Thursday, January 31, 2008

Civ Pro Matters - the bell tolls for thee

Today, after more than two years of litigation and a ton of money on the line ($20 million), twelve jurors returned a unanimous defense verdict for Morgan, Lewis & Bockius, LLP against a former client for one simple reason: the statute of limitations.

Purolite alleged that in the 1990's, despite the U.S. trade embargo against Cuba, Morgan counseled it to continue selling to Cuba from its foreign offices. In 1999, as one might have guessed, Don and Stefan Brodie, the Pennsylvania-based brothers who own Purolite, were indicted for violating the Trading With the Enemy Act (not to be confused with Sleeping With the Enemy). They later pled guilty to a lesser charge.

Morgan claimed that the brothers Brodie ignored the firm's advice to stop selling to Cuba because, "They didn't like to be told what to do." Ouch! I'm sure it's not the first or last time the firm counseled a slightly belligerent client, but it's surprising to hear Morgan speak that way about a former client. I wonder if its current clients are a little uncomfortable right now . . .

In the end though, Purolite appears to have slumbered too long on their rights and slept right through the tolling of the proverbial bell: the statute of limitations. Regardless of whether Morgan counseled for or against sale to Cuba (and that does matter from an integrity perspective) the partners over at Morgan must be glad they attended Civ Pro the day the statute of limitations was covered. They must also be glad that Purolite's current counsel apparently didn't attend class that day.

Thanks to for the tip!

I May Already Be a Winner

I got an amazing e-mail this morning from the Reverend Father Peter Clark, a Director of Special Duties at a little known but highly influential NGO: The United Nations Organisation in Conjunction With the International Monetary Fund World Bank Fact-Finding & Special Duties Office London UK (UNOCIMFWB-FFSD London). Reverend Clark, who I daresay is not a native English speaker, writes to seek my help in resolving a complicated payment problem of international proportions.

Rev. Clark and another officer of UNOCIMFWB-FFSD London has arranged to make a payment to me (with reference number LM-05-371) of $10 million (US). Why? According to the World Bank's security computer, I have been waiting a long time to receive this payment, sadly without success. The good news is that at long last, I have met "all the statutory requirements in respect of [my payment]."

Anticipating some suspicion on my part (how could I have not noticed that the UNOCIMFWB-FFSD London owed me $10 million?), Rev. Clark explained that my problem is that of "interest groups." "A lot of people are interested in [my] payment and those people are merely doing paper works with [me]." Interest groups messing with paper works explains why I "receive difffent kinds of untrue fax and phone messages from different people every day." Rev. Clark seems to anticipate my paranoia. He explains that he has uncovered that "officials and parastatals" have been extorting a lot of money from me with the pretext of helping me receive my money. Rev. Clark urges me to "do away" with these parasites. And the best way to do it is to remain silent about his news that my $10 million payment is on the way.

My payment, it appears, will be shipped to me in a "security proof box weighing 75Kg." I'm naturally curious about this, because a $10 million check weighs only a couple of mgs. Rev. Clark has already tried all the commercial courrier companies to arrange for shipment. But they all turned him down. It seems that commercial courriers require the right to open all packages for customs inspection. The box containing my payment can't go commercial because it's been "padded with synthetic nylon and to open it [I] will have to cut the pad before [I] will meet the button that [I] will press to open the dial code-lock." The sad fact is that there is no way customs or anyone else can open the box and re-close it.

I'm in luck though because Rev. Clark discovered that there is a "security courrier services specializing in diplomatic materials that can carry my box without passing through customs anywhere." (Rev. Clark assures me that the courrier in question is an "expact" and I have "Notting" to worry about). All I have to do to set the security courrier in motion with my box is to donate $500,000 to any charity I designate as soon as I receive the box. To facilitate my "donation," I am to execute a promissory note for $500,000 to Rev. Clark which he will hold until further instruction from me.

Why me? Why have I been singled out for this top secret diplomatic international payments transaction? It's not what you might think. Rev. Clark assures me that the UNOCIMFWB-FFSD London has chosen to help me get $9.5 million richer "because [I] am an honest person."

Tuesday, January 29, 2008

Rebate for (Almost) Everyone?

The Joint Committee on Taxation has posted a description of the "Economic Stimulus Act of 2008" which is scheduled for markup tomorrow by the Senate Committee on Finance.

After reading through it, the one interesting thing I noticed was that the description does not contain any discussion about a phaseout for the rebate check. Every news report I read stated that the rebate would phase out if the taxpayer earned too much money in 2007. However, there is nothing about that in the description and, in fact, in one of the examples, a couple with 230,000 in income is described as receiving a rebate.

That will likely get changed in the markup, but I was rather surprised by it.

UPDATE: It didn't even take the Senate to change it. The proposed bill in the house (HR 5140) has this language:
The amount of the credit allowed by subsection (a) (determined without regard to this subsection and subsection (f)) shall be reduced (but not below zero) by 5 percent of so much of the taxpayer's adjusted gross income as exceeds $75,000 ($150,000 in the case of a joint return).

Saturday, January 26, 2008

Shoot Money Out a Big Cannon

Hey Jeff and all, Calculated Risk has laid down a challenge. Come up with the worst idea for a government sponsored economic stimulus package. I'm sure RLR readers have some great ideas for terrible programs-- the possibilities for stupid plans that yield absolutely no economic growth are infinite. To help you get started, consider what makes a good stimulus package? It should lower costs of capital to people that are going to spend it on new goods and services, and not save it, or pay down existing debts.

You are going to have to be really creative to outdo the 229 ideas (and counting) posted at Calculated Risk. Here's one that shows real promise. Money cannons. Place a money cannon at the tallest point of each municipality in the US. Load in $100s and $20s. Fire and watch what happens.

Hat tip and thanks to my friend at Underbelly. We agree that the money cannon idea is the one to beat. Sadly, this idea may not be as bad as the one our government just delivered.

Friday, January 25, 2008

Capitalism Humor

Tom Smith (San Diego), who Brian Leiter calls "the funniest blogger in legal academia," has a very funny post about comments by Bill Gates at the Davos conference. My favorite line:
Gates is not even the future of operating systems, let alone the world economy. If he has time on his hands, let him invent a word processing program that doesn't suck.

Viva WordPerfect!

Hottie or Nottie?

Apropos of the photo of Karl Marx in the post below, here's Karl sans facial hair. What was he thinking?

Thursday, January 24, 2008

Who Decides?

Prof. Fershee,

In response to your comment on my previous post, I absolutely hear your concern, and I share it. That is the critical balance that we must decide going forward, is an interest in mortality something that should be salable in the market, or is a "death bond" more like human organs, where for the sake of policy, we simply do not want to allow them to be sold. (For a fun read see Elisabeth Landes & Richard Posner, The Economics of the Baby Shortage, 7 J. LEGAL STUD. 323 (1978).)

Anonymous makes a great point, just pick up Dukeminier, et al. on Wills, Trusts and Estates, your family members are much more likely to "do you in" than an investment banker on Wall Street. But setting the statistics aside, the real issue is whether or not it should be the government's role to tell you who to trust.

Here's another piece to consider, there is a split among the states on the issue of whether you can sell the contract rights to the death benefit on the life policy that you own on the life of someone else. For example, I can take out a life insurance policy on my husband, because I have an insurable interest in his life. However, not all states think I should be able to sell my interest in *his life* to a third party without his consent, though, amazingly, some do.

Perhaps you would prefer the approach that requires the insured (not necessarily the policy owner) to consent to have the interest in his life sold to a third party, and then again if that interest was securitized. However, now we seem to be putting restraints on alienation that are not only potentially costly to enforce, but which may be difficult to factor into pricing. If consent is required, then the investor is actually purchasing an option rather than a pure asset.

