Ideoblog

Goodbye Ideoblog, Hello TOTM

Yes, it's true. After more than six years of blogging on Ideoblog I've decided to take my act on the road, to Truth on the Market.  As I explain in my first post there, I expect that this move will not only unite me with a great group of market-oriented commentators, but also expand my reach.

I plan to continue all of the discussions I've had for the last six years at Ideoblog.  So this is not an end -- just a change of address. 

See you over at Truth on the Market.

The ballad of the conservative screenwriter

The WSJ has a story about a singer-songwriter who performs his big conservative hit song under a pseudonym with his face obscured by big shades and a Coors cap. His problem: he's also a Hollywood screenwriter.

"His dilemma is the dilemma of countless people in my life," says Andrew Breitbart, the conservative columnist and provocateur who runs a website, Big Hollywood, devoted to airing conservative grievances about Los Angeles. "You can survive here as a conservative, but it takes guile."

One person stunned to hear of Mr. Kahn's double life as a tea-party troubadour is top Hollywood record producer and Grammy Award-winner Walter Afanasieff. The two have worked on projects for years and are now midway through writing and producing an album for a young singer. "And I'm just finding out about this now? Oh my God, I'm getting chills hearing it," Mr. Afanasieff says, when informed of his friend's sideline. "I mean, he's a member of a huge, Democratic, liberal organization called the Los Angeles entertainment business." After digesting the news, he adds, "It's very wise he's going incognito." * * *

[Kahn] hates what he sees as Hollywood's core hypocrisy: "how it benefits so much from capitalism and bashes it at the same time."

I've explained that "hypocrisy" as artists' resentment of the capitalists who pay them.

Maybe someday they'll make a movie about a songwriter who bucked powerful forces of close-mindedness as he struggled to express his belief in freedom. Or maybe not.

Meanwhile, Kahn's colleagues are bashing capitalists at Cannes.

Corporate law scholars’ citations

Leiter's scholarly impact ranking in Corporate Law/Securities Regulation (Steve Bainbridge describes what it means). I offer it for what it's worth, as is, except for the bolding of one name.

Rank	Name	School	Total Articles Citing Name	Age in 2010
1	John Coffee	Columbia University	1500	66
2	Lucian Bebchuk	Harvard University	1060	55
3	Larry Ribstein	University of Illinois	960	64
4	Stephen Bainbridge	University of California, Los Angeles	850	52
5	Roberta Romano	Yale University	780	58
6	Ronald J. Gilson	Columbia University, Stanford University	770	64
7	Reinier Kraakman	Harvard University	760	61
8	Bernard Black	Northwestern University	730	57
9	Donald Langevoort	Georgetown University	720	59
10	Robert Thompson	Vanderbilt University	680	61
	Runners-up for the top ten
	Henry Hansmann	Yale University	640	65
	Mark Roe	Harvard University	620	59
	Lynn Stout	University of Califiornia, Los Angeles	610	53
	Stephen Choi	New York University	600	44
	Jill Fisch	University of Pennsylvania	600	50
	Highly Cited Scholars Whose Cites Are Not Exclusively in This Area
	Jonathan Macey	Yale University	1100	55
	Melvin Eisenberg	University of California, Berkeley	770	76

The Market for Conservation Law

Ribstein does environmental law! It's my latest paper. Here's the abstract:

This paper considers the extent to which there is, or should be, a market for environmental law. Conservation easements raise interesting issues for the law market because they resemble private arrangements through which property owners arrange their own property rights, and therefore arguably should be able to choose the law that applies to these rights. An important contribution of this paper is its treatment of a particular type of market for easement law – that is, a market for law unbundled from other attributes of the enacting jurisdiction. More generally, this paper adds to the literature on environmental law by showing how background legal institutions, including choice-of-law rules, can affect the law's movement toward efficient enforcement of contracts and property rights.

Those familiar with The Law Market will recognize this as an application of my general theory of jurisdictional competition to environmental law. Try it on and see if it fits.

 

The widening gyre of fiduciary duties

Today I bought a book from Amazon. I think I'll sue it for breach of fiduciary duty. You see, Amazon had a conflict of interest: while it was charging me for the book, it was planning to send some of the price to shareholders who collectively control the company. The more it charges me, the bigger the detriment to me, but the bigger the benefit to its shareholders.

Of course, I could always refuse to buy, and maybe I knew about the conflict all along, but still – it's a conflict isn't it? And therefore a breach of fiduciary duty?

Does this sound absurd? What about Goldman, which Senator Susan Collins suggested a couple of weeks ago had a duty to act in its clients', rather than its own, best interests. Of course Goldman has clients rather than customers. And we know the difference, don't we?

