Latest Laissez Faire Market Collapse Belies Far Right Rhetoric re Fannie, Etc.

The graphs at left are the picture of a debt crisis in the so-called PIIGS (Portugal, Italy, Ireland, Greece, Spain) countries. As you can see the PIIGS are facing a huge increase in their funding costs and their budget deficits mean that they will either have to impose severe austerity or face default. This is the root of a brewing global financial crisis.

As I posted earlier this week we seem to be spinning into another risk aversion credit market collapse that is wrecking havoc on global financial markets. Essentially we seem headed for a Lehman moment but instead of subprime mortgages it involves European debt. I feel like I have seen this movie before and it does not end well.

The main plot is this: banks gorged on risky credits in search of yields above no-risk U.S. Treasury obligations; easy credit meant borrowers overextended themselves; the unregulated derivatives markets spread the risky credit throughout the entire global financial system; now creditors do not trust even creditworthy borrowers; the system is now poised for a deflationary shock; and credit spreads are exploding globally. Here is how legendary bond guru Mohamed El-Erian sees it playing out: "The Greek crisis has already morphed into a regional Eurozone shock. It now stands on the verge of morphing into a more global phenomenon." According to high-profile European bankers the European Central Bank needs to bailout the banking system over there or we face a freeze up that could be "worse" then Lehman. Noble laureate Joseph Stiglitz sees "the very survival of the Euro at stake." I personally do not how this ends or how long we get to the endgame. Events this weekend will play a huge role in market action next week. I fear Americans are largely oblivious to events over there, but that may change next week, if markets give the thumbs down to the latest ECB and Eurozone actions.

I do know this however: these transnational banks gorged on excessive sovereign debt all on their own. Like commercial real estate, there simply was zero argument that some vague government policy or law caused the banks to gorge on risk that led to millions in payout for CEOs and a crash of global capitalism. Fannie and Freddie bought no Greek debt. Yet, the unregulated global financial system and the very lightly regulated global banks took these risks on board anyhow. In the US our top ten banks threw $176 billion at PIIGS debt.

So let's stop with the delusional laissez faire rhetoric. These transnational banks took these risks because they wanted these risks. These ultra-sophisticated banks with armies of quants armed with PhD.s took these risks because they wanted fatter profits than prudent banking would yield. The CEOs of these massive banks took these risks because they got huge bonuses on the front end and golden parachute payouts on the back end when their firms failed. Fannie and Freddie played a bit role at best in this still unfurling mega-drama.

President Obama’s Speech Before the Business Council

President Obama made a speech before the Business Council last Tuesday, making his pitch for financial regulation reform. One of the President’s key points was the importance of building and maintaining a working partnership between business and government in order to stabilize the economy. “I believe the success of the American economy depends not on the efforts of government, but on the innovation and enterprise of American businesses. And it will be American businesses that will help us emerge from this period of economic crisis and economic turmoil.” In discussing government’s role in rebuilding our economy, the President made clear that he believes in free markets. The President spoke of the importance of “markets that are free and open to all who are willing to work hard”. But, he continued, “that doesn’t relieve government of its responsibility to help foster sustained economic growth and to ensure that our markets are functioning freely.”

President Obama spoke of the importance of governmental rulemaking for a well-functioning market. Rules that will help to prevent dishonest market participants from “gaming the system” are essential. But the President’s speech, and the discourse about financial reform in general, fail to emphasize a change in business culture that would make ethics central to any discussion about business and finance. In other words, elected officials, regulators and business leaders should focus on the fundamental principles of responsible corporate leadership – not just the rules. Individuals can always get around the rules. What we need is a change in the business climate itself.

Nigeria's New President

Early this morning, one of Africa’s most populous and wealthiest countries swore in a new president. Goodluck Jonathan, former Vice President of Nigeria, assumed the role of president upon the death of Umaru Yar’Adua. Former President Yar’Adua had long suffered a number of significant health issues including heart inflammation and kidney ailments. President Jonathan, in assuming the position of acting President, pledged to focus on good governance and electoral reform. The nation’s April 2011 elections will offer a chance to measure the success of President Jonathan’s efforts.

The new president will face a myriad of issues, including the challenge of maintaining peace and stability in the deep oil-rich pockets of the nation’s delta. Former President Yar’Adua was celebrated by many for bringing peace to the Niger Delta region. Rich in oil deposits, the Niger Delta region, has generated significant wealth for the country. With one of the most developed economies in Africa, Nigeria’s growth depends heavily on the export of oil; revenues from oil account for 80% of the country’s GDP and 90% of its total exports. Nigeria is the 12th largest producer of petroleum in the world. After struggling through losses last year related to the global financial crisis, a Nigerian central banker reports that the country’s economy is poised to grow 7% this year.

