Heading Off The Next Financial Crisis

With the Health Care Reform Bill now delivered by this Congress, attention will turn to financial regulatory reform. As I mention constantly to the students in both my Securities Regulation and Corporations classes, we stand at an extremely important historical moment in connection with the way our nation does “capitalism.” Whether this Congress will be thoughtful, introspective and historical (meaning embracing the lessons of history and appreciating/comprehending the morass of regulatory action stacked now for more than seventy-five years) in writing, debating and enacting new regulatory legislation remains to be seen. I am hopeful, yet dubious.

To that end, David Leonhardt of the New York Times wrote a thoughtful piece for the Times Sunday Magazine that attempts to address the importance of this moment. Per Leonhardt and the NY Times:

"A public good is something that the free market tends not to provide on its own, to the detriment of society. Pollution laws and police departments are classic examples. In the case of finance — and of the crisis of the past two years — this missing good has been strong regulation. A weak system of regulation allowed Wall Street firms to take on enormous debt. Those debts let the firms make more and riskier investments than they otherwise could have, lifting their profits. But when the value of the investments began falling, the firms had little margin for error. They were like home buyers who made a tiny down payment and soon found themselves underwater.

It was tempting to let the banks fail. They certainly deserved it. But big bank failures often cause terrible damage. Credit dries up, and the economy can enter a vicious cycle of falling asset prices and job losses. That is what began to happen in 2008. To get credit flowing again, the federal government came to the rescue with billions of taxpayer dollars. It was a maddening story line: the government helped the banks get rich by looking the other way during good times and saved them from collapse during bad times. Just as an oil company can profit from pollution, Wall Street profited from weak regulation, at the expense of society.”

To read the rest of the article, click here.

Emory University School of Law to Host Transactional Education: What’s Next? Conference

Emory is delighted to announce that the web site for its conference - Transactional Education: What’s Next? - is open for registration.


Registration
The registration fee for the conference is $179.00. It includes a pre-conference lunch, snacks, and the reception on June 4 and breakfast, lunch, and snacks on June 5th. An optional dinner for attendees on Friday evening, June 4, is an additional $40.00. Attendees are responsible for their own hotel accommodations and travel arrangements.

After you register, we would appreciate you completing a short survey about transactional courses at your school. The results of the survey will be available at the Conference.

Registration closes May 25, 2010.
To register, please click here.

Hotel
Special hotel rates for conference participants are available at the Emory Conference Center Hotel less than one mile from the conference site at Emory Law. Subject to availability, rates are $129 per night. Free transportation will be provided between the Emory Conference Center Hotel and Emory Law. To make a reservation, call the Emory Conference Center Hotel at 800.933.6679 and use Group ID Number 20006017399 to obtain the special conference rate.

Learn more about the Emory Conference Center Hotel by visiting their website.

We look forward to seeing you in June.


Tina L. Stark
Professor in the Practice of Law
Executive Director of the Center for Transactional Law and Practice
Emory University School of Law
1301 Clifton Road
Atlanta, GA 30322
Phone: (404) 727-9577
E-mail: tina.stark@emory.edu

Greece, Financial Innovation and Derivative Regulation

One of the primary uncertainties in global markets today is the potential collapse of Greece’s financial markets. On Tuesday Gary Gensler, head of the U.S. Commodity Futures Trading Commission, claimed that proposed regulation in the financial services regulation package working its way through the Senate would have discouraged Greece from entering into its current precarious position in the first place. Gensler argues that had Greece been subject to the provisions in the proposed financial regulation it “would have required Greece to post collateral against its derivatives transactions, thus canceling out the embedded loan and discouraging the country from entering into such a transaction in the first place.”

The situation in Greece allows for an important point about financial innovation and regulation. Financial innovation is critical for developing new and creative ways to raise capital. Financial services regulation plays an important role in protecting investors and maintaining the integrity of financial markets. Government’s must walk a difficult line in encouraging financial innovation while debating and enacting common sense regulation that protects against systemic failure. Is the proposed financial services regulation bill an example of typical reactionary legislation (see Sarbanes-Oxley, TARP, Patriot Act, Private Securities Litigation Reform Act) or an example of thoughtful common sense regulation that will ultimately protect investors? I have serious reservations.

Elimination of Federal Restrictions on Corporate Spending in Politics: Corporations Can Have a Voice!

