Lehman...will live on....

And spin off all its toxic assets into a zombie shell aka Lamco Holdings, LLC....

...tasked to "sell" those assets to pay off creditors....er, taxpayers...while the working company keeps the goodies.

Yay!

cross posted from the black shoe lawyer

The most pernicious form of dishonest legislative shenanigans, no? "Let's get it right, let's do a study first."

Because, apparently, we need more evidence to prove that financial reform is essential. Even though the SEC and Congress already possess a substantial body of research:

Regulators have been investigating some of these same matters, and issuing new directives about them, since at least the early 1990s.

Several of the studies focus on proposals that are vigorously opposed by banking industry groups or Wall Street firms, like a change that would make stock brokers subject to the same fiduciary standards as financial advisers -- that is, to act in the best interest of their customers.

The Senate bill calls for a new study even though the Securities and Exchange Commission commissioned a similar report in 2008. At the same time, the new bill leaves the S.E.C. with no power to act on the subject of either review.

Of directly relevant historical note: After Enron and Worldcom, when Congress passed the Sarbanes-Oxley Act, reformers wanted to include in the new legislation prohibitions on off-balance-sheet accounting. You know, how Enron hid its losses from investors and regulators. Sort of like...how Lehman hid its losses from investors (but not from regulators, for shame). But they didn't. Why? Congress wanted to conduct a study first

The article in its entirety.

cross posted.

Yay for the new Jobs Bill Can You Cover Our UI Bill for Us Bill!!!! 

Under the bill now heading to President Obama's desk, businesses that hire workers who have been jobless for at least 60 days will be exempt from paying the 6.2 percent payroll tax on those employees' earnings until the end of the year. If those workers stay on for a full year, businesses will also get a $1,000 tax credit. (The employee's pay would still be subject to the usual personal income taxes.) The business tax breaks would add up to about $15 billion in all.

So all the new hires are going to get canned before year end?  But in the meantime, the government doesn't have to fork over unemployment benefits.

The Department of Treasury threw a suggestion on the table of the Senate Banking Committee: Uh, here's some text implementing the Volcker Rule regarding so-called proprietary conflict of interest trading -- since you guys are too darn busy to work it in yourself. 

Problem is:

It's not self-executing -- meaning we'd have to wait for a government agency to implement rules first. Which may take...years, if at all.

It doesn't cover non-bank financial companies. Like, oh, broker dealers:

Broker-dealers and other non-bank affiliates appear not to be subject to the prohibition, but their proprietary trading may be subject to additional capital requirements and quantitative limits as discussed below

Better than nothing, I guess.
Cross posted from the black shoe lawyer.

Not only did the NY Fed help Lehman cover up some its losses by agreeing to finance some shady transactions...

It, along with Big Brother SEC, was also watching over its shoulder while it covered up the rest. Indeed, in an office down the hall, perusing every email and spreadsheet flying around

The hubris of these people. 

cross posted from the black shoe lawyer

So I'm fairly certain Lehman execs will avoid not only criminal, but also civil, liability for their accounting shenanigans by virtue of the blessing they received for at least a portion of those shenanigans by the NY Fed.

Dodd's new bill, though, seems to hope to kill the babysitter defense -- at least in the future -- by giving Washington, and not Wall Street, the authority to determine who sits on the NY Fed board:

Among the most recent provisions in the bill to emerge, according to people who have been briefed on the draft, is one that would curb Wall Street's influence over theFederal Reserve Bank of New York. Its president would be appointed by the president of the United States, not by a board that includes representatives of member banks.

But here's a question: who came up with the "fox appoints the henhouse guard" system in the first place?

cross posted from the Black Shoe Lawyer.

cross posted from the Black Shoe Lawyer

A bout of prescience:
Lehman execs and directors shall cry foul: 

We are so sorry that we didn't catch all these accounting shenanigans. We had no idea it was wrong. We trusted those expert accountants! Shady Brits they turned out to be. 

