Banking and Finance Law Commons^™

Revisiting Sovereign Bankruptcy, Lee C. Buchheit, Anna Gelpern, Mitu Gulati, Ugo Panizza, Beatrice Weder Di Mauro, Jeromin Zettelmeyer

Faculty Scholarship

Sovereign debt crises occur regularly and often violently. Yet there is no legally and politically recognized procedure for restructuring the debt of bankrupt sovereigns. Procedures of this type have been periodically debated, but so far been rejected, for two main reasons. First, countries have been reluctant to give up power to supranational rules or institutions, and creditors and debtors have felt that there were sufficient instruments for addressing debt crises at hoc. Second, fears that making debt easier to restructure would raise the costs and reduce the amounts of sovereign borrowing in many countries. This was perceived to be against …

Securitization, Structured Finance, And Covered Bonds, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Strengthening Financial Reporting: An Essay On Expanding The Auditor’S Opinion Letter, James D. Cox

Faculty Scholarship

Users of financial statements, foremost of which are investors, have a voracious appetite for information that better enables them to assess the financial position and performance of the reporting firm. Even though financial statements purport to address their needs, because the statements, which are prepared by the firm’s managers, conceal a range of managerial estimates, assumptions, judgments, and choices, investors are deprived of the most fundamental kernel of information they seek, namely the overall quality of the financial reports themselves. In this Article, the author sets forth several modest steps that would enhance the overall quality of financial reporting by …

Regulating Shadows: Financial Regulation And Responsibility Failure, Steven L. Schwarcz

Faculty Scholarship

In the modern financial architecture, financial services and products increasingly are provided outside of the traditional banking system—and thus without the need for bank intermediation between capital markets and the users of funds. Most corporate financing, for example, no longer is dependent on bank loans but raised through special-purpose entities, money-market mutual funds, securities lenders, hedge funds, and investment banks. This shift, referred to as “disintermediation” and described as creating a “shadow banking” system, is so radically transforming finance that regulatory scholars need to rethink their assumptions. Two of the fundamental market failures underlying shadow banking—information failure and agency failure—were …

Restructuring A Sovereign Debtor’S Contingent Liabilities, Mitu Gulati, Lee C. Buchheit

Faculty Scholarship

How should the contingent liabilities of a sovereign be treated in a general restructuring of the debts of that sovereign? This question has played only a minor role in past sovereign debt restructurings because the size of such contingent liabilities has in most cases been small. In recent years, however, slathering government guarantees on third party debt has become the tool of choice for many countries in their efforts to quell an incipient panic in their financial markets. Some of those sovereigns are now, or may soon be, in the position of needing to restructure their debts. Ignoring large contingent …

Paying Paul And Robbing No One: An Eminent Domain Solution For Underwater Mortgage Debt, Robert C. Hockett

Cornell Law Faculty Publications

In the view of many analysts, the best way to assist “underwater” homeowners — those who owe more on their mortgages than their houses are worth — is to reduce the principal on their home loans. Yet in the case of privately securitized mortgages, such write-downs are almost impossible to carry out, since loan modifications on the scale necessitated by the housing market crash would require collective action by a multitude of geographically dispersed security holders. The solution, this study suggests, is for state and municipal governments to use their eminent domain powers to buy up and restructure underwater mortgages, …

The Big Banks: Background, Deregulation, Financial Innovation, And ‘Too Big To Fail,’, Charles W. Murdock

Faculty Publications & Other Works

The U.S. economy is still reeling from the financial crisis that exploded in the fall of 2008. This Article asserts that the big banks were major culprits in causing the crisis by funding the non-bank lenders that created the toxic mortgages, which the big banks securitized and sold to unwary investors. Ironically, banks that were then too big to fail are even larger today.

The Article briefly reviews the history of banking from the Founding Fathers to the deregulatory mindset that has been present since 1980. It then traces the impact of deregulation, which led to the savings and loan …

Credit Default Swaps: Dubious Instruments, Charles W. Murdock

Faculty Publications & Other Works

No abstract provided.

Is Hedge Fund Adviser Registration Necessary To Accomplish The Goals Of The Dodd–Frank Act’S Title Iv?, Luther R. Ashworth Ii

Washington and Lee Law Review

No abstract provided.

Why Register Hedge Fund Advisers—A Comment, Lyman P.Q. Johnson

Washington and Lee Law Review

No abstract provided.

Crowdfunding Securities, Andrew A. Schwartz

Publications

A new federal statute authorizes the online "crowdfunding" of securities, a new idea based on the concept of "reward" crowdfunding practiced on Kickstarter and other websites. This method of selling securities had previously been banned by federal securities law but the new CROWDFUND Act overturns that prohibition.

