Law Commons^™

Beneficial Ownership And The Remic Classification Rules, Bradley T.` Borden, David J. Reiss

David J Reiss

REMICs are securitized pools of mortgages that qualify for special flow-through taxation. To qualify for flow-through tax treatment, the pool must satisfy several requirements. An intended REMIC that fails to satisfy those requirements will likely be taxed as a corporation and payments made to holders of interests in a failed REMIC will likely be nondeductible dividend payments, subjecting the REMIC to significant tax and penalties. Such tax and penalties will cause beneficial interests in the pool to lose value and frustrate investors who relied upon REMIC classification as an incentive to purchase interests. Thus, tax classification is critical to REMICs …

The Dodd-Frank Act: A Moral Skeptic Framework, Ben Biran

Ben Biran

No abstract provided.

Eminently Reasonable, David J. Reiss

David J Reiss

Local governments across the country are considering an innovative use of eminent domain. They propose to condemn underwater mortgages (those that exceed the fair-market value of the home) in their communities and restructure them so that home­owners can afford their payments and so that the new mortgage is for less than the fair market value of the property. If this proposal is implemented, the local government will pay the owner of mortgages of "underwater" homes the fair market value for the mortgages. The local government will then restructure each mortgage by reducing the principal amount owed to be in line …

Wall Street Rules Applied To Remic Classification, David J. Reiss, Bradley T. Borden

David J Reiss

Investors in mortgage-backed securities, built on the shoulders of the tax-advantaged Real Estate Mortgage Investment Conduit (“REMIC”), may be facing extraordinary tax losses because of how bankers and lawyers structured these securities. This calamity is compounded by the fact that those professional advisors should have known that the REMICs they created were flawed from the start. If these losses are realized, those professionals will face suits for damages so large that they could put them out of business.

Comment On The Use Of Eminent Domain To Restructure Performing Loans, David J. Reiss

David J Reiss

There has been a lot of fear-mongering by financial industry trade groups over the widespread use of eminent domain to residential mortgages. While there may be legitimate business reasons to oppose its use, its inconsistency with Takings jurisprudence should not be one of them. To date, the federal government’s responses to the current crisis in the housing markets have been at cross purposes, half-hearted and self-defeating. So it is not surprising that local governments are attempting to fashion solutions to the problem with the tools at their disposal. Courts should, and likely will, give these democratically-implemented and constitutionally-sound solutions a …

The Good Faith Approach To Foreclosure Mediation: An Assessment Of Washington's Foreclosure Mediation Program, Scott P. Kennedy

Scott P. Kennedy

Since 2007, concerns over high home foreclosure rates have played a dominant role in U.S. economic news and policy, and several states have responded with bold statutory and regulatory innovations. In July of 2011, Washington State implemented one such innovation: the Foreclosure Fairness Act (FFA). It grants defaulting homeowners the right to initiate a mediation in which lenders must consider the alternatives to foreclosure in good faith. This article assesses the Washington model's potential to mitigate the forces frustrating foreclosure prevention. Despite the increasing viability of foreclosure's alternatives, national foreclosure rates remain high. Poor lender-borrower dialogue, a system of perverse …

U.S.Foreign Trade Zones, Tax-Free Trade Zones Of The World, And Their Impact On The U.S. Economy, Susan W. Tiefenbrun

Susan W Tiefenbrun

ABSTRACT

U.S. Foreign Trade Zones, Tax-Free Trade Zones of the World, and Their Impact on the United States Economy , by Susan Tiefenbrun

Free trade zones (FTZs) date back to the time of the Phoenicians; they developed in the l970s and proliferated from 1980 until today. FTZs are duty-free areas where goods may be warehoused, processed, sold, serviced, distributed, showcased, packaged, labeled, sorted, assembled, and/or manufactured as finished goods prior to re-exporting them as duty-exempt finished products. More than one 135 countries operate tax-free trade zones. There are more than 3,500 of these zones and subzones all over the world, …

