The Faculty Lounge

Employer Communications & Election Results

It happened.  Yesterday, a Las Vegas business owner called in to a radio program to report that he had fired 22 employees because of President Obama’s reelection.  The caller explained:  “I never tell them which way to vote. I believe in the free system we have, I believe in the right to choose who they want to be president, but  . . . I can’t wait around anymore, I have to be proactive.”

In the past several weeks, there’s been some discussion in the blogosphere over whether it is unlawful for an employer to attempt to influence employee voting choice by threatening adverse employment actions over the results of an election.  In October, billionaire casino mogul Sheldon Adelson was criticized for instructing casino managers to distribute an “issues guide” to employees that suggested that the President’s positions on taxes, health care, and energy policy would threaten jobs while Mitt Romney’s positions on these same issues would “lead to working-class prosperity.” The Koch brothers similarly distributed materials threatening Georgia Pacific employees’ job security if Obama was reelected.  

Are politically-motivated adverse employment actions ever legitimate?  Where's the line between a reasonable business decision and political motivation? How would plaintiffs ever prove that impermissible considerations went into the decision?

It remains to be seen whether mass layoffs like the one in Las Vegas will be contested in court. The law on most of these types of employer communications is inconsistent and untested, so it’s interesting to consider (and would make a great student law review topic (hint hint)).

Candy Caned (Or, The Outer Limits of Legitimate Property Security)

Two weeks ago, a man allegedly attempted to steal a Snickers™ bar from a 7-Eleven store in Brooklyn, New York. In response, three clerks accosted the man, tackled him, bit him, slammed his hand in the store’s doors, and stripped away his clothing, leaving him injured and nearly naked. The incident was captured by cameraphone video (warning: nudity, offensive language, and violence). The video shows the three store workers pushing, pulling, biting, and kicking the accused. (One can also see their faces when they realize that the incident is being recorded.) This incident has prompted a spirited discussion (at least among some New Yorkers) over whether the store clerks went “too far.” But what is “too far” in this context? Where does legitimate property security end and (illegitimate) violence begin?

Shoplifting is, admittedly, a major issue for the retail industry; theft accounts for billions of dollars in losses. And despite the economic effects of shoplifting, few shoplifters are ever caught. When shoplifters are apprehended, police intervention is not always available: Earlier this year, Dallas police announced that officers would not be dispatched for thefts totaling less than $50. Yet, while few people debate a retailer’s right to loss prevention, there is a line (in fact, a gulf) between loss prevention and brutality.

The 7-Eleven fracas has also prompted a conversation over whether the actions of the clerks were racially motivated. In recent years, New York City retailers have made news over their disparate treatment of suspected shoplifters of color. In 2006, Macy’s paid $600,000 to settle a case brought by former AG Eliot Spitzer over the retailer’s discriminatory treatment of black and Latino shoppers. In the Macy’s case, Latinos were five times more likely and blacks were three times more likely to be handcuffed than whites detained on allegations of shoplifting.

Troublingly, the 7-Eleven incident bears an eerie resemblance to another with which I have some familiarity. Imagine the scene: A girl visiting a chain grocery store allegedly puts a piece of candy into her pocket; before she leaves the store, the store manager detains her, binds her hands, and physically restrains her in view of passersby. The differences between this story and the 7-Eleven stripping are few: both involve national chains; both involve a single item of candy; both involve a retail employee responding to a suspected petty loss with disproportionate violence against a person of color. The primary difference between these incidents is that the 7-Eleven fracas occurred two weeks ago, while the situation involving the girl happened in 1930 in Jim Crow Georgia.

Charlie Mae Dowling, a twelve-year-old black girl, entered a Georgia A&P store, and picked up a single piece of candy from the floor. The store manager observed Dowling as she put the candy in her pocket; in response, he accosted her, forced her to pay for the candy, detained her, tied her hands together, physically forced her hands up above her head, and tied her to a rope suspended from the ceiling. The manager kept the girl in this position for two hours – during which time he threatened to kill her – until her mother arrived and paid the store $5 for the girl’s release. A civil jury later awarded Dowling money damages on the grounds that she had been "inhumanely assault[ed]" and "tortured" by the store manager (upheld on appeal at Great Atlantic & Pacific Tea Co. v. Dowling, 43 Ga.App. 549, 159 S.E. 609 (Ct. App. 1931)).

Research suggests that retail property security measures are differentially applied depending upon the race of the suspected shoplifter, with blacks and Latinos subject to physical restraints and criminal prosecutions more often than others. Without speculating over the motivations of these individual store clerks, I’d suggest that wherever violence is employed to protect property, we should be suspicious, as Daniel J. Sharfstein demonstrates in his brilliant article (on ssrn here) on the persuasive connection between property claims and violence against disfavored people. Sure, chasing down a thief may be an “expression of professionalism” (in Sharfstein’s words) for the store clerk, but I wonder how far a retailer should be allowed to go before liability attaches. In other words, are canings over candy ever within the bounds of legitimate property security?

Strictly Speaking, It’s Not Blaming the Victims for Our Economic Malaise, But Rather the Blaming of Those Who Support Public Policies that Help the Poor & Unemployed!

