Dodd-Frank IV: A Revolution in Corporate Governance?

Pay Czar Ken Feinberg's final report on executive compensation is out and its findings that bankers' pay was "ill-advised" and the product of "bad judgment" is hardly new. As John Cassidy highlights economists and others have reached a "rare consensus" that managerial pay played a central role in the financial crisis. Far be it from me to argue with that conclusion, especially in light of my recent work Lessons from the Subprime Debacle which formalizes exactly that thesis. However, contrary to Cassidy's conclusion, I think the Dodd-Frank Act holds the potential for a revolution in corporate governance that could permanently alter the power of CEOs over public firms in America, and that Feinberg's report may ultimately facilitate change. Here is a run down of the key Dodd-Frank provisions touching upon corporate governance:

Section 951: Gives shareholders a say on pay via non-binding shareholder resolution to approve compensation including severance pay. Subject only to SEC exemption rules. Takes effect in 6 months.

Section 952: Requires all listed companies to have independent compensation committees with the power to directly retain compensation advisers including independent legal counsel. SEC rule making regarding the definition of independence is required and then the exchanges must implement SEC requirements. This process will take some time and the SEC can also issue exemptions. Nevertheless, companies must begin to comply within 1 year, and many issuers will no doubt take steps to comply very soon.

Section 953: Requires the SEC to issue rules requiring more expansive disclosures to shareholders re compensation, "including information that shows the relationship between executive compensation actually paid and the financial performance of the issuer, taking into account any change in the value of the shares of stock and dividends of the issuer and any distributions." This could take time as the section includes no timetable for the SEC and they will certainly be busy on other fronts. But, when implemented it will another source of information that will exert market pressure on management.

Section 954: Requires SEC to require exchanges to require listed companies to promulgate policies authorizing compensation claw-backs. The policies must include a claw-back for inappropriate compensation based upon restatements of financial reports paid over the three years prior to any accounting restatement.

Section 957: Requires rules of exchanges to prohibit broker votes without shareholder direction in all "significant" votes, including compensation and director votes. This is a huge step toward real corporate democracy. According to the Council of Institutional Investors 16.5 percent of all votes cast at shareholder meetings in 2008 were broker votes, cast without direction from beneficial owners. These votes invariably benefited management. Moreover, this rule is effective now, meaning exchanges must promptly promulgate rules on this point or be put out of business. The SEC must promulgate rules defining what shareholder votes are significant, beyond director and compensation votes.

Section 971: Gives SEC power to require companies to give shareholders access to management's proxy to nominate directors. SEC rule-making is pending. Progress on this issue has been glacial at best. Perhaps this section can operate to break the log jam.

Section 972: Requires SEC regulations within six months to mandate disclosure regarding why or why not a public firm separates or does not separate the position of CEO and Board Chair.

In all, these changes hold the potential for a real revolution in corporate governance. The power of the CEO in the public firm has receded in the past 10 years with respect to such key elements of the public firm as the audit committee and the nominating committee. This is yet another step in the federal redesign of corporate governance to stem excessive CEO autonomy. Combined with prior steps and vigorous administrative rule making perhaps this changes will resolve problems associated with excessive CEO autonomy. If the SEC fails to act decisively prepare for more corporate scandals driven by excessive agency costs from too much managerial power.

Dodd-Frank III: FDIC Bailout Powers

The Dodd-Frank Act gives the FDIC expansive emergency bailout powers.

First, section 1105 of the Act directs the FDIC, in consultation with the Secretary of Treasury, to create a "widely available program to guarantee obligations of solvent insured depository institutions or solvent depository institution holding companies (including any affiliates thereof) during times of severe economic distress." The FDIC must issue regulations governing such guarantees "as soon as practicable." In order for these programs to be triggered both the Board of the FDIC and the Federal Reserve Board of Governors must approve by 2/3 votes.

Second, under the so-called Orderly Liquidation Authority of Title II, section 204(d) authorizes the FDIC to make loans to, guarantee assets or obligations of, or purchase assets of any financial company put into FDIC receivership under the auspices of the Dodd-Frank Act. Under section 206, these expenditures must be for the purpose of financial stability and not for the benefit of any particular company. The Treasury must approve these expenditures under section 210(n)(9). Moreover, if a financial firm enters this orderly liquidation process, the officers and directors are terminated, they are liable for gross negligence, and they are subject to recoupment of their compensation over the past two years. This entire process is triggered only upon a 2/3 vote of both the FDIC and the Fed.

The bottom line to Dodd-Frank is that it permits and formalizes more bailouts not fewer. As former Secretary of Treasury Hank Paulson stated: “We would have loved to have something like this for Lehman Brothers. There’s no doubt about it.” The FDIC and the Fed now have vast powers under law to assure that the failure of a major financial firm does not lead to chain-reaction failures through losses to unsecured creditors. And, because both the Fed and the FDIC are government agencies, the taxpayer is ultimately exposed to losses arising from their efforts to bailout unsecured creditors.