On January 21, 2010, the United States Supreme Court held in a landmark decision, Citizens United v. Federal Election Commission, that corporate funding of independent broadcasts in political campaigning is not limited under the First Amendment. The case initially started in 2008 when a conservative non-profit organization wanted to run ads to promote its critical documentary on Hillary Clinton on the eve of the democratic primaries. The Federal Election Commission asserted a restriction on electioneering communications 30 days before the primaries.

In a bitterly divided 5-4 decision, Justice Kennedy delivered the majority opinion, stating that 2 U.S.C. § 441b’s prohibition of all independent expenditures by corporations and unions are invalid because such restrictions would allow Congress to suppress political speech in newspapers, books, televisions, and blogs. The majority further held that corporations should be treated as “persons” who have constitutional rights and should not be restricted in their political speech. In the 90-page dissent, Justice Stevens argued that unlimited corporate spending would corrupt democracy.

Citizens United overruled 19-year old precedent, determining that Austin v. Michigan Chamber of Commerce (which held that laws prohibiting corporations from using treasury money in political campaigning did not violate the First and Fourteenth Amendments) provided no basis for allowing the Government to limit corporate independent expenditures. Citizens United also overruled part of McConnell v. Federal Election Commission, which upheld restrictions on corporate political spending under the Bipartisan Campaign Reform Act of 2002.

Perhaps not surprisingly, Citizens United has proven to be highly contentious. For First Amendment enthusiasts, the decision is hailed as a victory. However, the New York Times reported that due to the ruling, 24 states with laws prohibiting independent political expenditures by unions and corporations will have to alter their campaign finance laws. President Obama, believing the Supreme Court’s ruling to inequitably favor deep-pocket corporations, immediately released a statement on January 21, 2010 asserting that Citizens United “gives the special interests and their lobbyists even more power in Washington-while undermining the influence of average Americans who make small contributions to support their preferred candidates.” Thereafter, President Obama ordered his Administration to develop a forceful response to the decision, declaring that “the public interest requires nothing less.” Three weeks later, members of Congress outlined legislation to curb corporate spending on political advertising.

While the future of limitations placed on corporate finance campaign laws remains uncertain, for the time being, Democrats and Republican candidates now have the ability to raise money from more sources. Will this corrupt democracy? Stay tuned.

Obama's Grand Legacy: "Health Care Reform, at Last "

Well, President Obama did it. We finally will have health care for every American, allowing us to join other developed countries in achieving a basic element of a civilized society.

It always struck me that having over 30 million uninsured Americans simply belied a supposedly Christian nation. As Martin Luther King, Jr. stated: “Of all the forms of inequality, injustice in health care is the most shocking and inhumane.”

I am not an expert in health care law. So, I defer to the editorial comments of the day to sum up the nature of this momentous day:

NY TIMES

WALL STREET JOURNAL

MINNEAPOLIS STAR-TRIBUNE

ST. LOUIS POST DISPATCH

CHICAGO TRIBUNE

I think that list covers the water front in terms of the thinking about the bill from across the spectrum.

I just want to add an economic perspective. This bill empowers people. This bill protects people. Children will be healthier in America because of this bill. Given the increasing importance of human capital and ideas to economic growth (and the fact that ideas and human ingenuity generate increasing rather than diminishing returns), this bill is bound to spur more innovation and growth by upgrading our human resources. Moreover, human capital will be able to move to its highest and best use in accordance with free market principles because of this bill, particularly the elimination of preexisting conditions as a basis for denying coverage. Finally, this addition to our social safety net will encourage risk taking and entrepreneurial behavior. In short, this bill is a victory for capitalism and a victory for macroeconomic growth. The nation that empowers its people to achieve maximum economic productivity will be the most prosperous nation. This bill is a step in that direction.

So, aside from the very powerful social justice basis for supporting this bill (as stated by Dr. King), this bill also benefits from a sound vision of macroeconomic growth.

Financial Reform Legislation

As Steve Ramirez noted earlier this week, Senator Dodd has released his new financial regulation bill which the Senate is likely to take up after health care is completed. The bill moves toward providing additional information to regulators about systemic risk and giving more authority to regulators to manage collapses when they happen, but will likely do little to prevent the next collapse. The bill is as Senator Dodd said:

“I’m not predicting that we’re going avoid forever, in the future, any kind of financial crisis. The question is: Are we putting in place the tools that will minimize when that crisis occurs so it doesn’t create the kind of economic carnage that we’ve seen over the last several years?”

The bill will not resolve many of the continuing ills present in the financial sector, such problems having recently been exposed in the Valukas report on Lehman Brothers. Still, the bill has the backing of Elizabeth Warren, chairperson of the Congressional Oversight Panel of TARP, despite the fact that the Senate bill situates the new consumer protection agency within the Fed and the status of the Volcker rule remains unclear. The bill appears to be a step in the right direction, even if Goldman Sachs lobbyists are likely to be unfazed by its provisions.