My feeling is that life settlements and securitized pools of them, should be allowed. As long as the parties involved understand what they are doing, the practice will bring an increase in competition to a market that has unduly favored insurers. With a life settlement, consumers have another option with which to derive value from their assets. On the other hand, the corollary to an increase in life settlements is a decrease in policy lapse. Since lapse is figured into premium structures for insurance rates, insurers may have to increase premiums in order to account for this change in their expected cash flows (several already have). With an increase in premiums, it becomes more costly to procure insurance, which may dissuade a would-be insured from taking out insurance in the first place. As we still favor insurance from a policy perspective, this may be another reason to restrict life settlements.

How best to restrict the market place is not a question I am qualified to answer. So if anyone has ideas, please share. It is a fascinating web of issues, though, and something worth having on our radar.

It Doesn’t Take a “Star” to Lose $7 Billion

Reuters today reported that of French bank Societe Generale (SocGen) lost $7 billion due a “massive fraud” perpetrated by a “junior rogue trader.” All I know about this is what Reuters reported, but it sure sounds like SocGen is talking out of both sides of its mouth (note the reification of the entity; I teach BA 1 and 2, after all).

According to SocGen, this was a massive and “exceptional” fraud: "It was an extremely sophisticated fraud in the way it was concealed," said Societe Generale Chairman Daniel Bouton, who offered to resign but has been asked to stay on. However, the trader, who has been suspended pending dismissal, is reportedly “a man in his thirties who had worked for SocGen since 2002 and earned less than 100,000 euros a year.” SocGen states that the trader knew the bank's control systems because he had worked in the back office of SocGen’s trading rooms.

The Reuters article, written by Sudip Kar-Gupta, then states that SocGen said [the trader] had used a "scheme of elaborate fictitious transactions" to try to cover up his mistakes, but did not accuse him of profiting personally from his actions.

"He was not one of our stars," said a senior board member who declined to be named. It is hard to see how a low-level trader, who is apparently (or supposedly) not that good at his job, can have access to the amount of funding that leads to $7 billion in losses, much less be able to come up with a scheme of elaborate fictitious transactions without anyone else having a clue. I suppose the fact that the trader was able to pull off a $7 billion fraud without gaining any personal benefit supports SocGen's assertion that he was not, in fact, a star. But it seems to me there is either a seriously flawed oversight system at SocGen or someone (or multiple someones) noticed but decided not to act.

Yes, it is fraud, but it is not like these trades were completed without an electronic system. It is mind boggling (or mind bottling, if you prefer) that there was not some kind of trigger to know when the company’s money has been put at risk at this level. I can’t imagine any individual trader, even a “star,” could single handedly put that much capital in play.

If what SocGen says is true, then this starts to sounds to me an awful lot like Francis v. United Jersey Bank, 432 A.2d 814 (N.J. 1981) (holding a board member, an alcoholic widow, responsible for her sons’ “pillage” of funds from the company because she failed to even look at the financial statements). As the Francis court stated: "The sentinel asleep at his post contributes nothing to the enterprise he is charged to protect. . . . Detecting a misappropriation of funds would not have required special expertise or extraordinary diligence; a cursory reading of the financial statements would have revealed the pillage."

Okay, so this was likely a more sophisticated scheme, but I still find it hard to believe it would be that hard to notice a low-level trader (or anyone else for that matter) was trading on this scale. At least, that is, if anyone even bothered to look.

My House is Worth What?

The NYTimes reported a story that illustrates the tension between regret and blame, a subject of intense interest to lawyers and law students. San Diego homeowners Marty Ummel and her husband filed a lawsuit against their real estate broker alleging that he is to blame for the difference between what they paid for their house and what it is now worth. The Ummels contend that their broker, Mike Little, deliberately concealed the true value of the home to snag a $30,000 commission. Little was a "buyer's broker" with a fiduciary duty to the Ummels. (Although buyer's brokers used to be rare in residential sales, the National Association of Realators (NAR) estimates that they have a hand in two-thirds of all residential home sales.)

Little says that the Ummel's economic woes are not his doing, but rather part of the mess made when the housing bubble burst. Ms. Ummel tesified at her deposition that Mr. Little had told them “many times that [the house] was a very good buy.” “And you believed that?” asked David Bright, the lawyer who represents both Little and ReMax Associates, which was also named in the suit. “Yes, we trusted Mike Little,” Ms. Ummel replied.

This case is big trouble for real estate brokers whose clients often ask for advice as to whether a house is a "good deal." Until now, litigation against brokers from disappointed home buyers mostly focused on undisclosed defects like termite infestation or costly maintenance problems. (The NYTimes reported that the NAR reviwed its records for the last five years and could uncover no cases that revolved solely around the question of valuation.) Post-burst, however, the finger of blame could point toward brokers. In a brief phone interview with the NYTimes, Mr. Little called the case “ridiculous,” adding: “The lady’s a nut job. I didn’t do anything wrong.”

Wednesday, January 23, 2008

The Worth of a Life

Janus is the god of beginnings, endings, doorways and gates in Roman mythology. He is traditionally depicted as a head with two faces looking in opposite directions. This symbolizes his association with time; he looks into the future and surveys the past.

Janus is the source of the word January. The first month of the year is marked by resolutions and goals looking forward, but Janus and we also look back to reflect upon the past year and what we have learned.

On a macro level, we’ve got some challenges going forward. With the economy flirting with recession, the banking industry in upheaval and the political landscape uncertain, we would do well to recognize our shortcomings, learn from past mistakes, and try to do some things better going forward. On a micro level, January is a good time for personal assessment of our successes and failures in the year past. The point is to use what we have learned from the past to shape the future.

On that note, let’s look at what we have learned from the past with respect to the market for and regulation of life settlement-backed securities. (Since this topic will likely never just “come up” in a discussion on this blog or elsewhere, this may be as good a segue as there is likely ever to be).

A life settlement-backed security (sometimes referred to as a “death bond”) begins as a life insurance policy for an individual. The individual may determine that he or she no longer has a need for the right to benefits under the policy. Instead of allowing the policy to lapse or surrendering it to the insurer for its surrender value, the insured can sell his interest in the policy via a life settlement contract. The insured assigns his contractual right to benefits on his death (the “policy”) to a third party for cash. Presumably, the insured will choose this option only when the price the third pary will pay (the settlement offer) is higher than the surrender value offered by the insurer to obtain a release of its obligations under the policy.

The third party who purchased the policy then pools those rights together with similar rights obtained by purchasing other life policies. He “securitizes” the pool by selling interests in the pool to investors for cash. The investors get an interest in an asset that generates a smooth stream of income as the original policy holders die and their life policies pay off. They get a lovely return on investment to boot. (The typical return is somewhere between 8-11%).

Life settlement-backed securities are analogous to securities backed by mortgage obligations issued by a REIT. The difference is in the nature of the underlying income-generating asset. In the first case, the securitized asset is the borrowers’ obligation to pay home mortgage debt to retail mortgage lenders. In the second case, the securitized asset is an insurer’s obligation to pay benefits to an insured's assignee when the insured person dies. In some respects, the insurer’s obligation on a life policy is more attractive as an investment than a borrower’s obligation on a mortgage. Unlike default rates, death rates are not correlated to market events like changes in interest rates or declines in real property values.

