1. Seminar LEGAL IMPACT OF THE FINANCIAL CRISIS 4 December 2008 by Philip R Wood Special Global Counsel, Allen & Overy LLP Visiting Professor in International Financial Law, University of Oxford Yorke Distinguished Visiting Fellow, University of Cambridge Visiting Professor, Queen Mary College, University of London Visiting Professor, London School of Economics & Political Science

2. Phases of the financial crisis First phase Summer 2007: Bubble tenses. Hisses at vents. Second phase September 2008:AIG, Fannie, Freddie, Lehmans $2,700 bn bail out funds Third phase October 2008 ff:Debris from the skies Spread to corporates, sovereign states. BK:10307614

3. Government bail-outs of banks Tier 1 capital (preferred shares, warrants, some convertibles) (1) Funding guarantees e.g. interbank market, bond issues up to three years (2) Loss-sharing guarantees Asset purchases: valuation problems Compare historical asset purchase companies Nationalisation Note state aid, competition law See Map 56A: Examples of government bail-outs of banks 2007-08. Compare Map 56 (1)Shareholder vetos, dilution, no dividends, executive compensation, lending policy (2)Note protections to independent guarantors: first demand, grace period, pay by scheduled maturities, limited claims guarantee, application of recoveries, no waiver of defences, control, prepayment of guarantee, non-competition and subrogation, counter-indemnity, fees BK:10307614

4. Figure 56A: Examples of government bail­outs of banks BK:10307614

5. 56.Map: Bank insolvencies 1980-2002 BK:10307614

6. Liquidity and collateral Central banks substitute for Interbank markets Commercial paper market Collateral Eligibility Legal protections (Financial Collateral Directive) BK:10307614

7. Deposit protections Existing provisions, mainly retail. See maps 57 and 58 Runs on banks start in wholesale market Features of crisis schemes political guarantees eligible depositors amounts, often unlimited See Map 59A: Countries enlarging deposit protection 2007-08 BK:10307614

8. Figure 59A: Examples of new bank deposit protection 2007-08 BK:10307614

9. 58. Map: Deposit insurance – coverage ratio to per capita GDP BK:10307614

10. Shorting shares Selling shares one does not own naked shorts covered shorts Pros and cons Types of regulation prescribed companies only, e.g. banks ban on naked shorts, disclosure of covered shorts note general law of false market rumours/market manipulation See Map 64A: Examples of new shorting restrictions 2007-08 BK:10307614

11. Figure 64A: Map: Examples of new shorting restrictions 2007-08 BK:10307614

12. Other legal changes Mark-to-market accounting Executive compensation (moral suasion) Foreclosure forbearance BK:10307614

13. Regulatory proposals Basel counter-cyclicality (more capital in good times) Securitisations (more on balance sheet, skin in the game) Rating agencies: registration, conflicts of interest, differentiation of structured finance Hedge fund regulation? Liquidity regulation Subsidiarisation (banks must form local subsidiaries to enhance control) Credit default swap central counterparty Derivatives regulation and transparency BK:10307614

14. UK Special Resolution Regime Background: FDIC and others Partial transfers and credit analysis Set-off and netting Collateral Henry VIII clause BK:10307614

15. Legal impact of previous Depressions South Sea Bubble 1710s (companies retarded) Mississippi Co and Banque de France 1720 (John Law) (stock exchanges and banks retarded) 1930s Great Depression (US regulatory regime, rescue statutes) Japan 1990s: mild impact e.g. Civil Reorganisation Law 1999, no Glass- Steagall Major differences now: regulatory regime (See Map 54) corporate rescue statutes (See Map 42) BK:10307614

16. 54. Map: Financial regulatory regimes BK:10307614

17. 42. Map: Major changes to insolvency legislation 1997 – 2007 BK:10307614

18. Possible future impact on insolvency law Set-off and netting (Special Resolution Regime) Contract cancellations (EHYA views) Custodianship (the melting trust) Director liability and compulsory filings Security interests, especially rescues and consumer protection New money priority Partial transfers and novations (US BC s365, France) Faster prepacks Pensions and employees Shareholder vetos Official guidelines for work-outs (Britain, Turkey, Malaysia, Indonesia, Hong Kong, South Korea, Japan) BK:10307614

19. Conclusions 1.What really went wrong? 2.Can the law prevent what went wrong? 3.How should the law be changed, if at all? BK:10307614