I have written before in this blog about the McLean/Nocera book, ALL THE DEVILS ARE HERE.
It is a fine book, and I continue to re-read bits of it and discover new points.
Two quick ones today.
1) In their chapter 13, "The Wrap," the authors discuss AIG-FP, the financial products division of the vast insurance company AIG, and its contribution to the crisis. They introduce us to a fellow named Al Frost, who marketed credit default swaps (CDS) for AIG-FP.
After making this introduction, they mention that various CDS' held by AIG-FP included collateral triggers, i.e. contract clauses that allowed "counterparties to demand that AIG put up ... cold, hard cash -- if certain events took place."
Then there is this masterpiece of concision, in which Frost is allowed to hang himself.
"It is hard to know for sure if these triggers were there from the start. Frost ran his department like a little fiefdom; he tended to impart information on a need-to-know basis. (Through his attorney, Frost denies that he didn't talk freely about what was going on in his business.)"
Am I the only one who has chuckled at that?
2) Also in chapter 13, the authors briefly mention Gary Gorton, a Yale economist hired by AIG-FP to develop their risk models. His models obligingly told the division what everyone there wanted to hear, that the triggers weren't at all risky.
Gorton is mentioned again, much later, in chapter 16, about Treasury Secretary Hank Paulson. "Yale economist Gary Gorton -- the game man who did risk modeling for AIG-FP -- explains the repo market this way...."
That wasn't a typo. Or at least it wasn't my typo. They don't write that this is the "same man" mentioned earlier. He is the "game man." I imagine him telling his AIG-FP acquaintances: "Yes, I'll create a model that suits your desired conclusions. I'm game!"
I suspect this isn't their typo either, that it is a deliberate play on the two words. But hey, what do I know? I'm just the game man who keeps reading their book.
Showing posts with label AIG. Show all posts
Showing posts with label AIG. Show all posts
28 October 2011
12 May 2011
History of AIG
AIG is in the news again: The US government wants to sell the interest it acquired in this giant insurance company upon bailing it out in the horrid autumn of 2008. After a period of braggadocio about how the spin-off was going to net enough money to make the taxpayers whole -- in fact, to make us taxed folk net gainers on the deal -- everybody involved seems to have realized that this is not the case after all.
Here is what Forbes has to say. And here is a few words from Reuters.
'Lest we forget, AIG came to a bad end in its previous incarnation largely due to the Financial Products unit (AIG FP), which was taking the long side of mortgage derivatives long after more savvy folkk had grown wary of it. Here are a few words from Roddy Boyd's recent book on the subject, FATAL RISK.
This represent's Greenberg's thinking on the subject of FP as of the autumn of 2001:
"Nor is it a stretch to imagine Greenberg thinking that as long as he had a smart, hardworking sort in that slot who respected him and the AIG legacy well, that was all you needed. There developed a widespread perception that managing FP was very similar to being in charge of an elite military unit: with a clearly defined mission and parameters, close supervision from an experienced member of the ranks and enough operating latitude, positive results were nearly assured. There had, after all, been almost a decade since any material FP screw up."
Here is what Forbes has to say. And here is a few words from Reuters.
'Lest we forget, AIG came to a bad end in its previous incarnation largely due to the Financial Products unit (AIG FP), which was taking the long side of mortgage derivatives long after more savvy folkk had grown wary of it. Here are a few words from Roddy Boyd's recent book on the subject, FATAL RISK.
This represent's Greenberg's thinking on the subject of FP as of the autumn of 2001:
"Nor is it a stretch to imagine Greenberg thinking that as long as he had a smart, hardworking sort in that slot who respected him and the AIG legacy well, that was all you needed. There developed a widespread perception that managing FP was very similar to being in charge of an elite military unit: with a clearly defined mission and parameters, close supervision from an experienced member of the ranks and enough operating latitude, positive results were nearly assured. There had, after all, been almost a decade since any material FP screw up."
