Regulating Ex Post: How Law Can Address the Inevitability of Financial Failure

Unlike many other areas of regulation, financial regulation operates in the context of a complex interdependent system. The interconnections among firms, markets, and legal rules have implications for financial regulatory policy, especially the choice between ex ante regulation aimed at preventing financial failure and ex post regulation aimed at responding to that failure. Regulatory theory has paid relatively little attention to this distinction. Were regulation to consist solely of duty-imposing norms, such neglect might be defensible. In the context of a system, however, regulation can also take the form of interventions aimed at mitigating the potentially systemic consequences of a financial failure. We show that this dual role of financial regulation implies that ex ante regulation and ex post regulation should be balanced in setting financial regulatory policy, and we offer guidelines for achieving that balance

Fiduciary Duties for Activist Shareholders

Corporate law and scholarship generally assume that professional managers control public corporations, while shareholders play only a weak and passive role. As a result, corporate officers and directors are understood to be subject to extensive fiduciary duties, while shareholders traditionally have been thought to have far more limited obligations. Outside the contexts of controlling shareholders and closely held firms, many experts argue shareholders have no duties at all. The most important trend in corporate governance today, however, is the move toward shareholder democracy. Changes in financial markets, in business practice, and in corporate law have given minority shareholders in public companies greater power than they have ever enjoyed before. Activist investors, especially rapidly growing hedge funds, are using this new power to pressure managers into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or even the entire firm. In many cases these transactions uniquely benefit the activist while failing to benefit, or even harming, the firm and other shareholders. This Article argues that greater shareholder power should be coupled with greater shareholder responsibility. In particular, it argues that the rules of fiduciary duty traditionally applied to officers and directors and, more rarely, to controlling shareholders should be applied to activist minority investors as well. This proposal may seem a radical expansion of fiduciary doctrine. Nonetheless, the foundations of an expanded shareholder duty have been laid in existing case law. Moreover, there is every reason to believe that newly empowered activist shareholders are vulnerable to the same forces of greed and self-interest widely understood to face corporate officers and directors. Corporate law can, and should, adapt to this reality

Macroeconomic Modeling of Money, Credit, and Banking

A supply-and-demand model of deregulated financial markets is compared to deposit-multiplier models, interest-rate reduced forms, the textbook IS-LM model, and a credit-market approach. This model is used to analyze a variety of financial events that simpler models find paradoxical: some events stimulate the economy while contracting M1; open market purchases need not be multiplied by the banking system to be powerful; business-cycle fluctuationg in tax revenue can have strong effects on financial markets; and increased financial intermediation can be contractionary.Credit; M1; Macroeconomics; Money; Multiplier; Supply

Fiduciary Duties for Activist Shareholders

Corporate law and scholarship generally assume that professional managers control public corporations, while shareholders play only a weak and passive role. As a result, corporate officers and directors are understood to be subject to extensive fiduciary duties, while shareholders traditionally have been thought to have far more limited obligations. Outside the contexts of controlling shareholders and closely held firms, many experts argue shareholders have no duties at all. The most important trend in corporate governance today, however, is the move toward shareholder democracy. Changes in financial markets, in business practice, and in corporate law have given minority shareholders in public companies greater power than they have ever enjoyed before. Activist investors, especially rapidly growing hedge funds, are using this new power to pressure managers into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or even the entire firm. In many cases these transactions uniquely benefit the activist while failing to benefit, or even harming, the firm and other shareholders. This Article argues that greater shareholder power should be coupled with greater shareholder responsibility. In particular, it argues that the rules of fiduciary duty traditionally applied to officers and directors and, more rarely, to controlling shareholders should be applied to activist minority investors as well. This proposal may seem a radical expansion of fiduciary doctrine. Nonetheless, the foundations of an expanded shareholder duty have been laid in existing case law. Moreover, there is every reason to believe that newly empowered activist shareholders are vulnerable to the same forces of greed and self-interest widely understood to face corporate officers and directors. Corporate law can, and should, adapt to this reality

Regulating Systemic Risk: Towards an Analytical Framework

The global financial crisis demonstrated the inability and unwillingness of financial market participants to safeguard the stability of the financial system. It also highlighted the enormous direct and indirect costs of addressing systemic crises after they have occurred, as opposed to attempting to prevent them from arising. Governments and international organizations are responding with measures intended to make the financial system more resilient to economic shocks, many of which will be implemented by regulatory bodies over time. These measures suffer, however, from the lack of a theoretical account of how systemic risk propagates within the financial system and why regulatory intervention is needed to disrupt it. In this Article, we address this deficiency by examining how systemic risk is transmitted. We then proceed to explain why, in the absence of regulation, market participants cannot be relied upon to disrupt or otherwise limit the transmission of systemic risk. Finally, we advance an analytical framework to inform systemic risk regulation

Some Skepticism about Increasing Shareholder Power

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