Archive for the ‘Current Events’ Category
KSM on Trial
posted by Gerard Magliocca
The decision to try some of the ringleaders of 9/11 in the District Court for the Southern District of New York raises many interesting questions. Here are a few below the fold:
November 19, 2009 at 6:17 am
Posted in: Current Events
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Against Politics and Finance in Accounting
posted by Lawrence Cunningham
An old joke says every financial crisis needs an accounting culprit to blame. The current crisis may be attributable instead to the dominance of modern finance theory and subordination of traditional accounting principles. Two generations of finance theorists—in business and law schools—developed elaborate models to measure and manage risk in a theoretical world of efficient markets where accounting is not relevant.
Yet two strange twists have arisen—one showing the intellectual limits of the finance story and the other the dark art of making accounting into a political issue. Both concern debate over how to measure financial assets on a balance sheet—the so-called fair value debate.
First, for decades, proponents of modern finance theory urged standard setters to direct asset measurements using fair value rather than applying traditional accounting conventions. The prescription was based on assertions that emphasized the reliability of efficient markets to reveal relevant values. Proponents said traditional accounting conventions, using acquisition cost adjusted over time, were comparatively impoverished.
Amid the crisis, those same people shift their stance, now saying fair value measures in stressful markets are either misleading or put downward pressure on values that could render owners of impaired assets, especially banks, insolvent. On its face, this is an admission about the limits of markets to reveal reliable asset values, that modern finance theory is impoverished.
Second, without opining on the merits of measuring assets at fair value or using historical cost accounting conventions, this issue, once again, is turning accounting standard setting into a political expression rather than a professional one. Politicians in Congress, under heavy bank lobbying, pressured the US standard setter [the Financial Accounting Standards Board] to adopt bank-friendly approaches to asset measurement. Now, Congressional bills (here, for example, and noted here) contemplate empowering politicians and/or a new federal agency to oversee US accounting standard setting, equipping them with veto rights over any accounting standards the political power consensus disfavors.
November 16, 2009 at 11:48 am
Posted in: Accounting, Corporate Finance, Corporate Law, Current Events, Politics
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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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Literal Real Estate Crash
posted by Lawrence Cunningham
A Civil Engineering Quiz: Suppose you build a 12-story condominium using pilings designed to tolerate a degree of surface imbalance on its north and south side of about 2,000 tons. Then suppose you dig an underground garage on the building’s south side to 20 feet and pile the dirt on its north side to about 30 feet, yielding a surface imbalance of about 3,000 tons. What would happen?
See the accompanying photograph of a fallen condo in China, taken by Bill Hopen, featured in a story by Mish Shedlock. Hopen sees in the story and photograph a tragic metaphor for a coming economic crash in Chinese real estate, which he worries is likely, a year or two behind the similar convulsions the West began two years ago. If so, prospects for global economic recovery are dimmer than many suppose. Mish and Bill offer more photos and explain the concerns more fully at the foregoing two links. Worth a look.
Current Events Quiz: Will the effort that goes into determining the cause of the photographed building crash be proportional to that expended determining the cause of the economic crash imperiling the West, and predicted soon to imperil China? Is it difficult to understand why it is easier to see such excessive imbalances in physical than economic settings?
November 10, 2009 at 5:15 pm
Posted in: Current Events
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Boastful Contract Lawsuit Is Dismissed
posted by Dave Hoffman
I’ve posted on a lawsuit out of Texas, in which a law student plaintiff sued a lawyer defendant for failing to live up to a “promise” to pay $1,000,000 to any television viewer who could prove him wrong about his theory of a case. I opined the case was a classic example of puffery, unlikely to reach the merits on that ground. I challenged readers to prove me wrong.
Louis K. Bonham, counsel to the defendant, has done so. He reports that the case has now been dismissed – but for want of personal jurisdiction. According to the docket, Judge Miller’s decision issued on October 23. It rests on the observation that the only contact that the defendant had with Texas was the airing of a television broadcast: personal jurisdiction on these grounds would make him subject to national jurisdiction where it wasn’t otherwise anticipated.
