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April 28, 2010

Fixing the Rating Agencies

Credit rating agencies are back in the public eye as the Senate Permanent Subcommittee on Investigations releases another trove of embarrassing agency e-mails and the financial reform bill nears enactment.  In this context, a proposal by two professors at NYU's Stern School of Management, Lawrence White and Matthew Richardson, to improve credit rating agency performance by having the SEC decide which agencies will rate each instrument has attracted favorable attention from commentators such as Paul Krugman.  Although the proposal is refreshing in its boldness and offers a potentially useful way to address one of the many problems besetting the agencies, it should not be understood as a complete solution.  The complementary issue of rating-agency accountability for poor quality should also be addressed.

By now, the background story is familiar: Rating agencies - Moody's, Standard & Poor's, and similar firms whose business it is to assess the likelihood that debt obligations will be paid as agreed - gave their stamp of approval to innovative financial products that were in fact incomprehensible and/or based on the premise of an unending real-estate boom.  Panic set in when everyone realized that the ratings were wrong or unsupported.  The details and even the basic correctness of this narrative are disputed, but the major rating agencies have all more or less conceded that there was a problem of some kind:  their ratings on novel financial products didn't do  as well as they could have.

What exactly are the problems with the rating agency market?  There are several candidates:

(1) Lack of competition.   The SEC says that the three largest agencies have over 97% of the market, as measured by number of ratings outstanding.

(2) Absence of transparency.  Market participants complain that it is hard for users to know what the agencies do and how well their ratings perform.

 (3) Financial regulators' reliance on credit ratings in their rules.  If the rules say that regulated firms like banks and insurance companies have to own financial instruments with credit ratings, then there will be a demand for credit ratings, even if the agencies have no idea what they are doing. 

(4) The "issuer pays" business model.  The firms selling the financial products usually are the ones who pay for the ratings.  "Issuer pays" poses an obvious conflict of interest, as rating agencies have an incentive to please their customers, who are the people selling the products, not those buying them.

 (5) Absence of accountability.  There is no clear way to hold rating agencies liable for poor performance unless it rises to the level of fraud.

Congress' and the SEC's actions to date have focused mainly on the first two issues, competition and transparency:  Legislation passed in 2006 and rules adopted since then have focused on trying to get more rating agencies into the market and on increasing disclosure about what the agencies are doing, what data they're using, and how they're performing.  There has been fitful action on the third issue.  Starting in 2008, the SEC and other regulators have considered reducing their use of credit ratings in their rules, but they have not eliminated their reliance on credit ratings and do not seem to be on track to do so, although deliberations are ongoing.  The problem here is that financial regulators need a measure of credit risk, and it is not clear what would take the place of credit rating agencies, an issue I took up in this article last year. 

The White and Richardson proposal focuses on the fourth issue.  The idea is to remove issuers' ability to shop for high ratings from agreeable rating agencies by using the SEC to assign the agency that will rate each debt instrument.  Under the proposal, the issuers still pay for the rating, but they pay the agency that the SEC selects to do the rating.  The SEC will make its selection based on its assessment of which agency  is likely to do the best job, thus eliminating the conflict of interest that arises from the issuer-pays business model.  This is an innovative idea, and its boldness is refreshing given the limited scope of the reforms that have even been considered to date.  White and Richardson would fundamentally restructure the rating market - indeed, they apparently would eliminate the rating "market" and substitute SEC assignment. 

Of course, those who think that government can't do anything right will oppose this idea, arguing that the regulators are corruptible, capturable, and/or unskilled at evaluating the performance of rating agencies.   Those who think the SEC in particular is the wrong choice - pointing perhaps to the Madoff affair, to the SEC's oversight of the Wall Street investment banks leading up to the financial crisis, or to allegations that the SEC has been biased toward the large incumbent rating agencies - will oppose the choice of this particular regulator.  Those who think that government approval of rating agencies led to excessive reliance on them will observe that the proposal could exacerbate that problem.  I'll note all three sets of objections and set them to the side for the moment.   

I have two different concerns about this proposal.  First, it seems overbroad to prohibit agencies from expressing their opinions unless authorized to do so by the SEC.  If the SEC selects Moody's to rate a bond, should S&P really be barred from opening its mouth about that bond?  Even setting to one side the agencies' more extravagant First Amendment claims, this seems problematic.  The overbreadth concern could be addressed without changing the essence of the proposal by saying either that the SEC-selected agency is the only one whose ratings "count" for regulatory purposes or that only the SEC-selected can be paid by an issuer, leaving other agencies free to express their opinions in other contexts.

Second, the White and Richardson proposal doesn't address what I see as a central problem:  When confronted with a large and growing market for a set of novel products, agencies that are paid by the rating (or otherwise based on the volume of their business) have a financial incentive to issue ratings on those products even if they don't know what they are doing.  After all, the more ratings, the more revenue - even if the technical complexity or novelty of the product means that the agency can't do a good job.  Indeed, White & Richardson acknowledge this issue, stating that "it's surprising that rating agencies would even attempt to rate" certain types of novel products because of the technical difficulty of doing so.  But under their proposal, agencies apparently still are paid by the rating even though they are selected by the SEC:  The more ratings, the more revenue.  That enticement to poor quality still exists even though the issuer-pays problem may be eliminated.

