King and Country: Reflections on the Costs of Market Misconduct

1 04 2016

Read as updated SSRN paper with reference to the Panama Papers. Because of the Budget 2016, the chancellor has been accused of “looking more like Gordon Brown as a purveyor of gimmicks.” In difficult times when calls for his scalp over the row regarding the budget seemed to have eclipsed everything else, the rare bit of good news for George Osborne is that he can use the opportunity provided by the threat of Brexit – “a leap in the dark” which may cost the UK £100 billion or 5 per cent of GDP and 950,000 jobs by 2020 – to camouflage and obfuscate the real problems of conduct in the world of economics and finance. On the other hand, in an important interview with Charles Moore the former Bank of England governor Mervyn King showed hallmark signs of euroscepticism and said the people need to make up their own minds about the upcoming referendum. King also warned that lenders have not stopped taking excessive risks with savers’ money and the result is “bankers have not learnt the lessons of the Great Crash”. Unsurprisingly, in his somewhat controversial new book The End of Alchemy he makes the case against financial sorcery by arguing that it must be squeezed out of the world’s banking system. Perhaps, such failings are amplified further because “financial crises are a fact of life” and we are “moving into a rerun of the credit crunch”. Indeed, Lord King calls banks “the Achilles heel of capitalism.”

Below I sketch important/emerging issues in the intersecting themes of economics, law and misconduct as seen in the media, especially through the lens of “conduct costs” – some other themes are also explored. Mentioning Walter Bagehot and his classic text Lombard Street, which argued that the BoE should provide short-term financial support in times of crisis, King advises us that the old “lender of last resort” model (LOLR) is in need of revision because “banking has changed almost out of recognition since Bagehot’s time.” The former governor argues that the time has come to replace LOLR with the pawnbroker for all seasons (PFAS) system. For him, it is time for financial institutions to drop LOLR and embrace PFAS and be prepared to advance funds to just about anyone who has sufficient collateral. “The essential problem with the traditional LOLR,” argues King “is that in the presence of alchemy, the only way to provide sufficient liquidity in a crisis is to lend against bad collateral – at inadequate haircuts and low or zero penalty rates.” Read the rest of this entry »





UK Supreme Court: Case Preview: Securitisation and the Balance Sheet Test

23 02 2013

BNY Corporate Trustee Services Limited and others (Respondents) v Neuberger Berman Europe Ltd (on behalf of Sealink Funding Ltd) and others (Appellants) UKSC 2011/0086 and BNY Corporate Trustee Services Limited and others (Respondents) v Eurosail-UK 2007-3BL PLC (Appellant) UKSC 2011/0199 shall be heard by the UK Supreme Court on 25 and 26 February 2013. Lord Hope of Craighead DPSC and Lord Walker of Gestingthorpe, Lord Mance of Frognal, Lord Sumption and Lord Carnwath of Notting Hill JJSC will hear these appeals. This hearing can be viewed online during Court hours here.

Facts

Interest-bearing Notes were issued by a special purpose vehicle, Eurosail-UK 2007-3BL PLC (“the Issuer”), formed to hold income-producing assets, namely mortgage loans. Due to the insolvency of Lehman Brothers (see the earlier case decided by the UK Supreme Court involving Lehman Brothers here), with whom the Issuer had entered into swap agreements, the Issuer suffered a significant deficiency in its net asset position. The terms governing the issue of the notes provided that on specified Events of Default an enforcement notice could be served, the effects of which included altering the respective priorities of the Noteholders for repayment of capital and interest. One such Event of Default involved the issuer being unable to pay its debts within the meaning of section 123(2) – definition of inability to pay debts; “a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities” – of the Insolvency Act 1986. The trustee of the Noteholders’ rights, BNY Corporate Trustee Services Ltd, commenced the current proceedings seeking a determination of whether that event of default had occurred. Read the rest of this entry »