Category Archives: Finance

New Book: “Hedged Out: Inequality and Insecurity on Wall Street”

9780520307704Hedged Out: Megan Tobias Neely, Inequality and Insecurity on Wall Street (2022). Overview below:

A former hedge fund worker takes an ethnographic approach to Wall Street to expose who wins, who loses, and why inequality endures.

Who do you think of when you imagine a hedge fund manager? A greedy fraudster, a visionary entrepreneur, a wolf of Wall Street? These tropes capture the public imagination of a successful hedge fund manager. But behind the designer suits, helicopter commutes, and illicit pursuits are the everyday stories of people who work in the hedge fund industry—many of whom don’t realize they fall within the 1 percent that drives the divide between the richest and the rest. With Hedged Out, sociologist and former hedge fund analyst Megan Tobias Neely gives readers an outsider’s insider perspective on Wall Street and its enduring culture of inequality.

Hedged Out dives into the upper echelons of Wall Street, where elite white masculinity is the standard measure for the capacity to manage risk and insecurity. Facing an unpredictable and risky stock market, hedge fund workers protect their interests by working long hours and building tight-knit networks with people who look and behave like them. Using ethnographic vignettes and her own industry experience, Neely showcases the voices of managers and other workers to illustrate how this industry of politically mobilized elites excludes people on the basis of race, class, and gender. Neely shows how this system of elite power and privilege not only sustains itself but builds over time as the beneficiaries concentrate their resources. Hedged Out explains why the hedge fund industry generates extreme wealth, why mostly white men benefit, and why reforming Wall Street will create a more equal society.

New Article: Credit Scoring Duality

New Article: Pamela Foohey & Sara Sternberg Greene, Credit Scoring Duality, Law and Contemporary Problems, Vol. 58, 2022 Forthcoming. Abstract below:

Credit scoring is central to people’s financial growth and prosperity or financial decline and stagnation. People with a good credit score and accompanying credit report can buy opportunities to advance economically. The benefits they reap from their attractiveness to lenders and employers helps feed their future success. In contrast, people with a fair or poor credit score become stuck in cycle of high interest rates and costly loan terms, large required down payments, and denied applications for rentals, cell phone plans, and employment. Employers, service providers, lenders, and alternative financial service providers have begun to use alternative credit scoring models, which rely on data not typically tracked by the three major credit bureaus, such as income, rental history, and subscription services. Although touted as beneficial, the use of this alternative data does not necessarily make people more attractive because they perform below-average on many of the inputs. For instance, they earn lower salaries and have imperfect rental histories. Ultimately, most of the people with fair and poor scores, however calculated, find it nearly impossible to erase the blemishes that feed those scores. This essay, written as part of Two Americas symposium, details how the increasing reliance on credit scores has made this type of scoring integral to people’s access to the gates of economic citizenship. The increasing reliance on credit scoring has helped perpetuate and fuel household economic inequality. The essay concludes with a proposal for how to support people who lack the credit history or family assistance often needed to succeed in a financial world that depends on scoring.

New Issue: Wealth Inequality and Child Development: Implications for Policy and Practice

New Issue: Wealth Inequality and Child Development: Implications for Policy and Practice, 7 RSF J. Soc. Sci. (2021). List of Articles Within Below:

New Article: Fair Credit Markets: Using Household Balance Sheets to Promote Consumer Welfare

Jonathan R. Macey, Fair Credit Markets: Using Household Balance Sheets to Promote Consumer Welfare, 100 Tex. L. Rev. (forthcoming Nov. 1, 2022). Abstract below:

Access to credit can provide a path out of poverty. Improvidently granted, however, credit also can lead to financial ruin for the borrower. Strangely, the various regulatory approaches to consumer lending do not effectively distinguish between these two effects of the lending process. This Article develops a framework, based on the household balance sheet, that distinguishes between lending that is welfare enhancing for the borrower and lending that is potentially (indeed likely) ruinous, and argues that the two types of lending should be regulated in vastly different ways. 

From a balance sheet perspective, various kinds of personal loans impact borrowers in vastly different ways. Specifically, there is a difference among loans based on whether the loan proceeds are being used: (a) to make an investment (where the borrower hopes to earn a spread between the cost of the borrowing and the returns on the investment); (b) to fund capital expenditures (homes, cars, etc.); or (c) to fund current consumption (medical care, food, etc.). From a balance sheet perspective, this third type of lending is distinct. Such loans reduce wealth and are correlated with significant physical and mental health problems. In contrast, loans used to acquire capital assets (i.e. houses) are positively correlated with such socioeconomic indicators. 

Payday loans are the paradigmatic example of the use of credit to fund current consumption. Loans to fund current consumption reduce the wealth of the borrower because they create a liability on the “personal balance sheet” of the borrower, without creating any corresponding asset. The general category of loans to fund current consumption includes both loans used to fund unforeseen contingencies like emergency medical care or emergency car repairs, and those used to make routine purchases. Consistent with the stated justification for creating these lending facilities, which is to serve households and communities, the emergency lending facilities of the U.S. Federal Reserve should be made accessible to individuals facing emergency liquidity needs. 

Loans that are taken out for current consumption but are not used for emergencies also should be afforded special regulatory treatment. Lenders who make non-emergency loans for current consumption should owe fiduciary duties to their borrowers. Compliance with such duties would require not only much greater disclosure than is currently required. It also would impose a duty of suitability on lenders, which would require lenders to provide borrowers with the loan most appropriate for their needs, among other protections discussed here. These heightened duties also should be extended to borrowers when they take out a loan that increases the debt on a borrower’s balance sheet by more than 25 percent.

