ProfessorBainbridge.com

Senator Warren gets one share one vote dead wrong

Senator Elizabeth Warren is a former Harvard business law professor, so she ought to know better than to peddle this sort of nonsense:

United States Senator Elizabeth Warren (D-MA) today sent a letter to New York Stock Exchange (NYSE) Vice President John Carey and NASDAQ Executive Vice President & General Counsel Edward Knight, urging their organizations to consider proposing rules requiring "one share, one vote" corporate structures for listed companies.

Sen. Warren asks NYSE and NASDAQ to declare companies ineligible for an initial listing if they have unequal voting rights, and to prohibit already listed companies from issuing additional classes of common stock with unequal voting rights - a request made by the Council of Institutional Investors in an October letter. "If a company goes to the public markets to raise money, long-term ordinary common stock investors - a category that includes directly or indirectly millions of retirees and workers - should be entitled to certain basic rights," writes Sen. Warren.  "One of the most basic of those rights is one-share-one-vote."

Sen. Warren highlights several problems with unequal voting arrangements. She notes that under these structures, "Long-term investors will have limited recourse in holding management and the board accountable if the company heads in a wrong direction." Sen. Warren's letter asks NYSE and NASDAQ to issue proposed rules addressing this issue for public comment.

I've written extensively about one share/one vote over the years and am confident that everything Senator Warren said here was wrong.

First, shareholders do not have "rights," if by right you mean something “that is conceived as part of natural law and that is therefore thought to exist independently of rights created by government or society.” Black's Law Dictionary 1323 (7th ed. 1999). Instead, shareholders "rights" are defined entirely by a contract comprised of the corporation's organic documents and the default rules of corporate law. See Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del.2012) (noting that the articles of incorporation are regarded as contracts between shareholders and the corporation and are interpreted as such). There has never been a time in US history in which those default rules mandated one share/one vote. (I trace this history in Revisiting the One-Share/One-Vote Controversy: The Exchanges’ Uniform Voting Rights Policy, 22 Securities Regulation Law Journal 175 (1994).)

What we have here thus is Sen. Warren engaing in what her Harvard colleague Mary Ann Glendon calls Rights Talk, in which the term right is invoked as a sort of trump card to delegitimate opposistion.

As I also explain in Revisiting the One-Share/One-Vote Controversy, while some argue that equal voting rights help reduce agency costs by ensuring that management accountability to shareholders, this argument proves unpersuasive on close examination. Shareholder voting as such is a relatively inefficient accountability mechanism. The shareholders’ incentives to be rationally apathetic, coupled with their relative powerlessness, renders them the corporate constituency perhaps least able to hold management accountable for misbehavior.

To be sure, voting rights enable shareholders to indirectly hold management’s feet to the fire via a proxy contest or by selling their shares to a takeover bidder. From this perspective, dual class capital structures are problematic not because they deprive shareholders of voting rights, but because they shield management from exposure to the full force of these other accountability mechanisms. Having said that, however, the anti-takeover effects of dual class stock do not justify prohibiting such a capital structure. Proscribing dual class stock because of its takeover effects puts one on a very slippery slope indeed. Taken to its logical extreme, the argument against dual class stock based on its anti-takeover effect would justify a sweeping prohibition of all effective takeover defenses, a solution that no court or legislature has been willing to adopt.

Finally, Senator Warren ovelooks the a critical difference between one share/one vote capital structures created in the corporation's articles prior to the IPO and one created after the company has gone public via charter amendment or otherwise. While management’s conflict of interest may justify some restrictions on some disparate voting rights plans, it hardly justifies a sweeping prohibition of dual class stock. After all, not all such plans involve a conflict of interest. Dual class IPOs are the clearest case. Public investors who don’t want lesser voting rights stock simply won’t buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off is offered by the firm in recompense. In effect, management’s conflict of interest is thus constrained by a form of market review.

At present, stock exchange listing standards permit dual class capital structures only when the company adopted one before going public. As we've seen, there is no policy justification for restrictions on dual class stock capital structures in that context.

In sum, Senator Warren blew it again.

