Trust in the shadows: Law, behavior, and financial re-regulation

Buffalo Law Review

Volumn 57, Issue 5, 2009, Pages 1361-1445

  Brescia, Raymond H ^a  

^a ALBANY LAW SCHOOL   (United States)

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EID: 76749106976     PISSN: 00239356     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (426)

1. The so-called "voluntary codes" of conduct under the National Industrial Recovery Act turned out to be not so voluntary, their violation could result in criminal charges.
2. See 15 U. S. C. § 703 (1934), invalidated by A. L. A. Schecter Poultry Corp. v. United States, 295 U. S. 495 (1935). As a result, the Supreme Court struck down the law on which the system of conduct codes was based, when it determined that Congress's delegation of legislative functions under the Act was unconstitutional and the codes did not have a sufficient nexus to interstate commerce.
3. See Schecter Poultry, 295 U. S. at 499. Since the suggestion here-that the Obama Administration should develop a truly voluntary code of conduct for financial services institutions-would not suffer from the same defects, it is unlikely that it would not withstand similar constitutional challenges. For more information on the Blue Eagle program, see pp. 1439-40 & n. 266.
4. The literature comparing the Great Depression to the current financial crisis is extensive. See, e.g., Christina D. Romer, Council of Econ. Advisors, Presentation Before the Brookings Institution: Lessons from the Great Depression for Economic Recovery in 2009 (Mar. 9, 2009), available at http://www.brookings.edU/~/media/Files/events/2009/0309-lessons/0309-lessons -romer.pdf.
5. The Obama Administration has laid out what it has called a "new foundation" for regulatory reform of financial markets.
6. See DEP'T OF THE TREASURY, FINANCIAL REGULATORY REFORM: A NEW FOUNDATION: REBUILDING FINANCIAL SUPERVISION AND REGULATION (2009), http://www.financialstability.gov/docs/regs/ FinalReport-web.pdf [hereinafter Obama Plan].
7. Nouriel Roubini described the interplay between the shadow banking system and the risks inherent to it as follows: Last week saw the demise of the shadow banking system that has been created over the past 20 years. Because of a greater regulation of banks, most financial intermediation in the past two decades has grown within this shadow system whose members are broker-dealers, hedge funds, private equity groups, structured investment vehicles and conduits, money market funds and non-bank mortgage lenders. Like banks, most members of this system borrow very short-term and in liquid ways, are more highly leveraged than banks (the exception being money market funds) and lend and invest into more illiquid and long-term instruments. Like banks, they carry the risk that an otherwise solvent but liquid institution may be subject to a selffulfilling and destructive run on its liquid liabilities. Nouriel Roubini, The Shadow Banking System is Unravelling, FIN. TIMES, Sept. 22, 2008, at 9.
8. See, e.g., Alan S. Blinder, Six Blunders En Route to a Crisiss, N. Y. TIMES, Jan. 25, 2009, at BU7 (describing, inter alia, the role of leverage and subprime lending in fueling the financial crisis).
9. See infra Part LA.
10. JOHN STUART MILL, PRINCIPLES OF POLITICAL ECONOMY ch. VII, § 5, at 108-09 (Cosimo 2002) (1907).
11. Kenneth J. Arrow, Gifts and Exchanges, 1 PHIL. & PUB. AFF. 343, 357 (1972).
12. ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 292 (R. H. Campbell et al. eds., Oxford Univ. Press 1976) (1776).
13. NIALL FERGUSON, THE ASCENT OF MONEY: A FINANCIAL HISTORY OF THE WORLD 29-30 (2008).
14. A wide range of actors, public and private, have stressed the importance of restoring trust in the financial system.
15. See, e.g., The Proposed Consumer Financial Protection Agency: Implications for Consumers and the FTC Before the Subcomm. on Commerce, Trade, and Consumer Protection of the H. Comm. on Energy and Commerce, 111th Cong. (2009) (testimony of Michael Barr, Assistant Secretary for Financial Institutions, Dep't of Treasury) ("We must restore honesty and integrity to our financial system, in order to restore trust and confidence.") ;
16. Enhancing Investor Protection and the Regulation of Securities Markets Before S. Comm. On Banking, Housing, and Urban Affairs - Part II, 111th Cong. (2009) (testimony of Richard G. Ketchum, Chairman & Executive Officer, Financial Industry Regulatory Authority) ("Creating a system of consistent standards and vigorous oversight of financial professionals... which license they hold-would enhance investor protection and help restore trust in our markets.") ;
17. Bill Bradley, Op-Ed, Five Ways to Restore Financial Trust, WALL ST. J., Feb. 19, 2009, at A19 ("Restoring trust in the financial system is the key to solving the current economic crisis.") ;
18. Timothy Geithner & Lawrence Summers, Op-Ed., A New Financial Foundation, WASH. POST, June 15, 2009, at A15 ("By restoring the public's trust in our financial system, the administration's reforms will allow the financial system to play its most important function: transforming the earnings and savings of workers into the loans that help families buy homes and cars, help parents send kids to college, and help entrepreneurs build their businesses.") ;
19. Remarks by Assistant Secretary Michael Barr on Regulatory Reform to the Exchequer Club (July 15, 2009) (as prepared for delivery), in Press Release, U. S. Dep't of the Treasury, http://www.ustreas.gov/press/releases/ tg213.htm ('To rebuild trust in our markets, we need strong and consistent regulation and supervision of consumer financial services and investment markets.") ;
20. Citigroup Advertisement, Confidence, http://www.citigroup. com/citi/press/advertising.htm (last visited Sept. 22, 2009) (providing an advertisement explaining why people trust Citi and Citi's commitment to its clients) ;
21. Stephen Green, Group Chairman, HSBC Holdings, Remarks Before the British Bankers' Association Annual International Banking Conference: Restoring Governance and Trust (June 30, 2009), available at http://www.hsbc.com/1/ PA-1-1-S5/content/assets/newsroom/090630-speech-bba.pdf ("[R]estoring trust means getting back to the raison d'être of banking.") ;
22. Remarks by the President on 21st Century Financial Regulatory Reform (June 17, 2009), in Press Release, The White House http://www.whitehouse. gov/the-press-office/Remarks-of-the-President-on-Regulatory-Reform/ ("That's our goal-to restore markets in which we reward hard work and responsibility and innovation, not recklessness and greed; in which honest, vigorous competition is the system-in the system is prized, and those who game the system are thwarted.") ;
23. Remarks by the President After Regulatory Reform Meeting (Feb. 25, 2009), in Press Release, The White House, http://www.whitehouse.gov/the-press- office/Remarks-by-the-President-after-Regulatory-Reform-Meeting/("[T]o rebuild trust in our markets, we must redouble our efforts to promote openness, transparency and plain language throughout our financial system.") ;
24. Press Release, Standard & Poor's, Standard & Poor's Commitment to Reform: Restoring Confidence in the Credit Markets (July 16, 2009), http://www2.standardandpoors.com/spd/pdf/fixedincome/SP-W SJ-OpEd-Ad.pdf- (explaining the changes Standard & Poor's has implemented in order to earn back the trust of their investors) ;
25. Lawrence H. Summers, Dir., Natl Econ. Council, Remarks at the Peterson Institute for International Economics: Rescuing and Rebuilding the U. S. Economy: A Progress Report (July 17, 2009) (as prepared for delivery), available at http://piie.com/publications/papere/paper.cfm?ResearchID= 1264 ("The President was clear from the beginning that these two tasks needed to be dovetailed-that confidence in our ability to rescue the economy depended on a sense of our commitment to reform and a vision for rebuilding.").
26. Remarks by President Barack Obama on Executive Compensation with Secretary Geithner (Feb. 4, 2009), in Press Release, The White House, http://www.whitehouse.gov/the-press-office/RemarksbyPresidentBarackObama OnExecutiveCompensationSecretaryGeithner/.
27. See Regulatory Perspectives on the Obama Administration's Financial Regulatory Reform Proposals-Part Two Before the H. Comm. on Financial Services, 111th Cong. (2009) (testimony of Timothy F. Geithner, Secretary, U. S. Department of the Treasury) ("The reforms proposed in the Administration's plan are designed to strengthen our markets by restoring confidence and accountability, while preserving that tradition of innovation. ").
28. PAOLA SAPIENZA & LUIGI ZINGALES, UNIV. OF CHI. BOOTH SCHOOL OF BUS. & THE KELLOGG SCH. OF MGMT., FINANCIAL TRUST INDEX (Oct. 19, 2009), http://www.financialtrustindex.org/resultswave4.htm (showing 22% of Americans surveyed trust the financial system).
29. See, e.g., Lawrence E. Mitchell, The Importance of Being Trusted, 81 B. U. L. REV. 591, 596 (2001) (reviewing literature on trust from various disciplines).
30. Frank B. Cross, Law and Trust, 93 GEO. L. J. 1457, 1461 (2005) (footnote omitted) ;
31. see also Margaret M. Blair & Lynn A. Stout, Trust, Trustworthiness, and the Behavioral Foundations of Corporate Law, 149 U. PA. L. REV. 1735, 1739-40 (2001) ("[Trust is] a willingness to make oneself vulnerable to another, based on the belief that the trusted person will choose not to exploit one's vulnerability (that is, will behave trustworthily).") ;
32. Angela L. Coletti et al., The Effect of Control Systems on Trust and Cooperation in Collaborative Environments, 80 ACCT. REV. 477, 481 (2005) ("[W]e consider trust to be one's perception of another's trustworthiness.") ;
33. Mark A. Hall, Law, Medicine, and Trust, 55 STAN. L. REV. 463, 474 (2002) (("[Trust is] the optimistic acceptance of a vulnerable situation in which the trustor believes the trustee will care for the trustor's interests.") ;
34. Sim B. Sitkin & Nancy L. Roth, Explaining the Limited Effectiveness of Legalistic 'Remedies" for Trust/Distrust, 4 ORG. SCI. 367, 368 (1993) ("[N]early all research has at least implicitly accepted a definition of trust as a belief, attitude, or expectation concerning the likelihood that the actions or outcomes of another individual, group or organization will be acceptable or will serve the actor's interests.") (citations omitted).
35. See, e.g., Susan Rose-Ackerman, Trust, Honesty and Corruption: Reflection on the State-Building Process, 42 EUR. J. SOC. 526, 527-29 (2001) (describing different dimensions of trust).
36. See Cross, supra note 16, at 1463.
37. See id. at 1464-65.
38. See id. at 1465-68.
39. See, e.g., Oliver E. Williamson, Calculativeness, Trust, and Economic Organizations, 36 J. L. & ECON. 453, 485 (1993).
