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Summary Gevurtz - The Role of Corporate Law in Preventing a Financial Crisis
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Citigroup Inc. Shareholder Derivative Litigation Case & Issue ReviewThe 5 suggested basic areas of legislative tools (as suggested by the abstract)
include:
1. regulation of business activities;
2. capital requirements;
3. rules for executive compensation;
4. imposing liability on directors and officers for unreasonable risks; and
5. rules governing the selection of directors and officers.
These tools are divided into those addressed by (1) banking law (regulation of business
activities and capital requirements) those for which (2) state corporate law plays a role
(compensation limits, personal liability for unreasonable risks, and director and officer
selection).
It's suggested changes to (1) Substantive rules to (2) a particular party whom may impose
those rules which has yet to be defined and is questioned.
Gevurtz cites excessive liquidity from (1) low interest rates and (2) savings imbalances
between Asia and U.S. (Consider economic issues between the two), (3) subprime loans
(4) conflicts of interest afflicting key gate-keepers (5) The deregulatory philosophy of
more free market capitalism
(November 2008 Bailout Agenda)
Federal government invests (1) $20 billion in Citigroup, (2) absorbs ninety percent of the
losses, beyond the first $29 billion, under the conditions of further losses in its portfolio value
of $306 billion of residential and commercial real estate loans and other assets.
To cover these losses, if necessary, the (1) Treasury Department would use $5 billion of its
bailout fund, the (2) FDIC would cover the next $10 billion, and (3) the Federal Reserve
would guarantee the rest. In exchange, the federal government received preferred stock.
Conditions of stock distributions to government ?
Privileges of government as shareholder ?
Consider the outcome if firms like Citigroup were or wern't bailed out. If they
weren’t bailed out then [A] the financial markets would of dumped a lot of bad
holdings and potentially more people would be out of homes and jobs. Although
while that would be a closer subscription to more laizze faire capitalist economics
of the West, it's an arguable outcome as to how far strictly the private sector of
society would respond to the social and political needs of people in such a cyclical
crisis (and the alternative measures the government would of used to deal with
more unemployment and homelessness)
People also argue that bailing out these firms is a move towards socialism. That
because it's socialism, it's also not such a good thing that we bail out firms
(although some socialists will and won't argue in this direction).
, The issues with CDO's/Special Investment Vehicles (6)
If the government owns stock in the banks then this should be a moment and opportunity
for the masses to be taught financial literacy not just to understand the economy but to
truly manifest and participate in the free market capitalist financial mantra and markets
of Western Capitalism to truly exemplify its economic superiority. The next level of state-
financial capitalsm.
There's a claimed conflict of interest between Risk Managers & Executives. If technology
is becoming such a crucial factor in finance and business such as with ETF's, just
implement a trading/practices process/review program/software/A.I. that monitors
specific factors which contribute to risk that leads to losses or lesser returns on
investment.
Clinton crony Robert Rubin advised to Charles Prince to push CDO's, taking greater
risks. This really isn't the best point to criticize however. Greater risk is arguably part of
what I label the Western Capitalist "Mantra" as opposed to lesser risk taking in other
economic regions of the world such as in Germany or Japan. Rubin is merely professing
the philosophical ideological foundations of the western economy and its comparative
advantages. That's just as American as apple pie.
> To argue against this or oppose this abstractly is to go against some of the basic
principles that have brought wealth to the West
> The West and East are a careful economic balance of different comparative advantages
and ideologies. It's important to keep this in particular balance like an equation.
> Therefore it's not necessarily that poorly defined, socialist oriented regulation is the
answer. What's necessary is regulation which facilitates the strengths and comparative
advantages of Western styled free market capitalism and it's wealth building; there's many
factors to consider in this style of regulation. Promoting citizen involvement in the financial
markets and literacy; appropriate skill programs to build human capital needed for tomorrows
labor market (programming, and knowledge needed for other for sure technologies of the
future); health and fitness programs for physical labor, etc.
Tools for regulating risk and role of corporate law
1. Business activity regulation
2. Capital Requirements
3. Compensation Rules
4. Liability for Risk
5. Selection of Management
(1) involves much of what people criticize in terms of predatory practices or construction of
risky loans through minimally defined conditions in loan monitoring (i.e. - no doc loans,
documentation of borrower earnings)
Regarding (1), a good question is asked. "What justifies regulating the business
activities of banks and other financial firms to limit their risk".
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