Short-sale bans have been frequently utilized globally as a regulatory tool during periods of financial crisis. This paper is a review of the observed intended and unintended effects. We see that short-sale bans have pervasive effects spanning many financial markets that include options, convertible bonds, CDS, and ETFs. Such implications should be of interest to regulators and policymakers when contemplating future bans.
{"title":"The Intended and Collateral Effects of Short-Sale Bans as a Regulatory Tool","authors":"T. Hendershott, Ethan Namvar, B. Phillips","doi":"10.2139/SSRN.2159599","DOIUrl":"https://doi.org/10.2139/SSRN.2159599","url":null,"abstract":"Short-sale bans have been frequently utilized globally as a regulatory tool during periods of financial crisis. This paper is a review of the observed intended and unintended effects. We see that short-sale bans have pervasive effects spanning many financial markets that include options, convertible bonds, CDS, and ETFs. Such implications should be of interest to regulators and policymakers when contemplating future bans.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"1 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-10-10","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"129089398","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This testimony is from a hearing of the House Judiciary Committee's Subcommittee on Courts, Commercial and Administrative Law on reforming the venue laws applicable to chapter 11 bankruptcy cases. This brief testimony adds three distinctive elements to the scholarly debates about corporate bankruptcy venue that will be developed in future scholarship. First, the current bankruptcy venue laws are an aberration from federal venue principles. Second, place of incorporation - a criterion deemed quite important to defenders of current chapter 11 venue laws - bears little or no weight in forum selection by the Judicial Panel on Multidistrict Litigation, another complex litigation setting. Third, the procedural justice literature offers important insights about what is at stake when corporate reorganizations routinely take place far away from the people deeply affected by them.
{"title":"Congressional Testimony on H.R. 2533: 'The Chapter 11 Bankruptcy Venue Reform Act of 2011'","authors":"M. Jacoby","doi":"10.2139/ssrn.1975868","DOIUrl":"https://doi.org/10.2139/ssrn.1975868","url":null,"abstract":"This testimony is from a hearing of the House Judiciary Committee's Subcommittee on Courts, Commercial and Administrative Law on reforming the venue laws applicable to chapter 11 bankruptcy cases. This brief testimony adds three distinctive elements to the scholarly debates about corporate bankruptcy venue that will be developed in future scholarship. First, the current bankruptcy venue laws are an aberration from federal venue principles. Second, place of incorporation - a criterion deemed quite important to defenders of current chapter 11 venue laws - bears little or no weight in forum selection by the Judicial Panel on Multidistrict Litigation, another complex litigation setting. Third, the procedural justice literature offers important insights about what is at stake when corporate reorganizations routinely take place far away from the people deeply affected by them.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"6 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-09-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126369839","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
The financial sector has by now mostly sprung back from the crisis that began in 2007, as have corporate profits; but the labor market still sags, mortgage credit is scarce, and the future prospects for the economy, while not bleak, are not rosy either. Seeing this ongoing harm to the real economy caused by financial activities, Congress enacted the Dodd-Frank Act (“Act”) with an eye to limiting future financial instability. The Act hopes to do this by updating financial regulation and creating better incentives for the private sector.To see how the crisis developed and whether the Act will work, we need to understand how financial instability develops in capitalist market systems like ours. Economist Hyman Minsky claimed that the financial sector in capitalist market systems tends to chase returns by gorging on risk until its own financial structure becomes unstable, leading to a crisis like the last one that started in 2007. The claim – known as the financial instability hypothesis – merits our attention because, though critical of the financial sector, evidence for it is derived from observing how banks actually operate over the business cycle.I use the hypothesis in Part I to show what animated the last corporate leverage cycle: escalating expectations for profit financed on progressively riskier credit terms. In fact, the hypothesis thesis belongs to a larger critique of conceptual approaches that deny the intrinsic instability of capitalist market systems, so I also use Minsky’s work to challenge claims made by nabobs of neoliberal negativism who are resisting the implementation of the Act. Part II addresses two aspects of the Act that bear directly on how the financial sector creates potentially destabilizing liabilities: (i) new requirements that leverage caused by financial swaps be margined and cleared; and (ii) a new mandate that federal regulatory capital requirements go in the opposite direction of the boom-bust dynamics characteristic of the business cycle.
