Corporate governance, credit and bankruptcy Archives

February 28, 2008

The Subprime Mess-- Skeel

As Obama, Clinton, and everyone else tout their remedies for the subprime crisis, I’m reminded of the old joke about a group of blind men who encounter an elephant. The man who grabs the elephant’s leg tells the others he has encountered a tree, the one who touches the trunk is sure it’s a huge snake, and so on. In the fall, subprime worries centered on the losses that banks were suffering, and the possibility that credit markets would seize up. Now the homeowners who are facing default are on center stage.

These parts are connected in ways that often get obscured.

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March 6, 2008

More on Subprime: Bernanke and Bankruptcy--Skeel

Fed Chairman Ben Bernanke has now called on banks to forgive portions of the principal owed by struggling subprime borrowers, which suggests that a major intervention may be coming. As between jawboning (the Republican inclination) and a bailout (the Democrats’ leaning), I’ll take jawboning any day. But the third option, amending the bankruptcy laws to allow borrowers to reduce their mortgages, is, in my view, much superior to either, as I argued in a post last week.

Rather than repeat those arguments, I’ll simply add two additional points.

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March 14, 2008

The Fall of the House of Spitzer: Notes from Rome--Skeel

Shortly after I learned of Spitzer’s resignation, I was at dinner with
several Italian lawyers. At the table next to us at a lovely restaurant
near the Trevi Fountain sat the leading director of soft core porn
movies in Italy. (Note to wife: I didn’t recognize the director, my
companions did). The Italian lawyers were puzzled that resignation was
the obvious response to a sex scandal in the U.S. The Italian public
wouldn’t be especially alarmed about this kind of revelation, they said:
they expect it from their politicians.

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March 17, 2008

Spitzer, Bear Stearns and the Uses of Corporate Criminal Law--Skeel

Bill speculated several days ago that prosecutors’ use of criminal law to pursue the executives of firms that go spectacularly bust may often serve no other purpose than to discourage firms from engaging in the kinds of risks that make a market economy go. I for one think that this is a very real danger. Executives who commit crimes should be punished, of course, but often prosecutors seem to identify the targets in high profile cases first, and then start looking for criminal provisions to prosecute them with.

There are two problems with this, in my view.

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March 20, 2008

Bear Stearns and its Shareholders--Skeel

Many of Bear Stearns’ biggest shareholders are screaming about its proposed sale to JPMorgan for $2/share. This is a good sign. It is important that shareholders bear the costs of the bank’s missteps in the subprime market. But their squawking also raises at least two questions: can they derail the deal?; and would Bear Stearns be better off in bankruptcy?

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March 27, 2008

Clinton's Bank-Friendly Populism--Skeel

Hillary Clinton has just rolled out her most extensive recipe yet for addressing the subprime crisis. The plan, which includes $30 billion to purchase troubled mortgages and for foreclosure auctions, as well as a freeze on foreclosures and interest rates, is striking in two respects: 1) although the plan is wrapped in populist appeals to struggling homeowners (of whom we have many here in Pennsylvania), it seems nearly as attractive to big banks and other lenders; and 2) there’s nary a word about reforming the bankruptcy laws, a much more sensible way to help out homeowners. I suspect these two things may be related.

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April 1, 2008

Beware of the Home Owner's Loan Corporation Mirage--Skeel

As the Bush administration begins its defense of the new Treasury Department proposal to revamp U.S. financial regulation, Democrats are arguing, rightly in my view, that the more urgent concern should be to directly address the mortgage crisis. Unfortunately, Democrats increasingly are coalescing around a proposal by Congressman Frank and Senator Dodd to pump billions of dollars into the Federal Housing Administration to guarantee new mortgages that would replace troubled borrowers’ current mortgages. Proponents cite the Home Owners’ Loan Corporation, which was set up at the outset of the New Deal, as shining precedent for the Frank-Dodd plan.

The HOLC certainly sounds like a remarkable governmental success story.

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April 25, 2008

Where's a Real Villain When You Need One--Skeel

Almost a year into the subprime crisis, we still haven’t seen any major reforms. The Enron and WorldCom scandals six years ago, by contrast, prompted sweeping reforms in Congress and on Wall Street. Why the difference?

I increasingly think the most important difference is the lack of a clear villain– a person and company that serve as a posterchild for everything that is wrong and needs to be fixed with American finance.

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August 23, 2008

The Obama-Biden Ticket and Business Reform--Skeel

Most of the commentary on Obama's decision to tap Senator Joseph Biden as his V.P. pick has focused on the foreign policy expertise that Biden brings to the ticket. But I think the implications for some of Obama's business reform proposals are at least as important.

Obama has suggested that he will support more federal regulation of corporations. And he has signaled his support for bankruptcy reform that would allow borrowers to write down the value of their mortgages in bankruptcy. He also has sharply criticized the major bankruptcy reforms passed in 2005, which made bankruptcy more difficult for consumer debtors.

Biden has been on the other side of most of these issues.

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September 9, 2008

The McCain-Palin Salvo on Fannie Mae--Skeel

I may be over-reading the McCain-Palin op-ed in the Wall Street Journal on Fannie Mae and Freddie Mac this morning, but it seems to me to mark a sharp break from the Bush administration on the subprime crisis. Not on the bailout itself. Just about everyone seems to agree that bailout was inevitable, and that the question was simply when it was going to take place. The break, it seems to me, is in the proposals for mortgage lending going forward. The Bush administration has relied almost entirely on jawboning and voluntary measures. McCain-Palin seem to be advocating substantially more governmental intervention. They suggest that they would establish a minimum downpayment requirement for loans guaranteed by Fannie Mae or Freddie Mac, and would impose new disclosure requirements for derivative securities.

I wonder if this means we'll be hearing a little less about tax cuts in the next two months, and more about Teddy Roosevelt-style corporate and financial reform.

September 15, 2008

Lehman's Demise--Skeel

The government's dance with Lehman after having bailed out Bear Stearns reminded me of a game we used to play as kids. One kid would stand in front of another and fall backwards. The idea was that the kid in back would catch his falling friend. The Fed and Treasury are like the kid in back. Unfortunately, it's now completely unclear whether and when they'll catch an investment bank as it falls.

I don't mean to suggest the government should have bailed Lehman out. I don't think they should have. But they've managed to create a situation where it's almost completely uncertain whether the government will or won't step in. This is one problem.

But there's a second problem as well: the government is focusing too much on the wrong issue.

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September 23, 2008

The War on Executive Compensation--Skeel

As Congress rushes to enact the Treasury's $700 billion bailout plan this week, Obama, McCain, and politicians of both parties are insisting that the bailout include restrictions on executive pay at the firms whose mortgage backed securities will be bought by the government. Some of the executives' pay packages are indeed outrageous, but trying to impose pay limits is, it seems to me, one of the worst ideas yet proposed.

Hank Paulson has argued that firms might refuse to participate in the bailout if restrictions on pay were a condition of involvement. Perhaps this is true, although I suspect that shareholder pressure would force even the most reluctant firms to join the bailout party. But restrictions are likely to have two other effects, both of them bad. First, firms who wish to attract high quality executives will attempt to evade the restrictions. If the restrictions are onerous, these evasions may well be abetted by sympathetic courts. This is exactly what has happened after Congress imposed restrictions on executive compensation in bankruptcy in 2005.

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October 2, 2008

Bailout Stories--Skeel

One reason the current financial crisis seems so mystifying is, I think, the absence of a simple, coherent story that explains what the crisis is about. The Enron and WorldCom scandals earlier in the decade could be distilled to a plausible story about greed and the failure of the accounting firms and other gatekeepers who are supposed to police Wall Street. With the current crisis, by contrast, three main narratives seem to be competing for attention. And each is deeply flawed.

The first, which has been offered by Senator Bernie Sanders and others, attributes the crisis to Wall Street greed, and demands that Wall Street be punished and ordinary Americans helped. Wall Street greed certainly is a major factor in the crisis, most visibly in the pushing of exotic, mortgage-related securities that now have come back to haunt many financial institutions. But the greed story has at least two problems.

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October 9, 2008

C.S. Lewis and the Financial Crisis--Skeel

I suspect I'm not the only one who feels vaguely guilty when I'm not thinking about or talking about or trying in some small, inept way to do something about the financial crisis. Everything else seems secondary. How can we go about our ordinary lives in a time like this?

