Fintech SPACs Have Been Swimming Naked – and the Tide Is Going Out  

Acorns Grow Inc., the financial technology and investing startup, said last week that it was abandoning its $2.2 billion merger with SPAC Pioneer Merger Corp., putting itself on the hook for a $17.5 million termination fee. Coming almost eight months after the deal was first announced, the news surprised many in the fintech and SPAC worlds.  It shouldn’t have.

SPACs – a method of going public touted as faster, simpler, and cheaper than a traditional IPO – are proving to be a severely flawed way to finance fintechs and other technology companies. Their stock prices have almost invariably declined sharply … Read more

It’s Time to Regulate Stablecoins as Deposits and Require Their Issuers to Be FDIC-Insured Banks

In November 2021, the President’s Working Group on Financial Markets (PWG) issued a report analyzing the rapid expansion and growing risks of the stablecoin market.[1]  Stablecoins are digital assets that claim to maintain a “stable” value with reference to a designated currency (typically the U.S. dollar) or some other asset, index, or formula.  PWG’s report concluded that stablecoins pose a wide range of potential dangers, including inflicting large losses on investors, destabilizing financial markets and the payments system, facilitating money laundering, tax evasion, and other forms of illicit finance, and promoting dangerous concentrations of economic and financial power.

PWG’s … Read more

Financing Sustainable Entrepreneurship

At least since BlackRock boss Larry Fink’s annual letter to CEOs in 2019, investing in ESG assets has become a major topic among both retail and institutional investors. In a new article, we address the question of how economically attractive investments in ESG-oriented startups are.

Net capital inflows into sustainability-oriented firms and funds are soaring, and so are the valuations of ESG assets. Yet, the economics of sustainable investing are controversial among practitioners and academics. While many industry reports point to the high net capital inflows and favorable valuations of sustainable assets, financial economists warn that ESG-investing hype could be … Read more

How Rating Agencies’ Market Power Affects Credit Rating Standards

Global credit rating agencies (CRAs) like S&P and Moody’s are important gatekeepers for the debt market. The demand for their ratings has increased at an unprecedented rate in the past two decades due to an extraordinary growth in cross-border debt financing. While the global CRAs’ market dominance has been the subject of considerable attention and regulatory debate, we know little about how their overall market power affects rating standards and quality. One reason is that prior studies generally focus on the U.S. market, where S&P and Moody’s already command a more than 90 percent  share. In a forthcoming paper, … Read more

ISS Discusses Increase in Fund Flows for 2021

Back to normal doesn’t mean what it used to. Following a year like no other, demand came roaring out the gate in 2021. While the pace of new demand has slowed somewhat in recent months amidst concern of new COVID variants, net new flows into long-term mutual funds and ETFs reached unprecedented territory. The $1.1 trillion gathered over the first 11 months of the year has surpassed all other years on record for the fund industry.

Passive funds led inflows in the year-to-date period at $826.9 billion, but active funds have strongly contributed to demand with net deposits of

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Paul Weiss Discusses LIBOR Transition and SOFR Alternative

As previously reported, the LIBOR settings for one-week and two-month USD LIBOR tenors will cease being representative after December 31, 2021.[1] This cessation is expect to have less of an impact because these tenors are not as widely used as others.[2] All other settings—including one-month, three-month, and six-month USD LIBORs—are scheduled to cease being representative after June 30, 2023. In the U.S., transition efforts continue. We provide an overview of those recent developments and guidance, all of which emphasize that market participants should be evaluating the appropriate alternative to LIBOR for the products they offer. The Secured Overnight

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How Optimistic Earnings Forecasts Are Kept in Check

Consensus earnings estimates, prominently quoted at major media outlets such as CNBC, Bloomberg, and the Wall Street Journal, play an important role in capital markets by providing investors with a proxy for earnings expectations.  The common belief is that they are formed by simply taking an average of all analyst forecasts. However, to what extent is this true?  Unsophisticated investors know little about the process, while sophisticated investors typically know only what consensus vendors such as Institutional Brokers’ Estimate System (I/B/E/S), whose estimates CNBC uses to identify earnings misses, state in their marketing materials. Specifically, I/B/E/S claims it “removes’ stale … Read more

