Now that the worst of the financial storm is over, regulators are setting new strategies to deal with the systemic importance of the €427 trillion ($604 trillion) over-the-counter (OTC) derivatives market. This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. These risks affect the value chain of a typical derivative transaction and weaken the economic and legal rationale behind their widespread use. On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale “to build a safer financial system”. This paper finds, however, that in practice, the EU and US proposals lay out divergent roads to meet common objectives and the author warns that such divergences may encourage regulatory and supervisory arbitrage. Policy options currently under discussion may need further revision. For instance, access to network clearing infrastructures, such as CCPs, can only be made available to a restricted group of eligible derivative products. Mechanisms of adverse selection and moral hazard, then, may at any time affect the efficient functioning of these crucial infrastructures for financial markets.
{"title":"Shaping Reforms and Business Models for the OTC Derivatives Market: Quo Vadis?","authors":"Diego. Valiante","doi":"10.2139/ssrn.1593131","DOIUrl":"https://doi.org/10.2139/ssrn.1593131","url":null,"abstract":"Now that the worst of the financial storm is over, regulators are setting new strategies to deal with the systemic importance of the €427 trillion ($604 trillion) over-the-counter (OTC) derivatives market. This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. These risks affect the value chain of a typical derivative transaction and weaken the economic and legal rationale behind their widespread use. On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale “to build a safer financial system”. This paper finds, however, that in practice, the EU and US proposals lay out divergent roads to meet common objectives and the author warns that such divergences may encourage regulatory and supervisory arbitrage. Policy options currently under discussion may need further revision. For instance, access to network clearing infrastructures, such as CCPs, can only be made available to a restricted group of eligible derivative products. Mechanisms of adverse selection and moral hazard, then, may at any time affect the efficient functioning of these crucial infrastructures for financial markets.","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2010-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88604281","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Lehman’s bankruptcy has triggered calls for new approaches to rescuing systemically important institutions. This essay assesses and confirms the need for a new approach. It identifies the inadequacies of the Bankruptcy Code and advocates an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks—monitoring and intervention—are closely tied, ensuring that intervention occurs only when there is a well-established need for it. The same approach should be applied to all systemically important institutions. President Obama and the Congress are now considering such an approach, though it is unclear whether it will establish a sufficiently close connection between the power to intervene and the duty to monitor. The proposed legislation is unwise if it gives the government power to seize an institution regardless of whether it was previously subject to monitoring and other regulations.
{"title":"Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions?","authors":"E. Morrison","doi":"10.2139/SSRN.1529802","DOIUrl":"https://doi.org/10.2139/SSRN.1529802","url":null,"abstract":"Lehman’s bankruptcy has triggered calls for new approaches to rescuing systemically important institutions. This essay assesses and confirms the need for a new approach. It identifies the inadequacies of the Bankruptcy Code and advocates an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks—monitoring and intervention—are closely tied, ensuring that intervention occurs only when there is a well-established need for it. The same approach should be applied to all systemically important institutions. President Obama and the Congress are now considering such an approach, though it is unclear whether it will establish a sufficiently close connection between the power to intervene and the duty to monitor. The proposed legislation is unwise if it gives the government power to seize an institution regardless of whether it was previously subject to monitoring and other regulations.","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"7 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2009-12-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"86167561","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper will propose a plan to reform international finance – the World Financial Authority (WFA) Plan. Under such a plan, the IMF and other existing international financial institutions would be reformed and coordinated around a newly created WFA. The WFA would have two core functions. First, managing the international liquidity, which implies reducing externalities arising from domestic monetary policies adopted by its members, and dealing with global liquidity problems involving financial activities of transnational private banks. Second, helping countries to make their domestic monetary policies more effective, regaining traction and preventing contagion. A central instrument to this end is the creation of the World Financial Unit (WFU), an international currency unit conceived as a synthetic security backed by reserves composed of currencies surrendered to the WFA by member countries. The WFA is being thought as a device to support the financial globalization, as well as helping governments to maintain their power to manage the domestic macroeconomic conditions, contain externalities, align incentives, and allow for more responsible policies.
