Loyola Law School Faculty Blog

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

2013-05-15T20:36:31Z

Neil Irwin's The Alchemists delivers on its promise: the book is a central banker's view of the 2007/2008 Financial Crisis and the more recent (and related) Euro Crisis. Only the subtitle disappoints: The Alchemists isn't quite the story of the three central bankers depicted on its cover (Bernanke, Trichet and Mervyn King). Rather, The Alchemists offers a thorough treatment of Bernanke's crisis-plagued tenure at the Fed and insightful coverage of the ECB's Trichet - until Trichet morphs into Mario Draghi just in time for the worst of the Euro Crisis. Plus the odd bit of Bank of England's Mervyn King thrown in for comic relief. No doubt Irwin's project was inspired by Liaquat Ahamed's Lords of Finance, winner of the 2010 Pulitzer Prize, which treats four central bankers (their philosophies and their quirks) from the 1920s: the UK's Montague Norman, France's Emile Moreau, Germany's Hjalmar Schacht and the Fed's Benjamin Strong. Now these were central bankers: they dominated the monetary policies of their day.

Our contemporary central bankers lack some of the color of their predecessors (save Mervyn King, who is pretty darn colorful). Moreover, their field of action is much more circumscribed. They can be checked by other personalities within their respective institutions, by intimidating political leaders, and by uncooperative markets. These bankers do manage, at least in this account, to largely have their way in responding to the crises, through will and manipulation, and by playing on the palpable belief that no one else has any better idea of what to do.

Irwin's story begins with the shudders in the market in late 2007, when BNP is the first major institution to admit it had no real idea how much those tricky mortgage-backed securities were worth. The response by Trichet is immediate - and is the precursor of many more ECB interventions. Things get much much worse in the following year with the fall of Lehman Brothers. Lehman's collapse is marked by the surprising non-intervention of the Fed. Irwin's account of the abandonment of Lehman Brothers is thin - but he suggests that the Fed may have felt it had no clear legal basis to act. Bernanke no doubt learned many things from the Lehman Brothers fiasco, including (perhaps) the advantages of being a bit less scrupulous in respecting the limits of the Fed's authority.

Irwin clearly admires his subjects. These are very bright, very forceful and public-spirited individuals. They seem devoid of political agenda - but this may be due to their positions of power that sets them above ordinary politics. They are consummate technicians - they do things because they believe them to be the correct course of action. They ignore opinion polls, but cannot, of course, ignore the markets.

Bernanke, Trichet and King are the kind of individuals one would expect to rise in a technocracy. The isolation of a central bank from ordinary politics is an accepted design feature of the modern state (China, as Irwin notes, is an exceptional case, where key macroeconomic decisions are directly taken by political leaders). As such, central bankers are not expected to be influenced by popular sentiment. Their actions have important distributive effects, however: the raising of a key interest rate creates winners and losers. And central bankers do have their prejudices: much of the conflict within the ECB in response to a possible Greek default replays almost theological arguments between German inflation-phobes and pan-Europeanists.

As the central bankers confront the crises, we are invited to applaud their audacity, their creativity, and their resolve. Irwin somewhat understates the recurrent slips into illegality. One could of course fetishize legal compliance - and compliance demanded in ordinary times may be inappropriate in emergency. Irwin gets the emergency right - the reader takes away the sensation that, as bad as things were, they could have gone more badly. Still the major interventions undertaken by Bernanke and Trichet (and Draghi) do seem to exceed their respective authority. A technician may enjoy the curative legitimacy that comes with being right.

And central bankers do hide themselves away. While Neil Irwin manages access (at least after the fact), he reports little ongoing respect for transparency beyond Delphic Fed-speak (this is mimicked by the ECB). Irwin seems to relish the secrecy - the dodging of reporters, the misleading feints. This is odd, given Irwin's professional status as a Washington Post editor.

There is much to applaud in The Alchemists. Irwin does a superb job in presenting quantitative easing in its various incarnations and exploring the strange new world of zero interest rates. He is also excellent on the Greek Euro Crisis. One of his finest insights is a speculation: what would have happened had the UK belonged to the Eurozone?

Follow the author on Twitter @jefferyatik.

Welcome to the super PAC era

2013-05-09T21:55:56Z

By Associate Clinical Professor Jessica Levinson

This post originally appeared on KCET's website.

Is candidate centered campaign fundraising a thing of the past?

Greetings, and welcome to the Super PAC era. Thanks in part to the Supreme Court's 2010 decision in Citizens United, we now have new entities called "Super PACs," which are organizations that can raise and spend unlimited political funds.

Contributions given directly to candidates are unlimited, but again, contributions to outside groups such as Super PACs are not. Therefore, as many predicted, individuals and entities who wish to support candidates but have given up to the legal limit, now have a new outlet for their campaign donations. This pattern, however, is nothing new. Before there were Super PACs big donors gave to political parties or other outside organizations like independent expenditure groups.

Campaign fundraising by candidates is increasingly being marginalized and fundraising by independent groups including Super PACs is coming to the forefront. We are seeing this phenomenon play out real time in the Los Angeles mayoral race where the contribution limit to candidates is $1,300 both in the primary and the runoff elections. While fundraising by candidates is still outpacing fundraising by Super PACs in the mayoral race, at some point in the near future that could change. In this election both candidates have raised approximately $5.7 million and independent groups have raised roughly $4.7 million for Greuel and $1.3 million for Garcetti. That means about one-third of the money raised in the mayor campaign has been raised by outside organizations. Again, the lion's share has gone to groups supporting Greuel.

Of course those giving money to outside groups are generally those who have a financial interest in what happens in City Hall. For instance, donors include real estate developers, labor unions, members of the entertainment industry, and lawyers and lawfirms. This set up raises a host of problems including corruption, the appearance of corruption, undue access and preferential treatment.

