The Dark Side of Private Equity

Banks, which are businesses that simultaneously make loans and take deposits that are available to customers on demand, are inherently unstable. The instability exists because the mismatch in the (long-term) maturity of banks’ assets and the (short term) maturity of their liabilities makes them susceptible to runs and panics that destabilize the broader economy and require bailouts on a regular basis. As such, banks essentially hold society hostage. They must be continuously propped up by the government to prevent them from collapsing and bringing the rest of the economy down with them.
There is a strong need for the transaction-account services provided by banks, and there is a strong need for the loans provided by banks. Why it is necessary to combine lending and deposit taking, within a single firm, rather than have them supplied by separate firms, such as commercial lending companies and money market mutual funds, is an issue that has received surprisingly little attention. The main argument in favor of banks is that econ-omies of scope can be achieved by combining lending and deposit taking. For example, by offering checking accounts to borrowers, banks obtain private in-formation about these borrowers that is not available to rival, non-bank lenders. This private information from depositors is thought to make banks unusually efficient lenders.
In this Article I first argue that improvements in technology and information retrieval and sharing have reduced or eliminated the traditional efficiency justification for combining deposit-taking and lending. At the same time, other improvements in technology have made banks even more fragile by making it easier for depositors to trigger runs by withdrawing their funds electronically.
Previous scholars have argued for “narrow banks” that would unbundle the provision of lending and deposit-taking. Here I observe that these scholars do not consider the rationales offered by financial economists to explain why these activities are combined. They ignore the sparse but important literature in economics and finance that models how combining lending and deposit taking generates efficiencies in the form of synergies. Thus, these scholars focus on the costs of combining lending and deposit taking without considering the benefits.
While the scholars who argue for narrow banks ignore the beneficial efficiencies associated with combining lending and deposit taking, the financial economists who argue that combining lending and deposit taking is efficient ignore the harmful costs associated with combining these two functions. In particular, combining lending and deposit taking makes banks unstable, re-quiring the creation and maintenance of a thicket of regulation to deal with that instability, which still fails to prevent periodic runs and panics. This Article concludes that when the costs associated with combining lending and deposit taking are properly considered, the arguments that traditional banking is efficient appear highly doubtful.

Fraudulent transfer law is one of the principal bulwarks of private law. Fraudulent transfer law, however, now faces a crisis. Courts have long assumed that it was easy to determine whether a debtor made a fraudulent transfer of its property. One could use traditional markers of ownership to determine whether the debtor transferred property to a confederate. But today, most assets are intangible. Transactions happen in the blink of an eye, and they take place entirely on corporate books. Reliance on simple notions of what constitutes a “transfer” of property is wholly inadequate. Understanding what it means for a debtor to transfer property for fraudulent transfer purposes requires revisiting the foundational principles of fraudulent transfer law, a task that has proved elusive because one of those foundational principles has been forgotten.

The Texas Stock Exchange’s registration as a new national securities exchange is arguably the most formidable challenge to the NYSE and Nasdaq duopoly in recent memory. TXSE has raised expectations not only among those who champion the rise of Texas as a financial center and resist the imposition of progressive norms through securities law, but also among scholars who favor competition as a solution to structural problems in the national market system (NMS) for equity trading. This Article explores the extent to which a new exchange can manage these expectations. It further considers what it means to be a “fully integrated stock exchange” in a political and judicial climate increasingly hostile to the self-regulatory model and whether an opportunity for ideological competition can restore confidence in that model.

Should insurance companies be allowed to charge different prices based on a policyholder’s likelihood of making claims? This Article challenges the common view that “risk-based pricing” in insurance presents a tradeoff be-tween the twin goals of efficiency and fairness. It argues that the most com-pelling justification for charging policyholders prices that reflect their indi-vidual risk is grounded not in efficiency, but in egalitarian distributive jus-tice. The Article begins by shifting the focus of distributive analysis from the burdens of insurance (i.e., premium costs) to the benefits of insurance, measured as the consumer surplus each participant gains from coverage. It then demonstrates that risk-based pricing distributes this surplus more equally among high-risk and low-risk insureds than does a uniform “com-munity rate.” This egalitarian perspective helps to explain and justify a puz-zling feature of American law: the surprising lack of comprehensive antidis-crimination rules for insurance compared to other sectors like housing and employment. By providing a fairness-based defense of risk-based insurance pricing, the Article reframes the debate. The central conflict is not one of effi-ciency versus fairness

Courts routinely miscalculate pre-judgment interest, thereby failing to fully restore injured parties. Because pre-judgment interest can be substantial—often rivaling or even exceeding the underlying award—errors in its calculation are important and may create distorted incentives, promote opportunistic behavior, and suppress investment and economic activity. These errors often stem from reliance on speculation to determine the costs covered by interest. This Article argues that such speculation is unnecessary. The litigation claim is identified as the asset which has burdened the injured party with risks and costs imposed by the wrongful act, eliminating the need to rely on a hypothetical asset to estimate costs. From this premise, one can derive the appropriate rate of interest required to restore the claimant to the position he or she would have occupied absent the harm. Grounded in empirical evidence and established financial principles, this framework offers a rigorous and practicable alternative to prevailing methodologies.