China Experiments with Cross-Border Payments of Central Bank Digital Currencies

According to the Financial Stability Board (FSB), there is a consensus among major economies, such as the G20, to enhance cross-border payments.[1] Providing faster, cheaper, and more transparent and inclusive cross-border payment services would be beneficial for citizens, businesses, and national economies. As the Bank for International Settlements (BIS) noted, the Covid-19 pandemic made global policymakers rethink the significance of optimizing global payment and settlement systems, leading some countries to further explore the possibility of developing cross-border central bank digital currencies (CBDCs).[2] In response, China has sped up its own CBDC experiment – the digital yuan or digital … Read more

Skadden Discusses SEC’s Final Amendments Under Holding Foreign Companies Accountable Act

On December 2, 2021, the U.S. Securities and Exchange Commission (SEC) adopted final amendments implementing the disclosure and submission requirements of the Holding Foreign Companies Accountable Act (HFCA Act). In addition, the adopting release establishes the SEC’s procedures for (i) determining whether a registrant is a “Commission-Identified Issuer” under the HFCA Act and (ii) prohibiting the trading of a Commission-Identified Issuer’s securities.

The final amendments will go into effect 30 days after publication in the Federal Register. The earliest that the SEC could identify a Commission-Identified Issuer would be after companies file their annual reports for 2021 (i.e., spring 2022 … Read more

Offshore Activities and Corporate Tax Avoidance

Taxation of multinational companies (MNCs) has received increasing attention from politicians, the media, regulators, and academics. While the popular press provides considerable anecdotal evidence that large MNCs pay lower taxes than their domestic counterparts, academic research provides mixed evidence on how multinationality affects taxation. Although foreign operations provide additional cross-border tax avoidance opportunities such as income shifting to low-tax rate jurisdictions, the existing empirical studies find that MNCs do not have significantly lower effective tax rates than purely domestic firms have. As more U.S. firms become multinational and engage in offshore activities of serving foreign markets and moving production overseas, … Read more

A Ranking Season Would Help Combat Discrimination by Commercial Banks

Last October, the U.S. Department of Justice (DOJ), the Consumer Financial Protection Bureau (CFPB) and the Office of the Comptroller of the Currency (OCC) launched what they are referring to as an aggressive effort to combat deliberate financial discrimination against Black and Hispanic families by banks. Taking things one step further, earlier this month, the NYS Department of Financial Services announced that it plans to start examining banking institutions’ record of helping to meet the credit needs of minority- and women-owned businesses, and their participation in assistance programs for small and mid-size businesses, relying on the department’s Community Reinvestment Act … Read more

Cleary Gottlieb Discusses Federal Banking Agencies’ Crypto Initiative

On November 23, 2021, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued a joint statement on an inter-agency initiative to address bank and bank holding company participation in crypto-asset-related businesses.  The Agencies’ label for the initiative (“crypto sprint”) is undoubtedly more of a relative term, as both banks and non-bank fintechs have clamored for guidance for some time, and the Agencies’ publication last week amounts to a plan to issue more guidance in the future.  Nevertheless, the statement provides a useful overview of the … Read more

Debt and Taxes: Why Loans Are Really Leases

Debt has been a ubiquitous form of finance for millennia, and one might reasonably assume that we have a good handle on exactly what it is by now. It turns out that may not be the case.

A loan is commonly understood as the lender’s transfer of funds to the borrower on condition that the funds be repaid, with interest due in the interim. That is, the transaction is framed as a swap of loan proceeds on one hand for promises to pay interest and the amount borrowed back on the other. Call this the “standard view.” Under it, the … Read more

ISS Discusses Intangible Assets and Company Valuation

Intangible assets continue to represent a significant portion of the overall Balance Sheet globally. Over 40% of capital in the US today is in the form of intangible assets, as assessed by our ISS EVA (Economic Value Added) methodology. The growth in intangibles has made valuing and evaluating companies more difficult, as disclosure and treatment of intangible assets varies globally. In our most resent ISS EVA & ISS ESG white paper we explore the relationship between intangibles and valuation as well as intangibles and ESG.

