The Times reports:
The billionaire investor, who managed to fend off a criminal insider trading investigation of himself, if not of his former hedge fund, is looking for a former prosecutor and several agents from the Federal Bureau of Investigation to join his new $10 billion investment firm, Point72 Asset Management, said several people briefed on the matter, who spoke on the condition of anonymity.
Look, one of the reasons to feel good about the revolving door is that it salts financial institutions with people who expect law compliance. So maybe that explains this development, and we should celebrate Cohen's search for g-men. Or maybe it is, as the Times reports, that he was heartened by the insider trading ruling of the Second Circuit requiring the trader to know both that he was trading on inside information and that the information was obtained in exchange for a benefit, and just wants to grow the enterprise on a number of different fronts.
I'm not sure he should be too heartened by that ruling. It only may free one of his convicted lieutenants, and certainly wouldn't do anything about Matthew Martoma, who both paid for and traded on information provided by a pharma insider.
So, readers here know that I go to the movies a lot. A lot. I really like movies, and movies are expensive. Particularly the way we go to the movies (like they are going to stop making popcorn any second). One of the great things about Utah County is that there is a $1 theater and a $3.50 theater (with $1 popcorn) that show movies the week they leave the other theaters, and sometimes before. But now, AMC and MoviePass are offering a monthly subscription service in Boston and Denver that allow moviegoers to see up to one movie a day for a flat fee ($35 standard format/$45 any format). If the average AMC ticket price is $9, then you would need to see about one movie a month to break even.
A few thoughts. First, there are times of the year (February comes to mind) where there aren't any movies to go see at all. We see mostly family movies, and there really aren't enough of those to eke out a weekly outing all year. So, if I was paying $35 in February to see one animated sequal, I'd be a little disappointed. I might make up for it during the summer and the pre-Oscar season, but it would be close. Second, I would only do it if I were in a city where AMC had enough screens to show a lot of movies: indies, documentaries, etc. There really aren't enough mainstream movies that I would want to see 60 new releases a year. (Alas, there isn't an AMC here.)
But, if I did have such a card to a local theater, then I'm sure I would buy a lot of concessions (as if I didn't already). Even though it is irrational, I would feel like my admission was "free," and I could use more cash for extras. (Would you like some raisinets with that popcorn?)
The answer to David's question, Will The Swaps Pushout Rule Die In The Cromnibus?, was...no!
Here's the bill itself. A short-and-sweet 5 pages, it exempts from Dodd-Frank's Section 716 all "non-structured finance swap activities," and any structured finance swap that are for "hedging or risk management purposes" or later exempted by the relevant agencies in rulemaking. So there's still some room for industry lobbying at the agency rulemaking level, although it is a one-way ratchet that will only exempt more swaps from regulation.
Here is some commentary, via banking colleague and friend Mehrsa Baradaran:
- WSJ Law Blog summary
- Simon Johnson against
- American Banker on potential political fallout
- Salon with a Democratic post-mortem
- Rolling Stone (perhaps not the bastion of reporting we thought it was) on Dem's feebleness
I've been thinking a lot about the political economy, of which more later. In The Political Economy of Dodd-Frank, John Coffee basically responds to Steve Bainbridge, Roberta Romano, and the late, great, Larry Ribstein's fretting over bubble laws and quack federal intervention into corporate governance and securities laws by saying: "don't worry, folks. Even if post-crisis regulation goes overboard, the regulators will inevitably step in and modulate."
I am no banking expert, but my sense of Dodd-Frank is that Coffee's so-called Sine Curve of agency-level deregulation has in fact occurred (e.g., the Volcker rule). Business as usual.
So why the banking industry's power play of asking for regulatory relief at the congressional level? American Banker above suggests it was a mistake to deviate from the standard playbook of fighting at the less-public agency level:
Observers said the fight was a public relations nightmare for Citigroup and the big banks. "They've taken a lot of reputational hits now, a lot of people saying, 'You're trying to blackmail us and not fund our government until you get your way,'" said Sheila Bair, the former chairman of the Federal Deposit Insurance Corp., in an interview on CNBC before the House vote.
