By now, the risk that a distressed European nation such as Greece might leave the Eurozone and thereby spark global economic calamity is well known. Regular readers of this blog may even privately relish the prominence of the issue. Not since the days of the gold standard has international monetary policy come so close to being a socially acceptable topic of dinner conversation.
As I noted in my first post, observers rightly perceive the Eurozone sovereign debt crisis to be driven by political and economic forces. But many consequences of a euro breakup would be determined by law, including sources of American (specifically New York) private law.
This is a complex issue. I try to address it more fully in a new article, "Boilerplate Shock," which I've just posted on SSRN.
In brief, and to continue picking on Greece, one key question in the event of a euro breakup would be: would a court recognize an attempt by Greece to convert its euro-denominated debt into its new currency, or would it instead insist that Greece pay in euros, the currency of contract? The answer is important because, as a practical matter, requiring payment in euro would be tantamount to forcing a default.
That's the familiar narrative, anyway. And I agree. But I believe that the ubiquity of boilerplate terms in these bonds—specifically, clauses selecting governing law (usually foreign) and currency of payment (euro)—is likely to make any dispute over redenomination even more damaging than this suggests.
In the article, I argue that the sparse literature on the question of redenominating sovereign bonds overlooks some sources—especially cases interpreting New York contract law and private international law—that, if extended to Eurozone sovereign bonds, could surprise the market and cause serious global repercussions. I argue that the reason for this is not only that the dominant view overlooks what are likely controlling sources of law. It is that standardization of contract terms across the Eurozone sovereign lending market makes the stakes of surprise that much higher.
If Greece's attempt to redenominate its bonds is declared a default, then the fact that the operative terms in Italian, Spanish, Irish, etc. sovereign bonds are the same or similar makes markets likely to demand unsustainable premiums from those countries. Capital and investor flight could be very rapid. We have seen several previews of this movie over the past few years in the Eurozone, and each time official-sector bailout institutions have saved the day. But the European Union/European Central Bank and IMF probably do not have the resources to stop a broad-based bank run of this nature, to say nothing of the political support necessary to attempt it.
Maybe none of that will happen. Nevertheless, the potential for uniform contract terms to create risk not just to individual third parties but to securities markets seems likely to grow at least as fast as those markets. Using Eurozone sovereign bonds as a case study, I introduce the term "boilerplate shock" to describe the potential for standardized contract terms—when they come to govern the entire market for a given security—to transform an isolated default on a single contract into a threat to the market of which it is a part, and, possibly, to the economy in general. My larger objective here is to foster a discussion of the potential for securities law and private-sector securities lawyers to manage (or alternatively, to contribute to) systemic risk.
I've posted an abstract below and will be returning to the subject. I look forward your comments.
Boilerplate Shock abstract:
No nation was spared in the recent global downturn, but several Eurozone countries arguably took the hardest punch, and they are still down. Doubts about the solvency of Greece, Spain, and some of their neighbors are making it more likely that the euro will break up. Observers fear a single departure and sovereign debt default might set off a “bank run” on the common European currency, with devastating regional and global consequences.
What mechanisms are available to address—or ideally, to prevent—such a disaster?
One unlikely candidate is boilerplate language in the contracts that govern sovereign bonds. As suggested by the term “boilerplate,” these are provisions that have not been given a great deal of thought. And yet they have the potential to be a powerful tool in confronting the threat of a global economic conflagration—or in fanning the flames.
Scholars currently believe that a country departing the Eurozone could convert its debt obligations to a new currency, thereby rendering its debt burden manageable and staving off default. However, this Article argues that these boilerplate terms—specifically, clauses specifying the law that governs the bond and the currency in which it will be paid—would likely prevent such a result. Instead, the courts most likely to interpret these terms would probably declare a departing country’s effort to repay a sovereign bond in its new currency a default.
A default would inflict damage far beyond the immediate parties. Not only would it surprise the market, it would be taken to predict the future of other struggling European countries’ debt obligations, because they are largely governed by the same boilerplate terms. The possibility of such a result therefore increases the risk that a single nation’s departure from the euro will bring down the currency and trigger a global meltdown.
