The Big Do-Over

Lloyd and Me: Goldman Hysteria, Revisited

2010-04-28T17:33:00.047-04:00

In my last post, I suggested that the ranting in Congress over Goldman’s practices was a tad overdone, thus gleaning some interesting personal insults from Goldman-hating Seeking Alpha readers.

Guys, ya got me; Lloyd Blankfein bribed me to write that post.

Just kidding. Which is really too bad, because I imagine that a Goldman bribe would be the kind of dough that could put all of Octomom’s kids through college and grad school, with enough cash left over to bail out Greece.

Anyone who's spent any time on The Big Do-Over (or my old blog, Proxyland) knows that I’m not in the habit of writing stuff that would inspire Goldman Sachs to send me even one ugly firm-logo tote bag. But I always strive to be fair. And I just think that the portrayal of Goldman’s behavior by Senator Levin, and by much of the media, is becoming an unhelpful mash-up of:

- the SEC’s allegations in the Abacus case, which are plenty ugly, but are about a fraudulent failure to disclose, not about the firm's trading practices;

- some people's belated discovery that there’s no law on the books giving investment banks a fiduciary obligation to clients;

- genuine misunderstandings about industry lingo and the difference between institutional and retail markets;

- some vague notion that shorting in itself is evil; and

- the never-ceases-to-amaze-us reality that so many people got insanely rich doing stupid, venal, sleazy deals that we taxpayers then had to bail them out of. And that much of it was legal. And that they rarely show any remorse or gratitude. And that they’re still getting those huge goddamn effing bonuses.

Shucks, there goes my bribe.

Plus I don't get why all the fingers in Washington are pointing at Goldman. Let's reserve a few digits - maybe even the big one in the middle - for other firms that seem to have done similar stuff.

But I’ll say one thing for Mr. Levin’s hearing. By forcing an investment bank to explain on TV how the Street's principal trading business works, he’s given us a nice clear sight line into its short-termist, greed-driven business model. As Tom Brakke of The Research Puzzle said recently, "the firms act as if there is an inexhaustible supply of gullible clients."

Well, maybe there is, and maybe those clients will keep signing up for deals and paying the fees that feed The Great Big Wall Street Compensation Machine. But maybe not. Cynicism and distrust are spurting into the markets these days like ash from an unpronounceable volcano, and they might turn out to be our best friends.

Goldman Hysteria: Put Away Childish Things

2010-04-27T11:03:00.070-04:00

Kenneth Griffin, head of the Citadel hedge fund, says it's "childish" to use the uproar over Goldman’s Abacus deal as a basis for regulatory reform.

I feel ya, Ken. There are good reasons to be angry at Goldman, but this is turning into an extended Congressional tantrum aimed at just one of the many players we should be mad at. And when I look at some of the silly things Congress is doing, I want to pat it on the head, hand it a Dum Dum Pop and say: “Run along now and let the grownups talk.”

Silly Thing #1: Punching out Goldman for trading "against clients."

Sorry to burst your giant Ground Ball Grape flavored Big League Chew bubble, Congress, but this is what happens in the big leagues. Some clients go long and some go short, so as long we live in this universe – you know, the one where the Volcker rule doesn’t exist and proprietary trading at banks does – dealers will often take positions opposite to a client's.

Sure, I still want to send Goldman to detention and confiscate its Gameboy Advance. But the (alleged) misconduct in the Abacus trade wasn't about the firm's trading positions; it was about playing games and keeping secrets. In this great post on Interfluidity, Steve Waldman explains why Goldman should have told Abacus investors that John Paulson, a "speculative short," had helped choose the assets to which the CDO was linked:

That information would not only have been material, it would have been fatal to the deal, because the CDO’s investors did not view themselves as speculators.

(Bethany McLean also hit on the disclosure point in her New York Times op-ed today, as we did here at TBDO last week.)

But folks in Congress keep trying to spin the Abacus case into a broad condemnation of proprietary trading/market-making practices that, even if they make some people hopping mad, are widespread and legal.

Silly Thing #2: Punching out Goldman for shorting the mortgage market and thus losing fewer billions than folks who went long.

Oh, come on, Congress. If you were a Goldman shareholder, you’d be applauding the firm's genius. (Especially compared to, say, Citi.) As Lloyd the B said in his recent letter to shareholders, doubts about "the future direction of prices" inspired the firm to cut its mortgage-related investments back in 2007. Having attended a high school where it was totally uncool to be smart, I don't think Goldman deserves a wedgie just for being less stupid about the housing market than its competitors or its institutional clients.

As Felix Salmon wrote today (after watching Senator Levin punch Goldman on TV for selling mortgage products while shorting them):

If Goldman wants to go short mortgages and its clients want to go long mortgages, then it makes perfect sense for Goldman to sell mortgages to its clients.

Silly Thing #3: Endlessly yakking, yakking, yakking about Goldman, Goldman, Goldman...

As if no other financial institution around here ever did a shady structured deal or shorted something while selling it to investors. Yes, maybe in the same universe where Joan Rivers is the only celebrity who’s ever had plastic surgery.

image credit: mobilegrocerydelivery.com

Citi, the FCIC, and The End of History

2010-04-21T15:53:00.064-04:00

Yesterday I saw a preteen kid wearing a T-shirt that said: “I’m surrounded by idiots.” Bill Thomas, Vice Chair of the Financial Crisis Inquiry Commission, should totally have worn that shirt to the Commission’s last hearing.

As former high-paid Citi execs explained how the housing market's shocking, unforeseeable fall made them lose billions on what they'd thought were super-safe "super senior" CDO tranches, Mr. Thomas could barely contain himself. (Here’s the video from the hearing; Thomas gets rolling around 24 minutes in.) I’m not sure if the tone he took while questioning Citi’s former Chief Risk Officer, David Bushnell, is best described as Contempt Spiked With Incredulity or Incredulity Spiked With Contempt:

None of you ever heard the phrase ‘what comes up must come down’? You thought somehow housing was unique? Or are you familiar with other areas that never go down? Or why in the world would you pay anybody for risk management in the area of dealing with these securities if housing NEVER GOES DOWN?

To be fair, Citi’s risk models didn’t actually assume that housing prices would never go down, just that they wouldn’t go down quite so much. As Bushnell said in his written testimony:

Risk models, which primarily use history as their guide, assumed that any annual decline in real estate values would not exceed the worst case historical precedent. And since the beginning of World War II, nominal home prices in the United States had never decreased by more than five percent in any given year.

