Banking and Finance Law Commons^™

Is There Really A Sex Bureaucracy?, Suzanne B. Goldberg

Faculty Scholarship

This essay identifies several features of the higher-education context that can enrich The Sex Bureaucracy‘s account of why colleges and universities have adopted new policies and trainings to address sexual assault on their campuses. These features include: 1) schools’ preexisting systems for addressing student conduct; 2) the shared interest of schools in reducing impediments to education, including nonconsensual sexual contact; and 3) the pedagogical challenges of developing trainings that are engaging and effective. Taking these three factors into account, we can see that while federal Title IX intervention has had a profound effect, it is also important not to …

Targeted Subordination Of Official Sector Debt, Lee C. Buchheit, Mitu Gulati

Faculty Scholarship

If Greece’s debt is unsustainable, and most observers (including the IMF) seem to think it is, the country’s only source of funding will continue to be official sector bailout loans. Languishing for a decade or more as a ward of the official sector is undesirable from all perspectives. The Greeks bridle under what they see as foreign imposed austerity; the taxpayers who fund the official sector loans to Greece balk at the prospect of shoveling good money after bad. The question then is how to facilitate Greece’s ability to tap the private capital markets at tolerable interest rates. The IMF’s …

The Sovereign-Debt Listing Puzzle, Elisabeth De Fontenay, Josefin Meyer, Mitu Gulati

Faculty Scholarship

The claim that stock exchanges perform certification and monitoring roles in securities offerings is pervasive in the legal and financial literatures. This article tests the validity of this “bonding hypothesis” in the sovereign-bond market—one of the oldest and largest securities markets in the world. Using data on sovereign-bond listings for the entire post-World War II period, we provide the first comprehensive report on sovereigns’ historical listing patterns. We then test whether a sovereign bond issue’s listing jurisdiction affects its yield at issuance, as the bonding hypothesis would predict. We find little evidence of bonding in today’s sovereign-debt market. Instead, we …

Preserving The Corporate Superego In A Time Of Activism: An Essay On Ethics And Economics, John C. Coffee Jr.

Faculty Scholarship

This essay focuses on the impact of recent changes in corporate governance on ethical behavior within the public corporation. It argues that a style of corporate behavior – one characterized by a risk tolerant, even reckless, pursuit of short-term profits and a disregard for the interests of non-shareholder constituencies – is attributable in significant part to recent changes in corporate governance, including the rise of hedge fund activism, greater use of incentive compensation, and the appearance of blockholder directors. It then surveys feasible responses intended to strengthen the role of the boards as the corporation’s conscience and superego. Given the …

“Ev’Ry American Experiment Sets A Precedent”: Why One Florida State Court’S Bitcoin Opinion Is Everyone’S Business, Allison Caffarone, Meg Holzer

Scholarly Works

Part I of this article seeks to explain in largely non-technical terms the design of the Bitcoin network. Part II explains the guidance and administrative rulings provided by the United States Department of the Treasury's Financial Crimes Enforcement Network in relation to the issues in the Espinoza case. Additionally, Part II surveys different approaches taken by state legislatures and regulators in seeking to address decentralized virtual currencies, including bitcoin. Careful attention is paid to how the terms "monetary value" and "virtual currency" are defined, and how those definitions have been interpreted. Part II further explores the differences in the way …

Short-Termism And Long-Termism, Michal Barzuza, Eric L. Talley

Faculty Scholarship

A significant debate in corporate law and finance concerns the role of activist investors (especially hedge funds) in corporate governance. Activists, it is often alleged, imprudently privilege short term earnings over superior (but less liquid) long term investments. Activists counter that they target managers who unjustifiably cling to questionable strategies. While this debate is hardly new, it has grown increasingly fractious of late. We analyze the activism debate within a theoretical securities-market setting. In our framework – which draws from an emerging literature in empirical and experimental finance – managers are differentially overconfident (causing them to favor long-term projects), while …

