TheCorporateCounsel.net, April 23, 2008:
At yesterday's hearing of the Senate Committee on Banking, Housing and Urban Affairs entitled "Turmoil in U.S. Credit Markets: The Role of the Credit Rating Agencies," Chairman Cox defended the SEC's implementation of the Credit Rating Agency Reform Act of 2006 and spelled out some possible new rulemaking efforts on the credit rating front.
In his testimony, Chairman Cox outlined the SEC Staff's efforts in conducting ongoing examinations of the nationally recognized statistical rating organizations (NRSROs). Those efforts have included the review of thousands of pages of internal records and emails, public disclosures and rating histories by around 40 Staff members. While the examinations are not yet complete (a report is expected by early summer), Cox noted that the Staff has found so far that there was a substantial surge in ratings for structured finance deals from 2004 – 2006, with those deals involving increasingly complex products. The examination Staff's preliminary observations have been that the "ratings process used to rate these products may have been less quantitatively developed, particularly as the products became more complicated and involved different types of loans, than was generally believed." While the SEC is trying to avoid engaging in substantive regulation of the ratings process, it is interested in the adequacy of the NRSRO's disclosure about their procedures and methodologies, and whether such factors as a desire to maintain or increase market share may have caused the NRSROs to be "less conservative" than their disclosed methodologies.
Now that the SEC's NRSRO registration system is in place and other rules implementing the 2006 legislation are effective, the SEC is looking at other areas of rulemaking within its authority. Chairman Cox outlined the following possibilities:
1. Enhanced disclosure about ratings performance – this would include disclosures that allow market participants to better compare the ratings of one NRSRO with another.
2. Accountability for managing conflicts of interest – new rules might prohibit certain practices, as well as establish requirements that address potential conflicts that could impair the process for rating structured products (e.g., consulting services provided by NRSROs to issuers).
3. Annual reporting – new rules could required the NRSROs to furnish the SEC with annual reports describing internal reviews and how well the firms adhere to ratings procedures, manage conflicts of interest and comply with securities laws.
4. Enhanced disclosure of underlying assets – new rules may require disclosure of information about the assets underlying MBS, CDOs and other structured products so market participants could better analyze creditworthiness without the benefit of ratings (and to enhance the availability of data - and thus level the playing field - for subscriber-based NRSROs as compared to the "issuer pays" NRSROs).
5. Enhanced disclosure about ratings – new rules could also mandate enhanced disclosures about how the NRSROs determine their ratings for structured products, as well as ratings information that will make it possible for investors to distinguish between ratings for different types of securities.
6. Access to information – potential rules may seek to eliminate advantages (including access to information) that NRSROs following the "issuer pays" model may have over subscriber-based NRSROs.
7. SEC reliance on ratings – The SEC is revisiting its own reliance on ratings throughout its rules. This could be a big shift in the SEC's rules, including those related to corporation finance.
These new rules could substantially change the ratings landscape, and most likely for the better. It certainly can’t get much worse.
For a great breakdown of the history behind securities ratings and what went wrong with the ratings on mortgage backed securities, check out Roger Lowenstein's piece entitled "Triple-A Failure" which will be published in this Sunday's New York Times Magazine.
Wednesday, April 23, 2008
Thursday, April 17, 2008
Are Prosecutors Telling Warren Buffet How to Run His Company?
Posted by Dan Slater, LawBlog - WSJ.com
With Eliot Spitzer cast out of politics, do his prosecutorial tactics live on in U.S. Attorneys’ offices around the country?
According to the WSJ editorial board, the ousting of Gen Re CEO Joseph Brandon, whom prosecutors named as an unindicted co-conspirator in the fraudulent reinsurance transaction between Gen Re and AIG, is proof that they do.
Here’s the back-story: Last week, Law Blog colleagues Amir Efrati and Karen Richardson reported that federal prosecutors were pressuring the Oracle of Omaha, Warren Buffett, the chairman of Gen Re parent Berkshire Hathaway, to replace Brandon after four Gen Re executives were found guilty in February for allegedly using reinsurance deals to inflate the reserves of AIG, Gen Re’s biggest client. After the trial, the prosecutors said they would “work up the ladder” to ferret out wrongdoing.
On Monday, Brandon was forced to resign, despite, according to the WSJ editorial board, being “a superb manager.” In his annual letter to shareholders two months ago, Buffett wrote, “Now, thanks to Joe Brandon . . . the luster of the company has been restored.” Buffett added that Brandon and President Tad Montross “have been running the business for six years and have been doing first-class business in a first-class way, to use the words of J. P. Morgan.”
But, regardless of Brandon’s track-record, his resignation, reports the editorial board, was a foregone conclusion. Fiduciary duty to Berkshire shareholders required Buffet to avoid a criminal indictment of Gen Re at any cost. And U.S. Attorneys can pressure companies to fire executives as a show of cooperation. Georgetown Law prof John Hasnas says prosecutors rarely if ever tell corporations to fire their target. But all they have to do is to suggest that they are considering whether to indict the corporation, and that the extent of their cooperation will be considered in the decision, and “the message gets across.”
“We have come to a strange pass in this country,” writes the editorial board, “when prosecutors who can’t prove their case can nonetheless tell Warren Buffett who can run his companies.”
With Eliot Spitzer cast out of politics, do his prosecutorial tactics live on in U.S. Attorneys’ offices around the country?
According to the WSJ editorial board, the ousting of Gen Re CEO Joseph Brandon, whom prosecutors named as an unindicted co-conspirator in the fraudulent reinsurance transaction between Gen Re and AIG, is proof that they do.
Here’s the back-story: Last week, Law Blog colleagues Amir Efrati and Karen Richardson reported that federal prosecutors were pressuring the Oracle of Omaha, Warren Buffett, the chairman of Gen Re parent Berkshire Hathaway, to replace Brandon after four Gen Re executives were found guilty in February for allegedly using reinsurance deals to inflate the reserves of AIG, Gen Re’s biggest client. After the trial, the prosecutors said they would “work up the ladder” to ferret out wrongdoing.
On Monday, Brandon was forced to resign, despite, according to the WSJ editorial board, being “a superb manager.” In his annual letter to shareholders two months ago, Buffett wrote, “Now, thanks to Joe Brandon . . . the luster of the company has been restored.” Buffett added that Brandon and President Tad Montross “have been running the business for six years and have been doing first-class business in a first-class way, to use the words of J. P. Morgan.”
But, regardless of Brandon’s track-record, his resignation, reports the editorial board, was a foregone conclusion. Fiduciary duty to Berkshire shareholders required Buffet to avoid a criminal indictment of Gen Re at any cost. And U.S. Attorneys can pressure companies to fire executives as a show of cooperation. Georgetown Law prof John Hasnas says prosecutors rarely if ever tell corporations to fire their target. But all they have to do is to suggest that they are considering whether to indict the corporation, and that the extent of their cooperation will be considered in the decision, and “the message gets across.”
“We have come to a strange pass in this country,” writes the editorial board, “when prosecutors who can’t prove their case can nonetheless tell Warren Buffett who can run his companies.”
Monday, April 07, 2008
The Tulane Conference: See You in Court
April 7, 2008, 9:00 am
Posted by Heidi Moore, DealJournal, WSJ.com:
It is a widespread human trait that people who do something fast are prouder of the speed of the performance rather than its often imperfect quality. So it is with the merger boom of 2006 and 2007, which, it has become clear, has left a legacy of hastily drafted, inexactly worded merger agreements that are now in the hands of the inevitable cleanup crew — lawyers and judges who will puzzle out how to make these agreements more specific in the future.
That’s the lesson from the 20th Annual Tulane Corporate Law Institute Conference, where it became clear that merger battles have moved out of the hands of investment bankers who strike the deals and into those of lawyers who enforce them; out of the boardrooms and into courtrooms, where legal eagles will debate the finer points of merger contracts. Most attendees predicted a dropoff in the number of deals, leaving plenty of time to pore over the minutiae of old ones: in the words of Delaware Court of Chancery Vice Chancellor Leo E. Strine Jr., “Wouldn’t the solution be to scrape up one deal and spend the year getting the terms right?”
What was clear at the annual M&A confab is that the current spate of disputed mergers is beyond current laws and precedents, and calls for new court decisions that will set the stage for the future. One valuable lesson to all who were there is that being specific and exact can save you more time than writing an agreement that is broadly worded and will end you up in court. Here are a few issues you can expect to be hammered out this year.
Specific performance: “Specific performance” is just legalese that governs whether a court can force one party to a contract to follow through, or — it helps to think about it this way — perform on a specific aspect of its contract. In the pending $19.4 billion Clear Channel Communications buyout, specific performance is in dispute in a New York court as Thomas H. Lee Partners and Bain Capital try to force six lenders to fund the deal. The lenders argue that New York courts can’t enforce a lending agreement, but can only award money damages.
Forum selection: This is more legalese that just means where a case is heard. Traditionally, the Delaware courts have had a near-monopoly on merger law, because the small state houses the physical headquarters of so few businesses that it can act as an impartial referee. (Many major companies are incorporated in Delaware, however, to have the benefit of those impartial laws.)But there might be a trend towards merger partners seeking the home-court advantage in their home states. The Clear Channel deal also will provide a new testing ground for the Texas courts which historically haven’t been very active in determining the course of mergers. In a panel at Tulane, Strine quipped about “some interesting developments from the land of brisket,” a line which drew a laugh from lawyers uncomfortable with states other than Delaware calling the shots. In the Texas Clear Channel case the company and private-equity firms are suing the banks for tortious interference, or interfering with their contract.
