The $50 Billion Scam

The Wall Street Journal is reporting on the uncovering of a $50 billion dollar Ponzi scheme disguised as a hedge fund managed by renowned investment manager Bernard Madoff.

A Ponzi scheme (which is not the same as a Pyramid scheme) creates a false source of profits for investors by giving the principal investments of new investors to older investors as "profits". Madoff's hedge fund claimed to make a ten to twelve percent profit on an annual basis for more than a decade, but recently Madoff admitted to his sons that the profits were not real. The size and duration of this fraud is unprecedented, and the SEC and private investment fund regulation are likely to face even more scrutiny as a result.
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New York Times: The Day the S.E.C. Changed the Game

An audio recording from 2004 shows levity, even laughter, as the S.E.C. made a little-noticed, but fateful change to rules governing the five largest U.S. investment banks Read More......

Delaware's Dominance Doomed?

The WSJ Law Blog has posted a story about the emergence of a new shareholder-friendly corporate governance law in North Dakota.  Delaware and it's corporation-friendly laws are home to a large majority of US corporations.  The reason for this is that DE has intentionally crafted its laws to welcome corporate officers and directors to a corporate-friendly environment where they are free to act reasonably without too much fear of litigation by shareholders.  

North Dakota's governance laws enable shareholders to exercise a little more control over their corporations' directors and officers.  The shareholder advisory vote and ability to consider executive pay are both aspects of the ND law that you will not find in Delaware.  Although these laws were enacted a year ago, there are only two publicly-traded companies that are incorporated in North Dakota.  It is unlikely for corporations to flock to ND; most boards and officers likely prefer the friendly confines of Delaware corporate law.

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Chicago Tribune May File For Bankruptcy

Uh oh, here comes more bad news. The New York Times is reporting that our very own Chicago Tribune is suffering from serious financial distress and has hired investment bank Lazard and law firm Sidley Austin in an effort to avoid a potential bankruptcy filing. Just yesterday, the AP reported that the Tribune will sell off one of its biggest assets, the Chicago Cubs, no later than spring training.

But those who aren't experts in Bankruptcy should know that Chicago's most notable newspaper is not going to be history, per se. The Tribune is using this time to try and secure a line of credit to cover their debt. And if it turns out that filing for Chapter 11 is the right path to take, it still is very likely that the Tribune will stay with us. Filing for Chapter 11 will probably grant complete or partial relief from most of the company's debt and contracts, allowing a debtor to stay in control in order to remodel the financial and organizational structure so as to permit the rehabilitation and continuation of a business.

Look at United Airlines. UAL filed for bankruptcy in December 2002, weakened by low-fare competition and a drop-off in air travel following the September 11, 2001, terror attacks on the United States. After one year in bankruptcy, the airline ended up saving $7 billion by eliminating 25,000 jobs, replacing traditional pensions with 401(k) plans, reducing cost structure and cutting pay.

Now, do not think that I am an advocate for bankruptcy. It is likely that a lot of the company's assets will be stripped, which will include jobs and pension plans. A company should do everything in its power to prevent filing. But, if it turns out that filing is the only option, the Tribune will still likely survive.

If you find this to be interesting, make sure to investigate Professor Mason's Bankruptcy course, which will be offered on Tuesday and Thursday nights this spring.
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First Set of New Regulations

We knew that massive regulation reform was coming, and finally, the SEC has approved a new set of rules for credit rating agencies.  This may be the first regulation-product of the financial crisis.   The SEC set rules to increase the transparancy of the credit rating agencies (the major ones are Fitch, Moody's, and Standard & Poor's), enabling investors to inspect the processes and procedures used by these agencies when rating securities.  The financial crisis has been partially caused by the overly-favorable ratings that were given to some types of collateralized securities.  Investors relied on these inaccurate ratings, and put their money into what they thought were less-risky investments.  When the market for these securities collapsed, many people were quick to blame credit rating agencies for failing to recognize the riskiness of these securities.  The new rules approved by the SEC place certain restrictions on what types of securities may be rated, and the ability of the agencies to receive gifts from those that are rated.  

