From the Great Depression to the Great Recession: On the Failure of Regulation in the Mortgage Market

People tend to attribute the outbreak of the 2008 financial crisis to deregulation. This article challenges this view and presents a unique perspective of the crisis as in fact rooted in the way the residential mortgage market is regulated. Focusing on non-recourse mortgage legislation, which is a unique feature of the US mortgage market dating back to the period following the Great Depression, the article analyzes the contribution of this legislation to the onset of the Great Recession. The discussion shows how regulation that was enacted in response to a major economic crisis not only failed to prevent a large-scale future crisis but also created the conditions for its eventual emergence. Non-recourse laws prevent lenders from seeking a deficiency judgment after foreclosure and impose no personal liability on borrowers in the event of default. They distort risk allocation in the mortgage market as they allow borrowers to externalize the risk of default to third parties. These laws thus create incentives for excessive borrowing, which ultimately resulted in the housing boom and bust of the 2000s. The analysis in this article has important implications for current reforms in leading foreclosure states, such as California and Nevada, where regulators recently expanded the scope of the existing mandatory non-recourse legislation. The insights from the article regarding non-recourse mortgages should serve as a warning to regulators against adopting such legislation

The Importance of Inferior Voting Rights in Dual-Class Firms

Over the past several years, corporate law scholarship has carefully analyzed the effects of dual-class capital structures, which allocate superior voting rights to insiders and inferior voting rights to public shareholders. This Article adds to the literature by focusing on a unique and novel type of dual-class structure—one in which the public shares have no voting rights at all. It notes that this structure is fundamentally different because in the absence of even highly diluted voting rights in public hands, the firm does not have to abide by certain types of disclosure rules and corporate governance standards. Nonvoting shareholders are deprived of these significant components of investor protection. After carefully identifying the serious consequences of nonvoting common stock for investor protection, the Article suggests two ways to address them. First, the Securities and Exchange Commission should act to protect nonvoting shareholders by requiring the same level of disclosure when nonvoting stock is issued as is required when voting stock is issued. Towards implementing this proposal, the Article distinguishes between the situation of no voting rights and the long-standing federal court decision asserting that the regulation of voting rights is beyond the delegated authority of the Commission. Second, stock exchange rules should impose requirements for listed firms aimed at protecting holders of nonvoting stock. These rules would grant nonvoting shareholders certain disclosure and governance rights they do not otherwise have under federal or state law. The Article’s proposals directly address the implications of nonvoting stock for disclosure and corporate governance, and therefore are preferable to the current incidental reaction of major index providers to dual-class capital structures

From the Great Depression to the Great Recession: On the Failure of Regulation in the Mortgage Market

People tend to attribute the outbreak of the 2008 financial crisis to deregulation. This article challenges this view and presents a unique perspective of the crisis as in fact rooted in the way the residential mortgage market is regulated. Focusing on non-recourse mortgage legislation, which is a unique feature of the US mortgage market dating back to the period following the Great Depression, the article analyzes the contribution of this legislation to the onset of the Great Recession. The discussion shows how regulation that was enacted in response to a major economic crisis not only failed to prevent a large-scale future crisis but also created the conditions for its eventual emergence. Non-recourse laws prevent lenders from seeking a deficiency judgment after foreclosure and impose no personal liability on borrowers in the event of default. They distort risk allocation in the mortgage market as they allow borrowers to externalize the risk of default to third parties. These laws thus create incentives for excessive borrowing, which ultimately resulted in the housing boom and bust of the 2000s. The analysis in this article has important implications for current reforms in leading foreclosure states, such as California and Nevada, where regulators recently expanded the scope of the existing mandatory non-recourse legislation. The insights from the article regarding non-recourse mortgages should serve as a warning to regulators against adopting such legislation

Effect of aliskiren on post-discharge outcomes among diabetic and non-diabetic patients hospitalized for heart failure: insights from the ASTRONAUT trial