We are so busy, and rely so much on those to whom we delegate responsibility. 

And plus, the New York Fed helped us do something nearly identical. It's the babysitter's fault, truly, when the child veers off course, no?

Seriously, though, can you really sent someone to jail for just being a teeny bit negligent?

Why don't you take a peek at the CFO's emails? I betcha heknew what was going on. Or maybe his assistants.

A judge will buy it. And thus the buck passes, passes, passes, until it falls down the gutter drain and into the abyss.
*****Indeed, actual criminal lawyers agree with my prediction:

Buell [former federal prosecutor and current law professor at Washington University] says that senior executives criminally charged under the federal securities laws often bring up two defenses that can be hard for prosecutors to combat: that the key decisions were made "many floors beneath them," and that they relied on the advice of professional advisers. "The executives say 'I'm not a lawyer, I'm not an accountant,' " Buell says. "It can be hard to prove intent when this defense gets used."

Cross posted from www.pinkshoelawyer.blogspot.com

Okay, anyone whoever slept through half a semester of a Corporations/Business Organizations class in an American law school has heard of the Berle-Means separation of ownership and control agency theory. Basically, the people who own the company have no control over it.   I.e., your typical public company. 

Granted, the rise of influential institutional investors over the past decade or so (some of them good guys like public pension funds) attacks the maxim. Sort of (the people who buy into a mutual fund don't control it, either). 

Indeed, the entire Anglo-American law of corporate governance springs from this "agency cost" issue. It endeavors (however poorly) to ensure that the people controlling the company don't pilfer the chickens from the coop -- since the people who actually own the chickens can't protect themselves. 

 For those of you unfortunate enough to have sat through a bar exam: I refer to the dreaded "fiduciary duties." 

 Switching gears. The Bill of Rights ostensibly protects the ability of citizens to speak publicly and politically from government interference. It also ostensibly protects their right to associate in order to speak and act publicly and politically. Subject to some sort of "compelling government interest" bullshit review that no one in corporate law really remembers anyway.

Enter the John-Boy Roberts SCOTUS. Corporations are just associations of citizens, with a right to speak publicly and politically. They ought to be able to spend their money to do just that. 

 But wait a second. According to Berle-Means, the owners don't control the corporation. Indeed, most are even so rationally apathetic that they don't even bother to mail in their proxies when the board is up for re-election. So...if the corporation is speaking...it's speaking for corporate management. 

 Who does not, in fact, own the company. Duh. Only 200 years of common law, there.
Do Americans have a right to protection from government interference to spend other people's money to speak on political topics?? 

 Prof. Lucian Bebchuk (the closest thing to a good-guy in American corporate governance legal intelligensia) even argues that, in fact, allowing corporate management to throw money around on politics is actually bad for shareholder wealth maximization.  

To put it in terms that even a bankster could understand.

And to put it in the starkest relief possible: 

We can expect corporate management to exercise their new right to use corporate funds to lobby Congress for reforms that... deprive shareholders of what little influence they have on their investment and what little control they have over...corporate management.  You know, the same citizens that are the ones the JJ Roberts' Court insists have a right to associate and spend money in order to speak publicly and politically.

Sound like free speech to you??

Strong Year for Goldman, as it Trims Bonus Pool

Nothing smells like self-sacrifice and martyrdom like shaving a whopping 12% off your mega-bonus.

Especially when you guys paid back the TARP...with interest.

Well, let's just pretend like the AIG counterparty dollar-for-dollar toxic asset bailout doesn't exist on this year's balance sheet. 

Or that, indeed, any of the toxic assets are accounted for at all on this year's balance sheet.

Because, like, if they did, you wouldn't have been able to pay back TARP.  Nevermind with interest.

And... funny the announcement comes merely weeks after a fireman's pension fund sues it for... huge bonuses.  Specifically, for awarding bonuses in the amount of 48% of profits.

