Copyright (c) 2011 All rights reserved. http://works.bepress.com/steven_schwarcz Recent documents in Steven L Schwarcz en-us Sun, 06 Feb 2011 01:31:08 PST 3600 http://works.bepress.com/steven_schwarcz/17 http://works.bepress.com/steven_schwarcz/17 Fri, 04 Feb 2011 14:14:31 PST The BP Gulf oil spill and the Toyota car recalls have highlighted an important legal anomaly that has been overlooked by scholars—judicial inconsistency and confusion in ruling whether to compensate for the loss in market value of wrongfully affected property. This article seeks to understand the anomaly and, in the process, build a stronger foundation for enabling courts to decide when—and in what amounts—to award damages for market value losses. To that end, the article analyzes the normative rationales for generally awarding damages, adapting those rationales to derive a theory of damages that not only covers market value losses of financial securities (like bonds and stock) but also of ordinary products (like automobiles and lightbulbs). Steven L. Schwarcz Contracts Corporations Courts Products Liability Remedies Torts http://works.bepress.com/steven_schwarcz/16 http://works.bepress.com/steven_schwarcz/16 Fri, 04 Feb 2011 13:01:03 PST A major focus of finance is reducing risk on investments, a goal commonly achieved by dispersing the risk among numerous investors. Sometimes, however, risk dispersion can cause investors to underestimate and under-protect against risk. Risk can even be so widely dispersed that rational investors individually lack the incentive to monitor it. This article examines the market failures resulting from risk dispersion, and analyzes when government regulation may be necessary or appropriate to limit these market failures. The article also examines how such regulation should be designed, including the extent to which it should limit risk dispersion in the first instance. Steven L. Schwarcz Banking and Finance Bankruptcy Law Corporations http://works.bepress.com/steven_schwarcz/15 http://works.bepress.com/steven_schwarcz/15 Tue, 17 Aug 2010 14:41:37 PDT Covered bonds, which have been part of European finance since the time of Frederick the Great, are now being widely touted as the answer to securitization’s imperfections. There is great confusion, though, about the nature of covered bonds and their relationship to secured bond financing and securitization. This article attempts to demystify covered bonds, examining how they fit within a larger financing framework, analyzing their legal rights and obligations, and comparing their costs and benefits. The benefits of covered bonds are similar to those of securitization; both can access low-cost capital market funding with low risk to their investors, and both can be used to regenerate lending markets. The costs of covered bonds may be higher, though, because the “dynamic” collateral pools and “dual” recourse to the issuer that protect covered bonds shift virtually all risk to unsecured creditors. Whether that risk should be allowed to be shifted so asymmetrically is a policy question for any nascent covered bond regime. Steven L. Schwarcz Banking and Finance Bankruptcy Law Commercial Law Corporations Secured Transactions http://works.bepress.com/steven_schwarcz/14 http://works.bepress.com/steven_schwarcz/14 Wed, 11 Aug 2010 12:09:46 PDT Although microfinance has emerged as a key tool to alleviate poverty, the need for microfinance lending vastly exceeds the amount of funds that can be raised from charitable donors. Commercial bank lending is supplementing donor money, but microfinance loans made by banks are expensive and sometimes even exploitive. This article examines how innovative legal structures can enable microfinance loans to be funded directly from lower-cost, and virtually limitless, capital market sources by removing, or “disintermediating,” the need for a bank intermediary. In that context, the article identifies and attempts to resolve the resulting law-and-business issues of first impression and also examines, more normatively, the extent to which microfinance lending should rely on capital market funding sources. Steven L. Schwarcz Banking and Finance Commercial Law Economics Human Rights Law International Law Law and Economics Law and Society Secured Transactions Securities Law Social Welfare http://works.bepress.com/steven_schwarcz/13 http://works.bepress.com/steven_schwarcz/13 Mon, 22 Feb 2010 11:57:28 PST This article explores the important but until now largely neglected problem of distorting legal principles. Although legal principles enable society to order itself by preserving broadly based expectations, parties sometimes transact in ways that are so inconsistent with accepted principles as to create uncertainty or confusion that undermines the basis for reasoning afforded by the principles. The article starts by examining a fundamental distortion of the nemo dat legal principle (one cannot give what one does not have), which was a trigger of Lehman Brothers’ recent downfall. A practice called “rehypothecation” so distorted nemo dat that Lehman’s customers were uncertain whether their investments could be attached by Lehman’s creditors. As a result, they withdrew their investments on rumors of Lehman’s insolvency, inadvertently (and much like a bank run) triggering its collapse. The article constructs a normative framework for determining how lawmakers, judges, and lawyers should address distortions of legal principles. Not all legal distortions have net costs; sometimes they represent a positive evolution of law (as in the case