Reframing financial regulation

Boston University Law Review

Volumn 90, Issue 1, 2010, Pages 1-50

  Whitehead, Charles K ^a  

^a MIT Sloan School of Management   (United States)

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EID: 77950463340     PISSN: 00068047     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (422)

1. See Erik F. Gerding, The Next Epidemic: Bubbles and the Growth and Decay of Securities Regulation, 38 CONN. L. REV. 393, 418-24 (2006) (describing tendency of reactive regulation to follow financial crises );
2. Jerry W. Markham, Banking Regulation: Its History and Future, 4 N.C. BANKING INST. 221, 221 (2000) (describing bank regulation as "a set of accumulated responses to a long history of financial crises, scandals, happenstance, personalities and compromises");
3. Heidi Mandanis Schooner, Regulating Risk Not Function, 66 U. CIN. L. REV. 441, 480-81 (1998) ("[O]ur regulatory structure has generally been reactive to market events, thus focusing on existing products and activities.").
4. See Banking Act of 1933 (Glass-Steagall Act), Pub. L. No.73-65, §§16, 20, 21, 32, 73 Stat. 184-85, 188-89, 194. The barrier between banking and investment banking was largely repealed by the Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act, Pub. L. No. 106-102, 113 Stat. 1338 (codified at 15 U.S.C. §§ 6801-6809, 6821-6827 (2006)).
5. See infra notes 65-68 and accompanying text. The principal functions of financial intermediation are described infra at notes 21-51 and accompanying text. Types of financial intermediaries are described in Robert Charles Clark, The Federal Income Taxation of Financial Intermediaries, 84 YALE L.J. 1603, 1605-08 & nn.1-21 (1975) (classifying financial intermediaries as "first order financial intermediaries" that rely on capital from individual households and "second order financial intermediaries" that receive funds directly form other financial entities), and
6. Howell E. Jackson, Regulation in a Multisectored Financial Services Industry: An Exploration Essay, 77 WASH. U. L.Q. 319, 322-31 (1999) (presenting financial relations along a spectrum between privately negotiated arrangements and contingent-return intermediaries).
7. The savings and loan crisis of the 1980s and 1990s was a costly disruption, but confined to a specific sector of the financial system. See Gary Gorton, Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007 2-3, 38 (May 9, 2009) (unpublished working paper), available at http://papers.ssrn.com/sol3/papers.cfm?abstract-id=1401882. Likewise, the 22.6% drop in the Dow Jones index on October 19, 1987 (known as "Black Monday") - which exceeded the 12.8% decline at the start of the Great Depression - was largely limited to the stock market, and was touched off by program trading that caused the rapid sell-off of shares as stock prices tumbled.
8. See Lewis D. Solomon & Howard B. Dicker, The Crash of 1987: A Legal and Public Policy Analysis, 57 FORDHAM L. REV. 191, 191, 222-28(1988).
9. See infra notes 69-76 and accompanying text (illustrating the relaxation of the divide between investment and commercial banking that occurred in the 1970s due to increased competition, changes in regulations, and new products and other innovations); see also Ronald J. Gilson & Charles K. Whitehead, Deconstructing Equity: Public Ownership, Agency Costs, and Complete Capital Markets, 108 COLUM. L. REV. 231, 244-47 (2008);
10. Merton H. Miller, Financial Innovation: The Last Twenty Years and the Next, 21 J. FIN. & QUANTITATIVE ANALYSIS 459, 459-60 (1986) (describing "revolutionary" changes in financial institutions and instruments in the prior twenty years);
11. Peter Tufano, Financial Innovation, in 1A HANDBOOK OF THE ECONOMICS OF FINANCE 307, 311-312 (George M. Constantinides et al. eds., 2003) (discussing the "tremendous innovation" in financial products during the 1980s).
12. MMFs are mutual funds whose portfolios are limited to short-term, highly liquid, and relatively low-risk debt instruments. See infra note 103 and accompanying text.
13. See infra note 73 and accompanying text.
14. See Charles K. Whitehead, The Evolution of Debt: Covenants, the Credit Market, and Corporate Governance, 34 J. CORP. L. 641,657-659 (2009) ("[U]sing a credit default swap, a bank can buy or sell all or a portion of a borrower's credit risk without transferring the loan or bond itself, enabling it to more efficiently manage and diversify exposure and expanding the universe of prospective investors beyond those with significant amounts of capital to lend.").
15. A CDS is a type of derivative that permits a counterparty to a swap contract to buy or sell all or a portion of the credit risk tied to a loan or bond. The CDS customer pays the "writer" of the swap a periodic fee in exchange for a contingent payment in the event of a credit default. If a credit event occurs, typically involving default by the borrower, the CDS writer must pay the counterparty an amount sufficient to make it whole or purchase the referenced loan or bond at par. See William K. Sjostrom, Jr., The AIG Bailout, 66 WASH. & LEE L. REV. 943, 947-52 (2009).
16. For more information on derivatives and CDSs, see generally MORTON GLANTZ, MANAGING BANK RISK: AN INTRODUCTION TO BROAD-BASE CREDIT ENGINEERING 531-49 (2003),
17. and Blythe Masters & Kelly Bryson, Credit Derivatives and Loan Portfolio Management, in HANDBOOK OF CREDIT DERIVATIVES 43,43-85 (Jack Clark Francis et al. eds., 1999).
18. CDSs are, in substance, economically similar to term insurance policies written against the credit downgrade of the referenced borrower. See Stephen J. Lubben, Credit Derivatives & the Future of Chapter 11, 81 AM. BANKR. L.J. 405, 423-24 (2007);
19. Frank Partnoy & David A. Skeel, Jr., The Promise and Perils of Credit Derivatives, 75 U. CIN. L. REV. 1019, 1050 (2007).
20. There is no standard definition of "hedge fund," although a distinctive feature is an organizational structure that helps align shareholder and manager interests and the payment to managers of significant performance-related fees that aim to maximize the fund's riskadjusted returns. Those returns often rely on substantial borrowings, derivatives, and complex investment strategies. See infra note 170 and accompanying text; see also TECHNICAL COMM. OF THE INT'L ORG. SEC. COMM'NS, HEDGE FUNDS OVERSIGHT: CONSULTATION REPORT 6-9 (Mar. 2009), http://www.iosco.org/library/pubdocs/pdf/ IOSCOPD288.pdf [hereinafter IOSCO, HEDGE FUNDS].
21. Hedge funds and their advisors are subject to minimal regulation - often defined by reference to the federal securities laws from which they are exempt. See Steven M. Davidoff, Black Market Capital, 2008 COLUM. Bus. L. REV. 172, 201-16;
22. Troy A. Paredes, On the Decision to Regulate Hedge Funds: The SECs Regulatory Philosophy, Style, and Mission, 2006 U. ILL. L. REV. 975, 979-83.
23. In addition, the hedge fund industry, traditionally under the oversight of the Securities and Exchange Commission (the "SEC"), has largely fallen outside the scope of systemic risk regulation, which has principally been a function of the Federal Reserve and the Treasury Department. See John C. Coffee, Jr. & Hillary A. Sale, Redesigning the SEC: Does the Treasury Have a Better Idea?, 95 VA. L. REV. 707, 775-79 (2007); Paredes, supra, at 1000.
24. See infra notes 29-32, 125-134 and accompanying text.
25. See Registration Under the Advisers Act of Certain Hedge Fund Advisers, Investment Advisers Act Release No. IA-2333, 69 Fed. Reg. 72,054, 72,055-56 (Dec. 10, 2004); Paredes, supra note 10, at 999-1001.
26. As Jamie Dimon, the Chairman and CEO of J.P. Morgan Chase, has noted, "A lot of the rules and regulations [we have] are closer to the Civil War than they are to today." Paul Tharp, Ben Sees Treasury as the Bank Cure, N. Y. POST, July 9, 2008, at 31.
27. See infra notes 107-109 and accompanying text.
28. See infra notes 115-124 and accompanying text.
29. See U.S. DEP'T OF TREASURY, FINANCIAL REGULATORY REFORM, A NEW FOUNDATION: REBUILDING FINANCIAL SUPERVISION AND REGULATION 20-27, 37-38 (2009)
30. [hereinafter TREASURY, FINANCIAL REGULATORY REFORM], available at http://www.financialstability.gov/docs/regs/FinalReport-web.pdf
31. see also CONG. OVERSIGHT PANEL, SPECIAL REPORT ON REGULATORY REFORM: MODERNIZING THE AMERICAN FINANCIAL REGULATORY SYSTEM: RECOMMENDATIONS FOR IMPROVING OVERSIGHT, PROTECTING CONSUMERS, AND ENSURING STABILITY 22-24, 29 (2009) [hereinafter COP, SPECIAL REPORT], available at http://cop.senate.gov/ documents/cop-012909-report-regulatoryreform.pdf;
32. THE GROUP OF THIRTY, FINANCIAL REFORM: A FRAMEWORK FOR FINANCIAL STABILITY 8-10 (2009), available at http://www.group30.org/pubs/recommendations. pdf.
33. See supra notes 8-11 and accompanying text.
34. One such concern, involving financial risk management, is described infra at notes 177-181 and accompanying text.
35. As Eddie George, the former Governor of the Bank of England, commented, "[T]here are many ways of skinning this particular cat... . In any event no structure can be set in stone - the markets continue to evolve and so too must the regulatory structure." Edward George, Some Thoughts on Financial Regulation, 36 BANK ENG. Q. BULL. 213, 215 (1996).
