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Agency Authority at the Corporate Apex

The following question was posted over at one of the LinkedIn groups I follow:

... does the Chairman in a shareholding company have the right to give power to someone else to sign in the contract and documents of the company, who is usually gives him this authority?

As I explain in Agency, Partnerships & LLCs:

Corporate employees, especially officers, are agents of the corporation.[1] Curiously, however, neither an individual director nor even the board as a whole is regarded as agents of the corporation.[2] An individual director, as such, “has no power of his own to act on the corporation’s behalf, but only as one of the body of directors acting as a board.”[3] As for the board, when it acts collectively, the board functions as a principal rather than as agent. Unless shareholder approval is required, after all, the act of the board is the act of the corporation. Consequently, the board can be said to personify the corporate principal.

In my now out of print book Corporation Law and Economics, I addressed the issue in more detail:

Suppose a newly appointed CEO wishes to hire an Administrative Assistant. If the CEO signs an employment contract with a prospective assistant, purporting to act on behalf of the corporation, will that contract be binding on the firm? The answer to that question depends on whether the CEO has authority as that term of art is used in agency law. Accordingly, we must (briefly) digress into agency law and the authority of agents.

1. The agency relationship defined

The agency relationship, in its broadest sense, includes any relationship in which one person (the agent) is authorized to act on behalf of another person (the principal). More specifically, an agency relationship arises when there is a manifestation of consent by the principal that the agent act on the principal’s behalf and subject to the principal’s control, and the agent consents to so act.[1] The requisite manifestation of consent can be implied from the circumstances, which makes it possible for the parties to have formed a legally effective agency relationship without realizing they had done so. Corporate employees, especially officers, are generally regarded as agents of the corporation.[2]

Curiously, neither an individual director nor even the board as a whole are regarded as agents of the corporation.[3] In a sense, when the board acts collectively, it functions as a principal in agency law terms. Unless shareholder approval is required, after all, the act of the board is the act of the corporation. As to the individual director, recall that he “has no power of his own to act on the corporation’s behalf, but only as one of the body of directors acting as a board.” [4]

2. Authority of agents

An agent may have either actual, apparent, or inherent authority to enter into contracts on behalf of the corporate principal. Likewise, in some settings, the corporation may be estopped from denying the authority of its employees. Determining whether an agent had the requisite authority in any given situation can be challenging. The differences between the various categories of authority are complex and subtle. In addition, many of the categories overlap—it is not at all uncommon for more than one type of authority to be present in a single transaction. Finally, the courts are not always precise when using labels. For example, estoppel and inherent authority are often called apparent authority. For our purposes, however, it is critical for you to understand that the legal consequences of an agent’s actions do not depend on the type of authority at hand. For purposes of determining whether or not the corporate principal is bound by the contract vis-à-vis the third party to the transaction, authority is authority and the different types of authority are essentially irrelevant.

Why then does the law distinguish between different categories of authority? A former student of your author claimed that it was a deliberate attempt to confuse people, which called to mind the old joke—”just because you’re paranoid doesn’t mean you aren’t being followed.” As Justice Holmes once observed, albeit in a different context, “common sense is opposed to the fundamental theory of agency.”[5]

It will be helpful to focus for a moment on the two basic types of authority: “actual authority” and “apparent authority.” Consider the following hypothetical: Pam owns Whiteacre. Alan is her real estate broker and, indisputably, her agent. Ted is an outsider who claims that Alan entered into a contract on Pam’s behalf to sell Whiteacre. Suppose Ted seeks to prove the existence of authority by evidence relating to communications between Pam and Alan, such as a letter from Pam to Allen in which Pam directed Alan to sell Whiteacre. In this instance, Ted is attempting to establish the existence of actual authority. In contrast, suppose Ted seeks to establish authority by evidence relating to communications from Pam to Ted. Suppose Pam sent Ted a letter in which she said that she had ordered Alan to sell Whiteacre. In this case, Ted is trying to establish apparent authority. Importantly, the contract will be no less binding if Ted proves apparent authority rather than actual. The difference between actual and apparent authority thus arises out of the way in which Ted seeks to prove that Alan was authorized to enter into the contract. In other words, the different categories of authority really are ways of classifying the proof the plaintiff must offer to bind the principal to the contract.