Some of the most helpful answers I've heard come, as is so often the case, from C.S. Lewis. Speaking to university students at the height of World War II in an essay called "Learning in War-Time," he asked how they could continue studying "when the lives of our friends and the liberties of Europe are in the balance?" Lewis points out that, because times are never truly "normal," if we took the assumption that we should stop our ordinary activities when things are amiss to its logical conclusion, we would never engage in ordinary activities.

He then argues that the seemingly frivolous activities in which we engage are part of what makes us different from animals: people "propound mathematical theorems in beleaguered cities, conduct metaphysical arguments in condemned cells, make jokes on scaffolds, discuss the last new poem while advancing to the walls of Quebec, and comb their hair at Thermopylae. This is not panache: it is our nature."

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October 12, 2008

Is Government Ownership the Right Strategy?--Skeel

We now have yet another switch in the Treasury's strategy for stabilizing the markets. Plan A with the $700 billion rescue plan was to use the money to buy some of the questionable mortgage-related securities that are held by the nation's troubled financial institutions. Treasury Secretary Hank Paulson now wants to take a direct stake in the banks, to buy stock rather than simply buy some of banks' assets.

The most obvious reason for the shift is that, unless the government overpays, buying a bank's questionable securities doesn't necessarily improve its balance sheet. It replaces one asset- the securities- with another one- cash. If the government buys stock, on the other hand, the cash directly increases both the bank's assets and its net worth, potentially increasing the likelihood the bank will remain solvent.

That's the good news. But there are at least two potential problems.

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November 14, 2008

A Too-Transparent Treasury--Skeel

In their handling of the credit crisis, the Treasury Department and Federal Reserve have repeatedly been criticized for their lack of transparency. The decisions as to which financial institutions to bail out have been made behind closed doors, the complaint goes, and Treasury Secretary Henry Paulson's original plan for the $700 billion bailout was only three vaguely-worded pages long. But I wonder if this criticism isn't exactly backwards. It seems to me that the Fed and Treasury have been too transparent, and that this could be contributing to the crisis.

Take the bailout of Bear Stearns in March and the decision not to bail out Lehman Brothers six months later.

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November 18, 2008

Where Should GM File for Bankruptcy?--Skeel

The most surprising development in the Big 3's campaign for a bailout has been the amount of resistence it's met. Surprising to me, at least. After all the money that's been committed to the financial bailout, I assumed the carmakers would get a sympathetic welcome in Washington. It's encouraging, in my view, that this hasn't happened. The best case for a bailout is a situation where the company simply has a cash flow problem and will be fine if it is given temporary funding. GM's problem isn't cash flow; it's solvency- too much debt and not enough asset value. That's precisely the kind of problem chapter 11 is designed to address.

One of the most intriguing questions is where GM will file for bankruptcy if that's where it ends up. Large companies generally have a variety of filing options. In recent years, most have filed in New York or Delaware, because these are the bankruptcy courts with the most sophisticated judges- judges who handle a lot of big cases. I suspect GM wouldn't follow this pattern. Both the CEO, Rick Wagoner, and the employees may think they'll get a judge more sympathetic to their plight in Detroit. If they file in New York or Delaware, on the other hand, they'll seem to be turning their fortunes over to Wall Street (New York) or corporate America (Delaware). Assuming the bailout falls through, look for Wagoner to portray himself as a champion of employees' interests, and to file the case in Detroit.

January 27, 2009

Obama and Roosevelt--Skeel

            The most frequent worry I’ve heard about the new administration is that President Obama will get swept up in the messianism surrounding his historic presidency, and he will take advantage of it to pass a vast legislative agenda that is already mapped out in his mind. This seems to me exactly backwards:  President Obama seems to be the one person who hasn’t gotten swept up in the messianism, and while he obviously has a few pet issues, he doesn’t seem to have a grand scheme in mind.  

            I just finished “The Defining Moment,” Jonathan Alter’s page turner about Roosevelt’s first hundred days (which Obama apparently read during the transition). The similarities at the outset of Obama’s and Roosevelt’s presidencies are uncanny, and surely not accidental. One obvious similarity is the messianism. After Roosevelt was elected in 1932, there was serious discussion about the need for a dictator. Roosevelt seems to have been tempted by this talk (Alter’s prologue recounts how he initially planned to tell a veterans’ group that “I reserve the right to command you in any phase of the situation which now confronts us” but deleted the language from his speech). But he resisted the temptation, much as Obama seems to be wary of the excesses of the current adulation in the press and elsewhere.
            Second, Roosevelt revolutionized communication between the president and the American people, most famously with his “fireside chats.” Roosevelt harnessed radio to speak directly to the people, in a way previous presidents had not. President Obama’s release of his weekly message in video form on Youtube, and his use of the internet throughout his campaign, seems designed to revolutionize presidential communication in the internet era in much the same way.
            The third issue brings me back to the question of a grand plan. Roosevelt clearly didn’t have a grand solution for the Depression when he entered office. His principal theme was the need for immediate action (“This Nation asks for action, and action now,” he said in his first inaugural), and for experimentation. President Obama seems to have brought the same attitude to the White House—the sense of a need for decisive action, rather than a particular plan.

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February 22, 2009

Penn Panel on the Financial Crisis--Skeel

Like just about every university, we recently had a  panel discussion about the financial crisis-- its apparent causes and possible implications.  The panel was moderated by the university president, Amy Gutmann, and I was one of five panelists.  For those who are interested, here is a link.  (For anyone who perseveres and actually watches, you'll notice that I'm at my best in the first ten minutes-- when I'm simply listening to the others, who know what they're talking about).

March 5, 2009

Bankruptcy Phobia--Skeel

 Almost the only tool the government hasn’t seriously tried in its battle against the economic crisis is bankruptcy. Rather than bailout out Bear Stearns, AIG or GM, it would have made more sense to address their financial distress in bankruptcy. The most sensible strategy for addressing the foreclosure crisis is a proposed amendment to the bankruptcy laws that would let a homeowner write down her mortgage to the value of the house if the house is worth less than she owes.

Both strategies have met fierce resistance, on precisely the opposite grounds. The argument against letting AIG or GM file for bankruptcy is that it would be disastrous to leave these companies to market forces, rather than intervening to prop the companies up. Lehman’s bankruptcy, which roiled the markets, is widely cited as proof that bankruptcy doesn’t work. But the problems with Lehman had very little to do with bankruptcy. They stemmed from a bait and switch by the government—the government had strongly suggested it would bail out every large troubled investment bank (see Bear Stearns), then refused at the last minute to do so with Lehman. And it’s hard to argue that the AIG bailout, which occurred at the same time, has been more successful than Lehman’s bankruptcy.
With the mortgage write down provision, the concern is too much interference with the market, rather than too little. The same banks that are taking billions of dollars of government handouts complain that the provision would undermine the enforceability of mortgage contracts.

In each case, an irrational fear of bankruptcy seems to be coloring people’s perceptions. 

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March 8, 2009

Stanley Fish on Christianity and Bankruptcy--Skeel

A student emailed me this marvelous commentary by Stanley Fish, which I hadn’t seen. I’ll only add two brief thoughts, since Fish speaks for himself as always: 1) the two Christian discourses Fish discusses don’t strike me as necessarily at odds with one another—any more than faith and works are; and 2) the forgiveness offered by Christ, and the economic imagery so often used to describe it, was of course vividly foreshadowed in the Old Testament by the Jubilee (Leviticus 25), which had both practical and spiritual significance. 

March 24, 2009

Bankruptcy vs. Bailouts--Skeel

Readers of this blog are no doubt tired of hearing me argue that bankruptcy would often be a better solution to the financial distress of large financial firms like AIG or Bear Stearns than the bailouts the government has used throughout the current crisis.  But for those who haven't yet had enough, or are interested in a more scholarly treatment, here is a link to a paper by Ken Ayotte and me about the bankruptcy vs. bailout choice.

March 27, 2009

The Geithner Proposals--Skeel

Treasury Secretary Geithner finally sketched out the administration's blueprint for new financial regulation yesterday.  Many of the proposals, such as a new registration requirement for hedge funds, strike me as sensible.  But I think the proposal to give federal regulators the power to take over troubled investment banks and hedge funds is a serious mistake.  A colleague and I criticise the proposal in this op-ed piece.

