Saturday, May 1, 2010

Learning the Right Lessons

As I mentioned on Monday, I'm looking for some good stories related to derivatives that will help people understand the hubbub over them a little better.

Fareed Zakaria's column on Goldman Sachs is a good place to start.  As you've no doubt heard by now, Goldman has been sued civilly by the SEC and its executive were grilled by the Senate Permanent Subcommittee on Investigations in the past couple of weeks.

Zakaria demonstrates that one doesn't have to opposed derivatives regulation to understand the dangers, however, inherent when one firm is made a scapegoat for an industry:
the rage surrounding the Goldman case can cloud our perspective and distort public policy. We're going through a familiar part of America's boom-and-bust cycle. Having been mesmerized during the go-go years, having unduly lionized and feted industries, firms, and people as they rode the wave, we now want to throw these people to the wolves. We need to step back for a moment and try to understand what happened and learn the right lessons.
Whether new regulations are warranted is best left to a blog dedicated to studying financial issues, but making sure our processes and methods of oversight are calibrated to learning the right lessons is of vital importance to all fans of good government.

Thursday, April 29, 2010

Senate Committee Hearing - The History of the Filibuster

On April 22nd, the Senate Rules Committee held its first of a projected series of hearings on the filibuster.  The hearing focused on the filibuster's history and evolution as a rule and practice.  Witnesses included Professor Professor Sarah Binder (George Washington University), Robert Dove (former Senate Parliamentarian), Stanley Bach (former Library of Congress specialist on Senate procedures) and professor Greg Wawro (Columbia).

Chairman Charles Schumer (D-New York) opened by calling the current practice a "strait jacket" that is increasingly making the Senate a body where 60 votes is needed to accomplish more and more rather than the traditional majority of members present and voting.  He made clear that this had occurred under both parties and that the purpose was to determine whether changes were necessary rather than assigning blame (noting that he had likely made many anti-reform statements when Democrats were in the minority).

His Republican counterpart, Senator Robert Bennett (R-Utah), however, committed himself to defending the filibuster, noting that it gave the minority a "voice" and served as a check against one party rule even when that party held the presidency and majorities in both houses of Congress.  He was joined in this sentiment by Senators Robert Byrd (D-West Virginia), Republican Leader Mitch McConnell (R-Kentucky) and Pat Roberts (R-Kansas).

Only Senator Tom Udall (D-New Mexico), a leading advocate of reforming the rules, called for reforming not only the filibuster, but other related rules as well.

The statement of members and witnesses can be viewed here as well as some video of the hearing.

Just a  few highlights:
Dove: the filibuster is very characteristic of the Senate's role in our government, which is to slow consideration of measures and ensure thorough deliberation before enacting laws.
Bach: until 1917 the Senate never provided means to limit debate.  The trend towards increased filibusters is part of a larger trend of other devices employed by members to wring concessions such as the "hold" (blocking nominations from being voted on), more contested "motions to procced," etc.  In the past, a filibuster required members to stay on or near the floor and precluded anything else from being done.  Today, a Senator just files a notice with the appropriate leadership offices and the Senate agrees not to move forward.
Wawro: today's filibuster is a different animal than the one historically employed by the Senate.  In the past a determined majority could wear down a filibustering minority.  Modern practice does not allow for this, making the filibuster less a tool of delay as in years past rather than the 60 vote super-majority requirement it is today.

 A few things we might conclude then:

* The filibuster is neither a constitutional mandate nor a deliberately designed provision to protect the minority as some would have us believe.  Rather, it seems to have developed organically under the Senate's rules, which provided no means to terminate debate.  Further, today's filibuster is different not only in quantity, but quality as well, and something past generations of Senators wouldn't have recognized.  Because its operations imposes less of an imposition on the Senate and its members, which means it may be used less sparingly.

* Even so, the 60 vote super-majority requirement of today's Senate may simply be the contemporary manifestation of the founder's intent and design that the Senate would ensure full consideration of measures and guard against hastily conceived laws.

* Given the other procedural trends, perhaps the filibuster problem is actually a symptom rather than a cause of the Senate's ills - one implication is that these hearings should be expanded to look at a broader range of Senate procedural issues.

Wednesday, April 28, 2010

The Citizens United Case

Perhaps no Supreme Court case since Bush v. Gore has engendered such dyspeptic rage at Citizen United v. FEC, a 5-4 ruling that held laws prohibiting independent expenditures by corporations advocating on behalf of a candidate's election to be unconstitutional.

