Conglomerate

An SSRN for teaching materials?

2009-11-20T12:47:00-07:00

Open source and peer production ideas can also improve law teaching. There have been some very helpful trends already in this direction. Many legal scholars post articles on teaching and even some suggested exercises on SSRN. Larry Cunningham (GW) edits the SSRN 'Law Educator' e-Journal. In addition, there has been some sharing of syllabi on the AALS New Law Profess listserv.

It might be time to think about a separate non-commercial website devoted just to sharing teaching materials. SSRN is great, but the disadvantages are that teaching materials can get lost in the mass of scholarly papers, and professors might appreciate a password-protected site that students can’t access. But a new website could have many advantages of SSRN. For example, download counts could be used as one metric of the success of teaching materials. This could be enhanced with a system for tracking how many professors adopted materials. These aren't the only metrics for what makes a good teacher, but they could help.

Of course, professors need to take care not just to cut and paste from materials. I remember a story from about two years ago of a state bar disciplining an adjunct for cutting and pasting from old exams.

Perhaps there is a site already out there of which I'm not aware.

Moot court for transactional law

2009-11-20T12:09:53-07:00

Business law professors can learn a lot about teaching from our colleagues in trial practice. Last week, I mentioned how Therese Maynard (Loyola-LA) has developed a Business Planning simulation course for over 60 students. She uses practitioners as co-teachers using Trial Practice courses as a model for the course.

Karl Okamoto (Drexel) is also borrowing from litigation courses. Drexel is hosting the first "Transactional Lawyering Meet" for law students on March 4-5, 2010. Here is a link to what looks like a promising adaption of moot court to transactional law. I think some of the Glom bloggers will judging alongside with practitioners. I'm looking forward to seeing what the students can do and taking some ideas back to New Mexico.

Karl also has some stimulating ideas about creating a NITA like organization to train transactional lawyers. I'm sure some of the Glom bloggers will be following up on Karl's ideas after a conference at Drexel on the subject.

A Wiki for Contracts: Transactional Lawyers Wanted

2009-11-20T09:40:08-07:00

Some of my previous posts explored the implications of the Open Source movement for financial regulation. Other legal scholars in the corporate field are taking similar ideas on peer production and collaboration in provocative directions.

George Triantis (Harvard) has set up a "Contracts Wiki" to allow transactional attorneys to collaborate and design better agreements. The theory is if peer production works in software (like Linux), it should work for transactional documents too. They are just different kinds of code. This project is not only an interesting scholarly endeavor, it may also provide real value for both lawyers, particularly in smaller firms, and their clients.

The wiki will only pay dividends though if a sufficient number of practitioners participate. If you are interested here is the link.

Open Financial Regulation

2009-11-19T17:09:24-07:00

I've written a number of posts on my research so far that applies Open Source concepts to risk models and to improving securities disclosure. We should also turn the lens on financial regulators and explore ways in which greater transparency can ensure regulators are more effective at their jobs.

The examination of financial institutions appears to be incredible intensive (I needed a flash drive to store the examination manuals for the FDIC for my research files). But regulatory forbearance has long been a concern in banking law. In other words, how do we know those manuals are being followed; sometimes regulators may not blow the whistle on problems at a financial institution for various reasons, including career preservation.

Because of the opacity of examinations, we don't know when regulators are refusing to do their job or when they make mistakes. This problem is compounded as the business of banking (or insurance or investment banking) has become more complex. Consider how difficult it is for any regulator to audit any single firm's financial condition or modeling let alone to spot systemic risks caused by homogeneity or blindspots among the models of numerous institutions.

Greater transparency of the examination process would allow the many minds of the marketplace to backstop regulators and uncover both errors and forbearance. Again, this borrows heavily from ideas in Open Source software.

Note that greater transparency would have restored the public and market's confidence in some of the major crisis management decisions of the past year - such as why Bear and AIG were bailed out and Lehman was allowed to fail. We can engage in academic arguments forever about the wisdom of the bailouts, but so far we have had to trust the regulators. Similarly, how do we know that those vaunted stress tests of banks were valid?

