Law Commons^™

Another Role For Securities Regulation: Expanding Opportunity, Jasmin Sethi

Jasmin Sethi

Securities regulation can be justified on a number of grounds, but historically, expanding opportunities for wealth accumulation across sectors of the population has not been a justification given credence. This paper examines the implications of integrating an opportunities based perspective in evaluating securities regulation for policy decisions. I demonstrate how the policy implications of such a perspective are often distinct from those implicated by other approaches, such as a public welfare approach to securities regulation. In this article, I apply this perspective and what we know about human behavior to examine how securities policy could be shaped by an opportunities-based …

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; …

Reconsidering Disclosure And Liability In The Transatlantic Capital Markets, Mark Brewer, Orla Gough, Neeta Shah

Mark Brewer

In response to the current global financial crisis, governments around the world are introducing some of the most significant changes financial regulation since the Great Depression. However, these efforts fail to fundamentally alter the current overreliance on disclosure and fail to achieve international cooperation in deterring the next financial crisis. The article explores some of the limits of disclosure as a basis for financial regulation and to suggest international regulatory coordination of liability standards to help curtail the risky behavior that often leads to the pattern of boom and bust in the global financial markets. The purpose of this article …

Path Dependence And Durability Of Hong Kong's Existing Corporate Reorganization System, Charles Zhen Qu Dr

Charles Zhen Qu Dr

A corporate reorganization system that ensures optimal deployment of distressed companies’ assets helps promote economic development. In many developed economies, faltering firms are reorganized through a formal corporate reorganization procedure. The Hong Kong government has recently recommended the enactment of such a procedure on the assumption that the existing corporate and insolvency framework is ill-equipped to restructure failing companies. This article rebuts this assumption through an assessment of the efficiency of the judicially-developed reorganization system that has emerged as a result of the failure to introduce a formal reorganization procedure a decade ago. It argues that since an efficient alternative …

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.

Central Counterparties (Ccp) And The New Transnational Lex Mercatoria, Christian Chamorro-Courtland

Christian Chamorro-Courtland

This article argues that the new transnational lex mercatoria is the main source of law governing the operations of Central Counterparty (CCP) clearing systems. It demonstrates that the new transnational lex mercatoria has been recognized by the courts in various common law jurisdictions as the appropriate source of law governing the operations various other commercial and financial institutions. It is argued that this new legal regime requires official recognition by the courts in order to protect CCP arrangements from burdensome corporate insolvency laws; especially for the protection of non-financial market CCPs, which are currently not protected by special legislation like …

When Enough Is Not Enough: Correcting Market Inefficiencies In The Purchase And Sale Of Residential Property Insurance, Kenneth S. Klein

Kenneth S Klein

Each year at least hundreds, and often thousands of Americans lose their homes to natural disasters striking populated areas, and tens of thousands lose their homes to single-instance fires, floods, or other catastrophes. A recurring storyline is that the majority of these homeowners are underinsured, meaning they have less insurance than it will cost to rebuild their homes. This Article analyzes whether that is indicative of correctible inefficiencies in the residential property insurance markets. The Article identifies two inefficiencies – (1) Inadequate information, which is impairing informed pricing decisions by purchasers; and (2) Dispute costs (such as litigation) in the …

Exchange Of Tax Information: The End Of Banking Secrecy In Switzerland And Singapore?, Jean-Rodolphe W. Fiechter Ll.M.

Jean-Rodolphe W. Fiechter

At their London Summit in April 2009, the G20 Leaders proudly declared: “The era of banking secrecy is over.” The scope of this paper is to examine whether this statement is true. Is exchange of information really the panacea against tax evasion? Did it eradicate the banking secrecy cultivated for centuries by Switzerland and later also by Singapore or does the protection of privacy still have a role to play in the new global order? In the first chapter, I will depict the origins of the banking secrecy and its development in recent years until the breakthrough of the OECD …

Can The Federal Reserve Adopt An Inflation Targeting Regime Under The Current Statutory Arrangements?, Hong Kyoon Cho

Hong Kyoon Cho

This paper discussed legal perspectives in institutional framework of central banking, keyed to monetary policy framework. The statutory objectives of monetary policy provide an environment under which the central bank can design its monetary policy framework, in that the choice of the monetary policy framework could lie within the scope of the spirits embodied in the statutory objectives of monetary policy. Monetary policy framework could illuminate legal aspects of debate, as specifically seen in the Federal Reserve’s case that has adopted not an explicit but an implicit monetary policy framework, namely the Just-Do-It approach. Under the current legal mandate, i.e., …

How The Payday Predator Hides Among Us: The Predatory Nature Of The Payday Loan Industry And Its Use Of Consumer Arbitration To Further Discriminatory Lending Practices, Michael A. Satz

Michael A Satz

This Article argues that Payday lending is a predatory lending practice that disproportionately targets minority customers, and that the Payday lending industry utilizes consumer arbitration agreements to further the industry’s discriminatory lending practices. The Article proposes that protections enacted into law to protect military service members from payday lenders should be universally enacted on a national level.

