Ideoblog

More on the hedge fund acquittal

I said yesterday that I would be posting more on the acquittal of the Bear Stearns hedge fund managers, but John Carney says it for me:

[W]hen taken in context, the evidence provided actually indicated that the men were engaged in an active and ongoing analysis of the shape of the market. They were evaluating different pieces of evidence from the market, some of which seemed to show that the market for mortgages was falling apart and some of which indicated that the markets were temporarily dislocated due to an investor panic over the popping of the real estate bubble.

We want fund managers to feel free to express doubt about their strategies, to openly debate new evidence. This case threatened to have a chilling effect on internal debates over fund strategies.  Hopefully this acquittal will restore the confidence in fund managers that juries will not jump to the conclusion that the private expression of doubt equals fraud if it is not disclosed to investors.

Unfortunately, our view on this may be too optimistic. The very threat of prosecution may be a deterrent enough for many, even if they think they would be acquitted in the end. The chilling effect of this misguided prosecution may not have been totally extinguished by today's acquittal.

This point extends beyond what managers are saying to what they're doing. Criminal law does not mix with ordinary business operations. We have to decide whether we like the comforting spectacle of "fat cats" being hauled before the bar when times turn bad more than encouraging risk-taking to promote the creation of wealth.

A win for the Bear Stearns defendants

The jury completely rejected the government's misbegotten prosecution of the Bear Stearns hedge fund managers. 

I expect to have more to say later about this case. 

Is law school worth it?

A couple of months ago I speculated that, despite everything, a legal education might be a worthwhile investment:

Look at it this way: Assume for illustration purposes that a legal education buys you an annuity of $25,000 (over and above wages without legal training) which can be expected to grow over a lifetime at .5% a year, with a 3% discount rate. Under these assumptions, a legal education has a present value of $1,000,000. At $50,000/year tuition plus career opportunity costs, this looks like a decent investment regardless of assumptions about the future of law. * * *

This post got a fair amount of reaction, which led to a clarification:

I meant to say that it is not "obviously" a bad investment despite the recent job problems of law school grads.  I would certainly like to see data that sheds more light on that issue. So far the media and blogosphere have been dominated by anecdotes that do not get to the basic issue I raised:  what is the lifetime economic value of a legal education?  And of course a legal education potentially has a value that is not reflected in my annuity analysis.

Well, Herwig Schlunk of Vanderbilt decided to take this on, in the provocatively titled Mamas Don't Let your Babies Grow up to be . . . Lawyers. Here's the abstract:

This essay treats a legal education as an investment, and asks the question of whether, based on known costs and expected benefits, such investment should be undertaken. The inquiry will necessarily differ from one potential law student to another. But for three posited "typical students," the investment is shown to be a bad one.

Professor Schlunk says in a footnote that the paper was inspired by my post:

As I disagree both with the numbers he [Ribstein] pulled out of the air, and with what he does with them, I pulled out my own set (which are at least slightly better supported) and subjected them to my own analysis.

Well, yes, my numbers were pulled out of the air. But they accomplished their purpose of provoking more analysis, and hopefully a continuing discussion of this important subject.

The fundamental flaw in event studies

Yesterday at the Illinois Corporate Colloquium Jonathan Klick presented his important paper (co-authored by Jonah Gelbach and Eric Helland) Valid Inference in Single-Firm, Single-Event Studies.

The paper discusses single-firm event studies, which determine the existence of abnormal returns (compared to a model of expected returns such as the capital assets pricing model) around a disclosure or other event. Such studies are virtually mandatory in securities cases to demonstrate a causal link between an allegedly fraudulent statement and investor losses.  They are also important in antitrust cases. Event studies generally are a staple of the finance literature. But how accurate are these studies? 

Well, the paper shows that the current standard methodology for performing single-firm event studies is, in the authors' words, "fundamentally flawed," and that "existing securities litigation practices appear to be inappropriate as a matter of basic statistical practice." 

Essentially what's happening is that single-firm event studies are determining the existence of abnormal returns against an assumption that the firm's returns are "normally" distributed under a bell-shaped curve. "Abnormal" refers to returns located around the "bell's" right and left sides. The problem is that returns are often not normally distributed, and you can't determine if the observed returns are abnormal if you don't know the shape of the curve. The paper proposes "a very simple but statistically sound alternative," the "SQ" test, which does not present the problem of assuming a normal distribution.

