Saturday, December 31, 2011

Happy 2012

To our Corporate Justice Blog readers, friends, and commentators, we wish everyone a happy new year and a prosperous and blessed 2012. We genuinely hope that 2012 brings fiscal responsibility and equal opportunity and justice for all, across the United States and world.

Tuesday, December 27, 2011

Dodd-Frank Redux: The Fed Strikes a Blow for Rationalized Corporate Governance

On December 20, 2011, the Federal Reserve Board issued proposed regulations under section 165(h) of the Dodd-Frank Act requiring all large financial institutions to create enterprise-wide risk management committees complete with independent chairs and direct shared supervision of the chief risk officer. While I take issue with the definition of the term "independent," these proposed new rules embody a strong regulatory initiative to rationalize corporate governance in the US, starting with the megabanks. The proposed rules do not apply to every publicly held company; nevertheless, the Fed's clear endorsement of the theoretical underpinnings of enterprise-wide risk management could operate as a game-changer for limiting excessive CEO autonomy for all public firms. Let me explain, by way of a short history of ERM.

As Betty Simkins and I wrote, in Enterprise-Wide Risk Management and Corporate Governance, there is a powerful empirical and theoretical basis for actively managing all risks that a business enterprise faces in a coordinated way at the highest managerial levels. Enterprise-wide risk management (or "ERM") arose as natural evolution of the best means of managing risk within the modern firm that emerged in the 1990s. After the Enron series of corporate governance failures, it was apparent that firms needed to think about risk across all business functions. As we stated in 2008, "under ERM, all risk areas function as parts of an integrated, strategic, and enterprise-wide system. While risk management is coordinated with senior-level oversight, employees at all levels of the organization using ERM are encouraged to view risk management as an integral and ongoing part of their jobs." We identified a number of ERM best practices. For example, we argued in favor of diverse perspectives on risk and against allowing the CEO to act as a risk silo. Too often, the CEO faces distorted incentives to maximize short term profits regardless of risk. The CEO necessarily holds limited expertise regarding the full range of risks a large firm may face. Board involvement is therefore crucial. Nevertheless, we did not advocate any regulatory mandates with regard to ERM due to its relative infancy and lack of any empirical basis for any particular detailed approach. Instead, we argued in favor of SEC rulemaking to require disclosure of risk management policies to facilitate a market based outcome.

In December 2009, the SEC obliged, issuing rules to require disclosure of risk management policies within public firms. Specifically, the SEC directed that all public firms disclose the extent of the board’s role in the risk oversight of the firm, such as how the board administers its oversight function and the effect that this has on the board’s leadership structure. In addition, the SEC noted that in some cases firms should consider disclosing: "whether the individuals who supervise the day-to-day risk management responsibilities report directly to the board as a whole or to a board committee or how the board or committee otherwise receives information from such individuals." The SEC's approach to risk management, while laudatory, seemed too little and too late. After all, by late 2009, it was clear that American firms actually pursued risk mismanagement as a business model as I documented here, and as the Financial Crisis Inquiry Commission confirms here.  

The shocking depths of the dementia revealed by the financial meltdown of 2008, caused me to reassess the law's role in fostering rational risk management within the public firm (among other things) in Lessons From the Subprime Debacle.  There, I advocated that "every financial firm that is publicly held should now be required to have an independent risk management committee, comprised of experts in some field of risk management." I further argued that the independent risk management committee enjoy the power to promulgate and enforce risk management policies, appoint and supervise the chief risk management officer, and retain experts as needed to achieve the mission of the committee.