Please note that I do not advocate Congressional oversight of monetary policy. That is a downright horrible idea. I'd substitute a few bluer adjectives for "horrible" were this not a family blog. But there is a huge difference between making regulations - including monetary policy - transparent to the marketplace and to the public and giving control over the interest rate punch bowl to a group that faces reelection every two years.

There are legitimate arguments that immediate transparency may contribute to panics and banks runs. There are also limitations to the "many minds" argument, as Adrian Vermeule (Harvard) has written about. In economic terms, many minds can sometime devolve into herd behavior whether rational (information cascades) or irrational.

But there is little reason why we can't at least have post hoc transparency.

Big State Law School?

2009-11-19T14:57:28-07:00

I've been enjoying Erik's posts, particularly his back-and-forth with Larry (and apparently much of the blawgosphere) on the fate of the Big Law School. Focusing on what's important, I can't help wondering how the impending cataclysmic change in legal academe will affect...well, me. And I can't help thinking that State Law might be a big winner in the Great Big Law Fallout.

Take Georgia Law. If the problem is, as Erik writes, that the business model of Big Law School depends on students getting high paying law firm jobs to pay off high law school tuition, well Georgia's in-state tuition is $14,448 per year. Out of state is twice as much, but you generally qualify for in-state tuition after your first year. We're certainly talking about debt, but not the level of debt that hinges on earning a Big Law salary straight out of school.

Also, our identity is resolutely Georgian. Yes, we send our graduates to DC, Chicago, New York, and the West Coast. And we're proud of having had Supreme Court clerks 4 out of the past 5 years, and of our success in placing graduates on the teaching market. But while many of our graduates work in Big Law in Atlanta or Charlotte, most don't. Students generally come here because we train the future state legislators, judges, and governors of Georgia. They come because they want to be prosecutors or public defenders, or practitioners at small or medium-sized firms, and they know they'll get a great education at a great price. I don't see Big Law's demise changing that, except to make State Law look like even more of a value proposition.

Or maybe I'm just on the Titanic's lido deck, enjoying a glass of bubbly. At least the view's good.

If Complexity is the Problem, is Technology the Cure?

2009-11-19T14:34:15-07:00

We hear a lot about "complexity" as a contributing factor to the financial crises. Steven Schwarcz (Duke) pins blame on the complexity of financial products like asset-backed securities.

We need to be precise about what "complexity" means. In a paper (not quite ready for ssrn, but which I'll post in December), I outline three types of complexity for financial products:

1. Contractual complexity: this form of complexity measures how intricate the contractual terms of a financial product are. For example, how complex are the terms governing subordination and how many tranches of securities are being issued. I don't think contractual complexity poses as big a problem for sophisticated investors.

2. Derivative complexity: this form of complexity is created by the fact that asset-back securities and derivatives derive their value from underlying assets. But those underlying assets may in turn derive their value from other assets -- mortgage-backed securities are used to create CDOs which are used to back CDO squareds. Rinse, lather, repeat ad infinitum.

The problem with derivative complexity is that small errors in calculating the risk associated with underlying assets are magnified at each step of the securitization and credit derivative chain. So that a small error in calculating the risk of default on mortgages can translate into huge errors in pricing CDO squareds. The risk of error is magnified when there are unexpected correlations in losses on assets. For a great paper on this topic, see here. The problem is that, given multiple layers of securitization and hedging, it is now extremely difficult for any investor or swap counterparty to identify the ultimate assets that underlay their financial instrument.

Derivative complexity is a huge problem for financial products.

3. Systemic complexity: This form of complexity captures the idea that the value of financial instruments like asset-backed securities depends not just on the value of underlying assets, but the value of substitute financial instruments in the marketplace. These values, in turn, depend on market interest rates and on the trading behavior of multiple financial institutions. As I noted in an earlier post, homogeneity among the trading strategies of many firms can pose serious systemic consequences.

One approach to forms of complexity would be to put regulatory limits on the complexity of financial products. I'm not sure (1) how these regulations would work effectively, (2) if we understand the cost of prohibiting additional risk spreading, and (3) if this is politically feasible.

So I explore alternatives of using technology to help investors - particularly but not exclusively the sophisticated investors who purchase asset-back securities - better understand these forms of complexity.