The paper concludes that "event studies as currently performed may be inadmissible on reliability grounds" under Daubert and Kumho Tire. Moreover, there is evidence that the flawed test is producing systematically anti-plaintiff results because it under-rejects the "null hypothesis" that the returns are normal. Specifically, it's mainly the more volatile stocks that are producing abnormal returns.

This already sounds pretty important. But the problem may touch not only single-firm event studies like those done in securities litigation, but multiple firm event studies such as those examining the effect of the passage of Sarbanes-Oxley. What's happening to the firms' returns may be correlated, again interfering with a normal distribution. Similar problems could infect even multiple-firm/multiple-event studies. In other words, it looks like a significant chunk of securities and antitrust cases and papers published in finance journals and law reviews are based on a fundamentally flawed test. This could be the finance equivalent of DNA evidence in criminal trials.

The discussion in the workshop and class touched on a wide range of issues:

• As a matter of policy, should we worry about the anti-plaintiff bias in securities cases? Behavioral finance suggests that investors may be over-reacting to disclosures of all sorts, true and false, which contributes to stock price volatility. Klick, et al, just provide more evidence of the unreliability of securities class actions by indicating that statistical fraud is a byproduct of volatility. My article Fraud on a Noisy Market suggests that we can minimize this problem by relying on a bright-line test of loss causation, as arguably supported by the Dura case. More broadly, maybe the anti-plaintiff bias just offsets more basic problems with fraud cases such as the circularity or "pocket-shifting" nature of fraud damages.
• The Klick et al paper raises basic questions about expert testimony. Judges and lawyers untrained in statistics have to rely on experts who are invested in their standard theories, or tied to one or the other side in particular types of litigation. Klick suggested that judges could appoint their own experts. But who?
• Can we do a better job of training lawyers and judges to deal with these problems? Require statistics in law school? Sounds like a good way to scare away applicants. Maybe require statistics in grammar school or high school. As Jon suggested, do the students really have to learn all the state capitals?

Anyway, this is important stuff. Start by reading the paper.

Is Delaware’s antitakeover statute unconstitutional?

This is the question asked by Subramanian, Herscovici and Barbetta. Here's part of the abstract:

Delaware's antitakeover statute, codified at Section 203 of the Delaware corporate code, is by far the most important antitakeover statute in the United States. When it was first enacted in 1988, three bidders challenged its constitutionality under the Commerce Clause and the Supremacy Clause of the U.S. Constitution. All three federal district court decisions upheld the constitutionality of Section 203 at the time, relying on empirical evidence indicating that Section 203 gave bidders a "meaningful opportunity for success," but leaving open the possibility that future empirical evidence might change this constitutional conclusion. This Article presents the first systematic empirical evidence since 1988 on whether Section 203 gives bidders a meaningful opportunity for success. * * * Using a new sample of all hostile takeover bids against Delaware targets that were announced between 1988 and 2008 that were subject to Section 203 (n=60), we find that no hostile bidder in the past nineteen years has been able to avoid the restrictions imposed by Section 203 by going from less than 15% to more than 85% in its tender offer. At the very least, this finding indicates that the empirical proposition that the federal courts relied upon to uphold Section 203's constitutionality is no longer valid.

The authors also suggest that the absence of case law since the trio of 1988 cases is attributable to the strength during that period of the pill. Now that the pill is weakening under pressure of increased shareholder activism, Section 203 becomes more important. As the authors say,

Twenty years of unexamined experience, then, might be explained by a historical context in which the pill, not Section 203, was the binding constraint on a bidder's strategy. But today Section 203 is becoming important once again. As it does, it seems worthwhile, if not essential, to examine this past experience.

I'm skeptical of the authors' unconstitutionality claim. Notably, Section 203 is part of the Delaware's corporate statute, and therefore an integral part of its regulation of internal corporate governance, like its jurisprudence on the poison pill. This is important because, as Erin O'Hara and I explain in The Law Market (p. 126, footnote omitted):

Although the U.S. Constitution probably does not forbid a state from regulating the internal governance of a firm that is incorporated elsewhere, it may confer some extra regulatory power on the incorporating state. In CTS Corp. v. Dynamics Corp. of America, the Court reasoned that "no principle of corporation law and practice is more firmly established than a State's authority to regulate domestic corporations, including the authority to define the voting rights of shareholders."     This "authority" in CTS allowed the incorporating state to regulate the governance of firms based in other states, consistent with the Commerce Clause, and to preserve a state corporate law provision notwithstanding a potentially preemptive federal law, under the Supremacy Clause.

