So, in a time that is a little light on interesting mergers and acquisitions, here's a story we can chew on for awhile.  (Ha, ha.)  Kraft has made a bid for Cadbury, at a price with a substantial premium (31% over share price), only to be told that it is way too low.  Well, there goes that whole efficient market thing.  Cadbury is in the middle of a strategic plan to increase profitability and share price, and here comes Kraft trying to buy into that momentum.  WSJ story here; NYT story here.  Cadbury is known in Europe for chocolate, but it also has gum.  Kraft doesn't have gum.  In recessions, people eat gum.  Hmmm.

Stay tuned.  Hershey, which already has a distribution deal with Cadbury, may jump in.

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I'm hitting the road tomorrow to attend a Business Law and Narrative Symposium hosted by the Michigan State University College of Law and its Law Review.  Mae Kuykendall has assembled an impressive lineup of scholars, including our own Christine and Glom Masters Joan Heminway, Don Langevoort, and Larry Ribstein.   

For an English major turned corporate scholar, this agenda is a little slice of heaven.

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So, here's the deal.  For the past two years, I've been overwhelmed by the number of catalogs that I receive every Fall, building up to the holidays.  Some weeks, I would swear I got the same Pottery Barn catalog several times, but with different covers.  So, this year, I'm conducting an experiment.

Beginning yesterday, the day after Labor Day, I'm collecting all of the merchandise catalogs I receive until December 25.  I will report periodically on observations of the experiment, and will publish here the grand total after the holidays, with various types of statistics.

I think that I am an average catalog/internet/store shopper.  We order some things from the Internet, but I think we're fairly moderate.  I have not increased Internet spending recently to skew the findings.  In fact, I may have decreased spending "in these tough economic times."  I wish I had compared the last 2 years to this year, to see if stores trimmed down on mailings this year, but I'll add that to the list of things I wish I had done the last 2 years!  Stay tuned!

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John Coates has posted an informative summary of the amicus brief that he and an impressive group of law professors filed in support of the respondents in Jones v. Harris.  Larry Ribstein, who joined that brief and has been following the case for a while, has more details here.  And Stephen Bainbridge, whose excellent BusOrg casebook was very early to excerpt the Seventh Circuit opinion by Easterbrook, adds his own coverage here.

Since the amicus filing deadline last week, a number of news outlets and trade publications have published reports and analysis of the case, including a piece by SamMamudi in the Wall Street Journal.

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To deal with the market failure problems I've discussed last week, I have heard a variety of solutions to the question of what to do to prevent a future bank run, and to prevent banks from holding risky assets (as a colleague noted, another way to think about this was bad risk management by risk managers, who thought they had managed to sell off the riskiest bits of the assets they kept, or who permitted traders to hold assets that they thought were not risky). 

• Buffers between banks, like a Tobin tax on trading, for example, which would encourage a bit more siloing in the system, are a possibility.  
• Another option is capital insurance, one variant of which might be a two-trigger convertible bond that banks could be required to buy.  Such bonds would come due if, say, TED spreads blew up and the individual bank's capital declined precipitously, pouring capital into banks when they need it the most (the triggers thus have an economy-in-crisis test and a bank-in-crisis test).  On the other hand, insured institutions are incentivized to take risks, so capital insurance could mimic the situation for those people worried about the implicit bailout behind too-big-to-fail institutions.  
• Leverage caps - which would shrink the banks - could make them less systemically risky, as long as every bank did not fail at once (the old saw is that in a crisis, all correlations go to 1).  This is what the G20 is talking about, and it would be real reform.
• And, though I haven't heard a lot of support for reforming compensation practices among the finance commentariat (the law commentariat takes this more seriously, of course), I've seen one paper that notes that the intermediaries that compensated their top officials the most, relative to size, appear to have done the worst.  
• The Congressional Oversight Panel suggested creating a list of systemically significant institutions, which get a government guarantee, and accordingly could borrow cheaply - but the idea is that the banks on the list would find regulators camping in their offices, would have to adhere to whatever compensation practices Congress dreamed up for them, would have to sell the jets, stay in Motel 6es, move their HQ to the north slope of Alaska, and so on and so on.  The hope is that banks wouldn't want to be on the list (which would be extremely hard to draw up), that the Goldmans of the world would stay away, even though the government guarantee would make capital for these institutions cheap.

All of this has led people to take a close look at the system.  I've seen one interesting paper that noted, in a stylized form, that funding through securitization involves, through mortgage origination, tranching, SIVs, commercial paper, holders of this paper, and investors in the holders, etc, a seven step supply chain between borrowers and lenders.  Companies with those sorts of long supply chains worry about the efficiencies there, and boring old banking had a three step chain, involving a bank, a depositor, and a borrower.  Is funding through securitization a good model?

