Index

1

1929 Great Crash, 60 1986 big bang, 206

2

2007-08 global crisis, 2, 131 2007-08 global meltdown, 223

A

Aberdeen Railway Co v. Blaikie

Brothers (1854), 80 ABN Amro, 140 abolition of legal restraints in key areas of financial markets, 205 abolition of national controls over cross-border capital flows, 252 abuse of capital market finance, 55, 280 abuses of stock market finance, 246 accountability, 255 accounting dumps, 187 accounting manipulations, 164 accounting problems, 171 action for misfeasance, 84 Adelphia, 169 Adelphia Communication, 164 agency costs, 27, 28, 29, 30, 31, 32, 36 Agency costs, 27 agency issues, 4, 28, 29, 32, 240 agency problem, 9, 22, 26, 27, 30, 31, 76, 88, 92, 94, 166, 184 AIG, 265 Alan Greenspan, 125, 141, 204, 265, 294 Alberto Ferraris, 188 allocation of corporate resources, 26, 36 alternative investment schemes, 223 alternative regulatory patterns, 253 amending Regulation 2011, 152 Amendments to Rules for Nationally

Recognized Statistical Rating

Organizations, 157 American accounting rules, 177 AMF, 262, 266 Ancillary services, 145 Andrew Fastow, 172, 180 Anglo-American corporate law, 279 Anglo-American economies, 232, 254 Anglo-Irish Bank, 250 anything to make the deal ethos, 218 archipelagos of corporate entities, 230 architecture of the global financial system, 204 arm’s length contracting, 92 arm’s length relationship between state and agencies, 256 arm’s length relationship between state and regulatory body, 262 Arneson v. Arneson, 150 Arthur Andersen, 176, 177, 192 ASIC v. Healey (2011), 83 ASIC v. Rich [2003], 83 asset pool composition, 275 asset-backed securities, 113 assignment of receivable, 110 assumptions of rational market actors, 203 assumptions of strong economic forces, 203 asymmetric information, 27, 64, 76 audit, 245 audit committee, 172 audit on financial activities, 276 audit tax, 271

Explaining Financial Scandals 307

Aurora Loan Services, 218 Automatic Self-Cleansing Filter

Syndicate Co. Ltd v. Cuninghame [1906], 20 Avgouleas, 5, 6, 37, 45, 59, 64, 65, 66, 118, 206, 207, 214, 215, 223, 249, 250, 254, 288 Avvocatura dello Stato, 263 axiom of private ordering, 141

B

balance sheet, 113 balance sheet management, 115, 209 balance sheet mismatches, 215 balanced (enlightened) intervention of the state, 262 Banca d’Italia, 188 bank finance, 5, 9, 46, 47, 108, 116, 127, 246 Bank of America, 184, 188, 194, 220 Bank of England, 216 bank run, 212 bank’s liquidity and solvency, 216 banking regulations, 226 bankruptcy remoteness, 113 Barclays, 221 Basel Accord, 209 Basel Accord of 1988, 115 Basel Accords, 227 Basel committee, 95 Basel I, 216 Basel II, 64, 95, 147, 209, 228, 266, 288, 289 Basel III, 137 Bear Stearns, 219 behavioural finance, 37, 65, 250 benefit of standardisation, 125 Berle, 3, 19, 22, 25, 33, 48, 280, 283, 289 Berle and Means, 3, 25 Blair, 4, 5, 31, 35, 36, 37, 38, 39, 46, 62, 63, 88, 220, 224, 225, 226, 227, 228, 283, 286, 289 blame-avoidance, 254 Bligh v. Brent (1836), 21 block-holding, 30, 165 BNC, 218 Board of Supervisors, 260 board’s monitoring function, 77 boards’ short-termisms, 70 bond issues, 186 bond market, 123 Bonlat, 188, 191 Borland’s Trustees v. Steel Brothers & Co. Ltd, 21 bottom-up accountability, 257 bounded rationality, 58 BP case, 243 Bradford & Bingley, 206 break down the relationship between regulated and unregulated firms, 276 Bretton Woods, 44, 57, 205, 252 Bristol and West Building Society v.

