Working Papers 351-400
351. Excuse Doctrine: The Eisenberg Uncertainty Principle, (Goldberg, Victor P.)
Professor Mel Eisenberg argued in a recent paper for an expansion of the excuse doctrines. ; He argues that performance should be excused in those instances when parties tacitly assume that a given kind of circumstance will not occur during the contract time (the shared-assumption test). ; In addition, he argues that there should be a partial excuse when a change in prices would be sufficiently large to leave the promisor with a loss significantly greater than would have reasonably been expected (the bounded-risk test). ; This paper questions his first proposition by re-examining the Coronation cases and Taylor v Caldwell. ;His bounded-risk analysis is badly flawed, resting on a dubious proposition, inconsistent with the cases he relies on, and, most importantly, recognizing the wrong set of circumstances in which parties would choose to limit their exposure to large cost changes http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1436493
352. Letter to the SEC on Money Market Fund Reform, (Gordon, Jeffrey N.)
In the wake of the near-calamitous run on Money Market Funds during last fall’s financial meltdown that produced, among other things, an emergency Treasury deposit guarantee program, the SEC has recently proposed a modest set of reforms. ; The reform package aims to improve the quality of MMF portfolio securities, shorten maturities, enhance portfolio liquidity, and provide a smoother resolution process for occasions when an MMF has “busted the buck.” ; ; The Comment Letter argues that the SEC has failed to grapple with the fundamental problems with MMFs revealed by last fall’s financial crisis ; and, in the main, its proposals will exacerbate systemic fragility, not reduce it. ; ; It is widely appreciated that MMF holders receive an unpaid-for benefit through an implicit, if imperfect, government guarantee of their accrued balances. ; The flaw with the SEC’s approach is that the regulatory effort to substitute for explicit deposit insurance and to limit the implicit subsidy through restrictions on MMF portfolios adds systemic risk to financial intermediation by heightening the pressure on short-term money markets in the critical function of maturity transformation. ;This flaw turns out to be fundamental and requires a rethinking of the general MMF framework. ;
Barring such a wholesale rethinking, a minimum reform strategy should begin with a sharp division between MMFs sold to retail investors, “retail MMFs,” and those that are sold ; to corporations, life insurers, pension funds and other large purchasers, “institutional MMFs.” ; The retail MMF is a risk-free (but higher yielding) substitute for a bank account covered by deposit insurance. ; The institutional MMF is a low-cost specialized provider of a corporate treasury function, a substitute for business entities’ own assembly of a money market portfolio. ; Retail MMFs should be covered by deposit insurance that is funded by risk-adjusted premiums. ; Institutional MMFs should give up the promise of a fixed NAV, and disclosure rules should replace mandatory portfolio composition rules. ; These changes will reduce the systemic risk created by the present MMF regulatory structure both by reducing the risk of “runs” and by reducing distortions in short term credit markets. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1473275
354. Banking Reform in the Chinese Mirror, (Pistor, Katharina)
This paper analyzes the transactions that led to the partial privatization of China’s three largest banks in 2005-06. It suggests that these transactions were structured to allow for inter-organizational learning under conditions of uncertainty. For the involved foreign investors, participation in large financial intermediaries of central importance to the Chinese economy gave them the opportunity to learn about financial governance in China. For the Chinese banks partnering with more than one foreign investor, their participation allowed them to benefit from the input by different players in the global financial market place and to learn from the range of technical and governance expertise offered. This model of bank reform contrasts with the privatization strategies pursued in Latin America and Central and Eastern Europe throughout the 1990s. These different experiences stand for alternative strategies of bank reform - one that relies on top down changes of the rules of the game; another that focuses on inter-organizational learning via observation. It suggests that the latter model may be superior under conditions of uncertainty. The paper discusses the costs and benefits of these alternative models in the context of the global financial crisis. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1446930
355. Into the Void; Governing Finance in Central & Eastern Europe, (Pistor, Katharina)September 22, 2009
Twenty years after the fall of the iron curtain, which for decades had separated East from West, many countries of Central and Eastern Europe (CEE) are now members of the European Union and some have even adopted the Euro. Their readiness to open their borders to foreign capital and their faith in the viability of market self-governance as well as supra-national governance of finance is both remarkable and almost unprecedented. The eagerness of the countries in CEE to join the West and to become part of a regional and global regime as a way of escaping their closeted socialist past has both benefited and harmed them. There is little doubt that joining the EU and opening to the rest of the world has helped transform these economies at a pace that otherwise would have been unthinkable. Yet, as the global financial crisis reveals, these countries have also remained exceptionally vulnerable to shocks, including those that originate beyond their sphere of influence. This paper looks for explanations in the governance of finance, i.e. the allocation of de jure and de facto responsibilities over financial systems. It argues that as recipient countries of massive capital inflows CEE countries have largely relinquished policy tools to protect their economies and societies against a financial melt down or to respond effectively in a crisis. The policy choices they made – opening their boarders to capital inflows, limiting regulatory oversight by relying on home country regulators of foreign banks, etc. - were aimed at integrating them into the European and the global financial systems. A frequently overlooked side effect of these policies’ cumulative effect has been that they find themselves once more on the periphery - dependent on the goodwill of multilateral organizations over which they have little sway. The paper discusses two strategies to improve the governance of finance in CEE: A European regulator and the assertion of effect-based regulatory jurisdiction over foreign bank activities. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1476889
356. Preventive Adjudication, (Bray, Samuel L.)October 6, 2009, Forthcoming, ; 77 U. Chi. L. Rev.
This Article identifies, justifies, and explains the parameters of a largely ignored but important category of cases - what is here called “preventive adjudication.” In this category of cases, courts offer opinions without any “command” to the parties, and these opinions are meant to avoid future harm, not remedy past harm. Despite receiving little attention in the legal literature, preventive adjudication is pervasive throughout law. It happens in declaratory judgment actions about wills, patents, and unconstitutionally vague statutes; in paternity and maternity petitions; in petitions to have missing persons declared dead; in boundary disputes; in actions to quiet title. This Article explains what preventive adjudication is and how it should and should not be used.Preventive adjudication is intuitively appealing, because it helps people avoid harm and clarifies the law. But there are downsides to deciding cases in advance instead of waiting for remedial adjudication. The argument for preventive adjudication is therefore a qualified one. This Article identifies not only the merits of preventive adjudication but also the crucial limiting principles. One limiting principle is administrative and error costs; another is the adequacy of discounting, i.e., taking into account the uncertainty of future events. People discount for many kinds of uncertainty, and discounting is usually adequate for uncertainty caused by law. But discounting is inadequate when the law causes uncertainty about inescapable threshold questions for human behavior, such as legal parenthood, citizenship, marital status, or death. Discounting is also inadequate for uncertainty about property rights, because uncertainty undermines the policy reasons for having property rules in the first place. Where discounting is inadequate, preventive adjudication is especially valuable.This Article also shows how this normative understanding of preventive adjudication can be translated into the actual practice of courts in the United States. Legal systems in the United States have two ways of determining which cases should be decided by preventive adjudication: sometimes they rely on judicial discretion to decide if preventive adjudication is appropriate in each case (“retail sorting”); and sometimes they specify categories of cases in which preventive adjudication is available (“wholesale sorting”). An analysis of both approaches shows that wholesale sorting - which is common in state courts but almost unknown in federal courts - better aligns the actual practice of preventive adjudication with the cases in which it is justifiable. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1483859
357. Hoffman v. Red Owl Stores and the Limits of the Legal Method, (Scott, Robert E.)November 9, 2009
According to the overwhelming majority view, promissory estoppel is not an appropriate ground for legally enforcing statements made during preliminary negotiations unless there is a “clear and unambiguous promise” on which the counterparty reasonably and foreseeably relies. Bill Whitford and Stewart Macaulay were among the first scholars to note the apparent absence of such a promise in the case of Hoffman v. Red Owl Stores. Several years ago, after studying the trial record, I concluded that the best explanation for the breakdown in negotiations was the fundamental misunderstanding between the parties as to the amount and nature of Hoffmann’s equity contribution to the franchise. After locating and interviewing Hoffmann, Whitford and Macaulay tell a different story. They view as insignificant the misunderstanding about the nature of Hoffmann’s equity contribution. Rather, they focus attention on additional statements urging Hoffmann to sell his bakery business and store. In these later statements, ignored by the Wisconsin Supreme Court, they find the “missing promise” that they challenged all of us to look for years ago. While I credit their account, I remain as unconvinced by their story as they are of mine. Thus, the important question is how scholars could draw such different inferences from the same basic facts. In this Essay, I speculate that the different stories are a product of our respective methodological commitments: their commitment to a law and society approach to legal issues and mine to law and economics modes of analysis. Those diverse approaches illustrate the tension between “context” and “theory” and the inherent paradox of legal analysis: without context no legal rule can be applied, but with nothing but context no legal rule can be found. For this reason, I conclude, it is important for legal academics of every stripe to appreciate the biases inherent in their methodology of choice and work to correct for them http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1494463
