ECONOMIC AND REGULATORY POLICY

The Rules Of The Game

Mark Roe and Luigi Zingales

Were over-compensated and unaccountable bosses to blame for the Great Recession? Are bankers and financial managers overpaid? Which reforms must be adopted to save capitalism – above all from its practitioners?

RECENT COMMENTARIES

FEATURED COMMENTARIES

Central Bankers in the Line of Fire

Luigi Zingales Series: The Rules Of The Game

2012-02-02

The decision in January by Philipp Hildebrand to resign as Chairman of the Board of the Swiss National Bank, after a suspicious trade made by his wife, is to be welcomed. But, while Hildebrand’s resignation should serve as a precedent to be followed elsewhere, the circumstances surrounding his departure smell much worse than what caused it.... read

Comments: 0 Recommended: 0 Read: 3419

Reforming Repo Rules

Mark Roe Series: The Rules Of The Game

2011-12-21

This October, the derivatives firm MF Global filed for bankruptcy after losing more than $1 billion of its customer's funds in a number of complex "repos," or repurchase agreements. Until repos are reformed, the stability of the global financial system will remain at risk.... read

Comments: 5 Recommended: 0 Read: 11164

Elected Dirty Dealers

Luigi Zingales Series: The Rules Of The Game

2011-11-29

The US Congress, like legislatures elsewhere, effectively exempts itself from the normal rules of insider trading. But the real issue is not just insider trading – it's that Congress and other legislatures live by rules that are very different from those imposed on ordinary citizens.... read

Comments: 0 Recommended: 0 Read: 6842

Clearinghouse Over-Confidence

Mark Roe Series: The Rules Of The Game

2011-10-26

To reduce the chance that a financial meltdown like that of 2007-2008 will recur, regulators are now seeking to buttress institutions for the longer run by strengthening clearinghouses for derivatives – instruments that accelerated the implosion of AIG and others in the last financial crisis. But a clearinghouse is no panacea.... read

Comments: 2 Recommended: 0 Read: 9797

The Unexamined Crisis

Luigi Zingales Series: The Rules Of The Game

2011-09-22

Three years have now passed since the collapse of Lehman Brothers, which triggered the start of the most acute phase of the 2007-2008 financial crisis. But the financial world is no safer today, because the data needed to identify what caused the crisis have been withheld.... read

Comments: 7 Recommended: 1 Read: 16706

America’s First Debt Crisis

Mark Roe Series: The Rules Of The Game

2011-08-08

Both Europe and America should learn a lesson from US history: lost in the haze of patriotic veneration of America’s founding fathers is the fact that they created a new country during – and largely because of – a debt crisis. Might today’s crises one day be seen as a similar moment of political creativity?... read

Comments: 8 Recommended: 0 Read: 20980

The Perverse Politics of Financial Crisis

Luigi Zingales Series: The Rules Of The Game

2011-07-25

In trying to understand the pattern and timing of government interventions during a financial crisis, we should probably conclude that, to paraphrase the French philosopher Blaise Pascal, politics have incentives that economics cannot understand. Unfortunately, those incentives also often bring about crises in the first place.... read

Comments: 2 Recommended: 0 Read: 14101

How Capitalist is America?

Mark Roe Series: The Rules Of The Game

2011-06-20

If capitalism’s border is with socialism, we know why the world properly thinks of the US as strongly capitalist. But consider the extent to which capital – that is, shareholders – rules in large businesses: if a conflict arises between capital’s goals and those of managers, who wins?... read

Comments: 4 Recommended: 0 Read: 25479

The Derivatives Market’s Helpful Enemies

Luigi Zingales Series: The Rules Of The Game

2011-05-18

The launch of two European antitrust investigations into the market for credit default swaps might appear to be no more than a political vendetta against an alleged culprit behind the 2010 European sovereign-debt crisis. But the existence of political motivations does not undermine the legitimacy of the new inquiries.... read

Comments: 2 Recommended: 1 Read: 14599

Fukushima and Derivatives Meltdowns	Mark Roe
Many financial commentators have likened Japan’s nuclear catastrophe to the 2008 financial meltdown. But, while the resemblance between these crises is clear enough – each activity yields big benefits and a tiny but explosive risk – it ends where preventing their recurrence begins.... read

