Concurring Opinions » Property Law

On the Servicing Settlement

Frank Pasquale — Fri, 10 Feb 2012 02:47:46 +0000

Today, Jon Walker tweeted that “No one man has done more to protect the power of the financial elites than President Obama.” Is that a fair assessment? Here are some views expressed on the mortgage settlement today:

Adam Levitin, The Servicing Settlement: Banks 1, Public 0:

[The settlement] cover[s] robosigning and overbilling in foreclosures. Given the relatively narrow scope of this settlement, it’s not surprising that the dollars involved are quite small compared to the overall harms created by the housing bubble and aftermath.

The formal price tag for the settlement is $25 billion, although it is projected to accomplish up to $40 billion in relief. Only $5 billion of that is hard cash contributed by the banks. Let me repeat that. The five banks involved in the settlement, which have a combined market capitalization of over $500 billion, are putting in only $5 billion. That’s less than 1% of their net worth. And they are admitting no wrongdoing. To call that accountability is laughable. . . . $32 billion of the settlement is being financed on the dime of MBS investors such as pension funds, 401(k) plans, insurance companies, and the like—-parties that did not themselves engage in any of the wrong-doing covered by the settlement.

William K. Black, How Liberals are Getting Spun in the Mortgage Settlement Debate:

The Obama administration’s record of prosecuting elite financial frauds is worse than the Bush administration’s record, which is a very large statement. This fact is demonstrated by a November report by Syracuse University’s Transitional Records Access Clearinghouse (TRAC), “Criminal Prosecutions for Financial Institution Fraud Continue to Fall.” The truth is that neither administration has prosecuted any elite CEO for the epidemic of mortgage fraud that drove the ongoing crisis, in contrast to over 1,000 elite felony convictions arising from the Saving & Loan debacle in the 1980s.

Yet today’s ongoing crisis caused losses more than 70 times greater than the S&L debacle, and the amount of elite fraud driving this crisis is also vastly greater. Bank CEOs leading what I call “accounting control frauds” now do so with impunity. . . . The [staffing level of the current Obama administration] working group does not pass even the most generous laugh test. No one who has ever been involved in a successful, complex criminal investigation of a large organization could take it seriously.

Robert Kuttner, The Mortgage Deal with the Devil:

Ideally, we didn’t need this settlement now. It would have been better for prosecutors to mount more cases, not just related to robo-signing and MERS but aimed at the fraud at the heart of mortgage securitization. Then, prosecutors could extract penalties that more accurately fit the crime—specifically fines and mortgage relief as restitution, well into the hundreds of billions of dollars. This is said to be Schneiderman’s goal, both in agreeing to join the settlement once it was revised so as not to tie his hands and taking part in the Justice Department task force.

Yves Smith, The Top 12 Reasons Why You Should Hate the Mortgage Settlement:

We’ve now set a price for forgeries and fabricating documents. It’s $2000 per loan. This is a rounding error compared to the chain of title problem these systematic practices were designed to circumvent. The cost is also trivial in comparison to the average loan, which is roughly $180k, so the settlement represents about 1% of loan balances. It is less than the price of the title insurance that banks failed to get when they transferred the loans to the trust. It is a fraction of the cost of the legal expenses when foreclosures are challenged. It’s a great deal for the banks because no one is at any of the servicers going to jail for forgery and the banks have set the upper bound of the cost of riding roughshod over 300 years of real estate law.

Janell Ross, Mortgage Settlement Leaves Some Foreclosure Victims Wanting:

Settled into a new life — one with a low credit score in the 500s that makes buying a car or even connecting utilities a more expensive proposition, in a neighborhood populated mostly by senior citizens instead of middle-class families with kids — Monica Zapata’s anxiety is under control. Ricardo Zapata has a new job managing a Cuban restaurant. The family has a lot less money and little hope of owning a home again in the next decade. Those aren’t the things that sometimes leave Zapata fighting back tears. . . . “I try to be a grateful person, really I do,” said Monica Zapata. “But it’s almost a slap in the face when you consider everything we’ve been through.”

Better Markets Blog, A Criminal Sellout:

[T]he most egregious aspect of all this may be the reporting: stories repeatedly use innocuous words that obscure what really happened here. For example, so-called “robo signing” is massive, systematic, fraudulent, criminal conduct. This is where banks themselves or their contractors sign legal documents to file in court swearing under oath that the facts are true and therefore support the legal application to take someone’s home away from them, i.e., foreclose.

Can you think of anything more despicable? Lying under oath to get someone thrown out of their home and onto the street. That’s what robo-signing means and what it obscures every time that word is used. Then, there’s always someone saying, basically, no harm, no foul because it’s just a “paper work” problem and these people are all delinquent and “deserve” to be thrown out on the street. Really? Since when does saying “trust us” while we lie to you under oath make illegal conduct acceptable?

I have long been concerned about foreclosure fraud and other bank abuses. If the reactions above are on target, we are in danger of entrenching a two-tier system of justice. An inflection point has been reached in a long, tragic decline in the rule of law in matters relating to powerful banks. It will be very interesting to see where the negotiators go on to work after they leave government employ.

Image Credit: American Casino.

Stanford Law Review Online: Don’t Break the Internet

Stanford Law Review — Mon, 19 Dec 2011 08:14:43 +0000

The Stanford Law Review Online has just published a piece by Mark Lemley, David S. Levine, and David G. Post on the PROTECT IP Act and the Stop Online Piracy Act. In Don’t Break the Internet, they argue that the two bills — intended to counter online copyright and trademark infringement — “share an underlying approach and an enforcement philosophy that pose grave constitutional problems and that could have potentially disastrous consequences for the stability and security of the Internet’s addressing system, for the principle of interconnectivity that has helped drive the Internet’s extraordinary growth, and for free expression.”

They write:

These bills, and the enforcement philosophy that underlies them, represent a dramatic retreat from this country’s tradition of leadership in supporting the free exchange of information and ideas on the Internet. At a time when many foreign governments have dramatically stepped up their efforts to censor Internet communications, these bills would incorporate into U.S. law a principle more closely associated with those repressive regimes: a right to insist on the removal of content from the global Internet, regardless of where it may have originated or be located, in service of the exigencies of domestic law.

Read the full article, Don’t Break the Internet by Mark Lemley, David S. Levine, and David G. Post, at the Stanford Law Review Online.

Note: Corrected typo in first paragraph.

Application of the Public Trust Doctrine to the University of California

Frank Pasquale — Fri, 09 Dec 2011 18:13:51 +0000

Aaron Bady’s blog has been a must-read on the Occupy movement all this fall. Property law professors may be interested in a guest post on it from Gina Patnaik, applying the public trust doctrine to the UC:

In the latter half of the twentieth century, Joseph Sax, Professor Emeritus at UC-Berkeley School of Law, revived public trust doctrine within American case law. Because common law principally derives from court rulings and judicial opinion instead of legislation, it is useful only insofar as it is used: Sax argued that public trust doctrine was a prime example of the ways that historical understandings of a legal concept could be resuscitated to serve the changing demands of the American people. Sax’s seminal work, “The Public Trust Doctrine in Natural Resource Law: Effective Judicial Intervention,” demonstrated that public trust doctrine provided a compelling framework for “lawsuits in which citizens, demanding judicial recognition of their rights as members of the public, sue the very public agencies which are supposed to be protecting public interest.” And Sax was right: the forty years since his article’s publication have seen the public trust doctrine invoked by the courts to shield public lands, natural resources, and even endangered species. Over the course of the past century, the scope of public trust doctrine has moved inexorably towards expanded protections of the public’s interest.

At its heart, public trust doctrine emphasizes the enterprise being conducted on a particular area of land and protects the rights of the public to pursue that enterprise over the right of any single person or persons to control or limit access to the trust. In its early iterations, public trust protected entrepreneurial uses of waterways for fishing or water-based commerce routes; in the twentieth century, however, its nature has expanded to include recreational use, natural resource preservation, and endangered habitats. . . . In short, public trust preserves the land not as land per se, but rather as the space necessary to realize the enterprises conducted on it. . . .

The public trust framework thus seems inherently fit for imagining a university, especially one with aconstitutional charge to cultivate the “rights and liberties” of California citizens. Public trust doctrine reconfigures the terms of university space, emphasizing its value not as land, nor even as public land, but rather as the area necessary for undertaking the enterprises of public education.

Perhaps more to the point, however, the current structure of the university is deeply indebted to the legal precedents set when California waterways were made part of the public trust. A constitutional amendment proposed on October 14, 1878 declared that the waters of California were subject to eminent domain; as such, “the private use of such waters shall always be subordinate to their public use” (FS3956-110). Just six days later, the legislature framed its discussion of the university in identical terms, indicating that the decision to elevate university lands to a public trust stemmed directly from the legal framework establishing waterways as communal property.

From this foundation, Patnaik offers a number of valuable insights on the current UC system, and the troubling response of its administration to the Occupy movement.

Brooke Shields to Play Suzette Kelo in Lifetime Movie

Sarah Waldeck — Fri, 23 Sep 2011 01:20:07 +0000

Really, the headline says it all. But I am disappointed I didn’t see this one coming. Anyone who has read Jeff Benedict’s Little Pink House should have seen its made-for-TV-movie potential.

What actually got me thinking about Kelo, however, is the reporting this week in various media outlets that Justice Richard Palmer, one of the four Connecticut justices who found New London’s exercise of eminent domain to be constitutional, apologized to Suzette Kelo after hearing a keynote speech by Benedict. According to Benedict, Palmer approached Kelo and said, “Had I known all of what [Benedict] just told us I would have voted differently. I’m sorry.”

This certainly seems like grist for the Kelo mill, especially since it’s not every day that a judge apologizes to a litigant for having voted against her. Except that the back story matters a lot here, because that’s not what Justice Palmer says he did. Rather, as the Justice eventually clarified to Benedict, “Those comments were predicated on certain facts that we did not know (and could not have known) at the time of our decision and of which I was not fully aware until your talk — namely, that the city’s development plan had never materialized and, as a result, years later, the land at issue remains barren and wholly undeveloped.” The Justice further added the Court could not have known those facts “because they were not yet in existence.” Moreover, the Justice later responded to a series of written questions from Benedict, one of which was, “Looking back at the Kelo decision (by the Connecticut Supreme Court), how do you see it now? In other words, has it led to good law?” The Justice responded, “I think that our court ultimately made the right decision insofar as it followed governing U.S. Supreme Court precedent.” (The fullest account I’ve found of Justice Palmer’s encounter with Kelo and Benedict is here.)

So, not exactly an apology, but perhaps instead a very human expression of regret over what Suzette Kelo went through.

By the way, readers will note that I chose not to refresh anyone’s recollection about the substance of Suzette Kelo’s case or the eventual ruling from the U.S. Supreme Court. Instead, you can all just catch the movie.

Hat Tip to my former student Eric Abes.

Armenian genocide and the Third Amendment

Kaimipono D. Wenger — Tue, 13 Sep 2011 05:31:28 +0000

As Tom Bell has noted, the Third Amendment gets no respect. It is as likely to be mentioned by comedians as by courts, and holds a position of honor among the odd clauses of the Constitution, where it is so infrequently used that even non-uses draw attention. But this neglected amendment has one potential application today, where it could play an important role in a somewhat high-profile case.