April 13, 2009

Debtors' Prisons Old and New--Skeel

Debtors’ prisons seem to be back in the news. Last week’s New Yorker included an interesting article about debtors’ prisons in late eighteenth and early nineteenth century America (a link to the abstract is here). Decreasingly few states allowed imprisonment for debt by the mid nineteenth century, but debtors’ prisons weren’t abolished altogether until the Thirteenth Amendment was passed after the Civil War. Some commentators have argued that the 2005 amendments to the bankruptcy laws, which increased the costs and hassles of filing for bankruptcy, violate the Thirteenth Amendment. This is rather far fetched, but a recent practice in Florida seems a much closer call. A New York Times story reported that Florida courts have been throwing criminal defendants in jail if they fail to pay their court fees. Although this may not be imprisonment for debt, it seems awfully close.

April 30, 2009

The Chrysler Bankruptcy--Skeel

T.S. Eliot famously wrote that “The last temptation is the greatest treason: to do the right deed for the wrong reason.” 

I’m not sure if it’s doing the right deed for the wrong reason, or doing the wrong deed for the right reason, but I found myself thinking of Eliot as I read the terms of the Chrysler bankruptcy filing this afternoon. There’s no question that it made sense for Chrysler to file for Chapter 11, as also is the case with GM. But the U.S. government is essentially planning to commander the bankruptcy process, by pushing through a sale of most of Chrysler’s assets (not to a true third party, but to “New Chrysler”) early in the case. The only thing standing in the way of the government’s stratagem is the bankruptcy judge who will be forced to decide whether to approve the sale. It will be awfully hard for a judge to say no to the deal that’s about to be thrust on him or her.  The end result may well be desirable, but the means are worrisome.

May 8, 2009

More on the Chrysler Bankruptcy--Skeel

Several days ago, I wrote a short post noting some of my concerns about the extent to which the government seems to be commandeering the bankruptcy process in Chrysler as a means of effectuating its auto policy.  This commentary develops the critique in a bit more detail, and puts it in historical perspective. 

May 19, 2009

Banking on Bankruptcy--Skeel

This op-ed by equity fund manager Scott Sperling in today’s Wall Street Journal makes an interesting case that the Obama administration’s handling of Chrysler and GM is actually evidence of capitalism at work. In my view, he’s right that the restructuring of these companies has some similarities to how things would play out if the government weren’t cramming down its own preferred plans. Both companies would have filed for Chapter 11, and would have been restructured. But the op-ed strikes me as very misleading in its suggestion that restructuring of Chrysler in particular can be squared with the bankruptcy laws. In talking about Chrysler, Sperling seems to suggest that it’s fine to give employees, retirees or anyone else (including current stockholders, presumably) a large stake in the new company, so long as they aren’t allowed to keep everything they have now. That is, he seems to forget the rules of priority, which say that the senior lenders are required to be paid first. When he turns to General Motors, on the other hand, he suddenly remembers the priority rules. The recalcitrant bondholders really aren’t entitled to anything (or much of anything), he argues, because the government, as senior lender, is entitled to be paid first.

In my view, he’s right about GM and wrong about Chrysler. The government’s commandeering of the Chrysler bankruptcy, and rewriting of the priority rules, has laid the groundwork for a lot of mischief in the future.
Also on the bankruptcy front, Cleary Gottlieb lawyer extraordinaire Lee Buchheit and I have a little op-ed today arguing for a new approach to the financial distress of large, systemically important financial institutions. We propose that lawmakers provide for a 60-90 day interim period as a prerequisite to bankruptcy proceedings. In my view, the existing bankruptcy framework, this proposal, or the enactment of special bankruptcy provisions aimed at large nonblank financial institutions are each preferable to the current administration proposal, which would dramatically expand the FDIC’s authority and would continue the strategy of relying on bailouts. I hope to outline these thoughts in more detail in future posts and commentary.

June 4, 2009

Greenspan on "Too Big to Fail"--Skeel

            I was a minor player in a very interesting conference on systemic risk yesterday at the American Enterprise Institute in Washington DC yesterday. In the keynote address, Alan Greenspan suggested that he sees only three plausible responses to the emergence of financial institutions that are “too big to fail,” and thus will be bailed out if they fail. The first is to impose higher capital requirements on bigger institutions—in effect, to require them to have more equity and less debt on their balance sheets, so that they are less likely to fail. The second is for people to start new more new banks. Since new banks won’t have the baggage of the banks that are still holding lots of “toxic” assets, they presumably would be well positioned to compete with the big current banks. Third, he suggested that lawmakers might require that investment banks be structured as partnerships rather than corporations, as they were until recently. Because the partners of a partnership are personally responsible for its debts if it fails, the folks running future banks like Bear Stearns and Lehman Brothers might take a lot fewer risks. 

            The proposal to impose strict capital requirements on institutions that are “too big to fail” is a good idea, in my view, but it’s conventional wisdom (and is already on the administration’s radar screen). Forcing investment banks to be structured as partnerships is a very interesting idea but, as Greenspan himself noted, would almost certainly be evaded (for example, commercial banks could simply step up their involvement in investment banking activities.
            But I wonder whether we’ll set entrepreneurs taking the second idea to heart in the next year or two. As bad as the economic climate is, now might be a great time to start a bank, for those who have the inclination and the expertise.

Hearings in Congress and Bankruptcy Court--Skeel

            The enormous recent bankruptcies have provided a lot of reasons for a bankruptcy scholar to leave the library and venture out into the real world for a change. I’ve spent more time in New York and Washington in the past month than I ever would have imagined. In addition to conferences and conversations with congressional staff, I had the privilege of testifying at a House Judiciary Committee hearing on the auto bankruptcies two weeks ago, and I went to the bankruptcy court in New York last week to watch the first several hours of the hearing on the proposed sale of Chrysler’s assets to New Chrysler. (The bankruptcy court, by the way, is a lovely building—the old Custom House—at the very bottom of Broadway, at the southern tip of Manhattan, and well worth a visit).

            As different as the two venues were, I was struck by an important similarity. Although there is security in both buildings, anyone can come in and see the bankruptcy court in session, or see the offices and hearing rooms where our Senators and Representatives do their work. You aren’t asked to demonstrate your importance or explain why you’ve come. It had never fully occurred to me just how open our government is. Walking in and out of those buildings, I couldn’t help but feel proud of the system we are a part of. 

June 5, 2009

GM and the Railroads--Stuntz

This is more David’s department than mine, so if this observation is all wet, I’m happy to take correction. But in recent weeks, I’ve been thinking about the fate of the railroads in the late nineteenth and early twentieth centuries. Like the auto companies today, the railroads of the late nineteenth century received huge subsidies, often in the form of free land adjoining new track. Like GM and Chrysler, most of those subsidized railroads went belly up – not despite the government subsidies, but partly because of them. 

That sounds bizarre, but it isn’t. Allegedly friendly governments offer their business patrons a killing embrace – do this or that, and we’ll give you more money or land or trade protection than you could possibly ask. The subsidies are so generous, responsible corporate managers will do pretty much anything to get them. Over time, the corporations acquire more and more skill at pleasing the relevant government officials – and lose the ability to please their customers. The railroads laid track and built stations in places where the demand for transport could not match the supply; today’s GM is striving to build “green” cars that consumers may not buy. Insolvency is the inevitable consequence of such business decisions. So it was a century ago with railroads; so it is today with America’s auto companies. Perhaps the banks are next . . .

June 9, 2009

The Supreme Court Stay in Chrysler--Skeel

The $64,000 questions in my little world today are 1) what to make of Justice Ginsburg’s order temporarily halting the Chrysler sale; and 2) what it means for the General Motors bankruptcy. 

My guess is that it would be a mistake to read too much into the Chrysler stay. As a Supreme Court savvy lawyer pointed out to me today, the Justices are very busy these days writing their opinions for the term. The stay may simply be designed to give them time to focus on the case, and decide as a group whether to take it. Unless four of the nine justices conclude that they should, certiorari will be denied. At the end of the day, I suspect that will be what happens, though I hope I’m wrong.
Either way, I think the stay has important implications for the GM bankruptcy. At the least, it suggests that GM and the administration cannot assume that the proposed sale in that case will simply be rubberstamped by the court. In some ways, the proposed “sale” of GM’s key assets to New GM is less troubling than with Chrysler, since the plan will pay GM’s senior lenders in full rather than stiffing them as the Chrysler sale does. But in two respects the rush to effect a quick sale of GM is more problematic. First, whereas with Chrysler the parties could at least pretend it was a sale to a third party (FIAT), the GM sale lacks even the pretence of being a genuine sale. Second, the argument that a sale needs to be done right away is much weaker with GM. I suspect the bankruptcy court will be much less willing than in Chrysler to believe the administration’s claim that the sale needs to go through yesterday.

p.s. on Chrysler--Skeel

The Supreme Court has now lifted its stay on the Chrysler sale, which makes the first part of the last post moot.  On to GM.