This Article introduces the CROWDFUND Act and explains that it can be expected to have two primary effects on securities law and capital markets. First, it will liberate startup companies to use peer networks and the Internet to obtain modest amounts of capital at low cost. Second, it will help democratize the market …

Review: Is Hedge Fund Registration Necessary? , J. W. Verret

Washington and Lee Law Review

No abstract provided.

Critique Of Money Judgment Part Three: Restraining Notices, David G. Carlson

Articles

New York is virtually unique in permitting lawyers to issue court orders restraining debtors and third parties from conveying away any assets that could be used to satisfy a money judgment. In effect, these orders command the recipient to do nothing, whereas a turnover or garnishment orders the recipient to do something — pay the creditor or sheriff or surrender illiquid property to the sheriff. The weakness and strength of this debt collection tool is assessed at length. The Article also analyzes in detail New York’s Exempt Income Protection Act, enacted in 2008 to force banks to protect the exempt …

Don’T ‘Screw Joe The Plummer’: The Sausage-Making Of Financial Reform, Kimberly D. Krawiec

Faculty Scholarship

This Article examines agency-level activity during the preproposal rulemaking phase—a time period about which little is known despite its importance to policy outcomes—through an analysis of federal agency activity in connection with section 619 of the Dodd–Frank Act, popularly known as the Volcker Rule. By capitalizing on transparency efforts specific to Dodd–Frank, I am able to access information on agency contacts whose disclosure is not required by the Administrative Procedure Act and, therefore, not typically available to researchers.

I analyze the roughly 8,000 public comment letters received by the Financial Stability Oversight Council in advance of its study regarding Volcker …

Rural Crowdfunding, Andrew A. Schwartz

Publications

One reason that economic development in rural America lags behind its urban counterpart is the persistent lack of venture capital for rural entrepreneurs. Geography deserves much of the blame, as angel investors and venture capitalists tend to live and work in metropolitan areas on the coasts, in places like Silicon Valley and Boston. Many rural areas are literally thousands of miles away, with the result that venture capital has rarely found its way to rural regions.

Recent federal legislation, however, has the potential to change this dynamic. The JOBS Act authorizes the sale of securities over the Internet to large …

Keep It Light, Chairman White: Sec Rulemaking Under The Crowdfund Act, Andrew A. Schwartz

Publications

Title III of the JOBS Act, known as the CROWDFUND Act, authorizes the “crowdfunding” of securities, defined as raising capital online from many investors, each of whom contributes only a small amount. The Act was signed into law in April 2012, and will go into effect once the Securities and Exchange Commission (“SEC”) promulgates rules and regulations to govern the new marketplace for crowdfunded securities. This Essay offers friendly advice to the SEC as to how to exercise its rulemaking authority in a manner that will enable the Act to achieve its goals of creating an ultralow-cost method for raising …

Revolution In Manipulation Law: The New Cftc Rules And The Urgent Need For Economic And Empirical Analyses, Rosa M. Abrantes-Metz, Gabriel Rauterberg, Andrew Verstein

Faculty Scholarship

Three major banks have now admitted that their employees manipulated worldwide interest rates through the London Interbank Offered Rate (Libor), the most widely used interest rate index. Libor is the interest rate term for trillions of dollars of swaps and loans, and its manipulation may have been used to extract billions of dollars. These allegations come just as commodities manipulation law has been dramatically reformed and the Commodity Futures Trading Commission (CFTC) given vast new regulatory powers. This Article provides the first extended, scholarly analysis of the CFTC’s new anti-manipulation rules. We consider the difficulty the rules address: Commodities manipulation …

Index Theory: The Law, Promise And Failure Of Financial Indices, Gabriel Rauterberg, Andrew Verstein

Faculty Scholarship

Financial indices, like the S&P 500 or the Consumer Price Index, have become a ubiquitous feature of our financial markets. One index, the London InterBank Offered Rate ("Libor"), may be the world's most important number, an interest rate benchmark upon which hundreds of trillions of dollars depend. Yet, almost every day new revelations emerge that Libor was tampered with during the height of the financial crisis by one or many of the world's most prominent banks, with billions of dollars potentially misappropriated. This index disruption has attracted tremendous interest from regulators, private litigants, and market observers. Despite their importance, however, …

Mapping The Future Of Insider Trading Law: Of Boundaries, Gaps, And Strategies, John C. Coffee Jr.

Faculty Scholarship

The current law on insider trading is remarkably unrationalized because it contains gaps and loopholes the size of the Washington Square Arch. For example, if a thief breaks into your office, opens your files, learns material nonpublic information, and trades on that information, he has not breached a fiduciary duty and is presumably exempt from insider trading liability. But drawing a line that can convict only the fiduciary and not the thief seems morally incoherent. Nor is it doctrinally necessary.