I’m talking, of course, about the Armenian genocide litigation.

Here’s a snippet from a recent story in the Armenian Weekly (with emphasis added):

In July, Armenian American attorneys sued the Republic of Turkey and its two major banks, seeking compensation for confiscated properties and loss of income. A new federal lawsuit was filed last week by attorneys Vartkes Yeghiayan, Kathryn Lee Boyd, and David Schwarcz, along with international law expert Michael Bazyler, against the Republic of Turkey, the Central Bank, and the Ziraat Bank for “unlawful expropriation and unjust enrichment.” The plaintiffs are Los Angeles-area residents Rita Mahdessian and Anais Haroutunian, and Alex Bakalian of Washington, D.C. The three Armenian Americans, who have deeds proving ownership of properties stolen from their families during the genocide, are seeking compensation for 122 acres of land in the Adana region. The strategic Incirlik U.S. Air Base is partly located on their property.

That’s right. Armenian-Americans are seeking to recover property seized by Turkey during the Armenian genocide. And significant portions of that land are currently used to quarter American troops.

The Third Amendment mandates that, “No Soldier shall, in time of peace be quartered in any house, without the consent of the Owner, nor in time of war, but in a manner to be prescribed by law.” Does the Incirlik Air Base violate this provision? (Notably, Turkey has ignored the lawsuit, resulting in a default judgment in favor of the Armenian-American claimants.)

Based on my extensive reading in Third Amendment law [fn1], I think the case may indeed raise Third Amendment claims — but mostly, it brings up a complicated set of follow-up questions.

First, does the Third Amendment apply extraterritorially? This is outside of my expertise. I wonder if Boumediene would apply here. Is the U.S. air base enough control to extend Bill of Rights protections?

Second, what is the effect of the owners’ absence when the air base was built? I don’t think that homeowners need to be living in a home at the time of quartering for the amendment to apply. (On a related note, the Engblom court notes that the Third Amendment does not require fee simple ownership.) Presumably, the Third Amendment would give rights to refugees who flee their homes, and return to find them occupied by troops. However, other complicating factors here — particularly the passage of time — may bar claims.

And third, if there is a Third Amendment violation, what is the remedy? The amendment text itself doesn’t specify. Bell argues that the implied remedy for Third Amendment violations is similar to the Takings clause, and might include “recompense for any lost value that they could have exchanged on the market were it not for the government having seized their property, including the rental value of their homes and the value of any property stolen or destroyed.” However, Bell also notes that it “does not appear that the victims of quartering could recover for what may be their most grievous injuries: being forced onto the street, seeing strangers occupy and ransack their houses, and homesickness.”

At the very least, a Third Amendment claim would give Armenian-Americans a claim not just against an unresponsive defendant (Turkey) but also against the United States. This in turn could create additional U.S. pressure on Turkey to provide reparations to Armenians, or even to return the land in question.

All of which would be a welcome development for Armenian-Americans — and a big win for the Third Amendment.

(Hat tip to my colleague Chris Guzelian for discussion which prompted this post.)

(Image credit: Wikicommons photograph of the Etchmiadzin Cathedral.)

[fn1] “Extensive reading in Third Amendment law”: I read Tom Bell’s article and the Engblom opinion.

Adverse possession amid the foreclosure crisis

David Fagundes — Tue, 26 Jul 2011 18:45:16 +0000

Apparently I can’t stop blogging about morality, which is kind of weird because it certainly doesn’t play much of a role in my personal life or even my writing. Anyway, a student from a past property class recently passed along this really interesting article about Kenneth Robinson, a man who occupied a vacant house in a tony suburb of Dallas, apparently in an attempt to adversely possess it. The contemporary twist is that the house—valued at about $300,000—was vacant because its owners had abandoned it, apparently when they found themselves upside down on their mortgage. (They appear to still be the house’s title holders, since foreclosure has not yet taken place.)

I like this story for lots of reasons, including that it provides another modern data point about the continuing relevance of adverse possession. Another reason is that it stresses that adverse possession “is not just a loophole, it’s the law.” The article says that adverse possession is “as old as Texas” but even that understates the case—it’s actually one of the oldest property doctrines around, dating to Hammurabi’s Code.

But I like this story especially because it raises a new twist on the rationale for and merits of adverse possession doctrine. News stories about adverse possession are almost invariably accompanied by cries of outrage by people who regard the doctrine as offensive to property rights. In class, students also tend to regard the doctrine skeptically, though (to their credit) in a more measured and thoughtful way.

As this article (or at least the comments to it) illustrate, though, the ongoing housing crisis and related foreclosure epidemic have caused public reaction to adverse possession cases to become less angry and in some cases even positive. I explore this phenomenon in more detail below the fold.

Adverse possession may be the most counterintuitive doctrine introduced to students during their first year of law school, or even at any time during law school. The notion that a trespasser can become a valid title holder, eliminating the prior owner’s claim to the property, seems terribly wrong to students at first blush.

And that’s exactly why I enjoy teaching it so much. Because when examined more closely, there are plausible utilitarian rationales underlying adverse possession. Adverse possession may reward and incentivize more productive use of land, increasing aggregate social welfare. Pressed to examine this and other rationales, students may not end up agreeing that adverse possession is a good doctrine, but they learn that the story is a lot more complicated than their initial reaction indicated.

Public reaction to individual adverse possession cases typically lacks this degree of nuance, though. Adverse possessors are regarded as at least immoral tricksters, at worst dastardly thieves and criminals. Outrage over recent adverse possession cases in New York and Colorado has spurred successful movements to have those states’ laws changed to limit the scope of the doctrine.

But the tenor of the public reaction to the recent adverse possession case (measured at least by written comments to the article) in Texas is somewhat different. Plenty of comments–perhaps even most of them–regarded Robinson as an unadulteratedly evil threat to property rights. And the owners of other houses in the suburban Dallas neighborhood where Robinson is squatting don’t seem too thrilled about his presence there.

Others, however, appear to regard Robinson as heroic and clever. One commenter wrote, “What a great story!!! All I can say is ‘Good for him.’” Others suggested that Robinson’s ingenuity meant that he had a moral claim to the property: “I love this!!! The bible says that The wealth of the wicked is stored up for the righteous. Good luck Mr. Robinson. Move the fam in and enjoy your home!! You’ve definitely earned it!! Too bad you [other readers] weren’t smart enough to think of this.”

Several readers raised redistributive defenses of Robinson, suggesting that he was striking a blow against the abusive practices of mortgage companies and banks (although it’s not Bank of America, the current noteholder, to whom Robinson is adverse, since foreclosure has apparently not yet taken place), and grabbing a win for the common man in a Robin-Hood style move. As one commenter put it, “As crooked as the banking and mortgage systems are, kudos to Mr. Robinson for finding a way to make it work for him.”

The reason that public reaction to the Robinson case is different than earlier ones may be that the original owners are out of the picture. In the earlier cases, the adverse possession deprived a visibly upset private individual of (at least some of) their land. In this case, the only adverse party in the picture is Bank of America, who (upon foreclosure, at least) will have the house only as part of its overall book of distressed assets. It’s much easier to be sympathetic in the latter case given that the only apparently loser is a faceless, and possibly even abusive, business entity.

But that distinction doesn’t change the plausibility of the rationales underlying adverse possession. An adverse possessor may make better use of vacant and mouldering real property even when the title holder is a natural rather than a juridical person. And if redistribution is your thing, adverse possession can take from rich individuals (as well as rich banks) and place property in the hands of the less wealthy.

And the context of foreclosure may lend novel weight to the justice of adverse possession. Banks and other lenders bear much of the responsibility for the housing mess (in addition, of course, to greedy and overextended borrowers), which includes more vacant houses than they can–or at least care to–keep track of. Should squatters move into these houses and eventually acquire title to them, there seems some measure of equity in that (though as I explain below, it’s very unlikely that any given squatter will ever actually acquire title by adverse possession).

This isn’t the first time that the foreclosure crisis has bent the arc of public dialogue about morality and the law (the other example that springs to mind is the debate about the ethics of strategic mortgage default). But this one is particularly salient because it has spontaneously exhumed rationales for adverse possession that, while fully available, remain unexplored amid the hysterical moral superiority that usually characterizes the few public discussions of adverse possession that spring up in American popular culture. I hope that even after the foreclosure crisis passes, people will remember this moment and that it will contribute to more nuanced, less manichean dialogue about adverse possession in the future.

Doctrinal/practical postscript: In a followup to the initial article, KHOU reports that Robinson has been flooded with responses by others seeking to take advantage of adverse possession as a fast-track to ownership. My unsolicited advice to Robinson and his fans: Adverse possession isn’t a magical way to get instant ownership of vacant homes. At present, Robinson remains a mere trespasser on the property, even if he’s attained physical possession of it. All his possession of the land does is start the adverse possession clock (which appears to be 10 years in Texas), and doesn’t give him any enforceable rights in the house. At any time during that period, the titleholder to the house can demand that Robinson leave, and even get the police to come and kick him out for trespassing. The former would be enough to re-set the adverse possession clock by breaking the exclusivity of Robinson’s possession; the former would leave Robinson out on the street, or worse. Of course, if the title holder asserts no claim to the property during a decade of Robinson’s occupancy, and Robinson meets all the other elements of adverse possession, then he’d become the title holder, but the road is a lot longer and more complicated than many observers appear to understand.

Farewell, Barnes and Zoning Matters, Really

Sarah Waldeck — Tue, 12 Jul 2011 18:57:57 +0000

In the last week I’ve come across two teaching resources that are worth sharing. As the headline suggests, the first is about the Barnes Foundation, which closed the doors to its original home in Merion, Pennsylvania at the end of June. For years I’ve been urging my Estates and Trusts students to visit the Barnes before it is “too late,” by which I meant “before it moves to downtown Philadelphia.” I did this partly because I thought one needed to see the Barnes to fully understand the ongoing battle over its future, and partly because the Barnes was really, really cool. Now that it is officially “too late,” I will point them to this 360 degree interactive tour of the Barnes that was put together by the New York Times. Their effort really gives a flavor of the place, although many of us undoubtedly mourn that we’re left with only a computer program.

Next up is something for Property professors: an episode of This American Life entitled “Game Changer.” You can access the episode, which is about drilling for natural gas in Pennsylvania, here. Fast forward to minute 33:30 and soon a reporter will say, “The standoff between [the gas company] and [the town] started with one of the least gripping topics in all of government: zoning.” While the reporter’s explanation of the difference between conditional and permitted uses isn’t any more interesting than what I say in class, the story she tells is much more engaging than anything I’ve previously used to teach zoning. Moreover, the story of the small town that tried to write a zoning ordinance after Big Gas arrived does a better job of driving home the economic consequences of zoning than anything I’ve encountered to date.

Tsunami and “natural rights” in property

Andrew Sutter — Mon, 23 May 2011 08:29:24 +0000

תַּחַת כָּל-הַשָּׁמַיִם לִי-הוּא
– Iyov 41:3 (Tanakh)

Whatsoever is under the whole heaven is Mine.
– Job 41:11 (Authorized Version)

It’s said that the Lisbon earthquake and tsunami of 1755 had a profound effect on the thought of Voltaire, Rousseau, Kant, and others. Having occurred so far from Western intellectual centers, the 2004 Southeast Asian tsunami and the 2011 Japan tsunami are unlikely to be so influential. The first fits easily into the discourse of “underdevelopment,” and evokes our pity. The second occurred in a country more “like us” in many ways, but was soon overshadowed by just one of its effects, a so-called nuclear “catastrophe” that fits easily into the discourse of energy politics and money, and that resonates with our bi-polar attitude toward technology.