If I could pose my own questions to Mr. Bushnell and his fellow Wall Street risk managers, my tone would be one of bewilderment:

Question 1: Um, Mr. Risk Manager, does “history” only go back to the beginning of World War II? If so, kids sure are doing a lot of unnecessary homework.

Question 2: Did you happen to notice that your model historical period excluded the Great Depression?

Question 3: Forgetting all that, is it possible that the history of the housing market before the invention of mortgage-backed securities and CDOs wasn't even relevant? I mean, would you forecast the risk of airplane crashes based on how often they occurred in the 17th century?

Question 4: Did you ever hear that joke about what happens when you assume?

Later in the hearing, Mr. Bushnell confessed that he hadn't understood the need to stress-test for “things that have never happened before.” OK, sure, the people building financial risk models were math majors, not history majors. Still, I find it singularly odd that folks on Wall Street, the place that experienced 9/11 firsthand, would so readily believe that something catastrophic wouldn’t happen merely because it hadn’t happened before. I was in downtown Manhattan that day, and it sure changed my personal risk models.

Goldman and Paulson: Booty Call

2010-04-19T15:44:00.069-04:00

The name Goldman gave to its now-famous synthetic CDO deal - Abacus 2007-AC1 - sounds like a cute, cuddly robot from a Pixar movie. Turns out, though, it was more like The Terminator.

The way Goldman put the deal together was overly cute, too. Whether or not the SEC complaint sticks, what the firm did here feels ethically wrong, with a capital WR.

Goldman’s April 18 press release previews its upcoming defenses. First and foremost, they remind us, this CDO wasn't sold to mindless innocents. They say that IKB, the German bank that lost big bucks on the deal, was "then believed to be one of the most highly-sophisticated CDO investors in the world." (Fun fact: Goldman has added the "then believed to be" language since its April 16 press release.)

Sure, you can argue, as a lawyer friend did in an e-mail today, that big institutional investors have "the right to be stupid." These guys employ their own number geeks and they ought to do their homework carefully and thoroughly, which happens to be the same thing I lamely suggested to my son last night. (I wonder if IKB vetted the Abacus deal while watching the NBA playoffs, IM'ing 57 friends at once and plowing through a giant bag of Pirate's Booty.)

But the sophisticated investor defense seems disingenuous in this case. The SEC complaint says that Goldman involved an outside analyst, ACA Management, precisely because it knew IKB wouldn't be comfortable without some nerdy folks around "to analyze and select the reference portfolio." Goldman's marketing document boasted that “no rated notes in any of ACA’s CDOs have ever been downgraded," and also that ACA and the investors had an "alignment of economic interest." (Which was true, since they were all taking the dark side of John Paulson's bet.) Strangely, nowhere in the 28 pages touting ACA's wonderfulness did Goldman say, “oh, and BTW, this CDO is packed with crud that Paulson pushed to include because he thinks it's ripe for shorting."

The invisibility cloak that Goldman stole from Harry Potter and threw over Mr. Paulson, and the heap of pirate’s booty Paulson walked away with, are almost beside the point. The real problem is that Goldman pretended it was designing a deal for folks who wished to go long the underlying collateral, when in truth it was doing the opposite.

I'm giving Bond Girl the last word on the SEC's complaint:

"Why the hell would anyone want to be a client of Goldman Sachs after reading this?"

Greenspan on Financial Regulation: It's Complicated

2010-03-22T18:06:00.043-04:00

I just took a look at Alan Greenspan’s term paper for The Brookings Institution (called “The Crisis”), in which he reworks “too big too fail” as “too interconnected to be liquidated quickly.” If, in addition to monetary policy and bank regulation, the former Chairman had been in charge of naming TV shows, Lost would be called Individuals Whose Whereabouts Are Less than Fully Understood.

I would totally watch that show.

Anyway, speaking of things that are less than fully understood, Mr. Greenspan heaves some big sighs here over the “indecipherable complexity” that plagues our financial system and the products it churns out:

Neither bank regulators, nor anyone else, can consistently and accurately forecast whether, for example, subprime mortgages will turn toxic, or to what degree, or whether a particular tranche of a collateralized debt obligation will default, or even if the financial system as a whole will seize up.

OMG, it’s all so terribly complicated, whines the Maestro. He concludes that our best bet is to adopt “regulations embodying a forecast fail with regularity.” In other words - and, dude, we need some other words - we shouldn't expect regulators (including whatever systemic risk regulator we end up creating) to foresee the next crisis and head it off before it happens. The best we can do, the man is basically saying, is to make sure we’re in a better position to survive disaster.

What does this boil down to, regulation-wise, in Greenspan's view? Mainly, he thinks the government should require risk-takers to hold more regulatory capital and maintain more liquidity. And sure, we're all for that. But is that all there is?

Yes, Mr. Greenspan is right that even brainiacs can't grasp the risks of modern-day financial products, let alone stay on top of global systemic risk. Himself included, it seems. But there’s a weird passivity to his argument. He accepts without question the continued presence in our lives of CDOs and other structured products backed by assorted crud of unknown toxicity. What about the notion, floated by people like Kansas City Fed head Thomas Hoenig and, gee, Warren Buffett, that level-headed people ought to take arms against a sea of complex products and, by opposing, end them?

No, laments Mr. Greenspan, we can only prepare to suffer the slings and arrows of outrageous fortune, or, as he would probably put it if he were in charge of Shakespeare, “extreme negative tail risk.”

image credit: rosecityarchery.com

The FSOC and Systemic Risk: Maybe It Takes a Village

2010-03-18T10:57:00.086-04:00

In the final season of Lost, the main characters live in two universes and, for some reason, frequently gaze in mirrors. One guy saw his reflection in a glass microwave door, which made me wonder what Lewis Carroll might have dreamed up if he’d had a microwave.

At least we know that Lost will soon be over so we can resume our normal lives. Not so for financial reform, although we now have both an actual House bill (passed back in December) and Chris Dodd’s newly proposed Senate bill. And according to Barney Frank, the two bills are “more alike than they are different,” something we can’t yet say about the parallel lives of Sawyer, Jack and the other Losties. So who knows, maybe the big regulatory do-over will come to pass this year. (If you're one of the three people who still has patience for the political stuff, a great source is Politico's Morning Money.)

