• Selected
• Entire List

Abstract:
This essay examines, what, if anything, differentiates Enron's questionable use of off-balance-sheet special purpose entries, or SPEs, from the trillions of dollars of supposedly "legitimate" securitization and other structured finance transactions that use SPEs. The inquiry is important because the absence of meaningful differences would call all these transactions into question, whereas the presence of meaningful differences may inform regulatory schemes by providing a basis to distinguish which structured finance transactions should be allowed. This Essay also introduces the dilemma that some structured finance transactions are so complex that disclosure to investors in the sponsoring company is necessarily imperfect -- either oversimplifying the transactions or providing detail and sophistication beyond the level of most investors. The Essay argues that the company's investors must rely, to some extent, on the business judgment of management in setting up these structures for the company's benefit.

Abstract:
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 dominos. 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.

Abstract:
This short and accessible paper, based on a keynote speech for a law review symposium, addresses how and why the financial crisis occurred and what should be done to avoid future crises. Among other things, the paper explains why neither the making of subprime mortgages nor the originate-and-distribute model pursuant to which these mortgages were monetized was per se evil; why the governmental regulatory structure failed to deter the crisis; and why the governmental bailout plan under the Emergency Economic Stabilization Act is critically needed and where it may be deficient. The paper also explains the difficulties in valuing mortgage-backed securities and in locating the ultimate holders of risk under credit default swaps and the relationship between financial market breakdown and counterparty risk.

Abstract:
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.

Abstract:
Why has the recent subprime mortgage meltdown undermined 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 testing hypotheses that might explain the anomalies and failures. The resulting explanations provide critical insights into protecting financial markets.

Abstract:
The subprime mortgage crisis is undermining financial market stability and has the potential to cause a true systemic breakdown. This short and accessible essay, which is based on the author's 2008 Roy R. Ray Lecture at SMU Law School, uses this crisis to demonstrate that existing protections against systemic risk, which focus on banks and largely ignore financial markets, are misguided. Because companies increasingly access financial markets without going through banks, an effective framework for containing systemic risk must focus on markets.

Abstract:
This article has two objectives: To explain the threats to securitization in the post-Enron economic and regulatory climate, and to explore, more normatively, whether the threats are justified.

Because securitization uses special-purpose vehicles and facilitates off-balance sheet financing, it has been tainted by Enron's abuses, which relied heavily on special-purpose entities and off-balance sheet financing. There are, however, very fundamental differences between Enron's deals and securitization transactions. Securitization is normally used by companies to obtain lower-cost financing through removal of intermediaries between the company and the ultimate source of funds, the capital markets. This is markedly different from Enron's use of special-purpose vehicles for mere balance-sheet manipulation. Even where securitization is used to keep debt off a company's balance sheet, it unambiguously transfers risk from the company to third parties.

Perhaps the most fundamental difference, however, turns on conflicts of interest. The complexities of the Enron deals, and perhaps of certain securitization transactions, make it difficult for corporate directors and shareholders under existing corporate-law procedures to knowledgeably approve the deals. In the face of complexity, they also must rely on the business judgment of the managers that structure the deals - a reliance that may be misplaced where, as in Enron, those managers have significant conflicts of interest. In contrast, management in securitization transactions have been free of material conflicts. The absence of material conflicts may well explain why actual securitization transactions have not raised any of the excesses found in Enron or other corporate scandals.

The absence of excesses does not, however, mean that securitization is desirable. I therefore next examine whether securitization is efficient and fair, and conclude it is both. Securitization enables companies to obtain low-cost capital market financing, and provides liquidity for otherwise viable companies that need but cannot otherwise obtain financing. And it does this without prejudicing any third-parties, such as unsecured creditors. Moreover, the availability of securitization as a financing option actually facilitates bankruptcy rehabilitation policy.

Abstract:
This paper, written as an introduction to a forthcoming symposium issue on international securitization and structured finance, explains the basic concepts of securitization and then examines securitization in a cross-border context. Securitization has an increasingly international focus because, among other reasons, companies that wish to raise capital market funding may not be located in countries with established capital markets. They therefore must structure deals that cross their national borders.

Cross-border securitization, however, can be daunting to the uninitiated, involving multiple legal systems with strange terms and sometimes even stranger rules. I argue that it is unnecessary for a securitization lawyer who does not regularly practice in foreign jurisdictions to keep up with changes in foreign legal systems. All that is needed is a grasp of certain fundamental legal principles in order to ask the right questions of local counsel and understand the response and its implications. This article attempts to set forth those principles. The article also analyzes the United Nations Commission on International Trade Law's recently proposed Convention on the Assignment of Receivables in International Trade, designed to harmonize critical aspects of the laws applicable to cross-border securitization and finance.

