Ibanez held that, according to well-established Massachusetts precedent, a mortgagee cannot foreclose unless — surprise, surprise — it actually isthe mortgagee, or a legitimate assignee thereof.  In Ibanez,  lenders or servicers had foreclosed mortgages prior to completing (or commencing) the process of taking assignment of the note and  mortgage  on which they foreclosed.  When they later sought to clear title, Massachusetts courts balked.   “Utter carelessness,” Justice Cordy scolded the plaintiffs.

mistakes were made

This is potentially a huge [...]]]> The Massachusetts Supreme Judicial Court’s recent ruling in U.S. Bank v. Ibanez  is the latest and loudest salvo in what may be the most engaging and gruesome legal aspect of the credit crisis yet:  The day of reckoning for the staggering sloppiness that infected virtually every step of the mortgage-securitization process.

Ibanez held that, according to well-established Massachusetts precedent, a mortgagee cannot foreclose unless — surprise, surprise — it actually isthe mortgagee, or a legitimate assignee thereof.  In Ibanez,  lenders or servicers had foreclosed mortgages prior to completing (or commencing) the process of taking assignment of the note and  mortgage  on which they foreclosed.  When they later sought to clear title, Massachusetts courts balked.   “Utter carelessness,” Justice Cordy scolded the plaintiffs.

mistakes were made

This is potentially a huge problem for mortgage servicers (among others), given the long and convoluted chains of title through which mortgages may have passed in order to create mortgage-backed securities (MBS).   Not surprisingly, many observers are apoplectic, warning that this will lead to the end of the financial markets as we know them. 

How did this happen? 

There are probably several answers, but I think one is that the elite financial services sector (EFSS) that created the MBS is (or believes itself to be) a unique institutional force, unchallengeable by the ordinary legal or political mechanisms that keep institutions in check.  It is immune from the rules and norms  that apply to the rest of us.  But we know that spoilt children often lack discipline, so persistent failures of scrutiny have led inevitably to failures of competence. The drip, drip, drip of deregulation left us with firms that are not only too big to fail: they’re also too big to succeed. 

What will happen next? 

We can expect that the EFSS will respond to Ibanez as it always has after suffering any set-back: It will run to Congress for help. With a newly purchased Republican majority in the House, it will likely get it. 

The important questions for those concerned about the power of the EFSS should therefore be: 

1.  What power does Congress have to remedy these mistakes—especially in a world where, Republicans would tell us, we are bound to a Constitution whose “original” understanding would probably not tolerate federal intrusion into state power over real property conveyancing? and

2.  What will we get in exchange for fixing yet another mess created by the EFSS?

Others have already begun to address the former question, and the latter will play out in the media if (when) Congress takes up the question in the future.  I think many (not all) would agree that we should not permit portfolios of MBS to collapse further, or void (technically flawed) foreclosure sales to bona fide purchasers.  But simply sweeping aside state foreclosure law (as Congress nearly did last term) is probably not the answer, either.

In the meantime, what no one seems to have noticed is the larger point here:  We have, for many years, made “the rule of law” a core objective at home and abroad.    What this means generally — and whether it is sound policy — are debates above my pay grade.  Yet, whatever else it may mean, it would appear that from bailout to whiteout, when it comes to the EFSS, it is the rule of flaw — not the rule of law — that counts.

Sayeth Kaplan:

1,383 aspiring lawyers who took the October LSAT . . . [were] asked “What is most important to you when picking a law school to apply to?” According to the results, 30% say that a law school’s ranking is the most critical factor, followed by geographic location at 24%; academic programming at 19%; and affordability at 12%. Only 8% of respondents consider a law school’s job placement statistics to be the most important factor. In a related question [...]]]> For those of you who had any doubts, our friends at Kaplan have just confirmed it:  Aspiring law students care more about law school rankings than anything else, including the prospects of getting a job, quality of program, or geography.

Sayeth Kaplan:

1,383 aspiring lawyers who took the October LSAT . . . [were] asked “What is most important to you when picking a law school to apply to?” According to the results, 30% say that a law school’s ranking is the most critical factor, followed by geographic location at 24%; academic programming at 19%; and affordability at 12%. Only 8% of respondents consider a law school’s job placement statistics to be the most important factor. In a related question asking, “How important a factor is a law school’s ranking in determining where you will apply?” 86% say ranking is “very important” or “somewhat important” in their application decision-making.

