Law Commons^™

The Duty To Manage Risk, A. Christine Hurt

Faculty Scholarship

No abstract provided.

Who Should Be Providing Mortgage Credit To American Households?, David J. Reiss

Faculty Scholarship

No abstract provided.

Sales Suppression As A Service (Ssaas) & The Apple Store Solution, Richard Thompson Ainsworth

Faculty Scholarship

The problem of sales suppression fraud is estimated to cost state and local governments $20 billion annually ($2 billion in New York restaurants alone). Modern sales suppression (skimming) is carried out with technology (Zappers and Phantom-ware). Nine undercover sting operations in and around Manhattan and the Bronx by investigators working for New York’s Department of Taxation and Finance (NY-DT&F) have identified the SSaaS variant of modern skimming.

A striking example of SSaaS may be unfolding in the $1 million sales suppression case against Congressman Michael Grimm (R-NY). It is alleged that Grimm skimmed sales from his Healthalicious restaurant in Manhattan, …

Debt-Buyer Lawsuits And Inaccurate Data, Peter A. Holland

Faculty Scholarship

Pursuant to secret purchase and sale agreements (also known as forward flow agreements), the accounts that banks sell to debt buyers are often sold “as is,” with explicit and emphatic disclaimers that the debts may not be owed, the amounts claimed may not be accurate, and documentation may be missing. Despite their full knowledge that the accuracy and completeness of the data has been specifically disclaimed by the bank, when they sue consumers, debt buyers tell courts that the information obtained from the bank is inherently reliable and accurate. In order to avoid a fraud on the courts, the contents …

Incentivizing Credit Rating Agencies Under The Issuer Pay Model Through A Mandatory Compensation Competition, Robert J. Rhee

Faculty Scholarship

Credit rating agencies are important institutions of the global capital markets. If they had performed properly, the financial crisis of 2008-2009 would not have occurred. This article offers the simplest fix proposed thus far, and it is contrarian. This Article accepts the central role of rating agencies in the regulation of bond investments, the realities of a duopoly, and the issuer-pay model of compensation. The status quo is the baseline. The role of regulation should be to create the conditions necessary to induce competition. This article proposes that a small, recurring portion of revenue earned by the largest rating agencies …

An Overview Of The Fannie And Freddie Conservatorship Litigation, David J. Reiss

Faculty Scholarship

No abstract provided.

Remic Tax Enforcement As Financial-Market Regulator, Bradley T. Borden, David J. Reiss

Faculty Scholarship

No abstract provided.

A National Mineral Policy As An International Investment Law Stratagem: The Case Of Tajikistan's Gold Reserves, Nadia B. Ahmad

Faculty Scholarship

No abstract provided.

A People’S History Of Collective Action Clauses, Mark C. Weidemaier, Mitu Gulati

Faculty Scholarship

For two decades, collective action clauses (CACs) have been part of the official-sector response to sovereign debt crisis, justified by claims that these clauses can help prevent bailouts and shift the burden of restructuring onto the private sector. Reform efforts in the 1990s and 2000s focused on CACs. So do efforts in the Eurozone today. CACs have even been suggested as the cure for the US municipal bond market. But bonds without CACs are still issued in major markets, so reformers feel obliged to explain why they know better. Over time, a narrative has emerged to justify pro-CAC reforms. It …

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 …

Derivatives And Collateral: Balancing Remedies And Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Towards More Sustainable And Less Crisis-Driven Financial Regulation, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

From Pigs To Hogs, Stephen J. Choi, Mitu Gulati

Faculty Scholarship

The question of whether, and to what extent, markets price contract terms in government bond issues has been one of considerable debate in the literature. We use a natural experiment thrown up by the Euro area sovereign debt crisis of 2010-2013 to test whether a particular set of contract terms – ones that gave an advantage to sovereign guaranteed bonds over garden variety sovereign bonds – was priced. These contract terms turned out to be important for the holders of guaranteed bonds during the Greek debt restructuring of 2012, where they helped the holders of guaranteed bonds escape the haircut …

