Congress passed, and President Bush signed on October 3, the Emergency Economic Stabilization Act of 2008, H.R. 1424 (the “Act”).  The purposes of the Act are twofold:  It authorizes the Secretary of the Treasury (the “Secretary”) to restore stability and liquidity to the U.S. financial system and to do so in a manner that protects home values, college funds, retirement accounts and life savings; preserves home ownership and promotes jobs and economic growth; maximizes overall returns to American taxpayers; and provides public accountability to the exercise of that authority.

That’s a tall order.  The key provision involves a Troubled Asset Relief Program (”TARP”).  Under this program, the Secretary, through an office of Financial Security that is to be established, may purchase up to $700 billion in financial institution assets.  The assets must be residential or commercial mortgages or securities, obligations or other instruments relating to such mortgages originated on or before March 14, 2008 or other financial instruments that the Treasury determines necessary.  They may be purchased from all U.S. institutions of all sizes, including the licensed U.S. branches and agencies of foreign banks.  The Treasury can manage and sell the assets or enter into financial transactions regarding any purchased asset.

Some other provisions that sought to increase financial stability include an increase in FDIC deposit insurance from $100,000 per account to $250,000 per account until December 31, 2009 and an authorization for the SEC to suspend mark-to-market accounting.

The Act also included a number of unrelated provisions relating to tax relief, tax cut extensions, an R&D tax credit,  tax incentives, mental health and creating environmentally-friendly jobs, among others.

The House Majority Leader, Steny Hoyer, offers a section-by-section summary of the legislation here.

It can be very helpful at times to anticipate what the law will be, not what it is.  A change in the laws, rules or regulations affecting your industry can have a dramatic effect, for example, on how your company operates or the success of a transaction or even of your entire business.

Being a member of industry organizations will help keep your company abreast of potential changes in the law.  But given what’s happened in Washington the past week with a proposed bailout or other solution to address the credit crunch in the U.S., tracking legislation directly via the source can be more timely.

To that end, there are some excellent federal resources available online.  The Library of Congress offers Thomas, which provides easy access to federal legislative and other information.  I primarily have used Thomas to search for specific text in Bills under discussion and Committee Reports, but it includes links to access current activity in Congress, Public Laws since 1973, House and Senate roll call votes since 1989, Presidential nominations, and treaties entered into by the U.S. since 1990, among many other options.  Thomas also has links to other House, Senate, Executive and Judicial Branch resources.

Another useful federal resource is USA.gov, the official U.S. gateway to all government information.  There’s so much information that it can be overwhelming, but the U.S. government has done a good job of providing it on the Internet.  In my opinion, their websites are better organized and easier to use than those of many private companies.

I am a big fan of flow charts, process maps and checklists in streamlining and organizing work.  While the downside is that you might miss important detail, I believe that the gains usually outweigh the costs in time saved and energy expended.

I previously highlighted Erik Heels’ excellent drawing that explains copyright law in my post here.  IP law firm Bromberg & Sunstein has a useful flowchart for determining when U.S. copyrights in fixed works expire.  Federal copyright law states that a work is “fixed” when it is embodied in a tangible medium of expression.  If a work is not fixed, it is not eligible for federal copyright protection, although it may have protection under state law.

Cornell University has posted a chart, Copyright Term and the Public Domain in the United States, that details copyright duration in a different format.  The Copyright Advisory Network of the American Library Association offers a Digital Copyright Slider to determine if copyright protects a work that first was published in the United States.

The Copyright Management Center at Indiana University offers a Checklist For Fair Use.  U.S. copyright law basically defines “fair use” to mean that one can use a copyrighted work without infringing on the copyright.

Finally, on a more general level, Professor Lionel S. Sobel has produced a flowchart, a Copyright Navigator, a digital annotated concept map of the fundamentals of U.S. copyright law.

As a follow up to my last post noting that hard assets, such as real estate, tend to be good inflation hedges, I wanted to provide some basics on real estate investment trusts (”REITs”).  A REIT is an investment vehicle that owns either mortgage notes, real estate or a hybrid that both mortgage notes and real estate.

REITs came into being in 1960.  Most REITs at that time were mortgage REITS - they owned mortgage notes on real estate assets.  However, today, real estate and hybrid REITS are common.  Via securities, a REIT allows one to invest in large, income-producing real property.  That said, REITs come in a variety of flavors and can be sliced and diced a number of ways.

