The three or four approaches to financial regulation: A cautionary analysis against exuberance in crisis response

George Washington Law Review

Volumn 78, Issue 1, 2009, Pages 39-113

  Cunningham, Lawrence A ^a   Zaring, David ^b  

^a GEORGE WASHINGTON UNIVERSITY   (United States)

^b UNIVERSITY OF PENNSYLVANIA   (United States)

Author keywords

[No Author keywords available]

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EID: 72649084306     PISSN: 00168076     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (365)

1. Some say that if this crisis "fails to do the trick, then there is little hope Washington will ever summon the will to reorganize its creaking, disjointed system of financial regulation." Kevin Drawbaugh, Now or Never for Financial Watchdogs Shake-Up, REUTERS, Oct. 29, 2008, available at http://ww.reuters.coin/article/reutersEdge/idUSTRE49S6PD20081029. Others say "we don't have to start from scratch on regulatory reform of the financial-services industry: There's already a sensible blueprint for change." Editorial, A Starting Point for Regulatory Reform, MINN. STAR TRIB., Sept. 20, 2008, at 10OP.
2. DEP'T OF THE TREASURY, FINANCIAL REGULATORY REFORM: A NEW FOUNDATION: REBUILDING FINANCIAL SUPERVISION AND REGULATION 1 (2009) [hereinafter A NEW FOUNDATION], available at http://online.wsj.com/public/resources/documents/ finregfinal06172009.pdf.
3. DEP'T OF THE TREASURY, THE DEPARTMENT OF THE TREASURY BLUEPRINT FOR A MODERNIZED FINANCIAL REGULATORY STRUCTURE (2008) [hereinafter TREASURY BLUEPRINT], available at http://www.treas.gov/ press/releases/reports/Blueprint.pdf.
4. GROUP OF THIRTY, THE STRUCTURE OF FINANCIAL SUPERVISION: APPROACHES AND CHALLENGES IN A GLOBAL MARKETPLACE (2008) [hereinafter VOLCKER I], available at http://www.deloitte.com/ dtt/cda/doc/content/us-fsi-banking-G30%20Final%20Report%2010-3-08.pdf; GROUP OF THIRTY, FINANCIAL REFORM: A FRAMEWORK FOR FINANCIAL STABILITY (2009) [hereinafter VOLCKER II], available at http://www.group30.org/pubs/pub-1460. htm.
5. GOV'T ACCOUNTABILITY OFFICE, GAO-09-216, FINANCIAL REGULATION : A FRAMEWORK FOR CRAFTING AND ASSESSING PROPOSALS TO MODERNIZE THE OUTDATED U.S. FINANCIAL REGULATORY SYSTEM (2009) [hereinafter GAO FRAMEWORK], available at http://www.gao.gov/new.items/d09216.pdf.
6. MARK COOPER & BARBARA ROPER, REFORM OF FINANCIAL MARKETS: THE COLLAPSE OF MARKET FUNDAMENTALISM AND THE FIRST STEPS TO REVITALIZE THE ECONOMY (2009), available at http://consumerfed.org/pdfs/ FinancialMarketReformReport.pdf.
7. CONG. OVERSIGHT PANEL, SPECIAL REPORT ON REGULATORY REFORM: MODERNIZING THE AMERICAN FINANCIAL REGULATORY SYSTEM (2009), available at http://cop.senate.gov/documents/cop-012909-report- regulatoryreform.pdf.
8. BLANK ROME GOV'T RELATIONS LLC, NEW DEMOCRAT COALITION PRINCIPLES FOR FINANCIAL REGULATORY REFORM (2009), available at http://www.financialreformwatch.com/uploads/file/ New%20Democrat%20Principles%20for%20Fmancial%20Regulatory%20Reform. pdf;
9. CTR. FOR CAPITAL MKTS. C OMPETITIVENESS, U.S. CHAMBER OF COMMERCE, U.S. CHAMBER CENTER FOR CAPITAL MARKETS COMPETITIVENESS REGULATORY REFORM PRINCIPLES (2008), available at http://www.uschamber.com/assets/ccmc/081114ccmc- principles.pdf;
10. INT'L SEC. EXCH., INTERNATIONAL SECURITIES EXCHANGE PROPOSAL FOR REGULATORY REFORM FOR THE U.S. FINANCIAL MARKETS (2009), available at http://www.ise.corn/assets/files/about-ise/ISE-Proposal-for- US-Fmancial-Market-Regulatory-Reform.pdf;
11. INV. CO. INST., FINANCIAL SERVICES REGULATORY REFORM: DISCUSSION AND RECOMMENDATIONS (2009), available at http://www.ici.org/pdf/ppr- 09-reg-reform.pdf;
12. Noel Sacasa, Preventing Future Crises: Priorities for Regulatory Reform after the Meltdown, FIN. & DEV., Dec. 2008, at 11;
13. LUIGI ZINGALES, A New Regulatory Framework, CITY J., Mar. 31,2009, at 4, available at http://www.city-journal.org/ 2009/eon03311z.html;
14. Charles Calomiris, The Subprime Turmoil: What's Old, What's New, and What's Next (Oct. 2, 2008) (unpublished manuscript), available at http://www.williams.edu/Economics/seminars/Calomiris-10-02-08.pdf;
15. Press Release, Comm. on Capital Mkts. Regulation, Committee on Capital Markets Regulation Releases Recommendations for Reorganizing the U.S. Financial Regulatory Structure (Jan. 14, 2009), available at http://www.capmktsreg.org/ pdfs/CCMR %20- %20Recornmendations%20for%20Reorganizing%20the%20US%20Regulatory%20Structure. pdf;
16. Stephany Griffith-Jones, Proposals for Regulatory Reform (July 29,2009) (unpublished policy brief), available at http://wwwO.gsb.columbia.edu/ipd/pub/ proposals-for-regulatory-principles.pdf.
17. For an international perspective see Eric J. Pan, Structural Reform of Financial Regulation: The Case of Canada, 18 TRANSNAT'L L. & CONTEMP. PROBS. (forthcoming Fall 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1333385.
18. E.g., Oren Bar-Gill & Elizabeth Warren, Making Credit Safe, 157 U. PA. L. REV. 1, 98 (2008) (proposing a federal Financial Product Safety Commission as a consolidated federal regulator akin to the Consumer Products Safety Commission); John C. Coffee, Jr. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a Better Idea?, 95 VA. L. REV. 707 (2009) (concentrating on the Securities and Exchange Commission).
19. See, e.g.. Press Release, Dep't of the Treasury, Treasury Outlines Framework for Regulatory Reform: Provides New Rules of the Road, Focuses First on Containing Systemic Risk (Mar. 26, 2009) [hereinafter Treasury Outlines Framework], available at http://www.financialstability.gov/latest/tg72. html.
20. Damian Paletta, U.S. to Toughen Finance Rules, WALL ST. J., Mar. 16, 2009, at Al; President Barack Obama, Remarks by the President After Regulatory Reform Meeting (Feb. 25, 2009), available at http://www.whitehouse.gov/the-press-office/Remarks-by-the-President-after- Regulatory-Reform-Meeting/.
21. E.g., FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 13-14 (1991);
22. ROBERTA ROMANO, THE GENIUS OF AMERICAN CORPORATE LAW 148 (1993);
23. RALPH K. WINTER, JR., State Law, Shareholder Protection, and the Theory of the Corporation, 6 J. LEGAL STUD. 251, 289-92 (1977);
24. see also Henry N. Butler & Larry E. Ribstein, Opting Out of Fiduciary Duties: A Response to the Anti-Contractarians, 65 WASH. L. REV. 1,69-71 (1990) (arguing federal regulation of corporate law impedes evolution of "efficient state laws and optimal governance contracts");
25. Stephen J. Choi & Andrew T. Guzman, Choice and Federal Intervention in Corporate Law, 87 VA. L. REV. 961,965 (2001) (asserting federal regulation leads to pro-management, non-optimal corporate regimes and is too slow to adapt to changes);
26. ROBERTA ROMANO, Law as a Product: Some Pieces of the Incorporation Puzzle, 1 J.L. ECON. & ORG. 225 (1985) (arguing decentralized system promotes efficiency while centralized system would have trouble duplicating features promoting efficiency).
27. See TREASURY BLUEPRINT, supra note 3, at 137-82.
28. Notably, much of what is articulated in architectural detail in the blueprint, and especially the centralization, was enacted on the fly by Secretary Paulson and the Federal Reserve Chairman during the 2008 crisis.
29. See, e.g., Fact Sheet, Dep't of the Treasury, Financial Stability Plan 4-6 (Feb. 10, 2009), available at http://www.financialstability.gov/ docs/fact-sheet.pdf (announcing continuation of government investment in financial institutions' preferred stock but boasting of new transparency of approach and stating firm limits on any investee's right to declare cash dividends on common stock, to use cash for acquisitions, or to pay annual cash compensation to executive officers in excess of $500,000).
