Less than the Least

As Obama, Clinton, and everyone else tout their remedies for the subprime crisis, I’m reminded of the old joke about a group of blind men who encounter an elephant. The man who grabs the elephant’s leg tells the others he has encountered a tree, the one who touches the trunk is sure it’s a huge snake, and so on. In the fall, subprime worries centered on the losses that banks were suffering, and the possibility that credit markets would seize up. Now the homeowners who are facing default are on center stage.

These parts are connected in ways that often get obscured.

Fed Chairman Ben Bernanke has now called on banks to forgive portions of the principal owed by struggling subprime borrowers, which suggests that a major intervention may be coming. As between jawboning (the Republican inclination) and a bailout (the Democrats’ leaning), I’ll take jawboning any day. But the third option, amending the bankruptcy laws to allow borrowers to reduce their mortgages, is, in my view, much superior to either, as I argued in a post last week.

Rather than repeat those arguments, I’ll simply add two additional points.

Shortly after I learned of Spitzer’s resignation, I was at dinner with
several Italian lawyers. At the table next to us at a lovely restaurant
near the Trevi Fountain sat the leading director of soft core porn
movies in Italy. (Note to wife: I didn’t recognize the director, my
companions did). The Italian lawyers were puzzled that resignation was
the obvious response to a sex scandal in the U.S. The Italian public
wouldn’t be especially alarmed about this kind of revelation, they said:
they expect it from their politicians.

Bill speculated several days ago that prosecutors’ use of criminal law to pursue the executives of firms that go spectacularly bust may often serve no other purpose than to discourage firms from engaging in the kinds of risks that make a market economy go. I for one think that this is a very real danger. Executives who commit crimes should be punished, of course, but often prosecutors seem to identify the targets in high profile cases first, and then start looking for criminal provisions to prosecute them with.

There are two problems with this, in my view.

Many of Bear Stearns’ biggest shareholders are screaming about its proposed sale to JPMorgan for $2/share. This is a good sign. It is important that shareholders bear the costs of the bank’s missteps in the subprime market. But their squawking also raises at least two questions: can they derail the deal?; and would Bear Stearns be better off in bankruptcy?

Hillary Clinton has just rolled out her most extensive recipe yet for addressing the subprime crisis. The plan, which includes $30 billion to purchase troubled mortgages and for foreclosure auctions, as well as a freeze on foreclosures and interest rates, is striking in two respects: 1) although the plan is wrapped in populist appeals to struggling homeowners (of whom we have many here in Pennsylvania), it seems nearly as attractive to big banks and other lenders; and 2) there’s nary a word about reforming the bankruptcy laws, a much more sensible way to help out homeowners. I suspect these two things may be related.

As the Bush administration begins its defense of the new Treasury Department proposal to revamp U.S. financial regulation, Democrats are arguing, rightly in my view, that the more urgent concern should be to directly address the mortgage crisis. Unfortunately, Democrats increasingly are coalescing around a proposal by Congressman Frank and Senator Dodd to pump billions of dollars into the Federal Housing Administration to guarantee new mortgages that would replace troubled borrowers’ current mortgages. Proponents cite the Home Owners’ Loan Corporation, which was set up at the outset of the New Deal, as shining precedent for the Frank-Dodd plan.

The HOLC certainly sounds like a remarkable governmental success story.

Almost a year into the subprime crisis, we still haven’t seen any major reforms. The Enron and WorldCom scandals six years ago, by contrast, prompted sweeping reforms in Congress and on Wall Street. Why the difference?

I increasingly think the most important difference is the lack of a clear villain– a person and company that serve as a posterchild for everything that is wrong and needs to be fixed with American finance.

Most of the commentary on Obama's decision to tap Senator Joseph Biden as his V.P. pick has focused on the foreign policy expertise that Biden brings to the ticket. But I think the implications for some of Obama's business reform proposals are at least as important.

