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This morning I watched the bankers get knocked around a bit at After the Financial Crisis: Consequences and Lessons Learned, a forum at Davos sponsored by the Federation of Swiss Protestant Churches. This cage match pitted a couple token bankers (see panel list below) against an array of policy people like Juan Somavia, Director General of the International Labour Organization, Joseph Stiglitz, from Columbia’s Business School, and Christine Lagarde, the French Minister of Finance (famous for telling Hank Paulson not to let Lehman collapse). The discussion was fairly heated.
The curiously irreverent moderator, Stephan Klapproth (who referred to Patrick Odier as the “supremo” of the Swiss Bankers Association), began the discussion by invoking Nicholas Sarkozy’s comment that capitalism must become moral. Was moral capitalism an oxymoron, Klapproth wanted to know?
The bankers tried to steer the discussion away from morality. Odier argued that the only way to structure regulation was from a “responsibility point of view.” Morality, he argued, could not be measured, and therefore, could not be the basis for regulation. Responsibility, shot back Nikolaus Schneider, is just a “species” of ethics. “If you aren’t responsible to yourself” and to other people “you aren’t being ethical.” Schneider also became snappish when Ziya Akkurt of the Turkish bank Akbank TAS suggested that banks shouldn’t be singled out for blame because everyone bears some responsibility for the financial crisis. “If everyone has responsibility,” said Schneider, lapsing into German, “then no one has responsibility, and that’s just not right.”
The rest of the panel was determined to return to moral questions. They spread the blame, but not as broadly as Akkurt. “When [the banks] targeted the poorest people,” said Stiglitz, “they were acting unethically.” Somavia poured invective on the present model of globalization, calling it “unfair, unbalanced, and … unsustainable.”
Lagarde, by contrast, made the reasonable argument that capitalism and morality are unrelated. She thought government could manage moral questions by creating “a more balanced system” through regulation that is “implementable, enforceable, efficient,” and which “levels the playing field.” Like Tidjane Thaim of Prudential, Legarde expressed concern about regulatory arbitrage.
Stiglitz had the best line – “one of the reasons the invisible hand [of the market] so often seems invisible is that its not there.”
* Ziya Akkurt, Chief Executive Officer and Board Member, Akbank TAS, Turkey
* Christine Lagarde, Minister of Economy, Industry and Employment of France; Member of the Foundation Board of the World Economic Forum
* Patrick Odier, Chairman, Swiss Bankers Association, Switzerland
* Nikolaus Schneider, Vice-Chairperson of the Council, Evangelical Church in Germany, Germany
* Joseph E. Stiglitz, Professor, Columbia University, USA
Moderated by
* Stephan Klapproth, Anchor, Ten O’Clock News, Swiss Television SF DRS, Switzerland
Davos 1: the chuckling bankers
I’m slowly picking my way through the regulatory reform sessions from Davos. Yesterday, I listened to a podcast of a panel called Redesigning Financial Regulation. The panelists were a mix of financial services people and central bankers (see below).
I found the discussion interesting enough that later I watched it on Gawkk. I’m glad I did, because on iTunes you can’t see the central bankers cover their mouths to prevent themselves from laughing when hedge fund manager, and formula one enthusiast, Davide Serra suggests that financial company CEOs be dragooned to run regulatory agencies. I imagine the bankers were picturing Dick Fuld, or maybe Ken Lewis, running the Federal Reserve. That doesn’t make me laugh.
Serra’s argument is that financial company CEOs are smarter and know more about the industry than regulators. To me, everyone on the panel seemed pretty smart, but there was a marked difference between the regulators and the regulated. For one, Serra and Tidjane Thaim from Prudential were a lot more charismatic than their regulator counterparts, but the chief difference I noticed was in stated priorities.
The discussion of resolution authority is a good example. All of the central bankers mentioned the need for some kind of resolution scheme for giant, failing financial institutions. The regulators seemed content, even excited, to sink into a discussion of moral hazard and who should bear the burden when these institutions fail. As Jean-Claude Trichet put it, “this is very stimulating, intellectually – to the professor I would say, academically.”
By contrast, Tidjane Thaim, from Prudential, spoke in simple sentences and identified pragmatic goals. “We want regulation to be predictable … [w]e think regulation should be consistent.” “Regulatory arbitrage,” he said, “is very damaging to us.” He also expressed alarm about mixing the moral and the pragmatic “We’re just nervous,” he said, that regulators are concocting a system that will save big companies, no matter how badly run. “Bad companies,” he said, “or poorly managed companies, should die. We don’t think the system should take as an objective,” saving all large companies.