GE Press Release

++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++

 

 

Blog Cross Reference

NYT Dealbook: Big, In Banks, is in the Eye of the Beholder

Disaster Looms!!!

Banksters complain that BigPharma like Pfizer won't be able to "efficiently" raise enough money to prosecute a hostile takeover bid (of Merck, perchance???) if we break up the Big Banksters. And Verizon won't be able to lay tons and tons of FiOs line (in their big to beat out Comcast?? and jack up prices even higher??)

Too Big to Fail? Maybe Pfizer and Verizon are too big, too, if they need the Big Banksters so badly. And why the heck does Pfizer need to get bigger anyway, with hostile takeover bids???

 

 

Wall Street Weighs Legal Challenge

 So a white-shoe is hired to litigate and defer and delay the wall street bonus tax. His main ammunition? A Bill of Attainder argument. Which, ironically, civil rights activists and repressed groups usually assert, unsuccessfully, to combat unfair and unjust government action. Those poor banksters. A protected group now, they are.

In case anyone has issues cutting through Bankfein's bullshit, here's a Pink Shoe Lawyer-certified translation:

"It's all the credit ratings agencies' fault!!! They should have known better.  Even though we kicked and bullied and coerced them into doing whatever we said, but whatever.

"And by the way, those bizarre 100-step-removed-derivative-investments are merely a wonderful way to allocate risk through an economy, and don't resemble at all betting on broken-legged ponies (and so glad China is opening itself to these socially productive financial black-holes). Because purchasing plain-old straight-up insurance like normal people isn't a sophisticated enough form of risk allocation for us sophisticated park avenue types.

"And while we're on the subject of toxic assets, I suppose we shouldn't have helped all those poor pathetic middle class (but financially irresponsible) morons...er, homeowners... letting them buy houses when they really couldn't afford it...we were just too darn nice. Our bad. Nothing to do with us taking the money and running, none whatsoever.

"And we really didn't do anything wrong, because our customers are impervious to fraud and embezzlement.  Big sophisticated investors, ipso facto, can't violate their fiduciary duties to firefighters and policemen.  Because they're so darn smart and experienced and successful. And don't have any conflicts of interest and aren't lazy at all.  And we know this. So, ipso facto, we can't be negligent in selling those investors pipe dreams and poison tablets.  They should have known we were crooks."

http://dealbook.blogs.nytimes.com/2010/01/13/live-blogging-4-top-bankers-on-capitol-hill/

 

UPDATE: 1/19/10: Dr. Krugman, and the indomnitable Ms. Klein, apparently agree with me on my interpretation of one point, at least!

 

Conscience of a Liberal: Destructive Creativity

Today's  NYT, following the announcement by Obama's executive pay "tsar" that 125 of the country's top execs would have to choke down a big paycut, warned that any stunt pulled by Feinberg would prove illusory in the long run.  Instead, the times insists that it's up to "shareholders" to reign in executive pay.  See http://www.nytimes.com/2009/10/23/business/23nocera.html?_r=1&hp

 

What's not entirely clear from the article (perhaps because such clarity would come only with embracing a bit of legal wonkishness) is the drastic change in our corporate laws required to allow shareholders to actually govern CEO salaries.

 

Ever since the seminal CEO pay case - the one dealing with, if you remember, Michael Ovitz at Disney and his golden parachute (Brehm v. Eisner) - it's been clear to us lawyers that no one can touch a salary set by an executive compensation committee unless there's outright, plan-faced fraud or a conflict of interest.  This, incidentally, is almost impossible to prove.  Folks familiar with corporate law know the roadblock as the "business judgment rule."  It's a presumption that anything an "independent" board does passes the legal straight face test.  Only when a board member is on both sides of a transaction will a court begin to look at the merits of the deal and whether it's in shareholders' best interests.  And for you normal non-lawyers, "conflict of interest" is a term of art.  It doesn't mean "smells like fraud," "looks shady," and "indirectly, of course there's a conflict."  It means that the board member is voting himself his own pay raise, or voting for one for his best friend - not "if I give him a pay raise now, it will help inflate salaries everywhere and generally be good for rich people like me." 