One proposal is to require that assets going into a securitization have data tags affixed to them to allow investors to trace back and find the ultimate underlying assets that back their securities. This builds off the SEC's XBRL initiative, which requires issuers to affix data tags to their electronic SEC filings to allow investors to download information directly into spreadsheet and other analytic software. Data tagging assets has already been proposed, but I'm not sure if policymakers understand why this is so important.

Technology can also help us improve securities disclosure beyond asset-backed securities. I also examine whether we can make all securities disclosure more interactive. For example, financial disclosure ranging from Value-at-risk models (which attempt to quantify the financial risk a company faces) to valuations of inventory contain embedded assumptions. Interactive disclosure would allow investors to change assumptions and see how financial numbers would change.

We can also learn quite a bit from software about re-designing the "look and feel" of all electronic disclosure to help investors sort through volumes of disclosure. Consider how much easier computers with icons and drop down menus are (courtesy of the graphic user interface) are now then when we had to type in command prompts into DOS. Redoing the "menu design" of disclosure also builds off ideas from behavior law and economics about structuring the menu of choices available to consumers to improve investor decision-making in the face of cognitive biases.

I've already posted about open source risk models.

This is a work-in-progress and feedback is welcome. For one critique of this paper, see here.

The Mammogram Conundrum

2009-11-19T11:09:48-07:00

Anyone who is interested in behavioral psychology has to be fascinated by the consequences of The United States Preventive Services Task Force reporting this week that women should not get annual mammograms until age 50, instead of its earlier recommendation of age 40. I turned 40 last December and so have had one test; I feel a little like my sister did when Texas raised the drinking age from 18 to 21 when she was 19.

The Task Force reports that cost-benefit analysis dictate less screening for women age 40-50 because the modest benefits are outweighed by the harms of false positives, which result in anxiety and further testing. The report states that mammograms save 1 in 1,904 women in the 40-50 age group and 1 in 1,339 women in the 50-59 age group. From the report:

The 6 models produced consistent rankings of screening strategies. Screening biennially maintained an average of 81% (range across strategies and models, 67% to 99%) of the benefit of annual screening with almost half the number of false-positive results. Screening biennially from ages 50 to 69 years achieved a median 16.5% (range, 15% to 23%) reduction in breast cancer deaths versus no screening. Initiating biennial screening at age 40 years (vs. 50 years) reduced mortality by an additional 3% (range, 1% to 6%), consumed more resources, and yielded more false-positive results. Biennial screening after age 69 years yielded some additional mortality reduction in all models, but overdiagnosis increased most substantially at older ages.

Cost-benefit analysis necessarily puts monetary values on intanglible benefits, but I do wonder what the cost value for anxiety is. The Task Force may have simply considered the costs of additional testing, but it seems to emphasize the unnecessary anxiety as well. From what I hear from my friends, the report has created a lot of anxiety! Women are now anxious that they will be living with undetected cancer. That has to be put into the equation as well, I guess.

So much that we are told in the way of cancer prevention is reversed periodically, as this op-ed by Gail Collins points out. Should women believe that mammograms are now not necessary? Should they wait another few years to see if the Task Force reverses itself again? This part of the report, which explains the choice of modeling as a methodology, makes me wonder:

Randomized trials of mammography (2–4) have demonstrated reduc-tions in breast cancer mortality associated with screening from ages 50 to 74 years.Trial results for women aged 40 to 49 years and women aged 74 years or older were not conclusive, and the trials (4, 5) had some problems with design, conduct, and interpretation. However, it is not feasible to conduct additional trials to get more precise estimates of the mortality benefits from extending screening to women younger than 50 years or older than 74 years or to test different screening schedules.

I will leave it to the real scientists to discuss the modeling methodology.

And some are skeptical that this government-appointed Task Force is already rationing health care in case the government becomes the primary purchaser of health care.

Of course, anecdote doesn't help scientific proof, but it does enter into how much anxiety this reversal causes. Women who knew someone that caught cancer early with a mammogram thinks the report is bad. Women who knew someone who died from cancer that went undetected with mammograms simply shrugs. No one likes to get a mammogram, but it's not horrible. Women are generally risk-averse and used to going to see doctors on an annual basis, so they generally do what experts tell them to do to avoid things like cancer, death, etc. If a Task Force came out and said that colonoscopy was useless, people everywhere would cheer.

