Corporate disclosure, especially in securities regulation, has been a standard regulatory strategy since the New Deal. Brandeisian “sunlight” has been endorsed widely as a cure for nefarious inside dealings. An impressive apparatus of regulatory disclosure has emerged, including annual and quarterly reports enshrined in Forms 10K and 10Q. Other less comprehensive disclosures are also required: for initial public offerings and various debt issuances, as well as for unexpected events that require an update of available information in the market (Form 8K).
For the most part, corporate disclosure has focused on financial information: for the good and sufficient reason that it is designed to protect investors – especially investors who are relatively small players in large public trading markets. Some doubts have been raised about the effectiveness of this kind of disclosure and, indeed, the effectiveness of mandatory disclosure in general. A recent book by Omri Ben-Shahar and Carl Scheider, More Than You Wanted to Know: The Failure of Mandated Disclosure, advances a wide-ranging attack on all mandatory disclosure. (I think that their attack goes too far: I’ll be coming out with a short review of the book for Penn Law’s RegBlog called “Defending Disclosure”). Assuming, though, that much financial disclosure makes sense, what about expanding it to include other activities of business firms?
Consider three types of nonfinancial information that might usefully be disclosed: information about a business firm’s activities with respect to politics, the natural environment, and religion.
1. Politics. One good candidate for enhanced corporate disclosure concerns business activities in politics. Lobbying laws require various disclosures, and various campaign finance laws do too. It is possible to obscure actual political spending through the complexity of corporate organization. (For a nice graphic of the Koch brothers’ labyrinth assembled by the Center for Responsive Politics, see here.) Good reporters can ferret out this information – but they need to get access to it in the first place. My colleague Bill Laufer has been an academic leader in an effort to encourage public corporations to disclose political spending voluntarily, with Wharton’s Zicklin Center for Business Ethics Research teaming up with the nonpartisan Center for Political Accountability to rank companies with respect to their transparency about corporate political spending. The rankings have been done for three years now, and there are indications of increased business participation. Recently, even this voluntary effort has been attacked by business groups such as the U.S. Chamber of Commerce for being “anti-business.” See letter from U.S. Chamber of Commerce quoted here. Jonathan Macey of Yale Law School has also objected to the rankings in an article in the Wall Street Journal, arguing that the purpose of political disclosure is somehow part of “a continuing war against corporate America.” These objections, however, seem overblown and misplaced. What is so wrong about asking for disclosure about the political spending of business firms? One can Google individuals to see their record of supporting Presidential and Congressional candidates via the Federal Election Commission’s website, yet large businesses should be exempt? Political spending by corporations and other business should be disclosed in virtue of democratic ideals of transparency in the political process. Media, non-profit groups, political parties, and other citizens may then use the resulting information in political debates and election campaigns. Also, it seems reasonable for shareholders to expect to have access to this kind of information.
In Business Persons, I’ve gone further to argue (in chapter 7) that both majority and dissenting opinions in Citizens United appear to support mandatory disclosure as a good compromise strategy for regulation. One can still debate the merits of closer control of corporate spending in politics (and I believe that though business corporations indeed have “rights” to political speech these rights do not necessarily extend to unlimited spending directed toward political campaigns). It seems to me hard to dispute that principles of political democracy – and the transparency of the process – support a law of mandatory disclosure of corporate spending in politics.
2. Natural environment. Increasingly, many large companies are also issuing voluntary reports regarding their environmental performance (and often adding in other “social impact” elements). Annual reports issued under the International Standards Organization (the ISO 14000 series), the Global Reporting Initiative, and the Carbon Disclosure Project are examples. The Environmental Protection Agency (EPA) has also established a mandatory program for greenhouse gas emissions reporting, which is tailored to different industrial sectors. One can argue about whether these kinds of disclosures are sufficiently useful to justify their expense, but my own view is that they help to encourage business firms to take environmental concerns seriously. Many firms use this reporting to enhance their internal efficiency (often leading to financial bottom-line gains). As important, however, is the engagement of firms to consider environmental issues – and encouraging them to act as “part of the solution” rather than simply as a generating part of the problem.
One caveat that is relevant to all nonfinancial disclosure regimes: The scope of firms required to disclose should be considered. I do not believe that the case is convincing that only public reporting companies under the securities laws should be included. (For one influential argument to the contrary, see Cynthia A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency,” 112 Harvard Law Review 1197 (1999)). Instead, it makes to sense for different agencies appropriate to the particular issue at hand to regulate: the Federal Election Commission for political disclosures and the EPA for environmental disclosures.
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Portugal took the kind of quick action on its second largest bank that is completely by the book. What can we learn about the current reality of bank bailouts from it?
- Even medium sized banks are global: BES was doomed not by its Portuguese operations, but by its Angolan unit. This sort of thing has driven supervisors to set up global regimes - the idea that their domestically safe and sound bank is in trouble internationally, but they don't know it - or that its foreign counterparties are, and they don't know that.
- The government created a good bank and a bad bank, meaning that BES stakeholders now have one bank with depositors and branches, and another with dodgy loans in Angola. This is a way of giving everyone - creditors, shareholders, employees - a haircut, but, since the Portuguese government is loaning BES $4.5 billion, it is hard to say this isn't also a lender of last resort bailout. Still, a textbook approach.
