Banking and Finance Law Commons^™

Understanding Regulatory Capture: An Academic Perspective From The United States, Lawrence G. Baxter

Faculty Scholarship

Although it sometimes seems that financial regulatory agencies have been entirely captured by the larger players in the industry they regulate, a closer examination reveals that a variety of factors contribute to policy outcomes in this arena. Agencies have different agendas and stakeholders, and banks often perform quasi-governmental roles that blur the line between the captors and the captured. The real danger is that public policy can be distorted as a result of excessive influence by one set of interests at the expense of others. This danger is best thwarted or at least mitigated through the application of a range …

Bank Ceos, Inside Debt Compensation, And The Global Financial Crisis, Frederick Tung, Xue Wang

Faculty Scholarship

Bank executives’ compensation has been widely identified as a culprit in the Global Financial Crisis, and reform of banker pay is high on the public policy agenda. While Congress targeted its reforms primarily at bankers’ equity-based pay incentives, empirical research fails to show any correlation between bank CEO equity incentives and bank performance in the Financial Crisis. We offer an alternative analysis, hypothesizing that bank CEOs’ inside debt incentives correlate with reduced bank risk taking and improved bank performance in the Crisis. A nascent literature shows that inside debt may dampen CEOs’ risk taking incentives. Unlike the industrial firms that …

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.

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 And 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 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 …

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

Faculty Scholarship

No abstract provided.

My Brother's Keeper: An Empirical Study Of Attorney Facilitation Of Money-Laundering Through Commercial Transactions, Lawton P. Cummings, Paul T. Stepnowsky

Faculty Scholarship

In recent years, various “gatekeeping initiatives” have been introduced through inter-governmental standard-setting organizations, such as the Financial Action Task Force, as well as through federal legislation in the United States, which seek to apply the mandatory customer due diligence, record keeping, and suspicious activity reporting obligations contained in the existing anti-money laundering regime to lawyers when they conduct certain commercial transactions on behalf of their clients. The organized bar has argued against such attempts to regulate it, in part, due to the lack of empirical data showing that, as a threshold matter, lawyers unwittingly aid money laundering in a significant …

Will Cutting The Payroll Tax Increase Jobs In The U.S.? Empirical Evidence From The Eu Vat, Richard Thompson Ainsworth

Faculty Scholarship

Red Ink Rising, the Peterson–Pew Commission on Budget Reform’s report presents the country with a fiscal/employment dilemma – Congress must act immediately to stem the federal debt, but it must move carefully lest it harm employment in the fragile economy. In short, we must act fast and slow – we must decrease the debt and increase employment. This is a difficult task.

The Peterson-Pew dilemma (notably its jobs-creation aspect) was taken to heart by both of the reform commissions that issued reports soon thereafter (National Commission on Fiscal Responsibility and Reform, The Moment of Truth and The Debt Reduction Task …

Vat Fraud: The Tradable Services Problem, Richard Thompson Ainsworth

Faculty Scholarship

Tradable services – VoIP termination services, mobile minutes, software as a service (SaaS), or almost any service bought or sold in the “cloud” – are a distinct class of taxable supplies. These service-based supplies both resemble and differ fundamentally from goods. They also differ from services that are consumed-on-purchase (consumed services).

Tradable services are designed from the beginning for re-sale. They are hybrid supplies that behave commercially like goods, but have functional attributes that make them hard to distinguish from services generally. When determining the place of supply/ place of taxation for these kinds of supplies, their hybrid character presents …

Black Swans And Black Elephants In Plain Sight: An Empirical Review Of Central Bank Independence, Timothy A. Canova

Faculty Scholarship

No abstract provided.

Reparations, Microfinance, And Gender: A Plan, With Strategies For Implementation, Anita Bernstein, Hans D. Siebel

Faculty Scholarship

No abstract provided.