All of which will be the basis for much more debate.  We're just sketching out the insights of others here, which means that you, the readers, can view this blog as your own intermediary between the producers of finance scholarship and the consumers of it.

In the meantime, I'm going to ask Gordon, since we’re an intermediary, about purchasing some capital insurance.  The Conglomerate will not fall victim to the next panic with a strong supply of two-trigger convertible bonds backing us up.

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It’s (still) that time of year, so of course we need another post on the law review submission process! I’m not going to argue for abandoning student-run reviews for peer review journals or any of the usual fare. Instead, my post is about improving the selection process for students in light of an unprecedented number of submissions brought on by more authors, writing more, and submitting everywhere thanks to ExpressO.

Don’t get me wrong, I love ExpressO, but it's made it so easy and virtually costless for everyone to submit everywhere that we’ve created a mess for the students. The sheer number of submissions is overwhelming. Just figuring out what to read is half the articles editor’s battle (I’ve seen a journal’s ExpressO page – mind-boggling). Because it’s likely that too many submissions = some great submissions not being read, it seems that an admirable goal would be to reduce the number of submissions to reasonable levels again. But how do we do that? Here’s one suggestion: law reviews could start charging for submissions. For example, $50 to submit to the Harvard Law Review.

Before addressing obvious objections, let me note that charging for submissions is not unprecedented by any means. Peer reviews charge for submissions, and law school admissions offices charge you to apply, too. It’s the economic argument for taxing cigarettes to reduce consumption. A tax on law review submissions will drive down volume by causing authors to limit submissions to reviews where they have a realistic shot at publication. Because journals will receive fewer submissions, authors in that journal’s pool have a better chance at getting their articles read. Market forces would set the correct fees based on supply and demand. Those fees would constitute wealth transfers from faculty to students, and could allow students to create public interest scholarships or look for other ways to ease current economic burdens.

Now for the objections. The most obvious objection is that some authors are at wealthier schools, leading to the possibility of buying better placements. I’m at a state school, so I understand the concern. But if market forces keep fees reasonable (i.e., so the reviews ensure they continue to have a sufficient number of high-quality submissions), perhaps you’d see fees around say $50. $50 x 50 journals is $2,500, not out of the realm of possibility, and that’s a large number of submissions in the world I envision. Second, would authors be stuck in the sorts of journals they're placing in now, for better or worse? I don't think so. In fact, I think authors would have a better chance of moving up the totem pole because proxies such as school name wouldn't be as important with fewer submissions to sort through. Everyone in a review's pool would have a better chance of being read, increasing the chances that truly good content without the usual proxies could get its due. Sure there are problems with charging for submissions, and I’m prepared to be flogged in the comments. But perhaps the flogging could be accompanied by alternative solutions that address the sorting problem? Comments from student editors, the ones who actually do the sorting, are especially welcome.

P.S. An obvious sorting mechanism I don't talk about is expedites, but from the editors I've spoken with, these are less useful than in the past. Editors might not want to spend their time looking through expedites from who knows where, so instead look for alternative sorting mechanisms, such as faculty input.

[UPDATE: Sorry, comments were mistakenly closed. They should be open now.]

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The national story is that Sam Bradford injured his shoulder, but make no mistake, BYU played toe-to-toe with the Sooners in the first half before Bradford's injury. And last time I checked, Bradford doesn't play defense, so he wouldn't have stopped Max Hall on the 16-play, 78-yard drive that gave BYU the lead and, ultimately, the victory.

I just drove my son back to his dorm on BYU's campus -- we have been watching BYU games together for years, so why stop now? -- and hundreds of BYU students have gathered by Lavell Edwards Stadium to celebrate the victory. We joined in the party, honking our horn, shouting, and high-fiving the students as they walked down the middle of the street. I am not ready to talk about the national championship, yet, but I am happy for the return of college football. Very happy, in fact.

UPDATE: Hehe, almost like being there ...

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While there are behavioral biases in entrepreneurial finance – e.g., entrepreneurs are overconfident and VCs fall prey to the availability heuristic – they don’t seem as prevalent as in public securities markets, or at least don’t lend themselves to the same calls for regulatory reform. Still, with recent notable works like Nudge and thought-provoking posts like this one from Josh Wright (on Jones v. Harris), it’s hard not to spend some time figuring out into which camp – rational choice or behavioral law and economics – you more firmly plant your flag.

