Banking and Finance Law Commons^™

"Special," Vestigial, Or Visionary? What Bank Regulation Tells Us About The Corporation - And Vice Versa, Robert C. Hockett, Saule T. Omarova

Cornell Law Faculty Publications

A remarkable yet seldom noted set of parallels exists between modern U.S. bank regulation, on the one hand, and what used to be garden-variety American corporate law, on the other hand. For example, just as bank charters are matters not of right but of conditional privilege even today, so were all corporate charters not long ago. Just as chartered banks are authorized to engage only in limited, enumerated activities even to- day, so were all corporations restricted not long ago. And just as banks are subject to strict capital regulation even today, so were all corporations not long ago.

In …

The Macroprudential Turn: From Institutional 'Safety And Soundness' To Systematic 'Financial Stability' In Financial Supervision, Robert C. Hockett

Cornell Law Faculty Publications

Since the global financial dramas of 2008-09, authorities on financial regulation have come increasingly to counsel the inclusion of macroprudential policy instruments in the standard ‘toolkit’ of finance-regulatory measures employed by financial supervisors. The hallmark of this perspective is its focus not simply on the safety and soundness of individual financial institutions, as is characteristic of the traditional ‘microprudential’ perspective, but also on certain structural features of financial systems that can imperil such systems as wholes. Systemic ‘financial stability’ thus comes to supplement, though not to supplant, institutional ‘safety and soundness’ as a regulatory desideratum.

The move from primarily micro- …

Public Actors In Private Markets: Toward A Developmental Finance State, Robert C. Hockett, Saule T. Omarova

Cornell Law Faculty Publications

The recent financial crisis brought into sharp relief fundamental questions about the social function and purpose of the financial system, including its relation to the “real” economy. This Article argues that, to answer these questions, we must recapture a distinctively American view of the proper relations among state, financial market, and development. This programmatic vision – captured in what we call a “developmental finance state” – is based on three key propositions: (1) that economic and social development is not an “end-state” but a continuing national policy priority; (2) that the modalities of finance are the most potent means of …

Derivatives And The Legal Origin Of The 2008 Credit Crisis, Lynn A. Stout

Cornell Law Faculty Publications

Experts still debate what caused the credit crisis of 2008. This Article argues that dubious honor belongs, first and foremost, to a little-known statute called the Commodities Futures Modernization Act of 2000 (CFMA). Put simply, the credit crisis was not primarily due to changes in the markets; it was due to changes in the law. In particular, the crisis was the direct and foreseeable (and in fact foreseen by the author and others) consequence of the CFMA’s sudden and wholesale removal of centuries-old legal constraints on speculative trading in over-the-counter (OTC) derivatives.

Derivative contracts are probabilistic bets on future events. …

Regulate Otc Derivatives By Deregulating Them, Lynn A. Stout

Cornell Law Faculty Publications

When credit markets froze up in the fall of 2008, many economists pronounced the crisis inexplicable and unforeseeable. Lawyers who specialize in financial regulation, and especially the small cadre who specialize in derivatives regulation, knew better.That's because the roots of the catastrophe lay not in changes in the markets, but changes in the law. In particular, the credit crisis can be traced to Congress's 2000 passage of the Commodity Futures Modernization Act, which radically altered the traditional legal approach to financial derivatives.

This shift in the legal treatment of financial derivatives has brought the banking system to its knees. The …

Regulate Otc Derivatives By Deregulating Them: Response To Comments, Lynn A. Stout

Cornell Law Faculty Publications

Response to comments by Jean Helwege, Peter Wallison, and Craig Pirrong on the author's article, "Regulate OTC Derivatives By Deregulating Them." Article predates the author's affiliation with Cornell Law School.

The Evolution Of Debt: Covenants, The Credit Market, And Corporate Governance, Charles K. Whitehead

Cornell Law Faculty Publications

No abstract provided.

How Deregulating Derivatives Led To Disaster, And Why Re-Regulating Them Can Prevent Another, Lynn A. Stout

Cornell Law Faculty Publications

When credit markets froze up in the fall of 2008, many economists pronounced the crisis both inexplicable and unforeseeable. That’s because they were economists, not lawyers.

Lawyers who specialize in financial regulation, and especially the small cadre who specialize in derivatives regulation, understood what went wrong. (Some even predicted it.) That’s because the roots of the catastrophe lay not in changes in the markets, but changes in the law. Perhaps the most important of those changes was the U.S. Congress’s decision to deregulate financial derivatives with the Commodity Futures Modernization Act (CFMA) of 2000.

Prior to 2000, off-exchange derivatives contracts …

Insource The Shareholding Of Outsourced Employees: A Global Stock Ownership Plan, Robert C. Hockett

Cornell Law Faculty Publications

With the American economy stalled and another federal election campaign season well underway, the “outsourcing” of American jobs is again on the public agenda. Latest figures indicate not only that claims for joblessness benefits are up, but also that the rate of American job-exportation has more than doubled since the last electoral cycle. This year’s political candidates have been quick to take note. In consequence, more than at any time since the early 1990s, continued American participation in the World Trade Organization, in the North American Free Trade Agreement, and in the processes of global economic integration more generally appear …

Deconstructing Equity: Public Ownership, Agency Costs, And Complete Capital Markets, Charles K. Whitehead, Ronald J. Gilson

Cornell Law Faculty Publications

The traditional law and finance focus on agency costs presumes that the premise that diversified public shareholders are the cheapest risk bearers is immutable. In this Essay, we raise the possibility that changes in the capital markets have called this premise into question, drawn into sharp relief by the recent private equity wave in which the size and range of public companies being taken private expanded significantly. In brief, we argue that private owners, in increasingly complete markets, can transfer risk in discrete slices to counterparties who, in turn, can manage or otherwise diversify away those risks they choose to …

Why The Law Hates Speculators: Regulation And Private Ordering In The Market For Otc Derivatives, Lynn A. Stout

Cornell Law Faculty Publications

A wide variety of statutory and common law doctrines in American law evidence hostility towards speculation. Conventional economic theory, however, generally views speculation as an efficient form of trading that shifts risk to those who can bear it most easily and improves the accuracy of market prices. This Article reconciles the apparent conflict between legal tradition and economic theory by explaining why some forms of speculative trading may be inefficient. It presents a heterogeneous expectations model of speculative trading that offers important insights into antispeculation laws in general, and the ongoing debate concerning over-the-counter (OTC) derivatives in particular.

Although trading …

Larger Board Size And Decreasing Firm Value In Small Firms, Theodore Eisenberg, Stefan Sundgren, Martin T. Wells

Cornell Law Faculty Publications

Several studies hypothesize a relation between board size and financial performance. Empirical tests of the relation exist in only a few studies of large U.S. firms. We find a significant negative correlation between board size and profitability in a sample of small and midsize Finnish firms. Finding a board-size effect for a new and different class of firms affects the range of explanations for the board-size effect.

Creditors' Rights Against Participants In A Leveraged Buyout, Emily Sherwin

Cornell Law Faculty Publications

No abstract provided.