Truth on the Market

Academic commentary on law, business, economics and more

Archive for January, 2006

Hedge Fund Registration Requirement

Posted by Bill Sjostrom on January 28, 2006

The hedge fund registration requirements debated extensively in the blawgosphere a few months back (see, e.g., here, here, and here) will take effect on Wednesday of next week. According to this article in the W$J, so far 530 hedge fund advisers have registered and a few hundred more are expected before Wednesday. Recent estimates put the number of hedge funds at around 8,000 (although the number may be on the decline). So why haven’t there been more registrations? Well, the rules do not require registration if customers cannot withdraw money from an adviser’s fund for two years or more or if the fund is not taking new investors. Hence, a number of advisers have increased the lockup period for their funds to two years and others have closed their funds to new investors. Additionally, some hedge funds advisers have previously registered or are waiting to register pending the outcome of litigation challenging the rules (see this article).

The SEC’s reasons for adopting the new rules include the incredible growth of hedge fund assets, the fact that some hedge funds have expanded their marketing to attract retail investors, the gradual and detectable decline in investment minimums, and fraud deterrence. The SEC believes that fraudsters are attracted to the hedge fund industry specifically due to the lack of oversight. Likewise, the SEC hopes that similar to tax audits the prospect of random compliance examinations will serve to deter fraud. You can quibble with whether these reasons warrant additional regulation and whether adviser registration is the right answer (and many have). But if the SEC truly believes additional regulation is warranted and adviser registration is the right answer, why did they draft rules that appear to result in less than 25% of hedge fund advisers registering?

For a brief overview of the new rules (put together by my research assistant, Ron Taylor), see below the fold. Read the rest of this entry »

Posted in hedge funds | 2 Comments »

The Perils(?) of Educating Judges on Economics

Posted by Thom Lambert on January 28, 2006

Yesterday’s New York Times editorialized on my favorite recent non-story — the one about Justice Scalia’s failure to attend the swearing-in ceremony of Chief Justice Roberts.

C’mon guys. As lesser newspapers have already reported, Justice Scalia was in Colorado to teach a previously scheduled ten-hour seminar over two days. He received no honorarium for his work. He arrived at 11:00 PM the night before the seminar began, left at 6:30 AM the day after it ended, and, at some point during the two days, managed to squeeze in less than two hours of tennis (scandal!). The date of the swearing-in ceremony was uncertain until the last minute, because the timing of the confirmation vote itself was up in the air. Of course he honored his commitment to teach the course, for which lots of folks had spent lots of money and done lots of work. One of the conference attendees, who has written about what really happened, praised Justice Scalia for “work[ing] his ass off.”

Perhaps realizing there’s no real scandal here, the Times decided to make a larger point, criticizing judicial “junkets.” It focused in particular on what it called “vacations” provided to federal judges “under the guise of ‘judicial education.’”

The term “vacations” may be stretching things. These are not the sort of conferences (like, say, most law conferences) where one can skip out on the sessions and go lie by the pool. The seminars are small (there aren’t that many federal judges after all), and one’s absence from meetings would be noticed. The seminars do seem to be in desirable locations, and the food and accommodations are no doubt first-rate, but in exchange for a comfy bed and a good meal, the judges are expected to endure day-long lectures on highly technical subjects.

What, then, is the attraction? Well, federal judges are generalists, who are expected to decide cases involving all sorts of matters on which they may have no formal training. Their decisions, then, are a matter of public record and are usually subject to review by higher courts. They therefore want to write the best, most persuasive opinions they can, and they are attracted by the prospect of acquiring analytical skills that will help them do their jobs better. In short, their motivation for attending these seminars is almost certainly not the comfy beds and good meals (we can assume that federal judges generally eat and sleep pretty well). Instead, they want to become smarter judges.

So why would the Times (along with Senators Leahy, Feingold, and Kerry, who are drafting legislation to ban these educational seminars) object? Perhaps it’s because of the subject taught at some of the most successful judicial seminars. The three most famous judicial seminars — those hosted by George Mason’s Law and Economics Center, the Liberty Fund, and the Foundation for Research on Economics and the Environment — focus on educating judges about basic principles of microeconomics. An understanding of how markets work can be invaluable to judges charged with deciding cases involving the various complicated regulatory regimes purportedly aimed at correcting market failure.

But Senators Leahy, Feingold, and Kerry (and the Times) would prefer judges who are less economically sophisticated. Perhaps that’s because folks who understand economics are less likely to reflexively support many of the interventionist public policies preferred by those senators and the Times editorial board. Thus, the Times (et al.) would rather have judges who are a bit more ignorant of the dismal science.

How enlightened is that?