Reverse breakup fees: Reverse breakup fees, in which a buyer pays a fee to the seller to get out of a deal, is another legacy of Clear Channel as well as other buyouts including that of SLM Inc., or Sallie Mae. Tulane professor Eileen Nowicki questioned whether these breakup fees are high enough to discourage buyers from walking away from deals.
Return of the MAC: Material adverse effect clauses, or MACs, were at play in the defunct buyout of Harman International industries. These provisions need to be more specific to allow for changes in the market or an industry, argued Cravath Swaine & Moore partner Faiza Saeed. Right now, they are so broadly written as to be nearly useless.
Financing agreements: Unsurprisingly, these will also come under close scrutiny, argued Cleary Gottlieb Steen & Hamilton partner Meme Peponis and Citigroup banker Christina Mohr, and sellers could start providing their own financing to attract buyers for a deal. In addition, more private-equity firms could follow the lead of Hellman & Friedman, which cut out the middlemen –investment banks — by approaching lenders and hedge funds itself to finance the acquisitions of Goodman Global Holdings and Getty Images.
The investment bankers who advise on mergers, for their part, will stay busy with smaller deals and less complicated ones, according to Mark Shafir, global co-head of M&A for Lehman Brothers Holdings. He predicted that merger activity would be much quieter as private-equity firms reduce their buying by up to 80%, and “strategic,” or corporate buyers, cut back 30% this year. Overall, Wall Street investment banks, private-equity firms and their lawyers will continue to be involved in a vast legal postmortem, seeking to make sense of the merger boom that just passed and setting the legal precedents for the booms inevitably to come.
Posted by Heidi Moore, DealJournal, WSJ.com:
It is a widespread human trait that people who do something fast are prouder of the speed of the performance rather than its often imperfect quality. So it is with the merger boom of 2006 and 2007, which, it has become clear, has left a legacy of hastily drafted, inexactly worded merger agreements that are now in the hands of the inevitable cleanup crew — lawyers and judges who will puzzle out how to make these agreements more specific in the future.
That’s the lesson from the 20th Annual Tulane Corporate Law Institute Conference, where it became clear that merger battles have moved out of the hands of investment bankers who strike the deals and into those of lawyers who enforce them; out of the boardrooms and into courtrooms, where legal eagles will debate the finer points of merger contracts. Most attendees predicted a dropoff in the number of deals, leaving plenty of time to pore over the minutiae of old ones: in the words of Delaware Court of Chancery Vice Chancellor Leo E. Strine Jr., “Wouldn’t the solution be to scrape up one deal and spend the year getting the terms right?”
What was clear at the annual M&A confab is that the current spate of disputed mergers is beyond current laws and precedents, and calls for new court decisions that will set the stage for the future. One valuable lesson to all who were there is that being specific and exact can save you more time than writing an agreement that is broadly worded and will end you up in court. Here are a few issues you can expect to be hammered out this year.
Specific performance: “Specific performance” is just legalese that governs whether a court can force one party to a contract to follow through, or — it helps to think about it this way — perform on a specific aspect of its contract. In the pending $19.4 billion Clear Channel Communications buyout, specific performance is in dispute in a New York court as Thomas H. Lee Partners and Bain Capital try to force six lenders to fund the deal. The lenders argue that New York courts can’t enforce a lending agreement, but can only award money damages.
Forum selection: This is more legalese that just means where a case is heard. Traditionally, the Delaware courts have had a near-monopoly on merger law, because the small state houses the physical headquarters of so few businesses that it can act as an impartial referee. (Many major companies are incorporated in Delaware, however, to have the benefit of those impartial laws.)But there might be a trend towards merger partners seeking the home-court advantage in their home states. The Clear Channel deal also will provide a new testing ground for the Texas courts which historically haven’t been very active in determining the course of mergers. In a panel at Tulane, Strine quipped about “some interesting developments from the land of brisket,” a line which drew a laugh from lawyers uncomfortable with states other than Delaware calling the shots. In the Texas Clear Channel case the company and private-equity firms are suing the banks for tortious interference, or interfering with their contract.
Reverse breakup fees: Reverse breakup fees, in which a buyer pays a fee to the seller to get out of a deal, is another legacy of Clear Channel as well as other buyouts including that of SLM Inc., or Sallie Mae. Tulane professor Eileen Nowicki questioned whether these breakup fees are high enough to discourage buyers from walking away from deals.
Return of the MAC: Material adverse effect clauses, or MACs, were at play in the defunct buyout of Harman International industries. These provisions need to be more specific to allow for changes in the market or an industry, argued Cravath Swaine & Moore partner Faiza Saeed. Right now, they are so broadly written as to be nearly useless.
Financing agreements: Unsurprisingly, these will also come under close scrutiny, argued Cleary Gottlieb Steen & Hamilton partner Meme Peponis and Citigroup banker Christina Mohr, and sellers could start providing their own financing to attract buyers for a deal. In addition, more private-equity firms could follow the lead of Hellman & Friedman, which cut out the middlemen –investment banks — by approaching lenders and hedge funds itself to finance the acquisitions of Goodman Global Holdings and Getty Images.
The investment bankers who advise on mergers, for their part, will stay busy with smaller deals and less complicated ones, according to Mark Shafir, global co-head of M&A for Lehman Brothers Holdings. He predicted that merger activity would be much quieter as private-equity firms reduce their buying by up to 80%, and “strategic,” or corporate buyers, cut back 30% this year. Overall, Wall Street investment banks, private-equity firms and their lawyers will continue to be involved in a vast legal postmortem, seeking to make sense of the merger boom that just passed and setting the legal precedents for the booms inevitably to come.
Friday, March 21, 2008
Did The Fed Push Bear Into a Bad Deal?
DealJournal - WJS.com, March 21, 2008:
There are a lot of things that look right in the heat of the moment, and highly problematic in hindsight. Is J.P. Morgan’s proposed takeover of Bear Stearns one of those things?
The Fed did not learn how bad Bear’s condition was until Bear and the SEC told the Fed late Thursday March 13, and at that point, the firm said it saw little option other than to file for bankruptcy by Friday morning. The Fed pushed Bear to find a private sector buyer before markets opened Friday, but Bear couldn’t. At 7 a.m. Friday the Fed, for the first time in its 95 year history, approved a direct loan to Bear, a step so extraordinary it required the use of two special loopholes in the Federal Reserve Act. The Fed’s priority wasn’t to minimize losses for Bear shareholders but to prevent uncertainty over Bear’s fate from causing the derivative and repo markets to dry up, which meant finding a buyer if at all possible before Monday. That you knew already; and if you didn’t, you can find the whole timeline here.
See all of Deal Journal’s posts on the fall of Bear Stearns. Plus, click here for continuing coverage from the Wall Street Journal.
Still, that’s cold comfort for shareholders. “We thought they gave us 28 days. Then they gave us 24 hours,” one person familiar with Bear told the Journal. J.P. Morgan’s deal for Bear Stearns has several unusual features that make the deal particularly favorable to J.P. Morgan and comes at the expense of Bear Stearns’s shareholders, who are losing billions on the $2.40 a share offer. It’s nearly impossible for any rival bidder to break it up, J.P. Morgan already has management oversight of Bear, J.P. Morgan can buy the building even if Bear’s board rejects the deal, and J.P. Morgan can buy up to 20% of Bear’s shares if any other buyer does the same. So in essence, the Fed didn’t just support a deal, it supported this deal, with this buyer, and anyone who doesn’t like the terms of the deal is naturally going to start dusting the Fed and Treasury for fingerprints. What might have looked like a bailout and rescue last week to many now looks like highway robbery to some.
There’s a big element of Monday-morning quarterbacking in the complaints about the deal. Remember where the regulator stood before the sale: As late as the morning of Wednesday, March 12, Bear CEO Alan Schwartz was on CNBC saying the firm’s liquidity was fine. Bear didn’t tell the Fed and the SEC that the firm was in trouble until 7:30 p.m on Thursday March 13, and at that point, the firm was threatening to file for bankruptcy by Friday morning. The Fed tried to find a private sector buyer Thursday night, but couldn’t. If Bear filed for bankruptcy, its counterparties could potentially panic and destroy the $4.5 trillion repo securities market, and potentially touch off massacres in the credit-default swaps market, too.
There are a lot of things that look right in the heat of the moment, and highly problematic in hindsight. Is J.P. Morgan’s proposed takeover of Bear Stearns one of those things?
The Fed did not learn how bad Bear’s condition was until Bear and the SEC told the Fed late Thursday March 13, and at that point, the firm said it saw little option other than to file for bankruptcy by Friday morning. The Fed pushed Bear to find a private sector buyer before markets opened Friday, but Bear couldn’t. At 7 a.m. Friday the Fed, for the first time in its 95 year history, approved a direct loan to Bear, a step so extraordinary it required the use of two special loopholes in the Federal Reserve Act. The Fed’s priority wasn’t to minimize losses for Bear shareholders but to prevent uncertainty over Bear’s fate from causing the derivative and repo markets to dry up, which meant finding a buyer if at all possible before Monday. That you knew already; and if you didn’t, you can find the whole timeline here.
