postings by Mitu Gulati

Is Poland on its Way to Being Expelled From the EU?

posted by Mitu Gulati

Poland has been thumbing its nose at key European Union norms for some time now (refusal to comply with environmental commitments, unwillingness to take refugees, and so on). The most recent and egregious norm violation being the reforms of the judiciary being pushed by the current right-wing ruling party that will (in the view of critics) enable it to stack the judiciary with judges favoring it. These were signed into law by President Duda roughly ten days ago.

The European Commission, the EU’s principal administrative body, viewing these latest actions as inconsistent with basic democratic commitments of all EU nations to rule of law principles (independence of the judiciary and so on), has recommended that Article 7 proceedings be initiated. That could end up stripping Poland of its voting rights in EU matters; something that would be unprecedented in EU history. As a practical matter this is not likely to happen, because the removal of voting rights requires a unanimous vote of the remaining 27 members of the EU, and Hungary (with a government of similar inclinations to the Polish one) is one the members. But in a community that values collegiality and cooperation to a very high degree, this is a big deal (at least to this outsider).

There is a broader question here, that some in the press are already asking, which is whether, at some point soon, Poland’s (and perhaps Hungary’s) refusals to act consistently with EU values can constitute enough of a justification for the rest of the EU to expel them? As I explain below, an argument can be made that no member of the EU can ever be expelled, given that there is no explicit process contemplated in any of the EU treaties for expulsion. But can that really be the case?

Continue reading "Is Poland on its Way to Being Expelled From the EU?" »

Puerto Rico: Unexpectedly Hilarious Gifts From YouTube

posted by Mitu Gulati

HT: Joseph Blocher & Rich Schmalbeck

Joseph Blocher and I were talking to our tax guru friend and colleague, Rich Schmalbeck, yesterday about the provisions in the new tax bill relating to Puerto Rico and, specifically, how it was that the Puerto Rico could be treated as "foreign" for certain purposes (e.g., taxes on intellectual property).  The context being that these taxes will likely cause some employers to move operations from Puerto Rico to the mainland or elsewhere, thereby worsening the economic crisis on the island.  The answer, best we can tell, goes back to the horribly racist Insular Cases from the early 1900s that allow for Puerto Rico to be treated as "foreign in a domestic sense" (i.e, not on its way to incorporation into the United States - and therefore not worthy of full constitutional protections) -- something that Joseph and I have been railing about (here).

During that conversation, Rich asked us whether we remembered a tourism jingle that ended with "Puerto Rico -- a vacation . . . that lasts a lifetime . . . "   So, of course, Joseph and I went looking for it on YouTube (Rich has a brilliant sense of humor and we knew that we'd laugh if we could find it) . . . we didn't find it (still searching though), but we found a truly hilarious (unofficial, surely) government video touching on many of our favorite topics (debt, colonialism).  For my friends who work on Puerto Rican debt -- this will make you laugh as well, I think --  the video is here

Of course, going down that the YouTube path, takes one back to John Oliver's hilarious riff on the second class status of Puerto Rico, here

And if you watch that, you get taken to this one on the territories.

And then this (the Trump response to Hurricane Maria). For this one, all I can say is Aiyiyiyiyi

John Oliver is able to do harsh social commentary and humor in a way few others can.

And now, I'm watching cat videos.

Aurelius v. The Control Board: What is Going On? (Part II)

posted by Mitu Gulati

First, thanks to all of you who emailed and commented with possible answers as to what the Aurelius strategy in challenging the constitutionality of the Puerto Rican Control Board might be (the subject of Part I).  My favorite answer was the simple: “Create Chaos”.  That was followed by another answer: “Once the sheep start panicking, they become easy pickings for the wolves.”  I’m not sure that I understand either strategy, but that’s why I’m not running a multi-billion dollar hedge fund (if I were an investor, I suspect that I’d be one of the sheep trying to avoid being eaten by the wolves).

Second, I want to ask the “What is going on?” question from a different direction this week.  I’ve read or skimmed almost all of the anti-Aurelius briefs in the Aurelius v. The Control Board case now (for background on this, see here). Two things puzzle me about them.  I should say at the outset though that my being puzzled may stem directly from not understanding how these fancy constitutional law cases play out.

  1. Puzzle One: None of the anti-Aurelius briefs provide a clear and coherent explanation of exactly what would be at stake for Puerto Rico, financially, if the Control Board were to be deemed unconstitutional. More crassly, they don’t answer the following question at the outset: How much is it going to cost Puerto Rico if Aurelius wins? 