The Fed largely adopted this approach. Here is the Fed's own summary of its proposal:

"The Board is proposing to address the risk management weaknesses observed during the recent crisis and implement the risk management requirements of the Dodd-Frank Act by establishing risk management standards for all covered companies that would (i) require oversight of enterprise-wide risk management by a stand-alone risk committee of the board of directors and chief risk officer (CRO); (ii) reinforce the independence of a firm’s risk management function; and (iii) ensure appropriate expertise and stature for the chief risk officer. The proposal would also require bank holding companies with total consolidated assets of $10 billion or more that are publicly traded. . . to establish an enterprise-wide risk committee of the board of directors. . . .The proposal sets out certain responsibilities of a risk committee, which include the oversight and documentation of the enterprise-wide risk management practices of the company. The proposal also would establish various requirements for a risk committee, including membership with appropriate risk management expertise and an independent chair. The proposed rule also requires a covered company to employ a CRO who will implement appropriate enterprise-wide risk management practices and report to the covered company’s risk committee and chief executive officer."

The Fed's proposal is fundamentally sound. It is a positive step away from our current regime of CEO primacy because it limits CEO autonomy to manipulate a firm's risk profile for profit. I take issue with the Fed's definition of independence and other issues, and will post on these objections in due course. Today, I wish to posit that the Fed's embrace of enterprise-wide risk management for large financial companies constitutes a powerful incentive for all firms to embrace enterprise-wide risk management. The Fed's proposal is based in part on the findings of the Senior Supervisory Group's (SSG) reports on the causes of the financial crisis. That group, consisting of senior regulators from seven nations, found that firms with stronger risk management systems fared better during the financial crisis than firms with weak risk management. The SSG found that firms at the center of the crisis lacked basic risk management coordination.

Thus, the Fed's proposal amounts to an expert endorsement of fundamental enterprise-wide risk management principles, based upon a solid empirical foundation. As such, public firms subject to the SEC's disclosure mandates (as discussed above) face added pressure to adopt sound risk management precepts. Firms that do not do so will face market sanction, as well as a more difficult defense of any director liability claim. Indeed, if board members ignore solid evidence of the efficacy of enterprise-wide risk management  they will essentially be subordinating the interests of the corporation to their loyalty to the CEO, and the maintenance of CEO primacy.  I will be expanding on these points in a forthcoming law review article.

Friday, December 23, 2011

SEC Sues Fannie Mae and Freddie Mac

Two interesting recent Opinion pieces in the Wall Street Journal focus on the role that Governmental Sponsored Entities Fannie Mae and Freddie Mac played in the financial market crisis of 2008. The Securities and Exchange Commission has filed a lawsuit against several Fannie and Freddie executives alleging that these executives engaged in securities fraud by significantly understating the GSE's exposure to subprime loans it held and/or securitized in the run-up to the mortgage meltdown.

What Fannie and Freddie Knew

The Financial Crisis on Trial

While both articles are editorial/opinion pieces, each uses the SEC's lawsuit against Fannie and Freddie executives to make intriguing arguments about the role of government policy in the market crisis. The articles argue that Fannie and Freddie downgraded lending standards in an effort to meet HUD guidelines in connection with making housing affordable to Americans with sketchy credit and then served as the buying agent of many of these recklessly written loans. That the GSE's played a role in the crisis is now buttressed by the SEC's lawsuit.

One problem however, that I identified in my recent Utah Law Review piece Racial Coding and the Financial Market Crisis, is that both Democrats and Republicans strain desperately to place the blame for the financial market crisis on one single cause. Here, the Op-Ed pieces in the Wall Street Journal continue, now three years later, to attempt to pin single causation blame for the market crisis on one factor, namely Fannie Mae and Freddie Mac. While the SEC's lawsuit seems to indicate that Fannie and Freddie played a larger role in the crisis, due in part to its fraudulent reporting of subprime exposure, there are at least a dozen additional factors and causes that led to a near global meltdown, including predatory lending, credit rating agency complicity, predatory borrowing, deregulation, derivatives shadow trading, credit default swaps, collateralized debt obligations, etc. It disserves the public interest to attempt to blame the market crisis on one single factor, like the Op-Ed pieces attempt to do.

Switching gears: Professor Paul Butler has written a very interesting Op-Ed in the New York Times in connection with Jury Nullification and the nation's wayward War on Drugs and sentencing policies.