Incidentally, the underlying motion documents suggest that plaintiff’s claim was even weaker on the merits than I’d argued, as the unedited transcript of of the boast is different than the version in the complaint. Here’s what plaintiff asserted was said:
NBC’s Ann Curry asked whether there was enough time for [Mason's client] to commit [a crime]. An unidentified person said, “The defense says no.”
“I challenge anybody to show me,” Mason said. “I’ll pay them a million dollars if they can do it.”
But here’s what was actually said:
… And from there to be on the videotape in 28 minutes. Not possible. Not possible. I challenge anybody to show me, and guess what? Did they bring in any evidence to say that somebody made that route, did so? State’s burden of proof. If they can do it, I’ll challenge ‘em. I’ll pay them a million dollars if they can do it.
NBC Transcript, p. 3
This kind of qualifying language makes it even more obvious that the statement was a mere puff. Congrats to Mr. Bonham on his win!
November 9, 2009 at 9:58 am
Posted in: Contract Law & Beyond, Current Events, Law Practice, Law and Psychology
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Sam Heyman, RIP
posted by Lawrence Cunningham
Sam Heyman, lawyer, businessman and philanthropist, died this weekend at the age of 70 after complications arose following open heart surgery at Mt. Sinai Hospital in New York.
Scholars and practitioners of corporate law got to know Sam as a distinctive figure in the shareholder rights movement of the 1980s. Blending his training as a lawyer with his acumen as a businessman, Sam stood out among his peers in that movement by acquiring companies he intended to manage better than incumbent managers, rather than picking them apart to bust up or flip them for a quick buck. In doing so, he accumulated a considerable fortune.
Scholars and friends of Cardozo Law School knew Sam as a philanthropist and benefactor. He co-founded and co-endowed, with his wife Ronnie, The Samuel and Ronnie Heyman Center on Corporate Governance, which I had the pleasure of directing for most of the 1990s. The Heyman Center was Sam and Ronnie’s way of helping to educate law students interested in corporate law and providing a forum to generate ideas on the subject.
The Heyman’s multi-million dollar gift enabled us at Cardozo to award scholarships to students, support students in public interest work, study comparative corporate law at Oxford, fund special advanced courses at Cardozo, bring learned visiting scholars to Cardozo, and hosting of scores roundtables, speaker series, conferences and many multi-day symposia.
The Heymans never influenced any of our activities, but were always ready to support them in any way we asked them to. Among my favorite Heyman Center events, and an example of the Heyman’s willingness to contribute both money and ideas, was Sam’s own lecture in our 1999 speaker series called “Non-Practicing Lawyers.” Sam shared with our students his insights on the value his law degree gave him in thinking about risk, ethics and opportunities as applied to the business context.
Another of my favorite Heyman Center events was our 1997 symposium entitled Warren Buffett: Lessons for Corporate America, in which Sam and Ronnie participated, and for which they hosted a delightful dinner party at their home. This was one of many Heyman Center events for which Sam and Ronnie opened their home up to me and the Cardozo community.
Sam was a generous philanthropist, thoughtful and reflective business leader, best friend of Cardozo Law School and abiding supporter of mine and friend to me, plus from all accounts and my indirect observations, a wonderful husband and father.
We all will miss him.
Photo Credit: Norman Goldberg (Sam giving lecture at Cardozo, 1999).
NYT obituary here.
November 9, 2009 at 9:18 am
Posted in: Current Events
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Lawyers: Don’t Trade on Inside Information!
posted by Lawrence Cunningham
In my corporations classes, I urge my students planning a career in corporate and securities law to resist the ubiquitous opportunities and occasional temptations to trade on the basis of material non-public information. I offer in terrorum encouragement by emphasizing that all trades are tracked and that enforcement authorities periodically review them for unusual patterns. Those are traced back to professional advisors, including law firms, having been involved in related deals. It is not difficult for authorities to catch these violations.
Along with dozens of others apparently caught up in the ongoing insider trading scandal at Galleon, today, an associate at the prestigious firm, Ropes & Gray, is alleged to have violated securities laws by using confidential information obtained from clients to profit in securities trades. Lawyers, as fiduciaries, who obtain material information through client representation, violate their fiduciary obligations and hence federal securities laws when they trade on it. See United States v. O’Hagan, 541 U.S. 642 (1997).