As I said here, gosh, over a year ago, it’s a given that any do-over will involve some government body looking out for systemic risk. The current bills would give this job to a new "Financial Stability Oversight Council" made up of the top financial regulators, who would meet to share cheese Danishes at least once a quarter.*

The FSOC would have power to do more than just yak, gather data and recommend stuff. If 6 of its 9 members think some financial firms are looking Too Big To Fail-ish, it could put them under Fed regulation, and if things start getting scary, make them sell assets or quit certain lines of business. (There would be a different process, outside the Council, for quickie liquidations of future AIGs.)

I’m not totally hating the council idea. As long as we lack the will to change the basic structure of financial regulation – i.e., It Takes A Confusing Village of Agencies - then by all means let’s force our regulators to sit regularly in one room and focus on the stuff they forgot about before, like leverage, risk management, and credit exposure. Even if you’re completely cynical, you can say that at least this makes it harder for them to blame each other and/or claim ignorance when the next disaster happens. If you’re slightly less cynical, you can say that it’s far better to have some kind of systemic risk watchdog than not to have one at all, and that the FSOC might shake up the regulatory status quo and force people to think more broadly.

If the FSOC becomes reality, its value will depend largely on resources, staffing, and, yeah, politics. Also, it must be able to find out if market players are in trouble without tipping off the Street, creating systemic panic, and causing potentially viable institutions to suffer Sudden Death By Collateral Call. Which is, interestingly, one of the few fates not yet experienced by any character on Lost.

*In Dodd’s version, the folks consuming Danishes at FSOC meetings would be the heads of the SEC, CFTC, FDIC and OCC, the Fed chairman, the chief of the consumer protection bureau that Dodd wants to insert into the Fed, the director of the Federal Housing Finance Agency, and some as yet unnamed person who knows something about the insurance business. Oh, and also the Treasury Secretary, who would chair the whole thing. Everyone gets one vote. The head of a new Office of Financial Research at Treasury would attend and presumably be entitled to a Danish, though not a vote.

image credit: www.rcmbc.com

The Big Do-Over vs. Googliath

2010-03-08T12:56:00.038-05:00

Two weeks ago, a bunch of wacky robots who work for some company named Google (which runs the Blogger platform we use around here) mistook The Big Do-Over for a "spam blog." Without warning, they kidnapped it and locked it in a windowless basement deep beneath the Googleplex. It wasn't clear it would ever resurface.

Today the blog was freed, and it's standing here blinking in the sunshine. Thanks, Google, but may I say something? After days spent haunting your "help" forums, I've learned that your shiny happy company is running a dark creepy dungeon filled with people's Blogger blogs, AdSense accounts, and Gmail accounts. Freeing oneself is a Kafkaesque process, and not everyone succeeds.

Yeah, OK, many of these blogs and accounts are guilty of spamming or other perfidies. But others, like my blog, are innocent. As one "mommy blogger" put it after begging Google, over and over, to give back the blog on which she'd chronicled 3 years of her kids' lives: "What kind of company would erase someone's life without CAUSE or warning and then refuse to help?" I gather they eventually got around to helping her, but the company's m.o here smacks of heedless cruelty, which one might say is a form of, um, evil.

Once I've recovered from the trauma, I may finally get off my ass and move to WordPress, where, I'm told, blogs get more love from Google's search engines than they get here on Google's own blogging platform.

Of course, if a human, rather than a robot, had checked out what we write here at TBDO, he or she would have realized that this is a blog about financial regulation and dozed off before doing us any harm, the way Dorothy passed out in the field of poppies while the Tin Man was unaffected.

It's good to be back.

image credit: gonemovies.com

Project Leniency: Rakoff Approves BofA Settlement

2010-02-22T18:04:00.032-05:00

Yesterday, Judge Jed Rakoff “reluctantly" approved the SEC/BofA settlement. For this stroke of grace, BofA should thank neither the judge, nor the attorneys who so ably represented it, but rather the arcane legal precepts that forced the court to give "substantial deference" to the SEC’s wishes. And, of course, they should thank the SEC for being a heck of a lot nicer to them than the judge thought was warranted.

The tone of Rakoff’s opinion is quietly, politely contemptuous of both the agency and the bank. Had the judging taken place on Project Runway instead of in federal court, no doubt His Honor would have said exactly the same thing about the settlement agreement that Michael Kors said about that white dress on last week’s show - i.e., that it resembled "a tornado of toilet paper."

The judge makes it absolutely clear that, if not for the annoying legal constraints he had to deal with, things would have ended differently:

"So should the Court approve the proposed settlement as being fair, reasonable, adequate, and in the public interest? If the Court were deciding that question solely on the merits -- de novo, as the lawyers say - - the Court would reject the settlement as inadequate and misguided. But as both parties never hesitate to remind the Court, the law requires the Court to give substantial deference to the SEC..."

Anyhoo, Andrew Cuomo now gets his turn, minus the deference. Let the toilet paper roll.

image credit: beautyandfashiontech.com

Why BofA Fired Mayopoulos: Really?

2010-02-19T12:06:00.081-05:00

So here, in all its glory, is Bank of America's explanation for firing general counsel Tim Mayopoulos during the BofA/Merrill merger back in December 2008. (The SEC backed up BofA's story in papers filed with Judge Jed Rakoff this week.) Basically, the BofA folks are saying that they needed to give the GC job to their investment banking head, Brian Moynihan, so he'd still have a high-level post after the merger.* Otherwise, they say, he'd have quit on them, and they wanted to keep him around.

Well, OK. Um. Dear BofA: I have five questions, each containing an implied “really?”

1. If you had no issues with Mayopoulos and you were kicking him out of his Aeron chair just so some bigshot could sit in it, why didn't you allow the man some notice? Sure, when firing trader/banker types, it’s customary to suddenly throw the person’s family photos into a cardboard box, shove him or her into the express elevator, and hit “L” for lobby. But this is highly unusual treatment for a general counsel, especially one who, according to Ken Lewis, served the bank “with distinction." And jeez, why wouldn’t anyone give the guy a reference?

Aside: If the members of BofA’s former management team are telling the truth here, we must conclude, at a minimum, that they are a complete bunch of dickwads. Excuse me. I meant graceless, unkind and unprofessional.

2. And, if you don't mind my asking, why didn't you try to keep him around on friendly terms - maybe even offer him a consultancy - to ensure your shareholders a smooth legal transition? Why just trash his years of institutional knowledge and his recent work on the merger? Ever hear of recycling?

