While Americans worry that there isn't enough accountablility being imposed on banks for the financial crisis, the Times observes that European banks are forking over billions in penalties to their regulators. LIBOR is one thing, there's an insurance product that is causing no end of headaches, and:
European banks are expected to pay a total of about $25 billion for settlements and client compensation, so far. HSBC has to write the biggest check, paying $1.9 billion for lapses in its anti-money laundering controls. (A number of banks, however, have made provisions for potentially larger amounts.)
ING Bank, part of the Dutch financial giant ING Group, reached a $619 million settlement for allegation of sanction violations in June. Standard Chartered, based in London, agreed to pay a total of $667 million in two separate money-laundering claim settlements in August and December.
To be sure, American regulators haven't exactly eased off on sanctioning boycott avoiders. But this action in Europe is all worth keeping an eye on, if only for the possibility that financial regulation could go the way of antitrust or accounting, where global standards are set by European regulators. It is too soon to suggest that something like this is happening yet, and there is a great deal of work being done on harmonizing global standards so that European rules do not get applied extraterritorially. But it isn't outside the realm of possibility.
Here is a highly productive way for business law professors to procrastinate from grading exams:
The National Bureau of Economic Research just circulated a new version of a paper that provides a medieval complement to the law & finance literature and to Gilson's lawyer as transaction cost engineer idea. The paper by Davide Cantoni and Noam Yuchtman presents evidence that the training of commercial lawyers by new universities contributed to the expansion of economic activity in medieval Germany. Here is the abstract:
We present new data documenting medieval Europe's "Commercial Revolution'' using information on the establishment of markets in Germany. We use these data to test whether medieval universities played a causal role in expanding economic activity, examining the foundation of Germany's first universities after 1386 following the Papal Schism. We find that the trend rate of market establishment breaks upward in 1386 and that this break is greatest where the distance to a university shrank most. There is no differential pre-1386 trend associated with the reduction in distance to a university, and there is no break in trend in 1386 where university proximity did not change. These results are not affected by excluding cities close to universities or cities belonging to territories that included universities. Universities provided training in newly-rediscovered Roman and Canon law; students with legal training served in positions that reduced the uncertainty of trade in medieval Europe. We argue that training in the law, and the consequent development of legal and administrative institutions, was an important channel linking universities and greater economic activity.
A very interesting read.
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We'll outsource to DealBook:
The Lloyds Banking Group, partly owned by the British government after receiving a bailout, on Monday became the first bank in Britain to cut past bonuses because of losses that turned up later.
The bonus clawback of about £2 million ($3.2 million) applies to five former or current executive directors, including a former chief executive, and eight other managers. Eric Daniels, who left the bank as chief executive last year, would have to give up 40 percent of the share bonus he was awarded for 2010, or about £580,000, Lloyds said.
Something close to a plurality of corporate scholars are working on papers related to the financial crisis in the United States. I think it is much less likely that we will see something similar with the potentially even more dramatic European financial crisis. Here's why:
- A lot of what is happening in Europe is politics and markets, not law. For sovereign debt, lawyers put together the instruments, and creditors can in theory (but not in practice) sue on default. Ditto for the credit default swaps. But the decisions about whether to issue them, whether to buy them... those aren't legal decisions, they are market ones. And they are the ones of interest in the crisis.
- Similarly, the decision to bail out Greece isn't a matter of a European agency acting creatively. Instead, every member of the EU passed a law permitting a bailout. Again, there's not much to chew on there in terms of administrative law.
- Of course, it isn't like there is no law to apply. What the EU and the ECB do is governed by law ... but that's European law, it's hard, and I doubt American academics will have much to say about it.
- There are some questions of interest, of course. Consider MF Global’s bankruptcy filing, which has some stuff on how its exposure to European debt wasn’t working for its regulators or Moody’s. Might be something interesting there for lawyers. But generally, I'm not holding my breath.
- I predict the sovereign debt experts in the academy - your Gulatis and your Gelperns - will have plenty of wisdom to impart, by the way. But that's only a smidge of the corporate law academy, rather than, like, most of it.
There are two important forms of adjudication in international economic law. One may be found in the WTO, the other in the welter of treaties that permit resort to tribunals in international investment law, which often reference an ad hoc right of review, often to a tribunal set up by ICSID. This matters to foreign investors because it means that if the country in which they have invested treats them, say, differently than domestic investors, they needn't go to the local court, but can drag the sovereign into arbitration in DC, or Stockholm, or Paris, or wherever the investment treaty provides for a remedy. At the annual meeting of the American Society of International Law, there was some sense of ferment in this latter form of adjudication.
