The comment period just ended, and the Times has a piece on how active individual banks have been in filing their thoughts (with pictures of your favorite Davis Polk banking law celebrities, if you like that sort of thing).  Ordinarily, banks leave these sorts of things to the banking associations.  The WSJ has a piece summarizing the comments, and you can get your own taste here (SEC), here (CFTC), and here (Fed).  Perhaps most encouragingly, Kim Krawiec, already something of an expert on this sort of commenting, is on the case.  It certainly shows how financial lawyers may need to master some of the intricacies of participating in administrative rulemaking.

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The 2011 symposium edition of the Berkeley Business Law Journal on Dodd-Frank is out.  I would like to thank the editors and the Berkeley Center for Law, Business and the Economy for inviting me to a great conference.  My contribution, Credit Derivatives, Leverage, and Financial Regulation’s Missing Macroeconomic Dimension is now up on ssrn.  Here is the abstract:

Of all OTC derivatives, credit derivatives pose particular concerns because of their ability to generate leverage that can increase liquidity - or the effective money supply - throughout the financial system. Credit derivatives and the leverage they create thus do much more than increase the fragility of financial institutions and increase counterparty risk. By increasing leverage and liquidity, credit derivatives can fuel rises in asset prices and even asset price bubbles. Rising asset prices can then mask mistakes in the pricing of credit derivatives and in assessments of overall leverage in the financial system. Furthermore, the use of credit derivatives by financial institutions can contribute to a cycle of leveraging and deleveraging in the economy.

This Article argues for viewing many of the policy responses to credit derivatives, such as requirements that these derivatives be exchange traded, centrally cleared, or otherwise subject to collateral or 'margin' requirements, in a second, macroeconomic dimension. These rules have the potential to change – or at least better measure – the amount of liquidity and the supply of credit in financial markets and in the 'real' economy. By examining credit derivatives, this Article illustrates the need to see a wide array of financial regulations in a macroeconomic context. 

Understanding credit derivatives’ macroeconomic effects has implications for macroprudential regulatory design. First, regulations that address financial institution leverage offer central bankers new tools to dampen inflation in asset markets and to fight potential asset price bubbles. Second, even if these regulations are not used primarily as monetary or macroeconomic levers, changes in these regulations, including changes in the effectiveness of these regulations due to regulatory arbitrage, can have profound macroeconomic effects. Third, the macroeconomic dimension of credit derivative regulation and other financial regulation argues for greater coordination between prudential regulation and macroeconomic policy.

Comments by e-mail are always welcome.

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As the folks at Corp Counsel observe, the UK is making a big thing about reining in exeuctive pay:

As I've blogged before, the United Kingdom has been on a path to revise its executive compensation laws to rein in excessive pay. Yesterday, the UK announced a slew of proposals that would push the envelope in the executive pay area - here are the proposals (or the closest thing I could find to them), as well as British Business Secretary Vince Cable's oral statement, a summary of responses to the related discussion paper and a comparison with the High Pay Commission's report that came out a few months ago (note that the HPC is not an independent commission; it's a left wing charity). And here is a Towers Watson memo, ISS blog and NY Times article discussing these proposals.

The proposed major changes include:

- Say-on-pay votes would be binding
- Approval threshold increased to 75% from 50%
- At least two compensation committee members would have no prior board experience
- Clawbacks of bonuses if executives failed
- Enhanced disclosures

It's notable that Britain's opposition party is quoted in media reports as criticizing these proposals as not going far enough!

The Basel Committee is also worrying about executive pay in financial intermediaries.  I think this stuff is evidence of a change in the driver of the debate of executive pay regulation.  The American laissez faire perspective on pay was beginning to spread, to some consternation, to Europe and elsewhere.  But if anything, I think that the post-crisis inclination of foreign countries to point to executive compensation as part of the problem may end up constraining the old American liberality ... through vehicles like Basel.

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In the midst of repeated appeals to the merits of jail time as a post-financial crisis government strategy comes word of a new kind of reckoning.  The CEO of the Royal Bank of Scotland, who disastrously pushed his bank to go really big in the runup to the financial crisis, and received a knighthood for his efforts, is now getting stripped of it:

The British government announced Tuesday that Frederick A. Goodwin, the former chief executive of the Royal Bank of Scotland, now nationalized, would be stripped of his knighthood.