Posted in economics, politics | Comments Off

Disney/Pixar Deal and Omnicare

Posted by Bill Sjostrom on January 27, 2006

The Disney/Pixar deal is a hot topic in the blawgosphere (see, e.g., here, here, here and here), so I want to join in. I took a quick look at the transaction documents (they’re now available here on the SEC’s website) and noticed that Steve Jobs has executed a voting agreement (here) pursuant to which he agrees to vote 40% of Pixar shares in favor of the deal. A voting agreement of this type is a common deal protection measure. What caught my eye about the Jobs agreement is that he is not obligated to vote all of his shares in favor of the deal. According to Pixar’s most recent proxy statement, Jobs owns 50.61% of the outstanding shares of Pixar. Thus, I assume that the 40% number is a result of the Omnicare decision. In Omnicare, the Delaware Supreme Court, in a controversial 3-2 decision, struck down under the Unocal test a merger agreement that (1) included a shareholder voting agreement pursuant to which holders of a majority of shares of the target company contractually obligated themselves to vote all of their shares in favor of the merger, (2) included a requirement that the target company’s board of directors put the transaction to a shareholder vote even if it no longer supports the transaction (“force the vote” provision), and (3) did not include a fiduciary out.

If the 40% number (as opposed to all shares owned) is a result of Omnicare, it seems to me to be an overly conservative reading of the case. The Disney/Pixar deal does not include a force the vote provision (does California corporate law, Pixar’s state of incorporation, even allow a forced vote?) and does include a fiduciary out, so none of the factors present in Omnicare are in the deal. Doesn’t that leave room for Jobs to agree to vote all his shares in favor of the deal? Maybe it’s at 40% for some other reason. On another note, has a common practice emerged with respect to deal protection provisions post-Omnicare?

Posted in mergers & acquisitions | 2 Comments »

Blogs Providing Truth on the Market

Posted by Thom Lambert on January 27, 2006

My initial post on this blog hailed the power of the blogosphere to correct half-truths asserted by professional journalists. From Russ Roberts (via Cafe Hayek), a case in point.

Posted in blogging | Comments Off

Taking Maytag and Whirlpool to the cleaners

Posted by Geoffrey Manne on January 27, 2006

neptunewasheranddryer_th.jpgChristine blogs about the Whirlpool-Maytag merger and its antitrust problems. Law Blog has the story, as well. Both mention the American Antitrust Institute which opposes (vehemently) the merger.

In fact, the AAI has never met a merger it didn’t find anticompetitive, so its opposition should be taken with a grain of salt. Then again, I’ve never met a merger I thought was anticompetitive, so perhaps the same disclaimer applies to me . . . .

Nevertheless, here’s a couple of thoughts:

The FTC and the DOJ in my experience are pretty resistant to the “emerging foreign competition” argument, which is being claimed here (China is the source) (although there are exceptions). The problem, of course, is that it can be difficult to convince skeptical regulators that a not-quite-apparent (to them, anyway) threat is real, or that the mere potential for foreign entry into contestable markets is enough to restrain anticompetitive behavior. Often these just aren’t winning arguments against the “show us the numbers now” gambit, although they should be.

Meanwhile, here, as always, it comes down to market definition. The AAI says the combined company would have too much power in the top-loading washer “market” (scare quotes mine). “Of particular concern, the white paper explains, is the “market” for top-loading washers—a unique “Americanâ€? product for which there is no foreign competition.” (Notice the sly “and foreign competitors just won’t compete in this “unique” American market” argument). Now, the AAI is worried on other accounts, as well. And I haven’t seen the cross-elasticity study. But this doesn’t even pass the smell test. Does anyone seriously believe that Americans just wouldn’t go in for those fancy-pants front-loading washers if the price of their beloved top-loaders shot up? I mean, who wants to bend down to do laundry . . . you know, except for loading and unloading those uniquely-American front-loading dryers. Because, um, they’re different. Dryers and washers are apples and oranges, dontcha know. Um . . . I gotta go.

But perhaps because the companies maintain separate top- and front-loading divisions (I don’t know whether they do or not), or because some front-loader manufacturers just don’t make top-loaders (and vice versa), or because, currently, front-loaders seem to cost a bit more, the two are in separate “markets.” It’s a screwy way to determine an economically-relevant market: a more-or-less ad hoc assessment of competitor and customer comments, combined with a flawed dissection of internal memos, some casual empiricism (agency staff have been known to take field trips to local retailers to suss out “the market”), and a little econometrics on the side. (For more on the problems of market definition, see my article, Hot Docs vs. Cold Economics).

At any rate, here’s my casual empiricism. If you go to epinions.com you’ll find that there are currently 30 manufacturers listing top-loading washing machines. I realize some (like Kenmore) may be selling products manufactured by Whirlpool or Maytag, and others may not be available in the US, etc. Nevertheless, every single one of these manufacturers, along with the even greater number who make front-loaders, to say nothing of new entrants, could begin and/or step up top-loader sales in response to a price increase. Where’s the problem?