{"title":"Solving Global Financial Imbalances: A Plan for a World Financial Authority","authors":"Carlos Mauricio Mirandola","doi":"10.2139/ssrn.1507286","DOIUrl":"https://doi.org/10.2139/ssrn.1507286","url":null,"abstract":"This paper will propose a plan to reform international finance – the World Financial Authority (WFA) Plan. Under such a plan, the IMF and other existing international financial institutions would be reformed and coordinated around a newly created WFA. The WFA would have two core functions. First, managing the international liquidity, which implies reducing externalities arising from domestic monetary policies adopted by its members, and dealing with global liquidity problems involving financial activities of transnational private banks. Second, helping countries to make their domestic monetary policies more effective, regaining traction and preventing contagion. A central instrument to this end is the creation of the World Financial Unit (WFU), an international currency unit conceived as a synthetic security backed by reserves composed of currencies surrendered to the WFA by member countries. The WFA is being thought as a device to support the financial globalization, as well as helping governments to maintain their power to manage the domestic macroeconomic conditions, contain externalities, align incentives, and allow for more responsible policies.","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"28 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2009-11-16","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"79384383","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The high level of petroleum consumption in the United States contributes to environmental harms, burdens national security, and increases urban sprawl and traffic congestion. In response, the Obama administration has proposed targeted subsidies and regulatory mandates. We do not believe this will be an effective strategy because Congress has no comparative advantage in picking technological winners and losers. Among serious policy analysts, there is consensus that the best approach is to increase prices through a gas tax. The problem, however, is intense and widespread public opposition to this approach. We propose an alternative that offers many important benefits of a gas tax but is more politically palatable, and also will not reduce aggregate consumer demand: a revenue-neutral petroleum fuel price stabilization plan (the “PFPS”). The essential idea is to set a floor under the price of gasoline. If the market price falls below this threshold, then consumers would pay an additional levy on petroleum fuels to make up the difference. For example, suppose the PFSP sets a floor of $3.50 per gallon. If the price would otherwise fall to $3.00, the PFPS contribution would raise the price by 50 cents. But if the market price rises to $3.75, the levy would be zero. Our goal is not to collect revenue, but to influence behavior. Accordingly, we propose that any revenues collected be fully refunded to consumers pro rata. While consumers as a group would experience no net decline in purchasing power, individuals would, of course, be affected: those who consume less than the average amount of gasoline would enjoy a net benefit, while those who consume more would incur a net cost. Thus, the PFPS would create a systematic long-term incentive to reduce petroleum fuel consumption with a neutral fiscal impact. Our proposal would signal to consumers, auto manufacturers, and investors in alternative energy technology that petroleum fuel prices will not decline below the floor price in the future. Armed with this information, consumers, manufacturers and energy investors would commit to making fundamental changes in their behavior and their investments in new technology – without need of targeted government subsidies – because they would know that their investments would not be undermined by a future collapse in petroleum prices. Such assurances are crucial, as recent events have shown. Without a stabilization program, the wild fluctuation in oil prices in 2008 will leave investors and consumers all the more wary of investing in energy efficiency. Our proposal also has significant political advantages. The fact that it is refundable means that those who consume the average amount of petroleum or less will make net profit from the program, and thus will become a constituency for it. Moreover, if the floor on gas prices is set below the level of gas prices when the program is enacted – something that is easy to do when prices are high – then voters could take comfort
{"title":"A Proposed Petroleum Fuel Price Stabilization Plan","authors":"T. Merrill, David M. Schizer","doi":"10.2139/SSRN.1399706","DOIUrl":"https://doi.org/10.2139/SSRN.1399706","url":null,"abstract":"The high level of petroleum consumption in the United States contributes to environmental harms, burdens national security, and increases urban sprawl and traffic congestion. In response, the Obama administration has proposed targeted subsidies and regulatory mandates. We do not believe this will be an effective strategy because Congress has no comparative advantage in picking technological winners and losers. Among serious policy analysts, there is consensus that the best approach is to increase prices through a gas tax. The problem, however, is intense and widespread public opposition to this approach. We propose an alternative that offers many important benefits of a gas tax but is more politically palatable, and also will not reduce aggregate consumer demand: a revenue-neutral petroleum fuel price stabilization plan (the “PFPS”). The essential idea is to set a floor under the price of gasoline. If the market price falls below this threshold, then consumers would pay an additional levy on petroleum fuels to make up the difference. For example, suppose the PFSP sets a floor of $3.50 per gallon. If the price would otherwise fall to $3.00, the PFPS contribution would raise the price by 50 cents. But if the market price rises to $3.75, the levy would be zero. Our goal is not to collect revenue, but to influence behavior. Accordingly, we propose that any revenues collected be fully refunded to consumers pro rata. While consumers as a group would experience no net decline in purchasing power, individuals would, of course, be affected: those who consume less than the average amount of gasoline would enjoy a net benefit, while those who consume more