Corporate Justice Blog

Three Years After Lehman: Assessing the Regulatory Reforms on the Next Financial Crisis

noreply@blogger.com (dré cummings) — Fri, 24 Feb 2012 14:30:00 +0000

Today, Friday, February 24, 2012, the University of Utah S.J. Quinney College of Law is hosting a symposium aimed at assessing the current state of financial regulation and financial crises three years after the the collapse and damaging bankruptcy of Lehman Brothers. "Three Years After Lehman: Assessing the Regulatory Reforms on the Next Financial Crisis" features Anton Valukas as a keynote speaker (authored the Valukas report assessing the reasons behind the collapse of Lehman) and includes two panels that will focus on causes of the crisis and whether the Dodd-Frank reform act will protect against future crises. The two panels will are entitled:
(1) On the Ground: Reliving the Lehman Failure and its Aftermath; and (2) Assessing the Legislative and Regulatory Answers to Lehman.

The webcast can be viewed live here. Also the stream will be available for viewing following the conference.

The program will take place as follows at the Sutherland Moot Court room of the University of Utah College of Law:

CONFERENCE SCHEDULE, February 24, 2012

Three years after Lehman Bros. filed the largest Chapter 11 bankruptcy in U.S. history, world financial markets are still unsettled, unemployment in the U.S. remains stubbornly high, and Europe may be on the brink of financial disaster. This symposium considers the role Lehman Brothers’ failure played in the current economic downturn and whether reforms enacted in the wake of the failure are adequate to protect economic markets going forward.

9:30-10:30

Keynote Address – Anton Valukas, Lehman Brothers Bankruptcy Examiner, Chairman, law firm of Jenner & Block

10:30-12:30

On the Ground: Reliving the Lehman Failure and its Aftermath

Moderator: Professor Christian Johnson, S.J. Quinney College of Law at the University of Utah

Professor Ronald H. Filler, Director, Center on Financial Services Law, New York Law School, Managing Director in the Capital Markets Prime Services Division at Lehman Brothers

William F. Kroener, III, Sullivan & Cromwell, former FDIC General Counsel

Robert McLaughlin, partner, Fried Frank

George R. Sutton, partner, Jones Waldo, former Utah Commissioner of Financial Institutions

12:30-1:30

Lunch

1:30-3:30

Assessing the Legislative and Regulatory Answers to Lehman

Moderator and afternoon keynote speaker: Professor Jerry W. Markham, Florida International University School of Law, former secretary and counsel, Chicago Board Options Exchange, Inc.; chief counsel, Division of Enforcement, CFTC

Professor andré douglas pond cummings, West Virginia University School of Law

David Marshall, Senior Vice President, Associate Director of Research and Director of Financial Markets, Federal Reserve Bank of Chicago

Professor Steve Ramirez, Loyola University School of Law, Director Corporate Law Center

More Cowbell . . .

noreply@blogger.com (dré cummings) — Wed, 22 Feb 2012 06:13:00 +0000

Several stories of particular interest to the Corporate Justice Blog have been featured in the financial news in recent days. Articles worth thinking about include:

(1) A Washington Post story discussing a recent Kaiser Family Foundation survey that found that women of color have been hit hardest by the Great Recession, stating "The Great Recession carried special pain for black women . . . .":

For Some Black Women, Economy and Willingness to Aid Family Strains Finances

(2) A Wall Street Journal article quoting Federal Reserve Chair Ben Bernanke as saying that new U.S. government policies need to be adopted to assist in the housing market recovery. Bernanke stated "We need to continue to develop and implement policies that will help the housing sector get back on its feet.":

Bernanke: U.S. Needs Policies to Help Housing Recovery

(3) Much controversy surrounds the proposed implementation of the Dodd-Frank Act's "Volcker Rule" (named after former Fed Chair Paul Volcker, pictured) which is slated to take affect in July 2012. Large Wall Street and international firms are lobbying fiercely for further emasculation of the rule which ostensibly prohibits investment and commercial banks from proprietary trading:

Boos, and Backers, For 'Volcker Rule'
"Foreign governments and financial-industry giants lined up Monday to throw one last roundhouse punch at a proposed rule that aims to limit risk-taking by U.S. banks. Dozens of international banks, foreign officials, insurance companies, law firms and money managers petitioned U.S. regulators ahead of a midnight-Monday deadline to delay or water down the pending restrictions on banks' trading activities."

Goldman: Seeks Volcker Rule Change
"Goldman argued the rule underestimates the complexity of the financial markets, diminishes the role of banks in making money flow around the world to companies and countries, and could wind up causing banks to lend less and charge more for their services. The company asked that regulators revisit its basic assumptions and definitions of proprietary trading, market making and investing."

The Volcker Diversion
"Could even Paul Volcker draft a Volcker Rule? Team Obama and Democrats in Congress couldn't figure out how to turn his sensible idea—prohibiting banks from gambling with taxpayer money—into law. Now Mr. Volcker seems to be acknowledging that federal regulators can't draft a Volcker Rule either, at least not without help from the same bankers who will be subject to it."

Angel Investors Rise

noreply@blogger.com (dré cummings) — Thu, 16 Feb 2012 15:30:00 +0000

With many banks still hesitant to loan capital choosing instead to hoard it, and with venture capital firms targeting less risky companies that are in the later stages of growth, start-up businesses have had to look to new funding sources to launch. The trending wave: “Angel Investors.” These investors are wealthy investors who provide the capital to start-up firms with the potential for immediate growth.

A recent study by the Organization of Economic Cooperation and Development found that “[w]ith banks reining in all but the safest loans since the recession, and venture capital firms now targeting less risky late-stage business startups, angel investors are nearly alone in backing young, fast-growth companies.” Angel investors look at a “wider range” of companies to finance, and can be more creative in what they do, including not only giving money, but also advising the start-up business owners. In wake of the mortgage crisis and the need for a recovery, the OECD recommends providing tax breaks for angel investors. While banks might rally to revive their start-up funding in order to receive new tax breaks, the banks will likely not provide the same type of “service”—personalized attention and networking—that angel investors provide.

“Of the $8.9 billion in total investments by angels in the first half of 2011, 39% went into seed and start-up ventures, up from 26% of $8.5 billion in total investments over the same period in 2010 . . . . Many fast-growth, entrepreneurial ventures that attract angels are the same start-ups that create jobs. Led by start-ups, small firms have generated 65% of net new jobs over the past 17 years, according to the Small Business Administration.”