A couple of weeks ago, the country’s prime minister,David Cameron, said that he supported a review of Mr. Goodwin’s knighthood, which Mr. Goodwin received in 2004 for his service to the British banking industry.

That honor now looks woefully out of place. The bank, based in Edinburgh, is 82 percent owned by British taxpayers after receiving a multibillion-dollar bailout in 2008. Mr. Goodwin, who gained the nickname Fred the Shred for his cost-saving efforts, left the bank after the government took control of it in 2008.

Perhaps most amusingly, the stripping puts Mr. Goodwin among some pretty select company.

The removal of his knighthood places Mr. Goodwin alongside other notable individuals. Robert G. Mugabe, the president of Zimbabwe, lost his honorary knighthood in 2008 because of violence ahead of a presidential runoff. Jean Else, who helped transform a failing British school, lost her damehood last year for ignoring some standards and promoting her twin sister.

Given the track record of previous financial crises, I expected a lot more jail time in exchange for the bailouts, but perhaps the bailouts put governments in a "doing business with" rather than "being really angry at" place vis a vis the large banks.  From an American perspective, that relationship would be different from the one that developed after the S&L crisis of the 1990s.  But perhaps Britain is showing the way with regard to imposing sanctions, but not resorting to the criminal code.  If only the United States permitted titles.

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BankAtlantic allegedly minimized the problems in its loan portfolio (strong in Florida real estate) during the financial crisis; now the SEC is suing the bank and its chairman for fraud in failing to disclose risks that the bank was worried about, privately.  Taking the complaint abstractly, I'd say that it's the kind of conduct that a large number of banks might need to worry about, meaning that perhaps indeed, we're looking at some late-breaking SEC crisis enforcement.  Here's the press release, here's last years' news that BB&T bought BankAtlantic, suggesting possible encouragement from the FDIC, though there's nothing about it in the article.  It doesn't appear to be a big case announced by the highest of higher ups at the agency, but it does bare watching.

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This is the fifth and final installment of a series of previews of the papers being presented at the AALS Financial Institutions & Consumer Financial Services Section events this weekend.  This final paper will be presented at a special off-site event starting at 4 pm on Saturday at American University.  (See here for details on the full weekend of Financial Institutions/Consumer Financial Services Section events).

Peter Conti-Brown (Academic Fellow, Stanford Law, Rock Center for Corporate Governance) will present, Liability Holding Companies, a paper he co-authored with Anat Admati and Paul Pfleiderer (both of Stanford’s Graduate School of Business).  To understand this paper, it helps to read an earlier, influential paper by Admati, Pfleiderer, and a number of co-authors on which it builds.  This earlier work, Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive, countered criticisms of higher capital requirements.  That earlier paper responded to charges that higher capital requirements would impose large social costs, including reducing bank lending.

Yet in Liability Holding Companies, Conti-Brown and his co-authors admit that bank debt may have some benefits; creditors may monitor and discipline bank management.  To balance this disciplinary benefit against reducing the social costs of excessive bank leverage (financial institution fragility, systemic risk, increased risk of bailouts), Admati, Conti-Brown, and Pfleiderer propose a regulatory innovation.  Here is their abstract:      

An international debate continues to unfold in banking law, corporate governance, and finance on whether the capital structure of the world’s largest financial institutions is too heavily dependent on debt, too little on equity. Two of us, with co-authors, have argued elsewhere that there is no socially beneficial purpose for this over-reliance on debt and, indeed, that such reliance increases the likelihood of taxpayer bailouts, with their associated economic, financial, and social costs. Some academics and bankers continue to insist, however, that increased equity is costly for banks and for society. The arguments proffered in defense of these propositions contradict the most basic insights from corporate finance, and often neglect to distinguish private costs from social costs in explaining their preference for debt-heavy capital structures.

While there are overwhelming costs that excessive bank debt can have on the broader economy, some contend that there may be some benefits from debt for a firm’s corporate governance. In particular, some academics have argued that debt is useful because it “disciplines” bank management. The idea suggests that creditors with hard claims against the firm will monitor the firm to prevent bank management from misusing the free cash flows that the banks’ economic activities generate. If these benefits exist and are substantial, we may face a vexing tradeoff: too much debt creates dramatic social costs, moral hazard, and systemic risk, while too little may have negative consequences for firm governance. The challenge is to find a way of optimizing that tradeoff.