- You can't appeal an adverse decision in these cases - or can you? The very technical and limited means that you could use to complain about a ruling - a decision was never issued, or the panel was constructed incorrectly - has recently, maybe, given way to "the panel didn't explain its decision," which is sort of close to "didn't explain why our argument wasn't correct." If a right of appeal exists in this sort of law, it looks a little less like arbitration and a little more like, well, law.
- What is the same treatment as between foreign and domestic investors anyway? Is it the same thing as the national treatment principle in the WTO? There was a panel at ASIL considering that very question, which I'm pretty surprised is still an open one. My own view is that international finance is well on its way to adopting a national treatment principle sotto voce, but if various courts think that the principle means very different things, then finance's legal achievement will be limited.
- And it's not even clear whether there's a common approach to fee and cost shifting in investment law. Consider Susan Franck's recent paper, here's the abstract, which is a good way to familiar yourself with the latest greatest:
International investment and related disputes are on the rise. With national courts generally unavailable and difficulties resolving disputes through diplomacy, investment treaties give investors a right to seek redress and arbitrate directly with states. The costs of these investment treaty arbitrations — including the costs of lawyers for both sides, as well as administrative and tribunal expenses — are arguably substantial. This Article offers empirical research indicating that even partial costs could represent more than 10% of an average award. The data suggested a lack of certainty about total costs, which parties had ultimate liability for costs, and the justification for those cost decisions. Although there were signs of balance and a preference for parties to be responsible for their own costs, there was neither a universal approach to cost allocation nor a reliable relationship between cost shifts and losing. Awards typically lacked citation to legal authority and provided minimal rationale, and the justifications for cost decisions exhibited broad variation. Small pockets of coherence existed. Tribunals typically decided costs only in the final award; and as the amount investors claimed increased, tribunal costs also increased. Such a combination of variability and convergence can disrupt the value of arbitration for investors and states. In light of the data, but recognizing the need for additional research to replicate and expand upon the initial findings, this Article recommends states consider implementing measures that encourage arbitrators to consider specific factors when making cost decisions, obligate investors to particularize their claimed damages at an early stage, and facilitate the use of other Alternative Dispute Resolution (ADR) strategies. Establishing such procedural safeguards can aid the legitimacy of a dispute resolution mechanism with critical implications for the international political economy.
- Daniel Drezner argues that Europe is likely to come out of the current crisis pursuing even more integration, and I must say, I'm betting on that as well. It's all well and good to decry the loss of control over monetary policy that the Euro represents, but it's also quite the form of status quo bias (and the decrying is the province of the always far-seeing macroeconomists, for that matter). In fact, I can't really see how seeking the Euro breakup is different than arguing that Massachusetts ought to be able to mint its own fiat Romneys, or whatever, oh, and also reinstall border controls and implement free trade policies with other states in its own unique fashion. And if that seems silly, why would Portugal want to do the same thing?
- Stephen Bainbridge is now distinguished, and not just by his impressive holiday recipes.
- And Brian Galle opens what - as he himself will tell you - is a sure to be transfixing series of posts on unemployment insurance, which I'm sure he seeks to own the way I own American foreign investment regulation.
My efforts to prepay my summer rent in Berlin have been a fascinating tour of modern payment systems and foreign currency risk. Here’s the scoop: my rent is due in full June 1st. My landlord would like the money early and agreed to pay the transfer fees if I could prepay. One additional complication, I need to use my University’s credit card.
Xoom is just one of a bevy of new payment systems that have emerged in the last several years. Glompetitor Tim Zinnecker has already pointed out the great article in Wired magazine two months ago on the future of payment systems. When I agreed to prepay, I thought the fees I saved would more than offset the time value of money. What I didn’t anticipate was that little ‘ole me would also be subject to foreign currency risk; I guess I need to read Kim Krawiec’s posts over at the Glompetition on the Greek debt crisis on a more regular basis. In all seriousness, I do feel blessed though that my personal stakes in the foreign currency swings are so trivial (so far) compared to what many in Europe are going through.