The basic methodology handed down by the Supreme Court in SEC v. Dirks and United States v. O'Hagan dictates (i) …

The Problem Of Holdout Creditors In Eurozone Sovereign Debt Restructuring, Mitu Gulati, Lee C. Buchheit, Ignacio Tirado

Faculty Scholarship

The Eurozone official sector has declared that the belated restructuring of Greek bonds held by private sector creditors in 2012 was a “unique and exceptional” event, never, ever to be repeated in any other Eurozone country. Maybe so. But if this assurance proves in time to be as fragile as the official sector’s prior pronouncements on the subject of “private sector involvement” in Eurozone sovereign debt problems, any future Eurozone debt restructuring will be surely plagued by the problem of non-participating creditors --- holdouts. Indeed, it is the undisguised fear of holdouts and the prospect of a messy, Argentine-style debt …

Ring-Fencing, Steven L. Schwarcz

Faculty Scholarship

“Ring-fencing” is often touted as a regulatory solution to problems in banking, finance, public utilities, and insurance. However, both the precise meaning of ring-fencing, as well as the nature of the problems that ring-fencing regulation purports to solve, are ill defined. This article examines the functions and conceptual foundations of ring-fencing. In a regulatory context, the term can best be understood as legally deconstructing a firm in order to more optimally reallocate and reduce risk. So utilized, ring-fencing can help to protect public-benefit activities performed by private-sector firms, as well as to mitigate systemic risk and the too-big-to-fail problem inherent …

Lawyers In The Shadows: The Transactional Lawyer In A World Of Shadow Banking, Steven L. Schwarcz

Faculty Scholarship

This article examines how the role of transactional lawyers should change in the new world of shadow banking. Although transactional lawyers should consider the potential systemic consequences of their client's actions, their actions should be tempered by their primary duties to the client and by their responsibilities to the l,egal system more broadly.

Diversifying Clearinghouse Ownership In Order To Safeguard Free And Open Access To The Derivatives Clearing Market, Michael Greenberger

Faculty Scholarship

Implementing the rigorous governance and ownership standards established in the Dodd-Frank Wall Street Reform and Consumer Protection Act3 for derivatives clearing organizations (DCOs) will promote free and open access to clearing and reduce systemic risk within what is now the $700 trillion notional value derivatives market. Such standards are central to and advance the key regulatory tenants of Dodd-Frank: i.e., to restore transparency, capital adequacy, and accountability to what was the unregulated over-the-counter (OTC) derivatives market by ensuring that swaps are cleared through financially sound DCOs. Also, these rules will promote competition by curtailing large swap dealers‘ (SDs) control …

The Twilight Of Equity Liquidity, Jeff Schwartz

Cardozo Law Review

This Article argues that U.S. equity markets fail to offer a satisfactory listing venue for emerging firms. I contend that this lacuna is a manifestation of a flawed structure of equity-market regulation and that this void undermines entrepreneurship, jeopardizes the future of U.S. equity markets, and weakens the broader U.S. economy. To close this gap and respond to these concerns, I recommend a new theoretical structure for regulating equity markets. Under the "lifecycle model" I propose, regulations would adapt to firms as they age. The key change would be to establish a market specifically for newly-public young firms, where they …

The Misappropriation Theory In Light Of Carpenter And The Insider Trading And Securities Fraud Enforcement Act Of 1988, Mark A. Clayton

Pepperdine Law Review

No abstract provided.

Legal Framework For Soviet Privatization, Olga Floroff, Susan Tiefenbrun

Pepperdine Law Review

No abstract provided.

The Elephant In The Room: Dangers Of Hedge Funds In Our Financial Markets, Dustin G. Hall

Florida Law Review

This Note argues that the current judicial and regulatory stances on hedge funds fail to appreciate and account for the tremendous dangers that hedge funds pose not only to the security of our financial markets but also to the individual investors that securities regulations are designed to protect. To appreciate fully these failures, it is necessary to understand better the history of hedge funds and their recent explosion in popularity and in market power. To aid in this understanding, Part II of this Note discusses the four principal acts that regulate the securities markets and how hedge funds exist and …

Regulatory Conflicts: International Tender And Exchange Offers In The 1990s, John C. Maguire

Pepperdine Law Review

No abstract provided.

Mandatory Class Action Lawsuits As A Restructuring Technique, Bryant B. Edwards, Jeffrey A. Herbst, Selina K. Hewitt

Pepperdine Law Review

No abstract provided.

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

Cornell Law Faculty Publications

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 …