Law Commons^™

The Financial Crisis And The Future Of Law And Economics, Wladimir D. Kraus

Wladimir D. Kraus

A Failure of Capitalism is a multifaceted contribution to our understanding of the Great Recession. But, due to its overwhelmingly macroeconomic character and substance, the nuanced approach of the law and economics scholarship is virtually absent, and so is any plausible explanation of the financial crisis that touched off the great recession. This is puzzling, because attention to the economic consequences of the law seems to provide a much more powerful framework for understanding what caused the financial collapse, and it is a natural approach for scholars of law and economics to pursue.

Rethinking Preventive Measures For Money Laundering And Terrorism Financing, Richard K. Gordon

Richard K Gordon

Preventive measures for money laundering and terrorism financing are among the most widely accepted and observed global standards. However, there is substantial evidence that they do not work well. A main reason is that private sector parties, mostly financial institutions but including few others, are tasked with duties for which they are ill suited, while too little is required of the public sector . While they are required to monitor client transactions and reporting those that raise suspicion of money laundering or terrorism financing, they do not have sufficient expertise or data access to do so. Also, as suggested by …

The Trans-Saharan Gas Pipeline - An Overview Of The Threats To Its Success And The Means To Prevent Its Failure, Loic Conan

Loic Conan

The Trans-Saharan gas pipeline (TSGP) is a planned natural gas pipeline to transport gas from Nigeria to Algeria and, supply Europe by connecting to the existing pipelines across the Mediterranean coast.

The length of the pipeline would be around 4,300 kilometers (2,671 miles). It will start from the swampy areas of the Niger Delta basin, and then will go through cultivated lands and tropical forest of North Nigeria. In Niger, it will cross the Sahel region, a semi-arid tropical savanna preceding the Sahara desert. Almost half of the route will then roam arid immensities before getting over the Atlas Mountains …

Odious Debt: Modernizing Ancient Problems, Seth M. Reynolds

Seth M Reynolds

So far the odious debt debate has primarily focused on proving the existence of a rule of customary international law. Rather than following this tradition, this paper will focus on another method for demonstrating that a certain legal principle should be applied in an international context; general principles of law and equity. The heart of the odious debt debate revolves around the assertion by some that a successor government is absolutely liable for every debt incurred by a previous regime. However, almost every domestic legal regime limits the ability of a creditor to recover from a successor in interest. This …

Lessons Learned From Bernard Madoff: Why We Should Partially Privatize The Barney Fife’S At The Sec, Mark S. Klock

Mark S Klock

Financial markets do not function well when fraud is pervasive. Around September of 2009, the investigations into the SEC examinations of Bernard Madoff Investment Securities, LLC were completed and released to the public. The simple facts reveal an alarming level of incompetence and lack of financial literacy on the part of the guardians of the integrity of our financial markets. I suggest two important tools for addressing these problems. One is to supplement enforcement of anti-fraud rules with more private attorney generals by expressly creating a private right of action for aiding and abetting violations of securities laws. This will …

How Incentives Drove The Subprime Crisis, Charles W. Murdock

Charles W. Murdock

How Incentives Drove the Subprime Crisis

In order to address any systemic problem, whether the goal is to change the system, regulate the system, or change the incentives driving a system, it is necessary to appreciate all the drivers operating within the system. In the case of the subprime crisis, one of the drivers was the changing nature of the subprime loans, which was not factored into the models used by the investment bankers, the credit rating agencies, and the issuers of credit default swaps.

This paper is an attempt to look dispassionately at the subprime crisis from a particular …

Renters Evicted En Masse: Collateral Damage Arising From The Subprime Foreclosure Crisis, Creola Johnson

Creola Johnson

ABSTRACT: America is experiencing its worst foreclosure crisis in history, and tenants are the silent victims of this crisis. In this Article, Professor Johnson describes the consequences of thousands of tenants of being evicted from residential properties obtained by lenders in foreclosure proceedings against the owners-landlords. The individual consequences include tenants’ renting substandard alternative housing, experiencing disruptions in family life, and even becoming homeless. Societal consequences include the costs imposed upon communities to provide social services to the evicted tenants and their families and the burden on cities in dealing with homes left vacant due to the lenders' inability to …

The Credit Repair Organizations Act: The Sleeping Giant, Justin Smith

Justin T Smith

Congress created the Credit Repair Organizations Act (CROA) to protect consumers from unscrupulous providers of credit repair. In the fifteen years since it was enacted, problems have arisen in its application as many of the key provisions of CROA were left undefined and what little case law that has developed has yet to form a coherent understanding of how CROA is to be read. This lack of predictability makes CROA an ineffective piece of legislation in that parties are unable to properly modify their behavior since they are not operating on known terms.

