The Faculty Lounge

Two Presidents Are Better Than One

With the economy picking up steam, President Obama’s reelection prospects have brightened considerably. The unemployment rate is dropping, manufacturing activity is rebounding (with GM the top automaker again), and the stock market is rising. According to a Yahoo! forecast, the president will win in November with 303 electoral votes.

While this is good news for Obama, it reminds us how the public assigns too much credit or blame to the White House for the country’s well-being (or lack thereof).  As Supreme Court Justice Robert Jackson wrote in 1952, the president is the “focus of public hopes and expectations. In drama, magnitude and finality his decisions so far overshadow any others that almost alone he fills the public eye and ear.” When our political system isn’t working, the public assumes it can solve national problems by electing a new leader rather than making the structural changes that are needed.

Many observers point to Congress with its gerrymandered districts as the source of dysfunction in Washington, and public approval ratings suggest that voters agree. But as I argue in a forthcoming book (Two Presidents Are Better Than One, NYU Press 2013), we can trace the defects in our national government to the decision of the founding fathers to adopt a unitary rather than plural executive.

Romney on the Faculty Lounge?

It's Saturday morning, so perhaps time for a little reflection on the week's events.  Did anyone else around this faculty lounge find Romney's statement in his Florida victory speech of any interest?

Like his colleagues in the faculty lounge who think they know better, President Obama demonizes and denigrates almost every sector of our economy.  I will make America the most attractive place in the world for entrepreneurs, for innovators, and for job creators.  And unlike the other people running for President, I know how to do that.

Update:  Barb Shelly at the Kansas City Star has the latest on reactions to Romney's reference to the faculty lounge and what it means.  She even talks about Clint Eastwood's critique of liberal law professors (and judges) in Dirty Harry.

The Pinnacle of Political Films

Thanks for another delightful visit to The Lounge. In honor of today being a rather "political" day because of the Florida Primary, I thought it might be fitting to conclude this month's visit with a post about political films. In Advocacy to Zealousness, two examples of films with political themes are Judgment at Nuremberg (1961) and All the King's Men (pictured, 1949). I recently found a group that votes for the best political films of the year, so I thought I would also raise the question here, expanding it to include all political films. What are some other great political films that should be on the list of the best political films of all time? Which films should be listed among the best of 2011?

John Farmer, Rutgers-Newark Law Dean, Gives NJ Republicans A Big Win

While his day job may be acting as dean of Rutgers-Newark School of Law, in his spare time John Farmer serves as the tie-breaker on New Jersey's bipartisan redistricting committee.  This past weekend, Farmer sided with Republicans merging two Democratic districts into one in order to trim the number of Congressional districts from 13 to 12.  The commission has 6 Democratic and 6 GOP members plus one "independent" tie-breaker selected by the 12 other members.  Farmer had been selected unanimously by the 12 partisan committee members.

Farmer, the independent member, has some experience in the political realm.  He was New Jersey's state attorney general under Governor Christine Todd Whitman and served as Senior Counsel to the 9/11 Commission.  He was also Acting Governor of New Jersey for 90 minutes on January 8, 2002.  

Historian Loose in Public?

Everyone once in a while I talk about a legal historian who is loose in public -- like me wandering around the aisles of Target (near the coal mines of Midlothian, Virginia), or more seriously James R. Stoner of LSU teaching at Glenn Beck's  University -- but right now I want to ask about an exchange between Fox News' Megyn Kelly and Newt Gingrich, who is trained as a historian.  (Watch it here.)  And what I'm particularly interested in is how he sets up a distinction between his views as a historian and those of lawyers.

Close readers of the faculty lounge may recall that Ms. Kelly is a graduate of Albany Law School (and co-author of "The Conflicting Roles of Lawyer As Director," in Litigation back in 1996). I'd thought of her as a light-weight pretty much, though perhaps that is unfair.  At least she had the starch to take on Gingrich's attack on the Supreme Court.  Kelly described the plan this way (from the transcript at the Wall Street Journal's Law Blog):

You have proposed a plan to subpoena judges to testify before Congress about controversial decisions that they make. In certain cases, you advocate impeaching judges or abolishing courts altogether. 

I hadn't heard of that idea, though I'm not following the primaries much.  In the words of my favorite librarian, "I'm bored by this."  (She was referring to Obama's acceptance speech in Denver, but that apt phrase applies to a lot of politics!) In fact, this is the first debate that I watched much of.  This is what interests me about the exchange.  Gingrich defended the plan "because the courts have become grotesquely dictatorial, far too powerful, and I think, frankly, arrogant in their misreading of the American people."  He continued:

There’s an entire paper at newt.org — I’ve been working on this project since 2002, when the Ninth Circuit Court said that “one nation under God” is unconstitutional in the Pledge of Allegiance. And I decided, if you had judges who were so radically anti-American that they thought “one nation under God” was wrong, they shouldn’t be on the court. ....  I taught a short course in this at the University of Georgia Law School. I testified in front of sitting Supreme Court justices at Georgetown Law School. And I warned them: You keep attacking the core base of American exceptionalism, and you are going to find an uprising against you which will rebalance the judiciary.  We have a balance of three branches. We do not have a judicial dictatorship in this country. And that’s what the Federalist papers promised us. And I would — just like Jefferson, Jackson, Lincoln and FDR — I would be prepared to take on the judiciary if, in fact, it did not restrict itself in what it was doing.