It is likely that this is only the first of many new regulations to come in the near future.  More regulations are expected not only for credit rating agencies, but for securities, financial reporting, and lending institutions (among others).  

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Cashing in on Classes Actions

The Wall Street Journal Law Blog reports that prosecutors in Philadelphia recently unsealed an indictment against a group of people who concocted an elaborate scheme to game a number of major corporate class-action lawsuits:

According to the indictment, starting in 2001, a group of individuals created fake companies that submitted claims for a share of class-action settlements, including a $1 billion antitrust settlement involving the NASDAQ Stock Exchange and a $3 billion securities settlement with Cendant Corporation.

The defendants allegedly went to great lengths to perpetrate the alleged fraud. One conspirator traveled to Singapore as the vice president of a fake company in order to mail documents that would help make the fake company, “Keycorp,” look legitimate.

Apparently the scheme was a success (if you don't count that pesky federal indictment):

On behalf of a fictitious Australian company, [the group's attorney] in 2004 allegedly submitted a claim in the Cendant case and landed an $8 million check. She later secured a $5 million share of the Cendant settlement on behalf of a fake Chinese company.

If this group was able to obtain multi-million dollar settlements before being caught, who knows if smaller fraudulent settlements are ever uncovered? Read More......

Program Video: "From the Courtroom to the Boardroom: Using Your Law Degree in the Business World"

In case you missed it, here is the video from the CLS event on October 21, 2008. Thank you to all 72 of you who attended! Make sure to monitor our website or Facebook group for CLS events coming up.

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Too Easy to Prosecute Corporations? – by David Franklin

This may be a bad time to say that Corporate America needs even more help. Nevertheless, a former federal prosecutor argued on Friday that the standard for bringing criminal charges against corporations is too low.

Specifically, Andrew Weissmann wrote in an amicus brief to the 2nd Circuit that the “federal courts’ erroneous approach to vicarious liability [should] be revisited.” Weismann, who once prosecuted Arthur Anderson during the famous Enron scandal, is now taking the side of corporations. Currently, Weismann is representing Iona Management S.A. – a shipping company that was recently convicted after one of its employees dumped oil at sea.

The doctrine of respondeat superior provides that in many cases, an employer can be held liable for the acts of its employees. This doctrine is commonly applied in civil law, but do the principles of respondeat superior align with the goals of our criminal justice system? When considering the main goals of criminal law – deterrence and punishment – it seems that generally, a corporation should not be liable for its employees’ acts when the corporation is not morally culpable. However, Weismann argues that the district court’s standard makes corporations accountable for “almost all criminal acts of any low level employees – even those acting against explicit instructions.” Additionally, Weismann points out that this standard, combined with the fact that corporations are pressured to avoid stigmatizing criminal prosecutions, could actually make it easier to find companies liable through vicarious liability in criminal cases than in civil ones.

It seems that the former head of the Enron Task Force has a point. But who wants to give corporations any more help at this point?
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Countries as Investors - by Nick Holland

Markets and exchanges are filled with individual and institutional investors, but what happens when countries want to get involved?

One possibility is that they are just another participant, and nothing is wrong. They are looking for profits just like the next investor. But is that always the case? What if a country is using investing as a tool for foreign policy? What if a country is investing heavily in a different country in order to gain political influence?

Sovereign Wealth Funds (SWFs) are raising these questions. Essentially, they are a country’s investment portfolio of foreign assets. Some SWFs have been for decades, but many have popped up in recent years. They typically earn the funds they invest from natural resources, predominantly oil. Soaring gas prices partially account for the recent increase in the numbers of these funds.

Even though there have not been any SWF abuses as contemplated in the questions above, domestic and European politicians are still worried. The uncertainty of whether SWFs are investing for economic or political reasons bothers them. The Committee on Foreign Investment in the United States, commonly referred to as CFIUS, already evaluates some foreign investment within this country. But some may think that more legislation is necessary. To help allay these fears, the International Monetary Fund (IMF) and a SWF international working group brokered a set of guiding principles for SWFs and published them last October. These principles are called the Generally Accepted Principles and Practices (GAPP) or the Santiago Principles (the IMF negotiated and adopted them in Santiago, Chile). GAPP advocates disclosure and transparency in the SWF, but they are entirely voluntary.

