Banking and Finance Law Commons^™

Risk, Speculation, And Otc Derivatives: An Inaugural Essay For Convivium, Lynn A. Stout

Cornell Law Faculty Publications

Speculative trading, including speculative trading in derivatives, is often claimed to provide social benefits by decreasing risk and improving the accuracy of market prices. This assumption overlooks the possibility that speculation can be driven not just by differences in traders' risk aversion and information investments, but also by differences in traders' subjective expectations. Disagreement-based speculation erodes traders' returns, increases traders' risks, and can distort market prices. There is reason to believe that by 2008, the market for OTC derivatives may have been dominated by disagreement-based speculation that contributed to the Fall 2008 credit crisis.

Old Enough To Fight, Old Enough To Swipe: A Critique Of The Infancy Rule In The Federal Credit Card Act, Andrew A. Schwartz

Publications

In the 1960s and 1970s, American society came to the considered conclusion that if eighteen-year-olds can be drafted to fight and possibly die for their country, they should be treated as adults under the law. Thus, in 1971, the Twenty-Sixth Amendment to the United States Constitution, which lowered the voting age to eighteen from twenty one, was proposed and ratified in just three months, making it the fastest amendment in American history. The minimum age for federal and state jury service was also lowered to eighteen from twenty one. And, with regard to contract law, every state passed legislation reducing …

Pay For Banker Performance: Structuring Executive Compensation For Risk Regulation, Frederick Tung

Faculty Scholarship

Excessive risk taking by firm managers did not originate with the Financial Crisis of 2007-08. Though bankers had special incentives to take big risks in the period before the Crisis, the incentive effects of equity-based compensation have been understood for some time. Among other things, equity compensation tends to induce greater risk taking by aligning managers’ risk preferences with those of equity holders. Longstanding government guaranties of bank liabilities additionally served to intensify bankers’ risk taking incentives.

I propose to ameliorate this gambler’s incentive with a new approach to compensation at the largest banks, one that explicitly accounts for the …

Executive Pay Lessons From Private Equity, David I. Walker

Faculty Scholarship

Questions about the pay of public company executives – and, specifically, the structure of that pay – continue to dominate discussions regarding U.S. corporate governance. These concerns have been amplified by the recent financial meltdown. Some commentators suggest that the aggressive structure of executive pay packages – the heavy reliance on stock options – may have led to excessive risk taking at financial institutions that contributed to the collapse. Others have argued that incentive compensation has become a fetish in corporate America and that the heavy reliance on performance-based pay is no longer justified. More generally, Professor Frankel argues that …

Evolving Executive Equity Compensation And The Limits Of Optimal Contracting, David I. Walker

Faculty Scholarship

Executive equity compensation in the U.S. is evolving. At the turn of the millennium, stock options dominated the equity pay landscape, accounting for over half of the aggregate ex ante value of senior executive pay at large public companies, while restricted stock and similar compensation accounted for only about ten percent. Beginning in 2006, stock grants have displaced options as the single largest component of senior executive compensation at these firms. Accompanying this shift has been increased variation among companies in their relative emphasis on stock and options in equity pay packages. Both phenomena provide an opportunity for a rich …

Global Finance, Multinationals And Human Rights: With Commentary On Backer’S Critique Of The 2008 Report By John Ruggie, Faith Stevelman

Faculty Articles

This article references the excellent article of Larry Cata Backer, as it provides an analysis of the 2008 Report's "Protect, Respect, Remedy" (PRR) framework. Ruggie's most recent efforts, reflected in the 2010 Report, are directed at operationalizing the PRR framework set forth in the 2008 Report. Both these reports have been vetted internationally amongst governments, lawyers, academics and human rights advocates. How will governments, corporations, trade associations and rights advocates conceptualize and construct the fora and modes of recourse available to persons aggrieving human rights abuses? That question is the central focus of the 2010 Report and, as such, lies …

Is It Greek Or Déjà Vu All Over Again?: Neoliberalism And Winners And Losers Of International Debt Crises, Tayyab Mahmud

Faculty Articles

The global financial meltdown and the Great Recession of 2007-2009 have brought into sharp relief the uneven distribution of gain and pain during economic crises. The 2009-2010 debt crisis in Greece resulted in a windfall for financial institutions at the expense of taxpayers, a rollback of welfare systems, and the impoverishment of the working classes. This outcome is consistent with the pattern that has emerged in the international debt crises of the last three decades, including the Latin American crisis during the 1980s and the Asian crisis during the 1990s.