Because of the Supreme Court's misguided interpretation of limits on campaign contributions and expenditures, there is little hope, at least in the short term, of limiting how much can be given to and spent by outside groups. The best way to regulate the influence of money in politics is to advocate for robust campaign disclosure.

Atraverso Commentary - Tarullo on Basel III and Short Term Wholesale Funding

2013-05-07T21:57:30Z

By Professor Jeffery Atik

The Federal Reserve's Dan Tarullo has been a key player in post-Crisis U.S. bank reform and in the negotiation of Basel III, the set of international banking rules that guides regulation in major financial centers. In a speech made last Friday (May 3, 2013) Tarullo expressed some satisfaction with the U.S. and Basel III reforms -- and identified a risk needing further regulatory attention: runs on short-term wholesale funding.

Short-term funding has always constituted a vulnerability to the banking system. The traditional magic of banking involves the transformation of maturities -- banks borrow on a short-term basis and lend for the medium- or long-term. In ordinary times this works out splendidly -- as the short-term rates banks pay tend to be lower (over the long term) than the long-term rates they earn. And in ordinary times, short term funding is quite stable.

The dominant form of short-term funding was traditionally bank deposits. Deposits are essentially loans made to a bank by its depositors. Deposits are legally short-term, but practically rest in the hands of banks for substantial periods. Short-term funding becomes problematic, of course, when depositors systematically demand repayment: this is the old-style bank run. Post-Depression era deposit insurance has largely eliminated bank runs, at least in the United States, and so the ordinary insured bank deposit is (from the perspective of the bank) a trusty source of short-term funding.

The bank deposit no longer forms the core of short-term funding for many banks (particularly larger banks) -- and other systematically important financial institutions (hedge funds, money-market funds, broker-dealers) lack the ability to take insured deposits. The mix of short-term funding has changed -- and with this change, there are new vulnerabilities.

Tarullo points out that the liquidity freeze that occurred during the Crisis involved the unexpected drying up of short-term funding. Short-term investors had been willing to lend against mortgage pool securities up until the onset of the Crisis -- and then had a rapid change of heart. These breakdowns of investor willingness were the modern equivalent of the bank run -- in that expected funds suddenly became unavailable due to panic.

Contemporary short-term funding is often wholesale -- that is, it is provided in substantial packets by a few institutional players. It chiefly takes the form of securities transactions, such as repos, reverse repos and other forms of securities lending and borrowing, and so depends on the value and liquidity of the pledged securities. Tarullo observes that the basic structure of short-term wholesale funding has not changed in the years following the Crisis -- and the continuing risk of short-term funding runs has not been directly addressed in current reforms.

Let's be clear as to what happens when a short-term funding crisis occurs. First, a bank faces the obligation to make substantial disbursements to the fleeing investors. Whether it involves unanticipated account withdrawals or the refusal to roll-over other forms of funding, a challenged bank will have to expend liquid funds to satisfy the demands of the stampeding short-term fund providers. And, to the extent these demands exceed the then current amount of liquid funds, the stressed bank will have to create additional free funds either by borrowing (if possible) or by selling assets. Once a troubled bank begins selling assets, the downward spiral proceeds: assets dumped on the market erode asset prices, inflicting further damage to the bank's balance sheet. Moreover, a drought of short-term funding immediately shrinks a bank, affecting the amount of credit an institution can create. This has clear macroeconomic implications -- as the shrinkage of credit is directly transmitted to the real economy.

Tarullo notes that these risks can be managed by either capital or liquidity tools. A well-capitalized bank is less likely to face a short-term funding crisis in the first place, and if struck by contagion, can better withstand a certain degree of defunding. A bank with greater liquidity can meet unanticipated demands and live for a better day. But it seems implicit in Tarullo's assessment that the mix of minimum capital and liquidity requirements imposed by Basel III are not adequate to stem potential short-term wholesale funding runs. Far too many systematically important firms fall outside the coverage of Basel III -- and the Crisis demonstrated that a funding run against a shadow bank (such as a mutual fund) can be as destabilizing as a run on a regulated bank. Simply requiring maturity-matching is not adequate, Tarullo argues -- as a funding crisis may develop due to contagion involving a particular kind of pledged asset. Tarullo strongly signals that the Fed may use the authority it acquired in §165 of Dodd-Frank to increase the capital and liquidity requirements of large banking organizations to address short-term funding risks.

Follow me on Twitter @jefferyatik

Atraverso Review: The Future as Cultural Fact: Essays on the Global Condition by Arjun Appadurai

2013-05-03T16:12:20Z

By Professor Jeffery Atik

In this collection of essays, Arjun Appadurai links his role as leading globalization scholar to his practice as activist on behalf of the slum dwellers in his native city of Mumbai (or Bombay, the abandoned name Appadurai seems to prefer). Appadurai redeploys globalization theory (and more generally modernization theory, of which globalization is a part) as an ethical practice. He calls for cultivating the capacity to aspire among the world's poor -- an unabashedly cultural project with political and developmental implications. Appadurai argues that the poor must be enabled to aspire -- these aspirations will, in turn, define new and different trajectories from those promised by the passé globalist.

Globalization has failed in its predictions -- and so has failed as science. Globalization, it was thought, would lead to convergence and homogenization, more democracy and tolerance and less nationalism and violence. Yet the world we now see displays strong (and growing stronger) national states and continued developmental disparities. Those enabled by knowledge migrate; their home countries capture disappointing returns from their educational investments. New digital capacities have been harnessed by jealous ethnic groups to reinforce local identities; they can encourage aggression and conflict.