3. So you're saying that General Counsel - a title Moynihan kept for one month, for gosh sakes - was the only placeholder job you could come up with? Should we assume, then, that if he hadn’t happened to have a dusty law degree hanging on the wall near the dartboard in his basement rec room, you'd have let him walk? My goodness, how hard would it have been just to invent a new position for him with a cool title, something like "Head of Global Importance" or "Chief Title Inventor"? Don't companies do this every day?

4. Who, exactly, OK’d the conflict of interest/compliance nightmare created by having Moynihan take over as GC while still temporarily heading your investment banking operations?

5. Why did your press release say that you were appointing Moynihan as GC because "in these tumultuous times, the role of general counsel requires broad business and legal expertise"? Well, maybe we can answer that one ourselves: you said that because you knew it sounded better than the real reason - whether the real reason was the one you want us to believe or the one Andrew Cuomo wants us to believe.

Answers will be accepted by email, phone or tweet. Thank you.

*Merrill's John Thain was to supposed to run investment banking after the merger, but Moynihan ended up getting the job back 4 months later.

p.s. It's not surprising that Moynihan quickly jettisoned the GC title; while it may sound prestigious to the outside world, anyone who’s worked in a financial firm knows that lawyers are viewed as, at best, clueless "non-producers," and at worst, delegates from a legal nanny state whose main function is to nix the brilliant money-making schemes of bankers and turn them, too, into "non-producers." For this reason, attorneys have traditionally ranked just a few rungs above the “tea ladies” who, well into the 1990s, wheeled carts laden with Earl Grey and biscuits around trading rooms in the City of London. (And, btw, what’s wrong with “Chief of Strategic Biscuit Planning”?)

image credit: wrongwroks.wordpress.com

Rakoff to BofA: Happy Valentine's Day

2010-02-12T15:22:00.065-05:00

Judge Jed Rakoff has a Valentine's Day gift for Bank of America and the SEC: he's giving them one last chance to make him fall in love with their proposed settlement agreement. But to do that, they'll need to defuse Andrew Cuomo’s highly entertaining complaint against BofA - which is, as the judge put it, “far more suggestive of intentional fraud than anything presented by the SEC.” And the judge wants their love notes on his desk by Tuesday.

In the BofA/SEC version of the story, BofA's lawyers had said it was OK not to tell shareholders, before they voted on the 2008 merger with Merrill Lynch, about Merrill’s mounting losses and the lovely bonuses that were to accompany them. But Cuomo says that BofA execs concealed the losses from general counsel Tim Mayopoulos because they knew he'd ruin the fun and make them disclose - and that the second he found out the truth, they fired him. (Presumably, BofA’s submission to Rakoff will be entitled: "Yup, It’s a Total Coincidence That We Suddenly Fired Our Top Lawyer Smack in the Middle of One of the Most Legally Fraught Transactions Ever Done in the History of the World and Replaced Him With a Banker Who Happened to Have A Law Degree But Hadn’t Practiced in 15 Years and Who, BTW, is Now Our CEO.” )

Apparently, the judge hopes the new evidence will help him figure out whether CEO Ken Lewis and CFO Joe Price were liars, damned liars, or just plain airheads. (BofA does seem to be full of airheads; I recently closed my checking account because the bank was so ditzy that, even after repeated letters and phone calls, it couldn’t keep straight whose name and address belonged on the statements.)

Take Cuomo's account of a conversation between Mr. Price and BofA’s Treasurer, Jeffrey Brown, that (allegedly) took place right before the shareholders' merger vote. At that point, Merrill’s losses had reached $9 billion after taxes and Brown suggested that it would be good to disclose them. When Price poo-poohed his concerns, testified Brown, “I stated to Mr. Price that I didn’t want to be talking through a glass wall over a telephone.” But even this alarming statement didn't inspire Mr. Price to reveal the losses, and anyway he says he doesn't remember it - which may narrow things down to either damned liar or airhead.

Colorful moral of the case: Sure, maybe you can convince yourself that your disclosure obligations fall into a legal gray area. But when one of your senior finance guys starts having visions of orange jumpsuits, it's time to tell shareholders that your merger partner is way in the red.

Although Mr. Price still has a nice job at BofA that pays him a quite a bit of green, so maybe I should rethink that moral.

image credit: health.com

Bank of America vs. SEC vs. Rakoff: It's On

2010-02-10T14:27:00.083-05:00

This week the Times published a photo of the top SEC enforcement staff, arms crossed, unsmiling. It looks like the promo for a new TV drama about a regulatory agency, except that the TV enforcement team would include more women and they'd all look like Mariska Hargitay.

Tough as these folks appear, if you entered the entire SEC staff into a cage match with Jed (“The Rake”) Rakoff, the badass judge who’s overseeing the agency’s settlement with Bank of America, His Honor would take them all, one by one.

Oh, wait. Actually, the SEC is in a cage match with Judge Rakoff. And he's beating the crap out of them.

Last summer, as I noted here, Rakoff rejected the SEC’s settlement with BofA because he thought they were being way too nice. (As you’ll recall, the SEC had sued the bank for not mentioning to shareholders, in the proxy statement for the Merrill merger, that Merrill would be paying up to $5.8 billion in bonuses from its deathbed.*)

This week the agency presented Rakoff with a slightly tougher settlement, imposing new governance standards and upping the fine from a hilariously low $30 million to a still amusing $150 million. But according to law.com (whose coverage of the case has been excellent), Rakoff is still bent on finding out whether BofA was "culpable or simply negligent." In other words, did the bank's management think (erroneously) that it was OK to omit the bonus disclosure, or did they omit it knowing that wasn’t OK?

We don't yet have definitive proof that it was the latter. But it’s easy to imagine how, at that insane period in the fall of 2008, BofA's top management might have decided to violate the law. Having stupidly agreed to the bonuses, here were their choices:

Choice #1: Disclose the bonuses in the proxy and bring down upon their heads an unimaginable amount of sound and fury. In addition to being unpleasant, this might well have blown up the merger and done who knows what to the markets.

Choice #2: Keep the bonuses secret until the merger went through, and expect shareholder lawsuits and some flak from the SEC. This might have seemed far less scary than Choice #1 at the time. Remember how nicely the SEC treated Hewlett Packard when it didn't bother to disclose that one of its directors had resigned in a huff over the company's 2006 spying scandal? Even though disclosure is supposed to be the hallowed principle underlying all of American securities law, the SEC didn't ask HP to admit any wrongdoing, revamp any procedures, pay any fines, or even run to Starbucks and bring it a cup of coffee.

In hindsight, Choice #2 turns out to have been pretty risky. The world has turned upside down since 2008. And both The Rake and New York AG Andrew Cuomo, who badly needs a nickname, are on the rampage.

