Rick Perry is trying to label Mitt Romney and his old firm, Bain Capital, as "vulture capitalists," and Sean Hannity is not buying the rhetoric ... 

Ron Paul also came to Romney's defense against Perry, Newt Gingrich, Rick Santorum, and Jon Huntsman, all of whom are criticizing Romney's record at Bain. Ron Paul is right on this one. So is the WSJ:

Private equity helps to promote dynamic capitalism that creates wealth, rather than dinosaur capitalism of the kind that prevails in Europe and futilely tries to prevent failure. Sometimes this means closing parts of the company and laying off employees, but the overriding goal is to create value, not destroy it.

This debate will be with us through the general election, it appears, either because Romney figures out how to make it a plus with the middle class or because Newt Gingrich or President Obama figures out how to make it a liability for Mitt. While the particulars of many Bain investments leave some room for interpretation, the venture capital industry in the US has been the envy of the world, and the argument in favor of European-style capitalism seems especially weak right now. This should be a winner for Mitt, if he can make the connection to average voters.

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Over the break, various combinations of family members went to almost every movie showing in the C-U area.  On opening night, the adults met with other faculty colleagues to go see the U.S. version of The Girl With the Dragon Tattoo (or, as I like to call it, The Girl with Daniel Craig).  We had seen the three Swedish versions of Steig Larsson's posthumously published books -- the Millenium Trilogy.  I have to say that as excited as I was to see Daniel Craig, I was nervous that the Hollywood version of the Lisbeth Salander story was going to be embarassingly Americanized.

We were all pleasantly surprised.  I was worried that the movie would be like other blockbusters:  lots of special effects action with impossibly beautiful stars all around and set in Manhattan and upstate NY.  However, Dragon Tattoo is very faithful both to the books and to the Swedish films.  It is still set in Sweden, and the actors who are American at least try not to seem so.  (I still don't get Robin Wright's intermittent accent, but whatever.)  The focus of the film is still the haunting story of the disappeared Harriet Vanger from Hedestad.  There, the two lead characters, journalist Mikael Blomkvist (Craig) and legally incompetent but extremely smart Salander (Rooney Mara),are thrown together in what appears to be the coldest place on Earth.  Even though Mara is gorgeous and looks like Audrey Hepburn in her natural state, she appears here in full scary punk character.  Blomkvist's long-time girlfriend Erika Berger is played by the age-appropriate actress Robin Wright, who is actually a tad bit older than Craig, a first in Hollywood history!  (Neither actor is as old as the characters were probably written to be, but they are in the ballpark.)

Like the Swedish films, this version pulls no punches and depicts all the sadistic violence with the same graphic detail of the books.  If marketers' predictions of demographics carries any weight, note that the previews before the movie were mostly for spectacularly violent movies I will never go see, like The Devil Inside.  Of course, remember that the author's title for these books was originally "Men Who Hate Women."  The two monsters of the first film are evil in ways that really can't be given justice without the details, but I shut my eyes anyway.

Because the books were published posthumously, they did not benefit from a good editor, who would have pruned away some of the side plots that Larsson enjoyed.  The movies do a good job of cutting those away.  I do think the new movie did a better job of moving the narrative of how that mystery is solved at a much quicker pace than the books or the Swedish version.  This movie also made the ending not nearly as convoluted as the book did.  Without giving away the ending, note that the main conclusion of the mystery is still the same, but no one has to go to Australia to confirm!  I've read elsewhere a bit of snark because the movie radically tones down the love life of Blomkvist, who is a bit of a free-love guru in the books, temporarily mating with almost every woman he meets between the ages of 20 and 60.  This modification serves several purposes -- it trims down the side plots and also makes Blomkvist more likeable to non-European sensibilities.  Blomkvist also doesn't go to jail in the U.S. movie, saving plot time and avoiding having to explain why his Swedish jail seemed more like a meditation retreat.  Finally, the relationship between Blomkvist and Salander ends on the same note, nearly identical to the books. 

