April 03, 2008
Last Sunday's NYT reported on an idea that regulators and legislators have been kicking around to keep
people in their homes and save the housing markets--negative equity certificates. (Also see an earlier WaPo story). These certificates would be available to existing mortgage lenders willing to refinance upside-down mortgages--loans whose outstanding balance exceeds the current value of the home. Under the plan, a government-insured refinancing would reduce the outstanding mortgage balance to the current home value. The original lender, in addition to getting paid the current value of its collateral from the refinancing, would receive a negative equity certificate. This certificate would entitle the holder to any appreciation in home value realized when the the owner sells--up to the amount of the original loan. In effect, the old lender gets any prospective upside in exchange for stripping its loan down to the current market value of the home. Proponents anticipate that a trading market would develop for these certificates.
According to NYT, Treasury Secretary Henry Paulson's latest pronouncement would limit the plan to homeowners who are paying on their mortgages pre-reset, but who may be otherwise be tempted to abandon their homes once their interest rates jump.
At first blush, it seems like an interesting idea. The borrower gets to stay in her house without taking the credit hit of foreclosure. The original lender gets potential upside--which might be tradeable--without having to incur the costs of foreclosure, resale, and interim maintenance. And it's better than getting stripped down in bankruptcy--a prospective modification to the Bankruptcy Code that was (until recently) working its way through Congress--where the lender gets no upside. But several problems come to mind:
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When I speak with my Law & Entrepreneurship students about monitoring in the venture capital context, I always make a point of observing that continuous monitoring of portfolio companies by venture capitalists is not cost effective. That's one reason venture capitalists invest in stages. Each round of investment provides an opportunity for intermittent monitoring.
Makes sense, right? Now consider this from today's W$J:
For the first time in more than a decade, the Federal Reserve has set up shop inside brokerages to monitor their financial condition, perhaps the beginning of an expanded role for the central bank and additional regulation for Wall Street.
This revelation comes on the heels of Ben Bernanke's visit to Congress, where he discussed the Bear Stearns transaction:
The Fed last month threw Bear Stearns a $30 billion lifeline to pave the way for its rapid sale to J.P. Morgan Chase & Co. and to prevent a destructive ripple effect on Wall Street....
The Fed has offered little detail about the collateral backing the loan. J.P. Morgan is responsible for the first $1 billion in losses from a pool of $30 billion in assets. The Treasury Department recently told the Senate Finance Committee that the collateral consists primarily of mortgage-backed securities and related hedge-fund investments but has offered no other details.
Mr. Bernanke said the collateral consists entirely of investment-grade assets that are "entirely current and performing." He added that the Fed's investment adviser, money manager BlackRock Inc., is "reasonably confident that we would be able to recover the full amount" if the assets are sold on a "measured" basis rather than at once. Later, he also expressed confidence "that we'll be able to recover all the principal and indeed some interest, and there's some chance of even upside beyond that."
Did you know the Fed had an investment advisor? And that Bernanke was hoping to make money off the Bear Stearns investment?! The Fed is looking like a venture capitalist. A very hands-on venture capitalist.
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As summer approaches, my mind is slowly turning to the study of contracts. My article describing "Organizational Perspectives on Contracts" (with Brayden King) will be placed by the end of this week, and we are starting to implement some of those ideas through our study of Wisconsin cheesemakers. But I was reminded again today why empirical studies of contracts are so rare: it's tough to get your hands on the things.
Take the new contract being negotiated between Live Nation and Jay-Z and similar contracts that Live Nation concluded with Madonna and U2. Live Nation has not filed any of the existing contracts with the SEC, and I doubt they will file the Jay-Z contract when it is completed. Are these contracts not material? Pshaw! For some reason, perhaps simply benign neglect, the SEC does not routinely police the filing of material contracts. For purely selfish reasons, I wish they would get on the ball.
A few years back, The Wall Street Journal ran a story about a major new alliance between a couple of internet companies. My memory fails me, but I believe Yahoo was involved. In any event, I called the companies to ask whether they would be filing the agreement with the SEC. No, they said, they didn't want any of their competitors knowing what was in the agreements. So the companies were able to get the benefit of the publicity (based on a press release, not a contract document) without any of the accountability of a filing. In the wake of the foregoing experience, I asked a lawyer friend why Internet companies routinely announced alliances without filing the related contracts with the SEC. He responded, "Because the contracts don't bind them to do anything!" Vapor contracting!
