Banking and Finance Law Commons^™

Protecting Financial Markets: Lessons From The Subprime Mortgage Meltdown, Steven L. Schwarcz

Faculty Scholarship

Why did the recent subprime mortgage meltdown undermine financial market stability notwithstanding the protections provided by market norms and financial regulation? This article attempts to answer that question by identifying anomalies and obvious protections that failed to work, and then by examining hypotheses that might explain the anomalies and failures. The resulting explanations provide critical insights into protecting financial markets.

Making Sense Of Nation-Level Bankruptcy Filing Rates, Ronald J. Mann

Faculty Scholarship

Increased rates of consumer bankruptcy filings are a policy concern around the world. It is not easy, however, to explain the variations in per capita filing rates from country to country. Some of the variation is attributable to different levels of indebtedness. Some is attributable to different cultural attitudes about financial failure. And some is attributable to the accessibility of the legal system as a remedy for irremediable financial distress.

This paper analyzes the differences in nation-level, per capita filing rates. I start with a model that uses economic variables to explain nation-level variations in filing rates. The economic and …

Patterns Of Credit Card Use Among Low And Moderate Income Households, Ronald J. Mann

Faculty Scholarship

This chapter uses data from the Federal Reserve Board's Survey of Consumer Finances for 2004 (the "SCF") to examine the penetration of credit cards into LMI markets. The chapter has two purposes. First, I discuss the rise of the modern credit market, emphasizing the segmentation of product lines based on behavioral and financial characteristics of customer groups. Among other things, that trend involves the use of products aimed at LMI households that differ significantly from those aimed at middle-class households. Second, I describe the extent to which LMI households borrow on credit cards, the types of LMI households that borrow, …

Get Sick, Get Out: The Medical Causes Of Home Mortgage Foreclosures, Christopher Robertson, Richard Egelhof, Michael Hoke

Faculty Scholarship

In recent years, there has been national alarm about the rising rate of home foreclosures, which now strike one in every 92 households in America and which contribute to even broader macroeconomic effects. The "standard account" of home foreclosure attributes this spike to loose lending practices, irresponsible borrowers, a flat real estate market, and rising interest rates. Based on our study of homeowners going through foreclosures in four states, we find that the standard account fails to represent the facts and thus makes a poor guide for policy. In contrast, we find that half of all foreclosures have medical causes, …

The Problems Of Securitizing Sub-Prime Loans, Tamar Frankel

Faculty Scholarship

In October 2007, the board of directors of Merrill-Lynch, Smith & Fenner, one of the largest if not the largest brokerage houses in the United States, accepted the request for early retirement of its Chief Executive Officer. The brokerage firm disclosed that it has lost over $8 billion on its investments in sub-prime mortgage loans.¹ Merrill Lynch was not the only financial giant to sustain enormous losses. The losses caused market liquidity to dry up. The U.S. government took steps to ease the pressure.² But the high leverage of the system is still unravelling. The effect of these …

Do Patents Perform Like Property?, Michael J. Meurer, James Bessen

Faculty Scholarship

Do patents provide critical incentives to encourage investment in innovation? Or, instead, do patents impose legal risks and burdens on innovators that discourage innovation, as some critics now claim? This paper reviews empirical economic evidence on how well patents perform as a property system.

What Else Matters For Corporate Governance?: The Case Of Bank Monitoring, Joanna M. Shepherd, Frederick Tung, Albert H. Yoon

Faculty Scholarship

We address a crucial but underappreciated question: what else besides corporate law matters for corporate governance? We take the novel view that corporate governance must involve more than corporate law. Corporate scholars focus almost exclusively on corporate law mechanisms for controlling managerial agency costs. We contend, however, that contracting parties also attempt to control agency costs in their contracts with the firm. In particular, we hypothesize that banks, by monitoring firms in connection with their loans, enhance firm value for the benefit of shareholders.

We examine over one-thousand public firms for the period 1990-2004 to test the value of bank …

In Translation For The Latino Market Today: Acknowledging The Rights Of Consumers In A Multilingual Housing Market, Jo Carrillo

Faculty Scholarship

No abstract provided.

Dangerous Loans: Consumer Challenges To Adjustable Rate Mortgages, Jo Carrillo

Faculty Scholarship

No abstract provided.

When Should Investor Reliance Be Presumed In Securities Class Actions, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

It-Apas: Harmonizing Inconsistent Transfer Pricing Rules In Income Tax - Customs - Vat, Richard Thompson Ainsworth

Faculty Scholarship

In most jurisdictions there are three separate spheres of transfer pricing analysis - income tax, customs and VAT. Although they share policy objectives, terminology and frequently borrowing methodologies from one another these domestic transfer pricing systems are not in harmony.

Businesses find this lack of harmony costly, problematical, but also a planning opportunity. The door is open for arbitrage.

What if the transfer pricing rules within a jurisdiction were harmonized? The World Customs Organization (WCO) and the Organization of Economic Cooperation and Development (OECD) are considering this question.

