culture of corporate governance is likely to be more effective and more permanent than regulation or legislation.

Posted by Jeff Lipshaw on May 10, 2010 at 08:47 AM in Corporate | Permalink | Comments (0) | TrackBack

Wednesday, May 05, 2010

Emory Transactional Skills Conference - Reminder!

Just a quick reminder that Emory Law School's conference, Transactional Education: What’s Next?, is being held on June 4 and June 5.  Additional information is available by following the link or contacting Edna Patterson at (404) 727-6506 or [email protected]

Posted by Jeff Lipshaw on May 5, 2010 at 04:12 PM in Corporate | Permalink | Comments (0) | TrackBack

Friday, April 02, 2010

"Hot News" Misappropriation: Implications for Bloggers? for Bloomberg News?

What happens when the interests of newsgatherers and news aggregators collide?  That was the issue before District Court Judge Denise Cote last month in Barclays Capital Inc. v. (S.D.N.Y., 3/18/10), and the opinion in the case arguably has negative (dare I say ominous?) implications for bloggers and for anyone who republishes truthful information about a matter of public concern, even if that information has already leaked into the public domain.

The plaintiffs in the case were the financial services firms Barclays Capital, Merrill Lynch, and Morgan Stanley.  They sued (Fly) for misappropriation and copyright infringement for redistributing their stock analysts' investment recommendations "through unauthorized channels of electronic distribution."  Fly is an Internet subscription service that aggregates and distributes "relevant, market-moving financial news and information."  Fly often obtained research reports and recommendations via leaks from plaintiffs' employees or clients.  Fly would then quickly distribute the recommendations before the New York Stock Exchange opened, thereby undercutting the plaintiffs' abilities to profit from their reports.

After a bench trial, District Judge Cote entered judgment against Fly for copyright infringement, and awarded statutory damages, a permanent injunction against direct copying and republication of the reports, and attorneys' fees for the portion of the litigation expenses associated with pursuing the copyright infringement claim.  She also held that Fly had engaged in "hot-news misappropriation" when it redistributed the recommendations from the plaintiffs firms' investment reports before the opening of the New York Stock Exchange and crafted a "time-delay" injunction requiring Fly to delay future distributions for a specified period after the firms released their reports to remedy the problem.[Full details below.]

The theory of "hot news" misappropriation stems from International News Service v. Associated Press, 248 U.S. 215 (1918), in which the Supreme Court held, under federal common law, that "hot" news is "quasi-property."  That case involved a claim by the Associated Press against a competing news service that was obtaining and then redistributing on the West Coast AP battlefront news releases during World War I.  The Court's decision reflects the notion that "time is property", or as my colleague Michael Wolf puts it, the decision protects the "money value of time" as opposed to the "time value of money."  It also protects the "labor value" that AP invested in newsgathering, at least for a limited time.  The "hot news" misappropriation doctrine was criticized by no lesser lights than Justice Brandeis and later Judge Learned Hand. In fact, Justice Brandeis wrote in dissent in INS v. AP that "the general rule of law is that the noblest of human productions--knowledge, truths ascertained, conceptions,and ideas--become, after voluntary communication to others, free as the air to common use."  Despite the pedigree of its critics, the hot news misappropriation tort nonetheless caught on.

Indeed, Judge Cote relied on a Second Circuit decision, National Basketball Ass'n v. Motorola, Inc., 105 F.3d 841 (2d Cir. 1997), to define the contours of the tort.  There, the NBA sued the maker of a hand-held pager that provided real-time information about basketball games.  The Second Circuit held that a "narrow" hot news misappropriation claim could survive preemption by the federal Copyright Act when "extra elements" were present.  The extra elements are:  "(i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendants use of the information constitutes free riding on plaintiff's efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened."

Applying this test, Judge Cote held that Fly had misappropriated the research reports of the financial services firms when it distributed them to its subscribers before the opening of the New York Stock Exchange.  Judge Cote wrote:  "Fly's core business is its free-riding off the sustained, costly efforts by the Firms and other investment institutions to generate equity research that is highly valued by investors.  Fly does no equity research of its own, nor does it undertake any original reporting or analysis . . . [Fly's] only cost is the cost of locating and lifting the Recommendations and then entering a few keystrokes into its newsfeed software. Although Fly does attribute each of the Recommendations to its originating firm, if anything, the attributions underscore its pilfering." 

Alarmingly, Judge Cote absolutely rejected the argument that Fly had a right to redistribute truthful information that had already made its way into the public domain.  "[I]t is not a defense to misappropriation that a Recommendation is already in the public domain by the time Fly reports it."  The judge found it of no moment that the "actors in the marketplace repeat news of Recommendations to their friends and colleagues, such that the word inevitably gets out.  Rather, it is that Fly is exploiting its self-described 'hefty relationships with people in the know' to gather information from the rumor mill and run a profitable business dedicated, in large part, to systematically gathering and selling the Firms' Recommendations to investors."  

Judge Cote also found that the plaintiffs were in direct competition with Fly even though they were not themselves in the news business.  As to the final factor of the NBA test--whether the plaintiffs would have a reduced incentive to invest in research--Judge Cote found that the plaintiffs' investments in research had diminished because Fly and other news services had published their leaked recommendations.  Significantly, and quite interestingly, Judge Cote found that the "unauthorized redistribution of [analyst] Recommendations"  was a "major contributor to the decline in resources that each Firm devotes to equity research."  (emphasis mine) To be fair, the judge did concede that there were other factors in play during this time that might have affected analyst staff and budgets.  She observes, for example, that "[s]ince 2008, the world has experienced an economic cataclysm."  Still, it is richly ironic that these firms are concerned about protecting the "integrity" of their equity research.

In crafting a remedy for Fly's misappropriation, Judge Cote took into account "public policy considerations" but made no mention of the First Amendment.  Specifically, she observed that the production of equity research "is a valuable social good" that will be "underproduced unless the Firms can achieve an economic return on their investment."  She also noted that there is an "important" public interest in "'unrestrained access to information', particularly when the information is heavily fact-based."  She therefore enjoined Fly from unauthorized redistribution of Plaintiffs' research recommendations released when the market is closed "until one half-hour after the opening of the New York Stock Exchange or 10 a.m., whichever is later."  She enjoined Fly from publishing recommendations issued when the market is open until two hours after their release by the Plaintiffs. 

From a media lawyer's perspective, there are compelling interests on both sides of the case.  On one hand,the newsgatherers and content generators wish to turn a profit (and stay in business), and their ability to do so is threatened by online news aggregators.  On the other, this case involves a prior restraint preventing republication of newsworthy information, even if that information has already entered the public domain.  It also involves the imposition of tort liability for the publication of lawfully obtained truthful information.  Given this conflict, surely the district judge should have at least considered how to reconcile her decision with First Amendment cases like Near v. Minnesota, Florida Star v BJF, and Bartnicki v. Vopper.  Fly evidently plans to appeal the district court decision, so perhaps the appellate court will do a better job of reconciling the conflicts present in this case. 

Posted by Lyrissa Lidsky on April 2, 2010 at 04:18 PM in Blogging, Constitutional thoughts, Corporate, First Amendment, Information and Technology, Intellectual Property, Torts, Web/Tech | Permalink | Comments (3) | TrackBack

Tuesday, March 30, 2010

Carney's Firing: The Other Side of the Story?

Larry Ribstein and the good Professor Bainbridge are bemoaning last week's firing of John Carney from Business Insider.  Ribstein, Bainbridge and others are all citing this story by Foster Kamer as to the reason for the firing:

Blodget wanted more sensational, pageview-grabbing posts and click-friendly features like galleries, while Carney wanted to put forth breaking news scoops that told a longer narrative. It was also speculated that Carney, one of the highest paid members on the Business Insider staff, wasn't bringing the traffic numbers to sufficiently satisfy Henry Blodget, given his high profile within the financial reporting world, but that Clusterstock's homepage had the highest traffic of all the verticals at Business Insider during Carney's tenure, and that his own stories generated "tons of [unique visitors]."

This version of the story is obviously highly sympathetic to Carney; he wanted "breaking news scoops that told a longer narrative," while Blodget wanted "more sensational, pageview-grabbing posts."  But from my perspective, Carney's problem was that "longer narrative": he consistently tried to bend news stories around to an extremely conservative/libertarian perspective.  The latest example is this bit of regulatory nihilism: "Sorry America, The Latest Round Of Financial Regulation Reform Won’t Fix Anything."  And frankly, that post seems rather restrained when compared with "Lying Government Humiliated In The Very First Backdating Conviction" and "How The Government Used The CRA To Push Crappy Lending Standards."

Just to be clear, I'm not saying Carney should have been fired.  And I'm not saying he won't come back and be very popular at another site -- he probably will.  I'm just pointing out that some readers may have been turned off by the overly-politicized message, as commenters at Felix Salmon opined:

Even with Carney’s thousand word essays on Lehman, I found most of what he wrote to be knee jerk, ad hoc advocacy that was “shallow and vapid.” Clusterstock may be less of a resource without him, but that doesn’t necessarily imply that it was much of a resource with him. I can’t imagine where Blodget is headed if Carney was his upside connection to quality journalism…


I agree – I stopped reading it because of Carney and Weisenthal, not the reverse. They have a rather annoying tendency to exhibit knee-jerk political views which were more panic-driven than thoughtful. If I want that, I can go to FoxNews, not a blog that’s supposed to intelligently digest financial news.