The one thing that will be interesting to see in the next two films is whether Blomkvist and Salander's friendship will have a happy Hollywood ending.  All I know is that I will be there to see!

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Ah, January.  Here in Champaign, January for me means running on the indoor track here at the U of I (5 times around is a mile, can't beat that!).  Yesterday, I was running and listening to This American Life on my iPod.  I am never disappointed by TAL, but the epidsode I listened to yesterday beat even my high expectations.  When I clicked on the app, I was a little hesitant because the title, "Mr. Daisey and the Apple Factory" didn't instantly suggest anything to me.  I was quickly engrossed though by Mike Daisey, a comedian-actor, giving a 40-minute monologue on his trip to China to see where iPods and other Apple products are made.

Daisey has a two-hour one man show on the trip called "The Agony and the Ecstasy of Steve Jobs," returning to the stage in NY, but I had not heard about it until the condensed TAL podcast.  In the monologue, Daisey confesses himself to be a true follower of the Apple religion and lover of all things Apple.  Then, he was inspired to travel to Shenzhen, a city in China (bordering Hong Kong) where consumer electronics are manufactured for devices from the most popular companies.  His first stop is a factory called Foxconn, which employs 400,000 people at that location.  Daisey, risking arrest, interviews hundreds of workers and (as you can probably guess) hears as many stories of harsh working conditions, work-related illnesses and injuries, retaliation and general oppression by employers and the government.  These stories are hard to hear, but I think it is only right that as an iPod/iMac owner, I have to hear them.

Now, I'm not anti-globalisation or anti-trade, and I'm from a right-to-work state.  I understand that the alternative ways to make a living for some Foxconn workers may be even worse than working for Foxconn.  I know that as horrible as it is to imagine 12, 13 and 14 year-olds working long hours in a factory doing repetitious work, there are worse fates for pre-teens in many developing countries.  But none of that takes away from the fact that developed societies, who benefit from these ultra-cool technology devices, have all determined that these types of working conditions are intolerable and codified that determination into law.  In a perfect world, China would experience the same legal transformation that occurred in Western countries during our industrialization to prohibit child labor and unsafe working conditions and provide workers legal remedies for pay disputes.  That transformation seems a long way off for China, though.

Anyway, I have no development answers, but I do recommend the podcast or play.  It is not preachy or ideological.  It's even funny.

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This year BYU is inaugurating the Crocker Innovation Fellowships, and I am fortunate to be on the faculty, albeit in a very limited role. Nathan Furr (Business), Marc Hansen (Life Sciences), Chris Mattson (Mechanical Engineering), and Dan Olsen (Computer Science) have been pulling the laboring oars, so far, and I will make my main contributions in the fall semester.

As noted on the Fellowship website, "The goal of the course is to change the way students view the world and inspire the next generation of innovators." Closer to the ground, the year-long course begins this semester with an introduction to innovation, continues over the summer with an internship, and concludes in the fall with the students developing their own innovations. 

As a distant observer, I have been fascinated by the communications among the 20 Fellows as they build their collaborative community. They are sharing all sorts of ideas through Google Docs and LinkedIn, encouraging and correcting and building each other. Their energy is pretty infectious ... and I haven't even been able to meet them in person, yet!

Anyway, you are on notice. Watch for some great new businesses emerging from BYU in the fall 2012 semester.

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Tomorrow is my first class in Corpus Linguistics, the data-driven study of language. I am lucky that Mark Davies teaches at BYU, and grateful that he has agreed to let me sit in on his course. I have blogged about corpus linguistics here, here, and here, but, until now, I have had no formal training in the field.

Today I was reading tomorrow's assignment out of Susan Hunston's Corporata in Applied Linguistics, and I found this sentence in chapter 1:

The main argument in favour of using a corpus is that it is a more reliable guide to language use than native speaker intuition is.

Just two pages later, however, Hunston offers this on the role of intuition:

[Intuition] is an essential tool for extrapolating important generalizations from a mass of specific information in a corpus.

