The Panic of 2008

The Panic of 2008

Causes, Consequences and Implications for Reform

Edited by Lawrence E. Mitchell and Arthur E. Wilmarth, Jr

The Panic of 2008 brings together scholars from a variety of disciplines to examine the causes and consequences of the global credit crisis, the subsequent collapse of the financial markets, and the following recession. The book evaluates the crisis in historical context, explores its various legal, economic, and financial dimensions, and considers various possibilities for reform. The Panic of 2008 is one of the first in-depth efforts to study the crisis as it was in the very earliest stage of resolution, and establishes a foundation for thinking about and evaluating current reform efforts and the likelihood of recurrence.

Chapter 11: It’s Time to Resuscitate the Shareholder Derivative Action

Edward Labaton and Michael W. Stocker

Subjects: economics and finance, financial economics and regulation, law - academic, finance and banking law


Edward Labaton and Michael W. Stocker* INTRODUCTION Even in the midst of the spectacle of collapsing automobile giants and banks teetering on the brink of insolvency, little has outraged the public as much as abuses of executive compensation. While the credit crisis and plummeting real estate values may have resulted in more wide-scale damage, the trust and confidence of the American public were profoundly shaken when AIG’s board approved hundreds of millions of dollars in bonuses to many of the same executives who had run the company into the ground. AIG management was hardly alone in pocketing king-size bonuses in the midst of the greatest financial disaster of the last 70 years. In 2007, as the bubble economy began its death plunge, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers and Bear Stearns handed out about $36 billion in performance-related bonuses to top executives. Less than two years later, Lehman was bankrupt, Merrill Lynch had been forced into a shotgun marriage with Bank of America, and Bear Stearns was saved from bankruptcy only by its eleventh-hour rescue by JP Morgan Chase, subsidized by American taxpayers. Most frustrating to the public is that there is apparently so little that can be done to rein in this outrageous waste of corporate assets. Legislators argue that their hands are tied by the contracts companies have entered into with executives. Boards of directors have thus far shown little appetite for restraining management excesses, in part because structural biases tend to lead directors to promote...

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