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    <title>Ideoblog</title>
    
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    <id>tag:typepad.com,2003:weblog-19901</id>
    <updated>2009-07-14T09:13:33-05:00</updated>
    <subtitle>A blog about ideas.  Ideas are not beliefs or opinions: http://busmovie.typepad.com/ideoblog</subtitle>
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        <title>Why Delaware rules the roost</title>
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        <id>tag:typepad.com,2003:post-6a00d83451c88c69e20115720311fb970b</id>
        <published>2009-07-14T09:13:33-05:00</published>
        <updated>2009-07-14T09:13:33-05:00</updated>
        <summary>It’s long been known that Delaware’s legal infrastructure – courts and lawyers – are the main reason this state keeps its edge as the corporate (and uncorporate) leader. Here’s an eloquent explanation of this phenomenon, as well as a glimpse...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Corporate governance" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Jurisdictional competition" />
        
        
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<div xmlns="http://www.w3.org/1999/xhtml"><p>It’s long been known that Delaware’s legal infrastructure – courts and lawyers – are the main reason this state keeps its edge as the corporate (<a href="http://ssrn.com/abstract=1431989">and uncorporate</a>) leader. <a href="http://blogs.law.harvard.edu/corpgov/2009/07/14/delaware%e2%80%99s-art-of-judging/">Here’s</a> an eloquent explanation of this phenomenon, as well as a glimpse of what would be lost if Congress and the federal courts decided to take over regulating internal governance. </p></div>
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    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/07/why-delaware-rules-the-roost.html</feedburner:origLink></entry>
    <entry>
        <title>SOX for the little guy</title>
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        <id>tag:typepad.com,2003:post-6a00d83451c88c69e2011571fade6f970b</id>
        <published>2009-07-12T19:17:54-05:00</published>
        <updated>2009-07-13T05:28:11-05:00</updated>
        <summary>From the unincorporated business blog comes a report on the Incorporation Transparency and Law Enforcement Assistance Act (S569). The motivation for this piece of legislative detritus seems to be that since a tiny percentage of LLCs are being used for...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Limited liability companies" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Partnerships" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Regulation" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Sarbanes-Oxley" />
        
        
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<div xmlns="http://www.w3.org/1999/xhtml"><p>From the <a href="http://lawprofessors.typepad.com/unincorporated_business/2009/07/testimony-on-incorporation-transparency-and-law-enmforcement-assistance-act-s-569.html">unincorporated business blog</a> comes a report on the Incorporation Transparency and Law Enforcement Assistance Act (S569). The motivation for this piece of legislative detritus seems to be that since a tiny percentage of LLCs are being used for criminal activity let’s wreck LLCs for all firms. Hey, sounds sensible to me. </p>
<p>The bill requires all state-law corporations and LLCs to make disclosures about their beneficial owners, defined as “an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company.” </p>
<p>There is no definition of “control, manage, or direct,” but who cares, given “as a practical matter” and “directly or indirectly”?  Does this mean voting power? Financial leverage? Family ties? There are civil and criminal penalties for false beneficial ownership information. State laws are not preempted if they require additional information or impose additional limits on public access to the provided information. Someday the courts will decide how much of the rest of state business association law is preempted. </p>
<p>Note that the law only applies to corporations and LLCs. No doubt this will lead to a boom in limited partnerships, etc., and end the LLC era. But never fear: the act calls for study of whether we need to be worried about other business entities. </p>
<p>Not to be outdone by Congress, the National Conference of Commissioners on Uniform State Laws has a draft of a "uniform" law (which means it's uniform if all of the states are silly enough to adopt it): <a href="http://www.law.upenn.edu/bll/archives/ulc/roba/2009apr8_draft.pdf">The Uniform Law Enforcement Access to Entity Information Act</a> (pronounced “youleeay”). The theory here seems to be that any state law beats any federal law.  </p>
<p>Youleeay fills the gaps left by the federal bill by applying generally to state business entities that require filings. Youleeay requires disclosure of holders of various types of “governance” and “interest” holders, including shareholders, members, limited and general partners, LLCs members, etc. A “material” non-compliance with the statute warrants judicial dissolution in an action brought by the state attorney general as well as administrative dissolution, but no other penalties, including piercing the veil. </p>
<p>If this law is passed in your state, whether you need to worry depends on whether you’re a criminal. If you’re a criminal, no problem: you just form a general partnership or a non-profit entity, which the law effectively doesn’t reach. Of course you can’t earn a profit or get limited liability, but if you’re a criminal using the entity to hide ownership of property, do you care? Also, keep in mind that the penalty for non-compliance is dissolution. So you have to form another of these things. Big deal. </p>
<p>On the other hand, if you’re not a criminal, alas, you’re in trouble if this statute applies in your state. You might find your firm blowing up unexpectedly if, like many (most?) small business owners you make a mistake or fail to update a filing. Then who knows whether the liability shield will apply (the statute protects against veil-piercing, but not necessarily if the business has been dissolved and wound up). Your partner or co-member might welcome dissolution in some situations and so might whisper in the AG’s ear that there’s a problem with the ownership disclosures. </p>
<p>Remember: if business associations are illegal, only criminals will have business associations.</p>
<p>Email comments.</p>
<p>(Minor revisions 7/13/09)</p></div>
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    <entry>
        <title>Jurisdictional Competition for LLCs</title>
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        <id>tag:typepad.com,2003:post-6a00d83451c88c69e2011570ff0f3d970c</id>
        <published>2009-07-11T05:46:32-05:00</published>
        <updated>2009-07-11T05:46:32-05:00</updated>
        <summary>I have a new paper with Bruce Kobayashi, Jurisdictional Competition for LLCs, which as the title implies combines my two leading interests. We think it's an important paper -- the most extensive study so far on jurisidictional competition for non-corporate...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Jurisdictional competition" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Limited liability companies" />
        
        
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<div xmlns="http://www.w3.org/1999/xhtml"><p>I have a new paper with Bruce Kobayashi, <em><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1431989">Jurisdictional Competition for LLCs</a></em>, which as the title implies combines my two leading interests. We think it's an important paper -- the most extensive study so far on jurisidictional competition for non-corporate entities.  Here's the abstract: </p>
<blockquote dir="ltr">
<p>Most of the work on jurisdictional competition for business associations has focused on publicly held corporations and the factors that have led to Delaware’s dominant position in attracting out of state firms. Is there an analogous jurisdictional competition to attract formations by closely held firms? Limited liability companies (LLCs) offer a good opportunity to examine this question. Most LLC statutes have been adopted and changed rapidly during the past 20 years. Unlike general and limited partnerships, which have been shaped by uniform laws, LLC statutes vary significantly, and states have devoted a lot of effort to drafting their individual statues. This variation provides an opportunity to test the statutory provisions and other factors that influence LLC’s choice of where to organize. We find little evidence that firms choose to form outside their home state in order to take advantage of variations in statutory provisions. Instead, we find evidence that large LLCs, like large corporations, tend to form in Delaware, and that they do so for the many of the same reasons – that is, for the quality of Delaware’s legal system. </p></blockquote>
<p dir="ltr">Check it out!</p>
<p dir="ltr">[<a href="Comments closed. http://busmovie.typepad.com/ideoblog/2009/07/new-comments-policy.html">Comments closed</a>.]</p></div>
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    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/07/jurisdictional-competition-for-llcs.html</feedburner:origLink></entry>
    <entry>
        <title>AIG and the perils of capital lock-in</title>
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        <id>tag:typepad.com,2003:post-6a00d83451c88c69e2011570e54e48970c</id>
        <published>2009-07-08T09:57:53-05:00</published>
        <updated>2009-07-08T09:57:53-05:00</updated>