While I can’t speak to the 2004 tsunami, I did spend time earlier this month investigating the impact of the Japanese tragedy first-hand. Obviously, the effects of seeing one erased town or neighborhood after another, in three dimensions and 360 degrees, and of smelling them, and of sneezing or choking on their dust, were more than intellectual. But an unavoidable by-product of the experience is that it’s hard not to think some of our cherished intellectual positions are vain, self-serving and simply wrong. And among them, our notions of property.

My first chance after the quake to visit the northern prefectures, just like that of most other people here, was during the “Golden Week” holiday period from late April to early May. Traditionally this is the peak time for recreational travel, both domestically and internationally. The shinkansen high-speed train line from Tokyo to Miyagi, Iwate and Aomori had suffered structural damage in more than 1,100 locations during the earthquake and aftershocks. Despite an initial estimated repair time of two years, it re-opened on April 30. The main highways in the region were also re-opened to civilian traffic, with greatly-reduced tolls. Tens of thousands of Japanese used their vacations to volunteer in the clean-up from the tsunami. Local authorities were overwhelmed, and wound up turning some away.

My wife and I were not quite so selfless: our priority was to see our family in Morioka, inland capital of Iwate Prefecture. This city of 300,000 had suffered some of the worst shaking anywhere in the region, but emerged mostly intact. Fortunately, too, the earthquake hadn’t woken up the active volcano that towers over the region. The damage inland was more indirect: power outages for several days, gasoline and food shortages for weeks, and a month of isolation from the country’s elaborate door-to-door delivery infrastructure, on which most Japanese households rely.

It was clear that neither staying in Morioka nor even visiting just one or two of the coastal towns most frequently mentioned in the media – the usual drill for politicians and visiting foreign dignitaries – could give an adequate idea of what had happened. One reason is that the affected coastline on the main island of Honshu was at least 500 km in length (though in light of its irregular shape, this is certainly an underestimate). Another is that the character of the coast changes radically as one travels from the Chiba peninsula in the south (which, roughly speaking, plays the role of Long Island to Tokyo’s New York City, though the NY metro population is much smaller) up to Aomori Prefecture in the north. The southern portion, including Chiba, Ibaraki, Fukushima and about 2/3 of Miyagi Prefecture, is a smooth plain. From roughly the city of Onagawa in northern Miyagi, the coast northward through Iwate and Aomori Prefectures has a deeply scalloped form known as ria, from the Spanish word for ‘river’. Although usually caused by the submergence of river valleys, in this case an undersea mountain range is being pushed upward by a subducted plate – the one that caused the March 11 quake. When a tsunami hits a ria area, it cumulates to terrible heights, but its inland progress is usually impeded by mountains. When it hits a flat area, it stays lower, but can penetrate several kilometers farther.

My wife and I spent one day visiting coastal cities and towns in Iwate, and another visiting sites in Miyagi. All told, we drove along roughly 120-150 kilometers of coast, in both the rias and the coastal plain. Eight weeks had elapsed since the tsunami, so we knew that most of what we would see would have already been highly processed by the Jietai, Japan’s Self-Defense Force (who deserve a lot more credit than they get for the tough job they’re doing). As it turns out, even those places were disturbing.

In many of the rias, the roads were open, the debris cleared down to the bare soil, and the carcasses of automobiles neatly arranged in rows. But you could still see where the ocean had bitten chunks from the walk to the seawall, whose railings were twisted or fallen away, as in Oomoto (Iwaizumi City, Iwate). In other fishing towns, giant tsunami gates still stood, with nothing left to protect behind them.

Some, though, remained terrifying despite the long lapse of time. At Ryoushichou, a village in Miyako City, Iwate, we first encountered debris scattered along the sides of the highway, high on a hill more than a kilometer from the sea. As we descended into the ria, the rubbish not only surrounded us, but was plastered against the trees and hillside retaining walls 10 or 20 meters above us. The tsunami here had been 18 meters (nearly 60 feet) high when it entered the settlement. Houses far up the hillside were destroyed. The wall of another hung flattened on a retaining wall, like a squashed bug. Close to my car window, some of the tangled mounds of refuse were planted with red flags, signifying that human remains had recently been found there. And directly in front of us, giant chunks of the roadway hung precariously over the sea.

In some denser urban areas, the signs were mixed, or even encouraging. Some familiar places in downtown Miyako, including a port-side food complex where not long ago we’d enjoyed sea-salt flavored soft ice cream, were now totally gone. Near the sea wall, we had to drive around a boat sticking into the traffic lane. But some downtown areas had been spared – it seemed that a meter or two of extra elevation had made all the difference. In others, we could see owners cleaning up even though the businesses on either side of them looked damaged beyond repair, their metal shutters banged and twisted. In downtown Kamaishi, looking up sidestreets we could see that the destruction penetrated for many blocks. Yet amid the gutted shops on one main road, someone had set out a maneki neko – a “beckoning cat,” with left arm raised to attract guests and customers.

Two days later we headed to Sendai, the capital of Miyagi. The city and environs are a sort of an oceanfront twin, or at least sibling, to California’s Santa Clara County, including a city of over 1 million, a world-class science and technology university, start-ups and agriculture. The wave didn’t reach downtown, but the surrounding plains were desolate. Thanks to help from American armed forces, the formerly inundated Sendai Airport was already functional, though the businesses around it remain broken and deserted. Many square kilometers of rice fields in the Wakabayashi-ku district lay covered with a gray, cracked, foul-smelling mud, as if the ocean had reasserted its claims on the land by licking it. Most paddies were strewn with cars and other debris; some even with boats . At least, that’s what we could see from the highway – four kilometers inland. Thanks to the highway berm, the tsunami hadn’t been able to penetrate farther; but on those sections where the road was supported by pylons, we saw damage on the landward side as well. Moments after we entered a road from the highway to the coast, police stopped us and made us turn back – access was still limited to government vehicles only.

After Wakabayashi-ku, we decided to visit the Onagawa nuclear reactor, which is located on the ocean side of a mountainous peninsula. News stories had claimed that it was undamaged by the tsunami, though post-earthquake visuals of it were rare in the media. Our route took us through downtown Ishinomaki, built on the southern delta plain of the Kitakami River, which also flows through Morioka. Driving east on a main road we noticed a dark gray line on buildings and garage doors – first appearing about 30 cm above the ground, it gradually rose to more than a meter. The mud was here too, with the smell of the ocean and worse. But the scene across the river was much more severe. Block after block of devastation, covered with the mud dust. Large and expensive-looking homes, several blocks deep from where we were driving, were mangled and shattered. Unlike what we’d seen in Miyako and Kamaishi, no signs of vitality. Just a few workers and some dazed older men riding bicycles, surveying what had been lost.

Our route east through Ishinomaki was meant to take us to the headpoint of a mountain ridge road called the “Cobalt Line,” from which we planned to take a spur road down to the reactor’s visitor center. We drove along the shore of a lagoon that had clearly overflowed its banks during the tsunami; at its eastern end was a sunken ferryboat, its windows half-submerged. But when we reached the entrance of the Cobalt Line, the police had blocked the road, and made us turn around. Only government vehicles were allowed on the road leading to the peninsula. At that moment, not far from where we idled, bodies were being buried in a mass grave – highly unusual anywhere, but especially in Japan where cremation is the norm.

Our car’s GPS navigation told us that the best way back to Morioka was to continue east to downtown Onagawa, instead of turning back the way we had come. But as we rounded the bend, we realized several things: that although we were still far up a hillside, we were entering a scene of destruction on a scale that we hadn’t yet seen; that we were the only civilian vehicle on the road; and that directly down the road ahead of us was the ocean, with nothing between us and it. We were too shaken up by the place, and too conscious that we could be interfering with the Jietai’s work, to pull over on the still-torn-up road and document the town more thoroughly.

Our first impression was that, of all the places we’d seen, this was the one that seemed as if it had been least touched during the preceding eight weeks. I later found home videos on YouTube that showed it had actually been much worse in late March — the Jietai had been working all along, but the destruction was simply extreme. All the more puzzling, then, that we’d never heard any news stories about Onagawa, even though the nearby towns of Ishinomaki, Minami-sanriku, Kesennuma and Rikuzentakata had attracted international attention. We confirmed this later with a Google search: aside from a couple of stories shortly after the tsunami, and a couple of stories obliquely mentioning some Chinese interns who had survived the town’s destruction, virtually all easily-searchable references to Onagawa for more than two months after March 14 were to generally reassuring stories about the condition of the nuclear plant, which is 7 km distant from downtown as the crow flies, and maybe double that by car. Also conspicuously absent from the media have been ground-level post-quake visuals of the plant. Our best conclusion was that the government has deliberately discouraged coverage of the destruction in Onagawa, in order not to arouse suspicions that something similarly awful had happened to the nuke that shares its name, and not to attract the curious who might want to see the reactor’s actual condition first-hand. (*)

(*) There are some press stories about the condition of Onagawa, but to find them you usually need to make a deliberate effort to search within a particular website. E.g. this Yomiuri story from mid-April came up buried deep within in the website’s search results. The May 21-22 visit to Japan of Chinese Premier Wen Jiabao (known as ‘On Kahou’ in Japanese) provided additional circumstantial evidence of information control about the town. It was well-publicized in China that Satoh Mitsuru-san, the owner of a fish processing factory in Onagawa, had led all 20 of the Chinese workers at the plant to safety from the approaching tsunami, before meeting his own death as he ran back down the hill to look after his family. The rare nuke-free appearances of the city’s name in Japanese media were often in this Chinese and human-interest context. The national Mainichi Shimbun and the Sendai-based local paper Kahoku Shimpo reported (as recently as May 12 and May 18, respectively) that Wen wanted to visit Onagawa to honor Satoh-san’s memory and kindness. In the event, Wen merely commented on Satoh-san while being interviewed and photographed far to the south in Natori, near Sendai airport. Evidently either the Japanese government blocked him from visiting Onagawa, or he complied with a request not to visit there; or else if he did visit, it was under the rather anomalous condition of a complete press blackout.

II.

Unfortunately, it is all too plausible that some political-mediatic agenda is affecting the clean-up. Japanese journalism operates under a “press club” system, which effectively means that to keep your access to government agencies and other organizations, you need to cooperate in burying information. It’s no accident that a story about TEPCO’s past actions that should have provoked outrage was released on the most invisible news day of a slow-news holiday period. Conversely, whether the government was acting on its own initiative or merely being responsive to the masukomi (as the “mass communications” estate is known here), government effort seemed to go first to the best-publicized cases. The most nightmarish places we visited were ones we’d never heard about before. And my sister-in-law, a government surgeon based in Tokyo, told us that when she was dispatched to visit communities up north, she was given a choice of only four or five of the most mediatic towns, even though she’d wanted to go to areas that were being less well-served. (*)

From its first day, the disaster has been deeply enmeshed with politics. The quake that struck in the afternoon of March 11 obliterated the morning’s news story about illegal campaign contributions to Prime Minister Kan. In the recent campaign for governor of Tokyo, the ultra-right-wing incumbent, Ishihara Shintaro (**) prefaced his run for an unprecedented fourth term by declaring that the quake was a tenbatsu – punishment from heaven – for Japan’s greed. The remark provoked an outcry, even prompting some reckless soul to deface a campaign poster (a crime here), scrawling “tenbatsu” across Ishihara’s forehead like the mark of Cain.

