After the bailout: Regulating systemic moral hazard

UCLA Law Review

Volumn 57, Issue 1, 2009, Pages 183-236

  Okamoto, Karl S ^a  

^a DREXEL UNIVERSITY   (United States)

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EID: 72649094842     PISSN: 00415650     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (230)

1. For a detailed account of the events of the Financial Crisis of 2008 and the U.S. government's responses,.
2. see Steven M. Davidoff & David Zaring, Big Deal: The Government's Response to Ae Financial Crisis, ADMIN. L. Rev. (forthcoming 2009), available at http://papers.ssrn.com/so13/papers.cfm?abstract-id=1306342.
3. See Julie Creswell & Vikas Bajaj, Home Lender Is Seeking Bankruptcy, N.Y. TIMES, Apr. 3, 2007, at C5.
4. For a discussion of the causes of the credit bubble.
5. see Austin Murphy, An Analysis of the Financial Crisis of 2008: Causes and Solutions, (Nov. 4, 2008) (unpublished. manuscript, on file with author), available at http://papere.ssrn.com/so13/paper.cfm?abstract-id=1295344&rec= 1&srcabs=1306342.
6. Hedge Funds, Systemic Risk, and the Financial Crisis of 2007-2008: Written Testimony for the H. Oversight Comm. Hearing on Hedge Funds, 110th Cong. (2008) (written testimony of Andrew W. Lo, MIT Laboratory for Financial Engineering), available at http://papers.ssrn.com/so13/papers.cfm?abstract-id= 1301217.
7. See David M. Herszenhorn, Bush Signs Bill, N.Y. TIMES, Oct. 4, 2008, at A1 (reporting on the passage of the Emergency Economic Stabilization Act of 2008, Pub. L No. 110-343, 122 Stat. 3765 (codified. at 12 U.S.C. §§ 5201-5201, 5211-5241, 5251-5253, 5261 (2008)).
8. See id. (noting that in passing the bailout legislation, members of Congress "said that it was only a first step and pled.ged. to carry out a sweeping overhaul of the nation's financial regulatory system"). For an overview of the various proposals for regulation)
9. see generally Lawrence A. Cunningham & David T. Zaring, The Three or Four Approaches to Financial Regulation: A Cautionary Analysis Against Exuberance in Crisis Response, 78 GEO. WASH. L. Rev. (forthcoming Oct. 2009), available at http://papers.ssrn.com/so13/papers.cfm?abstract-id=1399204.
10. See A.C. Pritchard, The SEC at 70: Time for Retirement?, 80 NOTRE DAME L. Rev. 1073, 1081-82 (2005) ("Scandal driven reform followed. by political neglect has been a recurring pattern in the securities markets.... [D]emands for financial market regulation will arise in times of crisis...Crisis, however, does not create the ideal environment for developing balanced., cost-effective policy interventions. Politicians will want to 'do something, ' even if the proposed something may prove to be costly, ineffective or counterproductive. ").
11. See id.
12. I am not suggesting that there are no individuals whose actions deserve approbation. My point is that the problem is bigger than a few bad apples.
13. Or "modest[ ]" as Justice Breyer urges. STEPHEN BREYER, REGULATION AND ITS REFORM 184(1982).
14. See infra notes 60-63 and accompanying text.
15. See infra notes 68-73 and accompanying text.
16. See infra notes 88-89 and accompanying text.
17. See infra notes 52-55 and accompanying text.
18. See infra notes 56-59 and accompanying text.
19. An excellent definition of the carry trade in connection with mortgage-related. securities is given by Judge Spatt of the Eastern District of New York: The carry trade involves financing or "carrying" the purchase of mortgage-backed. securities with funds borrowed. through repurchase agreements from the money market. This strategy attempts to take advantage of the differences between the rates of repurchase agreements, which have lower short-term interest rates, and the mortgage-backed. securities, which have higher long-term interest rates. A comparison of the differences between the rates is called. the "yield curve." Relying on this mismatch of interest rates can produce significant gains when the yield curve is steep, that is, when the spread between long-term and short-term interest rates is wide.
20. In re N.Y. Cmty. Bancorp, Inc. Sec. Litig., 448 F. Supp. 2d 466, 470 (ED.N.Y. 2006).
21. LLOYD B. THOMAS, MONEY, BANKING AND FINANCIAL MARKETS 204 (2006) ("Banks earn profits principally by obtaining funds at relatively low interest rates and then lending the funds or investing in securities at higher interest rates.").
22. For a description of Collateralized. Debt Obligations, see infra notes 70-71 and accompanying text.
23. For a description of Special Investment Vehicles, see infra notes 70-71 and accompanying text.
24. As Judge Spatt described. it: However, the carry trade has its risks. If the yield curve flattens because short-term interest rates increase and long-term rates do not increase at a similar pace, the investment is exposed. in two ways. First, the spread between the interest rates is red.uced. such that net income from the spread decreases, an event known as a "margin squeeze." Second, under applicable accounting rules, mortgage-backed. securities are classified. as "available-for sale, " instead of "held to maturity, " and thus the investor must immediately realize any loss on the decline in value of the securities.
25. N.Y. Cmty. Bancorp., 448 F. Supp. 2d at 470.
26. see also Roberta Romano, A Thumbnail Sketch of Derivative Securities and Their Regulation, 55 MD. L. Rev. 1, 65 (1996) ("Financial institutions, such as savings and loans, frequently have mismatched. asset and liability durations. They lend at fixed. rates for the long term (mortgages), but they borrow at floating rates over the short term (deposits). With this balance sheet structure, if short-term rates rise the institution will lose money.").
27. Hed.ging strategies are a type of risk-management device used to address the risk of mismatched. cash flows. In an efficient market, we would expect the cost of the hedge to equal the profit of the trade, implying therefore that the real source of reward from any carry trade is the risk being taken.
28. See Kenneth A. Froot, David S. Scharfstein & Jeremy C. Stein, Risk Management: Coordinating Corporate Investment and Financing Policies, 48 J. FIN. 1629, 1633-38 (1993).
29. The "free lunch" refers to the observation that by holding a diversified. portfolio of assets, an investor can earn the same return as available from an undiversified. one while taking less risk. This observation is one of the cornerstones of modern portfolio theory and earned. its author, Harry Markowitz, the Nobel Prize.
