The regulatory fallout of the Bear Stearns bailout just took another interesting twist.  Today former investment banker and current Secretary of the Treasury Henry Paulson called for regulation via disclosure for investment banks that want to take advantage of Fed bailouts.   

1. I know you know this, but first, Paulson explains that there's a difference between I-banks and commercial banks:

one distinction between banks and investment banks remains particularly important - banks have the advantage that they issue deposits that are insured by the Federal government. A properly designed program of deposit insurance greatly reduces the likelihood of liquidity pressures on depository institutions and as a corollary, makes the funding base of these institutions more stable. The trade-off for this subsidized funding is regulation tailored to protect the taxpayers from moral hazard this insurance creates.

2. Paulson then calls for two disclosure oriented measures, one from the government - a clear "bailout procedure" identified by the Fed - and one by industry, involving information from investment banks, done with SEC and CFTC assistance:

First, the process for obtaining funds by non-banks must continue to be as transparent as possible. The Fed should describe eligible institutions, articulate the situations in which funds will be made available, and the magnitude and pricing structure for the funds....

Second, and perhaps most importantly, the Federal Reserve should have the information about these institutions it deems necessary for making informed lending decisions...[T]he Federal Reserve, the SEC, and the CFTC ... should consider whether a more formalized working agreement should be entered into to reflect these events.....The Federal Reserve's participation could [] allow for broader consideration of market stability issues by the SEC and the CFTC. This collaborative process will necessarily have a strong focus on liquidity and funding issues.

3.  My quick take: this is a strange combination of the reasonable and the novel.  On the one hand, would you make a loan to someone if you didn't know their assets and liabilities?  If Paulson thinks that the Fed shouldn't have to make loans to investment banks without access to the balance sheets, then he's not the only one.  On the other hand, there's plenty of reasons to speculate wildly about this sort of thing, ranging from theories about turf protection by Treasury banking regulators annoyed that the Fed gets to do everything to raised eyebrows about who would be bringing investment banking within the comfortable ambit of regulated industry.

But in my view, Paulson may just be saying that he supports an effort by other agencies that he doesn't oversee to formalize and coordinate investment bank liquidity disclosure requirements.  In time honored regulatory fashion, he may be thinking that the current crisis is the best time to push for the new program.  Moreover, the agencies probably need his support to get something new like this done. 

The SEC allegedly keeps track of the liquidity of investment banks, by the way (that agency concluded that Bear Stearns had plenty of liquidity when it was collapsing). But Paulson is pretty cagey about when and how often this information would be provided to the Fed.  All the time?  With supervisors looking over the shoulders of the accountants?  Or only when a bailout might be necessary?  There's nothing about this in the speech, and really, everything turns on it.

We will have to see what the Fed, SEC, and CFTC come up with.  But for now, it shows that the one industry that is growing apace during this crisis is government.

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I study international regulators like the Basel Committee on Banking Supervision because they matter today and will matter even more in the future.  But there's no question that it means that I have to consume a lot of sonorous nostrums.  The Committee just issued a paper on supervision during the current financial crisis.  It recommended more stress testing, possibly additional liquidity insurance, and noted that domestic banking regulators take quite different views on safe levels of liquidity, delegation of risk assessment to banks, and so on.  Okay, fine.  But there's also recommendations like this:

Members highlighted the importance of a nimble approach by supervisors that allowed for the rapid collection and analysis of additional information once stresses had been identified. Many members found that regular reporting frameworks for monitoring liquidity risk were inadequate in content (eg often missing off-balance sheet items and funding pressure points), comparability and timeliness. Other members were satisfied with their ability to gather more comprehensive data quickly during times of stress to supplement information gathered routinely.

So: The Basel Committee recommends that supervisors be "nimble," and notes that some supervisors were nimble enough, but others think they could be even more nimble.  It clears up everything, really!

ps.  You also won't believe this, but the supervisors have concluded that regulated industry needs their help: "Market disclosure did not always meet the needs of market participants, and in some cases, financial markets sought additional information on the liquidity positions of banks." 

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If you want to see just how complex it gets in the D.C. Circuit, check out today's grant of a collateral challenge to a prior environmental settlement as ultra vires re: the Army Corps of Engineers, and these cases affording neighbor standing but not bidder standing to plaintiffs who tried to stop the state of Maryland from turning a lovely old army base into a development site.  A technical day for environmental lawyers.