This problem can be addressed by taking on the fifth issue, rating agency accountability.  Eventually, poor-quality ratings will be discovered and if the agencies know they will have to give up their profits from the poor-quality ratings in that event, that reduces their incentive to issue ratings when they don't know what they are doing.  An article I wrote two years ago addressing this point can be found here

The Dodd bill takes steps in the direction of accountability by clarifying that a rating agency can commit fraud by failing to conduct a reasonable investigation of facts upon which it relies and by empowering the SEC to decertify rating agencies that consistently produce poor-quality ratings.  Neither of these provisions really addresses agencies' temptation to issue ratings when they don't know what they're doing.  Decertification is a weak remedy, as credit rating agencies can operate without being certified, and the requirement to conduct a factual investigation doesn't go to the fundamental question, which is whether the agency knows what to do with the facts that it has. 

The Dodd bill does provide for further study of agencies' incentives to produce high-quality ratings, so even if neither the White and Richardson proposal nor a stronger rating-agency accountability provision makes it into the financial reform bill that seems likely to be passed soon, there is some chance that the complementary issues of issuer-pays and accountability will be addressed.

 

April 27, 2010

Reading Notes on the Meltdown

One of the melancholy consolations of the late economic meltdown is that it has produced some pretty good second-draft journalism: here in a moment, gone in a moment, but helpful and instructive while they last. Over the past year or so I’ve found myself obscurely compelled to try to keep up on this stuff. Of course I can’t really; there aren’t enough hours in the day. But I may have done some successful cherry-picking. Here are some offerings:

If I had to recommend just one book on how we got into this mess, I suppose it would be Barry Ritholz’ Bailout Nation with the saucy subtitle of “How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.” Given the snarky packaging (an enrgaged bull on the cover), you’d think it was a lightweight but Ritholtz is an extraordinarly shrewd student of the market, and he’s not overawed by power and wealth. As the title implies, Ritholtz assigns a lot of blame to the role of the government as guarantor against loss—he goes all back to the first Chrysler bailout a generation ago. He also develops an important structural point I hadn’t thought about until I read him—the shift in the great investment banks from”partnership” to “corporate” form, setting the stage for a heads-I-win, tails-you-lose investment strategy, where it may make sense for the trader to make absolutely bad deals if he gets to keep the gains while someone else suffer the losses.

A variant on the theme is Yves Smith’s ECONned, another book better than its title. Yves saw some of the madness from the inside so she can get gritty and granular than an outsider. She also has a distinctive advantage: she’s a woman, so she can see how much of the mess finds its roots in macho bravado.

Thirteen Bankers by Simon Johnson and James Kwak has received and deserves respectful attention, not least for the insights that Simon can bring from his past experience with the International Monetary Fund. Johnson fears we are beginning to look like a banana republic (“without the bananas,” someone has grumped), and he knows what they look like because he has seen them. It does have the drawback of coming a little late in the game, so it can seem repetitive.

A recent arrival that does not seem repetitive is Gary Gorton’s Slapped by the Invisible Hand. (can’t anybody write good titles any more?). Gorton comes to the table with long experience in the study of financial bubbles: he offers a challenging analysis of the late meltdown as a classic bank panic in modern dress, with the Wall Street repo market playing the role once inhabited by Jimmie Stewart in the Greek Revival edifice down in the center of Bedford Falls.

Remember the housing bust? It almost gets lost in the underbrush of Wall Street, but it was, after all, the triggering event—the shock that sent the larger system into a tailspin. For background on housing, I doubt that there is anything better than Alyssa Katz, Our Lot. She makes a persuasive case that the housing problem was not just one problem but half a dozen. She pulls some of her most interesting examples out of California.

A superb little book with a shelf-life perhaps even shorter than the others is Robert Pozen’s Too Big to Save? which I elsewhere described as CliffNotes for Finance Professors. It’s a marvel of exposition, a point-by-point account of the various (economic) problems that afflict us, with specific action plans for reform. Might be the best economics book I’ve read all year; unhappily, events are already overtaking it.

There’s a lot more. I’ve more or less deliberately sidestepped the memoirs (necessarily self-serving) of the Alan Greenspan, Hank Paulson, and their ilk: I figure they would only send my blood pressure up. I’ve mostly sidestepped the journalism of people such as Andrew Sorkin, figuring the chances are they’ve already said what they know in the papers. I’ve read only a few of the ticktocks of day-to-day life in the midst of calamity (though I did enjoy Willliam D. Cohan’s House of Cards about the fall of Bear Stearns).

Oh, I could go on and on. But let me end with one item, not strictly on point but related, and likely to outlive the current uproar. That would be Liaquat Ahmed’s Lords of Finance, subtitled “The Bankers who Broke the World,” about the calamities of misjudgment that went so far to aggravate the Stock Market Crash of 1929 into the Great Depression of the 1930s. Ahmed just won a Pulitzer Prize and no wonder: this is a book that will stand solidly on the shelf. It’s perhaps a consolation to know that our betters have not led us quite so deep into the swamps this time. Or at least, not yet.

