1. Gresham’s Law. Centuries ago, Gresham observed that bad money drives out good. He was commenting on currency debasement, but his principle applies to many other human endeavors. For instance, banks that aggressively exploited regulatory capital rules had lower capital costs, and could, and did, use their lower capital costs to drive out competitors who were not as aggressive. Bad banks drove out the good. This perverse result is more common than most would think; regulations designed to thwart bad conduct end up encouraging it. This seems to be an unavoidable failing of any top-down, one-size-fits-all regulatory structure.

     2. Prince’s Law. Just before the bubble burst, former Citigroup CEO Charles Prince memorably observed, “As long as the music playing, you’ve got to get up and dance. We’re still dancing.” Prince was widely criticized for saying this, but I wonder how many of his critics could have, in the midst of one of the greatest credit expansions in history, shut down lending, closed departments, fired employees and put a “gone fishin’” sign on the window. Inertia is one of the most powerful forces in the universe, stoppable only by an equal and opposite force. Too often the equal and opposite force that stops the dancing also crushes the dancers.

     3. Summers’ Law. Larry Summers once wrote a paper criticizing the efficient market hypothesis. Its first lines were: “THERE ARE IDIOTS. Look around.” I start by looking in the mirror. When we try to fix past problems with new regulatory structures that depend, at their center, on the wisdom of regulators, I have to wonder why we think this time it will be different. We seem to think there “were” idiots, when in fact there “are” idiots, something we will prove again, and again, as much to our regret we learn, and re-learn the essential truth in Summers’ Law.

Simpson Thacher survey of recent public M&A deals finds that the dichotomy between PE and strategic buyers is disappearing: optionality for all? Maybe not: the DealProf discusses the recent BankRate deal here, suggesting it may be a new model for PE deals by stripping out acquirer’s optionality. The BankRate deal docs are available here.

Ouch! Executive pays $1.4m HSR fine after his counsel relies on PNO interpretations without calling PNO to confirm they are current. K&L Gates reminds us of the need to talk to the PNO. This may say more about the quality of the PNO’s published interpretations than it does about the quality of the counseling. 

Skadden’s Peter Atkins offers an excellent overview of the corporate governance forest, asks the difficult questions. In doing so he avoids the Wachtellian hysterical hyperbolism that so often clouds this debate.

S&S on the “Cuban Missive Crisis”. I am a sucker for a clever title.

The SEC cracks down on a $197m fraud, in the process raising the question of whether an investor can reasonably expect anything other than fraud when investing in a company called Radical Bunny LLC.

Milbank offers a concise overview of debt exchange offers. My take: hot topic, more common, but still rare because it’s so unwieldy compared to the alternatives and carries a stigma.

A&P article on the jurisdictional basis for the recent Siemens FCPA action: longest “virtually any transaction anywhere in the world, no matter how tangentially (if at all) it touches the US, can give rise to allegations of FCPA violations.” Longest long-arm ever?

O’Melveny memo on HSR filings required by stock grants to directors and officers. This is an oft unspotted issue. The FTC’s way of saying you have too much equity.

Nice survey by GDC of recent NPAs and DPAs with DOJ. Here’s hoping you never need this.

Another helpful survey from GDC: It reviewed bid documents made available under FOIA to figure out how the FDIC chose the winning bidder for BankUnited.

Wisdom from Strine: the “fact that something is cool doesn’t mean a court should decide it.” From Emulex transcript available at Deal Prof.

Michael Lewis on AIGFP. An unexamined crisis is not worth having. What governance model would prevent this? Mulling over this article, I keep thinking of William Goldman’s adage “no one knows anything.”

Is a new “bankslaughter” crime the answer? It is popular to criminalize stupidity, but once you start where do you stop? And it would also criminalize risk.

MoFo treatise on tender offer issues in debt buybacks and exchanges. Appears to be by Dave Lynn.

FINRA provides free bond pricing data for corporate and other issuers. Now those of us without Bloomberg terminals on our desks can check the credit market’s opinion of a company in seconds.

Useful overview from STB of recent indenture-related cases, including Amylin, Petrohawk and BearingPoint.

Helpful overview from DLA of at-the-market offerings. Unlike some current practices memos, this one actually includes a list of recent deals. That should be a required feature in any current practices memo.

FT’s Martin Wolf on why Obama’s White Paper won’t work: Too big to fail = Implicit government guarantee of  debt = Irresistable temptation to amp up the leverage on risky bets.

Davis Polk’s “New Foundations” memo on Obama’s White Paper is nearly as long as the White Paper itself, but it’s the best memo on this I’ve seen so far.

A&O lawyer muses on trusts and their role in the financial crisis. Takes us back to Roman times. My favorite feature: a world map color-coded by the strength of each country’s trust laws. Very cool.

Lowenstein Sandler surveys some recent earn-out cases. Lesson 1: Courts find damages for breaching earn-outs too speculative, so you need to specify liquidated damages. Lesson 2: Earn-outs are really hard to draft, even when the Seller remains in control of the business after closing. Forget about it when Seller leaves at closing. Lesson 3: “A Seller should not agree to an earn-out unless the Seller is willing to accept the risk that the purchase price paid at closing will turn out to be the sole consideration to be received in connection with the transaction.” That last one may be the Golden Rule of Earn-Outs.