358. Free Enterprise Fund v. Public Company Accountng Oversight Board (Strauss, L. Peter)Vanderbilt Law Review En Banc, Vol. 62, p. 51, 2009
This is the introductory essay in an electronically published roundtable sponsored by the Vanderbilt Law Review on the Supreme Court's forthcoming consideration of Free Enterprise Fund v. Public Company Accounting Oversight Board, a case raising important separation of powers questions and thought by some to foreshadow overruling or limiting of such precedents as Humphrey's Executor v. United States (sustaining independent regulatory commissions) and Morrison v. Olson (sustaining the independent counsel). The PCAOB is an unusual independent government authority appointed by the Commissioners of the SEC and subject to its oversight; PCAOB members are only by the Commission, and only for one of several defined causes. This essay is intended to "set the table" for competing essays by other scholars, that will appear in November. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1442879
359. Litigation Governance: Taking Accountability Seriously (Coffee, Jr. John C.)November 9, 2009
Both Europe and the United States are rethinking their approach to aggregate litigation. In the United States, class actions have long been organized around an entrepreneurial model that uses economic incentives to align the interest of the class attorney with those of the class. But increasingly, potential class members are preferring exit to voice, suggesting that the advantages of the U.S. model may have been overstated. In contrast, Europe has long resisted the U.S.’s entrepreneurial model, and the contemporary debate in Europe centers on whether certain elements of the U.S. model – namely, opt-out class actions, contingent fees, and the “American rule” on fee shifting – must be adopted in order to assure access to justice. Because legal transplants rarely take, this Essay offers an alternative “non-entrepreneurial model” for aggregate litigation that is consistent with European traditions. Relying less on economic incentives, it seeks to design a representative plaintiff for the class action who would function as a true “gatekeeper,” pledging its reputational capital to assure class members of its loyal performance. Effectively, this model marries aspects of U.S. “public interest” litigation with existing European class action practice. Examining the differences between U.S. and European practice, this Essay argues none of these differences are dispositively prohibitive and that functional substitutes, including an opt-in class action and third party funding, could be engineered so as to yield roughly comparable results. Although the two systems might perform similarly in terms of compensation, the ultimate question, it argues, is the degree to which a jurisdiction wishes to authorize and arm a private attorney general to pursue deterrence for profit. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1503513
360. Contract Interpretation Redux (Schwartz, Alan and Robert E. Scott)November 11, 2009, Forthcoming 119 Yale L.J. (2010)
Contract interpretation remains the largest single source of contract litigation between business firms. In part this is because contract interpretation issues are difficult, but it also reflects a deep divide between textualist and contextualist theories of interpretation. While a strong majority of U.S. courts continue to follow the traditional, Aformalist@ approach to contract interpretation, some courts and most commentators prefer the Acontextualist@ interpretive principles as exemplified by the Uniform Commercial Code and the Second Restatement. In 2003, we published an article that set out a theory of contract interpretation to govern agreements between business firms. In that article, we support a formalist theory of contract interpretation. Our article has prompted a number of anti-formalist responses. In our article we argued that, although accurate judicial interpretations are desirable, accurate interpretations are costly for parties and courts to obtain. Thus, any socially desirable interpretive rule would trade accuracy off against contract writing and adjudication cost. This trade-off implies that risk neutral business parties will commonly prefer judicial interpretations to be made on a limited evidentiary base the most important element of which is the contract itself. But importantly, we also argued that commercial parties’ preferences along this dimension will be heterogeneous. Thus, any interpretation rules the state adopts should be defaults and the state should defer to the expressed preferences of particular parties regarding interpretation. This Review Essay clarifies and extends these arguments. We briefly summarize empirical data that support our theory, and respond to our critics. Although much academic commentary suggests otherwise, both the available evidence and prevailing judicial practice support the claim that sophisticated parties prefer textualist interpretation. Sophisticated commercial parties incur costs to cast obligations expressly in written and unconditional forms to permit a party to stand on its rights under the written contract, to improve party incentives to invest in the deal, and to reduce litigation costs. Contextualist courts and commentators prefer to withdraw from parties the ability to use these instruments for contract design. The contextualists, however, cannot justify rules that so significantly restrict contractual freedom in the name of contractual freedom. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1504223
361. Solving Global Financial Imbalances: A Plan for a World Financial Authority, (Mirandola, Carlos Mauricio)November 16, 2009
This paper will propose a plan to reform international finance – the World Financial Authority (WFA) Plan. Under such a plan, the IMF and other existing international financial institutions would be reformed and coordinated around a newly created WFA. The WFA would have two core functions. First, managing the international liquidity, which implies reducing externalities arising from domestic monetary policies adopted by its members, and dealing with global liquidity problems involving financial activities of transnational private banks. Second, helping countries to make their domestic monetary policies more effective, regaining traction and preventing contagion. A central instrument to this end is the creation of the World Financial Unit (WFU), an international currency unit conceived as a synthetic security backed by reserves composed of currencies surrendered to the WFA by member countries. The WFA is being thought as a device to support the financial globalization, as well as helping governments to maintain their power to manage the domestic macroeconomic conditions, contain externalities, align incentives, and allow for more responsible policies. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1507286
362. Is the Bankruptcy Code an Adequate Mechanism for Resolving the Distress of Systemically Important Institutions? (Morrison, Edward R.)December 30, 2009
Lehman’s bankruptcy has triggered calls for new approaches to rescuing systemically important institutions. This essay assesses and confirms the need for a new approach. It identifies the inadequacies of the Bankruptcy Code and advocates an approach modeled on the current regime governing commercial banks. That regime includes both close monitoring when a bank is healthy and aggressive intervention when it is distressed. The two tasks - monitoring and intervention - are closely tied, ensuring that intervention occurs only when there is a well-established need for it. The same approach should be applied to all systemically important institutions. President Obama and the Congress are now considering such an approach, though it is unclear whether it will establish a sufficiently close connection between the power to intervene and the duty to monitor. The proposed legislation is unwise if it gives the government power to seize an institution regardless of whether it was previously subject to monitoring and other regulations. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1529802
363. Dispersed Ownership: The Theories, The Evidence, and the Enduring Tension Between "Lumpers" and "Splitters," (Coffee, Jr. John C.)January 7, 2010
From a global perspective, the single most noticeable fact about corporate governance is the radical dichotomy between dispersed ownership and concentrated ownerships systems, with the latter being much in the majority. Several prominent academics have offered grand theories to explain when dispersed share ownership arises, which have emphasized either legal or political preconditions. Nonetheless, mounting evidence suggests that these theories are overgeneralized and, in particular, do not account for the appearance (to varying degrees) of dispersed ownership in all securities markets. This article concludes that neither legal rules nor political conditions can adequately explain the spread of dispersed ownership across both the U.S. and the U.K., which developments occurred at different times, in different political and legal environments, and were precipitated by different exogenous factors. Instead, this article offers an alternative and simpler explanation: dispersed ownership arises principally from private ordering, with legal rules playing a minor role at best. Intermediaries – investment bankers, stock exchanges, and others – fill the void created by legal shortcomings and create bonding mechanisms that allow dispersed ownership to spread beyond the limited geographic area in which the founding entrepreneur is known and trusted. This process has two steps: (1) the appearance of numerous minority shareholders, gradually spreading across a broad geographic area, and (2) the break-up of controlling blocks. At the latter stage, historical contingencies have played a major role. In the United States, the merger boom of the 1890s played a critical role, and in the U.K. punitive tax changes compelled controlling shareholders to sell. The only common denominators across the two countries were: (1) political changes followed once share ownership dispersion was achieved, as law followed the market; and (2) private ordering and self-regulation encouraged minority owners to invest and protected their voting and control rights. This may suggest that in decentralized political economies (in which political and economic power tend to be separated and in which self-regulation is more common, such as the U.S. and the U.K.), dispersed ownership is more likely to arise, but it can arise for individual firms through private ordering in any market. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1532922
364. Short Selling and the News: A Preliminary Report on an Empirical Study, (Fox, Merritt B., Lawrence R. Glosten and Paul C. Tetlock)January 25, 2010
This paper examines the so far unexplored relationship between short selling and news. It starts with a theoretical analysis of short selling’s potentially beneficial and harmful effects, a brief history of its regulation and a review of the existing empirical literature. The study that follows uses daily NYSE short sale trading data representing a total of 2.3 million firm days and a measure negativity of firm news based on a content analysis of the Dow Jones Newswires. One major finding is that on trading days when there is an abnormally high level of short selling, there is a heightened level of negative news about the issuer in the non-trading hours that follow. A second finding is that where an issuer is the subject of negative news in the non-trading hours between one trading day and the next, the share price reaction when trading resumes is less pronounced where there has been an abnormally high level of short selling the day before. An analysis of our findings suggests that three news related types of short selling - traders who sell short after obtaining confidential information that an issuer is about to make a negative announcement, traders who sell short and then spread false stories, and traders who, by collecting and analyzing publicly available data, detect that an issuer’s share price exceeds its fundamental value, sell short and then truthfully spread their conclusions - are, in the aggregate, significant relative to the total amount of short selling in the market. This aggregate significance appears to come at least in part from the true and false news spreading types of short selling, not just from short selling based on confidential information concerning an impending corporate announcement. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1543855