02 July 2010
Cassano testified
Now THIS is the one for which people have been waiting! Well ... wonks of a certain sort.
On Wednesday, June 30, the Financial Crisis Inquiry Commission finally heard from Joseph Cassano on his role in American International Group (AIG) in the period leading up to the financial crisis of 2008.
Joseph Cassano, who ran a sort of high-risk prop desk within AIG, known as "Financial Products" or AIG FP, is often credited/debited with setting off the 2008 crisis. Indeed, Cassano wears the biggest black hat in Michael Lewis' book, The Big Short.
Describing a period beginning in late 2004, Lewis writes: "The 'consumer loan' piles that Wall Street firms, led by Goldman Sachs, asked AIG FP to insure, went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. In a matter of months AIG FP, in effect, bought $50 billion in triple-B rated subprime mortgage bonds by insuring them against default. And yet no one said anything about it -- not AIG CEO Martin Sullivan, not the head of AIG FP, Joe Cassano ....The deals, by all accounts, were simply rubber stamped inside AIG FP, and then again by AIG brass."
AIG FP stopped writing such deals in late 2005 -- except for those that were still "in the pipeline."
The news out of the hearing room Wednesday, though, was that Cassano was notably unapologetic. You can read his written submission to the committee for yourself, of course here.
To use the appropriate jargon, AIG FP was writing CDS' on CDOs. Or: it was writing credit default swaps on collateralized debt obligations. Or, as Lewis summarized it in the passage above, it was -- through a chain of instruments by which it hid the risk from itself -- implicitly buying bundled-up subprime mortgages.
Even in retrospect, after the blow-up, Cassano shows a touching faith in the ability of his quants in this statement. "You have asked about the way in which we calculated fair market value for our portfolio. This was, to be sure, a challenging, first-of-its-kind process at AIG-FP, but I believe we developed a reasonably strong analytic method for estimating fair value. We selected a model developed by Moody's (the Binomial Expansion Technique, or "BET") in September 2007. We customized it to provide the most accurate valuation estimate possible."
But of course, if Lewis is at all right than the damage had been done before September 2007. The plane hadn't crashed yet but it was on an auto-pilot course for the mountainside.
Cassano's back-and-forth with the committeemembers is more fun than his pre-hearing statement. Watch that here Go to FCIC Panel Two, and fast forward it to about 37:20, "We were working in an opaque market," and keep it running until he takes offense at the notion that he was making a "one sided bet."
That does seem to be what he was doing, umbrage notwithstanding,
On Wednesday, June 30, the Financial Crisis Inquiry Commission finally heard from Joseph Cassano on his role in American International Group (AIG) in the period leading up to the financial crisis of 2008.
Joseph Cassano, who ran a sort of high-risk prop desk within AIG, known as "Financial Products" or AIG FP, is often credited/debited with setting off the 2008 crisis. Indeed, Cassano wears the biggest black hat in Michael Lewis' book, The Big Short.
Describing a period beginning in late 2004, Lewis writes: "The 'consumer loan' piles that Wall Street firms, led by Goldman Sachs, asked AIG FP to insure, went from being 2 percent subprime mortgages to being 95 percent subprime mortgages. In a matter of months AIG FP, in effect, bought $50 billion in triple-B rated subprime mortgage bonds by insuring them against default. And yet no one said anything about it -- not AIG CEO Martin Sullivan, not the head of AIG FP, Joe Cassano ....The deals, by all accounts, were simply rubber stamped inside AIG FP, and then again by AIG brass."
AIG FP stopped writing such deals in late 2005 -- except for those that were still "in the pipeline."
The news out of the hearing room Wednesday, though, was that Cassano was notably unapologetic. You can read his written submission to the committee for yourself, of course here.
To use the appropriate jargon, AIG FP was writing CDS' on CDOs. Or: it was writing credit default swaps on collateralized debt obligations. Or, as Lewis summarized it in the passage above, it was -- through a chain of instruments by which it hid the risk from itself -- implicitly buying bundled-up subprime mortgages.