30. See Harry Markowitz, Portfolio Selection, 7 J. FlN. 77 (1952).
31. There has been an enormous discussion of the moral hazard implications of the government's actions to bail out troubled. financial institutions.
32. See, e.g., Daniel Henninger, Wonder land: Welcome to 'Moral Hazard', WALL ST. J., Oct. 2, 2008, at A17 ("[E]very corner bar and hair salon is filled. with experts on the perils of moral hazard. Everyone gets it: Cut risk down to next to nothing and some people do crazy things."). These discussions are usually focused on the moral hazard being created. by bailing out various entities and individuals from their excessive risk taking. My focus is on the moral hazard that pred.ated. any government rescue. The moral hazard I see as underlying our current troubles lies in the inherent incentives asset managers have to take excessive risk when playing with other people's money. This dynamic of moral hazard is by no means unique to the current situation.
33. See, e.g., John C. Coffee Jr., What Caused Enronl A Capsule Social and Economic History of the 1990s, 89 CORNELL L. Rev. 269, 278 (2004) ("After the S&L crisis, investigators quickly identified. a classic 'moral hazard' problem. Because the government guaranteed. banks' financial obligations to depositors, these depositors had little reason to monitor management, and accordingly bank promoters were able to leverage their firms excessively."). For a more wide-ranging discussion of moral hazard, including some historical perspective on the concept,.
34. see Tom Baker, On the Genealogy of Moral Hazard, 75 TEX. L. Rev. 237 (1996).
35. See Karl S. Okamoto, Skin in the Game, LEGAL TIMES, Sept. 29, 2008, at 52.
36. For the seminal work on this dynamic.
37. see Michael C. Jensen & William H. Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure, 3 J. FIN. ECON. 305 (1976).
38. See, e.g., Uday Rajan, Amit Seru & Vikrant Vig, The Failure of Models That Pred.ict Failure: Distance, Incentives and Defaults, (Stephen M. Ross Sch. of Bus. at the Univ. of Mich., Research Paper No. 1122; Chicago Graduate Sch. of Bus., Research Paper No. 08-19, 2008), available at http://ssrn.com/abstract= 1296982 (describing the tendency of loan originators to ignore "soft" information regarding creditworthiness as volume of lending grows).
39. For a similar conclusion based. on an earlier run of financial scandals.
40. see James Dow, What Is Systemic Risk? Moral Hazard, Initial Shocks, and Propagation, MONETARY & ECON. STUD., Dec. 2000, at 1, 2 ("[M]oral hazard... is an important element of financial crises.").
41. Indeed., there were Congressional hearings to discuss this precise scenario a year before.
42. See, e.g., Systemic Risk: Examining Regulators' Ability to Respond to Threats to the Financial System: Hearing Before the H. Comm. on Financial Sew., 110th Cong. (2007). The experts' pred.iction of a collapse came even earlier.
43. See, e.g., Editorial, The US Economy and the 'R' Word, BUS. TIMES (Singapore), Aug. 9, 2006 ("Many economists suggest that a housing bust is potentially more dangerous for the US economy than even the technology bust of 2001. For instance, Nouriel Roubini of New York University's Stern School of Business has pointed. out that whereas the victims of the tech-bust were mainly investors with high exposures to technology stocks, the victims of a housing bust will be every home-owning American household. Moreover a housing bust will be a triple-whammy for the US economy: it will lead to declines in residential investment, a slowdown in household spending on durable goods, as well as a fall in employment-all of which will feed. into further red.uctions in house prices and increase the chances of a recession.").
44. See BREYER, supra note 10, at 15 ("The justification for intervention arises out of an alleged inability of the marketplace to deal with the particular structural problems."). Justice Breyer identifies moral hazard as one kind of market failure that may justify a regulatory response.
45. See id. at 32-33.
46. See, e.g., Edmund L. Andrews, Treasury's Plan Would Give Fed. Wide New Power, N.Y. TIMES, Mar. 29, 2008, at A1 ("The Treasury Department will propose on Monday that Congress give the Fed.eral Reserve broad new authority to oversee financial market stability, in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.").
47. Edmund L. Andrews, Treasury Secretary Requests Greater Powers for the Fed.eral Reserve, N.Y. TIMES, June 20, 2008, at C3 ("The Bush administration said Thursday that the Fed.eral Reserve should be given sweeping new powers to protect the integrity of the financial system, contending that this year's market turmoil had exposed. a badly outdated. regulatory system.").
48. Press Release, U.S. Dep't of the Treasury, Treasury Releases Blueprint for Stronger Regulatory Structure (Mar. 31, 2008), available at http://www.ustreas.gov/press/releases/hp896.htm ("The U.S. regulatory structure does not serve American (sic) as well as it could, and modernization is inevitable.").
49. BREYER, supra note 10, at 184 (discussing pitfalls of overzealous regulation).
50. See FLUPPO STEFANINI, INVESTMENT STRATEGIES OF HEDGE FUNDS 148 (Laura Simontacchi trans., John Wiley & Sons Ltd. 2006) (2005) ("A carry trade consists in buying bonds with yields higher than the cost of money borrowed. to purchase them.")-.
51. See Richard A. Brealey & Stewart C. Myers, principles of Corporate Finance 678 (7th ed. 2003).
52. See id. at 675.
53. Recent years have seen a shift from this traditional model of matching low-cost deposits with higher-yielding assets such as loans to a noninterest, fee model. This model relies on fees for services like investment banking or origination and servicing fees for various securitization transactions.
54. See Robert DeYoung & Tara Rice, How Do Banks Make Money? The Fallacies of Fee Income, ECON. PERSP., 4th Q. 2004, at 34. As noted. below, securitizations are themselves another variation on the carry trade strategy.
55. See THOMAS, supra note 17, at 204-29.
56. Robin Sidel, David Enrich & Dan Fitzpatrick, WaMu Is Seized., Sold Off to J.P. Morgan, in Largest Failure in U.S. Banking History, WALL ST. J., Sept. 26, 2008, at A1 ("The collapse of the Seattle thrift... was triggered. by a wave of deposit withdrawals....").
57. See Steven L. Schwarcz, Systemic Risk, 97 GEO. L.J. 193 (2008).
58. Id. at 204.
59. Id. at 199.
60. Id. at 201.
61. Id. at 208 ("[P]reservation of the financial system is socially desirable and thus stability should be an important regulatory goal.").