This is to me the most interesting part of the exchange.  Kelly says that the people who criticized Gingrich's plan "are conservative former attorneys generals who have criticized the plan, as I say, dangerous, ridiculous, outrageous, totally irresponsible."  The exchange continued:

Gingrich: "I’d ask, first of all, have they studied Jefferson, who in 1802 abolished 18 out of 35 federal judges? ....

Kelly: Something that was highly criticized.

Gingrich: Not by anybody in power in 1802.

Shouldn't the immediate response by Kelly be something along the lines of, but I wouldn't expect the people in power to criticize the plans of those in power.  But instead, Gingrich continued talking and attacked both lawyers and (what a surprise) law schools!

Jefferson himself was asked, is the Supreme Court supreme? And he said, that is absurd. That would be an oligarchy.  Lincoln repudiates the Dred Scott decision in his first inaugural address in 1861 and says, no nine people can make law in this country.  That would be the end of our freedom.  So I would suggest to you, actually as a historian, I may understand this better than lawyers.  And as lawyers those two attorneys general are behaving exactly like law schools, which have overly empowered lawyers to think that they can dictate to the rest of us.

A couple of observations here.  First, I find it important that Gingrich is setting up historians (or maybe history) as a better example of how to interpret separation of powers than generations of legal precedent.  Second, Gingrich's examples are really selective and I should think not the best for how to approach separation of powers.  Third, I love the way thath law schools are credited (or perhaps Gingrich would say charged) with establishing American culture.  I didn't realize we had as much power as Gingrich thinks we do.

Finally, this political focus on constitutional interpretation outside of the Supreme Court may help stimulate more research on public ideas about constitutionalism in US history.  At least I hope so.  I especially hope that it inspires work on how public ideas about constitutionalism shaped the secession movement.   This is what I spend much of my time writing about these days and it seems like no one cares much about the public interpretations of the Constitution in the pre-Civil War era.  But maybe there's hope!

Now that I'm reading the Gingrich white paper on this, I see that it cites Larry Kramer's The People Themselves!  He quotes Kramer's discussion of the 1958 decision in Cooper v. Aaron for the proposition that "The lawyer class began a grand-scale power grab with the Warren Court in the 1950s." (at page 8).  At pages 23-24, in the section on "Reestablishing a Balance of Power Today," he says this about law schools:

The majority of lawyers are being educated in law schools that primarily teach an all powerful model of the federal judiciary and later become members of legal professional associations that largely embrace this philosophy.  As the executive and legislative branches vigorously reject judicial supremacy, emphasize the importance of originalism in constitutional interpretation, and reassert their constitutional powers to check and balance the judicial branch, we can expect law schools to take notice.  It is important for every law student to explore the historical legal and non-legal materials to understand why judicial supremacy constitutes a fundamental violation of American constitutional thinking, a radical departure from the constitutional system that the Founding Fathers invented, and a dangerous model for the survival of a free society.  Legal educators should allow for a robust dialogue in the law schools about the importance both intellectually and for the health of the country to return to a more modest sense of the role of the judiciary.

In fact, a bunch of legal historians appear in the white paper -- Appendix D has a bibliography of "Relevant Source Materials on the topic of Judicial Supremacy and Executive and Legislative Powers to Check and Balance the Judicial Branch."  Among the scholars cited there are Erwin Chemerinsky, Saul Cornell, Don Fehrenbacher, Robert George, Mark Graber, Daniel Hamilton, Morton Horwitz, Daniel Hulsebosch, Frank Michelman, Chris Tomlins, Mark Tushnet, Robin West, and Gordon Wood.

Update as of December 18: At the end of the debate, Ms. Kelly commented something to the effect of "Gingrich provided a strong response on the judiciary, which would play well with the base, but might prove a problem for him going forward in the general election."  That seems like it is already the case; yesterday's LA Times has a story that discusses Gingrich's suggestion (in the white paper linked to above) that in some cases he might ignore a Supreme Court ruling.

EIC Barack Obama On CNN...20 Years Ago

For your weekend viewing...vintage footage of then-Harvard Law Review EIC talking about Charles Hamilton Houston on a CNN Black History Minute. 

Do District Attorneys Campaign in the Courtroom?

Some thoughts here.

Singing to Prevent Housing Foreclosures: "Occupy the Auctions"

 

On Thursday, October 13, 2011, protesters interrupted foreclosure proceedings at the New York State Supreme Court (a state trial court) in Brooklyn, New York.  The video above captures the action and the protestors singing:

Mrs. Auctioneer, all the people here

we're asking you to hold off the sales right now.

We're going to survive but we don't know how.

The protests are organized by Organizing For Occupation.  Here's the group's self-description:  

Organizing for Occupation (O4O) is a group of New York City residents from the activist, academic, religious, homeless, arts, and progressive legal communities who have come together to respond to the housing crisis. We firmly believe that safe and affordable housing is a human right, and that the government and the private sector have failed to meaningfully address this crisis. 

For more info, see the website here.

According to the New York Times (here), nine people were arrested and charged with disorderly conduct.

More protests are planned for future dates.

Live Blogging "Critical Perspectives on Tax Policy" Conference at Emory Law - Part 2

The first afternoon session of the "Critical Perspectives on Tax Policy" featured these presentations:

• Karie Davis-Nozemack (Business, Georgia Tech), "Collision Course: EITC and the Rise of IRS Correspondence Examinations"
• Lisa Philipps (Osgoode Hall), "Canada Revenue as Social Service Agency? Equality Issues in the Administration of Tax-Delivered Benefits"
• Ajay Mehrotra, "The Old Fiscal Order: Trouble with Tariffs and the Faltering Property Tax."