Even in retrospect, after the blow-up, Cassano shows a touching faith in the ability of his quants in this statement. "You have asked about the way in which we calculated fair market value for our portfolio. This was, to be sure, a challenging, first-of-its-kind process at AIG-FP, but I believe we developed a reasonably strong analytic method for estimating fair value. We selected a model developed by Moody's (the Binomial Expansion Technique, or "BET") in September 2007. We customized it to provide the most accurate valuation estimate possible."
But of course, if Lewis is at all right than the damage had been done before September 2007. The plane hadn't crashed yet but it was on an auto-pilot course for the mountainside.
Cassano's back-and-forth with the committeemembers is more fun than his pre-hearing statement. Watch that here Go to FCIC Panel Two, and fast forward it to about 37:20, "We were working in an opaque market," and keep it running until he takes offense at the notion that he was making a "one sided bet."
That does seem to be what he was doing, umbrage notwithstanding,
19 March 2009
Dodd goes back and forth
Our chattering and governing classes are working themselves into a mutual lather over a matter that is at best of tangential significance to the present world financial crisis: the $165 million in bonuses that AIG appears to owe to some of its employees and former employees.
On Monday, Senator Grassley suggested the US import the Japanese tradition of hari-kari in reaction to this outrage. Most of the press reported on this remark in a jolly spirit -- oh what a state of jesters is Iowa!
It is in this climate that Senator Christopher Dodd, chairman of the Banking Committee, has just executed a rapid flip-flop on the question of how language that seems rather receptive toward the payment of those bonuses found its way into the stimulus legislation enacted last month.
Here's the key language: "The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary."
Even without knowing what clause (i) says, you can see that this is a grandfather clause, protecting certain bonus payments from a prohibition that might otherwise have applied.
But the Dodd flip-flop is the neat thing here. He has gone from (Tuesday) adamantly rejecting the notion that he could have drafted such a clause to an explanation that he had to do it because otherwise the section limiting bonuses would have been "lost entirely" and an apology (Wednesday) over "if we had some confusion">.
In that CNN clip to which I've linked you, Wolf has some nice language at about 5:00 and shortly thereafter about the above quoted clause, which he calls a "mysterious loophole that was added at the last minute."
Dodd keeps it mysterious, containing that administration officials asked him to make the modifications, and refusing to name them, "someone at the staff level."
Great material. Leno and Letterman's writers are working on this stuff, I'm sure. But tangential to the real problems. And $165 million? To you and I, reader, that is real money. But on the scale of TARP or of the stimulus bill? Peanuts.
On Monday, Senator Grassley suggested the US import the Japanese tradition of hari-kari in reaction to this outrage. Most of the press reported on this remark in a jolly spirit -- oh what a state of jesters is Iowa!
It is in this climate that Senator Christopher Dodd, chairman of the Banking Committee, has just executed a rapid flip-flop on the question of how language that seems rather receptive toward the payment of those bonuses found its way into the stimulus legislation enacted last month.
Here's the key language: "The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary."
Even without knowing what clause (i) says, you can see that this is a grandfather clause, protecting certain bonus payments from a prohibition that might otherwise have applied.
But the Dodd flip-flop is the neat thing here. He has gone from (Tuesday) adamantly rejecting the notion that he could have drafted such a clause to an explanation that he had to do it because otherwise the section limiting bonuses would have been "lost entirely" and an apology (Wednesday) over "if we had some confusion">.
In that CNN clip to which I've linked you, Wolf has some nice language at about 5:00 and shortly thereafter about the above quoted clause, which he calls a "mysterious loophole that was added at the last minute."
Dodd keeps it mysterious, containing that administration officials asked him to make the modifications, and refusing to name them, "someone at the staff level."