I'm a realist in thinking about what courts do in tough cases (as contrasted with the “legalist” who thinks doctrine does the overwhelming majority of work in predicting outcomes in all cases).  To my reading, the research tends to show that courts care a great deal about the social costs or policy implications of their decisions.  Yes, of course, they care about doctrine too.  But judges care a great deal about the impact of their decisions on real people (and how their decisions will be viewed in hindsight).

So, if a decision ruling that the Control Board is unconstitutional would impose a huge additional cost on the people of Puerto Rico (who have already suffered so much), and the law isn’t crystal clear, would it not be good legal strategy for the anti-Aurelius lawyers to emphasize that?  Clearly, I’m wrong, since that’s not what the all-star group of lawyers on the anti-Aurelius side have done.  But it puzzles me.

My thinking on this borrows heavily from my brilliant political scientist colleague, Georg Vanberg (see "Financial Crises and Constitutional Compromise”).

  1. Puzzle Two: Isn’t it a high-risk strategy to base key parts of one’s argument (as some of the anti-Aurelius briefs do) on cases that are, for want of a better word, “odious”? The cases here are the Insular Cases, that are an embarrassment. My guess is that many lawyers would at least balk at, if not outright refuse, to cite cases like Plessy or Korematsu as their primary support. And most judges, I’d think, would be mortified at having to turn to those cases for support for their decisions (and would like to be shown less yucky ways to getting to the right outcome by the lawyers).

There is a cool article here on the “Anti-Canon” in constitutional law, by Jamal Greene. Getting more specific, in terms of judges who are likely to be faced with these the Aurelius case on appeal, Judge Torruella of the First Circuit has a wonderful set of articles on the yucky Insular cases (and a thundering speech delivered at Harvard Law, where the key ideas for these awful cases were developed in the early 1900s).  A little more distant: Judge Lynch of the First Circuit has a fascinating recent piece talking about Korematsu (a star member of the Anti-Canon).

Odious Debts: A New Book

posted by Mitu Gulati

Classes are over, which means that I get to finally open some of the fun books that I've been meaning to read. Most of what I read is too low brow for me to have the courage to mention here. Plus, Mark tells me that the books in question have to have at least a distant relationship to credit and law.

A couple of days ago, Mark and I talked about Barak Richman's wonderful "Stateless Commerce".

Here is my next recommendation: Jeff King, The Doctrine of Odious Debt in International Law: A Restatement.

Jeff, who teaches at University College in London, was one of the pioneers in the rejuvenation of the Odious Debt literature in 2003-04, when Saddam's government in Iraq was overthrown.  Indeed, it was his co authored article for a Canadian think tank - the Center for International Sustainable Development Law, that jump-started the literature.  Now, thanks to Jeff and his co authors (and to Saddam too, I guess), there is a large and robust modern literature on the topic.  Along the way, in the years that have followed, Correa in Ecuador and Maduro in Venezuela have helped keep interest in the Odious Debt idea alive through their shenanigans. Indeed, Mr Maduro may end up rivaling Saddam in his contributions to the revival of this doctrine whose origins go back to the days of the Czarist regime in Russia in the early 1900s. As an illustration, sovereign debt gurus Ugo Panizza and Ricardo Hausmann have a nice recent piece in Project Syndicate on the relevance of Odious Debt concepts in the context of Venezuelan debt (they have an idea for an Odiousness rating system).

Slipsters are familiar with the Odious Debt debate, I suspect, since Anna G was one of its pioneers.  Plus, it is fascinating.  Basically, it is a doctrine of international law that says that the debts of "odious" regimes that are utilized for the private illicit purposes of the rulers (and where the creditors almost surely knew this was the case), do not have to be repaid by successor governments. The problem with this doctrine though -- to my mind, and to that of many others like Andrew Yianni, Anna, Mark W, Anupam Chander, Adam Feibelman, Sarah Ludington, Lee Buchheit, Eric Posner, Paul Stephan  -- is that it simply does not exist anywhere in international law (or that the basis for it is very very thin). There are some bits and pieces of historical precedent that one could arguably cobble together; but it strikes me as implausible that any modern court would accept the existence of a doctrine of Odious Debt today -- it is just too outlandish for them to do so without a more solid signal from the international community. At least, that was my view until Jeff's book showed up.

Jeff, in his superb book, argues otherwise -- he thinks there is much more of a basis for a doctrine of Odious Debt (and he very politely calls me out for having my head up my backside).  And while I can't quite bring myself to go over completely to his side, I found myself nodding in agreement with a great deal of his analysis. It is nuanced, careful and thoughtful.  Darn it! I don't think I've changed my mind, but that might simply be because I'm too stubborn.