Iceland’s Second Largest Bank Defrauded British and Dutch Investors of $5.4 Billion

Iceland has been plunged into further economic and political crisis after President Grimsson postponed signing a reimbursement legislation, which approved a governmental promise to reimburse approximately 3.9 billion Euros to the United Kingdom and the Netherlands. The legislation was in essence a political “apology” on the part of the Icelandic Government after the failure of Iceland's second largest bank, Landsbanki, filed for bankruptcy in October 2008. Landsbanki is the parent company of Icesave, an on-line banking institution, which is alleged to have defrauded British and Dutch depositors of approximately $5.4 billion.

In Fall 2008, Iceland’s economy went into a meltdown when three of its largest banks including Landsbanki failed. The failure resulted in the International Monetary Fund suspending financial assistance to Iceland, and jeopardized Iceland’s efforts to join the European Union. Allegations of fraud and misrepresentation were launched against Iceland. The United Kingdom and the Netherlands remain at a political and financial impasse with Iceland. Dutch regulators, in particular central bank president, Nout Wellink, has accused Iceland of providing false assurances regarding the financial health of Iceland’s banks and Iceland’s natural resources as indicia of Iceland’s abundance and “richness" in natural resources to collateralize the strength of Iceland's banking institutions-- “[G]eysers, fish, everything was put on the table.” The United Kingdom has accused Iceland of “lying” to British government officials. The British and Dutch Governments have reimbursed depositors who lost money when Icesave's parent Landsbanki filed for bankruptcy. But both governments have put tremendous pressure on Iceland to reimburse the money. A spokesman for the United Kingdom Treasury stated that the United Kingdom was "obviously very disappointed" by the President Grissom’s postponement to authorize the reimbursement legislation.

Originally, the Icelandic Government agreed to reimburse the British and Dutch Governments. However, the good people of Iceland were outraged that the Icelandic financial elite had defrauded foreign investors, and yet no one was prosecuted in Iceland. As further insult, the good people of Iceland who had absolutely nothing to do with the banking fraud would be required to reimburse the loss, which would be approximately 12,000 Euros or approximately $17,000 per Icelander. In a surprising turn of events, a recent referendum determined that the good people of Iceland by a 93% margin refused to confirm the reimbursement legislation. The referendum is in direct opposition to the legislation adopted a few months earlier in which the Icelandic Government agreed to reimburse the British and Dutch Governments for the misconduct of Iceland’s private banking institution. Landsbanki is not a public bank, but rather it is an elite private bank that has been owned by certain wealthy Icelandic banking families for generations. President Grimsson in an interesting political pledge of allegiance has refused to veto the referendum, and has sided with the good people of Iceland. In a recent address President Grimsson stated, "[I]t is the cornerstone of the constitutional structure of the Republic of Iceland that the people are the supreme judge of the validity of the law. It is...the responsibility of the president to ensure that the nation exercises this right."

Iceland is a very small country. Its total population is approximately 317,000, which is approximately the equivalent of the number of party-goers in South Beach, FL on any given weekend. To be fair to the good people of Iceland, they raise an interesting point, which is simply-- why should the British and Dutch Governments force the Icelandic people to underwrite the full burden of the losses suffered by British and Dutch depositors? Where were the British and Dutch banking regulators? Why did they not “regulate” Landsbanki, and ensure that it was a viable banking institution? More importantly, why doesn’t the fraud claim against Landsbanki terminate with Landsbanki’s bankruptcy? Why should approximately $5.4 billion loss be the burden of the Icelandic people to reimburse foreign investors?

The good people of Iceland’s position that reimbursement be shared on theory of shared-responsibility, is a valid one. The Icelandic people should not be the only ones held responsible for the losses of British and Dutch investors especially when British officials relied on misleading reports prepared by British academics, in particular Professor Richard Portes, President of the Royal Economic Society of Britain, which commended the "successful and resilient" banks of Iceland. Portes praised Iceland in the report stating that Iceland’s financial system was based on "an exceptionally healthy institutional framework. The banks have been highly entrepreneurial without taking unsupportable risks. Good supervision and regulation have contributed to that, using EU legislation." The findings in the report have turned out to be inaccurate. The good people of Iceland argue that Portes’ misleading report led to lax supervision and a "failure to regulate" Landsbanki by the British Government, the Dutch Government, and the European Union. Furthermore, this "failure to regulate” was the proximate cause of the British and Dutch depositors victimization by Landsbanki. The reality is that the British and Dutch depositors, in good faith, trusted the misguided judgment of British economist, and the lax supervision of British and Dutch regulators to their detriment.

