The Uneasy Case for Deferring Banker Pay

The article offers information related to banker-pay regulation in the context of overall financial regulation in the U.S. state Louisiana. In mentions that the primary goal of financial regulation is to reduce systemic risk associated with the economic conditions of the state. It mentions that the regulations should be framed for preventing risk associated with extraordinary and external costs of distress of banks and financial firms

Naked and Covered in Monte Carlo: A Reappraisal of Option Taxation

The market for equity options and related derivatives is staggering, covering trillions of dollars worth of assets. As a result, the taxation of these instruments is inherently important. Moreover, the importance is made even more acute by the use of options in creating more complex transactions and in avoiding taxes. Consider an equity call option, which entitles, but does not obligate, its holder to buy stock at a set price at a set time in the future. Option theory gives us a way to break the option down into more fundamental units. For example, an equity call option over 10,000 shares of stock might be equivalent to buying 7500 shares of stock itself. This financially equivalent synthetic option should serve as the model for taxing an actual option. That is not the approach of current law. Nevertheless, a Monte-Carlo simulation I wrote shows that current law does a good job of approximating the tax liability generated by the synthetic option - but only when we view the option in isolation. The results are radically different when the investor already owns some of the stock subject to the option. If such an investor sells (rather than buys) a call option, she has effectively sold a portion of the owned stock at fair market value. For example, the issuer of a call option over 10,000 shares may have effectively sold 7500 shares that she already owns. Option theory gives us a way to measure how much stock she has effectively sold. Taxing the sale of stock implied by many option and related contracts would reflect economic reality and curtail tax-motivated investments

Outlawing Pension-Funding Shortfalls

Before ERISA, employees faced a large risk that their employers would default or renege on pension obligations. By creating a federal guarantor of pensions (the PBGC), ERISA has greatly reduced this risk. All else being equal, low-risk pensions are worth more to employees but cost more to provide. Congress has never had a coherent policy on who should pay for these extra costs. Moreover, legal scholars have failed to create a theoretical framework for dealing with these costs, focusing instead on the supposed moral hazard that the PBGC guaranty creates. This Article inserts itself into the scholarly vacuum, asserting that employers should bear the full cost of providing low-risk pensions to their employees. The only practicable way to force employers to bear these costs is by requiring pension plans to be fully funded. Current law, however, tolerates persistent pension-funding shortfalls with a set of accounting conventions that allow employers to defer and spread funding obligations over several years. Only the powerful tax incentives of the Internal Revenue Code have the potential to draw employers to full funding. Unprofitable employers, however, will not respond to these incentives, choosing instead the subsidized guaranty offered by the PBGC. Because the PBGC guaranty is essentially a guaranty of corporate debt, the subsidized guaranty distorts the efficiency of capital markets. Outlawing pension-funding shortfalls would eliminate these subsidies