spring 2010 archive
April 27: I just received confirmation that you may take the exam at any time during the exam period (but you will have 8 hours to complete the exam). If you choose the online option you may begin at any time of day. If you choose not to do so the times at which you can pick up the exam and turn in your answers are more limited. Here is the FAQ.
Comment: Danny Schwarz – July 14, 2010 Basel [III] Accord Negotiators Likely To Dilute Proposals:
WEEK 14: April 19-23
Please read Materials Packet 8: Legal Risk and Insolvency
Update April 20: Lehman Diagram
Adrian Alvarez – March 30, 2010: Here’s an update on the Morrison v. NAB case:
richasadana – April 17, 2010: Lone Star Fund V v Barclays Bank PLC. Barclays sold Lone Star mortgage-backed securities of which consisted of pools of mortgages Barclays purchased from New Century. Lone Star sued Barclays for material misrepresentation and fraud. Involves “repurchase or substitute” clause.
WEEK 13: April 12-16
For this week please read:
Adair Turner, Speech: What do banks do, what should they do and what public policies are needed to ensure best results for the real economy? (Mar. 2010) (There are also Slides which are referred to in the text.)
Stijn Claessens, Giovanni Dell’Ariccia, Deniz Igan, and Luc Laeven, Lessons and Policy Implications from the Global Financial Crisis, IMF Working Paper WP/10/44 (Feb 2010)
Allen B. Frankel, The risk of relying on reputational capital: a case study of the 2007 failure of New Century Financial, BIS Working Paper No 294 (Dec. 2009)
We will also focus on proposed changes to the Basel Capital Adequacy Framework (Basel III). The proposals are in an 80 page document which provides more detail than we really need at this point (so you are not required to read it). Please read:
WEEK 12: April 5-9
Please read Materials Packet 7: Banking Regulation and Securities Regulation
April 8: Alan Greenspan at the Financial Crisis Inquiry Commission yesterday:
Concretely, I argue that the primary imperatives going forward have to be (1) increased risk-based capital and liquidity requirements on banks and (2) significant increases in collateral requirements for globally traded financial products, irrespective of the financial institutions making the trades. Sufficient capital eliminates the need to know in advance which financial products or innovations will succeed in assisting in effectively directing a nation’s savings to productive physical investment and which will fail. A firm that has adequate capital, by definition, will not default on its debt obligations and hence contagion does not arise. All losses accrue to common shareholders….
…let me reiterate that the fundamental lesson of this crisis is that, given the complexity of the division of labor required of modern global economies, we need highly innovative financial systems to assure the proper functioning of those economies. But while, fortunately, much financial innovation is successful, much is not. And it is not possible in advance to discern the degree of future success of each innovation. Only adequate capital and collateral can resolve this dilemma. If capital is adequate, by definition, no debt will default and serial contagion will be thwarted.
April 9: Robert Peston on banks’ window dressing:
Data supplied to the Federal Reserve Bank of New York shows that 18 big international banks systematically understated in their published quarterly accounts what they had borrowed to finance securities trading from the repo market (which is where securities can be swapped for short-term loans)….
The important point is that market discipline on banks is wholly ineffective if the market doesn’t have the relevant information.
Many would argue that it shows that the banks have learned almost nothing from the financial cataclysm of 2008.
All the banks would argue that wealth creation is maximised when official regulation is light and markets are liberated to do what markets do best.
But if they are not giving the market the facts that the market needs to sort the banking wheat from the chaff, then there is no alternative to very intrusive and costly regulation by the likes of the New York Fed and Britain’s Financial Services Authority.
WEEK 11: March 29-April 2
This week we will be working on Materials Packet 6: Syndicated Loans 4.
March 30: We’re currently looking at the mechanisms whereby banks have transferred interests in loans to other entities, including non-banks. Thus we’re looking at a part of the shadow banking phenomenon, which is an issue for regulation. On this topic, Paul Krugman wrote a column yesterday on Idiot-Proofing Financial Regulation you might want to take a look at.
WEEK 10: March 22-26
For this week please read Materials Packet 6: Syndicated Loans 4.
