ProfessorBainbridge.com

Ann Lipton on WeWork, securities regulation, and capital allocation

Recommended reading.

"Fed Economists Say Bitcoin Can't Compete in World of Trust"

This is sort of interesting:

Bitcoin and other cryptocurrencies solve the problem of making payments in an environment where trust is broken -- but it's unclear whether that's a dilemma that needs to be solved, Federal Reserve of New York economists wrote in a blog post.

Here's the post they referenced.

If we must replace LIBOR, what should the replacement look like?

Bloomberg reports that:

A Federal Reserve-sponsored group that has been working on an alternative is slated Aug. 1 to discuss the timing of the release of the measure. The new rate, which the New York Fed plans to begin publishing daily sometime in the first half of 2018 in cooperation with the Treasury Department's Office of Financial Research, eventually could be the benchmark for pricing some $350 trillion of U.S. derivatives, student loans, home mortgages and many other types of credit.

The meeting of the Alternative Reference Rates Committee follows comments recently by the U.K. Financial Conduct Authority that it intends to stop compelling banks to submit London interbank offered rates by the end of 2021, igniting concerns global regulators may have to speed up their implementation timelines for new alternative benchmarks. According to an interim report, ARRC said it considered and rejected plans that call for a “quicker and more disruptive transition” and recognized that its proposed recommendations “could take several years to accomplish.”

I discussed ideal characteristics of a benchmark in my article Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013), NYU Journal of Law & Business, Vol. 9, No. 2, 2013, available at SSRN: https://ssrn.com/abstract=2209970.

Some key points:

• It is speculated that, “in globally integrated capital markets,” it does not make “sense to have different benchmark borrowing rates for domestic U.S. and international dollar loans.”
• In an increasingly globalized market, control over such a systemically important benchmark by any single government likely would be a source of on-going tension and perhaps would trigger an arms race of sorts in which all of the major financial center nations seek to privilege their domestic benchmark.
• The US working group therefore should be coordinating with counterparts in other countries to develop a global benchmark.
• If a single global rate is desired, even though LIBOR is a U.S. dollar rate, it makes more sense to have the alternative continue to be produced by a London-based government agency or central bank. This is so because it is widely recognized that one of LIBOR’s major advantages was that the London time zone allowed it to straddle the Asian and U.S. markets.
• The benchmark should look to private sector lending, not government rates. The difference between interbank offering rates like LIBOR and potential government substitutes becomes particularly pronounced during periods of economic uncertainty or crisis. In such periods, there is a flight to quality by investors that drives down the rates on presumptively risk free investments like Treasury bills.Conversely, as was the case in the post-Lehman Brothers crisis, banks become less creditworthy and liquidity in the interbank lending market dries up. In such periods, accordingly, benchmarks based on government or central bank funding costs would be especially inappropriate alternatives to one based on interbank offering rates.
• The benchmark should be administered by a private sector body. The Wheatley Review, for example, expressed concern that “public ownership” would reduce the ability of LIBOR to adapt to changing needs of users.The profit motive gives a private actor an incentive to respond to changing conditions in the markets for its product. In contrast, government agencies and state-owned enterprises lack that incentive.

Replacing LIBOR

Bloomberg reports that:

Saron, Sonia, Tonar and Eonia. Behind the Tolkienesque names are the potential candidates to replace Libor, the global borrowing benchmark that underpins more than $350 trillion of financial products, which as of July 27 is being phased out by 2021.

Attaching a time frame to Libor's demise has shifted into sharp focus efforts by financial authorities from Japan to Switzerland to replace the London interbank offered rate. Aside from being mired in fixing scandals, the benchmark has proven increasingly obsolete because of the lack of data behind the daily morning calculation that has established the level set up by the British Bankers Association in 1986.

Count me as dubious.