The second afternoon session (currently underway) has three speakers:

• Samuel Brunson (Loyola-Chicago), "Polygamy and Tax: Married Filing Jointly (and Severally?)"
• David Herzig (Valparaiso), "A Call for Action: DOMA and the Internal Revenue Service"
• Marjorie Kornhauser (Arizona State), "Taxing Bachelors."

So far, we've had lots of good discussions about procedural due process in the federal income tax context and what it means to say that the tax law is "political."  We'll have some off-the-grid conversations into the evening.  

Reforming Financial Reform? The Wrap-Up

Many thanks to our guest bloggers Cristie Ford, Erik Gerding, Brett McDonnell, Saule Omarova, and Dan Schwarcz for what has been a really amazing two day on-line forum.  I’ve greatly benefitted from hearing their views on financial reform, and from the feedback on my own thoughts.

I notice that the original forum title had a question mark at the end – i.e. does financial reform need reforming?  I ‘d say that our guests mostly feel the answer to that is yes.  There was less agreement on exactly the nature of needed reforms.

Erik proposed some institutional redesign, soft countercyclical devices . . . and romance. There was some debate, prompted by Dan, about whether the political economy of financial regulation is fundamentally different from that of other issue areas. Cristie and Erik had some debate on the possibility of “making capture work,” with Cristie rejecting cozy club government in favor of a compliance-oriented approach that structurally forces transparency and broader participation. Saule proposes the statutory creation of a systemic risk PIG to impose structural checks on capture.  And Brett proposed (and argued that Dodd-Frank already contained) a variety of smoothing mechanisms to help address procyclical patterns of financial regulation.

I didn’t propose any solutions, and simply remained content to provide some hard evidence about the activity of relevant actors – including industry, public interest groups, and the general public – with respect to the Volcker rule. I do continue to think that the answer has to begin with Congress.  I complained from the start that some pieces of Dodd-Frank looked a lot to me like legislators seeking cover, with federal courts and agencies as the natural scapegoats if things went wrong down the road.  

A sincere thanks to all of our guest bloggers for this forum! I couldn’t have asked for a better group to have this discussion with.

Is There An Elizabeth Warren of Systemic Risk?

And would that be a good thing? 

This is a bit of a tongue-in-cheek way, I suppose, of trying to tie together some of the preceding posts and pose some follow-up questions for our guest bloggers.  Let me start with the first question, does systemic risk regulation need its own version of Elizabeth Warren? 

Now obviously Elizabeth Warren is a controversial figure, with many who worship her and others who seem to think she’s one step away from the devil.  So, I don’t intend this to be a debate about her personal merits.  Instead, what I’m trying to get at (granted, through a title designed to entice and/or inflame readers) are some of the points made by our guests here today. 

For example, in Saule’s very interesting new paper, which she discussed earlier today, she urges the creation of an independent government instrumentality staffed primarily by academics, public figures, and representatives of consumer and other public interest groups.  Similarly, Brett (building on an article with Dan) argues that the Office of Financial Research could become a regulatory contrarian – “an independent office that draws upon academics and does not itself make rules, it may be less subject to capture and more independent in its thinking.”

Although both concede that these proposals still leave many open questions, both, it seems to me, rely on the notion that a structural change of this sort can impact the political balance of financial reform.  That could be right, and one of the points I hope I’ve highlighted through my posts on the Volcker rule is the disproportionate investment by the affected industry in influencing regulatory outcomes. Still, though, some potential hurdles and concerns come to mind, some of which have already been thoughtfully raised by Cristie. 

For example, Cristie worries, to oversimplify her nuanced critique a bit, that regulators were not inclined to listen to real contrarians during the lead-up to the financial crisis.  I also notice that in his post Dan says:

empowered public interest groups do not simply provide regulators with additional information and perspective; they marry that information and perspective with the threat of political pressure through the use of media and public outreach.

So, I take it that Dan’s response to Cristie, at least in part, would be that successful contrarians would need to have, not only structural access, but also a type of grass-rootsy political power. Which, I have to say, brings me back to thinking about Elizabeth Warren.

Now, Paul Volcker was clearly an important public figure behind the Volcker rule. And folks like Simon Johnson and Nouriel Roubini were highly engaged in public advocacy and media play on systemic risk issues as well.  But I just haven’t noticed your average Joe or Jane in line at the grocery store talking about Paul Volcker or Simon Johnson in the same way they seem to talk about Elizabeth Warren.  Even the constant attention to Roubini’s sexual exploits hasn’t seemed to make him quite the household name that Warren has become. Does the public just find her more interesting?

Or is it because, once we move away from issues more directly related to consumers – or that seem to especially prompt their ire, such as compensation issues – it’s just not as easy to get the public engaged?  And if that’s so, what does that mean, if anything, for these types of contrarian and tripartism proposals?  Because, in addition to the incentive issues that Erik suggests make financial institution regulation different from other types of regulation, there just seems to me to be a problem with public salience and information levels, that I have to admit, is troublesome on many fronts. 

One of the things that surprised me about the Volcker rule letters was the amount of public anger they evidenced – people are really pissed off out there.  But it’s a rather ill-defined and amorphous sense of anger.  Rarely was there any indication that the writer understood, or cared, what proprietary or fund investment is, much less the ways in which FSOC interpretation of the Volcker rule’s complex and ambiguous provisions might govern such activities.  This suggests, not only the opportunity for principal-agent problems vis-à-vis elected officials, but potentially with any empowered public interest groups as well. 