Whitney Houston and the Business of Music

noreply@blogger.com (Cheryl L. Wade) — Wed, 15 Feb 2012 15:04:00 +0000

Like so many others, I have been riveted by the news stories about Whitney Houston's death. I watched in disbelief as music industry executive Clive Davis went ahead with a huge party just a few short hours after her death. I've learned from this torrent of recent coverage about Houston's life, that Davis was her only daughter's godfather. Houston thought of Davis as a close friend, a mentor. Several executives are already planning to meet to figure out how to market her music and capitalize on her death.

Houston's death and the party that Davis held should stand as reminders to artists to be careful with the music executives who control so much of their lives. These executives are not family. It's just business.

Let's Make A "Deal"

noreply@blogger.com (dré cummings) — Tue, 14 Feb 2012 13:30:00 +0000

Foreclosure “relief” has been announced as coming for millions of American homeowners as state attorneys general, federal officials, and bankers finally agreed to the details of a long-awaited mortgage crisis settlement worth $26 billion dollars a few days ago. The agreement purports to help pay down the principal on homes and provide relief—albeit fairly small—for families who were victims of improper foreclosure practices. Despite these measures, many argue that the settlement lets banks off too easily. Other critics argue that the settlement is nothing more than extortion as banks shareholders will end up footing the bill for little more than “sloppy” paperwork. Senator Sherrod Brown claims the measure will pass the cost to “middle-class Americans” and is too small; attorneys general Eric Schneiderman of New York and Martha Coakley of Massachusetts fought for the ability to hold banks accountable for other and future claims; Representative Brad Miller thinks that the government still needs to investigate the ugly predatory practices engaged in by many banks including Countrywide and Citigroup.

As it stands, the deal could affect 1 million homeowners by providing them up to $20,000 in debt reduction on their homes. On one hand, the multi-billion relief looks favorable for some homeowners, though most would likely argue that they are underwater on their homes significantly more than $20k. On the other hand, the settlement “pales in comparison with the fallout from the housing bust.” The banks are seeking to settle claims that they engaged in abusive foreclosure practices, including robo-signing foreclosure documents or fraudulent attempts to foreclose without the required deeds or documents. The settlement has left both Wall Street apologists and consumer advocates unhappy.

Obama's New Mortgage Fraud Unit

noreply@blogger.com (dré cummings) — Sun, 12 Feb 2012 22:30:00 +0000

President Barack Obama announced, during his recent State of the Union Address, that his administration plans to aggressively pursue crimes that led the United States into the crippling housing crisis in 2008 by appointing a new mortgage fraud task force. President Obama stated, “This new unit will hold accountable those who broke the law, speed assistance to homeowners and help turn the page on an era of recklessness that hurt so many Americans.” The Residential Mortgage-Backed Securities Working Group will be overseen by the SEC and the Justice Department, whose track record in investigating past unscrupulous lending practices has not been very successful. Several criminal investigations followed the mortgage crisis, but most did not go anywhere because, as Obama says, the conduct may have been reckless, but was not illegal. Nonetheless, this latest task force provides evidence that the administration wants some accountability—and results.

This new accountability augers toward more than just the 25 cases the SEC has filed since 2009. And it means more than just window-dressing. While typical punishment for criminal fraud includes barring CEOs from director positions (for a limited amount of time) or monetary penalties, most reckless executives are still keeping the compensation that they received during the run-up to the crisis, and the penalties are typically being paid by the companies—the shareholders, and not the individual reckless executive.

A roadmap has been provided for this new task force from private litigants. Several have been successful in revealing unscrupulous practices, including in depositions of a Bear Stearns’ executive who had knowledge of the toxic risks or from another executive who said that Bear Stearns did not do its due diligence in evaluating its vendors. With the recent guilty plea of two Credit Suisse bond traders to fraudulent manipulation of bond valuations, perhaps the new Residential Mortgage-Backed Securities Working Group will begin an era of corporate executive accountability for the roles they played in crashing global markets.

Occupy Wall Street Is Alive and Well

noreply@blogger.com (Cheryl L. Wade) — Wed, 08 Feb 2012 22:02:00 +0000

Last semester, as the drama of Occupy Wall Street unfolded, I asked my students in my Business Organizations class (about 70 students are in the class) if they were following the movement. Only a few said they were. Some of them had not heard of OWS even though the New York occupation was about a month old at the time I asked. And when I asked if any of them had gone to the park where the Occupiers were camped out, only two students raised their hands. One of the students was Christopher Dekki. After that class, Chris and I had several interesting discussions about the OWS movement. Because I enjoyed hearing his insights, I am posting Chris’ observations about the movement in this post. Chris provides an update on the current status of OWS, and he brings to the discussion his perspective as a young man concerned about our nation’s future. What follows are Chris’ observations.

"Stop Mourning and Cancel the Funeral: Occupy Wall Street Is Alive and Well

By Christopher Dekki

When young people speak, the elite tends to look away. When young people shout, the elite covers it ears hoping the racket eventually stops. When young people take to the streets, the elite comes up with slanderous labels to delegitimize the struggle upon which the youth have embarked. All of this happened as Occupy Wall Street evolved from a mere urban pest buzzing around the ears of the leaders of the corporate-political industrial complex, to a veritable threat: a threat to an undeniably unjust status quo. From the very inception of the movement, those in the government and the corporate media have been utterly flustered by the commotion surrounding OWS. The Washington elite could not seem to muster enough negativity to describe the activists who have taken up the mantle of protest from earlier generations of progressives. In recent months, foolish pundits and conservative politicos derisively declared the OWS movement to be dead after several flummoxed mayors used abhorrent force to push protestors out of the public eye. Although these mayors managed to clear a few tents and take the heat off their embattled city streets, they have not been able to vanquish OWS. The ideas heralded into the political discourse by OWS have managed to infiltrate almost every level of the political realm of the United States. It was the cries of young OWS activists that awakened the long dormant beast that is populist political fervor. So contrary to what so many pundits believe to be absolute truth, OWS is alive, well, and unquestionably pervasive.

