Author: Lawrence Cunningham


Professional Ethics Rankings

Lawyers continue to receive relatively low public ratings for professional honesty and ethics, according to the annual Gallup poll on the subject. The poll, by telephone of 1,010 adult Americans, asked people to assess the standards of honesty and ethics in 21 professions as very high or high/average/low or very low.

Nurses receive the highest scores (84/14/<2), followed by pharmacists, high school teachers, doctors, cops, clergy, funeral directors and accountants. Lobbyists receive the lowest: (<9/27/64). Lobbyists are preceded in their cohort by labor union leaders (16/45/35), followed by lawyers (18/45/37), then business executives (12/49/37), advertising professionals, stockbrokers, Members of Congress, car sales-people, and telemarketers in dead last. In the middle cohort are journalists (25/44/31), bankers (23/53/23), building contractors and real estate agents. Results for most professions were roughly constant this year compared to last. But two points stand out. First, bankers took a beating this year, the first time since 1996 they registered below 30% in the very high + high category and, at 23%, the lowest they’ve received in the poll's history. The pollsters attribute the results to the economic crisis, natch. Second, business executives last year registered 14% in the very high + high category which, while not a huge drop to 12% this year, is the lowest they’ve received in the poll’s history—having hit highs of 25% in both 1990 and 2001. The economic crisis, again.


Fact, Voice, Blogs and the Times

Debate within the New York Times over longstanding distinctions between editorial opinion and journalistic reporting prompt reflection upon two parallel issues: (1) do blog readers prefer opinion to reporting and (2) do academic bloggers maintain distinctions like that and distinctions between scholarly presentation and essayistic voice?

Clark Hoyt, Public Editor at the Times, wrote in Sunday’s paper about business journalists/columnists both reporting stories and expressing prescriptive opinions on them. He instanced recent cases, including Joe Nocera and Andrew Ross Sorokin (both covering General Motors and opining strongly on whether bankruptcy versus federal financial support is the better policy) and Gretchen Morgenson (covering Congressional hearings on credit rating agencies and separately opining on the credibility of the agency witnesses).

Those writers, along with the paper’s editors, say they are evaluating applicable policies concerning the division between reporting and opinion. But, in general, all seem to suggest that there is little or nothing wrong with reporters also expressing opinions. They do recognize the importance of clearly distinguishing when one is reporting versus opining. An example of a policy they would support is that writers could not publish a news story and an opinion column on the same subject the same day.

Mr. Hoyt, essentially the public’s watchdog at the paper, expresses more serious reservations. He sees a profound problem of blurring the lines between news and opinion at the paper. The current business section’s activities are a continuing manifestation of a practice that puts the paper’s credibility at risk, he worries.

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KPMG-BCE: Auditor Conflict in Huge LBO Deal?

Green Eyeshade.jpg As one of the largest leveraged-buy out deals in history verges on collapse, much attention is being paid to a central condition in the agreement, the target’s solvency; little attention has been given to conflicts of interest facing the firm, KPMG, deciding whether the condition is met.

The deal is a $28 billion LBO for BCE, Canada’s largest telecom firm. A principal lender in the proposed deal is Citigroup, the struggling commercial bank. BCE has made clear it wants the deal to close as scheduled on December 11; Citigroup, like other lenders amid the current financial crisis, may prefer that it does not.

The agreement contains a condition to the lenders’ obligation to close that BCE shall have obtained an opinion from KPMG, or another public accounting firm, attesting to the solvency of the post-LBO company. This may be difficult to deliver, given the considerable debt being used in the LBO and terrible market and economic conditions.

Trouble is, KPMG is the outside auditor for both BCE and Citigroup, presenting it with a potential conflict of interest. One arm of KPMG may wish to bless the deal, to promote favorable relations with BCE, while another may wish to scotch it, to promote favorable relations with Citigroup.

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The Fancy Dining Barometer

During the early 2000s, capital flourished, Wall Street prospered and it was hard to get reservations at top New York restaurants, except months in advance; today, as capital flows contract, and finance is paralyzed, you can get reservations at some of the best New York restaurants with a mere one week’s notice—or less.

In that earlier period, you could get reservations at any restaurant in Washington DC less than a month in advance, and at many on shorter notice. Today, top DC restaurants are booked solid, no tables available—at least not until late January, after President-elect Obama is inaugurated.

What gives? Probably some version of C + I + G, part of the famous Keynes/Samuelson formula defining aggregate economic demand as the sum of consumption, investment, and government spending. In a simplified picture of the US today, I happens in New York; G happens in Washington; and C happens nationwide.