Just as CROA has been neglected by …

Consumer Use And Government Regulation Of Title Pledge Lending, Todd J. Zywicki

Todd J. Zywicki

Recent years have seen growth in the use of certain types of nontraditional lending products, such as payday lending and auto title lending, and a relative decline of others, such as finance companies and pawnbrokers. Congress is currently considering major new regulations on short-term lending products, such as title lending, that could produce their demise—even though there is no evidence that such products were related in any way to the financial crisis.

This study examines the question of who uses title pledge lending and why. The results are surprising. I find that title pledge lending is used predominantly by three …

Credit Bidding And The Design Of Bankruptcy Auctions, Vincent S. J. Buccola, Ashley C. Keller

Vincent S. J. Buccola

Now that most chapter 11 “reorganizations” are glorified asset sales in which the debtor uses bankruptcy to prepare itself for auction, the design of sale procedures has become a paramount concern to bankruptcy practitioners and courts. Among the choices they face is whether — and if so, how — to permit credit bidding, the practice of offsetting the value of a creditor’s claim against the purchase price of the debtor’s assets. This paper shows that credit bidding tends to augment, and cannot depress, total creditor recoveries, and we therefore conclude that it should be a mandatory feature of bankruptcy auctions. …

How Incentives Drove The Subprime Crisis, Charles W. Murdock

Charles W. Murdock

How Incentives Drove the Subprime Crisis

In order to address any systemic problem, whether the goal is to change the system, regulate the system, or change the incentives driving a system, it is necessary to appreciate all the drivers operating within the system. In the case of the subprime crisis, one of the drivers was the changing nature of the subprime loans, which was not factored into the models used by the investment bankers, the credit rating agencies, and the issuers of credit default swaps.

This paper is an attempt to look dispassionately at the subprime crisis from a particular …

Distorting Legal Principles, Steven L. Schwarcz

Steven L Schwarcz

This article explores the important but until now largely neglected problem of distorting legal principles. Although legal principles enable society to order itself by preserving broadly based expectations, parties sometimes transact in ways that are so inconsistent with accepted principles as to create uncertainty or confusion that undermines the basis for reasoning afforded by the principles. The article starts by examining a fundamental distortion of the nemo dat legal principle (one cannot give what one does not have), which was a trigger of Lehman Brothers’ recent downfall. A practice called “rehypothecation” so distorted nemo dat that Lehman’s customers were uncertain …

Fairness, Utility, And Market Risk, Jeff Schwartz

Jeff Schwartz

In this Article, I argue that we lack a satisfactory theory about how disclosure, the centerpiece of securities regulation, serves investor interests. To close this gap, I contend that the regulations should be viewed as part of a broader societal framework that protects individuals from stock-market risk. I flesh out this notion in three ways. First, I set out to justify protection from market risk as a valid societal goal. To do so, I appeal to Rawlsian and utilitarian notions of justice. These moral theories contain the principle that a just society helps individuals manage risk. I argue that this …

How Incentives Drove The Subprime Crisis, Charles W. Murdock

Charles W. Murdock

In order to address any systemic problem, whether the goal is to change the system, o regulate the system, or change the incentives driving a system, it is necessary to appreciate all the drivers operating within the system. In the case of the subprime crisis, one of the drivers was the changing nature of the subprime loans, which was not factored into the models used by the investment bankers, the credit rating agencies, and the issuers of credit default swaps.