This paper synthesizes the range of transfer pricing regimes currently in use, …

Car Flipping In The U.K.: The Vat Fraud Marketplace And Certified Solutions, Richard Thompson Ainsworth

Faculty Scholarship

Missing Trader Intra-Community (MTIC) fraud and its offspring carousel fraud and contra trading fraud are siphoning huge amounts of VAT revenue from the UK Treasury. This fraud is not a function of the goods involved. It is a function of the market-place. Recently another type of market-place dependent VAT fraud has taken hold in the UK - car-flipping.

In some instances the market-place where these frauds festers is a pre-existing or natural market-place, one that grows out of legitimate commercial practices. Fraudsters enter this market-place (so the argument goes) and take advantage of legitimate businesses who unwittingly get caught up …

Cross-Monitoring And Corporate Governance, Joanna M. Shepherd, Frederick Tung, Albert H. Yoon

Faculty Scholarship

We take the view that corporate governance must involve more than corporate law. Despite corporate scholars' nearly exclusive focus on corporate law mechanisms for controlling managerial agency costs, shareholders are not the only constituency concerned with such costs. Given the thick web of firms' contractual commitments, it should not be a surprise that other financial claimants may also attempt to control agency costs in their contracts with the firm. We hypothesize that this cross-monitoring by other claimants has value for shareholders.

We examine bank loans for empirical evidence of the value of cross-monitoring. Our approach builds on prior empirical work …

A Social Defense Of Sarbanes-Oxley, James A. Fanto

Faculty Scholarship

No abstract provided.

Just Until Payday, Ronald J. Mann, Jim Hawkins

Faculty Scholarship

The growth of payday lending markets during the last fifteen years has been the focus of substantial regulatory attention both in the United States and abroad, producing a dizzying array of initiatives by federal and state policymakers. Those initiatives have had conflicting purposes – some have sought to remove barriers to entry while others have sought to impose limits on the business. As is often the case in banking markets, the resulting patchwork of federal and state laws poses a problem when one state is able to dictate the practices of a national industry. For most of this industry's life, …

A Social Defense Of Sarbanes-Oxley, James A. Fanto

Faculty Scholarship

No abstract provided.

Timbers Of Inwood Forest, The Economics Of Rent, And The Evolving Dynamics Of Chapter 11, Edward R. Morrison

Faculty Scholarship

The Supreme Court's decision in Timbers of Inwood Forest occupies an unhappy position in bankruptcy case law. It is often remembered as a troubled interpretation of the Code, denying undersecured creditors compensation for an important source of depreciation – depreciation in the real value of a creditor's claim during a lengthy reorganization process. But Timbers was not a simple case in which a bank was denied adequate protection for lost investment opportunities. It was instead a case in which the bank tried to opt out of the bankruptcy process itself. The debtor was an apartment complex. After it entered bankruptcy, …

Controlling Family Shareholders In Developing Countries: Anchoring Relational Exchange, Ronald J. Gilson

Faculty Scholarship

In recent years, corporate governance scholarship has begun to focus on the most common distribution of public corporation ownership: outside of the United States and the United Kingdom, publicly owned corporations often have a controlling shareholder. The presence of a controlling shareholder is especially prevalent in developing countries. In Asia, for example, some two-thirds of public corporations have one, most of whom represent family ownership. The law and finance literature, exemplified by a series of articles by Rafael La Porta, Florencio Lopez-de-Silanes, Andrei Shleifer, Robert Vishny and others, treats the prevalence of controlling shareholders as the result of bad law; …

Sarbanes-Oxley's Effects On Small Firms: What Is The Evidence?, Ehud Kamar, Pinar Karaca-Mandic, Eric L. Talley

Faculty Scholarship

This article presents an overview of the regulatory regime created by the Sarbanes-Oxley Act of 2002 (SOX) and its implications for small firms. We review the available evidence in three distinct domains: compliance costs, stock price reactions, and firms' decisions to exit regulated securities markets.

Financial Accounting And Corporate Behavior, David I. Walker

Faculty Scholarship

The power of financial accounting to shape corporate behavior is underappreciated. Positive accounting theory teaches that even cosmetic changes in reported earnings can affect share value, not because market participants are unable to see through such changes to the underlying fundamentals, but because of implicit or explicit contracts that are based on reported earnings and transaction costs. However, agency theory suggests that accounting choices and corporate responses to accounting standard changes will not necessarily be those that maximize share value. For a number of reasons, including the fact that executive compensation often is tied to reported earnings, managerial preferences for …

Biometrics, Certified Software Solutions, And The Japanese Consumption Tax: A Proposal For The Tax Commission, Richard Thompson Ainsworth

Faculty Scholarship

Significant change is anticipated in the Japanese Consumption Tax. The Japanese Tax Commission is recommending that the rate should double, multiple rates should be employed, and the "bookkeeping method" of accounting should be abandoned in favor of the European "invoice method."

The Tax Commission faces a tax policy dilemma. The aging population drives the need for a tax increase (making the Consumption Tax an obvious target for revenue enhancement) at exactly the same time the population is shrinking in overall size, thereby reducing the number of working-consumers who can pay the higher tax.