How Law Can Address the Inevitability of Financial Failure

My friend and colleague Iman Anabtawi and her co-author Steven Schwarcz have posted their article, Regulating Ex Post: How Law Can Address the Inevitability of Financial Failure, which is forthcoming in the Texas Law Review. Available at SSRN: http://ssrn.com/abstract=2271587

Abstract: Unlike many other areas of regulation, financial regulation operates in the context of a complex interdependent system. The interconnections among firms, markets, and legal rules have implications for financial regulatory policy, especially the choice between ex ante regulation aimed at preventing financial failure and ex post regulation aimed at responding to that failure. Regulatory theory has paid relatively little attention to this distinction. Were regulation to consist solely of duty-imposing norms, such neglect might be defensible. In the context of a system, however, regulation can also take the form of interventions aimed at mitigating the potentially systemic consequences of a financial failure. We show that this dual role of financial regulation implies that ex ante regulation and ex post regulation should be balanced in setting financial regulatory policy, and we offer guidelines for achieving that balance.

Today's tweet

@securitiesattny says "in past 5 yrs only 10% of venture backed companies exited w/ IPO" Here's why:ssrn.com/abstract=16963…

— Stephen Bainbridge (@ProfBainbridge) May 1, 2013

Speaking of fiduciary duties of bank directors

Apropos the prior post on the fiduciary duties of bank directors, I just read an excellent and provocative article by Chris Bruner. Conceptions of Corporate Purpose in Post-Crisis Financial Firms (March 5, 2013). Seattle University Law Review, Vol. 36, p. 527, 2013; Washington & Lee Legal Studies Paper No. 2012-29. Available at SSRN: http://ssrn.com/abstract=2228845. Here's the abstract:

Abstract: American "populism" has had a major impact on the development of U.S. corporate governance throughout its history. Specifically, appeals to the perceived interests of average working people have exerted enormous social and political influence over prevailing conceptions of corporate purpose - the aims toward which society expects corporate decision-making to be directed. This article assesses the impact of American populism upon prevailing conceptions of corporate purpose - contrasting its unique expression in the context of financial firms with that arising in other contexts - and then examines its impact upon corporate governance reforms enacted in the wake of the financial and economic crisis that emerged in 2007. 

I first explore how populism has historically shaped conceptions of corporate purpose in the United States. While the "employee" conceptual category best encapsulates the perceived interests of average working people in the non-financial context, the "depositor" conceptual category best encapsulates their perceived interests in the financial context. Accordingly, American populism has long fostered strong emphasis on the interests of bank depositors, resulting in striking corporate architectural strategies aimed at reducing risk-taking to ensure firm sustainability - notably, imposing heightened fiduciary duties on directors and personal liability on shareholders. I then turn to the crisis, arguing that growing shareholder-centrism over recent decades goes a long way toward explaining excessive risk-taking in financial firms - a conclusion rendering post-crisis reforms aimed at further strengthening shareholders a surprising and alarming development. While populism has remained a powerful political force, it has expressed itself differently in this new environment, fueling a crisis narrative and corresponding corporate governance reforms that not only fail to acknowledge the role of equity market pressures toward excessive risk-taking in financial firms, but that effectively reinforce such pressures moving forward. 

I conclude that potential corporate governance reforms most worthy of consideration include those aimed at accomplishing precisely the opposite, which may require resurrecting corporate architectural strategies embraced in the past to reduce risk-taking in financial firms. As a threshold matter, however, we must first grapple effectively with a more fundamental and pressing social and political problem - the popular misconception that financial firms exist merely to maximize stock price for the short-term benefit of their shareholders.

I don't agree with all of his arguments or conclusions, but he raises a lot of important issues. I would limit the discussion to systemically important financial institutions. My preferred solution would be to solve the "too big to fail" problem by capping the size of large financial institutions at a level at which their failure would not jepoardize the entire financial system and thereby solve the moral hazard problem created by the implicit taxpayer guarantee currently enjoyed by TBTF institutions.

If that proves politically or economically infeasible, however, I'm prepared to consider corporate governance reforms at such banks--perhaps including creating a fiduciary duty for managers of TBTF institutions running to taxpayers--as a second best solution.

One size corporate governance does not fit all

Adam Epstein of Third Creek Advisors in Business Week:

One-size-fits-all corporate governance doesn’t work because small public companies have a fraction of the resources of their larger counterparts. Limitations include smaller, less-diverse boards of directors, less-experienced management teams, and business-ending risks that crop up daily. 

