Securities Law Commons^™

Opening The Gate To Money Market Fund Reform, Hester Peirce, Robert Greene

Pace Law Review

This article proceeds as follows. Part I outlines briefly the background of MMFs. Part II discusses the role of the board of directors in governing MMFs, a role upon which our proposal would build. Part III discusses MMF-related events during the financial crisis of 2007-2008 and describes the government’s response to these events. Part IV describes the reforms the SEC instituted in 2010. Part V outlines options for further reform. Part VI outlines and discusses benefits and drawbacks of our proposed solution—unrestricted discretionary gating by fund boards. Part VII concludes.

Rollover Risk: Ideating A U.S. Debt Default, Steven L. Schwarcz

Faculty Scholarship

This article examines how a U.S. debt default might occur, how it could be avoided, its potential consequences if not avoided, and how those consequences could be mitigated. To that end, the article differentiates defaults caused by insolvency from defaults caused by illiquidity. The latter, which are potentiated by rollover risk (the risk that the government will be temporarily unable to borrow sufficient funds to repay its maturing debt), are not only plausible but have occurred in the past. Moreover, the ongoing controversy over the federal debt ceiling and the rise of the shadow-banking system make these types of defaults …

Framing Address: A Framework For Analyzing Financial Market Transformation, Steven L. Schwarcz

Faculty Scholarship

To open an international conference on “Rethinking Financial Markets,” this address seeks to frame that inquiry from the perspectives of scholars in the fields of law, economics, finance, and accounting. In attempting to identify what it is about financial markets that is worth rethinking, the address focuses on market changes that increase decentralization, fragmentation, globalization, disintermediation, and funding mismatches. The address also argues that the scholarly perspectives are inherently interrelated: although scholars in each field proceed from their own toolkits, they all aim for the common normative goal of optimizing financial markets to enable capital formation.

Lawyers In The Shadows: The Transactional Lawyer In A World Of Shadow Banking, Steven L. Schwarcz

Faculty Scholarship

This article examines how the role of transactional lawyers should change in the new world of shadow banking. Although transactional lawyers should consider the potential systemic consequences of their client's actions, their actions should be tempered by their primary duties to the client and by their responsibilities to the l,egal system more broadly.

Regulating Shadow Banking, Steven L. Schwarcz

Faculty Scholarship

Inaugural Address for Boston University Review of Banking & Financial Law's Inaugural Symposium: “Shadow Banking” February 24, 2012.

Although shadow banking is said to be huge, estimated at over $60 trillion, it is not well defined. This short and accessible paper attempts to define shadow banking by identifying its overall scope and its basic characteristics. Based on the definition derived, the paper also conceptually examines how shadow banking can be regulated to try to maximize its efficiencies while minimizing its risks.

Controlling Financial Chaos: The Power And Limits Of Law, Steven L. Schwarcz

Faculty Scholarship

This Essay examines how law can help to control financial chaos. To that end, regulation should strive to not only maximize economic efficiency within the financial system but also protect the financial system itself. Any regulatory framework for achieving these goals, however, will be imperfect and have tradeoffs. Increasing financial complexity has created information failures that even disclosure cannot remedy, whereas law-imposed standardization would have its own flaws. Bounded human rationality limits the effectiveness of even otherwise ideal laws. Furthermore, the increasing dispersion of financial risk is undermining monitoring incentives. We also do not yet fully understand how systemic risk …

The Emperor Has No Clothes: Confronting The Dc Circuit’S Usurpation Of Sec Rulemaking Authority, James D. Cox, Benjamin J.C. Baucom

Faculty Scholarship

In The Emperor Has No Clothes: Confronting the D.C. Circuit’s Usurpation of SEC Rulemaking Authority, Professor James D. Cox of Duke University School of Law & Benjamin J.C. Baucom, recent law clerk to Justice Don R. Willett of the Supreme Court of Texas, argue “that the level of review invoked by the D.C. Circuit in Business Roundtable and its earlier decisions is dramatically inconsistent with the standard enacted by Congress.” They conclude “that the D.C. Circuit has assumed for itself a role opposed to the one Congress prescribed for courts reviewing SEC rules.”

Regulating Systemic Risk: Towards An Analytical Framework, Steven L. Schwarcz, Iman Anabtawi

Faculty Scholarship

The global financial crisis demonstrated the inability and unwillingness of financial market participants to safeguard the stability of the financial system. It also highlighted the enormous direct and indirect costs of addressing systemic crises after they have occurred, as opposed to attempting to prevent them from arising. Governments and international organizations are responding with measures intended to make the financial system more resilient to economic shocks, many of which will be implemented by regulatory bodies over time. These measures suffer, however, from the lack of a theoretical account of how systemic risk propagates within the financial system and why regulatory …

Too Big To Fail?: Recasting The Financial Safety Net, Steven L. Schwarcz

Faculty Scholarship

Government safety nets in the United States and abroad focus, anachronistically, on problems of banks and other financial institutions, largely ignoring financial markets which have become major credit sources for consumers and companies. Besides failing to protect these markets, this narrow focus encourages morally hazardous behavior by large institutions, like AIG and Citigroup, that are "too big to fail." This paper examines how a safety net should be recast to protect financial markets and also explains why that safety net would mitigate moral hazard and help resolve the too-big-to-fail dilemma.

Regulating Complexity In Financial Markets, Steven L. Schwarcz

Faculty Scholarship

As the financial crisis has tragically illustrated, the complexities of modern financial markets and investment securities can trigger systemic market failures. Addressing these complexities, this Article maintains, is perhaps the greatest financial-market challenge of the future. The Article first examines and explains the nature of these complexities. It then analyzes the regulatory and other steps that should be considered to reduce the potential for failure. Because complex financial markets resemble complex engineering systems, and failures in those markets have characteristics of failures in those systems, the Article‟s analysis draws on chaos theory and other approaches used to analyze complex engineering …