SWFs represent trillions of dollars of wealth, but politicians and others are skeptical of the SWFs’ motivations because there is much uncertainty about them. Hopefully, GAPP will close this information gap, and allay people’s fears. Only time will tell.
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Big 3 Automakers and Executive Compensation

Have they lost their minds? Well, at least their sense of propriety ...

In a move reminiscent of AIG’s post-bailout bacchanalian (or, as the Smoking Gun crudely puts it, “Rock out with your Bailout”), representatives of the big three automakers admitted to having taken private jets on their groveling crusade to Washington.

Under questioning by Rep. Gary Ackerman (D-Queens), the CEOs assured Congress they had tightened their belts, cutting hundreds of workers and closing dozens of plants. “Obviously we're all slashing back every expense that's not critical to the business,” said GM CEO Rick Wagoner.

Right. On the same afternoon, Wagoner and Ford CEO Alan Mulally refused to consider taking a paycut from their respective $15.7 million and $22 million salaries to $1, a symbolic gesture suggestive of Lee Iacocca in the 1980s. Keep in mind that CEO compensation generally includes perks other than salary, such as bonuses, stock options, and . . . use of private jets.

Just another sign of the times – perhaps a change in the collective corporate mindset is just coming surely, but slowly?

NB – Chicago-Kent is offering a class on Executive Compensation in Spring 2009.

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Making Lemonade out of a Financial Crisis - by Drew Kelly

The current financial crisis may be contracting legal job prospects, but looming regulatory changes may allow law students and new attorneys to squeeze some opportunities out of this lemon of a job market.

The current U.S. financial regulatory system is a collection of various regulatory codes enforced by an acronym-laden list of administrative agencies. The securities markets have the Securities Exchange Commission (SEC). The futures and options markets have the Commodity Futures Trading Commission (CFTC). The banking industry has numerous entities like the Treasury’s Office of the Comptroller of Currency (OCC) and Office of Thrift Supervision (OTS). These agencies often have jurisdictional overlap problems with each other and other agencies, and duplicative rules and enforcement efforts often cause headaches for the financial industry. The current regulatory arrangement is a patchwork creation put into effect at different times across multiple generations, and, in light of current events, many critics are calling for a modernized system.

This summer, Treasury Secretary Hank Paulson recommended a complete overhaul of the financial regulatory system. His plan would include short term steps like merging the SEC with CFTC and the OCC with the OTS, but the long-term goal would be scrapping everything in favor of a group of regulators that base jurisdiction not on market type as is the case right now, but instead based upon the purpose of the regulator. CFTC Acting Chairman Walter Lukken, while not supporting the short-term mergers, recently voiced his support for a similar overhaul. Lukken’s plan would create three new objectives-based regulatory agencies: a market integrity regulator, a systematic risk regulator, and an investor protection regulator. Each new regulator would have regulatory authority over all types of markets, providing flexibility and (hopefully) less duplicative regulation and fewer jurisdictional disputes.

Whether you believe that such an overhaul is a good plan or not, major regulatory overhaul could provide a huge opportunity for law students and new attorneys. Industries that have operated for years under the current regulatory scheme will need attorneys who understand the modified (and, potentially, entirely new) regulations. Additionally, industries that have traditionally been able to avoid regulatory scrutiny—the private investment fund industry as a major example—will have a huge need for attorneys who can help restructure operations and provide oversight in order to comply with new regulation. Finally, if new multi-industry financial regulators are created, these massive agencies will require huge staffs that comprehend a new system of regulation. All of these opportunities could be a boon for those that aren’t married to the old system of financial regulation and are willing to put in the effort to understand the complex new regulatory landscape. Law students and new attorneys are in a great position to do just this; they just have to stay informed and get ready to do some squeezing.
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DLA Piper Overhauls Partnership Structure

DLA Piper is taking a dramatically different approach to the recent economic downturn than most other large firms.


