Law Commons^™

The New Global Financial Regulatory Order: Can Macroprudential Regulation Prevent Another Global Financial Disaster?, Behzad Gohari, Karen E. Woody

Karen Woody

This Article posits that the success of macroprudential regulation will depend on four factors. First, the economic philosophy of the central banker in charge of the domestic institution with jurisdiction over macroprudential regulation will prove crucial in the implementation of adopted regulation. If, like Chairman Greenspan, the banker is averse to the exercise of the Central Bank's regulatory oversight authority, then no amount or volume of policy or regulation will prevent or mitigate systemic risks and the accompanying shocks. Second, a sufficiently deep level of international cooperation is required to mitigate regulatory arbitrage, without being so broad that the ensuing …

From Fire Hose To Garden Hose: Section 13(3) Of The Federal Reserve Act, Christian A. Johnson

Christian A. Johnson

Commissioning The Consumer Financial Protection Bureau, Jolina C. Cuaresma

Jolina C. Cuaresma

Imperfect Alternatives: Networks, Salience, And Institutional Design In Financial Crises, Robert B. Ahdieh

Robert B. Ahdieh

With the benefit of hindsight — and some aspiration to foresight — it is useful to consider the type of regulatory regime that might best address financial crises. What could policymakers have done to prevent the recent crisis? And once the crisis started, what interventions might have alleviated it? These questions have been widely debated, with an eye to both substantive policy and the design of effective regulatory institutions. This Article speaks to the latter project — one of comparative institutional analysis — though with a framework that implicates our substantive policy choices as well. It begins with an account …

After The Fall: Financial Crisis And The International Order, Robert B. Ahdieh

Robert B. Ahdieh

Recent years have challenged the international order to a degree not seen since World War II — and perhaps the Great Depression. As the U.S. housing crisis metastasized into a financial and economic crisis of grave proportions, and spread to nearly every corner of the globe, the strength of our international institutions — the International Monetary Fund, the World Trade Organization, the Group of Twenty, the Basel Committee on Banking Supervision, and others — was tested as never before. Likewise tested, were the limits of our national commitment to those institutions, to our international obligations, and to global engagement more …

Shareholder Wealth Maximization As Means To An End, Robert P. Bartlett, Iii

Robert Bartlett

In several recent cases, the Delaware Chancery Court has emphasized that where a conflict of interest exists between holders of a company’s common stock and holders of its preferred stock, the standard of conduct for directors requires that they strive to maximize the value of the corporation for the benefit of its common stockholders rather than for its preferred stockholders. This article interrogates this view of directors’ fiduciary duties from the perspective of incomplete contracting theory. Building on the seminal work of Sanford Grossman and Oliver Hart, incomplete contracting theory examines the critical role of corporate control rights for addressing …

So Now Who Is Special?: Business Model Shifts Among Firms That Borrow To Lend, José Gabilondo

José Gabilondo

No abstract provided.

The Environmental Deficit: Applying Lessons From The Economic Recession, Christine A. Klein

Christine A. Klein

In 2007, the nation entered its greatest financial downturn since the Great Depression of the 1930s. What followed was a period of national introspection. Although prescriptions for financial rescue varied widely in the details, a surprisingly broad consensus emerged as to the underlying pathology of the crisis. This Article explores three principal contributing factors and the lessons associated with each that make up this pathology. These factors include: rejecting rules through deregulation, trivializing risk through overly optimistic analyses, and overconsumption supported by reckless borrowing and lending practices. The powerful lessons from this pathology, considered by a stunned nation in the …

Regulatory Arbitrage, Extraterritorial Jurisdiction, And Dodd-Frank: The Implications Of Us Global Otc Derivative Regulation, Christian Johnson

Christian A. Johnson

No abstract provided.

