Law Commons^™

Heart Of Darkness: The Problem At The Core Of The Us Proxy System And Its Solution, David C. Donald

David C. Donald

Voting rights are a shareholder’s main legal channel to exercise control internally over the company in which she invests her savings. Under the corporate law of the US states, a shareholder is someone registered on the stockholders’ list, not a person who has title to shares. When in the 1970s transferring paper certificates became impossible on high-volume markets, Congress ordered that the market’s securities be put into the vaults of a central depository and that claims against the depository’s accounts be transferred rather than the shares themselves. Once this was done, however, issuers no longer knew who owned their shares; …

Aligned Incentives: Envisioning Syzygy, Karl T. Muth

Karl T Muth

In the wake of the failure of AIG, this paper deals with the question of whether incentive alignment is truly the problem with contemporary insurance products (as many in the media and the economics community have alleged) by examining two hypothetical types of insurance where incentives are extraordinarily well-aligned.

Cleaning Up The Refuse From A Financial Crisis: The Case For A Resolution Management Corporation, James Thomson

James B Thomson

Systemic banking and financial crises invariably result in the transfer of a large volume of distressed financial assets into the hands of the government, which must later dispose of them. The fiscal and economic costs of the crisis and the speed of recovery depend on how effectively the government’s salvage operations can re-privatize these assets. To maximize the operations’ effectiveness, I propose that the government create a temporary resolution management corporation. Drawing on Kane’s (1990) asset-salvage principles, as well as the U.S. experience with special-purpose entities for managing and disposing of assets stripped from distressed financial firms’ balance sheets, I …

“A Psychological Investigation Of Consumer Vulnerability To Fraud: Legal And Policy Implications”, Debra P. Stark, Jessica M. Choplin

Debra Pogrund Stark

This article focuses on a type of consumer fraud that is particularly problematic because it may not be actionable in some jurisdictions, namely the problem of consumer vulnerability to deception when a consumer notices a problematic term in a contract but is persuaded through deception to proceed with the deal anyhow. Two fraud simulation studies and a follow-up survey demonstrated how this type of fraud operates, found that consumers with certain vulnerability characteristics such as having lower socio-economic status are more susceptible to this type of fraud, and explored some of the psychological reasons why consumers are vulnerable to it …

Is It Greek Or Déjà Vu All Over Again?: Neoliberalism, And Winners And Losers Of International Debt Crises, Tayyab Mahmud

Tayyab Mahmud

The global financial meltdown and the Great Recession of 2007-09 have brought into sharp relief the uneven distribution of gain and pain in economic crises. The 2009-10 debt crisis of Greece has resulted in a windfall for financial institutions at the expense of tax-payers, a rollback of welfare systems, and impoverishment of the working classes. This result is in tune with a pattern evidenced by the ubiquitous international debt crises of the last three decades, including the Latin American crisis of the 1980s, and the Asian crisis of 1990s. The recurrent international debt crises of the last three decades and …

The Dangerous Illusion Of International Financial Standards And The Legacy Of The Financial Stability Forum, Cally Jordan

Cally Jordan

In the aftermath of the Asian Financial Crisis, and the criticism directed towards the International Monetary Fund, in particular, for not having seen it coming, the Financial Stability Forum (FSF) was created in 1999 under a mandate from the G7 ministers of finance and central bank governors. The Asian Financial Crisis arose suddenly, spread rapidly and spared neither developed nor developing economies in the region, although some fared much better than others. In retrospect, the causes of the crisis were obvious and the consequences predictable. “Contagion” entered the financial lexicon. Thus the role of the FSF was to promote financial …

The Financial Reform Act: Will It Succeed In Reversing The Causes Of The Subprime Crisis And Prevent Future Crises?, Charles W. Murdock

Charles W. Murdock

Summary: The Financial Reform Act: Will It Succeed in Reversing the Causes of the Subprime Crisis and Prevent Future Crises? By: Professor Charles W. Murdock

The current financial crisis, which could have plunged the world into a financial abyss similar to the Great Depression, is far from resolved. The financial institutions, which this article asserts caused the crisis, have returned to profitability and have paid billions of dollars in bonuses, while ordinary Americans have borne the brunt of the meltdown, with formal unemployment hanging around the 10% mark. This has caused some to comment that profits have been privatized and …

Consumer Protection Initiatives In The Eu Mortgage Market: A Behavioral Economics Based Critique And Proposal, Debra P. Stark, Jessica M. Choplin

Debra Pogrund Stark

This article critiques the Commission of the European Union's recent consumer protection initiatives for the EU mortgage market focusing on the revised form of disclosures that the Commission appears poised to mandate in a Directive, providing suggested reforms to this form to make it more effective and proposing four additional consumer protections to empower EU consumers to make wise home loan decisions. The article argues that these additional consumer protections are a necessary condtion to creating the integrated EU mortgage market (with more cross border home loans) that the Commission desires.