April 21, 2010

John Paul Stevens and the American Century

For years after John Paul Stevens arrived in Washington, Court-watchers across the ideological spectrum typecast him as a “wild card” whose fact-conscious approach led to “maverick” results. Those terms seldom surface any more; accounts of his recent decision to step down at the end of this Term instead dubbed him a “lion,” a “leader of the liberal wing.”  Yet neither description alone does justice to Justice Stevens, who today celebrates his ninetieth birthday.  In his jurisprudence may be found not only a commitment to common law processes, but also a vision of how law must serve American ideals.

John Paul Stevens has lived much of what has been called the American Century.  He was born in Chicago on this day in 1920.  Just five months earlier, the Senate had voted to keep the United States out of the post-World War I League of Nations.  Four months before that, deadly race riots had roiled neighborhoods not far from Stevens’ Hyde Park home.  His family was among the city’s most prominent, having earned a fortune in the life insurance business.  In 1927 the family opened the lakefront Stevens Hotel, then the world’s largest, run by John’s father, already manager of another posh downtown hotel.  John’s Jazz Age childhood soon gave way to Depression-era tragedy: Stevens’ father, who had borrowed money from the insurance company in an attempt to save the hotel, was convicted in 1933 of embezzlement.  The Illinois Supreme Court fully exonerated him in 1934.  But the hotel was lost, and the father ran a food concession at the Century of Progress World’s Fair.  John had his first job selling Banbury tarts near the Fair’s replica Globe Theatre.  There began his love of Shakespeare’s plays.

As a University of Chicago undergraduate, John heard Mortimer Adler and Robert Maynard Hutchins – renowned as founders of the Great Books curriculum – debate whether America should come to the aid of England in its fight against fascism in Europe.  When war came Stevens served, earning a Bronze Star for his work as a Navy codebreaker at Pearl Harbor.  At war’s end he returned to Chicago.  Having excelled at Northwestern University School of Law, Stevens was hired by Justice Wiley B. Rutledge, Jr., later described as the conscience of a Supreme Court sorely tested by World War II and the ensuing Cold War.  As Rutledge’s law clerk Stevens played his part in America’s mid-twentieth century struggles to resolve competing claims of national security and individual dignity, and to enforce the Constitution’s guarantees of liberty and equality.

Stevens spent most of the nearly three decades between that clerkship and his own confirmation in Chicago, where he taught antitrust part-time and established himself as one of the city’s premier litigators.  (Stevens is quick to note that his stints in Washington, working on congressional antitrust inquiries, taught him how legislation is made, a lesson that has influenced his approach to statutory interpretation.)  His work as special counsel in a corruption investigation that prompted the resignation of Justices of the Illinois Supreme Court – chronicled in Kenneth Manaster’s Illinois Justice (2001) – led to Stevens’ appointment to the Seventh Circuit in 1970.  Five years later, he became the only Justice nominated by post-Watergate President Gerald Ford.

As commentators soon noted, Stevens brought to the Court the litigator’s focus on the case at hand.  That focus has remained evident not only in the Justice’s penchant for attending to factual wrinkles that sometimes lead to unexpected results, but also in his insistence that the Court should decide only the issues squarely presented in briefs and oral argument.

Less noted was the intellectual framework that Stevens brought with him to Washington.  During his tenure he, like Rutledge and all members of the Court, has grappled with the important issues of this last century:  issues of liberty, equality, and security.  Underpinning many such decisions has been a vision of the relation between the individual and the state that Stevens explicitly has linked to the work of Mortimer Adler and John Stuart Mill.  In a lecture published as The Third Branch of Liberty, 41 University of Miami Law Review 277 (1986), Stevens construed the “liberty” of the Due Process Clauses to protect every individual from “being treated less favorably than the average member of society unless there is an acceptable justification for such treatment.”  He then gave two examples of unjustified invasions of liberty:  when a “person is branded as a ‘felon’” without proper hearing, and when “he is treated less favorably than the majority of his peers simply because his skin is not of the same color as theirs.’”  Stevens thus maintains, as did the Court in Bolling v. Sharpe (1954), that the Constitution’s guarantee of fundamental fairness encompasses a principle of equality dating to the Declaration of Independence.  That view of the Constitution not only has influenced Stevens, but also may be discerned in recent writings of other Justices; most notably, those of Justice Anthony M. Kennedy in cases like Lawrence v. Texas (2003).

