Author Archive for nate-oman
What Keynes Got Right (Much As It Pains Me to Say It)
posted by Nate Oman
I recently read Liaquat Ahamed’s The Lord’s of Finance: The Bankers Who Broke the World, which is basically a collective biography of the world’s top central bankers in the 1920s and early 1930s. It is a good read, especially if you want to understand what Ben Berneke is terrified of becoming. Ahmad, however, doesn’t quite deliver on his central thesis, which is that bad monetary policy by central bankers caused the Great Depression. Here is what I think the book actually shows:
World War I caused the Great Depression, or at least it caused the financial crises that accompanied the Great Depression. In particular, World War I created three huge problems for the international financial system. First, during the course of the war the United States built up huge gold reserves and the gold reserves of the major European economies contracted massively. Second, it created huge debts owed by the Allies to the United States. Third, the system of reparations created by the Treaty of Versailles created a huge debt burden for Germany. These three economic forces ultimately lay behind the enormous pressures placed on the world’s financial system in the 1920s and 1930s.
The book also shows that the gold standard was a really bad idea, especially for Britain. After the war, Germany, the UK, and France all pursued different monetary policies. The Weimar Republic, which lacked broad political legitimacy, decided to spend money hog wild on various forms of government benefits as a way of buying the loyalty of key constituencies. As a result it ran huge budget deficits, which it filled by printing money on a gargantuan scale.
Britain went to the opposite extreme, returning to the gold standard at pre-war levels. This was catastrophic. The government debt of the war years had fueled inflation, and the only way to peg sterling at pre-war levels was to massively contract the monetary supply. In effect, the Bank of England deliberately caused recessions and unemployment for the sake of the gold standard. The sinister reading of this is that the Bank pursued this policy to protect the City of London’s dominant position as a financial center. The loss of gold to the U.S. during the war, however, meant that it could only protect the City by pushing up the value of the currency at the expense of the rest of the country. A less sinister – and ultimately more plausible explanation – is that the Bank of England had an arational faith in the power of the gold standard and was convinced that national honor and prestige was at stake in pegging sterling at the pre-war level. Read the rest of this post »
March 9, 2010 at 11:45 am
Posted in: Articles and Books
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Don’t Shoot the Guys Who Keep You Honest
posted by Nate Oman
The European Commission has decided that it is going to investigate the market in credit default swaps (CDSs) on sovereign debt. There is some concern that speculation in these markets is creating problems for Greece and other fiscally rickety European countries such as Spain, Portugal, and Ireland. The move in Brussels isn’t as crass as the accusations in the Greek press that their sovereign debt crisis is being driven a sinister cabal of “Anglo-Saxon speculators,” but it seems to partake of some of the same spirit.
CDSs on government bonds provide insurance against sovereign default. Accordingly, their prices are a barometer the market’s assessment of a country’s fiscal risk. They are particularly important indicators when countries structure their debts such that other indicators of market confidence, like the spread between short term and long term interest rates on government bonds are not available. Accordingly, they are a favorite target of politicians, who rightly point out that the holder of such contracts make money when a country’s finances deteriorate. Evil speculators! Of course, the CDS market also tells politicians when they are doing their jobs badly. In effect, the effort to regulate such markets amounts to politicians telling some of their most important — and informed — critics to shut up.
We saw the same thing in 2008, when the SEC banned short selling of the stocks of financial companies. Dick Fuld insisted that Lehman Brother’s stock was being pummeled by malicious, short-selling hedge funds. Look, he insisted, our stock price cannot reflect real value because our books show that we have all these really valuable assets. The shorts are just trying to manipulate the price as part of a nefarious plot! The shorts, however, didn’t believe Fuld’s accounting. They thought the stock price would fall in the future because they thought that Lehman was in effect lying to the market about its real value. They were right.
In the current political climate in the United States and Europe it is easy to demonize derivatives, and heaven knows that they were used to cause enough havoc. But it is important to remember that they perform a very important function by allowing the market to tell important men in expensive suits when they are full of crap, whether the important men are heads of state or CEOs. It’s hardly surprising that both the pols and the executives would rather that derivatives just went away.