In my article Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013), NYU Journal of Law & Business, Vol. 9, No. 2, 2013, available at SSRN: https://ssrn.com/abstract=2209970, I argued that:

Although some commentators proposed replacing LIBOR with a new benchmark, and some banks went so far as to test alternatives, that option never gained significant traction. Huge costs would have resulted from overturning long-settled reliance expectations in multiple markets, because numerous types of financial instruments and contracts with a total value in excess of $300 trillion referenced LIBOR. Accordingly, Wheatley opined, “that a transition to a new benchmark or benchmarks would pose an unacceptably high risk of significant financial instability, and risk large-scale litigation between parties holding contracts that reference LIBOR.” In addition, Wheatley concluded that there was “no immediately obvious alternative” to LIBOR. As a result, attention focused on developing what Wheatley called “a comprehensive and far-reaching program of reform” of the existing benchmark.

As far as I can tell, that analysis remains sound.

UCLA economists forecast an increase in growth thanks to Trumpnomics

From UCLA Anderson Forecast:

With $500 billion in tax cuts arriving in the third quarter of 2017, the forecast calls for GDP growth to accelerate from its recent 2 percent growth path to 3 percent for about four consecutive quarters and then slide back to 2 percent. Growth will be hampered by the difficulties of stimulating an economy operating at near full employment and the bite of higher interest rates. Employment will continue to grow on the order of 140,000 jobs per month in 2017 and 120,000 per month in 2018.

Of course it's couched in all sorts of anti-Trump caveats, but still.

Interestingly, as California evolves ever more into the Peoples Republic of California, we are likely to disproportionately benefit from Trump's defense and infrastructure spending plans:

“The increase in defense spending will be disproportionately directed to California, as sophisticated airplanes, weaponry, missiles and ships require the technology that is produced here,” he writes. “Moreover, there are few places to build the proposed 150 new warships, and San Diego is one of them. Regionally we expect a positive impact in the Bay Area and in coastal Southern California.” 

It's odd that GOP programs are going to reward and benefit the most looney left state in the country.

The errors of liberation theology

First Things has a succinct review of the basic errors of liberation theology.

More on the negative effect of shareholder activism on the economy

John Coffee reports that:

[A] recent study suggests that there may be real, but long-term, costs from hedge fund activism for the economy as a whole. These researchers took the stocks included in the Wall Street Journal’s and FactSet’s Activism Scorecard and trimmed this sample down to just those campaigns launched by activist hedge funds. Then, they followed those firms that successfully avoided a takeover. They found that these firms, even though they survived the activists’ engagement intact, were forced to curtail their investments in research and development by more than half over the next four years. Specifically, R&D expenses in this sample fell from 18% of sales to 8.12% of sales over that period.[16] Nor was this a general secular trend, because in a random sample of firms not engaged by activists, they found that research and development expenditures rose modestly as a percentage of sales over the same period.[17]

Although still a preliminary study, this finding should not surprise, because it confirms what activists say they are doing. Trian Fund made clear that it wanted to reduce DuPont’s expenditures on R&D. Similarly, when Pershing Square Capital and Valeant Pharmaceuticals made a bid for Allergan last year, Valeant announced that, if successful, it would cut R&D at the combined firm by 69%.[18] Although most pharmaceutical companies typically spend about 20% of their revenues on R&D, Valeant spent only 2.7% of its revenues on R&D.[19] Its business model was to milk acquired companies like cash cows for their cash flow.

This pattern of cutting R&D expenditures (even at companies like DuPont that have historically profited from R&D) may make sense for investors who will be long gone within a year or so.

[16] See Allaire and Dauphin, supra note 1, (finding an average decline in R&D expenditures as a percentage of sales from 17.34% in 2009 to 8.12% of sales in 2013). [Full cite: Yvon Allaire and Francois Dauphin, “Hedge Fund Activism: Preliminary Results and Some New Empirical Evidence” (Institute for governance of public and private corporations, April 1, 2015).]

[17] Id (finding a modest increase in R&D expenditures from 6.54% of sales in 2009 to 7.65% of sales in 2013).

[18] See Joseph Walker and Liz Hoffman, “Allergan’s Defense: Be Like Valeant,” The Wall Street Journal, July 22, 2014 at B-1.

[19] See Joseph Walker, “Botox Itself Aims Not to Age,” The Wall Street Journal, May 19, 2014 at B-1.