Jurors Need to Know They Can Say No

Therein, Butler argues: "Jury nullification is not new; its proponents have included John Hancock and John Adams. The doctrine is premised on the idea that ordinary citizens, not government officials, should have the final say as to whether a person should be punished. As Adams put it, it is each juror’s 'duty' to vote based on his or her 'own best understanding, judgment and conscience, though in direct opposition to the direction of the court. . . .'

Nullification has been credited with helping to end alcohol prohibition and laws that criminalized gay sex. Last year, Montana prosecutors were forced to offer a defendant in a marijuana case a favorable plea bargain after so many potential jurors said they would nullify that the judge didn’t think he could find enough jurors to hear the case. (Prosecutors now say they will remember the actions of those jurors when they consider whether to charge other people with marijuana crimes.) . . .

How one feels about jury nullification ultimately depends on how much confidence one has in the jury system. Based on my experience, I trust jurors a lot. I first became interested in nullification when I prosecuted low-level drug crimes in Washington in 1990. Jurors here, who were predominantly African-American, nullified regularly because they were concerned about racially selective enforcement of the law. Across the country, crime has fallen, but incarceration rates remain at near record levels. Last year, the New York City police made 50,000 arrests just for marijuana possession."

Wednesday, December 21, 2011

Bank of America Settles Predatory Lending Claims

Today, Bank of America settled discriminatory lending claims brought against it (and Countrywide Financial) by the Justice Department for steering qualified minority borrowers into subprime loans during the run-up to the mortgage crisis in 2008. Bank of America agreed to pay $335 million dollars for Countrywide's role in discriminating against minority borrowers between 2004 and 2008. According to CNN: "Attorney General Eric Holder said a federal probe found discrimination against at least 200,000 qualified African American and Latino borrowers from 2004 to 2008, during the height of the housing market boom. He said that minority borrowers who qualified for prime loans were steered into higher-interest-rate subprime loans."

The role that predatory lending and discriminatory bank practices played in the financial market crisis has been detailed many times on this blog previously. In the reckless lending period that precipitated the mortgage meltdown, minority borrowers were often targeted for subprime loans and in many instances, while qualified to receive prime loans were instead steered into more lucrative subprime loans by lending officers.

"Thomas Perez, assistant attorney general for Justice's civil rights division, said most of the victims of the discrimination were not aware that they were improperly steered to the riskier mortgages. . . . He said the discriminatory practices went to the heart of the problem with subprime mortgages and the financial market meltdown they helped set in motion. These borrowers paid on average tens of thousands of dollars more in interest and were subject to pre-payment penalties. [Perez] said while the discriminatory loans happened across the country, about 30% of the victims were in California, where Countrywide was based. About two-thirds of the victims were Latino. . . . He said that money from the settlement will go to borrowers who were identified by the probe. Details about how they will be compensated are not yet available."

According to the Wall Street Journal, Bank of America responded: "Bank of America neither admitted nor denied the allegations in the settlement. The bank said it settled to resolve issues tied to Countrywide's practices before Bank of America's July 2008 purchase of the lender. The bank said it is 'committed to fair and equal treatment of all our customers.'"

Sunday, December 18, 2011


The London press today is full of foreboding reports regarding the Eurozone crisis that suggest a very rough week ahead consistent with my position that we face a high probability of a financial crisis at least as bad as that which followed the failure of Lehman. Perhaps my pessimism is rooted in my penchant for reading European newspapers. In any event, here are the highlights (lowlights?) in no particular order:

First, The Telegraph reports that Britain faces deep political resistance to contributing some $40 billion to an effort to funnel bailout money thru the IMF. It really makes sense that Britain would not contribute because: a) they are merely EU members and not in the Eurozone; b) they have their own issues, including excessive austerity, and really cannot afford the $40 billion; and c) they would effectively be bailing out a rather economically stubborn and more backward Germany, and a downright nasty France that actually argued in public last week that Britain should be downgraded. Yet, if Britain pulls out it is game over for the Eurozone and western megabank capitalism as we know it. This accounts for the pain of British Prime Minister David Cameron, above.