30. Steve Vogel, Report Faults Financial Oversight, WASH. POST, Jan. 23, 2009, at A13. The GAO likewise encourages greater consolidation of regulatory authority in particular branches of the federal government and opines on characteristics that any refashioned U.S. financial regulatory system should have. See GAO FRAMEWORK, supra note 5, at 48-62.
31. E.g., Lucian Arye Bebchuk, Federalism and the Corporation: The Desirable Limits on State Competition in Corporate Law, 105 HARV. L. REV. 1435,1499-502 (1992); William L. Cary, Federalism and Corporate Law: Reflections upon Delaware, 83 YALE L.J. 663, 700-02 (1974).
32. The Treasury Secretary has testified before Congress on the need for "[a] [s]ingle [independent [rjegulator with responsibility over [s]ystemically [i]mportant [f]irms and [c]ritical [pjayment and [settlement [sjystems." Treasury Outlines Framework, supra note 10.
33. Cf. JOHN KENNETH GALBRAITH, THE GREAT CRASH: 1929 (1954) (reflecting cautiously upon the several alternative approaches to financial regulation to diminish the frequency or magnitude of economic crises).
34. A NEW FOUNDATION, supra note 2.
35. See id. at 12, 32.
36. See id. at 3-5, 10, 20-21.
37. See id. at 4, 7, 14-15, 55-70.
38. Our thumbnail sketch of the 2008 crisis would begin with the increased personal savings rate in Asian countries in the late 1990s, following stringent economic controls to correct the bursting of speculative asset bubbles there. Resulting cash found its way into the U.S. mortgage-finance system, which was already expanding. Expansion arose in part from low interest rates the Fed maintained to combat a recession threatened by the collapse of the U.S. technology bubble in 2000 and terrorist attacks of late 2001. Existing mortgage-finance institutions, including Fannie Mae and Freddie Mac, supported expansion by continuing to buy or guarantee mortgage loans. Expansion was propelled by growing use of highly rated mortgage-backed securities, pools of mortgages that pay interest and principal to investors, sold through investment banks. These forces led lenders to offer attractive deals to large numbers of borrowers lacking traditional indicia of creditworthiness. Trillions of dollars of loans were made on easy terms, including loans not requiring a down payment and low or no interest payments for initial periods, subject to reset at higher rates later. Reinforcing expansion of easy credit were novel financial-insurance products, called credit default swaps. These promised investors in mortgage-backed securities, and other debt, repayment by an insurer if their own debtor defaulted. The result was rising home prices that became a speculative bubble. The bubble began to deflate in 2004. Interest rates rose, sales slowed, lenders tightened standards, and rating agencies identified greater risk in financial instruments supporting the expansion. Large numbers of people defaulted on mortgage loans when their outstanding balances exceeded a home's market value. Cascade effects ensued: prices fell, mortgage defaults rose, mortgage-backed securities were impaired, capital contracted, and the effects rippled through all financial markets, eventually infecting the real economy, triggering a steep recession. All these effects pulsed through the global financial system, sparing no national economy. Of course, many articles will be written on the causes of the crisis, by lawyers, economists, and other academics, and our thumbnail sketch is not meant to preempt that work. For a useful popular economic account, see David Leonhardt, Can't Grasp Credit Crisis? Join the Club, N.Y. TIMES, Mar. 19, 2008, at Al, available at http://ww.nytimes.com/2008/03/19/business/191eonhardt.html? pagewanted=l&-r=l.
39. See 5 U.S.C. §§ 551-559, 701-706 (2006).
40. Indeed, some observers have characterized the system as a law market. See LARRY RIBSTEIN & ERIN O'HARA, THE LAW MARKET (2008).
41. We provide more elaborate assessment, and implications of, this system's regulation infra Part III.
42. Readers seeking a description may consult GAO FRAMEWORK, supra note 5, at 5-47, or TREASURY BLUEPRINT, supra note 3, at 31-74; readers seeking charts and diagrams may consult GAO FRAMEWORK, supra note 5, at 6-7, 17.
43. For a partial list of crisis responses, see Nelson D. Schwartz, A History of Public Aid During Crises, N.Y. TIMES, Sept. 6, 2008, at A27, available at http://www.nytimes.com/2008/09/07/busmess/07baUout. html?scp=l&sq=%22A+History+of+Public+Aid+during+Crises%22&st= nyt.
44. For a more general overview of the S&L crisis, see Edward L. Rubin, Communing with Disaster: What We Can Learn from the Jusen and the Savings and Loan Crises, 29 LAW & POL'Y INT'L Bus. 79, 79-83 (1997).
45. Id. at 80-82.
46. Id. at 82-83.
47. Id. at 83.
48. The Resolution Trust Corporation was established by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA), § 501(b), Pub. L. No. 101-73,103 Stat. 183, 369-76 (1989) (codified as amended at 12 U.S.C. § 1441a(b) (2006)). For an account of the Resolution Trust Corporation process, see Jerry W. Markham, Banking Regulation: Its History and Future, 4 N.C. BANKING INST. 221, 247-48 (2000).
49. See Markham, supra note 34, at 247.
50. FIRREA abolished the Federal Savings and Loan Insurance Corporation and Bank Board and replaced them with the Resolution Trust Corporation and Office of Thrift Supervision. FIRREA §§ 401, 501, 103 Stat, at 354, 364-94.
51. See id. § 301, 103 Stat, at 278.
52. See By the Numbers: Black October Market Crashes, NEWSWEEK, Nov. 15, 2008, http://www.newsweek.com/id/169279; see also Lawrence J. De Maria, Stocks Plunge 508 Points, a Drop of 22.6%; 604 Million Volume Nearly Doubles Record, N.Y. TIMES, Oct. 20, 1987, at Al.
53. Anise C. Wallace, Program Trading Gets More Brutal, N.Y. TIMES, May 1,1988, at 3:1.
54. For further discussion of the PWG, see infra text accompanying notes 167-74.
55. PRESIDENTIAL TASK FORCE ON MKT. MECHANISMS, REPORT OF THE PRESIDENTIAL TASK FORCE ON MARKET MECHANISMS 29-42 (1988) [hereinafter BRADY REPORT]. Critics extensively challenged these diagnoses, noting the international nature of the crash. See, e.g., David D. Haddock, An Economic Analysis of the Brady Report: Public Interest, Special Interest, or Rent Extraction?, 74 CORNELL L. REV. 841 (1989).
56. See BRADY REPORT, supra note 41, at 66.
57. See id. at 59 (Chapter Seven on Regulatory Implications: "One Market Mandates One Agency for Inter-market Issues"); id. at 61 (recommending possible merger of SEC and CFTC to promote joint responsibility); see also Mike Guttentag, Regulatory Rule #2: Insurance Products Need to be Regulated, CONGLOMERATE, Oct. 17, 2008, http://www.theconglomerate.org/2008/10/regulatory-ru-l.html (describing the role of portfolio insurance in the 1987 stock market crash).
58. See ROGER LOWENSTEIN, WHEN GENIUS FAILED 23-39 (2002).
59. See PRESIDENT'S WORKING GROUP, HEDGE FUNDS, LEVERAGE, AND THE LESSONS OF LONG-TERM CAPITAL MANAGEMENT 3 (1999) [hereinafter HEDGE FUNDS], available at http://www.ustreas.gov/press/releases/reports/hedgfund.pdf. For an account of the various proposals to regulate hedge funds by a current SEC commissioner, see Troy A. Paredes, On the Decision to Regulate Hedge Funds: The SEC's Regulatory Philosophy, Style, and Mission, 2006 U. ILL. L. REV. 975, 1025-34 (2006).
60. See LOWENSTEIN, supra note 44, at 3-122 (outlining the rise of LTCM).
61. See id. at 117.
62. See id.
63. See id. at 152-57. so See id. at 188.
64. See id. at 183-218.
65. E.g., Thomas A. Russo, Financial Innovation and Uncertain Regulation: Selected Issues Regarding New Product Development, 69 TEX. L. REV. 1431, 1497 (1991). Noted investor Warren Buffett famously quipped that derivatives had become "financial weapons of mass destruction." See WARREN E. BUFFETT, THE ESSAYS OF WARREN BUFFETT: LESSONS FOR CORPORATE AMERICA 145 (Lawrence A. Cunningham ed., 2d ed. 2008).
66. See HEDGE FUNDS, supra note 45; see also supra notes 40-43 and accompanying text (noting birth of Reagan's task force).
67. See Lawrence A. Cunningham, The Sarbanes-Oxley Yawn: Heavy Rhetoric, Light Reform (And It Just Might Work), 35 CONN. L. REV. 915, 928-36 (2003).
68. See id.
69. See id.
70. See id. at 928-41.
71. Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified at scattered sections of 11, 15, 18, 28, and 29 U.S.C. (2006)).
72. E.g., Roberta Romano, Sarbanes-Oxley and the Making of Quack Corporate Governance, 114 YALE L.J. 1521, 1528-29 (2005).
