October 2019

A new report from the Global Financial Literacy Excellence Center sheds some light on how workplace-only investors differ from others.  The report identifies workplace-only investors as persons “who only have retirement accounts through their employers.”  These are people who do not invest outside of these workplace-affiliated accounts.  They account for about 15% of the total population studied in the report.  As a group, about 53% of workplace-only investors are women.  In contrast, the report identifies active investors as persons who have investment accounts in addition to any workplace accounts.  This accounts for 43% of the population studied.  Another 42% simply don’t have any investments–employment or otherwise.

The report finds that financial literacy levels differ by type of investor and that a financial literacy gap exists between active investors and workplace-only investors.  While most people get basic asset-pricing questions wrong, “workplace-only investors exhibited an even lower understanding of asset pricing.” They also exhibited lower understanding on diversification questions.

More and more people now find themselves automatically enrolled in retirement accounts.  They begin to regularly invest this way with each pay period.  It doesn’t surprise that many people who have invested this way do not develop the same level of financial literacy…

On November 8, Professor Kristin Johnson of Tulane will host Tulane Law School’s 2019 Gamm Comparative Law and Justice Symposium, focusing on The Implications of Artificial Intelligence for a Just Society. The rise of artificial intelligence introduces efficiencies and new opportunities in finance, employment, education, criminal law enforcement risk assessments, national security and the automation of the various professions, including the development of smart contracts and the automation of various skills associated with the practice of law. Recursive learning and neural networks enable machine learning algorithms to adapt beyond simple instructions and independently assess data in decision-making processes. Early evidence indicates, however, that learning algorithms may operate in a manner that leads to unfair, biased or unethical and in some cases, discriminatory outcomes.

The Gamm Symposium will explore these normative concerns and proposed solutions including proposals demanding algorithmic accountability or, more specifically, proposals encouraging explainability and transparency. Advancing the discussion beyond traditional proposals, the Symposium concludes with a panel exploring the lack of gender balance in the technology industry and capital investment in women-lead technology firms.

The event is free and open to the public, though registration is required.  More information is available here.

“Big banks do not usually gang up to demand more financial regulation, least of all with asset managers in tow.”  That’s the first sentence of Gillian Tett’s recent piece, Banks are right to say that clearing houses are ripe for reform, in the Financial Times (here – subscription required).  Her title and lead sentence are spot on.  That should be worrisome to all.  Tett’s piece centers on a white paper, A Path Forward for CCP Resilience, Recovery, and Resolution (here), released on October 24, 2019, by nine financial institutions (Allianz Global Investors, BlackRock, Citi, Goldman Sachs, Societe Generale, JPMorgan Chase & Co., State Street, T.RowePrice, and Vanguard).  Tett states: “the current status quo around clearing houses is worrying.”  As BLPB readers know, I agree. 

The white paper calls for “enhanced risk management standards and aligning incentives through requirements for meaningful CCP [clearinghouse] own capital for covering both default and non-default losses and recapitalization resources.” (p.1)  It highlights the incentive misalignment present in many clearinghouses given their publicly-traded, shareholder ownership status: “Although CCP shareholders take 100% of the returns a CCP earns from clearing revenues, they bear only a small portion of the losses the CCP incurs…

The recent Tennessee Court of Appeals decision in Mulloy v. Mulloy has me thinking.  Here is the case synopsis:

Two brothers formed a limited liability company to own and lease a commercial property. When the tenant sought to expand, both brothers sought to find a suitable space for the tenant to lease. The younger of the two brothers found a property that would ideally suit the tenant’s needs, a fact that was communicated to his brother. The older brother purchased the property through a newly created limited liability company without his younger sibling’s involvement. The older brother’s new limited liability company then leased the new property to the tenant. The younger brother brought a derivative suit against his brother and the newly formed limited liability company, claiming usurpation of a corporate opportunity belonging to the limited liability company that the brothers had formed together and tortious interference with business relationships. The younger brother also claimed unjust enrichment. Following a trial, the chancery court found in favor of the older brother and his newly formed limited liability company and dismissed the complaint. After our review of the record, we affirm.