Aims The objective of the Aliskiren Trial on Acute Heart Failure Outcomes (ASTRONAUT) was to determine whether aliskiren, a direct renin inhibitor, would improve post-discharge outcomes in patients with hospitalization for heart failure (HHF) with reduced ejection fraction. Pre-specified subgroup analyses suggested potential heterogeneity in post-discharge outcomes with aliskiren in patients with and without baseline diabetes mellitus (DM). Methods and results ASTRONAUT included 953 patients without DM (aliskiren 489; placebo 464) and 662 patients with DM (aliskiren 319; placebo 343) (as reported by study investigators). Study endpoints included the first occurrence of cardiovascular death or HHF within 6 and 12 months, all-cause death within 6 and 12 months, and change from baseline in N-terminal pro-B-type natriuretic peptide (NT-proBNP) at 1, 6, and 12 months. Data regarding risk of hyperkalaemia, renal impairment, and hypotension, and changes in additional serum biomarkers were collected. The effect of aliskiren on cardiovascular death or HHF within 6 months (primary endpoint) did not significantly differ by baseline DM status (P = 0.08 for interaction), but reached statistical significance at 12 months (non-DM: HR: 0.80, 95% CI: 0.64-0.99; DM: HR: 1.16, 95% CI: 0.91-1.47; P = 0.03 for interaction). Risk of 12-month all-cause death with aliskiren significantly differed by the presence of baseline DM (non-DM: HR: 0.69, 95% CI: 0.50-0.94; DM: HR: 1.64, 95% CI: 1.15-2.33; P < 0.01 for interaction). Among non-diabetics, aliskiren significantly reduced NT-proBNP through 6 months and plasma troponin I and aldosterone through 12 months, as compared to placebo. Among diabetic patients, aliskiren reduced plasma troponin I and aldosterone relative to placebo through 1 month only. There was a trend towards differing risk of post-baseline potassium ≥6 mmol/L with aliskiren by underlying DM status (non-DM: HR: 1.17, 95% CI: 0.71-1.93; DM: HR: 2.39, 95% CI: 1.30-4.42; P = 0.07 for interaction). Conclusion This pre-specified subgroup analysis from the ASTRONAUT trial generates the hypothesis that the addition of aliskiren to standard HHF therapy in non-diabetic patients is generally well-tolerated and improves post-discharge outcomes and biomarker profiles. In contrast, diabetic patients receiving aliskiren appear to have worse post-discharge outcomes. Future prospective investigations are needed to confirm potential benefits of renin inhibition in a large cohort of HHF patients without D

The Importance of Inferior Voting Rights in Dual-Class Firms

Over the past several years, corporate law scholarship has carefully analyzed the effects of dual-class capital structures, which allocate superior voting rights to insiders and inferior voting rights to public shareholders. This Article adds to the literature by focusing on a unique and novel type of dual-class structure—one in which the public shares have no voting rights at all. It notes that this structure is fundamentally different because in the absence of even highly diluted voting rights in public hands, the firm does not have to abide by certain types of disclosure rules and corporate governance standards. Nonvoting shareholders are deprived of these significant components of investor protection. After carefully identifying the serious consequences of nonvoting common stock for investor protection, the Article suggests two ways to address them. First, the Securities and Exchange Commission should act to protect nonvoting shareholders by requiring the same level of disclosure when nonvoting stock is issued as is required when voting stock is issued. Towards implementing this proposal, the Article distinguishes between the situation of no voting rights and the long-standing federal court decision asserting that the regulation of voting rights is beyond the delegated authority of the Commission. Second, stock exchange rules should impose requirements for listed firms aimed at protecting holders of nonvoting stock. These rules would grant nonvoting shareholders certain disclosure and governance rights they do not otherwise have under federal or state law. The Article’s proposals directly address the implications of nonvoting stock for disclosure and corporate governance, and therefore are preferable to the current incidental reaction of major index providers to dual-class capital structures

Non-Recourse, No Down Payment And The Mortgage Meltdown: Lessons From Undercapitalization

The recent global financial crisis, sparked by developments in the American mortgage market, provides a timely opportunity for a thorough analysis of the standard model for financing home purchases. The United States residential mortgage market has two prominent aspects: first, a significant part of mortgages are de facto non-recourse loans that allow the borrower to limit his liability solely to the collateral securing the loan; second, residential mortgages confer the aforementioned advantage on borrowers while requiring merely a minimal down payment, or no down payment at all. This article examines the implications of each of these aspects, as well as the interplay between them. The findings of this examination lead to the novel insight that a non-recourse mortgage with no initial down payment resembles the case of corporate undercapitalization. Utilizing legal analysis and remedies applied in the case of corporate undercapitalization lends insight into creating mortgage arrangements that properly balance the competing interests of the various players in the home ownership credit market