- This sort of ring-fencing, on a much larger scale, is one of the ways that some regulators would like to practice bank safety. A British bank would have its British assets segregated from its overseas ones, and so on. That obviously creates internal inefficiencies in the bank, but there you go.
- What Portugal did was to "resolve" BES. You can perhaps see why some think that one of the failures of the post financial crisis reforms is the failure to, so far, come up with a cross-border resolution scheme. The British couldn't do this with Barclays, or couldn't without agreement by the Americans, and who knows if, when the chips are down, that would be forthcoming?
Over at DealBook, I've got something on the financial regulatory reform that Europeans, in particular, love. Give it a look. And let me know if you agree with this bit:
Can a supervisory college work in lieu of a vibrant global resolution authority regime? The problem with these colleges is not that they are implausible, but that they have not really been tried in a crisis. The best-known supervisory college outside of the European Union was created in 1987 to monitor the Luxembourg-based, but international, Bank of Credit and Commerce International. Rumors of widespread fraud in the management of the bank were plentiful, but the collegiate approach did not mean that these problems were nipped in the bud. Although coordinated supervision led regulators to close many of bank’s branches at once after the bank’s accountant resigned and its insolvency became obvious, it is not clear whether Bank of Credit and Commerce International is a college success story or cautionary tale.
There are other reasons to worry about relying on colleges. The collegiate approach is meant to encourage communication more than action. Colleges operate as peers, convened by the home banking regulator, without the sort of hierarchy of decision-making and direction that leads to coordinated action.
I've been on a bit of an international and administrative law kick these days, but as always, the case study is financial regulation. If you're interested in Sovereignty Mismatch And The New Administrative Law, available from the Washington University Law Review and here, you know what to do. Here's the abstract:
In the United States, making international policymaking work with domestic administrative law poses one of the thorniest of modern legal problems — the problem of sovereignty mismatch. Purely domestic regulation, which is a bureaucratic exercise of sovereignty, cannot solve the most challenging issues that regulators now face, and so agencies have started cooperating with their foreign counterparts, which is a negotiated form of sovereignty. But the way they cooperate threatens to undermine all of the values that domestic administrative law, especially its American variant, stands for. International and domestic regulation differ in almost every important way: procedural requirements, substantive remits, method of legitimation, and even in basic policy goals. Even worse, the delegation of power away from the United States is something that our constitutional, international, and administrative law traditions all look upon with great suspicion. The resulting effort to merge international and domestic regulatory styles has been uneven at best. As the globalization of policymaking is the likely future of environmental, business conduct, and consumer protection regulation — and the new paradigm-setting present of financial regulation — the sovereignty mismatch problem must be addressed; this Article shows how Congress can do so.
Comments and concerns welcome.
Those familiar with US corporate law are well aware that, in this field, a single small jurisdiction looms very large. The state of Delaware is today the legal home to more than half of US public companies and about 64% of the Fortune 500. It’s widely understood that no other US state even comes close, and there’s a substantial US corporate legal literature exploring the contours of, and seeking to explain, Delaware’s domestic dominance. As I’ve ventured into the field of cross-border finance, however, I’ve been struck by the fact that Delaware isn’t really unique. Taking a broad view of the regulatory fields relevant to cross-border corporate and financial services, there’s a set of small jurisdictions that are not merely successful in their respective fields of specialization, but are in fact globally dominant in those fields.
In a current working paper I’ve selected a handful of these jurisdictions that I find particularly interesting; assessed whether extant theoretical paradigms can shed much light on their successes; and proposed an alternative approach that I think better captures their salient characteristics and competitive strategies – the so-called “market-dominant small jurisdiction,” or MDSJ. The jurisdictions studied include Bermuda, well-established among the world’s preeminent insurance markets; Singapore, a rising power in wealth management; Switzerland, the long-standing global leader in private banking; and Delaware, the predominant jurisdiction of incorporation for US public companies and a global competitor in the organization of various forms of business entities.
The interesting question, of course, is why these small jurisdictions have been able to achieve global dominance in their respective specialties – and the paper includes an extended treatment of various theoretical lenses to which one might turn for an explanation. None, however, can account for the range of jurisdictions that I identify. Notably, while taxation (or lack thereof) certainly looms large as a competitive strategy in each case, the “tax haven” literature can’t explain the global dominance of these particular jurisdictions. Simply put, it’s implausible that a new entrant could meaningfully challenge the competitive position of any of these jurisdictions simply by copying their tax codes, or any other component of their regulatory structures for that matter. Each has a substantive domain of service-based expertise providing a source of real competitive advantage beyond the jurisdiction’s black-letter law – and this renders it effectively impossible to compete with these jurisdictions simply by copying and pasting their laws into one’s own books.
