tag:blogger.com,1999:blog-59164640969282224412024-02-20T21:11:00.190-05:00Sons of the DesertOliver Hardyhttp://www.blogger.com/profile/00484475890310385671noreply@blogger.comBlogger45125tag:blogger.com,1999:blog-5916464096928222441.post-26386430267491327292018-04-11T01:57:00.003-04:002018-04-11T01:57:42.299-04:00More Dots to ConnectHere is one that I knew about but failed to mention in my post of April 7: A train purportedly carrying Kim Jong Un <a href="https://www.cnn.com/2018/03/27/asia/china-north-korea-train-intl/index.html" target="_blank">visited Beijing during the last week of March</a>. I would conjecture that the Chinese took Kim to the top of a very high mountain, and showed him all the kingdoms of the world and the glory of them; and made him an offer he could not refuse.<br />
<br />
Then, on April 8 <a href="https://www.wsj.com/articles/north-korea-ready-to-discuss-denuclearization-u-s-officials-say-1523213724" target="_blank">it was reported that</a>: "North Korea has told the U.S. that Kim Jong Un is prepared to discuss the denuclearization of the Korean Peninsula, clearing the way for a summit meeting between the North Korean leader and President Donald Trump ..."<br />
<br />
Very interesting. Oliver Hardyhttp://www.blogger.com/profile/00484475890310385671noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-38636996439360433472018-04-07T01:44:00.000-04:002018-04-11T01:55:26.289-04:00Rank Speculation About Recent DevlopmentsHere is a rumor of a foreign policy development that could have a dramatic domestic political impact.<br />
<br />
A couple of weeks ago, I had lunch with a neighbor. He is in the military and has just returned from a tour of duty in Korea. His rumor is that the meeting between Trump and NORK dictator Kim will produce a peace treaty between the parties to the Korean War. <br />
<br />
The terms of the treaty will include the denuclearization of the Korean Peninsula and the withdrawal of American forces from South Korea.<br />
<br />
Yes, it is contrary to established policy, but Trump has no commitment to established policy. Further, it would fit Chinese policy.<br />
<br />
I am sure that Kim does not want to give up his nukes, but, he will do as the Chinese say. Kim has absolutely no leverage in dealing with China. His guns point south and China is to his north. They can turn off the spigot and Kim’s army will have neither food nor fuel. Against us Kim has the population of Seoul as his hostages.<br />
<br />
My concern is that China should pay a price for what would a very big win for them. The price should be backing down on several other issues:<br />
<br />
1. China must give up claims that the South China Sea is its territorial waters. It must confirm the judgment of the court in its case with the Philippines.<br />
<br />
2. China must agree that it will not use force or the threat of force to alter the political status of Taiwan.<br />
<br />
3. China must accept changes in the terms of its trade with the US. Most especially, it must abandon the policy of requiring US companies to give intellectual property rights to Chinese joint venturers as a condition for access to Chinese markets. Other restrictive practices must be stopped as well.<br />
<br />
Here is a reading of some not obviously connected recent events that may be pieces of the puzzle.<br />
<br />
1. Trump fires McMaster and Tillerson. Pompeo is made SoS. The connection? The departed opposed the deal. Pompeo and Mattis have pushed the deal. They may have set the term sheet.<br />
<br />
2. Trump imposes tariffs on US China trade. He may be pushing item 3 of the deal where China had been balky or foot dragging.<br />
<br />
3. Trump makes nice to Putin, invites him to White House. The Korean War which will be ended by the deal was fought by the US, but the US was authorized and directed in the matter by the UN. The treaty must be approved by the Security council and Russia has a veto. Putin must be on board.<br />
<br />
I am not enamored of Trump. He is not a naive genius at international affairs. He is very ADD. He never studies issues. And, I doubt that he thought this whole thing up. My guess is that the deal was first floated by Xi Jinping. Then, Pompeo and Mattis carried the ball over the objections of Tillerson and McMaster. <br />
<br />
This is all rank speculation based on very little. But, if it comes to pass it will be a spectacular development in international affairs, and it will force a reset of the political atmosphere in the US. Large numbers of Americans on the isolationist right, and the pro-communist left would be thrilled. The narrative of an unstable sabre rattling Trump would be destroyed. It would boost Trump’s popularity ratings dramatically, and perhaps reverse the anti-Trump electoral trend of the past few months.<br />
<br />
If it does happen, you read it here first. Oliver Hardyhttp://www.blogger.com/profile/00484475890310385671noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-54953705931247660472017-11-28T23:49:00.000-05:002017-11-28T23:49:30.938-05:00Yes It's 75,000 Pages, But Most of It Is Irrelevant to You
<br />
<br />
The length of the Internal Revenue Code and the
regulations, rules, forms, and instructions that come with it, while staggering, are not for the most part of any real concern to ordinary
citizens. The IRC (<a href="https://www.law.cornell.edu/uscode/text/26" target="_blank">Title 26 of the United States Code</a>) consists of 11 Subtitles. Of that total, the only one that is of real concern to the average citizen is <a href="https://www.law.cornell.edu/uscode/text/26/subtitle-A" target="_blank">Subtitle A. Income Taxes</a>.
To be sure, if buy booze, you pay the excise taxes in Subtitle E. But, you do not have to know anything about them unless you own a beer
distributorship, you lucky dog. Further, Subtitle A has lots and lots of material that most people know nothing about. E.G. "Chapter 3 -
Withholding Of Tax On Nonresident Aliens And Foreign Corporations" The relevant stuff is in Chapter 1 - Normal Taxes and Surtaxes.<br />
<br />
The
irrelevance pattern is repeated recursively in Chapter 1. Most of what affects individuals is in Subchapters-A and B, but the list of
Subchapters goes on to Y. You probably do not need to know anything about H-Banking Institutions or L-Insurance Companies. Once upon a
time, a very long time ago, in a previous millennium, I needed to learn about Subchapter K-Partners and Partnerships for professional reasons.
Please believe me when I tell you there is a special place in <a href="https://en.wikipedia.org/wiki/Inferno_%28Dante%29" target="_blank">the 10th circle of Hell</a>
for the man who wrote the 25 page, 11,198 word, explanation of three words in §704(b)(2): "substantial economic effect". But, once again, you
can spend, a long, productive, and happy life in total ignorance of that abomination.<br />
<br />
It is true that some of the few
remaining sections that are relevant to ordinary individuals have developed into very long disquisitions. For example §163, that
authorizes the deduction of interest payments, has grown enormously. In the <a href="https://www.givemeliberty.org/docs/TaxResearchCD/TaxActs/1939IRCode.pdf" target="_blank">1939 IRC</a>,
the provision (§23(b)) that was ancestral to §163, was 58 words long and included a rule about tax exempt bonds that was later put in a
separate section. In the <a href="http://constitution.org/uslaw/sal/068A_itax.pdf" target="_blank">1954 recension</a>, it was 3 subsections of 258 words. It is now 14 subsections totaling 6835 words. <br />
<br />
Some
of that verbiage was added is to alleviate taxpayer problems, such as a subsection that turned, as if by wizardry, mortgage insurance premiums
into deductible interest payments for a few years. Other provisions were inserted to deal with possible abuses like bearer bonds*. And yet other
provisions were added to deal with market developments. Today everyone lives off of consumer credit. but, the first bank credit cards were not
issued until 1958. When the first versions of the IRC were adopted, the common assumption was that money would only be loaned and interest paid
for business purposes. The invention and spread of consumer credit necessitated a rethinking of the treatment of interest payable on
consumer credit. In 1986, as part of the extensive amendments adopted that year, subsection (h) was added basically to disallow interest on
consumer credit.<br />
<br />
I have little doubt that vast
stretches of the existing tax code could be rewritten to clarify and simplify it. But, I doubt that anyone really cares about it that much.
People who have to deal with it have learned it as it is, and would rightly question whether any change would destabilize the meaning of the
parts they have to deal with. Any rewrite would leave substance of the provisions alone, and that is where the problems lie.<br />
<br />
Note:
The 74,000 page figure comes from Wolters Kluwer, CCH the publisher of the "Standard Master Tax Guide" a series of loose-leaf volumes
containing: the text of the income tax provisions of the Internal Revenue Code; excerpts of relevant Congressional Committee Reports; IRS
regulations; and summaries of IRS rulings and judicial opinions. Much of that material accumulates from year to year, e.g. judicial opinions
from the 1930s are still in there.<a href="https://www.cch.com/WBOT2013/003Anniversary.asp" target="_blank"> In 2013 the exact number they gave was 73,954</a>.
Every month, they sent you more pages with the latest developments to insert at various locations in the binders. Many law firms and
accounting firms had full time employees whose job it was to keep the binders up to date. I am sure that, by now, most tax professionals use
an on-line version to save the difficulty and expense of maintaining that much paper. <br />
<br />
<br />
*For those of you who are
blessedly of too young an age to have dealt with bearer bonds, they were paper certificates payable to bearer, i.e. whoever showed up at the
issuer's place of payment and surrendered the piece of paper. Interest on the bonds was evidence by tiny post-dated checks (called coupons)
printed on the paper, which were also payable to bearer. To cash them in you cut them off of the paper bond, and submitted them to the issuer
for payment. The taxing authorities had to depend on the honesty of taxpayers to find out how much interest they received in a year. People
who derived most of their income from cashing the interest coupons were called: "coupon clippers". Such people seldom clipped cents off coupons
from the Sunday paper to keep their family's grocery budget in line.<br />
<br />
Oliver Hardyhttp://www.blogger.com/profile/00484475890310385671noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-88014111947759794102017-11-18T10:50:00.003-05:002017-11-18T10:51:24.097-05:00Tax CutsI am sorry, but we can't afford them. The Federal government needs revenue
desperately. Its present and future obligations, both for bonded indebtedness and for entitlements (Social Security, Disability, Medicare,
Medicaid, Obamacare, etc.), exceed its revenue producing capability as the current tax system is configured. Further, the US must rebuild the armed
forces it has squandered so wastefully both by use and by abuse such as the F35 and the Zumwalt destroyer.<br />
<br />
The deficit in the recently ended fiscal year* (FY 2017 ended 9/30/17) was <a href="https://www.cbo.gov/publication/53286" target="_blank">$666
Billion Dollars</a>, which was 3.5% of the GDP. Of course the deficit
was financed by issuing bonded indebtedness. At the turn of the century, the US Government ran surpluses for the FYs 1998 through 2001. FY 2001
ended 30 September 2001 -- just 3 weeks after 9/11. FY 2002 began a string of deficits that peaked in FY2009 when the Panic of 2008, and the
political panic spending in its wake, produced a post WWII record deficit of 1.4T$ (pseudo-scientific notation here, T stands for Terra or
Trillion), but the string has not ended. The four year period, FY 2009 through FY 2012 saw 5T$ of deficits. Since then we have settled down in
the 500G$ range.<br />
<br />
<blockquote class="tr_bq">
*A Fiscal Year of the Federal Government begins
on October 1 of the previous calendar year. FY 2017 began on 10/1/2016 and ended on 9/30/2017.</blockquote>
The GDP is about 20T$. So is the gross Federal Debt. You could say that we have reached the point where the Debt equals, and soon will
exceed, the size of the economy. But, only about 15T$ is in the form of outstanding bonds that are owned by persons who are not agencies of the
Federal Government, mostly Social Security*. As such, the bonds owned by the Federal Government in so-called "Trust Funds" are just promises to
keep paying SS pensions, medicare benefits, etc. even though the payments exceed the payroll tax revenues that have funded them for most of the past
80 years. (CBO is currently projecting that will happen in about 10 years).<br />
<blockquote class="tr_bq">
Note: <a href="https://www.cbo.gov/" target="_blank">the
CBO Web Site</a> has lots of very informative reports and data. Their
budget projections are <a href="https://www.cbo.gov/about/products/budget-economic-data#1" target="_blank">here</a>. Spend enough time with that stuff, and you
will join the late, great B.B. King in singing: "I've got a mind to give up living, and go shopping instead, buy me a tombstone, and be
pronounced dead") It is that depressing. Who is the CBO? The Congressional Budget Office, a supposedly non partisan body created and
tasked by Congress with tracking the budget and Federal finances and explaining to Congress the cost of its folly. They do excellent work.</blockquote>
<blockquote class="tr_bq">
While we are at it, I should add some links to
web sites that track the Debt and the deficit: <a href="http://www.usdebtclock.org/" target="_blank">U.S. Debt Clock</a> <a href="https://www.nationaldebtclocks.org/debtclock/unitedstates" target="_blank">National Debt of the United States</a> <a href="http://www.truthinaccounting.org/about/our_national_debt" target="_blank">Truth In Accounting</a>. If you really want to wallow
in it try: <a href="https://www.fiscal.treasury.gov/fsreports/rpt/finrep/fr/fr_index.htm" target="_blank">Financial Report of the United States Government</a></blockquote>
<blockquote class="tr_bq">
*The Federal Reserve banks own another big
chunk of the total Federal Debt (~2.4T$), but economists and budget nerds regard that as being held by the public because the it is
the backing for all of those nice crispy Federal Reserve Notes in your wallet. What? You don't have any? Don't look at me, I haven't any
either.</blockquote>
The optimistic political line is that the debt can continue to grow indefinitely as long as the economy grows faster. And this is true, until
it isn't. The larger the debt is in relation to the economy, the more difficult it is to service. The nightmare scenario is that the interest on
the debt starts to compound above the growth rate of the economy and simply compounds to the sky.<br />
<br />
One might say, that only the publicly held debt represents an obligation that must be repaid. Much of it is owed to foreigners who might get testy
if they are not paid. Especially the Chinese, who own about 3T$ of bonds and a whole bunch of ICBMs. But, even though Congress could lawfully stiff
the beneficiaries of Social Security and Medicare, it is absolutely inconceivable that they could or would politically.<br />
<br />
If Congress cannot not pay, then perhaps we should think of those obligations as being ones that we should recognize upfront. Truth In
Accounting linked above says that the National Debt should really include 76T$ in future obligations of the Social Security and Medicare programs.<br />
<br />
Economists Laurence Kotlikoff and Alan Auerbach, have claimed that the relevant number is what they call the <a href="https://en.wikipedia.org/wiki/Fiscal_gap" target="_blank">Fiscal Gap</a> which is the difference between the
present value of all of government's projected financial obligations, including future expenditures for Social Security and Medicare and
servicing outstanding official federal debt, and the present value of all projected future tax and other receipts. They have pegged this amount to
be in excess of 200T$.<br />
<br />
Further there a few trillions of dollars of debts owed by agencies or instrumentalities of the Federal Government, such as the alphabet soup of
mortgage lenders that floats the price of houses far beyond the ability of the mass of homeowners to afford*, such as Fannie Mae (Federal National
Mortgage Association or FNMA), Freddie Mac (Federal Home Loan Mortgage Corporation), Ginnie Mae (Government National Mortgage Association), and
FHA. These entities have issued trillions of dollars worth of bonds and mortgage guarantees. If they were subsidiaries of private companies, the
SEC would make the parent companies include their operations in its financial statements. but, the Federal Government doesn't have to do that.
Why? Because they don't want to, and, besides, they do not want to scare the peasants.<br />
<blockquote class="tr_bq">
*In the early 1970s, the median price of a
house was less than 3 times the median annual household income. The median Family, i.e. the middle class, could afford the median house.
During the inflationary period of the 1970s the ratio went up to 3.5 In the 1990s it went to 4. After 2002 it took off until it hit 5 at the
peak of the housing bubble. During the Panic of 2008, it dropped back to 4.5. But fear not. The bubble has been re-inflated and the average is
now almost 5.5. You have nothing to worry about, it is as safe as houses. If you want to learn more go to <a href="http://politicalcalculations.blogspot.com/search/label/real%20estate#.Wg_G2scldAk" target="_blank">Political Calculations</a>. He has lots of
interesting, but not comforting information.</blockquote>
If you are inclined to whistle past grave yards, you can point to the example of Japan, which has a publicly held debt of about 250% of its GDP.
I really doubt that the US could get away with that for a a few reasons. First, the Japanese people are thrifty, and they have not run a trade
deficit. Therefore, almost all of the Japanese Government bonds are domestically owned. Second, those bonds pay very little interest. Even the
30 year bonds pay less than 1%. US 30s pay about 2.8%, which is low, but not that low. Third, Japan has an extraordinary amount of social cohesion
and trust. The US is closer than most of you think to a shooting civil war. <br />
<br />
Another comeback is that the US Government cannot go broke because it can print the Dollars it needs to pay off its obligations. The response to
that is yes, it can. But, how much will those Dollars be worth. If they are so abundant as to be worthless, we have hyperinflation. Welcome to
Argentina. Or worse, Wiemar Germany. <br />
<br />
Here is the way I see it. The Federal Debt is too large, and we are running large deficits even though this is a time of relative prosperity.
The bigger the debt and the deficit are, the smaller our margin for error and unforeseen events is. There could be a worldwide recession not caused
by the United States. War is always a possibility. We did not foresee the collapse of the Soviet Union, or 9/11, we may not foresee the next war.<br />
<br />
Risk of a truly catastrophic event, like the collapse of the Federal Government is asymmetrical. If it doesn't happen, we go on from day to day
suffering the slings and arrows. Some people say that we should throw down the Federal Government because it is corrupt and oppressive. But, history
suggests that such an event is far more likely to cause enormous chaos and suffering than to lead to a happy solution. Louis XVI called the Estates
General because he was out of money. What followed should be a cautionary tale for us. I have already mentioned the Soviet Union and Wiemar Germany.
