Banking and Finance Law Commons^™

Securitizing Insurance Risks, Tamar Frankel, Joseph W. Laplume

Faculty Scholarship

This Article analyzes and evaluates the legal problems that have arisen in connection with this rapidly developing insurance risk securitization. The first part of the Article deals with legal issues concerning the SPVs that undertake insurance and reinsurance contracts with ceding insurers and the other parties to the transaction. The Article addresses the dilemma in choosing the laws applicable to SPVs, the bonds they issue, and the persons and entities that form part of the securitization transaction. These laws involve state insurance laws, bankruptcy and tax laws, the Investment Company Act of 1940 and the Commodity Exchange Act of 1934, …

Japan's Experience With Deposit Insurance And Failing Banks: Implications For Financial Regulatory Design?, Curtis J. Milhaupt

Faculty Scholarship

This Article examines three decades of Japanese experience with deposit insurance andfailing banks, and analyzes the implications of that experience for bank safety net reform in other countries. To date, the literature and policy debate on deposit insurance have been heavily colored by U.S. banking history and have focused almost exclusively on explicit deposit protection schemes. Analysis of Japan's safety net experience suggests that (a) deposit insurance, for all its flaws, is superior to the real-world alternative-implicit government protection of depositors and discretionary regulatory intervention in bank distress, (b) a well-designed explicit deposit insurance system that includes a credible bank …

The Contribution Of The Fund Profile To Investor Education, James A. Fanto

Faculty Scholarship

No abstract provided.

Cross-Border Bank Branching Under The Nafta: Public Choice And The Law Of Corporate Groups, Eric J. Gouvin

Faculty Scholarship

This Article examines a question left unresolved after the negotiation of the North American Free Trade Agreement (NAFTA): whether the banks of the member countries should be permitted to engage in the business of banking in the other member countries simply by branching across national borders. Under present law, the United States permits branching subject to extensive restrictions, while Canada and Mexico permit access to their banking markets only by acquisition or establishment of institutions chartered in their countries. While the NAFTA does not provide for unfettered branching across national borders, article 1403(3) of the NAFTA left the issue of …

Of Hungry Wolves And Horizontal Conflicts: Rethinking The Justifications For Bank Holding Company Liability, Eric J. Gouvin

Faculty Scholarship

To what extent should bank holding companies bear the costs of bank failure? Current banking law provides a number of ways to impose liability on bank holding companies for bank failure. Those devices, however, have developed haphazardly and sometimes rest on inconsistent theoretical foundations. This Article critiques the regulatory justifications that have been offered for holding company liability and offers an alternative justification for imposing liability on holding companies based on the idea that directors of bank subsidiaries suffer from an especially difficult form of horizontal conflict--the situation where the board of directors owes several different duties and chooses to …

The Limits Of Discipline: Ownership And Hard Budget Constraints In The Transition Economies, Roman Frydman, Cheryl W. Gray, Marek P. Hessel, Andrzej Rapaczynski

Faculty Scholarship

This paper, based on a large sample of mid-sized manufacturing firms in the Czech Republic, Hungary and Poland, argues that the imposition of financial discipline is not sufficient to remedy ownership and governance-related deficiencies of corporate performance. The study offers three main conclusions. First, we find that state enterprises represent a higher credit risk both because of their inferior economic performance and because of their lesser willingness or propensity to meet their payment obligations. Second, the brunt of the state firms' lower creditworthiness is borne by their state creditors, as state enterprises deflect the higher risk away from private creditors. …

Making Something Out Of Nothing: The Law Of Takings And Phillips V. Washington Legal Foundation, Michael A. Heller, James E. Krier

Faculty Scholarship

Phillips v. Washington Legal Foundation held that interest on principal amounts deposited into IOLTA accounts is the property of the various clients who handed over the money but expressed no view as to whether the Texas IOLTA program worked a taking, or, if it did, whether any compensation was due. The debates among the justices about the meaning of private property, argued in terms of contextual and conceptual severance, are unlikely to prove fruitful. We elaborate a better approach in terms of the underlying purposes of just compensation. We conclude that efficiency and justice are best served by uncoupling matters …

Secured Credit And Software Financing, Ronald J. Mann

Faculty Scholarship

Software is a relatively new type of business asset, but already has taken on a central role in all sectors of the economy; when any asset brings such a crucial value to businesses, the desire for lending based on that asset cannot be far behind. Unfortunately, the existing academic literature contains no sustained examination of software-related lending.

