Ideoblog

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.

The costs of Geithner’s shell game

John Carney discusses the little matter of Tim Geithner's $13 billion mistake of judgment in the AIG bailout. The problem is that the bailout protected AIG's counterparties at par rather than at the substantial discount AIG had already substantially negotiated.

Carney figures the rationale was that the government

feared making banks take a haircut on the AIG swaps would leave them with insufficient capital. In short, it was a covert bailout of the banks. The biggest winners here include Goldman Sachs, which got $14 billion, as well as Societe Generale and Deutsche Bank.

Carney says it would have been better to "transparently bailout firms that needed the additional capital instead of doing it in an under-handed way."

Indeed, I've described Geithner's lack of transparency as a "shell game" where "the government subsidizes private equity companies to buy the assets at inflated values."

Moreover, there was good evidence at the time that the assets the taxpayers were paying for were, indeed, crap.

In the post just linked, I had a better idea:

Mark to market plus relief from capital requirements, as I've said. Either the capital requirements are of little use (my view) as long as the market knows the actual values, or rules that enabled the banks to game the capital requirements helped create this mess. Either way, we're better off suspending those requirements than helping the banks evade accurate valuation of the assets.

Unfortunately, Geithner decided that political expediency trumped honesty. What do you think the government would do to a private firm that made the same judgment?

Self-protecting from insider trading

John Carney has some advice for investors. My favorite:

The playing field in the market is never level. Investor confidence built on the idea that regulators can create a level playing field is no better than a con game. Instead of trying to foster investor confidence around this phony notion, the SEC should sanction anyone they find fooling investors into believing it. The truth is that the ordinary, retail investor is like the high school JV team playing against the New York Giants. You don't stand a chance if you try to beat them at their game of stock picking, forecasting and market timing.

The lesson: If someone tells you the playing field is level, get off their field and play somewhere else.

The (market) rise of the uncorporation

The WSJ has an investment recommendation:

Worried about a depreciating dollar, rising taxes and stingy investment yields? Try Master Limited Partnerships. MLPs are listed partnerships that typically invest in hard assets like oil and natural-gas pipelines. They pay no corporate tax and offer investors high cash distributions, most of which is tax-deferred. And their recent performance is hard to beat.

Yes, distributions are nice, for these and other reasons. See my Rise of the Uncorporation, particularly Chapter 8, which discusses publicly traded partnerships.

The trouble with criminalizing outsider trading

Gordon Crovitz, writing in today's WSJ, says that

the Galleon case is about what might be called "outsider trading"—trading by people who gathered information from insiders about company performance or operations, not trading by the insiders themselves.

The reason the U.S. government should tread carefully in criminalizing outsider trading is that markets run on information, analysis and the connecting of dots to determine when prices are too high or too low. * * *

Until recently, the vagueness of the insider-trading laws were more of an academic topic than a core issue for how markets operate day to day. In today's world of immediate, global flows of information, markets need greater clarity about how information can be gathered and used. The lesson so far is that knowing when insiders violate their duty is easier than knowing when outsiders go too far in bringing accurate information to markets.

Crovitz credits a particular academic, Steve Bainbridge, with this insight. I also pointed out last week that "[c]riminalizing insider trading doesn't just punish the bad guys who are caught, but deters perfectly legal and socially beneficial trading."

We keep hearing about how all the risk in markets demands more disclosure. Surely we cannot afford to clamp down on information. The government therefore better have some hot smoking guns that point to a clear roadmap of wrongdoing in the Galleon case, or drop it.