With the possiblity of debt ceiling default arising quarterly these days, it is worth thinking through the Article III consequences of prioritizing debt payments over its other obligations. Can Treasury do that without facing a ton of big, fat, lawsuits?
Or, to put it another way, why can't it? As Felix Salmon observes:
[W]hy is Matt Yglesias so convinced that prioritization is impossible? He gives four reasons.
The first is that prioritization is illegal: “Treasury is not authorized to unilaterally decide to pay certain bills and not others”. This is true — but also a bit irrelevant. Treasury is under unambiguous Congressional orders to pay lots of bills — all of them, in fact. If it fails to pay those bills, it will be violating the law as laid down by Congress. Hence the 14th Amendment argument that the president should simply ignore the debt ceiling entirely, if it comes to that. But underneath it all, it’s hard to credit any argument which says “Treasury isn’t allowed to pay its own bonds”. If that’s what Treasury wants to do, then surely it can do so. Besides, who would even have standing to sue?
I can think of some people who would have standing to sue - they would suffer a concrete and particularized injury, caused by the government, and fairly traceable to its actions if Treasury took a dwindling pot of money, and stiffed General Dynamics on contracts due for submarine repair or whatever, while instead paying interest on maturing sovereign debt. But that doesn't mean that they could sue and win; here, I agree with Felix Salmon. The courts have found - unless Congress has provided otherwise in its statutory guidance - that managing lump sum budgets is committed to agency discretion by law. Under the logic of Lincoln v. Vigil, the leading case for this proposition, I accordingly think that lawsuits against Treasury for prioritizing debt repayments would be unlikely to succeed. As the Supreme Court said then:
Ever had that experience of presenting a paper at a conference and coming home to a front-page WSJ article on your topic? Me neither. Until now! The paper I presented at the Kentucky symposium (which was amazing-- I felt honored to be in such company) was very much a work in progress. It asks a simple question: did the JOBS Act affect underwriter IPO fees? The question I'm still mulling over is whether we would expect it to. And behold, this morning I awoke to an article on Twitter's underwriting fees!
Telis Demos' WSJ article focuses on Twitter's "squeezing" its underwriting banks in two ways: first, by securing a $1 billion credit line from its bankers, and second, by negotiating a discount on the underwriting fee itself. Taking the second point first, in a firm-commitment IPO the underwriter buys the shares from the company at a discount, and then turns around and sells them to the public at full price. That discount, also called the gross spread, is the underwriter's overt compensation, and there's been a lot of literature about how it clusters at 7% for small and mid-sized IPOs.
The Journal reports that the banks' spread is 3.25%--not as low as Facebook's 1.1%, but pretty low. Suprisingly low? That's the question. Everyone agrees that as IPOs get bigger, the spreads should decline. It's just not that much more expensive to market a big deal versus a small deal, so economies of scale kick in. So is Twitter's low spread the function of its size, or has it really put the squeeze on the banks?
I examined U.S. IPOs from the passage of the JOBS Act through July 27, 2013. My sample excludes banks, S&Ls, REITs, ADRs, unit issuers, and closed-end funds. One problem is that Twitter is a really big IPO, with few comparables out there. During that period no emerging growth companies launched a Twitter-sized IPO (remember, Twitter is an EGC). The very biggest EGCs ranged from $430-630 million, and that spread averaged 5.67%. So 3.25% is obviously a much cheaper IPO price tag, but that could just be economies of scale kicking in.
Besides Facebook, there is one big non-EGC IPO, Zoetis, that raised north of $2.2 billion. Its spread was 3.7%. Which could suggest that perhaps Twitter did snag a deal--half the offering size, and yet a smaller discount rate. But that's just one data point, and a non-EGC company to boot. Hardly apples to apples.
Moreover, there's a lot going on with underwriting fees. As the WSJ article points out, Twitter also got what might be a sweetheart deal on its loan terms. And it might be that issuers are willing to pay more for sector expertise, or analyst coverage, marketing prowess, or plain old reputation. There's also the presence of underpricing, which may act as sub rosa compensation. And the fact that you may not want to pay rock bottom for underwriting--I don't remember anyone particularly highlighting the 1.1% spread during the fallout from Facebook's IPO debacle. But one wonders if you can cut the spread too low.
Watch for more from me on this topic once I can revise my draft. And let me know if you have any thoughts.
