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spring 2009 archive

This is the page for archived material for the Spring 2009 International Finance class.

REVIEW SESSION: I have booked our usual room for a review session on Monday April 27 at 10.30 am. I booked the room until 12.30 pm but the session is entirely voluntary from your perspective (you are free to miss it or to leave if you think it’s not in fact useful). I will answer questions and we could perhaps talk about some questions from past exams.

I am happy to answer questions by email. On Friday May 1 and Saturday May 2 I will be travelling and at a conference. I will be taking my laptop with me and should have email access for part of the time but for some of the time on both days I won’t be able to answer questions. I get back late on the 2nd and will try to check email on my return. However it would likely be a good idea to ask me any questions before Friday if possible!

WEEK 14: 20-24 April 2009 We read the GAO’s report early this semester. For this week, please read the Turner Review: A regulatory response to the global banking crisis which was published last month. There’s some material in this report about capital adequacy, which follows nicely from last week and about securitization. Although it isn’t short, I think it is quite readable.

WEEK 13: 13-17 April 2009 On Tuesday we will finish discussion of the Basel Committee/IADI, Core principles for effective deposit insurance systems – consultative document (Mar. 2009) and then move on to consider capital adequacy regulation. We will focus on Basel Committee, Range of practices and issues in economic capital frameworks (Mar 2009) (please read to page 38 of this document, and ignore the appendices).

April 13: Here is an additional handout on EU Deposit Insurance, to be read together with the EU’s 2009 Directive.

April 15: Here is a handout outlining the Basel Capital Adequacy Requirements with respect to credit risk.

WEEK 12: 6-10 April, 2009 This week we will move on from our consideration of loan sales by looking at banking regulation (with some comparisons with securities regulation). For this week please read :
1. Materials Packet 6
2. Basel Committee/IADI, Core principles for effective deposit insurance systems – consultative document (Mar. 2009)
3. Basel Committee, Range of practices and issues in economic capital frameworks (Mar 2009) (please read to page 38 of this document, and ignore the appendices).

April 6: On Friday the UK’s House of Commons Treasury Committee published a report: Banking Crisis: The impact of the failure of the Icelandic banks, HC 402 (Apr. 4, 2009) which states:

We consider the case for the provision of assistance by the UK Government to these depositors. We do not accept that there is a need to provide assistance to the local authorities. We recommend that, on this occasion only, all charities should be compensated for losses incurred as a consequence of the failures of the Icelandic banks. Finally, we agree that the overarching principle should be that the UK Government cannot provide cover for deposits held by British citizens in jurisdictions outside the direct control of the United Kingdom. As such, while we acknowledge the severe distress of those UK citizens suffering due to the Icelandic banking failure, we can only recommend that the UK authorities work with the Isle of Man and Guernsey authorities to resolve these issues.


The fact that the fate of Icelandic banks had an impact on millions of savers in the UK, as well as on numerous local authorities, wholesale depositors and charities testifies to the trans-national basis of the modern banking system. It also points to the complexity of the regulatory framework.

April 10: There’s a sceptical and provocative piece from this week’s Financial Times with the title Ten principles for a Black Swan-proof world. here’s an excerpt:

Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

WEEK 11: 30 March- 3 April 2009 For this week’s classes please read the rest of the current materials packet: Syndicated Loans III.

This week the G20 countries meet for a summit in London (a meeting which seems likely not to resolve all of the issues). The Intergovernmental Group of Twenty-Four on International Monetary Affairs and Development has issued a statement in preparation for the meeting. The statement begins:

The global economy is mired in perhaps the deepest and most widespread crisis in modern history. Although the crisis originated in advanced economies, it is having a disproportionate negative impact on developing countries. The sharp contraction in exports, falling prices for primary commodities, declining remittances, and a massive withdrawal of private capital flows have led to sharply falling growth and a severe credit crunch, culminating in rising unemployment and poverty. We underscore that this crisis requires collective solutions that pay due attention to their impact on developing countries.

March 31: Here is a link to a description of the paper studying performance pay I mentioned this morning.

April 1: Background information on the G20 meeting at the Council on Foreign Relations, the IMF, and the Bretton Woods Project’s Rethinking Finance site (plus Draft Communique here).

