PSULaw Students Are Smart

"Back to You" is Fox TV sitcom starring Kelsey Grammer and Patricia Heaton, about two news anchors who reunite on a Pittsburgh nightly news show. In a recent episode, Grammer learned that a friend's son had just been accepted to Penn State Law. "No surprise," says Grammer--"That boy is smart." (click here to run the clip).

This reminds me of the scene in "Risky Business" (1983) that put my alma mater on the cinematic map of cool. Tom Cruise plays a northside of Chicago rich kid who realizes that his dreams of Princeton are slipping away and he says: "Looks like University of Illinois!"

I can't resist:

Update on Thoughts on Art

In Thoughts on Art, Kelly asked: What is art? Kelly offered an answer to her own question partly in response to a story in the Yale Daily News. The story reported that a Yale art student inseminated herself "as often as possible" and used an abortifacient drug to abort multiple pregancies. The story provoked 320 on-line comments.

Dean of Yale College, Peter Salovey, issued a press release last week in which he noted that the student's project "bears no relation to what I consider appropriate for an undergraduate senior project.” The Dean of the Art School, Robert Storr, agreed: “This is not an acceptable project in a community where the consequences go beyond the individual who initiates the project and may even endanger that individual.” Two faculty members made "serious errors in judgment" and are subject to "appropriate action."

Inside Higher Ed interviewed art academics for a story running today about academic freedom in art. Nicola Courtwright, professor of art history at Amherst and president of the College Art Association notes that nixing a student's art project because of content would be "giving up your ethical responsibility to teach." An art professor should press students for the justification for their work. A professor should ask a student: '‘That kind of thing that you’re doing right now, it looks like it’s meant to be provocative, but what else is going on there? Is this really as deep as you could go with this subject? Are you stopping on a superficial level? Are you doing it to get a response?’”

John Carson, head of the School of Art at Carnegie Mellon, explained that art educators' responsibility is to encourage students to take risks. The limit isn't the subject matter: no subject should be taboo for art. Rather, the boundary of legitimate "art" depends on the artist's purpose. "I need justification from the artist," he said. “There are no hard and fast rules. You are looking at each case on an individual basis. You are looking at the sincerity of that artist.”

Apparently, if the artist's justification satisfies his or her professor, then the work is art, shielded from censorship as an act of legally-protected academic and expressive freedom. If the artist's justification fails, then no freedom. What kind of standard is that? How do art academics evaluate the artists' justification? How is this evaluation distinguishable from evaluating the social value of the content of the expression? The case of the Yale student's project is relatively easy for art academics. Jeanne Jaffe, chair of fine arts at University of the Arts in Philadelphia echoes Art Dean Storr's remark in Yale's press release. A project (such as the Yale student's) that causes harm to a "sentient being" is outside the range of protected expressive freedom.

Randy Martin, chair of art and public policy and director of the graduate program at NYU's Tisch School of the Arts adds this: “The question of reining [student artistic expression] in…cuts more deeply in an arts environment than it may in other situations because of how potent the cultural norms of freedom are, as they’re applied to artists.” Martin is right in one sense. We think of art as the ultimate venue for freedom of expression. But for student art projects, the stakes for expressive artistic freedom are relatively low compared to the political and economic contexts in which we lawyers struggle to balance collectively held values against individual freedom. What should be the limit of individual freedom? So far, art academics have dropped back to punt.

Wendy's Goes to Arby's

Yesterday Wendy's International Inc. and Triarc Companies, the franchisor of Arby's, signed a merger agreement for an all stock transaction in which Wendy's shareholders take Triarc stock. Don't worry, both brands will survive with consolidated management.

How is Wendy taking the news? Wendy Thomas, daughter of founder Dave Thomas, called the outcome a "huge, huge disappointment." Thomas, her three sisters and her mother hoped a local franchisee (with the help of two private-equity firms) would win the bidding for her dad's company.

Subprime Litigation Expected to Reach Record High

According to BNA reports, Navigant Consulting estimates that lawsuits related to subprime mortgage products will top the previous record high number of lawsuits from a single major financial crisis set in the wake of the savings and loan debacle in the early 1990's. During the first quarter of 2008, 170 federal subprime related cases were filed, an 85 % increase from the prior quarter. The rate of filing is two cases per day, including weekends. Most 1Q2008 filings are class actions by borrowers (46%) followed by securities cases and commercial disputes. This puts the subprime fallout on track to beat the old record of 559 savings and loan cases filed in the early 1990's. 448 subprime cases were filed over the 15 month period ending March 31, 2008.