In the United States, three types of REITs as securities exist.  Publicly-traded REITs register with the U.S. Securities and Exchange Commission (the “SEC”) and trade on national stock exchanges.  The are also non-exchange-traded REITs, which also register with the SEC, but which don’t trade on a stock exchange.  Finally, private REITS neither register with the SEC nor trade on a stock exchange.

Additionally, REITs may be distinguished by the type of real estate they invest in.  This can be either broad or narrowly-focused.  For example, there are office REITs, multifamily property REITs, hotel REITs, shopping center REITs, warehouse REITS and storage facility REITs.

Another way a REIT may differentiate itself is for it to focus on a specific state or geographical region.

Companies must qualify to be classified as a REIT.  To do so, they must meet specific requirements of the Internal Revenue Code.  These requirements include the following:

* The REIT must be managed by a Board of Trustees or a Board of Directors.

* The REIT must be taxable as a corporation.

* The REIT must have 100 different shareholders.

* No more than 50% of the REITs shares may be held by five or fewer individuals.

* REIT shares must be fully transferable.

* At least 75% of the REIT’s gross income must be real estate-related, such as from rents or mortgage interest.

* At least 75% of the REIT’s total assets must be real estate assets.

* The REIT’s stock in its taxable subsidiaries may not be more than 20% of its total assets.

* A REIT must distribute at least 90% of its taxable income to shareholders as dividends.

These are some, but not all, of the main limiting characteristics of a REIT. A good book on real estate syndication in general, including REITs, is Samuel K. Freshman’s Principles of Real Estate Syndication.

We’ve had many years of low inflation in the United States.  In the past year, however, inflation has increased.  The U.S. economy is complex and many reasons are behind this acceleration.  For example, the industrialization of the economies of China and India have increased the demand for commodities, which are used to build infrastructure.  So the prices of commodities, such as steel and oil, have risen as demand has increased globally.

The law of unintended consequences also has played a part in inflation.  Congress passed and President Bush signed the Energy Independence and Security Act, which mandated a huge boost in the use of corn-based ethanol.  This occurred at a time when world grain stocks are at a 30-year low and prices at historic highs.  With more demand for corn, prices shot up.  Livestock producers and food processors incurred greater costs, as corn is a staple of livestock feed.  As a result, the cost of food rose and now, for example, eggs cost 40% more than they did a year ago.  In fact, even the prices for non-food crops rose as farmers switched from them to grain crops, which are more lucrative.

So what holds value during inflationary times?  Hard assets typically do.  One such hedge against inflation  is real estate.  Despite the housing downturn due to the subprime crisis and resultant credit crunch, real estate historically has been a good long-term investment when inflation accelerates.  Although the market is not at its peak, we haven’t seen a decline in U.S. commercial real estate comparable to the residential slump.  Good value may lie in commercial real estate investment over the next few years.

What is amazing about technological change is how quick it is in today’s world.  It seems as if the rate of change in human history can be compared to a snowball that grows bigger and bigger and rolls faster and faster down a hill as time marches on.

Only 25 years ago, printed material permeated our lives.  Today, electronic data has largely complemented or supplanted the print medium for many routine processes.  New software applications seek out niches to exploit like water seeping through the earth to fill all the cracks in a rock.

One niche in which electronic means are taking hold is in software for Boards of Directors.  New software for corporate governance allows for worldwide, instantaneous, 24/7 access via easy-to-use interfaces.  It means that printed materials don’t have to be dragged around or distributed.  Confidentiality and security are enhanced.

State corporate law statutes regarding Board meetings have evolved to reflect this technological change by allowing for meetings by remote communication and remote participation (See, e.g., Massachusetts Bus. Corp. Law ch. 156D, § 8.20).

Companies that offer software or online applications for Boards of Directors include BoardVantage (Director Suite) and Diligent (Boardbooks).  Collaborative content management software, such as that produced by EMC (Documentum eRoom.net), also could be used, although it is not specifically designed for corporate governance.

Many different types of agreements include confidentiality provisions.  These provisions define the information that is deemed to be confidential.  I recently reviewed a consulting agreement and it had a flaw common to provisions that discuss confidential information:  the lack of any specificity regarding when information might not be considered confidential.

