Article

Deregulation and the Subprime Crisis

Many popular and academic commentators identify deregulation as a cause of the 2007–2008 financial crisis. Some argue that the Gramm-Leach-Bliley Act (“GLBA”) and the Commodity Futures Modernization Act of 2000 (“CFMA”) removed barriers to risk-taking by commercial and investment banks, while others contend that these statutes limited regulators’ ability to respond to changing market conditions. A more general argument is that stringent regulation of banking from the New Deal to the late 1970s produced a quiet period in which there were no systemic banking crises, but subsequent deregulation led to crisis-prone banking.

This Article examines the deregulation hypothesis in detail and concludes that it is incorrect. The GLBA and the CFMA did not remove existing restrictions that would have prevented the principal practices implicated in the subprime crisis, but instead codified the status quo. Although the two statutes prevented regulators from banning affiliations between commercial banks and securities firms and curbing over-the-counter derivatives markets, those actions would likely not have prevented the crisis or significantly reduced its severity.

The Article further argues that the era of stable banking was the result of a benign and predictable macroeconomic environment, not regulation of deposit interest rates. That era ended with the severe inflation and interest rate volatility of the 1970s. Policymakers had to either ease restrictions on the interest rates banks could pay their depositors or force savers to lend to banks at negative real rates of return. Interest rate risk caused both bank failures and bank deregulation.

Textualism and Statutory Precedents

This Article seeks to shed light on a little-noticed trend in recent U.S. Supreme Court statutory interpretation cases: the Court’s textualist Justices—or at least some subset of them—have proved remarkably willing to abandon stare decisis and to argue in favor of overruling established statutory interpretation precedents. This is especially curious given that statutory precedents are supposed to be sacrosanct. Congress, rather than the Court, is the preferred vehicle for correcting any errors in the judicial construction of a statute, and courts are to overrule such constructions only in rare, compelling circumstances. What, then, accounts for the textualist Justices’ unabashed willingness to overrule statutory precedents in recent years? And how can this practice be reconciled with textualism’s core aims of promoting clarity and stability in the law?

This Article advances a threefold thesis. First, it argues that the textualist Justices view precedents that create a test for implementing a statute (e.g., the “motivating factor” test for Title VII violations) as different from ordinary text-parsing statutory interpretation (e.g., “labor” means “manual labor”). More specifically, textualist jurists regard what I call “implementation test” precedents as akin to common-law decision-making, rather than statutory interpretation—and seem to have created a de facto “implementation-test exception” to the heightened stare decisis protection normally afforded statutory precedents. Second, the Article links textualist Justices’ proclivity for overruling to an oft-unspoken predicate assumption of textualism—that is, that there is a singular “correct answer” to every question of statutory interpretation. This assumption may make it especially difficult for textualist jurists to accept the idea that an incorrect statutory interpretation should be left in place simply because it was first in time. Last, the Article notes that some textualist jurists see themselves as “revolutionaries,” whose function is to overthrow the old, corrupt jurisprudential order, including outmoded precedents reached through the use of illegitimate, atextual interpretive resources.

Ultimately, the Article both supports and critiques textualist Justices’ approach to statutory precedents. On the one hand, it argues that a relaxed form of stare decisis for implementation test precedents makes sense for many reasons, as long as special deference is given to implementation tests that Congress has expressly endorsed. At the same time, it rejects textualists’ attempts to overrule non-implementation test precedents based on simple disagreement with the original interpretation.

Fee-Shifting and Shareholder Litigation

A fee-shifting provision, in a corporate charter or bylaws, requires the plaintiff-shareholder to reimburse the litigation expenses of the defendant-corporation when the plaintiff is not successful in litigation. After the Delaware Supreme Court ruled that such a provision is enforceable in 2014, a number of corporations adopted fee-shifting bylaws, utilizing the directors’ right to unilaterally amend bylaws without express shareholder approval. In 2015, the Delaware legislature reversed course by prohibiting fee-shifting provisions in both charters and bylaws. This back-and-forth history has left an important question unanswered: should fee-shifting be allowed in shareholder litigation and, if so, in what form?

This Article first makes a theoretical claim that the optimal fee-shifting arrangement lies somewhere between the pro-defendant version adopted by the corporations and the no-fee-shifting version mandated by the Delaware legislature. A more balanced fee-shifting provision will do better in encouraging meritorious lawsuits while discouraging nonmeritorious ones, especially with respect to direct shareholder lawsuits. For derivative lawsuits, a balanced fee-shifting rule will impose a higher threshold on the merits than the traditional, no-fee-shifting rule. The Article also undertakes an empirical investigation of fee-shifting provisions that are used in commercial agreements, notably stock purchase agreements and bond indentures, that employ more balanced fee-shifting arrangements but with variation. Building upon both the theoretical and empirical analyses, the Article finally argues that, instead of a categorical ban, the law should allow fee-shifting provisions in charters and bylaws but subject them to more robust judicial oversight. This will better allow the corporations and shareholders to realize the screening benefits of fee-shifting while protecting shareholders’ right to bring suit.

©Virginia Law Review Association. All rights reserved.