ProfessorBainbridge.com

How American Corporate and Securities Law Drives Business Offshore

The American Illness: Essays on the Rule of Law is a new book from Yale University Press edited by Frank Buckley. Amazon's description informs that:

This provocative book brings together twenty-plus contributors from the fields of law, economics, and international relations to look at whether the U.S. legal system is contributing to the country’s long postwar decline. The book provides a comprehensive overview of the interactions between economics and the law—in such areas as corruption, business regulation, and federalism—and explains how our system works differently from the one in most countries, with contradictory and hard to understand business regulations, tort laws that vary from state to state, and surprising judicial interpretations of clearly written contracts. This imposes far heavier litigation costs on American companies and hampers economic growth.

Yale's site offers up these blurbs:

"Buckley has assembled essays by many, perhaps most, of the best economic and legal scholars in the Anglo-American world to consider seriously the ways in which the American legal system burdens our citizens and our economy and puts us at an international competitive disadvantage. The "rule of law" we so earnestly commend to other countries is clearly in need of serious reform at home. The rigor of these historical, economic, and comparative studies, and the logic of the framework within which Buckley presents them, make a compelling case for law reform scaled to our needs for the 21st Century."—Judge Douglas H. Ginsburg, U.S. Court of Appeals and NYU Law School

"This book presents strong evidence of American hyper-litigiousness and the social costs it creates. The editor has assembled an impressive array of authors, who attack these issues with rich empirical evidence."—Eugene Kontorovich, Northwestern University School of Law

"This authoritative collection of essays draws a vivid portrait of a legal system that is out of control. The Rule of Law in America has become a kind of Frankenstein’s monster, bashing indiscriminately both good and bad conduct without proportion or self-awareness. These vivid essays let the facts drive you to this unavoidable conclusion: American law is indeed “exceptional”—but no longer in a way that supports either freedom or regulatory protection."—Philip K. Howard, author of The Death of Common Sense and Chair of Common Good  

I was privileged to be one of those asked to contribute an essay to the project. My offering is entitled "How American Corporate and Securities Law Drives Business Offshore," a preview of which is available here.

I've been reading the other essays in the volume and each is a gem. Collectively, they are essential reading for anyone interested in how law is choking our economy and society.

Jamie Dimon Crushes Challenge from Politicized Shareholder Activists

JP Morgan shareholders decisively rejected an effort by a highly politicized group of shareholder activists to divest CEO/Chairman of the Board Jamie Dimon of the latter title:

Jamie Dimon won more investor support this year than in 2012 to remain chairman, surviving a push to divide the roles after the biggest U.S. bank suffered a record trading loss.

The proposal to divide Dimon’s duties drew 32 percent of votes, down from 40 percent last year, the lender said today at its annual meeting in Tampa, Florida.

Matthew Yglesias pompously proclaims his ability to read the minds of thousands of shareholders, opining that:

Dimon was able to push back by deploying a highly effective tactic that just happens to illustrate precisely why he shouldn't hold both jobs: He threatened to quit.

He said that if he was forced to step down as chairman he would step down as CEO as well. And shareholders thought, not implausibly, that doing so would throw the firm into disarray and hurt its share price. So they stuck with Dimon.

In contrast, I have way of knowing for sure why thousands of disparate and anonymous shareholders voted the way they did. Lacking Yglesias' ESP, I'm limited to throwing out theories. For example, the shareholder activists who supported this effort to strip Dimon of his Chairman title likely were not interested in good governance. After all, who were the leaders of the effort? They were outfits like the American Federation of State, County & Municipal Employees (AFSCME) pension fund and the NY City pension funds. AFSCME, of course, is a major Democrat supporter and NYC Comptroller John Liu--who controls those funds--is himself a Democrat with aspirations for higher office. Jamie Dimon, of course, has famously earned liberal ire. As the WSJ opined recently:

For the sin of steering the bank through the disaster intact, the JP Morgan Chase chairman and CEO now finds himself the target of a political campaign to weaken his authority and shut him up. ...