March 4, 2010 at 12:02 pm
Posted in: Contract Law & Beyond
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Natural Law, Imperialism, and the Birth of Free Exercise Jurisprudence
posted by Nate Oman
I have been researching Reynolds v. United States (1879), the Supreme Court’s first Free Exercise case, on and off for several years. For those who are interested, my paper on the topic is now available for download at SSRN. My interest in the case is historical rather than doctrinal. I am interested in what Reynolds, which held that religious polygamy was not protected by the First Amendment, and the anti-polygamy crusade that followed tell us about constitutional politics in the nineteenth century. Historians have generally situated the case within the context of the post-Civil War politics of Reconstruction. The anti-polygamy crusade kicked off by Reynolds is seen as an extension of Reconstruction into the West. I offer a new interpretation.
I began my research by asking myself what the theory of the First Amendment put before the Court by the Reynolds’s lawyers looked like. The Court — following the arguments of the Attorney General — characterized the Mormons as claiming that all religiously motivated action was exempt from the criminal law. This sort of absolutist position, the Court and the government pointed out, would allow absurd results such as the inability to criminalize religiously motivated murders. The Court, however, was knocking down a straw man. The Mormons never in fact made this claim. Rather, they argued that the First Amendment only protected religiously motivated conduct that was not malum in se, that is wrong in and of itself as opposed to being wrong merely because of the law (malum prohibitum). Actions could be judges as malum in se, they went on to argue, by appeal to a set of well-established natural law arguments. These arguments were based in part by a series of more-or-less positive analogies to non-Western legal systems. The Court responded implicitly to this argument by analogizing Mormons to Indians and the federal government to the British Raj. In other words, the Court in effect looked at “The Mormon Question” through the lens of imperialism.
This imperial analogy was more than a one-off rhetorical fillip in the Court’s opinion. It shows up all over the anti-polygamy battles, where it is important for distinguishing the situation in Utah from the situation in the Reconstruction and post-Reconstruction South. It also gets picked up on in the first generation of cases that invoke Reynolds and its progeny as precedent. These cases, known as The Insular Cases, arose in the context of the United States’ conquest of the Philippines in the Spanish American War of 1898 and addressed the question of the federal government’s authority to engage in imperialism and colonialism abroad. In these cases Reynolds was seen not as a First Amendment case as much as a case about the scope of Congressional power over a conquered people. My paper thus suggests that Reynolds and the anti-polygamy battles need to be seen not only in the context of the domestic debates over Reconstruction that proceeded them. Rather, Reynolds and its heirs must also be seen as a prelude to the international debates over imperialism that followed the Spanish American War.
For those interested, here is an abstract of the paper: Read the rest of this post »
March 3, 2010 at 8:46 am
Posted in: Constitutional Law, Criminal Law, First Amendment, History of Law, International & Comparative Law, Jurisprudence, Law and Humanities, Race, Religion, Supreme Court
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Dismembered Goats and the Philosophy of Contract Law
posted by Nate Oman
My latest offering is now up on SSRN for your enjoyment. This particular paper began with a simple question: “Why did people in the ancient world formalize their contracts by hacking up a goat?” Here’s the abstract for the paper that resulted:
In the ancient Near East, contracts were often solemnized by hacking up a goat. The ritual was in effect an enacted penalty clause: “If I breach this contract, let it be done to me as we are doing to the goat.” This Article argues that we are not so far removed from our goat-hacking forbearers. Legal scholars have argued that contractual liability is best explained by the morality of promising or the need to create optimal incentives in contractual performance. In contrast, this Article argues for the simpler, rawer claim that contractual liability consists of consent to retaliation in the event of breach. In the ancient ritual with the goat, the retaliation consented to consisted of self-help violence against life and limb. The private law in effect domesticates and civilizes retaliation by replacing private warfare with civil recourse through the courts. It thus facilitates the social cooperation made possible by the ancient threats of retaliation while avoiding the danger of escalation and violence that such private violence presented. This civil recourse theory of contractual liability provides an explanation for a number remedial doctrines that have proven difficult for rival interpretations of contract law to explain, including the penalty clause doctrine, limitations on expectation damages, and the basic private law structure of contractual liability. Finally, this Article responds to some of the most powerful objections that might be made against a civil recourse theory of contractual liability.
The article, “Consent to Retaliation: A Civil Recourse Theory of Contractual Liability,” is, to my knowledge, the first full-length article on civil a recourse theory and contract. Civil recourse, of course, has been a much discussed topic in the philosophy of tort law, where it has been championed by John Goldberg and Benjamin Zipursky. My take on the normative foundations of civil recourse, however, is a bit different than theirs. Hence, in addition to illuminating the mystery of the hacked up goats, my hope is that the article will contribute to debates in the philosophy of contract law and the philosophy of private law more generally. Enjoy!