Chapman Dialogue And Law Review Symposium Keynote Address: Ex Ante Versus Ex Post Approaches To Financial Regulation, Steven L. Schwarcz

Faculty Scholarship

Ideal financial regulation would work ex ante, to prevent financial failures. Once a failure occurs, there may already be economic damage, and it may be difficult to stop the failure from spreading and becoming systemic. The reality, though, is that preventing financial failures should be only one role for regulators. Even an optimal prophylactic regulatory regime cannot anticipate and prevent every failure. This paper, which formed my Chapman Dialogue Address at Chapman University School of Law and the keynote speech at Chapman Law Review’s 2011 Symposium on the Future of Financial Regulation, attempts to contrast fundamental differences between ex ante …

Capture In Financial Regulation: Can We Redirect It Toward The Common Good?, Lawrence G. Baxter

Faculty Scholarship

“Regulatory capture” is central to regulatory analysis yet is a troublesome concept. It is difficult to prove and sometimes seems refuted by outcomes unfavorable to powerful interests. Nevertheless, the process of bank regulation and supervision fosters a closeness between regulator and regulated that would seem to be conducive to “capture” or at least to fostering undue sympathy by regulators for the companies they oversee. The influence of very large financial institutions has also become so great that financial regulation appears to have become excessively distorted in favor of these entities and to the detriment of many other legitimate interests, including …

Political Risk And Sovereign Debt Contracts, Mitu Gulati, Stephen J. Choi, Eric A. Posner

Faculty Scholarship

Default on sovereign debt is a form of political risk. Issuers and creditors have responded to this risk both by strengthening the terms in sovereign debt contracts that enable creditors to enforce their debts judicially and by creating terms that enable sovereigns to restructure their debts. These apparently contradictory approaches reflect attempts to solve an incomplete contracting problem in which debtors need to be forced to repay debts in good states of the world; debtors need to be granted partial relief from debt payments in bad states; debtors may attempt to exploit divisions among creditors in order to opportunistically reduce …

The Paradoxes Of Dodd-Frank, James D. Cox

Faculty Scholarship

No abstract provided.

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

Faculty Scholarship

No abstract provided.

Overwhelming A Financial Regulatory Black Hole With Legislative Sunlight: Dodd-Frank’S Attack On Systemic Economic Destabilization Caused By An Unregulated Multi-Trillion Dollar Derivatives Market, Michael Greenberger

Faculty Scholarship

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.[1] 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 OTC derivative guarantees of the subprime housing market; and the guarantors’ multi-trillion dollar interconnectedness with thousands of other OTC derivatives’ counterparties within that OTC market (through interest rate, currency, foreign exchange, and …

Dodd-Frank For Bankruptcy Lawyers, Douglas G. Baird, Edward R. Morrison

Faculty Scholarship

The Dodd-Frank financial reform legislation creates an “Orderly Liquidation Authority” (OLA) that shares many features in common with the Bankruptcy Code. This is easy to overlook because the legislation uses a language and employs a decision-maker (both borrowed from bank regulation) that will seem foreign to bankruptcy lawyers. Our task in this essay is to identify the core congruities between OLA and the Code. In doing so, we highlight important differences and assess both their constitutionality and policy objectives. We conclude with a few thoughts on the likelihood that OLA will contribute to market stability.

Economic Crisis And Share Price Unpredictability: Reasons And Implications, Edward G. Fox, Merritt B. Fox, Ronald J. Gilson

Faculty Scholarship

The volatility of share returns for individual companies increased sharply during the recent financial crisis. The larger part of this increase was due to a dramatic rise – five fold as measured by variance – in idiosyncratic risk. We find that this pattern repeats itself during each major economic reversal going back 85 years. Because idiosyncratic risk is what is involved, this increase cannot be explained by changes in predictions concerning the future course of the economy as a whole.