Though a longtime Democrat, Mr. Dimon became a Beltway-union-media target by speaking out against Washington's regulatory frenzy in the wake of the 2010Dodd-Frank law. He has highlighted the costs of the myriad new rules emanating from the capital, such as the Volcker Rule, which is still unfinished three years on. As a rare CEO of a big bank who avoided the worst of the mortgage crisis, Mr. Dimon carries an influential voice, and one that many politicians would rather not hear.

Charles Gasparino likewise noted that the dump Dimon "effort is being pushed by union and public pension funds run by liberal politicians" and speculated that:

Despite some recent mishaps, including an errant trade that led to a $6 billion “London Whale” trading loss, investors still regard Dimon as America’s most capable banker. He famously steered Morgan clear of the excess that led to the 2008 banking collapses — and even with the Whale loss, it cranked out a record $21 billion in profits last year.

Yet not a day seems to go by without a strategically leaked story that JPMorgan is being investigated by some federal agency. In one account, a regulator told Dimon he’s losing credibility with people in Washington. Yes, the political dolts whose policies caused the 2008 crash are losing confidence in the one banker who steered clear of it.

But the bull’s-eye on Dimon is real. As a lifelong Democrat, his disdain for President Obama’s high taxes, massive government growth and over-regulation of businesses (particularly the big banks) was all the more powerful. ...

So maybe JP Morgan's shareholders figured there was no reason to toss Jamie Dimon under the bus just to make a bunch of Democrats and their union allies happy.

Just a theory.

Should JP Morgan make Jamie Dimon decide between being CEO and Chairman of the Board?

The WSJ opined today:

For the sin of steering the bank through the disaster intact, the JP Morgan Chase chairman and CEO now finds himself the target of a political campaign to weaken his authority and shut him up.

Specifically, activist shareholders and the usual media scolds are pushing for JP Morgan to strip Mr. Dimon of his chairman's role in the name of better corporate governance. The activists also want to replace several other bank board members. Shareholders are voting on this question through JP Morgan's May 21 annual meeting. 

Though a longtime Democrat, Mr. Dimon became a Beltway-union-media target by speaking out against Washington's regulatory frenzy in the wake of the 2010 Dodd-Frank law. He has highlighted the costs of the myriad new rules emanating from the capital, such as the Volcker Rule, which is still unfinished three years on. As a rare CEO of a big bank who avoided the worst of the mortgage crisis, Mr. Dimon carries an influential voice, and one that many politicians would rather not hear. ...

Now Mr. Levin's allies at government pension funds are joining the campaign to cut Mr. Dimon down to size. And as usual, advisory firms like Institutional Shareholder Services (ISS) are joining with the public pension funds to demand governance reforms that perform better in theory than in practice.

Yesterday, the WSJ's news section tackled the merits of splitting the CEO/CoB positions between two people:

Efforts to split the posts of chairman and chief executive at U.S. companies are finding success. Now all that is needed is evidence it actually helps investors.

Studies show a mixed impact on shareholder returns when independent chairmen are named to keep a better eye on CEOs. While the evidence suggests a split could help companies that are struggling, it also shows the step could hurt shareholders in many other cases. ...

A 2009 review of studies on independent chairmen by the Millstein Center for Corporate Governance and Performance concluded the impact on performance "was inconclusive,'' said Stephen Davis, associate director of Harvard Law School's programs on corporate governance and institutional investors, who helped oversee the review.

"It isn't driven by research,'' Mr. Davis said of the push to separate the top two jobs. "It's driven by investors' views about accountability.''

I discussed the issue back in 2009 at some considerable length, concluding that:

In sum, corporate governance is not an arena in which one size fits all. Different firms have different governance needs. Boards of directors should be free to select the governance structures optimal for their unique firm without having corporate governance activists putting them in a straight jacket.

Kindly go read the whole thing.

The Essays of Warren Buffett

I'm not a huge fan of Warren Buffett's politics or some of his corporate governance moves (e.g., his failure to do proper succession planning and the way he threw David Sokol under the bus), but his annual letters to the shareholders of Berkshire-Hathaway are legitimate milestones in American business thinking. Lawrence Cunningham has collected those letters and essays in a series of anthologies, the most recent of which is now available (it's the one on the far left).

