Thursday, April 9, 2020
The American Business Law Journal (ABLJ) is a triple-blind peer review journal published quarterly “on behalf of the Academy of Legal Studies in Business (ALSB).” Its articles explore a range of business and corporate law topics, and it is a great resource for academics, industry professionals, and others. Its “mission is to publish only top quality law review articles that make a scholarly contribution to all areas of law that impact business theory and practice…[and it] search[es] for those articles that articulate a novel research question and make a meaningful contribution directly relevant to scholars and practitioners of business law.” I’ve previously posted about the journal (here).
The ABLJ has issued an invitation to ALSB members to apply for the position of Articles Editor. Not currently a member of the ALSB? No worries, you can easily become a member (here)! Below is the complete invitation to apply sent from Terence Lau, the ABLJ Managing Editor.
We invite ALSB members who are interested in serving on the Editorial Board of the American Business Law Journal to apply for the position of Articles Editor. The new Articles Editor will begin serving on the Board in August 2020. Board members serve for six years—three years as Articles Editor, one year as Senior Articles Editor, one as Managing Editor, and one as Editor-in-Chief. Articles Editors supervise the review of the articles that have been submitted to the ABLJ to determine which manuscripts to recommend for publication. In the case of manuscripts that are accepted, the Articles Editor is responsible for working with the author and overseeing changes in both style and substance. In the case of manuscripts that are believed to be publishable but need further work, the Articles Editor outlines specific revisions and/or further lines of research that should be pursued. The Articles Editors’ recommendations for works-in-process are perhaps the most important and creative aspect of the job because they provide the guidance necessary for such works to blossom into publishable manuscripts. An applicant for the position of Articles Editor should have an established track record of publishing articles in law reviews and should have published at least one article with the ABLJ. Experience serving as a Reviewer for the ABLJ or as a Staff Editor is helpful. Please send a resume and letter of interest to Terence Lau, ABLJ Managing Editor, at firstname.lastname@example.org by May 31, 2020, for full consideration.
Sunday, April 5, 2020
The tenuous link to business law is this…I was blessed to have a phenomenal first-year contracts professor. Over the years, one of my closest friends (also in that course) and I have reminded each other of the professor’s pearls of wisdom about contracts and life. “Life is a marathon, not a sprint,” he would assure us.
I would imagine that many of us feel in the midst of a marathon these days. As another week in these unusual times begins, I was thinking about a few of the lessons I’ve learned in distance running that were helping me to run the course we’re all on these days. First, the importance of paying attention to your breath (Joan Heminway has written about breath and mindfulness here). Second, if you just keep putting one foot in front of the other, you’ll eventually reach the destination/be done. Third, the need for pacing (likely the point my contracts prof was making). Fourth, you’ve always got one more mile in you than you think you have. Fifth, running with others pushes you to be your best and makes the miles fly by. While this is harder to do at the moment, I know that staying connected (via zoom, Skype, Strava etc.) to encouraging, positive people is especially important in these challenging times.
While Haskell went to the 2020 Olympic men’s marathon trials (here), I only read about them in his post and in Runners World. I first learned about the surprise, unsponsored, second-place finisher, Jake Riley, from the article Jake Riley and His Coach Were ‘Broken.’ Now, They’re Going to the Olympics (here). Amazingly, over the past three years, Riley has apparently dealt with a serious bacterial infection, major Achilles surgery, and a divorce. The article ends by quoting his coach as saying “‘There’s nothing better than seeing a broken man come back,’ Troop said. ‘And when they come back, they’ve got nothing to lose.’” Of course, Riley will now have to wait an additional year for his Olympic run. His story of grit, perseverance, and hope really inspired me. As another week in these unusual times begins, I hope that it might offer inspiration to some of you too.
[Revision: actually, I think my last running post is here, but Haskell has still written two since I wrote it!]
Sunday, March 29, 2020
In a December 2018 post (here), I noted that “although esoteric, such issues as who has access to an account at the Fed are critical social policy choices with real world implications that merit broad-based public debate.”
This past week, a federal district court judge granted the Federal Reserve Bank of New York’s (FRBNY) motion to dismiss The Narrow Bank’s (TNB) complaint in TNB USA Inc. v. Federal Reserve Bank of New York (USDC SDNY) (here). In light of this recent opinion, I wanted to reiterate my invitation to BLPB readers to think about seemingly technical, arcane issues such as who gets an account at the Fed – a master account is essentially a bank account at a regional Federal Reserve Bank enabling access to the Federal Reserve Payments System – and how such decisions should be made. The importance of this critical policy issue is only set to increase. A few months ago, the Federal Reserve announced plans to develop FedNow Service (here).
TNB is a financial institution with an innovative business model. Professor Peter-Conti Brown has written about it (here). It’s model is essentially this: open an account at the Federal Reserve, deposit customer funds (financial institution customers), receive interest on the funds deposited at the Fed’s Interest on Excess Reserves Rate (“IOER rate”), keep a slice of the gains, and pay out the remainder to customers. The Federal Reserve is a risk-free counterparty, but it is not limited to paying the risk-free interest rate. So, TNB has a really clever business model. TNB’s Chairman & CEO, James McAndrews spent 28 years working in the Federal Reserve System (19 at the FRBNY). Its Board members also includes two highly respected finance professors: Gary Gorton at Yale University and Darrell Duffie at Stanford University.
