Online or virtual stores also have a very different business model and cost structure (see, e.g., here). A small workforce in one location can service all of a company’s online customers. Compare that model with the brick and mortar model where a company operating in [...]]]> Have you noticed the number of empty storefronts around? (For a list of recent store closings, see here.) Business failure unfortunately is part of an economic recession, but it also follows changes in consumer patterns and market demands. Although studies debate the advantages of online versus brick and mortar stores (see here, here and here), consumers are increasingly more comfortable shopping online. Increased security and user-friendly return policies (not to mention all of those free shipping deals) appear to be fostering that trend.

Online or virtual stores also have a very different business model and cost structure (see, e.g., here). A small workforce in one location can service all of a company’s online customers. Compare that model with the brick and mortar model where a company operating in more than one location needs, at a minimum, to own or lease property in each location, pay maintenance and taxes for each facility, retain employees at each facility and comply with the law of each jurisdiction.  (For interesting comparisons, see here, here and here.) Accordingly, brick and mortar stores are relying to some extent on certain intangibles—e.g., consumers wanting to touch and see what they are buying, wanting personal service, etc.—to offset these additional costs.

So is it the economy, the changing market or (as is likely) some combination of factors causing companies like Blockbuster, Borders and Harry and David’s to struggle? (For my prior post related to Borders’ financial challenges, see here.) And if it is the latter, will traditional brick and mortar retail stores make a strong comeback when the economy recovers? I am not so sure. I think we may see more retail bankruptcies end like Circuit City’s case—i.e., Circuit City’s core business continues, as does the use of its name, but only in an online form (and under new ownership; see here). Although I appreciate the efficiencies of this model for both the company and the consumer, I do not think it is necessarily the best trend for us as communities and neighbors. As the commercial says, having a face-to-face conversation with a salesperson about your product questions: “priceless.”

But there are problems. Although progress is being made, agencies are behind schedule in meeting certain benchmarks, with the first anniversary of the Act quickly approaching. Opposition lobbies continue to form and are gaining strength (see, e.g., here and here), and funding for the Act’s initiatives remains in question (see here, here and here). I can’t help [...]]]> There currently is a lot of activity surrounding implementation of the Dodd-Frank Act. The various agencies are proposing rules, numerous organizations are filing responsive comments and many rules have become final. (For useful resources to help track rulemaking and developments, see here and here.) Major portions of the Act are taking shape (see, e.g., here, here and here); the new Consumer Financial Protection Bureau even has its website up and running.

But there are problems. Although progress is being made, agencies are behind schedule in meeting certain benchmarks, with the first anniversary of the Act quickly approaching. Opposition lobbies continue to form and are gaining strength (see, e.g., here and here), and funding for the Act’s initiatives remains in question (see here, here and here). I can’t help but wonder about the endgame. Can our already understaffed and underfunded agencies enforce these new rules? Are rules on the books without any meaningful enforcement mechanisms effective? If the answer to both of these questions is no, where exactly are we headed?

I am not the first, and certainly will not be the last, to raise these types of questions. Nevertheless, I raise them to consider the alternatives. If the risk management, corporate governance and consumer protection issues highlighted by the recent recession can’t be fixed effectively through the regulatory process, what might work? The obvious alternatives—market discipline and industry self-regulation—have their own problems, which might be as challenging to overcome as the resource issues facing the government.  (For interesting perspectives on these alternatives, see, e.g., here and here.) But I think we should continue to try; we should consider innovative ways to enhance the efficiency of these and other monitoring/disciplining tools that could complement whatever comes out of the regulatory initiatives. The economic problems we face are too big for us to fail.

The report piqued my interest regarding whether the recession was having a similar, positive effect on the provision of pro bono legal services. I suspected that more people were in greater need of legal assistance as a result of the recession, which in fact turns out to be the [...]]]> I heard an interview today with a representative of a nonprofit organization that matches volunteers with organizations in need—a sort of match-maker in the volunteer context. Interestingly, the representative reported an increase in the number of available volunteers during the recession (see also here and here). She attributed this trend to two things: people who had lost their jobs wanting to keep up their skills while searching for new employment and people generally wanting to help others in need.

The report piqued my interest regarding whether the recession was having a similar, positive effect on the provision of pro bono legal services. I suspected that more people were in greater need of legal assistance as a result of the recession, which in fact turns out to be the case (see here and here). I did not know, however, whether lawyers were meeting this increased demand. I like to think we are, but the profession’s record on this point is not necessarily encouraging (see, e.g., here).

