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Full-Text Articles in Law

Recursive Collective Actions Problems: The Structure Of Procyclicality In Financial And Monetary Markets, Macroeconomies And Formally Similar Contexts, Robert C. Hockett Jul 2015

Recursive Collective Actions Problems: The Structure Of Procyclicality In Financial And Monetary Markets, Macroeconomies And Formally Similar Contexts, Robert C. Hockett

Cornell Law Faculty Publications

The hallmark of a collective action problem is its aggregating multiple individually rational decisions into a collectively irrational outcome. Arms races, “commons tragedies” and “prisoners’ dilemmas” are well-known, indeed well-worn examples. What seem to be less widely appreciated are two complementary propositions: first, that some collective action problems bear iterative, self-exacerbating structures that render them particularly destructive; and second, that some of the most formidable challenges faced by economies, societies, and polities are iteratively self-worsening problems of precisely this sort. Financial markets, monetary systems and macroeconomies in particular are rife with them – as are other complex systems subject to group-mediated ...


Private And Public Ordering In Safe Asset Markets, Anna Gelpern, Erik F. Gerding Jan 2015

Private And Public Ordering In Safe Asset Markets, Anna Gelpern, Erik F. Gerding

Articles

An influential literature in economics explores the phenomenon of “safe assets” – when participants across financial markets act “as if” certain debt is risk free – as well as its role in the global financial crisis and its implications for post-crisis reform.

We highlight the role of private ordering in constructing safe assets. Private ordering, including contractual devices and transaction structures, contributes to the creation of these debt contracts, to their collective treatment in financial markets as low risk investments, and to the making of deep and liquid markets in them. These contracts and transaction structures also provide a template for understanding ...


Harmonizing European Union Bank Resolution: Central Clearing Of Otc Derivative Contracts Maintaining The Status Quo Of Safe Harbors, Christoph Henkel Jan 2013

Harmonizing European Union Bank Resolution: Central Clearing Of Otc Derivative Contracts Maintaining The Status Quo Of Safe Harbors, Christoph Henkel

Journal Articles

This Article argues that safe harbors for financial contracts should not be expanded in Europe, but instead should be repealed, as suggested by some commentators in the United States. At the very minimum, credit derivatives, swaps, and repurchasing agreements should be subject to a stay, and the resolution authorities in the Member States should have the power to assume beneficial contracts and to reject other unfavorable contracts. Also, the power of resolution authorities to transfer derivative positions in full or in part should not be sanctioned in favor of a full transfer. Rather, resolution authorities should have the power to ...


Contract As Pattern Language, Erik F. Gerding Jan 2013

Contract As Pattern Language, Erik F. Gerding

Articles

Christopher Alexander’s architectural theory of a "pattern language" influenced the development of object-oriented computer programming. This pattern language framework also explains the design of legal contracts. Moreover, the pattern language rubric explains how legal agreements interlock to create complex transactions and how transactions interconnect to create markets. This pattern language framework helps account for evidence, including from the global financial crisis, of failures in modern contract design.

A pattern represents an encapsulated conceptual solution to a recurring design problem. Patterns save architects and designers from having to reinvent the wheel; they can use solutions that evolved over time to ...


Law In Finance, Katharina Pistor Jan 2013

Law In Finance, Katharina Pistor

Faculty Scholarship

Law’s relevance to finance is by now well recognized, in no small part due to the literature on "law and finance" (La Porta et al. 1998; La Porta, Lopez-de-Silanes, and Shleifer 2008) celebrated in this journal ten years ago under the heading "the new comparative economics" (Djankov et al. 2003). There will always be some debate as to whether a specific law or regulation distorts or supports markets, but few would argue today that law is irrelevant to financial markets or that they could operate entirely outside it.

This special issue takes the debate about the relation between law ...


A Legal Theory Of Finance, Katharina Pistor Jan 2013

A Legal Theory Of Finance, Katharina Pistor

Faculty Scholarship

This paper develops the building blocks for a legal theory of finance. LTF holds that financial markets are legally constructed and as such occupy an essentially hybrid place between state and market, public and private. At the same time, financial markets exhibit dynamics that frequently put them in direct tension with commitments enshrined in law or contracts. This is the case especially in times of financial crisis when the full enforcement of legal commitments would result in the self-destruction of the financial system. This law-finance paradox tends to be resolved by suspending the full force of law where the survival ...


Defining Our Terms Carefully And In Context: Thoughts On Reading (And In One Case, Rereading) Three Books, Cynthia C. Lichtenstein May 2012

Defining Our Terms Carefully And In Context: Thoughts On Reading (And In One Case, Rereading) Three Books, Cynthia C. Lichtenstein

Boston College Law School Faculty Papers

In preparing to write this paper, I read again Walter Bagehot’s Lombard Street: A Description of the Money Market , Perry Mehrling’s The New Lombard Street: How the Fed Became the Dealer of Last Resort and John Authers’ The Fearful Rise of Markets: Global Bubbles, Synchronized Meltdowns, and How to Prevent Them in the Future. . Bagehot, of course, was the Governor of the Bank of England when he wrote what Mehrling calls his “magisterial” treatise in 1873 on how a central bank must react to a financial crisis. Mehrling is an economist and an economic historian. Authers is a ...