This paper is an attempt to look dispassionately at the subprime crisis from a particular perspective, namely, the incentives that …

Underwater And Not Walking Away: Shame, Fear And The Social Management Of The Housing Crisis, Brent T. White

Brent T. White

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and …

Regulatory Failures In The Design Of Securities Settlement Infrastructure, David C. Donald

David C. Donald

Nearly all transactions in listed securities on the US capital markets are settled through a securities settlement infrastructure that generates extensive negative externalities for issuers and securityholders. This model is still advocated by regulators and market structure experts; it is an intermediated structure originally designed for depositing paper certificates in the accounts of a depository to allow book entry transfers of claims on the deposited certificates. The structure dates back at least to 1873. It accelerates transfer by short circuiting "endorsement", "delivery" and "cancellation" of certificates, as all securities are and remain registered in the name of a single entity …

The Roles Of Acceleration, David Hahn

David Hahn

Acceleration clauses are found in most debt instruments. Upon the occurrence of predetermined triggering event, acceleration makes a creditor's future claim due and payable. While debt covenants have been analyzed extensively in the academic literature, the role of acceleration has been overlooked. This paper examines the role of acceleration clauses and maintains that they play a critical role in debt financing. The paper argues that the prime role of acceleration is to perfect a complex set of governance mechanisms within the corporate setting. This governance role is comprised of three parts. First, acceleration is a complementary measure that supports debt …

Designing Bankruptcy Auctions: The Indubitable Value Of Credit Bidding, Vincent S. J. Buccola, Ashley C. Keller

Vincent S. J. Buccola

Now that most chapter 11 “reorganizations” are glorified asset sales in which the debtor uses bankruptcy to prepare itself for auction, the design of sale procedures has become a paramount concern to bankruptcy practitioners and courts. Among the choices they face is whether — and if so, how — to permit credit bidding, the practice of offsetting the value of a creditor’s claim against the purchase price of the debtor’s assets. This paper shows that credit bidding tends to augment, and cannot depress, total creditor recoveries, and we therefore conclude that it should be a mandatory feature of bankruptcy auctions. …

Corporate Risks, Risk Bearing Ability And Equity, Lukas C. Handschin

Lukas C Handschin

There is a relation between corporate risks, risk bearing ability and equity. In order to assess the risk bearing ability of a corporation, one reference figure is equity, understood as the sum of legal capital and reserves, free reserves and accrued profits. Equity shows the risk bearing ability related to the risk of asset reduction as well as the ability of the corporation to attract new liquidity by increasing debts, in case of a negative free cash flow. Equity is the risk reserve of the corporation. The relation between equity and risk bearing ability allows defining the necessary amount of …

On Systemically Important Financial Institutions And Progressive Systemic Mitigation, James B. Thomson

James Thomson

One of the most important issues in the regulatory reform debate is that of systemically important financial institutions. This paper proposes a framework for identifying and supervising such institutions; the framework is designed to remove the advantages they derive from becoming systemically important and to give them more time-consistent incentives. It defines the four C’s of systemic importance (contagion, concentration, correlation, and conditions) as criteria for classifying firms as systemically important that goes beyond binary classification based on size alone (the classic doctrine of too big to let fail); it also discusses the concept of progressive systemic mitigation.

Financial Regulatory Reformation In South Korea And Experience Of The Consolidated Regulatory System, Jeongdoo Lee

Jeongdoo Lee

One significant recommendation for the U.S. financial reformation is the consolidation of regulatory system, which South Korea adopted after the Asian financial crisis. This paper briefly reflects the causes of the Korean financial crisis from the points of financial regulation, and explains the process of reformation and experiences of Korean consolidated system including some modifications after the initial reformation. In addition, this paper evaluates the Korean regulatory system with general standards and needs for changes in the backgrounds of various economic and political surroundings. Although there can be general requisites for desirable regulatory system, the reason for the change itself …

The Case For "Cramdown": Eliminating The Practical And Ideological Barriers To Pure Mortgage Modification, Peter J. Leo

Peter J Leo

This article was prepared for a seminar in Consumer Protection. The article makes the case that Congress should modify the Bankruptcy Code to allow for judicial modification of home mortgages on a bankrupt’s principal residence as a means of combating the foreclosure crisis. The article examines two different proposals originally published in the Minnesota Law Review and the Yale Journal on Regulation, examines some of the deficiencies in those proposals, and concludes that “cramdown” will be a more effective means of keeping consumers in their homes.

Student Loans In Bankruptcy: The Undue Hardship Test Is An Unnecessary Burden, James M. Leiby

James M Leiby

No abstract provided.