This Article engages that challenge, and introduces a new kind of financial institution – called a Liability Holding Company (LHC) – that appropriately balances the social costs of excessive private leverage with the purported benefits for corporate governance that such leverage might create. Our proposal places an increased liability version of the bank’s equity in a conjoined but separately controlled entity, the LHC, that also owns other assets to which the banks’ liabilities have recourse in the event of failure. The equity shares of the LHC—a holding company subject to a unique regulatory regime supervised by the Federal Reserve, similar to Bank Holding Companies or Financial Holding Companies—are then traded in public markets. The LHC thus aims to eliminate or at least greatly reduce the role of the government as the effective guarantor of the systemically important financial institutions (SIFIs), thus reducing the distortions that current implicit governmental guarantees create. It additionally allows banks the benefits of two boards: an advising board, that the bank managers may appoint, and the monitoring board housed at the LHC, appointed by the LHC’s own public shareholders. This dual board structure resolves some important issues raised in the long-standing debate about the role corporate boards should play. We discuss in detail how this proposal would function within the present legal and regulatory environment—particularly within the contexts of bank regulation, corporate governance, and Dodd-Frank—and address counter-arguments and alternative proposals.

 Saule Omarova (North Carolina) will serve as discussant for the paper.

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This is the fourth installment of a series of previews of the papers being presented at the AALS Financial Institutions & Consumer Financial Services Section meeting this Sunday from 9 am to 10:45 am at the Marriott Wardman Park.

Stavros Gadinis (U.C. Berkeley) has authored the fourth paper that will be presented on Sunday. His work, From Independence to Politics in Banking Regulation (forthcoming in the Duke Law Journal) provides a very insightful empirical study of how lawmakers are responding to the financial crisis. Surprisingly, Gadinis finds across a number of countries, lawmakers are moving away from giving responsibility for bank regulations to independent agencies. Instead, lawmakers are increasingly assigning responsibility to officials subordinate to elected politicians or to politicians themselves.

Here is his abstract:

U.S. financial regulation traditionally relied on independent agencies, such as the Federal Reserve and the FDIC. In the last two decades, countries around the world followed the U.S. example by strengthening the independence of their financial regulators, encouraged by recommendations from international organizations such as the Basel Committee and the IMF. Yet, reforms introduced following the 2007-2008 financial crisis abandon the conventional paradigm of agency independence and allocate authority to officials under the direct control of elected politicians, such as the Secretary of the Treasury. This paper studies reforms in 10 key jurisdictions for international banking. It shows that politicians gained new powers with three distinct features. First, politicians have new authority not only to handle emergencies, but also to oversee banks’ financial condition during regular times of smooth business operation. Second, politicians exercise these powers directly, rather than by delegation to a regulatory bureaucracy. Third, while reforms did not dismantle independent regulators, they require them to work under the leadership of politicians in new systemic oversight arrangements. Whenever reformers established new regulatory bodies or mechanisms, they placed politicians at the helm.

Gadinis’s paper promises to launch a fleet of subsequent scholarship. Beyond the normative/ policy question of whether this shift away from independence is a good development, are interesting questions that would drill down into the data. I would find it surprising that elected officials would assume all these new powers without building in mechanisms to hedge the risk of being blamed for the next crisis.

At the same time, Gadinis is writing at a particularly fertile juncture of financial regulation and administrative law. Some of the influential recent administrative law scholarship in this area has argued that traditional hallmarks to measure agency independence and traditional mechanisms to safeguard that independence need to be rethought, at least in the U.S. context. For example, Lisa Schulz Bressman & Robert Thompson have looked at the nuanced ways in which the President can exercise influence over agencies.   Rachel Barkow has laid out other ways in which agencies can be insulated from capture beyond the traditional mechanisms (which, include taking away the President’s power to fire an agency head and exempting agency regulations from Executive Office cost-benefit review). So we need to pay much more attention to texture and nuance in defining agency independence and serving its underlying goals. Of course, the coding in a comparative empirical study cannot take into account all the differences in institutional environments among numerous countries.