That’s why, as I mentioned in my first post today, the normative implications to be drawn from this conversation will, I think, be in the eye of the beholder. Those who perceive elected officials as overly responsive to public sentiment will, I suspect, view federal courts or, in this case, agencies, as the gatekeepers against panic-driven regulation.  And the last thing they probably want is an Elizabeth Warren of systemic risk riling up the public about issues it doesn’t understand.  System critics concerned with transparency and accountability, however, will likely be troubled by the disproportionate (and relatively unified when it comes to externalizing costs, to come back to Erik again) influence of regulated financial institutions that we’ve been discussing here today, even when the regulation at issue is of questionable utility. 

The Sausage Making of Financial Reform, II

In my last post, I was discussing the public comments on the Volcker rule.  As noted, 7316 of those comments are a virtually identical form letter.  I outline the possible implications of that in the paper.  But the remaining 515 comments submitted by private individuals that were not traceable to a form letter also yield a useful comparison to letters from other groups.  

Table 2 breaks down the comments by group and word count.  Figure 2 displays this information graphically, showing the distribution of word count by: private individual not using the PIG form (in red), private individuals using the form (in blue), and all others (in green). (You can click on any image to enlarge).

There are three spikes in the data, at less than 50 words, at 200-249 words, and at 250-299 words (note the larger sizes of the two bins at far right, representing comments with 350-799 words and those with 800 words or more).  The spikes at 200-249 words and 250-299 words represent the PIG form letter and its slight variations (in it’s original form that letter is 244 words.) The spike at comments of less than 50 words represents only letters from private individuals. 

The shortest comment -- only a single word, “regulate” -- was submitted by a private individual.   The longest comment, received from SIFMA (the Securities Industry and Financial Markets Association) measures 19,500 words.   The industry and trade group comments are, as a general rule, lengthy, contain cogent arguments on behalf of a generally narrow interpretation of the Volcker Rule’s scope of prohibited activity, advance detailed legal arguments relying on numerous statutes and cases, reference the Dodd-Frank legislative history, and often contain thorough empirical data. They are meticulously argued and carefully drafted. 

In contrast, comments from the general public tend to be short -- the average word count, excluding the PIG form letters, is only 86, and roughly half of the comments, again excluding those using the PIG form letter, are less than 50 words.  In addition, these public comments by and large lack specific suggestions or recommendations for interpreting and implementing the Volcker Rule, generally urge that the rule be “enforced” or “adopted,” contain many grammatical, punctuation, and typographical errors, and express extreme anger at the banks and, often, at the political system as well.

The meeting logs also give some insight into the work of Dodd-Frank statutory interpretation and implementation that goes on behind closed doors.  I break down those logs in great detail in the paper, but will give a brief overview here. 

Whereas financial industry representatives met with federal agencies on the Volcker Rule a total of 265 times, meetings with entities or groups that might reasonably be expected to act as a counterweight to industry representatives in terms of the information provided and the types of interpretations pressed numbered only 18. This is roughly the same number of times that a single financial institution -- JP Morgan Chase – met with federal agencies on Volcker Rule interpretation and implementation.  As shown by Table 8 and Figure 3, financial institutions, financial industry trade groups, and law firms representing such institutions and trade groups collectively accounted for 93.64% of all federal agency Volcker rule meetings, whereas public interest, labor, research, and advocacy groups and other persons and organizations accounted for only 6.36%.  Moreover, the quality of meetings with financial institution representatives exceeds that of other agency contacts on several measures.

I’ll be back again to talk about some of the implications of this research, and to relate it to the papers and posts of our other forum participants.  

 

The Sausage Making of Financial Reform

Does financial reform need reforming?  How would we even know? What mode of analysis might yield insight into this question?  

Two possibilities come readily to mind.  One, which I will call the “sausage approach,” analyzes output by examining the merits of particular financial reform provisions.  If the sausage -- the financial reform -- appears unwise on the merits, then one might be able to infer procedural problems of financial reform from this conclusion.  For example, a provision that appears overly favorable to the big banks might lend itself to an inference that the legislative outcome is the result of special interest influence.  In contrast, one that appears to impose costs in excess of its benefits might be attributed to pandering by elected officials. 

The other method, which I will call the “sausage-making approach,” examines inputs by observing the process of financial reform more directly. Do industry groups appear to be attempting to influence outcomes?  At what stage of the lawmaking process?  Do lawmakers appear receptive to those overtures?  Is there a meaningful counterbalance to influential industry voices?  What is the public salience of the reform?  Does the public appear interested? Involved?  Are relevant public interest groups (PIGs) engaged in the issue? 

Most Dodd-Frank analyses have so far been of the sausage variety.  Numerous books and articles substantively critique Dodd-Frank against alternative statutory schemes, debating which course is wiser.  Though these analyses are essential contributions to the literature, the substantive method has a serious drawback: there is little agreement on what the ideal response to the financial crisis should have been.  Moreover, the Dodd-Frank sausage is not yet finished and will not be for many years to come.  Given that so much of the substantive effect of Dodd-Frank depends on still-pending regulatory rulemaking, the sausage method is especially unsatisfying at this stage of Dodd-Frank’s existence. 

In a new working paper, Don’t “Screw Joe the Plummer”: The Sausage Making of Financial Reform, which I just barely managed to get up on SSRN before our forum launched, I direct the sausage-making approach at section 619 of the Dodd-Frank Act, popularly known as the Volcker rule and frequently touted as one of the most important pieces of modern financial reform.  Although the sausage-making approach has some limits, which I’ll come back to later, it has the advantage of neutrality on the Volcker rule’s merits.  In other words, the Volcker rule makes for an interesting financial reform case study, not because it is wise – that may or may not be the case.  Rather, the congressional maneuvering that accompanied the Volcker rule’s passage and the importance of proprietary and fund activities to banks’ bottom line signaled that the provision had the potential to illuminate questions of whose voice gets heard on a major issue of financial reform as the sausage is really getting made.