Shared responsibility to reimburse defrauded depositors is not an unreasonable request. Perhaps what is needed is an acknowledgement on the part of the British, Dutch, and Icelandic officials that more should have been done across the board to regulate Landsbanki, and what is need now is shared responsibility. Reimbursement should be a shard responsibility. Punitive measures should not be taken to force reimbursement measures on a single group of people who had nothing to do with the fraud. It was a shared mistake; an error of judgment on many levels. As such, the burden of reimbursement should be shared. Regulators, whether British, Dutch, Icelandic, European or American should do the job that they have been entrusted by the people to do—“regulate the banking industry.” That is all that we ask.

Dodd's Financial Reform Bill

So the Senate seems poised to move forward on financial reform. On Monday Chairman Chris Dodd of the Senate Finance Committee approved a 1336 page bill aimed at preventing the next financial meltdown. There are many important provisions in the bill, including shareholder rights, the Kanjorski Amendment authorizing prudential divestitures, a new consumer protection regime, derivatives regulation and new hedge fund regulations. All of this is good news.

Yet, on the flip side there is still much cause for concern. The lobbyists seemed equally poised to water down the bill, with the US Chamber of Commerce alone prepared to spend $3 million to lobby against the bill. Moreover, it is interesting that the bank index considers the bill a non-event.

So, I suppose it is a step in the right direction. Yet, I have this sinking feeling that it is Sarbanes-Oxley all over again. A step in the right direction that will do little to stop the next meltdown.

Corporate Social Responsibility at the Grassroots Level

Business law professors who pay attention to social and economic justice issues often must create outlets to voice non-traditional views. For example, law and economics-based corporate law scholarship rarely intersects with progressive, critical scholarship. The Corporate Justice Blog was created to fill the gap. As another example, law students take the basic Business Associations because the subject usually is tested on the bar. Many students expect little from the subject—or their law professors—beyond black letter law coverage. Despite the fiascos at Enron, WorldCom, AIG, and Lehman Brothers—and the disastrous impact on many law students’ ability to receive student loans and to gain legal employment after graduating law school—many students seem unable (or perhaps uninterested given the financial and time pressures students face) to connect a relevant topic, such as corporate social responsibility, to their own lives.

Financial regulatory reforms may succeed eventually in creating more economic justice for disempowered populations. However, such change appears to proceed at a near-glacial pace. Another approach is for law school transactional clinics to work with community-based organizations that promote social and economic justice at the grassroots level.

A small group of general litigation clinic students at Capital University Law School requested an opportunity to work with individuals seeking assistance with transactional matters. In September 2009, two general litigation clinic attorneys (Professors Danny Bank Lorie McCaughn), two business law professors (Professor Grant, a blogger on this blog and I) and one of the founders of the litigation clinic (Professor Roberta Mitchell) at Capital University Law School formed a team to create the Small Business Clinic Pilot Project. That month, the unemployment rate in central Ohio hovered above 8% (in March 2010, the rate is 9.8%). Perhaps counterintuitively, the demand for business formation and basic contract review was strong even though the unemployment rate was high.

The Small Business Legal Clinic Pilot Project provides students an opportunity to assist individuals who do not qualify for traditional business financing. The pilot project has teamed with the Economic and Community Development Institute, “a registered, 501(c)(3) nonprofit organization with the mission to invest in people to create measurable and enduring social and economic change.” (www.ecdi.org) Between February and March, 2010, ten Economic and Community Development Institute clients have sought and received advice from the Small Business Legal Clinic on matters including business formation and basic contract interpretation.

Clinic students initially may have requested transactional work to gain work experience that would be marketable to law firms. Indeed, under the close supervision of law school faculty, the students take the lead in counseling the business clients. However, the clinic provides an additional benefit to the central Ohio community—students are helping to create economic empowerment within struggling communities in central Ohio. Moreover, the clinic provides students an opportunity to improve interpersonal and counseling skills and develop empathy for individuals from different cultural backgrounds and viewpoints. As these students advance in their legal careers, they may consider how to continue to effect social and economic justice as they advise business clients.

Examining The Lehman Brothers Failure: Is This Enron All Over Again?