*The bank is also accused (by both the SEC and Cuomo) of concealing Merrill's losses, but we'll leave that for another post.

image credit: onlineworldofwrestling.com

Resolution Authority: A Lost Cause?

2010-02-08T12:56:00.046-05:00

Last week the New York Times ran a story that, in the print version, was headlined “Bipartisan Financial Reform Talks Crumble in the Senate." My first thought upon reading this headline was to wonder if I still had any of those crumbly shortbread cookies I bought last week. (Sadly, not.)

My second thought was that maybe, rather than waiting around for Congress to pass sensible, comprehensive financial reform – which will presumably happen right after Hell’s residents start ordering parkas from L.L. Bean, the moon waxes turquoise, and the Saints win the Super Bowl (hey, one down!) - we should table all attempts to fix the crap that got us into this crisis, and instead just try to fix the crap this crisis has gotten us into.

By "the crap this crisis has gotten us into," I mean, mainly, the Too Big To Fail thing. Like the Smoke Monster on Lost, TBTF could jump out of the jungle at any second and drag us all into a hole.

In other words, maybe it’s time for Mr. Obama to reboot back to last March, during the fuss over AIG’s 2008 bonuses, when his top priority was to get the power to liquidate failed non-banks so taxpayers wouldn’t have to bail out any more of these jokers. Anyone remember this? Yeah, for about a nanosecond, the administration talked about moving “resolution authority” ahead of the rest of its reform package, in case another firm decided to go on and implode while the imploding was good.

But the President gave up on that idea, and a year later there's still no resolution authority. So if anyone implodes, we'll be stuck watching a rerun of either The AIG Show or The Lehman Show, even though neither had much of a fan base. By contrast, the measure that was included in the House bill passed in December sounds pretty attractive:

"If a large institution collapses, the bill holds Wall Street - not taxpayers - accountable. Any costs associated with dismantling a failed firm will be paid first from the company’s assets at the expense of shareholders and creditors. Any additional costs will then be covered by a 'dissolution fund' pre-funded by large financial companies."

Of course, who knows if there would be any hope of getting this through Congress as a stand-alone bill. Surveys show that 130% of Americans think the bailouts were an even worse idea than moving Project Runway to L.A., so you’d think our elected representatives would want the federal government to have the power to make failed financial companies go away. But logic seems a useless tool, now that every legislative debate has become that argument my sister and I had on a daily basis when I was in 4th grade: “Did!” “Did not!” “Did!” Did not!”

As we all know, that argument can continue for an eternity, so I guess I’ll just end this post here.

image credit: theonion.com

Obama on Financial Reform: Man of Few Words

2010-01-28T13:12:00.022-05:00

Given the ongoing tantrum that is our political discourse these days, there’s not much you could say about last night’s State of the Union address that would make everyone nod their heads in agreement. But I think I’ve managed to come up with something, which is “man, that speech contained a lot of words.”

However, only 170 of those words were devoted to financial reform, including these: "If the bill that ends up on my desk does not meet the test of real reform, I will send it back until we get it right. We've got to get it right. "

That's good news. But what does the President consider the test of real reform? Last night he mentioned only two things:

#1: "We need to make sure consumers and middle-class families have the information they need to make financial decisions."

#2: "We can't allow financial institutions, including those that take your deposits, to take risks that threaten the whole economy."

Sentence#2 clearly refers to the Volcker Rule, this month’s "it girl" of financial regulation. (Yeah, I know my slang here dates from the 1920s, but so does Mr. Volcker.) Sentence#1, however, is so vague that it could refer either to the proposed Consumer Financial Protection Agency or to something less ambitious, like merely requiring consumer information to be written in plain language. (Not that we shouldn’t all jump to our feet and applaud loudly for that one.) This ambiguity was probably deliberate, as the new consumer agency seems unlikely ever to become a reality - though maybe James Cameron can design some 3-D glasses that make us think it’s there.

I’m not sure if Mr. Obama singled out these two parts of his reform agenda because they’re actually his top priorities or because it was easier than explaining on national TV why he wants standardized swap transactions to clear through central counterparties. I know the President is rather busy, but even us financial regulation geeks can’t figure out which reforms he’s likely to go to the mat for. Perhaps he just doesn’t find the subject compelling; in the 10 months that have passed since the administration first outlined its reform proposal, no one has bothered to add "financial reform" to the "Issues" list at the top of the White House home page. (It’s barely even mentioned under “Economy.” Stupid.)

Personally, I would have liked to hear Mr. Obama give an excruciatingly long explanation of that swap transaction stuff last night, mainly because - like 2-year olds who spend the day throwing tantrums - members of Congress are cutest when they’re asleep.

image credit: screenrant.com

The Citizens United Case: Tutus Wanted

2010-01-23T10:00:00.061-05:00

The Citizens United case is the First Amendment version of US Weekly, which shows celebrities carrying grocery bags and wiping their kids’ noses under the headline "They’re Just Like Us!" When it comes to political speech, said the Supreme Court’s conservative majority, corporations are just like us. Which might be true, if "us" had a lot more money.

In a great Slate piece, election law maven Richard Hasen posed this question:

Should the American people, through Congress, be able to decide that the vast economic inequality that comes with our wonderful capitalist system should not translate into vast political inequality?

No we shouldn't, the Court decided on our behalf. This makes me sad, and even more worried about my country than I already was. But what bracing news for those banks that grudgingly cut their bonus pools this year! Now they have more money to throw at the November elections.

In a post here last May, I wondered whether my blog's subtitle - Fixing Financial Regulation - was too optimistic, and whether I should have gone with Can Financial Regulation be Fixed? I reserved the right to revisit this issue “anytime things look really bleak in Washington, or when I run out of sugar, whichever comes first.”

So here we are. I'm doing fine on the sugar front; in fact, I've got an unopened box of chocolate shortbread cookies. But this week, with the Citizens United decision and the political disarray caused by the ascension of Senator Brown, You’ve Got a Lovely Daughter, bleakness in D.C. has reached critical mass.

So starting Monday, I will restate the blog’s subtitle in the form of a question. (If nothing else, this will be good practice should I ever appear on Jeopardy.)

As for what the Supreme Court hath wrought, our only hope is that lobbyists will now get so giddy that they’ll dance themselves to oblivion in their Gucci loafers like the crazed ballerina in the 1948 film The Red Shoes, except she wore toe shoes.

