IMF annouces "virtual standstill" in global economy

Yesterday's press conference at the IMF, Olivier Blanchard,Economic Counsellor and Director of the Research Department, began with an acknowledgment that he is a bearer of bad news: global output and trade are decreased; growth forecasts are being revised continually downward. As far as outlook, Blanchard reported that the global economy will come to a "virtual standstill" with just 1/2% of growth for 2009. The global financial crisis has taken a toll on different economies in different ways. In terms of developed economies, investor and consumer confidence is lower, making the cost of credit higher and less available. In emerging economies, the effect is different: (1) there is weaker external demand from developed countries for goods; (2) the global credit crunch has limited credit and increased the cost of credit; and (3) there is a decline in cost of goods exported.

The IMF's solution? Simply restoring financial health. Easier said than done, it would seem. The difficulty is one that still eludes us regarding the toxic assets that are still present on the balance sheets of banks. Much is said about the fiscal policies and government stimulus efforts, with a recommendation for proposals that emphasize government spending, rather than tax relief to have the quickest effect. Of course, the long term concern is the ability for governments to reverse the deficits that are created in the near term. Thankfully, the IMF is expecting the United States to return to a low level of growth (1%) by 2010.

The full press conference is available through the IMF.

— JSM

Fortune's Best Companies to Work For

. . . with no layoffs.

Lately, there has been a daily dose of bad news with company layoffs. Today's news was of 13,000 job cuts today and 110,000 for the week. Today's casualties include AstraZeneca, Eastman Kodak, Cessna, Oshkosh and Charles Schwab.

Some good news: here are 9 of Fortune's Best Companies to Work For that have never had a layoff (so far, of course).

Best Companies rank Company U.S. employees
10 Nugget Market 1,536
13 Devon Energy 3,752
26 Aflac 4,493
27 QuikTrip 10,159
32 Container Store 3,286
44 NuStar Energy 1,319
53 Stew Leonard's 2,219
60 Scottrade 1,946
88 Publix Super Markets 141,314

From the Fortune February 2, 2009 issue

— JSM

Court Holds Discover Card Arbitration Opt Out Can't Be Evaluated on the Pleadings

In November, I posted about a case alleging that credit card issuers violated the antitrust laws by agreeing to include arbitration provisions in all of their cardholder agreements. Judge William Pauley, in the Southern District of New York, initially dismissed the suit for lack of standing, reasoning that any injury would be contingent on future disputes that cardholders might be forced to arbitrate. The Second Circuit reversed, holding that an agreement not to compete on a critical contract provision deprived the plaintiffs of a meaningful choice and thus resulted in injury in fact. Ross v. Bank of America, N.A., 524 F.3d 217 (2nd Cir 2008).
Discover responded by moving to dismiss the complaint against it on the ground that its arbitration provision permitted cardholders to opt out within 30 days, and thus its cardholders were not compelled to artibitrate claims as a result of any anticompetitive agreement. The language of the agreement is available here, but you’ll have to scroll down a little to find it.
On January 22, Judge Pauley rejected Discover’s motion, reasoning that whether Discover cardholders had a meaningful opportunity to reject arbitration provisions could not be resolved on the pleadings. “Accepting the plaintiffs allegations as true,” the court explained, “an opt out provision may be illusory [and t]he issue requires discovery.” This is particularly true, the court reasoned, because the plaintiffs alleged that the defendants conspired to prohibit their cardholders from challenging card issuer behavior through class actions. Interestingly, the court recognized that the plaintiffs were harmed because without the class action option, cardholders could not rely on the class action plaintiffs bar to monitor card issuer conduct. The court also held that by citing meetings between Discover and American Express, the plaintiffs brought their conspiracy allegations beyond the Twombly specificity threshold required to support a class action complaint. The court did deny plaintiffs request for a jury trial on the ground that the relief sought was entirely injunctive in nature. In re Currency Conversion Fee Antitrust Litigation, 2009 WL 151168(S.D.N.Y. 2009).

EC Considers Cross Border Interchange for New Debit Program

Visa, MasterCard, and the European Commission have been jockeying for over a year with respect to cross-border interchange fees. The EC's desire to spur on the introduction of the Single Euro Payment Areas ("SEPA") direct debit program may help bring about an agreed solution.