Continue reading "Odious Debts: A New Book" »

Aurelius v. Puerto Rico's Control Board: What's the Game?

posted by Mitu Gulati

While most of the sovereign debt world is focused on Mr. Maduro’s shenanigans in Venezuela, a fascinating litigation is playing out in federal district court in Puerto Rico.  Aurelius, a hedge fund known to many of us because of the role it played in the legendary pari passu litigation against Argentina, is challenging the constitutionality of the Control Board that was put in place to run Puerto Rico’s debt restructuring (and, essentially, key aspects of its fiscal affairs). 

Elsewhere, Joseph Blocher and I have written about why this suit is exciting for us in the context of our other work on Puerto Rico’s problematic (okay, shameful) second-class status.  Specifically, this Aurelius case, has the potential to get the federal courts to confront the question of what the legal validity today is of a set of infamous cases from the early 1900s (the Insular Cases). We hope that the courts, when faced with arguments that derive their authority from these cases, will clearly say – and there is enough of a basis for them to do so – that the actions and developments of the past 100 years have effectively overruled these cases. These cases, for anyone unfamiliar, are a set of stunningly racist cases produced by many of the same judges who ruled in favor of “separate but equal” in Plessy v. Ferguson.  Oversimplifying, these cases ruled that Puerto Rico and its people, partly because they were not deemed to be civilized enough in the early 1900s, constituted an “unincorporated” territory (that is, so very foreign that they were not on their way to eventual statehood).

So, in a sense, I find myself in the bizarre position that while I am not rooting for Aurelius to win, I hope that their lawsuit ends up getting the Insular Cases condemned, once and for all, as an awful relic of an ugly past.  That said, what puzzles me about this case though is its economics, particularly from the perspective of Aurelius.  What do they get by undermining the Control Board? My assumption here is that a ruling that the Control Board is unconstitutional and that all of the actions it has taken so far are void will be hugely expensive for Puerto Rico’s debt restructuring effort.  After all, one of the key aspects of the Control Board is that it has been given the power to solve the traditional collective action problem that bedevils every sovereign or quasi-sovereign debt restructuring.  Remove the Control Board, and we go back to square one where the creditors are fighting with each other about who has what level of priority and how to avoid giving the holdouts a disproportionate share of the pie. End result: Lawyers get paid a lot, but both the people of Puerto Rico and the creditors (including Aurelius) have a much smaller pie to divide up.

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Mr. Maduro Writes an Exam Question on Veil Piercing

posted by Mitu Gulati

It is that time of the year; where one of the excuses I use to escape Thanksgiving dinners that have degenerated into to food fights over our current president is: "I have to go write my exam questions".

This year though, for those writing Corporations exams, Mr. Maduro has written an exam question whose facts I could not have imagined.  I don't know the answer, but this is a topic that Mark W has written a brilliant article on already (even he didn't quite imagine these facts though) and Anna G has thought about too (and maybe has an article in the offing). So, I'm throwing this out in the hope that they might answer it.

Put simply, the question is:

Has the risk of the corporate veil of PDVSA (Venezuela's state-owned oil company) being pierced increased significantly after Mr. Maduro fired six of the top executives of Citgo, the refining arm of PDVSA (Citgo a Delaware corp, wholly owned by PDVSA).  Officially, the charges are of corruption; but it is quite possible that they are trumped up (at least, let us assume that for purposes of the hypothetical exam question). Reality, the NYT suggests, is that Mr. Maduro is trying to use the arrests of the executives (four of whom are US citizens) to build political support. His administration has described the alleged corruption as "putrid" (that's a new one).

As background, creditors of Venezuela who have been defaulted on, have already been trying to get at PDVSA's assets, by arguing that PDVSA and the Republic are, for all purposes, one and the same and should be viewed that way.  And at least one such creditor, Crystallex (a Canadian company) has made considerable progress in its suit.

Put another way: Have Crystallex's chances of victory suddenly increased?

My two cents is a Yes. The more Mr. Maduro uses these subsidiaries as his playthings for non-corporate purposes (and particularly purposes that were not disclosed to creditors ex ante), the more likely is a court likely to decide the veil piercing is appropriate. After all, if Mr. Maduro won't respect that separate status of the subsidiaries, why should the court?

Why Didn't Puerto Rico Use its "Local Law" Advantage to Reduce its Debt?

posted by Mitu Gulati

Good academic workshops are hard to run. I know, because this is a task that I have failed at, and continue to fail at, repeatedly.