Abstract:
This paper, written as an introduction to a forthcoming symposium issue on international securitization and structured finance, explains the basic concepts of securitization and then examines securitization in a cross-border context. Securitization has an increasingly international focus because, among other reasons, companies that wish to raise capital market funding may not be located in countries with established capital markets. They therefore must structure deals that cross their national borders.

Cross-border securitization, however, can be daunting to the uninitiated, involving multiple legal systems with strange terms and sometimes even stranger rules. I argue that it is unnecessary for a securitization lawyer who does not regularly practice in foreign jurisdictions to keep up with changes in foreign legal systems. All that is needed is a grasp of certain fundamental legal principles in order to ask the right questions of local counsel and understand the response and its implications. This article attempts to set forth those principles. The article also analyzes the United Nations Commission on International Trade Law's recently proposed Convention on the Assignment of Receivables in International Trade, designed to harmonize critical aspects of the laws applicable to cross-border securitization and finance.

Abstract:
Although merely private entities, rating agencies have a profound economic impact on global finance. At the same time, these entities have engaged in potential abuses, such as threatening to assign unrequested ratings in order to force companies to use their services. Nonetheless, rating agencies are largely unregulated in the United States and abroad. I examine whether rating agencies should be regulated and, if so, whether it is feasible for individual nations to regulate multinational entities of this type.

Abstract:
This essay examines the future viability of securitization in light of its causal involvement in the subprime-mortgage financial crisis. Securitization has many positive attributes. It efficiently allocates risk with capital, it enables companies to access capital markets directly (in most cases at lower cost than the cost of issuing direct debt), and it avoids middleman inefficiencies. When the securitized assets are loans, securitization helps to transform the loans into cash from which banks and other lenders can make new loans. These positives might be outweighed, however, by four negatives of securitization revealed by the subprime crisis: subprime mortgages were a flawed asset type that should not have been securitized; the originate-and-distribute model of securitization can create moral hazard; securitization can create servicing conflicts; and securitization can foster overreliance on mathematical models. This essay examines these negatives and the extent to which they can be remedied in the future.

Abstract:
This article systematically examines sovereign debt restructuring in light of bankruptcy reorganization law principles. It proposes that a simple and arguably practical convention, based on just three of these principles, would encourage free market funding of troubled States, thereby avoiding reliance on the International Monetary Fund (and the moral hazard and taxpayer subsidy issues caused by such reliance). On the other hand, the article proposes a limited role for the IMF that would allow it to continue its current practice of imposing conditionality on funding, but without triggering any of the problems presently associated with IMF lending.

Furthermore, the article explains why a convention is needed to solve the problem of holdout creditors undermining collective action toward a negotiated settlement. In this context, the article shows that recent proposals to contractually solve this problem by introducing special-majority voting clauses in new bond issues are doomed to failure.

The article additionally explains why no international bankruptcy court or other new organization is needed.

Abstract:
This article explains asset securitization and shows how companies can use it to gain direct and indirect benefits. More importantly, this article demonstrates that securitization can enable certain companies to achieve a genuine reduction in financing costs by providing access to lower cost capital market funding. This article also explores potential innovative uses of this financing technique.

Abstract:
Significant controversy surrounds the issuance of legal opinions in structured finance transactions, particularly where accountants separately use these opinions, beyond their traditional primary use, for determining whether to characterize the transactions as debt. Reflecting at its core the unresolved boundaries between public and private in financial transactions, this controversy raises important issues of first impression: To what extent, for example, should lawyers be able to issue legal opinions that create negative externalities? Furthermore, what should differentiate the roles of lawyers and accountants in disclosing information to investors? Resolution of these issues not only helps to demystify the mystique, and untangle the morass, of legal-opinion giving but also affects the very viability of the securitization industry, which dominates American, and increasingly global, financing.

structured finance transactions, accountants, investors

Abstract:
Significant controversy surrounds the issuance of legal opinions in structured finance transactions, particularly where accountants separately use these opinions, beyond their traditional primary use, for determining whether to characterize the transactions as debt. Reflecting at its core the unresolved boundaries between public and private in financial transactions, this controversy raises important issues of first impression: To what extent, for example, should lawyers be able to issue legal opinions that create negative externalities? Furthermore, what should differentiate the roles of lawyers and accountants in disclosing information to investors? Resolution of these issues not only helps to demystify the mystique, and untangle the morass, of legal-opinion giving but also affects the very viability of the securitization industry, which dominates American, and increasingly global, financing.

Abstract:
In examining the factors that differentiate Enron's destructive use of off-balance-sheet special purpose entities, or SPEs, from the trillions of dollars of legitimate securitization and other structured-finance transactions that use SPEs, I encountered the dilemma that, like in Enron, many such legitimate transactions are so complex that disclosure to investors of the company originating the transaction is necessarily imperfect - either oversimplifying the transaction, or providing detail and sophistication beyond the level of even most institutional investors and securities analysts. My article focuses on solutions to this dilemma, arguing that complexity forces a rethinking of the long-held disclosure paradigm of securities law.