62. Id. at 234-35.
63. Id. at 241-42.
64. Id. at 243 (noting that "the reactive elements [of the proposed regulatory solutions] dominate").
65. Id.
66. See Andrew Ross Sorkin & Vakas Bajaj, Shift for Goldman and Morgan Mark the End of an Era, N.Y. TIMES, Sept. 22, 2008, at A1 (noting how the Financial Crisis had led. to the conversion of investment banks into bank holding companies, subjecting these firms to greater regulatory oversight). The Bank Holding Company Act of 1956, 12 U.S.C. §§ 1841-1850 (2006), governs the conversion of a bank into a bank holding company.
67. For a leading text on the economics of hedge funds, see ANDREW W. LO, HEDGE FUNDS: AN ANALYTIC PERSPECTIVE (2008).
68. For an excellent discussion of the legal structures, see TIMOTHY Spangler, THE LAW OF PRIVATE INVESTMENT FUNDS (2008).
69. See Keith H. Black, Designing a Long-Term Wealth Maximization Strategy for Hedge Fund Managers, IN HEDGE FUNDS: INSIGHTS IN PERFORMANCE MEASUREMENT, RISK ANALYSIS, AND PORTFOLIO ALLOCATION 181, 181 (Greg N. Gregoriou et al. ed.s., 2005).
70. See Jenny Anderson & Julie Creswell, Make Less Than $240 Million? You're off Top Hedge Fund List, N.Y. TIMES, Apr. 24, 2007, at A1.
71. For fuller accounts of the LTCM story, see NICHOLAS DUNBAR, INVENTING MONEY: THE STORY OF LONG-TERM CAPITAL MANAGEMENT AND THE LEGENDS BEHIND IT (2000).
72. ROGER LOWENSTEIN, WHEN GENIUS FAILED: THE RISE AND FALL OF LONG-TERM CAPITAL MANAGEMENT (2000).
73. Id. at 169, 179.
74. This risk was heightened. because of the unique treatment of derivatives under bankruptcy law. Unlike other assets that are subject to the automatic stay of a bankruptcy proceed.ing, collateral for derivative positions like swaps are exposed. to immediate execution by the creditor.
75. See Franklin R. Edwards & Edward R. Morrison, Derivatives and the Bankruptcy Code: Why the Special Treatment?, 22 YALE J. ON REG. 91, 95-99 (2005).
76. Steven Lipin, Matt Murray & Jacob M. Schlesinger, Bailout Blues: How a Big Hedge Fund Marketed. Its Expertise and Shrouded. Its Risks, WALL ST. J., Sept. 25, 1998, at A1.
77. For a synopsis of the demise of Bear Stearns (Bear).
78. see Kate Kelly, Greg Ip & Robin Sidel, Fed. Races to Rescue Bear Steams in Bid to Steady Financial System, WALL ST. J., Mar. 15, 2008, at A1.
79. Prime brokerage should not be confused with subprime mortgage brokers. The latter is the business of securing mortgages for higher-risk home buyers. The former is a part of the brokerage business of an investment bank that focuses on the trading activities of large professional traders like hedge funds.
80. For a discussion of the various business activities of Bear and other investment banks.
81. see K. THOMAS LIAW, THE BUSINESS OF INVESTMENT BANKING: A COMPREHENSIVE OVERVIEW 1-3, 18-22 (2d ed. 2006).
82. As SEC Chairman Christopher Cox put it, Bear's collapse "was the result of a lack of confidence, " and not a result of "inadequate capital." Letter From Christopher Cox, Chairman, SEC, to Nout Wellink, Chairman, Basel Comm. on Banking Supervision (Mar. 20, 2008), available at http://www.sec.gov/news/press/2008/2008-48-letter.pdf.
83. Susanne Craig, Lehman Struggles to Shore Up Confidence, WALL ST. J., Sept. 11, 2008, at A1.
84. Deborah Solomon et al., Ultimatum by Paulson Sparked. Frantic End, WALL ST. J., Sept. 15, 2008, at A1.
85. For a more complete account of the demise of Lehman.
86. see LAWRENCE G. MACDONALD & PATRICK ROBINSON, A COLOSSAL FAILURE OF COMMON SENSE: THE INSIDE STORY OF THE COLLAPSE OF LEHMAN BROTHERS (2009).
87. For a general discussion of credit swaps.
88. see Eric Dickinson, Credit Default Swaps: So Dear to Us, So Dangerous (Nov. 20, 2008)
89. This is the acronym for the International Swaps and Derivatives Association, Inc., a trade group that, among other functions, has developed. the standard form documents for swap agreements. For information, see http://www.isda.org (last visited. June 7, 2009).
90. See, e.g., Lehman Debt Swaps Settled for $5.2 Billion, N.Y. TIMES, Oct. 22, 2008, available at http://dealbook.blogs.nytimes.com/2008/10/22/ lehman-debt-swaps-settled-for-52-billion/(noting that an estimated. $400 billion in Lehman credit default swaps was settled for a net $5.2 billion because so many dealers held offsetting positions).
91. See generally INTL SWAPS & DERIVATIVES ASS'N, INC., 2005 ISDA COLLATERAL GUIDELINES 8-26 (2005), available at http://www.isda.org/ publications/pdf/2005isdacollateralguidelines.pdf (discussing the function of collateralization in managing risk).
92. For an interesting discussion of the market impact of the Lehman bankruptcy and its implications for governmental response to financial crises, see Kenneth Ayotte & David A. Skeel Jr., Bankruptcy or Bailouts? (Inst, for Law & Econ. Univ. of Pa. Law Sch., Research Paper No. 09-11; Law & Econ. Nw. Univ. Sch. of Law, Research Paper No. 09-05, 2009), available at http://papers.ssrn.com/so13/papers.cfm?abstract-id=1362639.
93. See Gretchen Morgenson, Behind Biggest Insurer's Crisis, A Blind Eye to a Web of Risk, N.Y. TIMES, Sept. 28, 2008, at A1 (describing how AIG's exposure to credit default swap liabilities led to its demise).
94. Id. For a fuller account of the AIG story and the governmental response.
95. see William K. Sjostrom Jr., The AIG Bailout, 66 WASH. & LEE L. REV. (forthcoming 2009).
96. For a description of certain common securitization structures and related. securities,.
97. see Romano, supra note 20, at 68-78.