Bad examples abound. Happy endings are rare.<br />
<br />
Prudence suggests that this is a good time to get our financial house in order.<br />
<hr />
What follows are statements from pundits who have said good and
prudent things about tax cuts. First Robert Samuelson from the liberal Washington Post:<br />
<br />
<a href="https://www.realclearpolitics.com/articles/2017/11/09/under-taxed_america_135488.html" target="_blank">Under-Taxed America</a><br />
November 9, 2017<br />
<blockquote class="tr_bq">
WASHINGTON -- We Americans are having the wrong
debate. Almost all the arguing over the Trump administration's proposed tax cut centers on two issues. Will the tax reduction stimulate faster
economic growth? And is the proposal too generous toward the wealthy and too stingy toward the middle class and poor?<br />
<br />
Interesting questions, to be sure -- but mostly irrelevant to the nation's long-term well-being.<br />
<br />
The truth is that we can't afford any tax reduction. We need higher, not lower, taxes. What we should be debating is the nature of new taxes ...,
how quickly (or slowly) they should be introduced and how much prudent spending cuts could shrink the magnitude of tax increases.<br />
<br />
To put this slightly differently: Americans are under-taxed. We are under-taxed not in some principled and philosophical sense that there is
an ideal level of taxation that we haven't yet reached. We are under-taxed in a pragmatic and expedient way. For half a century, we
haven't covered our spending with revenues from taxes.<br />
<br />
Of course, there are times when borrowing (that is, budget deficits) is unavoidable and desirable. Wars. Economic downturns. National
emergencies. But our addiction to debt extends well beyond these exceptions. We have run deficits with strong economies and weak, with
low inflation and high, and with favorable and unfavorable productivity gains.<br />
<br />
Since 1961 ... federal budgets have been in surplus in only five years. ...<br />
<br />
Based on present policies, it's doubtful that things will get much better. Aging baby boomers are inflating Social Security and Medicare
spending. ... the Congressional Budget Office projects that the budget deficit ($666 billion in 2017) will grow as a share of the economy.<br />
<br />
* * *<br />
<br />
The unspoken assumption that justifies big and continuous deficits is that -- rhetoric to the contrary -- they pose no serious danger to the
economy. We can run deficits forever without suffering ill effects. ...<br />
<br />
Excessive federal borrowing poses three theoretical dangers. First, it could raise interest rates and "crowd out" the private investment
essential for higher living standards. Second, it could trigger a financial panic, if private investors would no longer buy Treasury
securities except at exceptionally high interest rates. And finally, a large national debt could make it harder for the government to borrow
heavily during a true crisis.<br />
<br />
* * *<br />
<br />
But that's not us. By now, it must be obvious: We are no longer responsible. The urgent need is to plug the huge gap between government
spending and tax revenues. Naturally, we aren't doing that.</blockquote>
<hr />
Next Robert VerBruggen from the conservative National Review:<br />
<br />
<a href="http://www.nationalreview.com/article/453581/tax-cuts-bigger-deficit-pro-growth-combination" target="_blank">Cutting Taxes with Borrowed Money: Will a growing debt
eat away at economic growth?</a><br />
<br />
November 9, 2017<br />
<blockquote class="tr_bq">
* * *<br />
<br />
The House GOP’s new tax bill would reduce revenue by almost $1.5 trillion over the next ten years, according to the Joint Committee on
Taxation (JCT). ...<br />
<br />
Normally, the argument against raising the deficit is put in simple terms — by whatever party is out of power, of course. Our debt is
already about 77 percent of our GDP, a number that will rise to 91 percent by 2027 under current law and will only get worse from there.
Realistically speaking, this is going to force a combination of tax increases and entitlement cuts at some point in the future, and the
longer we wait, the more brutal those measures will have to be. Starting from such a precarious position, we have no business making our deficits
even worse, whether by cutting taxes or by increasing spending. ...<br />
<br />
But there’s an additional layer of complication to the debate over tax cuts funded through higher deficits, one amply illustrated in competing
studies of the GOP tax plan from the Tax Foundation and the University of Pennsylvania’s Wharton School. The former says the plan would boost
economic growth and create jobs, and that as a result we would lose significantly less than $1.5 trillion in revenue. The latter, by
contrast, says the bill would have essentially no long-term effect on the economy.<br />
<br />
* * *<br />
<br />
We’ll start with the Tax Foundation. The organization predicts “3.6 percent higher GDP over the long term, 3.1 percent higher wages, and an
additional 975,000 full-time equivalent jobs.” Furthermore, it projects that the “after-tax incomes of all taxpayers would increase by 4.4
percent in the long run,” a benefit fairly evenly distributed across the economic spectrum.<br />
<br />
The group says the plan will reduce tax revenue by $1 trillion when economic growth is taken into account. Interestingly, without accounting
for growth, it pegs the revenue loss at almost $2 trillion over a decade, higher than the estimate from the JCT. (The gap apparently stems
from some differences in the data and assumptions the two groups use in their modeling.) This means the Tax Foundation foresees enough economic
growth to create $1 trillion in federal revenue, and to cut the total revenue loss in half.<br />
<br />
That huge gain doesn’t come from the reforms to the individual income tax. In fact, the Tax Foundation estimates those reforms’ effect on
economic growth at zero. Instead, “the larger economy and higher wages are due chiefly to the significantly lower cost of capital under the
proposal, which is mainly due to the lower corporate income tax rate.” The statutory corporate rate would fall from 35 percent to 20 percent
under the plan, putting the U.S. roughly in line with the average for other developed countries.<br />
<br />
... the CEA wrote, “by lowering the user cost of capital and making more investments profitable, multinational corporations and foreign capital
can be attracted to invest in the U.S. economy.”<br />
<br />
* * *<br />
<br />
The Tax Foundation’s analysis is more or less what conservatives have had in mind when pushing “dynamic scoring,” as opposed to the old
“static scoring”: Tax cuts benefit the economy, and a stronger economy means more tax revenue, so tax cuts “pay for themselves” to some
significant degree (if not entirely).<br />
<br />
But it turns out two can play at that game. The Penn Wharton study is dynamic, too, and its results are shockingly different. It finds that
there would be some economic growth by 2027 -- but not much: GDP would be a whopping 0.33 to 0.83 percent bigger. ...<br />
<br />
Why do the GOP’s tax cuts fail to boost the economy in Penn Wharton’s analysis? ... The simplest way to put the argument ... is this: When the
government borrows money ... people will lend the government money that they otherwise would have invested in the American private sector. Thus
the deficit “crowds out” private investment, counteracting the pro-investment effect of cutting the corporate tax.<br />
<br />
This is hardly settled science. A Congressional Budget Office paper in 2014 rounded up the literature and reported a “high degree of
uncertainty”: “For each dollar’s increase in the federal deficit, the effect on investment ranges from a decrease of 15 cents to a decrease of
50 cents, with a central estimate of a decrease of 33 cents.”<br />
<br />
The Tax Foundation doesn’t even model this effect. “While past empirical work has found evidence of crowd-out, the estimated impact is usually
small,” it contends in the new report. “Furthermore, global savings remain high, which may help explain why interest rates remain low
despite rising budget deficits.” ...<br />
<br />
Penn Wharton ... points out that “since the year 2000, foreign savers purchased about 40 percent of annual increases in Treasury security
issues impelled by higher federal deficits” — implying the rest had to have come from U.S. savers, who most likely would have found other
domestic investments otherwise.<br />
<br />
* * *<br />
<br />
First, even in the Tax Foundation’s more optimistic analysis, the bill would reduce federal revenue by $1 trillion over a decade. So
Republicans should stop pretending that they won’t be making the debt significantly worse if they continue down this path. If they think it’s
a good trade to hike the debt in exchange for (hopefully) boosting the economy, they should make their case openly.</blockquote>
Oliver Hardyhttp://www.blogger.com/profile/00484475890310385671noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-61196903215979176912016-07-07T08:11:00.004-04:002016-07-07T08:11:56.949-04:00Gun Control<span style="font-family: "Palatino Linotype","serif";">I’ve got a short piece. "Are Gun Control Laws Constitutional?," in the Washington Monthly's online edition. The URL
is <a data-saferedirecturl="https://www.google.com/url?hl=en&q=http://washingtonmonthly.com/2016/07/07/are-gun-control-laws-constitutional/&source=gmail&ust=1467979826601000&usg=AFQjCNEgYcAo4_VqLlgqSaYxGAYyXHIztw" href="http://washingtonmonthly.com/2016/07/07/are-gun-control-laws-constitutional/" target="_blank">http://washingtonmonthly.com/<wbr></wbr>2016/07/07/are-gun-control-<wbr></wbr>laws-constitutional/</a></span>Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-73419211594513123062016-05-17T14:08:00.002-04:002016-05-17T14:08:50.519-04:00Race Report<!--[if gte mso 9]><xml>
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<span style="font-family: "Palatino Linotype","serif";">On
Sunday, May 15, I rode in the Connecticut Masters Games 20 and 40 kilometer
cycling races. I finished second in the 75-79 age group in both races. (I’m 74
now, but for these purposes, your age is your age on the last day of the year.)
</span></div>
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<span style="font-family: "Palatino Linotype","serif";">The CT Masters Games are held
every May, in a wide range of sports. For the last five years or more, the
cycling races have been held in New Britain on a fairly flat 0.98 mile loop in
Walnut Hill Park.</span></div>
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<span style="font-family: "Palatino Linotype","serif";">There are separate award for
women and men for each 5-year age group from 40 up, although some of the groups
race together. I raced with the 65+ men, and we started one minute after the
40+ women. </span></div>
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<span style="font-family: "Palatino Linotype","serif";">When I first did CT Masters way
back in 2004, it was somewhat amateurish and the competition wasn’t all that
stiff. It’s still amateurish (in the best way), but in the last few years the Games
have developed some sort of affiliation with USA Cycling, the country’s main
amateur cycling group. That, combined with the Games being open to non-CT
residents, means that a better (than me) class of riders has been showing up.
This year, the 70-74 group featured two national champions. As a result, I and
quite a few other oldsters got dropped before the two-mile mark, something
that’s never happened to me in past years. </span></div>
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<span style="font-family: "Palatino Linotype","serif";">I rode by myself for a few
miles and then gradually picked up or was picked up by a few other stragglers,
and we worked together, though not very well. For those of you who don’t know
much about cycling, riders in a group can go much faster than a lone rider, and
the bigger the group, the faster you can go. That’s because air resistance
plays such a big role that the rider at the front ends up doing 20-30% work
than the riders behind (though that 30% figure may only applies to
professionals, who go really fast). Still, at any level, you go faster if you
can rotate the lead. It was even more important yesterday, where the wind was
averaging 19mph, with the only mild uphill on the course facing right into the
blast.</span></div>
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<span style="font-family: "Palatino Linotype","serif";">Our own rotation was
helter-skelter, with some riders contributing more than others, and the pulls
being longer than optimal. Plus, at about 10 miles we got lapped by the women’s
lead group, followed closely by the men’s leaders. (In the process some rather
unladylike things were said to me for not getting out of the way fast enough.) The
rule is that the women aren’t supposed to ride with the men and vice-versa, so
our little group got split up and it took some time to reform. </span></div>
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<span style="font-family: "Palatino Linotype","serif";">The 20K and 40K races are run
as a single race: Your time and placement are recorded at 20K (actually 12
laps, or 11.76 miles) and then you continue on to 40K (24 laps, or 23.52 miles).
But everybody finishes on the same lap, so when we were lapped, our races became
11 and (if we didn’t get lapped again, which we didn’t) 23 laps. In the
confusion I lost track of when our 20K race finished, and I never heard the
bell that is rung to signal the start of the final lap, so I was never aware of
the 20K finish. </span></div>
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<span style="font-family: "Palatino Linotype","serif";">There were never more than six
in our group, but eventually that number got whittled down to three as riders
fell off the pace. We also rode with two women who had been separated from their
lead pack. We weren’t supposed to work with them, and didn’t for the most part,
but they were there, yo-yoing as much as 25 yards behind or ahead.</span></div>
<div class="MsoNormal" style="margin-bottom: .5pc; text-indent: 3.0pc;">
<span style="font-family: "Palatino Linotype","serif";">I sprinted for the 40K line,
finishing second in our troika. I didn’t know then what age groups my
companions were in, but the guy who beat me was the
75-79 winner; the third 75-79 rider was a few minutes behind us. It turned out
that all the 75-79 riders (there were four of us at the start) had been dropped
more-or-less when I got dropped. </span></div>
<div class="MsoNormal" style="margin-bottom: .5pc; text-indent: 3.0pc;">
<span style="font-family: "Palatino Linotype","serif";">The results are posted </span><a href="http://ctmastersgames.org/results/year-results/2016-connecticut-master-games-results"><span style="font-family: "Palatino Linotype","serif";">here</span></a><span style="font-family: "Palatino Linotype","serif";">. I averaged 19.4 mph for the
20K and 19.2 for the 40K. This is about what I did last year, but somewhat
slower than in prior years. On the other hand, I did a lot of pulling (which I
never had to do in past years), and there was a lot of wind, so it wasn’t all
that bad. I’ll get ‘em next year.</span></div>
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<span style="font-family: "Palatino Linotype","serif";"></span></div>
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<span style="font-family: "Palatino Linotype","serif";">—Howard</span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-13970867779518301752016-04-10T15:43:00.001-04:002016-04-10T15:43:49.074-04:00Philosophy paper<!--[if gte mso 9]><xml>
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<span style="font-family: "palatino linotype" , "serif";">I’ve
just published a philosophy paper, “Relativism Defended,” in <i style="mso-bidi-font-style: normal;">Cogent Arts & Humanities</i>, an online
journal. The URL is </span><a href="http://www.tandfonline.com/doi/full/10.1080/23311983.2016.1166685" target="_blank">http://www.tandfonline.com/doi/full/10.1080/23311983.2016.1166685</a>.</div>
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Here’s the “Public Interest Statement” (a <i style="mso-bidi-font-style: normal;">Cogent</i> requirement) for the article:</div>
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Relativism—the view that different
people can have conflicting accurate representations of (i.e. beliefs about)
the world—is a position with few friends in the philosophical establishment.
But the argument for such relativism is straightforward, proceeding in easy
steps from premises about human psychology that have widespread acceptance.
Moreover, the standard arguments deployed against relativism—that it is
internally inconsistent, that it doesn’t distinguish between accurate and
inaccurate representations, or that it doesn’t allow us to question other
people’s views—seem wrongheaded. Being a relativist does not mean that you get
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—Howard</div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-79673456157237409292016-01-19T19:20:00.000-05:002016-01-19T19:20:32.253-05:00New article<!--[if gte mso 9]><xml>
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I’ve just published a long
(6,000+ words) article on media bias, “<i style="mso-bidi-font-style: normal;"><a href="http://cogentoa.tandfonline.com/doi/full/10.1080/23311983.2015.1134030">The
Times<span style="font-style: normal;"> and General Motors: What Went Wrong?”,</span></a></i>
in <i style="mso-bidi-font-style: normal;"><a href="http://cogentoa.tandfonline.com/journal/oaah20">Cogent Arts &
Humanities</a></i>, an online journal. Here’s the public interest statement that
<i style="mso-bidi-font-style: normal;">Cogent</i> requires authors to submit:</div>
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<i>The New York Times’</i> coverage of
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was badly distorted. The reporters ignored the only detailed independent study
of the problem, instead filling the vacuum with stories that reflected their
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technical issues are involved.</div>
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—Howard </div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-74555425296407502742015-11-18T11:24:00.000-05:002015-11-18T11:24:36.548-05:00Our Constitution, happily mangled<!--[if gte mso 9]><xml>
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<span style="font-family: "Palatino Linotype","serif";">In
May of 2014, I inadvertently placed an unpublished 6,300-word paper, “How to
Think About the Constitution,” on ExpressO. The paper’s basic thrust is
summarized on page 3:</span></div>
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“The most important fact about our written
Constitution is that it is an inadequate framework for the modern American
polity: Few of us would want to live under the government it describes. That the
Constitution still works at all is due to a long history of the courts reading
that document in ways its authors never contemplated.”</div>
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It’s customary to criticize such mangling
of the Framers’ intentions, but I argued that such mangling is necessary if we are to have a
functioning government. The Constitution is so difficult to amend that needed changes
can only be forced through via textual misreading; the governmental machinery is
thus greased with regular applications of hypocrisy. It’s an inescapable
situation, but hardly optimal, as the courts (a) aren’t elected, and (b) can
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and downloading a pdf.</span></div>
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—Howard Darmstadter </div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-82684245584526983022015-10-21T12:01:00.000-04:002015-10-21T12:05:04.897-04:00What crime did GM commit?<!--[if gte mso 9]><xml>
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<br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">On
September 17 the government and General Motors Corporation announced a $900
million settlement of criminal charges stemming from a defective ignition
switch installed in many GM cars. The switch could be easily jarred into the
off position, disabling the airbag system and causing a number deaths. </span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">The
GM and other recent large-dollar settlements with corporations represent a
disturbing trend in federal criminal prosecutions. Until recently, it was
believed that a corporation could not commit a crime. A corporation lacks
beliefs or desires and is incapable of taking any action, lawful or criminal;
it is just a set of legal relationships among individuals—directors,
stockholders, officers, and employees—who act in the corporation’s name. So when
we say that a corporation does something, we should understand that it is the humans
who do those things.</span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">Just
as corporations can’t commit crimes, they can’t pay settlements. Saying that GM
paid $900 million just means that GM’s stockholders paid the $900 million. No
one has suggested that the stockholders committed any criminal act, yet they
end up paying the penalty. So the first problem with the GM settlement is that
it punishes the innocent. </span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">It
also fails to punish the guilty. In almost all the recent corporate
settlements, no individuals were charged. One can understand why prosecutors
are reluctant to go after individuals; if the case goes to trial, the
government may face substantial difficulties convincing a jury that a crime was
committed.</span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">Far
better to reach a settlement that will give the prosecutors their headlines
while avoiding the messiness of having to prove the charges. The corporation
also benefits—the fine is set so as to cramp, not cripple, the company. No
individuals are prosecuted, and there is no chance of a guilty verdict that might
amount to a corporate death-sentence. (The preceding argument tracks a more
detailed presentation I made <a href="http://www.americanbar.org/publications/blt/2015/02/05_darmstadter.html">here</a>.)</span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">There’s
a particular problem with the GM settlement: It doesn’t appear that any
individual committed a criminal act. After the story broke, GM commissioned a
team of outside lawyers to prepare a detailed <a href="http://www.nytimes.com/interactive/2014/06/05/business/06gm-report-doc.html">report</a> as to why GM’s engineers
failed to understand the role of the faulty ignition switch in the fatal
crashes. While the report was commissioned by GM, I am not aware that anyone
has seriously questioned its narrative of what went wrong. The report is
consistent with other accounts of engineering disasters, such as the cases
recounted by <a href="http://www.amazon.com/Engineer-Human-Failure-Successful-Design/dp/0679734163/ref=sr_1_1?s=books&ie=UTF8&qid=1442885021&sr=1-1&keywords=henry+petroski">Henry Petroski</a>, or the sociologist <a href="http://www.amazon.com/Challenger-Launch-Decision-Technology-Deviance/dp/0226851761/ref=sr_1_1?s=books&ie=UTF8&qid=1442885092&sr=1-1&keywords=diane+vaughan">Diane Vaughan’s account</a> of the loss of the space
shuttle<i> Challenger</i>. </span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">If
the report is accurate, then it does not seem that anyone at GM did anything
criminal. GM’s engineers had a lot of information to process, and not all of it
pointed to the defective switch. It was only in November 2013 that they finally
came up with a theory that could explain most of the airbag non-deployments. The
engineers may have been stupid, but no one seems to have papered over a safety
problem, or lied to regulators or the public.</span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">With
one possible exception: In 2007, Raymond DeGiorgio, the engineer in charge of
the switch’s development, acting against instructions from his superiors, had an
improved switch substituted for the faulty switch on the assembly line. (Neither
DeGiorgio nor his superiors seem to have been aware at the time that the old switch
was implicated in the airbag non-deployments.) </span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">Possibly
to cover his tracks for disobeying orders, and contrary to GM policy, DeGiorgio
didn’t change the switch’s part number. When GM engineers trying to explain the
airbag non-deployments realized that the problem did not affect cars
manufactured after 2007, DeGiorgio’s failure to change the part number led them
to conclude that the switch couldn’t be the cause. Later, DeGiorgio, who by this
point may have realized that there was a safety issue, assured the engineers that
the switch had not been changed. (DeGiorgio claims not to remember these
incidents, so I can only speculate as to his knowledge or motives.) But it’s
not clear that misinforming co-workers can be spun into a crime, and in any
case, DeGiorgio’s statements don’t seem to figure in the government’s charges
against GM.</span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">(I’ve
written a 7,500 word account of the press coverage of the ignition switch
problem, which I am trying to publish; if that doesn’t pan out, I’ll post it
here.) </span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">The
final problem with the GM settlement is that it does nothing to help the
victims; all of the $900 million penalty will be retained by the government. Of
course, the victims are not without a remedy: They can follow the normal process
of bringing product liability suits against GM. This would normally entail substantial
legal costs, but GM—to try and salvage its reputation, and to avoid endless
litigation—has provided an easier path for claimants by setting up an
independently-administered compensation fund, initially funded at $400 million.
