February 25, 2014
Could Your Holdings Survive the Failure of the NYSE?
Posted by Greg Shill

This morning, the Wall Street Journal is reporting that Mt. Gox—until this month the world's leading market for buying and selling Bitcoin—has "disappear[ed]" from the web:

The Bitcoin exchange Mt. Gox appeared to be undergoing more convulsions Tuesday [February 25], as its website became unavailable and trading there appeared to have stopped, signaling a new stage in troubles that have dented the image of the virtual currency. . . .

Investors have been unable to withdraw funds from Mt. Gox since the beginning of this month. The exchange has said that a flaw in the bitcoin software allowed transaction records to be altered, potentially making possible fraudulent withdrawals. No allegations have been made of wrongdoing by the exchange, but the potential for theft has raised concern that the exchange wouldn't be able to meet its obligations.

The apparent collapse of Mt. Gox is just the latest shock to hit Bitcoin, the price of which is now off more than 50% from its December 2013 peak:

Coindesk-bpi-chart

For those better acquainted with the dead-tree/dead-president variety of money, Bitcoin is a virtual currency not backed by any government. Rather than being printed or minted by a central bank, Bitcoins are created by a computer algorithm in a process known as "mining" and are stored online or on your computer. They are bought and sold on various exchanges, including until recently Mt. Gox (whose troubles have been reported for a few weeks now).

So, why use Bitcoin—which may well implode (see, e.g., herehere, herehere)—instead of a traditional state-backed currency, which in many ways is clearly superior?

There are many reasons, some of them even lawful. Bitcoins can be regarded as a medium of exchange, an investment, a political statement...or a way of avoiding capital controls and other pesky laws like bans on drug trafficking and human smuggling.

But the criminal potential of Bitcoin is probably overstated. The Chinese have gotten wise to its use for avoiding capital controls. Using Bitcoin for criminal or fraudulent activity would be difficult at scale (PDF). The Walter White method is still far and away the best way to ensure your criminal proceeds retain their value and anonymity.

I don't share the utopian fervor for Bitcoin expressed in tech and libertarian circles (see, e.g., this supposedly non-utopian cri de coeur), but it may have some positive potential as a decentralized and lower-cost electronic payments system. We'll see if that ever gets off the ground.

In the meantime, the Mt. Gox collapse is pretty huge news for Bitcoinland. Unlike the NYSE (the failure of which would be hard even to imagine), Mt. Gox does not benefit from any systemic significance and thus is unlikely to receive a lot of official-sector help. The situation has some early adopters running for the Bitcoin exits, like this leading Bitcoin evangelist.

Despite (because of?) my agnosticism on the currency, I'll be writing more about Bitcoin soon. (Mainly, I wanted to stake a claim to being the first to write about Bitcoin on The Conglomerate.) If your Palo Alto cocktail party can't wait, however, this explainer (PDF) from the ever-impressive Chicago Fed should tide you over.

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May 02, 2013
Eliminating the Online Shopping Discount: Getting Ready for the Internet Sales Tax
Posted by Christine Hurt

I hate to admit this, but my highly time-leveraged life seems to only work because of Amazon Prime.  If someone needs a book, a math compass, a birthday present, even diapers, it has sometimes made sense for me to merely order the merchandise from Amazon, get free shipping and no tax.  Yes, sometimes that's easier than driving the 20 minutes to Target.  If I'm willing to pay $3.99, then I get it the next day.  For a $20 item, it's seems like a wash.  This may change.

On Monday, the Senate will vote (and probably pass) The Marketplace Fairness Act of 2013.  (It has its own website, here.)  This bill would require online retailers to collect and remit sales taxes based on the delivery location of goods purchased.  If there is no delivery location, for example in the case of a download, then the tax will be based on the billing address.  For those of us living in Illinois, this difference between ordering on Amazon now and in the future could be almost 10%.  (Chicago's general merchandise tax is a total of 9.25%, down from 9.5% last year.)  For those of you who live in the five states without a sales tax, keep on living in tax-free bliss.

The winners here are the bricks-and-mortar stores who have to charge tax.  Apparently, "showrooming" is a thing -- customers shop in stores where they can see and try on merchandise, then order online and skip the tax.  Ouch.  This Act should take that incentive away.  Even big stores like Gap and Best Buy charge tax online because they have a physical presence in most/all states.  Of course, online retailers have had a good run, and that run may have been enough to kill many many competitors, including big ones like Borders.  

Interestingly, Amazon, which has been the obvious beneficiary of tax-free online retailing, is supportive of the legislation.  After years of fighting states that have tried to force Amazon to pay sales tax, (blog post here), the online giant is a cheerleader for the Act.  Perhaps this is because Amazon has recently entered into voluntary arrangements with nine states, including large markets such as California, New York and Texas.  Building warehouses in these states where it is already taxed has allowed Amazon to ship merchandise cheaper and even faster.  And, Amazon may have established such a loyal fanbase of customers addicted to its convenience and fast shipping that it doesn’t fear losing customers over price.  

What about downloads, you ask?  Most states don't include digital downloads in definitions of taxable goods.  In the states that do, you are probably already paying tax on downloads from Apple (which has physical stores), but not Amazon.  Now, you will.  And, the Marketplace Fairness Act may enbolden states to redefine general merchandise tax rates or use tax rates to include digital downloads.

So, who is against Internet sales tax equity?  Online-only retailers that aren’t nearly as big as Amazon and the portal that serves them:  eBay.  Though the act exempts small businesses with no more than $1 million in revenue, that threshold leaves medium businesses with a price disadvantage and new compliance costs.  Therefore, some groups argue that the $1 million threshold could be raised to $10 million without states losing much revenue, while giving needed relief to small-to-medium enterprises. And, of course, the Heritage Foundation and anti-tax watchdogs oppose the Act as just another tax increase that will hurt consumers. 