Mothew [1998], 75 Brownian Motion, 203 Bubble Act 1720, 18, 231, 241 Buconero, 188 Buconero LLC, 194 Bush administration, 222 business judgement rule, 39

C

Calisto Tanzi, 184 camouflage, 93 Caparo Industries v. Dickman, 150 capital adequacy requirements, 114 capital adequacy rules, 274 capital market finance, 2, 5, 8, 9, 11, 14, 15, 46, 65, 108, 116, 127, 160, 196, 198, 199, 201, 202, 223, 246, 279, 280 capital market finance transactions, 108 Capital Requirement Directive III, 102 capital requirements, 134, 137, 227 capital reserves, 137

308 Index

capital-market capitalism, 18 cash flow, 122 categorisation of systemically important firms, 250 categorisation of the two tiers, 245 CDO, 117, 119, 122, 218, 224, 279 CDO market, 146, 204 CDOs, 154, 158 CDS, 117, 119, 121, 123, 124, 218, 224, 279 Central Hudson Gas & Electric

Corp. v. Public Service

Commission, 149 certification of corporate activities, 268 Certification of corporate activities, 268 CESR, 135, 148, 260 changes in balance sheet structure, 213 changes in the regulatory framework, 205 chapter 11, 221 Cheffins, 3, 16, 20, 23, 24, 29, 50, 71, 76, 104, 284, 290 Chicago School of Economics, 203 Cirio scandal in 2002, 187 Citi Group, 188, 191 Citigroup, 123, 194, 195, 207, 221 classification of tier-one corporations, 267 clauses predetermined by the public body, 274 claw-back clauses, 97, 100 clearing house, 131 closely-held ownership, 23, 29, 30, 74, 190 CLRSG, 78, 79 Coca Cola of milk, 186 codetermination system, 31, 41 Coffee, 3, 23, 24, 29, 30, 40, 47, 49, 50, 51, 52, 53, 54, 143, 144, 151, 166, 168, 172, 175, 176, 177, 191, 290, 291 collateral/asset managers, 129 Collateralised debt obligations, 122 Collateralised Debt Obligations, 62, 124, 293 collateralised securities, 119 collectivist system, 55 Combined Code 2010, 99 command and control governance mechanisms, 166 commandite banks, 52 commercial risk, 132 commercial speech, 149 Committee on Oversight and

Government Reform, 222 Commodities Futures

Modernization Act, 46, 206, 207, 250 Commodities Futures

Modernization Act 2000, 206 Commodity Futures Trading

Commission, 132 CommonwealthBankofAustraliav.

Friedrich (1991), 82 Companies Act 1985, 39 Companies Act 2006, 32, 41, 74, 79, 80, 82, 99, 106, 130, 230, 289, 290 Company Law Review Steering

Group Modern Company Law:

The Strategic Framework (1999), 78 compensation packages, 28 compensation policy at Enron, 173 compensations of investment banks' executives, 219 complex web of structured transactions, 196 complexity, 141, 224, 230 complexity of transactions, 249 compliance-driven culture, 259 comply-or-explain, 100 comply-or-explain approach, 229 concentrated ownership, 32, 49 Concentrated ownership, 16 concentration of economic power, 278 concession company law model, 241

Explaining Financial Scandals 309

conflict of interest, 145 Congress, 278 CONSOB, 187 consolidated group account, 193 consumer finance, 62 contingent liabilities, 180 contingent liabilities related to its off-balance sheet SPVs, 171 contractarian, 35, 88, 106, 241, 270 control mechanisms, 229 control of capital flows, 273 control of financial innovation, 274 control of managerial actions, 106, 229 control over executives’ decisionmaking, 201 control problem over managerial actions, 279 controls over capital flows, 252 converging forces of globalised capital markets, 246 cooking the books, 38, 187, 194 corporate cultures, 199 corporate governance, 2, 3, 4, 7, 8, 10, 12, 14, 15, 16, 17, 18, 22, 23, 25, 26, 31, 32, 34, 40, 41, 43, 47, 48, 50, 51, 67, 70, 71, 72, 73, 77, 78, 80, 84, 86, 87, 89, 96, 99, 100, 101, 103, 104, 106, 123, 127, 129, 143, 164, 165, 166, 168, 169, 170, 171, 172, 175, 177, 183, 189, 190, 199, 201, 216, 224, 229, 231, 238, 239, 240, 262, 270, 277, 279, 284, 303 Corporate Governance Code 2010, 104 corporate governance failure, 169 corporate governance malfunctions, 231 corporate mind, 167 corporate objective, 15, 34, 67, 244 corporate scandals in North

America, 239 corporate structure, 239 corporatist state, 240 cost-effectiveness of delegation, 254 Coulisse, 53 counterparty risks, 131, 138 County of Orange v. McGraw-Hill

Cos.,, 149 Cour de Cassation, 263 covered bonds, 213 CRAs, 109, 142, 146, 158 CRD II, 136 CRD III, 102, 137 CRD IV, 234 creativity of market trends, 272 credit crunch, 212, 232 credit default swaps, 124 Credit Default Swaps, 62 credit derivatives, 62, 109, 123, 124 credit enhancement, 113 credit opinions, 143 credit rating agencies, 61, 108, 113, 131, 257, 275, 279 Credit Rating Agency Reform Act 2006, 156 Credit risk, 121 credit-linked notes, 121

