I want to thank Neel Kashkari for launching the Opportunity and Inclusive Growth Institute and for inviting me to join the deliberations of this distinguished group today [May 22]. This new Institute is another great example of how individual Reserve Banks are taking the initiative in illuminating key dimensions of our work and shaping the agenda of the Federal Reserve System.1
While it has long been understood that opportunity is central to the strength of America’s social fabric, it is now increasingly clear that opportunity and inclusion are central to the strength of America’s economy. I will touch on … Read more
In 2001, hedge fund manager Cliff Asness co-wrote a famous paper, Do Hedge Funds Hedge?1 Sixteen years later, amid significant changes in the industry, it’s worth asking, Are hedge funds worth as much as they say they are? And what explains the expectation, as reported by Preqin,2 that outflows from hedge funds will continue in 2017 (I suspect either performance-related or cost-related issues, or both)?
Using the CSFB/Tremont Hedge Fund Index’s monthly returns from January 1994 to January 2014,3 I conducted a study similar to the one described in Asness’s paper. I tried to determine whether hedge … Read more
The news media are an important source of information for the U.S. capital markets, especially when drawing attention to questionable behavior of corporate executives. Coverage can, however, pressure companies into making dubious financial decisions like emphasizing short-term earnings over long-term value. In our recent article, we explore the effect of media coverage on earnings management to shed light on the media’s role in the U.S. capital markets.
Earnings management is the use of accounting techniques to produce financial reports that misstate a firm’s business performance and financial position. There are two main mechanisms through which managers manipulate earnings: accrual-based and … Read more
How can regulators best respond to financial crises? In a forthcoming article in the Duke Law Journal, I show how a law-and-economics framework can guide regulators’ responses. There are two kinds of remedies for failing to comply with a law: property rules and liability rules. Liability rules require compensation, such as money damages. Property rules impose draconian penalties, such as injunctions, punitive damages, or large fines. Property rules can make sense during normal times, because the threat of harsh penalties ensures compliance. But financial crises upend many normal assumptions and prevent some entities from complying with all of their legal … Read more
Tax planning by multinational enterprises (MNEs) is estimated to generate a worldwide loss of corporate tax revenues of between $100 billion and $240 billion. U.S.-based MNEs alone are believed to retain a total of $2 trillion in earnings outside the U.S., largely for tax reasons. Over the last few years, the Organization for Economic Cooperation and Development (OECD) has been trying to come to grips with the tax reduction strategies of MNEs. Its results, presented in the 2015 final reports of BEPS (Base Erosion and Profit Shifting) have disappointed many. That is understandable: Most of the proposals depend on further … Read more
It is a pleasure to be at the Hoover Institution again. I was privileged to be a Visiting Scholar here from 1981 to 1982. In addition, many of the researchers and practitioners with whom I have discussed monetary policy over the years have had affiliations with the Hoover Institution–including several people here today. It is a pleasure also to have been invited to speak at this Hoover Institution Monetary Policy Conference, for the Hoover conference series provides a valuable forum for policymakers and researchers to engage in dialogue about important monetary policy issues facing the United States and other countries.… Read more
It is common wisdom among transactional lawyers that good teamwork results in smoother deals and better service for their clients. Perhaps for this reason, capital-markets practices frequently tout their teamwork skills as a source of value for clients, especially in securities offerings where lawyers acting for issuing companies work closely with underwriters and their lawyers in a team-like fashion, all pulling for the success of the issuing company.
However, teamwork holds a potential pitfall for transactional lawyers, because their desire to work collaboratively with other parties in a deal can blunt their ability to advocate effectively on behalf of their … Read more
Executives, directors and other corporate insiders have privileged access to material non-public information. Previous research shows that trades by insiders are informed, on average. For example, insider purchases tend to precede positive stock returns. In addition, like other investors, corporate insiders may have different investment horizons (i.e., anticipated stock-holding periods) when they trade their company’s stock, depending on their personal investment objectives and styles; desire for liquidity, diversification, or corporate control;, compensation contracts; or understanding and attitude toward insider trading laws.
In our recent paper, “Insider Investment Horizon,” we examine the relation between the investment horizon of corporate … Read more
I appreciate your invitation to participate in this [April 19] panel discussion. In my remarks, I will discuss how U.S. monetary policy actions affect our foreign trading partners, with particular focus on how foreign economies have responded to the Federal Open Market Committee’s (FOMC) ongoing normalization of policy rates.1
Spillovers from the Fed’s Unconventional Policies
Extensive empirical research on spillovers–including by Federal Reserve and International Monetary Fund (IMF) staff members–indicates that spillovers from the actions of major central banks occur through several important channels.2 While the exchange rate is a key channel of transmission and gets a great … Read more
Thank you for inviting me to speak here today (April 20).1 I will begin by looking back at the global financial crisis and the great recession, which were arriving on the horizon at about this time 10 years ago. For the United States and many other countries, this would turn out to be the most painful economic crisis since the Great Depression. The fact that we had a severe recession but not another depression is a tribute to the aggressive response of those who were in a position to act at that time.2
In the event, the financial … Read more
It’s been five years since Concepcion made “clear” that the Federal Arbitration Act (FAA) preempts state laws that forbid class action waivers. Concepcion did not protect arbitration agreements from laws of general applicability (such as unconscionability), but it did confirm that the FAA preempts state laws that seek to limit or invalidate various arbitration provisions.
