Greetings, Glommers! (and hello, Janet and Mario*!)
It’s an honor to join this extremely sharp and thoughtful community of corporate and commercial law scholars for the next two weeks. The Conglomerate has long been one of my favorite law blogs and it’s truly a privilege to walk among these folks for a time (if a bit daunting to follow not just them but Urska Velikonja and her excellent guest posts). Thanks to Gordon, David, and their Glom partners for inviting me to contribute.
By way of biographical introduction, I’m currently a Visiting Assistant Professor at the University of Denver Sturm College of Law, where I teach International Business Transactions and International Commercial Arbitration. Last year, I did a VAP at Hofstra Law School (and taught Bus Orgs and Contracts).
In the next few weeks, I’ll be exploring a number of issues related to law and global finance. I have a particular interest in currencies and monetary law, or the law governing monetary policy. Two of my current projects (on which more soon) address legal aspects of critical macroeconomic policy questions that have emerged since 2008: U.S. monetary policy and the Eurozone sovereign debt crisis.
Without further ado, I will take a page from Urska and kick off my residency here with a somewhat meta question: should scholars refrain from writing about legal issues in macroeconomics, specifically monetary policy?
One thinks of monetary policy decisions—whether or not to raise interest rates, purchase billions of dollars of securities on the secondary market ("quantitative easing"), devalue or change a currency—as fundamentally driven by political and economic factors, not law. And of course they are. But the law has a lot to say about them and their consequences, and legal scholarship has been pretty quiet on this.
Some concrete examples of the types of questions I’m talking about would be:
- Pursuant to its dual mandate (to maintain price stability and full employment), what kinds of measures can the Federal Reserve legally undertake for the purpose of promoting full employment? More generally, what are the Fed’s legal constraints?
- What recognition should American courts extend to an attempt by a departing Eurozone member state to redenominate its sovereign debt into a new currency?
When it comes to issues like these, it is probably even more true than usual that law defines the boundaries of policy. Legal constraints in the context of U.S. monetary policy appear fairly robust even in times of crisis. For example, policymakers themselves often cite law as a major constraint when speaking of the tools available to the Federal Reserve in combating unemployment and deflation post-2008. Leading economics commentators do too. Yet commentary on “Fed law” is grossly underdeveloped. With the exception of a handful of impressive works (e.g., by Colleen Baker and Peter Conti-Brown), legal academics have largely left commentary on the Fed and macroeconomics to the econ crowd.
A different sort of abstention characterizes legal scholarship on the euro crisis. Unlike the question of Fed power, there is a burgeoning literature on various “what-if” euro break-up scenarios. But this writing tends to focus on the impact on individual debtors and creditors, not on the cumulative impact on the global financial system. Again, the macro element is missing.
It is curious that so many legal scholars would voluntarily absent themselves from monetary policy debates. The subtext is that monetary policy questions are either normatively or descriptively beyond the realm of law. If that is scholars’ actual view, I think it is misguided. But maybe the silence is not as revealing as all that.
- One issue is sources. You will not find a lot of useful caselaw on the Fed’s mandate or the Federal Reserve Act of 1913, and the relevant statutes and regulations are not very illuminating. Further, it’s a secretive institution and that makes any research (legal or otherwise) on its inner workings challenging.
- Another issue is focus. Arguably the natural home of legal scholarship on domestic monetary issues, for example, should be administrative law. But the admin scholarly gestalt is not generally as econ-centric as, say, securities law. Meanwhile, securities scholars tend to focus on microeconomic issues like management-shareholder dynamics.
- A final possibility, at least in the international realm, is historical. After World War II, Bretton Woods established a legal framework intended to minimize the chance that monetary policy would again be used as a weapon of war. The Bretton Woods system collapsed over forty years ago, the giants of international monetary law (Frederick Mann, Arthur Nussbaum) wrote (and died) during the twentieth century, and now even some of the leading scholars who followed in their footsteps have passed away. At the same time, capital now flows freely across borders and global financial regulation has become less legalized in general. These factors plus the decline of exchange-rate regulations (most countries let their currencies float) may have undermined scholars’ interest in monetary law. But as the ongoing euro saga demonstrates, international monetary law and institutions remain as critical as ever.
These are some possible explanations for why legal scholars have largely neglected questions of monetary law, but I’m sure I’ve overlooked others. What do you think?
*Pictured are Janet Yellen and Mario Draghi, chiefs, respectively, of the Federal Reserve and the European Central Bank.
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What you'll hear from me, as a general matter, is a story about the increasing convergence on matters financial regulatory across borders. But this is not to say that this convergence will be a story of cosmopolitan triumphalism, sans bumps, disputes, and difficulties.