Cunnigham lays out the importance of the essays in a post at Harvard's corporate governance blog:

The essays address some of the most important governance problems. The first is the importance of forthrightness and candor in communications by managers to shareholders. Buffett tells it like it is, or at least as he sees it, and laments that he is in the minority. Berkshire’s annual report is not glossy; Buffett prepares its contents using words and numbers people of average intelligence can understand; and all investors get the same information at the same time. Buffett and Berkshire avoid making predictions, a bad managerial habit that too often leads other managers to make up their financial reports.

Cunningham goes on to summarize the lessons he thinks we can learn from Buffett's letters.

Pamela Holmes reviewed the latest edition (the one on the far left above) for Conglomerate:

The first edition of The Essays of Warren Buffett: Lessons for Corporate America was the focus of a symposium held twenty years ago and was the standard textbook for a specialized course taught by the author, Professor Lawrence A. Cunningham of George Washington University Law School.  It has since been adopted by many law and business schools for study in investment, finance and accounting.  Investment firms have used this book in their staff and investor training programs.  However, the layman should not be put off by these credentials as the book is an approachable guide to understanding investment.  Buffett quotes Twain, Churchill and even Woody Allen.  If it's a matter of faith in Warren's wisdom, you may be reassured by the sprinkling of Biblical references used to illustrate his points.

A sampling of Buffett's sage advice to shareholders includes, "Beware of companies displaying weak accounting."  If you question what you see, "it is likely they are following a similar path behind the scenes.  There is seldom just one cockroach in the kitchen."  Berkshire Hathaway's board of directors do not receive company stock as part of their compensation, they "purchased their holdings in the market just as you did...I love such honest-to-God ownership.  After all, who ever washes a rental car?"  Another gem, "...lemmings as a class may be derided but never does an individual lemming get criticized."

Organized by topic rather than chronologically, the words of Mr. Buffett are the words of every man - there is extremely little corporate lingo and no baffling verbiage.  His plain-speak is valuable guidance to learning the history of investing in the U.S., the good and the bad, and to understanding how you can make an intelligent investment decision if effort is put into researching the integrity and focus of company and management behind the investment. ...

Kevin LaCroix writes that despite some quibbles:

The book itself is quite an accomplishment; it is that rare business book that is both worthwhile and enjoyable to read.

He also writes that:

The latest edition is updated to include excerpts from Buffett’s most recent letters. The book not only facilitates quick location of Buffett’s statements on specific topics, but it also affords an opportunity to see how Buffett has developed his themes over time, which unquestionably provides great insight into Buffett’s investment views.

 

When do we expect directors to step in?

Dealpolitik:

The story of how the Dell special committee decided to accept Silver Lake’s and Michael Dell’s $13.65 per share cash offer, as portrayed by the Dell preliminary proxy statement filed Friday, is one of a conscientious group of independent directors doing their best after Mr. Dell had told them he wanted to take the company private.

It did not turn out to be a story where the independent directors were looking to hit a home run for shareholders by getting a generous cash out price. Rather it is one of how as these directors did their work they became concerned — perhaps even scared — by the strategic direction of the company and the performance of its management team.

And that raises a simple question: Where were Dell’s other directors were in the quarters and even years before the special committee engaged in this process?

The special committee’s concerns about Dell’s management appeared early on in the process. A leading problem seems to have been the committee’s loss of confidence in management’s ability to adequately forecast future results. As the proxy statement put it:

“While the [management forecast was] potentially useful to help negotiate a higher price from bidders, it was not particularly helpful in assisting the Special Committee in evaluating the Company’s alternatives to a sale transaction because of the Special Committee’s belief that some of the assumptions underlying the projections were overly optimistic and given management’s repeated difficulty in accurately predicting the Company’s performance”

Indeed, among the factors the committee considered in approving the deal was the fact that for the past seven quarters with one exception Dell’s revenue had missed management forecasts and consensus analyst estimates.

It's an interesting example of what I suspect is an intractable problem of corporate governance. Most of what directors do on a day to day basis consists of the on-going process of oversight rather than making discrete decisions. Getting a group of outside directors to mobilize for intervention, however, is inevitably much easier when they are asked to respond to a discrete event--especially a potential crisis or major transaction--than when they are simply watching management do its job dat to day.

