Ideoblog

After Stevens, what about Skilling?

Well, at least Ted Stevens got some justice. The Justice Department moved to set aside his conviction because it "recently discovered" that prosecutors withheld from the defense its notes of an interview with a major witness that contradicted his later testimony. Seems there’s something called the Brady Rule that requires the government to turn those notes over. This was only part of the prosecutorial misconduct in this case.

Now let’s think back to another case – that of Jeff Skilling, who’s currently rotting in jail. In order to convict Skilling, prosecutors had to prove he knew of the fraud perpetrated by underlings, notably including one Andy Fastow. A key part of their case on this point was a so-called “global galactic” document that Fastow testified he went through with Skilling detailing illicit side deals.

Funny thing, though: this critical document, like something out of a spiritual, once was lost then it was found, in Fastow’s safe deposit box. At trial, as I discussed at the time, Skilling’s lawyer wondered if the document didn’t "show up when you were making your deal with the government?"

As for that deal with the government, Tom Kirkendall has noted that what was supposedly a ten-year sentence somehow mysteriously morphed into a six-year sentence (a fourth of the time Skilling got).  If you had already shown a tendency toward fraud, might you create a document to save yourself four years in jail?  What might a jury think about that? 

Then, whadyaknow, it turns out that the government had not turned over to the defense raw notes of an interview with Fastow in which, as I discussed at the time Fastow told the Task Force he “doesn’t think [he] discussed list w/ JS.” Shades of Stevens. 

As the defense argued:

This obviously exculpatory statement was not included in the Task Force’s “composite” Fastow 302s given to Skilling. Nor was it included in the “Fastow Binders” the Task Force assembled for the district court’s in camera review of the raw notes. It is not possible that this omission was inadvertent. Fastow’s statement is one of the most important pieces of evidence provided during all his countless hours of interviews. Moreover, in preparing both the composite 302s and Fastow binders, the Task Force extracted and included other—relatively inconsequential—statements from the same interview date and even the same page of notes.

How important was all this? Consider that Enron prosecutor John Hueston’s crowing in a law review article about his triumph in convicting Skilling and Lay despite obvious problems with his case:

In a trial involving allegations of earnings manipulation and disputes over the defendants' respective understandings of the application of often arcane accounting rules, proof of criminal intent was of critical importance. Assembling such evidence proved challenging, however, as both Skilling and Lay clearly relied on the advice of inside and outside counsel, as well as their auditors. For instance, although Skilling resigned from Enron for “personal reasons” after a mere six months as C.E.O. and only four months prior to the company's bankruptcy in December 2001, he later took steps seemingly inconsistent with alleged criminal intent. Prior to Enron's collapse, he offered to return to the company as its steward, and in the weeks prior to bankruptcy he took several steps toward engineering and personally financing a private buyout. As forcefully argued by his counsel at trial, what fraudster would seek to return to what he understood was a collapsing house of cards? 

Hueston knew he had a problem with Fastow, as he discussed in the article:

If the defense was successful in portraying Fastow as criminally independent of Skilling and Lay, and without credibility in describing the involvement of Skilling and others in the accounting side deals set forth in Fastow's handwriting in the Global Galactic document, the jury would surely discard his testimony by the time Glisan was called to the stand months later.

Hueston then detailed how he skillfully set traps for the prosecution in his direct of Fastow. But he knew about the vulnerability on the authenticity of the Global Galactic agreement. Consider footnote 71:

Anticipating that the defense in its cross examination of Fastow might suggest that the Global Galactic agreement was fictional, we exercised our right to withhold Loehr's Jencks Act statements until the conclusion of Fastow's testimony. See 18 U.S.C. 3500 et seq. These statements revealed Loehr's ability to corroborate key aspects of Fastow's testimony about the document. For all other case-in-chief witnesses, prosecutors provided statements in advance of the time frame set forth in the act.

Yeah – but what about those raw notes of the Fastow interview?