April 2: Here is the Communique (and the annex on strengthening the financial system and the one on the IFIs).

WEEK 10: 23-27 March 2009

March 26: Here is Treasury Secretary Geithner’s written testimony to the House Financial Services Committee about regulatory reform.

Here is the next set of materials: Syndicated Loans III. Please read to page 23 for Thursday’s class.

On Tuesday we will finish up discussion of the Redwood Master Fund case. The judge dismissed the argument that the power of majority creditors to agree to the waiver should be exercised bona fide for the benefit of the creditors as a whole, and that a decision which benefited the majority at the expense of the minority was therefore invalid. This argument was based on cases about the power of shareholders to amend a company’s articles of incorporation. The judge said that applying this standard would be likely to “paralyse the exercise of the power” (para 93, and see para 105).

Instead the judge preferred to apply a test which looked at whether the waiver power was being exercised in good faith for the purpose for which it was conferred. Under his standard the waiver could be invalidated if it were approved for the purpose of or with the objective of benefiting the majority or harming the minority. The judge invokes the idea of a fraud on the minority. It would be more difficult to establish bad motive than to establish harm to the minority. Is this the right approach?

As a minority creditor, would you be happier with addressing the issue of amendment in the way that the amendment provision in the CACs on page 65 of the sovereign materials does?

In this case we see that there was a distinction between public lenders and non-public lenders. The public lenders were not supposed to receive non-public information. The judge says that trading in UPC stocks while in possession of non-public information could put them in breach of SEC regulations (para 25). Do you know why this is? Is it accurate? Look at the LSTA’s 2008 Code of Conduct and Confidential Information Supplement.

March 24: In case you are interested in following up, here is a link to the FSA’s Consultation Paper on Remuneration (you are not required to read this – it is 81 pages long). [Later: on the AIG bonus question you might want to look here.]

Insider Trading is regulated in the US under section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. US v O’Hagan (SCt discusses both the classical theory of insider trading and the misappropriation theory:

Under the “traditional” or “classical theory” of insider trading liability, §10(b) and Rule 10b-5 are violated when a corporate insider trades in the securities of his corporation on the basis of material, nonpublic information. Trading on such information qualifies as a “deceptive device” under §10(b), we have affirmed, because “a relationship of trust and confidence [exists] between the shareholders of a corporation and those insiders who have obtained confidential information by reason of their position with that corporation.” Chiarella v. United States, 445 U.S. 222, 228 (1980). That relationship, we recognized, “gives rise to a duty to disclose [or to abstain from trading] because of the `necessity of preventing a corporate insider from . . . tak[ing] unfair advantage of . . . uninformed . . . stockholders.’ ” Id., at 228-229 (citation omitted). The classical theory applies not only to officers, directors, and other permanent insiders of a corporation, but also to attorneys, accountants, consultants, and others who temporarily become fiduciaries of a corporation. See Dirks v. SEC, 463 U.S. 646, 655, n. 14 (1983).
The “misappropriation theory” holds that a person commits fraud “in connection with” a securities transaction, and thereby violates §10(b) and Rule 10b-5, when he misappropriates confidential information for securities trading purposes, in breach of a duty owed to the source of the information…Under this theory, a fiduciary’s undisclosed, self serving use of a principal’s information to purchase or sell securities, in breach of a duty of loyalty and confidentiality, defrauds the principal of the exclusive use of that information. In lieu of premising liability on a fiduciary relationship between company insider and purchaser or seller of the company’s stock, the misappropriation theory premises liability on a fiduciary turned trader’s deception of those who entrusted him with access to confidential information.
The two theories are complementary, each addressing efforts to capitalize on nonpublic information through the purchase or sale of securities. The classical theory targets a corporate insider’s breach of duty to shareholders with whom the insider transacts; the misappropriation theory outlaws trading on the basis of nonpublic information by a corporate “outsider” in breach of a duty owed not to a trading party, but to the source of the information. The misappropriation theory is thus designed to “protec[t] the integrity of the securities markets against abuses by `outsiders’ to a corporation who have access to confidential information that will affect th[e] corporation’s security price when revealed, but who owe no fiduciary or other duty to that corporation’s shareholders.”