Abstract:
This article tests the limits of private contracting by examining what it means to contract about bankruptcy. Bankruptcy law is governed by a statutory code that defines the relationship between debtors and creditors when a debtor enters the bankruptcy regulatory scheme. May debtors and creditors contract in advance to change that relationship? Or would these contracts be "Faustian" bargains that the state should not enforce? Both courts and scholars are in conflict, yet the answer is critical because it affects not only bankruptcy costs but also the structuring of corporate reorganizations and securitization transactions. I maintain that the threshold question, what freedom should parties have to contractually override a statutory scheme, has not yet been adequately addressed in this context. I first examine the principles by which parties should, or should not, be allowed to contractually alter statutory schemes. I then apply those principles to a model of prebankruptcy contracting by taking into account the policies underlying the bankruptcy code and also by analyzing the extent to which, under contract law, externalities should render a contract unenforceable. I conclude that, within defined limits, bankruptcy law should be viewed as default provisions and not mandatory rules. Finally, I show that my model of prebankruptcy contracting can have important applications, not only to making corporate reorganization and securitization transactions more efficient but also to understanding when parties should be allowed to contract about statutory schemes generally and when externalities should override freedom of contract.

Abstract:
When is a corporate structure legitimate, and when should it be collapsed? Although most urgent in the context of structured finance transactions, this question also arises in other important corporate contexts, including piercing the corporate veil, substantive consolidation, recharacterizing sales as transfers intended for security, and collapsing leveraged buyout (LBO) transactions. In a larger sense, it is one of the most fundamental questions in corporation law, at the basis of any finding that the private ordering of a firm, or of the relationship between firms, is unenforceable or that the law should disrespect form in favor of substance. In the past, judges and scholars have attempted to formulate rules for determining when to collapse corporate structures only in isolated contexts. My article first examines and synthesizes these isolated sources of law. The synthesis reveals that judges implicitly have been grappling with one of the most difficult conceptual problems of contract law: the circumstances under which externalities should defeat contract enforcement. By addressing that problem directly through contract theory and economics, this article proposes an overall theory for collapsing corporate structures, and then uses that theory to derive rules of general application. Finally, the article examines how that theory and its derivative rules might inform, or be informed by, the related debate over whether limited liability should be the default rule in corporation law.

Abstract:
This article engages a fundamental question of corporate law: when is a corporate structure legitimate, and when should it be collapsed? Although this question arises in many contexts (such as substantive consolidation, piercing the corporate veil, and collapsing leveraged buyout transactions), it is becoming most urgent in the context of widespread but increasingly complex structured finance transactions, which often utilize multiple corporate entities as part of the overall structure.

Judges and scholars have attempted to answer this question in isolated doctrinal contexts, but they have not seen the question as cutting across doctrines or attempted to formulate rules of general application, much less an overall theory from which to derive such rules. This failure leaves the law with unsettling ad hocery, which in turn creates uncertainty, inconsistency, and inefficiency on multiple levels.

My article attempts to answer this question by synthesizing existing doctrine, applying economic and contract theory to the synthesis, and then testing the result against actual examples. The answer not only helps to explain and harmonize existing doctrine but also provides a conceptual framework for developing future judicial doctrine and legislative initiatives.

Abstract:
As the financial crisis has tragically illustrated, the complexities of modern financial markets and investment securities can trigger systemic market failures. Addressing these complexities, this article maintains, is perhaps the greatest financial-market challenge of the future. The article first examines and explains the nature of these complexities. It then analyzes the regulatory and other steps that should be considered to reduce the potential for failure. Because complex financial markets resemble complex engineering systems, and failures in those markets have characteristics of failures in those systems, the article's analysis draws on chaos theory and other approaches used to analyze complex engineering systems.

financial markets, regulation

Abstract:
Notwithstanding their origins in gratuitous transfers, trusts are increasingly being used for securitizations and other distinctly non-gratuitous commercial or financial transactions. Few, however, have considered whether existing trust law is adequate to govern these "commercial" trusts, or whether commercial trusts are a better form of business organization than traditional alternatives, such as corporations. My article builds an analytical framework to examine these issues, concluding that commercial trusts and corporations can be viewed as mirror-image entities that respond to different investor needs.

Although its focus is on trust law in the United States, the article also attempts to inform scholars in civil law countries, where trusts are only now beginning to be recognized, why trusts have become important forms of business organization.

Abstract:
The sharing of regulatory authority with private actors ("private ordering") has lengthy historical precedent and, in recent years, has been rapidly expanding in scope, domestically and abroad. Nowhere is its expansion as prevalent as in the commercial, financial, and business sector ("commercial private ordering"), such as the recent entrusting by the U.S. government to the Internet Corporation for Assigned Names and Numbers (ICANN), a private nonprofit corporation, with the task of controlling the Internet domain name system and the assignment of Internet protocol numbers, or the entrusting by the Securities and Exchange Commission to the privately organized Financial Accounting Standards Board with the power to promulgate public accounting standards.