Take auditor rotation, which is the shorthand for "the government requires you to fire your auditor and hire a different one everyone so often, lest your auditor become captured, or you start speaking to it in a strange shorthand outsiders can't understand." It's something that will really make a difference to the lives of CFOs and their reports everywhere. It will also either disrupt the multi-billion dollar accounting business, or end competition in the sector. And the EU now requires it every 10 years or so, while the US has dropped its auditor rotation plans. You might even call the emerging approaches to auditor independence completely inconsistent with one another.
The interesting question will be whether the EU makes foreign listed companies rotate auditors if they solicit or somehow end up with a substantial number of European investors (the current answer appears to be no, but stay tuned). If it does that, it will be yet another example of the way that the EU makes regulatory policy for the rest of the world. HT: Corp Counsel
Better Markets is an advocacy group worried about the failure of the government to hold banks accountable for misdeeds that lead to the financial crisis. No problem there, I'm mystified by it myself, though there might be a normative case to be made for the policy, depending on how you feel about how the government treated Arthur Andersen and varous Enron executives during the last crisis.
But the group's suit against the government for violating separation of powers principles and FIRREA for settling with JPMorgan without filing the settlement with a court must have made the lawyers who filed the complaint a little nervous, in the "is this frivolous and will I get sanctioned?" kind of way.
Are you depriving courts of their Article III jurisdiction if you settle a case, instead of trying it to completion (and presumably then filing an appeal)? Owen Fiss thought so, in an article that I really love, but perhaps we should put the piece under the "seminal Yale thought experiment" rubric.
Settlement isn't exactly unprecedented in our federal system. Sometimes the government announces that it won't be defending a statute like DOMA in court, thereby depriving the judges of their Article III powers to assess the constitutionality of the law. Sometimes it changes policies when a powerful senator complains, thereby depriving Congress of its Article I right to reverse the executive branch's overreaching through legislation. And sometimes it enforces statutes - Title VII is an example - that deprive millions of potential plaintiffs of their right to file constitutional suits, in that case invoking the Equal Protection Clause. Sometimes, it also just settles cases before they go to trial, just like every other institution in America.
And yet somehow these dramatic examples of executive branch overreaching have never resulted in a colorable separation of powers claim. Indeed, separation of powers claims are almost never colorable; as a rule of thumb, they are step one towards losing a lawsuit, because they can be made about all cases, which is basically the same thing as saying they can be made about no cases. I'm generally not a fan of holding the government to particularly different standards than, say, Amnesty International, but even if you feel differently, you might do so because of the government's criminal powers, which the JPMorgan settlement doesn't involve.
The FIRREA count isn't a whit better, by the way. FIRREA authorizes the Attorney General to file suits against banks who violate the substantive principles of that banking statute. But just because a statute permits such litigation hardly means that it means that courts will be reviewing the AG's decisions as to whether to bring a case under it or not. THAT would be a separation of powers problem; courts would get to micromanage every decision whether to prosecute a case, supposedly one of the most core executive branch functions there is. Just ask Justice Scalia.
And don't even get me started on whether Better Markets has standing to sue over a settlement between the government and some other party that has nothing to do with Better Markets.
Congratulations to my former colleague at the University of New Mexico, Norm Bay. News came down at the end of last week that the President nominated Bay to be the next Chair of the Federal Energy Regulatory Commission. Before joining the UNM faculty, Bay served as a career prosecutor and was named the U.S. Attorney for New Mexico.
This continues a microtrend of the President placing former prosecutors at the head of federal agencies (See, e.g., M.J. White). It also asks for reconsidering Rachel Barkow's Prosecutorial Administration law review article from a few years back. If prosecutors increasingly shape regulatory policy, don't they also increasingly have the skill set to make policy more directly? If prosecution increasingly shapes policy in a given field, does it make more sense to integrate the two - and, if so, shouldn't we see more prosecutors in charge of agencies?
Of course, we might also ask whether we should have experts in other fields of public administration -- economists -- increasingly influence decisions to prosecute or not to prosecute.
The SEC just charged a finance professor from Florida State and an engineering professor from Florida A&M with naked short selling, which the professors might have been doing as a kind of protest against a practice that doesn't have a very good case for illegality behind it.
But I've heard it said that it's not the crime, it's the cover-up, and the two professors spent a lot of time covering up what they were doing. Moreover, part of their point of their shorts was to not take on the expense of covering, too, which for good or ill, is something all shorts are required to do. Anyway, here's the SEC:
Colak and Kostov set their scheme in motion in early 2010 and went on to sell more than $800 million worth of call options in more than 20 companies. Their trading strategy involved purchasing and writing two pairs of options for the same underlying stock, and targeting options in hard-to-borrow securities in which the price of the put options was higher than the price of the call options. Colak and Kostov profited by avoiding the cost of instituting and maintaining the short positions caused by their paired options trading.
