Mark Roe

An op-ed by Mark Roe. Headlines about banks’ risks to the financial system continue to dominate the financial news. Bank of America performed poorly on the US Federal Reserve’s financial stress tests, and regulators criticized Goldman Sachs’ and JPMorgan Chase’s financing plans, leading both to lower their planned dividends and share buybacks. And Citibank’s hefty buildup of its financial trading business raises doubts about whether it is controlling risk properly. These results suggest that some of the biggest banks remain at risk. And yet bankers are insisting that the post-crisis task of strengthening regulation and building a safer financial system has nearly been completed, with some citing recent studies of bank safety to support this argument. So which is it: Are banks still at risk? Or has post-crisis regulatory reform done its job?

An op-ed by Mark Roe: Should bankruptcy laws that allow companies broad latitude in selecting a venue be reformed? The venue statute effectively allows those filing the case to choose which district’s bankruptcy court will hear the case. That ability to choose leads many firms whose business is located elsewhere to file for bankruptcy in Delaware’s bankruptcy court or in the Southern District of New York. Is this a bad thing? In two dimensions, it is. Since the choice of where to file is typically made by the debtor’s senior management and its professional advisers, these two have reason to file in a court whose decisions favor their interests—more discretion for managers and more protection from liability for directors. Sometimes a tilt toward their interests makes sense; sometimes not. Second, bankruptcy court rulings that narrow management’s discretion in sensible ways can push firms to choose to file elsewhere.

An op-ed by Mark Roe. Should bankruptcy laws that allow companies broad latitude in selecting a venue be reformed? The venue statute effectively allows those filing the case to choose which district’s bankruptcy court will hear the case. That ability to choose leads many firms whose business is located elsewhere to file for bankruptcy in Delaware’s bankruptcy court or in the Southern District of New York. Is this a bad thing? In two dimensions, it is.

An op-ed by Mark Roe and Michael Troge. President Obama has reanimated the idea of taxing the debt of big banks to help stabilize the banking industry and prevent future financial crises. The administration argues that the new tax would discourage banks from taking on too much risk by making it “more costly for the biggest financial firms to finance their activities with excessive borrowing.” The president’s bank tax is unlikely to gain traction in the new Congress, following the failure of similar proposals from the administration in 2010 and last year from former House Ways and Means Chairman Dave Camp. But even if it became law, it wouldn’t put a sizable dent in bank debt. The existing tax system strongly encourages debt finance and the proposed new tax will not fundamentally change this.

Statistics released by the Social Science Research Network (SSRN) indicate that, as of the end of 2014, Harvard Law School faculty members featured prominently on SSRN’s list of the 100 most-cited law professors.

When some bondholders bought debt in casinos operated by Caesars Entertainment, they didn’t think they were gambling. Instead, they were relying on the guarantees of the parent company that it would stand behind the debt payments even if something went wrong. But after Caesars got into trouble and the company eliminated the guarantee, the investors turned to an obscure, rarely invoked Depression-era law devised to protect bondholders from abusive tactics...But over the decades, few cases have explicitly invoked this aspect of the law. That two recent cases do is noteworthy, Mark Roe, a professor at Harvard Law School, said, and may change the way debt restructurings are handled. “This statutory provision affects all bond issues and has long been dormant in litigation,” Mr. Roe said in an interview last week. “But now we’ve had two recent rulings in a row taking seriously the statute’s prohibition on voting outside of bankruptcy. People doing these restructurings will have to pay attention to it.”

An op-ed by Mark Roe. Last month, the United States Congress succumbed to Citigroup’s lobbying and repealed a key provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act: the rule that bars banks from trading derivatives. The Dodd-Frank law’s aim was to prevent another financial crisis like that of 2007-2008; the repeal reduces its chances of success...This sub rosa government indemnification of major banks’ derivatives portfolios undermines financial stability. If a major bank defaults on its derivative trades, the banks with which it has traded could also fail. If several large, interconnected derivatives-trading banks collapse simultaneously, the financial system could be paralyzed, damaging the real economy – again.

Mark J. Roe, who teaches corporate law and corporate bankruptcy at the Harvard Law School, has some free advice for South Dakota. If the state wants to become a haven for business incorporating, it'll probably have to develop a business court like Delaware's and also find and exploit one of Delaware's weaknesses. Even if those efforts are undertaken, rivaling Delaware for business incorporating will be tough. "It's a hard thing to do nowadays, since Delaware has sufficiently cornered the market," Roe said.