Mystal at ATL expresses shock–shock!–that potential law students could be so naive. Surely, he fairly observes, they should care most about job prospects.

Yes, that would be true if they were rational.  Yet, we all know from the behavioral literature that we apply a heavy discount rate to long-distance prospects.  How much can I or  should I care today about what may happen 3 (or 4) years from today?

If you think about it from the perspective of any law school applicant today, the one concrete thing they can lock onto that has present value is the school’s ranking:  It is simple, quantified, and–perhaps most important–tauntable.  No one’s face burns with shame because their enemy (or friend)  got into a law school with a better job placement rate.  Jealously and envy–the daily diet of anxious first-years–are driven by much simpler signals:  Is mine bigger (higher) than yours?

This is not to defend the students who place so much faith in numbers that have repeatedly been shown to be incredibly stupid.  It just means that Kaplan’s survey (and I have not seen the instrument or data) makes intuitive sense.

Which leads to me to offer two modest (and probably unoriginal) proposals:

1.  Perhaps the  LSAT itself should include some behavioral assessment portion that mirrors the Kaplan survey.  After you’re done solving logic puzzles such as whether Aunt Jean wore a blond wig to dinner based on Wisconsin’s BCS ranking, you should be asked what sorts of things matter to you in a law school.   As the Kaplan survey shows, the answers give insight not only into market preferences (for better or worse) but, imho, the judgment of test takers: Demerits for poor judgment if you answered as most of these students apparently did.  Even if you couldn’t quantify and rank the responses (and, really, how could you?), it would tell schools something about the kind of students they’re getting.

We know that behavioral testing of all sorts is important in a variety of fields.  Having taught at least one student who went postal (not my fault, I was assured), I think law schools would do well to have some insight into the psychological fitness of their students. To my knowledge, that’s not something the analytic grind of the LSAT measures.

2.  Why isn’t there competition among ratings?  We know that in a world of J.D. Powers, Kiplingers, Consumer Reports–to say nothing of at least three credit rating agencies–it is certainly possible to come up with multiple, credible ways to evaluate any given product. I know that valiant (and not-so-valiant) efforts have been made to compete with USNWR, but so far nothing seems to have stuck.  Why hasn’t some media powerhouse come up with its own system?  It’s clearly been lucrative for U.S. News–I suspect it is the only thing keeping the brand alive.

But perhaps I answered my own question, above:  No one really wants more than one ranking  precisely because of the clear signal sent by a single, if flawed, metric.

Still, if they’re smart enough to become lawyers, you’d think they’d be smart enough to assess more than one set of measures.  Isn’t that what judging is all about?

Organized by my colleague, Shubha Ghosh (and starring, among others, CoOp-erator Deven Desai), the goal is important:  How do we understand the intergenerational consequences of a legal regime—intellectual property—that is strongly determined by the present, but which has significant, but under-theorized, consequences for the future?  Fights about extending the term of the Mickey Mouse copyright—or any set of long-haul rights—don’t just affect my kids, but potentially their kids, their kids’ kids, and so on.  These are, in short, really fights about intergenerational equity.

I was only able to hear Michigan’s Peggy Radin (Property Longa, Vita Brevis) and Penn’s [...]]]> Yesterday, I had the all-too-brief pleasure of sitting in on the first couple of talks at the Wisconsin Law Review’s Symposium, Intergenerational Equity and Intellectual Property, here in Madison.

Organized by my colleague, Shubha Ghosh (and starring, among others, CoOp-erator Deven Desai), the goal is important:  How do we understand the intergenerational consequences of a legal regime—intellectual property—that is strongly determined by the present, but which has significant, but under-theorized, consequences for the future?  Fights about extending the term of the Mickey Mouse copyright—or any set of long-haul rights—don’t just affect my kids, but potentially their kids, their kids’ kids, and so on.  These are, in short, really fights about intergenerational equity.

I was only able to hear Michigan’s Peggy Radin (Property Longa, Vita Brevis) and Penn’s Matt Adler (Intergenerational Equity: Puzzles for Welfarists), but as expected, both provided awesome overviews of these sorts of problems.  As Radin pointed out, intellectual property (knowledge and information law generally) always involves two types of generational problems: One is temporal (my parents, me, my kids, their kids, etc.); the other is technological (my students barely know from videotape; I will never beat my daughter at any computer game).