March 22: I should, of course, have noted that we have not yet finished packet 5, so we will begin tomorrow with the Armco litigation.
Oral argument in Morrison v National Australia Bank is next Monday, March 29.
Spring Break: March 15-19
Have a good break. I will post the next set of materials by the end of the week.
WEEK 8: March 1-5
On Tuesday we will finish looking at the Libyan Arab Foreign Bank Case (in Materials Packet 3: Syndicated Loans 1). Then please read Gerald Corrigan’s testimony before the UK House of Commons Treasury Committee on February 22. I am asking you to read this at this point partly because Gerald Corrigan, who is now at Goldman Sachs, was an actor in the Libyan Arab Foreign Bank Case, and partly because we will be going on to think about participants in financial transactions. Then please read Materials Packet 4: Syndicated Loans 2
March 3: You might want to note this euractiv news story that suggests that the EU may restrict credit default swap activity with respect to sovereign debt to firms that hold the underlying debt (that have an “insurable interest”).
March 5: Here is a memo from Davis Polk on the proposed proprietary tarding restrictions.
WEEK 7: February 22-26
Please read the Standard & Poor’s Guide to the Loan Market which you can download from this page (as of this date it is the third document on the list). I will also be posting a new set of materials for our classes next week – I will aim to get them up by late Saturday.
Please also read Reject Ad Hoc, National Financial Reforms, A Commentary by Dominique Strauss-Kahn, Managing Director, International Monetary Fund Published in the Financial Times, February 17, 2010
Sunday Feb. 21: Here is Materials Packet 3: Syndicated Loans 1. I’m sorry it is later than I planned. Please read the first section on eurocurrency deposits and interest rates for Tuesday. On Thursday I plan to deal with the default interest/penalty cases and perhaps begin discussing the Libyan Arab Bank case (by the end of Tuesday’s class I’ll have a better sense of where we are).
WEEK 6: February 15-19
No classes this week.
FEBRUARY 15: My husband is in intensive care after emergency surgery which is why I am canceling class for this week. I might be able to manage the class but haven’t been able to focus on assigning the materials. We had 300 spare minutes at the beginning of the semester so are not yet in the make-up zone. I will aim to provide materials for class next week by the end of this week.
WEEK 5: February 8-12
This week we will begin by reviewing the IMF document :The G-20 Mutual Assessment Process and the Role of the Fund (Dec. 2, 2009). The G20 have agreed to work together to address issues of financial stability. Nevertheless, within different members of the G20 domestic politics affect how (and even whether) changes to financial regulation occur. This IMF document shows in more detail how the G20 mutual assessment process will work, with the help of the IMF. Note that the IMF characterizes its work in this process as the provision of technical advice under Art. V, Section 2(b) of the Fund’s Articles of Agreement, which states:
(b) If requested, the Fund may decide to perform financial and technical services, including the administration of resources contributed by members, that are consistent with the purposes of the Fund. Operations involved in the performance of such financial services shall not be on the account of the Fund. Services under this subsection shall not impose any obligation on a member without its consent.
After we have reviewed this document we will review a $1,000,000,000 Three Year Competitive Advance and Revolving Credit Facility obtained by Raytheon Company in November 2009 from a syndicate of lenders.
As you read the agreement, please consider the following features and questions:
1. The structure of the transaction – it is a syndicated loan with a group of banks as lenders, a syndication agent (Bank of America NA (the NA designation shows that it is a national bank in the US rather than a state regulated bank) and an administrative agent bank (JP Morgan Chase). What is the role of the administrative agent?
2. The provisions of the agreement which are designed to protect the interests of the lenders (conditions precedent, representations and warranties, covenants, events of default).
3. Are there provisions designed to protect the interests of the borrower?
4. What is the governing law? What courts or tribunals have jurisdiction over disputes under this agreement?
5. Note the provisions for assignment of interests in the loan.
6. Note section 2.15 of the agreement.
7. In what ways is this an international financial transaction?
The borrower described the arrangement in a filing with the SEC as follows:
On November 18, 2009, Raytheon Company (the “Company”) entered into two new credit facilities in the aggregate amount of $1.5 billion, and, as noted in Item 1.02, terminated its $2.2 billion credit facility. The following summary of the new credit facilities is qualified in its entirety by the credit agreements that are filed as exhibits with this Report, to which reference should be made for complete information.