My takeaway is that there's a tradeoff to the political economy. Legislation is attractive because it's virtually immune from judicial review--as opposed to time-consuming, D.C.-Circuit-vulnerable agency rulemaking. But lobbying at the agency level flies largely under the radar, and that's a very good thing post-crisis. My hunch is the banks calculated they could fly the Section 716 provision under the radar--just 5 pages in a big, big bill!
If so, clearly they were wrong--the question is whether the gain to their bottom line is worth the reputational hit. And Elizabeth Warren's reputational gain.
One dodgy thing that is being included in the currently debated spending bill is a substantive provision repealing a much-hated-by-banks law requiring them to do most of their derivatives trading though an entity that is not covered by deposit insurance. It's a rule that sounds pretty logical - why subsidize derivatives trading with deposit insurance, and isn't it risky to do otherwise? And why do we have to address this in a government budget bill anyway?
But it is also one of uncertain policy origins. Blanche Lincoln thought the swaps pushout rule would resonate with voters when she pushed it, and maybe community banks, which don't do a ton of this stuff, would like to make life hard for the big banks that do. Elizabeth Warren is incensed that it might be repealed, so maybe her constituents would be for it. But the Fed doesn't think it does bank safety much good.
Here's Dave Weigel on the politics, which look good for the banks (Warren's concerns aside, Democrats aren't whipping for the pushout rule reversal to be defeated). Here's DealBook on the sausage-making (the statutory language was drafted by Citigroup, which has always seemed like the most tone-deaf bank to me, rather than the most politically puissant).
My view is that financial regulation, which is just about protecting banks from themselves/macroeconomic shocks, with a soupcon of rent-seeking, is a mixture of easy rules and hard ones. Activity restrictions, like the Volcker Rule, or anti-branching laws, are easy. Capital rules, at least the current ones, are hard, and require a team of examiners to look over the daily positions of the banks, and so on. Admati's capital rule recommendation - banks must hold 4 times more capital than they do now, and there will be no risk-weighting - is an effort to make that easy again.
And organizational rules - create a bank holding company, make this sub do this thing, and that sub do that thing - are also easy.
Note that currently, it's the left and community banks that like the easy rules, and it's the right and the big banks that prefer to do things the hard, sophisticated way. That doesn't mean that complex rules are weak ones - I can't judge the onerousness of our tax laws, but some of them are super-complicated responses to super-sophisticated behavior, and maybe that makes more sense than giving up and charging everyone a VAT. But that's the way I see financial regulation right now.
And yes, I don't know why part of Dodd-Frank should be repealed as a condition of passing a spending bill. But I admire the ability of the lobbyists to get in there and at it.
One last thing - it's risky to be the bank named as the drafter of a bill taking away some of your regulator's regulatory powers. We'll have to see if Citi starts paying a extra-large number of fines in the next year, or if it really did do this with the tacit approval of its supervisors.
Thursday & Friday, June 4-5, 2015
Seton Hall University School of Law, Newark, NJ
Call for Papers
More information is available here: http://law.shu.edu/events/national-business-law-conference/index.cfm.
The Basel committee enforces through peer pressure, rather than through resort to a formal dispute settlement process, and the peer pressure is increasingly institutionalized through IMF-like reviews of the implementation of Basel commitments. The US just had its review, and Basel just released the report.
The big problem with the US embrace of global rules has come through its treatment of securitizations. Perhaps most notably:
a number of divergences were identified that for some US core banks lead to materially lower securitisation RWA [risk-weighted assets, the stuff against which you have to hold capital] outcomes than the Basel standard. These differences are mainly related to the prohibition on the use of ratings in the US rules. Pursuant to the Dodd-Frank Act, the US rules cannot include provisions related to the Basel framework’s Ratings-Based Approach (RBA) for securitisations, so the rules provide alternative treatments.