Obama has suggested that he will support more federal regulation of corporations. And he has signaled his support for bankruptcy reform that would allow borrowers to write down the value of their mortgages in bankruptcy. He also has sharply criticized the major bankruptcy reforms passed in 2005, which made bankruptcy more difficult for consumer debtors.

Biden has been on the other side of most of these issues.

I may be over-reading the McCain-Palin op-ed in the Wall Street Journal on Fannie Mae and Freddie Mac this morning, but it seems to me to mark a sharp break from the Bush administration on the subprime crisis. Not on the bailout itself. Just about everyone seems to agree that bailout was inevitable, and that the question was simply when it was going to take place. The break, it seems to me, is in the proposals for mortgage lending going forward. The Bush administration has relied almost entirely on jawboning and voluntary measures. McCain-Palin seem to be advocating substantially more governmental intervention. They suggest that they would establish a minimum downpayment requirement for loans guaranteed by Fannie Mae or Freddie Mac, and would impose new disclosure requirements for derivative securities.

I wonder if this means we'll be hearing a little less about tax cuts in the next two months, and more about Teddy Roosevelt-style corporate and financial reform.

The government's dance with Lehman after having bailed out Bear Stearns reminded me of a game we used to play as kids. One kid would stand in front of another and fall backwards. The idea was that the kid in back would catch his falling friend. The Fed and Treasury are like the kid in back. Unfortunately, it's now completely unclear whether and when they'll catch an investment bank as it falls.

I don't mean to suggest the government should have bailed Lehman out. I don't think they should have. But they've managed to create a situation where it's almost completely uncertain whether the government will or won't step in. This is one problem.

But there's a second problem as well: the government is focusing too much on the wrong issue.

As Congress rushes to enact the Treasury's $700 billion bailout plan this week, Obama, McCain, and politicians of both parties are insisting that the bailout include restrictions on executive pay at the firms whose mortgage backed securities will be bought by the government. Some of the executives' pay packages are indeed outrageous, but trying to impose pay limits is, it seems to me, one of the worst ideas yet proposed.

Hank Paulson has argued that firms might refuse to participate in the bailout if restrictions on pay were a condition of involvement. Perhaps this is true, although I suspect that shareholder pressure would force even the most reluctant firms to join the bailout party. But restrictions are likely to have two other effects, both of them bad. First, firms who wish to attract high quality executives will attempt to evade the restrictions. If the restrictions are onerous, these evasions may well be abetted by sympathetic courts. This is exactly what has happened after Congress imposed restrictions on executive compensation in bankruptcy in 2005.

One reason the current financial crisis seems so mystifying is, I think, the absence of a simple, coherent story that explains what the crisis is about. The Enron and WorldCom scandals earlier in the decade could be distilled to a plausible story about greed and the failure of the accounting firms and other gatekeepers who are supposed to police Wall Street. With the current crisis, by contrast, three main narratives seem to be competing for attention. And each is deeply flawed.

The first, which has been offered by Senator Bernie Sanders and others, attributes the crisis to Wall Street greed, and demands that Wall Street be punished and ordinary Americans helped. Wall Street greed certainly is a major factor in the crisis, most visibly in the pushing of exotic, mortgage-related securities that now have come back to haunt many financial institutions. But the greed story has at least two problems.

I suspect I'm not the only one who feels vaguely guilty when I'm not thinking about or talking about or trying in some small, inept way to do something about the financial crisis. Everything else seems secondary. How can we go about our ordinary lives in a time like this?

Some of the most helpful answers I've heard come, as is so often the case, from C.S. Lewis. Speaking to university students at the height of World War II in an essay called "Learning in War-Time," he asked how they could continue studying "when the lives of our friends and the liberties of Europe are in the balance?" Lewis points out that, because times are never truly "normal," if we took the assumption that we should stop our ordinary activities when things are amiss to its logical conclusion, we would never engage in ordinary activities.

He then argues that the seemingly frivolous activities in which we engage are part of what makes us different from animals: people "propound mathematical theorems in beleaguered cities, conduct metaphysical arguments in condemned cells, make jokes on scaffolds, discuss the last new poem while advancing to the walls of Quebec, and comb their hair at Thermopylae. This is not panache: it is our nature."

