Pre-Trial As Trial In Complex Litigation

A new article on big ticket civil litigation by Richard Nagareda of the Vanderbilt University School of Law provides a good sense of what is going on in this area:

Settlement, rather than trial, has emerged as the dominant endgame. As a result, in functional terms, the pre-trial phase effectively operates as the trial. . . . Two big-picture points emerge from this literature: first, costs (especially, the ability to impose costs on one’s opponent) matter greatly to the choice whether to continue litigation or to settle; and, second, risk (or, more specifically, variance) matters in the pricing of civil claims via settlement, above and beyond calculations of expected value. . . . [T]here is a lingering – but, often, undertheorized – sense that procedure itself is having an undue and even deleterious effect on the pricing of claims via settlement.

Simply put, if you have what it takes to make a lawsuit expensive for your opponent in litigation, this matters more than the actual merits of your case, especially if there is the least bit of uncertainty in the outcome.

The article compares the current situation to the situation in 1938, when a major overhaul of the system replaced technical rules regarding what can be contained in papers filed to begin a lawsuit with the early version of the current system.

There were "trials in roughly 18.9 percent of federal civil cases circa 1938" but are now trial in only 1.8 percent of cases. The holy grail in civil procedure these days is to get us to a point where "claim merit, in light of governing substantive law, should matter vastly more to the resolution of civil claims than whether counsel has said the right words to invoke the appropriate form of action."

As Nagareda accurately describes the process, in settlement discussions, defendants counseled by their lawyers consider the additional attorneys' fees and costs likely to be incurred by going to trial, "the expected value of the
underlying claim" and "a premium for the offloading of the risk." The increasing concern is that the litigation costs and risk premium are overshadowing the underlying merits of the case.

Courts aren't very good at regulating discovery costs. So, alternatives are considered:

The law might, in short, seek to address the information problem associated with third-party judicial regulation of cost imposition through alternative mechanisms designed to elicit information about the anticipated value of discovery to the requesting party. A second alternative consists of a shift in the tools deployed by third-party judicial regulation – specifically, the possibility of informing the settlement process not exclusively through motions framed as dispositive “stop” or “go” signals on the road to trial but, conceivably, in addition, through more direct informing of the claim pricing process itself.

As an example of the first approach:

[T]he law might provide for the shifting of discovery costs post-pleading and pre-summary-judgment in the event that the court ultimately grants summary judgment for the responding party. Absent summary judgment, the cost of discovery would remain where it is now: on the responding party. . . . [T]he elaborated literature on cost shifting in litigation generally suggests that such an approach with respect to discovery likely would have two countervailing effects.
As to the initial decision to sue, one should expect the addition of a contingent possibility of a discovery cost shift against the plaintiff to have the predictable effect, at the margin, of discouraging suit. In effect, the prospect of a discovery cost shift would add to the uncertainty already associated with claiming. In Europe, where a general loser-pays rule predominates, the contingent risk of a cost shift has taken a real-world form: a market whereby litigants may purchase insurance against that risk. . . .

The effect upon the initial decision to sue would not be the only complication here. In those instances when litigation is commenced, cost-shifting approaches tend toward an escalation of expenditures on both sides. Specifically, each side stands to bear its own expenditures, discounted by the probability that a cost shift might later occur. In effect, each side stands to garner one dollar of benefit from litigation expenditure for less than one dollar in expected cost. The predictable tendency will be toward increased expenditure, in the manner of a one-third-off sale at a department store. A more limited shifting of discovery costs would portend similar difficulties.

Now, consider together the dampened initial incentive to sue and the escalation of expenditures in those suits that are brought. The net effect is far from clear in systemic terms. The civil litigation system could end up spending even more money on fewer cases. This concern is not merely theoretical. An important 2009 report on civil litigation costs in the United Kingdom finds that the general loser-pays rule in that jurisdiction “tends to drive up the costs of litigation” and that there are, at the very least, “conflicting effects . . . upon access to justice.”