For that reason though, it is a treat to see someone else run their workshop successfully. I was at one recently that was spectacularly run: Jill Hasday's Public Law workshop at the University of Minnesota. The setting is intimate: a small group of students and faculty gathers in the late afternoon (without wine -- which I usually think of as being key) and they take apart whatever paper is the focus of the discussion. Indeed, after about an hour, the paper that is being discussed almost becomes secondary to the idea that the participants have by then honed in on as being central.  My colleague, Joseph Blocher, and I were lucky enough to have our paper "Puerto Rico and the Right of Accession" be deconstructed last week and it was a special treat for the both of us.  We have a concrete measure for whether a workshop was good (taken from our dear friend, Steve Choi): Did it help generate ideas for a new paper?  This workshop gave us at least three.  That's more than any other workshop I've been to. I don't know how Jill inspires her students or what magic potion her colleagues who attend take, but I want the secret sauce to use next semester at my workshop series with Guy-Uriel Charles.

The one question that Jill, Daniel Schwarcz and at least two students asked that keeps bugging me is: Why didn't Puerto Rico use the fact that the overwhelming majority of its bonds were governed by its own local law to directly restructure it?  Couldn't Puerto Rico have passed a set of laws to enable it to engineer a sharp reduction of its debt?  Greece did precisely that in March 2012; and it faced constitutional protections of property and prohibitions on expropriation very similar to what Puerto Rico would have (as an aside, the challenges to the Greek restructuring of 2012 -- and there have been dozens of suits filed -- have failed so far).  Indeed, the US did something like this with the gold clauses in the 1930s, to jumpstart the economy and get it out of the depression (actions that withstood legal challenge in a set of famous cases such as U.S. v. Perry).

Continue reading "Why Didn't Puerto Rico Use its "Local Law" Advantage to Reduce its Debt?" »

Venezuela's Debt: Is the Game Afoot?

posted by Mitu Gulati

Mitu Gulati & Mark Weidemaier

The confusion over the status of Venezuelan debt over the past week has been remarkable. The government and its oil company, PDVSA, have, variously, defaulted, promised to pay, paid, claimed the money got stuck in bank purgatory, gotten a Russian bailout, triggered CDS contracts, hosted sham restructuring talks (with gift bags!), and more. All while humanitarian conditions worsen. The charade of being able to meet debt obligations may be nearing its end. The prevailing narrative is that investors are willing to be patient as long as they think the government wants to pay. But the investor mix may also be changing. Have the vultures (i.e. distressed debt investors) arrived?  

Two recent articles suggest that the answer is close to being a yes. In this article, from a couple of days ago, Landon Thomas of the NYT reports that, while more traditional investors are beginning to pull out, others who specialize in distress scenarios, like David Martinez of Fintech (a “mysterious” figure, Landon tells us), are entering. The next day, Bloomberg’s Katia Porzecanski published an interview with Jay Newman, formerly of Elliott Associates and infamous for leading the pari passu litigation against Argentina, who seemed very knowledgeable about the legal risks in Venezuelan bonds. (He is ostensibly retired, but one wonders if Venezuelan debt might tempt him out of retirement).

The Bloomberg story highlights an interesting difference of opinion. The markets seem to view PDVSA bonds as significantly safer than Republic bonds. Jay Newman views the former as near-worthless. Why the difference?

Continue reading "Venezuela's Debt: Is the Game Afoot?" »

Puerto Rico, its Control Board and the "Two-Step Plan" Story

posted by Mitu Gulati

It is rare that the ideas in academic articles fundamentally change the world. A package of pieces by Clay Gillette and David Skeel (starting with "Governance Reform and the Judicial Role in Bankruptcy" in 2014, followed by a NY Times Op Ed in 2015,  and concluding with "A Two-Step Plan for Puerto Rico" in 2016) have arguably done just that though. The context, as many slipsters have written about, was the enormous financial crisis that Puerto Rico has been mired in for multiple years now. The three Gillette-Skeel articles were the foundation for the institution of a federal control board to displace the local elected authorities in the Commonwealth of Puerto Rico and, in their place, run Puerto Rico's debt restructuring.

Oversimplifying, the idea is that there are occasions when an electoral system becomes so dysfunctional in its running of the local government's operation that a more command-based system needs to be put in place temporarily. Clay has an aptly titled piece "Dictatorships for Democracy" that also explicates this idea. In political economy terms, the problem that Clay and David attack in their pieces is the one where the local competition among electoral candidates is, for whatever reason, consistently delivering severely sub-optimal local governance -- a consistently bad electoral equilibrium that eventually produces a severe government bankruptcy. And the way to get out of the bad equilibrium, they argue, is a temporary dictatorship (aka control board) that is not beholden to the kinds of political interests that were causing the dysfunction.

