Law Commons^™

The Meme Stock Fenzy: Origins And Implications, Dhruv Aggarwal, Albert H. Choi, Yoon-Ho Alex Lee

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In 2021, several publicly traded companies, such as GameStop, Bed Bath & Beyond, and AMC, became “meme stocks,” experiencing a sharp rise in their stock prices through a dramatic influx of retail investors into their shareholder base. Analyses of the meme stock surge and its implications for corporate governance have focused on the idiosyncratic creation of online communities around particular stocks during the COVID-19 pandemic. In this Article, we argue that the emergence of meme stocks is part of longer-running and more structural digital transformations in trading, investing, and governance. On the trading front, the abolition of commissions by major …

Pricing Corporate Governance, Albert Choi

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Scholars and practitioners have long theorized that by penalizing firms with unattractive governance features, the stock market incentivizes firms to adopt the optimal governance structure at their initial public offerings (IPOs). This theory, however, does not seem to match with practice. Not only do many IPO firms offer putatively suboptimal governance arrangements, such as staggered boards and dual-class structures, but these arrangements have been gaining popularity among IPO firms. This Article argues that the IPO market is unlikely to provide the necessary discipline to incentivize companies to adopt the optimal governance package. In particular, when the optimal governance package differs …

Taming Wildcat Stablecoins, Gary B. Gorton, Jeffery Y. Zhang

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Cryptocurrencies, including stablecoins, are all the rage. Investors are exploring ways to profit off of them. Governments are considering ways to regulate them. While the technology underlying cryptocurrencies is new, the economics is centuries old. Oftentimes, lawmakers are so focused on understanding a new technological innovation that they fail to ask what exactly is being created.

In this case, the new technology has recreated circulating private money in the form of stablecoins, which are similar to the banknotes that circulated in many countries during the nineteenth century. The implication is that stablecoin issuers are unregulated banks. Based on lessons learned …

Fenceposts Without A Fence, Katherine E. Dr Lucido, Nicholas K. Tabor, Jeffery Y. Zhang

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Banking organizations in the United States have long been subject to two broad categories of regulatory requirements. The first is permissive: a “positive” grant of rights and privileges, typically via a charter for a corporate entity, to engage in the business of banking. The second is restrictive: a “negative” set of conditions on those rights and privileges, limiting conduct and imposing a program of oversight and enforcement, by which the holder of that charter must abide. Together, these requirements form a legal cordon, or “regulatory perimeter,” around the U.S. banking sector.

The Orkney Slew And Central Bank Digital Currencies, Jeffery Y. Zhang, Gary B. Gordon

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This Article on central bank digital currencies is motivated by a parable, The Orkney Slew, which is set in an archipelago. Based on the parable, we point out a significant economic market failure that exists in the cross-border payments realm. The analysis then focuses on real-world examples and the national security concerns, including for Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) and the continued efficacy of U.S. sanctions, associated with the rapidly evolving digital payments landscape.

Many central banks around the world are now cooperatively experimenting with cross-border interoperability of digital currencies. These efforts are driven by the idea of …

Does Capital Bear The U.S. Corporate Tax After All? New Evidence From Corporate Tax Returns, Edward Fox

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This article uses U.S. corporate tax return data to assess how government revenue would have changed if, over the period 1957–2013, corporations had been subject to a hypothetical corporate cash flow tax—that is, a tax allowing for the immediate deduction of investments in long-lived assets like equipment and structures—rather than the corporate tax regime actually in effect. Holding taxpayer behavior fixed, the data indicate actual corporate tax revenue over the most recent period (1995–2013) differed little from that under the hypothetical cash flow tax. This result has three important implications. First, capital owners appear to bear a large fraction of …

An Agent-Based Model Of Financial Benchmark Manipulation, Gabriel Virgil Rauterberg, Megan Shearer, Michael Wellman

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Financial benchmarks estimate market values or reference rates used in a wide variety of contexts, but are often calculated from data generated by parties who have incentives to manipulate these benchmarks. Since the the London Interbank Offered Rate (LIBOR) scandal in 2011, market participants, scholars, and regulators have scrutinized financial benchmarks and the ability of traders to manipulate them. We study the impact on market quality and microstructure of manipulating transaction-based benchmarks in a simulated market environment. Our market consists of a single benchmark manipulator with external holdings dependent on the benchmark, and numerous background traders unaffected by the benchmark. …