Interchange fees are charges paid by merchants to accept credit cards. Although these fees are imposed by the card systems, they do not compensate the systems for any service provided. Instead, they are passed on to the bank that issued the card to help support its card-issuing business. The EC has focused particularly on the charges imposed when a card is used outside the country in which it was issued.
Interchange fees have raised competitive concerns in the US and Europe for decades. Card systems have long argued that these fees are necessary to provide a sufficient return to card issuers. In recent years, however, that justification has been attacked on multiple fronts. A multi-district class action filed by U.S. merchants is on-going, and, in other countries, competition regulators have struggled to find viable alternatives.

The concern with interchange fees stems from two market factors. First, the merchants are generally unable to pass the fees on to card users. In some cases, merchants are legally prohibited from surcharging card transactions; in others card systems’ rules prohibit surcharging; and in any event, surcharging may not be practical for many merchants. Because merchants cannot assess these fees only on card users, they may simply increase their prices across the board. All consumers would thus pay higher prices to enable some to use cards. And, even those who use cards might not if they were required to bear the full cost of card use.
Second, system rules and competitive considerations require many merchants to accept all cards issued on the largest systems, Visa and MasterCard. As a result, individual card issuing banks within the Visa and MasterCard systems need not compete on interchange fees to attract merchants to accept their cards.

In the U.S., merchants have sought the right to surcharge and an injunction against card issuers setting interchange fees cooperatively through Visa and MasterCard. In other countries, regulators have 1) permitted surcharging and/or 2) limited interchange fees to an amount necessary to cover only certain costs of card issuing.
The EC recently found that MasterCard’s method of setting cross-border interechange fees was anticompetitive, holding that an open card system must limit interchange fees to the extent that they “contribute to technical and economic progress that benefits consumers.” The Commission has been investigating Visa’s fees as well. While MasterCard is fighting the determination against it, Visa has been seeking to negotiate an acceptable interchange fee with the EC.

The EC has likely entertained Visa’s efforts because it is struggling to determine an appropriate method of interchange fee setting. Although current fees may be supra-competitive, eliminating interchange fees entirely could result in an inefficient drop in card issuance.

Recently, the negotiations have been impacted by the EC's desire to encourage a European-wide direct debit system in which cardholders could 1)use cards across Europe and 2) have the cost of the transaction deducted directly from their home bank. The banks claim that they are reluctant to support the direct debit plan if a cloud of uncertainty continues to hang over the interchange issue. EC competition commissioner Neelie Kroes recently recognized the need for an interchange system to get the direct debit program off the ground. “It may prove necessary,” she said, “to have a multi-lateral interchange fee for cross border SEPA Direct Debits.” But she wants to limit those fees to the “very initial stage” of the program. Whether that will be enough for many banks to back the debit system remains to be seen.

Yet Another Card Data Breach

Photo by d70focus

Watch your credit card and bank debit statements carefully over the next few months. The New York Times reports that a major processor of card transactions (Heartland Payment Systems) has disclosed that unencripted data was "sniffed" by thieves over the past several months at the point in transactions where the processor asks for authorization from the issuer network (VISA, MasterCard, Discover, AmEx). Tens of millions of credit and debit cardholders are potentially exposed to card data theft and subsequent fraud.

Heartland has set up a website explaining what happened and noting that "Cardholders are not responsible for unauthorized fraudulent charges made by third parties." Recall that the Truth in Lending Act (TILA) § 133 (codified at 15 U.S.C. § 1643) shields credit card holders from liability for unauthorized charges beyond the first $50, and I suspect Heartland's release reflects the credit card issuer networks' near universal policy these days to waive even the first $50 of liability. As for debit card fraud, at least for consumer accounts, the Electronic Fund Transfers Act (EFTA) § 909 (codified at 15 U.S.C. § 1693g) provides more or less parallel protection, though with some complicated expansions of liablity for consumers who are not vigilant about reporting fraudulent activity. Though the Heartland release mentions only "charges" (not debits), I understand that the major debit processing networks have a similar "zero liability" policy for fraudulent debits, waiving the first $50 and perhaps the expanded liability, as well.

All of this does the victimized consumer little good, though, if s/he doesn't notice and report the fraud (either to avoid paying a fraudulent charge or to request a refund of a fraudulent debit). So watch your statements carefully, and be thankful we're not in Europe, whose laws generally do not protect consumer card users as generously as TILA and EFTA.

