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Introduction to the Law of International Finance

LALA121S7

Module Guide2015/16

LLM/MA Intensive Programmes

CONVENOR DETAILS

Dr Stephen Connelly (the Convenor)

s.connelly@bbk.ac.uk

School of LawBirkbeck, University of LondonMalet StreetLondon WC1E 7HX

Please use email to contact me if possible.

IMPORTANT DATES

Seminars start: Wednesday 16th March 2016

Seminars end: Tuesday 22nd March 2016

Deadline for agreement of coursework titles: Monday 9th May 2016

Coursework Submission Date: Monday 13th June 2016, 11.30am

If you are having any trouble meeting deadlines, please contact Dr Stewart Motha as soon as possible.

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GENERAL INTRODUCTION TO THE COURSEWelcome to Introduction to International Finance Law. This is a core module for the LLM International Finance and Economic Law programme and an optional module for the LLM in International Economic Law, Justice and Development, and the LLM in Human Rights. The module aims to give an overview of the central issues affecting the relationship between international economic law, justice and development.

Introduction to the Law of International Finance (the Module) examines the financialisation of law that has taken place with increasing speed over the last 30 years. In so doing, the Module considers in some depth three areas in which traditional principles of law and equity have encountered and been suborned by the development of the international trade in debt and debt instruments. The wider theoretical aim of the module is the critical engagement with the ideas of ethics, norms and complexity within financial development, regulation and crisis. Students will be asked to explore the relationship between the concept of consciousness and the failure of financial regulation in the face of complex legal structures, and will be introduced to immanent critiques of finance in actu.

The primary legal focus of the Module will be English law-governed credit agreements in the form current in City of London practice, but given the international nature of the subject, due to the use of such English law-governed agreements in diverse jurisdictions globally, appropriate analysis of EU law and other national laws (particularly New York, Germany and France) will be undertaken at appropriate junctures. Students may be surprised to learn that an English law credit agreement for an English industrial corporation is not so very different in style from a loan agreement between, say, China and Costa Rica. By using the credit agreement as the anchor of the course, rather than international and somewhat abstract banking regulations, the Module attempts to offer a borrower perspective which links the more arcane aspects of the secondary market in debt to the more familiar and tangible context of industrial business, its directors and employees, and society as a whole. The Convenor contends that it is fundamental that the structure of financial relations be comprehended if one is to engage with the precise nature of ‘power’ at work during the current economic conjuncture.

Additionally, the Module is designed to bridge the gap between the formal understanding of the core principles of the English law of obligations, companies, and the tenets of equity, and the practise of these principles in ‘financial capitals’ across the World. For this purpose, the Module builds on students’ existing legal and socio-economic training to engage in a detailed analysis of credit facility agreements, guarantees, security agreements, intercreditor agreements and related primary and secondary finance documents, always emphasising the manner in which the economic demands of international finance ‘shape’ these agreements and in some instances strain legal doctrine to breaking point. We thus hope to illustrate the great tensions that lie at the heart of financialised law; tensions which were exposed by the 2008 Credit

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Crunch. The analysis will look in particular at the idea of regulation and consciousness, examining how justice and ethics fall in the encounter between markets, states and regulatory capture.

The Module will be taught intensively from 16th March 2016 until 22nd March 2016 inclusive. There is set reading for each seminar, which is divided into essential and further reading. Students are expected to have studied the essential reading for each seminar and to be prepared to discuss that material in the light of the discussion questions for each seminar.

USE OF MOODLEPlease check regularly for updates, information and materials. Where possible the lecturers will draw your attention to new materials being placed on the sites, but it is considered to be your responsibility to stay informed and check regularly. If for any good reason you are unable to use Moodle and require assistance with obtaining the materials for the course please contact a member of the Administration Team at the Main Law School Office.

Essential reading for each seminar and assessment information will be placed on Moodle.

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AIMS AND LEARNING OUTCOMESThe Module aims in general to introduce students to a critical examination of the law, regulations, institutions and practice of international finance, with particular emphasis on exploring the metaphysical assumptions supporting concepts of money, debt, guilt, finance, consciousness, normativity, and desire. In particular the Module’s aims are to:

• provide a critical genealogical background to the understanding of financial capitalism;• familiarise students with the concepts of money and finance capital;• give students a core working knowledge of current financial law practice and an understanding of

the relation between international secondary debt markets and credit agreements;• outline the relevance and contentious aspects of security and guarantees;• give students a working knowledge of complex international debt structures: syndication and

securitisation;• introduce students to the legal practical aspects of credit defaults, restructuring, transnational

insolvency and enforcement, and sovereign default; and• familiarise students with the problems of national and transnational financial regulation, with a

focus on banking supervision and the LIBOR scandal.

On successful completion of this module a student will be expected to be able to:

• apply their already acquired legal skills to the understanding of the central aspects of standard ‘London-form’ financial contracts in use in financial markets today;

• exhibit a general understanding of the common types of cross-border debt structures and be able to determine their morphology under credit default situations;

• discuss the relations between the ‘real’ economy, the world of private international finance, and international economic institutions; and

• critically discuss theories money, debt, guilt, finance, consciousness, normativity, and desire and their relation to socio-economic conditions in our financialised world, the activities of financiers, the failures of regulation, and financial crises.

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ASSESSMENTThe course will be 100% assessed by a 4,000 word research essay. Students may either (a) choose a question from the list of sample research essay questions that appears below, or (b) develop their own essay question in consultation with me.

Where students elect to develop their own essay question in consultation with me, the question must be finalised by 9th May 2016. By this date, students must get my approval for a question that is not on the list of sample essay questions. Essays on questions other than those set out in the list of sample research essay questions may not be marked if students have not consulted with me as required in this paragraph.

For the purpose of writing this essay, students are expected to consult a range of primary and secondary materials.

The essay must be footnoted and all sources must be properly cited. Failure to observe this obligation may result in the loss of marks. Students are reminded that the failure to acknowledge sources relied upon may amount to academic misconduct. Proven academic misconduct carries potential penalties of greater severity than the loss of marks.

A case list and bibliography must be submitted with the essay showing all sources consulted. The remarks above in relation to academic misconduct are also pertinent to the obligation in this paragraph.

The word limit for the essay is 4000 words. This word limit includes discursive footnotes, but not footnotes that only contain a citation to source.

The case list and bibliography are not subject to the word limit. Where an essay exceeds the word length by more than 500 words then I retain the discretion to reduce the overall mark in proportion to the amount by which the word limit is exceeded.

Where the ability of a student to comply with the assessment requirements is compromised by illness or other adverse personal circumstance the matter should be brought to my attention or to the attention of the relevant course director as soon as the student is aware of it.

SAMPLE RESEARCH ESSAY TOPICS

1. “The advent of the Christian God as the maximal God yet achieved, thus also brought about the appearance of the greatest feeling of indebtedness. … [T]he possibility cannot be rejected out of hand that the complete and definitive victory of atheism might release humanity from the whole feeling of being indebted towards its beginnings, its causa prima.” Nietzsche (On the Genealogy of Morals, II §20)

Critically assess the theory of ‘primordial debt’ as an explanation of the role of indebtedness in the grounding of cities and maintaining social order.

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2. Critically evaluate the contractual and statutory approaches to sovereign debt restructuring, and evaluate proposals for reform that take into account a wider range of social costs than the needs of creditors.

3. “A very significant portion of the social circulating capital…will thus periodically exist in the course of the annual turnover cycle in the form of capital set free. … This money capital that is set free…must play a significant role, as soon as the credit system has developed….” Marx Capital II pp.355-7.

Examine why Marx uses the language of self-liberation with respect to money capital, and how this classification of finance as sui juris might impact on attempts to regulate it.

4. “Without speculation there would be no business. Why the devil would I open my purse for you [Mme Caroline], just as I risk my fortune, if you didn’t promise fantastic pleasures…. The race begins, energies are released, the hurly-burly is such that, sweating as they do solely for personal gratification, people sometimes manage to produce children. … There is much filth, but without it the world would end.” Saccard in l’Argent by É. Zola

Critically assess theories which link finance capital with desire and/or life. Are such theories, despite their apparent radicalism, rather panegyrics for finance?

5. “The law of international finance is the new lex mercatoria in the sense that it exists independently of and is practically unbound by national legal regimes.” Critically discuss with reference to the tensions between international private financing structures and national laws (you may focus on your home jurisdiction).

6. “The capacity of finance institutions to require security, guarantees, and subordination, makes a mockery of states’ attempts to prefer other ‘stakeholders’ such as employees on insolvency of a business.”

Critically discuss, drawing on the contractual documentation discussed in the Module and examples reported in the financial press.

7. What are the rationales of regulation? With reference to the Global Financial Crisis, what are the key features and limits of a risk-based approach to regulation?

8. The basic principle of regulation—of requiring good behaviour—is against all common sense flawed. The sum total of good behaviours does not equal a well behaving financial system as the Global Financial Crisis powerfully proved.

Critically discuss with reference to the development of financial regulatory and bank supervisory regimes.

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SUMMARY OF SEMINAR TOPICS

Break

Day 1

Seminar 1

Introduction

The idea of social debt

Seminar 2

The London ‘form’ of credit agreement

Day 2

Seminar 3

Capital’s self-liberation, its power and its crises

Seminar 4

Risk mitigation

Syndication and securitisation

Day 3

Seminar 5

Bonds I –International corporate and sovereign bonds

Seminar 6

Bonds II – Sovereign default

Day 4

Seminar 7

Financialisation, uncertainty and instability

Seminar 8

Insolvency and restructuring in credit structures

Day 5

Seminar 9

Logics of financial consciousness

Seminar 10

Financial regulation, supervision, and control in the EU context

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SEMINAR TOPICS AND READING GUIDES

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SEMINAR 1 – INTRODUCTION; THE IDEA OF SOCIAL DEBTINTRODUCTIONLet us begin with the following lengthy quotation from Graeber (2011:58-59):

‘The “primordial debt,” writes British sociologist Geoffrey Ingham “is that owed by the living to the continuity and durability of the society that secures their individual existence.” In this sense it is not just criminals who owe a “debt to society” – we are all, in a certain sense, guilty, even criminals.

For instance, Ingham notes that while there is no actual proof that money emerged in this way, “there is considerable etymological evidence”:

In all Indo-European languages, words for “debt” are synonymous with those for “sin” and “guilt”, illustrating the links between religion, payment and the mediation of the sacred and profane realms by “money”. For example, there is a connection between money (German Geld), indemnity or sacrifice (Old English Geild), tax (Gothic Gild) and, of course, guilt.’

In this first seminar, after our introductions, I would like us to explore the interrelations between debt, guilt, morality, discipline, and the symbolic and religious realms. However, in so doing I want you to consider whether the arguments adopted by Graeber and set out in the readings below provide an adequate explanation of the role of finance (and its law) in the world. In short, please consider the possibility that a distinction might be made between debt and finance; a distinction which does not necessarily absolve finance of the theological baggage which attaches to the debt concept, but which marks a transition from one to the other that has constituted our world.

As part of our examination we will consider the law relating to money, the way in which money is constituted as legal tender through debt and finance, and I will draw your attention to the current ideas about ‘money’ and money creation deployed in macroeconomics.

I hope in this first seminar to highlight the way in which the complexity of financial law is mirrored by the richness of its various purported metaphysical underpinnings, metaphysical ‘assumptions’ which tend to be occluded in traditional texts on this subject.

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OBJECTIVES• To introduce ourselves and outline the aims of the Module.• To introduce the concepts of money, debt, capital, and finance, and consider certain theoretical

bases of these concepts, in particular:o the nominalist theory of money;

o the credit theory of money;

o the primordial debt theory of money.

DISCUSSION1. You will be asked to introduce yourselves and tell the rest of the class why you have chosen to do the

LLM in International Economic Law Justice and Development. Please be prepared to discuss your motivations for taking this module. I will also be interested to hear about your theoretical interests and inspirations.

2. Introduction to the main themes of the course:

2.1. the nature of debt and finance and its role in society;

2.2. finance structures and financial law;

2.3. instability and crisis, and their legal consequences;

2.4. financial ‘consciousness’ and regulation.

3. Questions for discussion of the introductory readings:

3.1. What is money? What is debt? How are the two related?

3.2. How does the idea of a primordial debt explain the inner nature of money? Is this conception too metaphysical? What objections might be raised against it?

3.3. Anselm of Canterbury (1033-1109) wrote:

“Hold it, therefore, as a most certain truth, that without satisfaction, i.e., without a willing payment of the debt, God cannot let the sinner go unpunished; nor can the sinner attain blessedness, even such as he had before he sinned; for were it so, man would not be restored even such as he was before sin.” (Cur Deus Homo I(XIX))

Having established this debt to God, Anselm introduces God-become-man:

“No man besides Him ever gave to God by dying what he would not at some time be compelled to lose; or ever paid, what he did not owe. But He, of his own accord, offered to the Father what He

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would not have ever been compelled to lose; and He paid for the sinners what He did not owe for Himself.” (Id. II(XIX))

It thus seems that Jesus saves so he can bail out sinners. Nevertheless, the links between certain theological logics and primordial debt theories should not be overlooked, though the latter theories tend to argue that theology is first a product of economic primordial debts (in the form of the temple system). Critically discuss these linkages between money, debt, and the divine (which can be found in several religions e.g. the Rig Veda (cf. Graeber infra.)).