36. Non-U.S. banking crises rose in the 1970s in line with changes in financial intermediation. One study found that globally there were few banking crises between 1945 and 1971. See Michael Bordo et al., Is the Crisis Problem Growing More Severe?, 16 ECON. POL'Y 53, 57-58, 65 (2001).
37. Between 1970 and 2007, however, forty-two systemic banking crises occurred in thirty-seven countries, even before the start of the current credit downturn. See Luc Laeven & Fabian Valencia, Systemic Banking Crises: A New Database 3 (IMF Working Paper No. WP/08/224, Nov. 2008), available at http://www.imf.org/external/pubs/ft/wp/2008/wp08224.pdf.
38. A number of factors contributed to the rise. Significant among them was growing competition among intermediaries as non-banks began to engage in banking activities, and the absence of a regulatory framework to manage the greater risk - in essence, the change in business model - assumed by banks in response. See The Banking Crises of the 1980s and Early 1990s: Summary and Implications, in 1 FED. DEPOSIT INSUR. CORP., AN EXAMINATION OF THE BANKING CRISES OF THE 1980s AND EARLY 1990s 3, 5, 35-38 (1997), available at http://www.fdic.gov/bank/ historical/history/3-85.pdf.
39. See Franco Modigliani & Merton H. Miller, The Cost of Capital, Corporation Finance, and the Theory of Investment, 3 AM. ECON. REV. 261,261-271 (1958).
40. See Robert C. Merton, Operation and Regulation in Financial Intermediation: A Functional Perspective, in OPERATION AND REGULATION OF FINANCIAL MARKETS 17, 21-27 (Peter Englund ed., 1993).
41. See Fischer Black, Bank Funds Management in an Efficient Market, 2 J. FIN. ECON. 323, 323-24 (1975);
42. Douglas W. Diamond, Financial Intermediation and Delegated Monitoring, 51 REV. ECON. STUD. 393, 393-95 (1984);
43. Eugene F. Fama, What's Different About Banks?, 15 J. MONETARY ECON. 29, 35-39 (1985);
44. Richard J. Herring & Anthony M. Santomero, What Is Optimal Financial Regulation? 13 (Wharton Fin. Inst. Ctr., Working Paper No. 00-34, May 1999), available at http://fic.wharton.upenn.edu/fic/papers/00/0034.pdf.
45. See Jeffrey N. Gordon, The Rise of Independent Directors in the United States, 19502005: Of Shareholder Value and Stock Market Prices, 59 STAN. L. REV. 1465, 1561-1563 (2007).
46. See Whitehead, supra note 8, at 668-670
47. See Philip E. Strahan, Borrower Risk and the Price and Nonprice Terms of Bank Loans tbl.l (Fed. Reserve Bank of N.Y., Staff Report No. 90, Oct. 1999), available at http://www.newyorkfed.org/research/staff-reports/sr90.pdf.
48. See Herring & Santomero, supra note 23, at 13-14.
49. See Jackson, supra note 3, at 330-31.
50. Today, insurers are also able to hedge risk by issuing securities whose value is tied to losses on outstanding policies or by swapping some portion of that risk with others in order to diversify their aggregate exposure. See Ernst Rauch, Effects of Climate Change on the Insurance Industry, 26A STAN. ENVT'L. L.J. 239, 249 (2007);
51. Robert J. Rhee, Terrorism Risk in a Post-9/11 Economy: The Convergence of Capital Markets, Insurance, and Government Action, 37 ARIZ. ST. L.J. 435, 500-05 (2005).
52. See Franklin Allen & Douglas Gale, Financial Markets, Intermediaries, and Intertemporal Smoothing, 105 J. POL. ECON. 523, 525-526 (1997) (explaining how intertemporal hedging can be used to limit the impact of nondiversifiable risks).
53. Whitehead, supra note 8, at 655-658
54. See infra notes 126-27 and accompanying text; see also Robert C. Merton, Financial Innovation and Economic Performance, J. APPLIED CORP. FIN., Winter 1992, at 12, 12 (observing that working capital, used to finance firm projects, can be separated from risk capital that bears those projects' risks).
55. See Franklin Allen & Anthony M. Santomero, The Theory of Financial Intermediation, 21 J. BANKING & FIN. 1461, 1466-74, 1482 (1996);
56. Whitehead, supra note 8, at 657 n.115.
57. By 2008, for example, an estimated sixty-two trillion dollars in notional amount of CDSs were traded. See Gretchen Morgenson, First Comes the Swap. Then It's the Knives, N.Y. TIMES, June 1, 2008, at BU.
58. This was up from $632 billion in 2001. See David Mengle, Credit Derivatives: An Overview, ECON. REV., 4th Q. 2007, at 1, 7, http://www. frbatlanta.org/filelegacydocs/erq407-mengle.pdf.
59. See Robert Charles Clark, The Soundness of Financial Intermediaries, 86 YALE L.J. 1, 12-13 (1976).
60. Financial holdings are particularly susceptible to self-dealing compared to less liquid assets, providing one basis for a higher standard of conduct for the directors and officers of financial intermediaries. See, e.g., Gerdes v. Reynolds, 28 N.Y.S.2d 622, 653 (Sup. Ct. 1941)
61. (finding former directors of an investment firm liable for breach of fiduciary duty for selling control to a purchaser notwithstanding red flags that indicated the purchaser would liquidate and misappropriate the firm's holdings). Regulators also use licensing to screen directors, managers, and employees. The failure, for example, of an insurer or its agent to satisfy applicable standards of conduct can result in the revocation of its license by the state insurance commissioner. See 7 ERIC MILL HOLMES, APPLEMAN ON INSURANCE §§ 49.7, 49.9 (2d ed. 2009)
62. ; see abo, e.g., N.Y. INS. LAW §§1102, 1104, 2601 (McKinney 2006)
63. (vesting power in the Superintendent to suspend or revoke an insurance provider's license for misconduct). Customer suitability requirements serve a similar function for securities firms. See Lewis D. Lowenfels & Alan R. Bromberg, Suitability in Securities Transactions, 54 Bus. LAW. 1557, 1557 (1999).
64. The Basel (Basle) Committee on Banking Supervision (a global forum of senior bank regulators) also lists the vetting of directors and senior managers to assess personal integrity as a best practice. See BASLE COMM. ON BANKING SUPERVISION, CORE PRINCIPLES FOR EFFECTIVE BANKING SUPERVISION 17-18 (1997), available at http://www.bis.org/publ/bcbs30a.pdf.
65. Products may also be too complex for investors to determine the cause of loss. Notwithstanding substantial public outcry, prosecutors have had difficulty in deciding whether losses from mortgage and other instruments tied to the 2007 credit crisis were the result of criminal misbehavior or simply bad business judgment. See Andrew J. Ceresney et al., Regulatory Investigations and the Credit Crisis: The Search for Villains, 46 AM. CRIM. L. REV. 225, 227-28 (2009).
66. Section 17(a) of the Investment Company Act of 1940 prohibits affiliates from buying or selling securities to or from a mutual fund or borrowing money from the fund, 15 U.S.C. §80a-17(a) (2006), and section 17(d) prohibits mutual funds from acting jointly with affiliates in transacting business with a third party in contravention of SEC rules, id. §80a17(d). The SEC subsequently issued Rule 17d-l, 17 C.F.R. §270.17d-l (2009), which has been expansively construed to limit a mutual fund's transactions with affiliates, absent an SEC exemption, see Joseph W. Bartlett & Stephen P. Dowd, Section 17 of the Investment Company Act - An Example of Regulation by Exemption, 8 DEL. J. CORP. L. 449, 452-58, 472-75 (1984),
67. without regard to whether or not the mutual fund profits, see, e.g., In re Imperial Fin. Serv., Inc., 42 S.E.C. 717, 727 (1965).
68. See Harold Marsh, Jr., Are Directors Trustees?: Conflicts of Interest and Corporate Morality, 22 Bus. LAW. 35, 73 (1966).
69. See Michael Jensen & William Meckling, Theory of the Firm: Managerial Behavior, Agency Costs and Capital Structure, 3 J. FIN. ECON. 305, 334-39 (1976);
70. Whitehead, supra note 8, at 641-642
71. See supra notes 28-32 and accompanying text.
72. See supra notes 22-23 and accompanying text; see also Bert Scholtens & Dick van Wensveen, A Critique on the Theory of Financial Intermediation, 24 J. BANKING & FIN. 1243,1247-1248 (2000) (asserting that managing risk has always been "the bread and butter of financial intermediaries").
73. See Robert DeYoung & Karin P. Roland, Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Leverage Model, J. FIN. INTERMEDIATION, Jan. 2001, at 54, 81-82.
74. Intermediaries also benefit from risk management in the same way as other firms. Firms with convex tax schedules, for example, have been found to hedge more, suggesting that hedging may reduce pre-tax earnings variability and enhance post-tax value. See Deana R. Nance, Clifford W. Smith, Jr. & Charles W. Smithson, On the Determinants of Corporate Hedging, 48 J. FIN. 267, 280 (1993);
75. Clifford W. Smith & René Stulz, The Determinants of Firms'Hedging Policies, 20 J. FIN. & QUANTITATIVE ANALYSIS 391, 392 (1985). In addition, hedging can reduce the risk premium that firms must pay employees whose wealth is substantially invested in their employer (through stock awards, options, and bonuses).