As part of this examination of Dodd-Frank sausage making, I analyze the roughly 8000 public comment letters received by FSOC on the Volcker rule and the meeting logs of the Federal Reserve, the CFTC, the SEC, and the FDIC. This analysis reveals a surprising level of public activity, but also a stark difference in investment by financial institutions versus all other actors in influencing Volcker rule implementation.  As I will come back to in later posts, the normative implications to be drawn from that analysis are in the eye of the beholder, and I expect that other forum participants, particularly Brett and Cristie, will be addressing this normative question in a more robust way than my sausage-making method allows.

But, nonetheless, there is much understanding to be gained from a sausage-making examination of the Volcker rule. For example, the public comment letter analysis reveals that a consortium of PIGs managed to generate a surprising level of Volcker rule interest among private citizens, who sent in letters by the thousands.  But, 7316 (or 91%) of those comments are a virtually identical form letter. 

The comment letters from private citizens that were not a form letter reveal a great deal – people are angry about the economy, about the plight of working Americans, and about the politicians who allowed the financial crisis to develop.  The banks are “fools,” hogs,” and “criminals” out to “screw joe the plummer [sic]” and should be “put in jail,” receiving no more “bailouts with citizens’ money.” Political officials fare little better.

Presumably these comments reveal something to FSOC, both about public attitudes and about the power of the relevant PIGs on this issue.  But at the same time, as I will discuss in more detail in my next post, the contrast with the meticulously drafted, argued, and researched – though far less numerous -- letters from the financial industry and its representatives is stark.  In comparison, the citizen letters are short and provide little evidence that citizen commenters even understand, or care, what proprietary or fund investment is, much less the ways in which FSOC interpretation of the Volcker rule’s complex and ambiguous provisions might govern such activities. 

"Reforming Financial Reform" Starts Today!

As I mentioned previously, we’ll be hosting an on-line forum, Reforming Financial Reform?, here at the Lounge today and tomorrow. I am very excited about this discussion and hope that you will enjoy it too.  This is a great group of scholars eager to share new ideas and research with Lounge readers.  I’ve already benefitted from the email exchanges we’ve had as a group over the past week, and I invite you Lounge readers to join in at any point with comments, questions, and the like over the next few days. 

To get us started, I’ll take a stab at outlining the main issues I expect these bloggers will address during the forum.  

(1) Why worry about the financial reform process? 

The recent financial crisis and extensive Dodd-Frank reforms have prompted renewed interest in and study of the process of financial reform. Disproportionate industry influence is a perennial worry of scholars of the regulatory process.  What can students of financial reform learn from these theories and evidence? Does financial reform pose special questions and concerns?  

(2) Is the danger that financial reform is insensitive to public concerns or too sensitive?

As noted, industry influence is a perennial worry, but some worry about the opposite extreme – elected officials overly sensitive to ill-informed public sentiment may respond to financial crises with unwise legislation that fails to adequately balance the benefits of regulation against the costs.  Which is the bigger worry in the current environment?  Does it depend on the issue, the timing, something else? 

(3) How might we reform financial reform?

Assuming that either excessive industry influence or excessive public pandering, or both, is problematic, what should we do about it?  Some of our guests will address the nitty-gritty of reform, including policies, organizational structures, and regulatory changes that might be utilized to correct any perceived imbalances.

As a reminder the forum participants are below, and should be chiming in later today with their thoughts:

Cristie Ford, Assistant Professor, University of British Columbia

Erik Gerding, Associate Professor of Law, University of Colorado

Kimberly D. Krawiec, Kathrine Robinson Everett Professor of Law, Duke University

Brett McDonnell, Professor of Law; Solly Robins Distinguished Research Fellow, University of Minnesota

Saule T. Omarova, Assistant Professor of Law, University of North Carolina

Daniel Schwarcz, Associate Professor of Law, University of Minnesota

Legal History Teaching Resource -- The Black Power Mixtape 1967-1975

Folks who teach (or are interested in) legal history or other aspects of 20th century law and politics may be interested in a new film by Göran Hugo Olsson.  "The Black Power Mixtape 1967-1975" won one of the awards at Sundance in 2011.  Here is the official description of the film:

THE BLACK POWER MIXTAPE 1967-1975 mobilizes a treasure trove of 16mm material shot by Swedish journalists who came to the US drawn by stories of urban unrest and revolution. Gaining access to many of the leaders of the Black Power Movement—Stokely Carmichael, Bobby Seale, Angela Davis and Eldridge Cleaver among them—the filmmakers captured them in intimate moments and remarkably unguarded interviews. Thirty years later, this lush collection was found languishing in the basement of Swedish Television. Director Göran Olsson and co-producer Danny Glover bring this footage to light in a mosaic of images, music and narration chronicling the evolution one of our nation's most indelible turning points, the Black Power movement. Music by Questlove and Om'Mas Keith, and commentary from prominent African- American artists and activists who were influenced by the struggle -- including Erykah Badu, Harry Belafonte, Talib Kweli, and Melvin Van Peebles -- give the historical footage a fresh, contemporary resonance and makes the film an exhilarating, unprecedented account of an American revolution.

More info is available here.  Here's the trailer:

 

The film arrives in some theaters in September.  Judging from the trailer, it contains several interviews and other clips that haven't been available to the public until now.