Over at the Wall Street Journal blog, Ashby Jones is asking how common insider trading is among lawyers. This is obviously a difficult empirical question. I can add, however, that (a) in the four years that I practiced law at Cravath, Swaine & Moore, one of my fellow-associates engaged in this activity (with his brother) and authorities prosecuted him (in 1995) for it and (b) during the two years before that when I was a paralegal at Skadden, Arps, one of the associates for whom I worked did so (with his sister) and he was likewise caught (in 1990).
In addition, the famous case embracing the so-called misappropriation theory of insider trading, United States v. O’Hagan, 541 U.S. 642 (1997), involved a lawyer—a partner at Dorsey & Whitney, representing Grand Met in its acquisition of Pillsbury, who generated nearly $4 million in unlawful trading gains from the knowledge.
I repeat to my students, past and present, and all lawyers: do not do this!
November 5, 2009 at 3:50 pm
Posted in: Current Events, Law Practice, Legal Ethics, Securities Regulation
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Buffett Bullish on America
posted by Lawrence Cunningham
Economic prognosis positive is the signal to hear today from Warren Buffett and Berkshire Hathaway’s agreement to buy 100% of the stock of the railroad, Burlington Northern Santa Fe, consolidating the company’s 22% ownership stake in a $34 billion acquisition.
As an author of books on Buffett’s investment philosophy, including a compilation of his letters I prepared for a law review symposium at Cardozo Law School in 1997, I’m quoted in tomorrow’s USA Today story covering the deal (written by Adam Shell).
Adam’s story correctly reflects my take on the deal as squarely meeting Buffett’s traditional criteria: a business within Buffett’s “circle of competence” (i.e., that is easy for him to understand), run by people he “likes, trusts and admires,” and at a price reflecting good value for money.
More broadly, the story reflects how this acquisition is a very public statement that Buffett is “bullish on America,” the long-time slogan of erstwhile investment bank Merrill Lynch (now a part of Bank of America).
There’s one way the deal and Berkshire’s disclosure is unusual: Buffett says this acquisition is a big “bet” on Burlington, its management, and the US economy. Buffett does not usually talk about investing using the word “bet” or other gambling terms, eschewing them in favor of emphasizing cool, calculated, rational evaluation of business and its environment.
Another notable feature about this investment, Berkshire’s largest acquisition ever, is how Burlington is particularly strong, among railroads, in transporting goods from West coast ports into America’s heartland. Forecasting high returns doing that suggests a prediction that, as the US economy recovers, the country will remain heavily reliant on imports, certainly of goods and probably of energy, especially from China and East Asia.
Maybe there is a gamble here, on both a US recovery and the post-recovery shape of trade, manufacturing and consumption. And there is always risk in investment. But this one fits enough within traditional Berkshire investments that it suggests being bullish again may be a safe bet. [Disclosure: I own Berkshire Hathaway stock, and have for many years.]
Photo Credit: Norman Goldberg (Buffett teaching my Corporations class at Cardozo Law School, 1998)
November 3, 2009 at 3:45 pm
Posted in: Current Events
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What would LBJ do?
posted by Spencer Waller
I am almost done with Robert Caro’s Master of the Senate, his magnificent biography of the years Lyndon Baines Johnson served in the United States Senate. This is the third volume of his-yet unfinished biography of the life of LBJ. This work in progress is now approximately 2500 pages long and has not even covered the years where LBJ was Vice-President and President.
All three volumes focus on Johnson’s ambition for power and leadership. Master of the Senate begins with the history of the Senate and its role in our Constitutional structure as the place where dramatic political and social change goes to die – by design. Even after Senators were directly elected, the longer terms, the rules of the Senate, the role of seniority, committee chairmanships, the ease of filibuster, and the difficulty of cloture have made the Senate a unique institution.
Caro focuses mostly on two developments in the years between 1948 and 1960 before Johnson was elected Vice-President. First, was his meteoric rise as the first (and possibly last) Senate Majority Leader to wield true power. Second, was his burning ambition to be the first Southerner to be elected President since the Civil War.