        <summary>Michael Lewis has big story on AIG in Vanity Fair. (See also Carney’s discussion of the story, and his link to old AIG ads that gave me the idea for the above picture, which I also have hanging on the...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Finance" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Private equity" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Unincorporated business entities" />
        
        
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<div xmlns="http://www.w3.org/1999/xhtml"><p><a href="http://busmovie.typepad.com/.a/6a00d83451c88c69e2011570e53cee970c-pi" style="DISPLAY: inline"><img alt="Aigadcompressed" border="0" class="at-xid-6a00d83451c88c69e2011570e53cee970c " src="http://busmovie.typepad.com/.a/6a00d83451c88c69e2011570e53cee970c-800wi" title="Aigadcompressed" /></a> </p>
<p>Michael Lewis has <a href="http://www.vanityfair.com/politics/features/2009/08/aig200908?currentPage=1">big story </a>on AIG in Vanity Fair. (See also Carney’s <a href="http://www.businessinsider.com/michael-lewis-on-aigs-stupid-stupid-cds-business-2009-7">discussion</a> of the story, and his <a href="http://www.businessinsider.com/5-old-ads-aig-doesnt-want-you-to-see-2009-7">link to old AIG ads </a>that gave me the idea for the above picture, which I also have hanging on the wall of my office). </p>
<p>Some of Lewis's story deals with the finance of what crashed AIG, and threatened the rest of the financial world. I <a href="http://busmovie.typepad.com/ideoblog/2009/03/aig-pee-wee-herman-and-the-brave-new-world-of-finance.html">wrote about that</a> last March:</p>
<blockquote dir="ltr">
<p>AIG was supposedly insuring risky paper for both banks and money funds. AIG got fees, the banks and the money funds got to look better. The problem is that AIG's plan for covering the risk was to assume, along with everybody else . . . that real estate prices would only go up. In other words, everybody was living in a Pee Wee Herman-like fantasy world. </p></blockquote>
<p>More specifically, AIG was, in effect, selling its AAA credit rating to help game regulatory capital requirements. See Joe Nocera's <a href="http://dealbook.blogs.nytimes.com/2009/03/02/propping-up-a-house-of-cards/">excellent article</a>, also from last March. </p>
<p>Lewis’s article does break new ground in explaining in more detail why this happened. Lewis blames everything on Joe Cassano, head of AIG Financial Products, whom Lewis dubs “the man who crashed the world.” According to Lewis, Cassano was not a financial wizard – just a back office guy with “a real talent for bullying people who doubted him.” He became ascendant when the man who put him in power,  and who could control him (Hank Greenberg), was forced to resign by Eliot Spitzer (so, hey, let's blame all this on Spitzer). </p>
<p>Cassano didn’t understand what a mistake it was to apply financial models based on corporate credit to consumer loans, and specifically subprime. Indeed, apparently nobody at AIG understood what a big part of its portfolio subprime was. By the time AIG figured this out and pulled the plug in 2005, the damage to financial markets and to AIG had already been done. </p>
<p>All this still leaves me with two questions: first, how did Cassano get away with essentially betting all of AIG’s billions on risks that nobody in the firm really understood? And, second, why did hedge funds largely avoid similar folly? </p>
<p>In my view, the questions and answers are related. Foolish people are ubiquitous, but incentive and control systems can be, and sometimes are, designed to constrain folly. These include, as I’ve repeatedly argued, the “uncorporate” structure of hedge funds, as contrasted with the corporate structure of firms like AIG. </p>
<p>Many commentators have gotten this general point, but they stress the wrong details -- the perversity of corporate executive compensation, and the vicarious partnership liability that Wall Street firms left behind when they incorporated in the 1990s. </p>
<p>These explanations never wholly convinced me. After all, many executives at firms like AIG, Bear and Lehman bet their personal wealth on their firms. This would seem to have gotten their attention much more directly than marginal accretions to wealth through compensation. The fact that they owned limited liability firms doesn’t necessarily undercut their incentives, since bankruptcy law essentially gives everybody limited liability – you can’t lose more than all you have. Perhaps vicarious liability investors would have paid more attention, but it's doubtful that would have caused them to figure out the problem. </p>
<p>What I find more convincing is this little excerpt from Lewis’s article: </p>
<blockquote dir="ltr">
<p>The typical hedge fund or private-equity fund has to schlep around and raise money all the time, and post collateral with big Wall Street firms for all the trades they do. The traders at A.I.G. F.P. had essentially unlimited capital on tap from the parent company, along with the AAA rating, rent-free. </p></blockquote>
<p dir="ltr">Hedge funds have to “schlep around and raise money all the time” because their investors, unlike corporate shareholders, do not give them permanent capital. While corporate shareholders can sell their shares to other investors at current market prices, sale prices are discounted by the market’s evaluation of current management. Hedge fund investors, by contrast, have rights to get their money back from the company. </p>
<p dir="ltr">In other words, it’s the “capital lock-in” of the corporate structure – which some commentators have credited for the rise of modern capitalism, that is to some extent responsible for its recent fall. For better or worse, corporate cash is stuck for all time, as the AIG ad suggests.</p>
<p dir="ltr">So what should happen now? Should all financial institutions be uncorporations (or owned by the government)? No, but markets have now learned more about the risks of having traditional corporations manage complex financial instruments. And, yes, markets do learn. Consider why, as Lewis observed, hedge funds have to post collateral for trades with their brokers: because they did learn a lesson from Long Term Capital Management. </p>
<p dir="ltr">Of course a new round of SOX-like financial regulation is likely to short-circuit that learning process. But that's another story.</p></div>
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    <entry>
        <title>New comments policy</title>
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        <id>tag:typepad.com,2003:post-6a00d83451c88c69e2011571c76b97970b</id>
        <published>2009-07-06T03:54:44-05:00</published>
        <updated>2009-07-06T04:55:28-05:00</updated>
        <summary>After much deliberation during my recent break, I have decided to close comments on all posts. The reason is that the ratio of spam and off-topic rants to good stuff is, alas, declining to the point that it is hurting...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Weblogs" />
        
        
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<div xmlns="http://www.w3.org/1999/xhtml"><p>After much deliberation during my recent break, I have decided to close comments on all posts. The reason is that the ratio of spam and off-topic rants to good stuff is, alas, declining to the point that it is hurting what I once thought was an important aspect of blogging. Also, it reflects my gradual move from a traditional blog to more of a website, with longer, more substantive, posts.</p>
<p>I believe this policy is consistent with and perhaps more straightforward than my prior policy of heavily moderated comments. It also is more conducive to thoughtful conversation between me and my readers than the comment format.  (And note that my announced policy has long been that "I don't particularly like anonymous comments.") </p>
<p>So please send me emails at lribstei at gmail.com.  I plan to discuss selected ones by updating the relevant posts, or possibly as subjects of whole new posts.  Let me know in the email if you want to be identified.   </p>
<p>This new policy applies to comments on yesterday's post, though I will treat those comments as emails under the new policy, with attribution depending on whether the commenter identified him/herself in the comment.  </p></div>
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    <entry>
        <title>A response to the Tribune</title>
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        <published>2009-07-05T04:04:58-05:00</published>
        <updated>2009-07-05T14:19:39-05:00</updated>
        <summary>I've been gone for two weeks, but not completely out of touch. I followed with dismay the Tribute's attacks on my friends and colleagues at the University of Illinois. My first impulse was to stay out of this story, lest...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Journalism" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Law schools" />
        
        
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<div xmlns="http://www.w3.org/1999/xhtml"><p>I've been gone for two weeks, but not completely out of touch.  I followed with dismay the Tribute's attacks on my friends and colleagues at the University of Illinois.  My first impulse was to stay out of this story, lest my closeness to it was seen as compromising my objectivity.  But after a lot of deliberation, I've decided to post a letter to the Tribune, which I and several other Illinois law faculty have joined, as well as a few additional thoughts which follow the letter <strong>(revised, and with signatures, as of 2:00 p.m. cdt).</strong>  </p>
<blockquote dir="ltr">
<p>An open letter to the Chicago Tribune </p>