Skilling's lawyer argued in the brief linked above:

By depriving Skilling of key exculpatory evidence that Fastow conveyed in his interviews, the Task Force was able to skew the proof and convince the jury to accept Fastow’s word over Skilling’s. As the Task Force later told Fastow’s sentencing judge and recounted in a law review article, Fastow’s testimony and credibility were the cornerstones to convicting Skilling.* * *

Tom Kirkendall adds:

The initial Fastow statements set out in the Skillling brief were not only not as damning as Fastow's trial testimony, they were irreconcilable with that trial testimony and described completely legal activity, even by Fastow. Consequently, had the Enron Task Force not been able to to pry Fastow off his original story, the core of the Task Force's case against Skilling and Lay would have have contradicted by Fastow, who was Skilling's main accuser at trial. And the fact that the DOJ did not disclose to the Skilling defense team how Fastow's incriminating testimony evolved over time from his exculpatory initial statements while Fastow and the Task Force were negotiating a dubious plea deal is beyond reprehensible. What is the DOJ going to say now, that they didn't disclose the exculpatory earlier statements to Skilling's defense team because Fastow was protecting Skilling in these initial meetings? Yeah, right.

Kirkendall, who has been on top of this case from the beginning, providing perspective the mainstream press has almost totally missed, says:

So, because of prosecutorial misconduct, the Justice Department decides to move for dismissal of the political corruption case against former Alaska senator Ted Stevens * * * Meanwhile, Jeff Skilling, who created billions of dollars in wealth and thousands of jobs by revolutionizing risk management of natural gas prices for producers and industrial consumers, sits in a Colorado prison cell under the weight of a barbaric 24-year prison sentence. Skilling's conviction involved even more egregious prosecutorial misconduct than the Stevens case. The criminal case against Skilling was materially weaker than the case against Stevens, too. It is a sad reflection of the current state of American rule of law that the DOJ readily concedes prosecutorial misconduct against a legislator, but ignores it in a shaky case against a businessperson who created many jobs and great wealth

The FASB gambit vs. the Geithner shell game

The FASB is proposing to change its mark-to-market rules to give banks flexibility in valuing certain assets in markets that they deem to lack willing bidders. Here’s the WSJ story.  This will encourage the banks to reject Geithner's plan to sell their assets to government-backed buyers, and instead to just wait for their fantasy valuations to someday become reality. 

That’s fine with me. Maybe it would provide the needed pressure for the better fix I described last week (channeling Warren Buffett and Holman Jenkins): "Let the banks sell the assets for what they’re worth but don’t make them reduce their capital for regulatory purposes. This would be honest, and wouldn’t require any taxpayer money." This would beat the shell game of using taxpayer money to inflate the market for the bank's assets. 

Freedom of contract in uncorporations vs. corporations

I have often pointed out on this blog, recently in the Harvard blog, and in several articles (e.g.) that uncorporation (i.e., LLC and limited partnership) fiduciary duty opt-outs are more broadly enforced than corporate contracts.

A recent case provides direct confirmation by explicitly comparing corporations and uncorporations. In Sutherland v. Sutherland, 2009 WL 750287 (Del. CH. March 23, 2009), a closely held family corporation had the following charter provision:

Any director individually ... may be a party to or may be pecuniarily or otherwise interested in any contract or transaction of the corporation, provided that the fact that he ... is so interested shall be disclosed or shall have been known to the board of directors, or a majority thereof; and any director of the corporation, who is ... so interested, may be counted in determining the existence of a quorum at any meeting of the board of directors of the corporation which shall authorize such contract or transaction, and may vote thereat to authorize any such contract or transaction, with like force and effect, as if he were not ... so interested.

The court refused to apply the provision to treat interested directors as disinterested for purposes of immunizing interested transactions from Delaware’s entire fairness analysis. The court said (emphasis added):

The question * * * is whether such a far-reaching provision would be enforceable under Delaware law. It would not. If the meaning of the above provision were as the defendants suggest, it would effectively eviscerate the duty of loyalty for corporate directors as it is generally understood under Delaware law.

While such a provision is permissible under the Delaware Limited Liability Company Act and the Delaware Revised Uniform Limited Partnership Act, where freedom of contract is the guiding and overriding principle, it is expressly forbidden by the DGCL. Section 102(b)(7) of the DGCL provides that a corporate charter may contain a provision eliminating or limiting personal liability of a director for money damages in a suit for breach of fiduciary duty, so long as such provision does not affect director liability for “any breach of the director's duty of loyalty to the corporation or its stockholders....”

In other words, if you want to completely opt out, you have to use an uncorporation. In corporations, freedom of contract is not, by negative implication, the "guiding and overriding principle."