would incur a net cost. Thus, the PFPS would create a systematic long-term incentive to reduce petroleum fuel consumption with a neutral fiscal impact. Our proposal would signal to consumers, auto manufacturers, and investors in alternative energy technology that petroleum fuel prices will not decline below the floor price in the future. Armed with this information, consumers, manufacturers and energy investors would commit to making fundamental changes in their behavior and their investments in new technology – without need of targeted government subsidies – because they would know that their investments would not be undermined by a future collapse in petroleum prices. Such assurances are crucial, as recent events have shown. Without a stabilization program, the wild fluctuation in oil prices in 2008 will leave investors and consumers all the more wary of investing in energy efficiency. Our proposal also has significant political advantages. The fact that it is refundable means that those who consume the average amount of petroleum or less will make net profit from the program, and thus will become a constituency for it. Moreover, if the floor on gas prices is set below the level of gas prices when the program is enacted – something that is easy to do when prices are high – then voters could take comfort ","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"32 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2009-05-05","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"82537639","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper explores the scholarship on the most recent Supreme Court school segregation case; Parents Involved. Many articles have appeared critiquing the majority of the Robert's Court's stance on the meaning of racial discrimination. This note does not give another version of that critique, but rather examines the fierce reactions the case engendered in legal scholars. It is, so to say, a critique of the critiques. I recast the debate about Parents Involved in terms of the victim's and the perpetrator perspective, a model borrowed from Alan Freeman. I argue that the critics of Parents Involved plead that the Supreme Court take up the victim's perspective. But would the affront felt by critics of the Robert's Court's opinion in this case be eliminated if the Court had adopted the victim's rather than the perpetrator's perspective? I argue that it would not. To the extent that what underlies the objection to the majority opinion in Parents Involved is a sense that the Court has done a form of violence to the idea of racial justice in this country, the turn to the victim perspective will not eliminate that violence. It would merely enact an alternative form of violence. In addition, things are more complicated because something larger than law is at stake in Parents Involved. At stake is a trauma and law cannot heal that. I conclude that the solution that the critics of Parents Involved have put forward is incapable of delivering the desired healing of old wounds.
{"title":"Impossible Desire: Parents Involved and Limits to the Victim's Perspective","authors":"A. Timmer","doi":"10.2139/ssrn.1375647","DOIUrl":"https://doi.org/10.2139/ssrn.1375647","url":null,"abstract":"This paper explores the scholarship on the most recent Supreme Court school segregation case; Parents Involved. Many articles have appeared critiquing the majority of the Robert's Court's stance on the meaning of racial discrimination. This note does not give another version of that critique, but rather examines the fierce reactions the case engendered in legal scholars. It is, so to say, a critique of the critiques. I recast the debate about Parents Involved in terms of the victim's and the perpetrator perspective, a model borrowed from Alan Freeman. I argue that the critics of Parents Involved plead that the Supreme Court take up the victim's perspective. But would the affront felt by critics of the Robert's Court's opinion in this case be eliminated if the Court had adopted the victim's rather than the perpetrator's perspective? I argue that it would not. To the extent that what underlies the objection to the majority opinion in Parents Involved is a sense that the Court has done a form of violence to the idea of racial justice in this country, the turn to the victim perspective will not eliminate that violence. It would merely enact an alternative form of violence. In addition, things are more complicated because something larger than law is at stake in Parents Involved. At stake is a trauma and law cannot heal that. I conclude that the solution that the critics of Parents Involved have put forward is incapable of delivering the desired healing of old wounds.","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"15 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2009-04-09","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"87909903","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The global financial crisis that began in 2007 revealed a fundamental weakness in the global financial system: Extensive financial interdependence of financial relations unmatched by a governance regime of similar reach. As multinational banks sought to fortify their capital base in the wake of the unfolding crisis, Sovereign wealth Funds (SWFs) and the banks’ home governments have become mutual stakeholders in some of the largest financial intermediaries with global reach. From the multitude of individual transactions has emerged a network of equity ties that spans the globe. These ties bridge institutional practices and governance regimes that previously operated largely independently of each other. They have the potential of fostering the emergence of a new governance regime for the global financial market place that deviates from earlier prognoses that globalization entails convergence on a single governance model. Instead, the newly created ties that jointly add up to a global financial network enable institutionally and organizationally diverse players to contribute their own perspectives as joint stakeholders in selected financial intermediaries, and indirectly, in the global financial system. This is likely to have important implications for the behavior of these actors in the future and the emergence of new governance solutions for the global market place. The paper discusses two recent cases of collaborative re-capitalization events to illustrate how this regime is evolving in practice.