UPDATE: Professor Bainbridge responds: "He's the John Stossel of financial news and that's a very good thing."

Posted by Matt Bodie on March 30, 2010 at 12:52 PM in Blogging, Corporate | Permalink | Comments (0) | TrackBack

Thursday, January 21, 2010

Two small thoughts on Citizens United

Just wanted to add these minor notes to the growing agglomeration of commentary:

  1. For a terrific take on the legitimate uses of corporate money to advocate for policy positions, see Jill Fisch's How Do Corporations Play Politics?: The FedEx Story, 58 VAND. L. REV. 1495 (2005).  Fisch does a great job of showing how corporations need to play politics in order to manage their businesses.  I think the same applies to unions, as I argued here.
  2. I predict Citizens United will lead to a new round of shareholder proposals designed to limit corporate political spending.  Shareholders -- particularly institutional shareholders -- will want to limit the money that flows out through theoretically "non-business-related" expenses. 

These two points are semi-contradictory.  Here's an effort to reconcile them: those companies whose contributions seem more ideological (more populist? more conservative?) will find themselves targeted by institutional shareholders, whereas those who play both sides of the street, in a low-key manner, will probably not be.

Posted by Matt Bodie on January 21, 2010 at 06:13 PM in Corporate | Permalink | Comments (7) | TrackBack

Friday, January 08, 2010

Apple, Google, and Nexus One: The Role of Eric Schmidt

If you stopped reading fake steve jobs when he went on hiatus as Dan Lyons for a while, it's time to go back.  Perhaps "Operation Chokehold" was not as successful as fsj had hoped, but it did point up AT&T's weaknesses with its network.  There was even some interesting discussion of shareholders vs. customers -- perhaps fodder for Vic Fleischer's consumer primacy.

Now fsj is all over the Nexus One, Google's attempt to eat into the cell phone (and the iPhone) market.  You may remember the fanfare when Eric Schmidt, Google's Chairman/CEO, joined the Apple board. He even worked for free!  Well, he's no longer on the board -- he resigned in August.  At the time, the real Steve Jobs said in a press release: "Unfortunately, as Google enters more of Apple’s core businesses, with Android and now Chrome OS, Eric’s effectiveness as an Apple Board member will be significantly diminished, since he will have to recuse himself from even larger portions of our meetings due to potential conflicts of interest."

At the time of the resignation, there was some speculation that "[t]he two companies may genuinely dislike each other now." I would say that's a yes.  FSJ has a great (hypothetical) conversation between Jobs and Schmidt in the aftermath of N-O:

I’m like, Dude, do you not remember all that stuff you told me about not making a phone, back when you were still not recusing yourself from iPhone discussions during board meetings? You swore, and I mean you looked me in the eye and swore, that you would never make a phone. He says, We’re not making a phone. HTC is making it.

I told him if he wanted to use that line on the retards in the hackery that’s one thing but please don’t insult me with it. He goes, Okay, it’s our phone.

So I guess my underlying legal question is: any possibility that Apple has claims against Schmidt?  I would assume not, since this stuff had to have been lawyered up so extensively on both sides that there's no room for illegality.  Still, it does seem fairly -- um, unusual -- that two competitors would have been working together so closely.  Or does this just mean that boards are a lot less important than corporate law makes them out to be?

Posted by Matt Bodie on January 8, 2010 at 11:36 AM in Corporate | Permalink | Comments (3) | TrackBack

Friday, December 18, 2009

Tiger Woods and the Wall Street Journal

There's a fascinating story in the WSJ about efforts by Tiger Woods to hide past indiscretions.  However, this paragraph within the story reminded me that Tiger is not the only one who made a deal with the tabloids:

The woman purportedly photographed with Mr. Woods in 2007, a Florida restaurant employee named Mindy Lawton—along with at least one of her family members—was recently promised an undisclosed sum in return for telling her story exclusively to News of the World, a London-based tabloid owned by News Corp., which also owns The Wall Street Journal. The agreement blocks her from discussing her alleged relationship until after Dec. 20—two weeks after it was first published in the U.K., according to people familiar with the matter.

I found it a little odd that News of the World refused to lend out a source to a sibling news organization.  Seems to show a lack of synergy -- but perhaps that's a good thing.

Posted by Matt Bodie on December 18, 2009 at 11:14 AM in Corporate, Sports | Permalink | Comments (1) | TrackBack

Wednesday, December 16, 2009

Mack Brown's $2 million raise

Having complained about Jim Calhoun's $1.6 million salary, I think I'm obligated to take issue with a raise that dwarfs Calhoun's entire salary.  Mack Brown is now making $5.1 million a year as a football coach through the year 2016 (or until the next raise).  A resolution of the UT Faculty Council said the deal was "unseemly and inappropriate." This resolution has drawn its own share of criticism.  The UT president pointed out that the athletic program, under Brown, has had no subsidies or deficits and has channeled $6.6 million into academic programs in recent years.  This is the same version of the argument used to support Calhoun's salary -- namely, the athletic programs more than pay for themselves, so they can pay their people in the millions of dollars.  Just today I heard ESPN personalities Mike Greenberg & Tony Kornheiser accuse the UT professors ("eggheads," in Kornheiser's parlance) of being completely wrong on the economics.

What the commentators are missing -- or, at least not talking about -- is that the "market" for college coaches is a grossly distorted one.  There is a lot of money floating around college sports -- primarily through TV contracts, but also ticket sales, team endorsements, licensing, and advertising.  But that money has nowhere to go, other than to the schools and the coaches.  The NCAA places strict limits on what players can get from their university -- only a scholarship.  And NBA and NFL rules essentially require that players spend time in college before entering the pros.  So what we have are athletes who must spend time in college to pursue their profession but cannot get paid for it.  So the money goes instead to the coaches.

If you have any doubt about this, just look at baseball.  Baseball has a thriving minor league system; there is college baseball, but you need not go to college to get into the pros.  How much do college baseball coaches get? This article says they make about one-sixth what football coaches make.  This one (from 2007) says that the highest paid college baseball coach makes $600,000.  Or look at pro football.  Only four NFL coaches made more than Mack Brown last year (according to this estimation).  Thirteen made less than $3 million; five made less than his raise. 

If we are going to keep the system we have, let's be honest about it.  We now take talented young athletes and use their skills to fund our universities.  The coaches help facilitate this -- and they are taking more and more off the top.  There are reasons to support this system, but saying that coaches "deserve" this money because of a distorted market is not one of them.

Posted by Matt Bodie on December 16, 2009 at 12:45 AM in Corporate, Sports | Permalink | Comments (10) | TrackBack

Friday, December 04, 2009

Amen, brother

Those who generally refrain from strong opinionating have more force when they step into that role for a moment.  David Zaring provides one such example.

Posted by Matt Bodie on December 4, 2009 at 11:25 AM in Corporate | Permalink | Comments (0) | TrackBack

Monday, October 26, 2009

The Truth on the Merger Guidelines

Our friends over at the Truth on the Market have organized an online symposium on the recent Department of Justice and Federal Trade Commission announcement that they will solicit public comment and hold joint workshops on the Horizontal Merger Guidelines (”HMG”).  The symposium will run today and tomorrow, and the line-up includes a bunch of terrific folks, including Joe Farrell from the FTC.

Posted by Matt Bodie on October 26, 2009 at 12:42 PM in Corporate | Permalink | Comments (1) | TrackBack

Tuesday, September 15, 2009

Judge Rakoff and Judicial Meddling

Judge Jed Rakoff (SDNY) rejected the settlement proposed by the SEC and the Bank of America for allegations that the Bank of America lied to shareholders during its merger with Merrill Lynch.  Specifically, the SEC claimed that Bank of America falsely told shareholders that Merrill would not be permitted to pay its executives year-end bonuses when, in fact, BoA had given Merrill approval to pay up to $5.8 billion in bonuses.  Here is the key graf:

In other words, the parties were proposing that the management of Bank of America -- having allegedly hidden from the Bank's shareholders that as much as $5.8 billion of their money would be given as bonuses to the executives of Merrill who had driven the company nearly into bankruptcy -- would now settle the legal consequences of their lying by paying the S.E.C. $33 million more of their shareholders' money.

This could be characterized as a Howard Beale moment for Judge Rakoff -- a cri de couer against the system.  After all, his criticism could be leveled against every SEC settlement in which a corporation (opposed to individuals) pays the fine.  Seasoned observer David Zaring reacts with outrage of his own against officious judicial meddling.  But instead of viewing this as grandstanding or obstreperousness, I think it's a useful opportunity to reconsider the basics of securities regulation.  After all, it does seem somewhat absurd to have the "victims of the violation pay an additional penalty for their own victimization."  Perhaps Judge Rakoff's opinion will prompt a reexamination of this basic facet of the system.