See all of Deal Journal’s posts on the fall of Bear Stearns. Plus, click here for continuing coverage from the Wall Street Journal.
Still, that’s cold comfort for shareholders. “We thought they gave us 28 days. Then they gave us 24 hours,” one person familiar with Bear told the Journal. J.P. Morgan’s deal for Bear Stearns has several unusual features that make the deal particularly favorable to J.P. Morgan and comes at the expense of Bear Stearns’s shareholders, who are losing billions on the $2.40 a share offer. It’s nearly impossible for any rival bidder to break it up, J.P. Morgan already has management oversight of Bear, J.P. Morgan can buy the building even if Bear’s board rejects the deal, and J.P. Morgan can buy up to 20% of Bear’s shares if any other buyer does the same. So in essence, the Fed didn’t just support a deal, it supported this deal, with this buyer, and anyone who doesn’t like the terms of the deal is naturally going to start dusting the Fed and Treasury for fingerprints. What might have looked like a bailout and rescue last week to many now looks like highway robbery to some.
There’s a big element of Monday-morning quarterbacking in the complaints about the deal. Remember where the regulator stood before the sale: As late as the morning of Wednesday, March 12, Bear CEO Alan Schwartz was on CNBC saying the firm’s liquidity was fine. Bear didn’t tell the Fed and the SEC that the firm was in trouble until 7:30 p.m on Thursday March 13, and at that point, the firm was threatening to file for bankruptcy by Friday morning. The Fed tried to find a private sector buyer Thursday night, but couldn’t. If Bear filed for bankruptcy, its counterparties could potentially panic and destroy the $4.5 trillion repo securities market, and potentially touch off massacres in the credit-default swaps market, too.
Wednesday, March 19, 2008
Financial crisis and the real economy
Corporate DealMaker, March 19, 2008:
At times of financial turmoil there's something reassuring about the term "the real economy." It would be even more reassuring if it didn't usually denote a realm threatened by forces emanating from a scary parallel universe. But when the headlines describe large, familiar financial institutions gravely damaged by securities so complex that nobody can put a price on them, it's nice to recall that there's a world out there where people are still making tractors. Let's just hope it can be kept safe from the reckless and greedy denizens of Wall Street.Lots of us think this way. Isn't the ongoing surge in commodity prices partly a revolt against weird abstractions? Forget those freaky collateralized loan obligations and, while you're at it, the U.S. dollar they rode in on. Give us some gold and oil and steel and coffee. In fact, I would be betting really big on commodities right now, except for one thing. I'm actually a little worried that commodities are forming a bubble of their own. You see, the wizards down the hall from the ones who designed those CLOs have continued to improve on the futures and options originally created so producers and users of commodities could manage price volatility. Now exchange-traded notes and other nifty new instruments may be facilitating investment flows way out of proportion to the actual demand for commodities. Well. As the great soul singer Tyrone Davis said of a situation like the one poor Mrs. Spitzer recently faced, there it is. The tensions in the often stormy, centuries-old marriage between finance and industry, between Wall Street and Main Street, have flared up once again, and there seems little doubt about who deserves the blame. Until we start the couples therapy.That's when things get messy. The conversation can't ignore people who are needlessly losing their homes and good businesses that can't get capital. Our patchwork system of regulating financial institutions obviously needs updating, and it's not just securities but also reputations that are being marked to market. It's already happening to former Fed chairman Alan Greenspan, and also to Robert Rubin. The former Clinton treasury secretary received more than $100 million as chairman of the executive committee at Citigroup over the last eight years, even as the nation's biggest financial institution helped to dig the hole we're now in. But we will do well to remember there's a relationship worth salvaging here. On one hand, Rubin arrived at Citigroup after he and Greenspan helped to remove the regulatory barriers to the merger that created it. Now it's falling to their successors to improvise some new guardrails. Another hallmark of the Greenspan-Rubin 1990s, though, was the financial diplomacy that helped turn developing economies into emerging markets for tractor-makers and then, when that project devolved into another great financial crisis, got it back on track. If either of these men wish, like Tyrone Davis, that they could turn back the hands of time on a few decisions, they haven't said so. Certainly other people in the financial world would like to. But they can't, and neither can those of us who identify more closely with the so-called real economy. We'll just have to try and make sure we get more of what we need out of the relationship in the future.--Kenneth Klee
Link to Professor's Klee's Biography: http://www.law.ucla.edu/home/index.asp?page=564
At times of financial turmoil there's something reassuring about the term "the real economy." It would be even more reassuring if it didn't usually denote a realm threatened by forces emanating from a scary parallel universe. But when the headlines describe large, familiar financial institutions gravely damaged by securities so complex that nobody can put a price on them, it's nice to recall that there's a world out there where people are still making tractors. Let's just hope it can be kept safe from the reckless and greedy denizens of Wall Street.Lots of us think this way. Isn't the ongoing surge in commodity prices partly a revolt against weird abstractions? Forget those freaky collateralized loan obligations and, while you're at it, the U.S. dollar they rode in on. Give us some gold and oil and steel and coffee. In fact, I would be betting really big on commodities right now, except for one thing. I'm actually a little worried that commodities are forming a bubble of their own. You see, the wizards down the hall from the ones who designed those CLOs have continued to improve on the futures and options originally created so producers and users of commodities could manage price volatility. Now exchange-traded notes and other nifty new instruments may be facilitating investment flows way out of proportion to the actual demand for commodities. Well. As the great soul singer Tyrone Davis said of a situation like the one poor Mrs. Spitzer recently faced, there it is. The tensions in the often stormy, centuries-old marriage between finance and industry, between Wall Street and Main Street, have flared up once again, and there seems little doubt about who deserves the blame. Until we start the couples therapy.That's when things get messy. The conversation can't ignore people who are needlessly losing their homes and good businesses that can't get capital. Our patchwork system of regulating financial institutions obviously needs updating, and it's not just securities but also reputations that are being marked to market. It's already happening to former Fed chairman Alan Greenspan, and also to Robert Rubin. The former Clinton treasury secretary received more than $100 million as chairman of the executive committee at Citigroup over the last eight years, even as the nation's biggest financial institution helped to dig the hole we're now in. But we will do well to remember there's a relationship worth salvaging here. On one hand, Rubin arrived at Citigroup after he and Greenspan helped to remove the regulatory barriers to the merger that created it. Now it's falling to their successors to improvise some new guardrails. Another hallmark of the Greenspan-Rubin 1990s, though, was the financial diplomacy that helped turn developing economies into emerging markets for tractor-makers and then, when that project devolved into another great financial crisis, got it back on track. If either of these men wish, like Tyrone Davis, that they could turn back the hands of time on a few decisions, they haven't said so. Certainly other people in the financial world would like to. But they can't, and neither can those of us who identify more closely with the so-called real economy. We'll just have to try and make sure we get more of what we need out of the relationship in the future.--Kenneth Klee
Link to Professor's Klee's Biography: http://www.law.ucla.edu/home/index.asp?page=564
Monday, March 17, 2008
Subprime Crisis: The PWG Weighs In
TheCorporateCounsel.net Blog, Broc Romanek and Dave Lynn, March 17, 2008:
Subprime Crisis: The PWG Weighs In
Last week, the President's Working Group on Financial Markets issued a Policy Statement on Financial Market Developments, reflecting the collective views of the Treasury, the Federal Reserve, the SEC and the CFTC on how to deal with the current market turmoil.
The report does not appear to break any new ground in describing the underlying causes of the problems: sloppy mortgage underwriting; the "erosion of discipline" in the securitization process, including failures to provide adequate risk disclosure; flaws in the credit rating process; and weaknesses in risk management and failures in banking policies to mitigate those weaknesses. The recommendations in the report might best be characterized as a suggestive – and perhaps soft – in terms of getting at these identified issues. Much of what is suggested could take years to implement – such as getting all states to implement nationwide licensing standards for mortgage brokers (if all states need to do it might not a federal licensing standard be a better idea?), compelling institutional investors to seek better risk information and better ways to evaluate risk other than through credit ratings, reforming the credit rating process, and enhancing risk management practices and prudential regulatory policies for financial institutions.
The one issue that the report actively sidesteps is what sort of concrete steps must taken with respect to the enormous OTC derivatives market that remains the 800-pound (or maybe $500 trillion) gorilla in the room. It has been the common wisdom that regulators need to continue to steer clear of the OTC derivatives market, lest they snuff out the flames of financial innovation that everyone loves until someone (or everyone) gets burned. Now we have a north of $500 trillion in notional amount market that has virtually no oversight – other than industry "oversight" – and no way to get a handle on the systemic risks posed to the worldwide financial system. Instead of suggesting any radical reforms, the PWG says that financial institution regulators should insist that the industry promptly "set ambitious standards for accuracy and timeliness of trade data submissions and the timeliness of resolutions of trade matching errors for OTC derivatives," urge the industry to amend credit derivative documentation to provide for cash settlement in the event of a credit event and ask the industry for a long terms plan for developing an integrated operational infrastructure. Whoa, some tough words on derivatives from the PWG!
The Bear Stearns Bailout: Is this the Big One?