I've been working away on a draft symposium piece for the NeXus Journal at Chapman where I present a model of deregulation that explains banking deregulation in Sweden leading up to that country's financial crisis in 1990. The model may also help us understand how the deregulation of Freddie & Fannie, the repeal of Glass Steagall, and bank OTC derivatives trading contributed to our own financial crisis.
The piece is called Deregulation Pas de Deux: Dual Regulatory Classes of Financial Institutions and the Path to Financial Crisis in Sweden and the United States and can be downloaded here. Here's the abstract:
This article presents the following model of two regulatory classes of financial institutions interacting in financial and political markets to spur deregulation and riskier lending and investment, which in turn contributes to the severity of a financial crisis:
1) Regulation creates two categories of financial institutions. The first class faces greater restrictions in lending or investment activities but enjoys regulatory subsidies, such as an explicit or implicit government guarantee, while the second class is more loosely regulated and can make riskier loans or investments and earn additional profits.
2) These additional profits leads to calls for deregulation to enable the first class to participate in lucrative lending or investment markets.
3) Deregulation allows the first class of institution either to compete with the second class in formerly restricted markets or to invest in the second class, in either case, while retaining its regulatory subsidy.
4) Deregulation spurs additional lending in two ways:
i) subsidy leakage, which occurs when the first class can use subsidized funds to make riskier investments (including investments in the second class) without regulation compensating for moral hazard; and
ii) displacement, which occurs when subsidized competition pushes the second class into riskier market segments.
5) Additional lending increases leverage in the financial system and fuels a boom in an asset market.
6) Asset prices collapse and threaten the solvency of financial institutions.
This model explains financial deregulation in Sweden in the 1980s, which led to a 1990 bank crisis. The model also provides a framework for scholars to examine whether deregulation in the United States involving the following dual classes of institutions contributed to the current crisis:
¶ GSEs (Freddie Mac and Fannie Mae) and sponsors of “private label” mortgage-backed securities;
¶ Commercial and investment banks with respect to the Glass-Steagall repeal; and
¶ Banks and hedge funds with respect to OTC derivatives.
The model would support the premises of the proposed Volcker Rule, which would restrict investment activities of banks, but suggests that imposing those restrictions may not be sustainable in the long run.
Comments are welcome!
It's hard to take the measure of European corporate and insolvency law, though goodness knows some people are trying. Now we've got The Defining Tension to help us understand Dutch and other continental developments. From the purpose statement:
The basic purpose of The Defining Tension is twofold:
- provide on a regular basis, and in a compact, up-to-date and easy accessible way, perspectives on Dutch and international developments in corporate law - with a focus on corporate governance - and insolvency law, including related litigation; and
- serve as an independent forum for constructive discussion among authors and readers.
The name of TDT is derived from an issue that is of special interest to us: the inherent tension between corporate director authority and judicial freedom to review corporate director conduct - often said to be the defining tension in today's corporate governance.
Welcome to the blogosphere!
I'm piping in from Europe briefly to point you to the Sunday Times's article on the best paid London lawyers. Takeaway: it's great for the few people who get to be barristers (that is, the nuts qualification limitation that the UK imposes on lawyers who want to appear in court) that they have a barrister requirement. The corporate guys who pull down three to five million bucks a year work "80 hour weeks" or “every hour God gives.” The top barristers? Well, they make slightly more money, and they spend many of the hours that God gives doing things other than working. One is the "cleverest man in England," summers (as in, spends the whole summer) in Bordeaux, and is writing a three volume history on one of England's obscure but lengthy late-medieval wars. Another "starts at 8.30, leaves at 5.30." A third lists his passions as "opera, riding, gardening, olive farming," and has a house in Hampshire and a villa in Tuscany.
I imagine this article is being passed around New York law firms, where one gets the sense that litigators are only vaguely tolerated, with some bemusement.
Just in time for March Madness, Sneaker Wars has just come out, recounting the modest origins of the now-multinational multi-billion-dollar sports shoe industry. I just happened to catch the book review in this morning's WSJ. The story begins with the Dassler brothers' little Bavarian shoe factory, started during the thick of WWII. Fraternal rivalry caused the brothers Adi and Rudi to part company in the late 1940s, when Rudi walked across the river to the other side of town--the medieval town of Herzogenaurach--to set up a competing factory. Adi Dassler's shoe became, of course, Adidas. Rudi developed the Puma brand. Together, the rivaling brothers and their rival brands came to dominate the world sports shoe industry for decades. Adi and Rudi pioneered what are today's standard marketing strategies for sporting goods and other consumer goods, giving away free shoes to athletes and later paying stars to wear the logo.
