To his friends on the left on accepting and understanding the role that regulation has played in the current financial mess despite calls to chalk the whole thing up to knee-jerk ideological deregulatory policies. Greg Mankiw also calls out Senator Obama for offering a distorted version of history in the Presidential debate.
Archive for September, 2008
A Open Letter From Steve Horwitz
Posted by Josh Wright on September 28, 2008
Posted in economics, regulation | Comments Off
AIG/NY Fed Credit Agreement
Posted by Bill Sjostrom on September 27, 2008
available here.
From the 8-K:
On September 22, 2008, American International Group, Inc. (“AIG”) entered into an $85 billion revolving credit facility (the “Credit Facility”) and a Guarantee and Pledge Agreement (the “Pledge Agreement”) with the Federal Reserve Bank of New York (“NY Fed”).
The Credit Facility has a two year term and bears interest at 3-month LIBOR plus 8.5%. The Credit Facility provides for an initial gross commitment fee of 2% of the total Credit Facility on the closing date. AIG will also pay a commitment fee on undrawn amounts at the rate of 8.5% per annum. Interest and the commitment fees are generally payable through an increase in the outstanding balance under the Credit Facility. Borrowings under the Credit Facility are conditioned on the NY Fed being reasonably satisfied with, among other things, AIG’s corporate governance.
AIG is required to repay the Credit Facility from, among other things, the proceeds of certain asset sales and issuances of debt or equity securities. These mandatory repayments permanently reduce the amount available to be borrowed under the Credit Facility.
The Credit Facility contains customary affirmative and negative covenants, including a requirement to maintain a minimum amount of liquidity and a requirement to use reasonable efforts to cause the composition of the Board of Directors of AIG to be satisfactory to the trust described below within 10 days after the establishment of the trust.
Under the agreement, AIG will issue a new series of perpetual, non-redeemable Convertible Participating Serial Preferred Stock (the “Preferred Stock”) to a trust that will hold the Preferred Stock for the benefit of the United States Treasury. The Preferred Stock will, from issuance (i) be entitled to participate in any dividends paid on the common stock, with the payments attributable to the Preferred Stock being approximately, but not in excess of, 79.9% of the aggregate dividends paid on AIG’s common stock, treating the Preferred Stock as if converted, and (ii) vote with AIG’s common stock on all matters submitted to AIG’s shareholders, and will hold approximately, but not in excess of, 79.9% of the aggregate voting power of the common stock, treating the Preferred Stock as if converted. The Preferred Stock will remain outstanding even if the Credit Facility is repaid in full or otherwise terminates.
Pursuant to the Credit Facility, AIG is required to hold a special shareholders meeting to amend its restated certificate of incorporation to increase its share capitalization and to lower the par value of its common stock in order to permit the conversion of the Preferred Stock into common stock. Once this amendment is effective, the Preferred Stock will be convertible at any time into 79.9% of the shares of common stock outstanding at the time of issuance.
AIG is required to enter into a customary registration rights agreement that will permit the NY Fed to require AIG to register the Preferred Stock and the underlying common stock under the Securities Act of 1933.
The Credit Facility will be secured by a pledge of the capital stock and assets of certain of AIG’s subsidiaries, subject to exclusions for certain property the pledge of which is not permitted by AIG debt instruments, as well as exclusions of assets of regulated subsidiaries, assets of foreign subsidiaries and assets of special purpose vehicles.
Posted in markets, mergers & acquisitions | 1 Comment »
N-Data Settlement Approved 3-1
Posted by Josh Wright on September 26, 2008
The public comment period has closed and the N-Data settlement has been approved by a vote of 3-1 with Chairman Kovacic voting against (his earlier dissent is here). I think is a sleeper candidate for one of the most important antitrust events of the year as it potentially signals a remarkable expansion of the Commission’s Section 5 Act. You can read the public comments on N-Data here. Bruce Kobayashi and I (in this paper) have criticized the decision on a number of grounds, most importantly the adequacy of alternative state contract and federal patent remedies to mitigate patent holdup problems coupled with the potential for significant welfare losses in the form of allowing antitrust remedies (including private follow-on and state litigation) when we extend antitrust liability to breach of contract or even good faith modifications.
