Texas Law Review

Originalism, Sex Discrimination, and Age Discrimination

texaslrev_admin — Wed, 14 Nov 2012 21:17:34 +0000

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Eric S. Fish

Posted on November 14, 2012

Eric S. Fish, Originalism, Sex Discrimination, and Age Discrimination, 91 Texas L. Rev. See Also 1 (2012)

Recent Yale graduate Eric S. Fish responds to Calabresi and Rickert.

Too Complex to Depict? Innovation, "Pure Information," and the SEC Disclosure Paradigm

texaslrev_admin — Mon, 25 Jun 2012 03:22:57 +0000

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Article appears in Issue 7

Prof. Henry T. C. Hu

Posted on June 24, 2012

90 Texas L. Rev. 1601

    Since the Depression, the Securities and Exchange Commission’s totemic philosophy has been to promote a robust informational foundation for private decision makers, thereby furthering efficiency and corporate governance. As a necessary corollary, the SEC’s approach has been incremental. The SEC has generally not ventured beyond the realm of information to that of substantive decision making, as to stock prices or otherwise.
   This disclosure philosophy has always been substantially implemented through what can be conceptualized as an “intermediary depiction” model. An intermediary—e.g., a corporation issuing shares—stands between the investor and an objective reality. The intermediary observes that reality, crafts a depiction of the reality’s pertinent aspects, and transmits the depiction to investors. Securities law directs that depictions are to be accurate and complete. “Information” is conceived of in terms of, if not equated to, such depictions.
   This Article’s core thesis is that the longstanding intermediary depiction model is increasingly undermined by innovations in financial theory and practice, and that the disclosure paradigm must metamorphosize to comprehend a spectrum of what can be referred to as “pure information” models. Modern financial innovation has resulted in objective realities that are far more complex than in the past, often beyond the capacity of the English language, accounting terminology, visual display, risk measurement, and other tools on which all depictions must primarily rely. This Article illustrates this in part by focusing on the crafting of depictions of the risk–return characteristics of asset-backed securities (ABS), an important financial innovation whose informational problems helped cause the global financial crisis. The Article shows that such characteristics can be so complex that even “objective reality” is subject to multiple meanings. Given such rudimentary tools and such complex realities, the depictions may offer little more than shadowy, gross outlines of the objective reality, however that reality might be conceived.
   Financial innovation can sometimes pose a second, more fundamental roadblock to good depictions: even a well-intentioned intermediary either may not truly understand or may not function as if he understands the reality he is charged with depicting. This second roadblock can flow both from complexities of financial innovation (what can be called “true misunderstanding”) and organizational complexities associated with the intermediary itself (what can be called “functional misunderstanding”).
   The Article shows that depictions of major banks involved in financial innovation activities can suffer from both roadblocks, thus helping explain the severity of the bank disclosure problems that also helped cause the financial crisis. Such a bank’s activities may be too complex relative to existing depiction tools, and the activities and the organization of the bank itself may be so complex that the bank may suffer from both true misunderstandings and functional misunderstandings of the objective reality it is in. An afterword (at Section IV(C)(3)) uses the just-unfolding derivatives problems involving JPMorgan Chase and its Chief Investment Office to illustrate both roadblocks.
   If complexities related to financial innovation are creating problems for the disclosure paradigm, technological innovation may contribute to a solution. With advances in computer and Internet technologies, it is no longer essential to rely exclusively on intermediary depictions of reality. The intermediary need not always stand between the investor and an objective reality, recounting to the investor what the intermediary sees. Figuratively, if the intermediary steps out of the way, the investor may now be able to see for himself, to download the objective reality in its full, gigabyte richness. Such “pure information” can be more granular and accurate than the intermediary’s depiction. Moreover, with this “disintermediation,” investors will have information freed from possible intermediary biases and misunderstandings embodied in the depictions. However, at the same time, disintermediation will also leave investors bereft of the benefits of an intermediary’s efforts to analyze and distill objective reality and incorporate the resulting insights in the intermediary’s depiction.
   A disclosure paradigm that relies on both the intermediary depiction model and the pure information model—and the full spectrum of disclosure models between these opposite extremes—can help investors triangulate the truth. The Article illustrates the potential of this more comprehensive approach to information in both the ABS and major bank contexts. Further, the Article outlines some possible models along the spectrum, including strategies that would generate “moderately pure” information as well as strategies involving the “simplification of reality” itself. Such an analytical framework for information may implicate issues of a substantive nature. If, for instance, a major bank is “too complex to depict” and pure information-type models are insufficient, should we consider if it is also “too complex to exist”? The Article also suggests that such a metamorphosis in the SEC disclosure paradigm, while needed, would also need to be accompanied by changes in the longstanding regulatory architecture.
   The Article also suggests, as a secondary matter, that challenges to the SEC disclosure paradigm extend even to the paradigm’s philosophy, in particular, the philosophy’s incrementalist component. Recent departures from incrementalism have been extraordinary in number and nature, even leaving aside the departures arising from the TARP program and the derivatives-related provisions of the Dodd-Frank Act. Departures such as the 2008 SEC short-selling ban illustrate not only the need to enhance SEC independence, but also the need to begin systematically considering the proper relationship between the paradigm’s traditional goals of promoting efficiency and governance and the truly rare situations in which such matters as short-term financial stability ought to also be considered. Other departures, such as interventions to address the 2010 “flash crash,” suggest the need to consider more urgently and comprehensively how complex innovations now dominating the microstructure of equity markets may conflict with the paradigm’s traditional goals.
   To remain vital, the SEC disclosure paradigm must be able to encompass in a meaningful and systematic way the vast complexities of modern markets and institutions. A fundamental and comprehensive rethinking is essential.