These phenomena play out in Mumbai, as elsewhere. In the central essays on Mumbai, one sees Appadurai's personal disappointments and hopes for the city he left many years ago. His portrait of Bombay -- the wonderfully cosmopolitan possibility of his youth -- is a new city, where peoples from many parts of India and elsewhere mix. The clearest example of Bombay's promise of co-existence is the presence of large and intermixed Hindu and Muslim communities -- but there are Parsis, Jews, Armenians, Syrian Christians and the ever-charming British colonialists adding flavor to the stew. Appadurai insists on the inherent capitalist foundation of the Bombay of his youth -- built on the production of textiles and other industrial goods for export markets. Bombay is thus twice cosmopolitan -- by the inner composition of its multi-ethnic population and by Bombay's full engagement with (and dependence on) international trade and capital investment.

Appadurai captures this fading Bombay in three delightful depictions. The first is his portrait of Bombay as the City of Cash. Cash in Bombay is not a cold technical concept -- rather it is the species of sociability, displayed and celebrated. The value of cash lies in cash's flashy visibility. One of the functions of cash, of course, is forging social linkages -- and this it does spectacularly well in Bombay. His second Bombay sketch renders the strange linguistic brew spoken there: Marathi at base, but filled with exotic elements provided by the various sub-groups arriving from other parts of India. And the third image of Bombay is colored via the neverland of Bollywood (a name that still incorporates the discarded Bombay) where most of India's ethnicities are featured (though not the local Maharastrians as such), either denatured ("vaguely North Indian") or stereotyped. The music of Bollywood -- its defining element -- flows from the northwest and its traditional ghazal into the streets of Mumbai.

This Bombay exists no more. And so Appadurai asks "What killed Bombay?" The renaming of Bombay marked more than a rejection of a colonial style; Mumbai, the new name, is an artifact of the Shiva Sena, the ruling party that projects a Marathi primacy at odds with Bombay's cosmopolitan past and multicultural present. Mumbai has been scarred by the 1992-1993 Hindu-Muslim riots. One of the thematic challenges of raising the hopes of Mumbai's poor is overcoming these divides.

The View from Mumbai is the core of the book. It reflects the engaged nature of Appadurai's intellectual projects and many of his convictions. Appadurai recounts the actions and practices of a constellation of slum-based NGOs devoted to improving housing for the city's poorest residents. He sees housing as a primary social need, the key to citizenship. Yet Appadurai rejects elite-controlled planning in favor of spontaneous design by the poor themselves -- the model children's toilet celebrated by Kofi Annan being a prime example.

Appadurai notes the internal innovations of the Mumbai NGOs: their patience, their "bias against 'projects'", their nonhierarchical styles, their strategies of precedent. He sees these groups fostering improvement to the lives of Mumbai's slum-dwellers. The central contribution of these housing activists in Appadurai's estimation is increasing the poor's "capacity to aspire."

Improvements in the capacity to aspire can result from deliberate political and social action -- by and on behalf of Mumbai's poor (and by extension the world's poor). These hopeful possibilities result from modernization/globalization -- they depend on e-mail and cell-phones, and the formation of transnational networks of activists, which distribute notions and celebrate achievements. The Future as Cultural Fact is a hopeful book; it suggests that social science can indeed contribute, in a modest manner, to social progress.

Follow me on Twitter @jefferyatik

California State Bar Driving Solutions to Crisis in the State Courts

2013-04-29T18:52:02Z

By Patrick Kelly, Guest Alumni Blogger

Regarding the crisis in the courts that I discussed in my previous blog post, I have been asked "What is the Bar doing about it?" The answer is: The Bar as an agency of the government can only take limited action; however, it is strongly supporting the work of the Bench-Bar Coalition and the Open Courts Coalition that exist for the sole purpose of keeping the courts open for the public through increased funding. I am on the steering committee of the latter group, chaired by Paul Kiesel and Naill McCarthy, and we are working together to facilitate budget discussions between the various departments of the court.

More importantly, we have been regularly meeting with court officials, representatives of the executive branch and legislators. For example, on March 11, both the BBC and the OCC traveled to Sacramento to meet with legislators and support the court by attending the Chief Justice's State of the Court address. I personally met with many legislators, including the chair of the Assembly Judiciary Committee, to underscore the crisis and secure full funding for our courts. I am pleased to say that everyone with whom we met understands the importance of the issue to their constituents and agrees we are at risk of losing many of the benefits of our justice system. To a person they support increased funding for the courts.

The question remains, "Where do we get the money?" That can be answered in part by using part of the budget surplus we have been told will exist. However, the real answer is for the executive and legislative branches to elevate the judicial branch to the very top of their priority scale. Why? The answer is simple: The court system is the gatekeeper for the rights of all Californians. It provides the only vehicle to enforce their rights under all of the other programs and agencies the legislature funds. All of the bills and laws in the world make no difference if there is no viable court system to enforce them. Thus the separate branch of government that is our justice system is integral to all other laws and programs, and indeed they cannot exist without it. Stated otherwise, although only taking 1 percent of the state's general fund, the courts must remain available to enforce 100 percent of the rights of 100 percent of Californians no matter what the right or law they are seeking to enforce.

What can you do to help ameliorate this crisis? We must come together to reach out to the legislature and the executive branch and to enlist the aid of community organizations in this quest. Now is the time to call your assembly members and senators and let them know how important this issue is to their constituents who even now are being denied their constitutional right to access to justice. Your voice will count.

Patrick Kelly is the Western Region Managing Partner at Wilson Elser Moskowitz Edelman & Dicker LLP and president of the California State Bar. A recipient of Loyola's Distinguished Alumni Award, he sits on the board of the Law School's Advocacy Institute and was elected to the Law School's Board of Overseers.

And That's What 'Glee' Missed on 'Glee'

2013-04-25T17:14:04Z

By Associate Dean Michael Waterstone

This op-ed originally appeared in the April 24, 2013 edition of the Daily Journal.