Whereas traditional private ordering derives its legitimacy from costly procedural safeguards (essentially the same as those protecting the legitimacy of administrative agency rule-making), the purported legitimacy of commercial private ordering derives from separate premises: that the goal of commercial regulation is efficiency, and that private institutions can operate more efficiently than government by using market incentives to allocate public resources without having to take account of such extraneous matters as the state's legitimacy and the interests of the politicians, legislatures, and special interest groups. Thus, commercial private ordering is thought to be legitimate even when unrestricted by the procedural safeguards by which traditional private ordering derives legitimacy.

This article questions, however, the premise that the only goal of commercial regulation is efficiency. Even in a commercial context, it argues, society sometimes has other regulatory goals; there may, for example, be distributional goals such as fairness. (The reader should note that this article does not purport to resolve whether non-efficiency goals should be included in any given regulatory scheme; it only intends to show that the uncertainty whether non-efficiency goals should be included makes it likely that non-efficiency goals sometimes will be included in regulatory schemes.) Then, commercial private ordering should not be legitimate without safeguarding those goals.

The article also argues that the safeguards by which traditional private ordering derives legitimacy may not be feasible for commercial private ordering. The cost of instituting those safeguards would likely offset any cost saving that motivates commercial private ordering in the first place, thereby undermining its raison d'etre. The article therefore proposes that non-efficiency regulatory goals be safeguarded directly as a less costly way to achieve legitimacy.

In connection with its analysis, the article finds that most of the literature concerning private ordering either discusses the subject using amorphous generalities or else focuses on specific examples of private ordering without considering their place within the subject's overall framework. The amorphous approach deters rigorous analysis, while the focus on specific examples does not easily allow a reader to extrapolate the analysis to other examples of private ordering. The article therefore attempts to classify the types of private ordering in order to provide a framework for its analysis. The classification shows that private ordering is a label applied to a broad range of activities, and that any analysis of private ordering is a function, and therefore should focus on specific types, of those activities.

Abstract:
Worldwide financial markets increasingly depend on structures that reduce risk by interposing intermediaries between investors and the companies obligated to pay them. If the intermediary holds assets solely in a custodial capacity, this risk traditionally is addressed by agency and trust law. Increasingly, however, intermediaries in a wide range of national and international transactions - including securitization, the trading of investment securities, and the sale of loan participations - hold assets in which they, as well as investors, share beneficial rights. The sharing of these rights creates a risk (intermediary risk) that, if an intermediary fails, its creditors can claim against assets that the intermediary holds for its investors. This type of risk has not been widely studied. Yet its systemic nature makes it potentially virulent: the failure of an intermediary may trigger a chain reaction of failures of investing institutions. For this reason, among others, the Hague Conference on Private International Law recently placed the issue of intermediary risk on its priority agenda for 2001-02. My article analyzes how legal systems should respond to this type of risk.

Abstract:
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.

Abstract:
According to the World Bank, decentralization of government is a pivotal force that will shape global development policy in the 21st Century. Subnational debt restructuring has emerged, however, as one of decentralization's most difficult problems. Financially troubled municipalities face many of the same concerns, for example, as financially troubled nations: holdout creditors can stymie collective attempts at debt restructuring, and reliance on politically-motivated lenders of last resort (the International Monetary Fund in the case of troubled nations, the central government in the case of troubled municipalities) can foster moral hazard. In a recent article, I argued that an international convention for sovereign debt restructuring based on several fundamental principles of bankruptcy reorganization law can effectively address these concerns for nations. In this article, I argue that similar principles can even more easily be applied to the financial problems of subnational governments. To this end, I propose a model law based on these principles that might form the foundation for national laws, informed by local political and legal culture. Then, using the Japanese municipal crisis as an example, I show that countries enacting such a law can prudently and equitably resolve their subnational debt burdens.

Abstract:
According to the World Bank, decentralization of government is a pivotal force that will shape global development policy in the 21st Century. Subnational debt restructuring has emerged, however, as one of decentralization's most difficult problems. Financially troubled municipalities face many of the same concerns, for example, as financially troubled nations: holdout creditors can stymie collective attempts at debt restructuring, and reliance on politically-motivated lenders of last resort (the International Monetary Fund in the case of troubled nations, the central government in the case of troubled municipalities) can foster moral hazard. In a recent article, I argued that an international convention for sovereign debt restructuring based on several fundamental principles of bankruptcy reorganization law can effectively address these concerns for nations. In this article, I argue that similar principles can even more easily be applied to the financial problems of subnational governments. To this end, I propose a model law based on these principles that might form the foundation for national laws, informed by local political and legal culture. Then, using the Japanese municipal crisis as an example, I show that countries enacting such a law can prudently and equitably resolve their subnational debt burdens.