TNB received a “temporary Certificate of Authority” from the Connecticut Department of Banking, contingent on several things, including “that the FRBNY would open a master account for TNB.” As the opinion explains, the FRBNY has not actually denied TNB’s application for a master account…though at least 18 months have passed since TNB applied for it! However, as the opinion notes, “the FRBNY’s delay is not TNB’s cause of action.” Hence, United States District Judge Andrew L. Carter, Jr. granted the FRBNY’s motion to dismiss, writing that “TNB lacks standing to pursue its claim, which is also constitutionally and prudentially unripe.”
The decision strikes me as technically correct, and it will be interesting to see TNB’s strategy from here. I’m not taking a position on whether TNB should/should not have a master account without additional research and thought. However, what I am taking a position on is the importance of greater public debate about the underlying policy questions surrounding who does/doesn’t get an account at the Fed.
In Regulating the Invisible: The Case of Over-the-Counter Derivatives (here), I noted that ICE US Trust LLC, an uninsured NY trust company clearing credit default swaps – controversial financial instruments that had just played a huge role in the financial crisis of 2007-08 – had been granted membership in the Federal Reserve System in 2009 (here). ICE Trust was essentially the predecessor of ICE Clear Credit, which essentially has the monopoly on CDS clearing today. Dodd-Frank’s Title VIII explicitly provides the Federal Reserve with the ability to provide accounts and services to clearinghouses designated as systemically important under that title. But prior to Dodd-Frank, I think that granting ICE Trust membership in the Federal Reserve System was a questionable decision.
The Fed obviously has its hands full at the moment with much more urgent issues. In the future, however, it should provide additional clarity about the granting of master accounts and the general timing of such decisions.
Sunday, March 22, 2020
In today’s post, I wanted to call BLPB readers’ attention to two blog posts related to current events that I've found helpful.
First, a few weeks ago, I was really excited to learn that Psychology Today had asked my OU management colleague Dr. Mark Bolino, the Michael F. Price Chair in International Business, to start blogging for them. He recently posted, Managing Employee Stress and Anxiety During the Coronavirus: Some practical, evidence-based advice for managers (here). Although the post’s target audience is likely business managers, I think its wisdom is applicable to a wide variety of work environments.
Second, University of Chicago Booth’s Initiative on Global Markets (IGM) has a Forum (here) on COVID-19 that’s definitely worth checking out. IGM Directors have also posted “Economic Policy Principles for Combating the Covid-19 Crisis” (here). A summary paragraph from this insightful document is below. Thanks to Professor Kathryn Judge for bringing the site to my attention!
We organize our discussion around three pillars. First, following the advice of medical experts, we must do all we can to spread out the number of infections over time, or “flatten the curve.” Second, policies should facilitate production and decision-making in a temporarily socially distanced world. Third, we should prepare to make the post-virus recovery as rapid as possible. Even though these three aspects of the policy response will play out in sequence, policymakers should start acting on all three now.
Sunday, March 15, 2020
To help support the economy as the nation grapples with the coronavirus, the Federal Reserve announced today its decision to take a number of actions (here), including lowering the fed funds target rate to 0 to 1/4%, increasing its holdings of Treasury securities and agency mortgage-backed securities, and taking coordinated measures with foreign central banks (I've written about the Fed's use of central bank swap lines, here). Today’s announcement is the Fed's second interest rate cut in two weeks. On March 3, 2020, it lowered the fed funds target rate to 1 to 1.25%. Economist Carola Binder recently posted (here) an interesting paper, Coronavirus Fears and Macroeconomic Expectations, related to this first March 2020 interest rate cut. Here’s the abstract:
The Federal Reserve cut interest rates by 50 basis points on March 3, 2020, in response to concerns about the coronavirus (COVID-19). On March 5 and 6, I conducted an online survey of over 500 U.S. consumers that asked about their attention to, concerns about, and responses to the coronavirus, their awareness of the Fed's policy move, and their inflation and unemployment expectations. I then provided respondents with information about the Fed's policy announcement, and re-elicited inflation and unemployment expectations. Most consumers were somewhat or very concerned about effects of coronavirus on the U.S. economy, their health, and their personal finances; 28% had cancelled or postponed travel and 40% purchased food or supplies in response to these concerns. About 38% were aware that the Fed had cut interest rates. I show how concerns and awareness of the rate cut depend on consumer characteristics and news sources. Greater concern about coronavirus is associated with higher inflation expectations and more pessimistic unemployment expectations. Provision of information about the Fed announcement leads some consumers to become more optimistic about unemployment and revise inflation expectations downward, consistent with recent research showing that many consumers associate bad times with high inflation.
Sunday, March 1, 2020
Professor Saule T. Omarova at Cornell Law School recently posted (here) a new article to SSRN, Technology v. Technocracy: Fintech as a Regulatory Challenge (forthcoming, Journal of Financial Regulation). I'm excited to read it. Omarova's articles are always excellent and it's on an important, timely topic. Here's the abstract:
Technology is a tool. How to use it, for what purposes and to what effects, is a choice. What does this choice involve in the context of fintech? And how can it be translated into a coherent strategy of fintech regulation? These questions are at the heart of this article. Taking a broad view of fintech as a systemic force disrupting the very enterprise of financial regulation, as opposed to any particular regulatory scheme, the article offers a conceptual framework for the development of a more cohesive and effective public policy response to fintech disruption.