76. See Lisa K. Meulbroek, The Efficiency of Equity-Linked Compensation: Understanding the Full Cost of Awarding Executive Stock Options, FIN. MGMT., Summer 2001, at 5, 35;
77. Smith & Stulz, supra, at 399-402.
78. An intermediary's managers can also benefit from hedging to the extent it reduces profit variability and, in their superiors' eyes, evidences stronger management performance. See Peter M. DeMarzo & Darrell Duffie, Corporate Incentives for Hedging and Hedge Accounting, 8 REV. FIN. STUD. 743, 746 (1995). Finally, an intermediary's expertise in risk management can provide an additional source of revenue for services it provides to institutional customers. See Allen & Santomero, supra note 32, at 1465.
79. See Allen N. Berger et al., The Role of Capital in Financial Institutions, 19 J. BANKING & FIN. 393,398-399 (1995).
80. A brief description of government guarantees appears infra at notes 52-54 and accompanying text and in Appendix A.
81. Regulatory restrictions on management discretion are described infra at notes 58-64 and accompanying text, and in Appendix B.
82. See Mark J. Flannery, Debt Maturity and the Deadweight Cost of Leverage: Optimally Financing Banking Firms, 84 AM. ECON. REV. 320, 325-326 (1994).
83. See Merton, supra note 22, at 43.
84. See Whitehead, supra note 8, at 641-642
85. See Clark, supra note 33, at 14-18.
86. See Franklin Allen & Douglas Gale, Systemic Risk and Regulation, in THE RISKS OF FINANCIAL INSTITUTIONS 341, 346-356 (Mark Carey & René M. Stulz eds., 2006).
87. See Frank H. Easterbrook, Derivative Securities and Corporate Governance, 69 U. CHI. L. REV. 733, 736-737 (2002).
88. There is a substantial amount of scholarship on the causes and effects of systemic risk. I will not repeat that literature here, but simply highlight some key aspects that financial regulation is intended to address. For a catalogue of approaches to defining "systemic risk," see Steven L. Schwarcz, Systemic Risk, 97 GEO. L.J. 193, 196-204 (2008),
89. and Paredes, supra note 10, at 983.
90. See Douglas W. Diamond & Philip H. Dybvig, Bank Runs, Deposit Insurance, and Liquidity, 91 J. POL. ECON. 401, 401-04 (1983);
91. Herring & Santomero, supra note 23, at 8-9, 14-17, 18-19.
92. Customers could single out individual firms by relying on less costly means, such as reputation, to bridge the information gap. A good reputation, however, takes time to establish and, in any event, may not be reliable if the benefits of default are sufficiently high. See William W. Bratton, Jr., Corporate Debt Relationships: Legal Theory in a Time of Restructuring, 1989 DUKE L.J. 92, 139-142 (remarking on "the limited force of reputation").
93. There is a substantial amount of scholarship on financial regulation that I do not repeat here. A comprehensive overview of approaches to U.S. financial regulation appears in Jackson, supra note 3, at 339-363
94. Banks can also access Federal Reserve funds to cover shortfalls in liquidity temporarily in the event of substantial withdrawals. See Mark E. Van Der Weide & Satish M. Kini, Subordinated Debt: A Capital Markets Approach to Bank Regulation, 41 B.C. L. REV. 195, 204-05 (2000).
95. More recently, in light of the credit crisis, the nation's largest securities firms (including Goldman Sachs and Morgan Stanley) elected to become bank holding companies subject to federal bank regulation. Among other benefits, those firms can now access funding that has historically been made available by the Federal Reserve to banks. See Patrice Hill, Treasury to Try to Keep Owners in Their Homes; Goldman, Morgan Cleared to Acquire Banks, WASH. TIMES, Sept. 22, 2008, at Al.
96. Brief descriptions of the FDIC and other government-directed insurance providers appear in Appendix A. The importance of government insurance was powerfully illustrated following a run on MMFs in fall 2008. See infra notes 101-05 and accompanying text. The Treasury Department responded to widespread customer redemptions by creating a temporary program to guarantee MMF account balances - economically, not unlike bank insurance - which quickly broke the run. See Joe Adler, Bailout Bill's FDIC Hike Temporary - For Now; Many View Increase in Coverage as Likely to Be Made Permanent, AM. BANKER, Oct. 2, 2008, at 1;
97. Steven Sloan, Money Market Funds Get Third Boost from Fed, AM. BANKER, Oct. 22, 2008, at 4.
98. The guarantee, which protected balances as of September 19, 2008, expired on September 19, 2009. See Press Release, U.S. Dep't of Treasury, Treasury Announces Expiration of Guarantee Program for Money Market Funds (Sept. 29,2009), http://www.ustreas.gov/press/releases/tg293.htm.
99. Richard S. Grossman, Deposit Insurance, Regulation, and Moral Hazard in the Thrift Industry: Evidence from the 1930's, 82 AM. ECON. REV. 800, 802-03 (1992);
100. Patricia A. McCoy, The Moral Hazard Implications of Deposit Insurance: Theory and Evidence, in 5 CURRENT DEVELOPMENTS IN MONETARY AND FINANCIAL LAW 417, 423-25 (Int'l Monetary Fund Legal Dep't ed., 2008);
101. Franklin Allen & Douglas Gale, Capital Adequacy Regulation: In Search of a Rationale 4-6 (Wharton Fin. Inst. Ctr., Working Paper No. 03-07, Sept. 2002), available at http://fic.wharton.penn.edu/ic/papers/03/0307.pdf.
102. For a description of the economic impact of a systemic shock, see Ben S. Bemanke, Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression, 73 AM. ECON. REV. 257, 264-65 (1983);
103. Charles W. Calomiris, Is Deposit Insurance Necessary? A Historical Perspective, 50 J. ECON. HIST. 283, 284 (1990).
104. See infra notes 151-154 and accompanying text (describing one particular example, the AIG failure).
105. See Clark, supra note 33, at 15-18, 23-24;
106. Jackson, supra note 3, at 352-59;
107. Jonathan R. Macey & Geoffrey P. Miller, Bank Failures, Risk Monitoring, and the Market for Bank Control, 88 COLUM. L. REV. 1153, 1155, 1165 (1988).
108. Financial regulation can also further social objectives by channeling funds to preferred projects or limiting concentrations of economic power. See Herring & Santomero, supra note 23, at 10-11. Those motivations, while important to an assessment of financial regulation, are beyond the scope of this Article.
109. See infra Appendix B for examples of regulations governing a financial intermediary's investment portfolio.
110. See infra Appendix B for examples of limitations on the types, amounts, and valuation of equity and debt instruments that can be issued by financial intermediaries.
111. See Charles K. Whitehead, What's Your Sign? - International Norms, Signals, and Compliance, 27 MICH. J. INT'L L. 695, 720-25 (2006) (citing the Basel Accord of 1988 as an example of indirect regulation of financial intermediaries' risk-taking activities). Examples of regulations covering net worth, capital (including risk-based capital), and surplus are included infra in Appendix B. A discussion of differences in regulatory capital requirements among financial intermediaries is also set out infra at notes 107-109 and accompanying text.
112. See Herring & Santomero, supra note 23, at 13-14, 17-18 (discussing justifications for capital requirements and other protections to prevent systemic failure in the banking industry).
113. See Robert W. Klein, The Insurance Industry and Its Regulation: An Overview, in THE FUTURE OF INSURANCE REGULATION IN THE UNITED STATES 13, 38-40 (Martin F. Grace & Robert W. Klein eds., 2008);
114. see also Brady Dennis, AIG Warned of 'Catastrophic' Failure; Company Told U.S. Its Collapse Would Cause Worldwide 'Chain Reaction,' WASH. POST, Mar. 10,2009, at D1.
115. See Clark, supra note 33, at 47.
116. Allen & Gale, supra note 55, at 3;
117. see also Gary Gorton, Bank Regulation When "Banks " and "Banking" Are Not the Same, 10 OXFORD REV. ECON. POL'Y 106, 107 (1994) (describing historical definition of banks);
118. Roberta S. Karmel, Regulatory Implications of Individual Management of Pension Fund: The Challenge to Financial Regulators Posed by Social Security Privatization, 64 BROOK. L. REV. 1043, 1056-58 (1998) (describing definitional distinctions that control regulatory oversight);
119. Heidi Mandanis Schooner & Michael Taylor, United Kingdom and United States Responses to the Regulatory Challenges of Modem Financial Markets, 38 TEX. INT'L LJ. 317, 328-29 (2003) (observing that U.S. regulation is largely tied to business model rather than function).
120. Banking Act of 1933 (Glass-Steagall Act), Pub. L. No.73-65, 48 Stat. 162 (codified as amended in scattered sections of 12 U.S.C.).
121. See James R. Smoot, Bank Operating Subsidiaries: Free at Last or More of Same?, 46 DEPAULL. REV. 651, 655-656 (1997).
122. Bank Holding Company Act of 1956, Pub. L. No.84-511, 70 Stat. 133 (codified as amended at 12 U.S.C. §§1841-1850 (2006)).
123. See LOWELL L. BRYAN, BREAKING UP THE BANK: RETHINKING AN INDUSTRY UNDER SGE 22-28 (1988);
124. KERRY COOPER & DONALD R. FRASER, BANKING DEREGULATION AND THE NEW COMPETITION IN FINANCIAL SERVICES 2-17 (1984);
125. Franklin Allen & Anthony M. Santomero, What Do Financial Intermediaries Do?, 25 J. BANKING & FIN. 271, 274-282 (2001);
126. Michael C. Keeley, Deposit Insurance, Risk and Market Power in Banking, 80 AM. ECON. REV. 1183, 1184-1186 (1990);
127. Alan E. Sorcher & Satish M. Kini, Does the Term "Bank Broker-Dealer" Still Have Meaning?, 6 N.C. BANKING INST. 227, 232-234 (2002).