{"title":"Dodd-Frank, Liability Structure, and Financial Instability Cycles: Neither a (Ponzi) Borrower Nor a Lender Be","authors":"Joseba Gabilondo","doi":"10.2139/SSRN.1914790","DOIUrl":"https://doi.org/10.2139/SSRN.1914790","url":null,"abstract":"The financial sector has by now mostly sprung back from the crisis that began in 2007, as have corporate profits; but the labor market still sags, mortgage credit is scarce, and the future prospects for the economy, while not bleak, are not rosy either. Seeing this ongoing harm to the real economy caused by financial activities, Congress enacted the Dodd-Frank Act (“Act”) with an eye to limiting future financial instability. The Act hopes to do this by updating financial regulation and creating better incentives for the private sector.To see how the crisis developed and whether the Act will work, we need to understand how financial instability develops in capitalist market systems like ours. Economist Hyman Minsky claimed that the financial sector in capitalist market systems tends to chase returns by gorging on risk until its own financial structure becomes unstable, leading to a crisis like the last one that started in 2007. The claim – known as the financial instability hypothesis – merits our attention because, though critical of the financial sector, evidence for it is derived from observing how banks actually operate over the business cycle.I use the hypothesis in Part I to show what animated the last corporate leverage cycle: escalating expectations for profit financed on progressively riskier credit terms. In fact, the hypothesis thesis belongs to a larger critique of conceptual approaches that deny the intrinsic instability of capitalist market systems, so I also use Minsky’s work to challenge claims made by nabobs of neoliberal negativism who are resisting the implementation of the Act. Part II addresses two aspects of the Act that bear directly on how the financial sector creates potentially destabilizing liabilities: (i) new requirements that leverage caused by financial swaps be margined and cleared; and (ii) a new mandate that federal regulatory capital requirements go in the opposite direction of the boom-bust dynamics characteristic of the business cycle.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"48 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-08-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"125947123","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Purpose – During the period 2006-2010, 49 finance companies collapsed or entered moratoriums, owing investors in excess of $8 billion, and the fingers of blame continue to point in circles. The blame for this tremendous financial crisis is extensive and a consolidation of arguments is essential for the wider understanding of the topic and to put responsibilities into perspective. A part of this paper is to recognise who can and is being held legally responsible for investors’ sake, and also identify parties who have failed their responsibilities. We believe in some way these findings will help avoid a similar crisis in the future and resolve a still commonly blurred line in public opinion. Methodology/Approach – This paper is based on a review of prior studies, publicly available information, media and government reports on the topics contributory to the financial companies collapse. We question the degrees of responsibility of a number of variables including but not limited to: Financial Advisors, The Securities Commission, the effectiveness of bond covenants (and trustee companies), Auditors, GAAP and of course corporate governance. Findings – Discussed the main contributors to the collapse from authorities in the field and with applicable examples. We have highlight the major issues created by corporate governance being the most direct cause of company failure, while defining to what degree more secondary responsibility to failures contributed to the actual company collapse as opposed to simply failing their responsibilities to individuals or the public. Implications – Create a better understanding for readers through consolidated ideas of causes of the finance company collapses in New Zealand. Value – This paper highlight the differences between: how specific factors directly caused companies to collapse, and where these factors failed to protect individuals and the public from the financial crisis. Therefore our results have interest for accounting standard setters, auditors, policy makers and regulatory bodies. Further, it is argued that these factors are not unique to New Zealand but have relevance globally.