Grants, Nicholson Price Ii

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Innovation is a primary source of economic growth and is accordingly the target of substantial academic and government attention. Grants are a key tool in the government’s arsenal to promote innovation, but legal academic studies of that arsenal have given them short shrift. Although patents, prizes, and regulator-enforced exclusivity are each the subject of substantial literature, grants are typically addressed briefly, if at all. According to the conventional story, grants may be the only feasible tool to drive basic research, as opposed to applied research, but they are a blunt tool for that task. Three critiques of grants underlie this …

Stock Market Reactions To India's 2016 Demonetization., Vikramaditya S. Khanna, Dhammika Dharmapala

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On November 8, 2016, the Indian government made a surprise announcement that certain currency notes (representing 86 percent of the currency then in circulation) would no longer be legal tender (although they could be deposited in banks over a limited period). The stated reason for this sudden “demonetization” was to combat tax evasion and corruption associated with “unaccounted for” cash. We compute abnormal returns for different subsamples of firms—defined by industry, ownership structure, and other characteristics—on the Indian stock market around this event. There is little evidence that sectors thought to be associated with greater tax evasion or corruption experienced …

Crisis-Driven Tax Law: The Case Of Section 382, Albert H. Choi, Quinn Curtis, Andrew T. Hayashi

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At the peak of the 2008 financial crisis, the Internal Revenue Service (IRS) issued Notice 2008–83 (the Notice), administrative guidance that limited Internal Revenue Code (the Code) section 382, an important tax rule designed to discourage tax-motivated acquisitions. Although styled as a mere interpretation of existing law, the Notice has been widely viewed as an improper exercise of the IRS’s authority that undermined its legitimacy. But did the Notice work? There were many extraordinary interventions during the financial crisis that raised questions about eroding the rule of law and the long-term destabilizing effects of bail­outs. In a financial crisis, regulators …

Financial Reform: Making The System Safer And Fairer, Michael S. Barr

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In the fall of 2008, the financial crisis crushed the U.S. economy and plunged the country into the Great Recession. The crisis shuttered American businesses, cost millions of Americans their jobs, and wiped out home values and household savings. The macro effects hit hardest and were the longest lasting for those least able to bear the brunt of the crisis. It was devastating to middle-income families and perhaps even more so to low- and moderate-income households, who had little financial buffer (Barr 2012a). Financial stability, never robust for these families, dropped precipitously (Barr and Schaffa 2016). Both in the United …

The New Stock Market: Sense And Nonsense, Merritt B. Fox, Lawrence R. Glosten, Gabriel V. Rauterberg

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How stocks are traded in the United States has been totally transformed. Gone are the dealers on NASDAQ and the specialists at the NYSE. Instead, a company’s stock can now be traded on up to sixty competing venues where a computer matches incoming orders. High-frequency traders (HFTs) post the majority of quotes and are the preponderant source of liquidity in the new market. Many practices associated with the new stock market are highly controversial, as illustrated by the public furor following the publication of Michael Lewis’s book Flash Boys. Critics say that HFTs use their speed in discovering changes in …

Mandatory Arbitration In Consumer Finance And Investor Contracts, Michael S. Barr

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Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts—for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The …

Accountability And Independence In Financial Regulation: Checks And Balances, Public Engagement, And Other Innovations, Michael S. Barr

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Financial regulation attempts to balance two competing administrative goals. On the one hand, as with much of administrative law, accountability is a core goal. Accountability undergirds the democratic legitimacy of administrative agencies. On the other hand, unlike with much of administrative law, independence plays a critical role.' Independence helps to protect financial regulatory agencies from political interference and-with some important caveats-arguably helps to guard against some forms of industry capture. In addition, with respect to the Federal Reserve (the Fed), independence serves to improve the credibility of the Fed's price stability mandate by insulating its decisionmaking from politics and, in …

Implementing Symmetric Treatment Of Financial Contracts In Bankruptcy And Bank Resolution, E. J. Janger, John A.E. Pottow

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Financial contracts come in many forms and serve many functions in both the financial system and the broader economy. Repos secured by U.S. Treasury securities act as money substitutes and can play an important role as part of the money supply, while similarly structured repos, secured by more volatile collateral, may be used as speculative devices or hedges. Swaps can be used to insure against various types of market risk, from interest rates to oil prices, or they can operate as vehicles for highly leveraged investments. The parties to these instruments are sometimes major financial institutions and, other times, ordinary …