Our Little Secret

The Virginia Supreme Court held last week that a lawyer has no duty to tell opposing counsel his client is about to file for bankruptcy. In McNally v. Rey, Va. No. 070522 (April 18, 2008), the court reversed an award of attorneys fees against a lawyer who filed a bankruptcy petition for a client the night before the trial in a civil case against him was to begin. Sanctions for violation of Virginia's frivolous litigation statute were unwarranted even though the lawyer filed witness and exhibit lists in the civil case, while knowing his client was contemplating a bankruptcy filing. The court held: "To hold otherwise would have a chilling effect upon the rights of litigants and their attorneys when such litigants seek to avail themselves of the statutory rights set forth in the federal Bankruptcy Code."

Explain This

Switzerland's largest bank, USB, issued a report yesterday to its regulator explaining how it lost more than $37 billion on its U.S. subprime mortgage investments. USB is one of the biggest losers in that market.

UBS's report offers some entertainment value. Dressed up in shareholder speak, it sounds a lot like what my kids tell me when they screw up (so far, not $37B):

Hey, everybody was doing it: UBS's approach to risk measurment and valuation of structured credit projects "reflects issues which were not unique . . . a number of other financial institutions with exposure to the U.S. subprime market used similar approaches."

UBS screwed up, but in a really classy way: Its analysis "identified a number of factors within the Risk Control functions, specifically within Market Risk, that suggest that the overall Risk Control framework was insufficiently robust."

Devil made me do it: In July 2005, the investment bank's senior management was replaced by managers with "strong sales and client attributes" who apparently lacked the "strong risk background" of the departing managers.

I didn't mean for this to happen. USB's research team issued negative reports on the U.S. subprime market but managers ignored them thinking that "deterioration in the subprime market would not impact [triple A rated] assets."

Who's Managing Your Market?

Senator Chris Dodd (D.Conn.) introduced a bill yesterday that would modify the federal student loan program for parent/borrowers (PLUS). The current program rules provide that a borrower can be ineligible for a PLUS loan if he or she has been delinquent on a mortgage for more than 90 days or experienced a foreclosure within the past five years. Dodd's bill would eliminate mortgage delinquency or foreclosure from the list of disqualifying credit problems, provided the defaults are on home loans and occur between January 1, 2007 and December 31, 2012.

Dodd said: "Students should not be denied access to PLUS loans simply because our housing market was mismanaged . . . ."

Co-sponsors of Dodds' bill: Senators Edward Kennedy (D. Mass.); Sherrod Brown (D-Ohio); Patty Murray (D. Wash.); Bernie Sanders (I-Vt.) and Hillary Rodham Clinton (D. N.Y.)

AP Photo: Dennis Cook

Not Keeping Up

The State Foreclosure Prevention Group (SFPG), a confab of state attorneys general and bank regulators, concluded yesterday that efforts of subprime mortgage servicers to respond to mortgage deliquencies are going nowhere. Government and industry sponsored programs "have not translated into meaningful improvement in foreclosure prevention outcomes" notes SFPG's report issued yesterday. Loan servicers are modifying more troubled loans, but the number of loans in trouble is increasing even faster.

This steel, grass lined wheel was designed by Dalhousie School of Architecture students David Gallagher, Kevin James and Jacob Jebailey. Photo credit to Andre Forget.

You Be the Judge: In re Stewart (E.D. Pa. 2008)

Caroline Stewart has lived in her house in South Philly for more than fifty years. Her husband's passed, her kids are grown and gone and she's alone. She pays the bills each month from her social security and pension checks.

Something got into Caroline Stewart's head in the fall of 2002. Maybe it was the chatter at the beauty shop. Maybe it was something she heard on the radio about inheritance taxes and the government and nursing homes taking everything folks had. She wanted to live in her own house until the day she died. She was afraid.

On December 9, 2002, Mrs. Stewart went down to her state congressman's office a few blocks away. She executed a deed conveying her house to her son, John Stewart, for $1. A staffer who worked for her congressman (not a lawyer) prepared the deed. It stated: Said Grantor for and in consideration of the sum of ONE ($1.00) DOLLAR and 00/100 lawful money of the United States of America, unto her well and truly paid . . . hath granted, bargained, sold, released and confirmed, and by these presents doth grant, bargain and sell, release and confirm unto the said Grantee his heirs and assigns, in fee.

