Law Commons^™

Size Matters: Commercial Banks And The Capital Markets, Charles K. Whitehead

Cornell Law Faculty Publications

The conventional story is that the Gramm-Leach-Bliley Act broke down the Glass-Steagall Act’s wall separating commercial and investment banking in 1999, increasing risky business activities by commercial banks and precipitating the 2007 financial crisis. But the conventional story is only one-half complete. What it omits is the effect of change in commercial bank regulation on financial firms other than the commercial banks. After all, it was the failure of Lehman Brothers — an investment bank, not a commercial bank — that sparked the meltdown.

This Article provides the rest of the story. The basic premise is straightforward: By 1999, the …

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 …

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- …

Comment On Home Mortgage Disclosure Act Proposed Rulemaking, David J. Reiss

Cornell Law Faculty Working Papers

No abstract provided.

Legitimacy And Impartiality In A Sovereign Debt Workout Mechanism, Odette Lienau

Cornell Law Faculty Publications

Particularly in light of recent developments in sovereign debt litigation, there is a pressing need for discussion of more robust sovereign debt restructuring mechanisms. This paper contends that any sovereign debt workout mechanism (DWM) should embody the principles of legitimacy and impartiality, to the extent possible, in order to garner the stable and long-term adherence of international stakeholders. These two elements are important both for attracting support ex ante, i.e. in the initial development of any treaty, ad hoc, or soft law restructuring mechanism, and for ensuring ex post that a DWM is ultimately utilized by states and their creditors. …

Paying For Risk: Bankers, Compensation, And Competition, Simone M. Sepe, Charles K. Whitehead

Cornell Law Faculty Working Papers

Efforts to control bank risk address the wrong problem in the wrong way. They presume that the financial crisis was caused by CEOs who failed to super­vise risk-taking employees. The responses focus on exe­cutive pay, believing that exe­cu­tives will bring non-execu­tives into line—using incen­­­­tives to manage risk-taking—once their own pay is regu­lated. What they over­look is the effect on non-executive pay of the com­pe­­ti­­tion for talent. Even if exe­­cu­tive pay is regu­lated, and exe­cu­tives act in the bank’s best interests, they will still be trapped into providing incentives that encourage risk-taking by non-executives due to the negative exter­nality that arises …

Rethinking Sovereign Debt: Politics, Reputation, And Legitimacy In Modern Finance, Odette Lienau

Cornell Law Faculty Publications

Conventional wisdom holds that all nations must repay debt. Regardless of the legitimacy of the regime that signs the contract, a country that fails to honor its loan obligations damages its reputation, inviting still greater problems down the road. Yet difficult dilemmas arise from this assumption. Should today's South Africa be responsible for apartheid-era debt? Is it reasonable to tether postwar Iraq with Saddam Hussein's excesses? Rethinking Sovereign Debt is a probing historical analysis of how sovereign debt continuity - the rule that nations should repay loans even after a major regime change or expect reputational consequences - became the …

“Private” Means To “Public” Ends: Governments As Market Actors, Robert C. Hockett, Saule T. Omarova

Cornell Law Faculty Publications

Many people recognize that governments can play salutary roles in relation to markets by (a) “overseeing” market behavior from “above,” or (b) supplying foundational “rules of the game” from “below.” It is probably no accident that these widely recognized roles also sit comfortably with traditional conceptions of government and market, pursuant to which people tend categorically to distinguish between “public” and “private” spheres of activity.

There is a third form of government action that receives less attention than forms (a) and (b), however, possibly owing in part to its straddling the traditional public/private divide. We call it the “government as …

Materializing Citizenship: Finance In A Producers' Republic, Robert C. Hockett

Cornell Law Faculty Publications

This invited essay critically assesses a movement of which I consider myself to be part – the movement to “redemocratize” financial institutions in a manner that restores, to non-wealthy citizens, access to basic financial services comparable to those enjoyed by wealthy citizens. I argue that while financial redemocratization of this sort is necessary to the larger project from which it draws most of its meaning – viz that of redemocratizing access to the resources requisite to productive enterprise and meaningful citizenship more generally – it is far from sufficient to this task. We must therefore take special care not to …