Who's In Charge Of Global Finance?, Michael S. Barr

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The global financial crisis caused widespread harm not just to the financial system, but also to millions of households and businesses and to the global economy. The crisis revealed substantive, fundamental weaknesses in global financial regulation and raised serious questions about whether national regulators and the international financial regulatory system could ever be up to the task of overseeing global finance. This Article analyzes post-crisis reforms with two questions in mind: First, how can we build an effective international financial architecture with more than one architect? Second, can we build a system that is legitimate and accountable? The Article suggests …

Revolution In Manipulation Law: The New Cftc Rules And The Urgent Need For Economic And Empirical Analyses, Rosa M. Abrantes-Metz, Gabriel V. Rauterberg, Andrew Verstein

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Three major banks have now admitted that their employees manipulated worldwide interest rates through the London Interbank Offered Rate (Libor), the most widely used interest rate index. Libor is the interest rate term for trillions of dollars of swaps and loans, and its manipulation may have been used to extract billions of dollars. These allegations come just as commodities manipulation law has been dramatically reformed and the Commodity Futures Trading Commission (CFTC) given vast new regulatory powers. This Article provides the first extended, scholarly analysis of the CFTC’s new anti-manipulation rules. We consider the difficulty the rules address: Commodities manipulation …

Index Theory: The Law, Promise And Failure Of Financial Indices, Gabriel V. Rauterberg, Andrew Verstein

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Financial indices, like the S&P 500 or the Consumer Price Index, have become a ubiquitous feature of our financial markets. One index, the London InterBank Offered Rate (“Libor”), may be the world’s most important number, an interest rate benchmark upon which hundreds of trillions of dollars depend. Yet, almost everyday new revelations emerge that Libor was tampered with during the height of the financial crisis by one or many of the world’s most prominent banks, with billions of dollars potentially misappropriated. This index disruption has attracted tremendous interest from regulators, private litigants, and market observers. Despite their importance, however, financial …

Globalizing Social Finance: How Social Impact Bonds And Social Impact Performance Guarantees Can Scale Development, Deborah Burand

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While the SIB structure is still in its infancy, there is momentum building to globalize this social finance innovation so that it can help scale development goals around the world. Taking the SIB global is not a simple matter, however. This article explores several of the more challenging issues that are likely to arise in applying a SIB or elements of the SIB structure to social problems and development goals in developing countries. The article begins with a summary review of the goals and structures used in the two earliest SIBs. It then discusses key challenges and opportunities that SIBs …

Accelerating The Growth Of The Next Generation Of Innovators, Dana Thompson

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In a recent study on the best practices of business incubators that contribute to the success of startups, one of the best practices asserted is to include a business lawyer on the advisory board of business incubators, who may suggest necessary legal issues for startups to address and connect the incubator startups with legal assistance. Although many college and university incubators may have access to experienced attorneys who are able to provide advice, and who are able to represent student-led ventures, most do not have access to a university law clinic established to provide pro bono, direct legal representation and …

Assessing Transnational Private Regulation Of The Otc Derivatives Market: Isda, The Bba, And The Future Of Financial Reform, Gabriel V. Rauterberg, Andrew Verstein

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For the last twenty years, the dominant narrative of the over-the-counter derivatives market has been one of absent regulation, deregulation, and regulatory conflict, predictably resulting in disaster. This Article challenges this narrative, arguing that the global derivatives market has been subject to pervasive and harmonized regulation by what should be recognized as transnational private regulators. Recognizing the reality of widespread transnational private regulation of derivatives has significant implications, which this Article explores. Appreciating the actual regulatory status quo is essential if policymakers are to correctly diagnose problems, avoid past regulatory errors, and plan effective remedies. There are also advantages to …

The Financial Crisis And The Path Of Reform, Michael S. Barr

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In the lead-up to the financial crisis, the U.S. financial sector was overleveraged, short-funded, risky, and opaque. "Shadow banking" permitted institutions to avoid comprehensive supervision and capital requirements. Innovation outpaced the ability or willingness of private- and public-sector guardians to rein in risks. An asset bubble fed the system, until the market imploded in the fall of 2008. When the crisis hit, our society found itself illequipped to deal with the failure of leading financial firms. In the wake of the crisis, the Obama Administration proposed a set of reforms that were eventually embodied, in large part, in the Dodd-Frank …

Beyond Microfinance: Creating Opportunities For Women At The Base Of The Pyramid, Deborah Burand

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A growing number of innovative social entrepreneurs are tackling this problem by creating 'busmesses in a bag' mspired by the world's largest direct seller of beauty products - Avon. These very small franchise or consignment businesses are affordable enough to be acquired and operated by women living at the base of the economic pyramid. Just as commercial franchise networks such as Avon have helped people with httle or no experience grow mto successful business owners around the world, microfranchise and microconsignment networks may hold similar promise.