Britain and the United States are increasingly matching one another stride for stride when it comes to supervision of the financial markets. Today, the meme was copying - Britain has announced a qui tam whistleblower program that may work like the one rolled out by the SEC. Earlier this year, it was about improving a flawed model; sick of being subjected to American deferred prosecution agreements, Britain came up with its own DPA scheme - and actually passed a law and went through notice and comment before doing so. And at times in the past, the model has been harmonization through a deal, which was the case for the first Basel capital adequacy accord, which only developed after the US and UK concluded a tentative arrangement on bank reserves that threatened to shut the rest of the world out of those then dominant financial markets.
These different approaches - copying, improving, negotiating - are distinctions that matter; but the consistent transmission of American rules into British financial markets is pretty interesting, given that we used to be talking about how Sarbanes-Oxley had made America distinctively bad, and Britain distinctively attractive, to public issuers.
My blogging has been a bit light lately, as I've been scrambling to finish working on a paper for what looks to be a great conference: The Securities Act of 1933 at 80: Does It Provide a Fair and Efficient Access to Capital? The paper is on post-JOBS IPOs, and I will try to post some data and observations after the conference.
I look forward to seeing some Masters (Joan Heminway, Don Langevoort) and friends of Glom (Bob Thompson) in beautiful Lexington, KY. And now, I'm going to see a man about a horse.
IPOs are hard and expensive. IPOs expose issuers to all kinds of liability pre- and post-IPO and require ongoing disclosure. The JOBS Act opened up the capital raising world by lifting private placement restrictions, most notably the ban on "general solicitation." Usha announced it just the other day here. I wondered if anyone would ever have an IPO after the ban was lifted here. So why is Twitter going through an IPO?
The alternative for Twitter is a private placement with general solicitation under Rule 506 (Reg D). But, the comparison isn't IPO v. new 506, it's the "emerging growth company" IPO v. new 506. As Usha pointed out, Twitter took advantage of the confidential registration provision of the emerging growth company exemptions. Here is a blog post from Bob Thompson summarizing other items in the registration statements that an emerging growth company can avoid. But, the registration process is still a pain, and it's still very expensive.
In a "new" 506 private placement, Twitter could tweet about its private placement all day long (unlike in an IPO pre-filing and pre-effective date) as long as it only sold to "accredited investors." I'll go out on a limb and say that most IPO shares will be sold to "accredited investors," a definition that has gone unchanged for quite a long time. With all that freedom and the same capital raising potential, it seems like a no-brainer. The only hitch would be the expanded 2000 shareholder rule. Twitter already has 2000 employees, so the probability that the number of shareholders would exceed 2000 is pretty high. But let's put that aside for now.
Even without the 2000 shareholder rule, the general solicitation 506 may not be a great idea from the perspective of the current owners of Twitter -- the VCs, the founders, the insiders. One of the benefits of an IPO is that it creates liquidity for the pre-IPO owners; in other words, they can cash out. For the founders and other early executives, the ability to cash out at least part of your holding is a great option; for the venture capital firms backing the IPO firm, cashing out is a must. However, if the shares are not registered, then shareholders would have to sell the restricted securities themselves under Rule 144, which is going to put a 1% of the public float condition on affiliates/control persons, which may encompass executives and large shareholders. Twitter's S-1 leaves blank how many shares individuals plan on selling in the IPO, but 4 officers own over 1% (Evan Williams owns 12%) and five VCs own over 5%. And, the purchasers of those shares would take them as restricted shares, so the price would be discounted for that. For cashing out, IPOs, even with lock-ups, are the better route.
The University of Georgia School of Law is seeking entry-level and junior lateral candidates in tax. Course needs are flexible but include basic federal income tax, corporate/partnership tax, state and local tax, and international tax. Interested persons should contact Randy Beck, Chair of the Faculty Recruitment Committee, firstname.lastname@example.org
You know how you get all those emails "inviting" you to a conference that takes place across the country tomorrow? Or yesterday? You weren't really invited. You were "noticed." This is not that kind of invitation.
As most readers know, my dear colleague, friend, and "friend of the Glom" Larry Ribstein passed away in December 2011. The University of Illinois College of Law has spent the better part of the last year designing an academic symposium composed of papers building on his huge and varied scholarly legacy. These papers will be published in our law review. We hope that many, many of his friends, colleagues, blog readers and fans will come to Champaign to continue exploring the ideas and themes he dedicated his career pursuing.