73. See, e.g., Stephen Labaton, S.E.C. to Ease Auditing Standards for Small Publicly-Held Companies, N.Y. TIMES, Dec. 11, 2006, at CI. For example, the original auditing standard governing internal control over financial reporting pursuant to Section 404 of Sarbanes-Oxley, Auditing Standard No. 2, adopted in 2004, was replaced in 2007 with Auditing Standard No. 5. Order Approving Proposed Auditing Standard No. 5, Exchange Act Release No. 56,152,91 SEC Docket 522 (July 27, 2007); see also Pub. Co. Accounting Oversight Bd., Auditing Standard No. 5: An Audit of Internal Control over Financial Reporting that Is Integrated with an Audit of Financial Statements (2007), available at http://www.pcaob.org/Rules/Rules-of-the-Board/Au- diting-Standard-5.pdf. In addition, the SEC repeatedly adopted exemptions making Sarbanes-Oxley's auditor-attestation provisions inapplicable to smaller public companies. See Press Release, Sec. & Exch. Comm'n, SEC Approves One-Year Extension for Small Businesses from Auditor Attestation Requirement in Sarbanes-Oxley (June 20,2008), available at http://www.sec. gov/news/press/2008/2008-116.htm; see also Feng Gao et al., Unintended Consequences of Granting Small Companies Exemptions from Securities Regulation: Evidence from the Sarbanes-Oxley Act, 47 J. Acer. RES. 459 (2009) available at http://www3.mtersdence.wiley.coin/cgi-biri/fulltext/ 122196986/PDFSTART.
74. See Romano, supra note 59.
75. Federal intervention to address problems of one or a few firms that could pose systemic ripple effects recurs. Famous examples include addressing Penn Square Bank, which threatened to topple Continental Illinois Bank, then 7th largest in the U.S., see Phillip L. Zweig, Learning Old Lessons from a New Scandal, N.Y. TIMES, Feb. 2, 2002, at A19 (reviewing case in light of pending crisis at Enron Corporation), and Bank of Credit and Commerce International, an illicit international web of financial operations whose collapse threatened the financial system's stability, see United States v. BCCI Holdings, 69 F. Supp. 2d 36, 38 n.3 (D.D.C. 1999).
76. See Steven M. Davidoff & David Zaring, Regulation by Deal: The Government's Response to the Financial Crisis, 61 ADMIN. L. REV. 463 (2009).
77. See, e.g., Andrew R. Sorkin, Lehman Files for Bankruptcy; Merrill is Sold, N.Y. TIMES, Sept. 14, 2008, at Al; Louis Uchitelle, Pain Spreads as Credit Vise Grows Tighter, N.Y. TIMES, Sept. 18, 2008, at Al.
78. See Joe Nocera & Edmund L. Andrews, Struggling to Keep Up as the Crisis Raced On, N.Y. TIMES, Oct. 23, 2008, at Al.
79. As discussed below, the response dealt with Bear Stearns in investment banking; In-dyMac, Washington Mutual, and Wachovia in commercial banking; AIG in insurance; and Fannie Mae and Freddie Mac in mortgage finance. See infra Part I.B.1-4.
80. Emergency Economic Stabilization Act of 2008, Pub. L. No. 110-343, § 2,122 Stat. 3765, 3766. This Act envisioned Treasury buying up to $750 billion in troubled assets using techniques such as reverse auctions to generate prices otherwise unformed amid distressed market conditions. It was subsequently used as the basis for Treasury's investment of $250 billion in preferred stock and warrants of banks. See Steve Lohr, Bold Action With Basis in History, N.Y. TIMES, Oct. 14, 2008, at Al.
81. See Davidoff & Zaring, supra note 63, at 508-12.
82. See, e.g., id. at 67; see also Tyler Cowen, Bailout of Long-Term Capital: A Bad Precedent?, N.Y. TIMES, Dec. 26, 2008, at BU5 (adopting the "regulation by deal" terminology).
83. See Charles Duhigg et al., As Crisis Grew, A Few Options Shrank to One, N.Y. TIMES, Sept. 8, 2008, at Al.
84. See Davidoff & Zaring, supra note 63, at 467-68.
85. Emergency Economic Stabilization Act of 2008 § 101,122 Stat, at 3767.
86. See infra text accompanying notes 110-16. On money market funds amid the crisis, see Mercer E. Bullard, Federally-Insured Money Market Funds and Narrow Banks: The Path of Least Insurance (forthcoming), available at http://papers.ssrn.com/soB/papers.cfm7abstract-id=1351987; on AIG, see William K. Sjostrom, Jr., The A1G Bailout, 66 WASH. & LEE L. REV. (forthcoming 2009).
87. See supra text accompanying notes 3-6 (citing sources).
88. See Marcel Kahan & Edward Rock, How to Prevent Hard Cases from Making Bad Law: Beam Stearns, Delaware, and the Strategic Use of Comity, 58 EMORY L.J. 713, 716 (2009).
89. See id. at 719.
90. See, e.g., Devin Leonard, How Lehman Brothers Got Its Real Estate Fix, N.Y. TIMES, May 2, 2009, at BUI. Evidence of its dire straits appeared in how Lehman was the only major defendant that refused to settle lawsuits challenging the suitability of auction-rate securities for individuals. These were portrayed as liquid cash equivalents but their liquidity depended on investment banks' willingness to trade them, willingness that terminated amid the crisis and left individuals holding securities they could not sell. Cf. Gretchen Morgenson, As Good as Cash, Until It's Not, N.Y. TIMES, Mar. 9, 2008, at BUI (discussing auction rate notes in general).
91. The effort to enlist Barclays was important to protect investors under securities laws designed to secure customer funds held in brokerage accounts. See Press Release, Sec. & Exch. Comm'n, Statement on Proposed Lehman Brothers, Inc. Acquisition by Barclays (Sept. 17, 2008), available at http://www.sec.gov/news/press/2008/2008-206.htm.
92. See Merrill Lynch & Co., Definitive Proxy Statement (Form 14A), at 49-52 (Oct. 31, 2008), available at http://www.sec.gov/Archives/ edgar/data/65100/000095012308014246/gl5211 mldefml4a.htm; see also Jonathan Keehner & Bradley Keoun, Bank of America Said to Reach $44 Billion Deal to Buy Merrill, BLOOMBERG, Sept. 14, 2008, http://www.bloomberg.com/apps/news?pid=20601110&sid=alGoI3fTqlUs (quoting an analyst stating that "If Lehman fails, the next bank to be attacked would be Merrill. They are attempting to forestall that attack by linking with Bank of America.").
93. See Louise Story & Jo Becker, Bank Chief Tells of U.S. Pressure to Buy Merrill Lynch, N.Y. TIMES, June 11, 2009, at Bl.
94. See Press Release, Fed. Reserve Bd. (Sept. 21, 2008), available at http://www.feder-alreserve.gov/newsevents/press/bcreg/20080921a.htm.
95. The Banking Act of 1933 (Glass-Steagall Act), Pub. L. No. 73-66, 48 Stat. 162.
96. Id.
97. Id.
98. Gramm-Leach-BIiley Act, Pub. L. No. 106-102,113 Stat. 1338 (1999).
99. See Arthur E. Wilmarth, Jr., The Transformation of the U.S. Financial Services Industry 1975-2000: Competition, Consolidation, and Increased Risks, 2002 U. ILL. L. REV. 215, 319-20;
100. Regulatory Reform in Transition: The Dismantling of the Glass-Steagall Act, Al ADMIN. L. REV. 545 (1995);
101. see also Christian A. Johnson, Holding Credit Hostage for Underwriting Ransom: Rethinking Bank Anti-Tying Rules, 64 U. PITT. L. REV. 157, 166-67 (2002) (recounting judiciary's involvement in the erosion of Glass-Steagall);
102. George J. Papaioannou & Adrian Gauci, Deregulation and Competition in Underwriting: Review of the Evidence and New Findings, 5 J. INT'L BUS. & L. 47, 48-49 (2006) (tracing the history of the erosion of Glass-Steagall).
103. The SEC's inspector general analyzed the program amid the crisis. OFFICE OF INSPECTOR GEN., SEC. & EXCH. COMM'N, SEC'S OVERSIGHT OF BEAR STEARNS AND RELATED ENTITIES: THE CONSOLIDATED SUPERVISED ENTITY PROGRAM, at v (2008), available at http://www.sec.gov/about/oig/audit/2008/446-a.pdf.
104. See Press Release, Sec. & Exch. Comm'n, Chairman Cox Announces End of Consolidated Supervised Entities Program (Sept. 26, 2008), available at http://www.sec.gov/news/press/2008/2008-230.htm.
105. For an overview of the various state and federal regulatory participants involved in banking supervision, see PATRICIA A. MCC OY, 1 BANKING LAW MANUAL § 3.02 (Matthew Bender, 2009). For concerns that the dual banking system is under attack, see Arthur E. Wil-marth, Jr., The OCC's Preemption Rules Exceed the Agency's Authority and Present a Serious Threat to the Dual Banking System and Consumer Protection, 23 ANN. REV. BANKING & FIN. L. 225 (2004), available at http://ssrn.com/abstract= 577863.
106. See Fed. Deposit Ins. Corp., Failed Bank Information, http://www.fdic.gov/bank/individual/failed/IndyMachtml (last visited Aug. 31, 2009).