These are dramatic changes for the Japanese …

Taxing Services Under The Eu Vat And Japanese Consumption Tax: A Comparative Assessment Of New Eu Place Of Taxation Rules For Services And Intangibles, Richard Thompson Ainsworth

Faculty Scholarship

Place of taxation rules are the seminal cross-jurisdictional provisions of any consumption tax regime. They determine where among competing jurisdictions a particular service is taxed. They are not important for transactions that are restricted to a single jurisdiction and to businesses or individuals belonging to that jurisdiction. However, when two or more jurisdictions are involved, these are the essential tools for revenue allocation and avoidance of double taxation.

It is therefore of considerable importance to Japanese businesses and consumers when the European Union (EU) undertakes a wholesale revision of the place of supply rules for services and intangibles. The European …

Digital Consumption Tax (D-Ct), Richard Thompson Ainsworth

Faculty Scholarship

Modern technology is dramatically changing the way consumption taxes are collected, but it is also changing the way policymakers assess the operation and impact of these taxes. Whether the design is a standard credit-invoice value added tax (VAT) of European design, or a retail sales tax (RST) of American design, or the credit subtraction VAT without invoices type of consumption tax (CT) of Japanese design, technology is having a profound impact.

Government certified transaction software is in place in the United States. The Streamlined Sales Tax offers taxpayers in 18 states the option of having their retail sales tax determined …

Carousel Fraud In The Eu: A Digital Vat Solution, Richard Thompson Ainsworth

Faculty Scholarship

Recent reports from the UK's Office for National Statistics estimate (as of May 11, 2006) that Missing Trader Intra-community Fraud (MTIC) may exceed 10 billion pounds this year.

Carousel fraud, a variant of MTIC where the same goods are sold over and over again, exploits the lingering non-certified, non-digital attributes of the EU VAT. The UK believes that carousel fraud cost the Exchequer between 1.12 and 1.9 billion pounds in the 2004-05 financial year. This article proposes that carousel fraud be eliminated in the EU through selective insertion of Digital VAT functionality into the present system. In other words, it …

International Rule Of Law And The Market Economy - An Outline, Samuel Bufford

Faculty Scholarship

Law matters in economic development. The Rule of Law is an indispensable foundation for a market economy, which provides an essential environment for the creation and preservation of wealth, economic security, and well-being, and the improvement of the quality of life. The Rule of Law is part of the "software" of governmental regulation that is needed to operate the "hardware" of free markets. Its promotion can make a major contribution to economic growth, and an infrastructure that creates and promites legal rights is an essential platform for economic development. The cumulative costs of doing without the Rule of Law in …

Check Clearing For The 21st Century Act - A Wrong Turn In The Road To Improvement Of The U.S. Payments System, The , Carl Felsenfeld, Genci Bilali

Faculty Scholarship

The Check Clearing for the 21st Century Act' (Check 21 Act) was introduced to Congress by the Federal Reserve System, enacted by Congress, signed by the President on October 28, 2003, and became effective one year later, on October 28, 2004. It makes a modest change in the check-clearing system designed to speed the movement of checks from the depositary to the paying bank. It is anticipated that it will eventually lead to what is called "electronic presentment," a process that may make the clearing of checks almost as swift as to- day's electronic payment systems. This Article gives the …

Paternalistic Regulation Of Public Company Management: Lessons From Bank Management, James A. Fanto

Faculty Scholarship

No abstract provided.

Legal Ground Rules In Coordinated And Liberal Market Economies, Katharina Pistor

Faculty Scholarship

This chapter seeks to explain the affinity between the nature of economic systems: coordinated market economies (CMEs) and liberal market economies (LMEs) on the one hand, and legal origin (civil vs common law systems) on the other. It starts with the simple observation that LMEs tend to be common law jurisdictions, and CMEs civil law jurisdictions. It proposes that the affinity between economic and legal system offers important insights into the foundations of different types of market economies and, in particular, differences in the scope of the state vs the powers of the individual. The main argument is that the …

Credit Cards, Consumer Credit, And Bankruptcy, Ronald J. Mann

Faculty Scholarship

This paper analyzes the effects of credit card use on broader economic indicators, specifically consumer credit, and consumer bankruptcy filings. Using aggregate nation-level data from Australia, Canada, Japan, the United Kingdom, and the United States, I find that credit card spending, lagged by 1-2 years, has a strong positive effect on consumer credit. Finally, I find a strong relation between credit card debt, lagged by 1-2 years, and bankruptcy, and a weaker relation between consumer credit, lagged by 1-2 years, and bankruptcy. The relations are robust across a variety of different lags and models that account for problems of multicollinearity …

Optimizing Consumer Credit Markets And Bankruptcy Policy, Ronald J. Mann

Faculty Scholarship

This Article explores the relationship between consumer credit markets and bankruptcy policy. In general, I argue that the causative relationships running between borrowing and bankruptcy compel a new strategy for policing the conduct of lenders and borrowers in modern consumer credit markets. The strategy must be sensitive to the role of the credit card in lending markets and must recognize that both issuers and cardholders are well placed to respond to the increased levels of spending and indebtedness. In the latter parts of the Article, I recommend mandatory minimum payment requirements, a tax on distressed credit card debt, and the …