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The Basle Committee on Banking Supervision - composed of reps from the 12 most important central banks - was started in 1974, after the failure of Bank Herstatt and Franklin Bank, and dedicated to multinational safety and soundness.  And ever since, it has been a crisis-driven regulatory effort (but maybe Sarbanes-Oxley and the 33 and 34 acts tell us that this is the case for all financial regulators).  Banco d'Ambrosiano, BCCI, and Baring have all prompted movement out of Basle.

So what will be the result of the SocGen fallout?  It's the schmanciest institution yet put in this sort of crisis, so I predict a bit more than hand-wringing and a working group.  You might expect a weird combination of greater efforts from Basle on, perhaps, inter-central-bank notification in crises, and a re-evaluation of some aspects of the most recent capital accord.  Currently, Basle relies on the internal risk models of banks.  SocGen's appeared to fail, or at least were circumvented.  Perhaps risk models plus, or an (no doubt headache-inducing) alternative minimum?  It's also possible that the Fed will make its already slow transition to the latest capital accord regime even slower.

I claim no expertise on the next set of substantive proposals, though.  Felix Salmon thinks Basle does too much.  Roger Ehrenberg just wants plain old harmonization (don't we all, buddy).

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Suing senior government officials in their personal capacity is all the rage these days.  Valerie Plame is doing it.  Jose Padilla is suing John Yoo.  And lots of other war on terror victims are pinning their hopes of the prospect of obtaining monetary damages against Donald Rumsfeld, Karl Rove, and the employees who are detaining them.  Roger Alford and Steve Vladeck debate the wisdom of this kind of accountability here and here.

I think that these sorts of suits are pretty new in aspiration, but are likely to have the same result almost all the old kinds of personal liability suits have had: dismissal at an early stage of the litigation.  Which makes you wonder: why are government employees purchasing private liability insurance that covers these sorts of claims?  Insurance is close enough to a corporate and economic subject to be Glom-worthy, I think.

Well, for one thing, the insurance is cheap - 300 bucks a year, and in many cases, the government will pick up half the tab.  Moreover, supervisors who purchase policies are probably a lot more worried about employment discrimination claims than tort suits.  And the line bureaucrats who buy insurance are probably overwhelmingly the kind of law enforcement officials who have always had to worry about excessive use of force claims.  So I don't know that the increasing popularity of this insurance - some 30,000 employees have it - demonstrates that the new wave of Bivens litigation is affecting government behavior.

I do suspect, however, that the growth in interesting Bivens plaintiffs is interesting because of the, well, plaintiffs.  These claimants are largely war on terror related, and I suspect that their Bivens cases are meant to remind everyone that said war is still ongoing, that they are still being detained or calumnied or whatever, and that their non-Bivens legal options are few.  And, given the attention paid to these unlikely and often-dismissed claims, the public relations, if not the legal, strategy is working.

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One question vexing courts and regulators is what to do about people who allege that a regulation of, say, toxic emissions or airplane maintenance practices, injures them because it increases the risk that they will be injured in the future.  The risk, after all, might be tiny - is a.000001% increased chance of getting sick an "injury" that can be used to afford standing?  Moreover, the whole point of these sorts of suits is that individuals are trying to sue the government not because of something it has done to them, but because it has failed to adequately regulate someone else.  That also seems weird to some, though not that weird to me.

Today the DC Circuit decided that Public Citizen couldn't challenge a NHTSA tire regulation because of an increased risk of harm to its members.  The opinion is here, and Public Citizen tried to establish the risk to its members through statistics.  The Courts decided that Public Citizen's statistics were bad ("Public Citizen’s calculations are unreliable"), noted that in an en banc case the DC Circuit ought to eliminate the increased risk form of standing entirely, and vowed to until that time to interpret risk standing claims "strictly."

It was, in short, a bad day to be a public interest group - or indeed, anyone who wants to challenge a safety regulation other than a regulated industry that would incur costs because of the regulation.  It would be great if Congress would set minimum risk thresholds for citizens who want to sue over the inadequacy of safety regulations, but that is the problem with standing law: it is based on the constitution, and so cuts Congress entirely out of the deal.  Still, if Congress doesn't try to set some guidelines here, it may never get the chance.