The resilience of a number of emerging market countries following the recession has ignited an interesting discussion regarding a shift in the global balance of economic power in the decades to come. According to a special report in this week’s Economist, four particular countries - Brazil, Russia, India and China- stand poised to set the agenda for economic reform. Hopefully, Nigeria will attain the good governance goals that the President Jonathan has set out and maintain peace in the Niger Delta region. President Jonathan’s given name suggests that fortune may already be on his side.

Not Quite Ready to Damn Derivatives

As a result of their role generating significant economic losses during the recent financial crisis, it is not surprising that there is a dearth of credit derivatives defenders. Few publicly disagree with demands for increased regulation of credit derivatives or dismiss as populism cries for increased transparency and oversight. Republicans, in a reversal of strategy, have hitched their efforts to thwart adoption of financial regulation to a “We-Want- Even-More-Regulation” battlewagon.

Interestingly, last week, a senior bank regulator and appointee of the Democratic administration expressed concerns that regulation as currently proposed threatens to drive use of derivatives into the shadows, an approach that may present more of a threat to future economic stability than structuring regulation in a manner that maintains a spotlight on the use of these instruments. In her letter to Senate Banking Committee chairman Christopher Dodd, D-Conn., and Agriculture Committee Chairwoman Blanche Lincoln, D-Ark., Sheila Bair urged caution in the Senate’s approach to regulating derivatives.

According to Ms. Bair, the chairwoman of the Federal Deposit Insurance Corp., Inc., legislators should tighten the reins on derivatives but avoid choking the industry. The current proposal for regulation of derivatives requires standardization of derivatives and compels exchange trading or trading these instruments through clearinghouses. By failing to include provisions for a broad enough range of alternatives or regulator flexibility in addressing customized derivatives products, Ms. Bair argued, “the underlying premise” of the proposed legislation suggests “that the best way to protect the deposit insurance fund is to push higher risk activities into the so-called shadow sector.” Ms. Bair argued against overly restrictive regulation on two grounds; first, derivatives offer an important risk management tool for banks and second, not all derivatives are created equal. After expressing “strong support for enhanced regulation of ‘over-the-counter’ (‘OTC’) derivatives and the provisions of the bill which would require centralized clearing and exchange trading of standardized products,” Ms. Bair explained that certain uses of OTC derivatives, such as bank’s use of derivatives for interest rate hedging, offer valuable tools for banks to manage risk in an environment where “uncertainty surround[s] future movements in interest rates” and failure to hedge may have detrimental effects on “unhedged banks.”

Is it that simple to distinguish among parties’ varied uses of derivatives? Distinguishing “good” and “bad” uses of these instruments may be more elusive than Ms. Bair suggests. The recent crisis illustrates that banks and bank holding companies should not be permitted to engage in activities that create substantial risks of solvency-threatening liquidity crises. The difficulty with Ms. Bair’s position and most other voices offering direction on how to regulate derivatives centers on the challenge of identifying “speculative trading.” Many point to naked credit default swaps as an example of the type of speculation that should be banned. The agreements are described as a mechanism for gambling. Is this characterization completely accurate? Are there any uses of credit default swaps or naked credit default swaps that offer strategic value beyond hedging against risk? Is risk-reduction the litmus test for determining the social value of investment products? If there is a distinction between hedging and speculation, can we articulately describe it? It seems we must agree on broader national questions about the social value of investing in order to reach acceptable answers to several of these questions.

Three Dead in Greece (Runaway Debt II)

Things in Greece turned deadly serious today with no end in sight, and your retirement funds suffered and will continue to suffer as a result. The essential problem revolves around too much debt and the fact that around the world governments basically used massive public debt to save the financial system from a massive private debt crisis. So, yesterday the global financial markets got hammered. Why?

First, look at Greece. Widespread riots and protests, fire bombings, destruction and now death. The problem is that the government agreed to deep spending cuts and tax increases as part of the Euro/IMF bailout package. But, the economy is already a mess. So the people edge towards open revolt. Trying to predict what happens next is an exercise in chaos theory. But, there is huge popular resistance to any austerity program and without such a program Greece will default on its sovereign debt. Interest rates on Greek debt soared to over 14 percent yesterday. Notably, Greece really has not yet imposed austerity measures but just talking about them is causing this reaction. So there is no easy way out here. The vote on the austerity measures is scheduled for later this week, so fasten your seat belts for at least a couple of days.