40. See id.
41. Claire A. Hill & Erin Ann O'Hara, A Cognitive Theory of Trust, 84 WASH. U. L. REV. 1717, 1727 (2006).
42. Russell Hardin, The Street-Level Epistemology of Trust, 21 POL. & SOC'Y 505, 506 (1993).
43. See, e.g., Thomas Gautschi, History Effects in Social Dilemma Situations, 12 RATIONALITY & SOC'Y 131 (2000) (showing one's history with trusting and untrustworthy behavior has an effect on that individual's willingness to trust in the future) ;
44. Roger C. Mayer et al., An Integrative Model of Organizational Trust, 20 ACAD. MGMT. REV. 709, 728 (1995) (finding experiences with trust and breaches of trust will inform perceptions of the trustworthiness of others).
45. In Steven Soderburgh's cinematic remake of Ocean's 11, George Clooneys character, Danny Ocean, a high end grifter and con man, is accused by his wife, played by Julia Roberts, of being "a thief and a liar." Danny professes that "he only lied about being a thief", defending his reputation for honesty to his spouse regardless of his chosen profession. OCEAN'S 11 (Warner Bros. Pictures 2001), available at http://www.dailyscript.com/scripts/oceans-11.pdf.
46. ERIC M. USLANER, THE MORAL FOUNDATIONS OF TRUST 17 (2002) ("Trust helps us solve collective action problems by reducing transaction costs-the price of gaining the requisite information that [two potential trade partners] need to place confidence in each other. It is a recipe for telling us when we can tell whether other people are trustworthy." (citations omitted)). Coase classified transaction costs into four categories: search, information, negotiation, and enforcement. R. H. Coase, The Nature of the Firm, 4 ECONOMICA 386, 390-92 (1937).
47. Denise M. Rousseau et al., Not So Different After All: A Cross-Discipline View of Trust, 23 ACAD. MGMT. REV. 393, 394 (1998) (citations omitted). Trust also has broader, non-economic payoffs as well: Trust promotes cooperation. It leads people to take active roles in their community, to behave morally, and to compromise. People who trust others aren't quite so ready to dismiss ideas they disagree with. When they can't get what they want, they are willing to listen to the other side. Communities with civic activism and moral behavior, where people give others their due, are more prosperous. Eric M. Uslaner, Democracy and Social Capital, in DEMOCRACY AND TRUST 121, 122 (Mark E. Warren ed., 1999).
48. See Stephen Gandel, Lenders Look Beyond Credit Scores to Gauge Who's a Risk, TIME, JAN. 9, 2009, http://www.time.com/ time/business/article/0, 8599, 1870 450, 00.html (explaining that lenders are going to less traditional methods of determining creditworthiness of borrowers).
49. See Carrick Mollenkamp et al., Lending Among Banks Freezes, WALL ST. J., Sept. 16, 2008, at A1 (explaining that despite efforts of central banks the Libor index showed banks' reluctance to lend to each other).
50. See Jeff Sommer, Up 40%, but Still Feeling Down, N. Y. TIMES, July 26, 2009, at BU4 (explaining that investors are turning to safer investments as it becomes more important to avoid big loses as opposed to making big gains).
51. See Jack Healy, As the Recession Worsens, Consumers Save More and Spend Less, N. Y. TIMES, Feb. 3, 2009, at B3.
52. PIPPA NORRIS, DEMOCRATIC PHOENIX: REINVENTING POLITICAL ACTIVISM 149 (2002) (citation omitted). Though not a perfect gauge of trust to any extent, Norris believes "this item has become accepted as the standard indicator of social or interpersonal trust."
53. Id.
54. Id.
55. For background information and to analyze the data results from the 2005 survey and prior surveys, see JAIME DIEZ MEDRANO, WORLD VALUES SURVEY ASS'N, WORLD VALUES SURVEY V23 (2005), http://www.jdsurvey.net/downloads/ wvs2005a-v20090901-spss.zip; and World Values Survey, www.worldvaluessurvey.org (last visited Oct. 29, 2009). A sampling of the data from 2005 shows that some nations, like Finland and the Netherlands, ranked very high in terms of individuals who felt that most people could be trusted, with respondents in those countries agreeing with that statement almost 60% of the time for Finland, and 45% of the time for the Netherlands. In that year, Iraqis agreed with that statement over 40% of the time, and respondents in the U. S., just under 40%. In countries like South Africa and Colombia, the percentage of individuals agreeing with the statement "most people can be trusted" was, not surprisingly, quite low: 19% and 15%, respectively. MEDRANO, supra.
56. On measuring social capital and trust, see, for example, Christiaan Grootaert et al., Measuring Social Capital: An Integrated Questionnaire 12 (World Bank, Working Paper No. 18, 2004).
57. Robert D. Putnam, E Pluribus Unum: Diversity and Community in the Twenty-first Century, 30 SCANDINAVIAN POL. STUD. 137, 137 (2007).
58. For an overview of social capital theory, see, for example ROBERT D. PUTNAM, BOWLING ALONE: THE COLLAPSE AND REVIVAL OF AMERICAN COMMUNITY (2000) ;
59. and James S. Coleman, Social Capital in the Creation of Human Capital, 94 AM. J. SOC. S95 (Supp. 1988).
60. See Michael Woolcock, The Place of Social Capitalism in Understanding Social and Economic Outcomes, http://www.oecd.org/dataoecd/5/13/ 1824913.pdf (providing an overview of benefits of social capitalism).
61. See, e.g., PUTNAM, supra note 37, at 415-26 (describing Putnam's methodology for measuring social capital).
62. See, e.g., NORRIS, supra note 33, at 156.
63. The interplay between trust and social capital has been described by Robert Putnam as follows: In the first place, networks of civic engagement foster sturdy norms of generalized reciprocity and encourage the emergence of social trust. Such networks facilitate coordination and communication, amplify reputations, and thus allow dilemmas of collective action to be resolved. When economic and political negotiation is embedded in dense networks of social interaction, incentives for opportunism are reduced. At the same time, networks of civic engagement embody past success at collaboration, which can serve as a cultural template for future collaboration. Finally, dense networks of interaction probably broaden the participants' sense of self, developing the "I" into the "we", or... enhancing the participants' "taste" for collective benefits. Robert D. Putnam, Bowling Alone: America's Declining Social Capital (1995), reprinted in CULTURAL METEPHORS: READINGS, RESEARCH TRANSLATIONS, AND COMMENTARY 109, 111 (Martin J. Gannon ed., 2001). But cf. USLANER, supra note 27, at 128 (arguing civic engagement does not lead to greater trust) ;
64. Dietlind Stolle, Clubs and Congregations: The Benefits of Joining an Association, in TRUST IN SOCIETY 202, 233 (Karen S. Cook ed., 2003) (finding higher trust within groups a product of self-selection: higher trusting individuals join groups rather than higher trust resulting from joining groups). On the importance of trust to the functioning of democratic governance generally, see Mark E. Warren, Democratic Theory and Trust, in DEMOCRACY & TRUST, supra note 28, at 310-43.
65. NORRIS, supra note 33, at 153.
66. See, e.g., id. at 156 ("Social capital is associated with socioeconomic development... but this link appears to operate through social trust, not civil society.") ;
67. Stephen Knack & Philip Keefer, Does Social Capital Have an Economic Payoff? A Cross-Country Investigation, 112 Q. J. ECON. 1251, 1283-84 (1997) (finding a relationship between trust and economic growth, but finding no evidence of relationship between social capital and such growth) ;
68. Paul F. Whiteley, Economic Growth and Social Capital, 48 POL. STUD. 443, 453, 460 (2000) (using response to questions related to trust of others on World Values Survey from 34 countries from 1970 to 1992 and finding trust closely related to economic growth and performance during that period).
69. Of course, growth or income is not the only measurement of well-being in a society, but I will use this as a gauge of economic activity generally because it appears that at this critical economic juncture, restoration of trust and trustworthiness is essential to stave off the worst impacts of the current economic downturn, which have obvious broader social ramifications: displacement and foreclosure, job loss, and hunger, to name just a few. For alternative benchmarks for measuring development, see AMARTYA K. SEN, DEVELOPMENT AS FREEDOM 3-53 (Oxford Univ. Press 2001) (1999).
70. As Hardin also points out: Betrayal is, of course, not a failure of trust but a failure of trustworthiness. It is odd therefore that academic writings-both philosophical and social scientific-focus heavily on trust rather than on trustworthiness. Indeed, most writings on trust tend to say things that, as noted earlier, would make easy sense if applied to trustworthiness but that make less sense when applied to trust. If such statements make sense for trust at all, it is only indirectly through the causal connection that trustworthiness begets trust. Russell Hardin, Conceptions and Explanations of Trust, in TRUST IN SOCIETY, supra note 41, at 32;
71. see also Cross, supra note 16, at 1530. Cross, recognizing the potential to abuse trust, notes that "more trust is not always preferable to less trust. The key is distinguishing when trust is undesirable."
72. Id.
73. It also seems to be the essential element in the morality of the trusttrustworthy nexus.
74. See Jane Mansbridge, Altruistic Trust, in DEMOCRACY AND TRUST, supra note 28, at 290 ("Because trust is a probabilistic expectation, it is a belief. We do not in general consider beliefs moral or immoral. Therefore trust is neither moral nor immoral. In an interaction in which trust means only prediction, the moral virtue is trustworthiness, not trust.").
75. Trustworthiness has been defined as "an innate personal characteristic reflecting one's preference for upholding some social norm of behavior, regardless of economic incentives. In contrast, we consider trust to be one's perception of another's trustworthiness." Coletti et al., supra note 16, at 481 (footnote omitted).
76. Edward L. Glaeser et al., Measuring Trust, 115 Q. J. ECON. 811 (2000). These researchers were replicating in some respects previous research that sought to explore similar issues.
77. See Joyce Berg et al., Trust, Reciprocity, and Social History, 10 GAMES & ECON. BEHAV. 122 (1995).
78. Glaeser, supra note 48, at 814.
79. Id. at 819-23.
80. Id. at 820.
81. Id.
82. Id.
83. Id. at 820-21.
84. Id.
85. Id. at 821 (the participants were undergraduates at the same university and some knew one another).
86. Id. at 822-27.
87. See id.
88. Id. at 833.
89. Id.
90. PUTNAM, supra note 37, at 347-49 (tracking IRS data on state-by-state tax compliance levels).
91. Id.
92. See, e.g., Michael G. Allingham & Agnar Sandmo, Income Tax Evasion: A Theoretical Analysis, 1 J. PUB. ECON. 323 (1972) (viewing tax compliance patterns and applying a model similar to Becker's criminal compliance model to explain tax evasion) ;
93. Dan M. Kalian, Signaling or Reciprocating? A Response to Eric Posner's Law and Social Norms, 36 U. RICH. L. REV. 367, 378-80 (2002) (discussing reasons for noncompliance with duty to pay taxes) ;
94. Chester N. Mitchell, Willingness-To-Pay: Taxation and Tax Compliance, 15 MEMPHIS ST. U. L. REV. 127 (1985) (discussing how undetected tax evasion encourages others to not comply) ;
95. Richard C. Stark, A Principled Approach To Collection and Accuracy-Related Penalties, 91 TAX NOTES 115, 116 (2001) (discussing reasons for noncompliance).