The fund ended up making settlement offers, each for $1 million or more, in
some 124 fatal accident claims. </span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">The
media have seized upon the 124 figure as the number of deaths caused by the
faulty switch, but the fund’s administrators never attempted to determine
whether the faulty switch caused the deaths. All they required was that the car
had the faulty switch and that the airbags did not deploy. Accordingly, settlement
offers were made in cases that did not fit the engineers’ theory of why the
airbags failed; offers were even made where the victim was in the back seat,
where there were no airbags.</span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">We
will probably never know how many deaths were caused by the faulty switch, but
it is likely far less than 124. <a href="http://www.ncbi.nlm.nih.gov/pubmed/20373238">Airbags fail to deploy in about 9% of all fatal
crashes</a>. Even if
airbags deploy, people may not survive: Since 1998 all new cars have had front
seat airbags, yet in 2013 over 22,000 drivers and passengers died on the
nation’s roads, the vast majority protected—inadequately—by airbags. </span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
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<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">The papers are now full of
stories about Volkswagen’s scheme to defeat U.S. emissions testing; VW can look
forward to an expensive encounter with the Justice Department. It remains to be
seen if the Department will continue to punish the innocent, let the guilty
walk (unlike GM, it seems that individuals at VW may have committed crimes), and
do nothing for the victims.</span></div>
<span style="font-family: Georgia,"Times New Roman",serif; font-size: large;">
</span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-size: small;"><span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i>—Howard
Darmstadter </i>(f/k/a<i> </i>Stan Laurel)</span><i> </i></span></span></div>
<span style="font-size: small;"><span style="font-family: Georgia,"Times New Roman",serif;">
</span></span><br />
<span style="font-family: Georgia,"Times New Roman",serif;"></span>Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-58794087422502324372015-10-21T11:55:00.001-04:002015-10-21T11:55:55.469-04:00Back to blogging<!--[if gte mso 9]><xml>
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<span style="font-family: Georgia,"Times New Roman",serif;">After
a hiatus of more than a year, I plan to start blogging again. The first piece,
on the Justice Department’s settlement with General Motors, will be posted
today. </span></div>
<br />
<br />
<br />
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<span style="font-family: Georgia,"Times New Roman",serif;">I’ll
be posting under my own name. My co-blogger, “Oliver Hardy” may be posting as
well; it’s up to him.</span></div>
<br />
<br />
<br />
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<span style="font-family: Georgia,"Times New Roman",serif;">Since
I do longer pieces, blogging will be sporadic. Each time I post, I plan to send
out an email briefly describing each new post. If you want to be added to the
distribution list, send an email to “Stan Laurel” at <a href="mailto:a.stan.laurel@gmail.com">a.stan.laurel@gmail.com</a>. (Note: The “Follow
by Email” box on the blogsite no longer seems to work; if anyone knows how to
get rid of it (or get it working again), please let me know.)</span></div>
<br />
<br />
<br />
<div class="MsoNormal" style="line-height: 15.0pt; margin-bottom: .5pc; mso-line-height-rule: exactly; text-indent: 1.5pc;">
<span style="font-family: Georgia,"Times New Roman",serif;">—Howard
Darmstadter (f/k/a Stan Laurel)</span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-59529732832790908262015-02-04T21:55:00.003-05:002015-02-04T21:57:12.584-05:00Sic et NonCall me a “Denier”, it does not offend me. I am proud of it, and here is why:<br />
<blockquote class="tr_bq">
There is the grand truth about Nathaniel Hawthorne. He says No! in thunder; but the Devil himself cannot make him say <i>yes</i>. For all men who say <i>yes</i>, lie; and all men who say <i>no</i>,
— why, they are in the happy condition of judicious, unincumbered
travellers in Europe; they cross the frontiers into Eternity with
nothing but a carpet-bag, — that is to say, the Ego. Whereas those <i>yes</i>-gentry, they travel with heaps of baggage, and, damn them! they will never get through the Custom House.</blockquote>
<br />
<pre id="line1"><a href="http://www.melville.org/letter2.htm" target="_blank">Herman Mellville Letter to Nathaniel Hawthorne, [April 16?] 1851</a></pre>
<br />Oliver Hardyhttp://www.blogger.com/profile/00484475890310385671noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-63718321210179197762014-10-05T17:44:00.000-04:002014-10-05T17:44:19.847-04:00Runaway horses <span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">There are about 48,000 wild horses on our grassy Western plains, which is nearly twice as many as the range can support, according federal wildlife managers. Obviously, the range is currently supporting all those horses, so talk about how many horses the range can support is an oblique way of talking about competing calls on that range. And the most obvious competitors--or at least the most vocal--are ranchers, who don't like all those horses eating grass and drinking water that could be going to their cattle. <br /> What definitely seems unsustainable is our current wild-horse policy. Since 1971 it's been illegal to capture or kill wild horses. So to keep numbers down, the Bureau of Land Management has been rounding up wild horses and storing them in feedlots and fenced pastures. The Bureau is now responsible for some 50,000 warehoused wild horses, which it can't euthanize or slaughter. The horses can be adopted, but adoptions have never kept up with removals, just as there have never been enough removals to keep the wild population to a "sustainable" number. The Bureau currently spends $50 million a year on its horse hotels, which leaves too little money for additional roundups. <br /> I learned all this from a <a href="http://www.nytimes.com/2014/10/01/us/as-wild-horses-overrun-the-west-ranchers-fear-land-will-be-gobbled-up.html?emc=eta1&_r=1" target="_blank"><i>New York Times</i> article</a>, the most interesting feature of which was the startling omission of two words: invasive species. Horses are not native to the New World. The wild horses of the American West are the feral descendants of domesticated horses brought over by the mainly Spanish early settlers. Like many other immigrants to our shores, the horses found America a great place to settle down and raise a family. <br /> People pretend to object to invasive species, but that only applies to species they don't like. Everyone has a fondness for horses, so attempts to wipe out these four-legged invaders are not in prospect. Indeed, we tend to pass over the uncomfortable fact that they are invaders; the <i>Times </i>article noted that unchecked horse populations could decimate grass and water on public lands, potentially leading to "starvation among horse herds <i>and other native species</i>" (my italics). You're in, guys!<br /> --Stan</span></span>Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-27439260226566564012014-10-02T15:41:00.000-04:002014-10-02T15:41:12.747-04:00How many ignition switch deaths? Postscript<!--[if gte mso 9]><xml>
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<span style="font-family: "Courier New";"><span style="mso-spacerun: yes;"> </span><span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">On Monday <a href="http://not-the-sons-of-the-desert.blogspot.com/2014/09/how-many-ignition-switch-deaths.html" target="_blank">I posted a note</a> on a <i>New York
Times</i> story (from the preceding Friday) about the GM ignition switch disaster,
the gist of which was that the particular accident the <i>Times </i>focused on in that
story didn't seem to be caused by the defective switch.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span>The following day the <i>Times </i>did a <a href="http://www.nytimes.com/2014/09/30/business/deaths-tied-to-flawed-general-motors-ignition-rise-to-23-as-compensation-offers-go-out.html?emc=eta1&_r=1" target="_blank">follow-up</a>
reporting that the ignition-switch death toll, as determined by Kenneth R.
Feinberg, who administers the compensation fund GM set up, had risen to 23.
Once more the <i>Times </i>illustrated the story by pointing to a particular victim,
an infant rendered a paraplegic in an accident in which his great-grandmother
and 13-year old aunt died. But through some evil chance, the <i>Times </i>managed to
again alight on an accident that also seems unrelated to the switch problem. </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span>The particular accident is not mentioned in the massive
Valukas report commissioned by GM, but was described in a <i>Times</i>' <a href="http://www.nytimes.com/2014/05/27/business/13-deaths-untold-heartache-from-gm-defect.html?emc=eta1" target="_blank">July 16 story</a>: "Less than a mile from the
Matthews family's home, another car swerved into their lane and crashed head-on
into the Cobalt." The air bags did not deploy.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span>As I briefly described the situation in Monday's post, and
at greater length in posts referred to there, GM's theory that connects the
ignition switch to the failure of the airbags is that there is
an initial bump, as when a car goes over a curb or hits a bush or small tree,
followed by a more serious crash into another object, such as a tree. The
initial bump causes the defective switch to jump to the ACC position, which
(after a delay of 0.15 seconds) turns off the airbag sensor. Almost all the
accidents described in the Valukas report conform to that scenario, but that is
clearly not what happened in the case described in Tuesday's <i>Times</i>. There was no initial
bump that flipped the ignition switch, just a head-on crash.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span>The <i>Times </i>has now unfortunately spotlighted the only two
reported fatal accidents that don't seem connected to the ignition switch. (The Valukas
report describes one other non-fatal non-conforming case.) It's not clear why
the airbags didn't deploy in these cases, and the ignition
switch could ultimately turn out to be the culprit. But the GM theory not only accounts for most of the accidents, it's the only theory we have; no one else
has conducted engineering tests to determine if there are other reasons for
the airbags not to deploy. Perhaps a
certain number of airbags fail to deploy for unknown reasons across all car
makes and models. Or perhaps there is a deeper problem with the GM airbags that
is as yet unappreciated. In any case, the <i>Times </i>coverage casts doubt on the
extent of their reporters' understanding of what is going on.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span>--Stan</span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-55308724964807157442014-09-29T17:51:00.001-04:002014-09-29T17:51:43.944-04:00How many ignition switch deaths?<span style="font-family: Georgia,"Times New Roman",serif;"> <span style="font-size: large;">A <a href="http://www.nytimes.com/2014/09/26/business/after-a-gm-recall-a-fiery-crash-and-a-payout.html?emc=eta1&_r=0" target="_blank">sad tale of missed opportunities</a> on the front page of Friday's <i>New York Times</i>: A 27-year old law student, Lara Gass, died in the fiery crash of her Saturn Ion just three days after she received a recall notice from GM for a faulty ignition switch. The flaw in the switch, undetected by GM for over a decade, allowed it to turn to the ACC position if jostled slightly, disabling the air bags. The message: If only GM had acted sooner, her life and many others might have been spared! All the story lacks is a convincing connection between her death and the faulty switch.<br /> The story of how GM engineers failed to detect the faulty switch is a fascinating one, about which <a href="http://not-the-sons-of-the-desert.blogspot.com/2014/08/the-gm-switch-decision.html" target="_blank">I've written before</a>. But while there are still some unanswered questions, it's hard to see how the switch could have been involved in Ms. Gass's crash. Some facts are clear: Two tractor-trailers stopped on the highway to avoid a wreck, and Ms. Gass's car plowed into the back of one of them. A photograph shows the car, its driver's compartment totally demolished and blackened by fire.<br /> Beyond that, facts are sketchy. A police officer was puzzled as to why Ms. Gass was not able to stop in time. The car's data recorder was destroyed in the fire, as was any physical evidence as to whether the airbags deployed. Two eyewitnesses who pulled the young woman out of the car moments before the vehicle erupted in flames said they saw no airbags. One suspects, however, that they were preoccupied with getting the young woman out of the car, and in any case their testimony comes from the lawyers for Ms. Gass's parents. <br /> Even if the airbags didn't deploy, it's hard to see how the ignition switch could have caused the failure. The article does not mention whether there was any physical evidence that the key was in the ACC position. GM insists that the key will not turn to the ACC position if there are no other objects on the key chain, but while Ms. Gass's parents had warned her to remove other objects from the key chain, the fire destroyed the chain. <br /> When the key on any GM car turns to the ACC position, power to the sensor for the airbags is lost after about 0.15 seconds. This is designed to prevent the airbag from going off if the car is hit while parked. But 0.15 seconds should be enough time to trigger the airbags in a head-on crash. Almost all the cases that came to GM's attention involved a crash preceded by a bump, as when a car jumps a curb or hits a small bush (the bump) and then hits a more substantial object, such as a tree (the crash). The theory is that the bump jolts the ignition switch to the ACC position, cutting off power to the airbag sensor and preventing the airbags from deploying in the ensuing crash. That clearly is not what happened in the Gass crash. (Actually two of the airbag failures that GM investigated--one fatal--didn't follow the bump-then-crash scenario, but airbags must occasionally fail for <a href="http://www.nytimes.com/2014/09/27/automobiles/ford-recalls-745000-vehicles-for-fault-that-could-disable-air-bags.html?rref=automobiles&module=Ribbon&version=context&region=Header&action=click&contentCollection=Automobiles&pgtype=article" target="_blank">other reasons</a>.) <br /> GM has set up an uncapped fund, initially for $400 million, administered by Kenneth R. Feinberg, to compensate victims of the faulty switch. Mr. Feinberg has now made an offer to Ms. Gass's parents to settle any claims they may have against GM. The size of the offer is confidential, but the low offer for any fatality is reportedly $1 million. <br /> I doubt that there will be many claims that were <a href="http://not-the-sons-of-the-desert.blogspot.com/2014/08/the-gm-switch-confusion.html" target="_blank">actually caused by the defective switch</a>, or that GM expects to see any of its $400 million again, so giving large settlements to anyone who was killed or injured in a GM car where the airbags may not have deployed wouldn't be the worst use of the money, whether or not the defective switch was the cause. Two things remain disturbing, however. First, how could the <i>Times</i>, which has run numerous prominently placed stories on the ignition switch problem, have so bungled things by misrepresenting the problem? The situation is bad enough--the faulty switch almost certainly killed some people--but there's no excuse for inciting what resembles a lynch mob. The <i>Times </i>selected 10 of the 211 comments on the story as "NYT picks." The first sentence of the first pick reads "GM has put more lives at risk on American soil than ISIS could dream of"; the second states that "All of this simply proves that if a corporation has enough money and political clout it could avoid personal liability of those individuals that allowed this tragedy to occur. ... The company should be put out of business." The <i>Times</i>' role in promoting this kind of hysteria is not an honorable one.<br /> Second, given the standards, or lack thereof, for settling claims, how will we ever know just how many casualties were caused by the faulty switch? The <i>Times</i> referred to "the rising death toll from accidents linked by the company to the ignition-switch defect," but that rising toll (<a href="http://news.yahoo.com/deaths-linked-gm-ignition-switch-defect-rise-23-141005316--finance.html?soc_src=mediacontentstory" target="_blank">23 </a>as I write this) may be an artifact of Mr. Feinberg's relaxed standards. Again, I have no trouble with giving away the money, but I think we should be clear that some of the awards probably have nothing to do with the switch problem.<br /> --Stan </span></span>Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-82133070141246933492014-09-17T12:04:00.000-04:002014-09-17T12:04:05.153-04:00Anger over Ray Rice, and the Islamic State<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The general line on the Ray Rice matter is that the original punishment--a two-game suspension--wasn't nearly enough ("spineless" said <a href="http://www.nytimes.com/2014/09/09/sports/football/forget-video-the-facts-are-shocking-enough.html?action=click&contentCollection=Pro%20Football&module=RelatedCoverage&region=Marginalia&pgtype=article&_r=1" target="_blank">Juliet Macur</a>), and that the NFL covered up how much it knew about that conduct. When the inside-the-elevator video eventually surfaced, the league suspended Rice indefinitely and the Baltimore Ravens released him. <br /> Keith Olbermann was characteristically apoplectic about the two-game suspension, and <a href="http://www.nytimes.com/2014/09/11/sports/football/ray-rice-in-lucrative-and-ludicrous-nfl-the-show-goes-on.html" target="_blank">Michael Powell</a> talked about "the Circus Maximus that is the National Football League," which "long ago banished shame from its executive suites." <br /> I beg to differ. I don't follow football closely, have no opinions about the NFL or its executives, and haven't been privy to any of the league's internal discussions about Rice. But viewing things from outside, I don't think the original two-day suspension was too little, and I find the final punishment disturbing.