Will M&A Die Under Obama or Clinton?

Posted by Heidi N. Moore, May 29, 2008, 2:48 pm
Deal Journal, WSJ.com

While Barack Obama predicts his own victory in the Democratic presidential primaries as of June 3, deal makers fret about whether a Democratic administration would mean never being able to do a big M&A deal again.
US Airways and United Airlines, for instance, said today that they are pedaling as fast as they can to get a deal done before the Bush administration leaves. Are their fears justified?
If you go by the rhetoric, yes.
Both Obama and Democratic rival Hillary Clinton have indicated they don’t see antitrust matters as loosely as they accuse the Bush administration of doing. Obama has been more outspoken, criticizing the Bush administration for what he sees as lax enforcement of the nation’s antitrust laws. Clinton has been less so.
Here is Obama’s first salvo: “We live in a globalized economy and we probably have to update how we approach antitrust to figure out what is truly uncompetitive behavior on the part of monopolies or oligopolies and what are just big successful companies that need to be big in order to compete internationally….Some of the consolidations that have been taking place, I think, may be anticompetitive….We’re going to have an antitrust division in the Justice Department that actually believes in antitrust law. We haven’t had that for the last seven, eight years.”
Of course, Obama is campaigning, and on a Democratic platform you would expect him to talk tough on mergers. The Clinton Administration gave Microsoft a heck of a time, for instance. But some believe that the important courts right now will still be staffed by Republican judges who may not be amenable to antitrust challenges.
Hillary Clinton is a little harder to read. Her only stance on antitrust has come in the form of comments against OPEC. She has promised to amend antitrust law to confront OPEC and has threatened repeatedly to confront the cartel through the World Trade Organization.
But as first lady in the ’90s, Clinton tried to encourage hospitals to communicate with each other as part her push for universal health care; she also promised to dial down any antitrust enforcement that would prevent hospitals from sharing information with each other.
Of course, the antitrust stances of these two candidates don’t extend to their own interests: there is, after all, rampant speculation about a merger of their two campaigns.

LBO Firms Must Return Cash to Change Plan

LBO Firms Must Return Cash to Change Plan, Hands Says
By Edward Evans
May 28 (Bloomberg) -- Leveraged buyout firms should hand back investors' money if they change strategy because of the credit crunch, British financier Guy Hands said.
Buyout firms that once focused on large investments have ``suddenly'' started investing in distressed debt, while other firms with little experience beyond their local markets are targeting Asia to profit from the region's economic growth, Hands wrote in his quarterly report to investors. He didn't identify the firms in the document, which was published on his Web site.
``This approach means using the capital entrusted to one strategy to pursue another,'' Hands said. Firms should return to investors' money they haven't already spent and ask investors' permission to invest it in other ways, he added. ``The firm one chooses to back to do mega-deals may well not be the firm one chooses to back in, for example, the mid-market. The limited partners should have the opportunity to decide.''
The world's largest leveraged buyout firms are struggling to get loans for deals after the collapse of the U.S. subprime- mortgage market spurred investors to flee all but the safest forms of debt. The firms have announced $118 billion of deals this year, about a third as much as in the same period in 2007, according to data compiled by Bloomberg.
Few Return Cash
Few, if any, buyout firms have ever returned cash to investors, apart from a number of venture capital firms that were unable to find investments after the bursting of the dot- com bubble, Hands added.
Hands, who runs London-based private equity firm Terra Firma Capital Partners Ltd., said his firm's only option is to invest in areas less affected by a slowdown in the economy, targeting asset-rich companies that require changes to their management and operations. He warned investors to expect short- term losses from this strategy.
``Whilst following this strategy early in a bear market may still lead to investors suffering mark to market losses in the short term, most private equity investors are more concerned about creating value over the whole economic cycle than they are with achieving performance in any particular part of that cycle,'' Hands added.
Hands, 48, built up Nomura Holdings Inc.'s buyout business in the 1990s before quitting to run his own firm with Nomura's backing in 2002. Terra Firma is investing a 5.4 billion-euro ($8.4 billion) fund that closed in May last year.
Terra Firma bought EMI Group Plc, the record label whose acts include the Beatles, for 2.4 billion pounds ($4.9 billion) last year. New York-based Citigroup, which financed Terra Firma's bid, postponed plans last month to sell the loans because of investor anxiety about EMI's turnaround under Hands.
``This is not ideal for EMI,'' Hands wrote. ``We have worked hard, and continue to work hard, to see if there are ways to help Citigroup syndicate or sell down this loan.''

