Law Commons^™

Statistical String Theory For Courts: If The Data Don't Fit..., David F. Babbel

David F Babbel

The primary purpose of this article is to provide courts with an important new tool for applying the correct probability distribution to a given legal question. This tool is path-breaking and will have an extensive impact on how a wide variety of cases are decided. In areas as diverse as criminal prosecutions and civil lawsuits alleging securities fraud, courts must assess the relevance and reliability of statistical data and the inferences drawn therefrom. But, courts and expert witnesses often make mistaken assumptions about what probability distributions are appropriate for their analyses. Using the wrong probability distribution can lead to invalid …

Complexity As A Catalyst Of Market Failure: A Law And Engineering Inquiry, Steven L. Schwarcz

Steven L Schwarcz

This article examines how the complexities of modern investment securities and the assets underlying them can trigger a breakdown of financial markets and also analyzes what should be done to mitigate the potential for market failure. Because these complexities are characteristic of complexities in nonlinear engineering systems, the article’s analysis draws on the literature analyzing these systems.

Behavioral Public Finance, Edward J. Mccaffery

Edward J McCaffery

These are slides from a presentation to the Gruter Institute for Law and Behavioral Research, Squaw Valley Conference, May, 2008 (at which event Michael Jensen got me to agree to post these slides as a pdf on SSRN . . . ). The task is to give an overview of what I hope to be an emerging field of behavioral public finance. Behavioral finance, as per Barberis and Thaler 2003 (and others), consists of two parts: (1) individual level heuristics and biases, which can lead to sub-optimal (inconsistent) judgment and decision-making, and (2) institutional arbitrage mechanisms. In private finance and …

Comments On Liebman And Zeckhauser, Simple Humans, Complex Insurance, Subtle Subsidies, Edward J. Mccaffery

Edward J McCaffery

These are brief comments on an excellent paper by Jeffrey Liebman and Richard Zeckhauser, prepared for a conference sponsored by the Urban Institute and Brookings on tax and health care policy. Liebman and Zeckhauser summarize the complexities involved in making optimal health insurance decisions, and offer generally cautionary notes about conflating these with tax law (a theme of the conference). Most importantly, Liebman and Zeckhauser suggest a positive role for employers in health care and insurance decisions, as better setters or framers of choice sets—witness 401(k) plans. In this Commentary, I applaud Leibman and Zeckhauser’s general work and particular observation, …

How The Government Can Protect Home Mortgage Consumers: A Proposal To Provide Consumers A Risk Assessment Of Mortgages, Adeline Park

Adeline Park

The recent sub-prime mortgage crisis has revealed the consumer’s vulnerability in the home mortgage marketplace. Consumers face an overwhelming variety of mortgage options, and are not motivated to invest the necessary time and resources to comprehend the meaning and implications of each loan feature. I propose that the government assess the risk of each loan feature available in the home mortgage market, based on the historical number of foreclosures each loan type has yielded. The government will then require lenders to display the risk assessment icon on all sales, marketing, and advertising materials. The risk assessment icon will identify the …

Reaffirming The Rights Of Foreign Investors To The Protection Of Icsid Arbitration: Sempra Energy International V. The Argentine Republic, Daniel Krawiec

Daniel A Krawiec II

Earlier this decade, the Argentine government responded to a substantial domestic economic crises by passing several emergency laws and unilaterally changing the terms of its investment agreements with foreign investors. Sempra v. Argentine Republic is an important case because the tribunal decisively reaffirmed the right to ICSID arbitration for American investors harmed by Argentina’s actions. Furthermore, the tribunal held that the U.S.-Argentina bilateral investment treaty provided substantial substantive investment protection.

Foreign Tax Credit Arbitrage, Eric Silver

eric silver

Within the sophisticated world of international finance, there exists an inherent tension in characterizing particular tax strategies as either savvy investments or imprudent tax avoidance. At the center of this struggle are the proposed amendments to regulation section 901 of the Internal Revenue Code. Both the Internal Revenue Service (the IRS) and the Treasury Department claim that the proposed regulations will guide tax strategists in determining the appropriate amount of domestic and foreign taxes paid and the claiming of foreign tax credits. More specifically, the updates to the legislation concern transactions involving U.S.-owned foreign entities and certain structured passive investment …

Measuring Identity Theft At Top Banks (Version 1.5), Chris Hoofnagle

Chris Jay Hoofnagle

There is no reliable way for consumers, regulators, and businesses to assess the relative rates of identity fraud at major financial institutions. This lack of information prevents a consumer market for bank safety from emerging. As part of a multiple strategy approach to obtaining more actionable data on identity theft, the Freedom of Information Act was used to obtain complaint data submitted by victims in 2006 to the Federal Trade Commission. This complaint data identifies the institution where impostors established fraudulent accounts or affected existing accounts in the name of the victim. The data were aggregated and used to create …

Corporate Corruption And The Complicity Of Congress And The Supreme Court - The Tortuous Path From Central Bank To Stoneridge Investment Partners, Llc V. Scientific-Atlanta, Inc.., Charles W. Murdock