The results appear mixed. Some reports suggest that the level of pro bono activity has remained the same or increased slightly in the past few years (but see here). (For interesting perspectives on the recession and the legal profession, including pro bono legal services, see here and here.) Nevertheless, even these increased activity levels fall woefully short of the reported need. So, given high lawyer unemployment rates and the desire to better train new lawyers, why does this gap exist?

Some law firms have encouraged associates who were deferred or underutilized at the firm to pursue pro bono activities (see, e.g., here and here). This approach likely is a win-win situation because the law firm and associates satisfy their ethical obligations to provide pro bono legal services, both also get the benefit of on-the-job skills training for younger lawyers and people get the legal help they need. Hopefully, this trend will continue after the economy and the legal market recover.  (For an interesting discussion of pro bono work in the U.S. Supreme Court, see here.)

Many bar associations, courts and law schools (see, e.g., here, here and here) have pro bono and access to justice programs that make wonderful contributions to their communities and the profession. These efforts started well before the recession and likely will continue well after. But their success depends on lawyers’ commitment to the recommended 50 hours of pro bono service per year under the ethical rules. Reports suggest that 50 percent or less of lawyers actually meet this aspirational goal, at least in certain jurisdictions (see, e.g., here and here). Notably, Mississippi is considering a mandatory pro bono requirement for its lawyers (see also here).

What does this all mean for the profession and the underserved? I am not quite sure, but the cynic in me suspects that, when the dust settles, it will mean very little, as the value of pro bono work remains unrecognized in many law firm cultures.  One nonetheless can hope that the underprivileged and underserved become surprising beneficiaries of a recession-generated upswing in pro bono activity.

The mortgage industry has been encouraging the Federal Reserve to address the rescission issue with a sense of urgency, perhaps fearing what might happen to the rule after July 21, 2011—the date that authority on such issues [...]]]> A Federal Reserve staffer suggested this week that the Fed will defer a key consumer decision to the newly-created Consumer Financial Protection Bureau (CFPB). That decision concerns homeowners’ rights of rescission. The rescission right gives a homeowner a certain period of time (in some cases up to three years) to challenge a mortgage on the grounds of misrepresentation or inadequate disclosure and requires the mortgagor to release its lien on the subject property. As you might guess, the rescission remedy has been invoked extensively in the recent economic downturn.

The mortgage industry has been encouraging the Federal Reserve to address the rescission issue with a sense of urgency, perhaps fearing what might happen to the rule after July 21, 2011—the date that authority on such issues is transferred to the CFPB. The Federal Reserve looked poised to make a move, having proposed a rule in September 2010 that would significantly restrict the circumstances under which a homeowner could seek to rescind a mortgage. The comment period for the proposed rule closed on December 23rd, and, despite opposition by consumer groups, many thought the Federal Reserve would continue to pursue the proposal. 

A decision by the Federal Reserve to defer this particular issue to the CFPB would be consistent with the CFPB’s objective to consolidate the oversight and implementation of consumer protection regulations in a single agency. It may not, however, produce a result consistent with the intent of the Federal Reserve’s proposed rule and the desires of many in the mortgage industry. One of the CFPB’s charges is to oversee the mortgage and credit card industries, including the language and substance of consumer disclosures. Given the CFPB’s preemption provisions (which favor enforcing state consumer protection laws), the CFPB’s proposed partnership with state attorneys general and the robo-signing and related concerns swirling around the mortgage industry, I doubt that weakening consumers’ rescission rights is high on the priority list.

I look forward to seeing how this and other pressing consumer issues play out, particularly after July 21st. The CFPB is starting to take shape (see here and here), and it appears that it will hit the ground running. (For interesting Q&A with Elizabeth Warren on the CFPB, see here and here.) In any event, the agency certainly has its work cut out for it.

Sounds like a dream coming true, right? Unfortunately, for many lottery winners, winning the lottery eventually leads to bankruptcy (see here, here and here). Statistics tend to show that a good portion of lottery winners file chapter 7 or chapter 13 personal bankruptcy cases within five years of receiving their jackpots (see here and here). In one sense, the tale of doom attached to big lottery winnings seems similar to the ploy of telling a bride that rain on her wedding day signals good luck—it makes those of us who [...]]]> Two lucky people woke up this morning mega millionaires. After yesterday’s lottery ticket buying frenzy, one winning ticket was sold in Idaho and the other in Washington (see here). The winners will share equally the $355 million jackpot.

