The University of Chicago Law School Faculty Blog

Nationalize the Banks After, Not Before They Go Bankrupt

That was Hank Paulson’s big mistake. He partially nationalized the big banks before they went under. He rescued them before we could gain control. The result is that we – the American people – are the largest shareholders of Citibank (with 7.8% of their equity) and of Bank of America (with 6% of theirs), and yet we have no way to really influence their lending practices, no way to make them thaw the frozen credit markets, nor any way to stop them from lining their pockets with our tax money.

Now, there’s a raging debate over the $18.4 billion in year-end bonuses that the bankers just gave themselves. President Obama went out of his way to express his anger, calling the bonuses “shameful” and “the height of irresponsibility.” Senator Christopher Dodd is trying to find a way to claw back the money; and it seems that Andrew Cuomo is actually going to try to get Merril Lynch to return their $4 billion in bonuses. Some on Wall Street are defending the bonuses and others are justifying them on various tax and compensation grounds. Personally, I don’t think President Obama went far enough on Thursday. I think Geithner should immediately have told the banks to return the bonuses to the American people. Even if Geithner probably couldn’t force it, I think he could have made it happen in a phone call. Clearly, the banks didn’t need those $18.4 billion – I mean, our $18.4 billion – that badly.

Student Blogger - The President and Immigration Law

Both sides of the immigration debate agree our current system is dysfunctional, but they disagree over why and about the proper remedy. Some are disappointed by the marginalization of a significant population who only exist in the shadows of society, believing a combination of human rights and economic policy require offering this population full membership in our society. Others are equally disappointed that our society tolerates a significant population who only exist in the shadows, believing it erodes respect for the rule of law; full exclusion, not full inclusion, is the proper response under this view. Given these divergent views, it is perhaps unsurprising that we have arrived at a middle ground arrangement that is satisfactory to none.

Institutional design may bear some of the blame as well, however. For example, immigration policy would more closely reflect the “full membership” view if former President Bush had possessed unilateral authority to create a guest worker program. At the Law & Politics Workshop on Tuesday, Professor Cristina Rodríguez presented a paper she co-authored with Professor Adam Cox examining the division of authority between Congress and the President in immigration law and how it contributes to the dysfunction of our immigration system.

What We Didn't Learn from the Chrysler Bailout (of 1979)

As policymakers consider the terms and conditions of the next bailout of the Big Three under the so-called TARP II plan, it is worth pausing to consider lessons learned from the Chrysler bailout of 1979. For, although it had its detractors, the government's $1.2 billion assistance to Chrysler 30 years ago met some very important criteria for success that the $25 billion bailout Congress has already given the automakers does not.

The best definition of success of any bailout must avoid any biases of hindsight and satisfy broadly held views of limits on government activity. A successful bailout is one (1) where the market cannot act because of a clear market failure and (2) the government acts in ways that mimic the way private parties would have acted. Under this definition, were the auto bailouts then and now a success?

Student Blogger - Chicago’s Best Ideas: Richard Epstein, “The Coming Meltdown in Labor Relations”

Update: You can download audio of this talk here, and video of the talk is embedded after the jump.

As you may already know, Professor Richard Epstein is not President Obama's biggest fan. Obama favors some economic regulations that Epstein does not. In his Chicago's Best Ideas talk on Tuesday, January 27, Professor Epstein spoke about three proposed laws in the area of labor relations: the Employee Free Choice Act, the Lilly Ledbetter Fair Pay Act, and the Paycheck Fairness Act. Epstein spent most of his time on the Employee Free Choice Act (EFCA), so my attention will focus on that law. (Epstein has a column about the Lilly Ledbetter Act on Forbes.com.) The EFCA is an amendment to the National Labor Relations Act (NLRA).

Epstein started with the word "free" in the EFCA's name. Back in the nineteenth century before the New Deal, "free" meant free for both sides of the labor relationship: employer and employee. An employer could not force the employee to accept a particular wage, and the employee could not, even if represented by a union, force the employer to hire him at a given wage. The NLRA was passed at the height of the New Deal in 1935. (Epstein is, not surprisingly, no fan of the New Deal.) The Act provides that unions can prompt a unionization vote by getting at least 30 percent of employees to show support by signing cards, called the card check. The vote is a simple majority vote by secret ballot. If the union is approved, the employer must negotiate with the union. Freedom under the NLRA is one-sided because employers must negotiate with a valid union.

Geithner Needs to Tell Bank of America to Cut a $4 billion Check to the U.S. Treasury, Now.

>Sometimes blog entries don’t need to be that long. Sometimes, the issues are cut and dry. The newest revelations about Merrill Lynch are a case in point. 

Thanks to the Financial Times, we now all know that Merrill Lynch handed out $4 billion of our bailout  money in year-end bonuses. That represents almost 10 percent of the $45 billion infusion that Bank of America received under the first tranche of the TARP bailout.

[For those who forgot the timing of all this: Bank of America announced it was buying Merrill in September 2008. Bank of America got its first TARP injection of $25 billion in October 2008. Merrill Lynch gets board approval for the $4 billion in bonuses in December 2008, while reporting losses of about $27 billion. Bank of America gets a second shot of $20 billion in January 2009.