A few months later, Mrs. Stewart thought about her daughter Susan and decided she should share in the house with John. So, Mrs. Stewart talked it over with John. He went to the same congressman's office and the same staffer prepared another deed, just like the first one only this time from John to John and Susan as tenants in common. Mrs. Stewart continued to live in the house. She paid the real estate taxes, but John took the deduction on his personal income tax returns for 2003 and 2004.

As it turned out, John had some problems with his credit cards. He filed for bankruptcy in 2005. The trustee in bankruptcy moved to sell John's interest in the house as property of the estate for the benefit of his creditors under 11 U.S.C. sec. 363(h)(trustee may sell the estate's interest and the interest of any co-owner (Susan) if partition is impracticable and then remit one half of the proceeds to the co-owner). John argued that the estate held only bare legal title to the house. Despite the unconditional deed, Mrs. Stewart retained the beneficial interest in the property under a resulting trust.

If the trustee wins, Mrs. Stewart loses the house to John's creditors. If the trustee loses, she stays and John's creditors get nothing.

You have the facts. Now here's the law.

1. Bankruptcy courts decide what is property of the estate (to be sold for the benefit of creditors) as a matter of federal law. But they look to state law, including the state law of trusts to determine the nature of the debtor's property rights at the time of the filing. Butner v. United States, 440 U.S. 48 (1979).

2. If the debtor holds only legal title to property (and not the beneficial interest), only that legal title becomes property of the estate, 11 U.S.C. sec. 541(d). Bare legal title is not worth anything to the estate.

3. Pennsylvania recognizes a resulting trust in favor of a grantor if the grantor did not intend to convey the beneficial interest in the property to the grantee. Pennsylvania appellate courts cite with approval the Restatement (2d) of Trusts sec. 404 (ALI 1959): A resulting trust arises where a person makes or caues to be made a disposition of property under circumstances which raise an inference that he does not intend that the person taking or hlding the property should have a beneficial interest therein, unless the inference is rebutted or the beneficialinterest is otherwise effectively disposed of.

4. The Restatement (2d) of Trusts divides resulting trusts into three types: 1) where an express trust fails; 2) where the express trust does not exhaust the trust estate; and 3) the so-called purchase money resulting trust, where property is transferred to one person but another pays the purchase price, the property is subject to a purchase money resulting trust in favor of the party who pays. No Pennsylvania court has found a resulting trust to exist except in one of these three situations.

5. The Restatement (3d) of Trusts (superceding the Restatement (2d)) is organized in a way to suggest that when there is no express trust, the only type of implied resulting trust is a purchase money resulting trust. See Restatement (3d) Trusts sec. 7, comment a. No Pennsylvania court has yet cited with approval to the Restatement (3d) Trusts.

6. A party can establish a resulting trust only on proof that is "clear, explicit and unequivocal." See Galford v. Burkhouse, 320 Pa. Super. 21, 30 (1984).

7. In a stack of Pennsylvania cases, courts have held that when the language of a deed is clear, the parol evidence rule bars introduction of extrinsic evidence on the issue of the grantor's intention. Under Pennsylvania law, use of the word "grant" in a deed conveys fee simple title to property to the grantee. 21 P.S. sec. 2.

8. Pennsylvania law recognizes a presumption that a gift arises when a transfer of real property is to a "wife, child or other natural object of the bounty of the [transferor]."

You be the judge.

What did Mrs. Stewart intend to do with her house when she went down to her congressman's office?

Who's running an unauthorized practice of law out of a South Philly congressman's office?

What was John doing taking the property tax deduction for taxes on Mrs. Stewart's house if he had only "bare legal title?" (IRS tax fraud hotline: 1-800-829-0433).

Choose one (Alison, this is for you):

A. What kind of a pushover are you? Don't you believe in the rule of law?
B. What kind of insensitive, amoral beast are you? How are you going to sleep at night if you put Mrs. Stewart on the street?

It goes without saying that wagering on how Judge Diamond (E.D. Pa.) decided this case on appeal from the decision of Bankruptcy Judge Frank (Bankr. E.D. Pa.) would be unconsiconable. But see, 2008 WL 938920.