Abstract:
This article argues that, once grasped, the fundamental legal principles underlying cross-border finance amount to a kind of universal language that can be utilized in any legal system. The article also explains these fundamental principles.

Abstract:
This essay, prepared for a University of Cambridge conference on Principles Versus Rules in Financial Regulation, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: Unless protected by a regime enabling one in good faith to exercise judgment without fear of liability, such a person will effectively act as if subject to a rule and, even worse, an unintended rule.

Abstract:
Government safety nets in the United States and abroad focus, anachronistically, on problems of banks and other financial institutions, largely ignoring financial markets which have become major credit sources for consumers and companies. Besides failing to protect these markets, this narrow focus encourages morally hazardous behavior by large institutions, like AIG and Citigroup, that are "too big to fail." This paper examines how a safety net should be recast to protect financial markets and also explains why that safety net would mitigate moral hazard and help resolve the too-big-to-fail dilemma.

financial markets, subprime, financial crisis

Abstract:
This essay attempts to achieve the same goal for the complex and confusing topic of sovereign debt restructuring that the "Idiot's Guide" series of books achieve for their covered topics: to provide a systematic, accessible, and easy-to-grasp overview, so that readers can understand issues in context and go on to more advanced study. The essay also compares and contrasts public-law and private-law approaches to sovereign debt restructuring.

Abstract:
In a separate article (Commercial Trusts as Business Organizations: Unraveling the Mystery), I have shown that although U.S. law focuses almost exclusively on gratuitous trusts, the increasingly dominant use of trusts in the United States is for distinctly non-gratuitous commercial transactions. I therefore constructed an analytical framework in which to try to address such questions as whether commercial trusts are a better form of business organization than corporations, and whether existing trust law is adequate to govern commercial trusts. This essay attempts to make that framework accessible to lawyers and scholars interested in examining the commercial trust form for comparison with, and possible application to, their own legal systems.

Abstract:
When public firms collapse amid allegations of financial information failure - such as misleading financial statements - society looks beyond the role of accountants to see who else should be held responsible. Increasingly, lawyers advising the firm are charged with responsibility, perhaps because modern financial complexity, as well as rules that make accounting determinations turn in part on legal conclusions, has blurred the boundary between legal and accounting duties. Lawyers should want to satisfy this responsibility not only to avoid liability but also to safeguard their reputation and integrity. The difficult question, which this article attempts to answer, is what that responsibility should be. In that context, this article confronts the larger question: To what extent should non-experts monitor experts on matters of their expertise?

Abstract:
Long-term debt securities, or bonds, issued to public investors can suffer a collective-action problem. Bondholders cannot act as a cohesive group where individual bondholder investments are relatively small, minimizing economic incentive to take action or cooperate. This is exacerbated by the fact that the identity of bondholders constantly changes, public bonds being actively traded. Although the rise in institutional bondholding - especially the advent of large, activist, hedge- and private-equity funds and the movement of some of these funds into bond investing - has helped to mitigate the collective-action problem, these funds often have conflicts of interest with other bondholders. Furthermore, the recent collapse of several major funds suggests that the collective-action problem could become more significant in future years.

Custom and law have provided a partial solution to the collective-action problem: for each public bond issue, an indenture trustee is appointed to act as a type of agent on behalf of the bondholders collectively. This solution is imperfect, however, because the standard of care for indenture trustees remains somewhat ambiguous, generating cost and inefficiency in the public bond markets.

An inquiry into the standard of care for indenture trustees is now timely, given the number of bond defaults and predictions of an imminent rise in the rate of defaults. Furthermore, public bondholder governance is increasingly recognized as a critical component of the larger realm of corporate governance. In the past, Congress and the legal literature have focused predominantly on the aspects of corporate governance related to equity investors. Given more than eighty percent of capital market financing raised by U.S. corporations now occurs through public bond offerings, greater attention should be devoted to public bondholder governance.

Abstract:
The standard of care for indenture trustees after default is intolerably vague, generating cost and inefficiency in the public bond markets. Yet public 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.

Abstract:
This article attempts to explain empirically the value that lawyers add when acting as counsel to parties in business transactions. Contrary to existing scholarship, which is based mostly on theory, this article shows that transactional lawyers add value primarily by reducing regulatory costs, thereby challenging the reigning models of transactional lawyers as "transaction cost engineers" and "reputational intermediaries." This new model not only helps inform contract theory but also reveals a profoundly different vision than those of existing models for the future of legal education and the profession.

Abstract:
The recent revisions of Article 9 of the Uniform Commercial Code, or UCC, are expected to have a significant impact on securitization - a type of financing that is perhaps the most rapidly growing segment of the U.S. credit markets and increasingly a major part of foreign credit markets. In its current form, Article 9 governs the transfer of only certain types of assets that are involved in securitization transactions. Revised Article 9 attempts to broaden its coverage to virtually all securitized assets. I analyze how it does that and what it means for Article 9 to apply to these transactions, addressing issues of perfection and priority of asset transfers, commingling of proceeds, assignability of assets in the face of contractual restrictions, and the effect of negative pledge covenants. Finally, I show that the revision of Article 9 does much to bring the commercial law setting for securitization into the 21st Century.