The“offshore financial center” literature looks beyond tax, emphasizing cross-border services as such, yet encounters its own problems. This literature has been heavily preoccupied with recent entrants, reflecting strong preoccupation with the global acceleration of cross-border finance since the late 1960s – an inclination that’s tended to distract this literature from the commonalities with early movers like Delaware and Switzerland, which rose to prominence in the early 20th Century. In this light, it’s critical to observe that some of the most successful of the small jurisdictions active in cross-border finance aren’t actually “offshore” at all – again, including Delaware and Switzerland. I argue that the onshore/offshore distinction has obscured more than it illuminates; it simultaneously fails to provide a comprehensive account of what’s truly distinctive about the range of successful small jurisdictions, and overstates the distinction between “us” (onshore) and “them” (offshore) – particularly in terms of involvement in problematic practices, which occur in both settings (of which more below). The rhetorical function of this distinction is largely to paint small jurisdictions’ activities as uniquely and exclusively problematic, obscuring both small-market positives and big-market negatives.
In developing my alternative – this “market-dominant small jurisdiction” (MDSJ) concept – I draw upon these and other literatures while endeavoring to avoid their limitations. I argue that, notwithstanding substantial differences, these jurisdictions do exhibit fundamental commonalities in their contextual features and economic development strategies:
MDSJs are small and poorly endowed in natural resources, limiting their economic development options. This creates a strong incentive to innovate in law and finance, while rendering credible their long-term commitment to the innovations undertaken. These jurisdictions substantially depend on their legal and financial structures, and the market knows it.
They possess legislative autonomy – the critical resource for such innovation. This is obvious for sovereigns like Singapore and Switzerland, yet full-blown sovereignty isn’t required. Delaware possesses sufficient room to maneuver under the internal affairs doctrine, and Bermuda – a British overseas territory – benefits from an express delegation of legislative authority.
MDSJs tend to be culturally proximate to major economic powers, and favorably situated geographically vis-à-vis those powers. These ties can arise in various ways – through colonialism, common histories, and/or geography. But in each case, their identification with – and capacity to interact closely with – multiple powers positions them to perform important regional and global “bridging” functions in cross-border finance.
- Bermuda has long bridged the Atlantic, maintaining strong ties with the UK and North America alike. They benefit from the substantial ballast of association with the British legal system and insurance market (i.e. Lloyds) on one side, and proximity to the massive US economy and insurance market on the other.
- Singapore has long bridged East and West, having been established as a British colony to maintain an East Asian trade route. Their location allowed them to contribute to the creation of a 24-hour global securities trading system – in the morning taking the baton from US markets that just closed, and in the afternoon handing the baton to European markets that just opened. Since the 2000s Singapore has developed a two-way wealth management strategy, serving as the entry point for Western money into East Asia, and the entry point for rapidly accumulating East Asian money into the West – a strategy facilitated by a highly educated, bilingual (Mandarin-English) working population.
- Switzerland, located in the heart of Europe, borders on and transacts in the native languages of each of the surrounding economic powers. German, French, and Italian are all official languages, and English-language proficiency is widespread as well.
- Delaware plays an under-explored bridging function in the US political economy, standing between and interacting with both the finance capital (New York) and the political capital (DC) – a geographic feature touted in corporate marketing materials.
In addition to these contextual commonalities, MDSJs exhibit similar economic development strategies. Notably, they’ve heavily invested in human capital, professional networks, and related institutional structures. The aim is to foster a community of financial professionals with the incentives and capacity to develop high value-added niche specializations – a project eased by the fact that these are small places. In each case the relevant public and private stakeholders often know one another personally, facilitating consensus and responsiveness to evolving markets. Additionally, these public and private constituencies share largely homogenous interests – they all prosper if finance prospers.
Finally, MDSJs consciously seek to balance close collaboration with, and robust oversight of, the relevant professional communities – the aim being to at once convey flexibility, stability, and credibility. Essentially these jurisdictions seek to avoid over-regulation frowned upon by the market, while at the same time avoiding under-regulation frowned upon by regulators in other jurisdictions. In so doing, they generally try to bring private-sector experience to bear upon the regulatory design process, seeking to maintain cutting-edge regulatory regimes while at the same time conveying stability and credibility to global markets and their foreign regulatory counterparts. In each case this dual aim is reinforced by additional confidence-enhancing features – notably, low levels of perceived public corruption, and multi-party support for the development of financial services capacity.
The paper explores the embodiment of these characteristics in some depth, and ultimately suggests that examining such jurisdictions through this lens could offer tangible benefits as we continue to assess their costs and benefits in cross-border finance. While potential abuse of the structures available in each of these jurisdictions is acknowledged – including money laundering and tax evasion – these problems are not unique to so-called “offshore” jurisdictions. Notwithstanding Delaware’s extraordinary contribution to the development of substantive corporate law – principally attributable to their expert bench and bar – the state has been roundly criticized for creating some of the world’s most opaque shell companies. At the same time, US calls for greater tax transparency are undercut by the fact that we ourselves don’t tax interest income on – and accordingly don’t require 1099s for – non-resident alien accounts. In this light, to avoid charges of a regulatory double standard, US policymakers seeking greater financial and tax transparency – efforts I broadly support – may have to start by cleaning up their own backyards.
I am sitting in the excellent AALS Mid-Year Meeting Workshop on Blurring Boundaries in Financial and Corporate Law organized by a planning committee chaired by the amazing and incredible Joan Heminway. The topic could not be more timely and the participants are making interesting and provocative presentations. This morning's plenary panel was entitled "Complexity," and featured excellent presentations from Henry Hu, Kristin Johnsons, Tom Lin, and Saule Omarova.