Data + intuition. That's quite a nice description of empirical study generally, and it makes sense that corpus linguistics would follow the pattern.

In addition to reading the first chapter of Hunston, we were assigned to read the last chapter (no cliffhangers in this course), which tells us that corpus linguistics can make life simpler ... and more complex. The source of complexity?

New ideas about language emerge and the old ones need re-evaluation.

This is going to be fun.

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ATL and several other media outlets have picked up on a story about David, an anonymous 2L at Cardozo, who voluntarily became "homeless" for nine weeks last semester just to see if he could.  I have no problems with David's experiment, and I don't think it makes hims hallow or insensitive to the plights of others.  However, I do think it is misguided for the media to pick up on his solutions for making his "homelessness" manageable as great ideas for folks who are actually homeless.  These solutions, which are making headlines, are showering and hanging out at an inexpensive health club and sleeping at the Cardozo law library.

As a background matter, David wasn't homeless.  He just didn't stay or sleep at his apartment.  He's more of an urban camper than a homeless person.  Just like campers aren't truly "living off the land," he wasn't homeless.  Like campers, he has all the markers of a non-outdoor/non-homeless life:  a place to go during the day where you are welcomed and tolerated for long stretches of time (a law school) and paid entry into other commercial establishments that must contractually welcome you and tolerate you (health club).  The law school is not open to all homeless folks.  (While visiting my friend at Cardozo, I worked in the library for two days and had to have myriad passes, etc.)   Yes, there are public libraries, and many see themselves as havens for the homeless (many do not).  However, public libraries do not tolerate sleeping.  I have been in public libraries where folks weren't allowed to put their heads down on tables or bring in bags as a means of curbing homeless traffic.  Law students pay a lot for the privilege of having access to the law building.  (David is on a scholarship, but his access has a FMV of tens of thousands of dollars.)   Second, he had a health club membership, and this almost seems like a no-brainer for homeless folks.  Yes!  Why don't they pay $1 a day to have a warm building with showers, soap, shampoo, TV, water, lockers, etc.?  Well, I'm going to bet that most health clubs require photo IDs, addresses, things like that.  And you don't get to pay by day, but maybe month, maybe year.  This may be a great idea for the newly homeless, but probably not for most homeless folks.

And of course David could keep all of his old stuff at his apartment, which he returned to when it started to get chilly outside.  He had a locker at his law school, and places to eat food kept at appropriate temperatures.  He had lots of friends who presumably had shelter, who probably invited him over from time to time.  And of course he had money for food, clothing, medicine, emergencies, etc.  He mentions keeping his "laundry" in a locker, so I'm assuming he took it to the laundromat or cleaners.  He also didn't interact with other homeless folks, so he's not the Barbara Ehrenreich of homelessness.  He went on an urban camping trip, and now he's back.

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The WSJ has a story about Mitt Romney's time at Bain Capital. Lots of Bain's investments failed, but that's no surprise for a venture capital/LBO firm. The firm had some home runs, too, which is also no surprise. Neither the failures nor the home runs are entirely attributable to Mitt, of course, so I am not sure this report will get much traction among voters. One thing we know for sure, and that is the investors in Bain profited handsomely:

The Wall Street Journal, aiming for a comprehensive assessment, examined 77 businesses Bain invested in while Mr. Romney led the firm from its 1984 start until early 1999, to see how they fared during Bain's involvement and shortly afterward.... The Journal analysis shows that in total, Bain produced about $2.5 billion in gains for its investors in the 77 deals, on about $1.1 billion invested. Overall, Bain recorded roughly 50% to 80% annual gains in this period, which experts said was among the best track records for buyout firms in that era.

I have known a number of people who worked with Mitt at Bain, and, if memory serves, all of them had good things to say about Mitt. I am not sure any of them thought that he was the world's greatest businessman, but he was no slouch, either.