Actual authority exists when the agent reasonably believes the principal has consented to a particular course of conduct.[6] Actual authority can be express, as where the principal instructs the agent to “sell Whiteacre on my behalf.” In the corporate context, express actual authority is usually vested in officers by a resolution of the board and/or a description of the officer’s duties set forth in the bylaws.[7] Actual authority can also be implied, however, if the principal’s acts or conduct are such the agent can reasonably infer the requisite consent. An agent has incidental actual authority, for example, to use all means reasonably necessary to carry out a particular result expressly mandated by the principal. A pattern of acquiescence by the board in a course of conduct may also give rise to implied actual authority to enter into similar contracts in the future.[8]

A contract entered into by an agent, purportedly on the principal’s behalf, can be binding even if the agent lacks actual authority. Apparent authority exists where words or conduct of the principal lead the third party to reasonably believe that the agent has authority to make the contract.[9] Of particular importance with respect to the authority of corporate officers is the concept of apparent authority implied by custom. Suppose the board of directors instructed the CEO not to hire an assistant. The CEO thus lacked actual authority. The CEO nonetheless signs a prospective assistant to an employment contract that purports to be binding on the corporation. Is it binding? If the assistant (the third party) knew that that the corporation had placed the CEO in that position and its was customary for CEOs to have authority to hire assistants, the CEO will have apparent authority by virtue of that custom and the contract will be binding.[10] The economic rationale for this rule should be self-evident—it is the basic concept of the cheaper cost avoider. Sound social policy dictates that the loss be put on the party who could have most cheaply avoided it. Here the corporation’s position, by definition, is idiosyncratic. Most firms let their CEOs hire assistants. Its cheaper for the few idiosyncratic principals to take precautions than for all job applicants to be obliged to take precautions.

3. Authority of corporate officers

Most of the case law on the apparent authority of corporate officers relates to the powers of presidents. Corporate presidents are regarded as general agents of the corporation vested with considerable managerial powers. Accordingly, contracts that are executed by the president on the corporation’s behalf and arise out of the ordinary course of business matters are binding on the corporation.[11]

Cases dealing with the authority of subordinate officers are much rarer. As to vice presidents, a number of (mostly older) cases hold they have little or no implied or apparent authority to bind the corporation. Accordingly, they have only such authority as is expressly conferred on them in the bylaws or by board resolution.[12] The corporate secretary is assumed to be the custodian of the corporation’s books and records. Accordingly, the secretary has actual authority to certify those records. Otherwise, however, the secretary has no authority other than that conferred on him by the bylaws or board resolutions.[13]

An important line of cases limits the implied and apparent authority of corporate officers to matters arising in the ordinary course of business. In the leading decision of Lee v. Jenkins Bros., the Second Circuit held:

The rule most widely cited is that the president only has authority to bind his company by acts arising in the usual and regular course of business but not for contracts of an “extraordinary” nature. . . .

Apparent authority is essentially a question of fact. It depends not only on the nature of the contract involved, but the officer negotiating it, the corporation’s usual manner of conducting business, the size of the corporation and the number of its stockholders, the circumstances that give rise to the contract, the reasonableness of the contract, the amounts involved, and who the contracting third party is, to list a few but not all of the relevant factors. In certain instances a given contract may be so important to the welfare of the corporation that outsiders would naturally suppose that only the board of directors (or even the shareholders) could properly handle it. It is in this light that the “ordinary course of business” rule should be given its content.[14]

As Lee suggests, there is no bright line between ordinary and extraordinary acts. It seems reasonable to assume, however, that acts consigned by statute to the board of directors will be deemed extraordinary.[15] Consequently, for example, the eight acts specified in MBCA § 8.25(e) that a board of directors may not delegate to a committee doubtless are extraordinary in nature. (Of course, once the board has made its decision with respect to an extraordinary matter, implementation of that decision can be delegated to officers.)

In general, when one must decide a particular action is ordinary or extraordinary, the following factors seem especially pertinent:[16] How much of the firm’s assets or earnings are involved? Suppose a corporation running a video tape rental store has $10,000 in cash available. A decision to spend $50 to buy a new tape would be ordinary, a decision to spend $5,000 to establish a line of compact discs for rent probably would be regarded as extraordinary. How much risk is involved? A decision to buy one tape is not very risky and would be an ordinary action, while a decision to open a new store might be very risky and therefore extraordinary. A decision to buy tapes on installment where the purchase price is paid off in three months probably would be seen as ordinary. A decision to take out a thirty year loan probably would be seen as extraordinary. How long will the action have an effect on the corporation? How much would it cost to reverse the decision? A decision to open a new store might be very expensive to reverse, as the corporation might not be able to get out of the lease if things went bad. Such a decision thus would be extraordinary.