Posted in antitrust, markets | 4 Comments »

Tom Ulen returns to the blogosphere (and it's a good thing, too)

Posted by Geoffrey Manne on January 26, 2006

Rumblings of the imminent emergence of the soon-to-be-formidable Law and Econ Prof Blog today. Tom Ulen is joined by Jagdeep Bhandari. Another not-to-miss read. Now I’ll never get to look at the Economist again.

Posted in blogging, law and economics | Comments Off

Maybe Hamas ain't so bad

Posted by Geoffrey Manne on January 26, 2006

hamasProf. B. writes with pronounced skepticism of and hostility to Hamas’ recent Palestinian parliamentary victory here. He sees this as a “decisive victory by a terrorist organization hostile to both the US and Israel,” and asks why anyone thinks this would be a good thing. Well, he’s right as a banal descriptive matter (Hamas is, in fact, “a terrorist organization hostile to both the US and Israel”), but here’s a couple of reasons to be optimistic.

As far as terrorist organizations go (a big caveat, to be sure), there’s a lot to commend Hamas. Not least among them: Its leaders seem not to be, in fact, irrepressibly self-destructive wackos (for the most part), and they recognize that self-preservation will require engagement with Israel. Hamas has (believe it or not) improved social services and governance in the PA town it currently controls. As a group, Hamas is way better than the incompetent Fatah alternative. Relatedly, Hamas has some actual influence with the people, which will be useful in Israel’s efforts to quell the real wackos. And, finally, like it or not, Hamas’ desire for political success in the PA will surely require some moderating of its religious agenda (on which, see here).

Hamas might view this victory as a vindication of its unseemly and subversive past, but I think that is unlikely. As Seth Weinberger notes:

But the act of governing will transform the situation. When Hamas was a shadowy organization conducting a terrorist insurgency, Israel’s options were limited. Targets were hard to find, and there was little to threaten other than the lives of the leaders and the militants. But now Hamas will look much more like a state, meaning that there will be a better chance of creating deterrence. Hamas will have to build social institutions, sit in the parliament and mayoral/gubernatorial houses, and openly campaign to win future elections. If Israel needs to retaliate, there will have much more concrete targets than before. Hamas will not likely be willing to forfeit and sacrifice the political power that it has so difficultly wrested away from Fatah.

There’s more along these lines from David Bernstein, here.

UPDATE: Gary Becker agrees.

Posted in international politics | 1 Comment »

Golfing: Scholarship or Distraction?

Posted by Bill Sjostrom on January 26, 2006

Click here to read about the $38 million home Tiger Woods recently purchased.  Maybe I should give up blogging so I have more time to work on my golf game.

Posted in sports | 1 Comment »

Questionable Boston Scientific Press Release

Posted by Bill Sjostrom on January 26, 2006

This story in yesterday’s Boston Herald asserts that during the bidding war for Guidant between J&J and Boston Scientific (BSX), BSX “used highly questionable investment advice to swing the battle their way and give their stock a good ‘pop.’� Specifically, BSX put out a press release that quoted various Wall Street analysts endorsing the BSX bid.

If Boston Scientific won the takeover, it would be “a ‘must own’ stock� (UBS), could rise “35-40� percent (Lehman Brothers), “56 percent (in) two years� (JMP Securities), or over 30 percent more than the market (SG Cowen), the statement said.

There is no problem with a company quoting analyst statements in a press release, although securities lawyers bristle whenever a company includes predictions that its stock will perform well. But that is where the bespeaks caution doctrine and the forward-looking statement safe harbors under the ’33 Act and ’34 Act come in. Under these provisions, as long as the forward-looking statements are identified as such and accompanied by meaningful cautionary language, the company can generally not be sued for the statements even if they turn out to be false. Read the rest of this entry »

Posted in 10b-5, securities regulation | Comments Off

The Ban on General Solicitation and Advertising

Posted by Bill Sjostrom on January 25, 2006

I blogged last week about the recommendations concerning Sarbanes-Oxley 404 adopted by the SEC Advisory Committee on Smaller Public Companies at a meeting on 12/14/05 (see here).  The transcript of the meeting is now available on the SEC’s website (click here).  Today I want to talk about a different recommendation adopted by the committee that has not received much if any attention but is arguably more important for small companies (at least small emerging companies) than the proposed S404 exemption.  I’m referring to the recommendation to “[a]dopt a new private offering exemption that does not prohibit general solicitation and advertising for transactions with certain purchasers.â€?  This is something I’ve argued for in the past (see my article, Relaxing the Ban:  It’s Time to Allow General Solicitation and Advertising in Exempt Offerings).  Basically, studies have indicated that there is a funding gap for emerging companies seeking start-up and early-stage private equity.  The funding gap persists notwithstanding large inflows into venture capital funds because as funds have gotten bigger they have by necessity shifted to later-stage and larger deals (see here).  Angle investors could fill this gap but the ban on general solicitation/advertising greatly impedes this.  Hence, my proposal to “relax the ban.â€? Read the rest of this entry »

Posted in private equity, securities regulation | 2 Comments »

 
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