Second, should Greece default, there will be massive losses. Where these losses fall is a function of our magical derivatives markets, which still have no transparency and no regulation. As dre cummings points out such regulation may well have forestalled this mess in the first instance. But a bigger problems lurks behind the flight to safety of today. Because of our wonderful laissez faire approach to derivatives regulation (among other market fundamentalist catastrophes) there is literally no way to know where the losses will land. So where is the money flowing today? Back into the dollar and Treasuries, just like post-Lehman. The market speaks: there is simply no other sure shelter because of the lack of transparency in who is exposed to what.

Hopefully the Greeks implement austerity notwithstanding the riots. Hopefully the Germans approve their part of the bailout. Hopefully Spain, Portugal, Italy, and Ireland do not follow Greece over the brink. Hopefully the UK does not get caught in the vortex of this mega-storm. If so, we may be OK for a while.

Otherwise, there is a possibility this thing gets out of hand. That could cause a huge financial crisis like what occurred in late 2008. This possibility is impossible to quantify. The closest thing is the VIX index, which is soaring.

Worst Oil Spill in U.S. History Will Devastate the Ecosystem, Economy, and Culture

Two weeks ago a British Petroleum oil drilling rig operating in the Gulf of Mexico exploded, and the riser oil pipe which transported the oil from the sea floor to the surface collapsed, and began gushing oil in three separate rupture points. A video illustrating how the rupture occurred, and potential engineering solutions to stem the oil flow is available here. Two days prior to the explosion Halliburton (former VP Dick Cheney’s company) had successfully completed cementing the oil pipe rig to the sea floor and connecting the riser to the oil rig on the surface or so everyone thought. Some are beginning to blame not only BP but Halliburton as well for their negligence. As a result of the explosion and subsequent pipe rupture, approximately 200 gallons of oil is gushing out of the three rupture points into the Gulf, and the wind is quickly pushing the oil towards the Texas, Louisiana, Mississippi, Alabama and Florida coast lines.

The enormity of this oil disaster is difficult to comprehend. I am myself struggling to grasp all of the variables that are at play. My co-blogger, Joseph Grant wrote an excellent commentary on Saturday addressing the impact of the Gulf oil disaster on the current American energy policy to allow drilling in the Gulf of Mexico. I would like to modulate the focus of the discussion a few degrees, and discuss the oil spill and its devastating impact on the environment, economy and American culture.

Dr. Robert Thomas, professor and director of Loyola University’s Center for Environmental Communication in New Orleans, explains that the BP oil spill’s impact on the environment will be disastrous. According to Dr. Thomas, the coastal wetlands of Louisiana are the most productive ecosystem along the coast in our country. Forty percent of the fisheries of the continental United States are based in the Gulf of Mexico wetlands. Alaska has extremely productive fisheries, simply think Alaska crab legs and salmon. However, holding constant the richness of the Alaska fisheries, the Gulf of Mexico, in particular southern Louisiana has seven of the top ten ports for fisheries in the United States. Ninety percent of the species of commercially important fisheries in the Gulf use coastal wetlands as their nursery grounds, including shrimp, crabs, oysters. Louisiana is the “mecca” of fisheries in the continental United States. The impact on the Gulf ecosystem can be damaging. The reality is that fish can possibly swim away from the oil. So can whales and possibly dolphins. Hopefully, they will return in the near future but for oysters who grow on the reefs, and crabs and shrimps that lay their eggs in the wetlands, when the oil comes in on top of them it’s just going to be devastating. Sea birds such as pelicans and gulls will also be devastated. They could simply fly away and some will. But what of those that have built their nest and laid their eggs in low lying barrier islands, which are just barely above sea level, throughout the coast of Louisiana, Mississippi, Alabama and Florida, when the oil-enriched waters arrive. Like any parent, the adult birds will not leave their young, and the eggs and the baby birds will be completely covered by oil along with their parents who will try in vain to protect their young. None of them will survive.