The article argues that the currently dominant technocratic model of financial regulation is inherently limited in its ability to respond to systemic challenges posed by fintech. The existing regulatory model operates primarily through the mechanisms of structural compartmentalization, bureaucratic specialization, and narrow targeting of isolated and well-controlled micro-level phenomena. Fintech, however, is transforming financial markets in ways that directly undermine the basic premises underlying this technocratic paradigm. Exploring these dynamics, the article develops a five-part taxonomy of the key tech-driven changes in the structure and operation of the financial system, and the corresponding challenges these systemic shifts pose to the continuing efficacy of the regulatory enterprise.
This exercise reveals the fundamental tension at the core of the fintech problem. In the fintech era, the financial system is growing ever bigger, moving ever faster, and getting ever more complex and difficult to manage. The emerging regulatory responses to these macro-level changes, however, continue to operate primarily on the micro-level. The article surveys current efforts to regulate fintech—including regulatory “sandboxes,” special charters, and RegTech—and highlights the limiting effects of the technocratic bias built into their design. Against that background, it outlines several alternative reform options that would explicitly target the core macro-structural, as opposed to micro-transactional, aspects of the fintech challenge—and do so in a more assertive, comprehensive, and normatively unified manner.
Sunday, February 23, 2020
At the University of Michigan's Center on Finance, Law & Policy, an important project is underway on The Central Bank of the Future. It’s a great, timely topic. The project’s website explains that: “In partnership with the Bill and Melinda Gates Foundation, this project explores the mandate and design of central banks to consider whether they might play an even stronger role in promoting financial inclusion, financial health, and a more inclusive economy. More broadly, it creates a vision for what the "central bank of the future" might look like and focuses in particular on how emerging technology could support central banks in their efforts to promote financial inclusion, growth, and development.”
The March 20, 2020, deadline is fast approaching to submit academic papers, policy proposals, and pitches for technology products or services to the Central Bank of the Future Conference (w/ co-host Federal Reserve Bank of San Francisco), November 16-17, 2020. A link to all of the details of the call for papers is here.
Sunday, February 16, 2020
What’s the #1 new release in Banking Law on Amazon? I’m glad you asked! It’s Professor David Zaring’s first book, The Globalized Governance of Finance (Cambridge University Press). In 2008, Zaring joined Wharton's Legal Studies and Business Ethics Department as an assistant professor. At the time, I was a PhD student in the Department and also focused on banking law. So, it was really exciting for me to have a banking law scholar join us and I’m thrilled to now have a chance to highlight his new book. My copy is on its way from Amazon, so for now, I’ll share Zaring’s description of his book and my own thoughts with BLPB readers soon!
The book pulls together work I’ve done on the regulatory networks – the Basel Committee, IOSCO, IAIS, e.g., – that have become the global taste for harmonizing financial regulation. I think the regimes, and their relative bindingness (especially Basel), are interesting in their own right, and they are also an interesting way of doing global governance, where the sine qua non is often thought to be a treaty enforced by a tribunal, a la the World Trade Organization.
But in finance, you see neither of those things, and still robust oversight that American regulators, regardless of administration, seem to embrace. Even as the Trump administration has pushed for changes in trade law, Randal Quarles of the Fed has been installed as chair of the Financial Stability Board, the network of networks that keeps everything moving. The Obama administration tried to get a Basel-like process into its trade deals, and issued an executive order encouraging agencies to harmonize regulations.
Moreover, since the financial crisis, regulators have doubled down on these networks, adding political oversight from the G-20, a middle manager in the FSB, and standardizing notice and comment rulemaking at the network level. That, I think, makes the whole scheme look increasingly like a cross-border bureaucracy. After all, American agencies make policy through notice and comment rulemaking overseen by career regulators overseen by political leaders. So too Basel, IOSCO, IAIS, and the other networks.
Sunday, February 9, 2020
At this point, we’re a bit past the New Year, but you might still be thinking about the conferences you’ll attend in 2020, right? Here are some great ideas:
The Academy of Legal Studies in Business has a great annual conference in early August. This year it’s in Providence, Rhode Island, August 4-8, 2020. I’ve never been to Providence, but I hear it’s lovely. I can’t wait!
The Academy also has a number of regional conferences. Check out all the options (if I missed one, send me an email)!
Canadian ALSB Annual Conference April 30-May 2, 2020 (Toronto, Canada)
Great Lakes ALSB, Fall 2020 (Grand Rapids area, Michigan – check back for more info)
Mid-Atlantic Academy of Legal Studies in Business, April 23-25, 2020 (Atlantic City, NJ)
Mid-West Academy of Legal Studies in Business, March 26-27, 2020 (Chicago, Illinois)
North Atlantic Regional Business Law Association Annual Conference, April 4, 2020 (Easton, Massachusetts)
North East Academy of Legal Studies in Business, May 1-3, 2020 (Lakeville, Connecticut)
Pacific Northwest Academy of Legal Studies in Business, April 23-25, 2020 (Vancouver, Canada)
Pacific Southwest Academy of Legal Studies in Business, February 13-16, 2020 (Palm Springs, California)
Rocky Mountain Academy of Legal Studies in Business, September 25-26, 2020 (Vail, Colorado)
Southern Academy of Legal Studies in Business, March 5-7, 2020 (San Antonio, Texas)
Southeastern Academy of Legal Studies in Business [check back for 2020 updates]
Western Academy of Legal Studies in Business, March 27-29, 2020 (Lake Tahoe)
Tuesday, January 28, 2020
I promised to check back in after negotiating The House on Elm Street (here). I’m checking in! We negotiated this exercise – which contains both legal and ethical issues – in my MBA Business Ethics/Legal course this evening. It proved to be a great learning experience. My previous post mentioned that Professor Siedel had made its use easy by creating thorough teaching notes. And as I suspected, while it might be ideal to have students read a negotiation text or have a full 75 minutes to debrief the exercise, neither proved essential to a valuable learning experience. It also provided a great segue into agency law, another of tonight’s topics.