New Article (Forthcoming): Americans Outside the Welfare State

New Article (Forthcoming): Andrew Hammond, Americans Outside the Welfare State, Mich. L. Rev. 49 (2020).

This Article is the first scholarly work to draw attention to these discrepancies in legal status and social protection. It surveys the eligibility rules and financing structure of disability benefits, food assistance, and health insurance for low-income Americans in the states and the territories. A comprehensive account of these practices provokes questions about the tiers of citizenship built by a fragmented and devolved American state.

New Article: Nefarious Neighbors: How Living near Payday Loan Stores Affects Loan Use

New Article: Nathalie Martin et al., Nefarious Neighbors: How Living near Payday Loan Stores Affects Loan Use, 88 Miss. L.J. 41 (2019).

Like all businesses, when it comes to payday lenders, geography matters. Payday lenders and other high-cost loan providers charge between 300% to 1,000% interest on consumer loans, a fact that concerns many consumer advocates. For decades, we have known another disturbing fact – by locating storefronts in neighborhoods frequented by certain demographic groups, payday lenders and other providers of high-cost credit target people of color, low-income and moderate-income Americans, military personnel, and the elderly. What we did not know until now, however, was whether this targeting succeeds in increasing loan usage by these groups.

New Article: Reconciling Fiduciary Duty and Social Conscience

New Article: Max M. Schanzenbach & Robert H. Sitkoff, Reconciling Fiduciary Duty and Social Conscience, 72 Stan. L. Rev. 381 (2020). Abstract below:

Trustees of pensions, charities, and personal trusts invest tens of trillions of dollars of other people’s money subject to a sacred trust known in the law as fiduciary duty. Recently, these trustees have come under increasing pressure to use environmental, social, and governance (ESG) factors in making investment decisions. ESG investing is common among investors of all stripes, but many trustees have resisted its use on the grounds that doing so may violate the fiduciary duty of loyalty. Under the “sole interest rule” of trust fiduciary law, a trustee must consider only the interests of the beneficiary. Accordingly, a trustee’s use of ESG factors, if motivated by the trustee’s own sense of ethics or to obtain collateral benefits for third parties, violates the duty of loyalty. On the other hand, some academics and investment professionals have argued that ESG investing can provide superior risk-adjusted returns. On this basis, some have even argued that ESG investing is required by the fiduciary duty of prudence. Against this backdrop of uncertainty, this Article examines the law and economics of ESG investing by a trustee. We differentiate “collateral benefits” ESG from “risk-return” ESG, and we provide a balanced assessment of the theory and evidence about the possibility of persistent, enhanced returns from risk-return ESG.

We show that ESG investing is permissible under American trust fiduciary law if two conditions are satisfied: (1) the trustee reasonably concludes that ESG investing will benefit the beneficiary directly by improving risk-adjusted return; and (2) the trustee’s exclusive motive for ESG investing is to obtain this direct benefit. In light of the current theory and evidence on ESG investing, we accept that these conditions could be satisfied under the right circumstances, but we reject the claim that the duty of prudence either does or should require trustees to use ESG factors. We also consider how the duty of loyalty should apply to ESG investing by a trustee if such investing is authorized by the terms of a trust or the beneficiaries, or is consistent with a charity’s purpose, clarifying with an analogy to whether a distribution would be permissible under similar circumstances. We conclude that applying the sole interest rule (as tempered by authorization and charitable purpose) to ESG investing is normatively sound.

New Article: Reducing The Wealth Gap Through Fintech ‘Advances’ in Consumer Banking and Lending

New Article: Pamela Foohey & Nathalie Martin, Reducing The Wealth Gap Through Fintech ‘Advances’ in Consumer Banking and Lending 2021 University of Illinois Law Review, Forthcoming, UNM School of Law Research Paper No. 2020-03 (March 1, 2020). Abstract below:

Research shows that Black, Latinx, and other minorities pay more for credit and banking services, and that wealth accumulation differs starkly between their households and white households. The link between debt inequality and the wealth gap, however, remains less thoroughly explored, particularly in light of new credit products and debt-like banking services, such as early wage access and other fintech innovations. These innovations both hold the promise of reducing racial and ethnic disparities in lending and bring concerns that they may be exploited in ways that perpetuate inequality. They also come at a time when policy makers are considering how to help communities of color rebuild their wealth, presenting an opportunity to critique policy proposals. This Article leverages that opportunity by synthesizing research about the long-term costs of debt inequality on communities of color, adding an in-depth analysis of several new advances in banking and lending, and proposing several key principles for reducing debt inequality as an input to the wealth gap.

Op-Ed: The Neoliberal Looting of America

Op-Ed: Mehrsa Baradaran, The Neoliberal Looting of America, N.Y. Times (July 2, 2020) (“The private equity industry, which has led to more than 1.3 million job losses over the last decade, reveals the truth about free markets”).

Op-Ed: A Cheap, Race-Neutral Way to Close the Racial Wealth Gap

Op-Ed: Annie Lowrey, A Cheap, Race-Neutral Way to Close the Racial Wealth Gap: It’s Time to Try Baby Bonds, The Atlantic (June 29, 2020).