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Contractual LandminesConventional wisdom is that the standardized boilerplate terms used in large commercial markets survive unchanged because they are an optimal solution to the contracting problems facing parties in these markets. As Smith and Warner explained, “harmful heuristics, like harmful mutations, will die out.” But an examination of a sample of current sovereign bond contracts reveals numerous instances of harmful landmines—some are deliberate changes to standard language that increase a creditor’s nonpayment risk, others are blatant drafting errors, and yet others are inapt terms that have been carelessly imported from corporate transactions. Moreover, these landmines differ from each other in important respects: deliberate changes to the standard form reflect strategic lawyering on behalf of sovereign clients, while errors that only benefit subsequent activists reflect haste in adapting precedents to new transactions. Using both quantitative data and interviews with market participants, we find that the conventional view fails to recognize the unique and distorting role that lawyers play in the drafting of standard form contracts. Systematic asymmetries in the market for the lawyers who negotiate and draft these contracts explain why real-world contracts depart from the efficient contract paradigm.
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Discretionary Investing by ‘Passive’ S&P 500 FundsSo-called passive index funds—investment funds that are designed to track a pre-specified underlying index—have become a dominant force in the investing landscape, collectively controlling over $12 trillion in assets. It is widely assumed that these funds are obligated to follow their underlying index, and that fund managers cannot, or do not, select portfolios that deviate from the index’s holdings. As a result, various critics have attacked these funds, raising concerns about their corporate governance incentives and their influence on market efficiency. We show this assumption is overly simplistic. To do so, we examine funds that track the most prominent index, the S&P 500. S&P 500 index funds do not typically commit to holding even a representative sample of the underlying index, nor do they commit to replicating the returns of that index. Managers have the legal flexibility to depart substantially from the underlying index’s holdings. We also show that these departures are commonplace: S&P 500 index funds routinely depart from the underlying index by meaningful amounts. While these departures are largest among smaller funds, they are also present among megafunds: even among the largest S&P 500 funds, holdings differed from the index by a total of between 1.7% and 7.5% in the fourth quarter of 2022. Across all S&P 500 funds, these deviations amounted to almost $61.5 billion in discretionary investment decisions. Moreover, at least within observed ranges, we find no meaningful relationship between these deviations and investment flows. In sum, S&P 500 index funds have substantial investment discretion, which they exercise to an extent not previously recognized. Our findings complicate the narrative around index funds and weaken many of the criticisms levied against them. At the same time, to the extent that investors—and particularly retail investors—fail to recognize this discretion, our findings suggest they may not be getting what they expect.
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Credit Markets and the Visible Hand: The Discount Window and the MacroeconomyIn times of crisis such as the 2008 financial crisis and the 2020 COVID-19 pandemic central banks throughout the world engage in interventions with lasting effects on financial markets and the macroeconomy, for better and worse. The negative political consequences of these interventions—fears of politicizing central banking and inflationary concerns about dramatic interventions among them—can dampen the enthusiasm for such interventions early in the face of crisis. This dynamic creates a dilemma for the US central bank, the Federal Reserve, causing it to eschew interventions beyond monetary policy until the crisis has already crashed, at which point the Fed moves into every aspect of policy throughout the economy. This Article highlights the inadequacy of this dynamic. Sole reliance on monetary policy is insufficient in the face of growing crisis, while the Fed's vast emergency lending facilities face ever stiffer political, inflationary, and equity concerns. The Article advocates instead for a new approach to macroeconomic stability, not just through monetary policy or emergency interventions, but through judicious use of the sleeping giant of Fed policy, the bank-intermediated discount window. Focusing on the problematic credit market for debtors-in-possession in the midst of bankruptcy, the Article suggests a reformed system that safeguards the Fed, supports small and medium-sized enterprises, and stabilizes the macroeconomy without exposing the system to the pockets of instability that the Fed’s overreliance on dramatic intervention can do.
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Mass Shootings and Mass Torts: New Directions in Gun Manufacturer LiabilityMass shootings are a particularly gutting form of American gun violence. The statistics are staggering to the point of numbing, with the issue’s intensity and timeliness enforced day after day, round after round. Gun manufacturers occupy a vital role in the chain of events ending with mass shooting headlines, yet they face little liability for their involvement because of a 2005 protective federal statute. This Note argues that there may be opportunity for change. Specifically, this Note offers evidence that once strong statutory protections may be weakening and presents strategies for creating previously unimaginable mass tort claims against gun manufacturers.
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Grid Reliability in the Electric EraThe United States has delegated the responsibility of keeping the lights on to a self-regulatory organization called the North American Electric Reliability Corporation (NERC). Although NERC is a crucial example of industry-led governance—and regulates in an area that is central to our economy and basic human survival—this unusual institution has received scant attention from policymakers and scholars. Such attention is overdue. To decarbonize its economy, the United States must enter a new “electric era,” transitioning many sectors to run on electricity while also transforming the electricity system itself to run largely on clean but intermittent renewable resources. These new resources demand new approaches to electric grid reliability—approaches that NERC is failing to adequately embrace. This Article traces NERC’s history, situates NERC in ongoing debates about climate change and grid reliability, and assesses the viability of reliability self-regulation in the electric era. A self-regulatory model for maintaining U.S. electric-grid reliability sufficed in prior decades, when regulated monopolies managed nearly every segment of electricity production. But the criteria that NERC once used to justify self-regulation— ’ expertise, clear accountability metrics, and public-private alignment of interests—no longer hold. The climate crisis creates a need for expertise beyond NERC’s domain, while the introduction of competition in the electricity sector blurs lines of accountability for reliability failures. NERC’s structure also perpetuates an incumbency bias at odds with public goals for the energy transition. These shifting conditions have caused to fail to keep pace with the reliability challenges of the electric era. Worse still, outdated NERC standards help entrench fossil-fuel interests by justifying electricity-market rules poorly suited to accommodate renewable resources. We therefore suggest a suite of reforms that would increase direct government oversight and accountability in electricity-reliability regulation.