These two developments combined in Johnson’ epic struggle to pass the Civil Rights of Act of 1957. Out of burning ambition, but also a complicated attitude toward race that was different than most Southern Senators, Johnson wanted, needed, some, any, civil rights legislation to lay the foundation for a run for the White House in 1960. Passing such legislation meant a weak enough bill so the Southern Bloc (his bloc as Caro makes clear in detail) wouldn’t filibuster, and yet enough of a bill that the Republicans, Northern liberals, and Western Democrats could support. To ensure passage, and no filibuster, Johnson had to stitch together a coalition that had never been successfully created on civil rights from the Jim Crow era on.
Caro lays out the cajoling, wheeling, dealing, strong arming, and compromising in the fight for the civil rights bill as well as the complicated linkages between the civil rights bill and other legislation to obtain LBJ’s winning coalition. Among other things, Johnson brokered a deal between Western Democrats who wanted public power and conservative Southern Democrats who wanted the most watered down civil rights bill possible. The Southerners voted for a public power bill they had previously opposed, but did not filibuster the emerging civil rights bills once key changes were made. The Southerners opposed the bill on the floor and voted against it, but would never used the one weapon which could have killed it entirely. The Western Democrats got their public power (at least in the Senate) and supported watering down the civil rights bill which would not hurt them politically back home in that era. Northern Democrats eventually were reconciled to the fact that some bill was better than nothing and Southern Democrats were reconciled to the fact that some bill was inevitable.
Does this remind you of anything currently going on in the Senate? We are seeing the same type of struggle now play out in the Senate over health care reform. Only a fraction of the sausage making is taking place in public, but the same issues of power, leadership, and strategy seems to be unfolding. Some bill, any bill, will probably ultimately pass. Obviously Harry Reid is no LBJ, but the demographics of the House, Senate, and White House are different enough that something is likely to emerge.
But the issues of power, leadership, and strategy remain. Is some bill better than no bill? Is this the first step to more comprehensive reform down the road? Is the watering down of the public option to build coalitions within the Democratic Party, and perhaps a couple of Republicans, leadership, weakness, or just rent seeking? While we will never know, what would LBJ have done on health care, and will we ever see the likes of him as a legislative leader again?
***
Thanks to Danielle, Dan, and the rest of Concurring Opinions for the chance to blog for the month of October. I look forward to the new group of guest commentators for November including my Loyola-Chicago colleague Mike Zimmer.
October 31, 2009 at 6:58 pm
Tags: Civil Rights, filibuster, Harry Reid, health care, LBJ, Lyndon Johnson, Majority Leader, Master of the Senate, Robert Caro, Senate
Posted in: Civil Rights, Current Events, Health Law, History of Law, Politics, Race
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Health Care Reform in Political Time
posted by Gerard Magliocca
As the health care bill crawls towards the Senate floor, I’d like to paraphrase my favorite Simpsons episode and say that I look forward to an orderly debate that will eliminate the need for a violent bloodbath. See Kang v. Kodos (1996).
The health case issue is playing out along the lines that I sketched out in my work on generational conflict in constitutional law. Each new movement eventually coalesces or or is identified with a major statutory initiative (the repeal of the Judiciary Act of 1801, the Indian Removal Act of 1830, the National Recovery Act of 1933, the Civil Rights Act of 1964, the Reagan Tax Cuts of 1981). That transformative effort is almost always met by intense resistance from the political branches or from the Supreme Court (Worcester v. Georgia, Schechter Poultry, the filibuster of the 1964 Act). This then leads both sides to engage in extraordinary procedural innovations to advance their agenda (judicial review, impeachment of Justices, Censure of the President, Court-packing).
Health care is now the signature measure of the Obama Administration. While the fight against the bill is still ongoing, the town halls during August definitely raised the political temperature far above a typical piece of legislation. (The length of the debate is another sign of this.) Now I’m waiting for the unusual procedures to emerge. Putting the bill through the Senate via reconciliation is the most likely candidate, but then again the innovation wouldn’t be extraordinary if I could easily predict what it will be.