Because the software industry is in its infancy, the existing empirical evidence is inadequate to support any understanding of it. Accordingly, I undertook a series of twenty-nine informal interviews with industry participants, including lenders in both the Massachusetts Route 128 corridor and Silicon …

Verification Institutions In Financing Transactions, Ronald J. Mann

Faculty Scholarship

One of the most common problems in commercial transactions is the resolution of information asymmetries, situations in which one party to the transaction knows more about a relevant fact than the other party. The natural response of the disadvantaged party is to attempt to investigate the transaction for itself – to investigate the matter with "due diligence" – but often such an investigation will be expensive and, however diligently undertaken, leave the truth of the matter uncertain. A law-centered approach to the problem would call for the development of warranties and covenants that the party with superior information would give …

Does Venture Capital Require An Active Stock Market?, Ronald J. Gilson, Bernard S. Black

Faculty Scholarship

The United States has both an active venture capital industry and well-developed stock markets. Japan and Germany have neither. We argue here that this is no accident – that venture capital can flourish especially – and perhaps only – if the venture capitalist can exit from a successful portfolio company through an initial public offering (IPO), which requires an active stock market. Understanding the link between the stock market and the venture capital market requires understanding the contractual arrangements between entrepreneurs and venture capital providers especially the importance of exit by venture capitalists and the opportunity, present only if IPO …

Securitization: The Conflict Between Personal And Market Law (Contract And Property), Tamar Frankel

Faculty Scholarship

The road to securitization - transforming debt and loans into securities - is littered with obstacles. These obstacles seem unrelated. Yet, upon reflection, many legal and business problems arising in the securitization process can be traced to one source: the inherent conflict between contract law governing personal relations among creditors and debtors, and property law governing the same relations converted into "commodities" issued or traded in the market among investors. Identical terms can be characterized as contract loans in personal context, and as personal property (securities or bonds) in market context.

Taking Future Claims Seriously: Future Claims And Successor Liability In Bankruptcy, Frederick Tung

Faculty Scholarship

Treatment of contingent tort liabilities when a business is sold presents a particular challenge for corporate and bankruptcy law. In this article, I focus on the precarious position of future tort claimants-those who may be harmed by a manufacturer's defective product after the manufacturer has sold its business and disappeared. By the time the future claimant's injury occurs, she may be left with no means of recovery. While the article focuses primarily on the bankruptcy sale context, a discussion of the nonbankruptcy context provides important background.

In the article, I make two claims. First, I address recent proposals suggesting that …

Trends In The Regulation Of Investment Companies And Investment Advisers, Tamar Frankel

Faculty Scholarship

Statutes, rules and enforcement actions are tea leaves we can read to predict future trends of mutual fund regulation. While statutes and rules are specific, the trends they signify are far more speculative. This Essay engages in such speculation to envision the long-term implications of the recent new N- 1A disclosure form, I the plain English Rule,² and the profile. ³ More generally, the Essay speculates on future trends in Securities and Exchange Commission ("Commission") enforcement, and predicts a continued and stronger use of informal enforcement by the Commission.

Creating Law At The Securities And Exchange Commission: The Lawyer As Prosecutor, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

The Challenge To Financial Regulators Posed By Social Security Privatization, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

Reflections On The Papers Presented By Weiler, Goebel, And Meyers & Levie, George A. Bermann

Faculty Scholarship

The preceding papers amply demonstrate that an important step in the progressive integration of the European Union can be a compelling one without being an easy one. The transition to economic and monetary union (EMU) in Europe is precisely such a step. In this brief comment, I hope merely to show that, however powerful may be the case for economic and monetary union, passage to it is both generating institutional misgivings and entailing what could be institutional mistakes.

I begin with the case for economic and monetary union, which I consider to be a very strong one indeed. Not many …

Derivatives, Corporate Hedging, And Shareholder Wealth: Modigliani-Miller Forty Years Later, Kimberly D. Krawiec

Faculty Scholarship

No abstract provided.

Banking In North America: The Triumph Of Public Choice Over Public Policy, Eric J. Gouvin

Faculty Scholarship

This Article examines the state of cross-border banking in the NAFTA countries and the question of whether member country banks should be permitted to branch freely throughout North America. Under present law, the United States permits foreign banks to branch into its territory subject to extensive restrictions, Canada has indicated that it plans to eliminate some restrictions on foreign branching, and Mexico continues to permit access to its banking markets only by investment in or establishment of an institution chartered in Mexico. Article 1403(3) of the NAFTA left the issue of cross-border branching open to subsequent negotiation. If the decision …

The Role Of Corporate Law In French Corporate Governance, James A. Fanto

Faculty Scholarship

No abstract provided.