The US is not Basel compliant because its regulators are explicitly not permitted to use a tool - credit ratings - that Basel requires. It looks like the committee may fix this not by forcing credit ratings down America's throat, but by coming up with some equivalence standard, which tells you that when Congress speaks clearly, global regulatory harmonizers must listen. Another admission of note:
In carrying out this review, the Committee's assessment team held discussions with senior officials and technical staff of the Federal Reserve Board, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation. The team also met with a select group of US banks.
This meet with regulated industry thing is one of the features of peer regulatory review, and it presumably gives industry yet another opportunity to make a case for its preferred version of regulation. But then, it is also a feature of international regulation, where the cross-border parties may sometimes also play roles as representatives of the domestically regulated.
This not at all silly list reveals the following:
- #1 William Dudley – President and CEO, Federal Reserve Bank of New York
Category: Government and Regulatory
- #1 Preet Bharara – US Attorney, Southern District of New York
Category: Government and Regulatory
- #3 Sophie Delaunay – Executive Director, Doctors Without Borders
Category: Non-Governmental Organization
- #4 Anonymous Whistleblower – Whistleblower, Securities and Exchange Commission
Category: Whistleblowing and Media
- #5 Glenn Murphy – CEO and Chairman, Gap Inc.
Category: Business Leadership
- #6 Eric Holder – Attorney General (outgoing), United States Government
Category: Government and Regulatory
- #7 José Ugaz – Chair, Transparency International
Category: Non-Governmental Organization
- #8 Pope Francis – Pope, Catholic Church
Category: Thought Leadership
- #9 Ma Jun – Director, Institute of Public and Environmental Affairs (IPE)
Category: Design and Sustainability
- #10 Larry Merlo – President and CEO, CVS Health
Category: Business Leadership
- #11 Carmen Segarra – Former Regulator, Federal Reserve Bank of New York
Category: Whistleblowers and Media
Dudley is the regulator who has called for bankers to act more ethically. I guess Bharara stands for the proposition that insider trading is the most unethical kind of business conduct, to the exclusion of all other such forms. Anonymous Whistleblower at 4! It proves you can make lots of money by being ethical! And Carmen Segarra, the Fed examiner, rounding out the top 11 - it suggests that business ethics are in question, finance would appear not to be the answer. Via.
My father, Eusebio Leo Rodrigues, died last month at age 87. He was a professor of English at Georgetown for 26 years. A hard thing about death is that, for all that one wants to stop all the clocks, they keep ticking away. I spoke at his funeral mass on Wednesday, but I'd like to commemorate him publicly. So I'm publishing my remarks after the fold. It feels strange to post something so personal, but my dad always loved reading this blog. Indeed, one of my first posts mused on my going into the family business.So this one's for him.
Not to pile on, but there's the slightly unsettling trned of CEOs talking, or not, about their health. Surely material information a real investor would want to know about when deciding whether to buy or sell a stock in these days of the imperial CEO. But deeply unprivate. Anyway, here's Jamie Dimon's letter to the staff, in part, on the very good news that, after been stricken with throat cancer, he now appears to be free of it.
Subject: Sharing Some Good News
Dear Colleagues -
This past summer, I let you know that I had been diagnosed with throat cancer. Having concluded my full treatment regimen a few months ago, I wanted to give you an update on my health. This week I had the thorough round of tests and scans that are normally done three months following treatment, including a CAT scan and a PET scan. The good news is that the results came back completely clear, showing no evidence of cancer in my body. While the monitoring will continue for several years, the results are extremely positive and my prognosis remains excellent.
The stock is up 2% on the day. It will be interesting to see whether this email makes its way into a securities filing.
The Freeport case was filed as a so-called “derivative” lawsuit, in which shareholders sue board members and others on behalf of the company itself.
In a typical derivative suit, that money would go back to the company itself. This model has drawn criticism from some legal experts, who say these types of cases benefit plaintiffs’ lawyers but not the shareholders they purport to represent.
Freeport, however, will pay out most of the money in a special dividend to its shareholders, people familiar with the settlement said. After legal fees and other costs, Freeport investors are likely to get more than $100 million, or at least 10 cents a share, they said.
