Category: Financial Institutions

Law and Economics: The Flow of Ideas is a Two-Way Street

Raul Carrillo and Rohan Grey have recently argued that “law students need macroeconomics…and macroeconomics needs us”—and I couldn’t agree more. They have launched several initiatives at Columbia to build on the excellent finance curriculum offered there:

As Professor Robert Jackson opined in The Modern Money Network’s recent seminar, “The way we talk about money systems in law school has been blocked in a way, because we’re not really honest with each other about the fact that our money system is a legal choice… We may have covered, in legal academia, microeconomics in reasonable depth, but we need to do much more work in macroeconomics.”

When we “do economics” in law school, we customarily confine it to the scale of individual entities, say, firm transactions in Contracts and Corporations. Broader discussion of political economy rarely creeps into the curriculum…. Whether you eventually practice or make policy, negotiate deals or craft legislation, every student can benefit from further integration of political economy into the curricula. This is why The Modern Money Network, a newly recognized student organization, exists. It is a transdisciplinary hub for learning about the interactions between money, finance, law, and the broader economy.

Carrillo has also observed that the Fed used to have far more input from attorneys, but has since become an intellectual monoculture of economists. That, too, has to change. We can only hope to reform the finance sector by addressing power dynamics among boards, CEOs, traders, and investors—the types of dynamics lawyers are expert at creating and manipulating. Moreover, attorneys need to understand the overall effect of finance on the broader economy, and not simply think of ourselves as mere hired guns for the highest bidders. I’ll be closely following the work of Carrillo and Grey, and suggesting some fruitful directions for political economy and law.

They are also looking to expand their approach to other law schools—so try to contact them (@ramencents for Carrillo, @rohangrey for Grey) if you’re interested. It’s great to see the legacy of Robert Lee Hale endure at Columbia!

Economic Growth and Legal Regularity

Izabella Kaminska is one of the most insightful writers at the Financial Times. In a recent post, she helps us understand the paradoxical relationship between legal regularity and economic growth. She first quotes from a recent work by Katharina Pistor, entitled “A Legal Theory of Finance,” which crystallizes the tensions at play:

Law lends credibility to financial instruments by casting the benevolent glow of coercive enforceability over them. But the actual enforcement of all legal commitments made in the past irrespective of changes in circumstances would inevitably bring down the financial system. If, however, the full force of law is relaxed or suspended to take account of such change, the credibility law lends to finance in the first place is undermined.

Kaminska applies this logic to explain why the shutdown threat eventually dissipated:

[In the] Tea Party shutdown standoff . . . . [i]t soon became clear that while upholding the debt ceiling and risking system collapse may have made a lot of sense to those without savings, lots of gold and many guns (i.e. those the Tea Party was representing) it did not serve the interests of the Tea Party’s wealthy benefactors who had a vested interest in seeing the system survive.

[For the middle class Tea Partiers,] the law, by yielding on bailouts and debt ceilings, is already failing them, so the step to outright lawlessness is hardly a step away. All they need is enough smarts (gold!), muscle (guns!) and divine favour (the constitution!) to survive the apocalypse, and re-establish the law on their terms. And this is how the apocalypse mindset arguably comes into play. Luckily for the markets, those in the apex of power are more likely to be aware that their wealth is symbiotically dependent on a functional and cohesive system anyway and that no man is an island.

I have to wonder, though, if the benefits of disorder are not greater for some very powerful players near the top of the system. Isn’t a classic recipe for financial success buying assets “on the cheap” in the midst of crisis?

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UCLA Law Review Vol. 61, Discourse

Volume 61, Discourse Discourse

Fighting Unfair Credit Reports: A Proposal to Give Consumers More Power to Enforce the Fair Credit Reporting Act Jeffrey Bils 226
A Legal “Red Line”? Syria and the Use of Chemical Weapons in Civil Conflict Jillian Blake & Aqsa Mahmud 244
Alleyne v. United States, Age as an Element, and the Retroactivity of Miller v. Alabama Beth Colgan TBD

A Nobel for Shiller

When I read Robert Shiller’s Finance and the Good Society last year, I had a sense the author treated the work as the penultimate step in a scholarly cursus honorum, to culminate in the Nobel. Thus my cautionary note in this review:

[Shiller] has eloquently analyzed the role of human psychology in markets, and he predicted both the tech and housing bubbles. He has been a methodological trailblazer, introducing behavioral science to the ossified academic discipline of finance. Time’s Michael Grunwald has called him a “must-read” among wonks in the Obama Administration. Shiller’s past books command respect and repay close reading. Given his sterling career, it is deeply disappointing to see Shiller divert the “behavioral turn” in economics into the apologetics of Finance and the Good Society.