We now have yet another switch in the Treasury's strategy for stabilizing the markets. Plan A with the $700 billion rescue plan was to use the money to buy some of the questionable mortgage-related securities that are held by the nation's troubled financial institutions. Treasury Secretary Hank Paulson now wants to take a direct stake in the banks, to buy stock rather than simply buy some of banks' assets.

The most obvious reason for the shift is that, unless the government overpays, buying a bank's questionable securities doesn't necessarily improve its balance sheet. It replaces one asset- the securities- with another one- cash. If the government buys stock, on the other hand, the cash directly increases both the bank's assets and its net worth, potentially increasing the likelihood the bank will remain solvent.

That's the good news. But there are at least two potential problems.

In their handling of the credit crisis, the Treasury Department and Federal Reserve have repeatedly been criticized for their lack of transparency. The decisions as to which financial institutions to bail out have been made behind closed doors, the complaint goes, and Treasury Secretary Henry Paulson's original plan for the $700 billion bailout was only three vaguely-worded pages long. But I wonder if this criticism isn't exactly backwards. It seems to me that the Fed and Treasury have been too transparent, and that this could be contributing to the crisis.

Take the bailout of Bear Stearns in March and the decision not to bail out Lehman Brothers six months later.

The most surprising development in the Big 3's campaign for a bailout has been the amount of resistence it's met. Surprising to me, at least. After all the money that's been committed to the financial bailout, I assumed the carmakers would get a sympathetic welcome in Washington. It's encouraging, in my view, that this hasn't happened. The best case for a bailout is a situation where the company simply has a cash flow problem and will be fine if it is given temporary funding. GM's problem isn't cash flow; it's solvency- too much debt and not enough asset value. That's precisely the kind of problem chapter 11 is designed to address.

One of the most intriguing questions is where GM will file for bankruptcy if that's where it ends up. Large companies generally have a variety of filing options. In recent years, most have filed in New York or Delaware, because these are the bankruptcy courts with the most sophisticated judges- judges who handle a lot of big cases. I suspect GM wouldn't follow this pattern. Both the CEO, Rick Wagoner, and the employees may think they'll get a judge more sympathetic to their plight in Detroit. If they file in New York or Delaware, on the other hand, they'll seem to be turning their fortunes over to Wall Street (New York) or corporate America (Delaware). Assuming the bailout falls through, look for Wagoner to portray himself as a champion of employees' interests, and to file the case in Detroit.

            The most frequent worry I’ve heard about the new administration is that President Obama will get swept up in the messianism surrounding his historic presidency, and he will take advantage of it to pass a vast legislative agenda that is already mapped out in his mind. This seems to me exactly backwards:  President Obama seems to be the one person who hasn’t gotten swept up in the messianism, and while he obviously has a few pet issues, he doesn’t seem to have a grand scheme in mind.  

Like just about every university, we recently had a  panel discussion about the financial crisis-- its apparent causes and possible implications.  The panel was moderated by the university president, Amy Gutmann, and I was one of five panelists.  For those who are interested, here is a link.  (For anyone who perseveres and actually watches, you'll notice that I'm at my best in the first ten minutes-- when I'm simply listening to the others, who know what they're talking about).

 Almost the only tool the government hasn’t seriously tried in its battle against the economic crisis is bankruptcy. Rather than bailout out Bear Stearns, AIG or GM, it would have made more sense to address their financial distress in bankruptcy. The most sensible strategy for addressing the foreclosure crisis is a proposed amendment to the bankruptcy laws that would let a homeowner write down her mortgage to the value of the house if the house is worth less than she owes.

In each case, an irrational fear of bankruptcy seems to be coloring people’s perceptions. 