March 1, 2010 at 8:14 am
Posted in: Contract Law & Beyond, Jurisprudence, Law and Humanities, Legal Theory, Uncategorized
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Introducing Tuan Samahon
posted by Nate Oman
I’m happy to introduce Co-Op’s newest guest blogger, Professor Tuan Samahon. In addition to his exploits as a law professor, I know Tuan from when he was one of a handful of upperclassman who lived in my freshman dorm in college. Suffice it to say, that Tuan set the standard for brilliance and coolness in my eyes. Tuan joined the Villanova Law School faculty after commencing teaching at the William S. Boyd School of Law at the University of Nevada, Las Vegas. His research focuses on separation of powers issues relating to the appointment and removal of federal officers. For the last several years Tuan has been engaged in a legal historical reconsideration of the resignation of Associate Justice Abe Fortas, which has at times required methods more typical of investigative journalism than legal history. Recently he testified before the Senate Judiciary Committee on appointments clause issues relating to executive branch “czars” and participated in a January 2010 AALS panel discussion on the same subject with Erwin Chemerinsky, Peter Strauss, Michael Gerhardt, and Richard Albert.
Prior to entering teaching, he clerked for Raymond Jackson, U.S. District Court for the Eastern District of Virginia (2000-01) and for Jay Bybee, U.S. Court of Appeals for the Ninth Circuit (2003-04) and practiced law in the Washington, D.C. office of Covington & Burling.
He is a proud father of three — Benjamin and Caleb (twins age 6) and Eve (4 months).
March 1, 2010 at 7:53 am
Posted in: Uncategorized
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Hawkins v. McGee and the Costs of Healthcare
posted by Nate Oman
One of the joys of being a contracts prof is that you get to teach Hawkins v. McGee, the hairy-hand case of Paper Chase fame. Reading this week’s Economist briefing on health care has got me thinking about the meaning of the holding in that case for the current health care debates. Read the rest of this post »
February 22, 2010 at 8:39 am
Posted in: Accounting, Contract Law & Beyond, Health Law, Insurance Law
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Puffery and Pizza
posted by Nate Oman
In this commercial, Domino’s Pizza offers us a definition of “puffery.” So does the claim, “Our pizzas taste better, and that’s not puffery. That’s proven.” constitute a warranty?
(And don’t forget to read “The Best Puffery Article Ever”)
February 11, 2010 at 8:25 am
Posted in: Advertising, Contract Law & Beyond
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Apple does its part to battle terrorism
posted by Nate Oman
Today in my contracts call we were looking at boilerplate and the problems of contracts of adhesion. After class one of my students pointed out to me that buried in the fine print of its iTunes Store Terms and Conditions is a clause where Apple is doing its bit to foster non-proliferation. Clause 34(g) declares in part
You may not use or otherwise export or re-export the Licensed Application except as authorized by United States law and the laws of the jurisdiction in which the Licensed Application was obtained. In particular, but without limitation, the Licensed Application may not be exported or re-exported (a) into any U.S. embargoed countries or (b) to anyone on the U.S. Treasury Department’s list of Specially Designated Nationals or the U.S. Department of Commerce Denied Person’s List or Entity List. By using the Licensed Application, you represent and warrant that you are not located in any such country or on any such list. You also agree that you will not use these products for any purposes prohibited by United States law, including, without limitation, the development, design, manufacture or production of nuclear, missiles, or chemical or biological weapons.
Notice, as I read this clause not only are terrorists — or at least those on terrorist watch lists — prohibited from using iTunes to manufacture WMD, they are also prohibited from even downloading and using iTunes. So all the Al-Qaeda operatives holed up in the Northwest Frontier Provinces of Pakistan, dodging drone attacks while listening to Britney Spears songs downloaded with iTunes are in violation of the terms and conditions, even if they paid for the music!
That’ll show ‘em…
(Unless, of course, they can argue that the clause violates the reasonable expectations doctrine. I mean, don’t we assume that when we download iTunes that we’ll be able to use it construct a nuclear missile?)
