Law Commons^™

Pay For Regulator Performance, Frederick Tung, M Todd Henderson

Faculty Scholarship

Few doubt that executive compensation arrangements encouraged the excessive risk taking by banks that led to the recent Financial Crisis. Accordingly, academics and lawmakers have called for the reform of banker pay practices. In this Article, we argue that regulator pay is to blame as well, and that fixing it may be easier and more effective than reforming banker pay. Regulatory failures during the Financial Crisis resulted at least in part from a lack of sufficient incentives for examiners to act aggressively to prevent excessive risk. Bank regulators are rarely paid for performance, and in atypical cases involving performance bonus …

Memo To The Sec On The Proposed Rule On Disclosure Of Payments By Resource Extraction Issuers, Perrine Toledano

Columbia Center on Sustainable Investment Staff Publications

CCSI strongly supports the transparency of contracts and tax flows. CCSI shares the belief of many stakeholders that transparency is essential to leverage extractive industries for sustainable development and is in the mutual interest of all stakeholders. However, some industry players continue to voice the concern that increased transparency would be harmful for their business. Therefore, CCSI is working to also establish the business case for transparency.

In one such case, some industry players have been lobbying against the regulations developed by the Security and Exchange Commission to implement the mandatory disclosure provisions of the Dodd Frank Wall Street Reform …

Institutionalization, Investment Adviser Regulation, And The Hedge Fund Problem, Anita Krug

All Faculty Scholarship

This Article contends that more effective regulation of investment advisers could be achieved by recognizing that the growth of hedge funds, private equity funds, and other private funds in recent decades is a manifestation of institutionalization in the investment advisory context. That is, investment advisers today commonly advise these “institutions,” which have supplanted other, smaller investors as advisory clients. However, the federal securities statute governing investment advisers, the Investment Advisers Act of 1940, does not address the role of private funds as institutions that now intermediate those smaller investors’ relationships to investment advisers. Consistent with that failure, investment adviser regulation …

An Industry-Specific Vat In Michigan - Objective Valuation In The Retail Gasoline Trade, Richard Thompson Ainsworth

Faculty Scholarship

New York adopted an industry-specific value added tax (VAT) to solve problems with virtual intermediaries (room remarketers) under its hotel accommodations tax. The New York VAT resembles the VAT used in the European Union (EU). It is a credit-invoice VAT that subjectively values supplies.

Michigan has also adopted an industry-specific credit-invoice VAT, however the targeted industry is the retail gasoline trade. The valuation method is objective, rather than subjective. In valuing supplies objectively rather than subjectively, the Michigan VAT resembles the exception provisions that are found in most VATs around the globe. Objective valuations are used in VATs when dealing …

Proving Racial Discrimination And Monitoring Fair Lending Compliance: The Missing Data Problem In Nonmortgage Credit, Winnie F. Taylor

Faculty Scholarship

No abstract provided.

An Evolving Foreclosure Landscape: The Ibanez Case And Beyond, Peter Pitegoff, Laura S. Underkuffler

Cornell Law Faculty Publications

Mortgage securitization, subprime lending, a persistently weak housing market, and an explosion of residential mortgage defaults – today’s homeowners and banks face a new and challenging landscape. Recently, courts in several states have issued decisions that alter the terrain for mortgage foreclosures. In Massachusetts, New Jersey, and New York, among other states, courts have dismissed foreclosure actions on the basis of what might seem to be highly technical deficiencies in the pleading or proof. The most well-known – and controversial – in this cluster of cases is U.S. Bank National Ass’n v. Ibanez, decided by the Supreme Judicial Court of …

Derivatives: A Twenty-First Century Understanding, Timothy E. Lynch

Faculty Works

Derivatives are commonly defined as some variation of the following: a financial instrument whose value is derived from the performance of a secondary source such as an underlying bond, commodity or index. But this definition is both over-inclusive and under-inclusive. Thus, not surprisingly, derivatives are largely misunderstood, including by many policy makers, regulators and legal analysts. It is important for interested parties such as policy makers to understand derivatives, because the types and uses of derivatives have exploded in the last few decades, and because these financial instruments can provide both social benefits and cause social harms. This Article presents …

Basel's Gone Cold On Cocos, But Is This A Blessing In Disguise For Banks?, Hilary Allen

Articles in Law Reviews & Other Academic Journals

The last few months have seen a dramatic fall in the value of bank stocks both in Europe and the U.S., bringingback unpleasant memories of the depths of the financial crisis in 2008. Concerns about the sovereign debt crisisin Europe, continuing litigation relating to the American subprime mortgage crisis, and the generally poor stateof the world economy have increasingly put banks under pressure. However, some commentators have pointedout the “silver lining” in all of this: the big American and European banks are better capitalized than they wereduring the financial crisis, and therefore are better able to absorb these shocks and …

Technology Solves Mtic - Vln, Rtvat, D-Vat Certification, Richard Thompson Ainsworth

Faculty Scholarship

Technology solves missing trader intra-community (MTIC) fraud. This should come as no surprise. MTIC is technology-intensive fraud – its solution should also be technology-intensive.