EVA stands for economic value added. EVA equals the return on capital, which is net

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Debevoise & Plimpton Discusses Federal Regulators’ Focus on AI and Consumer Protection in Finance

As financial institutions increasingly deploy artificial intelligence (“AI”), including machine learning and automated decision-making technologies, across their business lines, U.S. federal regulators have started to scrutinize the consumer protection implications of these technologies. Most recently, the Department of Justice (“DOJ”), in partnership with the Consumer Financial Protection Bureau (“CFPB”) and the Office of the Comptroller of the Currency (“OCC”), announced a new interagency “Combatting Redlining Initiative,” with a particular focus by the CFPB on “digital redlining” resulting from biased underwriting algorithms. The DOJ, OCC and CFPB initiative follows closely on the heels of another recent announcement by the White House … Read more

Sullivan & Cromwell Discusses Stablecoins Report of President’s Working Group on Financial Markets

The President’s Working Group on Financial Markets (the “PWG”),[1] the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (the “OCC”) published the Report on Stablecoins on November 1, 2021.[2] The Report (1) provides a high-level background description of stablecoins, (2) outlines potential risks and regulatory implications, building on prior publications by other regulators and international regulatory bodies, and (3) sets forth recommendations for legislation (or, pending congressional action, interim measures by regulators) to ensure that “payment stablecoins”[3] and payment stablecoin arrangements are subject to a consistent and comprehensive federal prudential framework. … Read more

The Dark Side of Information Dissemination

For decades, there has been an important debate over how much securities regulators should focus on protecting small investors. The regulators themselves have generally aimed to create a level playing field among investors, and historically, new technology has been an integral part of accomplishing this goal. Yet many posit that providing less sophisticated investors with better access to pertinent information can also impose significant costs on other market participants, regulators, and firms. Little, however, is known empirically about whether such costs exist or when they are greatest.

In a recent study, we investigate whether broadening the dissemination of corporate disclosures … Read more

Are Climate-Change Risks Reflected in Stock Prices?

Climate-change risks can result from physical forces like wildfires, floods, or droughts or from changes in policy, the so-called transition risks created by government actions or the adoption of new technologies. A key question for academics, policy makers, firms, and investors is whether either type is being priced into securities markets.

In a new paper, Dissecting Climate Risks: Are they Reflected in Stock Prices?, we provide an answer to that question. We analyze climate news and provide separate proxies for market-wide physical risks and transition risks by performing textual analysis of Reuters climate-change news over 2000-2018.

We find that … Read more

Davis Polk Discusses the FSOC Climate Report: 10 Key Takeaways for the Banking Sector

The FSOC Climate Report views “climate-related financial risk as an emerging threat to the financial stability of the United States.” Here are our 10 key takeaways on a critical step in what will be a long and complex journey.

10 Key Takeaways

  1. U.S. financial regulators are in catch up mode
  • In a press call on the Climate Report,1 an unnamed “senior administration official” stated, “Are we behind? Of course we are. This is the starting gun going off for the U.S. regulatory system.”2
  • The Climate Report contains 35 recommendations for FSOC’s member agencies. It is a framework

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Comparing Angels and Venture Capitalists as Investors in Entrepreneurial Firms

Angel investors (angels) and venture capital (VC) investors are both important sources of financing for entrepreneurial firms, but some critics, particularly VCs, often believe that angels are less able than VCs to perform due-diligence. However, an alternative view holds that VCs and angels are equally adept at adding value to startups. For example, a recent article by AngelList mentions that the presence of top VCs in a seed funding round of a startup does not affect the probability of its success. It is therefore important to empirically analyze and compare the value added to startups by angels and VCs. However, … Read more