Posted in antitrust, economics, federal trade commission, intellectual property, patent | Comments Off
How About a Little Personal Responsibility?
Posted by Paul Gift on September 25, 2008
I was reading an article last week about the SEC temporary ban on short-sales and came across the following quote:
Short-selling can contribute to efficiency while adding liquidity to the markets. But a recent wave of the maneuvers — profiting by selling unowned shares of companies in the anticipation their prices will drop — has been blamed in part for the demise of venerable investment firm Lehman Brothers and other big financial companies.
There appears to me to be a growing trend towards a lack of acceptance of personal responsibility (which I’m witnessing more and more over time in the classroom, by the way). While I know they aren’t blaming the collapse of Lehman Brothers entirely on short-sales, let’s get it straight. The executives, managers, and decision-makers at Lehman Brothers are responsible for the demise of Lehman Brothers. Yes, short-selling may have marginally accelerated the inevitable collapse in stock price. Yes, Alan Greenspan may have aided this mess with almost three years of historically aggressive expansionary monetary policy. That being said, the people at Lehman Brothers freely made their bad decisions. Lehman Brothers is responsible for the demise of Lehman Brothers. Let us not forget that.
Geradin on Loyalty Rebates
Posted by Josh Wright on September 24, 2008
Damien Geradin has posted an interesting paper on “Separating Pro-competitive from Anti-competitive Loyalty Rebates: A Conceptual Framework.” Here’s the (long) abstract:
In its submission to the recent OECD Roundtable on Bundled and Loyalty Discounts and Rebates (the “OECD Roundtable on rebates“), Korea observed that “loyalty discounts are getting growing attention both academically and practically” and that “this issue was now on top of the agendas of many seminars and workshops on competition law, with many papers devoted to the theme.” It then explained that this trend was attributable to the fact that loyalty discounts has become an important marketing tool, which raised several competition issues in the process.
While discounts or rebates – this paper will generally refer to rebates – have been used by businesses for centuries to sell greater amounts of products to customers, it is true that the compatibility of rebates with competition law has become a particularly acute issue in recent years. There are several reasons for this. These last few years have witnessed several major court judgments in the European Union (the “EU”) and the United States (the “US”), which have been abundantly commented upon, hence explaining the large number of papers and seminars devoted to the subject. But, more generally, the assessment of rebates seems to be one of the most unsettled areas of competition law.
In the EU, for instance, the decisional practice of the European Commission and the case-law of the Community courts have been harshly criticized as being unnecessarily strict, following a form-based approach that is poorly in line with economics. While these decisions have been sometimes misinterpreted, it is true that they were generally unhelpful in large part due to the fact they focused on the wrong questions. As a response to such criticisms (and more general criticisms about the manner in which Article 82 EC was implemented), the European Commission published in December 2005 a Discussion Paper, which promotes an effects-based approach to the assessment of rebates. While US courts have generally applied an effects-based approach to the assessment of rebates, the case-law is still unsettled, notably in the area of bundled rebates. This certainly led Korea to conclude its OECD submission by stating that “even in jurisdictions such as the US or the EU which have accumulated a considerable amount of enforcement experience regarding loyalty discounting often do not have a clear analysis method regarding this practice.”
While this observation is in many ways true, there are, however, encouraging signs that EU and US law are converging, and will increasingly do so, around a set of sound legal and economic principles to assess guidelines. Both the EU and the US contributions to the recent OECD Roundtable on rebates emphasize the importance of relying on objective economic criteria for the assessment of rebates. While the views of the European Commission and the US antitrust agencies still diverge on some issues, there seems to be a consensus that a price-cost test should play an important role in screening rebates that can (i.e., are able to) foreclose a dominant firms’ rivals to supply one or several customers. There is also a consensus that such tests should only be a component of a broader test that should also determine whether the rebates in question substantially foreclose the relevant market and, in such cases, whether the foreclosure effect can be compensated by efficiencies. While price-cost tests help determining whether the rebates granted can have the effect of foreclosing competitors because the dominant firm’s customers cannot turn to alternative suppliers without incurring substantial switching costs, it should also be demonstrated that these customers represent a substantial share of the market to which equally efficient rivals can turn, depriving them of the possibility to profitably enter and/or expand. Moreover, both EU and US law recognize the importance of taking into account in the assessment process the various efficiencies that can be generated by loyalty rebates and the extent to which they can counterbalance foreclosure effects.