The facts are quite a bit more complex than that.  But…

After spending the entire day grading undergraduate business law exams, I drove to my son’s elementary school for our first parent-teacher conference. On my wife’s advice, I mostly just listened. My legal and academic training have given me “a very particular set of skills” that I can use to construct and deconstruct arguments in a way some people find combative, so my wife’s advice was probably wise.

The parent-teacher conference for our kindergarten-aged son went well. Most important to me, it was clear that our son’s teacher already appeared to love him and seemed committed to helping him develop. But I worry about what our education system may do to my son. Only two months into formal school, my sweet son, who has been in speech therapy since age two, is already receiving grades. Granted, the grades are pretty soft at this point – 3 for mastery, 2 for on track to complete this year, 1 for behind schedule. I hope he will not get overly discouraged. I also know he will not receive nearly as much affirmation in school for his impressive, budding artistic skills as he would for a photographic memory. 

This parent-teacher conference, coupled with…

The Laundromat is Steven Soderbergh’s (and Netflix’s) loose adaptation of James Bernstein’s nonfiction book, Secrecy World: Inside the Panama Papers, illustrating the conduct facilitated  by shell companies and the lawyers who supply the paperwork.  Both in style and substance, it echoes Adam McKay’s The Big Short – which is why every. single. review. draws that comparison, and so will I – but sadly, I found it neither as entertaining nor as coherent.

The Laundromat takes the form of multiple vignettes regarding people whose lives are touched by the shell entities facilitated by the lawyers at Mossack Fonseca, with Gary Oldman and Antonio Banderas narrating as Mossack and Fonseca, respectively.  They break the fourth wall as they offer tuxedo-clad, cynical descriptions of the services the firm provides.

Despite shoutouts to 1209 North Orange and its 285,000 companies – as well as the confession, I assume truthful, that Soderbergh has companies at that location – the film never really offers an explanation of precisely what shell companies do for their owners.  That was one of the things I thought The Big Short attempted reasonably well: It took the complexity of the financial crisis and made a decent stab of explaining…

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Yesterday, my weekly SSRN search on the keyword “derivatives” returned a fascinating article: Vincent S.J. Buccola, Jameson K. Mah, and Tai Zhang’s The Myth of Creditor Sabotage (forthcoming in the U. of Chi. L. Rev. 2020). For years now, as researchers in this area know, much speculation has existed about the role of net-short creditors – those creditors for whom “a derivative payoff [as a result of a debtor’s failure would be] more than sufficient to offset a loss on the underlying investment” – potentially play in a debtor’s demise.  Indeed, I’ve posted about Confining Lenders with CDS Positions.  Largely missing from such debates, however, has been discussion of other market participants’ incentives.  Indeed, as the authors state in their Introduction: “The problem with the sabotage story is not that it misapprehends net-short creditors’ incentives, but that it ignores everyone else’s.”  So basic, yet so right.  Thus far, legal scholarship has insufficiently focused on this critical consideration.  In hopes of helping to reverse this shortfall, I highly encourage readers to review this article.  It is posted on SSRN here and an abstract is below:

Since credit derivatives began to substantially influence financial markets a decade ago, rumors have circulated…

Given the number of corporate governance functions that can be conducted using blockchains, it seems appropriate to consider how business lawyers should respond to related challenges.  Babson College’s Adam Sulkowski and I undertook to begin to address this concern in an article we wrote for the Wayne Law Review‘s recent symposium, “The Emerging Blockchain and the Law.”  That article, Blockchains, Corporate Governance, and the Lawyer’s Role, was recently released.  An abstract follows.

Significant aspects of firm governance can (and, in coming years, likely will) be conducted on blockchains. This transition has already begun in some respects. The actions of early adopters illustrate that moving governance to blockchains will require legal adaptations. These adaptations are likely to be legislative, regulatory, and judicial. Firm management, policy-makers, and judges will turn to legal counsel for education and guidance.

This article describes blockchains and their potentially expansive use in several aspects of the governance of publicly traded corporations and outlines ways in which blockchain technology affects what business lawyers should know and do—now and in the future. Specifically, this article describes the nature of blockchain technology and ways in which the adoption of that technology may impact shareholder record keeping…