Preliberal Autonomy And Postliberal Finance, Robert C. Hockett

Cornell Law Faculty Publications

Even American Founders whose views diverged as dramatically as those of Jefferson and Hamilton shared a view of finance and of enterprise that one might call “productive republican.” Pursuant to this vision, financial and other forms of market activity are instrumentally rather than intrinsically good — and for that very reason are of interest to the public qua public rather than to the public qua aggregate of “private” individuals. Citizens are best left free to engage in financial and other market activities, per this understanding, only insofar as these are consistent with sustainable collective republic-making. And the republic — the …

Market Collaboration: Finance, Culture, And Ethnography After Neoliberalism, Annelise Riles

Cornell Law Faculty Publications

In the wake of the disasters of March 2011, financial regulators and financial-risk management experts in Japan expressed little hope that much could be done nor did they take great interest in defining possible policy interventions. This curious response to regulatory crisis coincided with a new fascination with culturalist explanations of financial markets, on the one hand, and a resort to what I term “data politics”—a politics of intensified data collection—on the other. In this article, I analyze these developments as being exemplary of a new regulatory moment characterized by a loss of faith in both free market regulation and …

Beyond Finance: Permissible Commercial Activities Of U.S. Financial Holding Companies, Saule T. Omarova

Cornell Law Faculty Publications

!is essay explains the legal basis for, and examines public policy implications of, recent expansion of large U.S. financial holding companies’ non-financial business activities. Despite its potentially significant impact on economic growth and systemic stability, this phenomenon of financial conglomeration beyond finance remains poorly understood. Yet, any truly comprehensive and effective reform of financial services regulation must address public policy issues that arise when “too-big-to-fail” banks grow even bigger and more systemically significant by combining finance with commerce.

The Merchants Of Wall Street: Banking, Commerce, And Commodities, Saule T. Omarova

Cornell Law Faculty Publications

This Article explores the legal, regulatory, policy, and theoretical aspects of an ongoing transformation of large U.S. banking organizations into global merchants of physical commodities and energy. In the absence of detailed and reliable information, it is difficult to draw definitive conclusions as to the social efficiency and desirability of allowing this transformation to continue. What we can already ascertain about U.S. financial institutions' physical commodity assets and activities, however, raises potentially serious public policy concerns that must be addressed through a fully-informed public deliberation. Even if big U.S. FHCs were, in fact, to scale down their physical commodity operations …

Is New Governance The Ideal Architecture For Global Financial Regulation?, Annelise Riles

Cornell Law Faculty Publications

A central challenge for international financial regulatory systems today is how to manage the impact of global systemically important financial institutions (G-SIFIs) on the global economy, given the interconnected and pluralistic nature of regulatory regimes. This paper focuses on the Financial Stability Board (FSB) and proposes a new research agenda for the FSB’s emerging regulatory forms. In particular, it examines the regulatory architecture of the New Governance (NG), a variety of approaches that are supposed to be more reflexive, collaborative, and experimental than traditional forms of governance. A preliminary conclusion is that NG tools may be effective in resolving some …

Libor Integrity And Holistic Domestic Enforcement, Milson C. Yu

Cornell Law Library Prize for Exemplary Student Research Papers

Libor rate rigging is a dangerous externality of the increasing interconnectedness of global markets. Its effects have transcended national boundaries and permeated through the domestic socioeconomic stratum. And it is, unfortunately, not a singular threat: Libor and its companion reference rates have revealed the subtle holes in the Commodity Futures Trading Commission’s current enforcement toolbox. This Note encourages clarification of the domestic defenses available to financial regulators to combat the rate rigging of benchmark reference rates in the global financial markets.

