In Search of Broader Perspectives about our Financial System

James P. Sweeney is a Managing Director on the Global Strategy Team in Fixed Income Research at Credit Suisse in New York.  

Increasingly, economists and regulators are seen on trading floors and investors are seen in libraries. The challenge of understanding the Global Financial Crisis’s causes and implications has forced everyone who thinks about the economy to broaden their perspective.

Bridging the investment, academic, and regulatory worlds is not easy. Investors chuckle when an academic claims credit for “discovering” that LIBOR-OIS spreads or repo haircuts played a critical role in the crisis. And the professors and regulators cringe when investors … Read more

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Editor's Tweet: Credit Suisse economist James Sweeney discusses Broader Perspectives about our Financial System http://wp.me/p2Xx5U-19I

The Marketplace of Ideas: Cathy M. Kaplan and Jeremiah S. Pam Weigh in on Pistor’s Legal Theory of Finance

The CLS Blue Sky Blog presents Part II of the second installment of our new series, entitled “The Marketplace of Ideas.”  Part I can be found here.  Earlier installments are available here.  The intent is to present different perspectives on the same subject by two or more authors.

The subject is Professor Katharina Pistor’s Legal Theory of Finance (LTF).  For a short description of her theory and the format of the commentary we are releasing, please see here.

Our second and third releases comes to us from Cathy M. Kaplan of Sidley Austin and Jeremiah S. Pam … Read more

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Editor's Tweet: The Marketplace of Ideas: Cathy M. Kaplan and Jeremiah S. Pam Weigh in on Pistor's Legal Theory of Finance http://wp.me/p2Xx5U-1cD

The Legal Theory of Finance is a Starting Point

In her article “A Legal Theory of Finance” Katharina Pistor outlines an important theory about the relationship between laws and finance and highlights the basic legal construction of finance.  A legal theory of finance (LTF) asserts that the legal structure of financial markets can contribute not only to the success of the financial markets, but also to their undoing.  As a lawyer who has practiced more than 30 years in the finance area, I agree with the starting premise of LTF that laws and finance are inextricably linked, that laws affect finance both in the creating and structuring of the … Read more

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Editor's Tweet: The Legal Theory of Finance is a Starting Point http://wp.me/p2Xx5U-1b0

Sovereigns and Safety Valves in the Legal Theory of Finance

Katharina Pistor’s ‘Legal Theory of Finance’ (LTF) is an important contribution to our evolved understanding of international finance following the most recent (and in the case of Europe, ongoing) international financial crises. By probing the implications for international finance of that fundamental or irreducible uncertainty about the future that both Keynes and Knight described in 1921 – but which has all too damagingly been forgotten or suppressed for most of the time since – Pistor helps us better understand both the positive and negative relationships between law and financial crises. This post begins by singling out a key … Read more

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Editor's Tweet: Columbia Law's Jeremiah Pam discusses Sovereigns and Safety Valves in the Legal Theory of Finance

The Marketplace of Ideas: Kathryn Judge takes on Katharina Pistor’s Legal Theory of Finance

The CLS Blue Sky Blog presents the second installment of our new series, entitled “The Marketplace of Ideas.”  Earlier installments are available here.  The intent is to present different perspectives on the same subject by two or more authors.

Today, the subject is Professor Katharina Pistor’s Legal Theory of Finance (LTF).  Her theory grew out of a two year research project – the Global Finance and Law Initiative (further described here) – that set out to critique existing theories in economics and sociology on the relation of law to finance and developed an alternative approach.  It was distilled … Read more

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Editor's Tweet: The Marketplace of Ideas: Kathryn Judge takes on Katharina Pistor's Legal Theory of Finance

Systemic Stability and Fairness: An Analysis of Pistor’s Legal Theory of Finance

In A Legal Theory of Finance, Katharina Pistor introduces a provocative new theory about the relationship between law and finance and the role of law in producing and addressing financial instability.   Pistor shows that law plays a constitutive role in the financial system; yet, because of irreducible uncertainty and uneven liquidity, legal obligations, fully enforced, “would inevitably bring down the financial system.”  Hence, the law-finance paradox.  Collapse is avoided, and predictably so, by the relaxation or suspension of legal obligations, revealing law to be inherently elastic.  Significantly, however, law’s elasticity is not uniform.  “Law tends to be relatively elastic … Read more

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Editor's Tweet: Prof. Kathryn Judge of Columbia Law School Evaluates Prof. Katharina Pistor's Legal Theory of Finance

