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Roe, Mark

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Roe, Mark
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    Absolute Priority, Relative Priority, and Valuation Uncertainty in Bankruptcy - Appendix
    (University of Pennsylvania Carey Law School, 2025) Roe, Mark; Simkovic, Michael
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    Corporate Governance and Its Political Economy
    (2015) Roe, Mark; Vatiero, Massimiliano
    To fully understand governance and authority in the large corporation, one must attend to politics. Because basic dimensions of corporate organization can affect the interests of voters, because powerful concentrated interest groups seek particular outcomes that deeply affect large corporations, because those deploying corporate and financial resources from within the corporation to buttress their own interests can affect policy outcomes, and because the structure of some democratic governments fits better with some corporate ownership structures than with others, politics can and does determine core structures of the large corporation. In this review piece for the Oxford Handbook on Corporate Governance, we analyze the generalities and then look at core aspects of corporate governance that have been, and continue to be, politically influenced and sometimes politically driven: first, the historically fragmented ownership of capital in the United States; second, the postwar power of labor in Europe and its corporate impact; and, third, the ongoing power of the American executive and the American board as due in part to their influence on political and legal outcomes.
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    The Shareholder Wealth Maximization Norm and Industrial Organization
    (University of Pennsylvania, 2001) Roe, Mark
    Industrial organization affects the relative effectiveness of the shareholder wealth maximization norm in maximizing total social wealth. In nations where product markets are not strongly competitive, a strong shareholder primacy norm fits less comfortably with social wealth maximization than elsewhere because, where competition is weak, shareholder primacy induces managers to cut production and raise price more than they otherwise would. Where competition is fierce, managers do not have that option. There is a rough congruence between this inequality of fit and the varying strengths of shareholder primacy norms around the world. In Continental Europe, for example, shareholder primacy norms have been weaker than in the United States. Historically, Europe's fragmented national product markets were less competitive than those in the United States, thereby yielding a fit between their greater skepticism of the norm's value and the structure of their product markets. As Europe's markets integrate, making its product markets more competitive, pressure has arisen to strengthen shareholder norms and institutions.
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    Clearinghouse Overconfidence
    (California Law Review Inc., 2013) Roe, Mark
    Regulatory reaction to the 2008-2009 financial crisis focused on complex financial instruments that deepened the crisis. A consensus emerged that these risky financial instruments should move through safe, strong clearinghouses, which would be bulwarks against systemic risk, and that the destructive impact of the failures during the crisis of AIG, Lehman Brothers, and the Reserve Primary Fund could have been softened or eliminated had strong clearing-houses been in place. Via the Dodd-Frank Wall Street Reform Act, Congress instructed regulators to construct clearinghouses through which these risky financial instruments would trade and settle. Clearinghouses could cut financial risk, reduce contagion, and halt a local financial problem before it becomes an economy-wide crisis. But clearinghouses are weaker bulwarks against financial contagion, financial panic, and systemic risk than is commonly thought. They may well be unable to defend the economy against financial stress such as that of the 2008-2009 crisis. Although they are efficient financial platforms in ordinary times, they do little to reduce systemic risk in crisis times. They generally do not reduce the core risk targeted-that the failure of a financial firm will cause other firms to fail-but rather transfer that risk of loss to others. The major reduction in risk among the inside-the-clearinghouse traders is largely achieved by pushing that risk elsewhere, often to a systemically dangerous spot. Financial contagion can thus side-step the clearinghouse fortress and bring down other core financial institutions. Worse, clearinghouses could not have readily handled the major stresses that afflicted the economy in 2008-2009, could well have transmitted and magnified them, and can only weakly affect the type of financial stress that Congress targeted with Dodd-Frank. When we add in the other weaknesses of the new clearinghouses-as too-big-to-fail institutions, as institutions whose members' incentives to contain clearinghouse riskiness are weaker than the public's, and as institutions that will not be easy to regulate-even the direction of clearinghouses' impact on systemic risk is uncertain. The stakes are high in correctly assessing the value of clearing-houses in containing systemic risk. Much like an overconfidence inspired by powerful military fortresses that an invading enemy can side-step, the reigning overconfidence in clearinghouses lulls regulators to be satisfied that they have done much to arrest problems of contagion and systemic risk by building up clearing-houses, when they have not.
