The sub prime crisis : implications for emerging markets

This paper discusses some of the key characteristics of the U.S. subprime mortgage boom and bust, contrasts them with characteristics of emerging mortgage markets, and makes recommendations for emerging market policy makers. The crisis has raised questions in the minds of many as to the wisdom of extending mortgage lending to low and moderate income households. It is important to note, however,that prior to the growth of subprime lending in the 1990s, U.S. mortgage markets already reached low and moderate-income households without taking large risks or suffering large losses. In contrast, in most emerging markets, mortgage finance is a luxury good, restricted to upper income households. As policy makers in emerging market seek to move lenders down market, they should adopt policies that include a variety of financing methods and should allow for rental or purchase as a function of the financial capacity of the household. Securitization remains a useful tool when developed in the context of well-aligned incentives and oversight. It is possible to extend mortgage lending down market without repeating the mistakes of the subprime boom and bust.Debt Markets,,Access to Finance,Bankruptcy and Resolution of Financial Distress,Emerging Markets

Multiemployer Bargaining and Monopoly: Labor-Management Collusion and a Partial Solution

Multiemployer collective bargaining relationships between un- ions and employer associations easily devolve into legalized cartels. Once unions establish themselves as the bargaining representative for employers\u27 employees, the employers have much to gain from banding together as an association, raising their prices and eliminating non-union competition, with unions happily serving as enforcement agents in the scheme. In return, unions receive a share of the increased oligopolistic profits in the form of higher wages and benefits. A threat to such a cartel is an employer who wants to bargain with the union but does not want to accept the terms the associ- ation has bargained for. This Article examines the status of such an employer. It outlines how unions and (especially) as- sociations work to thwart such an employer from bargaining di- rectly with a union despite the federal labor policy ofprotecting an employer\u27s freedom in selecting its bargaining representa- tive. This anticompetitive behavior not only hurts individual non-association employers but also non-association employers\u27 union employees, as the union will refuse to realistically bar- gain with their employer unless it agrees to the terms in the as- sociation agreement. This leads to the employer either being forced to accept the association\u27s terms, which it cannot afford, or, if it survives a strike and picket, becoming non-union. A middle ground of real bargaining that serves the non- association employer\u27s union employees\u27 interests is not avail- able. In enforcing this scheme a cartel\u27s primary tactic is the use of most- favored-nations clauses in multiemployer collec-tive bargaining agreements. Another is the design and use of multiemployer ERISA plans. The Article also discusses the labor antitrust exemptions and how, notwithstanding the suggestions of other scholars, anti- trust law is an ineffective tool to remedy union-association car- tel behavior. Instead, the Article advocates changes that can be made to the labor laws and to ERISA that would allow individ- ual employers to escape the terms of association collective bar- gaining agreements and encourage unions to nevertheless bar- gain with them. This does not mean that multiemployer bar- gaining itselfshould be banned. Multiemployer bargaining has always been with us and is not going away, but its anticompeti- tive effects can be tempered

The New Judicial Federalism Before its Time: A Comprehensive Review of Economic Substantive Due Process Under State Constitutional Law Since 1940 and the Reasons for its Recent Decline

The coming of the New Deal may have spelled the end of the Lochner era in the federal courts, but in the state courts Lochner\u27s doctrine of economic substantive due process lives on. Since the New Deal, courts in almost every state have rebuffed the United States Supreme Court and have interpreted their own state constitutions\u27 due process clauses to provide substantive protections to economic liberties. This Article presents a comprehensive survey of state court use of economic substantive due process since the New Deal. It includes an enumeration of every instance since 1940 of a state court of highest review protecting economic liberties through state constitutional economic substantive due process. Previous work on the subject has examined this post-New Deal rejection of the United States Supreme Court\u27s jurisprudence, but this is the first study to comprehensively analyze the trends of that rejection. This comprehensive analysis reveals an intriguing, and potentially controversial, discovery. The discovery is that although state courts still to some degree apply state constitutional economic substantive due process in protecting economic liberties, the rate of that application declined dramatically in the 1970s and 1980s. The decline is surprising considering that through the 1940s, 1950s, and even 1960s, a full thirty years after the New Deal, state courts did not shy from invoking the long-past ghost of Lochner. This Article argues that the reason for this relatively sudden decline is that many state judges were comfortable applying economic substantive due process until the coming of Roe v. Wade and its related right to privacy cases. Because the right to privacy cases utilized substantive due process, but of the non-economic variety, a continued use of economic substantive due process provided legitimacy to their holdings. Faced with either legitimizing opinions legalizing abortion and other privacy rights, or rejecting substantive due process altogether, conservative state jurists chose the latter. These conservatives joined with progressive jurists who were already hostile toward the protection of economic liberties. Thus, with these strange bedfellows aligned, the use of economic substantive due process under state constitutional law quickly withered into the rare, but not quite extinct, doctrine that it is today