This is not form over substance because there are meaningful differences between uncorporations and corporations. Here's more on that. 

U.S. president now handles auto warranties

Really (HT MR). You would think that the leader of the free world would have other things on his mind.  But that's the way it is when you have to run the whole economy along with everything else. 

I've got a call in to ask him to finally do something about that leaking gasket.

More evidence on short-selling

I've argued, most recently here, that government's periodic war against short-selling amounts to killing the messenger, in view of mounting evidence of the shorts' contribution to market efficiency.  The latest evidence on the informational benefits of short-selling is Drake, Rees & Swanson, Trading Against the Prophets: Using Short Interest to Profit from Analyst Recommendations:

We find that positions taken by short sellers that conflict with consensus analyst recommendations are highly informative about future returns, and investors can profit by trading with the shorts. A six-month, abnormal return of 9.6% can be earned from a zero-investment strategy that 1) shorts firms with highly favorable analyst recommendations (buy signal) but high short interest (sell signal), and 2) buys firms with highly unfavorable analyst recommendations (sell signal) but low short interest (buy signal). To understand why this strategy is so profitable, we investigate whether shorts and analysts differ in their use of information that prior research shows to be predictive of future returns. We find that analysts tend to over-recommend stocks with high growth and high accruals - despite a negative association with future returns. In contrast, short sellers correctly use this and other fundamental analysis information to identify situations when analysts' recommendations are misleading.

Licensing history

You need a license to talk about history for money in Philly (also NYC and Washington).  The WSJ has the story.  The Institute for Justice is suing to free the Philly tour guides from having to get a license, which requires them to take a test on Philadelphia's version of history.

Not too surprisingly, the law was a tour guide's idea.  No doubt he is sincere, but it's worth noting that this is one way to reduce the competition. Philadelphia agreed because it wants to preserve its "branding, messaging and identity." Sounds like a business talking, but with a government stick. 

This would seem to be an easy case of pure speech rather than protecting citizens from economic harm.  But as the IJ points out:

The United States is in the midst of an explosion of occupational licensing. * * * Roughly 20 percent of American workers are now forced to meet government-imposed licensing requirements to work in their chosen field, up from only 4.5 percent in the early 1950s. * * * [I]n occupation after occupation—from floristry to interior design—the meteoric growth of arbitrary and unreasonable barriers to entry is making it more difficult for entrepreneurs to break into the career of their choice.* * *

The plight of Philadelphia’s tour guides is not unique. It is easy to single out this new regulation as unjust because the government’s goal—protecting people from hearing things that the government does not want them to hear—is patently illegitimate. But individuals have a right to be free from unreasonable restrictions on their choice of occupation no matter what that occupation is—be it braiding hair, arranging furniture or giving tours.

So, now let's talk about legal services.  What kind of talking about law should the government regulate?  Glad you asked.  See Lawyers as Lawmakers:  A Theory of Lawyer Licensing, 69 Mo. L. Rev. 299 (2004), online version.   

Wall Street's flight back to partnership

As I’ve been saying, the uncorporation (partnerships, LLCs, limited partnerships) is set to rise out of the ashes of Wall Street’s moribund corporate model. Wall Street investment firms, incorporated in the 1990s, lost control of risk and ended up as banks. The nail in their coffin is government money, with its baggage of heavy scrutiny, even if the firms manage to avoid confiscatory taxes on compensation.

Yesterday brought this Bloomberg story (HT Carney) about the emergence of Wall Street trading boutiques snapping up refugees from the big firms:

Broadpoint, whose shares have outperformed Citigroup Inc.’s by almost 51 percentage points this year, has added more than 240 people since September 2007. They include traders from Bear Stearns Cos., Lehman Brothers Holdings Inc. and Merrill Lynch & Co., which either collapsed or were absorbed by bigger banks * * * Cantor Fitzgerald LP, the closely held securities firm, has hired 100 people in the past six months from banks, including UBS and Bear Stearns.

* * *“The talent is streaming out of the doors of the big firms,” Bruce Foerster, a former Lehman Brothers managing director and now president of South Beach Capital Markets in Miami said. “As the best and the brightest leave, they will tip their hat to Senator Christopher Dodd. Bright people won’t want to be at places where the government is.”