A second approach, similar to one that I have advanced in the past, as as follows:

Geoffrey Miller . . . sketches a framework whereby parties could request, and courts could provide, what he describes as a “preliminary judgment” – that is, the court‟s own “provisional judgment on the merits of the case based on the information provided by the parties.” Under this approach, such a preliminary judgment “would convert into a final judgment after the expiration of a reasonable period of time,” during which any party against whom the preliminary judgment is issued may object. In the event of such an objection, the preliminary judgment “would be vacated” and the case returned to the ordinary posture of judicial regulation under the conventional pretrial motions.

European civil procedure uses this approach by weakening the rules of finality. A trial court decision is effectively reviewed de novo, on points of both fact and law, on a first appeal, and can consider new evidence.

The evaluation of the case on the facts and the law, early in a case, would influence the parties to settle closer to the value of their cases on the merits, because the settlement would be informed by a formal third party evaluation of the case on the merits that would reduce the bias and uncertainty involved in having parties trying to evaluate their own claims.

In particular, this kind of evaluation would give courage to parties involved in cases where there is a genuine dispute regarding a material fact, but the likely resolution of that dispute is fairly clear.

I'm The Other Andrew

I often have clients and colleagues ask me about my last name (I hyphenated it when I married, I'm part-Irish, the name is not). But, I learned today that Andrew is the name name of a nice Angel of Death in the Touched By An Angel television series.

While I routinely do work related to death, as a lawyer working with probate and estate planning, I'm not him. Indeed, I disclaim any angelic character whatsoever. But, who knew that I'd ever even be associated with an Angel of Death? Does this put me in the same category of people such as a music teacher of mine whose name was Melody?

How Can We Achieve Audit Industry Reform?

The Sarbanes-Oxley Act of 2002, particularly Title II, which banned the same firm from providing external auditing and other consulting services and imposed requirements designed to make public companies change their auditing firms from time to time, was supposed to have transformed the accounting industry. Mostly, it didn't.

The current public accounting market consists of a “Big 4”, a middle tier and a lower tier. The Big 4 firms are Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers and KPMG. As of the 2003 GAO study, these four firms audited over 78 percent of all U.S. public companies and 99 percent of all public company sales. . . .

[I]n 2003 before any firms were required to be compliant with SOX, 38.8 percent of auditor switches were from Big 4 auditors to other Big 4 auditors while 20.6 percent of switches were from Big 4 to middle tier auditors. In 2004 when the first firms were required to be compliant with SOX, 24.5 percent of switches were from Big 4 to other Big 4 auditors and 29.4 percent of switches were from Big 4 to middle tier auditors. . . . [W]hile only four firms are capable of auditing large multinational firms, more than 1600 firms have registered with the PCAOB as of March of 2006. . . .

This study defines the middle tier to include all non-Big 4 audit firms with 2004 revenues exceeding $250 million, according to Public Accounting Report’s Top 100 for 2004. This definition includes: RSM McGladrey (Minneapolis), Grant Thornton (Chicago), BDO Seidman (Chicago) and Crowe Chizek & Co (Indianapolis). These comprise all non-Big 4 firms with more than 100 SEC clients. All other firms are classified as small tier firms.

From Sarah cosgrove, Scott Niederjohn, "The Effects of Sarbanes-Oxley on the Public Accounting Industry" (2006)

This matters a lot, because auditing firms that screw up or misbehave risk a rapid exit from the market of the kind we saw from Arthur Anderson when it was indicted for criminal conduct in connection with the Enron scandal. When you have just four firms that dominate the industry, this is a problem.

Why is the industry so concentrated, despite legal initiatives designed to shake up this situation, and what can be done about it?

Sarbanes-Oxley lead to an across the board increase in accounting fees in publicly held companies, which helped encourage some firms to "go private" or "go dark." Much of this was associated with the initial burdens involved in setting up adequate internal controls under Section 404 of Sarbanes-Oxley. But, as of 2009, accounting fees had been falling again for eighteen months.