Almost as if to underscore that the suggested fixes in the PWG report aren't going to do anything to alleviate the current state of locked-up credit markets and rapidly deteriorating asset values, news began to break early Friday about the need for a Federal Reserve lifeline to the venerable Bear Stearns. The SEC put out this press release on Friday, noting that it was monitoring Bear's capital adequacy in the light of the firm's rapidly eroding liquidity. In a conference call on Friday – memorialized in this real time blog of the call – Bear Stearns executives said that the ability to borrow against the firm's collateral from the Fed through JP Morgan was going to give them a chance to look at strategic alternatives – although they apparently weren't thinking at the time that filing for bankruptcy or selling the firm at a fire sale price within 48 hours were among those alternatives.
As noted in this article from today's WSJ, JP Morgan has agreed to purchase Bear Stearns for $236 million or $2 a share – quite a delta from the firm's market value of $3.5 billion on Friday. The Bear Stearns board was apparently cajoled by government officials, who indicated that they might not be able to bail the firm out if it did not do a deal before markets opened again this week. Shareholders interests were of little concern, it seems, as the firm's insolvency became imminent when counterparties continued to refuse to do business with Bear and prime brokerage customers ran for the exits. Apparently the Fed's credit line on Friday was not enough to stave off the "run on the bank."
The WSJ article notes that financial regulators are "scrambling to come up with new tools because the old ones aren't suited for this 21st-century crisis, in which financial innovation has rendered many institutions not 'too big too fail,' but 'too interconnected to be allowed to fail suddenly.'" Not too comforting by any stretch of the imagination.
Subprime Crisis: The PWG Weighs In
Last week, the President's Working Group on Financial Markets issued a Policy Statement on Financial Market Developments, reflecting the collective views of the Treasury, the Federal Reserve, the SEC and the CFTC on how to deal with the current market turmoil.
The report does not appear to break any new ground in describing the underlying causes of the problems: sloppy mortgage underwriting; the "erosion of discipline" in the securitization process, including failures to provide adequate risk disclosure; flaws in the credit rating process; and weaknesses in risk management and failures in banking policies to mitigate those weaknesses. The recommendations in the report might best be characterized as a suggestive – and perhaps soft – in terms of getting at these identified issues. Much of what is suggested could take years to implement – such as getting all states to implement nationwide licensing standards for mortgage brokers (if all states need to do it might not a federal licensing standard be a better idea?), compelling institutional investors to seek better risk information and better ways to evaluate risk other than through credit ratings, reforming the credit rating process, and enhancing risk management practices and prudential regulatory policies for financial institutions.
The one issue that the report actively sidesteps is what sort of concrete steps must taken with respect to the enormous OTC derivatives market that remains the 800-pound (or maybe $500 trillion) gorilla in the room. It has been the common wisdom that regulators need to continue to steer clear of the OTC derivatives market, lest they snuff out the flames of financial innovation that everyone loves until someone (or everyone) gets burned. Now we have a north of $500 trillion in notional amount market that has virtually no oversight – other than industry "oversight" – and no way to get a handle on the systemic risks posed to the worldwide financial system. Instead of suggesting any radical reforms, the PWG says that financial institution regulators should insist that the industry promptly "set ambitious standards for accuracy and timeliness of trade data submissions and the timeliness of resolutions of trade matching errors for OTC derivatives," urge the industry to amend credit derivative documentation to provide for cash settlement in the event of a credit event and ask the industry for a long terms plan for developing an integrated operational infrastructure. Whoa, some tough words on derivatives from the PWG!
The Bear Stearns Bailout: Is this the Big One?
Almost as if to underscore that the suggested fixes in the PWG report aren't going to do anything to alleviate the current state of locked-up credit markets and rapidly deteriorating asset values, news began to break early Friday about the need for a Federal Reserve lifeline to the venerable Bear Stearns. The SEC put out this press release on Friday, noting that it was monitoring Bear's capital adequacy in the light of the firm's rapidly eroding liquidity. In a conference call on Friday – memorialized in this real time blog of the call – Bear Stearns executives said that the ability to borrow against the firm's collateral from the Fed through JP Morgan was going to give them a chance to look at strategic alternatives – although they apparently weren't thinking at the time that filing for bankruptcy or selling the firm at a fire sale price within 48 hours were among those alternatives.
As noted in this article from today's WSJ, JP Morgan has agreed to purchase Bear Stearns for $236 million or $2 a share – quite a delta from the firm's market value of $3.5 billion on Friday. The Bear Stearns board was apparently cajoled by government officials, who indicated that they might not be able to bail the firm out if it did not do a deal before markets opened again this week. Shareholders interests were of little concern, it seems, as the firm's insolvency became imminent when counterparties continued to refuse to do business with Bear and prime brokerage customers ran for the exits. Apparently the Fed's credit line on Friday was not enough to stave off the "run on the bank."
The WSJ article notes that financial regulators are "scrambling to come up with new tools because the old ones aren't suited for this 21st-century crisis, in which financial innovation has rendered many institutions not 'too big too fail,' but 'too interconnected to be allowed to fail suddenly.'" Not too comforting by any stretch of the imagination.
Thursday, March 06, 2008
Hedge Funds Frozen Shut
Business Week Online, March 5, 2008:
To buy time and stave off losses, more funds are blocking withdrawals. Are they just postponing the inevitable?
by Matthew Goldstein
There's a chill spreading across the hedge fund industry. With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprecedented move just postponing the day of reckoning for funds and the market?
Since November at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period.
It's understandable why hedge funds would want to keep investors from pulling out their money en masse. In this market, any sales would almost certainly be at cut-rate prices, guaranteeing big losses in portfolios. And once managers start dumping assets, there's also the danger that big banks, which provided the funds with credit lines to amp up returns through what's known as leverage, will demand their money back as collateral shrinks. Those margin calls would prompt further sales, setting off a vicious cycle that could ensure a fund's demise.
Read article at: http://www.businessweek.com/magazine/content/08_11/b4075000870869.htm?dlbk
To buy time and stave off losses, more funds are blocking withdrawals. Are they just postponing the inevitable?
by Matthew Goldstein
There's a chill spreading across the hedge fund industry. With more portfolios falling victim to the credit crunch, managers by the dozen are freezing investor redemptions, preventing a mad rush to the exits that would force funds to sell beaten-down assets to raise cash. But is this unprecedented move just postponing the day of reckoning for funds and the market?
Since November at least 24 hedge funds have barred or limited investors from taking their money out, tying up tens of billions of dollars for an indefinite period.
It's understandable why hedge funds would want to keep investors from pulling out their money en masse. In this market, any sales would almost certainly be at cut-rate prices, guaranteeing big losses in portfolios. And once managers start dumping assets, there's also the danger that big banks, which provided the funds with credit lines to amp up returns through what's known as leverage, will demand their money back as collateral shrinks. Those margin calls would prompt further sales, setting off a vicious cycle that could ensure a fund's demise.
Read article at: http://www.businessweek.com/magazine/content/08_11/b4075000870869.htm?dlbk
Wednesday, February 27, 2008
Study: Midmarket M&A to keep pace in '08
Corporate DealMaker, Posted on February 26, 2008 at 5:13 PM
Dealmakers at middle-market companies are generally optimistic about the current and future deal climate, according to the results of a recent survey. CFO Research Services and CIT Group Inc. surveyed 529 senior-level finance decision makers at middle-market U.S. and Canadian companies for their report "M&A in Challenging Times." According to the survey:
Although a substantial number of respondents said that M&A activity would decrease over the next year (23 percent), many respondents predicted an increase in M&A activity (47 percent), while nearly a third said they believed M&A activity would stay the same. Not surprisingly, respondents said strategic players with strong balance sheets would not be deterred by uncertainty in the credit market. The results also indicated that fundamental business factors such as the need to enter new markets and responding to competitive threats would be the main deal drivers. The survey results generally support the conclusions reported in this Dealscape, which predicts midmarket players may find good deals in the months to come as companies hurt by the sluggish IPO market, low liquidity among smaller companies and a tough economy go looking for buyers.
For more on the CIT study, including a chart, see this item on Dealscape. - Baz Hiralal
Dealmakers at middle-market companies are generally optimistic about the current and future deal climate, according to the results of a recent survey. CFO Research Services and CIT Group Inc. surveyed 529 senior-level finance decision makers at middle-market U.S. and Canadian companies for their report "M&A in Challenging Times." According to the survey:
Although a substantial number of respondents said that M&A activity would decrease over the next year (23 percent), many respondents predicted an increase in M&A activity (47 percent), while nearly a third said they believed M&A activity would stay the same. Not surprisingly, respondents said strategic players with strong balance sheets would not be deterred by uncertainty in the credit market. The results also indicated that fundamental business factors such as the need to enter new markets and responding to competitive threats would be the main deal drivers. The survey results generally support the conclusions reported in this Dealscape, which predicts midmarket players may find good deals in the months to come as companies hurt by the sluggish IPO market, low liquidity among smaller companies and a tough economy go looking for buyers.
For more on the CIT study, including a chart, see this item on Dealscape. - Baz Hiralal
Tuesday, February 26, 2008
Hedge Funds Still Pose Risk to Financial System, Report Says
Despite closer monitoring by regulators, hedge funds still pose significant risks to the financial system, a government report said Monday.
The loosely regulated capital pools favored by the rich and by large financial institutions “require continued monitoring by regulators and counterparties,” according to a report released by the Government Accountability Office, the investigative arm of Congress.
The study found that hedge funds’ inclination to take substantial risks with increasingly large sums of money — and to leverage those bets — means losses can spread and be magnified throughout the financial system.