In 2007, the SEC took enforcement action against Barclays Bank and Steven Landzberg, a distressed debt trader:

According to the complaint, Barclays and Landzberg illegally traded millions of dollars of bond securities over eighteen months, while aware of material nonpublic information received through six creditors committees. Landzberg simultaneously served as Barclays’ representative on the creditors committees and as its proprietary trader. Landzberg signed confidentiality agreements and committee bylaws on Barclays’ behalf, and received material nonpublic information concerning the financial condition and prospects of the issuers, their most recent business plans, detailed management projections, contemplated financing alternatives, proprietary advisor analyses, and the timing and terms of proposed plans of reorganization. Between March 2002 and September 2003, the repeated illegal insider trading by Barclays and Landzberg breached fiduciary and other duties of trust or confidence.
The complaint alleges that Barclays and Landzberg misappropriated material nonpublic information by failing to disclose any of their trades to the creditors committees, issuers, or other sources of such information. In a few instances, Landzberg used purported “big boy letters” to advise his bond trading counterparties that Barclays may have possessed material nonpublic information. However, in no instance did Barclays or Landzberg disclose the material nonpublic information received from creditors committees to their bond trading counterparties. Three of the six committees were official unsecured creditors committees appointed by the Office of the United States Trustee under the auspices of the federal bankruptcy courts. Barclays served as “Chair” of two of these bankruptcy committees at the time of its illegal insider trading.
The complaint further alleges that Barclays’ senior management authorized Landzberg to buy and sell securities for Barclays’ account while he served on bankruptcy creditors committees. Barclays’ Compliance personnel failed to prevent the illegal insider trading, despite receiving notice that the proprietary desk had nonpublic information and should have been restricted from trading.
Barclays and Landzberg each consented, without admitting or denying the allegations in the Commission’s complaint, to entry of final judgments permanently enjoining them from violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. To settle the Commission’s insider trading charges, Barclays also consented to entry of a court order requiring it to pay over $10.94 million: disgorgement of $3,971,736, prejudgment interest of $971,825, and a civil money penalty of $6,000,000. To settle the Commission’s charges against him, Landzberg further consented to be permanently enjoined from participation in any creditors committee in any federal bankruptcy proceeding involving an issuer of securities, and to pay a civil money penalty of $750,000.

WEEK 9: 9-13 March 2009 For the classes this week, please read this next materials packet Syndicated Loans II. This will not carry us over much into the period after Spring Break if at all – I will be posting another packet focusing on issues relating to loan trading shortly.

March 10: There is a proposal which is being put forward for consideration by the G20 for an international financial court to deal with transnational frauds. I’m not sure if this is a serious proposal or a way of getting more publicity about investors who lost money investing with Madoff. For one thing it would surely take a long time to get such an idea off the ground. And is another court what we really need right now?
Meanwhile the EU Commission is consulting on financial market supervision and a committee of the EU’s parliament is working on changing capital requirements for banks.

March 11: We discussed the idea of a windfall in the context of remedies for breach of fiduciary duties the other day. The English Court of Appeal recently decided a case (Imageview v Kelvin Jack) involving a soccer player and his agent where the agent agreed with Dundee United that the club would pay him for some of his services relating to his client’s work for the club. Lord Justice Jacobs said:

…. I should mention what was something of a constant refrain from Mr Lopian. It was this: Mr Jack got the benefit of the contract negotiated for him. Why should he not have to pay for it? Why should he have the benefit of the agent’s work for nothing at all?
..The answer is twofold. First it has already been given in the cases, and second there are sound policy reasons as to why…
.. The policy reason runs as follows. We are here concerned not with merely damages such as those for a tort or breach of contract but with what the remedy should be when the agent has betrayed the trust reposed in him – notions of equity and conscience are brought into play. Necessarily such a betrayal may not come to light. If all the agent has to pay if and when he is found out are damages the temptation to betray the trust reposed in him is all the greater. So the strict rule is there as a real deterrent to betrayal. As Scrutton LJ said…”The more that principle is enforced, the better for the honesty of commercial transactions.”