February 9, 2010 at 6:59 pm
Posted in: Contract Law & Beyond, Weird
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My Letter to the Economist on Climate Change
posted by Nate Oman
I recently sent the following letter to the editor of the Economist magazine:
Dear Sir,
In your most recent Lexington column you reiterated the Economist’s long standing preference for a carbon tax rather than a cap-and-trade system for dealing with global warming. Your preference has always puzzled me. The Economist is quite right to insist that providing market incentives is a better way of controlling carbon emissions than command-and-control style regulations. However, I have yet to see you make the case for carbon taxes.
A cap-and-trade system assumes that the government can set the optimal level of emissions and then lets the market determine the price of carbon. A carbon tax assumes that the government can determine the costs that emissions impose on society, price those through a tax and then lets the market determine the overall level of emissions. Another way of putting this, is that a cap-and-trade system assumes that scientists can determine the optimal level of carbon given the mosterously complex phenomena of the global climate. A carbon tax, in contrast, assumes that economists can determine the costs that carbon imposes on society given the monsterously complex phenomena of the climate’s effect on the economy.
Other than your publication’s name, I am at a loss as to why you believe that the scientists are at a disadvantage to the economists. Indeed, given the heroic intellectual feats that either policy demands, I’m at a loss as to which group of scholars has the edge. Sadly, I suspect that we actually don’t know.
Nathan Oman
February 6, 2010 at 10:28 am
Posted in: Contract Law & Beyond, Economic Analysis of Law
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Too Much Skin in the Game or Too Little?
posted by Nate Oman
The NYT is reporting today on the Administration’s latest round of proposed regulations for the financial sector. Among other things, the proposal includes the so-called Volker Rule, which would prohibit proprietary trading by banks. ”Prop trading” is when an institution makes investments in financial assets using its own capital, rather than its clients’ capital. When an investment banker works with other people’s money, he lives off of commissions. When he does prop trading, he lives off of the profits from the trade itself. The idea behind the Volker rule is that prop trading is just too tempting for bankers to handle. It holds out the possibility of huge profits but by putting the firm’s capital on the line it makes institutions more brittle. And so President Obama wants to ban it.
It seems to me, however, that there is a real tension between this approach and some of the regulations in the House’s recently passed bill. In particular, the House bill laid the blame for the financial crisis at least in part on the originate to distribute model of mortgage lending, insisting that from now on banks need to hold at least part of the residual risk for the loans that they originate. The idea is that when banks have more of a skin in the game, they will not make stupid loans or get swindled by fast talking mortgage brokers selling them subprime junk. Banning prop trading, however, is all about reducing the amount of skin that the banks have in the game. After all, playing with your own money — capital — rather than other people’s money is the ultimate skin in the game. Furthermore, many of the proprietary trades that the Administration is now castigating were in MBSs and CDOs produced by the banks themselves. In other words, rather than using the OTD model to off load subprime risk, a lot of banks were securitizing pools of mortgages and then buying the resulting securities with their own capital. In effect, securitization was less about off loading risk than about transforming an illiquid asset into a (supposedly) liquid asset.
It seems to me that policy makers have a deep schizophrenia in their reactions to the banks, arguing that they were both under- and over-incentivized with regard to mortgage transactions. Of course, there are other problems with prop trading, including a lack of transparency and the temptation for banks engaging in prop trading to increase their returns by over-leveraging themselves. Prohibition, however, strikes me as a rather ham fisted response.
UPDATE: Here are Christine Hurt’s thoughts on the announcement.
January 21, 2010 at 1:21 pm
Posted in: Uncategorized
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A Splendid Exchange
posted by Nate Oman
I just finished reading William Bernstein’s A Splendid Exchange: How Trade Shaped the World. The goal of the book is to provide a global history of international trade from ancient times to the present. The book doesn’t quite deliver on this promise. For example, trade within Africa and the Americas prior to the age of discovery is almost completely ignored. Likewise, for those who know their international economic history, the book isn’t likely to contain anything new. Still it’s a good read, and there is something to be said for seeing huge swaths of history in a single view.
The bulk of Bernstein’s discussion focuses on the history of long distance trade between Europe and the Far East from Roman times through the nineteenth century. He tells how this trade was dominated successively by Greeks, Arabs, Portuguese, Dutch, and finally the English. One of the striking themes is how little there was in the West that the Chinese or Indians actually wanted. Another theme is the often symbiotic relationship between trade and violence, most dramatically illustrated by the Opium Wars between Britain and China in the nineteenth century.