David Brooks on Economic Theory

David Brooks of the New York Times has of late been a big advocate of behavioral economics, as this column from October initially laid out. Last week, Brooks again raised his argument that the economic collapse has irreversibly exposed the flaws in classical economic theory:

Once, classical economics dominated policy thinking. The classical models presumed a certain sort of orderly human makeup. Inside each person, reason rides the passions the way a rider sits atop a horse. Sometimes people do stupid things, but generally the rider makes deliberative decisions, and the market rewards rational behavior.

While the classical model is hardly the quaint ancient history that Brooks' rhetoric suggests, I do agree with Brooks that the current crisis can be traced in part to a fantastical belief about both the nature of persons and of markets. It is also nice to see that others are moving toward acceptance that there may be a significant role for government and law to play in market regulation. It would have been much nicer to see that move occur prior to the complete meltdown of the economy, the destruction people's lives and livelihoods, etc. That's an argument for ex ante versus ex post regulation, I guess.

Even if the King is dead, I am less certain than Brooks seems to be that the natural successor to the throne is behavioral law & economics. Such a move could be seen as simply a mere substitute of a new mode of "mechanistic thinking" (to paraphrase Brooks' criticism) to address the problem. I guess it could be argued that the crisis has exposed the weaknesses not of one economic model for regulation, but of all economic models for regulation. But, if that is the case what are we left with? In any event, we are no doubt in the midst of a major shift in attitudes toward legal intervention into markets, and it will be interesting to see what insights behavioral economics has regarding solutions to the problems.

Banker's Cognitive Dissonance

Photo by darkpatator.

Jamie Dimon just doesn't get it. I suppose it's his job as CEO of JPMorganChase not to get the point about the need for reasonable mortgage modification to avoid unnecessarily wasteful foreclosures that are deepening (causing?) the current economic mess we're in. The Financial Times reported yesterday that Dimon strongly opposes--surprise, suprise--current bills in Congress that would allow bankruptcy judges to value claims secured by principal residences at the realistic, current value of the home, rather than the fanciful, contrived value on which the mortgage was based. This isn't the place for a drawn-out explanation of "mortgage strip-down," but suffice it to say that the current bills bring the treatment of principal residence mortgages into line with the treatment of other secured claims (it's actually more involved than this, but this is the takeaway point for non-specialists).

As a policy matter, thess bills essentially punish banks (and MBS securitization trustees and servicers) for unreasonably refusing requests for modifications of distressed mortgages (that in most cases help the banks/investors to avoid major losses in foreclosure). If the lending industry had responded to Congress and supported reasonable modifications before, these bills wouldn't be in the hopper. But these banker folks are now infamous for their unreasonableness (recall, these are the same rocket scientists who valued my home at a discount to actual recent sales prices for identical homes in my townhome association because the other places had been on the market too long!). Now, Dimon will have to lie in the bed that he and his like have made. One of these bills very likely will pass, probably the Durbin bill, behind which even Citigroup and other lenders have thrown their support.

Dimon invites us to feel sorry for the banks, whom this bill would put "at the mercy of the vagaries of the courts." This is ridiculous, as the bill does no such thing--the market value of the property defines the value of the bank's claim. There's no judge discretion or beating up on mortgagees going on here; it's simple market economics. And by the way, Dimon clearly has no problem with borrowers being at the mercy of the vagaries of the market . . . What goes around, comes around.

Dimon's main argument against this bill is the same old, tried-and-true argument that every economist/banker/fill-in-the-conservative-blank levels against any kind of consumer protection or market regulating legislation: it will make banks less willing to lend for fear that loans will be modified or destroyed in bankruptcy. For Heaven's sake, when will bankers stop making this utterly ludicrous argument. First, perhaps a bit less lending is exactly what the doctor ordered, at least less lending to the droves of people who should never have received loans on the terms that these banks and brokers foisted on them in the past several years (leading to our current predicament). Second, no amount of consumer protection has ever inhibited banks from lending, either here or in other countries, even after banks have made their "sky is falling" arguments before passage of legislation (see, e.g., the broad-ranging adoption of consumer bankruptcy in Europe over the past 20 years--lending certainly hasn't ground to a halt there!). Finally, the Durbin bill (as amended in the deal to secure Citigroup's support) applies only to mortgages already existing--not to prospective mortgages. This tired argument about "we will be hesitant to lend if you pass this law" is totally off the mark with respect to the Durbin bill.

