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Restructuring Finance: Reading Group
Visiting Professor Geoffrey Miller
1 classroom credit LAW-45765A Fall

The crisis of 2008 called into question many conventional assumptions about structured finance - sophisticated market mechanisms for distributing liquidity between suppliers and users of capital. The Basel I and II capital adequacy guidelines proved ineffective either at identifying the looming problems or at managing the events as they unfolded. International institutional frameworks for ensuring financial stability, such as the Financial Stability Forum, failed to identify the risk posed by U.S. subprime mortgage securities. Credit rating agencies misjudged the riskiness of structured financial products. Central banks around the world, and especially the U.S. Federal Reserve, supplied what in retrospect appears to be an excess of credit to world financial markets between 2001 and 2007 - perhaps beguiled by an exaggerated focus on price stability. Insurance regulators failed to scrutinize credit default swaps, which while offering the functional equivalent of insurance were considered to be a non-insurance product. Asset securitization programs failed to align the incentives of agents with social interests. In light of these many failures, some have called for abolishing or stringently regulating various types of structured finance. Others argue that structured finance has offered important benefits to society by more efficiently distributing liquidity to higher-valued users, and view the calls for stringent regulation as an over-reaction to the trauma of recent events. This reading group will consider what went wrong with structured finance, and evaluate various proposals for reform to the system. Readings will be drawn from scholarly publications and working papers, research papers issued by governmental institutions and private think tanks, and opinion or analytical background pieces published in the financial press. Research papers are encouraged; alternative means of evaluation (such as reaction papers) can be considered.

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