Does this matter in choosing a President? Mitt certainly thinks it matters. He keeps pressing his experience at Bain, partly as evidence of his leadership and partly as evidence of his understanding of how to create jobs. I don't find this part of his leadership narrative all that compelling because he was the investor -- a sounding board with money -- not the entrepreneur. On the jobs issue, however, I think this is an angle worth exploiting. Building successful companies is a theoretical exercise for most politicians, including President Obama, but Mitt has been part of the process.

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The Times has an op-ed about the truth that 120 million Japanese citizens and hundreds of thousands of foreigners don't want you to find out.  Amazing secret or cherry picked data - you decide!

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I think every member of this here blog is now on their way back from the AALS Annual Meeting (and we haven't been shy about posting about it, either).  AALS, if not always unrelentingly awesome, certainly does put a bunch of law professors in the same building.  That offers some rewards right there.  But there may be more.  I'm not sure if it's a lack of imagination on my part or a newly grown sense of responsibility, but I find myself attending more panels these days than I did as a rookie.  Perhaps that's a good sign for the meeting.  And with all the side and shadow conferences on tap as well - I spoke at this one - you can usually find something worth doing.  At least, unless you do international economic law.  More of that next year please!

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The only negative from the first meeting of the Section on Transactional Law and Skills this afternoon was the absence of Section Chair Tina Stark, who was unable to attend. Tina provided the energy and leadership for the creation of this new section. We are all indebted to her, and we missed her today.

The section meeting had two parts. First, two speakers who were selected from the call for presentations described their efforts in transactional education. Carol Morgan talked about corporate counsel externships at the University of Georgia, and she rekindled my interest in this form of transactional education. When I interviewed for my first academic job in 1993, I talked about the need to bring transactional training to law students, and shortly after arriving at Lawis & Clark, I created the "Clinical Internship Seminar: Corporate Counsel," which seems similar to the Georgia externship program. It's a great context for students to learn something about business and law.

Karl Okamoto followed by describing his incredible LawMeets competitions, MiniMeets tools, and ApprenNet program. I am not sure if I can claim to have been there at the creation, but I remember Karl floating some of these ideas at a dinner just three or four years ago, and I am astounded by the amount of progress he and his team have made. You can read more about all of this in The National Law Journal. After hearing Karl's presentation, I have decided to use a couple of his MiniMeets in my Business Associations course this next semester. If you want to include some transactional lawyering in one of your courses, I know he would be eager to discuss his products.

In the second part of the program, I moderated a panel discussion on "Getting it Done." Law schools have embraced the teaching of transactional skills, but many questions remain about how best to execute this strategy, and this panel featured people who were implementing transactional training on a grand scale. Scott Burnham of Gonzaga described the first-year Transactional Skills and Professionalism Lab; Jim Moliterno of Washington and Lee discussed transactional immersion and other components of that school's well-known third-year program; Bob Rasmussen of USC talked about the importance of interprofessional education for business lawyers and efforts at USC to encourage such training; and Janet Thompson Jackson related her experiences as transactional clinician at Washburn. The panelists were uniformly excellent.

While we touched on many subjects during the panel session, one point of emphasis among the panelists and the audience was the importance of adjunct professors. Eric Gouvin referred us to his ABA Report on Best Practices Report on the Use of Adjunct Faculty, which is essential reading for academic deans and others who work with adjunct professors. Eric noted that the ABA encourages law schools to employ adjunct professors. While that is true, the AALS has a membership requirement limiting the use of adjunct professors. My sense is that this requirement is not well known among law professors who have no experience in administration. AALS Bylaw 6-4(d) provides:

In each division of a member school's program, each student shall have the opportunity to obtain substantially all of his or her instruction leading to the Juris Doctor degree from the school's full-time faculty.