365. Chrysler, GM and the Future of Chapter 11 (Morrison, Edward R.)December 30, 2009
Although they caused great controversy, the Chrysler and GM bankruptcies broke no new ground. They invoked procedures that are commonly observed in modern Chapter 11 reorganization cases. Government involvement did not distort the bankruptcy process; it instead exposed the reality that Chapter 11 offers secured creditors - especially those that supply financing during the bankruptcy case - control over the fate of distressed firms. Because the federal government supplied financing in the Chrysler and GM cases, it possessed the creditor control normally exercised by private lenders. The Treasury Department found itself with virtually the same, unchecked power that the FDIC exercises with respect to failing banks. The Chrysler and GM bankruptcies are cautionary tales about Chapter 11, not about government intervention. It may be time to entertain longstanding proposals for reforming the reorganization process. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1529734
366. The Economics of Bankruptcy: An Introduction to the Literature (Morrison, Edward R.)December 30, 2009
This essay surveys important contributions to the economics of bankruptcy. It is an introductory chapter for a forthcoming volume (from Edward Elgar Press) that compiles the work of legal scholars as well as economists working in the field of corporate finance. The essay begins with the foundational theories of Baird, Jackson, and Rea and then collects scholarly work extending, testing, or revising those theories. At various points I identify questions that merit further study, particularly empirical testing. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1529822
367. Braiding: The Interaction of Formal and Informal Contracting in Theory, Practice and Doctrine (Gilson, Ronald J., Charles F. Sabel and Robert E. Scott)January 11, 2010
This article studies the relationship between formal contract enforcement, where performance is encouraged by the prospect of judicial intervention, and informal enforcement, where performance is motivated by the threat of lost reputation and expected future dealings or a taste for reciprocity. The incomplete contracting literature treats the two strategies as separate phenomena. By contrast, a rich experimental literature considers whether the introduction of formal contracting and state enforcement “crowds out” or degrades the operation of informal contracting. Both literatures, however, focus too narrowly on formal contracts as a system of incentives for inducing parties to perform substantive actions, while assuming that the effectiveness of informal enforcement depends on pre-existing levels of trust. As a result, current scholarship misses the relationship between formal and informal contract mechanisms characteristic of contemporary contracting in practice. Parties are responding to rising uncertainty by writing contracts that intertwine formal and informal mechanisms – what we call “braiding” – in a way that allows each to assess the disposition and capacity of the other to respond cooperatively and effectively to unforeseen circumstances. These parties agree on formal contracts for exchanging information about the progress and prospects of their joint activities, and it is this information sharing regime that “braids” the formal and informal elements of the contract and endogenizes trust. We argue that the low-powered enforcement associated with the formal governance structure in these braided contracts complements rather than crowds out the informal mechanisms that rely on increasing levels of trust. We examine the braiding phenomenon in a variety of contexts characterized by rising uncertainty. These range from the uncertainties of technological innovation to commercial ventures and corporate acquisitions where the uncertainty centers on the importance of the search for new partners. In each instance, courts appear to have harnessed the braiding phenomenon by using low-powered sanctions to protect formal contractual “preliminaries” without creating potential liability that will crowd out informal contracting. This technique allows potential collaborators to explore and develop their relations but it does not impose mutually enforceable obligations to pursue a particular project. But despite the wisdom of temperate enforcement of braided contracts, courts that emphasize the contemporary duty to negotiate in good faith are often tempted to expand the legal sanction and thereby unwittingly undermine the very informal arrangements that braided obligations are designed to support. We conclude, therefore, by explaining how courts can best support the braiding strategies that are critical to the success of an integrated regime of formal and informal contracting. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1535575
368. Regulatory Dualism as a Development Strategy: Corporate Reform in Brazil, the U.S., and the EU (Gilson, Ronald J., Henry Hansmann and Mariana Pargendler)January 23, 2010
Countries pursuing economic development confront a fundamental obstacle. Reforms that increase the size of the overall pie are blocked by powerful interests that are threatened by the growth-inducing changes. This problem is conspicuous in efforts to create effective capital markets to support economic growth. Controlling owners and managers of established firms successfully oppose corporate governance reforms that would improve investor protection and promote capital market development. In this article, we examine the promise of regulatory dualism as a strategy to diffuse the tension between future growth and the current distribution of wealth and power. Regulatory dualism seeks to mitigate political opposition to reforms by permitting the existing business elite to be governed by the old regime, while allowing other firms to be regulated by a new parallel regime that is more efficient. Regulatory dualism goes beyond similar but simpler strategies, such as grandfathering and statutory menus, by incorporating a dynamic element that is key to its effectiveness, but that requires a sophisticated approach to implementation.A paradigmatic example of regulatory dualism is offered by Brazil’s “New Market” (Novo Mercado), a voluntary premium segment within the São Paulo Stock Exchange that allows companies to commit credibly to significant protection of minority shareholders without imposing reform on companies controlled by the established elite. Yet regulatory dualism as a strategy for capital market reform is not unique to Brazil, nor is it suited just to developing countries. The long-standing U.S. approach to state-level corporate chartering is arguably better understood as a form of regulatory dualism than -- as is the custom -- as a form of regulatory competition, and the same can be said of EU corporate law post-Centros. The dramatic failure of Germany’s Neuer Markt illustrates some of the pitfalls of regulatory dualism. If thoughtfully deployed, however, regulatory dualism holds substantial promise in overcoming political barriers to reform, not just of corporate governance and capital markets, but of other economic institutions as well. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1541226
369. Avoiding Eight-Alarm Fires in the Political Economy of Systemic Risk Management, (Gordon, Jeffrey N. and Christopher Muller)February 15, 2010
The inherent tensions in the financial sector mean that episodes of extreme stress are inevitable, if unpredictable. This is so even if the regulatory and supervisory regimes are in many respects effective. The capacity of government to intervene may determine whether the distress is confined to the financial sector or breaks out into the real economy. Although adequate resolution authority to address a failing financial firm is a necessary objective of the current regulatory reform, a firm-by-firm approach will be unable to address a major systemic failure such as the Crisis of 2007-08, which may require capital support of the financial sector to avoid severe economic harm. We therefore propose standby systemic emergency finding authority, triggered by agreement among Treasury, the Federal Reserve, and the FDIC. Such a fund, scaled appropriately to the size of the US economy, $1 trillion, should be funded (and partially pre-funded) by risk-adjusted assessments on all large financial firms, who benefit from systemic stability. Standby emergency authority avoids the need for high stakes legislative action mid-crisis, which can be destabilizing even if successful and catastrophic if not. The ―triple key‖ constraint and on-going monitoring and oversight should address concerns of legitimacy and accountability. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1553880
370. Restoring the Banking Social Contract (Ricks, Morgan)March 10, 2010
The so-called "shadow banking system" arose over recent decades and achieved full bloom just prior to the recent financial crisis. That system proved unstable. And the shadow banking system was the central focus of the government's emergency policy response to the crisis. This article contends that the emergence and growth of shadow banking undermined a wellestablished regulatory framework that was designed to address the inherent instability of banking activities. That regulatory framework, referred to herein as the banking social contract, traditionally has entailed privileges (discount window access and federal deposit insurance) and obligations (activity restrictions, prudential supervision, capital requirements, and deposit insurance fees). The privileges furnish a safety net that stabilizes banking, while the obligations address the moral hazard inherent in that safety net. This paper argues that the failure to subject all forms of maturity transformation to the banking social contract is a policy mistake. This mistake rests on a series of misconceptions regarding the desirability and feasibility of causing short-term creditors of financial firms to exercise market discipline. Accordingly, this article proposes that the banking social contract be restored and adapted to modern finance. In particular, it proposes that maturity transformation be strictly limited outside the perimeter of the social contract. Within the perimeter, short-term creditors would receive explicit protection from impairment. But firms subject to the social contract would be required to abide by all of its obligations, including supervision, capital requirements, and usage fees based on the quantity of protected short-term liabilities. This paper also proposes that the boundary between those firms that are eligible for the banking social contract, and those that are not, be determined on the basis of functional criteria. Specifically, the boundary should be expanded if and to the extent that the economic benefits of incremental maturity transformation exceed the expected costs associated with extending the banking safety net. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1571290
