The riots and phone hacking saga remind us how fragile public confidence in government and corporations has become. Greater leadership, transparency and accountability are the first steps towards regaining this trust

The recent riots in the UK and high-level crimes such as phone hacking, and the MPs expenses scandal, reveal a lack of public confidence in the police, government and big business. Special police advisor William J. Bratton CBE draws on his experience in law enforcement and corporate leadership and finds that tough standards on accountability and transparency are needed to clean up crime at all levels of society

Evaluation of present thermal barrier coatings for potential service in electric utility gas turbines

The resistance of present-day thermal barrier coatings to combustion gases found in electric utility turbines was assessed. The plasma sprayed coatings, both duplex and graded types, were primarily zirconia-based, although a calcium silicate was also evaluated. Both atmospheric burner rig tests and high pressure tests (135 psig) showed that several present-day thermal barrier coatings have a high potential for service in gas turbines burning the relatively clean GT No. 2 fuel. However, coating improvements are needed for use in turbines burning lower grade fuel such as residual oil. The duplex ZrO2.8Y2O3/NiCrA1Y coating was ranked highest and selected for near-term field testing, with Ca2SiO4/NiCrA1Y ranked second. Graded coatings show potential for corrosive turbine operating conditions and warrant further development. The coating degradation mechanisms for each coating system subjected to the various environmental conditions are also described

Alternative approaches to tuberculosis treatment evaluation: the role of pragmatic trials

Clinical trials are sometimes classified as being explanatory or pragmatic, although they are rarely reported in that way. Explanatory trials may seek to investigate the efficacy of new treatments by imposing strict limitations on many aspects of trial design, including, for example, recruiting only those patients who are most likely to respond. In contrast, the objective of pragmatic trials is to assess whether treatments work in conditions more appropriate to routine practice. This dichotomy is, however, over-simplistic; there is usually a continuum, which is a consequence of there being many areas of trial design that can vary between the extremities of the explanatory and pragmatic approaches. The PRECIS (pragmatic-explanatory continuum indicator summary) wheel based on 10 domains, which include inclusion criteria, flexibility of delivery of the intervention and intensity of follow-up, has been proposed as a way of enabling researchers to assess the extent to which the trials they are designing could be considered explanatory or pragmatic. In this article, we consider how the PRECIS tool can be applied to trials of tuberculosis treatment. In view of the well-recognised delay in getting results from well-conducted clinical trials into practice, we would suggest that if more pragmatic trials were to be conducted, physicians would better understand the implications of the results for their own practice and be more ready to adopt new treatments

The New Bond Workouts

Bond workouts are a famously dysfunctional method of debt restructuring, ridden with opportunistic and coercive behavior by bondholders and bond issuers. Yet since 2008 bond workouts have quietly started to work. A cognizable portion of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. The result has been a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 (“TIA”), which prohibits majority-vote amendments of bond payment terms and forces bond issuers seeking to restructure to resort to exchange offers. This Article exploits the bond market’s reaction to the shift in law to reassess a long-standing debate in corporate finance regarding the desirability of TIA section 316(b). Section 316(b) has attracted intense criticism, with calls for its amendment or repeal because of its untoward effects on the workout process and tendency to push restructuring into the costly bankruptcy process. Yet section 316(b) has also been staunchly defended on the ground that mom-and-pop bondholders need protection sharp-elbowed issuer tactics. We draw on a pair of original, hand-collected data sets to show that many of the empirical assumptions made in the debate no longer hold true. We show that markets have learned to live with section 3169b)’s limitations, denuding the case for repeal of any urgency. Workouts generally succeed, so that there is no serious transaction cost problem stemming from the TIA; when a company goes straight into bankruptcy there tend to be independent motivations. We also show that workout by majority amendment will not systematically disadvantage bondholders. Indeed, the recent turn to secured creditor control of bankruptcy proceedings makes them all the more attractive to unsecured bondholders. Based on this empirical background, we cautiously argue for the repeal section 316(b). Section 316(b) no longer does much work, even as it prevents bondholders and bond issuers from realizing their preferences regarding modes of restructuring and voting rules. We do not know what contracting equilibrium would obtain following repeal, but think that the matter is best left to the market. Still, we recognize that markets are imperfect and that a free-contracting regime may result in abuses. Accordingly, we argue that repeal of section 316(b) should be accompanied by the resuscitation of the long forgotten doctrine of intercreditor good faith duties, which presents a more fact-sensitive and targeted tool for policing overreaching in bond workouts than the broad reading of section 316(b)

A Transactional Genealogy of Scandal: From Michael Milken to Enron to Goldman Sachs