Two sentences from this Telegraph report really show the sense of urgency in Britain over this crisis, in stark contrast to the public mood here in the US:

Yesterday it emerged that the Foreign Office was drawing up contingency plans to evacuate up to a million expats from Spain and Portugal in the event of a European banking crash. The planning was even said to include the nightmare scenario of thousands of penniless Britons sleeping at airports with no money to return to the UK.


Second, The Guardian reports that France faces a downgrade this week (before Christmas). As the report highlights, the whole rescue effort is premised on the AAA rating of France and Germany. So, most observers hold that this too would be game over and the end of megabank capitalism as we know it.

Third, in a second Telegraph report, it appears there is simply no way that the ECB is going to pursue the kind of massive purchase of Eurozone debt that would resolve the crisis, as I discussed here. The news is here is that Germany would essentially leave the Euro before they would allow the ECB to buy more bonds until the crisis ended. Instead, they want fiscal consolidation (austerity) until deflation takes hold and we see a vicious debt deflation downward cycle. This too could be the end of western megabank capitalism as we know it. Deflation (even when called fiscal consolidation) will not work.

Fourth, the Financial Times reports that Mario Draghi, in his first interview as ECB President, has ruled out any quantitative easing again and now speaks openly of the prospect of nations exiting the Eurozone, a prospect his predecessor declared "absurd." So no monetary fireman will rescue the Eurozone anytime soon.

Last week was bad. Fitch put a huge chunk of the Eurozone on imminent negative watch finding that: "Following the EU Summit on 9-10 December, Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach." Ouch! Belgium suffered a two notch downgrade from Moody's. Fitch put France on negative watch. These downgrades and rumors of downgrades hurt bank capital because they trigger accounting haircuts and collateral requirements under credit derivative agreements. So, they hit the banks across the world hard and even could threaten another major financial institution failure. In Australia the banks have been warned to come up with contingency plans to deal with a Eurozone crash within 7 days. I find that disconcerting.  

If we miss a big hit this week consider it an early Christmas gift.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law

Wednesday, December 14, 2011

Election Fraud and CEO Pay

News in recent days reveals that 2010 Chief Executive Officer pay jumped more than 36% from the previous two years (determined by averaging CEO pay at the Standard & Poor 500 companies). While unemployment continues to scourge Main Street, Wall Street executives, with what can only be described as modest performance, found their pay increased by 36%. CNN reports: "Paul Hodgson, senior research associate at GMI, said the sharp rise in pay was out of line with the relatively modest improvement that companies typically achieved in profits or share price during 2010. The most lucrative sector for CEO pay was health care, which included three of the nine top-paid executives, including the two most lucrative packages . . . ."

Next, in an under-reported story, a Republican campaign manager in Maryland was convicted of election fraud last week. As discussed by Professor Sherrilyn Ifill at The Root: "Those who are still confused about why Republicans spend so much energy making it harder for people to vote should pay some attention to a case that concluded this week in a courtroom in Baltimore. There, the campaign manager for 2010 Republican gubernatorial candidate, and former Maryland governor, Robert Ehrlich was tried and found guilty of election based on an attempt to suppress the African-American vote by authorizing the use of misleading robocalls."

Saturday, December 10, 2011


Mario Draghi, the head of the European Central Bank, could resolve the Eurozone crisis simply by pushing the button on massive debt monetization--that is, the purchase of Eurozone sovereign debt in sufficient quantities to stabilize financial markets. In normal times, such an inflationary move would be anathema to anyone interested in long run economic growth and stability. These are not normal times. We face an epic debt crisis that threatens to destabilize global markets, constrain growth and tip the global economy into debt deflation. These threats may persist for years if not addressed vigorously at their root. If the ECB purchased massive Eurozone bonds, then moderate inflation would set in as the money supply in Europe expanded, debt loads would ease relative to GDP, and monetary expansion would accommodate growth.