I admit to wondering if some arguments warrant any attention whatsoever, and not only because they emanate from the lofty perches of economics professors at the University of Chicago: “Casey Mulligan…claims that the continued weakness of employment in the US is due to policies introduced in 2008 and 2009, which ‘greatly enhanced the help given to the poor and unemployed — from expansion of food-stamp eligibility to enlargement of food-stamp benefits to payment of unemployment bonuses — sharply eroding (and, in some cases, fully eliminating) the incentives for workers to seek and retain jobs, and for employers to create jobs or avoid layoffs.’” This is actually a variation on an old and tired argument which rests on eminently contestable assumptions and silly but stubbornly persistent beliefs about human nature and moral psychology in the context of putative “economic efficiency” (I happen to believe these are historically associated with the Christian doctrine of ‘original sin’), well-illustrated by an infamous proposition from Charles Murray’s influential book, Losing Ground: American Social Policy, 1950-1980 (1984): “People are not inherently hard working or moral. In the absence of countervailing influences, people will avoid work and be amoral”(146).* Please see John Quiggin’s post at Crooked Timber.

* For a characteristically lucid discussion, see Robert E. Goodin’s chapter on “Efficiency” in his Reasons for Welfare: The Political Theory of the Welfare State (1988): 229-256. See too the section by Goodin, “The Morality of Incentives and Deterrence,” in David Schmidtz and Robert E. Goodin, Social Welfare and Individual Responsibility: For and Against (1998): 172-189. As to the pernicious influence of at least one strain of Christian moral psychology—that is, one of Puritan provenance—see “The new medicine for poverty,” in R.H. Tawney’s classic but somewhat neglected study Religion and the Rise of Capitalism (1926): 253-273.

The Economics of Well-Being & Unhappiness

The following (with apologies to Faculty Lounge readers who may have already read it) is my comment (with added ‘references and further reading’) to Maxine Eichner’s post at Concurring Opinions, “What Money Can’t Buy: The Massive Shift of Hours from Families to Work:”

The cornucopia of conspicuous consumption promised by capitalism and the material and psychological insecurities intrinsic to the labor market, particularly in a nation with a fragile history of organized labor and a prevailing neoliberal ideology unabashedly hostile to organized labor as such, does indeed hold out both the carrot and stick to account for an obsession with work. And in a political and cultural climate in which those on the Right are motivated to dismantle the weakest type of existing welfare regimes in the northern hemisphere (i.e., its ‘liberal’ variant, which is outperformed on any number of criteria by its corporatist and social democratic counterparts) and the corresponding economic philosophy that justifies its existence, namely, Keynesian (let alone neo-Keynesian) welfare economics, nothing should surprise us about the dominant ideologies of work and leisure (in which these two activities are conceived in pathologically polar terms such that work has precious little of the connotations of leisure as part of eudaimonia or human flourishing on the one hand, and leisure is afflicted with passivity, mind-numbing entertainment, escape from reality, or feverish hedonism on the other). It is Keynesian economics that heretofore has softened the periodic blows endemic to capitalist economic cycles: its manias, crashes, and panics, and calls to mind Ian Shapiro’s lament that

“[t]he ambiguous moral status of Keynesianism and welfare economics has always inhered in the fact that they appeal to the short-term interests of the disadvantaged (such as unemployed workers and firms on the verge of bankruptcy during recessions) by ensuring subsistence, creating employment, and expanding credit, yet these policies are geared in the medium term to sustaining the system which generates those very disadvantages—hence the ironic force of Joan Robinson’s quip that the one thing worse than being exploited is not being exploited at all.”

The majority of those politically well-positioned to lead us out of our current economic malaise into an economic world significantly different from the capitalist one remain infatuated with the “aristocracy of capital” and unperturbed by the utter commercialization or commodification of all social relations. Economic power remains hostage to the prioritization of the welfare of the wealthiest as both a necessary and sufficient condition to satisfying the general welfare and the generalizable interests of the many. Material uncertainty and psychological insecurity are part and parcel, the bone and marrow, of labor markets determined by the terms and conditions of private investment and the deleterious effects of finance capitalism. The distorted and artificial needs and the individually and socially harmful desires generated by hyper-industrialized casino capitalism finds the masses in a state in which they feel an overwhelming need to be psychologically indemnified by the possession and consumption of as many goods and services as possible, in a socio-economic world in which conspicuous consumption exists side-by-side with recalcitrant pockets and regions afflicted with inexcusable relative and absolute poverty.

Even before the latest precipitous economic downturn, there was a growing consensus among political scientists about the need to account, in Robert Lane’s words, for the “combination of growing unhappiness and depression, interpersonal and institutional distrust, and weakened companionship in advanced market democracies, in which people are, with important exceptions, reasonably well-off.” Or, as the philosopher Daniel M. Haybron notes,

“The United States is by a wide margin, among the most affluent nations in human history, and many Americans enjoy unprecedented freedom to shape their lives—for those individuals, a great success in moral and economic terms. Yet no one ever accused us of ‘knowing how to live.’ This is perhaps because, arguably, we don’t. Surveys find an overwhelming majority of Americans reporting that Americans have badly placed priorities. And there is no evidence that Americans grew any happier over the recent decades that witnessed astonishing growth in material standards of living. Self-reported happiness has remained essentially flat, while rates of suicide, depression, and other pathologies have soared.”