In the absence of vigorous Fed use of the power to order divestitures, the bill can fairly be termed the leave no bondholder behind act, insofar as bailouts are concerned. I argued in Subprime Bailouts and the Predator State that a bailout authority should be profit maximizing, depoliticized and pose serious adverse consequences to management, including severe civil and criminal sanctions. The authority should be accompanied by robust powers to order prudential divestitures. Dodd-Frank fails, particularly due to weakened section 121.

However, the bill also covers much more than bailouts. In my next post I will show that the bill has revolutionary potential in corporate governance, and may help stem the abusive executive compensation issues that were central to the crisis.

Dodd-Frank II: Revisioning Section 13(3) of the Federal Reserve Act

President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, in the above signing ceremony. Overall, the President's speech constitutes an outstanding analysis of the causes of the financial crisis and broad overview of the Act. However, I take issue with his statement (at the 11:00 minute point) that under the bill: "there will be no more tax funded bailouts. Period." This statement is highly problematic, if not outright false.

First, because section 121 is so deeply flawed, we will continue to be burdened by very large megabanks, larger now than ever before. So the question posed is whether these firms would be permitted to fail by future Congresses at the risk of a general economic crash. Think of the risks posed in late September 2008 and double them. There is little reason to think that Congress would behave any differently than it did when it passed the TARP legislation in 2008.

Second, section 1101 of the Dodd-Frank Act amends section 13(3) of the Federal Reserve Act in a way that paves the way for the Fed to bailout large banks so long as it does so pursuant to a program or facility that features "broad-based eligibility." Indeed, the Act directs the Fed and the Treasury to create emergency lending programs and facilities "as soon as practicable." The only limitations the Act imposes on this emergency lending power is that borrowers cannot already be in bankruptcy or receivership and the loan cannot be made with the "purpose of" assisting a "single and specific company." The Act specifically contemplates that the Fed may become an unsecured or at least undersecured creditor.

The bottom line here then is that while high profile bailouts of specific companies like AIG and Bear Stearns are out, regulations that would authorize bailouts of many companies in the same straits as AIG and Bear Stearns are in, and so those kinds of bailouts now have formal legal authorization.

In my next post, I will address the emergency powers of the FDIC under the Act.

Dodd-Frank I: Section 121 and Prudential Divestitures

I first argued in favor of giving regulators the power to order large banks to divest business units to eliminate or mitigate systemic risk (i.e., diminish too-big-to-fail banks) on July 20, 2009. I followed up on this argument on July 27, 2009 on this blog, and continued the effort in a series of postings over the past year (with a specific emphasis on the Kanjorski Amendment) as well as in a recent law review article. In sum, I suggested that this issue would be a litmus test for the sturdiness of financial reform in general or, on the other hand, the sway of lobbyists on the bill. My prediction was that the part of the house bill that authorized divestitures would be diluted relative to the original section 1105 of the House Bill which itself was a watered down version of the Kanjorski Amendment. One year down the road from my original post I am saddened to report that the divestiture provision has been hopelessly compromised.

The good news, as MIT Professor Simon Johnson highlights, is that the final Dodd-Frank Act includes a provision, section 121, that authorizes the divestiture of "assets or off-balance sheet items." As a foremost expert on the intersection of economics and concentrated economic power (particularly insofar as the financial crisis is concerned), Johnson is also clearly correct that this section holds the potential to be a game-changer, in that it can operate to fragment our excessively concentrated financial sector and diminish their political sway in Washington, D.C., as well protect our economy from another financial meltdown like the fall of 2008. Johnson takes a long view: he compares this new power to the Sherman Antitrust Act, which only reached its full potential 20 years after its enactment when the government used it to break up Standard Oil.

The problem is I seriously doubt we can wait 20 years. The plague of the megabanks is now. Our economy teeters on the edge of a deflationary downdraft, the financial sector faces a range of threats from across the world, everyone seems to be hoarding cash now, housing is a catastrophe waiting to happen, and the employment picture is about as grim as ever as manifest in the civilian employment ratio. At the core of all this lies a deeply dysfunctional banking system that seems busily hiding losses on zombie loans while hoarding vast capital.

