Behind the Curtain

[Excerpt] On August 31, 2004, for the first time, the nation’s mutual fund companies reported how they cast their proxy votes at the public companies in which they invest. The disclosure is the result of Securities and Exchange Commission rules adopted in January 2003, rules that the AFL-CIO first petitioned for in December 2000 and that the mutual fund industry strenuously opposed. This report evaluates how the 10 largest mutual fund families voted when presented with the opportunity to curb CEO pay abuses at a dozen S&P 500 companies in 2004. We chose executive compensation as our benchmark because, in the words of billionaire investor Warren Buffet, “The acid test for reform will be CEO compensation.

A Simple Approach to Preventing the Next Housing Crisis-Why We Need ONe, What One Would Look Like, and Why Dodd-Frank Isn\u27t It

This article considers the adequacy of The Dodd-Frank Act in terms of its potential ability to prevent another crisis in the housing market. The author argues that Dodd-Frank, even if implemented broadly, will not address the key problem of excess complexity in the housing and financial markets. The author then suggests additional reform focusing on simplicity, exemplified by the existing regulatory framework in Denmark. Lastly, the author addresses the current political economy, which is blamed for making the passage of effective regulation too difficult

Behind the Curtain: How the 10 Largest Mutual Fund Families Voted When Presented with 12 Opportunities to Curb CEO Pay Abuse in 2004

[Excerpt] On August 31, 2004, for the first time, the nation’s mutual fund companies reported how they cast their proxy votes at the public companies in which they invest. The disclosure is the result of Securities and Exchange Commission rules adopted in January 2003, rules that the AFL-CIO first petitioned for in December 2000 and that the mutual fund industry strenuously opposed. This report evaluates how the 10 largest mutual fund families voted when presented with the opportunity to curb CEO pay abuses at a dozen S&P 500 companies in 2004. We chose executive compensation as our benchmark because, in the words of billionaire investor Warren Buffet, “The acid test for reform will be CEO compensation.” We found that, when it comes to voting proxies on proposals involving CEO pay abuses, there is significant variation among fund families. The scores in our survey ranged from a high of 100% for American Century to a low of 20% for Putnam

The CDC’s Moratorium: Will the New Year Bring About an Eviction Crisis?

The new relief bill has extended the eviction moratorium another month. In this article, Matt Donahoe discusses whether this will provide tenants the necessary protection to avoid an eviction crisis as well as whether the moratorium is an infringement upon a landlord’s constitutional rights.https://scholarship.law.slu.edu/lawjournalonline/1054/thumbnail.jp

Conflicts of Interest and Corporate Governance Failures at Universal Banks During the Stock Market Boom of the 1990s: The Cases of Enron and Worldcom

The re-entry of commercial banks into the securities business transformed U.S. financial markets during the 1990s. The Gramm-Leach-Bliley Act of 1999 (GLBA) removed most of the legal barriers that had separated commercial and investment banking since 1933. GLBA allows commercial banks to become universal banks by affiliating with securities firms and insurance companies. In large part, GLBA ratified the securities underwriting powers that commercial banks gained during the 1990s, based on a series of orders issued by federal regulators and federal courts. By 2000, the top ten global underwriters of securities included three U.S. banks, three foreign banks, and four U.S. securities firms. Competition between commercial banks and securities firms spurred a spectacular growth in the issuance of corporate securities during the late 1990s. The growth in new securities contributed to the stock market boom of 1994-2000, which was comparable to the great bull market of 1923-2029. Unfortunately, as in the 1920s, the stock market boom of the 1990s was followed by a steep decline in stock prices during 2000-2002. The fall in stock prices was especially severe between December 2001 and October 2002, as investors reacted to reports of accounting fraud and self-dealing at new economy firms that had been viewed as stars during the boom. The sudden collapses of Enron and WorldCom - the two largest bankruptcies in U.S. history - were especially shocking to investors. Subsequent investigations and lawsuits revealed that universal banks had played key roles in financing the rapid expansion of Enron and WorldCom and in promoting the sale of their securities. This chapter is part of a larger project that will examine the role of universal banks during the U.S. economy\u27s boom-and-bust cycle of 1994-2002. The evidence presented in this chapter supports several conclusions. First, universal banks arranged dozens of structured-finance transactions for Enron, even though bank officials recognized that the transactions were deceptive and exposed their banks to reputational risk and legal liability. Second, universal banks competed for investment banking mandates by providing extraordinary financial favors to senior executives of Enron and WorldCom, notwithstanding the obvious corruption inherent in those favors. Third, universal banks distributed offering prospectuses and research reports that encouraged investors to buy Enron\u27s and WorldCom\u27s securities, even though bank officials knew or should have known that the banks\u27 promotional documents were materially misleading and failed to disclose significant investment risks. Fourth, universal banks repeatedly extended credit to Enron and WorldCom in order to attract investment banking business, despite serious concerns among bank officials about the financial viability of both companies. During the Enron and WorldCom episodes, universal banks exhibited promotional pressures, conflicts of interest, speculative financing and exploitation of investors that were similar to the perceived abuses that led Congress to separate commercial and investment banking in 1933. Both episodes indicate that GLBA\u27s regulatory framework is not adequate to control the risks posed by universal banking powers. A comprehensive reform of the supervisory system for universal banks should therefore become a top priority for Congress and financial regulators