Study Claims Milberg Weiss Scheme Hurt Shareholders

Anthony Lin, New York Law Journal, May 28, 2008:

As former securities class action king Melvyn I. Weiss awaits sentencing for his role in the payment of kickbacks to named plaintiffs in shareholder suits, a conservative think tank is set to release a study purporting to show that the scheme injured shareholders.
The American Enterprise Institute Legal Center is releasing today an article by professor Michael Perino of St. John's University School of Law that takes on the argument that the Milberg Weiss kickbacks constituted a victimless crime because the payments came out of legal fees awarded to the firm and named plaintiffs had incentive to maximize class recoveries.
Examining a database of 730 Milberg Weiss class action settlements and legal fee awards, Perino compared those that were cited in the indictments against the firm and its partners and those that were not. He found the indictment cases on average actually settled for slightly less than the non-indictment cases, suggesting the kickback incentives did not improve recoveries.
On the other hand, Perino found that the legal fees requested and awarded in the indictment cases were significantly higher than those in the non-indictment cases, and also higher than those in cases handled by firms other than Milberg Weiss.
According to the report, the findings support the notion that class members were hurt by the kickbacks, as they "appear to have received a lower proportion of the settlement proceeds than class members in otherwise substantially similar non-indictment cases."
Federal prosecutors have requested a 33-month sentence for Weiss, who pleaded guilty in March. He is in turn arguing for 18 months. His sentencing is scheduled for June 2.

M&A Optimism: It’s Spreading!

Posted by WSJ Deal Journal, May 15, 2008:
After months of paring back on loans, Wall Street’s banks are finally loosing their lending for private-equity deals, according to bankers speaking at a conference in New York on Wednesday.
Banks have committed $10 billion to $20 billion in new private-equity deals during 2008, meaning the total backlog now stands less than $80B, said John Eydenberg, head of Deutsche Bank’s leveraged finance group, speaking at The Deal’s Private Capital Symposium.
“Panic has been behind us,” said Eydenberg. “About three weeks ago, backlog didn’t matter any more. People started to think about fundamentals again.”
Optimism is budding on Wall Street and that’s primarily due to the speed banks with which banks like Citigroup have been able to sell down hung bridge loans. The backlog has decreased to its current level from around $250 billion a few months ago.
People are “less sanguine” than they were at earlier stages of the credit crunch, said Peter Schoenfeld, CEO of P. Schoenfeld Asset Management LLC. “The real horror stories are gone.”
But market participants say the recovery is still at an early stage.
“You will see us walk before we run,” said Alan Jones, co-head of Morgan Stanley’s private equity group. “We will be in a normal, more protected environment,” he said. But the recovery is “going to be gradual. We are in the crawling maybe walking phase.”

SEC Scrutinizing Investment Bank Liquidity

By Rachelle Younglai and Karey Wutkowski
WASHINGTON (Reuters) - The U.S. Securities and Exchange Commission is scrutinizing the liquidity of investment banks it supervises and is planning to require the top Wall Street firms to publicly disclose their current liquidity and capital positions, SEC officials said on Wednesday.
Attention has been on funding at the biggest U.S. investment banks since March, when Bear Stearns Cos Inc nearly collapsed after a sharp decline in its liquidity.
Go to Article from The New York Times»
Go to Article from Reuters»

IPOs: Back from the Dead?

by Ben Steverman, BusinessWeek.com, May 8, 2008:
A nervous Wall Street scorned initial public offerings for months, but suddenly IPOs are popular again.
Recent stock market debuts have been successful, including the largest IPO ever—Visa's (V) $19.6 billion deal—and a herd of new offerings are hitting the market soon. The next couple weeks are expected to be the busiest time for IPOs so far this year.
Investors seem more and more willing to take chances on small, fast-growing startups. That sort of appetite for risk has been hard to find since last fall, as a bear market and a credit crisis took big bites out of many portfolios.
After a tough start to 2008, the broader stock market recovered a bit. The broad Standard & Poor's 500-stock index gained 3.5% in the month before May 6. But the IPO market is doing even better. Recent IPOs, measured by Renaissance Capital's IPO index, are up 12.2% in the past month.
Go to Article from BusinessWeek»

Simply Appalling: Good judgment seems to have been short-circuited in the Circuit City boardroom