107. See Christopher Palmeri, JPMorgan Chase to Buy Washington Mutual, BUSINESS WEEK.COM, Sept. 26, 2008, http://www.busmessweek.coin/bwdaUy/driflasri/content/sep2008/db20080925-760466. htm.
108. See Andrew Frye & Alison Veshkin, Wachovia Regulators Push Citicorp, Wells to Settle, BLOOMBERG, Oct. 7, 2008, http://www.bloomberg.com/apps/news?pid=20601087&sid=aZ2gXzQ V2ndI&refer=home (noting that Wachovia initially agreed to merge with Citicorp but terminated that agreement in favor of superior deal with Wells Fargo, with federal regulators intervening to encourage a tripartite settlement of resulting dispute).
109. See Jon Hilsenrath & Prabha Natarajan, Federal Reserve to Buy Commercial Paper, Dow JONES NEWSWIRES, Oct. 7, 2008, available at http://www.smartmoney.com/breaking-news/smw/?story= 20081007094827.
110. See supra note 15.
111. U.S.C. § 343 (2006).
112. Id; see also Davidoff & Zaring, supra note 63, at 465 (discussing the unprecedented nature of the Fed's legal interpretations); Edmund L. Andrews, In Sweeping Move, Fed Backs Buyout and Wall St. Loans, N.Y. TIMES, Mar. 17, 2008, at Al (discussing the Fed's actions).
113. The Fed also had invoked this authority when opening its discount window to investment-banking institutions early in the 2008 crisis. See Davidoff & Zaring, supra note 63, at 476-78.
114. See Andrew Ross Sorkin, A Bailout Above the Law, N.Y. TIMES, Sept. 22, 2008, at C2.
115. Or so Davidoff and Zaring argue. See Davidoff & Zaring, supra note 63, at 535-36.
116. See Duhigg et al, supra note 70, at Al.
117. The same was true for Ginnie Mae and the Federal Home Loan Banks; the same had been true for Sallie Mae until it transitioned fully into a private enterprise in the early 2000s. See PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, A REFERENCE GUIDE TO THE U.S. R ESCUE EFFORTS 49 (2009) (Feb. 24 version) [hereinafter PAUL, WEISS]. For a prescient prescription that could have reduced the role that Fannie Mae and Freddie Mac played in the 2008 crisis, see A. Michael Froomkin, Reinventing the Government Corporation, 1995 U. III. L. REV. 543.
118. See generally David Reiss,.The Federal Government's Implied Guarantee of Fannie Mae and Freddie Mac's Obligations: Uncle Sam Will Pick Up the Tab, 42 GA. L. REV. 1019 (2008).
119. Id.
120. See Press Release, Fed. Hous. Fin. Agency, Fact Sheet: Questions and Answers on Conservatorship (Sept. 7, 2008), available at http://www.ustreas.gov/press/releases/reports/fhfa-consrv-faq-090708hpll28.pdf.
121. See Deborah Solomon et al., Mounting Woes Left Officials with Little Room to Maneuver, WALL ST. J., Sept. 8, 2008, at Al.
122. Treasury's promise not to use its sought authority to rescue the Frannies was based on an assumption that market knowledge of the existence of Treasury's power would increase market confidence in the viability of the two firms, thus obviating need to exercise the authority. This hypothesis proved incorrect. Notably, the same theory of market confidence appears in parts of the Treasury blueprint. See infra text accompanying notes 153-204.
123. Housing and Economic Recovery Act of 2008, Pub. L. No. 110-289, § 1145, 122 Stat. 2654, 2734.
124. Stephen Labaton & Edmund L. Andrews, Mortgage Giants Taken Over by U.S., N.Y. TIMES, Sept. 8, 2008, at Al.
125. The institutions also had plenty of skeptics, particularly of its forays into secondary mortgage finance, at the Fed (Alan Greenspan was particularly critical), in both parties, and at Treasury itself. Bethany McLean, Fannie Mae's Last Stand, VANITY FAIR, Feb. 2009, available at http://www.vanityfair.com/politics/features/2009/02/fannie-and- freddie200902.
126. Robert O'Harrow, Jr. & Brady Dennis, Downgrades and Downfall, WASH. POST, Dec. 31, 2008, at Al.
127. In a scathing depiction of these operations, however, Delaware Vice Chancellor Leo Strine refused motions to dismiss certain AIG directors in a shareholder derivative action in part on the grounds that the complaint's allegation supported characterizing AIG as a "criminal organization." In re Am. Int'l Group, Inc., 965 A.2d 763, 799 (Del. Ch. 2009).
128. Serena Ng & Liam Pleven, An AIG Unit's Quest to Juice Profit: Securities-Lending Business Made Risky Bets; They Backfired on the Insurer, WALL ST. J., Feb. 5, 2009, at CI; see O'Harrow & Dennis, supra note 110, at A8.
129. See Monica Langley et. al., Bad Bets and Cash Crunch Pushed Ailing AIG to Brink, WALL ST. J., Sept. 18, 2008, at Al, A7; Sjostrom, supra note 73, at 19-30; PAUL, WEISS, supra note 101, at 27-29.
130. See McCarran-Ferguson Act of 1945, 15 U.S.C. §§ 1011-1015 (2006); Barnett-Bank v. Nelson, 517 U.S. 25, 38-39 (1996); Jonathan R. Macey & Geoffrey P. Miller, The McCarran-Ferguson Act of 1945: Reconceiving the Federal Role in Insurance Regulation, 68 N.Y.U. L. REV. 13, 14-15 (1993).
131. See Press Release, Fed. Reserve Bd. of N.Y., Summary of Terms and Conditions Regarding the JPMorgan Chase Facility (Mar. 24, 2008), available at http://www.newyorkfed.org/newsevents/news/markets/2008/rp080324b.html (noting use of section 13(3)); see also Greg Ip, Central Bank Offers Loans To Brokers, Cuts Key Rate; Historic Steps, WALL ST. J., Mar. 17, 2008, at Al (noting novelty of securities dealers being able to borrow from Fed on similar terms as banks).
132. See PAUL, WEISS, supra note 101, at 2,12-13.
133. See Dwight Cass, Insurer Oversight Is Not Yet Broken, N.Y. TIMES, Apr. 30, 2009, at B2 (arguing that state insurance regulation is not a bad thing);
134. cf. Emeric Fisher, Banking and Insurance: Should Ever the Twain Meet?, 71 NEB. L. REV. 726, 726 (1992) (considering whether consumers would be adequately protected if banks were allowed to underwrite and sell all types of insurance).
135. See O'Harrow & Dennis, supra note 110, at Al; supra notes 111-13 and accompanying text.
136. See supra notes 111-13 and accompanying text.
137. Gretchen Morgenson, A.I.G., Where Taxpayers' Dollars Go to Die, N.Y. TIMES, Mar. 8, 2009, at BUI.
138. Commodities Futures Modernization Act of 2000 ("CFMA"), Pub. L. 106-554, app. E, 114 Stat. 2763, 2763A-365 to -462 (codified in scattered sections of 7, 11,12 & 15 U.S.C.) (enacted as part of Consolidated Appropriations Act, 2001, Pub. L. 106-554,114 Stat. 2763 (2000)). CFMA largely put an array of financial derivative products outside the jurisdiction of either the SEC or CFTC. The blueprint provides a review of this legislation that seems generally favorable to it. See TREASURY BLUEPRINT, supra note 3, at 46-48.
139. The difficulty of classifying credit default swaps continued amid the crisis, with New York State considering treating them as insurance, the SEC expressing concern that they were not covered by its regulations, and futures entrepreneurs floating proposals to develop organized futures trading markets for the instruments. See Serena Ng & Doug Cameron, New York Fed Calls Meeting for CDS Market, WALL ST. J., Oct. 9, 2008, at C7 (reporting discussions of participants seeking to create a new organized trading platform for credit default swaps).
140. See, e.g., Thomas Lee Hazen, Filling the Regulatory Gap: It is Time to Regulate Over-the-Counter Derivatives, 13 N.C. BANKING INST. 123 (2008).
141. See, e.g., Frank Partnoy & David A. Skeel, Jr., The Promise and Perils of Credit Derivatives, 75 U. CIN. L. REV. 1019, 1046-51 (2007). Much has been made about the fact that AIG Financial Product's federal regulator oversaw thrifts, which usually make consumer and home loans.
142. Derivatives Markets Transparency and Accountability Act of 2009, H.R. 977, 111th Cong. (2009) (sponsored by Representative Colin Peterson, Chair, House Committee on Agriculture). Other steps taken included efforts to establish an organized exchange market on which to trad e credit default swaps. See PAUL, WEISS, supra note 101, at 4 (noting SEC approval of LCH.Clearnet Ltd. to operate temporarily as a central clearing agency for credit default swaps).
143. This language appeared in an amendment to the credit agreement between AIG and the Federal Reserve Bank of New York, which AIG filed with the SEC. See Am. Int'l Group, Amendment No. 2 to Credit Agreement (Nov. 9, 2008), available at http://www.sec.gov/Archives/edgar/data/5272/ 000095012309004659/y75292exvl0wl.htm.