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The DC Circuit doesn't work during the summer, and didn't get out its first opinions until October.  This workload is costing the court a seat, which Congress is giving to the Ninth Circuit.  But the Court has had a busy December.  It has issued 19 opinions.  Only three of these were criminal and two discrimination-related.  In other words, the DC Circuit issued as many opinions on FERC cases (also three) as it did on routine criminal appeals, or I could draw the same analogy between the FCC and discrimination appeals.  You can see why people call it an administrative court. 

So how did the government do?  Well, DEA lost a license denial appeal to a pharmacy, EPA lost a Clean Air Act rulemaking appeal to Environmental Defense, the FCC lost a phone card reimbursement rulemaking appeal to Qwest, the FAA lost an equipment standards appeal to an equipment maker, DOD lost a facility services appeal to a class of hospitalized veterans, HHS lost a dialysis reimbursement guidance dispute, the CIA lost a FOIA case, and the National Marine Fisheries Service lost a groundfishing rule to an industry group.  FERC and the FCC shockingly went undefeated. 

The short of it is that the government lost a majority of the administrative law cases appealed to the DC Circuit and decided this month, and lost every rulemaking (which are thought to be the most important cases) so litigated.  So perhaps that helps to explain why it still pays to keep people on retainer in this legal market (though yes, yes, selection bias, inadequate sample, &c).

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It's not a 30-minute guarantee, exactly, but Domino's wants us to remember the golden days. The problem with the old guarantee was a legal one: Domino's was worried about being held liable for accidents caused by its or its franchisees' delivery people.

Of course, the franchising context raises an interesting issue of agency law because franchisors generally are not vicariously liable for the acts of their franchisee's employees, even though franchisors exert substantial control over their franchisees. I once taught a case on Domino's in Business Organizations called Parker v. Domino's Pizza, Inc., 629 So.2d 1026 (Fla. App. 1993). The case arose from an automobile accident in which the franchisee's delivery person was accused of "operat[ing] a vehicle in a reckless, negligent and careless manner, causing it to strike another vehicle." The plaintiff's were pedestrians who were struck by a third vehicle that hit them while they were helping the victims of the initial accident. The key issue in the case was whether Domino's should be vicariously liable under agency law, and this issue turned on the level of control exercised by Domino's.

The court read the franchise agreement and operating manual, and found control provisions all over the place:

The manual which Domino's provides to its franchisees is a veritable bible for overseeing a Domino's operation. It contains prescriptions for every conceivable facet of the business: from the elements of preparing the perfect pizza to maintaining accurate books; from advertising and promotional ideas to routing and delivery guidelines; from order-taking instructions to oven-tending rules; from organization to sanitation.

Obviously, most franchise guidelines have nothing to do with a delivery accident (and the law here is muddy enough that it's not clear whether that matters!). The court also mentions the 30-minute delivery policy, though more in passing than as a crucial fact. In any event, the court concluded, "The manual literally leaves nothing to chance," and this leads to "the self-evident conclusion that it was error to determine as a matter of law that Domino's does not retain the right to control the means to be used by its franchisee to accomplish the required tasks."

Well, it doesn't seem so self-evident to me, but that sort of reasoning was enough for Domino's. According to the W$J, "After abandoning the guarantee in the wake of the St. Louis lawsuit, Domino's began playing up the taste and quality of the pizzas themselves."

Hmm. The taste and quality of Domino's pizzas?

No wonder they are going back to the 30-minute delivery policy.

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If you follow developments in agency law at all, you know that the Restatement (Third) of Agency eliminated "servants." Courts and commentators have been calling them "employees" for years, anyway, so that change seemed inevitable. But did you know that the Restatement (Third) of Agency also eliminated "independent contractors"? Here is the explanation:

The common term "independent contractor" is equivocal in meaning and confusing in usage because some termed "independent contractors" are agents while others are nonagent service providers. The antonym of "independent contractor" is also equivocal because one who is not an independent contractor may be an employee or a nonagent service provider.

All of this seems right to me, but what are we supposed to call people who aren't employees?

Did you guess "nonemployees"? That seems perfectly reasonable, until you consider that "nonemployees" doesn't correct the fundamental problem with "independent contractors," namely, that within this group are both agents and nonagents.

To cure this ambiguity, the drafters of the Restatement (Third) of Agency opted for two terms: "nonemployee agents" and "nonagents." Simple.

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I am in the process of revising my Business Organizations casebook for a second edition, and I am integrating insights from the Restatement (Third) of Agency. Deborah DeMott has produced an amazing work, and I find it quite fascinating reading. Seriously.