Residents in coastal communities in Louisiana have begun reporting that the oil sheen has washed up on some parts of southern Louisiana. Local residents working alongside the U.S. Coast Guard have created more than 218,000 feet of boom (orange cylindrical devices designed to prevent the oil from reaching the coast line) has been placed throughout the Gulf, most of it off Louisiana's coast. People are beginning to question not only BP's slow response to the spill but also the Obama Administration’s response, which has been measured. Sally Brice-O'Hara, Coast Guard Rear Admiral, was questioned on Friday morning about whether the government has done enough to push BP to plug the underwater leak and protect the coast. Admiral Brice-O’Hara stated that the “federal response led by the Coast Guard has been rapid, sustained and has adapted as the threat grew since the drill rig exploded and BP has failed to stem the flow of oil into the Gulf… The Coast Guard has been closely monitoring efforts led by BP to contain and stop the oil spill and has filled in gaps where needed.” We may be witnessing the death of American seafood industry for the next few years, which is estimated to be approximately $2 billion per annum. We forget sometimes that every industry is comprised of not only the product or commodity being sold, but also the people within the industry. The seafood industry like many industries is people intensive, it is viewed by many as an inter-generational industry. For fourth-generation oyster farmer John Tesvich, looking out to sea off the coast of Louisiana, the future is daunting. For Tesvich, the future looks very bleak. "It's just like what we saw with Hurricane Katrina... At first, it was just another storm, just like this was just another oil spill. But by the time they realize how bad it really is, it's too late." A video illustrating the impact, of the reality of the BP oil spill on people’s livelihood and future is available here.


I am a little baffled by BP‘s and Halliburton’s inability to control the oil that is spewing out of the riser pipe. I understand the basic argument that a pipe ruptured. I also appreciate that the engineers are working with sensitive robotic equipment in attempting to cap the leaks, and that they are working under extreme oceanic pressure in pitch blackness. But why is it taking soooo long to fix? I am most astonished by BP’s and Halliburton’s apparent lack of preparedness for the magnitude of this catastrophe. Where is BP’s and Halliburton’s risk analysis and corresponding contingency plan to contain the damage? An oil pipe rupturing is not a “force majeure” or an “act of God.” This was a completely foreseeable catastrophic “worst case scenario.” BP and Halliburton should have been better prepared to handle this catastrophe. In 1989 the Exxon Valdez oil spill caused billions of dollars of damage to the Alaska coast line. The Alaskan ecosystem is still dealing with the damage to this day. Have we learned nothing from Exxon Valdez?


Risk and actuarial experts will argue that the extent of the damage caused by Exxon Valdez and the current Gulf oil spill were not properly calculated because they are the "worst case scenarios" and the "probability" of a disaster of that magnitude occurring fall into the category of “wildest dreams.” Therefore, there is no contingency plan for a disaster of this magnitude. But in the last few years one thing has become certain, when it comes to energy exploration and transportation worst case scenarios do happen—-coal mines collapse, “freak” waves destroy oil rigs, oil ships run aground, oil pipes rupture, oil rigs do explode, and people really do die. A video illustrating the harsh reality of when "wildest dreams" come true is available here. The time has arrived when energy companies must be held accountable not only for clean-up costs but also for failing to be prepared for foreseeable "worst case scenarios" that cause severe damage, destroy lives, and threaten the very survival of the ecosystem, economy and culture. In the words of Hugo Voltaire, “greater than the might of a thousand armies is an idea whose time has come.”

Lydie Nadia Cabrera Pierre-Louis

When Drill Baby Drill Becomes Spill Baby Spill: The BP Louisiana Oil Rig Tragedy

Drill Baby Drill!!! During the 2008 Presidential Election Campaign this was the mantra chanted at Republican rally after Republican rally. Crowd-after-crowd in city-after-city was stoked up by politicians like John McCain and Sarah Palin in passionate calls for more off-shore oil drilling. In 2008, American consumers were facing pain at the gas pump—gasoline was selling for over $3.00 per gallon in many parts of the country. Politicians, like McCain and Palin, latched on to a rather mindless and short-term solution to our nation’s oil problem. Why don’t we open our shorelines up for off-shore drilling? Won’t we add millions of barrels of oil to our supply and thereby decrease our dependence on foreign oil? The world will be wonderful and gas prices will go down. This was the rhetoric pushed on us by a number of our politicians at the time. Unfortunately, in this country our political leaders often reach for short-term solutions rather than long-term solutions—I guess it is the political climate—in this country no matter the party (Democrat or Republican) it has become increasingly hard to govern a partisan, mistrustful, and restless populace. How hard is it to govern? Ask President Obama.

Several weeks ago I was struck by a political announcement—President Obama announced plans for his Administration to move forward with plans to increase off-shore oil drilling. During the 2008 Presidential Campaign, Candidate Obama opposed increased off-shore oil drilling. Flash forward to 2010, President Obama reversed course and announced plans to increase off-shore oil drilling. Drill Baby Drill became the official policy of the Obama Administration. I can only speculate, but it appears that President Obama was sending an olive policy branch designed to placate Republicans, by announcing his newfound support for off-shore oil drilling.