Ignoring Ron Paul

Jon Stewart is speaking truth to power. Sort of.   But he's certainly got a point. 

The Daily Show
Get More: Daily Show Full Episodes,Political Humor & Satire Blog,The Daily Show on Facebook

H/T David Bernstein

Today’s Circularity in Government Award Goes To

The recent GAO Report on banking entity activities prohibited by the Volcker Rule: 

As required by section 989 of the Dodd-Frank Act, GAO . . . reviewed the trading and fund activities of the largest U.S. bank holding companies and collected selected data on their profits, losses, and risk measures. 

But GAO: 

determined . . . that collecting data on other proprietary trading [i.e. outside of stand-alone prop desks] was not feasible because the firms did not separately maintain records on such activities and because of the uncertainty over the types of activities that will be considered proprietary trading until the completion of the required rulemaking.  We also collected data on hedge and private equity fund investments that the bank holding companies believed to be restricted by the act.  . . . Revenues and losses from these firms’ hedge fund and private equity fund investments followed a similar trend [of small revenues relative to other activities.]

Translation: Congress told us to study prop trading in order to assist with Volcker Rule implementation and rule making, but we can’t do that until after Volcker Rule implementation and rulemaking because until then we won’t know what prop trading is. Also, since Congress did not fully define which activities were prohibited under the hedge and private equity fund restrictions, we asked banks which of their fund activities they believed were restricted by the statute.  They said, “not much.”

To be fair, the Merkley and Levin (among other) rants against GAO are only slightly less absurd:

The GAO study is a major disappointment.  At best it is incomplete.  At worst it is misleading.  . . .

Congress provided a definition of proprietary trading to work with; direction to look at proprietary trading wherever it exists; and direction to look at how proprietary trading losses can contribute to instability of financial institutions.

Rather than follow the statutory directions, GAO has examined in detail only proprietary trading which occurs on distinct ‘stand-alone’ proprietary trading desks and gave only passing consideration to the risks and conflicts of interest associated with proprietary trading more broadly.  Just a fraction of all proprietary trading occurs on stand-alone desks . . . 

But Congress did not, in fact, provide a definition of proprietary trading, which is rather the point. Admittedly, the section 989 definition of proprietary trading (the section that directs the GAO study) is broader than the 619 definition, as Merkely and Levin point out.  However, it seems to me that even that definition contains substantial ambiguities and, in any event, doesn’t resolve the lack of data problem.  

More fundamentally, GAO’s inability to obtain detailed information on prop trading activity outside of designated prop desks -- the same data that regulators will clearly need for effective rule enforcement – would seem to be a sign of the many problems inherent in the Volcker rule, rather than problems with GAO.

You can read the full Merkley and Levin letter to GAO here (Download Merkley Levin Letter to GAO 6-23-2011) and GAO’s response.

 

Related Posts:

Dodd-Frank By The Numbers: A Volcker Rule Case Study

Dodd-Frank By The Numbers: The Volcker Public Comments

Dodd-Frank By The Numbers: Screwing Joe The “Plummer”

Dodd-Frank By The Numbers: The Volcker Meeting Logs

Dodd-Frank By The Numbers: The Wrap-Up

Dodd-Frank By The Numbers: The Wrap-Up

Many thanks to Brett McDonnell for pressing me on a few open questions my prior posts left him with. His comments have helped me to clarify in my own mind the problems I see with the Volcker Rule and the legislative process that gave rise to it. 

In particular, I do not believe that a critique of responsibility-shifting delegations of the sort I have argued the Volcker Rule may represent depends on some notion of the optimal rule, though I can see why Brett might draw that inference from my prior posts (which suggests I need to work on the language some more as I write this paper).  Instead, the inference to be drawn, I would argue, is about the optimal governmental body for making such decisions -- Congress versus regulatory agencies – and the trade-offs that we make among transparency, accountability, and efficient lawmaking.  And this is especially worth emphasizing, given that we don’t know yet the final rule or how effective enforcement will be.

I do not contend that legislators are immune from interest group pressure or are more likely to enact substantively better laws.  Brett is correct about the pressure for the legislature to “do something” – whether it makes any sense or not – in the wake of a financial crisis.  Nor do I mean to suggest that the problem of interest group influence on the lawmaking process would conveniently vanish were Congress to legislate precisely rather than to delegate. In fact, as argued by some commentators, interest groups might wield even more influence when policy is made directly by Congress, rather than through delegations (because it would place more power in the hands of legislative committees and their leaders).  Moreover, Congress should delegate substantive lawmaking to agencies under many circumstances, such as when it makes sense to harness agency expertise, when an agency can make policy more efficiently, or when uncertainty about the future renders ex post gap filling prudent.

But the legislature does offer an advantage in terms of policymaking: transparency and electoral accountability. Direct policymaking by Congress, for all its faults, renders legislators' actions more observable by voters, who then have an opportunity to hold them accountable for their choices. So the question of appropriate delegation is, to my mind, really a matter of degree, motivation, and trade-offs under the particular circumstances.

One particular irony here is that, though Brett disavows any SILR (Slightly Imaginary Larry Ribstein) leanings, I actually am a bit of an SILR, particularly when it comes to financial regulation.  Like Brett, I am not a particular fan of the Volcker Rule.  Though I remain concerned about bank risk-taking (indeed, financial institution risk-taking more broadly), I have doubts that the Volcker rule, even a better-designed one, is the right approach to address that concern.  In short, I chose to study it, not because of any particular belief in the rule’s wisdom, but because I suspected – based on the congressional maneuvering that accompanied its passage and the importance of proprietary and fund activities to banks’ bottom line – that it would illustrate a point about whose voice gets heard on financial reform issues as the sausage is really getting made, so to speak. 