That may be slightly hyperbolic, but not much. Many alliance agreements are highly contingent, and you are left wondering about their value. So what do the Live Nation contracts look like? Or the contract between IBM and Linden Lab?
I wish I could tell you.
P.S. I would be happy to be corrected and pointed to any of the contracts discussed above. I checked the SEC's EDGAR database and didn't find them. I also tried a number of Google searches, but was unable to locate the documents.
April 02, 2008
IBM and Linden Lab, creator of Second Life, have entered into an alliance "to create an enterprise-class version of Second Life behind a corporate firewall." According to the IBM website: "IBM is helping clients and partners to conduct business inside virtual worlds and to connect the virtual world with the real world through a richer, more immersive Web environment."
So was this recent television commercial by IBM making fun of Second Life as a business tool? Or just the way some people use Second Life? Some discussion surrounding the ad from earlier this year is here.
On a personal note, looking at my travel schedule this summer, I would be interested to hear from people who have attended a virtual conference in Second Life. Good experience? Or not ready for prime time?
My friend Nate Oman has a new paper on SSRN entitled "Specific Performance and the Thirteenth Amendment." This paper includes a fascinating tour of the history of the term "involuntary servitude," which will be of interest to teachers of Contracts for the reasons Nate describes:
For more than a century, the assumption that ordering specific performance of a personal service contract would constitute involuntary servitude under the Thirteenth Amendment has hung over the law of contract remedies. While the claim has generally been coupled with more traditional objections against such orders, it has had the effect of ossifying development of the law, precluding courts from critically examining the merits of specific performance in the employment context. A recovery of the original meaning of "involuntary servitude" coupled with a reading of the cases construing the Thirteenth Amendment, however, reveals that the argument against specific performance cannot be sustained in any but the most extreme situations. Freed from the analysis-numbing effects of constitutional claims, the arguments supporting a per se rule against specific performance in the context of personal services turn out to be quite weak, and substantial reasons counsel in favor of awarding such orders in at least some cases. Accordingly, courts should abandon the per se rule against specific performance of personal service contracts, and begin applying the ordinary rules of contract to such agreements. This would result in specific performance where there is no significant practical difficulty and equitable remedies provide a superior remedy to money damages.
Good stuff.
Earlier this week, I stepped into a Barnes & Noble in Salt Lake City, and the first book I saw on the shelves was Valerie Bertinelli's Losing It: And Gaining My Life Back One Pound at a Time. Though I watched my share of One Day at a Time in the mid-1970s -- give me a break ... we had two channels on our rabbit-eared TV, and I lived in Osseo, Wisconsin for crying out loud! -- I can't imagine reading this book. Still, I was a little curious about that weight loss angle ...
So I opened to the Preface and saw this sentence: "Since going on Jenny Craig in March 2007, I've surpassed my original goal of 30 pounds and set new targets for myself."
Good for you, Valerie! I happened to be in that bookstore on March 31, and I had set my own goal of getting below 200 pounds by that date. I didn't quite make it (200.2 according to my digital scale), but today, for the first time in at least a decade, I saw the number "1" at the beginning of the weight on the scale. If you are keeping track, that's 40 pounds down since last August.
I am not planning to write a book about this experience, but if I did, it would go something like this (with an acknowledgment to Tom Lee for crafting the precise words):
Eat less. Exercise more.
That seems like a sure-fire formula for success.