Is Kiva a Private Equity Fund?

2009-11-19T10:30:00-07:00

Kiva.org is all aflurry these days after a blogger disclosed that lenders under the Kiva system are not actually lending to a specific entrepreneur, but to a previously undisclosed microfinance organization that has already made a loan to the specific entrepreneur. Now, that doesn't mean that Kiva is evil or that Kiva has a bad mission or that lenders are not making the impact they had hoped, but it does mean that Kiva was not being very transparent, a quality it had prided itself upon. So now, the website is revamped, and lenders see that its mission is now to connect people through lending for the sake of alleviating poverty, but it also calls itself a Person-to-Person microlending website and explains how you "choose an entreprenuer to lend to."

Transparency aside, there is nothing wrong with this model, and I'm sure it avoids certain transaction costs and allows more funds to go where the funds need to go. Non-profit microfinance organizations do not require person-to-person lending to benefit its borrowers.

But, I was intrigued by one aspect, a legal aspect. If you loaned money directly to a woman in Uganda to help her vegetable stand business, and that woman paid you back with interest, then there is no securities law implication there. If you donated money to a microfinance organization that then made many loans to many Ugandans, there is no securities law implication there, either. But, if you invest money in Kiva, which then pools invested money and makes loans to Ugandans, then repays your principal, are there are any securities law implications? Under the Howey test, a person invests money in a common eterprise and is led to expect profits solely from the efforts of the promoter or a third party. The threshold question is whether an investor is "led to expect profits" by merely expecting to get principal back. We don't have a lot of other examples of investors just wanting their principal back! The United Housing Foundation v. Forman case is somewhat similar; affordable housing tenants bought "shares" in the coop that were purchased back at the same price if they moved out. The court said there was no expectation of profit there. But the investment in the common enterprise is probably there. Here is how the pooling works, according to the Kiva website:

Over time, the entrepreneur repays her loan. The Field Partner collects those repayments and lets Kiva know if a repayment was not made as scheduled. We give Field Partners the option to cover both currency losses and entrepreneur defaults. To speed things up and to minimize the number and expense of wire transfers, Kiva works on a net billing system. This means that, for any given month, we subtract the amount of repayments that a Field Partner owes to Kiva lenders from the amount that a Field Partner fundraises for entrepreneurs on Kiva. If the balance is positive, that means that the Field Partner has raised more than they need to repay, and we use those funds to credit your lender account with the repayments due to you. Tell me more If the balance is negative, then the Field Partner has 30 days to send us a payment for the balance. As soon as we receive that payment, we use those funds to credit your lender account with the repayments due to you. Repayment and other updates are posted on Kiva and emailed to lenders who wish to receive them.

The lenders may choose to relend their repayments, donate them to Kiva, or withdraw them to their PayPal accounts. I would guess that Kiva investments wouldn't be securities because of the "expectation of profit" prong, but I'd be interested to hear what Kiva attorneys say.

Innovators and Value Creators from 40 to 80

2009-11-19T06:27:58-07:00

Fortune magazine has published its annual "40 under 40" list of rising stars in business. Topping the list is Google co-founders Sergey Brin and Larry Page, who, as Fortune reminds us, "are still under 40--and worth some $14 billion each." And although Google has clearly encountered some challenges including lawsuits and declining revenue, it has market value of over $174 billion. The youngest person on the list actually holds the number 2 slot--25 year old Facebook founder Mark Zuckerberg. Fortune contends that the list includes “innovators, value creators and agents of change.” I suppose Meredith Whitney, founder and CEO of Whitney Advisory Group, falls into the latter category. As a financial analyst at Oppenheimer, Whitney rose to prominence after issuing a 2007 research report on Citigroup that accurately highlighted its precarious financial situation. And many of her other predictions have proved accurate, transforming her into, as one commentator says, “the most famous and feared woman in finance” or at least one of them. The full list is here. Perhaps equally as interesting is Fortune’s list of 8 over 80. Topping the list is David Murdock, the 86 year old chair of Dole Food. And the list goes from 80 year old founder of the Vanguard Group John Bogle to 94 year old Walter Zable, president and CEO of Cubic Corp. And no one on the list appears ready to slow down. I suppose it would be quite the accomplishment if you end up on both lists.