So what does section 121 of the Dodd Frank Act offer today? Very little, I fear, and much less than the House version. Most importantly, the House bill gave divestiture power to the new Financial Stability Oversight Council (FSOC) based upon a simple majority vote. Dodd-Frank requires a 2/3 vote of the FSOC as well as certain trigger determinations by the Federal Reserve Board of Governors. Thus, no divestiture can proceed without the Fed. Yet, the Fed has been instrumental in facilitating the emergence of too-big-to-fail (TBTF) banks. The Fed also expanded the scope of its lending under section 13(3) of the Federal Reserve Act beyond all recognition in bailing out too-big-to-fail firms like AIG. Thus, the Fed seems poorly situated, in terms of its legal structure, to head off TBTF bailouts. Combined with the super-majority requirement at the FSOC, I recommend that no person hold their breath waiting for divestitures to be ordered.

There are further technical issues presented by section 121 that were not present in the original House version. For example, there must a determination made that other mitigatory actions are "inadequate" for addressing threats to financial stability. The House version authorized the FSOC to "deem" other actions inadequate. Presumably, these determinations would be subject to review under an abuse of discretion standard while the House's language implies a decision to commit the adequacy of other measures to the discretion of the Fed. The final version therefore gives banks an argument to use in court to seek an order that divestiture be a last resort instead of leaving the issue solely up to the Fed.

Finally, I wonder why the final Dodd-Frank provision deleted the clause "selling, divesting, or otherwise transferring business units" from the original House provision. Clearly, it would be a huge reach for any court to buy an argument that the deletion of that language limits the Fed to only ordering the sale of assets other than subsidiaries or business units (since subsidiaries and business units are assets), but it does create some question.

In all, section 121 as finally enacted materially dilutes the original House provision for prudential divestitures. That means that there simply is no viable mechanism for breaking up the megabanks, at least in the short run. We will almost certainly regret that because these banks simply have too much political and economic power, and they are costing us trillions in social wealth. I hope I am wrong. Nothing would please me more than to see the Fed announce tomorrow, immediately after the bill is signed, that they will be seeking to immediately break up the megabanks under section 121. I really doubt that will happen.

Finanical Reform at Last?

The Dodd-Frank Wall Street Reform and Consumer Protection Act (all 2300 pages) will be signed into law by President Obama on Wednesday, July 21, 2010. I will be blogging at length about the substance of the bill over the next 10 days or so, trying to highlight elements not covered well in the media. In general, the bill holds the potential to rein in Wall Street excess and hopefully prevent the next meltdown. Nevertheless, overall the bill is too little too late, and relies too much on regulators to regulate appropriately in defiance of the experience of the last 30 years when regulators led the march to re-imposition of discredited laissez-faire policies in the financial sector. Moreover, the bill largely leaves in place a financial regulatory sector that is proven to be subject to an inadequate legal structure that cannot resist special interest influence. There is no fundamental reform here that will change underlying political and legal dynamics. The issue of economic inequality, which according to Professor Raghuram Rajan played a foundational role in the entire crisis, fails to even warrant a mention.

According to a Wall Street Journal report, for example, the bill authorizes at least 243 rule makings, requires further study for 67 issues, and mandates 22 periodic reports. Clearly, Congress has simply kicked many issues down the road, to be resolved after the election largely by regulators subject to the same political pressure that got us into this mess.

Thus, the Federal Reserve, which really bent all the rules beyond recognition to bail out all kinds of financial firms that it deemed too-big-to fail is given the power to break-up firms to make sure they do not become too-big-to-fail under section 121. This is like putting a bartender in charge of an AA meeting. I will be expanding on this issue in my next posting but for today the point is the bill may rearrange the deck chairs a bit, but fundamentally leaves the same regulators in charge, subject to the same political pressures and realities.

Former Labor Secretary Robert Reich states the problem well:

"The American people will continue to have to foot the bill for the mistakes of Wall Street’s biggest banks because the legislation does nothing to diminish the economic and political power of these giants. It does not cap their size. It does not resurrect the Glass-Steagall Act that once separated commercial (normal) banking from investment (casino) banking."

Economist Daniel Kaufman argues:

"We should not totally rule out that some regulators may carry out appropriate actions at times. But we should be mindful that the vested interests in a system captured by ‘money-in-politics’ would tend to bias decision-making against such timely and tough regulatory actions. Congress did not dare to look into this issue."

By virtually all accounts, the regulatory implementation of the bill is paramount, and those interested in progressive reform should now prepare for an extended battle before the many regulatory agencies that now have the power to significantly repair the system. As former IMF Chief Economist Simon Johnson puts it: "Regulators can do a great deal, but they need political direction from the highest level in order to make genuine progress." The Obama Administration must move with a renewed sense of urgency before another shock to the financial system tips the system into a second downward plunge.

A very good start would entail working with the Fed immediately to identify which too-big-to-fail-bank should be broken up first under section121, so that the market ceases to provide these entities too much capital too cheaply right now. This would be a very important first signal.