<p>We have read with ever increasing dismay the “State of Corruption: Clout goes to college” series of stories that have dominated both the front and the editorial pages of the Chicago Tribune since May 29, 2009. Not dismay at the University of Illinois or its administrators; rather, dismay at the way that the Chicago Tribune has told the story. As long time academics who care deeply about the integrity of the Academy, we are disappointed in the Tribune’s performance here. Consider three questions about that performance: (1) was there really a story here worthy of the kind of front page attention and editorializing focus lavished on this issue this past month? (2) Even if there was, has the Tribune told the story in a fair and unbiased way? (3) Since we conclude both that there was not much of a story here and that it was reported in a biased and slanted manner, this gives rise to the motivational question: what has apparently motivated the Tribune to go after this distinguished University and its equally distinguished administrators? We take up each question in turn. </p>
<p>(1) The non-story story. We have between us taught at many different universities in the United States. The story the Tribune has “discovered” about the University of Illinois could be written about every one of them. This fact is not one to be celebrated, nor is the fact that “everyone does this” given as an excuse. But this fact does call into question whether the story merits the amount of attention given it by the Tribune, to say nothing of the shocked tone of the Tribune’s editorials and columns. </p>
<p>There are several reasons why every university receives pressure to its admissions process from the outside. One of these is particularly applicable to public universities like the University of Illinois. University of Chicago Law Professor Brian Leiter in his Law School Reports for June 29, 2009 <a href="http://leiterlawschool.typepad.com/leiter/2009/06/the-chicago-tribune-series-on-political-muscle-and-u-of-illinois-admissions.html">sees this reason clearly</a>: </p>
<blockquote dir="ltr">
<p>The Chicago Tribune…appears to have missed the actual story (they are journalists after all): the University of Illinois is hostage to the public purse for a lot of its operations, so every request for ‘special consideration’ on admissions from a politician with influence on the purse strings comes with an implied threat: admit this student, or lose funding. </p></blockquote>
<p>Those with power, no surprise, tend to use it. </p>
<p>Particularly when that power can be used to further the welfare of one’s children, other relations, friends’ children, etc., Politicians are human in this respect, and are tempted to help those to whom they feel (rightly or wrongly) a special obligation. Indeed, we would be surprised if the Tribune’s own senior staff had not used the power of their own positions to influence admission decisions about their children at various mid-western universities. </p>
<p>Third, the line between proper and improper influence on admissions decisions is a difficult one to draw, vague when drawn, and thus on both counts easy to step over by well-intentioned administrators. Surely it is relevant to the candidacy of some applicant that someone of good judgment thinks well of them, just as it is irrelevant that a person of power wants the applicant admitted without regard to his or her merit. Success in any walk of life – politics included – can be a proxy for both power and judgment, making the influence wielded by such people hard to classify as proper (based on judgment) or improper (based on power alone). </p>
<p>However ubiquitous the practice may be, and however expected because inevitable for the reasons just given, one might still think the University of Illinois admission practices are morally bankrupt and therefore newsworthy on that ground alone. If and when yet another Illinois ex-Governor goes to jail, for example, that will be newsworthy, no matter how numbingly familiar the story has become to residents of this state. </p>
<p>Yet what are the improprieties laid at the feet of the University’s administration? That they listened to politicians at all on particular admissions? To the extent politicians have information or judgment to impart about particular candidates, they like anyone else should be listened to by admissions officers. Alternatively, perhaps the impropriety is that University administrators put their thumb on the scale a little for those applicants whose admission was supported by powerful politicians. This is presumably what President White had in mind when he said (in his much quoted e-mail to Chancellor Herman) that we should “"stretch some but not too much in these cases, then call them as we see them." To the extent that the threat described by Leiter is real, then (like it or not) the University’s welfare demands that such politicians be appeased in some such fashion. It would be nice if political coercion had no influence on admissions decisions and that only the merit of each individual candidate mattered. </p>
<p>It would be nice, too, however, if all the factors (like geographic distribution of a class), or the accidental whims of fate that arbitrarily direct the attention of admission officials as they read files, also had no influence, because each of these too is unconnected to the merit of individual applicants. A rational and moral admissions policy is one that minimizes the influence of any of these merit-unrelated factors, without hoping to eliminate such influences entirely. When the numbers of cases so influenced by these merit-unrelated factors is small, the dereliction (if any) is itself small potatoes. </p>
<p>Another allegation of impropriety laid at the feet of University administrators is that promises of scholarships or jobs were received in exchange for positive admission decisions. Even if the unsubstantiated Tribune allegations of a “quid pro quo” being received by University administrators in exchange for certain admissions were true – about which, more below – this also would be morally untroubling. For the quid pro quo alleged is nothing beneficial to either the administrators or the students so admitted. It is not that they, the administrators, were promised money or jobs. It is not that scholarship monies or jobs were promised for the unqualified students. Only that such administrators were promised either more resources (scholarships) with which to allow students otherwise unable to attend to do so, or more employment opportunities for students otherwise unable to find them on their own. When no choice is given to the University on some merit-unrelated admissions by those holding the purse strings, such as the Governor, what is the wrong in obtaining extra resources for the University’s merit-admitted students? How is that worse than using such admissions to blunt the implied threat of lesser funding —are not both a way of making the best of a bad situation? </p>
<p>(2) The slanting of the story told by the Tribune. </p>
<p>One of the striking features of the Tribune’s month-long campaign is the imbalance of its emphasis. It has vigorously attacked the reputations of President White, Chancellor Herman, and other University administrators and admissions officers. They all have been castigated on the Tribune’s front page editorial (June 28, 2009) as swimming in a “sewer” that they have created. Moreover, the colorful prediction was made that “within days, perhaps sooner,” we will hear “a few thudding sounds like lonely bowling balls tossed down a dark alley” and we will “realize that you’re listening to the political heads of Chancellor Herman and his crew rolling into history.” (John Kass, June 26, 2009). </p>
<p>One would have thought that this kind of outrage, venom, and incendiary invective would have been directed at those exerting the pressure – legislators, the Governor, the Board of Trustees – and not those suffering under it. As Brian Leiter noted in his June 28 Law School Reports, “Attacking University officials over this scandal is like attacking the victim of a robbery for handing over his money.” Where is the Tribune’s “off with their heads” mentality with respect to legislators like State Senator Chris Lauzen, for example, who (when disappointed by Law School Dean Heidi Hurd’s reluctance to admit Lauzen’s clouted candidate), expressed the view that she should have been fired for the insolence of expressing distaste at his influence. (Tribune, May 31, 2009). Later defending himself in print (Tribune, June 22, 2009) Senator Lauzen said his contact of state lobbyists on behalf of an applicant had merely been a call “asking for information, not admission. I have seen applicants enter the admission and financial aid processes with incomplete applications.” Where is the Tribune’s critical faculties and harsh judgment in pointing out to its readers the transparent poppy cock that this is? </p>
<p>University administrators make easy targets. They are after all academics – mathematicians, philosophers, business scholars – who must attempt to navigate the choppy waters of Illinois state politics. They themselves have no clout, and can be attacked in the press with relative impunity. Perhaps the Tribune’s focus on them rather than on the state’s politicians is due to the predictably lesser repercussions. Perhaps the Tribune realizes that saying of some of the state's most powerful politicians, "They swim in a 'sewer' that has a 'stink', a 'smell', a 'stain' characteristic of 'political corruption,' that their 'political heads will roll into history' like 'lonely bowling balls tossed down a dark alley," might not go so well for the Tribune or its staff. </p>