The interpretation of this bylaw appears in Executive Committee Regulation 6-4.1:

Full-time Faculty Requirement. A member school demonstrates compliance with Bylaw 6-4(d) if in each division of its program, the school's full-time faculty offer at least two-thirds of the credit hours or student-contact hours leading to the J.D. degree. (emphasis added)

Most plans for increasing transactional training rely heavily on the use of adjunct professors, but truly ambitious programs run the risk of pushing a school into dangerous territory with regard to this provision. I hope the AALS' emphasis on full-time faculty is not merely a protectionist measure from law professors. In any event, if we are serious about encouraging experiential learning during law school, the Executive Committee will need to revist this interpretation.

The emphasis of this year's program was on transactional education, and I think it was terrific. Tina should be proud. However, I know that Tina, our new chair Joan Heminway, and the other officers and executive committee members of the Section are committed to the promotion of transactional scholarship, too. If you are interested in transactional teaching or scholarship, I hope you will support this Section.

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Over the years that I have been attending the AALS Annual Meeting, the Business Associations Section has held consistently good meetings, and this year's session on "The New Corporate Governance" was no exception. The panel discussion on a series of recent topics was particularly good. Robert Clark (Harvard), Meredith Cross (SEC), Margaret Foran (Prudential), Travis Laster (Delaware Court of Chancery), and Kara Scannell (Financial Times) discussed a host of issues, prompted by Hillary Sale (Washington University). In particular, two comments during the section caught my attention.

First, is there room for a Delaware claim on executive compensation in the wake of Say on Pay? Teasing the assembled law professors, Vice Chancellor Laster suggested that the Delaware courts could decide to review pay decisions with a form of enhanced scrutiny (because that standard of review applies to situations involving structural bias), but he rightly observed that such a move would be comparable to Smith v. Van Gorkom in 1985. Plaintiffs lawyers should not get their hopes up, absent a big shift in the debate on executive compensation.

The more likely path to a claim is one already being pursued by a number of plaintiffs lawyers, namely, going after a board of directors for waste of the corporate assets. Does Say on Pay affect this litigation? The text of Dodd-Frank provides, "The shareholder vote ... shall not be binding on the issuer or the board of directors of an issuer, and may not be construed ... to create or imply any change to the fiduciary duties of such issuer or board of directors [or] to create or imply any additional fiduciary duties for such issuer or board of directors...."

The duties of directors in Delaware are not promising for plaintiffs. Citigroup (2009) tells us that "the discretion of directors in setting executive compensation is not unlimited," but the standard for evaluating waste claims as articulated by the Delaware Supreme Court in Brehm v. Eisner (2000) is rough on plaintiffs: "an exchange that is so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration." Nevertheless, in the Citigroup case, Chancellor Chandler held, "there is a reasonable doubt as to whether the letter agreement [containing CEO Charles Prince's retirement package] meets the admittedly stringent 'so one sided' standard or whether the letter agreement awarded compensation that is beyond the 'outer limit' described by the Delaware Supreme Court." So it is possible to state a claim for waste in Delaware. If you couple such a claim with a bad vote on Say on Pay, you might have something. (Cf NECA-IBEW Pension Fund v. Cox for a similar claim in a federal district court in Ohio).

Second, Meredith Cross noted that many people at the SEC would like to take another run at proxy access after the Business Roundtable decision, but the SEC is too busy implementing Dodd Frank. As noted in my most recent article (Private Ordering with Shareholder Bylaws), I would prefer a private ordering solution to proxy access to the SEC's one-size-fits-all proposal, and we live in a world in which some private ordering is possible, but there is still the issue of getting the private ordering right. On that issue, Brett McDonnell believes my co-authors and I have gone "a tad too far" in our proposal.

According to Cross, the SEC has received 15 proposals relating to proxy access since the new Rule 14a-8 went into effect, and it will be interesting to see how this area of shareholder proposals develops. By the way, in our article, we stated "the SEC has not lifted the stay on the new Rule 14a-8," but the terms of the stay provided that it would last only until the "resolution of petitioners' petition for review by the Court of Appeals." Thus, new Rule 14a-8 has been effective since the end of the Business Roundtable litigation. Mea culpa.

