Don’t blame Bernie – of course the banks can be broken up

In a recent interview, a very confused New York Daily News reporter continually mixed up the Treasury Department and the Federal Reserve in the face of a very straightforward statement of presidential candidate Bernie Sanders that Congress can give the President power to impose changes on the structure of the financial system “under Dodd Frank.”

Well, the Treasury is an agency of the executive branch while the Federal Reserve is an independent hybrid public-private entity. The former is an extension of the power of the President while the latter has autonomy that limits, understandably, Presidential influence. Apparently in the minds of financial journalists the two entities can be conflated without consequence.

Sure enough Secretary Clinton jumped on the bandwagon and slyly and indirectly suggested on Morning Joe that Bernie Sanders does not “seem” to know enough about how the economy works to be qualified as president.

Now that we have cleared up the fact that it was the Daily News reporter who was confused not Sanders, let’s focus on the agency that a President does control, the Treasury. When Sanders said he wanted to use Dodd-Frank to break up the big banks one could consider that from two angles. First, does the current language of that law enable the federal government to break up the banks; and second, could Dodd-Frank be amended to give the federal government the power it needs to break up the banks. Since Sanders talked about going to Congress to empower the government to break up the banks it seems reasonable to conclude he means the latter, second method.* But he is taking the view that any such amendment would be consistent with Dodd-Frank, a necessary extension consistent with the spirit of what Congress intended to do.

I think he is right about that – Dodd Frank cannot be viewed in isolation or as a static statement by Congress. In fact, many aspects of the statute are clearly aimed at collecting information and monitoring the ongoing behavior of the financial system so that Congress can decide if further change to the financial system is necessary. This summary of the key features of Dodd-Frank authored by a major corporate law firm that advises banks makes clear the role of the statute in enabling Congress and the President to maintain ongoing live and dynamic oversight that could and should lead to further changes in banking structure.

One key feature of the Act? A Financial Stability Oversight Council (FSOC) which has several key roles including (according to that law firm): “identifying risks to U.S. financial stability that may arise from ongoing activities of large, interconnected financial companies as well as from outside the financial services marketplace, promoting market discipline by eliminating expectations of government bailouts, responding to emerging threats to financial stability.”

No wonder the authors of this report tell their banking clients in summation: “There will be much more to come once the studies mandated by the Dodd-Frank Act are completed. There also is every reason to believe that the rule-making process will be a long and winding road.”

In fact, in part, Dodd Frank did restructure the banks by implementing the so-called Volcker Rule which forbids proprietary trading by banking entities.

Recent controversies, post Dodd-Frank, suggest that such active oversight is warranted. JPMorgan, for example, had no idea that it was building up a huge bet on synthetic credit INSIDE the very part of the bank that was supposed to be reducing risk! The London Whale scandal would likely have led to a break up of the bank in a rational world and certainly should have led to the dismissal of its CEO. Arguably this was a form of proprietary trading and thus in violation of Dodd Frank (although the Volcker Rule provisions were not finally passed until after this particular scandal – just good luck?) Can anyone not believe that Sanders and the Minneapolis Fed President Neil Kashkari are raising alarms about a serious ongoing problem in the financial system?

Please note I am not taking a position here on whether all the banks should be broken up. I do think that the repeal of Glass Steagall did unleash serious problems and enabled a hidden bubble to build up inside large banks that blew up in 2007-08. For a full discussion of the normative debate about whether to break up the banks consider the comments expressed at a Brookings Institution conference by Kashkari of the Minneapolis Fed recently here.

*Given the opportunity to expand on his earlier comments to the Daily News on the Morning Joe program today (April 8) Senator Sanders confirmed that he intends to use both existing Dodd-Frank provisions and additional legislation. He pointed specifically to Section 121 of Dodd-Frank which allows the Federal Reserve with the backing of FSOC to impose structural changes on banks including restricting product offerings or terminating activities.

Chinese state cracks down on Berkeley labor education effort

A major blow to the idea that there can be engagement with the Chinese state unions as described in the Wall Street Journal.

