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Phases of the financial crisis

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Phases of the financial crisis

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  1. SeminarLEGAL IMPACT OF THE FINANCIAL CRISIS4 December 2008by Philip R WoodSpecial Global Counsel, Allen & Overy LLPVisiting Professor in International Financial Law, University of OxfordYorke Distinguished Visiting Fellow, University of CambridgeVisiting Professor, Queen Mary College, University of LondonVisiting Professor, London School of Economics & Political Science

  2. Phases of the financial crisis • First phase Summer 2007: Bubble tenses. Hisses at vents. • Second phase September 2008: AIG, Fannie, Freddie, Lehmans $2,700 bn bail out funds • Third phase October 2008 ff: Debris from the skies Spread to corporates, sovereign states. BK:10307614

  3. Government bail-outs of banks • Tier 1 capital (preferred shares, warrants, some convertibles)(1) • Funding guarantees e.g. interbank market, bond issues up to three years(2) • Loss-sharing guarantees • Asset purchases: valuation problems Compare historical asset purchase companies • Nationalisation • Nationalisation • Note state aid, competition law • See Map 56A: Examples of government bail-outs of banks 2007-08. Compare Map 56 (1) Shareholder vetos, dilution, no dividends, executive compensation, lending policy (2) Note protections to independent guarantors: first demand, grace period, pay by scheduled maturities, limited claims guarantee, application of recoveries, no waiver of defences, control, prepayment of guarantee, non-competition and subrogation, counter-indemnity, fees BK:10307614

  4. Figure 56A: Examples of government bail­outs of banks BK:10307614

  5. 56. Map: Bank insolvencies 1980-2002 BK:10307614

  6. Liquidity and collateral • Central banks substitute for • Interbank markets • Commercial paper market • Collateral • Eligibility • Legal protections (Financial Collateral Directive) BK:10307614

  7. Deposit protections • Existing provisions, mainly retail. See maps 57 and 58 • Runs on banks start in wholesale market • Features of crisis schemes • political guarantees • eligible depositors • amounts, often unlimited • See Map 59A: Countries enlarging deposit protection 2007-08 BK:10307614

  8. Figure 59A: Examples of new bank deposit protection 2007-08 BK:10307614

  9. 58. Map: Deposit insurance – coverage ratio to per capita GDP BK:10307614

  10. Shorting shares • Selling shares one does not own • naked shorts • covered shorts • Pros and cons • Types of regulation • prescribed companies only, e.g. banks • ban on naked shorts, disclosure of covered shorts • note general law of false market rumours/market manipulation • See Map 64A: Examples of new shorting restrictions 2007-08 BK:10307614

  11. Figure 64A: Map: Examples of new shorting restrictions 2007-08 BK:10307614

  12. Other legal changes • Mark-to-market accounting • Executive compensation (moral suasion) • Foreclosure forbearance BK:10307614

  13. Regulatory proposals • Basel counter-cyclicality (more capital in good times) • Securitisations (more on balance sheet, skin in the game) • Rating agencies: registration, conflicts of interest, differentiation of structured finance • Hedge fund regulation? • Liquidity regulation • Subsidiarisation (banks must form local subsidiaries to enhance control) • Credit default swap central counterparty • Derivatives regulation and transparency BK:10307614

  14. UK Special Resolution Regime • Background: FDIC and others • Partial transfers and credit analysis • Set-off and netting • Collateral • Henry VIII clause BK:10307614

  15. Legal impact of previous Depressions • South Sea Bubble 1710s (companies retarded) • Mississippi Co and Banque de France 1720 (John Law) (stock exchanges and banks retarded) • 1930s Great Depression (US regulatory regime, rescue statutes) • Japan 1990s: mild impact e.g. Civil Reorganisation Law 1999, no Glass-Steagall • Major differences now: • regulatory regime (See Map 54) • corporate rescue statutes (See Map 42) BK:10307614

  16. 54. Map: Financial regulatory regimes BK:10307614

  17. 42. Map: Major changes to insolvency legislation 1997 – 2007 BK:10307614

  18. Possible future impact on insolvency law • Set-off and netting (Special Resolution Regime) • Contract cancellations (EHYA views) • Custodianship (the melting trust) • Director liability and compulsory filings • Security interests, especially rescues and consumer protection • New money priority • Partial transfers and novations (US BC s365, France) • Faster prepacks • Pensions and employees • Shareholder vetos • Official guidelines for work-outs (Britain, Turkey, Malaysia, Indonesia, Hong Kong, South Korea, Japan) BK:10307614

  19. Conclusions • What really went wrong? • Can the law prevent what went wrong? • How should the law be changed, if at all? BK:10307614

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