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The Section on Financial Institutions and Consumer Financial Services will have a record four events at this weekend's Association of American Law Schools Annual Meeting in Washington, DC. The theme is rethinking and reviving the field of financial institutions on the ground and in the academy. We will take stock of reforms so far and consider the impact of the crises in the United States and Europe, but also will take a long-term view of the field from diverse theoretical, policy, and methodological perspectives.

The program begins on Saturday morning (10:30 am-12:15 pm, Marriott Wardman Park, Thurgood Marshall North - Mezzanine Level) with a big-think "revival" panel featuring Jill Fisch (Penn), Howell Jackson (Harvard), Kim Krawiec (Duke), Pat McCoy (Connecticut, recently at Consumer Financial Protection Bureau), Katharina Pistor (Columbia), and Annelise Riles (Cornell).

Next we have a lunch keynote speech by Governor Sarah Bloom Raskin, introduced by Arthur Wilmarth (George Washington) (12:15-1:30 pm)

Next comes an offsite event at American University starting at 4 pm (separate registration required).  This event will include a policy roundtable on moderated by Adam Feibelman (Tulane), with regulators and policy makers from different agencies, as well as a paper presentation.

The weekend will conclude on Sunday with a panel presentation of four scholarly papers (9 - 10:45 am - Maryland Suite A, Lobby Level).  Heidi Schooner will moderate the Call for Papers panel.

Full program details are here. 

Here are links to the selected papers, authors, and commentators (as well as my prior blog posts introducing the papers):

Saturday:

Anat R. Admati, Peter Conti-Brown, & Paul Pfleiderer, Liability Holding Companies (presented by Peter Conti-Brown (Stanford), comments by Saule Omarova (North Carolina)) (my introductory blog post)

Sunday:

Eric Chaffee (Dayton) & Geoffrey C. Rapp (Toledo), Regulating On-line Peer-to-Peer Lending in the Aftermath of Dodd-Frank (comments by Andrew Verstein (Yale)) (my introductory blog post)

Stavros Gadinis (U.C. Berkeley), From Independence to Politics in Banking Regulation (comments by Shruti Rana (Maryland))(my introductory blog post)

Anita K. Krug (Univ. of Washington), Institutionalization, Investment Adviser Regulation, and the Hedge Fund Problem (comments by Kristin N. Johnson (Seton Hall)) (my introductory blog post)

Wulf A. Kaal (St. Thomas)  & Christoph Henkel (Mississippi College School of Law), Sequential Contingent Capital Triggers in Europe and the United States (comments by Mehrsa Baradaran (BYU))(my introductory blog post)

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This is the fifth and final installment of a series of previews of the papers being presented at the AALS Financial Institutions & Consumer Financial Services Section events this weekend.  This final paper will be presented at a special off-site event starting at 4 pm on Saturday at American University.  (See here for details on the full weekend of Financial Institutions/Consumer Financial Services Section events).

Peter Conti-Brown (Academic Fellow, Stanford Law, Rock Center for Corporate Governance) will present, Liability Holding Companies, a paper he co-authored with Anat Admati and Paul Pfleiderer (both of Stanford’s Graduate School of Business).  To understand this paper, it helps to read an earlier, influential paper by Admati, Pfleiderer, and a number of co-authors on which it builds.  This earlier work, Fallacies, Irrelevant Facts, and Myths in the Discussion of Capital Regulation: Why Bank Equity is Not Expensive, countered criticisms of higher capital requirements.  That earlier paper responded to charges that higher capital requirements would impose large social costs, including reducing bank lending.

Yet in Liability Holding Companies, Conti-Brown and his co-authors admit that bank debt may have some benefits; creditors may monitor and discipline bank management.  To balance this disciplinary benefit against reducing the social costs of excessive bank leverage (financial institution fragility, systemic risk, increased risk of bailouts), Admati, Conti-Brown, and Pfleiderer propose a regulatory innovation.  Here is their abstract:      

An international debate continues to unfold in banking law, corporate governance, and finance on whether the capital structure of the world’s largest financial institutions is too heavily dependent on debt, too little on equity. Two of us, with co-authors, have argued elsewhere that there is no socially beneficial purpose for this over-reliance on debt and, indeed, that such reliance increases the likelihood of taxpayer bailouts, with their associated economic, financial, and social costs. Some academics and bankers continue to insist, however, that increased equity is costly for banks and for society. The arguments proffered in defense of these propositions contradict the most basic insights from corporate finance, and often neglect to distinguish private costs from social costs in explaining their preference for debt-heavy capital structures.

