Preventing the Fire Next Time: Too Big to Fail

H. Rodgin Cohen
90 Texas L. Rev. 1717

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In Preventing the Fire Next Time: Too Big To Fail, H. Rodgin Cohen, Senior Chairman of Sullivan & Cromwell LLP, New York, New York, argues that “the financial crisis of 2007-2009 threatened the very fabric of the financial system.” Cohen argues that while the great financial crisis requires a regulatory response, such a response “requires thoughtful and comprehensive analysis as opposed to simplistic answers.” Moreover, Cohen points out that any response will impact not only the banking system, but also the overall economy.

Governments as Shadow Banks: The Looming Threat to Financial Stability

Viral V. Acharya
90 Texas L. Rev. 1745

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Governments often have short-term horizons and are focused excessively on the level of current economic activity, disregarding whether financial-sector regulation designed to achieve it leads to long-term instability. Their short-term objective can be well served through policies governing competition and risk taking in the financial sector. By allowing excessive competition, providing downside guarantees, and encouraging risky lending for populist schemes, governments can create periods of intense economic activity fueled by credit booms. This way, governments effectively operate as “shadow banks” in the financial sector, a moral hazard that can have even more adverse consequences than risk-taking incentives of the financial sector. This government role appears to have been at the center of recent boom and bust cycles, especially in the housing sector in the United States through the presence of government-sponsored enterprises (Fannie Mae and Freddie Mac), and continues to pose a threat to financial stability.

Do Labrynthine Legal Limits on Leverage Lessen the Likelihood of Losses? An Analytical Framework

Andrew W. Lo & Thomas J. Brennan
90 Texas L. Rev. 1775

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A common theme in the regulation of financial institutions and transactions is leverage constraints. Although such constraints are implemented in various ways—from minimum net capital rules to margin requirements to credit limits—the basic motivation is the same: to limit the potential losses of certain counterparties. However, the emergence of dynamic trading strategies, derivative securities, and other financial innovations poses new challenges to these constraints. We propose a simple analytical framework for specifying leverage constraints that addresses this challenge by explicitly linking the likelihood of financial loss to the behavior of the financial entity under supervision and prevailing market conditions. An immediate implication of this framework is that not all leverage is created equal, and any fixed numerical limit can lead to dramatically different loss probabilities over time and across assets and investment styles. This framework can also be used to investigate the macroprudential policy implications of microprudential regulations through the general-equilibrium impact of leverage constraints on market parameters such as volatility and tail probabilities.

The Emperor Has No Clothes: Confronting the D.C. Circuit’s Usurpation of SEC Rulemaking Authority

James D. Cox & Benjamin J.C. Baucom
90 Texas L. Rev. 1811

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In The Emperor Has No Clothes: Confronting the D.C. Circuit’s Usurpation of SEC Rulemaking Authority, Professor James D. Cox of Duke University School of Law & Benjamin J.C. Baucom, recent law clerk to Justice Don R. Willett of the Supreme Court of Texas, argue “that the level of review invoked by the D.C. Circuit in Business Roundtable and its earlier decisions is dramatically inconsistent with the standard enacted by Congress.” They conclude “that the D.C. Circuit has assumed for itself a role opposed to the one Congress prescribed for courts reviewing SEC rules.”

What More Can Be Done to Deter Violations of the Federal Securities Laws?

David M. Becker
90 Texas L. Rev. 1849

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In What More Can Be Done to Deter Violations of the Federal Securities Laws?, David Becker of Cleary Gottlieb Steen & Hamilton LLP and former General Counsel and Senior Policy Director of the U.S SEC discusses recent criticism of the SEC that focuses “on the severity of sanctions the SEC obtains in its settlements with wrongdoers.”  Becker argues that “severity does not guarantee efficacy.”  Becker “suggests that there is probably little to be gained from increasing sanctions and that the SEC probably would be better served by focusing its efforts on increasing the likelihood that certain violations are punished and by redoubling its efforts to move more quickly.”