June 18, 2009

Consumer Financial Protection Agency--Skeel

The most surprising of Obama administration’s new financial reform proposals would establish a new Consumer Financial Protection Agency to look after consumers’ interests in financial services contracts such as credit cards and mortgages. It’s been discussed in Washington for many months, but it was not part of the earlier version of the reforms announced by Treasury Secretary Geithner in the spring. This new agency would have the power to write rules for credit card contracts and other transactions, examine financial institutions, and require firms to offer a “plain vanilla” mortgage product as a yardstick for comparing their more exotic mortages. 

The agency’s proposed powers are astonishingly broad. I strongly suspect that this is a first negotiating move, rather than an expectation of powers the agency will actually have when the legislation is passed. The financial services industry rightly fears that the agency is a major threat to their profits, and is already digging in its heels to fight vigorously. The final result is likely to be a compromise, at least if the Obama administration’s reluctance to take on banks directly in the past is any indication.
One of the most interesting questions—and a key to the likely efficacy of the agency—is who will be appointed its head. The principal proponent of the agency is Bill’s colleague Elizabeth Warren, who currently leads the TARP oversight panel, and she is an obvious choice to head it up. But Warren has locked horns with credit card banks for years over bankruptcy reform.  The banks surely will fiercely oppose her nomination.
I have sometimes disagreed with Warren about bankruptcy and credit issues in the past, but I personally think the agency is a good idea. Currently, consumers are protected by bank regulators. But bank regulators have more of a stake in bank health (and profits), than in consumer interests. Consumers could use a champion.

June 20, 2009

The New "Too Big to Fail" Proposal--Skeel

The Obama adminstation's new financial reform proposals, like the version proposed several months ago, would give regulators the power to step in and take control of large nonbank financial institutions, as the FDIC already does with commercial banks.  As folks who have stumbled on this blog in the past  will know (and are no doubt tired of hearing about), I think this is a serious mistake.  This magazine article describes the concerns in a bit more detail, and offers what I think would be a better approach.  I'd be very interested in reactions.

July 6, 2009

The GM Sale--Skeel

Although GM is vastly larger and more significant than Chrysler, its "sale"-- which was approved by the bankruptcy court late yesterday-- has received far less attention.  There seem to be two reasons for this.

The first is a been-there-done-that effect.  After many participants and observers complained about the problems with the Chrysler sale, and the objections were brushed aside as expected, there was even less suspense and therefore less media interest with GM.  Chrysler's executives griped during their negotiations with the government that their company was being used as a "guinea pig" for GM, and so it was.

The second reason is that GM and the government adjusted the "sale" strategy to make it less egregious than the Chrysler sale.  Some of the troubling features remained (such as a bidding process that made other, genuine bids nearly impossible).  But the GM sale does not stiff the senior lenders, as the Chrysler sale did.  And after nearly universal criticism of the failure to make any provision for products liability claimants, New GM now has agreed to pay the claims of future victims. 

If anyone finds that these technical ramblings make you long for more detail, Professor Mark Roe and I have just finished a draft of a law review article that critiques the Chrysler sale in much more detail.   The link is here.


October 6, 2009

DealBook Dialogue on the Financial Crisis--Skeel

The NY Times DealBook blog is hosting a dialogue on the financial crisis, with a variety of folks (I'm the least of them, by any yardstick) weighing in.  Several of the initial columns have been quite interesting; it's continuing all week here.

October 29, 2009

Bailouts and Preemptive Strikes--Skeel

One of many interesting questions I was asked while presenting a paper called “Bankruptcy or Bailouts?” at Professor Ted Janger’s bankruptcy seminar at Brooklyn Law School yesterday was whether there’s a connection between the ethos that led to the Bush adminstration’s preemptive strike policy and the Obama administration’s enthusiasm for bailouts. The question echoed a thought I’ve had often in the last few months. The Bush administration was criticized (fairly, in my view) for its secrecy and its “my way or the highway” attitude on foreign policy issues. Barack Obama campaigned against this ethos, and his administration has been far more transparent on foreign policy. Yet when it comes to economic issues, the Obama administration’s key financial regulators have been as high-handed and opaque as the Bush administration was on foreign policy.

 A preemptive strike is a little like a military version of a bailout.  And the ethos that produced that policy seems to have migrated, in the Obama administration, from military issues to economic ones.

November 22, 2009

Goldman's Good Works--Skeel

For reading the current financial tea leaves, the week’s most important event was Goldman Sachs’ announcement that it will devote $500 million to loans for small businesses and other good works. This noblesse oblige underscores just how much money Goldman has been raking in, in part thanks to the government’s bailouts. 

The early reports have speculated that Goldman is trying to repair its reputation with the American people, to curry favor with Main Street. I think this is partly right, but that the real audience is government. Goldman’s decision seems to reflect a conclusion by the smartest bank on Wall Street that keeping the government happy is going to be the most important factor in business success in the coming years, even after the crisis is fully behind us. I suspect a lot of other banks and businesses will follow Goldman’s cue. Many of these measures may be quite desirable in themselves, but it can’t be a good thing if everyone’s principal focus is keeping government overseers happy.

November 29, 2009

Should Geithner Step Down?--Skeel

A recent report by Neil Barofsky, the special investigator for the $700 billion TARP program, criticizing last year’s AIG bailout has stoked suggestions that perhaps it’s time for Treasury Secretary Geithner to step down. My guess is that Geithner will indeed step down by the end of 2010, but that he will almost certainly step down too late.

The ideal time for a Geithner resignation might be in January, before Congress finalizes its financial reform package. President Obama presumably selected Geithner as Treasury Secretary due to his deep familiarity with the big Wall Street banks, and in order to maintain continuity with the Bush Administration’s response to the financial crisis. The Bush and Obama response centered on the use of ad hoc bailouts to fend off the possibility of a market-wide crisis. We now seem to have passed this stage of the crisis, and moved to the regulatory phase. The central problem with the administration’s financial reform proposals is that they are backward looking. They are designed to expand bank regulators’ powers, so that they can more easily effect the kind of bailouts that regulators pursued in 2008.
If Geithner stepped down in early January, he could announce (carefully avoiding the words “mission accomplished,” of course) that regulators have achieved the purpose for which he came to Washington, generally stabilizing the banking system. President Obama could then nominate a new Treasury secretary who played no role in the bailouts, and who is capable of thinking beyond them. Under the new secretary, the financial reform proposals could be dramatically revised, into a form that is less backward looking, looks less like another handout to Wall Street banks, and is more likely to generate enthusiasm in Congress. (A side note: in my visits to Washington this fall, I have been astonished by the depth of the bipartisan hostility to the Administration’s financial proposals; these debates are very, very different from the healthcare debate).
Unfortunately, I think Secretary Geithner will stick around until after Congress passes financial reforms in 2010, on the view that this too is part of the project for which he came to Washington. If he does, I fervently hope that he doesn’t get what he wants.

December 21, 2009

Person of the Year?--Skeel

The selection by Time magazine of Fed chairman Ben Bernanke as its person of the year has been met by a collective yawn. Perhaps this reflects a general disinterest in financial regulators. It also could simply be one more illustration of the diminishing influence of newspapers and weekly magazines.