As to most matters falling in the gray area between ordinary and extraordinary, a small host of decisions could be cited on either side.[17] There is relatively little consistency of outcome in this area. Courts are divided, for example, as to whether such basic matters as filing a lawsuit[18] or executing a guarantee of another corporation’s debts are ordinary or extraordinary.[19] One is tempted to remind them that Emerson’s famous dictum against a fetish for consistency holds only that a “foolish consistency is the hobgoblin of little minds.”

How should cases falling between the extremes be resolved? Put bluntly, the authority of corporate officers should be regarded as virtually plenary. Only matters expressly reserved to the board by statute, the articles of incorporation, or the bylaws should be deemed “extraordinary” and, consequently, beyond the scope of senior officers’ authority.

One rationale for this position is suggested by simple statutory interpretation. recall that both the MBCA and Delaware law provide that the business of the corporation “shall be managed by or under the direction of a board of directors.”[20] The use of the disjunctive prior to the phrase “under the direction of” suggests that the statute’s drafters anticipated that the corporation would be managed by its officers with the board mainly exercising oversight authority. Unless a decision is expressly reserved to the board, the statutory language thus contemplates that a corporation may act through its officers subject to review by the board.

This reading of the statute comports with modern board practice. The de facto role of the board in most large public corporations consists of providing informal advice to senior management (especially the CEO) and episodic oversight. An extensive definition of extraordinary acts thus seems a needless formality.

An alternative justification for the proposed rule rests on the costs the existing rule imposes on third parties. Persons who do business with a corporation do so at some peril of discovering that their transaction will be deemed to implicate an extraordinary act and, accordingly, required express board action. An expansive definition of extraordinary matters increases this risk. Transaction costs thus increase in several respects. An expansive variant of the rule creates uncertainty, obliging third parties to take costly precautions. They may insist, for example, on seeing an express authorization from the board. Uncertainty about the outer perimeters of the rule also encourages opportunism by the corporation. If contracts dealing with extraordinary matters are voidable, the corporation effectively has a put with respect to the transaction. Uncertainty as to the enforceability of a contract gives the board leverage to extract a favorable settlement of the third party’s claims.

From Brian Leiter: Loans and the end of the world: legal issues

Loans and the end of the world: legal issues

Reader Ben Schewel shares this handy "Default Clause" just in case (author unknown):

12.7 END OF WORLD.  In the event that the world as known to mankind shall come to an end, whether through natural forces (including, without limitation, plague, drought, earthquakes, hurricanes, and floods), manmade forces (including, without limitation, nuclear or biological war, pollution and global warming), or divine forces (including, without limitation, the Second Coming, the Mayan Cataclysm, and the Rapture, regardless of religious affiliation of Bank or Borrower), then, in such event, all outstanding principal, interest, fees and charges remaining under the Loan Documents shall immediately become due and payable to Bank at Bank’s offices or designated shelter, without notice of any kind of character, all such notice being hereby waived by Borrower, and Borrower agrees that the end of the world shall not be deemed or construed to constitute a valid excuse or defense to payment; provided further, that in the event that the end of the world shall be divinely inspired, then, in such event, Borrower further agrees that Bank shall be aligned with forces of goodness and light, and Borrower shall be aligned with the forces of evil and darkness, and that Borrower shall be cast into a pit of fire until all sums owing under the Loan Documents, including attorney fees, shall be fully paid; provided further, that in the event that Borrower should be reincarnated subsequent to the end of the world, whether as an animal, vegetable or mineral, then, in such event, Bank shall have and possess, in addition to the collateral stated in the Loan Documents, a security interest in all of Borrower’s useful products, including, without limitation, any and all fur, hide, meat, edible portions, medicinal properties, and mineral rights, to further secure the prompt payment of all sums owing under the Loan Documents.  

via leiterlawschool.typepad.com

Reader Ben Schewel shares this handy "Default Clause" just in case (author unknown):