It’s an inspired idea when you get past the ghoulishness of it. (Everyone, except immortal gods like Janus, will surely die). Unfortunately, the industry is not without its share of trouble. First, the life settlement contract is relatively new. It is currently unregulated by the SEC (the D.C. Cir. decided in 1996 that life settlement contracts were not securities, because mortality fails prong three of the Howey test for an investment contract). The IRS has provided almost no guidance as to the proper tax treatment of the life settlement transaction. To the unwary, the life settlement market is a dangerous frontier. The most important issue to understand is that it is a violation of the "insurable interest" laws of every state to purchase a policy with the intent to sell it to someone who lacks insurable interest. It is the insurable interest violation which snags ambitious entrepreneurs who are interested in expanding the life settlement market, to sometimes cross the line from creative marketing to fraudulent inducement.

Stranger-Originated Life Insurance (STOLI, as it is known), is just now coming under legal scrutiny. A STOLI policy is one in which the intended holder of the right to benefit has no insurable interest in the life on which the policy is issued. Here’s what happens. A STOLI investor approaches an individual and induces him to take out a policy on his life with the intent of later selling the policy to the investor. The individual is wooed with cruises, theater tickets and the offer of “free” insurance coverage for the two years while the policy is still “wet” (life insurance cannot be re-sold during the first two years of the contract). Additionally, the investor finances the premium payments for the insured during the initial two years. It sounds like a great deal, the insured is seemingly out nothing. However, because the insured contracted for the insurance with the intent to sell the rights to the death benefit to the investor who lacks insurable interest in the insured’s life, a STOLI policy will likely be void ab initio under state law on lack of insurable interest grounds. (An insured may even be criminally liable for insurance fraud.) If a STOLI policy gets securitized, and its STOLI nature exposed by the insurer, an investor will not realize the anticipated return in his investment.

Like the problems within the mortgage-backed securities market's tranches of investors with individually negotiated debt forgiveness (just read Red Lion Reports for a couple of weeks!), the possibility that some or all of the payment rights in a pool of life insurance contracts are STOLI is latent risk to a would-be life settlement-backed security investor. At present, traditional bond raters have no way of uncovering STOLI and so cannot factor in the risk of nonpayment due to STOLI in rating the security issued by the life settlement pool.

What have we learned? Is there something going on here that we should try to stop? Should people be allowed to assign their rights under a life insurance policy to a stranger? Is there something about these contract rights that justifies a restriction on alienation?

There is no nice way to say it; it is the sale of an economic interest in a life. Perhaps we realize that the quest for profit will sometimes bring out the worst in us; inspiring fraud in the inducement of the contract is only the beginning. Perhaps the market for life insurance benefit rights will spawn another and even more troubling industry. Agents of life settlement pool servicers make sure you “die on time” to protect the investor’s expected return - the very conduct insurable interest laws were intended to prevent. On the other hand, when the transactions are legitimate, a life settlement could be a wonderful alternative way a policy hlder can gain liquidity from an otherwise illiquid asset.

Even if you think that regulation of the life settlement market is a good idea, effective regulation may be hard to implement. The insurable interest laws which already govern enforcement of policy acquisition rights for life insurance could control the STOLI problem, if insurers could or would enforce them fully. The cost to insurer’s of detecting STOLI policies and asserting the lack of insurable interest defense is high. Regulation is not likely to make that task any easier or cheaper. Perhaps the history of the mortgage backed securities market confirms what we already suspected, that the market is a hungry beast. Almost anything of value that can be sold (commodified) will be sold. The market for life settlement contracts is driven by the market for life settlement backed securities. Neither are easy or cheap to regulate. (For an excellent point-counterpoint discussion of STOLI, by industry experts Steve Leimberg and Alan Jensen, see pg. 110 of the ACTEC Journal.)

Looking back over the market for life settlement contracts and the secondary market for securities backed by pools of them, we can begin to think about how to use what we learned from analogous markets to maximize the benefits and minimize the costs here. Whatever we have learned should be used as the foundation upon which we base our decisions on how to best handle the situation going forward. And that’s a benefit that so far, there’s no way to sell.

Thank you to Professor Reilly for your feedback and mentoring on this post! As I dip my toes into the world of scholarship, I appreciate your support.

Tuesday, January 22, 2008

Economics Is Gold

Josh Wright (J.D. PhD. Econ.) on Truth on the Market adds to the debate on the value of interdisciplinarity in legal education the observation that economics education boosts lawyers' earning power relative to that of lawyers without it. Quoting from study titled Do Economists Make Better Lawyers? by R. Kim Craft and Joe G. Baker (2003) in the Journal of Economic Education:

Using nationally representative data, the authors examine the effects of preprofessional education on the earnings of lawyers. . . . Holding a Ph.D. or M.B.A. degree, with the law degree, is associated with significantly higher earnings in some sectors. Lawyers with undergraduate training in economics earn more than other lawyers, ceteris paribus, and economics is the only undergraduate field associated with earnings that differ significantly. The available evidence supports the hypothesis that economics training increases a lawyer’s human capital compared with other undergraduate majors.

For law students with degrees in economics, your investment may pay off in your legal career in a way you did not expect. For law students who will learn economic theory as part of an "interdisciplinary" legal education, cheer up. Basic understanding of economic theory adds value to your law degree and, so it seems, to your balance sheet as well. Economics is not a dismal science after all.

Monday, January 21, 2008

7th Circuit School for Smartypants

Judge Richard Posner of the Seventh Circuit Court of Appeals gave a lesson on legal anaylsis and brief writing last week. In Indiana Lumberman's Mutual Insurance Co. v. Reinsurance Results, Inc.,the court considered an appeal in breach of contract case involving a contract of reinsurance. What's that? An insurance company takes risk in exchange for premiums from its customers. That company (the insurer) usually wants to lay off some or all of this risk on someone else. So, an insurer enters into a reinsurance contract with a third party (a reinsurer) to do so. A single insurer may enter into many reinsurance contracts and sometimes needs help from a third party (a "servicer") to manage all its rights under all its reinsuranace contracts. To this end, Lumbermans entered into a contract with the defendant, Reinsurance Results, Inc. (Reinsurance), to take care of Lumberman's rights under its reinsurance policies. In its service contract with Reinsurance, Lumberman's agreed to pay Reinsurance 33% of the benefits Reinsurance obtained on Lumberman's behalf. The lawsuit involved a dispute between Lumberman's and Reinsurance in which Reinsurance claimed 33% of $2.2 million in "value" that Lumberman's received as a result of a change in its accounting practices regarding its reinsurance contracts. Lumberman's contended that it owed Reinsurance nothing and sued for a declaratory judgment.

The issue on appeal was whether the $2.2 million was a "benefit" Lumberman's received as a result of its contract with Reinsurance. Judge Richard Posner cut through the jargon that dominates discourse about reinsurance contracts, which in this case was covered with an even thicker layer of accounting terminology. He concluded that the $2.2 million advantage Lumberman's reaped because of the accounting change had nothing to do with the function Reinsurance was to perform under its contract. Judge Posner painted a clear picture of the case:

One who voluntarily confers a benefit on another, which is to say in the absence of a contractual obligation to do so, ordinarily has no legal claim to be compensated. If while you are sitting on your porch sipping Margaritas a trio of itinerant musicians serenades you with mandolin, lute, and hautboy, you have no obligation, in the absence of a contract, to pay them for their performance no matter how much you enjoyed it; and likewise if they were gardeners whom you had hired and on a break from their gardening they took up their musical instruments to serenade you.

So, the $2.2 million benefit to Lumberman's was like sweet violin music that Reinsurance made on a break from working in Lumberman's garden. And so the case which the parties' lawyers dressed in impervious jargon, was as simple as the case of the violin player who confers a benefit but who cannot recover from the grateful listener absent a contract.