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    The Corporate Shareholder's Vote and its Political Economy, in Delaware and in Washington
    (Harvard Law School, 2012) Roe, Mark
    Shareholder power to effectively nominate, contest, and elect the company's board of directors became core to the corporate governance reform agenda in the past decade, as corporate scandal and financial stress put business failures and scandals into headlines and onto policymakers' agendas. As is well known to corporate analysts, the incentive structure in corporate elections typically keeps shareholders passive, and incumbent boards largely control the electoral process, usually nominating and electing themselves or their chosen successors. Contested corporate elections are exceedingly rare. But shareholder power to directly place their nomination for a majority of the board in the company-paid-for voting documents, as the SEC has pushed toward, could revolutionize American corporate governance by sharply shifting authority away from insiders, boards, and corporate managements. During the past decade, the SEC proposed, withdrew, and then promulgated rules that would shift the control of some corporate election machinery, to elect a minority of the board, away from insiders and into shareholders' hands. Then, in July 2011, the D.C. Circuit Court of Appeals struck down the most aggressive of the SEC's rules. During this decade-long process a core corporate law was up for grabs, but the action was in Washington, not the states, until the end of the decade, despite that a century of corporate law theory has focused on jurisdictional competition among states in making corporate law. In earlier work, I amended the state competition understanding with a view that key features of American corporate lawmaking are Washington-oriented: Washington often makes corporate law directly, it did so for the central corporate controversy in most decades of the twentieth century, and it can influence state lawmaking, either directly or by establishing complements and substitutes to state corporate law. Shareholder access fits this federal-state paradigm and goes beyond it. It fits in that states were largely silent on these shareholder-power initiatives until 2009, when Delaware amended its corporate code to facilitate shareholder nominees. Indeed, it's hard to understand Delaware passing its 2009 shareholder statute if the issue had not been on the national agenda for nearly a decade. But the interaction goes beyond a basic Washington-Delaware paradigm in that Delaware's corporate lawmaking could have influenced the federal outcome and, quite plausibly, corporate players sought it, or used it, as a tool to dampen federal congressional, judicial, and regulatory actors' enthusiasm for strong shareholder access. The federal-state interaction is two-way. The analytic potential for a strategic, two-way interaction is enhanced because the strongest interest group inputs at each jurisdictional level sharply differ. Overall, the vertical interaction between states and Washington in reforming shareholder-insider voting power in the past decade is a far cry from the classical understanding of American corporate law being honed in horizontal state-to-state competition, and it implicates sharply differing political economy, interest-group dynamics.
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    Rolling Back the Repo Safe Harbors
    (Harvard John M. Olin Center for Law, Economics, and Business, 2014) Morrison, Edward R.; Roe, Mark; Sontchi, Christopher S.
    Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007-2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similarly liquid securities, as they once were. The more recent expansion of the exemption to mortgage-backed securities should be reversed.