This vision, along with his clerkship for Justice Rutledge and other life experiences, influenced Justice Stevens’ jurisprudence on myriad issues.  To cite a few instances:

Capital Punishment.  Soon after joining the Court, Steven drafted the opinion in Woodson v. North Carolina (1976), which made clear that the Eighth Amendment forbids mandatory imposition of the death penalty. But he also cast the essential vote in companion judgments, like Gregg v. Georgia, by which the Court ended a four-year de facto moratorium and reinstated capital punishment. Even then, his wartime experience had sown seeds of doubt about the death penalty, and he confronted his vote in Gregg throughout his career on the Court.  He has drawn an ever smaller circle around the types of cases that are death-eligible.  Noteworthy is his opinion for the Court in Atkins v. Virginia (2002), which reversed a thirteen-year-old precedent to outlaw the execution of mentally retarded persons, and set the stage for the abolition three years later of the juvenile death penalty.  Culminating this jurisprudence is Stevens’ separate opinion in Baze v. Rees (2008), in which he wrote that judicial experience compelled him to conclude that the capital punishment is not susceptible to constitutional application, and then explained that since his view did not command a majority, he would continue to evaluate every death case according to precedent.

Equal Protection.  Justice Stevens initially evinced hostility toward government programs said to give preference to minorities as a means to remedy past discrimination; indeed, in Fullilove v. Klutznick (1980), he likened one such program to the Nuremberg Laws by which Nazi Germany persecuted its Jewish citizens.  In contrast stands a 1948 memorandum, written fully six years before the Court’s landmark decision in Brown v. Board of Education (1954), in which clerk Stevens advised Justice Rutledge to “take judicial notice of the fact that … the doctrine of segregation is itself a violation of the Constitutional requirement.”  About midway through his tenure on the Court, Stevens came to approve affirmative action programs that, rather than dwelling on past discrimination, looked forward to the promotion of diversity in American society.  Wresting from the majority its claim to the mantle of Brown, Stevens declared in 2007 that the integration plans at issue in Parents Involved in Community Schools v. Seattle School District No. 1 served “the public interest in educating children for the future,” adding that “children of all races benefit from integrated classrooms and playgrounds.”

National Security.  An undisputed landmark in Stevens’ career is his forging of coalitions that crossed the conventional liberal-conservative divide to reject key aspects of the President’s post-9/11 campaign against terrorism.  Stevens wrote two of the most important judgments, Rasul v. Bush (2004), which granted federal habeas privileges to noncitizen  terrorism suspects held offshore at Guantánamo, and Hamdan v. Rumsfeld (2006), which invalidated military commissions established by a decree of President George W. Bush.  Those judgments restraining executive power stood in some tension with some of Stevens’ earlier decisions  respecting the extraterritorial reach of law enforcement.  The post-9/11 jurisprudence hearkens to opinions in which Rutledge – in one case, an opinion that clerk Stevens helped draft – stressed the Court’s duty to ensure fair treatment for even the most disfavored persons, even when national security rests in the balance.  For Stevens as for Rutledge, no less than America’s tradition was at stake.  “[I]f this Nation is to remain true to the ideals symbolized by its flag,” Stevens wrote in dissent from one post-9/11 judgment, “it must not wield the tools of tyrants even to resist an assault by the forces of tyranny.”

On this his ninetieth birthday, our country celebrates Justice John Paul Stevens’ invaluable service to the American Century.

Cross-posted at SCOTUSblog's "Thirty Days of John Paul Stevens: A series of posts by authors who know him and his work." A direct link to this entry is here.

April 12, 2010

Why U.S. News and World Report Should Include a Faculty Diversity Index in its Ranking of Law Schools

Co-authored with Associate Dean and FindLaw columnist Vikram Amar.

Click here to find out more!About a month ago, we wrote a column for www.FindLaw.com arguing that the influential U.S. News & World Reports law school rankings should consider the diversity of the student body in evaluating the quality of law schools. In essence, we contended that a diverse student body contributes to a better learning environment for students, and therefore should be used in measuring the quality of a law school.

In this column, we contend that the diversity of a law school faculty should also be factored into the U.S. News law school rankings methodology. Faculty diversity contributes measurably to the quality of legal education, as well as to the overall quality of the scholarship produced by a law faculty. It therefore warrants consideration in any legitimate law school ranking system.

The Modern Legal Profession: Dramatically Changed Demographics, Yet There Is Much Progress Still to Be Made

Women and racial minorities are much better represented in law schools today than they were just a generation ago. Specifically, women law students today comprise 47 percent of the total, and minorities account for about 20 percent of all law students.

As a result of the evolving law school demographics, the literal face of the legal profession is changing before our very eyes. Thankfully, long gone are the days when Justice Sandra Day O'Connor, one of the few women in her graduating class at Stanford Law School in 1952, had a difficult time finding a job as an attorney. In 1970, less than 3 percent of all lawyers were women, compared to about 34.5 percent in 2010. Although there certainly are questions about the so-called "glass ceiling" facing women attorneys, it is unquestionably the case that there are many more women in the legal profession today than a generation ago.

The increase has been less dramatic, but nonetheless steady, for most racial minorities. For African Americans, for example, the increase has been from 1.2 percent of all lawyers in 1970 to 4.6 percent in 2010.

As a result of the modern demographics of law student bodies, the iconic Professor Kingsfield of "The Paper Chase" no longer represents the typical law professor in the United States. However, law school faculties have been somewhat slower than the student bodies in increasing their percentages of women and minority faculty members.