98. Steven L. Schwarcz, Protecting Financial Markets: Lessons From the Subprime Mortgage Meltdown, 93 MINN. L. Rev. 373, 376-79 (2008).
99. See Frank Partnoy, The Siskel and Ebert of Financial Markets?: Two Thumbs Down for the Credit Rating Agencies, 77 WASH. U. L.Q. 619 (1999).
100. Steven L. Schwarcz, Private Ordering of Public Markets: The Rating Agency Paradox, 2002 U. ILL L. Rev. 1 (arguing that reputational costs are adequate to constrain rating agency misbehavior and overcome any conflict of interest arising from client fees).
101. See Monica Langley, Deborah Solomon & Matthew Karnitschnig, Bad Bets and Cash Crunch Pushed Ailing AIG a Brink, WALL ST. J., Sept. 18, 2008, at A1.
102. While money market funds did not historically benefit from government guaranties, in order to provide a sense of their relative stability, they all strove to maintain a per share value of one dollar. When several funds were forced by losses to fall below the one dollar threshold, the U.S. government stepped in and offered a federal guaranty of money market mutual fund deposits in order to prevent mass withdrawals. Press Release, U.S. Dep't of the Treasury, Treasury Announces Guaranty Program for Money Market Funds (Sept. 19, 2008), available at http://www.treasury.gov/press/releases/hp1147.htm.
103. Professor Schwartz provides a more derailed account of this cascade of events in the housing and debt markets.
104. See Steven L. Schwartz, Understanding the Subprime Financial Crisis, 60 S.C. L. Rev. 549, 550-53 (2009).
105. See Dow, supra note 27, at 16-17.
106. See, e.g., Richard M. Ennis & Michael D. Sebastian, Arc Performance Fees Right for Your Fund? A Case Study, J. INVESTING, Summer 2003, at 45, 45 ("In tying manager compensation to superior performance, rather than solely to asset size, PFs [performance fees] better align the interests of asset manager and client. Under an ABF [asset-based fee] the manager has an incentive to increase assets under management through marketing. But larger portfolios are more difficult to trade profitably, so the growth-oriented. manager runs the risk of becoming too large to outperform when trading costs are taken into account. PFs, on the other hand, reward the manager for performance, an inducement, in principle at least, to control growth in assets under management.").
107. See Dow, supra note 27, at 16-17 (describing the moral hazard effect of a trader's "convex payoff function").
108. See Thomas J. Brennan & Karl S. Okamoto, Measuring the Tax Subsidy in Private Equity and Hedge Fund Compensation, 60 HASTINGS L.J. 27 (2008) (describing fund manager compensation as different forms of call options).
109. For a discussion of the Option Pricing Model and the so-called. "Black-Scholes" Formula, see RICHARD A. BREALEY &. STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 601-03 (7th ed. 2003). For the seminal statements of the theory.
110. see Fischer Black & Myron Scholes, The Pricing of Options and Corporate liabilities, 81 J. POL. ECON. 637 (1973).
111. and Robert C. Merton, Theory of Rational Option Pricing, 4 BELL J. ECON.&MGMT. SCI. 141 (1973).
112. It is important not to understate the countervailing factors within an asset manager's incentives. Risk that threatens a loss of capital not only affects the current year's fees but will also adversely affect the opportunity to earn fees in subsequent years. Therefore, the asset manager's compensation is better seen as a compound option or option on an option to take into account the cost of losing the possibility of rolling the dice year after year. On the nature of compound options,.
113. see Robert Geske, The Valuation of Compound Options, 7 J. FIN. ECON. 63, 63 (1979) ("Almost any opportunity with a choice whose value depends on an underlying asset can be viewed. as an option. A contract specifies the terms of the opportunity, or details what financial economists call the option's boundary conditions. Many opportunities have a sequential nature, where later opportunities are available only if earlier opportunities are undertaken. Such is the nature of the compound option or option on an option."). For an example of the valuation of a hedge fund manager's compensation as a compound option,.
114. see Brennan & Okamoto, supra note 78, at 47-49.
115. See Thomas S. Coleman & Laurence B. Siegel, Compensating Fund Managers for Risk Adjusted. Performance, 2 J. ALTERNATIVE INVESTMENTS, WINTER 1999, at 9, 9 (stating that the performance fee structure "rewards higher returns with no reference to volatility or risk....[and] provide[s] an incentive for the manager to add to the risk of the fund...").
116. See Black, supra note 50, at 184-85 ("By understanding the Black-Scholes options valuation model, we can see that the potential incentive fee increases with the amount of assets under management, the length of time the hedge fund manager controls the assets, and the volatility of the fund's investment strategy. As the manager is able to retain investor assets for longer periods of time, the potential value of their incentive fee increases....While hedge fund investors may be risk averse, they have given hedge fund managers the incentive to be risk seeking.").
117. See William N. Goetzmann, Jonathan E. Ingersoll Jr. & Stephen A. Ross, High-Water Marks and Hedge Fund Management Contracts, 58 J. FIN. 1685, 1686 (2003) ("[W]hen investors are likely to remain for the long term, and when volatility is low, the regular fee portion of the contract provides the greatest value to the manager.").
118. See David Gauthier-Villars, Carrick Mollenkamp & Alistair MacDonald, French Bank Rocked. by Rogue Trader, WALL ST. J., Jan. 25, 2008, at A1 ("He was a low-level trader in the [Société Générale's] 'Delta One' desk in western Paris, earning about 100, 000 euros ($145, 000) a year. His job was to make bets on how large European stock indexes would move..").
119. See Nicholas Bray & Michael R. Sesit, Barings Was Warned Controls Were Lax but Didn't Make Reforms in Singapore, WALL ST.J, Mar. 2, 1995, at A3 ("Up to sometime last year, Mr. Leeson's responsibility was to execute trades on behalf of clients on the Singapore International Monetary Exchange, or Simex. But 'he was doing such a good job that it was decided he should begin trading for his own account, ' said a Barings executive...'His brief was to exploit differences, not to take risk positions.' The problem, however, was that he did take positions, huge ones that eventually racked. up the massive losses.").
120. Marcus W. Brauchli, Nicholas Bray & Michael R. Sesit, Broken Bank: Barings PLC Officials May Have Been Aware of Trader's Position, WALL ST. J., Mar. 6, 1995, at A1 ("Barings traditionally has paid out approximately 50% of its gross earnings as bonuses to its employees, and the 1994 bonus pool is estimated to have been around the equivalent of $163 million. A number of directors would have got bonuses of about $1.6 million, while Barings insiders say Mr. Leeson was in line for a bonus of more than a half-million dollars-approximately double what he had received the previous year.").