Against this background, this paper aims at providing a framework – based on sound legal and economic principles – designed to help competition authorities and courts to separate pro-competitive loyalty rebates from anti-competitive ones. It starts with the widely acknowledged view that in the vast majority of cases dominant firms grant rebates to their customers for legitimate reasons, i.e. not to exclude competitors but to engage in legitimate forms of price competition and to realize a variety of efficiencies, as discussed below. In fact, rebates are not only used by dominant firms, but also by firms without any market power and thus unable to exclude competitors. This paper also takes as a starting point the view – which is recognized in the vast majority of antitrust regimes – that the goal of competition law is not the protection of competitors, but the protection of competition. Hence, rebates that cause less efficient firms to lose market share should not be banned as they lack anti-competitive effects. As will be seen below, these rebates enhance consumer welfare as they ensure that customers are served by the most efficient firms and benefit from their more competitive offers.
Posted in antitrust, economics, scholarship | Comments Off
Nothing to See Here, Move Along …
Posted by Josh Wright on September 18, 2008
You’ve got questions about Freddie Mac? They’ve got answers. Here’s my favorite:
Does Freddie Mac pose financial risk to American taxpayers?
No. Many independent, formal studies – conducted by government agencies and private rating agencies – confirm that Freddie Mac is adequately capitalized and manages its business risks well. Freddie Mac’s obligations and securities do not constitute government debt and are not guaranteed by the Federal government.
Well, I guess that answers that.
Posted in markets | Comments Off
The Fed’s Bail-out of AIG and Shareholder Equity
Posted by Elizabeth Nowicki on September 18, 2008
The Federal Reserve Bank of New York’s announcement of an $85 billion bail-out of AIG came as a shock to many of us, and the precise terms of the lending agreement underlying the bail-out are still unclear.
In an e-mail to the BIZLAW listserv, Professor Bainbridge rightly queried how AIG could have offered the Fed secured status for the credit facility given the likelihood that some of AIG’s existing debt instruments have debt-related covenants or are secured by the same assets the Fed is using. Elliott Manning, Tom Joo, Steven Davidoff, and myself all chimed in, and it is not clear we have a final answer, but it is likely that either (a) such covenants do not exist in the older debt instruments (they obviously do not exist in the 2007 unsecured subordinated debt, but I have not seen the documents for the older secured debt), (b) if these covenants do, they can be waived, and (c) if they cannot be waived, AIG can violate the covenants with a slim likelihood of being sued by priority debt-holders as suing AIG would essentially amount to nudging them toward insolvency. If any of our readers have thoughts on this topic, please post them.
Another issue, and the more interesting issue in my view (and perhaps in David Zaring’s view), regarding the Fed bail-out of AIG involves the equity stake in AIG that the Fed claims to be getting in return for the $85 B credit facility. The Fed’s press release says “The [$85B] loan is collateralized by all the assets of AIG, and of its primary non-regulated subsidiaries…. The U.S. government will receive a 79.9 percent equity interest in AIG.” This equity interest, I am told, takes the form of warrants given to the government, and one commenter on Zaring’s post states that the equity interest is contingent, only to be taken if AIG defaults.
I am unclear as to how AIG can issue an 80% equity stake without the approval of their existing shareholders whose interests will thereby be severely diluted. Surely AIG does not have 80% of their authorized, issued, and outstanding common stock on hand to use. Where, then, do they get the authority to issue that much new stock without shareholder approval, … unless the stock is of a different class and the press release is simply conveniently omitting that important fact?
Posted in markets | 1 Comment »
Antitrust Week in Chicago
Posted by Josh Wright on September 17, 2008
Speaking of law and economics in Chicago, its the place to be for antitrust next week. On Thursday, the FTC at 100 series will continue at Northwestern University School of Law where I’ll be on a panel discussing the FTC’s competition mission after lunch along with Thomas Campbell, Randy Picker, and Robert Pratt. The antitrust focus continues at Northwestern on Friday and Saturday with the Searle Center Conference on Antitrust Economics and Policy which has a fantastic lineup of papers and keynotes (including from Michael Baye and Jerry Hausman). I’ll be discussing this paper by Dennis Carlton, Patrick Greenlee and Michael Waldman on Assessing the Anticompetitive Effects of Multi-Product Pricing.