3.4. Can we see a relation between debt and meaning or sense? Debts do not exist in nature in the broad sense of that word, but indebted people certainly sense the burden of debt. Could we say that debt is an expression of the sense or meaning of a human situation, and expression of subsisting power relations?

3.5. The following statement by Dicey & Morris (§36-001R) might be considered a general legal definition of the concept of monetary nominalism:

“A debt expressed in the currency of another country involves an obligation to pay the nominal amount of the debt in whatever is the legal tender at the time of payment according to the law of the country in whose currency the debt is expressed (lex monetae), irrespective of any fluctuations which may have occurred in the value of that currency in terms of sterling or any other currency, of gold, or of any commodities between the time when the debt was incurred and the time of payment.”

Critically assess how this concept might apply in times of crisis. What does this tell us about the nature of money and debt?

3.6. Why, when speaking of matters of credit, do we have different terms with different social registers e.g. debt, usury, finance…?

3.7. The word ‘finance’ derives from the Latin ‘finis’ meaning ‘end’. Why do you think this is?

3.8. Is it appropriate to interpret the Credit Crunch using the conceptual apparatus of ‘primordial debt’ (or its offshoots)?

READINGSInnes, J. ‘What is money?’ (1913) 30 Banking L. J. 377

______ ‘The credit theory of money’ (1914) 31 Banking L. J. 151

Théret, B ‘The Socio-Political Dimensions of the Currency: Implications for the Transition to the Euro’ (1999) 22 Journal of Consumer Policy 51-79

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FURTHER READINGSAnselm of Canterbury, (1865) Cur Deus Homo (anon. trans.), Henry & Parker, London, I(XIX) ‘That man cannot be saved without satisfaction of sin’, I(XXIV) ‘That so long as man does not pay to God what he owes, he cannot be beatified’, and II(XIX) ‘How the life of Christ is paid to God for the sins of men’.

Aristotle, Politics, Bk.1(9) [1256b40-1258a18] in the Bollingen edition.

Deleuze, G. & Guattari, F. (1988) A thousand plateaus: capitalism & schizophrenia, Continuum, New York, Plateau 9 ‘1933: Micropolitics and segmentarity’

Graeber, D (2011) Debt: the first 5,000 years, Melville House, NY, Ch.3 ‘Primordial Debts’

Keynes, J.M., (1930) A Treatise on Money, Ch.1

Ingham, G. (1996) ‘Money as a social relation’ 54(4) Rev. Social Econ. 507-29

________ (1999) ‘Capitalism, money, and banking: a critique of recent historical sociology’ 5(1) Brit. J. Sociology 76-96

________ (2000) ‘“Babylonian madness”: on the historical and sociological origins of money’ in Smithin J. (ed.) What is money? Routledge, New York

________ (2004) The nature of money, Polity Press, Cambridge

Proctor, C. (2012) Mann on the legal aspect of money, OUP Oxford, Ch.1, Ch.9.

Nietzsche, F (1997) On the genealogy of morality, (Ansell-Pearson trans.) CUP, Cambridge, ‘Second Essay’

Simmel, G. (2004) The philosophy of money, Routledge, London

Spinoza, B. (2001) Ethics, (Parkinson trans.), with a focus on Part I starting with its Appendix and moving back.

Winkler, R. ‘I Owe You: Nietzsche, Mauss’ (2007) 38(1) J. Brit. Soc. Phen. 90

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SEMINAR 2 – THE LONDON ‘FORM’ OF CREDIT AGREEMENT INTRODUCTIONIn the first seminar we discussed the relation between debt and money, and the relation between sense and debt. Now we are going to examine a significant interface between ‘debt money’ in general and individual indebtedness: the London form of credit agreement.

I think it very useful to regard the these sorts of contracts as machines which banks plug into sources of capital, and which transmit a flow of that capital to a borrow, and retransmit the capital plus margin (interest) back to the bank and thus the general supply of money/debt. Now nothing is physically flowing in the broad sense, but if we accept the proposal of regarding indebtedness as interposing sense into the human world – in the sense that social relations express something about power relations – then I would like to suggest that we regard the credit agreement as a kind of sense-machine which levies off the sources of capital and transmits it into circulation. In due course we will see that this transmission of flow has become a subsidiary function of the sense-machine, a bit like the steam engine was fixed in place to drive machinery, but soon set itself mobile and was primarily used to drive itself, but for the moment I want to focus on the transmission function.

The reason I have found this sense-machine notion useful in practice is that it holds in mind the idea, for the lawyer constructing it, that just any Heath-Robinson contraption will not do, the sense-machine has to be constructed in the manner appropriate for its functions, first of which in time is tapping into the money markets. Again by analogy, a three-pin plug might work in se, but it is useless when presented with a two-pin socket. My point here is that it is easy to regard the money markets as an homogenous mass of free-floating capital, but in fact this capital is extremely differentiated according to time and price. As to time, the availability of capital is subject to the condition that it be borrowed for a specific time (overnight, 1 day, 3, 6 months, 1, 2, 5, 10 years). This is not an inherent condition – in principle money can always be borrowed, but the market has developed certain ‘terms’ which are generally adhered to, to ease liquidity planning and so reduce cost, with the upshot that borrowing for unusual ‘terms’ comes at a premium. This also leads to the price differentiation – the cost of funds in the market varies every second, and while not by much in normal conditions, when one is speaking of credit agreements starting at €20,000,000, even minor variations can cost €1,000s. For this reason, our sense-machine should be constructed both to draw down capital, but also to withstand the shocks of power black-outs, brown-outs, or sudden surges.

For these reasons this ‘sense-machine’ has developed into a large and complicated piece of equipment. In this seminar I will help you to navigate your way through its mechanisms so that you can understand how the practice and conditions of finance have ‘formed’ this legal document.

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OBJECTIVESTo understand why credit agreements take the form they do, by critically examining the context in which they are drafted and operate. In particular:

• to understand the relation between the money markets and the structure of credit agreements;

• to understand the broad classes of finance structures;• to see how disruptions in financial capitalism can feed through into the ‘real’ economy;• to encounter legal doctrine within the context of the practise of a complex legal document.

DISCUSSIONWith reference to teaching document (A) (the Agreement):

1. When the Agreement was signed, how much money did the borrowers receive?2. What is the difference between a term loan and a rollover loan? How does this relate to the

money markets? Why do you think they are treated differently in Clause 4.2(a) (Further conditions precedent)?

3. What are ICE LIBOR and EURIBOR? How do their fluctuations impact on the Agreement?4. During the Credit Crunch of 2008, it became difficult to assess what the LIBOR rate was. How does

the Agreement deal with this circumstance?5. Locate the Market Disruption clause of the Agreement (hint: in the Section marked ‘costs of

utilisation’). One of the banks would like to amend this to cover any notice given by any bank. Is this acceptable?

6. The Company does not want to pay Increased Costs to the banks just because the authorities require banks to comply with prudential standards such as capital adequacy. Advise the Company about its position.

7. What role do the financial covenants play? Are they important?8. Consider the following scenario and advise the Company:

The Company has issued corporate bonds. While its business status is healthy, businesses in its sector are struggling, and Moody’s (the rating agency) has downgraded all the bonds in that sector to B2. In addition, due to market disruption in the Eurozone, the lenders have increased the Margin payable by the Company, which (you admit) the lenders are entitled to do. The Finance Director tells you that due to these factors beyond the Company’s control, almost half of the Group’s earnings before interest, tax, depreciation and amortisation will be eaten up servicing interest payments. The FD believes, however, that the Company has nothing to worry about, as a big order is likely to come in in five months’ time.

Is the FD right not to be worried?

9. What do your conclusions from question 7 indicate about the linkages between financial crisis and the ‘real’ or industrial economy?

10. What is the significance if clause 24 (Changes to the Lenders)? Why is there a difference provided for between assignment and novation of rights?

11. What is the role of:

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11.1. the Arrangers;11.2. the Facility Agent;11.3. the Security Agent.

12. The Facility Agent is Bornheimer AG, London Branch. What is a ‘branch’? Does this make legal sense? What problems do you foresee?

13. Under EU law the general position is that a jurisdiction clause which gives jurisdiction to a court in the EU where one of the parties to the relevant agreement is domiciled in the EU is required to meet the requirements of the Brussels I Regulation.

In Mme X v. Rothschild the French Cour de cassation ruled that the unilateral nature of a one-sided jurisdiction clause meant that it did not meet the requirements of the Regulation and was therefore entirely ineffective. Jurisdiction therefore fell to be determined by the fall-back rules in the Regulation as if there had been no jurisdiction clause. The Cour de cassation did not refer the point to the Court of Justice of the European Union. The decision in this particular case will, therefore, not be reviewed.

Review Clause 39 (Governing law) and suggest amendments in light of the above decision. How would you effect any amendments?

READINGSPlease familiarise yourself with, rather than read, the teaching document (A) Multicurrency credit facilities agreement between (amongst others) Phil Bell Group Limited as the Company, and Bornheimer AG, London Branch as Facility Agent.

FURTHER READINGSFinancial Services Authority Final Notice 122702 to Barclays Bank Plc dated 27 June 2012: http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf

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SEMINAR 3 – CAPITAL’S SELF-LIBERATION, ITS POWER AND ITS CRISESINTRODUCTION

“where abstract individuality appears in its highest freedom and independence,

in its totality, there it follows that the being which is swerved away from, is all being.”

(Marx reading Seneca in his doctoral dissertation)

In this seminar we are going to explore an alternative interpretation of the role of finance with respect to money (and law) from that offered by the theories we examined in Seminar 1, which latter I am going crudely to lump together under the title ‘Primordial Debt Theories’ or PDTs for ease of reference. Now as we saw, all PDTs do something at once obvious and yet metaphysically imperceptible, in that the raise the status of the primordial debt to the level of Being in a Parmenidean sense – that is, nothing can be or be thought of without ultimate reference to the One Being. In the context on monetary politics as much as theology, we are immediately reminded of Nietzsche’s warning about the linkages between One debt and One guilt in the constituting of modern morality, and of the possibility that a theorisation of debt as primordial condemns every citizen, via the money form, to an irredeemable debt to the issuers of money, and consequently to a profound sense of belonging as indebtedness to a given authority. Furthermore, Being qua Being can be interpreted as Unlimited (apeiron) such that any deviation from its order is affirmed and brought within Being. While Parmenides made no such claim of his Being, which was Limited because it was compete and perfect, we have seen that the money form is both Limited on one face (the nominal value of the debt) and Unlimited on the other (the absolute power of the sovereign). The argument can then be made that all wealth accumulation is always already brought within the primordial debt, and consequently any dealings within any monetary system condemn everyone to participating in the inescapable unity of the Being-sovereign. One can see why some people are politico-philosophically driven to set up their own monetary systems (Système libre-échange in France), or to revert to barter, in order to avoid this consequence.

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By utilising this categorical structure of {One substance/multiplicity of modes} PDTs immediately run into the problem of explaining Becoming, both metaphysically in terms of accounting for changes of Being (for only if Being is Limited is it properly complete, according to some Pre-Socratics), and practically, because we pointedly do not still utilise Roman sesterces, or might be citizens of a state that has acceded to the Eurozone. It seems that our ‘primordial debts’ are not that primordial at all, and that peoples come first and they create their monetary systems founded on state debt second. In Feuerbachian terms “man creates God in his own image”.

Yet we are not simply going to consider the case in which humans intentionally constitute monetary debt relations as a kind of debt. Rather, we will examine the particularly pertinent materialist theory of Marx whereby it is capital itself which frees itself from production to constitute the world in its own image. When you read the set texts, the first thing you need to be alive too is the difference that Marx is implicitly drawing between debt (usury, which he admits operated long before capitalism) and finance capitalism, which is specific to the capitalist mode of production itself. PDTs have criticised Marx (cf. Graeber (2011)) for falsely believing that the money form preceded debt in the constitution of economic relations, but to be fair to Marx, he is greatly interested not in debt as one might find in mercantilism or its spatial inverse the temple-market construct, but in the vast accumulation of capital in (associated) private hands which is repeatedly “thrown back” into the system in search of new profit, if necessary rearranging the system in order to achieve this. Marx would view the state monetary construct – the civil or bourgeois economy – as the highest example of Being i.e. a structure which endeavours to persist in its being; to remain the same. But in the wake of Hegel’s Begriff (concept), Marx is alive to the idea of Becoming, and the conception that bourgeois individuals might (r)evolve into social humans, and that civil states might (r)evolve into social becomings, of which capitalism is a dark precursor. As Harvey has maintained, Marx regards capital as not a thing but a process, a coming to be or becoming. If capital stops, it ceases to be capital; an extraordinary vision of what happened when the credit markets seized up in 2008.

OBJECTIVES• To familiarise ourselves with materialist theories of finance, as an alternative to the theories

discussed in Seminar 1.• To consider the reasons for Marx’s assertion that capital sets itself free.• To ascertain the power of finance capital.• To consider and critique the claim that finance capital engenders crises.