What led to the demise and failure of Lehman Brothers? This is the precise question that Anton Valukas, a partner in the New York office of the venerable law firm Jenner & Block, was appointed in January 2009 by the U.S. Bankruptcy Court for the Southern District of New York to answer. Indeed, Lehman Brother’s bankruptcy, which was filed on September 15, 2008, is the largest Chapter 11 bankruptcy filing in history. Many would argue that the Lehman collapse has contributed greatly to our current financial crisis—The Great Recession—one of the worst since The Great Depression. Yesterday, Valukas issued a 2,200-plus page Report detailing the failure of Lehman Brothers.

Valukas indentified a number of failures in corporate governance and auditing and financial controls. Valukas observed that Lehman Brothers “repeatedly exceeded its own internal risk limits and controls.” According to Valukas, Lehman’s management made a number of terrible decisions that ultimately led to Lehman’s collapse. Commenting on Lehman’s executives, Valukas noted that conduct “ranged from serious but non-culpable errors of business judgment to actionable balance sheet manipulation.” Valukas indicated that Lehman Brother’s attempted to forestall its ultimate demise by misleading investors about its true financial picture.

Perhaps most damning, Valukas discloses Lehman’s use of “Repo 105” a financial accounting device to “cook” or alter its balance sheet. Using Repo 105, Lehman shifted $50 billion of toxic assets off its balance sheet during the first and second quarters of 2008, instead of selling and reporting these toxic assets at a loss. Through a loophole and gap, accounting rules allowed Lehman to treat Repo 105 transactions as sales instead of financings. Lehman’s chief financial officer was implicated in emails that indicated that Repo 105’s chief purpose was to reduce liabilities on the balance sheet.

Valukas found that Repo 105 was not disclosed to government regulators, rating agencies, investors, or to Lehman’s board of directors. Lehman apparently did not act alone. Valukas discovered that Ernst & Young, Lehman’s auditor, was made aware of Repo 105 and did not challenge the use of this questionable accounting practice. Repo 105 led to the repossession of billions of taxpayer dollars and investment and retirement funds!!!

We passed Sarbanes-Oxley in the wake of the Enron scandal to try to root out financial and accounting irregularities. How could similar irregularities occur at Lehman Brothers? History has a way of constantly repeating itself. One thing is for certain, the civil lawsuits, and hopefully criminal charges and indictments, will flow shortly. I will do my best to keep you posted in the coming weeks and months.

Human Capital Versus Financial Capital: Which Is More Important?

Several days ago, a close friend forwarded me a very interesting article that appeared in the New York Times on March 5, 2010. The article, written by Paul Sullivan, entitled “Learning How to Hedge Yourself, and Not Just Your Portfolio” poses two (2) key questions. First, “[h]ow much are your working years worth?” Second, “[o]r put another way, what is the impact of joblessness on your financial future?” This article was very thought-provoking.

The article discusses the differences between human capital (i.e. your future job-related earnings) and financial capital (i.e. income received in the future from your financial investments). Sullivan points out that economists have long debated the distinctions between human capital and financial capital. Indeed, Sullivan notes that society has placed very little emphasis on human capital until it is far too late. In view of near 10% unemployment rates in the United States, and a substantial dip in the stock market and investment portfolios, the value of work and future earnings from job-related activities has found new importance.

In his article, Sullivan interviewed Michael Gordon, a vice president at New York Life Insurance, who posed an interesting question—“If the stock market goes down, would your income increase, decrease or not change?” At the moment, if you are doing bankruptcy and corporate work-outs, your income might increase. If you are a stockbroker, at least over the past few years, your income might have decreased. If you are a tenured college professor your income has probably stayed the same and largely remained unchanged.

This article left a major impression in my mind. Tuesday, I had lunch with colleague of mind here at Capital Law School, and a former student we both taught who recently graduated. My former student is a litigator in a large law firm, who at the moment happens to be extremely busy. My former student lamented about the down-turn and lack of work at the law firm for young corporate and transactional associates to undertake. Generally, we talked about the general lack of opportunities for young law school graduates over the next several years. We all agreed that we might see a “lost generation” in many industries, not only in the legal profession, for years to come as a direct result of our poor economy. A great deal of human capital has been lost in our current financial crisis. How much of this human capital will we recover over time? Does human capital recover like the stock market? As you can see, talking and thinking about a "lost generation" the other day got me a little depressed.

Mr. Sullivan’s article in the New York Times made me think about how our society needs to place more value and emphasis on human capital through education and training initiatives. As parents we need to impress upon our children the importance of understanding, developing, and valuing their own human capital. If you have a moment I suggest that you take a look at Mr. Sullivan’s article. Please share your thoughts and impressions. Do you agree, or disagree with Mr. Sullivan’s premise? I look forward to hearing your feedback!