Oregon recently amended its corporate code to expressly permit corporations to include in their charter a provision authorizing or directing the corporation to conduct its business "in a manner that is environmentally and socially responsible." The legislative history of the amendment notes that courts in other jurisdictions have interpreted corporations' obligation to act in shareholders' interest to mean that corporations must maximize shareholder profit, even if it results in a corporate failure to act environmentally and socially responsible. Apparently the amendment is designed to counteract this kind of interpretation, and encourage corporations to engage in sustainable behavior. On the one hand, some may argue that this kind of amendment is not necessary. Indeed, to the extent the amendment is designed to ensure that corporations are not prohibited from engaging in socially responsible behavior, the business judgment rule appears to give corporations the flexibility to pay heed to other interests, except perhaps in limited contexts such as takeovers. On the other hand, the amendment appears to go farther, suggesting that corporations that embrace such an amendment have an affirmative responsibility to be socially responsible. From that perspective, it is a clear change. What is not clear, however, is the precise contours of a corporate commitment to engage in responsible behavior, and the kind of exposure generated by the failure to live up to that commitment. Interestingly, the legislature apparently discussed the fact that many corporations have embraced a commitment to engage in responsible behavior in their corporate documents. I have also noticed this trend. But it seems that expressing a commitment to responsibility on a corporate website or even in an annual report is a far cry from embracing such a commitment in the articles of incorporation. Nevertheless, it is an interesting development.
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We'll be interested to see how the Fed and New York Fed chairs handle inquiries about Bear Stearns during two days of testimony on the Hill. They may not be able to avoid saying something substantive about the bailout, but if the SEC is any guide, they'll opine inscrutably about the wisdom of the regulatory reform proposals that followed it. SEC Commissioner Atkins said yesterday
Treasury is proposing .... the unification of the SEC and CFTC and a shift towards principles-based regulation. The latter would require radical adjustments by regulators and industry alike. The SEC would have to depart from its often very prescriptive approach to rulemaking. The financial industry would have to be weaned from its tendency to seek the protection that specific rules afford from later second-guessing and — if the rules serve as barriers to competition — from would-be competitors.
As to a possible merger between the SEC and the CFTC, ...[i]t is not surprising, then, that calls for a consolidation of the agencies have increased. Whether a merger ought to happen is a question for Congress and the Administration — it is certainly beyond my power as a Commissioner.
Hmmmm. It's not exactly a bottom line, but it is not uninteresting, particularly because of Atkins' view on the low-cost merits of principles-based regulation. Does principles-based regulation has lower barriers to entry than does rules-based regulation? Much depends on how it is done. The former can be administered in quite a clubby, exclusive way, after all, and affords regulators a lot of discretion as to who they pick on. I'd be interested to know if, say, the German financial industry thinks that its regulators have helped to create open and vigorous competition in Frankfurt through their principles approach.
For its part, SIFMA sounded vaguely supportive of the reorg, calling it a "thoughtful and sweeping plan which should provoke intense discussion, debate and potential legislative changes." Christopher Dodd, chair of the relevant Senate regulatory committee, called it a "wild pitch." So which is it? Expect Bernanke, if he says anything about the plan, to veer towards the former account.
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March 31, 2008
The Washington Post reports on opposition to the big financial institution reorganization. Is this thing already dead?
Maybe, but the jury is still out. As we told you yesterday, bureaucratic reorganizations turn on the ability of affected agencies to mobilize the lobbyists of regulated industry and, to a lesser extent, the chairs of affected congressional committees. Today, the Post says that "[f]ew leaders of these agencies -- and the associations that work with them -- welcomed such radical transformation." (It also says that "[b]efore the plan takes hold, however, lawmakers would have to sign off.
This would be a challenge given that the CFTC and the SEC report to two
different congressional committees, setting up the prospect of a turf
battle.") But other than the American Bankers Association, no industry group was willing to go on record opposing the plan - even though regulators from the CFTC, FDIC, and NCUA did. In fact, the hedge fund and securities industry lobbyists expressed cautious support for it.
We disclaim political expertise at the Glom, but to our untrained eyes, much of the fate this plan depends on whether it means the end of the credit union. Thrifts, especially now that they look exactly like banks, fine. State-chartered banks, ditto, okay. But credit unions? Consumers, voters, and unaligned Congresspeople love their credit unions.
The Fed, by the way, is telling the Post that it would be sharing just a bit of the reorg pain, giving up its banking supervisors to the new financial institutions supervision agency.
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[Explanatory note: I normally blog on the Business Law Prof Blog with my colleague Dale Oesterle, and I log in to TypePad under the name "Joe Business" rather than "Paul Rose" (not by choice). Hence the author name. I'll try to get this remedied.]