Adler explained that it is easy (and perhaps imprudent) to dismiss the utility of welfare economics as a tool to make these sorts of decisions.  Certainly, we might say, Benthamite sums of utils could predict little for those not in existence (the future):  what would their utility function be, really?

Hope I die before you get old

Yet, he observed, robust and subtle analytic models and conceptual frameworks are being developed by the Sens and Arrows of the world, and they may (if the future is bright) help develop more equitable and effective decision tools for matters with a long temporal reach.

Those who follow state politics may find this all a bit ironic. Wisconsin’s recent election was a decisive victory for Republicans, who captured both houses of the legislature and the Governor’s office on a message which may strain the state’s motto, “Forward.”

If Republicans keep their word, tax breaks for the rich and elderly will replace education and healthcare spending for the young and unborn; fossil fuel (old tech) subsidies will replace biofuel (new tech) development; and the University may have to fight to continue its path-breaking stem-cell research, certainly a way to kill both jobs in the present and medical miracles in the future. This may be good for baby boomers, but isn’t likely so hot for their grandkids.

Hope you die before I get old

Wisconsin’s liberals are, of course, despondent over their loss of power and position.  Yet, forecasting and discounting long-term causation are among the things that make questions of intergenerational equity  so interesting and difficult.  I doubt Newt Gingrich thought in 1994 that the Contract with America would virtually assure Bill Clinton a second term, but today the former seems to have led to the latter.   Likewise, it is certain that neither Jeremy Bentham nor Pete Townshend could have predicted the duration of their memetic contributions to today’s discussions about tomorrow.  They probably just thought it was all rock and roll.

Per Am Law, Henderson and others have started Lawyer Metrics which, according to their website, will  “design and build evidence-based systems to select, develop and retain world-class lawyers and counselors.”

No beef there.  The part I didn’t understand was Am Law’s analogy to Kinsey.  At first I thought it was a typo:  They must have meant McKinsey, the management consulting gurus who brought you Enron.   But no.   That’s really a reference to the man who, according to Wiki,

Kinsey's lawyers, in lust

is generally regarded as the father [...]]]> The Am Law Daily recently had the following lede:  “Can Bill Henderson, the one-man idea factory and Indiana law professor, do for the study of law firms what Indiana’s most famous academic, Alfred Kinsey, did for the study of sex?”

Per Am Law, Henderson and others have started Lawyer Metrics which, according to their website, will  “design and build evidence-based systems to select, develop and retain world-class lawyers and counselors.”

No beef there.  The part I didn’t understand was Am Law’s analogy to Kinsey.  At first I thought it was a typo:  They must have meant McKinsey, the management consulting gurus who brought you Enron.   But no.   That’s really a reference to the man who, according to Wiki,

Kinsey's lawyers, in lust

is generally regarded as the father of sexology, the systematic, scientific study of human sexuality. He initially became interested in the different forms of sexual practices around 1933, after discussing the topic extensively with a colleague, Robert Kroc. It is likely that Kinsey’s study of the variations in mating practices among gall wasps led him to wonder how widely varied sexual practices among humans were.

Now that’s evidence-based for you.

This leads to two questions.  First, is Henderson’s goal viable?  His work is great, so I have no doubt that if it can be done, he can do it.  But if, as my friend Claire Hill points out, career development in large law firms is as  much about social skills and judgment as technical acumen, what is the formula going to look like?  According to Am Law, Henderson is starting with expressed preferences of lawyers at large firms.   But is that really what matters?  Is it, instead, about dollars, wins, losses, closings or something else entirely?  Is the dependent variable simply “partner,” against which we regress everything we can think of (e.g., LSAT, GPA, law school, etc)?  Doubtless, Henderson & Co. have thought of these questions, so we will have to await any findings they publish.

Second,  is the analogy to Kinsey so inapt?  Given the f*cking many recent (and not-so-recent) grads have experienced in Big Law, maybe not.

Mating gall wasps courtesy of Wikimedia.

Pogo victim dance

When Madoff first hit, I heard two interesting things from (reasonably) reliable sources which complicate the victim calculus.  First, one person who claimed to know a number of Madoff investors, said [...]]]> Two recent items have me wondering about overinvesting in victim claims: (1) Christine Hurt’s new article on the implications of the Madoff scandal, Evil has a new name, and (2) Janet Tavakoli’s claim (if the link doesn’t work, this is also squibbed in the margin) that financial institutions caused the mortgage mess, the “biggest fraud in history.”  Both tell important—and perhaps accurate—stories about massive frauds that certainly produced victims. But both overlook an obvious point:  Not all victims are created equal.  As Pogo said, “we’ve seen the enemy, and he is us.”