A good way to measure the success of OWS is to compare it to its parallel grassroots movement on the right, the Tea Party. The Tea Party was born in what appears to have been a racially charged response to a black man defiantly overcoming all social obstacles to win control of the White House. Although many in the Tea Party claim to be crusading against the excesses of the federal government, there is simply no denying the racial underpinnings of the entire movement. It is doubtful that if Joe Biden were the current president, the Tea Party would be as electrified as it has been over the past two years. Now, compare the establishment of that right wing movement to the birth of OWS. OWS gained strength at a time when the left was technically in control of some aspects of the government. OWS rose up against all sides of the very limited American political spectrum and made a bold and truly authentic statement that certain things simply need to change. So while the Tea Party appears to be a reaction to a so-called “uppity” black man rising to the highest political office in the United States, OWS sprang forth to combat a real threat to our republican system of government: the power and influence of money in politics.

Besides the issues that gave birth to the Tea Party and OWS, the legitimacy of both movements can be measured by their degrees of political independence. While OWS remains free from the control of the Washington establishment, the Tea Party was co-opted by the GOP long ago. This has made the Tea Party vulnerable to the vices that currently poison American politics. OWS was never transformed into a vehicle of the Democratic Party. OWS does not endorse politicians nor does it seek to take sides in partisan struggles. In addition, many within the Democratic Party have been afraid to directly support OWS. Of course, nobody in Washington wants to be branded a “liberal” since that apparently translates into political suicide. So as the Tea Party, through its elected officials in Congress, causes chaos and embarrassment for the country, OWS remains firmly autonomous and staunchly true to its principles.

OWS may have many detractors, but it can take pride in the fact that it has never been a source of political obstruction. It has not helped cause the US credit downgrade. It never helped spur embarrassingly cruel politicians like Allen West into elected office. It has never called for an apocalyptic war on Iran. It stands up to American jingoism and modern economic imperialism. It recognizes the flaws of American capitalism and realizes that corrupt politicians on both sides of the aisle continue to act as surrogates for omnipotent corporate interests. OWS has stepped up to bat and has turned political rhetoric on its head even as the effects of Citizens United take a devastating toll on society. As a result, the likes of Rush Limbaugh and Karl Rove are free to believe whatever they like. This is not the first time they have turned their backs on reality in order to further their destructive neoconservative agendas. Occupy Wall Street is a viable force in American society it is now the turn of the people to ensure that the American government ceases to be a puppet of the 1% and begins to serve the interests of the 99%."

Guilty! Bond Traders Plea

noreply@blogger.com (dré cummings) — Fri, 03 Feb 2012 21:55:00 +0000

Yesterday, two former Credit Suisse bond traders pleaded guilty to criminal charges of conspiracy in connection with the mortgage bond market that spiraled out of control in 2007-08, precipitating the mortgage crisis of 2008. As discussed on the Corporate Justice Blog Wednesday, federal prosecutors have been preparing charges against these traders for several years. Former Credit Suisse traders David Higgs (pictured, courtesy of Bloomberg) and Salmaan Siddiqui pleaded guilty to conspiracy to falsify books and records and to commit wire fraud charges while Credit Suisse supervisor Kareem Serageldin remains charged and resides currently in the U.K.

According to the Wall Street Journal: "Federal prosecutors unveiled criminal charges against three former Credit Suisse Group AG employees, providing a window into the way traders allegedly invented inflated values for mortgage bonds during the financial crisis. Two of the three men pleaded guilty to criminal charges of conspiracy, admitting they attempted to conceal the scheme from managers in a bid to boost their bonuses.

The guilty pleas mark the first successful criminal case against Wall Street in relation to the financial meltdown. The case is a 'tale of greed run amok piggybacking on one of the worst economic dislocations our nation has ever experienced,' said Manhattan U.S. Attorney Preet Bharara. 'While the residential housing market was in free fall, and shock waves were reverberating throughout the economy, these defendants decided they were above the rules.'"

With these guilty pleas, the government has for the first time held parties accountable for some of the recklessness and fraud that permeated Wall Street during the run-up to the financial market crisis.

Mortgage Bond Traders to be Charged

noreply@blogger.com (dré cummings) — Wed, 01 Feb 2012 18:30:00 +0000

Former Credit Suisse mortgage bond traders will reportedly be criminally charged in coming days. The criminal charges will purportedly allege that these Wall Street traders misstated the value of mortgage bonds, purposely misleading Credit Suisse investors, all in an effort to boost their own bonuses in the run-up to the mortgage crisis.

According to the Wall Street Journal: "Federal prosecutors are preparing to file criminal charges against former Wall Street traders alleging they misstated the value of mortgage bonds, an issue central to the 2008 financial crisis, according to people familiar with the matter.

The Manhattan U.S. Attorney's office is planning to allege in a criminal complaint that several former traders at Credit Suisse Group AG, a major global investment bank, misled the bank's investors by booking inflated prices of mortgage bonds to boost their bonuses, despite knowing the values of those securities had dropped, according to the people familiar with the matter. Credit Suisse itself won't be charged in the case, these people say. The names of the traders couldn't be determined. Charges could be filed as early as Wednesday, these people say."

Most agree that valuation of mortgage bonds and Wall Street's efforts to securitize and package these mortgages into collateralized debt obligations played a major role in the collapse of the global markets in 2008-2009. Misleading investors as to the accurate valuation of these mortgage bonds and the credit rating agencies failure to truly rate the mortgage backed securities as risky, amongst many other issues, led to near financial calamity.

Again, per the WSJ: "Wall Street valuations of mortgage securities were a major factor in the market turmoil of 2008. For years, financial firms had packaged hundreds of billions of dollars of subprime mortgages into securities. When those mortgages soured, investment banks resisted taking losses, fearing that their own investors and clients would panic.

They ultimately took big write-downs on their mortgage portfolios—totaling hundreds of billions of dollars—throwing markets into turmoil and triggering losses that toppled financial giants Bear Stearns Cos. and Lehman Brothers Inc."

Perhaps efforts to hold rogue traders accountable will be a first step in policing Wall Street excess and recklessness.

2012 Foreclosures Expected to Rise

noreply@blogger.com (dré cummings) — Wed, 01 Feb 2012 02:00:00 +0000

With banks in “full-delay” mode in connection with foreclosures during 2011, California homeowners can expect a change—for the worst—in 2012 as banks look to aggressively pursue seriously delinquent mortgages this year. The foreclosure rate is expected to rise significantly, based on the second-half surge of initial default notices sent in 2011, but the rate should remain below the peak of 2010. Nonetheless, it remains disconcerting.

