ProfessorBainbridge.com

Corporate Practice Commentator's "Top 11" Corporate and Securities Law Review Articles for 2012

The Corporate Practice Commentator has announced the results of its nineteenth annual poll to select the ten best corporate and securities articles.  Teachers in corporate and securities law were asked to select the best corporate and securities articles from a list of articles published and indexed in legal journals during 2012. Here's the results (HT: Leiter):

1. Armour, John, Bernard Black and Brian Cheffins. Delaware's balancing act. 87 Ind. L.J. 1345-1405 (2012). 
2. Bar-Gill, Oren and Ryan Bubb. Credit card pricing: the CARD Act and beyond. 97 Cornell L. Rev. 967-1018 (2012). 
3. Bartlett, Robert P., III. Making banks transparent. 65 Vand. L. Rev. 293-386 (2012). 
4. Barzuza, Michal. Market segmentation: the rise of Nevada as a liability-free jurisdiction. 98 Va. L. Rev. 935-1000 (2012). 
5. Bratton, William W. and Michael L. Wachter. The political economy of fraud on the market. 160 U. Pa. L. Rev. 69-168 (2011). 
6. Cain, Matthew D. and Steven M. Davidoff. Delaware's competitive reach. 9 J. Empirical Legal Stud. 92-128 (2012). 
7. Cheffins, Brian, John Armour and Bernard Black. Delaware corporate litigation and the fragmentation of the plaintiffs' bar. 2012 Colum. Bus. L. Rev. 427-501. 
8. Fisch, Jill E. The destructive ambiguity of federal proxy access. 61 Emory L.J. 435-500 (2012). 
9. Rock, Edward B. Shareholder eugenics in the public corporation. 97 Cornell L. Rev. 849-906 (2012). 
10. Squire, Richard. How collective settlements camouflage the costs of shareholder lawsuits. 62 Duke L.J. 1-78 (2012). 
11. Thomas, Randall S. and Robert B. Thompson. A theory of representative shareholder suits and its application to multijurisdictional litigation. 106 Nw. U. L. Rev. 1753-1819 (2012).

Apparently there was a tie for 10th.

JOBS Act Symposium

The University of Denver Online Law Review has published an online symposium on the JOBS Act. 

The issue (with the exception of the intro that Jay Brown wrote) is entirely student written.  Students took a class that required the production of a 15 or so page paper on a narrow aspect of the JOBS Act.  Each paper had to examine the law as it existed before the JOBS Act, the appropriate language in the JOBS Act, and any relevant legislative history.  The papers ended with useful practical analysis about the impact of the JOBS Act.   

They were then bundled together into an issue of the Law Review (the Review reserved the right to reject any paper on qualitative grounds).  Consistent with the online culture, the papers are topical, useful, and short.  They are written in a highly accessible prose.  At the same time, they are thorough, with each having approximately 50 to 90 footnotes.   

The link for the issue is here  http://www.denverlawreview.org/jobs-act-feature# and on SSRN  here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257894

I've been filed with the SEC

Apparently the Hess Corporation is sending Jack Coffee's and my posts about hedge funds paying director nominees to its shareholders, because it's filed them as definitive additional proxy materials. Heh.

Wall Street Journal Smashes Arguments for Corporate Political Spending Disclosure

In a brilliant editorial, the WSJ exposes the political agenda behind those who would mandate corporate disclosure of campaign contributions and other political spending and smashes their arguments. The editorial concludes:

The political left poses as shareholder champions to try to embarrass companies into giving up their free speech rights only to invoke the First Amendment to avoid disclosing which unions or liberal billionaires are financing its campaign of political intimidation. Shareholders who care about political freedom and the health of their businesses should tell corporate boards to fight back against this bullying.

Exactly right. Please go read the whole thing.

Corporate disclosure via social media

It took the SEC over 15 years to decide that corporations could use the internet to disclose information. When it came to social media, however, the SEC has moved a bit faster. As the WSJ reported this am:

In a ruling that portends changes to how companies communicate with investors, the Securities and Exchange Commission said Tuesday that postings on sites such as Facebook and Twitter are just as good as news releases and company websites as long as the companies have told investors which outlets they intend to use.