144. See PAUL, WEISS, supra note 101, at 19-22.
145. Eric Pfanner & Julia Werdigier, Iceland, in a Precarious Position, Takes Drastic Steps to Right Itself, N.Y. TIMES, Oct. 8, 2008, at Bl.
146. See Carter Dougherty, Denmark Is Rethinking Its Spurning of the Euro, N.Y. TIMES, Oct. 27, 2008, at BIO.
147. See, e.g., Jeff Gerth, A Push for International Market Rules, N.Y. TIMES, NOV. 23,1987, at D3; Mark Landler & Vikas Bajaj, Some Currencies Plunge as Stocks Sink Worldwide, N.Y. TIMES, Oct. 25, 2008, at Al.
148. Wilmarth, supra note 86, at 370-71.
149. Indeed, one way to think about international regulatory harmonization is as a three-stage process. First, domestic regulators agree to share information with their foreign counterparts. This does not harmonize regulation, but solves some globalization problems (at least from the regulator's perspective). Second, the mechanism used for international information exchanges becomes the forum to generate principles of regulation commanding assent. These tend to be gauzy, short, and vague, and it isn't clear that they amount to much. Third, some of these institutions actually develop their own set of hard rules, as the Basel Committee on Banking Supervision did with its capital-adequacy accord. See David Zaring, Three Challenges For Regulatory Networks, 43 INT'L LAW. 211 (2009).
150. GROUP OF TWENTY, DECLARATION: SUMMIT ON FINANCIAL MARKETS AND THE WORLD ECONOMY 3 (2008), available at http://www.g20.org/Documents/g20-summit- declaration.pdf.
151. To be fair, the action plan that follows the agreement on principles in some cases is more substantive; the International Monetary Fund gets a to-do list, and may serve as a preliminary agreement on credit default swap regulation: Supervisors and regulators, building on the imminent launch of central counterparty services for credit default swaps (CDS) in some countries, should: speed efforts to reduce the systemic risks of CDS and over-the-counter (OTC) derivatives transactions; insist that market participants support exchange traded or electronic trading platforms for CDS contracts; expand OTC derivatives market transparency; and ensure that the infrastructure for OTC derivatives can support growing volumes. Id. app. at 3 (providing this, among several other steps, necessary to the G20's action plan from the Summit on Fiancial Markets and the World Economy).
152. See Zaring, supra note 132, at 216 (discussing these meetings).
153. Our evaluation in Part II and especially Part III includes considerable attention to globalization.
154. See PAUL, WEISS, supra note 101, at 33-37, 43-48, 50-51; Robert Schmidt & Scott Lanman, Treasury, Fed Said to Unveil Plan to Bolster Consumer Financing, BLOOMBERG, NOV. 25, 2008, httpV/www.bloomberg.com/apps/news?pid= newsarchive&sid-aIXCu2ptpeCQ. The FDIC also created a novel liquidity-guarantee program. See PAUL, WEISS, supra note 101, at 38-42.
155. Edmund L. Andrews & Bill Vlasic, GMAC Receives $5 Billion in Government Aid, N.Y. TIMES, Dec. 30, 2008, at Bl.
156. In other countries, cajoling one bank to buy another one would be clearly within the purview of a central bank. David Zaring, How Does the Fed Have the Legal Authority to Bail Out Bear?, CONGLOMERATE, Mar. 25, 2008, http://www.theconglomerate.org/2008/03/how-does-the-fe.html.
157. See, e.g., COMM. ON CAPITAL MKTS. REGULATION, THE COMPETITIVE POSITION OF THE U.S. PUBLIC EQUITY MARKET (2007), available at http://www.capmktsreg.org/pdfs/The-Competitive-Position-of-the-US-Public- Equity-Market.pdf; COMM. ON CAPITAL MKTS. REGULATION, INTERIM REPORT OF THE COMMITTEE ON CAPITAL MARKETS REGULATION (2006), available at http://www.capmktsreg.org/pdfs/11.30Committee-Interim-ReportREV2.pdf.
158. See supra notes 3-6.
159. See STUART BANNER, ANGLO-AMERICAN SECURITIES REGULATION (1998); Larry Ribstein, Bubble Laws, 40 Hous. L. REV. 77, 79-83 (2003).
160. See Jackie Calmes, Both Sides of the Aisle See More Regulation, and Not Just of Banks, N.Y. TIMES, Oct. 14, 2008, at A15.
161. TREASURY BLUEPRINT, supra note 3, at 137-82.
162. See supra notes 123-25 and accompanying text.
163. The blueprint does seem to endorse aspects of the Commodities Futures Modernization Act of 2000, Pub. L. No. 106-554, app. E, 114 Stat. 2763,2763A-365 to -462 (codified in scattered sections of 7, 11,12 & 15 U.S.C.), that limited federal regulation of certain financial derivative instruments. See TREASURY BLUEPRINT, supra note 3, at 46-48.
164. TREASURY BLUEPRINT, supra note 3, at 16.
165. BANNER, supra note 142; Ribstein, supra note 142.
166. See Cunningham, supra note 54 (reviewing potpourri provisions of this statute and noting how they were a collection of reforms in circulation for some time, and ranged from banning loans to corporate officials, blackout on corporate pension-fund trading rights, and requiring certain corporate-director attributes, to creating a new quasi-governmental agency to oversee the auditing profession); Romano, supra note 59 (criticizing Sarbanes-Oxley in part based upon how its mix of changes reflect the interests of various and diverse "policy entrepreneurs"). 130 TREASURY BLUEPRINT, supra note 3, at 13-14.
167. VOLCKER II, supra note 4, at 29 ("In all countries, the activities of government-insured, deposit-taking institutions should be subject to prudential regulation and supervision by a single regulator (that is, consolidated supervision).").
168. See Addressing the Need for Comprehensive Regulatory Reform: Hearing Before the H. Ways and Means Comm., 111th Cong. 4-5 (2009) (statement of Treasury Secretary Timothy Geithner), available at http://www.house.gov/ apps/list/hearing/financialsvcs-dem/geithner032609. pdf; Treasury Outlines Framework, supra note 10.
169. TREASURY BLUEPRINT, supra note 3, at 1.
170. Id. at 3-4.
171. See supra Part I.
172. TREASURY BLUEPRINT, supra note 3, at 27 ("[N]o single regulator has all of the information and authority necessary to monitor systemic risk.").
173. TREASURY BLUEPRINT, supra note 3, at 31. For other evaluations of the blueprint, see Coffee & Sale, supra note 9; Jill E. Fisch, Top Cop or Regulatory Flop? The SEC at 75,95 VA. L. REV. (forthcoming 2009) (arguing that the blueprint will not help the SEC become a more effective agency).
174. TREASURY BLUEPRINT, supra note 3, at 4.
175. The long-term regulatory structure recommended by the blueprint calls for three distinct regulators focusing exclusively on financial institutions: a market-stability regulator (the Fed), a prudential financial regulator, and a business-conduct regulator. See id. at 14.
176. See, e.g., Greg Ip, Central Bank Offers Loans to Brokers, Cuts Key Rate, WALL ST. J., Mar. 17, 2008, at Al ("The Federal Reserve announced one of the broadest expansions of its lending authority since the 1930s in an effort to stem a credit crisis that is engulfing the financial system and threatening a deep recession.").
177. TREASURY BLUEPRINT, supra note 3, at 7, 83.
178. The blueprint opines that "explicit government guarantees often erode market discipline, creating the potential for moral hazard and a clear need for prudential regulation." Id. at 18.
179. The blueprint recommends that the Fed's "lending to non-depository institutions should only occur in rare circumstances." Id. at 83-84.
180. See supra Part LB.
181. See text accompanying notes 40-43.
182. Early in the widening 2008 crisis, Secretary Paulson called for aid to industry sectors, rather than struggling individual institutions, and for clearer up-front rules on availability. See Greg Robb, Brokerage Firm Failure Has to Be an Option, MARKETWATCH, July 2, 2008, http://www.marketwatch.com/story/brokerage-firm-failure-has-to-be-an-option- paulson ("Treasury Secretary Henry Paulson will stress in a speech later Wednesday that federal regulators must craft a system to allow brokerage firms to fail without threatening the overall financial system."). Generally, the blueprint approaches bailouts with skepticism, but the skepticism is related to individual businesses. TREASURY BLUEPRINT, supra note 3, at 156.
183. See text accompanying notes 40-43. President Reagan created the PWG in a 1988 Executive Order. Exec. Order No. 12,631, 53 Fed. Reg. 9421 (Mar. 18, 1988).
184. Exec. Order No. 12,631, 53 Fed. Reg. 9421 (Mar. 18, 1988).
185. Brett D. Fromson, Plunge Protection Team, WASH. POST, Feb. 23, 1997, at HI, H8.
186. id.
187. GOV'T ACCOUNTABILITY OFFICE, GAO/GGD-00-46, FINANCIAL REGULATORY COORDINATION: THE ROLE AND FUNCTIONING OF THE PRESIDENT'S WORKING GROUP 18-19 (2000).