The Wolf At The Door: The Impact Of Hedge Fund Activism On Corporate Governance, John C. Coffee Jr., Darius Palia

Faculty Scholarship

Hedge fund activism has recently spiked, almost hyperbolically. No one disputes this, and most view it as a significant change. But, their reasons differ. Some see activist hedge funds as the natural champions of dispersed and diversified shareholders, who are less capable of collective action in their own interest. A key fact about activist hedge funds is that they are undiversified and typically hold significant stakes in the companies that comprise their portfolios. Given their larger stakes and focused holdings, they are less subject to the “rational apathy” that characterizes more diversified and even indexed investors, such as pension and …

Beyond Options, Edward R. Morrison, Anthony J. Casey

Faculty Scholarship

Scholars and policymakers now debate reforms that would prevent a bankruptcy filing from being a moment that forces valuation of the firm, crystallization of claims against it, and elimination of junior stakeholders’ interest in future appreciation in firm value. These reforms have many names, ranging from Relative Priority to Redemption Option Value. Much of the debate centers on the extent to which reform would protect the non-bankruptcy options of junior stakeholders, or harm the non-bankruptcy options of senior lenders. We argue that this focus on options misplaced. Protecting options is neither necessary nor sufficient for advancing the goal of a …

The First Year: The Role Of A Modern Lender Of Last Resort, Kathryn Judge

Faculty Scholarship

Insufficient liquidity can trigger fire sales and wreak havoc on a financial system. To address these challenges, the Federal Reserve (the Fed) and other central banks have long had the authority to provide financial institutions liquidity when market-based sources run dry. Yet, liquidity injections sometimes fail to quell market dysfunction. When liquidity shortages persist, they are often symptoms of deeper problems plaguing the financial system.

This Essay shows that continually pumping new liquidity into a financial system in the midst of a persistent liquidity shortage may increase the fragility of the system and, on its own, is unlikely to resolve …

Sovereign Debt Restructuring: A Model-Law Approach, Steven L. Schwarcz

Faculty Scholarship

The existing contractual framework for sovereign debt restructuring is sorely inadequate. Whether or not their fault, nations sometimes take on debt burdens that become unsustainable. Until resolved, the resulting sovereign debt problem hurts not only those nations (such as Greece) but also their citizens, their creditors, and—by posing serious systemic risks to the international financial system—the wider economic community. The existing contractual framework functions poorly to resolve the problem because it often leaves little alternative between a sovereign debt bailout, which is costly and creates moral hazard, and a default, which raises the specter of systemic financial contagion.

Most observers …

Misalignment: Corporate Risk-Taking And Public Duty, Steven L. Schwarcz

Faculty Scholarship

This article argues for a “public governance duty” to help manage excessive risk-taking by systemically important firms. Although governments worldwide, including the United States, have issued an array of regulations to attempt to curb that risk-taking by aligning managerial and investor interests, those regulations implicitly assume that investors would oppose excessively risky business ventures. That leaves a critical misalignment: because much of the harm from a systemically important firm’s failure would be externalized onto the public, including ordinary citizens impacted by an economic collapse, such a firm can engage in risk-taking ventures with positive expected value to its investors but …

Pricing Sovereign Debt: Discretion V. Expropriation, Michael Bradley, Irving De Lira Salvatierra, Mitu Gulati

Faculty Scholarship

The Greek restructuring of March 2012 illustrates how non-price contract terms can have a significant effect on the pricing of sovereign debt. In the Greek restructuring, bonds governed by local law suffered NPV haircuts in the range of 60-75%, whereas those bonds governed by foreign law were paid in full and on time. Other contract parameters such as the currency in which the debt is denominated and the exchange on which it is listed can also affect the leeway a sovereign debtor has in dealing with its creditors. In general, we find that sovereigns with strong institutions and investor protections …