128. See Allen N. Berger, Anil K. Kashyap & Joseph M. Scalise, The Transformation of the U.S. Banking Industry: What a Long, Strange Trip It's Been, 1995 BROOKINGS PAPERS ON ECON. ACTIVITY 55, 68-70.
129. See COOPER & FRASER, supra note 69, at 195-217;
130. ROBERT E. LITAN, WHAT SHOULD BANKS DO? 33-59 (1987); Berger,
131. Kashyap & Scalise, supra note 70, at 127.
132. See Smoot, supra note 67, at 654-60;
133. Whitehead, supra note 61, at 721-725
134. Finance companies lend to business and retail borrowers, relying on MMFs for funding through the sale to them of short-term commercial paper. See Jane W. D'Arista & Tom Schlesinger, The Parallel Banking System 3-4, 7-14 (Econ. Pol'y Inst., Briefing Paper No. 37, 1993), available at http://epi.3cdn.net/ 60831aal353ed4610d-nbm6i6tar.pdf.
135. MMFs, in turn, offer investors the convenience of a bank account, including checking services, toll-free telephone numbers, record-keeping, and wire transfers, but with nominally higher returns than bank deposits. See FRANKLIN R. EDWARDS, THE NEW FINANCE: REGULATION & FINANCIAL STABILITY 73-74 (1996).
136. Unlike bank deposits, MMF accounts are normally not protected by federal government insurance, see id., although the Treasury Department created a temporary program to guarantee MMF account balances following the run on MMFs in fall 2008, see supra note 54. Investors instead rely on regulations that limit portfolio assets to high quality securities and, in the past, the implicit assurance that an MMF's managers would prevent the fund's assets from falling below par, one dollar per share. See infra notes 101-02 and accompanying text. Together, MMFs and finance companies began to mirror the traditional balance struck by banks, resulting in a substantial shift in liquid household assets from the banking sector to the capital markets.
137. See EDWARDS, supra, at 73-74; D'Arista & Schlesinger, supra, at 3-4, 7-14.
138. See Gilson & Whitehead, supra note 5, at 244-245
139. See FRANKLIN ALLEN & DOUGLAS GALE, FINANCIAL INNOVATION AND RISK SHARING 38 (1994);
140. Allen & Santomero, supra note 32, at 1479-80;
141. Gilson & Whitehead, supra note 5, at 245-47;
142. James C. Van Home, Of Financial Innovations and Excesses, 40 J. FIN. 621, 621-22(1985).
143. See Allen & Santomero, supra note 32, at 1479-80;
144. Van Home, supra note 75, at 621-622
145. See James J. White, Death and Resurrection of Secured Credit, 12 AM. BANKR. INST. L. REV. 139, 153(2004).
146. See AON Trade Credit, Inc. v. Quintec, S.A., 981 So. 2d 475, 478 (Fla. Dist. Ct. App. 2008) (describing of a commercial credit insurance policy); Roberto Ceniceros, Credit Crunch Fuels Rush for Coverage; Trade Credit Insurers See Rise in Demand as Bankruptcies Grow, Bus. INS., Apr. 13, 2009, at 1, 1, 20.
147. For a detailed discussion of new capital markets instruments that permit the transfer of traditional insurance risk to investors, see J. David Cummins & Mary A. Weiss, Convergence of Insurance and Financial Markets: Hybrid and Securitized Risk-Transfer Solutions, 76 J. RISK & INS. 493, 515-527 (2009).
148. See White, supra note 77, at 153-155
149. The process of short selling is summarized supra at notes 48-49 and accompanying text.
150. See supra note 9 and accompanying text.
151. See Jonathan Batten & Warren Hogan, A Perspective on Credit Derivatives, 11 INT'L REV. FIN. ANALYSIS 251, 255-257 (2002).
152. See Allen & Santomero, supra note 32, at 1466-74;
153. Herring & Santomero, supra note 23, at 27-41.
154. See Gorton, supra note 65, at 116-18
155. Jonathan R. Macey, Derivative Instruments: Lessons for the Regulatory State, 21 J. CORP. L. 69, 78 (1995);
156. Merton, supra note 22, at 33-41.
157. See Allen & Santomero, supra note 32, at 1464-74;
158. Herring & Santomero, supra note 23, at 29-35.
159. See Thomas G. Fischer et al., The Securities Activities of Commercial Banks: A Legal and Economic Analysis, 51 TENN. L. REV. 467, 474-502 (1984);
160. Sorcher & Kini, supra note 69, at 233-234
161. See Coffee & Sale, supra note 10, at 737-738, 749.
162. See Donald C. Langevoort, Statutory Obsolescence and the Judicial Process: The Revisionist Role of the Courts in Federal Banking Regulation, 85 MICH. L. REV. 672, 728-733 (1987).
163. See Douglas W. Diamond & Philip H. Dybvig, Banking Theory, Deposit Insurance, and Bank Regulation, 59 J. Bus. 55, 63-64 (1986). Although uncommon today, the United States has had bank runs in the past, the basis for the scene in Frank Capra's 1946 film, It's a Wonderful Life (Liberty Films 1946), when Bedford Falls township flocked to the struggling Bailey Brothers Building and Loan to get its money back.
164. Although less common, traditional insurance and securities firms also face a risk of customer runs - by policyholders, in the case of insurance companies and by accountholders, in the case of securities firms. See Lissa L. Broome & Jerry W. Markham, Banking and Insurance: Before and After the Gramm-Leach-Bliley Act, 25 J. CORP. L. 723, 731-32 (2000) (describing insurance company runs);
165. Thomas W. Joo, Who Watches the Watchers? The Securities Investor Protection Act, Investor Confidence, and the Subsidization of Failure, 72 S. CAL. L. REV. 1071, 1110-12 (1999) (noting fear of securities brokerage runs in light of experience during Great Depression with bank runs).
166. See Landon Thomas, Jr., Run on Big Wall St. Bank Spurs U.S.-Backed Rescue, N.Y. TIMES, Mar. 15, 2008, at Al; Ben S. Bernanke, Chairman, Bd. of Governors of the Fed. Reserve Sys., Speech at the Fed. Reserve Bank of Kans. City's Ann. Econ. Symp.: Reducing Systemic Risk (Aug. 22, 2008), available at http://www.federalreserve.gov/newsevents/speech/bernanke20080822a.htm;
167. see also Gorton, supra note 4, at 31-38.
168. Bear Steams was not the first example of a bank run on a securities firm. Drexel Burnham, a prominent investment bank, declared bankruptcy in 1990 after the collapse of the secondary market for high-yield bonds. See Franklin Allen & Richard Herring, Banking Regulation Versus Securities Market Regulation 28-34 (Wharton Fin. Inst. Ctr., Working Paper No. 0129, Jul. 2001), available at http://knowledge.wharton.upenn.edu/papers/1174.pdf.
169. Securities that traded freely became illiquid after Drexel Burnham pleaded guilty to six felony charges, Michael Milken - the senior Drexel Burnham executive who had launched the high-yield bond market - was indicted for racketeering and conspiracy, and changes in regulations required thrifts to sell their holdings, resulting in a collapse in confidence in the value of high-yield instruments. Id. at 30-31.
170. The effect, as in the case of Bear Steams, was an increased cost of borrowing that forced Drexel Burnham into bankruptcy. Id. at 31-33.
171. See Letter from Christopher Cox, Chairman, Sec. Exch. Comm'n, to Dr. Nout Wellink, Chairman, Basel Comm. on Banking Supervision 3 (Mar. 20, 2008) [hereinafter Cox Letter], available at http://www.sec.gov/news/press/2008/2008- 48-letter.pdf
172. see also Markus K. Brunnermeier, Deciphering the Liquidity and Credit Crunch 2007-2008, 23 J. ECON. PERSPECTIVES 77, 80 (2009). Creditors rely on short maturities to police borrowers, in particular when monitoring is difficult and changes in risk-bearing are likely.
173. See Berger et al., supra note 41, at 398-99; Strahan, supra note 26, at 20-21. Any increase in risk can simply be priced into a subsequent loan.
174. See Flannery, supra note 44, at 321-322
175. See Gorton, supra note 4, at 10-13.
176. The collateralized loans to Bear Steams were made through sale and repurchase, also known as "repo," transactions. In a typical trade, a securities dealer (the "repo seller") sells securities to an investor (the "repo buyer") for cash. Jeanne L. Schroeder, A Repo Opera: How Criimi Mae Got Repos Backwards, 76 AM. BANKR. L.J. 565, 570-72 (2002). The repo buyer's object is not to invest in the securities; rather, he expects to receive a return from the repo seller for the use of his cash. Id. Accordingly, as part of the trade, the repo seller also agrees with the repo buyer to repurchase the same or equivalent securities at some future time, frequently overnight, at a repurchase price above the price at which the repo buyer first bought the securities. Id. Economically, the transaction is equivalent to a secured loan - with the repo buyer lending cash to the repo seller against the underlying securities as collateral. See id. Repo transactions take place through purchases and sales of securities in the capital markets. See id. For ease of reference, however, I sometimes refer to the Bear Steams transactions by their economic equivalents, "loans" and "collateral."