188. Id. at 5.
189. For example, in 1997, it suggested that the New York Stock Exchange change its circuit-breaker rules from a point decline in the Dow Jones Industrial Average to a percentage decline in that index. Those changes were made effective in 1998, when the group also proposed that Congress amend federal bankruptcy laws for financial institutions, and analyzed the LTCM hedge-fund debacle in a report that discussed ways to limit excessive leverage and cultivate better risk-management policies. See HEDGE FUNDS, supra note 45, at viii.
190. VOLCKER I, supra note 4, at 49.
191. TREASURY BLUEPRINT, supra note 3, at 5-6.
192. These are the Fed, Office Comptroller of the Currency, FDIC, Office of Thrift Supervision, Credit Union Administration, and Conference of State Bank Supervisors. Id. at 6.
193. Id. at 7.
194. Id. at 9.
195. See id. at 10.
196. See id.
197. See id. at 11.
198. See id.
199. Id.
200. See id. at 19.
201. See id. at 19, 21.
202. Id. at 8-9.
203. See id. at 8.
204. See id.
205. Id. at 9.
206. See id. at 6-7, 80-83.
207. See id. at 11-13.
208. See id.
209. Id. at 13.
210. Id. at 13.
211. See id. at 137.
212. The blueprint envisions the Fed continuing as at present except with broader jurisdiction. The Fed would continue as the central bank, setting monetary policy and serving as lender of last resort, among other traditional macroeconomic functions. Its supervision would extend to all financial institutions, not just depository institutions. This expansion is said to reflect changes in financial markets, in which nondepository institutions play at least as vital a role as depository institutions once did. In this vision, the blueprint emphasizes repeatedly that authority would be "broad, important, and difficult to undertake." Id. at 148, 152. The Fed's intervention powers would be "limited to instances threatening overall financial stability." Id. at 151. The blueprint envisions two aspects of the Fed's traditional function as lender of last resort. One would be regular discount-window operations, along traditional lines. Id. at 155. A new one would be called a "market stability discount window." Id. at 155-56. This would be available on more flexible terms, as to types of loans and borrowers. The idea is that the flexibility could be more effective to address short-term liquidity needs than the traditional discount window alone. Id.
213. Prudential financial regulation refers to things like capital adequacy, activity limits, and related supervision. It is akin to regulation now applicable to depository institutions. See id. at
214. This regulation is necessary to address the moral hazard that arises from explicit government guarantees. See id. The blueprint imagines a new federal charter for all financial institutions enjoying explicit government guarantees. See id. Contending that the traditional U.S. model of federal-plus-state banking regulation and experimentation is no longer useful, it recommends a new federal charter for all depository institutions to replace the fragmentary chartering system. See id. at 160. It draws the same conclusion for insurers, suggesting all become federally chartered. See id. at 166. All related guarantees, including for insurers, would be administered by a reconstituted FDIC. The prudential financial regulator would oversee all such chartered firms. See id.
215. The business-conduct regulator would have authority over all types of financial firms, not only those overseen by the prudential financial regulator, but also broker-dealers, hedge funds, private-equity funds, venture-capital funds, mutual funds, securities and futures firms, and others. See id. at 19. All would be subject to identical national standards overseen by this single agency. This regulator also would eventually oversee all financial markets, including securities and futures markets. Its primary function would address interactions between financial institutions and consumers and investors. See id. at 170. Regulatory focus would be on information, disclosures, and business-practice standards. Such focus would include prohibitions against unfairness, deception, and discrimination; it would also include regulation of financial capacity and expertise. See id. It would not include power to prohibit products, limit entry, control prices, or impose rigid licensing. See id.
216. Id. at 137-38.
217. Id. at 138-42.
218. See id. at 146.
219. See id.
220. See id.
221. id.
222. Id. ([The] "coordinating body could be headed by the Secretary of the Treasury, who would have the authority to settle disputes and ensure that appropriate amounts of coordination were taking place.").
223. See id. at 3, 26, 176-78; see also Elizabeth Brown, E Pluribus Unum, Out of Many One: Why the United States Needs a Single Financial Services Authority, 14 U. MIAMI BUS. L. REV. 1, 94 (2005) (noting countries moving towards dual regulation).
224. See TREASURY BLUEPRINT, supra note 3, at 3, 26,108.
225. VOLCKER I, supra note 4.
226. VOLCKER II, supra note 4. Both reports were prepared under the auspices of the so-called "Group of Thirty," an exclusive group of former and current regulators, including Andrew Crockett, formerly of the Basel Committee, Jacob Frenkel, a former board member of AIG, and former Fed Board members Roger Ferguson and E. Gerald Corrigan. See id. at 10.
227. David Cho & Neil Irwin, A Crucible of Three, WASH. POST, Sept. 19, 2008, at A01 (describing the close relationship between Paulson, Geithner, and Bernanke).
228. VOLCKER I, supra note 4, at 13.
229. Id. at 49.
230. Id. at 14.
231. Id. at 50.
232. Id. at 51.
233. Id.
234. Id. at 50.
235. Id.
236. See VOLCKER II, supra note 4, at 21.
237. See id. at 28.
238. See id at 28-31.
239. See id at 28.
240. Id. at 17.
241. See id. at 28-31.
242. See id. at 29.
243. Id.
244. Id. at 30.
245. See id. at 30-31.
246. Id.
247. See id. at 31-32.
248. Id. at 31.
249. Id. ("Governmental entities providing support for the mortgage market by means of market purchases should have explicit statutory backing and financial support.").
250. Id. at 49.
251. Id. at 52-53.
252. Id. at 53.
253. Id. at 35.
254. See id.
255. See id. at 59-68
256. See id. at 51; Jeffrey Manns, Rating Risk After the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability, 87 N.C. L. REV. 1011 (2009).
257. See VOLCKER II, supra note 4, at 46.
258. Id. at 45.
259. Id. at 18-19.
260. See id. at 63-66.
261. id. at 38.
262. VOLCKER I, supra note 4, at 48.
263. Id.
264. See supra Part II.A.
265. See supra Part II.B.
266. VOLCKER I, supra note 4, at 32.
267. As noted, House Committee on Agriculture Chairman Colin Peterson in February 2009 introduced legislation to require the CFTC to regulate credit default swaps and other derivative financial instruments. Supra note 125.
268. See supra notes 160-94 and accompanying text.
269. VOLCKER II, supra note 4, at 16, 35.
270. The report explains: "when risks are materializing and extreme pressures mounting, it is even more challenging for supervisors not to overreact to the use of capital, reserve, and liquidity buffers that should have been built up for use in just such circumstances. All this further underscores the importance of these agencies having ⋯ independence." Id. at 42.
271. id. at 49.
272. Id. at 53.
273. Howell E. Jackson, Variation in the Intensity of Financial Regulation: Preliminary Evidence and Potential Implications, 24 YALE J. ON REG. 253, 257-58 (2007) (noting the independence of federal financial regulators); cf. John Schwartz, Some Ask if Bailout Is Unconstitutional, N.Y. TIMES, Jan. 15, 2009, at A8 (describing some potential separation of powers concerns related to the government's response to the financial crisis).
274. For an interesting view of the potential for the president to be reconstituted as an independent agency, see Christopher R. Berry & Jacob E. Gersen, The Unbundled Executive, 75 U. CHI. L. REV. 1385 (2008).
275. TREASURY BLUEPRINT, supra note 3, at 146 (arguing that Treasury should be able to coordinate consolidated oversight).
276. These sorts of interagency commissions are usually not subject to the Freedom of Information Act (FOIA), 5 U.S.C. § 552(b)(5) (2006) (exempting interagency letters and memoranda which would not be available by law to a party in litigation with the agency from FOIA), and the Administrative Procedure Act, which reviews final rules and adjudications of agencies, would not be applicable to the putatively coordinative work of the PWG. See 5 U.S.C. § 706 (2006) (setting forth the availability of judicial review).
277. Recent examples include the case of President George W. Bush's Secretary of the Treasury, Paul O'Neill. David E. Sanger, The Treasury Secretary: Departure from Cabinet and Niceties, N.Y. TIMES, Dec. 10, 2002, at A30.
278. Elena Kagan, Presidential Administration, 114 HARV. L. REV. 2245 (2001).
279. See id. at 2281-82.
280. Id. at 2282; cf. David J. Barron & Elena Kagan, Chevron's Nondelegation Doctrine, 2001 SUP. CT. REV. 201, 201-02 (arguing judges should defer to the agency decisions of high-level government officials, rather than those of low-level bureaucrats).