As I explain in the review, in Finance and the Good Society Shiller engages in the cardinal sin of celebrity economists: he presumes to comment authoritatively on legal, poltical, and moral matters far from his real domain of expertise. As for co-winner Eugene Fama’s contributions, Justin Fox’s work is useful (as summarized in this 2009 review):

Eugene Fama . . . promulgated the efficient markets hypothesis in its most widely recognised form by combining it with the capital asset pricing model that portrays investing as a trade-off between risk and return. . . . [I]n the early 1990s, Fama and Kenneth French published a large empirical survey of stock market returns since 1940 and found several ways in which returns were not random and which could not be explained by [Fama's theory]. In aggregate, smaller companies did better than larger ones, while “value” stocks, which are cheap compared with the book value on their balance sheet, also outperformed. There was even a “momentum” effect – stocks that had been doing well for a while tended to continue to do so. . . . . Fox makes clear that this was tantamount to the founder of efficient markets admitting his theory was wrong and quotes the judgment of one critic: “The Pope said God was dead.” He is also scathing about Fama’s attempt to rescue the theory by categorising all these effects as “risk factors”. . . . All of this came more than a decade before last year’s implosion. So why did regulators continue to enshrine assumptions of efficiency in the rules they set?

The person who can answer that last question truly deserves a Nobel.

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Credit Card Merchant Fee Settlement — Injunctive Relief

Credit Card CroppedPrior installments in this series addressed the background leading up to the credit card merchant fee class action and the damages provisions in the b(3) opt out class action.  This post addresses the injunctive relief provisions that the settlement in In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation styles as a mandatory b(2) non-opt out class action.  An upcoming final installment in this series will address the release provisions in the settlement.

B(2) classes are appropriate where the nature of the injunctive relief is such that it will necessarily affect every class member.  After setting out the relief proposed in the settlement, I’ll provide some thoughts on whether b(2) is really an appropriate device for this case.  Perhaps class action experts out there could weigh in on this issue in the comments.

The injunctive relief set out by the settlement is notable for what is not provided.  Nothing in the settlement addresses the core concerns in the complaint about (1) the collective setting of a default interchange fee; (2) the rule prohibiting merchants from rejecting the cards of, surcharging the card transactions of, or otherwise discriminating against some card-issuing banks, but not others; or (3) the rules making it impossible for merchants to route transactions over the least expensive network.

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Credit Card Merchant Fee Settlement – Damages Provisions

Credit Card CroppedThis post will evaluate the settlement’s damages provisions.  You can find my first post providing background on the litigation here.  The settlement provided that upon the court’s preliminary approval, the card networks would pay $6.05 billion, 2/3 from Visa and 1/3 from MasterCard into a settlement fund.  Depending on how many merchants chose to opt out, however, the defendants retained the right to reduce the fund through take down payments of up to 25% of the total and to kill the deal if opt outs exceeded that amount.  Opt outs exceeded that amount, but the defendants have not abandoned the settlement.  In addition to the flat fee award, Visa and MasterCard agreed to cut their applicable interchange fees by 10 basis points for eight months.  Rather than actually reducing the fees paid by merchants, however, Visa and MasterCard would withhold 10 basis points from collected fees that would otherwise have been paid to card issuers.  This amount would then be contributed into the settlement fund within 60 days from the expiration of the eight-month period.  This contribution would be non-refundable, regardless of opt outs.