177. See Cox Letter, supra note 93, at 3.
178. See Bemanke, supra note 92.
179. See Brunnermeier, supra note 93, at 82-84, 88;
180. Gorton, supra note 4, at 4-5,31-35;
181. see also Tobias Adrian & Hyun Song Shin, Liquidity and Financial Contagion, FIN. STABILITY REV., Feb. 2008, at 1, 2-3, available at http://www.banque-france.fr/gb/publications/telechar/rsf/2008/etudl-0208.pdf.
182. See infra Part II.B.4.
183. See Gary Gorton, The Panic of 2007, at 65-66 (Yale Sch. of Mgmt. Int'l Cent, for Fin., Working Paper No. 08-24,2008), available at
184. See Sjostrom, supra note 9, at 952-961
185. See Christopher Condon, Bernanke Proposes Less Restrictive Money-Fund Rules, BLOOMBERG, Mar. 11, 2009, http://www.bloomberg.com/apps/news?pid= 20601103&sid=aPlgaF0MfY-8&refer=news.
186. A detailed description of what occurred at the Reserve Primary Fund, and the market and regulatory actions afterward, appears in INV. Co. INST., REPORT OF THE MONEY MARKET WORKING GROUP 31-39 (2009), available at http://www.ici.org/pdf7ppr-09-mmwg.pdf.
187. Neil Irwin, Fed Prepared to Prop Up Money-Market Funds, WASH. POST, Oct. 22, 2008, at Dl;
188. see also Daniel Gross, The Anatomy of Fear, NEWSWEEK, Oct. 20, 2008, at 31, 31-33;
189. Annys Shin, Funds Turn to Treasury Guaranty; Money-Market Managers Seek to Boost Confidence, WASH. POST, Oct. 12, 2008, at F1.
190. See 17 C.F.R. §270.2a-7 (2009); INV. CO. INST., supra note 101, at 53-67. New rules regulating MMF portfolio composition were recently adopted by the SEC. See infra note 189.
191. See Leslie Wayne, Investors Lose Money in "Safe " Fund, N.Y. TIMES, Sept. 28, 1994, at D1 (listing fifteen MMFs whose advisors covered for shortfalls, rather than allowing fund share prices to fall below one dollar).
192. See Edmund L. Andrews & Michael M. Grynbaum, Fed Weighs Bid to Spur Economy as Markets Plummet Worldwide, N.Y. TIMES, Oct. 7, 2008, at Al;
193. Joe Nocera, 36 Hours of Alarm and Action as Crisis Spiraled, N.Y. TIMES, Oct. 2, 2008, at Al (describing problems that could arise if MMFs abandon commercial paper)
194. ; see also EDWARDS, supra note 73, at 76-91.
195. See Gorton, supra note 4, at 33-35 (describing the escalating dynamics of the panic as it developed);
196. see also Brunnermeier, supra note 93, at 92-94 (explaining spiral effects in more detail).
197. See infra Appendix B for examples of bank capital requirements. See also Allen & Herring, supra note 92, at 4-7;
198. THE JOINT FORUM, RISK MANAGEMENT PRACTICES AND REGULATORY CAPITAL: CROSS-SECTORAL COMPARISON 10-11, 31, 34-38 (2001), available at http://www.bis.org/publ/joint04.pdf;
199. Stephen Morris & Hyun Song Shin, Financial Regulation in a System Context, BROOKINGS PAPERS ON ECON. ACTIVITY, Fall 2008, at 229, 230.
200. See infra Appendix B for examples of insurance capital requirements. See also THE JOINT FORUM, supra note 107, at 12-13, 29-30,41-46;
201. Klein, supra note 63, at 23-24.
202. See infra Appendix B for a description of the net capital rules applicable to securities firms. See also THE JOINT FORUM, supra note 107,at 11-12,30-31,38-41;
203. Allen & Herring, supra note 92, at 22-24.
204. See THE JOINT FORUM, supra note 107, at 46-57;
205. Frank Partnoy, Financial Derivatives and the Costs of Regulatory Arbitrage, 22 J. CORP. L. 211, 227-235 (1997).
206. See Gunter Franke & Jan Pieter Krahnen, Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations, in THE RISKS OF FINANCIAL INSTITUTIONS, supra note 48, at 603, 629;
207. Wolf Wagner & Ian W. Marsh, Credit Risk Transfer and Financial Sector Stability, 2 J. FIN. STABILITY 173, 174-175 (2006).
208. See Allen & Gale, supra note 48, at 346.
209. BRYAN, supra note 69, at 82-83.
210. Charles W. Calomiris, The Subprime Turmoil: What's Old, What's New, and What's Next 1, 47-48 (Oct. 2, 2008), available at http://www.williams.edu/ Economics/seminars/Calorniris-10-02-08.pdf.
211. See Floyd Norris, No Way to Make a Loan, N.Y. TIMES, Oct. 19, 2007, at Cl;
212. Timothy F. Geithner, President and Chief Executive Officer, Fed. Reserve Bank of N.Y., Remarks at the Economic Club of New York: Reducing Systemic Risk in a Dynamic Financial System (June 9, 2008), available at http://www. newyorkfed.org/newsevents/speeches/2008/tfg080609.html;
213. see also Aaron Unterman, Innovative Destruction - Structured Finance and Credit Market Reform in the Bubble Era, 5 HASTINGS BUS. LJ. 53, 58-60 (2009).
214. As former Citigroup Chairman and CEO Charles Prince told Rep. Barney Frank, off-balance sheet financing was necessary because on-balance sheet financing "would have put Citigroup at a disadvantage with Wall Street investment banks that were more loosely regulated and were allowed to take far greater risks."
215. Nelson D. Schwartz & Julie Creswell, What Created This Monster?, N.Y. TIMES, Mar. 23, 2008, at BU1, BU7.
216. See Standard & Poor's - Structured Investment Vehicle Criteria, http://www.standardandpoors.com/prot/ratings/articles/en/us/?assetID= 1245172969705 (subscription required).
217. See Brunnermeier, supra note 93, at 79-80.
218. Professor Gorton also describes the substantial rise in off-balance sheet financing. Gorton, supra note 4, at 25-29.
219. A portion of the decline may have been due to resulting agency problems - bank managers no longer had as significant an incentive to assess or monitor a borrower's credit quality and potentially had an incentive to transfer their riskiest assets to off-balance-sheet financing conduits. See Whitehead, supra note 8, at 646-647
220. As former Citigroup Chairman and CEO Charles Prince was famously quoted, "When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing."
221. Michiyo Nakamoto & David Wighton, Bullish Citigroup Is 'Still Dancing' to the Beat of the Buy-Out Boom, FIN. TIMES, Jul. 10, 2007, at 1.
222. See Shannon D. Harrington & Elizabeth Hester, Citigroup to Consolidate Seven SIVs on Balance Sheet, BLOOMBERG, Dec. 13, 2007, http://www.bloomberg.com/apps/news?pid=20601087&sid=amwIRXuKwRR8&refer= home.
223. Mortgage assets were transferred back to the banks pursuant to pre-agreed guarantees, see Patricia A. McCoy, Musings on the Seeming Inevitability of Global Convergence in Banking Law, 7 CONN. INS. L.J. 433, 449-52 (2001);
224. Nelson D. Schwartz & Eric Dash, Where Was the Wise Man?, N.Y. TIMES, Apr. 27, 2008, at BU1,
225. or due to concerns over reputation, see Harrington & Hester, supra note 121.
226. See Brunnermeier, supra note 93, at 80.
227. See Where Were the Watchdogs? Systemic Risk and the Breakdown of Financial Governance: Hearings Before the S. Comm. on Homeland Security & Governmental Affairs, 111th Cong. 3 (2009) (prepared statement of Robert E. Litan, Vice President, Research & Policy, The Kauffman Foundation, and Senior Fellow, Economic Studies & Global Economics Programs, The Brookings Institution), available at http://hsgac.senate.gov/public/index.cfm?FuseAction= Files.View&FileStore-id=0e83ced9-46d5-4ef9-97bl-2fec22 ec445f;
228. see also Daniel Immergluck, Private Risk Public Risk: Public Policy, Market Development, and the Mortgage Crisis, 36 FORDHAM URB. L.J. 447, 461-64 (2009).
229. See Whitehead, supra note 8, at 656-657
230. See JOHN B. CAOUETTE, EDWARD I. ALTMAN & PAUL NARAYANAN, MANAGING CREDIT RISK: THE NEXT GREAT FINANCIAL CHALLENGE 311-12 (1998);
231. GLANTZ, supra note 9, at 532;
232. Angus Duncan, Loan-Only Credit Default Swaps: The March to Liquidity, COM. LENDING REV., Sept.-Oct. 2006, at 15, 16-17;
233. Bernadette Minton, René M. Stulz & Rohan Williamson, How Much Do Banks Use Credit Derivatives to Reduce Risk? 7 (Ohio State Univ. Fisher Coll. Bus., Working Paper No. 2006-03-001, June 2006), available at http://ssm.com/abstract-785364;
234. see also Hamish Risk, Loan Credit-Default Swaps Surge as Hedge Funds Hunger for Yield, BLOOMBERG, Aug. 22, 2006, http://www.bloomberg.com/apps/news? pid=20601087&sid=a4fg-8Gw37Fw&refer=home ("When investors can't get the loans, they're increasingly using credit-default swaps.").
