Category: Corporate Finance

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The New York Fed and the Rule of Law

In Sunday’s New York Times, business columnist Gretchen Morgenson reported a piece of investigative journalism that is transcendently important, but whose complexity may have obscured that. It concerns secret dealings of the Federal Reserve Bank of New York. Morgenson explains the importance of her topic in terms of the threatened erosion of social trust that can occur when central banking officials engage in dubious behavior.

I would add that her topic, dubious dealings of central bankers, is of vital importance because those who run the FRBNY have enormous power in the field of banking regulation. They oversee the largest banks and provide direct input into the Financial Stability Oversight Council, the interagency government organization created by the Dodd Frank Act to oversee the financial system. It is empowered to intervene when the next financial crisis occurs, which could be later this year or five years or ten or what have you.

As with the financial crisis of 2008, these government actors, dominated by the FRBNY, will call all the shots about which institutions to save, sell or seize, on the one hand, and which creditors and shareholders to pay, wipe out or shortchange, on the other. How they exercise these powers is thus a matter of the utmost national interest. How they exercised them in the 2008 crisis remains both obscure and questionable. Read More

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Word Clouds of Buffett’s Letters

Here are word clouds I created to visualize words Warren Buffett used most frequently in two of his famous letters to Berkshire Hathaway shareholders, the first based on his newest letter (2012, released Friday) and the second based on his oldest (1977).

The word “billion” has (inevitably) replaced the word “million;” Charlie (Munger) has assumed a preeminent position; acquisitions matter greatly now but not then; insurance float matters more in 2012 while insurance underwriting mattered more in 1977; BNSF and GEICO are big today, along with newspapers, not the textile company or trading stamp business as was true back then.  Quite a few other changes should be obvious as well.  Among the similarities: the centrality of earnings to discussions of corporate performance (particularly as compared to cash flow or dividends).

 

Buffett 2012 Letter Word Cloud

 

 

Buffett 1977 Letter Word Cloud

 

 

 

 

 

 

 



 

 

 

 

 

 

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Volume 60, Issue 3 (February 2013)

Volume 60, Issue 3 (February 2013)


Articles

Urban Bias, Rural Sexual Minorities, and the Courts Luke A. Boso 562
Private Equity and Executive Compensation Robert J. Jackson, Jr. 638
The New Investor Tom C.W. Lin 678


Comments

The Fate of the Collateral Source Rule After Healthcare Reform Ann S. Levin 736
A New Strategy for Neutralizing the Gay Panic Defense at Trial: Lessons From the Lawrence King Case David Alan Perkiss 778
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Buffett + Heinz = Classic Application of Classic Lessons

Today’s report that Berkshire Hathaway, Warren Buffett’s company, along with 3G, will acquire Heinz, the venerable food products concern, reflects the acquisition criteria that Buffett has articulated for 20 years.  Essays explaining and outlining those criteria have appeared in my book, The Essays of Warren Buffett: Lessons for Corporate America, since its first publication in 1997.  Some excerpts follow (as they will appear on pages 211-214 of the forthcoming third edition):

 

We believe most deals do damage to the shareholders of the acquiring company. Too often, the words from HMS Pinafore apply: “Things are seldom what they seem, skim milk masquerades as cream.” Specifically, sellers and their representatives invariably present financial projections having more entertainment value than educational value. In the production of rosy scenarios, Wall Street can hold its own against Washington.

In any case, why potential buyers even look at projections prepared by sellers baffles me. We never give them a glance, but instead keep in mind the story of the man with an ailing horse. Visiting the vet, he said: “Can you help me? Sometimes my horse walks just fine and sometimes he limps.” The vet’s reply was pointed: “No problem—when he’s walking fine, sell him.” In the world of mergers and acquisitions, that horse would be peddled as Secretariat. 

At Berkshire, we have all the difficulties in perceiving the future that other acquisition-minded companies do. Like [them] also, we face the inherent problem that the seller of a business practically always knows far more about it than the buyer and also picks the time of sale—a time when the business is likely to be walking “just fine.” Read More

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NBLSC Call-for-Papers

From our friends sponsoring the National Business Law Scholars Conference (NBLSC), scholars please take note of the following  Call-for-Papers:

The NBLSC will be held on Wednesday, June 12th and Thursday, June 13th at The Ohio State University Michael E. Moritz College of Law in Columbus, Ohio. This is the fourth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world.

All on-topic submissions are welcome and the sponsors will attempt to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at echaffee1@udayton.edu with an abstract or paper by April 15, 2013. Please title the email “NBLSC Submission – {Name}”. If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance”. Please specify in your email whether you are willing to serve as a commentator or moderator. A conference schedule will be circulated in late May.

Conference Organizers: Barbara Black (University of Cincinnati); Eric C. Chaffee (University of Dayton); Steven M. Davidoff (The Ohio State University).

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Young Business Law Scholar Call for Papers

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School has announced its third annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes.  This year’s Workshop will be held on April 5-6, 2013 at GW in Washington.

The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty. By providing a forum for the exchange of creative ideas in these areas, C-LEAF aims to encourage new and innovative scholarship.