12.7 END OF WORLD.  In the event that the world as known to mankind shall come to an end, whether through natural forces (including, without limitation, plague, drought, earthquakes, hurricanes, and floods), manmade forces (including, without limitation, nuclear or biological war, pollution and global warming), or divine forces (including, without limitation, the Second Coming, the Mayan Cataclysm, and the Rapture, regardless of religious affiliation of Bank or Borrower), then, in such event, all outstanding principal, interest, fees and charges remaining under the Loan Documents shall immediately become due and payable to Bank at Bank’s offices or designated shelter, without notice of any kind of character, all such notice being hereby waived by Borrower, and Borrower agrees that the end of the world shall not be deemed or construed to constitute a valid excuse or defense to payment; provided further, that in the event that the end of the world shall be divinely inspired, then, in such event, Borrower further agrees that Bank shall be aligned with forces of goodness and light, and Borrower shall be aligned with the forces of evil and darkness, and that Borrower shall be cast into a pit of fire until all sums owing under the Loan Documents, including attorney fees, shall be fully paid; provided further, that in the event that Borrower should be reincarnated subsequent to the end of the world, whether as an animal, vegetable or mineral, then, in such event, Bank shall have and possess, in addition to the collateral stated in the Loan Documents, a security interest in all of Borrower’s useful products, including, without limitation, any and all fur, hide, meat, edible portions, medicinal properties, and mineral rights, to further secure the prompt payment of all sums owing under the Loan Documents.  

Behrens & Hitchcock Petite Sirah Spring Mountain District (Napa Valley) 2002

I served this with a beef, barley, and mushroom stew for which it made a very nice match. It's not a particularly complex wine, which meant it didn't fight with the complexly flavored stew.

At age 10, it's thrown a lot of flighty, light sediment, which meant that decanting was a royal pain in the proverbial beast of burden. I ended up having to decant the bulk of it through an unbleached coffee filter, which is always a last resort. (I decanted it about 75 minutes before service.)

Despite the considerable sediment it's thrown, the wine remains an incredibly deep and opaque purple-black with no signs of red even at the very edge of the rim. The amount of anthocyanidins in this wine must be off the chart.

On the palate, this is a big, high alcohol, high extract wine that has an almost port-like mouth feel. Blackberry and blueberry.

Grade: B/B+

The Myth of Fingerprints

That some Republicans are willing to see higher taxes for the sake of anti-tax purity is topsy-turvy enough. Adding to the vertigo: The Republicans (inside and outside the House) who fret about blurring the party’s definition are the ones who are doing most to blur it. They are the ones who are, in most cases, accusing Republican leaders of seeking to raise taxes when they are actually trying to cut taxes as much as they think possible — cut them, that is, from the levels the law already has in place for 2013. They’re the ones who are accusing most House Republicans of  “caving” to the Democrats, even as some of them prefer that the Democrats get their way entirely. That’s where the convoluted politics of this moment have led us.

via www.nationalreview.com

LIBOR, UBS, and the recurring problem of institutional versus individual wrongdoing

A post at Global Corporate Law blog poses a perennial question:

UBS admitted to fixing Euribor and Tibor – interest rates (financial benchmarks) set by lenders in the Eurozone and in Japan.

UBS has stated that it has agreed to pay fines to financial watchdogs in Europe and the US. These include:

• $1.2bn or £740m in combined fines to the US Department of Justice (DoJ) and theCommodities Futures Trading Commission
• £160m to the FSA
• 59m Swiss francs or £40m to Switzerland’s Financial Market Supervisory Authority

As a lump sum, the above penalties comprise the second largest fine to be imposed in banking history: the first largest, of course, was when HSBC opted to pay US $1.9 billion authorities to settle allegations of money laundering.

But do these fines go far enough?

Not really. Surely, the people, these modern day Robert Clives, behind all this rigging and manipulation should be charged under the criminal law and sentenced accordingly.

I have pretty strongly held views that in these cases institutional liability punishes the wrong people. In an important article, Vicarious Liability for Fraud on Securities Markets: Theory and Evidence, 1992 U. Ill. L. Rev. 691, Jennifer Arlen and William Carney, tackled this question with regard to corporate liability for securities frauds committed by agents of the firm. As they demonstrate, when a corporation pays a large fine the resulting balance sheet effect is to reduce assets on the left side. On the right hand side, liabilities remain constant. To offset the decline in net assets, accordingly, shareholder equity must fall. As a result, the effect of civil monetary liability is to replace "one group of innocent victims with another: those who were shareholders when the fraud was revealed. Moreover, enterprise liability does not even effect a one-to-one transfer between innocent victims: a large percentage of the plaintiffs' recovery goes to their lawyers. Finally, enterprise liability may injure innocent people in addition to shareholders. For example, employees are injured if enterprise liability sends a firm into bankruptcy or causes it to lay off employees." Id. at 719.