The behavioral camp has much to offer. But several observations made by others persuade me not to dip my toes too deep into the behavioral waters. Here’s a quick list:

--Regulatory responses are challenging because different individuals have different biases, and even the same individual may have competing biases that negate each other;

--While individuals have biases, so do regulators (see Choi & Pritchard comparing the biases of investors with those at the SEC);

--The rational choice model works pretty well most of the time (and critics sometimes seem to forget that it’s only meant as a model, not a full-on reflection of the real world); and

--Taking into account behavioral biases in policy prescriptions removes incentives for correction. Tom Ulen has a nice discussion of this in a short article at 10 Lewis & Clark L. Rev. 177, 179-80 (2006) (it doesn’t appear to be on SSRN). There he differentiates between our “software” biases that can be corrected, including the entertaining Monty Hall three-door problem, and our “hardware” biases that are much harder to correct. Regulatory responses seem more appropriate for hardware biases, education for software biases.

There are also persuasive critiques of the rational choice model, and they get a lot of play these days. But regulatory responses based on the behavioral model are far from easy or perfect, and rational choice has proved highly instructive in my work on sophisticated entrepreneurial parties. I for one am not ready to toss it out just yet.

UPDATE: I should put this post in context, since the topic is like so 2005 (or whenever). I just finished Nudge (where have I been, I know!) and had sort of a negative gut reaction to it. To me the paternalism part overwhelmed any mitigating libertarian influence. I'm not a raging libertarian or anything, but I find myself uncomfortable with paternalism in many contexts. I'll get a chance to flesh out the issue more when Todd Henderson visits my class in a couple of weeks to talk about his provocative new paper The Nanny Corporation. Todd's paper first argues that paternalism for corporate employees is inevitable because stakeholders will demand it (e.g., to cut health care costs), then engages in a comparative analysis of who should supply it, markets or the state. I have doubts about the premise, but assuming its validity, I agree with Todd that markets are the preferential provider.

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Today was the deadline for all amici supporting Harris Associates to file their briefs in the Supreme Court case of Jones v. Harris.  Neither the official Supreme Court docket nor the SCOTUSwiki for the case reflects today's filings yet, but I've seen a number of briefs distributed throughout the day.  So here is a preliminary list of amici, together with their counsel:

• Securities Industry and Financial Markets Association, represented by Carter Phillips of Sidley Austin
• Mutual Fund Directors Forum, represented by G. Eric Brunstad of Dechert
• Cato Institute, represented by Ilya Shapiro & Timothy Sandefur
• Fidelity Management & Research, represented by Jim Benedict of Milbank and Stephen Shapiro of Mayer Brown
• Independent Directors Council, represented by Ted Olson of Gibson Dunn 
• Law and Finance Professors, represented by Frances S. Cohen of Bingham McCutchen (Specifically, the professors are William Baumol, Michael Bradley, William Carney, Stephen Choi, Robert Clark, John Coates, Allen Ferrell, Joseph Grundfest, Ehud Kamar, Steven Kaplan, Edmund Kitch, Kate Litvak, Thomas Lys, Jonathan Macey, Fred McChesney, Adam Pritchard, Mark Ramseyer, Larry Ribstein, Eric Roiter, Steven Schwarcz, Kenneth Scott, J.W. Verret, Sunil Wahal, and Roman Weil.)
• Chamber of Commerce, represented by Richard Bernstein and Barry Barbash of Willkie Farr
• Investment Company Institute, represented by Seth Waxman of WilmerHale

Last month, the following amici filed in support of the petitioners Jones, et al.:

• Law Professors (specifically, the professors are Barbara Aldave, myself, Barbara Black, Douglas Branson, Jim Cox, Steven Davidoff, Lisa Fairfax, Jim Fanto, Jesse Fried, Theresa Gabaldon, Joan MacLeod Heminway, Don Langevoort, David Millon, Larry Mitchell, Bud Murdock, Donna Nagy, Liz Nowicki, Alan Palmiter, Frank Partnoy, Margaret V. Sachs, Bill Sjostrom, Marc Steinberg, Ahmed Taha, Steven Thel, Randall Thomas, and Manning Warren.)
• John Bogle
• AARP & Consumer Federation of America
• National Association of Shareholder and Consumer Attorneys
• North American Securities Administrators Association
• Professors Deborah DeMott and Mark Ascher
• Professors Robert Litan, Robert Mason, and Ian Ayres
• The United States

Even by Supreme Court standards, this collection appears to be a large, impressive, and remarkable array of contending forces for a business law case. 