The move was sparked by an investigation into a July Facebook posting from Netflix Inc. Chief Executive Reed Hastings, who boasted on the social-media site that the streaming-video company had exceeded one billion hours in a month for the first time, sending the firm's shares higher. The SEC opened the investigation in December to determine if the post had violated rules that bar companies from selectively disclosing information. ...

In its Tuesday ruling, the agency said social-media sites would also suffice—in some circumstances. It blessed sites as long as companies make clear to investors they plan to use them. It also suggested a corporate executive's personal Facebook page wasn't as likely as a company's social-media page to be a channel through which companies would be allowed to make important announcements. ...

Joseph Grundfest, a former member of the commission who now teaches at Stanford Law School, said the SEC is bowing to reality in blessing social media. Twitter, where users can post comments of 140 characters or less, says more than 200 million people world-wide use the service at least twice a month. Facebook says it has more than one billion users. "As a practical matter, Reed Hastings' personal Web page probably informed more people more quickly of the information than" a formal SEC filing, said Mr. Grundfest, who published a paper in January urging the SEC not to pursue an enforcement action against Mr. Hastings. "You don't have 200,000 people a day checking Netflix filings on" the SEC's electronic-document site.

The SEC announcement is here. Highlights:

The SEC’s report of investigation confirms that Regulation FD applies to social media and other emerging means of communication used by public companies the same way it applies to company websites. The SEC issued guidance in 2008 clarifying that websites can serve as an effective means for disseminating information to investors if they’ve been made aware that’s where to look for it. Today’s report clarifies that company communications made through social media channels could constitute selective disclosures and, therefore, require careful Regulation FD analysis. ...

Regulation FD requires companies to distribute material information in a manner reasonably designed to get that information out to the general public broadly and non-exclusively. It is intended to ensure that all investors have the ability to gain access to material information at the same time.

Blogosphere commentary includes Usha Rodrigues:

This move seems easy and right-- unless the SEC wants to play little Dutch boy. There seems to be no stopping social media.  

Next question: how broadly will companies authorize social media disclosure?  Dealbook's Michael J. de la Merced observes that "the new move may reduce spontaneity because companies may limit their communications to official corporate accounts and file the information with the agency at the same time."  

Broc Romanek:

Even though the SEC's press release touts the new report as a greenlight for companies - the press release's title is "SEC Says Social Media OK for Company Announcements If Investors Are Alerted" - I'm dubious that companies and their advisors will see it that way. For starters, the new guidance comes from an Enforcement report (here's an explanation of what a Section 21(a) report is) - perhaps not the best vehicle to encourage new practices. [Not surprisingly, many mass media reporters were fooled by the SEC's title and report that the SEC has "new" disclosure rules.]

And it doesn't get into the nitty gritty like IM's new guidance does. Given the slow adoption rate of social media by IR, finance and governance professionals - compared to the rest of the world - I'm not convinced this will be enough to get folks moving (for example, see this blog by Blank Rome's Yelena Barychev; this blog by Leonard Street's Steve Quinlivan and this Cooley news brief from Cydney Posner).

Both make excellent points.

 

The SEC's Illinois Stunt

The SEC has announced that it charged the State of Illinois with misrepresenting the health of the state's pension funds in connection with bond offerings:

An SEC investigation revealed that Illinois failed to inform investors about the impact of problems with its pension funding schedule as the state offered and sold more than $2.2 billion worth of municipal bonds from 2005 to early 2009. Illinois failed to disclose that its statutory plan significantly underfunded the state’s pension obligations and increased the risk to its overall financial condition. The state also misled investors about the effect of changes to its statutory plan. ...

According to the SEC’s order, Illinois took multiple steps beginning in 2009 to correct process deficiencies and enhance its pension disclosures. The state issued significantly improved disclosures in the pension section of its bond offering documents, retained disclosure counsel, and instituted written policies and procedures as well as implemented disclosure controls and training programs. The state designated a disclosure committee to assemble and evaluate pension disclosures. In reaching a settlement, the Commission considered these and other remedial acts by Illinois and its cooperation with SEC staff during the investigation. 