The question of why the local government system in Puerto Rico produced such immense fiscal mismanagement is a complicated one.  I am inclined to put a big portion of the blame for bad governance on the fact that Puerto Rico has not been allowed to meaningfully govern itself in the same fashion as the states for over a century ("foreign in a domestic sense" and all that). That said, it is hard to argue with the observation that, whatever the reason, Puerto Rico seems to be stuck in a bad governance equilibrium that it needs to be pushed out of. And Clay and David have provided one solution that might just work. (My preferred solution would be that Puerto Rico be allowed meaningful governance rights at the federal level, but no one in Washington DC seems to be willing to give them that).

Two things got me thinking about their idea over the past few days, and induced me to write this post.  First, the hearing on the legal challenge to the constitutionality of the control board is coming up soon (based on a challenge from a NY hedge fund).  Second, there was an interesting article Simon Davis-Cohen of The Nation (a lengthy piece about Clay and David and their ideas) that appeared about a week or so ago. Davis-Cohen's article, to my mind, manages to be both admiring of the ideas and goals that Clay and David have and also question the whether they are appropriate in the Puerto Rican context.

Continue reading "Puerto Rico, its Control Board and the "Two-Step Plan" Story" »

Venezuela is Defaulting, Maybe . . . Maybe Not

posted by Mitu Gulati

The news out of Venezuela with regards to its debt situation has been keeping investors (who love the high returns, but dislike the uncertainty) in a tizzy, to put it mildly. But today's news was perhaps the most bizarre yet.  Mr. Maduro, on the one hand, announced that PDVSA (the big state-owned oil company that produces 95% of Venezuela's foreign currency earnings) was making its latest payment to creditors (due today) and, on the other hand, announced that a restructuring was being planned immediately.

What? Why? How?

If the plan is to restructure because there is no money, then why were the payments today (and a few days ago) made? That makes no sense to my little brain.

And how in the world is there going to be a restructuring when there are US sanctions prohibiting just that? Through some Russian proxy? Or Chinese? Via a loophole in the sanctions regime?

Katia Porzecanski, sovereign debt guru, has a super article up on this puzzle already at Bloomberg (with co authors Patricia Laya, Ben Bartenstein, and Christine Jenkins).

(More on) Sticky Shipping Contracts

posted by Mitu Gulati

A few days ago, I put up a post about a very interesting recent article by Richard Kilpatrick on highly sticky (and inefficiently so) shipping contracts. The focus of Richard's article was on the failure of these standard-form ship contracts to pre-specify the allocation of financial responsibility among the various parties (ship owner, chartering party, etc.) when refugees need to be picked up and the ship's pre-planned journey gets diverted. Refugees needing to be rescued at sea has, as we know, become a huge international issue over the last couple of years.  In that post, I wondered aloud about what the explanation for the stickiness in the ship contracts might be. Theory, after all, would suggest that in a market with highly sophisticated repeat players, inefficient contract clauses would get reformed quickly -- yet they do not. Richard, whom I had never corresponded with before this, was kind enough to send me his thoughts on the question. With his permission, since his thoughts on this are fascinating -- especially the bit at the bottom about how these same parties are simultaneously highly innovative (with ship technology) and highly conservative (with contracts) -- I'm reproducing them below.

From Richard:

I’ve thought about these same questions over the past months and certainly agree that there is a more work to be done in understanding and exposing why there is continued reliance on these antiquated contract forms. In the charterparty context, this is especially surprising given that new iterations of similar forms have been promulgated by the same organization (BIMCO) that drafted the ‘46 form. One answer that invariably comes up is that the shipping industry is deeply conservative and resistant to change. At a recent Singapore Shipping Law Forum, a bunch of us legal and industry people discussed this phenomenon in the context of international conventions on carriage of goods. The Hague Rules governing bills of lading were drafted in the 1920’s (and revised very minimally in the 1960’s via the Visby amendments). These rules desperately need updating because containerization and multimodalism has completely changed the shipping landscape. The subsequent "Hamburg Rules" largely failed. And while the recently drafted "Rotterdam Rules" attempt to rectify some of these problems, they are already viewed by some observers as unlikely to catch-on. Only 4 countries have ratified them so far (including Cameroon in Oct 2017): .

At least in part, this appears to be because the industry folks, including their fancy shipping lawyers, don't like change. Note also that the shipping industry is constantly evolving in other ways, particularly in its reliance on technology. Larger and more sophisticated vessels are constantly entering the market, and ports (as well as the vessels themselves) are increasingly being operated by computers rather than traditional labor. So I think it is fair to say there is a very traditional view towards regulation and liability allocation, but a relatively innovative approach towards operations. This creates an increasingly widening gap between the legal framework and the realities of business practice.