96. THE YALE BOOK OF QUOTATIONS 498 (Fred R. Shapiro ed., 2006), available at http://yalepress.yale.edu/yupbooks/ qyd/("I do not care to belong to a club that accepts people like me as members.").
97. WorldofQuotes.com, Jerome Blattner Quotations, http://www.worldof quotes.com/author/Jerome-Blattner/1/index.html (last visited Oct. 28, 2009).
98. On the psychological process of projection, see, for example, THE DICTIONARY OF PSYCHOLOGY 767 (Raymond J. Corsini ed., 2002), for the definition of projection; and MARIE-LOUISE VON FRANZ, PROJECTION AND RE-COLLECTION IN JUNGIAN PSYCHOLOGY: REFLECTIONS OF THE SOUL 1-25 (Open Court Publ'g 1995) (1978), for a discussion of the concept of projection generally.
99. See, e.g., Richard A. Epstein, The Neoclassical Economics of Consumer Contracts, 92 MINN. L. REV. 803, 804 (2008) ("[T]he neoclassical conclusion [is] that competitive markets-markets with multiple, self-interested players on both sides, armed with relatively full information-will generate a mix of goods and services that is superior to those that can be generated with various forms of government regulation. ") (footnote omitted).
100. The literature on Law and Economics is vast, to say the least. For some of the early and seminal works, see GARY S. BECKER, THE ECONOMIC APPROACH TO HUMAN BEHAVIOR (1976) ;
101. RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW (7th ed. 2007). A close cousin to Law and Economics, the New Institutional Economics (NIE), takes into account the influence of institutions-which can be formal, like laws and constitutions, and informal, like norms-on human decision making. Many proponents of NIE would likely consider the sources of some of the forces described below as institutions worthy of study. For an overview of the NIE approach, see, for example, DOUGLASS C. NORTH, INSTITUTIONS, I NSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE (1990) ;
102. and Oliver E. Williamson, The New Institutional Economics: Taking Stock, Looking Ahead, 38 J. ECON. LIT. 595 (2000). For a comparison of the NIE approach with that of the Law and Economics movement
103. see RICHARD A. POSNER, OVERCOMING LAW 426-443 (1995).
104. For an overview of behavioral economics and its application in the legal context, see generally BEHAVIORAL LAW AND ECONOMICS (Cass R. Sunstein ed., 2000).
105. For an application of behavioral economics principles in a range of policy areas, see generally RICHARD H. THALER & CASS R. SUNSTEIN, NUDGE: IMPROVING DECISIONS ABOUT HEALTH, WEALTH, AND HAPPINESS (2008).
106. RICHARD A. POSNER, A FAILURE OF CAPITALISM: THE CRISIS OF '08 aND THE DESCENT INTO DEPRESSION 75-112 (2009) (assessing causes of the financial crisis).
107. See id.
108. Id. at 83-85.
109. See id. at 293, 296. Posner argues that it is " premature" to alter the regulatory framework and that "[r]eregulation, like reorganization, should wait."
110. Id.
111. See, e.g., Joe Nocera, Poking Holes in a Theory on Markets, N. Y. TIMES, June 6, 2009, at B1 (interviewing and discussing beliefs of respected market analyst Jeremy Grantham, who argues that the efficient market hypothesis led to a feeling of overconfidence in the market and its ability to correct itself leading to investors wrongly believing the crisis would solve itself;
112. Mr. Grantham believes that behavioral economic theory is more applicable to actual markets) ;
113. Robert J. Shiller, It Pays to Understand the Mind-Set, N. Y. TIMES, Mar. 29, 2009, at BU5 (claiming that the mind-set of investors, essentially over confidence, must be understood in order to fully understand the financial crisis) ;
114. Richard H. Thaler, Op-Ed., Mortgages Made Simpler, N. Y TIMES, July 5, 2009, at BU4 (describing and concurring with current Treasury Department plans for simplifying mortgage process and options in order to help consumers make proper decisions and avoid disrupting economy in future).
115. See, e.g., ROBERT J. SHILLER, THE SUBPRIME SOLUTION: HOW TODAY'S GLOBAL FINANCIAL CRISIS HAPPENED, AND WHAT TO DO ABOUT IT (2008).
116. See, e.g., THALER & SUNSTEIN, supra note 70, at 133-38;
117. Michael S. Barr et al., Behaviorally Informed Home Mortgage Regulation, in BORROWING TO LIVE: CONSUMER AND MORTGAGE CREDIT REVISITED 170 (Nicolas P. Retsinas & Eric S. Belsky eds., 2008).
118. See Joe LaPointe, Berra, at 83: A One-of-a-Kind Common Man, N. Y. TIMES, Apr. 16, 2009, at B13 (quoting Baseball Hall-of-Famer Yogi Berra, famous for his gritty play on the field and colorful turns of phrases off of it, as saying "Baseball is 90 percent mental and the other half is physical").
119. Some representative scholarship in this emerging field includes, for example, THE TOOLS OF GOVERNMENT: A GUIDE TO THE NEW GOVERNANCE (Lester M. Salamon ed., 2002) ;
120. Michael C. Dorf & Charles F. Sabel, A Constitution of Democratic Experimentalism, 98 COLUM. L. REV. 267, 345-56 (1998) ;
121. Bradley C. Karkkainen, "New Governance" in Legal Thought and in the World: Some Splitting as Antidote to Overzealous Lumping, 89 MINN. L. REV. 471 (2004) ;
122. James S. Liebman & Charles F. Sabel, A Public Laboratory Dewey Barely Imagined: The Emerging Model of School Governance and Legal Reform, 28 N. Y. U. REV. L. & SOC. CHANGE 183 (2003) ;
123. and Orly Lobel, The Renew Deal: The Fall of Regulation and the Rise of Governance in Contemporary Legal Thought, 89 MINN. L. REV. 342 (2004). In Part IV, I will also suggest a method for approaching re-regulation of the financial system consistent with New Governance approaches.
124. Lobel, supra note 79, at 449.
125. Id.
126. The most common of these games is the so-called prisoner's dilemma. The traditional setup of the prisoner's dilemma game is to imagine that there are two criminals who participated in the same crime and are being held by the police in separate interrogation rooms. The criminals are faced with a choice: each can choose to cooperate with the police, implicating his or her colleague while securing a lighter punishment for him or herself; or each can refuse to cooperate, leaving the police with little evidence with which to charge the detainees. If one cooperates and one does not, the one who refuses to cooperate will receive a stiff punishment. If both do not cooperate with the police, they will both be set free because the police need the testimony of the criminals to make their case. If both defect, and cooperate with the police, they will receive lighter punishments than if either of them refuse to give information to the police while the other sings like a canary. If the two criminals can coordinate their strategy, and agree to refuse to give the police any information, they both benefit from that strategy of cooperation (cooperation, that is, with each other, not the police). In the face of mistrust of the other criminal (and they are criminals after all), where there is a fear that the partner will defect and give the police the information they want, the wise strategy is to cooperate with the police as quickly as possible and rat out the other criminal in the hope of securing a lighter punishment. However the game plays out, collectively, the two should cooperate, while, individually, the wiser strategy is to defect, particularly if you fear the partner is a defection risk. Many cooperation games utilize this basic model, but with many different details and permutations. For a more in-depth description of this classic model, see, for example, ROBERT AXELROD, THE EVOLUTION OF COOPERATION 7-10 (1984).
127. See DAN ARIELY, PREDICTABLY IRRATIONAL: THE HIDDEN FORCES THAT SHAPE OUR DECISIONS (2008).
128. Robert C. Ellickson, A Critique of Economic and Sociological Theories of Social Control, 16 J. LEGAL STUD. 67, 71 (1987) (outlining typology of constraints).
129. Id. at 71.
130. Id. at 71-72.
131. Id.
132. Carol M. Rose, Trust in the Mirror of Betrayal, 75 B. U. L. REV. 531, 536 (1994).
133. Ellickson, supra note 84, at 81-90 (rejecting what he calls the 'legal centralism" of modern law-and-economics scholars) ;
134. see also Stewart Macaulay, Non-Contractual Relations in Business: A Preliminary Study, 28 AM. SOC. REV. 55, 60-67 (1963) (noting that business persons generally believe that formal contracts can be unnecessary in certain business dealings).
135. See FRANKLIN E. ZIMRING & GORDON J. HAWKINS, DETERRENCE: THE LEGAL THREAT IN CRIME CONTROL (1973) ;
136. Gary S. Becker, Crime and Punishment: An Economic Approach, 76 J. POL. ECON. 169 (1968).
137. For a discussion of the role of norms, see Amitai Etzioni, Social Norms: Internalization, Persuasion, and History, 34 LAW & SOC'Y REV. 157 (2000) ;
138. and Lawrence Lessig, The New Chicago School, 27 J. LEGAL STUD. 661 (1998).
139. See, e.g., TOM R. TYLER, WHY PEOPLE OBEY THE LAW (1990) (identifying some of the external reasons people may obey the law, including the influence that their interactions with the legal system have on their perceptions of whether they consider it as fair).
140. See ARIELY, supra note 83, at 213.
141. See id.;
142. see also Nina Mazar & Dan Ariely, Dishonesty in Everyday Life and Its Policy Implications, J. PUB. POL'Y & MARKETING, Spring 2006, at 1, 6 (citation omitted) (discussing a 2005 survey conducted by Nina Mazar, On Amir, and Dan Ariely).
143. ARIELY, supra note 83, at 198.
144. Id.
145. Id.
146. Id.
147. Id.
148. Id. at 198-99.
149. Id.
150. Id. at 200.
151. Id.
152. Id. at 201.
153. The Financial Crisis and the Role of Federal Regulators: Hearing Before the H. Comm. on Oversight and Gov't Reform, 110th Cong. 33 (2008) (testimony of Alan Greenspan, former Chairman, U. S. Federal Reserve Board), available at, http://oversight.house.gov/documents/200810241693819.pdf.
154. Press Release, Christopher Cox, Chairman, SEC, Chairman Cox Announces End of Consolidated Supervised Entities Program (Sept. 26, 2008), http://www.sec.gov/news/press/2008/2008-230.htm.
