November 21, 2008
Parting Thoughts on the Financial Crisis
Posted by Michelle Harner

First, I would again like to thank the hosts of The Conglomerate for giving me this space during the past two weeks to discuss some very interesting and timely issues.  I also would like to thank the readers of The Conglomerate who, through their comments and emails, have provided me with some very insightful and thought-provoking feedback.  I have truly enjoyed this opportunity.


Second, I would like to leave you with some parting thoughts on the financial crisis.  As the Carpenters sang in the early 1970s, “[W]e’ve only just begun.”  We will continue to witness fall out from the financial crisis for the foreseeable future.  In addition to the topics that I have discussed in previous posts, I would watch for activity on, among others, the following fronts:


·      Credit Default Swaps.  Last Friday, the President’s Working Group on Financial Markets announceda series of initiatives to strengthen oversight and the infrastructure of the over-the-counter derivatives market.”  The initiatives anticipate monitoring credit default swaps and similar derivatives through clearinghouses and cooperation among the Federal Reserve Board, the SEC and the Commodity Futures Trading Commission.  The guidelines for the initiatives are very sketchy and their implementation remains to be seen.  I also expect calls for additional regulation, as various parties continue to point to credit default swaps as a primary cause of the financial crisis.


·      MAC Litigation.  As the financial crisis deepens and creates unanticipated consequences for businesses and financial institutions alike, parties to credit, acquisition and similar agreements may increasingly try to invoke material adverse change clauses to escape now undesirable or infeasible deals.  Some litigation in and outside of bankruptcy already is grappling with the issue.  That type of litigation is likely to increase.


·      Fraud and Other Questionable Conduct.  Last Friday, the United States trustee filed papers in the Lehman Brothers’ bankruptcy case supporting the appointment of an examiner to investigate various transactions undertaken by the investment bank shortly before and after its bankruptcy filing.  Any appointment of an examiner could authorize an investigation of transactions beyond that limited time period.  The FBI also is investigating Fannie Mae, Freddie Mac, AIG, Lehman Brothers and others involved in the subprime mortgage crisis.  The findings of those investigations will be closely scrutinized and may refocus the discussion on corporate governance.  It also will be interesting to see if lawyers, accountants and other professionals are implicated in any way similar to what ultimately transpired during the investigation of the S&L scandals of the 1980s.


·      Ratings Agencies.  The ratings agencies are under fire for their role in the financial crisis, and many are calling for increased regulation of the industry.  The EU recently announced legislation that, if approved, would subject ratings agencies to registration, disclosure and oversight regulations overseas.  Some form of increased regulation is likely to follow in the U.S.


Finally, with respect to my personal interests and scholarship, I am currently researching the effect and consequences of creditor control, and the role of statutory fiduciaries in the chapter 11 context.  I will be presenting a paper on the former topic, entitled “Rethinking Controlling Stakeholder Liability:  A Proposal for Controlling Controlling Stakeholders by Increasing Board Accountability,” as part of the Business Associations Meeting at the AALS Annual Meeting in January, and I will be posting drafts of that paper and one entitled “The Search for an Unbiased Fiduciary in Corporate Reorganizations” on SSRN in the coming months.  I of course welcome any insight on these topics or papers.

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