Author: Lawrence Cunningham


Congress Should Ask Treasury: Can the US Self-Regulate?

365px-International_Monetary_Fund_logo_svg.pngAs Congress debates bills to let government buy $700 billion of distressed mortgage assets, it may want to ask if the US can still self-regulate or needs advice from outside experts. With little fanfare or media coverage, the Treasury Department recently signaled willingness to invite representatives of the International Monetary Fund to conduct an examination of the US economy, financial infrastructure, regulatory apparatus and other systemic elements.

This IMF examination, commonly performed for emerging economies, could identify causes of the current crisis and offer reforms less subject to domestic political pressures. It may be premature for the current bill to address causes or prescribe cures with specificity. But Members and Senators could ask both Treasury and the IMF about whether anything should be in the asset purchase legislation to enable or require Treasury to undertake such an examination.

The IMF is imperfect, of course, having occasionally failed to forestall looming financial crises or offered policies that worsened a brewing crisis. But it has plenty of experience with these problems. An example, with parallels to the current crisis, and indeed a contributing cause of it, is 1997’s Asian financial crisis.

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A Lehman Restitution Fund

Imagine how employees and shareholders of Lehman Brothers feel heading home this weekend. Their firm filed for bankruptcy on Monday, costing them jobs and sacrificing their net worth. This weekend, Congress will write legislation authorizing government to buy hundreds of billions of dollars of troubled assets from many other firms that will thus escape that fate. If this result seems unfair, arbitrary or induced by representations made to Lehman by the Fed and Treasury, should Congress make provision to balance out this result by creating some form of restitution?

Last weekend, the Federal Reserve and the US Treasury reportedly stated or signaled to Lehman’s leadership that no federal assistance would be forthcoming for it or other firms bearing the burden of troubled assets clogging the credit markets. Lehman filed for bankruptcy at least in part on the strength of those communications. Similar signals or statements partially explain Merrill Lynch’s decision to agree to a takeover by Bank of America.

Those authorities reversed course the next day when selectively extending financial support to American Insurance Group. Today, those authorities, now finally coordinating with Congress, indicate a planned wholesale intervention to remove essentially all such troubled assets from essentially all firms. If that decision were taken last week instead of this week, or if Lehman and Merrill had chosen to sit tight this week, the government repurchase would have included troubled assets held by those firms as they existed. Employees and shareholders of those firms would be in a much better position today, one functionally equivalent to peers at other firms facing substantially similar problems.

A consensus appears that the case-by-case nature of the Fed and Treasury approach this week, and earlier, was arbitrary. To the extent that the Fed or Treasury made statements to Lehman, or Merrill, on which the latter relied to their detriment, a reasonable case arises that some form of restitution may be warranted.

True, Congress cannot correct all mistakes that the Fed and Treasury made or address every inequity that their potentially unprincipled decision-making process created. And certainly factors other than Fed or Treasury statements or signals likely influenced Lehman’s, and Merrill’s, decisions. Perhaps the fate of those firms and their employees and shareholders should simply be chalked up to the workings of capitalism and attendant labor and equity markets.

But if the Fed and Treasury, unelected and only remotely accountable officials, are culpable in any way, Congress, elected and accountable representatives, may wish at least to consider whether some form of restitution may be justified. Given the huge size of the troubled asset purchases that Congress is poised to authorize, a restitution fund to compensate Lehman (and Merrill) employees and shareholders would be a relatively small proportion of the total.


List of Differences Between US GAAP and IFRS

Is anyone aware of the existence of a simple list of differences between the requirements of traditional US accounting (GAAP) and international financial reporting standards (IFRS)? A simple listing of the top 25 or so differences between these two systems could be a handy tool for many purposes, including for reference, research, and instruction. But I and colleagues interested in finding such a list have not been able to locate one.

This is somewhat surprising to us. After all, pending debate over moving the US from GAAP to IFRS involves a fundamental question: how convergent or divergent are the two systems? There is no question that the two differ on numerous topics in important ways. Examples include inventory, research & development costs, and leases. Extensive research explores the effects of such differences on resulting reports of net income and shareholders’ equity. But there does not appear to be a simple list of the major differences by topic.

If anyone is aware of one, I’d be grateful to know about it. Alternatively, I may create one and share it on the SSRN as a “working paper.” I would invite others to comment on it to improve its accuracy and also update it as the two sets of standards continue to change.


SEC’s Global Views

The SEC made two important announcements this week concerning its current interest in promoting global capitalism. Both were somewhat surprising. One, concerning accounting standards, is surprising for its cautiousness; the other, concerning mutual recognition of foreign regulatory systems, is surprising for a potential lack of caution.

The surprising cautiousness appeared in the SEC’s announcement yesterday concerning its interest in switching the US from traditional US accounting standards to new international standards. Earlier Commissioner speeches and Commission releases suggested strong interest in a rapid short-term switch to the new standards. But the SEC now says it will soon release a discussion document contemplating the possibility of such a switch in 2014. Formal SEC consideration would occur in 2011, assuming designated milestones are reached by then.

The costs, uncertainties, and complexities associated with the imagined switch from US to international standards justify this long lead time. Stakeholders will eagerly await the SEC’s discussion document. One hopes for a thoughtful, analytical framework to evaluate such a revolutionary move, analysis that the SEC has to date not supplied.

The surprising potential lack of cautiousness appeared in the SEC’s announcement on Monday of a mutual recognition agreement with its Australian counterparts. Short term, this agreement contemplates allowing brokers regulated in one country to offer services to investors in the other without the broker being subject to the other’s laws, supervision or enforcement mechanisms.

