Friday, January 30, 2009

Clothing the "Naked" Swap Market


The Wall Street Journal is reporting a bill circulating in Congress that seeks to ban "naked" credit-default swaps.

Credit-default swaps (CDSs) are, in the simplest of terms, insurance contracts that insure the purchaser against corporate debt default. CDSs are sold by hedge funds, investment banks, and some insurance companies (AIG, for example), and thanks to a lack of regulation, these CDS-selling entities are not required to maintain a minimum capital level to support large-scale corporate defaults.

The CDS purchaser may want a CDS because the purchaser owns bonds or other corporate debt insured by the CDS. However, a "naked" CDS is a CDS purchased by someone that does not own the debt insured by the CDS; such a purchaser wants the CDS for speculative purposes and stands to make a profit if the debt issuer defaults. Likening the purchase of naked CDSs to taking out a fire insurance policy on your neighbor's home, critics claim that naked CDSs create unnecessary systematic risk by inflating the damage caused by corporate debt default and want naked CDSs to be banned completely. Opponents of such a ban claim that removing speculators will dry up the CDS market's liquidity, effectively making non-naked CDSs too expensive to be used as default insurance. Other proposals for dealing with the CDS market include imposing minimum capital requirements on CDS dealers and creating a central CDS clearinghouse, both to limit the counterparty risk of the CDSs.
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No Surprises Here

The National Law Journal published an article earlier this week about the plight of 3Ls graduating into a contracted job market, where any expectations we might have had as 1Ls have been completely overturned. While the article doesn't necessarily shed any new light on the situation of upcoming graduates, it's still somewhat comforting to know that misery does have some company these days.

I can, however, think of one current job opening - I hear Blagojevich needs a criminal defense attorney.



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Tuesday, January 27, 2009

No Money for Illinois (Thanks Gov)

Dealbreaker provided a very interesting link yesterday to a portion of the latest Stimulus Bill:


None of the funds provided by this Act may be made available to the State of Illinois, or any agency of the State, unless (1) the use of such funds by the State is approved in legislation enacted by the State after the date of the enactment of this Act, or (2) Rod R. Blagojevich no longer holds the office of Governor of the State of Illinois.The preceding sentence shall not apply to any funds provided directly to a unit of local government (1) by a Federal department or agency, or (2) by an established formula from the State.

Looks like the Illinois Legislature are not the only ones that want him out!

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Shareholders are NOT The Answer!

Recently, Carl C. Icahn (chairman of a publicly traded diversified holding company) wrote an opinion piece for the Wall Street Journal suggesting some changes that he feels are necessary to help revive the private sector of the economy. While it is clear that regulation change is coming, it is unclear to what extent and where exactly the change will be felt – it may be changes to credit rating agency regulation, securities regulation, etc. Icahn calls for a change to corporate governance rules, allowing the shareholders more rights to make decisions within the corporation. His initial proposal calls for enhanced rights for shareholders to elect new boards, submit proposals, and provide input for issues such as executive compensation. Further, he calls for Congress to limit management’s ability to remove these rights from shareholders. Mr. Icahn is clearly pointing blame to directors and officers of corporation for excessive risk taking and poor judgment in running businesses into the ground. His proposal would tighten up oversight of the board’s performance and would, in theory, produce more effective boards.


However, Icahn fails to address some problems that his proposal would create. For instance, allowing shareholders enhanced rights to make business decisions removes the expertise from the decision making – shareholders do not run the day-to-day operations of a business because they likely do not have the expertise that the elected board and hired officers do have. While each shareholder may feel a greater sense of freedom and ability to affect the corporation which he or she owns, the aggregate of attempted action by many shareholders may add up to be a major waste of corporate resources. Shifting the power to the passive investor shareholder does not seem to be the proper solution to the problems faced by the private sector.

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