Carney adds:

We need to tread carefully with any new regulations to make sure we don't stomp these innovations while they are still in their cribs. For more on this trend, check out Larry Ribstein.

Geithner's shell game

Here’s how I understand this will work (see Carney and Salmon for details).

The government wants the banks to start lending, which they can’t do until they get their capital up, which they can’t do with all those toxic loans on their balance sheet.

The government could just give the banks the money, but that would be a “bailout,” and not too popular right now. The government also could buy the assets for the inflated values they’re currently booked at. But that would be a bailout and not too popular right now.

So we have an elaborate shell game. The government subsidizes private equity companies to buy the assets at inflated values.  Instead of just giving them wheelbarrows of money, they get non-recourse loans for most of the purchase price. Although most people don't understand this right now, they will come to understand that "non-recourse" means that the buyers are exposed only for the minimal payments they’re making on these hugely leveraged deals.

When we find out that the assets are actually worth what the banks really think they’re worth (as opposed to how they’re currently booked) the taxpayers, who provided most of the money, will bear most of the loss. Remember: the loans were non-recourse. If the assets are actually worth their currently fictional values, then the private equity companies will make money, possibly a lot.

Here are the problems:

• It may not work, because the banks will have to write down the assets to the sale price (albeit still more than actual value) and they still won’t have enough capital to lend.
• If the assets don’t go up, and the taxpayers find out they’ve been hosed, there will be hell to pay.
• If the scheme works and the private equity companies make money, the spotlight’s on them. They’ve been sucked into the maw of government assisted enterprises. The uncorporations have become corporations and will be regulated as such.
• The whole thing rides on a mountain of debt and phony asset values. The hope is that people will think the economy is worth more than it is, the stock market will go up, and the economy really will be worth more.  This is what is happening so far. But I thought that kind of Ponzi scheme was how we got into this mess in the first place.

How should we fix this? Here's how: Let the banks sell the assets for what they’re worth but don’t make them reduce their capital for regulatory purposes. This would be honest, and wouldn’t require any taxpayer money.

AIG in a nutshell

Ok, so let me get this straight.

As I've said:

AIG was supposedly insuring risky paper for both banks and money funds. AIG got fees, the banks and the money funds got to look better. The problem is that AIG's plan for covering the risk was to assume, along with everybody else . . . that real estate prices would only go up. In other words, everybody was living in a Pee Wee Herman-like fantasy world.

Joe Nocera described this as a huge “scam” that "helped create the illusion of regulatory capital with its swaps, and now the government has to actually back up those contracts with taxpayer money to keep the banks from collapsing."

(By the way, the credit rating agencies let this happen because they stupidly didn’t see through Pee Wee’s stage set. Guess who’s getting $400 million - $1.2 billion in TALF fees? No peeking.)

As I commented, "[t]he government is bailing out AIG because AIG undermined a system that the government was supposed to be, but wasn't, protecting. And now who's in charge? The government, of course."

But that bailout was necessary, wasn't it?  Nope. According to Stanford economist John Taylor, the failure to rescue Lehman did not cause a market reaction, suggesting that an AIG failure wouldn't have either. (James Suroweicki disagrees, but John Carney notes that the reaction Surowiecki points to is really to the discovery of the huge hole in Lehman's balance sheet, not to Lehman's failure.)

Of course I could be wrong.  Maybe an AIG failure would have been a disaster.  Hey, maybe the market would drop to 6 or 7000.  We couldn't handle that, could we?

I've pointed out that the horrendous problem here is that we now have the government running this huge company. Now that it's in charge of the company, the government has authorized hundreds of millions of dollars of bonuses. To whom? Well, the guys who authorized the brilliant derivatives scheme that triggered the bailout.

Tim Geithner, our Treasury chief, says they had to do it. (Remember that he was the guy we had to hire although he was a tax cheat because he would provide continuity with our previous brilliant Treasury chief Hank Paulson. All this from a President who promised Change.) Geithner says there's nothing he can do about this.  Wrong.

Anyway, the House voted to put a 90% tax on bonuses at Wall Street firms getting more than $5 billion in bailout money. So now firms are trying to get out of the bailouts. And the government has to decide whether the bailouts are so necessary that we should force firms to get bailed out so the government can run them and do stuff like approve bonuses that the government can then confiscate.

Got it?