The Federal Reserve is working to stabilize the housing market. The Fed has urged Congress to help underwater borrowers by reducing their loan principal and it has requested that Fannie Mae and Freddie Mac rid themselves of the backlogged foreclosures in bulk sales. With increased foreclosures comes decreasing home values.

According to the Los Angeles Times: “California and other states are likely to see an enormous wave of long-delayed foreclosure action in the coming year as banks deal more aggressively with 3.5 million seriously delinquent mortgages. And experts said that dealing with the foreclosure process, from issuing notices of default to selling repossessed homes, is likely to push housing prices lower this year before the real estate market has a chance to recover."

Proxy Season Promises to Challenge Executive Pay

noreply@blogger.com (dré cummings) — Fri, 27 Jan 2012 14:00:00 +0000

The Wall Street Journal reports that in a year where executive compensation has plateaued, Wall Street firms can still expect challenges from shareholders during the upcoming proxy season. According to the WSJ: "Investors ranging from charitable foundations to large state pension funds are preparing to challenge large financial firms on their pay practices. As a result, this year's 'proxy season'—the period, usually in the spring, when companies hold annual shareholder meetings—promises to be an eventful one in the financial sector, compensation consultants and corporate-governance experts say."

Activist shareholders in recent months have filed proxy proposals asking large Wall Street firms to study the potential negative impact that exorbitant executive compensation policies might have on the firm's reputation and growth potential. Again, according to the WSJ: "In December, the Nathan Cummings Foundation—a private charitable organization and institutional shareholder—filed proposals asking that directors at Goldman Sachs Group Inc. and J.P. Morgan Chase & Co. address potential reputational damage that big pay packages could bring to the banks, said Laura Campos, director of shareholder activities at the foundation. The proposals also request that they study how such awards could reduce banks' ability to spend money on other areas, and report those findings to shareholders."

The upcoming proxy season promises to be an interesting one as recent Dodd-Frank legislation requires firms to hold nonbinding shareholder votes on their executive pay policies (once every three years). Six of the largest Wall Street firms held these votes last year (J.P. Morgan, Wells Fargo, Citigroup, Goldman Sachs, Morgan Stanley and Bank of America), with all six receiving symbolic shareholder approval for their pay packages (as indicated in the chart above, courtesy of the Wall Street Journal). Each expects to hold nonbinding votes again this year.

"Three Years After Lehman" Symposium

noreply@blogger.com (dré cummings) — Thu, 26 Jan 2012 04:35:00 +0000

Three years after Lehman Bros. filed the largest Chapter 11 bankruptcy in U.S. history, world financial markets are still wobbly, unemployment in the U.S. remains stubbornly high, and Europe may be on the brink of financial disaster. On February 24, 2012 the University of Utah S.J. Quinney College of Law will host a special symposium, “Three Years after Lehman: Assessing the Regulatory Reforms of the Next Financial Crisis,” that will consider the role Lehman Brothers’ failure played in the current economic downturn and whether reforms enacted in the wake of the failure are adequate to protect economic markets going forward.

"Symposium organizer Christian Johnson, Professor of Law at the College of Law, said, 'The conference attempts to put into perspective the Lehman failure (and the crisis generally) and to understand the effectiveness of the reforms that were enacted in the crisis’s aftermath. Given the general state of the U.S. and the global economy, such reflection and analysis becomes critical as regulators and policy makers further consider their options and responsibilities.'"

Corporate Justice Blog contributors Steven Ramirez and andré douglas pond cummings will be featured speakers at the symposium.

Post-Racial?

noreply@blogger.com (dré cummings) — Fri, 20 Jan 2012 15:30:00 +0000

A favored argument by market fundamentalists is that capital markets are efficient, and will find equilibrium if left unfettered. For this argument to find root, issues of inequality, discrimination and racism must be ignored (or pushed aside), because, as the argument goes, efficient markets will themselves deal with discriminatory participants by eventually sifting them out of the system as inefficient market players. Additionally, law and economics proponents favor "post-racial" rhetoric that suggests that in 2012, the United States has entered a colorblind era of post-racialism. With an African American President and markets more advanced than at any time in history, issues of economic inequality and continuing racial division are simply no longer important considerations, per the post-racialist.

Several events in the past few weeks belie this post-racial sentiment, the following being one of the most egregious:

In Georgia this week, third and fourth grade students at Beaver Ridge Elementary School were given math problems, MATH PROBLEMS, that asked students to consider if a slave was beaten twice per day, how many beatings would the slave receive in one weeks' time? Another question on the elementary students' math homework asked them to calculate how many bushels of cotton Frederick picked? Outraged parents are meeting with school officials, who were quick to claim that nothing "malicious" was intended by these math questions, though they have opened an investigation into which teachers drafted the questions.

Post-racial?

Childhood Poverty in America 2012

noreply@blogger.com (Steven Ramirez) — Thu, 19 Jan 2012 18:44:00 +0000

The above chart graphically depicts the relative standing of the U.S. in terms of childhood poverty. The U.S. simply cannot lay claim to economic greatness nor to being the land of economic opportunity in the face of this reality. With nearly 25 percent of our children living in poverty we are more on par with Bulgaria and Mexico than economically advanced nations such as Denmark, Australia, Luxembourg and Norway.

Interestingly, those advanced nations also sport far higher per capita income (in U.S. dollars) than the U.S.: Denmark produces $63,000 per capita, Australia $67,000, Luxembourg $122,000, and Norway $97,000 per capita. The U.S. suffers weak per capita GDP of $48,000 (and holding for about 15 years). While one can always nitpick the data (for example, should we really count incarceration costs as GDP, as we currently do, which fattens the weak U.S. performance) the picture suggests the creeping third world reality gripping the U.S., due largely to its laissez faire economic policies and corrupt politics where money rules over law.