The L.A. Times' Michael Hiltzik writes that "one of the major problems with the state of our financial rules and regulations" is that "investment bankers and their professional cousins, broker-dealers, don't generally owe what's known as a "fiduciary duty" to their clients under federal or state laws." He seems to like a bill to fix this that was debated at a Senate hearing at which I testified two weeks ago.

Hiltzik is concerned that Goldman has been making so much lately from trading. But how is Goldman different from Amazon in my example? According to Hiltzik, the problem is that Goldman, in the infamous Abacus deal,

yoked its fortunes to one client at the expense of another. The firm's conflict of interest might have been evident to the buyers if they had been dealing in plain-vanilla securities, an SEC official said, rather than the tutti-frutti mishmash Goldman helped concoct.

Now, when you're a fiduciary, as Hiltzik notes, you're supposed to owe a duty which Justice Cardozo described as "not honesty alone, but the punctilio of an honor the most sensitive." Then you should have no conflicts.

So who's a fiduciary? I would say it's someone who delegates the kind of control to another that necessitates some judicial supervision, not a bank that is buying securities at arm's length from another bank.

Hiltzik and others, apparently including Jack Coffee who testified at the Senate hearing, seem to think that a fiduciary is anybody with a conflict of interest. That reasoning is rather circular: you owe a duty not to have a conflict ("punctilio of an honor") if you're a fiduciary, and you're a fiduciary if you have a conflict.

Hiltzik notes that

[n]ot everybody thinks a fiduciary standard will work. "Fiduciary rules are much too vague to have a deterrent effect," says Larry Ribstein, a law professor at the University of Illinois, who testified at the same hearing as Coffee. "They're too nebulous to apply across the board in a statute that applies to the spectrum of relationships" in the financial industry. He says that's particularly true if, as Congress is contemplating, you're going to impose criminal penalties for violations. "There you have a special need to be clear." Ribstein also contends that applying fiduciary standards to investment bankers would be solving a problem that doesn't exist. If Goldman Sachs withheld from its Abacus clients information it should have disclosed (as the SEC contends), that's fraud, and laws exist to punish it.

Coffee scoffs at my craven fear, telling Hiltzik that "any time you come up with a new statutory scheme you can imagine problems." Coffee gets the last word in Hiltzik's column: "[T]his is a way for the SEC to get a handle on the growing problem of conflicts of interest."

Well, call me a "chicken little" (as Coffee did at the Senate hearing), but when every "conflict of interest" becomes a fiduciary duty whether or not there's fraud I do see a growing problem – the loosening of anarchy upon the world.

Thomas not nominated!

I just noticed that I was the only blogger in America who hadn't posted on the Supreme Court today, and I just had to say something. 

So I thought I would note today's big surprise which hardly anyone has remarked:  No Thomas nomination! The judge discusses how he's taking the news.  Well, at least the media will not have to learn where Montana is.

So Act 1 of the play, in which the president pretends to consider diverse (i.e., non-Harvard/Yale) candidates, is over. Now we move to Act 2, in which the Senate pretends to consider the merits of the Kagan appointment.  This should consume much of the WGDB's summer. 

Wake me when it's over.

Hollywood and the capitalists

Last month I noted that Hollywood was fighting the establishment of a new movie derivative market, with an MPAA executive VP worrying about how such a market could tarnish "the reputation and integrity of our industry."

Well, Hollywood did indeed get a provision in the proposed financial reform bill to outlaw trading in securities based on motion picture box office receipts. The only other exception is for onion trading.

Felix Salmon writes that "the biggest losers [of this provision] will be the very film producers who lobbied for it."

[I]f the market got big enough, it would allow studios to easily hedge their investments in movies just by entering into a simple derivatives transaction. Studios could essentially sell contracts on their movies' grosses into the open market, and pocket the proceeds. * * * That kind of thing would be a lot easier, and a lot cheaper, than the studios' current methods of trying to hedge exposure and sell risk: the financing arrangements behind a typical Hollywood movie, with countless co-producers and incomprehensible accounting, make the average collateralized debt obligation look simple and transparent. * * *

So why is the MPAA lobbying for the provision? Salmon says

it is probably simply the age-old story of large, conservative institutions being averse to change. Top executives at the biggest studios may suspect that smaller and nimbler competitors would get more benefit out of such a market: it's easier to hedge a $10 million project than a $200 million one.

In other words, like a lot of the other regulation we're seeing, this is about established players opposed to innovation. After all, if you're a big, established business, the main thing you have to fear is the upstart whose new idea will put you out of business. So, for example, make it harder for small companies to raise capital or use new types of financial instruments.