{"title":"Causes of New Zealand Finance Company Collapses: A Brief Review","authors":"Noel Yahanpath, J. Cavanagh","doi":"10.2139/SSRN.1906923","DOIUrl":"https://doi.org/10.2139/SSRN.1906923","url":null,"abstract":"Purpose – During the period 2006-2010, 49 finance companies collapsed or entered moratoriums, owing investors in excess of $8 billion, and the fingers of blame continue to point in circles. The blame for this tremendous financial crisis is extensive and a consolidation of arguments is essential for the wider understanding of the topic and to put responsibilities into perspective. A part of this paper is to recognise who can and is being held legally responsible for investors’ sake, and also identify parties who have failed their responsibilities. We believe in some way these findings will help avoid a similar crisis in the future and resolve a still commonly blurred line in public opinion. Methodology/Approach – This paper is based on a review of prior studies, publicly available information, media and government reports on the topics contributory to the financial companies collapse. We question the degrees of responsibility of a number of variables including but not limited to: Financial Advisors, The Securities Commission, the effectiveness of bond covenants (and trustee companies), Auditors, GAAP and of course corporate governance. Findings – Discussed the main contributors to the collapse from authorities in the field and with applicable examples. We have highlight the major issues created by corporate governance being the most direct cause of company failure, while defining to what degree more secondary responsibility to failures contributed to the actual company collapse as opposed to simply failing their responsibilities to individuals or the public. Implications – Create a better understanding for readers through consolidated ideas of causes of the finance company collapses in New Zealand. Value – This paper highlight the differences between: how specific factors directly caused companies to collapse, and where these factors failed to protect individuals and the public from the financial crisis. Therefore our results have interest for accounting standard setters, auditors, policy makers and regulatory bodies. Further, it is argued that these factors are not unique to New Zealand but have relevance globally.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"42 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-08-08","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"126570503","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper discusses the causes and impacts of the financial crisis of 2007–2010 and examines the reforms aimed at the prevention of its recurrence. The causes to be discussed include housing and commodity bubbles, easy credit conditions, subprime lending, predatory lending, deregulation and lax regulation, incorrect risk pricing, collapse of the shadow banking system and systemic risk. The impacts to be examined include the major financial institutions, the financial wealth, the economies of the U.S. and other countries — Iceland, Hungary, Russia, Spain, Ukraine, Dubai, and Greece. The paper further discusses emergency policy responses, principles of financial reforms and various regulatory proposals. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Basel III accord are also discussed. Concluding remarks provide a brief discussion of the latest economic problems in 2011.
{"title":"Financial Crisis of 2007-2010","authors":"Winston W. Chang","doi":"10.2139/SSRN.1738486","DOIUrl":"https://doi.org/10.2139/SSRN.1738486","url":null,"abstract":"This paper discusses the causes and impacts of the financial crisis of 2007–2010 and examines the reforms aimed at the prevention of its recurrence. The causes to be discussed include housing and commodity bubbles, easy credit conditions, subprime lending, predatory lending, deregulation and lax regulation, incorrect risk pricing, collapse of the shadow banking system and systemic risk. The impacts to be examined include the major financial institutions, the financial wealth, the economies of the U.S. and other countries — Iceland, Hungary, Russia, Spain, Ukraine, Dubai, and Greece. The paper further discusses emergency policy responses, principles of financial reforms and various regulatory proposals. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and the Basel III accord are also discussed. Concluding remarks provide a brief discussion of the latest economic problems in 2011.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"7 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-06-30","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115102862","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This paper studies the relationship between domestic financial regulation and the incentive of non-banks to borrow from banks abroad using BIS banking data in a gravity framework. Conditional on a large set of macroeconomic controls, we find that under tighter domestic financial regulation non-banks borrow more abroad. Non-banks in a country on the upper quartile of a financial deregulation index borrow 21%–28% more than non-banks in a country with minimum regulation. The finding also holds for more disaggregated regulation measures. Interest rate controls and entry barriers to the banking sector are the most relevant types of regulation. The results in this paper indicate that international borrowing and lending is a prominent element to be taken into account in designing financial stability tools.
{"title":"Domestic Financial Regulation and External Borrowing","authors":"Sergi Lanau","doi":"10.2139/ssrn.1856118","DOIUrl":"https://doi.org/10.2139/ssrn.1856118","url":null,"abstract":"This paper studies the relationship between domestic financial regulation and the incentive of non-banks to borrow from banks abroad using BIS banking data in a gravity framework. Conditional on a large set of macroeconomic controls, we find that under tighter domestic financial regulation non-banks borrow more abroad. Non-banks in a country on the upper quartile of a financial deregulation index borrow 21%–28% more than non-banks in a country with minimum regulation. The finding also holds for more disaggregated regulation measures. Interest rate controls and entry barriers to the banking sector are the most relevant types of regulation. The results in this paper indicate that international borrowing and lending is a prominent element to be taken into account in designing financial stability tools.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"24 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-05-31","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"115086330","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
Many recent articles written by U.S. legal practitioners and law scholars in the wake of the financial crisis address regulatory reforms included in or omitted from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related agency initiatives. In contrast, this article focuses on institutional reforms - specifically those instituted at the U.S. Securities and Exchange Commission (SEC) since President Barack Obama took office in January 2009. In an article published in the Villanova Law Review last year, I assessed the early reform efforts at the SEC in the Obama era from the vantage point of change leadership literature (a branch of business management scholarship). This article updates the preliminary findings reported in the Villanova Law Review article in light of the enactment and initial phases of implementation of the Dodd-Frank Act (which was in the final stages of congressional action when work on the Villanova Law Review article was completed in the spring of 2010) and the subsequent change in the composition of Congress as a result of the mid-term elections in November 2010. The article begins by identifying and assessing ongoing evidence of effective change leadership at the SEC in accordance with the framework used in my earlier article and continues by briefly addressing the potential effects of shortfalls in SEC funding. The article then concludes by making tentative predictions about the future of institutional reform at the SEC in this new political environment.
