Tuesday, March 31, 2009

Government to Back Auto Warranties

It's a vicious cycle: US automakers (GM and Chrysler in particular) must drastically increase sales to have any shot at avoiding bankruptcy, but most Americans will not buy cars from a soon-to-be-bankrupt manufacturer. So, starting Monday, consumers who buy cars from GM or Chrysler will have their manufacturer warranties guaranteed by the Obama Administration. However, will government-backed warranties save these US automakers?

As a part of this Warranty Commitment Program, a portion of TARP funds will be used to back the warranties of any US automaker that elects to participate. Although Ford is not expected to participate, GM and Chrysler will surely welcome this program in an effort to boost consumer confidence. Still, I can't imagine that the effect of the Warranty Commitment Program will be enough to save GM and Chrysler from falling into bankruptcy. Indeed, even this warranty assurance will not dissolve the cloud of negative perception that currently surrounds these failing automakers.
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Google to Start Venture Capital Fund

Google officially announced yesterday the creation of Google Ventures, a $100MM venture capital arm of the company. Unlike VC funds at other companies like Cisco and Intel, the fund will not limit investments to startups that are related to Google's business. The Google Ventures website explains that the fund's purpose is not to foster companies for later acquisition or to push Google products; rather, it appears that Google simply believes that it can earn a healthy return from the fund because Google's in-house personnel and resources put the company in position to effectively evaluate and grow new companies. Is this deviation from Google's normal line of business just another example of the company's innovative mindset or could the company be starting to lose sight of who it is? Read More......

Monday, March 30, 2009

Revamping the Regulations

Treasury Secretary Timothy Geithner finally opened the can of worms last week, proposing a far-reaching plan to reform the financial system. He said the system had failed “in fundamental ways” and would require comprehensive overhaul. “Not modest repairs at the margin,” he told Congress, “but new rules of the game.” Geithner's audience, the House Financial Services Committee, for once seemed to be satisfied with his presentation, which included regulating hedge funds and giving the government the power to seize and dismantle companies deemed a threat to the economy.

The key measures of Geithner's proposal include:

  • Creating a new "sytemic risk regulator" that would have the authority to scrutinize and second-guess the operations of bank holding companies like JPMorgan Chase, insurance conglomerate American International Group and other institutions that are too big to fail.
  • Establishing a mechanism to seize and dismantle large institutions whose collapse or bankruptcy might threaten the nation's financial stability.
  • Passing tougher requirements for the amount of money and assets that financial institutions need to have on hand so they can withstand economic troubles.
  • Requiring hedge funds, private-equity firms and other private investment funds to register with the Securities and Exchange Commission and tell it about their risk-management practices.
  • Setting up a new, comprehensive framework of regulation of derivatives, including a central clearinghouse for trades in that market.
  • Developing stronger requirements for money market funds so increased withdrawals won't threaten the broader financial system.
Many of these proposals should generate a big welcoming, addressing dangers that clearly could have been addressed with simple regulatory reform. In the months ahead, Geithner said he will unveil more detailed proposals.

Nonetheless, a New York Times editorial posted today talk about the big underlying issues that Congress and the administration need to keep in mind. For instance:
  1. Is too big too fail actually exist? Such firms, like A.I.G., have proved dangerous mainly because of their involvement in a web of often conflicting financial practice and products. Geithner has called for a single regulator to police the most powerful institutions and presumably intervene in order to seize and restructure if failure seemed imminent. But, at what point should a firm ever even come close to become "too big" -- i.e. too diverse, too interconnected -- too fail?
  2. What are we trying to fix, anyway? Does anyone understand, with specificity, what brought on the financial meltdown? Can anyone actually sort out how much of the crisis is due to regulatory failure, how much to recklessness and greed, or how much to fraud and manipulation? Without the answers, the reform effort will be at best, hit or miss.
  3. Who is to carry out the reforms? For the last 30 years, there has been a serious political movement against regulation and for deregulation. In the last 10 years alone, opponents of financial regulation (e.g. Alan Greenspan) have been especially succesful in dismantling our financial regulatory scheme-- letting the market forces run free. As a result, the very agencies that were formed to protect our interests struck out -- big time. So if there is going to actually be meaningful regulatory reform, the rules will only be the first step.
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Friday, March 27, 2009

Thanks a Lot, Mr. Greenspan

The Wall Street Journal Opinion section devoted a full page to articles arguing for and against the idea that Alan Greenspan's Fed played a major role in causing the housing bubble by keeping interest rates too low. Only one article appears to back Greenspan's claim that interest rates were low thanks to increased consumer saving; the other articles all fault the Fed, and one even seems to insinuate that the Fed should be replaced by a return to the gold standard. Read More......