Refugee Clauses, the Allocation of Rescue Costs, and a (Really Old) Sticky Contracting Problem

posted by Mitu Gulati

HT: Joseph Blocher

I didn’t think it was possible for an article to hit all three of the issues mentioned in the title: Refugees, Allocation of the Costs of Refugee Care, and Sticky Contracting (I care because they are three topics near and dear to me –although I’ve never come close to combining them). But a recent article by Richard Kilpatrick of Northeastern Illinois University and the National University Singapore on the "Refugee Clause" does just this. The issue that Kilpatrick tackles is fascinating and highly relevant in the context of today’s refugee crisis, which is arguably at one of its worst points in history. The connection of Kilpatrick’s article (on the responsibilities of commercial ships) to the current crisis – particularly in terms of the horrors perpetrated by the regimes in Myanmar and Syria – is that many of the refugees flee in overcrowded and flimsy boats and then need to be rescued at sea.

It turns out that although there is a legal obligation on ship captains to rescue people who are in peril at sea (makes eminent sense to me – we want people rescued right away if they are struggling at sea), it is not clear who is to pay this cost. The question of allocation is particularly tricky when someone charters a ship and crew to transport goods from point A to point B.  If that ship has to take a detour along the way to rescue refugees they find struggling on the ocean, who is to bear the extra cost of the additional journey?  The charter-party or the ship owners? As an aside, it appears that the penalties on the ship captains for failing to rescue promptly can be quite substantial (there were “failure to rescue” issues with respect to the Titanic that received immense publicity).

Ordinarily, one would think that this allocation of the extra costs that result from a deviation from course to do a rescue would be clearly allocated up front; before the ship’s journey begins. As Kilpatrick explains, this is not the case. Even though there have literally been hundreds, if not thousands, of rescue operations needed over the past few years (and this is not exactly new – remember the Vietnamese boat crisis that went from 1975-1990, where many countries in the region desperately tried to push the refugees away), the standard contract form – that apparently lots of transactions use again and again – has not been changed. And this is a NY contract form that goes back to 1946. Wow. What is going on?

Continue reading "Refugee Clauses, the Allocation of Rescue Costs, and a (Really Old) Sticky Contracting Problem" »

Why is Netflix Listing its European Bonds on the Isle of Guernsey?

posted by Mitu Gulati

Netflix has long interested me as a company, not only because of shows like "Master of None" (Aziz Ansari and Alan Yang have delivered brilliantly), its darwinian management philosophy (very cool podcast on Planet Money), but because of its uncertain future. It is competing against rich giants like Amazon and Apple to deliver original content in a field that is getting increasingly crowded.  My guess is that it is having to spend more and more on content, but is unable to increase its prices very much. One solution for Netflix: borrow at a high interest rate from investors who are willing to bet on your future.  And that it has done, in spades. Most recently -- a few days ago -- it borrowed $1.6 billion (yes, billion). I was intrigued and trying to avoid doing my real work, so I went looking for its offering documents and while I didn't immediately find the current docs, I found the offering circular for the bond issue Netflix did a few months prior in Europe (Euro 1.3 billion) in an offering listed on the International Stock Exchange, which is an exchange licensed by the Bailiwick of Guernsey.  Yes, really. So, surely, at least some of you are asking the same questions I am. What? Where? Who?

Guernsey, for those of you who are clueless like I am, is a British Crown "dependency" (not sovereign, but not independent, and not quite like a former colony like the British Virgin Islands or Bermuda (they are "British Overseas Territories")). Basically, a cynic might say: Perfect for a tax haven. But it is the stock exchange that interested me, especially since it seems to have been quickly rising in popularity for US and EU companies over the last couple of years.

If I remember my basic corporate finance class (I don't), we were told that exchanges performed a monitoring and disciplinary role; they were "gatekeepers", as the fancy corporate types liked to say. So, is Netflix going all the way to the Isle of Guernsey to get extra special monitoring from the Channel Islanders? Curious, I went to the website for the Guernsey exchange, to see what it said. And it does say that it has wonderfully rigorous regulatory standards ("some of the highest regulatory standards globally"). But does it really?

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Venezuelan Debt: Call a Spade a Spade

posted by Mitu Gulati

Adam Lerrick, of the American Enterprise Institute, has offered an intriguing approach to the Republic of Venezuela/PDVSA debt problem. Call a spade a spade. The distinction in the market between Republic of Venezuela and PDVSA bonds has always been artificial and the market has normally perceived it as such. Only recently have market participants begun trying to figure out which bonds -- PDVSA or Republic of Venezuela -- will be more likely candidates for a debt restructuring and therefore which should trade higher in the market.

PDVSA accounts for 95 percent for the foreign currency earnings of the entire country. Without PDVSA, there is no credit standing behind Republic bonds.  At base, there is only one public sector credit risk in the country and Lerrick invites us to acknowledge this fact.