In listening to these thoughtful presentations, I had a few thoughts on the use of the term "complexity." Instead of taking up precious question an answer time, I thought I would just save this question for a blog post.
Many terms have been overused since the financial crisis: risk, systemic risk, tranche, "slice and dice," etc. Lately, however, the noun "complexity" has gained a lot of popularity. However, I'm not sure we are all using it either to describe the real noun being described (i.e., "complexity of X") or the nature of the underlying adjective "complex." The noun "complexity" ends up being a derivative itself that inserts more uncertainty into the conversation!
First, I would urge scholars to limit the use of "complexity" as a stand-alone noun. Are you describing a complex organizational structure? Complex business activities of a corporation, particularly a financial institution's proprietary trading system? Complex financial products that are either being sold by an entity or purchased by an entity and held as an asset?
Second, is compllex the right adjective to use? Like many folks this Spring, I recently finished "Flash Boys" by Michael Lewis. The book, which chronicles one man's campaign against the abuses of high frequency trading and dark pools, is fun to read and worthy of its own blog post, but I wanted to focus on one paragraph. In this paragraph, Zoran Perkov, a programmer lured away from NASDAQ to work for the good guys, defines a complex system as "something you cannot predict" and a place where "Sh*t will break and there is nothing you can do about it": "People think complex is an advanced state of complicated. It's not. A car key is simple. A car is complicated. A car in traffic is complex." Zoran cites the book "Complexity" by Mitchell Waldrop, and the Amazon page for that book talks about the work on complexity at the Sante Fe Institute. One commentator at today's panel also mentioned the SFI.
I haven't read the Waldrup book, but it does seem that we may be using the word "complex" in situations in which we should simply use "complicated." That would also cut down on the nominalization trend. "Complicatedness" just doesn't roll of your tongue very easily.
Here is an old saw: the best way to predict bubbles is to look at the industry to which Harvard MBA grads are flocking. I used this as a laugh line when I spoke to David’s students at Wharton in October. Now Matt O’Brien at the Washington Post Wonkblog extends the analysis to Crimson undergrads.
O’Brien’s article is the latest salvo in the analysis of what makes “Organization Kids” flock to finance. Kevin Roose’s Young Money made a splash when it was published earlier this year. Academics looking to understand students should consider delving into what makes students who enter finance and law with more than a dismissive lament of “kids these days.” Indeed, the modern university seems designed specifically to create organization kids. Think of how the bizarre gatekeeping rituals of college admissions filter down to create an achievement junky culture that begins in middle school if not earlier. Students and parents seek to anticipate the divinations of middle aged oracles who themselves attempt to divine meaning from personal statements and lists of extracurriculars.
The Harvard MBA Indicator is a fun parlor game. But it also suggests that in trying to understand deep questions such as why bubbles begin and how financial institutions operate, we might look at a broader set of disciplines than just economics. Some very interesting legal scholarship on bubbles, financial markets (think Stuart Banner’s history) and financial institutions (Annelise Rile’s sociological studies of Japanese firms) serves as examples of the possibilities. If academics lament their students being organization kids, they should have a little self-awareness and step outside their own institutional comfort zone.
Collateralized Debt Obligations
USAF Tests early 1950s
JPM experiments early 1990s
Pricey Simulation of Destruction of Tokyo
Computer Special Effects
Destructive Monte Carlo Simulation for Pricing
Heating up in Asia
Europe already burned
Laser, Taser, Bomb
Too Big To
Japan, Hawaii, San Francisco, Las Vegas, in other words, comparatively limited
Scope of Devastation
Arizona, California, Florida, Nevada, European banks, worldwide financial markets
“Mmm … Calamari”
Carl Levin, Mecha-Carl Levin
Hollywood too risk averse; recycles old assets
Wall Street too risk seeking; recycles old assets
We enjoyed a great lineup of speakers and cutting edge scholarship here in Boulder this past semester as part of CU’s Business Law Colloquium. The following papers make for excellent start-of-the-summer reading:
Dan Katz (Michigan State): Quantitative Legal Prediction – or – How I Learned to Stop Worrying and Start Preparing for the Data Driven Future of the Legal Services Industry: a provocative look at Big Data will help clients analyze everything from whether to bring or settle a lawsuit to how to hire legal counsel. Katz examines implications for legal education.
Rob Jackson (Columbia): Toward a Constitutional Review of the Poison Pill (with Lucian Bebchuk): Jackson and Bebchuk kicked a hornet’s nest with their argument that some state antitakeover statutes (and, by extension, poison pills under those statutes) may be preempted by the Williams Act. See here for the rapid fire response from Martin Lipton.
Brad Bernthal (Colorado): What the Advocate’s Playbook Reveals About FCC Institutional Tendencies in an Innovation Age: my co-teacher interviewed telecom lawyers to map out both their strategies for influencing the Federal Communications Commission and what these strategies mean for stifling innovation in that agency.
Kate Judge (Columbia): Intermediary Influence: Judge examines the mechanisms by which intermediaries – both financial and otherwise – engage in rent-seeking rather than lowering transaction costs for market participants. The paper helps explain everything from Tesla’s ongoing fight with the Great State of New Jersey to sell cars without relying on dealers to entrenchment by large financial conglomerates.