Charles W. Murdock

This article asserts that Congress and the federal courts are complicit in the widespread corporate corruption that has come to light this past decade. It begins by exploring the notion of bias and then chronicles judicial developments which have protected corporate officials, who have engaged in securities fraud and other wrongful conduct, at the expense of innocent shareholders and investors. It also analyzes the public policy in favor of corruption embodied in the Private Litigation Securities Reform Act, and the actions of federal courts in expanding the protection of PLSRA even beyond that dictated by the language of the statute. …

Protecting Financial Markets: Lessons From The Subprime Mortgage Meltdown, Steven L. Schwarcz

Steven L Schwarcz

Why did the recent subprime mortgage meltdown undermine financial market stability notwithstanding the protections provided by market norms and financial regulation? This article attempts to answer that question by identifying anomalies and obvious protections that failed to work, and then by examining hypotheses that might explain the anomalies and failures. The resulting explanations provide critical insights into protecting financial markets.

Waging War With Wal-Mart: A Cry For Change Threatens The Future Of Industrial Loan Corporations, Zachariah J. Lloyd

Zachariah J. Lloyd

Although ILCs have existed with relatively little fanfare for decades and several blue chips already control ILCs of their own, Wal-Mart’s ILC application created unprecedented opposition and drastic calls for legislative action from nearly every arena to prevent Wal-Mart and other giant retailers like it from controlling a banking institution. The purpose of this Note is to chronicle the development of the ILC industry and analyze whether the separation of banking and commerce is a justifiable basis for opposing ILCs. Part II will address: the history of the ILC, from its creation to emergence as the banking entity of choice …

Auction Rate Securities: Mechanics And Turmoil, Sachin Raval

Sachin R Raval

This study's objective was to understand the origins, mechanics and recent turmoil of the Auction Rate Securities market. Prior to the 2008 collapse, the ARS market had a successful 20-year history. Many investors believed that auction rate securities were cash equivalents with above market yields. Unfortunately, due to the credit crunch, these securities became illiquid, as no buyers were willing to take existing holders' positions. Furthermore, the clearing rate or interest rate of these securities is set through a Dutch auction. In 2006, the SEC conducted a probe of the ARS market. This probe revealed that broker/dealers prevented failed auctions …

For Whom The Bell Tolls: The Demise Of Exchange Trading Floors And The Growth Of Ecns, Jerry W. Markham

Jerry W. Markham

This article describes the rise and fall of exchange trading floors on exchanges in both the stock and derivatives markets. The colorful “open outcry” trading in the “pits” of the Chicago futures exchanges and the bell ringing tradition opening trading on the floor of the New York Stock Exchange (“NYSE”) have long dominated the public perception of how those markets operate. Those scenes are now fast becoming history as the exchanges implement radical changes to their trading practices as the result of competition from electronic communications networks (“ECNs”). That competition has already forced the NYSE and the Chicago futures exchanges …

The Impact Of Predatory Lending Laws: Policy Implications And Insights

Patricia A. McCoy

Over half the states and several localities have enacted statutes and ordinances to regulate abuses in the residential mortgage market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context.

We created a legal index of laws governing mortgage lending terms and practices, giving each state an overall score for the strength of its laws. In addition, we disaggregated the index to create sub-indices along three dimensions: (1) the scope of loans covered …

The Moral Hazard Implications Of Deposit Insurance: Theory And Practice

Patricia A. McCoy

No abstract provided.

The Legal Infrastructure Of Subprime And Nontraditional Mortgage Lending

Patricia A. McCoy

This paper provides a critical analysis of the legal landscape of residential mortgage lending and explains how federal law abdicated regulation of the subprime market. First, the paper presents the historical backdrop to government oversight of mortgage lending and identifies the changes to and innovations in the lending process that contributed to the recent transformation of the residential mortgage market. We then describe recent attempts at the state and federal level to re-regulate and the backlash initiated by the federal banking agencies to thwart regulation of their constituent banks through preemption, resulting in parallel universes of regulation. Next, the article …

The Trouble With Stockjobbers: The South Sea Bubble, The Press And The Legislative Regulation Of The Markets, Benedict Sheehy

Benedict Sheehy

Abstract: The South Sea Bubble Act of 1721 is often taken as the first securities legislation. Further it is understood to be a response to a stock market scandal. In fact, the Act was enacted prior to the scandal and indeed the likely cause of the collapse of the stock bubble itself. This article reviews the historical context, including the finance of government of the era, the development of the South Sea Company and its bubble, the legislation, burst and subsequent effects. It places securities legislation in its historical context as part of a broader movement in corporate law, shifting …

Unprofitable Lending: Modern Credit Regulation And The Lost Theory Of Usury, Brian M. Mccall

Brian M McCall

With almost daily news stories about the crisis in our credit markets, it seems inevitable that a new political and academic debate about credit regulation is commencing. With Americans paying billions of dollars in finance charges every year and some loosing their homes, it is time to ask fundamental questions about the liberality of credit supply and terms. Rather than readjusting usury limits or tinkering with disclosure requirements, it is time to reassess America’s philosophy of lending. Although the current socio-economic belief that more credit is better has held dominance for several centuries, history offers an alternative theory. Surprisingly, a …