Transparently Opaque: Understanding The Lack Of Transparency In Insurance Consumer Protection, Daniel Schwarcz

Daniel Benjamin Schwarcz

Consumer protection in most domains of financial regulation centers on transparency. Broadly construed, transparency involves making relevant information available to consumers as well as others who might act on their behalf, such as academics, journalists, newspapers, consumer organizations or other market watchdogs. By contrast, command and control regulation that affirmatively limits financial firms’ products or pricing is relatively uncommon in financial regulation. This Article describes a remarkable inversion of this pattern: while state insurance regulation frequently employs aggressive command and control consumer protection regulation, it typically does little or nothing to promote transparent markets. Rather, state lawmakers routinely either completely …

Epic Fail: An Institutional Analysis Of Financial Distress, Jonathan C. Lipson

Jonathan C. Lipson

This paper presents an institutional analysis of financial distress. “Institutional analysis” compares the effectiveness of large-scale processes, such as markets, courts, and governments, at solving social problems. Although financial distress is one of our most acute problems, there has been virtually no effort to analyze it from an institutional perspective. This paper begins to fill that gap.

Institutional analysis shows that, contrary to conventional wisdom, financial distress is not a problem that courts, such as bankruptcy courts, usually solve by themselves. Instead, it is increasingly a problem that political organs (whether elected or regulatory) both create and purport to resolve. …

Risk Based Student Loans, Michael Simkovic

Michael N Simkovic

Credit markets serve a vital function in capitalist economies: evaluating the riskiness of a range of possible investments and channeling resources toward those investments that investors believe are most likely to prove successful. This process is known as the “risk-based pricing” of credit. Ideally, risk-based pricing should lead to lower cost of capital for lower risk investment choices with larger rewards, and therefore more investment in such promising activities. Conversely, risk-based pricing should lead to higher costs of capital, and therefore less investment, in high-risk activities with relatively low rewards. If creditors are well informed and analytic, and borrowers respond …

If The Shoe Of The Sec Doesn't Fit: Self-Regulatory Organizations And Absolute Immunity, Jennifer M. Pacella, Esq.

Jennifer M. Pacella, Esq.

In recent years, the absolute legal immunity granted to self-regulatory organizations (“SROs”) in the securities industry has incited increasingly controversial concerns about the lack of accountability of financial regulators. Although SROs like the Financial Industry Regulatory Authority (“FINRA”) are deemed to “stand in the shoes” of the Securities and Exchange Commission (“SEC”) by carrying out delegated, quasi-governmental duties in monitoring securities markets, their alternate role as private, commercial entities raises questions as to the fairness of expansive SRO immunity. Plaintiffs have historically been denied any redress even in instances of alleged SRO fraud, misconduct and bad faith. Earlier this year, …

A New Philosophy For Financial Stability Regulation, Hilary J. Allen

Hilary J. Allen

The financial crisis of 2007-2008 showed up many inadequacies in the pre-crisis approach to financial stability regulation. The response from legislators and regulators has been to implement a broad new range of regulatory tools – individual solutions to individual regulatory failings highlighted by the crisis. But the prevailing cost-benefit philosophy that informed financial stability regulation in the United States prior to the crisis persists today - there has been no real effort to rethink the overarching philosophy behind financial stability regulation. Because a cost-benefit approach gives too much primacy to the short-term interests of the financial industry, this Article rejects …

The Dog That Didn't Bark: Private Investment Funds And Relational Contracts In The Wake Of The Great Recession, Robert Illig

Robert C Illig

In the aftermath of the subprime mortgage crisis, the contract rights of numerous hedge funds and venture capital funds were breached. These contracts were complex and sophisticated and had been negotiated at great time and expense. Yet despite all of the assumptions of neo-classical contracts theory, nothing happened. Practically none of these injured parties sued to enforce their rights. Professor Illig uses this dearth of litigation to conduct a form of natural experiment as to the value of contract law. Discrete market participants contracted before the crash and then pursued their rights in court afterwards, while relational market participants contracted …