Judge Rakoff's opinion is a brief but wide-ranging discussion of executive compensation, corporate wrongdoing, the TARP bailout (see n.1), and the role of the SEC.  Judge Rakoff wants individual accountability, and he thinks the settlement is an effort to evade it.  It remains to be seen whether this is merely an interesting blip or a catalyst for further action.  But I hope it's more than merely some extra work for the SEC.

Posted by Matt Bodie on September 15, 2009 at 12:46 AM in Corporate | Permalink | Comments (3) | TrackBack

Saturday, August 15, 2009

Predicting Fraud

Here's an interesting tidbit from this weekend's New York Times magazine profile of Bruce Bueno de Mesquita, a political scientist who uses game theory to predict political and corporate outcomes.  The Times reports that Bueno de Mesquita offered to use his predictive software for Arthur Andersen 

"to predict which of Arthur Andersen's clients - including, at the time, Enron - were likely to engage in financial fraud.  But the firm's lawyers, Bueno de Mesquita says, didn't want to use the tool for fear it would put them in awkward legal positions."  

No kidding.  The Times then quotes a former Arthur Andersen partner: "'Had I been able to convince the firm' to use the model... I think that Andersen would be alive today."

Posted by Verity Winship on August 15, 2009 at 09:03 AM in Corporate, Current Affairs | Permalink | Comments (3) | TrackBack

Wednesday, August 12, 2009

Recouping Bonuses From Innocent Executives

This post, the second in a series about recouping executive compensation, looks at the SEC's recent action to recoup bonuses from an executive who was not charged with misconduct.  This SEC action is the first to use the SOX 304 clawback provision this freestanding way.  The story has started to make the rounds of the blogs and op eds and many (Ribstein, WSJ) but not all (Conglomerate) criticize the move for penalizing innocent executives.  I explore two slightly different questions after the jump: How much does the same debate apply to the legislation implementing TARP, which also has a clawback provision? and How does agency law fit in?

So, first, how much do concerns about "innocent executives" apply to the legislation implementing TARP, which also has a clawback provision?  The TARP-related provision also does not seem to require that the executive be responsible for the materially inaccurate earnings statements, etc., that trigger the clawback power - the aspect that seems to have triggered the most outrage in the blogs and op eds about SOX 304.  To that extent, the debate may be relevant.  

But the implementation strikes me as quite different.  The TARP-related clawback provision includes this language:

"The Secretary shall require that the financial institution meet appropriate standards for executive compensation and corporate governance" including "a provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate." EESA 111

"A provision for the recovery" is a bit of an awkward construction, but I read it as pushing TARP recipients to include clawback provisions in employment policies or individual employment contracts and enforce it that way.  (Those of you deep in the weeds of EESA can correct me.)  So the enforcement might include arguments about whether the company had provisions in place or the employee's contractual rights, as much as statutory interpretation and institutional powers.

Another question I have is how much holding the CEO or CFO responsible is already reached by agency law?  After all, respondeat superior already reaches "innocent executives" because it doesn't require personal involvement in the conduct.  Maybe the simple answer is that the CEO isn't the employer, so that there is no agency relationship.  But at the very least, we should be used to mechanisms that penalize because of a person's position or relationship.  The question in the SEC case is then whether it is good policy to enforce this way or, as Usha Rodrigues points out on the Glom, whether the SEC can/should change interpretation midstream.

Posted by Verity Winship on August 12, 2009 at 09:05 AM in Corporate, Current Affairs | Permalink | Comments (0) | TrackBack

Tuesday, August 11, 2009

Recouping Executive Bonuses

Executive bonuses are in the news again, with the SEC complaint against Bank of America for allowing Merrill Lynch to pay up to $5.8 billion in discretionary bonuses, despite proxy statements suggesting that no bonuses would be paid.  Bank of America and the SEC agreed to a settlement, but these settlements are subject to judicial approval for being "fair, reasonable and adequate."  Judge Rakoff of the SDNY refused to approve it without a hearing, held yesterday, in which he called for more information.  A few thoughts:

First, the coverage seems to focus on whether TARP money was used to pay the bonuses, and outrage because $33 million seems small in comparison to the billions paid out.  But we should also be asking the usual question about corporate penalties: Where is that $33 million coming from and where is it going?  Is the penalty being paid with TARP funds?  (Is there any way to distinguish the source of money?)  Who gets the money?  In other words, maybe the cash is going from taxpayers to the Treasury, minus administrative costs.  Or the penalty could be distributed to injured shareholders through a Fair Fund.  It complicates the "bigger is better" account.   

Second, the NY Times reported that "Judge Rakoff said that he might hold another hearing to consider evidence of whether the bonuses were needed" and that "he might want to know if Merrill's management studied how many of the roughly 39,000 bonus recipients would have left had they not received their payouts."  This case may very well be part of an SEC bid to be relevant in the debates over executive pay and TARP, but this case is still about disclosure and it's not clear to me that the need for these bonuses is relevant to that.

Finally, we shouldn't be so surprised at Judge Rakoff's active role here.  He is no stranger to reviewing/shaping high profile SEC settlements - see WorldCom - and is also the co-author of a book on corporate sentencing guidelines, which raise some of the same issues as SEC corporate penalties.

Posted by Verity Winship on August 11, 2009 at 09:47 AM in Corporate, Current Affairs | Permalink | Comments (0) | TrackBack

Tuesday, July 21, 2009

Monitoring External and Internal Corporate Security

The WSJ law blog has a new story up about a corporate security scandal at Deutsche Bank, wherein the Bank's private detectives engaged in a number of acts that, in retrospect, sound either loopy (sending a dead microphone hidden in flowers to the COO to see if he would notice it) or more serious (spying on a board member suspected of leaking information to a journalist).  Similar to the Hewlett Packard pretexting scandal, which I discuss here, Deutsche Bank relied on private detectives to do much of its "security work" (although the head of internal corporate security has reportedly left the company in light of the scandal).  As was the case with HP, the Deutsche Bank scandal demonstrates some of the problems with corporate -- private -- policing.  The company's internal security apparatus is asked to investigate a problem and then relies on external investigators to do its dirty work.  As a result, the company has to monitor both its internal security and external security to ensure that both ethical and legal norms are met.  This can be extremely difficult when some of the company executives are unfamiliar (as was the case in the HP scenario) with the techniques that the security professionals are using.  

In any event, this all occurred in the past, between 2001-2007, when corporations - and corporate security departments -- had more money to spend. Now, in a world of vastly reduced resources, corporate security (along with corporate compliance) may well get the short shrift.  In this case, reduced resources promises mixed consequences.  On one hand, companies may have fewer resources to identify internal theft and fraud.  On the other hand, it may spell an end to the corporate "surveillance" measures that are, at best, unethical and at worst, plainly illegal.        

Posted by Miriam Baer on July 21, 2009 at 12:19 PM in Corporate | Permalink | Comments (0) | TrackBack

Friday, July 03, 2009

Thinking Like an Entrepreneur or a Lawyer?

If you are interested in the intersection of entrepreneurship and the law, the Kauffman Foundation, the leading sponsor of entrepreneurship development in the country, has funded an Entrepreneurship Law resource on its website,  This includes teaching materials.  (I think I contributed something, but I just registered myself so I'm not sure.)

For many of the same reasons expressed in my last post (and based on a fair amount of experience in the area), my reaction to "entrepreneurship law" is something like my reaction to my own travails as an athlete, which is that I think too much (this is known as "paralysis by analysis").  For a short sample of my contrarian view on this subject, see Why the Law of Entrepreneurship Barely Matters, the gist of which can be boiled down to this excerpt:

The entrepreneur . . . sees the world as a moveable feast of phenomena, posing danger and opportunity to be seized and exploited, and choices to be made, over and over again. One entrepreneurship scholar sees the entrepreneur's mode of reasoning as effectual rather than causal:  while causal reasoning posits a goal and seeks means to the goal, effectual reasoning "begins with a given set of means and allows goals to emerge contingently over time from the varied imagination and diverse aspirations of the founders and the people they interact with." 

The essence of thinking like a lawyer is causal reasoning, and not surprisingly, lawyers and entrepreneurs tend to be ships passing in the night.  (For a far more scathing assessment of the constricted scientific Sarasvathy paradigm - in a Kuhnian sense - of legal academia, see Pierre Schlag's essay on spam jurisprudence and air law, and Richard Posner's bemused but ultimately mild concurrence.)

The scholar referred to in the block quote is Saras Sarasvathy (pictured, left), who is at the Darden School of Business at the University of Virginia, and who established her chops working with Nobel Prize winner Herbert Simon (he of behavioral economics fame).  I had the pleasure of chatting with Professor Sarasvathy for a few minutes when she was in Boston last December, and I was delighted to find a couple days ago that a site to which I subscribe, Big Think, had a series of online interviews with her.  Enjoy!