155. ee, e.g., Pedro Dal Bo, Cooperation Under the Shadow of the Future: Experimental Evidence from Infinitely Repeated Games, 95 AM. ECON. REV. 1591 (2005) (showing that cooperation increases as players interact repeatedly) ;
156. Robert Evans & Jonathan P. Thomas, Reputation and Experimentation in Repeated Games with Two Long-Run Players, 65 ECONOMETRICA 1153-73 (1997) (showing that reputation comes into play when a game is repeated over the long-term leading to increased cooperation) ;
157. Robert Gibbons, Trust in Social Structures: Hobbes and Coase Meet Repeated Games, in TRUST IN SOCIETY, supra note 41, at 332-49 (showing participants more likely to cooperate in repeat games because there is more likely a greater payoff from cooperation) ;
158. see also, FOUNDATIONS OF HUMAN SOCIALITY: ECONOMIC EXPERIMENTS AND ETHNOGRAPHIC EVIDENCE FROM FIFTEEN SMALL-SCALE SOCIETIES (Joseph Henrich et al. eds. 2004) (collecting results from cross-cultural studies of cooperative behavior).
159. AXELROD, supra note 82, at 13.
160. Id. at 11-19 (discussing the emergence of cooperation in repeat-play prisoner's dilemma games) ;
161. see also DAVID M. KREPS, GAME THEORY AND ECONOMIC MODELLING 65-89 (1990) (same).
162. Dan M. Kahan, The Logic of Reciprocity: Trust, Collective Action, and Law, 102 MICH. L. REV. 71 (2003).
163. See AXELROD, supra note 82, at 109. For a hypothesis of why norms of cooperation develop in repeat play games, see ROBERT C. ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES 167-83 (1991).
164. See AXELROD, supra note 82, at 113-17 (suggesting that one should never be the first to defect) ;
165. Diego Gambetta, Can We Trust Trust?, in TRUST: MAKING AND BREAKING COOPERATIVE RELATIONS 227 (Diego Gambetta ed., 1988) (describing the benefits of a cooperative first move).
166. See AXELROD, supra note 82, at 31.
167. Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1657-77 (1996).
168. For a description of how cooperative behavior in repeat play games occurs in commercial settings, see, for example, Benjamin Klein & Keith B. Leffler, The Role of Market Forces in Assuring Contractual Performance, J. POL. ECON. 615 (1981) ;
169. and Gilbert Roberts & James S. Renwick, The Development of Cooperative Relationships: An Experiment, 270 PROCEEDINGS: BIOLOGICAL SCI. 2279 (2003).
170. See David M. Kreps, Corporate Culture and Economic Theory, in PERSPECTIVES ON POSITIVE POLITICAL ECONOMY 90 (James E. Alt & Kenneth A. Shepsle eds., 1990).
171. For research into the behavior of attorneys who frequently deal with each other and who exhibit a greater propensity to settle their cases than attorneys who do not, see Jason Scott Johnston & Joel Waldfogel, Does Repeat Play Elicit Cooperation? Evidence from Federal Civil Litigation, 31 J. LEGAL STUD. 39, 40-41 (2002). Similarly, when cross-border commerce was first evolving in the Middle Ages, merchants had to find ways to assess the trustworthiness of their trading partners in the absence of an ability to monitor defection from great distance or judge the quality of the goods traded. A class of intermediaries were created-the law merchant-that helped to spread information about the trustworthiness of trading partners.
172. See Paul R. Milgrom et al., The Role of Institutions in the Revival of Trade: The Law Merchant, Private Judges and the Champagne Fairs, 2 ECON. & POL. 1, 3 (1990).
173. See, e.g., Elizabeth Hoffman et al., Social Distance and Other-Regarding Behavior in Dictator Games, 86 AM. ECON. REV. 653, 658 (1996) (finding noncooperative behavior increases with greater social distance). In Janet Landa's famous study of rubber traders in Singapore and Malaysia in the 1960s, she showed that a complex hierarchy of social relations determined the extent to which a trader trusted another trader, with those closest in kinship to the trader being trusted more, and with trust in the other trader decreasing as social distance increased. Janet T. Landa, A Theory of the Ethnically Homogeneous Middleman Group: An Institutional Alternative to Contract Law, 10 J. LEGAL STUD. 349 (1981).
174. See Uslaner, Democracy and Social Capital, supra note 28, at 123-24 (noting tendencies to trust friends and other members of a particular group as opposed to non-friends or non-members). This phenomenon reveals a paradox of trust and the benefits that can derived from generalized and broad reaching trust: "It might seem that we can only develop trust in people we know. Yet, trust's benefits come when we put faith in strangers." USLANER, supra note 27, at 1.
175. See Lisa M. DeBruine, Facial Resemblance Enhances Trust, 269 PROCEEDINGS: BIOLOGICAL SCI. 1307, 1311 (2002) (finding in the social dilemma game that a participant's willingness to trust others improved when images of a fictional partner in the game were manipulated to look more like the participant).
176. For an overview of the concept of social distance, see Elizabeth Hoffman et al., supra note 118.
177. See, e.g., Iris Bonnet & Bruno S. Frey, The Sound of Silence in Prisoner's Dilemma and Dictator Games, 38 J. ECON. BEHAV. & ORG. 43, 46 (1999) (finding greater likelihood of giving where there is greater closeness between individuals) ;
178. Alberto Alesina & Eliana La Ferrara, The Determinants of Trust (Nat'l Bureau of Econ. Research, Working Paper No. 7621, 2000) (noting, inter alia, that increases in heterogeneity within communities decreases levels of trust within communities).
179. See Paul J. Zak & Stephen Knack, Trust and Growth, 111 ECON. J. 295, 312-13 (analyzing various measures of income inequality within various countries and finding that such inequality "is significantly related to" a decline in trust in those countries).
180. USLANER, supra note 27, at 165-81.
181. JOHN STEINBECK, THE GRAPES OF WRATH 61-66 (Penguin Books 2002) (1939).
182. *36-37 (E. D. N. Y. Aug. 22, 2007), plaintiffs alleged that the defendants engaged in targeting of borrowers for unfair loan terms along racial lines by, inter alia, advertising in newspapers patronized primarily by the communities of color in Brooklyn, New York and matching borrowers of color with salespeople of color.
183. See James L. Loomis, Communication, the Development of Trust, and Cooperative Behavior, 12 HUM. REL. 305, 314-15 (1959).
184. See David Sally, Conversation and Cooperation in Social Dilemmas: A Meta-Analysis of Experiments from 1958 to 1992, 7 RATIONALITY & SOC'Y 58, 86-87 (1995) (analyzing results of prisoner's dilemma games) ;
185. see also, Elinor Ostrom et al., Covenants With and Without a Sword: Self-Governance is Possible, 86 AM. POL. SCI. REV. 404 (1992) (describing effects of communication on cooperation in prisoner dilemma games).
186. Id.
187. Donna M. Desforges et al., Effects of Structured Cooperative Contact on Changing Negative Attitudes Toward Stigmatized Social Groups, 60 J. PERSONALITY & SOC. PSYCHOL. 531 (1991) ;
188. see also John M. Orbell et al., Explaining Discussion-Induced Cooperation, 54 J. PERSONALITY & Soc. PSYCHOL. 811, 811 (1988) (finding communication "greatly increases the incidence of cooperation" between group participants in cooperation games) ;
189. Sally, supra note 128, at 78 (analyzing results of prisoner's dilemma games and finding cooperation increased by forty percent when participants engaged in conversation before the experiment). On the importance of freedom of speech protections to promote greater communication between citizens in a democracy, see Jason Mazzone, Speech and Reciprocity: A Theory of the First Amendment, 34 CONN. L. REV. 405, 436-37 (2002).
190. Nina Mazar, On Amir & Dan Ariely, The Dishonesty of Honest People: A Theory of Self-Concept Maintenance, 45 J. MARKETING RES. 633 (2008).
191. Id. at 635-37.
192. Id. at 635-36.
193. Id.
194. Id. at 636.
195. Id.
196. Id. at 635.
197. Id. at 635.
198. Id. at 636.
199. Id.
200. Id. at 636-37.
201. Id. at 637.
202. See infra Part IV.
203. Numerous critics have assailed efforts to substitute law for trust.
204. See, e.g., FRANCIS FUKUYAMA, TRUST: THE SOCIAL VIRTUES AND THE CREATION OF PROSPERITY 27 (1995) (arguing that where law has become a substitute for trust, it has brought about the breakdown of trusting relationships) ;
205. id. at 309-11 (arguing that trust has been displaced by legalistic approaches to societal disputes that are less effective and efficient) ;
206. MARY ANN GLENDON, RIGHTS TALK: THE IMPOVERISHMENT OF POLITICAL DISCOURSE (1991) (arguing that adherence to the protection of individual rights through law undermines creation of a community of shared interests) ;
207. Larry E. Ribstein, Law v. Trust, 81 B. U. L. REV. 553, 580-84 (2001) (arguing that regulation promotes opportunistic behavior that undermines trust).
208. See, e.g., ELLICKSON, supra note 111.
209. Id.
210. Even Ellickson remains "agnostic" about whether heterogeneous groups can develop the types of informal controls that tight-knit groups might generally develop: The hypothesis predicts that welfare-maximizing norms emerge in close-knit settings but is agnostic about whether such norms can emerge in other social settings. This qualification is necessary because an informal-control system may not be effective if the social conditions within a group do not provide members with information about norms and violations and also the power and enforcement opportunities needed to establish norms.
211. Id. at 177 (footnote omitted).
212. See generally THOMAS L. FRIEDMAN, THE WORLD IS FLAT: A BRIEF HISTORY OF THE TWENTY-fIRST CENTURY (2005).
213. When commenting on the revolution in France, Edmund Burke wrote: "To make us love our country, our country ought to be lovely." EDMUND BURKE, REFLECTIONS ON THE REVOLUTION IN FRANCE, AND ON THE PROCEEDINGS IN CERTAIN SOCIETIES IN LONDON RELATIVE TO THAT EVENT IN A LETTER INTENDED TO HAVE BEEN SENT TO A GENTLEMAN IN PARIS 116 (1790).
214. See, e.g., Cross, supra note 16, at 1499 ("While law may reduce the need to rely on trust, this effect may end up extending the range of possible transactions rather than undermining those that can rest entirely on trust.") ;
215. Simon Deakin et al., Contract Law, Trust Relations, and Incentives for Co-operation: A Comparative Study, in CONTRACTS, CO-OPERATION, AND COMPETITION: STUDIES IN ECONOMICS, MANAGEMENT, AND LAW 105, 133 (Simon Deakin & Jonathan Michie eds., 1998) ("Institutional forces [like contract law] do not simply constrain individual agency, but channel contractual behavior which would not otherwise be feasible.").
216. See, e.g., NIKLAS LUHMANN, TRUST AND POWER 50-51 (1979). Whether this type of calculative decisionmaking-that I will have confidence in the law to serve as a hedge against untrustworthy behavior, and so I "trust" another enough to engage in business relations with him or her-can be considered "trust" is irrelevant. What matters is the cooperative conduct that is a product of that confidence.