In an unusually perceptive article in the April 2011 Le Monde Diplomatique, American scholar Harry Harootunian points out that Ishihara’s remark was a shrewd way to blame average Japanese for their moral failings, while exonerating the political class from blame for the disaster. Visiting the sites, it’s obvious that politicians must shoulder a lot of the blame. The village of Tarou, Miyako City, had spent hundreds of millions of dollars on building tsunami walls. I stood on the innermost of them, and looked out to the ocean, quite distant. Behind me, crows were picking over the garbage-strewn ruins of a commercial center. As we drove out, we passed by several piles of refuse with red flags planted in them, to show that they contained human remains. Then we passed the monument to the tsunami of Showa 8 (1933), a sight replicated in many towns and cities along the Iwate coast. When it was erected, the local government had directed that no one should live closer to the sea than this monument. But as the years went by, the village residents put their faith in a more expensive wall — which broke on March 11. (The ocean simply overflowed the older, inner ones.) Multi-hundred-million-dollar seawalls, and the creation of business centers in historically inundated areas, don’t happen solely through the choices of private citizens.

Nonetheless, private citizens are also complicating the situation. In some towns, they’re rushing to set up temporary housing on the same ground from which their original homes were washed away – trying to create a fait accompli that will be hard to reverse. As a bengoshi (Japanese lawyer) explained to me, a problem is that many landowners feel they have an absolute entitlement to their land. The roots of this feeling lie not in any philosophy of natural right, but Meiji expediency. When imperial rule was restored in the mid-19th Century after more than 260 years of the Tokugawa shogunate (military government), the new emperor found himself short of funds. In exchange for the right to collect taxes, he surrendered imperial title to all the lands of Japan, and allowed private ownership. That still left the land concentrated in the hands of a wealthy landlord class, but the US Occupying Forces took things a step further: they initiated a land reform program that distributed almost 40% of all arable land to the tenant farmers who were working it.

It doesn’t help that the law of eminent domain isn’t as strong in Japan as in some other countries. There is a law on the books that allows governments to appropriate land for a public purpose in exchange for compensation (the Tochishuuyou-hou, Land Expropriation Act, which is authorized by Art. 29, para. 3 of the Japanese Constitution). But as years of litigation involving airports in Narita and Shizuoka, among other places, have demonstrated, the law is difficult to invoke and cumbersome to enforce. As far as I can tell, it apparently isn’t even being discussed in the present context. A proposal recently announced by the Kan administration hints that a new special law might be enacted, under which the national government would purchase land from individuals. According to press reports, localities would interact directly with the central government in effecting this scheme, by-passing the prefectural governments. If this comes to pass, no doubt it will generate inter-governmental tension and resentment for years to come.

Private citizens aren’t motivated only by a feeling of entitlement, but by practical – and social – necessity. Even if they lost their homes in the tsunami, they still need to earn a living. During the Golden Week holidays, the government broadcaster NHK presented many short documentaries abut how people in Touhoku were coping. One profiled two men in Kamaishi, a sake distributor and the owner of a fishing boat maintenance shop. The distributor pointed out that he doesn’t have any business if no one needs him. So he spends his days helping his neighbors to re-open their restaurants, before returning at night to the evacuation center where he currently lives. The maintenance shop re-opened even though no-one could pay; if fishermen can’t fish they can’t earn the money to pay the shop, either. One of the shop’s first jobs was servicing a giant crane that was used to lift boats up from the land onto which they’d been carried by the wave, and to re-deposit them in the harbor. Asked why he does it for no pay, the owner admitted self-interest plays a part, but added “Yo no tame, hito no tame – for society and for people. Otherwise the people in Kamaishi won’t have sun.” Whether these businesses should remain for the long-term in their pre-tsunami locations merits a lot of thought and debate. But the case for their re-opening in the short-term seems a strong one.

How should Japan think about the long-term? The reactive mediocrity that characterizes most Japanese politicians these days suggests that those in power, at least, simply might not. There’s a good chance the country will muddle through with an accretion of short-term measures designed to boost “productivity” and “growth,” and intended to take the country back to where it was before. Seen in this light, the Kan government’s attempts to suppress debate about nuclear power appear as nostalgic as they are frantic. But one thing they are not is benign. Even if the government sincerely believes, as many people believed before March 11, that nuclear power is necessary for Japan’s future growth, the Kan cabinet evidently also believes that anti-democratic means are justified to achieve that end. And that’s just to put the most generous spin on their actions.

(*) She’d been especially interested in visiting settlements on small coastal islands that hadn’t received any aid. From what she was told, the government’s operating assumption seems to be that they were completely overwhelmed in the tsunami, with all souls lost, and hence not worth the investment of resources. She also told us that she and many of her medical colleagues believe the dead/missing numbers to be greatly underestimated, perhaps by a factor of between two and four (i.e., up to 100,000 dead). Since official records often were lost, official estimates tend to be based on missing person reports and on bodies actually recovered. Based on personal observations of another healthcare professional in our family (who survived the tsunami in Ofunato, Iwate), only a small fraction of bodies floating in the water right after the tsunami were subsequently washed up on the beach. In many cases where all members of a family were lost to the sea, no one would have filed a report. Police won’t accept a missing persons report if the person filing lacks a close-enough relationship to the missing; this rules out filings from mere acquaintances, even though they might be the only ones to notice someone’s absence.

(**) A former actor, novelist and dandy, Ishihara is best known in the West as the co-author with Sony’s then chairman, Morita Akio, of The Japan That Can Say No (1989). Since his stiffest opposition in 2011 was a TV comedian and accused child molester who had ditched his previous job as governor of rural Miyazaki Prefecture mid-term to run for this post, many voters gritted their teeth and re-elected Ishihara anyway.

III.

The long term deserves to be re-thought more radically, and not just in Japan. The Lisbon earthquake moved many to question whether there could really be a kind and merciful divinity. Pace Ishihara, fewer people today, and almost none in Japan, are prone to such theological speculations, and even if they were, the Twentieth Century has already provided ample food for thought. But to see the condition of the coast, and to realize that the ocean rose up and covered the land everywhere, over hundreds of kilometers, more or less at the same time, is to visualize an event on a Biblical scale — or actually, on a far vaster one. The parting of the Red Sea, which the tsunami so darkly inverted, covered a stretch of just a few miles.

At a minimum, the experience of the March events should move us to realize that our relationship to this planet might be different from what we have grown up thinking it is: something along the lines of what a recent CNN promo calls “the battle to manage the earth”s resources.” Just as to see, mile after mile, the jumbled mountains of shattered houses, toppled utility poles, upended vehicles, ownerless clothes, toys and much else, all ripped out of their daily context and mangled into a new one that screams out for meaning, should make us think differently about all the things we make, we sell, and we think we need for our well-being.

One practical result should be a rehabilitation of the precautionary principle. Instead of reifying the “expectation values” of disasters, discounting them to insignificance with our estimates of their low probabilities, we should imagine and prepare for the worst, as best we reasonably can. Fortunately, support is growing for this in Japan, though it remains heretical in U.S. policy circles.

Some in Europe have developed this idea further, into an intellectual movement known as écologie politique. In this view, precaution is couched within a larger notion of human responsibility for our actions on earth, including for our production of simply too much stuff. Building outward from this idea, and drawing on the writings of Hans Jonas, Jürgen Habermas, André Gorz, Ivan Illich, Emmanuel Levinas and others,écologie politique has developed not just an environmental ethic, but a a social and political one, based on responsibility, autonomy, solidarity and participative democracy. While the meaning of each of these terms is contestable, I’m inclined to think this might be a useful utopia to aim for.

Écologie politique, though, is too bloodless and rational to epitomize the deeper lessons of the March events. A more mythic line of thought is suggested by a passage in a recent book by Johns Hopkins political scientist Jane Bennett. Observing that politics is “often construed as an exclusively human domain,” she proposes that we consider instead “the agentic contributions of nonhuman forces … in an attempt to counter the narcissistic reflex of human language and thought. We need to cultivate a bit of anthropomorphism – the idea that human agency has some echoes in nonhuman nature – to counter the narcissism of humans in charge of the world.” Unfortunately, she doesn’t make any serious attempt to explore the practical implications of this point of view. But these few words, at least, resonated with what I’d seen.

In reflecting on anthropomorphism, it struck me that in the English-speaking world we often express impersonal agency through the image of hands. Adam Smith’s “invisible hand” may be the example that first comes to mind. John Locke provides another. Our notions of property rely on a famous passage:

Though the Earth, and all inferior Creatures, be common to all Men, yet every Man has a Property in his own Person. This no Body has any right to but himself. The Labour of his Body, and the Work of his Hands, we may say, are properly his. Whatsoever then that he removes out of the State that Nature hath provided, and left it in, he hath mixed his Labour with, and joyned to it something that is his own, and thereby makes it his Property.[The Second Treatise, § 27 (emphasis on original)]

These are literal, not figurative hands. But they’re not the only important hands in Locke. A bit later he says:

Though the Water running in the Fountain be every ones, yet who can doubt, but that in the Pitcher is his only that drew it out? His labour hath taken it out of the hands of Nature, where it was common, and belong’d equally to all her Children, and hath thereby appropriated it to himself. [Id., § 29 (emphasis in original)]

It wouldn’t be surprising if Anglo-Saxon philosophy were shaped, in part, by the disasters within its experience. Despite their destructive power, the typical calamities – tempests, tornadoes, earthquake and fire – tend to leave their debris more or less in situ, aside from the occasional cow or truck plopped down by a tornado far from where it had stood. What we own may of course disappear in smoke; yet most fires result from human agency, and human action, too, can often arrest a fire’s progress, even when it’s already touched our possessions. But few philosophers on our bookshelves ever directly witnessed a tsunami or its effects. A few days after visiting Onagawa, I found this video taken when the 18-meter tsunami hit it. During its final sequence, much of the town can be seen being pulled back into the ocean, sucked through the two large, red buildings near the waterfront (which are also visible to the right of center in the photo of the road to Onagawa, above; the road we were on goes right between them). Watching this, I could only think how ridiculous it is for us to believe that we can take anything from the hands of Nature. Those hands can take back anything, at any time – and we are always within their reach. A system of laws, an economy, and a society based on that truth, and on the understanding that we’re only borrowing even what we own, seem long overdue.

Pictures: all photos by author, except for tsunami frame captures: Hara Yoshinori. Iwate-ken photos 2011/05/04; Miyagi-ken photos 2011/05/06. To view full size, please click on picture, and then click on it again after the page reloads.