SEC Hits Goldman Sachs With Record $550 Million Fine

In April, my co-bloggers Jill Barclift and andre cummings posted wonderful pieces covering the SEC's decision to file civil charges against Goldman Sachs for securities fraud. For a link to Jill's piece click here. For a link to andre's piece please click here. On Thursday the SEC announced that Goldman Sachs had entered into a settlement agreement to resolve the high profile case linked to the mortgage meltdown. Goldman Sachs has agreed to pay a record $550 million to settle civil fraud charges centering on allegations that Goldman misled clients in complex investments. The SEC alleged that Goldman Sachs sold mortgage-backed securities without telling buyers that the securities were hand-picked by a Goldman Sach's client (Paulson & Co.), who in turn was shorting the same securities or betting that the securities would ultimately fail.

The settlement agreement calls for Goldman Sachs to pay a $535 million fine--the largest in the SEC's history--and $15 million in restitution for fees it collected. Out the total settlement of $550 million, $300 million will go to the government and $250 million will go to two (2) European banks (German bank IKB Deutsche Industriebank AG and Royal Bank of Scotland) who lost money on their investments with Goldman. IKB Deutsche Industriebank will recieve $150 million, while Royal Bank of Scotland is set to receive $100 million. Goldman admitted to no legal liability.

Goldman Sachs had a net income of $12.2 billion in 2009. The $550 million settlement with the SEC represents less than 5 % of Goldman's net income after payment of dividends to preferred shareholders--or little more than two weeks of net income. You could say this is a drop in the bucket. Goldman's settlement with the SEC was pleasing to investors. Goldman stock rose in after-hours trading as rumors of the settlement began to whirl shortly before the stock market's close on Thursday.

The Goldman Sachs settlement will leave deep ripples. As John Coffee, a noted securities law professor at Columbia University Law School noted: "Even if the penalty was lower than the market expected, the fact that Goldman admitted that it made misleading and incomplete disclosures to its clients vindicates the SEC's legal theory for the future...You have to understand that the defendant almost never makes such a concession in SEC settlements." Jacob Frenkel, a former SEC enforcement attorney noted: "This was a bet-the-agency case...They [the SEC] had a lot at stake here, and this did wonders to reestablish a strong enforcement image and presence."

At this time, Goldman Sach's settlement will allow the firm to move on and deflect growing public criticism. However, investors damaged by Goldman Sach's alleged misdeeds will almost certainly file civil lawsuits against Goldman Sachs in the coming weeks and months. A federal judge must still approve this proposed settlement before it is finalized. We shall see.

Is the Housing Market in the ICU or is it DOA?

The nation's housing market recently began to spiral downward, and there seems to be no bottom in sight. There has long been concern that unemployment would relentlessly lead to serious delinquencies and foreclosures, as evidenced in the chart at left. It looks like there will be over 1 million foreclosures this year, a new record. Now, even very wealthy borrowers are walking away from mortgage debt. Apparently, many people are strategically defaulting on their mortgages even though they have the means to pay because they are so far underwater, meaning the market value of their homes does not cover the amount of their mortgage debt. 4.5 million homeowners are deeply underwater. So expect to see massive potential real estate inventory for years to come as banks hold distressed properties off the market and more and more homeowners succumb to the temptation to strategically default. This reality will lead to constant pressure for price deflation in the housing market.

Meanwhile, buyers are running for cover. After the expiration of the home buyer's tax credit, pending sales plunged to a record low level. We recently learned that mortgage applications are plummeting even in the face of record low mortgage rates.

So what does this all mean? Well, first, real estate prices seem destined to fall more, with all of the attendant consequences on consumption implicit in the evaporation of household wealth. Second, bank capital seems exposed to further losses from mortgage lending, meaning more bank failures, more cash hoarding and less capital in the banking system for lending.

I have argued for some time that we bailed out the wrong people. We bailed out reckless bankers instead of their victims. I cannot help but wonder about the extreme shortsightedness of our political leaders on this point. If we had bailed out homeowners with the trillions spent bailing out the bankers, the real estate market may have been saved. Ironically, debt relief for consumers would have saved the financial sector billions in mortgage losses while promoting consumption and forestalling a deep recession. According to an IMF study, targeted debt relief for borrowers is "most successful" in containing financial crises.

We will regret these policy errors if residential real estate markets go into a full-fledged dive.

Inflation, Deflation and Excess Capacity

There is a titanic debate percolating among policymakers throughout the world regarding the threat of inflation versus deflation and whether austerity versus continued government stimulus of the global economy is the appropriate policy response. I posit that the economy in the US in particular (although probably throughout the world) is burdened with massive excess capacity that is deeply rooted in the flawed legal structure of the massive bailouts of 2008-2009. The degree of excess capacity is shown in the chart above, which still shows the economy with more than 25% excess capacity, on par with the depths of the recession of 2001. Simply put, this excess capacity rules out any real inflationary threat and could well fuel a deflationary spiral given persistent high debt levels, which will operate to stifle consumption as well as investment. The bond market is sending precisely such a deflationary signal.