DISCUSSION1. Marx spends a long time proving, and being very enthusiastic about, his idea that capital sets itself

free. Engels, who edited this chapter, however seems completely unimpressed that Marx has shown something which to him, as a practising industrialist, is a commonplace – that capitalists accumulate a surplus. Why do you think Marx cared so much about this? [I will suggest my own interpretation in the seminar, drawing on the Further Readings, but the hermeneutic exercise will benefit from everyone’s background and input.]

2. Marx talks both about the way that finance can help reduce turnover times, and how space can be annihilated by time. It seems that capital can relativise time and space. Discuss the implications of such a thesis. Are there other theoretical movements which hold such a view?

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4. Marx says that “the real barrier to capitalist production is capitalism itself” (Capital III p.250, 259). What might he mean by this?

5. Do you agree with the biocapitalist theory that production has been extended into consumption itself? How is profit derived in this way, and is this profit as ephemeral as the information gleaned by modern technology?

6. Biocapitalism as a theory is a fine example of TINAism (There Is No Alternative) from a left-perspective. In trying to critique capitalism it ends up weaving a glorious conspiracy theory in which nothing can escape a capitalism become ‘One’ or ‘Begriff’. Is this the ultimate form of ressentiment? Discuss.

READINGSMarx, K. (1978) Capital II, Penguin, London, Ch.15 ‘Effect of circulation time on the magnitude of capital advanced’ introductory section, and section 4 ‘Results’

______ (1981) Capital III, Penguin, London, Ch.21 ‘Interest-bearing capital’ and Ch.27 ‘The role of credit in capitalist production’.

FURTHER READINGSHarvey, D. (2011) The enigma of capital and the crises of capitalism, Ch.6 ‘The geography of it all’

Lefebvre, H. (1991) The production of space, Blackwell, Oxford

Marazzi, C (2011) The violence of financial capital, Semiotext(e), Los Angeles, ch.4 ‘The becoming-rest of profit’ pp.43-64.

Marx, K. ‘Differenz der demokritischen and epikureischen Naturphilosophie’ in (1990) Marx Engels Werke Bd.40 Schrifte bis 1844, pp.257-307.

Spinoza, B. (2001) Ethics, (Parkinson trans.), with a focus on Part II Props.7-13, Part III Prop.12 Scholium, and Part IV Props.37-39.

Weber, M. (1968) Economy and Society, California UP, Ch.9.6 ‘Distribution of Power: Class, Status, Party’

 

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SEMINAR 4 – RISK MITIGATION SYNDICATION AND SECURITIZATIONPART A—RISK MITIGATIONINTRODUCTIONIn seminar 2 we examined how the credit agreement was a kind of sense-machine which needed to be constructed in such a way that it could be ‘plugged into’ the supply of finance capital on the money markets, thus permitting capital to flow from its place of accumulation to particular uses in the economy. In effervescent or booming market conditions, banks have been quite happy to proceed to lend using just such a sense-machine; that is, it is enough that there is some binding stipulation that the borrower repay capital and margin, without further risk mitigation mechanisms built into the sense-machine. Indeed, just before the Credit Crunch, banks all but dispensed with lawyers altogether, and began lending on the basis of fundable term sheets – literally 1-2 page documents specifying the parties, the loan amount and margin, and date of repayment, and the odd additional condition which the banks felt important. These were still binding contracts, but given the sums involved they did appear from a lawyer’s perspective to be close to lending billions off the “back of a fag packet”. Analysis of historic bubbles (such as the “South Sea Bubble”) unsurprisingly indicates similar tendencies in which the mania to throw money into the ring of investment was so great that investors all but dispensed with legal formality, scribbling the heads of agreement on coffee house napkins, scraps of paper, or whatever else came to hand.

At the other extreme, just after the bubble bursts, lenders tend to rush to the law and demand the maximum protection conceivable before they lend (or enforce against sums already advanced). We will see more about this when we consider insolvency in financial law, but between these two extremes it is generally the case that lenders will demand some risk mitigation mechanisms in order to protect as much of their capital as possible if a borrower defaults. If we are realistic, however, we should note that most modern lenders are not just interested for their own part in mitigating risk, but, because they always have a view to distributing their assets (the credit advanced) to other investors, they are also interested in satisfying potential transferees of the asset that the asset is indeed a ‘safe investment’.

Potential transferees naturally will be primarily interested in the economic health and prospects of the borrower – they would rather just be repaid – but they are secondarily interested in risk mitigation, and in the seminar we will outline some of the classic methods of protecting capital advanced: namely security interests, guarantees, and subordination. Thus if we extend our sense-mechanical concept further, the

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credit agreement must not only be constructed so as to appropriately plug into the power (potentia) of capital, but it must also be drafted such that it is able to draw down the authority (potestas) of written law, such that, when something goes wrong, the lender is able quickly to return to itself as much value as possible. This is an important feature of financial capitalism: as Andrew Mellon, the US Treasury Secretary during the Great Crash of 1929 and one of America's richest men, observed: in a crisis assets return to their rightful owners. As Keynes put it in greater detail:

“There is a multitude of real assets in the world which constitute our capital wealth – buildings, stocks of commodities, goods in course of manufacture and of transport, and so forth. The nominal owners of these assets, however, have not infrequently borrowed money in order to become possessed of them. To the corresponding extent the actual owners of wealth have claims, not on real assets, but on money. A considerable part of this ‘financing’ takes place through the banking system, which interposes its guarantee between its depositors who lend it money, and its borrowing customers to whom it loans money wherewith to finance the purchase of real assets. The interposition of this veil of money between the real asset and the wealth owner is a specially marked characteristic of the modern world.” (Essays in Persuasion (1932:169))

These quotations point us to an important underlying fact about risk mitigations which lawyers, obsessed as they are with the pomp of the court, might perhaps overlook. Lenders are not interested in courts, they do not want to go anywhere near one; they do not even want to have their right to real assets questioned. It is not a question of proving title to property; it is a question of being able with the minimum of time and effort to assume the property of the borrower in satisfaction of a liquidated debt claim. By way of simple example, if a mortgagor defaults, the mortgagee ideally wants to foreclose on the mortgaged land, evict any tenant, and realise its value (sell it), as quickly as possible. Against this demand for satisfaction, the credit agreement must also contend with the singular demands of the borrower (e.g. the security conditions on land should not prevent the use of the land), the particular demands of legal practicality (how does one enforce against an intangible asset like a brand name?), and the general demands of public policy (should immediate foreclosure be tolerated?). The corollary demand – that the lender is uninterested in assets which cannot be easily enforced against – does not follow however. This latter depends on the risk appetite of the lender: in the aftermath of the Credit Crunch I experienced many lenders who purported to take security which they were advised was unenforceable – but they took it nonetheless. Ask yourself why they might do this.

This seminar will attempt to place these issues within the context of the currently practised financial law.

In the further readings I have referred you to the EU Financial Collateral Directive 2002 (as amended by 2009/44/EC, the FCD) which somewhat cuts through the security principles we will discuss in this seminar. In essence FCD provides for rapid and non-formalistic enforcement procedures designed in part to limit contagion effects in the event of default by one of the parties to the arrangement. Member States may not make the creation, perfection, validity, enforceability or admissibility of a financial collateral arrangement dependent on the performance of any formal act. In addition, Member States must ensure that the collateral taker is able to realise financial collateral in one of the following manners:

• if it concerns financial instruments by sale or appropriation and by setting off their value against, or applying their value in discharge of, the relevant financial obligations;

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• if it concerns cash by setting off the amount against or applying it in discharge of the relevant financial obligations;

• if it concerns a credit claim by sale or appropriation and by setting off their value against, or applying their value in discharge of, the relevant financial obligations.

• Appropriation is possible only if this has been agreed in the arrangement. The FCD defines:• Financial collateral arrangement: a collateral arrangement in the form of cash or financial

instruments, i.e. a title transfer of ownership or a security financial collateral arrangement.• Credit claims: pecuniary claims arising out of an agreement whereby a credit institution grants

credit in the form of a loan.

It is worth considering the policy pressures that led to the FCD being instituted, and the manner in which, within its financial domain, it attempts to brush aside national rules on security. I related matter is the doctrine of set-off and netting, which is quite baroque in its subtleties and a good indicator of the public policy attitude to debt and security in a given jurisdiction. For this, see Goode (2008) in the Further Readings below.

OBJECTIVES• To introduce the practice of granting security, guarantees, and accepting subordination in the

context of financial law.• To highlight major issues in the English and cross-border context.• To consider a case study regarding security in order to grant a ‘flavour’ of how legal issues and

international finance encounter each other (the critical legal theory idea of assessing the practise of law).

• This Seminar cannot possibly hope to treat of all the legal issues in sufficient detail – the law of security would require a module all of its own. It is designed to highlight the financial interface between law and practice.

DISCUSSIONWith reference to teaching documents (B) (and teaching document (A) to the extent relevant), consider the following questions:

1. What are the key practical considerations for a bank taking security?2. How does a company ‘organise’ property in a way that is different from, say, a natural person such

as Mr Bloggs? Think firstly about the way that a company holds as assets as a separate ‘stock’ from the providers of capital. Then think about how this is represented as a division between debt and equity. It has been argued that the key benefit of the company is this organisation of business property. Why do you think this is a benefit (think for example about liquidity and risk transformation)?

3. Consider the merits and problems of taking security over shares in Group companies as opposed to tangible corporate assets.

4. The Company already has a loan agreement with another bank which is based on the London form of credit agreement. What would you look for in this loan agreement to check whether or not there are any obstacles to the Company granting security?

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5. Suppose that the security is for “all moneys” rather than the “Secured Liabilities”. Do you foresee any problems with this in non-common law jurisdictions?

6. The security is over a number of contracts and receivables. The Company does not want to give any notice of the security interest to the obligors/customers on the contracts because it wants to continue to operate the administration of the accounts with the obligors/customers itself. The obligors on the contracts are located in a number of other jurisdictions. In principle you are happy with this, but do you see any problems?

7. Why is the security granted as fixed and floating charges?8. The banks want to amend this agreement so that the debtor’s book debts are subject to a fixed

charge? Do you think this will work?9. If the banks are taking first security, why do they care to restrict the Company from granting lower

ranking security to third parties?10. Who is the Receiver referred to in document (B)?11. The banks are taking security granted by Group members based in multiple jurisdictions. The

banks’ agent, who has only ever worked in the English market before, wants to employ a trustee of the security, as this has worked well for him in the past. Do you see any trouble with this proposal?

12. One of the Company’s assets, an industrial lathe, is located in Germany. Is this security agreement valid with respect to it?

READINGSFamiliarise yourself (rather than read) with the structure of teaching document (B): Security Agreement.

FURTHER READINGSRe Spectrum Plus Ltd [2005] UKHL 41, [2005] 4 All ER 209 – a leading case on the problem of securing book debts.

EU Financial Collateral Directive 2002 [Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements, as amended by 2009/44/EC]

Report from the Commission to the European Parliament and the Council Evaluation Report on the Financial Collateral Arrangements Directive (2002/47/EC) COM/2006/0833 final

Goode, R., (2008) Legal Problems of Credit and Security, Sweet & Maxwell, London – excellent though very detailed for the purposes of this Module.

McEndrick, E. (2010) Goode on Commercial Law (4th ed.), Penguin, London, Part 4 ‘Secured Financing’ – a good practical introduction to security in a commercial context.

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PART B—SYNDICATION AND SECURITISATIONINTRODUCTION

“For a machine constructed by man’s art is not a machine in each of its parts. … But natural machines, that is, living bodies,

are still machines to their least parts, to infinity.”

Leibniz, Monadology §64

We have deployed the concept of a contract as a kind of sense-machine which we construct and plug into various power sources to transmit effects. So we saw how the credit agreement is designed to plug into the money markets and draw off capital power (potentia) according to the timescales operating there, and we saw how the credit agreement achieves risk mitigation by attempting to draw down as much legal power (potestas) as possible should things go wrong. These have both been aspects of the machine which consider incoming power and the most efficient ways to draw it off, but now we are going to look at our sense-machine’s outputs. Our focus, however, is not on the obvious output of finance capital to the borrower’s use, but on an output of far greater interest to financial institutions: the claim to a borrower’s debt as the product of the sense-machine.

From this point of view, the capital advanced by the sense-machine becomes of almost secondary importance to the financial titles it produces. Why? Because once the capital is advanced it is tied up in the (industrial) production cycle, usually as plant and machinery, land, or raw materials, until such time as provided for in the repayment schedule as the borrower makes a profit and can repay the capital plus margin. In other words, the capital has got stuck, and when capital stops moving it ceases to be capital. But our sense-machine has developed a clever trick: though it cannot get the advanced capital moving while it is tied up in productive assets, it can get the claims to repayment and margin moving – it can sell these claims as products of the lending process, and use the proceeds of this sale to fund other loans to other borrowers, the claims to which it can sell on, with increasing velocity in ever increasing amounts. By way of example, a bank might lend £100 to Mr. X on the promise he repay £1 per month interest, repayment n of the principal sum in 12 months. Now for each of those 12 months the bank has the right to receive £1 and it is this ‘flow’ of £1s that is valuable and can be sold. Put enough such flows together and you can sell in quite an advantageous way. This in nuce is the ‘originate to distribute’ model that led in no small way to the Credit Crunch.