<br /> The problem the NFL faced, which few of those who have raged on about Rice's and the NFL's behavior seem willing to countenance, is how to suitably punish the perpetrator, Ray Rice, without punishing the victim, Janay Palmer (now Mrs. Rice). <br /> Before he was fired Ray Rice stood to earn about <a href="http://www.baltimoresun.com/sports/ravens/ravens-insider/bal-with-ray-rice-released-ravens-are-6328-million-under-nfl-salarycap-limit-20140910,0,3423706.story" target="_blank">$25 million </a>over the life of his contract. (Rice's compensation would have depended on his performance, so it's impossible to state an exact number, but $25 million is close enough.) Mrs. Rice would have gained a material benefit from that haul. As it is, she's now married to a man who, while currently well-off, may be unemployable. <br /> On the other hand, the two-game suspension seems about right. Rice's base salary for 2014 would have been <a href="http://profootballtalk.nbcsports.com/2012/07/16/ray-rice-in-line-to-make-24-million-by-march/" target="_blank">$4 million</a>, so missing two games--one-eighth of the regular season--would have cost him at least half a million dollars. That's more than a slap on the wrist, and enough of a warning of what could happen if there was another incident.<br /> Punishing the guilty often has bad consequences for the innocent. If Ray Rice had decked a total stranger, and gone to jail for it, his wife, his teammates, and many others would have suffered. That couldn't have been helped. What's different in the actual case is that Rice's punishment, however richly deserved, will directly harm the ostensible object of all this concern, Mrs. Rice, who deserves better. <br /> I have nothing to say about the Rices' relationship other than the obvious: <a href="http://www.nytimes.com/2014/09/10/us/seeing-abuse-and-a-pattern-too-familiar.html?action=click&contentCollection=Pro%20Football&module=RelatedCoverage&region=Marginalia&pgtype=article" target="_blank">It's complicated</a>. So were the issues facing the NFL and the Ravens as to what to do about it. But Mrs. Rice has been nearly forgotten in the orgy of declamations about larger issues. Whether the NFL was originally trying to do the right thing or simply covering up, they have now given way to the hue and cry. <br /> Yes, violence against women, including domestic violence, is an issue that deserves to be taken more seriously; no doubt traditional sanctions have been too lenient. But in the midst of this ideological frenzy, it might have been more compassionate to step back and consider the actual plight of the real woman at the end of Ray Rice's fist. <br /> <br /> OK, I get it. We see the tape of Ray Rice knocking the future Mrs. Rice unconscious, and we have a burst of anger. In our rage, we wish for Rice to be severely punished--Half-measures will not do! But when we eventually calm down, we may realize that our actions might not have been the wisest or best.<br /> Which brings me to the Islamic State. We see the tapes of the beheadings (actually, I've avoided them; hearing about it is bad enough) and we react: Kill those guys! something within us shouts. Bomb them back to the Stone Age! So President Obama, propelled by public anger and perhaps personal conviction authorizes an air campaign against IS. <br /> But when we calm down we may want to step back and ask ourselves whether this is the wisest course. And the place to start is by asking why IS decided to publicize the beheadings. If IS really wants to set up a government in the Levant, then inciting a military campaign by the US and others looks counter-productive. Perhaps they weren't thinking too clearly--terrorists can succumb to irrational anger too. But it's also possible that IS saw the beheadings as a recruiting tool, partially because they could attract young men willing to join in sanctified mayhem, but mainly because they could paint their struggle as a war with America and the other infidels rather than what it truly is, a war against other Muslims. If that was their goal, then they've been playing us like a violin.<br /> We've been through all this before. The Twin Towers fall, and our fear and rage lead to various self-mutilations: TSA, USA PATRIOT, Iraq. We should have learned more.<br /> Get a grip, folks<br /> --Stan </span></span>Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-32046792409402063392014-09-09T09:53:00.002-04:002015-05-25T11:09:46.982-04:00How Many Species Do We Need? <span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;"> A <a href="http://www.nytimes.com/2014/08/21/opinion/conservation-or-curation.html?emc=eta1&_r=0" target="_blank">recent op-ed piece</a> in The New York Times captured in a few sentences most of my discomfort with environmentalism. It described the aims of the Endangered Species Act as <br /> "[F]irst, to mitigate harms that humans had perpetrated against certain species, such as severely reducing their geographic range; and second, to make it possible for species to return to landscapes where they had been extirpated. The idea was that healthy ecosystems depend on the presence of native species."<br /> Talk about "healthy landscapes" is obviously metaphorical, but what is the metaphor getting at? Are the Sahara, the Antarctic, or the ocean depths unhealthy because few creatures can survive there? The answer seems to be that a "healthy landscape" just <i>is </i>a landscape that contains all and only its "native species." <br /> But what species are "native" to a landscape? Clearly, not all the species that are well-established there; I doubt that nativists would consider the Burmese python, a recent immigrant to the Everglades, or the Asian carp, a newcomer to the Mississippi, as "native" even though they are thriving. And some species no longer inhabit their historical landscapes, such as the grey wolf in most of the United States. Presumably, species are native to a landscape if (and only if) they were established there at some earlier point in time, but when would that have been? <br /> I suspect the answer is tucked away in that reference to mitigating the "harms that humans had perpetrated against certain species, such as severely reducing their geographic range." The idea seems to be that the native species in a landscape are those that were firmly established there before we humans came and mucked things up. But to "make it possible for species to return to landscapes where they had been extirpated," we'd probably have to pack up many of the humans now living there and send them back to their native landscapes. Which is where, exactly?<br /> Plainly, the government is not about to send millions of Americans back to wherever they or their ancestors came from. The best the Endangered Species Act can achieve is some reasonable accommodation between the thrust of populous contemporary human societies and our desire to maintain some pre-Columbian landscapes (to arbitrarily take a particular point in time) with their then-existing flora and fauna. <br /> Native Americans have recently been <a href="http://www.nytimes.com/2014/08/26/science/rarest-native-animals-find-haven-on-tribal-lands.html?ref=science&_r=2" target="_blank">introducing native species</a>, such as the swift fox and black-footed ferret, into never-plowed grasslands on Indian reservations. As the president of the Fort Belknap tribe said, "Part of our connection with the land is to put animals back, and as Indian people, we can use Indian country." That a group would want to create some replica of its historical experience is understandable, but why should non-Indians care about importing wildlife to its historical range and, by extension, exporting humans from that range?<br /> Most of us like to preserve ancient things; we have museums for man-made artifacts. But once we have enough museums to satisfy most of us, is there any reason to preserve more? I enjoy auto museums, but am not in favor of preserving every car ever made or returning any substantial number of them to the nation's roads. Nor do I think anyone would seriously suggest restoring the nation's highway system to its early-20th century form.<br /> Why should natural environments be different? To be desolated by the loss of any creature or natural habitat seems no more sensible than mourning the passing of my 2005 Honda Accord. If we woke one morning to discover that there was no longer a single 2005 Accord extant, I doubt that we would be much discomfited. Why should it be different when it's a natural species rather than an auto species that goes extinct? I'm not saying there is no difference, only that I would like to know what it is.<br /> Three reasons for preferring ferrets to Accords have occurred to me, all somewhat suspect. <br /> First, once a species disappears, we can't recreate it in the way we could build a working replica of a 2005 Accord. Some day that may not be true, and we can have a Jurassic Park of formerly extinct species, but for the moment extinction is an irreversible decision. Like a tattoo.<br /> The second reason is related to the first: It's difficult to foresee all the consequences of doing without a species. But isn't it just as difficult to foresee all the consequences of <i>retaining </i>a species? And, in truth, it shouldn't be that difficult to foresee the consequences of species extinction. Before a species goes extinct, its numbers decline, and the loss of most of a species must have larger consequences than the loss of the last few specimens. If we haven't noticed any adverse effects of losing most black-footed ferrets, then we're unlikely to notice the effects of losing the remaining few. (We might fail to notice that we've lost most of a species before the process becomes irreversible, but that's a separate problem of environmental monitoring.)<br /> The thought of the black-footed ferret going extinct sends many people into a funk. But extinctions happen all the time. There are supposedly about <a href="http://www.plosbiology.org/article/info%3Adoi%2F10.1371%2Fjournal.pbio.1001127" target="_blank">8.7 million species</a> on earth. It's also said that of all the species that have ever existed, <a href="http://en.wikipedia.org/wiki/Extinction" target="_blank">99.9% are now extinct</a>. Putting those two numbers together means that over the course of the earth's history some <i>8.7 billion </i>species have gone extinct--about one extinction every five months for the <a href="http://en.wikipedia.org/wiki/Timeline_of_evolutionary_history_of_life#Basic_timeline" target="_blank">3.6 billion years </a>since life emerged on this Earth. Talk about a funk! (I have limited confidence in these numbers, but that doesn't change the central conclusion: There have been an enormous number of extinctions.)<br /> Of course, humans had nothing to do with any but an infinitesimal portion of this carnage. There were at least five mass extinctions before there were any humans, and lots of non-mass extinctions in between. Which brings us to the third and most powerful reason--most powerful because it is generally unexamined: Many people view the pre-modern world as morally and aesthetically superior to the grimy world of industrial society. In this mindset, the pre-industrial world is <i>natural</i>, the current state of affairs <i>unnatural</i>.<br /> Justin E. H. Smith, a professor of history and philosophy of science at the University of Paris Diderot, <a href="http://chronicle.com/article/The-Great-Extinction/146275/" target="_blank">does not subscribe to these view</a>s, but he does offer a more plausible explanation of why we value ferrets above Hondas. Unlike many environmentalist screeds, Smith's argument doesn't rely on purely metaphorical arguments. "Nature," says Smith, "is indifferent." The earth isn't an organism that can be healthy or sick, that has a suitable body temperature, or an ideal set of charismatic megafauna. "The earth does not resent its humans, nor does it have any interest in preserving its polar bears or its rain forests." <br /> According to Smith, environmentalists conceive of a stable order of fixed kinds, where any change is "unnatural." Such a "mythological outlook" is the opposite of Darwinism, which denies that any particular arrangement of biodiversity is good in itself, or that any species has an absolute reason to exist. According to Smith,<br /> "Human beings are no less natural than bacteria. ... It is because we are fully in nature in this way, and not above it or apart from it, that the mass extinctions we cause cannot be unnatural--in fact, the very notion of the 'unnatural' is generally nothing more than a shrouded moral judgment."<br /> Judging by the posted comments to Smith's piece, most readers see him as accepting extinctions. But Smith is merely attacking environmental styles of argument; he has his own reasons for opposing extinctions: <br /> "The point here is not to ... call for an approach to mass extinction that simply says, <i>que sera, sera</i>. Rather, it is to suggest that conservationism might do well to acknowledge the endurance and the strength of the mythopoetical conception of nature, the one that sees our fellow creatures not only as more or less well adapted, but also as good, truly good."<br /> Smith argues that we feel a "fellowship" with animals that leads to a moral commitment. "[M]oral commitments emerge out of the way creatures, human and nonhuman, enter into meaningful exchange with one another." <br /> Smith has a good bit to say about the influence of photos in turning animals into "fellow beings." He's mainly referring to the photographic record of recently extinct species, but the same could be said of the influence of wildlife documentaries about existing species, such as PBS's <i>Nature </i>series. <br /> In basing his opposition to extinctions on feelings of fellowship, Smith is following a philosophical tradition that roots morality in our instinctive feelings of pleasure or pain when confronting the pleasures or pains of others, feelings sometimes characterized as "sympathy" or "empathy." The most prominent exponent of this view, David Hume, realized that these feeling could extend to animals: "[T]here is no human, and indeed no sensible, creature, whose happiness or misery does not, in some measure, affect us when brought near to us, and represented in lively colours." <br /> Recent natural extinctions seem to be a mirror of human progress. The relentless march of modernity is homogenizing human cultures, reducing diversity world-wide. One symptom is the decline in the number of human languages. <a href="http://www.linguisticsociety.org/content/how-many-languages-are-there-world" target="_blank">Linguists expect</a> that at least 3,000 of the nearly 7,000 known languages will disappear over the next century, "a vastly greater proportion of the world's languages than its biological species."<br /> We can weep at this loss of cultural and linguistic diversity, but we should realize that these changes are by-and-large welcomed by the people whose culture is being homogenized, including us. When you bought your HD TV, I doubt that you shed a tear for the cathode-ray tube model that it displaced, nor thought it regrettable that CRTs might someday flicker their last. Most people want TVs, i-Phones, indoor toilets, central heating, and modern medicine. Judging by migration patterns, they want to live more like Europeans and Americans. At the same time, they want to keep many traditional customs and practices, however incompatible with modern life. No one said people were consistent.<br /> It's much the same for natural species. Most of us love trees, flowers, and furry animals. We love to stroll outside on early summer evenings to see the fireflies and hear the crickets. We like to watch breathtaking HD views of tropical jungles on <i>Nature</i>, safe in our air-conditioned living rooms from lions and leeches, vipers and tsetse flies. A few of us actually go off for outings to thinly-peopled climes and feel ennobled, but most of us decline to do it regularly. <br /> As with most other things in life, our attitude toward extinctions is an attempt to work out some <i>modus vivendi </i>among our various incompatible desires: We want to preserve species and habitats, but we also want to have increasingly comfortable lives. As Smith says,<br /> "We talk about 'saving the earth,' but what we really want is to save ourselves. ... [W]e must be clear about the motive for our conservation efforts. ... [M]ore honesty about the fact that we wish to save polar bears because we love them, and not because the earth loves them, could help to reorient conservationist arguments in a direction that skeptics would find more compelling."<br /> But we love lots of things besides polar bears. With so many romantic urges to balance, we should realize that we often have to kill the things we love.<br /> --Stan</span></span><br />
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">PS If you found all of this depressing, maybe this will make you feel better: Of the 8.7 million species on Earth today, it's believed that fully 86% of those on land and 91% of those in the oceans still await description--that is, are unknown. If all of these unknown species were to be cataloged during the next century, that would be equivalent to discovering over 200 new species every day for 100 years. Welcome to life's abundance. </span></span>Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-81399167586424745342014-08-29T12:02:00.000-04:002014-11-01T18:38:12.453-04:00The Role of the Credit Rating Agencies<!--[if gte mso 9]><xml>
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<div class="MsoPlainText">
<span style="font-family: "Courier New";"><span style="mso-spacerun: yes;"> </span><span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">In the wake of the crisis of 2007-08 and the
ensuing Great Recession, there was a torrent of criticism of the credit rating
agencies, such as Standard & Poor’s and Moody’s, which had given their
highest ratings—AAA—to mortgage-backed securities (MBS) and collateralized debt
obligations (CDOs) that defaulted in massive numbers. One popular explanation
for the faulty ratings has been that the agencies gave inflated
rating to securities because they were paid by the issuers; if an agency
declined to give a AAA rating, it wouldn’t be used and wouldn’t be paid. This
explanation has been qu<a href="http://realestateresearch.frbatlanta.org/rer/2014/04/two-views-of-involvement-of-credit-rating-agencies-in-mortgage-crisis.html" target="_blank">estioned by economists</a>. I personally think (along with
some <a href="http://realestateresearch.frbatlanta.org/rer/2014/01/wall-street-and-housing-bubble.html" target="_blank">economists</a>) a better explanation is that the rating agencies were working
from the same faulty assumption as everyone else: that a substantial decline in
home prices was highly unlikely. Put slightly differently, the rating agencies
(and almost everyone else) did not believe that there was a housing bubble.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><br />
<div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"> I’m not equipped to sort out those issues.