Judge Posner revealed the lasting moral of Lumbermans v. Reinsurance:

A note, finally, on advocacy in this court. The lawyers’ oral arguments were excellent. But their briefs, although well written and professionally competent, were difficult for us judges to understand because of the density of the reinsurance jargon in them. There is nothing wrong with a specialized vocabulary—for use by specialists. Federal district and circuit judges, however, with the partial exception of the judges of the court of appeals for the Federal Circuit (which is semi-specialized), are generalists. We hear very few cases involving reinsurance, and cannot possibly achieve expertise in reinsurance practices except by the happenstance of having practiced in that area before becoming a judge, as none of us has. Lawyers should understand the judges’ limited knowledge of specialized fields and choose their vocabulary accordingly. Every esoteric term used by the reinsurance industry has a counterpart in ordinary English, as we hope this opinion has demonstrated. The able lawyers who briefed and argued this case could have saved us some work and presented their positions more effectively had they done the translations from reinsurancese into everyday English themselves.

To learn more about Judge and Professor Richard Posner, visit Project Posner, a searchable web site of his opinions, and Vol 74 of the University of Chicago Law Review, for reflections of Judge Posner's friends and colleagues commemorating his 25 years on the bench.

Hat tip to PSULaw student Marijana Predovan and WSJLaw Blog.

Sunday, January 20, 2008

Lift Every Voice and Sing

Lift every voice and sing, till earth and Heaven ring,
Ring with the harmonies of liberty;
Let our rejoicing rise, high as the listening skies,
Let it resound loud as the rolling sea.
Sing a song full of the faith that the dark past has taught us,
Sing a song full of the hope that the present has brought us;
Facing the rising sun of our new day begun,
Let us march on till victory is won.

Stony the road we trod, bitter the chastening rod,
Felt in the days when hope unborn had died;
Yet with a steady beat, have not our weary feet,
Come to the place for which our fathers sighed?
We have come over a way that with tears has been watered,
We have come, treading our path through the blood of the slaughtered;
Out from the gloomy past, till now we stand at last
Where the white gleam of our bright star is cast.

God of our weary years, God of our silent tears,
Thou Who hast brought us thus far on the way;
Thou Who hast by Thy might, led us into the light,
Keep us forever in the path, we pray.
Lest our feet stray from the places, our God, where we met Thee.
Lest our hearts, drunk with the wine of the world, we forget Thee.
Shadowed beneath Thy hand, may we forever stand,
True to our God, true to our native land.

Words: James W. Johnson, Music: John R. Johnson

To honor the life of Rev. Dr. Martin Luther King, Jr., read the words and listen to the music. Then check out these two videos to see a little piece of what this song means to our Nation.

"I believe that unarmed truth and unconditional love will have the final word in reality. This is why right, temporarily defeated, is stronger than evil triumphant."

King's Nobel Price Acceptance Speech. Dec. 10, 1964

Interdiscipline Studies - The Future of the Legal Academy

Very interesting post on the subject by Larry Solum over at the Legal Theory Blog.

Thursday, January 17, 2008

The Accidental Shredder?

Here is a quick update on the West Virginia shredding incident I mentioned in another post. For what it is worth, this seems to be the statute that would apply, if the allegedly shredded documents were, in fact, "public records."

W. Va. Code, § 29B-1-6, Code of West Virginia, Chapter 29B. Freedom of Information, § 29B-1-6. Violation of article; Penalties

Any custodian of any public records who willfully violates the provisions of this article is guilty of a misdemeanor and, upon conviction thereof, shall be fined not less than two hundred dollars nor more than one thousand dollars, or be imprisoned in the county jail for not more than twenty days, or, in the discretion of the court, by both fine and imprisonment.

So, as near as I can tell, mistakenly shredding the documents is not a criminal problem, even if they were not the Coach's to destroy. If he knew they weren't his documents, then destroying them would be a willful violation. But an accidental violation is not covered here. Thanks, Professor Force! Now, if CoachRod had to explain how a document that was clearly the University’s (and not his) got into a shredder accidentally, well, that still could be a problem. But not necessarily that much of one. Expressly exempted from the West Virginia public records statute, the likely source of potential liability, are: “internal memoranda or letters received or prepared by any public body.”

It seems to me that unless the coach and his cohorts went crazy there is little liability potential here, at least under the open-records laws. Especially given that the state is not known for complying with its own open-records laws anyway. CoachRod says all the allegations are lies. So really, it's just that $4.0 million breach of contract issue, which he is making a federal case, that he needs to handle. That sure is a lot of money, isn't it?

A Mystery No Longer

Yesterday I saw a report out of Discovery News that the identity of the woman behind the Mona Lisa has been confirmed. Her name is Lisa Gherardini del Giocondo, wife of a wealthy Florentine silk merchant and mother to five children: Piero, Andrea, Giocondo, Camilla, and Marietta.

I have to be honest, a part of my heart sank. Although I've not yet had the chance to view her portrait in person, I like to think that many over the centuries have been drawn to gaze up her face in part because of the mystery. Who is that woman behind those eyes who seems to watch you wherever you stand? Who is that mysterious woman with such a mysterious smile? But then another part of me was happy to discover that a wife and mother who lived a very ordinary life has captured the attention of so many, despite sensational conjecture over the years that she was perhaps a noblewoman, courtesan, or prostitute.

The other person who got a "bump" out of this discovery? Giorgio Vasari, the 16th century painter and art historian who identified Lisa Gherardini as Da Vinci's subject in his "Lives of the Artists," but was previously thought to be unreliable.

Wednesday, January 16, 2008

Jail Time for Coach Shredder?

New University of Michigan football coach Rich Rodriguez left his old job at the University of West Virginia under not such great terms. Now it is getting ugly.

The Charleston (W.Va.) Gazette reported that, according to an unspecified source, the coach “destroyed all or most of the paperwork files relating to every player on the current [University of West Virginia] Mountaineer roster and virtually all of the activities conducted by the programs over the past seven years."

The Detroit Free Press reported today:

Any shredding and missing files, eventually, could be a legal issue. JJ Prescott, an assistant professor at the U-M Law School specializing in employment law, said "the key question is likely to be who owned the files -- Rodriguez or the university?"

"Rodriguez is free to destroy his own property," Prescott wrote in a [sic] e-mail. "But, if the university owned the files, then Rodriguez might face criminal liability for destruction of property, possibly even if he mistakenly believed the files were his to (destroy)."

This struck me as odd. My first thought is that I can imagine there could be civil liability for such a mistake (if, in fact, it was mistake), but criminal liability seems like a tough one (again, if it were actually a mistake).

If I recall correctly from my first-year criminal law professor (and if I am wrong, it is my fault, not his) and the Model Penal Code, most criminal acts require scienter (or knowledge) that one is committing a criminal act. But, as a trusted colleague noted, some state laws, especially with regard to state records and education, can be quite broad. I hope to check out West Virginia law to see what is there, but in the meantime, any thoughts?

Mike Nifong: The Honest But Unfortunate Debtor?

Mike Nifong has filed for protection under title 11 of the US Code. His bankruptcy petition and schedules are here.

Nifong lists assets (a house and a car) totalling about $244,000. He lists liabilities of over $180 million. Insolvent? Yes. I think so. The $180 million takes into account the pending claims of six Duke lacrosse players who each filed prosecutorial misconduct suits against him for around $30 million a pop. None of the Duke players' claims have been reduced to judgment. But that doesn't matter for bankruptcy. A debtor has to list all claims against him or his property in a bankruptcy petition. And "claim," under the Bankruptcy Code, means a "right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent . . . ."

Nifong's bankruptcy filing invokes an "automatic stay"-- which enjoins creditors (including the Duke players) from taking any act to collect on a "claim." The automatic stay enjons all six civil cases against Nifong. The bankruptcy court will decide whether to lift the stay and let the litigation proceed. But first, the bankruptcy court will likely decide whether the players' claims against Nifong will survive his bankruptcy or be "discharged."