Many thanks to the Glom gang for inviting me to guest blog. I am delighted to spend a couple weeks blogging with such a great group. In terms of my nascent academic career, the folks at the Glom and I go way back. Vic and Gordon provided helpful advice and assistance to me when I was trying to break into the academic market a few years ago, and the Conglomerate gave me an opportunity to get some helpful feedback from three excellent scholars--Mercer Bullard, Bill Henderson and Larry Ribstein--on the article I presented at the 2nd Annual Conglomerate Junior Scholars Workshop. David and Christine also pitched in with some helpful comments.
David and Gordon have done a great job analyzing many important issues with the Paulson proposal. I just want to add my thoughts on another aspect to this effort that caught my eye. While Paulson's proposal calls for a potentially radical restructuring of the financial system's regulatory framework on the federal level, Paulson has also been in discussions with UK regulators, as the Financial Times reports:
Gordon Brown, British prime minister, and President George W. Bush have agreed to step up co-operation over the crisis in financial markets, setting up a UK-US working group that will develop proposals to monitor and regulate the banking system. At the heart of the plans, agreed on Wednesday by Alistair Darling, UK finance minister, and Hank Paulson, US treasury secretary, is a body that will comprise senior treasury and regulatory figures from London and Washington. Mr Darling and Mr Paulson have also discussed a UK proposal for a system of "individually tailored" international supervision for leading banks and financial institutions with significant cross-border activity.
The primary goal of the working group is to "establish a common approach" to dealing with financial crises before the upcoming Spring meetings of the G7, IMF and World Bank. After that, the working group will continue to meet together to consider, among other things, the role of ratings agencies and creating transparency in the valuation of complex instruments such as derivatives and other structured products. Interestingly, UK and US officials were in discussions during the run-up to the Bear Stearns crisis, and have regularly shared information. The creation of the working group would serve to formalize this process.
A skeptical view of the working group might suggest that while information-sharing is useful and likely to aid national regulators, finding and acting on common positions in dealing with financial crises could prove difficult. Chancellor Darling would also like to set up international regulatory "colleges"--the "individually tailored" system extending beyond just the UK and US--to oversee multinational financial institutions, and finding agreement would be even more difficult in this context. Another FT columnist underlines this point by pointing out the failure among British regulators in dealing with the crisis at Northern Rock:
[W]hen it comes to the detail, the chancellor is no closer to solving how to make these systems work under intense pressure.
Mr Darling knows, to the cost of his reputation, what happens when a “college” has to deal with a crisis: the UK Treasury, Financial Services Authority and Bank of England – the so-called tripartite authorities – are still recovering from their inability to staunch last year’s run on the British bank Northern Rock. How much more difficult it would be to sort out the bickering within a multipartite, multinational system of supervision.
For now, it will be a useful test case to see if the US and UK Treasuries can come to substantive agreement in time for the April 11th meetings of the G7.
Paul Rose is an Assistant Professor of Law at the Moritz College of Law of The Ohio State University, where he teaches and writes about matters relating to corporate governance, securities regulation, institutional investors, and comparative corporate law. Paul is also a veteran of the Conglomerate Junior Scholars Workshop, so we are thrilled that he has agreed to spend a couple of weeks with us as a guest blogger. Welcome, Paul!
For many years, Illinois has hosted a more-or-less informal VAP program for its own graduates, one of the more famous (infamous?) being my colleague Bob Lawless. Starting now, under the leadership of our new Associate Dean for Faculty & Research, Larry Solum, Illinois is expanding this program to all aspiring legal scholars who are interested in joining the academy. The Illinois Academic Fellowship Program invites applicants for one- or two-year posts:
The Illinois Academic Fellowship Program prepares future legal academics, who spend one or two years in residence at the College of Law devoted to scholarly research and writing (under the close mentorship of Illinois faculty), teaching one course per semester, and fully participating in the College's famously rich intellectual environment. By treating Illinois Academic Fellows as the virtual equivalent of tenure-track faculty (although with a light teaching load and no administrative responsibilities) and providing Fellows the support and counseling necessary to the development of a serious scholarly portfolio, we expect Fellows to be competitive for tenure-track positions at leading law schools.
More info is here.
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Ann has the details behind the Clinton campaign's charges of "embellishment" (oh, my!), but calls the issue a "distraction from the list as a whole."
