Predicting Recession: Could a Simple Method Deliver Superior Results?

Is there a simpler – and better – way to predict a recession? The answer is yes, and no, we are not astrologists – though one would not necessarily be wrong to use the position of stars and planets for this purpose. It’s just that we economists prefer economics, and we think you should, too, based on our findings in a recent study, “Predicting U.S. Business Cycle Turning Points Using Real-Time Diffusion Indexes Based on a Large Data Set,” available here. In fact, as we discuss below, using the diffusion indexes we developed in this study, along with some … Read more

Debevoise & Plimpton Discusses Regulatory Developments in FinTech

In this update, we review a number of recent regulatory developments that may impact firms engaged in the industry of new and innovative financial technology (“FinTech”). First, we discuss the Federal Deposit Insurance Corporation’s (“FDIC”) new guidance on examining third-party lenders, including the risks and potential takeaways for parties to marketplace lending (“MPL”) arrangements. Second, we examine the Office of the Comptroller of the Currency’s (“OCC”) recent proposed rule outlining a receivership framework for non-FDIC insured national banks, focusing particular attention on the implications for FinTech firms. We conclude with takeaways for MPL and FinTech firms to consider as they … Read more


Challenging the Financial Intermediation Myth

Many contemporary discussions of finance or of subjects that implicate finance – for example, federal budgetary or finance-regulatory policy – seem to be systematically colored by a seldom-examined presumption. We call this presumption the “intermediated scarce private capital myth.”

Like many a myth, this one assumes or amounts to a picture. In the picture, financial institutions intermediate between private suppliers of scarce finance capital on the one hand, and various public and private end-users of this capital on the other. Unstated but always assumed in this picture is also a causal direction: the funds that intermediaries intermediate originate with the … Read more

Shearman & Sterling discusses Brexit: a Financial Free Zone Within the City

The UK Government recently indicated that it intends to negotiate a unique EU-UK relationship post-Brexit. It is hoped that the arrangements will be appropriate for the UK and London’s position as a leading international financial centre. A number of existing models have been discussed and will no doubt be analysed, with variations, by the Government. This client note sets out a framework for new opportunities which could be developed in the UK post-Brexit, by establishing a “financial free zone” in London. This would enable the UK to take a bifurcated approach to financial services post-Brexit. The UK as a whole … Read more


Share Profits to Harness the Wisdom of Crowds

Crowdfunding has emerged in recent years as an alternative financing channel in which entrepreneurs can directly solicit contributions from a large number of investors. In return for their contributions, investors receive non-pecuniary rewards, private benefits, or most recently, monetary payoffs. In the realm of rewards-based crowdfunding, it is reported that the funding portal Kickstarter has received more than $2.6 billion in pledges from 11.7 million backers and successfully funded 112,897 creative projects since its launch on April 28, 2009.[1] In May 2016, against the backdrop of Title III and Title IV of the Jumpstart Our Business Startups (JOBS) Act, … Read more


How to Limit Opacity and Conflicts of Interest in Retirement Plans

Designing sensible defined-contribution retirement-plan rules is a challenging task since most Americans do not have sufficient financial acumen and self-discipline to manage their own retirement portfolio.  In spite of the fact that retirement plans constitute the bulk of their savings, most American families struggle with the management of defined contribution (DC) plans. Consequently their savings are inadequate to meet their retirement needs.  According to a recent report, 56 percent of Americans have less than $10,000 in their retirement accounts.  One in three Americans reported that they had no retirement savings.[1] Clearly, the current DC plans for retirement savings are … Read more


Bank Capital and Dividend Effects

As the financial system’s capital was being depleted in the 2007-2009 financial crisis, some banks curtailed their dividends but others, especially securities firms, continued to pay dividends well into the depth of the crisis. Indeed, some firms — including those that entered financial distress — actually increased their dividends during the crisis.