I really want to emphasise the way in which legal documentation has itself become a product here; a process we might call commodification. It is not particularly new that a legal document should become a commodity, for bank notes qua promissory note are the premier example of such a process. What is new, at least if we regard the last 30 years as recent, is that the evolution which has led IOUs declaring a promise to pay a sum endorsed on the face to become tradable as currency has been extended to legal documentation of such complexity that a whole industry has grown up of lawyers drafting the documents for credit parties and, importantly, of third parties who are paid to read these documents and assess their credit worthiness for the market. These latter are called rating agencies.

These structures are complicated for trained finance lawyers too, and mistakes and miscomprehension are not uncommon given the contradiction between legal complexity and the increasing velocity of capital circulation that drives these deals. In practise I have found the first stumbling block of many trainees is not

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so much the volume of information involved, but the unawareness that these structures tend to operate on multiple ‘plateaux’, such that changes at one level may or may not produce changes at other levels, and that the borrowers at the bottom of a structure may be completely unaware that their debt has been transferred to a new entity, sliced up, sold to multiple institutions, which themselves may have used the claims in weird and wonderful ways. Financial law has in a certain manner become ‘baroque’ (cf. Deleuze (1986)), the folds of legal sense may be unfurled only to reveal countless other folds and complications in a seething ferment of sense. The ‘mechanical’ contract has been raised up by its internalisation of production in itself into a multiplicity of pleats of sense, and has become, after a certain fashion, ‘alchemical’.

OBJECTIVES• To introduce students to the financial structures known as syndication and securitisation and the

reasons for their development;• to review some typical legal documentation related to these structures, with a particular focus on

the contract known as an intercreditor agreement;• to highlight some of the key legal issues which affect these structures; and• to discuss these structures’ role in the Credit Crunch.

DISCUSSIONHere are some questions to guide our exploration of these complicated structures:

(I) Syndication1. What is loan syndication?2. Why did syndication develop?3. In what ways do syndicated credit agreements differ from the traditional bilateral loan agreement

between one bank and one borrower? Consider the effect of syndicate decision making and facility agency. Why would any bank transfer its right to make decisions in this way?

4. Can a borrower restrict who its lenders might be?5. Intercreditor agreements are normally kept secret as between the bank syndicate and its agents;

borrowers only rarely get to review this document. Discuss why and whether this is desirable. 6. Pay attention to the way that cash flows through a syndicated credit structure. What is a

waterfall? What happens when there are insufficient funds?7. What are the differences between participation, sub-participation, beneficial participation (via

trust), and synthetic participation (via a total return swap)?8. Discuss the legal aspects of the following scenario with particular focus on the legal relations

between the parties (you can assume the valuer’s work fell well short of the required standard):

Bornheimer Bank, London Branch lends €100m to Borrower which uses the entirety of the funds to purchase various English real estate. The loan is secured by first ranking mortgage against this real estate. A local valuer “Krank Fight” employed by Bornheimer values the land in aggregate at €150m. Bornheimer syndicates its loan in its entirety to Lenders, and remains as facility and security agent. Borrower defaults, Bornheimer enforces against the security, but, on realising its value, recovers only €75m for the Lenders. It is subsequently discovered that Krank Fight misvalued the real estate because some of the land was historically polluted

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– a fact readily discoverable by the normal Envirocheck searches. The Lenders determine to sue Krank Fight for their losses.

(II) Securitisation9. What is securitisation? What are receivables?10. Why did securitisation develop?11. Explain the following jargon: ABS, CDO, RMBS, CMBS, SPV.12. What is the importance of a ‘true sale’ and its relation to capital adequacy?13. How might an originator achieve ‘credit enhancement’?14. What is tranching and how is it achieved?15. Consider the role of:

a. Credit rating agencies;b. Swap counterparties (interest swap with the SPV); andc. Monoline insurers

16. Discuss the legal aspects of the following scenario, based on real facts with particular focus on the liability of the rating agency:

NB. These facts are only indirectly linked to the securitisation structure but are based on a rare occurrence of some quite egregious facts ending up in a published court decision. They illustrate the distribute aspect of securitisation without the origination (the product relates to market indices, not specific receivables), but serve to emphasise the distributor-rating agency nexus and the liability of the rating agency (or lack thereof) with respect to investors.

These facts involve that now clichéd entity the "complex financial product" which no-one completely understood. A constant proportion debt obligation (the CPDO) had been developed by Tolomei Bank to track certain indices, with party and counterparty to the CPDO having to pay over a specific sum to the other as the indices fluctuated. Tolomei marketed the CPDO to Local Government Financial Services Pty ("LGFS"), who acted as a kind of investment broker (thus as agent) for various local councils.

Tolomei needed to obtain a AAA credit rating from a rating agency Bogstandard & Poorer (B&P) in order to satisfy the investment criteria of the local councils. When Tolomei approached B&P and asked them to rate the product, B&P initially decided to base their rating calculations on the assumption they had already used for a similar product that the volatility of the reference indices was 32%. On this basis they initially concluded that the CPDOs could not be rated AAA. A flurry of correspondence occurred in which Tolomei convinced B&P that the correct volatility assumption was 15% as this was the historic maximum volatility for the reference indices. This was simply false.

B&P accepted Tolomei’s representation as to volatility without verifying it, and proceeded to model the product on this basis. The CPDOs were granted AAA rating and B&P released a letter to Tolomei to accompany the financial prospectus stating that this indeed was its authorised rating.

The local councils purchased the CPDOs on LGFS' advice. From the beginning Tolomei began calculating the sums owed under the contracts by reference to its own models, which assumed

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a 29% volatility. Very quickly the local councils began having to pay out large amounts of money. As market conditions became choppier approaching the Credit Crunch, the actual volatility of the indices was around 32%. The local councils sued B&P, LGFS, and Tolomei inter alia for misstatement and misrepresentation.

READINGSPlease skim through the teaching documents marked (C) and (D) which I have put up on Moodle, focusing on teaching document (C(i)) which is the intercreditor agreement.

FURTHER READINGSThe following cases are particularly relevant to this seminar:

Australia

Bathurst Regional Council v Local Government Financial Services Pty Ltd and Others (No 5) [2012] Federal Court of Australia 1200

Esanda Finance Corporation v Peat Marwick Hungerfords [1997] HCA 8

England & Wales

BBL v Eagle Star [1995] 2 All ER 769, CA, reversed in part in [1997] AC 191, HL, where it was reported as South Australia Asset Management Co. v York Montague Ltd.

Caparo Industries plc v Dickman [1990] UKHL 2

Helmsley Acceptances v Lambert Smith Hampton [2010] EWCA Civ 356

Interallianz Finanz AG v Independent Insurance Company Ltd [1997] EGCS 91

European Commission

Rating Agencies page: http://ec.europa.eu/internal_market/rating-agencies/index_en.htm

Commission Delegated Regulation (EU) No 946/2012 of 12 July 2012 supplementing Regulation (EC) No 1060/2009 of the European Parliament and of the Council with regard to rules of procedure on fines imposed to credit rating agencies by the European Securities and Markets Authority, including rules on the right of defence and temporal provisions

United States (NY)

Ultramares Corporation v. Touche, 174 N.E. 441 (1932)

See also:

S. Jones ‘When Junk Was Gold’ , Financial Times (London), 17/10/ 2008, p. 16.

C. Gerner-Beuerle, ‘Underwriters, Auditors, and other Usual Suspects: Elements of Third Party Enforcement in US and European Securities Law’ (2009) 6 European Company and Financial Law Review 493- 499.

•

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The following texts might be read as different takes on the relations between mechanism and the internalisation of mechanism in either a molecular unity or a multitude, depending on the philosophical perspective. They are very difficult texts and consequently quite appropriate to our subject matter.

Deleuze, G. (1986) The fold: Leibniz and the baroque, Athlone Press, London

Hegel, GWF. (1989) Science of Logic, The doctrine of the Notion, s.II ‘Objectivity’.

 

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SEMINAR 5 – INTERNATIONAL CORPORATE AND SOVEREIGN BONDSINTRODUCTIONIn this seminar I will introduce international bond issues. Bonds can be thought of as very standard-form loans i.e. they are the same thing legally as parts of a loan under a credit facility agreement but they are so standardised that investors can exchange them readily on a like-for-like basis, the main variables of interest being the price of the bond and chances of it being repaid on maturity. It is a question liquidity: at one end of the spectrum you might have a highly negotiated and individual private equity loan to a corporation which requires lawyers to spend hours on due diligence before approving their client’s purchase, and at the other end, we have bonds which in principle should only require limited legal input: the investor need only consider micro- and macroeconomic factors.1 In between these two is the London form of credit facility agreement.

By international bonds I make an important distinction from domestic bonds. The difference has nothing to do with who issues the bonds—both corporations and states can issue international bonds and/or domestic bonds. The essential difference is that international bonds are denominated in a currency other than the issuer’s domestic currency, and commonly (but not necessarily) these bonds are traded on an international market. Bonds denominated in a foreign currency—such as Argentinian bonds denominated in US Dollars and traded in New York or London— are called Eurobonds. ‘Eurobonds’ has nothing to do with the Euro (the currency of the Eurozone) and is a term that developed in the 1970s. By contrasting example, were Argentina to issue peso-denominated bonds to Argentinian investors this would be a domestic bond issue.

The reason I will treat corporate and sovereign bonds together is historical—firstly, the techniques of bond issuance and dealing with defaults have been largely forged in the private sphere especially during the first wave of financialisation during the later nineteenth century, but primarily because corporate defaults are more common and more complicated than state defaults. Secondly, moral notions of debt and paying one’s way in the world have been transposed from the private sphere onto states, as the above quotation from Teddy Roosevelt indicates. You will of course be sensitive to the underlying tone of that ‘threat’; the moral symbolism is clothing for US policy instrumentalism towards Latin America in particular. We will look at this in the following seminar.

1 When debtors are at risk of default, however, the lawyers become heavily involved. Vulture funds may still wish to buy the bonds

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For this seminar I am going to introduce the basic structures and relevant points of contest in bond issues and show some of the similarities between corporate and sovereign bond documentation, before bringing out some distinctions. We will then plunge more deeply into sovereign debt issues in preparation for our discussion of the law, socio-economics, and politics, of sovereign default.

As I say, we will run this seminar and the next together—the readings for this seminar are highly relevant to the next also.

READINGSBuckley, R. (2010) ‘The Bankruptcy of Nations: Let the Law Reflect Reality,’ 29(6) Banking and Financial Services Policy Report

International Law Association (2010) ‘State insolvency: Options for the Way Forward,’ Report of the ILA Sovereign Insolvency Study Group, ch.1-2.

Weidemeier, M. (2013) ‘Sovereign Debt after NML v Argentina,’ 8(2) Capital Markets Law Journal

Wong, Y (2012) Sovereign Finance and the Poverty of Nations: Odious Debt in International Law, Northamption Mass.: Edward Elgar, ch.2

FURTHER READINGSCross, K H (2011) ‘Investment Arbitration Panel Upholds Jurisdiction to Hear Mass Bondholder Claims Against Argentina,’ 15(30) American Society of Int’l Law (ASIL) Insights available at http://www.asil.org/insights/volume/15/issue/30/investment-arbitration-panel-upholds-jurisdiction-hear-mass-bondholder

Herman, B, Ocampo J, & Spiegel, S (2010) Overcoming Developing Country Debt Crises, Oxford: OUP ch.1 and 17

UNCTAD (2011) ‘Sovereign debt restructuring and international investment agreements,’ IIA Issues Note No.2

Philip R Wood (2007) International Loans, Bonds, Guarantees and Legal Opinions, London: Sweet & Maxwell – now slightly outdated discussion of the mechanics of bond issue.

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SEMINAR 6 – SOVEREIGN DEFAULTINTRODUCTION

‘If a nation shows that it knows how to act with reasonable efficiency and decency in social and political matters, if it keeps order

and pays its obligations, it need fear no interference from the United States’

Pres. T Roosevelt, 20 May 1904

In the previous seminar I introduced bond finance and sovereign bonds—that is, bond finance that is used by states to fund their ongoing spending (known as gilts in the UK, and T-bills in the US). In fact, I say spending but a significant portion of gilt issuance takes place to refinance existing indebtedness. What this means is that a state may have to repay the principle on certain 10 year bonds on a given date. In order to find this money the state may well borrow it from private persons by issuing new bonds and it will try an ensure that this money is borrowed and available for use on the day the existing indebtedness is due, and that the new debt is on the same terms (or better) than the debt that is being repaid.

A major problem arises when the state cannot find new money to refinance its indebtedness, or, more likely, the terms of available refinancing are significantly worse than those of the existing debt. The principle term that varies, as we have seen, is the price (‘the yield’) which is the actual price the purchaser pays for the bond not necessarily the nominal price written on the bond. In a situation where a state is considered likely to not repay the debt it owes investors will only be prepared to invest at a significant discount to the nominal value of the debt. Such bonds are commonly called ‘junk,’ and more technically known as ‘high yield’. In such a situation a state may well have to issue vast amounts of debt to receive sufficient actual funds, a growth in indebtedness which very quickly becomes unsustainable. At this point the state is on the verge of bankruptcy.