Thursday, March 26, 2009

Madoff Provides Big Payout in Ponzi Scheme....er, Lottery

A lighter post, but this was too good to not share with you all. A New York man has won $1,500 by playing the last three digits of Bernard Madoff's prison number in the New York lottery. According to the New York Daily news, the man saw the number on the front page of the paper where it was published along with Madoff's mug shot. Says the New York Daily Mail, "The $1,500 prize is a 16,000% return on his $9 investment - far more than even Madoff promised his bilked investors." Read More......

SEC Update

SEC Chairwoman Mary Schapiro spoke to the Senate Banking Committee on Thursday, and here are some of the things she talked about:

Up-Tick Rule

The SEC will consider reinstating the rule or "something much like it." The rule required short sellers to trade only when the stock increased in value. Many believe that without this rule short sellers can manipulate the share value by putting downward pressure on it.

Corporate Governace

The SEC is working t provide "meaningful opportunities for a company's owners to nominate its directors." Perhaps they could move to an online approach. Individual investors may be more inclined to particpate, however it could open the door to security (in the safety context; not the '33 Act context) issues.

Regulatory Authority

Mary Schapiro talked about creating a systemic risk regulator that would "focus on investor protection." She also talked about regulating CDOs and municipal securities. My worry about regulating CDOs though is that doing so will create a false sense of security. Creative investors and bankers will find a way around regulation. Finally, the Chairwoman talked about merging investment adviser and broker-dealer regulatory schemes in order to prevent fraudsters like Bernie Madoff.

Money Market Mutual Funds

Lastly, Schapiro talked about maintaining credit and liquidity by addressing mutual funds. She wants to avoid funds "breaking the buck" which happened last Fall. That incident is often cited as "one of the closest points to a complete freeze in the credit markets that the U.S. economy has experienced throughout this entire crisis."

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Wednesday, March 25, 2009

Despite Hard Times, Millions Used for New Florida Baseball Stadium

Above The Law recently reported on the progress of the new Florida Marlins publicly-financed baseball stadium.

What's interesting is that it finally seems as though the public has reached a tipping point in terms of what it thinks to be a reasonable public expenditure. It used to be common for taxpayers to shell out millions for their beloved home sports teams to build stadiums and new practice facilities. But now, this spending is just deemed irresponsible and characterized as all that is wrong with the relationship between professional sports and the American city. This new Marlins stadium will be built but not without major opposition from those who inadvertently paid for it.
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Some Wednesday Links

Here are a few financial market news links. Hopefully you are as crazy as me and find them entertaining:
- AIG Executive's letter of resignation to CEO Edward Liddy
- Is the repeal of Glass-Steagal to blame for the crisis?
- What exactly is liquidity, and what is the Treasury going to do to bring it back?
- Outlining the potential struture of a new Systemic Risk Regulator Read More......

Advice for Law Students, courtesy of the Conglomerate

Some sound advice for law students about job-searching in tough economic times - from the Conglomerate Blog.

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Monday, March 23, 2009

Treasury Announces Public-Private Investment Funds

As I discussed as a possibility in a previous post, the Treasury has officially announced its plan to create public-private investment funds (PPIFs) for the purchase of toxic bank assets. The plan calls for five funds with the possibility of more based on the quality of the applications received by the Treasury for the fund manager positions. Details of the plan include private control over fund asset management with FDIC oversight, FDIC guarantees on qualified assets purchased by the PPIFs, a 6-1 leverage limit, and a 50-50 split of private and public fund equity capital. Notably the Treasury has not provided any indication of how the private fund managers will be compensated. Apparently the market is satisfied with the level of detail provided by the Treasury this time around as the Dow is currently up over 250 points. See this link for Treasury Secretary Geithner's piece about the plan in the Wall Street Journal.

[UPDATE] The Dow has closed with a gain just shy of 500 points. Read More......

Wednesday, March 18, 2009

Re: On Bonuses at AIG

I just wanted to respond to Anne's recent CLS Blog posting and address the question that the Obama administration seeks to resolve: how can we get the $165 billion in bonus payouts back from AIG employees?