During our discussion of ethical issues, I mentioned Professor Clayton M. Christensen's How Will You Measure Your Life? This past week, this question became particularly poignant. Christensen, one of Harvard Business School’s leading lights, passed away at the age of 67. Several years ago, BYU Law School Dean Professor Gordon Smith and I started “The Business Ethics Book Club for Law Professors.” The wonders of technology enabled several of us business law professors from all over the country to gather virtually about once a semester for a few years to read books on ethics, including Christensen’s book, which were generally written by business school professors. It’s a short, but powerful read. I highly recommend it to all BLPB readers. My recollection is that it was a popular book club selection too!
In this book, Christensen (and coauthors) seek to answer three simple questions: “How can I be sure that”: 1) “I will be successful and happy in my career?”, 2) “My relationships with my spouse, my children, and my extended family and close friends become an enduring source of happiness?,” and 3) “I live a life of integrity – and stay out of jail?” (p.6) Christensen wasn’t a business ethics professor. Rather, the book’s prologue explains that one of Christensen’s courses was Building and Sustaining a Successful Enterprise, in which “we study theories regarding the various dimensions of the job of general managers. These theories are statements of what cause things to happen – and why.” (5) On the last day of the course, instead of using these theories to examine organizations, the class used these theories to study themselves: “We are there to explore not what we hope will happen to us but rather what the theories predict will happen to us, as a result of different decisions and actions…Year after year I have been stunned at how the theories of the course illuminate issues in our personal lives as they do in the companies we’ve studied” (p.6) According to Amazon, this is “the only business book that Apple’s Steve Jobs said “deeply influenced” him.” And it’s not the only time Christensen’s work has been widely praised. His breakout work, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail, was heralded by some as "one of the six most important business books ever written." Without doubt, both books are great, worthwhile reads.
Friday, January 24, 2020
On January 17, I headed to the University of Florida’s Warrington College of Business to be a discussant at the Huber Hurst Seminar. A great event! On the same day, Randal K. Quarles, the Vice Chair for Supervision (a position created by Dodd-Frank) and Governor of the Federal Reserve System gave a speech, Spontaneity and Order: Transparency, Accountability, and Fairness in Bank Supervision, at the 2020 American Bar Association Banking Committee Meeting. Legal scholars have focused scant attention on bank supervision in the past, but this is starting to change. It can be a challenging area to work in as Wharton Assistant Professor Peter Conti-Brown explains in The curse of confidential supervisory information. Indeed, confidential supervisory information is protected from disclosure with criminal penalties.
Bank regulation (which has received a bit more attention) and bank supervision, though linked concepts, are distinct. Supervision “implements the regulatory framework.” An important tension exists in banking supervision. In his speech, Quarles explains that “We have a public interest in a confidential, tailored, rapid-acting and closely informed system of bank supervision. And we have a public interest in all governmental processes being fair, predictable, efficient, and accountable. How do we square this circle?” It’s an important question. Quarles terms it “a complex and consequential issue that, for decades now, has received far too little attention from practitioners, academics, policymakers and the public.”
Quarles’ speech makes several suggestions regarding “some obvious and immediate ways that supervision can become more transparent, efficient, and effective.” To improve transparency, he makes three proposals: 1) “create a word-searchable database on the Board’s website with the historical interpretations by the Board and its staff of all significant rules,” 2) “putting significant supervisory guidance out for public comment,” and 3) “submitting significant supervisory guidance to Congress for purposes of the Congressional Review Act.”
All three proposals strike me as reasonable. What would be the drawback of the Board making interpretations of significant rules transparent and easily accessible? Regulatory guidance, as opposed to rules, is not legally binding. Yet in reality, there may be no difference in practice. I’d welcome both additional public comment on significant supervisory guidance and review by Congress. However, it’s also critical that a variety of stakeholders, especially academics, policymakers, and the public, actively participate in these processes.
Tuesday, January 7, 2020
More on Incorporating Negotiation Exercises Into Business Law Courses: Some Help from Professor George Siedel
I’ve previously blogged about using negotiation exercises in my undergraduate and graduate Business Law/Legal Environment courses (here). I’ve also mentioned that, having taught both business law and negotiation courses in a law school, I know that such exercises would also work well in a law school business law course.
Last August, at the Annual Conference of the Academy of Legal Studies in Business, I had the good fortune of catching up with Professor Susan Marsnik from the University of St Thomas Business School. Eventually, our conversation turned to one of my favorite topics: negotiation! Marsnik mentioned that Professor George Siedel, the Williamson Family Professor of Business Administration Emeritus and the Thurnau Professor of Business Law Emeritus at the University of Michigan, had written some great negotiation materials (here), and they were free! Obviously, I couldn’t wait to learn more! And now that I have, via Marsnik’s help, I wanted to pay it forward!