To mitigate this risk, this Article proposes a new rule of contract interpretation that would allow a sovereign bond to be paid in the borrower’s new currency under certain circumstances. It also introduces the phrase “boilerplate shock” to describe the potential for standardized contract terms drafted by lawyers—when they come to dominate the entire market for a given security—to transform an isolated default on a single contract into a threat to the broader economy. Beyond the immediate crisis in the Eurozone, the Article urges scholars, policymakers, and practitioners to address the potential for boilerplate shock in securities markets to damage the global economy.
Permalink | Comparative Law| Contracts| Economics| Europe| European Union| Finance| Financial Crisis| Financial Institutions| Globalization/Trade| Law & Economics| Legal Scholarship| Securities| SSRN | TrackBack (0) | Bookmark
Greetings, Glommers! (and hello, Janet and Mario*!)
It’s an honor to join this extremely sharp and thoughtful community of corporate and commercial law scholars for the next two weeks. The Conglomerate has long been one of my favorite law blogs and it’s truly a privilege to walk among these folks for a time (if a bit daunting to follow not just them but Urska Velikonja and her excellent guest posts). Thanks to Gordon, David, and their Glom partners for inviting me to contribute.
By way of biographical introduction, I’m currently a Visiting Assistant Professor at the University of Denver Sturm College of Law, where I teach International Business Transactions and International Commercial Arbitration. Last year, I did a VAP at Hofstra Law School (and taught Bus Orgs and Contracts).
In the next few weeks, I’ll be exploring a number of issues related to law and global finance. I have a particular interest in currencies and monetary law, or the law governing monetary policy. Two of my current projects (on which more soon) address legal aspects of critical macroeconomic policy questions that have emerged since 2008: U.S. monetary policy and the Eurozone sovereign debt crisis.
Without further ado, I will take a page from Urska and kick off my residency here with a somewhat meta question: should scholars refrain from writing about legal issues in macroeconomics, specifically monetary policy?
One thinks of monetary policy decisions—whether or not to raise interest rates, purchase billions of dollars of securities on the secondary market ("quantitative easing"), devalue or change a currency—as fundamentally driven by political and economic factors, not law. And of course they are. But the law has a lot to say about them and their consequences, and legal scholarship has been pretty quiet on this.
Some concrete examples of the types of questions I’m talking about would be:
- Pursuant to its dual mandate (to maintain price stability and full employment), what kinds of measures can the Federal Reserve legally undertake for the purpose of promoting full employment? More generally, what are the Fed’s legal constraints?
- What recognition should American courts extend to an attempt by a departing Eurozone member state to redenominate its sovereign debt into a new currency?
When it comes to issues like these, it is probably even more true than usual that law defines the boundaries of policy. Legal constraints in the context of U.S. monetary policy appear fairly robust even in times of crisis. For example, policymakers themselves often cite law as a major constraint when speaking of the tools available to the Federal Reserve in combating unemployment and deflation post-2008. Leading economics commentators do too. Yet commentary on “Fed law” is grossly underdeveloped. With the exception of a handful of impressive works (e.g., by Colleen Baker and Peter Conti-Brown), legal academics have largely left commentary on the Fed and macroeconomics to the econ crowd.
A different sort of abstention characterizes legal scholarship on the euro crisis. Unlike the question of Fed power, there is a burgeoning literature on various “what-if” euro break-up scenarios. But this writing tends to focus on the impact on individual debtors and creditors, not on the cumulative impact on the global financial system. Again, the macro element is missing.
It is curious that so many legal scholars would voluntarily absent themselves from monetary policy debates. The subtext is that monetary policy questions are either normatively or descriptively beyond the realm of law. If that is scholars’ actual view, I think it is misguided. But maybe the silence is not as revealing as all that.
- One issue is sources. You will not find a lot of useful caselaw on the Fed’s mandate or the Federal Reserve Act of 1913, and the relevant statutes and regulations are not very illuminating. Further, it’s a secretive institution and that makes any research (legal or otherwise) on its inner workings challenging.