Why do I call this a stunt? No fine. No relief for the affected bondholders. No benefits for Illinois pensioners, although I grant that that's largely beyond the SEC's jurisdiction. And no additional changes beyond what Illinois has already done.

The New Investor Cliffhanger

Bainbridge, Stephen M., The New Investor Cliffhanger (March 6, 2013). UCLA Law Review Discourse, 2013; UCLA School of Law, Law-Econ Research Paper No. 13-05. Available at SSRN: http://ssrn.com/abstract=2229404

Abstract: In a recent UCLA Law Review article, The New Investor, 60 UCLA Law Review 678 (2013), available on SSRN at: http://ssrn.com/abstract=2227498, Professor Lin argues that: Technological advances have made finance faster, larger, more global, more interconnected, and less human. Modern finance is becoming an industry in which the main players are no longer entirely human. Instead, the key players are now cyborgs: part machine, part human. Modern finance is transforming into what this Article calls cyborg finance.

In this short essay for the UCLA Law Review’s online supplement, I reply to Professor Lin’s article. The article provides a comprehensive survey of how technology is changing the capital markets and thus, inevitably, providing new challenges for securities regulation. Lin writes well and clearly, even about highly technical legal and technological issues. The article is exhaustively researched, reflecting a command of literatures from a number of disciplines.

But while Professor Lin has flagged a substantial number of significant problems caused by the wide-ranging impact of technology on capital markets and securities regulation, he has not yet solved any of them. I conclude by encouraging Proessor Lin to use this article as the jumping off point for a series of articles that will offer legislators, regulators, and judges, solutions to the problems posed by technological change in this area.

Number of Pages in PDF File: 12

Keywords: securities regulation, capital markets, technology

JEL Classification: K22

Accepted Paper Series 

Is "fraud on the market" back on the agenda?

Apparently so:

A divided Supreme Court ruled on February 27th that proof of materiality is not a prerequisite to certification of a Rule 10b-5 securities fraud class action.Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, No. 11-1085 (Feb. 27, 2013).

The elements of a Rule 10b-5 claim include proof of a material misrepresentation or omission and reliance upon such misrepresentation or omission. Plaintiffs in securities fraud class actions typically seek to invoke the “fraud-on-the-market” presumption set out in Basic Inc. v. Levinson, 485 U.S. 224 (1988) to establish reliance. In Basic, a case in which only a bare quorum of six Justices participated, a bare majority of four Justices permitted plaintiffs who trade in an impersonal and efficient market to invoke a rebuttable presumption of reliance on public, material misrepresentations, and thus proceed with a class action even absent proof of individual reliance. ...

Notably, four Justices expressed a willingness to revisit Basic’s fraud-on-the-market presumption. Justice Thomas’ dissent (in which Justices Kennedy and Scalia joined all or in part) stated that the Basic decision is “questionable”. Justice Thomas noted that only four Justices had joined the portion of the Basic opinion adopting the fraud-on-the-market theory and that two other Justices had dissented from that portion of Basic and had expressed concern that the Court had replaced “traditional legal analysis” “with economic theorization”. Indeed, one law professor (whose article Justice Thomas referenced) has described the line-up of Justices that decided Basic as “remarkably skewed”. Justice Alito concurred in the majority opinion, but on the understanding that whether the Court should revisit Basic’s fraud-on-the-market presumption was not before the Court in Amgen and, he too, stated that “reconsideration of the Basic presumption may be appropriate”.

