Vol. 101 Issue 2

The University of North Carolina’s football team was reeling from accusations of widespread ethical lapses, and Butch Davis, the once-celebrated squad’s coach, stood right at the center of the mounting controversy. For Davis, 2010 was a brutal year. The National Collegiate Athletic Association (NCAA) was investigating several members of his team; one of his star players was making national headlines for allegedly receiving improper benefits during trips to Miami and California; and sports fans were calling for Davis’s head. As accusations swirled, journalists descended onto the school’s Chapel Hill campus looking for proof of wrongdoing. They sought public records, but what they got instead was a five-letter acronym: FERPA.

The University contended that the records requested, which included parking tickets and Davis’s phone logs, were exempt from disclosure under the Family Educational Rights and Privacy Act (FERPA), which penalizes educational institutions that have a policy or practice of releasing “education records” to unauthorized third parties. Despite convincing evidence to the contrary, the University continued to press the position that the information sought constituted education records. The next year, following a suit to compel UNC to release the records, the presiding judge chastised the university and reminded its administrators that federal law does not allow them to cover their campus with “an invisible cloak.” The judge then ordered the release of the phone logs and the tickets.

Mandatory use of swaps clearinghouses represents the principal regulatory response to the systemic risk from credit derivatives. Scholars are divided on the merits of clearinghouses; some scholars see them as reducing systemic risk, others contend they increase it.

The case for swaps clearinghouses comes down to two related propositions: (1) clearinghouses are better able to manage risk than dealer banks in the over-the-counter derivatives market, and (2) clearinghouses are better able to absorb risk than dealer banks. Both propositions are heavily dependent on the details of clearinghouse design, the structure of the clearinghouse market, and the manner of clearinghouse regulation.

In theory, a well-designed clearinghouse boasts one significant advantage over dealer banks: capital. Clearinghouses can have deep capital structures, including callable capital from their members. Clearinghouses thus diffuse losses across their membership, thereby avoiding catastrophic losses to any single institution. If designed properly, a clearinghouse should be much more resilient to losses than an individual dealer bank. Clearinghouse owners, however, are likely to pursue lower capitalization, leaving it up to regulators to ensure sufficient capitalization.

Clearinghouses potentially encourage greater risk taking—via underpricing and reduced capital—to gain market share and increase returns on equity. Therefore, because clearinghouses also concentrate risk, they can present a dangerous increase in systemic risk relative to dealer banks. Thus, the case for clearinghouses remains tenuous and ultimately dependent upon the still-to-be- determined particulars of their regulation.

Securities regulation is under extraordinary stress today. Part of the stress is political, as we debate the right balance among investor protection, the public’s interest in a safe and stable financial system, and the needs of private enterprise for access to capital, as well as the capacity of a government agency like the Securities and Exchange Commission (SEC) to carry out its sensitive mission in a complex economy. Much is asked of regulators, but regulatory budgets and resources are severely crimped. How much securities regulation we want and how much we are willing or able to pay for have become disconnected and heavily partisan.

The stress is also technological, played out through increasingly rapid innova- tion in financial products and financial markets. There are countless examples of technology and innovation upsetting seemingly solid institutional arrange- ments. Markets are increasingly fragmented and often opaque, even as transparency has become the dominant regulatory objective; new entrants and new arrangements appear constantly, putting regulators under relentless pressure to respond. Regulators’ ability to respond well to all this takes us back to the first form of stress, so that the political and technological stresses are inextricably linked.

“Of course, the education race doesn’t end with a high school diploma. To compete, higher education must be within the reach of every American. . . . If we take these steps, if we raise expectations for every child and give them the best possible chance at an education, from the day they are born until the last job they take, we will reach the goal that I set two years ago: By the end of the decade, America will once again have the highest proportion of college graduates in the world.”

In his 2011 State of the Union Address, President Barack Obama reaffirmed an ambitious educational goal: for the United States once again to have the highest proportion of college graduates in the world. This dramatic change will require taking a 2010 postsecondary enrollment of approximately 21 million students and increasing it by fifty percent over the next four years during a time when increases in educational attainment have appeared modest at best.

One of the most controversial issues in higher education has been determin- ing the role of for-profit educational institutions. Traditional, four-year, non- profit institutions may carry the bulk of postsecondary student enrollment, but these schools cannot accommodate the dramatic influx of students that President Obama hopes to see, even with the support of two-year community colleges. Estimates suggest that for-profit educational institutions account for twelve percent of all postsecondary education enrollment, though there is some suggestion that the percentage may be even higher. For-profit educational institutions have also experienced some of the most rapid growth in postsecondary education over the last decade, suggesting that their act is here to stay.

This Article challenges the academic and policy consensus that clearing- houses adequately mitigate the risks of trading credit derivatives. The Article advances two arguments. First, scholars have devoted little attention to the risks posed by underlying assets (such as mortgage loans) that the credit derivative references and the impact that these risks have on the clearinghouse. Credit derivatives enable the economic risk of debt to be separated from the legal rights attaching to that debt. This separation affects the clearinghouse profoundly. As a contract party to each trade it processes, the clearinghouse can be saddled with the economic risk of underlying debt without the legal rights necessary to mitigate its exposure. If a clearinghouse cannot manage its risks, the consequences are invariably systemic and enormously costly to the taxpayer. Second, the Article shows that the clearinghouse’s structure ex- poses its members to complex incentives that (1) encourage risk taking by subsidizing and mutualizing default losses; (2) shift the private costs of monitor- ing to the clearinghouse and thereby allow members to underinvest in due diligence; and (3) cause members to place undue reliance on information pro- vided by third parties that is often colored by the strategic motives of the parties providing it.

This Article concludes with a proposal for a new paradigm for the clearing- house. This new model seeks to repair the consequences of separating economic risks from legal rights, which are caused by the use of the credit derivative. It also seeks to mitigate the distorted incentives affecting clearinghouse members. With reforms in place that allow for improved policing of its exposures, the clearinghouse will become a more robust institution that is better positioned to control lax underwriting standards accompanying the extension of credit.

This Article critically evaluates the relationship between constructing narra- tives and achieving factual accuracy at trials. The story model of adjudication— according to which jurors process testimony by organizing it into competing narratives—has gained wide acceptance in the descriptive work of social scientists and currency in the courtroom, but it has received little close attention from legal theorists. The Article begins with a discussion of the meaning of narrative and its function at trial. It argues that the story model is incomplete, and that “legal truth” emerges from a hybrid of narrative and other means of inquiry. As a result, trials contain opportunities to promote more systematic consideration of evidence. Second, the Article asserts that, to the extent the story model is descriptively correct with respect to the structure of juror decision making, it also gives rise to normative concerns about the tension between characteristic features of narrative and the truth-seeking aspirations of trial. Viewing trials through the lens of narrative theory brings sources of bias and error into focus and suggests reasons to increase the influence of analytic processes. The Article then appraises improvements in trial mechanics—from prosecutorial discovery obligations through appellate review of evidentiary errors—that might account for the influence of stories. For example, a fuller understanding of narrative exposes the false assumption within limiting instruc- tions that any piece of evidence exists in isolation. And to better inform how adjudicators respond to stories in the courtroom, the Article argues for modify- ing instructions in terms of their candor, explanatory content, and timing.