He made some other useful statements about agency which are relevant from the perspective of the argument I have been making to you all that specific contractual provisions are more likely to be effective than more general provisions:

The law imposes on agents high standards. Footballers’ agents are not exempt from these. An agent’s own personal interests come entirely second to the interest of his client. If you undertake to act for a man you must act 100%, body and soul, for him. You must act as if you were him. You must not allow your own interest to get in the way without telling him. An undisclosed but realistic possibility of a conflict of interest is a breach of your duty of good faith to your client.
..That duty should not cause an agent any problem. All he or she has to do to avoid being in breach of duty is to make full disclosure. Any agent who is doubtful about his position would do well to do just that – the mere fact that he has doubts will generally be a message from his conscience…
The law as to an agent’s duty of fidelity where there is a realistic possibility of a conflict of interest, goes back a long, long way….

Lord Justice Mummery added:

In our age it is more important than it ever was for the courts to hold the precise and firm line drawn between payments openly, and therefore honestly, received by agents, and undeclared payments received by agents secretly, and therefore justly liable to all the legal consequences flowing from breaches of an agent’s fiduciary obligations.

If you are writing a paper in this class, please note that I am extending the deadline for submission of your drafts to April 1.

WEEK 8: 2-6 March 2009 Please read the rest of the current materials packet for this week. As I said in our last class, on Tuesday we will study the Libyan Arab Foreign Bank case. On Thursday we will begin to look at the materials on jurisdiction.

2 March: Via Marginal Revolution:

A new internet-only exchange, the so-called Deposit Exchange, has opened in Ukraine. It enables people whose bank deposits have been frozen in banks of questionable solvency to sell the money in those deposits at a discount.

WEEK 7: 23-27 February 2009 On Tuesday we will finsih looking at the loan agreement and then we’ll move on to the next packet of materials. Please aim to read to page 24 for Tuesday and to page 59 for Thursday.

WEEK 6: 16-20 February 2009 This week we will have only one class, on Tuesday 17 February, and most of the class will involve looking at the Subordinated Term Loan Agreement we started to look at on Thursday. I apologize for not giving more notice about the cancellation of Thursday’s class – I am going to a conference in Iowa which takes place on Friday and I hadn’t realized that I will be airborne during our class time!

To go along with your reading of the loan agreement, here is the next set of materials: Materials Packet 3: Syndicated Loans I. For Tuesday morning I don’t think you will need to read beyond the section on eurodollars and Libor.

February 18: Champerty news : the Second Circuit decided the other day to certify the following questions to the New York Court of Appeals:
1. Is it sufficient as a matter of law to find that a party accepted a challenged assignment with the “primary” intent proscribed by New York Judiciary Law § 489(1), or must there be a finding of “sole” intent?
2. As a matter of law, does a party commit champerty when it “buys a lawsuit” that it could not otherwise have pursued if its purpose is thereby to collect damages for losses on a debt instrument in which it holds a pre-existing proprietary interest?
3. (a) As a matter of law, does a party commit champerty when, as the holder of a defaulted debt obligation, it acquires the right to pursue a lawsuit against a third party in order to collect more damages through that litigation than it had demanded in settlement from the assignor?
(b) Is the answer to question 3(a) affected by the fact that the challenged assignment enabled the assignee to exercise the assignor’s indemnification rights for reasonable costs and attorneys’ fees?

WEEK 5: 9-13 February, 2009: On Tuesday, as I said, I aim to finish the second materials packet. For the class on Thursday, I would like you to read this Subordinated Term Loan Agreement. This agreement doesn’t look much like a cross-border agreement in most respects. The borrower is based in Illinois and owned by PrivateBancorp Inc., a Delaware corporation which is traded on NASDAQ. However, the interest rate which applies to this loan is LIBOR plus 3.5%. Libor is an interest rate which applies in the eurodollar market, a market for deposits of dollars outside the US, which originally applied to transactions outside the US and has come to be used in many domestic transactions. And the agreement provides for the possibility of foreign lenders. The document is very like one which could be used for a similar loan made in the London market.