281. Kagan, supra note 261, at 2342.
282. Steven Croley, White House Review of Agency Rulemaking: An Empirical Investigation, 70 U. CHI. L. REV. 821, 883 (2003) ("[T]he White House clearly has used rulemaking review to put its own mark on particular agency rules increasingly often over the course of the past two decades, and at an accelerated pace during the Clinton administration."). As a descriptive matter, Presidents tend to locate the (to their minds) worthy enhancements of the President's role in the domestic administrative state in a series of executive orders. President Reagan's 1981 Executive Order on regulatory review, Exec. Order No. 12,291, 46 Fed. Reg. 13,193 (Feb. 17,1981), which required agencies within the executive branch to run their draft regulations through the White House's Office of Management and the Budget ("OMB") before promulgating them, was a sea change that marked the beginning of ever greater amounts of presidential control over the federal bureaucracy. The Clinton Administration's cognate Executive Order, Exec. Order No. 12,866, 58 Fed. Reg. 51,735 (Oct. 4,1993), underscored the need for OMB to review particularly significant regulatory action on a cost-benefit plan and adopted an annual regulatory planning process. George W. Bush issued a subsequent executive order that largely retained these elements of Presidential supervision and brought even more agencies into the planning process. See Exec. Order No. 13,422, 72 Fed. Reg. 2763 (Jan. 23, 2007).
283. William P. Marshall, Eleven Reasons Why Presidential Power Inevitably Expands and Why It Matters, 88 B.U. L. REV. 505,517 (2008) ("The President's power is also enhanced by the vast military and intelligence capabilities under his command. In his roles as Commander-in-Chief and head of the Executive Branch, the President directly controls the most powerful military in the world and directs clandestine agencies such as the Central Intelligence Agency and National Security Agency. That control provides the President with immensely effective, non-transparent capabilities to further his political agenda ⋯"). But see Lisa Schultz Bressman & Michael P. Vandenbergh, Inside the Administrative State: A Critical Look at the Practice of Presidential Control, 105 MICH. L. REV. 47,70-76 (2006) (offering an empirical perspective qualifying and specifying the influence the White House has over EPA policymaking).
284. Thomas O. Sargentich, The Emphasis on the Presidency in U.S. Public Law: An Essay Critiquing Presidential Administration, 59 ADMIN. L. REV. 1, 4-5 (2007); see also Nicholas Bagley & Richard L. Revesz, Centralized Oversight of the Regulatory State, 106 COLUM. L. REV. 1260,1262-63 (2006) (arguing that presidential administration has led to an "unwarranted embrace of an unjustified antiregulatory mission"); Cynthia R. Farina, The "Chief Executive" and the Quiet Constitutional Revolution, 49 ADMIN. L. REV. 179,179 (1997) (decrying the "cult of the Chief Executive"); Peter M. Shane, Political Accountability in a System of Checks and Balances: The Case of Presidential Review of Rulemaking, 48 ARK. L. REV. 161, 200 (1995) ("If bureaucratic accountability to elected politicians is to be used as a structural mechanism aimed at achieving direct responsiveness to public opinion, it would probably make more sense to intensify the influence that Congress-especially the House-has over the agencies. Members of Congress are eligible for reelection indefinitely; a common observation of the House is that its members are in a constant election campaign.").
285. See David Zaring & Elena Baylis, Sending the Bureaucracy to War, 92 IOWA L. REV.1359,1361 (2007) ("Since September 11, the government has mobilized not just its national security apparatus, but almost all of the myriad units of the federal civil administrative state to battle against a small and elusive foe.").
286. Eric A. Posner & Adrian Vermuele, Crisis Governance in the Administrative State: 9/11 and the Financial Meltdown of 2008, (forthcoming), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id= 1301164.
287. Ironically, these far-reaching proposals were made through a process that is both administratively regular-the Department requested comment on its proposal the same day it issued the work-and seemingly legally modest, in that it was not accompanied by draft legislation or even an executive order.
288. TREASURY BLUEPRINT, supra note 3, at 165-70.
289. U.S. CONST, art. VI, § 2.
290. This is known as implied preemption, and Congress is sometimes unclear about how much state law is to be preempted intentionally, in the view of some scholars. See, e.g., Roderick M. Hills, Jr., Against Preemption: How Federalism Can Improve the National Legislative Process, 82 N.Y.U. L. REV. 1,16 (2007); Caleb Nelson, Preemption, 86 VA. L. REV. 225,302 n.235 (2000) ("When members of Congress focus on a particular issue but fail to reach a collective decision about how to resolve it, they sometimes compromise by enacting intentionally ambiguous language that transfers the issue to the courts.").
291. See, e.g., Nash v. Fla. Indus. Comm'n, 389 U.S. 235, 238-40 (1967) (holding a state law which denied unemployment compensation to anyone who filed a complaint with the National Labor Relations Board to be preempted by the National Labor Relations Act, 29 U.S.C. §§ 151-169 (2006)).
292. See, e.g., Riegel v. Medtronic, Inc., 128 S. Ct. 999 (2008). These sorts of preemption cases have been going on for some time. See also Marin R. Scordaro, Federal Preemption of State Tort Claims, 35 U.C. DAVIS L. REV. 1, 13 (2001) ("[I]n a 1913 Supreme Court case, a Wisconsin statute required that certain containers of syrup be labeled in such a way that the producer, in order to comply, would have to remove the product labels that were required by Congress under the Pure Food and Drug Act.").
293. See Watters v. Wachovia Bank, 550 U.S. 1, 20-21 (2007) (finding state banking regulations preempted by Office of the Comptroller rules). But see Cuomo v. Clearing House Ass'n, 129 S. Ct. 2710,2720-21 (2009) (finding state consumer protection rules not preempted by Office of the Comptroller rules).
294. Wyeth v. Levine, 129 S. Ct. 1187 (2009).
295. Cartherine Sharkey, Products Liability Preemption: An Institutional Approach, 76 GEO. WASH. L. REV. 449, 471 (2008) ("[F]rom Cipollone in 1992 to Riegel in 2008, the Supreme Court's position in every products liability preemption case (save one-Bates) aligned with the relevant underlying federal agency's take on preemption.").
296. E.g., DAVID E. LEWIS, PRESIDENTS AND THE POLITICS OF AGENCY DESIGN: POLITICAL INSULATION IN THE UNITED STATES GOVERNMENT BUREAUCRACY, 1946-1997, at 154 (2003); David E. Lewis, The Politics of Agency Termination: Confronting the Myth of Agency Immortality, 64 J. POL. 89, 92-93 (2002) (noting 62% of agencies created after 1946 were terminated by 1997).
297. With the possible exception of the Department of Homeland Security after 9/11. On the larger issue, see Darrell Delamaide, Washington Witch Hunt, MARKETWATCH, Apr. 3, 2008, http://www.marketwatchxom/story/ washington-witch-hunt-fmding-the-subprime-culprits. Practical political problems also warrant skepticism about the likelihood of an SEC-CFTC merger. The two agencies are overseen by different committees in Congress, each with vested stakes in maintaining their respective oversight.
298. For an overview of the distinctions between Madisonian and Burkean visions of governance (particularly constitutional governance), see Cass R. Sunstein, Five Theses on Originalism, 19 HARV. J.L. & PUB. POL'Y 311 (1996).
299. See, e.g., Michael Dorf & Charles Sabel, A Constitution of Democratic Experimentalism, 98 COLUM. L. REV. 267, 284 (1998).
300. For a review of the accord, see David Zaring, Informal Procedure, Hard and Soft, in International Administration, 5 CHI. J. INT'L L. 547, 575-77 (2005).
301. See id.
302. See Lawrence A. Cunningham, The SEC's Global Accounting Vision: A Realistic Appraisal of a Quixotic Quest, 87 N.C. L. REV. 1 (2008) (examining the expansion of international accounting standards); David Zaring, International Law by Other Means: The Twilight Existence of International Financial Regulatory Organizations, 33 TEX. INT'L L.J. 281 (1998) (considering systematizing efforts regarding international-banking and securities-regulation standards).
303. See generally Zaring, supra note 285.
304. E.g., Winter, supra note 12, at 254-62.
305. See Roberta Romano, The State Competition Debate in Corporate Law, 8 CARDOZO L. REV. 709, 752-57 (1987); see generally EASTERBROOK & FISCHEL, supra note 12.
306. See Jonathan R. Macey & Geoffrey P. Miller, Toward an Interest-Group Theory of Delaware Corporate Law, 65 TEX. L. REV. 469, 469-73 (1987).
307. See, e.g., RALPH NADER ET AL., TAMING THE GIANT CORPORATION 54-61 (1976); Cary, supra note 17, at 663-70; Joel Seligman, The Case for Federal Minimum Corporate Law Standards, 49 MD. L. REV. 947, 966 (1990).
308. See, e.g., Robert B. Ahdieh, Trapped in a Metaphor: The Limited Implications of Federalism for Corporate Governance, 77 GEO. WASH. L. REV. 255 (2009); Lucian Arye Bebchuk & Assaf Harndani, Essay, Vigorous Race or Leisurely Walk: Reconsidering the Competition over Corporate Charters, 112 YALE L.J. 553 (2002); William W. Bratton, Corporate Law's Race to Nowhere in Particular, 44 U. TORONTO L.J. 401 (1994).
309. Lucian Bebchuk et al., Does the Evidence Favor State Competition in Corporate Law?, 90 CAL. L. REV. 1775,1777-80 (2002); Marcel Kahan & Ehud Kamar, Th e Myth of State Competition in Corporate Law, 55 STAN. L. REV. 679, 681-87 (2002).