Posted by Jeff Lipshaw on July 3, 2009 at 08:37 AM in Corporate | Permalink | Comments (0) | TrackBack

Thursday, July 02, 2009

Complexity, Judgment, and the Subprime Crisis - The Hedgehog's View

At the end of April, Dave Hoffman and two of his colleagues at Temple, Jonathan Lipson and Peter Huang, organized a fascinating day-long colloquium on issues of complexity arising in the current financial crisis.  Among other presentations, Barry Schwartz from Swarthmore gave a talk on "the paradox of choice" (i.e., more choice, or more complex choice, doesn't necessarily make consumers happier), and Joe Grundfest gave a luncheon keynote.  One of the questions that kept occurring to me was the context of the complexity issue - what exactly were we trying to fix, if anything?  My analogy was this:  if law is a "science," and something about the financial crisis (whether complexity or something else) reflects a 180px-Igel01 disease, then what is the relationship between what we know about the disease and the regulatory medicine we would want to prescribe?  I liken financial boom-and-bust to bipolar disorder - is there a regulatory equivalent of lithium that we are assured will tamp down the peaks and valleys?  And even if there is, do we want to prescribe it?  Maybe we like the booms enough to bear the busts!  To keep the analogy going, there's a good chance Tchaikovsky and Van Gogh were bipolar - would we have their art if they had been medicated?

More on the hedgehog below the fold.

One of my most treasured Suffolk colleagues has suggested that I am a hedgehog, in the sense of the Greek saying (appropriated by Isaiah Berlin) that the fox has many clever ideas, but the hedgehog has one big one.  My big one (such as it is) is placing the canard "thinking like a lawyer" into the broader category of how people make sense of the world.  (This comes, I think, from spending so much of my professional life as a lawyer not surrounded by other lawyers.)  Nothing provokes this kind of reflection like great calamities, whether they are oceanic or financial tsunamis.  In a nutshell, the question is how we assess what happened against two very different kinds of "oughts":  (a) the normative "ought" of our sense of the way a just world should work, and (b) the descriptive "ought" that a scientist imagines when she comes up with a hypothesis of explanation that has yet to be borne out by experiment.  My working thesis is that thinking like a lawyer - somewhere between advocacy and truth-seeking - gets this all jumbled up.  What lawyers do mostly is look backwards and assess cause-and-effect in a particular way, and make implicit (and not necessary correct) assumptions about predicting the future from what happened in the past.  To put it otherwise, my hedgehog concern deals with difficulties in forward-looking judgment, namely, the difference between looking backward and assessing causation as a matter of attributing blame, and understanding what is going on as a descriptive matter sufficient to make a good forward-looking decision in real time under conditions of significant uncertainty. 

The result (how I spent my summer vacation) is The Epistemology of the Financial Crisis:  Complexity, Causation, Law, and Judgment, in which I've argued this is mostly an epistemological crisis - a crisis of faith in science and algorithm as against the ongoing irreducibility of judgment, whether our own or those to whom we delegate it.  In short, it's scary when we thought we had it nailed, and it turns out we don't know what we don't know.  (I apologize for the use of the word "epistemology" but I like it, despite the warning of a good friend that it's a signal of a high "crap factor.")  There's a little something for theorists of all kinds in there, including a critique of Michael Moore's new book Causation and Responsibility (the first extended treatment of causation in the law since Hart and Honore), Adrian Vermeule's Judging Under Uncertainty, and Richard Posner's A Failure of Capitalism

Posted by Jeff Lipshaw on July 2, 2009 at 07:51 AM in Article Spotlight, Corporate, Current Affairs, Legal Theory, Lipshaw | Permalink | Comments (4) | TrackBack

Wednesday, July 01, 2009

The Vacuous Private Law of Homeowners' Associations (Below the Fold) After Vacuous Reflections About My Vacuous Life

Here we are, back for the fourth summer stint on PrawfsBlawg.  It's hard to believe, when Dan first invited me to do this, in July, 2006, I was an outsider to the legal academy looking in (per Bob Uecker, "gosh, they're having fun in there.")  Also, Twitter was unknown.  Twitter has done a lot to focus my blogging, because, call me an old whatever, but I can't believe anybody gives two hoots about the mundane details of my life, whether by blog entry or tweet, something I wasn't considering back in 2006 while in a New Orleans carwash watching what looked like melted rainbow sherbet ooze all over my carSteve Bainbridge seems to be able to get away with food and wine, but he seems to know what he's talking about.  I try to maintain a connection to something legal (or, if not legal, funny). 

If I were inclined to vacuous reflections about life, however, I would extol the pleasures of not of litigating, but of home brewing beer, a subject touched upon in these parts recently.  My son, Matthew, and I are on our  third batch of the summer, having invested $100 in the basic tools of the trade.  Our first 43 bottles were an Irish stout recipe, which we named "Max and Annie's Jewish Stout," after our two dogs.  We've since moved on to "Max and Annie's Michigan Porcupine Pale Ale" (a Sierra Nevada Pale Ale recipe), and "Charlevoix Steam Beer," which is presently fermenting in the crawl space where it is cool.  Our plan is to lay down a carboy full of mead for a full year in a few weeks.  This is a stretch but the legal connection is that I can't post the labels, because I am positive at least the second two violate a whole raft of copyright and trademark rights.

But enough of me.  Let's go below the fold where YOU can hear me whine about the governance of homeowner's associations.

We spend the summers in Charlevoix, Michigan, where we bought a lot sixteen years ago, and built a house twelve years ago.  In Michigan, there is something called a "site condominium," which is basically another way of imposing regulations in a subdivision of free-standing homes, and that's what we have.  There are thirty-six lots, and common elements, which consist of two roads and landscaping, and a beach lot with a removable "Brock Dock" through which residents not on the lakeshore itself have access to the lake.  You own your own lot and house in fee simple absolute, but the lot is established pursuant to a master condominium deed, which contains the property rules, and which incorporates a set of recorded bylaws, which establish the five-person Board of Directors (classified board - two and three seat classes, elected for two years) and the architectual review board, empower the collection of assessments for the maintenance of the common elements, and set use restrictions such as no short-term leasing, no open garage doors, and no boats, trailers, RVs, etc. left in the driveways.

If you want to experience the thrills of corporate governance in a microcosm, do as I have done and be a member of the condominium association Board of Directors for going on fifteen years.  I would have resigned long ago, except that nobody is as anal about the record-keeping as I am, and so I've been the secretary (and now webmaster) for all these years.  The lesson I take from the experience, as a legal theorist, is the tenuous (vacuous?) relationship among (a) the actual private law of the association as reflected in its governing documents, (b) what people think their actual rights are, and (c) how, when it comes to asserting and defending one's interests as between the law and the lore (or custom), a foolish consistency is the hobgoblin of little minds (see Prawfs guest blogger Brian Tamanaha on Law as a Means to an End).   Take, for example, a matter of no small interest:  the ability to see the lake from your living room if you have a house that is not on the lakeshore.  There are local zoning rules that define setbacks, as well as an architectural review board within the condominium association, but it has been almost impossible to restrain the lakeshore residents from building setback to setback (i.e., very large homes on relatively small lots), so that the space between the houses is a mere sixty feet, filled with fast growing (and kind of ugly) white pines that the original developer planted at the lot lines to keep the place from looking like a landing strip.  But there is no legal right anywhere in the documentation that says you have a property right in your view of the lake.  The only way to control this is through community controls on landscaping (which doesn't help with the stuff that was here before) or an appreciation of the Prisoner's Dilemma we find ourselves living in, and the ensuing need to cooperate.  Nevertheless, I find myself educating a neighbor every year on the fact that there is no legal right to a "view corridor" as it has come to be known.  If there were, I would have already done something about the forest of scrubby white pines that block my view.

Then there is the question of the separation of ownership and management.  We just issued a rule to the effect that there were to be no permanent firepits built on the beach.  You can have fires, but you have to use a portable firepit (they exist), which means that you clean up after yourself, and there's no lingering hot embers for a kid to fall into.  My publication of this rule prompted the following "Berle and Means" response from a neighbor (otherwise, a very nice person - beware the pitfalls of the inference one draws from e-mail):  "Does the board act and make rules based on the good of the people that live here?"  

Well, I could go on, but there is shameless self-promotion yet to be written.

Posted by Jeff Lipshaw on July 1, 2009 at 11:19 AM in Corporate, Legal Theory, Lipshaw, Property | Permalink | Comments (5) | TrackBack

Tuesday, June 09, 2009

The Chrysler Bailout: Who Wins with Failure?