I did not see that one coming. But I direct your attention to William W. Bratton & Michael L. Wachter, The Political Economy of Fraud on the Market, available at SSRN: http://ssrn.com/abstract=1824324, which argues that:

The fraud on the market class action no longer enjoys substantive academic support. The justifications traditionally advanced by its defenders - compensation for out-of-pocket loss and deterrence of fraud - are thought to have failed due to the action’s real world dependence on enterprise liability and issuer funding of settlements. The compensation justification collapses when considered from the point of view of different types of shareholders. Well-diversified shareholders’ receipts and payments of damages even out over time and amount to a wash before payment of litigation costs. The shareholders arguably in need of compensation, fundamental value investors who rely on published reports, are undercompensated due to pro rata distribution of settlement proceeds to all class members. The deterrence justification fails when enterprise liability is compared to alternative modes of enforcement. Actions against individual perpetrators would deter fraud more effectively than does enterprise liability. If, as the consensus view now has it, fraud on the market makes no policy sense, then its abolition would seem to be the next logical step. Yet most observers continue to accept it on the same ground cited by the Supreme Court in 1964 when it first implied a private right of action under the 1934 Act in J.I. Case v. Borak - a private enforcement supplement is needed in view of inadequate SEC resources. Restating, even a private enforcement supplement that makes no sense is better than no private enforcement supplement at all. 

But then again, maybe not. Contrary to their argument that there are "sticking points retarding movement toward fraud on the market's abolition" by the courts, that door now appears to be wide open.

The New Investor Cliffhanger

University of Florida Tom Lin is here at UCLA today to present his paper, The New Investor, to a law review symposium. (The New Investor. 60 UCLA Law Review 678 (2013). Available at SSRN: http://ssrn.com/abstract=2227498.)

I've been asked to comment on the article. So here's what I plan to say:

There is much to like about Professor Lin’s article, The New Investor. The article provides a comprehensive survey of how technology is changing the capital markets and thus, inevitably, providing new challenges for securities regulation. Lin writes well and clearly, even about highly technical legal and technological issues. The article is exhaustively researched, reflecting a command of literatures from a number of disciplines.

As a lifelong tech geek and science fiction fan, moreover, the many explicit and implicit references to classic science fiction tropes tickled my fancy. Indeed, it is in my fanboy capacity that I must take issue with Lin’s foundation metaphor; namely, We are all cyborgs now.

But when we think of cyborgs, we think of organisms that are part man and part machine, such as the Borg of the Star Trek franchise or Darth Vader of the Star Wars franchise.  Instead, a better model would be the working relationship between humans and computers.

A classic science fiction trope is the ironically named “the computer is your friend,” in which a super computer becomes a super-villain. Before there was The Matrix there was Skynet.  Before there was Skynet there was Colossus. (I digress to note that The Forbin Project is one of those movies that’s so bad it’s good.) And so on back to at least Isaac Asimov’s The Machines. An apt metaphor for the hazards Professor Lin identifies in the computerization of the markets.

Conversely, of course, there are some science fiction supercomputers that turn out to be super-heroes. Holmes IV of Robert Heinlein’s novel The Moon is a Harsh Mistress springs to mind as an apt metaphor for the positive potentialities of technology.

So, first criticism, Borgs out, Skynet in.

On to a more serious point. As I said, there is much to like about this article, but I must confess to being left rather frustrated by it.

For one thing, like most law review articles, it is too long. (Mea culpa.) Consider, for example, Part I.A of the article, in which Lin traces the rise of the machines in society. That section easily could have been boiled down into the single sentence “computers are really important.”

In addition to being too long, law review articles all too often suffer from grandiose ambition, which detracts from their utility for end users such as practitioners, judges, legislators, and regulators.  I’m afraid that Part V of Professor Lin’s article is a case in point. In it, Lin takes on the question of whether technological advances “necessitate the fall of humans in society and finance,” concluding that they do not. I have no doubt that it is also a question worthy of serious philosophical musing, but I am not convinced that an article on regulating the impact of technology on capital markets is the right venue for it.

Turning to my principal criticism, however, as I thought about why the article left me frustrated, it occurred to me that I felt the same way when I finished George R.R. Martin’s book A Dance with Dragons. When a 1040 page book that is the fifth in a series ends on a cliffhanger, one is—I think—entitled to be a tad peeved. But by my count Professor Lin leaves us with not just one but 11 cliffhangers.

Lin’s article thus called to mind my former University of Illinois College of Law colleague John Nowak’s advice that the way to become a successful professor is to “[t]ake an obscure little problem that no one has thought much about, blow it all out of proportion, and solve it, preferably several times, in prestigious law reviews.”  Unfortunately, other than publishing in a prestigious law review, that is not advice Professor Lin chose to follow in The New Investor.