Earlier this decade, I was the biggest factor in the formula and you had to wait months for a reservation at Manhattan’s revered Gramercy Tavern. Now, with the New York Stock Exchange reeling while Congress lets the US Treasury dole out nearly a trillion dollars—and Congress discusses handing out more—G is the big factor in the formula, and you have to call months in advance for a table at West End’s Blue Duck Tavern.

Between Wall Street’s I and K Street’s G, of course, is C, the consumption component of the formula, the ultimate reality measure, capturing what’s going on in America, beyond New York and Washington. Today, the answer is not much. In all but a few big cities, Americans can get a reservation anywhere, today for tonight. But, alas, outside the Beltway and the Apple, many are eating tuna fish sandwiches at home.

An old quip says a recession occurs when your neighbor is out of work; a depression occurs when you are out of work. Hundreds of millions of people—including those in Manhattan—know that the United States is in a serious economic vise. But you would never know that here in Washington DC (at least not in the northwest quadrant of this city), where restaurants catering to the lobbying crowd are packed, and money flows freely.


The Coming Capital Flood

dollar sign.jpgExcesses in the financial sector have spilled into all sectors of the economy and are spelling global recession. The worst, most say, is yet to come, as the manufacturing, retail, housing and other sectors reel from the fallout, with more layoffs, generally rising unemployment, curtailed consumer and business spending, slashing asset values and so on—all on a global scale.

Nor have the financial sector causes of these real economy consequences ended: there remain trillions of dollars of financial instruments, created in the period 2004-06, outstanding, whose settlement upon maturity or other triggering events will have additional consequences.

Those consequences may either continue to add to the economic crisis or just possibly resolve it, not only by providing capital to the financial sector but possibly by reversing the consequences infecting the real economy.

This is the interesting analysis offered by Australian financial columnist, Alan Kohler, in Business Spectator, entitled A Tsunami of Hope or Terror?

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SEC Schizophrenic on Global Accounting

SEC Seal.gifWith surprising absence of fanfare, the Securities and Exchange Commission released over the weekend a 165-page document outlining its delayed and long-awaited proposals for how the US might switch from using its own generally accepted accounting principles to new international financial reporting standards. The release bears a schizophrenic quality. It offers one unsurprising and one surprising proposal.

The unsurprising portion reflects what the Commission reluctantly came to accept last summer: the US is not ready for such a switch and is not likely to be until 2014 at the earliest. Accordingly, the release principally outlines the many obstacles to such a switch and lays out milestones that would have to be met before considering such a radical move.

The surprising portion contemplates allowing selected US issuers voluntarily to make the switch as early as the year after next—2010. This radical proposal would be limited to US issuers whose industry uses IFRS as the basis of financial reporting more than any other set of standards. The release struggles to explain why this special approach for such issuers overcomes the many obstacles facing other US issuers.

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Explanation Option on Multiple Choice Exams

Teaching Hours Burden Post.jpgLaw professors may struggle to determine optimal exam format, especially between essays and multiple-choice questions or a combination. Student appetite varies. But many students prefer essay exams. They may express concern that multiple choice questions limit ability to identify and explain ambiguities.

Teachers may find a multiple-choice format optimal for many reasons, including psychometric evaluation, the nature of substantive material to test (e.g., statutory versus common law), or simple time budgeting to grade exams (e.g., a professor teaching both Contracts and Corporations in a single term to large enrollments simply cannot grade 200+ written exams within deadline).

One way to offer multiple-choice exams while meeting that student concern is to give students a limited option to address perceived ambiguities. This can be done for a limited number of questions on a separate attachment to the multiple choice exam. I’ve done this for years, using an approach passed on to me by Bernie Black years ago when he was at Columbia and I taught a course there.

The mechanism is easiest to explain by excerpting below the related instruction that appears on the general instructions page to my exam; it is followed by the form of explanations page I attach to the exam booklet. I always circulate the instruction and sample form of explanations page in the weeks before the end of the term and explain the method in the beginning of the term when summarizing the course evaluation method.

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Crisis Yields Turnabout by SEC Chair

SEC Seal.gifIn a speech Wednesday

at the Practising Law Institute’s program on securities regulation, the historically arch-conservative, deregulatory Chair of the Securities and Exchange Commission, Christopher Cox, offered very surprising recommendations for financial regulation reform based on lessons taught by the current economic meltdown. Highlights include:

1. Establishing a Congressional Select Committee on Financial Services Regulatory Reform.

2. Merging the SEC and the Commodity Futures Trading Commission “with a clear mandate to protect investors by regulating the markets in all financial investments, including securities, futures, and derivatives.” Many such calls have been made, dating to the 1987 market crash to the Treasury Department’s March 2008 blueprint for financial regulation reform. Most propose diluting the resulting agency by having the merged agency adopt the lax approach to regulation used by the CFTC rather than the relatively tight approach of the SEC. Mr. Cox’s statement emphatically prescribes sticking with traditional SEC approaches in the resulting merged agency. He says the crises “highlight the need for a strong SEC.”