MTIC is getting to be an out-dated term. Now that missing trader fraud has move into services it is no longer confined to intra-community trade, and the older acronym should be adjusted to MTIC/MTEC fraud (with MTEC standing for missing trader extra-community).

MTIC/MTEC fraud is fully digitized (the supply, the movement of the supply, and the funding). The consequences should be clear. MTIC/MTEC must be prevented (before the fact), not pursued (after the fact). In the …

Transfer Pricing & Business Restructurings: Intangibles, Synergies, And Shelters, Richard Thompson Ainsworth, Andrew Shact

Faculty Scholarship

Transfer pricing in business restructuring is attracting global attention. In the past two years two key policy-making groups have released three substantive documents on this topic. The Organization of Economic Cooperation and Development (OECD) issued two position statements while the Joint Committee on Taxation (JCT) issued one. While restructurings are a very common commercial practice, until recently it has been uncommon to apply transfer pricing criteria when examining them in detail.

Essentially, the OECD has overlooked that a unique and valuable intangible is created during the restructuring process. By not acknowledging that this intangible in the mix, the OECD fails …

New York Adopts A Vat, Richard Thompson Ainsworth

Faculty Scholarship

On August 13, 2010 the New York State Department of Taxation and Finance, Office of Tax Policy Analysis, Taxpayer Guidance Division released Amendments Affecting the Application of Sales Tax to Rent Received for Hotel Occupancy by Room Remarketers. The legislative revision it considers (Chapter 57 of the Laws of 2010) was effective September 1, 2010. The changes brought in by this Chapter effectively converted New York’s Hotel Room Occupancy Tax from a single-stage retail sales tax to multi-stage European-style VAT. This paper considers the New York VAT in hotel accommodations in three sections. The first defines a European-style credit-invoice VAT …

The Marginalist Revolution In Corporate Finance: 1880-1965, Herbert J. Hovenkamp

All Faculty Scholarship

During the late nineteenth and early twentieth centuries fundamental changes in economic thought revolutionized the theory of corporate finance, leading to changes in its legal regulation. The changes were massive, and this branch of financial analysis and law became virtually unrecognizable to those who had practiced it earlier. The source of this revision was the marginalist, or neoclassical, revolution in economic thought. The classical theory had seen corporate finance as an historical, relatively self-executing inquiry based on the classical theory of value and administered by common law courts. By contrast, neoclassical value theory was forward looking and as a result …

From Gramm-Leach-Bliley To Dodd-Frank: The Unfulfilled Promise Of Section 23a Of The Federal Reserve Act, Saule T. Omarova

Cornell Law Faculty Publications

This Article examines the recent history and implementation of one of the central provisions in U.S. banking law, section 23A of the Federal Reserve Act. Enacted in 1933 in response to one of the perceived causes of the Great Depression, section 23A imposes quantitative limitations on certain extensions of credit and other transactions between a bank and its affiliates that expose a bank to an affiliate's credit or investment risk, prohibits banks from purchasing low-quality assets from their nonbank affiliates, and imposes strict collateral requirements with respect to extensions of credit to affiliates. The key purpose of these restrictions is …

Recent Developments In European Bank Competition, Juliana Yu Sun

Research Collection School Of Economics

This paper investigates the degree of bank competition in the euro area, the U.S. and U.K. before and after the recent financial crisis, and revisits the issue whether the introduction of EMU and the euro have had any impact on bank competition. The results suggest that the level of bank competition converged across euro area countries in the wake of the EMU. The recent global financial crisis led to a fall in competition in several countries and especially where large credit and housing booms had preceded the crisis...