October 30, 2009 at 6:12 am
Posted in: Current Events
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Revolutionary Financial Regulation
posted by Lawrence Cunningham
As previously hinted at here, revolutionary changes are forthcoming in financial regulation. These will be far more significant than any that have been made, including compared to those in 1933 and 1934 after the 1929 stock market crash and ensuing Great Depression.
Seven years ago, when Sarbanes-Oxley was enacted, many people declared it “sweeping legislation.” The vast majority of observers and participants said it was the most significant set of reforms since the Great Depression. Proponents thought this an affirmative good and opponents, like Larry Ribstein and Roberta Romano, found it repugnant.
I was among the minority who explained how this notion of “sweeping” was rhetorical over-statement–and how the rhetoric combined with the modest changes could actually work, which they did. Certainly compared to what is coming, Sar-Box will be the yawn I suggested it was, though Congress continues to debate, in the current negotiation, how far parts of it should go, including whether to extend its internal control requirements to smaller enterprises.
Amid the current hurly-burly, also as previously noted, we at GW are hosting a conference, next Friday, to sort through some of this. A program is here, along with details on how to register. One highlight among many: our keynote speaker is SEC Commisioner Luis Aguilar, though spots for his lunch time talk may be scarce.
October 29, 2009 at 4:36 pm
Posted in: Current Events
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House Financial Committee Busy
posted by Lawrence Cunningham
The Staff of the House Financial Services Committee is extremely busy and doing a very good job of keeping its role in the legislative process transparent. A reasonable run down of current activity in financial regulation reform appears here. (You can even sign up to get email alerts.)
These bills are elaborate, complex and defy tidy characterization. All are likely to change, some significantly, as the legislative process grinds along. The Senate Banking Committee is unlikely to produce anything equivalent until well into November.
In general, however, together the House FSC’s work would make for sweeping change. The bills would:
(1) create three new federal agencies: a Federal Oversight Council, a Consumer Financial Protection Agency and an Office of Federal Insurance;
(2) considerably expand powers of the Securities Exchange Commission, including by subjecting rating agencies to considerable regulation and oversight by the SEC plus eliminate an exemption to the Investment Company Act of 1940 for private financial advisors.; and
(3) expand the mandate and powers of the Commodity Futures Trading Commission concerning regulation of derivative securities.
These pending Committee steps, of course, are in addition to bills the House passed earlier this year, including the summer’s Corporate and Financial Institution Compensation Fairness Act of 2009, embracing shareholder say on executive compensation to a certain extent.
At this link, you can access pending bills totaling just about 1,000 pages. Following is an additional breakdown: Read the rest of this post »
October 28, 2009 at 2:22 pm
Posted in: Consumer Protection Law, Corporate Finance, Current Events, Securities, Securities Regulation
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Ensuring that We Leave Children Behind
posted by Danielle Citron
Talk about children, their educations, and security abound. Politicians declare their devotion to children’s issues. Singers and actors assure us that “children are our future.” Books enlist villages to raise them. But when the rubber hits the road we routinely fail children in so many ways, including privacy. Today, Joel Reidenberg’s Center on Law and Information Policy released a report attesting to our utter inability to protect the privacy of children’s educational records. Reviewing publicly available information from all 50 states, the CLIP study found that states collect information far in excess of what law requires, including data about pregnancy, mental illness, family wealth, jail sentences, and Social Security numbers. Despite the sensitive nature of the information collected, state databases have weak privacy protections. The study found that oftentimes the flow of information from local schools to state departments of education failed to comply with the privacy requirements of the Family Educational Rights and Privacy Act.
This appalling state of affairs cannot stand. Such databases are ripe for identity thieves and hackers who will enjoy plundering the Social Security numbers. They can lead to discrimination based on inappropriately shared health information. The CLIP study has offered a number of wise recommendations, including the minimization of data collection, adoption of clear retention policies, and maintenance of audit logs. It also suggests the anonymization of data through the use of dual database architectures, which I wonder if Paul Ohm’s important work on the myth of anonymity would question. Otherwise, this study must be read and heeded.
