Author: Lawrence Cunningham


Posner’s Anxiety, Cardozo’s Influence

shackles.jpgHarold Bloom’s The Anxiety of Influence is a theory of ambivalence that “strong poets” feel toward influential predecessors and techniques successors use to fight resulting anxiety of influence. One detects hints of a parallel story in Richard Posner’s encounters with Benjamin Cardozo.

Bloom highlighted Wordsworth’s struggle with Milton. The thesis is that poetic influence is no simple transfer of method from strong predecessors to strong successors. The process makes life difficult for successors when predecessor influence is so hefty that strong successors cannot absorb it passively. They fight to avoid having predecessor’s power subordinate the successor to the status of imitator.

Strong successors fight the anxiety of influence to secure creative space. The fight is hard, given how predecessors influence not only a successor’s world but the successor’s contemporaries, equally under the influence that produces the anxiety. Strong successors cannot ignore strong predecessors but cannot passively absorb them. Strong predecessors must be reread (even misread), revised, undone, and completed—and still their shadow persists.

Posner may be Wordsworth to Cardozo’s Milton, or so I speculate in the conclusion to a draft article called Cardozo and Posner: A Study in Torts (companion to my 1995 Cardozo and Posner: A Study in Contracts). Bloom posits four phases of the process strong successors endure to battle the anxiety of influence against their strong predecessors, that I adapt and rename: (1) revising Cardozo down; (2) completing Cardozo; (3) undoing Cardozo; and (4) the haunting Cardozo.

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Cuomo’s Bombshell: Federal Pressure on Private Sector

knotty problem.jpgSuppose you are general counsel for a large financial institution battling economic adversity. Financial results in the most recent quarter show significant deterioration in your firm’s capital position that any reasonable investor would consider important so that there is essentially no doubt that federal securities laws require your firm to disclose the information in a current or periodic filing with the Securities and Exchange Commission.

Suppose further, however, that senior officials from the Treasury Department and Federal Reserve argue that the information should not be disclosed on the grounds that disclosure could disrupt already-fragile conditions in financial markets. Do you disclose or not disclose?

The hypothetical is imagined but real variants appear to be a risk from conflicts of interest arising in government’s massive and unorthodox intervention into the financial system and corporate governance. According to a letter from New York attorney general Andrew Cuomo released this afternoon, a more subtle variation occurred last December when then Treasury Secretary Henry Paulson pressured Bank of America CEO Ken Lewis into closing the latter’s disastrous acquisition of Merrill Lynch, despite massive deterioration in Merrill’s value, of which Lewis was keenly aware but did not disclose to B of A shareholders.

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Exuberance on Fin Reg Reform

revolution red orbit.jpgFew doubt that a revolution in financial regulation is coming. Treasury and the Fed already have succeeded in engineering considerable revolutionary incursions. Congressional staffers are busy writing even more sweeping legislation. Scores of proposals outline what must be done. They nearly-uniformly prescribe massive concentration of regulatory power in Washington.

Visions encompass all financial services industries, including insurance, banking, securities, futures, hedge funds, private equity and all. Prescriptions extend easily into matters of corporate governance traditionally handled by states. This especially concerns board of director composition and roles, with special attention to limiting executive compensation, at least for corporations of systemic significance.

A few participants evidently hope that revolution can be forestalled. That is a partial explanation for today’s Congressional momentum behind a bill to establish a formal panel to investigate causes of the financial collapse. Yet, peculiarly, even these hopefuls embrace concentrating greater power in Washington, although prescribing a light touch, supervisory, approach, not heavy handed regulatory intervention.

Amid the hurly-burly, I’m contributing two law review articles. Both offer cautionary analysis. One, released on SSRN today, is a comment on Robert Ahdieh’s Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance, just published in George Washington University Law Review.

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Fifteen (Plus) Proposals for Fin Reg Reform

bright ideas.jpgScores of serious and thoughful proposals for financial regulation reform have been published amid the financial crisis. Following is a list with links to a selected fifteen.

In a forthcoming paper, soon to appear on SSRN, David Zaring and I provide a guide to the perplexed amid this proliferation of proposals.

In brief, we (1) caution against excessive exuberance in fashioning reform and (2) develop a framework to evaluate the contending proposals by delineating what amount to only three or four alternative approaches.

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Treatment Differences in US / International Accounting

global and local accounting.jpgAmid continuing enthusiasm for the US to abandon its traditional accounting standards in favor of those set by an international body in London, insufficient attention is paid to differences in how the two treat particular questions and what those different treatments reflect about political realities.

In late August 2008 on this blog, I asked whether readers were aware of lists or charts illustrating treatment differences between US and international accounting standards. Comments and other research yielded modest results. The relevant literature tends to focus on differences in bottom lines between the two systems, not treatment differences.

This gap led Bill Bratton (Georgetown) and I to believe that a list or chart of treatment differences, with contextual analysis, would be useful to the literature (in both accounting and in law). As a result, Prof. Bratton and I prepared a contribution for the Virginia Law Review, commenting on a related paper by Jim Cox (Duke).

Our piece is now available here. The chart of treatment differences appears as the Appendix, at pp. 17-26. The preceding pages synthesize how these differences reflect deeply divergent philosophical and political realities, despite widespread talk of how the two standards are convergent.

The paper’s abstract reads as follows:

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As If Accounting

Do reasonable Americans today regard housing markets, credit markets, stock markets or collectibles markets to reflect accurately the fair value of their homes, corporate bonds/equity and collectibles? My guess is that a large number could honestly and in good faith say “no, that they do not,” whether correctly or incorrectly. Many might say instead that at least some of these markets are at least periodically distressed (or even inactive in the case of collectibles and some housing markets) and that related prices, if any, “really represent distressed sales.”