One of the most noticeable changes in the Restatement as you move from the second to third edition is the purported elimination of "inherent agency power." I always found inherent agency power a useful, if somewhat confusing, concept. It is useful mainly because it makes the notion of "apparent authority" more coherent. The doctrine of apparent authority (and its sibling, estoppel), as articulated by common law judges and the drafters of the Restatement (Second) of Agency, technically required communication between the principal and the third party. In some instances, however, courts have imposed liability on a principal for the acts of an agent, even when the principal and the third party never interact. With respect to such cases, Judge Learned Hand observed that apparent authority "is only a fiction" because the principal "has not communicated with the third person and thus misled him." Kidd v. Thomas A. Edison, Inc., 239 F. 405 (S.D.N.Y. 1917).

Without that connection between principal and third party, why are courts nevertheless willing to hold principals responsible for the acts of their agents? The problem, according to Judge Hand, lies not with the imposition of liability, but rather with the articulation of the doctrines of apparent authority and estoppel. In attempting to base liability in consent of the principal, those doctrines lost the notion that principals could sometimes be held liable merely because of status. In these "cases of customary authority," courts hold principals liable to the extent that custom would justify reliance by a third party. Judge Hand explained the policy rationale underlying this practice as follows:

The considerations which have made the rule survive are apparent. If a man select another to act for him with some discretion, he has by that fact vouched to some extent for his reliability. While it may not be fair to impose upon him the results of a total departure from the general subject of his confidence, the detailed execution of his mandate stands on a different footing. The very purpose of delegated authority is to avoid constant recourse by third persons to the principal, which would be a corollary of denying the agent any latitude beyond his exact instructions. Once a third person has assured himself widely of the character of the agent’s mandate, the very purpose of the relation demands the possibility of the principal’s being bound through the agent’s minor deviations. Thus, as so often happens, archaic ideas continue to serve good, though novel, purposes.

Kidd prompted the drafters of the Restatement (Second) of Agency to add a new section describing an agent's "inherent agency power." Relying on the notion of status, this §8A stated that inherent agency power "is not derived from [actual] authority, apparent authority, or estoppel, but solely from the agency relation and exists for the protection of persons harmed by or dealing with a servant or other agent." The use of the word "power" rather than "authority" recognizes that the principal has not authorized the agent's action by manifesting consent to either the agent or the third party. Nevertheless, the principal is bound by the agent's action for reasons of "fairness":

It is inevitable that in doing their work, either through negligence or excess of zeal, agents will harm third persons or will deal with them in unauthorized ways. It would be unfair for an enterprise to have the benefit of the work of its agents without making it responsible to some extent for their excesses and failures to act carefully. The answer of the common law has been the creation of special agency powers or, to phrase it otherwise, the imposition of liability upon the principal because of unauthorized or negligent acts of his servants and other agents. Restatement (Second) of Agency §8A, comment a.

Despite the apparent utility of the concept, inherent agency power is infrequently used to decide agency cases and usually surfaces where courts must choose between imposing a loss on an innocent third party and an innocent principal.

Restatement (Third) of Agency abandons inherent agency power, purporting to subsume all of the cases covered thereby with the expanded notion of apparent authority. Nevertheless, the logic of apparent agency does not extend to cases involving so-called "undisclosed principals," which traditionally were decided under the logic of inherent agency power. Courts and the Restatements have long distinguished between "disclosed principals" and "undisclosed principals.^" This distinction is important because "apparent authority is not present when a third party believes that an interaction is with an actor who is a principal." Restatement (Third) of Agency §2.03, comment f. In other words, apparent authority cannot exist in cases involving an undisclosed principal.

The drafters of the Restatement (Third) of Agency plugged the hole left by the absence of inherent agency power by creating a new section with "no precise counterpart" in the Restatement (Second) of Agency. The new section (§ 2.06) would make undisclosed principals liable for the actions of their agents – acting without actual authority – if a third party detrimentally relies on the agent and the principal does not take reasonable steps to notify the third party of the misplaced reliance. This new section also describes something that looks suspiciously like inherent agency power:

An undisclosed principal may not rely on instructions given an agent that qualify or reduce the agent's authority to less than the authority a third party would reasonably believe the agent to have under the same circumstances if the principal had been disclosed.

So it seems that inherent agency power still lives, if only in a dimly lit corner of agency law.

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