Pogo victim dance

When Madoff first hit, I heard two interesting things from (reasonably) reliable sources which complicate the victim calculus.  First, one person who claimed to know a number of Madoff investors, said that many  believed that Madoff was able to guarantee outsized returns because of his access to inside information.  This, of course, is a kind of securities fraud. So, my friend said, “everyone knew Madoff was committing fraud—they just thought it was a different fraud.” You have to wonder how innocent investors were if, as Hurt reports, they were sworn to secrecy when they gave him their money.

I realize I will likely be flamed by holocaust survivors for insensitivity to their losses.  To the extent they were innocent, of course, I have nothing but sympathy for them.  The point, however, is that, as Madoff’s bankruptcy trustee is learning, there is little moral clarity in some of these claims.

Second, we should not overstate the severity of Madoff’s punishment.  A lingering question I had about the case was why he turned himself in at all.  Given the cash to which he had access, it seems implausible that he could not have fled to some remote, pleasant place without an extradition treaty.  Why didn’t he?

The answer other friends on Wall Street gave was this:  He hadn’t simply screwed the Jews–he also screwed the Russian Mafia/Mossad/Name your other secret, powerful organization.  In other words, he believed—perhaps quite rationally—that spending the rest of his life in a federal prison—and taking the fall for his family—were vastly preferable to being murdered by victims who were most likely to take matters into their own hands.

As for Tavakoli’s claims about the mortgage mess:  It is alluring to say that the entire real estate bubble was the fault of the investment banks.  While they were clearly major malefactors, there were failures at every point, as I argued briefly here, from origination to foreclosure. Tavakoli speaks as if the  banks were the sole source of the problem.

But this massive failure cannot really be called a fraud in a conventional sense, and certainly not attributable to the banks alone.  It is something else—I am not sure what—because too many people had the wrong (or right) state of mind.  For example, fraud generally requires some kind of intent to mislead by act or omission.  But, so far as we can tell, many of the serious risks associated with mortgages being sold into securitizations were disclosed.  Even the Magnetar Trade—surely the most brazen manipulation we know of so far—was effectively revealed to investors, who all knew from the selling documents that it was possible that the sponsor was going to short the mortgage-backed securities it was selling.

I think all of this reflects a culture of denial and entitlement with which we have yet to come to grips.  Republicans genuinely believe, after having nearly destroyed the economy, that they are entitled to reclaim the wreck.  GM’s bondholders—professional investors who for years have used bankruptcy to force others to absorb losses—don’t like it when the same is done to them.

This may simply reflect the inevitable costs of a society that lives in the illusion that it is governed by the “rule of law.”  The rule of law requires rights, and we all think we have lots of them—including the rights both to attempt to screw each other and to compensation if we are unsuccessful in that attempt.

Where's the goo?

They are, in short, evidence of the virtues of extreme recycling.

Just imagine the pitch meeting for Galactica:  We’ll take what has to have been one of the dumbest pop-culture packing peanuts ever and make it stronger, faster, better:  How about an allegory about civil liberties and faith after 9/11 using Cylons and vats of [...]]]> I don’t watch much TV.  So, I am hardly the person to make strong claims about its quality or trends.  That said, I find it fascinating that three of the best shows of the past few years—Battlestar Galactica, Madmen, and Glee—share a really odd structural feature:  They have all taken ridiculously bad ideas from cringe-able eras and turned them around completely, made them not only fresh, but evocative, disturbing, intriguing.

Where's the goo?

They are, in short, evidence of the virtues of extreme recycling.

Just imagine the pitch meeting for Galactica:  We’ll take what has to have been one of the dumbest pop-culture packing peanuts ever and make it stronger, faster, better:  How about an allegory about civil liberties and faith after 9/11 using Cylons and vats of goo?

Or what about Madmen:  Let’s explore the most virulent cancers on our culture with lovingly pornographic attention to detail, to demonstrate the complex symbiosis among banality, beauty, evil and exculpation.  Madmen is the money shot of commodity fetishism, proving once again the truth of Chomsky’s admonition that if you want to learn what’s wrong with capitalism, don’t read The Nation, read the Wall Street Journal.