Lynn Stout (Cornell): Killing Conscience: The Unintended Behavioral Consequences of 'Pay For Performance': Stout argues that pay for performance compensation in companies undermines ethical behavior by framing choices in terms of monetary reward. This adds to the growing literature on compliance which ranges from Tom Tyler’s germinal work to Tung & Henderson, who argue for adapting pay for performance for regulators.
Steven Schwarcz (Duke): The Governance Structure of Shadow Banking: Rethinking Assumptions About Limited Liability: Schwarcz argues for imposing additional liability on the “owner-managers” of some shadow banking entities to dampen the moral hazard and excessive risk taking by these entities, which contributed to the financial crisis. This paper joins a chorus of other papers arguing to using shareholder or director & officer liability mechanisms to fight systemic risk. (See Hill & Painter; Admati, Conti-Brown, & Pfleiderer; and Armour & Gordon).
[I’ll inject myself editorially on this one paper: this is a provocative idea, but one that would make debt even cheaper relative to equity than it already is. This would encourage firms to ratchet up already high levels of leverage. I looked at the expansion of limited liability in Britain in the 18th Century in Chapter 2 of my book. The good news for Schwarcz’s proposal from this history: expansions of limited liability seem to have coincided and contributed to the booms in the cycle of financial crises in that country that occurred every 10 years in that country. The bad news: unlimited liability for shareholders does not seem to have staved off crises and likely contributed to the contagion in the Panic of 1825.]
The CU Business Law Colloquium also heard from Gordon Smith (BYU), Jim Cox (Duke), Sharon Matusik (Colorado – Business), Afra Afsharipour (UC Davis), Jesse Fried (Harvard), and Brian Broughman (Indiana). Their papers are not yet up on ssrn.
After the jump, is the program for the AALS Mid-year Meeting on Corporate and Financial Law in Washington, D.C. from June 7-9. If you register (site restricted) and attend, make sure to stay until the fireworks at the very last panel!
Saturday, June 7, 2014
4:00 - 8:00 p.m.
6:00 - 7:30 p.m.
Sunday, June 8, 2014
8:45 - 9:00 a.m.
Judith Areen, AALS Executive Director, Chief Executive Officer
Joan M. Heminway, Chair, Planning Committee for AALS Workshop on Blurring Boundaries in Financial and Corporate Law and The University of Tennessee College of Law
9:00 - 9:30 a.m.
Donald C. Langevoort, Georgetown University Law Center
9:30 a.m. - 12:00 p.m.
Sessions on Research
Recent appraisals of the state of legal education have raised questions about the value of legal scholarship. Yet, most law scholars believe that their work contributes meaningfully to important theoretical and policy-oriented discussions-including those involving financial and corporate law. What is the relevance and overall value of legal scholarship in financial and corporate law in an era of blurred and blurring boundaries? What methodologies, forms of scholarly output, and publication venues most effectively and efficiently reach the target audiences for financial and corporate law scholarship? This segment of the program focuses on these and other questions relating to research and writing in financial and corporate law as a matter of current and desired future practice.
Specifically, the segment features a two-part approach to questions involving research in the context of unclear substantive demarcations in financial and corporate law. The first part is a plenary panel discussion, and the second part is a series of small-group networking sessions. More detailed descriptions of each are set forth below.
9:30 -10:45 a.m.
Research Plenary Panel
Robert P. Bartlett, III, University of California, Berkeley School of Law
Jill E. Fisch, University of Pennsylvania Law School
Claire A. Hill, University of Minnesota Law School
The prevalence of economic analysis is one element that unites legal scholarship across the many areas of business law. Scholars in the various business law fields of endeavor (e.g., business associations, securities regulation, financial institutions, insurance) have used other disciplines and methodological approaches to a far lesser extent. Do we have the right mix of interdisciplinarity to most effectively respond to current challenges involving financial and corporate law? How, if at all, do traditional legal scholars re-tool to address any perceived need for interdisciplinary research that engages academic disciplines outside their areas of expertise (or areas of expertise in which their knowledge is superficial or outdated)?
This panel explores the capacity of a variety of methodologies and disciplines to enrich the study of financial and corporate law in an era of blurring substantive and regulatory boundaries. The panel also addresses cutting edge questions and controversies regarding blurring boundaries in particular research traditions. The panel comprises scholars who use different quantitative and qualitative analytical methods in their work. The panel is designed to allow these scholars to discuss techniques and tools they use and to yield valuable insights into questions that cut across financial and corporate law, such as the behavior of consumers, investors, financial institutions (and the individuals who work inside them), lawyers, and regulators.
10:45 - 11:00 a.m.
11:00 a.m. - 12:00 p.m.
Research Small Group /Networking Sessions
Michelle M. Harner, University of Maryland Francis King Carey School of Law
Christine Hurt, University of Illinois College of Law
Anne M. Tucker, Georgia State University College of Law
Others to be announced.