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The Credit Card Merchant Fee Litigation Settlement

I’d like to thank Concurring Opinions for inviting me to blog about In re: Payment Card Interchange Fee and Merchant Discount Antitrust Litigation.  This eight-year-old multi-district litigation has produced the largest proposed cash settlement in litigation history  ($7.25 billion) along with what is perhaps the most extraordinary release from liability ever concocted.  It may also be the most contentious.  Over half the name plaintiffs and over 25% of the class, including most large merchants (think Walmart, Target) and most merchant organizations, have objected.  On September 12, Eastern District of New York Judge John Gleesaon held a fairness hearing to consider the settlement, and the parties are awaiting his decision.  An appeal is a virtual certainty.

This post will provide background on the credit card industry pricing mechanisms that led to this litigation, the legal issues in the case, and the structure of the settlement.  (You can read more about the history of the credit card industry’s relationship to the antitrust laws here.)  In subsequent posts, I’ll separately analyze the damages and relief provisions in the settlement.  (If you can’t wait 8-) my working paper analyzing the settlement is here.)  If there are particular issues that you’d like to read more about, let me know in the comments and I will respond in subsequent posts.

The credit card industry is atypical, but not unique, in that it competes in a two-sided market, i.e., one that serves two distinct customer bases.  A card system like Visa provides both a purchasing device (credit cards) to consumers and a payment acceptance service to merchants.  (By way of comparison, the legal blogging market is also two-sided.  Concurring Opinions provides both an information forum to its readers and a platform to its advertisers.)

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A Refreshing Admission from a CFTC Commissioner

CFTC Commissioner Bart Chilton knows how to give a speech. Moreover, the substance is just as good as the style. Breaking from DC norms of decorum, he’s willing to say that his agency has nowhere near the resources it needs to regulate markets:

There are more and more violations of the law occurring, and we aren’t equipped to deal. [B]ad norms in the financial sector seem to be commonplace. A recent study queried 250 financial service industry insiders and 23 percent said they had “observed or had firsthand knowledge of wrongdoing in the workplace.” … To make matters worse, while enforcement officials are working hard …, the resources don’t exist to keep pace. Enforcement efforts are under-funded. Congress hasn’t done its job of providing needed funds to ensure that those who do the crime do the time.

If Congress isn’t going to fund these efforts, here are two requests for what they can do: 1) Allow the CFTC to collect a transaction fee from speculators using commodity markets (both futures and swaps). 2) We have an out-of-date penalty regime. We can only fine … $140,000 per violation. Congress should increase the penalty to $1 million per violation for individuals … and $10 million for firms. Such penalties would serve as a needed deterrent.

Without reforms like these, we will continue to suffer from Potemkin financial regulation. Real enforcement demands a real budget—or the type of deputization HHS’s anti-fraud teams now deploy. And let’s hope the FTC is listening, too. Otherwise we’re stuck with regulators on the bus, biding their time till they can make for the revolving door.

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GW Law’s C-LEAF Jr. Faculty Workshop

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School is pleased to announce its fourth annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes.  The Workshop and Prizes are sponsored by Schulte Roth & Zabel LLP. The Workshop will be held on February 7-8, 2014 at GW Law School in Washington, DC.

 The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty and practitioners. By providing a forum for the exchange of creative ideas in these areas, C-LEAF also aims to encourage new and innovative scholarship.

Approximately ten papers will be chosen from those submitted for presentation at the Workshop pursuant to this Call for Papers. At the Workshop, one or more senior scholars and practitioners will comment on each paper, followed by a general discussion of each paper among all participants. The Workshop audience will include invited young scholars, faculty from GW’s Law School and Business School, faculty from other institutions, practitioners, and invited guests.

At the conclusion of the Workshop, three papers will be selected to receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively.  All prize winners will be invited to become Fellows of C-LEAF.* C-LEAF makes no publication commitment, but chosen papers will be featured on its website as part of the C-LEAF Working Paper series. Read More

The Free Market in Automated Options Trading

Will Goldman get relief denied to Knight Capital?  That’s a big concern as the firm, not all that great at automation, finds itself in a bit of a mess:

[Computers] at Goldman Sachs responsible for trading options whose symbols start with the letters H through L traded a bunch of options at the wrong prices and put Goldman out by a hundred million dollars or so. [V]arious exchanges are sitting down and pondering whether to give Goldman that money back.

Turns out that the rules for a “free market” can get pretty complicated.