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    Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors' Bargain
    (Virginia Law Review Association, 2013) Roe, Mark; Tung, Frederick
    “Bankruptcy reallocates value in a faltering firm. The bankruptcy apparatus eliminates some claims and alters others, leaving a reduced set of claims to match the firm’s diminished capacity to pay. This restructuring is done according to statutory and agreed-to contractual priorities, so that lower-ranking claims are eliminated first and higher-ranking ones are preserved to the extent possible. Bankruptcy scholarship has long conceptualized this reallocation as a hypothetical bargain among creditors: creditors agree in advance that if the firm falters, value will be reallocated according to a fixed set of predetermined rules and contracts. In any given reorganization case, creditors may contest how the priority rules are applied — arguing over which creditor is prior and by how much. But once creditors’ relative status under the fixed priority rules is determined or compromised, the lowest-ranking financiers are eliminated. If there is not enough value left to go around for a group of equal-ranking creditors, creditors in that lowest-ranked group share proportionately. In this paper, we argue that over the long haul, the normal science of Chapter 11 reorganization differs from this creditors’ bargain. The bargain is never fixed because creditors regularly attempt to alter the priority rules and often succeed. Priority is in fact up for grabs. Bankruptcy should be reconceptualized as an ongoing rent-seeking contest in which creditors continually seek to break priority — to obtain categorical changes in priority rules in order to jump themselves ahead of competing creditors. Creditors seek to break priority by inventing innovative transactional structures, by persuading courts to validate their priority jumps with new doctrine, or by inducing Congress to enact new rules. Because these breaks are often successful, creditors must continually adjust to other creditors’ successful jumps. They can adjust to a priority break either by accepting it and modifying their terms for future transactions, or by attempting to suppress it with countermeasures. In recent years, major priority jumps have come from transactional innovation — such as special purpose vehicles — and from judicial sanction — via roll-up financing and critical vendor payment doctrines. And they have come from lobbying Congress. Financial industry participants obtained jumps from Congress for derivatives and repurchase agreements in the 1980s and 1990s, concessions that facilitated the financing that exacerbated the 2007-2009 financial crisis. Priority jumping, and the subsequent acquiescence, reaction, and reversal, are also part of bankruptcy history, from the equity receivership to the chapter X reforms of the 1930s to the 1978 Bankruptcy Code. We explain how priority jumping interacts with finance theory and how it should lead us to reconceptualize bankruptcy not as a simple, or even a complex, creditors’ bargain, but as a dynamic process with priority contests fought in a three-ring arena of transactional innovation, doctrinal change, and legislative trumps. The process of breaking bankruptcy priority, of reestablishing it, or of adapting to it is where bankruptcy lawyers and judges spend a large portion of their time and energy. While a given jump’s end-state (when a new priority is firmly established) may sometimes be efficient, bankruptcy rent-seeking overall has significant pathologies and inefficiencies.”
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    Capital Markets and Financial Politics: Preferences and Institutions
    (Oxford University Press, 2012) Roe, Mark
    For capital markets to function, political institutions must support capitalism in general and the capitalism of financial markets in particular. Yet capital markets’ shape, support, and extent are often contested in the polity. Powerful elements — from politicians to mass popular movements — have reason to change, co-opt, and remove value from capital markets. And players in capital markets have reason to seek rules that favor their own capital channels over those of others. How these contests are settled deeply affects the form, the extent, and the effectiveness of capital markets. And investigation of the primary political economy forces shaping capital markets can point us to a more general aspect of economic, political, and legal institutions. Much important work has been done in recent decades on the vitality of institutions. Less well emphasized thus far is that widely-shared, deeply-held preferences, often arising from current interests and opinions, can at times sweep away prior institutions or, less dramatically but more often, sharply alter or replace them. When they do so, old institutions can be replaced by new ones, or strongly modified. Preferences can at crucial times trump institutions, and how the two interact is well-illustrated by the political economy of capital markets.