Ella . . . Ella

 

As I mentioned in my prior post, I spoke on Monday about “rogue trading” at a seminar hosted by the Autorregulador del Mercado del Valores de Colombia in Bogotá, Colombia.  Though this is a topic I’ve discussed before at risk management meetings and seminars, this was the first time that I’ve had sufficient information regarding the Kweku Adoboli case to include him as a part of my presentation.  As I’ve discussed before, Adoboli is the alleged UBS rogue trader currently standing trial in the UK on criminal charges stemming from unauthorized trading that first came to light in September 2011.

I should say at the outset that there are still a lot of open questions concerning the Adoboli case.  UBS has conducted (and, I believe, completed) an internal investigation and KPMG has an ongoing external investigation.  UK (FSA) and Swiss (Finma) authorities also have initiated enforcement actions, which are still in progress.  So most of what we know about the case comes from press reports regarding the trial testimony and evidence, including testimony from UBS employees and internal auditors regarding the UBS and KPMG investigations.

What we do know is that Adoboli was a trader on UBS’s four person ETF desk.  According to Adoboli, he began off-books trading in 2008 using an account nicknamed “umbrella,” which he used as a slush fund to hide profits until he needed them to cover a loss on some later, rainier, day.  As I’ll discuss in another post, such smoothing of profits and losses is a common element in other recent rogue trading cases, including Jerome Kerviel at Société Générale.

The umbrella account is the one element of the case that has finally convinced me of the possibility of an Adoboli made-for-television movie (note to networks: I’m willing to consult on the cheap in exchange for hobnobbing with movie stars . . . or just for free lodging).  I think that we’re due for another rogue trading movie.  Though Nick Leeson got a real (not TV) movie out of his ordeal -- starring Ewan McGregor, no less -- it was a real dud, which hasn’t prevented me from showing it in class about a dozen times. 

But the umbrella account has, perhaps surprisingly and most definitely entertainingly, turned out to be an important element of Adoboli’s defense.  Adoboli’s lawyer, Charles Sherrard argues that all three ETF desk traders, including Adoboli’s supervisor, John Hughes, knew about the umbrella account.  Sherrard has introduced numerous email and chat communications referencing Adoboli’s “umbrella,” “Rhianna,” and “ella ella,” in an attempt to establish that Adoboli, far from being a rogue agent, was part of a collaborative scheme in which other bank employees (again, including his direct supervisor) acquiesced. 

  Even the UBS internal investigation concluded that “there is strong evidence of collusion at local desk level,” and that the “local supervisor was aware of Mr Adoboli’s propensity to smooth the profit and loss and take unacceptably high levels of net delta [risk]”.   The traders who have testified (including Hughes) have mostly admitted their knowledge of the umbrella account, but claim to have misunderstood its purpose. 

 I’ll be back later with more to say about Adoboli and UBS, and how the facts compare to other major rogue trading incidents.  

In the meantime, make sure to watch the Rhianna video above – ella, ella comes at around 1:35.

Photo: view of Monserrate from the Fernando Botero museum, Bogotá, Colombia.

Prior related posts:

AMV Seminario De Control Interno Y Compliance: Bogotá, Colombia

Kweku Adoboli Trial Began Today

The Rogue Trading KISS

When $61bn Seemed Like Real Money

Denial: It Ain’t Just A River In Egypt

It’s The Stupid Culture

It’s The Culture, Stupid

Kerviel’s Fake Trades: Genius Or Copy Cat?

Kerviel’s Fake Trades: The Anatomy of A Cover-Up

On Warning Signs II: Follow The Money

On Warning Signs: You Can’t Get There From Here

Rogues Versus Scapegoats

Kerviel Trial Opens to Fanfare

Société Générale: Back In The Saddle Again

Jérôme Kerviel to Société Générale: Stand By Your Man

 

The Post-it Breakup: Finance Version

From the FT:

Some 100 of the Swiss lender’s [UBS] fixed income traders in London discovered at the turnstiles that their passes were no longer working when they tried to get to work on Tuesday morning. Other bankers had been contacted by phone or discovered that they might lose their jobs when their email repeatedly bounced back.

 

 

Congratulations to Al Roth!

Congratulations to Al Roth, co-winner of the 2012 Nobel Prize in economics for "the theory of stable allocations and the practice of market design."  In an earlier post, I labeled Al the ““pied piper of repugnance,” due to his work on repugnance, kidney exchange, and similar taboo trades.  His research is nearly always cited as one of the best examples of the use of sophisticated economic tools to find solutions to daunting real-world problems, from the shortage of available kidneys for transplantation to the placement of students in urban school districts to the matching of medical residents with hospitals. 

As I’ve mentioned before, one of the things that you should know about Roth (in addition to his important market design work) is that he is one of the most generous people you’ll ever meet.  Roth was at Duke in 2011 to discuss a paper, Organ Allocation Policy and the Decision to Donate, and during his one-day visit managed to present his own paper, speak to my Taboo Trades seminar about kidney matching, meet with Duke students studying the market for judicial clerks (Al’s prior work includes the study of judicial clerkship markets, with co-authors Richard Posner and Christine Jolls), provide guidance to various faculty (including me) about their own research projects, and hang out in the faculty lounge and at dinner acting like a completely normal person.  None of this really should have surprised me – Al’s support and generosity with graduate students is well known, and he had been incredibly approachable in my prior interactions with him.  But it did impress me.

Anyway, it’s always nice to see great things happen to deserving people.  So, congratulations to Friend of The Lounge, Al Roth! 