Thoughts on Art

What is art? The question has puzzled thinkers for ages, how can you quantify that which is in essence intangible? The nature of art is that it possesses a quality distinct from the materials it is comprised of. That quality is metaphysical; an artist is a conduit, bringing forth that which has already been conceived. The art existed in the artist absent the medium of its expression – memories of copyright . . . I make no claim to give a categorical definition of art that will suit everyone, but here is my conception of art. Art is creative expression of that which is aesthetically pleasing. Art – including improvisational art – is created by innate skill or mastery of technique which requires intention, effort and care. Art can be emotive, visual, auditory, anything really; the common thread is that it instills in the observer a sense of life, peace or inspiration. Art is that which is aesthetic. Aesthetic is that which is beautiful and emotional, and that which is beautiful, is pleasing, excellent in form and expression. Even in our “ugliness,” there is artistic expression. Professor Reilly commented in her post that Martha Graham’s unique style of dance was, “release, passion and peace -- raw, ugly and real.” In her words, “ugliness is relative,” and she is right.

To me, art is life affirming, because it is uniquely human. The ability to create art is one of the most profound qualities we as humans possess. We create for the sake of it, and the results are breathtaking. With such a broad conception of art, is it possible to reject something claiming to be art as non-art? In Yale Daily News yesterday, a story broke about a senior who self-induced a series of miscarriages for the purpose of art. The project was done as a “documentation of a nine-month process during which she artificially inseminated herself "as often as possible" while periodically taking abortifacient drugs to induce miscarriages. Her exhibition will feature video recordings of these forced miscarriages as well as preserved collections of the blood from the process.”

My heart broke when I read this; it struck me as the very antithesis of art, destruction of life in order to “provoke.” This senior has certainly made a statement, but at what cost? Setting aside the morality issues, can this expression really be art? Viscerally, I want to say no – it is not life affirming, it is not a representation of death, it is death. But by incorporating other elements into the project which portray her experiences, did she transform death into excellence of expression? Where was the mastery of technique? Can damage to your body be a technique? These are questions I cannot answer, but I think this speaks to our brokenness as a culture. The feelings inspired in me upon reading about this project are sadness, pain, and frustration. Perhaps, then, this is art. This project reveals the ugliness latent in us, the ability to destroy for a statement. It is real, it is raw, and it evokes emotion; death is a part of life and its expression impacts us. Destruction too, is uniquely human.

--
Imaged: Graham Company dancers and Michelangelo’s Pieta, upon which the Graham form is based, both are undoubtedly art, and both are representations of death.

I Won't Grow Up

Park Forest Middle School presents Peter Pan this weekend, Th, Fri. Sat. 7:30PM. The musical is based on a book of the same title by J.M. Barrie. Jerome Robbins wrote the score. Peter Pan is a magical boy who successfully refuses to grow up. The play tells the story of his encounter with the perfectly ordinary Darling family children, and their escapades in magical Neverland where pirates and Indians emperil lost boys.

My interest in this particular production is more than just as a critic. I happen to know one of the cast members. In life, I play the role of her hideously embarrasing mother.

The show features a song I can't get out of my head:

I Won't Grow Up

The middle school players, ironically, are desparate to be seen as grown up, without the burden of actually being grown up.

I won't grow up
I don't want to go to school.
Just to learn to be a parrot
And recite a silly rule.

Peter Pan's philosophy is powerful. Law students, facing graduation, the July bar exam, high pressure jobs, marriage, debt-- They want to grow up for real, but are understandably terrified.

I don't want to wear a tie.
And a serious expression
In the middle of July.
And if it means I must prepare
To shoulder burdens with a worried air,
I'll never grow up, never grow up, never grow up
Not me.

As for me, I'm staring down growing old. Peter Pan and I agree on this:

If growing up means
It would be beneath my dignity to climb a tree,
I'll never grow up, never grow up, never grow up
Not me!

Spe Salvi Facti Summus: In Hope We Are Saved

Today, before a packed crowd at the new Washington Nationals' stadium, the Pope addressed American Catholics. He challenged us to give our contemporaries "a convincing account of the hope which inspires [us]."

Here is a part of his prayer:

"Those who have hope must live different lives! (cf. Spe Salvi, 2). By your prayers, by the witness of your faith, by the fruitfulness of your charity, may you point the way towards that vast horizon of hope which God is even now opening up to his Church, and indeed to all humanity: the vision of a world reconciled and renewed in Christ Jesus, our Savior. To him be all honor and glory, now and forever. Amen. "

A Ripple And A Shutter

As the effect of the mortgage crisis and the rising cost of necessities ripples through our economy, major retailers are looking to shutter around 100 stores each in the coming year. Retailers count on banks to loan them money during their down cycles in order to meet payroll, etc. However, banks may be reluctant to extend new loans in light of their own challenges in the mortgage market. In addition, retailers are likely to experience more acute down times as consumers save their pennies to buy gas and food rather than Manolos and iPods.