Reframing Financial Regulation, Charles K. Whitehead

Charles K Whitehead

Financial regulation today is largely framed by traditional business categories. The financial markets, however, have begun to bypass those categories, principally over the last thirty years. Chief among the changes has been convergence in the products and services offered by traditional intermediaries and new market entrants, as well as a shift in capital-raising and risk-bearing from traditional intermediation to the capital markets. The result has been the reintroduction of old problems addressed by (but now beyond the reach of) current regulation, and the rise of new problems that reflect change in how capital and financial risk can now be managed …

Incentivizing Credit Rating Agencies Under The Issuer Pay Model Through A Mandatory Compensation Competition, Robert J. Rhee

Robert Rhee

Credit rating agencies are important institutions of the global capital markets. If they had performed properly, the financial crisis of 2008-2009 would not have occurred. This article offers the simplest fix proposed thus far, and it is contrarian. This Article accepts the central role of rating agencies in the regulation of bond investments, the realities of a duopoly, and the issuer-pay model of compensation. The status quo is the baseline. The role of regulation should be to create the conditions necessary to induce competition. This article proposes that a small, recurring portion of revenue earned by the largest rating agencies …

Crossing The Fault Line In Corporate Criminal Law, Amy Sepinwall

Amy J. Sepinwall

Why is it that so few bankers have been prosecuted and punished in the wake of the financial meltdown? Pundits are quick to point to inadequate funding for addressing financial crime or, more cynically, the revolving door between government regulatory agencies and Wall Street. But the ultimate answer may be at once more banal and more dispiriting, lying as it does at the very foundations of our criminal law.

The conception of responsibility underpinning much of our criminal law contemplates the individual in isolation from others. As a result, our criminal law has tremendous difficulty tracking culpability in organizational contexts. …

Remic Tax Enforcement As Financial-Market Regulator, Bradley T. Borden, David J. Reiss

David J Reiss

Lawmakers, prosecutors, homeowners, policymakers, investors, news media, scholars and other commentators have examined, litigated, and reported on numerous aspects of the 2008 Financial Crisis and the role that residential mortgage-backed securities (RMBS) played in that crisis. Big banks create RMBS by pooling mortgage notes into trusts and selling interests in those trusts as RMBS. Absent from prior work related to RMBS securitization is the tax treatment of RMBS mortgage-note pools and the critical role tax enforcement should play in ensuring the integrity of mortgage-note securitization.

This Article is the first to examine federal tax aspects of RMBS mortgage-note pools formed …

Ignoring The Writing On The Wall: The Role Of Enterprise Risk Management In The Economic Crisis, Michelle M. Harner

Michelle M. Harner

No abstract provided.

Responsibility, Repair And Redistribution In The Wake Of The Financial Crisis, Amy Sepinwall

Amy J. Sepinwall

The point of departure for this paper is a claim about widespread shared responsibility for the financial crisis and the bailout it necessitated. We are inclined to decry Wall Street’s villainy, all the while conveniently overlooking our own role in precipitating the crisis. But individuals, we now know, prefer to spend rather than save and, as a result, require the kind of financial alchemy that can transform one’s house into a virtual ATM, or one’s exceedingly modest savings into a fiscal cushion that can sustain a long, comfortable retirement. Risk, then, is the inevitable price of our preferences for leisure …

The Big Banks: Background, Deregulation, Financial Innovation And Too Big To Fail, Charles W. Murdock

Charles W. Murdock

Summary: The Big Banks: Background, Deregulation, Financial Innovation and Too Big to Fail

The U.S. economy is still reeling from the financial crisis that exploded in the fall of 2008. This article asserts that the big banks were major culprits in causing the crisis, by funding the non-bank lenders that created the toxic mortgages which the big banks securitized and sold to unwary investors. Paradoxically, banks which were then too big to fail are even larger today.