D

dairy industry, 185 day-do-day supervisory powers, 135 debt capital market technique, 127 debt finance market, 115 deficit of democratic legitimacy, 254 definition of the transaction, 273 delegated management, 26 delegation, 30, 73 delegation of power, 22 delegation of regulatory powers, 253 Deloitte, 188, 192 democratic and inclusive approach to regulation of corporate and financial law, 280 democratic deficit, 262 democratic legitimacy, 255 Democratic legitimacy, 262

310 Index

democratic link, 262 democratic process, 233 democratic regulation of international finance, 277 Democratic underpinning, 255 demutualisation, 61 demutualisation of building societies in the 1980s, 206 demutualise, 212 depersonification, 19, 20 deregulation, 118, 147, 254 deregulation of the energy market, 169 deregulation policies, 57 deregulation process, 205 deregulation shift of the 1980s, 247 deregulatory process, 205, 209 derivative litigation in Italy, 189 derivatives, 119, 178 derivatives clearing organizations, 132 deterioration of lending standards, 222 Deutsche Bank, 52, 188 dichotomy between close and dispersed ownership, 25 dichotomy between state and market regulation, 249 directors’ duties, 34, 67, 70, 71, 72, 74, 77, 79, 86, 87, 106, 240, 268 directorship, 74 disclosure, 63, 64 disclosure mechanism, 249 disclosure paradigm, 108 disintermediation, 44, 227 disperse shareholding, 22 Dispersed ownership, 16 distortion of ratings caused by persisting conflicts of interests and flawed methodologies, 275 Dodd-Frank Act, 95, 131 Dodd-Frank Act 2010, 157 Dorchester Finance Co. Ltd v.

Stebbing [1989], 39, 82 dotcom bubble, 55 double billing, 195 Dresdner Bank, 52 DTI Our Competitive Future:

Building the Knowledge Driven

Economy, 1998, 79 dual concession theory, 242 due diligence, 126, 137, 145 due diligence procedures, 216 Dun & Bradstreet Inc. v. Greenmoss

Builders Inc, 149 duties of care and skill, 39 duties of diligence care and skill, 82 dynamic transactions, 274

E

earning manipulations, 166 economic crisis, 222 Economic regulation, 56 economies of scale, 245 effective governance constraints on the board, 216 effects of interconnectedness, 273 Efficient Market Hypothesis, 203, 254 empire-building strategies, 39 empowerment of national authorities, 252 energy market, 169 enlightened shareholder value, 78 enlightened sovereign control, 2, 12, 238, 280 Enrico Bondi, 188 Enron, 2, 4, 8, 12, 16, 34, 35, 37, 38, 42, 46, 71, 77, 78, 87, 91, 109, 113, 119, 123, 125, 143, 146, 148, 149, 151, 164, 165, 166, 167, 168, 169, 170, 171, 172, 173, 174, 175, 176, 177, 178, 179, 180, 181, 182, 183, 184, 188, 189, 190, 191, 192, 193, 195, 196, 197, 198, 199, 202, 223, 225, 230, 235, 239, 240, 248, 283, 284, 285, 286, 287, 289, 290, 294, 299, 300, 302, 305 Enron bankruptcy, 168

Explaining Financial Scandals 311

Enron’s code of conduct, 180 entrepreneurship, 86 environmental risks, 245 Epicurum fund, 188, 194 equity-based compensation, 93 equity-based compensations, 88 Ernst & Young, 220 ESC, 2, 6, 7, 8, 11, 87, 142, 200, 235, 238, 239, 243, 244, 246, 249, 250, 252, 255, 262, 267, 268, 269, 272, 273, 277, 279, 280 ESMA, 110, 134, 135, 136, 152, 153, 154, 155, 159, 234, 257, 260, 261, 275, 292 ESMA’s accountability to the

European Parliament and

Council, 261 ESMA’s rule-making and intervention powers, 260 ESMA's funding base, 261 EU framework, 251 EU Parliament, 251 EU political dynamics, 260 EU regulator, 260 EU rulebook, 155 EU Transparency Directive 2004/109, 185 European Market Infrastructure

Regulation, 136 European Supervisory Agencies, 260 European supervisory authorities, 134 excessive level of leverage, 214 excessive leverage, 224 excessive risk-taking and leverage, 252 expanded concept of stakeholder value, 240 Externalities on social groups, 245