235. See U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-07-716, CREDIT DERIVATIVES: CONFIRMATION BACKLOGS INCREASED DEALERS' OPERATIONAL RISKS, BUT WERE SUCCESSFULLY ADDRESSED AFTER JOINT REGULATORY ACTION 6 n.8 (2007), available at http://www.gao.gov/new.items/d07716.pdf. (citing British Bankers' Association report that "top five end-users of credit derivatives are banks and broker-dealers (44 percent), hedge funds (32 percent), insurers (17 percent), pension funds (4 percent), and mutual funds (3 percent)");
236. Daniel Fisher, A Dangerous Game, FORBES, Oct. 16, 2006, at 40, 40 (citing Greenwich Associates analysis that fifty-eight percent of CDSs are traded by hedge funds);
237. Risk, supra note 126;
238. Janet Morrissey, Credit Default Swaps: The Next Crisis?, TIME.COM, Mar. 17, 2008, http://www.time.com/timeftusmess/article/0,8599,1723152.00.html (reporting that an original CDS can be traded fifteen to twenty times).
239. The importance to a client relationship of holding a loan, even if the credit risk is transferred, was illustrated in the WorldCom securities litigation. There, J.P. Morgan sought to decrease its exposure to WorldCom by entering into CDSs without WorldCom becoming aware it had transferred the risk.
240. See In re WorldCom, Inc. Sec. Litig., 346 F. Supp. 2d 628, 651-652 (S.D.N.Y. 2004).
241. See George S. Geis, Business Outsourcing and the Agency Cost Problem, 82 NOTRE DAME L. REV. 955, 977-982 (2007) (analyzing techniques to control agency costs in outsourcing).
242. For example, at the time of its bankruptcy, there was approximately $72 billion in notional amount of CDSs tied to Lehman Brothers, with estimates of up to $400 billion in total notional amount linked to it.
243. See Gordon Piatt, Credit Default Swaps Market Outstandings Shrink as Dealers Tear Up Offsetting Agreements, GLOBAL FIN., Dec. 2008, at 68, 70.
244. On a net basis, however, only $5.2 billion ultimately traded hands. Id. Part of the difference reflected trading among market participants, with offsetting trades shrinking the amount of actual risk that the outstanding swaps covered. Id. at 68-71.
245. See supra notes 55-57 and accompanying text (discussing agency and externality problems);
246. infra notes 151-154 and accompanying text (analyzing these problems with respect to the AIG bailout).
247. See Tomas Garbaravicius & Frank Dierick, Hedge Funds and Their Implications for Financial Stability, 34 EUR. CENT. BANK OCCASIONAL PAPER SERIES 1, 56-63 (2005), available at http://www.ecb.int/pub/pdf/scpops/ecbocp34.pdf.
248. Although a broad cross-section of banks hold derivatives, the impact of a fall in the CDS market is likely to be concentrated among the five largest, which hold more than ninty percent of derivatives in the banking industry.
249. See COMPTROLLER OF THE CURRENCY, ADMINISTRATOR OF NATIONAL BANKS, OCCS QUARTERLY REPORT ON BANK TRADING AND DERIVATIVES ACTIVITIES, THIRD QUARTER 2008, at 1, 5-7 (2008), available at http://www.occ.treas.gov/ftp/release/2008-152a. pdf.
250. Recent change in the financial markets may help limit the impact: initiation of the first central counterparty clearinghouse ("CCP") for CDSs in March 2009.
251. See Gordon Platt, ICE Begins Clearing Credit Default Swaps as Counterparty Risk Hits Record High, GLOBAL FIN., Apr. 2009, at 64, 64.
252. Each party transfers its CDS position to the CCP after a trade is agreed, potentially minimizing their counterparty credit exposure. See Darrell Duffie & Haoxiang Zhu, Does a Central Clearing Counterparty Reduce Counterparty Risk? 2-3 (Stan. Graduate Sch. Bus., Research Paper No. 2022, 2009), available at http://www.stanford.edu/~dufrie/DufrieZhu.pdf. Of course, CDS trades that continue to be handled directly will still be subject to the risk of counterparty default. Id.
253. To date, the U.S. government has invested over $150 billion in AIG. See Liam Pleven et al., U.S. Revamps Bailout of AIG, WALL ST. J., Mar. 2, 2009, at A1.
254. see also Examining What Went Wrong, Government Intervention, and Implications for Future Regulation: Hearing on American International Group Before the S. Comm. on Banking, Housing, and Urban Affairs, 111th Cong. 3-5 (2009) [hereinafter Polakoff March 2009 Testimony] (prepared statement of Scott M. Polakoff, Senior Deputy Dir. & Chief Operating Officer, Office of Thrift Supervision), available at http://banking.senate.gov/public/-files/ PolakoffTestimony3509.pdf.
255. AIG 2007 Annual Report, supra note 136, at 4 (disclosing that in 2005 financial services operations accounted for $4,424 billion of AIG's total operating income of $15.213 billion).
256. American International Group, Inc., Amended Annual Report (Form 10-K/A), at 13, 93 (June 19,2006);
257. Polakoff March 2009 Testimony, supra note 136, at 4-5.
258. Robert O'Harrow, Jr. & Brady Dennis, The Beautiful Machine, WASH. POST, Dec. 29, 2008, at Al, A6-7.
259. Brady Dennis & Robert O'Harrow, Jr., A Crack in the System, WASH. POST, Dec. 30, 2008, at Al, A8.
260. See Mengle, supra note 32, at 13;
261. Minton, Stulz & Williamson, supra note 126, at 3-5. A description of CDSs is included supra at notes 9,126-34 and accompanying text.
262. See also Satyajit Das, Credit Derivatives - Instruments, in CREDIT DERIVATIVES: TRADING & MANAGEMENT OF CREDIT & DEFAULT RISK 7, 32-68 (Satyajit Das ed., 1998) (providing detailed example of CDSs);
263. Robert F. Schwartz, Risk Distribution in the Capital Markets: Credit Default Swaps, Insurance and a Theory of Demarcation, 12 FORDHAM J. CORP. & FlN. L. 167, 175(2007).
264. Polakoff March 2009 Testimony, supra note 136, at 5;
265. Carol J. Loomis, AIG: The Company that Came to Dinner, FORTUNE, Jan. 19, 2009, at 70, 73.
266. See Robert O'Harrow, Jr. & Brady Dennis, Downgrades and Downfall, WASH. POST, Dec. 31, 2008, at A1, A8.
267. AIG 2007 Annual Report, supra note 136, at 33 (indicating that $379 billion of AIGFP's $527 billion in notional amount of super senior CDSs was written to financial institutions to facilitate regulatory capital relief);
268. Matthew Kamitschnig et al., U.S. to Take Over AIG in $85 Billion Bailout; Central Banks Inject Cash as Credit Dries Up, WALL ST. J., Sept. 17, 2008, at A1, A6 (describing a "domino effect" if AIGFP had defaulted on its swaps).
269. See Gretchen Morgenson, Behind Insurer's Crisis, Blind Eye to a Web of Risk, N.Y. TIMES, Sept. 28,2008, at Al, A28;
270. O'Harrow & Dennis, supra note 143, at A9;
271. Joe Nocera, Propping Up a House of Cards, N.Y. TIMES, Feb. 28, 2009, at B1;
272. Press Release, U.S. Dep't of Treasury, U.S. Treasury and Federal Reserve Board Announce Participation in AIG Restructuring Plan (Mar. 2, 2009), available at http://www.ustreas.gov/press/releases/tg44.htm (remarking that AIG "is a significant counterparty to a number of major financial institutions");
273. see also Dennis, supra note 63, at D1 (describing an AIG presentation to the U.S. government indicating that an AIG bankruptcy could force European banks to raise ten billion dollars in capital and quoting the AIG officer as saying it "would cause turmoil in the U.S. economy and global markets"). The U.S. government's decision to bail out AIG, and the terms of the bailout, are also described in Sjostrom, supra note 9, at 964-977
274. Dennis & O'Harrow, supra note 140, at A1.
275. Roger Parloff, Wall Street: It's Payback Time, FORTUNE, Jan. 19, 2009, at 57, 62;
276. see also Brady Dennis, A Meek Ending for Mighty Unit That Gutted AIG, WASH. POST, Feb. 21, 2009, at Al, A7 (indicating that many of the CDOs written by AIGFP were written "appropriately").
277. O'Harrow & Dennis, supra note 143, at A8-A9;
278. Parloff, supra note 147, at 62.
279. AIG 2007 Annual Report, supra note 136, at 33,81 ;
280. see also PAUL GORIS, THE LEGAL ASPECT OF SWAPS 130-37 (1994) (discussing the role of collateralization as a means to "reduce or eliminate a [CDS] party's credit risk");
281. Gorton, supra note 4, at 11-12 (detailing that the posting of collateral is often required when the value of a CDS falls below an agreed threshold). More recently, during the second quarter of 2009, AIG began to recoup collateral as the value of its CDSs moved in its favor.
282. See Liam Pleven, In Reversal of Fortune, AIG Recoups Collateral, WALL ST. J., Oct. 29, 2009, at C1.
283. Morgenson, supra note 145, at 28 (describing this phenomenon as a "downward spiral");
284. Parloff, supra note 147, at 62.
285. See CHARLES GOODHART ET AL., FINANCIAL REGULATION: WHY, How AND WHERE Now? 38-43 (1998).
286. See AIG 2007 Annual Report, supra note 136, at 112-118
287. See PRESIDENT'S WORKING GROUP ON FIN. MKTS., HEDGE FUNDS, LEVERAGE, AND THE LESSONS OF LONG-TERM CAPITAL MANAGEMENT 31 (1999) (asserting that individual firms limit risk taking to protect themselves, not system as a whole);
288. Jackson, supra note 3, at 335-36;
289. Sudeep Reddy & Michael R. Crittenden, Fed's Kohn Concedes Risk in AIG Rescue, WALL ST. J., Mar. 6, 2009, at A3 (quoting Federal Reserve Vice Chairman Donald Kohn's concern, regarding AIG, "I'm worried about the knock-on effects in the financial markets. Would other people be willing to do business with other U.S. financial institutions ... if they thought, in a crisis like this, they might have to take some losses?").