David Zaring offers up his as-always savvy analysis on the Supreme Court's grant of a stay in the Chrysler bailout.  Here are some quick thoughts:

  • Fiat can pull out if the deal is not wrapped up by June 15.  Would Fiat pull out?  It's unclear what has changed.  Perhaps the continuing toll of bankruptcy uncertainty would weaken Chrysler too much.  Or perhaps Fiat's having buyer's remorse.
  • It is assumed that the failure of this deal would be a blow to the Obama Administration.  But who wins and who loses, at this point, if the deal blows up now?  Ford and GM are better off without Chrysler around.  The Chrysler creditors would lose their deal and fall back into the morass of a liquidation.  This might chasten the GM creditors.  Moreover, the Obama administration would be able to say it had tried its hardest to save Chrysler without incurring the expense and risk of actually bailing out the company.  So perhaps the best thing for the administration would be a stay that gives Fiat an out.  Fiat walks away, the deal blows up, and the Supreme Court then dismisses the case as moot, at least until the GM bankrupcty is resolved.  And maybe those creditors get a bit more of a buyout -- just enough to persuade them not to appeal. This theory was influenced by Mickey Kaus, who wrote on Saturday: "You have to wonder if the Obama team knows the FIAT deal it promoted won't work, and arranged it simply as a way to delay the inevitable--while it actively avoided a merger that would foist Chrysler on GM, because GM does have at least a chance to survive after bankruptcy and doesn't need Chrysler's baggage. (Why make Chevy responsible for the Sebring?)" 
  • The big losers if the deal blows up would be Chrysler workers and management.  The shutdown of the Studebaker factory is widely regarded as a catalyst for the creation of ERISA.  Might the collapse of Chrysler, and its devastating impact on its employee and retiree health care coverage, serve as a catalyst for national health care reform?

Posted by Matt Bodie on June 9, 2009 at 04:06 AM in Corporate | Permalink | Comments (0) | TrackBack

Monday, June 01, 2009

The Chrysler bankruptcy case & Indiana's "takings" lawsuit

Last night, Bankruptcy Judge Arthur Gonzales approved the section 363 sale of Chrysler to Fiat. This morning, Judge Gonzales refused to transfer Indiana's constitutional claim against the deal to federal district court. Here's a question for the prawfs interested in takings: Is there any merit to the Indiana pension funds' claim that, by ignoring the absolute priority of secured creditors, the bankruptcy court has "taken" those creditors' security interest without just compensation in violation of the Fifth Amendment?

The claim has inspired the usual outrage or applause from the usual suspects: George Will praises Indiana's lawsuit as plucky opposition to Obama's confiscatory Leviathan, and the Daily Kos praises the Chrysler deal as a bold move to save rust belt industry. But suppose that, just for the heck of it, one gave the ideological hand-waving a rest and instead analyzed the legal merits of Indiana's claim: is there anything to it?

For what it is worth (not much, as I am no bankruptcy scholar), my first instinct is to agree with David Zaring's analysis: Since 1937, takings-based objections to bankruptcy dispositions are generally doomed. And rightly so: After all, the essential assumption of bankruptcy is that creditors, secured or otherwise, are going to lose property. The question of how much, in what order of priority, is a matter of policy for the discretion of policy-makers, not judges.

But here is one reason to pause: In the usual post-1937 bankruptcy case in which creditors raise takings claims, the federal government itself is not one of the creditors, no? The bankruptcy disposition, therefore, is the result of an impartial referees' arbitrating between rival claimants. After TARP's investment in Chrysler, this is no longer the case (right?) Should the analysis, therefore, be different and more rigorous, when the feds themselves or their proxies budge ahead of other creditors?

The classic analysis of this distinction is Joseph Sax's old article, Takings and the Police Power, 74 Yale L. J. 36 (1964), in which Sax distinguishes between exercises of the police power that enhance the government's own entrepreneurial enterprises and exercise of the police power that impartially arbitrate between rival private parties. The former should be regarded with more skepticism than the latter, according to Sax.

I do not automatically endorse the analogy between regulatory takings of real property and claims that security interests have been taken: I have not given the question enough thought. Nor do I suggest that TARP automatically puts the feds in the position of an interested party or that the actual 363 disposition constitutes self-interested action by the feds (whatever that means). But I have an uneasy feeling that Zaring's analysis might be missing Sax's distinction. When the rest of the creditors are arguably bought off with TARP funds and when the feds themselves retain an equity interest in the firm that results from a section 363 sale, then there is a sense in which the takings claim becomes a bit more powerful to my mind. Given that the statutory merits of this section 363 seem a bit shaky, I'd be interested in hearing a more informed person explain to me whether and to what extent Indiana's taking claim is bunk.

Posted by Rick Hills on June 1, 2009 at 10:22 AM in Corporate | Permalink | Comments (1) | TrackBack

Tuesday, April 28, 2009

Online Antitrust Symposium at Truth on the Market

The folks over at the Truth are having a three-day online symposium entitled: "Section 2 and the Section 2 Report: Perspectives and Evidence."  Here's the relevant info:

The proceedings will begin on May 4 and continue officially through May 6.  We’ve organized the symposium across the three days so that each day will have a different emphasis.  The first day, Monday the 4th, we’ll discuss some introductory themes and set the context with some more-broadly-oriented perspectives on the Section 2 Report, including the enforcement perspective from inside the antitrust agencies and economists’ views, among others.  The second day, Tuesday the 5th, we’ll devote to the general Section 2 standards debate.  And we’ll finish up on Wednesday the 6th focusing on specific substantive areas, tracking the Section 2 Report and its substantive content in greater depth and detail.

The participants are: Alden Abbott, FTC; Tim Brennan, University of Maryland; Dan Crane, Cardozo/Michigan Law; David Evans, LECG/UCL/Chicago Law; Herbert Hovenkamp, Iowa Law; Keith Hylton, BU Law; Bruce Kobayashi, George Mason Law; William Kolasky, WilmerHale/former DAAG; Thom Lambert, Missouri Law/Truth on the Market; Tad Lipsky, Latham & Watkins/former DAAG; Geoffrey Manne, LECG/Lewis & Clark Law/Truth on the Market; Howard Marvel, Ohio State; Bill Page, Florida Law; Michael Salinger, BU/LECG/former Director, Bureau of Economics, FTC; and Josh Wright, George Mason Law/former Scholar-in-Residence, FTC/Truth on the Market. 

It's a terrific group of participants -- congrats to Geoff and Josh on putting together a great event.

Posted by Matt Bodie on April 28, 2009 at 05:14 PM in Corporate | Permalink | Comments (0) | TrackBack

Tuesday, March 31, 2009

Lyondell Chemical Co. v. Ryan and Delaware's (Counter-)Cyclical Jurisprudence

Larry Cunningham has posted on the recent Lyondell Chemical Co. v. Ryan opinion from the Delaware Supreme Court.  (The title of his post reminds me of this.) He calls the opinion "refreshingly lucid and terse" and states that "for now, Lyondell puts the notion of good faith in something of a coma. Not dead, but nary alive."

There has been lots of great commentary on the opinion: I'll crib from Larry and point you to Steve Bainbridge; Jeff Lipshaw; Gordon Smith; and Andrew Lund's paper on the subject.  There's one angle that I haven't yet seen mentioned, however, and that's the counter-cyclical nature of the opinion.

There's a standard meme in corporate law that Delaware courts are worried about encroachment from federal law, and so their jurists are motivated to shape the law in accordance with the prevailing political winds.  As the abstract for Mark Roe's Delaware's Competition explains:

Delaware's chief competitive pressure comes not from other states but from the federal government. When the issue is big, the federal government takes the issue or threatens to do so. Delaware players are conscious that if they mis-step, federal authorities could step in. These possibilities of ouster, threat, and consciousness have conditioned Delaware's behavior.

The Disney case is often held up as an example of this, as sketched (in simplified form) by this timeline:

  • 1998 [pre-Enron]: Chancery Court dismisses claims

  • 2000 [pre-Enron]: Supreme Court affirms as to most counts, but remands for dismissal without prejudice

  • 2003 [post-Enron]: Chancery Court finds good faith claim has been stated and rejects motions to dismiss

  • 2005 [post-post-Enron]: Chancery Court criticizes Eisner but finds no violation of good faith

  • 2006 [post-post-Enron]: Supreme Court affirms

Of course, this simplification does no justice to the actual opinions and their complexities.  But it is an illustration of the (cynical) explanation of Delaware's relationship with D.C.: Delaware judges do what they need to do to satisfy the feds but no more.

Recent cases from the Chancery Court have been somewhat in harmony with this thesis.  In the AIG case, Vice Chancellor Strine called AIG a "criminal enterprise" (under the facts as alleged in the complaint) and allowed the case to move forward.  In Citigroup, Chancellor Chandler dismissed the Caremark claims but did allow a excessive compensation-waste claim to go forward - a fairly unusual event.  (But cf. Jay Brown's criticisms of Citigroup here.) 

However, Lyondell seems like a pretty clear victory for the deregulatory side.  It cuts back on the fiduciary duty of good faith in straightforward and dramatic terms, using adverbs like "completely" and "utterly" that provide little wiggle room.  Moreover, this near-elimination of good faith was arguably unnecessary to the resolution of the case.  (See Andrew Lund's comment here.)  Given the regulatory mood in Washington and across the country, Lyondell seems to be radically out of step with the prevailing political winds.

So does this mean that the "federal competition" explanation of Delaware jurisprudence is wrong?  Maybe it was right before but the equilibrium has changed?  Or is this case just an exception?