* Agustin Carstens, Governor of the Central Bank of Mexico
* Pravin Gordhan, Minister of Finance of South Africa
* Muhammad S. Al Jasser, Governor of the Saudi Arabian Monetary Agency
* Davide Serra, Founding and Managing Partner, Algebris Investments TCI, United Kingdom
* Tidjane Thiam, Group Chief Executive, Prudential, United Kingdom
* Jean-Claude Trichet, President, European Central Bank, Frankfurt
Moderated by Barry Eichengreen, Professor of Economics and Political Science, University of California (Berkeley))
Davos on iTunes
The World Economic Forum has been posting audio and video podcasts of its proceedings on iTunes. Over seventy useful-but-nod-inducing selections from which to choose. For free!
Glory Your Only Recompense!
The Speculative Debauch, a blog about securities and corporate law, is seeking contributing posters. I am a former West securities-law-expert-turned-layoff-casualty and I’m looking for others, similarly situated, who’d like to fill their empty hours writing about the law. This isn’t a moneymaking venture yet, so you’d be donating your work in exchange for glory. How can you say no?
If this description resembles you, email.
Volcker Rule vs Kanjorski Amendment!
Cutting our elephantine financial institutions down to size is much on the agenda since last week when the administration unveiled the “Volcker Rule” (Volcker). A proposal that would prevent federally insured banks from owning hedge funds and private equity funds. It would also “limit the consolidation of the financial sector.” This appears to mean that banks won’t be allowed to get bigger.
Barney Frank was quick to insist that his Committee’s bill, HR 4173, the Wall Street Reform and Consumer Protection Act, which passed the House in December, “give[s] the regulators the power to do everything the President has proposed.” The powers Frank is referring to come from the “Kanjorski Amendment” (Kanjorski) to HR 4173.
While it is true that Kanjorski confers on the Financial Stability Council (Council) the power to dismember very large financial institutions, it is also true that there is no Financial Stability Council. Thus, the regulator with the power to do the things the President proposed is, you know, not real. Also, if Frank’s bill becomes law, the regulator in question would also get the power to conduct a more sophisticated analysis of our financial institutions.
Volcker is based on a philosophical aversion to taxpayer-insured institutions acting like their private competitors and it provides a mechanistic solution (make them divest). Kanjorski, by contrast, is a much subtler instrument. It gives the Financial Stability Council the power to examine the “size, scale, scope, concentration, activities, and interconnectedness” of the 50 largest financial institutions to determine if any present a “grave threat to the financial stability or economy of the United States.” The Council is given a variety of tools to reduce such threats – from a modification of regulatory standards up to forcing them to divest “business units, branches, assets, or off-balance sheet items.”
Drivel-o-matic
IR Web Reports has done a public service, of sorts, by creating a Twitter feed that consolidates the twitter messages from public companies. As you can imagine, inanity prevails, but if you want to see a snapshot of peer social media drivel, this is the place! It is sort of awesome.
Diggin’ in the Crates of Regulatory Reform
So, I’m a turning into a financial markets reform geek (no, I wasn’t one before, smart guy). This weekend I was pleased to receive in the mail a copy of Global Equity Markets – a book published by NYU’s Stern School in 1995. I ferreted it out on Alibris because it contains a synopsis of a very ambitious 1993 proposal by the Chicago Mercantile Exchange to completely restructure federal regulation of financial markets.
The CME proposal looks prescient – it contains many ideas that made their way into existing regulatory proposals, but it also contains a number of clever innovations that appear to have been lost in the mists of time. It is interesting to think how things might have turned out if this proposal had been enacted ten years ago.
The CME proposal was, like Hank Paulson’s “Blueprint,” a functional regulatory scheme. And while it left the Fed alone, it proposed dissolving the OCC, OTS, FDIC, CFTC, SEC, SIPC, and PBGC and replacing them with eight new agencies. None of the new agencies would be independent of the executive, and the operations of all eight would be coordinated and overseen by a “board of commissioners” composed of the heads of the “Divisions” and chaired by a cabinet-level officer. The CME envisioned that “The board of commissioners [would] provide the mechanism that has to date been lacking for coordination of financial regulatory policies.”
If you’ve been following our series on the regulatory pissing match between the SEC and the CFTC, you won’t be surprised that the CME proposed a new way of differentiating between securities and derivatives. The Division of Risk-Shifting Markets would oversee trading in “all standardized offset instruments.” While the Division of Investment Securities would be in charge of “instruments commonly known as securities.” But, as they quickly admit, it is damn hard to tell the difference sometimes so the Divisions “may therefore fuse over time.”