金融危机之后，美国法律从业者和法律学者最近撰写的许多文章都涉及《多德-弗兰克华尔街改革和消费者保护法案》(多德-弗兰克法案)和相关机构倡议中包含或遗漏的监管改革。相比之下，本文关注的是机构改革，特别是自2009年1月奥巴马总统上任以来美国证券交易委员会(SEC)实施的改革。在去年发表在《维拉诺瓦法律评论》(Villanova Law Review)上的一篇文章中，我从变革领导文学(企业管理学术的一个分支)的角度，评估了奥巴马时代SEC早期的改革努力。本文根据《多德-弗兰克法案》的颁布和实施的初始阶段(《维拉诺瓦法律评论》的文章于2010年春季完成时，《多德-弗兰克法案》正处于国会行动的最后阶段)以及2010年11月中期选举导致的国会组成的变化，更新了《维拉诺瓦法律评论》文章中报道的初步调查结果。本文首先根据我之前文章中使用的框架，识别和评估美国证券交易委员会有效变革领导的持续证据，并继续简要解决美国证券交易委员会资金短缺的潜在影响。文章最后对SEC在这种新的政治环境下的制度改革前景进行了初步预测。
{"title":"Sustaining Reform Efforts at the SEC: A Progress Report","authors":"Joan Macleod Heminway","doi":"10.2139/SSRN.1859045","DOIUrl":"https://doi.org/10.2139/SSRN.1859045","url":null,"abstract":"Many recent articles written by U.S. legal practitioners and law scholars in the wake of the financial crisis address regulatory reforms included in or omitted from the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and related agency initiatives. In contrast, this article focuses on institutional reforms - specifically those instituted at the U.S. Securities and Exchange Commission (SEC) since President Barack Obama took office in January 2009. In an article published in the Villanova Law Review last year, I assessed the early reform efforts at the SEC in the Obama era from the vantage point of change leadership literature (a branch of business management scholarship). This article updates the preliminary findings reported in the Villanova Law Review article in light of the enactment and initial phases of implementation of the Dodd-Frank Act (which was in the final stages of congressional action when work on the Villanova Law Review article was completed in the spring of 2010) and the subsequent change in the composition of Congress as a result of the mid-term elections in November 2010. The article begins by identifying and assessing ongoing evidence of effective change leadership at the SEC in accordance with the framework used in my earlier article and continues by briefly addressing the potential effects of shortfalls in SEC funding. The article then concludes by making tentative predictions about the future of institutional reform at the SEC in this new political environment.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"86 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2011-04-01","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121271131","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
This chapter adopts a political approach to explain the philosophy and practice of securities regulation in China in the context of the unique developmental path of the country’s economic and political systems. It argues that securities regulation in China is part of the Chinese government’s political legitimacy management effort. For this reason, government regulation of securities market in China shall not be understood merely as economic regulation. Seen in a broader picture, securities regulation is a government-controlled process to rebuild and maintain political legitimacy of the Chinese state. This explains, in part, the often-conflicting regulatory objectives and self-contradictory regulatory practices in the Chinese securities market. In this endeavor, the paper also borrows some elements from the public interest and public choice theories which offer some powerful explanatory tools for use in the Chinese case.