Can Treasury really reorganize American oversight comprehensively - and extend supervision to investment banks and maybe even hedge funds? Here is the report, and here's the text of Paulson's speech. Also with great early reactions, here's Larry Ribstein and Elizabeth Nowicki. Below, I go through the proposal point by point from an administrative law perspective, with every qualification about the quick and cursory nature of this analysis applicable.
Although, as we will see below, Treasury will need legislation to do most of what it wants to do, it has also requested comments on its blueprint in the Federal Register, much as it might for any advanced notice of proposed rulemaking.
If the more unified financial regulator is supposed to be based on the so-called "President's Working Group," formalizing that institution and maybe building on its domestic responsbilities (it was created to engage in international regulatory cooperation thought the Financial Stability Forum) is administratively easy. Paulson says: "We should formalize the current informal coordinating practice among the US regulatory community by amending and enhancing the Executive Order which created the PWG." And executive orders are not reviewable by federal courts.
What about the so-called Mortgage Original Commission? Paulson: "This commission, the MOC, would be led by a director appointed by the President. The Commission membership would include federal banking regulators and appropriate state representation." That is an exceedingly odd administrative structure (though there's nothing illegal about it, probably, the DC area transit authority is composed of state and federal officials). It will take legislation.
Paulson: "we recommend the creation of a federal charter for systemically important payment and settlement systems and that these systems should be overseen by the Federal Reserve." That's new, will take legislation, and is a real expansion of the Fed's supervisory power.
Merging the CFTC and SEC will of course take legislation, but note Paulson's European view on rules v. standards: "The market benefits achieved in the futures area should be preserved and we do not want to lose the CFTC's principle-based process for market exchange oversight." Translation: I don't want this to be an SEC takeover, because even if American exchanges are losing listings after SOX, the futures markets are doing great. The blueprint has a number of other suggestions for the SEC, including one deregulatory one that could be done by rulemaking: generally exempting "Exchange Trading Funds" from SEC oversight. Treasury is worried that US mutual funds are not competitive: "Treasury also notes the inability of the U.S. fund industry to market successfully on a global basis shares of U.S. registered investment companies because of a variety of issues, including [] tax..... This limits investor choice and the growth and competitiveness of the U.S. fund industry."
Oddly, the states regulate insurers - which in other countries are the biggest and most sophisticated financial institutions around. Insurers hate having 50 state rules. But surely this administration's commitment to federalism will mean that Paulson wouldn't ... oh: "There have been numerous attempts to modernize the regulatory structure for insurance. At this time, it seems clear that the way forward is to give insurers the ability to elect for federal regulation." Legislation required. I think a lot of people think this reform is overdue, but check out Larry Ribstein's "state competition leads to races to the top" view: "In brief, our proposal is based on corporate-type jurisdictional choice ... with modifications that recognize the greater demand for consumer protection in the insurance context."
What about the end of independent S&L regulation? "With the elimination of the federal thrift charter, the OTS would be closed and its operations would be assumed by the OCC." That will require legislation, but note that it would be legislation reorganizing and combining two offices in the Treasury Department, which you'd think would be the sort of thing to which Congress might defer to the Secretary.
Okay, this post is long already. That's an overview, anyway.
Following Gordon's post on the long term vision of the Paulson proposal, one of my rules of administrative law thumb is that new regulatory schemes tend to be born in crises and in a hurry. But the corollary to that rule is that the much of a new scheme's content will have been around for a while. The Treasury Department's new effort, to be announced later this morning, appears to follow both rules. We've pointed you to the long term vision, the AP has seen an overview of the mechanics, Treasury wants to:
-Expand the role of the President's Working Group on Financial Markets to include the entire financial sector rather than just financial markets.
-Create a federal commission, the Mortgage Origination Commission, to develop uniform, minimum licensing standards for mortgage market participants.
-Close the Office of Thrift Supervision, which regulates thrift institutions, and move those functions to the Office of the Comptroller of the Currency, which regulates banks.
-Merge the functions of the Commodity Futures Trading Commission into the Securities and Exchange Commission to create one agency to provide unified oversight of the futures and securities industries.
-Establish an Office of National Insurance within the Treasury Department to regulate those in the insurance industry who want to operate under an optional federal charter.
-Work to establish as a long-term goal three major regulators: the Federal Reserve as a "market stability regulator"; a "prudential financial regulator" to take over the functions of five separate banking regulators; and a "business conduct regulator" to regulate business conduct and consumer protection.