I have argued for sometime that the structure of the massive financial bailouts of 2008-2009 were upside down. I was against the bailouts from the beginning on the grounds that they did not bailout the right people and instead excessively favored financial elites. I argued that elites would hoard cash and strangle the economy, just as zombie banks did in Japan during the 1990s. Instead, financial elites should face harsh sanctions for crashing firms at the government's cost. This culminated in my most recent law review article Subprime Bailouts and the Predatory State, available for free download right here.

My central point has always been that the legal structure of the massive bailouts entrenched financial elites, allowed them to hide the weakness of their balance sheets, and encouraged them to hoard cash and rein in lending. This is exactly what has happened. For example, reserves held at the Federal Reserve by banks has surged to over one trillion dollars as shown at right. The fact that the Fed now pays above market interest on these reserves does not help. As I have argued previously this is highly contractionary because if banks do not lend their reserves the economy cannot grow. One trillion in bank reserves amounts to massive idle capital. Moreover, Federal Reserve Governor Elizabeth Duke states that it could be "years" before credit conditions return to normal, even though credit restoration is already lagging past business cycles.

Further, there is still massive unemployment within the economy, as shown by this broad measure of employment showing a historic dive that has not really moderated at all. Over 50% of all Americans have now suffered some employment related set back due to the recession. This has caused over 60% of consumers to trim spending. Thus, the underutilized human resources in our economy is a direct hit to consumption. Until employment markets recover, there is no likelihood of inflation. Wage growth is key to inflationary pressures on both the supply and demand side. Today's job report shows that even after nearly three years of recession conditions the economy continues to lose jobs.

All of this means massive idle capacity in terms of human and capital resources. Indeed, add in all the capital idly invested in the gold bubble and the Treasury market and one can only conclude that economy is burdened by historic levels of capital tied up in very liquid and low yielding assets consistent with massive risk aversion.

There is simply too much idle capacity plaguing the American economy right now.

Thus, to the extent there is any debate regarding inflation or deflation in the economy, Paul Krugman's position that we are headed for a depression seems fundamentally sound. The great threat facing the American economy is debt-deflation and zombie banks. In short, it is hard to discount the view of economists like Robert Schiller who suggest we are turning Japanese.

In my view, the upside structure of the bailouts (as well as the upside down stimulus package) will be tagged as the root of a historic down-turn in growth. This has been my fear for some time, and combined with Europe's mess could lead to highly contractionary conditions across the globe.

The bottom line is that we wasted massive resources bailing out the bankers and cutting taxes for the rich when we should have been massively investing to rebuild our economy, in accordance with this article which I wrote in 2002.

U.S. Supreme Court Unanimously Rules-- Sarbanes-Oxley Act “Remains Fully Operative as a Law”

The Supreme Courted voted unanimously to reject a challenge to the constitutionality of the Sarbanes-Oxley Act of 2002 (SOX). The case Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB) raised the constitutional issues as to whether the PCAOB's structure complies with the Appointments Clause and the doctrine of separation of powers, in particular, whether SOX appropriately authorized the Securities and Exchange Commission (SEC) to appoint members of PCAOB rather than the President.

SOX was adopted by Congress to regulate the accounting industry as a result of the corporate scandals on Wall Street including the infamous Enron, WorldCom, Kmart, Global Crossing debacles, and others of their ilk, which exposed a wave of accounting chicanery used by certain publicly-traded companies to pump up their stock prices during the late-1990s through early-2000s bull market. In the aftermath of the accounting chicanery exposure, Congress sought to reform corporate America by creating, in essence, a federal corporate governance law. For centuries, corporate governance laws with the exception of securities laws, had been the exclusive purview of state legislators because corporations are creatures of state law not federal law. I recently published an article in the Encyclopedia of the U.S. Supreme Court, which analyzes the historical rulings of the Supreme Court regarding corporate law from 1880-2008. The article is available here.

Nonetheless, Congress overwhelming adopted SOX, which authorized the SEC to create an administrative entity that would regulate the accounting industry as it relates to publicly-traded companies, and the accuracy and truthfulness of financial disclosure to the general public. In response, the SEC created PCAOB to oversee the accounting methodology and disclosure of publicly-traded companies. Almost from its creation SOX has been vilified by many and beloved by many. Some commentator argued that SOX was too burdensome and expensive for publicly-traded multi-million dollars to adequately comply with its requirements. Still others argued that SOX did not go far enough regarding governance disclosure requirements, and as a result companies were not in compliance with the “spirit” of the law. In the words of Benjamin Franklin, it seemed as if SOX was the quintessential example of “laws too gentle are seldom obeyed, too severe seldom executed.”