The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.
The G.A.O. study comes at a tough time for hedge funds, which last month reported heavy average losses in a slumping stock market. In December, new money invested in hedge funds hit its lowest level in two years as investors cooled to the sector.
As it has grown in size and gained public attention, the hedge fund industry has fought a series of battles over regulation and taxation on Capitol Hill and with the U.S. Securities and Exchange Commission, with mixed results
Go to Article from BusinessWeek »
Go to Article from Reuters »
The loosely regulated capital pools favored by the rich and by large financial institutions “require continued monitoring by regulators and counterparties,” according to a report released by the Government Accountability Office, the investigative arm of Congress.
The study found that hedge funds’ inclination to take substantial risks with increasingly large sums of money — and to leverage those bets — means losses can spread and be magnified throughout the financial system.
The report said banks eager to do business with hedge funds often are not critical enough when assessing the risks of their complex investment strategies.
The G.A.O. study comes at a tough time for hedge funds, which last month reported heavy average losses in a slumping stock market. In December, new money invested in hedge funds hit its lowest level in two years as investors cooled to the sector.
As it has grown in size and gained public attention, the hedge fund industry has fought a series of battles over regulation and taxation on Capitol Hill and with the U.S. Securities and Exchange Commission, with mixed results
Go to Article from BusinessWeek »
Go to Article from Reuters »
Friday, February 22, 2008
Supreme Court Continues Pro-Business Stance
In three key business rulings handed down Wednesday, the Supreme Court continued its trend toward freeing companies from the conflicting regulation of 50 different states in favor of one federal regime.
The Court favored federal pre-emption over state laws and state court remedies in the areas of medical device regulation, interstate shipping of tobacco and arbitration of contract disputes.
In announcing one of the cases from the bench, Justice Antonin Scalia said the day's decisions made it clear that "we consider it part of our business" to sort out the balance between federal and state law.
But it was not a clean sweep for business Wednesday. In LaRue v. DeWolff, Boberg & Associates, the Court ruled that employees can sue employers under the Employee Retirement Income Security Act for mismanaging their 401(k) retirement plans.
Of Wednesday's pre-emption cases, Riegel v. Medtronic may have the broadest impact. The Court ruled against the estate of Charles Riegel, who died after a catheter made by Medtronic malfunctioned during heart surgery.
Riegel sued in federal court, invoking New York state common law to argue for liability and damages. Like lower courts, the Supreme Court ruled that the federal Medical Device Amendments of 1976 specifically preclude states from imposing their own requirements on the makers of federally regulated medical devices.
Justice Ruth Bader Ginsburg dissented from the opinion authored by Scalia. Ginsburg called the ruling a "radical curtailment" of state law remedies that Congress did not intend when it passed the law.
Jon Haber, head of the American Association for Justice, the organization for trial lawyers, criticized the ruling and said it "should be narrowly viewed as applying only to certain medical device cases and should not serve as precedent for cases involving drugs and other consumer products."
The Court favored federal pre-emption over state laws and state court remedies in the areas of medical device regulation, interstate shipping of tobacco and arbitration of contract disputes.
In announcing one of the cases from the bench, Justice Antonin Scalia said the day's decisions made it clear that "we consider it part of our business" to sort out the balance between federal and state law.
But it was not a clean sweep for business Wednesday. In LaRue v. DeWolff, Boberg & Associates, the Court ruled that employees can sue employers under the Employee Retirement Income Security Act for mismanaging their 401(k) retirement plans.
Of Wednesday's pre-emption cases, Riegel v. Medtronic may have the broadest impact. The Court ruled against the estate of Charles Riegel, who died after a catheter made by Medtronic malfunctioned during heart surgery.
Riegel sued in federal court, invoking New York state common law to argue for liability and damages. Like lower courts, the Supreme Court ruled that the federal Medical Device Amendments of 1976 specifically preclude states from imposing their own requirements on the makers of federally regulated medical devices.
Justice Ruth Bader Ginsburg dissented from the opinion authored by Scalia. Ginsburg called the ruling a "radical curtailment" of state law remedies that Congress did not intend when it passed the law.
Jon Haber, head of the American Association for Justice, the organization for trial lawyers, criticized the ruling and said it "should be narrowly viewed as applying only to certain medical device cases and should not serve as precedent for cases involving drugs and other consumer products."
Tuesday, February 19, 2008
Investor Activism Tops Last Year's Record Pace
Kaja Whitehouse of the WSJ wrote this article on Saturday: "Efforts by activist investors to fight for board seats, oppose mergers and otherwise shake up companies are on track to beat last year's record levels, contrary to expectations that activity would dry up because of unstable market conditions.
There have been 72 campaigns waged by activists so far this year, as of Feb. 11, with targeted companies ranging from Countrywide Financial Corp. to New York Times Co. Last year, when shareholder activism hit record levels, there were just 54 campaigns waged over the same time period, according to FactSet SharkWatch, which tracks proxy contests and corporate-takeover defenses.
Hedge funds continue to be big participants. More than half, or 38, of the campaigns so far this year were initiated by hedge funds, compared with 21 during last year's period, according to FactSet SharkWatch."
There have been 72 campaigns waged by activists so far this year, as of Feb. 11, with targeted companies ranging from Countrywide Financial Corp. to New York Times Co. Last year, when shareholder activism hit record levels, there were just 54 campaigns waged over the same time period, according to FactSet SharkWatch, which tracks proxy contests and corporate-takeover defenses.
Hedge funds continue to be big participants. More than half, or 38, of the campaigns so far this year were initiated by hedge funds, compared with 21 during last year's period, according to FactSet SharkWatch."
Tuesday, February 12, 2008
How acquirers can ride the restructuring wave
Steve Zuckerman, director of the Special Situations Group at Farlie Turner & Co., writes exclusively for Corporate Dealmaker on how strategic buyers can muscle through tough economic conditions. The Corporate Dealmaker, February 12, 2008.
With less liquidity in the market and tighter credit standards now in place, it is likely that credit defaults will dramatically rise and companies will no longer be able to refinance themselves out of their financial challenges. This economic climate will create opportunities to acquire companies with overleveraged capital structures -- but sound business models -- for a significant discount.
The opportunities will develop in multiple sectors -- not just among real estate developers and mortgage lenders, but also in any industry tied to the housing market such as the myriad of building product and equipment rental companies. We also expect other industries to suffer considerable challenges, including retail, casual dining, manufacturers and distributors of durable goods. Within these industries, it is smaller and midsize companies that will feel the pressure first as they typically have fewer resources and are less likely to raise institutional capital.
Strategic buyers with strong balance sheets will benefit because they will be able to capture market share by acquiring undercapitalized competitors. Private equity firms, flush with capital, are also likely to find many favorably priced deals, although they will be unable to use as much debt to finance their purchases as in the past. Still, buyers will need to be vigilant, since different rules and strategies apply in distressed M&A.
When acquiring a company that is insolvent (generally defined as a company whose liabilities exceed its assets or one that is unable to pay its debts as they come due), one of the greatest risks is being sued for a fraudulent transfer. The term "fraudulent" is somewhat of a misnomer, since neither fraud nor misconduct needs to be proved. Instead, federal and state (constructive) fraudulent transfer law permits a transfer to be unwound if the transfer was not for fair consideration and the seller was not solvent at the time of transfer or become insolvent as a result of the transfer. A failed leveraged buyout, for example, is often attacked by creditors as a fraudulent transfer. As the buyer utilizes the target's assets to finance the transaction, the target arguably received less than "reasonably equivalent" value.
There are several ways for a buyer to limit its exposure to a fraudulent transfer claim, such as obtaining a fairness opinion, a solvency opinion or consummating the transaction in the context of a bankruptcy proceeding -- which is the most foolproof approach. Another interesting wrinkle in negotiating with a distressed company is that when the company enters into the "zone of insolvency," the fiduciary responsibility of directors and officers shifts from shareholders to creditors. Buyers can gain leverage by making this point painfully clear to directors and officers.
Whether the buyer is strategic or financially oriented, an important part of the acquisition strategy should be focused on whether the assets should be acquired in or outside of bankruptcy. Acquiring distressed companies and assets through a bankruptcy proceeding provides considerable benefits, such as cleansing the assets of liens, the ability to reject unfavorable contracts and the virtual elimination of various types of liabilities. However, these benefits must be weighed against the transparency of a bankruptcy proceeding, which is designed to fully vet an asset, foster competition and garner the highest and best price. Strategic buyers also need to consider the reputational impact of a bankruptcy and the effect it could have on trade vendors. If a company has critical and irreplaceable vendors, a buyer should consider contacting such vendors to determine whether they would discontinue doing business with the company if it files bankruptcy. In the end, each distressed situation presents unique facts and buyers should rely on experienced restructuring advisers to assist them in their quest to take advantage of the challenging times that lie ahead.
Steve Zuckerman. The author is director of the Special Situations Group at Farlie Turner & Co., a Fort Lauderdale, Fla.-based investment bank serving growth-oriented middle-market companies. Recently launched, the group provides investment banking, capital raising and financial advisory services to middle-market companies experiencing financial difficulties, ranging from underperforming to significantly distressed businesses.
With less liquidity in the market and tighter credit standards now in place, it is likely that credit defaults will dramatically rise and companies will no longer be able to refinance themselves out of their financial challenges. This economic climate will create opportunities to acquire companies with overleveraged capital structures -- but sound business models -- for a significant discount.