Even for those of us who find regulators fascinating, the Bernanke pick seems misguided in two respects. First, if Time wished to single out the regulators who flooded the markets with money to avert a Depression, it didn’t make sense to select Bernanke alone. For better and worse, Bernanke was part of a team effort that included then Treasury Secretary Henry Paulson and current Treasury Tim Geithner. The did everything from the Bear Stearns bailout to TARP in tandem. It doesn’t make sense to include just one of the three musketeers. The second problem is much more revealing, however. Time seems to have had a problem with its calendar. Nearly all of the major financial interventions took place in 2008, not 2009. Perhaps Bernanke should have gotten some votes for person of the year last year, but his contributions were so 2008.
New York Times columnist Frank Rich had an interesting column yesterday suggesting that Tiger Woods would have been a better pick, since the complete mismatch between his carefully crafted public image and his actual private behavior fits a pattern that includes financial wrongdoers like Enron.
With the benefit of several extra weeks of political developments to consider, I would make still another pick. My pick for persons of the year would be Rahm Emanuel and David Axelrod, President Obama’s advisors. If the story of last year was Obama’s sensational election, this year’s story is the legislation at all costs strategy that the Administration’s advisors have persuaded the President to adopt. It doesn’t seem accidental to me that the most quoted political comment earlier in the year was Emanuel’s statement about a crisis being a terrible thing to waste; and the most quoted recent comment is his statement that everything is negotiable except success. Only time will tell whether this strategy of doing whatever it takes to line up votes will seem to have been well-founded in retrospect. But in my view, it is the story of 2009.

January 24, 2010

Obama's Populist Turn--Skeel

It’s hard not to think of Franklin Roosevelt (Roosevelt-and-water, perhaps) as President Obama criticizes the Wall Street banks, welcomes Paul Volcker (who argues that the banks should be partially broken up) back into his inner circle, and condemns the Supreme Court’s new campaign finance decision as a threat to democracy. Roosevelt did break up the banks (a successful reform), and he wanted to “pack” the Supreme Court with new New Deal friendly justices (a disaster).

I think the President’s bank proposals will be much more difficult for Republicans to simply reject than healthcare. If the tax were called a “penalty for bigness” instead, and designed to force the too-big-to-fail banks to slim down, it would fit perfectly with a commitment to competition in the marketplace. The proposal to “break up” the banks—actually to prohibit deposit taking banks from owning hedge funds and the like—is more debatable, but is also defensible. I would reduce the ability of deposit taking banks, which enjoy a government guaranty, to gamble with the taxpayer’s money.  If the President were to go one step further, and abandon his proposed resolution authority (with would mean more bailouts in the future), he would have a package that Republicans ought to support. And if they didn’t, they could be the ones on the wrong side of the current populist outrage in the fall.
It remains to be seen, of course, whether the populist turn will amount to more than just words. In my view, a key indicator is the future of Treasury Secretary Tim Geithner, whose fingerprints are all over the bailouts, especially AIG. If the President is serious about reform, he will replace Geithner with a Treasury Secretary who is less committed to Wall Street and bailouts. If Geithner remains, it is unlikely that the new populism will achieve its promise.

March 7, 2010

Art and Markets--Skeel

Through a quirk of scheduling, I was in Amsterdam a week ago for a corporate law conference and (after a brief return home) am now in Milan and Rome for nine days with the twelve students in my Globalization of Corporate Governance seminar.   The combination of corporate law conferences and side trips to several of the world’s great art museums has gotten me thinking—however ill-informedly—about the relationship between markets and art.

In my seedtime, we always assumed that great artists invariably resisted the commercial tendencies of their time.  But after a couple of hours with Rembrandt’s paintings of wealthy burghers (like this one, The Sampling Officials (1662)) from 17th Century Holland in Amsterdam’s Rijksmuseum, or the Medici commissioned paintings in the Brera here in Milan, it seems clear that art-as-resistance is not a universal tendency. In 17th century Holland and Renaissance Italy, markets and art blossomed in tandem.
It may be that artistic trends alternate between fellowship with and resistance to markets. But I’m more inclined to suspect that markets and art invariably move in roughly parallel directions. The fragmentation of the art world in the past several decades may, for example, echo the destabilizing effects of globalization and rapid innovation in the financial markets.  Perhaps this means that we will see a period of neotraditionalism both in art and in corporate and financial life once the current crisis passes.

April 9, 2010

The Dodd Bill--Skeel

The Dodd Bill—the financial reform package currently under consideration in the Senate—is a sterling illustration of the old cliché that sometimes it's worse to miss by an inch than a mile. The provisions for handling large financial institution failures have progressed a great deal from last summer’s Obama administration proposal. They borrow a lot more from the bankruptcy laws, for instance. And there’s a lot of tough talk about ending too big to fail and harsh medicine for large financial institutions that stumble. But the framework has more than enough wiggle room for bank regulators to bail out creditors as they did in 2008, and it gives them a $50 billion pot of cash to do it with.  The end result is as bad, and could even be worse, than the original, for reasons described in more detail in this op-ed from a couple of days ago.

The bill also resolves the debate over whether to establish a Consumer Financial Protection Agency to police credit cards and mortgages in a strange way. The Dodd Bill does call for a new consumer watchdog—a good thing, in my book-- but would stick it in the Federal Reserve. The Fed focuses on protecting the banking system, which often benefits from credit card and mortgage terms that may hurt consumers. If the watchdog is sufficiently independent, the arrangement might work. But the proposal seems to invite lots of cognitive dissonance within the Fed.
If I were a lawmaker and were forced to vote today, the resolution provisions would put me squarely in the no category. But if I were a Republican lawmaker, the last thing I would do is commit myself to opposing any financial reform package that emerges from Congress. The politics of financial reform seem very different than the healthcare debate, as I’ve argued before, given the distaste for bailouts on both sides of the political spectrum. If the Dodd Bill were amended in ways that really made good on the claims to end too big to fail and to reduce the need for bailouts, it might be worth voting for. But we definitely aren’t there yet.

April 18, 2010

Goldman's Dark Hour--Skeel

I remember the moment when I realized that Goldman had gone from being the darling of Wall Street—the firm everyone pointed to as the best run, with the best internal risk controls—to something very different. Last summer, in response to a little piece I wrote for a New York Times Dealbook blog discussion, a commentator referred to Goldman as the embodiment of evil, or something to that effect. I couldn’t imagine what he was talking about. Within a few weeks, I began to understand, as rumors surfaced about Goldman profiting from its customers’ subprime losses and being a multibillion dollar beneficiary of the government’s AIG bailout.

After many months of rumors, the SEC has charged Goldman with violating the securities laws by misleading the investors in synthetic collateralized debt obligations (CDO’s). With a CDO, investors invest in an entity that holds bonds issued by a variety of companies.  A synthetic CDO doesn’t actually hold the bonds, but achieves the same effect by holding financial instruments (usually, credit default swaps) that are linked to the same kind of bonds.  As I understand it, based on a quick reading of the SEC complaint, the SEC alleges that Goldman didn’t tell investors that John Paulson, a hedge fund manager who helped to determine the contents of the synthetic CDO, had placed large bets that the underlying subprime bonds would decline in value.  Paulson was picking bonds that he viewed as likely to default.
I personally have somewhat conflicting reactions to the scandal.  First, if the allegations are true, Goldman deserves to be punished for hiding key information about the packaging of the synthetic CDOs.  Although the losers in these transactions seem to have been large institutions, that’s no excuse for withholding key information about how the investment portfolio was selected.  But second, I suspect that part of the reason for charging Goldman is a distaste both for synthetic CDOs and for the fact that Goldman benefitted from the subprime crisis. I’ve never understood the rationale for synthetic CDO’s and have doubts about their benefits. But as long as they’re legal, I don’t think banks should be punished for having profited from them.

April 30, 2010

Endgame in the Financial Reforms--Skeel

With the financial reform bill now in the full Senate and all signs pointing toward its passing in the next week or two, a flurry of possible amendments are circulating privately and publicly. Which are most important? Not Senator Boxer’s new amendment, which would explicitly state that large financial institutions must be liquidated if they are subject to the proposed resolution procedures for “systemically important” financial institutions. Senator Boxer’s claim that this would prove that the bill doesn’t allow future bailouts illustrates an understandable but dangerous confusion about what a bailout is. If all of an institution’s creditors are paid in full, it’s a bailout even if the institution itself is eventually liquidated. If creditors know they’ll be paid—and they can be under the proposed bill—they’ll be too willing to lend to the institution and won’t monitor as carefully as they would if they would if they weren’t protected. They’ll act like the creditors of Bear, Stearns, AIG and Lehman Brothers did.

The one amendment that would do most to change this, in my view (and as Tom Jackson and I argued in this recent op-ed), would be to reverse the special treatment that derivatives and other financial contracts are now given under the bankruptcy laws. Parties to a derivatives contract currently can terminate their contract, sell their collateral, and keep even preferential or fraudulent payments they receive prior to a bankruptcy. These special rules, which were insisted on by Goldman Sachs and other major derivatives dealers in the 1980s, 1990s and 2000s, substantially reduce the benefits of bankruptcy for a large, troubled financial institution. Unlike many of the proposals being discussed in DC, which would slap down Wall Street without producing real benefits, this one would punish Wall Street more productively. It would make bankruptcy even more attractive as an alternative to bailouts than it already is, and make future bailouts much less likely.