The Silver Lining to "Supersize Bonuses": Corporate Philanthropy?

2009-11-18T16:38:59-07:00

By now, you have no doubt heard about Goldman Sach's decision to launch its 10,0000 Small Businesses Initiative. Guided by a team of advisers including the deans of Wharton and the Columbia Business School, and co-chaired by Warren Buffet and Michael Porter of the Harvard Business School, the Initiative will receive $500 million from Goldman to be used to help develop small businesses throughout the U.S. Of course, the announcement was made in the midst of an apology by Goldman's CEO for the company's "participation in things that were clearly wrong," and on the heels of sharp criticism regarding the company's large bonuses. As a result, the announcement has been met with a heavy dose of cynicism from those who see it as a public relations ploy. Indeed, a week ago when Goldman announced plans to increase its charitable giving more generally, a New York Times article called the move "no surprise" in light of "the firm's anticipated profits and supersize bonuses, which have touched off public furor." To be sure, as the New York Times notes, Goldman has insisted that the Initiative "was not motivated by its current public relations headache." Indeed, a Goldman press release points out that the Initiative has been in development for nearly a year and is modeled after a similar 2008 initiative focused on supporting women entrepreneurs and managers. But even if the cynics are correct (and assuming that one believes that at least some form of corporate philanthropy is a good idea) one wonders if the motives behind engaging in this endeavor really matter for purposes of recognizing the potential benefits that can flow from the Initiative. A couple of thoughts.

First, to the extent these actions were aimed at quelling public criticism, the criticism and skepticism with which they have been met cast doubt on the success of those actions, particularly since some have pointed out that the money pledged for the Initiative is "dwarfed" by the $16.7 billion earmarked for bonuses this year, while others note that the Initiative is at best a first step in the right direction.

Second, regardless of the motivation, it is in fact a step in which the company has pledge to provide businesses with greater access to education, networks and financial capital. Hence, it is a step that has the potential to do good. And if it is just a first step, then it could be that the Initiative triggers many more steps that do good.

Third, as one commentator has noted, if it is the case that engaging in corporate philanthropy can have a positive impact on a company's public image and its bottom line, then don't we want to encourage companies to do so? In other words, so long as a company actually engages in corporate philanthropy, is it wrong for them to engage in such philanthropy, at least in part, for public relations purposes? On the one hand, this does not mean that a company's good behavior can erase more problematic actions or that a company should be rewarded for pretending to engage in philanthropy or responsible behavior. On the other hand, it may mean that we can both recognize the ploy if it is one, while at the same time appreciating and crediting the Initiative and its potential to positively impact small businesses.

Open Source and Spotting Systemic Risk

2009-11-18T11:11:57-07:00

One of the recurrent themes in financial reform these days is that regulators need to get better about spotting systemic risk - or the risk that entire financial markets will suffer massive losses. One potential source of systemic risk is homogeneity in the investment and risk management strategies and portfolios of financial institutions. For example, if many different financial institutions buy the same kind of assets, you have herd behavior and a market boom. If, in reaction to a market decline, financial institutions begin selling the same assets to raise liquidity, the market goes into a tailspin.

How should regulation respond? I see three options. First, we can rely on traditional prudential regulations to regulate the types and concentrations of loans and investments that financial institutions make. There are a number of problems with this approach. Regulations can be gamed and can become quickly obsolete. This would require policymakers to continue to look for new forms of systemic risk and unhealthy homogeneity. And sometimes prudential regulations can also promote homogeneity, as banks would be restricted to similar kinds of investments.

The second option is to require greater disclosure of investment activity by financial institutions to regulators, who would then be responsible for spotting emerging systemic risks. This is the approach taken by the Committee to Establish a National Institute of Finance (http://www.cenif.org/). This approach would require regulators to devote massive resources (including computing resources) to map out emerging threats. One potential problem with this second approach is that the sheer scope of the task might overwhelm even well-financial regulators with access to high-quality information and powerful supercomputers.