From The Schoolhouse To The Poorhouse: The Credit Card Act's Failure To Adequately Protect Gen Y Consumers, Eboni Nelson

Eboni S Nelson

Whether through personal experiences or through the experiences of our friends and family, most, if not all, of us are all too familiar with the credit card industry’s unrelenting attempts to saddle young, naïve college students with debt that they cannot afford to repay. Students thoughtlessly apply for and use credit cards without considering the negative effects credit card debt can have on their academic, personal, and financial wellbeing. In May 2009, Congress attempted to address the pervasive problem of young consumer indebtedness by passing the Credit Card Accountability Responsibility and Disclosure Act of 2009. While this Article recognizes and …

Disintermediating Avarice: A Legal Framework For Commercially Sustainable Microfinance, Steven L. Schwarcz

Steven L Schwarcz

Although microfinance has emerged as a key tool to alleviate poverty, the need for microfinance lending vastly exceeds the amount of funds that can be raised from charitable donors. Commercial bank lending is supplementing donor money, but microfinance loans made by banks are expensive and sometimes even exploitive. This article examines how innovative legal structures can enable microfinance loans to be funded directly from lower-cost, and virtually limitless, capital market sources by removing, or “disintermediating,” the need for a bank intermediary. In that context, the article identifies and attempts to resolve the resulting law-and-business issues of first impression and also …

The Financial Reform Act: Will It Succeed In Reversing The Causes Of The Subprime Crisis And Prevent Future Crises?, Charles W. Murdock

Charles W. Murdock

Summary: The Financial Reform Act: Will It Succeed in Reversing the Causes of the Subprime Crisis and Prevent Future Crises? By: Professor Charles W. Murdock

The current financial crisis, which could have plunged the world into a financial abyss similar to the Great Depression, is far from resolved. The financial institutions, which this article asserts caused the crisis, have returned to profitability and have paid billions of dollars in bonuses, while ordinary Americans have borne the brunt of the meltdown, with formal unemployment hanging around the 10% mark. This has caused some to comment that profits have been privatized and …

How "Big" Became Bad: America's Underage Fling With Universal Banks, Lawrence G. Baxter

Lawrence G. Baxter

In little more than a decade gigantic new financial institutions have emerged in America. These organizations are quite different from their predecessors in that they share the highly complex, diversified characteristics of foreign “universal banks.” They are still in the process of developing experienced and mature operational and risk management systems. During this same period, the regulatory framework necessary to match the size, power and hazards generated by these new universal banks remains underdeveloped, and the primary framework around which the system is being constructed, namely Basel II, lies in tatters in the wake of the financial crisis of 2007-08. …

Odious Debt: Modernizing Ancient Problems, Seth M. Reynolds

Seth M Reynolds

So far the odious debt debate has primarily focused on proving the existence of a rule of customary international law. Rather than following this tradition, this paper will focus on another method for demonstrating that a certain legal principle should be applied in an international context; general principles of law and equity. The heart of the odious debt debate revolves around the assertion by some that a successor government is absolutely liable for every debt incurred by a previous regime. However, almost every domestic legal regime limits the ability of a creditor to recover from a successor in interest. This …

How Incentives Drove The Subprime Crisis, Charles W. Murdock

Charles W. Murdock

How Incentives Drove the Subprime Crisis

In order to address any systemic problem, whether the goal is to change the system, regulate the system, or change the incentives driving a system, it is necessary to appreciate all the drivers operating within the system. In the case of the subprime crisis, one of the drivers was the changing nature of the subprime loans, which was not factored into the models used by the investment bankers, the credit rating agencies, and the issuers of credit default swaps.