Taxpayers are thoroughly offended that AIG has recently distributed millions in bonus money to nearly 400 of its employees. Indeed, these employees contributed to the financial disaster that plagues AIG, which has already received $170 billion in taxpayer bailout money. So, can we get this money back, or is "a deal a deal?"

Well, some suggest that the answer lies in basic legal principles. And in response to Anne's call to 1Ls, I think I will whip out my contracts outline from last semester. Ok, so I threw that out. But, if my memory/Wikipedia serves me correctly, it seems that the impracticability doctrine - amongst other fine doctrines - could allow for AIG to rescind these employee-bonuses contracts.

Here, the nonoccurrence of AIG's financial insolvency - which would necessitate an unprecedented taxpayer takeover - seems like a basic assumption to the contract. And I suppose that it is impractical for any broke company to pay out millions of dollars in bonuses.

Therefore, it could ultimately come down to who ought to bear the risk of this occurrence. Arguably, the AIG bonus recepients - who worked within the company's financial products unit - were in the best position to avoid the problems that resulted from poor investments and risky trading positions. So, is "a deal a deal?" Probably not.
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On Bonuses at AIG

Great op-ed in yesterday's NY Times about AIG's contractual obligations to their employees to pay out bonuses. The author brings up some really basic tenets of contract law that both the government and AIG might be able to use to avoid payouts and potential liability. 1Ls, this is your territory.
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Tuesday, March 17, 2009

We're on Spring Break

We will be back next week. Read More......

Thursday, March 12, 2009

Madoff Behind Bars

"I always knew this day would come." CnnMoney.com reports Bernie Madoff as saying in front of U.S. District Judge Denny Chin. Madoff was in court today to plead guilty to criminal charges related to his Ponzi scheme. Judge Chin remanded him to jail, and set his sentencing hearing for June 16. Madoff faces up to 150 years in prison.
The article reports that some investors believe that Madoff was not the only one involved in the scheme though. They think his family was involved as well. Could Madoff have done it alone? I would like to hear your thoughts on whether or not he could have done it by himself. Read More......

Court Grants Cert in Jones et al. v. Harris Associates, L.P.

This week the Supreme Court granted certiorari in Jones, et al. v. Harris Associates, L.P. In deciding the case (which concerns whether mutual fund shareholders can sue their financial advisers for charging excessive fees which made their losses worse) the Court will tackle competing opinions from Judge Easterbrook and Judge Posner on law and economics.

Chicago-Kent's own Professor William Birdthistle, who served as counsel of record for and authored a brief of amici curiae with several other law professors weighs in through a series of posts over at The Conglomerate. Professor Birdthistle offers insight on the case, and the ideologies of both Judges. His opinions, and others, after the jump.

Professor William Birdthistle:
Will the Supreme Court Save Our Savings?
Chief Judge Easterbrook and Classical Law & Economics
Judge Posner and Behavioral Law & Economics

Professor Birdthistle has more in his series of posts, so stay tuned at The Conglomerate.

You also should check out:
Floyd Norris at the New York Times
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Wednesday, March 11, 2009

Racing Star Uses Foreign Shell Corporations to Hide Taxable Income

Sports Illustrated recently reported on Indy Racing star Helio Castroneves's tax evasion case. The IRS and the U.S. Department of Treasury claim that Castroneves set up foreign shell corporations ran by his family to specifically hide taxable income.

The Government claims that Castroneves hid about $480,000 in taxable income in a Panamanian corporation called Seven Promotions and roughly $5 million in a shell Dutch corporation with the intent to eventually move from the United States to tax-haven countries like Andorra or Monaco with the money.

While Castroneves's celebrity reputation would normally help him in front of a jury, we need not look too far in the past to see that celebrities are not necessarily immune from serious penalties for tax violations - as evidenced by the recent three year prison sentence handed down to Wesley Snipes for failing to file tax returns.
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Congress Has Some Interesting Plans for Financial Regulation

Jim Hamilton reported yesterday on Congress’s plan to reform financial market regulation, as delivered by Barney Frank, Chair of the House Financial Services Committee. The two-pronged approach will (1) address the creation of a systemic risk regulator and (2) strengthen investor confidence by increasing investor protection. Two particular components of the plan stood out to me.

First, to prevent loan securitization from shifting the risk of default completely off the shoulders of loan originators and securitizers, Congress would place a limit on how much of a loan may be securitized.

