Law Commons^™

The Market For Subprime Lending: A Law And Economics Analysis Of Market Failures And Policy Responses, Diego Valiante

Diego Valiante

Subprime mortgages represent a relevant wealth accumulation tool for low-income borrowers, and may promote efficient social policies. However, as recently brought to attention by the financial crisis, origination and distribution services are affected by strong information asymmetries and cognitive biases (rational and irrational). The failure of the subprime mortgages market was triggered by a mixture of irrational and opportunistic behaviours, as well as a lack of regulation, supervision and efficient disclosure. This paper, therefore, sheds lights on four areas of this market, highlighting causes and proposing remedies to structural failures. Therefore, the paper discusses: the financial architecture of the subprime …

Shaping Reforms And Business Models For The Otc Derivatives Market. Quo Vadis?, Diego Valiante

Diego Valiante

Regulators around the globe are setting new strategies to deal with the systemic importance of the €427 trillion ($604 trillion) over-the-counter (OTC) derivatives market. This paper explores the three major sources of disruptive effects in OTC derivatives: liquidity, counterparty risk and legal uncertainty. The author highlights risks that may affect the value chain of a derivative transaction and weaken the economic and legal rationales that justify their widespread use. On the policy side, commitments have been made at G-20 level to draft uniform rules on a global scale “to build a safer financial system”. This paper finds, however, that in …

The Trouble With Investment Banking: Cluelessness, Not Greed, William C. Bunting

W. C. Bunting

We assume that the set of marketable financial instruments can be divided into two distinct categories: (1) easy-to-price and (2) difficult-to-price, and then isolate two behavioral effects as most important with respect to securities trading in difficult-to-price securities; specifically, the house-money-effect and the earned-money-effect. It is shown that these behavioral effects discourage profitable investment in research effort. We then argue that the Private Securities Litigation Reform Act (“PSLRA”) safe harbor should not apply to investment banks that issue/underwrite difficult-to-price securities. We also advocate for the return of the private investment banking partnership as the most sensible way in which to …

The Start Of A Revolution: How Shays’ Rebellion Continues Today, Gary P. Opper

Gary P Opper

You might remember from your days in your high school history class the tale of Daniel Shays. He was a poor farmhand from Massachusetts that went on to lead a rebellion against the United States government, whom he and others felt were imposing crushing debt and taxes. Anyone who failed to pay such debts could end up in debtor’s prison and had their property seized.

Shays and his compatriots sought debt relief through lower taxes and receiving funds from the government. They attempted to stop the courts from taking their property by forcing the courts in western Massachusetts to close …

The Great Recession And The Future Of International Banking Cooperation, Webb Mcarthur

Webb McArthur

The credit crisis of 2008 will likely produce reforms of the financial regulatory structure in the U.S., rearranging powers between regulators, implementing new rules governing the sort of risk financial institutions may assume, and instituting new consumer-oriented protections. The crisis made it clear that transparency and coordination of our regulation is crucial to the wellbeing of the U.S. economy. It follows that we should reexamine our coordination on the international level, as the world grows more, not less, interconnected. The current international standards for financial institutions set out in the Basel II Framework have proven to be ineffective, and the …

Energy-Efficiency And Wind Energy: Investment Strategy For Venture Capital And Private Equity, Nicolas L. Boittin

Nicolas L Boittin

Some renewable sources of energy are becoming economically profitable and legislatures are providing greater legal predictability for investment in this area. Many states have implemented Renewable Portfolio Standards (RPSs) and the U.S. Congress extended the investment period for Investment Tax Credits (ITCs) recently. Wind energy is the most mature renewable technology and energy-efficiency offers high profit potential in the short term. These two areas thus provide great investment opportunities for venture capital funds interested in clean technology and private equity funds focusing in renewable energy buyouts.