217. Alesina & La Ferrara, supra note 122, at 3 (discussing how effective criminal prosecution leads to more trusting behavior).
218. See Simon Deakin et al., supra note 150, at 105-43 (discussing how contracts have a significant and positive effect on trust) ;
219. Mark Granovetter, Economic Action and Social Structure: The Problem of Embeddedness, 91 AM. J. SOC. 481, 491 (1985) (describing how institutional arrangements like contracts generate trust).
220. See, e.g., Cross, supra note 16, at 1501 (arguing that when monitoring is necessary in the absence of contract remedies, such monitoring can cause distrust).
221. Cross, supra note 16, at 1483. Law can also have an "expressive function" such that laws that promote cooperation and encourage trustworthy behavior can, themselves, generate trust.
222. See, e.g., Jason Mazzone, When Courts Speak: Social Capital and Law's Expressive Function, 49 SYRACUSE L. REV. 1039, 1041 (1999) (discussing the expressive function of law, and its impact on norms) ;
223. Richard H. McAdams, The Origin, Development, and Regulation of Norms, 96 MICH. L. REV. 338 (1997) ;
224. Cass R. Sunstein, On the Expressive Function of Law, 144 U. PA. L. REV. 2021 (1996). Law can also "frame" a norm of cooperation by creating a cooperative social context in which trusting and trustworthy behavior are encouraged.
225. See Blair & Stout, supra note 16, at 1796.
226. See, e.g., Ann E. Tenbrunsel & David M. Messick, Sanctioning Systems, Decision Frames, and Cooperation, 44 ADMIN. SCI. Q. 684 (1999).
227. Coletti et al., supra note 16, at 477.
228. Id. at 486-87.
229. Id. at 486.
230. Id.
231. Id.
232. Id.
233. Id. at 489.
234. Id. at 490-93.
235. Id. at 493-96.
236. Id. at 495.
237. Id. at 478-79.
238. Cross, supra note 16, at 1509.
239. ROSALINDE KLEIN WOOLTHUIS ET AL., ERASMUS RESEARCH INSTITUTE OF MANAGEMENT, TRUST AND FORMAL CONTROL IN INTERORGANIZATIONAL RELATIONSHIPS 12 (2002).
240. See, e.g., Bernard S. Black, The Legal and Institutional Preconditions for Strong Securities Markets, 48 UCLA L. REV. 781, 834-37 (2001) (finding that stronger investor protections promoted higher levels of investment) ;
241. Cross, supra note 16, at 1516-17 (discussing the value of strong investor protections in investing) ;
242. see also Daron Acemoglu & Simon Johnson, Unbundling Institutions, 113 J. POL. ECON. 949, 988 (2005) (finding robust evidence that property rights institutions "have a major influence on long-run economic growth") ;
243. Cross, supra note 16, at 1525-27 (analyzing several measures of the rule of law within nations and finding strong correlation between the rule of law and economic growth) ;
244. Martin Leschke, Constitutional Choice and Prosperity: A Factor Analysis, 11 CONST. POL. ECON. 265 (2000) (analyzing cross-country data and showing rule of law promoted economic growth) ;
245. Ismail Serageldin & Christiaan Grootaert, Defining Social Capital: An Integrating View, in SOCIAL CAPITAL: A MULTIFACETED PERSPECTIVE 40, 50 (Partha Dasgupta & Ismail Serageldin eds., 1999) (comparing effectiveness of informal norms in Brazilian garment industry and formal mechanisms in Chilean garment industry and showing higher economic activity in Chile). Proponents of New Institutional Economics promote the effectiveness of formal laws and informal norms in fostering economic growth, particularly in the developing world.
246. See, e.g., KENNETH W. DAM, THE LAW-GROWTH NEXUS: THE RULE OF LAW AND ECONOMIC DEVELOPMENT 16-17 (2006) (arguing that the existence of formal laws, promotion of the rule of law, and informal norms are critical to economic growth in the developing world) ;
247. HERNANDO DE SOTO, THE OTHER PATH: THE INVISIBLE REVOLUTION IN THE THIRD WORLD (1989).
248. For a critique of the effectiveness of transporting rule of law concepts into developing economies, see for example, Katharina Pistor, The Standardization of Law and Its Effect on Developing Economies, 50 AM. J. COMP. L. 97, 124-29 (2002) ;
249. and David M. Trubek & Marc Galanter, Scholars in Self-Estrangement: Some Reflections on the Crisis in Law and Development Studies in the United States, 1974 WIS. L. REV. 1062, 1089-93.
250. Simon Deakin et al., supra note 150, at 134.
251. Russell Hardin, Conceptions and Explanations of Trust, in TRUST IN SOCIETY, supra note 41, at 17.
252. Joseph E. Stiglitz, Formal and Informal Institutions, in SOCIAL CAPITAL: A MULTIFACETED PERSPECTIVE, supra note 170, at 65.
253. In 1996, Thomas Friedman of the New York Times famously said: "There are two superpowers in the world today in my opinion. There's the United States and there's Moody's Bond Rating Service. The United States can destroy you by dropping bombs, and Moody's can destroy you by downgrading your bonds. And believe me, it's not clear sometimes who's more powerful." Public Broadcasting System, Newshour (PBS radio broadcast Feb. 13, 1996), available at http://www.pbs.org/newshour/gergen/friedman. html.
254. Such ratings became a "heuristic", a shorthand or proxy for the relative quality of the assets backing certain securities that assisted potential investors in making investment decisions with respect to those securities. On the functioning of heuristics, see infra Part IV.
255. See 15 U. S. C. § 78o-7 (2006).
256. § 78o-7 (c) (2).
257. See, e.g., Deryn Darcy, Credit Rating Agencies and the Credit Crisis: How the "Issuer Pays" Conflict Contributed and What Regulators Might Do About It, 2009 COLUM. BUS. L. REV. 605, 632-33 ("[C]ourts have proven somewhat receptive to the agencies' arguments that their ratings are opinions protected under the First Amendment.") (footnote omitted) ;
258. Jeffrey Manns, Rating Risk After the Subprime Mortgage Crisis: A User Fee Approach for Rating Agency Accountability, 87 N. C. L. REV. 1011, 1055 (2009) ("This First Amendment hurdle has made it extraordinarily difficult to establish that rating agencies engaged in libel and has left issuers without legal recourse except in outlier cases.").
259. See Darcy, supra note 178, at 622-27 (describing the "issuer pays" conflict of interest).
260. See, e.g., Timothy E. Lynch, Deeply and Persistently Conflicted-Credit Rating Agencies in the Current Regulatory Environment, 59 CASE W. RES. L. REV. 227, 246-48 (2009) (describing the conflict of interest in the "issuer pays" business model) ;
261. Manns, supra note 178, at 1052-53 (describing the inherent conflict of interest in relationships between rating agencies and issuers) ;
262. Roy C. Smith & Ingo Walter, Rating Agencies: Is There an Agency Issue?, in RATINGS, RATING AGENCIES AND THE GLOBAL FINANCIAL SYSTEM 289, 302-04 (Richard M. Levich ed., 2002) (describing competition among ratings agencies that can lead to the issuance of more favorable ratings to attract and maintain issuercustomers). For an argument for creating a user-pays compensation system)
263. see Manns, supra note 178, at 1059-69. For an argument that the prospective reputational harm to rating agencies that results from poor performance is sufficient to rein in rating agency conduct see Steven L. Schwarcz, Private Ordering of Public Markets: The Rating Agency Paradox, 2002 U. III. L. REV. 1.
264. See JOHN C. COFFEE, JR., GATEKEEPERS: THE PROFESSIONS AND CORPORATE GOVERNANCE 302 (2006) (noting credit rating agencies' "virtual immunity" from liability in private litigation).
265. The Obama Plan stresses the need for greater transparency through the disclosure of the ratings agencies' methodologies, the potential conflicts of interest under which the agencies operate and the risks associated with the products the agencies assess. Obama Plan, supra note 3, at 46-47. It also calls for the reduction of the use by regulators of credit ratings agencies "in regulations and supervisory practices, wherever possible."
266. Id. at 46.
267. For an overview of fiduciary obligations, see generally Arthur B. Laby, The Fiduciary Obligation as the Adoption of Ends, 56 BUFF. L. REV. 99 (2008) ;
268. Robert C. Clark, Agency Costs Versus Fiduciary Duties, in PRINCIPALS AND AGENTS: THE STRUCTURE OF BUSINESS 55, 71-79 (John W. Pratt & Richard J. Zeckhauser eds., 1985) ;
269. and Tamar Frankel, Fiduciary Law, 71 CAL. L. REV. 795 (1983).
270. I have proposed this same sort of voluntary assumption of fiduciary duties in the context of the borrower-mortgage broker relationship.
271. See Raymond H. Brescia, Capital in Chaos: The Subprime Mortgage Crisis and the Social Capital Response, 56 CLEV. ST. L. REV. 271, 304-05 (2008).
272. See, e.g., Blair & Stout, supra note 16, at 1796 (arguing fiduciary law "frames" relationships to encourage trustworthy behavior).
273. See, e.g., Vern Countryman, The Holder in Due Course and Other Anachronisms in Consumer Credit, 52 TEX. L. REV. 1, 2 (1974) (describing the holder in due course doctrine).
274. Engel and McCoy have described the doctrine as follows: To satisfy the requirements of a holder in due course, the purchaser must be the holder of a negotiable note, who took the note for value, in good faith, and without notice that the note contains certain defects. To meet the definition of a "holder", the assignee must possess the note and the note must be "issued or indorsed to him or to his order or to bearer or in blank." If a note is payable to an identified person or entity, the note must bear an endorsement or be among a group of loans to which an allonge was attached. When assignees qualify as holders in due course, they take the notes free of most defenses to nonpayment and affirmative claims that borrowers could have pursued against the originators. Kathleen C. Engel & Patricia A. McCoy, Turning a Blind Eye: Wall Street Finance of Predatory Lending, 75 FORDHAM L. REV. 2039, 2053 (2007) ;
275. see also Countryman, supra note 186, at 2 (describing the holder in due course doctrine).
276. JAMES J. WHITE & ROBERT S. SUMMERS, UNIFORM COMMERCIAL CODE §§ 14-1, 14-2 (5th ed. 2000).
277. See Kathleen C. Engel & Patricia A. McCoy, Predatory Lending: What Does Wall Street Have to Do With It?, 15 HOUSINGPOL'Y DEBATE 715, 715-16 (2004), available at http://www.mi.vt.edu/ data/files/hpd%2015 (3)/hpd%2015 (3) -article-engel.pdf (describing relevance of holder in due course doctrine to subprime mortgage securitization) ;
278. Cassandra Jones Havard, To Lend or Not to Lend: What the CRA Ought to Say About Sub-Prime and Predatory Lending, 7 FLA. COASTAL L. REV. 1, 16-18 (2005).
