Law Commons^™

Remutualization, Erik F. Gerding

Publications

Policymakers need to rediscover the organizational form of business entity as a tool of financial regulation. Recent and classic scholarship has produced evidence that financial institutions organized as alternative entity forms – including investment bank partnerships and banks and insurance companies organized as mutual or cooperatives – tend to take less risk, exploit customers/consumer less, or commit less misconduct compared to counterparts organized as investor-owned corporations. This article builds off the work of Hill and Painter on investment banks organized as partnerships, Hansmann on the history and economics of banks and insurance companies organized as mutuals and cooperatives, and other …

The Subprime Crisis And The Link Between Consumer Financial Protection And Systemic Risk, Erik F. Gerding

Publications

This Article will appear in a May 2009 symposium issue of the Florida International University Law Review on the global financial crisis. This Article argues that the current global financial crisis, which was first called the “subprime crisis,” demonstrates the need to revisit the division between financial regulations designed to protect consumers from excessively risky loans and safety-and-soundness regulations intended to protect financial markets from the collapse of financial institutions. Consumer financial protection can, and must, serve a role not only in protecting individuals from excessive risk, but also in protecting markets from systemic risk. Economic studies indicate it is …

Code, Crash, And Open Source: The Outsourcing Of Financial Regulation To Risk Models And The Global Financial Crisis, Erik F. Gerding

Publications

The widespread use of computer-based risk models in the financial industry during the last two decades enabled the marketing of more complex financial products to consumers, the growth of securitization and derivatives, and the development of sophisticated risk-management strategies by financial institutions. Over this same period, regulators increasingly delegated or outsourced vast responsibility for regulating risk in both consumer finance and financial markets to these privately owned industry models. Proprietary risk models of financial institutions thus came to serve as a "new financial code" that regulated transfers of risk among consumers, financial institutions, and investors.

The spectacular failure of financial-industry …

The Subprime Crisis And The Link Between Consumer Financial Protection And Systemic Risk, Erik F. Gerding

Publications

This Article argues that the current global financial crisis, which was first called the “subprime crisis,” demonstrates the need to revisit the division between financial regulations designed to protect consumers from excessively risky loans and safety-and-soundness regulations intended to protect financial markets from the collapse of financial institutions. Consumer financial protection can, and must, serve a role not only in protecting individuals from excessive risk, but also in protecting markets from systemic risk. Economic studies indicate it is not merely high rates of defaults on consumer loans, but also unpredictable and highly correlated defaults that create risks for both lenders …

Laws Against Bubbles: An Experimental-Asset-Market Approach To Analyzing Financial Regulation, Erik F. Gerding

Publications

This article analyzes the effectiveness of proposed and actual securities, financial, and tax laws designed to prevent, or dampen the severity of asset price bubbles, including laws designed to mitigate excessive speculation. The article employs experimental asset market research to measure the effectiveness of these anti-bubble laws in correcting mispricings. Experimental asset markets represent complex simulations of stock markets in which subjects trade securities over a computer network. These markets allow scholars to test causal links between legal policies and market effects in ways that empirical research alone cannot. With these virtual markets, researchers can identify asset price bubbles - …