The so-called bankruptcy of states, however, is legally incongruous. The fact that lawyers have applied the private law mechanisms of bankruptcy to a public entity should already indicate the problematic—a private bankrupt is rightly or wrongly deemed the sole cause of her own loss, is stripped of her non-essential assets, declared bankrupt, and then pushed to re-enter the market place. A state however, is almost never the sole author of its economic collapse, may only own ‘essential’ assets, contains very many innocents who may be severely affected by anything the state agrees to, and it is legally assumed (though it is a vexed question) that a state cannot actually be liquidated like, say, a corporation.2 The international politics of sovereign default drive this incongruity to extremes.

2 Ultimately it may always print coin to repay debts, and its principle asset (its territory) is likely to exceed liabilities.

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The objective of this seminar is for you to discuss further the legal, economic and political issues raised in the previous seminar. We will explore in detail the landscape of international sovereign financing and the problems posed by the current international legal framework (or lack thereof) relating to sovereign debt restructuring.

The following exercise assumes you prepared the reading for the previous seminar and builds on it.

SEMINAR EXERCISEPlease read these articles (in your readings):

Elaine Moore ‘International Bankruptcy Back on the Agenda’ (Financial Times 29 October 2014); and

Jose Antonio Ocampo ‘The UN Takes the First Step to Debt Restructuring’ (Financial Times 29 October 2014),

and come prepared to debate the issues raised by the articles. In particular, you will be asked to discuss and explain the current regime for sovereign debt restructuring and debate the advantages and disadvantages of the contractual approach to sovereign debt restructuring versus the statutory approach to sovereign debt restructuring.

Seminar questions:

1. What is sovereign debt?

2. Why do countries get into debt? Is sovereign debt necessarily a bad thing?

3. What are the categories of sovereign debt and does it make a difference to their governing legal framework? Can excessive domestic debt lead to sovereign debt crisis?

4. What are the sources of sovereign finance today? What’s the difference between official and commercial debt?

5. What are the implications of imprudent sovereign borrowing and lending?

6. What is odious debt?

7. What happens when a sovereign state cannot repay its debt?

8. Considering examples from your own knowledge, how has international politics affected sovereign indebtedness, from colonialism to the Bretton Woods world order to today?

9. How is sovereign debt restructured? What is the current international framework for restructuring sovereign debt?

10. What are the differences between a contractual approach to sovereign debt restructuring and a statutory approach? Which is preferable for resolving sovereign debt crises?

11. How are human rights affected by sovereign debt restructuring and how might they be protected?

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SEMINAR 7 – FINANCIALISATION, UNCERTAINTY AND INSTABILITYINTRODUCTION

“…in knowing nothing, [one] knows in a way that surpasses understanding.”Pseudo-Dionysius

During the early modern period natural philosophers developed the concept of the general equilibrium, though they used theological names for it, such as ‘divine immutability,’ infinite ‘power,’ ‘constancy.’ The basic concern of these thinkers was to reconcile the apparent change of the universe with the perfection of God, perfection being understood as completion. There was nothing God lacked and nothing God had not already ordained for the universe, and so the events of our world ought to be reconcilable with a set plan in the divine intellect. Some philosophers, such as Newton, continued to believe that God could miraculously intervene in the universe, but others, termed ‘Spinozists’ by their critics, followed the logic of divine perfection to its conclusion of a completely determined and perfectly ordered universe, in which change was explicable and indeed predictable through the development and application of natural laws.

Parallel to the idea of divine immutability came the idea of divine omniscience, which translated into a theory of knowledge which expressed the general equilibrium. While every finite thing in the equilibrium knew a certain amount about its world, its very finitude explained the partiality of its ignorance. Finitude was equated with ignorance, but on condition also that the whole as whole knew all of its parts and maintained the order. There was thus a limit case of knowledge which was ascribed to God.

In essence, the concept of general equilibrium might be regarded as the view that given a lawful physical system, any change in that system would be instantaneously compensated for by that system to preserve equilibrium. An easy example from statics would be an incompressible fluid – if you push one part of the fluid, the other parts will move out of the way, but the general volume of the fluid will not change. This general equilibrium view is more complicated than this however – it holds not only that the same extension (e.g. volume) will be maintained, but also that the same overall motions (and so forces) will be maintained i.e. we have a dynamic equilibrium. When the organisers of Davos’ World Economic Forum 2013 chose the epithet ‘Resilient dynamism’ I suggest this is what they imply – a system which changes in order to remain the same: a Being or One which subsists even as it appears to change.

This little excursion into some interesting metaphysics is important because the general equilibrium concept of classical physics was transposed readily into economics, unsurprisingly along with all the

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theological deadweight too. We cannot blame C18-19th economists for seeking to apply successful physical methods to economic matters, provided they were open about it, especially because otherwise their task would have become impossible. Marx, for example, is completely explicit3 that he assumes a general equilibrium for methodological purposes (a) because he is critiquing his classical predecessors who implicitly assumed the same equilibrium, and (b) because if he did not hold certain things constant readers would not be able to see the ‘generality’ of the laws that Marx was able to derive about economic matters. This does not mean that Marx was not aware that economic systems did not (r)evolve; just that drawing the line between his self-proclaimed ‘scientific’ analysis and his metaphysical commitment to transformation of one’s world can be difficult, especially when Marx starts referring to ‘iron laws’ and ‘gravity asserting itself’. Others went further, with Adam Smith asserting that markets via the infamous ‘invisible hand’ would naturally move to their natural equilibrium state without the need for outside intervention (i.e. state regulation). To be fair to Smith, let’s quote him in full:

The natural price, therefore, is, as it were, the central price, to which the prices of all commodities are continually gravitating. Different accidents may sometimes keep them suspended a good deal above it, and sometimes force them down even somewhat below it. But whatever maybe the obstacles which hinder them from settling in this centre of repose and continuance, they are constantly tending towards it. The whole quantity of industry annually employed in order to bring any commodity to market, naturally suits itself in this manner to the effectual demand. It naturally aims at bringing always the precise quantity thither which may be sufficient to supply, and no more than supply, that demand. (Smith (1776), Vol. I, p. 65).

Consider how this taps into the idea of divine omniscience: the merchants are all parts of the market and as such they cannot know the status of the whole market know, nor in the future, but the whole market as such can be relied upon nevertheless to find its natural level, regulate itself, and ensure the greatest good possible. The deeper thought process implies that we do not need to know or worry about everything, and may pursue our individual desires, because the mind controlling the invisible hand is tending to us like the good shepherd. Incidentally, I cannot emphasise enough the gravitational analogy Smith is deploying and your need to critique that deployment to the extent that it is not mere metaphor but is actually, shall we say, ‘exerting its own force’ on Smith’s conceptualisation. Marx uses the gravity metaphor too (Capital I p.168).

The problem when applying iron laws to market behaviour is that even though certain laws do apply (let’s be clear about that), their predictive capacity collapses within moments. Actually Newton already knew this (a case of selective pilfering by economists). Newton had established the laws applicable when one body orbits another, and so naturally moved to consider the case of three bodies in an orbit. His mathematics established that with just three bodies apparently random behaviour ensured, with planets spinning out of orbit, or smashing into each other, and he could not find the law that explained this. Physicists and mathematicians have spent the following centuries investigating this ‘three-body problem’ and from it the subjects of non-linear dynamics and chaos theory were born.

Now if we consider a market, with all the variables involved, we start to guess that ‘resilient dynamism’ is a bit of a fairy story. Markets could do almost anything, including explode, and as we have seen this is what

3 Cf. e.g. Capital I p.708, Capital II p.1-2, Grundrisse p.89-100. Strictly the general equilibria are modified according to the components of the economy Marx is focusing on.

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they do to the surprise of almost everyone, however well-schooled in the ‘science’ of economics. This surprise comes from a risk inherent in economic ‘scientism’, namely that once a beautiful law is established, deviations from this law are deemed aberrations to be ignored, or at best accounted for by special factors added in as ‘transaction costs’, ‘imperfect information’, or politically as ‘state meddling in the private sector’. Such an attitude is deeply unscientific; scientists ought (and do) jump at the strange and inexplicable, and try and make their theories account for them, rather than attempting the Sisyphean task of making the world fir their theories. Now, one thinker pertinent to our investigations of financial markets who embraced the problematic of instability and uncertainty is JM Keynes, whose ideas you will be reading through his interpreter Hyman Minsky. Keynes was not the first person to appreciate the difference between a lack of knowledge and a knowledge of nothing, but he puts it in quite concise terms drawing on his investigations into the theory of probability:

“By ‘uncertain’ knowledge, let me explain, I do not mean merely to distinguish what is known for certain from what is only probable. The game of roulette is not subject, in this sense, to uncertainty….The sense in which I am using the term is that in which the prospect of a European war is uncertain, or the price of cooper and the rate of interest twenty years hence…. About these matters there is no scientific basis on which to form any calculable probability whatever. We simply do not know. Nevertheless, the necessity for action and for decision compels us as practical men to do our best to overlook this awkward fact and to behave exactly as we should if we had behind us a good Benthamite calculation of [utility].” Keynes (1937) 51 Q. J. Econ. 213-214.

We simply do not know, and to emphasis this point, even if we knew the state and tendency of everything today as a whole, we still could not know. I cannot but perceive undertones of British Hegelianism in this doctrine. Over against ignorance we come to realise that even if we were omniscient, there are some things which cannot be known even if everything acts in a lawlike manner. Economists and legislators must acknowledge this awkward fact, that not even the God of the general equilibrium has all the answers, and cannot be relied upon for them. The phenomenological breakthrough, however, is to embrace this uncertainty as a power: it is not a lack of knowledge for there is no standard against which this lack can be measured, but is rather a positive act of mind – a positive cognition of nothing as such. It is only when mind becomes conscious of its finite power of cognising the nothing, that it opens itself up to the Becoming of Being, which, in the narrower sphere of the general equilibrium of financial markets, means on openness to the creative/destructive potential of uncertainty and the instability – the necessary general disequilibrium - it breeds.

The purpose of this seminar therefore is to lay down some of the theoretical foundations for our examinations of financial complexity, crisis, supervision and regulation that follow. At the core, we will be asking ourselves about the possibility of law’s responses to uncertainty and instability.

OBJECTIVES• To explore what drives financialisation and the proliferation of financial products;• To introduce the concept of uncertainty in markets, and ideas about nonlinearity and chaotic

processes;• To compare at a high level the instability hypothesis of Minsky to deterministic theories of

classical economics;• To consider how law confronts inherent instability.

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DISCUSSION1. Do you accept Foster and Magdoff’s definition of ‘financialization’?

2. Consider the following quotation from Blackburn (2006):“In an important exchange, Giovanni Arrighi and Robert Pollin agreed that the most fundamental question concerning financial expansion is ‘where do the profits come from if not from the production and exchange of commodities?’ The three possibilities they focused on were, firstly, where some capitalists were profiting at the expense of others; secondly, where capitalists as a whole are able to force a redistribution in their favour; and, thirdly, where transactions had allowed capitalists to shift their resources from less to more profitable fields. However, we should also take into account two dimensions internal to finance itself: firstly, the cost of generating finance functions and products; and secondly, efficiency gains in anticipating risk. The financial revolution of the last two decades has registered large potential gains in dealing with risk; but most of this gain has been swallowed by the rising costs of financial intermediation, made possible by monopoly and asymmetric information resources, and generated by escalating marketing and trading expenditures as well as extravagant remuneration.” Discuss.

3. Classical economics implicitly assumes (and Marx explicitly assumes for the purposes of argument) a ‘general equilibrium’. Discuss the meaning of this theoretical condition and its limitations.

4. Consider the concept of ‘uncertainty’ and differentiate it from ignorance. Why is this important?

5. How do the modulations of individual’s uncertainty generate instability?

6. William McChesney Martin, Chairman of the Federal Reserve (1951-1970), famously said his job was “to take away the punch bowl just as the party gets going”. How does a central bank “take away the punch bowl”?

7. Avgouleas (2012:89-90) highlights five macro-causes for the Global Financial Crisis:a. relaxed monetary policies and trade imbalances that fuelled bubbles;b. well-meaning governmental policies, such as universal housing in the US, or the single-

minded pursuit of success in one sector (Ireland, Cyprus);c. economic doctrine and regulatory failure;d. flawed use of financial innovation;e. possible behavioural causes of the crisis.

Avgouleas admits that to some extent these overlap. Consider this list in relation to the readings. Is it adequate?

8. Avgouleas (ibid.) also highlights three micro-causes which focus on ‘perverse’ incentives:a. bonuses;b. the originate-to-distribute model; andc. the short-comings of credit ratings.

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Critically discuss both why these causes are included, and, methodologically, whether they are Credit Crunch specific, mere manifestations of the macro-causes, or sui generis causes which may be treated and legislated for separately.

9. Consider how the distinction between macro- and micro-causes expresses distinctions in legal theory about the appropriateness of legal intervention, for example by means of macro-economic supervision, regulation, and directly applicable legislation.