Moreover, even if the Court were inclined to hold a provision of a state corporate statute unconstitutional, I doubt the Court would hold constitutionality hostage to the vagaries of the takeover market.

Finally, as an aside, one section of the paper particularly piques my interest. The authors explain the shift from unconstitutionality of the Illinois takeover statute in Edgar to constitutionality of the Indiana statute in CTS on the basis that the CTS Court

was clearly more receptive to state regulation of takeovers than the Court's reasoning just five years earlier. One likely explanation for this shift, at least in part, was the change in popular sentiment towards hostile takeovers. Stories of "corporate raiders" dismantling healthy companies for enormous personal gain dominated the business press during the mid-1980s. American competitiveness was faltering compared to Japanese and German manufacturers, and many blamed "two-tier, front-end-loaded, boot-strap, bust-up, junk-bond-financed" hostile tender offers. It is no coincidence that 1987, the year that CTS was decided, was also the year that Oliver Stone's Wall Street hit movie theaters. The villain was Gordon Gekko, a takeover artist played by Michael Douglas, whose infamous mantra "Greed is Good" became Exhibit A for those who wanted greater regulation of hostile takeovers. Three years later, Richard Gere played a soulless corporate raider in the even bigger Hollywood blockbuster Pretty Woman. Rather than going to federal prison for insider trading like Mr. Gekko, Gere found personal salvation in Julia Roberts, and business salvation when he promised her that he would build companies rather than break them apart.

I'm not sure exactly where the authors are going with all this. I think the distinction between CTS and Edgar is based on the internal affairs doctrine, as discussed above. But for what it's worth I have my own views on the role of film in shaping public policy on finance, including takeovers. I discuss both films in my Wall Street & Vine, and focus on Wall Street and its regulatory aftermath in Imagining Wall Street. I update all this to the current financial crisis in my recent How Movies Created the Financial Crisis. The bottom line is that I agree that films can have an effect on popular views, and accordingly on regulation. On the other hand, my research shows the anti-capitalist bias in films is fairly consistent. Accordingly, it's no more reliable as a test of the constitutionality of state takeover law than is the authors' data.

Update: Professor Subramanian responds:

Thanks to Professor Ribstein for his thoughtful post on our article.  As I've tried to explain in other forums (see, e.g.,), our article makes three fairly straightforward points:

1. Three federal district courts held in 1988 that Delaware's antitakeover statute must give bidders a "meaningful opportunity for success" in order to be valid under the Supremacy Clause of the U.S. Constitution.

2. These three courts upheld Section 203 because the empirical evidence available at the time showed that bidders were able to achieve an 85% tender in hostile offers reasonably often, but all three courts left open the possibility that future empirical evidence could change this constitutional conclusion.

3. No bidder in the past nineteen years has been able to achieve 85% in a hostile tender offer against a Delaware target 

Implicit in the posting above, and confirmed through private communications, Professor Ribstein does not dispute any of these three points. Instead, Professor Ribstein speculates about how a future federal court might assess Section 203 in view of CTS and the internal affairs doctrine. It is not obvious why this future assessment should be different than the three prior assessments, which all occurred post-CTS. In any case, my co-authors and I do not speculate in our article about what a future federal court might do; instead we simply observe: "[T]he empirical claim that the federal courts have relied upon to uphold Section 203's constitutionality is no longer valid. It seems possible that the federal courts would uphold the constitutionality of Section 203 on different grounds. But at the very least the constitutionality of Section 203 would seem to be up for grabs."

Will envy help kill Big Law?

ATL shows us how Goldman Sachs GC Greg Palm made $60 million between 2003 and 2009 – i.e., over $8 million/year. This would sound mighty good even to top partners in Big Law firms. So ATL says

Sullivan & Cromwell partners, eat your hearts out. Not only does Goldman GC Gregory Palm get to boss you around, he also makes more money than you do.

Two years ago I wrote an article for Forbes ("Lawyers Don't Make Enough") in which I favorably compared Goldman Sachs partner earnings to those at, say Wachtell. I speculated that ethical rules are preventing lawyers from getting bigger pieces of the transaction fee pie. The ATL comparison is more to the point, comparing compensation of lawyers to lawyers, not to investment bankers.

