UCLA Law Review Volume 59, Issue 4

Liability Holding Companies

An international debate continues to unfold in banking, corporate governance, and finance on whether the capital structure of the world’s largest financial institutions is too heavily dependent on debt, too little on equity. Two of us, with coauthors, have argued elsewhere that there is no socially beneficial purpose for this overreliance on debt, and that such reliance increases the likelihood of taxpayer bailouts with their associated economic, financial, and social costs. Some academics and bankers continue to insist, however, that increased equity is costly for banks and for society. The arguments proffered in defense of these propositions contradict the most basic insights from corporate finance, and often neglect to distinguish private costs from social costs in explaining this preference for debt-heavy capital structures.

While excessive bank debt can impose overwhelming costs on the broader economy, some contend that there may be some benefits from debt for a firm’s corporate governance. In particular, some academics have argued that debt is useful because it disciplines bank management. The idea suggests that creditors with hard claims against the firm will monitor the firm in order to prevent bank management from misusing the free cash flows that the banks’ economic activities generate. If these benefits exist and are substantial, we may face a vexing tradeoff: Too much debt creates dramatic social costs, moral hazard, and systemic risk, while too little may have negative consequences for firm governance. The challenge is to find a way to optimize that tradeoff.

This Article engages that challenge and introduces a new kind of financial institution—a liability holding company (LHC)—that appropriately balances the social costs of excessive private leverage with the purported benefits for corporate governance that such leverage might create. Our proposal places an increased-liability version of the bank’s equity in a conjoined but separately controlled entity, the LHC, which also owns other assets to which the banks’ liabilities have recourse in the event of failure. The equity shares of the LHC—a holding company subject to a unique regulatory regime supervised by the Federal Reserve, similar to bank holding companies—are then traded in public markets. The LHC thus aims to eliminate or, at least, to greatly reduce the role of the government as the effective guarantor of the systemically important financial institutions (SIFIs), thereby reducing the distortions created by current implicit governmental guarantees. It additionally allows banks the benefits of two boards: an advising board that the bank managers may appoint and the monitoring board that is housed at the LHC and appointed by the LHC’s own public shareholders. This dual-board structure resolves some important issues raised in the longstanding debate about the role that corporate boards should play. We discuss in detail how this proposal would function within the present legal and regulatory environment—particularly within the contexts of bank regulation, corporate governance, and the Dodd-Frank Act—and address counterarguments and alternative proposals.

Congress in Court

Congress rarely participates in litigation about the meaning of federal law. By contrast, the executive branch joins in federal litigation on a regular basis as either a party or amicus curiae. Congress simply assumes that the president’s lawyers adequately represent its interests save in those rare instances when the two branches have a direct conflict. This Article questions that assumption.

The federal judiciary’s approach to statutory and constitutional interpretation diminishes Congress’s influence, often to the benefit of the executive branch. The rise of textualism, the canon of constitutional avoidance, the reliance on Chevron deference, and the courts’ reluctance to second-guess the executive branch on issues of national security and foreign affairs all lead to judicial decisions that favor the president’s preferences over those of Congress. Furthermore, Congress rarely challenges executive encroachment on its most basic institutional prerogatives, such as the executive’s use of intrasession recess appointments to avoid Senate confirmation. Congress remains silent even when the executive branch takes positions in ideologically charged cases that are at odds with the preference of the majority of its members. Congress’s poor track record in all these areas should come as no surprise in an adversarial system in which the executive is well represented and Congress is not.

Congress can and should change this dynamic by becoming a more active participant in federal litigation. By speaking on its own behalf in court, Congress could both protect its institutional interests against executive encroachment and open direct lines of communication with the executive and judiciary that may improve the quality of judicial decisions about the meaning of federal law.

The Cost of Price: Why and How to Get Beyond Intellectual Property Internalism

The field of intellectual property (IP) law today is focused, as the name itself advertises, on one particular institutional approach to scientific and cultural production: IP. When legal scholars explain this focus, they typically do so with reference to the virtues of price. Because price gives us a decentralized way to link social welfare to the production of information, IP is alleged to be more efficient than other approaches. The dominant mode of IP scholarship begins here and then addresses questions internal to IP law— for example, how broad or narrow should exceptions to IP rights be? But the internalism that characterizes the field of IP cannot, as I show, be justified by the value of efficiency. Economics offers us no a priori reason to assume that IP is more efficient than other possible approaches, most prominently government procurement and commons-based production. If we take the invitation that economists offer us to think external to IP, we also gain new insights about the implications of values other than efficiency for the choice between different institutional approaches to scientific and cultural production. We see, as I argue, that using price to guide scientific and cultural production—which is to say, using IP—may have costs not only for efficiency, but also for distributive justice and informational privacy. The IP approach is in tension with the value of distributive justice because reliance upon price may yield not only unjust distribution of existing information resources but also unjust production of future information resources. The IP approach is in tension with the value of information privacy because relying on price to generate information facilitates the desire, the demand, and perhaps the capacity for price discrimination. That, in turn, generates an impulse for the extensive collection of personal information. Both government procurement and commons-based production plausibly offer more promise than does IP in both distributive justice and privacy terms, and they may be no less efficient than IP. Giving full scope to all three of these values thus requires us to telescope out from the internalism that characterizes the field, and to countenance a broader role for commons-based production and government procurement. In the field of IP, I conclude, we should pay less attention to IP and more to the alternatives.

More Than Just a Formality: Instant Authorship and Copyright’s Opt-Out Future in the Digital Age

The digital age has forever changed the role of copyright in promoting the progress of science and the arts. The era of instant authorship has provided copyright to countless authors who are not motivated by copyright incentives. It has also made it impracticable for copyright to return to a system requiring author adherence to formalities, such as notice and registration. Though many intellectual property scholars today argue for “reformalizing” copyright, they fail to consider fully the consequences of shifting from the current opt-out copyright system to an opt-in regime. This Comment fills that gap by exploring how an opt-in regime would work in a world with countless authors. In particular, it details the inability of many authors to know at the time of creating an original work whether that work will be commercially successful, such that, if copyright did not automatically vest, it would be worth the time and cost to obtain protection. This Comment ultimately argues that an opt-in copyright system characterized by formalities would not scale in the era of instant authorship and that returning to such a regime would disincentivize authors who are motivated by the present copyright scheme. This Comment then concludes with a discussion of why an opt-out system that automatically grants rights to authors is supported by the different theories of the U.S. Constitution’s Copyright Clause.

Reconciling Caperton and Citizens United: When Campaign Spending Should Compel Recusal of Elected Officials

Two recent high-profile U.S. Supreme Court decisions—Caperton and Citizens United—promise to fundamentally alter the landscape of campaign finance at all levels of government. At first glance, however, their holdings appear to be in considerable tension with one another. This Comment argues that we should overcome this tension by reading the decisions with reference to the form of power exercised by the government official who stood to benefit from the campaign expenditures in question. It argues that, as a reflection of two constitutional values—the Due Process Clause’s guarantee of a neutral decisionmaker and the First Amendment’s guarantee of decisionmakers responsive to the people—we should be supportive of attempts to influence officials who exercise nonadjudicatory power with campaign expenditures, but wary of similar attempts to influence officials who exercise adjudicatory power. The Comment finishes by contending that the principal consequence of this argument should be to investigate when a nonjudicial government official exercises adjudicatory power and to determine whether or not campaign expenditures made in support of that official require disqualification.