Another account here:

Chinese state cracks down, but workers keep fighting | REDFLAG.

Sadly, some in the law school world operate under the same illusions as some in our democratic labor movement. See my exchange with NYU professor Rick Hills here and here.

A Fall 2016 seminar on “global tectonics” – call for papers

The theme will be the application of law to the problems created by what I call “global tectonics.” I intend to consider problems like the Ukraine, Boko Haram, Mexican drug violence and more. Students will be reading the globalization and rule of law literature and then examining these trouble spots where global social, political and economic tectonic plates are clashing. They will be asked to consider how or whether legal solutions to these situations are feasible. If you have any ideas for papers or other material for the seminar or would like to present work of your own please let me know. My campus email address is sdiamond@scu.edu.

Henry Manne, 1928-2015

Steve Bainbridge writes here of the passing of Henry Manne, one of the most important legal thinkers of the late 20th century. I did not know Henry at all personally until one evening a few years ago I was very pleased, out of the blue, to receive an email from him commenting on a paper of mine that had been posted on SSRN. That led to a brief but fruitful exchange of ideas about law and capitalism that proved very helpful in my own thinking and apparently, while he was perhaps just being polite in saying so, in his own thinking as well. Henry was someone who I think, alongside the late Benoit Mandelbrot whom I also was privileged to get to know in a similarly random way, should have received a Nobel Prize. Henry’s work and ideas will be of significance for a very long period of time and deserve careful study.

Putin dances to the tune of fictitious capital

Today’s Financial Times has a front page story on the newest stage of the Russian crisis. Putin’s Russia is being hit by both western sanctions as a result of its invasion of its sovereign neighbor, Ukraine, as well as by a glut in the supply of global oil.

This chart indicates the significant downward move in oil prices:

ChartBuilder-1

As a result, the world market is marking down the value of the Russian economy and hence the ruble is tanking in value.

In response, Putin is now forced to pump large amounts of cash into the banking system to keep key financial institutions afloat. The latest infusion amounts to close to $8 billion for three major banks. While the regime is claiming the ruble crisis is over, the FT story includes the following: “This is only the beginning,” said a senior executive at a large Russian financial institution. “Everyone is bracing for what comes after new year.”

Indeed the news about the bank infusion sent the ruble down again Friday after a rally earlier in the week. The overall damage of recent months is clear in the chart below:

ChartBuilder

Meanwhile in a recent speech Putin continued to make noise about diversifying the Russian economy which is another way of admitting that a quarter century of post-Cold War political and economic development has largely been a waste for the majority of Russians (and for much of the former eastern bloc as a whole it might as well be said, Ukraine first and foremost).

Thus, the Cold War may be over but we are far from resolving the fundamental imbalances in the global economy. These have now become so severe that countries like China and Russia are increasingly willing to confront the West with provocative actions like the Ukraine invasion and the assertion of Chinese sovereignty in the south China sea area.

It is understandable that we sympathize with the victims of this kind of aggression but pushing counties like Ukraine to choose Nato membership over genuine autonomy, which has been US policy for years, only stokes the tensions with Russia and provides Putin with political capital that he uses to shore up his own domestic position. Sanctions, too, are a dual edged sword. It is true that Russia needs the world economy but authoritarian forms of capitalism have been very stable over time. As the crisis deepens inside Russia it is just as possible that it will lead to greater centralization of power by Putin and his military and bureaucracy.

Leading study of JD’s million dollar value published in Journal of Legal Studies

The widely respected Journal of Legal Studies has now published “The Economic Value of a Law Degree,” the most important and widely discussed study of the value of earning a JD authored by legal scholar Michael Simkovic and economist Frank McIntyre.

The study concludes based on exhaustive empirical analysis that includes the impact of the recent recession that “a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.”

A working paper version of the article released last year triggered an intense debate because it provided strong empirical evidence that, despite the difficulties of recent law school graduates, over a career a JD had significant value relative to entering the workforce with only a BA. The concrete data assembled by the authors flew in the face of the anecdotal approach taken by most critics of the JD who dominated discussion of the future of law school in the wake of the economic crisis.