After recounting the Opium Wars, Bernstein’s focus shifts to the politics of free trade and protectionism. Bernstein clearly believes that the free traders have the better of this argument (which, of course, is true) but he is sensitive to the way in which trade can hurt particular groups even if its benefits ultimately outweigh its costs. He also has a good nose for stories of how protectionism has backfired in the past. For example, in the first part of the eighteenth century English weavers rioted repeatedly, placing pressure on Parliament to exclude cheaper (and higher quality) cotton textiles from India. Shielded from low wage Indian labor, English weavers claimed victory. The tariff, however, also gave manufacturers and incentive to find some other way of avoiding high-wage English weavers. The result was the mechanization of cloth production in the late eighteenth century, which ultimately displaced more high-wage weavers than the India trade ever did. Read the rest of this post »
January 20, 2010 at 8:14 am
Posted in: Book Reviews, Contract Law & Beyond, History of Law, International & Comparative Law
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Sun on Katrina’s Lessons for Haiti
posted by Nate Oman
This is a guest post from Professor Lisa Sun at BYU Law School. She is the author, along with Daniel Farber, Jim Chen, and Robert Verchick, of Disaster Law and Policy, from Wolters Kluwer. Lisa writes:
News reports emerging from the devastation of the 7.0 earthquake that struck Haiti last Tuesday suggest that street violence is growing and that local and international officials fear widespread looting, rioting, and the breakdown of civil order. For example, the U.K. Telegraph reported on Saturday that “[a]s anger and fears of violence grew amid desperate shortages of food, water, and medical supplies, bands of machete-wielding earthquake survivor [stet] yesterday roamed through the ruins of Port-au-Prince.” The paper likewise reported incidents of violence against rescuers.
These media reports evoke similar reporting about New Orleans in the aftermath of Hurricane Katrina in fall 2005. Feverish reports of widespread looting and violence painted a picture of a city sinking, not only into the sea, but also into the depths of anarchy. The New Orleans Police Chief told Oprah Winfrey that “little babies [were] getting raped” in the Superdome. Numerous media outlets reported that Katrina survivors were firing on their would-be rescuers. Widespread looting was reported with headlines such as “The looters, They’re Like Cockroaches.” Read the rest of this post »
January 20, 2010 at 7:42 am
Posted in: Current Events, Law and Inequality, Psychology and Behavior
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Law and the Judge’s Cousin
posted by Nate Oman
There is an interesting exchange in the comments of my last post between Dan Cole,Jeff Lipshaw, and Michael Froomkin about institutions and the limits of substantive law. Dan Cole writes:
But substantive law is an intrinsic part of the institutional structure. If the quality of institutions matter, then by definition the quality of laws matter. That is a point made over and over again by Coase, North, Williamson and other economists.
Yes and no. I don’t deny that law plays a role in the quality of the institutions that resolve disputes. I also don’t deny that the overall quality of dispute resolving institutions is effected by the substantive law that the institutions apply. On the other hand, legal institutions are the result of much more than either the legal rules that define their workings or the legal rules that they apply. They are also the result of things like allocation of resources and informal social practices.
I was once at a panel that brought this point home forcefully. It was on comparativecommercial law and that perennial chestnut, which is better the common law or the civil law. The partisans of the common law were laboring hard to establish the virtues of its flexibility and respect for freedom of contract. (I’ve labored over these virtues myself on occasion.) At this point, a long-time commercial practitioner on the panel interjected remarks to this effect:
At the margins, I suppose that the common law is slightly more friendly to commercial innovation than is the civil law. When I go to a civil law jurisdiction I often learn that there are certain transactions I simply can’t run or are more complicated to structure. On the other hand, when I am assessing the economic prospects in any particular country, my main question isn’t “Is this a civil law or a common law jurisdiction?” Rather, my main question is whether or not the fact that the lawyer on the other said is the judge’s cousin will effect the outcome of the case.
That is what I mean when I say that institutions matter more than substantive law.
January 13, 2010 at 8:37 am
Posted in: Contract Law & Beyond, Culture, Economic Analysis of Law, International & Comparative Law, Jurisprudence
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The Irrelevance of Legal Thought
posted by Nate Oman
I suspect that one of the depressing truths of being a law professor is that much of our thinking on how to solve social problems is irrelevant at best and pernicious at worse.