This appears to be the first example of such a payout, lawyers say.
It looks like the suit aligns the interests of the company and the shareholder plaintiffs by getting the insurer to fund the special dividend. Is that always the case, though? I would think that directors would be happy to admit to mistakes if it meant that the insurance company would send investors a check. Or even the corporate treasury a check. But anyway, it makes it surprisng that this settlement would be the first of its kind.
Before the Thanksgiving week (which found us in Disneyland (!!)), my thirteen year-old son and I went to the "midnight" premiere of Hunger Games: Mockingjay Part 1 (showtime at 9:00, which was still late for a Thursday). We were not the only ones there, with showtimes every 30 minutes from 8:00 p.m. until midnight.
I'll admit that even though I plowed through the Hunger Games trilogy, I read the third out of duty and a desire to just know the end. For some reason, I thought the writing was particularly poor and the series of events plodding. Every third chapter it seemed that Katniss was waking up in a strange room no knowing what had happened. That gets a little old. But, because I am a human with understandable failings, I had to know who Katniss eventually married! So, I read on. (For a hilarious parody of the Hunger Games love triangle, watch this.)
Thankfully, Mockingjay Part I accomplishes that rare feat of making a book better. The assorted scenes that seemed disjointed in the book come together in the film. However, there is not a lot of exposition, so you may need to refresh your memory of the violent and furious events of Catching Fire. At the end of that movie, Katniss wakes up in a strange room, not knowing where she is. You eventually discern that she has been "rescued" from the game arena along with a few other players, who were in on the plan. (Yes, Philip Seymour Hoffman is in the whole movie, and he is very good.) The ultimate goal of the plan is for Katniss to inspire a small rebel faction in District 13 and to recruit the other Districts to fight against the Capitol for their freedom. Katniss was ignorant of this plan, though both her games partner, Peeta, and mentor, Haymitch, were in on the plan. Peeta, unfortunately, was not rescued and so remains in the Capitol. Katniss' "just friends" best friend, Gale, however, is with the rebels in District 13, having saved the Everdeen family and a few hundred others right before District 12 (their home district) was flattened with bombs in retaliation for Katniss' rescue.
The main actions of the movie follow Katniss' evolution from "what am I doing here/I just want to go home" to "we have to stop President Snow/we have to rescue Peeta." During this time, other Districts join in the fight, and at least at the end of the movie, the tide seems to have turned in the rebels' favor. What the movie decides not to foreshadow is the book's cautionary depiction of a revolution gone wrong. To the uninitiated in the last half of the Mockingjay book, the lofty goals of the revolution look to be realized, in a sort of 1970s Star Wars' Rebel Alliance sort of way, not an Animal Farm kind of way. At least in Mockingjay Part 1, the movie treads lightly on the political structure of District 13 and the rebel faction, as well as the motivations of its leaders.
The book trilogy and the movies have all been criticized for the high levels of violence, particularly because the books and movies are aimed at young adult readers/viewers. Note that this film is probably the least violent. There is no close-range games arena violence here, where children with names and faces kill each other. Here, the violence is that of war: planes, bombs, buildings. Perhaps tellingly, this type of violence, even with higher body counts, is easier to watch than the personal violence of the other films. However, when we see Peeta (who isn't in very much of the movie), it is obvious he has been tortured off-screen, which is hard for young viewers to get out of their minds. Also, the tension of President Snow's cold, callous bloodthirstiness for Katniss is palpable. There is also a part of the movie where a "victor" reads a statement in a propaganda video that insinuates that President Snow sold him to wealthy patrons for unmentionable purposes. A rescue attempt is taking place at the same time, so I don't think that my son heard or understood the statement. Either way, I'm sure I'm not a great mother for taking him to the movie, but I am an awesome one for taking him at 9:00 p.m. on a weeknight.