If so, according to the logic of new accounting rules the country’s independent accounting standard setter adopted last week, valuation of these items may not accurately be ascertained by using recent comparable home sales or trading prices for corporate debt and common stock or auction sales of collectibles. Instead, they could be ascertained by reference to the owner’s own judgments about what those assets would sell for in an “orderly transaction” and “active market.”

The accounting body (the Financial Accounting Standards Board) last week gave analogous authorization to corporate America (and FASB’s London-based counterpart is being pressured to follow suit). In its plain English version of these new rules, FASB says they are designed “to figure out fair values when there is no active market or where the price inputs being used really represent distressed sales.” FASB continues: “The objective is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) .”

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The Great Repression

Great Repression Human Brain in Cage.jpgAmid contending descriptions of the prevailing economic crisis, and candidates for causes and responses, I nominate The Great Repression and, in doing so, point out how unconscious exclusion of painful realities from the conscious mind caused the crisis and continues to infect policy responses to it.

No consensus appears on what to call the prevailing economic crisis, let alone diagnostics of its causes or prescriptions for cure. It’s not yet so severe to warrant Great Depression II or so mild to be called a mere recession. As something in between, some are tempted to call it a Great Recession.

People seem agreed that an asset price bubble, especially in housing, manifested crisis, but disagree on exact culprits. Consumers and businesses respond by curtailing borrowing and spending, but government’s responses are exactly the opposite.

All candidates for culprits ultimately involve false stories that people—citizens, business people, regulators and politicians alike—told themselves. Exemplars: the American dream of home ownership can be made available to all; housing prices tend inexorably upward; massive current borrowing can be repaid from future assumed prosperity; financial risk can be diversified, hedged, securitized away by carving up underlying financial instruments; regulators can let market participants self-monitor and self-correct; and politicians can safely respond to citizen appetites by sustaining all these false beliefs.

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Delaware Back to Sturdy Doctrine; Good Faith in Coma

death knell for good faith.jpgLast week, the Delaware Supreme Court backed off any notion that directors owe their corporations any special duties of good faith (or absence of bad faith) and retreated to the more traditional standards of corporate duties. In a refreshingly lucid and terse (easily edited to 5 pages of casebook text) opinion, Justice Carolyn Berger, for the Court en banc, clarifies that directors do not have to follow any specific steps when deciding to sell corporate control and that reasonable steps to that end are enough to reject any claim that they failed to act in good faith—even on a motion for summary judgment.

This decision, Lyondell Chemical Co. v. Ryan, is noteworthy because in two other noted opinions in 2006 (Disney and Stone v. Ritter), the Delaware Supreme Court suggested, in dicta, that there were potentially recurring contexts in which directors might fail to act in good faith such that, apart from any other duty, they may be personally liable for that. Delaware’s latest marks return to more familiar doctrinal terrain. The role of good faith, ultimately, is to prevent fiduciaries who engage in particularly egregious conduct, or “conscious disregard of duty,” from avoiding liability for money damages or enjoying corporate indemnification, both under Delaware statutory law.

Of course, given Delaware’s notoriously shifting corporate law, what Justice Berger settles in Lyondell could change in Delaware’s next big case. After all, Delaware courts, consciously seeing themselves as judges in equity, may, on egregious facts, revive the notion of good faith as an independent fiduciary duty or some vital aspect of obligation, such as a component or cognate of the duty of loyalty. But, for now, Lyondell puts the notion of good faith in something of a coma. Not dead, but nary alive.

Where that leaves Delaware corporate fiduciary duty doctrine is on more familiar terrain. The following is a snap shot of that terrain for directors and officers.

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AIG’s Unsupervised Capital Structure Conflicts

Chaos.jpgChaos occurs when government uses private deal making to invest in corporations. AIG gives lessons in this (as William Sjostrom explores) that characterize scores of other deals the New York Federal Reserve and US Treasury have been cooking up for a year, on-the-fly and without any administrative law or other legal supervision (as David Zaring and Steve Davidoff explore).

To see some of the problems, start with the following rundown of AIG’s current capital structure, as constituted by the NY Fed and Treasury without any oversight.

Senior Debt. The NY Fed is AIG’s senior secured lender, with about $50 billion in credit extended, along with other lenders to whom the company owes another $130 billion in long-term debt.

Senior Equity. The US Treasury holds AIG’s senior equity, a series of non-voting, non-convertible preferred for which it paid $40 billion (which AIG used, in turn, to reduce borrowings from the NY Fed). The US Treasury also holds warrants to buy about 2% of AIG’s common. It says it is about to acquire another series of non-voting, non-convertible preferred for $30 billion.

Mezzanine Equity. A Trust whose sole beneficiary is the US Treasury holds convertible preferred stock which, before conversion, commands 77.9% of AIG’s total share voting power.

Junior Equity. Finally, junior equity, the common stock, is held by numerous institutional and other sophisticated investors, with 10% of that held by AIG’s former CEO Maurice Greenberg.

The presumed purpose of this unsupervised intervention is to put voting control in the Trust so that, eventually if AIG is rehabilitated, that controlling interest can be sold in an orderly transaction to private investors, perhaps along with Treasury’s senior equity, and certainly after the NY Fed’s senior debt is repaid. Trouble is, the deal for the Trust’s equity is incomplete, and the overall structure seems replete with conflicts of interest.

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