{"title":"Global Network Finance: Organizational Hedging in Times of Uncertainty","authors":"Katharina Pistor","doi":"10.2139/SSRN.1284606","DOIUrl":"https://doi.org/10.2139/SSRN.1284606","url":null,"abstract":"The global financial crisis that began in 2007 revealed a fundamental weakness in the global financial system: Extensive financial interdependence of financial relations unmatched by a governance regime of similar reach. As multinational banks sought to fortify their capital base in the wake of the unfolding crisis, Sovereign wealth Funds (SWFs) and the banks’ home governments have become mutual stakeholders in some of the largest financial intermediaries with global reach. From the multitude of individual transactions has emerged a network of equity ties that spans the globe. These ties bridge institutional practices and governance regimes that previously operated largely independently of each other. They have the potential of fostering the emergence of a new governance regime for the global financial market place that deviates from earlier prognoses that globalization entails convergence on a single governance model. Instead, the newly created ties that jointly add up to a global financial network enable institutionally and organizationally diverse players to contribute their own perspectives as joint stakeholders in selected financial intermediaries, and indirectly, in the global financial system. This is likely to have important implications for the behavior of these actors in the future and the emergence of new governance solutions for the global market place. The paper discusses two recent cases of collaborative re-capitalization events to illustrate how this regime is evolving in practice.","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"46 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2008-10-14","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"76807896","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In the current debate over the constitutionality of voter identification laws, both the Supreme Court and defenders of such laws have justified them, in part, as counteracting a widespread fear of voter fraud that leads citizens to disengage from the democracy. Because actual evidence of voter impersonation fraud is rare and difficult to come by if fraud is successful, reliance on public opinion as to the prevalence of fraud threatens to allow courts to evade the difficult task of balancing the actual constitutional risks involved. In this short Article we employ a unique survey to evaluate the causes and effects of public opinion regarding voter fraud. We find that perceptions of fraud have no relationship to an individual's likelihood of turning out to vote. We also find that voters who were subject to stricter identification requirements believe fraud is just as widespread as do voters subject to less restrictive identification requirements.