Last week's episode of the popular TV show "Glee" dealt with the issue of gun violence. At the high school where the show is set, two random gun shots are fired. Terrified, everyone shelters in place until the SWAT team gives the all clear. Police search for the culprit. Later, it is revealed that the shots were inadvertently fired by Becky, a character with Down's syndrome. Scared and frustrated that her high school experience was ending, and facing what she believed to be an uncertain future, she decided to bring a gun to school.

"Glee" has received praise and awards for how it contributes to society's understanding of people with disabilities. One of the main characters on "Glee," Artie, uses a wheelchair (although the actor who plays Artie does not). The show has gracefully managed the line between highlighting how thoughtless socially constructed barriers can make Arnie's life difficult, but for the most part, he is just one of the gang going through what all the characters go through: falling in love, deciding what he wants to be, and always singing and dancing. Similarly, having Becky, a character (and actor) with Down's syndrome, allows an exploration of the sometimes stigmatizing ways in which people perceive her, while also allowing her to be a high school student trying to find her way in life. The show does not revolve around these disabilities, but neither does it ignore them.

For many viewers, "Glee" has helped shape perceptions of what it would be like to have a world where people with disabilities are in the mainstream. Culture has power - for too long, the only depictions of people with disabilities in TV, movies, and books were as villains (think Captain Hook or Captain Ahab) or as helpless and childish (think Tiny Tim). "Glee" does much better than that. For other viewers, especially the younger generation, "Glee" is just a reflection of what their world already looks like, where civil rights laws have required the inclusion of students with disabilities into mainstream life to the greatest extent possible. Among other laws, the Individuals with Disabilities Education Act remedied the traditional exclusion of students with disabilities from schools, and the Americans with Disabilities Act has helped improve accessibility of public spaces. When I am teaching my law students about these laws, many of them have grown up with people who use wheelchairs or developmental disabilities in their schools and lives. But for those that have not, often times the characters on "Glee" serve as their proxies for people with these disabilities.

I usually enjoy watching "Glee." But the show's creators badly missed the mark by making the choice to depict Becky as being the source of potential gun violence. This was objectionable for two reasons. First, the source of Becky's frustration was that she was leaving high school and did not have any advanced education as an option. This ignores college options for people with developmental disabilities, an odd omission for a show that has so carefully focused on depicting a realistic, not stereotypical, life for someone with Down's syndrome.

But second, and more seriously, by having Becky be the character responsible for the gun scare, the show created a link between mental and developmental disabilities and gun violence. Even if this was not intentional, it was certainly insensitive to the many ways that the public and members of the media tend to casually believe that mental illness contributes to and is responsible for recent tragedies. After both the Colorado and Newtown tragedies, news accounts emerged both making the potentially erroneous assertions that the shooters had some form of mental or developmental disabilities, and, despite the lack of any evidence, implying a connection between this media-driven diagnoses and the violence. Wayne Lapierre, the head of the National Rifle Association, added fuel to the fire with his alarmist public remarks that there are "monsters" living among us, and seemingly advocating a national registry for people with mental illness.

Mental and developmental disability is a stigmatized and misunderstood category. But the reality is that people with mental illnesses and developmental disabilities are no more violent than people without mental illnesses and developmental disabilities. No one who is dangerous should have access to a gun, mental disability or not. But to draw a direct line from mental or developmental disability to gun violence, as "Glee" did, is misleading, wrong, and contributes to prejudice against people with mental illness. Unfortunately, this leads to heightened sensitivity and fear of seeking treatment, and helps reinforce the chronic underemployment and social marginalization of people with mental disabilities.

I am a realist: I realize that the creators of "Glee" are in the business of getting ratings and producing what they believe is an appealing show, not necessarily making the world a better place. But what makes this particularly frustrating is that over the course of the show, they seemed to have wanted to do more. They have addressed difficult topics (including disability) in a constructive and entertaining way - no small feat. It was likely in that spirit that they approached school violence, but in playing too easily into harmful stereotypes, they can and should be criticized.

What's at stake in Metrish v. Lancaster

2013-04-24T16:37:47Z

By Associate Visiting Clinical Professor Lara Bazelon

In the Supreme Court case of Metrish v. Lancaster, the state appeals the finding of the Sixth Circuit's grant of habeas relief to Burt Lancaster (no relation to the actor), who was twice tried and found guilty for the murder of his girlfriend. In the first trial, Lancaster raised both insanity and diminished capacity defenses. The jury rejected both, but because of an unrelated constitutional error, the conviction was set aside.

At the second trial, Lancaster again sought to raise the insanity defense. In the interim, however, the Michigan Supreme Court abolished the defense. That decision was applied to Lancaster retroactively. Lancaster was once again convicted and sentenced to life in prison.

After exhausting his state court appeals, Lancaster filed a writ of habeas corpus in federal court. Lancaster lost in the district court, but prevailed before a divided panel of Sixth Circuit judges, which granted the writ after finding that Lancaster's due process rights were violated.

To find in Lancaster's favor, the panel had to clear two exceptionally high hurdles erected by the United States Supreme Court's retroactivity and habeas jurisprudence. On the retroactivity front, the court of appeals had to find that the Michigan courts' abolition of the diminished capacity defense was "unexpected and indefensible." On the habeas front, the bar was even higher: the Sixth Circuit had to find that the Michigan courts' decision to apply retroactively to Lancaster its "unexpected and indefensible" decision was "so lacking in justification that there was an error well understood and comprehended in existing law beyond any possibility for fairminded disagreement" among reasonable jurists.

You may be wondering exactly what kind of habeas petitioner could possibly prevail under either standard, much less both. I'm not sure I know the answer, but I'm pretty sure it isn't Lancaster.