But it sucks for the rest of us.

I await a reply from the activists' academic apologists.

The JOBS Act apparently has not solved the problems with the American capital markets

In my essay Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010), available at SSRN: http://ssrn.com/abstract=1696303, I explained that:

During the first half of the last decade, evidence accumulated that the U.S. capital markets were becoming less competitive relative to their major competitors. The evidence reviewed herein confirms that it was not corporate governance as such that was the problem, but rather corporate governance regulation. In particular, attention focused on such issues as the massive growth in corporate and securities litigation risk and the increasing complexity and cost of the U.S. regulatory scheme.

Tentative efforts towards deregulation largely fell by the wayside in the wake of the financial crisis of 2007-2008. Instead, massive new regulations came into being, especially in the Dodd Frank Act. The competitive position of U.S. capital markets, however, continues to decline.

This essay argues that litigation and regulatory reform remain essential if U.S. capital markets are to retain their leadership position. Unfortunately, the article concludes that federal corporate governance regulation follows a ratchet effect, in which the regulatory scheme becomes more complex with each financial crisis. If so, significant reform may be difficult to achieve.

If you believed the Obama administration and the Democrats' hyoe, the JOBS Act was going to solve the problem. They were wrong, according to a new study by some economists (which I'm more inclined to accept that ones done by law professors masquerading as quants):

We examine the effects of Title I of the Jumpstart Our Business Startups Act (JOBS) for a sample of 213 EGC IPOs issued between April 5, 2012 and April 30, 2014. We show no reduction in the direct costs of issuance, accounting, legal, or underwriting fees, for EGC IPOs. Further, the indirect cost of issuance, underpricing, is significantly higher for EGCs than other IPOs. More importantly, greater underpricing is present only for larger firms that were not previously eligible for scaled disclosure under Regulation S-K. EGCs that are more definitive about their intentions to use the provisions of the Act have lower underpricing than those that are ambiguous. Finally, we find no increase in IPO volume after the Act. Overall, we find little evidence that the Act has initially been effective in achieving its main objectives and conclude that there are significant consequences to extending scaled disclosure to larger issuers.

Interestingly, one of the authors - Kathleen Weiss Hanley - was until very recently an economist at the SEC,

Attention SEC: "Whatever Happened to Promoting Small Business Capital Formation?"

SEC Commissioner Daniel Gallagher has given an excellent speech on the titular question. The whole thing is a must read, but this passage jumps out at me:

... sadly, we at the SEC are not doing nearly enough to ensure that small businesses have the access to capital that they need to grow. We layer on rule after rule until it becomes prohibitively expensive to access the public capital markets. Only rarely do we remove any of our rules, even after they have long since ceased to serve their purpose or have become obsolete or worse. And although we have made significant progress in expanding our economic analysis of new rules and rule amendments, we almost never consider how heavily the weight of the entire corpus of rules bears down on registrants.

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

LIBOR case tossed (mostly)

Kevin LaCroix reports that:

On March 29, 2013, in a ruling that she acknowledged some might find to be “unexpected” in light of the substantial regulatory fines and penalties that some of the defendants have paid, Southern District of New York [Judge] Naomi Reice Buchwald granted the defendants’ motions to dismiss the antitrust and RICO claims in the consolidated Libor-based antitrust litigation. Judge Buchwald also dismissed the plaintiffs’ state law claims and some of the plaintiffs’ commodities manipulation claims. However, she denied the defendants’ motions to dismiss at least a portion of the plaintiffs’ commodities manipulation claims. A copy of Judge Buchwald’s massive 161-page opinion can be found here.

As detailed here, the consolidated litigation arises out of allegations that the banks involved with setting the Libor benchmark interest rate conspired to manipulate the benchmark. The plaintiffs – several municipalities, commodities traders and investors, bondholders and the Schwab financial firm, among many others – variously allege that suppression of the Libor benchmark reduced the amount of interest income they earned on various financial instruments. The various cases were consolidated before Judge Buchwald. The defendants moved to dismiss.

