Finance & Economics

Corporate Venture Capital

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Why are venture capitalists the winners in the startup funding game?  VCs have funded most of the big-name startups that now dominate the NASDAQ and, in a sense, have been the only game in town for high-growth startups needing millions to grow as private companies.  Entrepreneurial finance’s ancillary players – angel investors, venture lenders, and now crowdfunding investors – all depend on VCs to fund and advise startups as they grow and either exit via IPO or sale to a larger company.

But there is one player whose entry into this space can significantly alter that dynamic: the large corporation.  … Read more

Liquidity, Pledgeability, and the Nature of Lending

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In a new paper, we explain that variation in prospective liquidity in an industry or economy prompts changes in corporate lending and banking, including changes in the level of corporate borrowing, the type of debt contracts issued, the covenants contained in them, and the role and leverage of banks.

We start with the basic principle that the nature of business lending in an economy changes over a financial cycle. This includes the amount of debt that a borrower can take on and the extent to which banks play an important role or become dominated by non-bank lenders issuing arm’s length … Read more

How the Litigious Bird Caught the (Banque) Worm

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The transactional plumbing of corporate debt payment systems is hardly where one expects to find watershed legal moments; and it usually lives up to that mundane reputation. But every so often, real disputes emerge, and they are often doozies. Such was the case with a $1.8 billion loan facility that Revlon Inc. entered into with a syndicate of lenders half a decade ago. This particular loan, in fact, had the honor of being embroiled in controversy not once, but twice within a single year. And the second of these imbroglios seems destined to cast a long shadow on the law, … Read more

How Regulatory Stress Tests Affect Bank Lending

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The Dodd-Frank Act, enacted in 2010 in the wake of the Great Recession, introduced mandatory stress-testing for the largest U.S. banks. Dodd-Frank Act Stress Testing (DFAST) was intended to ensure that banks have sufficient capitalization to absorb the losses they may experience in an economic downturn and, more importantly, continue providing credit to the economy. The stress-testing exercise, which is conducted by the Federal Reserve, uses hypothetical macroeconomic scenarios to predict a bank’s portfolio return under stress and its implied equity values. Thus, the exercise indicates whether a bank, given its current equity position and portfolio allocation, could withstand a … Read more

States Should Still Be Prepared to Borrow

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The pandemic has blown huge holes in most state budgets.  Now, with the advent of the Biden Administration and a Democratic Congress, there is a reasonable chance that substantial federal aid is coming – finally.

Given this turn of events, states may conclude that it no longer makes sense to borrow to handle budget shortfalls.  This would be a mistake.  The new round of relief has not yet passed, and it is unclear whether it will be sufficient either in general or as to particular states.  It is also unclear whether it will be enough as the crisis unfolds… Read more

Fried Frank Discusses U.S. Treasury’s Carried Interest Regulations

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Section 1061 of the Internal Revenue Code was enacted as part of the 2017 Tax Cuts and Jobs Act to create greater parity between the tax treatment of ordinary income and capital gains attributable to carried interest. The basic statutory framework applies by recharacterizing certain long-term capital gain (“LTCG”) as short-term capital gain (“STCG”), unless either an extended holding period is satisfied (three years, as compared to one year) or an exception applies. In August, 2020, the Treasury Department and the IRS issued proposed regulations (the “Proposed Regulations”) interpreting Section 1061, which were complex and restrictive in many respects, and … Read more

How Scrutinizing Honest Managers Encourages Earnings Management

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Research in finance and accounting consistently documents that a significant number of managers overstate reported earnings when true earnings miss a benchmark [1]. Managers face strong incentives to meet and beat important earnings thresholds, such as the analyst consensus forecast of a corporation’s next period future earnings per share (EPS), because capital markets react negatively to firms falling short of earnings expectations [2]. Hence, there is a widespread belief that managers “cook the books” in order to meet these benchmarks.