The dissenting judge on the Sixth Circuit panel laid bare the shaky foundations of her colleagues' opinion. Simply put, the majority could not overcome a standard of review so highly deferential that it allowed federal judges to grant relief to state court petitioners only in cases of "extreme malfunctions in the states' criminal justice systems."

My take: This dissent, coupled with SCOTUS' decision to grant cert, signals swift reversal.

Atraverso Review: Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb

2013-04-22T20:57:44Z

By Professor Jeffery Atik

Nassim Nicholas Taleb is back, and in his new book he asserts that his signature idea was not The Black Swan (that was so last book), but rather Antifragility. This second idea shares a viral quality with the first; like the Black Swan, once you catch the notion of antifragility, it's hard to get rid of it.

Antifragility is the characteristic of certain systems to grow stronger when stressed; it is the mirror concept to fragility (where stress destroys). Exercise stresses our muscles, and so renders us stronger. As Taleb insists, antifragility is not robustness -- robustness is merely resistance to stress. Stress improves the antifragile. And in a world where stresses cannot be avoided, it is better to be antifragile.

I admit to being a Taleb fan -- and not everyone is. Most all -- critics and admirers -- agree he is an engaging and imaginative thinker. But he does seem to go out of his way to be, shall we say, difficult. Antifragile is an odd book -- it is a collection of personal essays mixed with some rather formal decision theory. That said, the personal (and the fictional) do serve the argument.

Taleb sees antifragility everywhere. Indeed, he is an avid antifragility spotter -- which results in no small amount of quirkiness in his personal life. At times Taleb convinces, at times he doesn't -- as his examples (or speculations) range from finance to picking bar fights to drinking too much wine. And so we get views of Taleb's various cantankerous postures. Physicians by and large do more harm than good (as they are compelled to do something) -- and so should be avoided outside of dire emergency. Universities are dangerous -- better to wander in a library.

As Taleb would concede, there are many more instances of fragile systems than antifragile ones. So a large part of the book is exploring the roots of fragility -- and possible moves to avoid fragility's dangers. Taleb provides a host of tantalizing heuristics -- take small over large, simple over complex, acute stress over chronic stress, the natural over the artificial. Old technologies are to be prefered over new ones -- as those technologies that have already survived the stresses of experience are more likely to remain viable (this is an example of the Lindy effect). It is no surprise that Taleb writes with a fountain pen. Of course Taleb may be wrong in particular instances. I suppose his cardiologist (if he has one) is horrified by his binging diet and his disdain for statins.

Finance is the field where Taleb has his most important following. Antifragility becomes an investment design goal -- one should lay certain risks off on 'suckers' while accumulating plays that pay off greatly in certain extreme situations. His antifragile model portfolio -- drawn to demonstrate the 'barbell' idea -- would have 90 percent in cash and the remaining 10 percent in an investment with a "massive upside". Ten percent loss would be the worse case; the upside is to be left to "take care of itself." This example of structural asymmetry matches the wildly optimistic with the paranoid in each of us -- two qualities Taleb sees in himself. These strategies may well be psychologically suitable -- but it remains to be demonstrated how they perform. I suspect they would perform well precisely when we need them; Taleb's barbell portfolio would have handled the Financial Crisis quite well.

In the final chapters, Taleb explores the ethical implications of our fragile world. The Taleb persona is an odd, though admirable fellow. He avoid the fragile deceptions of risk avoidance (no hiding from life's hazards in a tenured post at the university for him) and seeks a flux of new experience. He is a self-described flâneur, seeking "optionality." And yet there is a certain fatalism to his life-view. We should aspire to live long, but not too long: "place aux autres", Taleb says.

There is much behavior that offends him. His examples seem a bit catty -- as he uses the names of individuals he cares little for (Joseph Stiglitz, Alan Blinder, Robert Rubin) to label categories of unethical conduct. He excoriates the bankers (like Rubin) who construct free options (heads I win, tails I win). Yet his access to the antifragile depends at times on the presence of 'suckers' -- those who succumb to the various fallacies Taleb identifies and avoids. Perhaps his sucker bets are ethically unproblematic -- the suckers after all (when playing against Taleb, but not Rubin) do win in the ordinary case.

Taleb's ethics reflect the influence of newish sociobiological ideas (notwithstanding his preference for the seasoned in ideas). He seems to accept the fate of the species as a more appropriate locus for concern than the fate of any particular individual, including Taleb himself. Taleb seems to seek the status of a free man -- which he calls 'self-ownership': a kind of detachment that results from a mix of independence, retreat and stoicism. It is from this position that one may practice altruism.

In the end, Taleb's antifragile prescriptions may have greater ethical, or psychological, content than predictive value. But if that is so, I suspect it would not trouble Taleb. He would certainly prefer to be seen as a philosopher (or a moralizing kind) than as a financial analyst. He remains restive and inquisitive -- and that's a good thing. The flâneur's life is inherently experimental.

Follow me on Twitter @jefferyatik

Introducing Guest Alumni Blogger Pat Kelly

2013-04-22T17:52:50Z

I am excited to introduce our second guest alumni blogger. We are proud to welcome Pat Kelly to our Summary Judgments blog. In addition to being a Western Region Managing Partner at Wilson Elser Moskowitz Edelman & Dicker LLP, Pat is the current President of the California State Bar. He is also a member of the Law School's Board of Overseers. We are looking forward to having Pat blog about many of the important issues facing the bar, including the court funding crisis.

-Associate Dean Michael Waterstone

Court Funding is Biggest Barrier to Justice for Citizens

2013-04-22T16:28:02Z

By Patrick Kelly, Guest Alumni Blogger

I believe the current court funding crisis is the greatest threat to our justice system and access to justice for our citizens I have seen in my 42 years of practice. I have focused upon this as the number one issue affecting the public and lawyers in California and have made it an integral part of every speech and discussion I have had since taking office in October. Examples of the carnage caused by these funding cuts exist everywhere in California -- seven courthouse closures in Fresno, four courthouse closures in San Bernardino County and 10 courthouse closures in Los Angeles County, just to name a few examples.