371. Economically Benevolent Dictators: Lessons for Developing Democracies (Gilson, Ronald J. and Curtis J. Milhaupt)March 4, 2010
The post-war experience of developing countries leads to two depressing conclusions: only a small number of countries have successfully developed; and development theory has not produced development. In this article we examine one critical fact that might provide insights into the development conundrum: Some autocratic regimes have fundamentally transformed their economies, despite serious deficiencies along a range of other dimensions. Our aim is to understand how growth came about in these regimes, and whether emerging democracies might learn something important from these experiences.Our thesis is that in these economically successful countries, the authoritarian regime managed a critical juncture in the country’s development - entry into global commerce by the transition from small-scale, relational exchange, to exchange where performance is supported by government action, whether based on the potential for formal third party enforcement or by the threat of informal government sanctions. Compared to a weak democracy, a growth-favoring dictator may have an advantage in overcoming political economy obstacles to credibly committing that rent seeking will not dissipate private investment.We explore this hypothesis by examining the successful development experiences of three countries in the late twentieth century: Chile under Augusto Pinochet; South Korea under Park Chung-Hee; and China under Deng Xiaoping and his successors. Although the macroeconomic policies and institutional strategies of the three countries differed significantly, each ruler found ways to credibly commit his regime to growth. Decades of law reform activity by the World Bank, IMF, and other international NGOs, along with a vast academic literature, assume that an impartial judiciary is the key to the transition from relational to market exchange. Our study reveals that a variety of alternatives are possible.We then consider a now familiar question raised about contemporary China: Does economic development inexorably lead to political liberalization? The conventional wisdom says yes, drawing support from the experience of Chile and South Korea. We show that the conventional wisdom overlooks important features of the Chilean and Korean historical experiences that bear directly on China. The same incentive structures that have propelled Chinese economic growth are likely slow political liberalization. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1564925
372. Reforming the Taxation of Derivatives - An Overview, (Raskolnikov, Alex)April 29, 2010
This brief essay outlines three benchmarks for evaluating alternative ways of taxing capital income, summarizes anticipatory, retroactive, and accrual-based proposals for reforming the taxation of derivatives, and offers guidelines for evaluating more limited reforms. It is intended as an introduction to key concepts, tensions, and ideas for reforming the taxation of financial instruments. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1596909
373. Executive Compensation and Corporate Governance in Financial Firms: The Case for Convrtible Equity-Based Pay, (Gordon, Jeffrey N.)July 1, 2010
Unlike the failure of a non-financial firm, the failure of a systemically important financial firm will reduce the value of a diversified shareholder portfolio because of an increased level of systemic risk. Thus diversified shareholders of a financial firm generally internalize systemicrisk whereas managerial shareholders and blockholders do not. This means that the governance model drawn from non-financial firms will not fit financial firms. Regulation that limits risk taking by financial firms can thus provide a benefit, rather than necessarily impose a cost, for the typical diversified public shareholder. Managerial shareholding also gives rise to particular problem of the CEO who, despite the increasing precariousness of the firm’s position, may be reluctant to pursue equity infusions or to sell the firm because of the consequent dilution of his ownership stake. This might be called the “Fuld problem.” To mitigate excessive risk-taking both in ordinary operations and as the firm approaches financial distress, the paper proposes a new compensation mechanism for senior managers, convertible equity-based pay. Upon certain external triggers, such as a downgrade into a high risk category by regulators or a stock price decline of a particular percentage, such stock-based compensation should convert into subordinated debt, at a valuation discount. This will give managers an incentive to curb excessive risk-taking and in particular to steer the firm away from financial distress. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1633906
374. Confronting Financial Crisis: Dodd-Frank's Dangers and the Case for a Systemic Emergency Insurance Fund (Gordon, Jeffrey N. and Christopher Muller)August 18, 2010
The inherent tensions in the financial sector mean that episodes of extreme stress are inevitable, if unpredictable. This is so even if the regulatory and supervisory regimes are in many respects effective. The capacity of government to intervene may determine whether the distress is confined to the financial sector or breaks out into the real economy. Although adequate resolution authority to address a failing financial firm is a necessary objective of the current regulatory reform, a firm-by-firm approach will be unable to address a major systemic failure such as the Financial Crisis of 2007-08, which may require capital support of the financial sector to avoid severe economic harm. We therefore propose the creation of a Systemic Emergency Insurance Fund ("the Fund") ("SEIF"), scaled appropriately to the size of the US economy, $1 trillion. The facility should be funded (and partially pre-funded) by risk-adjusted assessments on all large financial firms, including hedge funds, that benefit from systemic stability. The Department of the Treasury ("Treasury") would administer the Fund, use of which would be triggered by a “triple key” concurrence among Treasury, the Federal Deposit Insurance Corporation ("FDIC"), and the Federal Reserve ("Fed"). Unlike a taxpayer “bailout,” such a fund would mutualize systemic risk among financial firms through a facility overseen by the regulators. The funding mechanism will give financial firms new incentives to warn regulators of growing systemic risk. Such standby emergency authority avoids the need for high stakes legislative action mid-crisis, which can be destabilizing even if successful and catastrophic if not. Such an approach is superior to the financial sector nationalization strategy that is found in the newly enacted Dodd-Frank financial regulatory reform. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1636456
375. Ratings Reform: The Good, The Bad, and The Ugly, (Coffee, Jr., John C.)August 18, 2010
Both in Europe and in the United States, major steps have been taken to render credit rating agencies more accountable. But do these steps address the causes of the debacle in the subprime mortgage market that triggered the 2008-2009 crisis? Surveying the latest evidence on how and why credit ratings became inflated, this paper argues that conflicts of interest cannot be purged on a piecemeal basis. The fundamental choice is between (1) implementing a “subscriber pays” model that compels rating agencies to compete for the favor of investors, not issuers, and (2) seeking to deemphasize or eliminate the role of credit ratings to reduce the licensing power of rating agencies. Although it strongly favors the first option over the second, it also recognizes that the “public goods” nature of ratings makes it unlikely that a “subscriber pays” system will develop on its own without regulatory interventions. Thus, it considers how best to encourage the development of a modified system under which the investor would choose and the issuer/deal arranger would pay for the initial rating on structured finance transactions. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1650802
376. Subsidizing the Press (Schizer, David M.)August 24, 2010
Information is the lifeblood of a free society, and the professional press is a crucial source of information. For many years, the positive externalities from investigative and beat reporting were cross-subsidized by robust advertising and subscription revenue. Yet the professional press is experiencing a severe economic crisis, and news organizations across the nation are on the brink of insolvency. When an activity that generates positive externalities is undersupplied, the textbook policy response is a government subsidy. Yet if the press becomes financially dependent on the government, would they be deterred from monitoring and criticizing the government? If so, the subsidy would undercut the very social benefits it is meant to preserve.In response to this conundrum, this Article proposes a three-part analytical framework for evaluating press subsidies. The first step is to assess how effectively the subsidy safeguards press independence, including the extent to which the First Amendment helps to achieve this goal. The second criterion, which this Article calls “focus,” gauges how effectively a subsidy channels resources to externality-generating activities, as opposed to other uses. For example, a subsidy that induces press organizations to hire more reporters is superior to one that can be used, instead, to fund pay raises for the advertising staff or more attractive office space. The third criterion is political plausibility. How likely is a subsidy to attract political support? And how much political support does it need? One that can be implemented under current law, for example, requires less political support than one that depends on broad new legislation.Based on this framework, the principal recommendation of this Article is for news organizations to make greater use of the nonprofit form. By providing a subsidy through the charitable deduction, we would not empower the government to choose how much funding to allocate to each news organization. Instead, the charitable deduction allows the government to piggyback on the judgments of private donors about which charities to support. In addition, this subsidy is feasible politically since it already can be used, to a significant extent, under current law. This Article also considers four alternative subsidy structures, highlighting their strengths and weaknesses and showing the tradeoffs they present. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1664676
377. A Comparative Analysis of Hostile Takeover Regimes in the US, UK and Japan (with Implications for Emerging Markets), (Armour, John, Jack B. Jacobs and Curtis J. Milhaupt)August 12, 2010