The case for corporate criminal liability is even weaker. The principal functions of criminal liability are retribution and deterrence. As I have argued elsewhere in the context of corporate reparations:

A corporation is not a moral actor. Edward, First Baron Thurlow, put it best: "Did you ever expect a corporation to have a conscience, when it has no soul to be damned, and nobody to be kicked?" The corporation is simply a nexus of contracts between factors of production. As such, there is no moral basis for applying retributive justice to a corporation - there is nothing there to be punished.

So who do we punish when we force the corporation to pay reparations? Since the payment comes out of the corporation's treasury, it reduces the value of the residual claim on the corporation's assets and earnings. In other words, the shareholders pay. Not the directors and officers who actually committed the alleged wrongdoing (who in most of these cases are long dead anyway), but modern shareholders who did nothing wrong. Retributive justice is legitimate only where the actor to be punished has committed acts to which moral blameworthiness can be assigned. Even if you assume the corporation is still benefiting from alleged wrongdoing that happened decades or even centuries ago, which seems implausible, the modern shareholders are mere holders in due course. It is therefore difficult to see a moral basis punishing them. They have done nothing for which they are blameworthy.

As always in corporate accountability, both efficiency and morality require that punishment be directed solely at those who actually commit wrongdoing. In this context, it would be the directors, officers, or controlling shareholders who actually enslaved people. Since they're long dead, there is nobody left who properly can be punished.

That conclusion was influenced in part by the Arlen and Carney paper, which argues for imposing liability on the corporation's agents:

... we find that there is little reason to believe that enterprise liability is the superior rule from the standpoint of deterrence, and there are many reasons to suspect the contrary. The deterrent effect of the available monetary sanctions under agent liability probably exceeds the deterrent effect of enterprise liability because a civil judgment against an agent hurts his reputation more than does a sanction imposed by the firm in private. Moreover, the threat that sanctions will be imposed appears to be greater under agent liability. Agent liability places the responsibility of sanctioning wrongful agents with the victims, who have no reason not to proceed against them and have every reason to proceed. Enterprise liability, by contrast, places the responsibility of proceeding against the wrongful agents with the firm, and thus with the very agents (and their close associates) most likely to have committed fraud. Moreover, agent liability in effect enlists insurance companies as corporate monitors and disciplinarians, thereby eliminating the agency costs associated with firm managers monitoring and disciplining each other. Furthermore, the judgment proof problem under agent liability can be completely eliminated if, in addition to civil liability, the government imposes sufficient nonmonetary criminal penalties on agents, such as imprisonment.

Although they are discussing civil liability, their comments on deterrence seem equally applicable to the criminal law.

Ridge Estate Cabernet Sauvignon (Santa Cruz Mts.) 2008

This wine is sourced from the same vineyards as Ridge's Monte Bello wine, but tends to be much more approachable in its youth. It's sort of analogous to the second wine of a Bordeaux chateau. Prior to the 2008 vintage, these wines were bottled as Santa Cruz Mountains Cabernet Sauvignon.

The 2008 is a delicious wine. It barely qualifies as a varietal Cabernet Sauvignon, with 75% coming from that grape, 20% Merlot, 3% Petit Verdot, and 2% Cabernet Franc (where's some Malbec?). I smell and taste intense chocolate and mocha java, as well as rich red and black fruits. Lots of cassis, for example. A long finish. Drinkable now but with sufficient structure to support additional aging. Sadly, this was my only bottle, but I'm going on the auction sites to find more. Grade: A- (arguably I ought to bump this up to A given how relatively inexpensive it was at $40/bottle).

This is not me, but it's a good analysis:

Should concealed carry laws trump employment-at-will? In short, no.

At Lexology, a recent post discussed a new Kentucky case dealing with the intersection of concealed carry laws and the employment at will doctrine:

At issue in Korb v. Voith Industrial Servs., Inc., 12CV0222 (W.D. Ky Nov. 28, 2012), was an employee who pulled out a handgun from his car to show a security guard the “sweet deal” he received for $150. The court did not describe a hostile employee. It seems he was simply engaging in his own version of show-and-tell. The employer was not amused and terminated the employee’s employment pursuant to a company policy prohibiting firearms on company property.