Attention All Flatlanders, Fudgies, and Other-State Equivalents II

Sarah Waldeck — Wed, 18 May 2011 18:59:02 +0000

Now for some seasonally-appropriate scholarship:

A while back, I asked readers who were involved with family cottages (or summer homes or cabins or whatever you want to call them) to tell me their stories. I was curious about how many generations the property had been in your family; how you handled carrying costs, improvements, scheduling and use; whether your property was governed by a tenancy in common or other legal arrangement; and whether that arrangement was rocky or smooth. Some first-rate sociology had already been done in this area, but I was curious enough to want to supplement with some casual empiricism.

I recently posted the article that grew out of these inquiries on SSRN. Forthcoming in the Notre Dame Law Review, the article discusses how “identity property” is passed along from one generation to the next. Identity property is that which is valued for what it represents about self and family—a sort of ratcheted-down version of Margaret Radin’s “personhood property.” In the absence of more sophisticated estate planning, identity property is often inherited by the decedent’s children, who take as tenants in common. Standard doctrine relies on familial bonds and the unilateral right of partition to mitigate bilateral monopoly problems and to foster cooperation in the management of the children’s common resource. I argue that with identity property, this standard account is often wrong. Because courts favor partition by sale, the exit of one tenant often means that the remaining co-tenants will be forced to sell the identity property. Because the remaining tenants perceive the property as non-fungible, the threat of exit can be powerful enough to exacerbate bilateral monopoly problems and decrease the likelihood of cooperation.

The article makes use of some of the stories that readers of Concurring Opinions told about their family cottages to elucidate how devisees modify the default rules of a tenancy in common, particularly the right of partition. What I found most interesting about these stories was how willing some individuals were to radically restrict their right of exit from the co-tenancy and the corresponding belief that a strong right of exit would ultimately work against their collective interest. The Article ultimately argues that when it comes to identity property, the right of exit through partition should not be as absolute as current law allows.

For those who are interested in learning more, the abstract and article are available here.

p.s. And for those of you who are gearing up for another season in property that is jointly owned with other relatives, rest assured that not one single person who responded to my request reported an entirely smooth arrangement!

Invisible Hand or Hidden Fist?

Frank Pasquale — Sat, 30 Apr 2011 20:49:14 +0000

In his press conference last week, Ben Bernanke concluded on an upbeat note. He had high hopes for a US recovery, since he believed that the Great Financial Crisis (GFC) of 2008 hadn’t taken from the US any of its basic productive capacity.

Whatever the merits of that view, the GFC did highlight debilitating trends in US finance infrastructure that have been intensifying for years. In this week’s Businessweek, Hernando de Soto (with Karen Weise) highlights one of the most important: the opacity of key markets and relationships. With scant exaggeration, de Soto warns that the US is on its way to levels of uncertainty more common in developing and communist countries:

During the second half of the 19th century, the world’s biggest economies endured a series of brutal recessions. At the time, most forms of reliable economic knowledge were organized within feudal, patrimonial, and tribal relationships. . . . The result was a huge rift between the old, fragmented social order and the needs of a rising, globalizing market economy.

To prevent the breakdown of industrial and commercial progress, hundreds of creative reformers concluded that the world needed a shared set of facts. . . . The result was the invention of the first massive “public memory systems” to record and classify—in rule-bound, certified, and publicly accessible registries, titles, balance sheets, and statements of account—all the relevant knowledge available, whether intangible (stocks, commercial paper, [etc]), or tangible (land, buildings, boats, machines, etc.). Knowing who owned and owed, and fixing that information in public records, made it possible for investors to infer value, take risks, and track results. The final product was a revolutionary form of knowledge: “economic facts.”

Over the past 20 years, Americans and Europeans have quietly gone about destroying these facts. The very systems that could have provided markets and governments with the means to understand the global financial crisis—and to prevent another one—are being eroded. Governments have allowed shadow markets to develop and reach a size beyond comprehension. . . . In a few short decades the West undercut 150 years of legal reforms that made the global economy possible.

de Soto gives a number of concrete examples of how we are kept in the dark about the “thousands of filaments that businesses are creating between themselves,” including:

1) Mortgage Bundling: Law professor Christopher L. Peterson observes that, “For the first time in the nation’s history, there is no longer an authoritative, public record of who owns land in each county.”

2) Default Swaps: “these risks have slipped outside the public memory systems, making it very difficult to know who ultimately bears the risk and where it is.” And you can count on Tim Geithner to exacerbate the problem. McClatchy’s Greg Gordon identified the problem in 2009:

Cayman Islands deals . . . . became key links in a chain of exotic insurance-like bets called credit-default swaps that worsened the global economic collapse by enabling major financial institutions to take bigger and bigger risks without counting them on their balance sheets. The full cost of the deals, some of which could still blow up on investors, may never be known.

3) Exemptions: “Businesses are left to figure out [accounting realities] on the basis of connections, influence, and private information. Just like we do in developing and former communist countries.”

4) Off-Balance-Sheet Accounting: “In the 1990s governments began . . . allowing companies in financial difficulty to pass facts concerning debts from their public balance sheet to a less visible memory system called a special purpose entity (SPE) (or to sweep debt information into the balance sheet’s footnotes in words so obtuse that the statements cease being factual).”

5) Government Use of Swaps and Repo Markets: “Gary Norton at the Brookings Institution has argued that we still do not have the vaguest idea of the size of the repo market.”

6) Rating Agencies: We need “to consider whether overreliance on ratings based on co-variance formulas is a trustworthy substitute for facts. Any reform effort must keep in mind the difference between facts, which can be tested for truth, and opinions, such as ratings, which can’t. Facts are not simply about transparency; facts are about empirical truth.”

de Soto has long been a hero of conservative property rights groups. Unfortunately, the official Republican position on finance reform appears not merely to tolerate, but to affirmatively encourage the “destruction of economic facts” that de Soto laments. Leaders like Spencer Bachus want to reduce funding for the SEC, the Office for Financial Research and the Office of Credit Ratings (or kill the latter offices outright).

Some might be astonished that a political movement based on the rhetoric of “property rights” sees fit to undermine the very institutions necessary for us to understand who owns (and owes) what. But perhaps we shouldn’t be surprised, since rapidly increasing opacity in political donations makes it very difficult to understand what dominant donor classes are demanding. Just as the Koch-allied groups have largely drown out other libertarian voices on monetary policy, so too can veiled money flows trump the doux commerce ideal of an invisible hand. Who wants to be on the wrong side of Rove’s Crossroads group? There is a much broader “process of social control” at work here.

Ideas for Reform

de Soto gives several brief suggestions for reform; more are developed in detail in the Roosevelt Institute report “Make Markets Be Markets.” For example, Joshua Rosner elaborates on worries about bundled mortgages, and proposes a solution:

[K]ey terms that define contractual obligations are not standardized across the industry, across issuers of securities with the same type of collateral (e.g. RMBS, CMBS or RMBS based CDOs) or even by issuer (each issuer often had several different Pooling and Servicing Agreements and Representation and Warranty Agreements).

The lack of standardization and the length of the documentation effectively created opacity, which contributed to the problems in the securitization market. When panic set in and investors began to question the value of their securities, they knew that they did not have the time to read all of the different several- hundred page deal agreements. This reinforced the rush to liquidate positions. . . .

In order to accurately price securities, investors need timely loan-level performance data on the assets backing each deal. We need loan-level data on a daily, or at least monthly, basis in both the primary and secondary markets. Without frequently updated and standardized disclosure of loan-level data, market participants can’t independently analyze and credibly value asset-backed securities based on full information.

I think these are very good points, but reformers will need to overcome much entrenched dogma about the sanctity of trade secrets and proprietary information. In coming weeks, I’ll be focusing on other solutions, suggested in sources ranging from the de Larosiere report to Eric J. Weiner’s book The Shadow Market. I’ll also look at journalists’ ideas of their role, ranging from Gillian Tett’s pre-crisis “Iceberg Memos” (which warned FT managers that they were only covering the tip of an increasingly murky financial world) to Joe Nocera’s recent declaration that journalists have a fundamentally different role than, say, law enforcement, because they lack surveillance tools.

Consumer Combat: Crouching Exceptions, Hidden Fees

I have one more big picture point to make: “gotcha capitalism” extends from the highest levels of finance down to the consumer end of the economy. As Nathalie Martin recently noted:

I heard a humorous radio program this morning in which Europeans were complaining about how you never know the real price of anything in America. Things seem cheap, but once you consider the taxes, the tipping, the hidden ad-ons, the price is so much more. There is no transparency. Boy, they don’t know the half of it. At times it seems everywhere you turn, you find a scam or an unauthorized fee.

I have been following efforts to improve transparency in health insurance contracts, especially those sponsored by the Center for Consumer Information & Insurance Oversight. Recently, Daniel Schwarcz has demonstrated the need for more clarity in homeowners’ insurance policies, too:

The current personal lines insurance marketplace is largely organized around a myth. That myth is that personal lines insurance policies are completely uniform. This myth explains regulatory rules that do nothing to promote insurance contract transparency. It explains the ignorance of most information intermediaries about the details of contract terms. And, to a substantial degree, it explains the willingness of courts to treat insurance policies as ordinary contracts. . . .

[The situation] reflects the efforts of carriers to limit coverage relative to the presumptive industry baseline. These insurers have actively hidden and obscured this trend, in notable contrast to the comparatively transparent marketing of the few carriers who have departed from standardized policies to improve coverage. If regulators do not act to substantially improve consumer protection in this domain, then it can be expected that coverage will continue to degrade for most carriers, in a modern day reenactment of the race to the bottom in fire insurance that triggered the first‐wave of standardized insurance policies.

Many commentators have worried that consumer protection has been a neglected goal of bank and insurance regulators, whose primary goal was promoting credit and industry. Consumer protections in the financial world have too often been treated as a distraction from the primary goals of regulators, rather than as a critical part of their mission. As work from de Soto’s to Schwarcz’s shows, that attitude is impossible to sustain. Practices that harmed borrowers contributed to a larger crisis of confidence that threatened to initiate a chain reaction of catastrophic consequences for the finance system. In 2010, legislators realized that the regulatory arbitrage persistent in the financial sector—where the Office of Thrift Supervision, Office of the Comptroller of the Currency, and other regulators competed to offer the most lax regulatory regime—served neither consumers nor the larger economy. The Dodd-Frank Act addresses both concerns by establishing a Financial Stability Oversight Council, the Consumer Financial Protection Bureau, and the Office of Financial Research. Each could help rebuild institutions devoted to the “economic fact-finding” that de Soto recommends.

Photo Credit: Autovac.

Sidebar Publishes Essay on Reforming the American Land Title Recording System

Columbia Law Review — Sun, 03 Apr 2011 23:09:34 +0000

The Columbia Law Review Sidebar is pleased to announce the publication of Foreclosures and the Failure of the American Land Title Recording System, by Professor Tanya D. Marsh of Wake Forest Law School.

In her essay, Professor Marsh argues that the current mortgage crisis should serve as a wake-up call for an overdue modernization of the American land title recording system. The essay describes how the current public land title recording system is lacking and suggests how it can be improved to lessen the chance of such problems in the future. The essay goes beyond other recent proposals for the modernization of the American system of land title recording by proposing a radical solution: the gradual federalization of land title records.