Prior related posts:

Al Roth: The Pied Piper of Repugnance?

Al Roth, Market Designer, in August Forbes

Scalping The Dalai Lama

Call for Articles: Arkansas Law Review

From my friend (and Arkansas law professor) Dustin Buehler:

The Arkansas Law Review is pleased to announce a call for papers in conjunction with the 2012 Annual Symposium to be held on Friday, November 9 in Fayetteville, Arkansas.  The topic of the symposium will focus on the mortgage foreclosure crisis.  The University of Arkansas School of Law is delighted to host Professor Dale Whitman as a Visiting Professor for the 2012-2013 academic year.  His scholarship has informed the direction of our symposium.

The first issue of Volume 66 will be devoted to the Symposium and will be published in early spring 2013. We encourage articles analyzing both the causes and effects of the crisis from a regulatory perspective and a homeowner perspective.  We would also appreciate forward-looking articles that posit solutions and preventive measures.    

Authors should submit an abstract and a cover letter to rewright@email.uark.edu.  The deadline for submissions of article proposals is Monday, October 8, 2012.  Please feel free to email Robin Wright at rewright@email.uark.edu with any questions.

Brian Tamanaha on the Rising Cost of Legal Education

Chapter 10 of Brian Tamanaha's Failing Law Schools explains why law school tuition throughout the rankings has risen to its current levels.  After reciting the usual litany of causes -- ABA accreditation standards, faculty size and workload, faculty salaries -- he makes an important point: "[W]e must be careful not to misapprehend effect for cause -- mistaking what law schools have spent their stream of tuition dollars on for the reasons tuition rose."  (p. 128)  That is, while law schools have chosen to spend their revenue in certain ways, the price of law school is set by market demand and not the accounting cost of those choices.  Market demand, in turn, is determined by willingness and ability to pay, and with the aid of student loans, law school applicants have been willing and able to pay rising tuition costs.  In short, law schools have raised tuition because they can. (p. 132)

Tamanaha next discusses why law school tuition has risen to the precise level that it has over the last two decades.  He pins the cause on elite law schools like Harvard, Yale, and Columbia that, due to their prestige and position as market leaders, charge the top tuition prices.  Once the elite law schools set their tuition, all other law schools price in relation to the market leaders depending on their relative prestige and location (i.e., proximity to desirable job markets).  Consequently, one can see law school tuition grouped in stepped intervals down the rankings.

The implication of Tamanaha's account is that a law school's tuition revenue is determined by the number of students that it can attract at the tuition it can charge given its market position.  (Overall revenue would also include income from endowment and other income sources such as continuing legal education fees.)  As noted above, however, the market does not dictate how law schools choose to spend that revenue.  And the ABA accreditation standards leave law schools much flexibility in structuring their operations, so meeting those standards still leaves much revenue to allocate at the law school's discretion.  Indeed, it would be the purest of coincidences that the cost of an ABA-approved legal education just so happens to equal the amount of revenue that a law school generates in the current market.  (That ABA accreditation standards do not drive tuition levels to their current heights is discussed here and here.)

So, law schools generate the revenue that the market allows them, and the revenue is more than needed to operate in a way that meets accreditation standards.  What, then, determines the other items on which a law school spends its tuition?  Well, to answer that question, we should ask who determines these other expenditures.  And the answer to that question is the administrators, faculty, and staff who run the law school.  In other words, the personal, professional, and institutional preferences and  incentives of those decision makers dictates the choices that shape of the modern law school.  So, the following allocations of law school revenue, all of which Tamanaha criticizes in Chapter 4, are all determined by law school administrators, faculty, and staff:

• Law school salaries
• Faculty teaching loads
• Faculty hiring
• Faculty travel and research budgets
• Faculty research stipends

Note that Tamanaha writes that he reduced or eliminated many of these items in his short stint as interim dean, and so his criticisms are backed up by his actions. (p. 7)

The above leaves me with two take aways.  First, the cost of legal education is set by the willingness and ability to pay law school tuition.  Consequently, the cost of legal education bears no necessary connection to what it would cost to provide a quality legal education in an efficient manner.  Second, those responsible for running law schools have allocated tuition revenue in ways that are open to question.  As tuition revenue decreases due to slackened demand for legal education, we will see how these same decision makers re-allocate scarce resources among competing wants and needs.  I will look forward to reading the book that tells the story of this next chapter for legal education.  But for now, I need to get back to living it.

The University Press and the Art of Just Pricing

    Think about your own personal backlist, the pieces you wrote years and years ago that haven’t been cited in a decade or more and, truth be told, didn’t get a heck of a lot of play even when they were first published.  Suppose someone contacted you out of the blue to ask for permission to reprint one of those articles.  How would you react? 

    Naturally, there would be an initial moment of Ralph Kramden-esque euphoria – “Alice, we’re sittin’ on a gold mine!”  But when you came to your senses, you would probably realize, sadly, that the market value of your old work is roughly zero, any excerpting or reprinting presents a matchless opportunity to get the work in front of new eyes, and the obvious thing to do is simply to grant permission unconditionally.  Perhaps you might ask for a nominal sum, though for my own part, I find it difficult to imagine having the courage (nerve? gall?) to do so, and in fact have never asked for money in exchange for permission.

