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June 2009 Archives

June 4, 2009

Greenspan on "Too Big to Fail"--Skeel

            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 proposal to impose strict capital requirements on institutions that are “too big to fail” is a good idea, in my view, but it’s conventional wisdom (and is already on the administration’s radar screen). Forcing investment banks to be structured as partnerships is a very interesting idea but, as Greenspan himself noted, would almost certainly be evaded (for example, commercial banks could simply step up their involvement in investment banking activities.
            But I wonder whether we’ll set entrepreneurs taking the second idea to heart in the next year or two. As bad as the economic climate is, now might be a great time to start a bank, for those who have the inclination and the expertise.

Hearings in Congress and Bankruptcy Court--Skeel

            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).

            As different as the two venues were, I was struck by an important similarity. Although there is security in both buildings, anyone can come in and see the bankruptcy court in session, or see the offices and hearing rooms where our Senators and Representatives do their work. You aren’t asked to demonstrate your importance or explain why you’ve come. It had never fully occurred to me just how open our government is. Walking in and out of those buildings, I couldn’t help but feel proud of the system we are a part of. 

June 5, 2009


Thanks mostly to medical business, I’ve been out of touch for awhile. I was hospitalized for various tests and procedures nearly all of last week (no large problems, thank God), and save for a brief appearance at the law school’s graduation ceremony – I love graduations: everyone is so unremittingly happy – have spent this week recuperating. 

Last week reminded me just how much attention patients in reasonably well-run hospitals receive. It’s remarkable; I saw a half-dozen doctors and another half-dozen nurses on a regular basis. Nighttime excepted, I rarely went as long as ninety minutes without at least one of them dropping by. Of course, I’m more advantaged than most patients. But this isn’t just a matter of class or status. My roommate, an alcoholic who appeared less than fully in touch with reality, had almost as much doctor attention and more nursing care than I had. All of which is a reminder that health care is a strange business: in the end, a large fraction of what sellers sell is human relationship. When done well, those relationships are a tonic. But it’s hard to see how one can both do them well and do them more cheaply – the twin goals of any plausible health care reform process. Plainly, the system needs reforming. Equally plainly, reform will come at a price. I hope it’s not too steep for patients like my hospital roommate, who need all the care they can get.

GM and the Railroads--Stuntz

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. 

That sounds bizarre, but it isn’t. Allegedly friendly governments offer their business patrons a killing embrace – do this or that, and we’ll give you more money or land or trade protection than you could possibly ask. The subsidies are so generous, responsible corporate managers will do pretty much anything to get them. Over time, the corporations acquire more and more skill at pleasing the relevant government officials – and lose the ability to please their customers. The railroads laid track and built stations in places where the demand for transport could not match the supply; today’s GM is striving to build “green” cars that consumers may not buy. Insolvency is the inevitable consequence of such business decisions. So it was a century ago with railroads; so it is today with America’s auto companies. Perhaps the banks are next . . .

June 9, 2009

The Supreme Court Stay in Chrysler--Skeel

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. 

My guess is that it would be a mistake to read too much into the Chrysler stay. As a Supreme Court savvy lawyer pointed out to me today, the Justices are very busy these days writing their opinions for the term. The stay may simply be designed to give them time to focus on the case, and decide as a group whether to take it. Unless four of the nine justices conclude that they should, certiorari will be denied. At the end of the day, I suspect that will be what happens, though I hope I’m wrong.
Either way, I think the stay has important implications for the GM bankruptcy. At the least, it suggests that GM and the administration cannot assume that the proposed sale in that case will simply be rubberstamped by the court. In some ways, the proposed “sale” of GM’s key assets to New GM is less troubling than with Chrysler, since the plan will pay GM’s senior lenders in full rather than stiffing them as the Chrysler sale does. But in two respects the rush to effect a quick sale of GM is more problematic. First, whereas with Chrysler the parties could at least pretend it was a sale to a third party (FIAT), the GM sale lacks even the pretence of being a genuine sale. Second, the argument that a sale needs to be done right away is much weaker with GM. I suspect the bankruptcy court will be much less willing than in Chrysler to believe the administration’s claim that the sale needs to go through yesterday.

p.s. on Chrysler--Skeel

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.

June 17, 2009

Iranian and Iraqi Democracy--Stuntz

In the many discussions of the pro-democracy protests in Iran, I’ve seen precious little about the relationship between that country’s democracy and democracy in its majority-Shiite neighbor: Iraq. The example of a democratic and not theocratic state on Iran’s borders may be destabilizing in precisely the ways the Bush Administration hoped – only the effect took hold more slowly than expected. If so, Bush should get some credit for this hopeful turn of events.

June 18, 2009

Consumer Financial Protection Agency--Skeel

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 agency’s proposed powers are astonishingly broad. I strongly suspect that this is a first negotiating move, rather than an expectation of powers the agency will actually have when the legislation is passed. The financial services industry rightly fears that the agency is a major threat to their profits, and is already digging in its heels to fight vigorously. The final result is likely to be a compromise, at least if the Obama administration’s reluctance to take on banks directly in the past is any indication.
One of the most interesting questions—and a key to the likely efficacy of the agency—is who will be appointed its head. The principal proponent of the agency is Bill’s colleague Elizabeth Warren, who currently leads the TARP oversight panel, and she is an obvious choice to head it up. But Warren has locked horns with credit card banks for years over bankruptcy reform.  The banks surely will fiercely oppose her nomination.
I have sometimes disagreed with Warren about bankruptcy and credit issues in the past, but I personally think the agency is a good idea. Currently, consumers are protected by bank regulators. But bank regulators have more of a stake in bank health (and profits), than in consumer interests. Consumers could use a champion.

June 19, 2009

Democracy and Law--Stuntz

With good reason, ours is an age in which the rule of law is a terribly important concept. In the United States, support for law—and support for law’s natural product: order—is near-universal. Not so with respect to support for democracy. Americans oscillate between Administrations (like the previous one) that seek to promote both law and democracy and Administrations (like the current one) that seek to promote stability and order: the key products of the rule of law. We agree about law’s virtues. About democracy, not so much.

This is curious, and deeply wrong. Law has no moral content: its rights and wrongs depend wholly on the content of the relevant legal rules. Democracy does have moral content: it says that, as between thuggish rulers and people in the streets of Tehran, the people in the streets are on the side of the angels. True, democratic governments are sometimes evil—but the concept of democracy places limits on those evil rulers; their rule is subject to a power they cannot control. Law is more a tool for evil rulers than a limit on them. As between democracy and law, I would think Americans of all political stripes could agree that democracy is a better and more consistent ally.
Perhaps that will be the lesson of what looks more and more like the Iranian Revolution of 2009. I certainly hope so. The American-style rule of law is deeply problematic; much about our legal system is nightmarishly wrong and unfair. But the twin ideas that elections matter and that governments do not fake election results—those are thoroughly good and right ideas, ones with which all of us, Bushian and Obamaphile alike, ought to agree. Maybe the rise of the Iranian street will produce such agreement. Again, I hope so.

June 20, 2009

The New "Too Big to Fail" Proposal--Skeel

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.