The information on the symposium is here. If you are coming, feel free to email me (email@example.com) or Carolyn Turner (firstname.lastname@example.org) to get registered and get a password for the papers. I would love to see you, and we will treat you like an invited guest, not an interloper with a mass email "invite." Champaign is a couple/few hours away from notable urban centers with many law schools. If you decide to drive down and spend the night, know that the fanciest hotels in town are pretty cheap!
Here is the lineup:
|October 17, 2013:|
|8:00-9:00 a.m.||Breakfast at the College of Law|
|9:00-11:15 a.m.||1st Session: Legal Practice (Moderator: Bruce Smith)|
|11:30 a.m.-12:30 p.m.||2nd Session: Jurisdictional Competition (Moderator: Verity Winship)|
|12:30-1:30 p.m.||Lunch at the College of Law|
|1:30-3:00 p.m.||3rd Session: Corporate Law I (Moderator: Christine Hurt)|
|3:15-4:45 p.m.||4th Session: Corporate Law II (Moderator: Jamelle Sharpe)|
|6 p.m.||Reception and Dinner|
|October 18, 2013:|
|7:45-8:45 a.m.||Breakfast at the College of Law|
|8:45-10:15 a.m.||5th Session: Corporate Law III (Arden Rowell)|
The Fed board member finished off a speech on October 4 by laying into money market funds:
I would be remiss if I did not remind you of another, highly complementary area where reform is necessary: the money market fund sector. Money funds are among the most significant repo lenders to broker-dealer firms, and an important source of fire-sale risk comes from the fragility of the current money fund model. This fragility stems in part from their capital structures--the fact that they issue stable-value demandable liabilities with no capital buffer or other explicit loss-absorption capacity--which make them highly vulnerable to runs by their depositors. I welcome the work of the Securities and Exchange Commission on this front, particularly its focus on floating net asset values, and look forward to concrete action. Another source of fragility arises from money funds investing in repo loans collateralized by assets that they are unwilling or unable to hold if things go bad. This feature creates an incentive for them to withdraw repo financing from broker-dealers at the first sign of counterparty risk, even if the underlying collateral is in good shape.
For those reading between the lines, this "I care what the SEC is doing with MMFs" might be viewed as a threat, both to the industry and the agency. The Fed may be telling the SEC that it will step in, via the FSOC process, to regulate the funds as systemtically destabilizing (and therefore in need of SIFI designation), if the SEC doesn't sort them out itself. One thing is clear: Stein has no doubt that the funds are fraught with danger.
Better than Planes. . . .
OK, that's not much of a review, but it says it all. Last Friday, the boys (11 and 6) and I raced from school to make the 4:35 (read: cheap matinee) of Cloudy With a Chance of Meatballs 2. Though the younger one wailed for 3D, I did not give in. That may not have been a great idea because the best part of the movie is the artistry.
The plot is a little forced, and the writers oh-so-cleverly get around this. At the end of the first movie, nutty but loveable inventor Flint Lockwood, with the help of his costars, I mean friends, destroyed his water-into-food invention, which had malfunctioned to produce giant food that falls violently from the sky. The second movie picks up moments later when before unmentioned childhood science hero of Flint, Chester V, appears offering to clean up the giant food-strewn island and temporarily relocate its inhabitants, including Flint, his dad, his friend/girlfriend Sam, bully-turned-friend and police bully-turned-friend. Six months later, we find that the invention has not only still been working, but it reprogrammed itself to produce living food-animals out of water, which have populated the island. How? Who knows? This worry is whisked away as Flint admits to Sam that he has no idea how the machine reprogrammed itself, so they shouldn't waste time pondering it. And so, disbelief is suspended.
So, there's the set up, so what's the plot? The plot is that Chester V, who wears a sporty orange vest, offers Flint a job at Live Corp (hmm, evil spelled backwards), which seems eerily like Google, replete with soy lattes, caffeine patches and volleyball courts. Flint's dream is to be a "thinkquanot" (I have no idea how to spell this and can't find it online), which seems to be an "imagineer"-type appellation given to the best inventors at Live Corp. When he fails in his first attempt, Chester V, who has a secret plan, asks him to go back to the island and help him to shut off the machine. A desperate Flint jumps at the second chance at thinkquanot greatness, grabs his posse and heads back to Swallow Falls island. The band encounters the foodimals, who Chester V tells them are ferocious and dangerous, but which of course are not.