The first new credit facility entered into by the Company and Raytheon United Kingdom Limited (“RUK”) is a Three-Year Competitive Advance and Revolving Credit Facility (the “3-Year Credit Agreement”) with certain financial institutions as lenders and JPMorgan Chase Bank, N.A., as administrative agent. The obligations of RUK under the 3-Year Credit Agreement are guaranteed by the Company. The 3-Year Credit Agreement provides for a $1 billion revolving facility, which includes an $850 million revolving facility that is available solely to the Company and a $150 million revolving facility that is available to both the Company and RUK. This $1 billion facility includes a $500 million letter of credit sublimit, of which no more than $150 million is available to RUK. This $1 billion revolving facility matures on November 18, 2012, and requires no scheduled prepayments before that date. The 3-Year Credit Agreement is unsecured.
The second new credit facility entered into by the Company is a 364-Day Competitive Advance and Revolving Credit Facility (the “364-Day Credit Agreement” and, together with the 3-Year Credit Agreement, the “Credit Agreements”) with certain financial institutions as lenders and JPMorgan Chase Bank, N.A., as administrative agent. The 364-Day Credit Agreement provides for a $500 million revolving facility. This revolving facility matures on November 17, 2010 (the “Termination Date”), and requires no scheduled prepayments before that date. The Company has the option on the Termination Date to convert the revolving loans under the 364-Day Credit Agreement to term loans, and upon such conversion, such term loans would mature on November 17, 2011. The 364-Day Credit Agreement is unsecured.
The interest rates applicable to loans under the Credit Agreements involve various rate options that are generally available to the Company and, as applicable, to RUK. The rates are calculated using a combination of conventional base rate measures plus a margin over those rates. The base rates include an alternative base rate and various Eurocurrency rates. The actual rate will depend on the level of these underlying rates plus a margin based on the Company’s credit default swap spread, with minimum and maximum margins that are based on the Company’s credit rating. In addition, the Company is permitted to seek loans at interest rates that are determined through a competitive bid process. The Credit Agreements also provide for facility fees that vary depending on the facility and the Company’s credit rating. As under the Company’s terminated credit agreement, the Credit Agreements also provide for conventional affirmative and negative covenants, including continuing financial covenants relating to interest coverage and indebtedness to capitalization. In addition, the Credit Agreements contain certain customary representations and warranties, and events of default, similar to those in the terminated credit agreement.
Some of the lenders under the 3-Year Credit Agreement and under the 364-Day Credit Agreement and their affiliates have various relationships with the Company involving the provision of financial services, including cash management, investment banking, and trust and leasing services. In addition, the Company has entered into foreign exchange and other derivative arrangements with certain of the lenders and their affiliates.
Feb. 11: For background on syndicated loans you may find it helpful to read Standard & Poor’s Guide to the Loan Market which you can download from this page (as of this date it is the third document on the list).
Comment: Aaron W. – February 10, 2010: I ran across this story and wanted to share it with the class. It’s interesting, considering that it follows in the wake of Obama’s call for more regulation in the markets, as well as Paulson’s new book covering the crisis. http://www.npr.org/templates/story/story.php?storyId=123413508
WEEK 4: February 1-5
This week please read the rest of the current materials packet: International Finance: Sovereigns. We will begin on Tuesday by finishing up with the vulture fund cases and the more recent (non-sovereign related) champerty litigation.
Feb. 2, 2010: I am sorry – I omitted from the assignments for upcoming classes the following (which I posted last week): After the Sovereigns Materials Packet I will ask you to read this document: IMF, The G-20 Mutual Assessment Process and the Role of the Fund (Dec. 2, 2009) because it supplements the G20 and FSB documents we looked at in the first materials packet.
Feb.4, 2010: A quote from George Soros in Businessweek:
“It’s not just a question of restarting the system,” he said. “We actually have to create a system that currently doesn’t exist, namely a global regulation of financial markets.”