October 28, 2009 at 1:28 pm
Posted in: Current Events, Education, Privacy
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Privacy’s Zietgeist Moment
posted by Danielle Citron
Privacy has seemingly come center stage. Companies like Google, Microsoft, and eBay have joined forces to support a federal law that would impose uniform standards for the collection, use, and transfer of information across the private sector. Activists and officials hope 
to update the Privacy Act of 1974 for the twenty-first century. Senator Leahy has a renewed interest in data breach legislation, proposing the Personal Data Privacy and Security Act in July. The American Recovery and Reinvestment Act of 2009, the stimulus bill, includes a data breach notification requirement for health providers. The Federal Trade Commission recently published its final rule on data breach notification for e-health records.
Strengthening the nation’s commitment to privacy is crucial. But, as Paul Schwartz’s engrossing Preemption and Privacy essay (Yale Law Journal) illuminates, a unitary federal information privacy statute should give us pause. Today’s information privacy law landscape is mainly comprised of federal sector-specific statutes and stronger state regulation. Schwartz makes a compelling case for remaining on that course, rather than adopting a uniform federal privacy statute. As Schwartz underscores, a uniform federal approach would likely preempt stronger state law rules, eliminating successful experimentation at the state level. California exemplifies this trend: its privacy innovations include allowing consumers to freeze their credit in the face of identity theft among others. New York and Connecticut are now considering bills that would set limits on companies that track consumers across websites to deliver targeted advertisements based on their online behavior. A uniform federal law would likely extinguish state-driven innovations whereas most federal sectoral privacy laws, such as the Gramm-Leach-Bliley Act, only provide a federal floor for information privacy and security, not a ceiling. Schwartz highlights the possibility that a comprehensive information privacy law may ossify, thus making the loss of state experimentation all the more grave. The piece also spearheads an important discussion about whether the centralizing forces at work today undermines the contributions of competitive federalism.
Schwartz’s piece is a must read. Here is the abstract for Preemption and Privacy: Read the rest of this post »
October 27, 2009 at 11:08 am
Posted in: Current Events, Cyberlaw, Privacy
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GW Fin Reg Conference Nov. 6
posted by Lawrence Cunningham
As financial regulation reform reaches its apogee, we at GWU are delighted to host a roundtable on Friday Nov. 6 at the Law School (2000 H Street, NW, Washington, DC). An outline of the Program, co-sponsored by the Institute for Law and Economic Policy, follows, along with how to register. Note that participation of some panelists is subject to the legislative calendar. Read the rest of this post »
October 26, 2009 at 11:22 am
Posted in: Current Events, Law School (Scholarship), Securities Regulation
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When Joining Forces Spells Trouble: Proposed Merger of E-Voting Companies
posted by Danielle Citron
Last month, Diebold announced that ES&S would purchase its e-voting business for $5 million plus some outstanding revenue. Diebold’s shareholders no doubt rejoiced: while the company’s ATM machines have a strong reputation, its e-voting machines brought the company only grief. Diebold even changed its e-voting unit’s name to Premier to protect the company’s otherwise strong brand name.
This merger, however, is bad news for voters. It would entrust 3/4s of e-voting machines into the hands of a company whose machines rival Diebold’s for inaccuracy and insecurity. Consider this recent example. In 2008, ES&S machines allocated votes cast in one race to a different race that was not even on the ballot. As a result, the wrong candidate won a state House nomination race. Given the consolidation of the e-voting market, we can have little hope that future machines will be more secure. Ed Felten explains that “[t]he odds of one major e-voting company breaking from the pack and embracing up-to-date security engineering are now even slimmer than before.” Because breaking into the e-voting business is expensive due to high accreditation costs, ES&S may face limp competition in bids for upcoming contracts. Voting administrators thus may be unable to obtain important terms crucial to transparency and accountability, such as the placement of source code in escrow.