Even with the waving away of the machine's reprogramming itself, several plot holes still remain: if Chester V knows the animals aren't ferocious and can easily capture them for his secret plan, then why does he need an "expendable" party to go find the machine? And if Flint finds the machine easily in basically the volcano in the middle of the island, why couldn't smarty-pants Chester V figure that out? Well, because the movie is about the friends trekking across the colorful island finding all the amazing evolutionary innovations the foodimal machine made -- the tacodile, the cheesespider, the hippo-potato-mus, etc. The foodimal jungle is pretty extraordinary, and makes up for a pretty thin plot.
Overall, the 11 year-old thought it was better than Planes, and the 6 year-old, who liked Planes, thought it was great. He's not much of a plot critic. But he's also holding out for Frozen and Free Birds.
Bloomberg has done the arithmetic, and it appears that US banks have paid over $100 billion in legal costs in the wake of the financial crisis. Half of that is going to mortgage settlements, a number that must increase, if JPMorgan's impending $11 billion settlement is for real.
Those burdens have not been spread equally:
JPMorgan and Bank of America bore about 75 percent of the total costs, according to the figures compiled from company reports. JPMorgan devoted $21.3 billion to legal fees and litigation since the start of 2008, more than any other lender, and added $8.1 billion to reserves for mortgage buybacks, filings show.
Most of this constitutes compliance fines and contract damages - and the latter presumably would have been paid if the contracts had been executed correctly. But the costs of processing these payments suggest that there is at least one legal sector with plenty to do. HT: Counterparties.
GEORGIA STATE UNIVERSITY: Robinson College of Business, Department of
Risk Management & Insurance TENURE TRACK or NON-TENURE TRACK
POSITIONS IN LEGAL STUDIES
GEORGIA STATE UNIVERSITY invites applications for one or more tenure track or non-tenure track appointments in Legal Studies for an opening effective Fall 2014 in the Department of Risk Management and Insurance at the Robinson College of Business. Rank is open but we expect to hire at the level of Clinical Assistant Professor (non-tenure track) or Assistant Professor (tenure track).
Candidates for a tenure track position must have a J.D. from an ABA approved law school. Further, candidates for assistant professor must have a strong capability of publishing in law related journals. Such evidence of capability might include law review experience, publications, clerking experience, and/or advanced degrees in areas related to business or risk. More senior candidates will have a record of outstanding scholarly contributions in law relating to business as well as strong evidence of teaching at the Undergraduate and Graduate levels. Candidates for a non-tenure track position must have significant professional experience as a lawyer, the capability for publishing research in refereed professional or pedagogical journals, evidence of excellence in teaching, and an earned J.D. from an ABA approved law school.
For all candidates we are particularly interested in those who study how law and risk is related, but candidates in all areas of business law will be considered.
ABOUT THE ENVIRONMENT
The mission of the Department of Risk Management and Insurance at Georgia State University is to better understand how risks faced by individuals, institutions, and societies can be more accurately measured and more efficiently managed. Faculty members have risk-related research interests including behavioral economics, experimental methods, actuarial science, mathematical finance, econometrics, household finance, corporate decision making, legal risk, and insurance economics, among others.
The department is one of the oldest and most influential risk management programs in the U.S. and has a distinguished history of serving students, alumni, and the risk management profession for more than 60 years. We are currently rated #4 in the U.S. News and World Report ranking of RMI programs; we hold a Center of Actuarial Excellence designation from the Society of Actuaries; and we are an Accredited Risk Program according to the Professional Risk Management International Association (PRMIA).
The salary level and course load are competitive.
Positions are contingent on budget approval. Applications will be accepted until the position is filled. To apply, a letter of application, curriculum vitae, three recommendation letters, teaching evaluations if any, and copies of publications should be emailed (preferred) to academicjobsonline.org or mailed to Martin F. Grace, Department of Risk Management & Insurance, Robinson College of Business, Georgia State University, PO Box 4036, Atlanta. GA. Be sure to indicate in the cover letter that you are applying for the legal studiesposition and whether you are applying for a tenure track or non-tenure track position.
