How Europe Can Survive Without Introducing Sovereign Debt Limits

EU financial policymakers appear to be once more in a deadlock situation over proposals to limit the sovereign risk exposure of European banks. The strong exposure of some banks in the southern European periphery in their national sovereign’s debt was seen by many as one of the contributing factors to the ongoing sovereign debt crisis (Acharya et al. 2014, Beltratti & Stulz 2015; Brunnermeier et al. 2016). Powerful incentives have encouraged financial institutions to buy and hold government bonds in the past (Gros 2013). In fact, this was the intellectual background for the policy framework known as the Banking Union, … Read more

Shareholder Activism, the Short-Termist Red-Herring, and the Need for Corporate Governance Reform

The “meh” economy that accounts for some of the sourness in the American electorate is partly due to a design flaw in the US corporate governance system.  One proffered diagnosis is that  companies invest for the short term and are too quick to return cash to shareholders through stock repurchases.  Why? It’s the attack of hedge funds, shareholder activists looking for short term gain even at the expense of investments that would produce higher returns over the long run, and, along the way, would lead to employment gains and then wage gains.  What follows, then, is a prescription for changes … Read more

Greece: What About the Banks?

A recent news story gives us a sobering anecdote about the Greek crisis: a merchant who must conduct all his business in cash because he can neither receive credit card payments nor pay vendors with electronic transfers. This means that the Greek banking system is failing to provide a payment system, a core function.   At first blush, this looks like another piece of the same crisis story we’ve heard for some time. But it is important to distinguish the banking system and its woes from the refusal of the “Troika” to extend a bailout program for the Greek government over … Read more

The Sotheby’s Poison Pill Case: The Plate Tectonics of Delaware Corporate Governance

The best part of a Delaware Chancery Court opinion is the first 30 or so pages. In most important cases, the opinion typically starts by telling a story – a detailed account of the people who figure in the dispute, what they did, their motives and personalities, and how this character-driven narrative resulted in the dispute the court must resolve.  Often there is drama: exposition, crisis and denouement.  The recent decision over the validity of a poison pill invoked to disadvantage Third Point’s effort to dislodge Sotheby’s management is a great example.  The interest and importance of the case is … Read more

How to Save Bank Resolution in the European Banking Union

The Single Resolution Mechanism (SRM) just enacted by the European Parliament will fail in its essential mission of managing the failure of a systemically important bank in a way that overcomes the fatal link between sovereigns and their banks. The SRM simply provides no strategy to avoid contagion from a bank failure because depositors and short-term creditors are not adequately protected, due to an insufficient resolution fund and the absence of a credible, centralized deposit insurance scheme.  If bank resolution is not a credible threat, then the Single Supervisory Mechanism of the European Banking Union will be a paper tiger.… Read more

Proposals to “Reform” the Section 13D Rules: Getting it Precisely Backwards

The current proposals to accelerate the timing of beneficial ownership disclosure under Section 13(d) of the 1934 Securities Exchange Act and to broaden the definition of beneficial ownership to include derivative positions that provide economic exposure to stock price movement but not a right to vote or acquire stock, gets the problem precisely backwards.  The mismatch of problem and solution is apparent when we focus on two dates:  1968, when the Williams Act adding Section 13 was adopted, and 2010, when Section 766 of the Dodd-Frank legislation gave the SEC the authority, but not the obligation, to consider whether derivative … Read more

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Editor's Tweet: Profs. Gilson and Gordon on Proposals to “Reform” the Section 13D Rules: Getting it Precisely Backwards

Activist Investors and the Revaluation of Governance Rights

Equity ownership in the United States no longer reflects the dispersed share ownership of the canonical Berle-Means firm. Instead, in our new working paper, The Agency Costs of Agency Capital:  Activist Investors and the Revaluation of Governance Rights, Ron Gilson and I observe the reconcentration of ownership in the hands of institutional investment intermediaries, which gives rise to what we call “the agency costs of agency capitalism.”

This ownership change has occurred because of (i) political decisions to privatize the provision of retirement savings and to require funding of such provision and (ii) capital market developments that favor investment … Read more

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Editor's Tweet: Professor Jeffrey N. Gordon of Columbia Law School discusses Activist Investors and the Revaluation of Governance Rights

Money Market Fund Reform: Endorsement of the Minimum Balance at Risk Proposal

On February 28, I submitted a letter on Money Market Fund Reform to the Financial Stability Oversight Council in response to their November 2012 request for comments on a number of alternative proposals.  I endorse the so-called “Minimum Balance at Risk Proposal,” in which fund sponsors would create a capital buffer by contributing or raising capital of one percent of a money market fund’s assets while fund investors would be subject to delayed redemption of three percent of their account over $100,000.  This approach could cause sponsors to internalize the costs of portfolio security selection while forcing large fund investors … Read more

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Editor's Tweet: Professor Jeffrey N. Gordon of Columbia Law School discusses Money Market Fund Reform