Siedel’s comprehensive negotiation materials center on the sale of a house, and include Seller/Buyer roles. He shares that “Over the years, I have developed and tested “The House on Elm Street” exercise in undergraduate and MBA courses and in executive seminars in North America, South America, Asia and Europe. The courses and seminars have been developed for (or have included) a wide range of participants, such as athletic directors, attorneys, engineers, entrepreneurs, managers, and physicians.” (p. 2)
What is absolutely wonderful about Siedel's materials is that he also provides not only a slide deck, but also a twenty-page teaching note, Why and How to Add Negotiation to Your Introductory Law Course, to guide you through how to teach the exercise. This is key. He states (and I agree) that many professors don’t include negotiation exercises in their business law courses because there is already so much material to cover, and perhaps more importantly, they don’t feel qualified to teach it. That’s the beauty of these materials: Siedel walks you through teaching the exercise, step by step! Many negotiation exercises for purchase do include teaching notes. However, Siedel’s teaching notes are free, and among the most comprehensive that I’ve seen. What are you waiting for?
In my experience, students love negotiation exercises. Probably like many BLPB readers, I’m tweaking and finalizing my spring 2020 course syllabi as the new semester is around the corner. I encourage you to review Siedel’s excellent materials, and consider including negotiation exercises in your business law courses. It would be ideal if: 1) students were to be able to read at least some of a good negotiation text such as Siedel’s Negotiation for Success: Essential Strategies and Skills or Richard Shell’s Bargaining for Advantage: Negotiation Strategies for Reasonable People, and 2) you had a full 75 minutes to debrief the negotiation exercise. However, from my perspective, you shouldn’t let the absence of either deter you, especially from trying out the negotiation exercise for the first time. That’s exactly how I’m about to proceed, and I’ll keep you posted on how it all turns out.
Finally, a huge THANK YOU to Professor Siedel for creating and making these materials available!
Tuesday, December 10, 2019
As many BLPB readers know, former Chairman of the Federal Reserve System, “inflation slayer,” and namesake of the famous “Volcker Rule,” Paul A. Volcker, passed away Sunday. He was 92. Much has already been – and will continue to be – written about him. To pay tribute to this great man and public servant, I wanted to share a few such pieces (in bold), with a quote from each (in italics).
The Volcker Alliance (here)
Mr. Volcker worked in the United States Federal Government for almost 30 years, culminating in two terms as Chairman of the Board of Governors of the Federal Reserve System from 1979-1987, a critical period in bringing a high level of inflation to an end. He also served as Under Secretary of the Treasury in the 1970s, a period of historic change in international monetary arrangements. Upon leaving public service, he headed two private, non-partisan Commissions on the Public Service, in 1987 and 2003; both recommended a sweeping overhaul of the organization and personnel practices of the United States Federal Government. His last official role in government service was as head of the President’s Economic Recovery Advisory Board, established by President-Elect Obama in 2008 to help steer the nation through the Great Recession.
Paul Volcker’s Greatest Lesson Wasn’t on Economics. It Was on Being a Public Servant. (here)
Despite jobs at the epicenter of world financial power — early in his career he worked at Chase Manhattan, and he would lead the Federal Reserve Bank of New York before Mr. Carter picked him as Fed chair — he seemed uninterested in the trappings of wealth and power.
The strongest reason to mourn Volcker: He was willing to be unpopular (here)
Volcker did things that made him unpopular with presidents, with Congress and with the general public. He elicited their enmity not because he was a provocateur or masochist. He undertook unpopular actions because he believed they were the right things to do, and he cared more about the long-run health of the country than he did about his own career.
Paul Volcker, Who Guided U.S. Monetary Policy and Finance for Nearly Three Decades, Is Dead (here)
In retirement he was tapped repeatedly for high-profile international positions. In the late 1990s, he headed a committee investigating dormant accounts and other assets in Swiss banks that belonged to Holocaust victims. From 2000 to 2005, he chaired the International Accounting Standards Committee, developing global accounting practices. In 2004, United Nations Secretary General Kofi Annan tapped him to chair an independent panel investigating corruption allegations in the U.N.’s Iraqi oil-for-food program.
As Fed chairman, Paul Volcker made everyone mad (here)
The former Fed chairman said that, when he started his career, bank executives wouldn’t pay bonuses to individuals because it created the wrong culture. “You can’t imagine a bank these days debating that,” he said.
Billionaire Ray Dalio calls the late Paul Volcker 'the greatest American hero I've known' (here)
"I knew him personally as a man who had great wisdom, humility, and classic heroism in which he sacrificed his well-being for the well-being of others." [quoting Dalio]
There’s the Legend of Paul Volcker and the Man I Got to Know (here)
One evening about two years ago, I was at Paul Volcker’s Manhattan apartment when the phone rang. It was Ray Dalio, the billionaire hedge fund manager, inviting Paul and his wife, Anke, to join him at the ballet on some future date. Soon after, Paul said that he and Anke had to leave for Brooklyn. They were attending a wake for his barber.
Factbox: Volcker quotes on U.S. banks, inflation, government (here)
ON MEETING WITH BANKS RESISTING REFORMS FOLLOWING THE 2008 FINANCIAL CRISIS
Wake up, gentlemen. I can only say that your response is inadequate. I wish that somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy, just one shred of information.” (Wall Street Journal interview, 2009)
Tuesday, November 12, 2019
As a professor, I love it when academic research is front-page news! So, I was delighted yesterday to see a piece there in the Financial Times, Academics accuse Morningstar of misclassifying bond funds (here – subscription required), on Huaizhi Chen, Lauren Cohen, and Umit G. Gurun’s recently posted SSRN article: Don’t Take Their Word For It: The Misclassification of Bond Mutual Funds (here).
