Combating the Financial Crisis: European and German Corporate and Securities Laws and the Case for Abolishing Sovereign Debtors' Privileges

By Kersting, Christian | Texas International Law Journal, Spring 2013 | Go to article overview

Combating the Financial Crisis: European and German Corporate and Securities Laws and the Case for Abolishing Sovereign Debtors' Privileges


Kersting, Christian, Texas International Law Journal


SUMMARY

INTRODUCTION 270

A. The Financial Crisis 271

B. Regulatory Framework 273

I. SUBPRIME CRISIS 2008 274

A. Guarantee of Savings 274

B. Corporate Law 275

1. Recapitalization Without Decision of the General Meeting 277

2. Expedited General Meeting 280

3. Eminent Domain Solution 281

4. Silent Partnership 284

5. Good Governance Requirements 285

C. Securities Law 285

D. Accounting Law 286

II. SOVEREIGN DEBT CRISIS 288

A. Background 289

B. Political, Primary, and Constitutional Law Issues 290

C. Regulatory Measures 296

1. New Regulatory Oversight System 296

2. Regulation of Short Selling and Credit Default Swaps 297

3. Regulation of Ratings and Rating Agencies 299

4. Higher Capital Requirements for Banks 301

D. Revival of the Financial Market Stabilization Fund Act 303

III. THE CASE FOR ABOLISHING SOVEREIGN DEBTORS' PRIVILEGES 304

A. Privileges Granted to Sovereign Debtors 304

1. Prospectus Requirement 304

2. Continuous Disclosure Obligations 306

3. Market Integrity (Prohibition on Insider Dealing and Market Manipulation) 308

4. Assessment of Credit Risk by Banks 311

5. Conclusion Regarding the Privileges Granted to Sovereign Debtors 311

B. Learning from the Crisis: Treating Sovereign Debtors and Private Debtors More Alike 312

1. Sovereign Debts Are Not Safer than Private Debts 312

2. Sovereign Debtors Have the Same Incentives for Opportunistic Behavior 314

3. Individual Exemptions Are Not Justified 314

a. Prospectus Requirement 314

b. Continuous Disclosure of Information 316

c. Market Integrity (Prohibition on Insider Dealing and Market Manipulation) 318

d. Assessment of Credit Risk by Banks 319

4. Need for Sovereign Immunity? 320

C. Conclusion 322

SUMMARY AND CONCLUSIONS 322

INTRODUCTION

The financial crisis is a multidimensional phenomenon. It involves private and state actors. It touches on private, public, national constitutional, European and international law. It is embedded in political visions of peace, prosperity, and solidarity that to a certain extent collide with hard economic facts and different priorities set by public opinion in different states. The complexity of the issue makes it imperative to focus on specific aspects. The first part of this Article deals primarily with the 2008 subprime crisis, the corporate law tools employed in Germany to combat it and the European context. The second part briefly looks at the ongoing sovereign debt crisis and focuses on securities law and private law measures taken by the European Union. The third part looks more closely at sovereign debtors and suggests that they be treated to a greater extent like private debtors. Other issues like institutional reforms within the European Union and especially within the euro area, i.e., the Member States of the European Union that use the euro as their currency,1 will only be dealt with colorandi causa?

A. The Financial Crisis

Due to an increase in interest rates, many homeowners defaulted on their loans, which led to a substantial number of foreclosures followed by a decline in houseprices because supply exceeded demand. In consequence, banks found the houses to be insufficient collateral for their loans, especially if they had granted non-recourse loans, and had to write off a significant portion of their receivables. Since many of the so-called subprime loans had been securitized and sold on, it was by no means transparent which banks and insurances were affected. This led to great insecurity which culminated in the collapse of the bank Lehman Brothers on September 15, 2008.3 The Lehman insolvency affected banks and insurances worldwide. Banks lost trust in each other and refused to lend each other money.4 This forced states to bailout banks and insurances which in turn proved to be a significant strain on the states' budgets, which also suffered from the effects of the economic turmoil and the costs of immense stimulus packages.

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