1.  Should a change of venue be granted?  Are the defendants unduly prejudiced by a trial held a few blocks away from Ground Zero?

2.  To what extent, if at all, is knowledge about 9/11 a reason to excuse jurors for cause?

3.  If the prosecution exercises several of its peremptory challenges against Muslims or Arabs, could that lead to a Batson claim?

4.  Can the case against the defendants be made without relying on evidence obtained through torture?  If not, would such evidence be admissible?  (The same issue may arise for electronic surveillance.)

5.  Can KSM represent [...]]]> 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:

1.  Should a change of venue be granted?  Are the defendants unduly prejudiced by a trial held a few blocks away from Ground Zero?

2.  To what extent, if at all, is knowledge about 9/11 a reason to excuse jurors for cause?

3.  If the prosecution exercises several of its peremptory challenges against Muslims or Arabs, could that lead to a Batson claim?

4.  Can the case against the defendants be made without relying on evidence obtained through torture?  If not, would such evidence be admissible?  (The same issue may arise for electronic surveillance.)

5.  Can KSM represent himself and then refuse to attend the proceedings, thus turning this into a kind of trial in absentia?

6.  If #5 occurs, would the death penalty still be an appropriate punishment?

7.  To what extent should defense counsel (if there is one) have access to classified information to prepare a defense?

8.  Will all of the OJ trial commentators return for a kind of circus reunion?

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 [...]]]>

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.

Such politicization of accounting, a recurrent threat in the United States that generally is recurrently defeated, is dangerous, as Bill Bratton has explored. Injecting politics into accounting standard setting would not only turn our accounting system into a version of the politically-pockmarked and incomprehensible US tax code, it would diminish the hard-won emphasis on investors as the primary constituent for which accounting standards are adopted.

Examples of hard-won investor focus, and successful resistance to campaigns to make accounting a political product in the US, include (a) accounting for oil companies during the energy crisis of the 1970s, (b) accounting for mergers in the takeover wave of the 1980s, (c) accounting for pensions and employee benefits in the late 1980s after these proliferated and (d) accounting for stock options in the late 1990s and early 2000s after these mushroomed.

In all those contexts, lobbyists got politicians to pressure the independent accounting standard to steer it off its intended course. In each case, however, eventually the standard setter won, retained its position and achieved adoption of accounting standards focused on the needs of investors, rather than parochial interests of managers.

In the current context, the legislative talk is going much further, to create political watch-dog power to oversee the independent standard setter, even giving the federal agency power to veto any standard it does not like. This is a dangerous proposal that should be rejected out of hand.

There is no accounting culprit in the current crisis, a crisis more a product of modern finance theories. Politicians ought to focus on those theories that failed rather than exploit a period of chaos and confusion to alter practices that have succeeded.

Above all, modern finance theories seduce belief that markets, not accounting, matter. Yet the intense and costly political lobbying about what accounting should be also shows that real-world participants know that finance theory’s intellectual elegance masks important drivers of capital allocation.

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 [...]]]> 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?

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 [...]]]> 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!

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, [...]]]> 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.

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. [...]]]> 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!

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 [...]]]> 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)

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 [...]]]> 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.

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 [...]]]> 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.

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 [...]]]> 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.

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 [...]]]> 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:

NEW AGENCIES

Financial Stability Improvement Act of 2009 (draft 10/27) (253 pages) (would create a Financial Services Oversight Council with extensive authorities and duties)

Consumer Financial Protection Agency Act of 2009 (draft 9/25) (291 pages) (would create elaborate new independent federal agency, the CFPA, with broad regulatory powers, many taken away from the Federal Reserve) [summary here]

Federal Insurance Office Act of 2009 (draft 10/16) (15 pages) (would create federal office within the Treasury Department, the FIO, to monitor insurance industry) [summary here]

EXPANDED SEC POWERS

Investor Protection Act of 2009 (draft of 10/16) (153 pages) (would expand powers of the Securities and Exchange Commission in substantial ways) [summary here]

Enhanced Accountability and Transparency in Credit Rating Agencies Act of 2009 (draft 10/16) (37 pages) (would considerably expand SEC oversight of rating agencies and prescribe important aspects of their governance structures and policies and procedures) [ summary here]

Private Fund Investment Advisers Registration Act of 2009 (draft 10/16) (11 pages) (would eliminate private adviser exemption from Investment Company Act of 1940)

EXPANDED CFTC MANDATE AND REGULATIONS

OTC Derivatives Markets Act of 2009 (draft 10/2) (187 pages) (would expand authority of Commodity Futures Trading Commission over certain kinds of financial swap deals and prescribes specific clearing regulations and other regulation)[summary here]

UPSHOT

With this kind of legislative energy, you can be sure another crisis like the one gripping us will never happen again!  (But you can also be sure others will.)