And Glee?  Well, all I can say is:  Don’t Stop Believing.

Which may lead you to this question:  No one really takes the “and everything else” part of CoOps’s desktop mantra seriously, so what the frak does this have to do with law?

Two things.  First, it is a way to understand what’s wrong with the system-salvation provisions of Dodd-Frank.  Second, it describes what (imho) courts will have to do with the likely coming wave of lender liability (and similar) claims falling out from the credit crisis.

Dodd-Frank has already seen more than its fair share of attention, much of it centered on the instability built into the resolution powers given to the executive branch for systemically important (TBTF) firms.  No doubt, these powers might be threatening to capital market participants long accustomed to profound (and in some cases profoundly expensive) government obeisance.  Not only do we now know that the federal government, through the Financial Stability Oversight Council, really has the power to do what it said it couldn’t do (but sort of did anyway with Bear Stearns, AIG, GM, and, depending on your version of the story, Washington Mutual): we also know that the scope and use of these powers is almost entirely unpredictable ex ante.

What is extreme here is the failure to recycle, the failure to learn from history that lasting, effective regulatory restructuring requires years of investigation, analysis and horse-trading.  The Dodd-Frank Congress has tried to do in about a year what it took Roosevelt and his Congresses nearly a decade to do.  We may be faster, but I am not sure that we are that much smarter.  (I note, here, the one important exception to this criticism:  the creation of the Consumer Financial Protection Bureau.  While it was not based on massive, multi-year studies of the sort William O Douglas developed to support securities and bankruptcy reform, it nevertheless was backed by outstanding empirical and normative legal scholarship from two people (Warren and Bar Gill) who—while they may have an axe to grind—understand how properly to hone blades).

A form of extreme legal recycling I think we may see will involve the rebirth of the lender liability lawsuit.  During the 1970s and ‘80s—you know, when we had proto-Galactica and Journey—courts occasionally held lenders liable to borrowers or their creditors for enforcing their rights too aggressively (e.g., foreclosing for mere technical defaults), actions that may have been within the four walls of the contract, but nevertheless lacked “good faith.”

These cases largely collapsed under the convulsive contractarian logic of Frank Easterbrook in Kham & Nate’s No. 2:  Lender liability, Easterbrook told us, is an oxymoron, and courts have no business policing aggressive, but contractually contemplated, collection practices.

This may have made sense in the early 1990s, when lenders were banks trying to collect loans from borrowers whose technical defaults may (or may not) have signaled serious risk of payment default.  Today, I have argued to anyone who will listen, the world is fundamentally different:   We have a Shadow Bankruptcy System, which means, in part, that we have sophisticated, aggressive (largely) unregulated investors (hedge funds, etc) trading in a (largely) unregulated secondary market for distressed debt.  With credit derivatives, equity short sales, and a variety of important gaps in securities, bankruptcy and commercial law, opportunities for opportunistic behavior, I have argued here, appear to be rich and alluring.

Since Dodd-Frank won’t deal with this–Too Small To Matter?–the solution, I have also argued, is another kind of recycling:  build a newer, faster, better form of good faith review of distress investor behavior.  I don’t need to get into the details here.  Suffice to say, if you didn’t like “good faith” in the lender liability cases of the 1970s and 1980s, I’ve got something else you might want to think about.

To paraphrase Faulkner:  The past isn’t prologue—it isn’t even past.

Extremely Recycled Cylon courtesy of Wikimedia

Every year, Tsinghua, which partners with Temple’s China LLM program, puts on an international conference on corporate or commercial law. This year’s theme: Corporate Restructuring. Speakers from around the world (but mostly Asia) gathered to talk about everything from bringing the ineffable elegance of the reverse triangular merger to China to the scourge of needless transactional complexity.

Organized by Tsinghua Professors Wang Baoshu and Zhu Ciyuan, speakers included Helmut Kohl (University of Frankfurt); Professor Chih-Cheng (Spencer) Wang (National Chung Cheng University (Taiwan)); Professor Len-Yu Liu (Chengchi University, [...]]]> Okay, just about everything in the title is false, except that I have been at Tsinghua University, in Beijing, to present a talk entitled “Enron Rerun: The Credit Crisis in Three “Easy” Pieces.” [ Download file]

Every year, Tsinghua, which partners with Temple’s China LLM program, puts on an international conference on corporate or commercial law. This year’s theme: Corporate Restructuring. Speakers from around the world (but mostly Asia) gathered to talk about everything from bringing the ineffable elegance of the reverse triangular merger to China to the scourge of needless transactional complexity.