Personal Bankruptcy And Tax Debt: An Examination Of The Usefulness Of Chapter 13 In Managing Irs Claims, Matthew Q. Mcpherson, Donald D. Hackney, Daniel L. Friesner, Candice L. Correia

Matthew Q McPherson

The bankruptcy code has been used, with varying degrees of success, to mitigate debtor obligations for certain classes of financial claims. Taxes are a unique class of claim. The IRS, as the enforcement tool of the Federal Government’s revenue generating operations, is armed with collection powers not available to ordinary creditors. These include, but are not limited to, liens, levies, attachments, assessment penalties, and, most significantly, the power to ignore debtor homestead protections. Bankruptcy can be very valuable to a debtor caught in an active IRS tax collection. For example, filing Chapter 13 bankruptcy stops the running of interest on …

The International Anti-Money Laundering And The Combating The Financing Of Terrorism Regulation: A Critical Analysis Of Compliance Determinants In International Law., Navin Beekarry

Navin Beekarry

Concerns about risks of money laundering (ML) and terrorist financing (TF) to the stability of the international financial system have resurfaced in the context of the liquidity problems faced by financial institutions resulting from the recent credit crisis (2007). Because of their constantly evolving nature linked with new criminal activities and methodologies, ML and TF present threats of a systemic nature to the stability of the financial system. Addressing those changing faces of ML/TF and associated risks requires the design of a sufficiently flexible and adaptable international regulatory strategy. In this paper, I examine the international anti-money laundering and combating …

Universalising The American – Secured Credit And Uncitral, Gerard Mccormack

Gerard McCormack

Abstract - Universalising the American – Secured Credit and UNCITRAL This paper turns the spotlight on harmonisation and modernisation of secured credit law. The whole harmonization and modernization agenda appears to be driven by a desire to remove restrictions on the taking of security. This is because of a widespread belief that a “liberal” secured transactions regime promotes economic growth by widening the availability of credit. But the agenda also has its critics. The law of secured finance embodies cultural attitudes and public policy choices that vary greatly among States. Changes to legal doctrine often mirror changes that have taken …

Microfinance Regulation: Interest Rate Caps And Concept Of Usury, Gray L. Skinner, William H. Payne

Gray L Skinner

I. Between Scylla and Charybdis: The balancing act of lending to the poor (Abstract)

Over the past two decades, microfinance has grown rapidly, reaching markets around the world and garnering the attention of policy makers and the media. Microfinance is the practice of offering small-scale banking services to communities in developing nations to improve the client's productivity and quality of life. The microfinance industry has attracted investors and practitioners who wish to unlock the profit potential of new markets while also achieving a philanthropic goal. As microfinance has grown, however, so has the need for legal regulation. Experts and practitioners …

Taking Bubbles Seriously In Contract Law, John P. Hunt

John P Hunt

This Article argues that bubbles driven by traders with poor judgment exist, can be identified on an aggregate level, and have negative effects on parties that are not involved in the bubble markets. If those premises are accepted, then failing to respect bubble contracts – rescinding bubble transactions – makes sense. Such a rule should deter the formation of bubbles. Moreover, the rule is not in serious tension with the principle of freedom of contract to the degree one might expect. The poor judgment exhibited during a bubble suggests that incapacity should, and mistake and fraud do, apply to a …

Quagmire: Is The Sec Stuck In A Misguided War Against Pipe Financing?, Douglas Hoffer

Douglas Hoffer

A popular non-traditional capital formation option is the “PIPE” deal: Private Investment in Public Equity. Over the last ten years, companies raised more than $100 billion using PIPE transactions. The Securities and Exchange Commission (“SEC”) has increased its regulatory oversight of PIPE transactions as they have become more popular. The SEC believes that some PIPE investors who take a short position in a PIPE issuer’s publicly traded shares violate Section 5 of the Securities Act by selling unregistered securities, and that PIPE investors who trade on knowledge of an impending PIPE transaction are guilty of insider trading. The purpose of …

Illinois Mortgage Foreclosure: Problems And Solutions, John N. Oest

John N Oest

No abstract provided.

The Financial Crisis And The Future Of Law And Economics, Wladimir D. Kraus

Wladimir D. Kraus

A Failure of Capitalism is a multifaceted contribution to our understanding of the Great Recession. But, due to its overwhelmingly macroeconomic character and substance, the nuanced approach of the law and economics scholarship is virtually absent, and so is any plausible explanation of the financial crisis that touched off the great recession. This is puzzling, because attention to the economic consequences of the law seems to provide a much more powerful framework for understanding what caused the financial collapse, and it is a natural approach for scholars of law and economics to pursue.