Perhaps Sullivan & Cromwell partners, after they're through eating their hearts out, will join with other lawyers in getting to work on the ethical rules that produce these disparities. This is just one of the forces contributing to what I've called The Death of Big Law.

Update:  The ATL post notes some questions about Palm's precise compensation, though none that would cast doubt on the general point made above.  

Amending SOX

Just as Sarbanes-Oxley is under siege at the Supreme Court, the House Financial Services Committee has decided to adopt an amendment to its Investor Protection Act of 2009 bill to exempt sub-$75 million companies from SOX internal controls reporting.

A Times editorial and Times columnist Floyd Norris are apoplectic, seeing a sellout of investors by politically vulnerable Democrats to corporate interests.

SOX was a misbegotten, inadequately debated, debacle from the beginning. I saw this as evident from the beginning, and after three years of theory and evidence. Still later, Henry Butler and I wrote a monograph detailing the SOX debacle. I've continued covering the Act on this blog, including this 2008 critique of a previous Floyd Norris foray into SOX-land.

Butler and my book recommends, among other things, exempting small firms from SOX (at 91):

SOX presents significant problems for small firms, since their compliance cost per dollar of capitalization is much higher than for larger firms. Moreover, SOX's disproportionate impact on these firms is entirely unwarranted, since the corporate meltdowns that led to it were a phenomenon of large corporations. To the extent that SOX addresses the problems in the latter, its provisions are not necessarily appropriate for small firms. * * * In particular, small firms may have far less need for extensive internal controls provisions throughout the organization. * * *

For some critical evidence of SOX's perverse effects on small firms, see Kamar, Karaca-Mandic and Talley.

The justifications for a small firm exemption are even greater now. Given evidence of SOX's negative effect on risk-taking (see especially Bargeron, Lehn & Zutter), an exemption targeting the smaller firms that incubate the economy, can be seen as a cost-effective form of economic stimulus. Moreover, with more financial regulation and "investor protection" on the way, SOX's regulatory costs are likely to cut even deeper on the margin.

Of course, as discussed in the book, SOX's problems run deeper than small firms, and there are good reasons for trashing the whole thing, or at least making it optional. But a small firm exemption is a good place to start.

Economics and greed

Does knowledge of economics make you greedy? Here's Wang and Murnighan, Economics and Greed:

Greed is a classic topic in human development (Balot, 2001; Robertson, 2001) and it inevitably affects many of our choices and decisions. Although greed is typically viewed as uniformly negative and reprehensible, we propose that people's attitudes and opinions about greed are actually subject to change. In particular, studying economics may help legitimize and even beautify greed. Previous research shows that economics education might make people more self-interested because self-interest maximization is central to most economic models (Marwell & Ames, 1981; Frank, et al, 1993). Because greed and maximizing self-interest are sometimes difficult to separate, conceptually or empirically, we propose that studying economics may make people view greed as potentially positive and beneficial. Two complementary studies support our proposition. Study 1 shows that students who are pursuing economics view greed more positively than students who are pursuing other majors and taking other courses. Study 2 indicates that positively priming greed can significantly increase people's positive attitudes and opinions about greed.

Of course, knowledge of economics helps you see the social benefits of business activity that society may prefer to characterize as greed. Maybe everybody should get this education.

State competition for hedge funds

Congress is reportedly considering legislation that would let states regulate investment advisors, including hedge funds, which manage less than $100 million. This would shift some funds from SEC regulation and require state registration of some previously unregulated funds.

Of course we're going to hear about a race to the bottom that boosts systemic risk. But funds do have an incentive to offer assurances to their investors and therefore to "bond" themselves by seeking responsible and expert regulators.

Perhaps surprisingly, one critic of state regulation is Richard Blumenthal, attorney general in the Connecticut, home of many hedge funds.

Current rules in Connecticut and New York have exemptions that many hedge-fund advisers exploit to avoid state oversight. Mr. Blumenthal said that if states are given more powers, Connecticut will likely have to revise its laws for "more-robust oversight and fewer exemptions."

Maybe Blumenthal's reticence isn't too surprising. Connecticut may fear having to enter a competition that could threaten its leadership.

According to the WSJ, critics "also warn that a patchwork of state rules could burden advisers that operate in more than one jurisdiction."