- Another issue is focus. Arguably the natural home of legal scholarship on domestic monetary issues, for example, should be administrative law. But the admin scholarly gestalt is not generally as econ-centric as, say, securities law. Meanwhile, securities scholars tend to focus on microeconomic issues like management-shareholder dynamics.
- A final possibility, at least in the international realm, is historical. After World War II, Bretton Woods established a legal framework intended to minimize the chance that monetary policy would again be used as a weapon of war. The Bretton Woods system collapsed over forty years ago, the giants of international monetary law (Frederick Mann, Arthur Nussbaum) wrote (and died) during the twentieth century, and now even some of the leading scholars who followed in their footsteps have passed away. At the same time, capital now flows freely across borders and global financial regulation has become less legalized in general. These factors plus the decline of exchange-rate regulations (most countries let their currencies float) may have undermined scholars’ interest in monetary law. But as the ongoing euro saga demonstrates, international monetary law and institutions remain as critical as ever.
These are some possible explanations for why legal scholars have largely neglected questions of monetary law, but I’m sure I’ve overlooked others. What do you think?
*Pictured are Janet Yellen and Mario Draghi, chiefs, respectively, of the Federal Reserve and the European Central Bank.
Permalink | Administrative Law| Comparative Law| Economics| European Union| Finance| Financial Crisis| Financial Institutions| Globalization/Trade| Law & Economics| Legal Scholarship | Comments (5) | TrackBack (0) | Bookmark
After over four years of work, my book Law, Bubbles, and Financial Regulation came out at the end of 2013. You can read a longer description of the book at the Harvard Corporate Governance blog. Blurbs from Liaquat Ahamed, Michael Barr, Margaret Blair, Frank Partnoy, and Nouriel Roubini are on the Routledge’s web site and the book's Amazon page. The introductory chapter is available for free on ssrn.
Look for a Conglomerate book club on the book on the first week of February!
Permalink | Books| Comparative Law| Corporate Law| Economics| Finance| Financial Crisis| Financial Institutions| Law & Economics| Legal History| Legal Scholarship| Securities| White Collar Crime| Wisdom and Virtue | Comments (0) | TrackBack (0) | Bookmark
Hot off the presses comes a stimulating way to start the summer for corporate law professors. Cambridge recently published Christopher Bruner’s new book Corporate Governance in the Common-Law World. The book builds on his earlier law review work, including Power and Purpose in the “Anglo-American” Corporation and Corporate Governance Reform in a Time of Crisis.
Bruner lays patient, meticulous siege to functionalist accounts that have occupied center stage in comparative corporate law scholarship. The key moves in his gambit:
¶ Disaggregating the idea of “Anglo-American” corporate law by arguing that British, Australian, and Canadian systems give far more power to shareholders than does the U.S. approach;
¶ Arguing that a functional approach (which has led to predictions that differing social welfare and social democracy concerns explains a divergence between continental European systems and Anglo-American systems) fails to account for the differing approaches among these four common-law countries;
¶ Articulating the further differences among the U.K., Canadian, and Australian approaches; and
¶ Providing evidence that politics, not functional concerns, provides a better explanation for the diverging paths within the common-law world.
Bruner also looks at how the crisis has affected these four common-law countries to different degrees. Harder hit, the U.K. and United States have moved to increase shareholder power within corporations. Although in the introduction Bruner sets out to navigate middle course between “functionalism” and “contextualism,” the book hews much closer to the latter. In doing so, he stages a serious challenge to comparative scholarship that poses grander economic arguments to explain differences and similarities among corporate law regimes.
To my mind, the book also raises a challenge of whether a similar political approach might explain divergences within continental Europe. Moreover, might a politics focus provide an explanation for divergences and convergences well before the latter half of the 20th Century?
Bruner’s Introduction is available on ssrn.