The real toll is to the users of our courts -- the citizens of California who have a constitutional right to full and fair access to our justice system. Not only are we losing the neighborhood court system that provided access to all, but also user fees have escalated to the point that we are moving toward a disastrous pay-for-play system that is certainly not what the framers of our Constitution had in mind when they defined our rights. Moreover, the framers of our Constitution could not have envisioned a system where the rich have access through private judging whereas those less affluent and the poor have to stand in a line that because of a decline in resources is growing longer. These cuts have also threatened small businesses, the very engine of California's economic recovery. The importance of this issue cannot be overstated. Paraphrasing Alan Greenspan, one of the key elements of business growth is ready access to a justice system that provides prompt dispute resolution.

Some argue that despite the budget cuts to the branch over the past few years, the funding has remained relatively stable due to the use of backup funds. That statement does not even scratch the surface of the whole story and implies that somehow the courthouse closures and longer lines don't exist. The truth is that while other states that fund courts generally spend about 2 percent of their general fund on the court system, in California it is 1 percent. In fact, the share of court funding that comes from the state general fund in California has fallen from 56 percent to 20 percent since 2008.

As noted, much of the money used to yield the impression of "stability" has come from redirection of court construction funds into court operations ($891 million since 2008); mandatory spend down of reserves ($500 million); redirection of funds intended for statewide court programs ($414 million); and increases in user fees ($397 million). Thus the fact is "stability" has left the court with a decimated construction and maintenance program, an almost complete loss of reserve funds necessary for court operations and a much higher cost for access to the long courthouse lines. And it gets worse. The ability to take courthouse construction funds is almost over and there is little left in reserves. In short, the money movement devices have now run out and the state will have to step up or we have only seen the tip of a much bigger iceberg of courthouse closures and staff layoffs. All of this leads to the inescapable conclusion that justice is being denied, and the magnitude of that denial is growing with each passing day.

Next week: How to solve the crisis...

Atraverso Review: The Bankers' New Clothes: What's Wrong with Banking and What to Do about It by Anat Admati and Martin Hellwig

2013-04-11T23:23:24Z

By Professor Jeffery Atik

I have the odd habit, with academic writing, of first reading the notes and then returning to the central text. I like to see the foundation of a work. Would that I had read the notes to The Bankers' New Clothes first! For The Bankers' New Clothes is really two books which I had read in sequence (slave as I was to the Kindle's primitive formatting). The first book -- the primary text of 228 pages -- seemed simple-minded, sometimes shrill and often tedious. It argues for a significant increase in the amount of 'capital' (a specialized term in banking regulation) banks should maintain. The second book - the 107 pages of dense notes -- reveals a much more subtle, more flexible and more open understanding of the issues. This 'book' is more useful and persuasive. I recently heard co-author Anat Admati speak in Los Angeles. She described her surprise when first viewing the book as published, that it was so 'short' when the notes were stripped away and shuttled to the back of the book. It matters (Kindle take note) how books are presented; I would have had a better impression on my first read had these rich notes been on the page or gathered at the end of each chapter. And perhaps these authors will speak up the next time they write for the broader public.

Admati and Hellwig are on a mission. They fervently believe that banks should be required to hold more capital than present rules require. And by more, they mean much much more. From current rules that require, depending of the measure, 3 to 7 percent of a bank's assets, to something on the order of 20 to 30 percent. They demonstrate that such higher levels of capital (think of this like the ratio of equity to the fair market value of a house) would significantly increase the robustness of the entire banking system, relieving the state from facing new rounds of bailouts. Moreover, as the leverage of bank's decrease, banks will be less likely to attract the risk-seeking buccaneers that have managed our great financial institutions into the ground.

Most of the argument here is negative -- Admati and Hellwig counter the various claims promoted by bankers to justify the maintenance of low pre-Crisis levels of mandatory capital. Leverage is good, of course, for bankers -- they quickly harvest a good deal of the upside (through compensation) and, together with depositors and bondholders, largely escape the downside due to government supports, including ex post bailouts. In such a topsy-turvy world, management would be dim to resist gambling wildly on high risk, high yield plays.

Bankers are the villains of this book. Their stories seduce regulators and their campaign dollars gain the uncritical support of members of Congress from both parties. There is very little resistance to their arguments and few who voice the interests of the broader public. Admati and Hellwig are to be applauded for stepping into the fight.

Consider this argument: requiring banks to hold more capital will reduce the supply of credit to the real economy -- and so will further drag out the Great Recession. Admati and Hellwig give two responses: first, this is not so, and second, even if it is, it would not be a bad thing (at least in the longer run). The supply of credit by banks -- such as the making of loans -- constitutes assets. By fixing capital requirements, the regulator necessarily limits the supply of credit for a given amount of capital. Here the bankers and Admati and Hellwig agree. If you increase the capital ratio, you must reduce the supply of credit, again for a given amount of capital. But Admati and Hellwig do not accept that the amount of capital underlying the banking system would be fixed; rather they argue that one could maintain the existing supply of credit by simply shifting the capital mix. More equity, less debt. And perhaps this would result.

Admati and Hellwig respond to the concerns of stifling the economy by proposing a phase-in of higher capital requirements -- with the newly-required additional capital to be built up from retained earnings. This would involve restrictions on the payment of dividends -- and perhaps limits on compensation as well. It does have the appeal of a moderated approach.

And they leave us with the thought that perhaps our economy does not require as much credit as we have grown used to. Perhaps, they suggest, we have been weakened by cheap credit much as we are sickened by the abundance of cheap food.