Gadinis’s paper is sure to spark a lively scholarly conversation. Shruti Rana (Maryland) will serve as discussant and be first to engage.

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This is the second installment of a series of previews of the papers being presented at the AALS Financial Institutions & Consumer Financial Services Section meeting this Sunday from 9 am to 10:45 am at the Marriott Wardman Park.

If the first paper I previewed looks at the challenges of disintermediation and allocating regulatory responsibility, the second paper that will be presented looks at another fundamental question facing financial institution regulation: how can regulation harness market discipline effectively?  Christoph Henkel (Mississippi College School of Law) and Wulf Kaal (Univ. of St. Thomas) take a deep, nuanced look at one approach, contingent capital requirements, in their paper Taking Contingent Capital Seriously – The Prospect of Sequential Triggers in Europe and the United States.  Contingent capital describes debt instruments that would automatically convert into equity upon the occurrence of a trigger event (which might be defined in a regulation).  The trigger would be set to signal the failing health of a financial institution.  Contingent capital provides an additional cushion for failing firms as well as a systemic risk buffer for financial markets.    

Here is Henkel and Kaal’s abstract:

Contingent capital has great potential to help make systemically important financial institutions safer and help avoid another financial crisis. United States policy makers may not have fully utilized the potential of contingent capital. A draft by the EU Commission already suggests the mandatory issuance of contingent capital securities in the resolution phase of systemically important banks in Europe. The Dodd Frank Act mandates a study on the feasibility of contingent capital. This article proposes the use of contingent capital with a sequential trigger as an early preventative tool and as a reorganization tool before liquidation and independent of protection under bankruptcy proceedings. The first preventative trigger would convert a fixed amount of debt to equity at a stage when the institution is still sound on a micro prudential basis, but shows early signs of substantial weakening. The second reorganization trigger would increase voting rights for holders of contingent capital after conversion to equity at the reorganization stage. Sequential triggers could incentivize corrective actions by bank management. The second trigger introduces a quasi preparation stage for bankruptcy, independent of management decisions or corrective action by regulators. The proposal would work seamlessly with the regulatory framework proposed by the EU Commission and could provide U.S. policy makers with a new perspective on the multiple uses of contingent capital in the context of bank restructuring.

Contingent capital has emerged as one of the most innovative potential responses to the financial crisis.  A few years back, Rob Beard blogged at the Conglomerate on CoCo bonds, one version of contingent capital. 

Contingent capital has a long intellectual lineage, including proposals to replace or supplement capital requirements with subordinated debt.  However, the track record in Europe of bank subordinated debt serving as a buffer and early warning system during the crisis was less than stellar. 

One response to this: subordinated debt instruments were poorly designed.  But how should sub debt, contingent capital, or other market discipline instruments be designed?  We need to move beyond the “concept car – looks sexy at the auto fair” phase to doing the safety and road testing to make sure the car doesn’t explode in a turnpike pileup.  Attention to the engineering details is the real strength of the Henkel and Kaal paper. 

Designing these instruments properly is a high stakes job.  The challenge facing market discipline proposals is that we most need them to work when markets go haywire.  This is a challenge, indeed, for all financial institution regulation.

I look forward to hearing Henkel present the paper and to the comments by discussant Mehrsa Baradan (BYU).

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Update 12/24:  I wrote this post before I learned that Larry Ribstein had fallen ill two days ago.   Sadly, Larry passed away early this morning,  The University of Illinois press release is here.  

I will always be touched by how generous Larry was as a scholar and a person. He reached out to me at a conference several years ago.  I was dumbfounded that someone of his stature cared about the scholarship of someone just starting out and someone who didn't share his (occasionally strong) views.  I will miss him and know my colleagues here will as well.  

When the shock dulls a little, I will share more memories of Larry.

Just in time for the Holidays, the corporate law blogosphere has all lit up. The less-than-festive occasion: a draft paper by John Coffee (not on ssrrn, but I have a copy), in which Coffee, among other things, criticizes Roberta Romano, Stephen Bainbridge, and Larry Ribstein for being members of academic “Tea Party" that has opposed Sarbanes Oxley and other recent federal corporate law reforms. (Posts by Ribstein, Bainbridge, Bodie, Leiter).