In the most important (and fundamentally bearish) development of the week, Draghi moved strongly in the opposite direction. He not only ruled out monetary expansion through troubled debt purchases, he argued that such action would violate the ECB charter even if pursued indirectly--such as loaning money to the IMF to buy bonds--or through any other "legal tricks." It is hard to walk back from illegal.

The second most important development of the week involves downgrades and rumors of downgrades. Moody's downgraded the French megabanks Thursday night. And, S&P put essentially the entire Eurozone on negative watch on Monday. So, in the midst of a historic debt crisis both European banks and European sovereigns are facing a mass loss of creditworthiness. Experts suggest that France now faces a two notch downgrade, possibly very soon.

The market finds cause for optimism in the recent Eurozone agreement for consolidation of fiscal power in Brussels which may now accede to enhanced power over national finances within errant Eurozone nations. Frankly, it is hard for me to believe that any nation would cede fiscal power to such an extent. Even in the US, the federal government has very limited legal power over state finances. Yet, more fundamentally, this does absolutely nothing to help with the debt crisis at hand. I hate to dissent from market verdicts, but I think the equity market has gotten a little giddy here.

The good news is that Eurozone yields are down right now and that equity markets have responded favorably to the deal announced at the EU summit this week. We may have bought some time. But, I am convinced things got gloomier this week, not better.

The fundamental problem is this:

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and is predicting declines in eurozone GDP for late 2011 and early 2012.

I have argued this point many times over the past three years. The only way out of a debt crisis is rapid growth--and that requires high-payoff fiscal policy and monetary accommodation. The Eurozone is following the austerity mantra off the cliff.

In my forthcoming law review article, I address this issue head-on. In Taking Fiscal Policy Seriously I will articulate an optimal legal framework for the operation of fiscal policy in a globalized economy. This will build on my prior work in this area, Fear and Social Capitalism which argued in favor of a depoliticized fiscal policy to complement monetary policy.

Tuesday, December 6, 2011

Call for Submissions - Iowa Law's Journal of Gender, Race & Justice

The Journal of Gender, Race & Justice is seeking innovative scholarship for Volume 16. The Journal is dedicated to the living discussion of feminist inquiry and critical race analysis in legal scholarship. We explore how people are classified, stratified, ignored and singled out under the law because of race, sex, gender, economic class, ability, sexual identity and the multitude of labels applied to us. The Journal would like to invite legal authors of all perspectives to submit proposals for articles to fill Volume 16 of our publication.

For more information about the Journal please see:

Please send article or proposal submissions, along with your curriculum vitae to Whitney Smith at

The deadline for submission of proposals is January 30, 2012.

The University of Iowa College of Law's Journal of Gender, Race and Justice's mission statement reads in part as follows: "The Journal of Gender, Race & Justice is not for the weak of heart or the timid in spirit. Feminist inquiry and critical race analysis are the touchstones of our endeavor. Our building blocks are new forms of analysis that reach beyond traditional conceptions of legal thought. We challenge our writers, our readers, and ourselves to question who we are and how the law defines us. We strive to be a transformative experience. In a spirit of openness, we explore how we are classified, stratified, ignored and singled out under the law because of our race, sex, gender economic class, ability, sexual identity and the multitude of labels applied to us. Identity is a matrix of experiences; when the law fails to recognize any one facet of our identity, both the law and the person lose invaluable dimension. Our challenge is to examine how we negotiate our identities, how the legal system negotiates them for us and how these negotiations affect our ability to attain justice."