Private Lawmaking And The Architecture Of Confidentiality In Nonprofit Boardrooms, Norman I. Silber

Norman I. Silber

Abstract

Placement of the boundary line between transparent and confidential deliberation inside a boardroom affects the quality, efficiency, and fairness of corporate decision making. Policies which do not insist upon confidentiality can improve the perceived legitimacy of decisions and of those who make them; confidentiality can improve the ability to implement decisions effectively. The degree of transparency facilitated by these policies affects the volume and quality of available information. In the nonprofit boardroom, the boundaries that are set by governance rules also reflect and give shape to institutional structures and cultural norms.

This article explores justifications for changing from a …

"Systemic Poverty As A Cause Of Recessions", Robert Ashford

College of Law - Faculty Scholarship

This article argues that the failure to address and ameliorate systemic poverty is a major cause of recessions. Recessions occur (and sub-optimal employment and growth persist) when a critical mass of market participants come to believe that the distribution of future earning capacity is not sufficient to purchase what can be produced despite the physical and technological capacity to employ available labor and capital to produce more over the same period even at lower unit cost. The essence of systemic poverty is widespread inadequate earning capacity. In recessionary periods, with rising unemployment, the problem of inadequate earning capacity (which perennially …

The Emergence Of The New Chinese Banking System: Implications For Global Politics And The Future Of Financial Reform, Shruti Rana

Shruti Rana

As the current financial crisis spreads from country to country around the world, China’s new-found financial and political power is dominating global, financial, and political arenas. China’s recent rise to power deserves increased scrutiny as China’s experience may offer lessons and models for other countries struggling with financial chaos. These remarks begin a dialogue over the lessons that can be learned from China’ ascent to power, and considers some of implications of China’s rise. It also contrasts China’s experience with that of Western countries, who have approached financial reform from entirely different perspectives. After considering these perspectives, and providing an …

The Great Recession And The Rhetorical Canons Of Law And Economics, Michael D. Murray

Law Faculty Publications

THE GREAT RECESSION AND THE RHETORICAL CANONS OF LAW AND ECONOMICS, by Michael D. Murray

Abstract

The Great Recession of 2008 and onward has drawn attention to the American economic and financial system, and has cast a critical spotlight on the theories, policies, and assumptions of the modern, neoclassical school of law and economics—often labeled the "Chicago School"—because this school of legal economic thought has had great influence on the American economy and financial system. The Chicago School's positions on deregulation and the limitation or elimination of oversight and government restraints on stock markets, derivative markets, and other financial practices …

After The Great Recession: Law And Economics' Topics Of Invention And Arrangement And Tropes Of Style, Michael D. Murray

Law Faculty Publications

AFTER THE GREAT RECESSION: LAW AND ECONOMICS’ TOPICS OF INVENTION AND ARRANGEMENT AND TROPES OF STYLE

by Michael D. Murray

Abstract

The Great Recession of 2008 and onward has drawn attention to the American economic and financial system, and has cast a critical spotlight on the theories, policies, and assumptions of the modern, neoclassical school of law and economics—often labeled the "Chicago School"—because this school of legal economic thought has had great influence on the American economy and financial system. The Chicago School's positions on deregulation and the limitation or elimination of oversight and government restraints on stock markets, derivative …

Comment On The Federal Housing Finance Agency’S Strategic Plan: Fiscal Years 2013-2017, David J. Reiss

David J Reiss

This is a comment upon Performance Goal 4.3 from the Federal Housing Finance Agency’s Strategic Plan: Fiscal Years 2013-2017. Performance Goal 4.3 addresses the future of Fannie Mae and Freddie Mac as well as the future of the infrastructure of the residential housing finance market. This comment will address the future of Fannie and Freddie after they exit conservatorship. Once analyzed in the context of regulatory theory, Fannie and Freddie’s future seems clear. They should be privatized so that they can compete on an even playing field with other financial institutions, and their public functions should be assumed by pure …