290. See Richard Herring & Susan Wächter, Bubbles in Real Estate Markets 8 (Wharton Sch. Zell/Lurie Real Estate Ctr., Working Paper No. 402, 2002), available at http://realestate.wharton.upenn.edu/newsletter/bubbles.pdf;
291. see also O. EMRE ERGUNGOR & JAMES B. THOMSON, SYSTEMIC BANKING CRISES 5 (2005), available at http://www.clevelandfed.org/research/POLICYDIS/No9Jan05. pdf (describing potential for herd behavior among banks).
292. See Schwartz, supra note 141, at 173-74, 181-188
293. See supra note 9 and accompanying text;
294. see also Phelim Boyle &
295. Feidhlim Boyle, DERIVATIVES: THE TOOLS THAT CHANGED FINANCE 165-67 (2001);
296. David Felsenthal & M. Sharmini Mahendran, Credit Derivatives: Legal and Regulatory Issues, in HANDBOOK OF CREDIT DERIVATIVES, supra note 9, at 277, 282-84.
297. There are, of course, differences in the instruments as well such as the requirement that an insurance policyholder have an insurable interest, not a requirement in a CDS.
298. See Partnoy & Skeel, supra note 9, at 1050.
299. See N.Y. INS. LAW §69010-1) (McKinney 2005).
300. See Hearing on the Causes and Effects of the AIG Bailout Before the H. Comm. on Oversight and Government Reform, 110th Cong. 18-19, 81 (2008) [hereinafter Oversight Comm. Hearing] (statement of Eric R. Dinallo, Superintendent, New York State Ins. Dep't), available at http://oversight.house. gov/images/stories/documents/20081010162126.pdf;
301. Schwartz, supra note 141, at 174.
302. See Oversight Comm. Hearing, supra note 158, at 27-28 (testimony of Eric R. Dinallo) ("For a large, large, large percentage of credit default swaps, you're required to have absolutely no collateral or capital behind them.").
303. See Partnoy & Skeel, supra note 9, at 1046-1047
304. See 7 U.S.C. §16(e)(2) (2006). Swaps and other derivatives may also fall outside of state gambling laws where there is a related, underlying business activity.
305. See Korea Life Ins. Co. v. Morgan Guar. Trust Co. of N.Y., 269 F. Supp. 2d 424, 442 (S.D.N.Y. 2003) (interpreting New York Anti-Gambling Statute).
306. AIG selected OTS, as its regulator of choice, by acquiring a thrift bank (AIG Federal Savings Bank) in 1999.
307. See U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-09-216, FINANCIAL REGULATION: A FRAMEWORK FOR CRAFTING AND ASSESSING PROPOSALS TO MODERNIZE THE OUTDATED U.S. FINANCIAL REGULATORY SYSTEM 10 (2009), available at http://www.gao.gov/new. items/d09216.pdf. AIG was subject to OTS supervision as a unitary thrift holding company. See 12 U.S.C. §1467a(a)(l)(D), (H) (2006).
308. See U.S. GOV'T ACCOUNTABILITY OFFICE, GAO-07-154, FINANCIAL MARKET REGULATION: AGENCIES ENGAGED IN CONSOLIDATED SUPERVISION CAN STRENGTHEN PERFORMANCE MEASUREMENT AND COLLABORATION 54 (2007), available at http://www.gao.gov/new.items/d07154.pdf;
309. Binyamin Appelbaum & Ellen Nakashima, Banking Regulator Played Advocate Over Enforcer, WASH. POST, Nov. 23, 2008, at Al.
310. The OTS failed to review AIGFP's risk exposures until 2005-2006 - although, by that point, AIGFP had entered into most of the CDSs included in its swaps portfolio. Polakoff March 2009 Testimony, supra note 136, at 8-11. The OTS did uncover weaknesses in a number of AIG's and AIGFP's risk controls, id. at 11-12, but its staff appears to have been comforted without independent verification - by determinations by AIGFP's managers that their derivatives business posed minimal liquidity and credit risk.
311. See id. 18-19;
312. Jeff Gerth, Was AIG Watchdog Not Up to the Job?, MSN MONEY, Nov. 10, 2008, http://articles.moneycenfral.msn.com/Investing/Extra/was-aig-watchdog-not- up-to-the-job. aspx.
313. 164 AIG was not alone: other institutions, ranging from American Express to Morgan Stanley, also chose to be regulated by the OTS.
314. See Risk Management and Its Implications for Systemic Risk: Hearing Before the Subcomm. on Securities, Insurance and Investment of the S. Comm. on Banking, Housing and Urban Affairs, 110th Cong. 3 (2008) (prepared statement of Scott M. Polakoff, Senior Deputy Dir. & Chief Operating Officer, Office of Thrift Supervision), available at http://banking.senate.gov/public/-files/ POLAKOFF61908OTSTestimony61908.pdf.
315. In addition, recent press reports indicate that at least thirty federally-chartered banks converted to state charters in order to avoid federal regulatory action.
316. See Binyamin Appelbaum, By Switching Their Charters, Banks Skirt Supervision, WASH. POST, Jan. 22,2009, at A1.
317. See Hearing on the Causes and Effects of the AIG Bailout Before the H. Comm. on Oversight and Gov't Reform, 110th Cong. 2-4 (2008) (prepared statement of Eric R. Dinallo, Superintendent, New York State Ins. Dep't), available at http://oversight.house.gov/images/stories/documents/20081007100906.pdf.
318. See supra notes 115-124 and accompanying text.
319. See supra notes 125-134 and accompanying text.
320. See Nocera, supra note 145, at B1;
321. Craig Torres & Hugh Son, Bernanke Says Insurer AIG Operated Like a Hedge Fund, BLOOMBERG, Mar. 3, 2009, http://www.bloomberg.com/apps/news?pid= 20601087&sid=aHx9vZa0IJA0&refer=home.
322. See Partnoy, supra note 110, at 227-228
323. Hedge funds are typically organized as limited partnerships and may include provisions that restrict management discretion or otherwise grant investors specific rights, including the regular distribution of free cash flow to a fund's investors. Advisors also often invest their own money in the funds they manage.
324. See Larry E. Ribstein, Partnership Governance of Large Firms, 76 U. CHI. L. REV. 289, 301-02 (2009).
325. In addition, a hedge fund advisor's poor performance may result in liquidation of the fund or difficulty in raising capital for successive funds.
326. See Houman B. Shadab, The Law and Economics of Hedge Funds: Financial Innovation and Investor Protection, 6 BERKLEY BUS. L.J. (forthcoming 2010) (manuscript at 21), available at http://papers.ssm.com/sol3/papers.cfm?
327. abstraet-id=1066808. Hedge fund advisors also typically charge performance fees for gains in fund performance, but are not required to rebate fees for losses. Public mutual fund advisors, by contrast, may only charge performance fees where gains and losses have a symmetric effect on compensation. See 15 U.S.C. §80b-5(a)(1) (2006);
328. 17 C.F.R. § 275.205-3 (2009);
329. Davidoff, supra note 10, at 206-10;
330. Robert C. Illig, The Promise of Hedge Fund Governance: How Incentive Compensation Can Enhance Institutional Investor Monitoring, 60 ALA. L. REV. 41, 70-77 (2008).
331. See supra notes 56-57 and accompanying text.
332. See supra notes 92-97 and accompanying text.
333. See supra notes 99-100, 142-150 and accompanying text.
334. For a discussion of how risk transfer to less-regulated entities increases the likelihood of systemic failures, see supra Part II.B.3.
335. See Peter A. Diamond, The Role of a Stock Market in a General Equilibrium Model with Technological Uncertainty, 57 AM. ECON. REV. 759, 770 (1967);
336. Gilson & Whitehead, supra note 5, at 243-247
337. See supra notes 92-97 and accompanying text.
338. See supra note 16 and accompanying text.
339. See Olivier Scaillet, The Origin and Development of Value-at-Risk, in MODERN RISK MANAGEMENT 151-58 (Sarah Jenkins & Tamsin Kennedy eds., 2003).
340. By way of illustration, suppose that a portfolio's "one-day VaR at the ninety-nine percent confidence level" is $300,000. That would mean that, under normal conditions, there is a ninety-nine percent probability that the portfolio manager will not lose more than $300,000 by holding the portfolio for a day.
341. Regulation S-K, 17 C.F.R. §229.305(a)(1)(Hi)(A) (2009) (describing SEC value-atrisk disclosure procedures);
342. THE GROUP OF THIRTY, DERIVATIVES: PRACTICES AND PRINCIPLES 10-11 (1993) (indicating that for portfolio managers, "[m]arket risk is best measured as 'value at risk"');
343. Whitehead, supra note 61, at 723 n.146 (citing Basel Comm. on Banking Supervision, Amendment to the Capital Accord to Incorporate Market Risks (Apr. 1998), http://www.bis.org/publ/bcbsc222.pdf) (describing value-at-risk bank regulation).