Understanding The Choice Between Public And Private Equity Financing Of Early Stage Companies: A Comment On Barry And Turki, Ronald J. Gilson

Faculty Scholarship

This Comment considers the results of Barry and Turki's research data that indicates that investments perform differently depending on whether innovation is financed by private or public equity investment. The Comment posits two hypotheses for the differential performance. The first highlights ex ante differences between private and public subsamples, that is that the financing choice separates good prospects from bad. The second hypothesis focuses on ex post differences in performance that results from differences in governance structure and incentives created by the structure of public and private equity investment. The ex ante separation hypothesis and the ex post performance hypothesis …

Deutsche Telekom, German Corporate Governance, And The Transition Costs Of Capitalism, Jeffrey N. Gordon

Faculty Scholarship

In November 1996, Deutsche Telekom AG, the government-owned German telephone company, sold common stock representing approximately 25 percent of the company in a global stock offering that raised approximately DM 20 billion ($13 billion), the largest equity offering ever in Europe. In selling off this equity stake, the German government (i.e., the Federal Republic) had a number of motives. First, the sale was an important step in converting a government-run telephone monopoly into a nimble competitor in the emerging European and world telecommunications market. In anticipation of a fully competitive European telecommunications regime in 1998, Deutsche Telekom ("DT") had been …

Arbitration In Banking And Finance, William W. Park

Faculty Scholarship

The world's bifurcation into debtors and creditors has created yet another class of people: those involved in resolving disputes between lenders and borrowers. To promote reliability in financial dispute resolution, credit agreements have generally provided that potential controversies will be submitted either to courts in the bank's home jurisdiction, or to courts of a major money center such as London or New York.

A Report On The Attitudes Of Foreign Companies Regarding A U.S. Listing, James A. Fanto, Roberta S. Karmel

Faculty Scholarship

No abstract provided.

Towards A More Balanced Treatment Of Bidder And Target Shareholders, Miriam Baer

Faculty Scholarship

No abstract provided.

Shareholder Enforced Market Discipline: How Much Is Too Much?, Eric J. Gouvin

Faculty Scholarship

This Article considers the federal banking regulation regime implemented in response to the widespread bank failures of the 1980s and early 1990s. The first section of the Article examines the moral hazard problem created by the presence of the deposit insurance scheme and the market discipline debate that has attempted to correct the moral hazard problem. The Author argues that the law has evolved to make bank holding companies the primary enforcers of market discipline. The Article’s second section examines the specific regulatory changes that have been designed to create an incentive for bank holding companies to impose discipline on …

Searching For Negotiability In Payment And Credit Systems, Ronald J. Mann

Faculty Scholarship

The casual observer of the legal academy would assume that negotiability is a legal principle of foundational importance to our nation's payment and credit systems. All of the obvious indicators support that assumption. Among other things, the 1980s witnessed a major effort by the American Law Institute and the National Conference of Commissioners on Uniform State Laws to update and revise the relevant provisions of the Uniform Commercial Code. Similarly, negotiability continues to occupy a safe position in law school curricula, as prominent academics at our most elite schools continue to write casebooks focusing on negotiability. Most recently, for example, …

The Truth About Secured Financing, Robert E. Scott

Faculty Scholarship

The debate over the social value of secured credit (and the appropriate priority for secured claims in bankruptcy) is entering its nineteenth year. Yet the continuing publication of succeeding generations of articles exploring the topic have yielded precious little in the way of an emerging scholarly consensus about the nature and function of secured credit. Put simply, we still do not have a theory, of finance that explains why firms sometimes (but not always) issue secured debt rather than unsecured debt or equity. Moreover (and perhaps because of the lack of any plausible general theory), we lack any persuasive empirical …

The Role Of Secured Credit In Small-Business Lending, Ronald J. Mann

Faculty Scholarship

The traditional perspective holds that large firms in our economy use unsecured credit and small firms use secured credit. Existing scholarship, however, has provided little explanation of that pattern. In a recent article, I attributed the use of unsecured credit by large firms to the limited capacity of secured credit to lower the lending costs of creditworthy companies. This article uses data from a dozen interviews with small-business bankers to explain the small-business half of that lending pattern. To the extent smallbusiness lenders require secured credit, they do so largely for one significant benefit: secured credit allows small-business lenders to …

Lending Discrimination: Economic Theory, Econometric Evidence, And The Community Reinvestment Act, Keith N. Hylton, Vincent D. Rougeau

Faculty Scholarship

Although it has been settled law for almost two decades, there has been a heightened interest in the Community Reinvestment Act (CRA) over the last several years. One factor driving this interest is the continuing economic decline of the inner cities and the consequent widening of the wealth gap between cities and surrounding suburbs in many areas of the country. A second factor is the consolidation of the banking industry, which has encouraged expansion-oriented banks to improve their CRA ratings to gain the approval of regulators. A recent effort to enhance enforcement of the statute, in part the result of …

Rethinking The Role Of Recourse In The Sale Of Financial Assets, Steven L. Schwarcz, Peter V. Pantaleo

Faculty Scholarship

The presence of recourse in the sale of a financial asset is generally thought to jeopardize the "true sale" treatment of the sale, especially in the event of the seller's bankruptcy. This article examines the existing law and concludes that a transfer that qualifies as a sale under state law should be treated as a sale even if the buyer retains recourse to the seller, so long as recourse is limited to warranting that the asset will perform in accordance with its terms.