The Skadden departures and the coming failure of Big Law

ATL reports that two Skadden litigators are leaving that monument to law firm profitability to form a new firm with a DC boutique. One of the lawyers also “will become the CEO of Corporate Risk Advisors, a multi-disciplinary consulting firm providing services to the financial services industry.”

ATL says “Time will tell, but it doesn't look like Skadden associates should read too much into these departures.”

I don’t know about Skadden in particular, but this move has significant implications for Big Law. As I’ve been saying, here, the model of law firm as worker coop highly leveraged by the inverted pyramid of associate leverage is doomed. The associates no longer can pay the stars enough to make them stay.

When it starts happening even at a firm like Skadden, you know, notwithstanding comforting noises by law firm managers, and deep in your heart, that I’m right.

Why we shouldn't bail AIG/Goldman

Harvard’s Lucian Bebchuk writes in today’s WSJ why AIG can fail:

• Insurance policy holders are protected by their insurance subs (though ironically I recall AIG advertisements from just a couple of years ago selling insurance based on the supposed strength of the overall company).
• Losses to derivative counterparties would be “best addressed by the U.S. government (or foreign governments in the case of their banks) infusing capital directly -- in return for shares -- into the banks that need it.” (Could it be that this whole thing is about avoiding a direct payment to Goldman Sachs?).  
• Depositors in financial institutions, including money market funds, are now protected, as they were not when Lehman failed.

Bebchuk explains why we can let AIG fail. This is why we should:

• We cannot continue to both encourage risk-taking and to bail out failed bets. Moral hazard is not just a theoretical concern here. I wonder how Lehman and AIG would have been managed in the months preceding September 15, 2008 if Bear Stearns had not been bailed. Let's not compound that horrendous mistake.
• Bailing out AIG would contribute to a building assumption, which may become official if we get a “systemic risk regulator,” that a huge swath of our investment industry is backed by the government. If you like Fannie and Freddie you’ll love this.
• Our market-based economy demands accepting the market’s judgment on which firms should fail.
• We cannot tolerate additional US government control of financial institutions. Even if Treasury’s investment would be nominally debt, surely it would have actual or implied powers comparable to equity. AIG – and all the firms that would have to be bailed after AIG – would effectively become government institutions.

We should not accept these very serious consequences policy implications based on the ad hoc judgment of any Treasury Secretary, least of all this one.

Update:  The original version of this post erroneously stated that Geithner worked for Goldman.  Sorry, but it is an understandable mistake.

Geithner, revisited

Remember when we were all in a sweat to get Geithner confirmed as Treasury Secretary despite the fact that he couldn’t seem to handle his own taxes? Here’s what I said at the time:

Of course the confirmation's going to happen. But I thought I would post this so I can pull it out again when the ultimate irony emerges -- we learn that Geithner’s no more indispensable than his predecessor turned out to be.

Well, maybe it's not too early to say I told you so.

Update:  Apparently there's some question about whether Geithner lied to Congress about the AIG bonuses.  Geithner lie?  Could that be possible? 

The bailout fallout

That's what I'll be discussing at Bill Brown's class at Duke.  Some details here (March 18 events).  After doing some thinking I have some thoughts.  Watch this space!

Conglomerate book club on The Law Market

It's here!

A real criminal stands in the dock

Yesterday the world got to see a real corporate criminal.  Bernie Madoff deliberately used his control over money to ruin, directly or indirectly, thousands of lives.  He did this through a so-called "business" that was essentially never legitimate.

Madoff wasn't somebody who devoted his life to building a business and then watched it go up in flames (Skilling, Lay).  Madoff didn't fail to account for his pay properly.  Madoff wasn't some underling caught up in the corporate hierarchy who paid dearly for refusing to admit to a crime he believed he did not commit (Olis).  Madoff lied to and stole from everybody who trusted him for an entire generation. 

Yet it's likely that Madoff will receive a sentence not strikingly different from some of those just mentioned. It's too bad Madoff's guilt has been blurred by all those others who have shared the dock with him.

Is this any way to run a market?

Suppose you're offered a deal:  buy very risky assets.  If by a combination of skill and luck it pays off, you get raked over the coals for making excessive profits.  On the other hand, if it blows up, you lose your shirt. 