Broad, generic drafting creates potential flash points.  Instead of protecting both parties by clarifying the details, its broadness makes a potential dispute more likely.  I don’t argue the point that, in some cases, one party purposely will leave a clarifying section (AKA a carve-out) out of the agreement because it is advantageous to do so. But often, it’s just sloppy drafting without carefully crafting what is appropriate in the circumstance.

Here are some carve-outs that I suggested be added to the consulting agreement:

1. Information that, at the time of disclosure, is generally known in the pertinent field or is in the public domain;

2. Information that, after disclosure, becomes generally known in the pertinent field or becomes part of the public domain without breach of the provisions of this Agreement by either party;

3. Information that either party can show it possessed at the time of disclosure and did not acquire, directly or indirectly, from the disclosing party;

4. Information that either party can show it independently developed after disclosure without reference to the other party’s Confidential Information;

5. Information that Contractor can show it received from a third party which did not acquire it, directly or indirectly, from Company under an obligation of confidentiality and which did not require Contractor to hold it in confidence;

6. Information that Company can show it received from a third party which did not acquire it, directly or indirectly, from Contractor under an obligation of confidentiality and which did not require Company to hold it in confidence;

7. Information that is required to be disclosed by applicable law, by rule or regulation of a court or government agency of competent jurisdiction, or pursuant to legal process; provided, however, that the party required to make such disclosure shall (a) use its best efforts to limit such disclosure, (b) use its best efforts to promptly provide the other party with advance notice of any such request for disclosure so that said other party may seek a protective order or such other appropriate remedy as said other party deems necessary, and (c) make such disclosure only to the extent so required.

Number 7 is an interesting provision, in that, without it, a party could be stuck between being in violation of the law or breaching the contract.  Let’s say Company is sued by a third party and confidential information, as defined by the Company-Contractor Agreement, is or becomes an issue in the lawsuit.  If the third party’s lawyer deposes Contractor, but the Company-Contractor Agreement doesn’t include # 7, then if Contractor testifies in the deposition, he is in breach of the Agreement - and could then be subject to suit by Company.  Yet if he does not testify, he is in violation of the law.  Clearly, it is in Contractor’s interest to include this provision in the Agreement.

With the stocks of banks and investment banks imploding in 2008, there’s been much talk of capital ratios.  Regulators require banks to maintain minimum capital requirements.  The reason is to prevent them from failing due to overzealous lending during economic expansions that could result in financial setbacks when the economy turns down.  So just what are capital ratios?

In the United States, there are two primary capital ratios:  Tier 1 and Tier 2.  The Tier 1 capital ratio is the most important one, and that’s what I’ll focus on here.

The Tier 1 capital ratio consists of the ratios of the bank’s stockholders’ equity, preferred stock and retained earnings to its total risk-weighted assets.  Risk-weighted assets are calculated by putting each of the bank’s assets and off-balance sheet items into a basket and assigning a risk category to that basket.  Risk categories range from 0% to 100%.  If the overall risk is lower, then the bank is considered more stable for depositors and more conservative for investors.

The problem today is in determining both the valuation of and the risk relative to the assets.  Some, as I noted in my earlier posting on auction rate securities, are hard to value, but are less likely to default.  Others, such are a letter of credit, may be considerably riskier.  So actually determining the Tier 1 capital ratio involves art as well as science. Thus, bank stocks, which have fallen considerably this year, may still be overvalued.

Regulators use the Tier 1 capital ratio to segregate banks into five categories ranging from well-capitalized  to critically undercapitalized.

The Tier 2 capital ratio includes undisclosed reserves, general loss reserves, subordinated term debt, hybrid instruments, among other items.

Title 12 of the Code of Federal Regulations includes the regulations regarding minimum capital ratios.  A much more detailed compendium of what is included in bank capital ratios is available in Appendix A to Part 3.

Once upon a time, a CEO I worked with critiqued the difference between our leadership styles.  He told me, “You’re like a coconut.  You’re hard on the outside, but soft on the inside.  People think you’re tough until they get to know you.  Then they realize you care about them.”

He then said something shocking.  He said, “I’m just the opposite.  Everybody likes me instantly.”  “But I’m hard on the inside,” he continued, waving his arm at a group of people working for his company.  “I could care less if any of them walked outside and got hit by a car.”