Abstract:
In a previous article ("Intermediary Risk in a Global Economy," 50 Duke Law Journal 1541 (2001)), I observed that intermediaries in a wide range of international dealings now hold assets in which they, as well as investors, share beneficial rights. The sharing of these rights creates significant uncertainty as to whether the intermediary's creditors can look to all those assets, or merely to the intermediary's interest therein, for repayment. This "intermediary risk" not only affects individual investors and increases transaction costs but also can be systemic. The present article focuses on this risk in the context of the indirect holding system used worldwide for trading of securities. It concludes that a uniform rule is needed to regulate this risk, and examines how such a rule should be implemented in an international law context.

Abstract:
Taken from Introduction to paper: Structured finance, although only a recent innovation, nonetheless is becoming one of the dominant means for capital formation in the United States.1 Also known as asset securitization, structured finance refers to an approach used to raise capital whereby income-producing [financial] assets ... are pooled and converted into capital market instruments. In a typical [structured] financing, a sponsor transfers a pool of [financial] assets to a limited purpose entity, which in turn issues [in the capital markets] non-redeemable debt obligations or equity securities with debt-like characteristics ... Payment on the securities depends primarily on the cash flows generated by the pooled assets.

Abstract:
Lawyers, increasingly, are scrutinized as to their public responsibility when companies fail, particularly where the lawyer's involvement with the failed company is nontraditional and, arguably, intertwined with the failure. One of the least traditional roles of lawyers today is as counsel in structured finance transactions. This article focuses on the public responsibility of lawyers involved in these transactions.

Abstract:
When public firms collapse amid allegations of financial information failure - such as misleading financial statements - society looks beyond the role of accountants to see who else should be held responsible. Lawyers advising the firm increasingly are charged with responsibility, perhaps because modern financial and business complexities, as well as rules that make accounting determinations turn in part on legal conclusions, have blurred the boundary between legal and accounting duties. Lawyers should want to satisfy this responsibility not only to avoid liability but also to safeguard their reputation and integrity. The difficult question, which this article attempts to answer, is what that responsibility should be.

Abstract:
Corporate governance scholarship has long focused on conflicts of interest between firms and their top executive officers. This essay contends that increasing leverage and financial complexity make it important for scholars to also focus on conflicts of interest between firms and their secondary managers.

conflicts of interest, financial leverage, corporate governance

Abstract:
This testimony is based on the results of Prof. Schwarcz's research over the past year on systemic risk, such research and results being more fully set forth in the forthcoming paper, "Systemic Risk," which is available at http://papers.ssrn.com/abstract=1008326.

Abstract:
This short paper, prepared as a keynote address, explains why the credit crunch is fundamentally a story about financial markets, not banks. Its cause was a collapse of securitization and other debt markets, which have become major sources of financing for consumers and companies. Deprived of this financing, consumers have had difficulty purchasing homes and automobiles, and companies have had difficulty purchasing inventory and making capital investments, causing the real economy to shrink. This paper examines how these financial markets should be protected. Although already subject to many prescriptive regulatory protections, these markets evolve faster than regulation can adapt. The paper argues that a market liquidity provider of last resort is the most robust and cost-effective way to protect these financial markets when prescriptive regulation inevitably fails.

securitization, financial markets

Abstract:
Many of the world's banks have operations, if not branches or agencies, in the United States. When these banks fail, their U.S. operations and assets are subject to a confused, and confusing, patchwork of insolvency laws, both federal and state. This essay examines that legal patchwork, asking whether it is desirable, much less efficient, for a nation to have an inconsistent foreign-bank insolvency regime. The essay does not attempt to provide final answers but, instead, focuses on identifying the threshold conceptual issues that must be resolved before attempting to provide answers.

Abstract:
No single body of law presently governs a corporation's obligations to creditors. However, disparate laws, starting from different perspectives, contribute to a patchwork of obligations that is poorly understood. Consequently, corporate directors have little guidance when balancing creditor and shareholder rights under corporate restructurings, securitizations, and leveraged buyouts.

Commentators who have grappled with this issue focus almost exclusively on the fiduciary duty of a corporation's board of directors to shareholders. Some argue that only shareholders should be entitled to the duty; others argue that the duty should be extended to creditors under various circumstances. This article maintains that both approaches are incomplete because they assume that the standard of duty, if one exists, is fiduciary and also because they fail to take into account other, more fundamental, sources of the corporate obligation to creditors.

This article instead argues that the analysis of whether a corporation owes an obligation to creditors must start with the question of whether a debtor generally has an obligation to creditors. Only by answering that question can one analyze how the debtor's being a corporation should affect that obligation.