Today, women comprise 37 percent and minorities constitute about 16 percent of full-time law teachers, numbers that lag behind the corresponding percentages in law school student bodies.

The underrepresentation of racial minorities on law school faculties is even greater if one looks at the general population. Latinos and African Americans each comprise roughly 13% of the overall population, and Asian Americans about 4%. These three groups together account for about 30 percent of the population, yet all minorities comprise only 16 percent of all law faculty members.

The representation of women is also deeply disappointing. When roughly half the students in law school are women, there is simply no excuse – unless one were to make the untenable argument that women on the whole are generally less qualified as men for the academy – for law schools not to aspire to have faculties that are not composed of roughly half women. This is especially true given that women are well-represented among the student bodies at the two law schools that send the most graduates into legal academia, Harvard (currently at approximately 47 percent) and Yale (49 percent). Although the numbers for racial minorities are smaller, there remains no reason for law schools not to strive to hire the same percentage as can be found in law student bodies.

This data begs the obvious question: Why is the gender and racial diversity of law faculties important to evaluating the quality of law schools? We believe that diverse law school faculties better prepare students to practice law in a world with diverse clients and lawyers, and we believe that diverse law school faculties are also more likely to produce cutting-edge scholarship. Let us explain why.

Law Faculty Members as Role Models

To begin, law students need role models while they are in law school. This is especially the case for women students and students who are members of racial minorities, as these groups historically were excluded from the legal profession. A full representation of women in law school faculties, for example, would confirm in the eyes of women law students that they can be effective lawyers and indeed can in fact succeed in the legal profession. In this vein, the appointments of Supreme Court Justices Sandra Day O'Connor, Ruth Bader Ginsburg, and Sonia Sotomayor sent powerful messages to women lawyers about the possibility for women to rise to the loftiest echelons of the legal profession.

The same holds true for law students who are members of racial minorities. African American, Latino, Asian American, and Native American students often clamor for minority role models on their law school faculties. Minority faculty members teach minority students by example – sending the strong message that these students in fact belong in law school and can be top-flight lawyers. In the same way, the appointment of Justices Thurgood Marshall, Clarence Thomas, and Sonia Sotomayor told African Americans and Latinos, respectively, something important about their ability to ascend to the very top echelons of the legal profession, and of the government.

For many years, law schools have recognized the need for minorities on law school faculties, and have undertaken focused efforts to hire more of them. Law schools aggressively recruit minorities, especially those with elite credentials. The claim that there is a "pool problem" due to a lack of minorities in the legal profession carries some weight but, as demonstrated above, its persuasiveness has markedly lessened over time. And, going forward, there simply will be no "pool problem" at all when it comes to women law school graduates.

The Diversity of Faculty Perspectives Clearly Matters When It Comes to Teaching and Scholarship

There are other benefits, as well, to having a diversity of backgrounds represented in law school classrooms. For example, might it not be possible – some would contend even probable – that a woman teaching legal concepts surrounding rape or abortion might present the law in different ways, with different perspectives on, these subjects than her male counterparts would? Recall, for instance, that Justice Ruth Bader Ginsburg reportedly helped change the minds of several of her male colleagues on the Supreme Court in the recent Fourth Amendment case (Safford Unified School District v. Redding) holding that a strip search of a young female teen at her middle school violated the Fourth Amendment.

Similarly, an African American man might understandably bring an entirely different set of perspectives to the discussion of racial profiling in law enforcement than the average white colleague might offer. Harvard Professor Charles Ogletree, who is African American (or, for that matter, Harvard's Henry Louis Gates, whose racially-charged run-in last summer with the Cambridge, Massachusetts police made the national news), in all likelihood might bring different perspectives to bear on criminal justice than, say, Wayne LaFave, who is white, even though few would question that LaFave is one of the leading criminal procedure scholars of his generation.

So too, Latino and Asian American law professors might bring entirely different perspectives on immigration law and enforcement than even a brilliant white colleague could offer. A Native American faculty member might have an entirely different perspective on Indian Law than other professors could provide. And, rather obviously, an Arab or Muslim professor might bring to bear wholly different perspectives on the various security measures taken by the U.S. government after September 11, 2001 than other faculty members. And these are only the most obvious examples: Importantly, this difference of perspective is not limited to particular subject matters that are directly related to race, ethnicity or gender, but also might be expected to apply across the board to various legal topics as well.

Nor is the classroom the only sphere where faculty diversity matters. Differences of perspective can affect scholarship just as they can affect teaching. Even if one does not believe that there is a "voice of color," it is an unquestionable truth that, in the aggregate, members of different minority groups will bring different experiences and perspectives to bear on the analysis of the law and legal doctrine. It would be startling, moreover, if one did not see these differences influence their scholarship to some degree.

Of course, we do not mean to say that all minorities or all women will add different perspectives to the mix. Rather, what we mean to say is that a diversity of faculty with various backgrounds and experiences can help enrich teaching and scholarship. And in other respects, our legal system embodies the belief that a diverse set of perspectives leads to improved decisionmaking. For instance, Supreme Courts in the federal and state systems are designed to have many (ranging from five to nine) Justices, rather than a single Justice, deciding cases. Similarly, we strive for the juries that decide civil and criminal cases to be comprised of many persons (usually twelve) pulled from a cross-section of the community. There also is good reason to consider the diversity of faculties in evaluating the quality of law schools. There, too, a multiplicity of perspectives will predictably improve the quality of debate and deliberation on vital issues.