121. David Gauthier-Villars & Carrick Mollenkamp, Société Générale Blew Chances to Nab Trader, WALL ST. J., Jan. 29, 2008, at A1 ("[B]y the end of 2007, [Kerviel] had cashed out positions producing a profit of 55 million euros ($81 million) for the bank. That was far more than his annual target, so Mr. Kerviel was expecting a bonus of 300, 000 euros to be paid out this year..").
122. For an interesting discussion on the choices for regulatory responses to rogue trading.
123. see Kimberly D. Krawiec, The Return of the Rogue, 51 ARIZ. L. REV. 127 (2009).
124. For an account of the demise of WaMu.
125. see Christopher Palmeri, JPMorgan Chase to Buy Washington Mutual, BUS. Wk., Sept. 26, 2008.
126. See Rajan, Seru 6k Vig, supra note 26.
127. Professor Schwarcz has described. this as the "originate-to- distribute" model of lending. Steven L. Schwarcz, Regulating Complexity in Financial Markets, 87 WASH. U. L. REV. (forthcoming), available at http://papers.ssrn.com/so13/papers.cfm?abstract-id=1240863 (SSRN manuscript at 9).
128. These concerns over the effectiveness of rating agencies as monitors were well known, having been detailed almost a decade ago by Professor Frank Partnoy.
129. See Partnoy, supra note 71.
130. See Morgenson, supra note 68.
131. As Justice Breyer admonishes, "modesty is desirable in one's approach to regulation." BREYER, supra note 10, at 184 (discussing pitfalls of overzealous regulation).
132. See, e.g., INST. OF INT'L FlN., FINAL REPORT OF THE IIF COMMITTEE ON MARKET BEST PRACTICES: PRINCIPLES OF CONDUCT AND BEST PRACTICE RECOMMENDATIONs (2008), available at http://www.iif.com/regulatory(scroll down to "Global Finance Leaders Release Comprehensive Proposals to Strengthen the Financial Industry and Financial Markets;" then click "IIF Final Report of the Committee on Market Best Practices" hyperlink under "Related Documents"). The IIF is a trade association of leading financial institutions worldwide.
133. See A. Cain, Banking Organization Proposes Stronger Risk Focus, INTERNAL AUDITOR, June 2008, at 16 ("[Blanks focus on self-regulation to avoid tighter government regulation."). For a more formal discussion of self-regulation as a strategy to preempt governmental action.
134. see John W. Maxwell, Thomas P. Lyon & Steven C. Hackett, Self-Reguhtion and Social Welfare: The Political Economy of Corporate Environmentalism, 43 J.L. & ECON. 583 (2000).
135. See, e.g., MICHEL CROUHY, DAN GALAI & ROBERT MARK, THE ESSENTIALS OF RISK MANAGEMENT (2006). The IIF Report, INST. OF INT'L FIN., supra note 94, provides a description of what a comprehensive program of risk management looks like.
136. See, e.g., 2 INTERNATIONAL POLITICAL RISK MANAGEMENT: THE BRAVE NEW WORLD (Theodore H. Moran ed., 2004).
137. See, e.g., Fouad Bendimerad & Stephen Hom, Catastrophe Modeling, RISK MGMT., May 1999, at 26.
138. Ming Li & Imelda Y. Powers, The Role of Catastrophe Modeling in Insurance Rating, RISK MGMT., Oct. 2007, at 40.
139. Fermín Mallor, Carmen García-Olaverri, Sagrario Gómez-Elvira & Pedro Mateo-Collazas, Expert Judgment-Based Risk Assessment Using Statistical Scenario Analysis: A Case Study-Running the Bulls in Pamplona (Spain), 28 RISK ANALYSIS 1003 (2008).
140. For a general discussion of value at risk (VAR).
141. see Darrell Duffie & Jun Pan, An Overview of Value at Risk, J. DERIVATIVES, Spring 1997, at 7, and CROUHY, GALAI & MARK, supra note 96, at 149-79.
142. Mortgage Losses: Move Over, Subprime, ECONOMIST, Feb. 5, 2009, available at http://www.economist.com/businessfinance/displaystory.cfm?story-id=13062194.
143. For a discussion of the challenges in constructing a unified. measure of VAR for a portfolio of assets across time and for multiple risk factors, see Duffie & Pan, supra note 100.
144. See, e.g., Jón Daníelsson, The Emperor Has No Clothes: Limits to Risk Modeling, 26 J. BANKING & FIN. 1273 (2002) (arguing that risk modeling assumptions are especially suspect during times of crisis).
145. First, VAR itself was never intended. to capture the range of risk that could impact entire firms or markets. See Duffie & Pan, supra note 100, at 9 ("[VAR] captures only one aspect of market risk, and is too narrowly defined. to be used on its own as a sufficient measure of capital adequacy."). Second, VAR relies on an underlying assumption regarding the distribution of potential outcomes. These assumptions tend to undervalue the impact of outlier, or "fat tail, " distributions, often leading to optimistic assessments.
146. See NASSIM NICHOLAS TALEB, THE BLACK SWAN (2007).
147. For a general discussion of scenario analysis,.
148. see CROUHY, GALAI & MARK, supra note 96, at 173-79.
149. See id. at 325-45 (describing approaches to managing "operational risk").
150. See, e.g., Josef Ackermann, Op-Ed., How the Banks Can Win Back Confidence, FIN. TIMES, July 31, 2008, at 9 ("[M]anaging complex financial institutions requires raising the bar on risk management, underwriting and disclosure if companies are to prosper in the very competitive global marketplace.") (advocating self-regulation based. upon an industry group's statement of market best practices).
151. L. Gordon Crovitz, Information Age: Seeking Rational Exuberance, WALL ST. J., Oct. 6, 2008, at A17 ("The credit crisis is a crisis of information-or rather the lack of information-Adequate disclosure would have made clear the payment and investment flows through each level of securities and where the risks lie, including when they are swapped. to counterparties.").