As attention moves rapidly towards comparative approaches, the research and teaching of company law has somehow lagged behind. The overall purpose of this book is therefore to fill a gap in the literature by identifying whether conceptual differences between countries exist. Rather than concentrate on whether the institutional structure of the corporation varies across jurisdictions, the objective of this book will be pursued by focusing on specific cases and how different countries might treat each of these cases. The book also has a public policy dimension, because the existence or absence of differences may lead to the question of whether formal harmonisation of company law is necessary. The book covers 10 legal systems. With respect to countries of the European Union, it focuses on the most populous countries (Germany, France, the UK, Spain, Italy and Poland) as well as two smaller Member States (Finland and Latvia). In addition, the laws of two of the world's largest economies (the US and Japan) are included for the purposes of wider comparison. All of these jurisdictions are subjected to scrutiny by deploying a comparative case-based study. On the basis of these case solutions, various conclusions are reached, some of which challenge established orthodoxies in the field of comparative company law.This is a very cool project, for which I am the U.S. contributor. Mathias and David were patient and longsuffering editors, and I believe they have produced something truly worthwhile for those of us interested in comparative company law. Thanks to the many collaborators who made this happen.
Elizabeth Trujillo, Jason Yackee, Sonia Rolland, and yours truly are the new leadership of the American Society of International Law's International Economic Law Group, Sonia and I in the vice-chair role. So hurrah and all that.
The historiography of this group is a bit different from that of the usual business law outfits. Corporate and securities regulation academics have been thinking about Delaware and the SEC for a very long time, and it seems to me that the new areas of research - executive compensation, what to do about private equity, and so on - fit within the Delaware and SEC framework. International economic law meant, until about 2000, one thing, and one thing only: the WTO (well, maybe also letters of credit, not that there's a lot of research on that). Then it meant two things that don't really overlap - the WTO and investment arbitration. Now there is a third group of financial regulation scholars in the mix, and the next emerging outfit will likely be one focusing on debt instruments. So what you see on the committees, and at the conferences, are trade specialists, investment specialists, and financial regulatory specialists, with sovereign debt to come. It isn't easy to knit those research interests together. But that is why we have the IELG.
So I'm excited to add VCASILIELG to my already impressive acronymic title roster (see also CCABAALSILC)
Anyway, the official announcement follows.
Elizabeth Trujillo from Suffolk University Law School and Jason Yackee from University of Wisconsin School of Law have been elected to be Co-Chairs of the International Economic Law Interest Group for ASIL. Jason and Elizabeth are stepping in after 2 years as being Co-Vice Chairs under the wonderful leadership of Sungjoon Cho and Claire Kelly. New Co-Vice-Chairs are David Zaring and Sonia Rolland. The election took place at the ASIL-IEcLIG Biennial conference held at George Washington Law School in Washington DC on Nov. 29-Dec. 1, 2012. The new leadership will be assuming their positions at the ASIL 2013 Annual Meeting in April. The ASIL-IEcLIG Biennial, in cooperation with George Washington University School of Law and the Federal Trade Commission, was on "Re-Conceptualizing International Economic Law: Bridging the Public/Private Divide." Keynote speakers included Professor Ralph Steinhardt from GW Law School, the Honorable Donald C. Pogue, Chief Judge United States Court of International Trade, and Amelia Porges from the Law Offices of Amelia Porges. There were over 100 registered participants from all over the world including the U.S., Europe, Latin America, New Zealand, and Asia.
The Times has an op-ed about the truth that 120 million Japanese citizens and hundreds of thousands of foreigners don't want you to find out. Amazing secret or cherry picked data - you decide!
This is the fourth installment of a series of previews of the papers being presented at the AALS Financial Institutions & Consumer Financial Services Section meeting this Sunday from 9 am to 10:45 am at the Marriott Wardman Park.
Stavros Gadinis (U.C. Berkeley) has authored the fourth paper that will be presented on Sunday. His work, From Independence to Politics in Banking Regulation (forthcoming in the Duke Law Journal) provides a very insightful empirical study of how lawmakers are responding to the financial crisis. Surprisingly, Gadinis finds across a number of countries, lawmakers are moving away from giving responsibility for bank regulations to independent agencies. Instead, lawmakers are increasingly assigning responsibility to officials subordinate to elected politicians or to politicians themselves.