Thus, Dr. King's commitment to fight against poverty and in favor of economic opportunity is as relevant today as ever, and is both morally and economically compelling. The U.S. cannot be either a moral or economic leader of the world with one in four children impoverished. Perhaps our new claim should be land of childhood poverty.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law

"King" of All Nations

noreply@blogger.com (dré cummings) — Tue, 17 Jan 2012 22:48:00 +0000

Martin Luther King, Jr., American hero, is also an international icon. An op-ed in the New York Times describes Dr. King's influence both in the United States and in nations around the world. From the NY Times:

"Indeed, it was King’s 'I Have a Dream' speech that sealed his global fame. We’ve all seen photos of the hundreds of thousands marching in 1963 Washington. But thousands also marched that day in London, Tel Aviv and Accra, Ghana. In my home country, Britain, support for the march was overwhelming. Many watched King’s speech live via the newly launched Telstar satellite. In London, demonstrators marched to the American Embassy carrying a banner that read, 'Your fight is our fight.'"

The article continues by chronicling how King's influence has been used by parties the world over to advocate for causes that King would undoubtedly have supported and for those that he no- doubt would have quailed to learn his name was being invoked to support. For example, activists that support affirmative action often invoke King's legacy to support race-based remedies to resolve stubborn and persisting racial discrimination and racial inequality. Simultaneously, King's "dream" is used by those that would end affirmative action and race-based remedial programs by invoking his "color-blind" rhetoric as a signal that the era of race-based remedies should end.

Despite the contradictory messaging, it is clear that toward the end of Dr. King's life, with many civil rights advances secured, including passage of the 1965 Civil Rights Act, he turned his life and leadership toward economic opportunity and economic justice. Dr. King believed that our country would "reach the promised land" and lived his life trying to secure equal opportunity for all.

MLK's Vision of Social Justice

noreply@blogger.com (Steven Ramirez) — Mon, 16 Jan 2012 22:06:00 +0000

The greatest warrior for social justice in the last century in the US was Martin Luther King, Jr. With great respect to dre cummings, I do not think that MLK ever argued in favor of economic equality. Instead he simply argued for equality of opportunity and equality of rights. Thus, in his most famous speech, above, he wanted to free people of color from police brutality, poverty, segregation, and impaired political rights. His dream consisted of universal freedom for all where people were not judged "by the color of their skin but by the content of their character." You may scour this speech for any reference to economic equality and come up empty.

Having said that, there is no doubt that King would be alarmed, angered and disappointed by the state of economic inequality present in America today. For example, King would be outraged by the fact that more than one in five American children now live in poverty, including nearly 40 percent of black children, 35 percent of Latino children, and more than 12 percent of white children. How can we live with this sin against our children? How can we tolerate three time more black children than white children living in poverty over four decades after the King assassination? Only the continued sway of race can explain the continuation of such moral degeneracy. Today is a good day to do something about this heinous reality, and I suggest this. If nothing else, King commands that we see to it that no child starves in America, yet up to 33 percent do not get enough to eat. Allowing childhood poverty to fester is not just morally reprehensible, it is economic suicide. Only a nation that empowers all of its human resources to reach their highest productive use can ever be the most productive and prosperous nation. King understood this.

Indeed, this quote best summarizes King's vision of social justice, from his speech "Social Justice" delivered at Western Michigan University on December 18, 1963:

"All I'm saying is simply this, that all life is interrelated, that somehow we're caught in an inescapable network of mutuality tied in a single garment of destiny. Whatever affects one directly affects all indirectly. For some strange reason, I can never be what I ought to be until you are what you ought to be. You can never be what you ought to be until I am what I ought to be. This is the interrelated structure of reality. John Donne caught it years ago and placed it in graphic terms. "No man is an Island, entire of itself; every man is a piece of a Continent, a part of the main." He goes on toward the end to say "Any man's death diminishes me because I am involved in mankind; and therefore never send to know for whom the bell tolls; It tolls for thee." It seems to me that this is the first challenge. This emerging new age."

Economically, that which diminishes any human, diminishes the economic prospects of all humans because contracted opportunity for one contracts the demand for what all others offer for sale in terms of goods or services. Poverty anywhere means fewer law students for me to teach, for example. Poverty lessens the demand for innovation. Poverty destroys our ability to produce new ideas. Poverty incites violence and crime. The more poverty, therefore, in any society, the less prosperous that society will be. On this point, King echos Adam Smith who stated in 1776: "No society can surely be flourishing and happy of which by far the greater part of the numbers are poor and miserable."

Poverty anywhere is a threat to prosperity everywhere.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law
sramir3@luc.edu

MLK "Dreamed" of Economic Equality

noreply@blogger.com (dré cummings) — Mon, 16 Jan 2012 02:55:00 +0000

Known most for his inspired leadership during the Civil Rights Movement, Dr. Martin Luther King, Jr., was a fierce advocate for economic equality. Prior to his assassination in 1968, Dr. King had focused his leadership efforts on economic justice and equality.

From today's San Jose Mercury News: "Michael Honey, a historian who chronicled King's campaign for economic justice in two books, said the civil rights leader's fateful trip to Memphis was undertaken to improve job security and pension benefits. 'And on that score we haven't moved very far forward,' Honey said. 'The assault now on public employee unions is directly hitting the black middle class.'

Though King's eye was on the prize of civil rights until 1965, he began writing and speaking to union groups about the tyranny of poverty long before that. 'What he says in those labor speeches is that the civil rights movement was the first phase of the freedom movement,' Honey said. 'In fact, he saw that as a down payment. His basic point was that the idea of equality in the Declaration of Independence was not just about civil rights. It was about everybody having an equal chance.'"

Dr. King believed that gaining basic civil rights for African Americans was simply the beginning, a down payment, and that gaining equal economic opportunity was the ultimate goal. Still, forty-four years following his death "economic justice remains elusive for many Americans. While poverty gradually declined in the decades since King's death - 32.4 million Americans lived below the threshold in 1986, the year the King holiday was first celebrated - the numbers have climbed in recent years as the economy soured. Today, as the nation celebrates MLK Day for the 27th time, 46.2 million of its people have slid into the misery that King spent his final years fighting, with blacks experiencing the highest [poverty] rate of any group: 27 percent. . . .

'In some ways, things are worse than when Martin was alive,' said Clayborne Carson, founding director of the King Institute at Stanford University. 'If he was concerned about the distribution of wealth in 1968, the lack of opportunity for poor people and the lack of commitment to eliminating poverty as a social problem at that point, it seems obvious that those issues have become more pressing today.'"