There's a solution to that: let each fund choose the regulating state, just as corporations can choose where to incorporate. Again, the market for hedge fund investments offers some protection against a race to the bottom. And consider the alternative: one size fits all regulation by the agency that gave us Madoff.

Buffett’s train set

So why did Warren Buffett spend $26 billion on a railroad (BNSF) – seemingly a rather unexciting target for a 31% premium. The WSJ reports that

Mr. Buffett is betting that in an era of high fuel costs, railroads will perform better than the trucking industry. More broadly, the investment is a wager on the long-term strength of the U.S. economy as it emerges from a prolonged recession. As U.S. commerce recovers, so too will demand to move goods around the country.

It's also nice that there's no Google of transportation waiting to replace railroads.

But Jason Zweig has another explanation:

Mr. (Benjamin) Graham taught Mr. Buffett that at the heart of the relationship between management and shareholders is a profound conflict of interest. Managers, Mr. Graham believed, will always want to pile up cash to protect themselves in case they make mistakes. But that cash belongs to the shareholders, who may be able to put it to better use than the company's managers. * * *

Because of Mr. Buffett's extraordinary skill at picking stocks and buying lucrative businesses, Berkshire consistently generates far more cash than even Mr. Buffett thinks he can put to productive use. * * *

Mr. Buffett would rather not resort to the simplest way of solving this problem -- paying excess cash out to shareholders in the form of a dividend. Since he owns roughly 26% of Berkshire's shares, a cash dividend would saddle Mr. Buffett with one of the largest personal-income tax bills in American history. That's not the kind of thing at which he likes to excel. Mr. Buffett's reluctance to pay a dividend leaves him with little choice but to buy big companies outright. * * *

Like Burlington Northern itself, Berkshire's shares aren't quite a steal. Mr. Buffett is putting tens of billions of dollars into a company that he thinks has only moderate growth prospects. That implies that the market as a whole isn't a steal, or he would have put the money elsewhere. But Mr. Buffett has built an investing bulwark -- and an industrial conglomerate. Berkshire is likely to survive any storm, but whether it can continue to beat the market by such wide margins is another story.

Maybe investors will come to recognize that even somebody like Warren Buffett can entail agency costs. One way to address these costs is to turn Berkshire into an uncorporation that promises investors greater access to the cash.

So if Buffett ever tires of Benjamin Graham (or wants to see Graham's lessons applied to modern firms) here is some reading I would suggest.

The law and economics of choice of law

Want the latest on the economics of conflicts of law? Erin O'Hara and I have it for you. Here's the abstract:

In this revised entry for a new edition of Elgar's Encyclopedia of Law and Economics we discuss the law and economics of conflict of laws and choice of law, focusing on the law in the US. We first consider choice of law when the parties have not effectively chosen their governing law by contract. We address four questions: (1) Why do courts ever apply anything other than the law of the forum? (2) If a court sometimes applies foreign law, is a rule-based or more modern standard-based approach to its choice preferable? (3) Why have so many states abandoned rule-based approaches in favor of standard-based ones? and (4) Is there any real practical difference between the First Restatement and modern approaches? We then discuss costs and benefits of enforcing parties' contractual choice of law provisions. We conclude that permitting parties to choose the governing law that best fits their transactions and future private disputes can enhance jurisdictional competition and help restore predictability to the conflict of laws problem. When states nevertheless wish to insist on the application of their own governing law, they should state that explicitly in statutes.

This is an important topic in our multijurisdictional world, and here's an opportunity to read all about it in one clear, concise little article.

And while you're at it, get our book on jurisdictional competition, The Law Market.

Did movies create the financial crisis?

Well, in a sense. Here's a summary of my argument, in How Movies Created the Financial Crisis (just out on SSRN):

Narrative makes sense out of reality and can forcefully persuade listeners to a particular point of view. Artists in general have a narrative of business which springs from their belief that at least some aspects of business are antithetical to art. Filmmakers add to this a resentment of the constraints capital places on their art. Film is particularly persuasive because of its vivid images and because of the consistency of filmmakers' anti-capitalist perspective on business. Filmmakers' negative portrayal of capitalists has helped to prepare the public to believe that capitalists - and not government, economic cycles, greedy people or business generally - caused the financial crisis. This will help the public accept a regulatory agenda built on this premise, specifically including the regulation of hedge funds.

