Edited by Susan Rose-Ackerman and Peter L. Lindseth
Chapter 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 implement ‘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 1994–5, South Korea in 1997–8, and the United States in 2008–09. 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 captured 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. Power without concern for one’s immediate future leads to overconfidence and a general lack of urgency. But the toxic mix of uncertainty...
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