This leads to the third approach, which I advocate, namely greater and more granular disclosure of financial institutions' investment and loan activity to the entire marketplace. Per my earlier post, I would like to apply concepts from the Open Source movement in software to financial regulations to allow the many minds of the marketplace to spot systemic risk. You could think about the difference between the second and third approach as a variation on Hayek's arguments for why market economies allocate resources in a superior fashion to planned economies.

The third approach would be a complement not a substitute for traditional bank regulation and inspection (in other words, backstopping the first and second approaches). Financial institutions might resist extremely granular and real-time disclosure of the investment opportunities because that would allow others in the marketplace to reverse engineer trading strategies and trade against the firms. So some mixture of a time lag, confidentially, and aggregation would be in order.

Open Source Approaches to Financial Regulation

2009-11-17T17:23:52-07:00

Two of my recent research interests are the ways in which technology contributed to the financial crisis and the ways in which it can help prevent future crises.

In one article, I've written about how financial regulators directly delegated (or outsourced) vast responsibility for regulating financial risk taking to the computer-based risk models of financial institutions. These models were used to market and price loans to consumers, price asset-backed securities and derivatives, provide credit ratings, and manage financial risk for large institutions. In some cases, regulators refrained from regulating, trusting that these models accurately assessed risk. In other cases, they actively delegated core regulatory responsibility to models - most notably under the Basel II Accord. Basel II permits national bank regulators to allow certain large banks to set their own capital requirements according to internal models.

Ken Bamberger (UC Berkeley) has a great paper on the same theme called "Technologies of Compliance." Ken takes a broader view and finds that private sector compliance technologies are assuming risk regulatory functions in other areas including Sarbanes Oxley and privacy protection.

But Ken and I may have slightly different take on several points.

First, in terms of how this delegation occurred, I tend to focus a little more on industry pushing to use their own technologies in lieu of traditional risk regulation. I think this explains Basel II.

Second, I may be more skeptical about the motivation of industry in using models. Many financial risk management models can be prone to gamesmanship.

Third, I focus more on the errors and limitations in industry models. As I noted earlier, the problem is not that some of the underlying finance theories - like Black Scholes -- are "wrong"; it is that these theories have embedded assumptions and limitations that are often overlooked. Models cannot be used uncritically.

Fourth, I have serious reservations about the incentives and capacities of regulators to audit these models (a topic I'll address in a subsequent post).

I catalogue some of the ways in which risk models failed in the current crisis. I also explore some of the remedies for these failures. If regulators continue to rely on private sector models to regulate risk, we need to require greater transparency of both these risk models and the auditing of these models by regulators. I borrow concepts from the Open Source movement in software on the theory that "many minds" can both debug these models, spot sources of systemic risk, and police regulators.

A full open source approach might undermine the incentives of the private sector to generate good risk models. So in many cases, I see this as an ideal of disclosure. But there are two exceptions. First, I advocate fairly comprehensive disclosure of rating agency models. Rating agencies essentially enjoy a government regulation-created oligopoly that will be difficult to undo. Because of this oligopoly power, we have less to worry about undermining proprietary rating agency models. Second, I argue that if banks elect to set their capital requirements under Basel II using their own internal models, they need to fully disclose these models to the marketplace. This may create a disincentive for banks to exploit Basel II and use internal models to set capital requirements. But I don't believe Basel II works in the first place.

I'll be exploring some of the potential applications of Open Source ideas and other ways in which technology can improve securities regulation and banking regulation in subsequent posts. I welcome comments on the paper.

Just a little patience . . .