Several legal commentators predicted that because SOX did not contain a severability clause, the Supreme Court would rule that SOX was unconstitutional. As such, Congress would be forced to re-enact SOX with amended provisions to address the severability and power to appointment concerns raised in Free Enterprise Fund v. PCAOB . In the alternative, Congress could simply return to the law, as it was before SOX was adopted. Professor Donna Nagy, C. Ben Dutton Professor of Law at the Indiana University Maurer School of Law, most recent scholarship on the PCAOB published in the PITTSBURGH LAW REVIEW entitled, "Is the PCAOB a 'Heavily Controlled Component' of the SEC?: An Essential Question in the Constitutional Controversy" raised interesting arguments regarding the PCAOB’s constitutionality. Professor Nagy’s article is available here. Additionally, Professor Nagy in collaboration with several law professors, submitted an amici brief to the Supreme Court in support of Free Enterprise Fund. The amici brief is available here. Despite legal commentators’ well argued positions, the Supreme Court disagreed. On Monday, the justices unanimously ruled that PCAOB has been legally established and appointed. There was a 5-to-4 split, but it concerned only the manner in which members of the PCAOB can be removed from office. As a result of the ruling, the SEC can remove PCAOB members at will, rather than being able to do so only if there were good cause that warranted removal. Chief Justice John G. Roberts Jr., writing the majority opinion stated that “the Sarbanes-Oxley Act remains ‘fully operative as a law’ with these tenure restrictions excised.”

With the issue settled, the SEC, under the direction of its chairwoman, Mary L. Schapiro, is expected to promptly act to fill three of the five seats on the PCAOB. SOX only authorized two of the five members could be certified public accountants — and both those jobs went to former SEC officials — Mr. Goelzer and Mr. Niemeier. Mr. Goelzer stated that the PCAOB was “pleased it would be able to carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest.” Although, the PCAOB was established by Congress, it is not formally a federal government agency. As such it does not have to comply with federal pay schedules. PCAOB members are paid more than $500,000 a year. Not bad for an honest day’s work at the PCAOB.

Lydie Nadia Cabrera Pierre-Louis

More on BP Dividend Payments

Professor Dorothy Brown has recently posted an opinion piece on CNN.com in connection with British Petroleum's decision to suspend dividend payments to shareholders based on its continuing oil spill debacle in the Gulf of Mexico, as detailed in this blog space by Professor Joseph Grant. On CNN, Professor Brown argues that BP's shareholders, by virtue of their investment in the petroleum powerhouse, must recognize that a risk of ownership includes the possibility that the corporation will be called upon to pay for massive environmental accidents that it causes. Per Professor Brown:

"Shareholders who own stock in an oil company that drills offshore without adequate plans in place, should disaster strike, have made a risky investment indeed. Given the potentially catastrophic impact of the oil spill, how can BP really know how much all of the costs will be? And the safest course of action is to wait until the company gets a better handle on its potential liabilities, which seem to be growing daily.

Between the business owners in the Gulf with their very livelihoods being threatened, the workers who are unable to earn a living and the looming environmental cleanup costs (once the oil actually stops spilling into the ocean) on the one hand and BP's shareholders on the other hand, the choice is easy: The shareholders should wait for their dividends. After all, isn't that why their tax rates are so low?"

To view the entire story see "BP Right to Stop Paying Dividends."

World Summit Regarding Ayiti’s Future Held in the Dominican Republic

In early June, the most recent World Summit was held in Punta Cana, Dominican Republic to discuss Ayiti’s future given the catastrophic devastation caused by the 7.0 earthquake that hit the island-nation on January 12th. Dominican Republic President Leonel Fernandez Reyna's welcoming remarks at the Summit began with "in only 30 seconds, more than 300,000 people were injured; in just 30 seconds, more than one million people lost their homes; in just 30 seconds, Ayiti lost 120 percent of its GDP; in just 30 seconds thousands of children were made orphans, thousands lost their most close relatives, and thousands were left in anguish."

The theme of the World Summit was Solidarity Beyond the Crisis, and was hosted by Dominican Republic President Leonel Fernandez, in collaboration with Ayiti President Rene Preval, and Ayiti Prime Minister, Jean-Max Bellerive. Ayiti President Rene Preval stated that "Ayiti was already facing a very difficult situation before the earthquake. We shouldn't only heal the wounds caused by this earthquake. We must develop the economy, we must develop the agriculture, we must develop the education and health, create jobs and strengthen democratic institutions." To a large extent, the World Summit was successful in securing a sustainable commitment for Ayiti’s long-term recovery. The World Summit on Ayiti focused on four specific development central themes: (1) economic re-foundation, (2) territorial re-foundation, (3) social re-foundation; and (4) cultural and artistic recovery.