Although voters should lament this development, all isn’t lost. As Joe Hall notes, California Secretary of State Debra Bowen has provided wise advice to the Election Assistance Commission with regard to the integrity of e-voting systems. Bowen urges that the EAC require greater disclosure of vulnerabilities, the adoption of procedures that jurisdictions can follow to collect and report data about incidents they experience with their voting systems, and the systematic collection of data from election officials about how voting systems perform during general elections. This recalls the important work of Heather Gerken in her book The Democracy Index: Why Our Election System is Failing and How to Fix It. The EAC would be wise to adopt these proposals, especially in light of the upcoming merger.
October 24, 2009 at 2:17 pm
Posted in: Administrative Law, Architecture, Current Events, Technology, Uncategorized
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Aspirational International Law
posted by Gerard Magliocca
So I go away for a few days and the President wins a Nobel Peace Prize. I’ve always wondered how high you have to go in life before you no longer need a resume. I’d be busy updating mine to say “Nobel Laureate,” but I guess the Chief Executive does not need to do that. (BTW, I’m not sure this is any more bogus than the President’s “Spoken Word Grammy” for his books. What does that mean exactly?)
My favorite line of defense, however, is that this is an aspirational prize. It’s not what he’s done. It’s what he’s going to do. Unfortunately, this idea has a poor track record. Frank Kellogg, the Secretary of State under Coolidge, won a Nobel in 1929 for his role in crafting the Kellogg-Briand pact, in which the United States and other great powers agreed to renounce war as an instrument of national policy. International law is still working on that one –last I heard.
October 12, 2009 at 7:34 pm
Posted in: Current Events
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Umpires Don’t Make Law, Players Do.
posted by Dave Hoffman
Via Deadspin comes this great video of Joe Mauer, apparently reading the catcher’s signs and relaying them to batter Jason Kubel.
Putting aside Mauer’s denial, the interesting thing about this is whether it’s actually wrong to steal signs. There’s no rule against it, and so the answer is: it depends on the players’ perceptions of the situation. If you run afoul of the norm (i.e., a batter looking behind him) then you are likely to face informal sanctions in the form of a baseball to the body. Mauer’s sign-stealing, by contrast, seems acceptable: (1) it was a crucial game; and (2) the Tigers didn’t protect their signs despite knowing a man was on second. But it isn’t so acceptable that he can admit it publicly. That is: Mauer’s sign stealing was at once lawful, permitted in the social context, and publicly wrongful.
(H/T: Reader CDP. For more on the history of sign-stealing in baseball, check out The Echoing Green: The Untold Story of Bobby Thomson, Ralph Branca and the Shot Heard Round the World)
October 2, 2009 at 8:49 am
Posted in: Criminal Law, Culture, Current Events, Sociology of Law
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Scandal and Conflict of Interest in Formula One
posted by Michael Kang
A major cheating scandal has erupted at the highest level of international auto racing. After an investigation by the Federation Internationale de l’Automobile (FIA), the ING Renault Formula One Team announced it does not dispute the FIA’s charge that the team illegally conspired with its driver Nelson Piquet, Jr. to aid his teammate Fernando Alonso’s victory at last year’s Singapore Grand Prix by crashing intentionally during the race. Piquet crashed on lap fourteen of the race, ending his day and requiring deployment of a safety car (race cars stack up in order, with passing prohibited) while stewards cleaned up the course. Piquet’s crash was incredibly well-timed for his teammate Alonso and vaulted Alonso to a race lead that he would never relinquish. Alonso had mechanical problems during qualifying and started the race in fifteenth position on a narrow street circuit where overtaking is difficult. Piquet’s crash came immediately after Alonso had pitted for fuel, but before the rest of the field had done so, and as a result, Alonso promptly assumed the race lead as the other cars pitted in turn during the caution period. The perfect timing of Piquet’s crash for another Renault driver was suspicious from the start: Safety cars are somewhat rare in Formula One, but Piquet’s crash occurred where the stewards couldn’t quickly remove his car, and what is more, Alonso’s race strategy to pit so early was unusual—most cars starting at the back of the field load up on fuel and pit as late as possible, while Alonso did the opposite in the improbable hope of exactly what happened.
