Business Law Prof Blog

Sarbanes-Oxley Compliance Costs Decline

A survey of 185 companies by Financial Executives International found that compliance costs for Sarbanes-Oxley's internal controls audit requirements, Section 404, had declined 5.4% last year.  Total audit costs were up 2%, however.  The data will give some solace to SOX supporters.  It does not affect the basic argument against Section 404 however:  1) The SEC vastly underestimated the costs of Section 404;  2) The current costs of Section 404 still hovers around $850,000 per firm -- nearly 25% of total audit fees; 3) The early costs of Section 404 were in the million per firm; 4) Small companies are still exempted by SEC order because they simply cannot afford to comply; and 5) Section 404 has not stopped the current sub-prime mortgage crisis or any other major financial crisis  (it does catch shortfalls in penny cash discretionary accounts, however). In short, the section is still a disaster and should be repealed.   

We Are Not in a Recession

The Commerce Department released preliminary data on the GDP for the first quarter of this year.  It showed a growth rate of .6% [corrected].  Granted this is not stunning but is it not negative -- we are not now and have not been in a recession.  We are in a slow growth period.  The press and politicians have claimed we are in a recession since summer of last year -- it is false and has been false.  Why the hysteria?  Media likes crises to sell ads and out-of-power politicians like bad times to advocate change and get votes.  Folks, we are not in a recession. This is good news--except to scare mongers.   

Political Arbitrage

Business is focusing on the election and guessing that a very liberal Democratic will win the White House and that Democrats will control both houses of Congress. Politics will change and business parameters will change. We will see higher investment taxes and we will see stricter anti-trust enforcement.  So better now and November expect some blockbuster cash deals -- consolidating market power with an unusual frequency of taxable versus tax free structures.  Some have come already. There will be more -- political arbitrage.

Liberty Mutual to buy Safeco

On Wednesday, property and casualty insurer Safeco Corp. agreed to be acquired by Liberty Mutual Group in a $6.2 billion deal.  The acquisition would make Liberty Mutual the fifth-largest property and casualty insurance-provider in the U.S. and the second-largest surety insurer.  It is an odd time for such a large deal in the insurance business given the current distress in the financial community.  Moreover, the deal will have to survive anti-trust analysis by either the DOJ or the FTC.  Perhaps they are anticipating tougher anti-trust review under a Democratic administration. 

Mars to Acquire Wrigley

Today, Mars, Inc., and Berkshire Hathaway, Inc., agreed to acquire Wrigley Jr. Company for about $23 billion. Mars will spend $11 billion, with Goldman Sachs providing a $5.7 billion credit facility, and Berkshire will provide provide $4.4 billion of subordinated debt.  At closing Berkshire will also purchase a $2.1 billion stake in Wrigley at a discount relative to the $80 per-share price.  It agains looks like Buffett has once again negotiated a special price for himself; he shows once again his bargaining savy.

Clear Channel Will Win or Lose in Texas

The New York Court has refused to block the Texas suit by Clear Channel against the lenders of the buyout group for tortuous interference with the Clear Channel buyout.  The lenders have refused to lend.  So we are back to a Texas jury with a Texas plaintiff against New York financial companies.  Anybody remember the Pennzoil v Texaco debacle??  Are we in for a replay?

Hedge Fund Mavericks

Reading about David Einhorn of Greenlight Capital is a delight.  He is a maverick with strong opinions on the SEC, boards of directors, and the fed.  A financial system that can supports such folks (as opposed to concentrations of power in big banks) is a national treasure.

SEC Asleep at the Switch or Did It Throw the Wrong Switch?

Critics have long suggested that the SEC has been asleep at the switch when it comes to new financial frauds.  The SEC may have done more--it may have thrown the switch to the wrong track.  In 2004, the SEC changed its accounting releases to allow brokerage companies to include risky capital in the capital reserves that it requires brokers dealers to hold when engaging in securities transactions.  The brokerage companies are also banks and used the diminished capital requirements to increase leverage and participate in the asset backed securitization markets.  Great.  Recall that the Chairman of the SEC, Cox, noted that the system was fine and needed no repair on the eve of the Bear Stearns emergency bailout.   

Questions About National City's Outside Directors and Executives

There is a very telling note to the recent $7 billion infusion of money into National City Bank by a hedge fund club.  The leader of the hedge fund group, Corsair Capital Vice Charmian Richard Thornburgh, is joining the board of directors and will be the only outside director with banking experience.    Whatttt???  By the way, the CEO of National City, Peter Raskind, who presided over the lose of $15 billion because the bank invested in high risk securities and used mortgage brokers that participated in questionable mortgage brokerage practices made $3.4 million last year.  The fellow at the bank, Jeffry D. Kelly, who designed the mortgage loan practices made $4 million last year.  The bank has cleaned house in the lower mortgage divisions but the top folks, and those who monitor the top folks, have survived and continue to prosper.