Sound bad? Well, the SEC didn't get an admission of guilt out of the two, and all told, they had to pay the agency $400,000 to settle the case. So not exactly throwing away the key. Not good for business school professors to be accused of violating the securities law, though. HT: Securities Docket.
UPDATE: Here's Matt Levine with a nice explanation, more careful than anything you see above, or how the scheme was meant to work, and the regulatory arbitrage implications thereof, vel non.
Over at the FCPA Professor blog, Mike Koehler has a take on the year the SEC has had with bribery, an increasingly important remit for the agency's enforcement lawyers. The topline - action is slightly up from last year, but down from its peak a couple of years ago. Some intriguing details:
The range of SEC FCPA enforcement actions in 2013 was, on the high end, $153 million in the Total enforcement action, and on the low end, $735,000 in the Ralph Lauren enforcement action. Of the $300 million the SEC collected in 2013 corporate FCPA enforcement actions, approximately $219 million (73%) were in two enforcement actions (Total – $153 million and Weatherford – $66 million).
Two corporate FCPA enforcement actions from 2013 were SEC only (Philips Electronics and Stryker).
Of the 8 corporate enforcement actions from 2013, 3 enforcement actions were administrative actions (Philips Electronics, Total, and Stryker) and 1 action (Ralph Lauren) was a non-prosecution agreement. In other words, there was no judicial scrutiny of 50% of SEC FCPA enforcement actions from 2013. The settlement amounts in these actions comprised approximately 57% of the SEC’s $300 million collected in 2013 corporate FCPA enforcement actions.
In 2013, the SEC collected approximately $208 million in disgorgement and prejudgment interest in enforcement actions that did not charge anti-bribery violations (either administrative actions that did not charge any FCPA violations or settled civil complaints that did not charge anti-bribery violations). In other words, approximately 69% of the $300 million the SEC collected in 2013 FCPA enforcement actions was no-charged bribery disgorgement.
Chris Brummer has a column over at Project Syndicate with some proposals for improving an increasingly frayed relationship. You'll have to head over there for the prescriptions, but here's his encapsulation of the problem:
Radical disparities between the rule-making cultures of the US and the EU are exacerbating the problem. Unlike the US, where independent agencies lead the rule-making process according to Congressional dictates, legislative actors in Brussels and Strasbourg – the European Commission, the European Council, and the European Parliament – set regulatory agendas and write the rules. And, though EU agencies like the European Central Bank are assuming an increasing share of regulatory responsibility, divergences in decision-making procedures continue to affect the rate and nature of transatlantic coordination.
Making matters worse, market and monetary reforms have occasionally merged, with rule-making becoming partly dependent on the decisions of disparate agencies and institutions. Meeting enhanced Basel III capital standards, for example, is about more than just rules; it requires the recapitalization of banks – a process that is taking longer in Europe than in the US, partly because the eurozone has had to negotiate funding mechanisms for banks and cash-strapped governments. Now these delays are raising doubts in the US about the EU’s commitment to reform.
Well worth your time, if you think that this sort of regulatory diplomacy is an increasing feature of financial supervision....
Part of what has moved Treasury officials is an effort to keep up with the globalization of insurance supervision. Europe responded to the crisis by overhauling the way it looks after its industry, with renewed attention to its ability to survive financial shocks, and the empowerment of a continent-wide insurance supervisor. The European Union’s so-called Solvency II framework, moreover, raises the specter that Europe may use it solvency rules to keep foreign insurers out of European markets, on the grounds that they are too risky to trust with the money of European consumers. That threat, among other things, means that copies of the European approach are taking root across the world.
But keeping pace with Europe doesn’t work well with the American system of insurance regulation, where the federal role is minimal and each state has a different regulatory regime.
And you can find the whole thing over here.
One of the many disasters of the financial crisis involved the bankruptcy of Lehman Brothers, which was marked by a race to the courthouse doors by creditors in most places Lehman had a substantial number of assets. It also, given the number of subsidiaries Lehman had created, was very complicated to discern even which assets were domiciled where.
Anyway, the consensus has been that a cross border resolution regime for big banks is needed, in light of the Lehman problems. But very little progress on this high priority of the G20's has been made. All of which brings us to the latest speech by a German banker urging that a cross-border deal be arranged. Does that mean a treaty? Evidently not. The German central bank thinks that agencies like the FDIC should come up with a cross-border resolution authority protocol, and that that should do it.