152. Aaron Lucchetti, Moving the Market: More Data on Mortgage Bonds Sought, WALL ST. J., July 16, 2008, at C3 ("The American Securitization Forum, a trade group representing banks, investors and others in the loan-securitization business, is expected. to propose on Wed.nesday the collection and disclosure of more than 100 types of data for mortgages that are packaged. into securities- In recent weeks, ASF representatives have met with the Securities and Exchange Commission, Treasury Department and other regulators, which are supportive of the trade group's efforts.").
153. Of course I'm not talking about the case where your choice saves your child from involvement in some bad event (a drug bust, for example) that occurs anyway. I'm thinking of those cases where but for your child staying home, he would have been the one driving to the liquor store.
154. I derive the model and the forms of notation from the model presented in Anthony R. Harris & Gary D. Hill, Bias in Status Processing Decisions, in RATIONALITY AND COLLECTIVE BELIEF 1, 15-34 (Anthony R. Harris ed., 1986).
155. A typical conflict-of-interest rule restricts the ability of a risk manager or compliance officer from having a financial interest in the transactions she is charged with reviewing.
156. U.S. DEPT OF THE TREASURY, BLUEPRINT FOR A MODERNIZED FINANCIAL REGULATORY STRUCTURE (2008).
157. Id. at 144.
158. Id.
159. Id. at 147.
160. Id.
161. Id.
162. Id. ("[T]he Fed.eral Reserve's financial institution regulation and supervision should not generally focus on the financial health or failure of an individual financial institution, but rather on the overall risk exposure of the entire financial system.").
163. Press Release, U.S. Dep't of the Treasury, supra note 31.
164. See, e.g., Alistair Darling, Shocks to the System Show Need. for Fresh Answers, FIN. TIMES, Oct. 10, 2008, at 13 ("Last April finance ministers agreed. to implement recommendations on strengthening regulation and we have made good progress on these issues, including disclosure. But the turmoil has underscored. the need for further, speed.ier action, including on reviewing capital requirements, executive compensation structures that encourage irresponsible risk-taking, the finance system's procyclicality and improving cross-border co-operation.").
165. Joellen Perry & Alistair MacDonald, The Financial Crisis: EU Proposes Regulatory Overhaul Amid Bailouts, WALL ST. J., Sept. 30, 2008, at A7B ("The European Union's top markets official is preparing an overhaul of banking regulation across the continent, as Europe struggles to deal with its own wave of bank failures.").
166. Gillian Tett, Paul J. Davies & Aline Van Duyn, A New Formula? Complex Finance Contemplates a More Fettered. Future, FIN. TIMES, Oct. 1, 2008, at 11 ("Thus Mr. Dinallo is now working with David Paterson, the New York governor, to push for regulation of credit default swaps, contracts that protect against default. The Securities and Exchange Commission has also called. for increased. regulation of credit derivatives.").
167. See INST. OF iNTl FIN., supra note 94, at 49.
168. As I discuss below, see supra notes 129-132 and accompanying text, one regulatory change I propose is to increase the stake of key decisionmakers in the transactions that create risk. But my suggestion is to increase both their downside and their upside by insisting they put their own money on the table.
169. See, e.g., BREYER, supra note 10, at 186 (advocating "less restrictive" regulatory methods when dealing with complex industries: "[tjaxes, marketable rights, and similar incentive-based. approaches often provide practical methods for reconciling the need for simple regulatory rules with the diversity and complexity of the industrial world").
170. id. at 199 (describing the complex cost structure of the U.S. airline industry that led. to a failure of price and entry regulation).
171. id. at 266 (describing the complexity and constant change characteristic of costs and technologies subject to environmental regulation, inhibiting the creation of effective environmental standards).
172. Steven M. Davidoff, Paradigm Shift: Fed.eral Securities Regulation in the New Millennium, 2 BROOK. J. CORP. FIN. & COM. L 339, 355 (2008) (describing the regulatory challenges posed. by rapid innovation in financial products).
173. Bradley C. Karkkainen, Information as Environmental Regulation: TRI and Performance Benchmarking, Precursor to a New Paradigm?, 89 GEO. LJ. 257, 263 (2001) ("Conventional approaches to environmental regulation are nearing a dead end, limited. by the capacity of regulators to acquire the information necessary to set regulatory standards and keep pace with rapid changes in knowled.ge, technology, and environmental conditions.").
174. Steven L Schwarcz, Rethinking the Disclosure Paradigm in a World of Complexity, 2004 U. ILL. L. Rev. 1, 6-7 (discussing the inadequacy of U.S. federal securities regulation to cope with the complexity and rapid innovation in derivatives).
175. Implications of the Growth of Hedge Funds: Staff report to the U.S. Securities and Exchange Commission vii (2003).
176. Walter Hamilton, Investors Pull $152 Billion Out of Hedge Funds in Fourth Quarter, L.A. TIMES, Jan. 22, 2009, at C5 (noting that the industry assets had fallen by $0.5 trillion since its peak).
177. See, e.g., HERSH SHEFRIN, BEYOND GREED AND FEAR: UNDERSTANDING BEHAVIORAL FINANCE AND THE PSYCHOLOGY OF INVESTING 257 (2000) (describing the tendency toward optimism in evaluating future outcomes).
178. On March 15, 2008, Bear agreed. to be acquired. by JPMorgan Chase for a deeply discounted. price. Robin Sidel, Dennis K. Berman & Kate Kelly, J.P. Morgan Buys Bear in Fire Sale, as Fed.Widens Credit to Avert Crisis, WALLST.J., Mar. 17, 2008, at A1. Lehman filed. for bankruptcy protection on September 15, 2008, and subsequently sold most of its operations to various financial firms.
179. Michael J. de la Merced., Lehman Is Selling Its Money Management Business to Two Equity Firms, N.Y. TIMES, Sept. 30, 2008, at C9.
180. Andrew Ross Sorkin, Bids to Halt Financial Crisis Reshape Landscape of Wall St., N.Y. TIMES, Sept. 15, 2008, at A1. On September 15, 2008, AIG agreed. to accept an $85 billion loan from the U.S. government, in exchange for the right to an ownership stake of more than 70 percent.
181. Monica Langley, Deborah Solomon & Matthew Karnitschnig, Bad Bets and Cash Crunch Pushed. Ailing AIG to Brink, WALL ST. J., Sept. 18, 2008, at A1. On September 25, 2008, federal bank regulators seized. Washington Mutual and sold its bank operations to JPMorgan Chase for $1.9 billion.