The recurrent international debt crises of the last three decades …

Cuomo V. Clearing House Association, L.L.C.: States Enforcing State Laws Against National Banks, Louis P. Malick

Journal of Business & Technology Law

No abstract provided.

Book Review (Reviewing Leonard Orland's A Final Accounting), Adeen Postar

All Faculty Scholarship

Leonard Orland is the Oliver Ellsworth Professor of Law at the University of Connecticut. He has written a fine, if a bit unwieldy, book that traces the sad history of money and other assets deposited in supposedly sacrosanct Swiss banks by European Jews during the Nazi era to its long overdue resolution by the American justice system. The book provides background and perspective on how and why the $12.1 billion in pre-war dollars (about $250 trillion today) of financial assets of Holocaust victims disappeared into thin air in the years following World War II. These assets were given over to …

Arab Spring Brings Winds Of Change To The Maghreb And Mena Region: Does That Spell Opportunity For Infrastructure Development And Project Finance?, Silvano Domenico Orsi

Richmond Journal of Global Law & Business

No abstract provided.

When Responsive Legislation Ignores The Forest For The Trees, Matthew G. Curtis

Richmond Journal of Global Law & Business

No abstract provided.

Doing Business In Egypt After The January Revolution: Capital Market And Investment Laws, Radwa S. Elsaman

Richmond Journal of Global Law & Business

Despite the Egyptian economy’s remarkable growth during the last decade, unequal treatment at law and unfair distribution of wealth led to the Revolution on January 25, 2011. The Revolution affected investment in Egyptian markets. Reforming business laws— specifically the Capital Market and Investment Laws— has become essential to restore confidence in Egyptian markets. These two branches of business law have undergone many developments over the years, which have improved them significantly. Legal compliance, however, remains a major concern. This Article surveys the economic activity in Egypt from a legal perspective. It evaluates Egyptian laws affecting economic activity by analyzing the …

Yukos Universal V. Russia: Shell Companies And Treaty Shopping In International Energy Disputes, Paul M. Blyschak

Richmond Journal of Global Law & Business

No abstract provided.

Prudential, Pragmatic And Prescient, Reform Of Bank Resolution Schemes, Janis P. Sarra

All Faculty Publications

The 2008-2009 global financial crisis highlighted the interdependency of financial institutions and markets worldwide. Globally, fiscal support packages totaling 3 trillion USD were introduced, placing enormous strain on the public finances of a number of countries. Even in jurisdictions such as Canada, with relatively well-managed banking systems, a generalized loss of confidence led to a sharp rise in funding costs. The largest negative effects of the financial crisis on the Canadian economy stemmed from crises originating in other countries, with adverse contagion effects on the Canadian banking system, making it very difficult for Canadian banks to fund themselves in foreign …

Investment Recommendations And The Essence Of Duty, Onnig H. Dombalagian

American University Law Review

No abstract provided.

The New Laws And Regulations For Financial Conglomerates: Will They Better Manage The Risks Than The Previous Ones?, Elizabeth F. Brown

American University Law Review

No abstract provided.

Laudable Goals And Unintended Consequences: The Role And Control Of Fannie Mae And Freddie Mac, Andrea J. Boyack

American University Law Review

No abstract provided.

Chasing The Greased Pig Down Wall Street: A Gatekeeper’S Guide To The Psychology, Culture And Ethics Of Financial Risk-Taking, Donald C. Langevoort

Georgetown Law Faculty Publications and Other Works

The current financial crisis has once again focused attention on lawyers, corporate directors and auditors as gatekeepers, who are expected to introduce some degree of cognitive independence to the task of risk assessment and risk management in public companies, including financial services firms. This essay examines the psychological and cultural forces that may distort risk perception and risk motivation in hyper-competitive firms, beyond the standard economic incentives associated with agency costs and moral hazards, warning gatekeepers against too easily assuming that all is well when insiders display high levels of intensity, focus and devotion to hard-to-achieve goals. In fact, these …

Activist Distressed Debtholders: The New Barbarians At The Gate?, Michelle M. Harner

Faculty Scholarship

The term “corporate raiders” previously struck fear in the hearts of corporate boards and management teams. It generally refers to investors who target undervalued, cash-flush or mismanaged companies and initiate a hostile takeover of the company. Corporate raiders earned their name in part because of their focus on value extraction, which could entail dismantling a company and selling off its crown jewels. Today, the term often conjures up images of Michael Milken, Henry Kravis or the movie character Gordon Gekko, but the alleged threat posed to companies by corporate raiders is less prevalent—at least with respect to the traditional use …

Ratings Reform: The Good, The Bad, And The Ugly, John C. Coffee Jr.