Too Libor, Too Late: Time To Move To A Market Rate, Michael S. Barr

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Barclays has been fined, the British have issued their report, and now the market is anxious for everything to go on as usual with the London Interbank Offer Rate (“LIBOR”). I think that would be a serious mistake. The U.S. and British investigations into rate-fixing by Barclays revealed a widespread culture of pervasive, deceitful conduct in the setting of the most important private sector benchmark for over $300 trillion in derivative contracts and $10 trillion in adjustable-rate loans. It is highly unlikely that Barclays was the only major bank engaging in this conduct, and public investigations and private lawsuits against …

Ability To Pay, John A. E. Pottow

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The landmark Dodd-Frank Act of 2010 ("Dodd-Frank") transforms the regulation of consumer credit in the United States. Many of its changes have been high-profile, attracting considerable media and scholarly attention, most notably the establishment of the Consumer Financial Protection Bureau ("CFPB"). Even specific consumer reforms, such as a so-called "plain vanilla" proposal, drew hot debate and lobbying firepower. But when the dust settled, one profoundly transformative innovation that did not garner the same outrage as plain vanilla or the CFPB did get into the law: imposing upon lenders a duty to assure a borrower's ability to repay. Ensuring a borrower's …

Populist Retribution And International Competition In Financial Services Regulation, Adam C. Pritchard

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The pattern of regulatory reform in financial services regulation follows a predictable pattern in democratic states. A hyperactive market generates a bubble, the bubble deflates, and much financial pain ensues for those individuals who bought at the top of the market. The financial mess brings the scrutiny of politicians, who vow "Never again!" A political battle ensues, with representatives of the financial services industry fighting a rearguard action to preserve its prerogatives amidst cries for the bankers' scalps. Regulations, carefully crafted to win the last war, are promulgated. Memories fade of the foolish enthusiasm that fed the last bubble. Slowly, …

Microfranchising: A Business Approach To Fighting Poverty, Deborah Burand, David W. Koch

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Imagine a franchise network that trains, guides, and supports hundreds of poor women with little or no business experience to become successful business owners. Such "microfranchise" efforts, though relatively small in number, have been gathering steam in the development community and, recently, attracting the attention of the mainstream franchising indus- Deborah Burand try. Advocates have seized on microfranchising as a natural complement or follow-on to the widely acclaimed successes of the "microfinance" sector, which provides small-scale finance services to over 150 million of the world's poor. Microfranchising today is where microfinance was a decade or more ago. It is appropriate …

Deleveraging Microfinance: Principles For Managing Voluntary Debt Workouts Of Microfinance Institutions, Deborah Burand

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This paper focuses on the challenges of responding to a deleveraging of the microfinance sector and offers guidelines for stakeholders in microfinance-regulators, policymakers, investors (debt and equity), donors, and microfinance providers-for how to address these challenges in the context of a microfinance institution debt workout so as to minimize undue disruption and damage to the microfinance sector as a whole.

Interpreting Data: A Reply To Professor Pardo, Robert M. Lawless, Angela K. Littwin, Katherine M. Porter, John A. E. Pottow, Deborah K. Thorne, Elizabeth Warren

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Professor Pardo has published a pointed critique to our Report, raising three major complaints. First, he claims that we make two predicating assumptions in our study that are flawed. Second, he contends that we misunderstand the means test and fail to appreciate with sufficient "nuance" its "operative effect." Third, he maintains that our Report suffers from methodological problems. We can address the two impugned assumptions quickly. The first one - that BAPCPA's means test is the sole causal agent driving 800,000 putative filers from the bankruptcy courts - is not one we make. The second - regarding the income profiles …

Peter Mieszkowski And The General Equilibrium Revolution In Public Finance, James R. Hines Jr.

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The importance of understanding the implications of general equilibrium is by now abundantly clear to researchers analyzing public fi nance issues. What is perhaps less apparent is that this was not always so. The study of public fi nance was radically transformed during the 15 years between 1959 and 1974 by the pioneering efforts of a small number of leading scholars, notably including Peter Mieszkowski. Thanks to their efforts, the analysis of applied problems in public finance moved from partial equilibrium to general equilibrium, providing the methods and insights that characterize modern public economics. The transformation began with the publication …