Sounds like a dream coming true, right? Unfortunately, for many lottery winners, winning the lottery eventually leads to bankruptcy (see here, here and here). Statistics tend to show that a good portion of lottery winners file chapter 7 or chapter 13 personal bankruptcy cases within five years of receiving their jackpots (see here and here). In one sense, the tale of doom attached to big lottery winnings seems similar to the ploy of telling a bride that rain on her wedding day signals good luck—it makes those of us who didn’t win feel a little better. In another sense, however, it highlights a real problem in our approach to financial education.

Yesterday, the American Bankruptcy Institute reported a significant increase in overall personal bankruptcy filings. Undoubtedly, some of those filings are the direct result of the recession, and some filings stem from similar unforeseen changes in circumstances, such as divorce and serious health problems. But many personal bankruptcies involve honest, unsophisticated individuals who simply do not understand or have the skill set to manage their personal finances. Yes, these individuals should take responsibility for their finances, but they also need training and resources to be successful in that endeavor. Studies suggest that many high school graduates do not understand how credit cards and other basic financial instruments work (see here, here and here), yet most carry credit and debit cards in their wallets.

I appreciate the enormous challenges facing the U.S. education system. As we evaluate these challenges, however, we need to consider financial education as part of the core curriculum. We also need to continue working to provide meaningful financial education to adults (for an interesting study concerning financial education and bankruptcy, see here). Although the 2005 amendments to the U.S. Bankruptcy Code incorporate a consumer education component, that requirement has become little more than the potential debtor sitting in front of a computer screen and answering a few questions in order to be able to file her bankruptcy petition (for other perspectives, see here, here and here; for an excellent study regarding the impact of the 2005 amendments on consumer debtors, see here). I hope that as the economy recovers, so too do our financial education initiatives  (see here and here) so that more individuals have a real chance at sustainable financial health.

Consider, for example, Borders, which recently announced that it was suspending payments to vendors and trying to refinance its debt obligations (see here and here). Borders, like its competitor Barnes & Noble, is struggling to compete with big box retailers that offer steep discounts on traditional books and the growing popularity of e-Books (see here, here and here). Also like many retailers, Borders was hit hard by the economic recession (see here).

Some may say that Borders is a victim of the recession and [...]]]> In my opening post, I referenced the slow pace of change and how it can be exceedingly painful for individual consumers. I want to follow up on that concept in the business context, where slow change—or the failure to change at all—can be fatal.

Consider, for example, Borders, which recently announced that it was suspending payments to vendors and trying to refinance its debt obligations (see here and here). Borders, like its competitor Barnes & Noble, is struggling to compete with big box retailers that offer steep discounts on traditional books and the growing popularity of e-Books (see here, here and here). Also like many retailers, Borders was hit hard by the economic recession (see here).

Some may say that Borders is a victim of the recession and creative destruction. And that may, in part, be accurate. (For interesting perspectives on the utility of recessions and creative destruction, see here and here.) But anyone who follows the retail industry or is an avid reader had some sense that this was coming (see here, here and here). So why didn’t Borders’ management? Or rather, why didn’t they react more quickly to the changing market and economy?

As a former corporate restructuring lawyer, I often ponder this and similar questions. Why do managers try so hard to salvage rather than innovate? And why is it so hard for them to admit that change—perhaps both financial and operational innovation—is necessary? (For a discussion of the denial often accompanying financial distress, see here.)

Admittedly, it is easy to throw out questions from the cheap seats and much harder to make the calls from the sidelines (or boardroom). I have worked with, and truly appreciate the challenges and difficult decisions faced by, the management of troubled companies. I am not trying to assess blame; I am simply suggesting that we recast creative destruction as creative reconstruction.

Creative reconstruction is not my phrase. Others have used it in a variety of ways, including Chrysler’s CEO, Sergio Marchionne (see here). I use the phrase to describe a company seizing upon the change agents typically associated with creative destruction to reduce inefficiencies or modernize operations. Rather than those change agents destroying the company, they motivate the company to reinvent itself. (For another perspective on creative destruction and firm success, see here.) All too often, those outside of the restructuring community view corporate reorganizations solely as balance sheet restructurings—only to prolong the inevitable. Corporate America and the U.S. bankruptcy system can and should do better (see here).