Merging the CFTC and SEC certainly isn't new. Nor, as the US has increasingly been called on to harmonize its practices of insurance supervision with foreign regulators, is the idea of moving that supervision from the states to the federal government altogether surprising (not, of course, that it has anything to do with the current crisis). In addition to the AP summary, it appears that the SEC's ex post regulation of financial products would change, and the Fed and Treasury would get way more authority over non-commercial bank financial institutions.
If turf is your thing, then you should conclude that the Fed and the Treasury Department would, if these proposals were enacted, get massive new responsibilities, while the SEC, OTS, CFTC, and FDIC would lose authority. My final rule of thumb is that when agencies are pitted against each other in a legislative fight, their constituencies tend not to be individual congressmen, though the chairs of committee charged with overseeing regulators may not want to see those regulators disappear. Rather, the foot soldiers in these fights tend to be the lobbyists for regulated industries themselves. So you have the policy arguments (shouldn't we, after all, merge the CFTC and SEC?) and the question about whether the Securities Industry Association will care about the reorg, or fear the power of the Fed. I think we can assume that the hedge fund and derivatives industry lobbyists will oppose much more regulation, though they may welcome the idea that the putative regulator at least would not be the SEC.
The Washington Post is where you turn for legislative prospects Kremlinology; it puts the chances at passage, at least as things currently stand, as pretty low. Check out the amusingly dismissive take by the head of the Office of Thrift Supervision, the S&L regulator which, somewhat mysteriously, has always been separate from the OCC, which regulates banks:
John M. Reich, director of the Office of Thrift Supervision, discounted the importance of the blueprint, which calls for his agency to be merged with the Office of the Comptroller of the Currency to streamline the regulation of similar types of financial firms. In an e-mail to his employees, which was obtained by The Washington Post, Reich wrote that "you might be wondering whether financial services restructuring is an idea whose time has finally come. I don't think so."
Reich suggested that the current arrangement, of multiple banking regulators, offers important checks and balances. "When the Treasury Department issues its recommendations, expect to see news stories and renewed questions about what the future will hold," Reich wrote. "Take note of the fanfare, then look back to [past failed efforts to restructure financial regulation] and resume the important work that you continue to do so well."
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March 30, 2008
Since I traveled to Pittsburgh this week, I had the chance to read a story in the Pittsburgh Post-Gazette on the pros and cons of allowing employees to participate in office bracket pools. Indeed, some offices have sought to ban such pools. Apparently not because they may be illegal. But rather because they may have a negative impact on employees and the workplace. To be sure, one research firm estimates that the distraction created by basketball office pools will cost employers some $1.7 billion in wasted work time. This estimate is based on wasted time spent on bracket-related activities from "trash talking at the water cooler" to "watching live videos of the games during business hours." In addition, to the wasted time, one employment lawyer notes that bracket pools in the office invite trouble because things may go awry. Such as when someone believes they should have taken first prize and instead gets third place, or worse, when the CEO wins first prize, after having pooled money with "the people in the mailroom and the messenger." If this happens, the advice is that the CEO should buy everyone lunch instead of pocketing the money. To be sure, despite the potential loss in productivity, most companies either encourage or do not discourage bracket pools in the office. Such companies find that allowing employees to participate in brackets is good for employee morale, fostering a sense of community and healthy competition. So for now, most employees are free to fill out and agonize over their brackets, even on company time. Given the many students that participate in bracket pools, it is probably a pastime that would be very difficult for companies to disrupt.
Henry Paulson is proposing to reconstruct our financial regulatory institutions from scratch. According to the executive summary, this report has been in the works for a year: "Treasury began this current study of regulatory structure after convening a conference on capital markets competitiveness in March 2007." But the recent drama on Wall Street ensures an extra degree of salience:
Market conditions today provide a pertinent backdrop for this report's release, reinforcing the direct relationship between strong consumer protection and market stability on the one hand and capital markets competitiveness on the other and highlighting the need for examining the U.S. regulatory structure.