The proposal would also create a Division of Prudential and Systemic Risk as well as a Division of Consumer Protection. The Division of Systemic Risk would set capital adequacy standards for all regulated institutions and the Division of Consumer Protection would control the “vast variety” of retail sales practices employed by all regulated entities. All disclosure to investors would be regulated by the Division of Disclosure and Reporting and any entity that directs the “deployment of other people’s money” would have to register with the Division of Pooled Vehicles and Fiduciaries. Unlike existing reform proposals, the CME would strip financial market oversight from ERISA and the Department of Labor and put it in the hands of the relevant functional regulator.
The new agencies would share a common chief counsel, chief accountant, and chief economist. Examination and enforcement functions for all agencies would also be shared in common. Agency administrative law judges would go to a newly created specialist court.
The CME proposal even addresses resolution authority. It combines the existing receivership powers of the FDIC, SIPC, and PBGC into the Division of Consumer Insurance. While, for the most part, the CME proposal does not change the law, in the case of resolution authority it allows that the Division could address “any failure authorized by the board.” The proposal imagines that this Division will ultimately be replaced “by less costly private solutions over time.” Uh huh.
Free market utopianism aside, this is a pretty reasonable set of ideas. Even though the CME proposal leaves the law mostly the same, it is leaner and smarter than any existing reforms wallowing through Congress. That was a depressing note on which to end, wasn’t it?
Nuns Bring the Pain
Today, Westlaw Business Legal Currents published an article, to which I contributed, about the battles over health care reform shaping up for the 2010 proxy season. My bit is about attempts by Catholic charities to get corporations to adopt a set of health care reform “principles.” The SEC appears disposed to let such proposals go forward, but that doesn’t mean the 14a-8 slugfest won’t be worth watching.
I am Corporation, Hear Me Roar.
“The court has thus rejected the argument that political speech of corporations … should be treated differently … simply because [corporations] are not ‘natural persons’.” It sounds like the beginning of a Shouts and Murmurs, doesn’t it? I imagine various inanimate objects, pets, or possibly, robots, voicing their political opinions. Fighting for their rights – the Non-natural Persons Legal Defense Fund.
The quote, of course, comes from Citizens United v. Federal Election Comm’n, decided yesterday, which appears to grant First Amendment rights to corpoprations. In reaching this weird result the Court relies on First National Bank v. Bellotti, but that isn’t what Bellotti says at all. Bellotti found unconstitutional a Massachusetts statute that criminalized corporate speech not directly material to the corporation’s business. The Bellotti Court’s decision does not rest on the question of whether corporations can have civil rights. In fact, the Bellotti Court chastised the court below for posing the question at all. “The proper question therefore is not whether corporations ‘have’ First Amendment rights and, if so, whether they are coextensive with those of natural person. Instead, the question must be whether [the Massachusetts statute] abridges expression the First Amendment was meant to protect.” In other words, the proper inquiry is into the speech, not the speaker. Is what is being said the type of thing the First Amendment was enacted to protect? Or, as the Bellotti Court put it, “the inherent worth of speech in terms of its capacity for informing the public does not depend upon the identity of its source.”
You’re Only as Old as You Feel
Last week, I listened in on a Twitter discussion about age-based mandatory director retirement. This issue arises every now and again when a company decides – like ConocoPhillips did in 2005 (see Taub, Director Retirement Policies Drawing A Big Yawn, Compliance Week, 3/22/05) and Home Depot did in 2007 – to disregard its own mandatory retirement policy.
I vowed to take another look at the issue. My research took me up a funny alley because while it appears that there’s been much discussion about best practices and proxy adviser policies, there hasn’t been much notice taken that the EEOC thinks mandatory director retirement policies are illegal.
The Age Discrimination in Employment Act makes it illegal for a company with more than 20 employees to discriminate against them based solely on age. Although, as the Employment Discrimination Coordinator reminds us, corporate directors are “traditionally viewed as employers,” (s. 18:29) the EEOC has convinced a number of circuit courts that they can be employees, too.
In EEOC v. First Catholic Slovak Ladies Assn., (694 f2d 1068) the Sixth Circuit held that if directors took on “traditional” employee duties they became eligible for ADEA protection. The Second Circuit, in EEOC v. Johnson & Higgins (91 F3d 1529), applied the common law agency test to the directors of J&H and found them to be employees. The EEOC thinks law partners can be employees, too. In 2005, to settle an EEOC suit, Sidley Austin paid $27.5 million and agreed not to maintain “a formal or informal age-based retirement policy” for partners. The Sidley Austin settlement led the ABA to suggest that all law firms eliminate mandatory retirement policies.