Legal and Policy Choices in the Aftermath of the Subprime and Mortgage Financing Crisis

This essay, delivered at a symposium at the University of South Carolina in October 2008 and forthcoming in South Carolina Law Review, sets out initial thoughts about to the legal and policy choices that decision makers must address in the aftermath of the subprime crisis that has since triggered a global financing crunch. After tracing a narrative of how subprime lending grew into a mortgage financing crisis and then a broader financial dislocation, the essay addresses two issues. First, while it is commonly stated that increased regulation will be required in secondary mortgage markets going forward, the essay explores competing policy considerations that legislators and regulators must balance in developing effective regulation and not overregulation. These policy issues include: the benefits of the secondary mortgage; the globalization of capital; prevention of fraud and predatory lending; personal responsibility vs. paternalism; market discipline vs. regulation; ending racial discrimination in lending; the role of intermediation in creating the crisis; the current state of the American dream of home ownership; and addressing risk shifting vehicles. The second part of the essay examines how the development of the secondary market has changed mortgage law in the various states. It discusses the benefits, and costs, of the nationalization of real estate documents and terms brought by Fannie Mae and Freddie Mac and speculates on how conservatorship of these institutions may affect this trend. The essay also looks at modernization of state mortgage law in light of the secondary market, through vehicles such as MERS, and the lessons that the crisis teaches about the modernization trend. It argues that the beneficial aspects of modernization should be retained and suggests other changes that would better reflect commercial reality (e.g., changes in assignment rules for mortgages, documentation for foreclosure), but asserts that increased consumer protection and transparency are also necessary for fair and effective secondary market transactions

Conflicts of Interest and Corporate Governance Failures at Universal Banks During the Stock Market Boom of the 1990s: The Cases of Enron and Worldcom

The re-entry of commercial banks into the securities business transformed U.S. financial markets during the 1990s. The Gramm-Leach-Bliley Act of 1999 (GLBA) removed most of the legal barriers that had separated commercial and investment banking since 1933. GLBA allows commercial banks to become universal banks by affiliating with securities firms and insurance companies. In large part, GLBA ratified the securities underwriting powers that commercial banks gained during the 1990s, based on a series of orders issued by federal regulators and federal courts. By 2000, the top ten global underwriters of securities included three U.S. banks, three foreign banks, and four U.S. securities firms. Competition between commercial banks and securities firms spurred a spectacular growth in the issuance of corporate securities during the late 1990s. The growth in new securities contributed to the stock market boom of 1994-2000, which was comparable to the great bull market of 1923-2029. Unfortunately, as in the 1920s, the stock market boom of the 1990s was followed by a steep decline in stock prices during 2000-2002. The fall in stock prices was especially severe between December 2001 and October 2002, as investors reacted to reports of accounting fraud and self-dealing at new economy firms that had been viewed as stars during the boom. The sudden collapses of Enron and WorldCom - the two largest bankruptcies in U.S. history - were especially shocking to investors. Subsequent investigations and lawsuits revealed that universal banks had played key roles in financing the rapid expansion of Enron and WorldCom and in promoting the sale of their securities. This chapter is part of a larger project that will examine the role of universal banks during the U.S. economy\u27s boom-and-bust cycle of 1994-2002. The evidence presented in this chapter supports several conclusions. First, universal banks arranged dozens of structured-finance transactions for Enron, even though bank officials recognized that the transactions were deceptive and exposed their banks to reputational risk and legal liability. Second, universal banks competed for investment banking mandates by providing extraordinary financial favors to senior executives of Enron and WorldCom, notwithstanding the obvious corruption inherent in those favors. Third, universal banks distributed offering prospectuses and research reports that encouraged investors to buy Enron\u27s and WorldCom\u27s securities, even though bank officials knew or should have known that the banks\u27 promotional documents were materially misleading and failed to disclose significant investment risks. Fourth, universal banks repeatedly extended credit to Enron and WorldCom in order to attract investment banking business, despite serious concerns among bank officials about the financial viability of both companies. During the Enron and WorldCom episodes, universal banks exhibited promotional pressures, conflicts of interest, speculative financing and exploitation of investors that were similar to the perceived abuses that led Congress to separate commercial and investment banking in 1933. Both episodes indicate that GLBA\u27s regulatory framework is not adequate to control the risks posed by universal banking powers. A comprehensive reform of the supervisory system for universal banks should therefore become a top priority for Congress and financial regulators