While there are overwhelming costs that excessive bank debt can have on the broader economy, some contend that there may be some benefits from debt for a firm’s corporate governance. In particular, some academics have argued that debt is useful because it “disciplines” bank management. The idea suggests that creditors with hard claims against the firm will monitor the firm to prevent bank management from misusing the free cash flows that the banks’ economic activities generate. If these benefits exist and are substantial, we may face a vexing tradeoff: too much debt creates dramatic social costs, moral hazard, and systemic risk, while too little may have negative consequences for firm governance. The challenge is to find a way of optimizing that tradeoff.

This Article engages that challenge, and introduces a new kind of financial institution – called a Liability Holding Company (LHC) – that appropriately balances the social costs of excessive private leverage with the purported benefits for corporate governance that such leverage might create. Our proposal places an increased liability version of the bank’s equity in a conjoined but separately controlled entity, the LHC, that also owns other assets to which the banks’ liabilities have recourse in the event of failure. The equity shares of the LHC—a holding company subject to a unique regulatory regime supervised by the Federal Reserve, similar to Bank Holding Companies or Financial Holding Companies—are then traded in public markets. The LHC thus aims to eliminate or at least greatly reduce the role of the government as the effective guarantor of the systemically important financial institutions (SIFIs), thus reducing the distortions that current implicit governmental guarantees create. It additionally allows banks the benefits of two boards: an advising board, that the bank managers may appoint, and the monitoring board housed at the LHC, appointed by the LHC’s own public shareholders. This dual board structure resolves some important issues raised in the long-standing debate about the role corporate boards should play. We discuss in detail how this proposal would function within the present legal and regulatory environment—particularly within the contexts of bank regulation, corporate governance, and Dodd-Frank—and address counter-arguments and alternative proposals.

 Saule Omarova (North Carolina) will serve as discussant for the paper.

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This is the fourth installment of a series of previews of the papers being presented at the AALS Financial Institutions & Consumer Financial Services Section meeting this Sunday from 9 am to 10:45 am at the Marriott Wardman Park.

Stavros Gadinis (U.C. Berkeley) has authored the fourth paper that will be presented on Sunday. His work, From Independence to Politics in Banking Regulation (forthcoming in the Duke Law Journal) provides a very insightful empirical study of how lawmakers are responding to the financial crisis. Surprisingly, Gadinis finds across a number of countries, lawmakers are moving away from giving responsibility for bank regulations to independent agencies. Instead, lawmakers are increasingly assigning responsibility to officials subordinate to elected politicians or to politicians themselves.

Here is his abstract:

U.S. financial regulation traditionally relied on independent agencies, such as the Federal Reserve and the FDIC. In the last two decades, countries around the world followed the U.S. example by strengthening the independence of their financial regulators, encouraged by recommendations from international organizations such as the Basel Committee and the IMF. Yet, reforms introduced following the 2007-2008 financial crisis abandon the conventional paradigm of agency independence and allocate authority to officials under the direct control of elected politicians, such as the Secretary of the Treasury. This paper studies reforms in 10 key jurisdictions for international banking. It shows that politicians gained new powers with three distinct features. First, politicians have new authority not only to handle emergencies, but also to oversee banks’ financial condition during regular times of smooth business operation. Second, politicians exercise these powers directly, rather than by delegation to a regulatory bureaucracy. Third, while reforms did not dismantle independent regulators, they require them to work under the leadership of politicians in new systemic oversight arrangements. Whenever reformers established new regulatory bodies or mechanisms, they placed politicians at the helm.