F

factoring, 110 failure of board of directors, 229 failure of control system, 224 failure to govern big public corporations, 279 fall of the Soviet Union, 247 Fannie Mae, 111, 221 Fausto Tonna, 187 federal government agency, 275 Federal Reserve, 205, 221, 265 fiduciary duties, 11, 48, 71, 72, 73, 74, 76, 82, 130, 180, 229, 241, 242 Fiduciary duties, 74 fiduciary liability, 74 Financial crises, 1 financial cushion, 227 financial deregulation, 201 financial development, 46, 108 financial economies, 232 financial engineering, 63, 170, 178, 203 financial innovation, 2, 5, 11, 46, 55, 62, 63, 67, 108, 109, 117, 131, 140, 141, 151, 198, 207, 209, 223, 224, 227, 235, 261, 274 financial intermediaries, 225 financial markets euphoria, 223 financial regulation, 239 financial reporting, 83, 176 Financial Reporting Council, 99 financial revolution, 205 financial scandals, 278 Financial Services Act 2010, 102 Financial Services and Markets Act 2000, 258 Financial Services Authority, 60 financial-economic theories, 254, 262 financialisation, 7, 45, 46, 48, 129, 202, 232, 233, 280 Finanziaria Centro Nord, 185 First Amendment, 148 first tier of public corporations, 244 Fisher Black and Myron Scholes, 203 Fitch Ratings, 143 flag of neo-liberal policies, 204

312 Index

flawed capital adequacy regulation, 216 Fletcher v. National Mutual Life

Nominees Ltd [1990], 81 Fortune Magazine’s award, 169 forward contracts, 180 France, 31 Freddie Mac, 111, 221 freefall collapse of the capitalist order, 221 free-market anarchy, 233 free-market regulatory system, 57 FSA, 58, 60, 84, 99, 100, 102, 151, 159, 161, 216, 220, 229, 231, 256, 257, 258, 259, 261, 263, 264, 265, 293, 294, 303, 305, 307 FSA Remuneration Code, 100 FSA Revised Remuneration Code 2010, 102 Fuld, 221 funding base, 213

G

G-20, 95 GAAP, 178 Gas Bank, 170 gatekeepers, 175, 220 Gatekeepers, 158 gatekeepers of debt capital markets, 223 gatekeepers’ failure, 174, 271 Gatekeepers’ failure, 143 gate-keeping function, 276 gate-keeping role, 269 Gaussian copula function, 204 gearing ratio, 116 Geographical spread, 245 George Soros, 124, 141 German corporate governance, 31 Germany, 31 Gilson, 4, 29, 30, 32, 42, 203, 239, 240, 254, 294 Glass Steagall Act, 51, 231 Glass-Steagall Act 1933, 205 Glass-Steagall Act in 1999, 205 global financial crisis, 12, 40, 42, 77, 80, 85, 88, 99, 104, 106, 108, 117, 143, 146, 158, 165, 199, 201, 202, 212, 224, 228, 229, 235, 239, 240, 243, 255, 260, 278 global governance of financial markets, 252 global treaty negotiated by states’ sovereign authorities, 251 globalisation of financial markets, 7, 44, 48 globalisation of the banking business, 207 Goldman Sachs, 124, 126, 133, 218, 220, 265, 275 Goodhard, 5, 57, 284 government bailout, 212, 216 government bailouts, 263 government intervention in the economy, 205 governments’ interference in the regulation of financial markets, 247 Gramm-Leach-Bliley Act, 45, 206 Gramm-Leach-Bliley Act 1999, 206 Grant Thornton, 184, 188, 191, 192, 193, 194 Great Crash of 1929, 108, 205, 235 Great Depression, 175 great panic of 2008, 221 greed, 167 Grossbanken, 52 Group turnover, 245 guardian of social goals, 262

H

hard law mechanisms, 277 HBOS group, 84 hedge funds, 124, 223, 276 hedging / Enron investment practice, 178 hedging function, 125 Henry Paulson, 220, 265

Explaining Financial Scandals 313

hidden leverage, 228 hide the bank’s level of leverage, 220 high level of leverage, 45, 215, 219, 222, 232 high levels of leverage, 204, 208 high leverage, 90 high-end employees, 100 High-end employees, 269 high-leveraged firms, 94 highly leveraged institutions, 227 high-volume trading, 47 HM Revenue & Customs, 271 Hobbesian scenario, 233 hostile takeovers, 39 Houston Natural Gas, 169 hypothesis of market efficiency, 246

I

Imperial Hydropathic Hotel Co.,

Blackpool v. Hampson (1882), 75 implicit government guarantee, 207 in whose interest the company should be run, 240 incentive to increase the level of leverage, 219 incentive to pursue short-term strategies, 219 independence from government, 254 independent administrative authorities or agencies, 253 independent commission for financial products, 249 independent judgment, 84 independent non-governmental body, 258 independent regulatory agencies, 254 indirect legitimisation, 257, 261 indirect public accountability, 256 industrial economies, 232 inflating share value, 196 information asymmetry, 249 information failures, 230 innovation, 273 innovation of securitised products, 230 innovation process, 62 innovative financial products, 44 inside control system, 51 insider board member, 171 Insolvency Act 1986, 39, 82, 84, 130 institution’s regulatory scope, 264 institution’s transparency, 264 institutional framework, 253 institutional oversight, 262 integrated and liberalised financial markets, 252 integration of capital markets, 44 interconnectedness, 109, 127, 141 interest rate swaps, 202 International Swap and Derivatives