It may seem unusual that corporations have "free speech" rights that extend to elections.  It seems that it is this proposition is behind much of the outrage.  If you have a problem with that, however, you should have gotten angry a long time ago when the court first stated that proposition.  That such a right extends to corporate spending on behalf of a ballot proposal was announced many years ago in the First National Bank of Boston v. Bellotti case.  Extending the reasoning of Bellotti to advocacy for a candidate doesn't seem like such a leap if you accept the court's reasoning in these prior cases.  This did mean reversing its decision in Michigan Chamber v. Austin, a case that, itself, was not terribly consistent with the Court's previous rulings in this area.

For our purposes, the question however is what has been the affect on our government?  So far, we've seen no evidence that corporations have any interest in availing themselves of this newly declared liberty.  Right now the big winners appear to be the portion of the Washington bar specializing in campaign finance laws.

Congress is getting ready to take up legislation that will provide transparency to efforts by corporations to finance independent campaigns for or against one candidate (Note: corporations and labors may still not actually donate $ to the campaign itself - the activity must be truly independent).  Interestingly, it's liberal groups, however, that are voicing concerns about having to disclose their donors.

We'll keep watching corporate activity here to see what the impact of the ruling is.  As an in-house corporate lawyer, my own guess is not a whole lot as companies are (a) loath to spend money on politics unless it directly affects its short term bottom line, and (b) very risk adverse when it comes to the resultant publicity.

Tuesday, April 27, 2010

Former "Law and Order AG": Too Many Crimes

When Ed Meese was Attorney General, he was caricatured by the press and the Reagan administration's political opponents as being insensitive to the rights of the accused.

Of course, Meese didn't help matters any when he famously stated that "if a person is innocent of a crime, then he is not a suspect."

Still, Meese was actually a highly capable public servant, and I recall the amazement of my fellow law students, who had been prepared to protest him, when Meese spoke to a packed auditorium and convinced the vast bulk of them of the need to be more sensitive to the constitutional protection of property rights in the early 1990s.

So, it may surprise many to learn that Meese's current concern with the criminal justice system today is that the criminal law it too hard on people:

America is in the throes of "overcriminalization."
We are making and enforcing far too many criminal laws that create traps for the innocent but unwary — and threaten to turn otherwise respectable, law-abiding citizens into criminals.

Meese cites as examples a 12 year old girl being prosecuted for eating a french fry in the DC public transit system, an elderly cancer patient being arrested for failure to trim her hedges, and a high school science student being taken into custody by the FBI for failure to affix a required sticker to a package containing his science project.

The problem illustrated by these cases is that we're criminalizing non-traditional activities.  The criminal law was once used to deter people from doing things we all knew were subject to the criminal law - such inherently bad things as murder, robbery and rape.  We could reasonably say that every citizen should know this, and had no excuse if they committed such an act because "ignorance of the law was no defense."

The same cannot be said today.  According to the American Bar Association we have criminalized over 3,000 offenses (just under federal law) and there's "no conveniently accessible, complete list" of them.

A website dedicated to these issues can be found here:

If I find some cogent criticisms of this proposition and movement, I'll be sure to note them.

Monday, April 26, 2010

The Congressional Debate Over Derivatives

I recall Congress debating derivatives several years ago.  Listening to members talk about them was painful.  One member even discussed them as if Congress was discussing mathematical derivatives (such as that above) and asked why Congress thought it could regulate mathematics.  Needless to say, nothing was done at the time.

With the financial crisis and the role that derivatives well publicized (if not totally agreed upon), it appears Congress is now ready to tackle them.

Derivatives (as in the financial type - no the mathematical) are simply agreements for party A to pay party B some money if something else happens (interest rates go up, the price of wheat falls, the dollar rises against the ruble).  For many parties, such as farmers and manufactures, its a useful tool to "hedge" against a risk that party doesn't want to bear.  In current parlance, hedgers are known as "end users" and are generally thought to be ok sorts of folks.  The other guys are the "speculators" or those who create them to speculate rather than hedge any risk that derives from their business operations.  These are mainly Wall Street types.

The main questions being debated: to what extent must derivatives be standardized and traded through exchanges (with the exchange serving as a middleman) rather than customized and traded "over the counter" directly between two parties?  Next, to what extend should financial institutions need to segregate their derivatives trading from other financial activities?

These topics are way to complex to do justice to them in a blog, but I'll try to post some links to useful sources for those who want to learn more soon.