June 15, 2010

David Brooks on Goverment-Corporate Relations--Skeel

Inspired by the Obama Administration’s awkward dance with BP over the oil spill, David Brooks divides the nations of the world into two categories in this column today: those that treat oil companies and other large corporations as private corporations (“democratic capitalism”), and those that directly own and control the companies (“state capitalism”).

Brooks’ columns are always interesting, but this time his love for the number two—for dividing everything into two camps—leads him astray. The category he calls democratic capitalism merges very two different approaches, corporatist governance in which the state regulates and collaborates with large corporations; and a more decentralized approach (smaller corporations and industry competition). The U.S. has traditionally tended to favor the decentralized approach, whereas many European countries favor corporatism.
One of the most remarkable developments in the two years has been the extent to which we’ve moved in a corporatist direction. With a few small exceptions—such as the so-called Volcker rule limiting banks’ propriety trading—the entire financial reform package has a corporatist cast. The Obama administration’s new plan to pressure BP to set aside a fund for those injured by the oil spill has the same corporatist quality. It’s more evidence of the shift toward European-style governance.

July 6, 2010

Business Expertise and the Supreme Court--Skeel

Jeff Rosen proposed in this op-ed in the New York Times Sunday that Elena Kagan should strive to do justice to the seat she will be inheriting, which was held by Louis Brandeis in the mid twentieth century.  For Rosen, this means developing a progressive jurisprudence on business and economic issues.

One question Rosen didn’t consider is this: if business and financial issues are so important in our era, why don’t the Supreme Court short lists ever seem to include business or financial experts?  Brandeis himself came to the Court with both private (that is, business and commercial) and public law credentials.  Others—most notably, William Douglas, a corporate bankruptcy scholar (heaven forbid!), who joined the Court in 1939—had even more business law expertise. Why isn’t President Obama—any more than President Bush before him—tapping into this kind of expertise?
One answer, I think, is that the networks that lead to the Supreme Court tend to be thin on business and financial experts. Perhaps because of the role the Supreme Court played on Civil Rights issues in the second half of the 20th Century, the very best students—the ones who are angling for clerkships with Supreme Court justices—often seem to focus heavily on Constitutional and administrative law. These students, many of whom go on to prominent teaching or legal careers, are the ones who are most likely to emerge as possible Supreme Court Justices two or three decades later.
Whatever the reason, I think we are entering a period—much like the 1930s and 1940s—when business and financial expertise are going to be crucially important on the Supreme Court.  Just imagine all of the judicial challenges to the new financial reform legislation if, as seems all but certain, it is enacted.  The current Court seems far from ideal for handling these cases.
Don’t worry. I’m not campaigning for the Supreme Court myself.  There are few jobs for which I would be less qualified.  But some of my best friends might make very good Supreme Court justices.

July 15, 2010

The New Financial Reforms--Skeel

With the Senate vote today, it’s all over but the signing. 

Readers have been kind enough to compliment me on a couple of recent predictions, so it’s only fair that I fess up to one I got very wrong. I said on more than one occasion that the politics of financial reform seemed different, and far less partisan, than with healthcare. In the end, they weren’t. As with healthcare, Republican objections did shape parts of the bill (the resolution regime was tweaked, for instance, and the $50 billion bailout fund was removed), but it’s Democratic legislation rather than a bi-partisan effort.
One of the most interesting decisions for President Obama is who to nominate to head up the new Bureau of Consumer Financial Protection (as the consumer regulator is now called). The obvious choice is Elizabeth Warren, who conceived the consumer regulator idea in the first place and has emerged as the nation’s most famous and effective consumer advocate. But Warren has had run-in’s in the past with several key members of the administration—she called Joe Biden out in an op-ed in the New York Times during the debates over the 2005 bankruptcy amendments, and she sharply criticized Hillary Clinton in her book The Two Income Trap. Warren also is controversial in Washington, with big fans but also big critics.
At another time, the controversy might persuade President Obama to go with someone else. But with foreclosure rates continuing to climb, I think Warren is the one. The administration still is widely viewed as having done too little to address the financial woes of ordinary Americans, and advocating their interests is precisely what Warren is famous for. The other possible choices don’t bring nearly as much to the table in this respect. Assistant Treasury Secretary Michael Barr is quite impressive, for instance, but he’s been closely associated with Tim Geithner (who’s rightly seen as close to Wall Street) throughout the crisis and reform campaign. 
As for the legislation as a whole, I do think it has a number of good provisions in it.  (I think the derivatives regulation has a lot to commend it, for instance).  But the overall thrust is to create a European style partnership between the government and the largest financial institutions, as I’ve complained about before.  I’m writing a book on the reforms on a breakneck schedule—to be finished by the end of August and published this fall—so I’ll no doubt have lots more reactions in the weeks to come.

July 21, 2010


Steven Davidoff (aka, the Deal Professor) has an interesting post on DealBook today speculating about whether regulators will step in and take over A.I.G. now that the new financial reforms (signed today) have given them sweeping powers to "liquidate" floundering, systemically important financial institutions.  The new resolution regime automatically applies to bank holding companies with $50 billion in assets; it isn't automatic with nonbanks, but regulators can designate those that are systemically important and pull them into the framework.  Once they're designated, regulators can take them over if they're in default or in danger of default.  I doubt regulators would go that far with A.I.G.  It's a bit too late, and A.I.G. has been scaling back on its own.  But regulators do face an interesting question whether to designate A.I.G. or any other nonbanks for inclusion now that the legislation has been passed.  If they don't identify any, it will undermine the credibility of the new resolution regime, since it will suggest regulators are just going to swoop in at the last minute when a big firm runs into trouble, as they did in 2008.  But if they designate a group of nonbank financial firms for inclusion, it will mark those on the list as special (and potentially too big to fail, though the resolution regime purports to end that) and spur speculation as to why others weren't included.

My guess is that regulators will at least designate A.I.G. for inclusion in the near future.  I doubt they'll designate many others.  But they do seem to need to designate at least one to show that they're serious about implementing the new regime.

July 22, 2010

Elizabeth Warren?--Skeel

The question whether President Obama will nominate Elizabeth Warren to head up the new consumer bureau has gotten so interesting I can’t resist another post. Here are some things I suspect the President is thinking about:

Reasons to pick Warren: 1) the liberal base: liberals will be outraged if the President picks someone else, which could further deflate the enthusiasm of his base, boding ill for the November elections; 2) She’s a true consumer advocate: if he cares at all about the new agency, it will be hard to pick anyone else; 3) when push comes to shove, it won’t be easy for Democratic senators to vote “no” on someone who has defined herself as a protector of middle class Americans. (Republicans won’t be the issue. My guess is that the three who voted for the financial reforms are possible yes’s, and the others will all be no’s.)
Reasons to pick someone else: 1) picking Warren could destroy the President’s relationship with the financial services industry (a relationship that is a lot better than people tend to think); this might not matter in November, but it could be a big problem as he raises money for 2012; 2) a vote for Warren would be a very difficult vote for moderate Democrats like Ben Nelson, who’ve already taken some tough votes this year; as a result, confirmability is a genuine issue; 3) Effect on markets and lending: Warren’s signature concerns, such as clamping down on further on credit card and mortgage loans, could scare the markets and prompt banks to further tighten their lending to consumers and small businesses. 
I still think it will be Warren.  To be sure, the President has been willing to eschew the preferences of his liberal base (See: Geithner, Timothy, nomination of). But I think there’s too much pressure for Warren.  My guess is that he’ll announce the choice tomorrow (Friday) night after the stock market closes, in the hope of dampening any negative market reaction.

September 5, 2010

Is Obama for or Against Wall Street?--Skeel

Two views on President Obama’s relationship with Wall Street seem to alternate in the media.  One view, increasingly prevalent of late, is that he’s hostile to Wall Street, perhaps even on vendetta against it starting with the Dodd-Frank reforms.  The other view suggests he coddles the big Wall Street banks.  Is Obama for or against Wall Street?