He proposes that the Republic assume the indebtedness of PDVSA and proceed to restructure that debt as part of a generalized Republic debt workout. As part of this process -- and to discourage potential holdouts from the Republic's offer to exchange PDVSA bonds and promissory notes -- he suggests that the Government take back PDVSA's concession to lift and sell Venezuelan oil. This risk has always been prominently disclosed in the PDVSA offering documents and should not come as a surprise to anyone.

Lerrick's proposal adds to the growing list of suggestions for how a future Venezuelan debt restructuring (and there almost certainly will be such a debt restructuring) may be accomplished without holdout creditors devouring the process. No one wants to repeat the experience of Argentina.

Recently, in the context of trying to work out the knotty problem of how to restructure Venezuela’s promissory notes, Lee Buchheit and I made a similar suggestion along these lines. (our friends, Bob Lawless and Bob Scott, two gurus of this world of secured financing and contracts, were invaluable in helping us figure this structure out -- all blame for errors is ours, of course).

The structure we suggest differs from the Lerrick proposal mainly on the question of what should happen to the PDVSA oil assets, including receivables for the sale of oil.  We suggest that PDVSA pledge those assets to the Republic in consideration for the Republic's assumption of PDVSA bond/promissory note liabilities (as opposed to transferring title to the assets back to the Republic).  Such a pledge is expressly permitted by the terms of the PDVSA bonds and promissory notes and should operate to shield the assets from attachment by holdout creditors.

Variation in Boilerplate: What Does it Mean?

posted by Mitu Gulati

Most of us who have had to read hundreds of commercial contracts for either our jobs as lawyers or for our research have also necessarily read lots of “choice-of-law” provisions. I know I have. But I am also embarrassed to say that I never paid much attention to many of the minor variations in language that frequently show up. For example, whether the clause says that the bond is “governed by New York law” or that its terms are to be “construed in accordance with New York law” is a variation that I’ve seen, but have never given much thought to. But as UNC Law School’s John Coyle points out in a wonderful new article, these small variations in the boilerplate language risk being interpreted as being quite different by a court. And particularly so by a New York court that pays a lot of attention to the text. Before going further, I should note here that John’s article showing that contract language that is assumed to be boilerplate is often not really all that boilerplate follows in the tradition of another super article out of UNC, this one by slipster Mark Weidemaier, appropriately titled “Disputing Boilerplate”.

The basic empirical inquiry that John engages in his article (“Choice-of-Law Clauses in U.S. Bond Indentures”, forthcoming in the peer reviewed Capital Markets Law Journal) has two parts. First, along the lines of Mark’s “Disputing Boilerplate” article, he uses a substantial sample of bonds (over 300) to document the extent of the variation. And second, he interviews senior lawyers to ask whether they think the small variations are supposed to signify different preferences (they are notindeed, in most cases, the lawyers don’t seem to have even been aware that the variation was meaningful). The second finding is particularly surprising and interesting, given that John is able to point to multiple actual court cases where these differences in language have turned out to be meaningful.

Continue reading "Variation in Boilerplate: What Does it Mean?" »

The Gender Gap Among Fancy Economists at the NBER Summer Institutes

posted by Mitu Gulati

The NBER summer institutes are where the fanciest economists go.  Anusha Chari and Paul Goldsmith-Pinkham have a cool new paper looking at the gender gaps in who gets on the schedule for the NBER summer institutes. 

Here is their basic finding:

Over the period of study (2001-2016), women made up 20.6 percent of all authors on scheduled papers. However, there was large dispersion across programs, with the share of female authors ranging from 7.3 percent to 47.7 percent. While the average share of women rose slightly from 18.5% since 2001-2004, a persistent gap between finance, macroeconomics and microeconomics subfields remains, with women consisting of 14.4 percent of authors in finance,16.3 percent of authors in macroeconomics, and 25.9 percent of authors in microeconomics.

The under-representation in in finance and macro is striking to me.  And got me wondering about what the data might look like if one were to look at the programs for, for example, ALEA or CELS.

The complicated questions, of course, have to do with matters such as causality--whether the results are being driven by choice or discrimination or some complicated interactive dynamic.  That authors do a super job of explicating the complexities, if anyone is interested in delving deeper.

Is the Trump Administration Causing a Reduction in Corruption in Public Companies?

posted by Mitu Gulati

In theory it is possible, I guess.  The Trump Administration comes in, promising to clean or drain or pump the swamp in Washington, and CEOs of public companies become scared and decide to reform themselves.  If so, one would expect to see fewer corruption prosecutions because, of course, there is less corruption to prosecute.