Rather than continuing with the current trend of laying off associates en masse, DLA Piper has decided to convert its two-tier partnership into a single tier of equity partners. Traditionally, DLA has had two levels within its partnership ranks - income partners, who do not have an ownership stake in the firm, and equity partners, who buy into the partnership with a capital contribution.

While the initial upside comes from an influx of cash from the potential 275 capital contributions, DLA should see continued savings by not having to pay the salaries of non-equity partners. Another direct consequence of this shift will be added pressure on partners to bring in clients; generating business is an enormously significant factor in partner compensation. John Cashman of Major Lindsey & Africa LLC, a legal industry recruiter, says that "it’s very clear to their (junior-level lawyers), it’s either up or out: We want business generators or worker bees. They want to send that message." And in this economy, that message is all the more crucial, especially to all of us future "worker bees" still in school.

One commentator has taken a positive approach to the restructuring, praising DLA Piper for purusing what appears to be a more pragmatic than reactive solution: "Instead of scapegoating associates, it looks like DLA Piper has taken a hard look at the underlying business model." I would have to agree.
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Mark Cuban Charged With Insider Trading - by Anne Szkatulski

The SEC today charged controversial entrepreneur and Dallas Mavericks' owner Mark Cuban with insider trading.


The complaint alleges that in June 2004, Cuban sold 600,000 shares in Mamma.com after being invited to participate in a stock offering of the company; knowing that the offering would be conducted at a discount, Cuban allegedly sold his shares within four hours of the invitation.

"Insider trading cases are a high priority for the Commission. This case demonstrates yet again that the Commission will aggressively pursue illegal insider trading whenever it occurs," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement.

The SEC has charged Cuban with violation of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.

The Commission's complaint seeks to permanently enjoin Cuban from future violations of the federal securities laws, disgorgement (with prejudgment interest), and a financial penalty.

Cuban released a statement early this afternoon: "I am disappointed that the (SEC) chose to bring this case based upon its enforcement staff's win-at-any-cost ambitions. The staff's process was result-oriented, facts be damned. The government's claims are false and they will be proven to be so."
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Economic Crisis: Opportunity for Corporate Law Students? By Ethan Samson

Now that the economic crisis is no longer developing and seems to have come to full fruition (no more, please!), many in the legal world are contemplating the changes that will come about in corporate law. No, I am not talking about the lost business that will occur due to cut-backs in legal spending from corporations. Developments in the law will create new responsibilities for lawyers to make sure clients are both compliant and aware of liability for their actions.

Earlier posts have referred to Alan Greenspan’s “affection for deregulation” during his tenure as Federal Reserve Chairman. However, he has recently come around, acknowledging that he was “partially wrong” in opposing regulation of derivatives in an article from Bloomberg.com, and others have called for much heavier regulation. Regulation reform is coming, whether Greenspan likes it or not, but it is not the only change that will be meaningful for corporate attorneys.

The Conglomerate Blog has recently posted about the effect of the economic crisis on corporate boards of directors. The post refers to the shift that occurs in a board’s fiduciary duties when a corporation becomes insolvent. The Business Judgment Rule makes it difficult for a board to be found liable for excessive risk taking; however, this is going to be the prime allegation in upcoming litigation where shareholders are upset over a board’s decision to invest in the poorly collateralized securities that helped spark this crisis (and likely lead to the demise of the corporation in the lawsuit). The Conglomerate post discusses how corporate insolvency shifts the fiduciary duty owed by the board to creditors instead of to shareholders. When someone accepts a position on the board of a corporation, they do not do so with the vision of the corporation going insolvent; likely they assume some level of success.

It is important for corporate attorneys to keep their clients aware of how their roles in the corporation may shift with the potential or actual insolvency. Furthermore, law students should be looking at the impact this economic crisis will have on corporate law; there may be opportunities coming where firms are looking for attorneys who are up to date on these current developments. Read More......

The Corporate Law Society Recommends...

Chicago-Kent Corporate Law Professor Batlan and student William Allen have put together a website that brings together some of the best and most accessible materials related to the current financial crisis. It provides resources such as articles on the failure of regulation, the Congressional testimony of key players, editorials on the government's bailout of banks, books on previous financial debacles, and the voices of people who have lost homes in foreclosures.