In late March, the United Nations hosted the International Donors Conference on Ayiti. The International Donors Conference garnered pledges of $5.3 billion for the next two years and $9.9b for the next three years and beyond. The World Summit on Ayiti sought to solidify those commitments and to create permanent ties of solidarity between the international community and Ayiti. U.S. Secretary of State Hillary Clinton stated that "we have more than one million people that are currently living in very precarious conditions, in camping tents." Secretary Clinton is part of the United Nation's Special Envoy to Ayiti. Secretary Clinton continued that "we cannot allow for people to die during this Hurricane Season because they inhabit temporary dwellings." It is estimated that more than 1.3 million people were left homeless amid predictions of a very intense hurricane season. Much of Ayiti's fragile infrastructure was destroyed by the earthquake, which left more than 200,000 people dead, and 300,000 people injured including two thousands amputees.

The Summit also sought to spearhead the beginning of Ayiti’s reconstruction work. The commitments of donor countries and organizations were reviewed, and a list of the projects containing the priority activities, and detailed progress reports were analyzed to effectively manage the reconstruction process. The priority activities identified in the action plan, which require almost immediate attention, and financial support focused on development of critical infrastructure including highways, potable water systems, electricity, housing, schools and universities. By the conclusion of the World Summit, the international community and multilateral organizations agreed to provide Ayiti with more than US $15 billion in aid during the next decade.

The World Summit included participants from Heads of State and Government, as well as representatives of multilateral organizations to evaluate the aid to Ayiti and arrange for the disbursement of economic resources for Ayiti’s recovery. In particular, former Jamaica Prime Minister, P.J. Patterson, Special Representative of the CARICOM Heads of Government to Ayiti, and Ambassador Colin Granderson, Assistant Secretary-General, Foreign and Community Relations, represented the Caribbean Community at the forum.

Lydie Nadia Cabrera Pierre-Louis

The Politics Of BP's Dividend Payment: Should BP Pay A Dividend As The Gulf Of Mexico Oil Spill Rages On?

Several weeks ago I posted a piece on the BP oil spill in the Gulf of Mexico. At that time I was optimistic that the oil spill would be quickly resolved. We are now more than 50 days out and still no resolution. The environmental damage to the Gulf of Mexico, and specifically to Louisiana, Alabama, and Florida, is mounting each day.

According to BP's latest press release the company has spent $1.43 billion on the oil spill thus far. Estimates on the clean-up cost of the oil spill range from $3 to $40 billion over a period of several years. Last year BP had a cash flow of $30 billion. Undoubtedly, this will be a costly accident.

BP has proposed paying a quarterly (for the second-quarter) dividend of an estimated $2.4 billion. According to BP's annual report the company paid dividends of $10.5 billion last year.

Political pressure is mounting to suspend or halt BP's payment of dividends until the Gulf of Mexico oil spill is resolved or brought under control. BP's CEO Tony Hayward will likely face intense pressure and get push-back on the dividend from members of Congress when he testifies next Thursday on the oil spill.

Apparently, members of the BP Board of Directors are discussing a plan to set up an escrow fund to place the $2.4 billion dividend payment until the Gulf of Mexico oil spill is brought under control.

What do you think? Should BP be pressured to suspend or halt all dividend payments until the Gulf of Mexico oil spill is resolved? Alternatively, would the establishment of an escrow fund be a satisfactory resolution? Should BP look out for BP shareholders? Should environmental clean-up and remediation take top priority? The BP oil spill presents important questions on shareholder primacy, corporate responsibility, and the role of the corporation in our society. I look forward to hearing your thoughts.

Parallels

There are several interesting parallels between the concerns and resolutions proffered to address the current Gulf oil spill and the recent financial crisis. Each of these crises has generated significant and, in certain instances, irreversible harms. Financial markets and environmental regulators are working diligently to develop and adopt effective prophylactic measures to prevent a repeat of either disaster.

Regulators, legislators, academics and pundits are now debating whether implementing ex ante rules that require market participants to contribute to a collective disaster relief fund may effectively address these concerns. Under the current financial reform bill passed by the House, ex ante pre-pay rules would require banks to pay into a $150 billion rainy-day reserve fund. The monies collected in the fund would be distributed to an ailing bank whose insolvency threatens to trigger a daisy-chain collapse of multiple systemically significant financial institutions. Pre-paying into a fund is an attractive proposal because it suggests that the need for public funding will not be necessary in the event of a future crisis. Some are skeptical and challenge the presumption that the reserve fund will be sufficient and ask whether developing a pre-pay system is even possible in light of the current market instability and lack of liquidity. As a result, the Senate version of the bill, supported by the White House and Wall Street firms, does not include a pre-payment program.