The proposal includes short-, intermediate- and long-term proposals, but the ultimate goal is regulatory efficiency, which will be achieved by consolidating federal power in the hands of three regulatory agencies. Each agency would be responsible for one of the following objectives:
• Market stability regulation to address overall conditions of financial market stability that could impact the real economy (the Federal Reserve);
• Prudential financial regulation to address issues of limited market discipline caused by government guarantees (the Prudential Financial Regulatory Agency); and
• Business conduct regulation (linked to consumer protection regulation) to address standards for business practices (the Conduct of Business Regulatory Agency).
Paulson refers to this structure as the "optimal" regulatory framework. The SEC's current responsibilities would be assumed by the CBRA.
The most interesting part of the executive summary is the paragraph in which Paulson explains other regulatory models:
Treasury considered four broad conceptual options in this review. First, the United States could maintain the current approach of the [Gramm-Leach-Bliley Act of 1999] that is broadly based on functional regulation divided by historical industry segments of banking, insurance, securities, and futures. Second, the United States could move to a more functional based system regulating the activities of financial services firms as opposed to industry segments. Third, the United States could move to a single regulator for all financial services as adopted in the United Kingdom. Finally, the United States could move to an objectives based regulatory approach focusing on the goals of regulation as adopted in Australia and the Netherlands.
The executive summary doesn't explain why the objectives-based approach would be optimal for the U.S. That is a conversation worth having. Elizabeth Brown started us down that road here at Conglomerate two years ago, and the British system has some fans in high places here in the U.S. Something tells me that this discussion is going to gain some increased attention in the next few years.
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March 29, 2008
Last fall, I received an invitation to teach a class in Barcelona this summer. In a fit of madness, I declined. Here is a photo of Barcelona that I found on Flickr, using Seth Godin's tips on searching for the "Most Interesting" HDR images.
What are you doing during Earth Hour?
I'm blogging in the dark.
Good restaurants are scarce in Utah Valley, but I discovered one tonight, thanks to a tip from my colleague, Fred Gedicks. Inspired by an offer to publish my article -- and the fact that my wife and daughters went to SLC for the evening -- I took my sons to Pizzeria Seven Twelve. (A restaurant with it's own light-content blog.)
We walked in and got a table at 6:30 pm on a Saturday, but it won't be long before this place will require an hour wait. It's all about the pizza, and this is the best pizza I have ever eaten. Sorry, New York.
If you don't believe me, read some of the other reviews.
By the way, the "712" is a reference to the temperature of the brick oven, imported from Italy. The server told me on the sly that the oven actually cooks at 780 degrees, but the owners liked the sound of "Seven Twelve." I am in favor of whatever it takes to get pizza that good.
March 28, 2008
Two hours until game time, and I am calling Wisconsin BIG over Davidson tonight. Davidson hotshot Stephan Curry will get fewer than 20 points and Davidson will not reach 50. Unless Wisconsin slacks off during garbage time at the end of the game. But in any event, Badgers advance to the Elite Eight.
UPDATE: From ESPN re Wisconsin:
They play in the rough-and-tumble Big Ten, where it's often hard to tell when football season ended and basketball season began. Their trademark is their textbook defense -- they're allowing only 53.9 points a game, best in the country, and have allowed only seven opponents to score more than 60 points -- and their offense is often overlooked because it's so balanced. They're old-school, right down to the jerseys that have only a number on the back.
UPDATE2: Now you know why I am in the bottom third of the Conglomerate bracket.
After Bear went south, the Basel Committee on Banking Supervision announced that it would be revisiting its "Sound Practices for Managing Liquidity in Banking Organizations" guidance. The SEC then wrote the committee, in what looks to me like an effort prove that it was on the ball. I may sound like a broken record on this, but the SEC didn't used to have to justify its broker dealer supervision to the central bankers of other countries. It does now, though. A taste of what the agency said:
Bear Stearns' registered broker-dealers were comfortably in compliance with the SEC's net capital requirements, and in addition that Bear Stearns' capital exceeded relevant supervisory standards at the holding company level. Specifically, throughout the week of March 10 until the closing of the JP Morgan Chase transaction on Sunday March 16, Bear Stearns had a capital ratio of well in excess of the 10% level used by the Federal Reserve Board in its "well-capitalized" standard.
