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Blue Sky 2013-2014

May 15, 2014

Michelle White, Professor of Economics, University of California, San Diego

Discussion Topic: Using Bankruptcy to Reduce Foreclosures: Does Strip Down of Mortgages Affect the Supply of Mortgage Credit?

We assess the credit market impact of allowing mortgage “strip-down”—that is, reducing the principal of underwater residential mortgages to the current market value of the property for homeowners in Chapter 13 bankruptcy. Our identification is provided by a series of U.S. Circuit Court of Appeals decisions in the early 1990’s that introduced mortgage strip-down in parts of the U.S., followed by a 1993 Supreme Court ruling that abolished it all over the U.S. We find that the Supreme Court decision led to a short-term reduction of 3% in mortgage interest rates and a short-term increase of 1% in mortgage approval rates, but only the approval rate effect persists in longer sample periods. In contrast, the circuit court decisions to allow strip-down did not have consistent effects on mortgage terms. We also show that strip-down had little effect on default rates by homeowners with existing mortgages. Taken together, these results suggest that mortgage lenders responded weakly to both the adoption and abolition of strip-down because strip-down had little effect on their profits from mortgage lending. According to these findings, re-introducing strip-down of mortgages in bankruptcy as a foreclosure prevention program would have only small and transient effects on the supply of mortgage loans.

Please RSVP to Greg Klochkoff (, including any special dietary requests. 

For a pdf of the paper, click here

April 7, 2014

Peter Conti-Brown, Academic Fellow, Stanford Law School

Discussion Topic: The Institutions of Federal Reserve Independence

The Federal Reserve System has come to occupy center stage in the formulation and implementation of national and global economic policy. And yet, from the perspective of legal theory, the mechanisms through which the Fed acts autonomously from other governmental actors are barely analyzed. This article undertakes that analysis and describes the way that law does--and, more interestingly, does not--shape the Fed's vaunted independence. The article demonstrates that nothing within the Federal Reserve Act's independence enhancing mechanisms are as they seem, including the Fed's self-funding, participation or private banks' representatives on the Fed's monetary policy-making committee, the long tenures of the members of the Fed's Board of Governors, and other examples frequently invoked by scholars and policy-makers to explain--incorrectly or incompletely--the Fed's independence. In the process, the article challenges the prevailing accounts of independence in administrative law, economics and political science, all of which focus on statutory mechanisms of creating policy--making space between the central bank and other governmental institutions. Fed independence is not, then, simply a creature of statute, but an ecosystem of formal and informal institutional arrangements, within and beyond the control of the actors and organizations most interested in controlling Fed policy.

For a pdf of the paper, click here

March 31, 2014

Thomas W. Merrill,Charles Evans Hughes Professor of Law, Columbia Law School

Discussion Topic: Dodd-Frank Orderly Liquidation Authority: Too Big for the Constitution?

Title II of the Dodd-Frank Act of 2010 establishes a new specialized insolvency regime, known as orderly liquidation, for nonbank financial companies deemed to be too big to fail. Title II raises a number of serious constitutional questions, most of them related to the provisions requiring a federal district judge to appoint the receiver for a failing firm. In order to vest the appointment authority in an Article III judge, and yet also avoid a financial panic, the Act requires that the judicial proceedings be conducted in secret, that no notice can be given to the public or other interested parties on pain of criminal penalties, and that the judge must rule on the petition to appoint the receiver within twenty four hours. These unprecedented procedures raise serious questions under the Due Process Clause, Article III of the Constitution, and the First Amendment. The very broad discretion given the executive branch to decide whether a distressed financial firm should be subject to mandatory liquidation under Title II, as opposed to conventional bankruptcy, also raises questions under the uniformity requirement of the Bankruptcy Clause. Finally, Title II raises a number of potential takings issues. Given the extremely abbreviated time for judicial appointment of a receiver, the prohibition on any stay pending appeal, and the absence of any post-appointment judicial review of the decision to put a firm into receivership, there are also a number of vexing questions about how and when the constitutional issues raised by Title II might be presented to the courts. This article examines these constitutional and procedural questions, and argues that Congress should amend the Dodd-Frank Act to provide for plenary judicial review after rather than before a receiver is appointed. This simple change, along with some tightening of the language that determines when orderly liquidation rather than bankruptcy is appropriate, would help assure that the new Title II authority is not undermined by a confusing welter of constitutional claims, if and when it becomes necessary to use this authority to avert a future financial crisis.