Exactly.

Jim Hamilton: Contour of Dodd-Frank Corrections Bill Begins to Emerge in 113th Congress

Senator Mark Warner (D-VA) presaged this in December of 2012 when he said, in remarks at the Bipatisan Policy Center, that the Senate would take up a bi-partisan Dodd-Frank corrections bill in 2013. A 2500 page piece of legislatikon like Dodd-Frank will be in need of corrections, said Senator Warner, who is a key member of the Banking Committee and a author and co-author of a numberf of Dodd-Frank provisions. In addition, Senate Banking Committee Chair Tim Johnson (D-SD) said that the Commitee will consider changes to Dodd-Frank if they have strong and overwhelming bi-partisan  support. As more and more bi-partisan bills emerge, such as one codifying the end-user exemption from some Title VII requirements, the momentum for a Dodd-Frank corrections bill will become inexorable and irresistable.

via jimhamiltonblog.blogspot.com

I've got some provisions they ought to repeal. See Dodd-Frank: Quack Federal Corporate Governance Round II (September 7, 2010). Available at SSRN: http://ssrn.com/abstract=1673575

SEC Commissioner Gallagher on the proper role of the federal government in corporate governance

SEC Commissioner Daniel Gallagher from a recent speech:

It seems that the standard response to severe economic downturns or epochal corporate scandals is reactive and hurried federal legislation and regulation, often impacting corporate governance standards.  A hallmark of this trend is the presentation of proposed new, sometimes misplaced and usually onerous, requirements as “feel good and cure all” responses to perceived problems that one would be hard pressed to disagree with.  After all, who could be against “better” corporate governance? The result is that the lofty goals of such legislation and their implementing regulations, often rushed out without serious analysis of costs and benefits, are superseded by a higher law: the law of unintended consequences.  Indeed, the risk of unintended consequences looms particularly large in the case of corporate governance, a field in which states have long enjoyed the role of primary steward.

This has been, of course, a longstanding argument advanced by myself and others such as Roberta Romano and the late Larry Ribstein. See, e.g., my book Corporate Governance after the Financial Crisis.

Indeed, Commissioner Gallagher goes on to cite yours truly at two points in his argument:

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. ...

... 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.

News on "Reforming LIBOR: Wheatley versus the Alternatives"

From SSRN:

Dear Stephen Mark Bainbridge:

Your paper, "REFORMING LIBOR: WHEATLEY VERSUS THE ALTERNATIVES", was recently listed on SSRN's Top Ten download list for: Corporate Governance & Law eJournal. ...

Corporate Governance & Law eJournal Top Ten.

Click the following link(s) to view all the papers in:

Corporate Governance & Law eJournal All Papers.

Also, I have posted a revised version of the paper to SSRN that you can download here.

Abstract:  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.

Keywords: London Interbank Offering Rate, LIBOR, benchmark, intellectual property, property rights, banks, financial reform

Bainbridge, Stephen M., Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013). NYU Journal of Law & Business, Vol. 9, No. 2, 2013; UCLA School of Law, Law-Econ Research Paper No. 13-02. Available at SSRN: http://ssrn.com/abstract=2209970.

It'll be the lead article in the next issue of the NYU Journal of Law & Business.

 

Alison Frankel asks "Can we now admit it’s time to end issuer-pays credit rating model?"

She posits:

In July 2007, a recently hired analyst in Standard & Poor’s structured finance group exchanged a series of emails with an investment banking client who wanted to know how the new job was going. Things were just great, the analyst said sardonically, “aside from the fact that the MBS world is crashing, investors and media hate us and we’re all running around to save face … no complaints.” Part of the problem, the analyst said in a subsequent email, was that some people at S&P had been pushing to downgrade structured finance deals, “but the leadership was concerned of p*ssing off too many clients and jumping the gun ahead of Fitch and Moody’s.

I suspect that only an investment banker could find it in his or her heart to sympathize with a credit analyst in the summer of 2007, but this one suggested that some good might come from S&P’s internal conflict. “This might shake out a completely different way of doing biz in the industry,” the banker wrote. “I mean come on, we pay you to rate our deals and the better the rating the more money we make?!?! Whats up with that? How are you possibly supposed to be impartial????”