Is it a new tax?  Not really.  It's the same old state sales tax, just with more enforcement.  Though sales taxes are an obligation imposed on the consumer, retailers are supposed to collect and remit the tax. However, retailers with no physical presence in a state can’t be compelled to collect these taxes.  Funnily enough, we were all supposed to be sending in the tax we aren't charged on our Amazon purchases.  Who knew?  Well, I hope I get some sort of Internet shopping amnesty.

 

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January 17, 2012
Yahoo! Remembered
Posted by Gordon Smith

Jerry Yang is stepping down from Yahoo's board of directors. He seems like a dinosaur, but he is only 43 years old. This is what the Yahoo! web directory looked at in 1996 (click on it for the full effect), the year of Yahoo!'s successful IPO:

Yahoo

The Internet was a lot smaller back then, and a web directory made more sense. Yahoo! editors have continued to maintain the web directory, which they say is useful when "you're not sure how to describe what you want."

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January 05, 2012
Sunday Scholarship at AALS: Distintermediation & Regulating P2P Lending
Posted by Erik Gerding

On Sunday, January 8th, the AALS Section on Financial Institutions and Consumer Financial Services will be holding a panel discussing featuring an impressive list of papers selected from an annual Call for Papers. The panel will take place from 9 am to 10:45 am in the Marriott Wardman Park in Maryland Suite B.  It is part of a full weekend of programs by the section, including a Saturday lunch speech by Federal Reserve Governor Sarah Bloom Raskin.

In advance of that panel, let me showcase the papers one by one. (The Conglomerate is all about emphasizing the scholarly aspects of the AALS Annual Meeting.) Each of the four papers deals with a different set of foundational challenges to the regulation of financial institutions. The first paper I will preview looks at three interrelated problems:

  • Distintermediation;
  • Which regulator should be responsible for consumer/investor protection; and  
  • How to allocate regulatory responsibility generally, when innovative financial services do not fit neatly within traditional regulatory silos.

In many ways, the first challenge – disintermediation -- is an echo (an extremely loud one) of an old problem. Starting over 30 years ago the cozy world of depository banking was rocked first by the rise of rival intermediaries – money market mutual funds, deeper bond markets and more sophisticated structured finance, as well as other elements of shadow banking.

Now scholars are looking at another competitive wave coming from radical disintermediation, in which the web facilitates direct connections between lenders and borrowers. This is the subject of the first paper, Regulating On-line Peer-to-Peer Lending in the Aftermath of Dodd-Frank,  by Eric Chaffee (Univ. of Dayton School of Law) and Geoffrey C. Rapp (Univ. of Toledo College of Law). Eric will be presenting the paper, which is forthcoming in the Washington & Lee Law Review. Andrew Verstein (Yale Law School) will serve as discussant. Andrew has also written a fantastic paper on the same topic, The Misregulation of Person-to-Person Lending, which is forthcoming in the U.C. Davis Law Review.  

Chaffee and Rapp outline the business model and current regulatory treatment of peer-to-peer lending, which includes platforms like Prosper Marketplace and Lending Club. They examine how securities laws govern the investment by lenders and banking law regulates the borrower end. The Dodd-Frank Act required the GAO to look at the regulation of p2p lending, and the GAO responded by formulating two alternatives. The first was continued regulation of investors on p2p sites by the SEC and regulation of borrowers by agencies responsible for consumer financial regulation (i.e. the CFPB). The second is assigning regulation to a unified consumer regulator.

In the end, Chaffee and Rapp argue that regulatory heterogeneity is not bad, but actually the way to go. They argue for an “organic” approach to regulating P2P lending, allowing different regulators to govern different aspects of the business. Here is their abstract:

The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act called for a government study of the regulatory options for on-line Peer-to-Peer lending. On-line P2P sites, most notably for-profit sites Prosper.com and LendingClub.com, offer individual “investors” the chance to lend funds to individual “borrowers.” The sites promise lower interest rates for borrowers and high rates of return for investors. In addition to the media attention such sites have generated, they also raise significant regulatory concerns on both the state and federal level. The Government Accountability Office report produced in response to the Dodd-Frank Act failed to make a strong recommendation between two primary regulatory options – a multi-faceted regulatory approach in which different federal and state agencies would exercise authority over different aspects of on-line P2P lending, or a single-regulator approach, in which a single agency (most likely the new Consumer Financial Protection Bureau) would be given total regulatory control over on-line P2P lending. After discussing the origins of on-line P2P lending, its particular risks, and its place in the broader context of non-commercial lending, this paper argues in favor of a multi-agency regulatory approach for on-line P2P that mirrors the approach used to regulate traditional lending.

Verstein comes out the other way and argues against SEC regulation of P2P lending and for unified regulation of p2p lending by the CFPB. Here is his abstract:

Amid a financial crisis and credit crunch, retail investors are lending a billion dollars over the Internet, on an unsecured basis, to total strangers. Technological and financial innovation allows person-to-person (“P2P”) lending to connect lenders and borrowers in ways never before imagined. However, all is not well with P2P lending. The SEC threatens the entire industry by asserting jurisdiction with a fundamental misunderstanding of P2P lending. This Article illustrates how the SEC has transformed this industry, making P2P lending less safe and more costly than ever, threatening its very existence. The SEC’s misregulation of P2P lending provides an opportunity to theorize about regulation in a rapidly disintermediating world. The Article then proposes a preferable regulatory scheme designed to preserve and discipline P2P lending’s innovative mix of social finance, microlending, and disintermediation. This proposal consists of regulation by the new Consumer Financial Protection Bureau.