In each of the three largest economies with dispersed ownership of public companies - the United States, the United Kingdom, and Japan - hostile takeovers emerged under a common set of circumstances. Yet the national regulatory responses to these new market developments diverged substantially. In the United States, the Delaware judiciary became the principal source and enforcer of rules on hostile takeovers. These rules give substantial discretion to target company boards in responding to unsolicited bids. In the UK, by contrast, a private body consisting of market professionals was formed to adopt and enforce the rules on hostile bids and defenses. In contrast to those of the US, the UK rules give the shareholders primary decision making authority in responding to hostile takeover attempts. The hostile takeover regime in Japan, which developed recently and is still evolving, combines substantive rules with elements drawn from both the US (Delaware) and the UK, while adding distinctive elements, including an independent enforcement role for Japan’s stock exchange.This Article provides an analytical framework for business law development to explain the diversity in hostile takeover regimes in these three countries. The framework focuses on the universal supply and demand dynamics that drive the evolution of business law in response to new market developments. It emphasizes the common role of subordinate lawmakers in filling the vacuum left by legislative inaction, and it highlights the prevalence of “preemptive lawmaking” to avoid legislation that may be contrary to the interests of important corporate governance players.Extrapolating from the analysis of developed economies, the framework also illuminates the current state and future trajectory of hostile takeover regulation in the important emerging markets of China, India, and Brazil, where corporate ownership structures may be changing. An important pattern revealed by the analysis is the ostensible adoption - and adaptation - of “best practices” for hostile takeover regulation derived from Delaware and the UK in ways that protect important interests within each emerging market’s national corporate governance system. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1657953
378. Host's Dilemma: Rethinking EU Banking Regulation in Light of the Global Crisis (Pistor, Katharina)June 28, 2010
One of the main objectives of transnational banking regulation over the past two decades has been the standardization of regulatory practices and the allocation of regulatory powers to minimize the regulatory burden for banks. The resulting division of labor between home and host country regulators strongly favors Home over Host; And the regulatory scope has continued to focus on entities rather than activities. This paper argues that this has created several blind spots in transnational regulation of finance. First, Home is unlikely to monitor and respond to risks that are unique to Host, even though they might emanate from activities of banks that are subject to their consolidated regulatory supervision. Second, Host, may have regulatory supervision over a subsidiary of Home’s parent company, but may rely on Home to exert regulatory controls. Moreover, Host has little regulatory leverage if the parent bank side-steps regulatory restrictions imposed on subsidiaries by engaging in direct lending practices, or by channeling capital through entities that are not subject to similar regulations. Second, the continued focus on entity based regulation ignores the fact that the core function of banks, maturity transformation, is increasingly performed by non-bank institutions that escape the existing transnational regulatory framework. Against this background, this paper proposes effect-based regulation, which gives Host the power to regulate any activity that has a systemic effect on its financial system, irrespective of who undertakes it and where it is carried out. The paper uses the recent example of Central and Eastern Europe during the global financial crisis to illustrate the failure of the existing regime. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1631940
379. When Do Generics Challenge Drug Patents?, (Hemphill, C. Scott and Bhaven N. Sampat)July 1, 2010
The Hatch-Waxman Act regulates competition between brand-name and generic drugs in the United States. We examine a feature of the Act that has generated significant controversy, yet received little systematic attention. “Paragraph IV” challenges are a mechanism for generic drug makers to challenge the patents of brand-name drug makers as a means to secure early market entry.We begin with a set of descriptive results about brand-name patent portfolios and Paragraph IV challenges. Over time, patenting has increased, measured by the number of patents per drug and the length of the nominal patent term. During the same period, the fraction of drugs receiving challenges has increased. Drugs are also challenged sooner, relative to brand-name approval.Our econometric analyses of challenges over the past decade show that brand-name sales have a positive effect upon the likelihood of generic challenge, consistent with the view that patents that later prove to be valuable receive greater ex post scrutiny. The likelihood of challenge also varies by patent type and timing of expiration. Conditional on sales and other drug characteristics, drugs with weaker patents, particularly those that expire later than a drug’s basic compound patent, face a significantly higher likelihood of challenge. Though the welfare implications of Hatch-Waxman patent challenge provisions are complex, our results suggest these challenges serve a useful purpose by promoting scrutiny of low quality and late-expiring patents. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1640512
380. Bail-Ins Versus Bail-Outs: Using Contingent Capital to Mitigate Systemic Risk, (Coffee, Jr., John C.)September 10, 2010
Because the quickest, simplest way for a financial institution to increase its profitability is to increase its leverage, an enduring tension will exist between regulators and systemically significant financial institutions over the issues of risk and leverage. Many have suggested that the 2008 financial crisis was caused because financial institutions were induced to increase leverage because of flawed systems of executive compensation. Still, there is growing evidence that shareholders acquiesced in these compensation formulas to cause managers to accept higher risk and leverage. Shareholder pressure then is a factor that could induce the failure of a systemically significant financial institution.
What then can be done to prevent future such failures? The Dodd-Frank Act invests heavily in preventive control and regulatory oversight, but this paper argues that the political economy of financial regulation ensures that there will be an eventual relaxation of regulatory oversight (“the regulatory sine curve”). Moreover, the Dodd-Frank Act significantly reduces the ability of financial regulators to effect a bail-out of a distressed financial institution and largely compels them to subject such an institution to a forced receivership and liquidation under the auspices of the FDIC.
Believing that there is a superior and feasible alternative to forcing a strained, but not insolvent, financial institution into a liquidation, this paper recommends a system of “contingent capital” under which, at predefined points, a significant percentage of a major financial institution’s debt securities would convert into an equity security. However, unlike earlier proposals for contingent capital, the conversion would be to a senior, non-convertible preferred stock with cumulative dividends and voting rights. The intent of this provision is to create a class of voting shareholders who would be rationally risk averse and would resist common shareholder pressure for increased leverage and risk-taking, but who would obtain voting rights only at the late stage when the financial institution enters the “vicinity of insolvency.”
This paper discusses (i) the possible design of such a security, (ii) the recent experience in Europe with issuances of similar securities, (iii) tax and other obstacles, (iv) the possibility of international convergence on a system of contingent capital, and (v) the existing authority of the Federal Reserve Board to implement such a requirement. It submits that contingent capital is an idea whose time is coming, but whose optimal design remains debatable. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1675015
381 A New Look at Patent Quality: Relating Patent Prosecution to Validity, (Mann, Ronald J.and Marian Underweiser)September 3, 2010
The paper uses two hand-collected datasets to implement a novel research design for analyzing the precursors to patent quality. Operationalizing patent "quality" as legal validity, the paper analyzes the relation between Federal Circuit decisions on patent validity and three sets of data about the patents: quantitative features of the patents themselves, textual analysis of the patent documents, and data collected from the prosecution histories of the patents. The paper finds large and statistically significant relations between ex post validity and both textual features of the patents and ex ante aspects of the prosecution history (especially prior art submissions and the existence of internal patent office appeals before issuance). The results demonstrate the importance of refocusing analysis of patent quality on replicable indicators like validity, and the value that more comprehensive collection of prosecution history data can have for improving the output of the patent prosecution process http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1671784
382. After Frustration: Three Cheers for Chandler v. Webster (Goldberg, Victor P.)382 ; November 4, 2010
Performance of a contract can be excused by a number of circumstances, notably impossibility, impracticability, and frustration. When performance is excused there remains the question of how to treat any payments or expenditures that were made prior to the occurrence of the contract-frustrating event. In Chandler v. Webster, the English courts decided over a century ago that the parties should be left where they were at the time of the frustrating event. Forty years later that holding was overturned so that now recovery might be had both for restitution of payments made prior to the event and for expenditures made in reliance on the contract. American law, as embodied in the Restatement (Second) of Contracts, has also favored restitution with some concern for reliance. Both the English and the American responses emphasize the injustice of the Chandler solution.This paper argues that the English and American rules both got it wrong. By emphasizing ex post justice rather than ex ante planning, they both propose default rules that are difficult to interpret and somewhat sticky. The paper first traces the development of the English rule from Taylor v. Caldwell through the most recent application of the Law Reform (Frustrated Contracts) Act. It then considers the American majority rule as presented in the Restatement, which focuses on a particular context: a contract to work on an existing structure which is destroyed prior to completion of the contracted work. After considering some of the problems with the Restatement resolution, I consider the contractual solution which, it turns out, rejects the Restatement rule, opting instead for the Chandler rule. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1703123 ;
383. The Past and Future of American Finance: American Experimentalism Without American Exceptionalism (Lothian, Tamara)October 31, 2010
This piece introduces the distinction between financial regulatory reform and institutional reconstruction and argues that efforts in the US and other countries to reform the regulation of finance can and should serve as a first step towards institutional reconstruction. The financial crisis has revealed a series of problems that can be adequately addressed only by initiatives designed to reorganize the relation of finance to the real economy. These problems, we now understand, apply to every country in the world, including the United States.
To illustrate the nature and range of alternatives that can serve as points of departure in the project of institutional reconstruction, I contrast three different programs of reform in the area of finance in the US setting: the New Deal reforms; the current regulatory reform agenda (i.e. the “current deal”); and an alternative approach, which I call the “better deal”. I develop the contrast among the three projects by considering five dimensions of change in the basic organization of finance. The purpose of this simple typology is to encourage and to guide us in the search for usable institutional innovations.