What was shocking to me was not his statement, but that he admitted it.  He was not a very nice person, but he was so confident that he could admit it and not care what people thought about him.

This CEO started with a few people and built a publicly-traded company.  As could be expected, he’s not good at maintaining long-term relationships with most of his employees.  Once they figure him out, they move on.  He can’t be trusted; I’ve seen him break contracts that he signed, but later decided not to honor.  Plus, every few months, the company had a new strategy.

Nonetheless, he’s been successful if judged only in terms of building a company and creating wealth.  He has the smarts, he’s crafty and he has tremendous confidence.

That caused me to think about what the characteristics of a successful leader are.  There are thousands of books on the topic.  If you google “what makes a good leader,” in a fraction of a second, you get more than 1.5 million entries.

Having been an attorney who’s worked with hundreds of companies and in leadership roles myself, what I’ve learned is that there is no one type of leader.  No one combination of characteristics exists that leads to the corner office at the top of the skyscraper.

Vision is overrated.  It’s important, but once you have the vision, you need to be able to act on it.  This requires a certain amount of organization - the ability to get things done.  You need ambition, so that you actually do act on it.  And you have to make people believe in you; that’s where the confidence comes in.  Plus, there are a few other traits that the books mention, such as keeping cool under pressure and making tough decisions on time, among others.

Yet good leaders come in a myriad of combinations.  What works in one organization or situation may utterly fail in another.  So to say that there’s any one, two, five or ten characteristics that define a leader is wrong because the mix of traits or lack of any one trait depends on the company, the circumstances and the individuals involved in the endeavor.

A difference exists, though, between leaders and those that stand out as great leaders.  The great ones I’ve met have the ability to listen, and let people feel like they’ve been listened to.

And I do think integrity is critical.  The CEO I mention above was successful, but was constantly losing good people.  Had he kept them, his company would have been much larger and much more profitable.

General Colin Powell offers some good thoughts in this leadership primer.

How can a failure in one market snowball and create failures in others?  Here’s a simplified example, in the case of auction rate securities (ARS).

Much has been written this year about the sudden illiquidity of the ARS market.  ARS are a product often used by companies to invest their excess cash.  The inability to properly value such securities led to problems because they need to be properly valued on a company’s balance sheet for financial reporting.  Additionally, when that cash was needed, reselling the ARS at what was their supposedly appropriate value was an issue, as they were trading at significant discounts because of market illiquidity.

An ARS is a debt security, most often a municipal or corporate bond, in which the interest rate is reset via a Dutch auction on each payment date.  Essentially, it is a long-term bond with a 20 or 30-year term, but with variable interest rate, so that it acts like short-term debt.  A Dutch auction, also known as a descending price auction, is the winning bid at which the lowest possible interest rate at which equilibrium occurs (equal numbers of buyers and sellers exist), such that all securities can be sold.  For ARS, the auctions to reset the interest rate usually are held every 7, 28 or 35 days.

In February, 2008, the market for ARS collapsed and more than 1,000 auctions failed.  This is because the ARS’ insurers were in financial difficulties because they previously had insured mortgage-backed securities that were now defaulting at higher rates.  Suddenly, the ARS were seen as riskier because the insurers backing them were less secure.  Although an auction may fail, the ARS’ rates do reset,  typically increasing to the maximum rate allowed for the issuer of that particular ARS.  Demand for the securities decreased.  The investment banks that make a market in these securities refused to act as bidders of last resort, which they previously had done.  Consequence:  the market for ARS froze.

Investment banks had pitched these securities as “cash or cash equivalents” to companies.  But cash and cash equivalents are considered liquid.  Suddenly, many companies which held ARS had to revalue their holdings, and some reclassified them as short-term investments.  These changes reduce cash holdings on the balance sheet.  In some cases, a company may technically default on its debt covenants based on the ratio of cash on its balance sheets.  Public companies with significant amounts of ARS as a percentage of cash could see a drop in their share prices.

Even if the issuer underlying a particular ARS is fine, the lack of liquidity and auction failure created problems for investors.  These problems, with began with the failure of mortgage-backed securities, spiraled into auction rate securities, affected companies’ balance sheets and perhaps, share prices.  This, simply put, is how the failure of one market can snowball into other markets.