The point of filing of filing a chapter 7 petition for a guy like Nifong is to give him something to live for (financially speaking). He's lost his law license for professional misconduct. He might be able to scrape out a living working retail. But if the Duke six get judgments, he'll be working for them-- unless he can get a discharge of those debts from a bankruptcy court.

Discharge is bankruptcy jargon for forgiveness. Not everybody can earn their way out of debt problem. Official forgiveness of indebtedness in bankruptcy yields a social value we all enjoy--insurance coverage against financial failure. Creditors whose claims are discharged provide the coverage in the form of debt forgiveness. We all pay the premiums. Creditors charge us all a little bit more to cover the risk that a subset of us will default and discharge debt.

The trick is to provide just enough and the right kind of debt forgiveness but not too much. If a person can run to bankruptcy court for debt forgivness, why should he try to live within his means and avoid overwhelming liability in the first place? Putting the same problem another way, finding the optimal scope of bankruptcy discharge is another example of the endlessly fascinating problem of dual causation. Both debtor and creditor have a hand in preventing hopeless financial failure, just the same as both the drug dealer and user are 'responsible' for or 'cause' drug addition. We need discharge policy that encourages creditors to make good underwiting decisions and at the same time encourages debtors to live within their means.

Blowing by a lot of detail, the Bankruptcy Code purports to extend discharge to the "honest and unfortunate debtor" but withhold it from the dishonest, conniving, or undeserving debtor. First, not everyone qualifies for bankruptcy relief. Second, those who qualify cannot discharge all claims against them.

Here's where Nifong has to worry. The Bankruptcy Code excludes from claims for which an individual can obtain a discharge, those "for willful and malicious injury by the debtor to another entity . . . ." The idea is that if you hurt someone intentionally and you cause injury, you're the cheaper avoider of the loss and you don't qualify for the social insurance coverage. The phrase "willful and malicious" is a holdover from the Bankrutpcy Act of 1898. The Restatement of Torts and modern tort rhetoric talks about intentional, reckless and negligent acts-- but makes no mention of "willful and malicious" injury. Bankruptcy lawyers will be watching to see whether this discharge issue is actually litigated in Nifong's case or goes away in a global settlement in the shadow of a discharge. If the parties do litigate, we'll be watching to see whether Nifong will argue that his prosecutorial misconduct was willful but not malicious, or more inscrutably, malicious but not willful. Either way, if Naifong can show that the exception to discharge does not apply, he'll get debt forgiveness and the Duke players will walk away with nothing. That's his only hope of forgiveness, at least on this earth.

Nifong Liabilities

As noted in this report, Mike Nifong, the disgraced prosecutor in the Duke lacrosse case, has filed for bankruptcy.

Although there has been no settlement of the case, he lists the three lacrosse players as unsecured creditors (claiming he owes them $30 million each). According the report (subject to Marie's opinion), unless the bankruptcy judge finds that Nifong's actions amounted to wrongdoing, the debt goes away.

Based on the reports that I have seen about the entire episode, I would certainly find wrongdoing on Nifong's part. In fact, although I have no legal expertise in the area, I would be pretty surprised if the three could get any judgment against Nifong unless they can prove wrongdoing since there is usually liability protection for government employees.

On Further Reflection

(Josh, I'm not sure of blog etiquette either so let's just make it up as we go along.)

After I posted my reply last night, I thought about the Yucca Mountain project, the intended home for spent fuel in the US. It's currently ten years behind schedule. The site is probably the most scientifically examined, measured, and analyzed piece of dirt on the planet. So far though, science can't quell the anxiety of Nevada state officials and others whose opposition has pushed the opening of the facility most likely into the 2020's.

On reflection, I agree with you that absent a politically and scientifically viable plan for fuel disposal, no private investor is likely to take investment in a new nuclear power plant seriously without "incentives" like the US loan guarantees you describe in your first post, tax credits and the like. Your point, that new nuclear construction investment should stand or fall on its own without government prop-up makes sense. Nuclear energy production competes in an investment market with other forms of energy production. The rationale for government intervention in this market in the form of loan guarantees for nuclear projects rests on the assumption that nuclear energy yields a public good relative to other forms that justifies public subsidy. On this question, the jury is still out, as they say.

Tuesday, January 15, 2008

A Response to Marie's Nuclear Response: A Couple More Thoughts

Not sure if this response is "legal," from a blog etiquette perspective, but here goes:

Fair points, as always, Marie, but I respectfully disagree.

First, as Jerry Taylor, a senior fellow at the Cato Institute noted in 2006, "It's not as if Greenpeace killed the industry. Guys in pinstripe suits on Wall Street killed the industry." Construction costs are still very high, regardless of the new nuclear technology.

Second, another cost has increased, not decreased: waste disposal. It is not likely siting will be easy, and if there is no place to put nuclear waste, I can't see the investment being worthwhile. I simply can't imagine the NRC granting an operating permit until a plan for disposal of the new nuclear waste is in place. As an example, consider the French, who “love” nuclear energy, yet are still facing a similar problem:

Nuclear waste is an enormously difficult political problem which to date no country has solved. It is, in a sense, the Achilles heel of the nuclear industry. Could this issue strike down France's uniquely successful nuclear program? France's politicians and technocrats are in no doubt. If France is unable to solve this issue . . . then "I do not see how we can continue our nuclear program."

Finally, I have not worked a lot with the NRC, but from what I did see, I don't think that the NRC has the resources to handle one or more major new projects -- particularly under a completely untested regulatory regime, by staff who (at least in large part) have never handled a new nuclear construction project. I simply believe that there are better options, with similar upside and less downside, than nuclear energy.

Banking Nuclear Power Development: A Reply to Josh

Josh, before we dismiss the idea of US government bonding of private investment in nuclear power plants, I see a couple of possible differences between now and 2003 when the CBO trashed a similar proposal.

First, we are not talking about investment in first generation nuclear facilities. (I worked on rate issues for Illinois Power's Clinton plant when I was a whipper snapper in the 1980's.) I'm obviously not a nuclear engineer but nuclear generation and spent fuel storage technology has evolved considerably since the design process for plants like Clinton and Watts Barr. Now nuclear engineers are working on advanced light water reactor designs and safety backups that rely on natural laws of physics like gravity and capillary action instead of the elaborate pumps and valves used in old systems. (Ok, I might be a nuclear engineer.)

Second, the NRC has decades of experience with regulation. True, the NRC presided over some of the longest, most incomprehensible, most expensive regulatory proceedings known to man. But, it may just be getting the hang of it.

If the engineering is better and the regulatory environment is better, it's just possible that the investment isn't the dog you make it out to be. The use of US guarantees -- assuming the investment is otherwise market-worthy -- makes sense. I'm guessing that the sheer size of the commitment and length of the term narrows the sources of capital down to very big, very diversified private and governmental sources -- like Uncle Sam.

The Nuclear Guarantee

In the Energy Policy Act of 2005, the U.S. Congress provided that, if funds were appropriated, the Secretary of the Department of Energy could provide loan guarantees equal to 80% of the project cost of new nuclear facilities. In December 2007, Congress, as part of omnibus appropriations legislation (HR 2764), provided for up to $18.5 billion in such loan guarantees.

Yesterday, it was reported that people are again protesting the idea of new nuclear plants. This is nothing new. Personally, I am conflicted about whether nuclear energy is a good option for the United States, but I have no doubt that such loan guarantees are a bad idea. Why? In 2003, the Congressional Budget Office assessed a similar proposal for a 50% loan guarantee for new nuclear plants:

CBO considers the risk of default on such a loan guarantee to be very high—well above 50 percent. The key factor accounting for this risk is that we expect that the plant would be uneconomic to operate because of its high construction costs, relative to other electricity generation sources. In addition, this project would have significant technical risk because it would be the first of a new generation of nuclear plants, as well as project delay and interruption risk due to licensing and regulatory proceedings.

