In a newsy week, here's a couple of international developments not to be missed, courtesy of Securities Mosaic:

• Congress can legislate all it wants, but even more dramatic regulatory reform can be found in the Basel Committee's consultative document, which actually contains many of the proposals reformist academics have been mulling.  Such as: "Introducing a leverage ratio as a supplementary measure to the Basel II risk-based framework with a view to migrating to a Pillar 1 treatment based on appropriate review and calibration. The leverage ratio will help contain the build-up of excessive leverage in the banking system, and introduce additional safeguards against model risk and measurement error."  I can't see Congress pulling leverage caps off; sometimes getting things done the undemocratic way is the only way to get it.
• Derivatives regulation - and this is Congress's idea - may be pursued extraterritorially: "Some of the regulatory bills being proposed in the United States, however, have raised concerns among international banks they could allow U.S. regulators to impose capital requirements on European banks that operate in the country, on top of rules planned for the continent."

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As a junior faculty member, I spend a lot of time thinking about how to develop into a productive scholar, and one who has an impact on my field.  When I look at senior people whose careers I respect, it seems as if they sprouted from the womb as fully-formed intellectuals, born with a complete, big-picture understanding of corporate and securities law, and with a clear and compelling perspective on where that law should go.  They address fundamental issues, and they make me think about them in a way that I hadn't before.  If that picture is accurate, if those criteria are the standard to be met, I am, in a word, doomed.

But, instead of throwing in the towel, maybe it would be better to think about how to turn into one of those people, rather than bemoaning the fact that I am not one today.  In fact, as I meet more and more of my peers, it strikes me that very few of us have achieved that sort of mastery early in our careers.  Frankly, and with a couple of notable exceptions, most beginners who think they have are wrong.  

So, in comes my Mosaic Theory.  In essence, it advocates treating the work of corporate law scholarship like the creation of a mosaic - laying small tile after small tile, and eventually using those individual pieces to create a larger, coherent picture.  The name comes from the famous description of a securities analyst, whose job is to "piece seemingly inconsequential data together with public information into a mosaic which reveals material non-public information."  Specifically, it rejects the idea of beginning with a theory of everything and then applying that theory to your prospect of choice.  Rather, it advocates picking a discrete area, and writing in a convincing and thorough manner on a small topic in that area.  Then, do it again.  And again.  And again.  After a while, step back. 

If you have spent enough time laying the individual tiles, if you have taken care to lay them properly and with skill, the full picture will begin to come into focus.  When you see it, you are ready to write your big article(s).  If you don't, keep doing what you have been doing.

So, does this approach make sense to anyone else?  Am I fooling myself?  Is this just an overly elaborate way of saying "start small"?  I find this characterization useful and will explain in future posts how it can help candidates on the job market in crafting their research agenda, and how it is playing out in my own scholarship.

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As my colleague Larry Cunningham over at concurring opinions has noted, the business law faculty at GW have been pretty busy lately working to launch a comprehensive business law program, the Center for Law, Economics and Finance (C-LEAF).  In addition to other endeavors, C-LEAF will feature a junior faculty workshop and junior faculty prize focused on scholarship related to business, economic and finance issues, and we will be seeking submissions for the papers in the Fall of 2010 for an event to be held in the Spring of 2011. 

Of course, law schools and law organizations often host junior faculty workshops.  Moreover, some recent junior workshops have added a substantive focus, such as those in environmental law organized jointly by Harvard, Berkeley and UCLA or the one in family law at Washington & Lee.  GW's junior workshop will focus on business and financial law.  Of course, we at the Glom are intimately familiar with junior faculty workshops tied to these issues since Christine, the rest of the Glommers and friends of the Glom pull together an impressive online version of these junior faculty workshops.  The Glom and other academic institutions promote junior faculty workshops because they help enrich the scholarship of young faculty while giving such faculty the opportunity to interact with others in the field.  So GW is excited to be building on that kind of work in this area.  Indeed, we have a strong interest in promoting scholarship in this field, and the faculty at GW wants to be a part of providing forums to exchange ideas and showcase new scholarship in this area.

As Larry noted in his post, details about the rest of the C-LEAF programs will come via a more "formal grand announcement," but these junior faculty workshops are time-sensitive enough that we wanted to provide some advance notice.  C-LEAF will host an annual or biennieal Junior Faculty Workshop starting next year.  As many as seven to ten papers may be selected for presentation at an academic workshop where senior faculty will provide feedback on the papers.  Selected authors will receive a Junior Faculty Prize--a combination of cash, symbolic recognition, and an invitation to become affiliated members of C-LEAF.  In addition to the participants and senior faculty commentators, the workshop audience will include GW Law School Faculty, and other invited guests, likely to include colleagues from the winning junior scholars' home schools, nominated by them.