{"title":"The Political Logic of Securities Regulation in China","authors":"Jiangyu Wang","doi":"10.2139/SSRN.1729089","DOIUrl":"https://doi.org/10.2139/SSRN.1729089","url":null,"abstract":"This chapter adopts a political approach to explain the philosophy and practice of securities regulation in China in the context of the unique developmental path of the country’s economic and political systems. It argues that securities regulation in China is part of the Chinese government’s political legitimacy management effort. For this reason, government regulation of securities market in China shall not be understood merely as economic regulation. Seen in a broader picture, securities regulation is a government-controlled process to rebuild and maintain political legitimacy of the Chinese state. This explains, in part, the often-conflicting regulatory objectives and self-contradictory regulatory practices in the Chinese securities market. In this endeavor, the paper also borrows some elements from the public interest and public choice theories which offer some powerful explanatory tools for use in the Chinese case.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"23 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-12-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"121180516","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
During the financial crisis of 2007-08 and the debates on regulatory reform that followed, there was general agreement that the “too-big-to-fail” principle creates unacceptable moral hazard. Policy makers divided, however, on the solutions to this problem. Some argued that the banking behemoths in the United States should be broken up. Others argued that dismantling the big banks would be bad policy because these banks would not be able to compete with universal banks in the global capital markets, and in any event, breaking up the banks would be impossible as a practical matter. Therefore, better regulation was the right solution. This approach was generally followed in the financial reform legislation (“Dodd-Frank”) that was passed. Yet voices in favor of a return to the Glass-Steagall Act of 1933 wall between commercial and investment banking, or using some other techniques for curtailing risky bank activities, continue to be heard and studied. Therefore, further inquiry concerning the question of whether and how the big financial institutions should be curtailed remains relevant, even after the passage of Dodd-Frank. In the past, the United States has taken a variety of approaches to reining in banks. These include capital constraints, geographical restrictions, activities restrictions and conflict of interest restrictions. The primary techniques for reining in big banks considered by Congress or financial regulators in current regulatory reform efforts are increasing capital requirements, taxing financial transactions and walling off proprietary trading and/or derivatives trading from commercial banking. In addition, the reform legislation will put into place a resolution regime for failed financial institutions. All of these approaches are discussed in this Article.One approach that has not been tried or even seriously discussed with regard to the big banks is the approach that was used to break up the utility pyramids created during the 1920s, that is the antitrust approach utilized in the Public Utility Holding Company Act of 1935. This targeted and highly effective regulatory framework empowered the Securities and Exchange Commission (“SEC”) to dismantle and simplify the corporate structures of the utilities without destroying them. This program was so successful that even after it was essentially completed the statute and SEC regulation of utilities remained on the books until quite recently. This article argues that this approach should be considered as a solution to the too-big-to-fail problem since it combines deconcentration, capital limits, activities restrictions and conflict of interest restrictions as an alternative to antitrust regulation, outside of adversarial prosecutorial case development.
{"title":"Is the Public Utility Holding Company Act a Model for Breaking Up the Banks that are Too-Big-to-Fail?","authors":"R. Karmel","doi":"10.2139/ssrn.1680887","DOIUrl":"https://doi.org/10.2139/ssrn.1680887","url":null,"abstract":"During the financial crisis of 2007-08 and the debates on regulatory reform that followed, there was general agreement that the “too-big-to-fail” principle creates unacceptable moral hazard. Policy makers divided, however, on the solutions to this problem. Some argued that the banking behemoths in the United States should be broken up. Others argued that dismantling the big banks would be bad policy because these banks would not be able to compete with universal banks in the global capital markets, and in any event, breaking up the banks would be impossible as a practical matter. Therefore, better regulation was the right solution. This approach was generally followed in the financial reform legislation (“Dodd-Frank”) that was passed. Yet voices in favor of a return to the Glass-Steagall Act of 1933 wall between commercial and investment banking, or using some other techniques for curtailing risky bank activities, continue to be heard and studied. Therefore, further inquiry concerning the question of whether and how the big financial institutions should be curtailed remains relevant, even after the passage of Dodd-Frank. In the past, the United States has taken a variety of approaches to reining in banks. These include capital constraints, geographical restrictions, activities restrictions and conflict of interest restrictions. The primary techniques for reining in big banks considered by Congress or financial regulators in current regulatory reform efforts are increasing capital requirements, taxing