The Value of Diversity

In a February New York Times article, Adam Brant wrote a profile piece about Ursula Burns, the current CEO of Xerox. Burns is the first African-American woman to lead a Fortune 500 company. The piece details Burns management style, which couples the advice she embraced from previous Xerox CEO’s in her rise to the top with the lessons she learned from her mother growing up in difficult circumstances on the Lower East Side of Manhattan. Burns, who is currently working on the details of Xerox’s acquisition of Affiliated Computer Services, takes a unique approach to her leadership at Xerox. Her distinctive mix of corporate culture with the lessons of her upbringing brings a different and refreshing style to the typically staid corporate leadership model.

Cheryl Wade wrote about the expectations that would be placed upon Burns last year interrogating whether diverse leadership treats discrimination claims any differently.

The New York Times piece can be found here.

Let’s Talk About the Lawyers Who Represented Borrowers Who Were Targeted For Predatory Loans

Last Friday, dre cummings posted a blog describing the St. John's University School of Law’s conference entitled “The Fall of the Economy”, sponsored by the Journal of Civil Rights and Economic Development and the Ron Brown Center for Civil Rights and Economic Development which is led by my colleagues Professors Leonard Baynes and Janai Nelson. The day’s discussion was lively and insightful and included the roles that Wall Street, mortgage lenders, and regulators played in causing the economic downturn of 2008/2009. During the Q&A, a lawyer in the audience, addressing a panel on the mortgage foreclosure crisis, engaged in the now familiar victim blaming we’ve heard in the past few months. Her position was that homeowners who were targeted for subprime loans were solely responsible for the mess they find themselves in when banks foreclose on their homes.

After the conference, I realized that we had not talked about the role that lawyers played in the subprime debacle that has caused a mortgage crisis in many communities. In the last few months, lawyers have filed suits that include claims against mortgage lenders accused of discriminatory lending practices. Lawyers are also representing subprime borrowers facing foreclosure. When analyzing the causes of the crisis, we should ask about the lawyers who represented borrowers who were victims of predatory lending practices. Some brokers acted as advocates for borrowers but others told borrowers that they did not need a lawyer in order to take advantage of them. But what about the many subprime borrowers who did have legal representation? How could these lawyers allow the kinds of predatory lending practices about which so many have written. And, of course, there were lawyers who victimized their client borrowers in order to earn legal fees.

Legal Abandon: How Corporate Tort Reform Trashed the Economy

Common law tort liability for fraud is a basic protection that all markets need. Private lawsuits are a market-based solution to deterring fraud and providing remedies to the victims of fraud. Combined with contingency fee arrangements, robust civil remedies for fraud create a depoliticized mechanism for policing markets. No government funds are expended and political connections will not serve to deter lawsuits brought by a private contingency fee attorney.

Typically, fraud remedies evolved in courts under the watchful eye of the judiciary. Of course, the judiciary is composed of lawyers meaning they constitute an elite group, which represent elite interests. That is just plain economic reality as lawyers are generally faced with compelling economic incentives for representing wealthy clients. In addition, the wealthy can afford the best lawyers.

As a former private securities litigator and former SEC enforcement attorney, I have represented the government, defendants and plaintiffs in a wide variety of securities lawsuits. I also have served as a securities arbitrator for the NASD. I can tell you that if anything the advantage heavily favored defendants who typically had far superior resources and attorneys that were expert in using those resources to protect their clients' interests. Judges hailed more often from corporate firms, and thus any bias there also favored defendants.

However, just holding more sway before judges and having superior representation and resources was not enough. Monied interests went to Congress and obtained powerful insulation from liability for securities fraud. First came the Private Securities Litigation Reform Act of 1995 (PSLRA). Then came the Securities Litigation Uniform Standards Act of 1998 (SLUSA). The PSLRA and SLUSA for the first time in our history gave special protection to securities fraudfeasors under federal law. This was a fundamental betrayal of the federal securities laws which were enacted after the Great Depression to provide more generous remedies to victims of securities fraud. Huge lobbying expenses turned federal law upside down. The SLUSA act actually eliminated the bulk of liabilities under state law. After the PSLRA and the SLUSA, securities fraud was downright profitable.

The cost of this legal promiscuity has been a non-stop run of scandals culminating in the Great Subprime Securities Fraud of 2005-2007.