Rather, I want to recount my personal experience with the role of the rating
agencies in the MBS world immediately before the
tsunami hit. I didn’t negotiate with any rating agencies and all my experience
related to prime and alt-A residential mortgage securitizations (RMBS), so my
observations may not hold for CDOs and subprime MBS.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><br />
<div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"> There are only four rating agencies:
Standard & Poor’s (S&P), Moody’s, Fitch, and Duff & Phelps. S&P
and Moody’s are the big fish, Fitch a smaller fish, Duff a minnow. An RMBS
issuance needs ratings from two agencies, and no one would proceed with a RMBS
rated only by Fitch and Duff. Which means that every securitization had to have
a rating from either S&P or Moody’s. What’s more, investors occasionally
insist on ratings from both the big guys, so that issuances rated by both S&P and Moody's were a bit more saleable. Under these circumstances, an
issuer’s power to negotiate for higher ratings was limited.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><br />
<div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"> A RMBS issuance consists of a number of
classes with different ratings from AAA to junk. As homeowners default on their
mortgages, the lowest-rated class takes the losses until it is wiped out, then the next
lowest-rated class, and so on up the ladder. In rating RMBS, the rating agencies
principal decision is the level of protection that will justify rating a class
AAA (or AA, or A, and so forth). That comes down to a decision as to how much
padding there should be under each class. Should 5% of the issuance be rated
below AAA, or should it be 5.5%? </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><br />
<div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"> In my experience, issuers shopped for ratings,
but that shopping was limited to how much of the issuance would be rated AAA.
The decision was important to issuers because AAA classes fetched higher prices
than lower-rated classes. But as a percentage of the offering, the differences
between rating agencies was small, on the order of tenths of a percent. So in a
$500 million offering, one rating agency might be satisfied with a $24 million
cushion of below-AAA classes while another might want $26 million. A financial
crisis is not made of such differences.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><br />
<div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"> As I said, my experience was with prime and
alt-A RMBS. The ratings of CDOs, which were more central to the crisis, may
have had a different dynamic. </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><br />
<div class="MsoPlainText">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"> —Stan</span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-85751794504353681422014-08-25T10:09:00.002-04:002014-08-25T10:09:54.072-04:00The Earned Income Credit<!--[if gte mso 9]><xml>
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<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">In
late June I posted a </span><a href="http://not-the-sons-of-the-desert.blogspot.com/2014/06/minimum-wage-maximum-ideology.html"><span style="font-family: "Georgia","serif";">piece about the minimum
wage</span></a><span style="font-family: "Georgia","serif";">. I
was generally opposed to it, partially because of the possible effects on
employment—I thought some people would lose their jobs—but also because I saw
it as a reflexive, feels-good approach to an issue that requires serious
thought. At the end of the piece I noted that some policy wonks had proposed an
expansion of the earned-income credit (EIC) as an alternative to the minimum
wage, and I said I would write something about the EIC one of these days. That
day is here. </span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">But
first I want to talk about a personal interest in the minimum wage. My younger
son refused to go to college, despite being probably the brightest one in the
family. Instead, he spent a year at a technical school learning to be an auto
mechanic. (He’d previously done a lot of mechanic’s work fixing beat-up
vehicles at a Colorado wolf sanctuary where he spent a few years.) Course
completed, he went back to Colorado and took a job with an auto dealership as
a “lube tech”—the guy who changes your oil, rotates your tires, and does the
safety check. All for $9 an hour, raised to $10 after his third month (though
he does get to buy into the company health plan at a below-market price). </span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">It’s
not enough to live on, even for a single young man. The carrot is that
eventually—though it could take several years—he would move up to a
real mechanic's job, where the pay is better though still not great. In the
meantime, he’s working Real Hard. It’s not like bagging groceries. For one
thing, to do the work well you have to know quite a few things you don’t just learn
on the job. And it’s hard physical labor, not to mention that you’re on your
feet almost all day. On top of all that, it costs a bit of money just to be a mechanic;
it’s the mechanic, not the employer, that supplies most of the tools, and lube
techs may have to pay for damage done to cars, such as scratched paint, during
oil or tire changes. Bo<a href="https://www.blogger.com/null" name="_GoBack"></a>th the tools and the damage can
cost thousands. Finally, doing it badly, especially the safety checks, could
get someone killed.</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">So,
despite my principled objections to the minimum wage I might be in favor of Colorado
enacting a $15/hour minimum as Seattle recently did. (Not that there’s much
chance of that; only this past January 1, Colorado raised its minimum hourly
wage to—drum roll—$8.) On the other hand, a raise from $10 to $15 might get my
son unemployed; people might want fewer oil changes or tire rotations, or pay
their neighbor’s kid to do it. I don’t think there would be a precipitous fall
in lube tech employment, but it’s quite a risk when you consider that the job’s
main attraction isn’t the pay but the opportunity for advancement. Think of lube
techs (and perhaps many other low-wage workers) as extremely well-paid interns.
</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">But
why does a hard job that requires some technical expertise pay so little? The
economics texts tell me it’s because there are lots of people who are able and
willing to do the work for that pay. Supply and demand, if you will. Apparently
there aren’t that many attractive jobs for intelligent high-school graduates. Still,
it’s not clear why they should earn no more than sales clerks, who requires
minimal training. Puzzling.</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">And
now for the EIC. An EIC has the government pay low-wage workers a supplement
for each hour they work. Right now the EIC is paid through tax code refunds,
and participation and benefits are limited. Current proposals are to open it up
to all low-wage workers and to make it more generous.</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">The
attraction of the EIC is that there is no danger that it will increase
unemployment. Indeed, it seems likely that it will <i>decrease </i>unemployment for the workers it covers. That’s because
<a href="http://www.nytimes.com/2013/03/03/business/the-minimum-wage-employment-and-income-distribution.html?pagewanted=all&_r=0" target="_blank">part of the EIC goes to employers rather than employees</a>. </span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">To
see why employment might increase, suppose that the government starts to pay an EIC of $2 an
hour to bakers, who previously earned $8 an hour. At $8 an hour, bakeries were
just able to fill all their openings. (If they couldn’t, bakers’ wages would
have risen.) But with a $2 EIC, the employer can now fill all the bakers’ positions
while only paying $6 an hour, with the EIC raising the bakers’ total
compensation to $8. But an employer who now pays a wage lower than $8 is likely
to want to hire more bakers, since he can now sell more bread at a lower price, and
this will raise the wage above $6. </span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">Suppose
that as a result of the EIC, the bakery winds up paying an hourly wage of $7—$1
lower than it paid without the EIC—while the bakers enjoys total compensation of $9 an hour</span></span><span style="font-size: large;"><span style="font-family: "Georgia","serif";"><span style="font-size: large;"><span style="font-family: "Georgia","serif";">($7
wage plus $2 EIC)</span></span> , which is $1 more than they received before the EIC. The
EIC raises bakers’ compensation while lowering bakers’ wages, with the difference
being made up by the EIC. Both bakers and bakeries are better off, and more
bakers are employed.</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">We
don’t know a priori how much of the EIC will go to the bakery (in the form of the
lower wage it has to pay), and how much to the bakers (in the form of a
higher post-subsidy wage rate). That depends on market responses to the
introduction of the subsidy. But statistical studies by economists indicate
that employment has in fact responded to increases in the EIC, suggesting that the
EIC has allowed employers to pay a lower wage. </span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">Like
the policy wonks, I prefer an EIC to a minimum wage. But most of the popular
writing on both proposals refuses to come to terms with a critical question:
Why do some workers earn less than others? (It’s the same question I wondered
about for my son the lube tech.) Folk wisdom, too often reflected in media
accounts, holds that employers are mean-spirited. The economists’ answer is
that workers get the value of their marginal product; if that product is less
valuable than the workers’ pay, their employer will fire them, lower their pay,
or go out of business; if the workers’ product is more valuable than their pay,
other employers will bid them away. Obviously, nothing in real life works that
smoothly, but it’s hard to deny that the relation between the value of work
product and work compensation exerts a force that over time will bring wages
into line with what people are willing to pay for the workers’ product.</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
</div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">The
direct cost of the EIC supplement will be borne by taxpayers, and there will
also be indirect costs in economic efficiency: Workers will move between jobs
to reflect the altered compensation landscape. Still, these efficiency losses
should be less than with a minimum wage, and the benefits to low-wage workers
higher. </span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">—Stan
(with help from an actual economist)</span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-12422197286776190992014-08-22T17:38:00.000-04:002014-08-22T17:38:45.440-04:00Corporations in the Dock: Addendum<!--[if gte mso 9]><xml>
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<div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">Bank
of America’s nearly $17 billion <a href="https://www.documentcloud.org/documents/1278636-bank-of-america-and-justice-dept-settlement.html">settlement</a>
with the Justice Department, announced yesterday, has all the evils I blogged
about <a href="https://www.blogger.com/null" name="_GoBack"></a><a href="http://not-the-sons-of-the-desert.blogspot.com/2014/08/corporations-in-dock.html"><span>previously</span><span></span></a>,
plus a new ingredient. Once again, no individual is cited as having behaved
criminally (though it has been reported that the government is getting set to
charge Angelo Mozilo, Countrywide Mortgage’s former CEO). And once again, no
thought seems to have been given to compensating investors who were victimized
by BofA’s supposed criminal acts, though the government will be compensated—and
then some—for money HFA and HUD lost insuring dud mortgages from BofA.</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">The
new wrinkle here is that most of the conduct <a href="https://www.documentcloud.org/documents/1278638-statement-of-facts-on-bank-of-america-deal.html">cited
by the government</a> was committed by Countrywide and Merrill Lynch before
those companies were acquired by BofA in 2008. It’s standard corporate law that
a surviving company is liable for the acts and obligations of an acquired
company, but that makes little sense in the criminal context.</span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">One
possible explanation advanced for penalizing stockholders for a company’s sins
is that the prospect of criminal penalties will encourage stockholders to
prevent illicit conduct. Given the limited abilities stockholder have to influence
corporate conduct, it’s not much of an argument. But when the conduct occurs before
an offending company is acquired (and the acquisition is for cash so that
stockholders of the acquired company do not become stockholders of the acquiring
company), the stockholders of the acquiring company could not possibly have
prevented the criminal acts. </span></span></div>
<span style="font-size: large;">
</span><div class="MsoNormal" style="line-height: normal; margin-bottom: 0.0001pt; text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: "Georgia","serif";">—Stan</span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-49285707562006790502014-08-15T14:04:00.000-04:002014-08-15T14:04:00.147-04:00Corporations in the Dock<!--[if gte mso 9]><xml>
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<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">In the last few months various
federal and state agencies have gathered up enormous fines from the big banks. <a href="http://www.economist.com/news/world-week/21607882-business-week"><i>The Economist</i></a> estimates the total at
$35 billion, with Bank of America (rumored in the $15 billion range) and others
still to be heard from. Among the recent contributors to the public fisc were
JPMorgan Chase ($15 billion for dicey mortgage sales and foreclosures), BNP
Paribas ($8.9 billion for money laundering), and Citigroup ($7 billion for misleading
investors). </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">So the question for today is: Can the
banks have done any of these things? Or more generally, in what sense can a
corporation be said to <i>do</i> anything?
After all, a corporation is simply an organizational form for doing business. It
doesn’t have beliefs or desires, and it cannot act except through individuals.
So when we say that a corporation “did” something—laundered money or lied to
investors, for example—what we really mean is that <i>individuals</i> acting for the corporation did the laundering or lying.
Saying that the corporation did something is merely a <i>façon de parler</i>: useful in many contexts, misleading in others.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">There is a legal doctrine, <i>respondeat</i> <i>superior</i>, that makes a business owner (including a corporation) responsible
for the tortuous acts of an employee. For example, if an employee driving a
truck on the owner’s business negligently injures a pedestrian, the owner can
be liable for the employee’s negligence. It’s not that the employee is excused;
both he <i>and</i> the owner are liable. But
it’s usually the owner that gets sued because that’s where the money is.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Early in the twentieth century the
concept of <i>respondeat superior</i> was
ported over from tort law to criminal law: A corporation could be criminally
liable for the criminal acts of its employees. A corporation can’t go to jail
of course, but it can pay a fine, lose a governmental license, or have certain
business practices enjoined. Much later in the twentieth century, in the wake
of Enron and other gaudy scandals, the penalties for corporate crimes were
greatly increased. (An <a href="http://www.ropesgray.com/files/Publication/157e9a17-caed-4037-832e-a7720911548a/Presentation/PublicationAttachment/67dd2b7b-d6f5-4487-9d47-44a7cd642c25/Article_2005_Corporate_Criminal_Liability_McPhee.pdf">article
by Joan McPhee</a>, a partner at the Boston law firm of Ropes & Gray,
explains the evolution.)</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Of course, when we say the
corporation pays a fine, loses a license, or has its conduct curtailed, we
should understand that we’re really talking about consequences for individuals.
For the most part, it’s the corporation’s stockholders, not “the corporation,”
who bear the costs. (Similarly, if someone forges your name on a check, it’s
you and not your checking account that will be the loser.) But why should the
stockholders suffer for the illegal act of a corporate employee? There are a number
of explanations, not all equally plausible.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">First, if the employee’s conduct
benefited the corporation, as it might where a corporate customer is defrauded,
it seems only fair that the corporation/stockholders return the ill-gotten
gains. But this explains only a small part of what’s been going on recently,
where no one bothers to reckon how much the corporation may have profited and
little thought is given to paying over the fines to the victims of the
employees’ acts.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">A second explanation is that the
guilty employees usually don’t have the resources to fully compensate the
victims. But this argument would never pass muster outside the corporate
context: If your neighbor defrauds someone but can’t fully compensate his
victim, should you have to pay the difference? In any case, little of the fines
go to the ostensible victims of the fraud or other illicit conduct.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">A better reason for making
stockholders pay is that the possibility of punishment will encourage them to prevent
illicit conduct. In a modern US corporation, the stockholders elect the
company’s directors, who in turn elect and monitor the company’s officers.
Unlike the directors, who only serve part-time, officers are full-time
employees who run the day-to-day affairs of the corporation, including hiring
and firing lower-level employees. If the stockholders can be punished with heavy
fines, they will elect responsible directors, who will in turn appoint responsible
officers, who will in their turn institute measures to prevent criminal
conduct, including more closely monitoring the corporation’s employees.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Corporate
officers don’t like to explain to more senior officers or to directors why
their operations incurred governmental wrath, not to mention heavy fines. But
the problematic conduct usually would have occurred up and
down the line: Employees and officers engaged in illegal conduct, and more
senior officers, directors, and stockholders were not sufficiently attentive. However,
as one moves from employees to officers to directors to stockholders, the
ability to control the conduct of underlings, and the degree of culpability, rapidly
erode. So why does the least culpable group, the stockholders, take nearly all
the hit?</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">One reason is that the process is
controlled by prosecutors and corporate officers, and it is in their mutual
interest that things work this way. One manifestation of this mutuality is that
while corporate crimes must be committed by the corporation’s employees, the
guilty individuals usually suffer no punishment more grievous than losing their
jobs. (Their legal costs are almost invariably paid by the corporation—that is,
by the stockholders.)</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">For a prosecutor, pursuing
corporate employees for criminal activities raises all sorts of problems. For
one thing, it requires amassing detailed evidence as to the employees’
activities. Moreover, juries are much more likely to punish an abstract entity
like a corporation than a flesh-and-blood employee, so indicting individuals
can prove embarrassing. (In the Tap Pharmaceuticals case, for example, the
company settled for $875 million and an onerous corporate integrity agreement,
after which a jury acquitted the 13 corporate employees whose supposed crimes
were the basis for the charges against the company.) And massive fines, of a
size that no employee could pay, are profitable for the government and produce
headlines that can make a prosecutor’s career (the Rudi Giuliani effect). </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">On the corporate side, no one wants
to go to jail, least of all well-paid corporate directors and officers. Far
better to take the question of individual guilt off the table and lumber the
stockholders with the fine. (Directors and officers are usually stockholders
too, but they bear only a miniscule percentage of the economic damage.) Most
important, a criminal conviction—even an indictment—can be a death knell for a
company. (The accounting firm <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=918084">Arthur
Andersen collapsed after being indicted</a>. Its subsequent conviction was posthumously
<a href="http://scholar.google.com/scholar_case?case=9749195094830574590&q=arthur+andersen+v.+united+states&hl=en&as_sdt=8006&as_vis=1">overturned</a>
by a unanimous Supreme Court.) Better to settle for a sum that, while
impressively large, does not threaten the company’s existence.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The result is that corporate
criminal prosecutions have turned the Justice Department into a kind of protection
racket. Since no individuals are charged and the corporation cannot risk an
indictment, let alone a conviction, prosecutors do not have to put any facts
before an independent judge and jury. Instead, the prosecutors and the corporation
simply agree on a dollar settlement that will be large enough to burnish the
prosecutor’s resume while permitting the corporation to survive without having
any executives go to jail. </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Viewed this way, corporate criminal
prosecutions resemble certain types of civil actions. In most states there is
“strict liability” for death or injury caused by defective products. That is,
the victim needn’t prove negligence in the design of the product, only that it
was defective. Even though no one at the manufacturer was derelict in their
duty, the corporation is still required to compensate the victim. The usual
explanation for such a rule is that where someone is victimized by a faulty
product, it’s the corporation that was best placed to avoid the injury by
preventing the product defect. </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Whatever you may think of strict product
liability, the similarities with corporate criminal prosecutions are dwarfed by
the differences. Most obviously, a plaintiff in a product liability case will
have to prove to a court that the product was truly defective, that the defect
caused the injury, and the amount that will adequately compensate for the
injury. In a corporate criminal prosecution, in contrast, prosecutors will not
have to prove that a crime was committed or the amount of the damages because the
corporation cannot risk going to court. Moreover, no part of the settlement
need go to the ostensible victims. (As <a href="http://www.nytimes.com/2014/07/18/business/what-the-citigroup-settlement-gets-right-and-wrong.html?emc=eta1&_r=1">Floyd
Norris noted in <i>The New York Times</i></a>,
in Citigroup’s recent $7 billion settlement of charges that it misled investors
in mortgage-backed securities “there seems to have been no effort to quantify
just how much Citigroup’s improper behavior cost investors,” and “there is
nothing in the settlement to benefit most of those affected.”) </span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">It’s understandable that prosecutors
will want to raise money for the government and to make their careers, and that
corporations will want to avoid oblivion. But what makes this situation
possible is public anger over particular corporate scandals such as Enron and,
more generally, over the recent recession. But anger is a poor guide to action.