My post last month suggested that Hollywood's traditional resentment of capitalists seemed to have something to do with the fight. But Salmon's explanation makes more sense. The film artists are just confused – they like innovators (e.g., Coppola's Tucker) and don't understand that it's the capitalists like Gordon Gekko who bring us innovation. Maybe they'll catch on that big entrenched companies lobbying for regulation would make better bad guys.

Morning at the sausage factory

Ah, nothing like watching new legislation being made (or, hopefully, not).

Arlen Specter decided he needed a piece of the Goldman/financial reform action. Alas, his subcommittee deals with crime and drugs – not a promising forum.

But fiduciary duties provided a possible hook. After all, it should be obvious to any senator seeking an issue and reelection that there oughtta be a law against Goldman's supposed double-dealing. Never mind that there already are lots of laws against fraud, all cited in the SEC's complaint against Goldman.

Then all we need is to make a breach of fiduciary duty a crime. After all, it should be obvious to any senator that we don't have enough criminal laws already, because if we did, people would not be doing bad things.

Then we need a hearing to produce evidence, or at least talk, to justify such a move. Where can we find people to argue that we ought to create a brand new federal fiduciary duty and impose jail time for its breach? Well, plenty of places. Consumer groups and labor unions will always send somebody over (in this case, Barbara Roper from the Consumer Federation of America, and Damon Silver of the AFL-CIO).

But if you want to be respectable, you also need a few academics. Today we had a full load.

UC-Irvine criminologist Henry Pontell testified that we not only need harsher criminal penalties for white collar crime, but also chief criminologists as officers of regulatory agencies.

Famed securities professor Jack Coffee endorsed Specter's idea. Coffee testified that we need a new fiduciary duty with criminal penalties. He criticized "Chicken Littles" who fear the worst from such a necessary and desirable fix.

Those scared little animals included me and Jay Verret, who testified for the defense. I discussed the ambiguity of fiduciary duties, their inappropriateness for the sorts of things investment bankers do for clients (drawing from my article on fiduciary duties), and how all these problems would be exacerbated by criminalizing the duties. Indeed, I said, it's not even clear we'd get more deterrence, since those subject to the duty would have little idea of what the duty covers. But they sure would stay away from anything innovative, because how would they know whether it's illegal?

Coffee responded that, well, we already have a fiduciary duty in the Investment Company Act and for investment advisers, and they haven't caused any trouble, right? I said, no, unless you count forty years of costly litigation and, finally, a Supreme Court decision, all without coming up with a meaningful standard or a plaintiff victory at trial. And nobody yet knows exactly what the fiduciary duty under the Investment Advisers Act entails.

Senator Specter (only two other committee members were sporadically present) asked me if these problems would be dealt with by the precise definition of the duty in the bill. Unfortunately, the bill isn't available except to a privileged few like Coffee who had worked on it. Fortunately I did have a few minutes to look at Coffee's testimony before the hearing in which he discussed the language. I noticed that the duty seemed to be one to act in the best interests of the customer. So I was able to point out that this is basically a broad fiduciary duty that shares all the problems I had testified about.

The hearing veered off into other Specter pet projects – reviving aiding and abetting liability (which is already criminal, so Specter couldn't do anything about that) and reversing Iqbal and Twombly. This discussion didn't get anywhere, this morning anyway. So many laws, so little time.

Finally, a few words about the remaining witness, Andrew Weissman – the former Enron prosecutor turned defense lawyer. He opined that the current financial crisis was no Enron, and we don't need more criminal laws. Specter understood how damaging this particular witness given his pedigree and used all of his prosecutorial skills to try to discredit him with a discrepancy between two statements he had submitted to the committee (reminder to self: never submit two versions of anything to an adversary).

In the end, a good time was had by all. I had my moment of fun jousting with the Senator from Pennsylvania. I suspect little or nothing will come of this. Which I suppose is the best thing that can be said of anything being done in Washington these days.

For those whose thirst for more knowledge about this hearing has been whetted by this blog post, here are links to the statements and the video of the hearing. Thanks to Gordon and Ted for the plugs.

Wall Street, fiduciary duties and jail time

Live in DC on Tuesday.

Here's the press release.

Goldman and materiality

Buffett on Goldman:

Instead of needing to be told that a hedge fund manager who suggested which bonds should form the underpinnings of the Abacus collateralized debt obligation was also short the bonds, the investors should have relied on their own due diligence, Mr. Buffett said. "If I have to care who is on the other side of the trade, I shouldn't be insuring bonds," he said.

Any questions?