PrivateBancorp’s Form 10Q described the financing of which the agreement you are going to read is part, as follows:

In the third quarter 2008, the Company entered into a credit facility comprised of $20.0 million of senior holding company debt and a $120.0 million subordinated debt facility issued by The PrivateBank – Chicago. The $140.0 million credit facility replaced a credit facility with a correspondent bank comprised of a $25.0 million senior debt facility and a $75.0 million subordinated debt facility. The subordinated debt qualifies as Tier 2 capital under banking rules and regulations and was sold to commercial banks pursuant to a subordinated debt loan agreement, which includes customary representations, warranties, and events of default. The subordinated debt matures on September 26, 2015. The PrivateBank – Chicago, with regulatory approval, can prepay the subordinated debt without penalty at any time. The interest rate for the subordinated debt is floating at LIBOR plus 3.50%. The debt is unsecured and subordinate to all other categories of creditors, including general creditors.

As you read the agreement, please consider the following features and questions:
1. The structure of the transaction – it is a syndicated loan with a group of banks as lenders and an administrative agent bank. What is the role of the administrative agent?
2. The provisions of the agreement which are designed to protect the interests of the lenders (conditions precedent, representations and warranties, covenants, events of default).
3. Are there provisions designed to protect the interests of the borrower?
4. What is the governing law? What courts or tribunals have jurisdiction over disputes under this agreement?
5. The agreement provides for assignment and for the sale of participations in the loan. What does the agreement say about the differences between assignment and the sale of participations?
6. The agreement contains provisions relating to Libor (the definition, a provision for what happens should it become impossible to determine Libor, and an illegality provision).
7. Note the increased costs clause.

9 February: Fn. 29 of the 2nd materials packet refers to summary judgments against Argentina in a case news reports cite as Seijas v Argentina. There is a summary judgment reported as Dolcetti v Argentina at 2009 U.S. Dist. LEXIS 7638 (SDNY 2009).

10 February: Here’s a link to a blogpost at Zero Hedge with some pretty dramatic video of Congressman Paul Kanjorski talking about the lead up to the bailout.

11 February: Daniel Glass points us to this article in yesterday’s NYT: Washington Hopes ‘Vulture’ Investors Will Buy Bad Assets

WEEK 4: 2-6 February, 2009 I have posted the second materials packet to the course materials page. For next Tuesday’s class we will start with the appendices to the GAO report. We will then move on to this next packet. I’m going to ask you to read to page 38 in this packet for next week, although we may need to add some pages if we move quickly on Tuesday!

4 February: The Committee of European Securities Regulators (CESR) issued a public statement for investors affected by the Madoff collapse today. CESR says:

CESR is organising regular contacts between its Members (EU securities regulators) to establish the extent of potential losses of European investors and to coordinate the Members’ actions. CESR is also ensuring a co-ordinated dialogue with the SEC in order to ensure regulatory resources are used as effectively as possible. Concerns have been raised in respect of custody and sub-custody arrangements. For this reason, CESR will focus its efforts on establishing how the various rules on depositary obligations have been implemented in Member States and will seek to establish if further clarity is needed on an EU-wide basis.

6 February:Here’s a link to a useful article on what may happen with respect to financial regulation.

WEEK 3: 26-30 January, 2009 We will finish the first set of materials and begin to read the GAO’s recent report:

GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO – 09-216 (Jan 2009).

NB. For background on the foreign exchange market you may find it useful to look at this page from the Federal Reserve Bank of New York.

January 28: Charlie McCreevy, the EU’s internal market commissioner, is talking tough on financial regulation these days. He made one comment in particular which relates to our focus on the recent apparent intensification of interest in harmonization:

It must now be clear to everyone that there is a growing gap between the EU supervisory structure, which is primarily organised on a national basis, and market developments, where integration and internationalisation lead to complex interdependencies and growing spill-over effects.

January 30: Davos: Scales tipping back toward regulation; Financial rules ‘worsened crisis’.

