Finance Commons^™

Stress Testing During Times Of War, Kathryn Judge

Faculty Scholarship

In the spring of 2009, the United States was mired in the greatest recession it had faced since the Great Depression. In March, the Dow Jones Industrial Average had fallen to 6,594.44, a total decline of 53.4 percent from its peak in the fall of 2007. The official unemployment rate was over 9 percent and still trending upward, eventually exceeding 10 percent. With the support of Congress, the Federal Reserve (the Fed) and other financial regulators had launched an array of initiatives to contain the fallout of what had become a global financial crisis. These interventions, including a massive recapitalization …

Corporate Crime And Punishment: An Empirical Study, Dorothy S. Lund, Natasha Sarin

All Faculty Scholarship

For many years, law and economics scholars, as well as politicians and regulators, have debated whether corporate criminal enforcement overdeters beneficial corporate activity or in the alternative, lets corporate criminals off too easily. This debate has recently expanded in its polarization: On the one hand, academics, judges, and politicians have excoriated enforcement agencies for failing to send guilty bankers to jail in the wake of the 2008 financial crisis; on the other, the U.S. Department of Justice has since relaxed policies that encouraged individual prosecutions and reduced the size of fines and number of prosecutions. A crucial and yet understudied …

Private Equity Value Creation In Finance: Evidence From Life Insurance, Divya Kirti, Natasha Sarin

All Faculty Scholarship

This paper studies how private equity buyouts create value in the insurance industry, where decentralized regulation creates opportunities for aggressive tax and capital management. Using novel data on 57 large private equity deals in the insurance industry, we show that buyouts create value by decreasing insurers' tax liabilities; and by reaching-for-yield: PE firms tilt their subsidiaries' bond portfolios toward junk bonds while avoiding corresponding capital charges. Previous work on affiliated or "shadow" reinsurance and capital management misses the important role that private equity buyouts play as recent drivers of these phenomenon. The trend we document is of growing importance in …

A Tale Of Two Markets: Regulation And Innovation In Post-Crisis Mortgage And Structured Finance Markets, William W. Bratton, Adam J. Levitin

All Faculty Scholarship

This Article takes the occasion of the tenth anniversary of the financial crisis to review recent developments in the structured products market, connecting the emergent pattern to post-crisis regulation.

The Article tells a tale of two markets. The financial crisis stemmed from excessive risk-taking and shabby practice in the subprime home mortgage market, a market that owed its existence to the private-label, originate to securitize model. But the pre-crisis boom in private label subprime mortgage-backed securities could never have happened absent back up financing from an array of structured products and vehicles created in the capital markets—the CDOs that found …

The Broken Buck Stops Here: Embracing Sponsor Support In Money Market Fund Reform, Jill E. Fisch

All Faculty Scholarship

Since the 2008 financial crisis, in which the Reserve Primary Fund “broke the buck,” money market funds (MMFs) have been the subject of ongoing policy debate. Many commentators view MMFs as a key contributor to the crisis because widespread redemption demands during the days following the Lehman bankruptcy contributed to a freeze in the credit markets. In response, MMFs were deemed a component of the nefarious shadow banking industry and targeted for regulatory reform. The Securities and Exchange Commission’s (SEC) misguided 2014 reforms responded by potentially exacerbating MMF fragility while potentially crippling large segments of the MMF industry.

Determining the …

How To Improve The Financial Architecture And Its Resilience, Dirk Helbing, Eve Mitleton-Kelly, Jean-Philippe Bouchaud, Fabio Caccioli, J. Doyne Farmer, Steve Keen, Katharina Pistor, Dennis J. Snower, Olsen Richard, Angelo Ranaldo, Norbert Häring, Edward Fullbrook

Faculty Scholarship

This financial resilience survey was circulated on behalf of a working group of the Complexity Council of the World Economic Forum comprised of Prof. Eve Mitleton-Kelly of London School of Economics and Prof. Dirk Helbing at ETH Zurich's Risk Center. It was sent to a few dozens of financial experts with the aim to create an inventory of ideas of how the financial system might be improved and made more resilient. Unconventional ideas were also welcome.