I’ve participated in both previous Workshops and can attest that participants have benefited from the exchange of ideas and getting acquiainted with newer scholars.  About 100 papers are submitted and the C-LEAF faculty select about 10 for presentaiton.  At the Workshop, senior scholars comment on each paper, followed by a general discussion.

Three papers receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively. All prize winners will be invited to become Fellows of C-LEAF.  C-LEAF makes no publication commitment, but chosen papers are featured on its website as part of the C-LEAF Working Paper series.   Read More

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Amazing New Corporate Law & Econ Book

If you are interested in corporate law, especially economic analysis of it, you likely will enjoy an impressive new book collecting original pieces by 30 prominent corporate law scholars. Edited by Claire Hill and Brett McDonnell of the University of Minnesota, the book canvases every important topic in corporate law.

After an overview that traces the history of the economic analysis of corporate law, the book addresses corporate constituencies, governance, gatekeepers, government oversight and a few other hot topics not classified.

Within constituencies, topics consider the directors’ role, the roles of other corporate actors, including shareholders, creditors, employees, and other stakeholders along with broader notions of the public interest. 

Internal governance looks at fiduciary duties, shareholder litigation, outside directors, shareholder activism and executive compensation.  

Gatekeeper pieces address lawyers and auditors, as well as rating agencies,  research analysts, D&O insurers and investment banks.

Jurisdiction looks at both domestic federalism as well as comparative perspective.

Unclassified topics address self-dealing, behavioral economics, and market efficiency.

The scholars are the following professors:

Ahdieh,   Atanasov, Bainbridge, Black, Blair, Bodie,  Ciccotello,  Clarke, Cunningham, Darbellay, Davidoff, Fairfax,  Ferri, Fisch,  Frankel, Gilson, Griffith, Hill, Kraakman, Langevoort, Lee, McDonnell, Painter, Partnoy, Smith,  Thomas,  Thompson, Walker, and Whitehead.  

The table of contents to this impressive volume follows. Get it while it’s hot!!

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The Corporate University: Recent Developments

There are many memorable images in Rob Nixon’s book Slow Violence and the Environmentalism of the Poor. Describing the “risk relocation” that is a prime function of the global economy, he offers this vision of Nigeria:

Often, as a community contends with attritional assaults on its ecological networks, it isn’t granted equitable access (or any access at all) to modernity’s basic infrastructural networks . . . . Like those Niger Delta villages where children for decades had no access to electricity for studying at night, while above their communities Shell’s gas flares created toxic nocturnal illumination. Too dark for education, too bright for sleep: modernity’s false dawn. (42)

Exxon is now “a corporation so large and powerful — operating in some 200 nations and territories — that it really has its own foreign policy.” As Steve Coll observes, the US “gives Chad only a few millions dollars a year in aid, while Exxon’s taxes and royalties can be worth as much as $500 million.” Had Exxon directed only 10% of its 2008 profits to political expenditures that year, it would have spent “more than every candidate for President and every candidate for Senate spent at the last election.” In a surprising number of contexts, corporations enjoy far more freedom of action, and secrecy, than states.

Is it any wonder, then, that universities are beginning to shift allegiance, to pursue the agenda of corporate donors instead of public values? Conferences like EduFactory have chronicled the long history of the corporate university; Philip Mirowski has critiqued it in books and edited collections. But it feels like we are on the verge of a phase change, an irreversible acceleration of dynamics once muted and slowed by the ancient cultural identity of the university. Consider these developments:

1) Martha McCluskey has described “economics scholars simultaneously acting as academic experts on the public interest and as sellers of this expertise to the highest private bidder.” She has chronicled a number of troubling aspects of a recent report on fracking issued by the “Shale Resources and Society Institute” (SRSI) of SUNY Buffalo:
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Stanford Law Review, 64.4 (2012)

Stanford Law Review

Volume 64 • Issue 4 • April 2012

Articles
The Tragedy of the Carrots:
Economics and Politics in the Choice of Price Instruments

Brian Galle
64 Stan. L. Rev. 797

“They Saw a Protest”:
Cognitive Illiberalism and the Speech-Conduct Distinction

Dan M. Kahan, David A. Hoffman, Donald Braman, Danieli Evans & Jeffrey J. Rachlinski
64 Stan. L. Rev. 851

Constitutional Design in the Ancient World
Adriaan Lanni & Adrian Vermeule
64 Stan. L. Rev. 907

The Copyright-Innovation Tradeoff:
Property Rules, Liability Rules, and Intentional Infliction of Harm

Dotan Oliar
64 Stan. L. Rev. 951

Notes
Testing Three Commonsense Intuitions About Judicial Conduct Commissions
Jonathan Abel
64 Stan. L. Rev. 1021

Derivatives Clearinghouses and Systemic Risk:
A Bankruptcy and Dodd-Frank Analysis

Julia Lees Allen
64 Stan. L. Rev. 1079

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Stanford Law Review, 64.3 (2012)

Stanford Law Review

Volume 64 • Issue 3 • March 2012