Coffee usually doesn’t stain permanently, I don’t like doing laundry, and I know little about civility.  So I will make a few questions and observation to switch the discussion to a more productive track.  Hopefully, this might focus on some important differences in ideas among a group of scholars who I admire.

The immediate debate about Professor Coffee’s civility is obscuring a big difference between two very different scholarly approaches to the political economy of law and “bubbles.” This is a topic near and dear to me. I’ve written about it before, and am feverishly working to finish a book on the topic before Winter Break ends.

First, two introductory points: One, as I’ve written before, the greatest cost of Sarbanes Oxley and its debate was that it distracted attention from the growing storm of the financial crisis. While scholars and policymakers were debating whether or not that statute was too little, too much, or just right, financial institutions were making decisions that would do far greater and more lasting damage to the competitiveness of U.S. capital markets than anything SOX did.  

Two, I have yet to be convinced that corporate governance was a first order cause of the crisis or that fixing corporate governance should be a first-order response. The crisis was about financial institutions, not corporations generally. Instead of focusing on executive pay at the Caterpillars of the corporate world or the board composition at Google, we should be worried about the leverage of the Bank of Americas and risk concentrations at the BONYs.  Even if corporate governance played a role,it's financial institutions, smarty.

Now onto the main course… I do think there is an important difference in focus between Coffee on the one hand, and Romano, Bainbridge, and Ribstein on the other. The latter group has labeled SOX as an example of mis-regulation after financial crises and asset price bubbles. For example, Ribstein, in an article I enjoyed quite a bit, includes SOX in a history of “bubble laws.”

Even if you disagree with Ribstein, Romano and Bainbridge with respect to SOX, there is a long history of misguided legal responses to financial crises and bubbles. Some of this legal history is downright ugly. For example, the collapse of one of the first stock market bubbles, that of England in the 1690s, led to restriction on the number of Jewish stock brokers in the City of London. (See my article, p. 406, n. 74.) (As a footnote, the infamous “Bubble Act,” by which Parliament imposed legal restrictions on the formation of new joint stock companies, was not technically a response to a collapsed bubble. In fact, it was passed at the urging of insiders of the notorious “South Seas Company” before the collapse of the eponymous bubble. The law was an attempt to prevent competitors from entering English capital markets (see that same paper, p. 408)).

However, the focus on legal reactions in the wake of bubbles is only half the historical and political economy story. The criticism of bubble laws misses the ways in which legal change contributed to the formation of bubbles and financial crises. By legal change, I mean more than just deregulation, but also under-enforcement of laws and, in many cases, government subsidization of booming asset markets.

One way governments provide these subsidies is by granting legal monopolies to certain investment ventures. These monopolies are intended stimulate financial investment, foreign trade or the development of certain industries. In my book, I am tracing this practice from the royal charters in the South Seas and French Mississippi bubbles all the way to Freddie and Fannie in the present day. Corporate governance can and has been a part of the bubbles, just not in the way the SOX debate suggests. Indeed, it can be helpful in looking at history to see corporate law as an important tool (albeit a crude one, often used to dangerous effect) in the greater set of financial market regulations. Corporate law and corporate monopolies have been used to stimulate markets. The problem is that it is hard to pull away the punch when the party gets rockin’.

The focus on bubble laws misses the contribution of laws to bubble formation. By contrast, Coffee, in the disputed paper, provides an analysis of the political economy of financial regulation pre-crisis. However, his analysis is too spare. It focuses on Mancur Olson’s writings and leaves out the broader spectrum of theories – public choice and otherwise – that attempt to explain regulation and deregulation of financial markets and otherwise. It also misses the fact that law and regulation can stimulate markets beyond just deregulation and rollback. I argue that governments also subsidize have a history and incentive to provide excessive subsidies to particular financial markets, through corporate law and otherwise.

Coffee seems to miss the government subsidy story and the potential for misregulation.  By contrast, Romano and Ribstein focus on the risk of legal overreaction to bubbles, but do not focus on the perverse political incentives to deregulate or stimulate financial markets during boom times.  