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Enduring Credit Crunch

u_s__treasury_department_2.jpgThe FDIC just released its periodic list of financially troubled banks. There are 117 listed banks, up from 90 last quarter, commanding $78 billion in assets, up from $26 billion. FDIC leaders say the report is unsurprising, noting that the credit crunch that began more than a year ago does not appear to be abating.

At least two profound problems contribute to the enduring credit crunch, of length and severity not seen since the Great Depression. The first is that the securities driving the crunch, including pools of sub-prime mortgage loans with complex features, are difficult to value. Investors continue to shun them. The second is that the US government’s efforts at building confidence despite those valuation difficulties have failed. Investors are not impressed with the government’s actions or plans to date. No solution to either problem appears on the horizon.

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DC’s New Taxi Pricing

Taxi.pngRegular visitors to Washington, DC this fall will notice a new taxi meter pricing system. It replaces the zone pricing system that had been in effect for generations. Under the old system, fares were based on how many zones a trip traversed (there were 8 main zones and 23 sub-zones); under the new one, fares are based on a combination of distance travelled and time consumed. The change, approved by the Mayor after Congress required him to act, took effect earlier this summer.

Cynics note that the old system benefited Congress. Capitol Hill and Georgetown, where many Members have homes, were within a single zone despite being miles apart; many governmental buildings where Members attend meetings are within a single zone. Citizens and visitors are said to benefit from the new approach. A Washington Post poll reveals that the overwhelming majority of DC residents (some 80%) favored it. Taxi owners and operators resisted, staging work slowdowns and stoppages and unsuccessfully challenging the change in court.

It is possible that neither the old nor new system is optimal, as both are products of regulatory imposition. The alternative to regulatory imposition is private market pricing. Individual taxi operators elect how to price, whether using zones, time and/or distance, flat or negotiated rates, peak and off-peak pricing and so on. The most common approach to taxi pricing in large US cities, however, is by regulatory imposition using the time-and-distance meter pricing, now adopted in Washington. It does not appear that Congress or the District government seriously considered a private market pricing alternative.

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Pedagogical Nomenclature

The traditional style of doctrinal illustrations in the American Law Institute’s Restatements of Law identifies parties by meaningless letters such as A, B, C and D. In Contracts, at least, it would be clearer for the illustrations to identify parties by meaningful normative categories they occupy, such as General-Sub, Company-Inventor, Buyer-Seller, Borrower-Lender, Father-Daughter, or even Promisor-Promisee, Obligor-Obligee and so on.

Using meaningless letters adds unnecessary, if slight, cognitive demand to exercises that should be maximally parsimonious. Normative categories in Contracts are especially useful to emphasize the context in which an exchange occurs. The abstract lettering system should be abandoned in future Restatements. A few examples from Illustrations to Section 227 of the Restatement (Second) of Contracts appear below.

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SEC Authority

Suppose Congress authorizes an agency to promulgate standards. The agency delegates that authority. Congress later enacts laws preserving the agency’s promulgation authority but strictly limiting its delegation power to organizations meeting stated criteria. Suppose the agency then delegates the function to an organization lacking those criteria. May the agency do so?

The SEC plans to do exactly that. It has congressional power to set accounting standards and has delegated that to FASB, a private domestic standard-setter for whom the later statute is tailor made. The SEC instead wants to delegate this authority to IASB, an international organization lacking many of the requirements. Congress has raised doubts about the SEC’s statutory authority to take this position but SEC officials have testified before Senate committees that it has the authority. It seems illegal and irresponsible for the SEC to take this position as (somewhat technical) analysis below explores.

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Elitism: A Good Thing Too

A flurry of discussion recently centered on Senator McCain’s suggestion that Senator Obama is an elite or an elitist (terminology McCain notably used when so characterizing Obama’s comments on guns, religion and the prevailing mood in America). Pieces in the mainstream media and blogs alike promptly observed the irony of the accusation, noting McCain’s own qualifications. Less attention was paid to the many different meanings and usages of the concepts or of the ultimate question whether elitism is an appealing trait for a US president or other leader.

Exact meanings of elite and elitism are not always self-evident. As a beginning, elite persons may be those possessing skills, talent, achievement, resources or training that are recognized within a civilization as extraordinary. These attributes earn for elites respect in their fields of distinction and enable them to assume leadership roles in a civilization’s governance. Under this formulation, Obama likely qualifies as an elite, as would McCain. If so, both are also qualified to lead the nation and may be recognized as achievers. Recent McCain campaign theme flirtations that portray Obama as famous but unqualified to lead, and criticism of his asserted lack of achievement, are thus in tension with any claim that he is an elite.

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Contorts Anyone?

Grant Gilmore D of C for Blog.jpgLast year, I had the pleasure of teaching Contracts alongside a colleague, Jonathan Turley, teaching Torts, who inspired ways that enabled both of us to play the courses off each other. For example, we compared how the two approach remedies and the nature of the underlying obligations implicated. We even had some fun, in our respective classes with the same group of students, probing whether Contracts or Torts was more coherent, successful or even enjoyable.

With the new semester weeks away and my preparation for teaching Contracts in full swing, I’ve been considering the Contracts-Torts interface again. Doing so seems invariably to recall the notion of Contorts. Grant Gilmore coined the term to designate a field of civil obligation that merged Contracts with Torts, famously quipping that “Contracts is dead.” Everyone knows that Contracts is not dead—and neither is Torts—but whatever happened to Gilmore’s general law of civil obligation, Contorts? Is there a definable subject there? Does anyone teach it?

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