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January 11, 2010 at 9:44 am
Posted in: Bankruptcy, Consumer Protection Law, Contract Law & Beyond, Corporate Finance, Current Events, Economic Analysis of Law, Legal Theory, Securities Regulation
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An Egalitarian Argument for Punishing Poor People More Harshly
posted by Nate Oman
Consider the following argument: The same punishment for different people is not in fact the same. Thinking of a criminal fine is the easiest example. A $1000 fine levied on an offender who is a millionaire is simply not as serious of a sanction as a $1000 fine leveled against a poor criminal. The millionaire can pay the fine without noticing it, while the poor criminal may be subjected to considerable economic hardship. The result is that the $1000 fine will not have much deterrent effect against the millionaire. To get his attention we require a much harsher punishment. So far so good. Read the rest of this post »
January 10, 2010 at 3:02 pm
Posted in: Economic Analysis of Law, Law and Inequality, Legal Theory
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posted by Nate Oman
Poetic justice (nbo)
December 16, 2009 at 6:44 pm
Posted in: Asides
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Social Insurance and the Autonomy of Private Law
posted by Nate Oman
Grading my secured transaction’s exam has got me thinking about the politics of private law. In particular, I think that debates about the proper level of government provided social insurance have a way of distorting our thinking about private law. Consider the much debated subordination of tort victims to secured creditors in bankruptcy. In law school I was taught that the debtor-friendly American bankruptcy system (and yes, even after the supposedly draconian 2005 amendments, it is still among the most debtor friendly bankruptcy laws around) was a substitute for our lamentable lack of a greater government funding for social insurance. Implicit in this line of argument, however, is that tort judgments are supposed to function as a kind of insurance mechanism.
Tort as insurance, however, doesn’t really make that much sense. From an economic point of view there is no a priori reason to suppose that tortfeasors can provide insurance at a lower cost than tort victims. Furthermore, the dominant philosophical theories of tort – corrective justice and civil recourse – don’t view damages as providing insurance to victims. Rather, damages are supposed to vindicate a moral claim by the plaintiff against the defendant, either to compensation or to the right of legitimate retaliation against the tortfeasor. Indeed, for a civil recourse theory in particular, the important thing about a tort system is that it allows a tort victim to act against the person who has wrong him. Driving the tortfeasor into bankruptcy may serve this purpose just as well as money damages, even if the victim ultimately receives pennies on the dollar in bankruptcy.
Indeed, if we take moral theories of private law seriously, then the traditional ideological positions in some of our legal debates get moved around in rather interesting ways. For example, a corrective justice theorist would be quite troubled by a tortfeasors ability to avoid paying compensation in bankruptcy (a “progressive” position) while at the same time being quite hostile to punitive damages (a “conservative” position). A civil recourse theory, on the other hand, would be less concerned about the subordination of tort victims to secured creditors in bankruptcy (a “conservative” position), while being quite a bit friendlier to claims for punitive damages (a “progressive” position). Even more interesting that this diversion from traditional ideological groupings, however, is the way that these theories are both more or less indifferent to the questions of social insurance that so dominated my own introduction to bankruptcy and commercial law.
December 16, 2009 at 5:51 pm
Posted in: Bankruptcy, Tort Law
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Barney Frank’s Bad Idea
posted by Nate Oman
Last month Barney Frank unveiled the House plans to fix the financial services industry. One of the provisions (section 1501) will require that any creditor who originates a loan to retain some of the ultimate risk of non-repayment of the loan. The provision is an apparently sensible response to the pathologies in the originate-to-distribute (OTD) model of mortgage lending that we saw at the height of the subprime boom. The basic idea is that originators were insufficiently incentivized to monitor the credit worthiness of applicants, and therefore manufactured a huge volume of ultimately toxic financial assets. The idea is to fix the problem of agency costs by aligning the incentives of loan originators with loan holders. Despite the plausibility of the proposal, I think that it is ultimately a bad idea.
First, it is a bad idea because it addresses a symptom rather than a cause of financial rot. The problem with the mortgage-brokers-as-villains narrative is that it fails to explain why the brokers could do a land office business selling toxic junk to a voracious secondary market. One explanation – the one implicit in section 1501 – is that brokers were taking advantage of purchasers, selling them supposedly sound financial assets that the purchasers were too unsophisticated or blinded by greed to realize were junk. To state this assumption explicitly is to see its limitations. The purchasers of mortgages were not unsophisticated consumers or little old ladies entrusting their savings to fast talking swindlers. These were a bunch of extremely wealthy, extremely sophisticated, extremely large financial institutions. It is rather unlikely that these guys were “fooled” by the mortgage brokers.