Both Larry and I will provide further details about the junior faculty workshop and C-LEAF.  In addition, details will be available on the GW web site.  But interested scholars may contact any one of the business faculty at GW to get on our mailing list and receive details directly.  We are: Michael Abramowicz, Don Clarke, Larry Cunningham, Lisa Fairfax, Theresa Gabaldon, Scott Kieff, Jeff Manns, Dalia Mitchell, Larry Mitchell, and Art Wilmarth.

In the meantime, stay tuned. . .

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I've blogged before about the rarity of action from the government's national security committee, which in my view - and you will have to stay tuned for the soon to be published article on this - rarely acts against foreign acquirers, but does serve as a congressional notification service.  Congress is much more likely to swing into action for certain foreign acquisitions, and one place where it does so, oddly enough, is natural resources.  The Obama administration has just told a Chinese company that it will not let it take over a small Nevada gold company, which is curious, to say the least, because such an acquisition would hardly let the Chinese corner the market in gold.  As the Times notes, however, "The Nevada mines are also close to military installations, including the Fallon Naval Air Station, complicating the deal, according to written summaries of meetings with Obama administration officials obtained by The New York Times."  There's also been a further investigation of a sale of Virgin Galactic to a Middle Eastern government owned concern, but I'm guessing that the acquisition will be permitted there.

Winners: DC lawyers, who have all the more reason to remind companies that they need to hire experts to take them through the opaque CFIUS process.  And DoD, which is much more worried about foreign acquisitions than the other members of that committee, which supervises foreign acquisitions.

Loser: China, which is really the only country that has ever suffered reversals before CFIUS.

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The chief of Fiat says he's thinking about suing to undo the law that gives former GM and Chrysler dealers arbitration rights against the two companies.  Here's a summary of how the law works:

GM and Chrysler now have 30 days to send letters to the owners of about 2,150 rejected dealerships informing them of their rights under the new law and spelling out the reasons that their franchise agreements were terminated.

With Obama's signature, the eliminated dealerships have 40 days to give notice that they intend to seek arbitration.

Arbitration must be completed within six months, and dealerships that win must receive a letter of intent from the automakers within another 14 business days.

I don't see any way that Chrysler could prevail in this suit.  Congress can do anything it likes to regulate commerce, provided that it doesn't take property without compensation or due process (and it gets plenty of leeway there), commandeer the states, or violate certain enumerated rights.  In other words, congressional legislation cannot be unconstitutional, but nowhere does it say that it has to be sensible.  Interfering in the company-dealer relationship is a stunningly bad idea, probably, but there's nothing illegal about it.  It is worth noting, moreover, that the government all but owns these two auto companies, though - to be clear - I don't think that makes a bit of difference to the constitutionality of the legislation.  Binding arbitration is pretty due process (it is to be conducted under AAA rules), and the takings clause is rarely applied to interfered with contracts (which franchise agreements are).  As for the contracts clause, the Supreme Court has said that “[L]aws intended to regulate existing [private] contractual relationships must serve a legitimate public purpose ... [and] courts properly defer to legislative judgment as to the necessity and reasonableness of a particular measure.”  That's rational basis review, which requires much less than straightforward sensibility, and UPDATE: as Larry Ribstein reminds me, the contracts clause doesn't even apply to the federal government.  I'm no constitutional law scholar, so I may be missing something, but I don't see anything here.

After the jump, the test the arbitrator is supposed to use in these disputes (it is on page 187 of this document).  I confess that I've rarely seen this sort of intervention a private relationship by the federal government, though I suspect that states do it all the time.  But there, Bainbridge and Ribstein are much more likely to be reliable guides than I.  It looks to me like the dart at the heart of capitalism, and done entirely for the benefit of a rich, politically connected group.  It makes financial regulatory reform look that much more difficult.

more ...

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Many of you will be coming to New Orleans in early January for AALS.  Over the next few weeks, I will intersperse posts about New Orleans among the usual fare of Business, Law, Economics, and Society.  My plan is to make a variety of posts covering four topics - adult entertainment (music clubs and bars, not THAT kind of adult entertainment), fun things for the whole family, restaurants, and Katrina recovery.

As I mentioned, I've lived here a while and have strong opinions about my hometown.  When dispensing advice about what to do, I follow the same motto I use when playing cards - Often Wrong but Never in Doubt.  I guess that's my way of saying, I hope you find this useful, but recognize that your mileage may vary.