WEEK 3: January 25-29
We will begin this week by finishing going over the remainder of Materials Packet 1: Introductory Materials . In particular this involves the excerpt from the CME prospectus at p 33 ff and the De Kwiatkowski decision at pp 57-70.
The materials we have read so far include some cases and some other materials. We will be reading a range of different materials through the semester. Cases illustrate issues that arise in litigation and also issues that transactional lawyers need to take into account in drafting documentation and imagining the structure of transactions. Statutory rules and regulations are similarly important for both litigation and transaction planning, but it’s not just the rules that exist now that matter. If a bank is planning to make a loan for a 7 year term, for example, the bank needs to think about how the documentation can plan for changes in regulation that may be made during the term of the loan. So discussions at the supranational level of how regulation may be evolving are relevant to transactions being negotiated today. In addition, financial firms (and their legal advisers) may want to plan their lobbying strategies based on announcements by transnational standard-setters about how they plan to act.
Here is the next set of materials: International Finance: Sovereigns. For this week please read to page 48 of this packet.
After the Sovereigns Materials Packet I will ask you to read this document: IMF, The G-20 Mutual Assessment Process and the Role of the Fund (Dec. 2, 2009) because it supplements the G20 and FSB documents we looked at in the first materials packet (but this will be for next week).
Jan 25: The Financial Stability Board welcomed the President’s proposals to deal with the too big to fail problem, but noted it was discussing a number of different ideas about how to address this problem and:
Several other options for addressing the TBTF problem are being considered by the FSB. These include: targeted capital, leverage, and liquidity requirements; improved supervisory approaches; simplification of firm structures; strengthened national and cross-border resolution frameworks; and changes to financial infrastructure that reduce contagion risks.
A mix of approaches will be necessary to address the TBTF problem, given the different types of institutions and national and cross-border contexts involved. At the same time, these approaches must preserve an integrated financial services market and not create regulatory arbitrage through an uneven playing field.
And this is from the American Lawyer:
non-U.S. banks with subsidiaries in the U.S. are in a unique position of uncertainty, according to Sabel, Rice and Robert Tortoriello of Cleary Gottlieb Steen & Hamilton. Banking jurisdictions in the European Union support universal banking, meaning they allow banks to engage in a full range of commercial and speculative activities. Foreign banks are wondering: If the U.S. renews the separation of investment and commercial banking here, would that rule change apply only to the U.S.-based subsidiaries of foreign banks or to the global operations of those banks? If it’s the latter, some foreign banks might contemplate exiting (at least physically) the U.S. market, Tortoriello says. “That would be great news if you’re a London fan,” he says.
Jan. 22: The Guardian reacts to the President’s announcement about how rules of bank regulation would change as follows:
There is a big question about what took the president so long. Barack Obama’s attack on the banks came 15 months after the collapse of Lehman Brothers, a year after the presidential inauguration, two days after his party lost the previously solid Massachusetts senate seat and on the very morning that Goldman Sachs announced it would pay $16bn in bonuses to staff – and described that as restrained. He could have acted a lot sooner; he should certainly go further. Instead, he got bogged down in a long, drawn-out battle over healthcare reform, and got distracted from the rest of his in-tray.
Still, say this for the president: when other governments kept harping on about how any serious reform could only be done internationally, he has just gone ahead and done it. No G20 agreements, no OECD working party, just political will. Gordon Brown, over to you.
WEEK 2: January 18-22, 2010
Please read Materials Packet 1: Introductory Materials
I am not sure how long it will take us to work through this material. I will plan to address the issues in the order they are raised in the packet and to focus on the questions highlighted in the document.