Anger over 9/11 leads us to blame Muslims generally, with results<span> </span>both silly—stopping a mosque near the World
Trade Center site—and tragic—invading Iraq. In each case there is what we might
call a metaphysical confusion, which leads us to punish innocent individuals
who are connected in our minds with an abstract entity, Islam or the
corporation. (Strangely, many people who attack the Supreme Court decisions in <i>Citizens United</i> and <a href="http://not-the-sons-of-the-desert.blogspot.com/2014/07/hobby-lobby-why-all-fuss.html"><i>Hobby Lobby</i></a> by denying that a
corporation can have speech or religious rights seem willing to accept that a
corporation can have the mental state—<i>mens
rea</i>—requisite for the commission of a crime.) The result in the corporate
context is a corporate version of lynch law where, without any determination by
an independent fact-finder, innocent stockholders are hung, drawn, and quartered.</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">—Stan</span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-36534569535335269962014-08-13T15:47:00.001-04:002014-08-15T13:47:03.196-04:00The GM switch confusion<!--[if gte mso 9]><xml>
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<b style="mso-bidi-font-weight: normal;"><span style="font-family: "Palatino Linotype","serif";"></span></b></div>
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">In
an August 6 post, “<a href="http://not-the-sons-of-the-desert.blogspot.com/2014/08/the-gm-switch-decision.html">The GM ignition switch decision</a>,” I noted that a car should remain
controllable when power is lost, so that GM’s defective switch didn’t cause any
accidents, though it made them much worse by disabling the air bag system. I
also noted that the press and the public seemed confused on the point, citing a
<i>New York Times</i> article.</span></span></div>
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">
</span></span><br />
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<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">The
GM engineers who initially investigated the defective switch believed that a
car would remain controllable after the engine shut off, and I’m unaware that
anyone has seriously challenged that conclusion. (My auto mechanic son tells me
that there should be enough remaining boost in the power brakes to bring the
car to a stop without undue effort.) All the cases GM investigated involved
serious crashes in which an airbag failed to deploy.</span></span></div>
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">
</span></span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">But
the press’s confusion continues: The <i>Times
</i>for August 11, <a href="http://www.nytimes.com/aponline/2014/08/11/us/ap-us-general-motors-lawsuits.html?emc=eta1&_r=0">reporting on a hearing
involving lawyers</a>
representing nearly 1,000 plaintiffs suing GM over the switch, stated that “The
ignition switches, when jostled, can shut off the engine, cutting power
steering and brakes and potentially causing drivers to lose control. The
problem also can disable air bags.” Again the defective ignition switch is cited
as causing the crashes, with the real problem—the disabled airbag system—seemingly
a secondary concern.</span></span></div>
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">
</span></span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">It
might seem a niggling distinction: GM is culpable either way you think. But from
that confusion a thousand plaintiffs rise. It’s doubtful that many of these
suits have any merit. That would require an accident where an airbag failed to
deploy. (If the airbag deployed, the ignition switch must have been in the RUN
position throughout and couldn’t have caused the accident.) If airbags were truly
failing to deploy in their thousands, surely someone would have noticed early
on; the airbag failures that GM knew about were taken quite seriously.</span></span></div>
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">
</span></span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">What
seems to be happening is the usual feeding frenzy among personal injury
lawyers, always eager to take advantage of grieving families who, understandably,
want to blame someone else for deaths or serious injuries to loved ones. Even
if the suits are without merit, they have settlement value, especially when
fueled by public anger. It’s a shame that the press, through mere incompetence,
is assisting this sorry spectacle.</span></span></div>
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">
</span></span><br />
<div class="MsoNormal" style="text-indent: 3pc;">
<span style="font-size: large;"><span style="font-family: Georgia,"Times New Roman",serif;">—Stan</span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-46343920377735262014-08-06T09:11:00.000-04:002014-08-06T09:12:52.081-04:00The GM switch decision<!--[if gte mso 9]><xml>
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<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">On May 29, Anton R. Valukas, a
partner at the law firm Jenner & Block and a former federal prosecutor,
delivered a 325-page report on the Chevy Cobalt ignition switch recalls to
General Motors’ Board of Directors. The defective switches were apparently involved
in at least 13 fatal crashes, yet it took GM almost 11 years to initiate a
recall. (Some other GM models, such as the Saturn Ion, had the same defective
switch, but I’ll refer to them all as “Cobalts.”)</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The Valukas report is likely to be
the best description we’ll have for some time on what went wrong at GM.
Valukas’s team interviewed almost all the important players and read thousands of
documents, and the story they tells is fascinating. Yet the report suffers from
a number of flaws, most of which stem from its being put together by lawyers,
for whom the main question seems to have been: Who was responsible? (The report
resulted in the dismissal of 11 GM employees.)</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The ignition switches installed in
the Chevy Cobalt from its introduction in model year (MY) 2003 into MY 2007
were defective; they allowed the key to be turned on and off with so little
force (torque) that the key could be moved to the accessory (ACC) position by a
very light force, as when the key fob was brushed by the driver’s knee. When
the key moved to ACC while the car was moving, the motor shut down and the
steering and brakes, denied power assist, became heavy. Most critically, after approximately
0.15 seconds power was lost to the sensor for the airbags, so that they would
not deploy in a crash. (Shutting off power to the sensor was a deliberate
design choice, to prevent airbags going off while the car is parked.)</span></span></div>
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<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The GM engineer mainly responsible
for the switch, Ray DeGiorgio, knew about the low-torque condition, which was
outside GM’s established parameters, but approved the switch anyway. (Why the
switch, manufactured by Delphi Mechatronics, had such low torque, and why
DeGiorgio approved it, remain a mystery.) </span></span></div>
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<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Complaints about stalling caused by
the key turning to ACC began to reach GM soon after the MY 2003 Cobalts hit the
streets, but DeGiorgio and the other GM engineers working on the switch apparently
did not know that when the key was in the ACC position the airbags would not
deploy. They did know, however, that when a car loses power it remains
controllable, so the engineers considered the ignition switch problem a
“customer convenience” rather than a safety issue; they felt no pressure to
solve the problem quickly. </span></span></div>
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<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">That a car remains controllable
when power is lost seems undeniable: Drivers lose power all the time—for
example, when they inadvertently run out of gas—without the car becoming
uncontrollable. (Of course, some Cobalt accidents apparently involved young
women who had been drinking, for whom the heavier steering and braking might
have been more problematic). So the switch didn’t cause the accidents, though
it made them much worse by disabling a key safety feature. (The press and the
public occasionally seem confused on this point; for example, the <a href="http://www.nytimes.com/2014/08/02/business/victims-begin-filing-claims-in-gm-case.html?emc=eta1">August
1, 2014 <i>New York Times</i></a> refers to
“accidents caused by [GM’s] vehicles’ faulty ignition switches.”) </span></span></div>
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<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Soon other GM engineers began
investigating reports of Cobalt airbags failing to deploy in crashes. There
were at least 54 such incidents prior to the recall. However, these engineers
were not aware for some time of the ignition switch connection, for two reasons.
</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">First, the ignition switch was
changed during MY 2007 to solve the low-torque problem, but the responsible
engineer (DeGiorgio again) did not change the part number, contrary to GM
policy. So in 2009 when the engineers looking at the airbag non-deployments
noticed that they ceased for MY 2008 and later Cobalts, they reasonably
concluded that the switch—which they thought had remained unchanged—couldn’t be
the cause. Worse, when they asked DeGiorgio whether the switch had been
changed, he replied that it had not. It is unclear why DeGiorgio (who was one
of the dismissed employees) took these actions. (Interestingly, he bought a
2007 Cobalt for his son, but we don’t know whether it had the defective
switch.) </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The second reason the engineers
missed the ignition switch connection was that the airbag sensor in some of the
crashed Cobalts retained a record of the key position when power was lost, and
in almost half of these cases the sensor showed the key to be in the RUN, not
the ACC, position. In the report the engineers only offer one explanation for
this anomaly, but the discussion is confusing, and no clear answer emerges.</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">If the sudden loss of power didn’t
cause the crash—that is, the car remained controllable—then something happening
<i>between</i> the driver’s losing control
and the crash must have caused the key position to change to ACC. It was only in
late 2013 that GM’s engineers finally concluded that the airbags would not
deploy in a crash where the vehicle had several impacts before the final crash,
as when it goes over a curb or rough terrain or hits small objects before
hitting a larger object, with the first bumps causing the key to turn to ACC (a
conclusion the report accepts; Valukas’s team did not commission any independent
engineering analyses).</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">GM engineers had noticed that many
of the airbag non-deployments involved off-road crashes, and by 2009 had come
up with a theory—“contact bounce”—that jarring the ignition switch could “open
up” the switch so that the signaling mechanism for the airbags would think the
key was in the ACC position. The contact bounce theory was similar to the final
theory, except it sought the cause in the internals of the switch rather than
in the key position. The engineers conducted “abusive and teeth-chattering
tests” in 2009 “in which the car was driven through steep ditches and deep
potholes” without ever getting the switch to “open up.” The report doesn’t say,
but presumably the engineers were testing Cobalts built after the ignition
switch had been changed; otherwise the bouncing would likely have caused the
key to rotate to ACC. Once more the failure to change the part number, and
reassurances that the switch had not changed, seem to have misled GM’s investigators.
</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The report only discusses 13
non-deployment cases (not all fatal), presumably because they were the only
ones with written evaluations from counsel. It’s not a representative sample,
but for what it’s worth, three of the cases don’t fit the report’s theory, and
a fourth isn’t described in enough detail to know if it fits. In two cases,
there was no series of impacts; in one, a car was hit from the side in an
intersection, in another the car rear-ended a tractor-trailer. In a third case,
the car left the road going backwards; it’s not clear whether the airbag should
have deployed or if it would have made any difference if it had. Finally, in a
fourth case there is no indication whether the car left the road or had a
second impact. </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">(<a href="http://www.nytimes.com/2014/05/27/business/13-deaths-untold-heartache-from-gm-defect.html?module=Search&mabReward=relbias%3Ar%2C%7b%221%22%3A%22RI%3A9%22%7d&_r=0">One
of the 13 fatalities</a> described in <i>The
New York Times</i> but not in the Valukas report also fails to fit the theory:
a head-on crash with a drunk driver who crossed the highway center line. The
air bag failed to deploy, but it’s hard to see how this could have resulted
from the ignition switch problem.)</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">If the story really is as simple as
“defective ignition switch disables airbags,” then by 2007 two outsiders had come
up with the correct diagnosis: A Wisconsin state trooper at the site of a fatal
crash noticed that the ignition key was in the ACC position and surmised that
the airbags had failed to deploy for that reason, and an Indiana University
Transportation Research Center report on that accident reached the same
conclusion. Valukas faults the GM engineers for not being aware of the outsiders’
reports, which were in the public record, but it seems likely that even if the
GM engineers had read the reports, they would have had little effect. For one
thing, the outsiders got it right because, unlike GM’s engineers, they weren’t
privy to the misinformation that the switch hadn’t been changed or to the fact
that the sensors often showed the key to be in RUN position. The outsiders were
only able to connect the dots because they had fewer dots to connect. </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">There’s another reason, barely
alluded to in the Valukas report, why the GM engineers would be likely to
discount information provided by outsiders: Many of these outsider were
plaintiffs or their lawyers, who had a great deal to gain if an accident’s
cause could be traced to a GM design defect. This is not new territory. The MY82-MY87
Audi 5000 model and various MY2000-MY2010 Toyotas were claimed by persons
involved in accidents to have had “<a href="http://en.wikipedia.org/wiki/Sudden_unintended_acceleration">sudden
acceleration</a>.” Audi sales suffered, and Toyota initiated massive recalls
and a $1.2 billion settlement, as a result of these claims. The National
Highway Traffic Safety Administration later concluded that most, if not all,
the sudden-acceleration crashes resulted from driver error. Outside information
frequently fails to be objective.</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">In March 2012 GM engineers
examining a crashed Cobalt at a junkyard noticed that the ignition switch
turned extraordinarily easily. The engineers had not brought any tools with
them to measure the torque, but using a fish scale purchased from a nearby bait
and tackle shop (you can’t make this stuff up), they measured the torque for a
number of Cobalt ignition switches in the yard. The torque on many switches was
so low that they concluded that the key could turn to ACC if the car hit a
pothole. The next day one of the engineers searched the Cobalt warranty
database and discovered the numerous complaints about the ignition switch
turning to ACC. He then elevated his concerns to more senior management.</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">But it would still be almost 20
months before GM finally decided to replace the defective switches. No doubt
part of the problem was the inertia built into getting any large organization
to take an expensive action. But perhaps a more important difficulty was that
it remained unclear to several decision makers that the low-torque switch was
the cause of the problem. And they had reasons.</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">In May 2012 the GM engineers
visited the junkyard again and tested some 40 Cobalts. (This time they brought
a torque wrench.) They found that earlier Cobalts required lower torque, but
this was also true of some MY 2007 and MY 2008 models. And in spring or summer
of 2012, DeGiorgio and his supervisor again stated that there had been no
changes in the switch that would affect the torque. </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Then, in April 2013, plaintiff’s
attorneys took apart pre- and post-2007 switches and showed GM lawyers just how
they had been changed: a plunger in the later switches was longer by about a
millimeter, just enough to significantly increase the torque. But it was only
on October 29, 2013 (one month before GM initiated the formal recall process)
that Delphi confirmed that in 2006 DeGiorgio had approved the change to the
plunger.</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The report characterizes the ignition-switch
saga as a “history of failures”: GM personnel “failed” to understand the
connection between the switch position and airbag deployment, to search for GM
or publicly available documents that would have pointed to the connection, to
take apart the pre-and post-2008 switches to compare them, to alert key
decision makers that the airbag nondeployments were causing fatalities, to
demand action in the face of mounting fatalities, to make themselves or others
accountable, and to marshal the expertise and information available to solve the
problem.</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The search for the cause of the
non-deploying airbags involved many persons in many areas. All of these people
had many other tasks to perform, and given their various backgrounds and
responsibilities, it’s not surprising that the delay in organizing a recall
stretched over many years. Leaving aside Ray DeGiorgio, whose actions arguably both
created the problem and delayed its solution, it’s not obvious that anyone “failed.”
Suppose that you could at any time have initiated a recall of the defective
switches. Would you have done it much before GM did? Remember, there was a good
deal of information and misinformation pointing to some other cause than low torque.
</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">Valukas heaps scorn on the GM
engineers’ search for the “root cause,” but without knowing the root cause, you
couldn’t know that replacing the switches would work. Clearly, once you saw
that the airbag non-deployments ceased in models with the new switch, you
didn’t need to know the root cause (presumably, the too-short plunger) or why
the sensor occasionally showed the key position to be RUN (an anomaly that is
still unexplained). But to see that, you have to know that the key was changed
in 2007, something the engineers couldn’t confirm until one month before the
recall was initiated. (True, a plaintiff’s lawyer had shown them the two
plungers some six months earlier, but you can understand the GM engineers
discounting explanations from such a source.) </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The actions of GM’s personnel might
look like “failures” to a litigator, but for anyone familiar with large-organization
decision processes when faced with technical problems, their actions were to be
expected (again leaving aside DeGiorgio’s actions, which remain inexplicable). For
example, we have the sociologist Dianne Vaughan’s book on the decision process
leading to the 1986 loss of the space shuttle Challenger (<a href="http://www.amazon.com/Challenger-Launch-Decision-Technology-Deviance/dp/0226851761/ref=sr_1_1?s=books&ie=UTF8&qid=1403375931&sr=1-1&keywords=challenger+launch+decision"><i>The Challenger Launch Decision: Risky
Technology, Culture, and Deviance at NASA</i></a><span class="MsoHyperlink">)</span>.
Vaughan presents the narrative twice, first as a journalist (or a lawyer) might
give it, as a series of stupid and/or venal decisions that any sensible person
would have seen as likely to lead to disaster. But the second account, told in
greater detail, shows how the launch decision reflected years of experience
with a process that everyone acknowledged was fraught with risk. Let me assure
you that nothing you’ve ever done in your life is likely to have been as
carefully thought through as NASA’s decision to launch Challenger. Then, at the
end, Vaughan shows how the experience that the NASA engineers relied on, when organized
in a different way, might have told them not to launch. </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">For those not up to Vaughan’s
exhausting 592-page account, the lessons are summarized in the “Blowup” chapter
of Malcolm Gladwell’s <a href="http://www.amazon.com/What-Dog-Saw-Other-Adventures/dp/0316076201/ref=sr_1_1?s=books&ie=UTF8&qid=1403378984&sr=1-1&keywords=what+the+dog+saw"><i>What the Dog Saw: And Other Adventures</i></a>.
The chapter’s tagline says it all: “Who can be blamed for a disaster like the <i>Challenger</i> explosion? No one, and we’d
better get used to it.” </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">The Valukas report concludes with
18 pages of recommendations dealing with organizational structure, culture,
training, and other matters intended to make a recurrence of these kinds of
safety problems less likely. Most of them sound reasonable, but it’s not
evident that they were reviewed by anyone with an expertise in management or
organizational structure. They are, in fact, typical lawyers’ products, with an
emphasis on written reports, formal meetings, and other methods familiar to
persons involved with the court system. I doubt if many people on the Valukas
team ever worked for a large for-profit company. Of course, Valukas’s firm, Jenner
& Block, is a large organization, with 450 lawyers and perhaps 1,500
employees overall. The very largest law firms might have three times that
number. But General Motors has 210,000 employees. Moreover, law firms are
semi-feudal, with each partner having his own fiefdom built around his or her
clients, arrangements that differ markedly from most other forms of enterprise.