financial transactions and walling off proprietary trading and/or derivatives trading from commercial banking. In addition, the reform legislation will put into place a resolution regime for failed financial institutions. All of these approaches are discussed in this Article.One approach that has not been tried or even seriously discussed with regard to the big banks is the approach that was used to break up the utility pyramids created during the 1920s, that is the antitrust approach utilized in the Public Utility Holding Company Act of 1935. This targeted and highly effective regulatory framework empowered the Securities and Exchange Commission (“SEC”) to dismantle and simplify the corporate structures of the utilities without destroying them. This program was so successful that even after it was essentially completed the statute and SEC regulation of utilities remained on the books until quite recently. This article argues that this approach should be considered as a solution to the too-big-to-fail problem since it combines deconcentration, capital limits, activities restrictions and conflict of interest restrictions as an alternative to antitrust regulation, outside of adversarial prosecutorial case development.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"180 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-09-22","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"123629892","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
"Control frauds" are seemingly legitimate entities controlled by persons that use them as a fraud "weapon." (The person that controls the firm is typically the CEO, so that term is used in this testimony.) A single control fraud can cause greater losses than all other forms of property crime combined. Neo-classical economic theory, methodology, and praxis combine to optimize criminogenic environments that hyper-inflate financial bubbles and produce recurrent, intensifying financial crises. A criminogenic environment is one that creates such perverse incentives that it leads to widespread crime. Financial control frauds’ "weapon of choice" is accounting. Neoclassical theory, which dominates law & economics, is criminogenic because it assumes that control fraud cannot exist while recommending legal policies that optimize an industry for control fraud. Its hostility to regulation, endorsement of opaque assets that lack readily verifiable market values, and support for executive compensation that creates perverse incentives to engage in accounting control fraud and optimizes fraudulent CEOs’ ability to convert firm assets to the CEO’s personal benefit have created a nearly perfect crime. Studies have shown that control fraud was invariably present at the typical large S&L failure. There is a consensus about the decisive role of control fraud in the Enron era frauds. The FBI began testifying publicly in September 2004 that there was an epidemic of mortgage fraud and predicting that it would cause an economic crisis if it were not contained. Similar widescale control frauds have driven financial crises in other nations. It is astounding, therefore, that neo-classical economists overwhelmingly ignore even the possibility of control fraud in the current crisis.
{"title":"Testimony Before the Financial Crisis Inquiry Commission, Miami, Florida September 21, 2010","authors":"W. Black","doi":"10.2139/ssrn.1729344","DOIUrl":"https://doi.org/10.2139/ssrn.1729344","url":null,"abstract":"\"Control frauds\" are seemingly legitimate entities controlled by persons that use them as a fraud \"weapon.\" (The person that controls the firm is typically the CEO, so that term is used in this testimony.) A single control fraud can cause greater losses than all other forms of property crime combined. Neo-classical economic theory, methodology, and praxis combine to optimize criminogenic environments that hyper-inflate financial bubbles and produce recurrent, intensifying financial crises. A criminogenic environment is one that creates such perverse incentives that it leads to widespread crime. Financial control frauds’ \"weapon of choice\" is accounting. Neoclassical theory, which dominates law & economics, is criminogenic because it assumes that control fraud cannot exist while recommending legal policies that optimize an industry for control fraud. Its hostility to regulation, endorsement of opaque assets that lack readily verifiable market values, and support for executive compensation that creates perverse incentives to engage in accounting control fraud and optimizes fraudulent CEOs’ ability to convert firm assets to the CEO’s personal benefit have created a nearly perfect crime. Studies have shown that control fraud was invariably present at the typical large S&L failure. There is a consensus about the decisive role of control fraud in the Enron era frauds. The FBI began testifying publicly in September 2004 that there was an epidemic of mortgage fraud and predicting that it would cause an economic crisis if it were not contained. Similar widescale control frauds have driven financial crises in other nations. It is astounding, therefore, that neo-classical economists overwhelmingly ignore even the possibility of control fraud in the current crisis.","PeriodicalId":309706,"journal":{"name":"CGN: Governance Law & Arrangements by Subject Matter (Topic)","volume":"79 1","pages":"0"},"PeriodicalIF":0.0,"publicationDate":"2010-09-21","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":null,"resultStr":null,"platform":"Semanticscholar","paperid":"133846399","PeriodicalName":null,"FirstCategoryId":null,"ListUrlMain":null,"RegionNum":0,"RegionCategory":"","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":"","EPubDate":null,"PubModel":null,"JCR":null,"JCRName":null,"Score":null,"Total":0}
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