Two main premises underlie the development of my argument here. A first premise is that the contemporary debates about the adequacy of established institutional arrangements apply to the United States just as much as they do to any other country. A second premise is that many of the concepts and categories required both to understand and to reshape established institutional arrangements exist in the form of legally-defined institutional detail. They are inevitably informed by conceptions of law as well as by ideas about the role of finance in our democracy and in our economy. Legal analysis matters; it has an indispensable – and misunderstood – role to play. It represents a starting point for the disciplinary approach we need in order to understand opportunities and constraints in the world today for transforming finance and other areas of social practice. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1711417
384. Collusive and Exclusive Settlements of Intellectual Property Litigation (Hemphill, C. Scott)November 30, 2010
This essay considers antitrust objections to recent settlements of intellectual property litigation. Part I examines the Google Book Search settlement, which resolves a copyright dispute between Google and a class of authors and publishers, including the creators of so-called orphan works. It focuses on one term of the agreement, the license granted to Google to distribute orphan works. Settlement opponents have objected on the ground that rival distributors will find it difficult to secure similar licenses. Proponents, for their part, defend on the ground that “one is better than none” - that this joint venture raises welfare compared to a world without the settlement. Part I evaluates these arguments and explains why neither is a correct approach to the antitrust inquiry.The debate to this point has assumed that antitrust objections are relevant to the approval of this class-action settlement. As Part I also demonstrates, that premise is doubtful. Under the applicable law, the district judge must determine whether the settlement is “fair, reasonable, and adequate” for class members, not consumers. Even accepting arguendo that the settlement raises the cost of future entry, approval is appropriate if, as seems likely, this effect does no harm to authors and publishers.Part II considers patent suits in which a brand-name drug maker seeks to prevent entry by a competing generic firm. In some cases, the brand-name firm makes a large payment to the generic firm to induce settlement and delay generic entry. Some courts considering antitrust objections to these settlements have adopted a rule of effective per se legality. As Part II explains, such a rule overstates the exclusionary force of a patent, ignores precedent that encourages judicial tests of patents, and leads to absurd results - for example, by removing the difference between strong and weak patents, since either can delay competitive entry until patent expiration, provided the payment is large enough. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1718515
385. Contract, Uncertainty and Innovation, (Gilson, Ronald J., Charles F. Sabel and Robert E. Scott)November 18, 2010
Contract today increasingly links entrepreneurial innovations to the efforts and finance necessary to transform ideas into value. In this Chapter, we describe the match between a form of contract that "braids" formal and informal contractual elements in novel ways and the process by which innovation is pursued. It is hardly surprising that these innovative forms of contract have emerged first in markets, and that the common law, and the theory of contract, then play catch-up. Between the time contracting practice adapts to the demands of innovation and the time contract doctrine adapts to the demands of practice, law acts as a friction on the innovation process rather than a lubricant to it. Our goal here is to reduce that lag by providing a theory that can guide courts in developing case law that addresses current forms of innovation This chapter provides an overview of our ongoing work. The starting point is the Knightian distinction between risk and uncertainty. In our view, traditional contracting techniques and traditional contract law address problems of risk. Braiding, or contracting for innovation, addresses conditions of uncertainty. We illustrate the relevance of this distinction by describing the shift in the organizational location of innovation - in particular a fundamental shift from vertical integration to contract as the organizing mechanism for cutting-edge innovation. We then describe the braiding of formal and informal contracting that has developed to organize collaboration across organizational boundaries where the desired outcome can, at best, be anticipated only very approximately. Next, we re-examine the interaction between formal and informal contracting to understand why braiding was not envisaged as a theoretical possibility before it became a salient reality, and to make theoretical sense of braiding now that it has. Finally, we look to recent case law, especially that considering preliminary agreements, to argue that the domain of braiding now includes contexts where uncertainty is not generated by technological development, and we examine the failure of courts to recognize the difference between and consequences of low-powered and high-powered enforcement in addressing braided contracts. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1711435
386. After the Crisis: Institutional Innovation and the Alternative Futures of American Finance (Lothian, Tamara)December 1, 2010
The worldwide financial and economic crisis of 2007-2009 and the subsequent slump in much of the world provide an opportunity to rethink the nature of finance and its relation to the real economy. Because any reshaping of this relation requires a revision of institutional arrangements established in law, it provides an opportunity for legal analysis to contribute to the project of institutional innovation.
This piece addresses the role of finance in the crisis, in the economic downturn that followed it, and in the ongoing debates about how finance should now be regulated. It deals with these issues and events in the American center of the crisis. The reinterpretation of American experiences and prospects in this area exemplifies a more general approach both to finance and to comparative law.
A major element in the American genealogy of the crisis was the partial hollowing out of institutional arrangements, especially with regard to banks and to the mortgage market, that were established during the New Deal period. To redress present problems it is no longer enough to re-regulate finance in the New Deal spirit. It is necessary to innovate in the arrangements governing the relation of finance to the real economy.
The innovations should be oriented to two goals: to place finance more effectively at the service of the real economy in general and of production in particular and to contribute to a broadening of economic opportunity – socially inclusive economic growth. At every point along the way, both for the understanding of what has happened and for the proposal of alternatives, legal detail is crucial. The piece seeks to exemplify a practice of national and comparative legal analysis useful to the execution of this task. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1721106
387. The Democratized Market Economy in Latin America (and Elsewhere): an Exercise in Institutional Thinking Within Law and Political Economy (Lothian, Tamara)1995
Socially inclusive growth and national independence are two of the policy goals commanding greatest authority in the world today. This piece proposes a way of thinking, in light of past experience, about an agenda of institutional change capable of serving these aims. It is simultaneously an exercise in comparative legal analysis, in historically informed political economy, and in programmatic thinking about institutional alternatives. It pursues these concerns by addressing aspects of the development experience of Latin America from the mid twentieth century to today. In so doing, it outlines an answer to the question: What can and should come after the “Washington Consensus?”Three main ideas inform the development of the argument here. The first idea is that sustained and inclusive growth has not been, and cannot be achieved in the circumstances of very unequal societies without an array of innovations in the institutional arrangements of the market economy. Neither arm’s-length regulation of firms by government, nor compensatory redistribution through progressive taxation and social programs are enough. A democratized market economy is one in which government uses its powers and resources to broaden access to economic and educational opportunity, including the opportunity to participate in more markets on more terms, and in which both private and public law are revised to serve this end.The second major idea is that there is a reciprocal relation between success in democratizing the market economy and the ability of a country to participate actively in the world economy, without resigning itself to a rigid and unfavorable position in the international division of labor. Democratizing a market economy can go hand in hand with strengthening a country’s ability to diverge from the institutional formulas favored by leading powers and by international organizations. A comparison of the development experiences of Latin America and East Asia suggests the crucial role that efforts to shape and contain the penetration of the national economy by foreign capital may play in such a development strategy.The third idea is that political economy and programmatic thinking are half-blind when unequipped by insight into the detailed legal forms of established and possible institutional arrangements. The new vocation of comparative law is to explore, in comparative legal and institutional detail, actually existing models of social organization, and the possibility of alternative models of social organization. This article provides one illustration of such an effort. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1721159
388 Law and Finance: A Theor4tical Perspective ( Lothian, Tamara)December 1, 2010
Finance is traditionally studied by lawyers as well as by economists from the vantage point of the premise that a market economy has, at its core, a single natural and necessary institutional form, expressed, for example, in the basic rules and doctrines of contract and property. The literature about "varieties of capitalism" has proved insufficient to challenge this assumption. A corollary of this view is the idea that, barring particular market defects, a market economy will channel the savings of society to its most efficient possible uses. The first task of regulation is supposedly to redress such localized flaws in the competitive allocation of resources.
This brief text outlines the rudiments of another way of thinking about finance. It does so in the form of a list of connected propositions. Under prevailing arrangements, finance has become increasingly decoupled from the real economy. The production system is largely self-financed on the basis of the retained and reinvested earnings of private firms. Financial intermediation is largely self-directed, oriented to asset trading and position taking by highly leveraged financial institutions, supported in good times and bad by favorable monetary and regulatory policies.
It need not be this way. A series of innovations in our present institutions and practices could greatly enhance the usefulness of finance and mitigate its dangers. Regulation, as conventionally understood and practiced, is not enough. Regulation better understood and directed is the first step toward institutional reorganization. The reorganization of finance should in turn be judged by the standard of its service to broader aims. One aim is the organization of socially inclusive economic growth. Another is the power of a national economy to participate actively in the global economy without accepting an unfavorable niche in the international division of labor or abdicating its potential for strategies of development that go against the institutional formulas favored in the world today.