But I’m not as confident that the benefits of vague laws given little effect by agency interpretations outweigh the costs.  Aside from the false signal to voters (and, potentially, other governmental actors) about the state of financial regulation, these moves have other, potentially unintended, consequences.  Let’s remember that even a Volcker rule that fails to substantially alter proprietary trading and fund investment activity will impose costs – banks have reorganized their activities to comply with the mechanics of the law and there will be ongoing compliance and oversight expenses.   

There is really much more to say on this, but I’ve exhausted myself with this anniversary celebration and have probably exhausted you patient readers as well.  As I mentioned, my goal with these posts was to float some preliminary data and ideas for a work-in-progress (something I'm usually too wimpy to do at an early stage).  So, feel free to send comments my way. 

Related Posts:

Dodd-Frank By The Numbers: A Volcker Rule Case Study

Dodd-Frank By The Numbers: The Volcker Public Comments

Dodd-Frank By The Numbers: Screwing Joe The “Plummer”

Dodd-Frank By The Numbers: The Volcker Meeting Logs

 

 

Dodd-Frank By The Numbers: The Volcker Meeting Logs

In my last post, I discussed the public comment letters. Now, I want to talk about the agency meeting logs.  As part of the new transparency efforts associated with Dodd-Frank implementation, the Federal Reserve, the CFTC, the SEC, and the FDIC began disclosing their contacts regarding Dodd-Frank shortly after the bill was signed into law last July.  These logs give some insight into the work of statutory interpretation and implementation that goes on behind closed doors: who is meeting with the regulators that will ultimately determine the scope of the Volcker Rule?  What interests do they represent?  What are the topics on which they are meeting?  What questions are being asked and answered and what sort of information is being conveyed? 

Table 1 shows the federal agency meetings with financial institutions to discuss the Volcker Rule posted between July 26, 2010, and July 5, 2011.  To save space in this post, I have included only the top 10 institutions individually, as well as the total number of financial institution meetings. 

As you can see from Table 1, JP Morgan Chase, Morgan Stanley, and Goldman Sachs met with federal agencies most frequently on the Volcker Rule, with 27, 13, and 12 meetings, respectively.  In total, 216 financial institutions met with federal regulators regarding the Volcker Rule during this time period.

Table 2 shows federal agency meetings to discuss the Volcker Rule with law firms representing financial institutions.  In total, these law firms met with agencies 24 times during the relevant time period. Davis, Polk; Sullivan & Cromwell; and Debevoise met most frequently with federal regulators, with 8, 6, and 5 meetings each. 

Table 3 shows financial industry trade associations, lobbyist, and policy advisor meetings with federal agencies to discuss the Volcker Rule – a total of 25.  SIFMA (The Securities Industry and Financial Markets Association), the Financial Services Roundtable, and the Managed Funds Association met most frequently with federal agencies -- 8, 5, and 2 times, respectively.

Table 4 shows public interest group and research or advocacy organization meetings with federal agencies to discuss the Volcker Rule -- a total of 9 meetings, primarily with labor union representatives. Finally, Table 5 shows a total of 9 meetings by other persons and organizations: namely, Senators Merkley and Levin and their staffs, and Paul Volcker and his staff.  

In sum, whereas financial industry representatives met with federal agencies on the Volcker Rule a total of 265 times, “public interest groups” -- by which I mean nothing more technical than an entity or group that might reasonably be expected to act as a counterweight to industry representatives in terms of the information provided and the types of interpretations pressed  – met only 18 times, even if we include the Merkley, Levin, and Volcker meetings under the heading of “public interest group” meetings.  This is roughly the same number of times that a single financial institution -- JP Morgan Chase – met with federal agencies on Volcker Rule interpretation and implementation, and a total meeting ratio of almost 15 to 1. 

A few notes here.  First, July 5, 2011 is our cut-off date for collecting meeting logs.  But because different agencies have different lag times for updating their logs after meetings take place, there were agency meetings prior to July 5 that were not yet posted by that date. 

Second, for these purposes, I have defined “financial institution” broadly to include not only commercial and investment banks, but also asset managers and investment advisors, as well as insurance companies.  This does not mean that these different types of institutions raised identical concerns at every meeting. But, although the exact subject matter of the meetings differed according to the particular regulatory concern faced by each group, the important point for these purposes is that nearly all of the industry representatives to meet with federal agencies on Volcker were seeking clarifications on the rule’s application to their activities -- most often, a clarification that the Volcker Rule would not prohibit the activities in question.

Finally, I should emphasize that not all meetings are created equal.  Many of the meetings in Table 1are group meetings, often as part of an industry trade association meeting.  For example, 27 separate financial institution representatives were listed in attendance at an April 7, 2011, SIFMA-SEC meeting with Chairman Schapiro. 

Perhaps more tellingly, nearly all of the public interest group meetings in Table 4 are of this nature.  For example, representatives of AFL-CIO, Laborer's International Union of America, AFSCME, and SEIU are logged for an October 13, 2010, SEC meeting with Kayla J. Gillan and Jim Burns.  These are 4 of the 5 meetings by public interest groups with the SEC (Americans for Financial Reform met separately with the SEC on April 13, 2011).  And all of the public interest group meetings with the CFTC on Volcker took place together, on March 16, 2011.