The email exchange, recounted deep in the Justice Department’s new civil complaint against S&P and its parent, McGraw-Hill, pretty well sums up the entire theory of the government’s case against the rating agency. S&P, according to the Justice Department, had a choice as the housing market began to collapse and subprime mortgages began to default. Rating agency analysts who monitored mortgage-backed securities knew the crash was coming and warned repeatedly that previous ratings of mortgage-backed instruments were no longer a reliable gauge. But rather than heed those warnings and toughen standards on mortgage-tied instruments, S&P continued to accept fees from banks in exchange for conferring its blessing on tens of billions of dollars of collateralized debt obligations. When truth collided with the client relationships that generated S&P’s revenue, in other words, money won out.

So what do we do? Frankel suggests:

There are alternatives to the issuer-pays model. ... Investors could directly share with issuers the cost of rating securities, or could fund their own independent credit rating agency. Or perhaps the government or an independent board could administer credit ratings, either by allocating assignments on the basis of market share or by overseeing auctions in which rating agencies compete for business. The point of all the alternative models is to recalibrate the incentives of rating agencies so their revenue doesn’t depend on delivering the results issuers want.

For a more detailed treatment of the various alternatuives, see Frank Partnoy's essay How and Why Credit Rating Agencies are Not Like Other Gatekeepers, in which he argues that "the best proposals would help resolve the paradox of credit ratings by creating incentives for credit rating agencies to generate greater informational value while reducing the impact of ratings on markets."

Psychoanalyzing Occupy Wall Street

Schwartz, Howard S., What is the Occupy Wall Street Protest a Protest of? A Psychoanalytic Investigation (February 9, 2013). Available at SSRN: http://ssrn.com/abstract=2214377:

The Occupy Wall Street movement appears to be a protest of capitalism, but their expressions of what they are doing offer little in the way of economic analysis. Their critique is not economic but moral. I analyze Communique #1, their purest self-definition, which reveals that they see us as living in a world of artificial images created by, and serving the interests of, malevolent forces: capitalism is the expression of these forces. Their stance against this is their own authenticity, which is their paradigm of an alternative. I compare this to the movie The Matrix, which sees us as living in a similar world, except that the malevolent forces are not capitalism. I compare these with the Cave allegory in Plato's Republic, which is similar, except the artificial images are not expressions of malevolence. I use psychoanalytic theory to argue that the malevolent object of OWS' critique is the father, who, in fulfillment of the paternal function, forces socialization upon us. The world of artificial images is culture, seen from the standpoint of alienation. Their alternative, rooted in their authenticity, with themselves as models, doesn't amount to much.

LIBOR scandals still reverberate

Schumpeter:

They were said to be among the most talented of their generation, recruited after exhaustive interviews and gruelling internships. They worked at firms prepared to spend small fortunes to attract and retain them lest they take their skills elsewhere. Yet the moral bankruptcy of traders implicated in the rigging of the London Interbank Offered Rate (LIBOR), one of the world’s most important interest rates, is matched only by the incompetence with which they covered their tracks.

Take traders at the Royal Bank of Scotland (RBS), who left a trail of evidence in a trove of e-mails and audio recordings detailing how they set about trying to manipulate LIBOR, even after they knew investigators were looking into the issue. “We’re just not allowed to have those conversations over Bloomberg anymore,” said one trader, laughingly, in a call to another who a little earlier had asked in writing for a rigged rate. “Its [sic] just amazing how libor fixing can make you that much money,” was the verdict of another trader.

These exchanges, and many others, were part of a settlement announced on February 6th in which RBS admitted to rigging rates. It agreed to pay fines of $475m to American regulators and another £87.5m ($137m) to Britain’s Financial Services Authority. By the arcane mathematics determining the severity of regulatory fines, RBS is adjudged not to have been as bad an offender as UBS, which last year agreed to pay penalties of $1.5 billion, but is being dealt with a bit more harshly than Barclays, which paid fines of £290m. Regulators said they found attempts to rig LIBOR hundreds of times in at least four and a half years at RBS, compared with the “thousands” alleged in the case of UBS.