Our first goal is to explain why difficult economic times, which are defined in terms of market wide phenomena, make …

Keynote Address: A Regulatory Framework For Managing Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

This accessible analysis of systemic risk regulation was delivered as the keynote speech at an October 20, 2011 European Central Bank conference on regulation of financial services. Many regulatory responses, like the Dodd-Frank Act in the United States, consist largely of politically motivated reactions to the financial crisis, looking for villains (whether or not they exist). To be most effective, however, the regulation must be situated within a more analytical framework. In this speech, I attempt to build that framework, showing that preventive regulation is insufficient and that regulation also must be designed to limit the transmission of systemic risk …

Foreword: The Three And A Half Minute Transaction: Boilerplate And The Limits Of Contract Design, Mitu Gulati, Robert E. Scott

Faculty Scholarship

The Hofstra Law Review has organized an “Ideas” symposium around our book manuscript “The Three and a Half Minute Transaction” (see http://ssrn.com/abstract=1937900). The idea for this symposium came from a debate that occurred at a faculty workshop at the Hofstra Law School some months ago where we were presenting our book manuscript. The topics of conversation included the following: the future of the current big-law-firm model, what value lawyers add in commercial transactions that use boilerplate contracts, why (and whether) boilerplate contracts are so slow to change, why law firms do not generally have R&D departments, the resolution of the …

Helping Microfinance Become Commercially Sustainable, Steven L. Schwarcz

Faculty Scholarship

Microfinance primarily refers to the making of small loans to low-income individuals and the poor, to enable them to start or expand small businesses. Currently, most microfinance loans are made through nonprofit microfinance institutions (MFIs) that receive donor money. However, donor-funded loans can account for only a small portion of the need. Microfinance analysts estimate, for example, that total market potential is $300 billion, of which only ten percent is currently being captured. Increasingly, the shortfall in funding is being met by commercial banks. But commercial-bank intermediation is expensive, with a global average effective interest rate (on commercial microfinance loans) …

Pricing Terms In Sovereign Debt Contracts: A Greek Case Study With Implications For The European Crisis Resolution Mechanism, Mitu Gulati, Stephen J. Choi, Eric A. Posner

Faculty Scholarship

Conventional wisdom holds that boilerplate contract terms are ignored by parties, and thus are not priced into contracts. We test this view by comparing Greek sovereign bonds that have Greek choice-of-law terms and Greek sovereign bonds that have English choice-of-law terms. Because Greece can change the terms of Greek-law bonds unilaterally by changing Greek Law, and cannot change the terms of English-law bonds, Greek-law bonds should be riskier, with higher yields and lower prices. The spread between the two types of bonds should increase when the probability of Greek default increases. Recent events allow us to test this hypothesis, and …

Regulating Systemic Risk: Towards An Analytical Framework, Steven L. Schwarcz, Iman Anabtawi

Faculty Scholarship

The global financial crisis demonstrated the inability and unwillingness of financial market participants to safeguard the stability of the financial system. It also highlighted the enormous direct and indirect costs of addressing systemic crises after they have occurred, as opposed to attempting to prevent them from arising. Governments and international organizations are responding with measures intended to make the financial system more resilient to economic shocks, many of which will be implemented by regulatory bodies over time. These measures suffer, however, from the lack of a theoretical account of how systemic risk propagates within the financial system and why regulatory …

Compensating Market Value Losses: Rethinking The Theory Of Damages In A Market Economy, Steven L. Schwarcz

Faculty Scholarship

The BP Deepwater Horizon spill and the Toyota car recalls have highlighted an important legal anomaly that has been overlooked by scholars — judicial inconsistency and confusion in ruling whether to compensate for the loss in market value of wrongfully affected property. This article seeks to understand the anomaly and, in the process, to build a stronger foundation for enabling courts to decide when — and in what amounts — to award damages for market value losses. To that end, the Article analyzes the normative rationales for generally awarding damages, adapting those rationales to derive a theory of damages that …

Restoring Transparency To Automated Authority, Frank Pasquale

Faculty Scholarship

No abstract provided.

Information Asymmetry And Information Failure: Disclosure Problems In Complex Financial Markets, Steven L. Schwarcz

Faculty Scholarship

Disclosure of information has been a key to regulation of the financial markets in the United States. Indeed, some have argued that the ‘exclusive focus [of federal securities regulation] is on full disclosure’ (Hazen, 2005). Yet there is relatively little dispute that although most if not all of the risks giving rise to the collapse of the market for structured securities backed by subprime mortgages were disclosed, the disclosure was ineffective. Disclosure failed because of the complexity of those securities and transactions.

This chapter examines disclosure’s insufficiency in addressing information asymmetry, arguing that complexity can cause information failure. There are …