    This is why neither of us is editor of a university press.  In the bizarre world of academic publishing, everything has a just price, set if not divinely then by the customs of our people from time out of mind.  I had the occasion to discover this recently when seeking permission to reprint short excerpts from several works in a forthcoming casebook I have written with Guy Charles, Election Law in the American Political System (Aspen).  For your enlightenment, here is the relevant correspondence between me and the editor of a well-known university press:

    Gardner:  "The amount of text I am asking to use is five paragraphs – about 800 words.  The price I have been quoted is $645 – nearly a dollar a word.  They are good words, to be sure, but that price is – and I really don’t know how to say this delicately – absurd.  We would like to excerpt from one essay in a collection . . . that is [more than 25] years old. . . .  I note that [the collection] is listed on Amazon’s best-seller list at number 2,769,366. . . .  The figure of $645 that I’ve been quoted . . . bears no relation to the value of the underlying asset.  Requests for similar works we have submitted through the Copyright Clearinghouse Center have come in priced between about $44 and $80. . . . "

    Editor: "I can appreciate that from your perspective . . . the fee appears high.  We do not, however, calculate our permission fees based on Amazon rankings, the age of the material, or the value others place on it.  Such indicators are highly subjective and changeable and would result in unjustifiable inequities.  Rather, we use a very specific fee chart . . . .  We cannot negotiate a special rate for you based on your particular circumstances, as we must treat every request equally. "

Oh, I see, your fees are established by a CHART – well, why didn’t you say so?  And who indeed would be so foolish as to take into account “the value other place on” a work?  Ridiculous!  Yes, of course you must “treat every request equally”; we wouldn’t want any authors to feel bad if their permissions went out at a price reflecting their actual value, would we? 

    No wonder university presses are in trouble!

Ryan at Miami University of Ohio

As I'm sitting here working a little on a piece with Stacey Gahagan on Obama's 1994 race and law syllabus, I have suddenly become very interested in Paul Ryan's early work.  The Cincinnati Enquirer has a not wildly searching story about Representative Ryan's time in college at Miami University of Ohio.  Rich Hart, one of his economics professors, recalls that favorite books included The Road to Serfdom (available in cartoon -- yes, cartoon -- version here) and Atlas Shrugged.  Did Ryan write a senior thesis?  I'm not seeing any evidence of it.  Also, when I heard that Ryan had been a student at Miami University I immediately wondered if he had been a student of the extraordinary Cambridge intellectual historian Michael O'Brien, who taught at Miami back in the day.  O'Brien, you may recall, wrote a sweeping two volume history of conservative ideas in the old South.  Would be most cool to know if those two people ever met and if so, what that conversation was like.

If it turns out that Ryan did write a thesis, I'll add it to my list of the early writings of the now famous.

Two other thoughts on this -- first, you may recall that I've written a little bit about George Junkin, who was briefly president at Miami (before he was pushed out for his proslavery ideas).  Also, you might enjoy Representative Ryan's self-deprecating graduation speech at Miami in 2009.  Ryan gave a shout-out to Rich Hart in the speech as well.  

Update: Completely understandably, Dr. William Richard Hart is saying nice things about his star student -- and Representative Ryan has returned the favor.  Thus, I'm interested in learning a little more about Dr. Hart's work.  His Washington University Ph.D. dissertation is titled, "The Financing Constraint and Macroeconomic Analysis."  I can't find either an abstract or the dissertation on-line.  And he signed a letter (using the name William R. Hart) with a number of other economists asking for the repeal of the ACA in January 2011.  He also signed a January 2009 letter prepared by the Cato Institute (using the name Richard Hart) opposing stimulus spending.  It reads in part:

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

Here is a link to a 20 minute podcast of Dr. Hart speaking with Detroit talkshow host "Doc Thompson" back in June 2011.  Hart speculates just before minute 2 that Ryan would like to go further but political considerations constrain him.

Most importantly, Dr. Hart has a sense of humor -- a trait so rarely found these days.  Hart's linkedin profile notes that in addition to a past job working for "North Pole at Santa Claus Inc," he is now retired.  "I sit at home and lounge around reading, writing a little, and watching races on TV. Then, every month someone sends me a big check. Ahhh, for the first time in my life I know what it is like to be a Democrat!"  His current occupation (for 3 years and 9 months is "nObama.")  I love good senses of humor and I wish I'd had the chance to serve on a faculty with Dr. Hart, because (though we'd disagree on a few things), I think we would have had a good time together.

Braucher on Law School Debt Repayment

Commercial law expert Jean Braucher has a thoughtful post on law school debt repayment over at Credit Slips, entitled "Repaying Debt for Law School:  Federal Programs Make It Doable, Not Easy."

ABA’s Class of 2011 Employment Outcomes Data Show How Rough It Is Out There

Greetings.  I’ve been away attending to an illness in my family, and it’s good to return.  Thanks to both of you for your postcards; I had forgotten how majestic the Badlands could be this time of year.

What’s new?  Well, the ABA Section on Legal Education has kept its promise to disclose more detailed data on law-school employment outcomes, and to do so earlier.  In mid-June, the ABA released employment outcome data for the Class of 2011 at accredited law schools nine months after graduation.  Two things are new about these data:  (1) They are being released nine months earlier than usual (past practice would have seen them released in March 2013); and (2) The data gathered and disclosed are more detailed than prior years’.  Among other categories, school-funded, part-time and short-term positions are broken out.  The types of jobs are categorized by type and size of employer, as well as separated according to whether the job requires a law license, is “JD Advantaged,” “Other Professional,” “Nonprofessional,” or “Undetermined.” 