I’ll save my analysis of this political economy of law and bubbles for another day. The story or regulation and bubbles I am writing doesn’t fit into neat political boxes in which de-regulation or re-regulation alone is to blame. Like cloying good cheer at this wintry time of year, there is plenty of blame to go around and provoke (if not inflame).

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The FSB has designated 29 of them, and required them to hold extra capital.  It means that there are too big to fail, probably, but perhaps regulators are devising careful resolution plans for them as we speak.  At any rate, here's how big you have to be to be a Global Systemically Important Financial Institution:

Bank of America, Bank of China, Bank of New York Mellon, Banque Populaire CdE, Barclays, BNP Paribas, Citigroup, Commerzbank, Credit Suisse, Deutsche Bank, Dexia, Goldman Sachs Group, Crédit Agricole, HSBC, ING Bank, JP Morgan Chase, Lloyds Banking Group, Mitsubishi UFJ FG, Mizuho FG, Morgan Stanley, Nordea, Royal Bank of Scotland, Santander, Société Générale, State Street, Sumitomo Mitsui FG, UBS, Unicredit Group, Wells Fargo.

The American representatives are the not particularly huge investment banks, the really huge retail banks, and BONY and State Street, which aren't huge at all.  Still, I've heard Rodgin Cohen say that the payment systems role that SS plays makes it the picture perfect definition of "too interconnected to fail," and the same probably goes for BONY.  Still, they are a fraction the size of some of the Chinese banks that don't make the list, and you have to wonder if some much smaller institutions wouldn't also threaten the global financial system if they collapsed.  Capital One?  Allianz?  The G-SIFI list hopefully won't be the only list that American regulators on the Financinal Stability Oversight Council consult when they come up with their own, domestic list. 

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Is the SEC finally abandoning caution and going after some serious scalps?  Peter Henning has a nice overview.  He thinks it looks okay for the executives, depending on whether a jury (or a judge, at summary judgment), will be persuaded or nonplussed by fine print.

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It would appear that yearly quotas are being met:

• Perhaps most intererestingly, the Basel Committee sent out for comment "a set of requirements for banks to disclose the composition of their regulatory capital," which might be of real interest to investors, shorts, and competitors.
• Much less tough, the Basel Committee, worried that arbs are forcing the prices of certain regulatorily required forms of credit protection sky hight, said that "the Committee is clarifying that supervisors will consider the cost of credit protection that has not yet been recognised in earnings when assessing whether credit protection purchased should be recognised for purposes of regulatory capital, including whether a bank meets the Basel standards for significant credit risk transference."
• And Basel put out a third set of questions and answers on Basel III.
• The Joint Forum (Basel plus supes of insurers and investment banks) asked for comment on its paper on "Principles For The Supervision of Financial Conglomerates.

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Judge Rakoff is inexplicably loath to have the SEC add such a clause - which it has done for years - to its consent decrees.  He thinks that because the SEC is asking for future court involvement in enforcing the decree, also standard, that he should have some say about the content of the deal.  It'snot wrong, but the sort of scrutiny he has been applying is a bit of a reach, I think.  Still, I found Eugene Volokh's discussion of the judge's worries about the first amendment to be interesting.  Basically, the SEC standardly requires companies to neither admit nor deny guilt and not to declare after the nonadmission that they didn't do the things the decree covered. We'll outsource the rest to Eugene:

That’s from Judge Rakoff’s opinion in SEC v. Vitesse Semiconductor Corp., 771 F. Supp. 2d 304 (S.D.N.Y. 2011), which was decided in March but which I just ran across. First the background:

Long before 1972, the S.E.C. had already begun entering into consent decrees in which the defendants neither admitted nor denied the allegations. This was strongly desired by the defendants because it meant that their agreement to the S.E.C.‘s settlements would not have collateral estoppel consequences for parallel private civil actions, in which the defendants frequently faced potential monetary judgments far greater than anything the S.E.C. was likely to impose. But there were benefits for the S.E.C. as well. First, the practice made it much easier for the S.E.C. to obtain settlements. And second, at a time (prior to 1972) when the S.E.C.‘s enforcement powers were largely limited to obtaining injunctive relief, the S.E.C.‘s focus was somewhat more centered on helping to curb future misconduct by obtaining access to the Court’s contempt powers than on obtaining admissions to prior misconduct.