Explaining Jones

Why did counsel for the defendant in Jones v. Harris, the mutual fund fees case, abandon on oral argument the reasoning of the judge who had supported its position? Todd Henderson has a plausible explanation:

Easterbrook believes that litigation against advisors claiming excessive compensation is socially wasteful, and his opinion tries to do away with these cases in all but the most extreme cases. This Essay * * * exposes the reasons why none of the parties nor the mutual fund industry agree with Judge Easterbrook. Obviously the lawyers on both sides benefit from litigation, which he is trying to end, but more interestingly the mutual fund industry rationally prefers the small tax on its profits that the current regime generates over the risk that the Supreme Court or, worse, the Congress might make matters much worse. This case is therefore a classic example where the narrow interests of the parties are not informative of the right result. This Essay shows why the Supreme Court should consider the interests of investors over the lawyers and the funds before reinstating a legal regime under which the plaintiffs have never won and that serves no deterrent function.

But if the Court considers investors' interests, would it get reversed by Congress? Is there a scenario here in which the investors win? Doesn't seem that way.

A standard forms approach to mutual funds regulation

That's my take on Jones v. Harris for the Conglomerate Masters forum.  Tune in!

Update:  Here's William Birdthistle's ringside view of the oral argument.

Jones v. Harris at the Glom

Usha Rodrigues has the background.  Tune in there and here for more on Sunday, in preparation for Monday's Scotus argument.

The unconstitutionality of the pay czar

Former judge Michael McConnell writes in today's WSJ regarding "Pay Czar" Kenneth Feinberg's fixing of compensation for executives at large financial firms:

Mr. Feinberg's ukase is the most prominent example (and not just by the Obama administration) of the exercise of power by an individual unilaterally appointed by the executive branch without Senate confirmation—and thus outside the ordinary channels of Congressional oversight. * * *

The Appointments clause of the Constitution, Article II, section 2, provides that all "Officers of the United States" must be appointed by the president "by and with the Advice and Consent of the Senate." * * *

There is no doubt that Mr. Feinberg is an "officer" of the United States. * * * [His] orders setting pay levels * * * have the force of law and are surely an exercise of "significant authority" pursuant to an Act of Congress. * * * That means his office is subject to the requirements of the Appointments Clause. * * *

[P]rovisions governing appointments * * * embody the Founders' conviction that all power under U.S. laws must be exercised by officers with constitutional authority.

The Founders * * * required Senate confirmation as what the Federalist Papers call "an excellent check" on abuse or favoritism by the president. * * *

The power to set compensation at large American businesses is especially subject to potential abuse, favoritism, arbitrariness, or political manipulation. * * * Because he is not a properly appointed officer of the United States, Mr. Feinberg's executive compensation decisions were unconstitutional.

Earlier this month I expressed similar sentiments about Geithner's pay czar:

Perhaps the worst aspect of this whole thing is the Obama administration's attempt to avoid political accountability by creating a "czar." Process is supposed to matter in a democratic system. This is, in fact, what's at stake in the PCAOB case. I wonder if the Supreme Court will have in mind the current administration's approach to governance when considering the constitutionality of a past effort to create an agency with executive power but not executive accountability.

Big Law tries to get bigger

If, as I've argued, Big Law is dying, then what explains Hogan & Hartson and Lovells's plan to create a US/UK megafirm?

Got me.

The WSJ explains that the merger would create "one of the world's largest law firms, with about 2,500 attorneys and $2 billion in annual revenue." I've argued that Big Law lacks a business model that binds property to the firm. If that's true of large law firms generally, then it would seem that it's likely to be even truer of a transatlantic firm with clashing cultures, notably including eat-what-you-kill vs. seniority-based compensation.

My guess is that the consultants think clients will pay premium prices to a firm that can provide integrated advice on global regulatory and antitrust issues. But in order for that to work, the firm has to keep all those lawyers working for the firm. The WSJ quotes Peter Kalis, chairman of K&L Gates LLP, as saying that the obstacles to the merger "boil down to . . . [n]ame, power and money."

Oh, is that all?

Think about what happened to other firms that have grown rapidly to become one-stop-shopping behemoths. Remember Brobeck?

So good luck to Sterling Cooper Hogan Hartson Lovells (or whatever the new firm will be called).

Notes from the nationalization of GM

Last June I talked about the nationalization of GM.