I think the answer is both. The Obama administration clearly is comfortable with the biggest banks (Citigroup, JPMorgan Chase) dominating American finance, and the new financial reforms won’t change this.  So in this sense the administration is Wall Street’s best friend—at least one part of Wall Street. But the administration’s willingness to interfere with one industry after another has seriously complicated business.  Everyone now has to spend as much time predicting political risk as economic risk.  The increased uncertainty is bad news for Wall Street more generally, and for everyone else.

November 2, 2010

TARP Confusion--Skeel

One of the biggest punching bag this election season seems has been the $700 billion TARP legislation that Congress passed in fall 2008 to rescue the banks. Those who voted no have trumpeted this fact, and many of those who approved have said as little about it as possible.

There were indeed several major problems with TARP and its rollout. The first was that then-Treasury Secretary Henry Paulson stunned Congress when he told lawmakers, with almost no explanation, that the economy would crash unless they immediately handed over $700 billion. Indeed, some studies show that the shock of Paulson’s Congressional appearance was the single most unnerving moment of the fall 2008 crisis. The second problem is that the TARP funds, which were designated for “financial institutions,” were treated as an all-purpose kitty that Paulson and his successor Tim Geithner could use for purposes that Congress never intended, like bailing out Chrysler and GM.
But this doesn’t mean that pumping money into the banking system was a mistake.  In my view, rescuing individual firms like Bear Stearns or AIG is almost always a terrible idea.  But if the entire banking system is on the verge of paralysis, as it was in 2008, industry-wide intervention is necessary.

November 21, 2010

Christ's Parables and Bank CEOs--Skeel

I’m just back from a wonderful visit to Liberty University’s law school, where I gave a talk called “Making Sense of the New Financial Deal.” (I also had a chance to spend several hours in the Jerry Falwell archives). The talk was based on the book I wrote this summer (due out any day now), and in addition tried to consider some of the Christian implications of the crisis and financial reforms.  

One of the sources I used for the last part of the talk was Christianity and the Social Gospel, a 1907 book by Walter Rauschenbusch, the most famous representative of the social gospel.   In critiquing the heads of the giant corporations of his own day, Rauschenbusch drew on Christ’s servant parables:
“In the parables of the talents and the pounds [Matthew 25:14-30; Luke 19:11-27], he evidently meant to define all human ability and opportunity as a trust. His description of the head servant who is made confident by the continued absence of his master, tyrannizes over his subordinates, and fattens his paunch on his master’s property [Matthew 25: 45-51], is meant to show the temptation which besets all in authority to forget the responsibility that goes with power. …”
Like the servants in the parable, Rauschenbusch argues, the head of a large corporation (such as, in our context, the CEO of a financial institution like Bear Stearns or Lehman Brothers) is a steward of the enterprise he oversees and bears the responsibility of a steward.
I find the connection Rauschenbusch draws between the servant parables and the heads of corporate enterprise quite compelling. And it strikes me as a very useful framework for thinking about the failures of the CEOs of the largest financial institutions that contributed to the recent crisis.
In my view, Rauschenbusch’s analysis also offers a useful illustration of the extent to which Scripture gives us clear and at times uncontestable teaching on a political or social issue, on the one hand, and the extent to which the implications are less clear, on the other. Based on his analysis of the servant parables, Rauschenbusch makes an argument for nationalization of many large corporations. While his conclusion that the parables offer a telling critic of poor business leadership (and suggest what true servant leadership would look like) is persuasive, the policy implications he draws from this are much more debatable. In my view, Rauschenbusch’s call for nationalization would correct for the abuses of corporate leaders by inviting comparable abuses by government overseers of the big businesses. At least in the current environment, a more modest strategy of correcting regulation that encouraged misbehavior by bank executives (such as tax rules that abetted risktaking) seems more promising.
Like Rauschenbusch’s, my policy conclusion is of course debatable. I would argue that the critique of corporate leadership that flows from the servant parables is not.

November 24, 2010

Should States be Allowed to File for Bankruptcy?--Skeel

The next big bailout issue in the U.S. is likely to be the question whether to provide rescue financing for states like California and Illinois that are running huge deficits.  I make an argument for adopting a bankruptcy chapter for states, similar to the provisions we already have for municipalities, in this little magazine article.  In my view, bankruptcy wouldn't be a perfect solution, but it is likely to be a lot better than the current alternatives (such as a federal rescue or simply watching California default).

January 19, 2011

More on Bankruptcy for States--Skeel

I speculate a bit more as to what it might mean to have a bankruptcy law for states in this op-ed.  There seems to be a flurry of drafting activity going on, but no draft legislation has been released yet.  I'm hoping that will change shortly.

January 27, 2011

Listening to the Bond Market--Skeel

My friend Stephen Lubben had a characteristically interesting post on the bankruptcy-for-states debate in his Dealbook column yesterday. Stephen pointed out that the advocates for a bankruptcy chapter for states are overwhelmingly Republican, and concluded that this bodes ill for the prospects of enactment.

It seems to me that more Democrats should support the legislation—especially those who are concerned to protect public employee unions. Although they fear the legislation would simply be used to whack unions, in reality union contracts are already under great pressure, even without bankruptcy.   The virtue of bankruptcy—at least as an option in the direst circumstances—is that it would bring everyone to the table, and ensure that everyone made sacrifices as necessary.
Which brings me to the bond markets. Republicans definitely aren’t united in favor of legislation at this point. My sense is that many who oppose a bankruptcy option—such as Eric Cantor—have bond traders whispering in their ears. The standard refrain is that a bankruptcy option would be devastating to the bond markets, and would create chaos for all states, even the financial stable ones. It’s possible that a state bankruptcy option would have adverse effects on the bond markets, but I think the effects are greatly overstated. The markets are very good at distinguishing between troubled borrowers and healthier ones; and even troubled borrowers often can quickly return to the markets after a rough patch. (On the international stage, Argentina has shown how this can be done—almost too easily).
Moreover, bankruptcy is much less destructive than a complete default by a state on its bonds, which is a real possibility with a couple of the most troubled states. In bankruptcy, the bonds could be trimmed a little, along with the state’s other obligations.
Hopefully, no state would need to use a bankruptcy option. But if worst came to worst, having the option seems a lot better than not.

February 17, 2011


I once wrote a poem about the bankruptcy and liquidation of a department store called Arlan’s, which figured prominently (the store, not the bankruptcy) in my own childhood. The news that Borders had filed for bankruptcy didn’t have quite the same effect, but it isn’t far off.

Borders was the first store with a café in Philadelphia—before Starbucks and before Barnes & Noble-- at least as I remember. I spent hundreds of hours in the Borders in Center City, Philadelphia in the 1990s, sipping coffee, reading or working, and wandering over to the shelves to look at the poetry shelves, or essays, or other things. Borders was as likely to have an odd or unusual book as a good library. They also had wonderful readings (as well as a few very strange ones).
Bankruptcy doesn’t mean that Borders is destined to become simply a memory, but the odds of a successful restructuring don’t seem great. Unfortunately, the very qualities that make Borders (for me, at least) a far more appealing bookstore than Barnes & Noble may weigh against survival. Barnes & Noble is full of best sellers and management books, and rarely seems to have anything else. This is no doubt the only plausible strategy in a world where you can get any book in the world from Amazon in four or five days. Best to keep the books everyone wants right now, because anything more interesting will spend too much time on the shelves.  
Borders did spell doom for many a small, quirky, local bookstore.   But Borders was an excellent bookstore itself. I for one will miss it a great deal if it doesn’t survive bankruptcy, or survives as only a handful of stores.

April 20, 2011

Magical Thinking at the FDIC--Skeel

The FDIC has just released a report speculating about how Lehman’s crisis would have been handled if the Dodd-Frank Act had been in place in 2008. As the report imagines it, the FDIC would have intervened early in the crisis, and guided Lehman to a soft landing that got the utmost value for the business. The FDIC “could have participated in a meeting in the spring of 2008, together with [other regulators], to outline the circumstances that would lead to the appointment of the FDIC as receiver.” The FDIC could have parachuted in and conducted on-site oversight on Lehman’s premises from that point forward.   The FDIC could have prodded Lehman to sell itself or, if “Lehman were unable to sell itself, the FDIC would have commenced with marketing Lehman.” Once Lehman was taken over pursuant to the new resolution rules, the FDIC “would have minimized losses and maximized recoveries,” assuring that Lehman’s general creditors recovered roughly 97% of what they are owed—as compared to the roughly 20% they are likely to get in the actual bankruptcy case.