Of All Things Made in America Why are We Exporting the Penn Central Test

Developing countries enter into bilateral investment treaties ( BITs ) in order to increase foreign direct investment ( FDI ). Ignoring this straightforward fact has led to a great deal of confusion in the assessment of BITs and their protection of regulatory takings. This article addresses the question of how a BIT should approach regulatory takings with the purpose of increasing FDI in mind. It explores the background of the United States Supreme Court\u27s Penn Central test and the test\u27s incorporation into the post-NAFTA round of U.S. BITs. Then, the article examines whether an uncertain and flexible test such as Penn Central is suitable for treaties that seek to provide foreign investors with incentives to invest in developing counties. The article argues that Penn Central is not appropriate for BITs because it does not provide a clear rule of law that will induce a foreign investor to send its capital overseas to a developing country. This is partly due to the greater need for clarity in public law than in private law. For this distinction the article employs the work of F.A. Hayek and rules of just conduct versus rules of organization of government. The article also addresses criticisms of the incentives BITs provide to foreign investors and to host governments and how those incentives counsel for clear regulatory takings rules. Whatever the merits there may be for a flexible regulatory takings rule when interpreting the Fifth Amendment\u27s Takings Clause, those reasons do not apply to BITs. The article acknowledges that BITs may not actually succeed in increasing FDI, as the empirical evidence on the question is mixed. However, if they do, then BITs with clear regulatory takings standards will be more successful than those with vague standards, such as Penn Central. Drafters of BITs can still take into account other objectives such as environmental protection, but should do so with clear rules of law so foreign investors can plan their investments accordingly

Of All Things Made in America Why are We Exporting the Penn Central Test

Developing countries enter into bilateral investment treaties ( BITs ) in order to increase foreign direct investment ( FDI ). Ignoring this straightforward fact has led to a great deal of confusion in the assessment of BITs and their protection of regulatory takings. This article addresses the question of how a BIT should approach regulatory takings with the purpose of increasing FDI in mind. It explores the background of the United States Supreme Court\u27s Penn Central test and the test\u27s incorporation into the post-NAFTA round of U.S. BITs. Then, the article examines whether an uncertain and flexible test such as Penn Central is suitable for treaties that seek to provide foreign investors with incentives to invest in developing counties. The article argues that Penn Central is not appropriate for BITs because it does not provide a clear rule of law that will induce a foreign investor to send its capital overseas to a developing country. This is partly due to the greater need for clarity in public law than in private law. For this distinction the article employs the work of F.A. Hayek and rules of just conduct versus rules of organization of government. The article also addresses criticisms of the incentives BITs provide to foreign investors and to host governments and how those incentives counsel for clear regulatory takings rules. Whatever the merits there may be for a flexible regulatory takings rule when interpreting the Fifth Amendment\u27s Takings Clause, those reasons do not apply to BITs. The article acknowledges that BITs may not actually succeed in increasing FDI, as the empirical evidence on the question is mixed. However, if they do, then BITs with clear regulatory takings standards will be more successful than those with vague standards, such as Penn Central. Drafters of BITs can still take into account other objectives such as environmental protection, but should do so with clear rules of law so foreign investors can plan their investments accordingly