Faculty Diversity is an Index of Law School Quality, Both Locally and Nationally

In our previous column for this site, we argued that, because the U.S. News rankings seek to employ a methodology that accurately evaluates the overall quality of law schools, it makes perfect sense to evaluate the diversity of the student bodies for all U.S. law schools and include that evaluation in the rankings. There can be no convincing justification for the special treatment of law schools in states that may not enjoy the same demographic diversity as, say, California and Florida. (Schools in Maine and Kansas were the examples used by U.S. News's law school rankings guru, Robert Morse). The diversity of faculty is as important to the quality of a legal education and of legal scholarship in Maine as it is in California.

As with student diversity, the concern that law schools in less diverse locales should be subject to different criteria carries no weight in evaluating the quality of the schools' faculty. Indeed, the market for law teachers is unquestionably national. Serious faculty candidates generally are willing to relocate to wherever they land the best job. Consequently, there is no reason why a law school in Maine or Kansas has any excuse for failing to have a gender- or racially-diverse faculty.

Currently, there are not as many women and racial minorities as might be desirable on many law faculties – and that fact is not lost on law schools. As a result, the competition for those much-coveted potential faculty members is often intense. Yet the intensity of that competition should not be an excuse for the lack of diversity in law school faculties. Importantly, there are law schools – and not only those that rank among the most top tier of schools – that are doing something right in recruiting and retaining diverse faculties. Those schools should be rewarded for their effective competition and for improving the quality of the education their schools provide.

This brings us to the question of how a law school might work to secure and maintain a diverse faculty. This is a topic that is well beyond the scope of this column. But, as with most things, it takes leadership, commitment, time, and effort. Law school Deans must be willing to instill the values of diversity and excellence in the hiring of faculty. Faculty appointments committees that include women and minorities are important, in order to increase the likelihood of diverse search outcomes. Appointments committees must, within legal limitations, be encouraged to bring a diverse group of candidates to campus for the full faculty to consider.

The Need for a Critical Mass of Minority Professors, If Legal Education Is to Improve

A faculty diversity index that values significant, as opposed to minimal, diversity is called for as a measure of faculty diversity. That is because a "critical mass" of minority faculty members – not just one or two – on a law school faculty is good for both the teaching and scholarly missions of the law school.

A critical mass of minority and female faculty will ensure that students are exposed to a diversity of law professors possessing different experiences and perspectives. This diversity will, in turn, provide students with a richer environment – one that more likely mirrors the diversity of lawyers and clients that the students will encounter as lawyers. A token minority professor teaching a class or two clearly will not have nearly as positive an impact on a student's educational experience as having a wide variety of minority and women teachers. Indeed, seeing the diversity of opinion within members of a minority group, and among women, teaches students much about diversity in and of itself.

Moreover, creating a critical mass will help to ensure that minority faculty members do not feel as if they are mere window dressing, or that they are being looked to by students and colleagues as being required to offer the "minority perspective." A lonely (minority) soul is more likely to leave a given law school for greener pastures elsewhere. Thus, the retention of minority faculty members, too, will depend in part on the ability of a law school to maintain a "critical mass" of diversity on its faculty.

Who Counts? Why the Representation of Asian American Faculty Should Matter, Too

In measuring the racial diversity of law faculties, it seems clear that we should consider Latinos, African Americans, and Native Americans. Some might question whether Asian Americans, who are so richly represented on many college and university campus, should be counted. We believe that they should.

As with student diversity, we are not making a remedial argument for faculty diversity here – that is, we are not calling for diversity to remedy historic wrongs, but rather to enhance today's teaching and scholarship and provide a superior experience for today's law students. Importantly, as with student body diversity, the benefits of the diversity of a law faculty accrue with or without the underrepresentation of a particular group, such as Asian Americans. In any event, Asian Americans historically have been underrepresented in law, often because of societal pressures that funneled them into math and the sciences. Some have also claimed that law faculties have relied on stereotypes of the "passive" Asian to argue that Asian American faculty candidates whose scholarship was strong nevertheless would not do well in the classroom, and thus to decline to hire them.

As this discussion suggests, the quality of law schools rests in part on the diversity of their law faculties as well as of their student bodies. The U.S. News rankings therefore should expressly consider both faculty and student diversity, rewarding the schools that encourage either or, ideally, both.

Finally, while we have focused in this column on gender and racial minorities, we acknowledge that other kinds of diversity among the members of law faculties may also make a positive difference in law teaching and scholarship. For example, socioeconomic diversity, ideological diversity, LGBT diversity, religious diversity, etc., among faculties also may be important. We are open to ideas on how to ensure these and other kinds of faculty diversity that might improve legal education and scholarship, and open to arguments that these kinds of diversity, too, should be taken account of by the U.S. News rankings.