In her March 29 Opinion, Judge Buchwald granted the defendants’ motions to dismiss as to all of plaintiffs’ claims, except for a portion of the plaintiffs’ commodities manipulations claims. All of the dismissals were with prejudice, except for her dismissal of plaintiffs’ state law claims, over which she declined to exercise supplemental jurisdiction and therefore she dismissed the state law claims without prejudice.

As LaCroix explains, this probably will not end the litigation over the LIBOR scandal. Going forward, however, the more important question is whether the reforms that are being undertaken will give us confidence in LIBOR in the future. On that issue, see my article Reforming LIBOR: Wheatley versus the Alternatives (January 31, 2013). NYU Journal of Law & Business, Vol. 9, No. 2, 2013. Available at SSRN: http://ssrn.com/abstract=2209970

 

 

Pope Francis and the Economy

As a Catholic professor of corporate law, I have a deep and abiding interest in what Catholic Social Thought has to say about the economy and economic regulation. I know almost nothing about the new Pope's views on these issues, so I was interested to see this report:

According to National Catholic Reporter’s John Allen, the new pope steered clear of liberation theology — a branch of Catholic social thought which emphasizes the importance of reforming capitalist structures that disadvantage the poor — even as many of his peers in Latin America were embracing it. 

Thank God. There are few sources of more muddled thinking about the economy than liberation theology. (See Michael Novak's takedown of the nonsense).

Back to the report:

Francis also seems to be an opponent of austerity, most notably during his time as spiritual leader of Argentina when the country defaulted on its debt in 2002.

A paper by Thomas Trebat, “Argentina, the Church, and Debt,” details the church’s role in the crisis’s resolution. Argentine bishops, including Francis, had long criticized the laissez-faire policies of Carlos Menem, who was president from 1989 to 1999. “The bishops were critical of the economic model as a generator of poverty and unemployment, notwithstanding the stability it had brought to the country,” Trebat wrote.

Oh dear. Sounds like he might be one of those third way folks. The problem, of course, is that there is no third way.

And when the debt crisis hit in 2002, the church called in strong terms for a debt restructuring to take place which privileged social programs above debt repayment. They argued that the true problems in the Argentinian economy were, in their words, “social exclusion, a growing gap between rich and poor, insecurity, corruption, social and family violence, serious deficiencies in the educational system and in public health, the negative consequences of globalization and the tyranny of the markets.”

Trebat thinks this influenced the eventual outcome of the crisis, wherein the country’s creditors accepted a less devastating austerity package than many expected. “Civil society, of which the Church is a part, has a clear role to play in demanding that debt service not take precedence over human development once reasonable efforts have been expended to pay the debt,” he concludes.

Interesting. Sounds like his views here are in line with those who argue for repudiation and/or reformation of odious debt and probably also those who call for a sovereign debt jubilee. Of course, these folks rarely ponder the question of why creditors who were forced to write off sovereign debts would put good money after bad by extending new loans to debtor nations.

Trebat studied the whole church’s response, rather than just Francis’s, but comments by the new pope suggest he held similar views. Allen quotes a later speech in which then-Cardinal Bergoglio declared, “We live, apparently, in the most unequal part of the world, which has grown the most yet reduced misery the least. The unjust distribution of goods persists, creating a situation of social sin that cries out to Heaven and limits the possibilities of a fuller life for so many of our brothers.”

Wealth inequality is a major social ill. The trouble is that Catholic social thought on how to deal with it often aligns itself with left-liberal, statist redistribution policies that destroy wealth without fixing the structural problems that create inequalities.

In any event, the Church's sex and financial scandals ought to keep Francis sufficiently busy that he can leave the economy to the laity.

Corporate Law and Governance: UK: FSA responds to to Treasury Committee report on LIBOR

Last August the Treasury Select Committee published its report Fixing LIBOR: some preliminary findings: see here. The response of the Financial Services Authority was published today: see here (pdf). This contains some interesting points about the FSA's powers in respect of approved persons, and the approved persons regime, which were also recently discussed before the Parliamentary Commission on Banking Standards: see here.

via corporatelawandgovernance.blogspot.com

For my take on reforming LIBOR, see 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

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.