Davis Polk discusses U.S. Basel III Final Rule

The U.S. Basel III final rule is the most complete overhaul of U.S. bank capital standards since the U.S. adoption of Basel I in 1989 – nearly a quarter of a century ago.  The final rule comprehensively revises the regulatory capital framework for the entire U.S. banking sector by implementing many aspects of Basel III as well as key provisions of the Dodd-Frank Act, including the Collins Amendment capital floor in Section 171 and the ban on references to credit ratings in Section 939A.  The U.S. Basel III final rule also makes significant changes to the 2012 U.S. Basel III … Read more

Torys on why Chinese Companies Need More Than the JOBS Act

Although the JOBS Act was passed just over a year ago to facilitate capital raising in the United States, allegations of accounting fraud, diminished investor confidence and a regulatory impasse over audit work papers have caused many Chinese companies to exit the U.S. capital markets in the past two years. A large number of Chinese companies went public in the United States in 2010 through IPOs or reverse mergers, but in 2011, the trend began to reverse. In 2012, only two Chinese companies went public in the United States; so far in 2013, only one Chinese company has filed an … Read more

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Editor's Tweet: Torys on why Chinese Companies Need More Than the JOBS Act

Aguilar on Institutional Investors: Power and Responsibility

The following remarks were delivered by Commissioner Luis A. Aguilar of the U.S. Securities and Exchange Commission at Georgia State University on April 19, 2013. 

Good evening. Thank you for that kind introduction. I am glad to be here at Georgia State University and the J. Mack College of Business. I would like to thank the Center for the Economic Analysis of Risk (CEAR) and the Department of Finance for sponsoring this workshop. Before I begin, let me issue the standard disclaimer that the views I express this evening are my own, and do not necessarily reflect the views of … Read more

Against Being Against the Revolving Door

I have argued, in an article in the Illinois Law Review, and in an op-ed for the New York Times/DealBook, that the perils of the revolving door, whereby lawyers move in and out of government service whilst many wring their hands about it, are overstated.   In this post, I want to defend that argument mostly with reference to the employment outcomes of a set of elite prosecutors, most of whom went through the revolving door, but who have not exhibited the signs of corruption we might expect.

I’m not surprised by the result.  Most government officials have plenty of reasons … Read more

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Editor's Tweet: Wharton Professor David Zaring: Against Being Against the Revolving Door http://wp.me/p2Xx5U-15T

Should Lex Americana be universal? FATCA turns foreign banks into tax informants

Over the last decades, a number of initiatives taken by various US administrations on both sides of the aisle have raised concerns about the actual legality of the extraterritoriality attached to laws imposed by the United States of America on other jurisdictions around the world, often using “persuasion” rather than legal due process.

In my first course on International Private Law at the Catholic University of Louvain, we were taught that tax laws could not extend beyond the borders of the taxation authorities. The territoriality of tax laws is confirmed by the literature.   The double taxation treaties confirm this principle … Read more

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Editor's Tweet: George Ugeux discuss whether the Lex Americana should be universal? How FATCA turns foreign banks into tax informants

Should Municipal Bond Issuers be Required to Disclose Bank Loans?

You may be surprised to learn that municipal bond issuers are not required to disclose bank borrowings.  I’ve heard numerous estimates that such issuers have outstanding bank borrowings in the $200 to $300 billion range, which would amount to approximately 5-8 percent of the $3.7 trillion municipal bond market. A nine-member working group of banks, underwriters, financial analysts and attorneys recently released a white paper to provide guidance to states and municipalities on disclosure for bank borrowing.  As discussed below, the white paper appears to be a blueprint for disclosing as little as possible.

It’s pretty astounding that a community

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Editor's Tweet: Cate Long of Reuters Discusses Whether Municipal Bond Issuers should be Required to Disclose Bank Loans?

The Separation of Investments and Management

This post comes to us from Professor John Morley, who is currently an associate professor of law at the University of Virginia School of Law.  He will be joining the Yale Law School faculty as an associate professor this July. 

In my new paper, “The Separation of Investments and Management,” I suggest a basic shift in the way we think about investment funds. The essence of these funds and their regulation lies not just in the nature of their investments, as we commonly believe, but also—and more importantly—in the nature of their organization.

Every type of … Read more

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Editor's Tweet: Yale Law School's Professor John Morley discusses the separation of investments and management

Sullivan & Cromwell discusses the Basel Intraday Liquidity Framework

The Basel Committee on Banking Supervision (the “Basel Committee”), in consultation with the Committee on Payment and Settlement Systems, recently published a final document concerning supervisory monitoring tools for intraday liquidity management (the “Intraday Liquidity Document”).

The Intraday Liquidity Document complements the Basel Committee’s overall liquidity risk management framework by setting forth a new set of metrics (or “ monitoring tools”) intended to enable national supervisors to monitor banks’ intraday liquidity risk and ability to meet payment and settlement obligations on a timely basis under both normal and stressed conditions. The tools are also intended to benefit authorities responsible for … Read more

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Editor's Tweet: Sullivan & Cromwell discusses the Basel Intraday Liquidity Framework

Gibson Dunn discusses the Fed’s Foreign Banking Organization Proposal: Will Comments on the Intermediate Holding Company Requirement Be Heeded?