This should be a lively discussion and of interest to our securities law junkies. Disintermediation is of course a topic a challenge for securities regulation generally, as other platforms are linking equity investors and companies seeking capital. Usha has been blogging about Sharespost and friend of the Glom Joan Heminway is working away on disintermediation too, looking at “crowdfunding” from the securities regulation angle (See her working paper here,  see also, among others, Pope )

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November 30, 2010
Fun with the Internet
Posted by Gordon Smith

Subzin allows you to search phrases in movies. Following Ann Althouse, I searched for names, including my own. My favorite results were from 2012, which I haven't seen:

Time       Phrase

00:14:19 Bye, Gordon.

00:28:15 No, Gordon gave it to me for my birthday.

00:34:49 Gordon!

00:34:55 Gordon!

00:39:28 Gordon!

00:46:43 Gordon. Gordon, you can fly.

00:46:55 Come on, kids. Gordon's gonna get us out of here.

00:47:27 Gordon, go. - Come on.

00:47:28 Gordon! - Go, go, go!

00:47:33 We're not there yet. - Gordon, take off.

00:57:01 Stop it, Gordon.

Apparently, Gordon is a pilot.

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July 09, 2010
Peer-to-Peer Microfinancing for the Arts? Looking at Kickstarter
Posted by Christine Hurt

First of all, apologies for absence this summer.  My summer travels are now complete (as far as I know), so I can focus on keeping first things first, like the Glom!

Now, for the fun.  I love movies, and I love to think about both microfinance and peer-too-peer investing and borrowing.  So, yesterday on the plane (of course, the plane) I loved this article on Kickstarter, a crowd financing website that enables all kinds of artists to raise money for their projects.  Apparently it has been so successful that this week it is hosting the Kickstarter Film Festival (which it Kickstarter financed).

Reading the article, I assumed that Kickstarter was allowing artists to use its website to find angel investors for their projects.  So, of course, I was interested to see how the site was going to satisfy SEC regulations on registering securities.  But, I was wrong.  When you "back" a project on Kickstarter, you are not an investor.  Or a lender.  Or even a donor.  What are you?  You're a backer. 

So, if you look at the FAQ, you'll see that Kickstarter goes to some length to explain that backers are not making an investment.  Project owners must keep 100% of the ownership and "may not offer financial return or equity under any circumstances."  Investment and loan solicitations are "forbidden."  OK, so if I can't get a return, I must get a tax deduction, right?  Um, probably not.  Your "pledge" is not tax deductible, unless the project owner is a 501(c)(3) entity.  In fact, Kickstarter tells project owners that this is "not a place for charity projects" or "donations to causes."

Well, this will almost certainly keep Kickstarter's legal costs down, if money goes directly to the project and is not a security, or a loan, or a charitable deduction.  But what is in it for the backer?  Well, Kickstarter requires project creators to deliver "rewards" worth between $1 and $10,000.  (Not sure why the $10k limit.  Gift tax?)  So, what are some of the rewards?  I looked through the film projects and was intrigued by a film that is already fully funded, so in using it as an example, I don't think I'm really hawking it.  The film is Green Corn, about a U.S. family that illicitly grows marijuana.  The project wanted to raise $6,000, a fraction of the film's cost.  Backers receive various rewards, depending on their funding level.  For example, $25 gets you a DVD, $50 gets you a t-shirt and a DVD.  Interestingly, although creators aren't supposed to offer equity, $1,000 gets you a single share of "Green Corn LLC," which will issue only 25 shares.  (My crude internet research skills found a Nevada LLC of the same name with a Las Vegas address, but that's all.) 

Another project I clicked on, which is not yet fully funded, seemed to also walk the line on Kickstarter's prohibition against "funding your life" through Kickstarter.  In this project, which I won't name, a creator wants $5,000 to be used walking through a geographical region.  $2,000 is for backpacking equipment, and $2,000 for living expenses, and the rest to make "rewards" for backers.  The rewards seem to be photographs of the walk.  The creator may very well be a professional photographer, but it still makes me wonder if I could fund my next family vacation this way.  My kids are really cute and sometimes photograph very well.

Projects are picked by the backers by reviewing information provided by the creators themselves.  Kickstarter seems to have adopted a "caveat backer" approach and merely tells would-be backers to "use your internet street smarts."  One small protection is that if a project is not fully funded within a certain time period, then the backers' credit charges will not be charged and no money changes hands.  So, perhaps if your internet smarts are not as refined as the rest of the backer market, the backer market will save you.

So, why are so many people backing these creative projects without hope of a financial return or even a tax deduction?  I can think of at least three reasons, which may all amount to one reason.  First, perhaps most financial backers of artists don't receive much of a return anyway, if at all, so this just tosses away the burdens of that expectation.  Maybe it's better to send a t-shirt to a stranger even if your film doesn't get picked up then have to look your father-in-law in the eye next holiday season after the film dies into obscurity.  Second, perhaps backers just like being part of something, like the idea of getting a unique reward (a t-shirt and DVD of an indie film seems like a pretty good reward for $50) or even a "thank-you" in the credits in the film.  The ability to show your friends that you're in the credits of the next indie film sensation may be worth a lot more than a thousand dollars or two.  Third, lots of people gamble away $25 here or there anyway with low probabilities of return because of the consumption value of gambling.  Here, the consumption value seems pretty high.   You get to scroll through fun, new projects, follow it along, feel some moral investment if it comes to a festival near you, etc.