Executive Compensation: The Law And Incentives, Stas Getmanenko

Stas Getmanenko

Excessive executive compensation frequently breeds resentment, undermines consumer faith in the financial system, and overly stigmatizes otherwise common business failures. Frequently, the opponents of lavish pay packages compare executive compensation to the compensation of rank-and-file workers. Such criticism reflects perfectly appropriate societal concerns over pay equity and distribution of wealth within a society. An entirely separate source of friction is the shareholders’ right to benefit from the corporation’s wealth. Shareholders’ dividend is directly reduced by the company’s expenses, one of which executive compensation. For most of today’s public companies the executive compensation expense is often negligible when considered in light …

The Mortgage Market Crisis: A Game Theory Analysis, Raquel Mato

Raquel Mato

The mortgage market experienced a global bubble during the early 2000s. The bubble burst in 2006, creating a global financial crisis with widespread repercussions. In this paper, I will discuss how the mortgage market normally works and what changes occurred leading up to the 2000s that allowed for the rapid expansion of the mortgage market. I will talk about contributing factors such as: deregulation of the market, government encouragement of homeownership, the mortgage backed securities market, existing legislation, and a general lack of responsibility by all parties involved. I will use various aspects of game theory to explain how this …

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 …

Is The Public Utility Holding Company Act A Model For Breaking Up The Banks That Are Too-Big-To-Fail?, Roberta S. Karmel

Roberta S. Karmel

ABSTRACT FOR “IS THE PUBLIC UTILITY HOLDING COMPANY ACT A MODEL FOR BREAKING UP THE BANKS THAT ARE TO-BIG-TO-FAIL?”

BY ROBERTA S. KARMEL

During the financial crisis of 2007-08 and the debates on regulatory reform that followed, there was general agreement that the “too-big-to-fail” principle creates unacceptable moral hazard. Policy makers divided, however, on the solutions to this problem. Some argued that the banking behemoths in the United States should be broken up. Others argued that dismantling the big banks would be bad policy because these banks would not be able to compete with universal banks in the global capital …

Do Accounting Rules Matter? The Dangerous Allure Of Mark To Market, Todd Henderson, Richard Epstein

Todd Henderson

This paper examines the relative strength of two imperfect accounting rules: historical cost and mark to market. The manifest inaccuracy of historical cost is well known, and, paradoxically one source of its hidden strength. Because private parties know of its evident weaknesses they look elsewhere for information. In contrast, mark to market for hard-to-value assets has many hidden weaknesses. In this paper we show how it creates asset bubbles and exacerbate their negative collateral consequences once they burst. It does the former by allowing banks to adopt generous valuations in up-markets that increase their lending capacity. It does the latter …

Do Accounting Rules Matter? The Dangerous Allure Of Mark To Market, Todd Henderson, Richard Epstein

Todd Henderson

This paper examines the relative strength of two imperfect accounting rules: historical cost and mark to market. The manifest inaccuracy of historical cost is well known, and, paradoxically one source of its hidden strength. Because private parties know of its evident weaknesses they look elsewhere for information. In contrast, mark to market for hard-to-value assets has many hidden weaknesses. In this paper we show how it creates asset bubbles and exacerbate their negative collateral consequences once they burst. It does the former by allowing banks to adopt generous valuations in up-markets that increase their lending capacity. It does the latter …

The Future Of Financial Dispute Resolution In Hong Kong: Promoting A Comprehensive “Multi-Tier Dispute Resolution System” With Reference To The “Lehman Brothers Mediation Scheme”, Shahla F. Ali, John Koon Wang Kwok

Shahla F. Ali

Recent global financial dislocation has provided an impetus for examining effective avenues for the resolution of financial disputes. Hong Kong, like many financial centers throughout the world, has been directly affected by the collapse of Lehman Brothers. Its response to the collapse has included a creative mix of regulatory strengthening and government sponsored mediation and arbitration. Each of these alternative mechanisms of resolution provides a useful case study of the prospects of the use of ADR in response to financial crises. The efficacy of such interventions will be reviewed and options for the future development of a multi-tier dispute resolution …