Nothing would have come of suspicions about Alonso’s victory, except that Renault fired Piquet as a driver this August, about a year after the race. Immediately following his dismissal, Piquet launched a public campaign against Renault managing director Flavio Briatore and then confessed to the FIA that he had crashed intentionally at Renault’s direction. Piquet claims, and Renault no longer denies, that Briatore and Renault director of engineering Pat Symonds approached him before the race about whether he would be willing to crash intentionally early in the race. Piquet explains that he “was in a very fragile and emotional state of mind . . . brought about by intense stress due to the fact that Mr. Briatore had refused to inform [him] of whether or not [his] driver’s contract would be renewed.” As a result of this developing scandal, Briatore and Symonds have resigned, and it isn’t clear what penalties the FIA will apply against Renault and the various parties involved. The FIA disqualified McLaren-Mercedes outright from the constructor’s championship and levied a $100 million penalty following a similarly appalling scandal two years ago.
The additional wrinkle here is that the scandal features an astounding conflict of interest at its heart. Briatore, while acting as managing director of Renault, served also as Piquet’s professional manager through a separate company. In other words, Briatore sat on both sides of the table in Piquet’s dealings with Renault. To be candid, Piquet has always struck me as an immature, unsympathetic character living a charmed life in no small part because his father is a three-time Formula One champion as a driver. But a driver’s seat in Formula One is incredibly difficult to secure, and it isn’t surprising that even Piquet may have felt overwhelming pressure to compromise himself (as well as risk serious injury) for someone serving as both his personal representative and his boss at the same time. Indeed, Briatore’s conflict of interest is not unusual in the incestuous world of Formula One. Briatore’s company actually has a similar arrangement with Piquet’s replacement, Romain Grosjean, as well as some type of management relationship with virtually every F1 driver employed by Renault during the last decade, including Alonso. As far as I know, neither the FIA nor the Grand Prix Drivers’ Association requires certification for driver’s managers or representatives anywhere comparable to the standards set by the unions for professional athletes in American sports leagues. It appears that the Renault scandal may finally prod the FIA or World Motor Sports Council to action on the issue.
September 18, 2009 at 9:25 am
Posted in: Current Events, Legal Ethics
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Hidden Culprit in Financial Crisis
posted by Lawrence Cunningham
The Financial Crisis Inquiry Commission, created by the Fraud Enforcement and Recovery Act (May 20, 2009), held its first public meeting today, launching its mandate to examine causes of the financial crisis. The statute enumerates 22 possible culprits, all now usual suspects, like executive compensation, bad regulatory oversight, financial derivatives, complex securitization schemes and the like. Also on the list is the general notion of bad lending practices at banks, which two Commissioners today likewise noted in general terms.
Not on the list, and not mentioned today, or much discussed in the cacophonous litany, are the credit scoring systems lenders use to make first and sometimes final cuts on loan decisions. The credit scores lenders used before the crisis are still used today. But they do not measure credit-worthiness, or probability of loan repayment, as much as they measure whether applicants are good customers of banks, compared to those less reliant on banks. They value debt, and over-leverage is a recurring culprit in all financial crises.
To illustrate, take a pop quiz. Suppose the following two people apply for a mortgage loan on a home in suburban Maryland (say for $500,000). (1) Which is more credit worthy? (2) Which is more likely to be approved? (3) Would the answers differ if the decision were made today, after the financial crisis, or two years ago, before that?
Applicant A is a tenured Professor of Medicine at Johns Hopkins University, with a mid-6 figure base salary, doubled by significant practice income, revenue on patents she shares with the University, and rental income from resort properties she inherited from an aunt years ago that are owned free and clear of any liens or loans. The Doctor has no outstanding debt, a net worth in the low seven figures and has bought and sold two previous homes, paying off related mortgages before their maturity date.
Applicant B is a local real estate developer, with a low-6 figure income, ¼ of which is in contingent bonus compensation, and no other source of income. His net worth consists mainly of a modest retirement account, stock options and grants from his employer, and some cash in the bank, about enough to make the down-payment contemplated by the mortgage loan application. He has several lines of credit outstanding, all with meaningful balances, that he has increased regularly for years, though always paying monthly minimum balances when due. Read the rest of this post »
September 17, 2009 at 4:58 pm
Posted in: Culture, Current Events
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