President Barack Obama has warned that this might not be good for the banks. Dave Krasne on the NYT op-ed page> writes about “foolhardy behavior.” And Andrew Cuomo has subpoenaed Merrill’s ex-boss.

But there’s no need for expensive litigation, nor, for that matter, veiled threats. Our new Treasury secretary, Timothy Geithner, should simply demand that Bank of America immediately cut a check to the United States Treasury for $4 billion. Now. It’s that simple.

{If you are interested, I am intervening more regularly and often at greater length in the French weekly, L’Express, at this site here}

Student Blogger - Global Warming: Valuing Foreign Civilizations

United States' cost-benefit analyses on global warming do not currently account for any loss Americans would feel if global warming harmed foreign countries. This may cause policymakers to underestimate the potential costs of global warming to American citizens. But including them raises a couple of problems. How do you figure out how much Americans value foreign civilizations? And if you could figure that out, what do you do if they aren't the results you hoped for (i.e. Americans just don't care that much)?

Professor David Dana explored these issues in a recent paper (downloadable here). The paper urges policymakers to consider the potential losses to American citizens if foreign countries were harmed by global warming. These costs may be some type of intangible companionship, or more tangible values, such as the enjoyment of a nice overseas vacation. To the extent foreign losses are excluded, these cost benefit analyses may underestimate the potential losses, causing us to spend too little to stop global warming. And since a large portion (disproportionate even) of global warming's effects are expected to occur elsewhere (countries with little inland area), we may be grossly underestimating the costs.

Harcourt Continues French Coverage of American Politics

Those of you who read French may be interested to know that the French weekly, L’Express – the equivalent of Time magazine – has again turned to Professor Bernard E. Harcourt for commentary on the new Obama administration.  Professor Harcourt’s chronicle Politique USA – Les 100 Premiers Jours is also being published in a new live electronic book format by Éditions Le Manuscrit, which just released Professor Harcourt’s most recent book, Journal de campagne (2009).

Student Blogger - Do Private Antitrust Suits Benefit Consumers? Is There a Better Way?

What's the point of antitrust law? Is it to compensate those that are harmed by monopolistic practices? If so, current law isn't doing a very good job. Economists consider the true harm from monopoly to be deadweight losses arising from foregone consumption - that is, the utility lost when you don't buy a good or service at the monopoly price that you would have bought at competitive price. But victims of this harm are not the plaintiffs in private antitrust suits.

Maybe the aim is deterrence, and we are not so worried about compensation (rhetoric to the contrary aside). If so, antitrust law seems to be failing to achieve this goal also. Antitrust suits take a long time, often longer than the tenure of decisionmakers in their positions. Product line managers who set pricing policies might not care very much about legal costs years down the line. Further, the line between liability and no liability in antitrust is hard to pin down. Unlike someone standing outside a bank and considering whether to rob it, or even someone considering whether to salt their icy sidewalk, those deciding whether to engage in arguably anticompetitive conduct might not be deterred very effectively by criminal or tort liability.

Is this twin failure a problem? If it is, what should we do about it? Professor Daniel Crane tackled these questions in his paper "Optimizing Private Antitrust Enforcement" (itself part of a forthcoming book, "The Institutional Structure of Antitrust Enforcement") at this week's Works in Progress (WiP) talk at the law school.

Student Blogger - Dispelling the Myth of Punishment Proportionality

A die-hard retributivist and an efficiency-obsessed utilitarian walk into a bar... and start discussing punishment theory. Beyond their propensity for the abstruse, what might these two philosophical opponents share in common? If anything, it will be the belief that the intentional harm (punishment) a state inflicts upon its own citizens be calibrated to the perceived severity of the crimes those citizens commit. For the former, proportionality is fundamental; for the latter, the loss of marginal deterrence that follows imposition of disproportionate punishments would be unpalatable. How, then, does punishment affect the subjective well-being of those who are punished?  That is the question Professors Jonathan Masur, John Bronsteen, and Christopher Buccafusco set out to answer in their new paper, Happiness and Punishment (forthcoming U Chi L Rev), which they presented at the Crime and Punishment Workshop last week.

Obama's America: Liberty and Secrecy

The past eight years of the George W. Bush Administration have seen significant restrictions of individual liberty. Much of the impetus for these restrictions has come from the tragedy of September 11 and its complex aftermath: War inevitably magnifies the tension between individual liberty and national security. But there are wise and unwise ways to strike the appropriate balance. In the years since September 11, the Bush Administration has embraced a series of policies–including torture, aggressive surveillance of international communications, clandestine detention of American citizens, secret prisons in Eastern Europe, closed deportations proceedings, and restrictions on the writ of habeas corpus–that have unnecessarily undermined the fundamental American value of individual liberty.

However, the most unfortunate policy of the Bush Administration in terms of American liberty has been its deliberate and consistent effort to hide some of its most important policy decisions from the American public. Of course, there are legitimate reasons to keep certain information secret to protect the national security. But secrecy can also be used to evade responsibility and to manipulate and distort public debate and understanding. Overbroad government assertions of secrecy can cripple informed public debate. It is impossible for citizens responsibly to consider the merits of the actions of their elected representatives if they are kept in the dark about their conduct. As Sen. Daniel Patrick Moynihan once observed, "Secrecy is the ultimate form of regulation because people don’t even know they are being regulated." This has been a legacy of the Bush Administration.