I will reflect on whether creative reconstruction is working for Chrysler (and GM) in a future post, as well as its prospects under the resolution authority contemplated by the Dodd-Frank Act. (For another perspective on creative destruction and the Dodd-Frank Act, see here.) The concept may not work for every company; some companies should fail. Nevertheless, if the approach encourages troubled companies to analyze their problems sooner and consider implementing change more quickly, it is worth a try.

2010 certainly was an active year—we saw Congress pass landmark legislation (see here and here), voters overhaul the political landscape in the mid-term elections (see here and here) and everyone continue to focus on the economic recovery (see here, here and here). But as I reflect on the past year and look forward to 2011, I am not really sure that much has changed.

Yes, we were told [...]]]> I want to start by wishing everyone a very happy New Year and by thanking my colleague Danielle Citron and all of the permanent authors of Concurring Opinions for inviting me back to guest blog. I truly enjoyed my time as a guest blogger last January, and I look forward to participating on the blog during the next few weeks.

2010 certainly was an active year—we saw Congress pass landmark legislation (see here and here), voters overhaul the political landscape in the mid-term elections (see here and here) and everyone continue to focus on the economic recovery (see here, here and here). But as I reflect on the past year and look forward to 2011, I am not really sure that much has changed.

Yes, we were told that the economic recession officially ended, but people, businesses and countries are still feeling the pain. Domestic unemployment continues to hover around 9.8 percent, and some jobs lost during the recession may not be coming back (see here). The U.S. national debt exceeds $13 trillion, and we have no clear path for reducing it (see here and here). Several European countries continue to struggle with liquidity issues (see here and here) and banks continue to fail.

Nevertheless, some things do appear to be changing—albeit at a very slow pace. For academics, slow change can be good, in that it allows us to analyze critically the causes, developments and potential resolutions in (almost) real time. For others, the slow pace of change can be exceedingly painful. In any case, part of what I hope to do during the next few weeks is explore ongoing changes in the corporate and financial fields, as well as the challenges we continue to face in the legal profession generally. These areas are the primary focus of my teaching and scholarship, and I will endeavor to impart some of my passion, concern and optimism for each through my upcoming posts.

This summer started off with a three part series from Professor Olufunmilayo B. Arewa looking at the credit crisis and possible changes that would focus on averting future market failures, rather than continuing to create regulations that only address past ones.  Part I of Prof. Arewa’s looks at the failure of risk management within the financial industry.  Part II analyzes the regulatory failures that contributed to the credit crisis as well as potential reforms.  Part III concludes by addressing recent legislation and whether it will actually help solve these very real problems.

Next, Professors Alan Devlin and Michael Jacobs take on an issue at the “heart of a highly divisive, international debate over the proper application of antitrust laws” – what should be done when [...]]]>

This summer started off with a three part series from Professor Olufunmilayo B. Arewa looking at the credit crisis and possible changes that would focus on averting future market failures, rather than continuing to create regulations that only address past ones.  Part I of Prof. Arewa’s looks at the failure of risk management within the financial industry.  Part II analyzes the regulatory failures that contributed to the credit crisis as well as potential reforms.  Part III concludes by addressing recent legislation and whether it will actually help solve these very real problems.

Next, Professors Alan Devlin and Michael Jacobs take on an issue at the “heart of a highly divisive, international debate over the proper application of antitrust laws” – what should be done when a dominant firm refuses to share its intellectual property, even at monopoly prices.

Professor Carter Dillard then discussed the circumstances in which it may be morally permissible, and possibly even legally permissible, for a state to intervene and prohibit procreation.

Rounding out the summer was Professor Clay Calvert’s article looking at journalists’ use of open record laws and death-related privacy rights.  Calvert questions whether journalists have a responsibility beyond simply reporting dying words and graphic images.  He concludes that, at the very least, journalists should listen to the impact their reporting has on surviving family members.

The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business. . . .

Of late, it’s not so easy to tell this to my law students with a straight face. Last year saw the market lurch like a madman, dropping almost 2000 points in one week alone, and nearly 800 points in one day. That doesn’t look like a market that’s open and efficient (and perhaps just a bit noisy here and there); that looks more like a market [...]]]> Basic v. Levinson clearly sets out the theoretical justification for the fraud on the market theory:

The fraud on the market theory is based on the hypothesis that, in an open and developed securities market, the price of a company’s stock is determined by the available material information regarding the company and its business. . . .