...the holding company had a pool of high quality, highly liquid assets of over $18 billion as of the morning of March 11. This was consistent with what the SEC had seen over the preceding weeks, during which SEC staff - both on-site and at headquarters - monitored the capital and liquidity positions of all the CSEs, in the case of Bear Stearns on a daily basis.
In accordance with customary industry practice, Bear Stearns relied day-to-day on its ability to obtain short-term financing through borrowing on a secured basis. Beginning late Monday, March 10, and increasingly through the week, rumors spread about liquidity problems at Bear Stearns, which eroded investor confidence in the firm. Notwithstanding that Bear Stearns continued to have high quality collateral to provide as security for borrowings, market counterparties became less willing to enter into collateralized funding arrangements with Bear Stearns.
After the jump, you can see how the SEC measured Bear's liquidity, up from $8.4 billion at the end of January to $21 billion by March 6, down to $2 billion during Bear's very bad final week.
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March 27, 2008
When we lived in Wisconsin, I noticed occasional announcements in my alumni magazine about the BYU Animation Program, which has produced a number of award-winning films. Last year, my daughter started her college career intent on majoring in some form of visual art. After investigating the Animation Program, she was hooked, and she started taking classes last fall. It's a very cool major at the intersection of technology and art. She works incredibly hard, but she loves what she is doing.
With this personal investment, I was very pleased to read today about the creation of a new BYU Center for Animation. And I was especially pleased to read the remarks of Ed Catmull, President of Pixar Animation Studios and Walt Disney Animation Studios:
"Over the years, Pixar has worked with a lot of different universities around the country and hired people. One of the interesting things is, all of a sudden, in the last few years, we found that BYU has risen to the top. BYU has an extraordinary program here."
...
"It's amazing to suddenly see that BYU is producing the best in the industry.... It's the perception not just at Pixar but also at the other studios that something pretty remarkable is happening here."
If you follow the link above, you can see a preview of the latest film from the BYU animation students entitled "Pajama Gladiator." More stuff here.
UPDATE: The original post was mainly just me bragging about my daughter. One thing that I didn't mention is that the Animation Program accepts only about 10% of the applicants each year, and this selectivity must be part of their formula for success.
This morning, I read more about Catmull's speech in The Daily Universe, BYU's campus newpaper. His discussion of the making of Toy Story 2 may be of more general interest to readers of Conglomerate:
Through most of the production, the team [working on Toy Story 2] had internal problems. As a result, the film suffered. Nine months before the movie's release, Pixar requested to start over with a new crew, even though it was a daunting task.
"We just had an idea that was a good idea, and we put a team on it and they screwed it up; they couldn't do it," Catmull said. "And we put a great team on it and they fixed it. It's absolutely clear the issue for us has nothing to do with finding that idea. It's all about putting together a team that works well together."
...
Catmull ... emphasized the importance of doing the best one can. He mentioned how Pixar was told to make "Toy Story 2" second-class and release it to video for a large profit.
"The problem is [Disney's] sequels weren't very good," Catmull said. "We realized, as we went through with this, the very concept of [doing] 'B-work' was bad for our souls."
There is wisdom borne of experience.
The SEC hasn't abandoned its ever faltering mutual recognition efforts for foreign regulators and the markets they supervise. The last time it tried this seriously, the agency only got as far as Canada - sorta. But perhaps globalization - and the new impetus to harmonize accounting standards - will prove more inspiring this time. Here is the SEC's plan going forward:
The Commission contemplates taking the following actions:
- Exploring initial
agreements with one or more foreign regulatory counterparts, which
would be based upon a comparability assessment by the SEC and by the
foreign authority of one another's regulatory regimes.
- Considering adoption of a formal process for engaging other national regulators on the subject of mutual recognition. This process could be accomplished through rulemaking or other appropriate mechanisms, possibly informed by one or more initial agreements with other regulators.
- Developing a framework for mutual recognition discussions with
jurisdictions comprising multiple securities regulators tied together
by a common legal framework, including Canada (which has no national
securities regulator, but rather provincial regulators) and the
European Union (whose national securities regulators are subject to
supranational legislation and directives).
- Proposing reforms to Rule 15a-6 in order to improve the process by which U.S. investors have access to foreign broker-dealers.
One guy to read on this is Larry Cunningham; you might start here. Chris Brummer has also written on the issue.