Posted by Matt Bodie on March 31, 2009 at 12:40 PM in Corporate | Permalink | Comments (0) | TrackBack

Wednesday, March 25, 2009

Do Cities Have Any Role in Regulating Executive Comp?

A combination of recent headlines and Richard Schragger's recent piece "Mobile Capital, Local Economic Regulation and the Democratic City" (which suggests, among other things, that "[t]he new 'regulatory localism' challenges the proposition that industrial policy, redistribution, and other responses to global economic restructuring must be addressed at the national level") prompt me to wonder about the role of cities in economic regulation. 

I'm sure the answer depends on a rigorous definition of "economic regulation," which I don't claim to offer here.  So let me just raise a specific question I'm intrigued by: the role of the city in regulating executive compensation.  Should it or can it have any role at all?  At the very least, we can say that the interests of the different levels of government as to executive compensation may be different.  The AIG bonus example plays out on the national stage (e.g., 90% taxation of the bonuses) and at the state level (the New York Daily Newssuggestively quotes Attorney General Andrew Cuomo as saying that "If a person returns the money, I don't believe there's a public interest in releasing their name.").  At the city level, though, Mayor Bloomberg apparently warned that "[e]ven if you think that it's fair to take [the bonuses] away, just recognize that we're going to have to make up that tax gap, that reduction, by taxing the rest of us."

Posted by Verity Winship on March 25, 2009 at 04:04 PM in Corporate | Permalink | Comments (0) | TrackBack

Tuesday, March 10, 2009

Will the "Systemic Risk Authority" be the new sheriff in town?

Proposals for regulatory consolidation are not new - our multiple financial regulators can be thought of as chaotic, redundant and burdensome or as an beneficial source of regulatory competition and an experimental laboratory.  But Bernanke's speech to the Council on Foreign Relations today is potentially a bid to emerge as a new macro-regulator, a "systemic risk authority." 

[B]ecause the goal of any systemic risk authority would be to have a broader view of the financial system, simply relying on existing structures likely would be insufficient.  For example, a systemic risk authority would need broad authority to obtain information--through data collection and reports, or when necessary, examinations--from banks and key financial market participants, as well as from nonbank financial institutions that currently may not be subject to regular supervisory reporting requirements. A systemic risk authority likely would also need an appropriately calibrated ability to take measures to address identified systemic risks--in coordination with other supervisors, when possible, or independently, if necessary. The role of a systemic risk authority in setting standards for capital, liquidity, and risk-management practices for the financial sector also would need to be explored ....

Notice echoes of pre-financial-meltdown consolidation proposals in the Treasury's Blueprint for a Modernized Financial Regulatory Structure....

Posted by Verity Winship on March 10, 2009 at 04:28 PM in Corporate | Permalink | Comments (0) | TrackBack

Tuesday, March 03, 2009

Shareholder Pandering and the End of the Economy

I just read this interesting paper by Larry Mitchell that seems particularly on point these days.  As a former denizen of Wall Street (Morgan Stanley Public Finance & Chemical High Yield), I can report that just about everyone I worked with knew that the stock market created an irrational focus on the price of equity in the short term -- whining stockholders are the bane of every good business executive with a decent long-term business plan.  But most of us assumed that was the price corporate America had to pay for all the equity that stockholders pumped into the market.  They'd made their deal with the devil and, well, at least the devil paid pretty well.  Right?  Wrong. 

With extensive historical data, Mitchell demonstrates that shareholders are actually bringing increasingly little to the table -- in fact, they haven't brough much for a long, long time.  Here's a particularly nice graph from the paper: 


Modern industry runs on debt, not equity.  In fact, Mitchell argues, the decline of equity is one of major untold stories of the last century. If he's right -- and I'll believe him until someone shows me better data -- then this turns the standard model of modern markets on its head.  Shareholder empowerment not only has major downsides, it has little or no upside, and the irrationality of our focus on equity is a lot worse than most of us imagined.  The takeaway: shareholder empowerment actually hurts both business and the serious investor, all for the sake of short-term speculation.  (As this is one of the few really good fights in corporate law, I'll be very curious to see how Bebchuck and other defenders of shareholder empowerment respond to this new data.)  

Posted by Donald Braman on March 3, 2009 at 09:56 AM in Corporate | Permalink | Comments (0) | TrackBack

Thursday, January 15, 2009

Down goes Geithner?

TaxProf has been all over the Geithner tax-payment story, which has morphed from a Zoe-Baird-esque household-help issue into a much bigger catastrophe. His failure to pay taxes from his IMF income seems more and more troubling as details come out.  These revelations from Byron York seem particularly damning:

Documents released by the Senate Finance Committee strongly suggest that Geithner knew, or should have known, what he was doing when he did not pay self-employment taxes in 2001, 2002, 2003, and 2004. . . .

The IMF did not withhold state and federal income taxes or self-employment taxes — Social Security and Medicare — from its employees’ paychecks. But the IMF took great care to explain to those employees, in detail and frequently, what their tax responsibilities were. First, each employee was given the IMF Employee Tax Manual. Then, employees were given quarterly wage statements for the specific purpose of calculating taxes. Then, they were given year-end wage statements. And then, each IMF employee was required to file what was known as an Annual Tax Allowance Request. Geithner received all those documents.
. . .

At the end of the tax allowance form were the words, “I hereby certify that all the information contained herein is true to the best of my knowledge and belief and that I will pay the taxes for which I have received tax allowance payments from the Fund.” Geithner signed the form. He accepted the allowance payment. He didn’t pay the tax. For several years in a row.
. . .

In a conversation today with sources on Capitol Hill who are familiar with the situation, I asked, “Was Geithner made whole for tax payments that he didn’t make?”

“Yes,” one source answered. “He was getting the money. He was being paid a tax allowance to pay him for tax payments that he should have made but had not.”

As the New York Times opined: "As much as Mr. Obama and his team may wish it, however, the disclosures cannot be dismissed so easily, or papered over. The just-the-facts report of Mr. Geithner’s tax transgressions, compiled and released by the Senate Finance Committee, paints a picture of noncompliance that is considerably more disturbing than his supporters are acknowledging."  Lest anyone forget, here is the organizational chart of Treasury -- notice the little agency on the lower left.  (It's next to the Bureau of Engraving and Printing.)

Despite these problems, the Intrade market seems unfazed; when I last looked, Geithner shares were trading at around 93.  Perhaps Geithner's special skills are enough to outweigh the obvious concerns about his tax compliance.

Posted by Matt Bodie on January 15, 2009 at 05:15 PM in Corporate | Permalink | Comments (2) | TrackBack

Sunday, January 11, 2009

The Difficulties of Law and Finance: An Update from Roberta Romano

In a 2005 article entitled After the Revolution in Corporate Law, Roberta Romano said that an economics Ph.D. was not the "best match" for business law scholarship.  Romano argued that finance, not economics, was the future for corporate law scholarship, and that empirical work was more important than modeling.  She wrote:

[T]he building blocks of the revolution in corporate law originate most prominently in modern finance, which (as hopefully is clear) is a specialized field of economics.  As a consequence, there is a highly imperfect match between the body of knowledge imparted in an economics Ph.D. program and that which is critical for analyzing corporate law issues, and particularly for the direction in which the field has been moving, using quantitative methods.

To this end she discussed a new Yale program, combining a J.D. with an accelerated finance Ph.D. program, as a way for the next generation of corporate scholars to get that training.  A brief blurb about the program can be found here.

This past Saturday, at a fascinating AALS Business Associations panel, Romano provided an update on the Yale program.  Romano had been disappointed, she confessed, about participation in the program.  While she had initially hoped for one or two students a year, it appeared that only one student would be graduating from the first few years of the program.  Although three students had signed up, two had subsequently dropped out.  Romano mentioned the difficulties of being a lone law student in a class of finance Ph.D students, many of whom had foreign training.  The rigors of the math, together with the attraction of law school "extracurricular activities," had made the joint JD/Finance Ph.D less popular than expected.

Romano's comments added an intriguing subplot to the panel, which was on the potential for synergies between finance and corporate law.  The finance folks on the panel lamented the failures of their models, while the law professors talked about the problems of regulating without reliable empirical findings.  Bankruptcy and Madoff featured prominently.  Despite the gloomy tone, however, the panelists remained upbeat about the potential for collaboration between the two disciplines.  I'd love to hear thoughts from folks out there.  After fall 2008, are we now in the post-post-revolution period?

Posted by Matt Bodie on January 11, 2009 at 11:33 PM in Corporate | Permalink | Comments (7) | TrackBack

Monday, November 03, 2008

SEIU & Election Politics

If you have a hankering for election-related content, here is a story you might have missed.  It's a traditional story about union politicking for a particular candidate -- in this case, SEIU's work for Barack Obama.  Some details from SEIU's website:

Through October 30, SEIU's members have:

  • Knocked on 1,878,421 doors.
  • Made 4,405,136 phone calls.
  • Sent 2,562,689 pieces of mail.
  • Registered 85,914 voters.
  • Helped more 10,982 people vote early.
  • Distributed 52,005 workplace flyers.
  • Made workers' voices heard by investing $13 million in independent expenditure ads that have run more than 10,000 times

The website clains: "No single organization has done more than SEIU to make sure that Barack Obama is our next president."  (Even the Democratic Party?)