Important to the case for the court was Kentucky Revised Statute § 237.106(1), which provides:

No … employer, who is the owner, lessee, or occupant of real property shall prohibit any person who is legally entitled to possess a firearm from possessing a firearm, part of a firearm, ammunition, or ammunition component in a vehicle on the property.

These restrictions may seem familiar to Wisconsin employers who recently wrestled with the provisions of the concealed carry law. Wisconsin Statute §175.60(15m)(b) provides:

An employer may not prohibit a licensee or an out-of-state licensee, as a condition of employment, from carrying a concealed weapon, a particular type of concealed weapon, or ammunition or from storing a weapon, a particular type of weapon, or ammunition in the licensee’s or out-of-state licensee’s own motor vehicle, regardless of whether the motor vehicle is used in the course of employment or whether the motor vehicle is driven or parked on property used by the employer.

Both laws establish strong protections for employees to keep a firearm in their personal vehicle.

Although the Western District of Kentucky court repeatedly pointed out it felt the consequences were rather harsh, it found that the Kentucky law did not protect the employee. As noted by the court, if this was simply a matter of storing the gun in the vehicle, the employee would have been protected. But the employee did more. He took the gun out of its holster and handled it, and he did so for reasons that the statute did not otherwise protect. For the court, this was enough for the employer to lawfully discharge the employee without violating the law.

I'm mostly a neutral in the gun control wars, albeit rethinking that issue and lacking any real enthusiasm for constitutionalizing the issue, but I'm defintely not a fan of these laws. As I have explained at considerable length before (and please go read the post before commenting here), I firmly believe employment-at-will ought to trump concealed carry "rights." In brief, laws like those at issue in Kentucky and Wisconsin are part of the steady erosion of carving out one "little exception" to the at will doctrine after another that has essentially eviscerated that doctrine.

In any case, when last I visted this issue, my post moved one blogger to ask:

What if an employer fired employees for keeping “inflammatory” banners or signs concealed in their vehicles, for use at a rally after work?  Would Professor Bainbridge mount a fierce defense of the at-will employment doctrine in these circumstances?  Probably not.  After all, college professors are generally much fonder of talking and demonstrating than shooting.

Piffle. Of course I would raise a defense of the employment-at-will doctrine in those circumstances. First amendment free speech rights limit only the government. In my view, if a private employer wants to prohibit any form of worker speech -- inflammatory or otherwise -- on its own private property and enforce that prohibition by firing workers who violate it, the employer should have the right to do so. The economic and social values of employment at will and property rights makes this an easy case. (And, before you ask, I think labor laws authorizing union speech on employee property are a bad idea, as are laws forbidding private employers from banning religious speech or pretty much any other kind of speech.) I'm much fonder of private property and laissez-faire economic policy, after all, than either talking or shooting.

LIBOR, UBS, and the regulators

I'm working on an article on the need to reform the process by which the London Interbank Offering Rate (LIBOR) is set, so I've been following the news accounts of the LIBOR manipulation scandal closely for some time. Today's WSJ brings news of a major new development:

U.S., U.K. and Swiss authorities alleged a vast conspiracy led by UBS AG to rig interest rates tied to trillions of dollars in loans and other financial products, indicating the practice was far more pervasive than previously known.

UBS agreed to pay about $1.5 billion to settle charges against the Swiss bank, and a unit in Japan where much of the wrongdoing occurred pleaded guilty to criminal fraud. U.S. prosecutors also filed criminal conspiracy charges against two former UBS traders allegedly at the heart of the scheme.

Schumpeter notes an interesting aspect of the evidence released so far by the authorities:

For any who doubted whether there was honour among thieves, or indeed among investment bankers, solace may be found in the details of a settlement between UBS, a Swiss bank, and regulators around the world over a vast and troubling conspiracy by some of its employees to rig LIBOR and EURIBOR, key market interest rates. ...

... even in the midst of this wrongdoing there was evidence of a sense of honour, however misplaced. One banker at UBS, in asking a broker to help manipulate submissions, promised ample recompense:

"I will fucking do one humongous deal with you ... Like a 50, 000 buck deal, whatever. I need you to keep it as low as possible ... if you do that ... I’ll pay you, you know, 50,000 dollars, 100,000 dollars ... whatever you want ... I’m a man of my word."