A student emailed me this marvelous commentary by Stanley Fish, which I hadn’t seen. I’ll only add two brief thoughts, since Fish speaks for himself as always: 1) the two Christian discourses Fish discusses don’t strike me as necessarily at odds with one another—any more than faith and works are; and 2) the forgiveness offered by Christ, and the economic imagery so often used to describe it, was of course vividly foreshadowed in the Old Testament by the Jubilee (Leviticus 25), which had both practical and spiritual significance. 

Readers of this blog are no doubt tired of hearing me argue that bankruptcy would often be a better solution to the financial distress of large financial firms like AIG or Bear Stearns than the bailouts the government has used throughout the current crisis.  But for those who haven't yet had enough, or are interested in a more scholarly treatment, here is a link to a paper by Ken Ayotte and me about the bankruptcy vs. bailout choice.

Treasury Secretary Geithner finally sketched out the administration's blueprint for new financial regulation yesterday.  Many of the proposals, such as a new registration requirement for hedge funds, strike me as sensible.  But I think the proposal to give federal regulators the power to take over troubled investment banks and hedge funds is a serious mistake.  A colleague and I criticise the proposal in this op-ed piece.

Debtors’ prisons seem to be back in the news. Last week’s New Yorker included an interesting article about debtors’ prisons in late eighteenth and early nineteenth century America (a link to the abstract is here). Decreasingly few states allowed imprisonment for debt by the mid nineteenth century, but debtors’ prisons weren’t abolished altogether until the Thirteenth Amendment was passed after the Civil War. Some commentators have argued that the 2005 amendments to the bankruptcy laws, which increased the costs and hassles of filing for bankruptcy, violate the Thirteenth Amendment. This is rather far fetched, but a recent practice in Florida seems a much closer call. A New York Times story reported that Florida courts have been throwing criminal defendants in jail if they fail to pay their court fees. Although this may not be imprisonment for debt, it seems awfully close.

T.S. Eliot famously wrote that “The last temptation is the greatest treason: to do the right deed for the wrong reason.” 

Several days ago, I wrote a short post noting some of my concerns about the extent to which the government seems to be commandeering the bankruptcy process in Chrysler as a means of effectuating its auto policy.  This commentary develops the critique in a bit more detail, and puts it in historical perspective. 

This op-ed by equity fund manager Scott Sperling in today’s Wall Street Journal makes an interesting case that the Obama administration’s handling of Chrysler and GM is actually evidence of capitalism at work. In my view, he’s right that the restructuring of these companies has some similarities to how things would play out if the government weren’t cramming down its own preferred plans. Both companies would have filed for Chapter 11, and would have been restructured. But the op-ed strikes me as very misleading in its suggestion that restructuring of Chrysler in particular can be squared with the bankruptcy laws. In talking about Chrysler, Sperling seems to suggest that it’s fine to give employees, retirees or anyone else (including current stockholders, presumably) a large stake in the new company, so long as they aren’t allowed to keep everything they have now. That is, he seems to forget the rules of priority, which say that the senior lenders are required to be paid first. When he turns to General Motors, on the other hand, he suddenly remembers the priority rules. The recalcitrant bondholders really aren’t entitled to anything (or much of anything), he argues, because the government, as senior lender, is entitled to be paid first.

            I was a minor player in a very interesting conference on systemic risk yesterday at the American Enterprise Institute in Washington DC yesterday. In the keynote address, Alan Greenspan suggested that he sees only three plausible responses to the emergence of financial institutions that are “too big to fail,” and thus will be bailed out if they fail. The first is to impose higher capital requirements on bigger institutions—in effect, to require them to have more equity and less debt on their balance sheets, so that they are less likely to fail. The second is for people to start new more new banks. Since new banks won’t have the baggage of the banks that are still holding lots of “toxic” assets, they presumably would be well positioned to compete with the big current banks. Third, he suggested that lawmakers might require that investment banks be structured as partnerships rather than corporations, as they were until recently. Because the partners of a partnership are personally responsible for its debts if it fails, the folks running future banks like Bear Stearns and Lehman Brothers might take a lot fewer risks. 