Debt, Deflation, And Debacle: Of Private Debt Write-Down And Public Recovery, Richard W. Vague, Robert C. Hockett

Cornell Law Faculty Publications

Most public discussion of the world’s continuing financial and macroeconomic troubles focuses rightly on debt. It focuses wrongly, however, on public debt. The real source of our ills is global-trade-related private debt overhang among millions of households below the top of the wealth distribution in the “developed” world. That is the provenance of both (a) the asset price bubbles and busts in whose aftermath we still struggle, and (b) the fact that we’re still struggling. Public sector debt growth in the developed world since 2009 is merely a symptom – the product of thus far failed treatment – of this …

Managing Regulatory Arbitrage: An Alternative To Harmonization, Annelise Riles

Cornell Law Faculty Publications

This policy-oriented article argues for deploying conflict of laws doctrines as a tool of coordination in international financial governance.

Domestic Bank Regulation In A Global Environment - A Comparative Dialogue, Robert C. Hockett

Cornell Law Faculty Publications

No abstract provided.

Restricted Investment In Private Equity: The Volcker Rule's Incursion Into Banking?, Manasa Reddy Gummi

Cornell Law School LL.M. Student Research Papers

Investment in private equity originally came from individual investors and corporations. However, over the years institutional investors have become prominent in the investor pool with the hope of achieving risk adjusted returns. Banks have become significant sources of funds in the private equity market. Bank affiliate groups account for a significant share of the private equity activity as well as the banks’ own capital. A distinct feature of a leveraged buyout by a private equity firm as opposed to strategic buyouts and other transactions is the significant reliance on debt financing. Typically, shell companies with substantially no assets would be …

Bretton Woods 1.0: A Constructive Retrieval For Sustainable Finance, Robert C. Hockett

Cornell Law Faculty Publications

Global trade imbalance and domestic financial fragility are intimately related. When a nation runs persistently massive current account deficits to maintain global liquidity as has the United States now for decades, its central bank effectively relinquishes exchange rate flexibility to become a de facto central bank to the world. That in turn prevents the bank from playing its essential credit-modulatory role at home, at least absent strict capital controls that are difficult to administer and have long been taboo. And this can in turn render credit-fueled asset price bubbles and busts all but impossible to prevent, irrespective of the nation's …

Paying Paul And Robbing No One: An Eminent Domain Solution For Underwater Mortgage Debt, Robert C. Hockett

Cornell Law Faculty Publications

In the view of many analysts, the best way to assist “underwater” homeowners — those who owe more on their mortgages than their houses are worth — is to reduce the principal on their home loans. Yet in the case of privately securitized mortgages, such write-downs are almost impossible to carry out, since loan modifications on the scale necessitated by the housing market crash would require collective action by a multitude of geographically dispersed security holders. The solution, this study suggests, is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, …

The Goldilocks Approach: Financial Risk And Staged Regulation, Charles K. Whitehead

Cornell Law Faculty Publications

Financial firms engage in a wide range of private conduct. New rules that address financial risk can regulate elements of that conduct but not all conduct or all the factors that affect conduct. There is, therefore, a real concern that new regulation will have unanticipated consequences, particularly in a system as complex as the financial markets. The result may be new risks or a shift in risk taking away from regulated conduct — responses that regulators can anticipate but may not be able to accurately predict or control.

This Article cautions against the rush to adopt new financial risk regulation …

Were "It" To Happen: Contract Continuity Under Euro Regime Change, Robert C. Hockett

Cornell Law Faculty Working Papers

One way or another, the European Monetary Union (EMU) is apt to endure. The prospect of continuation under the precise contours of the regime as we presently find it, however, is anything but certain. Hence many investors and other actual or prospective contract parties are likely to remain skittish until matters grow clearer. This skittishness, importantly, can itself hamper the prospect of expeditious European recovery. Addressing particular sources of ongoing uncertainty about EMU prospects can itself therefore aid in the project of recovery.

