Economics

Week in Review: SAC Insider Trading and Google’s Growth

By Christopher Hammond, J.D. Candidate 2015 | Posted on

SAC Capital Advisors has been under intense pressure from government regulators—and it appears that its chief, Stephen A. Cohen, may be ready to make a deal.  Amongst the biggest provisions under negotiation on insider trading charges, as reported this week by the New York Times, is a requirement that SAC may be required to exit the investment advisor business entirely.  While Cohen could still manage his personal fortune, he would not be allowed to invest with others’ money; this represents a major strategy shift for the once-famed hedge fund.  What’s more, the deal will likely require SAC to admit to criminal misconduct and the parties have “agreed in principle” (according to the Huffington Post) to record-setting penalties and restitution upwards of $1 billion.  The plea agreement is no yet a done-deal and either party may yet balk at the proposal, but it will represent a significant victory for the government if its goes through.

Google is on the rise once again.  The dominant search-engine company’s stock traded above $1,000 per share this morning for the first time, up more than 13%.  Google exceeded analysts’ expectations, reporting a 23% rise in Internet-related revenue last quarter as the company’s focus on mobile-based content and advertising proved successful.  The shift towards smartphones, iPads, and tablets has pushed down cost-per-click ad revenue, but growth Google’s traffic and ad volume has ‘outpaced’ this trend according to a Reuters interview.

The Government Shut Down, The Revival of High Frequency Trading, And What The SEC Is Doing To Keep Up

By Roxana Guidero, J.D. Candidate 2016 | Posted on

The government shut down continues while the American public anxiously awaits a resolution.  Unless Congress raises the debt ceiling by October 17, the U.S. government will default on its debt.  For the securities markets, this means market chaos, which provides a feeding ground for high frequency traders.

High frequency trading (HFT) uses complex computer algorithms to analyze multiple markets and trade high volumes of stocks, moving in and out of trades in fractions of a second.  For high frequency traders, fortune favors the speedy.  Computers generate returns in a manner that human beings simply cannot, leaving ordinary investors aghast.  The question remains, does high frequency trading help or hurt our markets?  On one side of the debate, proponents of this practice argue that HFT provides liquidity in the market.  On the other side, critics blame HFT for market disruption and see the sophisticated technology as providing an unfair advantage to traders.

The Securities and Exchange Commission has been fighting to keep up with the technological advancements on Wall Street and research just how much of an advantage traders acquire through the use of such technology.  The SEC is planning to release a public website containing data-driven analysis of trading patterns, increasing accessibility to the obscure patterns of high frequency trading. The data collected will also aid the SEC in closing the technological gap between this regulatory agency and high frequency traders.  Although the SEC continues to weigh the actions it should take, if any, against high frequency traders, it is not as quick to blame HFT for market crashes as some of its critics are.  SEC Chairman, Mary Jo White, in a speech on October 2nd, noted that although there is an increased risk of technology failure as trading systems become faster and more complex, high frequency traders are not to blame for the market problems of the last few years.

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Week in Review: Government Shuts Down, Twitter Ramps Up

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Twitter, Inc. publicly filed its IPO documents on Thursday, revealing the microblogging company’s financials for the first time.  Analysts expect the seven-year-old site to be valued in the $10- to $15-billion range, although it is still unprofitable.  Rapid growth has been outmatched (for now) by accelerated expenses:  in the first half of this year, revenue doubled to $254 million but net loss increased by 40% to $69 million.  Twitter, which has chosen the ticker symbol TWTR, is still behind the pace set by Facebook.  By comparison, Facebook’s IPO sales pitch showcased a $1 billion annual profit in 2011 and 845 million active users (Twitter has 215 million).  Twitter’s co-founder and former CEO Evan Williams will expect the largest payout once the liquidity event is completed; he owns 12 percent of the company.  Co-founder Jack Dorsey owns 4.9 percent.

The federal government is paralyzed as lawmakers have failed to agree on the nation’s budgetary priorities.  Divided government in hyper-partisan Washington, D.C., has proven to be a recipe for stalemate.  While most of the coverage has focused on House Republicans’ objection to funding the Affordable Care Act, the debate will likely be viewed as a much broader battle on federal spending.  Two storms will soon converge—the current battle over a Continuing Resolution (essentially legislative authorization to write certain checks from the U.S. Treasury) and the imminent necessity to raise the federal government’s $16.7 trillion debt ceiling (to further add to the nation’s debt).  Treasury Secretary Jack Lew has estimated that the U.S. government will need to raise the ceiling before October 17th, less than two weeks away.  For lawmakers, resolving the current shutdown by passing a “clean CR” will solve little unless the deal also addresses the debt ceiling—thus, the conversation for congressional leaders of both parties appears to have shifted to a grand bargain or large-scale budget deal.  For now, Wall Street has remained mostly apathetic, but prolonged brinksmanship is likely to change the market’s attitude in a hurry.