You object: “But without equity, they won’t think like owners.” To me, that’s a feature, not a bug. Managers should think like managers. Owners should think like owners. Things get confused when we expect our managers to think like owners and like managers.

But what about incentives? With equity, a manager’s main incentive is to increase the stock price. The problem is, the stock price depends on a lot of variables, many of which are out of the manager’s control. At best, the stock price is just an indirect and distorted reflection of what the manager actually did. At worst, the stock price will have nothing to do with the manager’s efforts, as we’ve seen when market bubbles rewarded the incompetent and market crashes punished the competent. Might as well pay our managers with lottery tickets.

A cash-only compensation system requires us to set incentives the old fashioned way: Figure out what we want our managers to accomplish, and pay them based on what they actually accomplish. This isn’t easy to do well. It requires a good understanding of the business, where it is going, what needs fixing, which achievements are probable, possible and nearly impossible, and how much it’s worth to the company to accomplish these goals. This is the sort of finely-tuned understanding we’d expect a knowledgeable board of directors to have. But many don’t. And others do but aren’t sufficiently  independent of the manager to implement it. And it’s a lot of work. It’s so much easier to load up on the equity and let the stock market sort it out.

Imagine if a CEO paid the heads of his subsidiaries this way. Instead of figuring out what they needed to accomplish and how much that would be worth, and then monitoring their performance throughout the year and adjusting as needed, the CEO just handed them shares in their subsidiary and left them alone, figuring they’d act like owners so everything would work out. I doubt anyone would view that CEO as managing effectively. So why is it okay to manage our CEOs that way?

Equity brings complexity. Complexity brings compensation consultants. That alone should be enough to scare us away from equity. But even worse, equity brings obfuscation. We all know what a dollar’s worth. We never know what equity is worth. This leads to crazy results. Every year there’s a new poster boy for over-compensation, some lucky dog we read about pulling down a nine-figure pay-day. In every one of those cases, I’ll bet, no one actually thought they’d be paying out nine-figures for a year’s work. No, they thought they’d be allocating a mix of X options, Y restricted shares and Z performance units based on some ostensibly scientific formula that, once run through the requisite black box, will magically spit out the right value. Who knew it would all add up like that? If they’d been dealing exclusively in dollars, they would have known. I guarantee that none of them would ever have agreed to write a check for those amounts if they’d been denominated all along in dollars.

Similarly, I feel for the managers who have a great year when the stock market happens to be having a bad year. All their hard work wiped out by the vagaries of the market. That makes no sense. If the manager did valuable work, accomplished what we asked of him, we should pay him for it.

But shouldn’t we pay in equity because it is tax-advantaged? Any tax advantage of equity only matters if it exceeds equity’s other costs. I expect those other costs – distorted incentives, unintended payouts, shareholder dilution – are substantial but rarely factored into the analysis. In any event, tax is subordinate. The goal is to build a sensible incentive structure, not a tax-avoidance scheme.

And we shouldn’t require a cash-compensated manager to invest in our stock, either. The manager is already heavily invested in the company just by being its manager. It is only prudent for him to diversify his holdings away from the company. No one should be forced to put all his eggs in one basket. I expect that forcing our managers to do this is what led some to take irrational, all-or-nothing bets. Which manager do you think is more likely to throw the dice with the company assets: the manager with everything in company stock or the manager who keeps his assets in index funds?

Equity is too often the currency of choice for executive compensation. Last I checked, cash was still legal tender for all debts, public and private, even executive compensation.

Sign of the Times: Weil Gotshal memo questions “blind” contract compliance, says look for opportunities for efficient breach.

Sign of the Times II: Alston & Bird memo on how to draft an effective forbearance agreement.

Goodwin’s thoughtful take on the flaws General Growth’s bankruptcy revealed in the CMBS bankruptcy remote structure, and what can be done differently if the securitization market ever returns.

Katten memo on interesting Delaware case: Does DGCL 142 allow a bylaw that gives stockholders the direct right to remove the CEO and other officers? Makes the SEC’s direct nomination proposal look tame by comparison.

Sure, we may be losing the OCC, OTS and PWG, but with the addition of the CFPA, FCCC, FSOC, NBS and ONI the acronym count will just keep growing.

You can’t tell these all cap players without a scorecard, so to help guide you through the alphabet soup I’ve prepared this Financial Reform Glossary. It deciphers over 75 of the acronyms and other cryptic terms used in the white paper. I hope it injects a little transparency into this process.

Financial Reform Glossary

     1. The term. The term “golden parachute” is intended to convey a certain cushy lavishness. In fact, it makes no sense. A parachute made of gold will drop like a lead balloon. With a golden parachute, you won’t get a soft landing, you’ll plummet to a bone-crushing death. A parachute made of silk, canvas or sail-cloth works much better, but you never hear anyone calling an executive termination arrangement a “silk parachute.”