Great material. Leno and Letterman's writers are working on this stuff, I'm sure. But tangential to the real problems. And $165 million? To you and I, reader, that is real money. But on the scale of TARP or of the stimulus bill? Peanuts.
31 December 2008
Top Financial Stories 2008
I generally ask myself at this time of year what were the biggest stories of the past twelve months, in business/financial news.
By "stories," I don't mean themes, such as "Bear market in bank stocks" or "volatile crude oil prices." I mean stories, such as one might have seen in a particular newspaper on some specific day.
Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. Usually, on this blog last year at this time and at my blog-city home for two years before that, I've simply given one "top" story from each of the twelve months of the year now ending.
This year has been so wild, though, especially its second half, that I haven't been able to stick to the one-a-month presentation. I've ended up with a list of 18 big stories, two per month starting with July.
All that understood, here we go!
January. Frenchman Jerome Kerviel loses 4.9 billion euros for Societe Generale. $7 billion. The story started off the year with a bang. Kerviel leap-frogged past Nick Leeson as the all-time most rogue-ish "rogue trader."
February. A jury in Hartford, Conn. convicts a former AIG exec of skullduggery.
The executive in question was Christian Milton, once AIG's vice-president for re-insurance. He was convicted of an effort to inflate AIG's loss reserve numbers.
March. The Federal Reserve backs a JPMorgan takeover of Bear Stearns. At one point, [i.e. the morning of March 17] the price was actually $2 a share for Bear's stock, although less than a week prior -- at the close of trading Monday afternoon, March 10, the market valuation had been $70.08 a share. It was hard not to think JP Morgan was making off with ill-gotten gains somnehow. In fact, the purchase price didn't stay down at $2. To resolve some problem in the documentation, it was eventually raised to $10. Bully. Still, the value-evaporation was breaktaking.
April. Food price increases cause riots, political crises, worldwide.
There would be a lot to discuss under this heading, were that my goal in this entry. Instead, I'll just ask about the use of foodstuffs as a surrogate for gasoline: what impact did that have in triggering the price increases or the result?
May. Yahoo successful in warding off acquisition attempt by MS.
A victory for Jerry Yang, the founder of Yahoo!, who remains its guiding spirit and has preserved its independence.
June. Voters in Ireland reject the Lisbon treaty, thus slowing Euro unity..
The world continues to wrestle with the whole idea of "sovereignty," in terms of nation-states or of broader or smaller units.
Hereafter we award two biggest-story prizes per month.
July. (a) Israel, of Bayou and Bear Mountain infamy, turns himself in.
The whole Bayou funds meltdown had more than a touch of the bizaare to it. Israel's effort to simulate a suicide on the Bear Mountain Bridge, the failure of authorities to discover a body in the Hudson, and his re-appearance and surrender just added the garnish to that meal of oddities.
(b) Crude oil prices peak near $150 barrel, head down.
Why did it get that high? Why has each barrel lost close to three quarters of that value in the months since? Which one is the anamoly, prices above $140 or around $40? which one will be the norm going forward? Reviewing this year just leaves me full of questions.
August. (a) Second circuit court hears arguments in CSX/TCI dispute.
This is fascinating litigation about proxy votes and the working of the equity swaps market. These aren't issues that will go away anytime soon.
(b) CME, Nymex agree to consolidation -- part of the much broader trend of the consolidation of exchanges worldwide.
September. (a) Bankruptcy of Lehman Brothers, all heck breaks loose re: bank stocks or, for that mnatter, US equities generally.
(b) SEC emergency order bans any short selling of bank stocks .
These two points rather adequately explain themselves. I'll only add that the ban later expired unlamented. Various restrictions of short-selling remain, but a simple ban on it is akin to a ban on pessimism. It is idiotic.
October. (a) Bush and 'leadership' put a TARP over troubles.
The acronym "TARP" stood for the "Troubled Assets Relief Plan," the keystone of the Emergency Economic Stabilization Act of 2008, which became law on OPctober 3, after a turtuous legislative process that re-defined the Presidential campaign to Senator McCain's disadvantage. That isn't all it has redefined.