Here is his abstract:
U.S. financial regulation traditionally relied on independent agencies, such as the Federal Reserve and the FDIC. In the last two decades, countries around the world followed the U.S. example by strengthening the independence of their financial regulators, encouraged by recommendations from international organizations such as the Basel Committee and the IMF. Yet, reforms introduced following the 2007-2008 financial crisis abandon the conventional paradigm of agency independence and allocate authority to officials under the direct control of elected politicians, such as the Secretary of the Treasury. This paper studies reforms in 10 key jurisdictions for international banking. It shows that politicians gained new powers with three distinct features. First, politicians have new authority not only to handle emergencies, but also to oversee banks’ financial condition during regular times of smooth business operation. Second, politicians exercise these powers directly, rather than by delegation to a regulatory bureaucracy. Third, while reforms did not dismantle independent regulators, they require them to work under the leadership of politicians in new systemic oversight arrangements. Whenever reformers established new regulatory bodies or mechanisms, they placed politicians at the helm.
Gadinis’s paper promises to launch a fleet of subsequent scholarship. Beyond the normative/ policy question of whether this shift away from independence is a good development, are interesting questions that would drill down into the data. I would find it surprising that elected officials would assume all these new powers without building in mechanisms to hedge the risk of being blamed for the next crisis.
At the same time, Gadinis is writing at a particularly fertile juncture of financial regulation and administrative law. Some of the influential recent administrative law scholarship in this area has argued that traditional hallmarks to measure agency independence and traditional mechanisms to safeguard that independence need to be rethought, at least in the U.S. context. For example, Lisa Schulz Bressman & Robert Thompson have looked at the nuanced ways in which the President can exercise influence over agencies. Rachel Barkow has laid out other ways in which agencies can be insulated from capture beyond the traditional mechanisms (which, include taking away the President’s power to fire an agency head and exempting agency regulations from Executive Office cost-benefit review). So we need to pay much more attention to texture and nuance in defining agency independence and serving its underlying goals. Of course, the coding in a comparative empirical study cannot take into account all the differences in institutional environments among numerous countries.
Gadinis’s paper is sure to spark a lively scholarly conversation. Shruti Rana (Maryland) will serve as discussant and be first to engage.
Law schools are under attack. Depending upon the source, between 20-50% of corporate counsel won’t pay for junior associate work at big firms. Practicing lawyers, academics, law students and members of the general public have weighed in publicly and vehemently about the perceived failure of America’s law schools to prepare students for the real world.
Admittedly, before I joined academia a few months ago, I held some of the same views about lack of preparedness. Having worked with law students and new graduates as outside and in house counsel, I was often unimpressed with the level of skills of these well-meaning, very bright new graduates. I didn’t expect them to know the details of every law, but I did want them to know how to research effectively, write clearly, and be able to influence the clients and me. The first two requirements aren’t too much to expect, and schools have greatly improved here. But many young attorneys still leave school without the ability to balance different points of view, articulate a position in plain English, and influence others.
To be fair, unlike MBAs, most law students don’t have a lot of work experience, and generally, very little experience in a legal environment before they graduate. Assuming they know the substantive area of the law, they don’t have any context as to what may be relevant to their clients.
How can law schools help?
First, regardless of the area in which a student believes s/he wants to specialize, schools should require them to take business associations, tax, and a basic finance or accounting course. No lawyer can be effective without understanding business, whether s/he wants to focus on mom and pop clients, estate planning, family law, nonprofit, government or corporate law. More important, students have no idea where they will end up after graduation or ten years later. Trying to learn finance when they already have a job wastes the graduate’s and the employer’s time.
Of course, many law schools already require tax and business organizations courses, but how many of those schools also show students an actual proxy statement or simulate a shareholder’s meeting to provide some real world flavor? Do students really understand what it means to be a fiducuiary?
Second and on a related point, in the core courses, students may not need to draft interrogatories in a basic civil procedure course, but they should at least read a complaint and a motion for summary judgment, and perhaps spend some time making the arguments to their brethren in the classroom on a current case on a docket. No one can learn effectively by simply reading appellate cases. Why not have students redraft contract clauses? When I co-taught professional responsibility this semester, students simulated client conversations, examined do-it-yourself legal service websites for violations of state law, and wrote client letters so that the work came alive.