You can access the website at: http://libraryguides.kentlaw.edu/FinancialCrisis Read More......

Greenspan's Grand Experiment

Way before the potential for a credit crisis was on anyone’s radar, American investment guru Warren Buffet dubbed derivatives, the complex financial contracts that are claimed to be the culprit of the collapse, “financial weapons of mass destruction.” Felix Rohatyn, a former U.S. ambassador and a central player in the 1975 plan that saved New York City from bankruptcy, described derivatives as potential “hydrogen bombs.”

One economic titan, however, felt differently. And as head of the world’s most influential economic institution, his views carried a lot of weight. I am talking about Alan Greenspan, Chairman of the Federal Reserve from 1987 to 2006. Greenspan had deep affection for deregulation. To him, the powerful financial institutions that (used to) populate Wall Street had a very large interest in ensuring that all of their assets were protected and that they had the resources in place to make sure all the investments they made were sound. While defending derivatives during a hearing in 2003, Greenspan said: “What we have found over the years in the marketplace is that derivatives have been an extraordinarily useful vehicle to transfer risk from those who shouldn’t be taking it to those who are willing to and are capable of doing so.”

In 2000, after years of pushing and shoving, Greenspan persuaded Congress to pass the Commodity Futures Modernization Act, the bill that removed derivatives from the purview of federal oversight. The derivatives market thereafter grew from $100 billion to more than $50 trillion. Although the housing collapse is often cited as the culprit of the current credit crisis, derivatives are what actually made our financial system vulnerable. Originally intended to reduce risk and spread prosperity, derivatives instead magnified the impact of bad mortgages. When homeowners began defaulting on their mortgages, the investment houses did not have enough capital to cover the derivative settlement claims and, as a result, are now in great peril.

In essence, the great debt that the world economy has to now face is the result of an experiment by Greenspan to let the market forces run free. Investment bankers, who collected billions of dollars in bonuses, were selling mortgage securities they thought were safe and derivatives that they thought would never have to be paid off. On the other side of the spectrum were the investors, who were buying credit default swaps that would pay off big when other people’s mortgage investments went south. And with the multitrillion-dollar market in place – no one was there to regulate. No one was keeping track of how many derivatives sold. No one knew who owned them. No one was making sure that the investment houses were setting aside the money needed to pay off their obligations if the mortgages went sour.

On Thursday, while testifying at a Congressional hearing, Greenspan admitted that he had “put too much faith in the self-correcting power of free markets and had failed to anticipate the self-destructive power of wanton mortgage lending.” Hailed three years ago as “the greatest central banker who ever lived,” the retired Chairman’s legacy will likely be quite the opposite: the man who paved the way to a global credit crisis.

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Credit Default Swaps: Part II

If you happened to read my last posting on credit default swaps, make sure to read the transcript from 60 Minutes last night, who aired another segment on the topic.

For a complete transcript, go to: http://www.cbsnews.com/ stories/ 2008/ 10/26/ 60minutes/main4546199.shtml

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Dean's Roundtable - Building your "Knowledge Bank" by Ethan Samson

We all have a "knowledge bank" that we develop throughout our life, which we rely on and tap into to distinguish ourselves in the workforce. Enrolling in law school was a huge commitment, both financially and mentally, to enhance this knowledge bank through devoting (almost all of) your time to studying law at Chicago-Kent. Sitting in at two of Dean Krent's Roundtable discussions not only showed how valuable it is to expand a student’s "knowledge bank,” but also gave an opportunity to expand it.

Mr. Ted Koenig (Chicago-Kent class of 1983), Founder and CEO of Monroe Capital, spoke often of this “knowledge bank.” Mr. Koenig explained that everyone has a “knowledge bank” that contains valuable bits of information that enable us to work in different fields and different positions. Mr. Koenig’s knowledge bank, prior to entering the business world, has contributions from many sources: he earned his CPA after graduating with degrees in accounting and finance from Indiana University, he had an externship with a court working in organized financial crimes, he worked as an M&A attorney at Winston & Strawn, and then as an attorney at Hollub & Kauf. In 1998 he realized that his wealth of knowledge had surpassed that of his clients, and entered the business world to open his own financing business. Eventually, he opened Monroe Capital, which has provided over $1.5 billion in financing since 2004. The legal portion of his “knowledge bank” has given him an advantage in many aspects of his financing business, including the effect of bankruptcy, assignability of rights, effects of selling off investments, the list goes on. Mr. Koenig stressed that the most important thing as a developing attorney or business person is to build on this bank; take advantage of every opportunity you have as a student, because the opportunities (and time) decrease as you enter the workforce.