In our paper, available here, we provide a framework that can accommodate such divergence in the reactions of financial intermediaries in their capital decisions. Using this framework, we ask how divergent interests of the banks’ stakeholders are likely to play out during times of heightened financial distress.

Dividend … Read more


The Hidden Costs of Rotating Auditors

The avalanche of accounting scandals in the late 1990s and early 2000s triggered major changes in the corporate accounting world. The Sarbanes-Oxley Act of 2002 (SOX) stampeded in, promising tightened audit regulation aimed at easing the minds of frightened market participants. Given heightened concern over excessively “chummy” relationships between corporate management and its auditors, one rule set forth in SOX requires more frequent client rotation of audit partners (every five years rather than seven) and greater time required before partners may return to the same client (five years rather than two).

While there is little doubt that this rule was … Read more


Are Activist Investors Good for Targeted Companies?

In recent years, activist investors and the companies they target have attracted considerable attention—in the press, in the business and legal communities, in the political arena, and in academia. The fundamental question under debate is whether activist interventions create or destroy firm value. We have conducted a study of the issue, available here. Our sample includes thousands of activist campaigns conducted over the two decades from 1994 to 2014. We examine five types of evidence: stock market reactions, analyst recommendations, short sales, financial statement fundamentals, and institutional ownership.

We find the initial market reaction to the announcement of an … Read more

Debevoise & Plimpton discusses New York’s Proposed Cyber Regulations

On September 13, 2016, the New York Department of Financial Services (“DFS” or the “Department”) issued proposed regulations (the “Proposed Regulations”) designed to guard against the onslaught of cyber-attacks faced by banks, insurance companies and other financial services providers.[1] Billed by Governor Andrew Cuomo as a means to assure that regulated banks and insurance companies “protect consumers and ensure that [their] systems are sufficiently constructed to prevent cyber-attacks to the fullest extent possible,” the Proposed Regulations provide a baseline with respect to companies’ cybersecurity practices regardless of the size, nature or complexity of the business.[2] Though they mirror … Read more

Morrison & Foerster Covers the Highlights of World Economic Forum’s Blockchain Report

The World Economic Forum threw a knockout punch last month when it released its report, “The Future of Infrastructure: An Ambitious Look at How Blockchain Can Reshape Financial Services.”[1] When Giancarlo Bruno, the World Economic Forum’s Head of Financial Services Industries, stated powerfully and unequivocally, “Rather than to stay at the margins of the finance industry, blockchain will become the beating heart of it,”[2] the world felt the impact.

Like so many other things that we know are important to do, but which we may struggle to find the time for, reading the roughly 130-page World … Read more


Income Tax in the Brave New World of Zero Interest Rates

The time value of money, measured by the interest rate at which an entity can borrow or invest, plays an incredibly important role in income tax. Every tax teacher emphasizes the value of deferral to taxpayers, explaining that paying a dollar of tax  10 years in the future is worth much less than paying a dollar of tax today, because the taxpayer can invest less than a dollar today, earn interest for 10 years, and then pay the tax obligation.

But, as I explain in my recent short article, “How to Think About and Teach Income Tax When Interest Rates … Read more

Early Returns: Companies Change Non-GAAP Financial Disclosures Following Recently Issued SEC Guidance

On May 17, 2016, the Securities and Exchange Commission issued new Compliance and Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures. With a fiscal reporting period having passed since the SEC issued the C&DIs, we surveyed the impact that the C&DIs had on company disclosure practices and related developments. Our survey sample included 100 earnings releases issued by Fortune 500 companies since May 17 that included a presentation of two or more non-GAAP financial measures and guidance on at least one non-GAAP measure (the “Survey”). Unsurprisingly, given the nature of the C&DIs, a significant … Read more