Association, 125 InterNorth, 169 intervention powers, 135 intrinsic volatility of economies over-reliant on stock markets, 247 intrusive supervision, 259 investor pays, 143 investors’ recourse to the originator, 249 invisible balance-sheets, 225 invisible levels of leverage, 276 IOSCO code of conduct, 152 IOSCO Code of Conduct, 148 IPO, 185 IPO market, 177 issuer pays, 143 issuer-pays model, 145, 259

J

Jeff Skilling, 170 John Locke, 256 joint stock companies, 18 Joint Stock Companies Act, 19 Joint Stock Companies Act 1856, 19

314 Index

Joint Stock Companies Act 1862, 19 JP Morgan, 265 JP Morgan Chase, 123, 221 Judge Easterbrook, 176

K

Keay, 4, 34, 36, 42, 43, 78, 79, 80, 81, 82, 83, 87, 104, 285, 296 Kenneth Lay, 169 knowledge-driven economy, 79 Korea Development Bank, 221 Kraft Foods, 265

L

Labour interests, 31 lack of competition in the rating market, 275 laissez-faire attitude, 221 laissez-faire, light-touch rhetoric, 216 legal constraints on OTC derivatives speculations, 207 legal opinion, 220 legal origin, 3, 16, 23, 24, 48 legal process of delegation, 72 legal risks related to capital market finance, 279 legal structure of SPVs, 274 legality of excessive, 270 legislative changes, 202 legitimacy to represent the interest of all social constituencies, 252 Lehman Brothers, 2, 12, 46, 105, 117, 151, 168, 201, 202, 212, 216, 217, 218, 220, 221, 222, 230, 294, 297, 302, 304, 307 lender of last resort, 217 level of interconnectedness of the shadow banking system, 226 level of leverage and risk-taking, 209 level of risk-retention, 274 leverage, 118 Leverage, 227 leveraged speculations, 105 liberalisation and integration of capital markets, 205 light-touch axioms, 259 light-touch principle-based supervision, 257 limited liability, 19 Linklaters, 220 liquidity ratios, 138 listing requirements, 48 LJM Cayman L.P., 180 long-term implications of securitisation, 218 Lord Browne-Wilkinson, 141 Lord Turner, 71, 229, 257 loss-absorbency principles, 139 Lowe v. SEC, 149

M

macroeconomic imbalances, 109, 223 macro-economic imbalances, 62 macro-prudential regulation, 141 managerial behaviours, 8, 9, 11, 33, 34, 38, 39, 70, 73, 81, 87, 90, 105, 106, 223 managerial effort, 88 managerial power, 3, 20, 22, 25, 77, 93, 197, 243 managerial rent extraction, 30 mandating rotation of the audit firms, 191 mandatory outsourcing of corporate activities, 268 manipulation of the structuring of a synthetic CDO, 275 market discipline, 59 Market discipline, 36 market euphoria, 177 market for corporate control, 8, 11, 28, 36, 52, 93, 201 market integration, 250 market interconnectedness, 223, 250 market mechanisms, 87 market system, 55 market-based expertise, 257

Explaining Financial Scandals 315

market-discipline framework, 248 mark-to-market accounting, 179 Marquis of Bute’s Case [1892], 82 Mary Shapiro, 265 mathematical models, 159 mathematisation of financial models, 203 maturity and liquidity transformation, 226 maturity mismatch, 114 maximalist approach to corporate objective, 33 Maxwell Communication, 77 mega-banks, 206 Merrill Lynch, 221 MiFID, 136 Milan Stock Exchange, 185, 189 minimalist approach to corporate objective, 33 minimisation of capital, 215 Minsky, 247 Minsky’s Theory of Financial Crisis, 232 Mitchell, 1, 5, 45, 46, 280, 285, 298 monitoring incentives, 123 Moody’s Investors Service, 143 moral hazard, 27, 38, 57, 64, 86, 90, 128, 134, 138, 264, 270, 274 more prescriptive role of states, 279 Morgan Stanley, 218, 220 mortgage market, 62 mortgage-backed securities, 218 Mr Zini, 194 Myers v. Perigal (1852), 21