My favorite comment: Dimon warns that passage of the bill will "lead to an increase in personal bankruptcies." Well, no @#$%, Sherlock! That's the whole point. We wouldn't need more bankruptcies if the bankers would act reasonably in dealing with the foreclosure crisis, but since they've amply demonstrated that they're incapable of dealing with it responsibly, Congress is stepping in. This is like criticizing the release of a new cancer drug for fear that it will lead to more doctor visits by sick people. Indeed!

Oops!

Law.com reports that Bank of America and Citibank stand to lose in excess of $51 million because Bank of America, acting on its own behalf and as Citibank's agent, terminated both banks' financing statements against the former law firm of Heller Ehrman in August 2007, some 14 months before Heller Ehrman filed bankruptcy. As we all know, UCC § 9-317(a)(2) and 11 U.S.C. § 544(a)(1), collectively, generally give a bankruptcy trustee (or a debtor-in-possession) priority over any security interests that were unperfected when the debtor filed bankruptcy. That's bad enough news for Bank of America's and Citibank's apparently unperfected-at-filing security interests. (Bank of America and Citibank have argued that an October 2008 "correction" revived their perfection well before Heller Ehrman filed bankruptcy and had the effect of making the banks perfected when Heller Ehrman paid them. Heller Ehrman counters that the "correction" did not cure the banks' lapse in perfection.)

But, wait, it appears to get worse. Less than 90 days before Heller Ehrman filed bankruptcy, and well after Bank of America terminated its and Citibank's filings, Heller Ehrman paid the banks $51 million of the firm's outstanding debt. Under 11 U.S.C. § 547(b), the payment looks like an avoidable preference, which the banks may have to refund to the bankruptcy estate.

With Pillsbury Winthrop Shaw Pittman on one side and Greenberg Traurig on the other, this dispute figures to be hotly contested and should be interesting to follow.

(Hat tip to Scott Burnham.)

2009 AALS Commercial and Related Consumer Law Section Officers

At last week's AALS annual meeting in San Diego, those attending the AALS Section on Commercial and Related Consumer Law's Friday business meeting voted our own Keith A. Rowley (UNLV) to be the section's chair-elect and fellow blogger A. Brooke Overby (Tulane) to be an at-large member of the section's executive committee. Amelia H. Boss (Drexel) is the new section chair and immediate past chair Kevin E. Davis (NYU) and at-large members Neil B. Cohen (Brooklyn) and Gregory E. Maggs (GWU) round out the executive committee.

UPDATE: The AALS informed us that Amy Boss was ineligible to serve this year because Drexel is not yet a member school. Consequently, Keith Rowley becomes chair a year earlier than planned, Greg Maggs is the chair-elect, and Emily E. Kadens (Texas) is our new at-large member.

Economic Trouble Hits the Little Blue Guys?

Photo by unfolded

This post is both silly and serious. On the silly side, I just couldn't resist noting that the W$J today announced that Smurfit-Stone has warned its lenders that it may seek bankruptcy. I can't see that name without thinking of the little blue guys of my youth (I had a small collection of the cute little characters). On the serious side, Smurfit is a sort of bellwether for the economy, as it produces cardboard boxes of every size and shape. When consumers stop buying things that go in boxes, companies like Smurfit are on the other end of the chain of businesses that suffer. When the pain reaches that far, we know we're really in serious economic trouble (as if that weren't clear already). Brace yourself for many more announcements like Smurfit's in coming months.

Bracing for the Wave of Retail Bankruptcies

Photo by jurvetson

I don't want to seem too gleeful about this, but we insolvency professionals are likely to be in the spotlight for a while during this Year of the Bankruptcy. I'm surprised it took so long for the W$J to come out with the first such story of 2009, but today's Marketplace section (on B1) announced a Wave of Bankruptcy Filings Expected From Retailers in Wake of Holidays. The current period, unprecedented in so many ways, will likely see an unprecedented and massive restructuring of the U.S. retail sector. Much of the activity will be liquidations, it seems to me, whether out of bankruptcy altogether, under Chapter 7, or even in liquidating Chapter 11 plans. Our unsustainable reliance on out-of-control consumer spending seems to have met its demise. Or maybe this will be a temporary lull, with consumers pulling out the stops once the job market rebounds. One way or another, 2009 will be a rough one for many. Here's hoping that this year can also be marked as the Year of the Great Recovery.