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Credit Default Swaps on Trial

Luigi Zingales Series: The Rules Of The Game

2010-04-19

Credit default swaps, once an esoteric product known only to a small number of sophisticated investors and specialized academics, are now widely blamed as one of the main causes of the financial crisis. That odious reputation is jeopardizing their survival, but to ban them would merely sow the seeds of the next financial bubble.... read

Comments: 2 Recommended: 0 Read: 32859

The False Promise of Global Governance Standards

Lucian Bebchuk Series: The Rules Of The Game

2009-05-07

Last year's global financial meltdown has naturally spurred interest in bringing about improvements in corporate governance, including reliable standards for evaluating its quality in publicly traded companies. But the quest for a single set of global governance standards is misguided.... read

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Toxic Tests

Lucian Bebchuk Series: The Rules Of The Game

2009-06-18

The US government is now permitting ten of America’s biggest banks to repay about $70 billion of the capital injected into them last fall, after the banks passed so-called “stress tests” and raised additional capital. But neither the stress tests, which G-8 finance ministers have now agreed to replicate, nor the ability to raise fresh capital prove that the banks are truly healthy. ... read

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Why Financial Pay Shouldn’t be Left to the Market

Lucian Bebchuk Series: The Rules Of The Game

2009-08-18

Although some financial firms are reforming how – and how much – they pay their employees, governments around the world are seriously considering regulating such firms’ compensation structures, spurring loud protests from financial bosses. But, as the recent financial crisis showed, such regulation is both justified and necessary.... read

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Europe’s Financial Alchemy

Luigi Zingales Series: The Rules Of The Game

2010-12-23

It is universally recognized that a key factor behind the financial crisis was the diffusion of collateralized debt obligations, which transformed lower-rated debt into highly rated debt. And now Europe has embraced this egregious financial alchemy, in the form of the European Financial Stability Facility.... read

Comments: 3 Recommended: 0 Read: 27554

Let the Good Times Roll Again?

Lucian Bebchuk Series: The Rules Of The Game

2009-07-15

With Goldman Sachs and other big banks once again reporting huge profits, Wall Street and the City of London are awash with rumors that salaries and bonuses this year will match their level before the financial crisis hit. But banks' return to profitability must not be allowed to disguise the need -exposed by the crisis - to reform financial executives' pay arrangements.... read

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Taming the Stock Option Game

Lucian Bebchuk and Jesse Fried Series: The Rules Of The Game

2009-11-18

Standard pay arrangements give executives broad discretion over when they sell shares and exercise options awarded to them as part of compensation plans. But such discretion is both unnecessary and counterproductive, while removing it would enhance the performance of firms – and thus value for shareholders.... read

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How Capitalist is America?

Mark Roe Series: The Rules Of The Game

2011-06-20

Comments: 4 Recommended: 0 Read: 25479

Unblocking Corporate Governance Reform

Lucian Bebchuk Series: The Rules Of The Game

2009-09-21

When they met earlier this month, G-20 finance ministers and central bankers called for global improvements in corporate governance. Such appeals are often heard, but powerful vested interests - sometimes where least expected - make it hard for governments to follow through in the absence of strong and persistent public pressure.... read

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The Economic Future of Egypt’s Revolution	Mark Roe
The question of the day regarding Egypt is whether the country will build a democratic political system or relapse into some form of autocratic regime. But an equally important question – above all for Egyptians, but also for other developing countries (and development experts) – is the economic impact of the outcome.... read
Should Bondholders be Bailed Out?	Lucian Bebchuk
The general rule of thumb that has emerged from the past year’s turmoil seems to be that when a financial institution is deemed “too big to fail,” governments should and will intervene if it gets into trouble. But a better approach may be to protect only some creditors of a bailed-out institution, and never their bondholders. ... read

AUTHOR INFO

Mark Roe

Mark Roe is a professor at Harvard Law School.

Luigi Zingales

Luigi Zingales is Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business and author of the forthcoming book A Capitalism for the People.

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