But until we hear that folks at Patton Boggs are shedding their suits and donning tutus, we will firmly embrace the question mark here at TBDO.

Science Flash: Volcker’s Voice No Longer Audible Just To Dogs

2010-01-22T08:34:00.017-05:00

What a week for the geriatric set! First, retiring Manhattan District Attorney Robert Morgenthau - age 90 - took a new job at Wachtell Lipton. (I can’t imagine Wachtell expects much work out of him; I suspect he’s just a ringer for the firm's intramural b-ball team.) Then suddenly Paul Volcker, age 82, burst onto the scene as the new financial regulation centerfold, based on an idea he’d been trying to sell, to no avail, for months: making banks isolate hedge funds, private equity and “pure” proprietary trading from their normal, old-fashioned banking activities.

Of course, age doesn’t always bring wisdom. Take Alan Greenspan, who refused to snatch away the punch bowl even after people pointed out to him that the punch was growing smelly green froth on top.

Anyway, in an attempt to make sure that kind of thing doesn’t happen again, the President has embraced what he’s calling the “Volcker Rule.” Yo, P. Volck is in da house, y’all.

The financial world was shocked, shocked. For real, it seems. According to this FT story, entitled "'Volcker Rule' Takes Bankers By Surprise," even the lobbyists at the Financial Services Roundtable were blindsided. “We had absolutely no idea this was coming,” said Scott Talbott, one of the Roundtable’s lobbying gods.

So it’s odd that the written testimony Goldman’s Lloyd Blankfein submitted last week to the Financial Crisis Inquiry Commission contained what now sounds like a preemptive strike at Mr. Volcker’s proposal:

Some commentators have made statements about the nature and level of trading risk, including proprietary risk, that financial institutions undertake. There has been concern that institutions may be returning to the practices that contributed to the financial crisis. The fact is that for Goldman Sachs, the vast majority of risk we take and the revenues we generate are dominated by trades that advance a client need or objective. Our market making businesses require assuming risk and significant amounts of capital and are deeply imbedded in our risk management processes.

Yeah, so, Goldman is more plugged in than the rest of us. I’m shocked, shocked.

Herd on the Street: Fun With the Financial Crisis Inquiry Commission

2010-01-20T16:24:00.022-05:00

The new Financial Crisis Inquiry Commission, chaired by Phil Angelides, was inspired by the Senate's Pecora Hearings on the 1929 crash. Those hearings bore the name of the Senate Banking committee’s chief counsel, a respected New York prosecutor named Ferdinand Pecora.

Pecora is also the Italian word for sheep (whence comes Pecorino cheese). Coincidentally, if sheep could talk and have jobs on Wall Street, you might expect them to say exactly what Jamie Dimon bleated last week at the FCIC’s first open meeting: “In mortgage underwriting, we somehow missed that home prices don’t go up forever.”

Jamie, I actually think you deserve mucho credit for not having followed the herd a few years ago into CDOs and subprime debt. But, I mean, did you hear what you just said? I’m just saying.

Thankfully, the FCIC also heard from Denise Voigt Crawford, Texas securities commissioner and head of NASAA. Never mind what that stands for, but it’s the group representing all 50 state securities regulators. I once interviewed Crawford for an article and she seemed smart, down-homey, and dedicated. Her statement is worth reading; it makes the case for strengthening state regulation, which was gutted back in 1996 by the comically named National Securities Markets Improvement Act.

For example, Crawford notes, states can no longer regulate private placements - which the feds don’t, as a practical matter, regulate either. This has created a “regulatory black hole,” she says, attracting unsavory folks whom the states lack power to smack down. It’s a bad scene, believe me: we’re letting people buy securities from the kinds of guys who put Brylcreem on their comb-overs.

And ouch, here’s what Ms. Crawford had to say about the SEC:

"Ironically, in its own enforcement activities, the SEC has not met the standard of conduct that it requires of the broker-dealer firms it regulates. On numerous occasions, the SEC has failed to detect abuses or has failed to take appropriate action despite the appearance of 'red flags,' where similar conduct by a broker-dealer firm would invite SEC disciplinary action."

Because I wish the FCIC well - and because I love cheese - I suggest we rename it the Gruyere Commission. I have some of that stuff in my fridge right now and damn, is it good.

image credit: bigoven.com

Financial Reform: The Missing Headlines

2010-01-11T17:36:00.054-05:00

An ex of mine had a motto: “Never apologize, never explain.” Which explains, in part, why he’s an ex.

Still, there are times when I, too, adopt this tactic. For instance, you might think you deserve some explanation or apology from a blogger who said she was monitoring the overhaul of financial regulation, yet suddenly disappeared while financial regulation was (sort of) being overhauled. But why should I feel guilty? The House Republicans disappeared too.

I did miss a few things, of course, like the House's passage in mid-December of a major reform bill, H.R. 4173. But it's also true that NONE of the following three headlines appeared during my four-month absence:

Headline #1: Sweet! Obama Signs Sweeping Legislation Reining in Wall Street, Empowering Consumers and Remaking the U.S. Financial System: World Rejoices, Buys Itself a Diet Coke

Instead, all we got was that House bill. Not nothing, mind you. But not yet something, either.

Headline #2: Ken Feinberg Goes All Spanish Inquisition on Wall Street Pay: Chastened Bankers Eliminate Bonuses, Join Sam’s Club

Instead, we got more big bonuses. Well, it wasn't actually us who got them.

Headline #3: Congress Shuns Financial Services Lobbyists, "DKs"* K Street

Instead, we got un-shunned lobbyists.

So I’m, um, back. Hey guys, what’s up?
_____________________________________________________
*Message to non-financial folks: First, why are you here boring yourself with this stuff? Please go and find out for me what night the Lost season premiere airs. Second, “DK” stands for “don’t know,” which is a nice way for a firm to say “WTF is wrong with this trade? I’m rejecting it, dude.”

Financial Regulation Equals Health Care, Minus the Guns

2009-09-10T11:33:00.022-04:00

In his big health care speech last night, the President asserted that "now is the season for action." Yeah, isn't that what we all hate about September?

Mr. Obama has many skills, but he has yet to learn the art of creative procrastination. Can't say the same for me. For instance, in an attempt to avoid reviewing my brokerage statements, I picked up my guitar and tried once again to master the riff from “Sweet Home Alabama,” which was assigned in my guitar class. I figure this skill will be invaluable should I ever stumble on a time machine that takes me back to the 70s so I can impress teenage boys. Thanks to procrastination, I will be ready.