(b) Waxman hearings excoriate the credit rating agencies I'll just leave a link to my contemporaneous explanation of this hearing and its bovine idiom.
November. (a) Geithner an early cabinet choice of President Elect.
The Republicans during the campaign had sought to tag Sen. Obama a "socialist" (while a President and Treasury Secy of their party were nationalizing industries -- how odd!) Anyway, the Prez-elect's choice of Timothy Geithner as his own Treasuiry Secretary should have re-assured anyone who needed re-assurance on this front.
(b) Paulson completes the bait-and-switch with the TARP.
The outgoing Treasury boss has advertised the TARP as a fund for purchasing troubled assets. Hence, the name. Those purchases were meant to stabilize, without taking over, the banking system. But by one month out, Paulson was acknowledging that the real use of the money would be to make "equity infusions." In other words, takeovers.
December. (a) Bernard Madoff is arrested Dec. 11, one day after his sons had apparently revealed his pyramid scheme to the authorities.
You can't really call Madoff a "rogue trader" in the manner of Kerviel, the rogue with whom the year began. A rogue is a trader who gets a firm in trouble by going behind the back of his bosses there. Madoff was the guy with his name on the door. Call him a "rogue principal" if you like. Still, his fall gives a nice sense of symmetry to the year.
(b) Dec. 16, Federal Reserve lowers federal funds rate to a range between 0% and 0.25%, record territory. Three days later, the Bank of Japan followed suit, lowering its benchmark rate to 0.10%.
Wow. Funds rates are dropping like crude oil prices.
Whew. I'm sooo happy this year is over.
By "stories," I don't mean themes, such as "Bear market in bank stocks" or "volatile crude oil prices." I mean stories, such as one might have seen in a particular newspaper on some specific day.
Of course, I choose the ones I do largely because they illustrate an important theme. But the theme itself isn't the story.
Further, I don't rank them, as in a top ten list. Usually, on this blog last year at this time and at my blog-city home for two years before that, I've simply given one "top" story from each of the twelve months of the year now ending.
This year has been so wild, though, especially its second half, that I haven't been able to stick to the one-a-month presentation. I've ended up with a list of 18 big stories, two per month starting with July.
All that understood, here we go!
January. Frenchman Jerome Kerviel loses 4.9 billion euros for Societe Generale. $7 billion. The story started off the year with a bang. Kerviel leap-frogged past Nick Leeson as the all-time most rogue-ish "rogue trader."
February. A jury in Hartford, Conn. convicts a former AIG exec of skullduggery.
The executive in question was Christian Milton, once AIG's vice-president for re-insurance. He was convicted of an effort to inflate AIG's loss reserve numbers.
March. The Federal Reserve backs a JPMorgan takeover of Bear Stearns. At one point, [i.e. the morning of March 17] the price was actually $2 a share for Bear's stock, although less than a week prior -- at the close of trading Monday afternoon, March 10, the market valuation had been $70.08 a share. It was hard not to think JP Morgan was making off with ill-gotten gains somnehow. In fact, the purchase price didn't stay down at $2. To resolve some problem in the documentation, it was eventually raised to $10. Bully. Still, the value-evaporation was breaktaking.
April. Food price increases cause riots, political crises, worldwide.
There would be a lot to discuss under this heading, were that my goal in this entry. Instead, I'll just ask about the use of foodstuffs as a surrogate for gasoline: what impact did that have in triggering the price increases or the result?
May. Yahoo successful in warding off acquisition attempt by MS.
A victory for Jerry Yang, the founder of Yahoo!, who remains its guiding spirit and has preserved its independence.
June. Voters in Ireland reject the Lisbon treaty, thus slowing Euro unity..
The world continues to wrestle with the whole idea of "sovereignty," in terms of nation-states or of broader or smaller units.
Hereafter we award two biggest-story prizes per month.