Monday, December 5, 2011

More Cowbell . . . Occupy and Otherwise

In catching up on important stories and links the past few days, several are noteworthy:

Occupy Wall Street: First, why has the Occupy Wall Street movement not resonated with more African American citizens? A Washington Post story offers some opinions:

Why African Americans Aren't Embracing Occupy Wall Street

Second, is it true that conservative lobbying firms are offering politicians advice on how to undermine Occupy Wall Street efforts for a price? It appears that for a cool $850k, you can pay for advice on how to effectively smear Occupy Wall Street messaging. From

Lobbyists Offer An "Occupy Wall Street" Smear Campaign for Just $850,000
(Thanks to Cole W from Memphis Law for the link)

Third, a top GOP strategist is reportedly "frightened to death" over the Occupy Wall Street movement and is offering talking points to conservative politicians. From

GOP Message Man "Frightened to Death" of Occupy

: On the education equality side, reportedly, Asian American students, fearing discrimination in the university application process are NOT checking the "Asian" race box in an attempt to avoid higher admissions standards being applied to them. According to the San Francisco Chronicle:

Some Asians' College Strategy: Don't Check "Asian"

From the prison industrial complex, reportedly, white Americans receive presidential pardons for their crimes at rates that far exceed other races. From the Washington Post:

ProPublica Review of Pardons in Past Decade Shows Process Heavily Favored Whites

Friday, December 2, 2011

Jon Huntsman is Right!

Last month Jon Huntsman (GOP candidate for President) wrote an excellent op-ed for the Wall Street Journal entitled "Too-Big-to Fail" is Simply Too Big. Here are some key excerpts:

"More than three years after the crisis and the accompanying bailouts, the six largest American financial institutions are significantly bigger than they were before the crisis, having been encouraged to snap up Bear Stearns and other competitors at bargain prices. These banks now have assets worth over 66% of gross domestic product—at least $9.4 trillion, up from 20% of GDP in the 1990s. There is no evidence that institutions of this size add sufficient value to offset the systemic risk they pose."

"The major banks' too-big-to-fail status gives them a comparative advantage in borrowing over their competitors thanks to the federal bailout backstop. This funding subsidy amounts to roughly 50 basis points, or one-half of a percentage point in today's market."

"The best would be to eliminate Dodd-Frank's backstop. Congress should explore reforms now being considered by the U.K. to make the unwinding of its biggest banks less risky for the broader economy. It could impose a fee on banks whose size exceeds a certain percentage of the GDP to cover the cost they would impose on taxpayers in a bailout, thus eliminating the implicit subsidy of their too-big-to-fail status. Congress could also implement tax reform that eliminates the deduction for interest payments that gives a preference to debt over equity, thus ending subsidies for excess leverage."

"Eliminating subsidies would encourage the affected institutions to downsize by selling off certain operations or face having to pay the real costs of bailouts. We need banks that are small and simple enough to fail, not financial public utilities."

In a recent policy statement, Huntsman states: "To protect taxpayers from future bailouts and stabilize America's economic foundation, Jon Huntsman will end too-big-to-fail. Today we can already begin to see the outlines of the next financial crisis and bailouts. More than three years after the crisis and the accompanying bailouts, the six largest U.S. financial institutions are significantly bigger than they were before the crisis, having been encouraged by regulators to snap up Bear Stearns and other competitors at bargain prices."

With the Eurozone approaching a meltdown that promises to more catastrophic than the failure of Lehman Brothers, and with big bailouts now too often assumed to be forthcoming in both the Eurozone and the US, there is no single issue more important in the coming election campaign than Too-Big-to-Fail. We need a President willing to let the banks fail. Once they fail, and their sound assets separated from their toxic assets we need to form new banks under competent management. Our precious public wealth is far better spent forming new banks with new managers and clean balance sheets than constantly running to the rescue of our current zombie bank sector that hoards cash and does not lend.

So, which candidate can we trust to bust up the banks? Right now, Huntsman makes sense and seems sincere. I might disagree with him on many other issues--including issues relating to financial regulation. But, I would vote for him if he were the candidate most likely to let the megabanks fail.

Even very recently, we learned that the bailouts were larger than we realized--amounting to trillions and trillions in secret Fed loans alone. The next set of bailouts will be larger. It will be tens of trillions. And, it is totally unjustified economically. This is the most pressing issue of our times--and the recent coordinated action by the world's major central banks confirms my point. A major crisis is afoot. We must end TBTF right now.

Professor Steven A. Ramirez
Loyola University Chicago