A simple "close stores" Google search returned the following: CompUSA, Starbucks, Kmart, 84 Lumber, Toys R Us, Wilson's Leather, Radio Shack, Border, Ann Taylor, Circuit City, and the list goes on and on. From a purely psychological standpoint, it is demoralizing for Americans to walk into their local malls and see store after store with the gate down and the lights out. Abandoned retail buildings with weeds growing in their parking lots only feed the pessimism and sense of despair. But, perhaps this is needed to motivate us to get out of debt as individuals and as a nation.

Going bankrupt is the pits. Nobody wants to go bankrupt, but increasingly both individuals and businesses are filing those Chapter papers. I am enrolled in Bankruptcy next semester and look forward to learning about debt, how the Code operates, and the implications for our daily lives. What I do know is that, "the borrower is the slave of the lender."

O Appalachian Spring!

Thank you Jim for your post on Jurisdynamics in celebration of our milestones.

In the summer of 1942, Aaron Copland agreed to write a score for a dance program for choreographer Martha Graham in exchange for $500. Their collaboration, the modern ballet Appalachian Spring, is no accident.

Aaron Copland was born in Brooklyn in 1900. Copland's family was unmusical. He was an outsider from birth. During his life, technology made commercial recording of music possible. Copland thought that classical music should be "for the people" and by radio and records one composer could reach them all. Copland's music broke out of the classical concert hall and into the places where the people lived.

Martha Graham was born in 1894 in Allegheny County, Pa. Graham rejected the preoccupation of classical ballet with line, flow and grace. She saw and felt movement as tension and release, passion and peace -- raw, ugly and real. She shattered entrenched dance stereotypes and created in its place American Modern Dance.

Here is a longer excerpt from Hart Crane's poem, The Dance

There was a bed of leaves, and broken play
There was a veil upon you, Pocahontas, bride—
O Princess whose brown lap was virgin May;
And bridal flanks and eyes hid tawny pride.

I left the village for dogwood. By the canoe
Tugging below the mill-race, I could see
Your hair’s keen crescent running, and the blue
First moth of evening take wing stealthily.

What laughing chains the water wove and threw.
I learned to catch the trout’s moon whisper; I
Drifted how many hours I never knew,
But, watching, saw that fleet young crescent die,—

And one star, swinging, take its place, alone,
Cupped in the larches of the mountain pass—
Until, immortally, it bled into the dawn.
I left my sleek boat nibbling margin grass . . .

I took the portage climb, then chose
A further valley-shed; I could not stop.
Feet nozzled wat’ry webs of upper flows;
One white veil gusted from the very top.

O Appalachian Spring! I gained the ledge;
Steep, inaccessible smile that eastward bends
And northward reaches in that violet wedge
Of Adirondacks!—wisped of azure wands,

Jim, the sound of Copland's Appalachian Spring, and the sight of Graham's dancers raising their bodies not by magic but by muscle and soaring will, is a simple gift from our Creator. They gained the ledge and showed us what in our hearts we already knew-- northward reaches in that violet wedge.

In Their Own Words

Over at www.lawprose.org, Bryan Garner posted interviews with eight of the current nine Justices. They candidly answer his questions ranging from oral argument to legal writing, both from the advocates' perspectives and their own perspectives as Justices. Perhaps you, like me, have seen this posted elsewhere, but I have found it so charming and helpful I just had to post it here as well.

I find their comments particularly helpful as I prepare to draft a Supreme Court opinion for the case Cuellar v. United States, which the Court heard oral argument on back in February. My endeavor is an assignment for the Supreme Court seminar offered by our very own Professor Kit Kinports, who is no stranger to the Court herself. Professor Kinports clerked for Justice Blackmun in the 1980's. The class is great fun. My only regret is that we don't hear more "insider" tidbits from Professor Kinports, but perhaps she signed a privacy agreement that restricts her from sharing such information? Regardless, for those 2Ls wishing they had taken the course this semester there is good news, Professor Kinports will not be on sabbatical in the fall and Supreme Court is on tap. For those of you even remotely interested, I encourage you to stay up until midnight and register at 12:01 a.m. It's the only way to get in, as the class has limited seating, and it's worth the extra effort.

Postscript: Linda Greenhouse of The New York Times wrote a book on Justice Blackmun titled, Becoming Justice Blackmun: Harry Blackmun's Supreme Court Journey. In an article published in the Times, Greenhouse mentioned Professor Kinports and her interactions with Justice Blackmun regarding the case Mississippi University for Women v. Hogan.