When possible, schools should also re-evaluate their core requirements to see if they can add more clinicals (which are admittedly expensive) or labs for negotiation, client consultation or transactional drafting (like my employer UMKC offers). I’m not convinced that law school needs to last for three years, but I am convinced that more of the time needs to be spent marrying the doctrinal and theoretical work to practical skills into the current curriculum.
Third, schools can look to their communities. In addition to using adjuncts to bring practical experience to the classroom, schools, the public and private sector should develop partnerships where students can intern more frequently and easily for school credit in the area of their choice, including nonprofit work, local government, criminal law, in house work and of course, firm work of all sizes. Current Department of Labor rules unnecessarily complicate internship processes and those rules should change.
This broader range of opportunities will provide students with practical experience, a more realistic idea of the market, and will also help address access to justice issues affecting underserved communities, for example by allowing supervised students to draft by-laws for a 501(c)(3). I’ll leave the discussion of high student loans, misleading career statistics from law schools and the oversupply of lawyers to others who have spoken on these hot topics issues recently.
Fourth, law schools should integrate the cataclysmic changes that the legal profession is undergoing into as many classes as they can. Law professors actually need to learn this as well. How are we preparing students for the commoditization of legal services through the rise of technology, the calls for de-regulation, outsourcing, and the emerging competition from global firms who can integrate legal and other professional services in ways that the US won’t currently allow?
Finally and most important, what are we teaching students about managing and appreciating risk? While this may not be relevant in every class, it can certainly be part of the discussions in many. Perhaps students will learn more from using a combination of reading law school cases and using the business school case method.
If students don’t understand how to recognize, measure, monitor and mitigate risk, how will they advise their clients? If they plan to work in house, as I did, they serve an additional gatekeeper role and increasingly face SEC investigations and jail terms. As more general counsels start hiring people directly from law schools, junior lawyers will face these complexities even earlier in their careers. Even if they counsel external clients, understanding risk appetite is essential in an increasingly complex, litigious and regulated world.
When I teach my course on corporate governance, compliance and social responsibility next spring, my students will look at SEC comment letters, critically scrutinize corporate social responsibility reports, read blogs, draft board minutes, dissect legislation, compare international developments and role play as regulators, legislators, board members, labor organizations, NGOs and executives to understand all perspectives and practice influencing each other. Learning what Sarbanes-Oxley or Dodd-Frank says without understanding what it means in practice is useless.
The good news is that more schools are starting to look at those kinds of issues. The Carnegie Model of legal education “supports courses and curricula that integrate three sets of values or ‘apprenticeships’: knowledge, practice and professionalism.” Educating Tomorrow’s Lawyers is a growing consortium of law schools which recommends “an integrated, three-part curriculum: (1) the teaching of legal doctrine and analysis, which provides the basis for professional growth; (2) introduction to the several facets of practice included under the rubric of lawyering, leading to acting with responsibility for clients; and (3) exploration and assumption of the identity, values and dispositions consonant with the fundamental purposes of the legal profession.” The University of Miami’s innovative LawWithoutWalls program brings students, academics, entrepreneurs and practitioners from around the world together to examine the fundamental shifts in legal practice and education and develop viable solutions.
The problems facing the legal profession are huge, but not insurmountable. The question is whether more law schools and professors are able to leave their comfort zones, law students are able to think more globally and long term, and the popular press and public are willing to credit those who are already moving in the right direction. I’m no expert, but as a former consumer of these legal services, I’m ready to do my part.
Permalink | Business Organizations| Comparative Law| Contracts| Corporate Governance| Corporate Law| Current Affairs| Education| Fiduciary Duties| Finance| Globalization/Trade| Innovation| Junior Scholars| Law Schools/Lawyering| Popular Culture| Small Business| Social Responsibility| Teaching | TrackBack (0) | Bookmark
I am in London teaching a course called "Corporations: U.S. and Transnational Perspectives" through the Georgetown Law Center's Summer Program. The students are excellent, and the facilities -- classes at King's College, offices on High Holborn -- are nice. My apartment in Islington? Ok ... but shouldn't Baker's Row have a baker on it?