Conservatives were bamboozled here. Conservative rhetoric painted securities litigation as oppressive to the most powerful elements of our society--and many conservatives bought it hook, line and sinker--even in the absence of any evidence that innovation was somehow being stifled during the 60 years of prosperity that followed the enactment of the federal securities law. Even today, in the face of compelling evidence of what a fraud-laced securities market looks like and performs like they still lip synch to the tune of corporate elites.

A new white paper has been released recently featuring our own dre cummings. It walks through the whole sordid mess. It is a story of the dangers of conservative rhetoric and the power of ideologues who substitute partisan rants for thought. True conservatives would be deeply suspicious of any special legislative indulgences for fraudfeasors.

Shredding common law notions of accountability never makes sense. Almost always behind the rhetoric is raw economic power seeking to subvert the rule of law. And, almost also allowing the powerful to escape legal accountability will prove costly.

Executive Independence Misdirection

A recent study of 1,300 corporate executives conducted by James Westphal and Melissa Graebner, and reported in The Economist, found that “chief executives commonly respond to negative appraisals from Wall Street [analysts] by managing appearances, rather than making changes that actually improve corporate governance.” Instead of honestly appointing independent directors to corporate boards, the study found that executives hire directors with whom they are “socially close” while trying to persuade analysts that these hires are totally independent. This misdirection seems to work, as firms that make an effort to persuade analysts that board changes boost independence results in upgrades in the firm’s stock rating 36% of the time. Analysts are upgrading under false pretenses.

Why do analysts fall for the executive’s misrepresentation? Most analysts say they do not have the time to look into executive’s social connections, the study found.

Profiting From TARP: The Treasury Department Nets $1.5 Billion In Bank Of America Warrant Sale

On Wednesday, the Treasury Department completed an auction of warrants it received from Bank of America in exchange for emergency TARP loans. The government indicated that it netted $1.54 billion from the Bank of America warrant auction. By all indications, this is the most lucrative and profitable warrant auction for the Treasury Department since it began the warrant auction process in December. A warrant is a derivative security that gives the holder the right to purchase securities from an issuer at a specific price within a certain time frame. The Bank of America TARP warrants expire in 2018 and 2019 and have a strike price that is close to double Bank of America’s recent trading price ($16.42 as of the close of the NYSE on Wednesday).

Recall, Bank of America repaid $45 billion in TARP funds to the federal government late last year, in December. As reported earlier on this Blog, things are looking up for American banks. Last year, the Congressional Budget Office (“CBO”) estimated that the TARP program would cost taxpayers $356 billion. Recently, indeed in January, the CBO estimated that the TARP program would only cost taxpayers $99 billion over its lifetime. The Obama administration’s Office of Management and Budget produced a similar estimate. The stock market rally in recent months, and the fact that relatively few banks retain TARP funds has narrowed the original gap somewhat. Again, the estimates regarding the TARP program are just that—estimates—it may take a number of years to fully understand the impact of the program and see fully just how much it might end up costing taxpayers.

TARP recipients have two options: 1. to repurchase their own warrants; or 2. to allow the government to auction the warrants to others. Goldman Sachs spent $1.1 billion to repurchase its warrants in July, after repaying $10 billion in TARP loans. Morgan Stanley spent $950 million to purchase its warrants associated with a $10 billion TARP loan. The Treasury Department began its first warrant auctions in December of 2009. In these first auctions, the Treasury Department raised $950 million auctioning JPMorgan Chase warrants. JPMorgan had received and repaid $25 billion in TARP funds. Citigroup and Wells Fargo, the last two megabanks to receive and repay TARP funds, have not yet decided whether they want to repurchase their own warrants or have the Treasury Department auction off those warrants.

At the end of the day, for all the criticism of the TARP program, the Treasury Department has recouped some profit for taxpayers. From the taxpayer’s perspective, however, when it comes to TARP bailouts in the auto and housing industries we might not end up being so lucky. The jury is still out!

Consumer Financial Protection Agency

The proposed new independent Consumer Financial Protection Agency is facing a difficult time in the United States Senate. The hope for an independent, stand alone oversight consumer protection agency seems to be fighting a losing battle. Senate Banking Committee chair, Christopher Dodd, himself formerly embroiled in compromising relationships with bad-acting mortgage crisis players, seems to be considering two proposals for the new agency: either (1) housing a new agency in the Federal Reserve or (2) situating the agency within the Treasury Department. By compromising an independent agency by making it beholden to Fed or Treasury officials is, arguably better than nothing, stripping a new oversight agency of independence will certainly emasculate it from providing clear consumer protection in an unfettered way.