Here is the full abstract from the article:

“We investigate the economic value of a law degree and find that for most law school graduates, the present value of a law degree typically exceeds its cost by hundreds of thousands of dollars. The median and 25th-percentile earnings premiums justify enrollment. We track lifetime earnings of a large sample of law degree holders. Previous studies focused on starting salaries, generic professional degree holders, or the subset of law degree holders who practice law. We incorporate unemployment and disability risk and measure earnings premiums separately for men and for women. After controlling for observable ability sorting, we find that a law degree is associated with median increases of 73 percent in earnings and 60 percent in hourly wages. The mean annual earnings premium is approximately $57,200 in 2013 dollars. Values in recent years are within historical norms. The mean pretax lifetime value of a law degree is approximately $1 million.”

Some critics claimed, inaccurately, that the paper was not subject to peer review. It was, however, peer reviewed prior to its circulation in working paper form and now has been published in a leading refereed journal published by the University of Chicago Press.

As the economic recovery from the collapse of the 2008-10 period continues its momentum there is some evidence that applications to top tier JD programs remain strong with applicants with very LSATs now having increased. Nonetheless, second and third tier schools remain challenged to survive the prolonged economic cycle. This study, however, is likely to reinforce the argument that the JD and law schools remain a viable and important economic institution.

In victory for women’s rights, California agency blocks anti-choice effort at two universities

In a clear affirmation of the longstanding right of women and girls in California to choose whether or not to terminate a pregnancy, the Director of California’s Department of Managed Health Care (DMHC) this week rejected a multi-year effort by the administrations of two California universities affiliated with the Catholic Church to limit coverage of abortions in their employee health care plans.

California has long led the nation in the protection of a woman’s right to effective reproductive health care. Since the early 1970’s case law, statutes and the state Constitution itself have made it clear that under California law all women and girls possess a right to choose whether or not to terminate a pregnancy. Thus, the California Constitution enshrines an express right to privacy as a result of an amendment that followed court cases recognizing a woman’s right to choose. This was followed more recently (2002) by the Reproductive Privacy Act (RPA) which guarantees a woman’s right to both terminate a pregnancy and to birth control.

These fundamental rights to reproductive health care are reinforced by statutes that require state regulated health care plans including insurance plans and HMOs to provide coverage for safe and effective means to terminate a pregnancy once a woman or girl has exercised her right to choose that outcome.

There is only one category of abortion that an HMO or insurance provider would not be required to cover: an abortion that is illegal under the California Reproductive Privacy Act (termination of a pregnancy of a viable fetus is illegal under the RPA).

(One aspect of the law that confuses many is the question of what is a non-medically necessary abortion. Some anti-abortion advocates characterize such an abortion as “elective.” In fact, there is no category called “elective” abortion under California law unless one is referring to the right of a woman to “choose” to have an abortion (for whatever reason) in the sense that she may elect to have an abortion. A 1967 California statute called the Therapeutic Abortion Act attempted to create a distinction between abortions needed to protect the life of the mother and other abortions. At the time this was an advance from an era where all abortion was illegal. But the California Supreme Court struck down that attempt to create different classes of abortions In People v. Barksdale (1972) as “impermissibly vague.” The effect was to recognize abortions generally as legal in California prior to the US Supreme Court decision in Roe v. Wade. The TAA remained on the books, however, until expressly repealed by the RPA when it went into effect in 2003.

(The choice to have an abortion is, thus, separate from what kinds of medical or surgical methods are safe and effective to carry out that choice. Any such safe and effective method is considered “medically necessary” under the Knox-Keene Act and therefore will be part of providing a basic medical service that must be covered by a plan licensed under the Act by the DMHC, as the letters to the major insurers from the DMHC make clear. A non-medically necessary abortion is an oxymoron. Confusion may exist because some insurers explain to their beneficiaries that a request to use a drug like RU-486 for treatment of a medical condition other than pregnancy is considered “experimental” and therefore not “medically necessary.”)

