Law Session Summary in Last Summer-Part II

Financial regulation in the U.S. is quite complicated.

Bankruptcy. Most companies are subject to the default bankruptcy rules. When a company is insolvent, it goes into bankruptcy, which allows creditors to take over the company and repay themselves to the greatest possible extent. In the United States, corporate bankruptcy does not carry the same stigma as in some other countries. Here, it is considered noble to launch companies, even if you go bankrupt a number of times. Part of the reason for this is that our bankruptcy code (law) is very friendly to debtors.

Banks and insurance companies. There are two kinds of company, however, that cannot enter bankruptcy: banks and insurance companies. Instead, they enter "receivership." Receivership is similar to bankruptcy except it is usually controlled by the government, not creditors, and the government tries to pay the depositors (banks) or policyholders (insurance companies) before anyone else. The idea is that banks and insurance companies are particularly social important institutions for storing wealth, and it is important not to let them go bankrupt and completely lose all their depositors/policyholders' funds.

Investment banks ("broker-dealers"). Broker-dealers like Goldman Sachs and JP Morgan have traditionally not been regulated like banks. However, in the wake of the financial crisis, there is a big push to allow the government to put them into receivership when they are failing, instead of bankruptcy.

Mutual funds/hedge funds. Mutual funds are heavily regulated as to what they can invest in and what they must disclose. Hedge funds are largely unregulated, except that they may accept funds only from rich individuals/organizations. The professor noted that unfortunately there are many rich organizations (pension funds, for instance) that are nonetheless not very smart. Hence, there have been attempts to regulate hedge funds more strictly to make sure they don't take advantage of stupid pension funds. These efforts have largely stalled.

Securities. In the U.S., we don't really regulate securities apart from forcing companies to disclose a lot. In other words, we don't say that companies have to have a certain financial strength in order to issue securities, as some countries do. Instead, any company can issue securities, as long as they disclose all required financial information. If people want to buy the securities, they do so at their own risk.