Two final thoughts about Kickstarter.  First, why isn't Kickstarter organized like Kiva for the arts.  Why didn't they become a 501(c)(3) and make all pledges tax-deductible?  I think Kickstarter would prefer to be the next Facebook, not the next Kiva.  Watch for a Kickstarter IPO near you.  (And wouldn't it be amazing if it was an online IPO!!)

Second, do we need a charitable deduction for backers of the arts?  Would Kickstarter attract more funding for the arts if it offered a tax-deduction?  This model makes an interesting opportunity to see whether the arts needs the tax deduction to attract donors.  Perhaps it's the intangible rewards of arts funding that attracts donors, not the tax deduction.

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June 03, 2010
The Future of Newsweek
Posted by Christine Hurt

Newsweek is on the block.  The Washington Post Co. is accepting nonbinding bids for the 77 year-old magazine, and a few prospective buyers are lining up.  However, most name brands have declined:  Bloomberg, Thomson-Reuters, U.S. News & World Report.

I used to love Newsweek.  It was my airport purchase of choice.  I never had a subscription though, because it was so expensive.  I remember getting a call form a marketer once who would give me three other subscriptions for free (I think my picks were Oprah, Vanity Fair and something else) for purchasing a Newsweek subscription.  When I was in practice, I received an offer a week to purchase a subscription for "half off the newstand price," but it was still expensive.  Weekly magazines subscriptions are expensive. 

But now I rarely buy it, even in the airport.  If the morning newspaper seems to have stories that are already familiar, then reading a weekly magazine seems a lot like reading a 6 day-old newspaper.  And Newsweek's concept was news.  Mostly short pieces similar to a newspaper article or a blog post, with a few longer pieces, with more texture and interviews.  So, these days, you're paying $4 for the two long pieces, a lot of articles you've already read, and the cartoon/quotations page.  The weekly format just got squeezed by the Internet.  Weekly deadlines make sure that almost everything is stale and nothing is incredibly deep and thoughtful.  I actually love the articles in Vanity Fair, which are often about the financial industry, well-written and in-depth.  But I'm sure they take more than 4 days to write.

But what about People magazine?  It's a weekly, it's expensive, and it's very popular.  But what is in there isn't available on the Internet.  They have exclusive photographs.  Good ones, that I'm sure they pay for.  They also have exclusive interviews with celebrities, which they may also pay for.  Yes, you see on the Internet that Sandra Bullock is separated from her husband, but People magazine has the exclusive interview.  Two other things that sets People magazine out from the crowd.  First, it's more reliable than their competition.  If you look at a grocery store checkout aisle, four other magazines will have a cover that says that Hollywood couple No. 347 is divorcing because of (1) strange religious practice; (2) same-sex affair; (3) opposite-sex affair; (4) plastic surgery; (5) baby or lack thereof; or (6) aliens.  The cover of People magazine will be silent on the topic.  I don't believe any celebrity gossip unless it's in People magazine.  Second, People magazine may sell to a different demographic than the one that is following every celebrity on Twitter and scanning the internet constantly for news.  So, what's in People is still news to the mom at the grocery store who gets to check Facebook every other day, and People is amazingly good at getting things in the weekly magazine that seemed to have happened six hours ago.  The same people who would buy Newsweek have already kept up with most of the news that's in the latest issue.

So, stay tuned to see who wins the auction and what they will do with Newsweek once they win.

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May 08, 2010
Who’s xooming who?
Posted by Erik Gerding

My efforts to prepay my summer rent in Berlin have been a fascinating tour of modern payment systems and foreign currency risk. Here’s the scoop: my rent is due in full June 1st. My landlord would like the money early and agreed to pay the transfer fees if I could prepay. One additional complication, I need to use my University’s credit card.

I first tried Paypal – but the transaction got dinged based on a paypal algorithm that tries to detect fraud. Setting up a wire transfer takes time (and further navigating the University bureaucracy) not to mention higher fees than Paypal. I then ran across this alternative for foreign currency transfers: xoom. It worked like a charm, although having taught payment systems once I did carefully read the terms of use to figure out what my recourse would be should the money go into the wrong German account, or should there be no apartment when I arrive in Berlin.

Xoom is just one of a bevy of new payment systems that have emerged in the last several years. Glompetitor Tim Zinnecker has already pointed out the great article in Wired magazine two months ago on the future of payment systems. When I agreed to prepay, I thought the fees I saved would more than offset the time value of money. What I didn’t anticipate was that little ‘ole me would also be subject to foreign currency risk; I guess I need to read Kim Krawiec’s posts over at the Glompetition on the Greek debt crisis on a more regular basis.  In all seriousness, I do feel blessed though that my personal stakes in the foreign currency swings are so trivial (so far) compared to what many in Europe are going through.

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April 14, 2010
Marriage Procedure
Posted by Mae Kuykendall

 

Disputes about the substance of marriage have obscured questions about the statutes governing marriage procedure.  The states license marriages under statutes that assumed fairly standard forms during the twentieth century.  

Banns developed in England to prevent clandestine marriages which undercut parents' and communities' ability to stop objectionable marriages.  Licensing emerged in the U.S. as an improvised replacement, given the lack of a state church to supervise a regime of banns.  Couples have, nonetheless, for generations defeated efforts to stop them from using state law to formalize their relationship. 

In his memoir of growing up in Wharton, Texas, the late playwright Horton Foote recounts the story of his parents' marriage against firm parental disapproval by his mother’s parents.  Albert Horton Foote and Harriet Gautier Brooks sneaked over to a nearby Texas town called El Campo, got a license, and came back to Wharton, where a minister married them in a house six blocks from Harriet’s parents' house.  They set up housekeeping in Wharton and were snubbed by her parents until the day her mother called and said, "I thought I'd come over to see you this afternoon if you're going to be home."  Her mother had yielded to the hardy practice of couple autonomy.