For a pdf of the paper, click here

January 27, 2014

Wolf-Georg Ringe, Professor of International Commercial Law, Copenhagen Business School

Discussion Topic: Banking Union Resolution Without Deposit Guarantee: A Transatlantic Perspective On What It Would Take, authored with Jeffrey N. Gordon

The project of creating a Banking Union is designed to overcome the fatal link between sovereigns and their banks in the Eurozone. As part of this project, political agreement for a common supervision framework has been reached with difficulty, and it looks possible that resolution may follow soon. However, Member States’ disagreements appear to rule out a federalized deposit insurance scheme, commonly regarded as the necessary third pillar of a successful Banking Union. This paper argues for an organizational and capital structure substitute that can minimize the systemic distress costs of the failure of a large financial institution. We borrow from the approach the FDIC has devised in the implementation of the "Orderly Liquidation Authority" under the Dodd Frank Act. The FDIC’s experience teaches us three important lessons: first, systemically important institutions need to have in their liability structure sufficient subordinated term debt so that in the event of bank failure, the conversion of debt into equity will be sufficient to absorb asset losses without impairing deposits and other short term credit; second, the organizational structure of the financial institution needs to permit such a debt conversion without putting core financial constituents through a bankruptcy, and third, a federal funding mechanism deployable at the discretion of the resolution authority must be available to supply liquidity to a reorganizing bank. On these conditions, deposit insurance plays a subsidiary role in resolution and could remain at the national (not EU) level.

For a pdf of the paper, click here

January 22, 2014

Kevin Haeberle, Post-Doctoral Research Scholar
Program in the Law & Economics of Capital Markets
Columbia Law School & Columbia Business School

Discussion Topic: Stock-Market Law and the Accuracy of Public Companies' Stock Prices

It is well understood that when public companies’ stock prices are more accurate, corporations are better governed and capital is allocated more efficiently—thereby increasing social welfare. But many believe that those who produce accurate stock prices are unable to capture the full benefits of their efforts, meaning that market forces alone will fail to generate an optimal level of stock-price accuracy. For these reasons, scholars and lawmakers have examined the extent to which securities law can and should be used to enhance price accuracy. Indeed, improving price accuracy is thought to be one of the principal aims of the corporate disclosure, fraud, and insider-trading laws that compose the traditional core of securities law. Yet very little attention has been given to the effect of stock-market law—that is, the law that governs the markets in which stocks are traded—on stock-price accuracy

This Article examines a set of stock-market laws that dictates how stocks are traded in the contemporary stock market. The Article shows that these rules affect the level of price accuracy that the market generates, and argues that stock-market law can be modified to increase that level. Accordingly, it provides a framework to help regulators determine whether using this previously unidentified way to improve price accuracy is socially desirable.

January 16, 2014

Martijn Cremers, Professor at Mendoza College of Business


Discussion Topic: Staggered Boards and Firm Value, Revisited

This discussion revisits the association between firm value (as proxied by Tobin’s Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978 – 2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.

For a pdf of the paper, click here.

October 30, 2013

Robert M. Daines, Pritzker Professor of Law and Business Stanford Law School

Discussion Topic: "Right on Schedule: CEO Option Grants and Opportunism" (Authored with Grant R. McQueen and Robert J. Schonlau)

In the wake of the backdating scandal, many firms began awarding options at the same time each year. These scheduled option grants eliminate backdating but create other agency problems. CEOs that know the dates of upcoming scheduled option grants have an incentive to temporarily depress stock prices before the grant dates to get options with lower strike prices. We provide evidence that CEOs respond to this incentive and document negative abnormal returns before scheduled option grants and positive abnormal returns after the grants. These returns are higher when CEOs have the incentive and ability to influence stock price. For example, the size of the abnormal returns is increasing in the number of options awarded to the CEO. We document several mechanisms CEOs use to manipulate the strike price, including changing the substance or timing of the firm’s disclosures.

For a pdf of the paper, click here.


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Upcoming Events

December 18, 2014

"Israel, the United States, and the Shifting Energy Landscape"

Tel Aviv University, Israel

Agenda |  Registration | Live Broadcast

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This conference will focus on the energy landscape and its importance and is hosted by the Institute for National Security Studies, as well as three centers at Columbia University: the Center for Israeli Legal Studies, the Richman Center for Law Business and Public Policy, and the Center on Global Energy Policy.

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November 11, 2014
Martin Schroeter and Laurie Simon Hodrick
"Capital Structure in Major Corporations"

November 5, 2014
Dave Bozeman
"US Competitiveness in the Manufacturing Sector"

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Global Justice Forum on Income Inequality

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Conference proceedings will be available soon!

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Featured Event

Dave Bozeman, SVP Catepillar Enterprise, on "U.S. Competitiveness in the Manufacturing Sector"

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Analyzing Global Financial Stability: "Have we Tamed the Too Big To Fail Financial Institutions?"

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