Complexity, Innovation, And The Regulation Of Modern Financial Markets, Dan Awrey Jan 2012

Complexity, Innovation, And The Regulation Of Modern Financial Markets, Dan Awrey

Cornell Law Faculty Publications

The intellectual origins of the global financial crisis (GFC) can be traced back to blind spots emanating from within conventional financial theory. These blind spots are distorted reflections of the perfect market assumptions underpinning the canonical theories of financial economics: modern portfolio theory, the Modigliani and Miller capital structure irrelevancy principle, the capital asset pricing model and, perhaps most importantly, the efficient market hypothesis. In the decades leading up to the GFC, these assumptions were transformed from empirically (con)testable propositions into the central articles of faith of the ideology of modern finance: the foundations of a widely held belief ...


On The Theoretical Foundations For Regulating Financial Markets, Katharina Pistor Jan 2012

On The Theoretical Foundations For Regulating Financial Markets, Katharina Pistor

Faculty Scholarship

How we think about financial markets determines how we regulate them. Since the 1970s modern finance theory has shaped how we think about and regulate financial markets. It is based on the notion that markets are or can be made (more) efficient. Financial markets have been deregulated when they were thought to achieve efficient outcomes on their own; and regulation was designed to lend crutches to them when it appeared that they needed support. While modern finance theory has suffered some setbacks in the aftermath of the global crisis, defenders hold that improving market efficiency should still be the overriding ...


Bubbles, Busts, And Blame, Robert C. Hockett Apr 2011

Bubbles, Busts, And Blame, Robert C. Hockett

Cornell Law Faculty Publications

I argue that financial asset price bubbles and busts, such as those we have recently experienced in the mortgage and securities markets, are compatible with market efficiency, individual rationality, and even ethically unobjectionable behavior. The reason is that they constitute classic recursively self-amplifying collective action problems, the hallmark of which is the efficient aggregation of individually rational behaviors into collectively calamitous outcomes. In the present case, individuals rationally "legged the spread" between cheap borrowing costs and credit-fueled capital gains rates, neither of which market actors could affect in their individual capacities even when knowing that credit would have eventually to ...


Governing Interdependent Financial Systems: Lessons From The Vienna Initiative, Katharina Pistor Jan 2011

Governing Interdependent Financial Systems: Lessons From The Vienna Initiative, Katharina Pistor

Faculty Scholarship

This paper argues that while financial markets have become transnational, their governance structures have remained national at the core: Fiscal responsibility for crises is ultimately born by the nation state where the crisis occurred – whether or not it bears any responsibility for regulatory or policy failures. The tension between the transnational nature of markets and national responsibility for these markets has been revealed once more by the global financial and the European sovereign debt crises. Against this background, the Vienna Initiative (VI) offers the prospect of an alternative governance regime. The VI was formed to manage the fallout from the ...


The Confidence Game: Manipulation Of The Markets By Governmental Authorities, Caroline Bradley Jan 2009

The Confidence Game: Manipulation Of The Markets By Governmental Authorities, Caroline Bradley

Articles

No abstract provided.


Going-Private Decisions And The Sarbanes-Oxley Act Of 2002: A Cross-Country Analysis, Ehud Kamar, Pinar Karaca-Mandic, Eric L. Talley Jan 2005

Going-Private Decisions And The Sarbanes-Oxley Act Of 2002: A Cross-Country Analysis, Ehud Kamar, Pinar Karaca-Mandic, Eric L. Talley

Faculty Scholarship

This article investigates whether the passage and the implementation of the Sarbanes-Oxley Act of 2002 (SOX) drove firms out of the public capital market. To control for other factors affecting exit decisions, we examine the post-SOX change in the propensity of public American targets to be bought by private acquirers rather than public ones with the corresponding change for foreign targets, which were outside the purview of SOX. Our findings are consistent with the hypothesis that SOX induced small firms to exit the public capital market during the year following its enactment. In contrast, SOX appears to have had little ...


Asset Securitization And Corporate Risk Allocation, Christopher W. Frost Nov 1997

Asset Securitization And Corporate Risk Allocation, Christopher W. Frost

Law Faculty Scholarly Articles

Asset securitization is a financial innovation in which corporations sell financial assets to a specially formed entity that in turn taps financial markets for the purchase price. The device provides firms an alternative to raising capital through traditional debt and equity markets. Practitioners of the approach tout securitization as a means through which a firm can lower its overall cost of capital by limiting the risk facing investors in the securitized assets. Commentators have described asset securitization as "one of the most important financing vehicles in the United States." Interest in the device is increasing dramatically as more companies see ...


What Can Be Done About Stock Market Volatility, Tamar Frankel Nov 1989

What Can Be Done About Stock Market Volatility, Tamar Frankel

Faculty Scholarship

Volatility is as old as the financial markets. The bull market of 1986 and the crash that followed in 1987 were but the latest of periodic market gyrations that started with the South Sea Bubble and the Lombard Street run on commercial paper and have continued ever since.' Volatility in the financial markets would not be very important if market activity simply mirrored economic activity. Volatility would be much less important if the markets moved independently of the economy. But if we believe, as I do, that the markets and the economy are interdependent, and that their volatility is generally ...