The Louisiana BP oil rig tragedy this past week has forced us to examine and deliberate on the efficacy of off-shore oil drilling. It appears that this tragedy could eclipse the 1989 Exxon Valdez oil spill in Alaska. Coastlines from Texas, Louisiana, Mississippi, and Alabama could be affected. Already, these are fragile coastlines and ecosystems. The first oily birds have started to reach the beaches. This is a tragedy beyond belief. It will take years for this region of the country to recover.

Are we really willing to bear these sorts of tragedies for a meager amount of more oil? How would you like to see the beaches of Maryland, New Jersey, and Delaware choked with oil? This is something no right-minded person would want to see. This should serve as a wake-up call for our nation’s leaders to develop a comprehensive alternative energy program. We can’t keep drilling for oil. We literally are destroying our planet and environment. Selfishly we are destroying the future of our children and grandchildren.

How does all of this relate to corporate justice? Keep reading and I’ll explain to you how this relates to corporate justice. Well, this week I was driving (yeah, burning oil) and listening to a right-wing radio host blast President Obama’s response to the BP oil spell. The talk show host blasted what he dubbed as Department of the Interior SWAT teams being deployed to inspect off-shore oil rigs. The talk show host characterized the Obama Administration’s response as a move to a police state, where the government would conduct warrantless searches in violation of the Fourth Amendment of the Constitution. This radio host went on to say that President Obama was planning to nationalize the American oil industry. The host compared President Obama to Hugo Chavez. What was this guy smoking or drinking? Remind me not to drink from his cup. This is nonsense!

BP realized early on that its resources were inadequate to respond to an oil spill of this magnitude. BP specifically asked for government help. Apparently, the NAVY has at its disposal remotely-operated dive vessels and robots that can assist in capping the leaky oil rig. The NAVY would lend these vessels to civilian authorities to assist in their mitigation efforts.

Some schools of political thought preach a gospel that the government is always an impediment and should step aside. The gospel preaches that corporations and free-markets are be-all-to-end-all of the world. Again, government has no role in our lives. This harkens back to the right-wing radio talk show host that I referenced a moment ago. Instead of truly talking about the role that corporations and government can and should play vis-à-vis one another, this radio talk show host was distracting his targeted listeners from the real trouble. Yes, corporations are vast and control enormous resources—still there are times when they are playing outside of their league. This time around, BP is in the midst of a tragedy of nation proportions. Even with billions of dollars, BP can’t buy its way out this one. Undoubtedly, BP needs the government’s help. More importantly, the people of the Gulf of Mexico region need their government’s help in this time of need and tragedy. This tragedy reinforces in our minds that the path of corporations and governments sometimes collide and intersect.

Where are the people who were yelling Drill Baby Drill? What happens when the mantra gets reversed to Spill Baby Spill? I’m curios to hear your thoughts on the BP oil rig tragedy. What role and culpability do corporations like BP have when things go tragically bad? What role does or should the government play in this these types of tragedies or disasters? I want to hear from you.

Greenspan Right 70% of the Time?

Last week Wednesday, former Fed chair Alan Greenspan testified in front of the Financial Crisis Inquiry Commission. The most notable quote of Greenspan’s testimony was when he claimed that during his tenure as Fed Chief he was “right 70% of the time,” meaning of course that he was wrong 30% of the time and admitted to significant errors during his tenure. Once considered the Oracle of the financial markets, Greenspan now comes across as a pilot who crashed a plane but now seeks rhythm because he flew the plane well while it was in the air.

One main criticism of Greenspan is that as fed chair he failed to see or protect against the asset bubble in the housing market the bursting of which contributed to the failure of mortgage backed securities that were a primary cause of the financial crisis. Perhaps out of contrition, in his testimony Greenspan moved away from his laissez faire philosophy and promoted regulation of “too big to fail banks” because “the productive employment of the nation’s scarce saving is being threatened by financial firms at the edge of failure, supported with taxpayer funds, designated as systemically important institutions.” Nonetheless, to have Greenspan, who along with Robert Rubin was one of the foremost proponents of deregulation in the late 1990s, recognize that reform is needed is further evidence of the necessity for substantive financial reform.

Further, as predicted, the Senate began debate on financial reform Thursday after several filibuster hiccups on Monday and Tuesday. With Senator Chris Dodd promising a bipartisan bill, it remains to be seen whether new financial sector reform will have any serious bite.

Walmart’s Diversity Doublespeak

In her well-done post last Tuesday, Lydie Pierre-Louis revealed her surprise that the class action brought by women employees against Walmart alleging sex discrimination had not been settled. She noted that Walmart had been recognized for its efforts to protect the environment and wondered about the incongruity of Walmart’s good citizenship in this regard at the same time it denied accusations about pervasive mistreatment from over a million female employees.