Obama Speech at George Mason on Economy

In case you missed it (especially for those at the AALS Conference), here is Obama's speech today at George Mason University on the economy. Obama calls immediately for an American Recovery and Reinvestment Plan (the "Plan"). The Plan will create up to 3 million new jobs for Americans over the coming years, focusing on investment in energy, education and healthcare to help America remain competitive. The Plan will include infastructure projects, tax cuts, and extension of unemployment benefits. Obama acknowledged the cost of economic recovery, but stressed greater accountability for government spending.

Obama asked people to consider not what is good for me, but "what is good for the country my children will inherit." A very good speech. Now, hopefully action is not far behind. What exact form that action will take is probably the biggest unresolved question. There is sure to be political wrangling about what projects are most important and the cost.

Part I:

Part II:

— JSM

University of Memphis Law Review Spring Symposium 2009

Rethinking the U.S. Regulatory Structure Governing Financial Institutions: 21st Century Solutions for a 21st Century Marketplace
Friday, February 20, 2009
8:00 a.m. - 5:00 p.m.
The University of Memphis, FedEx Institute of Technology
Co-Sponsored by:
and
First Horizon National Corporation

"The U.S. regulatory structure reflects a system, much of it created over seventy years ago, grappling to keep pace with market evolutions and, facing increasing difficulties, at times, in preventing and anticipating financial crises."

-The Department of the Treasury Blueprint for a
Modernized Financial Regulatory Structure
(released in March 2008)

The University of Memphis Law Review is pleased to announce its annual Spring Symposium to be held at The University of Memphis in Memphis, Tennessee. This symposium will explore the myriad legal and policy issues surrounding federal regulatory reform governing financial institutions. In early 2008, the Department of the Treasury issued a Blueprint for a Modernized Financial Regulatory Structure, which is the most recent of a long line of careful studies addressing the Federal regulatory structure applicable to financial institutions. The Blueprint was a response to mounting concerns about the performance, safety and health of financial institutions. It was intended to modernize government’s approach to preserving market stability, enhancing U.S. competitiveness in the global marketplace and promoting consumer protection.

Since the Blueprint's release, turmoil in world financial markets has grown significantly. The U.S. economy is in the midst of perhaps its most severe contraction since the Great Depression. Many in government, business, the press and the academy blame the current financial crisis on excessive governmental deregulation of financial markets. Others point the finger at negligent regulators, meddling political players, faulty assumptions and underlying structural failures. Regardless of where fault can best be rested, it is clear that today’s regulatory framework for financial services needs serious reexamination and perhaps deep reform, both to correct current ills and to guard against future problems.

This symposium will focus on a broad range of topics concerning the short and long term goals of and approaches to financial services reform, including those set forth in the Blueprint and others surfacing since it was released. Presenters will discuss their ongoing scholarship in areas pertinent to today’s financial markets crisis. The specific topics of that scholarship (risk-based regulatory objectives, the impact of unfolding Federal bailout legislation, accounting and financial reporting, consumer protection) will afford springboards throughout the day for broader-ranging discussions and commentary by panelists.

CLE Credits

The Law Review has requested CLE credit approval for 4.5 general hours from Tennessee, Mississippi, and Arkansas.

Registration Fees
MBA Member: $200.00
Non-MBA Member: $260.00
Governmental Attorney: $140.00
Non-attorney or no CLE needed: $140.00

The registration fee covers the conference sessions, parking, breakfast, and lunch.

For more information please contact:

Jera L. Bradshaw
Symposium Editor
The University of Memphis Law Review
E-mail: jlbrdshw@memphis.edu
Telephone: (901) 581-3539

— JSM

More trouble for home refinancing?

Thanks to the Federal Reserve, interest rates are lower than ever. That would normally lead to home owners refinancing home mortgages in order to lock in lower rates, lower payments and (for some) to keep their homes. A good thing for a troubled economy with some homeowners in trouble. But, as Jason Kilborn has warned us, not so quick (see Refi No Good --- A Lesson in "LTValuation"). Home prices in twenty American cities dropped 18% in October from the last year according to the S&P/Case-Shiller index . Unfortunately, the twenty city index has been dropping since January 2007. All of this means bad news for homeowners who are seeing the value of their home drop each and every month.