Party Rulemaking: Making Personal Rules Through Party Choice

Robert G. Bone
90 Texas L. Rev. 1329

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Procedural rules have different sources and are made in different ways.  Some boast a constitutional pedigree, while others are legislatively created.  Some, such as the Federal Rules of Civil Procedure, are the product of a formal committee-based rulemaking process, while others are rooted in the common law or the rulemaking of local courts.  In this article, Professor Robert Bone explores yet another source of procedural rules: party rulemaking.  Party rulemaking involves parties choosing general procedural rules for their lawsuits by agreement.  Today, the latitude given to party rulemaking is quite limited in adjudication, even though it is very broad in arbitration.  For example, parties can contract for discovery rules in civil cases, but it is not clear that they can alter otherwise applicable pleading rules, joinder rules, summary judgment rules, and so on.  The scope of party rulemaking has been the subject of intense debate in recent years.  Some scholars favor an expansive approach, one that would turn many of the officially promulgated rules into defaults.  Others urge much stricter limits.  Yet arguments on both sides of the debate are incomplete and rather weak in important respects.  For example, they fail to appreciate the difficulty of evaluating costs and benefits in the highly strategic environment of litigation, and when they discuss the impact of party rulemaking on adjudicative legitimacy, they tend to rely on perceived legitimacy and ignore the importance of normative legitimacy.

In this article, Bone takes a close look at this debate.  He critically examines the conventional arguments for and against party rulemaking and evaluates the balance of costs and benefits from utilitarian and rights-based perspectives.  He concludes that the cost-benefit case against party rulemaking is unpersuasive except in certain cases, and he identifies three limited scenarios that justify judicial restraint in enforcing agreements.  He then turns to arguments from adjudicative legitimacy, those that claim that broad party rulemaking licenses illegitimate departures from the way civil adjudication should be conducted.   Arguments of this type require a theory of adjudication that is capable of identifying core elements essential to the institution’s legitimacy.  In the case of American civil adjudication, he argues, the core elements have to do with an institutional commitment to a distinctive mode of principled reasoning.   It follows that the most troubling examples of party rulemaking are those that tinker with procedures that frame, guide, or incentivize this reasoning process.  In the end, Bone concludes that while some important aspects of procedure should be off limits to party rulemaking, parties in general should have broader freedom to fashion their own procedural rules than they do today.

Injunctions as More (or Less) than “Off Switches”: Patent-Infringement Injunctions’ Scope

John M. Golden
90 Texas L. Rev. 1399

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Injunctions have often been viewed as mere “off switches” that prevent future violations of rights protected by so-called property rules.  But injunctions in fact come in a variety of forms, with different objects, scopes, and degrees of effectiveness.  In practical situations, an injunction might amount to little more than a threat of higher-than-normal monetary sanctions delivered at substantially higher-than-normal speed.

This Article builds on these insights by investigating the potential and actual scopes of injunctions against patent infringement.  An economic model for infringer incentives shows how concerns of injunction scope are substantially analogous to widely examined concerns of patent scope.  A new taxonomy provides named classifications for different forms of injunctions.  A systematic study of patent-infringement injunctions issued by U.S. district courts in 2010 indicates how often these different forms appear in practice.  Startlingly, this study suggests that the majority of such patent-infringement injunctions take an “obey the law” form that violates the Federal Rules of Civil Procedure, at least as the U.S. Court of Appeals for the Federal Circuit has traditionally understood those rules.  In another indication of patent law’s technology specificity, only 12% of the injunctions directed to biomedical-substance technology feature such error.  Meanwhile, courts frequently issue specially tailored injunctions that protect patent rights more or less than a conventional “do not infringe” order would.  Prophylactic injunctions and other specially tailored injunctions should be recognized as legitimate forms of relief that can enable better balancing of concerns of notice, rights protection, rights limitation, and administrability.