Between high construction costs and licensing and regulatory delays, nuclear power is all but a guaranteed loser of an investment. Many proponents of nuclear energy note that other countries, such as France, generate much of their energy using nuclear facilitates. And that is true. However, France never had to deal with the delays seen in the United States. (Among the worst of the U.S. projects: The Watts Bar Unit I plant, a TVA project, obtained its operating license in 1996; the construction permit was issued in 1973.)

Unless and until Congress guarantees a streamlined regulatory process, nuclear plants will be just like the worst of the subprime loans -- we pretty much know now that there is no way the entire loan will get paid. At this point, quite simply, there are better investments, in energy and otherwise, than nuclear power. I can only hope that the investors who are supposed to put up the first 20% will agree.

The Subprime Story Continues: Charm City v. Wells Fargo Bank

The City of Baltimore has filed a complaint in federal district court against Wells Fargo Bank alleging that the bank deliberately lured black homebuyers into high-cost, subprime loans in violation of the the federal Fair Housing Act of 1968. The City of Baltimore claims that Wells Fargo's "reverse redlining" caused "severe economic damage" to the city including lost property tax revenue, expenses for increased fire protection, and "significant administrative and legal costs." The Baltimore Sun reports that city officials hope to recover "tens of millions" of dollars from Wells Fargo, which the city could "funnel into public programs to aid homeowners." The New York Times reports that the Baltimore case may be the first of a series of cases by municipalities facing falling revenue and rising costs associated with abandoned property and the problems that come with it like arson, drug use and prostitution.

According to the complaint, Wells Fargo has been the first or second largest provider of home mortgage loans in Baltimore since 2004. Between 2004 and 2006, Wells Fargo made more than 1,285 loans per year on more than $600 million in property value. A Wells Fargo spokesperson has denied the allegations.

Clark Byse 1912-2007

Professor Clark Byse is thought to be the inspiration for Professor Kingsfield in the novel The Paper Chase by John Osborne, Jr. He said this to his class on the first day of Contracts:

On the first day of the class on Contracts, there is a temptation to lecture because, as Adlai Stevenson said when he was the speaker at a college commencement, "This is a wonderful opportunity, for there is so much that I, a man in his fifties, have learned in my lifetime that would be of great value to you in your early twenties." At this point, Mr. Stevenson paused, shook his head slightly, and said in a mournful tone, "But it would do no good for me to tell you those things, for what is important and lasting in life must be learned -- by action, by participation, rather than by passive absorption."

So never forget that the emphasis in this class is on what and how you think, not on what some judge or treatise writer or your instructor thinks. My function is to assist you to develop your lawyerly skills and understanding of the institution of Contract and of the development of the legal process and the role of law in our society. Developing those skills and understanding can and will be an exciting experience for some. For others, the experience at times may be frustrating and even unpleasant. Some will enjoy being called on and speaking in class. For others, speaking in front of 100 hearers may be embarassing, even painful -- something to be avoided at all costs.

To those who dread being called on, I say, Relax. We are all in this together, to learn to improve ourselves. Of course, mistkes will be made. This is why there are erasers on pencils. There is nothing wrong about making a mistake. What would be wrong is not learning from one's mistakes.

Clark Byse, Introductory Comments to the First-Year Class in Contracts, 78 B.Y.U. L. Rev. 59 (1998). Prof. Byse taught Contracts and Administrative Law at Harvard for nearly 50 years.He died on October 9, 2007 at the age of 95. May he rest in peace.

Saturday, January 12, 2008

Law School Exam as Literature

As the exam writing, taking and grading season winds to a close, let's take a moment to consider the law school exam as literary genre. Matt Bodie (Hofstra Law) did so here at Prawfsblog. A good law school essay question raises legal issues covered in the course. At the same time, it tells a story that must be both succinct and compelling. Bodie notes, "In a field that blends reason and emotion, the law school exam essay needs to speak to the students' issue-spotting abilities as well as their notions of right and wrong."

Oliver Wendell Holmes said that the purpose of a law school (he was speaking of Harvard Law School in particular) is not simply to teach law. "It is to teach law in the grand manner and to make great lawyers." The craft of the law school exam is part of teaching the law "in the grand manner." It's part of the majestic law school tradition . The quality of the exam as literature is an umistakable reflection of the quality of the professor. It's too bad that law school exams are usually filed away, or worse, shredded -- deleted from the corpus except in the memory of law students.

Friday, January 11, 2008

Stranger than Fiction

This story is proof that no matter how crazy an exam hypo may sound, life will always come up with something stranger:

Timothy Elliott - the lucky buyer of a $1 million scratch ticket in the $800 Million Spectacular game - is a two-time bank robber whose lottery ticket purchase last week violated the terms of his probation. Last year, when he pleaded guilty to unarmed robbery, the 55-year-old Hyannis man was ordered "to not gamble, purchase lottery tickets, or visit establishments where gaming is conducted, including restaurants where Keno may be played," according to his probation from Barnstable Superior Court.

A hearing to determine whether he violated his probation by buying the ticket is set for January 18.

If you can read this statute, thank a tax teacher

In the last month, Thomson-West published a nutshell on the taxation of S Corporations that I coauthored. One of the nicer things about publishing a book is the dedication page where an author can thank anyone or anything. For the nuthsell, I decided to use the following dedication:

Cui dono lepidum novum libellum?
To Professors Kahn, Perris and Newton, three truly amazing professors.

Professor Kahn is, of course, my father who taught me many things (including partnership tax when I was in law school). Professor Perris, a tax attorney at Squire Sanders, was my corporate tax professor at Michigan and it was that class that made me realize how interesting tax can be.

The final professor is not one of my former law professors. I was a double major in classical studies and latin in college and Professor Newton was the reason I decided to major in those areas. He was an amazing teacher of not just the subject being covered but also the love of learning.

Professor Newton has retired from teaching but I still stay in touch with him. Thus, I sent him a copy of the book with a note asking him to look at the dedication page. Last week, I received an email from him that made it clear that he was very touched. Even though I am a professor myself now, I forgot how much it means to hear from someone who truly appreciates what you have done for them.

Telephone Practice of Law

In Wright v. Von Patten (January 2008), the Supreme Court held that a criminal defendant whose lawyer participates in his plea hearing by speakerphone has not presumptively received ineffective assistance of counsel. The Court's opinion is here.

In the context of this case, the defendant was entitled to habeus relief only if he could establish a ban on lawyers' speaker phone appearances in prior Supreme Court cases. The Court held: Our precedents do not clearly hold that counsel's participation by speaker phone should be treated as a 'complete denial of counsel' on par with total absence. Even if we agree [] that a lawyer physically present will perform better than one on the phone, it does not necessarily follow that mere telephone contact amounted to 'total absence' or 'prevented [counsel] from assisting the accused' . . . ."

The Court did not rule on the merits of the defendant's ineffective assistance of counsel argument, and expressly left the question of whether a tele-lawyer can render effective assistance to a criminal defendant "for another day."

Thursday, January 10, 2008

Just Forgive

The LA Times recently ran a story about the possible health benefits of forgiveness. Psychologist, Robert Enright and other researchers assert that forgiveness is key to healing from injuries that others cause. Psychological studies show that 'forgiveness interventions' -- "short sessions in which the wounded are guided toward positive feelings for an offender" improve heart function, alleviate chronic pain and depression and improve quality of life among the most seriously wounded people.

I've known about the healing power of forgiveness for a long time. Now it appears that knowledge of forgiveness may be expanding from faith to science. It won't be long until forgiveness study (forgivology?) is a medical school elective. Wait a minute. How about a law school class on forgiveness as an 'alternate dispute resolution' technique?