A2K Symposium: Owning the Stars

Frank Pasquale — Thu, 03 Feb 2011 01:59:53 +0000

I heard Lawrence Liang give a terrific talk at the Open Video conference in New York last Fall. His contributions to the A2K volume are also thought-provoking. Here is the conclusion from one of them:

I end this piece with a small parable that many of us will have read while we were children. The story is from Antoine de Saint Exupéry’s tale The Little Prince. The Little Prince visits a number of planets and encounters a range of different characters. On the fourth planet, he meets a businessman who owns millions of stars, and the reason why he owns them is because he was the first one to think of owning the stars.

The Little Prince is perplexed, because he can’t seem to find a reason for owning the stars beyond the fact that they can be put in a bank to enable the businessman to buy more stars. The Little Prince tells the businessman that “I own a flower myself, which I water every day. I own three volcanoes, which I rake out every week. I even rake out the extinct one. You never know. So it’s of some use to my volcanoes, and it’s useful to my flower, that I own them. But you’re not useful to the stars.”

Liang’s parable in turn made me think of ownership as an obligation, not (just) an opportunity for exploitation.

A2K As a a Statement of Progressive Intellectual Property?

In a special issue of the Cornell Law Review, four noted professors of property law wrote a brief series of propositions they identified as “A Statement of Progressive Property.” I found the following propositions particularly compelling:

2. Property implicates plural and incommensurable values.

2.1. Some of these values promote individual interests, wants, needs, desires, and preferences. Some promote social interests, such as environmental stewardship, civic responsibility, and aggregate wealth. Others govern human interaction to ensure that people relate to each other with respect and dignity.

2.2. These values are not solely a matter of satisfying personal preferences. Values can generate moral demands and obligations that underlie judgments about the interests that the law should recognize as property entitlements.

2.3. Values promoted by property include life and human flourishing, the protection of physical security, the ability to acquire knowledge and make choices, and the freedom to live one’s life on one’s own terms. They also include wealth, happiness, and other aspects of individual and social well-being.

There is little reason not to put “intellectual” in front of property each time it occurs in this statement. Is that an indication of the propositions’ powerful universality or thin generality?

Finance is Fundamental

My worry is that agendas like A2K—or progressive property—are going to founder on larger economic forces. Over the past decade, I’ve watched various reform programs in both health care and information law run up against the “irresistible force” of capital flight and demands for increasing returns on investment. Pharmaceutical research is declining or trending toward the redundancies of me-too drugs. An explosion of creativity on the net is being channeled through megacorps, which are often driven by little more than a desire to maximize charges (for internet service provision) and marketing (for search engines and social networks). Rationales for vertical integration in the internet field often sound like little more than a new idea to “own the stars” (possibly literally if Comcast, NBC, and Hollywood someday find a way to reincarnate the “star system“).

Huge imbalances of wealth, earnings, and power are confounding traditional distinctions between market and state. They also make it nearly impossible for many firms to adopt principles of A2K. A blind market demand for maximum returns does not leave much room for the ethical goals of progressive property or A2K. Nor are global capital markets consistently promoting human freedom, development, or access to knowledge. They are increasingly serving, instead, to advance crony capitalist “creative destruction” that precarizes labor in the developed world and constantly exposes the global poor to food and energy shortages.

Democratizing Capital Allocation and Financial Information

A2K scholarship has focused on how state-granted entitlements to intellectual property protection unfairly deny access to knowledge. Leading thinkers in the field have promoted conditions on and limits to such entitlements. I think that, as the scope of state subsidies to business (both explicit and implicit) becomes clearer, that agenda needs to move beyond information industries themselves to the finance firms and traders who call the shots in the global economy. These firms simply cannot be profitable without taking advantage of exorbitant privileges, including access to the Fed’s discount window, the TLGP, current ultraloose monetary policy, and various forms of “too big to fail” backstops.

When thinking about the future of finance, we should look at another sector utterly dependent on government subvention—health care. In exchange for paying at least 45% of the bills, the government imposes myriad conditions on providers in order to assure certain outcomes. I teach about these in my course on Health Care Finance and Regulation, and if the American people ever get their money’s worth from explicit bailouts and ultraloose monetary policy, “Finance Industry Finance and Regulation” may be a topic for a future generation of law students.

In health care finance and regulation, the government’s goals are relatively clear: raise quality, cut costs, and increase access. These goals are often in tension, but they provide guidance for policymakers. I believe that the A2K agenda is doomed to failure (or at least far from complete implementation) if global policymakers cannot do more to encourage responsible capital allocation that promotes the goals of A2K, progressive property, and ecological renewal. Hope for new levels of access to knowledge is dependent on the development of alternatives to finance-driven capitalism, or, at the very least, a democratization of the financial information economy now shrouded in secrecy and obfuscation.

Recently many legal scholars have begun to turn their attention to financial markets, even if their primary field of study has been outside of that area. For example, employment law experts like Joan Williams and Richard Freeman have critically commented on the upside-down socialism driving bank bailouts for the few and austerity for the many.

I began looking at financial markets after years of teaching and researching healthcare finance and regulation, because I began to feel that the ways of Wall Street were a kind of physics or chemistry that set fundamental limits on whatever ecology of healthcare finance we learned about. The fundamental economic imperatives of rising stock prices and CEO salaries had begun to dictate insurers’ and hospitals’ political action, which in turn was driving the very rules that were supposed to set limits on them. Just as Mireille Hildebrandt and Helen Nissenbaum have warned that privacy values must be designed into technology (rather than just tacked on by law), I began to feel that a just health care system could not persist within finance capitalism as it is presently constituted. To mix the positive theory of Luhmann and the normative theory of Walzer: the health care system’s capacity to operate as a sphere of justice is diminished to the extent that bottom line demands eclipse its larger social mission.

Is It Written in the Stars?

So the A2K movement, like all modern social justice movements, must make a choice. It can either try to work within modern finance capitalism, or reform it. One of the chief allures of A2K for me has been its creation of an alternative, peaceable kingdom of reciprocity as an alternative to a monetary exchange system warped by inequality. To exemplify that exchange in some small way, I want to repay Liang’s starry metaphor with one of Brian Holmes’s:

Imagine the night sky as an overarching dome, filled with thousands of shimmering points of light. Each of these bright stars represents the stock of a publicly traded corporation. The intensity of their luminous presence varies in real time according to the frequency of trading. If one star co-varies with others – that is, if a pattern emerges between the rates at which certain stocks are bought and sold – then the flickering points of light draw slowly together, forming unstable constellations.

The illuminated dome is an artwork by Lise Autogena and Joshua Portway, entitled “Black Shoals Stock Market Planetarium” [pictured above]. It refers both to the financial economy and to ancient astrological techniques for the calculation of human destinies. At first glance it might resemble dozens of other stock-market visualizations, remarkable only for the astrological metaphor. But a further element transforms it into an existential allegory of contemporary social relations. . . .

Black Shoals is a great work because it asks two fundamental questions. First, what is the “artificial world model” that contemporary civilization has come to embody, under the decisive influence of speculative finance? And second, will the “creatures” of this particular world – not only the traders themselves, but all the cultures of global circulation that have sprung into existence over the last thirty years – now have to dramatically change survival strategies. . . .? As proven by the series of crises that have surged through the world economy over the last thirty years, nothing has more powerful effects at ground level than the shifting map of the financial stars above.

As Yochai Benkler’s seminal work on the Wealth of Networks showed, A2K’s promise lies in modes of production that sidestep markets and states (and the ever more prevalent “predator state” that melds both). But if A2K fails to pay attention to the fundamental drivers of markets and states, ominous forces of surveillance, exploitation, and control will erode its spaces of peer production and sharing. A “world model” that is “under the decisive influence of speculative finance” cannot long abide a social movement invested in meeting real human needs.

Image Credits: From Flight Log and Holmes’s Blog.

On Feudalism

Gerard Magliocca — Tue, 25 Jan 2011 22:50:31 +0000

My colleague Tom Wilson, who just did a sabbatical in Scotland, told me an interesting fact today. Feudalism was the law there until 2000. The Abolition of Feudal Tenure Act ended vassal status and entail except for lands owned by the Crown. This makes Scotland the last European region to get rid of feudalism. England did so in 1290, though there were earlier attempts at reform.

Hockett on the Financial Crisis

Frank Pasquale — Thu, 23 Dec 2010 16:22:47 +0000

There is a growing consensus that our mortgage markets are fundamentally broken. In a recent article in The American Prospect, Robert Kuttner surveys a number of leading legal academics’ prescriptions for the foreclosure crisis:

Katherine Porter, a law professor at the University of Iowa and an expert in mortgage servicing, recently testified to the Congressional Oversight Panel for the Troubled Asset Relief Program (TARP) that according to lawyers for both home-owners and banks, “a very large number (perhaps virtually all) securitized loans made in the boom period in the mid-2000s contain serious paperwork flaws, did not meet underwriting or other requirements of the trust, and have not been serviced properly as to default and foreclosure.” . . . .

One remedy, proposed by professor Adam Levitin of the Georgetown Law Center, would create a new chapter of the bankruptcy code and allow a home-owner to come before a bankruptcy judge and get the mortgage reduced to the present value of the home. The process would also clear the title. Another proposal, by professor Howell Jackson of Harvard Law School, would use government’s power of eminent domain to take securitized mortgages, compensate the holder at the securities’ (much reduced) fair market value, and use the savings to turn the paper back into whole mortgages with steep reductions in interest and principal. This would also allow millions of people to keep their home and help stem the broad decline in housing values.

I think each of these ideas is valuable. I’d also like to see them complement a broad set of proposals articulated by Robert Hockett in a recent piece in the Washington University Law Review. Hockett’s proposals are worth quoting at length, since he keenly grasps the historical dimensions of this crisis:

1. Regulation as Modulation: The Fed and Bubble Preemption
Easily the most important lesson to be drawn from the model of asset price bubbles and bursts schematized [earlier in the article], I think, is the critical role that the Fed must play in preventing bubbles from emerging and inflating in the first instance. . . . While, of course, it is not easy to separate out “fundamental” value and “merely speculative” value with scalpel-like precision or an entirely bright line, it is often quite easy to find reasonable proxies for fundamental value and then to compare prevailing market prices to them. When home prices depart as significantly from counterpart rental prices and from building costs . . . there simply cannot be serious doubt that a bubble is afoot. . . .

Second, and relatedly, any inadequacy in private rates of betting against bubbles could readily be supplemented by regulatory action. For one thing, of course, the Fed now would have means of better timing their boosting of the market rate of interest, the credit-dampening margin requirements imposed upon financial institutions, or both. For another thing—and here we would be speaking not simply of the Fed, but the IRS working in cooperation with the Fed—we could readily impose a form of “Tobin taxation” on the capital gains realized by those who “flip” assets like houses during times of speculative excess, as now would be newly determinable by the Fed.

2. Portfolio Regulation by Reference to Underlying Assets
Asset markets’ overvaluation of assets during times of speculative excess, and their undervaluation of such assets during times of symmetrical “depressive” excess, are problem enough in themselves. But their harmful effects are transmitted more widely when assets are valued by regulators–not just the Fed, but other financial regulators as well—and private institutions by reference to market value. So-called “market value” and “mark-to-market” accounting—employed by our financial regulators, our rating agencies, and many other institutions alike . . . played a critical role in enabling our stock and real estate bubbles to inflate. . . .I]t has never been obvious why such measures should altogether supplant, rather than simply complement, measures-by-proxy of more lasting, “fundamental” value. . . .