Cross-posted at FindLaw.

April 8, 2010

Only in Immigration Law and in Alice in Wonderland: Aggravated Misdemeanors?

Co-authored with Raha Jorjani, Supervising Attorney and Lecturer in the UC Davis Immigration Law Clinic

Under the Immigration & Nationality Act (INA), conviction of an "aggravated felony" makes long-term permanent resident aliens ineligible for a form of discretionary relief from removal known as "cancellation of removal." Over the last two decades, Congress has slowly but surely expanded the definition of "aggravated felony" to punish immigrants convicted of crimes, revealing the deep unpopularity of "criminal aliens" among the public and policymakers. As a result, since 1996, the nation has deported hundreds of thousands of immigrants each year.

In 2006, the Court in Lopez v. Gonzales, 549 U.S. 47 (2006) held that a state felony drug possession conviction that would not have been a felony under federal law was not an "aggravated felony": Since "Congress generally treats possession alone as a misdemeanor whatever the amount," a possession conviction does not ordinarily constitute an "aggravated felony." Last Term, the Supreme Court decided three of four immigration cases in favor of the immigrant. The single victory for the government came in Nijhawan v. Holder, 129 S. Ct. 2294 (2009), in which the Court ruled that the immigration court correctly inquired into the underlying facts of a state fraud conviction in concluding that the monetary loss to the victims exceeded $10,000, which was necessary to make the crime an "aggravated felony" under the INA.

In Carachuri-Rosendo v. Holder, the Court must address the complex question whether a state misdemeanor conviction for drug possession amounts to an aggravated felony. A lawful permanent resident with four U.S. citizen children, Jose Angel Carachuri-Rosendo entered the United States from Mexico in 1993. He was convicted in the Texas courts for (1) misdemeanor possession of marijuana, for which he was sentenced to 20 days in jail; and (2) misdemeanor possession of one tablet of Xanax, for which he was sentenced to ten days in jail.

Under federal law, when a person is convicted of possessing a controlled substance after a previous drug conviction, the prosecutor may seek a recidivist enhancement, which, if established, converts what ordinarily would be a misdemeanor into a felony. For such an enhancement, federal law requires adherence to rigorous procedural safeguards, including a formal charge of a recidivist enhancement and an opportunity for the defendant to challenge the prior conviction. In this instance, the prosecutor in the second drug possession prosecution did not pursue any recidivist enhancements.

Because Carachuri-Rosendo could have been prosecuted for a felony on the second drug charge in federal court, the immigration court found that Carachuri-Rosendo was an aggravated felon and ineligible for cancellation. Although uneasy with the result, the Board of Immigration Appeals found that Fifth Circuit precedent required a finding that he was an aggravated felon. In an opinion by Judge Edith Jones, the U.S. Court of Appeals for the Fifth Circuit denied Carachuri-Rosendo's petition for review. The Supreme Court granted certiorari to resolve a conflict among the circuits.

In the Supreme Court, Carachuri-Rosendo argues that, because the state court did not make a determination of recidivism and failed to adhere to the procedural protections under federal law, his second misdemeanor possession conviction is not an "aggravated felony." The fact that he could have been convicted of recidivist possession was not sufficient for concluding that he had been convicted of an aggravated felony. Carachuri-Rosendo further argues that the "rule of lenity" requires that any statutory ambiguity be interpreted in his favor.

The U.S. government takes the position that Carachuri-Rosendo's second misdemeanor conviction for possession is in fact an "aggravated felony" because the offense could have been punishable as a felony under federal law. According to the United States, Congress's judgment controls; as stated at oral argument, "Congress has taken a hard line over the past 20 years on criminal aliens, particularly recidivist criminal aliens ...."

The U.S. government's position, if accepted by the Court, would have an incredible result. It would mean that a noncitizen with a federal misdemeanor possession conviction -- if, for example, the U.S. Attorney decided not to pursue recidivist enhancement charges -- could nevertheless have been characterized as guilty of an aggravated felony under the immigration laws because such charges could have been brought if the case had been prosecuted in federal court. Such a result would contradict Lopez v. Gonzales, which held that a crime must be a felony under federal law to constitute an aggravated felony.

On March 31, Sri Srinivasan, a partner with O'Melveny & Myers LLP, argued Carachuri-Rosendo's case before the Supreme Court for Carachuri-Rosendo. Nicole Saharsky, Assistant to the Solicitor General, argued for the United States. The Justices aggressively questioned both sides. In particular, Justice Breyer, the author of the majority opinion in Nijhawan v. Holder, peppered counsel with questions about the complex matrix of state and federal statutes at issue in the case and the applicability of the Court's past decisions. To make clear the harsh treatment of criminals under the U.S. immigration laws, Justice Breyer offered a hypothetical of how the conviction of the harmless "pussycat burglar" stealing an innocuous "pop gun" would be classified as an aggravated felon.