Finally, I understand I am not a professional film critic, and I do not have a degree in film studies. However, before I write a film review, I watch the film. This, I believe is more than I can say for some NYT reviewers. For instance, the reviewer here does not seem to have watched the movie, or at least not watched it without playing on their phone and making dinner and reading a book at the same time. The first paragraph retells the rebels trying to film a propaganda video with Katniss and the problems inherent in that, though the reviewer tells us "[e]ventually, they get it right." They actually do not. In the next scene, they scrap the video because it is so bad and go to plan B. I guess sometime between those two scenes, the reviewer got a text and stopped watching. I also don't get the sense that the reviewer saw the other movies and definitely did not read the third book. Otherwise the reviewer could not say that "'The Hunger Games' has never been antiwar" or describe President Coin as "equal parts iron and silk." The entire premise of the trilogy is that war is brutal and awful. In the third movie, Katniss even gives up deer hunting because she is so tired of being preyed upon and having to prey upon others. And, as readers of the third book know, President Coin has no silk in her. This isn't quite as bad as a different NYT reviewer referring to the adopted Loki in Thor 2: The Dark World as Loki, "a genetic anomaly in a bulked-up bloodline," but close.
We write about the revolving door here, and elsewhere, and we're not as worried about it as some. So what to make of Goldman's hiring of Fed bank supervisors? The critical problem here is that one hire may have brought (or obtained) Fed information to his new job at Goldman. Since the bank supervisor relationship is supposed to be pretty confidential - why would a bank let you examine their books if you're going to talk about their positions to their competitors? - this is a big deal. And also because of the ethics rules that generally require you to stay off of matters you worked on in the government.
Here's what happened:
Rohit Bansal, the 29-year-old former New York Fed regulator, was one such hire. At the time he left the Fed, Mr. Bansal was the “central point of contact” for certain banks.
Seizing upon Mr. Bansal’s expertise, Goldman assigned him to the part of the investment bank that advises other financial institutions based in the United States. That assignment presented Mr. Bansal with an ethical quandary: He might have to advise some of the same banks he once regulated.
Before starting at Goldman, Mr. Bansal sought to clarify whether New York Fed policy prevented him from helping those banks, according to a person briefed on the matter. Initially, he presented Goldman with a notice from the New York Fed, which indicated that he might have to steer clear of certain assignments for one client, the midsize bank in New York. (While the person briefed on the matter provided the name of the bank, The Times decided to withhold the name because the bank was not aware of the leak at the time.)
The New York Fed’s guidance was apparently somewhat ambiguous. And Mr. Bansal later assured Goldman colleagues that he could work behind the scenes for that banking client, the person briefed on the matter said, so long as he did not interact with the bank’s employees.
Mr. Bansal’s lawyer, Sean Casey at Kobre & Kim, declined to comment.
And then Goldman found him using some data that had to come from the Fed. Some thoughts:
- Our former supervisor has himself a very fancy lawyer
- When enforcement officials go through the revolving door, there's little reason to believe they have been encouraged to go easy on the industry they plan to join. Why not keep that guy where he is, and hire away the tormentor? Bank supervision, which is more collaborative, could be different.
- But note that what former bureaucrats are selling is, partly, expertise - particularly, the expertise about what current bureaucrats will do. The question is whether there is anything wrong with paying for this sort of expertise.
Which means a redo of the argument. We'll outsource, via Corporate Counsel, to Cooley:
The D.C. Circuit court of Appeals has granted the petitions of the SEC and Amnesty International for panel rehearing (and the motion of Amnesty to file a supplemental brief) in connection with the conflict minerals case,National Association of Manufacturers, Inc. v. SEC. (The Court also ordered that the petitions filed for rehearing en banc be deferred pending disposition of the petitions for panel rehearing.)
[In prior litigation, the D.C. Circuit,] "specifically citing the NAM conflict minerals case, ... indicated that “[t]o the extent that other cases in this circuit may be read as holding to the contrary and limiting Zauderer to cases in which the government points to an interest in correcting deception, we now overrule them.”
Zauderer applies a lenient standard of review to requirements of disclosure of purely factual information. Looks good for the SEC.
5 days ago the WSJ published an opinion piece on Delaware's fee shifting bylaws. I read it with interest, thinking "Maybe I should blog about that." Life intervened. In the meantime, my friend Steve Bainbridge posted not one, but two blogposts--footnoted, no less--on the topic.