Barriers To Market Discipline: A Comparative Study Of Regulatory Reforms, Vincent Di Lorenzo

Vincent Di Lorenzo

This article explores regulatory reforms in the U.S. and U.K. in response to the recent mortgage market crisis. First, the article explores the extent to which regulatory bodies have recognized behavioral barriers to market discipline on the part of both consumers and industry actors. The academic literature has long identified such barriers, but recognition by government regulators has lagged. Without such recognition legal requirements and regulatory policies evolve without consideration of a major influence on human decision making. Second the article examines the varied response in the U.S. and U.K. to both market limitations and behavioral limitations to self-protection and …

Major Violations For The Ncaa: How The Ncaa Can Apply The Dodd-Frank Act To Reform Its Own Corporate Goverance Scheme, Jason Rudderman

Jason Rudderman

This paper applies the Dodd-Frank Act, and specifically its corporate governance laws, to the National Collegiate Athletic Associate (NCAA). The NCAA has experienced rapid, largely uncontrolled growth over the past decade that has led to an influx of corporate governance and regulatory problems within its member institutions. As with financial institutions, the influx of money itself is not the inherent problem. Money in college athletics is good. When large schools succeed, they help support smaller schools in their conference through revenue sharing plans. It is the lack of control and governance mechanisms regulating the influx of money that poses the …

Are Short Sellers Really The Enemy Of Efficient Securities Markets Or Are They Just Public Patsies?, Abel C. Ramirez Jr.

Abel C Ramirez Jr.

When the 2008 global financial crisis caused the stock market to drastically decline, short selling generated intense political and economic scrutiny that negatively characterized the practice as a predatory scheme. When the 2008 global financial crisis caused the stock market to drastically decline, short selling generated intense political and economic scrutiny that negatively characterized the practice as a predatory scheme. As a legitimate investment strategy, short selling is a method by which investors can capitalize on over-valued stocks that decline – this is NOT the same as “contributing” to the stock’s decline, which short selling’s detractors might believe.

Congressional Intent Regarding The Qualified Mortgage Provision, Raymond Natter

Raymond Natter

The Consumer Financial Protection Bureau (CFPB) is currently considering a regulation that could well have a significant impact on the cost and availability of mortgage loans in the United States. The regulation is intended to implement the Qualified Mortgage (QM) provisions in the Dodd-Frank Act. These provisions impose significant legal liability on any mortgage originator that does not make a determination before making a mortgage loan that the borrower has a “reasonable ability to repay” the loan, before the mortgage is made. In light of the subjective nature of this standard, the Dodd-Frank Act also establishes a safe harbor for …

Is The Middle East Moving Toward Islamism After The Arab Spring? The Case Study Of The Egyptian Commercial And Financial Laws, Radwa S. Elsaman Ms., Ahmed Eldakak Mr.

Radwa S Elsaman

The parliamentary elections that followed the Egyptian Revolution witnessed an unprecedented success for Islamists as they secured an overwhelming majority of seats, suggesting that they may intend to amend many laws to bring it in compliance with the Islamic Shari’a. This article addresses legal challenges that will face the new majority if they decide to Islamize laws and regulations related to business and finance. Particularly, the article discusses Islamic money theory, trade, banking systems, consumer protection, insurance, competition, and tax systems. The article analyzes the Egyptian business and finance laws to examine whether they comply with Islamic law. It then …

Debtor’S Prison In The Neoliberal State: “Debtfare” And The Cultural Logics Of The Bankruptcy Abuse Prevention And Consumer Protection Act Of 2005, Linda E. Coco