This paper is an attempt to look dispassionately at the subprime crisis from a particular …

The Credit Repair Organizations Act: The Sleeping Giant, Justin Smith

Justin T Smith

Congress created the Credit Repair Organizations Act (CROA) to protect consumers from unscrupulous providers of credit repair. In the fifteen years since it was enacted, problems have arisen in its application as many of the key provisions of CROA were left undefined and what little case law that has developed has yet to form a coherent understanding of how CROA is to be read. This lack of predictability makes CROA an ineffective piece of legislation in that parties are unable to properly modify their behavior since they are not operating on known terms.

Just as CROA has been neglected by …

How Incentives Drove The Subprime Crisis, Charles W. Murdock

Charles W. Murdock

How Incentives Drove the Subprime Crisis

In order to address any systemic problem, whether the goal is to change the system, regulate the system, or change the incentives driving a system, it is necessary to appreciate all the drivers operating within the system. In the case of the subprime crisis, one of the drivers was the changing nature of the subprime loans, which was not factored into the models used by the investment bankers, the credit rating agencies, and the issuers of credit default swaps.

This paper is an attempt to look dispassionately at the subprime crisis from a particular …

Distorting Legal Principles, Steven L. Schwarcz

Steven L Schwarcz

This article explores the important but until now largely neglected problem of distorting legal principles. Although legal principles enable society to order itself by preserving broadly based expectations, parties sometimes transact in ways that are so inconsistent with accepted principles as to create uncertainty or confusion that undermines the basis for reasoning afforded by the principles. The article starts by examining a fundamental distortion of the nemo dat legal principle (one cannot give what one does not have), which was a trigger of Lehman Brothers’ recent downfall. A practice called “rehypothecation” so distorted nemo dat that Lehman’s customers were uncertain …

How Incentives Drove The Subprime Crisis, Charles W. Murdock

Charles W. Murdock

In order to address any systemic problem, whether the goal is to change the system, o regulate the system, or change the incentives driving a system, it is necessary to appreciate all the drivers operating within the system. In the case of the subprime crisis, one of the drivers was the changing nature of the subprime loans, which was not factored into the models used by the investment bankers, the credit rating agencies, and the issuers of credit default swaps.

This paper is an attempt to look dispassionately at the subprime crisis from a particular perspective, namely, the incentives that …

Regulatory Failures In The Design Of Securities Settlement Infrastructure, David C. Donald

David C. Donald

Nearly all transactions in listed securities on the US capital markets are settled through a securities settlement infrastructure that generates extensive negative externalities for issuers and securityholders. This model is still advocated by regulators and market structure experts; it is an intermediated structure originally designed for depositing paper certificates in the accounts of a depository to allow book entry transfers of claims on the deposited certificates. The structure dates back at least to 1873. It accelerates transfer by short circuiting "endorsement", "delivery" and "cancellation" of certificates, as all securities are and remain registered in the name of a single entity …

On Systemically Important Financial Institutions And Progressive Systemic Mitigation, James B. Thomson

James Thomson

One of the most important issues in the regulatory reform debate is that of systemically important financial institutions. This paper proposes a framework for identifying and supervising such institutions; the framework is designed to remove the advantages they derive from becoming systemically important and to give them more time-consistent incentives. It defines the four C’s of systemic importance (contagion, concentration, correlation, and conditions) as criteria for classifying firms as systemically important that goes beyond binary classification based on size alone (the classic doctrine of too big to let fail); it also discusses the concept of progressive systemic mitigation.

An End To Too Big To Let Fail? The Dodd–Frank Act’S Orderly Liquidation Authority, Thomas J. Fitzpatrick Iv, James B. Thomson

James Thomson

One of the changes introduced by the sweeping new fi nancial market legislation of the Dodd–Frank Act is the provision of a formal process for liquidating large fi nancial fi rms—something that would have been useful in 2008, when troubles at Lehman Brothers, AIG, and Merrill Lynch threatened to damage the entire U.S. fi nancial system. While it may not be the end of the too-big-to-fail problem, the orderly liquidation authority is an important new tool in the regulatory toolkit. It will enable regulators to safely close and wind up the affairs of those distressed fi nancial fi rms whose …

Federal Preemption, Regulatory Failure And The Race To The Bottom In Us Mortgage Lending Standards

Patricia A. McCoy

No abstract provided.

Guioco Piano: The Acquiree's Dilemma, Karl T. Muth, Hans Trees

Karl T Muth

This article discusses strategic decisions made by the acquiree in an M&A scenario and also includes a case study on Zond Energy and Enron.