The Massey Prize for Research in Law, Innovation, and Capital Markets was created at the University of Texas School of Law to promote the interdisciplinary research and teaching that encourages robust links between the rule of law and the capital markets.
Established in 2009 by a $2.4 million gift from John H. Massey, '66, and his wife, Elizabeth, this biennial prize for scholarship recognizes the book, article, or body of work that makes a substantial contribution to understanding the intersections of law, innovation, and capital markets. The prize carries a cash award of $50,000, and is presented at a symposium that highlights the recipients' scholarship.
On November 11, 2011, the inaugural Massey Prize was awarded to Robert E. Litan, for his remarkable body of work on entrepreneurship and economic growth. Litan is vice president for research and policy at the Ewing Marion Kauffman Foundation, a senior fellow in economic studies at the Brookings Institution, and coauthor of Good Capitalism, Bad Capitalism, and the Economics of Growth and Prosperity, a book which has been translated into ten languages and is widely used as a college text.
The award ceremony launched the Massey Prize Symposium. Several hundred people gathered to hear the keynote presentation by Diana Henriques, New York Times senior financial writer and author of The Wizard of Lies: Bernie Madoff and the Death of Trust. Her talk, "Mixed Signals: Madoff, the Meltdown, and the Media," explained how fear of the market's uncertainties and complexities drove investors to Madoff—who appeared to offer a safe haven with reliable, if unremarkable, returns. The investors, seeking safety, were betrayed by the considerable failures of the regulatory and legal structures that were supposed to protect them.
"The full disclosure regime is woefully inadequate," Henriques said. "It is based on the assumption that sunlight is the best disinfectant. And I believed in this until I began to study Bernie Madoff … investing with him was a leap of faith … but most investing is a leap of faith, because no one reads the fine print. That is the fatal flaw in the full disclosure regime."
Henriques concluded by proposing some solutions to this problem. Notably, she suggested that Washington could establish draconian penalties for rogue players—penalties so severe that Wall Street would have powerful incentives to police itself.
Charles Plott, an experimental economist at the California Institute of Technology, discussed the analysis of securities markets through a series of mathematical models he developed to explain and predict how markets move.
"Markets depend wholly on the legal rules and structures that govern them," Plott said. Using the models he developed, he illustrated the point that while markets can seem chaotic, they are in fact coherent when examined in light of their structure and architecture. When markets fail to operate it's because of their underlying architecture. Plott's conclusion was that regulators must proceed with caution, because the models demonstrate that even the smallest changes in structure can have profound consequences on how markets behave.
These were excellent introductions to the third speaker, Dr. Robert Litan. His talk focused on the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law on July 21, 2010, legislation which was passed as a direct response to the financial contraction of 2008.
Two basic conditions produced the 2008 contraction, Litan explained. First, too many banks were too highly leveraged. Second, there were too many bad mortgages packaged in misleadingly rated bond securities. Wall Street, commercial and investment banks, rating agencies, regulators, consumer—each bears a share of the blame. And it is because there are so many reasons the banking system came to a screeching halt in the fall of 2008 that Dodd-Frank is a 2,300-page bill.
Litan believes that this bill, while far from perfect, contains a number of provisions that will force Wall Street to be more careful—notably, establishing a clearinghouse for derivatives contracts. He cautioned, however, that legislators will have to make certain these entities are well capitalized. Litan's accessible, erudite discussion of this complicated legislation clearly demonstrated why he was chosen as the recipient of the inaugural Massey Prize.
The symposium concluded with a roundtable discussion on the regulation of financial markets that continued the conversation about the Dodd-Frank legislation. It was moderated by Tom Gilligan, dean and Centennial Chair in Business Education Leadership at the McCombs School of Business. Henriques, Litan, and Plott were joined by Paul Atkins, a former Securities and Exchange commissioner, and Edward S. Knight, '76, executive vice president, general counsel, and chief regulatory officer of NASDAQ.
Dean Larry Sager closed the program with his thanks to symposium participants, John and Elizabeth Massey, and to Professor Matt Spitzer, director of the Massey Prize in Law, Innovation, and Capital Markets and the Center for Law, Business, and Economics at the University of Texas, for organizing the event.
John H. Massey, a member of the UT Law School Class of 1966, has spent his professional life as a successful investor and executive in radio, television, banking, and the insurance business. Elizabeth Shatto Massey has long been active as a community volunteer. John Massey's interest in endowing this fund at his law school stems from his strong belief in the importance of the rule of law for economic stabilization and growth.
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