In a similar vein, the Administration and Congress should consider procrastinating - creatively - on the unpleasant task of health care reform. As the Lehman anniversary approaches, how about putting off the medical stuff and turning back to financial regulation? Remember that issue? No? OK, well here's a handy refresher from Reuters on the proposed regulatory reforms.

As far as I know, no one has yet toted a gun to any discussion on financial regulation. If you have plans to do so, I would advise that you trade in your gun for a high-quality pillow; with enough memory foam, you won’t remember what some bureaucrat said about the wonders of clearinghouses for derivatives.

Members of the House Financial Services Committee may be getting with the procrastination program. Next week a subcommittee will hold a hearing on "the role of technology in financial services oversight." So let's all drop our guns and grab our pillows. As for me, I plan to spend the fall months practicing bar chords and recruiting on Craigslist for my new punk girl group, Sarah and the Death Panels.

image credit: fairdiscountstore.com

Merrill Bonuses: Judge Rakoff's Startling Questions

2009-08-11T17:42:00.046-04:00

Oh, that Judge Rakoff is such a spoilsport, refusing to bless the SEC's settlement with Bank of America on the Merrill Lynch bonuses.

The Times said today that the judge may hold a hearing to find out whether the bonuses - all $3.6 billion - were necessary. More specifically, he'd like to know if Merrill's management really tried to figure out "how many of the roughly 39,000 bonus recipients would have left had they not received their payouts."

In response, Bank of America's lawyer said the bank could prove "there were a number of companies that might have hired Merrill’s employees.” Which is nice, but doesn’t really address the judge’s concern.

Rakoff is asking about the process: Did the board ask management to prove these bonuses were essential, and did management meet that burden? To do so, I think, would have required them to muster empirical evidence on the following points:

- Exactly which employees were likely to stomp out the door if they got smaller bonuses, or no bonuses, and how management knew this in advance.

- Whether all hell would really break loose if some of these folks left.

- Whether or not the firm could recruit, on the streets of Lower Manhattan, some dazed but qualified victims of Wall Street’s bloodbath who'd be willing to work for less than $3.6 billion.

Did the board ask for such factual backup? I’m guessing no. The “science” of executive compensation is a strange kind of science, in that it’s pretty much devoid of both evidence and experimentation. Year after year, public companies assert in proxies that their compensation programs are exquisitely designed to retain each indispensable, irreplaceable employee. A less generous pay scale just wouldn’t do the trick, we’re told. But few firms tell us how they know this. Nor do they road-test different compensation schemes.

For empirical research on whether compensation methods actually work the way they're supposed to, we’ve got to resort to academics. Like these guys, who concluded a couple of years ago that stock options encourage foolhardy risk-taking. Hey, how about that.

How can you say your compensation structure is efficient and effective if you never experiment with a cheaper one, even when the world is coming apart at the seams and you have a perfect excuse for cutting pay?

Thanks to a crabby guy in robes, one company may soon have to answer that question.

image credit: www.clarksonlab.com

Consciences, Liberals, Banks, and Blankfein

2009-08-04T13:48:00.016-04:00

Not long ago, if you needed someone to argue unabashedly that banks ought to serve the public interest, you'd have to locate a lefty thinker like Robert Kuttner, co-founder of The American Prospect magazine, and tear him away from his slice of vegan tofu pie with soy milk.

Kuttner has suggested that the financial sector should be treated “more like a public utility.” In a report he did for Demos called “Financial Regulation After the Fall,” he proposes that before a bank can unleash a financial innovation on the world, it should first have to prove that its new doodad will make the economy better, not worse.

Kuttner’s thinking on such matters long predates the latest crisis. According to his bio, he’s been interested in “harnessing capitalism to serve a broad public interest” for the last four decades. Now that’s what I call forty years in the desert.

Hey, welcome back from the Sahara, Bob. Maybe. Joe Nocera of the Times used his column last weekend to float the increasingly popular notion that banks, particularly the bailed-out ones, ought to be asking what they can do for their country. He quotes Larry Summers: “It is very important that those in the financial system consider carefully their obligations to their fellow citizens.”

You know who else thinks the financial sector has responsibilities to the rest of us poor slobs? Lloyd Blankfein, CEO of Goldman Sachs. When Goldman returned its TARP money back in June, its check came with a letter to Congress in which Blankfein said that “the return of the government’s investment does not, in any way, end our obligations to the public interest.”

OK, cool, so I guess we all agree that from now on bankers will have a conscience and consider how their actions affect society? I hope Mr. Blankfein has made his public-spirited position clear, privately, to the Goldman folks he pays to lobby against regulatory reform. (As you may have heard, by the way, the Goldman team includes Barney Frank’s former top staffer.)

image credit: africatravelpictures.com

The Cuomo Bonus Report, Rhyme Added

2009-07-31T20:24:00.016-04:00

I must take issue with the title of Andrew Cuomo’s groundbreaking report on Wall Street bonuses, released yesterday: "No Rhyme or Reason: The 'Heads I Win, Tails You Lose' Bank Bonus Culture."

First of all, Wall Street’s bonus culture isn’t “heads I win, tails you lose.” It’s “heads I win, tails I win, and you don’t work here so remind me why I'm even talking to you?” Or, to quote Nine Inch Nails:

There is no you
There is only me

Second, the bonus culture is not without “reason.” You simply start with the numbers you want to pay, and then you come up with a reason to pay them.

For instance, according to Cuomo, Merrill Lynch paid a total of 3.8 billion in bonuses in 2008, a year in which its net losses were 27.6 billion. So there are your numbers. Now comes the reason: “As Merrill Lynch's performance plummeted, Merrill severed the tie between paying based on performance and set its bonus pool based on what it expected its competitors would do.” So, you see, it was still performance-based compensation. It just happened to be based on somebody else’s performance (though exactly whose, at that juncture, is another question, since Merrill's competitors were hemorrhaging too).

Third. That part about “no rhyme.” Irresistible:

There once were some Wall Streeters who
Had to live through a bad year or two.
With no rising tide to lift 'em,
They devised a new system
Where a giant black hole lifts 'em too.

Forgive me. It is Friday, after all.

image credit: www. dealbreaker.com

Regulatory Reform: Are We Anywhere Yet?

2009-07-29T15:52:00.019-04:00

So here it is, nearly August. In a speech at the National Press Club yesterday, Barney Frank insisted (“promised” would be too strong a word) that Congress would spit out a regulatory reform package by year-end.