2009-11-17T16:34:30-07:00

Here is a new economics paper that might be of interest to Gordon and the rest of you out there interested in law & entrepreneurship: Azoulay et al., "Incentives and Creativity: Evidence from the Academic Life Sciences". Here is the abstract:

Despite its presumed role as an engine of economic growth, we know surprisingly little about the drivers of scientific creativity. In this paper, we exploit key differences across funding streams within the academic life sciences to estimate the impact of incentives on the rate and direction of scientific exploration. Specifically, we study the careers of investigators of the Howard Hughes Medical Institute (HHMI), which tolerates early failure, rewards long-term success, and gives its appointees great freedom to experiment; and grantees from the National Institutes of Health, which we are subject to short review cycles, pre-defined deliverables, and renewal policies unforgiving of failure. Using a combination of propensity-score weighting and difference-in-differences estimation strategies, we find that HHMI investigators produce high-impact papers at a much higher rate than two control groups of similarly-accomplished NIH-funded scientists. Moreover, the direction of their research changes in ways that suggest the program induces them to explore novel lines of inquiry.

What might this mean for law? Shooting from my hip, it might imply that companies that are subject to short-term pressures to produce (either because of the types of investors, the incentives of managers, or incentives created by corporate law) might produce less long term innovation. Any thoughts, Gordon, on what might be the results of a study of similar start-up companies backed by v.c. funds with different horizons?

What might this mean should law firms invest more in r&d? The best results may require a longer gestation.

Something for scholars to think about too in our own scholarship.

Disconnect by Applicants and Discontent by Graduates

2009-11-17T15:55:06-07:00

The surge of new LSAT takers cited by Gordon is troubling to Larry Ribstein given the changes we've been discussing in our interblog discussion (the Death of Big Law and the Death of Big Law School) on how structural changes in the legal profession will affect law schools.

As Gordon notes, going to law school might make more sense if this is just a cyclical downturn in the legal market and if employment rebounds. I hope this turns out to be the case, but macroeconomic prognostication is not my specialty. But the layoff carnage among law firms means there will be a lot of people on the market competing with new graduates for an extended period.

Moreover, if the financial crisis has triggered both a larger structural shift in legal services and a longer-term decline in well paying entry level jobs, this upsurge in applicants and enrollment could result in calamity. Larry agrees.

Some of the responses to my original blog suggest that legal education will be fine no matter what happens because there will always be a crop of new undergraduates regardless of job prospects.

First, I hope law schools don't become that cynical

Second, sooner or later any long term disconnect between applicants and job prospects would have a "correction." Behavioral economists might ask if applicants suffer from biases of over-optimism or overconfidence. But if the decline is well-paying jobs is long-term, sooner or later front-page stories of law school graduates looking for work would resonate with all but the most determined or romantic undergraduates.

Not to mention, if graduates can't service their debt, lenders would react. Massive increases in government support for lawyer training would not play well politically even if we have a former law professor in the Oval Office.

One response for law schools will likely be investment in placement officers. But I hope legal education's long term response is not like certain PhD programs in the humanities. I recall reading several years ago about how graduate programs were struggling to place newly minted PhDs. The head of one professional organization suggested that humanities PhD programs reinvent themselves as training for a broader range of job opportunities, including private sector work in fields like advertising. That response seemed to me to place a priority on preserving the size of PhD programs rather than on education or scholarly mission, let alone student's bottom lines.

Haircuts and Prosecutions

2009-11-17T10:00:39-07:00

David made a number of interesting points on the financial crisis in separate posts over the last two days.

First, he noted the TARP inspector general has criticized the AIG bailout for not giving creditors a haircut. This is one of the most under-discussed aspects of the bailouts. It also leads to a myth that some financial institutions are returning all of their bailout money. Not if you count the money they received indirectly as creditors of other bailed out firms like AIG. Of course even some of the more lauded financial crisis responses in history -- like Sweden's in 1990 -- do not appear to have given creditors a serious haircut.

Turning from crisis management to crisis prevention: Doesn't the new potential moral hazard for creditors warp the important role of creditors in corporate governance (a topic Glom alumnus Fred Tung has written about) and in policing risky behavior by financial institutions and other firms?

Second, David wondered when the criminal prosecutions in the wake of the crisis would gear up. One explanation might be that the lion's share of catastrophic decisions on Wall Street on risk were not necessarily criminal. Still, we have already seen criminal behavior on a mammoth scale...

I wrote a while ago about the historic pattern of massive fraud in the wake of bubbles. When this crisis first broke, I wondered "where was the fraud?" And then we learned about Madoff and Stanford.