There is a great deal of information here.  Let’s start examining it by seeing what we can learn about the employment value of a law degree for the law school class of 2011.  In other words, for how many 2011 law grads did their time, effort, three years’ forgone income and advancement from other work, and expenditures on tuition, fees and books result in a certification that provided them real and substantial opportunities for employment not otherwise available to them? 

There are a number of ways this question could be addressed.  Here’s how I propose to take the first cut at it: 

Dodd Frank Rulemaking Snapshot

Via Alphaville comes this snapshot, courtesy of Davis Polk, of Dodd Frank rulemaking progress (or lack thereof, depending on whether you’re a glass half full or half empty type of person).  The full Davis Polk Dodd Frank progress report is here.  

JP Morgan's Whale-sized Lobbying

As I mentioned the other day, one of the reasons that the press, pundits, and politicians are taking such pleasure in bashing JP Morgan on its trading losses is because Jamie Dimon has been one of the most vocal critics of the Volcker rule and other financial reforms, insisting that they’re unnecessary and so costly as to make American banks uncompetitive. 

And JP Morgan has also been one of the (if not the) most active institutions lobbying federal regulators for favorable Volcker rule interpretations and exemptions.  For example, in the period between Dodd-Frank signing and proposed rule publication, JPMC met with federal regulators charged with Volcker rule implementation, either alone or with other industry members, a total of 27 times – more than any other single entity, organization, or person.  (Table 8 at right shows this information, this paper has more details.)

This meeting activity continued after rule proposal, though the rate appears on first cut to have declined.  I’ll have more detailed information on that down the road, as my RAs and I finish going through the meeting logs beginning the day after the Volcker rule proposal.  JPMC also filed a substantial (65 page, not counting the appendix) comment letter complaining that the proposed Volcker rule was too restrictive and went beyond Congress's wishes as expressed in the statute, and outlining its suggestions for appropriate revisions. 

Although it can sometimes be difficult to get an accurate sense of meeting content from logs, the Federal Reserve’s are pretty good and give at least some indication of the points being discussed.  Those logs show that JP Morgan met with fed staff to argue that the proposed Volcker rule needed more narrow definitions of prohibited activity and more broadly defined exemptions, that the rule as proposed would negatively impact their own business and markets generally, and would render US banking entities uncompetitive.  On the substance, the logs show that JPMC discussed with fed officials both the proprietary trading and fund investment restrictions of the Volcker rule, as well as concerns regarding the effective date, the conformance period, the use of specific metrics to gauge Volcker rule compliance, and the hedging, market making, underwriting, and customer service exemptions of the rule, among other items. 

I should be circulating a draft of a new paper by the end of the summer that details these meeting logs and comment letters more systematically, and places them in the context of rule changes from inception to final product (whenever we finally have one).  But even from the limited preview here, you can, I think, see why reform-minded commentators are taking particular pleasure in this JP Morgan misstep.  

 

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Putting the JP Morgan Loss In (Real) Perspective

Ever since JP Morgan’s announcement of a $2 billion loss on Thursday from what might or might not be a hedging transaction, advocates for financial reform have used the news as a basis for calls to strengthen rules currently in the works, most notably the Volcker rule.  This is not the least bit surprising, given both the nature of politics and the fact that Jamie Dimon has been the most vocal opponent of such reforms, insisting that they’re unnecessary and so costly as to make American banks uncompetitive.  So it’s really a given that reformers and pundits are not going to waste an opportunity to hit back when Mr. Dimon announces losses from egregious sloppiness that are multiple times his own estimates of the costs of Volcker rule compliance. 

Perhaps just as predictably, less reform-minded commentators are now fighting back.  Notably, Jonathan Macey has a piece in today’s WSJ arguing that we should keep the JP Morgan losses in perspective.  Says Macey:

The truth is that nobody should care about J.P. Morgan's loss—nobody except J.P. Morgan stockholders and a few top executives and traders who will lose their bonuses or their jobs in the wake of this teapot tempest. The three executives with the closest ties to the losses are already out the door.

After the $2 billion in losses, J.P. Morgan still had $127 billion in equity. This means that J.P. Morgan could lose another $100 billion and creditors would still have an equity cushion that could absorb 10 times the losses that the bank suffered on this trade. . . .

Thus, far from serving as a pretext to justify still more regulation of providers of capital, J.P. Morgan's losses should be treated as further proof that markets work. J.P. Morgan and its competitors will learn from this experience and do a better job of hedging the next time. They will learn because they have to: In the long run their survival depends on it. And in the short run their jobs and bonuses depend on it.

Yes, of course the losses are small change given JP Morgan’s size and, of course, politicians are opportunists.  Moreover, I’ll even grant Macey’s basic position that markets typically work better than governments.  More to the point, I’ve been quite vocal on this blog about the limitations of the Volcker rule, along with many other Dodd Frank reforms.