Two conservative judges on the DC Circuit have expressed concerns that the rule is too broad (I guess this would be a Chevron problem) and impinges on free speech (laughable, but a constitutional problem with the statute, I guess). And the federal regulators had been doing so well! HT: Corporate Counsel
I'm unworried about the revolving door (these guys are, if you want a different view), but one of the traditional ways to slow it has been to require cooling off periods before former government employees can represent clients before their former colleagues. These periods get longer the higher up the food chain one goes; the SEC, however, has long received an exemption from them for its litigators, because it used the revolving door as an enticement for recruitment.
Times are tough for lawyers, however, and the SEC no longer has these recruting problems, and so requested that the exemption be removed. Hey presto - it happened, in a rule that is being passed without going through notice and comment (which isn't really very kosher, especially if the intital exemption did go through notice and comment).
If anything, the most interesting aspect of this development was the basis for the exemption itself, which was so that the SEC could tell senior lawyers that they could supercharge their private sector earning potential if they took high-level enforcement jobs. At this point, maybe everyone knows this, and cooling off periods haven't hurt the private sector earning potential of senior prosecutors at Justice any either.
But it also shows that a benefit, once given, can always be taken away.
I'm at a banking conference in Hong Kong, but noticed that the Treasury Department has urged a greater federal role in the regulation of insurance in a long-awaited report issued by its Federal Isurance Office. It's a role that the large insurance firms, always unethusiastic about 50 state regulation, would no doubt welcome. Some observations:
- The report does not seek to end state insurance supervision, but would like some direct federal regulation of the sector (for example, for mortgage insurers), and the capacity to threaten states with supplanting regulation if the states do not shape up in various ways.
- The report justifies the need for a federal role in part on the internationalization of isurance, and, to some degree, through IAIS, the internationalization of insurance regulation.
- The rationale for state supervision is that insurance doesn't really need to be regulated for capital adequacy (but see AIG), but rather for consumer protection (your policy doesn't pay out, you get sold insurance you don't need).
- This, like the Volcker Rule, is a product of Dodd-Frank, which created the FIO.
- A report is, as a matter of law, meaningless. Indeed, Congress would have to act to give the FIO some of what it wants.
A wrap on the report is here. It will be interesting to see whether this lands with anything more than a thud.
I've got a piece over in DealBook on the advantages of a multi-regulator regime, which can be seen if you squint in just the right way. A taste:
No other country has created such a patchwork of agencies to deal with financial oversight. Henry Paulson, a former Treasury secretary, called for a rationalization of financial regulation before the financial crisis in 2008. You wouldn’t dream up a world where a rule on proprietary trading by banks has to be administered by five agencies, if it is going to work at all.
Nonetheless, even historical accidents have their merits. Cass Sunstein, the former White House regulatory czar, has long argued that group dynamics — whether they involve multiple judges looking at the same issue, or multiple agencies thinking about the same regulation — can moderate the extremes, and, perhaps, reflect the more careful deliberation that a give-and-take among decision makers should produce.
Moreover, if those regulators, in the end, decide to do things differently, we might expect the benefits of experiment, followed by market discipline, as investors flock to those financial institutions subject to the regulations most likely to keep them profitable and solvent.
Go give it a look, and let me know what you think.
One of the things the FSOC is supposed to be is a task force keeping an eye on financial stability. But it is also, to that end, supposed to be a noodge. It keeps threatening to do something about money market funds in an effort to force the SEC to do more, for example. And it has designated two insurance companies and GE Capital as systemically significant because their primary regulators had not done so.
That is why it is kind of interesting that the Chamber of Commerce has urged that the noodge factor be tamped down. Currently the FSOC can just vote to designate a financial institution as systemtically signficant over the objection of their primary regulator. As Reuters reports on the Chamber's proposal:
"If the primary regulator or independent council member does not vote in favor of designating a non-bank financial company for which the council member has industry expertise... then a second vote shall be scheduled within 45 days," the Chamber wrote. "The primary regulator shall issue a report to the FSOC within 30 days of the initial vote explaining its rationale as to why a firm should not be designated."
It's not a dramatic change - it would slow, rather than end, the council's designation role - but it does suggest that regualted industry is worried about what the FSOC is doing. And that is worth noting, because it wasn't clear that the committee would be able to accomplish much at all, considering that it is a jammed together new federal entity, without totally obvious powers to forces its members to do anything (not always - Jake Gersen has a nice article on the entity that characterizes some of its powers to require as a "Mother-May-I" approach - the cite to that is here, and after the jump).