The gist of the article is that in deriving its risk classifications/ratings for bond funds, Morningstar’s rating system relies upon self-reported, summary data – often misreported – from bond mutual fund managers about the percentages of funds’ assets in different risk categories (AAA, AAA, B, etc.) rather than using it to supplement the data that those same funds file quarterly with the SEC. The authors explain that assets in equity funds are generally of the same security type (for example, common stock), but that this isn’t true in the case of bond funds, which are “more bespoke and unique” with differences “in yield, duration, covenants, etc. – even across issues of the same underlying firm.” (p.2) And while equity might have about 100 positions, bond funds generally have more than 600 issues. (p.2) So, in the case of fixed income funds, the role of information intermediaries such as Morningstar is incredibly important.
The article suggests that “[t]his misreporting has been persistent, widespread, and appears strategic – casting misreporting funds in a significantly more positive position than is in actuality.” (p.1) This matters because such misclassified funds then appear to perform better than others with the same risk classification and, not surprisingly, both retail and institutional investors increase their investment in these funds. (p.3) It also increases expense ratios. (p.5)
Interestingly, the authors comment “[s]tepping back, what makes this even somewhat more surprising is that the funds actually do report holdings directly to Morningstar, and these holdings line up almost perfectly with the SEC-downloaded holdings. Thus, it is literally that Morningstar uses the Summary Reports itself (and not the other data also delivered directly to it by funds) instead of taking the extra step of calculating riskiness itself that contributes to classification.” (p. 5-6). So, did Morningstar allegedly not “tak[e] the extra step” for reasons of cost, an unfortunate oversight, or another possible explanation? Note that the FT article quotes Morningstar as saying “We stand by the accuracy of our data and analytics, and we are reaching out to the authors with an offer to help understanding the data they used and to clarify the…methodologies we employ.” Commentary on this article by Morningstar, Morningstar Stands Behind Its Fixed-Income Data and Fund Ratings, is here.
If the article’s analysis is accurate, at least some funds must have been aware of the misclassifications. If so, what (if any) related responsibility (legal or ethical) might they have in this systemic issue? If the article’s analysis is correct, I would imagine that lawsuits won’t be far behind. Stay tuned! For now, here’s the abstract:
We provide evidence that mutual fund managers misclassify their holdings, and that these misclassifications have a real and significant impact on investor capital flows. In particular, we provide the first systematic study of bond funds’ reported asset profiles to Morningstar against their actual portfolios. Many funds report more investment grade assets than are actually held in their portfolios, making these funds appear significantly less risky. This results in pervasive misclassifications across the universe of US fixed income mutual funds by Morningstar, who relies on these reported holdings. The problem is widespread- resulting in about 30% of funds being misclassified with safer profiles, when compared against their actual, publicly reported holdings. “Misclassified funds” – i.e., those that hold risky bonds, but claim to hold safer bonds– outperform the actual low-risk funds in their peer groups. “Misclassified funds” therefore receive higher Morningstar Ratings (significantly more Morningstar Stars) and higher investor flows due to this perceived outperformance. However, when we correctly classify them based on their actual risk, these funds are mediocre performers. Misreporting is stronger following several quarters of large negative returns, and it is strong at the fund family level.
Tuesday, October 29, 2019
“Big banks do not usually gang up to demand more financial regulation, least of all with asset managers in tow.” That’s the first sentence of Gillian Tett’s recent piece, Banks are right to say that clearing houses are ripe for reform, in the Financial Times (here – subscription required). Her title and lead sentence are spot on. That should be worrisome to all. Tett’s piece centers on a white paper, A Path Forward for CCP Resilience, Recovery, and Resolution (here), released on October 24, 2019, by nine financial institutions (Allianz Global Investors, BlackRock, Citi, Goldman Sachs, Societe Generale, JPMorgan Chase & Co., State Street, T.RowePrice, and Vanguard). Tett states: “the current status quo around clearing houses is worrying.” As BLPB readers know, I agree.
The white paper calls for “enhanced risk management standards and aligning incentives through requirements for meaningful CCP [clearinghouse] own capital for covering both default and non-default losses and recapitalization resources.” (p.1) It highlights the incentive misalignment present in many clearinghouses given their publicly-traded, shareholder ownership status: “Although CCP shareholders take 100% of the returns a CCP earns from clearing revenues, they bear only a small portion of the losses the CCP incurs as a result of a default.” (p.10) Many of its recommendations are not new, but some are. These include: a clearing member voting mechanism in recovery; ex-ante provision of financial resources for resolution; and, the possibility of “long-term debt that could be bailed in for recapitalization.” (p.1)
While I generally agree with the white paper’s recommendations, I don’t think they go far enough. As I’ve posted before on clearinghouses (here, here, here, here) and will do so in the future, I’ll just highlight a few things. First, while increasing clearinghouse capital is a step in the right direction towards better incentive alignment, it’s only a start. The ownership structure itself of these institutions needs to be addressed. If clearinghouses were owned by their members – as they were historically – the incentive misalignment between members and owners would largely diminish. However, as I’ve noted in Incomplete Clearinghouse Mandates (here), even if clearinghouses are all member-owned, this doesn’t solve the problem of who ultimately holds the extreme tail risk of these institutions. In a previous post (here), I pointed out parallels between clearinghouses and the residential mortgage giants, Fannie Mae and Freddie Mac, whose exit from government ownership is still pending more than a decade after the financial crisis. Let’s not go down the same route in the clearinghouse space.