Here's some details (Breakingviews via Dealbook):

Imagine . .  .the case of a fictional hedge fund — call it Acme Partners L.L.C. Under the emerging outlines of the plan, Acme and the Treasury would invest equal amounts of equity into a fund, say $5 million apiece. The Federal Reserve might then lend the fund $90 million, . . . on a nonrecourse basis.

Assume the Acme-Treasury fund invests its $100 million in a basket of distressed loans that sells for 20 cents on the dollar. Those assets . . . may recover to, say, 40 cents after two years. . . After paying off the $90 million loan and perhaps an additional $10 million of interest, there would be $100 million left. Split two ways, that’s $50 million for Acme on an initial investment of $5 million.

But . . . when Acme’s lead partner pays himself 20 percent of that profit, as is the standard procedure at hedge funds, how would politicians react? They might be delighted that the taxpayer has also turned $5 million into $50 million, but don’t bet on it. . .

And what happens if, instead, the $100 million turns into $50 million? The investor loses his $5 million, yet taxpayers plus the Fed in total are stuck with a $45 million loss. Acme will probably be damned if it wins, and damned if it loses. . . .

What’s more. . . there is a danger that Congress will be tempted to use the taxpayer financing of these two initiatives as a backdoor means to impose greater regulation of the banking and investment industries. This is what it did to TARP recipients . . . . While the Treasury had offered clear guidelines on the requirements for accepting the funds, Congress retroactively changed the rules with its amendment to the stimulus package, capping incentive compensation.

Sound inviting? 

Welcome to the rent-seeking economy

Welcome to the rent-seeking economy When a free market is replaced by government hand-outs of trillions of dollars, it becomes a rent-seeking economy. Instead of pie-increasing competition, we get costly zero-sum competition for pie-pieces. The outcome depends on the personal interests of the powerful and the interests they represent.

Here's Gordon Tullock:

Under certain assumptions (see Posner 1975) the competitive outlays to establish a monopoly will exactly equal the present value of the profit rectangle. * * * [A] powerful king sells the monopoly privilege in a manner designed to avoid competitive waste and takes the rent-seeking outlay as a personal transfer. There is no waste in such a transaction.

* * * Compare this situation with that of a weak democratic government, incapable of imposing its will on the bidding process for the monopoly that it is purveying, and vulnerable to competitive bidding for the rent-creating mechanism from other would-be governments. Surely, in this situation, the monopoly profits will be dissipated to a much greater degree than would occur under the powerful monarch.

* * * Even if the rich were disposed to have the government take their wealth and redistribute it to the poor, it seemed clear to me that such a process would be vulnerable to moral hazard. Potential recipients would be well-advised to become suitable objects for charity. * * *

The problem worsens sharply once government replaces private individuals in the charitable process. There is no obvious reason why governments driven by a vote motive should stop at the point where the utility of the rich is maximized. Much more likely is the outcome where the median voters coercively transfer, at no cost to themselves, a large part of the wealth of the rich to the poor, or where special interest groups access the political process to transfer the wealth of consumers to their own members. * * *

Now consider a couple of recent news stories. From Lambert: 

A couple of weeks ago, Rep. Barney Frank sent a snippy letter to Northern Trust, a Chicago-based bank that caters to very wealthy clients. Mr. Frank and some other Platonic guardians on the House Financial Services Committee were incensed that Northern Trust, a recipient of TARP funds, had sponsored and hosted clients at a California golf tournament. Messrs. Frank et al. wrote:

At a time when millions of homeowners are facing foreclosure, businesses and consumers are in dire need of credit, and the government is trying to keep financial institutions — including yours — alive with billions in taxpayer funds, this behavior demonstrates extraordinary levels of irresponsibility and arrogance. We insist that you immediately return to the federal government the equivalent of what Northern Trust frittered away on these lavish events.* * *

Northern Trust is a healthy bank that participated in TARP at government request (the government needed maximum participation to avoid negative signaling by participants). Northern Trust uses golf tournaments as a very effective way to attract wealthy customers. Yet Thom points out that in Barney Frank’s considered view, having never worked in the industry, “There are cheaper, more cost-effective ways to get to know people and understand them.”