            The enormous recent bankruptcies have provided a lot of reasons for a bankruptcy scholar to leave the library and venture out into the real world for a change. I’ve spent more time in New York and Washington in the past month than I ever would have imagined. In addition to conferences and conversations with congressional staff, I had the privilege of testifying at a House Judiciary Committee hearing on the auto bankruptcies two weeks ago, and I went to the bankruptcy court in New York last week to watch the first several hours of the hearing on the proposed sale of Chrysler’s assets to New Chrysler. (The bankruptcy court, by the way, is a lovely building—the old Custom House—at the very bottom of Broadway, at the southern tip of Manhattan, and well worth a visit).

This is more David’s department than mine, so if this observation is all wet, I’m happy to take correction. But in recent weeks, I’ve been thinking about the fate of the railroads in the late nineteenth and early twentieth centuries. Like the auto companies today, the railroads of the late nineteenth century received huge subsidies, often in the form of free land adjoining new track. Like GM and Chrysler, most of those subsidized railroads went belly up – not despite the government subsidies, but partly because of them. 

The $64,000 questions in my little world today are 1) what to make of Justice Ginsburg’s order temporarily halting the Chrysler sale; and 2) what it means for the General Motors bankruptcy. 

The Supreme Court has now lifted its stay on the Chrysler sale, which makes the first part of the last post moot.  On to GM.

The most surprising of Obama administration’s new financial reform proposals would establish a new Consumer Financial Protection Agency to look after consumers’ interests in financial services contracts such as credit cards and mortgages. It’s been discussed in Washington for many months, but it was not part of the earlier version of the reforms announced by Treasury Secretary Geithner in the spring. This new agency would have the power to write rules for credit card contracts and other transactions, examine financial institutions, and require firms to offer a “plain vanilla” mortgage product as a yardstick for comparing their more exotic mortages. 

The Obama adminstation's new financial reform proposals, like the version proposed several months ago, would give regulators the power to step in and take control of large nonbank financial institutions, as the FDIC already does with commercial banks.  As folks who have stumbled on this blog in the past  will know (and are no doubt tired of hearing about), I think this is a serious mistake.  This magazine article describes the concerns in a bit more detail, and offers what I think would be a better approach.  I'd be very interested in reactions.

Although GM is vastly larger and more significant than Chrysler, its "sale"-- which was approved by the bankruptcy court late yesterday-- has received far less attention.  There seem to be two reasons for this.

The first is a been-there-done-that effect.  After many participants and observers complained about the problems with the Chrysler sale, and the objections were brushed aside as expected, there was even less suspense and therefore less media interest with GM.  Chrysler's executives griped during their negotiations with the government that their company was being used as a "guinea pig" for GM, and so it was.

The second reason is that GM and the government adjusted the "sale" strategy to make it less egregious than the Chrysler sale.  Some of the troubling features remained (such as a bidding process that made other, genuine bids nearly impossible).  But the GM sale does not stiff the senior lenders, as the Chrysler sale did.  And after nearly universal criticism of the failure to make any provision for products liability claimants, New GM now has agreed to pay the claims of future victims. 

If anyone finds that these technical ramblings make you long for more detail, Professor Mark Roe and I have just finished a draft of a law review article that critiques the Chrysler sale in much more detail.   The link is here.

The NY Times DealBook blog is hosting a dialogue on the financial crisis, with a variety of folks (I'm the least of them, by any yardstick) weighing in.  Several of the initial columns have been quite interesting; it's continuing all week here.

One of many interesting questions I was asked while presenting a paper called “Bankruptcy or Bailouts?” at Professor Ted Janger’s bankruptcy seminar at Brooklyn Law School yesterday was whether there’s a connection between the ethos that led to the Bush adminstration’s preemptive strike policy and the Obama administration’s enthusiasm for bailouts. The question echoed a thought I’ve had often in the last few months. The Bush administration was criticized (fairly, in my view) for its secrecy and its “my way or the highway” attitude on foreign policy issues. Barack Obama campaigned against this ethos, and his administration has been far more transparent on foreign policy. Yet when it comes to economic issues, the Obama administration’s key financial regulators have been as high-handed and opaque as the Bush administration was on foreign policy.