182. Robin Sidel, David Enrich & Dan Fitzpatrick, WaMu Is Seized., Sold Off to J.P. Morgan, In Largest Failure in U.S. Banking History, WALL ST. J., Sept. 26, 2008, at A1.
183. Whereas Bear's stock price peaked. at $171.00 per share, JPMorgan Chase ultimately agreed. to pay $10.00 per share for the firm. Landon Thomas Jr., At Bear, an Apology Is Met With Silence, N.Y. TIMES, May 30, 2008.
184. at C6; Landon Thomas Jr., Run on Big Wall St. Bank Spurs U.S.-Backed. Rescue, N.Y. TIMES, Mar. 15, 2008, at A1. Lehman's stock lost 95 percent of its value prior to the firm's bankruptcy filing.
185. Alex Berenson, A Financial Drama With No Final Act in Sight, N.Y. TIMES, Sept. 14, 2008, at WK1. From January through September 2008, AIG's share price declined. by more than 90 percent, and shareholders faced. further losses from dilution due to the partial nationalization of the firm and decline in asset value due to the sale of the firm's assets to repay the federal loan.
186. Mary Williams Walsh, At A.I.G., Maneuvers to Salvage Some Value, N.Y. TIMES, Sept. 23, 2008, at C10. From April 2007 through September 19, 2008, Washington MutuaPs stock price fell precipitously.
187. Eric Dash, Bank Is in Line for a $5 Billion Infusion, N.Y. TIMES, Apr. 8, 2008, at C2.
188. Ben White, The Winners, Maybe, N.Y. TIMES, Sept. 20, 2008, at CI.
189. See, e.g., Jennifer Arlen, The Potentially Perverse Effects of Corporate Criminal Liability, 23 J. LEGAL STUD. 833, 836-37 (1994) (noting that strict liability may lead firms to avoid internal efforts to detect wrongdoing if the cost of liability exceed.s the expected. preventive value of increasing the risk of detection through better monitoring).
190. see also Jennifer Arlen &. Reinier Kraakman, Controlling Corporate Misconduct: An Analysis of Corporate Liability Regimes, 72 N.Y.U. L. Rev. 687, 754 (1997) (contending that "the purpose of corporate sanctions is not to punish wrongdoers but rather to induce firms to detect, report, and punish wrongdoers").
191. A notable example is Warren Buffett's $5 billion investment in Goldman Sachs Group, Inc. As part of his investment, Mr. Buffett required the senior managers of Goldman to agree to maintain very sizable personal investments in the firm for several years unless Buffett's investment was first paid off.
192. Yogita Patel, Buffett Insists Goldman Executives Are Also Owners, WALL ST. J., Oct. 8, 2008, at C3.
193. See Black, supra note 50, at 185 (noting that managers tend to red.uce risk taking to preserve assets under management and fees already earned.).
194. Goetzmann, Ingersoll 6k Ross, supra note 83, at 1716 ("returns [to hedge fund managers] are diminishing in scale"). Another dynamic is that as assets grow, the annuity value of the fixed. portion of the typical "2 and 20" management fee becomes increasingly valuable, incentivizing the manager to seek to simply grow and preserve assets under management rather than seek outsized. returns.
195. I think it is interesting how the "stigma" of bankruptcy has changed. in recent times for the managers of the defunct companies. The loss of social approbation associated. with bankruptcy may have lessened. one of the countervailing costs that previously constrained. the incentive to take excessive risk.
196. Any objection that this intrudes into personal affairs, while true, may now seem petty. We have seen that their "private" decisions do indeed have a very public impact. We routinely ask our public servants to disclose their financial interests. Is it absurd to think that we might ask the same of those who might spend $700 billion of the public purse by their actions?.
197. see BASEL COMM. ON BANKING SUPERVISION, BANK FOR INTL SETTLEMENTS, INTERNATIONAL CONVERGENCE OF CAPITAL MEASUREMENT AND CAPITAL STANDARDS 2-5 (2006).
198. See, e.g., Jennifer Arlen & Reinier Kraakman, supra note 128, at 754 (contending that "the purpose of corporate sanctions is not to punish wrongdoers but rather to induce firms to detect, report, and punish wrongdoers").
199. Daniel R. Fischel &. Alan O. Sykes, Corporate Crime, 25 J. LEGAL STUD. 319, 321 (1996).
200. Reinier H. Kraakman, Corporate Liability Strategies and the Costs of Legal Controls, 93 YALE L.J. 857, 866-67 (1984) (asserting that imposition of ex post liability on individual managers is generally inefficient).
201. Jonathan R. Macey, Agency Theory and the Criminal Liability of Organizations, 71 B.U. L. REV. 315, 340 (1991) ("Increased. organizational penalties may induce corporate managers to be excessively risk-averse. What ensues is a stifling of innovation and an increase in costly internal control systems-costs borne ultimately by consumers.").
202. See, e.g., Kara Scannell & John R. Emshwiller, Countrywide Chiefs Charged. With Fraud, WALL ST. J., June 5, 2009, at C1.
203. This debate has played. most famously in the development of the business judgment rule and the duty of care imposed. on corporate directors.
204. See Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57 VAND. L. Rev. 83 (2004). It has also been the center of the debate over the certification provisions of Sarbanes-Oxley. These provisions impose personal liability on the members of senior management of a public company for certain errors or omissions in the company's financial disclosure. Sarbanes-Oxley Act of 2002 § 302, 15 U.S.C. § 7241 (2006) (imposing personal civil liability on an issuer's chief executive officer and chief financial officer for falsely certifying as to the accuracy of periodic financial statements or the adequacy of internal financial controls).
205. HAROLD S. BLOOMENTHAL, SARBANES-OXLEY ACT IN PERSPECTIVE §§ 23, 2: 6 (2008-2009). For a general discussion and critique of these and other provisions of the Sarbanes-Oxley Act of 2002,.
206. see HARRY N. BUTLER & LARRY E. Rlbstein, THE SARBANES-OXLEY DEBACLE: WHAT WE'VE LEARNED; HOW TO FIX IT 92 (2006) ("These sanctions [i.e., the SOX criminal penalties for officers] make the corporate suite a very dangerous place even for law abiding executives. They may react by avoiding public firms that are subject to SOX, or engaging in conduct that is far more conservative than diversified. shareholders would prefer-including excessive attention to internal controls disclosures.").