Jenner & Block lawyers may work with large clients, but their day-to-day
law-firm experience doesn’t make them experts on the organization of large
for-profit companies. </span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">It’s not that nothing can be done,
but doing something requires a lot of hard thought by people who understand the
organization. What we tend to get instead are rituals like the Valukas report—a
Who-Is-To-Blame? orgy of hindsight, concluding with untested sounds-good
recommendations. The report is duly accepted, higher-ups make fulsome
apologies, lower-level people are fired. Almost everybody feels better.</span></span></div>
<div class="MsoNormal" style="text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">—Stan </span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-91725826661936100702014-07-29T12:24:00.000-04:002014-07-29T12:24:54.036-04:00The Foreclosure Wars<!--[if gte mso 9]><xml>
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<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span>(I’ve been posting less over
the last month, mainly because I’ve been working on longer pieces that
I’ve been sending around to more traditional publishing outlets. However, I
expect that I’ll be receiving rejections soon that will free up those longer
pieces for posting here. In the meantime I thought I’d post the following long article,
which I finished a year ago but for which I have been unable to find a
publisher. -- Stan)</span></i></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span><span> </span></span></i><span></span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>In January 2013, ten
large mortgage servicers—including Bank of America, Citibank, JPMorgan Chase, and
Wells Fargo—announced a settlement with their chief regulators, the Federal
Reserve Board and the Comptroller of the Currency, pursuant to which they would
pay approximately $8.5 billion in direct payments and loan foregiveness to
homeowners who may have been victimized by deficient practices in mortgage loan
and foreclosure processing during 2009 and 2010. This followed a $25 billion
settlement in early 2012 between the four banks named above plus Ally Financial
and the U.S. and 49 state governments.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Consumer advocates and
others were quick to characterize the settlement with the mortgage servicers as
a “slap on the wrist.” The<i> </i>January 9,
2013<i> New York Times</i>, for example,
editorialized that “while there are no reliable analyses to identify wronged
borrowers, … given the extent of foreclosure abuses and the amount of money
available, the individual reimbursements will be paltry compared with the harm
of losing one’s home in an abusive process.”</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>But how much damage
had been done to homeowners by the abusive processes? </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>In 2005, about 1% of
U.S. mortgages were in foreclosure, a number that had remained fairly steady
for at least 15 years. By 2009, foreclosures had more than quadrupled, to 4.6%.
Nearly 2.5 million American families were in the process of losing their homes,
and an additional five million were delinquent on their loans.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Most foreclosed
families simply hand over the keys to the lender and move on. Some, however,
hire lawyers to stop or delay the foreclosure, so the vast increase in foreclosures
led to a predictable increase in foreclosure litigation. What could not have
been predicted was the turn this litigation took, and the public reaction to
it, most notably allegations that mortgage servicers had engaged in illegal
corner-cutting practices (dubbed “robosigning” by the press), and that a
central mortgage registration system holding 30 million active mortgages had no
authority to initiate foreclosures. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>As the litigation
increased, and headline accusation followed headline accusation, many Americans
were convinced that something nefarious had indeed been going on. Unfortunately,
those perceptions, combined with an understandable concern for defaulting mortgage
debtors, may end up harming the group the litigation was supposed to protect:
America’s homeowners. But sorting out rights and wrongs in the foreclosure wars
requires a basic understanding of the rapid development of the U.S. mortgage
market and the slower evolution of the governing legal rules. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><h1 style="line-height: normal; margin-top: 0in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span style="font-weight: normal;">Some mortgage
basics</span></i></span></span></h1>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span><span>In the United States, as in most of the
developed world, homes are usually purchased with borrowed money. To protect
their investment, home lenders will generally advance only a portion of the
purchase price, generally no more than 90%; the homebuyer must put up the
remainder as a down payment. Lenders also insist on taking a mortgage on the
home. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>The details of mortgage
law vary among our 50 states, but the main elements are the same: A mortgage is
an agreement between the homeowner and the lender that allows the lender, if
the homeowner defaults on the loan, to seize the home, sell it a foreclosure
sale, and repay itself from the sale proceeds. If the lender records the
mortgage in a specified public office, it will prevail over subsequent purchasers
and lenders, and will not have to share any foreclosure sale proceeds with the
homeowner’s other creditors. If the sale proceeds are greater than the amount
owed to the lender (including foreclosure costs), the excess is usually
returned to the homeowner or the homeowner’s other creditors; any deficit will,
in most states, remain owing to the lender. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Most mortgage loans
require monthly payments of principal and interest, and failure to make these
payments (a “delinquency”) may trigger a foreclosure. Most lenders will usually
not begin foreclosure proceedings until the homeowner is at least 90 days
delinquent—that is, has missed three consecutive monthly payments. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Some states require a
lender to go to court to foreclose (“judicial foreclosure”); others just
require a filing in the land records office. In some states the lender can
choose between judicial and non-judicial foreclosure. The lender must generally
notify the homeowner of the foreclosure and give him or her the opportunity to
cure the delinquency, and the foreclosure sale must be publicly announced. For
a judicial foreclosure, a representative of the lender must file a sworn affidavit
witnessed by a notary public. The affidavit must be based on personal knowledge
as to the amount of the indebtedness, the status of the loan, and the lender’s
right to foreclose. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>The robosigning
controversy was ignited by the discovery that in many cases, lenders’ representatives
signing the affidavits had no personal knowledge of the statements being sworn
to. Instead, they relied on the business processes for preparing the
affidavits, which involved inserting information from the lenders’ computer
records; no one personally checked the mortgage note, the mortgage, or the
other paper records in the homeowners’ mortgage files. Moreover, the notaries
often did not witness the signing (though in many cases they may have
recognized a familiar signature), simply stamping bundles of signed affidavits as
they were handed to them. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><h1 style="line-height: normal; margin-top: 0in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span style="font-weight: normal;">Mortgages
become commodities </span></i></span></span></h1>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span><span>The robosigning controversy had its roots in
changes in the mortgage industry over the last 40 years. In the middle of the
20th century, most home mortgage lending was done by savings banks, building
and loan societies, and other financial institutions that specialized in residential
mortgage lending. These institutions saw mortgage loans as long-term investments,
to be retained until they were paid off. Mortgage lending was a local business,
and the lenders generally knew a good deal about the local housing market and frequently
about the homeowner, who was often a long-term depositor. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>But mortgage loans can
be tricky—and in an inflationary environment, combustible—investments. Most
mortgage loans permit the homeowner to pay off the old loan at any time without
any monetary penalty. When interest rates fall, homeowners often prepay their old
mortgage loan and take out a new loan at a lower rate. But if interest rates
rise, homeowners will hold on to their low-rate loans. In the inflationary
environment of the late ‘70s and early ‘80s, as interest rates spiked upward,
savings banks had to pay higher rates to attract deposits but found that their
low-rate mortgage loans were paying off more slowly. A savings bank that has to
pay depositors 8% while its outstanding mortgages are bringing in only 4% will
be in a bind, and it wasn’t long before large numbers of savings banks failed.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>That experience,
combined with other financial and regulatory changes, led to profound changes
in the mortgage industry. Beginning in the 1990s, mortgage lenders, instead of
holding on to their mortgage loans, frequently sold them off to investment
banks, who securitized them. Securitization has come in for more than its share
of opprobrium recently, but it’s a relatively benign practice: Investment banks
or government-sponsored entities such as the Federal National Mortgage
Association (popularly known as Fannie Mae) and the Federal Home Loan Mortgage
Corporation (popularly, Freddie Mac) create pools of residential mortgage loans.
Various classes (“tranches”) of securities are then created that receive the principal
and interest payments from the mortgage loan pool. For investors in these
“mortgage-backed securities” the risk of homeowner default is spread over a
pool that is large enough that the risks of default are statistically
predictable (though when the Great Recession came, many of the prediction
models proved faulty). </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Mortgage-backed
securities are almost always sold to institutional investors who are regular
clients of the sellers. The bankers can therefore structure the tranches to
meet these customers’ particular risk and maturity preferences. Some tranches are
better shielded from homeowner defaults—the AAA-rated tranches—and some are
more exposed, with ratings from AA down to “junk” (industry lingo for bonds
rated lower than BBB–). Among the AAA tranches, some may have faster pay-outs,
others slower, some fixed interest rates, others floating. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Because mortgage loans
usually require monthly payments of principal and interest, and an escrow for
real-estate taxes, the loans must be “serviced”—that is, someone must calculate
the monthly payments due from the homeowner and which parts of the payment are
principal and which parts interest, determine how much should be escrowed for
real estate taxes and pay the taxes, check that the payments are made, send monthly
statements to the homeowners, contact homeowners who miss payments, and
foreclose when the loan becomes seriously delinquent. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>In the good old days,
a savings bank with a portfolio of mortgage loans would service the loans
itself. When savings banks began to sell off their mortgage loans, some
retained the right to service the loans, others sold off the servicing rights.
But servicing is a business with economies of scale, and most servicing today
is done by large highly-computerized companies that service millions of loans;
the five largest servicers currently have 60% of the servicing market. Servicers
of securitized mortgages typically earn annual fees of 0.25% of the unpaid principal
amount of fixed-rate mortgages and o.375% of adjustable-rate mortgages. The
local savings bank’s main role today is to “originate” the loan—that is to evaluate
a home’s value and the borrower’s creditworthiness, and to make sure the mortgage
loan paperwork is in order.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>These changes in the
mortgage industry have had several effects. For one, the risks of inflation and
downturns in housing prices are now spread among myriad institutional investors
instead of being concentrated in the savings and loan industry. Perhaps as
important, once mortgage loans became more liquid investments, their values
rose and their interest rates fell, providing a boon to homebuyers. Home
sellers also benefited from the rise in home values consequent upon lower financing
costs. (Not all the effects may have been so happy: It is frequently asserted—though
some researchers have denied—that the separation of originators from investors encouraged
riskier lending as originators no longer had to live for years with the
consequences of lending to dodgy borrowers on over-priced properties.)</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span>The documentation trail</span></i></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><b><span><span> </span></span></b><span>At a
house closing, the homebuyer signs two documents with special importance for
our story: a promissory note payable to the mortgage lender, and a mortgage. The
lender records a copy of the mortgage and retains the original signed note and
mortgage. When mortgage lending was done by local savings banks, the note and
mortgage were usually kept on the bank’s premises and occasionally consulted.
But in the world of computerized servicing of millions of mortgages, the note
and mortgage, along with other documents (the “mortgage file”) are warehoused at
a specialized document custodian, sometimes thousands of miles removed from the
servicer’s operations center.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Until recently, the
promissory note and mortgage would both be in the originator’s name, and the
mortgage would be recorded in that name. But as mortgage loans became tradable
commodities, ownership of the note and mortgage would be transferred
(“assigned” in legal jargon), usually several times, often winding up in a
securitization trust that issued mortgage-backed securities. To make the series
of assignments as efficient as possible, the promissory note might be endorsed
by the originator “in blank”—that is, subsequent owners would not be named and
the note could be enforced by whomever had valid possession. Moreover the
mortgage assignments, which were usually evidenced by separate agreements, were
not recorded. Lenders relied in part on the legal rule, which is part of the
Uniform Commercial Code in every state, that the owner of the promissory note
necessarily owns the mortgage. Many states did not even require a written assignment,
let alone recordation, to validly transfer a mortgage. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>If a mortgage enters
foreclosure, servicers may be reluctant to go to the bother of searching the
mortgage file housed with a distant document custodian for the original
mortgage, promissory note, and assignment documents. Since retrieving mortgage
documents involves some cost, and since the documents may be missing,
incomplete, or lacking some requisite formality, some servicers found it more convenient
to file an affidavit stating that the promissory note had been lost. There are
standard legal rules for handling lost notes, which to the servicers looked simpler
than actually dredging up the original note. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>OK, they shouldn’t
have done it. Filing false affidavits is a practice that should not be encouraged,
but we can at least ask which parties were harmed by the servicers’ extra-legal
shortcuts. Homeowners were, of course, harmed to the extent that observing all the
legal niceties might have enabled them to avoid eviction for another month or
two, but the procedural formalities were designed for other purposes: to ensure
that the homeowner was indeed in default, that the amount claimed to be owed
was correct, and that the proceeds of the sale of the home went to the actual
holder of the mortgage loan. But with accusations flying of “fraudulent”
affidavits, the press fostered the impression that large numbers of innocent
homeowners were being foreclosed on—that they were not really in default, or
owed less than was claimed, or that the lenders had no right to foreclose. The
truth is far different, and more interesting.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><h1 style="line-height: normal; margin-top: 0in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span style="font-weight: normal;">How harmful
was robosigning?</span></i></span></span></h1>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span><span>At some point in the distant past,
examination of a mortgage promissory note might have told a court something interesting
about the identity of the note’s owner or the amount owing on the loan. Those
days are long gone. Today, the best evidence of the amount owing on the note,
and the identity of the loan’s owner, are the servicer’s computerized records. No
computerized record can be entirely free from error, but material errors are unlikely
in the case of mortgage payment records since servicers make monthly statements
available to homeowners, and homeowners are likely to notify the servicer if they
think something is wrong. Nor is it likely that a defaulting homeowner will be
unaware that he might be foreclosed upon; foreclosures are always costly and in
present conditions the proceeds of sale may not be enough to make the lender
whole, so servicers make strenuous efforts to notify homeowners that they are
behind, and to work out some arrangement that will be less costly to the lender
than foreclosure. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Nor is there much
doubt as to the owner of the mortgage loan. The servicer has all along been
forwarding monthly payments to somebody—usually a securitization trust—and it’s
unlikely that anyone else has made a claim to those payments. In any case, in
states that require a court proceeding for foreclosure, the judicial decree will
settle the matter.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Nonetheless, with home
foreclosures more than quadrupling between 2005 and 2009, the servicers’ resources
and manpower have been stretched thin. In such circumstances, one would expect
the error rate to rise. An interagency review released in April 2011 by the Federal
Reserve System, the Comptroller of the Currency, and the Office of Thrift Supervision
noted that “some servicers failed to accurately complete or validate itemized
amounts owed by [defaulting] borrowers,” and that “the percentage of errors at
some servicers raise[d] significant concerns regarding those servicers’
internal controls.”</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>These conclusions were
based on a review of 2,800 files of foreclosed mortgages from 14 companies who
in the aggregate serviced more than 2/3 of the nation’s mortgages. The files
were not chosen randomly—one of the criteria for selection was that a consumer
complaint had been raised—so one might expect the sample to exaggerate the
extent of errors. Nonetheless, the review found that </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal; text-indent: 0.5in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">“[B]orrowers
subject to foreclosure in the reviewed files were seriously delinquent on their
loans. … [S]ervicers possessed original notes and mortgages and, therefore, had
sufficient documentation available to demonstrate authority to foreclose.
Further, examiners found evidence that servicers generally attempted to contact
distressed borrowers prior to initiating the foreclosure process to pursue loss-mitigation
alternatives, including loan modifications.”</span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span><span>As for errors in computing the amount owed,
the errors seem to have been small—“typically less than $500”—and in more than
half the cases favored the borrower. Not that the process was entirely error-free:
The review noted </span>“cases in which foreclosures should not have proceeded
due to an intervening event or condition, such as the borrower (a) was covered
by the Servicemembers Civil Relief Act, (b) filed for bankruptcy shortly before
the foreclosure action, or (c) qualified for or was paying in accordance with a
trial modification.” But these problems do not seem to have been caused or
exacerbated by robosigning.<span></span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Another persistent
failure of the affidavits was notarization. A notarized document is one signed
and sworn to before a notary public. Notaries are officers of the court, and false
statements in the notarized document thus carry possible penalties for perjury.
But lawyers routinely have documents notarized without having the signer
present. It’s one of the smaller sins of legal practice, to which few pay much
heed—worthy of a “tut-tut” but not much more. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>What has emerged is a
situation that is difficult for the legal mind to grasp, though perfectly
obvious to non-lawyers: Who owes what to whom on a mortgage loan is determined
primarily by the servicer’s records, since the servicer’s monthly statements
are available to both the mortgage owner and the homeowner. In the absence of
anyone questioning those monthly statements, they can be regarded as dispositive.