Rethinking Preventive Measures For Money Laundering And Terrorism Financing, Richard K. Gordon

Richard K Gordon

Preventive measures for money laundering and terrorism financing are among the most widely accepted and observed global standards. However, there is substantial evidence that they do not work well. A main reason is that private sector parties, mostly financial institutions but including few others, are tasked with duties for which they are ill suited, while too little is required of the public sector . While they are required to monitor client transactions and reporting those that raise suspicion of money laundering or terrorism financing, they do not have sufficient expertise or data access to do so. Also, as suggested by …

The Trans-Saharan Gas Pipeline - An Overview Of The Threats To Its Success And The Means To Prevent Its Failure, Loic Conan

Loic Conan

The Trans-Saharan gas pipeline (TSGP) is a planned natural gas pipeline to transport gas from Nigeria to Algeria and, supply Europe by connecting to the existing pipelines across the Mediterranean coast.

The length of the pipeline would be around 4,300 kilometers (2,671 miles). It will start from the swampy areas of the Niger Delta basin, and then will go through cultivated lands and tropical forest of North Nigeria. In Niger, it will cross the Sahel region, a semi-arid tropical savanna preceding the Sahara desert. Almost half of the route will then roam arid immensities before getting over the Atlas Mountains …

Lessons Learned From Bernard Madoff: Why We Should Partially Privatize The Barney Fife’S At The Sec, Mark S. Klock

Mark S Klock

Financial markets do not function well when fraud is pervasive. Around September of 2009, the investigations into the SEC examinations of Bernard Madoff Investment Securities, LLC were completed and released to the public. The simple facts reveal an alarming level of incompetence and lack of financial literacy on the part of the guardians of the integrity of our financial markets. I suggest two important tools for addressing these problems. One is to supplement enforcement of anti-fraud rules with more private attorney generals by expressly creating a private right of action for aiding and abetting violations of securities laws. This will …

Renters Evicted En Masse: Collateral Damage Arising From The Subprime Foreclosure Crisis, Creola Johnson

Creola Johnson

ABSTRACT: America is experiencing its worst foreclosure crisis in history, and tenants are the silent victims of this crisis. In this Article, Professor Johnson describes the consequences of thousands of tenants of being evicted from residential properties obtained by lenders in foreclosure proceedings against the owners-landlords. The individual consequences include tenants’ renting substandard alternative housing, experiencing disruptions in family life, and even becoming homeless. Societal consequences include the costs imposed upon communities to provide social services to the evicted tenants and their families and the burden on cities in dealing with homes left vacant due to the lenders' inability to …

Consumer Use And Government Regulation Of Title Pledge Lending, Todd J. Zywicki

Todd J. Zywicki

Recent years have seen growth in the use of certain types of nontraditional lending products, such as payday lending and auto title lending, and a relative decline of others, such as finance companies and pawnbrokers. Congress is currently considering major new regulations on short-term lending products, such as title lending, that could produce their demise—even though there is no evidence that such products were related in any way to the financial crisis.

This study examines the question of who uses title pledge lending and why. The results are surprising. I find that title pledge lending is used predominantly by three …

Credit Bidding And The Design Of Bankruptcy Auctions, Vincent S. J. Buccola, Ashley C. Keller

Vincent S. J. Buccola

Now that most chapter 11 “reorganizations” are glorified asset sales in which the debtor uses bankruptcy to prepare itself for auction, the design of sale procedures has become a paramount concern to bankruptcy practitioners and courts. Among the choices they face is whether — and if so, how — to permit credit bidding, the practice of offsetting the value of a creditor’s claim against the purchase price of the debtor’s assets. This paper shows that credit bidding tends to augment, and cannot depress, total creditor recoveries, and we therefore conclude that it should be a mandatory feature of bankruptcy auctions. …

Fairness, Utility, And Market Risk, Jeff Schwartz

Jeff Schwartz

In this Article, I argue that we lack a satisfactory theory about how disclosure, the centerpiece of securities regulation, serves investor interests. To close this gap, I contend that the regulations should be viewed as part of a broader societal framework that protects individuals from stock-market risk. I flesh out this notion in three ways. First, I set out to justify protection from market risk as a valid societal goal. To do so, I appeal to Rawlsian and utilitarian notions of justice. These moral theories contain the principle that a just society helps individuals manage risk. I argue that this …

Underwater And Not Walking Away: Shame, Fear And The Social Management Of The Housing Crisis, Brent T. White