For reading the current financial tea leaves, the week’s most important event was Goldman Sachs’ announcement that it will devote $500 million to loans for small businesses and other good works. This noblesse oblige underscores just how much money Goldman has been raking in, in part thanks to the government’s bailouts. 

A recent report by Neil Barofsky, the special investigator for the $700 billion TARP program, criticizing last year’s AIG bailout has stoked suggestions that perhaps it’s time for Treasury Secretary Geithner to step down. My guess is that Geithner will indeed step down by the end of 2010, but that he will almost certainly step down too late.

The selection by Time magazine of Fed chairman Ben Bernanke as its person of the year has been met by a collective yawn. Perhaps this reflects a general disinterest in financial regulators. It also could simply be one more illustration of the diminishing influence of newspapers and weekly magazines.

It’s hard not to think of Franklin Roosevelt (Roosevelt-and-water, perhaps) as President Obama criticizes the Wall Street banks, welcomes Paul Volcker (who argues that the banks should be partially broken up) back into his inner circle, and condemns the Supreme Court’s new campaign finance decision as a threat to democracy. Roosevelt did break up the banks (a successful reform), and he wanted to “pack” the Supreme Court with new New Deal friendly justices (a disaster).

Through a quirk of scheduling, I was in Amsterdam a week ago for a corporate law conference and (after a brief return home) am now in Milan and Rome for nine days with the twelve students in my Globalization of Corporate Governance seminar.   The combination of corporate law conferences and side trips to several of the world’s great art museums has gotten me thinking—however ill-informedly—about the relationship between markets and art.

The Dodd Bill—the financial reform package currently under consideration in the Senate—is a sterling illustration of the old cliché that sometimes it's worse to miss by an inch than a mile. The provisions for handling large financial institution failures have progressed a great deal from last summer’s Obama administration proposal. They borrow a lot more from the bankruptcy laws, for instance. And there’s a lot of tough talk about ending too big to fail and harsh medicine for large financial institutions that stumble. But the framework has more than enough wiggle room for bank regulators to bail out creditors as they did in 2008, and it gives them a $50 billion pot of cash to do it with.  The end result is as bad, and could even be worse, than the original, for reasons described in more detail in this op-ed from a couple of days ago.

I remember the moment when I realized that Goldman had gone from being the darling of Wall Street—the firm everyone pointed to as the best run, with the best internal risk controls—to something very different. Last summer, in response to a little piece I wrote for a New York Times Dealbook blog discussion, a commentator referred to Goldman as the embodiment of evil, or something to that effect. I couldn’t imagine what he was talking about. Within a few weeks, I began to understand, as rumors surfaced about Goldman profiting from its customers’ subprime losses and being a multibillion dollar beneficiary of the government’s AIG bailout.

With the financial reform bill now in the full Senate and all signs pointing toward its passing in the next week or two, a flurry of possible amendments are circulating privately and publicly. Which are most important? Not Senator Boxer’s new amendment, which would explicitly state that large financial institutions must be liquidated if they are subject to the proposed resolution procedures for “systemically important” financial institutions. Senator Boxer’s claim that this would prove that the bill doesn’t allow future bailouts illustrates an understandable but dangerous confusion about what a bailout is. If all of an institution’s creditors are paid in full, it’s a bailout even if the institution itself is eventually liquidated. If creditors know they’ll be paid—and they can be under the proposed bill—they’ll be too willing to lend to the institution and won’t monitor as carefully as they would if they would if they weren’t protected. They’ll act like the creditors of Bear, Stearns, AIG and Lehman Brothers did.

Inspired by the Obama Administration’s awkward dance with BP over the oil spill, David Brooks divides the nations of the world into two categories in this column today: those that treat oil companies and other large corporations as private corporations (“democratic capitalism”), and those that directly own and control the companies (“state capitalism”).