Organized by Tsinghua Professors Wang Baoshu and Zhu Ciyuan, speakers included Helmut Kohl (University of Frankfurt); Professor Chih-Cheng (Spencer) Wang (National Chung Cheng University (Taiwan)); Professor Len-Yu Liu (Chengchi University, Taiwan; Professor Alain Couret (Sorbonne); Jennifer Hill (Sydney University); Daniel Ohl (Orleans); Nicholas Howson (Michigan) and Daniel Kleinberger (William Mitchell).

Kleinberger’s paper was especially interesting to me, as it was on the problems inherent in what he considers needless transactional complexity. His examples of this complexity involved things like dual entity citizenship and the phenomenon in LLC law of permiting “series” to subsist as distinct legal entities (at least for certain purposes) within a larger LLC. He could, of course, just as easily have talked about the role that arguably needless complexity played in the current credit crisis.

Fortunately for me, he didn’t, so I had something to talk about.

My talk was pretty much what it sounded like. Today’s crisis can be seen as Enron writ large, as both have been dominated by (1) needlessly complex trsactions, (2) regulatory and investor complacency; and (3) unchecked conflicts of interest. The affirmative claim—and this is the hard part—is that complexity played a material role in facilitating the complacency and complexity that produced both debacles. The talk as presented doesn’t get into this question in detail (I had only 10 minutes). But the basic point is that we’ve used complex contracts and entity structures to facilitate (or mask) all sorts of bad behavior, for a variety of reasons.

If I get a real paper out of this, it will have to address some of the following problems:

(1) What do I mean by “complexity”? Contracts with lots of words? Deals with lots of contracts? Lots of choices (options) embedded in the deals? Lots of entities?

(2) Assume for the moment it is possible to define complexity: What’s so bad about it? Don’t parties willingly choose it? And doesn’t complexity really just represent the advance of legal technology? Concerns about complexity might be equivalent to concerns about the development of the microcircuit.

(3) Even if I am correct that complexity was a screen to mask self-dealing, what exactly would we do about it? Even if you could distinguish a (bad) complex transaction from a (good) simple transaction, what would you do to alter it? What is the regulatory response to complexity?

(4) If it is a problem, won’t excess complexity cure itself? We know that this is not the first time in history that transactions and structures were comparatively complex. The trusts that grew up around the railroads and the rapid development and aggregation of assets and rights throughout the late 19th and early 20th century reflected tremendous complexity. The ultimate response was, in part, a drastic reduction in deal activity generally (the Depression). This produced much simpler transactions. Won’t the market for legal technology correct itself here, as it (arguably) did in the past?

(5) If complexity is a problem, what besides disclosure is the solution? If disclosure is the cure, isn’t it really just more of the disease? After all, there is no claim (at least not yet) that MBS/CDO issuers were concealing the real risks of loss. From what we know, the securities disclosures were likely to have been adequate. The deals may have been too complex to fully understand (or investors over-relied on ratings, etc). But would more information have made them less complex? Arguably not.

In any case, I’d welcome comments on this.

Cuomo’s leverage (so to speak) arises from, among other things, laws forbidding fraudulent conveyances and similar transactions. Fraudulent conveyance law is a complex, if vital, corner of debtor-creditor law. It essentially says that a company cannot convey property for less than “reasonably equivalent value” if it is “insolvent,” undercapitalized, or the like. If you’re in financial trouble, the saying goes, “you must be just before you are generous.”

Among other things, this means that if a company like AIG was paying bonuses (or redeeming stock) while it was in fact [...]]]> New York Attorney General Andrew Cuomo has been making headlines because he has strong-armed AIG into trying to recover “outrageous” bonuses and other perks while its financial condition was not so great.

Cuomo’s leverage (so to speak) arises from, among other things, laws forbidding fraudulent conveyances and similar transactions. Fraudulent conveyance law is a complex, if vital, corner of debtor-creditor law. It essentially says that a company cannot convey property for less than “reasonably equivalent value” if it is “insolvent,” undercapitalized, or the like. If you’re in financial trouble, the saying goes, “you must be just before you are generous.”