Horton Foote's parents were tame compared with the couples who went to "Gretna Greens," or to Las Vegas, to marry despite reasons (often, the age of a girl) for someone to intervene and stop them.  The record of marriage is clear about one point.  Marriage licensing simply does not support goals of marriage regulation and preservation of tradition.  It never has, not in Las Vegas in the 1960s, not in Horton Foote's Texas, and not today. 

What does licensing do?  Very little.  It asserts no control over the decision-making by couples. It generally does not impose health checks on the parties.  It doesn't force disclosure by one person to the other.  Waiting periods are almost all gone.  Historically, licensing has served as a means to support anti-miscegenation laws and forms of religious discrimination.  It's hard to view marriage licensing as useful, except insofar as it serves the purpose of formality, open consent to marriage, ceremonial affirmations celebrated by a community, and clear records.  

At its best, licensing is about the state's serving as a facilitator of the creation and recognition of a legal status.  In that way, the state is doing something similar to what it does when it facilitates the formation of other legal relationships, such as the corporation or binding agreements, all subject to autonomous party choices for their creation.  Indeed, the Massachusetts marriage statute avoids the term, "license."  Massachusetts’s statutory usage recognizes the parties’ control over the marriage and the role of the state as a facilitator, recorder, and source of publicity.

Despite the similarity of the state role in marriage formation to its role in facilitating other legal relations, the states have been timid and unimaginative about creating innovations in marriage procedure.  Marriage statutes contain odd rigidities, little regulatory clout, and a continuing insistence that couples use the marriage license within the state that issues it.  Licensing sounds like something that protects a tradition, even as its main use has been to exclude some pairings, create needless complications for couples who are physically separated, and defeat couples' occasional preferences about ceremonial details. 

Adam Candeub and I have posted a paper exploring the possibility of bringing a new energy to the states' facilitative role in marriage solemnization.  For shorthand, we've labeled the idea e-marriage.  We suggest that, with careful study and deliberation, states could enhance their facilitative and record-keeping role by modernizing the statutes governing marriage ceremonies.  For marriages of same-sex couples, states that authorize the marriages could take the next step in the logic of federalism by allowing couples in distant states to use their marriage-authorization laws. 

For controversial marriages, states that do not recognize them would still be able to refuse recognition. But the couples could engage in an expressive activity, with legal meaning in many jurisdictions, in their own community.   Couples already travel to marry in places like Massachusetts, returning to reside in states that refuse their marriage recognition, so such couples clearly value an official legal blessing provided by another jurisdiction.

We have tentatively planned a conference on November 12, 2010, in East Lansing, to explore the many ramifications of our idea.  We will have legal scholars, legislators, economists, and English professors gather for a stimulating discussion of the possibilities for innovation in the regime governing marriage formation.  We'd welcome suggestions for types of relevant commentary and for specific names of persons from business schools with expertise in evaluating proposed business models, experts in e-government and government record-keeping and statistics generation, and any other source of insight about the notion of improving current marriage formation procedure.

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January 23, 2010
Google, China and Citizens United: a Short Essay on Power and Corporations
Posted by Erik Gerding

I couldn’t agree with Rachel more. The discussion on the role of corporations in society is not over, in fact two seemingly separate stories from last week – the standoff between Google and China and the landmark Supreme Court decision in Citizens United –together signal that we are a watershed moment in this question. I don’t claim to have done the type of deep thinking that Rachel or Gordon or Lisa or other corporate scholars who have written on corporate social responsibility have. But at the risk of interloping into territory others know and think about far deeper and better than I, consider a few quick thoughts on how contrasting Google/China with Citizens United suggests we are returning to some very old questions about the twin risks of not having corporations separated from government power and not having governments separated enough from corporate power.

I would argue that Google’s threat to leave China because of government intrusion into its operations can be seen as a victory for those who advocate for corporate social responsibility. And the Citizens United decision obviously represents a victory for those who want to see corporations as not being creatures of the state, but rather as persons that can check government action. But these two victories pose thorny intellectual problems for the victors. These problems, in turn, reveal something about the horrible tangle we find ourselves in after the financial crisis as we cut our way between the risks of government being captured by corporate interests and corporations becoming the playthings of the state. Bear with me, because I think these two stories also have something to tell us about New Governance and the need for even greater cross pollination between public and private law in scholarship and the classroom.

Google v China: Do we know corporate social responsibility when we see it?

Many (I won’t even attempt to embed links) have applauded Google’s threat to pull out of China on account of state censorship and cyberattacks on Google’s servers as a victory for corporate social responsibility. Some scholars, like Ribstein, complicate this interpretation, in part, because Google’s actions may stem more from pure economic self interest. Given Google’s business model -- particularly their need to reassure users of the sanctity of personal information -- it may be impossible to disentangle definitively whether this resistance to China is an example of self-interest or social responsibility.

Let me ask a more basic question. How do we define what corporate social responsibility is? And who gets to define it? When we discuss corporate social responsibility at the end of my Business Associations class, there inevitably seems to be widespread consensus in the classroom about what responsible behavior means. Everyone seems to agree that dumping mercury in the Rio Grande or employing child laborers is irresponsible. But then I ask students what if social activists were pushing a corporation either to include abortion coverage in their health plans or to exclude same sex partners from employee health benefits. Consensus evaporates.

Do we define corporate social responsibility through the public law process? There are real dangers with treating corporate social responsibility as a matter of positive law and state determination. Consider that Google may not be a good corporate citizen if you look through the lens of the Chinese government. They are violating Chinese law. That of course is an extreme, rhetorical example. But there is a deep concern though that by implicating public law or government intervention – however light and well-intentioned -- in the core purposes of corporations we are slouching towards treating corporations as a plaything of the state rather than as a potential check on government power. Which is the role many lauded Google for playing.