279. See, e.g., Christopher L. Peterson, Predatory Structured Finance, 28 CARDOZO L. REV. 2185, 2235-38 (2007) (describing exceptions to holder in due course doctrine).
280. Id. at 2236.
281. 15 U. S. C. §§ 1601-1615 (2006).
282. 15 U. S. C. §§ 1639, 1648.
283. See Engel & McCoy, supra note 187, at 2052-54 (describing, inter alia, TILA and HOEPA exemptions).
284. See Peterson, supra note 190, at 2239-40.
285. See, e.g., Kurt Eggert, Held Up in Due Course: Predatory Lending, Securitization, and the Holder in Due Course Doctrine, 35 CREIGHTON L. REV. 503, 640 (2002) (arguing that the holder in due course is not necessary in residential mortgage loans) ;
286. Siddhartha Venkatesan, Note, Abrogating the Holder in Due Course Doctrine in Subprime Mortgage Transactions to More Effectively Police Predatory Lending, 7 N. Y. U. J. LEGIS. & PUB. POL'Y 177, 177 (2003) (advocating an affirmative cause of action against predatory loan assignees).
287. See H. R. 1728, 111th Cong. § 204 (2009) (extending "limited" TILA liability to assignees and securitizers of loans under certain conditions).
288. The literature critiquing the holder in due course doctrine is extensive.
289. See Countryman, supra note 186, at 10;
290. Eggert, supra note 196, at 636;
291. Engel & McCoy, supra note 187, at 730-31;
292. Julia Patterson Forrester, Constructing a New Theoretical Framework for Home Improvement Financing, 75 OR. L. REV. 1095, 1138 (1996) ;
293. Grant Gilmore, Formalism and the Law of Negotiable Instruments, 13 CREIGHTON L. REV. 441, 461 (1979) ;
294. Ronald J. Mann, Searching for Negotiability in Payment and Credit Systems, 44 UCLA L. REV. 951, 1007 (1997) ;
295. Walter D. Navin, Jr., Waiver of Defense Clauses in Consumer Contracts, 48 N. C. L. REV. 505, 550 (1970) ;
296. Albert J. Rosenthal, Negotiability-Who Needs It?, 71 COLUM. L. REV. 375, 375-76 (1971) ;
297. Edward L. Rubin, Learning from Lord Mansfield: Toward a Transferability Law for Modern Commercial Practice, 31 IDAHO L. REV. 775, 776 (1995) ;
298. M. B. W. Sinclair, Codification of Negotiable Instruments Law: A Tale of Reiterated Anachronism, 21 U. TOL. L. REV. 625, 625 (1990).
299. Preservation of Consumers' Claims and Defenses: Final Regulations, Proposed Amendment and Statement of Basis and Purpose, 40 Fed. Reg. 53, 506, 53, 512 (Nov. 18, 1975). For an analysis of this FTC Rule, see Peterson, supra note 190, at 2237-38.
300. Presently, the FHA and ECOA apply to assignees if they engaged in some form of discriminatory conduct with respect to the underlying loan, or knew or should have known of discriminatory conduct on the part of the seller of the instrument.
301. See Peterson, supra note 190, at 2239-40.
302. For a discussion of the role of racial discrimination in subprime lending, see infra notes 250-53 and accompanying text.
303. For an overview of the role of credit default swaps in increasing and encouraging risky investment practices, see POSNER, supra note 71, at 56-60.
304. Commodity Futures Modernization Act of 2000, 7 U. S. C. §§ l-27f (2006).
305. See 7 U. S. C. 16 (e) (2) (2006).
306. See Gretchen Morgenson, A. I. G., Where Taxpayers' Dollars Go to Die, N. Y. TIMES, Mar. 8, 2009, at BU 1.
307. See Joint Hearing on Regulation of Over the Counter Derivatives Before the H. Comm. on Financial Services and the H. Comm. on Agriculture, 111th Cong. (2009) (testimony of Timothy Geithner, Secretary, U. S. Dep't of Treasury) [hereinafter Geithner Testimony];
308. see also Obama Plan, supra note 3, at 46-51.
309. According to Secretary Geithner, the value of the derivatives market in 2008 was nearly three-quarters of a quadrillion dollars.
310. See Geithner Testimony, supra note 206.
311. See generally The Effects of the Economic Crisis on Community Banks and Credit Unions in Rural Communities: Hearing Before the Financial Institutions Subcomm. of the S. Comm. on Banking, Housing & Urban Affairs, 111th Cong. (2009) [hereinafter The Effects of the Economic Crisis on Community Banks and Credit Unions in Rural Communities] (statement of Peter Skillern, Executive Director of the Community Reinvestment Association of North Carolina) (testifying to the "stability small banks have provided" in rural areas during the financial crisis as they largely steered clear of subprime lending) ;
312. id. (statement of Ed Templeton, President/CEO of SRP Federal Credit Union on behalf of The National Association of Federal Credit Unions) (asserting that credit unions, unlike large financial institutions, remained free from entanglement in the subprime lending crisis) ;
313. Phillip Longman & T. A. Frank, Too Small to Fail, WASH. MONTHLY, Nov./Dec. 2008, at 14, 14-15 [hereinafter Longman & Frank, Too Small] (citing specific examples of community banks that stayed away from subprime lending and are doing well as a result) ;
314. see also Greg Bordonaro, Local Banks See Uptick in Activity, HARTFORD BUS. J., Oct. 20, 2008, http://hartfordbusiness.com/news6900.html (explaining that small, local banks are assuring customers they are separate from the turmoil in financial markets and your money is safe) ;
315. Katie Zezima, Vermont Bank Thrives While Others Cut Back, N. Y. TIMES, NOV. 8, 2008, at B4 ("While many of the nation's large and midsize banks are staggering under the weight of bad mortgages piled up during the housing boom, the First National Bank of Orwell, Vermont's smallest bank... is having its best year in recent memory.") ;
316. Press Release, Indep. Cmty. Bankers of Am., ICBA statement on FDIC Quarterly Bank Report (Aug. 22, 2007), http://www.icba.org/news/ newsreleasedetail.cfm?ItemNumber=37054 & sn. ItemNumber=1733&tn. ItemNumber=1915 ("[C]ommunity banks have strong deposit growth, have maintained solid underwriting standards, have healthy collateral, and have had little or no exposure to subprime lending. They are among the most highly regulated financial institutions in the nation. ") ;
317. Video: Phillip Longman & T. A. Frank, Community Banks to the Financial Rescue, (New Am. Found. Op-Ed Video Nov. 20, 2008), available at http://www.newamerica.net/publications/special/save-americas-finances- bring-back-community-banking-8399 [hereinafter Longman & Frank Video Op-Ed] (describing the positive practices and effects of community banking).
318. See The Effects of the Economic Crisis on Community Banks and Credit Unions in Rural Communities, supra note 208 (statement of Frank Michael, President and CEO, Allied Credit Union on behalf of the Credit Union National Association) ("The maintenance of... ownership interest means that credit unions care deeply about what ultimately happens to the loans they originate-they care if the loans are paid back. The sub-prime crisis, in contrast, has been closely linked to lenders who... cared little about repayments because the quality of the loans they sold became someone else's problem.") ;
319. Kevin Coyne, Small Banks Stay Snug, Like the Fabled Ant, N. Y. TIMES, Oct. 19, 2008, at NJ2 (attributing the success of small banks in avoiding the financial crisis to "[s]taying small and staying home") ;
320. Longman & Frank, Too Small, supra note 208, at 16 ("When savers, borrowers, and lenders all live in the same community... [lenders] know their business depends on their good reputation. Similarly, borrowers, who prize the good opinion of their neighbors, don't easily walk away from their loans.") ;
321. David Pevear, Bank On It: Your Cash Is Safe, SUN (Lowell, Mass.), Oct. 17, 2008, at A1 ("[Local banks] bring in local deposits and lend out locally, one loan at a time, to qualified borrowers with whom they develop faceto-face relationships...") ;
322. Kevin Post, Local Banks Tell Customers: Your Money Is Safe, PRESS OF ATLANTIC CITY, Sept. 18, 2008, at C4 ("The reality is, when you keep your money close to home in a community bank, you're safe and sound.") ;
323. Christina Rexrode, Small Banks Buck Subprime Downturn, CHARLOTTE OBSERVER, Feb. 2, 2008, at 1D (noting that local community banks '"know thenlenders in many ways, not just information on a form that was faxed to them from somebody somewhere else in the country."' and that community bankers take great care in lending because they '"work,... go to church, [and] go to school with the people in our community. We would not want to make a loan to someone that they could not repay at a later date."") ;
324. David Segal, We're Dull, Small Banks Say, and Have Profit to Show for It, N. Y. TIMES, May 12, 2009, at A1 ("Forget 'too big to fail.' These banks consider themselves too small to risk embarrassment. They are run by people who grew up in the towns where they work, and their main fear is getting into a financial jam that will shame them in the eyes of their neighbors.").
325. See Teresa Dixon Murray, The Little Banks That Could, PLAIN DEALER (Cleveland), July 6, 2008, at D1 (detailing the conservative lending strategies of three small, local banks that kept them from being enmeshed in the subprime meltdown) ;
326. Segal, supra note 209 ('"Banking should not be exciting.... If banking gets exciting, there is something wrong with it."' (quoting Clay W. Ewing, President of Retail Financial Services at German American Bancorp.)).
327. See, e.g., Murray, supra note 210 (knowledge of customers allows lenders to assess whether a borrower will be able to repay a loan) ;
328. Adam Serwer, Banks as Heroes, AM. PROSPECT, July/Aug. 2009, at A18 (stating that because community banks know their customers via long-term relationships they are able to accurately evaluate credit-worthiness) ;
329. Zezima, supra note 208 ("There's serious value in looking someone in the eye and understanding what their drive is, where they're coming from and how serious they are about the project.'" (quoting Bryan Young, Vice President of First National Bank of Orwell)).
330. See, e.g., Joseph Berger, Money Lending, the Old-Fashioned Way, N. Y. TIMES, Apr. 26, 2009, at WE1 (detailing the "old-fashioned,.....conservative, "' "common-sense" practices of a '"plain-vanilla bank"' strongly linked to its local community) ;
331. Eric Dash, Caution Pays for a Lender in New Jersey, N. Y. TIMES, Aug. 14, 2008, at C1 (explaining the success of a small bank that stuck to the basics, "preferring to operate as a mom-and-pop boutique instead of a financial department store[,]" and was careful in evaluating borrowers before making loans) ;
332. Murray, supra note 210 ("[B]anks that haven't gotten pummeled by mortgages have something in common: They were conservative with their lending... earlier this decade when most banks were falling all over themselves to make every loan possible.") ;
333. Posting of Ryan Goldberg to Top Stocks, http://blogs.moneycentral.msn. com/topstocks/archive/2009/07/21/the-best-littlebank-in-america.aspx (July 21, 2009) (asserting that adhering to conservative lending principles kept Sunwest Bank in Orange County, California out of the subprime lending mess, resulting in current strong growth and potential).