People (Still) Do The Darndest Things

Apropos of the ongoing angst of who is to blame and how to fix the "subprime crisis," Larry Ribstein at Ideoblog posted this excerpt from Douglas & Bates, The Federal Securities Act of 1933, 43 Yale L.J. 171 (1933) in which William O. Douglas observed:

"There is nothing in the [Securities Act of 1933] which would control the speculative craze of the American public, or which would eliminate wholly unsound capital structures. There is nothing in the Act which would prevent a tyrannical management from playing wide and loose with scattered minorities, or which would prevent a new pyramiding of holding companies violative of the public interest and all canons of sound finance. All the Act pretends to do is to require the ``truth about securities'' at the time of issue, and to impose a penalty for failure to tell the truth. Once it is told, the matter is left to the investor. . . .

The economy under which we live is not static. Industry is not stabilized and under our present methods never can be. Competition and the progress of invention make it inevitable that many enterprises will fail. The toll of technology over a period of years is enormous. And the downward turn of the business cycle may eliminate more than just the marginal enterprise. Other factors of management, not related to cupidity and fraud, contribute to the same end. As a result, a substantial percentage of industrial investment will in any event be lost. To speak then of underwriting the values which are based on such unstable foundations is sheer nonsense. And to expect that the judgment of investors as respects these imponderable factors will improve perceptibly in this generation is baseless optimism."

Blame the BlackBerry

BlackBerries, the phones that celebrate the evolutionary breakthrough of the opposable thumb, may be at the root of lawyers' woes.

A law firm in suburban NYC has decided that BlackBerries are no longer welcome in firm meetings, Newsday reports. Meltzer, Lippe, Goldstein & Breitstone in Mineola expects its attorneys to respond to clients as soon as possible. But don't bring your BlackBerry to law firm meetings. The firm made its meetings BerryFree Zones because the constant BerryBuzz at meetings was interfering with lawyers' focus. The co-head of the firm's corporate group notes that you're not fooling anyone by thumbing under the table (he ought to know).

Lawyers' bonds with their Berries (BerryBonds?) is a factor in lawyers' dissatisfaction with work/life balance, according to a recent survey conducted by the New York Bar Association. A committee of lawyers talked to peers around the state about a variety of work/life balance issues. In a section on technology issues, BlackBerry gets mentioned by name as a source of stress and imbalance. The report also notes that lawyers understand who is BlackBerry Boss. Achieving a balanced life is up to you. Nobody else is going to care.

RedLion prefers the Motorola Q.

Charm City v. Wells Fargo, Round II

Last January Red Lion Reports reported that the City of Baltimore filed a complaint against Wells Fargo Bank for damages to the city caused by foreclosures arising from WF's alleged predatory mortgage lending practices. Lawyers for WF filed a motion to dismiss the complaint. The motion (no link yet) argues that WF is not to blame for Baltimore's foreclosure woes. Baltimore is.

Skadden, Arps, Slate, Meagher & Flom LLP, on behalf of WF, argued that Baltimore lacks constitutional standing to bring the suit. The chain of events linking WF to Baltimore's pain is too long and too weak to confer subject matter jurisdiction on the court.

WF notes that Baltimore caused its own foreclosure problems based on conditions brewing for years. WF's brief notes: "This is an unprecedented lawsuit in which the City seeks to use a single financial services company as a scapegoat for broad social problems that have plagued Baltimore for decades . . . ."

The City of Cleveland has brought a similar suit against 21 investment banks in Cuyahoga County.

New Classification of "Financial Services"

The term "financial services" refers to an assortment of institutions that provide the means for people to save for the future, hedge against risks, acquire capital for consumption and organize capital for investment. Actors who undertake this intermediation function facilitate social gains from trade.

The The Department of the Treasury Blueprint of A Modernized Financial Regulatory Structure (March 2008) makes a provocative observation about the "financial services" sector and the term itself. Our current regulatory structure organizes financial services institutions into legally distinct categories, (e.g., commercial banks, other insured depository institutions, insurers, companies engaged in securities and futures transactions, finance companies, and specialized governmental companies such as Freddie Mac and Fannie Mae). These categories in part reflect distinctions in the way these actors function as capital intermediaries. In ways we hardly notice, however, the legal categories both reflect and entrench distinctions that regulation, not function, makes important.