The use of a superfund is not unprecedented. Following the Exxon Valdez oil spill which involved the release of 250,000 barrels of oil into Alaska's Prince William Sound and $3.5 billion in cleanup costs, Congress adopted the 1990 Oil Pollution Act creating the Oil Spill Liability Trust Fund. In addition to arguments challenging their constitutionality, the Act and the trust fund have also faced practical limitations that leave many unsatisfied. Under the law, BP’s current exposure would be limited to clean up costs and a fine of $75 million. Although BP has waived the $75 million limitation, there are many questions about what BP will legally be required to pay to assist the many communities and businesses economically impacted by the recent oil spill. The long-term losses experienced by many who enjoy the Gulf area, like my family in Texas, may be genuinely immeasurable and will likely fail to be fully captured in any payout.

-- Kristin Johnson

SEC Charged Mickey Mouse Former Employee with Insider Trading

Poor Mickey. He must be appalled that confidential Walt Disney Company information was offered for sale to several investment firms including private equity firms in the U.S. and abroad. Bonnie Hoxie, an executive assistant to the Head of Corporate Communications at Disney, and Yonni Sebbag, Hoxie’s boyfriend, unfortunately offered to sell confidential information to an undercover FBI agent for $15,000. Hoxie and Sebbag were arrested in Los Angeles before they were able to actually sell the confidential Disney information including quarterly earnings, and purported “tips” on alleged efforts to sell the ABC television network to private equity firms. Both Hoxie and Sebbag were charged with one count of wire fraud and one count of conspiracy. The U.S. Securities and Exchange Commission filed civil charges against Hoxie and Sebbag. The complaint alleged that Hoxie and Sebbag sent anonymous letters to more than 20 U.S. and European hedge funds, offering pre-release of Disney second quarter 2010 results in exchange for a fee. The charges carry a maximum sentence of 25 years in prison and a fine of at least $250,000. The developing story is available here.

Lydie Nadia Cabrera Pierre-Louis

ClassCrits Progressive Rhythm

As reported on the Corporate Justice Blog earlier this week, the Rethinking Economics and the Law After the Great Recession Conference was held at the University of Buffalo Law School on Monday and Tuesday, May 17th and 18th, 2010. Conference Organizer Angela Harris had the following to say about the conference (as memorialized at the Salt Law Blog):

"The workshop was organized by the “class-crits,” a small group of American legal scholars (I count myself as one) who bring the insights of critical legal scholarship to the study of the interrelationships among market and state institutions. Sponsored by the Baldy Center for Law and Social Policy, an internationally recognized institute at the University at Buffalo that supports the interdisciplinary study of law and social institutions, this year’s class-crits meeting brought legal scholars together with “heterodox” economists. The results were inspiring, exciting — and subversive.

In a recent article, economist James K. Galbraith concludes: “It is . . . pointless to continue with conversations centered on conventional economics. The urgent need is instead to expand the academic space and the public visibility of ongoing work that is of actual value when faced with the many deep problems of economic life in our time.” Galbraith’s conclusion that conventional economics should be abandoned rests in large part on the extraordinary intellectual impoverishment of mainstream economics departments. These departments have largely jettisoned the teaching of history, politics, social theory, and culture in order to pursue what Paul Krugman, in a recent lament titled “How Did Economists Get It So Wrong?” calls their “desire for an all-encompassing, intellectually elegant approach that also [gives them] a chance to show off their mathematical prowess.” This blinkered approach to economics was enthusiastically adopted by the legal academy’s “law and economics” movement, which — thanks to lavish funding by the Olin Foundation and others — produced a generation of Smart White Guys wielding terms like “Pareto optimality” who were uninterested in history, culture, subordination, sociology, psychology, and anything having to do with “distribution.” . . .

For the class-crits, the 2008 crisis offered an opportunity to take Galbraith’s advice and abandon the crumbling edifice of neoclassical economics, along with the rickety shed in its back yard that is “law and economics.” “Rethinking Economics and Law After the Great Recession” invited heterodox economists to sit down with progressive law professors, and the result was a dramatically different conversation. To begin with, the group decided, economics is not “the science of the allocation of scarce resources.” It is the study of social provisioning. Economic activity, therefore, doesn’t take place only in formal markets, but also in families and informal arrangements. Economic activity can’t be made sense of without an understanding of organizations, culture, history, and the state. Our discussion of the financial crisis moved from TARP to massive mortgage fraud to the financial sector’s culture of entitlement to the history of racial discrimination in housing, to the global history of colonialism. And our discussion of the law encompassed a range of state projects, from the regulation of property and corporate personhood to the workings of the administrative state, the economic significance of mass incarceration, the law of the family, immigration law, and questions of access to justice."

To read the entire post by Professor Harris, go here.