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Full-Text Articles in Securities Law

How Deregulating Derivatives Led To Disaster, And Why Re-Regulating Them Can Prevent Another, Lynn A. Stout Feb 2015

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

Lynn A. Stout

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 …


Derivatives And The Legal Origin Of The 2008 Credit Crisis, Lynn A. Stout Feb 2015

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

Lynn A. Stout

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. …


On The Rise Of Shareholder Primacy, Signs Of Its Fall, And The Return Of Managerialism (In The Closet), Lynn Stout Feb 2015

On The Rise Of Shareholder Primacy, Signs Of Its Fall, And The Return Of Managerialism (In The Closet), Lynn Stout

Lynn A. Stout

In their 1932 opus "The Modern Corporation and Public Property," Adolf Berle and Gardiner Means famously documented the evolution of a new economic entity—the public corporation. What made the public corporation “public,” of course, was that it had thousands or even hundreds of thousands of shareholders, none of whom owned more than a small fraction of outstanding shares. As a result, the public firm’s shareholders had little individual incentive to pay close attention to what was going on inside the firm, or even to vote. Dispersed shareholders were rationally apathetic. If they voted at all, they usually voted to approve …


Regulate Otc Derivatives By Deregulating Them, Lynn A. Stout Feb 2015

Regulate Otc Derivatives By Deregulating Them, Lynn A. Stout

Lynn A. Stout

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 …


How Efficient Markets Undervalue Stocks: Capm And Ecmh Under Conditions Of Uncertainty And Disagreement, Lynn A. Stout Feb 2015

How Efficient Markets Undervalue Stocks: Capm And Ecmh Under Conditions Of Uncertainty And Disagreement, Lynn A. Stout

Lynn A. Stout

No abstract provided.


Betting The Bank: How Derivatives Trading Under Conditions Of Uncertainty Can Increase Risks And Erode Returns In Financial Markets, Lynn A. Stout Feb 2015

Betting The Bank: How Derivatives Trading Under Conditions Of Uncertainty Can Increase Risks And Erode Returns In Financial Markets, Lynn A. Stout

Lynn A. Stout

On April 12, 1994, Procter & Gamble Co. announced that it had incurred pre-tax losses of $157 million from trading in leveraged interest rate swaps, a form of financial derivative. At the time that figure seemed enormous. Yet within a year, Procter & Gamble's misfortune had been overshadowed by that of Orange County, a wealthy California enclave that lost an estimated $2.5 billion of its investment fund as a result of dealings in reverse-repurchase agreements, inverse floaters, and other arcane instruments. Recent months have seen further losses by investment funds, government entities, and even colleges and Native American tribes. Perhaps …


The Mechanisms Of Market Inefficiency: An Introduction To The New Finance, Lynn A. Stout Feb 2015

The Mechanisms Of Market Inefficiency: An Introduction To The New Finance, Lynn A. Stout

Lynn A. Stout

During the 1970s and early 1980s, the Efficient Capital Market Hypothesis (ECMH) became one of the most widely-accepted and influential ideas in finance economics. More recently, however, the idea of market efficiency has fallen into disrepute as a result of market events and growing empirical evidence of inefficiencies. This essay argues that the weaknesses of the efficient market theory are, and were, apparent from a careful inspection of its initial premises, including the presumptions of homogeneous investor expectations, effective arbitrage, and investor rationality. By the same token, a wide range of market phenomena inconsistent with the ECHM can be explained …