READINGSBellamy Foster, J. & Magdoff, F. (2009) The great financial crisis – causes and consequences, Monthly Review Press, NY, Ch.5 ‘The financialisation of capital and the crisis’

Minsky, H. ‘The financial instability hypothesis: an interpretation of Keynes and an alternative to the “standard theory”’ 16(1) Nebraska J. of Law and Bus. 1

FURTHER READINGSAvgouleas, E. Ch.3 ‘The causes of the Global Financial Crisis’ in Avgoulas, E. (2012) Governance of global financial markets – the law, the economics, the politics, CUP, Cambridge

Blackburn, R. ‘Finance and the Fourth Dimension’ [2006] 39 New Left Review

___________ ‘The Subprime Crisis’ [2008] 50 New Left Review

Brunkhorst, H. ‘The return of crisis’ in Kjaer, PF. & Teubner, G. (eds.) (2011), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation, Hart Pub., Oxford

Marazzi, C. (2011) The violence of financial capitalism, Semiotext(e), Los Angeles

Marx, K. in (1981) Capital III, Penguin, London, Ch.30 ‘Money capital and real capital: I’

Minsky, H. (2008) John Maynard Keynes, McGraw Hill, New York

Schoenmaker D. ‘The financial trilemma’ (2011) 111 Economics letters 57-59

 

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SEMINAR 8 – INSOLVENCY AND RESTRUCTURING IN CREDIT STRUCTURESINTRODUCTION

‘What is robbing a bank compared to founding a bank?’Bertolt Brecht

In the course of my own studies and training I have sat through courses on insolvency law which were repeated at every level and were a complete chore – the lecturer would recite the liturgy of grey rules issuing from the latest insolvency acts and it all seemed so abstract and pro forma that one was forced to question why on earth anyone would specialise in the subject. The problem is, this is one of those areas where the law only makes sense when you are immersed in the practicalities of economic distress, because it is only then that one encounters the fundamental tensions between interested parties, the legal structures they have built to mitigate risk, and policy considerations. For this reason I have decided that we will attempt a case study so that we can work through a practical example and you can hopefully use this experience to obtain a more fleshed-out sense of what is at stake in this area.

There is another reason why I have chosen to proceed this way, however. Lawyers being lawyers tend to race to the written the law, and when it comes to insolvency matters they inevitably reach for the insolvency statute book. The problem is that in the case of financial law, and credit agreements designed to meet every eventuality (at least in intent), private contractual arrangements will have been applied to the problem of the potential or actual insolvency of a borrower long before the law of insolvency is invoked . Just look again at teaching document (A): can you see all the ways in which the lenders monitor and discipline the borrowers? The credit agreement is also designed with an inbuilt early warning system; the financial covenants in particular are supposed to be triggered before any insolvency event, in order that lenders may take increasing control of the ‘care’ of their investment. If we consider a spectrum from corporate health to dissolution, it might look like this:

[performing] – [underperforming] – [turnaround] – [work out] – [formal insolvency] – [liquidation]

Creditors will already be asking questions at ‘underperforming’, and will be enforcing their legal rights by ‘turnaround’ and ‘work out’. Their goal is to stay as far away from ‘formal insolvency’ as possible, not just because a healthy business will repay its debts, but because on insolvency the law intervenes and can trump the private contractual arrangements that creditors have put in place. It is more complicated and

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fluid than that (insolvency law can formally protect the private arrangements against third parties), but my point is that many more businesses will spend a significantly greater amount of time in informal ‘distress’ than those that make the headlines with an announcement of filing for insolvency. Companies can trundle along for two or three years or more, confidentially negotiating with creditors about how best to solve their problems, and either resolve them quietly, pass quickly in and out of a formal insolvency of a couple of weeks, or collapse into insolvency. Examples include some of the world’s big auto manufacturers, which seem to be in a persistent state of borderline default.

The case study is designed to show you how insolvency law is sometimes more of a horizon to the work out and restructuring process, and thereby to emend where we, as critical lawyers, should place our emphasis when analysing insolvency regimes.

Engineering default – RBS GRBOn 25 November 2013 Dr Lawrence Tomlinson, former adviser to the Dept. Innovation, Business and Skills, published a report detailing alleged abuses by a team at the Royal Bank of Scotland (RBS) named the Global Restructuring Group (GRG). The central allegations was this:

The Tomlinson Report mades a number of observations and allegations in support of the Principal Allegation concerning the bank's lending to and recovery of debts from small to medium sized enterprises ("SMEs") as follows:

The bank operated a 'process by which businesses are assessed for their potential value' in order to select viable SME customers as targets.

The bank's actions 'artificially distress' the customer, triggering a transfer to the bank's business support division so that the bank can take control of that customer's assets. The bank uses a number of mechanisms to 'engineer' a default, including:

(a) the manipulation of property valuations, through which the bank 'significantly undervalues the business's assets and puts [it] into breach of [its] covenants'; and

(b) the withdrawal or failure to renew existing facilities, including overdraft facilities and expiring term-loans.

Once under the management of the business support division, actions are taken which put the customer 'on a journey towards administration, receivership and liquidation'.

GRG acts as a 'profit making centre' for the bank, extracting the greatest amount of value possible from the bank's customers by:

(a) imposing additional fees; (b) requiring further equity injections and personal guarantees to assist

(b) with the turnaround process, in circumstances where 'the bank has no intention of supporting or helping the business';

(c) re-negotiating pre-existing facilities on terms priced so as to enable GRG to extract the greatest amount of value from the business to maximise its recovery; and

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(d) purchasing properties 'at cut prices' from customers in Business Restructuring Group ("BRG") within GRG through the bank's property acquisition vehicle, West Register, in order to make an 'easy profit'.

Tomlinson’s Report (see Further Reading) was rebutted at length by a Clifford Chance Report of 11 April 2014 (also in Further Reading). I cannot comment on the specific allegations as Tomlinson’s Report was a summary of evidence purported to be in his hands. However, his characterisation of ‘engineering default’ accords with my own experience. We will examine this as we look at our case study.

Pre-packsGiven the importance of pre-insolvency matters for the financial lawyer, I wanted to highlight one particular policy-creditor nexus in the UK, which is the so-called “pre-pack” (an idea adapted from US bankruptcy practice). As you will see from the readings, a pre-pack can be seen as a confidential pre-insolvency work out with the biggest creditors that is suddenly launched on the world and formal approved (and so enforced) by the courts. Here’s how the Association of Business Recovery Professionals defines a pre-pack:

“Administration has become the main insolvency procedure aimed at rescuing a company's business. During an administration the company is controlled by a private sector insolvency practitioner, known as the administrator, whose powers and responsibilities are set out in the Insolvency Act 1986, Schedule B1. A pre-pack administration describes the situation where a company's business and assets are sold on terms that were negotiated between the buyer and the administrator before the company formally entered administration. The sale is often then carried out privately and rapidly by the administrator with limited disclosure or control available to creditors. Pre-packs are not new and have been used commonly where commercial pressures require urgent action in order to save the value of a company's business.”4

Centre of Main Interest (CoMI)One overarching factor we should deal with, but which is somewhat of a topic in its own right, is the determination of the question of where insolvency proceedings should be commenced and have priority in the European Union (except Denmark). In international finance we will likely be dealing with borrower groups with legal persons and assets situated in multiple jurisdictions. If insolvency proceedings are commenced, different laws and rules will apply, with differing attitudes as to whether the business or creditors should be protected, and what say unsecured creditors should have against secured creditors. The EC Regulation on Insolvency Proceedings (1346/2000) (the Regulation) attempts to solve this problematic by determining the choice of law and jurisdiction in such cases, and then enforcing co-ordination between national courts. The Regulation is not an insolvency law, it is technically a jurisdiction law that does not affect national insolvency laws (save that it requires recognition of other member states’ courts’ judgments. These are the vertical policy reasons for the Regulation, but enterprising lawyers have been quick to use the Regulation to their clients’ advantage by means of forum-shopping. By way of example, in some cases a business based in one jurisdiction has been migrated overnight to another jurisdiction whose insolvency laws have been deemed more friendly to that business, whereupon a pre-

4 Association of Business Recovery Professionals, Pre-packaged sales briefing notes, available at https://www.r3.org.uk/uploads/documents/Pre-packs%20briefing.pdf

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planned insolvency procedure has been enforced in the new jurisdiction, confounding creditors who had assumed they could rely on the laws of the former seat of the company.

The question of where a company is based is thus critical in thinking about relying on the Regulation. The Regulation will only apply if the centre of main interests (CoMI) is in the EU, and the location of the CoMI will determine where main insolvency proceedings are commenced, but there is no definition of the expression “centre of main interests” in the Regulation.

There is a rebuttable presumption in Article 3 of the Regulation that, in the case of a corporate debtor, the CoMI is the place of the registered office. In England, it has been held that the registered office presumption is not very strong and is merely one of the factors to be taken into account when determining the CoMI. In the Eurofood case the ECJ found that the location of a company’s registered office is key to determining its CoMI. The registered office presumption in Art.3 Regulation can be rebutted only if factors which are both objective and ascertainable by third parties lead to a conclusion that the CoMI is not in the same location as the registered office: for example, a letterbox company which does not carry out business in the EU member state in which its registered office is situated. No further guidance on the objective criteria by which third parties may ascertain a company’s CoMI was provided.

Preamble 13 of the Regulation also states that the CoMI should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties. In England, it has been held that the most important third parties in this respect are creditors (Geveran Trading Company Ltd v Skjevesland [2002] EWCA Civ 1567; [2003] 1 W.L.R. 912).

Note: the Regulation does not apply to credit institutions, collective investment undertakings, and insurance undertakings, which are supposed to be subject to their own specific insolvency jurisdiction regulations. In fact, when Lehman Bros. collapsed the entities it controlled in the EU did not qualify as ‘credit institutions’ for technical reasons, and so the insolvency had to be dealt with under the pre-existing rules of private international law.

OBJECTIVES• To introduce students intuitively to the relation between financial law and insolvency law by

focusing on the practice of law when borrowers are in distress.• To undertake a case study of a work out in order to highlight the importance of what happens

before insolvency laws are involved.• To consider some of the aspects of restructuring and insolvency in an international context,

with particular emphasis on the question of in which jurisdiction insolvency proceedings should be commenced.

• To examine the tension between work outs and insolvency policies with reference to the ‘pre-pack’ form of administration.

DISCUSSION1. Consider the teaching documents (E): Amendment and restatement agreement, and (F) work out

and restructuring case study, and review the questions in document (F).

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2. Consider the Principal Allegation in the text above (‘Engineering Default’) which were laid against RBS’ Global Restructuring Group. Can you work out how these allegations might apply to the contractual provisions of teaching document (E)? (Hint: where does the contract deal with property valuations?)

3. In 2009 the UK Parliament Business and Enterprise Select Committee reported on pre-packs:“There is, however, evidence that unsecured creditors fare worse during a pre-pack, recovering 1% of their debts on average compared to 3% as part of a standard business sale. Moreover, there are suggestions that pre-pack administrations adversely affect competitors, who will continue to carry costs which the phoenix company has shed. Criticisms of pre-packs are at their sharpest where existing management buy back the business following private negotiations with an insolvency practitioner and then continue to trade clear of the original debts through a new "phoenix" company. This means that unsecured creditors are initially kept in the dark and then left empty handed. The phoenix company may also have some advantage over competitors who honour their financial obligations. The anecdotal evidence in media reports and confidential letters to the Committee suggest that "phoenix" pre-packs affecting smaller companies with high levels of unsecured trade creditors cause particular concern and are more likely to damage the supplier base without corresponding broader benefits to the overall economy.”5

Discuss. In particular, the Committee’s Report focuses on SMEs and management “stitch-ups”. Is it right to focus only on these cases?

4. Critically consider the question of CoMI in the following scenario:

A large Italian production company with subsidiaries across Europe has a syndicated credit facility secured over its assets and those of its subsidiaries. In search of further debt funding it issued bonds in Ireland. To do this tax efficiently it set up an Irish registered company whose sole purpose was to issue and manage the bonds in order to provide finance for the whole group. This Irish company is regulated and taxed in Ireland, and has Irish and Italian directors.Subsequently, a scandal causes the collapse of the Italian production company. Creditors initiate insolvency proceedings against the group in Italy, but simultaneously bond holders initiate insolvency proceedings against the group in Ireland. The creditors come from multiple jurisdictions, including New York, and the assets of the company are spread through the European Union.

Where is the Centre of Main Interests of the group located?

READINGSFamiliarise yourself (rather than read) with the structure of teaching documents (E): Amendment and restatement agreement, and (F) Work out and restructuring case study.

5 http://www.publications.parliament.uk/pa/cm200809/cmselect/cmberr/198/19806.htmPage | 42

L Tomlinson (2013) Tomlinson Report of 25 November 2013 available at http://www.tomlinsonreport.com/docs/tomlinsonReport.pdf, with a focus on the primary allegations stated in the text here above (‘Engineering Default’).