So the Google victory poses several questions for advocates of corporate social responsibility, including how do we know what is corporate social responsibility, who decides, and are we comfortable that we can draw principled distinctions that will ensure the public does not subsume the private? Are corporate social responsibility advocates putting great faith in the political process to check abuses?

Citizens United: spheres unseparated

Meanwhile, Google and all other corporations received a huge boost to their political power and their ability to check and shape government regulation by virtue of the Supreme Court’s landmark decision in Citizens United. I won’t pretend to be a public law scholar, but the sweeping aside of restrictions on corporate political speech clearly represents the culmination of a centuries long evolution of case law -- running from Dartmouth College to Bellotti – that has given corporations more and more of the constitutional rights of natural persons. If last week’s Supreme Court decision means anything, it is a clear refutation of the ancient idea that corporations are creatures of the state.

But in this victory too lies a deep intellectual challenge for the victors. In the precursor of the current debate on social responsibility, Berle espoused a view of corporations and government as existing in “separate spheres” a view that echoed 19th century political thought and was in turned echoed later by Milton Friedman and others who later argued against corporate social responsibility. To render a fine idea into a quick sausage: governments should set the rules of the game for corporations then stay out, and corporations play by the rules.

From a pure descriptive standpoint, after the Citizens United decision, it seems impossible to argue that these spheres can be neatly separated. Corporations are not just playing by the rules, they have the right to participate in setting them. Moreover, they may be the 800 lb gorilla in the room. One interesting morsel in reading through the dissent was to see Justice Stevens grappling, even briefly, with corporate law scholarship questioning whether shareholders have the realistic ability to control corporate speech through corporate governance.

More deeply, do we now need to worry more that corporate law rules are not merely the product of competition and economic efficiency but set through management’s use of the political process. (For an interesting comparative study of the intersection of politics and corporate governance, see Peter A. Gourevitch & James Shinn, Political Power & Corporate Control (Princeton 2005). There seems to be a danger of management using the political process to hardwire not only management entrenchment but the political preferences of those in control of corporations. Aren't those who laud Citizens United placing great faith in the capacity of markets and the competition for corporate control to prevent agglomerations of political power? If the Google/China standoff lays bare for the need for the separation of corporations from state control, Citizens United raises the question of how we ensure that governments can retain sufficient independence from corporate control.

Strange constellations: the alignment of corporate law scholars after the financial crisis

I don’t think these concerns about corporations capturing the government or the government overreaching into the private sector are just dystopian constructs. The bailouts during the financial crisis reveal that these concerns are festering. There is plenty in the bailout for people across the political spectrum to lament. Progressives lament that bailing out AIG and other firms represents government capture and the socialization of loss and the privatization of profit. Conservatives lament the government interference in the discipline of the marketplace and now government using its leverage from the bailouts to justify interventions such as in executive compensation.

In the wake of the financial crisis, is government becoming the plaything of corporations? Are corporations becoming the playthings of government? Or is the reality some complex and perverted mix of both? Forgive the metaphor, but we seem to be stuck in bad remake of some scene from Eyes Wide Shut. It’s not clear from the tangle and the masks who is in control, but it’s clear it is not G-rated.

Problems of power and the dangers of a lack of clarity between public and private power point to a reason to ask tough questions of New Governance – which I admit to being only at the beginning of understanding. Cindy Williams politely told me that there are different versions of New Governance. At its core, New Governance seems to look to public/private partnership in regulation. But blurring the lines between public and private, even in experiments, has dangers. Progressives should fear regulatory capture. Libertarians should fear government co-opting the private sector.

Further afield, experimentation to insulate government decision-making from the political process has again become a constitutional issue as revealed by the Supreme Court taking up the challenge to the Public Company Accounting Oversight Board. This case – about an obscure and odd agency duckling created in the wake of the Enron scandal to insulate the regulation of the accounting profession from the political influence of the accounting profession – brought together strange constellations of law professors to support and oppose the constitutionality of the agency. If you look at the professors who filed briefs as amici, you might seem some striking lineups. I don’t presume to place scholars in political pigeonholes, but their previous scholarship suggests we have seen truly strange alliances of professors with very different political beliefs. And within the various alliances, the professors likely have very different opinions on the relative risks of state versus corporate power. I am sorry I missed the AALS Hot Topic Panel on the case, because I hear it cast a sharp spotlight on the strangeness of these political constellations.

Is this a one-off phenomenon, or are we seeing an ideological realignments in the legal academy? If you are outside the academy, you might ask: who care what we eggheads think on this technical topic? It sounds trite, but ideas matter and will spill over into the political arena -- perhaps after years of gestation. Perhaps the gestation period will be much shorter; the political arena seems ripe for a tectonic shift. We already see stark examples of strange political bedfellows – the Kuciniches of the left and the Pauls of the right -- in Congressional opposition to bailouts and to the political independence of the Federal Reserve itself.

Unchecked Power – Public and Private

So in debating the risks of concentrated corporate power versus concentrated government power, we are likely revisiting the same debates we had at the turn of the last century. History didn’t end. Nor does it repeat. It rhymes and samples. Indeed, to sample from my favorite poem, “All the new thinking is about concentrated power. In this it resembles all the old thinking…”

We are also likely to hear some familiar motifs in the political noise – such as calls to break apart corporate conglomerates to reduce perceived threats to democratic values. Is this perhaps an unspoken aim of the Volcker plan to limit the size of financial institutions. Will we return to trust busting?