Mr. Lee Augsburger, of Prudential Financial, Inc. demonstrated to a group of 7 students his path to building his “knowledge bank.” While it is always expanding, his experiences as a law student (Chicago-Kent class of 1987), attorney, and businessman have allowed him to rise to the position of Senior Vice President & Chief Ethics and Compliance Officer of Prudential, a Fortune Global 500 company. His role in the company is large; he basically oversees how the company takes legal advice and implements it into the business process in the most effective and efficient way possible. As a corporate lawyer, his advice was insightful as to how a company uses advice that attorneys feed them. Lawyers should be aware of the steps taken after advice has been given, and ask if their advice can be implemented into the client’s business so as to be compliant with regulation. Further, Mr. Augsburger advised anyone who is looking to be in-house counsel for a company of any size what sort of experience helped put him in this position. His “knowledge bank” is what allowed him to bridge the connection from lawyers to businesses. Prudential Finance saw the value in this, and put him in the position where he has been able to succeed.

These Roundtable discussions are one very valuable way to expand your knowledge bank while in law school. The opportunity to speak with people working in the positions of Mr. Koenig and Mr. Augsburger does not come often, but when it does, it pays to take advantage of it. Many more opportunities similar to these are constantly being presented here at Chicago-Kent College of Law. Look out for upcoming events such as the October 21 event “From the Courtroom to the Boardroom” and other events which will be discussed here in the CLS blog.

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The Blame Game by Brandon Davis

It is undeniable that greed has played a starring role in our current financial crisis. However, playing the blame game is complex when the actions of so many people in so many positions had a disastrous effect on our economy. Although it may be easiest to blame the self-indulgent nature of Wall Street, other players may be equally, if not more responsible.

I think that we need to focus more on Congress' actions in precipitating our current reality. I agree that furthering social policy goals should be high atop Congress' "To-Do List." However, the current state of our economy can be closely tied to an admirable mandate of Congress: that every American should have the opportunity to own a home.

Since 1992, Congress has pushed Fannie Mae and Freddie Mac to increase their mortgage financing to low and moderate-income borrowers. In fact, Congress has given Fannie and Freddie concrete targets. For example, this year the goal was that 28% of all mortgage purchases would be "specially affordable" loans. These loans typically go to borrowers with income less than 60% of their area's median income. Furthermore, in 1995, Congress bolstered the Community Reinvestment Act and caused an increase in bank loans to low- and moderate-income families by 80%. These methods allowed Congress to increase low-income home ownership without spending a dime on subsidies.

Win-win, right? Not through the lens of moral hazard. Moral hazard is the prospect that an individual shielded from risk may act differently than he or she would act if fully exposed to that risk. The mortgage meltdown stemmed from Congress' drive to increase home ownership by reducing its risks. Moreover, these efforts were directed at the riskiest borrowers, leading to an unacceptable level of moral hazard and, in turn, the subprime mortgage crisis. What can Congress learn? Risk may shift or spread among several parties, but it is never eliminated. Maybe the actions taken to further public policy goals should not be freed from the restraint imposed by ordinary risk.

While the investigation continues into the greedy, Wall Street titans, we should not forget about the harmful effect public policy may have played in the failure of our financial system.
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Corporate Law Society Presents: "From the Courtroom to the Boardroom"

Please join the Corporate Law Society and the Career Services Office on Tuesday, October 21, 2008, when alumnus Howard Davis (Class of 1980), Jeffery Rothbart (Class of 2002) and Paul Cohen will address the topic, “From the Courtroom to the Boardroom: Using Your Law Degree in the Business World.”