Even more incongruous is Wal-Mart’s articulated position on diversity. The company says all the right things about women and “minority” employees and suppliers. Its supplier diversity program seeks to ensure that the company does business with women and people of color. Wal-Mart even requires diversity at the law firms it retains.

Walmart’s public discourse about diversity is similar to the statements many other companies make. “Diversity is a way of life at Walmart. And our commitment to diversity is not just something we talk about, it’s who we are.” But it’s hard to reconcile this kind of diversity cheerleading with the company’s stubborn denial of the allegations of millions of women about the company’s discrimination in hiring, promotion and pay. It seems to me that a true commitment to diversity would require Walmart to avoid blanket denials about anything amiss with its women employees – now and in the past. A real commitment to diversity would inspire Walmart’s managers to conduct a serious investigation into the accusations, make changes where appropriate, and settle the class action.

Walmart’s denials do not ring true because sexism, sexual harassment and discrimination are still prevalent in U.S. workplaces. Discrimination within a U.S. company that employees millions is inevitable. And, the disparities between the pay and promotion rates of male and female employees at Walmart would inspire a company that is truly interested in diversity to undertake a serious investigation of the plaintiffs’ allegations.

Walmart’s “diversity-is-a-way-of-life” rhetoric is what I call “diversity doublespeak”. I wrote about this phenomenon in an article entitled “’We Are An Equal Opportunity Employer’: Diversity Doublespeak”. Diversity doublespeak allows companies to avoid responsibility for enduring discrimination within a firm. Too often there is a gaping disparity between what companies say – “diversity is a way of life” – and what they do.

Ninth Circuit Certifies Wal-Mart Gender Discrimination Class-Action Law Suit

In a divided 6 to 5 ruling, the Ninth Circuit Court of Appeals has certified a gender discrimination class-action lawsuit against Wal-Mart to proceed to trial. Wal-Mart is the world’s largest retailer. The gender discrimination lawsuit includes over 1 million women, and is the biggest employment discrimination case in U.S. history. Brad Seligman, a lawyer for the plaintiffs and executive director of the Impact Fund, a public-interest litigation organization that funds complex litigation, stated that “Wal-Mart tries to project an improved image as a good corporate citizen. No amount of P.R. is going to work until it addresses the claims of its female employees.”




The class-action lawsuit was originally filed against Wal-Mart in June 2001 by six female Wal-Mart employees who had worked in 13 Wal-Mart stores. The lawsuit alleged that Wal-Mart engaged in a pattern and practice of discriminating against women in promotions, pay, training and job assignments. Since the filing of the lawsuit, Wal-Mart has fiercely defended itself and its outside counsel, Theodore Boutrous, a partner Gibson Dunn & Crutcher LLP, has successfully managed to delay the case for nine long years including obtaining a stay of discovery during the pendency of several appeals. It is not surprising that Wal-Mart's general counsel, Jeff Gearhart, stated that "…Wal-Mart is considering options, including seeking review from the Supreme Court... We do not believe the claims alleged by the six individuals who brought this suit are representative of the experiences of our female associates." Appeals have delayed the lawsuit from moving to trial thus far, Wal-Mart has nothing to lose by appealing the decision to the Supreme Court, other than time.



Many experts believe the court’s class certification ruling provides a major incentive for the parties to reach a settlement before the case goes to trial, because juries are so unpredictable—sometimes awarding plaintiffs big sums and sometimes awarding the plaintiffs nothing. If the case does proceed to trial, approximately 1.4 million female plaintiffs could be awarded billions in actual damages and an even more substantial amount in punitive damages. The Ninth Circuit left the issue of punitive damages to the trial judge to decide whether the plaintiffs can seek punitive damages on class-wide basis or whether they must they pursue punitive damages individually. Seligman stated that he would be "happy to talk settlement." However, Boutrous believes that [Wal-Mart] is focused on a Supreme Court appeal rather than on a settlement. Boutrous stated that "[W]e feel the majority's ruling conflicts with not only Supreme Court precedent, but the law of several other circuits…talks of settlement were premature."