In order to restore the discipline of the lender-borrower relationship that was substantially weakened by securitization, the legislation will make it illegal for anybody to securitize 100 percent of anything. The exact percentage of retention is open for debate, said the oversight chair, but whatever percentage Congress decides to allow must follow the principle that the first dollar of loss is borne by the securitizer. This principle is correct, he reasoned, because securitizers are the ones who have to do some checking. But some liability will also be put on the originators.

This type of limitation would force the entities that purchase loans from originators in order to securitize and sell off the loans in parts to retain some portion of the purchased loans, which causes the securitizers to suffer some losses if those loans go bad. This retention of risk should cause the investment banks, hedge funds, and other securitizers to be more wary of the quality of the loans they purchase from originators, which in turn will cause originators to use tighter, more responsible lending standards.

Second, Congress intends to revisit the notion that “sophisticated” investors do not need the protection of the federal securities laws. This notion is the basis of numerous exemptions in the various securities laws that have allowed private investment funds to avoid most federal regulation by restricting access to investors with large amounts of money/financial sophistication. However, thanks to massive frauds pulled on these “sophisticated” investors by the likes of Madoff Investments and Stanford Financial, this notion has been seriously challenged.

If the exemptions for sophisticated investors are removed and all investors are treated the same, that could spell the end of hedge funds and possibly private equity funds as we know them. Hedge funds could be forced to disclose their trading strategies and take on less risk, which would basically turn them into mutual funds. Private equity and venture capital funds could be forced to give up their long lockup periods on investor funds, which could make their long-term investment strategies far less stable. Even if the only reform is that the standard of what makes someone a sophisticated investor is raised, that could cause a permanent contraction of the private investment fund market as the pool of potential investors shrinks. Read More......

Tuesday, March 10, 2009

Investor Confidence - Thoughts?

What do you think influences investor confidence most? Do you consider yourself someone who is swayed by outside factors in your decisions? In these economic times, investor confidence means more than ever.

I noticed that the NY Times today had two articles next to each other, and it occurred to me that maybe they were more related than meets the eye.

First - the Dow Jones went up 379 points. Good news!

Then, the next headline - Madoff Guilty Plea Expected: Could Face Life in Prison.

Sure, the first article gave some convincing arguments as to why the Dow "soared" today.

A memorandum from Citigroup saying that the bank had been profitable in the first two months of the year; calls for regulatory reforms from the Federal Reserve chairman, and the possibility that the government would reinstate rules governing short sales of stocks.

But what of the likely Madoff outcome? I think we can all agree that, however irrational, hesitant investors want to see results, and fast. Whether those results come from the bailout or from the criminal courts, investors are looking for answers.

The bailout requires prudent and cautious execution. I'm not saying a criminal trial does not, but results may come faster from criminal trials (or at least charges) if investors are anxious to place blame. Should the government enforcement mechanisms and the media be focusing more on the Madoffs and Stanfords of the world to boost investor confidence?

I would love to hear your thoughts on this - please comment below!

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Back to the basics...

Apparently, the current economic downfall has people getting back to the basics of capitalism. What better reference than Ayn Rand's Atlas Shrugged? If you read the book, you can draw a lot of parallels between what's been going on in the world lately and the events of Atlas Shrugged.

Here are some links, for your reference:

Atlas Climbs the charts


From fiction to fact in 52 years

Who is John Galt?
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Some News in Sports (and Wrestling)

The WSJ Law Blog recently reported that the National Football League is now exempt from suits in the event of a terrorist attack. This protection only extends to companies' services or equipment that meet the anti-terrorism effectiveness standards established by the Department of Homeland Security.

In other sporting news (sort of), a federal judged dismissed the claims of former World Wrestling Entertainment wrestlers. The former wrestlers claimed that their employer - the WWE - denied them of health care and other benefits because the WWE misclassified its wresters as independent contractors. The judge's decision is consistent with the opinion of WWE Attorney Jerry McDevitt, who commented that the wrestlers were "big guys who signed big guy contracts." Read More......

Monday, March 9, 2009

Bank of America Exec Challenges "Misinformation"

The Wall Street Journal ran an opinion piece by Bank of America President and CEO Kenneth Lewis today in which Mr. Lewis challenges common claims about the current state of the banking world. Topics addressed include current lending activity, bank insolvency, and the effectiveness of TARP. Read More......