It's a treat for me to read about the history of Adidas. Anyone who played grade-school basketball in the 70s remembers the dominant basketball shoes--Converse All-Stars and the Adidas Superstar, with the latter gradually overtaking the former both in the pros and in the school yard. According to Wikipedia, three quarters of all NBA players in the mid-70s were wearing the Superstar. I remember well getting my first pair. They were navy felt with white stripes (I know, I know . . . but remember, this was the 70s). I was a mediocre basketball player at best, but at least the shoes looked cool.
The sports shoe industry took a big jolt in the mid-80s, when Phil Knight signed Michael Jordon for Nike and launched the Air Jordan, which became the best-selling basketball shoe ever. Nike has dominated the U.S. market ever since, though Adidas and Puma appear to be making comebacks. You can read about Adidas' recent comeback efforts with its signing of David Beckham in the Prologue to Sneaker Wars.
I'm in a global mood as I sit here at Dulles waiting for my night flight to Addis Ababa, where I'll be consulting with the Ethiopian Ministry of Justice on commercial law reform for about a week. As luck would have it, it's also been a happenin' few weeks in terms of changes afoot for global securities regulation. To wit:
On Wednesday, the SEC voted unanimously to recommend that non-US based companies be allowed to rely on International Financial Reporting Standards (IFRS, promulgated by IASB--the international accounting standards board) without having to include GAAP reconciliation, as is currently required.
A few weeks back, the eighth annual meeting of the SEC Historical Society occurred. Its focus: Beyond Borders: A New Approach to the Regulation of Global Securities Offerings. The discussion centered around a proposal for a regime of mutual recognition with the EU regarding large issuers (WKSIs, more or less), which was presented by Ed Greene of Citi Markets and Banking.
And finally, the SRO arms of NYSE and NASDAQ are officially combining as SIRA--the Securities Industry Regulatory Authority. While not technically an international development, it's consistent with the increasing international consolidation among exchanges (the WSJ piece referred to NYSE Regulation as a "unit of NYSE Euronext Inc."). NASDAQ CEO Mary Schapiro also suggested the possibility of some movement toward principles-based regulation, similar to LSE. Perhaps a competitive adjustment?
In any event, my flight is boarding. Internet access willing, stay tuned for more from Addis.
The "ouster" of Klaus Kleinfeld as CEO of Siemens is a big corporate governance story, even though it doesn't register so vibrantly in the US. Kleinfeld was not formally terminated. He left after learning that shareholder representatives on the supervisory board were searching for his replacement. As our readers surely know, Siemens is attempting to move beyond a series of scandals, and even though Kleinfeld has not been directly implicated in any criminal activity, his presence was an obstacle to a fresh start for the company.
In the reports of the events that I have been reading, one of the central characters in the drama is Josef Ackermann, chief executive of Deutsche Bank AG, which is a large shareholder of Siemens. Ackermann is a member of the supervisory board, which has 20 members, half of whom are elected by Siemens' employees. According to the W$J, "Labor representatives on the board had said in recent days they were still undecided on whether to support Mr. Kleinfeld when his contract came up for renewal yesterday."
So this looks like a classic block shareholder story, in which Deutsche Bank monitors the top managers of the company and intervenes in a moment of crisis. Would the same underlying facts have the same result in the US? Well, that's hard to say, but my guess is that Kleinfeld stays if Siemens is a US company. Cf. HP (Mark Hurd) and Apple (Steve Jobs).
Dale Oesterle has a nice update on the Alternative Investment Market (AIM), and he explains why the U.S. needs to pay attention:
The AIM market is booming. In 2005 AIM had 335 IPOs compared to NASDAQ’s 35. The deal size comparisons are also telling. The average technology IPO deal size on the NASDAQ was $117.5 million, on the AIM it was $18.7 million. The AIM supported the smaller deals. Interestingly, the enterprise value as a multiple of revenue was lower on the NASDAQ 4.7x than on the AIM, at 6.3x. AIM investors were willing to accept more risk. The London market has successfully created a public offering market for small and micro cap companies. To remain competitive, the United States trading markets need to mount a successful competitor to this market.
Let's say that you have a job that allows you to travel during the summer. You do most of your work online, so as long as you have an internet connection, you can be anywhere. And let's say that you love all of Europe, but you prefer to focus on one country per summer, rather than hopping around.