Monthly Archives: October 2008

Uncle Sam should claw back Wall Street bonuses

Editor’s Note: For a related piece published in the San Francisco Chronicle by Professor Jesse Fried, the author of this post, see here.

Warren Buffett aptly called the credit-related derivatives invented, marketed, and held by Wall Street firms “financial weapons of mass destruction.” These weapons have now gone off, putting the economy at risk. The Bush administration has cobbled together a $700 billion taxpayer-financed plan to bail out Wall Street firms and, it is hoped, avoid a larger economic disaster.

Unfortunately, While Wall Street executives have already pocketed large profits from the reckless business decisions that made the bailout necessary in the first place. Over the last two years, Wall Street financiers took home more than $60 billion in bonuses, much of it in cash. Lehman Bros. alone shelled out almost $6 billion in bonuses in 2007; it recently filed for bankruptcy.

If the government ends up losing money on the bailout, it should make a serious effort to “claw back” at least part of the bonuses paid to Wall Street executives before the meltdown. The cost of cleaning up this mess must not fall entirely on taxpayers’ shoulders; those who profited from the derivatives casino should chip in directly. Clawing back executives’ bonus pay will also make future decision-makers think twice before taking similar financial gambles, reducing the likelihood that another generation of Americans will be asked to bail out Wall Street.

The challenge would be finding legal authority to recover pre-meltdown bonuses. If a bailed-out firm were to file for bankruptcy, several provisions of the Bankruptcy Code could be used to recover pre-bankruptcy bonus payments to its executives. But if the rescue plan is successful, most of these bailed-out firms won’t be forced to file for bankruptcy. Is there a way to attack the bonuses paid by the firms that, thanks to government assistance, are able to steer clear of bankruptcy?

One possible source of authority is New York’s “fraudulent conveyance” statute, which applies to all firms in that state, including those that have not filed for bankruptcy. The statute gives creditors the right to recover a payment to an insider if, for example, the paying firm (1) did not receive fair consideration for the payment and (2) at the time had unreasonably small capital for its business operations. Some courts have held that managerial services do not constitute fair consideration for purposes of this type of statute. The statute may thus permit the government, to the extent it is considered an unpaid creditor of a bailed-out firm, to recover a bonus payment to one of that firm’s executives.

Will the federal government be able to recoup bonuses paid to Wall Street executives before the meltdown? We won’t know for sure until the government litigates these cases. But if the government loses money on the bailout, bringing these cases is the least the government can do for taxpayers – both those on the hook for the $700 billion rescue plan and those who may be asked to pay for a future bailout.

Analysis of the Emergency Economic Stabilization Act of 2008

This post is from John F. Olson of Gibson, Dunn & Crutcher LLP.

My firm is pleased to provide a section-by-section analysis of the Emergency Economic Stabilization Act of 2008 as passed by the Senate, by a vote of 74-25, on October 2, 2008. The section-by-section analysis includes commentary from experts on Gibson, Dunn & Crutcher LLP’s Financial Markets Crisis Group. We hope you find it useful as you work through the challenges and opportunities posed by the market crisis and the government’s response.

On a procedural note, the Senate used H.R. 1424, which was a resolution to amend the Employment Retirement Security Act to include mental health parity provisions, as a vehicle to pass the Emergency Economic Stabilization Act. As passed by the Senate, the bill also included energy and tax extender provisions. We have not included those provisions in this analysis.

The analysis is available here.

Leo Strine’s Marvelous Adventures

Editor’s Note: The article below, just published in The Deal, came to us from its author David Marcus.

Leo E. Strine Jr. doesn’t have any time to waste as he settles in behind the lectern for his first mergers and acquisitions class of the year at Harvard Law School. He’s tackling three classic Delaware cases today. Most law school professors excerpt cases. Strine does not. “If a judge thought something was important enough to put in the opinion,” he tells the class, “you might want to entertain the notion that it’s worth thinking about why it’s there.”

The first case treats T. Boone Pickens’ 1985 hostile bid for Unocal Corp. Strine ranges far beyond the opinion to explore the legal and business context in which then-Delaware Supreme Court Chief Justice Andrew G.T. Moore II wrote. Strine notes that Unocal’s board met for eight or nine hours to consider Pickens’ offer — a response to Smith v. Van Gorkom, a case decided a few months before Unocal in which Moore’s court found board members personally liable for not thoroughly considering a bid.

“They definitely learned the lesson of Van Gorkom. They were not going to be accused of a lack of process,” Strine tells the class of 75. Unocal’s board answered Pickens’ offer by making one of its own to all shareholders except Pickens. Delaware’s Court of Chancery enjoined the Unocal bid, but Moore reversed.

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Panel Discussion on Transactional Practice

The Harvard Law School Program on Corporate Governance is pleased to announce the availability of the video of its event on transactional practice. The event, which was held earlier this month, is the second of the Program’s series entitled Introduction to Corporate Practice. The series’ aim is to expose students to leading practitioners and their perspective on corporate practice—What do they enjoy about their jobs? What issues do they deal with? And what does it take to succeed in their field? The videos are made public as a resource for law students and young lawyers everywhere who are considering corporate practice.

The three panelists at the transactional practice event were:

  • Eileen T. Nugent, co-head of the Private Equity group at Skadden Arps.
  • Matthew J. Gardella, co-chair of the Public Offerings & Public Company Counseling practice group at Edwards Angell Palmer & Dodge LLP.
  • Christopher L. Mann, a partner in the New York office of Sullivan & Cromwell.

Each member of the panel gave introductory remarks, followed by Q&A. One of the main topics of discussion was how the panelists came to find and love transactional practice. Chris Mann said he had always wanted to be involved in business deals, and got off to a very quick start when he was sent to Papua New Guinea for a finance project three weeks into his job at Sullivan & Cromwell. Project finance is still one of his major areas of practice today. By contrast, Matt Gardella admitted that he had originally wanted to become a defense attorney. He eventually moved into securities work because he valued the long-term client relationship, in which the attorney can take a proactive advisory role. Eileen Nugent discovered her passion for deals as an in-house counsel, and only later moved to Skadden Arps to pursue it. All three emphasized the business orientation of transactional lawyering. The panel also offered their perspectives on career planning issues, including working for law firms or other players in the transactional world, and the types of characteristics they felt were central to the success of associates.

A video of the panel discussion is available for download here. (video no longer available)

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