July. (a) Israel, of Bayou and Bear Mountain infamy, turns himself in.
The whole Bayou funds meltdown had more than a touch of the bizaare to it. Israel's effort to simulate a suicide on the Bear Mountain Bridge, the failure of authorities to discover a body in the Hudson, and his re-appearance and surrender just added the garnish to that meal of oddities.
(b) Crude oil prices peak near $150 barrel, head down.
Why did it get that high? Why has each barrel lost close to three quarters of that value in the months since? Which one is the anamoly, prices above $140 or around $40? which one will be the norm going forward? Reviewing this year just leaves me full of questions.
August. (a) Second circuit court hears arguments in CSX/TCI dispute.
This is fascinating litigation about proxy votes and the working of the equity swaps market. These aren't issues that will go away anytime soon.
(b) CME, Nymex agree to consolidation -- part of the much broader trend of the consolidation of exchanges worldwide.
September. (a) Bankruptcy of Lehman Brothers, all heck breaks loose re: bank stocks or, for that mnatter, US equities generally.
(b) SEC emergency order bans any short selling of bank stocks .
These two points rather adequately explain themselves. I'll only add that the ban later expired unlamented. Various restrictions of short-selling remain, but a simple ban on it is akin to a ban on pessimism. It is idiotic.
October. (a) Bush and 'leadership' put a TARP over troubles.
The acronym "TARP" stood for the "Troubled Assets Relief Plan," the keystone of the Emergency Economic Stabilization Act of 2008, which became law on OPctober 3, after a turtuous legislative process that re-defined the Presidential campaign to Senator McCain's disadvantage. That isn't all it has redefined.
(b) Waxman hearings excoriate the credit rating agencies I'll just leave a link to my contemporaneous explanation of this hearing and its bovine idiom.
November. (a) Geithner an early cabinet choice of President Elect.
The Republicans during the campaign had sought to tag Sen. Obama a "socialist" (while a President and Treasury Secy of their party were nationalizing industries -- how odd!) Anyway, the Prez-elect's choice of Timothy Geithner as his own Treasuiry Secretary should have re-assured anyone who needed re-assurance on this front.
(b) Paulson completes the bait-and-switch with the TARP.
The outgoing Treasury boss has advertised the TARP as a fund for purchasing troubled assets. Hence, the name. Those purchases were meant to stabilize, without taking over, the banking system. But by one month out, Paulson was acknowledging that the real use of the money would be to make "equity infusions." In other words, takeovers.
December. (a) Bernard Madoff is arrested Dec. 11, one day after his sons had apparently revealed his pyramid scheme to the authorities.
You can't really call Madoff a "rogue trader" in the manner of Kerviel, the rogue with whom the year began. A rogue is a trader who gets a firm in trouble by going behind the back of his bosses there. Madoff was the guy with his name on the door. Call him a "rogue principal" if you like. Still, his fall gives a nice sense of symmetry to the year.
(b) Dec. 16, Federal Reserve lowers federal funds rate to a range between 0% and 0.25%, record territory. Three days later, the Bank of Japan followed suit, lowering its benchmark rate to 0.10%.
Wow. Funds rates are dropping like crude oil prices.
Whew. I'm sooo happy this year is over.
30 September 2007
Changing the Proxy Rules II
Electing your friends to the board isn't the only way you, as a corporate activust/dissident, might decide to use proxies. You might seek to force votes at the annual meeting, or press the board to take a stand, on a range of actions through the non-binding resolution for example: that the company will stop doing business with country X until the dictator for life in country X promises free elections.
How much of that should be allowed, and when does it become a pointless distraction that the management and incumbent board can rightly keep off the ballots?
Previous efforts by the Securities and Exchange Commission to codify principles on such points has led to the creation of rule 14a-8. Here's the URL for an outline of 14a-8 prepared by the University of Cincinnati College of Law.
http://www.law.uc.edu/CCL/34ActRls/rule14a-8.html
The present shenanigans arose over one particular provision of this rule, 14a-8(i)(8), which says specifically that a company has no obligation to present a shareholder proposal in its proxy materials if that proposal "relates to an election."