Just as you accept your monthly bank or securities account statement without
the need for those silly passbooks or stock certificates, so you can accept the
monthly mortgage statement without having to refer to the warehoused promissory
note. And if you did review the promissory note, what could it tell you? It likely
to be endorsed in blank rather than to the current owner of the mortgage loan,
and it will almost certainly not reveal how much of the loan has actually been
paid. A person signing an affidavit prepared by a computer is more likely to
get the main points right than someone who muddies the waters by insisting on
reviewing the documents. Not for the last time in the foreclosure wars, the
legal rules from a bygone paper-based era have lingered long past the point of
usefulness. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>In sum, the situation
seems to be as follows: In attempting to foreclose mortgage loans, servicers
have signed affidavits based on computerized mortgage records that are likely
to be more accurate than the paper records. This has involved making false
statements as to their examination of the paper mortgage file. But the false
statements have not been material, the errors have been small—probably smaller
than would have been the case with manual procedures—and have favored the
borrowers at least as often as the lenders. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Of course, the files examined
in the Interagency Review may not have been an adequate sample of the problem,
and the examination was subject to other limitations. Accordingly, the agencies
required each of the 14 servicers to have an independent review conducted of its
2009–2010 foreclosure actions “to determine any financial injury to borrowers
caused by errors, misrepresentations, or other deficiencies identified in the
review….” Unfortunately for our purposes, that larger review was never
conducted.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span>Putting robosigning behind us </span></i></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><b><span><span> </span></span></b><span>The
robosigning crisis now seems to be largely over. As part of the $25 billion global
mortgage settlement, the federal and state governments agreed not to pursue robosigning
claims against the five bank defendants. The banks also agreed to new servicing
procedures that should—at an unknown cost—make robosigning less likely going
forward. Several states, most notably California, are moving forward with
“homeowners’ bill of rights” legislation that will mandate these procedures for
all large servicers.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>It is impossible to
say just how much of the $25 billion settlement was owing to robosigning claims,
or to estimate the future costs of the new procedures, but it seems likely that
the robosigning firestorm gave the government considerable leverage. Even if
robosigning contributed only $500 million to the settlement—less than 2% of the
total—that’s still a lot to pay for procedural flaws that arguably injured no
one. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>The global settlement
does not affect the rights of individual homeowners to raise robosigning
claims. But homeowners have generally not been successful in invalidating
foreclosures or liens on the basis of robosigning allegations. For homeowners, robosigning
allegations “have more bark than bite,” as one lawyer put it.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal; page-break-after: avoid;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span>MERS
wars</span></i></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><b><span><span> </span></span></b><span>Robosigning
may have garnered most of the headlines, but another war, fought in dozens of
separate litigations, may prove more consequential. In state after state, homeowners
have alleged that the entity holding their mortgages, Mortgage Electronic Registration
Systems, Inc. (MERS), did not have the legal authority to foreclose. MERS is
the record holder on 30 million active mortgages, and a decision in favor of
the homeowners could throw the entire foreclosure system into chaos.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>MERS was set up in
1995 as a membership organization owned by major players in the mortgage
origination, securitization and servicing industries, including Fannie Mae,
Freddie Mac, Bank of America, JPMorgan Chase, Citigroup, and Wells Fargo. Its
3,000 members include almost all mortgage lenders as well as many companies
that trade or service mortgage loans.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>MERS was designed to
solve a particular problem: As mortgage loans became tradable commodities, the
paperwork routines that had worked when mortgages stayed in one place began to
seem onerous. The journey from mortgage originator to securitization trust
might involve a half dozen stops, and keeping track of and documenting the
transfers, and possibly having to record at least some of the assignments, was
expensive, time-consuming, and error-prone. </span></span></span></div>
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</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>MERS changed all that.
Mortgage agreements now usually authorize the mortgage lender to record the
original mortgage in MERS’s name as nominee for the original mortgage lender
and for all subsequent owners of the mortgage loan who are MERS members. Thus,
when a mortgage lender that is a MERS member assigns the mortgage loan to another
MERS member, such as an investment bank, MERS remains the named party on the
recorded mortgage, but now as the nominee of the investment bank rather than the
original lender. Since MERS remains the nominee of the owner of the mortgage
loan, the assignment of the mortgage need not be recorded. When the investment
bank further assigns the mortgage loan to a MERS-member securitization trust,
MERS automatically becomes the nominee of the securitization trust, thus avoiding
still another mortgage filing. MERS keeps an electronic database of the real
owner and the servicer of each mortgage loan for which MERS acts as nominee (although
the accuracy of the database depends on noteholders and servicers keeping MERS
informed of transfers). </span></span></span></div>
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</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>When a mortgage loan
defaults, the mortgage usually permits MERS to bring a foreclosure action in
its own name—that is, MERS can initiate judicial foreclosure proceedings and
conduct the foreclosure sale. MERS has few employees, but has appointed thousands
of non-employees—almost always employees of the real owners or servicers of the
mortgage loans—as MERS officers to act for MERS on foreclosures and other
matters. </span></span></span></div>
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</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Most state foreclosure
statutes were written and most precedents decided well before mortgages became
tradable commodities, and there is now some legal confusion about how to categorize
MERS’s role in foreclosure actions. Legal theory distinguishes between “legal
title” and “beneficial ownership.” The classic case is the trust, where the
trustee has legal title to but no economic interest in the trust assets. The
trustee acts for a beneficiary who is the beneficial owner of—that is, has the
real economic interest in—the trust. There is no doubt that a trustee can bring
a legal action in its own name as trustee, and the same reasoning might seem to
apply to MERS, except that MERS is neither a trust nor a trustee. Sometimes
MERS seems to function as a nominee or agent (other familiar legal categories),
and sometimes as the legal owner. It’s all very confusing to the legal
theorist. </span></span></span></div>
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</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Moreover, in states
that require a judicial proceeding for foreclosure, it is often argued that
only the real “party in interest”—that is, the beneficial owner—can bring a
suit (although this is never the case for trustees). Thus, it is claimed, only
the owner of the mortgage note, and not MERS, can initiate a foreclosure. As a
result of these conceptual difficulties, homeowners and their lawyers have
attempted to argue that MERS does not have legal authority (“standing” in legal
jargon) to bring a foreclosure action. MERS has managed to fend off most of these
attacks. However, a few courts have been sympathetic to the view that MERS lacks
standing, and at least one New York State court declared that MERS did not have
the power as a nominee to either foreclose or to assign a mortgage back to the
note owner. Since the court also held that the note owner could not foreclose
unless the mortgage was assigned back to it, this holding would have raised an
insuperable barrier to any foreclosure, at least for those mortgages MERS held in
New York State. Happily, the decision was overturned on technical grounds, but
its reasoning could still reappear in an appropriate case. (The case illustrates
the benefits for some homeowners of litigation: The foreclosure action was
commenced in March 2008, with litigation continuing—and the homeowner
presumably remaining in the house without paying principal or interest on the
mortgage loan—for four years.) As a result of the onslaught of litigation, MERS
now discourages members from initiating foreclosures in MERS’s name, preferring
to assign the mortgage back to its beneficial owner, who will then foreclose in
its own name. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Another frequent
allegation in MERS litigation is that MERS has subverted the mortgage recording
system. One purpose of the system, it is claimed, is to provide homeowners with
a record of the real owners of their mortgage. Such a claim seems far-fetched.
For one thing, there is no requirement that a mortgage be recorded; parents and
other relatives frequently take unrecorded mortgages on their relations’ houses.
More important, the purpose of recording mortgages is not to provide a record
for homeowners but to protect lenders. If a house with an unrecorded mortgage
is sold to an unsuspecting buyer, who records the sale, the lender will lose its
mortgage. (The original homeowner will still owe the lender on the note, but
the debt will now be unsecured and the lender’s chances of collecting diminished.)
Similarly, if a subsequent lender records a mortgage without knowing of the
earlier unrecorded mortgage, any foreclosure proceeds will go first to the
recording lender. Finally, if the homeowner files for bankruptcy, an unrecorded
mortgage will be without legal effect. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>It may be desirable
that the homeowner know whom to talk to about the mortgage, but that person is
the servicer, not a mortgage owner that is unlikely to have any useful
information. (Various federal laws now require homeowners to be notified of the
identity of their servicer, including a toll-free telephone number, and, since
2009, any assignee of their mortgage loan.)</span></span></span></div>
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</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>In February 2012, New
York State sued MERS and three of its shareholders—Bank of America, JPMorgan
Chase, and Wells Fargo—for fraudulent and deceptive acts or practices. (Similar
suits had been initiated in Delaware and Massachusetts.) Much of New York’s complaint
was based on practices, such as robosigning, that were discussed in the Interagency
Review, rephrased in a more hysterical manner. But the complaint also alleged
that many of the 13,000 foreclosure actions initiated in MERS’s name in New
York were invalid because MERS lacked standing. The suit demanded that MERS be
enjoined from continuing such activities, and that the defendants disgorge all
profits and fees collected and pay all damages caused by such acts and
practices (although the defendant banks settled the robosigning claims for an
aggregate $25 million). While it is by no means clear that there were any
profits collected or damages caused by these actions, the injunction would at
the very least make using MERS in New York a more expensive process. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Of course, for
non-lawyers it doesn’t seem all that important whether the real (beneficial)
owner of the mortgage loan brings a foreclosure action in its own name or in
the name of a nominee such as MERS. The important practical questions are: Does
the homeowner owe the money?, and Will the foreclosure proceeds be paid to the
appropriate person? The answer to both questions is almost always “Yes.” But
the advent of MERS has raised those cloudy legal questions one would expect when
a real-world system outpaces its legal conceptualization. </span></span></span></div>
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</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><h1 style="line-height: normal; margin-top: 0in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span style="font-weight: normal;">A familiar
problem</span></i></span></span></h1>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span><span>We have all been here before, and recently. The
creation of MERS was inspired partly by earlier developments in the securities
industry. In the early 1960s almost all stock or bond trades required the
physical transfer of a paper certificate, which involved turning in the old
certificate to the issuer or its transfer agent, who would then issue a new
certificate to the new owner. It was a system devised for a quieter era; back then,
an active day on the New York Stock Exchange might involve the transfer of five
million shares. But then the volume of trading expanded rapidly, and before the
end of the decade 10 million-share days were common. Brokerage back offices
were overwhelmed by the paper crunch, resulting in the failure of many old and
established firms. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Within a relatively
short time, the industry devised a solution: A depository was set up—The
Depository Trust Company (DTC)—to hold the stock certificates in its name (actually,
in the name of DTC’s nominee, Cede & Co.). All the major brokerage houses and
banks were “participants” in DTC, and DTC kept records of which of its
participants was the beneficial owner of the share certificates held in DTC’s
vault. The participants, in turn, kept records of which of its customers (some
of whom were themselves financial institutions) were the beneficial owners of
the shares the brokerage house held through DTC, and so on down the chain until
at the end one found the true beneficial owners of the securities—those persons
who were not holding for someone else. When a beneficial owner bought or sold
shares, his securities firm would indicate the change by appropriately marking
its records (a “book entry”), and corresponding book entries would be made at
the firms further up the chain and finally at DTC; no paper certificates would
change hands. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>This strategy of
“immobilizing” the certificates at the depository and doing all the transfers
by book entry has worked remarkably well. The New York Stock Exchange now routinely
handles one billion share days without fuss or panic. Most investors hold their
shares through their brokers; they receive a brokerage statement that shows
their stock holdings without realizing that these holdings are evidenced only
by a chain of computer records, culminating in an actual single stock
certificate issued to DTC (an entity they have never heard of) that represents all
of the shares held by the depository.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>While the system has solved
the most pressing practical problems of securities transfer, it was for some
time a legal orphan. Transfers of investment securities are governed in every
state by the Uniform Commercial Code, and for roughly a quarter-century that
statute provided only minimal guidance as to the status of a financial
institution holding shares for its customers through a depository: Was the broker
an agent, a trustee, or a bailee? What duties were owed by the depository or
the broker to persons further down the chain? None of the familiar legal categories
seemed to quite fit the situation, yet the choice of category could carry important
legal and financial consequences. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>It was only in 1994
that a new version of the Uniform Commercial Code became available—quickly
adopted by all 50 states—that, for our time and situation, resolved the legal categorization
problem. The solution consisted largely in realizing that the relation of the
various parties in the chain of security ownership did not fit into any of the standard
legal categories. Instead, a new category was invented—the “security
entitlement”—and rules propounded for the new way of doing business. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>The mortgage recording
system with MERS at its heart was partly inspired by the success of the
depository system for immobilizing security certificates, and seems to be suffering
the same sort of legal uncertainties that afflicted that system before the 1994
modifications to the Uniform Commercial Code. Unfortunately, there is no
analogue to the Uniform Commercial Code for mortgage and foreclosure statutes,
so it may be some time before we have a legal structure that is responsive to
the new realities of the mortgage markets. In the meantime the consequences of overly-technical
judicial decisions could be serious.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<br /></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><h1 style="line-height: normal; margin-top: 0in;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><i><span style="font-weight: normal;">The stakes</span></i></span></span></h1>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span> </span><span>Almost all the reactions to the mortgage
crisis involve changes in procedures that will initially be costly to industry
participants. While the one-time costs are likely to be borne by those
participants, the ongoing increased monitoring and documentation burdens will
inevitably be passed on to the industry’s customers—homebuyers and home sellers.
Moreover, the crisis has revealed some unexpected legal risks in mortgage
lending, as courts have not only bent over backward but have contorted pretzel-fashion
to come up with rationales to benefit families in foreclosure. For an extreme example,
in 2011 Massachusetts’s highest court decided that a bank did not have standing
to bring an action to settle title to a foreclosed property because the
mortgage was not recorded in its name, even though the bank held the promissory
note. The generally recognized common law principle is that “the mortgage
follows the note”—that is, the holder of the note has the benefit of the
mortgage even if the mortgage has not been formally assigned to it. But the Massachusetts
court, relying on judicial decisions from the nineteenth century, denied that the
mortgage followed the note, without even considering that Massachusetts’s
version of the Uniform Commercial Code, as it became effective in 2001,
reaffirmed the mortgage-follows-the-note principle and clearly trumped the
ancient decisions cited by the court. (The court’s failure to consider the statute
may not have been deliberate: Perhaps because the issue had not been raised in
the lower courts, none of the nine legal briefs submitted to the court by the
parties and several friends of the court, including the Attorney General,
mentioned the statute. But the following year the court repeated the mistake,
again without any litigant citing the statute.) </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Perceptions of
increased legal risk in foreclosure may make lenders less eager to lend on
traditional terms, with substantial consequences for anyone who owns a home. Most
people buy the most expensive home they can afford, based on the down payment
and the expected monthly payment. Imagine a three-bedroom cottage in a quiet
suburban community that Mr. & Mrs. Seller are offering for $250,000. Lender
banks are willing to make a $225,000 (that is, 90% of the sale price) mortgage
loan on the cottage to Mr. & Mrs. Buyer. The Buyers love the house and can
just scrape together the $25,000 down payment and can just afford the monthly loan
payments. House sold!</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>While a 20% down
payment is occasionally cited as a standard for prudent lending, and while
residential mortgage securitization trusts often required primary mortgage insurance
for mortgage loans above 80% of the value of the house, for many years before
2007 most borrowers did not have to post such a large down payment, 10% being
frequently acceptable. But now suppose that perceived legal difficulties with
foreclosing on residential real estate cause lender banks to reassess the risks
of mortgage lending. They decide to raise the down payment requirement for Mr.
& Mrs. Seller’s house to 20%—that is, they will now only finance 80% of the
purchase price. Now the minimum down payment on the house will be $50,000. No
sale—unless Mr. & Mrs. Seller lower their price. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>By how much must the
price come down? The $25,000 maximum down payment that is all the Buyers can
make is 20% of only a $125,000 purchase price.</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>Of course, in the real
world Mr. & Mrs. Seller will look for other buyers for their house. A rise
in the required down payment will dampen demand, but it’s reasonable to assume
that the price of the Sellers’ house will fall by less than would be necessary
to close the sale to Mr. & Mrs. Buyer. Let’s suppose that another buyer can
be found who can afford a $45,000 down payment. Then the increased down payment
requirement will result in a reduction of the purchase price to $225,000, or 10%
less than the sale price before the increase in the required down payment. (Sale
price reductions could also be expected if the bank decided to charge additional
interest to compensate for increased foreclosure risk.)</span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>In 2010 the value of
residential fixed assets held by U.S. households was over $15 trillion. A 10%
drop in the value of those assets would thus represent a decline of over $1.5 trillion
in value. Of course, the 10% drop is purely my back of the envelope guesstimate,
and increased foreclosure risk may not be the largest factor driving an increase
in required down payments, but it does give some idea of the amounts at stake. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>The last few years
have witnessed a real estate bubble that raised the sales price of most homes
by substantial amounts. We are now undergoing the painful process of lowering
those prices to more traditional amounts. But the provision of 90% financing
was not a cause of that bubble, and a retreat to 80% financing is likely to
force home prices well below pre-bubble levels. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>We often slip into thinking
of houses (and many other things) as having an intrinsic value. The truth is
that the value of anything is what a willing buyer will pay a willing seller,
and that willingness is heavily influenced not only by beliefs about future
price trends but also by financial and institutional arrangements. If we change
the institutional arrangements for mortgage lending—for example, by convincing
lenders that they may not be able to foreclose on mortgages—we can lower the
value of the nation’s homes. </span></span></span></div>
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;">
</span></span><div class="MsoNormal" style="line-height: normal;">
<span style="font-family: Georgia,"Times New Roman",serif;"><span style="font-size: large;"><span><span> </span>For most Americans,
their home is their most valuable asset. Commonly, as children move away and
homeowners no longer need the extra room, they move to smaller quarters, selling
their homes to provide retirement income. Or they may refinance their home to
provide cash for starting a business, paying medical bills, or sending a child
to college. Any rise in down-payment percentages or mortgage interest rates will
lower sales prices, decreasing retirement nest eggs and diminishing the ability
to raise cash for other needs. The ultimate dark legacy of the foreclosure wars
may be that in their desire to help borrowers facing foreclosure, the foreclosure
warriors may end up being responsible for a material decline in the value of
most Americans’ largest single asset. </span></span></span></div>
Stan Laurelhttp://www.blogger.com/profile/02027389859465585787noreply@blogger.com0tag:blogger.com,1999:blog-5916464096928222441.post-35441488856456222812014-07-28T16:09:00.001-04:002014-07-28T16:09:22.337-04:00An ApologyDear Stanley, and our Gentle and Loyal Readers:<br />
<br />
I am terribly sorry that I have posted so little in the past few weeks. I shall endeavor to to do better in the future.<br />
<br />
Yr Hmbl & Obdnt Srvt.<br />
<br />
Oliver Hardy, Esq.Oliver Hardyhttp://www.blogger.com/profile/00484475890310385671noreply@blogger.com0