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My friend and colleague Paul Heald has just posted a typically iconoclastic piece that's generating some buzz.  Ever heard a birkenstock-wearing, tofu-eater deplore the tyranny of modern agribusiness? Has the replacement of myriad heirloom varieties with supermarket pablum got you down?  Apparently the science behind foodie nostalgia hinges on one study that compared seed catalogs from 1903 to ones from 1983 and found a stunning 97% loss rate in number of available varieties. 

According to Paul, the numbers are wrong.  Quoting from the abstract:

Our study of 2004 commercial seed catalogs shows twice as many 1903 crop varieties surviving as previously reported in the iconic 1983 study on vegetable crop diversity. More important, we find that growers in 2004 had as many varieties to choose from (approximately 7100 varieties among 48 crops) as did their predecessors in 1903 (approximately 7262 varieties among the same 48 crops). In addition, we cast doubt on the number of distinct varieties actually available in 1903 by examining historical sources that expose the systematic practice of multiple naming.

Of extra interest to lawyers, it doesn't seem like whether a type of produce could be patented increases the number of available varieties.  Food innovation occurs with or without legal protection.

Don't get me wrong, I'm a big fan of locally grown food and heirloom varietals. I belong to a CSA.  Our Saturday morning farmer's market visit is a weekend ritual.  And it's a wrench for me to pass up a roadside produce stand, no matter how sketchy.  Paul's research just suggests that the cornucopia of fruits and veggies available to us now is varied as it ever was.  Something to chew on.

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All the big investment banks failed over the course of six months - or would have, if the Fed hadn't intervened.  And hedge funds and other shadow institutions also got killed, while insurance companies went for TARP funds, they were so pressed for solvency.

These institutions suffered something of a bank run during this period, as counterparties refused to trade with them.  Why?  No deposit insurance is a precondition, of course, but I'm not sure there is agreement about the precise form of the bank run, though it is pretty clear that there was one.  Repo market, commercial paper, CDSes, or just fire sales of assets due to asset depreciation....all of these funding mechanisms (CDSes may not be funding mechanisms, but humor me) dried up at roughly the same time.  At any rate, the investment banks and special investment vehciles borrow short and lend long, and they found that they couldn't borrow short from their counterparites all at the same time, meaning that they all started to go down at once.  There's a lot to say about timing here - when did everything go south?  Lehman, the start of the subprime meltdown, or what?  All of this, however, threatened the financial intermediaries so much because they were highly leveraged, and what capital they had was tied up in risky assets. 

You and I, simple depositors, don't have to worry about the solvency of our bank.  I don't care - and I wouldn't care even my credit union said that it had had a terrible quarter, or was putting all of my money into big bets at the dog track.  But the counterparties of the shadow banks had to worry about the solvency of their trading partners.  And they all lost confidence in the shadow banks at the same time, who, since they depend on short term money quickly fell apart.

The problem with sorting out what cased the loss of confidence in September, when things really went kerblooey (though they weren't easy before then), is that the month is overdetermined.  You could to an event study on the VIX or LIBOR, but it is hard to separate the Lehman news from the AIG news, from the "we're going to Capitol Hill" news from the "deposit window is open" news from the WaMu news from the Reserve Primary news.  I wonder if we'll ever know what really triggered the collapse - of course, it is possible to spook people with a range of bad news events that come close together, and perhaps that is what happened here.

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As a first timer on the appointments committee, I wanted to add my two cents to the great advice for candidates already out there in the blogosphere. Please take it with the caveat that it’s just me talking, not my appointments committee, and that my wealth of experience is all of four years in academia (which does include one lateral move). But, while I may not know as much as others, I am in the throes of the selection process right now, so maybe some of this will be helpful.

--To entry-level candidates, write directly to schools you’re interested in. I seem to recall one blog post saying it might not matter, but for candidates on the borderline for a DC interview, I definitely think it helps.

--To lateral candidates, do not write directly to schools you’re interested in, and do not go through the AALS process. You do not want to appear anxious to escape your current situation, even if you are. The best way to get the word out that you’re open to a move is to let your well-respected friends at other schools know that. These folks will inevitably be contacted by appointments committees looking for people who might be moveable. Also, the standard advice about going to conferences, publicizing your papers all holds true. If you’re doing good work, getting yourself out there, and are at a school from which one would reasonably assume you are extractable, you’ll get calls.