WSJ reviews The AIG Story

From the Wall Street Journal:

Did the U.S. government break the law when it seized control of American International Group during the financial crisis of 2008? In "The AIG Story," the man who built the giant insurer says that the answer is yes and explains his reasoning. Former AIG chief executive Maurice R. "Hank" Greenberg—along with his co-author, Lawrence A. Cunningham—also offers a fascinating company history and an account of how, after Mr. Greenberg's ouster in 2005, AIG made the disastrous mortgage bets that drove it into the arms of the feds. ...

Taking over in 1968, Mr. Greenberg launched the company on one of the great winning streaks in corporate history. By 2005, the authors report, the value of the company had increased by 19,000%, and AIG was the world's largest insurance company. The streak ended that year when New York Attorney General Eliot Spitzer accused Mr. Greenberg of fraud—specifically, of having engineered a sham reinsurance transaction to boost AIG's reserves against losses—and bullied the AIG board into firing him with threats of a corporate indictment. Like many of Mr. Spitzer's prosecutions, the case turned out to be less successful in court than in the media. No criminal charges were ever filed against Mr. Greenberg, and much of the civil suit was later dropped. ...

When the day of reckoning came in 2008 and the failed mortgage bets threatened to sink the firm, the government took control of AIG. Mr. Greenberg argues that it was illegal since the feds never received the approval of shareholders.

This is a great book and a must read.

The AIG Story

Prominent and respected corporate law professor Larry Cunningham has teamed up with former AIG CEO Hank Greenberg to write The AIG Story. According to Amazon:

In The AIG Story, the company's long-term CEO Hank Greenberg (1967 to 2005) and GW professor and corporate governance expert Lawrence Cunningham chronicle the origins of the company and its relentless pioneering of open markets everywhere in the world. They regale readers with riveting vignettes of how AIG grew from a modest group of insurance enterprises in 1970 to the largest insurance company in world history. They illustrate AIG's distinctive entrepreneurial culture and how its outstanding employees worldwide helped pave the road to globalization. 

• Corrects common misconceptions about AIG that arose due to its role at the center of the financial crisis of 2008.
• Unique account of AIG by one of the iconic business leaders of the twentieth century who developed close relationships with many of the most important world leaders of the period and helped to open markets everywhere.
• New critical perspective on battles with N. Y. Attorney General Eliot Spitzer and the 2008 U.S. government seizure of AIG amid the financial crisis.
•  Confidential information shared publicly for the first time.

The AIG Story captures an impressive saga in business history--one of innovation, vision and leadership at a company that was almost destroyed with a few strokes of governmental pens. The AIG Story carries important lessons and implications for the U.S., especially its role in international affairs, its approach to business, its legal system and its handling of financial crises.

I've been reading it and have been fascinated. Highly recommended.

Reforming LIBOR: Wheatley versus the Alternatives

I have posted to SSRN a new paper entitled Reforming LIBOR: Wheatley versus the Alternatives. The abstract follows"

The London Interbank Offered Rate (LIBOR) is the trimmed average interest rate for interbank loans by a panel of leading London banks. LIBOR is the most widely used benchmark rate. An estimated $350 trillion in financial products are based on the LIBOR rate.

In late June 2012, a major scandal broke when Barclays PLC — one of the panel banks whose rates went into calculating LIBOR — agreed to pay $453 million in fines to UK and US regulators to settle allegations that Barclays had attempted to manipulate the LIBOR rate. The probe by multiple national regulators around the world quickly spread to include several other global banks.

In response, the United Kingdom’s Chancellor of the Exchequer charged a commission led by Martin Wheatley with conducting an independent review of the setting and usage of LIBOR. In September 2012, Wheatley released a report proposing a comprehensive 10-point reform plan. In October, the UK Government announced that it accepted “the recommendations of Martin Wheatley’s independent review of LIBOR in full.”

Even though Wheatley’s recommendations likely will have been implemented by the time this article appears in print, they are still deserving of analysis. First, changes and amendments may be necessary to further improve the process, perhaps including some of those suggested in this Article. Second, while LIBOR is one of the most important benchmark rates, it is not the only such rate. Some of these other benchmarks are already under scrutiny. Assessing the merits of various LIBOR reforms therefore may be helpful as regulators evaluate whether these other benchmark rates require similar reform.