 

In which I disagree with Alison Frankel on the import of the UBS LIBOR settlement

Let me preface what follows by emphasizing that I have tremendous respect for Alison Frankel. She's one of the best journalists covering law/business matters around. But I (respectfully, of course) dissent from her recent column on the meaning of the UBS LIBOR settlement.

Frankel tees up her argument with a quick rundown of the admittedly appalling facts:

UBS disclosed its cooperation with antitrust authorities more than a year ago, so it’s no surprise that the bank was penalized, though the size of the penalty – a total of $1.5 billion to United States, UK and Swiss regulators – was certainly notable, particularly because UBS had been granted leniency for some parts of the Libor probe. But what’s most striking about the FSA’s filing on UBS, just like its previous notice on Barclays, is the brazenness of the misconduct the report chronicles. According to the FSA, 17 different people at UBS, including four managers, were involved in almost 2,000 requests to manipulate the reporting of interbank borrowing rates for Japanese yen. More than 1,000 of those requests were made to brokers in an attempt to manipulate the rates reported by other banks on the Libor panel. (Libor rates, which are reported for a variety of currencies, average the borrowing rates reported by global banks; 13 banks are on the yen panel.)

The corruption was breathtakingly widespread. According to the FSA, UBS took good care of the brokers who helped the bank in its rate-rigging campaign: Two UBS traders whose positions depended on Libor rates, for instance, engaged in wash trades to gin up “corrupt brokerage payments … as reward for (brokers’) efforts to manipulate the submissions.” In one notorious 2008 phone conversation recounted in the FSA filing, a UBS trader told a brokerage pal, “If you keep (the six-month Libor rate) unchanged today … 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.”

So what does Frankel makes of this?

Everyone who has ever claimed that the financial industry is overregulated should be forced to read the final notice on UBS’s manipulation of the London interbank offered rate issued Wednesday by the United Kingdom’s Financial Services Authority. ...

If we’ve learned nothing else in the last four years, we should at least acknowledge that some people within financial institutions, if left to their own devices, will behave dishonorably and even illegally. The drive for profits in people like the UBS traders and their brokerage conspirators, as described in the FSA filing, is obviously more powerful than any qualms about morality or fear of being found out.

That’s why moaning about Dodd-Frank whistle-blowers or duplicative actions against the banks rings hollow. Insiders will abuse the power of asymmetry: They know about their own secret conduct and we don’t. We’re playing by their house rules, and regulators armed with subpoenas are the only hope we’ve got.

First, LIBOR differs from the other cases she describes in that the LIBOR process was essentially unregulated. The British Bankers’ Association (BBA) is a trade association for the UK banking and financial services industries, representing over 200 member banks.  It created LIBOR in 1986 to serve as the benchmark interest rate for commercial bank lending on the London interbank money market.

The method by which LIBOR was calculated gave banks considerable room for strategic behavior. First, because banks self-reported, there was no system for verifying their answers. Indeed, because LIBOR was based on the panel banks’ estimates rather than actual transaction data, there was nothing to verify.  Second, the key term “reasonable market size” was “intentionally left broadly defined,”  which again created opportunities for banks to make strategic tweaks in their estimates by varying what they regarded as a reasonable loan size. Third, because the panel size was relatively small, misreporting by even a few participating banks could shift the LIBOR benchmark.  Fourth, because each panel bank’s submission was made public almost immediately, it easy for banks colluding to move the benchmark in a particular direction to ensure that their partners had complied with the agreement.  Even in the absence of outright collusion, real-time publication made it possible for a single bank to make good estimates of where their submission needed to be set in order to influence the outcome of the benchmarking process.

In April 2008, the Wall Street Journal reported suspicions that some of the LIBOR panel banks were taking advantage of these opportunities for strategic misbehavior.  During the financial crisis of 2007-2008, some banks allegedly did not want to report the high interest rates they were being charged for interbank loans because they did not want to alert regulators and markets of the full extent of the economic difficulties in which those banks found themselves.  Prompted by the Journal’s reporting and regulatory pressure, the BBA undertook an expedited review to determine whether banks had been filing false reports.

