Perspectives on Regulating Systemic Risk

This book chapter, which synthesizes several of the author’s articles, attempts to provide useful perspectives on regulating systemic risk. First, it argues that systemic shocks are inevitable. Accordingly, regulation should be designed not only to try to reduce those shocks but also to protect the financial system against their unavoidable impact. This could be done, the chapter explains, by applying chaos theory to help stabilize the financial system. The chapter then focuses on trying to prevent excessive corporate risk-taking, which is one of the leading triggers of systemic shocks and widely regarded to have been a principal cause of the financial crisis. It begins by inquiring why so few managers have been prosecuted for the excessive corporate risk-taking that led to the financial crisis. Targeting managers in their personal capacity would be a greater deterrent to excessive risk-taking than fallbacks such as imposing firm-level liability. The chapter finds, however, a host of reasons why managerial prosecution is not — and is unlikely to become — a credible deterrent. Finally, the chapter examines how else excessive risk-taking could be regulated, including by mandating a public governance duty and narrowing limited liability protection for owner-managers of shadow-banking firms

Judgment Proofing: A Rejoinder

The paper compares the Limpopo and Orange Rivers in Southern African Development Community (SADC), and the Juba and Shabelle Rivers in the Horn of Africa (HoA), which all are internationally shared basins. The aim is to identify differences and similarities between the river basins in the two regions in order to increase our knowledge and understanding of the issue of shared rivers. Relevant data were mainly collected and methods applied include document and literature review, text analysis, interviews with key professional persons during several study visits to the regions. Both the physical geography and the sectoral water uses of the rivers were presented and analyzed. Climatic similarities stand out when comparing the basins, as they are characterized by unevenly distributed rainfall patterns with great seasonal and annual variations, and the regions are water scarce. In both regions, the population is increasing, while the available water resource is decreasing. In all of the four basins, the regions are facing inevitable crisis of water scarcity. The river basins differ however primarily in terms of physical development of rivers’ water resources. The rivers in SADC have been developed for varieties of uses while the rivers in HoA are under-developed and under-utilized. The SADC rivers have established joint institutions for cross-border river cooperation while the HoA rivers have never had any type of river cooperation. Since the rivers have almost similar climatic and physical conditions, the legitimate research question in the future could be: what caused the differences in resource development and cooperation?QC 20140926</p

Intermediary Risk in a Global Economy

Worldwide financial markets increasingly depend on structures that reduce risk by interposing intermediaries between investors and the companies obligated to pay them. This reduction of risk may be offset, however, by the risk that an intermediary will fail, and its creditors then will claim against assets held by the intermediary for the benefit of investors. If the intermediary holds assets solely in a custodial capacity, this risk traditionally is addressed by agency and trust law. What is novel, however, is that intermediaries in a wide range of domestic and international dealings-including the trading of investment securities, the sale of loan participations, and securitization transactions-now hold assets in which they, as well as investors, share beneficial rights. The sharing of these rights creates significant uncertainty as to whether the intermediary\u27s creditors can look to all those assets, or merely to the intermediary\u27s interest therein, for repayment. This intermediary risk not only affects individual investors and increases transaction costs but also can be systemic: the failure of an intermediary may trigger a chain reaction of failures of investing institutions that contract with the intermediary. Moreover, the problem of intermediary risk raises innovative legal issues that blur the boundaries between commercial law and property. This Article analyzes how legal systems worldwide should respond to this risk. It concludes that a uniform rule is needed to regulate intermediary risk in cross-border commercial and financial transactions, and it examines how such a rule should be implemented in an international law context

The Future of Securitization

Securitization, a process in which firms can raise low-cost financing by efficiently allocating asset risks with investor appetite for risk, has been one of the most dominant and fastest-growing means of capital formation in the United States and the world. The subprime financial crisis, however, has revealed certain defects with how securitization is sometimes utilized. This article examines these defects and the extent they can, and should, be remedied going forward

Distorting Legal Principles

Legal principles enable society to order itself by preserving broadly based expectations. Sometimes, however, parties transact in ways that are so inconsistent with generally accepted principles as to create uncertainty or confusion that undermines the basis for reasoning afforded by the principles. Such a distortion might occur, for example, if a normally mandatory legal rule were unexpectedly treated as a default rule. This article explores the problem of distorting legal principles, initially focusing on rehypothecation, a distortion whose uncertainty and confusion contributed to the downfall of Lehman Brothers and the resulting global financial crisis. But not all distortions are, on balance, harmful; sometimes they represent a positive evolution of law. To this end, the article also seeks to construct a normative framework for determining how government lawmakers, judges, and lawyers should address distortions of legal principles

Nonlinear Collapse in the Semilinear Wave Equation in AdS

Previous studies of the semilinear wave equation in Minkowski space have shown a type of critical behavior in which large initial data collapse to singularity formation due to nonlinearities while small initial data does not. Numerical solutions in spherically symmetric Anti-de Sitter (AdS) are presented here which suggest that, in contrast, even small initial data collapse eventually. Such behavior appears analogous to the recent result of Ref. [1] that found that even weak, scalar initial data collapse gravitationally to black hole formation via a weakly turbulent instability. Furthermore, the imposition of a reflecting boundary condition in the bulk introduces a cut-off, below which initial data fails to collapse. This threshold appears to arise because of the dispersion introduced by the boundary condition.Comment: 4 pages, 5 figures, Updated with higher resolution runs; Updated with suggestions from referee and an added panel in Fig. 4; Accepted at PR

Observational Searches for Galaxies at z > 6

Although the universe at redshifts greater than six represents only the first one billion years (<10%) of cosmic time, the dense nature of the early universe led to vigorous galaxy formation and evolution activity which we are only now starting to piece together. Technological improvements have, over only the past decade, allowed large samples of galaxies at such high redshifts to be collected, providing a glimpse into the epoch of formation of the first stars and galaxies. A wide variety of observational techniques have led to the discovery of thousands of galaxy candidates at z > 6, with spectroscopically confirmed galaxies out to nearly z = 9. Using these large samples, we have begun to gain a physical insight into the processes inherent in galaxy evolution at early times. In this review, I will discuss i) the selection techniques for finding distant galaxies, including a summary of previous and ongoing ground and space-based searches, and spectroscopic followup efforts, ii) insights into galaxy evolution gleaned from measures such as the rest-frame ultraviolet luminosity function, the stellar mass function, and galaxy star-formation rates, and iii) the effect of galaxies on their surrounding environment, including the chemical enrichment of the universe, and the reionization of the intergalactic medium. Finally, I conclude with prospects for future observational study of the distant universe, using a bevy of new state-of-the-art facilities coming online over the next decade and beyond.Comment: Invited review, Accepted for publication in the Publications of the Astronomical Society of Australia. 40 pages, 10 figures, 3 table

The ‘Principles’ Paradox

This essay, prepared for a University of Cambridge conference on ‘Principles Versus Rules in Financial Regulation’, posits a new issue in that debate. Although principles-based regulation is thought to more closely achieve normative goals than rules, the extent to which that occurs can depend on the enforcement regime. A person who is subject to unpredictable liability is likely to hew to the most conservative interpretation of the principle, especially where that person would be a potential deep pocket in litigation. This creates a paradox: unless protected by a regime enabling one in good faith to exercise judgment without fear of liability, such a person will effectively act as if subject to a rule and, even worse, an unintended rule