This part of the program is designed to offer participants the opportunity to share their thoughts on blurred lines in financial regulation research. Topics will vary from session to session but may include: how individual research approaches and methods have changed and are changing; how law academics keep up with emerging research approaches and methods-e.g., where research content is now found and how it is processed; whether (and, if so, how) individuals with different substantive law and research backgrounds "talk" to each other to help bridge gaps; and what optimal work product outcomes look like as substantive and regulatory lines continue to blur. Facilitators will report out the ideas from their sessions.
12:00 - 1:30 p.m.
Elizabeth Warren, U.S. Senator for Massachusetts (Invited)
1:45 - 5:00 p.m.
Associated legal and regulatory challenges and changes force us to reconsider our pedagogy and the business law curriculum in very fundamental ways. Structuring courses and choosing and employing effective teaching tools are, of course, part of the discussion. But teaching financial and corporate law in an era of blurring boundaries also engages larger issues, such as the role of different types of courses (e.g., clinics, practicums, externships, field placements, simulation courses) and pedagogies in teaching business law courses. Also important are pedagogical methods geared to develop the financial literacy, numeracy, and professional values that students concentrating in financial and corporate law should have when they graduate from law school. Finally, it seems that it would be beneficial to address the value for law students, if any, in joint degree (e.g., JD/MBA) and advanced degree (LLM, Masters in Law, Juris Masters, etc.) programs and the overall place and prominence of financial and corporate law in the current and future program of legal education in the United States. The program is designed to involve a significant amount of "show and tell," rather than predominantly focusing on traditional academic presentations.
1:45 - 3:00 p.m.
Teaching Plenary Panel
William A. Birdthistle, Chicago-Kent College of Law, Illinois Institute of Technology
James A. Fanto, Brooklyn Law School
Edward J. Janger, Brooklyn Law School
John Henry Schlegel, University at Buffalo Law School
David A. Westbrook, University at Buffalo Law School
This panel, populated with presenters culled from a call for proposals, explores the challenges and opportunities for legal educators in an era of blurring substantive and regulatory boundaries. A range of possible teaching methods and tools can assist in the task. But difficult questions exist as to how to best use these methods and tools in individual courses and across the curriculum-in and outside business law teaching. Course selection and curricular options (including those external to the standard Juris Doctor courses and curriculum) deserve important consideration at both the individual (student and faculty) and institutional levels. The panel is designed to allow academics specializing in financial and corporate law to discuss these and other issues relevant to educating business law students in light of blurring financial and corporate law boundaries.
3:00 - 3:15 p.m.
3:15 - 5:00 p.m.
Teaching Concurrent Sessions
This portion of the program features concurrent sessions on teaching led by law faculty chosen from a call for proposals. Each session has a different topical focus and is offered twice-once in each breakout period. Accordingly, each attendee has the opportunity to attend two sessions, each on a different topic. These sessions are designed to involve significant interaction between the selected discussion leader and the attendees.
3:15 - 3:45 p.m.
Consumer Protection Clinicas as a Site for Blurring Boundaries
Bryan L. Adamson, Seattle University School of Law
Teaching Banking Law
Mehrsa Baradaran, University of Georgia School of Law
A Multi-Disciplinary Approach to Real Estate Investment and Finance Law
Andrea Boyack, Washburn University School of Law
Teaching the Federal Reserve in Law School: Crossing Disciplines, Paradigms and Vantage Points
Timothy A. Canova, Nova Southeastern University, Shepard Broad Law Center
From the Balance Sheet to Beta: A Hands-On Approach to Teaching Accounting & Finance Concepts
Virginia Harper Ho, University of Kansas School of Law
3:45 - 4:15 p.m.
Repeat of Concurrent Session Presentations
4:15 - 5:00 p.m.
5:30 - 6:30 p.m.
Monday, June 9, 2014
9:00 - 10:15 a.m.
Complexity Plenary Panel
Henry T. Hu, The University of Texas School of Law
Kristin N. Johnson, Seton Hall University School of Law
Tom C.W. Lin, University of Florida Fredric G. Levin College of Law
Saule T. Omarova, University of North Carolina, School of Law
Modern financial markets, as well as the firms that operate within these markets, have become increasingly complex over the last several decades. This trend is attributable to various developments, including the accelerating sophistication of technology, the increasing size of firms, the more heterogeneous and sophisticated needs of users of financial services, and the inevitable desire of firms to seek out regulatory gaps. This ever-growing complexity creates a broad set of new challenges for law and regulation. For instance, complexity may confound the efforts of regulators to monitor financial markets for systemic risk or to erect rules to prevent or mitigate that risk. Similarly, it can frustrate the capacity of law to promote more informed consumer and investor protection tools such as disclosure or financial literacy education. Increasing complexity also raises new challenges about the optimal modes of regulation: according to some, it demands greater reliance on regulatory approaches such as self-governance or "new governance," while others argue that it may counter-intuitively necessitate simpler and blunter rules. Finally, market and firm complexity complicates the targets of regulation, which now consists not only of banks, insurers and broker-dealers, but also shadow banks, hedge funds, and participants in derivatives markets.
10:15 - 10:30 a.m.
10:30 a.m. - 12:00 p.m.