Georgia State University is an Equal Opportunity Employer/Institution Affirmative Action Employer.
That's the rule that compares CEO pay to median worker pay - it is supposed to shame CEOs, but so was the rule requiring them to plain old disclose their own compensation, and look how that turned out.
Anyway, here's a nice overview from Matt Levine; I found it interesting how interested people are in this rule; the SEC said it would be regulating in this area (Dodd-Frank requires it), and:
In connection with rulemakings implementing the Dodd-Frank Act, we have sought comment from the public before the issuance of a proposing release. With respect to Section 953(b) of the Dodd-Frank Act, as of September 15, 2013, we have received approximately 22,860 comment letters and a petition with approximately 84,700 signatories.
If anything like those numbers comment on the agency's proposal, it will be pretty busy when it drafts the final rule's statement of basis and purpose. That statement must respond to "well-supposed arguments contained in public comments critical of the agency's proposed rule." A lot of comments means a long, long statement.
"Our financial results will fluctuate from quarter to quarter, which makes them difficult to predict" (FB); "If we fail to effectively manage our growth, our business and operating results could be harmed" (GOOG);"If we are unable to maintain and promote our brand, our business and operating results may be harmed" (both); "Our corporate culture has contributed to our success, and if we cannot maintain this culture as we grow, we could lose the innovation, creativity and teamwork fostered by our culture, and our business may be harmed" (GOOG); "Our intellectual property rights are valuable, and any inability to protect them could reduce the value of our products, services and brand" (GOOG); "We are currently, and expect to be in the future, party to intellectual property rights claims that are expensive and time consuming to defend, and, if resolved adversely, could have a significant impact on our business, financial condition or operating results" (GOOG), etc.But here's a good one, which actually appears in some other S-1s, including Yelp's:
We have incurred significant operating losses in the past, and we may not be able to achieve or subsequently maintain profitability.That's definitely not puffery. There is also language about San Francisco earthquakes (also in Yelp's), and NOLs and anti-takeover devices. Perhaps those last two things may go together before the articles of incorporation are amended.
Dan Doctoroff is giving $5 million to the law school in Hyde Park to develop a law and business curriculum, which isn't exactly a vast amount of money, but congratulations to UC nonetheless. Like Wharton, Chicago has a 5-years-in-4 MBA-JD program already; there is a lot of happiness about the program in these parts, but it does require students to pay a ton of tuition, and compresses their schedule flexibility massively. It sounds the Doctoroff donation will permit law students to take classes at Booth, or maybe buy out some Booth teachers to teach a class exclusively comprised of law students on asset valuation, managerial economics, and &c.
One bridge that must be crossed for such classes concerns the basic level of knowledge of the law students. Some Wharton students are coming from the army or Teach For America, but most have been spending a few years working on spreadsheets and going through quarterly statements. This sort of thing provides a critical background (and a culture spreadable to those who are abandoning their careers in ballet or publishing) that just being smart and eager does not, and my case study for that would be the accounting for lawyers classes you might have taken in law school, and promptly forgot about. Good luck to Chicago as it seeks to deliver classes that law students can find instructive; oddly enough, it might be easier to focus on undergraduate finance offerings rather than on the MBA program.
A former trader with Goldman Sachs, Steven Mandis, is now spending time at Columbia Business School, and has written a very business schooley book about change at the company. It might be the kind of thing you'd like, if you like that sort of thing. Peter Lattman provides the overview:
Mr. Mandis said that the two popular explanations for what might have caused a shift in Goldman’s culture — its 1999 initial public offering and subsequent focus on proprietary trading — were only part of the explanation. Instead, Mr. Mandis deploys a sociological theory called “organizational drift” to explain the company’s evolution.
These changes included the shift to a public company structure, a move that limited Goldman executives’ personal exposure to risk and shifted it to shareholders. The I.P.O. also put pressure on the bank to grow, causing trading to become a more dominant focus. And Goldman’s rapid growth led to more potential for conflicts of interest and not putting clients’ interests first, Mr. Mandis says.
It's coming out from and Havard Business Press Books, which is basically an arm of HBS's distinctive revenue generator. Most of that revenue comes from cases sold for b school classes, to be sure, but Mr. Mandis can hope that he will have a hit on his hands.