Law Commons^™

Systemic Risk, Steven L. Schwarcz

Steven L Schwarcz

This article is the first major work of legal scholarship on systemic risk, under which the world’s financial system can collapse like a row of dominoes. There is widespread confusion about the causes and even the definition of systemic risk, and uncertainty how to control it. This article attempts to provide a conceptual framework for examining what risks are truly “systemic,” what causes those risks, and how, if at all, those risks should be regulated.

It begins by carefully examining what systemic risk really means, cutting through the confusion and ambiguity to establish basic parameters. Economists and other scholars historically …

Turning A Blind Eye: Wall Street Finance Of Predatory Lending

Patricia A. McCoy

Today, Wall Street finances up to eighty percent of subprime home loans through securitization. The subprime sector, which is designed for borrowers with blemished credit, has been dogged by predatory lending charges, many of which have been substantiated. As subprime securitization has grown, so have charges that securitization turns a blind eye to financing abusive loans. In this paper, we examine why secondary market discipline has failed to halt the securitization of predatory loans.

When investors buy securities backed by predatory loans, they face a classic lemons problem in the form of credit risk, prepayment risk, and litigation risk. Securitization …

To Make Or To Buy: In-House Lawyering And Value Creation, Steven L. Schwarcz

Steven L Schwarcz

In recent years, companies have been shifting much of their transactional legal work from outside law firms to in-house lawyers, and some large companies now staff transactions almost exclusively in-house. Although this transformation redefines the very nature of the business lawyer, scholars have largely ignored it. This article seeks to remedy that omission, using empirical evidence as well as economic theory to help explain why in-house lawyers are taking over, and whether they are likely to continue to take over, these functions and roles of outside lawyers. The findings are surprising, suggesting that in-house lawyers may now be performing as …

Insider Waiting: The New Loophole Under 10b5-1, Maureen Mcgreevy

Maureen McGreevy

In October, 2000, the Securities and Exchange Commission (SEC) enacted Rule 10b5-1 which provides an affirmative defense for individuals charged with insider trading. The Rule states that a person is not deemed to have traded on the basis of material non-public information if, before he or she gained knowledge of that material, non-public information, the person had entered into a trading plan under which he or she contracted to sell the securities in question. As a result of this rule, many corporate executives have established what have become to be known as 10b5-1 trading plans in order to protect themselves …

Rethinking Disclosure In A World Of Risk-Based Pricing

Patricia A. McCoy

The residential mortgage market in the United States has changed significantly since the passage of current federal mortgage disclosure laws in the 1960s and 1970s. In this Article, Professor Patricia McCoy advocates for the reform of these traditional disclosure rules. After describing the evolution of the subprime mortgage market and providing a description of current federal disclosure laws, she explores how these new market dynamics cause the traditional disclosure rules to break down in the subprime market. Professor McCoy concludes with proposals to counteract false advertising practices, facilitate "meaningful comparison-shopping, and formulate streamlined disclosures addressing loan applicants' greatest concerns in …

Predatory Lending And Community Development At Loggerheads

Patricia A. McCoy

For decades, cities have invested in decaying neighborhoods, leading to increases in home values and home equity. As a result, these neighborhoods have become ready targets for predatory lenders, who market their abusive loans to financially unsophisticated homeowners with home equity and no relationships with traditional lenders. Some borrowers lose their homes; others forsake home repairs to avoid default and foreclosure. Neighborhoods that once were stable become littered with abandoned and neglected homes, resulting in increased crime, falling home values, rising demands for social services, and lower tax revenues.

In the wake of the devastation done by predatory lenders, the …