Jeff Rosen proposed in this op-ed in the New York Times Sunday that Elena Kagan should strive to do justice to the seat she will be inheriting, which was held by Louis Brandeis in the mid twentieth century.  For Rosen, this means developing a progressive jurisprudence on business and economic issues.

With the Senate vote today, it’s all over but the signing. 

Steven Davidoff (aka, the Deal Professor) has an interesting post on DealBook today speculating about whether regulators will step in and take over A.I.G. now that the new financial reforms (signed today) have given them sweeping powers to "liquidate" floundering, systemically important financial institutions.  The new resolution regime automatically applies to bank holding companies with $50 billion in assets; it isn't automatic with nonbanks, but regulators can designate those that are systemically important and pull them into the framework.  Once they're designated, regulators can take them over if they're in default or in danger of default.  I doubt regulators would go that far with A.I.G.  It's a bit too late, and A.I.G. has been scaling back on its own.  But regulators do face an interesting question whether to designate A.I.G. or any other nonbanks for inclusion now that the legislation has been passed.  If they don't identify any, it will undermine the credibility of the new resolution regime, since it will suggest regulators are just going to swoop in at the last minute when a big firm runs into trouble, as they did in 2008.  But if they designate a group of nonbank financial firms for inclusion, it will mark those on the list as special (and potentially too big to fail, though the resolution regime purports to end that) and spur speculation as to why others weren't included.

My guess is that regulators will at least designate A.I.G. for inclusion in the near future.  I doubt they'll designate many others.  But they do seem to need to designate at least one to show that they're serious about implementing the new regime.

The question whether President Obama will nominate Elizabeth Warren to head up the new consumer bureau has gotten so interesting I can’t resist another post. Here are some things I suspect the President is thinking about:

Two views on President Obama’s relationship with Wall Street seem to alternate in the media.  One view, increasingly prevalent of late, is that he’s hostile to Wall Street, perhaps even on vendetta against it starting with the Dodd-Frank reforms.  The other view suggests he coddles the big Wall Street banks.  Is Obama for or against Wall Street?

One of the biggest punching bag this election season seems has been the $700 billion TARP legislation that Congress passed in fall 2008 to rescue the banks. Those who voted no have trumpeted this fact, and many of those who approved have said as little about it as possible.

I’m just back from a wonderful visit to Liberty University’s law school, where I gave a talk called “Making Sense of the New Financial Deal.” (I also had a chance to spend several hours in the Jerry Falwell archives). The talk was based on the book I wrote this summer (due out any day now), and in addition tried to consider some of the Christian implications of the crisis and financial reforms.  

The next big bailout issue in the U.S. is likely to be the question whether to provide rescue financing for states like California and Illinois that are running huge deficits.  I make an argument for adopting a bankruptcy chapter for states, similar to the provisions we already have for municipalities, in this little magazine article.  In my view, bankruptcy wouldn't be a perfect solution, but it is likely to be a lot better than the current alternatives (such as a federal rescue or simply watching California default).

I speculate a bit more as to what it might mean to have a bankruptcy law for states in this op-ed.  There seems to be a flurry of drafting activity going on, but no draft legislation has been released yet.  I'm hoping that will change shortly.

My friend Stephen Lubben had a characteristically interesting post on the bankruptcy-for-states debate in his Dealbook column yesterday. Stephen pointed out that the advocates for a bankruptcy chapter for states are overwhelmingly Republican, and concluded that this bodes ill for the prospects of enactment.

I once wrote a poem about the bankruptcy and liquidation of a department store called Arlan’s, which figured prominently (the store, not the bankruptcy) in my own childhood. The news that Borders had filed for bankruptcy didn’t have quite the same effect, but it isn’t far off.