Basel Iii And Credit Risk Measurement: Variations Among G20 Countries, Matt Schlickenmaier

San Diego International Law Journal

Most countries require banks to hold extra capital to protect against unforeseen financial calamities; banks with riskier loans must hold more capital than those with safer loans. Basel II, a set of international banking standards, allows banks to measure a loan’s risk in different ways: some banks make their own judgments; others use outside agencies. The recent mortgage crisis prompted banks to reevaluate these methods, in part due to banks having failed to perceive the high level of risk inherent in securitized mortgages. The international community’s response was Basel III, an updated version of its previous standards. This Comment will …

Recent Developments In European Bank Competition, Juliana Yu Sun

Research Collection School Of Economics

This paper investigates the degree of bank competition in the euro area, the U.S. and U.K. before and after the recent financial crisis, and revisits the issue whether the introduction of EMU and the euro have had any impact on bank competition. The results suggest that the level of bank competition converged across euro area countries in the wake of the EMU. The recent global financial crisis led to a fall in competition in several countries and especially where large credit and housing booms had preceded the crisis...

Leveraged Etfs: The Trojan Horse Has Passed The Margin-Rule Gates, William M. Humphries

Seattle University Law Review

What do the Great Depression, the Great Recession, and the demise of Lehman Brothers and Bear Sterns all have in common? One word: leverage. The misuse of leverage, in all its forms, contributed greatly to all of these events. Yet even today, common investors can purchase a leveraged exchange-traded fund (leveraged ETF), a complex product that uses leverage to increase returns, without triggering applicable laws designed to regulate the use of leverage. This Comment articulates the basics surrounding the functions and operations of leveraged ETFs and margin rules in order to assess the compatibility of the two. The Comment argues …

Black Tuesday And Graying The Legitimacy Line For Governmental Intervention: When Tomorrow Is Just A Future Yesterday, Donald J. Kochan

Donald J. Kochan

Black Tuesday in October 1929 marked a major crisis in American history. As we face current economic woes, it is appropriate to recall not only the event but also reflect on how it altered the legal landscape and the change it precipitated in the acceptance of governmental intervention into the marketplace. Perceived or real crises can cause us to dance between free markets and regulatory power. Much like the events of 1929, current financial concerns have led to new, unprecedented governmental intervention into the private sector. This Article seeks caution, on the basis of history, arguing that fear and crisis …

Financial Crisis Containment, Anna Gelpern

Georgetown Law Faculty Publications and Other Works

This Article maps financial crisis containment - extraordinary measures to stop the spread of financial distress - as a category of legal and policy choice. I make three claims.

First, containment is distinct from financial regulation, crisis prevention and resolution. Containment is brief; it targets the immediate term. It involves claims of emergency, rule-breaking, time inconsistency and moral hazard. In contrast, regulation, prevention and resolution seek to establish sound incentives for the long term. Second, containment decisions deviate from non-crisis norms in predictable ways, and are consistent across diverse countries and crises. Containment invariably entails three kinds of choices: choices …

Domestic Bonds, Credit Derivatives, And The Next Transformation Of Sovereign Debt, Anna Gelpern

Georgetown Law Faculty Publications and Other Works

Not long ago, financial markets in most poor and middle-income countries were shallow to nonexistent, and closed to foreigners. Governments often had to rely on risky borrowing abroad; the private sector had even fewer options. But between 1995 and 2005, domestic debt in the emerging markets grew from $1 trillion to $4 trillion. In Mexico, domestic debt went from just over 20% of the total government debt stock in 1995 to nearly 80% in 2007. Foreign and local investors are buying. Over the same period, derivative contracts to transfer emerging market credit risk surpassed the market capitalization of the benchmark …