During the 2008 financial crisis, the U.S. government viewed the survival of large consolidated banks as inextricably linked to the welfare of the overall economy, prompting such institutions to be labeled too-big-to-fail (TBTF) and granted government assistance. The primary and preferred means of bank resolution by federal regulators was, however, mergers and acquisitions (M&A). The basic idea was that through a merger a healthy bank would acquire a failing bank, saving the economy from the full cost of the distressed bank’s collapse. This private-sector solution was preferred because the government did not have to use public funds to bail out … Read more
On Friday, October 6, the Treasury Department issued a report to the President on streamlining and reforming U.S. capital market regulation. The report covers recommendations on nine topics across the U.S. financial regulatory system. One of the topics – Access to Capital – includes many recommendations of interest to participants in public and private company capital markets. Without dwelling on why Treasury would issue such a report on the Friday before a holiday weekend, let’s dive into the substance of this section of the report.
The report starts with frequently cited statistics chronicling the decline in the number of listed … Read more
The financial crisis of 2007-2009 caused the most severe global economic downturn since the Great Depression. The recent crisis has generated renewed interest in the Glass-Steagall Banking Act of 1933, which Congress adopted in response to the collapse of the U.S. banking system and the freezing of U.S. capital markets during the Great Depression. Glass-Steagall was designed to stabilize the U.S. financial system by separating commercial banks from the capital markets and by prohibiting nonbanks from accepting deposits.
Since the financial crisis, scholars have debated the question of whether the removal of Glass-Steagall’s structural barriers during the 1980s and 1990s … Read more
As cryptocurrencies such as Bitcoin and Ethereum become more prevalent in investment circles and acceptable for commercial transactions, the United States Internal Revenue Service (“IRS”) has said little other than to label “virtual currencies” as property and state that transactions involving virtual currencies may be subject to taxation under generally applicable law. However, on September 7, the United States Congressional Blockchain Caucus (the “Caucus”) introduced the Cryptocurrency Tax Fairness Act (the “Act”), which would exempt certain cryptocurrency transactions and create a cryptocurrency-specific information reporting requirement.
The Cryptocurrency Tax Fairness Act
Under the … Read more
For most of the 20th Century, Eastman Kodak Company (often referred to simply as Kodak) was one of the most recognizable brands in the world. Founded in 1888, Kodak dominated the film and camera markets — in 1976, Kodak had 90% of the film market and 85% of the camera market in the United States. The phrase “a Kodak moment” — describing an event in one’s life that needed to be captured on film for posterity — became a common part of the American lexicon.
However, by the mid-2000s, Kodak was reeling. Although it had built a significant … Read more
The Dodd-Frank Act’s worthy objectives were to improve the safety, resilience, efficiency, and transparency of our financial system. Yet the law has drastically diminished the credit available to low-income Americans – the very people it was supposed to help. Equally important, community banks, which service disproportionately large shares of agricultural, residential mortgage, and small business loans, have been particularly adversely affected by Dodd-Frank. Specifically, since Dodd-Frank, there are 2,400 fewer small banks and community bank small business lending has dropped 21 percent. The CHOICE Act, recently passed by the U.S. House of Representatives, attempts to address many of these shortcomings.… Read more
On July 27 of this year, Andrew Bailey, chief executive of the UK Financial Conduct Authority (FCA), delivered a speech in which he questioned the sustainability of the London Interbank Offered Rate (LIBOR) in its current form. The FCA has regulated LIBOR since April 2013 and while significant improvements have been made to LIBOR during that time, the continuing decline in liquidity in interbank unsecured funding markets has undermined confidence in the reliability of LIBOR. The message, in essence, is that the underlying market is not robust enough to allow the determination of LIBOR to be based on actual transactions. … Read more
On August 3, the Federal Reserve (Fed) proposed for comment a new supervisory rating system to assess the safety and soundness of Large Financial Institutions (LFIs).1 This is the first change to the Fed’s supervisory rating system since the financial crisis, and aims to simplify and clarify the existing five-component supervisory assessment process2 by assigning ratings across three pillars: (1) capital, (2) liquidity, and (3) the effectiveness of governance and controls.
1. Doubling down on capital and liquidity. The proposal is designed to focus future ratings on two areas where the Fed has made the most changes … Read more
Since the CFPB issued its Arbitration Rule in July, most commentators have focused on ways the rule may be blocked from going into effect. Chief among these is the possibility that Congress will vote to overturn the rule under the Congressional Review Act, and the House did promptly vote in favor of overturning the rule on July 26, 2017. The Senate began its August recess without a vote to overturn the CFPB Arbitration Rule and with no indication for when it might take the matter up again. In light of that uncertainty, it is now time for financial institutions to … Read more
Publications like Bloomberg, The Financial Times, and The Wall Street Journal have recently reported that current stock markets and especially those in the United States are more overvalued than ever. In an interview with the Financial Post, David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., added that U.S. stocks are “supremely overvalued.” This suggests that a period of gloom might be closer than anticipated. There is, in fact, good reason for investors to be concerned. In terms of price earnings ratios, the S&P 500 Index has been trading at an … Read more
On August 3, the Federal Reserve (Fed) proposed for comment supervisory guidance for boards
of directors of Fed-supervised institutions1 (i.e., Board Effectiveness (BE) guidance). The proposed BE guidance is the result of a multi-year review by the Fed of existing guidance and practices of boards of directors across supervised firms. It is intended to consolidate and replace existing board supervisory expectations from 27 SR Letters, which include 170 supervisory expectations for boards, with 33 expectations of effective boards. The 33 proposed expectations are categorized into five attributes which the Fed intends to assess a firm’s board of directors, including: … Read more
An over-the-counter (OTC) market and an open limit order book (LOB) market are the two common mechanisms for organizing financial markets. An OTC is a decentralized market, where trades occur only through dealers. The dealers’ quotes are not fully transparent and are not binding, so customers can shop around and negotiate for the price. An open LOB is a centralized market, where traders submit anonymous orders to a central order book. The quotes are transparent and binding, traders can trade among themselves, and the transactions are transparent as well.