This wasn't entirely unexpected. Congress passed Sarbanes-Oxley almost unanimously because of a widespread feeling that sloppy and maleficent internal controls and accounting practices were leading to financial disaster, and Congress wanted to impose more discipline. A short term burst of accounting activity to get everyone on the level naturally followed.

But, why didn't the external audit firms of the Big Four get spun off from their parent companies that mostly engaged in internal accounting and consulting functions and why didn't medium sized firms gain a bigger market presence, freed of the need to be full service behemoths to serve public companies in the narrow external audit function?

Most public companies, after all, aren't large multinational companies. There are 1024 foreign public companies and about 15,000 domestic ones registered with the SEC as of 2008. Of those, only a couple thousand are large multi-national companies.

Mid-sized and small accounting firms ought to be able to handle, at least, the affairs of these 13,000 or so smaller domestic publicly held companies, but overwhelmingly do not. Why?

Limits of the EITC

The Earned Income Tax Credit (EITC) reduces the tax burden of working class people with earned income, a benefit which as phased out as taxpayers approach middle class incomes.

It has received considerable criticism, however, and rightly so.

The provision is a complex one targeted at people who rarely have access to professional tax advisors. Indeed, it is the single most complex part of the tax code that applies to working class and middle class taxpayers who are not self-employed. As a result, the EITC is the single largest source of audits in the tax code. EITC mistakes are so common that working class taxpayers are audited more often than wealthier taxpayers much more likely to be intentionally violating the law.

Equally problematic, the effective marginal tax rates that result from the phase out of the EITC are the highest faced by taxpayers of any income. Also, these same people often lose many means tested benefits at the same time that they are facing an EITC benefit. As a result, taxpayers in the EITC phaseout income range often face effective marginal tax rates approaching 100% when means tested benefit phase outs are considered. High marginal tax rates for working class people is hardly a good way to help them escape poverty.

A new law review article further explores the problems with the EITC:

[T]he EITC reduces poverty only modestly, and even the maximum credit falls short of closing the gap between low-wage earnings and poverty. At the same time, gaps in other social welfare programs leave low-income workers vulnerable to the job disruptions that characterize low-wage work - when the EITC provides no assistance at all.

Analysis

Getting The Working Poor Out Of The Tax System

Tax policy directed at the working poor needs to be minimally bureaucratic and provide good incentives for participants. As a general rule, those in poverty should owe no federal income or payroll taxes of any kind, and should not need to file a return to claim this benefit.

The resources of the IRS are not best spent chasing after working poor people who have trouble accurately calculating their entitlement to the EITC, waiters who don't fully report their tip income, and gray market part-time hairdressers and baby sitters. Its resources are better spent pursuing big businesses that take elaborate efforts to twist federal tax law to permit tax breaks not contemplated by the law, and affluent self-employed people and property owners who fail to report significant taxable income.

The jobs bill signed by President Obama today, which creates a payroll tax holiday for certain unemployed workers hired by businesses, is a step in the right direction.

Categorical Programs Are Often Preferrable To Means Testing

Social welfare programs, when possible, should have a categorical eligiblity test, like Medicare and public K-12 education, rather than a means test, like Medicaid and cash welfare programs.

Health Care

Once you are committed to the idea of universal health care, as our nation looks likely to be in a matter of weeks, the money spent administering means tested programs is no longer a matter of cost control; it simply a matter of shifting cost from one financing approach to another. This greatly reduces the value involved in high administrative costs.

School Breakfasts and Lunches

For example, the are many schools where the vast majority of students are poor. And, a large share of all poor students attend schools where the vast majority of students are poor, because neighorhoods tend to be made up of people with similar incomes. In schools where most students are poor, it may make more sense to make school breakfasts and lunch available for free to all students, than to try to keep track of free and reduced school nutrition program eligiblity and to collect lunch money from students who haven't applied to the program or are affluent enough not to qualify. The administrative cost savings involved in making entire schools eligible may offset the costs involved in providing benefits to more students. And, many of the new beneficiaries in these schools would have been eligible for a means tested program anyway, if they had applied, but have parents who never got their act together bureacratically well enough to receive those benefits.