Week in Review: JPMorgan Returns to the Hot Seat

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking.  Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures. 

Another settlement deal surfaced this week—and its numbers are much larger.  The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless.  According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.”  On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour.  Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.

All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives.  The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products.  To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf. 

While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country.  Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth.  He told the Post:  “If I was in [Holder’s] position, I would be concerned about my legacy. . . .  There’s been a lot of criticism of officials in Justice being much too soft, timid.”

BerkeleyLaw Lecture Series: The Economic Value of a Law Degree

By Avery Masters, J.D. Candidate 2015 | Posted on

Is it even worth it to go to law school?  The thought came before law school, and it wriggles into those moments when all that work and stress and money pile up.  It could come any time:  at 4 AM when you are trying to finish that last chapter; out for drinks with friends in the workforce who blithely pay for happy hour drinks without wincing at thoughts of crushing student loans; or when you discover that you didn’t get your first pick for a ‘big law’ summer associate position.  Myths and misconceptions have swirled amongst the legal community and the general public, as law professors, students, and others question the value of a law degree, leading in part to plummeting application numbers for law schools around the country.

On Thursday, September 12, 2013, Berkeley Law hosted Seton Hall University business law Professor Michael Simkovic in the first event in a lunchtime series sponsored by the Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal.  Mr. Simkovic was previously an attorney at Davis Polk & Wardwell in New York concentrating in bankruptcy litigation as well as a strategy consultant at McKinsey & Company, where he specialized in legal, regulatory and business issues affecting financial services companies.  Professor Simkovic persuasively presents a different (and thankfully more positive) outlook for those considering whether to pursue a law degree. 

At the outset, Professor Simkovic tackled empirical claims that law school offers a poor return on investment.  He pointed out serious flaws in data sets being presented by those who claim that investing in a law degree is a low-value investment proposition.  For example, earnings in early years are not necessarily strong predictors of subsequent earnings because law degree holders—as opposed to those holding a bachelor’s degree—see steep growth in salary over a short period of time during their first few years of work.  It is also important not to conflate the recent dip in the general market with a dip solely in law.  In other words, while things may look worse in the legal market than they did ten years ago, it is important contextualize with broader market conditions.

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START-UP NY: A Less Taxing Proposal

By Jared Mayberry, J.D. Candidate 2015 | Posted on

In an attempt to foster entrepreneurialism and job creation, New York State has passed a tax incentive program called START-UP NY.  The program alleviates tax liability for start-up companies that move to or start in one of the specified tax-free communities within the State.  There are, however, limitations on the companies that qualify for participation.  Among these limitations, restaurants, retail businesses and certain professional organizations are completely excluded from the program, and any business that can participate must not compete with a local business located outside the tax-free community. Nevertheless, the companies that are able to qualify are eligible for substantial benefits.

The program alleviates all tax liability for the participating company for a ten-year period, including corporate/business taxes, sales taxes and property taxes.  Furthermore, employees of the qualifying company will not pay income taxes during the first five years and will only have to pay taxes on income over $200,000 for individuals, over $250,000 for a head of household and over $300,000 for taxpayers filing a joint return during the second five year period.  In light of the potential for misconduct, participating companies will be subjected to significant oversight.

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City Council Votes in Richmond, CA, Mortgage Eminent Domain Proposal and UPDATE

By Christopher Hammond, J.D. Candidate 2015 | Posted on

After a seven-hour meeting that dragged into early Wednesday morning, the Richmond City Council voted 4-to-3 to continue pursuing its plan to condemn underwater mortgages using the city’s eminent domain power.  The development is just the latest in an ongoing and high-stakes dispute over a novel property law argument. 

Here is the background:  The city of Richmond, California, has long-faced deteriorating property values.  Once a shipbuilding powerhouse for the U.S. Navy during World War II, the region’s declining industrial based has hit Richmond particularly hard.  City leaders have struggled to attract redevelopment capital, as businesses have largely opted for other booming Bay Area locations.  And when the mortgage crisis hit, Richmond’s communities experienced rampant foreclosures.