The above abstract is an excerpt from Professor Hu's article, and is subject to:
Copyright © 2012 by Henry T. C. Hu. All rights reserved.

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

texaslrev_admin — Mon, 25 Jun 2012 03:35:06 +0000

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Note appears in Issue 7

Prof. James D. Cox and Mr. Benjamin J.C. Baucom

Posted on June 24, 2012

90 Texas L. Rev. 1811

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

Preventing the Fire Next Time: Too Big to Fail

texaslrev_admin — Mon, 25 Jun 2012 03:25:28 +0000

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Article appears in Issue 7

Mr. H. Rodgin Cohen

Posted on June 24, 2012

90 Texas L. Rev. 1717

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

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

texaslrev_admin — Mon, 25 Jun 2012 03:37:36 +0000

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Note appears in Issue 7

Mr. David M. Becker

Posted on June 24, 2012

90 Texas L. Rev. 1811

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

Governments as Shadow Banks: The Looming Threat to Financial Stability

texaslrev_admin — Mon, 25 Jun 2012 03:28:27 +0000

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Book Review appears in Issue 7

Prof. Viral V. Acharya

Posted on June 24, 2012

90 Texas L. Rev. 1745

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

The Relevance, Role, and Reliability of Audits in the Global Economy

texaslrev_admin — Mon, 25 Jun 2012 03:39:48 +0000

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Note appears in Issue 7

Mr. James R. Doty

Posted on June 24, 2012

90 texas L. Rev. 1891

In The Relevance, Role, and Reliability of Audits in the Global Economy, James R. Doty, Chairman of the Public Company Accounting Oversight Board (PCAOB), discusses the PCAOB and its oversight work.

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

texaslrev_admin — Mon, 25 Jun 2012 03:32:04 +0000

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Book Review appears in Issue 7

Profs. Andrew W. Lo and Thomas J. Brennan

Posted on June 24, 2012

90 Texas L. Rev. 1775

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

Switching to Prophylactic Injunctions

texaslrev_admin — Wed, 23 May 2012 16:26:06 +0000

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Professor Tracy A. Thomas

Posted on June 1, 2012

90 Texas L. Rev. See Also 295

Professor Thomas responds to John Golden's argument regarding patent-infringement injunctions.

Party Rulemaking: Making Procedural Rules Through Party Choice

texaslrev_admin — Wed, 23 May 2012 15:42:24 +0000

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Article appears in Issue 6

Prof. Robert G. Bone

Posted on June 1, 2012

90 Texas L. Rev. 1329

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

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