Income Inequality

noreply@blogger.com (dré cummings) — Thu, 05 Jan 2012 07:16:00 +0000

According to the Congressional Research Service, the income gap between the wealthy and the poor has grown even wider between 1996 and 2006. The report released by the Congressional Research Service points to the Bush tax cuts and the performance of the stock market between 1996 and 2006 as the primary reasons that the income gap grew between the rich and the middle and lower classes during that span.

According to CNN Money: "After-tax income for the top 1% of taxpayers soared 74%, on average, between 1996 and 2006. The top 0.1% benefited even more, nearly doubling their income over that decade. By comparison, the bottom 20% of taxpayers saw their income fall by 6%, while the middle quintile experienced a meager 10% gain."

Happy 2012

noreply@blogger.com (dré cummings) — Sat, 31 Dec 2011 22:31:00 +0000

To our Corporate Justice Blog readers, friends, and commentators, we wish everyone a happy new year and a prosperous and blessed 2012. We genuinely hope that 2012 brings fiscal responsibility and equal opportunity and justice for all, across the United States and world.

Dodd-Frank Redux: The Fed Strikes a Blow for Rationalized Corporate Governance

noreply@blogger.com (Steven Ramirez) — Wed, 28 Dec 2011 00:30:00 +0000

On December 20, 2011, the Federal Reserve Board issued proposed regulations under section 165(h) of the Dodd-Frank Act requiring all large financial institutions to create enterprise-wide risk management committees complete with independent chairs and direct shared supervision of the chief risk officer. While I take issue with the definition of the term "independent," these proposed new rules embody a strong regulatory initiative to rationalize corporate governance in the US, starting with the megabanks. The proposed rules do not apply to every publicly held company; nevertheless, the Fed's clear endorsement of the theoretical underpinnings of enterprise-wide risk management could operate as a game-changer for limiting excessive CEO autonomy for all public firms. Let me explain, by way of a short history of ERM.

As Betty Simkins and I wrote, in Enterprise-Wide Risk Management and Corporate Governance, there is a powerful empirical and theoretical basis for actively managing all risks that a business enterprise faces in a coordinated way at the highest managerial levels. Enterprise-wide risk management (or "ERM") arose as natural evolution of the best means of managing risk within the modern firm that emerged in the 1990s. After the Enron series of corporate governance failures, it was apparent that firms needed to think about risk across all business functions. As we stated in 2008, "under ERM, all risk areas function as parts of an integrated, strategic, and enterprise-wide system. While risk management is coordinated with senior-level oversight, employees at all levels of the organization using ERM are encouraged to view risk management as an integral and ongoing part of their jobs." We identified a number of ERM best practices. For example, we argued in favor of diverse perspectives on risk and against allowing the CEO to act as a risk silo. Too often, the CEO faces distorted incentives to maximize short term profits regardless of risk. The CEO necessarily holds limited expertise regarding the full range of risks a large firm may face. Board involvement is therefore crucial. Nevertheless, we did not advocate any regulatory mandates with regard to ERM due to its relative infancy and lack of any empirical basis for any particular detailed approach. Instead, we argued in favor of SEC rulemaking to require disclosure of risk management policies to facilitate a market based outcome.

In December 2009, the SEC obliged, issuing rules to require disclosure of risk management policies within public firms. Specifically, the SEC directed that all public firms disclose the extent of the board’s role in the risk oversight of the firm, such as how the board administers its oversight function and the effect that this has on the board’s leadership structure. In addition, the SEC noted that in some cases firms should consider disclosing: "whether the individuals who supervise the day-to-day risk management responsibilities report directly to the board as a whole or to a board committee or how the board or committee otherwise receives information from such individuals." The SEC's approach to risk management, while laudatory, seemed too little and too late. After all, by late 2009, it was clear that American firms actually pursued risk mismanagement as a business model as I documented here, and as the Financial Crisis Inquiry Commission confirms here.

The shocking depths of the dementia revealed by the financial meltdown of 2008, caused me to reassess the law's role in fostering rational risk management within the public firm (among other things) in Lessons From the Subprime Debacle. There, I advocated that "every financial firm that is publicly held should now be required to have an independent risk management committee, comprised of experts in some field of risk management." I further argued that the independent risk management committee enjoy the power to promulgate and enforce risk management policies, appoint and supervise the chief risk management officer, and retain experts as needed to achieve the mission of the committee.

The Fed largely adopted this approach. Here is the Fed's own summary of its proposal:

"The Board is proposing to address the risk management weaknesses observed during the recent crisis and implement the risk management requirements of the Dodd-Frank Act by establishing risk management standards for all covered companies that would (i) require oversight of enterprise-wide risk management by a stand-alone risk committee of the board of directors and chief risk officer (CRO); (ii) reinforce the independence of a firm’s risk management function; and (iii) ensure appropriate expertise and stature for the chief risk officer. The proposal would also require bank holding companies with total consolidated assets of $10 billion or more that are publicly traded. . . to establish an enterprise-wide risk committee of the board of directors. . . .The proposal sets out certain responsibilities of a risk committee, which include the oversight and documentation of the enterprise-wide risk management practices of the company. The proposal also would establish various requirements for a risk committee, including membership with appropriate risk management expertise and an independent chair. The proposed rule also requires a covered company to employ a CRO who will implement appropriate enterprise-wide risk management practices and report to the covered company’s risk committee and chief executive officer."

The Fed's proposal is fundamentally sound. It is a positive step away from our current regime of CEO primacy because it limits CEO autonomy to manipulate a firm's risk profile for profit. I take issue with the Fed's definition of independence and other issues, and will post on these objections in due course. Today, I wish to posit that the Fed's embrace of enterprise-wide risk management for large financial companies constitutes a powerful incentive for all firms to embrace enterprise-wide risk management. The Fed's proposal is based in part on the findings of the Senior Supervisory Group's (SSG) reports on the causes of the financial crisis. That group, consisting of senior regulators from seven nations, found that firms with stronger risk management systems fared better during the financial crisis than firms with weak risk management. The SSG found that firms at the center of the crisis lacked basic risk management coordination.

Thus, the Fed's proposal amounts to an expert endorsement of fundamental enterprise-wide risk management principles, based upon a solid empirical foundation. As such, public firms subject to the SEC's disclosure mandates (as discussed above) face added pressure to adopt sound risk management precepts. Firms that do not do so will face market sanction, as well as a more difficult defense of any director liability claim. Indeed, if board members ignore solid evidence of the efficacy of enterprise-wide risk management they will essentially be subordinating the interests of the corporation to their loyalty to the CEO, and the maintenance of CEO primacy. I will be expanding on these points in a forthcoming law review article.