So, what does this really mean? Well, we are considering refinancing our home in Boston where the new October 2008 index is 159.17. The last time the Boston index was about the same level was February 2004. As it turns out, this was when we purchased our home. In September 2005, the highest index was reached in the Boston Metro area at 182.45. The current level is almost 13% off the highest point reached on the index. But, we might also expect the numbers will continue to decline for some additional time, representing further erosion of home values. How bad the news is depends on where you live and when you bought your home. Some cities like Miami, Phoenix and Las Vegas have suffered the largest declines on the index, whereas cities like Charlotte, Dallas, Cleveland and others have only felt modest changes.

For us, who knows? Our Boston home is not worth what it was in 2005, but the drop is not as bad as some cities. Like Jason's refi gone wrong, the discretion of appraisers will dictate whether refinancing makes sense. The problem for homeowners is that they may not be able to take advantage of lower rates. For more on this, Urban Deveopment Secretary Steve Preston recently spoke on the Future of the Housing Market.

— JSM

21 Dumbest Business Moments of 2008

Well, I am sure that we all can add to this list, but Fortune just came out with its "21 Dumbest Business Moments of 2008." You betcha' . . . those auto execs are leading the way with the first and second picks. Only surprise is that those crazy execs from AIG with their $440,000 resort trip did not make the list at all (see Greed is good . . . well maybe not always).

Here they are (from Fortune):

1) Detroit execs flying to D.C.: The chief executives of General Motors (GM,Fortune 500), Chrysler and Ford spark outrage when they fly their corporate jets to Washington D.C. to beg Congress for a multi-billion dollar bailout. More

2) Detroit execs driving to D.C.: Given a second chance after the private-jet fiasco to plead their case before Congress, the Detroit 3 take to the road. More

3) Henry Paulson's initial $700 bailout proposal: All of three pages, the Treasury Secretary seeks carte-blanche access to government funding with scant details on how or where the money will be spent. More

4) The final bailout: When Congress is done with it, the measure balloons to 451 pages and is loaded with pork barrel spending - including, unbelievably, a cut in taxes on toy arrows and an extended tax break on "wool products." More

5) The Mozilo e-mail: The now former Countrywide CEO mistakenly broadcasts his thoughts on a customer's plea for help with a home loan. More

6) The iPhone 'I am rich' app: Eight people download a $999.99 screen-saver for Apple's (AAPL, Fortune 500) iPhone. More

7) Paulson's 'bazooka': The Treasury Secretary tells Congress in July he thinks he
won't actually need to use the funds he's requesting to support Fannie Mae and Freddie Mac. More

8) Tough talk from Fannie Mae: In May, CEO Daniel Mudd says his company will "feast" on weakened competition in the mortgage market. More

9) Scandal at the Department of Interior: The agency's Inspector General finds that staffers were taking gifts, having sex and engaging in illegal drug use with employees of some of the oil companies they oversee. More

10) GM's Lutz on global warming: The General Motors exec behind the Chevrolet Volt electric car hands environmentalists another twig to beat GM with when he reportedly calls global warming "a crock of sh-t." More

11) Hope
for Homeowners - er, not really: Congress passes bill to keep hundreds of thousands of troubled borrowers in their homes. A whopping 321 applications get filed. More

12) Ban the short-sellers: To head off a market onslaught,the SEC outlaws short-selling on 799 financial stocks. Remarkably, investors find other ways to punish the group and the sector sinks another 25 percent. More

13) McCain on economics: On the morning of Sept. 15, as Lehman Brothers declares bankruptcy, Republican presidential candidate John McCain declares "the fundamentals of this economy are strong." More

14) Obama's tough talk on Nafta: A top economic adviser privately assures Canadian officials in February that his candidate didn't really mean it when he threatened to
renegotiate the North American Free Trade Agreement. More

15) Microsoft bids for Yahoo: The $31-per-share offer represents a 61% premium over Yahoo's YHOO, Fortune 500) price at the time of the February overture. More

16)Yahoo turns down Microsoft's offer: If Microsoft's (MSFT, Fortune 500) offer for
Yahoo was wrong-headed, Yahoo's opposition to it was downright bone-headed. More

17) The Madoff miss: As news reports reveal that the Securities and Exchange Commission had probed Madoff and his New York City investment firm over the years, chief Christopher Cox cops to the embarrassing screw-up. More