The article uses this two-step approach to reflect on the appropriate boundaries of the corporate obligation to creditors, particularly where the interests of shareholders and creditors conflict. It shows that a debtor - corporate or not - owes a limited obligation of good faith to creditors that addresses many of the evils that commentators advocating a broad fiduciary duty to creditors have identified.

This article then explores how that obligation is affected when the debtor is a corporation. In that context, it analyzes the vicinity of insolvency test proposed by Chancellor Allen in the Credit Lyonnais case, and suggests an alternative approach that sets a brighter line to determine when directors should have loyalty to both creditors and shareholders but gives more leeway and discretion to directors when that dual loyalty arises.

Finally, the article proposes a theory that unifies these commercial law and corporate governance approaches while balancing a corporation's ability to take legitimate business risks with the reasonable expectations of creditors that their rights will not be impaired.

Abstract:
This article examines the dilemma of a fiduciary acting after default for parties who, as among themselves, have conflicting commercial interests (e.g., different priorities or sources of payment). Such a fiduciary faces the difficult task of trying to understand and balance the respective obligations owed to those parties and the risk of being sued no matter how the balancing is performed. This has become a very real problem as defaults increase in complex debt instruments.

fiduciary conflicts, agency, securities, bankruptcy, CDO, SIV

Abstract:
For years, scholars have questioned the efficiency of secured debt, many suggesting that it transfers uncompensated risk to unsecured creditors. This Article argues that the most important form of secured debt, new money credit secured by collateral, tends to create value for unsecured creditors as well as for the debtor. Prior writing on the value of secured debt ignores the distinction between the use and the availability (and subsequent use only if needed) of secured credit. As a result, previous models of secured debt erroneously assumed that a debtor that can borrow on an unsecured basis may well prefer to borrow on a secured basis to reduce interest cost. The Article combines theory and experience to show that those models do not reflect an economically rational debtor. A rational debtor that can borrow unsecured has an economic incentive not to prematurely encumber its assets because doing so gives away value in an amount, which the Article calls Theta, that exceeds any interest cost saving. Perhaps the most significant component of this value is the increased liquidity in times of financial trouble that secured credit affords. The Article also shows that this increased liquidity does not generally keep debtors alive that should be allowed to fail. Bankruptcy creates market imperfections that tend to make lenders reluctant to extend credit, even on a secured basis, to debtors that are likely to go bankrupt. Furthermore, these market imperfections discourage troubled debtors from incurring secured debt unless they can thereby avoid bankruptcy. Secured credit is therefore usually extended in these circumstances only where the liquidity would help the debtor regain viability. Therefore, unsecured creditors should want a debtor to have access to secured credit.

Abstract:
This article examines the temporal conflict between current and future investors. Although disclosure can reduce the information asymmetry between a firm and investors in the firm's securities, disclosure itself involves probabilities and difficult judgment choices and often is ambiguous. If a risk is possible though unlikely, should management disclose it? If the risk should be disclosed, how prominently should it be disclosed? These questions highlight the temporal conflict: disclosure of a possible risk harms a firm's current investors, and the more prominent the disclosure, the greater their harm; but failure to disclose the risk, or to give sufficient prominence to the disclosure, may harm the firm's future investors. The article's purpose is both positive and normative: to explain the conflict and its attendant problems, and to help resolve the conflict by analyzing, in each case, who should be included in the relevant audience.

Abstract:
This article argues that certain basic principles of bankruptcy reorganization law can create a framework for crafting national laws for the restructuring of subnational debt, and that these principles should have universal application to the internal laws of any nation irrespective of its subnational structure or its existing approach toward insolvency law.

Abstract:
In a prior article, I asked why, if a sovereign debt restructuring treaty would be effective and easy to implement, one does not yet exist. There appeared to be at least three reasons: the very novelty of the approach; the opposition of interest groups who believe that a treaty-approach would make it too easy for sovereign debtors to default; and the failure of parties to appreciate the importance of a treaty approach, coupled with concern over ceding sovereignty. In this short reverie, which takes its inspiration from Edward Bellamy's Looking Backward, I hope to show that these reasons are flawed and that - even where bond issues already include collective-action clauses - a treaty approach would benefit both debtor-nations and their creditors.