Further hints emerge of the warped morality that was held by some UBS employees and their conspirators at brokers and rival banks. In one telling conversation an unnamed broker asks an employee at another bank to submit a false bid at the request of a UBS trader. Lest the good turn go unnoticed the broker reassures the banker that he will pass on word of the manipulation to UBS.

Broker B: “Yeah, he will know mate. Definitely, definitely, definitely”;
Panel Bank 1 submitter: “You know, scratch my back yeah an all”
Broker B: “Yeah oh definitely, yeah, play the rules.

All of which suggests an opening for a fascinating rethink of how social norms and behavioral biases can cause even bad actors to be trustworthy and honorable within the confines of their conspiracy (to the detriment of larger society). It suggests that we shouldn't expect such folks to behave as self-maximizing rational actors when confronted with problems like prisoners' dilemmas. But that's a question for another day.

More to the point, the tawdry business calls into question the actions and omissions of the key regulators who may have knowingly allowed LIBOR manipulation to occur. As I explain in my draft article:

As The Economist reported, however, there was a second—and potentially more troubling in the long term—reason Barclays misreported its LIBOR figures. During the financial crisis, both government and private sector actors viewed a high LIBOR submission as a sign of financial weakness on the part of the submitting bank.[1] Barclays admitted to having reduced the rates it submitted so that its submission fell within the mid-range of the panel banks.[2]  Internal Barclays documents showed that top Barclays managers had expressed concern throughout the financial crisis that Barclay’s relatively high LIBOR submissions were attracting negative media attention and raising questions about the bank’s creditworthiness.[3] This led to a directive being issued by a senior bank manager to Barclay’s LIBOR submitters that the bank “should not stick its head above the parapet.”[4]

Troublingly, Barclays “released evidence that can be interpreted as an implicit nod from the Bank of England (and Whitehall mandarins)” approving of the bank’s fudging its LIBOR submissions.[5] During the crisis, the U.K. government—like many others—was desperate “to bolster confidence in banks and keep credit flowing. The suspicion is that at least some banks were submitting low LIBOR quotes with tacit permission from their regulators.”[6]

The same may have been true of other key global regulators. In the US, for example, the New York Federal Reserve Bank—then run by Timothy Geithner, who subsequently served as Treasury Secretary in the first Obama administration—reportedly was aware as early as August 2007 of possible LIBOR manipulation but failed to aggressively respond.[7]

Today's WSJ editorial page takes up the cudgels on this very point:

... there's a good deal of ex post facto outrage over Libor, which has become the regulators' surrogate for all that was supposedly wrong in finance before the panic of 2008. Regulators who are now putting the hammer down knew about problems with Libor years ago but did little or nothing to stop any manipulation.

The Financial Times reported Wednesday that Treasury Secretary Tim Geithner knew about Libor manipulation in May 2008, even earlier than previously believed. (See our editorial, "Tim Geithner and Libor," July 21, 2012.) And yet he soft-pedaled his criticism of Libor while at the New York Federal Reserve. The New York Fed even used Libor as a benchmark throughout the worst of the crisis, in major contracts to which the U.S. government was party.

When regulators mess up, they don't get indicted. They get promoted.

Which is another very real scandal.

Green Bag Almanac & Reader Good Writing Honorees

Green Bag Almanac & Reader Good Writing Honorees

Once a year, the Green Bag’s impressive board of advisers for exemplary legal writing selects 20 or so works to honor with publication in the Green Bag Almanac & Reader. It is not an easy task, because there really is a great deal of good writing produced every year by lawyers and other people who write about the law. So, there is a burdensome but unavoidable process for making choices. Here are this year’s honorees. Congratulations to all.

via prawfsblawg.blogs.com

Click over to see the list of honorees.

Greg Mankiw's Blog: Asness on Buffett

Asness on Buffett

Warren may be a great investor, but he really doesn't cut it as a policy wonk.

via gregmankiw.blogspot.com

Lowell Milken Institute Law Teaching Fellowship

If you are looking for a teaching fellowship in corporate law, it would be hard to beat the Lowell Milken Institute Law Teaching Fellowship at UCLA. Now accepting applications.

via www.theconglomerate.org

What a nice thing for Gordon to say!