The opportunities will develop in multiple sectors -- not just among real estate developers and mortgage lenders, but also in any industry tied to the housing market such as the myriad of building product and equipment rental companies. We also expect other industries to suffer considerable challenges, including retail, casual dining, manufacturers and distributors of durable goods. Within these industries, it is smaller and midsize companies that will feel the pressure first as they typically have fewer resources and are less likely to raise institutional capital.
Strategic buyers with strong balance sheets will benefit because they will be able to capture market share by acquiring undercapitalized competitors. Private equity firms, flush with capital, are also likely to find many favorably priced deals, although they will be unable to use as much debt to finance their purchases as in the past. Still, buyers will need to be vigilant, since different rules and strategies apply in distressed M&A.
When acquiring a company that is insolvent (generally defined as a company whose liabilities exceed its assets or one that is unable to pay its debts as they come due), one of the greatest risks is being sued for a fraudulent transfer. The term "fraudulent" is somewhat of a misnomer, since neither fraud nor misconduct needs to be proved. Instead, federal and state (constructive) fraudulent transfer law permits a transfer to be unwound if the transfer was not for fair consideration and the seller was not solvent at the time of transfer or become insolvent as a result of the transfer. A failed leveraged buyout, for example, is often attacked by creditors as a fraudulent transfer. As the buyer utilizes the target's assets to finance the transaction, the target arguably received less than "reasonably equivalent" value.
There are several ways for a buyer to limit its exposure to a fraudulent transfer claim, such as obtaining a fairness opinion, a solvency opinion or consummating the transaction in the context of a bankruptcy proceeding -- which is the most foolproof approach. Another interesting wrinkle in negotiating with a distressed company is that when the company enters into the "zone of insolvency," the fiduciary responsibility of directors and officers shifts from shareholders to creditors. Buyers can gain leverage by making this point painfully clear to directors and officers.
Whether the buyer is strategic or financially oriented, an important part of the acquisition strategy should be focused on whether the assets should be acquired in or outside of bankruptcy. Acquiring distressed companies and assets through a bankruptcy proceeding provides considerable benefits, such as cleansing the assets of liens, the ability to reject unfavorable contracts and the virtual elimination of various types of liabilities. However, these benefits must be weighed against the transparency of a bankruptcy proceeding, which is designed to fully vet an asset, foster competition and garner the highest and best price. Strategic buyers also need to consider the reputational impact of a bankruptcy and the effect it could have on trade vendors. If a company has critical and irreplaceable vendors, a buyer should consider contacting such vendors to determine whether they would discontinue doing business with the company if it files bankruptcy. In the end, each distressed situation presents unique facts and buyers should rely on experienced restructuring advisers to assist them in their quest to take advantage of the challenging times that lie ahead.
Steve Zuckerman. The author is director of the Special Situations Group at Farlie Turner & Co., a Fort Lauderdale, Fla.-based investment bank serving growth-oriented middle-market companies. Recently launched, the group provides investment banking, capital raising and financial advisory services to middle-market companies experiencing financial difficulties, ranging from underperforming to significantly distressed businesses.
Tuesday, February 05, 2008
SEC Proposes Further Section 404 Delay
TheCorporateCounsel.net Blog:
The SEC has proposed yet another one-year delay in implementation of an independent auditor’s attestation report on the internal controls for the smallest public companies. As noted in the blog at the end of last year, Chairman Cox had promised this delay in his testimony before the House Committee on Small Business.
Under the proposal, non-accelerated filers would be required to provide auditor’s attestation reports beginning with their annual reports filed for fiscal years ending on or after December 15, 2009. The proposal does not affect the requirement that management complete its own assessment of internal control over financial reporting – which is now required for all filers, regardless of size. The proposing release is out for a 30-day comment period.
The proposed delay in fully implementing Section 404(b) – to over seven years after Sarbanes-Oxley was enacted – coincides with an announcement that the Staff has commenced its previously discussed study of the costs and benefits associated with the auditor attestation requirement for smaller companies. This is supposed to be an analysis of “real world” data in order to measure experience with the recent SEC and PCAOB guidance for management and auditors. The final results of the study are not expected for several months.
The SEC has proposed yet another one-year delay in implementation of an independent auditor’s attestation report on the internal controls for the smallest public companies. As noted in the blog at the end of last year, Chairman Cox had promised this delay in his testimony before the House Committee on Small Business.
Under the proposal, non-accelerated filers would be required to provide auditor’s attestation reports beginning with their annual reports filed for fiscal years ending on or after December 15, 2009. The proposal does not affect the requirement that management complete its own assessment of internal control over financial reporting – which is now required for all filers, regardless of size. The proposing release is out for a 30-day comment period.
The proposed delay in fully implementing Section 404(b) – to over seven years after Sarbanes-Oxley was enacted – coincides with an announcement that the Staff has commenced its previously discussed study of the costs and benefits associated with the auditor attestation requirement for smaller companies. This is supposed to be an analysis of “real world” data in order to measure experience with the recent SEC and PCAOB guidance for management and auditors. The final results of the study are not expected for several months.
Thursday, January 31, 2008
New Rules Could Shine Spotlight on Deal Fees
NYT DealBook, January 31, 2008:
New accounting rules for mergers and acquisitions are likely to have some far-reaching consequences for what such deals cost and how they get done, Compliance Week reports.
One of the most significant changes relates to transaction fees, including fees for investment bankers, attorneys and accountants. Under the new standard, those fees will generally need to be expensed when they are incurred. (Under the current rules, such fees are capitalized and amortized over time.)
Because so much deal-related work happens before a transaction is announced, companies may need to worry about tipping off the markets about a potential deal when those expenses turn up.
The new rule, set to take effect in fiscal 2009 for calendar year-end companies, could also bring more attention to the size of lawyers’ and brokers’ fees.
“Anytime you have something hitting the bottom line, it’s going to lead to more attention,” David Zagore, a partner at Squire, Sanders & Dempsey, told Compliance Week.
Go to Article from Compliance Week »
New accounting rules for mergers and acquisitions are likely to have some far-reaching consequences for what such deals cost and how they get done, Compliance Week reports.
One of the most significant changes relates to transaction fees, including fees for investment bankers, attorneys and accountants. Under the new standard, those fees will generally need to be expensed when they are incurred. (Under the current rules, such fees are capitalized and amortized over time.)
Because so much deal-related work happens before a transaction is announced, companies may need to worry about tipping off the markets about a potential deal when those expenses turn up.
The new rule, set to take effect in fiscal 2009 for calendar year-end companies, could also bring more attention to the size of lawyers’ and brokers’ fees.
“Anytime you have something hitting the bottom line, it’s going to lead to more attention,” David Zagore, a partner at Squire, Sanders & Dempsey, told Compliance Week.
Go to Article from Compliance Week »
Monday, January 28, 2008
Here Is Why the Blackstone-ADS Deal Is in Trouble
Posted by Heidi Moore, WSJ DealJournal:
A lot of private-equity firms probably would be happy these days to have an excuse to walk away from a $7.8 billion deal. But Blackstone Group insists it is clinging tight to the dream of acquiring Alliance Data Systems – no matter what Office of the Comptroller of the Currency says.
The OCC appeared to deal a death blow late Friday to Blackstone’s hopes of acquiring the credit-card processor by setting down requirements that Blackstone refused to meet. Blackstone said the OCC wanted the firm to take on “operational and financial burdens…that cannot be reasonably assumed.”
In wake of that announcement, ADS shares have shed more than $22, or more than 34%, to $43.23 this morning, well below the $81.75 a share Blackstone agreed in May to pay for the Dallas company.
What requirements could be so harsh as to endanger a deal for which Blackstone already had set up financing? What the OCC required, according to a person familiar with the matter, is for Blackstone to guarantee itself as “the source of strength” for ADS’s bank operation.
What, you didn’t know ADS had a bank? Actually, it owns World Financial Capital Bank, an industrial bank with a Utah charter, which puts the company under the regulatory oversight of the OCC as well as the Federal Deposit Insurance Corp. ADS cited World Financial Capital in its most recent quarterly filing as one of its four main sources of funding. The OCC wanted Blackstone to bail out ADS in the event of any trouble – with no size limit to the bailout.
Given the scary press recently about the possibility of the U.S. slipping into recession and the general dismal state of the financial sector lately, it isn’t surprising that Blackstone declined.
Blackstone will continue to talk to ADS about doing a deal, this person says, and will take up a previously mentioned plan to restructure ADS so that the acquisition can go through.
It is a good thing, too: ADS today said Blackstone would have no grounds for walking away from the deal according to the merger agreement, and added that Blackstone should continue negotiating with the OCC.
Merger-structure wonks might be excited about what comes next. What Blackstone and ADS have discussed–and avoided so far–is a move that would somehow transfer World Financial Capital to another institution. (No word on what that institution might be, however.) A partial acquisition might be better than none at all.
A lot of private-equity firms probably would be happy these days to have an excuse to walk away from a $7.8 billion deal. But Blackstone Group insists it is clinging tight to the dream of acquiring Alliance Data Systems – no matter what Office of the Comptroller of the Currency says.
