Author: Lawrence Cunningham


Enduring Credit Crunch

u_s__treasury_department_2.jpgThe FDIC just released its periodic list of financially troubled banks. There are 117 listed banks, up from 90 last quarter, commanding $78 billion in assets, up from $26 billion. FDIC leaders say the report is unsurprising, noting that the credit crunch that began more than a year ago does not appear to be abating.

At least two profound problems contribute to the enduring credit crunch, of length and severity not seen since the Great Depression. The first is that the securities driving the crunch, including pools of sub-prime mortgage loans with complex features, are difficult to value. Investors continue to shun them. The second is that the US government’s efforts at building confidence despite those valuation difficulties have failed. Investors are not impressed with the government’s actions or plans to date. No solution to either problem appears on the horizon.

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DC’s New Taxi Pricing

Taxi.pngRegular visitors to Washington, DC this fall will notice a new taxi meter pricing system. It replaces the zone pricing system that had been in effect for generations. Under the old system, fares were based on how many zones a trip traversed (there were 8 main zones and 23 sub-zones); under the new one, fares are based on a combination of distance travelled and time consumed. The change, approved by the Mayor after Congress required him to act, took effect earlier this summer.

Cynics note that the old system benefited Congress. Capitol Hill and Georgetown, where many Members have homes, were within a single zone despite being miles apart; many governmental buildings where Members attend meetings are within a single zone. Citizens and visitors are said to benefit from the new approach. A Washington Post poll reveals that the overwhelming majority of DC residents (some 80%) favored it. Taxi owners and operators resisted, staging work slowdowns and stoppages and unsuccessfully challenging the change in court.

It is possible that neither the old nor new system is optimal, as both are products of regulatory imposition. The alternative to regulatory imposition is private market pricing. Individual taxi operators elect how to price, whether using zones, time and/or distance, flat or negotiated rates, peak and off-peak pricing and so on. The most common approach to taxi pricing in large US cities, however, is by regulatory imposition using the time-and-distance meter pricing, now adopted in Washington. It does not appear that Congress or the District government seriously considered a private market pricing alternative.

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Pedagogical Nomenclature

The traditional style of doctrinal illustrations in the American Law Institute’s Restatements of Law identifies parties by meaningless letters such as A, B, C and D. In Contracts, at least, it would be clearer for the illustrations to identify parties by meaningful normative categories they occupy, such as General-Sub, Company-Inventor, Buyer-Seller, Borrower-Lender, Father-Daughter, or even Promisor-Promisee, Obligor-Obligee and so on.

Using meaningless letters adds unnecessary, if slight, cognitive demand to exercises that should be maximally parsimonious. Normative categories in Contracts are especially useful to emphasize the context in which an exchange occurs. The abstract lettering system should be abandoned in future Restatements. A few examples from Illustrations to Section 227 of the Restatement (Second) of Contracts appear below.

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SEC Authority

Suppose Congress authorizes an agency to promulgate standards. The agency delegates that authority. Congress later enacts laws preserving the agency’s promulgation authority but strictly limiting its delegation power to organizations meeting stated criteria. Suppose the agency then delegates the function to an organization lacking those criteria. May the agency do so?

The SEC plans to do exactly that. It has congressional power to set accounting standards and has delegated that to FASB, a private domestic standard-setter for whom the later statute is tailor made. The SEC instead wants to delegate this authority to IASB, an international organization lacking many of the requirements. Congress has raised doubts about the SEC’s statutory authority to take this position but SEC officials have testified before Senate committees that it has the authority. It seems illegal and irresponsible for the SEC to take this position as (somewhat technical) analysis below explores.

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Elitism: A Good Thing Too

A flurry of discussion recently centered on Senator McCain’s suggestion that Senator Obama is an elite or an elitist (terminology McCain notably used when so characterizing Obama’s comments on guns, religion and the prevailing mood in America). Pieces in the mainstream media and blogs alike promptly observed the irony of the accusation, noting McCain’s own qualifications. Less attention was paid to the many different meanings and usages of the concepts or of the ultimate question whether elitism is an appealing trait for a US president or other leader.

Exact meanings of elite and elitism are not always self-evident. As a beginning, elite persons may be those possessing skills, talent, achievement, resources or training that are recognized within a civilization as extraordinary. These attributes earn for elites respect in their fields of distinction and enable them to assume leadership roles in a civilization’s governance. Under this formulation, Obama likely qualifies as an elite, as would McCain. If so, both are also qualified to lead the nation and may be recognized as achievers. Recent McCain campaign theme flirtations that portray Obama as famous but unqualified to lead, and criticism of his asserted lack of achievement, are thus in tension with any claim that he is an elite.

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Contorts Anyone?