Among other things, this means that if a company like AIG was paying bonuses (or redeeming stock) while it was in fact in distress, those who received AIG’s cash—like Joe Cassano, who was paid millions for running AIG’s brilliant credit default swap shop–should have to pay it back unless they gave AIG “reasonably equivalent value.” Gifts are axiomatically not supported by any (much less reasonably equivalent) value.

But if AIG is Cuomo’s only target, he’s thinking WAY TOO SMALL. Today’s New York Times reports the following “grim milestone: All of the combined profits that major banks earned in recent years have vanished:”

In the case of the nine-largest commercial banks — Citigroup, Merrill Lynch, Bank of America, Morgan Stanley, JPMorgan Chase, Goldman Sachs, Wells Fargo, Washington Mutual and Wachovia — profits from early 2004 until the middle of 2007 were a combined $305 billion. But since July 2007, those banks have marked down their valuations on loans and other assets by just over that amount

.

What does this mean? Well, it may mean that all those profits they declared weren’t exactly, uhm, profits. Which may mean that they actually weren’t so healthy financially after all. Which may mean that all those bonuses and crazy severance packages—remember when we thought Stan O’Neal’s $57 million looked reasonable?—should, in theory, be as vulnerable as Joe Cassano’s $1 million/month “consulting” fee at AIG.

I know, I know. The accounting and bankruptcy wonks will start shouting that proving insolvency is a fool’s errand. And in any case, there will be serious defenses that the recipients of these companies’ largesse can assert (their brilliant performance was “reasonably equivalent value”, Cuomo lacks standing, etc).

Perhaps. But the real point is, as I observed here earlier, if we care about recovering some of the ill-gotten gains from the mortgage crisis, we need to reconceptualize the whole program. We can’t just give money to the banks and hope (against hope) that they will start lending. We might want to figure where the money went, and how to get some of it back.

“As president of the United States,” Mr. McCain said, “I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished value of those homes and let people make those, be able to make those payments and stay in their homes. Is it expensive? Yes.”

How? He didn’t say. But he’d have to overcome a mountain of contractual and legal obstacles in the “toxic” securities (bonds) that these defaulted mortgages were supposed to back (pay for).

Georgetown Law Professor Adam Levitin has done a good job of explaining [...]]]> In last night’s debate, John McCain proposed that Treasury purchase defaulted mortgages, thereby providing relief to distressed homeowners.

“As president of the United States,” Mr. McCain said, “I would order the secretary of the treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished value of those homes and let people make those, be able to make those payments and stay in their homes. Is it expensive? Yes.”

How? He didn’t say. But he’d have to overcome a mountain of contractual and legal obstacles in the “toxic” securities (bonds) that these defaulted mortgages were supposed to back (pay for).

Georgetown Law Professor Adam Levitin has done a good job of explaining why simply purchasing the bonds themselves will provide little relief to homeowners: Unless the government purchases a controlling amount and number of bonds–meaning lots of bonds–it will lack the voting power, among other things, to cause any changes to the underlying mortgages.

It is possible the government could do this already under the Paulson bailout plan. in theory, it could also purchase individual mortgages from the trusts that currently hold them (which, in turn, issued the mortgage-backed securities that are said to be “toxic”).

But I am not sure the trustees of the trusts that now own these mortgages have, or want, the power to pick and choose which mortgages to sell to the government. Nor is it clear that the servicing companies that really manage the mortgages have the power–or the incentive–to facilitate these sales. There is some evidence that it is easier (and perhaps more lucrative) for them to foreclose than renegotiate the mortgage.

The real solution, as many bankruptcy hands have been arguing for years, is amending the Bankruptcy Code to permit bankruptcy judges to modify existing mortgages, bringing them in line with the fair value of the underlying property.

Until recently, banking and financial interest groups (and most Republicans) vehemently opposed this as a bailout of profligate borrowers. Banks would stop lending if Congress made this change, and all commerce as we know it would come to an end.

Now that the banks stand to receive in excess of $1 trillion in federal largesse (and commerce as we know it is coming to an end, anyway), I am not sure where they are on this. I have been informed that the Commercial Law League–not exactly a lobbying organization for profligate borrowers–has come out in support of these changes.

In the meantime, I look forward to learning how the Maverick plans to rewrite millions of pages of bond indentures.