The OCC appeared to deal a death blow late Friday to Blackstone’s hopes of acquiring the credit-card processor by setting down requirements that Blackstone refused to meet. Blackstone said the OCC wanted the firm to take on “operational and financial burdens…that cannot be reasonably assumed.”
In wake of that announcement, ADS shares have shed more than $22, or more than 34%, to $43.23 this morning, well below the $81.75 a share Blackstone agreed in May to pay for the Dallas company.
What requirements could be so harsh as to endanger a deal for which Blackstone already had set up financing? What the OCC required, according to a person familiar with the matter, is for Blackstone to guarantee itself as “the source of strength” for ADS’s bank operation.
What, you didn’t know ADS had a bank? Actually, it owns World Financial Capital Bank, an industrial bank with a Utah charter, which puts the company under the regulatory oversight of the OCC as well as the Federal Deposit Insurance Corp. ADS cited World Financial Capital in its most recent quarterly filing as one of its four main sources of funding. The OCC wanted Blackstone to bail out ADS in the event of any trouble – with no size limit to the bailout.
Given the scary press recently about the possibility of the U.S. slipping into recession and the general dismal state of the financial sector lately, it isn’t surprising that Blackstone declined.
Blackstone will continue to talk to ADS about doing a deal, this person says, and will take up a previously mentioned plan to restructure ADS so that the acquisition can go through.
It is a good thing, too: ADS today said Blackstone would have no grounds for walking away from the deal according to the merger agreement, and added that Blackstone should continue negotiating with the OCC.
Merger-structure wonks might be excited about what comes next. What Blackstone and ADS have discussed–and avoided so far–is a move that would somehow transfer World Financial Capital to another institution. (No word on what that institution might be, however.) A partial acquisition might be better than none at all.
Alliance Data Says Blackstone Deal Is in Trouble
For months, Alliance Data Systems said that its $6.43 billion sale to the Blackstone Group was on track. In recent weeks, amid sudden, sharp declines in Alliance Data’s stock price, people briefed on the deal negotiations told DealBook and other media outlets that the acquisition was proceeding.
But on Monday, the credit-card services provider said it has received notice from Blackstone that the private equity firm does not expect to complete the deal. The notice, sent after the market’s close Friday, said that a federal regulator is asking for “extraordinary measures” in order to grant approval — and that Blackstone is unwilling to meet them.
Blackstone also said that it does not expect the regulator, the Office of the Comptroller of Currency, to consider alternative solutions that are acceptable to Blackstone, according to Alliance Data.
Alliance Data’s board said it “strongly disagrees” with Blackstone’s assessment. The company does not believe that the O.C.C.’s position is final, it said in its statement. Alliance Data also said that Blackstone’s notice does not claim any breach of the deal agreement by the company, or what is known as the declaration a material adverse change. Blackstone also has not taken issue with Alliance Data’s financial or operational performance.
A person close to Blackstone confirmed the notice and the buyout firm’s concern over the O.C.C.’s position, but reiterated that the regulator’s demands were untenable and would have exposed the private equity firm to millions of dollars in losses even after a potential sale of Alliance Data.
Alliance Data’s board is now evaluating its possible courses of action, the company said in its statement.
The deal has now joined the ranks of other buyouts that have run into trouble after the deflation of the buyout boom. Buyouts of companies ranging from Sallie Mae to United Rentals to PHH, another Blackstone deal, have collapsed for reasons ranging from legal issues to financing concerns.
Some of those deals, like those for Sallie Mae and United Rentals, have gone to court.
Go to Alliance Data Press Release via CNN Money »
But on Monday, the credit-card services provider said it has received notice from Blackstone that the private equity firm does not expect to complete the deal. The notice, sent after the market’s close Friday, said that a federal regulator is asking for “extraordinary measures” in order to grant approval — and that Blackstone is unwilling to meet them.
Blackstone also said that it does not expect the regulator, the Office of the Comptroller of Currency, to consider alternative solutions that are acceptable to Blackstone, according to Alliance Data.
Alliance Data’s board said it “strongly disagrees” with Blackstone’s assessment. The company does not believe that the O.C.C.’s position is final, it said in its statement. Alliance Data also said that Blackstone’s notice does not claim any breach of the deal agreement by the company, or what is known as the declaration a material adverse change. Blackstone also has not taken issue with Alliance Data’s financial or operational performance.
A person close to Blackstone confirmed the notice and the buyout firm’s concern over the O.C.C.’s position, but reiterated that the regulator’s demands were untenable and would have exposed the private equity firm to millions of dollars in losses even after a potential sale of Alliance Data.
Alliance Data’s board is now evaluating its possible courses of action, the company said in its statement.
The deal has now joined the ranks of other buyouts that have run into trouble after the deflation of the buyout boom. Buyouts of companies ranging from Sallie Mae to United Rentals to PHH, another Blackstone deal, have collapsed for reasons ranging from legal issues to financing concerns.
Some of those deals, like those for Sallie Mae and United Rentals, have gone to court.
Go to Alliance Data Press Release via CNN Money »
Friday, January 25, 2008
The Economic Impact of Private Equity
Fron Dan Primacks' Private Equity Hub:
Last Friday, SEIU protesters at Wharton accused the private equity industry of being a callous job killer. Then The Private Equity Council released a study purporting to show that its members were actually magnanimous job creators. Not surprisingly, the truth is found somewherei n the middle.
A massive new academic study called “The Economic Impact of Private Equity” was released today in Davos, and included detailed findings on private equity employment. Among the findings:
* Two years prior to a buyout, PE-backed companies cut 4% more of their employees than do companies that are not acquired by PE. The indication here is that the typical PE-backed company is in relatively tougher shape to begin with.
* PE-backed companies cut, on average, 7% of its existing workforce over the first two years post-buyout. But they also add jobs over the same amount of time, resulting in just a 1% net employment decrease. Job growth balances out with the non-PE control group in years four and five. Expect the SEIU and other critics to inquire as to the “quality” of those new jobs — in terms of location, salary and benefits.
The study examined around 5,000 PE transactions between 1980 and 2005 (recent boom excluded, therefore), and was co-led by Josh Lerner of Harvard Biz School and Steven Davis of U Chicago. I’ll have more on this later, once I read through it all. In the meantime, you can also read it for yourself:
Executive Summary: ExecSummary.pdf
Full Report: Full_Report.pdf
Last Friday, SEIU protesters at Wharton accused the private equity industry of being a callous job killer. Then The Private Equity Council released a study purporting to show that its members were actually magnanimous job creators. Not surprisingly, the truth is found somewherei n the middle.
A massive new academic study called “The Economic Impact of Private Equity” was released today in Davos, and included detailed findings on private equity employment. Among the findings:
* Two years prior to a buyout, PE-backed companies cut 4% more of their employees than do companies that are not acquired by PE. The indication here is that the typical PE-backed company is in relatively tougher shape to begin with.
* PE-backed companies cut, on average, 7% of its existing workforce over the first two years post-buyout. But they also add jobs over the same amount of time, resulting in just a 1% net employment decrease. Job growth balances out with the non-PE control group in years four and five. Expect the SEIU and other critics to inquire as to the “quality” of those new jobs — in terms of location, salary and benefits.
The study examined around 5,000 PE transactions between 1980 and 2005 (recent boom excluded, therefore), and was co-led by Josh Lerner of Harvard Biz School and Steven Davis of U Chicago. I’ll have more on this later, once I read through it all. In the meantime, you can also read it for yourself:
Executive Summary: ExecSummary.pdf
Full Report: Full_Report.pdf
Friday, January 18, 2008
Union Protest Roils Private Equity Conference
David Rubenstein was supposed to deliver the keynote speech Friday morning at the Wharton Private Equity Conference, an annual event that draws buyout professionals and academics to discuss the state of the industry. Instead, Mr. Rubenstein, managing director of the Carlyle Group, was “hooted off the stage,” as The Philadelphia Inquirer’s Joseph N. DiStefano described it, by protesters from the Service Employees International Union.
The union, which has emerged as one of the buyout industry’s fiercest critics in recent years, has been no stranger to street theater and other attention-getting events. But Friday’s protest, which Daniel Primack of PEHub.com said drew a “small army of police” to the scene, took things to another level.
George White, writing for TheDeal.com’s DealScape blog, described between 30 and 50 people streaming into the conference room at the Park Hyatt Philadelphia Hotel, shouting and passing out flyers. A woman with a megaphone “lit into” Mr. Rubenstein about his firm’s recent acquisition of ManorCare, the largest chain of nursing homes in the United States, Mr. White wrote.
The union tried to thwart that deal by questioning the effects it would have on residents’ living conditions, but it was ultimately approved by ManorCare’s shareholders as well as regulators in all the states involved.
The Service Employees International Union, which has nearly 2 million members, has moved on several fronts to raise questions about whether the recent boom in private equity deals is good for the average worker. Last summer, they organized a small demonstration in the Hamptons, a tony enclave in New York’s Long Island, where protesters pretended to be billionaires and expressed mock opposition to raising taxes on private equity fund managers.
The union has also created Web sites critical of various private equity firms as well as specific buyout deals.
On Friday, a correspondent for DealBreaker.com described Mr. Rubenstein as being rendered momentarily “speechless” by the protesters — remarkable in itself for a man who is a regular on the speech-giving circuit.
He apparently found his voice soon enough, however, telling the woman with the megaphone to “take a remedial course in English before you go any further.”