Follow me on Twitter @jefferyatik

Prof. Natapoff's "Misdemeanors" article honored with 2013 Law and Society Association Article Prize

2013-04-09T16:00:52Z

Professor Alexandra Natapoff was honored with the 2013 Law and Society Association Article Prize for her law review article "Misdemeanors," which was published by the Southern California Law Review.

Abstract:

Misdemeanor convictions are typically dismissed as low-level events that do not deserve the attention or due process accorded to felonies. And yet with ten million petty cases filed every year, the vast majority of U.S. convictions are misdemeanors. In comparison to felony adjudication, misdemeanor processing is largely informal and deregulated, characterized by high-volume arrests, weak prosecutorial screening, an impoverished defense bar, and high plea rates. Together, these engines generate convictions in bulk, often without meaningful scrutiny of whether those convictions are supported by evidence. Indeed, innocent misdemeanants routinely plead guilty to get out of jail because they cannot afford bail. The consequences of these convictions are significant: in addition to the stigma of a criminal record, misdemeanants are often heavily fined, incarcerated, and/or lose jobs, housing, and educational opportunities. In other words, petty convictions are growing more frequent and burdensome even as we devote fewer institutional resources to ensuring their validity.

The misdemeanor phenomenon has profound systemic implications. It invites skepticism about whether thousands of individual misdemeanants are actually guilty. It reveals an important structural feature of the criminal system: that due process and rule-of-law wane at the bottom of the penal pyramid where offenses are pettiest and defendants are poorest. And it is a key ingredient in the racialization of crime, because misdemeanor processing is the mechanism by which poor defendants of color are swept up into the criminal system, i.e., "criminalized," with little or no regard for their actual guilt. In sum, the misdemeanor process is an institutional gateway that explains many of the criminal system's dynamics and dysfunctions.

Atraverso Review: Noble Savages: My Life Among Two Dangerous Tribes - The Yanomamö and the Anthropologists by Napoleon Chagnon

2013-03-28T20:11:42Z

By Professor Jeffery Atik

Napoleon Chagnon's title promises a visit to two dangerous tribes: the Yanomamö and the Anthropologists. He provides a disjointed treatment. The larger part of the book takes the form of memoir, a return by Chagnon to the people he studied over the greater part of his career. The later chapters address the academic scandal surrounding Chagnon's work - and his place within the evolving discipline. Chagnon defends himself here - but he does not 'scientifically' study his anthropologist accusers: their violence (as opposed to that of the Yanomamö) is not explained.

Chagnon made the Yanomamö famous: his monograph (subtitled "The Fierce People') was widely studied (it was a highlight of the undergraduate Cultural Anthropology course I took). And of course the Yanomamö made Chagnon famous.

Chagnon's work was always controversial. He presented the Yanomamö as among the world's few remaining "Stone Age" people, largely isolated in the regions dividing Venezuela and Brazil. From here they subsistence agriculture from ever shifting villages. The Yanomamö were hardly unaffected by encounters with the outside -- they grew plantains and other crops that had been introduced to South America and prefered modern tools (including the machete and shotgun). Chagnon depicted the Yanomamö as a violent society, characterized by treacherous killings, inter-village raids, and systematic abduction of females. The Yanomamö were not Rousseau's noble savages.

Chagnon's scientific work with the Yanomamö involved careful collection of data over a fairly long horizon -- tempered with some theorizing that gets him into hot water. Perhaps his most controversial claim was that Yanomamö competition (which is to say, violence) was directed at the acquisition of women -- and not of material resources. And violence is celebrated: men who have killed others (known as unokais) secure status and -- Chagnon documents -- have significantly more offspring than their more peaceable neighbors. Chagnon suggests that past human experience was much more brutish than we'd like to imagine. Still in his focus on violence from the perspective of competing (and cooperating) males, he overvalues male agency and neglects to inquire of the female Yanomamö: what is it that they seek?

Chagnon also relates his struggles with the Salesians -- the Catholic order charged by Venezuela with overseeing the welfare of the Yanomamö. Both Chagnon and the Salesians use trade (the provision of tools) to advance their respective missions among the Yanomamö. This erupts in political conflict that results in Chagnon's exclusion from Yanomamö territory and thus the end of his field research.

And Chagnon acquires new theoretical habits that seem (to him at least) to fit his earlier observations. He finds much in E.O. Wilson's sociobiology that explains Yanomamö social behavior. As these ideas develop, he repositions himself in the new fields of evolutionary science. The abduction of women, the unokais' greater number of offspring -- these cultural practices (if we can term them such) reflect competition over reproductive resources.

Chagnon displayed his new orientation in "the late 1980s" by resigning from the American Anthropological Association. The AAA in 2000 famously attacked Chagnon and his work, prompted by the eventually discredited assertions made in the book Darkness in El Dorado. The accusations range from methodological shortcomings (some of these stick) to the deliberate introduction of measles (which is found to have had no foundation). The AAA shamefully flips and flops as the 'scandal' plays out.

Anthropology is a famously fractured discipline. For over a generation, most university departments have been divided into four sections: the cultural anthropologists, the physical anthropologists, the archeologists and the linguists. Yet for the most part they remain grouped in the larger unit where they engage in some of the university's most notorious infighting. Why do they not 'fission' (a word Chagnon seems to like) as do Yanamamö villages when they grow to a certain size and squabbling displaces harmony?

Why do the anthropologists fight each other? Is it over material resources (as the Marxists would suggest)? Or do they compete like the Yanamamö over reproductive resources (graduate students or journal placements)?

Why does the academy rise up and toss Chagnon out? Is he no longer sufficiently 'fierce'? Or does 'fierceness' no longer earn status within American anthropology? Professional envy goes only so far as an explanation.

