June 17, 2006
Fairness Opinions: The NASD Rules
The proposed NASD rules on fairness opinions required only that conflicts of the writer, an investment bank, be disclosed. No-one takes the opinions seriously --- except the courts. The opinions are designed to protect boards from court scrutiny. If courts policed the opinions, refusing to given bogus opinion any weight in suits against boards, we would not need new rules. The new rules are, in essence, an indictment of court oversight.
June 16, 2006
University Financial Shenanigans
The elite Universities are selling bonds in a big way. Here's the racket. They offer tax exempt bonds and use the money to invest in the higher yield taxable markets. They cannot do so directly, it is illegal, so they do so indirectly. The universities raise money through the bonds, use the proceeds to build a building, hedge the interest-rate risk in swaps, then use endowment money saved to invest in the taxable markets. Sweet.
Leases on the Balance Sheet?
The FASB is reconsidering the accounting rules that allow corporations to keep long-term leases off their balance sheets. The use of leases has been one of the hottest "off-the-balance sheet" financing techniques for years. It will take several years for the FASB to act. This is big.
SarbOx Increases Leverage
Businesses avoiding the reach of Sarbanes-Oxley have turned to private offerings of debt rather than public offerings of equity securities. So SarbOx regulation has another unintended effect, that of increasing the leverage of American companies. The new competition for placing debt drives down yields and reduces protective covenants. In other words, creditors are absorbing more risk for a given rate of return.
Cost of Oil
The high cost of oil has led many companies to improve their energy efficiency, reducing consumption of oil and shifting from hydrocarbons towards cleaner alternatives. The environmentalists are happy. See Climate Group, "Carbon Down, Profits Up" (2006).
Vinson & Elkins: Enron
The last shoe to drop on Enron may be a discussion of the role played by its outside counsel, Vinson & Elkins. The Enron bankruptcy trustee is negotiating to settle claims with V& E for $30 million. The SEC is investigating V&E and class action lawyers have sued V&E for their role in the Enron collapse. The suits will soon reveal a flood of documents and transcipts that focus on the role of outside counsel. Early disclosures of some of the evidence reveal that V&E had doubts about Enron practices as early as 1997 even as the firm provided opinion letters to Enron on controversial deals. The case may transform opinion letter practice.