Linda E. Coco

The enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”) of 2005, amending the Bankruptcy Reform Act of 1978, marks a transformation in bankruptcy law and policy that is representative of larger shifts in dominant economic and political models from “embedded liberalism” to free market “neoliberalism.” BAPCPA’s provisions are part of the new practices of the emergent neoliberal state as they relate to the American middle class segment of the population. In disciplining the middle class, BAPCPA shifts the risk and the responsibility of the lending relationship onto consumer debtors. BAPCPA does this by keeping financially distressed individuals …

Municipal Securities: The Crises Of State And Local Government Indebtedness, Systemic Costs Of Low Default Rates, And Opportunities For Reform, Christine Sgarlata Chung

Christine Sgarlata Chung

Municipal securities are securities that state and local governments issue to pay for large infrastructure projects like roads and power plants, to fund economic development and public welfare initiatives like sports stadiums and hospitals, and to meet day-to-day funding needs. According to conventional wisdom, municipal securities are safe because state and local government issuers rarely default. State and local governments rarely default because they may be legally obligated to collect taxes, fees and assessments in amounts necessary to pay bondholders. In addition, legal and non-legal constraints may make it difficult or impossible for state and local governments to obtain discharge. …

Janus Capital Group V. First Derivative Traders: A Call To Rewind Securities Law Jurisprudence To Protect Investors – A Practitioner’S Guide And Policy Perspective, Max Schatzow

Max Schatzow

As of 1989, the federal courts were inundated with more Rule 10b-5 litigation than all of the other provision of the federal securities law combined. The Securities Enforcement Commission’s (“SEC”) Rule 10b-5 (“Rule 10b-5,” “the rule,” or “10b-5”) makes it unlawful for certain persons to make material misrepresentations. On June 12, 2011, The Supreme Court in Janus Capital held that those certain persons were those who have the “ultimate authority” over a statement. The Supreme Court in Janus left many litigators and regulators in the securities field grasping for answers. A progeny of cases have been tried under Rule 10b-5 …

Preventing Future Economic Crises Through Consumer Protection Law Or How The Truth In Lending Act Failed The Subprime Borrowers, Jeff Sovern

Jeff Sovern

This paper argues that one cause of the current economic crisis was that the federal Truth in Lending Act failed to provide mortgage borrowers with the tools to determine whether they would be able to meet their loan obligations, and that as a result many borrowers assumed loans on which they would later default. The paper first explores the disclosures for adjustable rate mortgages—which were commonly used for subprime loans—and explains how those disclosures misled borrowers about their monthly payments. Next, the paper reports on a survey of mortgage brokers conducted in July of 2009. The brokers were nearly unanimous …

Preventing Future Economic Crises Through Consumer Protection Law Or How The Truth In Lending Act Failed The Subprime Borrowers, Jeff Sovern

Jeff Sovern

This paper argues that one cause of the current economic crisis was that the federal Truth in Lending Act failed to provide mortgage borrowers with the tools to determine whether they would be able to meet their loan obligations, and that as a result many borrowers assumed loans on which they would later default. The paper first explores the disclosures for adjustable rate mortgages—which were commonly used for subprime loans—and explains how those disclosures misled borrowers about their monthly payments. Next, the paper reports on a survey of mortgage brokers conducted in July of 2009. The brokers were nearly unanimous …

The Virtue Of Home Ownership And The Vice Of Poorly Secured Lending: The Great Financial Crisis Of 2008 As An Unintended Consequence Of Warm-Hearted And Bone-Headed Ideas, Mark S. Klock

Mark S Klock

This article utilizes a simple economic model of asymmetric information to model a pooling equilibrium in the housing market. There are two types of households in the model—disciplined and undisciplined. Disciplined households are able to distinguish themselves by saving a significant portion of their income for a down payment on a home leading to a stable equilibrium. A change in government policy which requires a rate of home ownership greater than the proportion of disciplined households causes the equilibrium to collapse. I argue that changes in U.S. housing policy driven by federal legislation had exactly this effect on the housing …