And the identity (or number) of agency representatives at certain meetings may signal something about the importance of the event.  For example, the log for an August 3, 2010, CFTC meeting with SIFMA and ISDA at which the Volcker Rule was discussed (along with other Dodd-Frank provisions) lists 53 SEC and CFTC staff members in attendance. But Goldman Sachs CEO, Lloyd Blankfein, is logged as meeting alone with SEC Chairman Mary Shapiro (along with Chief of Staff Didem Nisanci, and Robert Cook, Director of Trading & Markets) on March 9, 2011. Mr. Blankfein met with Ms. Shapiro again on Oct. 8, 2010, at an SEC-Financial Services Roundtable meeting, at which Jamie Dimon of J.P. Morgan, Robert H. Benmosche (President and CEO of AIG), Richard K. Davis (President and CEO) of U.S. Bancorp, and other major financial institution CEOs are logged as being in attendance.

What to make of this data?  For me, it suggests that those worried that Dodd-Frank left too many details to be filled in my regulators, giving industry a second chance to lobby for important exemptions and interpretations, were at least barking up the right tree.  Federal agency contacts with industry representatives significantly outpace those of any potential countervailing voices in terms of both quantity and quality. 

Does this prove that regulatory agencies are captured or not regulating in the public interest?  No, of course not.  But regulators are only human.  They have limited time, expertise, personnel, and budgets.  Although comment letters and meetings are not by any means the only source of information and persuasion to which regulators are subjected, the meeting logs (particularly when combined with the data on the public comment letters) paint a very one-sided picture of influence, information, and pressure – influence, information, and pressure that largely take place in the absence of meaningful public scrutiny.

In my next, and final, post, I’ll be back to address some of Brett McDonnell’s always-thoughtful comments, and will wrap up with some concluding thoughts.  

 

Related Posts:

Dodd-Frank By The Numbers: A Volcker Rule Case Study

Dodd-Frank By The Numbers: The Volcker Public Comments

Dodd-Frank By The Numbers: Screwing Joe The “Plummer”

 

 

Dodd-Frank By The Numbers: Screwing Joe The “Plummer”

In my last post, I was discussing the public comments on the Volcker Rule, specifically Table 3, included again in this post, which shows the breakdown of comments by word count, and Chart 1, which displays this information graphically, showing the distribution of word count by: private individual not using the PC form (in red), private individuals using the form (in blue), and all others (in green). 

As noted, the spike at comments of less than 50 words are all (with one exception) letters from private individuals.  As you might expect in a comment of less than 50 words, these are short, non-substantive, and provide no meaningful guidance or relevant information to regulators, beyond the fact that members of the public continue to be angry about the financial institution bailouts.

To illustrate, the shortest comment received by FSOC, from a member of the general public, is only a single word: “regulate!” In contrast, the longest comment, received from SIFMA (the Securities Industry and Financial Markets Association) measures 19,500 words and advises FSOC that:

the key definitions in this [the hedge and private equity] portion[s] of the Volcker Rule are generally overbroad: they sweep in entities and vehicles that Congress never intended to be treated as hedge funds or private equity funds and which Congress expected the implementing agencies to exclude from the general definition through the exercise of their regulatory discretion.

In between these two extremes lie the comments to the right end of Chart 1, nearly all of them from industry (or the occasional public interest group, think tank, or academic).  These industry and trade group comments are lengthy, contain cogent arguments on behalf of a generally narrow interpretation of the Volcker Rule’s scope of prohibited activity, advance detailed legal arguments relying on numerous statutes and cases, reference the Dodd-Frank legislative history, and often contain detailed empirical data. 

In contrast, comments from the general public tend to be short (the average word count, excluding the PC form letters, is 86), lack specific suggestions or recommendations for interpreting and implementing the Volcker Rule, generally urge that the rule be “enforced” or “adopted,” and express anger over bank risk-taking and the resulting bailouts that followed.  One letter, stating “Reinstate the Volcker Rule!” is typical.  Others are amusing. 

Said one:

in regards to the Volker Rule, just how stupid do you think the working class is? we just passed the two bills of financial reform and here, not even 3 months later, you big banks are at it again to screw joe the plummer.

Said another: “Being the crooks you are you will ignore this.” And finally, one of my favorites:

I support the Volker Rule. I also support a Barney Frank rule which states that congressmen and senators should make no law or rule or provision what states that every citizen the United States has a right to have a home.  . . .  PS - I still cannot believe that he won re-election. Cannot believe people are that stupid. Regards, Frank

To put all of this into context, the Volcker rule comment process was, in many ways, an astonishing campaign victory for public interest groups generally and Public Citizen, particularly.  This display of private individual interest in the Volcker Rule – a rather arcane and technical piece of legislation – is somewhat astonishing.  Unlike consumer protection or executive compensation, proprietary trading and hedge fund investments by banks are not sexy topics, even post-crisis.  The average consumer likely has no idea what proprietary trading is, much less what sorts of risks it might pose to the financial system. 

At the same time, however, this series of posts aims to illustrate how, even under these favorable circumstances, it is optimistic to think that such public-interested efforts can counterbalance the extraordinary influence and lobbying power that affected financial institutions are bringing to bear on important issues of financial reform, such as those embodied in the Volcker Rule.  There’s too much at stake for industry, and they have the money, the information, and power. 

In my next post, I’ll discuss the next phase in the Volcker Rule gap-filling game: the agency meeting logs. 

Related Posts:

Dodd-Frank By The Numbers: A Volcker Rule Case Study

Dodd-Frank By The Numbers: The Volcker Public Comments

 x-posted at The Conglomerate