But what to do going forward? That's where I come in with Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013). UCLA School of Law, Law-Econ Research Paper No. 13-02. Available at SSRN: http://ssrn.com/abstract=2209970:

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.

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.

John Carney on "Why AIG Suing America Isn't as Crazy as You Think"

John opines:

A judge on the Federal Claims court ruled last summer that if what Greenberg argues is true, the government may really have acted illegally.

Greenberg's legal team, led by David Boies, argues that the government pushed away sovereign wealth-funds and other foreign investors who might have been willing to invest in the company before it was bailed out. This, they argue, prevented AIG from being able to raise capital and contributed to its downgrading by ratings agencies, which in turn put the company into even more dire straits. This forced AIG to accept the unfair terms the government offered in its loan agreement, the lawyers say.

Greenberg's lawyers also raise questions about the events around one of the oddest episodes of the AIG-Treasury relationship. You might recall that in the summer of 2009, the government converted its preferred shares into 79.9 percent of the common stock of AIG, something that it was entitled to do under the terms of the government's loan. This was accomplished by means of a reverse 20:1 stock split.

You might not recall precisely why the stock split occurred. At the time, then-chief executive Ed Liddy said it was necessary to prevent the stock from being delisted on the New York Stock Exchange. That might be true. But it is also true that the split was a necessary part of the conversion from preferred shares because AIG's charter didn't authorize enough common stock to allow the government to take 79.9 percent of the common stock. So when the government converted to common, it was issued unauthorized common stock.

When common shareholders were asked to authorize the additional common stock—which would have badly diluted their interest in the company—they voted no. Because the government's stake was in unauthorized shares, it didn't get a vote. 

So another vote was held about the reverse split of all issued stock—including the government's unauthorized shares. This time, the government got to vote its 79.9 percent stake on this question because its unauthorized shares were also affected. And so the measure prevailed. After the split, the total number of shares outstanding no longer exceeded the number authorized in AIG's charter, so the government's shares were now officially authorized.

That's more than a little bit confusing, I'll admit. And it does sound more than a bit questionable, even to someone as jaded about shareholder rights as I am. But Greenberg's lawyers say it's even worse. They say that this procedure was engineered to circumvent a Delaware court order meant to protect the rights of the common shareholders when the government took over the company.'

If you have the stomach for gross violations of the rule of law by the federal government, go check out the rest.

Astonishing Dodd-Frank statistic of the day

while the Panama Canal was built in 20 million man hours, Dodd-Frank’s already-written rules span 7,365 pages, at a cost of around 24 million labor annual labor hours.

via www.nationalreview.com

Carney Responds to Partnoy and Eisinger

You'll recall that the other day I praised the Frank Partnoy and Jesse Eisinger article in the latest Atlantic on the problems with bank disclosure and regulation. John Carney has replied to Partnoy and Eisinger with an interesting analysis:

Eisinger and Partnoy think that a regulatory regime that threatened bank executives with jail time if it turned out that their financial statements weren't accurate and adequate would go a long way to clear away the black-boxiness. They want this standard of accuracy and adequacy to be intentionally left vague, figuring that prudent chief executive types would err on the side of better disclosure. ...

I'm not sure that's really the way things would go. The threat of jail might result in even less disclosure because it is obviously easier to prove negligence—the standard Eisinger and Partnoy would employ—for actual errors than for omissions. The best way to avoid saying things that aren't true is not to say anything at all. This is part of the reason we're in the mess to begin with.

It's no coincidence that the era of bank financial opacity has coincided with the era of securities litigation. Serious litigation reform that made it far more difficult for the securities bar to bring cases against companies for what is said in public filings would probably improve the filings. Repealing Regulation FD, for starts, would allow a company like Wells Fargo to actually answer questions put to it by people like Eisinger and Partnoy, rather than just kicking them back to the annual statement filed with the SEC.

If investors really would value more disclosure from banks—and I have no doubt that they would—banks would compete for better disclosure, absent some kind of market friction. So if banks aren't competing for investor dollars with better disclosure, something must be standing in the way. It's not collusion. Believe me,Bank of America would love to crush JP Morgan Chase with far better disclosure practices. If Eisinger and Partnoy realize that " these changes would be for the banks' own good," you can be the executives at these banks realize it also. So it's likely the very regulations already in place that are standing in the way.

You need to read both.