An op-ed by Mark Roe. If you could make one change to the bankruptcy code, what would it be? It’s the safe harbors. The bankruptcy code works well, but even good codes could be improved. Everyone will have a favorite for making a typical industrial firm bankruptcy work better. (Mine is to better handle the time value of money during a bankruptcy proceeding.) But only one piece of the code can spill over to damage the entire American economy in a serious way. And it’s those safe harbors for repo and derivatives. They need narrowing and fixing.

An op-ed by Mark Roe. At a closed-door conference attended by senior bankers, regulators, and some academics, Federal Reserve Governor Daniel Tarullo and Federal Reserve Bank of New York President William Dudley used their bully pulpit to do something unexpected. Instead of focusing on how to bolster bank stability – channeling more capital toward the largest institutions, curbing their riskiest activities, and determining how to manage a failing bank without bailing it out – the officials discussed the bankers themselves.

An op-ed by Mark Roe. When a company files for Chapter 11 protection a second, third or even fourth time, who’s to blame? Bankruptcy recidivism has a bad name. The best data points to one out of six restructured companies refiling for bankruptcy not long after getting a Chapter 11 plan of reorganization confirmed. If blame needs to be handed out, one could point to the judge who is charged under the Code with independently concluding that the plan is not likely to lead to a further restructuring of the company. But blaming the judge would be harsh, because the statutory standard of ‘not likely’ doesn’t require a “guarantee,” just a likelihood. The data suggests that most—more than 80%—don’t refile.

It’s not every day that Wall Street comes out and celebrates a change that erodes its rights in a lucrative market. On the surface, the applause for the change, which was agreed upon this past weekend, didn’t make sense. Why would the banks back something that could lessen their longstanding privileges in one of their most profitable businesses — derivatives trading?...Mark J. Roe, a professor at Harvard Law School, said that the contract overhaul was in some ways a good thing because it would most probably lead to a more orderly winding-down of large banks. But he also argued that the advantages that derivatives continue to enjoy could, over time, reduce the strength of the market...“On that dimension, it doesn’t make us better off, and that’s an important dimension,” Mr. Roe said. “The bottom line is that this chips away at too-big-to-fail, but too big to fail is still big.”

Translated from German: Mark Roe, Professor at the Harvard Law School in Cambridge, Massachusetts and Michael Troege Professor at ESCP Europe in Paris, … want to tax banks' debt [instead of profits on their equity]. Equity capital thus becomes more attractive as an alternative form of finance. The idea is that as a result banks would raise less debt and finance more with equity [and be safer]. In return, the corporate taxes on bank profits should decrease or be completely eliminated.”

An op-ed by Mark Roe. Last month, at a US Federal Reserve Bank conference on the money market, officials lamented the market’s enduring fragility. Indeed, six years after a run on the money market nearly brought the United States – indeed, global – financial system to its knees, critical risks that underpinned that crisis still have not been brought under control.

An op-ed by Mark Roe. To Europeans with whom I speak, the $8.9 billion fine imposed on the French financial-services company BNP Paribas for violating American sanctions against Cuba, Iran, and Sudan seems excessive. Yes, BNP did something seriously wrong. But $8.9 billion? Isn’t that extremely disproportionate for an otherwise highly responsible bank? French President François Hollande asked US President Barack Obama to intervene to have the fine reduced, as did the European Union’s commissioner for the internal market and services, Michel Barnier...Three factors, not all of which are being discussed, seem to explain the size of the penalty.

An op-ed by Mark Roe. Detroit’s bankruptcy offers a cautionary tale for responsible municipal officials on how, and how not to, manage their budget. The pressure from pension obligations was a big factor in the Detroit bankruptcy. The simple lesson focuses on how municipalities save up to pay pensions to their retired police, firefighters, and other municipal employees. The city sets aside funds for the future retirement payments and expects earnings from the investments to help pay the pensions.

An op-ed by Mark Roe. Since the global financial crisis, regulators have worked hard to make the world’s big banks safer. The fundamental problem is well known: major banks have significant incentives to take on excessive risk. If their risky bets pay off, their stockholders benefit considerably, as do the banks’ CEOs and senior managers, who are heavily compensated in bank stock. If they do not pay off and the bank fails, the government will probably pick up the tab. This confluence of economic incentives to take on risk makes bank managers poor guardians of financial safety. They surely do not want their bank to fail; but, if the potential upside is large enough, it is a risk they may find worth taking.

The American College of Bankruptcy recently announced that Harvard Law School Professor Mark Roe '75 will be inducted as a fellow of the College. The ceremony will take place on March 14, 2014, in Washington, D.C., will be presided over by D.J. (Jan) Baker, chair of the College.