The New Judicial Federalism Before its Time: A Comprehensive Review of Economic Substantive Due Process Under State Constitutional Law Since 1940 and the Reasons for its Recent Decline

The coming of the New Deal may have spelled the end of the Lochner era in the federal courts, but in the state courts Lochner\u27s doctrine of economic substantive due process lives on. Since the New Deal, courts in almost every state have rebuffed the United States Supreme Court and have interpreted their own state constitutions\u27 due process clauses to provide substantive protections to economic liberties. This Article presents a comprehensive survey of state court use of economic substantive due process since the New Deal. It includes an enumeration of every instance since 1940 of a state court of highest review protecting economic liberties through state constitutional economic substantive due process. Previous work on the subject has examined this post-New Deal rejection of the United States Supreme Court\u27s jurisprudence, but this is the first study to comprehensively analyze the trends of that rejection. This comprehensive analysis reveals an intriguing, and potentially controversial, discovery. The discovery is that although state courts still to some degree apply state constitutional economic substantive due process in protecting economic liberties, the rate of that application declined dramatically in the 1970s and 1980s. The decline is surprising considering that through the 1940s, 1950s, and even 1960s, a full thirty years after the New Deal, state courts did not shy from invoking the long-past ghost of Lochner. This Article argues that the reason for this relatively sudden decline is that many state judges were comfortable applying economic substantive due process until the coming of Roe v. Wade and its related right to privacy cases. Because the right to privacy cases utilized substantive due process, but of the non-economic variety, a continued use of economic substantive due process provided legitimacy to their holdings. Faced with either legitimizing opinions legalizing abortion and other privacy rights, or rejecting substantive due process altogether, conservative state jurists chose the latter. These conservatives joined with progressive jurists who were already hostile toward the protection of economic liberties. Thus, with these strange bedfellows aligned, the use of economic substantive due process under state constitutional law quickly withered into the rare, but not quite extinct, doctrine that it is today

Risk and Return on Real Estate: Evidence from Equity REITs

We analyze monthly returns on an equally-weighted index of 18 to 23 equity (real property) real estate investment trusts (REITs) that were traded on major stock exchanges over the 1973-87 period. We employ a multifactor Arbitrage Pricing Model using prespecified macroeconomic factors. We also test whether equity REIT returns are related to changes in the discount on closed-end stock funds, which seems plausible given the closed-end nature of REITs. Three factors, and the percentage change in the discount on closed-end stock funds, consistently drive equity REIT returns: unexpected inflation and changes in the risk and term structures of interest rates. The impacts of these variables on equity REIT returns is around 60 percent of the impacts on corporate stock returns generally. As expected, the impacts are greater for more heavily levered REITs than for less levered REITs. Real estate, at least as measured by the return performance of equity REITs, is less risky than stocks generally, but does not offer a superior risk-adjusted return and is not a hedge against unexpected inflation.

Pricing Rate Caps on Default-Free Adjustable-Rate Mortgages

A model is developed and utilized in this paper to value a life of loan interest rate cap on an ARM that reprices monthly. The value of the cap is seen to depend importantly on both the slope of the term structure and the variance of the one month rate. However, the cap value is not sensitive to the source of the slope of the term structure -- what precise combination of interest rate expectations and risk aversion determined the slope. This insensitivity is fortunate because of the great difficulty of knowing at any point in time why the term structure is what it is. Given the variation in the slope of the term structure and the variance of the one month rate that occurred over the 1979-84 period, the addition to the coupon rate on a one-month ARM that lenders should have charged for a 5 percent life of loan cap has ranged from 5 to 40 basis points.

On the Determinants of the Value of Call Options on Default-Free Bonds

Models of interest-dependent claims that imply similar term structures and levels of interest rate volatility also produce similar estimates of bond option values. This result is established for simple option forms with known closed-form solutions as well as for more complex options that require numerical methods for evaluation. The finding is confirmed for a wide range of economic conditions, and it is robust with respect to the number and nature of factors that generate interest-rate movements.