This Essay accordingly aims to impose structure upon one particular, and indeed particularly complex, source of uncertainty …

Bankers, Bureaucrats, And Guardians: Toward Tripartism In Financial Services Regulation, Saule T. Omarova

Cornell Law Faculty Publications

This Article advocates the statutory creation of a new form of tripartite regulatory regime aimed at the detection and prevention of systemic risk in the financial sector. Although it leaves many significant details blank and many important questions unanswered, this Article offers a radically new vision of the financial services regulation as a process involving three equal participants: bankers, bureaucrats, and guardians of the public interest. Admittedly, this vision is not likely to become reality in the near future. Nor is it meant as a comprehensive plan to solve the problem of effective systemic risk regulation in the financial sector. …

Complexity, Innovation, And The Regulation Of Modern Financial Markets, Dan Awrey

Cornell Law Faculty Publications

The intellectual origins of the global financial crisis (GFC) can be traced back to blind spots emanating from within conventional financial theory. These blind spots are distorted reflections of the perfect market assumptions underpinning the canonical theories of financial economics: modern portfolio theory, the Modigliani and Miller capital structure irrelevancy principle, the capital asset pricing model and, perhaps most importantly, the efficient market hypothesis. In the decades leading up to the GFC, these assumptions were transformed from empirically (con)testable propositions into the central articles of faith of the ideology of modern finance: the foundations of a widely held belief in …

License To Deal: Mandatory Approval Of Complex Financial Products, Saule T. Omarova

Cornell Law Faculty Publications

This Article explores the possibility of creating a system of mandatory pre-approval of complex financial products as an ex ante solution to the problem of systemic risk containment. Building on the concept of regulatory precaution borrowed from environmental and health law, and elements of pre-CFMA regulation of commodity futures, the Article outlines the broad contours of a new licensing scheme that would place the burden of proving social and economic utility of complex financial instruments on the intermediaries that structure and market them. Fundamentally a thought experiment, this proposal seeks to enrich the current policy debate by expanding the range …

That Which We Call A Bank: Revisiting The History Of Bank Holding Company Regulations In The United States, Saule T. Omarova, Tahyar E. Margaret

Cornell Law Faculty Publications

This Article does not purport to present an exhaustive and detailed analysis of the entire political or economic history of bank holding company regulation in the United States. Rather, its goal is to examine one particular aspect of that history-the evolution of the BHCA definition of "bank" and the principal exemptions from that definition. Incomplete as it may be, this story highlights some of the key economic, social and political factors that shaped the current institutional structure of the U.S. financial services market and regulation. Without a thorough understanding of the genesis of that structure, it is difficult to envision …

An Evolving Foreclosure Landscape: The Ibanez Case And Beyond, Peter Pitegoff, Laura S. Underkuffler

Cornell Law Faculty Publications

Mortgage securitization, subprime lending, a persistently weak housing market, and an explosion of residential mortgage defaults – today’s homeowners and banks face a new and challenging landscape. Recently, courts in several states have issued decisions that alter the terrain for mortgage foreclosures. In Massachusetts, New Jersey, and New York, among other states, courts have dismissed foreclosure actions on the basis of what might seem to be highly technical deficiencies in the pleading or proof. The most well-known – and controversial – in this cluster of cases is U.S. Bank National Ass’n v. Ibanez, decided by the Supreme Judicial Court of …

From Gramm-Leach-Bliley To Dodd-Frank: The Unfulfilled Promise Of Section 23a Of The Federal Reserve Act, Saule T. Omarova

Cornell Law Faculty Publications

This Article examines the recent history and implementation of one of the central provisions in U.S. banking law, section 23A of the Federal Reserve Act. Enacted in 1933 in response to one of the perceived causes of the Great Depression, section 23A imposes quantitative limitations on certain extensions of credit and other transactions between a bank and its affiliates that expose a bank to an affiliate's credit or investment risk, prohibits banks from purchasing low-quality assets from their nonbank affiliates, and imposes strict collateral requirements with respect to extensions of credit to affiliates. The key purpose of these restrictions is …

Bubbles, Busts, And Blame, Robert C. Hockett

Cornell Law Faculty Publications

I argue that financial asset price bubbles and busts, such as those we have recently experienced in the mortgage and securities markets, are compatible with market efficiency, individual rationality, and even ethically unobjectionable behavior. The reason is that they constitute classic recursively self-amplifying collective action problems, the hallmark of which is the efficient aggregation of individually rational behaviors into collectively calamitous outcomes. In the present case, individuals rationally "legged the spread" between cheap borrowing costs and credit-fueled capital gains rates, neither of which market actors could affect in their individual capacities even when knowing that credit would have eventually to …