Modern Regulatory Approaches
Historically, scholars have studied law and regulation within a particular substantive area, such as banking, corporate, insurance, or securities regulation. However, modern regulatory approaches frequently require knowledge of multiple topics and raise challenges that cut across different areas of legal study. These two concurrent sessions will feature four approaches to understanding modern regulation, each led by a scholar whose work has been focused in the area.
Regulatory arbitrage and cost-benefit analysis are issues that cut across many areas of modern regulation. Many costly rules create incentives for parties to transact in ways that are economically equivalent, but lead to differential regulatory treatment. Both regulators and courts increasingly are required to, and do, use cost-benefit analysis to justify new regulation.
10:30 - 11:15 a.m.
Modern Regulatory Approaches Concurrent Session #1
Jordan M. Barry, University of San Diego School of Law (confirmed)
Modern Regulatory Approaches Concurrent Session #2
Yoon-Ho Alex Lee, University of Southern California Gould School of Law (confirmed)
11:15 a.m. - 12:00 p.m.
Modern Regulatory Approaches Concurrent Session #1
Adam J. Levitin, Georgetown University Law Center (confirmed)
Modern Regulatory Approaches Concurrent Session #2
Dana Brakman Reiser, Brooklyn Law School (confirmed)
12:00 - 1:30 p.m.
Daniel K. Tarullo, Governor, Board of Governors, Federal Reserve System, Washington, DC
1:30 - 3:00 p.m.
New Frontiers: Innovation, Competition and Collaboration in International Financial Markets
Wulf Kaal, University of St. Thomas School of Law
Eric J. Pan, Associate Director, Office of International Affairs, U.S. Securities and
Exchange Commission, Washington, DC
Roberta Romano, Yale Law School
Innovation and the mobility of capital have changed global financial markets in profound and consequential ways. Advances in technology and developments in the infrastructure of financial markets have engendered new levels of interconnectivity. The creation of new financial products, the increasing prominence of market participants such as private equity and hedge funds, and the birth of complex trading strategies (namely algorithmic and high-frequency trading); have permanently altered the landscape of financial markets. Operating in this new frontier, significant financial institutions face historically unparalleled vulnerabilities. The financial crisis of 2008 demonstrated the broad range of concerns that challenge government efforts to regulate financial markets.
Responding to the crisis, authorities propose a diverse array of regulatory reforms. For example, the U.S. Congress and regulators have adopted an aggressive and extraterritorial policy governing domestic and international over-the-counter derivatives, creating a Financial Stability Oversight Council and articulating formal processes to address the insolvency of an international financial market conglomerate. In addition, the highly debated and not-yet-finalized Volker Rule promises to reduce excessive risk taking by systemically important financial institutions and minimize the likelihood of future crises. Other countries' proposed solutions take a different tack, adopting Vickers- and Liikanen-style "ring-fencing" policies. The trend toward diversity in regulatory approaches overshadows central bankers' collaborative efforts to craft, implement and enforce the third round of Basel accords.
The debate over uniformity or diversity in regulation provides a forum for evaluating the merits of these various regulatory approaches and the domestic and international actors who inform the discussion. Questions arising from the debate explore the value of efforts to adopt uniform regulatory approaches; the contributions of international regulatory bodies and trade organizations such as the BIS, the G-20, and IOSCO; the benefits and shortcomings of microprudential policies governing banking institutions; and the limits that political accountability and legitimacy pose for each of the governments whose regulatory policies may heighten or mitigate the potential for future financial crises.
3:00 - 3:15 p.m.
3:15 - 4:45 p.m.
Political Dynamics Plenary Panel
Erik F. Gerding, University of Colorado School of Law
M. Todd Henderson, The University of Chicago, The Law School
Steven Ramirez, Loyola University Chicago School of Law
Hillary A. Sale, Washington University in St. Louis School of Law
Financial and corporate regulation no longer fits within the comfortable regulatory silos so familiar to scholars of previous decades. The efforts to design and implement new regulatory structures after the financial crisis are taking place in sometimes unfamiliar political cross-currents that reshape prior theories. This plenary panel will address the political dynamics of financial and corporate law in contexts framed by a series of important questions: Have financial and corporate law become more political (e.g. the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Jumpstart Our Business Startups Act within 20 months of each other)? Have the roles of courts, legislators, the president, and independent agencies changed and what should those roles be, (with the Citizens United, Business Roundtable, and American Petroleum cases as recent relevant examples)? How has the blurred world of financial and corporate law changed? Who are the constituencies to be considered in evaluating these laws? For example, whose primacy should be our focus and is there new space for occupiers, crowds, and those pursuing social benefit enterprises? Does globalization stress our traditional reliance on state regulation and complicate our existing theories of political economy?
Oops, says BofA, we messed up our capital calculations. We don't have as much money on hand for shocks or emergencies as we thought. Since that's the principal thing that banking regulators care about, you might wonder what happens to banks who do this. Perhaps it would be interesting to consider some alternatives, might offer a sense of what bank supervision does and doesn't involve these days.
- The Fed could prosecute BofA executives for fraud. Call that the securities regulator/white collar approach. One problem, fraud must be intentional, so this would have to be not an error, but at the very least some sort of reckless accounting. It punishes individuals in management who contributed to the fraud.