Perspectives On Regulating Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

This book chapter, which synthesizes several of the author’s articles, attempts to provide useful perspectives on regulating systemic risk. First, it argues that systemic shocks are inevitable. Accordingly, regulation should be designed not only to try to reduce those shocks but also to protect the financial system against their unavoidable impact. This could be done, the chapter explains, by applying chaos theory to help stabilize the financial system. The chapter then focuses on trying to prevent excessive corporate risk-taking, which is one of the leading triggers of systemic shocks and widely regarded to have been a principal cause of the …

Pricing Contract Terms In A Crisis: Venezuelan Bonds In 2016, Elena Carletti, Paolo Colla, Mitu Gulati, Steven Ongena

Faculty Scholarship

As of this writing in June 2016, the markets are predicting Venezuela to be on the brink of default. On June 1, 2016, the 6 month CDS contract traded at about 7000bps which translates into a likelihood of default of over 90%. Our interest in the Venezuelan crisis is that its outstanding sovereign bonds have a unique set of contractual features that, in combination with its near-default status, have created a natural experiment. This experiment has the potential to shed light on one of the long standing questions that sits at the intersection of the fields of law and finance, …

A Sovereign’S Cost Of Capital: Go Foreign Or Stay Local, Michael Bradley, Irving Arturo De Lira Salvatierra, Mitu Gulati

Faculty Scholarship

A critical question faced by any sovereign seeking to raise funds in the bond market is whether to issue the debt under foreign or local parameters. This choice determines other key characteristics of any bond issue such as which banks, lawyers, and investors will be involved. Most important though, this decision involves a tradeoff between the sovereign retaining discretion in managing the issue and relinquishing control of the issue to third parties to prevent the sovereign from expropriating wealth from bondholders in the future. Based on a sample of 17,349 issuances by 117 sovereigns between 1990 and 2015, we investigate …

Keynote Address, Regulating Corporate Governance In The Public Interest: The Case Of Systemic Risk, Steven L. Schwarcz

Faculty Scholarship

There’s long been a debate whether corporate governance law should require some duty to the public. The accepted wisdom is not to require such a duty—that corporate profit maximization provides jobs and other public benefits that exceed any harm. This is especially true, the argument goes, because imposing specific regulatory requirements and making certain actions illegal or tortious can mitigate the harm without unduly impairing corporate wealth production. Whether that is true in other contexts, this paper—delivered as the keynote address at the June 2016 National Business Law Scholars Conference at The University of Chicago Law School—questions if it’s true …

Shadow Banking And Regulation In China And Other Developing Countries, Steven L. Schwarcz

Faculty Scholarship

The rapid but largely unregulated growth in shadow banking in developing countries such as China can jeopardize financial stability. This article discusses that growth and argues that a regulatory balance is needed to help protect financial stability while preserving shadow banking as an important channel of alternative funding. The article also analyzes how that regulation could be designed.

The Macroprudential Quandary: Unsystematic Efforts To Reform Financial Regulation, Kern Alexander, Steven L. Schwarcz

Faculty Scholarship

No abstract provided.

Panel 3: Litigation Funding As A Tool For Collective Actions And Arbitrations, Anthony J. Sebok

Articles

The article explores innovative models of litigation funding, particularly third-party financing, and their implications for access to justice and legal efficiency. It examines how different jurisdictions, such as Quebec and Australia, have implemented funding mechanisms to address gaps in legal representation and the challenges of aggregating claims. The analysis highlights the potential benefits of these models, including increased access to justice and economic efficiency, while also addressing concerns about legitimacy, corruption, and systemic biases.

Class Warfare: The Disappearance Of Low-Income Litigants From The Civil Docket, Myriam Gilles

Articles

In recent years, much attention has been paid to the startling disparities in income and wealth in contemporary U.S. society. The enormous concentration of economic power in the top 1% is the culmination of decades of significant income and wealth gains for the top, combined with stagnant or decreasing growth for the majority - a trend that continues apace. But nowhere is the gap more glaring than in the civil docket, where class actions brought by or on behalf of low-income consumers and employees are on the verge of disappearing.

To be sure, the decline in class actions is only …