The article briefly reviews the history of banking from the Founding Fathers to the deregulatory mindset that has been present since 1980. It …

Iosco's Response To The Financial Crisis, Roberta S. Karmel

Roberta S. Karmel

ABSTRACT FOR IOSCO’S RESPONSE TO THE FINANCIAL CRISIS BY ROBERTA S. KARMEL, Centennial Professor, Brooklyn Law School Like other international financial bodies, the International Organization of Securities Commissions (IOSCO) has responded to the financial crisis of 2008. IOSCO thus revised its Objectives and Principles and added eight new Principles, including two that specifically focused on systemic risk. IOSCO’s ongoing efforts to support these new Principles are parallel to efforts by other financial regulators to deal with systemic risk. Yet, IOSCO’s efforts focus on somewhat different issues in the capital markets than the issues of interest to bank regulators. This Article …

China’S Tax Policy Response To The Global Financial Crisis, Wei Cui

Wei Cui

VAT reform constituted the most important tax policy action China took during the global financial crisis in 2008-9. If China had had a more typical tax structure, this specific policy instrument (as well as certain others) would not have been available. Conversely, because of the idiosyncrasies of China’s current tax structure, some of the policy measures commonly deployed in other countries also cannot be used. In comparing China and Europe in the tax policies adopted since 2008, therefore, major differences in prior tax structures must be taken into account. There are also two other potential determinants of China’s tax policy. …

Strategic Default: The Popularization Of A Debate Among Contract Scholars, Meredith R. Miller

Meredith R. Miller

A June 2010 report estimates that roughly 20% of mortgage defaults in the first half of 2009 were “strategic.” “Strategic default” describes the situation where a home borrower has the financial ability to continue to pay her mortgage but chooses not to pay and walks away. The ubiquity of strategic default has lead to innumerable newspaper articles, blog posts, website comments and editorial musings on the morality of homeowners who can afford to pay but choose, instead, to walk away. This Article centers on the current public discourse concerning strategic default, which mirrors a continuing debate among scholars regarding whether …

Save The Economy: Break Up The Big Banks And Shape Up The Regulators, Charles W. Murdock

Charles W. Murdock

Save the Economy: Break Up the Big Banks and Shape Up the Regulators

The U.S. economy is still reeling from the financial crisis that exploded in the fall of 2008. This article asserts that the big banks were major culprits in causing the crisis, by funding the non-bank lenders that created the toxic mortgages which the big banks securitized and sold to unwary investors. Paradoxically, banks which were then too big to fail are even larger today.

The article briefly reviews the history of banking from the Founding Fathers to the deregulatory mindset that has been present since 1980. It …

Finding Shelter In A Time Of Crisis: A Process-Oriented Approach To Risk Management, Kristin Johnson

Kristin N Johnson

Success in financial markets rests on the effectiveness of a business’s risk management strategy: manage risks well and profits follow; fail to manage risks and a crisis ensues. It has long been evident that inadequate enterprise risk management policies, or internal risk-reducing strategies, create perilous consequences for a business. The recent financial crisis illustrates that the often disparate regulatory guidance and multiplicity of regulators who influence enterprise risk management policies were ill-suited to address conflicts and weaknesses in risk management accountability and enforcement mechanisms. During the crisis, a chorus of commentators demanded a federal solution to address the devastating economic …

Book Review: The Subprime Virus: Reckless Credit, Regulatory Failure, And Next Steps, David J. Reiss

David J Reiss

John Godfrey Saxe’s 19th century poem, “The Blind Men and the Elephant,” opens with six learned men

Who went to see the Elephant

(Though all of them were blind),

That each by observation

Might satisfy his mind.

The financial crisis is the Elephant of our time. Over the last couple of years, more than six wise men and women have written books purporting to explain the financial crisis and many more such books are surely in the works. Most of these wise ones suffer from the same limitations as the poem’s learned men. As each reaches out, he or she …

Is Our Economy Safe? A Proposal For Assessing The Success Of Swaps Regulation Under The Dodd-Frank Act, Michael Greenberger

Michael Greenberger

On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law. The central goal of the Dodd-Frank Act is to ensure that all standardized derivates products are regulated. The Act requires these trades be fully transparent and backed by adequate capital. The central question for evaluating the success of the Dodd-Frank Act is simple but profound: Has the Dodd-Frank Act made the economy any safer from the threat of another economic meltdown? This paper introduces a number of metrics that can be used to assess the success of the Dodd-Frank Act.