Let’s start with John’s recommendation that one select “an obscure little problem.” Lin violated all three precepts. Instead of one problem, he chose many. Instead of an obscure problem, he chose very important ones. Instead of a little problem, he chose very big ones. But then he doesn't solve them.

The discussion of how cyber crimes threaten capital markets, for example, concludes with the observation that “[c]ybersecurity prevention and protection efforts are undoubtedly difficult, but they must also be sensible, thoughtful, and not obstruct the promise and progress of cyborg finance.”  Lin therefore urges that the endeavor to balance these competing concerns “must be pursued vigorously because, ultimately, technological advances in finance may hold more promise than threat in the future.”  But the reader is left wondering (1) assuming all turns out well, how do we effect such a balance and (2) what happens if the future of computerized finance looks more like Skynet than HOLMES IV?

Lin’s failure to provide solutions is particularly frustrating when one comes to his discussion of the implications technological change has for the legal definition of the “reasonable investor.” Here indeed was a “problem that no one has thought much about,” albeit not a little one, crying out for a solution. I left the analysis fully persuaded that technological changes and new insights from behavioral economics require us to rethink what it means to be a reasonable investor, but I also left it with no idea of how courts might go about reframing the existing legal definition to take cognizance of those developments. Telling the reader that “regulators need to become more mindful of the dynamism and realism of the new investor model if they hope to remain relevant” is not a solution.

What makes Lin’s failure to offer solutions here even more frustrating is that this is one context in which his interest in broader social questions may well prove relevant. In U.S. v. Sayre, the Ninth Circuit held that a district court had not abused its discretion by refusing to instruct the jury in a securities fraud case as to the meaning of “reasonable investor.” The appellate court explained that “[t]he term ‘reasonable investor’ is a concept within the jury's ordinary experience and understanding.” But if Lin is right about the way technology is changing what it means to be a reasonable investor and I’m right that most investors are not cyborgs, will it remain the case that the everyday experiences of ordinary jurors will equip them to decide questions of materiality? Put another way, will Wall Street’s Skynets be able to find a jury of their peers?

In sum, if one wants a broad survey of technology and capital markets from which one could mine multiple problems one could proceed to solve, “preferably several times, in prestigious law reviews” Professor Lin’s article will serve the purpose admirably. Indeed, in closing, I hope that Professor Lin himself will do so. His article demonstrates a command of several relevant literatures that will give him a launching platform from which to move on to detailed analyses of the problems he has identified herein. Just skip the cliffhangers from here on out, okay?

Manne's oral history

As regular readers know, Henry Manne is one of my heroes. Father of law & economics and, I'm proud to say, a mentor and friend. He was and remains one of the great legal minds of our time. The SEC Historical Society collects oral histories from notable contributors to securities law. They've finally gotten around to doing Henry's (it's about damned time). You can download it from here.

Now, when are they doing me?

Does the Apple proxy decision mean anything? No.

Schumpeter:

... a legal action brought against Apple by Greenlight Capital, a hedge fund run by David Einhorn, a high-profile financier, has now become something of an embarrassment for the tech giant. On February 22nd a judge ruled in favour of Greenlight, which has a stake in Apple, giving Mr Einhorn a symbolic victory in his battle to get the company to return more of its $137 billion cash mountain to shareholders.

The legal tussle revolves around Apple’s plan to have its shareholders vote on a proposal that critics such as Mr Einhorn fear will make it harder for the company to issue preferred shares in the future. Greenlight’s boss has been urging Apple to issue such shares with a perpetual 4% dividend as a way to hand back more of the computer maker's Croesus-like stash of cash.

Greenlight has won this round on a technicality: issuing a preliminary injunction, the judge handling the case said that a vote on Apple’s proposed move could not go ahead as planned at its annual shareholder meeting on February 27th because the firm had bundledthe preference-share matter together with other, unrelated ones in a single proxy. However, he also added that Greenlight was likely to succeed in its challenge to Apple's proposed move "on the merits of the case". The hedge fund was quick to hail the decision as “a significant win for all Apple shareholders and for good corporate governance”.