of the holder-in-due-course distortion of nemo dat). Therefore any normative framework should attempt to balance costs and benefits. However a simple balancing test would be misleading because private interest groups favoring a distortion would almost certainly receive a disproportionate share of the benefits with the public potentially suffering a disproportionate share of any harm. In this potentially biased context, the article argues that distortions of legal principles should be assessed not on a simple cost-benefit basis but by a heavily-outweigh balancing test. This type of test not only can help rebalance distributive inequities but also can offset unknown or undervalued costs. Steven L. Schwarcz Banking and Finance Bankruptcy Law Commercial Law Corporations Judges Law and Economics Legal Profession Legislation Public Law and Legal Theory Secured Transactions http://works.bepress.com/steven_schwarcz/12 http://works.bepress.com/steven_schwarcz/12 Thu, 26 Feb 2009 13:59:07 PST This article examines how the complexities of modern financial markets and investment securities can trigger market failure. The article also analyzes what steps, including possible regulation, should be taken to reduce the potential for failure. Because market complexities and failures are characteristic of complexities and failures in engineering systems with nonlinear feedback, the article employs a law and engineering analysis, drawing on the literature analyzing those systems. Steven L. Schwarcz Banking and Finance Bankruptcy Law Corporations Organizations Securities Law http://works.bepress.com/steven_schwarcz/11 http://works.bepress.com/steven_schwarcz/11 Mon, 16 Feb 2009 13:01:13 PST This article examines how the complexities of modern financial markets and investment securities can trigger market failure. The article also analyzes what steps, including possible regulation, should be taken to reduce the potential for failure. Because market complexities and failures are characteristic of complexities and failures in engineering systems with nonlinear feedback, the analysis draws on the literature analyzing those systems. Steven L. Schwarcz Banking and Finance Bankruptcy Law Corporations Economics Securities Law http://works.bepress.com/steven_schwarcz/10 http://works.bepress.com/steven_schwarcz/10 Mon, 25 Aug 2008 13:07:45 PDT This article examines how the complexities of modern investment securities and the assets underlying them can trigger a breakdown of financial markets and also analyzes what should be done to mitigate the potential for market failure. Because these complexities are characteristic of complexities in nonlinear engineering systems, the article’s analysis draws on the literature analyzing these systems. Steven L. Schwarcz Banking and Finance Bankruptcy Law International Law Law and Economics Securities Law http://works.bepress.com/steven_schwarcz/9 http://works.bepress.com/steven_schwarcz/9 Mon, 18 Aug 2008 15:41:14 PDT This article examines how the complexities of modern investment securities and the assets underlying them can trigger a breakdown of financial markets and also analyzes what should be done to mitigate the potential for market failure. Because these complexities are characteristic of complexities in nonlinear engineering systems, the article’s analysis draws on the literature analyzing these systems. Steven L. Schwarcz Banking and Finance Bankruptcy Law Corporations International Law http://works.bepress.com/steven_schwarcz/8 http://works.bepress.com/steven_schwarcz/8 Thu, 14 Aug 2008 16:04:43 PDT This article examines how the complexities of modern investment securities and the assets underlying them can trigger a breakdown of financial markets and also analyzes what should be done to mitigate the potential for market failure. Because these complexities are characteristic of complexities in nonlinear engineering systems, the article’s analysis draws on the literature analyzing these systems. Steven L. Schwarcz Banking and Finance Bankruptcy Law International Law Law and Economics Law and Technology http://works.bepress.com/steven_schwarcz/7 http://works.bepress.com/steven_schwarcz/7 Tue, 19 Feb 2008 15:17:58 PST Why did the recent subprime mortgage meltdown undermine financial market stability notwithstanding the protections provided by market norms and financial regulation? This article attempts to answer that question by identifying anomalies and obvious protections that failed to work, and then by examining hypotheses that might explain the anomalies and failures. The resulting explanations provide critical insights into protecting financial markets. Steven L. Schwarcz Banking and Finance Bankruptcy Law Corporations Law and Economics http://works.bepress.com/steven_schwarcz/6 http://works.bepress.com/steven_schwarcz/6 Tue, 12 Feb 2008 16:01:48 PST Governments and international organizations worry increasingly about systemic risk, under which the world’s financial system can collapse like a row of dominoes. There is widespread confusion, though, about the causes and even the definition of systemic risk, and uncertainty about how to control it. This article offers a conceptual framework for examining what risks are truly “systemic,” what causes those risks, and how, if at all, those risks should be regulated. Scholars historically have tended to think of systemic risk primarily in terms of financial institutions such as banks. However with the growth of disintermediation, in which companies can access capital market funding without going through banks or other