Anyway, the core of my course is US corporate law, and I am using my casebook to teach that, but I have enjoyed using the "transnational" aspect of the course as an excuse to read the second edition of Anatomy of Corporate Law, an excellent primer on comparative corporate law by Reinier Kraakman, John Armour, Paul Davies, Luca Enriques, Henry B. Hansmann, Gérard Hertig, Klaus J. Hopt, Hideki Kanda, and Edward B. Rock. That's a terrific lineup of authors, and they do not disappoint. The new edition is even better then the first, which I used five years ago to teach a similar class in Lund, Sweden.
The book is well written and insightful, relying on a functional approach to compare the regulation of corporations in various jurisdictions. It bears the marks of deep, thoughtful conversations among sophisticated analysts. But it is accessible, less like a typical law review article than an essay in The Economist. If you are interested in adding a transnational perspective to your study of corporate law, I have a hard time imagining a better starting place.
I've been working away on a draft symposium piece for the NeXus Journal at Chapman where I present a model of deregulation that explains banking deregulation in Sweden leading up to that country's financial crisis in 1990. The model may also help us understand how the deregulation of Freddie & Fannie, the repeal of Glass Steagall, and bank OTC derivatives trading contributed to our own financial crisis.
The piece is called Deregulation Pas de Deux: Dual Regulatory Classes of Financial Institutions and the Path to Financial Crisis in Sweden and the United States and can be downloaded here. Here's the abstract:
This article presents the following model of two regulatory classes of financial institutions interacting in financial and political markets to spur deregulation and riskier lending and investment, which in turn contributes to the severity of a financial crisis:
1) Regulation creates two categories of financial institutions. The first class faces greater restrictions in lending or investment activities but enjoys regulatory subsidies, such as an explicit or implicit government guarantee, while the second class is more loosely regulated and can make riskier loans or investments and earn additional profits.
2) These additional profits leads to calls for deregulation to enable the first class to participate in lucrative lending or investment markets.
3) Deregulation allows the first class of institution either to compete with the second class in formerly restricted markets or to invest in the second class, in either case, while retaining its regulatory subsidy.
4) Deregulation spurs additional lending in two ways:
i) subsidy leakage, which occurs when the first class can use subsidized funds to make riskier investments (including investments in the second class) without regulation compensating for moral hazard; and
ii) displacement, which occurs when subsidized competition pushes the second class into riskier market segments.
5) Additional lending increases leverage in the financial system and fuels a boom in an asset market.
6) Asset prices collapse and threaten the solvency of financial institutions.
This model explains financial deregulation in Sweden in the 1980s, which led to a 1990 bank crisis. The model also provides a framework for scholars to examine whether deregulation in the United States involving the following dual classes of institutions contributed to the current crisis:
¶ GSEs (Freddie Mac and Fannie Mae) and sponsors of “private label” mortgage-backed securities;
¶ Commercial and investment banks with respect to the Glass-Steagall repeal; and
¶ Banks and hedge funds with respect to OTC derivatives.
The model would support the premises of the proposed Volcker Rule, which would restrict investment activities of banks, but suggests that imposing those restrictions may not be sustainable in the long run.
Comments are welcome!
I've had almost enough of end-of-the-year and end-of-the-decade lists. (Is this a peculiarly American phenomenon? An attempt to produce some amount of cultural cohesion in a nation of 300 million?)
But not enough to refrain from speculating on what will be the major stories in business law and the legal academy in the next decade. In my guest posts a while ago, I wrote about how the economic pressures on law firms and legal education will intensify. Here are two other trends to watch:
1. Graying boomers continue to rock the boat: The leading edge of the baby boom will turn 64 this year (and back of the envelope calculations suggest these boomers will be 74 in ten more years). Like in every previous decade, the boomers will continue to be heard. Some pundits suggested that the retirement of boomers will create massive demand for new workers (including lawyers and professors) to fill the gap. Not so fast. Demand for many services may also shift. And don't expect boomer to retire on cue. Anticipate tension in all sorts of places of work as generations grapple with the issue of when the torch will be passed.