The U.B.S. Case: The U.S. Attack On Swiss Banking Sovereignty, Beckett G. Cantley

Beckett G Cantley

On August 1, 2006, the United States Senate’s Permanent Subcommittee on Investigations (“PSI”), a branch of the Committee on Homeland Security and Governmental Affairs, released a report in conjunction with a Senate hearing that revealed alarming statistics regarding wealthy Americans’ love affair with offshore banking. The PSI report was a culmination of the subcommittee’s investigation into tax haven abuses, providing the most detailed look to date of high-level tax schemes. The report revealed such an alarming number of rich Americans are using offshore accounts to evade taxes that law enforcement is unable to control the growing misconduct. Senator Carl Levin …

“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 …

Is Chapter 15 Universalist Or Territorialist? Empirical Evidence From United States Bankruptcy Court Cases, Jeremy Leong

Jeremy Leong

No abstract provided.

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 …

The Rise And Fall Of Managerial Adaptive Responses To Incentive Pay, Sharon Hannes

Sharon Hannes

A commonly-voiced argument ties the current financial crisis to prevailing executive compensation practices. Huge stock-option packages and annual bonuses, the claim goes, caused managers to concentrate on the short-run and overlook the downside of risk-taking. But why did crisis emerge only recently, even though such incentive pay schemes are hardly a new phenomenon? This paper argues that for a long period of time, from the beginning of the 1990s until the beginning of the twenty-first century, managers employed a variety of adaptive tactics in response to option-based compensation and other risk-inducing pay schemes. These practices enabled executives to enrich themselves …

Lessons In Price Stability From The U.S. Real Estate Market Collapse, Andrea J. Boyack

Andrea J Boyack

The U.S. residential housing market collapse illustrates the consequences of ignoring risk while funding mortgage borrowing. Collateral over-valuation was a foundational piece of the crisis. Over the past few decades, secondary markets, securitization, policy and psychology increased the flow of funds into real estate. At the same time, financial market segmentation divorced risk from reward. Increased mortgage capital availability, unmitigated by proper risk allocation, led to real estate price inflation. Social trends and government policies exacerbated both the mortgage capital over-supply and the risk-valuation disconnect.

The Dodd-Frank Act inadequately addresses the underlying asset valuation problem. Federal regulation may support market …

State V Fowler: North Carolina Dwi Procedure Considered, Jeffrey Martin

Jeffrey Martin

This case has its origin in attempts by the government of North Carolina to reduce drunk driving fatalities and improve road safety.

Taxation As Regulation: Carbon Tax, Health Care Tax, Bank Tax And Other Regulatory Taxes, Reuven S. Avi-Yonah

Law & Economics Working Papers

This paper addresses three questions: 1. Is regulation a legitimate goal for taxation? 2. Which tax is best suited for regulation? 3. Would it be better to allocate just one goal per tax among the major taxes (individual and corporate income tax and VAT)? It then analyzes the proposed bank tax and the enacted health care tax as regulatory taxes, and concludes that the first is desirable (as is a carbon tax) but the second is not.

A Justified Assault Upon The Citadel Of Privity And The First Amendment, Joseph G. Bunn Esq.

Joseph G Bunn Esq.

The active involvement of credit rating agencies (“CRAs”) in the structured finance market and the recent financial crisis is an adequate basis for investors to pursue claims against CRAs for negligent misrepresentation. Traditionally, CRAs have qualified for protection from suit by investors under the privity doctrine and under the First Amendment. CRAs qualified for protection under the privity doctrine because CRAs are not typically in a contractual relationship with investors who utilize their ratings. CRAs qualified for protection under the First Amendment because courts viewed their ratings as “speech” regarding public matters. However, this dual protection is limited in certain …

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.

Controlling Creditor Opportunism, Jonathan C. Lipson

Jonathan C. Lipson

This paper addresses problems of creditor opportunism. “Distress investors” such as hedge funds, private equity funds, and investment banks are opportunistic when they use debt to obtain control of a financially troubled firm and extract improper gains at the expense of the firm and its other stakeholders. Examples include the mis-use of private information to short-sell a borrower’s securities and creditor self-dealing.

Creditors can act opportunistically because legal doctrines that historically checked such behavior—e.g., “lender liability”—have not kept pace with fundamental changes in the market for control of distressed firms. The recent Dodd-Frank financial reform is not likely to change …