This is all very disturbing. There has been such little media coverage regarding the pending gender discrimination lawsuit that most people, myself included, had forgotten about it. I gather we all assumed that the case had been dismissed or quietly settled. And, Wal-Mart had done such an extraordinary public relations effort of profiling itself as an environmental sustainability superstar over the past six years that our collective focus was misdirected. Professor Jared Diamond’s op-ed piece in the New York Times last December applauded Wal-Mart’s sustainability programs include using renewable energy to power its stores and cleaner transportation to drive its trucking fleet. The new sustainability programs were going to save Wal-Mart’s millions in operating expenses which would have resulted in major savings, that Wal-Mart had announced that it would to pass on to its customers. We were all lovin’ Wal-Mart. However, it makes me wonder whether Wal-Mart’s environmental sustainability efforts were simply smoke and mirrors to create goodwill, and a positive public image to defray attention from Wal-Mart’s mistreatment of its women employees. Perhaps Wal-Mart is committed to environmental sustainability, I certainly hope so, but it all feels pre-calculated and rather icky in light of the gender discrimination lawsuit. As a periodic Wal-Mart customer, is it too much to ask that the world’s largest retailer should help save the environment, and treat its women employees decently? We should demand no less.

Reaching the Gatekeepers – Do We Have to Abandon the Issuer Pay Model for Credit Rating Agencies?

Last Friday, Carl Levin, chair of the Senate Permanent Subcommittee On Investigations rang the alarm. Congress has aimed a spotlight on critical issues such as moral hazard engendered by a “too big to fail policy.” The ability of large financial institutions to employ products or strategies that recklessly or intentionally create excessive risk is a national and arguably global concern. Senator Levin warned, however, that effective reform of financial markets will also require addressing the role of secondary actors, like credit rating agencies. (See here.)

Between 2002 and 2007, each of the three largest credit rating agencies earned more than $6 billion a year, double their annual revenues for years past. (See here.) The increased revenues came largely from rating complex credit derivative instruments. While testimony continues to emerge from various legislative committees, few contest the need to address the central and critical role that credit rating agencies played in the most recent financial crisis. The creation of collateralized debt obligation (CDO) introduced a nascent industry centered on pooling and packaging home mortgage debt. The CDOs offered rights to receive periodic payments from the cash flows associated with specified bundles of home mortgages. Each CDO received a rating from two nationally recognized credit rating agencies. Investors viewed credit rating agencies as gatekeepers who issued independent, fair and accurate assessments of the value of these instruments. Last Friday’s hearing charged credit rating agencies with recklessly assigning ratings. Some have alleged collaboration with the banks that packaged and sold the bonds.

The current financial reform bills in the House and the Senate do address some of these concerns – requiring credit rating agencies to register with the SEC and to offer greater transparency regarding their rating methodologies. There is also a call to adopt an express private right of action to allow investors to sue credit rating agencies – a path that had been closed by judicial decisions protecting credit ratings under the First Amendment.

Ultimately, however, it seems that the stickiest issue underlying the role of the credit rating agencies in the crisis may be the conflict of interest inherent in the issuer pay model. Bond issuers pay credit rating agencies for the ratings issued on the bonds that the issuers hope to distribute. When dissatisfied with the ratings, issuers may shop for a different opinion.

Failing to address the conflict of interest created by the issuer pay model creates an opportunity for continued market manipulation. Arguing that we cannot adopt legislation unless we can contemporaneously fix every open issue may undermine reform because legislators lack the crystal ball required to predict the antecedents of all future crises. Reform should, however, address identified and correctable issues from a comprehensive perspective, or else we will find ourselves reacting to the next crisis or running to shove our fingers and toes into each new hole in the buckling dam of financial markets regulation.

Wrestling with the gods of Risk – Why Do We Keep Coming up Short?

Many thanks to dré cummings and company for inviting me to guest blog with Corporate Justice. I am delighted to discover a forum like Corporate Justice. During my years as a practicing lawyer in New York, I had the opportunity to support clients who engaged in public and private, domestic and international business transactions including securities offerings, syndicated credit facilities and acquisitions and dispositions of businesses. I had hoped and am enthusiastic to embark upon the marriage of that experience with my dream job – law teaching (hang in there, for those planning to go onto the teaching job market next fall).

My current research focuses on a variety of aspects of financial markets regulation. I teach corporations, securities regulations and a seminar exploring the intersection of federal law and corporate governance. I recently posted to SSRN an article exploring derivative securities and hope to share and receive commentary on certain issues raised in the article.

Risk management has presented itself as one of the most interesting topics underlying my current research. The discussion of risk management is rich and complex. For over a decade, financial institutions and hedge funds have challenged regulation of exotic financial investment products like credit derivatives because these instruments, financial intermediaries argue, offer a valuable risk management tool. Even if instruments like credit default swaps assist some financial services firms by allowing them to hedge against risk, as the recent crisis demonstrates, these investment products engender grave concerns.