If we are concerned about democratic values, we need to pay attention to agglomerations of control in the media. Without a critical and independent media, we will have no way of gauging how corporate and state powers are intersecting. But we may come to find a genie let out of the bottle during the Clinton presidency when few were watching closely. If few really understood what the repeal of Glass Steagall would mean for the consolidation of power in the financial sector, are we considering enough what the Telecommunications Act of 1996 means for the consolidation of power in the media industry? Do we understand how competition and consolidation among broadcast, cable, phone, internet, newspaper, radio corporations will play out in terms of concentrations of political power? I certainly don’t because communications law and the economics of those industries lie far outside my understanding.

When historians look back to the Clinton era, they will likely see the most radical shifting in economic and political control since FDR – all the more radical because its magnitude was obscured by its technicality and by the fact that the President who squired it cast himself as part of some “Third Wave” in politics. Beware those selling easy ways to transcend and triangulate across political divides. Here is a third example of a statute passed during the Clinton years that will have far reaching consequences for concentrations of political power: cyberlaw scholars have been trying to get us for years to pay attention to what the Digital Millenium Copyright Act of 1996 means for who holds the power over the intellectual commons.

Looking for checks

Cyberlaw scholars first made their mark by alerting us to the subtle and far-reaching consequences of seemingly technical questions on how both the state and corporations could use the internet as a means of social control. So we are now full circle to the conflict between Google and China. One of those scholars, Larry Lessig advocated making the “code” of the internet “open” to allow civil society to check these subtle forms of control. This last fall, Lessig notably balked at a broadbrush application of these same open source ideas to making politics more transparent.

Indeed, citizens would have trouble making sense of raw government transparency – in terms of the volume of information and the complexity of issues. This is not because people are stupid, but no individually has time to master complex issue and process reems of raw data. We need to rely on experts to edit and filter information for us. The forms of political, economic, and technological control are subtler and potential threats to democratic value harder to grasp.

But how do we trust those experts? Trust throughout society has long been thought to have been declining for decades, and perhaps accelerating in an age of political polarization. Moreover, we also decry how the digital age has left us with shorter attention spans. We also live famously  in an age of irony. It is often remarked now that some of our most intelligent commentators on public affairs are fake newscasters. This irony may lead to a particularly unfunny kind of political paralysis (“Ha ha – that’s really funny what Colbert said about our country going to hell. LOL ;-).”)

It’s not easy to make sense of the new dangers of concentrations of political power. Bolshevism and trusts were simple compared to understanding interconnections between complex corporate ownership structures, telecommunications regulations, and how the technology of the internet functions.

Understanding this landscape requires the involvement of scholars who are independent of corporate and government power. Which is why sources of university financing during an age of budget cuts looms as so large an issue.

All the New Thinking: cross pollination in legal scholarship and public law in the business law curriculum

If legal scholars must play a valuable role in sorting through the risks of concentrating political power, it suggests that faculties need to foster greater dialogue among private and public law scholars. Understanding new constellations of power might require minds in corporate law, constitutional law, cyberlaw, communications law …

Integrating scholarship in corporate law with public law is not a new idea. In fact, this essay has clearly trampled all over ground covered by many scholars who’ve looked at the intersection of public law and corporate law -- Kent Greenfield, Larry Mitchell, Lyman Johnson, Lynn Stout, Cindy Williams, Margaret Blair, Lynn Dallas. Not to mention our own Lisa and Gordon and our guest Rachel. I’m likely making enemies galore by the dozens of scholars I am leaving out including scholars -- like Bainbridge -- critical of corporate social responsibility.

There is also a question of whether we corporate law scholars need to build a bigger public law component into basic business law courses. This is also not a novel idea. I admit being resistant to doing this; law students need to learn the nuts and bolts in order to get a job and have the intellectual tools to practice as effective lawyers. But I am reconsidering, because law students also need a set of intellectual tools to exercise their duties as citizens.

Permalink | Administrative Law| Antitrust| China| Constitutional Law| Corporate Governance| Corporate Law| Financial Crisis| Google| Internet| Law & Society| Legal Scholarship| Politics| Social Responsibility| Supreme Court| Teaching| Web/Tech | Comments (0) | TrackBack (0) | Bookmark

December 14, 2009
Search v. Social
Posted by Gordon Smith
Fred Wilson has started a fascinating discussion on the relative merits of search (i.e., Google) and social networking to generate quality content. The first comment captures the basic dichotomy: "When you know what you're looking for search will always be king. When you don't know what you're looking for but just looking, social is where it is at."

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December 09, 2009
Distributed Objects of Thought
Posted by Gordon Smith

I have been using Firefox since 2005, and I generally like the browser, but a few weeks ago, I converted to Chrome. I have been tinkering with Chrome since its release, but I have been waiting for extensions (particularly Xmarks) before taking the plunge. This week Google launched an extensions site, which is terrific.

My favorite new (to me) extension: feedly.

One of today's "top picks" on the extension page is DotSpots. There is no easy way to explain this annotation service. You have to see it ...

What is your reaction to this? I confess that my initial reaction was overwhelmed

Truth be told, I do not have enough time to sort through the day's emails and news stories and blog posts and Facebook updates ... the idea of reading and evaluating dots (distributed objects of thought) from people I don't even know seems a bit much.

Nevertheless, the vision is enticing: to harness "the power of ordinary people using freedom of speech and open collaboration to inform each other and to raise our collective intelligence."

Something tells me that a year from now we are all going to be reading dots.

UPDATE: As long as you are doing extensions, try Cooliris. Wow!

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November 20, 2009
An SSRN for teaching materials?
Posted by Erik Gerding

Open source and peer production ideas can also improve law teaching. There have been some very helpful trends already in this direction. Many legal scholars post articles on teaching and even some suggested exercises on SSRN. Larry Cunningham (GW) edits the SSRN 'Law Educator' e-Journal. In addition, there has been some sharing of syllabi on the AALS New Law Profess listserv.