Götterdämmerung, Lawrence G. Baxter

Faculty Scholarship

In his panel remarks on the future direction of financial regulation after the 2012 elections, Professor Lawrence Baxter argues that the age of large banks and “too big to fail” is destined to come to an end, but not through the traditional avenue of governmental oversight. Baxter starts by detailing the warning signs that illuminate the unsustainable nature of the current financial model and moves to a discussion on the deficiencies of modern banking regulations. Some hope for an end to giant banking behemoths, Baxter finally posits, lies in stricter market discipline and a realization that smaller, less-complex banks provide …

The Governance Structure Of Shadow Banking: Rethinking Assumptions About Limited Liability, Steven L. Schwarcz

Faculty Scholarship

In an earlier article, I argued that shadow banking — the provision of financial services and products outside of the traditional banking system, and thus without the need for bank intermediation between capital markets and the users of funds — is so radically transforming finance that regulatory scholars need to rethink their basic assumptions. This article attempts to rethink the corporate governance assumption that owners of firms should always have their liability limited to the capital they have invested. In the relatively small and decentralized firms that dominate shadow banking, equity investors tend to be active managers. Limited liability gives …

Regulating Systemic Risk In Insurance, Daniel Schwarcz, Steven L. Schwarcz

Faculty Scholarship

As exemplified by the dramatic failure of AIG, insurance companies and their affiliates played a central role in the 2008 global financial crisis. It is therefore not surprising that the Dodd-Frank Act—the United States’ primary legislative re-sponse to the crisis—contained an entire title dedicated to insurance regulation, which has traditionally been the responsibility of individual states. The most important insurance-focused reforms in Dodd-Frank empower the Federal Reserve Bank to impose an additional layer of regulatory scrutiny on top of state insurance regulation for a small number of “systemically important” nonbank financial companies, such as AIG. This Article argues, however, that …

Do The Securities Laws Matter? The Rise Of The Leveraged Loan Market, Elisabeth De Fontenay

Faculty Scholarship

One of the enduring principles of federal securities regulation is the mantra that bonds are securities, while commercial loans are not. Yet the corporate bond and loan markets in the U.S. are rapidly converging, putting significant pressure on the disparity in their regulatory treatment. As securities, corporate bonds are subject to onerous public disclosure obligations and liability regimes, which corporate loans avoid entirely. This longstanding regulatory distinction between loans and bonds is based on the traditional conception of a commercial loan as a long-term relationship between the borrowing company and a single bank, in contrast to bonds, which may be …

Extraterritorial Impacts Of Recent Financial Regulation Reforms: A Complex World Of Global Finance, Lawrence G. Baxter

Faculty Scholarship

No abstract provided.

Putting The Securities Laws To The Test: The Long-Standing Approach To Federal Securities Regulation Is Not Working, Elisabeth De Fontenay

Faculty Scholarship

No abstract provided.

Lawyers: Gatekeepers Of The Sovereign Debt Market?, Michael Bradley, Irving De Lira Salvatierra, Mitu Gulati

Faculty Scholarship

The claim that lawyers act as gatekeepers or certifiers in financial transactions is widely discussed in the legal literature. There has, however, been little empirical examination of the claim. We test the hypothesis that law firms have replaced investment banks as the gatekeepers of the market for sovereign debt. Our results suggest that hiring outside law firms sends a negative signal to the market regarding the pending issuance; a finding that is inconsistent with the thesis that outside law firms primarily play a certification role in the sovereign debt market.

The Functional Regulation Of Finance, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

The Bankruptcy-Law Safe Harbor For Derivatives: A Path-Dependence Analysis, Steven L. Schwarcz, Ori Sharon

Faculty Scholarship

U.S. bankruptcy law grants special rights and immunities to creditors in derivatives transactions, including virtually unlimited enforcement rights. This article argues that these rights and immunities result from a form of path dependence, a sequence of industry-lobbied legislative steps, each incremental and in turn serving as apparent justification for the next step, without a rigorous and systematic vetting of the consequences. Because the resulting “safe harbor” has not been fully vetted, its significance and utility should not be taken for granted; and thus regulators, legislators, and other policymakers—whether in the United States or abroad—should not automatically assume, based on its …

“Robbing Peter To Pay Paul”: Economic And Cultural Explanations For How Lower-Income Families Manage Debt, Laura M. Tach, Sara Sternberg Greene