Friday, March 6, 2009

Wanted: TARP Attorneys

Earlier this week at the ABA's white collar crime conference Neil Barofsky, the special inspector general special inspector general for the Troubled Asset Relief Program (TARP) said his office expects to hire 75 to 100 attorneys in the upcoming year.

Barofsky believes white collar crimes attorneys will see a significant increase in work as the government continues to use TARP money to infuse the private sector. Barofsky believes that up to $300 of the TARP funds may be vulnerable to fraud by banks, hedge funds, mortgage servicers and others that take funds. Barofsky believes that companies may make misrepresentations about their financial status in order to get TARP money and use the money in a manner inconsistent with TARP.

In addition Mark Mendelsohn, of the Department of Justice's Foreign Corrupt Practices Act (FCPA) is looking for attorneys as well.
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Thursday, March 5, 2009

Follow Up to the CBA YLS Bankruptcy Meeting

Judge A. Benjamin Goldgar, U.S. Bankruptcy Judge for the Northern District of Illinois spoke at the Bankruptcy meeting on this past Tuesday. He talked about what he likes to see in motions that come before him. But these tips are helpful for more than a just bankruptcy practice.

First, Judge Goldgar defined what a motion is. It is a letter to the court asking for something--usually an order. He noted that motions are not pleadings. See FRCP 7 for the distinction. After reading a motion, the judge should initially be inclined to give the writer what she is asking for.

Writing such a motion requires answering two question--what the writer wants and why the judge should give the writer what she wants. The first part requires the writer to explicitly state what she wants. Judge Goldgar thinks that the writer should put this up front. This way the reader knows at the outset what the writer is looking for. The judge does not have to go through the entire motion without knowing what the litigant wants and then finding it at the end of the motion. The second part--why the writer should get what she wants--should include facts and law.

The writer should include facts supporting the requested relief. There should be enough facts in the motion so that the judge understands the case. Judge Goldgar noted that judges are not as familiar with a case as the lawyer is--judges need background. But he also said that writer should not include too many facts. Judge Goldgar said that lawyers like to include dates in their motions. Judges see the date, and think that it must be important. Often it is not. He said that lawyers think that dates are "good anchors" for sentences and make them as writers feel more comfortable, but the motion is not for their comfort. The motion should make the judge comfortable.

The motion should also include the relevant law. The motion should state the authority the writer has for bringing the motion and the law that entitles the movant to the relief sought. Judge Goldgar points out that judges are capable of researching the law and applying it to the facts on their own, but this is not the result that a lawyer should want. If the writer leaves this up to the judge, there is no guarantee that the judge will reach the conclusion that the writer wants. Providing the judge with the relevant law, and leading her to the desired outcome, makes the judge's job easier. Motion writers want to make the judge's job easier because they are asking the judge for relief--they do not want a grumbling judge.

Finally, Judge Goldgar said that writers should proofread their motions. Typos give bad impressions. However, he noted that errors do happen. They do come up in 75 page motions. But Judge Goldgar says that writers have to try--there should not be a typo in a two page motion. He believes that these errors show that writers do not care, and if the writer does not care why should the judge trust the citations in the motion?

Seeing Judge Goldgar's presentation on Tuesday reminded me how important writing is. Writers should be clear and concise. But they should not be afraid to say what they want and why they should get it.

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US threatens prosecution of UBS top executives

The United States government is pressuring UBS once again -- but this time the target is UBS top executives. During a senate subcommittee hearing yesterday, the US Justice Department indicated that they may seek prosecution of top UBS executives. But will the Justice Department follow through on this, or is it just a tactic designed to put pressure on UBS to turn over more account information?

The Justice Department's tax division acting assistant attorney general, John DiCicco, has said that he would not, "rule out one way or the other whether there will be prosecutions."

Given the potential consequences to UBS, and even Switzerland, of disclosing more account information, the threat of prosecuting UBS executives could just be a measure designed to pressure UBS into more disclosure.

UBS is resisting more disclosure because of the interference of Swiss banking traditions and stability and the potential threat of losing clients en masse as a result. This could all deliver a big blow to the Swiss banking industry, and Switzerland may not have the resources to shore up banks like other countries have.

So, if the threat of UBS executive prosecution is just that, a threat, is it enough to force UBS into more disclosure?
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Wednesday, March 4, 2009

Supreme Court Likely to Hear NFL Case

Earlier this week, Above The Law reported that the Supreme Court will likely decide to hear an anti-trust dispute between the NFL and one if its former licensees of merchandise.

