What We Really Need from a Bailout Bill: 58 Trillion Reasons

The CorporateCounsel.Net blog, Sept. 24, 2008:

Predictably, the bare-boned Treasury proposal for a bailout bill - frought with Constitutional problems - is receiving backlash on the Hill. Also predictable - given that elections are coming up - many key Republicans have come around to the notion that the bailout bill should include limits on executive pay (see this Washington Post article and NY Times' article).

However, the bailout plan is missing a strategy to fix the problems that caused all the problems that the market faces. Without a going-forward plan, I don't see an end to shoveling money to the bailout. Simply banning short sales ain't gonna do it. Yesterday, SEC Chairman Cox testified about some of these problems before the Senate Banking Committee - here is an excerpt:

"The failure of the Gramm-Leach-Bliley Act to give regulatory authority over investment bank holding companies to any agency of government was, based on the experience of the last several months, a costly mistake. There is another similar regulatory hole that must be immediately addressed to avoid similar consequences. The $58 trillion notional market in credit default swaps - double the amount outstanding in 2006 - is regulated by no one. Neither the SEC nor any regulator has authority over the CDS market, even to require minimal disclosure to the market.
Economically, a CDS buyer is tantamount to a short seller of the bond underlying the CDS. Whereas a person who owns a bond profits when its issuer is in a position to repay the bond, a short seller profits when, among other things, the bond goes into default. Importantly, CDS buyers do not have to own the bond or other debt instrument upon which a CDS contract is based. This means CDS buyers can “naked short” the debt of companies without restriction. This potential for unfettered naked shorting and the lack of regulation in this market are cause for great concern. As the Congress considers fundamental reform of the financial system, I urge you to provide in statute the authority to regulate these products to enhance investor protection and ensure the operation of fair and orderly markets."

Sovereign Funds Agree on Voluntary Rules

NYT DealBook, September 3, 2008:
A working group of the International Monetary Fund said it reached a preliminary agreement on guidelines for sovereign wealth funds that invest abroad. It didn’t disclose specifics of the voluntary code of conduct, which is to be presented to I.M.F. members in October.
Government-run funds in the Mideast and Asia have recently stepped up their investments in overseas assets, taking minority stakes in companies — and especially troubled financial firms — in the United States, Europe and elsewhere.
This trend has created concern in some circles, because these sovereign funds generally disclose little information about their strategies or holdings. In some cases, these investments have generated a debate about potential national security implications.
The International Working Group of Sovereign Wealth Funds, whose members include representatives from more than 20 countries, including the United States and the United Arab Emirates, agreed on a set of principles after a two-day meeting in Santiago, Chile, that ended Tuesday.
In a joint statement, the group’s two co-chairs, Hamad al Suwaidi of the Abu Dhabi Investment Authority and Jaime Caruana, director of the International Monetary Funds Monetary and Capital Markets department, said, “These principles and practices will promote a clearer understanding of the institutional framework, governance, and investment operations of SWFs, thereby fostering trust and confidence in the international financial system.”
The details of the new guidelines weren’t revealed, but some are already speculating that they may not address all of the concerns out there.
“A voluntary set of principles and practices goes a long way to help de-mystify the methodology of sovereign wealth funds and how they invest, Debbie Fuller of law firm Eversheds told the BBC News. “However, a voluntary code will not satisfy certain governments who were hoping for some form of compulsory transparency rules.”
Go to Article from BBC News »Go to Press Release from the International Working Group of Sovereign Wealth Funds »

With Much Applause: DOJ Revises Attorney-Client Privilege Guidelines

Last Thursday, the DOJ released a new set of guidelines regarding how it would charge companies. The new guidelines are effective immediately and they revoke earlier - and heavily criticized - guidelines issued under then-Deputy Attorney General Larry Thompson, which were then subsequently revised by then-Deputy Attorney General Paul McNulty. Here is the DOJ press release - and remarks from Deputy Attorney General Mark Filip.
The new guidelines parallel the legislative proposals contained in the reborn "Attorney-Client Privilege Protection Act of 2008," which has passed in the House and pending in the Senate. So we ponder the big question: whether the new guidance sufficently protects the attorney-client privilege and work product protection, or whether congressional legislation is still desirable?
Apparently, the sponsor of the legislation thinks so. Sen. Arlen Specter issued a statement Thursday that says: “The revised guidelines are a step in the right direction but they leave many problems unresolved so that legislation will still be necessary. For example, there is no change in the benefit to corporations to waive the privilege by giving facts obtained by the corporate attorneys from the individuals in order to escape prosecution or to have a deferred prosecution agreement. The new guidelines expressly encourage corporations to comply with the waiver and disclosure programs of other agencies including the SEC and EPA. Legislation, of course, would bind all federal agencies and could not be changed except by an Act of Congress.”