18) Oil speculator scapegoats: Are speculators to blame for $37 oil too? More

19) Steve Jobs' obit: In August, Bloomberg News accidentally releases an obit for Apple CEO Steve Jobs, who - despite a well-publicized brush with pancreatic cancer - is still alive and kicking. More

20) Phil Gramm and the "nation of whiners": In early July, as the financial crisis spreads to Main Street, McCain campaign co-chair and former senator Phil Gramm appeals to voters and their economic anxieties by calling them a "nation of whiners" and dismisses a troubled economy as a "mental recession." More

21) Bill Miller comes up short: The fund manager's contrarian bets on Bear Stearns, AIG and Freddie Mac cost his investors plenty. More

— JSM

More on University Endowments

The financial condition of university endowments is continuing its downturn. About a month ago, I blogged about the troubles that many universities were facing (University Endowments and the Financial Crisis). Things have gotten worse. As one of our commenters mentioned, Vanderbilt University, which had reported a positive return, may be in the same condition as other universities financially. At the very least, universities are cancelling bigger projects widely. Over at Harvard, this are equally grim (see Pushkin Comes to Shove for Harvard Faculty as Endowment Plunges). Yeshiva University anticipates that its losses from the Bernard Madoff scandal alone will top $140 million.

Endowments provide scholarship aid to students, fund faculty salaries and projects, support research and facilities. Like all investments, university administrators must exercise due diligence in the use of endowments funds. Should universities be in a better situation in this time of crisis than investors in general? Vanderbilt seems to think so according to its "Giving to the Future" endowment brochure. In it, Vanderbilt emphasizes that with "careful investment and adherence to sound financial principles, the endowment will continue to grow and support Vanderbilt, now and in the future." My suspicion is that that most universities ascribe to the same standards.

Have universities met this standard? It seems not. Over at Yeshiva, university trustee and chair of the investment committee J. Ezra Merkin resigned in the fall out from the Madoff hedge fund losses. Jim Chen wrote earlier this week criticized the "cowboy philanthropy" approach to charitable gifts that does not seriously consider duties of stewardship (see Curtains on Cowboy Philanthropy: a Cruel Lesson From the Maddoff Scandal). While we reflect on the changes that must be made to the financial industry as a whole, we must also take a closer look at university investment practices that allowed them to sustain the level of losses that have occurred. Sure, even careful investors took heavy losses during this severe downturn. But, universities must also ask whether in their hurry for new buildings, research projects and greater prestige, they also sacrificed sound financial principles that would have seen them better through this crisis. Years of healthy returns on investments may have lured ordinarily careful universities into more risky investments. Recovery will be slow, but will we make better decisions in the future?

— JSM

Why Are Credit Card Issuers Undermining the Economy?

Photo by SqueakyMarmot

More evidence that the financial sector is squandering the hard-won rescue funds from Congress: Not only are banks not lending to rejuvenate business, especially to the small-business backbone of the American economy, they're making existing loans rapaciously expensive for good borrowers. This can have no other effect than to drag down our struggling economy further. The story linked above observes that the banks' lame excuse for raising rates on small businesses and individuals is a vague reference to "economic reasons." What reasons? That the banks need more money from good risks because they've so messed up their investments in bad risks? I can't believe Congress hasn't jumped on this kind of thing more aggressively . . . yet.

The idea of nationalizing the banking sector is sounding better and better. The W$J reported yesterday that regulators have become more involved in internal strategy for struggling Citigroup. Perhaps this (and the FDIC's role in managing IndyMac's troubled mortgage portfolio) will be a model for the future. Even if you believe that "Socialism" is bad, some form of level-headed government oversight HAS to be better than the foolishness we're seeing from these banks.

AALS Workshop on Transactional Law

You may want to mark your calendars for next June's AALS Workshop on Transactional Law, June 10-12, in scenic Long Beach, California. If you go, keep your eyes open for flying buses and '67 Shelby GTs. (Both scenes are set in or entering Long Beach; and yes, the dialogue in the second one is in Espanol.) The workshop is part of the AALS Mid-Year Meeting. Program details are not yet available on the AALS web site. However, the November AALS News provides the following description, as well as a list of topic and speakers and registration information that you can access by clicking this link.