It might be time to think about a separate non-commercial website devoted just to sharing teaching materials. SSRN is great, but the disadvantages are that teaching materials can get lost in the mass of scholarly papers, and professors might appreciate a password-protected site that students can’t access. But a new website could have many advantages of SSRN. For example, download counts could be used as one metric of the success of teaching materials. This could be enhanced with a system for tracking how many professors adopted materials. These aren't the only metrics for what makes a good teacher, but they could help.

Of course, professors need to take care not just to cut and paste from materials. I remember a story from about two years ago of a state bar disciplining an adjunct for cutting and pasting from old exams.

Perhaps there is a site already out there of which I'm not aware.

Permalink | Internet| Law Schools/Lawyering| Social Networks| SSRN| Teaching | Comments (0) | TrackBack (0) | Bookmark

A Wiki for Contracts: Transactional Lawyers Wanted
Posted by Erik Gerding

Some of my previous posts explored the implications of the Open Source movement for financial regulation.  Other legal scholars in the corporate field are taking similar ideas on peer production and collaboration in provocative directions.

George Triantis (Harvard) has set up a "Contracts Wiki" to allow transactional attorneys to collaborate and design better agreements.  The theory is if peer production works in software (like Linux), it should work for transactional documents too.  They are just different kinds of code.  This project is not only an interesting scholarly endeavor, it may also provide real value for both lawyers, particularly in smaller firms, and their clients.

The wiki will only pay dividends though if a sufficient number of practitioners participate. 

Update (11/21/09)

If you are interested here is an old link to the wiki.  I understand from Professor Triantis that the wiki is being bbeta tested with a small group of practitioners, but will go live and be open to a broader public sometime in the Spring.  I'll ask one of the regular bloggers at the Conglomerate to post a notice and a new link then. 

Permalink | Contracts| Innovation| Internet| Law Schools/Lawyering| Social Networks| Transactional Law | Comments (0) | TrackBack (0) | Bookmark

November 19, 2009
If Complexity is the Problem, is Technology the Cure?
Posted by Erik Gerding

We hear a lot about "complexity" as a contributing factor to the financial crises. Steven Schwarcz (Duke) pins blame on the complexity of financial products like asset-backed securities.

We need to be precise about what "complexity" means. In a paper (not quite ready for ssrn, but which I'll post in December), I outline three types of complexity for financial products:

1.  Contractual complexity: this form of complexity measures how intricate the contractual terms of a financial product are. For example, how complex are the terms governing subordination and how many tranches of securities are being issued. I don't think contractual complexity poses as big a problem for sophisticated investors.

2.   Derivative complexity: this form of complexity is created by the fact that asset-back securities and derivatives derive their value from underlying assets.  But those underlying assets may in turn derive their value from other assets -- mortgage-backed securities are used to create CDOs which are used to back CDO squareds. Rinse, lather, repeat ad infinitum.

The problem with derivative complexity is that small errors in calculating the risk associated with underlying assets are magnified at each step of the securitization and credit derivative chain. So that a small error in calculating the risk of default on mortgages can translate into huge errors in pricing CDO squareds. The risk of error is magnified when there are unexpected correlations in losses on assets. For a great paper on this topic, see here. The problem is that, given multiple layers of securitization and hedging, it is now extremely difficult for any investor or swap counterparty to identify the ultimate assets that underlay their financial instrument.

Derivative complexity is a huge problem for financial products.

3. Systemic complexity: This form of complexity captures the idea that the value of financial instruments like asset-backed securities depends not just on the value of underlying assets, but the value of substitute financial instruments in the marketplace. These values, in turn, depend on market interest rates and on the trading behavior of multiple financial institutions. As I noted in an earlier post, homogeneity among the trading strategies of many firms can pose serious systemic consequences.

One approach to forms of complexity would be to put regulatory limits on the complexity of financial products. I'm not sure (1) how these regulations would work effectively, (2) if we understand the cost of prohibiting additional risk spreading, and (3) if this is politically feasible.

So I explore alternatives of using technology to help investors - particularly but not exclusively the sophisticated investors who purchase asset-back securities - better understand these forms of complexity.

One proposal is to require that assets going into a securitization have data tags affixed to them to allow investors to trace back and find the ultimate underlying assets that back their securities. This builds off the SEC's XBRL initiative, which requires issuers to affix data tags to their electronic SEC filings to allow investors to download information directly into spreadsheet and other analytic software. Data tagging assets has already been proposed, but I'm not sure if policymakers understand why this is so important.

Technology can also help us improve securities disclosure beyond asset-backed securities.  I also examine whether we can make all securities disclosure more interactive. For example, financial disclosure ranging from Value-at-risk models (which attempt to quantify the financial risk a company faces) to valuations of inventory contain embedded assumptions. Interactive disclosure would allow investors to change assumptions and see how financial numbers would change.

We can also learn quite a bit from software about re-designing the "look and feel" of all electronic disclosure to help investors sort through volumes of disclosure. Consider how much easier computers with icons and drop down menus are (courtesy of the graphic user interface) are now then when we had to type in command prompts into DOS. Redoing the "menu design" of disclosure also builds off ideas from behavior law and economics about structuring the menu of choices available to consumers to improve investor decision-making in the face of cognitive biases.

I've already posted about open source risk models.

This is a work-in-progress and feedback is welcome. For one critique of this paper, see here.

Permalink | Finance| Financial Crisis| Internet| Legal Scholarship | Comments (0) | TrackBack (0) | Bookmark

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