American Needle had for more than 20 years held a non-exclusive license to design and manufacturer headgear furnishing the NFL teams' names and logos. About 9 years ago, the NFL teams decided to offer an exclusive license for merchandising to Reebok, one of Needle's main competitors. Needle sued the NFL under Section 1 the Sherman Act (which prohibits "contract, combination...or conspiracy in the restraint of trade or commerce") alleging that their teams are illegally restraining trade in the NFL logo and merchandising market.

The NFL contends there is no violation because of a single-entity exemption of Section 1 of the Act which provides that there can be no conspiracy in restraint of trade where the defendant in a Section 1 suit is a single entity. The NFL has raised the single-entity defense on several occasions already and each time it has failed. The Northern District of Illinois and the 7th circuit in this case though have been decidedly more Pro-NFL. Both courts agreed that the NFL constituted one entity because, despite the competitiveness and separate ownership structure of each team, the joint licensing of the teams' trademarks for many years through a subsidiary, NFL Properties, was enough to push them into single-entity status.

Some think Needle actually has a stronger legal argument but it is clear that the NFL has a stronger legal team. It will be interesting to see on what side the Supreme Court falls.

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Government-Sponsored Investment Funds?

The Wall Street Journal reported yesterday that the Treasury’s leading idea for removing “toxic” assets from bank balance sheets would involve the creation of government-sponsored investment funds. Under the potential plan, the government would purchase $500 billion to $1 trillion worth of bad bank loans and other distressed assets in a partnership with the private sector. The government’s funds would be run by investment managers who place certain amounts of their own capital into the funds, thereby aligning the interests of the government and the managers. Other private investors would also be able to invest in the funds.

The plan to buy up distressed bank assets was originally offered by former Treasury Secretary Henry Paulson, but the first round of bailout funds were instead injected directly into banks in hope of unfreezing the credit market. The main issue that blocked the Treasury’s plan to purchase distressed assets was the pricing of these assets in an illiquid market. Taxpayers do not want the government to overpay for these assets, but banks are not willing to accept the marked-to-market prices for these assets because doing so could annihilate their balance sheets. Additionally, the government wants to make sure that the purchase of these assets provides sufficient capitalization to allow banks to resume lending.

The Obama administration’s idea of the creation of a “bad” bank to purchase these assets would force money into the markets, but pricing of these assets would be problematic because the bad bank would be one of the only participants in the market. The idea of creating multiple investment funds carrying large amounts of government funds potentially solves the illiquid market pricing problem by allowing the private-sector to price the assets through the competition of the funds’ investment managers over those assets.

The creation of this system creates a number of new questions. How many different funds would be necessary to create sufficient competition over bank assets? How will the funds’ investment managers be compensated? What are the performance expectations of the investment managers? Will the funds have boards of directors and who will select the directors? Will taxpayers have any say in this process? If the Treasury does go forward with this plan, it will need to provide a specific plan that covers all of these questions and more or else uncertainty could again cause investors to retreat from the markets as they did last month when Secretary Geithner outlined a plan to fix this problem that was simply too vague.
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Tuesday, March 3, 2009

Former CEO Sues AIG for Securities Fraud

American International Group Inc. has been sued by former Chairman and CEO Maurice “Hank” Greenberg. Greenberg alleges securities fraud stemming from the misrepresentation of billions of dollars in losses on the company’s portfolio of credit default swaps. The defendants include former directors and officers who Greenberg claims led him to acquire AIG stock at an artificially inflated price as part of a deferred compensation plan. Greenberg claims that AIG overstated its financial health and masked losses on credit default swaps that hedged default risk for at least $527 billion of debt. He alleges that AIG “recklessly ignored” facts suggesting the company was facing ever-increasing losses on the portfolio.

AIG shares closed at $57.37 on Jan. 30, 2008, the day that Greenberg acquired AIG shares through the deferred compensation plans, and closed today at 43 cents. As a result, Greenberg claims that he has lost hundreds of millions of dollars when the stock prices plummeted and now seeks to recover the difference between the price he paid for the shares and the “true and fair” value. He also claims that, as a result, he significantly overpaid income tax on the securities, and seeks to recover more than $70 million of taxes.