But it's really not all tha big a deal, as Larry Cunnigham explains:

The substantive fight is about how Apple should allocate substantial accumulated cash, running to some $140 billion. The board wishes to retain it; the shareholder wants it distributed to shareholders. Einhorn envisions using a specific approach to distributing the cash that would involve the issuance of a new class of preferred stock to existing shareholders with a stated cash dividend. Einhorn has no right to direct the board on such a matter and any claim challenging the board’s decision would be decisively dismissed. In fact, I cannot imagine any reputable attorney filing such a suit. Boards, not shareholders, set dividend policy. ...

Einhorn won this technical round but the substantive power about the dividend policy remains firmly in the board’s hands.

Exactly.

SEC Commissioner Gallagher slams federalization of corporate governance, citing yours truly

SEC Commissioner Daniel Gallagher recently gave a great speech on the problems posed by the creeping federalization of corporate law, in which he noted that:

Although the stated purpose of Sarbanes-Oxley was to help protect investors, if you were to ask executives and boards of directors today who they believed were the biggest beneficiaries of the passage of the Act, many would answer that it was accountants, foreign markets, and lawyers that truly benefited.  One example relates to compliance with Section 404 of Sarbanes Oxley, which the Commission estimated would cost on average roughly $91,000 a year to implement.⁵  Section 404 of Sarbanes-Oxley (in conjunction with the related PCAOB Auditing Standard 2) caused a fury when the associated costs of compliance ended up being substantially higher than anticipated by policymakers.  Most of the costs related to auditors, who were perhaps overly cautious in the wake of the failure of Arthur Andersen.  Or maybe they simply found Section 404 compliance to be a lucrative new revenue source. ...

Proxies today are remarkably different than they were twenty, ten or even five years ago.  Disclosure requirements have made them increasingly longer, more technical and more difficult to read. I have no doubt that many – indeed, most - retail investors find it too time consuming and daunting to attempt to dissect the issues they must vote on. This phenomenon is paralleled by the rise of proxy advisory firms and the increasing willingness of investment advisers to large institutional investors to rely on such firms to do this work for them.    

In addition to raising the vital question of whether advisers are fulfilling their fiduciary duties when they rely on recommendations from proxy advisory firms – a question I don’t have time to address today but one to which I hope you all give serious thought – this shift by institutional investors has resulted in increased influence by proxy advisory firms over investors and the companies in which they invest.  The Dodd-Frank mandated say-on-pay requirement has only increased this influence.  As Professor Stephen Bainbridge wrote in his article Quack Federal Corporate Governance Round II, the proponents of say-on-pay ignore “the probability that say-on-pay really will shift power from boards of directors not to shareholders but to advisory firms[.]”⁷

5 Stephen M. Bainbridge, Dodd-Frank: Quack Federal Corporate Governance Round II, 95 Minn. L. Rev. 1779, 1781 (2011). ...

7 Bainbridge supra note 5 at 1811.

Do go read the whole thing. It's concise and clear. Also, of course, I hope you'll read Dodd-Frank: Quack Federal Corporate Governance Round II. 

 

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.

Warren Buffett's lack of transparency and the corporate governance activists' silence

Deal Journal:

While we all continue to speculate on who Buffett’s designated Berkshire Hathaway successor is, Buffett has treated us to a new mystery: Who got the sweetheart stock price Berkshire announced today.

Berkshire paid more than a 17% premium to book value to purchase 9,200 class A shares from the “estate of a longtime shareholder,” Berkshire announced today.

Why aren't shareholder/corporate governance activists up in arms about Berkshire's lack of transparency? Why does Buffett get a free ride?

 

The immensely complex and burdensome conflict minerals disclosure debacle

Just looking at this flowchart of the steps required to comply with the new conflict mineral disclosure rules should give investors the willies. The complexity. The costs. The error risk. The liability exposure. This is a bad rule. If Obama really wants to get the economy going, he's got to start taking a second look at this sort of nonsense.