But, this “let’s put the JP Morgan loss in perspective” tale making its rounds the past few days quite misstates both the concerns of the proposed Volcker rule and what is worrying about the JP Morgan losses.  The rationale behind the Volcker rule became embodied in a “too big to fail” and “no government bailouts” narrative, perhaps because those were winning spin points for Obama and because those rationales are easier for the general public to grasp.  But the real rationale of the rule was really about subsidies: depository institutions receive a variety of federal subsidies, including underpriced federal deposit insurance and liquidity assistance.  The sense of most Volcker rule proponents (or at least the more thoughtful ones) is that these federal subsidies, designed to provide stability to such institutions, should not then be leveraged into risky trading activities that bear no relation to traditional banking services.  I’ve discussed my own views on this before: the Volcker rule’s goals are noble in theory, but I’m not persuaded the rule will be at all workable.  And, as I discussed in this earlier post, the JP Morgan loss – rather than illustrating the need for the Volcker rule -- demonstrates the many hurdles to successful implementation. 

But we should be straight about the purposes of the rule. 

Yes, markets typically work.  Maybe if we allowed them to work for banking entities we wouldn’t need to worry about JP Morgan’s risk profile.  But we don’t . . . so we do.  

Quacking Like A Prop Trade

So, I’ve finally gotten out from behind the wheel of a car long enough to post something a bit meatier on the JP Morgan Whale Fail.  As I predicted in my earlier post, the case is already generating much debate about the implications for the Volcker rule, and could conceivably impact the rule’s final content. 

Jamie Dimon claimed in a conference call on Thursday afternoon that the trade, while flawed, was consistent with the Volcker rule’s proposed hedging exemption.  I wonder whether that’s really the best rhetorical tack to take.  If true, it will simply lead to calls for a stricter final rule, or renew calls for more drastic solutions, such as breaking up large, systemically important institutions. 

For example, Sheila Bair is calling for a more narrow definition of the hedging exemption to the Volcker rule, and Barney Frank (who has to be one of the funniest guys on the hill) quipped that, though Jamie Dimon has spent months complaining about the $400 million that financial reform compliance will cost JP Morgan, the firm managed to lose five times that amount in a matter of weeks “entirely without any help from the government.”

In dispute is whether or not the Whale’s positions, about which few details are known at this point, was a hedge, which would be permitted by the Volcker rule, or a proprietary trade, which would not be. Dimon’s position is that the trade was simply a poorly-designed hedge gone awry -- people make mistakes, people made them here. 

I’m skeptical of that explanation, though it could turn out to be true.  Lisa Pollack at FT Alphaville has done a great job of speculating about the nature of the trades, based on a variety of public documents and statements.  It’s a very complicated story and I won’t try to replicate it here, but you can head over to Alphaville if you’re interested in the nitty gritty.  In brief, her theory is that JP Morgan was betting that the CDX.NA.IG.9 — a credit index that was launched in 2007 — would flatten.

There seem to me to be a couple of different possibilities here.  One is that, as claimed by Dimon, the position started out as a hedge against JP Morgan’s credit exposure.  Perhaps, though intended as a pure hedge, the design of the hedge was flawed from the start.  Or perhaps the “hedge” had a bit of a directional bet built into the design.  Notice that scenario one would appear to comport with the spirit of the Volcker rule, whereas scenario two does not.

However, Dimon’s contention appears to be that the error (assuming there was one) arose later, in connection with rebalancing the hedge:

The original premise of the synthetic credit exposure was to hedge the company in a stress credit environment. Our largest exposure is credit across all forms of credit. So we do look at the fat tails that would affect this company. That was the original proposition for this portfolio.

In re-hedging the portfolio, I've already said, it was a bad strategy. It was badly executed. It became more complex. It was poorly monitored.

So that brings up two other scenarios: one, the rebalancing, while intended to maintain a pure hedging position, was flawed; or two, the rebalancing was purposely off-kilter a bit, in order to take a directional position.  Again, I’d think that one scenario meets the spirit of the Volcker rule and the other does not. 

All of this to me simply highlights the difficulties confronting effective Volcker rule implementation and enforcement, about which I’ve written here on many occasions.  Poorly constructed hedges may quack like a prop bet, but in order to effectively address the concerns underlying the Volcker rule, and other Dodd Frank reforms, regulators will have to be able to tell the difference before the firm announces a $2 billion loss.  

 

JP Morgan’s Whale

This will have to be a quick one today, but JP Morgan’s “whale fail” is going to make for some interesting news over the coming weeks.  The timing couldn’t be worse for JP Morgan and the industry generally, it seems to me.  Embattled over the Volcker rule, capital requirements, and numerous other issues, this is exactly the type of event that will lead reformers to call for a crack down, just as regulators are contemplating the final content of some important pieces of financial reform.  I’ll be back in the near future with more on this story and the implications for the Volcker rule, in particular.  In the meantime, news stories are in the WSJ, Forbes, and the FT, among others.  

As I’ve mentioned before, I’m spending quite a bit of time with the Volcker rule these days, and I’m especially interested in the implications of this news for the continuing manuevering over the final content of the rule.  According to news reports, the losses originated with the credit desk in the London unit of JP Morgan’s chief investment office, which the bank says “hedges positions and invests ‘excess deposits’.”  As more information on the exact nature of the trades emerges, I suspect the case will present a beautiful example of the hurdles to Volcker rule implementation – namely, differentiating from a regulatory perspective trades permitted by the hedging and other statutory exemptions from prohibited proprietary trading.  Surely it will impact the discourse surrounding the rule.