--To entry-level candidates, I predict that the whole process is on its way to mirroring the lateral process. It started with the rise of the VAP, which has produced far more sophisticated entry-levels, but now it’s more than that. You should not only do a VAP, but also go to conferences, especially those like the Big Ten Aspiring Scholars Conference and similar venues where you can present your work and mingle with those already in the academy. I like the idea of guest blogging somewhere too, but really take some care in your posts – it will likely be your first impression on the academic world. I recommend taking these extra steps because great candidates might not be picked up by a FAR search for any number of reasons. Also, there’s obviously a right way to go about all this without overdoing it. But it never hurts to have those of us on this side of the table know your name, think that your work has promise, and be able to pass it along to friends at other schools.

Good luck to all!

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Sunday I met a woman who works for an organization that provides social services for the city of Philadelphia and has not gotten paid since June.  Moreover, she said that the last time she was paid the check bounced, and the government had to take steps to cover the fees resulting from the bounced check.  She concluded her story by telling me that her oldest son was starting college, noting that the bills were still coming even though she was not getting paid. 

Her story prompted me to look again at the budget woes impacting Philadelphia.  Indeed, Pennsylvania has been without a budget since its new fiscal year began July 1, and the stalemate at the state level has repercussion for cities and government workers.  Indeed, it has meant that many workers and contractors stopped receiving a full paycheck at the end of June, and while a bridge budget was passed in early August that covered many workers, others were left out.  And it is not clear when a budget will be passed.  In fact, apparently Pennsylvania may soon become the only state in the nation doing business without a budget.  What does this mean for Philadelphia?  According to the city's mayor, the state's inaction could force Philadelphia to institute a plan that not only would shrink the municipal workforce by 13%, but also would require the closing of all of its recreation centers and all branch and regional libraries while reducing trash pickup to a bi-monthly schedule.  One group called the plan "the largest lay off of Philadelphia public servants in history."  To be sure, it is not clear if the plan will be implemented.  Indeed, on a somewhat brighter note, yesterday the mayor of Philadelphia announced that the city would be getting a $275 million loan from JP Morgan Chase.  The loan obviously provides much needed cash for the city, enabling it to finally pay the salaries of thousands of contractors.  Not sure if this would include the woman I met, but I certainly hope so.  Needless to say, even if a state budget is finally passed and Philadelphia is able to avoid such large layoffs, its budget woes have had a tremendous impact on its citizens, reminding us that the financial crisis has very real and personal repercussions. And that the bills keep coming.

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Financial intermediaries usually put investors together with opportunities.  But one reason why they fared so badly in the crisis was that they retained so many risky assets on their books, rather than selling them on to sleepy pension funds and insurance companies who tend to be super long only, and very long term, investors.  This is something that can be shown, and it is a basic insight about the cause of the crisis; capital adequacy collapsed, and intermediaries could no longer roll their obligations by posting the bad assets as collateral.  Without repo or commercial paper, the intermediaries went insolvent quickly, because they borrow short and lend long.  Why did they keep these bad assets?

I haven't heard a great story, whether it was to chase alpha, because they thought they had a government guarantee, or because they were running doomed insurance schemes, picking up nickels in front of steam rollers, on the assumption that they (or the employees making the asset purchase decisions) would get out before the collapse and retire to the Vineyard or whatever. 

Or maybe intermediaries were just dumb, though economists don't like the "dumb" explanation much, especially since intermediaries are supposed to be smarter than most market participants, and have always transferred risk to dumb people who don't mind holding it, rather than keep it on their own balance sheets.

There's lots to unpack here.  Jimmy Cayne, the Bear Stearns CEO, had almost all of his net worth tied up in company stock.  Why didn't he do something about "securitize and hold"?  The corporate governance of financials, btw, couldn't be better, loads of outside directors, plenty of M&A, and few poison pills, etc.

Whatever the case, it was a widely shared strategy that didn't work. 

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A stimulating conference on the performance of financial intermediaries (that's banks and shadow banks) during the crisis reminded me that a number of finance scholars largely agree on some of the basics of what happened.  Legal scholars and bloggers have expressed no such consensus, perhaps because we are focused on institutions and laws, such as was it compensation practices?  Regulators asleep on the job?  Credit rating agencies?  And so on.

All of these institutions probably played a role, of course, but many economists would probably put much of the blame where, it seems to me, it must belong: in the markets.  And in those markets, banks and shadow banks kept risky assets on their books, rather than selling them on to the greater fool.  When the asset values collapsed, there was an old-fashioned run on the shadow banks, and a serious impact on the solvency of the banks.

So I thought I'd do a couple of posts on this, ventriloquizing what I've heard - there's no creativity here - so that the wise readers of this here website can consider these issues. But the market failures raise three questions.  First, why did the banks keep the risky assets?  Second, why was there a bank run in the shadow banking sector?  And third, what should be done to prevent these sorts of market failures from happening again?

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