Three scandals have reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “ABACUS” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together—a deal structure known as the synthetic collateralized debt obligation involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit. The SPE remains mysterious and poorly understood despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through preset instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real-world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality. When coupled with financial disaster, the use of an SPE alter ego can turn even a minor compliance problem into a scandal because of the mismatch between the traditional legal model of the firm and the SPE’s economic reality. The standard legal model looks to equity ownership to determine the boundaries of the firm: equity is inside the firm, while contract is outside. Regulatory regimes make inter-firm connections by tracking equity ownership. SPEs escape regulation by funneling inter-firm connections through contracts, rather than equity ownership. The integration of SPEs into regulatory systems requires a ground-up rethinking of traditional legal models of the firm. A theory is emerging, not from corporate law or financial economics, but from accounting principles. Accounting has responded to these scandals by abandoning the equity touchstone in favor of an analysis in which contractual allocations of risk, reward, and control operate as functional equivalents of equity ownership—an approach that redraws the boundaries of the firm. Unfortunately, corporate and securities law hold out no prospects for similar responsiveness. Accordingly, we await the next alter-ego-based innovation from Wall Street’s transaction engineers with an incomplete menu of defensive responses

The New Bond Workouts

Bond workouts are a famously dysfunctional method of debt restructuring. The process is so ridden with opportunistic and coercive behavior by both bondholders and bond issuers as to make success intrinsically unlikely. Yet since 2008 bond workouts have quietly started to work. A segment of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. There resulted a new, broad reading of the primary law governing workouts, section 3 16(b) of the Trust Indenture Act of 1939 (TIA), which prohibits majority-vote amendments of bond payment terms and forces bond issuers seeking to restructure to resort to exchange offers. This Article exploits the bond market\u27s reaction to the shift in law to reassess a longstanding debate in corporate finance regarding the desirability of TIA section 3 16(b). Section 3 16(b) has attracted intense criticism, with calls for its amendment or repeal because of its untoward effects on the workout process and tendency to push restructuring into the costly bankruptcy process. Yet section 3 16(b) has also been staunchly defended on the ground that mom-and-pop bondholders need protection from sharp-elbowed issuer tactics. We draw on a pair of original, hand-collected data sets to show that many of the empirical assumptions made in the debate no longer hold true. We show that markets have learned to live with section 3 i6(b)s limitations, denuding the case for repeal of any urgency. Workouts generally succeed, so that there is no serious transaction cost problem stemming from the TIA; when a company goes straight into bankruptcy there tend to be independent motivations. We also show that workout by majority amendment would not systematically disadvantage bondholders. Indeed, the recent turn to secured creditor control of bankruptcy proceedings makes direct amendment all the more attractive to unsecured bondholders. Based on this empirical background, we cautiously argue for the repeal of section 316(b). Section 316(b) no longer does much work, even as it prevents bondholders and bond issuers from realizing their preferences regarding modes of restructuring and voting rules. We do not know what contracting equilibrium would obtain following repeal,but think that the matter is best left to the market. Still, we recognize that markets are imperfect and that a free-contracting regime may result in abuses. Accordingly, we argue that repeal of section 316(b) should be accompanied by the resuscitation of the long-forgotten doctrine of intercreditor good faith duties, which presents a more fact-sensitive and targeted tool for policing overreaching in bond workouts than the broad reading of section 316(b)

A Transactional Genealogy of Scandal: From Michael Milken to Enron to Goldman Sachs

Three scandals have reshaped business regulation over the past thirty years: the securities fraud prosecution of Michael Milken in 1988, the Enron implosion of 2001, and the Goldman Sachs “ABACUS” enforcement action of 2010. The scandals have always been seen as unrelated. This Article highlights a previously unnoticed transactional affinity tying these scandals together—a deal structure known as the synthetic collateralized debt obligation involving the use of a special purpose entity (“SPE”). The SPE is a new and widely used form of corporate alter ego designed to undertake transactions for its creator’s accounting and regulatory benefit. The SPE remains mysterious and poorly understood despite its use in framing transactions involving trillions of dollars and its prominence in foundational scandals. The traditional corporate alter ego was a subsidiary or affiliate with equity control. The SPE eschews equity control in favor of control through preset instructions emanating from transactional documents. In theory, these instructions are complete or very close thereto, making SPEs a real-world manifestation of the “nexus of contracts” firm of economic and legal theory. In practice, however, formal designations of separateness do not always stand up under the strain of economic reality. When coupled with financial disaster, the use of an SPE alter ego can turn even a minor compliance problem into a scandal because of the mismatch between the traditional legal model of the firm and the SPE’s economic reality. The standard legal model looks to equity ownership to determine the boundaries of the firm: equity is inside the firm, while contract is outside. Regulatory regimes make inter-firm connections by tracking equity ownership. SPEs escape regulation by funneling inter-firm connections through contracts, rather than equity ownership. The integration of SPEs into regulatory systems requires a ground-up rethinking of traditional legal models of the firm. A theory is emerging, not from corporate law or financial economics, but from accounting principles. Accounting has responded to these scandals by abandoning the equity touchstone in favor of an analysis in which contractual allocations of risk, reward, and control operate as functional equivalents of equity ownership—an approach that redraws the boundaries of the firm. Unfortunately, corporate and securities law hold out no prospects for similar responsiveness. Accordingly, we await the next alter-ego-based innovation from Wall Street’s transaction engineers with an incomplete menu of defensive responses

