Business Law Prof Blog

SEC and International Accounting Standards

In a very important vote, the Securities and Exchange Commission dropped a requirement that foreign companies with United States trading exchange listings that comply with rules set by the International Accounting Standards Board (ISAB) still must reconcile their accounting records to comply with United States accounting rules.  The international accounting rules are less detailed than the United States rules and cost less to implement.  The SEC agreed with our major exchanges that have lobbied for the change so as to better attract foreign issuers.  Some United States issuers have objected, arguing that one set of rules should apply to all listed companies.  All have to agree, however, that the vote is an expression of qualification on the quality or rationality of United States accounting rules.    

NYSE: Traditional Specialists On the Ropes

Two of the seven NYSE specialist operations are quitting, signaling an eventual end to the dominate position of floor trading in NYSE listed stocks.  Electronic trading is steaming ahead, dominating trading in listed stocks.  Specialists operations will survive, in electronic form; floor trading will not.  The new head of the NYSE is an electronic trading advocate.  He once said something to the effect of "I do not want my trades executed by several folks all named "Vinnie" on the floor."  It took a long time for this to happen -- too long.  [I wrote an article in 1991 suggesting that specialists should innovate and was savaged by NYSE flunkies for it.]  Vested interests delayed the move, all the the detriment of the US trading markets, which were slow to embrace electronic trading and lost their competitive edge, and US traders, who paid higher trading costs. 

The Home Foreclosure Mess

The top three states in home foreclosures are California, Florida and Ohio.  In California and Florida there was a spike in real estate values that attracted speculators, many of whom were flippers.  The speculators who took risks and lost do not deserve much sympathy.  In Ohio, however, the housing market did not show substantial price spikes.  The situation is very different.  Those losing their homes were cause by rising unemployment rates in their income sectors and by the false hope (lured by low teaser initial rates) that many in the lower income sectors could afford homes that were beyond their means.  Should government money bail them out? Should the government force "renegotiation of rates" (should SIV trustees be prohibited from foreclosing)? The argument is more complicated.  One has to balance long-term injury to the home lending market (caused by disabling execution on loan; loans with be more expensive in the future and less available to lower income earners) with short-term relief for those who are facing the lose of their homes.  The moral questions are much tougher.  Since the government, if empowered will probably make a mess of things, I would let the market clear on its own.   

Ohio Court Stops Foreclosures by SIVs

A federal judge in Ohio, Judge Boyko in Cleveland, asked a straightforward question of Deutsche Bank National Trust Company, a trustee for securitization pools of mortgage backed securities.  The bank was attempting to foreclose on 14 homes in Ohio. "Prove that you own the loan and the mortgage."  he asked.  The Bank could not.  The legal papers had not kept up with the multiple assignments that created the securitization pools.  This is a new and serious wrinkle for the already hammered SIVs who have pooled subprime mortgages and sold securities in the pools to others.  The default rates on the mortgages are up and the value of the securities is, corresponding, down, causing major banks, who had purchased the securities to take massive write-downs.  Now the potential defaults will be augmented by the possibility that the SIVs cannot  execute on the homes.  Loans that were worth 40% to 60% of their face value (due to the underlying collateral, the home) are suddenly worth nothing, nadda, zero.  The write downs will get bigger unless the lawyers can figure out how to find the appropriate legal documents that demonstrate ownership. 

The SubPrime Pain: The Big Lie

Much of the roiling in the markets has been caused by a very simple lie:  Many investors hold positions that were advertised as bankruptcy proof (very low risk) and found out, much to their anger and surprise, that the low risk promise may have been untrue.  Their response is to flee the questionable positions and no wait for assuring claims of insurance or guarantees.  There are several examples.  First and foremost are those holding money market accounts who have found out that some of the commercial paper in the accounts was from SIVs issuing asset back securities.  Surprise! They thought that commercial paper came from blue chip operating companies and that the default risk was negligible (only Penn Central has defaulted on its commercial paper).  The response?  Withdraw from money market funds and refuse to buy, even through, intermediaries, any asset back commercial paper.  It is a rational response to having been misled.  Similarly, E*Trade now has people moving deposits and investment accounts to other banks and to other brokers respectively because they have discovered that E*Trade has lost a boat load of money in CDO investments.  Surprise! You might have to rely on SDIC insurance or on SIV insurance against losses.  They do not want to claim insurance proceeds, they want their money in secure accounts as they were told they would be.  So they flee.  Those who offer the utmost security and then disappoint get severely burned, as they should. 

Another Valuable Role for Short Sellers

With true investigative journalists suffering from job cutbacks and claims of political bias, we have another source of truth telling, the short seller.  A short seller tested the clothing make by Lululemon Athletica and found that, contrary to its claim, it was not made our of "seaweed."  He toke a short position in the stock and released his study.  The New York Times picked up the study, did one of its own, and wrote a confirming story.  So now the NYT reports are watching clever short sellers for good information.

GM 3rd Quarter Loss

General Motors reported a third quarter loss of $39 billion dollars. GM attributed the loss to a $38.6 billion non-cash charge largely related to the write-off of accumulated deferred tax credits. The loss is the second largest quarterly corporate deficit in the history of the United States. According to Standard and Poor’s, the largest quarterly deficit belongs to AOL, who wrote down $45.5 billion following its troubled merger with Time Warner in 2002.   The reported loss is larger than GM's total market capitilization.  Those who admire unions might ask themselves whether any unionized industry in the United States is doing well at the moment. A serious question for management is whether the shareholders would be better off if the company were liquidated and the cash reserves just distributed to shareholders in a liquidation dividend.

E* Trade's Troubles

E*Trade is facing the potential of a good ol' fashioned run on the bank.  Depositor in E*Trade's retail banking business and investors who hold stock through E*Trade brokerage accounts are nervous because E*Trade has substantial exposure to loses in the subprime credit markets.  The depositors and investors do not want to take the time to figure out, based on complex legal analysis of business structure and guarantees, whether their own funds are at risk; they want out now.  E*Trade is livid about the suggestion that investors and depositors are at risk, offering all sorts of assurances.  Folks, they're done.  Yet another bank is finding out that you cannot hold depositors and investors accounts under the same name as the name attached to a risky investment business.

New Treasury Department Study on Income Inequality

The Wall Street Journal reports that income tax data from 1996 to 2005 show that nearly 58% of all filers in the poorest income groups in 1996 had moved into a higher income category by 2005.  This means, of course, that other had moved down as well.  This is a stunning show of wealth mobility in the United States.  There is other evidence that the gains are not equally distributed by race however.  The other bit of news is that the median income of all tax filers had increased a whopping 24% real dollars (adjusted for inflation) in the time period.  The lowest quintile filers had median income increases of 90% and the highest quintile filers had gains of 10%; the richest 1% actually lost 25% of their income.  Data often gets in the way of a good heart wrenching populist appeal.