But, by 1972, it had become obvious that as soon as courts had signed off on such settlements, the defendants would start public campaigns denying that they had ever done what the S.E.C. had accused them of doing and claiming, instead, that they had simply entered into the settlements to avoid protracted litigation with a powerful administrative agency. Thus, the real change effected by the S.E.C. in 1972 was the requirement that a defendant who agreed to a consent judgment “without admitting or denying the allegations of the Complaint” nevertheless agree that the defendant would not thereafter publicly deny the allegations. To this end, each of the proposed Consent Judgments now presented to this Court is accompanied by a formal written “Consent” of the defendant agreeing, pursuant to 17 C.F.R § 205.5, “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.”

Now, Judge Rakoff’s view of the matter:

The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C. The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either (though, as one would expect, his supporters feel no such compunction). Only one thing is left certain: the public will never know whether the S.E.C.‘s charges are true, at least not in a way that they can take as established by these proceedings.

This might be defensible if all that were involved was a private dispute between private parties. But here an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”

The disservice to the public inherent in such a practice is palpable. Confronted with the same choice, the United States Department of Justice has long since rejected allowing defendants, except in the very most unusual circumstances, to enter into pleas of nolo contendere, by which a defendant accepts a guilty plea to a criminal charge without admitting or denying the allegations....

Moreover, as a practical matter, it appears that defendants who enter into consent judgments where they formally state, with the S.E.C.‘s full consent, that they neither admit nor deny the allegations of the complaint, thereafter have no difficulty getting the word out that they are still denying the allegations, notwithstanding their agreement not to “make any public statement” denying the allegations....

In a more recent case, SEC v. Citigroup Global Markets Inc. (S.D.N.Y. Nov. 28), Judge Rakoff reaffirmed that the practice might violate the First Amendment rights of the companies as well as undermining the interests of the government:

On its face, the SEC’s no-denial policy raises a potential First Amendment problem. See Vitesse, 771 F.Supp.2d at 309 (“[H]ere an agency of the United States is saying, in effect, ‘Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it’ ”); see also Crosby v. Bradstreet Co., 312 F.2d 483, 485 (2d Cir.1963) (reversing a consent settlement between two parties because the “injunction, enforceable through the contempt power, constitute[d] a prior restraint by the United States against the publication of facts which the community has a right to know”).

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For a North Carolina law review symposium, Dain Donelson and I took a look at the question: did lax regulation cause the financial crisis?  Of course, that's a hard question to answer, but at least we could look at how institutions that shifted in and out of the vilified and shuttered Office of Thrift Supervision did during the crisis, and consider what light was shed on the lax regulation thesis there.  It's up on SSRN, do give it a look and tell us what you think:

We evaluate evidence reflecting the stability of our multi-regulator, charter-competitive system of financial regulation during the financial crisis in this symposium essay. Specifically, we compare thrifts to banks, charter-switchers to other thrifts and banks, and bailout recipients to non-bailout recipients to discover if any of these institutions did poorly when compared to their peers during the financial crisis. First, we compare publicly traded thrifts to publicly traded banks during 2008--the critical year of the crisis--and find that thrifts fared only marginally worse than banks, if at all, during that year. This result modestly suggests that the multi-regulator regime, however illogical, did not concentrate instability in a particular industry subject to a weak regulator. Second, to evaluate the impact of competition for charters, we compare thrift and bank performance to those institutions that chose to switch regulators immediately before and during the financial crisis. We find no significant differences in returns among either institutions that converted their federal bank charters to federal thrift charters, or institutions that converted federal thrift charters to bank charters, although our samples of these institutions are small. Third, we examine the bailout propensity of these charter-switchers. Our results suggest that although institutions switching to thrift charters were big enough to receive bailout money from the government, they did not. Conversely, we find that institutions switching away from thrift charters received more bailout money than their size would suggest. Our final finding may suggest some (possibly misplaced) dissatisfaction with the performance of the federal thrift regulator among federal government officials, which may have contributed to the decision to eliminate it in the Dodd-Frank Financial Reform Act passed in the wake of the crisis.

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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.

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