Corporate bonds are traded worldwide mostly in OTC markets while stocks … Read more
The recently released public sections of the 2017 resolution plans submitted by the eight US global systemically important banks (G-SIBs)1 provide a unique window into the banks’ resolution planning efforts that have developed over the last five years. Notably, the 2017 plans not only describe how the banks have enhanced their resolution plans but also highlight improvement in their intrinsic resolvability, which is indicative of the mindset change that has evolved over the past seven years: resolution planning has developed from a one-time compliance “project” to an important strategic consideration for business-as-usual (BAU) financial and operational choices.
These fifth… Read more
With the recent release of the Trump administration’s tax plan, discussions of tax “reform,” or at least tax cuts, are once again at the center of American law and politics. Although the president’s tax plan is short on details, it has plenty of potential benefits for high-income earners, including a reduction in top marginal income tax rates and a modest decrease in the tax rate on capital gains. More specifically, the White House tax plan seeks to repeal the 3.8 percent Obamacare tax on net investment income, thereby increasing the tax preference for realized gains from capital investments.
Unsurprisingly, the … Read more
Congress, the U.S. Department of the Treasury (“Treasury”), and countless legislators have criticized corporate inversions — mergers designed to help American companies lower their tax bills by moving overseas — since McDermott International completed the first one in 1982. Nearly 59 percent of registered voters across the country believe it is Congress’ duty to stop such deals, according to a 2015 study, but about 35 years after the first one, little progress has been made. Every law against these transactions is met with a creative way around it. In other words, when Congress and the Treasury close one loophole, another … Read more
With trillions of dollars in assets, sovereign wealth funds (SWFs) play a major role in financial markets around the world. With billions (and perhaps trillions) of dollars’ worth of equity investments around the world, the investment behavior of SWFs is of primary concern to regulators, portfolio firms, and other investors. Most work on SWF equity investments has focused on the challenges that SWFs present to regulators, portfolio companies, or their own domestic constituencies. In a forthcoming essay, I seek to provide a realistic appraisal of the benefits and potential costs of SWF investment for other investors.
As numerous scholars have … Read more
The fluidity of labor markets depends on the ease with which one side of the market can fulfill the needs of the other: whether workers can find employment that suits their skills and firms can find adequate substitutes for workers who leave. Today much is known about the worker’s perspective. A large body of empirical literature documents that workers suffer persistent earnings losses after they have been displaced from their job – in line with Becker’s (1962) idea that human capital has firm-specific components (see, e.g., Topel 1991; Jacobson et al. 1993; and Dustmann and Meghir 2005).
The other side … Read more
The Situation: The IRS had discontinued issuing private rulings on certain transactions related to spin-offs, leaving companies to wonder if favorable tax treatment was likely.
The Action: Recent IRS guidance announced the resumption of private rulings in transactions under consideration, and provided confirmation that certain “north-south” transactions will not adversely impact second-step spin-offs.
Looking Ahead: Further clarification on these matters is necessary, and additional guidance on spin-offs may be in the offing.
The IRS recently provided taxpayers with favorable guidance involving tax-free spin-offs. First, the IRS will resume issuing private rulings that allow a distributing corporation to satisfy … Read more
There is a longstanding and growing public debate about the costs and benefits of automation. Earlier this year, Bill Gates argued that robots who take human jobs should pay taxes. Mark Zuckerberg recently warned the graduating class at Harvard University that, “Our generation will have to deal with tens of millions of jobs replaced by automation like self-driving cars and trucks.” Elon Musk has joined the ranks of industrialists in favor of guaranteed minimum income, which he says will be necessitated by automation.
It isn’t just industry leaders who are aware of the problems automation poses. This year the EU … Read more
In a new research paper, we consider the impact of a group of new entrants into financial services and regulation. These new entrants include technology, e-commerce, social media, and telecommunications companies with often large pre-existing bases of non-financial services customers. These firms (loosely termed “TechFins”) may be characterized by their capacity to leverage data gathered in their primary businesses into financial services by the use of Big Data analytics, machine learning, and artificial intelligence. Initially they often act as conduits linking their customers to regulated financial firms.
China’s Alibaba with its subsidiary Ant Financial is the frontrunner, and its founder, … Read more