“Transactional law” refers to the various substantive legal rules that influence or constrain planning, negotiating, and document drafting in connection with business transactions, as well as the “law of the deal” (i.e., the negotiated contracts) produced by the parties to those transactions. Traditionally, the law school curriculum has emphasized litigation over transactional law. However, many modern lawyers serve corporate clients, and a significant percentage of lawyers engage in some form of transactional practice. Hence, law schools must place greater emphasis on training law students to be transactional lawyers, and should support law faculty engaged in scholarship focused on transactional law. To this end, in 1994, the AALS held a workshop on the transactional approach to law, which sparked experimentation and innovation in teaching and scholarship related to transactional law. Since that time, there have been significant developments in transactional law. This Workshop not only will take stock of those developments, but also will enable participants to gain some in-depth perspective regarding the relative benefits and drawbacks of those developments.

Law schools have attempted to respond to the demand for increased transactional training in a variety of ways, from integrating transactional law into traditional law school courses to developing stand alone “Deals” or “Business Planning” courses. A number of law schools have developed innovative programs in transactional law. This Workshop will enable participants to discuss specific methods of teaching transactional skills with an eye towards ferreting out best practices. Should professors interested in teaching transactional law focus on substantive law, “transactional skills,” (i.e., planning, negotiating, and drafting), economic or other theories of business transactions, or all of the above? Should transactional skills be taught in separate courses or integrated into substantive courses? If taught in separate courses, should such courses be part of the first-year curriculum, integrated throughout the three years, or focused on the upper-level curriculum? How do you modify or supplement the traditional case method to teach students useful transactional skills? The Workshop also will explore the challenges and benefits that arise for those who write or would like to write transactional scholarship. And as initial matter, the Workshop will address how best to define “transactional scholarship” in a way that accurately captures the potential breadth and depth of transactional law, and how transactional scholarship differs from traditional legal scholarship.

The Workshop also will explore best practices for writing scholarship in this area, including methodologies for researching the legal, financial and practical effects of various corporate transactions. The Workshop will feature concurrent works-in-progress sessions, enabling participants to exchange ideas and insights regarding new scholarship related to transactional law.

One important goal of the Workshop is to bring together faculty from different doctrinal areas of law, including faculty who teach in the clinical setting. Transactional law touches many substantive areas of law, and it is closely identified with bankruptcy, business associations, contracts, commercial law, intellectual property, labor and employment law, securities regulation, and taxation. The Workshop will provide a unique opportunity for faculty members to make connections between their primary fields and transactional law, and thus should appeal to a broad spectrum of scholars and teachers.

Dick Speidel Tribute at AALS Annual Meeting

Northwestern University School of Law and the University of San Diego School of Law are hosting a reception at the AALS Annual Meeting in San Diego on Friday, January 9, from 6:30 to 8:30 p.m. in the Warner Center Room, 4th floor, south tower of the San Diego Marriott Hotel & Marina, honoring the career of Richard Speidel, who passed away this past semester. Dick was a major figure in contracts, commercial law, and international arbitration.

A short program, featuring remarks by Professors Jim White (Michigan) and Bob Summers (Cornell), Dick's long-time collaborators, and Deans Kevin Cole (San Diego) and David Van Zandt (Northwestern), will begin at 7:00 p.m. The organizers will also videotape remarks from those who knew Dick or his work and will provide a copy to Dick's family.

Hurray for Fannie!

Fannie Mae has announced that tenants will be permitted to stay in foreclosed homes. A nice touch during the holiday season for sure. Imagine being a paying tenant who gets an eviction notice at the holidays. The hassles of moving makes me shudder. Moving also adds moving costs, new security deposits and perhaps increased rent to the budgets of many families in low-income apartment complexes that are foreclosed.

Here enters Fannie Mae the landlord. Fannie Mae will execute new leases with the paying tenants in foreclosed properties, who would otherwise face eviction. Perhaps I am missing something here, but in light of the current market, this is long overdue. Normally, the government having all the headaches of a landlord (maintenance, rent collection, etc.) of these properties would not be ideal. Let's hope this isn't a long term solution. With plenty of vacant properties around, however, evicting paying tenants would seem to increase the losses that Fannie Mae would face. In many cases, these properties will be worth more with paying tenants than sitting vacant.

For now, at least the government should collect rent. Now I just wonder what kind of landlord will Fannie Mae be? Now, a bit of humor during these hard times is a good thing. Will Farrell's short on the "Landlord" comes to mind. For those of you with sensitive ears, don't push play.

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— JSM