From today’s WSJ:

When Rep. Barney Frank was looking to aid a Boston-based lender last fall, the Massachusetts Democrat urged Maxine Waters, a colleague on the House Financial Services Committee, to "stay out of it," he says. The reason: Ms. Waters, a longtime congresswoman from California, had close ties to the minority-owned institution, OneUnited Bank. Ms. Waters and her husband have both held financial stakes in the bank. Until recently, her husband was a director. At the same time, Ms. Waters has publicly boosted OneUnited's executives and criticized its government regulators during congressional hearings. Last fall, she helped secure the bank a meeting with Treasury officials.* * *

Such potential conflicts of interest are more serious as the banking system's crisis has led the government to take an increasingly active role in overseeing financial institutions, including OneUnited.

* * *OneUnited's executives have donated $12,500 to Ms. Waters's election campaigns. * * *Ms. Waters and her husband, Sidney Williams, were investors in two African-American owned California banks that merged with other lenders in 2002 to form OneUnited. Congressional financial-disclosure forms show Ms. Waters acquired OneUnited stock worth between $250,000 and $500,000 in March 2004, as did Mr. Williams. Mr. Williams joined the board of OneUnited that year. * * * In the lawmaker's most recent financial-disclosure form, dated May 2008 and covering the prior year, Ms. Waters reported that her husband held between $250,000 and $500,000 worth of the bank's stock. Mr. Williams also received interest payments from a separate holding at the bank, also worth between $250,000 and $500,000. * * *

In January, Ms. Waters acknowledged she made a call to the Treasury on OneUnited's behalf. * * * OneUnited eventually secured bailout funds under the government's $700 billion Troubled Asset Relief Program, which was set up later that month. A provision designed to aid OneUnited was written into the federal bailout legislation by Mr. Frank, who is chairman of the financial-services panel. Mr. Frank has said he inserted the provision to help the only African-American owned bank in his home state. He said in an interview that Ms. Waters's interest "had zero impact on the outcome because I would have done it anyway."

The reinvention of Wall Street

The WSJ reports that key investment banking "rainmakers" 

are seeking to join boutiques firms, such as Evercore, Greenhill or Centerview Partners * * * . For some, the motivation to leave is the same one that drew them to Wall Street in the first place: money. * * * Bankers there are paid almost entirely by "eating what they kill," while the larger Wall Street firms have historically offered somewhat lower, but more consistent, pay. * * *

Looks like things are moving in the right direction.  As I've said:

Over the last generation, better governance technologies have evolved through private equity, venture capital and hedge funds. This should be the model for the reorganization of Wall Street[.]

Among the advantages of what I've called the "uncorporate" model is higher-powered incentives based on the firm's actual financial success or failure.   

The war on the shorts reignites

Markets are going down partly because traders are shorting shares. So maybe we should make them go up by stopping shorting?  Never mind that the shorting is an indication of what the stocks are actually worth.

This anyway is the flawed logic of such financial gurus as Barney Frank. See Dealbook, and the WSJ:

Rep. Barney Frank was reported to have said that the Securities and Exchange Commission may reinstate the uptick rule, which barred investors from betting against stocks that are already falling. The SEC eliminated the rule in July 2007 and some investors have pushed for its return. If reintroduced, the rule will serve as a stabilizer of the market "because people can't pile on a stock all at once," said Dave Rovelli, managing director of U.S. equity trading at Canaccord Adams. Still, the rule is not going to prevent failing companies from going under, Mr. Rovelli said

As I've argued, "short-sellers are significant potential contributors to market efficiency." Here and here is some evidence. Here's my and Bruce Kobayashi's extended argument in favor of efficiency-driving trading by informed outsiders, and my analysis of the arbitrage function of short-selling in disciplining "noisy" markets.

Hardly anybody -- particularly politicians -- likes to see markets gyrate the way they have been, particularly not when the gyration is mostly down.  But markets need to stabilize and rise the old fashioned way -- based on information. Removing a significant mechanism supporting market efficiency is the last thing we need in these times. 

Finally, consider this:  the securities markets are a report card on government actions.  These actions, as I've said, are undermining and destabilizing markets by, among other things, dithering and threatening property rights. So it's not surprising that Barney Frank -- a key architect of the housing bubble that got us into the mess -- would like the naysayers to go away.

The Law Market at the Glom

Today is book day, I guess.  My book with Erin O'Hara, The Law Market is having a book party at the Conglomerate next week.  Tune in -- I'll be there with Erin, Fred Tung, Paul Stephan, and Joel Trachtman.