<p>In addition, of course, sometimes there just is nothing newsworthy in pointing a finger at some Illinois politicians, our recent Governor being a case in point. That Blagojevich directed the admission of some unqualified applicants is so far down on the list of his alleged derelictions that it is of little interest to anyone to add this one to his list. New villains are needed to keep a story fresh, and where better to find them than in the unfortified halls of academe? </p>
<p>A number of University of Illinois’ most senior and most distinguished professors have circulated recently a letter complaining of the “demonizing” of the University’s administration, and Chancellor Richard Herman in particular. “Demonizing” is the right word for the Tribune’s misemphasis here. A more balanced investigation would have agreed with Northwestern University Law Professor Ron Allen’s conclusion in a letter he wrote to the Tribune on June 26 that did not get published: “It seems to me like Ms. Hurd deserved the praise of the citizens of Illinois rather than their contempt, and that is an important part of this story that, at a minimum, deserves investigation.” </p>
<p>Apart from this fundamental misemphasis in its reportage and editorializing, the Tribune also has speculated negatively about facts it could have investigated but did not. </p>
<p>Item 1: The Tribune editorial of June 28, 2009 states (quoting from its own story of two days earlier) that ‘“several clouted students received full-ride scholarships.”’ The editorial then repeats this in italics: “One more time: several clouted students received full ride scholarships.” Given the astonishment expressed, the implication is that unqualified applicants not only were admitted but also got to go for free! Yet did the Tribune check to see whether those receiving such scholarships were less qualified than others receiving scholarships? Did it investigate whether the students they are talking about didn’t fully deserve the scholarships they received, and that their receipt of them was purely based on merit? Rather than seeking the truth, the Tribune wanted its readers to infer what it itself had no evidence to support. </p>
<p>Item 2: The Tribune twice remarked that it was “unclear” whether jobs were ever received in its jobs-for-admission stories. (June 25, June 26). Once (June 26) the Tribune made it sound like what was unclear was only where the jobs were, in private practice or in government. Yet again, whether any jobs were received because of the alleged “deal” was a documentable fact. The Tribune could have asked and investigated whether any jobs were in fact delivered by the then Chairman of the Board of Trustees, Lawrence Epply to law graduates at the bottom of their class at the University of Illinois Law School. The answer to this question is almost certainly no, as testimony before the Commission will establish; but that answer being unwanted by the Tribune, the question was never asked. </p>
<p>Item 3: One would also have the impression from reading the Tribune that the paper’s “Clout goes to College” investigation is the precursor to a federal investigation into University of Illinois admission practices. On numerous occasions the Tribune has expressed its satisfaction that the federal prosecutors with subpoena powers are coming after these alleged sewer-rats who run the state’s flagship University. Yet the truth of the matter is that the focus of the federal investigation is former Governor Blagojevich, not the University. The subpoenas directed by the feds to the University seek Blagojevich’s influence on the University, not the influence generally imposed on the University’s admission process by politicians. </p>
<p>Item 4: As the former Dean of the Law School made plain in her Tribune comment of June 28, 2009, no one could read her e-mails the way the Tribune stories, columns, and editorials of June 26 and June 28 read them. No one, that is, interested in the truth more than they are interested in telling the story they want to tell. The Tribune has been chided by widespread criticism on this point. E.g., Ron Galowich in his letter to the Tribune of June 29: “Any knowledgeable and reasonable person would know Dean Hurd was being sarcastic…” Brian Leiter in his Law School Reports for June 28: “odd is that they [the Tribune staff] missed the sarcasm in former Dean Hurd’s e-mails to the Chancellor: are journalists really this humorless?” Showing that one doesn’t have to be a lawyer or a law professor to understand sarcasm, one law student wrote to the Tribune (Chicago Tribune.com topix/Forum, 6/21/09): “I am dumfounded that the Tribune did not pick up that Ms. Hurd’s e-mails were sarcastic. When I read them, I understood that they were clearly sarcastic. How could the Tribune have missed the obvious so easily?” Former Dean Hurd in her response on this point (News-Gazette, July 1, 2009) attributes this misreading to the “tin ear” of Tribune writers. We are not so charitable: the sarcasm is so obvious that the Tribune’s misreading of it seems deliberate, what lawyers call wilfull blindness. Our colleague, Leon Dash, the Pulitzer Prize-winning journalist who also holds a distinguished chair in Journalism at this University, also makes no charitable reading of the Tribune on this point: “The Tribune’s deliberate misreading of former Dean Hurd’s sarcasm, to cite just one example, is an egregious abuse of journalistic ethics.” </p>
<p>Item 5: In its stories on the supposed jobs-for-admissions deal, the Tribune (June 26, June 27) states that “at least 24 students” were admitted from the special admit list. Why not, “at most 24 students” were admitted? Or better: why not say precisely what the document (an e-mail from Assistant Dean for Admissions Paul Pless dated March 8, 2007) actually said: there were 24 such students, neither more nor less, over this period? Only those who want the story to be as bad as it can be slant the facts in this way. </p>
<p>Item 6: Again in the context of its jobs-for-admissions columns and editorials, the Tribune describes the jobs allegedly promised as “patronage style jobs” (June 26), as part of “Illinois’ entrenched system of patronage” (June 26), and as “corruption and patronage” (June 26). In ordinary understanding – and certainly in the understanding of those familiar with recent political scandals in Illinois – the term “patronage” connotes personal benefits to the recipient. Even on the Tribune’s version of the facts, there is no allegation that any University administrator could benefit from the jobs allegedly promised. Use of the word “patronage” is just more incendiary rhetoric, used to enhance the supposed “corruption” (another much-used Tribune word here) at the University of Illinois. </p>
<p>(3) The Tribune’s motivations. </p>
<p>So why does a nationally respected newspaper like the Chicago Tribune exaggerate and slant in order to elevate a minor story into front page “news” and editorial crusading? A slow summer and a paper whose declining revenues place its survival in question? That’s too easy – and too shallow, as well as too cynical, for us. Our reading of the Tribune’s motives for instigating this month-long witch-hunt is (hopefully) both subtler and closer to the truth. It is twofold. </p>
<p>First, some Tribune staffers seem to have deluded themselves into thinking that they are the next Woodward and Bernstein. More than one generation of politicians were clearly captivated by the glamour of John F. Kennedy and his “Camelot.” The same is true for many young journalists and their image of the Pulitzer-Prize winning investigative journalism that uncovered the Watergate scandal. Some of those starry-eyes journalists appear to work at the Tribune. One sees such a self-image in the repeated patting on the back and self-congratulation appearing in many of the Tribune’s stories about the UI scandal (e.g., June 25, June 26, June 28). The pride the Tribune obviously takes in having started this witch-hunt can only exist because the Tribune sees itself as leading a crusade worthy of a Pulitzer Prize. </p>
<p>Second, there is a punitive/deterrence motive that seems to explain the Tribune’s excesses here. When the University of Illinois President Joseph White refused to release to the Tribune individual data from student records, when Chancellor Herman failed to produce all of the documents arguably covered by the Tribune’s FOIA request to the University, when former Law School Dean Heidi Hurd failed to return the Tribune’s “repeated” calls to her, the anger of the Tribune is palpable. To punish such “insolence” to the Tribune, and to deter its recurrence, the Tribune has published the least favorable speculations possible about the motives of each of these three University administrators. One ignores the Tribune at one’s peril! </p>
<p>Speculations about other people’s motivations are always just that, speculations. However, since the Tribune has given itself free rein to indulge its own speculations about the motives of various University personnel, it seems fitting that one speculate as to the Tribune’s motives for stepping out of line. </p>
<p>* * * * * </p>
<p>The Tribune’s “clout goes to college” stories have all been about the abuse of power of University administrators and politicians. Newspapers also wield a great deal of power, and like all power, theirs too can be abused. Such is the case here. The Tribune should publicly apologize to those whom it has unjustifiably demonized. We are not so naïve as to expect this. Criticism such as this more often evokes anger than it does guilt. Indeed, we were advised against publishing this letter – “the Tribune has more ink than you do,” we were told. Yet “ink” is only as good as its content. What say you, Tribune? Can you own up to your mistakes and at least express remorse for unjustifiably damaging the distinguished careers that took lifetimes to build? </p>