N

national financial sovereignty, 234 national gatekeeper, 276 nationalisation, 217 negative pledge, 116 neo-liberal cultural tide, 202 Neo-Liberal cultural tide, 118 neo-liberal economic theories, 57 neo-liberal ideology, 66 neoliberal propositions, 232 neo-liberal regulatory models, 239 network of off-shore vehicles, 193 network of SPVs, 179 New Deal legislation, 132 new economy, 164 new sources of debt finance, 227 Newby v. Enron Corp, 149 nexus of contracts, 27, 35 non-executive committees, 92 non-executive directors, 28, 41, 72, 77, 85, 94, 100, 139, 173, 189, 201, 216, 229, 265, 295 non-majoritarian institutions, 255 Norman v. Theodore Goddard [1992], 39, 82 Northern Rock, 2, 12, 46, 77, 84, 86, 117, 168, 201, 202, 206, 212, 213, 214, 215, 216, 217, 258, 286, 297, 301, 302 NRSRO, 148 NYSE Euronext, 53

O

obstructions to capital market activities, 272 Odeon TV, 185 off-balance sheet financing, 116 Off-balance sheet financing, 178, 187 off-balance sheet liabilities, 141, 230 off-balance sheet partnership, 172 off-balance sheet vehicles, 214 off-shore vehicles, 182 optimal contracting theory, 92 option, 181 options-pricing formula, 203 originate-and-distribute, 115, 128 originate-and-distribute model, 214 originate-to-distribute, 62, 133, 140 originator, 111 orphan vehicles, 130 OTC, 132 OTC trading, 136 output-oriented legitimacy, 255

316 Index

outrage cost, 93 outsider board member, 171 outsourcing major policy-making, 268 over-collateralisation, 113 overdeveloped capital markets, 231 Overend & Gurney v. Gibb (1872), 39, 82 Overend Gurney & Co., 212 over-reliance on trading speculations, 206 over-the-counter, 126, 204 ownership model, 239 ownership structure, 15, 16, 18, 22, 25, 29, 32, 47, 70, 74, 166, 184, 244

P

pan-European financial authority, 251 pan-European public rating agency, 275 panoply of market-oriented techniques, 240 paradigms of market disciplines, 259 Paris Bourse, 53 Parkinson, 4, 33, 39, 73, 75, 78, 243, 286 Parmalat, 2, 8, 12, 16, 32, 46, 71, 91, 143, 151, 164, 165, 166, 167, 171, 174, 183, 184, 185, 186, 187, 188, 189, 190, 191, 192, 193, 194, 195, 196, 197, 198, 199, 202, 223, 230, 235, 239, 245, 283, 284, 286, 289, 293, 302, 305, 306 Parmalat Finanziaria SpA, 185 Parmatour, 194 partnership law, 18 paternalistic regulation, 58 pension funds, 223 performance-based compensations, 93 permanent public organisation, 262 pluralist approach, 240 pluralist approach in the decisionmaking process, 268 political preconditions, 24 populist reactions, 239 Powers Report, 179 practice of collateralisation, 224 predetermined corporate goal, 268 pre-rating assessment, 145 prioritisation of social interests, 268 private benefits of control, 29, 32, 166, 240 private contracting, 270 private equity funds, 276 private ordering, 50 private placements, 128 privatisations, 57, 254 problems of liquidity and solvency, 227 problems of risk classification, 209 proceduralisation of fiduciary duties, 242 proposed sovereign regulator, 276 proprietary trading, 45, 133 prospectus, 65 Prospectus Rules, 127 protection buyer, 121 protection seller, 121 proximity test, 150 public accountability, 256 public audit, 271 public intervention in corporate affairs, 244, 268 public legitimisation of managerial power, 243 public rating agency, 152, 275 public takeovers, 263 public watchdog, 249

Q

quasi-democratic structure, 261

R

railway scandal, 55 Range of activities, 245

Explaining Financial Scandals 317

Raptors transactions, 181 rating arbitrage, 124, 146 rating methodologies, 144, 158, 223 ratio of total debts to assets, 227 rationale behind financial activities, 272 RBS, 140, 307 Re Barings Plc (No5) [2000], 84 Re Brazilian Rubber Plantation and

Estates Ltd [1911], 82 Re City Equitable Ltd [1925], 39, 82 Re D’Jan of London Ltd [1993], 82 Re Parmalat Securities Litigation,, 195 Re Southern Counties Fresh Foods