I feel dispiritingly inadequate. But I also feel hearteningly efficient: Steve's made my work easier by first describing the fee-shifting bylaw on the merits (first post), and then applying an interest group analysis (second post)
You should read both Steve's posts, but what grabs me is the interest-group question. Steve takes as his starting point Larry Ribstein's riff on Macey & Miller's article, which is a candidate for the single law review article that most changed my view of corporate law. Usually at the end of my Corporations class's discussion of the duty of good faith, I say something like, "Yes, it's fuzzy. Maybe it's supposed to be..." Cue M&M:
Delaware could stimulate litigation by supplying legal rules that are unclear in application. The bar therefore has some interest in reducing the clarity of Delaware law to enhance the amount of litigation. But the bar risks killing the proverbial goose that laid the golden egg because it is primarily the certainty and stability of Delaware law that creates the opportunities for profits in the first place. The bar as a whole does not have an interest in making the law so unclear that corporations begin to move elsewhere in large numbers. The bar should instead favor an equilibrium point of uncertainty at which the marginal increase in bar revenues from litigation fees equals the marginal loss in revenues due to reduced incentives to incorporate in Delaware.
By this point in the semester I've waxed rhapsodic to my class about Delaware law. So I feel some guilt at disillusioning them by suggesting that the indeterminacy that so bedevils them and their outlining efforts may be by design. I can't help it, though. It's too much fun.
I digress. Steve's second post first asserts that:
Both sides of the litigation bar thus have a strong interest in banning fee shifting bylaws. Such bylaws would raise plaintiff costs, deterring lawsuits, reducing fees for all litigators.
To which I say, "Amen, brother." But then Steven suggests that
All corporate lawyers—litigators and transactional—have a strong incentive to oppose fee shifting bylaws. Hence, it was no surprise that the Delaware legislature—dominated in this area by the Delaware bar—leaped to ban such bylaws. The business groups that favor fee shifting bylaws were able to delay that action. But the final decision remains pending.
But that's not quite true, right? Certainly litigators want litigation. But deal lawyers don't want it--at least, not this particular kind of litigation. Indeterminacy over doctrinal areas like good faith is good for transactional types as well as litigators, because it gives them more nuances and risks to have to explain at length to boards as they advise on various types of action. The type of fee-shifting bylaw we're discussing, in contrast, is bad for deal lawyers--at least, if you think, as Steve does, that
There is a serious litigation crisis in American corporate law. As Lisa Rickard recently noted, “where shareholder litigation is reaching epidemic levels. Nowhere is this truer than in mergers and acquisitions. According to research conducted by the U.S. Chamber Institute for Legal Reform, lawsuits were filed in more than 90% of all corporate mergers and acquisitions valued at $100 million since 2010.” There simply is no possibility that fraud or breaches of fiduciary duty are present in 90% of M&A deals. Instead, we are faced with a world in which runaway frivolous litigation is having a major deleterious effect on U.S. capital markets.
If these suits amount to nothing more than a litigation tax on deals, then they discourage deals. And that's bad for deal lawyers.
Steve's posts left me with 2 questions:
- Small bore: Where are Delaware's transactional lawyers?
- Large bore: Will Delaware really be so short-sighted as to kill its corporate franchise goose?
Over at DealBook, I've got a take on MetLife's claim that it will be suing over its designation as a systemically important financial institution. A taste:
Congress gave the government 10 factors to take into account when making a too-big-to-fail designation. This sort of multiple-factor test all but requires regulators to balance values that have different degrees of quantifiability. Some can be counted, like the amount of leverage and off-balance sheet exposure. But others like “the nature, scope, size, scale, concentration, interconnectedness and mix of the activities of the company” have so many moving parts, some of them difficult to quantify, that expressing them mathematically may not be worth the effort. The government has also been given the leeway to consider “any other risk-related factors” that it deems appropriate, a standard that encourages judges to defer to regulators.
Do give it a look!