 

Moreover, as the article does make clear, it's nearly impossible for shareholders to control corporate governance through their suffrage rights.  Boards are stacked - so your shares only entitle  you to vote for certain board positions - and unless you have a candidate to endorse, it's financially infeasible to launch a proxy contest against the incumbents.  You can't just complain about their behavior, you have to find a willing replacement.  On top of it all: since when do beneficial share owners pay enough attention to have a voice?  The folks with enough weight to make a difference are your institutional investors.  That's Fidelity, along with your state pension fund.  Inspiring confidence??

 

My point is this: there's a mountain to move if you want to control executive pay through empowering shareholders.  On the other hand, passing a law linking executive pay to, for example, 10-year average profits is easy.  Okay, so you discourage risk taking and maybe the most talented of the talented will find a career that will bring in bigger bucks.  But last I checked, there are some pretty brilliant hard-working people in, for example, the ivory towers of academia who are motivated by such other than dollars.

correct me if I'm wrong, here, please...

but I feel like this whole currency debate has boiled down to memes and knee-jerk reactions.  Me Caveman.  Me Like Strength.  Me Want Strong Dollar.

The NYT posted 2 articles in the past 2 days (links below) talking about the falling dollar...and they  mention that a falling dollar vis a vis the world's other currencies means our exports get cheaper.  This does NOT mean (unlike inflation) that milk will double in price.  It means that foreign goods will go up in price.  For those of us not buying any high-end electronics or new foreign cars or italian suits, it's not such a bad thing.  Meanwhile, we may save a few manufacturing jobs.  The dollar means something different to the rest of the world, but means exactly the same for us.

Currency exchange rates are only truly scary if there are severe changes over short periods of time.  Otherwise, they're supposed to reflect t he relative efficiency of our economies.  So if the europeans get relatively better at making widgets, the euro will become (relatively) cheaper than dollars (ie, it takes less euros to make the same thing).  And since when is getting more efficient a bad thing??

One of the problems is that china likes to manipulate its currency so that it always remains artificially cheap.  So it will always look like it offers bargain basement prices compared to the rest of the world. I'm sure everyone remembers that Thailand did the same thing.  And we remember what happened 10 years ago, right? <shudder>  You can't keep that stuff up forever.  Eventually, you run out of foreign reserves and everything goes bust.

So maybe we ought to quit worrying about the US dollar vis a vis [insert world currency x] and concentrate on getting China off of it's unseemly currency habits??

But I'm no macroeconomic/monetary policy expert.  I'd be interested to hear what folks have to say!

 

 http://www.nytimes.com/2009/10/20/business/economy/20fed.html?ref=business

http://www.nytimes.com/2009/10/19/business/global/19dollar.html?ref=business

 

Today's NYT (online) business section features an article exclaiming the lack of empirical evidence of excessive compensation encouraging excessive risk-taking:

http://www.nytimes.com/2009/09/27/business/27stra.html?_r=1&ref=business


In so far as anyone can generate empirical evidence of what's going on inside a person's head, I mean.

Harvard Prof Lucian Bebchuk (no bastion of liberal progressivism, I assure you), on the other hand, points to the obvious: stock options reward successful risk taking, but do nothing in the event of failure.  

Granted, fixing executive compensation laws won't likely solve the problem -- in this the NYT is correct -- and certainly there are other alternatives.  For example: letting only long-term shareholders vote, thus making boards beholden to only those with long term interests; or, as my last blog post points out, putting a government official on the board. 

Nevertheless, I suspect this "empirical evidence" bs is the enemy's foot in the door.
The "we can't win by claiming execs deserve all this money...but if we say it doesn't *hurt*...."