Today's WSJ has a progress report on the government's role in GM's recent business decisions:

• Reinstatement of a mining contract advocated by local politicians.
• Decisions as which dealerships to close.
• Dropping plans to produce a new subcompact car in China.
• Whether to give hauling work to nonunion contractors.
• Getting GM to participate in an environmental program that removes mercury from scrapped cars.

A GM spokesman says "being responsive to members of Congress while moving forward on our business plan is the best way to repay the nation's support." I suppose that's one way of putting it.

I'm shocked – shocked! – that the government would buy a company and then attempt to manage it. And I almost had a heart attack on learning that politics would play a role in these management decisions. Oh well, you live and learn.

 

Are law professors necessary?

Mathias Siems imagines A World Without Law Professors. Here's the abstract:

Inspired by Alan Weisman's book "The World Without Us" (2007) I analyse the thought experiment of a world in which law professors suddenly vanished. First, without academic teachers legal training would shift back to the legal professions. Purely professional law schools would provide legal training for future lawyers. This is feasible in both Common Law and Civil Law jurisdictions. These professional law schools can also be involved in a more general provision of legal education. In addition, non-law faculties of universities can take responsibility for teaching on law-related subjects. Secondly, I analyse the impact on legal research. Self-referential research would diminish. Doctrinal research would persist but it would be done by practitioners and the current oversupply would melt down. At universities legal research would continue but it would shift to related fields of social sciences and humanities. Thus, the threshold would be an "academic dinner party test": legal research would have to show that it is of interest for other academic disciplines. Overall, I would therefore expect some changes; however, legal education and research would not disappear. In some respects, one could even argue that without law professors the quality of both teaching and research may improve. The paper finishes with the implications for the current system.

Siems' thought experiment is no trivial exercise. I've argued that a key part of the law student job market – big law firms – is dying. Obviously this suggests that law schools need to fundamentally rethink their mission. Siems' idea of legal education melting into the universities they are only loosely connected with now is one possible future I also imagine in my article. What's really dying is the idea of law as an autonomous profession. The law-only school is going to go the way of the law-only firm.

US News impoverishes law students

Believe it or not, that's what the GAO says (HT ATL). According to a couple of the GAO's slides (printed in the ATL post), US News rankings, by emphasizing costly inputs rather than educational outputs, have forced law schools into a costly competition that raises costs for students.

As I've pointed out,

The US News survey is done by a private business. No law gives it monopoly power. It gets attention because it's earned it in the market. There's room in the market for multiple surveys of law schools * * *

So we should focus on flaws in the survey. * * *

More fundamentally, US News stresses inputs (resources) over outputs (success of students, faculty scholarship). This is particularly bad since academic institutions are notoriously bad at using resources. On the other hand, we can have some sympathy with measuring the measurable. And what should be the output measure? Counting faculty publications, or citations of these publications, or graduates' salaries?

Of course we don't know what the perfect measure is, which is why we have markets to sort this out. * * *

Saul Levmore has another take:

[The GAO Report] concludes that although some critics had claimed that accreditation standards were a major factor in the cost of law schools, "officials for more than half of the ABA-accredited schools we spoke with stated that they would meet or exceed some ABA accreditation standards even if they were not required." The report and the conclusion miss the point.

When we say, for example, that obesity is the cause of higher medical costs, we do not mean that with no obesity there would be no visits to the doctor. Rather, we mean that it is an important explanation for varying costs, or that it is a controllable cause of higher costs. * * *

[T]he costs that can be traced to competition * * * are there, for the most part, in the absence of regulation. If a school competes by exceeding 80% of the accreditation requirements, it might still object to having bookshelves that are not needed, assistant deans who fill out required reports, and faculty or non-faculty who are tenured not because the school thinks that tenure is the right way to attract talent but rather because tenure was required by the regulators. In this as in so many other things, it is marginal analysis that matters. On the margin, ABA regulations might raise costs; evidence that something else, like rankings or competition, matters more, is a bit beside the point.

In other words, we have two problems that are driving up costs: problems in the market for which there is no obvious solution, and for which it's dumb to blame US News; and ABA regulation that we can do something about. The GAO report, like a bullfighter or a pitcher with a crazy windup, wants to take our eyes off the ball. Let's not get distracted.

Anyway, this is all a short-term problem. Once the problems in the market for lawyers hit law schools, US News will be the least of their worries.