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    Derivatives Market's Payment Priorities as Financial Crisis Accelerator
    (Stanford Law School, 2011) Roe, Mark
    Chapter 11 bars bankrupt debtors from immediately repaying their creditors, so that the bankrupt firm can reorganize without creditors shredding the bankrupt’s business. Not so for the bankrupt’s derivatives counterparties, who unlike most creditors, even most other secured creditors, can seize and immediately liquidate collateral, net out gains and losses, terminate their contracts with the bankrupt, and keep both preferential eve-of-bankruptcy payments and fraudulent conveyances they obtained from the debtor in ways that favor them over other creditors. Their right to jump to the head of the bankruptcy re-payment line, in ways that even ordinary secured creditors cannot, weakens their incen-tives for market discipline in managing their credits to the debtor; it reduces their concern for the risk of counterparty failure and bankruptcy, since they do well in any resulting bankruptcy. If they were made to account better for counterparty risk, they would be more likely to insist that there be stronger counterparties than otherwise on the other side of their derivatives bets, thereby insisting for their own good on strengthening the financial system. True, because they bear less risk, nonprioritized creditors bear more and thus have more incentive to monitor the debtor or to assure themselves that the debtor is a safe bet. But the repo and derivatives market’s other creditors - such as the United States of America - are poorly positioned contractually either to consistently monitor the deriva-tives debtors’ well or to fully replicate the needed market discipline. Bankruptcy policy should harness private incentives for counterparty market discipline by cutting back the extensive de facto priorities for these investment channels now embedded in chapter 11 and related laws. More generally, when we subsidize derivatives and repos activity via bankruptcy benefits not open to other creditors, we get more of the activity than we otherwise would. Repeal would induce the derivatives market to better recognize the risks of counterparty financial failure, which in turn should dampen the possibility of another AIG/Bear/Lehman financial meltdown, thereby helping to maintain financial stability. Re-peal would lift the de facto bankruptcy subsidy. Yet the major financial reform package Congress just enacted lacked the needed cutbacks.
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    Restructuring Failed Financial Firms in Bankruptcy: Selling Lehman’s Derivatives Portfolio
    (Harvard John M. Olin Center for Law, Economics, and Business, 2014) Roe, Mark; Adams, Stephen
    Lehman Brothers’ failure and bankruptcy is widely thought to have deepened the 2008 financial crisis whose negative effects the real economy is still experiencing. Yet, while financial regulation has changed in hopes of avoiding another crisis, bankruptcy rules such as those that governed Lehman’s failure, have not been changed at all. When Lehman failed, it lost considerable further value when its contracting counterparties terminated their financial contracts with Lehman. Hit by broad termination, Lehman’s overall value to its creditors degraded beyond the immediate losses that caused its downfall, and then, along with AIG’s failure several days later, the broad termination involving Lehman further deeply disrupted financial markets in the United States, and indeed the world. Lehman’s financial portfolio was thought to be running a paper profit of over $20 billion when it filed, and is said to have lost up to $75 billion as a result of the post-filing liquidation by Lehman’s counterparties of their deals with Lehman. How such a vast shift can occur, whether bankruptcy can ameliorate the problem (yes), and whether bankruptcy law has been updated since the financial crisis to handle the problem (no) are the subjects of this paper. For bankruptcy to handle a systemically important financial institution successfully, it must market the institution’s financial contracts’ portfolio, which current bankruptcy law prevents. Moreover, regulatory and bankruptcy authorities need authority to sell the portfolio along product market lines, which they lack. Such authority is needed, first, to preserve its overall portfolio value, and, second, to break up and sell a very large portfolio that could not be sold intact in the aggregate, as the most systemically difficult portfolios are embedded in the world’s largest financial institutions and cannot readily be sold intact. Bankruptcy is the best and first place to put that authority. And, from a systemic perspective, bankruptcy needs to be able to dismantle a large failed portfolio, rather than sell it intact to a larger institution, a typical but undesirable solution here. Lastly, although regulatory and other conditions have changed since the financial crisis, making the bankruptcy target a moving one, the bankruptcy target deserves more consideration today, rather than less, because it is a reachable target without the complexities and uncertainties of new alternatives now in motion. Bankruptcy, however, has not been fixed and updated since the financial crisis, leaving the financial system at risk that, if a major financial institution failed and could not be otherwise resolved, the same difficulties would again arise as arose during the 2008-2009 crisis and the failures of Lehman and AIG.