Public Defenders and Bankruptcy

Programs that primarily benefit the working poor, even if they marginally benefit others, like the public defender system, and the bankruptcy system, should likewise be structured to avoid elaborate financial paperwork. Rather than basing access to these services on means, the nature of the benefit itself could be structured to favor the intended beneficiary.

For example, a universal public defender system, in which anyone can have a lawyer appointed for them in a criminal case regardless of means, is less likely to be abused if people who are convicted have a duty to reimburse the state for their defense if they have the means to do so. Perhaps 80% or more of people in the system already receive public defenders because they are indigent already, and many of those who don't are still far from affluent. Also, providing financial assistance to people who are charged with crimes and then acquitted would not be very expensive (since full acquittals at trial are quite rare as a percentage of all criminal cases filed, making about around 1% of the total) and have ample moral justification of a categorical benefit.

Similarly, a bankruptcy system that imposes a three year garnishment after the case is otherwise closed, for the benefit of creditors whose debts were discharged, would discourage high income people from filing for bankrputcy without using means as a gatekeeper to bankruptcy court relief.

Higher Education

Means tests may be unavoidable at times. But, they should be used sparingly and with an eye towards the incentives that they create.

For example, means testing may be a worthwhile part of the solution for higher education, where a large share of students are from affluent families, most of the rest of the students are from bureacratically competent middle class families (and most students are bureacratically competent), the benefit is relatively large in absolute dollar value, and the impact that financial assistance has on college attendance of students with low means is great. Yet, even in higher education, categorical screens based on factors like first generation college student status and academic merit are also very useful.

Rather than indiscriminantly funding all in state students, or all students who attend public institutions of higher education, it may make more sense to bring regular tuition more in line with the costs associated with providing higher education, and then to be more selective about who receives limited public assistance in getting a college education.

On one hand, the system does neither beneficiaries nor the public purse, few favors by providing financial assistance to students entering academic programs that they are likely to fail because they are ill prepared.

On the other hand, even a quite generous means test can end a subsidy for highly affluent upper middle class students, and in the process make more of the scarce funds available to fund higher education available to those who would likely forego higher education without financial assistance.

Unemployment

Our unemployment system is another major safety net that is deeply broken.

While not strictly speaking a means tested program, it devotes considerable resources to denying benefits to applicants, because they are unemployed for the wrong reasons, because they set their standards too high in their job hunt or don't devote enough effort to a job hunt, or because they get some marginal work that leaves them merely underemployed rather than unemployed.

For the long term umemployed, and the unemployed who didn't manage to build up a substantial emergency fund before losing work, credit cards are often a more meaningful form of unemployment and underemployment assistance than unemployment insurance.

The COBRA subsidies we've seen in response to the financial crisis are one sensible, catagorical response. Another policy option used in many countries is a system of severance payments that are due on termination of employment in the vast majority of cases that decouple the likely financial burden associated with a discharge from employment from the process of finding a new job.

Some Thoughtful Corporate Law Articles

* Bank CEOs who have loaned money to their banks were less likely to take risks that caused trouble for the bank in a financial crisis, than banks whose CEOs had not loaned money to their companies.

* Shareholder derivative litigation (i.e. suits by shareholders against corporations alleging that the corporation is not acting in their interests) might be more effective if it was resolved by juries rather than judges.

* Fiduciary duty might be a better ethical touchstone for lawyers who advise businesses, than zealous advocacy, an ethical touchstone rooted in adversarial criminal proceedings and civil lawsuits.

* Victor Fleischer from the University of Colorado Law School opens up powerfully: "Most of us share a vague intuition that the rich, sophisticated, well-advised, and politically connected somehow game the system to avoid regulatory burdens the rest of us comply with. The intuition is correct; this Article explains how it’s done."