V.Finch (1996) ‘Pre-packaged administrations: bargains in the shadow of insolvency or shadowy bargains?’ [1996] J. Bus. Law 568-588

FURTHER READINGSON CORPORATE INSOLVENCY GENERALLYMcEndrick (ed.) Goode on Commercial Law (4th edn) Penguin London, Ch.31 ‘corporate insolvency’

ON ENGINEERING DEFAULTClifford Chance LLP (2014) Independent Review Of The Central Allegation Made By Dr Lawrence Tomlinson In Banks' Lending Practices: Treatment Of Businesses In Distress report of 25 April 2014 available at http://www.rbs.com/content/dam/rbs/Documents/News/2014/04/Clifford-Chance-Independent-Review.pdf

ON PRE PACKS(UK Parliament) Business and Enterprise Committee - Sixth Report: The Insolvency Service (21 April 2009) Part 3 ‘Confidence in the Insolvency Regime: Pre-pack administrations’

Bo Xie, ‘Regulating pre-packaged administration - a complete agenda’ (2011) 5 J. Bus. L. 513-527

ON COMI AND RELATED MATTERSEurofood IFSC (Area of Freedom, Security and Justice) [2006] EU ECJ C-341/04

Geveran Trading Company Ltd v Skjevesland [2002] EWCA Civ 1567; [2003] 1 W.L.R. 912

Westwood Shipping Lines Inc and Another v Universal Schifffahrtsgesellschaft MBH (formerly GMB Schiffahrts GMBH) [2012] EWHC 1394 (Comm) (25 May 2012)

The draft Insolvency (Amendment) (No. 2) Rules [2011] on Moodle, which have been repeatedly delayed.

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SEMINAR 9 – LOGICS OF FINANCIAL CONSCIOUSNESSINTRODUCTION

“The deliberate creation of lack as a function of market economy

is the art of a dominant class.”(Deleuze & Guattari, Anti-Oedipus p.28)

Over the last few morning seminars we have been considering how finance breaks free of society and then turns and comes to confront it, or, as Marx interpreted Feuerbach, how humans create their own gods. Another theoretical route into finance, however, involves a return to Spinoza in which rather than focusing on the role of working and power in constituting our world, one places a greater emphasis on another key concept: desire.

Spinoza (Ethics Part III Props.7-9) defines desire as appetite accompanied by the consciousness thereof. Appetite is defined by reference to the conatus, which is defined as the struggle of each thing to persevere in its being. Infamously for his time, Spinoza regards appetite as a consciousness of conatus of mind and body, and will as consciousness only in respect of mind, and regards both instances as completely determined by the causal order of Nature. There is thus no free will; will is just an effect of desire, and desire is said to be an indefinite striving that amounts to a life. This does not mean that Spinoza thus reduces everyone to the anarchic license of Selden, say. It is will and desire which link us to a kind of logic, understood in a rather old-fashioned was as a theory about ends. Will and desire provide ends for things – things desire certain results, the ideas of these desires are called volitions, and the things strive to attain them. In Spinoza’s deterministic model of the conatus, logic and physics appear to coincide: we are all machines, and our desires are simple down to our construction combined with inputs from our environment. If we desire something “it is by the Highest Right of Nature” (Tractatus theologico-politicus Ch.XVI).

He subsequently brings in the concept of beatitude for persons determined to attain virtue, and this beatitude may be summarised as consciousness of the power of Deus sive Natura in the individual. This power is not experienced as desire, or will, or indeed as personal, but as an amor intellectualis Dei which is impersonal and pre-individual. Once understood, the beatified conceives of the conditions of her own consciousness as formative of, but exhausting, their particular finite individuality.

If we move to the Kantian formulation of desire, what we find is in fact a kind of acceptance of this idea of desire, but with a raising up of its personal status to create a new subset of desire called “higher will”

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which is a desire that is produced by right reason as legislator for the willing faculty. Kant’s definition is extremely interesting:

“The faculty of desire is a being’s faculty to be by means of its representation the cause of the reality of the objects of these representations.” (CPrR (1997:8))

Kant is implying two things here, neither of which is that a subject can desire an object into existence. By ‘reality’ here I suggest he seems to mean reality in the older sense of ‘vivacity’ or ‘intensity’ such that what the faculty of desire does is produce a hallucinatory impression about the world, and in a sense picks out this object against that object as ‘desirable’. As we indicated, this facultas has two levels: at one level desire produces imagination, and is itself driven by subjective conditions i.e. Kant defines pleasure as the agreement of this representation with the subjective conditions of life (I am hungry-I perceive food with more reality). But in addition Kant posits the rational agent as a free cause of the faculty of desire insofar as the agent intervenes with reason in its desires. The free rational agent legislates for desire such that what is desired, e.g. the highest good, now has the most reality for the subject. Kant calls this legislated-for desire the will.

Now Hegel for example will build on this distinction, in which Kant purports to find freedom, but will famously note that Kant has only pushed the problem of determinism up a level. Spinozism has not been escaped, in fact Spinoza had already envisaged two levels of determination, the finite and the divine, and the divine was just as determinate as the finite. Drawing on Leibniz-Wolff, Hegel can already see that we are now presented with the question of interrogating the will and the historical conditions in which it is formed as legislator for desire.

The purpose of this seminar will be to explore those theories of desire which attempt to relate (I) variations on this distinction between subjective/objective desire (and/or will) to (II) capitalism insofar as (a) individual desires (and/or will) constitute social and particularly financial legal orders, and (b) the thus constituted order determines the conditions of individual desires (and/or will).

OBJECTIVES• To attempt to relate the Global Financial Crisis to theories which draw links between social

phenomena (in particular financial institutions) and concepts of the unconscious and desire.• To explore logics of the unconscious/social consciousness/pre-individuality.• To prepare the ground for our discussion of the regulation of financial activity.

DISCUSSION1. Clarify the following categories: conscience and consciousness (Spinoza); conscious and

unconscious (Freud); subconscious; social field (of consciousness).

2. Freud defines the libidinal constitution of a group as when a group which places one and the same object in the place of their ego ideal and have consequently identified themselves with one another in their ego. Critically discuss with respect to the regulation of finance capital.

3. Consider this quotation from Simmel’s Theory of Money p.484:

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“I will content myself with this singular example of credit’s distancing effect on the style of life and only add one of its very general traits that refers back to the significance of money. Modern times, particularly the most recent, are permeated by a feeling of tension, expectation and unreleased intense desires—as if in anticipation of what is essential, of the definitive of the specific meaning and central point of life and things. This is obviously connected with the overemphasis that the means often gain over the ends of life in mature cultures. Aside from money, militarism is perhaps the most striking example in this respect. The regular army is a mere preparation, a latent energy, a contingency, whose ultimate goal and purpose not only very rarely materialises but is also avoided at all costs. Indeed, the enormous build-up of military forces is praised as the only means of preventing their explosion. With this teleological web we have reached the very pinnacle of the contradiction that lies in the drowning out of the end by the means: the growing significance of the means goes hand in hand with a corresponding increase in the rejection and negation of the end. And this factor increasingly permeates the social life of the people; it directly interferes with personal, political and economic relationships on a large scale and indirectly gives certain age groups and social circles their distinctive character.”

Simmel appears to be arguing that credit, as the apotheosis of money, constitutes one great postponement of giving one’s life meaning (an end or purpose), which requires social forces of such magnitude that ‘explosion’ is always on the horizon. He wrote this in 1903. Discuss whether this is an adequate characterisation of credit’s effect on society.

4. Lukács (Simmel’s doctoral student) raises Simmel’s concept of reification up a to key concept of his History and class consciousness. In that work he writes:

“The transformation of the commodity relation into a thing of ‘ghostly objectivity’ cannot therefore content itself with the reduction of all objects for the gratification of human needs to commodities. It stamps its imprint upon the whole consciousness of man; his qualities and abilities are no longer an organic part of his personality, they are things which he can ‘own’ or ‘dispose of’ like the various objects of the external world. And there is no natural form in which human relations can be cast, no way in which man can bring his physical and psychic ‘qualities’ into play without their being subjected increasingly to this reifying process.”

Compare to the idea of money advanced by Simmel in the readings. What is this ‘ghostly objectivity’?

5. In the same work Lukács adopts Marx’s basic categories of generality, particularly and singularity to consider the precise nexus by which capitalism affirms its order even in the excess of human desires:

“The capitalist process of rationalisation based on private economic calculation requires that every manifestation of life shall exhibit this very interaction between details which are subject to laws and a totality ruled by chance.”

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Lukács continues that the ‘laws’ determining such a society would have to be the ‘unconscious’ product of the activity of the different commodity owners acting independently of one another, i.e. a law of mutually interacting ‘coincidences’ rather than one of truly rational organisation. Consider what Lukács might mean by this ‘law’ of the unconscious.

6. Teubner writes of the Credit Crunch:

“In order to understand the recent global financial crisis, we should not rely on factor analysis alone. Instead, we should look for the underlying self-destructive growth compulsions of information flows – in other words, for phenomena of collective addiction.

…

The definition of individual addiction – compulsive engagement in an activity despite lasting negative consequences – must be rethought for social systems in general, and for collective actors in particular. Which ‘addiction mechanisms’ are responsible for the fact that the autopoietic self-reproduction of a social system through the recursivity of system-specific operations reverts into a communicative compulsion to repetition and growth, bringing self-destructive consequences in its wake?”

Teubner is driving at the moment when a healthy ‘systemic’ desire to preserve through growth metastasises into cancerous over-growth and collapse. Consider which ‘addition mechanisms’ might be responsible and suggest how they might be restrained.

7. In their Anti-oedipus-capitalism and schizophrenia, Deleuze and Guattari consider the apparent difference between the ‘molar’ structures of states, institutions, techniques, and the ‘molecular’ world of singular organisms, and write:

“…when the connections [of single subjects] become global and specific…then desire does not need to project itself into these forms that have become opaque. These forms are immediately molar manifestations, statistical determinations of desire and of its own machines. They are the same machines (there is no difference of nature): here as organic, technical or social machines apprehended in their mass phenomenon, to which they have become subordinated; there, as desiring-machines apprehended in their submicroscopic singularities that subordinate the mass phenomena. That is why from the start we have rejected the idea that desiring machines belong to the domain of dreams or the Imaginary…” (Anti-Oedipus p.287)

This is thus a direct attack on an atomic unconscious in favour of a pre-individual social field which generates e.g. economic institutions from out of itself, but which is never exhausted in this generation. Nevertheless, the molar constructions are said to immediately subordinate the desiring-machines. Discuss the nature of this dialectic, and consider how it responds to Simmel’s theory of reification, which some have described as ‘tragic’.

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READINGSTeubner, G., ‘A Constitutional Moment? The Logistics of ‘Hit the Bottom’, in Kjaer, PF. & Teubner, G. (eds.) (2011), The Financial Crisis in Constitutional Perspective: The Dark Side of Functional Differentiation , Hart Pub., Oxford

Simmel, G. (2004) The Philosophy of Money (3rd ed.), Routledge, London, Ch.1 ‘Value and Money’ pp.56-99 and 117-128.

FURTHER READINGSBalibar, É., (1992). ‘A Note on 'Consciousness/Conscience' in the Ethics’ 8 Studia Spinozana 37–53.

________ (1997) ‘Spinoza: From Individuality to Transindividuality’ Band 71 von Mededelingen vanwege het Spinozahuis, Eburon, Netherlands

Deleuze, G. & Guattari, F., (2000) Anti-Oedipus: capitalism & schizophrenia, Athlone Press, London, Ch.3 ‘Savages, barbarians, civilised men’ part 5 (pp.184-192) and parts 9-10 (pp.222-262).

Kant, I., (1997) Critique of Practical Reason, CUP, Cambridge, the footnote defining ‘desire’ to 5.8.

Lukács, G. ‘Zur Soziologie des modernen Dramas’, 38 Archiv für Sozialwissenschaft und Sozialpolitik 283, pp.303–45, 662–706.

________ (1915) ‘Zum Wesen und zur Methode der Kultursoziologie’, 39 Archiv für Sozialwissenschaft und Sozialpolitik 216.

________ (1971) History and class consciousness, Merlin Press, London ‘Reification and the consciousness of the proletariat’ p.83ff.

Marx, K. (1968) Capital I, Penguin London, Ch.1.4 (pp.163-177) ‘The fetishism of the commodity and its secret’

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SEMINAR 10 – FINANCIAL REGULATION, SUPERVISION, AND CONTROL IN THE EU CONTEXTINTRODUCTION

“For you...anything. I am going to go 78 and 92.5. It is difficult to go lower than that in threes, looking at where cash is trading.

In fact, if you did not want a low one I would have gone 93 at least.”

(Barclay’s LIBOR rate submitter6)

In this seminar we are going to look at the concept of regulation and I am going to introduce you to (a) the regulation of market abuse in the context of the LIBOR-fixing scandal, and (b) the framework of banking supervision (Basel Accords). The regulatory framework is much wider than these two important topics, but I have chosen them to highlight a critical regulatory black hole concerning the trade in loan participations. Consider the financial metamorphoses of a loan:

[1. making of loan] [2.a syndication or] [2.b possible securitisation] [3. issue of securities]

Stages 1 and 3 are very heavily regulated. Stages 2.a and b, very much less so. In fact there are no laws or regulations specifically targeting the trade in loan participations or the money used to fund those loans. To the extent regulations and criminal laws apply, they must be cobbled together from either criminal statutes of general application (e.g. fraud) or read across from other regulatory contexts with only a limited degree of success (market abuse). In short, what goes into financialisation and what come out of its processes are regulated, but the twilight world between is almost hors la regulation if not exactly hors la loi.