But the prize for crazy claims about the credit crisis must go to former Dallas Fed President Bob McTeer, whose Monday post on the New York Times’ Economix blog claims that: (i) Wall Street banks were the real victims of the crisis; (ii) the real villains were minorities; and (iii) the only thing needed to fix the crisis is to change accounting rules.

I kid you not.

Let’s consider each in turn.

1. Banks are Victims

“[A]ll the focus on C.E.O. salary caps,” he writes “implied [...]]]> The credit crisis has provided ample opportunities for foolishness. Certainly California Republican Darrell Issa’s claim that the House bill would have been a “coffin on top of Reagan’s coffin” was an oddly necrophilic bunkmate to President Bush’s penetrating insight that “this sucker’s going down.”

But the prize for crazy claims about the credit crisis must go to former Dallas Fed President Bob McTeer, whose Monday post on the New York Times’ Economix blog claims that: (i) Wall Street banks were the real victims of the crisis; (ii) the real villains were minorities; and (iii) the only thing needed to fix the crisis is to change accounting rules.

I kid you not.

Let’s consider each in turn.

1. Banks are Victims

“[A]ll the focus on C.E.O. salary caps,” he writes “implied that the holders of illiquid mortgage-backed securities were the villains in this drama rather than the victims. They didn’t package the securities, or sell them; they bought them as an investment.”

Excuse me? I didn’t get that.

Bear Stearns, Merrill Lynch, Lehman Brothers, Goldman Sachs, Citibank and many others now in or near trouble did not package or sell these securities? Perhaps the league tables were just lies?

The reality, of course, is that investment banks were both issuers and purchasers. That was the point: To keep the paper moving as fast as possible, hoping that once the music stopped, there would still be a seat. No one realized (or admitted) that this game of musical chairs was being played on the deck of the Titanic.

2. It’s Minorities’ Fault

The real villains, McTeer would have us believe, are minority borrowers. This was because “the government had encouraged the purchase of mortgage-backed securities by giving banks C.R.A. (Community Reinvestment Act) credit for securities that contained mortgages made in ZIP codes.” While he concedes that this lending may not have played a “decisive” role, the implication is clear: It was lending to people who look like, you know, Barack Obama, who are really to blame here.

This is truly outrageous. There is not a shred of evidence that CRA-based lending had anything to do with the credit crisis. The CRA is an extremely weak piece of banking legislation that in theory requires banks to lend in their “communities,” which has usually (albeit mistakenly) been taken to mean “minority” communities. Excess liquidity doubtless resulted in mortgage lending to all sorts of bad risks, including minorities. But it wasn’t the CRA that caused this.

And, while it is true that a disparate amount of subprime lending was to African Americans, it wasn’t by banks. It was by non-bank originators like Countrywide.

You would expect a former Fed branch president to know this.

3. The Magic Cure: New Accounting!

To the extent the credit crisis is not the fault of minority borrowers, McTeer appears to believe it was caused by “mark to market” accounting rules that forced holders of toxic securities to write these assets down if they couldn’t offload them quickly. This is not really McTeer’s insight. Many, including William Isaac, who was the F.D.I.C. chair during the S&L crisis, believe this was a critical part of the problem, since it forces lenders to declare something valueless simply because it is illiquid, which really doesn’t make much sense.

I am not an accountant, so offer no opinion on whether this is true. But what McTeer doesn’t bother to tell us is what should now replace it? “Marking-to-model?” That got us into this problem in the first place, because it enabled sponsors—you know, McTeer’s victims—to claim unrealistical valuations and amortization rates for the securities they issued. Should we go back to that? How would that revive the market for these securities? If you add zeroes to the balance sheet, will the credit market miraculously revive?

4. Who IS this Guy?

McTeer is not only a former President of the Dallas Fed. He has a PhD in economics from the University of Georgia, is a former of Chancellor of Texas A&M, and self-published poet. He is a zealous free marketeer, whose insights include this: “The market system features consumer sovereignty, meaning that the consumer is king. We decide what will be produced by casting dollar votes for the things we want and by not spending on the things we don’t want.”

That may well be true–in a world where people have dollars that are worth something. So far as I can tell, his version of the free market has gone a long way to making sure that we have fewer dollars, and those we have are weaker.

He is also a management guru who’s maxims include this mind-bender: “Too long” and “too short” appear to mean the same thing. Go figure.”

Perhaps he’s right. Only a man who thinks opposites are identical could believe investment banks are victims and minority borrowers villains.