SEC Sues Fannie Mae and Freddie Mac

noreply@blogger.com (dré cummings) — Fri, 23 Dec 2011 13:30:00 +0000

Two interesting recent Opinion pieces in the Wall Street Journal focus on the role that Governmental Sponsored Entities Fannie Mae and Freddie Mac played in the financial market crisis of 2008. The Securities and Exchange Commission has filed a lawsuit against several Fannie and Freddie executives alleging that these executives engaged in securities fraud by significantly understating the GSE's exposure to subprime loans it held and/or securitized in the run-up to the mortgage meltdown.

What Fannie and Freddie Knew

The Financial Crisis on Trial

While both articles are editorial/opinion pieces, each uses the SEC's lawsuit against Fannie and Freddie executives to make intriguing arguments about the role of government policy in the market crisis. The articles argue that Fannie and Freddie downgraded lending standards in an effort to meet HUD guidelines in connection with making housing affordable to Americans with sketchy credit and then served as the buying agent of many of these recklessly written loans. That the GSE's played a role in the crisis is now buttressed by the SEC's lawsuit.

One problem however, that I identified in my recent Utah Law Review piece Racial Coding and the Financial Market Crisis, is that both Democrats and Republicans strain desperately to place the blame for the financial market crisis on one single cause. Here, the Op-Ed pieces in the Wall Street Journal continue, now three years later, to attempt to pin single causation blame for the market crisis on one factor, namely Fannie Mae and Freddie Mac. While the SEC's lawsuit seems to indicate that Fannie and Freddie played a larger role in the crisis, due in part to its fraudulent reporting of subprime exposure, there are at least a dozen additional factors and causes that led to a near global meltdown, including predatory lending, credit rating agency complicity, predatory borrowing, deregulation, derivatives shadow trading, credit default swaps, collateralized debt obligations, etc. It disserves the public interest to attempt to blame the market crisis on one single factor, like the Op-Ed pieces attempt to do.

Switching gears: Professor Paul Butler has written a very interesting Op-Ed in the New York Times in connection with Jury Nullification and the nation's wayward War on Drugs and sentencing policies.

Jurors Need to Know They Can Say No

Therein, Butler argues: "Jury nullification is not new; its proponents have included John Hancock and John Adams. The doctrine is premised on the idea that ordinary citizens, not government officials, should have the final say as to whether a person should be punished. As Adams put it, it is each juror’s 'duty' to vote based on his or her 'own best understanding, judgment and conscience, though in direct opposition to the direction of the court. . . .'

Nullification has been credited with helping to end alcohol prohibition and laws that criminalized gay sex. Last year, Montana prosecutors were forced to offer a defendant in a marijuana case a favorable plea bargain after so many potential jurors said they would nullify that the judge didn’t think he could find enough jurors to hear the case. (Prosecutors now say they will remember the actions of those jurors when they consider whether to charge other people with marijuana crimes.) . . .

How one feels about jury nullification ultimately depends on how much confidence one has in the jury system. Based on my experience, I trust jurors a lot. I first became interested in nullification when I prosecuted low-level drug crimes in Washington in 1990. Jurors here, who were predominantly African-American, nullified regularly because they were concerned about racially selective enforcement of the law. Across the country, crime has fallen, but incarceration rates remain at near record levels. Last year, the New York City police made 50,000 arrests just for marijuana possession."

Bank of America Settles Predatory Lending Claims

noreply@blogger.com (dré cummings) — Thu, 22 Dec 2011 02:55:00 +0000

Today, Bank of America settled discriminatory lending claims brought against it (and Countrywide Financial) by the Justice Department for steering qualified minority borrowers into subprime loans during the run-up to the mortgage crisis in 2008. Bank of America agreed to pay $335 million dollars for Countrywide's role in discriminating against minority borrowers between 2004 and 2008. According to CNN: "Attorney General Eric Holder said a federal probe found discrimination against at least 200,000 qualified African American and Latino borrowers from 2004 to 2008, during the height of the housing market boom. He said that minority borrowers who qualified for prime loans were steered into higher-interest-rate subprime loans."

The role that predatory lending and discriminatory bank practices played in the financial market crisis has been detailed many times on this blog previously. In the reckless lending period that precipitated the mortgage meltdown, minority borrowers were often targeted for subprime loans and in many instances, while qualified to receive prime loans were instead steered into more lucrative subprime loans by lending officers.

"Thomas Perez, assistant attorney general for Justice's civil rights division, said most of the victims of the discrimination were not aware that they were improperly steered to the riskier mortgages. . . . He said the discriminatory practices went to the heart of the problem with subprime mortgages and the financial market meltdown they helped set in motion. These borrowers paid on average tens of thousands of dollars more in interest and were subject to pre-payment penalties. [Perez] said while the discriminatory loans happened across the country, about 30% of the victims were in California, where Countrywide was based. About two-thirds of the victims were Latino. . . . He said that money from the settlement will go to borrowers who were identified by the probe. Details about how they will be compensated are not yet available."

According to the Wall Street Journal, Bank of America responded: "Bank of America neither admitted nor denied the allegations in the settlement. The bank said it settled to resolve issues tied to Countrywide's practices before Bank of America's July 2008 purchase of the lender. The bank said it is 'committed to fair and equal treatment of all our customers.'"

EUROZONE MELTDOWN III: The Week Ahead

noreply@blogger.com (Steven Ramirez) — Mon, 19 Dec 2011 02:07:00 +0000

The London press today is full of foreboding reports regarding the Eurozone crisis that suggest a very rough week ahead consistent with my position that we face a high probability of a financial crisis at least as bad as that which followed the failure of Lehman. Perhaps my pessimism is rooted in my penchant for reading European newspapers. In any event, here are the highlights (lowlights?) in no particular order:

First, The Telegraph reports that Britain faces deep political resistance to contributing some $40 billion to an effort to funnel bailout money thru the IMF. It really makes sense that Britain would not contribute because: a) they are merely EU members and not in the Eurozone; b) they have their own issues, including excessive austerity, and really cannot afford the $40 billion; and c) they would effectively be bailing out a rather economically stubborn and more backward Germany, and a downright nasty France that actually argued in public last week that Britain should be downgraded. Yet, if Britain pulls out it is game over for the Eurozone and western megabank capitalism as we know it. This accounts for the pain of British Prime Minister David Cameron, above.