The FDIC has just released a report speculating about how Lehman’s crisis would have been handled if the Dodd-Frank Act had been in place in 2008. As the report imagines it, the FDIC would have intervened early in the crisis, and guided Lehman to a soft landing that got the utmost value for the business. The FDIC “could have participated in a meeting in the spring of 2008, together with [other regulators], to outline the circumstances that would lead to the appointment of the FDIC as receiver.” The FDIC could have parachuted in and conducted on-site oversight on Lehman’s premises from that point forward.   The FDIC could have prodded Lehman to sell itself or, if “Lehman were unable to sell itself, the FDIC would have commenced with marketing Lehman.” Once Lehman was taken over pursuant to the new resolution rules, the FDIC “would have minimized losses and maximized recoveries,” assuring that Lehman’s general creditors recovered roughly 97% of what they are owed—as compared to the roughly 20% they are likely to get in the actual bankruptcy case.

Enthusiasts for the Chrysler and General Motors bailouts have been congratulating themselves as the car companies' prospects have improved in recent months.  As won't surprise anyone who has followed this blog, I worry that the wrong lessons will be drawn from the resurgence.  Some of the costs of the bailouts, at least as I see them, are outlined in this op-ed.

Peter Conti-Brown has written a lovely tribute to Bill's mode of scholarship using illustrations from a discipline dear to my own heart: corporate law.  It can be accessed here.

The Harvard Law Review's June issue will have a series of short tributes to Bill.  As soon as it's available, I will post a link.

Everyone, even German Chancellor Angela Merkel, seems to be comparing the Eurozone crisis to Lehman Brothers’ collapse three years ago. According to this reasoning, the default of Greece (or Portugal, Ireland, Spain or Italy) could trigger market chaos, just as Lehman supposedly did in 2008. My own view of Lehman, as a few readers of this blog may remember, is that the conventional wisdom is mistaken in almost every respect. Lehman does seem to me a useful analogy, however. The reason Lehman’s collapse came as such a shock was that the decision to rescue Bear Stearns six months earlier seemed to signal that large troubled institutions would be bailed out. Everyone understandably expected a bailout, and was stunned when no bailout came. European leaders have boxed themselves into a very similar corner. Even now, few think that they will let Greece default, despite the fact that Greece is clearly insolvent and has no real prospect of repaying its debt.

My first reaction to the reviews of Ron Suskind’s new book about the Obama administration’s handling of the economic crisis was that it mostly seemed to confirm widely held views, such as the perception that President Obama and Treasury Secretary Geithner are both comfortable with big banks, and resisted to efforts to scale them down. (The one big exception was the President’s temporary decision to break up Citigroup, which was, according to Suskind’s sources, stymied by Geithner).

My favorite piece on the Occupy Wall Street movement thus far is a commentary by John Gapper in last Thursday’s Financial Times. (In good capitalist fashion, FT puts articles behind a paywall, so I can’t link to the commentary here).  For Gapper, there’s nothing wrong with the movement’s confused messages—the mostly young protesters are angry at Wall Street and worried about the future, and appropriately so. He would be much more disappointed if the movement devolved into violence, as has occurred in Greece and London.

Earlier this week, I wrote an op-ed on the Eurozone crisis that was inspired by a wonderful conference in Iceland two weeks ago, and follows up on thoughts from an earlier blog post.  The op-ed is here.

The former CEO of American thought so.  He's seems like an admirable leader, but I think he's wrong about bankruptcy.  Here's a little blog post elaborating on that theme.

A friend sent an interesting email offering a less sympathetic view of bankruptcies like the American bankruptcy. With his permission, I thought I would quote it in full here:

"David: I read your post.  But it seemed to me that AA filing was, essentially, just another in the long line of U.S. board decisions over the last twenty-five years or so to use our liberal bankruptcy laws as a strategic restructuring tool to get rid of debt and contracts and employee obligations that they felt held back profitability and the stock price.  Chapter 11 is a wonderful tool for people who are essentially amoral, as many people in business and most lawyers are."

In case anyone might be interested, here are a few recent op-eds and articles:

Op-Eds:

A recent op-ed on the mortgage settlements is here.

An op-ed from the beginning of the contraception crisis (before the more recent "compromise" from the Obama administration) is here.

Articles

An essay on the implications for law of the writings of the theologian Stanley Hauerwas is here.