Of late, it’s not so easy to tell this to my law students with a straight face. Last year saw the market lurch like a madman, dropping almost 2000 points in one week alone, and nearly 800 points in one day. That doesn’t look like a market that’s open and efficient (and perhaps just a bit noisy here and there); that looks more like a market that was completely out of whack.

The problem with Basic is well known, and commenters like Larry Ribstein have suggested various solutions (such as more careful focus on causation issues) to combat general noisiness.

But is there a solution that addresses complete insanity? Try asking this one in class some time, and just listen to the discussion that follows.

The bank’s unprecedented reach and power have enabled it to turn all of America into one giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, [...]]]> That’s how Matt Taibbi describes Goldman Sachs in the opening paragraph of his 12-page Rolling Stone article (which, as far as I can tell, is available online only here, in moderately annoying scanned form). From there, Taibbi picks up steam. For instance, we learn that:

The bank’s unprecedented reach and power have enabled it to turn all of America into one giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where its going.

Yikes!

Is this just another crackpot conspiracy theory? (Paging Mr. Stein, Mr. Ben Stein.) Nay — Taibbi has give us proof of Goldman’s nefari-iety. It goes more or less along these lines: 1. Goldman survived the Great Depression. 2. Goldman made some savvy bets in the past ten years. 3. Goldman pays really big bonuses.

But wait, you ask, what does that prove? Let’s go over it in detail.

After noting that Goldman Sachs is almost 150 years old, Taibbi pronounces that of Goldman’s first 100 years, “there’s really only one episode that bears scrutiny now,” and then cites John Kenneth Galbraith for the idea that Goldman’s investment trusts were an important part of the Great Depression. So far, so good. (But why exactly would an evil vampire want to blow up its own money-printing scheme? Something about this conspiracy theory doesn’t make sense. Hold that thought for a moment — we’ll get back to it.)

From there, Taibbi jumps to 1999, and begins an analysis of the past ten years. (All of financial history boils down to 1929 and the past ten years, folks.) The breakdown of the last decade proceeds as follows: Taibbi notes that the stock prices during the internet bubble were not always based on sound principles (in other news, the sky is blue); that Goldman helped drive up prices by problematic practices like laddering and spinning; that Goldman put risky debt into overpriced CDOs with badly understood risks; that Goldman’s commodities trading sub made some good bets when oil prices spiked; that regulators were surprisingly compliant with Goldman’s commodity trading; and of course, that Goldman almuni have been heavily involved in the current bailout. Also, repeatedly, that folks at Goldman and other investment banks have made a lot of money, and earned big bonuses. Add it all up, and it is incontrovertible proof that Goldman has taken over the world.

The story also takes swipes at AIG and other entities. And yet, again and again, Taibbi’s narrative runs into the too-many-villains problem. Is AIG a co-vampire? Well, the market crisis has not been particularly good for AIG, to say the least. Taibbi throws stones at Merrill, too (err, the financial services sub of Bank of America) — but he offers no explanation for why these smart vampires (smart enough to take over the world) are so busy drilling holes in their own lifeboats.

And the same goes for not just AIG and Merrill, but for Goldman as well. (Remember what we said earlier about the Depression?) Taibbi’s narrative is one where Goldman deftly rigs the housing market and makes massive profits, only to gleefully blow it up a few years later, because they apparently know that they will be able to rig yet another market. At what point does the supervillain story begin to stretch credulity? If Goldman has the power and acumen to rig the market so well in the first place, why wouldn’t they just keep the rigged game rolling? Apparently the Goldman vampire is smart enough to take over the world every two years, but stupid enough that it continually blows up its own highly profitable and effective schemes — for no reason except the sheer joy of being able to suck the life out of the little guy.

It’s unfortunate, because there really are interesting stories to tell. The CFTC account seems like a fascinating example of the problems of regulatory capture. (Goldman disagrees.) And, as a number of commenters have noted, it’s true that Goldman alumni have been quite effective in shaping and steering the bailout. As Felix Salmon notes, there’s certainly evidence to support a somewhat more staid, less hyperbolic story about regulatory capture. Unfortunately, Taibbi chose to tell a vampire story instead.

(Hat tip to the inimitable Elisabeth for pointing me to the Taibbi article.)