The U.S. Court of Appeals, Second Circuit, kicked over this applecart in September 2006, when it ruled in a lawsuit brought by the American Federation of State, County, and Municipal Employees against American International Group Inc. that although an issuer such as AIG can exclude rule changes that "relate to a particular election," it can't exclude rule changes that "like AFSCME's, would establish the procedural rules governing elections generally." [Emphasis added.]
The Second Circuit includes the federal district courts of Vermont, Connecticut, and New York. It seems to have gone "off the reservation" here, though. The other circuits generally understand the federal rule to mean that an issuer can exclude changes about a corporation's election rules full stop, regardless of whether their terms are "general" or "specific." By interpreting the ability to exclude narrowly, the circuit court has given shareholder activists a new target -- to try to change corporate policy by holding these meta-elections, votes about the procedures for future votes.
So the SEC has now proposed two distinct re-workings of 14a-8(i)(8). They are mutually inconsistent, but the SEC hasn't chosen between them. It has put them both out for public comment, saying, "Hey, everyone, help us decide what to do about the AFSCME case!"
In the eyes of most activists or would be activists, the SEC shouldn't do anything about the AFSCME case except embrace it.
But both of the proposals fall short of an embrace. One would allow the meta-elections, but would also set out a very restrictive set of rules about how they would be conducted. The other would disallow them completely.
Personally, I'm in favor of the third option. The SEC should reject both of its own proposals and just embrace the Second Circuit's reading, opening the doors wide (not just a crack) to meta-elections with activist intent.
Why? I'll explain tomorrow, completing this triptych.
How much of that should be allowed, and when does it become a pointless distraction that the management and incumbent board can rightly keep off the ballots?
Previous efforts by the Securities and Exchange Commission to codify principles on such points has led to the creation of rule 14a-8. Here's the URL for an outline of 14a-8 prepared by the University of Cincinnati College of Law.
http://www.law.uc.edu/CCL/34ActRls/rule14a-8.html
The present shenanigans arose over one particular provision of this rule, 14a-8(i)(8), which says specifically that a company has no obligation to present a shareholder proposal in its proxy materials if that proposal "relates to an election."
The U.S. Court of Appeals, Second Circuit, kicked over this applecart in September 2006, when it ruled in a lawsuit brought by the American Federation of State, County, and Municipal Employees against American International Group Inc. that although an issuer such as AIG can exclude rule changes that "relate to a particular election," it can't exclude rule changes that "like AFSCME's, would establish the procedural rules governing elections generally." [Emphasis added.]
The Second Circuit includes the federal district courts of Vermont, Connecticut, and New York. It seems to have gone "off the reservation" here, though. The other circuits generally understand the federal rule to mean that an issuer can exclude changes about a corporation's election rules full stop, regardless of whether their terms are "general" or "specific." By interpreting the ability to exclude narrowly, the circuit court has given shareholder activists a new target -- to try to change corporate policy by holding these meta-elections, votes about the procedures for future votes.
So the SEC has now proposed two distinct re-workings of 14a-8(i)(8). They are mutually inconsistent, but the SEC hasn't chosen between them. It has put them both out for public comment, saying, "Hey, everyone, help us decide what to do about the AFSCME case!"
In the eyes of most activists or would be activists, the SEC shouldn't do anything about the AFSCME case except embrace it.
But both of the proposals fall short of an embrace. One would allow the meta-elections, but would also set out a very restrictive set of rules about how they would be conducted. The other would disallow them completely.
Personally, I'm in favor of the third option. The SEC should reject both of its own proposals and just embrace the Second Circuit's reading, opening the doors wide (not just a crack) to meta-elections with activist intent.
Why? I'll explain tomorrow, completing this triptych.
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