In response, the City has considered a novel move:  mortgage condemnations through the power of eminent domain.  That is, the City’s proposl would condemn the underwater mortgage obligations, but not the real estate itself.  If implemented, banks would be forced to write down large portions of a borrower’s principal.  The Network has previously covered the mortgage eminent domain proposal and Mortgage Resolution Partners, which had backed Richmond’s plan.  And last September, the Berkeley Center for Law, Business and the Economy and Berkeley Business Law Journal hosted Adjunct Professor Bill Falik—who is a partner at MRP—to discuss the innovative (though controversial) scheme.  The Network covered counterarguments as well.

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Basel Committee and IOSCO Publish Policy Framework

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s note:  The following post is authored by Goodwin Procter LLP.]

The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) jointly issued a final policy framework (the “Policy Framework”) establishing minimum standards for margin requirements for non-centrally cleared derivatives.  The Policy Framework is a result of a 2011 G20 agreement calling upon BCBS and IOSCO to develop, for consultation, global standards for margin requirements for non-centrally cleared derivatives; BCBS and IOSCO released two consultative versions prior to releasing the current final version of the Policy Framework.

The Policy Framework requires the exchange of both initial and variation margin between so-called “covered entities” that engage in non-centrally cleared derivatives.  The document explains that margin requirements for such derivatives “would be expected” to reduce systematic risk by ensuring the availability of collateral to offset losses caused by a counterparty default, and would also promote central clearing by reducing the perceived cost benefits of engaging in uncleared derivatives transactions.  The Policy Framework further explains that margin requirements have certain benefits over capital requirements, such as being allocated to individual transactions rather than being shared across an entity’s full range of activities.  Margin is also, in the words of the document, “defaulter-pay” in the sense that the margin provided by the defaulting party is used to absorb the losses caused by the default, as opposed to capital’s “survivor-pay” model in which the non-defaulting party bears losses out of its own assets.

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Week in Review: Verizon’s Vodafone Buyout

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The week’s business news was widely dominated by Verizon’s buyout of Vodafone’s 45% stake in their joint venture, Verizon Wireless.  Why?  The short answer is:  “That’s what happens when news breaks of the largest such deal since the dot-com crash (circa 2000), the second-largest in the telecom industry, and the third-largest… ever.”

The slightly longer answer is that the deal is still, to some degree, clouded in a bit of mystery.  The New York Times today asked a few obvious questions:  Why $130 billion for 45% of an enterprise valued (in total) at $176 billion?  Why not earlier, like Verizon’s opportunities to make the move in 2001 and 2004?  And why did Verizon choose a joint venture in the first place?  The article describes a good deal of ‘inside baseball’–perhaps detailing the thought process of each company’s management team as they sought to lead the wireless charge in the United States.  This week’s post in The Economist, titled “A $130 billion divorce,” asked what Vodafone planned to do with the large payout?  And now, according to Bloomberg, Reuters, and other outlets, a Verizon shareholder class action suit is seeking to block one of history’s largest deals.  The plaintiffs are pointing to Verizon’s share performance since rumors of the deal surfaced:  down approximately 7.5%.

The Network will keep up-to-date as the deal moves forward.

Upcoming BCLBE Event: “The Economic Value of a Law Degree”

By Christopher Hammond, J.D. Candidate 2015 | Posted on

The Berkeley Center for Law, Business and the Economy will be hosting “The Economic Value of a Law Degree” on Thursday, September 12th at 12:45p.  The event is co-sponsored by the Berkeley Business Law Journal and will take place at the Boalt Hall School of Law.  Registration is suggested (sign up here).

How much is a law degree worth?  Prof. Simkovic will present his research into the market value of a law degree.  His study, co-authored with Frank McIntyre, is one of the first to examine the issue since the financial crisis.  Through US Census data and statistical techniques from labor economics, Simkovic will present his conclusions on the average lifetime earnings of a law degree compared to a bachelor’s degree.  Simkovic’s methods have generated significant controversy, and an ongoing battle in the press and the academy.

Simkovic’s paper is available here, and the powerpoint presentation from the American Law & Economics Association Conference is available here.  The debate between Simkovic & McIntyre and their critics can be followed on Brian Leiter’s Law School Reports.