334. See Murray, supra note 210 (citing a bank where every loan application is reviewed by the head officers of the institution before being granted or denied) ;
335. Jim Rendon, Rusty Cloutier Has Money to Spare, N. Y. TIMES, May 17, 2009, at MM28 (suggesting that knowing one's customers is the key to successful lending) ;
336. see also Phillip Longman & Ellen Seidman, To Save America's Finances, Bring Back Community Banking, NEW AM. FOUND., NOV. 20, 2008), http://www.newamerica.net/ publications/special/save-americas-finances-bring-back-community-banking-8399 [hereinafter Longman & Seidman, To Save America's Finances] ("[S]mall-scale banking means that savers, borrowers, and lenders all have a heightened ability to judge each other's character and to hold each other accountable.... [S]mall-scale banks are rich with what Federal Reserve Chairman Ben Bernanke calls 'informational capital,' which they develop through 'gathering relevant information, as well as by maintaining ongoing relationships with customers.' Or as the Federal Reserve Bank of Dallas put it... in a 2004 report:... 'the most relevant indicators regarding the creditworthiness of individual small businesses still take the form of firsthand information gained through close lender-borrower relationships."').
337. See, e.g., Rexrode, supra note 209 ("Community banks... [are] more concerned than many mortgage orginators about keeping customers for the long term.") ;
338. Segal, supra note 209. Segal quotes a saying heard among community bankers in Indiana that "We want to be around for decades, so we're not focused on the next quarter." Segal, supra note 209.
339. See Bordonaro, supra note 208 ('"Public confidence' is a crucial issue,' said Bill McGurk, CEO and president of Rockville Bank. 'Banks need to reach a sense of trust with their depositors."") ;
340. see also Longman & Frank, Too Small, supra note 208 (suggesting that banks closely tied to their community have a vested interest in promoting the well-being of that community, and this is reflected in their financial practices) ;
341. Rendon, supra note 213 (describing how conservative, relationship-based banking practices have resulted in profits and the solvency to keep lending during the current financial situation) ;
342. Serwer, supra note 197 (explaining that the community-focused practices of ShoreBank has positioned it to offer help to people suffering as a result of the subprime crisis) ;
343. Longman & Seidman, To Save America's Finances, supra note 213 (suggesting that "relationship banking" and the other practices of
344. 12 U. S. C. §§ 2901-2908 (2006).
345. See, e.g., Howard Husock, Housing Goals We Can't Afford, N. Y. TIMES, Dec. 10, 2008, at A49 ("Banks were [sic] now being judged not on how thenloans performed but on how many loans they made. This undermined the regulatory emphasis on safety and soundness.") ;
346. Charles Krauthammer, Catharsis, Then Common Sense, WASH. POST, Sept. 26, 2008, at A23 ("[The CRA] led to tremendous pressure on Fannie Mae and Freddie Mac-which in turn pressured banks and other lenders-to extend mortgages to people who were borrowing over their heads.").
347. The regulators, and the types of financial institutions they each regulate, are as follows: the Office of the Comptroller of the Currency applies the law with respect to national banks; "the Board of Governors of the Federal Reserve System with respect to State chartered banks which are members of the Federal Reserve System and bank holding companies;" the Federal Deposit Insurance Corporation "with respect to State chartered banks and savings banks which are not members of the Federal Reserve System and the deposits of which are insured by the Corporation;" and the Office of Thrift Supervision with respect to savings association, "the deposits of which are insured by the Federal Deposit Insurance Corporation" and savings and loan holding companies. 12 U. S. C. § 2902 (1).
348. Id. § 2901 (b) (emphasis added).
349. As a result of these examinations, banks are given one of four "ratings" based on the evaluations conducted: "outstanding", "satisfactory", "needs to improve", or "substantial noncompliance."
350. Id. § 2906 (b) (2).
351. Id. § 2903 (a). These transactions include applications for any of the following: "a charter for a national bank or Federal savings and loan association;" "deposit insurance in connection with a newly chartered... bank;" the opening of a branch or other facility that will accept deposits; the relocation of a home or branch office; or the merger, consolidation, or acquisition of another regulated financial institution in certain circumstances.
352. Id. § 2902 (3).
353. See Richard D. Marsico, The New Community Reinvestment Act Regulations: An Attempt at Implementing Performance-Based Standards, 49 CONSUMER FIN. L. Q. REP. 47, 48 (1995).
354. For an in-depth look at the exemptions that made the CRA largely irrelevant to the overwhelming majority of subprime lending, see Raymond H. Brescia, Part of the Disease or Part of the Cure: The Financial Crisis and the Community Reinvestment Act, 60 S. C. L. REV. 617, 642-45 (2009).
355. See, e.g., Michael S. Barr, Credit Where It Counts: The Community Reinvestment Act and Its Critics, 80 N. Y. U. L. REV. 513, 566 (2005) ("[T]he CRA and their affiliates made nearly $620 billion in home mortgage, small business, and community development loans to low-and moderate-income borrowers and communities.") ;
356. Douglas D. Evanoff & Lewis M. Segal, CRA and Fair Lending Regulations: Resulting Trends in Mortgage Lending, ECON. PERSP., Nov./Dec. 1996, at 19;
357. Lewis M. Segal & Daniel G. Sullivan, Trends in Homeownership: Race, Demographics, and Income, ECON. PERSP., 2d Quarter 2008, at 53, 68 (finding CRA lending reduced minority homeownership rate gap during two year period between 1995-1997) ;
358. ERIC S. BELSKY ET AL., JOINT CTR. FOR HOUS. STUDIES, HARVARD UNIV., THE EFFECT OF THE COMMUNITY REINVESTMENT ACT ON BANK AND THRIFT HOME PURCHASE MORTGAGE LENDING (2001), http://www.jchs.harvard.edu/publications/governmentprograms/belschillyezer-cr a01-1.pdf;
359. JOINT CTR. FOR HOUS. STUDIES, HARVARD UNIV., THE 25TH ANNIVERSARY OF THE COMMUNITY REINVESTMENT ACT: ACCESS TO CAPITAL IN AN EVOLVING FINANCIAL SERVICES SYSTEM 48, 53-54 (2002), http://www.jchs.harvard.edu/ publications/governmentprograms/cra02-1.pdf (indicating that prime mortgage lending carried out in minority communities was the strongest when carried out by banks acting within their CRA assessment areas) ;
360. ROBERT E. LITAN ET AL., U. S. DEP'T OF THE TREASURY, THE COMMUNITY REINVESTMENT ACT AFTER FINANCIAL MODERNIZATION: A BASELINE REPORT, ES-5 chart ES-5, 70 chart 14, 74 chart 16 (2000), http://www.treas.gov/press/releases/docs/crareport.pdf.
361. Memorandum from Glenn Canner & Neil Bhutta, Div. of Research and Statistics, Bd. of Governors of the Fed. Reserve Sys. to Sandra Braunstein, Dir., Consumer & Cmty. Affairs Div., Bd. of Governors of the Fed. Reserve Sys. 10 tbl.7 (Nov. 21, 2008), http://www.federalreserve.gov/newsevents/speech/ 20081 203-analysis.pdf;
362. see also Lei Ding et al., Ctr. for Comty. Capital, Univ. N. C., Risky Borrowers or Risky Mortgages: Disaggregating Effects Using Propensity Score Models 1 (Dec. 2008) (working paper, on file with the University of North Carolina Center for Community Development), available at http://www.ccc.unc.edu/documents/RiskyMortg-Final-Decll.pdf (showing better performance of CRA-related loans as compared to non-CRA-related subprime loans even with borrowers of similar income and creditworthiness).
363. Canner & Bhutta, supra note 225, at 10.
364. Id. at 3.
365. The Community Reinvestment Act: Thirty Years of Accomplishments, but Challenges Remain: Hearing Before the H. Comm. on Financial Servs., 110th Cong. 194 (2008) (statement of John Taylor, President & Chief Executive Officer, National Community Reinvestment Coalition).
366. Id.
367. Id.
368. Id.
369. Barr, supra note 224, at 586 (citing TREASURY DEP'T, APPLICATIONS SUBJECT TO CRA THAT WERE PROTESTED ON CRA GROUNDS (2000)).
370. Id.
371. Id.
372. Foreclosures at the Front Step of the Federal Reserve Bank of Cleveland-Hearing Before the Subcomm. on Domestic Policy of the H Comm. on Oversight and Government Reform, 110th Cong. 63-64 (2007) (statement of Sandra Braunstein, Director, Division of Consumer and Community Affairs).
373. RICHARD D. MARSICO, DEMOCRATIZING CAPITAL: THE HISTORY, LAW, AND REFORM OF THE COMMUNITY REINVESTMENT ACT 133 (2005) (citations omitted).
374. NAT'L CMTY. REINVESTMENT COAL., CRA TOOLKIT: PROTECTING AND PRESERVING THE COMMUNITY REINVESTMENT ACT 2 (2008), https://salsa.democracyinaction.org/o/2249/images/cra%20toolkit-v5.pdf.
375. MARISCO, supra note 236, at 133.
376. See, e.g., Elizabeth Laderman & Carolina Eeid, Lending in Low-and Moderate-Income Neighborhoods in California: The Performance of CRA Lending During the Subprime Meltdown (Fed. Reserve Bank of S. F., Working Paper No. 200805, 2008), available at http://www.frbsf.org/publications/ commu nity/wpapers/2008/wp08-05.pdf. In this study, the authors used data on over 200, 000 mortgages made in metropolitan California markets from 2004-2006, which corresponds to the subprime explosion in California, to show the CRA was not a cause of the crisis based on how the examined CRA regulated loans performed at least as well as, if not usually significantly better than, non-CRA loans. CRA loans made within the bank's area of operation were roughly half as likely to be in foreclosure as those made by an independent mortgage company (IMC) which did not have to follow CRA guidelines and that loans made by wholesalers, typically not covered by the CRA, were at least twice as likely to be in foreclosure.
377. Id. at 7-8, 17-20, tbl.20;
378. see also TRAIGER & HINCKLEY LLP, THE COMMUNITY REINVESTMENT ACT: A WELCOME ANOMALY IN THE FORECLOSURE CRISIS (2008), http://www.traigerlaw.com/publications/traiger-hinckley-llp-cra -foreclosure-study-1-7-08.pdf ("CRA banks were substantially less likely than other lenders to make the kinds of risky home purchase loans that helped fuel the foreclosure crisis.").