- The Fed/FDIC could revoke their license or pull the inspectors. This is the USDA approach. The problem is that it is too nuclear - both of those things would shut down a bank that is far too big to fail.
- The Fed could fine them. This is the money laundering approach, and those fines are often imposed not just for tolerating the laundering of money, but for having inadequate controls in place to prevent it. We may see a fine here, BofA is pretty much saying that it had inadequate controls in place by acknowledging that it did the calculations wrong to the tune of billions of dollars.
- Or the Fed could do what the Fed is, for now, doing. It is suspending any dividend increases by the bank until it submits an accurate account of the state of its capital reserves, and has that account approved by the agency as sufficient. This is a somewhat new thing in high level banking oversight - punish the shareholders, thereby encouraging them to monitor management. Does it work? It is perhaps a little untested, although suspending capital distributions has been a tool used by the FDIC on the sorts of distressed small banks that were its old stock in trade. Seeing that tool applied to Citi and now BofA, however, is a dfferent thing altogether. It will be interesting to see if this trend continues.
Dealbook has reprinted a series of tweets by Marc Andreessen explaining the sometimes lofty valuations of acquisitions in the tech sector. The key idea is "attach rate," which Andreessen describes as follows: "acquirer Y can attach company X's product to Y's sales engine."
We used to have another word for this idea: synergy.
Just because it's not new doesn't mean it's not real. But Andreessen rightly cautions: "Of course, for the deal to be good, I have to deliver that attach rate. But when it works, and it often does, it's magical & worth doing."
I am probably more skeptical -- "often" should probably be "sometimes" -- but I generally agree with the thrust of the tweets. Thanks to Matt Jennejohn for the pointer.
You may remember Greg Shill blogged about Mr. Gox--at that time I just had some vague, "Mt. Gox-bad-virtual-currency-shady" bitcoin association in my head. Since then, I've heard 2 student presentations on Bitcoin , and I thought I'd pass along what I have learned. Dear reader, I will presume that you, like me, really don't know anything about it. It may well be that in this matter, like so many, I am wrong.
Both presentations started out with this video (It's less than 2 minutes, just go ahead and watch it):
Ok, what struck you? Was it the miners? How bizarre is that? Bitcoin crowdsources its processing of individual transactions to "miners," who earn bitcoins for their trouble. And bitcoin has a built-in limit. From bitcoin.org:
Bitcoins are created at a decreasing and predictable rate. The number of new bitcoins created each year is automatically halved over time until bitcoin issuance halts completely with a total of 21 million bitcoins in existence. At this point, Bitcoin miners will probably be supported exclusively by numerous small transaction fees.
Here is another video that shows a large scale bitcoin miner. This one is longer, and a little local-news cheesy:
I'm now much more interested in bitcoin. Here are some random thoughts:
- I love the "stick it to the man" "down with the banks" angle. No user fees! Fight the power!
- Much to say about the auto-limiting feature. Supposedly it's built into the code. But clearly bitcoins have been hacked before. Who's to say the 21 million ceiling is a unhackable?
- What if it can't be hacked? What does it mean to have a currency that can't be devalued by a government in need of quick cash? Sounds pretty cool.
- How important is anonymity in purchasing? Is it just a drugs and porn thing, or for more mainstream industries?
- What role does/should law have here?
Update: Urksa Velikonja in the comments linked to a great article giving more info about mining. Have miners created securities? Sounds like a great fact pattern...
Also, on the hacking front, here's a link to a chronology of bitcoin hacking incidents. The idea of hackers making off with my virtual wallet has me rocking me back and forth humming and holding my hands over my ears. I don't think I could do more than dabble in the world of virtual currency.
- "That one million hours a year devoted to resolution planning is 500 full-time employees"
- "There are 8,000 employees 'dedicated solely to building and maintaining an industry-leading Anti-Money Laundering (AML) program.' JPMorgan employs more AML compliance officers than the Treasury and the Fed combined."
- Stress testing required 500+ FTEs
- Compliance with Basel's new securitization rules has required 35,000 hours of work (at 2000 hours per year, that's only 17.5 FTEs, so you can see why they moved to hours there).
That's a lot of compliance, and indeed, at these rates, way more people do compliance for JPMorgan than, probably, do actual investment banking. Of course, maybe we want all of this given that the firm is far too big to fail, and maybe we want to make banking burdensome and unprofitable. If so, we are on our way!
The leverage rule agreed to internationally is 3%, and you should think of a it as an alternative minimum tax. Worried that banks might be able to game capital requirements, which require them to hold funds in reserve to deal with shocks, the world's regulators also decided to forbid, on pain of cutting dividends and executive compensation, large banks froms from taking positions that would mean that more than 3% of their assets are capital. American banking regulators are going further - they are disincentivizing bigness by requiring the 8 largest banks to comply with a 5% leverage ratio. Some thoughts:
- The giveback to industry is that this rule isn't effective until 2018. Only in financial regulation do you ever see such long-dated rules.
- American banks might have to add $68 billion in capital to comply with this requirement. Would you sue to avoid that kind of a charge? Of course you would! But the banks probably won't. The Fed just doesn't face the sort of Total Litigation regulatory contest that the SEC faces.
- Ditto, you'd think that such a big deal rule would require review by OIRA. Nope!