<p>___</p></blockquote>
<p>Signed: </p>
<p>J. Steven Beckett, Director, Trial Advocacy Program; Leon Dash, Swanlund Professor of Journalism and Law; Matthew Finkin, Albert J. Harno and Edward W. Cleary Chair in Law, Director, Program in Comparative Labor and Employment Law &amp; Policy; Eric Freyfogle, Max L. Rowe Professor of Law; Nuno Garoupa, H. Ross and Helen Workman Research Scholar; Christine Hurt, Richard W. and Marie L. Corman Scholar, Co-Director, Program in Business Law and Policy; Jay Kesan, Mildred Van Voorhis Jones Faculty Scholar and Director, Program in Intellectual Property &amp; Technology Law; Peter Maggs, Clifford M. and Bette A. Carney Chair; Michael Moore, Charles R. Walgreen, Jr. Chair and Co-Director, Program in Law and Philosophy; Andrew P. Morriss, H. Ross and Helen Workman Professor of Law and Professor of Business; Peter F. Nardulli, Professor of Political Science and Law, Director for the Center for the Study of Democratic Governance, and Head of the Department of Political Science; Larry E. Ribstein, Mildred van Voorhis Jones Chair and Co-Director, Program in Business Law and Policy; Jacqueline E. Ross, Professor of Law; Lawrence P. Solum, Associate Dean for Faculty and Research and John E. Cribbet Professor; and Thomas S. Ulen, Swanlund Chair and Director, Illinois Program in Law and Economics. </p>
<p>* * * *</p>
<p dir="ltr">And now a couple of my own additional thoughts.  It seems to me that both the above letter and Brian Leiter were too generous to the Tribune in suggesting that the reporters missed the real story.  In fact, I think they hit their intended target.  There is no Pulitzer in a dog-bites-man story.  Surely the shenanigans of Illinois politicans are no longer much of a story. But corrupt academics -- that's another matter. And if the reporters couldn't find a real story there they could at least try to create one.  Too bad about the collateral damage to innocent people who deserved a lot better than what they got. </p>
<p dir="ltr">But I don't use this blog for score-settling. In the end I decided to go with this post because it fits right in with what I've been saying about the Pulitzer-hounding of journalists for years now -- think Gretchen and backdating.  Why stay away when the story lands in your own backyard? </p>
<p dir="ltr">I have <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=700961">argued </a>that the blogosphere plays a corrective role, cleaning up after the mainstream media's mistakes.  I've been disappointed at the extent to which blogs (with Leiter as the notable exception) simply accepted the Tribune slant.  Come on folks, let's do a better job.   </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/07/a-response-to-the-tribune.html</feedburner:origLink></entry>
    <entry>
        <title>Hot off the press:  Litigating in LLCs</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/KQWX9kcec00/hot-off-the-press-litigating-in-llcs.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/hot-off-the-press-litigating-in-llcs.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-68299545</id>
        <published>2009-06-19T19:19:59-05:00</published>
        <updated>2009-06-19T19:19:59-05:00</updated>
        <summary>My article, Litigating in LLCs, has been published in The Business Lawyer. Here's the abstract: One of the most important issues involving limited liability companies is the appropriate way to characterize and handle disputes among members. Courts and legislatures borrowed...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Limited liability companies" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>My article, <em>Litigating in LLCs</em>, has been <a href="http://www.abanet.org/abanet/common/login/securedarea.cfm?areaType=premium&amp;role=cl&amp;url=/buslaw/mo/premium-cl/tbl/2009_064_03/0002/0002.pdf">published</a> in The Business Lawyer. Here's the abstract: </p>
<blockquote dir="ltr">
<p>One of the most important issues involving limited liability companies is the appropriate way to characterize and handle disputes among members. Courts and legislatures borrowed the derivative suit remedy from corporations and limited partnerships and applied it to LLCs without adequately considering whether this application was appropriate. In fact, this remedy is not suited to the typical business associations for which LLC statutes are designed—that is, closely held fi rms in which members generally participate directly in management. In this setting, the derivative remedy creates costs and complications that are unnecessary because more appropriate remedies are available, including member- authorized suits on behalf of the entity, direct suits by the injured parties, and contractual arbitration. Accordingly, the derivative suit should not be a default remedy for LLCs. More generally, this analysis provides an example of the potential risks of borrowing LLC rules from other types of business associations.</p></blockquote></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/hot-off-the-press-litigating-in-llcs.html</feedburner:origLink></entry>
    <entry>
        <title>Off to Scotland</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/tHC825_ZXiA/off-to-scotland.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/off-to-scotland.html" thr:count="2" thr:updated="2009-06-19T15:35:13-05:00" />
        <id>tag:typepad.com,2003:post-68281565</id>
        <published>2009-06-19T09:25:38-05:00</published>
        <updated>2009-06-19T09:25:38-05:00</updated>
        <summary>For the next couple of weeks here's where I'll be. No, not in the cemetary, but looking at it. Sort of a momento mori. Anyway, this gives a good picture of my internet access. So probably no blogging until July...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Scotland" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>For the next couple of weeks here's where I'll be. </p>
<p><a href="http://busmovie.typepad.com/.a/6a00d83451c88c69e20115712e855b970b-pi" style="DISPLAY: inline"><img alt="Buviewweb" border="0" class="at-xid-6a00d83451c88c69e20115712e855b970b image-full" src="http://busmovie.typepad.com/.a/6a00d83451c88c69e20115712e855b970b-800wi" title="Buviewweb" /></a> </p>
<p>No, not in the cemetary, but looking at it.  Sort of a momento mori.  Anyway, this gives a good picture of my internet access.  So probably no blogging until July 5.  </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/off-to-scotland.html</feedburner:origLink></entry>
    <entry>
        <title>Obama proposes SOX II</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/ugKTn07p_5w/obama-proposes-sox-ii.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/obama-proposes-sox-ii.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-68239683</id>
        <published>2009-06-18T08:51:58-05:00</published>
        <updated>2009-06-18T08:51:58-05:00</updated>
        <summary>Here's a nifty summary, and Bainbridge's early critique. I haven't evaluated the proposal closely, and won't be able to for awhile because I'm about to get out of range for a couple of weeks. But I do have a few...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Finance" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Jurisdictional competition" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Mutual funds" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Private equity" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Regulation" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Sarbanes-Oxley" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Securities fraud" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>Here's a <a href="http://blogs.wsj.com/washwire/2009/06/17/obamas-financial-reform-plan-the-condensed-version/">nifty summary</a>, and Bainbridge's <a href="http://www.professorbainbridge.com/professorbainbridgecom/2009/06/the-white-paper-on-financial-market-regulation.html">early critique</a>.</p>
<p>I haven't evaluated the proposal closely, and won't be able to for awhile because I'm about to get out of range for a couple of weeks. But I do have a few quick thoughts on particular elements of interest. </p>
<p><strong>First</strong>, we have to keep in mind that this isn't really a legislative package, but a kind of starting gun to let the intense lobbying begin.  It will be interesting to compare the proposal to the sausage that emerges at the other end of the grinder. </p>
<p><strong>Second</strong>, since we're about to embark on SOX II, wouldn't it be useful to look again at what happened with SOX I?  Here's <a href="http://www.aei.org/books/bookID.855,filter.all/book_detail.asp">Butler and my analysis</a>.  At the end of our book we have some suggestions for regulatory humility, such as optional provisions and sunsetting.  I fear that in the end we will find that we learned very little from the SOX debacle. </p>
<p><strong>Third</strong>, the Obama proposal suggests (p. 13) requiring hedge fund registration under the Investment Advisers Act overseen by the SEC.  It also proposes that hedge funds be required to make reports on funds under management sufficient to indicate whether they pose a threat to financial stability.  </p>
<p>This is particularly misguided.  The best commentator on that is Houman Shadab.  See <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1066808">here</a> and <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=978539">here</a>.  The bottom line is that hedge funds are more a solution to problems of the financial system than a cause.  </p>