On January 29, the Congressional Oversight Panel published a Special Report on Regulatory Reform (109 pages long – you don’t need to read it):

The Panel has identified eight specific areas most urgently in need of reform:
1. Identify and regulate financial institutions that pose systemic risk.
2. Limit excessive leverage in American financial institutions.
3. Increase supervision of the shadow financial system.
4. Create a new system for federal and state regulation of mortgages and other consumer credit products.
5. Create executive pay structures that discourage excessive risk taking.
6. Reform the credit rating system.
7. Make establishing a global financial regulatory floor a U.S. diplomatic priority.
8. Plan for the next crisis.

Although there is some overlap with the GAO report in terms of issues identified, the tone is a bit different.

January 21, 2009: Possible papers for this class could be based on regulatory proposals/recent regulatory developments or consultations.
For example:
EU Commission: Consultation on the review of the Prospectus Directive (Directive 2003/71/EC) (this page is also useful)
Recent EU action on Credit Rating Agencies (and there are US rules which have not yet been published)
UK’s Treasury, Consultation on Revision of the E-Money Directive and EU Regulation on Cross-Border Payments (Jan 20, 2009)
Issues raised by the GAO report we will be reading, or by the case we discussed in the first class could also be the basis for a paper.

January 20, 2009: Tomorrow, the U.S. Senate Committee on Homeland Security and Governmental Affairs will hold a hearing on the topic “Where Were the Watchdogs? The Financial Crisis and the Breakdown of Financial Governance”. One of those giving evidence will be Gene L. Dodaro, Acting Comptroller General, U.S. Government Accountability Office, and I imagine they will discuss the GAO report we’ll be reading soon. (Update 21.1.2009: here is Dodaro’s testimony)

Thursday 15 January, 2009:
This morning we continued to discuss some of the implications of having financial activity cross territorial boundaries. On Tuesday we discussed the NAB case, and issues of when US courts should exercise jurisdiction over “foreign cubed” securities cases. This involved thinking about the regulation of transactions. Today we began to think about issues to do with the regulation of institutions (particularly banks).

As I said, I don’t plan to look at money laundering regulation in detail this semester. If you are interested in exploring AML (anti-money-laundering regulation) further (this is not required) you could look at the IMF’s recent Detailed Assessment Report on Anti-Money Laundering and Combating the Financing of Terrorism with respect to Mexico.

NEXT WEEK (Jan. 19-23) we’ll begin by looking at the Greenspan quote on page 9 of the Introductory Class Materials. I think that if you read to the top of page 52 of this set of materials this should give us enough to discuss next week.

For a brief and quite clear description of some of the issues underlying Gudmundsson’s comments you could read James Hamilton, Borrowing short and lending long (Econbrowser, Sept. 6, 2007).

The following week (Jan 26-30) we will finish the first set of materials and begin to read the GAO’s recent report (I will post questions to think about when reading this material next week):

GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO – 09-216 (Jan 2009).

Comments for Week 2:
1. SLuedtke – January 16, 2009: I came across this article that summarized the recommendations of a panel put together by the Group of Thirty and headed by Paul Volcker. In the report, 18 recommendations were given including: requirements for greater levels of capitalization, regulation and reporting changes for hedge funds, bank-like regulation for money market funds in regards to maintaining a stable NAV, and creating regulations for over-the-counter derivatives (an example of which is the credit default swaps mentioned briefly in class). The summary can be found at the Economist site here:
The full text of the report can be found at the Washington Post site here:
2. Bradley – January 17, 2009: Thanks. I have added the document to the market turmoil page (which has links to a lot of material on recent events):

The GAO just published a report I think it would be useful for us to read as a whole, rather than just looking at extracts, as it provides some useful background to the current market turmoil, and for thinking about issues in financial regulation (though mostly at a domestic rather than an international level). So I will be asking you to read this report after we finish with the first set of materials (and I will post some questions for you to consider for the purposes of discussion in class):

GAO, Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System, GAO – 09-216 (Jan 2009).

After the first class, on Thursday, 15 January, 2009 we will be working from a set of Introductory Class Materials. For the second class please read to page 21 of these materials. I will provide further reading assignments for this material next week.

For the first class on Tuesday, 13 January, 2009, please read the First Class Materials (which includes questions to think about and for us to discuss in class).

Class meetings will take place on Tuesdays and Thursdays from 8 am to 9.20 am in Room E 265.