The accounting and corporate governance literature offers at least two ways to curb earnings management: carefully scrutinizing managers [3] and … Read more

Exploring the Shadows of Litigation Finance

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Here’s a familiar story for litigators. A client calls you with a strong legal claim, but she can’t afford to pay your hourly rates. And your firm won’t let you take the case on contingency. You feel hard-pressed to tell your client to look elsewhere.

Enter litigation finance: the practice where a third party provides capital to a litigant or law firm in connection with a legal claim, frequently to help claimholders finance their lawsuits – in return for a share of the proceeds from a winning case. Ten or even five years ago, most lawyers and regulators had barely … Read more

Skadden Discusses Supreme Court Review of FTC Monetary Relief Authority

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On January 13, 2021, the U.S. Supreme Court heard a case, AMG Capital Management, LLC v. FTC, that could substantially curtail the primary authority the Federal Trade Commission (FTC) relies on to seek monetary relief from defendants in federal court. For decades, the FTC has used Section 13(b) of the Federal Trade Commission Act of 1914 (FTC Act) to seek billions in restitution and disgorgement in a wide range of actions, including cases concerning telemarketing and online frauds, deceptive business practices, data security and privacy breaches, and conspiracies to monopolize in pharmaceutical markets.

Section 13(b) authorizes the FTC to seek … Read more

Domesticating Foreign Finance

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Barclays, Credit Suisse, Deutsche Bank, UBS, and other foreign banks played an outsized role in the 2008 financial crisis that cost U.S. households trillions of dollars of wealth. As credit markets froze, foreign banks’ U.S. offices experienced extreme stress and relied on the Federal Reserve’s emergency lending facilities for survival. After the crisis, policymakers tried to strengthen regulation of foreign banks’ U.S. operations, which account for roughly 20 percent of the U.S. banking system. In my new article, Domesticating Foreign Finance, I contend that the United States’ post-crisis reforms were insufficient and that foreign banks continue to pose unwarranted … Read more

Independent Central Banks: The Politics of Reversals

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In the United States, President Trump has struggled to decide whether Jay Powell or China’s Chairman Xi is the greater enemy to the U.S. In Turkey, President Erdogan concluded that “interest rates are the mother of all evil,” switched out his central bank governor for refusing to lower interest rates, and reined in the independence of the central bank with the stroke of a pen. In India, Indonesia, Ukraine, and elsewhere, lawmakers are tightening the political grip on monetary authorities. These examples reflect a new reality in monetary policy circles: the political retreat from central bank independence, … Read more

Alternative Venture Capital: The New Unicorn Investors

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The COVID-19 outbreak provides fertile ground for sweeping regulatory changes. On May 19, 2020, for example, President Trump issued “Regulatory Relief to Support Economic Recovery Executive Order 13924”, which prompted the U.S. Securities and Exchange Commission (“SEC”) and Department of Labor (“DOL”) to promulgate new rules to protect investors and facilitate capital formation. The SEC adopted amendments aimed at harmonizing and improving the “patchwork” exempt offering framework, while the DOL announced that 401(k) plan fiduciaries have the ability to invest in private equity funds.

The primary purpose of these changes is to democratize and equalize access to … Read more

Debunking Fintech Inside and Outside the Blockchain

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The hype over technology-enabled disintermediation of financial services, commonly known as fintech, seems at a peak. Though fintech firms promise to increase competition in the financial industry, it is unclear how much the various forms of fintech, including those working on the blockchain, will disrupt the current competitive environment.

In our paper, we review the market failures justifying financial intermediation. We find that fintech has the potential to improve the efficiency of financial intermediation in, for instance, the area of payments and financial advice. However, the current hype may be exaggerated and partly misleading. We contend that trust, a … Read more

Fintech and International Financial Regulation

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In the weeks leading up to Ant Financial’s ill-fated IPO, Jack Ma criticized the system of international banking regulation in remarks at the Bund Summit in Shanghai. The Alibaba co-founder contended that the current framework was a poor match for countries like China that needed to innovate in the creation and delivery of financial services. Describing today’s regulatory system as designed for the “elderly” economies that have long relied on a traditional and compliance-heavy system of banking, Ma explained that emerging or “youth” nations depended on their ability to foster innovation in ways that were less constrained by capital-intensive rulemaking.… Read more