In its decision on April 6 in McGill v. Citibank, the California Supreme Court fired the latest salvo in the battle over arbitration clauses. In McGill, Citibank sought to compel arbitration of claims under California’s Unfair Competition Law (UCL), False Advertising … Read more
The legal advisory market for major corporate transactions is dominated by a relatively small number of elite law firms. What value do these law firms provide? Regulatory expertise, innovative drafting, speed of execution, and reputational cachet have all been offered as likely candidates. In Market Information and the Elite Law Firm, I argue that a considerable share of the profits earned by these firms also derives from selling their information about current “market” transaction terms.
Indeed, corporate transactions such as mergers and acquisitions or financings are characterized by several salient facts that lack a complete theoretical account. First, they … Read more
I am delighted to have this opportunity to speak at West Virginia University. Thanks to Brian Cushing for inviting me here today.1
Gathered in this part of West Virginia, we are located in the Fifth Federal Reserve District, which stretches down from here to South Carolina and east to the Atlantic Ocean (figure 1). More than 100 years ago, the organizers of the Federal Reserve System divided the country into 12 of these Districts, each with its own Federal Reserve Bank. Together, the Board of Governors in Washington and the 12 Reserve Banks are the key elements … Read more
The UK Government triggered on March 29, 2017, Article 50 TEU. As a result, the UK is likely to have exited the EU by March 2019.
In a speech delivered on January 17, Prime Minister (“PM”) May explained that the UK would not seek to be part of the EU’s customs union, but would instead look to establish a “comprehensive” trade agreement with the EU. In tandem, she noted that the UK would no longer accept the jurisdiction of the European Court of Justice.
How Will a Post-Brexit Future Relationship be Achieved?
1. The Current Situation
… Read more
Whether in large auction markets involving worldwide sales of, say, automobiles or in more specialized forums like the Tsukiji, Tokyo, fish market, auctioneers provide a platform for buyers and sellers to interact. They also play an important role in designing the market and have significant discretion in administering the auctions. While auctioneers are colorful figures in the popular imagination, they are largely absent from the academic literature, where auctions are typically assumed to be run by a passive entity whose incentives are aligned with the seller’s. Thus, the literature does not provide much guidance on how one may think … Read more
The blockchain protocol (a form of a ‘distributed ledger system’) was originally designed as a platform to process Bitcoin transactions. The protocol enables peer-to-peer transactions and eliminates the need for a trusted intermediary to verify and process the transactions.
The blockchain protocol as a platform is actually independent of Bitcoin, and is therefore transferable to other applications. Naturally, because blockchain was conceived of as supporting a specific digital payment system, the initial and most obvious use of the blockchain outside of Bitcoin is “fintech” – technology-based payment and financial transaction systems. The goal of recent experimentation and development in fintech … Read more
In our recent paper, we discuss the economic case for regulating shadow banking and ask three questions. First, what is shadow banking? Second, why should it be regulated? And third, what’s an efficient way to regulate it? We focus on systemic risk, defined as the likelihood of a financial system failure so serious that it impairs the financing of production and consumption. We argue that such a risk can never be measured precisely enough to predict financial crises.
Our paper examines shadow banking on the basis of its contribution to systemic risk. We argue that shadow banking should be regulated … Read more
As has been widely reported, FDIC Vice Chairman Thomas Hoenig put forward in remarks to the Institute of International Bankers on Monday, March 13, a “Market-Based Proposal for Regulatory Relief and Accountability” (the “Hoenig Proposal” or the “Proposal”). If adopted, the Hoenig Proposal would substantially change the regulation of large and complex banking organizations doing business in the United States.
The Hoenig Proposal advances ideas that the Vice Chairman has long advocated concerning a new framework for bank regulation. In 2015 and 2016, Mr. Hoenig proposed various types of regulatory relief for what he described as traditional commercial banks … Read more
Many financial institutions1 have implemented the three Lines of Defense (LoD) model to help define their risk management frameworks and bolster supervisors’ (e.g., desk heads and senior traders) abilities to monitor risk.2 However, as frameworks for managing financial risks (e.g., credit, market, and liquidity) have become more developed, regulators are increasingly focusing on oversight of non-financial risks (e.g., operational and conduct).3
Supervisors are often not only expected to design, manage, and execute a financial institution’s first LoD controls framework, but to do so while meeting (or exceeding) revenue expectations. In order for supervisors to meet the expectations of … Read more
Developments in private and public markets are changing the role equity plays in the United States, i.e., what “stock” means as a matter not only of investment and corporate governance, but also of political economy. For several generations, a broad middle class invested directly in bureaucratically run corporations, disciplined by securities and other laws. The governance of firms and therefore much of the economy was answerable to this broad middle class. Perhaps most important, citizens understood such arrangements as “the free enterprise system” or even “the American way.” We call this a “republican” imagination of equity markets.
There has recently … Read more