After practicing law for ten years, Howard Davis, Class of 1980, and partner Jerry Kleiner teamed up in 1991 to open Vivo restaurant in what was then an undeveloped West Loop. Since then, Mr. Davis and Mr. Kleiner have established themselves as the creators of some of Chicago’s most imaginative and respected restaurants, including Marche, Red Light, Gioco, and Opera.

Jeffery Rothbart, Class of 2002, is the Principal of Boulder Net Lease Funds, a private equity real estate fund. After practicing real estate and tax law, he formed Boulder Net Lease Funds, where he serves as day-to-day manager and is primarily responsible for the identification of investment opportunities, acquisition related activities, asset management and serves as liaison to the legal, accounting, securities, insurance and financial advisors.

As Vice President of Mesirow Financial Real Estate, Inc., Paul Cohen is the assistant project manager on several of Mesirow’s largest projects. Specifically, Mr. Cohen currently works on the development of 353 N. Clark, a 1.4 million square-foot high rise office and retail property in downtown Chicago. He plays an integral role in the legal, marketing, leasing and management functions of the project as well as structuring financing for the project. Mr. Cohen received his JD and MBA from Washington University in St. Louis, MO.

The event will convene at 12:00 p.m. in Room 510. Pizza and refreshments will be served. Read More......

Credit Default Swaps

For those who watched 60 Minutes’ segment Sunday on “credit default swaps,” were you enraged to hear about these financial explosive devices? Were you embarrassed to find out that our economy, the financial pioneer, has been taken advantage of by champagne drinking, shrimp cocktail eating Wall Street titans? I was, and I had trouble sleeping last night because of it!

If you did not catch this week’s edition of 60 Minutes, the show laid out the following horror story: Mortgage lenders sold loans with low introductory “teaser” interest rates. The lenders then sold the huge volume of loans to Wall Street banks, like Bear Stearns, Lehman Brothers and Merrill Lynch, who then bundled them into bonds known as “mortgage backed securities.” To entice investors, the investment houses created and sold a “credit default swap” that was marketed to protect the investors against losses if the investments went bad.

And this is where it gets bad. In essence, a “credit default swap” is an insurance contract. However, the banks were very careful not to classify it as “insurance” and used a magic word, “swap,” as a substitute. If it were insurance, the person who sold the policy would have to have capital reserves able to pay in the case the insurance was called upon or triggered. But because it was a “swap,” and not insurance, there was no requirement that adequate capital reserves be put to the side. When homeowners began defaulting on their mortgages, and Wall Street's high-risk mortgage backed securities also began to fail, the big investment houses had not set aside the money they needed to pay off their obligations. And this is where we are today.

Thomas Friedman, the Pulitzer Prize author on foreign-affairs, says that there have only been a few times in his life when he has truly been frightened for this country: the Cuban missile crisis in 1962; when J.F.K was assassinated in 1963; on September 11, 2001; and today, the scariest moment of them all. While the first three attacks on the U.S. were by outsiders, today’s financial crisis was a result of our own failure to regulate our financial system. In other words: we let greed take over.

Look at us now. On Monday morning, the Fed announced that the system will receive yet another enormous injection of liquidity, saying it would make as much as $900 billion available. But what is especially frightening is that even with action of this magnitude, confidence does not seem to be restored. By Monday, the Dow dropped 370 points. European markets are falling. Russia and Brazil shut down trading. Not exactly confidence-boosters.

About one hundred years ago, in response to the creation of the Federal Reserve, Charles Lindbergh, a Congressman from Minnesota, made this comment: “From now on depressions will be scientifically created. Like two con men working a mark, the Fed made credit easy while…newspapers hyped what riches could be made in the stock market.” Well said Congressman Lindbergh. Nothing seems to have changed.

For a complete transcript from last Sunday's 60 Minutes, visit: http://www.cbsnews.com/stories/2008/10/05/60minutes/main4502454.shtml Read More......

Welcome to the Chicago-Kent Corporate Law Society Blog!

To post on this blog, please contact us at chicagokentcls@gmail.com. We welcome comments on current events, relevant topics, or questions to pose to CLS members. Be sure to check back regularly as we update the blog! Read More......