A crucial test of every program of reform is success in forming the appropriate institutional vehicles for carrying its agenda forward. From this imperative arises the need to re-invent comparative law as a handmaiden of institutional innovation. The institutional details matter, and they exist only as law. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1721207
389. The Criticism of the Third-World Debt and the Revision of Legal Doctrine ( Lothian, Tamara)Wisconsin International Law journal, Vol. 13, No. 421, Spring 1995
I argue, implicitly, and much against the grain of American traditions of legal thought: vision above content; content above method; method above process, propriety and role. ... This model, in turn, contributes to a narrowing of democratic control over the content and character of economic development. ... Entrepreneurs and workers alike are content, especially those in the capitalized, modern sector who enjoy a stronger organization and a louder voice than their counterparts in the second economy. ... These considerations suggest that the doctrine of economic distress cannot be based on the formulation of standards that are both universal in application and precise in content. ... Here, empirical assumptions and causal conjectures become more than an informative background to legal analysis; they enter into the content of the analysis and merge with normative concerns. ... Fiduciary principles are narrative or historical in content: they look to the genealogy of the obligations rather than to the consequences of their performance. ... 3) an effort to redefine the content of the ideals or principles that are supposed to be realized in the law. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1722319
390. Promoting Innovation: The Law of Publicly Traded Corporations (Fox, Merritt B.)December 14, 2010
391. Earning Exclusivity: Generic Drug Incentives and the Hatch-Waxman Act, (Hemphill, Scott C. and Mark A. Lemley)
“Reverse” or “exclusion” payments to settle pharmaceutical patent lawsuits are facilitated because the Hatch-Waxman Act has been interpreted to give 180 days of generic exclusivity to the first generic company to file for FDA approval, whether or not that company succeeds in invalidating the patent or finding a way to avoid infringement. As a result, the patentee can “buy off” the first generic entrant, paying them to delay their entry into the market while still offering them the valuable period of generic exclusivity. And if that first generic is entitled to its 180 days, no one else can enter until after the exclusivity period has expired or been forfeited. The result is that the 180-day exclusivity period is not serving its purpose of eliminating weak patents. True, it is encouraging lots of challenges to those patents. But it is encouraging the challengers to accept compensation to drop those challenges, rather than taking them to judgment and benefiting the rest of the world.We propose a change to the Hatch-Waxman statutory scheme. Our alternative is straightforward: first-filing generic drug companies should be entitled to 180 days of exclusivity only if they successfully defeat the patent owner, for example, by invalidating the patent or by proving that they did not infringe that patent. The point of 180-day exclusivity was to encourage challenges to patents because the invalidation of bad patents benefits society as a whole. Society doesn’t benefit from a private deal to drop a challenge. That doesn’t mean settlement is never a good idea; it is a commonplace in our legal system. But it seems bizarre to insulate a company from competition just because it settles the case. Indeed, we expect that our proposal, if implemented, would facilitate more rational settlements, in which the settlements that result accurately reflect the likelihood of success in litigation. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1736822
392. The Political Consequences of Labor Law Regimes: The Contractualist and Corporatist Models Compared, (Lothian, Tamara)7 Cardozo Law Review 1001 (1985-1986)
This piece develops, in the form of a discussion of alternative labor-law regimes, a thesis about the importance of enlarging the existing repertory of institutional arrangements for the organization of different areas of social life. ; Law and legal analysis form the terrain on which such innovation should take place: they alone deal with institutional alternatives at the requisite level of detail.Two major labor-law regimes have been established since the decade of the 1930s. One is the contractualist type, exemplified by American labor law: workers choose to unionize or not, and the union structure is wholly independent of government. The other is the corporatist type, exemplified by the labor laws of the major Latin Americans countries that established their basic labor-law regimes (sometimes under fascist influence) before the Second World War: all workers are automatically unionized, and the unions fall under institutionalized governmental tutelage. ; It is widely but mistakenly believed that the contractualist type of labor-law regime is the only one suited to the conditions of a contemporary democratic market economy.This piece compares the legal logic and the practical consequences of each of these regimes. It argues that it is neither necessary nor desirable to choose between them. Across a wide range of present-day circumstances, the preferable regime would be one that combines the contractualist principle of union independence from government with the corporatist principle of automatic and universal unionization. Such a regime, suggested in varying degree in many different contemporary political economies, would help shift the focus of labor militancy from the effort to unionize to the use of union power, and favor a focus on institutional issues, not merely economic advantage. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1743134
393. Rethinking the Laws of Good Faith Purchase (Schwartz, Alan and Robert E. Scott)March 2011, Forthcoming, Colum. L. Rev. 2011.
This article is a comparative economic analysis of the disparate doctrines governing the good faith purchase of stolen or misappropriated goods. Good faith purchase questions have occupied the courts and commentators of many nations for millennia. We argue that prior treatments have misconceived the economic problem. An owner of goods will take optimal precautions to prevent theft if she is faced with the loss of her goods; and a purchaser will make an optimal investigation into his seller’s title if the purchaser is faced with the loss of the goods. An owner and a buyer cannot both be faced with the full loss, however. The good faith purchase question thus presents a problem of “double marginalization,” and as with these problems generally, it cannot be solved in a first best efficient way. However, the laws of the major commercial nations are less efficient than they could be. This is particularly true of current U.S. law: In the U.S., an owner always can recover stolen goods, which reduces her incentive to take optimal precautions but creates first best incentives to search for stolen goods. In turn, a buyer of those goods makes a suboptimal investigation into title because the owner may never find him. We propose that the owner should be permitted to recover goods only if she satisfies a negligence standard set at the socially optimal precaution level (which we argue is feasible). This would increase her incentive to take precautions while retaining her efficient incentive to search. Since owner search and buyer investigation are complements, our proposal leaves unchanged the buyer’s (suboptimal) incentive to investigate. Also under current law, an owner who voluntarily parts with her goods cannot recover them from a good faith purchaser. This rule reduces the owner’s incentive to search and so reduces the buyer’s incentive to investigate. Thus, we propose that a negligence standard should apply to owners generally. We argue that the verifiability objections to a vague standard of negligence can be satisfied by the specification of rule-like proxies for owner negligence. A comparative analysis of the law of good faith purchase in the leading commercial jurisdictions shows the chaotic nature of the current disparity in treatment of owners and buyers. Since today many stolen goods cross national borders, a generally applicable solution to the good faith purchase issue will further reduce the demand for stolen goods, reduce the incidence of strategic litigation and enhance social welfare. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1775032
394. Crisis, Slump, Superstition and Recovery: Thinking and acting beyond vulgar Keynesianism (Lothian, Tamara and Roberto Mangabeira Unger) March 1, 2011
The intellectual and practical response to the worldwide financial and economic crisis of 2007-2009 as well as to the subsequent slump has exposed the poverty of prevailing ideas about how economies work and fail. The transformative opportunity presented by the crisis has largely been squandered; but the opportunity for insight has not. Insight today can support transformation tomorrow.The present debate about the crisis and the subsequent slump has largely suppressed two themes of major importance. The first theme is the relation of finance to the productive agenda of society. It is not enough to regulate finance: it is necessary to reshape the institutional arrangements governing the relation of finance to the real economy so that finance becomes servant rather than master. The second theme is the link between redistribution and recovery. A pseudo-democratization of credit has been made to do the work of the redistribution of wealth and income in laying the basis for a market in mass-consumption goods. The most important form of redistribution is not retrospective and compensatory redistribution through tax-and-transfer; it is the reshaping of economic and educational arrangements to broaden opportunity and enhance capabilities. ;
Fiscal and monetary stimulus is rarely enough to redress the effects of a major economic crisis. (It was the massive mobilization and the experiments in public-private coordination of the war economy, rather than any proto-Keynesianism, that took countries out of the depression of the 1930s.) The proper role of a stimulus is to play for time by preventing the aggravation of crisis and to prefigure a program of recovery and reconstruction.
;The relative success of major emerging economies in responding to the crisis and in avoiding a slump fails to provide the model of such a program. Many of the policies and arrangements pursued in these countries stabilized markets and created the conditions for continued growth. But it would be wrong to assume that economic recovery in emerging economies represents the emergence of a superior economic logic. It should be understood instead as a series of second bests. For example, the forced continuation of credit flows through governmentally controlled banks and development agencies has largely reinforced preexisting inequalities rather than democratizing access to resources and capabilities.
A preliminary to a program of broad-based economic recovery is the repudiation of the regulatory dualism that has characterized the regulation of finance: the distinction between a thinly and thickly regulated sector of financial activity. In one direction such a program must seek the institutional innovations that put finance more at the service of the productive agenda of society. In another direction, it must conceive and build institutional arrangements that give practical effect to the ideal of socially inclusive economic growth. It does so by basing growth on an institutionalized broadening of economic and educational opportunity.