Faculty Scholarship

This article builds upon classic economic perspectives of financial behavior by applying the narrative identity perspective of cultural sociology to explain how lower-income families respond to indebtedness. Drawing on in-depth qualitative interviews with 194 lower-income household heads, we show that debt management strategies are influenced by a desire to promote a financially responsible, self-sufficient social identity. Families are reluctant to ask for assistance when faced with economic hardship because it undermines this identity. Because the need to pay on debts is less acute than the need to pay for regular monthly expenses like rent or groceries, debts receive a lower …

Comments On The September 29, 2014 Fsb Consultative Document, ‘Cross-Border Recognition Of Resolution Action’, Steven L. Schwarcz, Mark Jewett, Bruce Leonard, Catherine Walsh, David Kempthorne

Faculty Scholarship

This CIGI Paper No. 51 was released on December 3, 2014 by the Centre for International Governance Innovation (CIGI) as a response to the Financial Stability Board’s (FSB) Consultative Document, “Cross-Border Recognition of Resolution Action.” Principally authored by CIGI Senior Fellow Steven L. Schwarcz (who works with the think tank’s International Law Research Program), the Paper comments on the policy measures proposed by the FSB, an international body that monitors and makes recommendations about the global financial system, to address the cross-border legal uncertainties of troubled systemically important financial firms. In that context, the Paper explains why a statutory approach …

Money Market Funds Run Risk: Will Floating Net Asset Value Fix The Problem?, Jeffrey N. Gordon, Christopher M. Gandia

Faculty Scholarship

The instability of money market mutual funds (“MMF”), a relatively new form of financial intermediary that connects short-term debt issuers with funders who want daily liquidity, became manifest in the financial crisis of 2007-2009. The bankruptcy of Lehman Brothers, a major issuer of money market debt, led one large fund to “break the buck” (that is, violate the $1 net asset valuation convention (“NAV”)) and triggered a run on other funds that was staunched only by major interventions from the U.S. Treasury and the Federal Reserve. One common reform proposal has been to substitute “floating NAV” for “fixed NAV,” on …

Substituted Compliance And Systemic Risk: How To Make A Global Market In Derivatives Regulation, Sean J. Griffith

Faculty Scholarship

The conventional wisdom is that the global financial crisis of 2007-2008 revealed faults in the ability of international financial regulation to contain the problem of systemic risk. Further conventional wisdom suggests that the failure to regulate comple

The Impact Of Income Disparity On Financial Regulation, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Hazardous Hedging: The (Unacknowledged) Risks Of Hedging With Credit Derivatives, Gina-Gail S. Fletcher

Faculty Scholarship

Is hedging with credit derivatives always beneficial? The benefit of hedging with credit derivatives, such as credit default swaps, is presumed by the Dodd-Frank Act, which excludes hedge transactions from much of the new financial regulation. Yet, significant new risks can arise when credit derivatives are used to manage risks. Hedging, therefore, should be defined not only in relation to whether a transaction offsets risks, but also whether, on balance, the risks that are mitigated—as well as any new risks that arise—are outweighed by the potential benefits.

Regulators of the derivatives markets must consider the risks of hedging with credit …

Santa Anna And His Black Eagle: The Origins Of Pari Passu?, Benjamin Chabot, Mitu Gulati

Faculty Scholarship

One of the most debated issues in international finance is the meaning of the pari passu clause in sovereign bonds. The clause is ubiquitous; it is in almost every single foreign-law sovereign bond out there. Yet, almost no one seems to agree on its meaning. One way to cut the Gordian knot is to track down the origins of the clause. Modern lawyers may have simply copied the clause from the documents of their predecessors without understanding its meaning. But surely the people who first drafted the clause knew what it meant. Four enterprising students at Duke Law School may …

The Judiciary And Fiscal Crises: An Institutional Critique, Peter Conti-Brown, Ronald J. Gilson

Faculty Scholarship

Scholars have long debated the role for courts with respect to governmental action that responds to crisis. Most of the crises analyzed, however, are exogenous to the political process; the courts’ role in response to politically endogenous crises has received less attention. We evaluate the role of the judiciary in a subset of those endogenous crises: the judicial treatment of governmental efforts to resolve the crisis facing underfunded public pensions. Assessing institutional competence schematically with reference to an institution’s democratic accountability and fact-finding ability, we argue that, where institutions function properly, judicial intervention in politically endogenous economic crises should be …