     2. The kitchen sink lump sum. When an executive gets a golden parachute payment, it is usually reported as one lump sum amount. Outrage ensues. What isn’t reported is that the lump sum invariably includes benefits the executive has already earned, such as deferred compensation and payouts on previously-vested compensation. I’ve even seen an executive’s 401(k) balance included in his publicly-reported golden parachute. Getting paid what you previously earned might be copper or bronze, but it’s not golden. So when we get outraged over golden parachutes, let’s be sure we’re not getting outraged over the golden part, not the fool’s gold.

     3. The ex post view. Golden parachutes are, by definition, paid when an executive leaves. Executives sometimes leave for good reasons, such as selling the company for a good price, but the departures that get our attention are those that are for bad reasons, such as poor performance. So viewed ex post, golden parachutes usually look bad.

     There is an assumption that it is always inappropriate to pay an executive who leaves for poor performance. This is, in fact, something that the newly-proposed Shareholder Empowerment Act of 2009 would ban.

     But when viewed ex ante, sometimes these payments make sense, even for poor performers. For instance, if to lure an executive to our company we need to pay her for benefits she is forfeiting at her old company, we can either reimburse her for them now or, instead, we can offer to pay them only if we terminate her early, even if that termination is because things didn’t work out. We might win that concession from her by convincing her that if things do work out at our company, she’ll make a lot more than she would have at her old company and therefore will still be ahead. But if things don’t work out, and we end up having to pay her for the forfeited benefits, outrage will ensue. And we’ll learn our lesson from the bad PR: Pay her successor up-front, even if it costs us more.

     4. Tax trumps all. I’ve seen golden parachutes attacked because they are not tax-deductible or because an executive’s benefits were grossed-up. There is nothing inherently wrong with doing things that are not tax-deductible or that require a tax gross-up. Just because the government decides something is or is not taxable doesn’t mean we should or should not do it. (Look what happened when we mindlessly piled into tax-advantaged stock options. The civilization may never recover.) So in deciding whether to enter into a golden parachute arrangement, a company should consider all the relevant factors, including the tax costs. If on balance the golden parachute still makes sense, the company should do it.

     5. We’re not tenured professors. A golden parachute may be needed to protect a specific deal, as in the example above. And a golden parachute can be fair when executives, well on their way to achieving a multi-year performance target, have their company sold out from under them. In situations like that it is hard to begrudge the payment (though we often do). What is easy to begrudge is the automatic golden parachute built on the presumption that by reaching the executive suite you’ve somehow earned tenure, especially when your company treats other employees as terminable at-will. It’s as if the executive suite moved to a northern European welfare state, leaving the rest of the company to toil away in Bangladeshi sweat-shops. There are situations in which golden parachutes make good sense, but these sorts of parachutes give them all a bad name.

I get the sense that a lot of us have in mind a Platonic ideal form of corporate governance against which we measure individual companies, sorting those deviating the least from the ideal into the “good” category and those deviating the most into the “bad” category.

But is there one Platonic ideal form of governance for all companies?

I think most would agree that the ideal governance for private companies is not the same as the ideal governance for public companies. That one’s easy.

Many would agree that the ideal governance at a distressed or failing company differs from other companies, as distressed and failing companies are usually being run for the benefit of, and/or under contractual restrictions imposed by, their creditors.

I expect that most would agree that the ideal governance for a public company controlled by a large shareholder differs from the ideal governance for a company with more widely dispersed voting power, if for no other reason than the ownership/management agency problem is less acute (or, if you prefer, different) at a controlled company.

Many companies are run for the long-term, but not all. Those that are being run for a quick sale, such as PE- or VC-backed portfolio companies, probably have a different ideal governance.

I would suggest that the ideal governance at companies in mature industries differs from the ideal governance at companies in immature industries, if for no other reason than management entrenchment is most likely to be a concern when the company itself is entrenched.

Similarly, I have a sense that slow-and-steady companies with strong economics may be better served by a democratic style of governance while volatile companies with high risk/reward opportunities may be better served by an autocratic dictatorship style of governance. In the latter case we may need the strong leadership of a visionary CEO to lead us into the promised land, while in the former case we’ve already arrived and just want to be sure the CEO doesn’t screw it up. The Great Man/Great Ham divide, if you prefer.

So, when we say a company’s governance is good or bad, we should also have to say which of the many Platonic ideal forms of governance we are measuring the company against.

Mayer Brown explains how a Delta Air earnings call led to an antitrust class action.

The Washington Post profiles SEC Chair Mary Schapiro. My main takeaway: her job is all about brand management.

Nice overview from MoFo on 3(a)(9) exchange offers.

“A Simple Theory of the Financial Crisis:” Short and thought-provoking. Such as: “Market participation involves a selection bias in favor of the over-confident.”

And finally, to as you wait for the SEC to finally finish its shareholder access proposing release, here’s a shareholder access haiku to keep you company:

Green shoots of access,

But clouds gather. What’s that chill?

Lipton’s tea party.