3. Derivative and Hedge Fund Disclosure
[T]he multitude of derivative financial arrangements pursuant to which asset price risk was transmitted worldwide have been occluded. . . . [which] is surely one of the most remarkable and surprising features of our current finance-regulatory environment. As any student of securities regulation knows, the leading strategy adopted by Congress in the 1930s for purposes of securities regulation was that of disclosure. . . . Up through the mid-1990s, there might arguably have been reason for this. Derivative transactions were, well, derivative—they were, at most, the tail on the dog of securities. . . . But that growth has long since occurred, and the once-tail now very much wags the dog.

4. A Glass-Steagall for Auditors, Rating Agencies, and Regulators
Banks now are able to affiliate with securities firms, as well as insurance companies, with abandon. A single financial holding company may hold multiple such firms. . . . [T]here are two conspicuous conflicts of interest that proliferate right now and are clearly germane to the integrity of our financial system. One is the case of auditors and rating agencies. These reputational intermediaries are retained and paid by the very financial firms that they audit and rate. And significant evidence already is emerging that some of these intermediaries have been lax in rating many of our recently worst-hit financial institutions. A related conflict is that raised by the practice of many financial regulators–not to say Members of Congress–who pursue careers with financial institutions after brief careers regulating them. . . .

[S]omething in the way of imposition of walls of separation here could be managed at little public cost. It would not be at all difficult, for example, simply to prohibit former regulators from taking positions with financial firms for some lengthy period–say five years or more–following their stints in office. By the same token, it would not be that difficult to impose upon financial firms, as a sort of licensing cost, fees of the sort that they pay auditors and raters, with a view then to publicly paying those intermediaries. . . .

5. Originator Liability
We do not, after all, permit manicurists and pizza delivery companies to underwrite or sell securities. Why, then, did we permit them to originate mortgages–a form of asset at least as critical to wealth and the health of the macroeconomy? The final reform that I take our present troubles to show critical, then, is just this: Recognize once and for all that real estate finance is as critical as is corporate finance, and regulate markets in these assets accordingly.

These are all excellent ideas, and illuminate a holistic response to the crisis. Hockett’s article is well worth reading in toto. He notes that “among the many accomplishments of the first Roosevelt Administration touted on campaign flyers during the 1936 reelection campaign now on display at [the Roosevelt Library in Hyde Park, New York], upwards of half are finance-regulatory in nature.” A party that took Wall Street reform seriously could expect similar electoral dividends.

Liar Loans: White-Out & Scotch Tape at the Subprime Art Department

Frank Pasquale — Mon, 15 Nov 2010 01:25:14 +0000

Doug Henwood has a good eye for the best of recent business analysis. Henwood’s interview with Michael W. Hudson (about Hudson’s new book, “The Monster”) is a must-hear for those interested in the subprime mess. From the book website:

This book tells the story of . . . subprime by chronicling the rise and fall of two corporate empires: Ameriquest and Lehman Brothers. . . . By the height of the nation’s mortgage boom, Orange County was home to four of the nation’s six biggest subprime lenders. Together, these four lenders—Ameriquest, Option One, Fremont Investment & Loan, and New Century—accounted for nearly a third of the subprime market. . . .

Under its pugnacious CEO, Richard Fuld, Lehman helped bankroll many of the nation’s shadiest subprime lenders, including Ameriquest. “Lehman never saw a subprime lender they didn’t like,” one consumer lawyer who fought the industry’s abuses said. Lehman and other Wall Street powers provided the financial backing and sheen of respectability that transformed subprime from a tiny corner of the mortgage market into an economic behemoth capable of triggering the worst economic crisis since the Great Depression. . . .

[Helped by Lehman,] Ameriquest Mortgage unleashed an army of salespeople on America. They numbered in the thousands. They were young, hungry, and relentless in their drive to sell loans and earn big commissions. One Ameriquest manager summed things up in an e-mail to his sales force: “We are all here to make as much f****** money as possible. Bottom line. Nothing else matters.” [This activity] helped fuel the mortgage empire that in 2004 produced $1.3 billion in profits [for Ameriquest's CEO].

Two highlights of the interview stuck with me. Hudson describes how subprime boiler rooms equipped salespeople with white-out, exacto knives, and scotch tape—the better to cut out embarrassingly low income figures from applicants’ W-2s and to paste in higher figures from other W-2s that happened to be lying around. Salespeople called the room where this occurred the “art department” or “lab.”

We also learn from Hudson that at one point, Ameriquest’s CEO was worth over $3 billion, and apparently lived in “a $30 million estate.” That little data point reminded me of Matthew Yglesias’s recent reflections on some of the extraordinary wealth in our society:

[We have to wonder how many billionaires are] reckless gamblers who got lucky making bad bets [rather] than brilliant visionaries who can peer into the future and see the best ideas. In other words, if a thousand guys walk into a casino and all put $1 million down on different numbers on the roulette wheel, then the guys who win all make a second bet, someone will probably walk out of the casino with a billion dollars and an air of smug self-satisfaction.

Even as that conclusion seems ever more fitting for the finance sector (where Paul Volcker claimed the last great innovation was the ATM), an army of lobbyists amasses on Capitol Hill to les bons temps roulez. We can probably rest assured that current regulators will not openly fight states’ efforts to curb abusive lending (as many federal agencies did during the Bush era). But how many could end up in rather comfortable positions at the very firms they are now regulating?

Foreclosures and the Rule of Law

Frank Pasquale — Mon, 08 Nov 2010 02:00:47 +0000

Is the US becoming a third world nation? Arianna Huffington’s recent book makes the case, arguing that crumbling infrastructure and vast inequality herald a new era of unaccountable elites. She argues that “our financial system [has] become a bad carnival game where the rich always get the grand prize and the average American walks away empty-handed.”

Matt Taibbi directly connects financialization with the decline of common infrastructure in his new book, Griftopia. He describes a litany of roads and bridges “already leased or set to be leased for fifty or seventy-five years or more in exchange for one-off lump sum payments of a few billion bucks at best, usually just to help patch a hole or two in a single budget year.” Taibbi says the process is “stripping wealth out of the heart of the country,” reminiscent of the extractive industries of Nigeria or Equatorial Guinea. Even the New York Times‘s moderates are finding the US uncomfortably close to a “banana republic,” with Nicholas Kristof concluding that “You no longer need to travel to distant and dangerous countries to observe . . . rapacious inequality. We now have it right here at home.”*

Attorneys have a difficult time coming to grips with this new political economy. Many wholeheartedly believe that today’s chief executives deserve to make four or five hundred times the average worker’s wages (rather than the roughly fifty-fold multiple prevalent in 1980 America, and elsewhere in the world today). Perhaps the nation’s richest 1 percent in some sense deserves to have captured 80% of the increase in income from 1980 to 2005. These are moral claims that cannot be conclusively proven or disproven.

But we as attorneys can at least insist on a common rule of law for all. And that’s what our legal system has grievously failed to provide during the foreclosure crisis. As the indisputably pro-market Jonathan Macey notes, “the banks have created significant legal exposure for themselves ‘by committing fraud upon the courts.’” And yet the first thing our Congress could think to do was to endorse legal cover for them, as eagerly as it retroactively immunized warrantless wiretapping.

Was that merely a case where the grandeur of “democracy” deserved to trump punctilious formalism? Had it occurred in isolation, perhaps. But coming after a long line of bailouts, megabonuses, and the refusal of big banks to play even their basic utility role in our economy, it is inexcusable. As Joseph Stiglitz explains,

The mortgage debacle in the United States has raised deep questions about “the rule of law,” the universally accepted hallmark of an advanced, civilized society. The rule of law is supposed to protect the weak against the strong, and ensure that everyone is treated fairly. In America in the wake of the subprime mortgage crisis, it has done neither.

[I]n recent weeks and months, Americans have seen several instances in which individuals have been dispossessed of their houses even when they have no debts. . . . The procedural shortcuts, incomplete documentation, and rampant fraud that accompanied banks’ rush to generate millions of bad loans during the housing bubble has, however, complicated the process of cleaning up the ensuing mess. . . .

But banks want to short-circuit these procedural safeguards. They should not be allowed to do so. To some, all of this is reminiscent of what happened in Russia, where the rule of law—bankruptcy legislation in particular—was used as a legal mechanism to replace one group of owners with another. Courts were bought, documents forged, and the process went smoothly. In America, the venality is at a higher level. It is not particular judges who are bought, but the laws themselves, through campaign contributions and lobbying, in what has come to be called “corruption, American-style.”

When Businessweek looked for guidance on implications of the US crisis, it turned to property rights expert Hernando de Soto. Having crusaded for years to modernize the Peruvian land titling system, he is apparently now ready to offer guidance to America.

Stiglitz calls for a “Homeowners’ Chapter 11,” in order “to keep families and communities intact” as efficiently as business bankruptcies “allow a speedy restructuring by writing down debt, and converting some of it to equity.” I will leave it to the bankruptcy experts to comment on the plausibility of that particular proposal. But the current crisis convinces me that Andrew G Haldane, Executive Director for Financial Stability at the Bank of England, is correct to make the following points:

During this century, restrictions have been placed on poisonous emissions from cars – in others words, prohibition. This is recognition of the social costs of exhaust pollution. Initially, car producers were in uproar. The banking industry is also a pollutant. Systemic risk is a noxious by-product. Banking benefits those producing and consuming financial services . . . .But it also risks endangering innocent bystanders within the wider economy – the social costs to the general public from banking crises.

If we continue to subordinate the rule of law to the whim of banks, what former IMF Chief Economist Simon Johnson described as the “quiet coup” will be complete. Liquidation of the rule of law in foreclosures will be one more “social cost” of banking crises.

Photo Credit: Steve Rhodes.

*I believe Tom Friedman recently had a column comparing US politics to those in a country where unaccountable leaders promised to make the roads run “downhill both ways.” If anyone can find that column, I’d like to link to it as well.

The American Dream and Federal Foreclosure

Lawrence Cunningham — Fri, 22 Oct 2010 16:45:38 +0000

Friends of ordinary people urge them to walk away from mortgage contracts if they want and protest mishandling documents as a defense to resulting foreclosure proceedings. Champions of institutional interests counter that it’s morally wrong for people to walk away from mortgage obligations and detect opportunism in challenges to the technical sufficiency of the paperwork.

Writers on both sides discern a double standard in the other. Consumer advocates accuse lenders and their backers of insisting on the sanctity of contracts to reject strategic default, yet excuse their own failure to handle contract documents with requisite care, sometimes deliberately mishandling them. Lenders and their backers complain that deadbeats are trying to game the system, backing out of contracts then using technical legal process as a disguise to enable staying in homes.

Many get overheated in staking out positions. It’s easy to understand such heated lapses, though. After all, the mortgage meltdown and foreclosure furor make enticing platforms for ideological chanting. Stoking the passions is burbling anger inflamed by the mid-term election campaigns.