Greenberg led the company for almost 40 years until he was forced to resign in March 2005 amid an investigation led by former New York Attorney General Eliot Spitzer and allegations of fraud. It seems likely that the current problems would have begun during his tenure rather than in the relatively short time since his departure. As AIG's largest shareholder, and in light of his long reign at the company, Greenberg's level of knowledge regarding AIG's financial health and risks associated with the portfolio of credit default swaps should be in question.
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Monday, March 2, 2009

CBA YLS Bankruptcy Committee Meeting

Tomorrow, Tuesday March 3, at 12:15 pm the CBA YLS Bankruptcy Committee is meeting. Two Bankruptcy judges will be on hand to answer questions and give practice tips.

The CBA YLS practice committees meet once a month, and I am the Chicago-Kent Liaison to the Bankruptcy Committee. Young practicing attorneys attend the meetings each month, and it is a great way to learn about a bankruptcy practice. All are welcome to attend, but only CBA members are eligible for CLE credit.

The meeting lasts only about an hour, and it is at The Chicago Bar Association Building at 321 S. Plymouth Ct. It's right next door to The John Marshall Law School and across the street from the federal court house. Feel free to e-mail me at nholland@kentlaw.edu with any questions. I'll be there tomorrow, and I hope to blog about the meeting in my post on Thursday.
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Bankers Need to be More Susceptible to Risk

A piece in last Wednesday's Wall Street Journal argues that Wall Street's casual approach to risk was due to the abandonment of the partnership model in favor of the corporation.

[I]n a $14 trillion economy, you can't hire enough overseers to pore over everyone's books. There is, however, a better solution: expose players in the financial game to greater personal loss if their risk-taking fails. When you worry that a mistake will cause you to lose your second home, your stocks and bonds and your club memberships, then you're less likely to take the kinds of risks that expose the rest of society to your failures. A simple mechanism exists to achieve this purpose: the private partnership. Partners face liability that extends to their personal assets. They aren't protected by the corporate shield that limits losses to what the corporation itself owns (as well as the value of the stocks and bonds the corporation has issued).

[I]nvestors -- and governments -- should recognize the extra safety inherent in doing business with partnerships. In the end, the partnership -- not more regulatory intrusion -- is an efficient, even elegant, answer to the thorny risk-mitigation problem. Partnerships are less likely to make big mistakes, but, even if they do, their smaller size means they pose less of a threat to the financial system as a whole, and to the taxpayers who have to pay for the clean-up.
Indeed a compelling argument. On the other hand, Professor Larry Ribstein, of Ideoblog, thinks otherwise. While he does strongly believe that the role of the corporation needs to change, he states that "[o]ver the last generation, better governance technologies have evolved through private equity, venture capital and hedge funds. This should be the model for the reorganization of Wall Street."
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Delaware to the Rescue

On Tuesday of last week, Citigroup was victorious in the Delaware Chancery Court when the court dismissed all but one claim in a lawsuit brought by shareholders of Citigroup. The shareholders claimed the Citigroup's board had breached its fiduciary duties because the board permitted the company to invest in sub prime mortgages despite suffering huge financial losses because of Citi's investment in sub prime mortgages.

As written by Professor Davidoff, of the University of Connecticut School of Law the decision is in important for three reasons.

1. It is doubtful that Delaware courts will hold corporate boards liable for bad decisions made before the financial crisis. Thus the decision last week reinforces the business judgment rule as highlighted by this quote from Chancellor William B. Chandler III.

Oversight duties under Delaware law are not designed to subject directors, even expert directors, to personal liability for failure to predict the future and to properly evaluate business risk.
2. The court refused to dismiss the suit in favor of a New York suit which alleged similar claims and was filed first. The Delaware Court chose to implement the McWane doctrine, to retain jurisdiction over the suit even though the suit in New York had been filed first.

3. The Delaware Court dismissed the plaintiff's breach of fiduciary duty claim, which happened to be a Caremark claim. A Caremark claim created the duty a corporate board has to monitor the corporate enterprise. As stated by Chancellor William B. Chandler III, the standard for a Caremark claim is quite high.

[T]o establish oversight liability a plaintiff must show that the directors knew they were not discharging their fiduciary obligations or that the directors demonstrated a conscious disregard for their responsibilities such as by failing to act in the face of a known duty to act. The test is rooted in concepts of bad faith; indeed, a showing of bad faith is a necessary condition to director oversight liability.
For commentary on the claim sustained by the Delaware Court, check out Professor Cunningham's blog.
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