Chagnon no doubt felt the need to defend himself - to correct a historical and institutional record that unfairly dismissed him and his work. And so he attacks his enemies on every ground. Time it seems is on Chagnon's side - his earlier detractors now seem puny. But a better book might have applied the kind of inquiries to the "dangerous tribe" of anthropologists that Chagnon pursued with the Yanamamö.

Follow me on Twitter @jefferyatik

Atraverso Review: Bull by the Horns: Trying to Save Main Street from Wall Street and Wall Street from Itself by Sheila Bair

2013-03-21T22:31:07Z

By Professor Jeffery Atik

Bull by the Horns is part defense of past action, part call-to-action. Sheila Bair served as chairman of the Federal Deposit Insurance Corporation, one of the chief federal bank regulators, from 2006 through 2011 -- and thus rode the entire wave of the Financial Crisis. By her own account, she clashed with officials of both the Bush and Obama Administrations (in important cases, these were the same individuals). And throughout these times she was the most prominent woman in United States financial regulation.

Bair becomes the FDIC in this story -- she absorbs its mission and makes it her own. The FDIC has a peculiar mission -- and it has never been the only law in banking. Bair believes in deposit insurance but not bailouts. Deposit insurance is paid to depositors in the event of bank failure; bailouts are payouts to shareholders, bondholders and management in the same circumstances. There is a distinction here -- but perhaps not as self-evident a one as Bair imagines. Both deposit insurance and bailouts (under the Too Big to Fail doctrine or otherwise) create moral hazard. Bair though sees banking policy through the FDIC lens -- depositors (up to the FDIC limits) are to be given continuous access to their funds in the event of failure; shareholders and bondholders are to be wiped out and -- at least in most cases -- bank management is to be fired. All very by the book. Which is to say, Bair wants the bank resolution system to work as it is promised to work -- which of course is not at all what happened following the Financial Crisis.

Moreover, Bair seems to have little sympathies for the other agencies involved in federal banking regulation, unless their objectives accidentally converge with those of the FDIC. The Office of the Comptroller of the Currency and the Office of Thrift Supervision are consistently dismissed as completely captured by the institutions they regulate; the Department of Treasury is a political instrument of the White House (although Treasury is often portrayed as a rogue department under Timothy Geithner). The Fed is okay most of the time -- Bair is generally admiring of Bernanke -- but the New York Fed is a different story. Throughout the book, Bair signals which players were friends and which -- the greater number -- were enemies. In all, it is a very personal book: Washington is a field for contesting personalities.

Bair frequently notes her outlier status -- as a woman whose presence disturbs the boys clubs of Washington and Wall Street. Here she is most convincing; one feels the slights she took. She bristles at and takes pride in the snide e-mail of OTS chief John Reich: "I cannot believe the continuing audacity of this woman." Bair is still of the pioneer generation of powerful women -- her politics and values may be conservative, but her experiences form her as a feminist. She surprises herself when a group of women antiwar protesters cheer "Give it to 'em, Sheila!."

Bair describes herself as a Main Streeter -- a 'lifelong Republican' from a small town in Kansas who has been simply blessed with common sense and a sense of public service. She notes she hasn't profited from any revolving door -- she and her husband have a sensible fixed-rate mortgage and she bought her 'fat cat' suit at Macy's for $139. Feminist though she may be, she is essentially Midwestern.

One of the charms of Midwest populism is conviction -- and Bair firmly holds her ideas. At times this leads to probable oversimplification of a more complex reality. I do not know Timothy Geithner. Perhaps Geithner really is an Archfiend, as Bair seems to believe he is (and Robert Rubin, for her, the Prince of Darkness), intent on saving Citibank at any and all costs due to venal personal interests. But there is at least a plausible case that the failure of Citibank might have sent systemic shock waves through the reeling global economy, provoking an even greater catastrophe. Bair fails to acknowledge this possible reading of the banking system's predicament -- a reading that would supply a less self-interested justification for Geithner's actions.

Bair, though widely praised and wildly popular, has had many critics throughout. She takes considerable pains to correct -- in her view -- the accounts of others concerning her various actions taken during the Crisis. If there is a singular idea Bair presents in Bull by the Horns, it is the desirability of having multiple regulators (she fought Chris Dodd's plan for a single financial regulator, along the lines of UK's FSA). The motive for this might be largely defensive: to preserve the independence and mission purity of the FDIC. But multiple points of regulatory authority may be salutary in a Washington poisoned by capture.

Follow me on Twitter @jefferyatik

Angelenos: United in Voter Apathy?

2013-03-20T16:24:39Z

By Associate Clinical Professor Jessica A. Levinson

Mayoral candidates Eric Garcetti and Wendy Greuel are now in the final stretch of their campaign to become the next mayor of Los Angeles. Following the March 5 election, both candidates will seek to motivate voters to go to the polls. But what voters? According to preliminary numbers, only 16 percent, yes that's right, only one out of six voters went to the polls or mailed in ballots. In a city divided over so many issues, it seems elections have managed to unite 84 percent of eligible Angelenos in laziness, boredom, apathy, or all of the above.

In Los Angeles, the second most populous city in the nation, there are approximately 1.8 million eligible voters and 3.8 million residents. This means approximately 290,000 voters weighed in on decisions that will affect nearly four million people. Another way of thinking of this is that each voter voted for the interests of 12 people living in Los Angeles.

I cannot claim to have a comprehensive knowledge of the reasons behind this significantly depressed turnout, therefore I cannot seek to propose solutions to this problem. But I do know that by sitting out elections we are giving a few of our fellow Angelenos, those who cast ballots, a great deal of power over the face of our city government. In essence what we have is a city of residential representatives who chose our political representatives. But, of course, no one appointed or elected this first group -- they merely decided to take part in our democracy.

Finish reading this post on KCET.org.