3. Merging all existing bank regulators, of which there are six at the federal level and scores at state levels. Again, this proposal has been often made, including by Treasury, although Mr. Cox again signals an urgency and muscularity that differs from the looser supervisory approach Treasury contemplated. Mr. Cox says: “the lessons of the credit crisis all point to the need for strong and effective regulation.” He contrasts the traditionally “strong SEC” with the comparatively lax banking regulatory structure: the SEC is independent of those it regulates. In contrast: “banks regulated by the Federal Reserve Bank of New York elect six of the nine seats on the board of the New York Fed. Both the CEOs of J.P. Morgan Chase and Lehman Brothers served on the New York Fed board at the beginning of the credit crisis.”

4. Mr. Cox also takes the lessons from the crisis to reject proposals, made as recently as a year ago, to weaken US regulations on the grounds such regulation results in the US losing financial business to less-regulated markets. The “mortgage meltdown” and “credit crisis” show that what is needed is strong regulation backed by statute, not mere supervision, voluntary compliance, weaker regulation or limited enforcement, Mr. Cox said.

The speech overall is an impassioned defense of a strong SEC, and strong regulation. Numerous SEC observers over Mr. Cox’s tenure may recognize this as a bit of a turnabout for him.


Capitalism and Regulation

dollar sign.jpgThis weekend’s talk among world leaders will be accompanied by opposing diagnoses of economic failure and prescriptions for correction and prevention. The outgoing President of the United States sought to frame discussion in a speech yesterday extolling the virtues of unbridled free-market capitalism, warning that government regulation is a danger not a solution. In contrast, the continuing President of France and Prime Minister of Great Britain signal interest in devising an elaborate international, government-sponsored regulatory structure at global levels, to modulate capitalism’s most acute downsides.

Neither of these extremes is likely to hold. All modern capitalistic economies involve considerable government regulation and no advanced modern government is likely to cede sufficient national sovereignty to international regulatory authorities to forge a single global financial regulator. Reality suggests a combination of continued or enhanced national regulatory oversight with perhaps greater international coordination among senior national regulators.

Deeper policy talk may turn to the form regulations should assume within nations to enhance oversight and facilitate coordination. This may refashion discussion about whether rules or standards are superior. No slogan has been more popular in financial regulatory circles in the past few years than “principles-based systems” as contrasted to “rules-based systems.” Conservative reformers in the US, including current Treasury Department leadership, had been condemning the US system as “rules-based” and celebrating the “principles-based systems” they assert exist in the UK and Europe.

Regulation in general, and rules in particular, are a problem not a solution, in this view. If any regulation is politically necessary or economically justified, it would assume the form of broad general expressions of expected conduct, as standards or principles, not rules. This approach enables reposing maximal discretion in targeted actors, letting them exploit opportunities and take risks sans regulatory shackles. Opponents, skeptical of such discretion, contend that, at least for some purposes, strict rules are required to restrain excesses to which such actions can lead. When taking stances on the form of national and international financial regulation in coming discussions, participants may need to confront several fundamental questions.

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Michael Lewis on Causes of Financial Crisis

Michael Lewis, author of the long-selling book, Liar’s Poker, offers a magazine-style account of some of the factors provoking the current financial crisis. It is a delightfully literary contribution that will likely appeal to those captivated by best-selling narrative (complete with protagonists and famous characters plus expletives and references to football, sex and gambling).

Mr. Lewis’s 9000-word piece does not purport to provide a full picture, of course, because many factors conspired to generate the disaster. Extensive research and diagnosis must be undertaken to form a useful understanding. But the piece is enjoying attention and may be of some interest.

In general, Mr. Lewis blames the crisis on a “Wall Street machine” incubated by stupid investment bankers who lacked training to understand the risks they were creating. He ties the current crisis back 20 years to his period on Wall Street, as a 20-something, know-nothing paid a huge salary and bonuses. It was in that period that devices like mortgage-backed derivative securities were invented—the devices that proliferated geometrically in the past five years and form the catalyst of crisis.

In particular, the “Wall Street machine” consists of two parts: (1) real pools of subprime mortgage loans packaged into bonds presenting meaningful default risk and (2) a synthetic market of side bets that those bonds would indeed default packaged into bonds backed by bettors’ wagers. Mr. Lewis reports a story based on interviews with several people who participated in this casino. Its substantive elements can be summarized as follows.

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