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Sandoval, Irma E. --- "Financial Crisis and Bailout: Legal Challenges and International Lessons from Mexico, Korea and the United States" [2010] ELECD 835; in Rose-Ackerman, Susan; Lindseth, L. Peter (eds), "Comparative Administrative Law" (Edward Elgar Publishing, 2010)

Book Title: Comparative Administrative Law

Editor(s): Rose-Ackerman, Susan; Lindseth, L. Peter

Publisher: Edward Elgar Publishing

ISBN (hard cover): 9781848446359

Section: Chapter 32

Section Title: Financial Crisis and Bailout: Legal Challenges and International Lessons from Mexico, Korea and the United States

Author(s): Sandoval, Irma E.

Number of pages: 26

Extract:

32 Financial crisis and bailout: legal challenges and
international lessons from Mexico, Korea and the
United States
Irma E. Sandoval


Financial bailouts must balance the need to keep financial institutions afloat and the
desire to aid debtors and reduce costs to taxpayers. Why do some governments imple-
ment `tough' legal strategies that pass on costs to bank shareholders, hold managers to
account and lead to direct government ownership of financial institutions, while others
follow more `permissive' strategies, often leading to serious problems of corruption and
moral hazard?
In an effort to answer this question, this chapter presents a comparative-historical
analysis of three diferent domestic responses to financial crises: Mexico in 1994­5, South
Korea in 1997­8, and the United States in 2008­09. My objective is to understand the
causes of the variation in the design of and compliance with bailout legislation. I argue
that laws tend to be tougher and more strictly complied with when the state is relatively
autonomous from the dominant distributional coalitions (independently of the nature
of those coalitions). In contrast, `corrupt legislation' (laws intentionally designed to
benefit powerful minorities) and rent-seeking will tend to predominate when the state is
captured or otherwise vulnerable to the influence of organized interest groups.
My analysis also shows that governments are particularly vulnerable to being cap-
tured when leaders are simultaneously both uncertain about their future and in full
control of policy. Uncertainty without power leads to political humility and a search for
broad-based support. ...