Specifically, there is little reason to believe that a new Consumer Protection Agency under the supervision of the Treasury or Fed will regulate banks and their businesses in any serious, reform oriented way. The current Treasury Secretary Timothy Geithner has already proven to be under-enthusiastic about any serious financial reform as he has cautioned against clamping down on executive pay and has resisted the Volcker’s rule proposed regulation against proprietary trading. Further, with Washington’s current trend of appointing Wall Street insiders as Treasury Secretary the implication is clear that that any Consumer Protection Agency will be hamstrung from its origination.

This following example of credit card contracts provides evidence that a Consumer Financial Protection Agency is needed. In 1980, the average credit card contract was 1 page long. Today, it is often more than 30 pages long. Now with 30 page contracts, complicated ARMs and other sub-prime mortgages, banks should be required to make profits on honest lending practices, not complicated agreements that make profits available to them based on unforeseen fees or penalties.

Will Congress have the will to create an independent Consumer Financial Protection Agency?

Today, March 5, 2010, the St. John's University School of Law and its Journal of Civil Rights and Economic Development will host an important symposium entitled "The Fall of the Economy: How New York Can Rise to the Challenge." This day long symposium sponsored by the Ronald Brown Center for Civil Rights will feature searching explorations into the following subjects:

(1) The Economic Collapse: Big Business Issues and Reform

(2) Big Business Collapse: Government Bailouts and other Government Policies

(3) A Colloquy on Mortgage Foreclosure Crisis

(4) The Mortgage Foreclosure Crisis and Effect on Housing, Citizens and Society.

The featured speaker during the event is former Congressperson and current CEO of Common Cause Bob Edgar.

The proceedings of this event will be published by The Journal of Civil Rights and Economic Development. For more information, go to: The Fall of the Economy: How New York Can Rise to the Challenge.

Goldman Sachs Ignores Its Shareholders’ Concerns About Bonuses

In December, 2009, Goldman Sachs announced that it would not pay cash bonuses to its most senior executives. Their bonuses were paid in the form of restricted stock instead. Some applauded Goldman for this decision, claiming that it was an appropriate response to the taxpaying public's understandable outrage about large bonuses for bankers after having bailed out Wall Street's financial institutions. That same month, Goldman also announced that it would at some point in the future give its shareholders the opportunity to vote on executive compensation. The shareholder vote, however, would be nonbinding.

Now, just a little more than two months later, Goldman, a bailout benficiary whose managers exposed the bank to toxic mortgage-backed securities, is ignoring shareholders who are complaining about 2008 and 2009 bonuses. An individual shareholder and an institutional shareholder (a pension fund) have filed two separate shareholder derivative suits complaining that the bonuses are excessive and asking for corporate governance changes.

Goldman Sachs spokesman, Michael DuVally told the media that "the lawsuits are completely without merit". Goldman's board has refused shareholder demand letters asking that the board investigate the company's pay practices. A vigorous defense is to be expected, but Goldman's response leaves so much to be desired. Of course the firm will not ask executives to give the bonuses back, as the shareholder plaintiffs asked. Of course the firm will move to have the suits dismissed and the court will do so, deferring to the board's decisions under the business judgment rule. But what about the part of the shareholder suit and the demand letter that simply ask the board to review its compensation-related practices? It's unfortunate that the board did not take the opportunity to respond to the litigation and to the demand letter with a sincere promise to at least listen to shareholders' concerns about pay decisions.

Future Bailouts of America

On February 13, Gretchen Morgenson wrote an important article in the New York Times describing post-bailout America. Within, she describes how major financial institutions have become “too politically powerful to fail,” and a Congress that is too weak knee-ed to appropriately tackle the problem of Too Big to Fail.

The article makes two important points: First, that post-bailout the government has now given an implicit guarantee to large financial institutions that is currently unquantifiable and that this implicit guarantee is likely to be dismissed by politicians. The article cites Edward J. Kane, professor of finance at Boston College, who argues that “People talk about systemic risk, but they have no metric of measuring it. If we recognize that obligations are being put on the taxpayer down the line, then they can be controlled and managed.” Second, Morgenson then notes that “Lawmakers interested in re-election have little incentive to be truthful about what implied guarantees of powerful companies will cost the taxpayer. Better to brush it under the rug or pretend the costs don’t exist. Then, when they must be paid, policy makers can argue that it’s an unforeseen emergency and an odious necessity.”

Will we have the political will to come to terms with the realities of post-bailout America?

See: Future Bailouts of America