Second, the white paper argues that clearinghouses should generally be responsible for non-default losses. I agree. However, as I’ve noted before, both types of losses could occur in close proximity. Hence, it could be very difficult in practice to separate them out to allocate any losses in the case of investor-owned clearinghouses. Finally, as I write about in forthcoming research, clearinghouses are self-regulatory organizations (SROs). Presumably, they would be acting in a regulatory capacity in a recovery scenario as it is arguably the analog to government action in a resolution scenario. Exchanges, as SROs, are generally entitled to regulatory immunity for actions taken in a regulatory capacity (for more on exchange immunity, see here). At the same time, the recovery of an investor-owned, distressed clearinghouse is also inherently a commercial endeavor. It is fundamentally about the survival of the clearinghouse, and potentially the exchange group structure itself. So, it could be very difficult in practice to separate regulatory from commercial action for purposes of regulatory immunity. Given this consideration, investor-owned clearinghouses could have less incentive to be circumspect about recovery decisions that might adversely impact members.
Tett refers to a “trenchant letter” from the Systemic Risk Council to the Financial Stability Board “demanding action” on clearinghouses. Paul Tucker, who chairs the Council, is the former Deputy Governor of the Bank of England. In closing, I recommend that readers interested in understanding more about the centrality of clearinghouses in financial markets read a 2014 speech by Tucker: Are Clearing Houses the New Central Banks? If the answer to Tucker's question is yes, that says it all!
Sunday, October 13, 2019
Yesterday, two highly important events occurred in the sports world. First, OU prevailed in the Red River Showdown. Boomer Sooner! But, that’s not what this post is about (so, stay w/me Texas Longhorns fans!). Second, famed Kenyan marathoner Eliud Kipchoge broke the 2-hour marathon barrier. Today’s post is my heartfelt way of paying tribute to Kipchoge’s historic moment.
In June, co-blogger and fellow runner Haskell Murray wrote about inspirational runners exemplifying toughness, self-discipline, humility, and perseverance (here). In July, I followed suit (here). In reflecting upon the little I know of Kipchoge’s journey that led to smashing a barrier many thought impossible, it’s clear to me that he has these character traits in abundance.
In November 2016, Nike announced its Breaking2 project. In a nutshell, it involved years of planning, the assembly of world-class scientists, trainers, runners, and even a new shoe, in the quest for a sub-two hour marathon. In May 2017, after months of intense preparation, Kipchoge almost achieved this objective. His time: 2:00:25 (a Nike/National Geographic documentary of the Breaking2 project is: here). He’d given 100%, but ultimately failed to reach the goal. Nevertheless, Kipchoge did not quit. Indeed, in the 2018 Berlin Marathon, he set the current official world marathon record of 2:01:39.
Yesterday, Kipchoge made history. This required tremendous perseverance, extreme self-discipline, mental toughness, and the humility to risk once again falling short of the goal in the international spotlight. As I’ve learned more about Kipchoge’s running career through reading and short films like the one released ahead of the 2019 London Marathon of his training camp and philosophies (here), several takeaways and life-lessons for all seem to be:
Never give up.
“If you want to be successful, you need to choose. But to choose well, you must know who you are and what you stand for. Where you want to go and why you want to get there.”
The importance of sacrifice in achieving success.
Keep it simple and focused.
The importance of taking risks
“In training, it’s teamwork” – “1 percent of the whole team is really more important than 100 percent of yourself.”
Believe in the impossible!
[10/15/19 Postscript: Kipchoge won two Olympic medals: bronze (2004) and silver (2008) in the 5000m. He pivoted to distance running after failing to make the 2012 Kenyan Olympic team (here). In 2016, he won the Olympic marathon. Yet one more example of his not letting failure stop him, but instead persevering and turning it into triumph!]
Monday, September 16, 2019
I am pleased to announce that The University of Tennessee College of Law is again hosting editors of this blog for a symposium focusing on current topics in business law. The website for the symposium, which is sponsored by UT Law's Clayton Center for Entrepreneurial Law, is here. Faculty and students from UT Law will comment on presentations given by my fellow BLPB bloggers. Participating editors of the BLPB in this year's program include Colleen Baker, Ben Edwards, Josh Fershee, me, Doug Moll, Haskell Murray, and Stefan Padfield. The lunchtime panel features me and two of my UT Law colleagues exploring the legal meaning and understanding of mergers and other business combinations from various perspectives, including business associations law, bankruptcy and UCC law, and federal income tax law. That, alone, is surely worth the price of entry!
If you live in or near Knoxville, please come and join us. Continuing legal education credit is available to members of the Tennessee bar. If you cannot make it to the symposium, however, a video recording of the proceedings will later be available on UT Law's website, with an expected option for online continuing legal education credits. (Last year's program is available here with a continuing legal education credit option.) In addition, the written proceedings of the symposium are scheduled to be published in the spring volume of Transactions: The Tennessee Journal of Business Law.
I am looking forward to having many of my BLPB co-editors in town for this program. It's always a special time when we are together.
Sunday, August 18, 2019
Last week, I posted about the Annual Conference of the Academy of Legal Studies in Business. Since then, I reflected on Robert Prentice’s fantastic presentation at this event on Ethical Decision Making and the Conformity Bias. So, I decided to mention the conference again both to highlight Prentice’s extensive and important work in business ethics, and to remind – and perhaps in some cases, introduce – BLPB readers of a phenomenal teaching resource: Ethics Unwrapped, a program within the Center for Leadership and Ethics (CLE) at the McCombs School of Business at the University of Texas.