My dear friend and co author, Steve Choi, constructed a graph of the actions filed against US public companies and subsidiaries in the first fiscal year since the Trump Administration took office (that is, month by month data of filings, until September 30, 2017).  If you are interested, the graph is here (along with details about our data collection process, caveats blah blah).

Bottom line:  At first cut, the SEC, at least under the FCPA, seems to be bringing a lot fewer actions under the Trump Administration than they were bringing under the Obama Administration.

Is it because there is a lot less corruption now?  Because CEOs are running scared? Hmmmm . . .

Continue reading "Is the Trump Administration Causing a Reduction in Corruption in Public Companies?" »

Deus Ex Trumpina

posted by Mitu Gulati

Sometimes, a graph on Bloomberg says it all.

Wow, just wow.  There is no easy or ready mechanism to do this (of course).  But the statement just took a giant chunk out of a large set of portfolios.

HT: Darrell Miller 

Could Giving the Rohingya Refugees a Debt Claim Ameliorate the Current Crisis?

posted by Mitu Gulati

From Joseph Blocher & Mitu Gulati

Just a couple of weeks ago, the plight of the Rohingya, a muslim minority group in Myanmar, who are being oppressed (to put it mildly–they have been called “the most friendless people in the world”) was front page news. But, as has often been the case with the plight of the Rohingya over the years, news of their plight quickly receded as other human drama and tragedy took over (hurricane in Puerto Rico, Las Vegas shooting, Catalan secession vote/violence, North Korean craziness etc.)

We realize that we are likely engaged in a pointless task.  But we want to plead for the condition of the Rohingya, and indeed other refugees, not to be forgotten so quickly. As a threshold matter, we recognize that our government cannot be depended on to care much (if at all) about the plight of oppressed groups that are as far away, foreign and poor as the Rohingya. In other words, the top down mechanism isn’t going to work. The question then is whether, assuming that the oppression in question is clear and cognizable, there is some other solution—something bottom up--that the international legal system could provide to oppressed groups who are forced into refugee status that does not depend on other governments, such as the U.S., having a self interest in intervening.

Continue reading "Could Giving the Rohingya Refugees a Debt Claim Ameliorate the Current Crisis? " »

Could Puerto Rico be Expelled for its "Tremendous" Debt?

posted by Mitu Gulati

From Joseph Blocher & Mitu Gulati

We would not exactly call ourselves avid readers of the US Navy blogs. But there is an interesting post on the U.S. Naval Institute Blog today on Puerto Rico and debt by Commander George Capen (retired).

The context that inspired his blog post was the behavior of our president toward the current crisis in Puerto Rico. To quote: 

“Ultimately, the government of Puerto Rico will have to work with us to determine how this massive rebuilding effort—will end up being one of the biggest ever—will be funded and organized, and what we will do with the tremendous amount of existing debt already on the island.” – President Donald J. Trump, 29 September 2017:

Commander Capen, whose post is worth reading in its entirety, writes:

Puerto Rico didn’t ask to become a U.S. territory in 1898; nor do they get to vote in U.S. elections; nor do they have voting representation in Congress. But they are Americans. And they also voted to become a state (over 97 percent) earlier this year.

As an unincorporated commonwealth, our Congress holds the fate of Puerto Rico in their hands. Following their vote for statehood, our Congress can make Puerto Rico a state. Congress could also vote to cast Puerto Rico aside as an independent nation.

That final statement raises a question that we have been fascinated by (and have struggled with). Could Congress really “cast Puerto Rico aside as an independent nation,” even stripping Puerto Ricans of their US citizenship, because they have a “tremendous debt”?

Continue reading "Could Puerto Rico be Expelled for its "Tremendous" Debt?" »

Thanks for the Warm Welcome

posted by Mitu Gulati

My thanks to the Slipsters, and particularly to Bob, Mark and Anna, for making me feel so welcome to your space already. I've long been a fan of the generous and supportive environment you have created and nurtured over the years. Serious and yet fun. I'm thrilled to be joining in and hope to live up to what you have already created.

Thanks also for the multiple emails sharing insights on the results of the SEC Gender Gap study already; especially from those of you who have worked in similar settings.

Elite Government Jobs, the Revolving Door, and the Gender Gap

posted by Mitu Gulati

We all know about the so-called revolving door where a few years of selfless government service translates into a high paying job in the private sector. The question my co authors, Steve Choi and Adam Pritchard, and I set out to ask was whether these goodies resulting from government service got allocated to men and women on a differential basis. 

A couple of days ago, we posted our preliminary results on this question in a paper titled "Should I Stay or Should I Go?".  We think they are intriguing, but would be delighted to get some feedback. 

Continue reading "Elite Government Jobs, the Revolving Door, and the Gender Gap " »


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