<p>The "systemic risk" argument is totally misguided.  As Jon Macey has noted, hedge funds actually combat systemic risk by, essentially, betting against the "system."  One way to make them part of the problem is to force enough disclosure that other financial institutions can follow them off any cliffs they seek to explore.  See Macey, PROMISES KEPT, PROMISES BROKEN 265-72(2008). </p>
<p>And what's with this regulation by the SEC?  Are we satisfied with the great job that agency did supervising Madoff?  See <a href="http://busmovie.typepad.com/ideoblog/2009/04/me-on-tv-on-madoff.html">here</a> (detailing the SEC's massive regulatory incompetence in Madoff) and <a href="http://busmovie.typepad.com/ideoblog/2009/01/the-sec-as-madoff-accessory.html">here</a> (suggesting that the SEC was actually Madoff's unwitting accomplice).  </p>
<p><strong>Fourth</strong>, the proposal calls for (p. 40) "increased national uniformity through either a federal charter or effective action by the states." Butler and I <a href="http://papers.ssrn.com/sol3/cf_dev/AbsByAuth.cfm?per_id=47251">show</a> that this objective in insurance regulation is misguided and offer a better alternative. </p>
<p><strong>Finally</strong>, let's keep in mind that the US is no longer alone in the world.  Regulatory overkill here could be a boon for <a href="http://busmovie.typepad.com/ideoblog/2009/05/reflections-on-offshore-legal-centers.html">places like Singapore and Hong Kong</a>. </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/obama-proposes-sox-ii.html</feedburner:origLink></entry>
    <entry>
        <title>Conglomerate book club:  Street Fighters</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/Ot3qLPBRAjc/conglomerate-book-club-street-fighters.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/conglomerate-book-club-street-fighters.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-68162499</id>
        <published>2009-06-16T10:04:12-05:00</published>
        <updated>2009-06-16T10:04:12-05:00</updated>
        <summary>Over at the Glom, they're having a discussion of Kate Kelly's Street Fighters about the last days of Bear Stearns. Here's my entry on who killed the Bear.</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Finance" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>Over at the Glom, they're having a discussion of Kate Kelly's <em>Street Fighters</em> about the last days of Bear Stearns. Here's <a href="http://www.theconglomerate.org/2009/06/larry-ribstein-on-street-fighters.html">my entry</a> on who killed the Bear.</p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/conglomerate-book-club-street-fighters.html</feedburner:origLink></entry>
    <entry>
        <title>Volcker talking sense on hedge funds</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/q03_qEiirN0/volcker-talking-sense-on-hedge-funds.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/volcker-talking-sense-on-hedge-funds.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-68155911</id>
        <published>2009-06-16T06:35:32-05:00</published>
        <updated>2009-06-16T06:35:32-05:00</updated>
        <summary>Volcker told the International INstitute of Finance meeting in Beijing June 11: Hedge funds and private-equity funds have an entirely legitimate role to play in providing liquidity and innovation in our capital markets. I do not believe they need to...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Private equity" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>Volcker <a href="http://online.wsj.com/article/SB124511733241717573.html#mod=todays_us_opinion">told </a>the International INstitute of Finance meeting in Beijing June 11: </p>
<blockquote dir="ltr">
<p>Hedge funds and private-equity funds have an entirely legitimate role to play in providing liquidity and innovation in our capital markets. I do not believe they need to be so closely supervised and regulated as depository institutions. A presumption of government protection and support for financial institutions outside the "safety net" should be avoided. </p>
<p>Nor by the same token should hedge funds or private-equity funds indirectly benefit from official support by sponsorship or ownership by a banking institution. The possibility that failure of a large hedge fund or trading organization might present a systemic risk can be reduced by way of speeding timely resolution of troubled nonbanking institutions. Such authority already exists in the United States for insured banking institutions by means of appointing a "conservator" or "receiver" empowered to maintain continuity of services pending a more lasting resolution of a failing institution. </p>
<p>There is a growing international consensus that hedge funds and equity funds beyond some de minimus size should at least be required to register, with the implication of limited reporting requirements. There may be a few instances in which such funds become so large as to suggest official capital and leverage requirements would be appropriate. Hedge and private-equity funds are necessarily dependent on banks for credit and operational needs. Encouraged by supervisory and risk-management processes, such funds could be appropriately monitored and controlled through those banking relationships. </p></blockquote>
<p>Indeed, I would go farther. The increasing perversity of bank regulation, including the implicit guarantee of large banking institutions I <a href="http://busmovie.typepad.com/ideoblog/2009/06/the-hidden-costs-of-the-governments-implicit-guarantee.html">discussed yesterday</a>,  increases the need for institutions outside that system to keep financial markets honest. </p></div>
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    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/volcker-talking-sense-on-hedge-funds.html</feedburner:origLink></entry>
    <entry>
        <title>Dismantling capitalism: substituting government decisions for market prices</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/cC5tr62BwPY/dismantling-capitalism-substituting-government-decisions-for-market-prices.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/dismantling-capitalism-substituting-government-decisions-for-market-prices.html" thr:count="1" thr:updated="2009-06-15T11:28:54-05:00" />
        <id>tag:typepad.com,2003:post-68119961</id>
        <published>2009-06-15T08:22:56-05:00</published>
        <updated>2009-06-15T08:22:56-05:00</updated>
        <summary>The WSJ has an interesting article on what it means to insert the government into decisions that used to be made by the price system. Cabela, the hunting goods store, got TALF money. So now it’s encouraging customers to buy...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Dismantling Capitalism" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>The WSJ has an <a href="http://online.wsj.com/article/SB124501974568613573.html#mod=todays_us_page_one">interesting article</a> on what it means to insert the government into decisions that used to be made by the price system. </p>
<ul>
<li>Cabela, the hunting goods store, got TALF money. So now it’s encouraging customers to buy more guns to shoot gophers, etc. </li>
<li>Deere bought a bank so it got a government guarantee on $2 billion of its debt. But Caterpillar didn’t own a bank. So its trade group got TALF expanded to include Caterpillar and other equipment makers. Funny how government backing of credit cards turned into a government subsidy of equipment makers.</li>
<li>But smaller equipment-leasing firms that can't get the high ratings didn’t qualify and now must pay four percentage points more than higher-rated firms to borrow – a three points higher gap than before the crisis. One company that didn’t qualify “is slashing expenses by about 25% to try to stay alive.” </li>
<li>Small insurance companies that could qualify to buy thrifts got bank bailout money. Others missed the cut.  So insurance company survival will now depend on whether they own banks.</li>
<li>Spending on lobbying this year is 80% higher than 2002, when businesses were fighting SOX. </li>
<li>A California telecom entrepreneur scrapped his plan to sell equipment in emerging markets and hired Patton Boggs to figure out how to get government money to build broadband networks in the U.S.</li>
<li>And now "systemically important" institutions will get money at lower rates but with more regulation, including of executive pay. (<a href="http://online.wsj.com/article/SB124484447022511071.html#mod=todays_us_marketplace">Here's </a>the WSJ on the questions surrounding the latter plan, as well as <a href="http://blogs.law.harvard.edu/corpgov/2009/06/11/compensation-structure-and-systemic-risk/">Bebchuk's proposal</a>). So now firms, instead of just deciding whether to make money, will have to decide whether they want to be systemically important, whatever that turns out to m<span id="fck_dom_range_temp_1245072093155_169" />ean.</li>
</ul></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/dismantling-capitalism-substituting-government-decisions-for-market-prices.html</feedburner:origLink></entry>
    <entry>
        <title>Dismantling capitalism:  The hidden costs of the government's implicit guarantee</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/wxw9AYG5Jp0/the-hidden-costs-of-the-governments-implicit-guarantee.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/the-hidden-costs-of-the-governments-implicit-guarantee.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-68105097</id>
        <published>2009-06-14T19:40:56-05:00</published>
        <updated>2009-06-14T19:42:31-05:00</updated>
        <summary>In the film Other People’s Money, Larry the Liquidator Garfiled said: “You can change all the laws you want. You can't stop the game. I'll still be here. I adapt.” Well, maybe, but John Carney notes a special problem with...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Dismantling Capitalism" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>In the film Other People’s Money, Larry the Liquidator Garfiled said: “You can change all the laws you want. You can't stop the game. I'll still be here. I adapt.” </p>