Faculty Scholarship

Although dissatisfaction with the performance of the credit rating agencies is universal (particularly with regard to structured finance), reformers divide into two basic camps: (1) those who see the "issuer pays" model of the major credit ratings firms as the fundamental cause of inflated ratings, and (2) those who view the licensing power given to credit ratings agencies by regulatory rules requiring an investment grade rating from an NRSRO rating agency as creating a de facto monopoly that precludes competition. After reviewing the recent empirical literature on how ratings became inflated, this Article agrees with the former school and doubts …

Systemic Risk After Dodd-Frank: Contingent Capital And The Need For Regulatory Strategies Beyond Oversight, John C. Coffee Jr.

Faculty Scholarship

Because the quickest, simplest way for a financial institution to increase its profitability is to increase its leverage, an enduring tension will exist between regulators and systemically significant financial institutions over the issues of risk and leverage. Many have suggested that the 2008 financial crisis erupted because flawed systems of executive compensation induced financial institutions to increase leverage and accept undue risk. But that begs the question why such compensation formulas were adopted. Growing evidence suggests that shareholders favored these formulas to induce managers to accept higher risk and leverage. Shareholder pressure, then, is a factor that could cause the …

Sovereignty, Accountability, And The Wealth Fund Governance Conundrum, Anna Gelpern

Scholarly Articles in Law Reviews & Journals

Sovereign wealth funds – state-controlled transnational portfolio investment vehicles – began as an externally imposed category in search of a definition. SWFs from different countries had little in common and no particular desire to collaborate. But SWFs as a group implicated the triple challenge of securing cooperation between deficit and surplus states, designing a legal framework for global capital flows, and integrating state actors in the transnational marketplace. This Article describes how an apparently artificial grouping of investors, made salient by the historical and political circumstances of their host states in the mid-2000s, became a vehicle for addressing some of …

Public Participation And The Private Sector: The Role Of Multilateral Development Banks In The Evolution Of International Legal Standards, Daniel D. Bradlow, Megan S. Chapman

Scholarly Articles in Law Reviews & Journals

This paper systematically describes the public participation standards currently applied by multilateral development banks (MDBs) to the private sector and seeks to identify emerging trends and areas for further development or improvement. It begins by outlining the developing body of international law on public participation and its relationship to good development practice. Thereafter, the paper describes the two principle models for standards attached to MDB funding and assistance to the private sector: (1) the World Bank policies applicable to the public sector; and (2) the International Finance Corporation (IFC) standards that are applicable to the private sector and how these …

Securitization And Suburbia, Heather Hughes

Scholarly Articles in Law Reviews & Journals

This Article explores the relationship between one typical form of real estate development finance-the securitized mezzanine loanand one controversial phenomenon-suburban sprawl. It asks foundational questions about the connection between financial transactions and real-world applications of the capital they raise. In this work, sprawl serves as an example of an environmental consequence of applications of capital raised with a common form of transaction. This Article considers the extent to which commercial finance laws release forceful incentives driven by capital markets upon land use decisions, potentially undermining the collective, morally informed determination such decisions require. It rejects the aesthetic aversion to looking …

Deconstructing Lyondell: Reconstructing Revlon, Lawrence Lederman

Articles & Chapters

No abstract provided.

Ask The Professor: “Omg! What Did Mf Global Do?, Ronald Filler

Articles & Chapters

This paper, written one week after MF Global, a large futures brokerage firm filed for bankruptcy, analyzes the bankruptcy, its impact on futures customers and the shortfall in customer funds that occurred on October 31, 2011. Subsequent to MF Global's bankruptcy, several customer protection rules were amended by the U.S. Commodity Futures Trading Commission and the National Futures Association.

Mortgage Modification And Strategic Behavior: A Contrarian Interpretation Of The Countrywide Financial Corporation Settlement, Gregory S. Crespi

Faculty Journal Articles and Book Chapters

Christopher Mayer, Edward Morrison, Thomas Piskorski and Arpit Gupta of Columbia University have recently published in the Law and Finance eJournal a comprehensive study demonstrating the significant impacts on strategic default rates of the widely publicized Countrywide Financial Corporation settlement of 2008. While their study is comprehensive and carefully done, their implicit assumption that strategic defaults are something to be discouraged rather than encouraged, a position that I have criticized in my earlier work, undercuts the usefulness of their work for policy guidance. From their perspective the Countrywide settlement provides a cautionary tale about difficult trade-offs to be faced in …

Consultation And Legitimacy In Transnational Standard-Setting, Caroline Bradley

Articles

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 …

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 …