An End To Too Big To Let Fail? The Dodd–Frank Act’S Orderly Liquidation Authority, Thomas J. Fitzpatrick Iv, James B. Thomson

James Thomson

One of the changes introduced by the sweeping new fi nancial market legislation of the Dodd–Frank Act is the provision of a formal process for liquidating large fi nancial fi rms—something that would have been useful in 2008, when troubles at Lehman Brothers, AIG, and Merrill Lynch threatened to damage the entire U.S. fi nancial system. While it may not be the end of the too-big-to-fail problem, the orderly liquidation authority is an important new tool in the regulatory toolkit. It will enable regulators to safely close and wind up the affairs of those distressed fi nancial fi rms whose …

Breaking Bucks: Sec Regulation By Obfuscation, William A. Birdthistle

All Faculty Scholarship

This Article argues that the Securities and Exchange Commission’s first and most significant response to the economic crisis profoundly contradicts widely accepted theoretical and regulatory approaches to financial oversight. More alarmingly, the SEC’s newest rules increase rather than decrease the likelihood of future failures in money market funds and the broader capital markets.

Scholars – of both neoclassical and behavioral economic theory – have long insisted that transparency and disclosure play essential roles in ensuring efficient capital markets and sound financial regulation. Professors Gilson and Kraakman notably argued that the efficient capital market hypothesis, and its reliance on a market …

Case Management And Online Public Access Systems Of The Courts – An Urgent Call Of Legislative Action P 2, Joseph Zernik

Joseph Zernik

Digital voting machines were previously shown to be vulnerable to malfunction and malfeasance. Papers, recently published in computer science journal, likewise, outlined the invalidity of digital case management and online public access systems that govern the courts, jails, and prisons in the United States, and documented large-scale abuse of such systems. Invalid case management and online public access systems were claimed as key to deterioration of integrity of the justice system, which was previously opined in official, expert, and media reports. Such systems enabled the holding of prisoners under pretense of lawfulness, the conduct of pretense court proceedings, and the …

Case Management And Online Public Access Systems Of The Courts – An Urgent Call Of Legislative Action, Joseph Zernik

Joseph Zernik

Digital voting machines were previously shown to be vulnerable to malfunction and malfeasance. Papers, recently published in computer science journal, likewise, outlined the invalidity of digital case management and online public access systems that govern the courts, jails, and prisons in the United States, and documented large-scale abuse of such systems. Invalid case management and online public access systems were claimed as key to deterioration of integrity of the justice system, which was previously opined in official, expert, and media reports. Such systems enabled the holding of prisoners under pretense of lawfulness, the conduct of pretense court proceedings, and the …

Befuddlement Betwixt Two Fulcrums: Calibrating The Scales Of Justice To Ascertain Fraudulent Transfers In Leveraged Buyouts, John H. Ginsberg, M. Katie Burgess, Zachary R. Caldwell, Daniel R. Czerwonka

John H. Ginsberg

In a leveraged buyout, a company goes deep into debt and grants liens on its assets to finance the purchase of itself. The company’s risk of insolvency increases with its debt burden. Unsecured creditors of the company are exposed to insolvency risk without compensation, unlike the parties to the leveraged buyout—buyer, seller and lender—all of whom expect good returns on the lesser risks to which they are exposed. When a leveraged buyout leaves the acquired company with “unreasonably small capital” such that insolvency is “reasonably foreseeable” upon consummation of the buyout, unsecured creditors may have recourse to constructive-fraudulent-transfer law. They …

Energy-Efficiency And Wind Energy: Investment Strategy For Venture Capital And Private Equity, Nicolas L. Boittin

Nicolas L Boittin

Some renewable sources of energy are becoming economically profitable and legislatures are providing greater legal predictability for investment in this area. Many states have implemented Renewable Portfolio Standards (RPSs) and the U.S. Congress extended the investment period for Investment Tax Credits (ITCs) recently. Wind energy is the most mature renewable technology and energy-efficiency offers high profit potential in the short term. These two areas thus provide great investment opportunities for venture capital funds interested in clean technology and private equity funds focusing in renewable energy buyouts.

Negligent Insider Trading: A Viable Theory Of Civil Liability?, Steven Brody

Steven Brody

A flurry of civil suits by the SEC and private parties has followed on the heels of the collapse of the subprime mortgage market. Many of these actions raise theories of liability that are still developing in the area of white collar crime and securities fraud. As the SEC and private parties seek to explore new theories under which to bring suit, this article briefly addresses one as-yet unexplored avenue that many academic authorities have alluded to as possible under Section 17 of the Securities Act of 1933: that of “negligent insider trading.” While such a theory has yet to …