Ltd, [2008], 80 reactive legislation, 272 reactive regulation, 239 recharacterisation, 112 reckless use of structured finance and derivatives, 212 recourse clause, 128 recourse clauses, 274 redistribution of regulatory powers, 234 Regal (Hastings) Ltd v. Gulliver [1967], 82 Regentcrest plc v. Cohen [2001], 81 regional character of the EU, 251 registration, 152 Regulation (EC) No 1060/2009, 152 Regulation 1060/2009 on credit rating agencies, 152 regulation and supervision stemming from a national public authority, 279 regulation of financial activities, 267 regulator’s funding base, 258 regulatory arbitrage, 63, 137, 226 regulatory architecture of corporate and financial law, 278 regulatory culture, 277 regulatory incentives, 114 regulatory licences, 147 regulatory paradox, 110 remunerated with company’s debt, 269 remuneration committee, 101 remuneration committees, 85, 99, 270 repackaging and selling of CDOs, 212 repo105, 220 repos, 138 repurchase agreements, 220 reputational capital, 175 re-securitisations, 137 reserve ratios, 227 reserve requirements, 227 residential mortgage-backed securities, 119 residual claimants, 36 retail investors, 66, 249 reverse merger, 185 revolving doors, 233 Rhythm NetConnection, 180 Rhythms transaction, 183 Richard Fuld, 217 ring-fencing, 139 risk classifications, 228 risk management, 99 risk management products, 170 risk-management process, 229 risk-retention, 133 risks of counterparties’ solvency, 223 risk-taking, 86, 89, 160 Roe, 3, 4, 7, 24, 29, 30, 31, 32, 41, 47, 48, 49, 53, 269, 286, 300 role of capital as a cushion, 215 role of enforcement, 190 role of independent committees in board dynamics, 270 role of rating agencies, 223 Roosevelt, 278 rule-making powers, 135 rules of private international law, 274

318 Index

S

s 420 Companies Act 2006, 99 s. 170. The Companies Act 2006, 74 s. 172, 80, 290 s. 174 Companies Act 2006, 83 s. 214 of the Insolvency Act 1986, 82 s. 621 Dodd Frank Act 2010, 133 s. 941 Dodd Frank Act 2010, 133 S. 951 Dodd Frank Act 2010, 96 s. 952 Dodd Frank Act 2010, 96 S. 971 Dodd Frank Act 2010, 97 s.172 Companies Act 2006, 130 s.173 Companies Act 2006, 84 s.212 Insolvency Act 1986, 84 s.214 Insolvency Act 1986, 86 S.304 Sarbanes-Oxley Act 2002, 97 s.723 Dodd Frank Act 2010, 132 s.953 Dodd Frank Act 2010, 97 s.954 Dodd Frank Act 2010, 97 s.971 Dodd Frank Act 2010, 97 Salomon rule, 20 Salomon v. Salomon & Co. Ltd [1897], 20 Santa Clara County v. Southern

Pacific Railroad, 21 Sarbanes-Oxley Act, 97, 169 Sarbanes-Oxley Act 2002, 78, 148, 164, 231 say-on-pay provisions, 104 say-on-pay requirement, 96 Schwarcz, 5, 6, 9, 37, 45, 62, 65, 66, 110, 119, 128, 129, 147, 170, 178, 179, 180, 183, 220, 230, 248, 249, 300 Scottish Co-operative Wholesale

Society Ltd v. Meyer [1959], 80 SEC, 89, 96, 97, 101, 124, 126, 133, 136, 148, 149, 156, 157, 178, 187, 231, 257, 265, 275, 291, 299, 301 second tier board, 190 second tier of public corporations, 244 Securities Act 1933, 175 Securities Exchange Act 1934, 175 securities regulation, 64 securitisation, 62, 108, 109, 114, 117, 127, 131, 137, 140, 178, 182, 187, 209, 273 Securitisation at Northern Rock, 213 securitisations, 154 securitised notes of medium to longterm maturity, 214 self-dealing transactions, 172 self-regulation, 50, 59, 108, 118 Self-regulation, 59, 60 self-regulatory institutions, 50 separation between casino and utility banking., 206 separation between ownership and control, 16 separation of ownership and control, 16, 20, 22, 24, 31, 33, 48, 50, 67, 166 servicing, 111 shadow banking, 118, 224 shadow banking sector, 225 shadow banking system, 5, 62, 131, 207, 208, 223, 225, 226, 230, 232, 234, 235, 276 shareholder exclusivity, 106 shareholder protection, 23 shareholder value, 4, 14, 17, 34, 35, 36, 37, 38, 40, 42, 43, 44, 51, 67, 70, 77, 78, 79, 87, 88, 89, 90, 91, 98, 101, 103, 104, 106, 197, 199, 243, 245, 279, 290, 302 shareholder wealth maximisation, 37 shareholders’ empowerment, 104 shareholders’ loss of power, 25 shareholders’ proprietary rights, 20 shirking, 73 shopping for the best rating, 222 short position, 126 Short v. Treasury Commissioners, 21 short-term debt financing, 222 short-term liabilities, 214 short-term pay arrangements, 266