Brent T. White

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and …

The Roles Of Acceleration, David Hahn

David Hahn

Acceleration clauses are found in most debt instruments. Upon the occurrence of predetermined triggering event, acceleration makes a creditor's future claim due and payable. While debt covenants have been analyzed extensively in the academic literature, the role of acceleration has been overlooked. This paper examines the role of acceleration clauses and maintains that they play a critical role in debt financing. The paper argues that the prime role of acceleration is to perfect a complex set of governance mechanisms within the corporate setting. This governance role is comprised of three parts. First, acceleration is a complementary measure that supports debt …

Designing Bankruptcy Auctions: The Indubitable Value Of Credit Bidding, Vincent S. J. Buccola, Ashley C. Keller

Vincent S. J. Buccola

Now that most chapter 11 “reorganizations” are glorified asset sales in which the debtor uses bankruptcy to prepare itself for auction, the design of sale procedures has become a paramount concern to bankruptcy practitioners and courts. Among the choices they face is whether — and if so, how — to permit credit bidding, the practice of offsetting the value of a creditor’s claim against the purchase price of the debtor’s assets. This paper shows that credit bidding tends to augment, and cannot depress, total creditor recoveries, and we therefore conclude that it should be a mandatory feature of bankruptcy auctions. …

Corporate Risks, Risk Bearing Ability And Equity, Lukas C. Handschin

Lukas C Handschin

There is a relation between corporate risks, risk bearing ability and equity. In order to assess the risk bearing ability of a corporation, one reference figure is equity, understood as the sum of legal capital and reserves, free reserves and accrued profits. Equity shows the risk bearing ability related to the risk of asset reduction as well as the ability of the corporation to attract new liquidity by increasing debts, in case of a negative free cash flow. Equity is the risk reserve of the corporation. The relation between equity and risk bearing ability allows defining the necessary amount of …

Financial Regulatory Reformation In South Korea And Experience Of The Consolidated Regulatory System, Jeongdoo Lee

Jeongdoo Lee

One significant recommendation for the U.S. financial reformation is the consolidation of regulatory system, which South Korea adopted after the Asian financial crisis. This paper briefly reflects the causes of the Korean financial crisis from the points of financial regulation, and explains the process of reformation and experiences of Korean consolidated system including some modifications after the initial reformation. In addition, this paper evaluates the Korean regulatory system with general standards and needs for changes in the backgrounds of various economic and political surroundings. Although there can be general requisites for desirable regulatory system, the reason for the change itself …

The Case For "Cramdown": Eliminating The Practical And Ideological Barriers To Pure Mortgage Modification, Peter J. Leo

Peter J Leo

This article was prepared for a seminar in Consumer Protection. The article makes the case that Congress should modify the Bankruptcy Code to allow for judicial modification of home mortgages on a bankrupt’s principal residence as a means of combating the foreclosure crisis. The article examines two different proposals originally published in the Minnesota Law Review and the Yale Journal on Regulation, examines some of the deficiencies in those proposals, and concludes that “cramdown” will be a more effective means of keeping consumers in their homes.

Student Loans In Bankruptcy: The Undue Hardship Test Is An Unnecessary Burden, James M. Leiby

James M Leiby

No abstract provided.

Case Management And Online Public Access Systems Of The Courts – An Urgent Call Of Legislative Action P 2, Joseph Zernik

Joseph Zernik

Digital voting machines were previously shown to be vulnerable to malfunction and malfeasance. Papers, recently published in computer science journal, likewise, outlined the invalidity of digital case management and online public access systems that govern the courts, jails, and prisons in the United States, and documented large-scale abuse of such systems. Invalid case management and online public access systems were claimed as key to deterioration of integrity of the justice system, which was previously opined in official, expert, and media reports. Such systems enabled the holding of prisoners under pretense of lawfulness, the conduct of pretense court proceedings, and the …

Case Management And Online Public Access Systems Of The Courts – An Urgent Call Of Legislative Action, Joseph Zernik

Joseph Zernik

Digital voting machines were previously shown to be vulnerable to malfunction and malfeasance. Papers, recently published in computer science journal, likewise, outlined the invalidity of digital case management and online public access systems that govern the courts, jails, and prisons in the United States, and documented large-scale abuse of such systems. Invalid case management and online public access systems were claimed as key to deterioration of integrity of the justice system, which was previously opined in official, expert, and media reports. Such systems enabled the holding of prisoners under pretense of lawfulness, the conduct of pretense court proceedings, and the …