<p>Well, maybe, but John Carney <a href="http://http://www.businessinsider.com/flying-blind-risk-management-bank-debt-and-the-next-financial-disaster-2009-6">notes </a>a special problem with the government’s guarantee implicit in letting ten big banks out of TARP. It’s not just moral hazard, but the “calculational chaos” that results when the market no longer fully prices the risk of failure. The cost of failure still exists, but if market participants don’t feel it then the market can’t send the right signals in response to banks’ decisions.  </p>
<p>And the government can’t simply reverse this decision, because that could cause the very panic it was trying to prevent by the initial action. </p>
<p>Messing with markets isn’t as much fun as it might seem. </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/the-hidden-costs-of-the-governments-implicit-guarantee.html</feedburner:origLink></entry>
    <entry>
        <title>Dismantling capitalism:  the hidden costs of Chrysler's 363 sale </title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/6CW8hbazOIc/dismantling-capitalism-the-hidden-costs-of-chryslers-363-sale-.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/dismantling-capitalism-the-hidden-costs-of-chryslers-363-sale-.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-68105017</id>
        <published>2009-06-14T19:36:40-05:00</published>
        <updated>2009-06-15T13:26:47-05:00</updated>
        <summary>Saturday’s WSJ notes that the “363 sale” used in Chrysler (referring to Section 363 of the Bankruptcy Code) is typically used to shed assets * * * that need[] to be sold quickly to maximize its value, and can be...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Dismantling Capitalism" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>Saturday’s WSJ <a href="http://online.wsj.com/article/SB124485225707711561.html#mod=todays_us_money_and_investing">notes</a> that the “363 sale” used in Chrysler (referring to Section 363 of the Bankruptcy Code) is </p>
<blockquote dir="ltr">
<p>typically used to shed assets * * * that need[] to be sold quickly to maximize its value, and can be done without creditor approval. But critics said Chrysler used the procedure to restructure the entire company. </p></blockquote>
<p dir="ltr">Now a hockey team is trying it. Where does it end?</p>
<blockquote dir="ltr">
<p dir="ltr">Bankruptcy and financial professionals said such scenarios, if successful, could make investors demand higher interest rates on debt amid uncertainty over how they might fare should the firm encounter financial difficulties. </p>
<p dir="ltr">"The concern is that you have thousands of lenders, hedge funds, insurance companies who model their investments on rules and laws," said Stephen Lerner, a lawyer for a committee of Chrysler dealers. "How do these folks make investment decisions when they're faced with bankruptcy courts that appear to disregard the rules?" </p>
<p dir="ltr">* * * Lawyers who represent banks, hedge funds and other creditors fear the Chrysler precedent could be used to allow companies to get around established rules for reorganizations, and not just in extraordinary circumstances. </p></blockquote>
<p dir="ltr"><strong>Update:  </strong>Mark Roe has an <a href="http://It would, though, have been much better to correct the Chrysler problem and regain market confidence before it set a precedent. From a bankruptcy and a capital markets perspective, it’d be best to put this one behind us">article in Forbes</a> on the bankruptcy law issues in Chrysler. </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/dismantling-capitalism-the-hidden-costs-of-chryslers-363-sale-.html</feedburner:origLink></entry>
    <entry>
        <title>The significance of the Cravath deferrals</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/gQIJfNh7Uu0/the-significance-of-the-cravath-deferrals.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/the-significance-of-the-cravath-deferrals.html" thr:count="3" thr:updated="2009-06-12T23:39:00-05:00" />
        <id>tag:typepad.com,2003:post-68034797</id>
        <published>2009-06-12T13:07:15-05:00</published>
        <updated>2009-06-12T13:07:15-05:00</updated>
        <summary>The Law Blog and ATL, among others, are reporting deferrals at Cravath. The payment terms are generous. Cravath is supposedly saying its business is fine, it just has too many associates and summer clerks because of a high acceptance rate....</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Lawyers" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>The <a href="http://blogs.wsj.com/law/2009/06/12/the-mighty-are-humbled-cravath-offers-associate-deferrals/">Law Blog</a> and <a href="http://abovethelaw.com/2009/06/cravath_voluntary_deferral.php">ATL</a>, among others, are reporting deferrals at Cravath. The payment terms are generous. Cravath is supposedly saying its business is fine, it just has too many associates and summer clerks because of a high acceptance rate. </p>
<p>Yet Cravath is not only offering a deferral option to its current associate class of 09, but a mandatory deferral of its entire 2010 class with less generous terms. Moreover, these layoffs come as the economy is showing signs of life. This seems like more than a minor glitch in the acceptance rate. </p>
<p>Why is this big news, given how many other layoffs, etc, we’ve been seeing lately? Because Cravath has been touted as the epitome of the traditional high-reputation law firm, the type most likely to survive the current upheavals. See, e.g., this recent <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1407051">Henderson &amp; Bierman paper</a>. </p>
<p>This latest news supports <a href="http://busmovie.typepad.com/ideoblog/2009/06/the-nyt-on-the-white-case-meltdown.html">my assertion</a> that the problems with Big Law are fundamental to the business model and not just recession fallout. </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/the-significance-of-the-cravath-deferrals.html</feedburner:origLink></entry>
    <entry>
        <title>Private equity-backed IPOs</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/P3TCB6-reO0/private-equitybacked-ipos.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/private-equitybacked-ipos.html" thr:count="1" thr:updated="2009-06-22T09:33:54-05:00" />
        <id>tag:typepad.com,2003:post-67953683</id>
        <published>2009-06-10T14:22:41-05:00</published>
        <updated>2009-06-10T14:22:41-05:00</updated>
        <summary>Private equity bashing is inevitable as entrenched interest groups defend their corporate turf. They will try to show that substitutes are hazardous – despite the manifest difficulties with corporate governance we’ve observed, especially lately. Consider in that light a recent...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Private equity" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Unincorporated business entities" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>Private equity bashing is inevitable as entrenched interest groups defend their corporate turf. They will try to show that substitutes are hazardous – despite the manifest difficulties with corporate governance we’ve observed, especially lately. </p>
<p>Consider in that light a recent <a href="http://www.irrcinstitute.org/pdf/What%20is%20Impact%20of%20PE%20on%20CG%20June%202009.pdf">report </a>by the Investor Responsibility Research Center Institute. The report shows, per <a href="http://dealbook.blogs.nytimes.com/2009/06/10/private-equity-not-so-shareholder-friendly/">Dealbook</a>, that “on average, private-equity-backed companies that go public are more likely to have takeover defenses and less likely to link pay to performance — just the kind of things that usually have activist investors up in arms.” </p>
<p>The study, per its executive summary, “makes no claims about the actual performance of companies with these structures” and doesn’t try to explain these features. The apparent idea is that, just because these IPO firms don’t look like standard corporations, this must be a problem. </p>
<p>But as Dealbook notes, "the whole issue becomes more complicated, however, when you consider that private equity firms generally keep a large ownership stake in their portfolio companies for years after they take them public."</p>
<p>I’ve pointed out in my <em><a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1003790">Uncorporating the Large Firm</a></em>: </p>
<blockquote dir="ltr">
<p><span id="fck_dom_range_temp_1244661741305_320" />A “reverse leveraged buyout” involves a public offering by a firm that had been taken private. The resulting firm appears to be a conventional publicly held corporation. However, the firm retains a key uncorporation-type high-powered incentive characteristic of the privately held firm -- manager-ownership. A leading study of these transactions notes that after the public offering the buyout group retains on average a 38% stake, while its managers and directors retain an average 36% share (citing Jerry X. Cao &amp; Josh Lerner, <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=937801">The Performance of Reverse Leveraged Buyouts</a>).</p></blockquote>
<p>And more generally, let's keep in mind, as I say in my <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1410135">more recent and shorter paper </a>on this subject, "courts [and regulators!] need to consider the firm’s entire bundle of rights and obligations before applying corporate restrictions on contracting." </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/private-equitybacked-ipos.html</feedburner:origLink></entry>