It makes sense for SEIU to be making noise about its role in Obama's election.  The union is hoping for support for the Employee Free Choice Act (EFCA), which would allow employees to join unions by signing cards rather than requiring a secret ballot.  Politicos seem to think that the EFCA would be among the first pieces of legislation passed by an Obama administration and Democratic Congress.  Perhaps because of this, EFCA opponents have ratcheted up their public campaign against it.  (See George McGovern inveighing against it here.)

If you're interested in reading more about SEIU and union politics, I just have posted the final version of my paper, Mother Jones Meets Gordon Gekko: The Complicated Relationship between Labor and Private Equity (forthcoming Colorado Law Review).  The paper discusses how SEIU's political influence is part of its overall bargaining strategy -- particularly in its recent dealings with private equity.  One of the article's overall normative claims is that unions should be allowed to play politics like other businesses.  The effect of this election on the EFCA's chances is solid proof, in my view, of the importance of politics to the business of unions.

Posted by Matt Bodie on November 3, 2008 at 05:52 PM in Corporate, Employment and Labor Law | Permalink | Comments (0) | TrackBack

Wednesday, October 29, 2008

"Run on the Bank"

A radio interview describing the creation of the FDIC has me thinking about runs on banks.  (NPR interview with author Timothy Egan here.)  In 1933, Roosevelt closed banks for a five-day "bank 300pxwar_of_wealth_bank_run_posterholiday" to slow panicked withdrawals. FDIC insurance was part of the response to bank closures and runs on banks. Apparently Roosevelt later said that, if there had been a widespread run, the insurance could not have covered all of the deposits.  The (unsurprising?) lesson may be that  public perception - even when unrealistic - is central to fixing our financial problems (or at least avoiding new ones).

Roosevelt and his aides seem to have recognized that investor confidence was key.  In his first "fireside chat," in 1933, Roosevelt said that "[a]fter all, there is an element in the readjustment of our financial system more important than currency, more important than gold, and that  is the confidence of the people."  And, as one of his advisors put it: "We knew how much of banking depended upon make-believe or, stated more conservatively, the vital part that public confidence had in assuring solvency."

One more tidbit on "runs on the bank": the phrase - and probably the accompanying fear - has been around since the late 1600s.  A 1697 text said that "Any jealousie or suspicion that they shall not have Money for such Bills on Demand, will occasion a general run."  And the phrase pops up again over the years.  My favorite is from Adam Smith, The Wealth of Nations: "When a run comes upon them, they sometimes endeavor to gain time by paying in sixpences."  A practical solution.  (More from the OED here.) 

Posted by Verity Winship on October 29, 2008 at 10:45 AM in Corporate | Permalink | Comments (0) | TrackBack

Tuesday, October 28, 2008

Who Are Investors?

In the context of possible new regulation in the financial markets, it's worth asking an old and fundamental question: who are the investors?   The type of regulation we choose turns in part on the answer.  Our current financial woes put pressure on this question, but so does the longer-term trend of institutionalization or "deretailization" of the US markets.  In other words, while our system is rooted in protection of retail investors and much of the political rhetoric reflects this ("mom-and-pop" investors), institutions such as mutual funds, pension funds, etc. increasingly play a role.   

My modest aim here is to point you to some "food for thought."  First, identifying the investors comes up even in the most mundane of contexts.  Take the SEC website.  Featured at the top of the page these days is the headline "SEC Protecting Investors, Markets During Credit Crisis" and a link to the "SEC Actions During Credit Crisis."  What audience does this target?  Sophisticated investors don't need to read it.  I suspect Congress has heard it in other forms.  The press?  Do retail investors really read it or care?

Second, Donald Langevoort has a paper called The SEC, Retail Investors, and the Institutionalization of the Securities Market recently posted to SSRN.  In a passage that is almost an aside, he complicates the debate over how institutionalization should influence regulatory choices:

I am convinced that part of the motivation for the substantive and procedural disclosure requirements of US securities regulation increasingly is disconnected from shareholder or investor welfare per se, and instead relates to the desire to impose norms that we associate with public governmental responsibility - accountability, transparency, openness and deliberation - to institutions that have comparable power and impact on society.  It is a familiar point that many large corporations have more economic power than many counties and cities, perhaps even a handful of states.

Posted by Verity Winship on October 28, 2008 at 10:20 AM in Corporate | Permalink | Comments (0) | TrackBack

Monday, October 27, 2008

Greg Mankiw threatens work stoppage if Obama is elected

From Greg Mankiw's blog:

Here is a question that you may have been thinking about: How do the different candidates' tax plans affect Greg Mankiw's incentive to work?

* * *

Let me start with my personal situation: I am a pretty lucky guy. I have a comfortable, upper middle class life style that includes one house, two cars, three kids, a wife, and a dog. I am fortunate enough that I don't have trouble keeping that going. I am also fortunate enough that I don't crave much more than I already have. I don't particularly want to own multiple houses or drive a Ferrari or wear Armani suits. You might say that I am close to being sated.

On a regular basis, I am offered opportunities to make some extra money. It could be giving a talk, writing an article [ed. note - !], editing a journal, and so on. What incentive is there to put forward that extra work effort?

To a large extent, the beneficiaries of that extra effort are my kids. My lifestyle is, as a first approximation, invariant to my income. But if I make an extra few dollars today, I will leave more to my kids when I move on. I won't leave them enough so they can lead lives of leisure, but perhaps I will leave them enough so they won't have to struggle too much to afford a downpayment on their houses or to send their own kids to college.

Do you notice a rather big part of Mankiw's income that isn't discussed here?  Isn't he a professor somewhere?  I imagine if the H decided to cut all professors' income by half or decided to fire the good professor, he would find that his "lifestyle" is perhaps not so " invariant to [his] income."  But that couldn't happen, could it?  He's tenured at a very wealthy university.  The chances that this economic downturn will affect him directly are pretty slim.  Nice!

Anyway, he continues.

Let me try to put each tax plan into a single number. Let's suppose Greg Mankiw takes on an incremental job today and earns a dollar. How much, as a result, will he leave his kids in T years?

The answer depends on four tax rates. First, I pay the combined income and payroll tax on the dollar earned. Second, I pay the corporate tax rate while the money is invested in a firm. Third, I pay the dividend and capital gains rate as I receive that return. And fourth, I pay the estate tax when I leave what has accumulated to my kids.

Notice how he slips the corporate tax rate in there, because he assumes that he will invest all of his children's future money in stocks.  T-bills too safe, huh?

Let t1 be the combined income and payroll tax rate, t2 be the corporate tax rate, t3 be the dividend and capital gains tax rate, and t4 be the estate tax rate. And let r be the before-tax rate of return on corporate capital. Then one dollar I earn today will yield my kids:


I guess he assumes that he'll do no estate planning. 

For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years.

If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.

Ah, yes.  They should really get the $28.  Anything less is socialism.

Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.

The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories.

Is this tongue-in-cheek?  I hope so.  The fact that he's writing this on a blog that has no advertising only increases the sense of irony.  (Perhaps his blog header should be: "I'M BLOGGING AWAY MY CHILDREN'S INHERITANCE.")  But if this is all a joke, apparently Instapundit isn't in on it.

Posted by Matt Bodie on October 27, 2008 at 12:15 PM in Corporate | Permalink | Comments (8) | TrackBack

Thursday, October 23, 2008

Ritualistic Lawyering

Jeff Lipshaw has a great post on the value of lawyers in business deals.  He posits (in part) that lawyers are not making the pie bigger in many cases, and that if lawyers always made the pie bigger then we would see them used more often on smaller deals.  He sees a different and interesting reason for lawyers:

My equally non-testable theory is that lawyers sometimes add value to deals, sometimes subtract value, and appear most of the time during the deal for the same reason neckties do:  it's part of the ritual.  There is no intrinsic reason they have to be there.  Lawyers, like neckties, have value, not because they necessarily make the pie bigger, any more than neckties make the pies bigger, but because somebody values the lawyer enough to pay more for her to be there than it cost for her to get there (marginally speaking, of course).

I think his theory has legs, perhaps in big business deals where he has experience.  For example, he notes that representations and warranties often expire at closing, significantly limiting their value in comparison with the lawyering cost of negotiating those clauses. 

That said, I think the cockfighting necktie theory goes a bit far - lawyers can add real value in ways I discuss after the jump.   

I'll admit that I have very little experience on large public company deals, though I have worked on a few.  Most of my experience comes from working on smaller deals (big company down to individual) and also litigating such deals when they go bad.  And that, I think, is where lawyers can add the most value - foreseeing how deals might sour.

Two specific points:

First, good lawyers have a wealth of experience on a variety of transactions.  They know contract language that worked and didn't work, they know business terms that worked and didn't work, they know representations and warranties that are likely to give problems, they can recognize assets that need examination (for example, in intellectual property).   Even the most experience business person likely works on a fraction of the number of transactions that a lawyer will work on, and certainly not with the same variety of transactions, parties, and industries.  When good lawyers quibble over seemingly small terms, it is because they have seen the small terms turn into large future costs.