The photo is of a window in St. Ann's Catholic Church in Fayetteville, NC.

Cut Out To Be A Lawyer?

Consider the story of Lisa Dawn Rittenhouse, a former law student at Southern Illinois University, who is suing her former dean and law school because the school rejected her application for readmission. Rittenhouse finished her first year at SIU with a 1.98 GPA and school rules require a 2.0 average for a student to continue.

Rittenhouse alleges she was discriminated against based on her race (white) and her disability. From the story of her lawsuit appearing in the Madison County Record, she filed a complaint in the US District Court for the Southern District of Illinois in which she explained that she suffers from bipolar disorder, hyperactivity, ADHD, and dyslexia. Her complaint describes ADHD as "Attention Span Deficit Disorder," which contributed to her "low grape point average." This and other impairments "substantially limits here [sic] ability to perform" and the school's failure to accommodate her was a violation of the "Americans for [sic] Disabilities Act."

Disabilities are not funny. At some point, though, we must distinguish between those people with the potential to succeed as lawyers, and those whose talents point in another direction. Ms. Rittenhouse's case raises the difficult and essential question for legal academy. Where does reasonable accommodation for disabilities end?

Do You Have CD?

I've got it bad. Take the test to see if you suffer from chronic disorganization (CD).

The National Study Group on Chronic Disorganization not only offers a test to see if you have it, they also provide a tool to measure how bad you've got it -- the Clutter Hoarding Scale.

There is help for those of us with CD. The NSGCD offers tips for beating procrastination. If you don't have CD yourself, you might be an enabler. NSGCD offers tips for communicating with your CD afflicted loved one.

The photo is from, a website hosted by Carolyn W. Sanger, a professional organizer and expert at clutter control. To find your own CD therapist, check out the website of the National Association of Professional Organizers.

I'm going to try to beat CD on my own.

Wednesday, January 9, 2008

Energy Policy is Everything Policy

Last week, Josh Fershee challenged the wisdom of the Renewable Fuel Standard (RFS) that Congress made part of the Energy Independence and Security Act of 2007 (EISA). The White House says the new law "represents a major step forward in expanding the production of renewable fuels, reducing our dependence on oil, and confronting global climate change." At the same time, "[i]t will increase our energy security, expand the production of renewable fuels, and make America stronger, safer, and cleaner for future generations." (the website of the American Coalition for Ethanol) touts ethanol as though it were magic juice that falls like rain from heaven. It "drives economic development, adds value to agriculture and moves our nation toward energy independence." But wait, there's more. Ethanol "cleans America's air and offers consumers a cost effective choice at the pump." That all sounds fabulous to me.

My concern is different from Josh's. He objects that the price of sustainable energy policy is hidden from consumers at the gas pump, and ultimately borne by taxpayers, who apparently are politically less fearsome than gas customers. I'm worried about the impact of sustainable energy policy on everything else.

Ethanol and other biofuels require corn and soybeans as Josh points out. Replacing our dependence on fossil fuel with a dependence on corn and soybeans has radical implications for national security, land use, agricultural, food and health policy, to name a few. Let's consider one slice of the pie. is following the progress of the 2007 Farm Bill through Congress. The shape of this bill will affect directly and indirectly agricultural product prices, which in turn affect food prices, food production and consumption patterns and ultimately how much we weigh. (Obesity already costs US taxpayers more than $117 billion annually). Farm bills over the last three decades have directed tens of billions of dollars to support commodity crops -- corn and soybeans. After more than thirty years of subsidy, it's no surprise that we are stuffing ourselves with an abundance of processed foods that feature the cheap starches, fats and sweeteners made from these crops. The RFS in the EISA will increase demand for commodity crops as inputs for "sustainable" fuels, driving up commodity crop production, just as Americans are waddling through a food market stuffed with high calorie, low nutrition (ok, delicious) cheap food. I'm wondering what effect biofuel-driven demand for commodity crops will have on the price of the foods Americans should be eating to minimize the looming and staggering health care costs of obesity and related diseases.

Ideally, we'd think about energy policy considering all the effects, from national security, the environment and tax equity all the way to our bathroom scales. The very interconnectedness of nearly everything makes this task impossible. We approach impossible problems by compartmentalizing (a skill lawyers teach and learn in law school). We define ourselves and our ambits of expertise to match up with the compartments we create -- tax, agriculture, energy, economy, politics and so on. We confront complexity. But we do so by artificial isolation. The content of our compartments spills over into the compartments of others despite our efforts. Energy policy is everything policy. We can sublimate complexity. But we cannot overcome it.

To concede the interconnectedness of our compartments is to embrace the limits of our compartmental expertise. And we hate that more than we hate broccoli.

Tuesday, January 8, 2008

The Game's Afoot

Another semester of Contracts is about to begin. The words of Shakespeare's King Henry, the famous battle cry at the gap in the walls of Harfleur, ring in my ears: "Once more into the breach dear friends, once more." Henry V, act 3, sc. 1, 1.1.

Begging your pardon for the pun, I offer to you students of Contract law these words to rouse your courage. The bleak midwinter surrounds us. We are weary from the battle waged last semester. Another battle lies ahead.

Once more unto the breach, dear friends, once more;
Or close the wall up with our English dead.
In peace there's nothing so becomes a man
As modest stillness and humility
But when the blast of war blows in our ears,
Then imitate the action of the tiger;
Stiffen the sinews, summon up the blood,
Disguise fair nature with hard-favour'd rage;
Then lend the eye a terrible aspect;
Let pry through the portage of the head
Like the brass cannon; let the brow o'erwhelm it
As fearfully as doth a galled rock
O'erhang and jutty his confounded base,
Swill'd with the wild and wasteful ocean.
Now set the teeth and stretch the nostril wide,
Hold hard the breath and bend up every spirit
To his full height.
On, on, you noblest English.
Whose blood is fet from fathers of war-proof!
Fathers that, like so many Alexanders,
Have in these parts from morn till even fought
And sheathed their swords for lack of argument:
Dishonour not your mothers; now attest
That those whom you call'd fathers did beget you.
Be copy now to men of grosser blood,
And teach them how to war.
And you, good yeoman,
Whose limbs were made in England, show us here
The mettle of your pasture; let us swear
That you are worth your breeding; which I doubt not;
For there is none of you so mean and base,
That hath not noble lustre in your eyes.
I see you stand like greyhounds in the slips,
Straining upon the start.
The game's afoot:
Follow your spirit, and upon this charge
Cry 'God for Harry, England, and Saint George!'

Friday, January 4, 2008

Red Lion Reports Welcomes Prof. Joshua Fershee

Red Lion Reports is delighted to welcome contributions from an old friend, Professor Joshua Fershee of the University of North Dakota School of Law. Last year, Prof. Fershee and his wife, Prof. Kendra Fershee, were Visiting Assistant Professors at PSULaw with offices down the hall. Now, they're digging North Dakota. (Josh's NDULaw photo didn't render well so I thought I'd post this useful guide to locating North Dakota).

Josh is a rising star among legal academics who study energy policy. Last November, he moderated a panel on a national renewable portfolio standard at the Energy Bar Association's Mid-Year Meeting in Washington, D.C. He's recently published an article critiquing regulation of the U.S. energy infrastructure in the Harvard Journal on Legislation. He's a 2003 graduate of Tulane Law School and practiced law in New York City (Davis Polk & Wardwell) and D.C. (Hogan & Hartson).

Josh, what's the deal with biodiesel?

Lower Gas Prices By Paying More at the Pump?