In light of LIBOR’s systemic importance as a global interest rate benchmark and the compelling evidence of rate manipulation by panel banks, reforming LIBOR was both a political and economic incentive. This Article explores a number of alternatives that were available to the UK government.

The Article concludes that leaving the problem to market forces had failed and, moreover, was politically unfeasible. Switching to a government-supplied alternative benchmark was both impractical and unwise as a policy matter, as was installing a government agency as a replacement for BBA as the LIBOR administrator. Although vesting the LIBOR administrator with sufficiently strong intellectual property rights to ensure an adequate stream of licensing fees to provide adequate incentives for the administrator and panel banks is an important part of a reform package, but — contrary to what some commentators have suggested — is not viable as a stand-alone reform.

In contrast to the alternatives, the Wheatley Review provides a comprehensive reform package that has proven politically attractive and seems likely to significantly enhance LIBOR’s credibility and attractiveness as a interest rate benchmark. To be sure, the Wheatley regime is not perfect. To the contrary, this Article suggests a number of ways in which it can be expanded and improved. Over all, however, the analysis of the Wheatley Review herein strongly suggests that it will prove a viable starting point as a blueprint for reforming LIBOR and other interest rate benchmarks.

I will be sending it out to law reviews next week.

Do shareholders benefit from corporate political contributions?

Yes:

A hard-fought campaign is over and President Obama has been reelected. Should shareholders take notice? In brief, yes. In the paper, Corporate campaign contributions and abnormal stock returns after presidential elections, forthcoming in Public Choice, we explore the stock market performance of top corporate contributors after the elections that brought Bill Clinton and George W. Bush, respectively, to power. In both cases, the top contributors strongly outperformed the market. ...

An investor selecting a portfolio according to the percentage of contributions given to the winner in a presidential election would have earned significant abnormal returns of up to 6.6% per year during the first year after an election. Investing in a portfolio formed according to a company’s total contribution would have yielded abnormal annual returns of up to 15.5% for the same observation period.

Which tells me that the people bitching and moaning about corporate political contributions don't really have shareholder intersts at heart .. but rather the interests of the Democratic Party's anti-business left.

Why can't the Vatican clean up its bank?

Schumpeter:

SINCE the beginning of the new year, tourists in Rome who want to visit the Sistine Chapel and see the papal art collections have had to put up with some unholy complications. At the end of a tedious hike from Saint Peter's square and often lengthy queuing alongside the Vatican's walls, they are being told that they cannot pay with credit or debit cards. Those without €16 ($21) in cash for an adult ticket have to walk ten minutes to the nearest bank with an ATM. (Cash dispensers in Vatican City are, incidentally, unique in providing the option of instructions in Latin.)

The refusal is the result not of a papal edict banning electronic payments, but of a decision by Italy’s central bank, which doubles as the country’s banking regulator. Payment services in Vatican City have been provided by the Italian arm of Deutsche Bank since 1997, but it did so with out the necessary authorisation. So the Bank of Italy told it to stop processing the payments. It even refused Deutsche’s request for a moratorium.

The reason for central bank's tough stance is that it has to comply with the European Union’s banking and anti-money-laundering law. This law permits EU banks to operate in non-EU countries only if these have adequate regulatory frameworks and supervisory controls in place. Brussels keeps a list of countries that are considered to satisfy requirements, and the Vatican is not on it.

In July Moneyval, an international body that assesses anti-money-laundering systems, decided that the Vatican's was not up to snuff—the Istituto per le Opere di Religione (IOR), the Vatican's bank, has yet to clean up its reputation. 

The Vatican Bank isn't the Church's worst scandal--obviously, the plague of ephebophile priests still stands as #1--but it is a long running embarassment that should have been fixed ages ago. The failure to clean things up leads one to inevitably suspect that high-ranking Vatican officials are implicated in the "clandestine monetary transactions ... by the Church, but allegedly also by the mafia as well as corrupt politicians and companies" run through the bank.

At this point, the best solution would be to shut down the current bank and start over with entirely new management, state of the art transparency, and independent lay supervision or oversight.