Lehman Brothers Bankruptcy Plan Released

Lehman Brothers filed its first reorganization plan in its bankruptcy yesterday.

A total of $830 billion in claims have been filed, but many involve multiple claims for the same debt because different entities guaranteed debts from affiliated entities. The total debt of the holding Company and its 22 affiliates is significantly less than $715 billion.

The value of the company's assets at the time that it filed for bankruptcy was $639 billion, but has probably gone up and down over time. The value of the assets available to creditors is also greatly impacted by a $250 million sale of many Lehman assets to Barclay's bank in what turned out to be a sweetheart deal.

I blogged the bankruptcy petition here. I reasoned at that time the the bulk of any losses were likely to be suffered by equity and subordinated debt.

News reports leave unclear what percentage of claims will get what payment, although many will clearly get paid later than agreed. There is now a blog devoted almost entirely to covering the case. The reorganization plan is available here.

Basically, the plan makes the payment of other debts contingent upon assets realized from the company which are not set forth in the plan. Assets would be sold over a long period of time by a company created to dispose of the Lehman assets in an economically sensible way.

Priority claims, secured claims to the extent of their security, and senior unsecured claims are likely to be paid in full. Entities are respected, so a flush affiliate may have its debts paid in full, while another that made bad investments may have its debts only partially paid. Equity for an entity covered by the plan is paid at all only if all debts of the entity in which equity is held are paid in full.

But, intercompany guarantees complicate this picture. At first glance, it appears that all or most of the affiliated are solvent on a fair market value balance sheet basis, but for their guarantee obligations to the parent company, but will have to make payments to the parent company towards its debts which will essentially wipe out their equity across the board.

All of the subordinated debt is at the holding company level and realistically, the holding company level equity will get nothing and the subordinate debt at the holding company level will not be paid in full and may not be paid at all.

In theory, general unsecured claims may be paid in full in some entities, and not in others. It depends upon how much is realized for the assets sold and who owes whom what on their guarantees. Without up to date valuations of assets broken down by entity, it is hard to tell what percentages of each class of claim will be paid.

One plausible scenario, which is being suggested as an alternative reorganization plan, is that the equity in all of the entities and the subordinate debt of the holding company would get nothing, and that the unsecured general creditors of all classes will be paid almost all, but not 100% of their claims.

Each guarantee obligation, however, is capped at a sum certain. Determining how guarantee obligations involving related entities are worked out is the primary legal problem in the complex bankruptcy filing. Normally, in a bankruptcy, all claims are paid as if they were not guaranteed, and then non-bankrupt guarantors make up the difference.

Financial Regulation Reform On Deck

A major post-financial crisis new financial regulation package that has been discussed for months is being introduced. An eleven page summary of the proposed Senate bill (which differs in some details from the House bill compared here) can be found here.

Highlights include:

* A comprehensive, semi-independent consumer finance regulatory agency housed in the Federal Reserve.

* FDIC-like resolution authority for non-bank financial firms, with an FDIC-like fee to fund it.

* New capital and leverage requirements for large financial firms.

* Increased disclosure requirements for derivatives, private equity and hedge funds, and limitations on propietary trading by publicly held companies in private equity and hedge funds.

* Increased regulation of mortgage brokers, municipal bond professionals, and payday loans.

* Increased regulation of firms that assign credit ratings to securities.

* Appointment of top Federal Reserve officials would be more in the hands of the President and less in the hands of member banks, some of whom are now also regulated by the Fed. The Federal Reserve would be subject to more stringent audits of its emergency lending.

* Bank regulation will not be unified. The FDIC (for state banks and thrifts), Office of Comptroller of the Currency (for small national banks and federal thrifts), and Federal Reserve (for 35 largest national banks and federal thrifts) will continue to divide responsibility for bank regulation.

* The jurisdictional boundaries between the CFTC and the SEC will be clarified, but both regulators will continue to exist as separate entities.