If there is something you're hoping I'll cover, let me know in the comments or shoot me an e-mail.

To get the ball rolling, the 2010 Jazz Fest lineup came out this week!

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I spent two hours this morning with a state court judge. He told me that a decade ago he had 30-35 jury trials, and this year he has had two. Both criminal trials. We didn't have an opportunity to explore all of the variables that might have produced this result, but his point was that people (and businesses) simply don't use the judicial system anymore for civil litigation. This is not a new point, I realize, but it still made me pause and reflect on the litigation-oriented curricula at most law schools.

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According to this W$J story, "the new golf" in Silicon Valley is The Settlers of Catan. Or just "Settlers" to aficionados.

I was introduced to the game by my son, who bought the expansion game for me on my birthday last month. (The techies in this video are playing the basic version.)

The expansion game is fairly complicated, and I don't always remember the rules, but it's a good way to pass some time with friends or family.

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Roy Disney died today at the age of 79.

Walt's nephew will likely be best remembered (around these parts, at least) as a full-time dissident director.  Just a few years ago, he led a revolt against Michael Eisner that culminated in a 45% withhold vote against Eisner's candidacy for re-election to the board.  This result shows Roy's relative power and influence - the Disney election played a significant role in the adoption of a majority voting standard for director elections at many companies.  It also demonstrates the relative lack of power of shareholders to influence corporate governance directly - Eisner was re-elected, and a 99% withhold vote wouldn't have altered that outcome.

Over the next few weeks, I look forward to sharing my thoughts with you about corporate governance, the role of law in director decision-making, and whatever else strikes my fancy.  As a born-and-bred New Orleanian, I am also excited to serve as a cyber-tour guide and resource for those of you coming down here in a few weeks for AALS.

Thanks to Gordon, Christine, and the rest of the gang for having me!

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The Fed isn't upping interest rates, which was predicted, but it doing so unanimously.  That is of perhaps a little note - there have been some dissenters over the course of the past two years.  However, it's worth noting that the Fed also announced that its liquidity programs would for the most part disappear by February:

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

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Trey Drury, former Glom Junior Scholar Workshop participant and now professor at Loyola University New Orleans College of Law, has agreed to join us mid-week as a special holiday guest blogger!  Not only will Trey give us a glimpse into what he's been thinking about in the area of corporate and securities law, but he'll also give us AALS conference-goers an inside view of New Orleans.  Welcome, Trey!

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I'd be interested to hear your thoughts, actually.  Perhaps this is blindingly obvious, but I think that pre-crisis pay regulation was often focused on disclosure, and done through the SEC.  So called say on pay, one of the potential reforms of the crisis, is, if you like, disclosure with an exclamation point. 

Empirically proving this would be very difficult, but it seems to me that disclosure does not shrink pay packages, which, I assume, was one of the goals of requiring it.

The corporate governance move in pay, I think, was to do more of it through options, and longer horizon payouts, which were designed to align the executive's interest with those of the owners.  This did the opposite of shrinking pay packages, though it may have been a good idea.

One thing we have seen from the crisis is what happens when you limit pay, instead of disclosing it or long terming it.  Cutting pay packages, as the US did as an owner, through its pay czar, and also, as a result, making future compensation uncertain - that has been a stunning penalty for financial intermediaries, and one they will move heaven and earth to avoid.  Limiting pay looks to me like a forceful discipline of management.

Again, this may be obvious, but it suggests to me that pay regulation can be a tool that owners and regulators could use to great effect on banks.  I'm not sure that pay disclosure, however, makes much of a difference, consistent though it is with the SEC's ethos.

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In the big business cases (one overview here), it will be interesting to see how often the justices reach for the interpretive tool of legislative history.  They will, after all, be interpreting "honest services" fraud, "business method" patents, and what Congress was thinking when it created PCAOB.  You could discern that by looking only at the statute, or you could look to the larger legislative record.  In a paper I'm doing with David Law, we've taken a look at how often the justices have looked at the Congressional record for most of the frequently-seen statutes.  Based on the data we collected, here's one purely descriptive graphic way to look at the Court's practice (it's an early take, so don't hold us to it):

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Poor Goldman Sachs -- they just can't win for losing these days.  If they announce profits, they are reviled in the court of public opinion.  They even try to build some affordable housing.  Then, they try to appease the "we hate finance" crowd by doing away with cash bonuses for the top 30 executives at Goldman and instituting shareholder advisory "say on pay," but they still get hit with a shareholder derivative lawsuit over their existing compensation system, which is still due to pay out $22 billion in 2009 bonuses.  Here is the press release from the law firm that filed the suit on behalf of the retirement fund institutional investor.  More importantly, here is the complaint.