Abstract:
In recent articles in the Yale Law Journal and the Stanford Law Review, Professor Lynn M. LoPucki has sparked much academic discussion arguing that recent developments in corporate law have led to an erosion in the system of corporate liability, such that it might one day prove impotent. LoPucki has argued that transactions such as asset securitizations, sale-leasebacks, and corporate structures in which liabilities are placed in asset-poor subsidiaries are driving this change. One early critic to the LoPucki thesis, Professor James J. White, has argued that empirical data show no evidence of increasing use of judgement proofing techniques. In this Article, Professor Steven L. Schwarcz joins this debate, arguing that an economic analysis of these transactions suggests that widespread use of these judgement proofing techniques is unlikely. A key distinction in the analysis, Schwarcz argues, is between arm's length and non-arm's length transactions. Arm's length transactions are unlikely to lead to judgement proofing because corporations will receive value - often cash - for the assets they sell. It is only by paying out this value in dividends that a corporation begins to judgement-proof itself. The theoretical possibility to take value away from future involuntary creditors through such transactions will rarely be realized because of the costs - taxes, negative publicity, personal and criminal liability - of entering into such agreements. By contrast, in non-arm's length transactions, corporate owners do have the incentive to create judgement-proof structures. However, these structures are not innovative, and they will continue to be well-regulated ex post by existing legal doctrines in bankruptcy, corporate law, tort law, and criminal law. Following this article are a response from Professor Lynn LoPucki, a comment by Professor Charles Mooney, and a breif rejoinder from Professor Schwarcz.

Abstract:
Under Section 9-309(3) of the Uniform Commercial Code, sales of payment intangibles are automatically perfected without the requirement of filing financing statements. Originally intended as a concession to the banking industry (to perfect sales of loan participations without filing), this provision has become a trap for the unwary - including unwary banks. It misleads those who think they're buying payment intangibles (and thus need not file to perfect) only to find out, too late, that a court has construed that arcane definition too narrowly. It also undermines the ability to know one's priority in purchased or pledged payment intangibles. This essay analyzes these problems, examines their historical origins, and suggests potential solutions.

Abstract:
In this article, Messrs. Schwarcz and Rothman analyze the disquieting impact of civil forfeiture law on creditors' rights. The article begins by describing the historical origins of civil forfeiture and its development into current day law. The article then explores the tension between forfeiture law and commercial bankruptcy law by examining the effect of a forfeiture action on unsecured and undersecured creditors. The article evaluates a recent model for balancing governmental and commercial law interests, and concludes by suggesting reforms to the present civil forfeiture scheme.

Abstract:
This article examines the private rulemaking process under which uniform state laws are formulated. It suggests that deficiencies may arise from the failure of rulemakers to step back and ask fundamental questions about the consequences of the rules being proposed and sets forth a framework for asking these questions. As part of this framework, the article indentifies and explores the meaning of underlying statutory policies, such as consistency and fairness. Although the article's focus is on private rulemaking, its conclusions are show to be relevant to public rulemaking and possibly even to judicial decisionmaking.

Abstract:
This article examines the conflict between state law which under UCC Sec. 9-204 permits the creation of security interests in a debtor's after-acquired property - or floating liens - and federal bankruptcy law's potential cutoff under 11 U.S.C. Sec. 552 of many of those security interests. This conflict arises in virtually every bankruptcy case. However, because of ambiguous statutory language and a failure of the jurisprudence to balance competing policies, the case law is ad hoc and lacks a conceptual center. This article argues that using a model of a debtor in liquidation to analyze the cutoff of floating liens would balance the underlying policy considerations and make judicial outcomes more predictable. The model would apply irrespective of whether the debtor actually liquidates or reorganizes.

Abstract:
According to the World Bank, decentralization of government is a pivotal force that will shape global development policy in the 21st Century. Subnational debt restructuring has emerged, however, as one of decentralization's most difficult problems. Financially troubled municipalities face many of the same concerns, for example, as financially troubled nations: holdout creditors can stymie collective attempts at debt restructuring, and reliance on politically-motivated lenders of last resort (the International Monetary Fund in the case of troubled nations, the central government in the case of troubled municipalities) can foster moral hazard. In a recent article, I argued that an international convention for sovereign debt restructuring based on several fundamental principles of bankruptcy reorganization law can effectively address these concerns for nations. In this article, I argue that similar principles can even more easily be applied to the financial problems of subnational governments. To this end, I propose a model law based on these principles that might form the foundation for a national law, informed by local political and legal culture. Then, using the Japanese municipal crisis as an example, I show that countries enacting such a law can prudently and equitably resolve their subnational debt burdens.

Abstract:
Receivables potentially constitute the single largest category of assets transferred in cross-border financing transactions. Being intangible, however, their transfer is not physically apparent. Because the problem of evidencing, or perfecting, these transfers has been addressed in various ways by different countries, there is no international perfection standard. This lack of a standard deters the growth of receivables financing, which in turn impedes economic development. Recently, however, the United Nations Commission on International Trade Law (UNCITRAL) has drafted a Convention on Assignment in Receivables Financing to regulate cross-border receivables transactions. The Convention provides for an optional perfection standard of centralized registration. I use empirical evidence and historical analogy to argue that it is in the interest of countries that become parties to the Convention to opt for that standard.

Abstract:
This symposium article examines how disclosure, the regulatory focus of the federal securities laws, has failed to achieve transparency in the subprime mortgage crisis and what this failure means for modern financial securities markets.