* Shareholders in public companies would be given a greater ability to nominate directors and a non-binding vote on executive compensation. Executive compensation based upon inaccurate financial statements could be disgorged.

* Increased enforcement powers of existing financial regulation laws.

The reforms aren't revolutionary, but they are progress. They also give agencies the power to enact significantly more bold specific measures through the regulatory process.

Mortgage Modifiers Marginal

The HAMP mortgage modification process is mostly modifying mortgages of modest income people who have mortgages far larger than their reasonable ability to repay them and shrinking their payments. But, even as revised most of these individuals would not have qualified for a new mortgage because they are too heavily burdened with debt.

The rule of thumb used to be that your mortgage make up no more than 28% of your income. Coming into the program, the average participants mortgage payment (including principal, interest, taxes, insurance and HOA) is 45% of income and is reduced to 31% of income.

The other rule of thumb used to be that your combined mandatory payments (the mortgage amounts plus mandatory debt payments and alimony and child support) should be no more than 36%-40% of your income. Coming into the program, the average participant has total debt payments of 76% of income which is reduced to about 60% of income.

The average participant has a total income of about $32,433 per year, and comes into the program with an average of $431 a month of money after FICA to spend on non-debt, non-housing expenses, and leaves the program with $879 a month of money left over. Doubling disposal income makes life much more liveable for these families, but still leaves a very thin budget.

In short, they are turning impossible burdens into very difficult to manage burdens. One can expect that many families will redefault or will retain a modified mortgage while discharging other debts in a Chapter 13 bankruptcy.

Colorado Caucuses Today At 7 pm

The Democratic and Republican parties in Colorado hold their caucuses today at 7 p.m.

The caucuses start the process of determining who party nominees will be in races with more than one candidate (for Democrats, most notably the race between Bennet and Romanoff, but also many state legislative posts). The precinct committee people selected there are also the people who choose the people who run the non-legislative part of the major political parties.

Delegates from precinct caucuses participate in county level meetings and meetings with particular legislative office districts that nominate party candidates for offices at those levels, and participants in meetings at the county level in turn send delegates to state level meetings that nominate people for state level offices. Party platform issues are also dealt with, often as an afterthought, at each level of the process.

We have a government by people who show up for people who show up. With the exception of the 2008 caucuses that influenced who the Presidential nominee of the major political parties would be, attendance is usually about 1% of the registered voters with a party affliation who are the only ones allowed to vote at a caucus.

A caucus vote is equivalent to 100 votes in a political primary. It takes a couple hours, but in exchange you have much more of a say in how your state is run.

Arguments Against Zoning

Various arguments against zoning are collected at Richard's Real Estate and Urban Economics blog, which notes, via the New York Times, that not only zoning, but also Fannie Mae regulations discourage mixed use development.

Pardon Power Falling Into Disuse

A former U.S. Pardon Attorney, Margaret Colgate Love, documents the gradual demise through disuse of the pardon power:

[T]his article first looks at pardoning practices in the 19th and early 20th centuries, a time when the pardon power played an important operational role in the federal justice system. It describes how pardon evolved into parole, and after 1930 came to be used primarily to restore rights of citizenship. It then examines the reasons for pardon’s decline in the 1980s and its collapse in the Clinton Administration. Finally, it argues that President Obama should want to revive the power, and suggests how he might do it.

She notes that the growth of a Department of Justice bureaucracy effectively stifled the federal pardon power for those without political back channels that circumvent that process.

The Future Of The Islamist Movement

In the wake of 9-11, Americans were extremely concerned about Islamic terrorism and the threat that Islamist regimes could pose. We remain afraid. But, eight years later, it does not look like the modern civilization destroying threat that it did eight and a half years ago. This is a movement without a grass roots base of support in the United States. In the United States and Europe, planned terrorist attacks have been thwarted much more often than they have been carried out. European countries with large Muslim population like Germany and France, have not experienced an epidemic of terrorism. There have been attacks, but not insurgencies, in the developed world.