This leads to second, just because small deals didn't involve lawyers doesn't mean that a lawyer wouldn't have added value.  Having worked in litigation and transactions, I can say with a certainty that a large percentage of business disputes I saw in litigation could have been avoided if a good lawyer had been involved in the transaction.   It is true that most deals don't sour, but enough do that I wouldn't write off the importance of a quick contract review to minimize risk if things go bad.  I think that lawyers are often not used not because they don't bring value, but because a) potential clients don't know they won't bring value, b) potential clients have not had good lawyers in the past, or c) attorney access is limited due to cash, status, retainer, etc. 

Note that I use the proviso "good lawyers."  There are plenty of bad lawyers, who negotiate just for the sake of minor victories, who use cookie cutter forms without modification rather than understanding why provisions are needed, and who don't recognize when the cost of the negotiation is exceeding the value of the requested change.   I would definitely agree that these lawyers are not making the pie bigger or decreasing transactions costs.  Perhaps there are more bad lawyers than good, and maybe that's the difference between fact and theory.

Posted by Michael Risch on October 23, 2008 at 11:41 AM in Corporate | Permalink | Comments (0) | TrackBack

Monday, October 13, 2008

Macey on Corporate Governance

Jonathan Macey's new book Corporate Governance: Promises Kept, Promises Broken arrives this week.  It is available now on Amazon.  Here is the publisher's blurb.

In the wake of the Enron meltdown and other corporate scandals, the United States has increasingly relied on Securities and Exchange Commission oversight and the Sarbanes-Oxley Act, which set tougher rules for boards, management, and public accounting firms to protect the interests of shareholders. Such reliance is badly misplaced. In Corporate Governance, Jonathan Macey argues that less government regulation--not more--is what's needed to ensure that managers of public companies keep their promises to investors.

Macey tells how heightened government oversight has put a stranglehold on what is the best protection against malfeasance by self-serving management: the market itself. Corporate governance, he shows, is about keeping promises to shareholders; failure to do so results in diminished investor confidence, which leads to capital flight and other dire economic consequences. Macey explains the relationship between corporate governance and the various market and nonmarket institutions and mechanisms used to control public corporations; he discusses how nonmarket corporate governance devices such as boards and whistle-blowers are highly susceptible to being co-opted by management and are generally guided more by self-interest and personal greed than by investor interests. In contrast, market-driven mechanisms such as trading and takeovers represent more reliable solutions to the problem of corporate governance. Inefficient regulations are increasingly hampering these important and truly effective corporate controls. Macey examines a variety of possible means of corporate governance, including shareholder voting, hedge funds, and private equity funds.

Corporate Governance reveals why the market is the best guardian of shareholder interests.

Posted by Matt Bodie on October 13, 2008 at 11:09 AM in Corporate | Permalink | Comments (0) | TrackBack

Wednesday, October 08, 2008

Reports of the Death of Big Government Have Been Greatly Exaggerated

We've come a long way from 1996.

Posted by Matt Bodie on October 8, 2008 at 11:52 PM in Corporate | Permalink | Comments (0) | TrackBack

Thursday, October 02, 2008

Why We Need the Bailout

NyseWe, as a nation, are facing a critical choice: Should we give Wall Street something in the neighborhood of a trillion dollars so that it can continue doing the outstanding job it’s doing? Or should we let Wall Street collapse and see if the rest of America can get by without all those "financial services" that Wall Street provides?

To help you, and all Americans, understand why we need this bailout package – and we urgently do – I’ve decided to answer all your questions. Right here, right now.

It’s easy now to say, “Well, you shouldn’t have accepted loan applications filled out in crayon.” Or, “It was a mistake to give five mortgages to a single 19-year-old who listed his employment as ‘watching Flip That House! on cable tv.’”

Why should we give this money to Wall Street? I mean, if the economy needs to be spurred by an injection of billions of dollars, why not give it to us?

That’s a funny question. You already have it! Ha ha! What sense would it make to take money from taxpayers and give it straight back to taxpayers? That’s just silly. The whole point is to take the money from taxpayers and give it to someone else – preferably some hedge-fund manager who doesn’t pay taxes at all thanks to his tax-sheltered yacht parked off Antigua. I know it’s hard for you to understand, but the fact is that, after all is said and done, the money actually will come back to you, the taxpayer. How? As a result of rescuing Wall Street, banks and yacht captains will be able to extend loans to people on Main Street. That way, Main Street businesses will be able to make the investments that are needed to keep the economy going.

If the problem is that people on Main Street need loans, then why don't we just loan the money directly to them, instead of giving away it to the people on Wall Street?

You need to look at the broader picture. Farmers need to buy seed for their fields, ranchers need to buy feed for their cattle, and bankers need to buy drinks for their congressmen. Everybody plays their part. That’s how the economy works.

Wall_streetI completely fail to understand why it helps anything to buy bad loans from banks. If banks made bad loans, shouldn’t the banks suffer the losses?

The problem, with all due respect, is that you simply don’t understand enough about economics and finance to form your own judgment about these sorts of things. Don’t forget that officials in the Bush administration have carefully thought this through. Do you think you could have done a better job evaluating pre-war intelligence from Iraq? Or deciding exactly how many days to wait before sending help to New Orleans after Hurricane Katrina? I’m sure you don’t.

More importantly, you need to realize that this situation is not the fault of the bankers. Everybody thinks they can Monday-morning quarterback the whole situation, but that’s unfair. It’s easy now to say, “Well, you shouldn’t have accepted loan applications filled out in crayon.” Or, “It was a mistake to give five mortgages to a single 19-year-old who listed his employment as ‘watching Flip That House! on cable tv.’” The fact is, it’s not productive to look backward. We need to reject the impulse to lay blame, and we need, instead, to figure out how we are going to solve this crisis.

Hmmm. Let me see. Um. Oh! I’ve got it! How about we keep our money and just see how things go?

That may seem like a tempting course. But we simply cannot wait. As the Bush administration has explained, without the bailout, Wall Street will collapse, and the misery will quickly spread to Main Street.

How? How exactly will the misery spread from Wall Street to Main Street?

Think about it this way: If Wall Street collapses, tens of thousands of investment bankers, stock brokers, and other financial-industry professionals will be out of a job. While they will retain their education, skills, and knowledge, the companies they work for will no longer be able to pay their salaries. At that point they will be forced to leave Wall Street and come to your town looking for work.

Do you really want them to set up a hedge fund inside your local Wal-Mart between the optical center and the portrait studio? I didn’t think so. You wouldn’t be able to get from the self-checkout to the greeter table without some pinstriped MBA trying to sell you a collateralized derivative-backed forward-swap debenture. And believe me, you don’t want that. It’s worth however many hundreds of billions we have to pay to keep these people in lower Manhattan, where they just sell these things to each other.

Okay, you’ve convinced me. How can I help?

Please, support the bailout by writing or calling your congressional representatives as soon as you read this. Do it first thing in the morning. If you wait until 3 p.m. in the afternoon, they’ll probably have already left to go drinking with the bankers.

[cross-posted on The Backbencher]

Posted by Eric E. Johnson on October 2, 2008 at 01:23 PM in Corporate, Current Affairs | Permalink | Comments (0) | TrackBack

Wednesday, September 24, 2008

"Bad Apples" and the Financial Meltdown - Does the SEC Have a Role Absent Fraud?

Financial meltdowns often seem to lead media and regulators to look for illegal activity, which is why I was not surprised to read that the FBI is investigating Fannie Mae, Freddie Mac, Lehman and AIG for potential fraud.  (New York Times story here).  This focus on illegal activity has happened elsewhere - in the wake of rising gas prices, for instance, the CFTC investigated price manipulation and fraud.  And here an anonymous government official told the Times that it was "logical to assume" that these companies would be investigated, given the questions surrounding their collapse. 

Two thoughts on this.  First, the danger of focusing on "bad apples" is that it excuses us from rethinking the system and potential regulation.  To date, the focus seems to have been on systemic problems and on greed, without linking that to illegal behavior.  Let's not get distracted by the FBI.

Second, what are the roles of the various government actors?  The FBI's actions seem like a reasonable expression of its responsibilities, although I'm willing to be told differently.  But where is the SEC?  In the context of the recent collapses and bailouts, the SEC's announcement of a "sweeping investigation ... into possible market manipulation in the securities of certain financial institutions" seems besides the point.  As David Zaring points out in excellent posts here and here, the SEC is MIA.  Does this mark a shift from looking to lawyers for expertise to looking to economists?  Is the SEC like the FBI in that prosecution is its main tool?  The SEC has been examining and reporting on credit rating agencies, which could be a hook for SEC action.  Or maybe just the basis for another critique....

Posted by Verity Winship on September 24, 2008 at 05:00 PM in Corporate, Current Affairs | Permalink | Comments (0) | TrackBack