For example, we perceive a legal difference between a commercial bank and an "other depositary institution" because the law that regulates commercial banks is different than that which regulates other depositary institutions. To accommodate the regulatory difference, we invent and deploy different words to describe the differently regulated actors. The most famous example of this may be the "non-bank bank" a term coined in the 1980's for a financial institution that did not meet the regulatory definition of a "commercial bank" and thus avoided the prohibition against interstate banking for commercial banks. The words we use to describe and importantly to think about "financial services" institutions make non-functional distinctions important.

The Blueprint proposes a new regulatory regime for intermediaries in which non-functional regulatory distinctions give way to functional ones. It opens a discussion on the possibility and realization of optimal regulation free of the restraint the current regulatory classification system imposes.

The proposal is both thrilling and terrifying. Mastery of the elaborate financial services classification system, like its biological counterpart, is not cheaply acquired or easily relinquished. For those players who have invested in manipulating the present regime to their advantage, the prospect of change threatens their return. The Blueprint invites financial services lawyers (and others who might be) to abandon the old vocabulary and embrace and create a new legal field that as yet has no name.

Legal Education Overvalued?

You can become a Supreme Court Justice without having taken Bankruptcy in law school. But it helps to have gone to Yale. Justice Samuel A. Alito gave the keynote address to at the American Bankruptcy Institute's Spring Meeting in D.C. last Monday. He conceded that he never took a course in bankruptcy as a law student but explained that bankruptcy courses were not offered at Yale. (Alito graduated from Yale Law in 1975).

Not to worry though. Justice Alito explained that federal judges are generalists and learn on the job. "We are not experts in all statutes we are called upon to interpret," he noted. But, "we can learn how to read a statutory provision." "You can teach yourself what you need to know" he said. Indeed, "formal legal education today is a bit overvalued."

Milestone

5000 visitors to Red Lion Reports since October 2007!

The U.S. Air Force Thunderbirds fly over the 2007 U.S. Air Force Academy graduation ceremony May 30 in Colorado Springs, Colo. (U.S. Air Force photo/Dennis Rogers)

May Perpetual Light Shine Upon Them

Today marks the anniversary of the death of Rev. Martin Luther King, Jr. in Memphis. It also marks the anniversary of another event -- a speech delivered by presidential candidate Robert Kennedy Jr. in Indianapolis in eulogy for King. What was just another campaign stop, became a shining moment of grace.

News of King's assassination reached Kennedy moments before he was to address a crowd gathered in an inner city playground. Local police advised him to cancel the appearance. Riots were breaking out in cities all over the country. Local officials could not guarantee his safety against an angry crowd.

Kennedy stepped up to the microphone on an improvised stage near a basketball goal. The assembled crowd was loud and lively. Many, it seemed, did not yet know of King's death. Kennedy ignored the speech an aide had prepared for him. He pulled from the pocket of his overcoat a crumpled page of notes he had written himself moments before. In a story today marking the occasion, Indystar.com reporters say it best: "It was a cold, windy evening and Kennedy was no King. His voice lacked the rich timbre, the rolling thunder and power, the memorable metaphors of that most gifted of orators. But he was up there, . . . hunched in his black overcoat, his face gaunt and full of anguish."

Words from the speech are carved into the marker at Robert Kennedy's grave site in Arlington National cemetery: "What we need in the United States is not division; what we need in the United States is not hatred; what we need in the United States is not violence and lawlessness, but is love, and wisdom, and compassion toward one another, and a feeling of justice toward those who still suffer within our country, whether they be white or whether they be black."

Kennedy announced King's murder and presented the crowd with two paths. One led to hatred, violence and bitterness. The other would unite us in King's commitment to understanding and compassion as the path to peace. He recited from memory lines from Aeschylus' Agamemnon: "Even in our sleep, pain which cannot forget falls drop by drop upon the heart, until, in our own despair, against our will, comes wisdom, through the awful grace of God." He asked the crowd in Indianapolis and the nation to "dedicate ourselves to what the Greeks wrote so many years ago: to tame the savageness of man and make gentle the life of this world."

Six weeks later, Robert Kennedy was killed in Los Angeles. In the weeks that followed King's death, riots, looting and burning ravaged American cities. But Indianapolis, where Kennedy spoke, was calm.

You can see Kennedy's speech and read the text on American Rhetoric.com.

Link to Treasury's Big Plan

Get your own copy of the Treasury Department's Blueprint for a Modernized Financial Regulatory Structure here. If you prefer a lighter version, pick up the Fact Sheet in the same place.