The complaint attacks the Board of Directors for annually implementing the Goldman compensation system, whereby almost 50% of profits each year is paid out in employee bonuses, as breaching fiduciary duties to the shareholders.  Which fiduciary duties?  Hard to say.  First, the complaint alleges that compensation system constitutes "waste," and alleges that "no person acting in good faith" would implement this system.  So, the argument could be that the compensation system is a breach of the duty of care (without using those words, for some reason), and that the directors' lack of good faith evidences this lack of care, or the attorneys may be alleging a breach of the now-disappeared stand-alone duty of good faith.  The second count alleges a breach of the duty of loyalty, which makes sense in an executive compensation suit, but the complaint uses the phrase "robotically, without analysis" to describe the board's approval of the compensation system -- a phrase that to me would be used in a procedural due care claim.  Anyway, it will be interesting to see if any of these arguments get very far.  For those keeping score, out of the 14 board members, 4 were inside directors.

The complaint accuses Goldman of a lot more than it sets out in the rather small allegations section.  It comes pretty close to saying Goldman made false statements during the fall/winter of 2008 about TARP, AIG and its own financial health, but it bases no allegations on this.  The complaint also wants to characterize the compensation plan as bad because Goldman's 2009 profits would not have been possible without the infusion of taxpayer TARP money, which Goldman repaid, and also $13 billion which the federal government pressured AIG to pay to Goldman pursuant to credit default swaps that Goldman had purchased from AIG, which were due.  However, AIG was insolvent at that time, and the Treasury Department had AIG pay Goldman and other banks 100 cents on the dollar for those claims, using taxpayer money.  The complaint finds this fishy, and thinks that $13 billion should be repaid to the federal government instead of used for bonuses.  This point doesn't quite make it into the allegations -- hard to find a fiduciary duty to the shareholders to not negotiate well as a secured creditor.  Would the shareholders have preferred 5 cents on the dollar?  AIG shareholders might have a problem with this, or taxpayers generally, but Goldman shareholders should have no complaint unless they think Goldman broke a law.

As John Carney said last month:

There's really not much Goldman can do about this situation. Paying the money to shareholders would only reward the shareholders for demanding the firm take on additional risk. There's really no good solution to the moral and economic problems of an investment bank propped up by an implicit government guarantee. And anyone acquainted with market processes shouldn't be surprised by this: intervention distorts markets, creating insoluable moral and economic problems.

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So, Saturday night all five of the Hurtcils went to the movies, from age 2 on up.  All three kids (10, 8 and 2) were excited to see The Princess and the Frog (or as Will says, Frog and Princess).  This much-awaited Disney-NonPixar film seemed to attract all of their attentions.  The first thing we noticed was that the theater was nearly empty at 6:15 p.m. on the first Saturday.  Not a great sign.  But, I had read Champaign's own Roger Ebert's positive review, which said "This is what classic animation once was like!"  And he was right -- it is very classic Disney.  (In fact, some characters look a little familiar -- the snake from Robin Hood?  the alligator from The Rescuers?

The movie, which doesn't depend on computer animation to make you go "wow," has an actual plot, and it's very compelling.  My eight-year-old boy was very into it, and was talking to the screen for the last half hour.  And, like classic Disney, it's scary.  Really scary.  The movie is rated G because (unlike most kids' movies these days) it doesn't try to have veiled double entendres for the adults and cartoon action for the kids.  There is no potty humor, no bodily function noises, etc.  Yay!  But, there's good old-fashioned scare-your-pants off bad guys.  Only here, the bad guys are evil voodoo spirits.  Remember Sleeping Beauty?  Yeah, like that.

Of course, the most notable aspect of the movie is that the main character -- the princess -- is African-American, the first African-American heroine Disney has chosen.  Although Disney could have taken on some 1920s racial issues ( a la the gender issues in Mulan), it chose not to.  So, no one seems to notice that Tiana's best friend is white, or that she and her friend are vying for the affections of the same prince, who is of indeterminate race from a made-up foreign country.  In fact, Tiana's dreams of owning a restaurant are belittled because she is a girl, but no one mentions her race.  But Disney may be more of a social mover than anyone if thousands of children of all races ask for a Tiana doll for Christmas/Hanukkah, right?

For us law professors, the best part of going to see the movie is that it is set in New Orleans and cajun food is the best supporting actor here.  I was getting very hungry (and homesick for Houston) just watching.  I have a box of Cafe du Monde beignet mix, courtesy of friend of the Glom Elizabeth Nowicki, that I'm going to bust out tonight!

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