Prentice’s conference talk was entertaining, engaging, and thought-provoking. Here’s the description: Even the best people are only boundedly ethical. A wide range of social and organizational pressures, cognitive heuristics and biases, and situational factors affect (often adversely) people’s ethical decision making. This paper explores one of these influences that is often underestimated—the conformity bias, which is the tendency that people have to take their cues as to what to think and how to act from those around them, particularly members of their in-group. Click here to download the paper: Download Conformity Bias Paper Montreal
One of the many videos offered by Ethics Unwrapped is on the conformity bias. As with other videos on this site, it is also accompanied by related discussion questions, case studies, teaching notes, and additional resources. If you’ve never browsed the website, I highly encourage you to spend a few minutes familiarizing yourself with [t]his free educational program…used around the world by more than 1,200 colleges and universities, in hundreds of businesses and organizations, and by tens of thousands of ethics learners. It will definitely be time well spent!
Sunday, August 11, 2019
I just returned from the Annual Conference of the Academy of Legal Studies in Business (ALSB) in Montreal, Canada. It was a great conference, packed with a variety of panels, paper presentations, workshops, social opportunities, and events showcasing this beautiful city to the north. Hence, there’s much that could be shared! In today’s post, I’ve decided to highlight two conference panels whose format I found to be creative and intellectually exciting. Both identified an overarching theme, and then scholars with divergent interests discussed the theme in the context of their own research. Then, after panelists’ initial remarks, the moderator posed questions to panel participants before welcoming audience queries.
Stephen Park assembled and moderated a group of scholars (including me!) to discuss interconnections among global financial markets and sovereign actors, as both regulators and market participants. Tim Samples examined sovereign debt restructuring; Matthew Turk focused on the sovereign/banking nexus and interactions between governments and intergovernmental actors; Jeremy Kress discussed bank capital requirements for sovereign debt; and, I considered the use of sovereign debt to meet clearinghouse margin requirements. The panel was a lot of fun and we were all really grateful to Stephen for taking the lead in organizing it! Here’s the panel’s official description:
Financial Crisis and Reform: Sovereign Debt, Systemic Risk, and Government Insolvency. Like companies, governments participate in the financial markets in various ways, including issuing bonds. However, this shared modus operandi obscures fundamental legal differences between corporate and government financing and the deep linkages between government debt and the broader financial markets. The significance of these differences is particularly evident when governments become insolvent or when their activities pose a risk to the financial system. This panel explores the implications of these dynamics under bankruptcy, banking, securities, and international law and in the context of sovereign and municipal debt restructurings, the use of sovereign debt as collateral, and macroprudential regulation.
Sarah Light and Stephen Park organized the second panel. It centered on standard setting, collective action problems, and governance by private actors in different subject matter areas. David Zaring discussed the Equator Principles and the Santiago Principles; Kevin Kolben examined the protection of labor rights in global supply chains; Scott Shackelford considered the issue of cyber peace; Stephen Park focused the intersection of international economic law, corporate social responsibility, and financial law, particularly in regard to ESG reporting; and, Sarah Light explored efforts to insure nature by private actors. Here’s the panel’s official description:
Private Governance and the Collective Action Problems Facing Business Today. Private standards—created, monitored, and enforced by groups of non-state actors—are proliferating to address emerging risks and opportunities in business. Their appeal lies in their capacity to address collective action problems that governments are not addressing effectively on their own. Their growing influence calls for new ways of analyzing the process of lawmaking, the accountability of lawmakers, and the enforceability of standards that do not rely on coercive governmental authority. This panel will address these questions and others across several emerging areas, including labor and employment law, cybersecurity, financial regulation, international trade, environmental protection, and socially responsible investing.
In sum, both panels were thought-provoking, and followed a great format. I’m already looking forward to the 2020 ALSB Annual Conference in Providence, Rhode Island! And, lastly, on the flight home today, I read through half of Cal Newport’s Deep Work: Rules for Focused Success in a Distracted World (noted by co-blogger Haskell Murray). Thus far, I strongly second his recommendation!
Monday, August 5, 2019
I did not manage to do much outside reading over the summer, given a move to the Nashville suburb of Franklin.
Always open to recommendations. I am also interested in podcast recommendations for my new commute.
On Paradise Drive - David Brooks (Social Commentary) (2004). Rough satire (or is it satire?) to read right before we moved to the suburbs.
Running for My Life - Lopez Lomong and Mark Tabb (Biography) (2012). Recommendation from Colleen Baker. Inspiring story of how one of the lost boys of Sudan became a US Olympic athlete. Just a few weeks ago, Lopez Lomong won both the 5000m and 10,000m at the U.S. Championships.
Deep Work - Cal Newport (Self-Help) (2016). Georgetown computer science professor argues that there are increasing rewards for “deep work” (challenging work, requiring full concentration), but that society is pushing us toward “shallow work” with social media, constant e-mailing, open office, and the like. He suggests setting routines, fully resting (embracing boredom), and scheduling internet use (and avoiding the internet outside of those times).
Advanced Marathoning - Pete Pfitzinger and Scott Douglas (Fitness) (2d. 2009). Recommended by two of the best runners I know. Will use this book (along with the advice of my friend and supper runner Joey Elsakr) to train for the Rocket City Marathon in December 2019. The third edition is now available.
Gilead - Marilynne Robinson (Novel) (2004). Narrator shares his experiences and the experiences of his father and grandfather as ministers in Gilead, Iowa. Winner of the Pulitzer Prize for Fiction in 2005. On the short-list of President Obama’s favorite books.