Barriers To Effective Risk Management, Michelle M. Harner

Michelle M. Harner

“As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”** This now infamous quote by Charles Prince, Citigroup’s former Chief Executive Officer, captures the high-risk, high-reward mentality and overconfidence that permeates much of corporate America. These attributes in turn helped to facilitate a global recession and some of the largest economic losses ever experienced in the financial sector. They also represent certain cognitive biases and cultural norms in corporate boardrooms and management suites that make implementing a meaningful risk culture and thereby mitigating the impact of future economic downturns a challenging proposition. The …

Barriers To Effective Risk Management, Michelle M. Harner

Michelle M. Harner

“As long as the music is playing, you’ve got to get up and dance. We’re still dancing.”** This now infamous quote by Charles Prince, Citigroup’s former Chief Executive Officer, captures the high-risk, high-reward mentality and overconfidence that permeates much of corporate America. These attributes in turn helped to facilitate a global recession and some of the largest economic losses ever experienced in the financial sector. They also represent certain cognitive biases and cultural norms in corporate boardrooms and management suites that make implementing a meaningful risk culture and thereby mitigating the impact of future economic downturns a challenging proposition. The …

Case Study Of The Bank Of America And Merrill Lynch Merger, Robert J. Rhee

Robert Rhee

This is a case study of the Bank of America and Merrill Lynch merger. It is based on the article, Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson’s Choice during a National Crisis, 17 Geo. Mason L. Rev. 661 (2010). The case study analyzes the controversial events occurring between the merger signing and closing. It reviews in depth the circumstances under the federal government threatened to fire the board and management of Bank of America unless it consummated the Merrill Lynch acquisition. Among other issues, this case study raises the questions: (1) what is the role …

How "Big" Became Bad: America's Underage Fling With Universal Banks, Lawrence G. Baxter

Lawrence G. Baxter

In little more than a decade gigantic new financial institutions have emerged in America. These organizations are quite different from their predecessors in that they share the highly complex, diversified characteristics of foreign “universal banks.” They are still in the process of developing experienced and mature operational and risk management systems. During this same period, the regulatory framework necessary to match the size, power and hazards generated by these new universal banks remains underdeveloped, and the primary framework around which the system is being constructed, namely Basel II, lies in tatters in the wake of the financial crisis of 2007-08. …

Financial Crisis Containment And Its Implications For Institutional And Legal Reform, Seraina N. Gruenewald

Seraina N. Gruenewald

This article analyzes financial crisis containment from a governance perspective. It depicts containment decision making by governments as a complex technical process of different stages. Deviating from the existing well-worn paradigms, the article argues that efficient crisis containment requires a clear allocation of responsibilities with explicit objectives and powers, proper channels of accountability and more transparency. It models a governance framework, the core of which is a crisis containment council. Shared responsibility and accountability on the part of the council members as they seek crisis containment would incentivize them to collaboratively decide on containment policies that correspond to the greatest …

Fiduciary Exemption For Public Necessity: Shareholder Profit, Public Good, And The Hobson's Choice During A National Crisis, Robert J. Rhee

Robert Rhee

This Article is written as two discrete, independently accessible topical sections. The first topical section, presented in Part I of this Article, is a case study of Bank of America’s acquisition of Merrill Lynch and the impact of a flawed merger execution on the board’s subsequent decisions. The second topical section, presented Parts II-IV of this Article, advances a theoretical basis for fiduciary exemption during a public crisis. The financial crisis of 2008 was the worst economic disaster since the Great Depression. It nearly resulted in a collapse of the global capital markets. A key event in the history of …

Black Tuesday And Graying The Legitimacy Line For Governmental Intervention: When Tomorrow Is Just A Future Yesterday, Donald J. Kochan

Donald J. Kochan

Black Tuesday in October 1929 marked a major crisis in American history. As we face current economic woes, it is appropriate to recall not only the event but also reflect on how it altered the legal landscape and the change it precipitated in the acceptance of governmental intervention into the marketplace. Perceived or real crises can cause us to dance between free markets and regulatory power. Much like the events of 1929, current financial concerns have led to new, unprecedented governmental intervention into the private sector. This Article seeks caution, on the basis of history, arguing that fear and crisis …