It is difficult to predict how the Supreme Court will decide Carachuri-Rosendo v. Holder. However, although "criminal aliens" are unpopular with the public and Congress, the Roberts Court -- conservative as it is -- has been willing to rule in favor of immigrants when the government has gone too far. Indeed, immigrants have prevailed in two cases decided by the Court this Term. In Kucana v. Holder, 130 S. Ct. 827 (2010), the Court unanimously held that congressional court-stripping provisions did not bar judicial review of the Attorney General's discretionary decision to reopen a removal proceeding. In Padilla v. Kentucky, 2010 U.S. LEXIS 2928 (Mar. 31, 2010), the Court, in a landmark decision, ruled that a noncitizen could base an ineffective assistance of counsel claim on the failure to advise him of the immigration consequences of a guilty plea in a drug case.

In Carachuri-Rosendo v. Holder, the U.S. government's claim that a state misdemeanor drug possession conviction somehow amounts to an "aggravated felony" drug trafficking offense under the U.S. immigration laws goes too far. At oral argument, Justice Ginsburg correctly observed the government's interpretation would have an "absurd result," deporting a long term resident for two misdemeanor drug possession convictions. The U.S. government's tortured interpretation would have a devastating impact on immigrant communities, especially long-time residents with deep family and community ties to the United States. Indeed, Carachuri-Rosendo faces banishment from America - and four U.S. citizen children -- for a crime deemed so minor by the court that it sentenced him to a measly ten days in jail. For a minor, non-violent misdemeanor to result in, as the Supreme Court has put it, "the loss of all that makes life worth living," violates the principles of proportionality and justice embraced by democratic societies.

Cross posted from American Constitution Society Blog.

[Image via M J M.]

April 2, 2010

Death Ships

In B. Traven's novel The Death Ship, a misbegotton sailor finds himself cast out to sea on an old scow whose purpose, as he learns, is not to reach port, but to sink--the owners having decided that it is worth more at the bottom of the ocean while they disport themselves with the insurance money. So, a death ship born to die.


I've been reflecting on death ships lately as it dawns on me that they may be more common than we think. Specifically I've read two accounts of the late financial uproar, in which the authors identify transactions which, as they argue were designed to fail. I choose my words advisedly--designed not just with reckless disregard of their prospects, but with failure as the end in view, and design feature and not a bug.

One is Yves Smith's account of Magnestar which (per Yves) designed investment vehicles with such a high probability of failure that the promoter could make money by shorting its own creation. That is, designed to fail.

The other is Gary P. Gorton in Slapped by the Original Hand, where he makes a comparable argument about the adjustable. Recall (forget so soon?): in the ARM, I take a 30-year mortgage at a two-year teaser rate. At the end of the two years, the rate adjusts up--but not adjust "up;" rather, up so far that I can't come close to servicing the old debt. So I have two remaining choices. One, default. Two, cut a new deal, perhaps with the same bank--which the bank, perhaps surprisingly, is happy to do because the property has gone in value and under the new deal, the bank effectively captures the new equity.

Per Gorton, this "new deal" scenario is not just a happy accident. Rather, he argues, the deal was structured that way from the start--the bank foresaw default and wanted default, because that was the bank's route to the ballooning equity stake.

So now I'm up to two now in my count of financial death ships--devices designed to screw up the economy not just by accident but on purpose and as a matter of policy.

Are there more death ships on Wall Street? I wouldn't be surprised; once you start looking for death ships, you see them everywhere. Consider Mel Brooks' The Producers, where the naughty boys undertake to get rich by producing a show that will fail: the comedy is that they fail to fail, and wind up in jail. Hell, consider the chicken: the fastidious among us may cringe at the thought that we get our dinner by breaking the neck of an innocent creature. The Marengo-and-Tetrazzini crowd will say: hey, the chicken wouldn't have been born to begin with if we hadn't intended to kill him. So, we did him a break. Or, a death ship.

I would want to distinguish those activities that harm others by fatal indifference as distinct from general plan, though the distinction may be hard to isolate. For example, I assume the tobacco companies know that they are in the business of killing people, but I assume this counts more as an unfortunate side effect than a settled business purpose--if they could make all that money through a non-lethal form of addiction, they'd be perfectly happy to do so. I would also distinguish those who make money off the misfortune of others. As a bankruptcy lawyer, I hear a lot about that, but I don't know of any bankruptcy lawyer who structures deals so he can profit from the debtor's bankruptcy.

I hesitate to include the Republican Party, because its nihilistic behavior has become something close to a meme. But I think you'd have to concede that the Republican campaign against Obamacare was more about destroying Obama than it was about his plan--and that, indeed, there must have been Republicans thanking their lucky stars that they President wanted something so bad that they would have the opportunity to try and destroy it. Query, was there ever a case where an entire economy, an entire polity, counted as a death ship?

It is dangerously tempting to raise this whole analysis to a higher plane--to consider whether we are all characters in somebody else's drama where we have no idea of the plot, nor least of all the denouement. Or as I say on my Facebook page (though the line is not original with me)--perhaps the rapture has already happened and we are the ones left behind. Or perhaps it is all just a giant rust-eaten garbage scow, on which somebody else hopes to collect the the insurance.

[Cross-posted at Underbelly.]