Go to Article from the Philadelphia Inquirer »
Go to Item from PEHub.com »
Go to Item from The Deal’s DealScape Blog »
Go to Item from DealBreaker.com »
The union, which has emerged as one of the buyout industry’s fiercest critics in recent years, has been no stranger to street theater and other attention-getting events. But Friday’s protest, which Daniel Primack of PEHub.com said drew a “small army of police” to the scene, took things to another level.
George White, writing for TheDeal.com’s DealScape blog, described between 30 and 50 people streaming into the conference room at the Park Hyatt Philadelphia Hotel, shouting and passing out flyers. A woman with a megaphone “lit into” Mr. Rubenstein about his firm’s recent acquisition of ManorCare, the largest chain of nursing homes in the United States, Mr. White wrote.
The union tried to thwart that deal by questioning the effects it would have on residents’ living conditions, but it was ultimately approved by ManorCare’s shareholders as well as regulators in all the states involved.
The Service Employees International Union, which has nearly 2 million members, has moved on several fronts to raise questions about whether the recent boom in private equity deals is good for the average worker. Last summer, they organized a small demonstration in the Hamptons, a tony enclave in New York’s Long Island, where protesters pretended to be billionaires and expressed mock opposition to raising taxes on private equity fund managers.
The union has also created Web sites critical of various private equity firms as well as specific buyout deals.
On Friday, a correspondent for DealBreaker.com described Mr. Rubenstein as being rendered momentarily “speechless” by the protesters — remarkable in itself for a man who is a regular on the speech-giving circuit.
He apparently found his voice soon enough, however, telling the woman with the megaphone to “take a remedial course in English before you go any further.”
Go to Article from the Philadelphia Inquirer »
Go to Item from PEHub.com »
Go to Item from The Deal’s DealScape Blog »
Go to Item from DealBreaker.com »
Tuesday, January 15, 2008
Supreme Court Restricts Securities Lawsuits
In one of the most closely watched business cases in years, the Supreme Court on Tuesday upheld protections for secondary players in securities-fraud schemes, as opposed to the primary engineers of those plots.
The court ruled, 5 to 3, against plaintiffs who had sued two cable television equipment suppliers whose dealings with a cable television company had allowed the cable outfit to inflate its earnings and hide its failure to achieve its financial goals.
Although the outcome of the case, Stoneridge Investment Partners v. Scientific-Atlanta, No. 06-43, hinged on terminology that might seem technical and arcane to a layman, the case is likely to be felt far beyond Wall Street, as lawyers for investors and businesses fight over who can be sued and who cannot.
The majority noted that, whatever deception was committed by the defendants, “their deceptive acts were not communicated to the investing public during the relevant times,” and that it was Charter that misled auditors and filed fraudulent financial statements.
The plaintiffs were unable to show any public reliance on the defendants’ actions “except in an indirect chain that we find too remote for liability,” Justice Anthony M. Kennedy wrote for the majority.
The Stoneridge ruling appears to offer protection for accountants, lawyers and others who may know about corporate shenanigans but can establish that they are not directly involved in them. Defense lawyers in shareholders’ suits often complain that defendants can be forced to settle claims with little merit rather than risk prolonged and costly litigation.
“The court held that you are not your brother’s bookkeeper,” said Jerrold J. Ganzfried, a former assistant to the solicitor general and now head of the Howrey law firm’s Supreme Court and appellate litigation group.
A key question in the case decided on Tuesday was whether Scientific-Atlanta and the other defendant, Motorola, were “primary violators” in a sham bookkeeping transaction with Charter, or if they were guilty only of “aiding and abetting” a fraud engineered by Charter.
At the request of Charter, which in mid-2000 was falling short of its cash-flow target, Scientific-Atlanta and Motorola agreed to increase their prices for the cable boxes they sold to Charter and to use the extra money to buy advertising on Charter’s cable stations. The arrangement allowed Charter to treat the advertising purchases as current revenue while listing the money spent on cable boxes as a capital expense.
Four Charter executives eventually pleaded guilty to criminal charges, and Charter paid $144 million to settle a suit brought by Stoneridge on behalf of shareholders.
When the case was argued before the justices on Oct. 9, the lawyer for Scientific-Atlanta and Motorola asserted that, at worst, his clients had aided and abetted Charter’s fraud, and thus should not be liable.
Subtle or not, the difference between a primary violation and aiding and abetting was all-important in the case decided on Tuesday. The reason is that in a 1994 case, Central Bank of Denver v. First Interstate Bank, the Supreme Court ruled that laws governing securities did not provide for any liability for “aiding and abetting.”
Although Congress responded to that decision by giving the Securities and Exchange Commission the authority to bring lawsuits for aiding and abetting, it did not give private plaintiffs the authority to do so.
Any decision to give private litigants the power to sue aiders and abetters “is thus for the Congress, not for this court,” Justice Kennedy wrote. Joining him were Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr.
Lawyers involved in securities litigation said the ruling continues a trend in which the court shows itself “less inclined to finish up legislation for Congress” than earlier lineups of justices, as Bob Pietrzak, co-head of litigation in Sidley Austin’s New York City office put it.
“The court’s decision continues its recognition that expanding the U.S. securities laws beyond the reach expressly intended by Congress is not only legally incorrect but endangers the competitive position of the United States in the global marketplaces,” Mr. Pietrzak said. “Non-U.S. entities can feel more comfortable that doing business in the United States will not have the unintended consequence of exposing them to liability under the U.S. securities laws.”
Go to Article from The New York Times »
Go to Previous Item from DealBook »
The court ruled, 5 to 3, against plaintiffs who had sued two cable television equipment suppliers whose dealings with a cable television company had allowed the cable outfit to inflate its earnings and hide its failure to achieve its financial goals.
Although the outcome of the case, Stoneridge Investment Partners v. Scientific-Atlanta, No. 06-43, hinged on terminology that might seem technical and arcane to a layman, the case is likely to be felt far beyond Wall Street, as lawyers for investors and businesses fight over who can be sued and who cannot.
The majority noted that, whatever deception was committed by the defendants, “their deceptive acts were not communicated to the investing public during the relevant times,” and that it was Charter that misled auditors and filed fraudulent financial statements.
The plaintiffs were unable to show any public reliance on the defendants’ actions “except in an indirect chain that we find too remote for liability,” Justice Anthony M. Kennedy wrote for the majority.
The Stoneridge ruling appears to offer protection for accountants, lawyers and others who may know about corporate shenanigans but can establish that they are not directly involved in them. Defense lawyers in shareholders’ suits often complain that defendants can be forced to settle claims with little merit rather than risk prolonged and costly litigation.
“The court held that you are not your brother’s bookkeeper,” said Jerrold J. Ganzfried, a former assistant to the solicitor general and now head of the Howrey law firm’s Supreme Court and appellate litigation group.
A key question in the case decided on Tuesday was whether Scientific-Atlanta and the other defendant, Motorola, were “primary violators” in a sham bookkeeping transaction with Charter, or if they were guilty only of “aiding and abetting” a fraud engineered by Charter.
At the request of Charter, which in mid-2000 was falling short of its cash-flow target, Scientific-Atlanta and Motorola agreed to increase their prices for the cable boxes they sold to Charter and to use the extra money to buy advertising on Charter’s cable stations. The arrangement allowed Charter to treat the advertising purchases as current revenue while listing the money spent on cable boxes as a capital expense.
Four Charter executives eventually pleaded guilty to criminal charges, and Charter paid $144 million to settle a suit brought by Stoneridge on behalf of shareholders.
When the case was argued before the justices on Oct. 9, the lawyer for Scientific-Atlanta and Motorola asserted that, at worst, his clients had aided and abetted Charter’s fraud, and thus should not be liable.
Subtle or not, the difference between a primary violation and aiding and abetting was all-important in the case decided on Tuesday. The reason is that in a 1994 case, Central Bank of Denver v. First Interstate Bank, the Supreme Court ruled that laws governing securities did not provide for any liability for “aiding and abetting.”
Although Congress responded to that decision by giving the Securities and Exchange Commission the authority to bring lawsuits for aiding and abetting, it did not give private plaintiffs the authority to do so.
Any decision to give private litigants the power to sue aiders and abetters “is thus for the Congress, not for this court,” Justice Kennedy wrote. Joining him were Chief Justice John G. Roberts Jr. and Justices Antonin Scalia, Clarence Thomas and Samuel A. Alito Jr.
Lawyers involved in securities litigation said the ruling continues a trend in which the court shows itself “less inclined to finish up legislation for Congress” than earlier lineups of justices, as Bob Pietrzak, co-head of litigation in Sidley Austin’s New York City office put it.
“The court’s decision continues its recognition that expanding the U.S. securities laws beyond the reach expressly intended by Congress is not only legally incorrect but endangers the competitive position of the United States in the global marketplaces,” Mr. Pietrzak said. “Non-U.S. entities can feel more comfortable that doing business in the United States will not have the unintended consequence of exposing them to liability under the U.S. securities laws.”
Go to Article from The New York Times »
Go to Previous Item from DealBook »
Congress asks Prince and O’Neal to testify on pay
A United States Congressional committee has asked Charles O. Prince III, the former chairman and chief executive of Citigroup, and E. Stanley O'Neal, his counterpart at Merrill Lynch, to justify their exit pay packages when they were forced to leave the banks.
Go to Article from Financial News»
Go to Article from Financial News»
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