Grant Gilmore D of C for Blog.jpgLast year, I had the pleasure of teaching Contracts alongside a colleague, Jonathan Turley, teaching Torts, who inspired ways that enabled both of us to play the courses off each other. For example, we compared how the two approach remedies and the nature of the underlying obligations implicated. We even had some fun, in our respective classes with the same group of students, probing whether Contracts or Torts was more coherent, successful or even enjoyable.

With the new semester weeks away and my preparation for teaching Contracts in full swing, I’ve been considering the Contracts-Torts interface again. Doing so seems invariably to recall the notion of Contorts. Grant Gilmore coined the term to designate a field of civil obligation that merged Contracts with Torts, famously quipping that “Contracts is dead.” Everyone knows that Contracts is not dead—and neither is Torts—but whatever happened to Gilmore’s general law of civil obligation, Contorts? Is there a definable subject there? Does anyone teach it?

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SEC on the “Performance” of Standards

Green Eyeshade.jpg

Is it useful to ask which performs better, the metric system or the imperial system of measurement? Are meters better than miles? Does one system offer more refined tools to achieve precise results? How useful is it to ask, which performs better, German or Russian? Must it depend on purpose, such as for philosophy or literature? The SEC proposes to ask a version of such comparative performance questions about international accounting versus US accounting at a hastily-called roundtable next Monday.

The SEC’s purpose in holding the roundtable is vague, with its Chairman, Chris Cox, saying it is intended to give the SEC “valuable insights” about how international versus US accounting “performed” amid current market “turmoil” and “pressures.” The roundtable occurs during intense, ongoing debate within the US about whether and on what terms the US should switch from US accounting to international accounting. Chairman Cox and the SEC make it very clear that they favor moving to international standards as rapidly as possible, while investors and others have expressed strong concern about this.

The calling of this roundtable and this framing of the discussion are therefore both interesting and important. Accounting standards are not usually evaluated in terms of their “performance.” They are certainly not evaluated with reference to a particular market environment, such as one in turmoil or under pressure. Accounting standards usually are evaluated in terms of some ultimate purpose, chiefly whether they are reasonably calculated faithfully to capture and fairly report on underlying economic activity. In the US, moreover, that assessment is made according to how useful resulting applications are to investor decision-making.

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Hamlet at the SEC

Many are waiting to hear from the SEC about its current views on its much ballyhooed but inchoate flirtations to have US companies use international financial reporting standards (IFRS) and let non-US organizations use US markets without local registration if they are supervised by comparable regimes at home (mutual recognition). Earlier, in speeches, press releases and at roundtables, SEC official talk told us that we’d have formal delineation on these initiatives this summer. Action still may come, but there appears little doubt that efforts are delayed, talk is ahead of action and momentum is far ahead of concrete formulations.

Delay may reflect SEC realization that these initiatives are more difficult in practice than officials would like to believe. Or delay may reflect how the SEC is sidetracked by the credit turmoil, criticism of its oversight effectiveness, and Treasury Department proposals that would substantially reduce the agency’s regulatory role in the future. Either way, investors may benefit from the delay, for SEC statements to date on these subjects suggest approaches that subordinate investor interests in favor of interests of brokers, exchanges and issuers.

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The 3-Year JD-MBA

Northwestern University generated extensive discussion recently after announcing a program to let students complete legal studies in 2 years instead of 3, also done at University of Dayton. Less discussed, Northwestern has for a decade offered an alternative that lets students get both the JD and MBA in 3 years instead of the usual 4 or 5. Although analysis applicable to the speedy JD may likewise apply to the speedy dual degree, there may be some differences warranting a separate look.

We considered adapting the fast track dual degree, also done at St. Thomas University, when I was Academic Dean at Boston College . A modicum of reverse engineering was required to connect Northwestern’s bulletin description to the driving regulatory requirements. And special tailoring for specific attributes of BC was necessary. In the end, the BC faculty opted to forego the step. Yet it may work well for some schools in some locations and be of interest to many more students than Northwestern or St. Thomas can accommodate.

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Panic or Crisis?

Is Senator Phil Gramm right that economic turmoil is all in our heads, a sort of panic, or are there real problems, suggesting instead a crisis? More generally, how should the current US economic situation be described?

Some descriptive financial terms have fairly settled definitions, although exact classifications can remain contestable. For example, a recession, formally two successive quarters of negative growth, is rarely recognized until an economy is in one. At present, economists are split on whether the US economy is in or near one. A bear market, formally a 20% decline in general equity market prices, is easier to measure, and under that measure, US stock markets are in bear territory (indeed, price levels are not much higher than they were a decade ago).

The terms panic and crisis seem less susceptible to formal definition. Financial panic generally signals an irrational response to perceived economic conditions while crisis, which can include the results of panic, tends to connote a more substantive condition in which structural, cyclical or other forces pose actual acute financial adversity.

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