From Directors & Boards E-Briefing, May, 2008:
A perennial mystery to this longtime governance observer is how a board can seemingly sit silently by and watch a management trash a business. This seems to be what’s been happening at Circuit City Stores Inc. A year ago the company announced a turnaround plan. A centerpiece of the plan was laying off a slew of more experienced salespeople, to be replaced with lower-paid hires. But get this: Those who lost their jobs could reapply for their old jobs, at the lower pay, but had to wait 10 weeks to do so. That’s simply appalling.“That’s the most cynical thing I’ve heard about in a long time,” said Peter Cappelli, in a critique of the plan published by the Wharton School’s Knowledge@Wharton newsletter. Cappelli is a management professor and director of Wharton’s Center for Human Resources . Another Wharton professor, Daniel Levinthal, termed the layoff plan “a massive de-skilling” of the company. I’m all for companies doing what they feel they must do to survive. But let’s be mindful of what Peter Drucker said: “The purpose of a business is to create a customer.”When a company takes steps that are repellent in its treatment of its human resources — its work force and its customers — is it really a business anymore? Or a business that should stay in business?I didn’t write about this abhorrent policy at the time. My personal response was to vow never to set foot in a Circuit City store again, and to leave it at that.I did wait for the follow-on announcement that the current board members all submitted their resignations — so as, in the spirit of their approved turnaround plan, to allow management to replace them with a newer, younger board, which would be paid a lower retainer and fees than the old directors received. Less experienced? Who cares about that? And the current board, after a cool-down period, would be allowed to reapply for their old seats, at the lower scale, of course. Funny … I missed that announcement. Did you, too?Well, a year has gone by, and Circuit City is now much in the news. Perhaps my personal reaction was shared by similarly offended spirits. The turnaround seems to have run aground. Circuit City’s results are punk, the stock price has collapsed, and a hedge fund, which has called the turnaround effort “disastrous,” is at the board’s throat. Then, in a bizarre turn, in mid-April Blockbuster Inc. weighed in with a merger proposal. That’s being charitable to call it bizarre. It’s also being called “crazy,” “reckless,” and “looney” by deals analysts.All I can hope is that there were some dissenting voices in the boardroom — “What are they thinking?!” —when management unveiled the HR components of its turnaround plan. It must be a sad day in the life of a director when he or she sees the company’s business and reputation about to be trashed.

Jim Kristie is the editor and associate publisher of Directors & Boards.

Wall Street, Run Amok?

How on earth did the credit crisis on Wall Street become such a catastrophe, Ben Stein wonders in his latest column for The New York Times? How, he asks, did all of the mechanisms operated by the mind-bogglingly well-paid men and women of the Street go so wrong that we saw a major investment bank, Bear Stearns, essentially disappear?
In an effort to answer those questions, Mr. Stein, a lawyer, writer, actor and economist, points to a speech on the matter that was given on April 8 by hedge fund manager David Einhorn at a Grant’s Interest Rate Observer event.
One of Mr. Einhorn’s more troubling observations, Mr. Stein says, is that the Securities and Exchange Commission allowed broker-dealers to set their own valuations on assets and liabilities that were hard to value. And broker-dealers could assign their own creditworthiness ratings to counterparties in complex derivatives transactions when those counterparties were otherwise unrated.
In a word, Mr. Einhorn says, the S.E.C. told Wall Street to police itself to save on regulatory costs, while not bothering to “discuss the cost to society of increasing the probability that a large broker-dealer could go bust.”
A result of all this, he says, was as follows:
“The owners, employees and creditors of these institutions are rewarded when they succeed, but it is all of us, the taxpayers, who are left on the hook if they fail. This is called private profits and socialized risk. Heads, I win. Tails you lose. It is a reverse-Robin Hood system.”
In his response to Mr. Einhorn’s thesis, Mr. Stein writes:
It looks to me as if the inmates are running the asylum. One truth, that deregulation is sometimes a good thing, has been followed down so long and winding a road that it has led to an immense lie: that deregulation carried to an extreme will not lead to calamity.
To think that people of this mind-set are in charge of the finances of the nation that is the cornerstone of world freedom is terrifying.
Go to Article from The New York Times »

A Tale of Two Public Offerings

New York Times DealBook, April 24, 2008:
With the credit market still in lockdown and the equity market on a downswing, taking a company public might seem a bit loopy. Two companies that actually took the plunge this week, American Waterworks and Intrepid Potash, exemplify how bipolar this market has become.
There has been much hand-wringing about the horrible environment for initial public offerings — but the reality is a bit more nuanced. At $24 billion, the volume of new issuances in the United States actually doubled in the first quarter from a year earlier. But if you exclude the gargantuan stock sale from Visa, the total value in the first quarter was about $5 billion, down 58 percent from last year, according to Dealogic.
Those that did brave the market have seen wildly different outcomes. Take American Waterworks, which hit the market Wednesday. The spinoff of German utility giant RWE might normally have attracted a lot of attention from risk-averse institutional investors — especially now that risk is out of fashion.
But it was far from popular, bankers working the deal said. RWE priced the stock at $21.50, 40 percent below what it originally thought it could grab last year. And investors were still not impressed — the shares fell as much as 6 percent Wednesday morning.
On the flipside, Intrepid Potash, which makes fertilizer, saw its stock pop as much as 60 percent in its debut Tuesday. Commodity-crazed investors fell over each other to buy a piece of the agricultural company, whose main product, potash, has seen a 131 percent increase in value in just seven months.
This wild market is scaring a lot of companies from going public. A total of 83 companies withdrew their initial public offerings this year and another 24 have delayed share sales, according to Ernst and Young. That is a record.
At this pace, the long-anticipated public offering from private equity giant Kohlberg Kravis Roberts might be sitting on the shelf for many more months to come.

Next Steps on the Credit Rating Fiasco

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.

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.”

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.

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.

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

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.

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

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

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 »

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."

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."