344. See Avinash Persaud, Sending the Herd Off the Cliff Edge: The Disturbing Interaction Between Herding and Market-Sensitive Risk Management Practices, J. RISK FIN., Fall 2000, at 59, 59-65
345. ("[I]n a world of 'herding,' tighter market-sensitive risk management regulations and improved transparency can, perversely, turn events from bad to worse, creating volatility, reducing diversification and triggering contagion."); Tobias Adrian & Markus K. Brunnermeier, CoVaR 1-4, 25 (Fed. Reserve Bank of N.Y., Staff Report No. 348, 2009), available at http://www.newyorkfed.org/research/staff-reports/sr348.pdf
346. (proposing a system to avoid the systemic risk created when multiple trading institutions act like "identical clones" because they all used VaR). Note, however, that Philippe Jorion has preliminarily concluded, based on an analysis of the relationship between VaR and trading by banks, that VaR systems have not contributed to volatility.
347. Philippe Jorion, Bank Trading Risk and Systemic Risk, in THE RISKS OF FINANCIAL INSTITUTIONS, supra note 48, at 29, 56.
348. See Stephen Morris & Hyun Song Shin, Risk Management with Interdependent Choice, OXFORD REV. ECON POL'Y, Spring 1999, at 52, 52-53, 59-60.
349. An earlier example was the feedback loop created by portfolio insurance, which involved the programmed computer trading of common stock when prices fell to pre-specified levels. When the stock fell to a trigger price, institutional investors each separately sold their shares, causing further declines in price and further sales, which fueled the Black Monday crash of 1987. See supra note 4;
350. see also Lawrence A. Cunningham, Behavioral Finance and Investor Governance, 59 WASH & LEE L. REV. 767, 784-785 (2002).
351. See, e.g., Matthew Benjamin & Christine Harper, Glass-Steagatt's Specter Returns to Haunt Wall Street, BLOOMBERG, Mar. 10, 2009, http://www.bloomberg.com/apps/news?pid=20601087&sid=ad-KRWTbPsJw&refer= home.
352. See, e.g., Robert C. Merton & Zvi Bodie, Design of Financial Systems: Towards a Synthesis of Function and Structure, J. INVESTMENT MGMT., 1st Q. 2005, at 6, 13;
353. Robert C. Merton, Financial Innovation and the Management and Regulation of Financial Institutions, 19 J. BANKING & FIN. 461, 466-70 (1995)
354. (proposing that traditional institutional categories have "become almost arbitrary," as the same functions can be performed by various institutions); Merton, supra note 22, at 21-27.
355. See COP, SPECIAL REPORT, supra note 16, at 29 ("Functional regulation can mean applying the same principles and not necessarily producing identical regulatory outcomes.").
356. aggregate MMF assets are now about four trillion dollars. Svea Herbst-Bayliss, U.S. Money Market Funds Expected to Face New Rules, REUTERS, Mar. 18, 2009, http://www.reuters.com/article/Americas Regulatory News/idUSNl 834332120090318.
357. See supra notes 101-105 and accompanying text.
358. GROUP OF THIRTY, supra note 16, at 9
359. ("Money market mutual funds wishing to continue to offer bank-like services ... should be required to reorganize as special-purpose banks, with appropriate prudential regulation and supervision . . . ."). As Paul Volcker, former Federal Reserve Chairman and head of President Obama's Economic Recovery Advisory Board, has argued, "If [MMFs] are going to talk like a bank and squawk like a bank, they ought to be regulated like a bank."
360. Shefali Anand, Money-Fund Bailout Has Been Winner, WALL ST. J., Feb. 17,2009, at C1.
361. See Raghuram G. Rajan, Has Financial Development Made the World Riskier? 2, 1820 (Nat'l Bureau Econ. Research, Working Paper No. 11728, 2005), available at http://www.nber.org/papers/w11728.pdf.
362. As this Article was going to press, the SEC adopted new money market fund regulations - consistent with the approach recommended here - that, among other things, would improve portfolio liquidity, reduce the weighted average maturity of assets, and increase credit quality in order to reduce the likelihood of future runs on MMFs. See Press Release, SEC Approves Money Market Fund Reforms to Better Protect Investors (Jan. 27, 2010), available at http://www.sec.gov/ news/press/2010/2010-14.htm.
363. The Obama Administration has, in fact, proposed such a tax. Damian Paletta, Obama Proposes New Transaction Fees for Financial Firms ' Riskiest Investments, WALL ST. J., Jul. 23, 2009, at A2.
364. 12 U.S.C. §1821(c) (2006).
365. Id. §1821(c), (e).
366. Id. §1821(f).
367. Id. §1817(b).
368. Id.
369. 12 U.S.C.A. §5241 (West 2009);
370. Congress Extends $250,000 Insurance Coverage Through 2013, FDIC CONSUMER NEWS (Fed. Deposit Ins. Corp., Washington, D.C.), Spring, 2009, at 6 available at http://www.fdic.gov/consumers/consumer/news/cnspr09/coverage.html.
371. The increase in FDIC coverage was originally part of the so-called Bailout Bill, but was due to expire at the end of 2009. Emergency Economic Stabilization Act of 2008, Pub. L. No.110-343, §136,122 Stat. 3799 (amended 2009).
372. N.Y. INS. LAW §7603 (McKinney 2009).
373. Id. §7706.
374. 17C.F.R.§240.15c3-3(2009).
375. Pub. L. No.91-598, §3, 84 Stat. 1637 (codified as amended at 15 U.S.C. §78ccc (2006)).
376. See Daniel J. Morse, When a Securities Brokerage Firm Goes Broke: A Primer on the Securities Investment Protection Act of 1970, AM. BANKR. INST. J., Feb. 2006, at 34, 34.
377. 15 U.S.C. §78fff-3(a).
378. Financial Institutions Reform, Recovery, and Enforcement Act of 1989, Pub. L. No.101-73, 103 Stat. 183 (codified in scattered sections of 12,18, and 31 U.S.C).
379. 29 U.S.C. §§1301-68;
380. see also Pension Ben. Guar. Corp. v. LTV Corp., 496 U.S. 633, 637 (1990) ("When a plan covered under Title IV terminates with insufficient assets to satisfy its pension obligations to the employees, the PBGC becomes trustee of the plan, taking over the plan's assets and liabilities.").
381. Clark, supra note 33, at 4-10.
382. See also 12 U.S.C. §§29, 371 (2006) (restricting banks' ability to hold real property and extend real estate loans);
383. id. §84 (establishing caps on extending credit to a single borrower).
384. Id. §24 (Seventh).
385. Id. §1843(c)(6).
386. 12 U.S.C. §335 (2006);
387. 12 C.F.R. §1.1(c) (2009).
388. See, e.g., CAL. FIN. CODE §§750, 751 (West 1999);
389. N.Y. BANKING LAW §98 (McKinney2009).
390. 2,1 See, e.g., N.Y. BANKING LAW §104.
391. For examples of minimum investment requirements, asset restrictions, and valuation rules for investments, stocks, and bonds, see N.Y. INS. LAW §§1405, 1414, 4202, 4217 (McKinney2009).
392. See, e.g., 15 U.S.C. §§80a-8(b)(l), 80a-12(a), 80a-13 (2006) (requiring a recital of the fund's policies and prohibiting practices outside those recitals, such as borrowing money, underwriting securities, or concentrating investments in an industry); 17 C.F.R. § 210.6-03 (2009) (detailing the rules for the filing of financial statements).
393. See supra notes 6, 103.
394. R. Alton Gilbert, Requiem for Regulation Q: What It Did and Why It Passed Away, FED. RES. BANK OF ST. LOUIS REV., Feb. 1986, at 22, 30-34.
395. 12 U.S.C. §1828(g); 12 C.F.R. §329 (2008).
396. See, e.g., CAL. FIN. CODE §660 (West 1999).
397. See, e.g., N.Y. INS. LAW §1307 (McKinney 2009).
398. See, e.g., id. §1323.
399. See, e.g., id. §§3201-3237.
400. 15 U.S.C. §80a-18 (2006).
401. 12 U.S.C. §281 (2006).
402. Id. §§
403. 15 U.S.C. §§142, 282.
404. See 12 C.F.R. pt. 3 apps. A, B (2009);
405. id. pt. 225 app. A (establishing a "risk based capital measure" applicable to bank holding companies).
406. See Press Release, Bank for Int'l Settlements, Basel II Capital Framework Enhancements Announced by the Basel Committee (July 13, 2009), available at http://www.bis.org/press/p090713.htm.
407. 12 U.S.C. §329; Regulation H, 12 C.F.R. pt. 208.
408. 12 U.S.C. §461(b); Regulation D, 12 C.F.R. pt. 204.
409. See 12 C.F.R. pt. 208 app. A.
410. See, e.g., N.Y. BANKING LAW §4001 (McKinney 2009).
411. See, e.g., CAL. FIN. CODE §§660,661 (West 1999);
412. N.Y. BANKING LAW §114.
413. See, e.g., N.Y. BANKING LAW §§14, 107.
414. See, e.g., N.Y. INS. LAW §4202 (McKinney 2009) (requiring paid-in capital of at least two million dollars and paid-in initial surplus equal to greater of four million dollars or twohundred percent of its capital).
415. See id. §1301.
416. See id. §1322.
417. 15 U.S.C. §80a-14 (2006);
418. 17 C.F.R. §§270.14a-l, 14a-2 (2009).
419. 17 C.F.R. § 238 Id §240.15c3-1(a).
420. Id. §240.15c3-l(a)(2).
421. Id. §240.15c3-3;
422. see also Louis Loss & JOEL SELIGMAN, FUNDAMENTALS OF SECURITIES REGULATION 853-856 (4th ed. 2004).