310. See Renee M. Jones, Rethinking Corporate Federalism in the Era of Corporate Reform, 29 J. CORP. L. 625,627-29 (2004); Mark J. Roe, Delaware's Competition, 117 HARV. L. REV. 588, 605 (2003).
311. But see Roberta Romano, Is Regulatory Competition a Problem or Irrelevant for Corporate Governance?, 21 OXFORD REV. ECON. POL'Y 212, 223-29 (2005).
312. See generally Roberta Romano, Empowering Investors: A Market Approach to Securities Regulation, 107 YALE L.J. 2359 (1998) (arguing federal preemption of state law is not the proper way to reduce frivolous lawsuits).
313. See Stephen J. Choi & Andrew T. Gozman, Portable Reciprocity: Rethinking the International Reach of Securities Regulation, 71 S. CAL. L. REV. 903, 907 (1998).
314. See Romano, supra note 294, at 2399-401.
315. See Howell E. Jackson, A System of Selective Substituted Compliance, 48 HARV. INT'L L.J. 105,105-06 (2007).
316. See, e.g., James D. Cox, Regulatory Duopoloy in U.S. Securities Markets, 99 COLUM. L. REV. 1200 (1999).
317. See John C. Coffee, Jr., Racing Towards the Top? The Impact of Cross-Listings and Stock Market Competition on International Corporate Governance, 102 COLUM. L. REV. 1757, 1759-62 (2002); Andreas M. Fleckner, Stock Exchanges at the Crossroads, 74 FORDHAM L. REV. 2541, 2541-44 (2006).
318. Chris Brummer, Stock Exchanges and the New Markets for Securities Laws, 75 U. CHI. L. REV. 1435, 1435-37 (2008).
319. Id. at 1437.
320. Id. at 1480-91.
321. See TREASURY BLUEPRINT, supra note 3, at 11, 20, 99-100, 106-25
322. See Lawrence A. Cunningham, Response, The New Federal Corporation Law?, 77 GEO. WASH. L. REV. 685, 700-07 (2009).
323. See supra text accompanying notes 126-27; VOLCKER II, supra note 4, at 42.
324. See supra text accompanying notes 189-94.
325. David Cho et al., Long Fight Ahead for Treasury Blueprint: Consumer Groups, Agencies Criticize Regulatory Overhaul, WASH. POST., Mar. 30,2008, at A01. (describing the arguments of supporters, including Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee; Spencer Bachus (R-Ala.), member of Financial Services Committee; and former SEC Chairs Christopher Cox and Harvey L. Pitt).
326. See id. (describing the arguments of opponents as well, including Sen. Christopher J. Dodd (D-Conn.), chairman of the Senate Banking Committee, and John M. Reich, former director of the Office of Thrift Supervision, who "discounted the importance of the blueprint").
327. See A NEW FOUNDATION, supra note 2, at 10-18.
328. See Benedict Kingsbury et al., The Emergence of Global Administrative Law, 68 LAW & CONTEMP. PROBS., Summer/Autumn 2005, at 15, 31.
329. See Cunningham, supra note 285.
330. For an argument about the value of increased international financial coordination, see David Zaring, Reforming International Financial Regulation, The HEARING, http://voices.wash-ingtonpost.com/hearmg/ 2009/07/reforrrung-international-financ.html, (July 2, 2009, 12:30 EDT, blog hosted by The Washington Post).
331. See supra text accompanying notes 132-34.
332. See Roger Altman, The Great Crash of 2008: A Geopolitical Setback for the West, 88 FOREIGN AFF. 2, 9 (2009).
333. See Editorial, Protecting European Unity Against Crisis, FIN. TIMES, Feb. 19,2009, at 12.
334. See Chris Brummer, Post-American Securities Regulation, 97 CAL. L. REV. (forthcoming 2009).
335. This enables foreign firms to operate in the U.S. without local registration or supervision, so long as they are overseen sufficiently by a regulator comparable to the SEC and with comparable regulations. See Ethiopis Tafara & Robert J. Peterson, A Blueprint for Cross-Border Access to U.S. Investors: A New International Framework, 48 HARV. INT'L L.J. 31, 32 (2007).
336. See Press Release, Sec. & Exch. Comm'n, SEC, Australian Authorities Sign Mutual Recognition Agreement (Aug. 25, 2008), available at http://www.sec.gov/news/press/2008/2008-182.htm. For a discussion, see Eric J. Pan, Single Stock Futures and Cross-Border Access for U.S. Investors, 14 STAN. J.L. BUS. & FIN. 221, 223-24 (2008).
337. See Cunningham, supra note 285, at 41-42; Zaring, supra note 285, at 281.
338. See, e.g., Cunningham, supra note 285, at 40-53 (documenting these variations in the context of assessing the prospects for sustained international commitment to uniform financial-accounting standards).
339. See Otmar Issing & Jan Krahnen, Why the Regulators Must Have a Global "Risk Map," FIN. TIMES, Feb. 19, 2009, at 11 (attributing lack of international coordination concerning systemic risk to "the competitive situation in international financial markets, with governments aiming at preserving the competitive advantages of national banking industries").
340. See Brummer, supra note 316.
341. See Zaring, supra note 283, at 601-02.
342. True, more informal networks may enable substantial coordination of international financial regulation. See Zaring, supra note 285, at 283 ("[The International Organization of Securities Commissions] and [the International Association of Insurance Supervisors] have accordingly expanded during their short lifetimes to include representatives from a majority of the world's countries. The Bas[el] Committee has focused more narrowly on the expensive regulation of most of the world's largest international banks."). But the Volcker vision seems to recognize that much more than that would be required and, in our view, this does not seem highly probable.
343. E.g., Haig Simonian, Haven to Relax Rules on Bank Secrecy, FIN. TIMES, Mar. 13, 2009, httpy://www.ft.com/cms/s/0/ 1908ee26-0f71-llde-bal0-0000779fd2ac.html?nclick-check=l (noting that Liechtenstein, under pressure from the Organization for Economic Cooperation and Development, agreed to conform its banking laws more closely to internationally ordained standards).
344. TREASURY BLUEPRINT, supra note 3, at 137.
345. id. at 170.
346. Id. at 137.
347. id. at 106-26.
348. See Brown, supra note 206, at 94.
349. See supra notes 167-73 and accompanying text.
350. See TREASURY BLUEPRINT, supra note 3, at 6-7, 78-80.
351. See VOLCKER II, supra note 4, at 52, 66-67.
352. See SUSAN M. PHILLIPS & J. RICHARD ZECHER, THE SEC AND THE PUBLIC Interest 17-25 (1981) (providing an overview of public choice theory).
353. Mark Mooney & Matt Jaffe, New TARP Rules: Curb Executive Pay, Bonuses, Parachutes, ABCNEWS.COM, Feb. 4, 2009, http://abcnews.go.com/ Politics/Business/story?id=6801 950&page=l (describing the executive pay limitations); Tomoeh Murakami Tse, For Hedge Funds, Biggest Fear is More Regulation, WASH. POST, June 25, 2009, available at http://www. washingtonpost.com/wp-dyn/content/article/2009/06/24/ AR2009062403450.html (noting that 37% of hedge fund managers favored more regulation).
354. See, e.g, Ribstein, supra note 142, at 78-83; see generally BANNER, supra note 142 (outlining early history of securities regulation and the influence of public opinion thereon).
355. See MCKINSEY & Co., SUSTAINING NEW YORK'S AND THE US' GLOBAL FINANCIAL SERVICES LEADERSHIP, at i (2007), available at http://home.nyc.gov/html/oni/pdf/ny-report-final. pdf. The Committee on Capital Markets Regulation issued similar reports, available at http://www.capmktsreg. org.
356. See A NEW FOUNDATION, supra note 2.
357. Although the CFTC was not organized until 1975, the federal government has asserted regulatory authority over futures trading since at least the 1920s. See Future Trading Act, ch. 86, 42 Stat. 187 (1921), invalidated by Hill v. Wallace, 259 U.S. 44, 69-70 (1922).
358. Grain Futures Act, ch. 369, 42 Stat. 998 (1922); see also Bd. of Trade of Chi. v. Olsen, 262 U.S. 1 (1923) (upholding Grain Futures Act).
359. Federal Home Loan Bank Act, ch. 522, 47 Stat. 725 (1932).
360. See McCarran-Ferguson Act of 1945, 15 U.S.C. §§ 1011-1015 (2006).
361. E.g., Bernard S. Black, Is Corporate Law Trivial?: A Political and Economic Analysis, 84 Nw. U. L. REV. 542, 544 (1990).
362. Paul Krugman, The Dilbert Strategy, N.Y. TIMES, Mar. 31, 2008, at A21.
363. Reform a la Glasgow, WALL ST. J., Apr. 1, 2008, at A16.
364. Michael Corkery, Obama's Regulatory Overhaul vs. the Paulson Blueprint, DEAL J., http://blogs. wsj.com/deals/2009/06/17/obamas- regulatory-overhaul-vs-the-paulson-blueprint/(June 17, 2009, 10:15 EDT, blog hosted by The Wall Street Journal).
365. VOLCKER I, supra note 4, at 224.