Latham & Watkins analyzes Court Ruling on Bitcoin Sales and Crime

In State of Florida v. Espinoza, a trial court in Miami recently dismissed all charges against an individual Bitcoin exchanger, who was arrested in a sting operation after agreeing to sell bitcoins to an undercover detective who purported to need them to buy stolen credit cards.1 The court’s decision, which is now being appealed by the prosecution, includes several notable holdings. In dismissing charges that the defendant had operated a money transmitting business without a license, the court held that bitcoins are not “money,” that selling bitcoins is not money “transmitting,” and that selling bitcoins without charging transaction fees … Read more


The Economy Isn’t a Machine, and Politicians Aren’t Mechanics

A good deal of current American political commentary centers on disputes about whether the American economy has truly recovered from the slump of 2008. Our political candidates offer different narratives about the causes of the slump as well as about how to promote societal flourishing going forward. What should an ordinary citizen make of these sharply divergent narratives? Despite this divergence, both narratives use the same rhetorical imagery of politicians as mechanics, economies as machines, and economic theory as providing tools for the mechanics.

This image has been reinforced by a century of economic theory that treats an economy as … Read more

David Zaring

Financial Reform’s Internationalism

Financial reform has driven many changes in American governance, but the most dramatic one may prove to be the government’s cautious, but wide-ranging, embrace of a revised global regime to regulate international finance. That reform has moved the equilibrium of the separation of powers in foreign affairs towards Congress and uses the informal way that financial regulatory standards spread across the globe to do the work that customary international law used to do.

Both of these developments derive from the way that international financial cooperation has evolved.  The agencies charged with implementing Dodd-Frank have embraced “soft law” in their international … Read more


Oil Prices and the Global Economy: Is It Different This Time Around?

The positive correlation between oil prices and equity markets over the past few years has been discussed extensively in the media as well as by prominent economists, such as Bernanke and Obstfeld, and has brought into question the generally accepted view that lower oil prices are good for the U.S. and the global economy. However, in a recent study, we illustrate that there has been no stable relationship between real oil prices and equity returns over the last 71 years. Nevertheless, we argue that, as in previous episodes of falling oil prices, lower oil prices improve profit opportunities … Read more

Steven Schwarcz, J.D.
Stanley A. Star Professor of Law & Business

Changing Law to Address Changing Markets: A Consequence-Based Inquiry

When should changes in markets for financial securities drive changes in law? In my forthcoming essay, available here, I argue that a normative framework for making that examination would increase transparency and legitimacy. It would also help counter the tendency of politics to distort legal responses to market changes. During economic prosperity, for example, the political push for deregulation can leave financial markets under-protected. But when the bubble of prosperity inevitably bursts, the political push for regulation can lead to over-protective laws.

The essay argues that the extent to which financial market changes should drive legal changes should depend on … Read more


A Tip for Financial Advisers to Retirement Savers: Heed the Prudent Investment Rule

Today the bulk of American workers’ retirement savings, worth trillions of dollars, is in self-directed individual retirement accounts (IRAs) and defined contribution pension plans. Understandably, many workers with self-directed accounts turn to financial advisers for help in matching the vast and complicated array of investment options in today’s financial markets to the worker’s particular circumstances. However, the manner by which financial advisers are compensated has long raised concerns about conflicts of interest. Some advisers are compensated by the providers of the financial products that the adviser sells, giving the adviser a financial incentive to recommend the products that provide the … Read more

Morrison & Foerster discusses FDIC’s Release of Proposed Third-Party Lending Guidance

On July 29, 2016, the board of directors of the Federal Deposit Insurance Corporation (FDIC) released a proposal regarding third-party lending guidance (“Proposed Guidance”) as part of a package of materials designed to “improve the transparency and clarity of the FDIC’s supervisory policies and practices.” The Proposed Guidance elaborates on previously issued agency guidance on managing third-party risks[1] and, if finalized, could apply to all FDIC-supervised institutions that engage in third-party lending programs.

The Proposed Guidance affirms that an institution’s board of directors and senior management are responsible for managing, identifying and controlling the risks associated with lending activities … Read more