Strengthening the nation’s commitment to privacy is crucial.  But, as Paul Schwartz’s engrossing Preemption and Privacy essay (Yale [...]]]> 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:

A broad coalition, including companies formerly opposed to the enactment of
privacy statutes, has now formed behind the idea of a national information privacy law. Among the benefits that proponents attribute to such a law is that it would harmonize the U.S. regulatory approach with that of the European Union and possibly minimize international regulatory conflicts about privacy. This Essay argues, however, that it would be a mistake for the United States to enact a comprehensive or omnibus federal privacy law for the private sector that
preempts sectoral privacy law. In a sectoral approach, a privacy statute regulates only a specific context of information use. An omnibus federal privacy law would be a dubious proposition because of its impact on experimentation in federal and state sectoral laws, and the consequences of ossification in the statute itself. In contrast to its skepticism about a federal omnibus statute, this Essay views federal sectoral laws as a promising regulatory instrument. The critical question is the optimal nature of a dual federal-state system for information privacy law, and this Essay analyzes three aspects of this topic. First, there are general circumstances under which federal
sectoral consolidation of state law can bring benefits. Second, the choice between federal ceilings and floors is far from the only preemptive decision that regulators face. Finally, there are second-best solutions that become important should Congress choose to engage in broad sectoral preemption.

Friday Nov. 6, 2009, GW Law, 2000 H Street, NW, DC

Breakfast (8:30 a.m. – 9:15 a.m.)

Welcome (9:15 a.m. – 9:30 a.m.)

Edward Labaton, President, ILEP

Frederick M. Lawrence, Dean, GW Law School

Panel I: The Legislative Agenda (9:30 a.m. – 11:15 a.m.)

Moderator: Jeffrey Manns, Professor, GW Law School

Panelists: Edmund L. Andrews, Economics Correspondent, New York Times

Ricardo R. Delfin, Special Counsel, Securities and Exchange Commission

Dean V. Shahinian, Senior Counsel, Senate [...]]]> 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.

Friday Nov. 6, 2009, GW Law, 2000 H Street, NW, DC

Breakfast (8:30 a.m. – 9:15 a.m.)

Welcome (9:15 a.m. – 9:30 a.m.)

Edward Labaton, President, ILEP

Frederick M. Lawrence, Dean, GW Law School

Panel I: The Legislative Agenda (9:30 a.m. – 11:15 a.m.)

Moderator: Jeffrey Manns, Professor, GW Law School

Panelists: Edmund L. Andrews, Economics Correspondent, New York Times

Ricardo R. Delfin, Special Counsel, Securities and Exchange Commission

Dean V. Shahinian, Senior Counsel, Senate Banking Committee

David A. Smith, Chief Economist, House Financial Services Committee

Dan S. Sokolov, Senior Attorney, Department of the Treasury

Arthur E. Wilmarth, Jr., Professor, GW Law School

Panel II: Federal Enforcement (11:15 a.m. – 12:30 p.m.)

Moderator: Theresa A. Gabaldon, Professor, GW Law School

Panelists: James D. Cox, Professor, Duke University Law School

Rob Cox, New York Bureau Chief, Breakingviews

Lorin Reisner, Deputy Director, Enforcement, Securities and Exchange Commission

James Robertson, Judge, U.S. District Court (D.C.) and/or Stanley Sporkin

Lunch (12:45 p.m. – 2:00 p.m.)

Keynote Speaker:  Louis Aguilar, Commissioner, SEC

Panel III: State & Private Enforcement (2:00 p.m. – 3:30 p.m.)

Moderator: Lawrence A. Cunningham, Professor, GW Law School

Panelists: Lisa M. Fairfax, Professor, GW Law School

Steven D. Irwin, Commissioner, Pennsylvania Securities Commission

Donald C. Langevoort, Professor, Georgetown University Law Center

David Markowitz, Office of the Attorney General, State of New York

Lawrence A. Sucharow, Partner, Labaton Sucharow LLP

TO REGISTER, CONTACT

Laura Stein, Insitute for Law & Economic Policy, laurasteinesq@yahoo.com

Attendance at the luncheon/keynote is limited according to the order in which registration is received.

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 [...]]]> 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.

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 [...]]]> 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.

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 [...]]]> 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)

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 [...]]]> 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.

(1) A, the Doctor, is by far the more creditworthy of the two.

(2) B, the real estate developer, will have a much higher credit score.

(3) No, under the so-called Desktop Underwriting software that lenders use, before crisis and now (hawked as enabling these decisions to be “made in less than 15 minutes”), B gets a far higher credit score than A. B passes lender underwriting cut-offs; A does not.

Why? Credit scores increase when people have large amounts of debt and decrease when they do not have large amounts of debt. Credit scores are unaffected by factors like employment security, equity net worth, or income. True, after credit score screening, banks may apply an additional test to borrowers with good credit scores, to assure requisite ratios of income to debt payment obligations. But the credit scores bias even that evaluation and still overlook significant factors. They essentially foreclose the possibility of making loans highly likely to be repaid.

In short, credit scores do not reflect people’s probability of repaying loans (whether they are creditworthy) but whether someone is a good customer of the banking system. Contributing to the crisis, banks made mortgage loans to millions of people with wonderful credit scores who lacked creditworthiness. They avoided lending to people with bad credit scores and strong credit quality. The practice continues. The Commission should put credit scoring on its list of possible causes of the financial crisis.