Compare this with the situation in equity finance, where the Listing Rules in the UK for example require a great degree of public disclosure about businesses. There is an argument to be made that the debt boom

6 §64, Financial Services Authority Final Notice 122702 to Barclays Bank Plc dated 27 June 2012.Page | 49

of 1990-2007 was partly assisted by the increasing regulation of equities in the light of multiple stock market scandals (cf. the UK’s various corporate governance codes), which may have nudged capital flows to prefer the less regulated debt-based method of financing businesses. The Federal Reserve Bank of New York has noted that the decline in listings on stock exchanges is general across competitor markets of New York (citing in particular the stringent disclosure requirements of the U.S. Sarbanes-Oxley legislation), while capital markets have been growing, especially the Eurobond markets.7

Therefore, to situate the two specific regulatory elements on which we will focus, I place them within the following list of the kinds of regulatory control exercised in financial law:

1. Public – internationala. The international organisations, such as the IMF and World Bank, which you may have

studied in other Modules of this LLM;b. Finance-specific boards and committees of the above, including:

i. The Basel Banking Supervision Committee of the Bank for International Settlements;

ii. The Financial Stability Forum, and Financial Action Task Force, both set up by the G7, the former to improve coordination of international regulation, the latter to deal with money laundering and terrorist financing.

2. Public – national (and EU)a. Criminal law (such as laws against fraud and insider trading, cf. s.397 Financial Services

and Markets Act 2000 (FSMA));b. Regulatory offences (such as market abuse s.118 FSMA, which allows criminal-like

punishment e.g. fines);c. Regulation of market entry, namely:

i. licensing of market participants as ‘approved’;ii. regulation of activities (marking out certain activities as illegal if not carried out

by ‘approved persons’, and specifying the manner of execution of these activities);

d. Regulation of disclosure (e.g. the Prospectus Directive 2003);e. Regulation of business conduct (cf. Conduct of Business Sourcebook);f. Micro-prudential regulation of capacity to withstand economic shocks (cf. Prudential

Sourcebook); g. Macro-prudential regulation of whole sectors. Prior to 2008 the legislative focus had

been on (f) above, based on the assumption that if every actor behaved properly, then the whole system would behave properly. As we saw earlier, this assumption is false; systemic crisis may occur precisely because of good behaviour. Macro-prudential regulation in this context focuses on ‘financial stability’ in general, for example identifying a build-up of risk in a particular market such as residential mortgages in the UK.

h. Macroeconomic – this is practically the most important. I am referring to the central bank as gatekeeper to the money market and lender of last resort. Central banks exert a huge

7 Peristiani, S. ‘Evaluating the Relative Strength of the U.S. Capital Markets’ (2007) 13(6) Current Issues in Economics and Finance, Federal Reserve Bank of New York

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amount of ‘soft’ power simply through the unspoken threat of cutting off the flow of capital to credit institutions.

i. The civil law. It should not be forgotten that parties affected by wrongful conduct may have claims in the law of obligations or the law of trusts. Of course, it is a question of private will and capacity to pursue such claims.

3. Private:a. Self-regulation e.g. the British Banking Association sets out codes and guidance for its

members;b. licensing of entry to a market (exchanges tend to be private companies and so have a

right of refusal);c. standard-setting organisations. These are private entities which set benchmarks which

the market expects participants to follow if they are to conclude deals. For example:i. the International Accounting Standards Board issues the IFRS accounting

standards;ii. the Loan Market Association issues the standard London-form of credit

agreement;iii. the British Banking Association until recently set the LIBOR rate, until it lost

credibility; andiv. the rating agencies, who will not only assess economic quality (a mode of

regulation in itself) but will expect what they rate (e.g. securities) to be delivered to them in a ‘market standard form’ if they are to be considered ‘safe’.

Note that many of these areas overlap, with some public regulations relying on private and/or international institutions to fill in the gaps e.g. disclosure rules refer to supply of accounts in accordance with Generally Agreed Accounting Principles (GAAP) or IFRS.

Basel Accords on banking supervisionHere I just propose to provide some historical background for the purposes of the seminar’s discussion of banking supervision. Since 1988 capital requirements have been a feature of international financial regulation, when the Basel Committee on Banking Supervision adopted the Basel Accord, now known as Basel I. While states had long before set minimal capital and other requirements for banks in order to ensure they could withstand various risks, Basel I was an attempt to harmonise standards with respect to international credit institutions. It seems that in order to attain acceptability and widespread adoption, Basel I set its bar very low and was crude; for example it treated the risk of all sovereign debt as equal. Basel I was adopted by the US and more than 100 other countries.

In order to build on the success of Basel I, the Basel Capital Accord was adopted in 2004-05 (Basel II), and in the EU it became law via the Capital Requirements Directive 2006 (CRD I). In the UK CRD I was implemented via the FSA’s General Prudential Sourcebook (GENPRU) and the Prudential Sourcebook for Banks, Buildings Societies, and Investment Firms (BIPRU).

Basel II sets out three pillars, of which the first is arguably the most important:

• Pillar 1 – minimum capital requirements with respect to credit, market, and operational risk;• Pillar 2 – supervisory review (including ensuring internal procedures); and

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• Pillar 3 – market discipline (disclosure rules).

I will work through the basic ideas of Pillar 1 in the seminar with you.

In the Credit Crunch of 2008-09 Basel II proved, shall we say, inadequate, if not positively crisis-inducing. As the FSA has noted8 there was immediate impetus to develop what is known as Basel III and which is in the process of staged agreement and implementation as we speak. The Basel III proposals have sought to strengthen the regulatory regime applying to credit institutions in the following areas:

• enhancing the quality and quantity of capital;• strengthening capital requirements for counterparty credit risk (and in CRD III for market risk)

resulting in higher Pillar I requirements for both;• introducing a leverage ratio as a backstop to risk-based capital;• introducing two new capital buffers: one on capital conservation and one as a countercyclical

capital buffer; and • implementing an enhanced liquidity regime through the Net Stable Funding Ratio and

Liquidity Coverage Ratio.

Already a CRD II (differentiating advanced levels of monitoring) and CRD III (tightening the rules, including re securitisations) were implemented during 2010 and 2011 respectively. The remaining Basel III proposals are a long-term package of changes that commenced on 1 January 2013 and, based on the Commission’s timetable, the transition period is expected to run until 2021.

The Basel III proposals will be implemented into EU law through changes to an existing CRD – referred to as CRD IV. CRD IV comprises an EU Regulation and an EU Directive (the latter implemented through national law). This is a key instrument through which the Commission intends to introduce substantive parts of the new European supervisory architecture, including the development of the Single Rule Book for financial services. But note that responsibility for supervisory oversight has changed somewhat: the European Central Bank now has a dual function of ensuring monetary and financial stability, and as part of the latter its Single Supervisory authority oversees, with technical guidance from the European Banking Authority, compliance with CRD IV.

OBJECTIVES• To consider the concept of regulation as opposed to law, and critique regulation’s claims to be

appropriate to its tasks;• To be introduced to the Basel II and proposed Basel III banking supervision frameworks, within

the context of the Credit Crunch;• To conclude this Module with a general discussion of financial law.

DISCUSSIONPART 1 – REGULATION AND SUPERVISION

1. What is regulation as opposed to law?2. Consider Singh & Labrosse’s paper:

a. Who are the different actors in a financial crisis and why?

8 FSA ‘The Basel Accord and Capital Requirements Directive’ (2011) archived at http://www.fsa.gov.uk/about/what/international/basel.

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b. What is the difference between and macro- and a micro-prudential outlook?c. With whom does primary responsibility for crisis management reside in your jurisdiction?

Do you agree with this? Why?3. In this Module you will hopefully have been introduced to the complexities of financial law,

and will have an idea about how much time and thus money must be expended in attempting to regulate the market and understanding these regulations. Consider the effect this has on:a. market competition;b. the set of people capable of becoming regulators (and for that matter academics

specialising in financial law).4. Following my explanation of the Basel bank supervision framework, generally discuss whether

capital and liquidity ratios will prevent another financial crisis, with reference to the concept of systemic-risk or ‘Too Big to Fail’.

5. As we have seen, Basel II was pro-cyclical, and Basel III has instituted a counter-cyclical regime. This is part of a fashion for ‘dynamic’ legal mechanisms whereby rules change over time with conditions. Is such a development desirable; is it even practical?

6. Discuss your own ideas about how to deal with the current global conjuncture.

PART 2 – CONCLUSIONThe aftershocks from the Credit Crunch are continuing to shake financial law. For the remainder of this final seminar I would like us to conclude by applying what we have learnt to recent crises, scandals, and developments in the financial world. Please be prepared to propose for consideration and discuss current financial, economic, and political affairs across the world.

READINGSSingh, D. & LaBrosse (2012) ‘Developing a Framework for Effective Financial Crisis Management,’ OECD Journal: Financial Market Trends, Vol,2011/2 available at http://www.oecd-ilibrary.org/docserver/download/2711021ec008.pdf?expires=1418132450&id=id&accname=ocid195745&checksum=281A79B6653A932165DF53860A01ED13

FURTHER READINGSAkinbami, F. ‘Is meta-regulation all it’s cracked up to be? The case of UK financial regulation’ (2013) 14(1) J. Bank. Reg. 16-32

Crotty, J. ‘Marx, Keynes and Minsky on the instability of the capitalist growth process and the nature of government economic policy’, in Bramhall D. & Helburn S. (eds), (1986) Marx, Keynes and Schumpeter: a centenary Celebration of Dissent, Armonk, M.E. Sharpe, New York

Davis, E.P. (1995), Debt, Financial Fragility and Systemic Risk, Oxford University Press, London.

De Brunhoff, S. (1976), The State, Capital and Economic Policy, Pluto Press, London.

Dickens, E., ‘A Political-Economic Critique of Minsky’s Financial Instability Hypothesis: the case of the 1966 financial crisis’, (1999) 11(4) Review of Political Economy 379-398.

Dorn, N. ‘Lehman – lemon: “too connected to fail as a policy construct’ (2012) 6(4) L. Fin. Mar. R. 271-283

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Minsky, H., ‘Can ‘It’ Happen Again?’ in D.Carson (ed.), (1963) Banking and Monetary Studies, Richard D. Irwin. Homewood, Illinois.

Marx, K. (1981) Capital III, Ch.34 ‘The Currency Principle and the English Bank Legislation 1844’ provides a fascinating insight into what can happen when contradictory monetary and supervisory policies are brought under one roof without adequately thinking through the legal structuring and conflict resolution mechanisms. Compare with the current plans for the Bank of England.

Mooslechner P., Schuberth H., Weber, B. (eds,) (2006) The Political Economy of Financial Market Regulation: The Dynamics of Inclusion and Exclusion, Edward Elgar Publishing Ltd., London

Scott HS. ‘Reducing systemic risk through the reform of capital regulation’ in Cottier et al. (eds) International law in financial regulation and monetary affairs, OUP, Oxford

Stigler, G.J., ‘The theory of economic regulation’, (1971) 2(1) Bell Journal of Economics and Management Science 3-31

Financial Services Authority Final Notice 122702 to Barclays Bank Plc dated 27 June 2012: http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf

Turner, A. (2009) The Turner Review: A regulatory response to the global banking crisis , FSA, London available at: http://www.fsa.gov.uk/pubs/other/turner_review.pdf

 

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ABBREVIATIONSABS Asset-Backed SecurityBasel I Basel Capital Accord of BIS of 1988Basel II Basel Revised Capital Accord of 2005BIS Bank for International SettlementsBoE Bank of England, the UK's central bank.CDO Collateralised Debt ObligationCMBS Commerical Mortgage-Backed SecurityCoMI Centre of Main Interest - see Seminar 7CPDO Constant Proportion Debt ObligationCRA Credit Rating Agency, especially in EU jargonCRD I-IV EU Capital Requirements Directive ECB European Central BankEFSF European Financial Stability FundESCB European System of Central Banks, coordinated by the ECBESM European Stability MechanismESMA European Securities and Markets AssociationEuribor Euro Interbank Offering RateFCD EU Financial Collateral Directive (2002/47/EC)Fed The United States Federal Reserve Bank - a central bankFiscal Compact Another name for the TSCGFSA Financial Services Authority (UK)FSMA Financial Services and Markets Act 2000IBOR Interbank Offering Rate - the averaged cost of funds in a money marketIMF International Monetary FundISDA International Swaps and Derivatives Association, Inc.LIBOR The London Interbank Offering RateMAD EU Market Abuse Directive 2003 (2003/6/EC)MiFID EU Market in Financial Instruments Directive 2004 (2004/39/EC)NCB National Central Bank which is a member of the ESCBOECD Organisation for Economic Co-operation and DevelopmentOTC Over the counter i.e. A financial instrument not traded on a formal marketPDT Primordial Debt Theory - see Seminar 1Pre-pack See Seminar 7RMBS Residential Mortgage-Backed SecurityS&P The rating agency Standard & Poor'sSEC Securities and Exchange Commission (US)SMP The Securities Market Programme of the ECBSPV Special Purpose Vehicle

TARGET2

TRS Total Return SwapTSCG Treaty on Stability, Coordination and Governance in the European Monetary Union

An interbank payment system for the real-time processing of cross-border transfers throughout the EU. TARGET2 replaced TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) in November 2007

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