Heroic assumptions abound, such as an assumption that the counterparties to Lehman’s derivatives would have been fully collateralized. Most heroic of all is the suggestion that the FDIC would have deftly nudged Lehman to plan for its demise, and that the FDIC would be able to handle a resolution on this scale.   The Dodd-Frank Act does include provisions that could improve regulators’ oversight in the future, such as its requirement that systemically important institutions prepare a “living will” (or “rapid resolution plan,” in Dodd-Frank terminology) that explains how the institution would respond to a crisis. But the claims that regulators will intervene early in a future crisis rather than delaying the inevitable (that “next time will be different,” to paraphrase the title of a recent book on financial crises), and that they’ll foreswear future bailouts because Dodd-Frank says they aren’t supposed to do them, are wildly implausible.
Perhaps the most interesting question is why the FDIC would write a report that could prompt guffaws from financial experts. Two possible reasons come to mind. First, the FDIC made these kinds of claims throughout the debates that led to Dodd-Frank, and somehow they worked. The FDIC was given extraordinary new powers under the new resolution rules, even though the FDIC’s track record in handling large cases is not good. Second, the FDIC has been floundering in its efforts to implement Dodd-Frank’s new requirements. It may be that the report is designed to distract attention away from growing fear that the living will requirement will not be effectively implemented, and that the resolution rules are a disaster.

June 6, 2011

A Dissenting Note on the Auto Recovery--Skeel

Enthusiasts for the Chrysler and General Motors bailouts have been congratulating themselves as the car companies' prospects have improved in recent months.  As won't surprise anyone who has followed this blog, I worry that the wrong lessons will be drawn from the resurgence.  Some of the costs of the bailouts, at least as I see them, are outlined in this op-ed.

June 12, 2011

Recent Tributes

Peter Conti-Brown has written a lovely tribute to Bill's mode of scholarship using illustrations from a discipline dear to my own heart: corporate law.  It can be accessed here.

The Harvard Law Review's June issue will have a series of short tributes to Bill.  As soon as it's available, I will post a link.



September 28, 2011

Lehman and the Eurozone Crisis--Skeel

Everyone, even German Chancellor Angela Merkel, seems to be comparing the Eurozone crisis to Lehman Brothers’ collapse three years ago. According to this reasoning, the default of Greece (or Portugal, Ireland, Spain or Italy) could trigger market chaos, just as Lehman supposedly did in 2008. My own view of Lehman, as a few readers of this blog may remember, is that the conventional wisdom is mistaken in almost every respect. Lehman does seem to me a useful analogy, however. The reason Lehman’s collapse came as such a shock was that the decision to rescue Bear Stearns six months earlier seemed to signal that large troubled institutions would be bailed out. Everyone understandably expected a bailout, and was stunned when no bailout came. European leaders have boxed themselves into a very similar corner. Even now, few think that they will let Greece default, despite the fact that Greece is clearly insolvent and has no real prospect of repaying its debt.

In other contexts (states, large financial institutions, Argentina in the early 2000s), I have argued that a bankruptcy is likely to be a better solution than bailouts or a default. There are some good arguments for creating a European bankruptcy framework. European countries already have given up some of their sovereignty, for instance, so bankruptcy would only be a limited additional interference; and countries such as Italy may be too big to bail out. But I’m not sure if bankruptcy would be the right answer here. The banks of other European countries, especially France, hold large amounts of Greek debt. If a bankruptcy regime were in place and Greece used it, the bankruptcy would have serious knock on effects in these other countries. It’s not clear whether countries like France or the E.U. could plausibly contain the effects on the banking sector. I may eventually cast my own lot for bankruptcy here as elsewhere, but the overall case seems a little murkier.

October 5, 2011

The Suskind Book--Skeel

My first reaction to the reviews of Ron Suskind’s new book about the Obama administration’s handling of the economic crisis was that it mostly seemed to confirm widely held views, such as the perception that President Obama and Treasury Secretary Geithner are both comfortable with big banks, and resisted to efforts to scale them down. (The one big exception was the President’s temporary decision to break up Citigroup, which was, according to Suskind’s sources, stymied by Geithner).

My other reaction was to marvel at how differently President Obama and Elizabeth Warren address politically sensitive issues. The President often seems to tailor his remarks to his audience. This got him in trouble during the 2008 campaign, when he told a group of Democratic contributors that ordinary Americans cling to guns and religion. During the economic crisis, he has berated Wall Street, on the one hand, while defending the too big to fail banks behind the scenes.
Warren recently caused a flutter when her quote (at a gathering of fervent Democrats) that no one got rich on their own, without the government, went viral on YouTube. In the Suskind book, she complains that the Obama administration can’t criticize Wall Street and at the same time “dump money in their laps and be credible.” Her message—that the government has a central role to play, that big institutions should be controlled, that consumers need a protector-- is almost the same in both contexts. Whether one likes the message or hates it, it doesn’t change from one setting to the next.

October 11, 2011

Occupy Wall Street--Skeel

My favorite piece on the Occupy Wall Street movement thus far is a commentary by John Gapper in last Thursday’s Financial Times. (In good capitalist fashion, FT puts articles behind a paywall, so I can’t link to the commentary here).  For Gapper, there’s nothing wrong with the movement’s confused messages—the mostly young protesters are angry at Wall Street and worried about the future, and appropriately so. He would be much more disappointed if the movement devolved into violence, as has occurred in Greece and London.

If OWS is like a Tea Party movement from the left-- I agree with commentators like Gapper who have suggested it is-- Democratic politicians should hesitate to assume that OWS is wind in their sails. Much as the mostly Republican Tea Party criticized President Bush’s spending and bailouts, the mostly Democratic OWS may indict President Obama for underestimating the seriousness of the economic crisis and failing to rein in the largest banks.
I don’t think a massive new stimulus would solve the economic malaise. Continuing to rely on government funding, and keeping the market at bay, seems more likely to prolong than to end this period of low growth and few jobs. If OWS is as varied and multi-faceted as it seems, perhaps one or two of the protestors might even agree.

October 21, 2011

The Eurozone Crisis--Skeel

Earlier this week, I wrote an op-ed on the Eurozone crisis that was inspired by a wonderful conference in Iceland two weeks ago, and follows up on thoughts from an earlier blog post.  The op-ed is here.

December 5, 2011

Was it Immoral for American Airlines to File for Bankruptcy?--Skeel

The former CEO of American thought so.  He's seems like an admirable leader, but I think he's wrong about bankruptcy.  Here's a little blog post elaborating on that theme.

December 7, 2011

Another View on American's Bankruptcy--Skeel

A friend sent an interesting email offering a less sympathetic view of bankruptcies like the American bankruptcy. With his permission, I thought I would quote it in full here:

"David: I read your post.  But it seemed to me that AA filing was, essentially, just another in the long line of U.S. board decisions over the last twenty-five years or so to use our liberal bankruptcy laws as a strategic restructuring tool to get rid of debt and contracts and employee obligations that they felt held back profitability and the stock price.  Chapter 11 is a wonderful tool for people who are essentially amoral, as many people in business and most lawyers are."

"I remember when I saw the amorality that accompanies most Chapter 11's up close and personal for the first time.  It was in July, 1977, when GAF Corporation, the company where I was SEC and finance counsel, did what was at the time a big divisional write-off and fired most of the workers at some factories in and around Binghamton, NY.  I worked on the SEC and financial aspects, but what struck me was stuff I learned talking to managers in Personnel: for example, how none of the second and third-tier managers questioned instructions to do things "in the most effective way" -- just telling hundreds of factory workers they were fired when they reported for their shift at 7 A.M. or 8 A.M., and instructing them to go downtown to file for unemployment, declining to arrange with the state department of unemployment to set up tables at the factory where workers could file for benefits more easily."
"Actually, I'm not sure whether the department name had yet been changed from "Personnel" to "Human Relations."  No matter; in my experience, "Human Relations" people are always the meanest, most unfeeling people around, people who live the Nuremberg Defense."

February 26, 2012

Odds and Ends--2012

In case anyone might be interested, here are a few recent op-eds and articles:


A recent op-ed on the mortgage settlements is here.

An op-ed from the beginning of the contraception crisis (before the more recent "compromise" from the Obama administration) is here.



An essay on the implications for law of the writings of the theologian Stanley Hauerwas is here.