Lipton's advice for boards in 2013

Famed corporate lawyer Martin Lipton has posted the 2013 edition of his annual "Some Thoughts for Boards of Directors," which highlights the key governance and legal issues boards will face in the upcoming year. As has been the case in recent years, much of his attention is devoted to shareholder activism. As always, it's a good read.

Should concealed carry laws trump employment-at-will? In short, no.

At Lexology, a recent post discussed a new Kentucky case dealing with the intersection of concealed carry laws and the employment at will doctrine:

At issue in Korb v. Voith Industrial Servs., Inc., 12CV0222 (W.D. Ky Nov. 28, 2012), was an employee who pulled out a handgun from his car to show a security guard the “sweet deal” he received for $150. The court did not describe a hostile employee. It seems he was simply engaging in his own version of show-and-tell. The employer was not amused and terminated the employee’s employment pursuant to a company policy prohibiting firearms on company property.

Important to the case for the court was Kentucky Revised Statute § 237.106(1), which provides:

No … employer, who is the owner, lessee, or occupant of real property shall prohibit any person who is legally entitled to possess a firearm from possessing a firearm, part of a firearm, ammunition, or ammunition component in a vehicle on the property.

These restrictions may seem familiar to Wisconsin employers who recently wrestled with the provisions of the concealed carry law. Wisconsin Statute §175.60(15m)(b) provides:

An employer may not prohibit a licensee or an out-of-state licensee, as a condition of employment, from carrying a concealed weapon, a particular type of concealed weapon, or ammunition or from storing a weapon, a particular type of weapon, or ammunition in the licensee’s or out-of-state licensee’s own motor vehicle, regardless of whether the motor vehicle is used in the course of employment or whether the motor vehicle is driven or parked on property used by the employer.

Both laws establish strong protections for employees to keep a firearm in their personal vehicle.

Although the Western District of Kentucky court repeatedly pointed out it felt the consequences were rather harsh, it found that the Kentucky law did not protect the employee. As noted by the court, if this was simply a matter of storing the gun in the vehicle, the employee would have been protected. But the employee did more. He took the gun out of its holster and handled it, and he did so for reasons that the statute did not otherwise protect. For the court, this was enough for the employer to lawfully discharge the employee without violating the law.

I'm mostly a neutral in the gun control wars, albeit rethinking that issue and lacking any real enthusiasm for constitutionalizing the issue, but I'm defintely not a fan of these laws. As I have explained at considerable length before (and please go read the post before commenting here), I firmly believe employment-at-will ought to trump concealed carry "rights." In brief, laws like those at issue in Kentucky and Wisconsin are part of the steady erosion of carving out one "little exception" to the at will doctrine after another that has essentially eviscerated that doctrine.

In any case, when last I visted this issue, my post moved one blogger to ask:

What if an employer fired employees for keeping “inflammatory” banners or signs concealed in their vehicles, for use at a rally after work?  Would Professor Bainbridge mount a fierce defense of the at-will employment doctrine in these circumstances?  Probably not.  After all, college professors are generally much fonder of talking and demonstrating than shooting.

Piffle. Of course I would raise a defense of the employment-at-will doctrine in those circumstances. First amendment free speech rights limit only the government. In my view, if a private employer wants to prohibit any form of worker speech -- inflammatory or otherwise -- on its own private property and enforce that prohibition by firing workers who violate it, the employer should have the right to do so. The economic and social values of employment at will and property rights makes this an easy case. (And, before you ask, I think labor laws authorizing union speech on employee property are a bad idea, as are laws forbidding private employers from banning religious speech or pretty much any other kind of speech.) I'm much fonder of private property and laissez-faire economic policy, after all, than either talking or shooting.

LIBOR, UBS, and the regulators

I'm working on an article on the need to reform the process by which the London Interbank Offering Rate (LIBOR) is set, so I've been following the news accounts of the LIBOR manipulation scandal closely for some time. Today's WSJ brings news of a major new development:

U.S., U.K. and Swiss authorities alleged a vast conspiracy led by UBS AG to rig interest rates tied to trillions of dollars in loans and other financial products, indicating the practice was far more pervasive than previously known.

UBS agreed to pay about $1.5 billion to settle charges against the Swiss bank, and a unit in Japan where much of the wrongdoing occurred pleaded guilty to criminal fraud. U.S. prosecutors also filed criminal conspiracy charges against two former UBS traders allegedly at the heart of the scheme.