In terms of law practice, it would not be at all surprising if employment discrimination, trusts and estates, and elder law see growth spurts.
In terms of social issues, thanks in part to immigration and to Americans having more kids, the U.S. won't deal with the same degree of economic and social challenges that Japan and Europe face. But there will still be huge issues.
For example, expect the costs and ethics of elder care to become a national issue that dwarfs the current health care debate. Financial markets may gyrate as boomers reallocate or cash out of investments. Expect consumer finance to focus on new financial products aimed at the elderly, of which reverse mortgages are just the harbinger. (In short, my colleague Nathalie Martin will have a full plate this decade.)
2. We will all be comparativists soon: Law professors have been stressing the need to incorporate international and transnational issues in the law school curriculum, including in business law, for quite a while. But I doubt public international law will be as important as giving students some comparative law skills to enable them to work with clients and lawyers across jurisdictions. Over my time in practice, I think I looked at a treaty only once, but spent quite a bit of time working with lawyers in other jurisdictions. It was one of the more difficult and fascinating aspects of practice.
Overarching treaties will be less important in corporate and financial law scholarship too compared to the type of bilateral and multilateral cooperation among national regulators that scholars like Chris Brummer and our own Professor Zaring have written about. To understand whether this cooperation works, we need to know quite a bit about foreign legal systems.
Here's a fascinating interview with Niall Ferguson. I was particularly interested in his comments a la Douglass North crediting the rule of law with the success of Western economic powers and asserting that China must fundamentally change its legal system or fail. It's not a novel point, but it sounds wonderful in Ferguson's accent. If you don't have time for the whole thing, start at 19:07.
Via Paul Kedrosky.
This semester I am teaching Antitrust law to a group of eager students who are willing to take the class pretty early in the morning. I have now taught the class for a few years and have come across the same issue each year: how much of an international/comparative perspective should I bring into the course? On the one hand, there is the worry that too much of a comparative perspective will confuse students in an introductory course who are trying to master the basic concepts. On the other hand, as can be seen in many cases, like the infamous lysine cartel playing at a theater near you, modern antitrust cases and practice have a vast global component.
There has been a dramatic increase in cross-border antitrust issues since the 1990s with more comprehensive antitrust laws being adopted around the world, such as China’s 2007 Anti-Monopoly Law, or antitrust regimes in India or Latin America. Furthermore, the European Union has played an aggressive role in antitrust enforcement in the past ten years, including against US companies and in challenging merger transactions between US companies. For example, the European Commission recently imposed a record $1.5 billion fine against Intel (which Intel claims violated its human rights) and has released a very lengthy decision laying out its evidence and justifying this enormous fine. In another high profile matter, the Europeans have decided to extend their investigation into Oracle’s $7.4 billion acquisition of Sun Microsystems which the Department of Justice had already approved back in August without any conditions. Antitrust scrutiny of horizontal mergers is just one of the areas in which Europe and the US have diverged. Some antitrust scholars like Jonathan Baker and Carl Shapiro have argued “ in favor of reinvigorating horizontal merger enforcement" and statements by Christine Varney, who heads the Department of Justice antitrust division, also indicate that there will be greater merger review in the US. It is too early to say whether antitrust enforcement by the US and EU will converge, although the big players have been talking regularly. And on the merger front, the DOJ and the Federal Trade Commission will be holding joint workshops to determine whether the Horizontal Merger Guidelines need to be updated “in light of legal and economic developments that have occurred since the last major revision of the guidelines” in 1992. Assistant Attorney General Varney, in a recent speech discussing international convergence of competition policy regimes (HT: Antitrust Law Prof Blog), stated that this modification process will be done with "an openness to others' ideas and new approaches."
These types of developments indicate a need for the introductory Antitrust course to take a global view. Of course, the challenge is how to convey the essential substantive material that should be covered in the class with the undertaking to help students comprehend the global nature of current Antitrust practice. Undoubtedly, the degree to which one should/can bring a global perspective comes up in numerous other courses. I am not sure that I have any solutions yet, but I am planning on internationalizing at least some of the material covered in my Antitrust course.