Cleary Gottlieb Discusses Case on Collective Action Clauses in Sovereign Debt Restructuring

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On July 31, 2020, Judge Caproni in the Southern District of New York denied an emergency motion filed by certain bondholders for a temporary restraining order that would have halted efforts by the Republic of Ecuador (“Ecuador”) to restructure $17.4 billion of its sovereign debt based on allegations of securities fraud arising from statements made by Ecuador in its restructuring-related press releases.  The Court upheld Ecuador’s use of the collective action clauses (“CACs”) in its indentures as the primary tool to accomplish the proposed restructuring.

In addition to its effects on Ecuador, which is restructuring its debt amidst a severe … Read more

Latham & Watkins Discusses IBOR Fallbacks Protocol and Supplement from ISDA

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On October 23, 2020, the International Swaps and Derivatives Association, Inc. (ISDA) published its IBOR Fallbacks Protocol (Protocol) and Supplement to the 2006 ISDA Definitions (Supplement) in anticipation of the expected discontinuation of the London Interbank Offered Rate (LIBOR) at the end of 2021. ISDA has also published a related set of Frequently Asked Questions, as well as a User Guide to IBOR Fallbacks and RFRs, to assist market participants in navigating the Protocol and the Supplement.

ISDA collaborated with the Financial Stability Board’s Official Sector Steering Group to devise more robust fallbacks for LIBOR and other key … Read more

Kirkland & Ellis Discusses New EU Foreign Direct Investment Regulations

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The European Union has recently taken a significant step in regulating foreign direct investment (“FDI”). As of October 11, 2020 a new EU regulation related to inbound foreign investment (the “FDI Regulation[1]”) became binding on all 27 Member States.[2] The new FDI Regulation does not create a stand-alone mechanism to vet foreign investment akin to the Committee on Foreign Investment in the United States (“CFIUS”) or national security review systems established by individual Member States. Rather, the new EU FDI regime establishes minimum standards for Member States’ review systems, creates an information sharing channel between the EU … Read more

Bank Lending During the Pandemic

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Since the beginning of 2020, COVID-19 has prompted a surge in economic uncertainty, causing interruptions in business supply chains and revenues that now threaten the survival of companies. Companies struggling to meet their fixed expenses and existing obligations respond by increasing the demand for loans, but banks are inclined to reduce the supply. In our new paper “Bank Lending during the COVID-19 Pandemic,” we examine how the COVID-19 crisis affects the pricing and structure of large corporate loans in the global syndicated loan market.

Overall we consider more than 4,000 loans granted from 77 banks to 820 firms in 28 … Read more

Debevoise & Plimpton Discusses State Marijuana Initiatives and Financial Institutions

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With ballots still being counted in many races, and threats of litigation in others, the 2020 election season may not be fully complete. Voters in red states and blue states displayed unity on few issues, but among these cannabis ranks high: New Jersey, Arizona, Montana and South Dakota voted to legalize recreational cannabis, and Mississippi and South Dakota voted to legalize use of medical marijuana. Oregon also became the first state to decriminalize small amounts of cocaine, heroin, methamphetamine and other drugs.1

These state-level actions will pose additional compliance challenges for financial institutions that already struggle with the conflict posed … Read more

Presidential Pendulums in Finance

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While much attention has been paid to President Trump’s deregulatory efforts and intentions, presidential involvement in the work of the administrative agencies is not new.  Past presidents including Ronald Reagan, Bill Clinton, and Barack Obama have acted up to – and at – the limits of presidential power in efforts to ratchet-up, or ratchet-down, regulation.[1]

My recently published article, Presidential Pendulums in Finance, examines the past decade of presidential involvement in financial regulation in particular.  As the paper explains, presidential involvement in financial regulation over the past 10 years stands to quicken the rate at which regulatory cycles … Read more