Explaining Financial Scandals 319

Sir David Walker, 229 Size and number of employees (group level)., 245 social democracies, 24, 31, 254 social dimension that financial markets need to encompass, 272 social function of financial markets, 234 social function of securitisation, 274 social goals of regulation, 253 Social regulation, 56 social role of corporations, 244 social role of financial markets, 232 Sociète Generale de Credit Mobilier, 53 soft law, 86 soft law mechanisms, 100 soft-law powers, 135 sophisticated investors, 124, 128 South American financial crisis of 2001, 187 South Sea Bubble, 1, 55, 231, 283 sovereign authority, 267 sovereign competence, 252 sovereign control, 251, 267 sovereign control in corporate affairs, 245 sovereign defaults, 202 sovereign dimension of regulation, 261 sovereign intervention, 267 sovereign intervention in tier-one firms, 270 sovereign regulation in the area of financial markets, 272 SPE Granite Fund, 214 special purpose vehicle, 111, 145 speculative derivatives transactions, 202 springloading, 98 SPV, 111, 112, 113, 116, 120, 121, 122, 123, 129, 130, 145, 170, 179, 180, 181, 182, 188 SPVs governance, 130 stakeholder theory, 4, 14, 34, 40, 42, 43, 44, 67, 78, 104, 240, 241 Standard & Poor, 187 Standard & Poor’s, 143 standardisation of contractual models of securitisation, 274 state control over tier-one corporations, 279 state exam, 266 state regulation, 248 state-centred policies, 254 state-level supervision, 277 statutory definition of SPVs, 275 Stewardship Code 2010, 104 stock market capitalisations, 46 stock market finance, 47, 142, 160, 196, 246, 251 Stock markets, 44 stock option, 173 stock options, 31, 36, 38, 46, 70, 71, 72, 88, 90, 91, 93, 94, 101, 105, 106, 172, 173, 174, 198, 201, 269, 270 Stout, 5, 36, 37, 88, 131, 132, 182, 205, 206, 207, 208, 289, 302 structure of SPVs, 274 structured finance, 115, 118, 127, 142, 144, 194, 204, 238, 277, 279 Structured finance, 178 sub-criteria, 245 subordinated loan, 113 subprime crisis, 213 subprime securitisation market, 217 subsidiarity, 59 substantive consolidation, 112 supervision and control of financial activities, 252 supervisory boards, 268 swap transactions at Parmalat, 188 Sweden, 31 syndicated loans, 125 synthetic CDO, 123 synthetic CDOs, 224 synthetic exposure, 123 synthetic exposures, 224 synthetic loan, 119 synthetic securitisation, 120

320 Index

synthetic securitisations, 273 system of democratic representation, 255 systemic concerns, 271 systemic dimension, 223 systemic failures, 248 systemic risk, 6, 58, 63, 115, 126, 127, 133, 134, 138, 207, 208, 209, 225, 226, 244, 248, 249, 252, 267, 305 systemic risks impossible to quantify, 276 systemically important financial institutions, 244 systemically important firms, 134

T

Technological advancements, 203 Tetra Pak packaging process, 184 The 2008 crisis, 250 The Capital Requirements Directive, 148 The Market Abuse Directive, 148 The Market in Financial Instruments

Directive, 148 third party guarantees, 113 third way, 79 threat of private enforcement, 177 tier-one corporate boards, 268 tier-two corporations, 270 timeline, 210 too-big-to-fail, 45, 207, 245 top-down accountability, 257 tort claims of misrepresentation, 150 total return swap, 181 trade-off between different agency issues, 240 transactional development, 208 transaction-based regulation, 251, 273 transaction-based regulatory approach, 140 transparency reports, 154 Treasury, 220, 265 true sale, 112, 182 true sales, 220 trustees, 129 Tulip Mania, 1 Turner Review, 72, 202, 259, 303 two-tier classification of firms, 279 two-tiered classification of corporations, 244 Tyco, 164, 169

U

UBM (Unicredit Banca

Immobiliare), 187 UHT (Ultra-Heat Treatment), 184 UK independent Commission on

Banking, 138 undisputed reliance on the market, 231 universal banking, 139 universal banks, 51 unrestrained innovation of financial transactions, 201 unsustainable level of leverage, 223 US housing boom, 218 US housing market, 218 US Senate investigation / on the role of the Enron board, 173 use of short-term debt to finance long-term assets, 215

V

VAT control, 271 Vickers Report, 138, 234, 296 Volcker rule, 132

W

Walker Review, 72, 85, 86, 99, 100, 101, 102, 103 Warren Buffet, 141 watchdogs, 175 weapons of mass destructions, 141 welfare capitalism, 18 widely-held firms, 3, 28, 29, 94 Wood, 5, 56, 111, 112, 113, 116, 127, 129, 181, 213, 287, 297

Explaining Financial Scandals

WorldCom, 2, 8, 38, 77, 87, 125, 164, 165, 169, 174, 235, 239 wrongful trading, 39, 82, 86 321