Optional Federal Charters for Insurers: Desperately Needed Medicine or a Step Toward Destruction?

“Any modern and comprehensive insurance regulatory structure should enhance competition among insurers in national and international markets, increase efficiency, promote more rapid technological change, encourage product innovation, reduce regulatory costs, and, above all, provide the highest quality of consumer protection.” Pg. 129 of the Paulson plan. Paulson’s “Blueprint” reads like a motivational speech, the recommendations contained within seem almost too good to be true. Since I do not know nearly enough about most of the aspects contained in the plan, I will leave the commentary to the expertise of the Red Lion herself, but I thought I would offer a few observations about the proposed nationalized insurance regulations.

Insurance is, as the plan points out, a national industry. Major insurance companies transact business across state and even national borders. Insurance companies currently need to conform their products to the jurisdictions of fifty states plus territories, this is costly and inefficient. Streamlining the governance of the insurance industry seems like a great idea. Plus, with all of the brewing issues surrounding the life settlement industry, it may be an ideal time for the Federal Government to step-in and facilitate consistency. The plan recommends only an optional federal charter, so if a small insurer prefers to be regulated locally, presumably this will be allowed – for now. In spite of 135 years of state-regulation, it may well be time for change. After all, insurance is big business: in 2006, insurance companies held $6 trillion in assets – half of the assets held by the banking industry. This brings me to my next point.

The more insurance looks like a financial tool, the less likely life insurance death benefits will retain their tax-exempt status. The primary purpose of life insurance is to provide security to one who would suffer loss upon the death of another, not to be a security for investors. Courts uniformly recognize the dual-component nature of life insurance, that of both providing a consumable benefit (insurance coverage) and an investment vehicle (the internal cash accumulation of a permanent policy and eventual death benefit). The Internal Revenue Code exempts life insurance proceeds from gross income if paid by reason of the death of the insured, in spite of the investment component of life insurance. Presumably, the IRS doesn’t believe anyone is willing to die for a tax shelter. Insurance companies are able to use this to their advantage in marketing insurance for estate planning purposes – it is a huge selling point. Recognition of the need for national regulation of insurance, to me, suggests that insurance is beginning to resemble other financial tools. This, in turn, makes the argument for special treatment of life insurance less compelling. While one could argue that there is a long way to go before reaching that point, this seems to be a step in that direction – a sobering thought.

Of course, on the flip side, a federal charter may give consumers an advantage they have not had before. The disclosures required of an insurer are minimal when compared to sellers of other financial products. For instance, insurers don’t disclose commissions paid to agents. In contrast, underwriters’ compensation structure must be disclosed when registering a security with the SEC. If commission structures or rates vary across insurance companies, disclosure would facilitate shopping and ultimately drive down cost. Another possible benefit to consumers is that the insurable interest laws, which vary slightly from state to state, could be clarified once and for all – which would have the effect of imposing a heavy burden on any individual seeking to induce an individual to procure insurance for the purpose of reselling it to an investor. This practice, known as STOLI (stranger-originated life insurance – see my earlier post) is poison in the secondary market for life insurance. With federal chartering and enforcement, the incentive for an investor to engage in STOLI may be lessened.

Perhaps the Paulson plan isn’t quite Faust’s deal with Mephistopheles, but we all must go into any situation which seems too good to be true with eyes wide-open.

Fight Terrorism Without a Gun

When it's not working on revamping regulation of financial products and markets in the U.S., the Treasury Department is quietly fighting terrorism. Yesterday, the Senate Finance Committee held a hearing to gather information about the progress Treasury is making in tracking and disrupting terrorists' financial support networks.

The Treasury Department Office of Terrorism and Financial Intelligence (TFI), formed in 2004, gathers and uses financial intelligence to identify individuals, charities or other groups that help channel money to terrorist groups. Stuart Levey, undersecretary for TFI reported that it has made "significant progress" in exposing terrorist networks by following the money. TFI has designated about 50 charities worldwide as terrorism supporters and increased awareness among charities of the possibility that they may be used as conduits to support terrorist. TFI works through the Financial Action Task Force (FATF), an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing.

The photo is U.S. Army Spc. Brian Stubbs of Apache Troop, 1st Squadron, 33rd Cavalry Regiment, 3rd Brigade Combat Team, 101st Airborne Division, searching a home during a downpour in Sadr City, Iraq, April 30, 2006. Army photo by Staff Sgt. Russell Lee Klika.