With respect to the questions we have addressed so far, note that in a decision in August last year, the 11th Circuit in In Re CP Ships Ltd. Securities Litigation found that it was faced with a case whose facts were different enough from those in Morrison v NAB to allow it to exercise jurisdiction and approve a settlement:
…we conclude that the instant case is very different from Morrison. Although the problematic numbers in Morrison may have originated in the United States, all of the executives bearing responsibility to present accurate information to the investing public, and all of their actions in supervising and verifying such information, occurred in Australia. By contrast, in the instant case, not only did the manipulation and falsification of the numbers occur in Florida, the executives with responsibility for ensuring the accuracy of the accounting data operated from Florida. The accounting department for the Company was located in Tampa, and operated under the micromanagement of Halliwell (first in his position as Chief Operating Officer and later as Chief Executive Officer). Although other divisions of the Company’s headquarters were located in its official headquarters in England, the headquarters operations “which were central to the misconduct in this case . . . were located in the Company’s offices in Tampa.” A number of the statements challenged in this Complaint were actually made or signed by Halliwell, who was based in and operated out of Tampa. Although it is true that other challenged statements were made by Defendant Miles or Defendant Webber (who operated out of England) there is no indication in the Complaint that they performed any verification activities with respect to ensuring the accuracy of the information generated in Tampa. In any event, the most that could be said is that they also bore some responsibility in that regard, in addition to the primary responsibility borne by Halliwell in Tampa. Furthermore, in the instant case, and unlike Morrison, the Complaint indicates no lengthy chain of causation between the American contribution to the misstatements and the harm to investors. Rather, the causation here was direct and immediate.
Interestingly in this case a Canadian investor also part of a class in a suit in Canada objected to the exercise of jurisdiction in the US, presumably on the basis that a more favorable remedy might be obtained in the Canadian litigation.
ASSIGNMENT FOR THE FIRST WEEK OF CLASS
Please read the Materials for the first week (jurisdiction and securities fraud) (note that I have also linked to this document from the spring 2010 materials page).
Extraterritorial jurisdiction: Section 7216 amends both the Securities Act and the Exchange Act with respect to extraterritorial jurisdiction. It adds to both statutes that the federal courts’ jurisdiction includes “(1) conduct within the United States that constitutes significant steps in furtherance of the violation, even if the securities transaction occurs outside the United States and involves only foreign investors; or (2) conduct occurring outside the United States that has a foreseeable substantial effect within the United States.”
This question of the federal courts’ jurisdiction in securities cases involving foreign companies has been the subject of high-profile litigation recently in the Second Circuit (Morrison v. National Australia Bank) and is now pending before the U.S. Supreme Court. Section 7216 would effectively resolve that issue by mandating a jurisdictional standard for extraterritoriality that is broader than that argued for by the defendants in the NAB case. Under Section 7216, the U.S. courts would have jurisdiction over so-called “F-cubed” claimants (foreign purchasers who purchased their shares of foreign companies on foreign exchanges) if there was any conduct within the United States.
Jan. 12, 2010: a link to the china bank reserves story.
We will not be using a Casebook in this class. Class materials will be available from the class weblog at http://blenderlaw.umlaw.net/international-finance/.
The weblog will help to structure the course and class discussion and will link to useful resources. You should check the weblog a couple of times each week during the semester. The weblog and course materials together represent the materials for which you are responsible on the exam. As far as the weblog goes this means items posted directly to the blog including any comments.
On the front page of the blog I will post material relevant to this class and will post links from this page – you should read this material. I will sometimes post links to other material – in this case you are not required to click through to the other site unless I expressly state that you should do so.
To learn about transnational financial transactions and about the ways in which lawyers who work on different types of international financial transaction need to consider the potential impact of different areas of law (including contract, tort, conflicts, fiduciary law, and regulatory law (such as banking and securities regulation). In particular this course will focus on issues raised by the transnational market turmoil which began in the summer of 2007.
A three hour in class closed book written examination (past examples are posted here)
ATTENDANCE AND CLASS PARTICIPATION
You are entitled to three unexplained absences from class during the semester. This is not a policy which requires the Dean of Students’ office to certify that your absence was “justified” in order for the absence to count as explained. In order to explain your absence you may visit the Dean of Students’ office and fill out the form or you may send me an email. I reserve the right to lower the grade of anyone who misses more than three classes without informing me of the reason for their absence. If you miss a class please do ask me if you have any questions about the material you missed.
Consistent and useful participation in class may raise your grade. Class participation for this purpose includes useful participation in the weblog through posting of comments, links to relevant materials and questions.