207. Cass R. Sunstein, Problems With Rules, 83 CAL. L. REV. 953, 976 (1995) ("In modern regulation, a pervasive problem is that members of regulated. classes face ambiguous and conflicting guidelines, so that they do not know how to plan. For people who are subject to public force, it becomes especially important to know what the law is before the actual case arises. Indeed., it may be more important to know what the law is than to have a law of any particular kind. Consider, for instance, the Miranda rules. A special virtue of those rules is that they tell the police specifically what must be done, eliminating the guessing games that can be so destructive to ex ante planning. So, too, in the environmental area, where prospectively clear rules, even if strict, are often far better than the 'reasonableness' inquiry characteristic of the common law."). This strategy has been used often in regulating the financial markets.
208. See Lawrence A. Cunningham, A Prescription to Retire the Rhetoric of "Principles-Based. Systems" in Corporate Law, Securities Regulation, and Accounting, 60 VAND. L. REV. 1411, 1447 & n.136 (2007) ("SEC regulations provide safe harbors, all of which contain precisely delineated. boundaries...." (citing numerous examples)).
209. Donna M. Nagy, Judicial Reliance on Regulatory Interpretations in SEC No'Action Letters: Current Problems and a Proposed. Framework, 83 CORNELL L. REV. 921, 930 (1998) ("The SEC often uses its general rulemaking powers to define statutory terms or to create 'safe harbors' that provide objective criteria upon which market participants may rely to secure exemptions provided for in the statutory text.").
210. id. at 957-58 ("Safe harbor rules are tremendously popular with market participants because the federal securities statutes insulate from liability any person who in good faith conforms with an SEC rule, even if a court subsequently determines that the rule is invalid.").
211. Securities Act of 1933 § 11(b)(3), 15 U.S.C. § 77k(b)(3) (2006).
212. see also 9 LOUIS LOSS &. JOELSEUGMAN, SECURITIES REGULATION ch. 11, § (C)(2)(d), at 4259-61, 4269-70 (3ded. 2004).
213. See Robert Eli Rosen, Resistances to Reforming Corporate Governance: The Diffusion of QLCCs, 74 FORDHAM L. REV. 1251, 1274 (2005) ("In making law a critical contingency, SOX led. to the empowerment of compliance officers. As a result of the scandals, 'compliance officers are being given far more responsibility and resources. "This is a tremendous sea change.... Now, the compliance officer will report directly or indirectly to the board of directors."' At other times, inside counsel shunned. the compliance role, fearing that being the 'corporate conscience' would exclude them from important decisions. In the post-SOX environment, compliance has become an essential element in important corporate decisions. Susan Hackett, of the Association of Corporate Counsel ('ACC), advised. inside counsel to '[tjake advantage of the passage of... Sarbanes-Oxley* and to '[u]se this opportunity to position the legal department as a center of... institutionalizing... compliance initiatives.'" (citations omitted)). Under SEC rules, registered. investment companies, business development companies, and investment advisers must appoint a "chief compliance officer" to ensure that the entity has in place policies and procedures fostering compliance with the securities laws, including Sarbanes-Oxley. 17 C.F.R. § 270.38a-1 (2008);.
214. id. § 275.206(4)-7. "[T]he compliance officer should have a position of sufficient seniority and authority within the organization to compel others to adhere to the compliance policies and proced.ures." Compliance Programs of Investment Companies & Investment Advisers, Investment Advisers Act Release No. 2204, Investment Company Act Release No. 26299, 81 SEC Docket 3448, at 3454 (Dec. 17, 2003).
215. Andrew Hopkins, Beyond Compliance Monitoring: New Strategies for Safety Regulators, 29 LAW & POL'Y 210, 215 (2007) (discussing regulatory strategies to increase workplace safety).
216. See David Zaring, Best Practices, 81 N.Y.U. L. REV. 294 (2006) (arguing drat "best practices" regulation often leads to imposing only "common practices").
217. "Tick the box" refers to regulatory regimes that require a checklist of objective steps that may be fulfilled. through formalistic measures, inviting compliance with the literal requirements rather than the spirit of the regulation.
218. See Hopkins, supra note 140, at 214 (arguing that best practices should avoid "tick the box" approach and insist on effectiveness as the goal).
219. U.S. Dep"t of the Treasury, supra note 111, at 2.
220. Id. at 15.
221. "Regulatory capture" refers to the notion that regulators tend over time to become subject to the influence and control of the industry they regulate. For an interesting discussion of regulatory capture in the context of food and drug safety,.
222. see Sidney A. Shapiro & Rena I. Steinzor, Capture, Accountability, and Regulatory Metrics, 86 TEX. L. Rev. 1785 (2008).
223. IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION: TRANSCENDING THE DEREGULATION DEBATE (1992).
224. Id. at 101.
225. THOMAS K. MCCRAW, PROPHETS OF REGULATION: CHARLES FRANCIS ADAMS, LOUIS D. BRANDEIS, JAMES M. LANDIS, ALFRED E. KAHN 308 (1984).
226. A "light touch" is preferred. because of the difficulty of evaluating die costs and benefits of regulatory change.
227. See, e.g., Robert W. Hahn & John A. Hird, The Cost and Benefits of Regulation: Review and Synthesis, 8 YALE J. ON REG. 233 (1991) (providing a re-assessment of the costs of various regulatory programs). The concern that "overregulation" has adversely affected American competitiveness and economic growth should not be forgotten in this milieu of panic.
228. See Comm. on Capital Markets Regulation, Interim Report of the Committee on Capital markets regulation (2006), available at http://www/capmktsreg.org/ pdfs/11.30Cornmittee-Interim-ReportREV2.pdf(arguing that overregulation has caused an erosion in the U.S.'s competitiveness as a source of public equity capital).
229. See COMM. ON CAPITAL MARKETS 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 (offering evidence of decreasing competitiveness).
230. cf. Darrell Duffie & Henry T. C. Hu, Competing for a Share of Global Derivatives Markets: Trends and Policy Choices for the United. States (Rock Ctr. for Corporate Governance, Stanford Univ., Working Paper Series No. 50; U. of Tex. Law, Law & Econ. Research Paper No. 145, 2008), available at http://ssrn.com/abstract=1140869 (concluding that while differing regulation can impact the choice of location for the development of derivatives markets, other factors, such as the concentration of human capital, have a stronger effect).