July 12, 2009
Partnoy on Regulating Credit Ratings
Rethinking Regulation of Credit Rating Agencies: An Institutional Investor Perspective, by Frank Partnoy, University of San Diego - School of Law, was recently posted on SSRN. Here is the abstract:
This white paper was commissioned by the Council of Institutional Investors for the purpose of educating its members, policymakers, and the general public about important credit rating agency regulation proposals and their potential impact on investors. It offers an institutional investor perspective of the pros and cons of several proposals for redesigning credit rating agency regulation. It focuses on two areas of primary importance - oversight and accountability - and offers specific recommendations in both areas.
First, Congress should create a new Credit Rating Agency Oversight Board (CRAOB) with the power to regulate rating agency practices, including disclosure, conflicts of interest, and rating methodologies, as well as the ability to coordinate the reduction of reliance on ratings. Alternatively, Congress could enhance the authority of the Securities and Exchange Commission (SEC) to grant it similar power to oversee the rating business. Second, Congress should eliminate the effective exemption of rating agencies from liability and make rating agencies more accountable by treating them the same as banks, accountants, and lawyers.
As financial gatekeepers with little incentive to “get it right,” credit rating agencies pose a systemic risk. Creating a rating agency oversight board and strengthening the accountability of rating agencies is thus consistent with the broader push by U.S. policymakers for greater systemic risk oversight. Over the long term, other measures for assessing credit risk may become more acceptable and accessible to regulators and investors. Meanwhile, a more powerful overseer and broader accountability would help reposition credit rating agencies as true information intermediaries.
Partnoy on Overdependence on Ratings
Overdependence on Credit Ratings Was a Primary Cause of the Crisis, by Frank Partnoy, University of San Diego - School of Law, was recently posted on SSRN. Here is the abstract:
A primary cause of the recent credit market turmoil was overdependence on credit ratings and credit rating agencies. Without such overdependence, the complex financial instruments, particularly Collateralized Debt Obligations (CDOs) and Structured Investment Vehicles (SIVs), which were at the center of the crisis could not, and would not, have been created or sold. Long-term sustainable policy measures should take into account both regulatory and behavioral overdependence on ratings.
Bruner on the Anglo-American Corporation
Power and Purpose in the 'Anglo-American' Corporation, by Christopher M. Bruner, Washington and Lee University - School of Law, was recently posted on SSRN. Here is the abstract:
Public corporations in the United States and the United Kingdom are – from the global perspective – so very similar that it has become a commonplace in the comparative corporate literature to treat them as if they were practically identical. Notably, large American and British corporations tend to finance their operations through public offerings of stock to passive, dispersed investors, whereas their counterparts elsewhere tend to be financed and dominated by controlling families, banks, corporate groups, or the government. Likewise, the U.S. and U.K. corporate governance systems emphasize generating returns for public shareholders more than other systems do, reflecting a relatively shareholder-centric perspective fairly described as uniquely “Anglo-American.” I argue, however, that the U.S. and U.K. corporate governance systems exhibit substantial differences that have received insufficient attention in the comparative corporate literature. Simply put, shareholders in the United Kingdom are, in fact, far more powerful, and far more central to the aims of the corporation, than are shareholders in the United States.
In this paper I seek to describe this divergence, to offer an explanation for it, and to explore its practical and theoretical implications. Part I begins with an examination of methodological challenges faced in comparative corporate governance. Part II, then, provides an overview of corporate governance structures reflecting the substantial divergence in shareholder orientation between the U.S. and U.K. systems. In Part III, I argue that a complete explanation of this divergence requires addressing the range of regulatory structures affecting relationships among various stakeholders within the public corporation, including employees. Through an examination of political, social, and cultural forces at work in each country during critical periods in the development of their corporate governance systems, I argue that stronger stakeholder-oriented social welfare policies and legal structures have permitted the U.K. corporate governance system to focus more intently on shareholders without giving rise to political backlash – and conversely that weaker stakeholder-oriented social welfare policies and legal structures have inhibited the U.S. corporate governance system from doing the same. In so doing, I distinguish my approach from other political theories of corporate governance, which I argue fail to account for the observed U.S.-U.K. divergence.
This analysis, I conclude, holds important implications for comparative corporate governance and for domestic debates regarding the future of corporate governance in the United States. In Part IV, I argue that my analysis exposes substantial shortcomings in comparative theories predicting or advocating convergence on a shareholder-centric model, to the degree that they fail to address the political, social, and cultural factors conditioning the degree of shareholder-centrism in U.S. and U.K. corporate governance. More broadly, I argue that my analysis casts doubt on the descriptive power of economically driven theories of corporate governance built on the portrayal of the public corporation as a purely private endeavor.
Stout on Derivatives Regulation
How Deregulating Derivatives Led to Disaster, and Why Re-Regulating Them Can Prevent Another, by Lynn A. Stout, University of California, Los Angeles - School of Law, was recently posted on SSRN. Here is the abstract:
When credit markets froze up in the fall of 2008, many economists pronounced the crisis both inexplicable and unforeseeable. That’s because they were economists, not lawyers.
Lawyers who specialize in financial regulation, and especially the small cadre who specialize in derivatives regulation, understood what went wrong. (Some even predicted it.) That’s because the roots of the catastrophe lay not in changes in the markets, but changes in the law. Perhaps the most important of those changes was the U.S. Congress’s decision to deregulate financial derivatives with the Commodity Futures Modernization Act (CFMA) of 2000.
Prior to 2000, off-exchange derivatives contracts were subject to a common-law rule called the “rule against difference contracts” that treated derivative contracts that could not be proven to hedge against a real position in the underlying asset as legally unenforceable wagering contracts. Speculative wagers on prices could only be safely made on regulated exchanges. Congress overturned this centuries-old rule in 2000, making it legal for hedge funds, banks and insurance companies to use derivatives for speculative gambling, not just for true hedging. This led to the collapse of AIG and the 2008 credit crisis.