In my forthcoming posts, I would like to explore these and other concerns such as the pending legislation in Congress designed to address the recent financial crisis, the SEC’s allegations against Goldman Sachs and Goldman’s role in the use of derivatives to assist Greece in doctoring its national debt levels to facilitate the country’s acceptance into the Eurozone. Hopefully, each will offer an opportunity to explore noteworthy normative issues and cultural assumptions about risk management, financial markets and financial market participants’ innovative creation of products and investment strategies designed to defy the odds of risk.

SEC Doing What?

The Securities and Exchange Commission has had a rough decade. Once viewed as the brightest star in the U.S. government agency constellation, the SEC has been its own worst enemy as news keeps spilling out that causes pause. The luster has certainly dimmed. Against the backdrop of egregious misses on Bernie Madoff and Allen Stanford, enormous ponzi schemers, news yesterday indicates that SEC employees were "distracted" at work in recent years. Apparently, viewing pornography while on the clock and using government computer equipment to do so is a routine practice by some at the SEC. The Agency is tasked with protecting investors and ensuring the integrity of the U.S. capital markets.

How surfing porn fits into these objectives is difficult to imagine.

Potential Senate Debate on Financial Reform

As Cheryl Wade noted yesterday, President Obama delivered his financial regulation reform speech near Wall Street touting a bill that just one week ago appeared stalled. The bill appears poised to move ahead on Monday as it was filed for cloture to begin debate on Capitol Hill. Just seven days ago, 41 Republican Senators sent a letter to Democratic Majority Leader Harry Reid promising to filibuster the proposed financial regulation. Today, many see financial reform as inevitable and happening quickly. The reason? External political pressure. The primary argument forwarded by the Republican Senators was that passing the bill would lead to “perpetual bailouts.” This particular talking point, purportedly taken explicitly from a “Words that Work” memo by Republican consultant Frank Luntz written before Senate financial reform was proposed, was too transparent and ridiculed throughout the media. Still, the cloture vote is a political risk as Senator Reid appears to be attempting to call the bluff of the 41 Senators who signed the filibuster letter.

However, it appears that members of Congress are willing to work together towards a deal. Senator Blanche Lincoln, a conservative Democrat introduced tough derivative reform language. Republican Senator Bob Corker has signaled his willingness to deal and has said that he expects financial reform to receive 70 votes, rhetoric that is far more positive toward new regulation than that in the past. Senator Olympia Snowe, one of the few Republicans to vote for President Obama’s stimulus bill, has signaled that she would be willing to be the sole Republican to break a filibuster in favor of reform. The real reason behind this sudden change? Most likely the realization that standing for reform is more politically favorable than standing with Wall Street and its lobbyists.

What’s Missing From Financial Reform: Compliance, Ethics, Due Diligence

Earlier today, President Obama made a much-anticipated speech about reforming financial regulation. Financial reform is not a new item on the President’s agenda. He has advocated for this reform for about two years. And, as we all know, the recent calls for reform were ignited by the 2008/2009 economic meltdown that put our nation into a deep recession. The reform the President called for today responds to some of what is wrong with corporate governance in general, and Wall Street in particular.

But we’ve been through this before – recently. Remember the Sarbanes-Oxley Act? After a string of corporate bankruptcies and governance failures at companies like Enron, WorldCom, Adelphia, Tyco in 2001 and 2002, Congress enacted Sarbanes-Oxley in an attempt to address the managerial misconduct and accounting fraud that plagued these companies. Legislators, regulators, politicians, academics, lawyers and members of the business community argued about whether the Act was necessary, and whether it would prevent future wrongdoing.

The Sarbanes-Oxley Act attempted to close several troubling gaps in corporate governance and compliance, but legislation and regulatory reform cannot address the root causes of what went wrong at Enron at the beginning of the last decade. Legislation and regulatory reform cannot deal with what went wrong at the financial institutions and car manufacturers that were bailed out by the American taxpayers. Legislative and regulatory reform cannot prevent excessive risk taking and poor corporate governance.

Policymakers and reformers must initiate a discussion among business leaders about corporate culture itself. The discussion should include broad concepts relating to compliance, ethics, due diligence and fiduciary duty. For example, public companies should establish corporate cultures that take compliance and ethics programs seriously. Compliance and ethics officers should report directly to corporate boards in order to avoid the marginalization that frequently occurs with respect to this work. Another example - when mortgages are pooled, securitized and sold to investors, the financial institutions involved in the process must perform due diligence in order to understand what they have purchased.

Some say that the details of the reform that President Obama seeks fail to address the problems that led to the economic downturn. We, however, must not get mired in the details. Business leaders must go back to the basics of good corporate governance. And, as a nation, we must expect more from business leaders.