Gadinis’s paper promises to launch a fleet of subsequent scholarship. Beyond the normative/ policy question of whether this shift away from independence is a good development, are interesting questions that would drill down into the data. I would find it surprising that elected officials would assume all these new powers without building in mechanisms to hedge the risk of being blamed for the next crisis.

At the same time, Gadinis is writing at a particularly fertile juncture of financial regulation and administrative law. Some of the influential recent administrative law scholarship in this area has argued that traditional hallmarks to measure agency independence and traditional mechanisms to safeguard that independence need to be rethought, at least in the U.S. context. For example, Lisa Schulz Bressman & Robert Thompson have looked at the nuanced ways in which the President can exercise influence over agencies.   Rachel Barkow has laid out other ways in which agencies can be insulated from capture beyond the traditional mechanisms (which, include taking away the President’s power to fire an agency head and exempting agency regulations from Executive Office cost-benefit review). So we need to pay much more attention to texture and nuance in defining agency independence and serving its underlying goals. Of course, the coding in a comparative empirical study cannot take into account all the differences in institutional environments among numerous countries.

Gadinis’s paper is sure to spark a lively scholarly conversation. Shruti Rana (Maryland) will serve as discussant and be first to engage.

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[Last year I blogged about some research my student, Brad Flynt, had done on SharesPost.  As promised, here is the second of two posts from him.]

The company research reports available on SharesPost were fascinating.  The amount of information in them was incredible. For example, there is a 68-page research report on Facebook dated May 30, 2011 that includes a specific per share valuation of $22.24-22.57 and a market capitalization of an estimated $52.3-53.1 billion.  These specific estimates are despite disclaimers that the source of the information was only “believed to be reliable”!  This lack of concrete information is amazing to me.

Taking a step back, I do not think these research reports are necessarily bad.  Assuming they are reasonably accurate, facilitating the transfer of capital is a good thing.  The issue to me is who is creating the reports and what is their incentive.  Professor Davidoff’s article addresses that SharesPost is now paying for the research reports.  The question then becomes, why are they paying for the reports and what is their incentive? 

The principals in SharesPost have created their own broker-dealer in the form of SP Investments Management, LLC, a “wholly owned subsidiary of SharesPost, Inc.”  It is not exactly clear what SP Investments Managements’ role in the transaction is and where they are making money.  If SP Investments Management’s revenue is in any way tied to procuring shares of Facebook at the lowest price possible, there seems to be a clear conflict of interest.  The issue is that this relationship is not disclosed.  

Additionally, there is another potential conflict of interest between SharesPost, GSV Capital Corp (NASDAQ: GSVC), and Candlestick Advisors.  GSVC is a fund created for the sole purpose of purchasing pre-IPO shares through platforms such as SharesPost.  In fact, Michael Moe, the creator of the GSVC fund, is on the SharesPost board.  Candlestick Advisors is a supposedly independent, third-party creator of research reports for SharesPost.  But the GSVC logo is on the Candlestick research reports, thus leading me to question what sort of influence GSVC might have on them.  What is not specifically addressed is whether GSVC or an affiliate pays Candlestick for producing the reports.  That is the key.  Is GSVC paying Candlestick to produce reports pricing shares below market value so GSVC can purchase at a lower price?  If so, anyone selling shares of Facebook on SharesPost has been misled. 

The bottom line is that there might not be anything more than lousy disclosure in this case.  In fact, I believe that is the most likely scenario and all of these players are all operating legitimately.  And to be clear, my research paper does not accuse anyone of actual wrongdoing.  It simply addresses the possibility of market manipulation and suggests the need for more transparent disclosure. 

The takeaway here is that the potential for fraud is so great because there is the possibility of making large sums of money.  This is not some Mom-n-Pop operation.  This is Facebook.  Hundreds of thousands of shares are exchanging hands at over $30/share, meaning hundreds of millions of dollars are at stake.  It’s scary to think how in the dark everyone really is. 

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