Toward Transatlantic Convergence In Financial Regulation, Hwa-Jin Kim

Law & Economics Working Papers

This Article reviews the historical background of the Glass-Steagall Act of 1933 along with the developments in the markets that led to the Gramm-Leach-Bliley Act of 1999. It analyzes the discussions on the Volcker Rule in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 from a comparative perspective. It shows how the reform in the United States may impact financial institutions and markets in other jurisdictions. Germany and Switzerland, where universal banking is the hallmark of the financial services industry, are the primary jurisdictions of interest. After taking a historical and political look at the regulation of …

Preferences For Banking And Payment Services Among Low- And Moderate-Income Households, Michael S. Barr, Jane Dokko, Eleanor Feit

Law & Economics Working Papers

This paper characterizes the features of an account-based payment card – including bank debit cards, prepaid debit cards, and payroll cards – that elicit a high take-rate among low- and moderate-income (LMI) households, particularly those without bank accounts. We apply marketing research techniques, specifically choice modeling, to identify the design of a specific financial services product for LMI households, who often face difficulties maintaining standard bank accounts but need banking services. After monthly cost, we find that, on average, non-monetary features of a payment card, such as the availability of federal protection and the type of card, are factors LMI …

Implementing Dodd-Frank: A Review Of The Cftc‟S Rulemaking Process: Testimony, Michael Greenberger

Congressional Testimony

The Relationship of Unregulated OTC Derivatives to the Meltdown. It is now accepted wisdom that it was the non-transparent, poorly capitalized, and almost wholly unregulated over-the-counter (“OTC”) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008. Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized or non-capitalized OTC derivative guarantees of the subprime housing investments. Moreover, the many undercapitalized insurers of that collapsing market had other multi-trillion dollar …

"On The Take": The Black Box Of Credit Scoring And Mortgage Discrimination, Cassandra Jones Havard

All Faculty Scholarship

Subprime credit, a relatively new method of risk-based pricing, has been hailed as a way to open up markets and provide access to credit to those who would otherwise be excluded. Evidence suggests that subprime mortgage segmentation increases rather than reduces exclusionary practices in lending. Furthermore, what is unclear is how lenders determine who qualifies as a subprime borrower. This concern became manifested when studies demonstrated that minority borrowers, regardless of creditworthiness, are more likely to receive expensive, sub-prime loans. The disparity is properly attributed to lenders’ credit pricing policies which included discretionary increases despite the objectively-determined risk-based interest rate …

Regulating Financial Innovation: A More Principles-Based Proposal?, Dan Awrey

Cornell Law Faculty Publications

Modem financial markets are characterized by complexity, seemingly perpetual innovation, chronic asymmetries of information and expertise, and pervasive agency costs. Perhaps nowhere are these characteristics-or their attendant regulatory challenges-more pronounced than within OTC derivatives markets. Mounting effective responses to these challenges must be considered amongst the most difficult and important tasks confronting financial regulators. Prescriptive, rules-based approaches toward financial regulation have thus far proven inadequate to this task. Through the utilization of outcome-oriented principles, enhanced dialogic relationships, intensive supervision, and targeted and proportional (yet vigorous) enforcement, "more principles-based" financial regulation (MPBR) manifests the potential to overcome these challenges and, in …

Derivatives And The Legal Origin Of The 2008 Credit Crisis, Lynn A. Stout

Cornell Law Faculty Publications

Experts still debate what caused the credit crisis of 2008. This Article argues that dubious honor belongs, first and foremost, to a little-known statute called the Commodities Futures Modernization Act of 2000 (CFMA). Put simply, the credit crisis was not primarily due to changes in the markets; it was due to changes in the law. In particular, the crisis was the direct and foreseeable (and in fact foreseen by the author and others) consequence of the CFMA’s sudden and wholesale removal of centuries-old legal constraints on speculative trading in over-the-counter (OTC) derivatives.

Derivative contracts are probabilistic bets on future events. …

Bubbles, Busts, And Blame, Robert C. Hockett

Cornell Law Faculty Publications

I argue that financial asset price bubbles and busts, such as those we have recently experienced in the mortgage and securities markets, are compatible with market efficiency, individual rationality, and even ethically unobjectionable behavior. The reason is that they constitute classic recursively self-amplifying collective action problems, the hallmark of which is the efficient aggregation of individually rational behaviors into collectively calamitous outcomes. In the present case, individuals rationally "legged the spread" between cheap borrowing costs and credit-fueled capital gains rates, neither of which market actors could affect in their individual capacities even when knowing that credit would have eventually to …

The Volcker Rule And Evolving Financial Markets, Charles K. Whitehead

Cornell Law Faculty Publications

The Volcker Rule prohibits proprietary trading by banking entities - in effect, reintroducing to the financial markets a substantial portion of the Glass-Steagall Act’s static divide between banks and securities firms. This Article argues that the Glass-Steagall model is a fixture of the past - a financial Maginot Line within an evolving financial system. To be effective, new financial regulation must reflect new relationships in the marketplace. For the Volcker Rule, those relationships include a growing reliance by banks on new market participants to conduct traditional banking functions.