A more plausible story, in my opinion, looks at the underlying supply and demand for credit. First, why did the mortgage brokers go into the subprime market? At least in part the answer is that they could afford to do so. With the short term wholesale funding on which they relied to originate loans costing them essentially nothing, it was extremely inexpensive to originate loans. At the same time, the massive subsidization of the subprime market through implicit guarantees to the Fannie and Freddie, the so-called “Greenspan Put” on which Wall Street relied, and various (admittedly much smaller) direct subsidies created a massive demand for the assets churned out by the mortgage brokers. Add to this the impact of monetary and Chinese balance of payments factors on asset prices, and the notion that the subprime crisis was really the result of agency costs in the OTD model looks implausible. Absent macro-economic and regulatory distortions, I suspect that market competition and reputational sanctions are sufficient to keep the OTD brokers honest. Given those distortions, we have seen spectacular examples of those who did have skin in the game responding perversely to the perverse incentives with which they were presented. Read the rest of this post »
November 11, 2009 at 2:53 pm
Posted in: Consumer Protection Law, Contract Law & Beyond, Corporate Finance, Current Events, Uncategorized
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Today’s Strange Legal Relic from the Civil War
posted by Nate Oman
In 1862, the legislature of Mississippi enacted the following statute:
It is lawful for any married woman to alledge [sic] as a cause of divorce, that her husband is engaged in the service of the United States of America, either in the army or navy, or from choice reside in any one of the States of the United States in preference to residence in one of the Confederate States. Provided, that such divorce shall not render illegitimate the children of such marriage.
Interestingly, the Confederate husband whose wife sided with the Yankees was left without specific recourse, although I believe that female abandonment of the marital home was always cause for divorce. One also wonders about the loyal son of the South caught on the wrong side of the lines and forced to reside amongst the Northerners. Could he argue that he did not reside by “preference,” or was his wife free to cut him off?
November 11, 2009 at 12:37 am
Posted in: Uncategorized
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Voices from the Past
posted by Nate Oman
Of late, I have been listening to historic audio recordings online. There is something haunting about hearing the voices and sounds of a world that one generally experiences only in print. Consider, for example the earliest recorded human voice, made in France in 1860. When this almost entirely incomprehensible bit of sound was captured, the election that would put Lincoln in the White House and split apart the country was raging on the other side of the Atlantic.
Thirty-seven years later, Wilford Woodruff, the president of the Mormon church who abandoned polygamy in 1890, recorded this statement of his religious beliefs. Four years later in 1901 Booker T. Washington made this speech on “The American Negro” and William Jennings Bryan denounced imperialism. (Here is a 1921 re-recording of his famous “Cross of Gold” speech, originally given in 1896, a year before Woodruff’s recording was made.)
On the other side of the Atlantic, in 1908 Christabel Harriette Pankhurst, one of the so-called ”militant suffragettes,” justified protests and civil disobedience to get votes for women, and a year later David Lloyd George, then Chancellor of the Exchequer, defended the so-called “People’s Budget” of 1909, which marked the beginning of the British welfare state.
Here is a 1912 recording of Theodore Roosevelt in which he makes the case for vigorous trust-busting authority. Notice the nasally quality to his voice. This was pretty common among 19th and early 20th century orators, as it allowed their voices to be heard farther without the benefit of loud speakers. Later in the decade V.I. Lenin gave this speech (in Russian) about a fallen comrade. At the time of the speech, the civil war precipitated by the October Revolution still raged across Russia.
In 1931, Justice Oliver Wendell Holmes Jr. made this recording on his 90th birthday giving his thoughts on life, struggle, work, and his impending death. A few years later, FDR won re-election in the campaign of 1936 and gave this “fireside chat” on his plans to tame the federal judiciary. Four years later, in the summer of 1940 Winston Churchill spoke to the House of Commons in the aftermath of Dunkirk, declaring “We will never surrender!” It still counts, in my mind, as the most heroic moment of political rhetoric and statesmanship in the twentieth century, and one of the great moments of all time. I get goose bumps listening to it, despite Churchill’s lisp.
Finally, in honor of yesterday’s anniversary, I offer this, less historical, recording of Reagan’s challenge, “Mr. Gorbachev, tear down this wall!” Another of the great moments of 20th century political oratory.
November 10, 2009 at 10:18 am
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