Thanks to all of you at Red Lion Reports for giving me the opportunity to post a few thoughts. As a new professor, I am a frequent blog reader, but have done little on the content side. Much of my research focuses on energy law and policy, so I thought I'd start there -- I welcome your comments!

The Energy Independence and Security Act of 2007 was signed into law on December 19, 2007. It contained a renewable fuel standard (RFS) as a major part of the bill. The RFS requires that that certain "obligated parties – refiners, importers, and blenders (other than oxygen blenders) –" account for a minimum of 9 billion gallons of renewable fuel in 2008, rising to 36 billion gallons per year by 2022.

In light of a spot price hovering around $100 per barrel for oil, the RFS could be a promising step toward reduction of domestic US consumption of foreign oil. The question is: at what cost? Renewable fuels on the level mandated in the RFS require expensive new processing facilities and distribution channels, and rely heavily on multiple-use commodities, most notably corn. To help facilitate the process, the Act includes significant subsidies for industrial fuel producers to facilitate the production of ethanol and other advanced biofuels.

These subsidies hide the real costs of this energy policy. To ensure the pipeline for these renewable fuels in the long term, many market contingencies must be managed. Earlier this year, in North Dakota and Minnesota, a number of ethanol plants either shut down operations or delayed opening because the high price of market inputs (read: corn) made operations too expensive. The current high oil prices could motivate the plants to restart operations. But, a significant drought, even with the RFS, might push renewable fuel production costs out of the profitable range.

If shifts in agricultural input prices can shut down renewable fuel plants, renewable fuel producers are also sensitive to the actions of the largest players in the market for oil – especially OPEC. Although some claim that OPEC cannot impact oil prices (an assertion about which I am highly skeptical), changes in demand for oil in global markets unquestionably can. The real test for the efficacy of the RFS will come down the road. If the RFS is effective in reducing oil demand for a period of time, and our resulting demand for oil does in fact reduce oil prices, what happens in five years if world corn prices triple and oil supplies are high because of reduced demand?

We will have two choices. We could rollback the RFS. But that would waste the major infrastructure and human capital (e.g., people moving to communities for renewable fuel-related jobs) investments needed to satisfy the RFS in the first place. Quite simply, sunk costs will be high. Second, we could enact law to provide additional subsidies to producers of renewable fuels to ensure production. Either way, consumers would end up, directly or indirectly, paying higher prices for fuel as a result of the RFS.

While high prices are not appealing, that is how markets work. High demand and low supply = higher prices. Econ. 101. But markets are not efficient when the primary consumers don’t know the real prices they are paying. And, because of RFS legislation and the government subsidies to support it, the real price of renewable fuels will not be reflected at the pump.

I, for one, am willing to pay higher fuel costs to help reduce our dependence on fuels coming from the many less-than-friendly nations providing much of our oil supply. As such, I support the concept of the RFS. However, market participants need better information. An RFS can help reduce our dependence on foreign oil, and that is a good thing for national security. Additional fuel production using U.S. materials and labor are also a good thing. But consumers need to know what they are getting into, and without better information, the market can’t work efficiently.

The solution: reduce taxes elsewhere, and fund all subsidies in the bill through a direct, per gallon tax. That way, we all pay for the true price of our consumption at the pump. Five dollar gas is expensive, but the better the information, the better decisions we can make, and the better the market will work. Is a little transparency too much to ask?

Thursday, January 3, 2008

Caution: Falling Home Prices

Researchers for the Boston Federal Reserve Bank have analyzed the financial aspects of home ownership in Massachusetts between 1989 and 2007. In a working paper available here, economists Kristopher Gerardi, Adam Shapiro and Paul Willen shed some light on why people default on their mortgages and why they allow lenders to foreclose on their homes. The dominant factor, they say, is not abusive subprime mortage marketing, or widespread securitization of mortgages. It's falling home prices.

Like elsewhere in the US, Massachusetts experienced a spike in home mortgage foreclosures during 2006 and 2007. The authors conclude that home ownership financed by subprime mortgages end up in foreclosure almost 20 percent of the time, more than six times more than for homeowners with prime mortgages. Homeowners who have suffered a 20 percent or greater decline in home value are about 14 times more likely to experience foreclosure compared to homeowners whose property increased in value by 20%. The increase in percentage of subprime mortgages created a class of homeowners who were particularly sensitive to declining home values.

This makes perfect sense. Mortgage foreclosure is one of several options to homeowners. When home prices are rising, homeowners caught short on cash for mortgage payments can sell their homes for enough to cover their obligation. Or, they can use their equity to refinance their mortgage at an affordable rate. Negative equity does not necessarily point to borrower default. A borrower will adjust cash flow to make home payments whenever possible to avoid losing the chance to reap an increase in home value in the future.

The authors forecast that over the next twelve years, 18 percent of subprime mortgagors will experience foreclosure compared to only 3 percent of prime mortgagors. They see the glass both half empty and half full. 82 percent of all subprime mortgagors will end up making payments, refinancing or otherwise staying in their homes for at least 12 years (compared to 97 percent of prime mortgagors).

High foreclosure rates are bad news for communities. Homeowners caught in the perfect storm face the loss of their home and the destruction of their wealth. Multi-unit housing is experiencing default at more than double the rate for single family homes-- sobering news for renters who may find themselves on the street. Foreclosure of the house down the block spells doom for home prices in the area, and can have a spiral downward effect as discouraged neighbors choose to walk away from their mortgages.

If home values are the dominant factor in driving up foreclosure rates, what does this tell us about how to fix the problem? Borrowers caught with no home equity and no cash to pay subprime interest rates once they reset need to refinance to avoid foreclosure. Eric Rosengren, President of The Massachusetts Instittue for a New Commonwealth, made a couple of suggestions to the Boston Fed. Banks, who largely abandoned home mortgage lending to subprime and prime home mortgage specialty lenders, may be induced to re enter the market, especially if their loans are backed by the Federal Housing Administration or comparable state agencies. The FHA may be willing to back refinance loans for some borrowers who would not have qualified for an FHA guarantee on their original loan because they've got a payment history on the subprme. (1.2 million borrowers or 55% of securitized subprime adjustable rate mortgagors, are on time and current in their payments over the last two years). If subprime borrowers are to have a chance to refinance, banks and other new sources of capital will have to step up. In Massachusetts 8 of the 10 largest subprime "specialty" mortgage lenders are out of business and no longer lending.

Wednesday, January 2, 2008

Antitrust Celebrity

Congratulations to PSULaw Professor John Lopatka and his co-author Professor William Page (Florida). A panel of antitrust law scholars have recognized Lopatka and Page's book, The Microsoft Case, as one of the best antitrust books of 2007. Read more about the best in antitrust scholarship from Josh Wright at Truth on the Market, and Dan Sokol at Antitrust & Competition Blog.

Ten years ago, the US DOJ and a host of state antitrust agencies sued Microsoft alleging that it was monopolizing the market for personal computer operating systems by suppressing a competitive threat from Netscape’s web browser and Sun Microsystems’ Java technologies. Lopatka and Page analyze the litigation that ensued from the first idea of a lawsuit through the trial.

Here's an excerpt of a review of the book in 121 Harv. L. Rev. 684 (Dec. 2007):

"Skeptical of antitrust actions in general, Professors Page and Lopatka are at their most provocative when defending the integration of Windows and Internet Explorer, including Microsoft's decision to prevent users from deleting the browser from the operating system. They conclude that integration did not reduce competition, primarily because the government's theory--that competing browsers could eventually become platforms for competing operating systems--was speculative and unsupported. The authors are generally uncompromising in their defense of Microsoft, and they conclude that although its actions may have harmed competitors, they did not harm consumers."

The Harvard L. Rev. book review editor seems a bit irked about the authors' thesis. RedLion Reports could not possibly be prouder.