379. See Community Reinvestment Modernization Act of 2009, H. R. 1479, 111th Cong. (2009)
380. See SHILLER, supra note 76, at 123 ("The first step in correcting this failure of public education is to promote comprehensive financial advice for everyone through institutions that will make sure that all individuals, not just the most wealthy, receive such advice.") ;
381. see also Richard H. Thaler & Cass R. Sunstein, Op-Ed, Economic Policy for Humans, BOSTON GLOBE, Apr. 17, 2008, at A13 (arguing that the complexity involved in mortgage process led to uninformed decisions by consumers and that more transparency to allow informed decisions is needed in the future to avoid a similar situation developing).
382. See PAULETTE J. THABAULT, VT. BANKING COMM'R, ANNUAL REPORT OF THE BANK COMMISSIONER 1 (2009), http://www.bishca.state.vt.us/ BankingDiv/ann ual-report/MI-1.pdf (noting that while Vermont has not been "immune to the rise in foreclosures" consistent with national trends, fewer than 1700 new foreclosure filings were reported in calendar year 2008 in that state).
383. As of August 26, 2009, RealtyTrac had noted that there were a total of 61 new foreclosure filings in Vermont for all of calendar year 2009. RealtyTrac, Vermont Trends, http://www.realtytrac.com/STATES/Vermont.html (last visited Aug. 26, 2009).
384. See Brian K. Sullivan, Vermont Foreclosures Held Off By Yankee Ways, Land Use Laws, BLOOMBERG. COM, Jan. 29, 2009, http://www.bloomberg.com/apps/news?pid=newsarchive&sid=afvnBtrN0HSk# (noting culture of frugality may have contributed to low level of foreclosures in Vermont) ;
385. see also, Katie Zezima, Vermont Bank Thrives While Others Cut Back, N. Y. TIMES, NOV. 8, 2008, at B4.
386. VT. STAT. ANN. tit. 9, § 104 (1997). The state has issued regulations pursuant to the disclosure law, which can be found at Regulation B-98-2, "High Rate, High Point Notices for Residential Real Estate Loans." Section 3 of the regulations provides as follows: Section 3. Content of Written Disclosure The Disclosure shall: A. Contain the following notice in uppercase letters and in a size equal to at least 14 point bold type and otherwise distinguishable from all other text of the Disclosure: YOU MAY BE ELIGIBLE FOR A LOAN WITH EITHER A LOWER INTEREST RATE, FEWER POINTS, OR BOTH, FROM ANOTHER LENDER. B. Inform the borrower (s) that they are applying for a loan with an interest rate that exceeds the Declared Rate by more than 3 percent and/or for which the lender shall charge more than 4 points. C. Include a statement informing the borrower (s) that they can obtain a' list of other lenders by calling or writing to the Department of Banking, Insurance, Securities and Health Care Administration (the "Department's"), including the Department's telephone number and mailing address. D. Be signed and dated by the lender and all borrowers to be obligated under the note. B-98-2 VT. CODE R § 3 (1999).
387. See Sullivan, supra note 244 (quoting Tom Candon, Deputy Commissioner of the Vermont Banking, Insurance, Securities & Health Care Department).
388. PUTNAM, supra note 37, at 293 fig.80.
389. Sullivan, supra note 244 (quoting James Douglas, Governor of Vermont).
390. See id.
391. Robert B. Avery et al., The 2006 HMDA Data, 93 FED. RES. BULL. A73, A95 (Fed. Ees. Bank) (2007), http://www.federalreserve.gov/pubs/bulletin/2007/pdf/hmda06final.pdf.
392. Id. at A95-96.
393. Id. at A96.
394. Michael Powell & Janet Roberts, Middle Class Suffers-Neighborhoods are Devastated, N. Y. TIMES, May 16, 2009, at A1 ("In New York City, for example, black households making more than $68, 000 a year are almost five times as likely to hold high-interest subprime mortgages as are whites of similar-or even lower-incomes.").
395. See, e.g., Taylor v. Accredited Home Lenders, Inc., 580 F. Supp. 2d 1062 (S. D. Cal. 2008) ;
396. Miller v. Countrywide Bank, N. A., 571 F. Supp. 2d 251 (D. Mass. 2008).
397. *1 (D. Md. July 2, 2009) ;
398. City of Cleveland v. Ameriquest Mortgage Sec., Inc., 621 F. Supp. 2d 513 (N. D. Ohio 2009).
399. One example of state attorney generals' lawsuits targeted at fraud in the subprime mortgage market: last year, Bank of America settled 11 state lawsuits filed against its subsidiary, Countrywide Financial. These cases raised a range of state law claims for fraud and unfair trade practices, though none alleged lending discrimination. For a description of this litigation, see Raymond H. Brescia, Tainted Loans: The Value of a Mass Torts Approach to Subprime Mortgage Litigation, 78 U. CINC. L. REV. (forthcoming 2010).
400. Proposals to Fight Fraud and Protect Taxpayers Before the H. Comm. on the Judiciary (2009) (testimony of John S. Pistole, Deputy Director, FBI) (describing efforts of the FBI to combat mortgage and other financial frauds).
401. 42 U. S. C. §§ 3601-19 (2006).
402. 15 U. S. C. §§ 1691 (a) -1691 (f) (2006).
403. The New York Post, during the swirling storm over AIG bonuses, ran the following on its cover, in large-type print: "Not So Fast You Greedy Bastards: Feds Plan 100% Tax on AIG Bonuses." N. Y. POST, Mar. 18, 2009.
404. Obama Plan, supra note 3, at 44-45;
405. see also Posting of Jessica Lee to White House Briefing Room Blog, http://www.whitehouse.gov/blog/Accountability-on-Executive-Compensation (June 10, 2009, 15:16 EST) (describing Secretary Geithner's announcement of the Administration's desire for legislation authorizing the SEC to require nonbinding shareholder votes on executive compensation) For more information on the executive compensation legislation see U. S. DEP'T OF TREASURY, FACT SHEET: ENSURING INVESTORS HAVE A "SAY ON PAY", http://www.treas.gov/press/releases/reports/fact-sheet-say%20on%20pay.pdf.
406. Stephen Labaton, A Panel Is Named to Examine Causes of the Economic Crisis, N. Y. TIMES, July 16, 2009, at B3 (describing creation of the commission and its appointment of members).
407. See Obama Plan, supra note 3, at 55-62, for a description of the proposed CFPA.
408. See Barr et al., supra note 77 (suggesting that lenders offer simple mortgage product as default option for most borrowers) ;
409. see also Obama Plan, supra note 3, at 66-67 (describing proposed regulatory role of encouraging financial institutions to offer consumers simple, easy-to-understand financial products).
410. See Cross, supra note 16, at 1510-11, for a description of the application of heuristics.
411. Numerous commentators have discusses the background of the Blue Eagle Program.
412. See, e.g., DAVID EDWIN HARRELL, JR. ET AL., UNTO A GOOD LAND: A HISTORY OF THE AMERICAN PEOPLE 906-07 (2005) (describing the purpose, creation and decline of the 1933 "Blue Eagle" National Recovery Administration program calling on employers to voluntarily limit worker hours and raise minimum wages to help put people to work during the Depression) ;
413. Erik McKinley Eriksson, Blue Eagle Emblem in DICTIONARY OF AMERICAN HISTORY 490 (Stanley I. Kutler ed., 3d ed. 2003) ("All who accepted President Franklin D. Roosevelt's reemployment agreement or the special Code of Fair Competition could display a poster that reproduced the blue eagle with the motto 'Member N. R. A. We Do Our Part."' (emphasis in original)) ;
414. James G. Pope, National Industrial Recovery Act (1933) in 3 MAJOR ACTS OF CONGRESS 31 (Brian K. Landsberg ed., 2004) (describing the "Codes of Fair Competition" and the implementation strategy of the N. R. A. "Blue Eagle" program).
415. MICHAEL J. SANDEL, DEMOCRACY'S DISCONTENT: AMERICA IN SEARCH OF A PUBLIC PHILOSOPHY 253-54 (1998) (recounting criticism).
416. A. L. A. Schecter Poultry Corp. v. United States, 295 U. S. 495 (1935).
417. Due to the interconnected nature of financial products, institutions, and markets, no one would argue that the financial sector does not affect interstate commerce. Similarly, if the codes were truly voluntary, their promotion would not constitute an improper delegation of legislative functions to the Executive.
418. Such an approach would be consistent with practices in the environmental context under the Clean Air Act, 42 U. S. C. §§ 7401-7671 (g) (2006), and Clean Water Act, 33 U. S. C. §§ 1251-1387 (2006) in which the states are the primary regulators, subject to federal approval of their oversight structure and practices.
419. See, e.g., 42 U. S. C. § 7661 (b) (4) (requiring adequate personnel and funding to administer the permit program) ;
420. 42 U. S. C. § 7661 (a) (d) (3) (authorizing Environmental Protection Agency to administer permit program within states in which the EPA has not approved a state program for same).
421. This concept, known as "skin in the game", is one of the proposals of the Obama Plan; mortgage loan securitizers would be required to maintain on their books 5% of the loans they package to be sold on the securitization market.
422. See Obama Plan, supra note 3, at 44.
423. On the use of heuristics in the political realm, see Heather K Gerken, Shortcuts to Reform, 93 MINN. L. REV. 1582 (2009) for a description of party affiliation of candidates as a heuristic on which voters rely.
424. See e.g., IAN AYRES & JOHN BRAITHWAITE, RESPONSIVE REGULATION: TRANSCENDING THE DEREGULATION DEBATE 35-41 (1992) (advocating that regulators must have strong sanctions-a "benign big gun"-that makes lighter regulatory approaches possible) ;
425. Christine Parker, Reinventing Regulation Within the Corporation: Compliance-Oriented Regulatory Innovation, 32 ADMIN. & SOC'Y 529, 533-35 (2000) (recognizing the role of credible enforcement in making lighter touch regulation possible). The process of developing the voluntary codes could itself serve valuable ends, and develop a more cooperative relationship between the representatives of the financial industry, regulators, and consumer advocates: While stressing the continued need for an active public role, however, the "new governance" acknowledges that command and control are not the appropriate administrative approach in the world of network relationships that increasingly exists. Given the pervasive interdependence that characterizes such networks, no entity, including the state, is in a position to enforce its will on the others over the long run. In these circumstances, negotiation and persuasion replace command and control as the preferred management approach, not only in the setting of policy but in carrying it out. Instead of issuing orders, public managers must learn how to create incentives for the outcomes they desire from actors over whom they have only imperfect control. Indeed, negotiation is even necessary over the goals that public action is to serve since part of the reason that third parties are often cut into the operation of public programs is that such clarity cannot be achieved at the point of enactment.
426. Lester M. Salamon, The New Governance and the Tools of Public Action: An Introduction, 28 FORDHAM URB. L. J. 1611, 1635-36 (2001) (footnote omitted).