In response to the concerns flagged by the Journal, the BBA in June 2008 made several changes to the way in which LIBOR was calculated. First, the number of panel members was increased.  Second, the BBA announced plans to police the accuracy of the reported estimates more carefully.  Broader changes, including changes to the definition of LIBOR, however, were rejected.  Indeed, the BBA’s critics dismissed the changes as minor tweaks unlikely to change the fundamental problems with how LIBOR was set.

In sum, the admitted fact that LIBOR was underregulated, doesn’t mean that other sectors of the financial market are not overregulated.

Second, Frankel’s trust in “regulators armed with subpoenas” is particularly misplaced in this context. 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. Barclays admitted to having reduced the rates it submitted so that its submission fell within the mid-range of the panel banks. 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. 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.” Jun Anthony Garcia, “Fixing the Benchmark”—Wheatley Considers LIBOR Overhaul at 2, available at http://ssrn.com/abstract=2143137.

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. 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.” How Britain’s Rate-Fixing Scandal Might Spread—And What to do About it, The Econ. (July 7, 2012), available at http://www.economist.com/node/21558260.

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. Rachelle Younglai & Pedro da Costa, Geithner Says Did All he Could to Address LIBOR Problem, Chi. Trib. (July 26, 2012), available at http://articles.chicagotribune.com/2012-07-26/news/sns-rt-us-usa-geithnerbre86o0vc-20120725_1_libor-responsibility-for-market-manipulation-british-bankers-association.

Frankel’s regulators with subpoenas knew what was going on (or at least should have known) and did absolutely nothing. So how exactly will empowering them help? (Well, I’m working on an article to address the issue.)

Please note that in the case of LIBOR I am not reflexively opposing new regulation of the LIBOR process. To the contrary, I am currently working on an article on LIBOR reform that embraces reasonable new regulatory constraints.

But I would also remind Frankel that the chief lesson of financial bubbles is that they tend to lead to bad laws. See generally Larry E. Ribstein, Bubble Laws, 40 Hou. L. Rev. 77, 79 (2003); Roberta Romano, The Sarbanes-Oxley Act and the Making of Quack Corporate Governance, 114 Yale L.J. 1521, 1590 (2005).

I detail the problem at length in my book Corporate Governance after the Financial Crisis.

The history of securities regulation in both the United Kingdom and the United States teaches that new regulation is an inevitable political response to financial crises and scandals. In a bubble period, such as the one that preceded the financial crisis of 2007-2008, major regulatory initiatives are relatively rare, because interest groups like shareholders and consumers are lulled into inaction by the seemingly ever-rising value of their portfolios.  At the same time, however, the stage is being set for a post-bubble burst of regulation. In the euphoria associated with a bubble, regulators and private gatekeepers tend to let their guard down, potential fraudsters see an explosion of opportunities, and investors become both more greedy and trusting.  The net effect is a boom in fraud during bubbles, especially towards the end, when everybody is trying to keep the music going. When the bubble inevitably bursts, investigators reviewing the rubble begin to turn up evidence of speculative excess and even outright rampant fraud.  Investors burnt by losses from the breaking of the bubble and outraged by evidence of misconduct by corporate insiders and financial bigwigs create populist pressure for new regulation.

It is in the post-bubble environment, “when scandals and economic reversals occur” and grab the attention of the public, that regulators and legislators act.  This is hardly surprising, because such periods typically involve an upswing in populist anger and accompanying intense public pressure for action.  This pattern is a reoccurring phenomenon in American law, going back even before the New Deal.  Indeed, the same pattern of boom, bust, and regulation can be seen in both American and British legal history far back into the Nineteenth Century.

The trouble is that new financial regulations adopted in a post-crisis environment often “impose regulation that penalizes or outlaws potentially useful devices and practices and more generally discourages risk-taking by punishing negative results and reducing the rewards for success.”  Ribstein supra, at 83.

As I will detail in my forthcoming article, I think there is a good chance of avoiding this phenomenon in the case of LIBOR. But I don’t see why that makes the LIBOR case anything more than the exception that proves the rule.