Two sentences from this Telegraph report really show the sense of urgency in Britain over this crisis, in stark contrast to the public mood here in the US:

Yesterday it emerged that the Foreign Office was drawing up contingency plans to evacuate up to a million expats from Spain and Portugal in the event of a European banking crash. The planning was even said to include the nightmare scenario of thousands of penniless Britons sleeping at airports with no money to return to the UK.

Whatever.

Second, The Guardian reports that France faces a downgrade this week (before Christmas). As the report highlights, the whole rescue effort is premised on the AAA rating of France and Germany. So, most observers hold that this too would be game over and the end of megabank capitalism as we know it.

Third, in a second Telegraph report, it appears there is simply no way that the ECB is going to pursue the kind of massive purchase of Eurozone debt that would resolve the crisis, as I discussed here. The news is here is that Germany would essentially leave the Euro before they would allow the ECB to buy more bonds until the crisis ended. Instead, they want fiscal consolidation (austerity) until deflation takes hold and we see a vicious debt deflation downward cycle. This too could be the end of western megabank capitalism as we know it. Deflation (even when called fiscal consolidation) will not work.

Fourth, the Financial Times reports that Mario Draghi, in his first interview as ECB President, has ruled out any quantitative easing again and now speaks openly of the prospect of nations exiting the Eurozone, a prospect his predecessor declared "absurd." So no monetary fireman will rescue the Eurozone anytime soon.

Last week was bad. Fitch put a huge chunk of the Eurozone on imminent negative watch finding that: "Following the EU Summit on 9-10 December, Fitch has concluded that a 'comprehensive solution' to the eurozone crisis is technically and politically beyond reach." Ouch! Belgium suffered a two notch downgrade from Moody's. Fitch put France on negative watch. These downgrades and rumors of downgrades hurt bank capital because they trigger accounting haircuts and collateral requirements under credit derivative agreements. So, they hit the banks across the world hard and even could threaten another major financial institution failure. In Australia the banks have been warned to come up with contingency plans to deal with a Eurozone crash within 7 days. I find that disconcerting.

If we miss a big hit this week consider it an early Christmas gift.

Professor Steven A. Ramirez
Loyola University Chicago
School of Law

Election Fraud and CEO Pay

noreply@blogger.com (dré cummings) — Wed, 14 Dec 2011 18:30:00 +0000

News in recent days reveals that 2010 Chief Executive Officer pay jumped more than 36% from the previous two years (determined by averaging CEO pay at the Standard & Poor 500 companies). While unemployment continues to scourge Main Street, Wall Street executives, with what can only be described as modest performance, found their pay increased by 36%. CNN reports: "Paul Hodgson, senior research associate at GMI, said the sharp rise in pay was out of line with the relatively modest improvement that companies typically achieved in profits or share price during 2010. The most lucrative sector for CEO pay was health care, which included three of the nine top-paid executives, including the two most lucrative packages . . . ."

Next, in an under-reported story, a Republican campaign manager in Maryland was convicted of election fraud last week. As discussed by Professor Sherrilyn Ifill at The Root: "Those who are still confused about why Republicans spend so much energy making it harder for people to vote should pay some attention to a case that concluded this week in a courtroom in Baltimore. There, the campaign manager for 2010 Republican gubernatorial candidate, and former Maryland governor, Robert Ehrlich was tried and found guilty of election based on an attempt to suppress the African-American vote by authorizing the use of misleading robocalls."

EUROZONE MELTDOWN II: The Week in Review

noreply@blogger.com (Steven Ramirez) — Sat, 10 Dec 2011 18:00:00 +0000

Mario Draghi, the head of the European Central Bank, could resolve the Eurozone crisis simply by pushing the button on massive debt monetization--that is, the purchase of Eurozone sovereign debt in sufficient quantities to stabilize financial markets. In normal times, such an inflationary move would be anathema to anyone interested in long run economic growth and stability. These are not normal times. We face an epic debt crisis that threatens to destabilize global markets, constrain growth and tip the global economy into debt deflation. These threats may persist for years if not addressed vigorously at their root. If the ECB purchased massive Eurozone bonds, then moderate inflation would set in as the money supply in Europe expanded, debt loads would ease relative to GDP, and monetary expansion would accommodate growth.

In the most important (and fundamentally bearish) development of the week, Draghi moved strongly in the opposite direction. He not only ruled out monetary expansion through troubled debt purchases, he argued that such action would violate the ECB charter even if pursued indirectly--such as loaning money to the IMF to buy bonds--or through any other "legal tricks." It is hard to walk back from illegal.

The second most important development of the week involves downgrades and rumors of downgrades. Moody's downgraded the French megabanks Thursday night. And, S&P put essentially the entire Eurozone on negative watch on Monday. So, in the midst of a historic debt crisis both European banks and European sovereigns are facing a mass loss of creditworthiness. Experts suggest that France now faces a two notch downgrade, possibly very soon.

The market finds cause for optimism in the recent Eurozone agreement for consolidation of fiscal power in Brussels which may now accede to enhanced power over national finances within errant Eurozone nations. Frankly, it is hard for me to believe that any nation would cede fiscal power to such an extent. Even in the US, the federal government has very limited legal power over state finances. Yet, more fundamentally, this does absolutely nothing to help with the debt crisis at hand. I hate to dissent from market verdicts, but I think the equity market has gotten a little giddy here.

The good news is that Eurozone yields are down right now and that equity markets have responded favorably to the deal announced at the EU summit this week. We may have bought some time. But, I am convinced things got gloomier this week, not better.

The fundamental problem is this:

One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.

I have argued this point many times over the past three years. The only way out of a debt crisis is rapid growth--and that requires high-payoff fiscal policy and monetary accommodation. The Eurozone is following the austerity mantra off the cliff.

In my forthcoming law review article, I address this issue head-on. In Taking Fiscal Policy Seriously I will articulate an optimal legal framework for the operation of fiscal policy in a globalized economy. This will build on my prior work in this area, Fear and Social Capitalism which argued in favor of a depoliticized fiscal policy to complement monetary policy.