The vulgar Keynesianism in which many contemporary progressives have looked for orientation fails to offer a theoretical guide to such a program of recovery. However, the fault does not lie solely in the vulgarized version of Keynes’s ideas; it lies in those ideas themselves and indeed in the whole mainstream of economic analysis that grew out of the marginalist revolution of the late nineteenth century. The established economics suffers from a deficit of institutional understanding and imagination. Only a broadening of institutional understanding can provide the practical and conceptual materials we need to imagine alternative futures. And although this understanding remains foreign to the main tradition of thinking about economic policy and reform, the same cannot be said of law. Law and legal thought are integral to the theoretical alternative explored in this essay, because they provide the institutional imagination with indispensable equipment.
This essay takes a first step in the effort to develop an intellectual alternative. ; It does so by outlining an approach to our present problems of crisis, slump, and recovery. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1780454
395. Maximizing Autonomy in the Shadow of Great Powers: The Political Economy of Sovereign Wealth Funds (Hatton, Kyle and Katharina Pistor)March 15,2011
Sovereign Wealth Funds have received a great deal of attention since they appeared as critical investors during the global financial crisis. Reactions have ranged from fears of state intervention and mercantilism to hopes that SWFs will emerge as model long-term investors that will take on risky investments in green technology and infrastructure that few private investors are willing to touch. In this paper we argue that both of these reactions overlook the fact that SWFs are deeply embedded in the political economy of their respective sponsor-countries. This paper focuses on four countries that sponsor some of the largest SWFs worldwide: Kuwait, Abu Dhabi, Singapore and China. Each of these countries has been governed for decades by elites whose grip on power has been tied to the economic fortune of their country and their ability to pacify, or at least balance against, foreign powers. We argue that for these four countries, both the motives for establishing SWFs and the strategies they employ can best be explained by an “autonomy-maximization” theory.In a world where uncertainty - both economic and political - looms larger as a concern in the wake of the global financial crisis and political upheavals, such as the revolutions in Tunisia, Libya, and Egypt, elites use an increasingly diverse array of tools to protect their autonomy within the global system and hedge against unexpected turmoil. SWFs serve ruling elites by concentrating substantial resources, which can be used to pay-off domestic adversaries, to insure the economy against major downturns and thereby mitigate public discontent, to signal cooperation to major foreign powers, and to increase legitimacy in the global arena by presenting governance structures familiar to the West. We employ a comparative case study analysis to highlight the critical importance of these political economy dynamics in the establishment of SWFs, their governance structures, and their behavior in both normal times and during times of crisis. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1787565
396. Governing Interdependent Financial Systems: Lessons from the Vienna Initiative, (Pistor, Katharina)March 21, 2011
This paper argues that while financial markets have become transnational, their governance structures have remained national at the core: Fiscal responsibility for crises is ultimately born by the nation state where the crisis occurred – whether or not it bears any responsibility for regulatory or policy failures. The tension between the transnational nature of markets and national responsibility for these markets has been revealed once more by the global financial and the European sovereign debt crises. Against this background, the Vienna Initiative (VI) offers the prospect of an alternative governance regime. The VI was formed to manage the fallout from the global crisis in the former socialist countries of Central and Eastern Europe (CEE). It brought together in an open and deliberative process the key stakeholders in the pan-European financial market, including transnational bank groups, fiscal authorities, regulators and central banks from home and host countries, the European Central Bank (as observer), the European Commission (EC), and several international financial institutions (IFIs). While each of these stakeholders had a manifest interest in a coordinated response, effective coordination required engineering to overcome the collective action problems they faced. The commitments stakeholders ultimately made to fend off a financial collapse went well beyond what they were legally obliged to do. The paper explores the institutional and organizational foundations of the VI and suggests lessons it may hold for other transnational governance challenges. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1792071
397. Traynor (Drennan) v Hand (Baird): Much Ado About (Almost) Nothing, (Goldberg, Victor P.)March 25, 2011
Most Contracts casebooks feature either Baird v. Gimbel or (Drennan v. Star Paving to illustrate the limits on revocability of an offer. In this paper an analysis of the case law yields three major conclusions. First, as is generally known, in the contractor-subcontractor cases Drennan has prevailed. However, both it and its spawn, Restatement 2d 87(2), have had almost no impact outside that narrow area. Moreover, almost all the cases involve public construction projects - private projects account for only about ten percent of the cases. This suggests that private parties have managed to resolve the problem contractually. Public contract law is encrusted with regulations, which courts and contracts scholars have ignored. The result is a peculiar phenomenon - a supposedly general contract doctrine that applies only in a specific context, but which ignores the features of that context. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1795322
398. Rethinking the Laws of Good Faith Purchase (Schwartz, Alan and Robert Scott)
This article is a comparative economic analysis of the disparate doctrines governing the good faith purchase of stolen or misappropriated goods. Good faith purchase questions have occupied the courts and commentators of many nations for millennia. We argue that prior treatments have misconceived the economic problem. An owner of goods will take optimal precautions to prevent theft if she is faced with the loss of her goods; and a purchaser will make an optimal investigation into his seller’s title if the purchaser is faced with the loss of the goods. An owner and a buyer cannot both be faced with the full loss, however. The good faith purchase question thus presents a problem of “double marginalization,” and as with these problems generally, it cannot be solved in a first best efficient way. However, the laws of the major commercial nations are less efficient than they could be. This is particularly true of current U.S. law: In the U.S., an owner always can recover stolen goods, which reduces her incentive to take optimal precautions but creates first best incentives to search for stolen goods. In turn, a buyer of those goods makes a suboptimal investigation into title because the owner may never find him. We propose that the owner should be permitted to recover goods only if she satisfies a negligence standard set at the socially optimal precaution level (which we argue is feasible). This would increase her incentive to take precautions while retaining her efficient incentive to search. Since owner search and buyer investigation are complements, our proposal leaves unchanged the buyer’s (suboptimal) incentive to investigate. Also under current law, an owner who voluntarily parts with her goods cannot recover them from a good faith purchaser. This rule reduces the owner’s incentive to search and so reduces the buyer’s incentive to investigate. Thus, we propose that a negligence standard should apply to owners generally. We argue that the verifiability objections to a vague standard of negligence can be satisfied by the specification of rule-like proxies for owner negligence. A comparative analysis of the law of good faith purchase in the leading commercial jurisdictions shows the chaotic nature of the current disparity in treatment of owners and buyers. Since today many stolen goods cross national borders, a generally applicable solution to the good faith purchase issue will further reduce the demand for stolen goods, reduce the incidence of strategic litigation and enhance social welfare. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1823366
399. Evergreening, Patent Challenges, and Effective Market Life in Pharmaceuticals (Hemphill, C. Scott and Bhaven N. Sampat)May 3, 2011
The Hatch-Waxman Act permits a generic drug maker to enter the market for a patented drug, prior to patent expiration, by asserting that one or more patents are invalid or not infringed. Observers worry that generic patent challenges are on the rise, increasingly come early after branded drug approval, and reduce the effective market life of drugs. A particular concern is that challenges disproportionately target high-sales drugs, reducing market life for these “blockbusters.”To study this question, we examine a new dataset of all new molecular entities for which first generic approval occurred between 2001 and 2010. Our results show that challenges are much more common for higher sales drugs. We also demonstrate a slight increase in challenges over this period, and a sharper increase for early challenges (those commencing within five years of drug approval). Despite this, effective market life is stable across drug sales categories, and has hardly changed over the decade.To help understand this surprising result, we examine a second new dataset identifying which patents are challenged on each drug. Exploiting within-drug variation in patent type and expiration date, we find that lower quality and later expiring patents disproportionately draw the challenges. Taken together, this evidence suggests that patent challenges serve to maintain, rather than reduce, the historical baseline of effective market life, by responding to and reducing the effectiveness of evergreening by branded drug makers. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1830404
400. Fraud-On-The Market Class Actions Against Foreign Issuers (Fox, Merritt B.)April 30, 2011
This Article goes back to first principles to look at the basic policy concerns that are implicated by the extra territorial reach of fraud-on-the-market class actions. The resulting analysis suggests a simple, clear rule that can be shown likely to both maximize U.S. economic welfare and, by also promoting global economic welfare, foster good U.S. foreign relations as well. The U.S. law based class action fraud-on-the-market liability regime, I conclude, should not as a general matter be imposed upon any genuinely foreign issuer, even where the purchaser making the claim is a U.S. investor purchasing the share in a U.S. market or where significant conduct contributing to the misstatement occurs in the United States. An issuer is genuinely foreign if it has its economic center of gravity as an operating firm outside the United States. The only exception would be a foreign issuer that has agreed, as a form of bonding, to be subject to the U.S. liability regime, in which case all such claims against the issuer should be allowed, regardless of the nationality and residence of the purchasing plaintiff, the place where she executes the transaction, and the place or places where conduct contributing to the misstatement occurs. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1831453