The Power of Debt: Identity and Collective Action in the Age of Finance

The Debt Collective is organized around the possibility for radical action within and against finance capitalism. In the wake of the 2008 financial crisis it was often hard to understand how finance intersected with the everyday lives of ordinary—and especially, poor—people. But in the years since, it has become increasingly clear that mass indebtedness—from the mortgage crisis to student debt, criminal “justice” fines and fees to municipal austerity—is a direct effect of the conflict between debt payments generating value as securitized investments (mortgage backed securities, municipal bond offerings) vs. their role in providing shelter, food, and the ability to merely get by. In the age of finance, debt has become an immersive, systemic problem; but it is one that, in its ubiquity, may hold the seeds of its own solutions. As oil tycoon JP Getty famously quipped: “If you owe the bank $100 that’s your problem. If you owe the bank$100 million, that’s the bank’s problem.” Student debt alone stands today at 1.5 trillion dollars. Together, arguably, we can be the banks’ problem. This is the provocation of the Debt Collective: how can we reframe debt from an issue of isolation and shame to a platform for collective action and political mobilization

The Case for Mandatory Ownership Disclosure

The use of equity derivatives to conceal economic ownership of shares (“hidden ownership”) is increasingly drawing attention from the financial community, as is the exercise of voting power without corresponding economic interest (“empty voting”). Market participants and commentators have called for expansion of ownership disclosure rules, and policymakers on both sides of the Atlantic are now contemplating how to respond. Yet, in order to design appropriate responses it is key to understand why we have ownership disclosure rules in the first place. This understanding currently appears to be lacking, which may explain why we observe divergent approaches between countries. The case for mandatory ownership disclosure has also received remarkably little attention in the literature, which has focused almost exclusively on mandatory issuer disclosure. Perhaps this is because most people assume that ownership disclosure is a good thing. But why is such information important, and to whom? This paper aims to answer these fundamental questions, using the European disclosure regime as an example. First, the paper identifies two main objectives of ownership disclosure: improving market efficiency and corporate governance. Next, the paper explores the various mechanisms through which ownership disclosure performs these tasks. This sets the stage for an analysis of hidden ownership and empty voting that demonstrates why these phenomena are so problematic.ownership disclosure; market efficiency; corporate governance; monitoring; hidden ownership; empty voting; hedge fund activism

Private and Public Ordering in Safe Asset Markets

An influential literature in economics explores the phenomenon of “safe assets” – when participants across financial markets act “as if” certain debt is risk free – as well as its role in the global financial crisis and its implications for post-crisis reform. We highlight the role of private ordering in constructing safe assets. Private ordering, including contractual devices and transaction structures, contributes to the creation of these debt contracts, to their collective treatment in financial markets as low risk investments, and to the making of deep and liquid markets in them. These contracts and transaction structures also provide a template for understanding the role of government regulation in constructing safe assets. Safe asset supply and demand does not occur organically. Rather, whether through private or public ordering, three types of legal tools operate to construct safe assets: 1. Making Assets Safe: one set of tools contributes to the production of safe assets by regulating the cash flows into and out of an issuer of safe assets to increase the likelihood of full and prompt payment to investors. These tools might take the form of: engineering the asset side of an issuer’s balance sheet to reduce the risk of inputs in safe assets; engineering the liability side of an issuer’s balance sheet to give holders of safe assets priority over other claimants on the issuer; or creating and regulating the secondary market for safe assets. 2. Labeling Assets Safe: another set of legal tools focuses on the demand for safe assets by granting special status to these contracts when held on the books of investors. These tools create liquid markets for certain assets by either: signaling the low risk of default by issuers of those assets; or coordinating the collective treatment of those assets as having low risk and high liquidity. 3. Guaranteeing Asset Safety: financial intermediaries and governments can also guarantee the performance of safe assets, putting their own credit on the line. Guarantees may be ex ante or ex post, explicit or implicit. A comparison of private and public ordering in safe asset markets reveals how difficult it is to separate the two. Indeed, much of private ordering relies on statute and regulation. Public ordering succeeds at creating safe assets when it enables private ordering and herding by investors into safe asset markets. Understanding this complex interplay between public and private tools becomes vital for understanding how safe asset markets operate, how they fail, and how they must be reformed. The Article concludes with two lessons. First, it deconstructs the notion that there is purely private or public ordering in safe asset markets. Second, it underscores a kind of first law of thermodynamics for safe assets: neither private nor public ordering can banish risk altogether from safe asset markets or financial markets in general. They merely move risk around or, worse, obscure risk until it rematerializes

Shareholder Activism as a Corrective Mechanism in Corporate Governance

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Kenneth Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision-making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this Article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism. Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework that protects the value of centralized authority and a legal framework that rests fiduciary responsibility with the board, authority is not shifted to influential, yet unaccountable, shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies, before they will be permitted to share the authority necessary to implement the policy. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This Article thus reframes the ongoing debate on the value of shareholder activism by showing how offensive shareholder activism can co-exist with—and indeed, is supported by—Kenneth Arrow’s theory of management centralization, which undergirds the traditional authority model of corporate governance. This Article also provides a much-needed bridge between the traditional authority model of corporate law and governance as utilized by Professors Steven Bainbridge and Michael Dooley and those who have done empirical studies on hedge fund activism, including Professor Lucian Bebchuk. This bridge helps to identify when shareholder activism may be a positive influence on corporate governance

Shareholder Activism as a Corrective Mechanism in Corporate Governance

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Kenneth Arrow also recognized that other elements within the organization, beyond the central authority, occasionally may have superior information or decision-making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this Article finds that such a corrective mechanism comes in the form of hedge fund activism, or, more accurately, offensive shareholder activism. Offensive shareholder activism operates in the market for corporate influence, not control. Consistent with a theoretical framework that protects the value of centralized authority and a legal framework that rests fiduciary responsibility with the board, authority is not shifted to influential, yet unaccountable, shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies, before they will be permitted to share the authority necessary to implement the policy. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority with the activists by either providing them seats in the board or simply allowing them to directly influence corporate policy. This Article thus reframes the ongoing debate on the value of shareholder activism by showing how offensive shareholder activism can co-exist with—and indeed, is supported by—Kenneth Arrow’s theory of management centralization, which undergirds the traditional authority model of corporate governance. This Article also provides a much-needed bridge between the traditional authority model of corporate law and governance as utilized by Professors Steven Bainbridge and Michael Dooley and those who have done empirical studies on hedge fund activism, including Professor Lucian Bebchuk. This bridge helps to identify when shareholder activism may be a positive influence on corporate governance