Schumpeter notes an interesting aspect of the evidence released so far by the authorities:

For any who doubted whether there was honour among thieves, or indeed among investment bankers, solace may be found in the details of a settlement between UBS, a Swiss bank, and regulators around the world over a vast and troubling conspiracy by some of its employees to rig LIBOR and EURIBOR, key market interest rates. ...

... even in the midst of this wrongdoing there was evidence of a sense of honour, however misplaced. One banker at UBS, in asking a broker to help manipulate submissions, promised ample recompense:

"I will fucking do one humongous deal with you ... Like a 50, 000 buck deal, whatever. I need you to keep it as low as possible ... if you do that ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I’m a man of my word."

Further hints emerge of the warped morality that was held by some UBS employees and their conspirators at brokers and rival banks. In one telling conversation an unnamed broker asks an employee at another bank to submit a false bid at the request of a UBS trader. Lest the good turn go unnoticed the broker reassures the banker that he will pass on word of the manipulation to UBS.

Broker B: “Yeah, he will know mate. Definitely, definitely, definitely”;
Panel Bank 1 submitter: “You know, scratch my back yeah an all”
Broker B: “Yeah oh definitely, yeah, play the rules.

All of which suggests an opening for a fascinating rethink of how social norms and behavioral biases can cause even bad actors to be trustworthy and honorable within the confines of their conspiracy (to the detriment of larger society). It suggests that we shouldn't expect such folks to behave as self-maximizing rational actors when confronted with problems like prisoners' dilemmas. But that's a question for another day.

More to the point, the tawdry business calls into question the actions and omissions of the key regulators who may have knowingly allowed LIBOR manipulation to occur. As I explain in my draft article:

As The Economist reported, however, there was a second—and potentially more troubling in the long term—reason Barclays misreported its LIBOR figures. During the financial crisis, both government and private sector actors viewed a high LIBOR submission as a sign of financial weakness on the part of the submitting bank.[1] Barclays admitted to having reduced the rates it submitted so that its submission fell within the mid-range of the panel banks.[2]  Internal Barclays documents showed that top Barclays managers had expressed concern throughout the financial crisis that Barclay’s relatively high LIBOR submissions were attracting negative media attention and raising questions about the bank’s creditworthiness.[3] This led to a directive being issued by a senior bank manager to Barclay’s LIBOR submitters that the bank “should not stick its head above the parapet.”[4]

Troublingly, Barclays “released evidence that can be interpreted as an implicit nod from the Bank of England (and Whitehall mandarins)” approving of the bank’s fudging its LIBOR submissions.[5] During the crisis, the U.K. government—like many others—was desperate “to bolster confidence in banks and keep credit flowing. The suspicion is that at least some banks were submitting low LIBOR quotes with tacit permission from their regulators.”[6]

The same may have been true of other key global regulators. In the US, for example, the New York Federal Reserve Bank—then run by Timothy Geithner, who subsequently served as Treasury Secretary in the first Obama administration—reportedly was aware as early as August 2007 of possible LIBOR manipulation but failed to aggressively respond.[7]

Today's WSJ editorial page takes up the cudgels on this very point:

... there's a good deal of ex post facto outrage over Libor, which has become the regulators' surrogate for all that was supposedly wrong in finance before the panic of 2008. Regulators who are now putting the hammer down knew about problems with Libor years ago but did little or nothing to stop any manipulation.

The Financial Times reported Wednesday that Treasury Secretary Tim Geithner knew about Libor manipulation in May 2008, even earlier than previously believed. (See our editorial, "Tim Geithner and Libor," July 21, 2012.) And yet he soft-pedaled his criticism of Libor while at the New York Federal Reserve. The New York Fed even used Libor as a benchmark throughout the worst of the crisis, in major contracts to which the U.S. government was party.

When regulators mess up, they don't get indicted. They get promoted.

Which is another very real scandal.

Do Corporations Think Short-Term? And, if so why? Also, who cares?

Harvard law prof Mark Roe ponders these questions.

Does worker ownership reduce agency costs?

Reihan Salam offers some reasons to think it might. I remain skeptical.