{"title":"Vote Fraud in the Eye of the Beholder: The Role of Public Opinion in the Challenge to Voter Identification Requirements","authors":"S. Ansolabehere, N. Persily","doi":"10.2139/SSRN.1099056","DOIUrl":"https://doi.org/10.2139/SSRN.1099056","url":null,"abstract":"In the current debate over the constitutionality of voter identification laws, both the Supreme Court and defenders of such laws have justified them, in part, as counteracting a widespread fear of voter fraud that leads citizens to disengage from the democracy. Because actual evidence of voter impersonation fraud is rare and difficult to come by if fraud is successful, reliance on public opinion as to the prevalence of fraud threatens to allow courts to evade the difficult task of balancing the actual constitutional risks involved. In this short Article we employ a unique survey to evaluate the causes and effects of public opinion regarding voter fraud. We find that perceptions of fraud have no relationship to an individual's likelihood of turning out to vote. We also find that voters who were subject to stricter identification requirements believe fraud is just as widespread as do voters subject to less restrictive identification requirements.","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"67 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2008-02-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"83582307","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Sovereign wealth funds (SWFs) have increased dramatically in size as a result of increased commodity prices and the increase in the foreign currency reserves of Asian trading countries. SWF assets now roughly equal those in hedge and private equity funds combined. This growth, and the shift of SWF investment strategy toward equities and increasingly high profile investments like capital infusions into U.S. financial institutions following the subprime mortgage problem, have generated calls for domestic and international regulation. The U.S. and other western economies already regulate the foreign acquisition of control of domestic corporations. However, acquisitions of significant but non-controlling positions are not regulated. The danger is that new regulation will compromise the beneficial recycling of trade surpluses accomplished by SWF investments. In this paper, we situate the controversy over SWF investments in the increasing global trend toward direct governmental involvement in corporate activity, a phenomenon we label the New Merchantilism. We explain why increased transparency of SWF investment portfolios and strategy, the most commonly advanced policy recommendation, does not respond to the chief concern that SWF investments have engendered. We offer a regulatory minimalist response to fears that SWFs will make portfolio investments for strategic rather than economic reasons. Under our proposal, voting rights of SWF equity investments in U.S. corporations would be suspended but reinstated on sale. Thus, SWFs would buy and sell fully voting rights, thereby assuring that the incentives to make non-strategic investments would be unaffected, while the capacity to exercise influence for strategic motives would be constrained. The paper concludes by assessing the extent to which even a regulatory minimalist response remains both over and under inclusive; however, the limited imprecision does not undermine the effectiveness of the response.
{"title":"Sovereign Wealth Funds and Corporate Governance: A Minimalist Response to the New Merchantilism","authors":"R. Gilson, C. Milhaupt","doi":"10.2139/SSRN.1095023","DOIUrl":"https://doi.org/10.2139/SSRN.1095023","url":null,"abstract":"Sovereign wealth funds (SWFs) have increased dramatically in size as a result of increased commodity prices and the increase in the foreign currency reserves of Asian trading countries. SWF assets now roughly equal those in hedge and private equity funds combined. This growth, and the shift of SWF investment strategy toward equities and increasingly high profile investments like capital infusions into U.S. financial institutions following the subprime mortgage problem, have generated calls for domestic and international regulation. The U.S. and other western economies already regulate the foreign acquisition of control of domestic corporations. However, acquisitions of significant but non-controlling positions are not regulated. The danger is that new regulation will compromise the beneficial recycling of trade surpluses accomplished by SWF investments. In this paper, we situate the controversy over SWF investments in the increasing global trend toward direct governmental involvement in corporate activity, a phenomenon we label the New Merchantilism. We explain why increased transparency of SWF investment portfolios and strategy, the most commonly advanced policy recommendation, does not respond to the chief concern that SWF investments have engendered. We offer a regulatory minimalist response to fears that SWFs will make portfolio investments for strategic rather than economic reasons. Under our proposal, voting rights of SWF equity investments in U.S. corporations would be suspended but reinstated on sale. Thus, SWFs would buy and sell fully voting rights, thereby assuring that the incentives to make non-strategic investments would be unaffected, while the capacity to exercise influence for strategic motives would be constrained. The paper concludes by assessing the extent to which even a regulatory minimalist response remains both over and under inclusive; however, the limited imprecision does not undermine the effectiveness of the response.","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"1 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2008-02-18","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"88118031","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
In 2006-2007, convert funded stock buybacks are popular. Why? Consider Cypress Semiconductor's complex transaction. In March 2007, its stock at $18.89, Cypress sells $600 million of converts, enters a $571 million VWAP (volume weighted average price) stock buyback contract, buys calls and sells warrants. It retires 28.9 million shares. Good profits! Bad deal? Six months post deal with its stock up 51.9% to $28.70, Cypress stands to reap a $180 million benefit at maturity, a $1.18 (4.3%) stock price boon for ongoing shareholders. Still, when it enters the deal, Cypress: - Needs 11.0% stock price appreciation to break even - Is exposed to 100% of any shortfall in its stock price from breakeven - Receives 100% of any stock price increase up to 28.7% above breakeven - Receives just 13.0% of any further stock price advance Simpler, superior structures are available. At 0-5% added cost, a call spread matches upside but cuts risk 83% or more. Other structures give lower cost with equal (or better) upside. Its deal choice (full downside; limited upside) suggests Cypress at execution is sure its stock is going up. Are selling shareholders adequately informed? Is earnings management an attraction? Real economic advantage through tax arbitrage seems blocked, but equity accounting lets deal losses (if incurred) and most fees bypass the income statement. A baseline settlement at current spot has Cypress receive a $180.2 million benefit through in part (40%) cash receipts, in part (60%) a 2.4% share count reduction. The only definite monetary trace in reported income is $27.0 million of tax deductible expense over the deal's life; Cypress can elect to show phantom income, but real tax then cuts the total real economic benefit. Also, stock buyback execution prices are seriously understated, but companies should not value this feature: The complex, syndicated deal itself exacerbates 10b-18 governance concerns, and misleading trade confirmations just put other anomalies in stock volume and pricing in a bad light. This analysis is tentative insofar as it fails to identify economic or governance advantages to explain the popularity of convert funded buybacks. Earnings cosmetics is not satisfying given the deal's poor risk/reward. Is there an overlooked tax advantage? The deal's popularity with banking syndicates is easy to understand, but, for now, we wonder, could the transaction be popular with companies because it is popular?
