BRENT T. WHITE, University of Arizona - James E. Rogers College of Law
Email: brent.white@law.arizona.edu

Despite reports that homeowners are increasingly “walking away� from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

LOOK CHAN HO, Freshfields Bruckhaus Deringer LLP
Email: lookchan.ho@googlemail.com

In explaining the concept of centre of main interests (COMI) within the UK Cross-Border Insolvency Regulations 2006 (CBIR), the Englush court in Re Stanford International Bank over-emphasised third-party ascertainability due to an apparent lack of appreciation of the different functions performed by the COMI concept under the CBIR and the EC Insolvency Regulation.

In cases of fraud, the court’s approach to the COMI presumption risks the court concreting the fraudsters’ house of cards.

The Stanford decision also unnecessarily jars with case-law under Chapter 15 of the US Bankruptcy Code.

STEPHEN HABER, Hoover Institution and Political Science, Stanford University, National Bureau of Economic Research (NBER)
Email: Haber@stanford.edu
F. SCOTT KIEFF, George Washington University - Law School, Stanford University - Hoover Institution on War, Revolution and Peace
Email: skieff@law.gwu.edu

Few doubt the seriousness of the recent crisis afflicting the financial systems of the United States and the world. Few claim that nothing needs to be fixed. And few have missed the major debates about what types of solutions are best - often conducted at high volume, intensity, and frequency. So rather than try to add to one side or the other of the well-rehearsed arguments about each type of proposed reform, we try to refocus the analysis on some core incentives: when the basic rules of the game are changing, property rights and the rule of law are too ill-defined, creating exactly the wrong incentives for investment and economic growth. The wrong incentives created by repeated surges of bold government action pose risks that have direct, short-term impacts, which we fear have been seriously underexplored during both the end of the Bush administration and the beginning of the Obama administration. We hope that, by pointing out these risks, they can be significantly mitigated at relatively low cost.

We begin by recommending a change to the general approach: halt soon the introduction of new, bold programs. We are not saying that nothing should be done; we are saying that it is important in times like these for government to reach closure on its decisions so that it can pick one set of rules of the game and then stick to them. We then focus more narrowly on the process of structuring workouts from bad deals and recommend avoiding approaches that undermine bankruptcy. Bankruptcy allows the large group of private professionals who are experts at restructuring or winding up bad deals - consultants, financiers, lawyers, managers, and so on - to get involved. Given the magnitude of the problem of toxic assets, any solution to the current crisis will almost certainly need to involve these private actors. We then explore how particular reform proposals can be implemented without running afoul of the cautions that are the focus of our effort. In the final analysis, we applaud the Herculean efforts by so many serious thinkers in the Bush and Obama administrations and outside government who have thrown themselves into this important work in good faith and with great sacrifice. All we can hope to add to the conversation are these relatively easy-to-deploy (and important to deploy quickly) tools for mitigating some vital but underappreciated risks with proposed financial system fixes.

STEPHEN J. LUBBEN, Seton Hall University - School of Law
Email: lubbenst@shu.edu

The "safe harbors" excuse derivatives from much of the normal operation of the Bankruptcy Code. This exception to the normal rules is justified by fears that involvement of derivatives in the bankruptcy process will increase systemic risk. But as I and others have argued, the safe harbors themselves are likely to increase systemic risk by encouraging a "run on the bank." As Congress considers a variety of responses to the financial crisis, I argue that it is time to repeal the safe harbors. I do not advocate pulling out sections of the Bankruptcy Code and leaving the Code otherwise the same. Derivative contracts are somewhat unique. The volatility, interconnectedness and sheer magnitude of the sums of money involved make financial firms unique. As part of the repeal that I suggest, the Code would have to adapt to these realities. But the safe harbors should be repealed.

NICHOLAS DORN, Erasmus University Rotterdam - School of Law
Email: dorn@law.eur.nl

This response to the 2009 UK White Paper on ‘Reforming Financial Markets’ argues for stronger democratic oversight of regulators and for regulatory diversity in order to reduce ‘market herding’ and the consequent systemic risks. In the context of hitherto weak democratic accountability and political challenges, international networking of regulators and those they regulate has resulted in convergence of regulatory thinking and standards - creating groupthink, common ‘blind spots’ and systemic vulnerability. The antidote, regulatory diversity, would correspond to the strategy of re-politicisation of financial market regulation, and democratic steering of regulatory agencies, displacing the currently dominant notion of financial market regulation as a purely technical, expert, ‘insider’ discourse. If it is too much of a paradox for policy-makers and market participants that international cooperation in pursuit of global stability must include making space for some regulatory diversity, then we may expect re-plays of recent stressful events.