Despite this clear Constitutional and statutory framework, in place since the mid-1970’s, certain entities affiliated with the Catholic Church have attempted to put in place new categories or distinctions that would carve out certain abortions from those that are protected under California law.

A few years after a resounding legal defeat at the California Supreme Court in 2004 (in an attempt to overturn the Women’s Contraception Equity Act), the Catholic Church apparently used its influence at Loyola Marymount University to get the University and its insurers to engineer in secret approval by the DMHC of an HMO product that would have prevented coverage of what Anthem called “elective” abortions as well as a wide variety of birth control methods. This restriction was approved in a hidden administrative process inside the DMHC, which has regulatory authority over the HMO industry in California, during the Schwarzenegger governorship. For more detail on that effort see my earlier post here.

DMHC records obtained through a Public Records Act request suggest that that 2008 decision was made on the basis of a relatively thin legal analysis with no reference to the Constitution or the RPA. In any case, Anthem did not in fact sell any HMO product based on that 2008 interpretation by the DMHC. Only in 2013 did Loyola Marymount University and Santa Clara University, both Jesuit affiliated schools, announce their intent to buy health care plans from Kaiser and Anthem that would exclude some abortion coverage.

Their announcement of this intention included new categorizations of abortions called “medically necessary” and “elective.” The new plans would have eliminated whatever was considered an “elective” as opposed to a “medically necessary” abortion. As explained above, the concept of an “elective” abortion does not exist in California law. Tellingly, neither the Universities nor the insurers ever definitively explained what kinds of abortions these new categories would include and provided no legal basis for these distinctions. At one point, Santa Clara University proposed language that mirrored that of the Hyde Amendment, attempting to define any abortion that was undertaken for anything other than to save the life of the mother as “elective.” Again, there was no basis for this kind of discriminatory language in California law, as the DMHC has now unambiguously agreed.

Faculty at Santa Clara University objected to this effort by the University Administration and its Trustees and, with the strong support of the campus chapter of the American Association of University Professors (AAUP), convened a special session of its Faculty Senate, apparently for the first time in the 150 year history of the school, to affirm its objections to the University’s new policy effort. Specifically, faculty objected to the failure of the University to abide by its commitment to shared governance in attempting the policy change. A campus wide vote of the faculty overwhelmingly approved this objection.

Several faculty demanded that the University define these new categories so that employees could understand the implications for their health care and to provide an explanation why these categories had a legal and constitutional basis in California. Many university staff and several student groups supported these efforts.

The University was never able to answer that challenge. University officials said they were attempting to answer those questions in conversations with Kaiser and Anthem. But no clear answer was ever provided. Instead, in the face of continued faculty and staff efforts to block the policy change, the trustees of Santa Clara publicly backed up the Administration and even went so far as to suggest that they were morally obligated to stop coverage for abortion because women faculty and staff might be using abortion to engage in “gender selection” of their children. This claim outraged many on the campus because it was not only facially absurd and not backed up by any serious research (in fact, quite the opposite, see here and here) but a racial slur aimed at Asian American communities. Unfortunately, this kind of charge has been used more widely of late by many in the anti-abortion movement.

Several faculty members at both SCU and LMU began a concerted effort last fall to raise objections to the proposed new restrictions with the State of California. Working closely with several advocacy groups including Planned Parenthood Affiliates of California, the ACLU of Northern California, the Trust Women Silver Ribbon Campaign and the National Health Law Program, extensive discussions with the DMHC took place.

Finally this past week the DMHC agreed unequivocally that the proposal by the University administrations at LMU and SCU had no basis in California law.

The Director of the DMHC, Michelle Rouillard, admitted that earlier approvals of new products that would have ended coverage of legal abortions were wrong. Further, she stated, using new discriminatory categories and limitations like “elective” abortions was inconsistent with both the California Constitution and the Knox-Keene Act. The letter, sent to seven major insurers, can be found here.

There has been widespread media coverage of the effort by SCU and LMU faculty and staff to defend reproductive freedom here, here and here. The ACLU has posted a blog about the DMHC letters here.