Yet narrators on both sides vastly oversimplify the reality. It’s also easy to understand that, aside from the political motivations. After all, more than 10 million individuals in the country faced the prospect of mortgage default and/or foreclosure, each with a personal story; scores of lenders were involved on the other side of those deals. The related contracts and foreclosure processes are governed by the laws of the 50 states and other localities, each varying substantially. Any meta-narrative about such deeply-detailed realities will inevitably succumb to sweeping generalizations and hysterical finger-pointing.

Worth noting, though, is how the existing machinery is both handling the turmoil reasonably well and yet how we could take sober lessons from these stories. One concerns the value of tossing out the prevailing state-based system of mortgage foreclosure and replacing it with a single national standard.

What’s working in the current system is that properly motivated lawyers on both sides are advancing rights and defending the discharge of duties, in an exercise that exposes problems. Many journalists properly report the discoveries. Lenders conduct internal examinations of the integrity of their processes. Hundreds of foreclosure actions have been withdrawn as a result.

Over the past three years, state judges from Ohio to Florida to Maine have dismissed foreclosure cases when found to rely on unreliable lender documentation. In the past ten days, judicial leaders, from New York, to Maryland, to Florida, toughened litigation rules to cure the defects detected in some cases. Valid cases are proceeding.

Meanwhile, federal authorities and state attorneys general are pursuing investigations. Though the machinery is grinding along, one thing those investigations should probe is how fragmented, ancient, and quaint is the US system of mortgage lending and enforcement. Its roots date back hundreds of years to a time when real property acquisition and finance were a local affair. The system is antiquated today when these are mostly national affairs.

Once the current fracas and furor fade, the new Congress, however constituted, would do well to consider adopting uniform federal law concerning the mortgage foreclosure process. Participants could begin by considering the proposal of law professor Grant Nelson published earlier this year. It’s not a perfect way to protect the American dream. But the state-based way has failed, as both dueling narratives attest.

Where Have You Gone, Hernando de Soto?

Frank Pasquale — Sun, 03 Oct 2010 21:56:52 +0000

Remember Randy “Duke” Cunningham’s “bribe list” pricing—”$50,000 for every $1 million in appropriated funds he would obtain?” There are now allegations that certain firms offered to “fabricat[e] documents out of whole cloth” to lubricate the foreclosure machine. For a mere $95, one could “recreate entire collateral file,” which is all “the documents the trustee (or the custodian as an agent of the trustee) needs to have pursuant to its obligations under the pooling and servicing agreement on behalf of the mortgage backed security holder [including] the original of the note (the borrower IOU), copies of the mortgage (the lien on the property), the securitization agreement, and title insurance.” Yves Smith draws some interesting implications:

Amar Bhide, in a 1994 Harvard Business Review article, said the US capital markets were the deepest and most liquid in major part because they were recognized around the world as being the fairest and best policed. As remarkable as it may seem now, his statement was seem as an obvious truth back then. In a mere decade, we managed to allow a “free markets” ideology on steroids to gut investor and borrower protection. The result is a train wreck in US residential mortgage securities, the biggest asset class in the world. The problems are too widespread for the authorities to pretend they don’t exist, and there is no obvious way to put this Humpty Dumpty back together.

Smith’s global perspective reminds me of two items. I once heard that, in the wake of Bush v. Gore, a representative of the OAS began a meeting by saying something along the lines of: “We are now to hear from a fragile democracy, one that has suffered severe strains but which looks capable of attaining legitimate procedures for governance. Would the United States representative please come to the dais?” And policymakers who prescribe the titling work of Hernando de Soto for Latin America might want to apply it a bit more carefully at home.

Foreclosure Mills Under Fire; A New Way Forward?

Frank Pasquale — Sat, 02 Oct 2010 19:31:33 +0000

The early days of the financial crisis revealed megabanks indulging in sloppy and self-serving recordkeeping on the macro-scale. Now we see the devastation and disorder that happens when that same profit-at-all-costs mentality is inflicted on individuals. As has recently been reported, foreclosure horror stories include “a man who was foreclosed on when he didn’t have a mortgage and paid cash for the home; a home that had two foreclosure suits against it because both servicers claimed ownership of the title; and a couple foreclosed on over a contested $75 late fee.”

Reform groups like A New Way Forward are gaining strength and members because large financial institutions are increasingly untrustworthy. They no longer appear to be unitary “actors” at all, but rather shadowy and unstable ensembles of desks and divisions whose main goal is slipping by whatever bonus-maximizing scheme won’t set off alarms among risk managers and regulators. As Satyajit Das memorably puts it in his book Traders, Guns, and Money, “no trader making $1 million + a year is going to take questions from an auditor making $50,000 a year” (144).

Given this grim landscape, I wanted to highlight two hopeful items. First, this Monday the Roosevelt Institute will host a conference on the future of financial reform, featuring some of the most credible and compelling voices in the field (including Jennifer Taub, Mike Konczal, Richard Carnell, Sen. Jeff Merkley, and Michael Greenberger). Second, three new books appear poised to reinvigorate stale debates over “markets vs. regulation:”

In his sweeping . . . The Illusion of Free Markets: Punishment & the Myth of Natural Order (forthcoming January 2011), Harcourt brilliantly links our irrational notions about punishment with our fantasies about the supposedly natural system of market organization. It’s a deeply subversive book in the best sense of the word. Ten years ago, Harcourt launched a critique of the “broken windows” philosophy of urban law enforcement (the idea that if you harshly punish small property crimes, it will stop the big crimes) with his book Illusion of Order. That strategy had hypnotized policy-makers, and Harcourt’s thoughtful challenge opened a discussion. I’m hopeful that his new book will inspire a similar rethinking of our faith in the market metaphor.

In Maynard’s Revenge: The Collapse of Free Market Macroeconomics (January 2011) Lance Taylor shows how little relevance mainstream macroeconomic theories have for the everyday real world. . . . This is the sort of big, important book that will hopefully percolate through to the pop economists and the general educated public.

On the libertarian side, Russ Roberts and Arnold Kling have banging the drum about the pseudoscientific foundations of macro-econ for some time, and Taylor’s book should be a welcome contribution to that discussion. The final “hopeful” book I’m thinking of is John Quiggin’s Zombie Economics, now on sale. Quiggin’s book not only deconstructs ideas like privatization and trickle-down economics, but also “looks at alternatives to the ideas of market liberalism.” It is sure to be a welcome addition to a growing post-crisis literature that looks at the foundations, rather than the symptoms, of an increasingly unstable, unequal, and unfair US economy. Old ways of thinking are, as Joshua Clover puts it, busted.

Image Credit: American Casino.

Money Matters in Ongoing Marriage Law

Alicia Kelly — Fri, 01 Oct 2010 17:04:35 +0000

Married life is characterized by a sharing norm. As I described in an earlier post, spouses commit to and in fact engage deeply in sharing behavior, including a shared family economy. Overwhelmingly, spouses pool economic resources, including labor, and decide together how to allocate them to benefit the family as a whole.

In addition to its affects in the paid labor market (see my last post), sharing money matters inside a functioning marriage. It shapes the couple relationship as well as each partner individually. Research shows that in an ongoing marriage, money is a relational tool. For example, making money a communal asset is a way to demonstrate intimacy and commitment, and that can nurture a couple’s bond. Yet, in some circumstances, an assignment of resources to just one spouse can also be understood (by both partners) to be appropriate and deserved—a recognition of the individual within a sharing framework. Conversely, it is also possible that spouses’ monetary dealings can undermine individual autonomy and the relationship as well. For example, one person might exercise authority over money in a way that disregards the other. Accordingly, power to influence financial resource allocation within the family is important for individual spouses and for togetherness.

It becomes a special concern then, that sharing patterns in marriage are gendered. As highlighted in my previous post, role specialization remains a part of modern intimate partner relations. Particularly true for married couples, men continue to perform more as breadwinners, and women more as caregivers. As a result, women tend to have reduced earning power in the market. How does this market asymmetry translate into economic power at home? Happily, in a significant departure from the past, a majority of couples report that they share financial decisionmaking power roughly equally. Indeed, most married couples today endorse gender equality as an important value in their relationship. However, in a significant minority of marriages, spouses agree that husbands have more economic power. For some couples then, a husband’s breadwinning role and/or perhaps his gender, confers authority in contentious money matters.

How should law governing an ongoing marriage respond to these sharing dynamics? Consider this hypothetical fact situation. A husband has a stock account from which he plans to make a gift to his sister who he feels really needs the money. The husband suspects that his wife would not approve of the gift. Even though the wife too loves the sister, she believes the sister is irresponsible with money. Let’s assume that the money in that stock account was acquired while the parties were married, and that it came from the market wages of one or both of the spouses earned during marriage. It was a product of the couple’s shared life. Does contemporary law allow the husband to give his sister the gift without her consent? Without even telling her? How should legal power over the money be allocated?

A surprise perhaps, the law in most states is that the husband can give away the stocks without the consent or even knowledge of the wife, and she will very likely have no recourse, even if they divorce. This is so because perversely, spousal economic relations law in the forty-one “separate property states” simply ignores the marriage altogether. Ownership is based on formal title, with a default rule of individual acquisition. (Ironically, the title determines ownership rule has been partially abandoned in divorce law, and to a lesser extent in inheritance law, but still dominates intact marriage law.) As it stands now, the titled spouse is unilaterally empowered to dispose of an asset that should be considered co-owned with the other.

As I have developed in an article (and am continuing to explore in other projects), my view is that this approach is backward and should be replaced with an actualized joint property regime for marital wealth. Basically I argue for an intensified and expanded community property law approach (that for some transactions functions more like a tenancy by the entireties), grounded on an explicitly theorized foundation. I recommend that marriage should be conceptualized in law as a distinctive partnership of equals for a shared life that includes mutual economic and non-economic contributions as well as joint life-planning and resource-allocation decisions. This sharing framework reflects and facilitates communal goals and behaviors chosen in married life. But it also draws attention to the vulnerability interdependence recurrently produces, offering protection for both individual and joint interests. Key for working against gender hierarchy, the equality standard helps level the economic playing field as couples negotiate resource allocation within the family.

Under my model, both husband and wife are equal co-owners of the stock account. The joint and equal property ownership rule recognizes the sharing process in marriage and equally values whatever kind of contributions spouses make, including both market work and unpaid caregiving work. Additionally, the spouses must collaborate and consent regarding a major transaction like the gift to the sister. (Third party actors, primarily financial institutions, would serve as key enforcers of the mutual consent requirement, by requiring, for instance, two signatures for certain withdrawals, mitigating the opportunity to monopolize joint wealth). This is needed to provide a safety net against the risks sharing inevitably brings. At the same time, operating in the background of spousal negotiations, the rule evenly distributes legal power over the resource. A transfer like the gift potentially affects each spouse individually, as the transfer would concretely diminish wealth to which each partner has a claim. Also crucial, the consent requirement would give each spouse a voice in the decision over what to do with jointly owned property. In addition, allocation of financial decisionmaking power could affect the spouses as a couple and the family unit more broadly. Not surprisingly, having to reach agreement is a more demanding process than unilateral decision making, and may well trigger or reveal conflict. Yet research suggests that sharing control over money is good for marriage. A large-scale study found that “when couples do take the time to share control over money management, they seem to have happier, calmer relationships.” A recurrent collaborative decision-making process marks and augments the communal experience.

Many thanks to Concurring Opinions for hosting me and for the opportunity to dialogue his past month.