As luck would have it, I’ll be spending next week at Northwestern as a Visiting Fellow at the Searle Center for Law, Regulation and Economic Growth. It’s going to be a very busy week for me too! On Tuesday, I’ll be presenting my new paper with the aforementioned Michael Baye , Is Antitrust Too Complicated for Generalist Judges? The Impact of Economic Complexity and Judicial Training on Appeals. I’ll blog more about the paper later. But if you’re going to be in Chicago at any of these events, come by and say hello!
Bainbridge on Law & Economics at Chicago
Posted by Josh Wright on September 17, 2008
Motivated by Justice Scalia’s remark (HT: Brian Leiter) that the University of Chicago Law School is not what it once was and “has lost the niche it once had as a rigorous and conservative law school,” Professor Bainbridge notes that:
It’s certainly true that, from the outside, Chicago now looks like your run of the mill left-liberal law faculty. But was Chicago ever really a conservative bastion or was it just that the political connotations ascribed to law and economics created a false impression back when Chicago actually had high profile law and economics folks? One thing that seems certain, however, is that the place has lost its law and economics distinctiveness.
My own sense, informed mostly by casual observation, is that Bainbridge is right that U of C has last its law and economics distinctiveness and that this change is real rather than imagined (e.g. Chicago really did have high profile law and economics folks!). Chicago is obviously still among the top law schools for L&E. The citation rankings say so, and to be sure, some of the L&E legends are still there along with some superstar juniors. But I don’t think many L&E folks still view U of C as dominating L&E the way it once did. This strikes me largely as a case of the rise of the rest relative to U of C with top L&E talent spreading out in smaller clusters across the top law schools as the discipline matured and gained influence and acceptance within the broader legal academy. With their recent L&E hires over the past several years and the flurry of intellectual activity surrounding the Searle Center, my sense is that U of C has been surpassed by Northwestern in the battle for L&E primacy in Illinois.
Posted in economics, law and economics, law school | 4 Comments »
Odd FTC Consent in Vertical Licensing Case
Posted by Josh Wright on September 17, 2008
The FTC announced a complaint today challenging Fresenius Medical Care AG & Co.’s proposed acquisition of an exclusive sublicense from Luitpold Pharmaceuticals, who is in turn a wholly owned subsidiary of a Japanese firm Daiichi Sankyo Company. The sublicense would allow Fresenius to manufacturer and supply the intravenous iron drug Venofer to dialysis clinics in the US. Here’s how the FTC press release describes the complaint:
The FTC’s complaint charges that the proposed vertical agreement would provide Fresenius, the largest provider of end-stage renal disease (ESRD) dialysis services in the United States, with the ability to increase Medicare reimbursement payments for Venofer. This is possible because after the transaction, the competitive market will no longer determine the price that Fresenius’ clinics will pay for intravenous (IV) iron. That amount will instead become an internal transfer price reported by Fresenius to the Center for Medicare & Medicaid Services (CMS).
Here’s where things get interesting:
The Commission’s consent order settling the complaint resolves the anticompetitive issues raised by the proposed transaction by preventing Fresenius from reporting an intra-company transfer price to CMS for Venofer that is higher than the level set forth in the order. The level in the order is derived from current market prices. The order further provides that if a generic Venofer product enters the market, Fresenius would be required to report its intra-company transfer price at the lower of the level set forth in the order or the lowest price at which Fresenius sells Venofer to any customer until December 31, 2011. These provisions are designed to ensure that the price Fresenius reports to CMS is in line with current market conditions, including potential generic entry. The order also provides that if CMS implements regulations that eliminate the potential anticompetitive harm from this transaction, those regulations will supersede the order.
Holding aside the underlying merits of the complaint, which I don’t know anything about, this strikes me as an unusual and highly regulatory remedy in that it includes both a price cap and a most-favored-nations (MFN) clause. How unusual is this? The criticism for imposing price controls are well known and don’t need to be rehearsed here. It should also be noted that the FTC itself has challenged MFN clauses in other settings!
Posted in antitrust, economics, federal trade commission | Comments Off