{"title":"Understanding Convertible Debt Funded Stock Buybacks - Cypress Semiconductor Case Study","authors":"M. Gumport","doi":"10.2139/ssrn.1019326","DOIUrl":"https://doi.org/10.2139/ssrn.1019326","url":null,"abstract":"In 2006-2007, convert funded stock buybacks are popular. Why? Consider Cypress Semiconductor's complex transaction. In March 2007, its stock at $18.89, Cypress sells $600 million of converts, enters a $571 million VWAP (volume weighted average price) stock buyback contract, buys calls and sells warrants. It retires 28.9 million shares. Good profits! Bad deal? Six months post deal with its stock up 51.9% to $28.70, Cypress stands to reap a $180 million benefit at maturity, a $1.18 (4.3%) stock price boon for ongoing shareholders. Still, when it enters the deal, Cypress: - Needs 11.0% stock price appreciation to break even - Is exposed to 100% of any shortfall in its stock price from breakeven - Receives 100% of any stock price increase up to 28.7% above breakeven - Receives just 13.0% of any further stock price advance Simpler, superior structures are available. At 0-5% added cost, a call spread matches upside but cuts risk 83% or more. Other structures give lower cost with equal (or better) upside. Its deal choice (full downside; limited upside) suggests Cypress at execution is sure its stock is going up. Are selling shareholders adequately informed? Is earnings management an attraction? Real economic advantage through tax arbitrage seems blocked, but equity accounting lets deal losses (if incurred) and most fees bypass the income statement. A baseline settlement at current spot has Cypress receive a $180.2 million benefit through in part (40%) cash receipts, in part (60%) a 2.4% share count reduction. The only definite monetary trace in reported income is $27.0 million of tax deductible expense over the deal's life; Cypress can elect to show phantom income, but real tax then cuts the total real economic benefit. Also, stock buyback execution prices are seriously understated, but companies should not value this feature: The complex, syndicated deal itself exacerbates 10b-18 governance concerns, and misleading trade confirmations just put other anomalies in stock volume and pricing in a bad light. This analysis is tentative insofar as it fails to identify economic or governance advantages to explain the popularity of convert funded buybacks. Earnings cosmetics is not satisfying given the deal's poor risk/reward. Is there an overlooked tax advantage? The deal's popularity with banking syndicates is easy to understand, but, for now, we wonder, could the transaction be popular with companies because it is popular?","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"26 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2007-10-04","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85118839","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Pub Date : 2007-09-08DOI: 10.1007/978-90-481-9588-6_7
Mathilde Cohen
{"title":"Reasons for Reasons","authors":"Mathilde Cohen","doi":"10.1007/978-90-481-9588-6_7","DOIUrl":"https://doi.org/10.1007/978-90-481-9588-6_7","url":null,"abstract":"","PeriodicalId":10506,"journal":{"name":"Columbia Law School","volume":"31 1","pages":""},"PeriodicalIF":0.0,"publicationDate":"2007-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"85339837","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
京公网安备 11010802042870号
京ICP备2023020795号-1
扫码关注我们
求助内容：
应助结果提醒方式：