OK, Barney, whatever. Remember when you said you'd get comprehensive legislation out of your committee by the end of July? Congress’s digestion of regulatory reform, which was supposed to be paced like a Coney Island hot dog-eating contest, has been more like a dog trying to gnaw its way through a large gob of peanut butter. (Click on the link; you'll like it.)

The elements of delay and confusion are all clicking into place:

- Addled and/or venal Congresspeople: check.

- Overstretched young administration pushing a crazy-big agenda: check.

- Regulators observing the law of Conservation of Turf: check.

- Lobbyists acrobatically arguing for the status quo: check.

- Lawyers expensively arguing for the status quo: check.

- Congress waiting until now to form a commission to figure out what went wrong: check.

- Set of truly complex and politically charged issues that the above cast of characters seems hopelessly unsuited to solving: check.

No big surprise that our political system is lying by the pool, snoring, an empty pina colada glass at its side, while Wall Street fills up its 2009 bonus pool. Ah, the dog days of summer.

image credit: aliensatemybabysitter.wordpress.com

Bernanke on Consumer Protection: Fur Not Flying

2009-07-23T20:08:00.011-04:00

Ben Bernanke is so cute and cuddly, especially for a Fed Chairman. Before his term ends, America’s toddlers ought to rise up and demand his face on a Beanie Baby.

So it’s jolting when Mr. Bernanke pushes back, as he did yesterday when speaking to the Senate Banking Committee about Obama’s proposed Consumer Financial Protection Agency.

According to this widely circulated AP story, headlined “Bernanke Resists Plan for Consumer Products Agency,” Bernanke “put himself at odds” with the administration, arguing that the job of protecting consumers “should stay with the central bank.” Similar press reports proliferated after the hearing.

Dunno, I listened to the Chairman's testimony, and it lacked any of the zing these reporters injected into it. In the most mild-mannered of tones, Bernanke merely asserted that the Fed had done some good stuff in recent years to protect consumers, acknowledged it hadn't done a terrific job on this issue in the past, and expressed confidence that it could do much better in the future. (He said Congress could help, e.g. by beefing up the Federal Reserve Act.)

When asked what he thought of Obama’s proposal to create a shiny new agency focused solely on consumers, all Bernanke said was: "I understand why some would want to see a new agency that would be fully committed to this area and I'm not criticizing that. I'm simply saying that, from the Federal Reserve’s perspective, we believe we can continue to do good work in this area." Which made him sound more like an earnest job applicant than an almighty regulator defending his turf.

True, Bernanke didn't exactly throw his support behind the new agency, and it’s clear he’d like the Fed to hang on to its consumer protection mandate. But to the extent the man threw his weight around at yesterday’s hearing, he seemed no heavier than a stuffed bear.

image credit: bigskymind.wordpresscom

Breaking News: Gladwell States The Obvious

2009-07-21T17:29:00.017-04:00

When I saw the subtitle of Malcolm Gladwell’s New Yorker piece about Wall Street (“Cocksure: Did Overconfidence Cause the Crash?”), I figured this gave me an excuse to write a very short blog post:

Duh, Malcolm.

But I decided this would be unfair to Mr. Gladwell. He did, after all, go to the trouble of interviewing a bunch of psychologists before concluding that “the roots of Wall Street’s crisis were...psychological.”

As an example of “maladaptive” overconfidence on the Street, Gladwell selects former Bear Stearns CEO Jimmy Cayne, pulling material from William Cohan’s book, House of Cards. (Cohan stuffed his book with fun, eye-opening details about Bear's last days; I've posted about the book here and here.)

Malcolm, you're cheating: Using Jimmy Cayne to illustrate the hubris of Wall Street is like using the New York State legislature to illustrate the dysfunctionality of government; it’s an over-the-top example. Way too easy. Yeah, Wall Street CEOs were arrogant, but Cayne was arrogant in 3-D and Surround Sound.

Actually, by choosing Cayne as his subject, Gladwell undermines his own argument that it was overconfidence, not incompetence, that got us into this mess, because Cayne makes an excellent poster child for both. (Oddly, Gladwell doesn't mention greed.) In one example from Cohan’s book, a Bear executive describes Cayne's behavior during a crucial conference call held for analysts as the firm teetered: “Our vaunted CEO was incapable of answering a single question.”

Overconfidence and incompetence. Makes for a nice double feature. Hand me some popcorn and a giant cup of high fructose corn syrup, please.

image credit: squidoo.com

Proxy Access: Shareholder Democracy, Maybe

2009-07-17T13:03:00.020-04:00

Great column by Floyd Norris today on the potential dark side of proxy access. Although I've made fun of the corporate establishment’s apocalyptic view of this concept, they're right that it carries some risks.

The combo of allowing proxy access and disallowing broker voting in director elections will definitely bring more democracy to the world of public companies. But will it be the kind of democracy we need?

It’s not easy, after all, to devise an electoral system that works. American democracy was designed by those wise Founding Father guys, and yet we just came damn close to putting a winking Alaskan on the threshold of the Oval Office, where you betcha she'd have been hanging out and coaxing President Melanoma McCain to come out and sun himself in the Rose Garden.

Corporate democracy, meanwhile, is being reshaped by a motley crew of forces, some focused on the greater good, others on what’s good for them. Among the players: federal bureaucrats; state legislators; large institutional investors loaded with conflicts of interest; unions wielding the power of their pension funds; the Business Roundtable and other lovers of the status quo; and a few colorful individuals like Carl Icahn and Nell Minow.

Like our political democracy, the new shareholder democracy will be subject to capture by the monied and powerful. Not to say that we don’t have this problem already; the velvet ropes outside the C-suite and boardroom are regularly parted so big institutional holders can be ushered in, while you and I, the bridge-and-tunnel shareholders, only know what the Chairman tells us - patronizingly - in the annual report.

Norris worries that, since proxy access makes proxy fights a much greater threat, institutional investors will be able to force management, behind the scenes, to do their bidding. “The greatest threat will not come from contested director elections…but from deals made by companies to avoid such a fight,” he writes. Maybe, he says, the SEC should require companies to disclose whatever compromises they make to avoid proxy challenges.

It's hard to argue with more disclosure. According to a favorite cliché of regulators, after all, sunlight is the best disinfectant. (Though if this were true, wouldn't operating rooms have sunroofs?) The SEC might also consider a "sunset" provision, where they try out proxy access for a few years and then, if they don't like it, they give up. Like a certain Alaskan governor.

image credit: chandlercoaches.wordpress.com