intermediary-institutions, greater focus should be devoted to financial markets and the relationship between markets and institutions. This perspective reveals that systemic risk results from a type of tragedy of the commons in which market participants lack sufficient incentive, absent regulation, to limit risk taking in order to reduce the systemic danger to others. Law therefore has a role in reducing systemic risk. Steven L. Schwarcz Banking and Finance Bankruptcy Law Economics International Law Law and Economics Law and Society http://works.bepress.com/steven_schwarcz/5 http://works.bepress.com/steven_schwarcz/5 Fri, 17 Aug 2007 10:48:50 PDT This article is the first major work of legal scholarship on systemic risk, under which the world’s financial system can collapse like a row of dominoes. There is widespread confusion about the causes and even the definition of systemic risk, and uncertainty how to control it. This article attempts to provide a conceptual framework for examining what risks are truly “systemic,” what causes those risks, and how, if at all, those risks should be regulated. It begins by carefully examining what systemic risk really means, cutting through the confusion and ambiguity to establish basic parameters. Economists and other scholars historically have tended to think of systemic risk primarily in terms of financial institutions such as banks. However with the growth of disintermediation, in which companies can access capital market funding without going through banks or other intermediary-institutions, greater focus should be devoted to financial markets and the relationship between markets and institutions. Using this integrated perspective, the article derives a working definition of systemic risk. It then uses this definition to examine whether systemic risk should be regulated. To that end, the article examines how risk itself—in particular, financial risk—should be regulated and then inquires how that regulatory framework should change by reason of the financial risk being systemic. A threshold question is whether regulatory solutions are appropriate for systemic risk. The article argues they are because, like a tragedy of the commons, no individual market participant has an incentive, absent regulation, to limit its risk taking in order to reduce the systemic danger to other participants and third parties. Steven L. Schwarcz Banking and Finance Bankruptcy Law International Law Law and Society http://works.bepress.com/steven_schwarcz/4 http://works.bepress.com/steven_schwarcz/4 Tue, 14 Aug 2007 10:45:39 PDT This article, attached for your review, rethinks the standard of care for trustees of public bonds. The present standard is intolerably vague, generating cost and inefficiency in the public bond markets. Yet bondholder governance is increasingly recognized as a critical component of the larger realm of corporate governance, and indeed more than eighty percent of capital market financing raised by U.S. corporations now occurs through public bond offerings. This article examines how that standard of care should be modified to make indenture trustees more effective. Steven L. Schwarcz Banking and Finance Bankruptcy Law Commercial Law Contracts Corporations Law and Economics Law and Society Remedies http://works.bepress.com/steven_schwarcz/3 http://works.bepress.com/steven_schwarcz/3 Thu, 01 Mar 2007 09:04:38 PST In recent years, companies have been shifting much of their transactional legal work from outside law firms to in-house lawyers, and some large companies now staff transactions almost exclusively in-house. Although this transformation redefines the very nature of the business lawyer, scholars have largely ignored it. This article seeks to remedy that omission, using empirical evidence as well as economic theory to help explain why in-house lawyers are taking over, and whether they are likely to continue to take over, these functions and roles of outside lawyers. The findings are surprising, suggesting that in-house lawyers may now be performing as high quality work as outside lawyers and that the reputational value of outside lawyers may be significantly diminishing. Steven L. Schwarcz Corporations Employment Practice Law and Society Legal Education Legal Profession Organizations http://works.bepress.com/steven_schwarcz/2 http://works.bepress.com/steven_schwarcz/2 Tue, 27 Feb 2007 08:42:02 PST Steven L. Schwarcz Corporations Employment Practice Law and Economics Law and Society Legal Education Legal Profession http://works.bepress.com/steven_schwarcz/1 http://works.bepress.com/steven_schwarcz/1 Wed, 21 Feb 2007 09:48:58 PST In recent years, companies have been shifting much of their transactional legal work from outside law firms to in-house lawyers, and some large companies now staff transactions almost exclusively in-house. Although this transformation redefines the very nature of the business lawyer, scholars have largely ignored it. This article seeks to remedy that omission, using empirical evidence as well as economic theory to help explain why in-house lawyers are taking over, and whether they are likely to continue to take over, these functions and roles of outside lawyers. The findings are surprising, suggesting that in-house lawyers may now be performing as high quality work as outside lawyers and that the reputational value of outside lawyers may be significantly diminishing Steven L. Schwarcz Banking and Finance Commercial Law Contracts Corporations Economics Employment Practice Law and Economics Law and Society Legal Education Legal Profession Organizations