    <entry>
        <title>Shareholders, bank pay and systemic risk</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/hEmAPRi8dGg/shareholders-bank-pay-and-systemic-risk.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/shareholders-bank-pay-and-systemic-risk.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-67934063</id>
        <published>2009-06-10T08:50:32-05:00</published>
        <updated>2009-06-10T08:50:32-05:00</updated>
        <summary>From Bloomberg via Dealbook, The Obama administration intends to seek new powers for the Securities and Exchange Commission to force financial firms to give shareholders votes on executive pay packages, people familiar with the matter told Bloomberg News. * *...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Dismantling Capitalism" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Executive compensation" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>From <a href="http://www.bloomberg.com/apps/news?pid=20601208&amp;sid=aV0wrDNqSfck">Bloomberg </a>via <a href="http://dealbook.blogs.nytimes.com/2009/06/10/sec-may-play-a-role-in-executive-pay-report-says/">Dealbook</a>, </p>
<blockquote dir="ltr">
<p>The Obama administration intends to seek new powers for the Securities and Exchange Commission to force financial firms to give shareholders votes on executive pay packages, people familiar with the matter told Bloomberg News. * * * The changes aim to ensure that even financial companies that free themselves of government stakes will be subject to universal guidelines aimed at reducing systemic risks, the news service reported. </p></blockquote>
<p dir="ltr">Now we see that bank pay regulation is politically motivated populist-feeding, and not really about systemic risk. The systemic risk argument for regulation assumes that this risk is an externality not taken into account by banks’ owners. If the owners care about the risks their banks pose to the financial system enough to micromanage pay to reduce these risks, then why can’t we trust the shareholders to manage the banks in other ways to contain these risks? Conversely, if we need systemic risk regulation because we can’t trust the shareholders, then why give the shareholders the power to control pay? </p>
<p dir="ltr">Another thing:  why should the SEC be the agency to dictate shareholder control over bank pay? Isn’t that agency supposed to be about disclosure? </p></div>
</content>


    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/shareholders-bank-pay-and-systemic-risk.html</feedburner:origLink></entry>
    <entry>
        <title>Dismantling capitalism: executive compensation</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/oiZ_q84ie_c/dismantling-capitalism-executive-compensation.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/dismantling-capitalism-executive-compensation.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-67838823</id>
        <published>2009-06-08T09:50:25-05:00</published>
        <updated>2009-06-08T09:50:25-05:00</updated>
        <summary>The government thinks it ought to micromanage the compensation of firms getting government money. Here’s links to my previous thoughts on these pay restrictions. Of course a big problem with these restrictions is that they defeat the purpose of the...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Dismantling Capitalism" />
        <category scheme="http://www.sixapart.com/ns/types#category" term="Executive compensation" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>The government thinks it ought to micromanage the compensation of firms getting government money. <a href="http://busmovie.typepad.com/ideoblog/2009/02/the-stupid-bailout-pay-caps.html">Here’s </a>links to my previous thoughts on these pay restrictions. </p>
<p>Of course a big problem with these restrictions is that they defeat the purpose of the bailouts by discouraging financial institutions from taking or keeping the money the government thinks they need to boost the recovery. So the banks are rushing to repay. </p>
<p>How to solve that? Of course: regulate non-recipients too. Here’s <a href="http://www.nytimes.com/2009/06/08/business/08bank.html?_r=1&amp;hp">today’s NYT</a> on these plans. </p>
<blockquote dir="ltr">
<p>“This is the government trying to tell the TARP banks not to worry, because everyone else’s compensation will be monitored, too,” Gustavo Dolfino, president of the WhiteRock Group, a financial recruiter, said of the industrywide principles. “We’re in a world of TARP and non-TARP.” </p></blockquote>
<p dir="ltr">The endgame, I fear, is to use the financial crisis as an excuse to put into effect all of those wacky and ill-supported ideas about pay that have been kicking around for years.  </p>
<p dir="ltr">Remember the good old days when it was supposedly just all about disclosure?  </p></div>
</content>


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    <entry>
        <title>Teaching the basic business associations course</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/QYqIehTRbIc/teaching-the-basic-business-associations-course.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/teaching-the-basic-business-associations-course.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-67834925</id>
        <published>2009-06-08T08:30:47-05:00</published>
        <updated>2009-06-08T09:23:48-05:00</updated>
        <summary>So here I am at the AALS mid-year conference on business associations. This morning I moderate the first panel: “Role of Basic Course: What it is and where it is going.” The speakers are Bill Carney (Emory), my colleague Christine...</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Law schools" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>So here I am at the AALS <a href="https://memberaccess.aals.org/eWeb/DynamicPage.aspx?webcode=EventInfo&amp;Reg_evt_key=a6bf30e8-0a1b-4133-b2bd-f4c9c5cf5b3d&amp;RegPath=EventRegFees">mid-year conference on business associations</a>. This morning I moderate the first panel: “Role of Basic Course: What it is and where it is going.” The speakers are Bill Carney (Emory), my colleague Christine Hurt, my co-author Jeff Lipshaw (Suffolk), Bob Thompson (Vanderbilt, visiting Georgetown) and Cheryl Wade (St. John’s). Bob is going to open with the results of a survey he did on who’s doing what in the basic course. </p>
<p>I plan to to pose something like the following question to provoke discussion at this plenary session and in the ensuing small groups: </p>
<blockquote dir="ltr">
<p>The basic business associations course is the only exposure some law students (how many?) get to the foundation of business law. Yet some (how many?) of these "intro-only" students end up practicing a significant amount of business law. How well do we prepare these students for their careers?</p></blockquote>
<p dir="ltr">Here are some specifics that I hope this morning's discussion will address:</p>
<blockquote dir="ltr">
<p dir="ltr">1. From the standpoint of adequately preparing the intro-only students, does the basic course unduly stress publicly held over closely held firms? Corporations over unincorporated firms? Litigation over transactional? Basic theory over doctrine or on-the-ground practical considerations? </p>
<p dir="ltr">2. Do intro-only students get enough business background to enable them to fully appreciate the law taught in the course? </p>
<p dir="ltr">3. Do corporate law teachers tend to shape their courses to what they’re most interested in talking about, to what is the most fun to teach or learn, or to what the intro-only students need to know for practice? </p>
<p dir="ltr">4. Should the intro-only students drive the content of the course, or should the course instead be designed as a platform for more advanced business courses?  What tradeoffs does this choice entail?</p>
<p dir="ltr">5. How do recent events in the business world affect what ought to be taught in the basic course? </p></blockquote>
<p dir="ltr"><strong>Update</strong>:  It occurs to me after some coffee that all of these boil down to one multipart question:  Are we training the Main Street lawyers of tomorrow to be the Wall Street lawyers of yesterday and, if so, why? </p></div>
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    <feedburner:origLink>http://busmovie.typepad.com/ideoblog/2009/06/teaching-the-basic-business-associations-course.html</feedburner:origLink></entry>
    <entry>
        <title>Off to the AALS</title>
        <link rel="alternate" type="text/html" href="http://feedproxy.google.com/~r/typepad/lribstei/ideoblog/~3/nyGUmkQT3AI/off-to-the-aals.html" />
        <link rel="replies" type="text/html" href="http://busmovie.typepad.com/ideoblog/2009/06/off-to-the-aals.html" thr:count="0" />
        <id>tag:typepad.com,2003:post-67771135</id>
        <published>2009-06-07T08:32:15-05:00</published>
        <updated>2009-06-07T08:32:15-05:00</updated>
        <summary>I'll be at the AALS mid-year Business Associations meeting for the next few days. More later!</summary>
        <author>
            <name>Larry Ribstein</name>
        </author>
        <category scheme="http://www.sixapart.com/ns/types#category" term="Law schools" />
        
        
<content type="xhtml" xml:lang="en-US" xml:base="http://busmovie.typepad.com/ideoblog/">
<div xmlns="http://www.w3.org/1999/xhtml"><p>I'll be at the AALS mid-year <a href="https://memberaccess.aals.org/eWeb/DynamicPage.aspx?webcode=EventInfo&amp;Reg_evt_key=a6bf30e8-0a1b-4133-b2bd-f4c9c5cf5b3d&amp;RegPath=EventRegFees">Business Associations meeting</a> for the next few days. More later!</p></div>
</content>


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