Proprietary trading has moved to less-regulated businesses, in many cases, to hedge …

Complex Financial Institutions And Systemic Risk, Manuel A. Utset

Scholarly Publications

No abstract provided.

The Federal Home Loan Bank System: A Vehicle For Job Creation And Job Retention, Cornelius K. Hurley, Rebecca Hicks Gallup

Faculty Scholarship

This paper discusses three proposals aimed at reorienting the mission of the System and of the FHLBanks: (1) liberalizing the System's collateral requirements to make the use of small business and other job-creation loans a more viable source of collateral for advances; (2) expanding the membership requirements of the FHLBanks to allow those financial institutions that currently lend to small businesses to become members; and (3) creating a job creation program that uses some of the best practices of the System's Affordable Housing Program. Taken together or separately, these proposals utilize the unique structure of the FHLB System as described …

Making Sense Of The New Financial Deal, David A. Skeel Jr.

All Faculty Scholarship

In this Essay, I assess the enactment and implications of the Dodd-Frank Act, Congress’s response to the 2008 financial crisis. To set the stage, I begin by very briefly reviewing the causes of the crisis. I then argue that the legislation has two very clear objectives. The first is to limit the risk of the shadow banking system by more carefully regulating the key instruments and institutions of contemporary finance. The second objective is to limit the damage in the event one of these giant institutions fails. While the new regulation of the instruments of contemporary finance—including clearing and exchange …

Consumer Financial Protection: It's A Smaller World After All.Pdf, Hilary Allen

Articles in Law Reviews & Other Academic Journals

Few of the reforms of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) havebeen as controversial as the creation of the Consumer Financial Protection Bureau. On the one hand,proponents envisioned the Bureau as “a single, highly motivated federal regulator, [that would apply] the sameregulation … to all similar products, regardless of the identity of the lender.” On the other hand, critics havecalled the Bureau “fatally flawed” and suggested that it has the potential to “stifle innovation and leave somemarket participants worse off.”

Dodd-Frank, International Remittances, And Mobile Banking: The Federal Reserve’S Role In Enabling International Economic Development, Colin C. Richard

NULR Online

International remittances—"cross-border person-to-person payments of relatively low value" sent primarily by international migrants to family members in developing countries—alleviate poverty, support entrepreneurship, and foster the development of financial systems. Until recently, aside from prohibitions on financial interactions with countries such as Cuba or Burma, U.S. regulators have only indirectly addressed these monetary transfers. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) changes this, providing direct, substantive regulation of the industry for the first time. Dodd-Frank calls on the Board of Governors of the Federal Reserve System (Board) to craft more than a dozen regulations to enforce Dodd-Frank's remittance …

Implementation Of Title Vii Of The Wall Street Reform And Consumer Protection Act. Hearing Before The United States Senate, Committee On Agriculture, Nutrition And Forestry - 112th Cong., 1st Sess., Michael Greenberger

Congressional Testimony

The Relationship of Unregulated OTC Derivatives to the Meltdown. It is now accepted wisdom that it was the non-transparent, poorly capitalized, and almost wholly unregulated over-the-counter (―OTC‖) derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008. Because tens of trillions of dollars of these financial products were pegged to the economic performance of an overheated and highly inflated housing market, the sudden collapse of that market triggered under-capitalized or non-capitalized OTC derivative guarantees of the subprime housing investments. Moreover, the many undercapitalized insurers of that collapsing market had other multi-trillion …

Justifying Board Diversity, James A. Fanto, Lawrence M. Solan, John M. Darley

Faculty Scholarship

No abstract provided.

The Limits Of Eu Hedge Fund Regulation, Dan Awrey

Cornell Law Faculty Publications

This article examines the mechanics of the recently adopted EU Alternative Investment Fund Managers Directive. On balance, the results of this examination are not encouraging. The EU has failed to mount a persuasive case for why the Directive represents an improvement over existing national regulatory regimes or prevailing market practices in several key areas. Furthermore, by attempting to shoehorn an economically, strategically and operationally diverse population of financial institutions into a single, artificial class of regulated actors, the EU has established what is in many respects a conceptually muddled regulatory regime. Most importantly, however, the Directive's approach toward the amelioration …