Back with more later . . . 

 

 

Is It All The American Lawyer’s Fault?

American Lawyer editor-in-chief Aric Press keynotes the May print issue, which contains the 25^th-anniversary report on the AmLaw 100, with an exceptionally thoughtful, candid and concise essay (here, sub. req’d).  In it, Mr. Press faces the accusation that has often been leveled at his publication over the years:  That (and this is my paraphrase) the American legal profession wouldn’t be the indecorous, avaricious mess it is today if it weren’t for American Lawyer founder Steven Brill and the price of everything/value of nothing reportage he pioneered.

To his credit, Mr. Press takes the contention seriously.  To his even greater credit, he addresses it fairly and openmindedly, in the process offering some valuable insights about how we got here and where we’re going.  Near the beginning, he comments:

Information turned loose on any environment has the power to warp it, and law firms proved as susceptible as other human enterprises. Is there more talk now of commerce and earnings in the top echelon of a profession that once didn't engage in such open banter? Yes. Does that make for a healthier marketplace? We think so. Does it mean that profit is the only value or measure by which a firm should measure itself? No. And lawyers and firms that operate as though it were have only themselves to blame for their choices—and their pernicious influence on lawyers at large.

Press goes on to catalogue a number of “disruptive” real-world market forces operating on large law firms’ clients over the last 50 years or so that would inevitably have expanded the footprint of BigLaw in the service economy, driven up the scope and price of high-end legal services, engorged the income of the lawyers that provide them, and thus ignited greater competition among law firms for both legal talent and legal business.  You can quibble with Press’s choice of factors, how he characterizes them, and their relative importance; what you can’t argue with is his conclusion that, given the evolution of our national and world economy, the competitive and venal preoccupations of the profession widely bemoaned today were and remain inevitable.  Let me say it again:  inevitable.

Press then tries to imagine what a competitive market for legal services would look like without the market information The American Lawyer purveys:

Financial information would have been no less important; it just would have been held in fewer hands. There were other economic surveys when The Am Law 100 appeared: Pricewaterhouse's was fading, and Citibank's was surging. But their results were (and are) closely held, their comparison data purposefully limited and blinded. The traders—merger-minded consultants and recruiters—would have episodic data, again closely held. And we in the press, as we chronicled firm rises and falls, would have reported financials as we found them, occasionally, anecdotally, erratically.

This is one place where I disagree.  Information wants to be free, and if the trade press hadn’t freed it, someone else would have.  The early 20^th-century regime that viewed discussion of firm finances not only as unseemly but as an unethical form of (heaven forfend) advertising was bound to fracture one way or another in a free-market economy.  History chose Bates v. Arizona and its progeny, which (oversimplifying a bit) invoked the First Amendment to prevent guild regulation of speech designed to suppress competition among guild members.

In the absence of a transformation of commercial speech doctrine that seems unlikely in the foreseeable future, information on law firm economics will remain beyond the reach of parochial professional regulation.  It’s fair to ask whether that’s a good thing, and if so for whom.  I think there is an obvious answer that, while by no means original, is not nearly widely enough recognized.

In my next post, I’ll tell you what I think that answer is.  As thanks for making it to the end of this one, I’ll foreshadow by suggesting that, while the new game is not without its costs, its winners are ultimately the clients—if they play the game sensibly.  And that, I will argue, is just as it should be.

--Bernie

Dewey, McKay & Sandel

Today’s post weaves together the collapse of Dewey & LeBoeuf, the music of Nellie McKay, and Michael Sandel’s new book, What Money Can’t Buy: The Moral Limits of Markets.

But it seems so creepy. Winning can leave you feeling sleazy. – Nellie McKay, “Beneath the Underdog.”

On May 2, the New York Times quoted one of the approximately 30 unfortunate law students that lost his summer employment with the fall of Dewey:  “A firm may look like a corporation, yes, but we’re all part of a fraternity of lawyers.”  Two days later, James Stewart’s NYT article asserts that Dewey’s demise “shatters the perception” that “law is at heart still a guild . . . a profession more than a business.” Stewart supports his premise with a former Dewey partner’s lament that firms are partnerships in name, but that attorneys have become free agents and thus destabilized the legal profession. 

The debate that Sandel seeks to further in What Money Can’t Buy seems to have an important place in the changing landscape of the legal profession.  In short, we have transformed from a market economy to a market society.  This transition has been done thoughtlessly, has resulted in negative consequences and it is time to have a robust debate about where market systems should not exist or at least have greater limitations based on moral considerations.

While I share the optimism and belief of the law student quoted above about law being something more than a business, my experiences since law school lead me to simultaneously share the sentiments of Stewart about the legal profession (to a degree) and Sandel about our national dialogue beyond law.  To be sure, money cannot be wholly extracted from the legal profession, nor do I believe it would even be a positive development, let alone a practical one.  But, the calling of justice certainly cannot be solely (or most likely predominantly) market based without losing focus on the role that the profession of law plays in society.

As for Nellie McKay, she is an eclectic, edgy, independent musician whose lyrics often seem apropos as I reflect on the events of the day.  Another great line from her song quoted above:  “I don’t get people. I don’t get the things they think are reasonable.”  Here’s her somewhat bizarre video for Beneath the Underdog.  Another song that may be of interest to the Lounge is her Song for Troy Davis.