A Tale of Two Markets: Regulation and Innovation in Post-Crisis Mortgage and Structured Finance Markets

This Article takes the occasion of the tenth anniversary of the financial crisis to review recent developments in the structured products market, connecting the emergent pattern to post-crisis regulation. The Article tells a tale of two markets. The financial crisis stemmed from excessive risk-taking and shabby practice in the subprime home mortgage market, a market that owed its existence to the private-label, originate to securitize model. But the pre-crisis boom in private label subprime mortgage-backed securities could never have happened absent back up financing from an array of structured products and vehicles created in the capital markets—the CDOs that found their way into CDO squareds, SIVs, and synthetics, magnifying subprime credit risk and carrying it into the system’s vulnerable nodes where the bailouts occurred in 2008. The post-crisis regulatory pattern shifts the emphasis back from the end point in the causation chain (magnified risk and bailouts) to the start point (residential mortgage origination and securitization). It is only at the start point, in the world populated by consumers and their immediate counterparties, that we find anything like new prohibitions. The capital markets side of the picture is touched much more lightly. Even so, at a quick glance today’s structured products market looks like a qualitatively different place—subprime RMBS, CDOs, CDO squareds, CDO-based synthetics and SIVs are all gone. This Article takes a closer and longer look at today’s structured products market to show that the difference between now and then is more a matter of degree. The new regulatory landscape for structured products has definite borders, and it is at just those borders where the beat of financial innovation and regulatory arbitrage goes on. This activity is not centered at the banks, for there private label originate-to-securitize and investment in private label products is affirmatively discouraged by post-crisis regulation. Today’s innovation in structured products occurs at the more lightly-regulated nonbanks, which are displacing the banks at the riskier end of the residential mortgage and corporate lending markets

The New Bond Workouts

Bond workouts are a famously dysfunctional method of debt restructuring. The process is so ridden with opportunistic and coercive behavior by both bondholders and bond issuers as to make success intrinsically unlikely. Yet since 2008 bond workouts have quietly started to work. A segment of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. There resulted a new, broad reading of the primary law governing workouts, section 3 16(b) of the Trust Indenture Act of 1939 (TIA), which prohibits majority-vote amendments of bond payment terms and forces bond issuers seeking to restructure to resort to exchange offers. This Article exploits the bond market\u27s reaction to the shift in law to reassess a longstanding debate in corporate finance regarding the desirability of TIA section 3 16(b). Section 3 16(b) has attracted intense criticism, with calls for its amendment or repeal because of its untoward effects on the workout process and tendency to push restructuring into the costly bankruptcy process. Yet section 3 16(b) has also been staunchly defended on the ground that mom-and-pop bondholders need protection from sharp-elbowed issuer tactics. We draw on a pair of original, hand-collected data sets to show that many of the empirical assumptions made in the debate no longer hold true. We show that markets have learned to live with section 3 i6(b)s limitations, denuding the case for repeal of any urgency. Workouts generally succeed, so that there is no serious transaction cost problem stemming from the TIA; when a company goes straight into bankruptcy there tend to be independent motivations. We also show that workout by majority amendment would not systematically disadvantage bondholders. Indeed, the recent turn to secured creditor control of bankruptcy proceedings makes direct amendment all the more attractive to unsecured bondholders. Based on this empirical background, we cautiously argue for the repeal of section 316(b). Section 316(b) no longer does much work, even as it prevents bondholders and bond issuers from realizing their preferences regarding modes of restructuring and voting rules. We do not know what contracting equilibrium would obtain following repeal,but think that the matter is best left to the market. Still, we recognize that markets are imperfect and that a free-contracting regime may result in abuses. Accordingly, we argue that repeal of section 316(b) should be accompanied by the resuscitation of the long-forgotten doctrine of intercreditor good faith duties, which presents a more fact-sensitive and targeted tool for policing overreaching in bond workouts than the broad reading of section 316(b)