The comment period has now closed on the controversial proposed rule (FBO Proposal) of the Board of Governors of the Federal Reserve System (Board) implementing Sections 165 and 166 of the Dodd-Frank Act (Dodd-Frank) for foreign banking organizations (FBOs) and foreign nonbank financial companies supervised by the Board. 

If the FBO Proposal becomes final in the manner proposed, it will mark a sea change in the regulation of the U.S. operations of FBOs, by requiring FBOs with $50 billion or more in total global consolidated assets and $10 billion or more in total U.S. nonbranch assets to form an intermediate Read more

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Editor's Tweet: Gibson Dunn discusses the Fed's Foreign Banking Organization Proposal

Irredeemably Inefficient Acts: A Threat to Markets, Firms, and the Fisc

My forthcoming article, Irredeemably Inefficient Acts: A Threat to Markets, Firms, and the Fisc, identifies a category of acts that clearly and inevitably reduce social welfare.  These acts—which I call irredeemably inefficient—have not been expressly recognized in previous work.  Yet the distinction I draw reflects a fundamental feature of the U.S. antitrust law, justifies several recent Delaware Chancery Court decisions, and suggests substantial rethinking of some important aspects of securities and commodities regulation.

Irredeemably inefficient acts have remained outside of the standard theory of public enforcement of law.  That theory holds that inefficient conduct may be converted into … Read more

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Editor's Tweet: Professor Alex Raskolnikov of Columbia Law School discusses his new paper on Irredeemably Inefficient Acts.

Information Transmission between Financial Markets in Chicago and New York

High frequency trading has led to widespread eff orts to reduce information propagation delays between physically distant exchanges.  In my recent paper Information Transmission between Financial Markets in Chicago and New York, co-authored with Gregory Laughlin and Anthony Aguirre of UC Santa Cruz, we use relativistically correct millisecond-resolution tick data to document a 3-millisecond decrease in one-way communication time between the Chicago and New York areas that occurred from April 27th, 2010 to August 17th, 2012. We attribute the first segment of this decline to the introduction of a latency-optimized fi ber optic connection in late 2010. A second … Read more

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Editor's Tweet: Stanford Law's Joseph Grundfest discusses Information Transmission between Financial Markets in Chicago and New York

Warren Buffett v. Modern Finance Theory

Experienced readers of Warren Buffett’s letters to the shareholders of Berkshire Hathaway Inc. have gained an enormously valuable informal education. The central theme uniting Buffett’s lucid essays is that the principles of fundamental business analysis, first formulated by his teachers at Columbia Business School, Ben Graham and David Dodd, should guide investment practice.

This stance conflicts with the dominant view of contemporary teachers of finance, which stresses modern finance theory’s efficient market hypothesis to challenge whether such fundamental analysis can be practiced successfully. Debate over this question nevertheless continues, in academia and on Wall Street, raising issues of great important … Read more

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Editor's Tweet: Professor Lawrence A. Cunningham of GW Law discusses Warren Buffett's investing philosophy against modern finance theory

Deterring Libor Manipulation and Improving Benchmarks

It’s tempting to think that we might be seeing the end of potential manipulation of financial benchmarks and rates, such as Libor.

The story would go like this: the Libor rate was an anomaly – humorous in retrospect – that was structured in a way prone to manipulation because it relied on the subjective (and objectively unverifiable) judgments of bank personnel who were subject to conflicts of interest.  Having weathered that scandal, we have now grown wiser. The FSA’s recent reforms of the rate-setting process have constrained the opportunities for ex ante human discretion in Libor: they treat Libor panel … Read more

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Editor's Tweet: Andrew Verstein of Yale Law School discusses deterring Libor manipulation and improving benchmarks

Cyprus: what happened to the sanctity of insured deposits?

In the turmoil created by the decision of the Cyprus Government to impose a 6.75% levy on deposits up to 100,000 euros and 9% above, it might be useful to look at the legal aspects of this decision. The issue of a guarantee scheme for deposits is not new, and even Cyprus established such a scheme in 2000. This posts walks through the relevant European and Cypriot regulation.  I argue that there is no precedent for Cyprus’ levy and that it creates a serious risk of contagion.

European regulation

On July 12, 2010, the European Commission adopted a legislative proposal … Read more

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Editor's Tweet: Georges Ugeux, Chairman and CEO, Galileo Global Advisors, discusses Cyprus: what happened to the sanctity of insured deposits.