The heartland of the Islamist effort to change the world is not in the West. It is in places like Algeria, Iraq, Iran, Afghanistan, Pakistan and Saudi Arabia. It is an effort to replace secular regimes in Islamic countries with religious ones in already overwhelmingly Muslim jurisdictions, not a movement to conquer or obliterate the rest of the world. The terrorist attacks we have seen directed as the West are more in the nature of the international sanctions that Western countries try to impose on countries we see as behaving badly than they are in the nature of a war.

Yes, the Islamist movement may hate America. But, it hates America more for corrupting countries they know than simply for being the way that it is.

Coordinated multi-lateral efforts have put groups inclined to commit terrorist attacks on the defensive. The international community has rediscovered the importance of having functional government in place even in backwaters of the world that don't directly impact the developed countries like Afghanistan, Somolia, and Yemen.

But, at its heart, the Islamist movement is a war of ideas, a bit like the long festering anti-monarchy movement that Europe experienced for a couple of centuries before republics and constitutional monarchies became the norm. Indeed, many of the places where the Islamist movement has been most vital have been places where it is offered as an alternative to dictatorships, monarchies and failed states. This will continue to fester, notwithstanding military and political gains and losses, until an ideological resolution is reached.

If non-communist democracy is to prevail is the Islamic world, it has to provide a success story of a republic in an overwhelmingly Muslim nation where Islam is not compromised to use a model. It needs a proof of concept. There are few of these so far.

Saudi Arabia, Morocco, the United Arab Emirates, Oman, Jordan, Kuwait and Brunei are still ruled by kings. Syria, Egypt, Sudan and Libya are ruled by dictators, sometimes claiming the mantle of single party regimes. Until very recently, so did Indonesia and Iraq. Iran replaced a monarchy. The experience of Pakistan and Bangladesh with civilian democratic self-government has been decidely inconsistent, with frequently interludes of miltiary intervention and dictatorship. Lebanon, Afghanistan, Yemen and Somolia have all been failed states in recent history. Efforts at democratic self-rule in the Palestinian territories have been ineffectual.

Turkey has made one of the more successful efforts to have democratic government in an overwhelmingly Muslim country, but its model has as a core features Ataturk's effort to Westernize Turkish culture and military intervention to keep religion out of politics. Algeria's Islamist movement, ultimately organized on the communist one party rule model, was a reaction to what looked like a Turkish model of military enforced secularism in politics under its 1989 constitution.

A superficial look at democratic government in overwhelmingly Christian countries reveals that the vast majority of these countries show a strong trend towards secularization. In the long run, the political economies that have emerged in the Western world show that socialists, the leading party of the left in most of Europe, have had more success implementing their visions than Christian Democrats, the leading party of the right.

Iran is really the only significant example of a country that has embraced Islam while providing some measure of non-dicatatorial civilian self-government. Is it any wonder that forces for change in the Islamic world have looked to it as a model, albeit, a model to be improved upon?

Models of democratic self-government in the Islamic world are emerging. Kosovo and Kurdistan, while both are highly autonomous regions rather than full fledged independent states, and while both are rooted in dominant party systems, look like promising models - Kurdistan has had a genuine contested election. Civilian governments in Pakistan, Bangladesh and Indonesia seem headed towards a less military and strongman influenced era. Iraq and Afghanistan are attempting to implement regimes that combine legal supremacy for Islamic law with fully democratic institutions. Jordan, Kuwait and the United Arab Emirates are toying with constitutional monarchies along the lines of early English constitutional monarchy models. Reformists in Iran with grass roots support are attempting to shift the balance in its Islamist Republic in the republican direction.

But, until there is a real civilian democratic success story that preserves an Islamic society in an overwhelmingly Islamic country, the Islamist movement to replace existing depotisms, military influenced governments and anarchies with its own vision of theocratic rule will continue to be a powerful political force in overwhelmingly Islamic countries and this conflict will spill over from time to time into the rest of the world.

Positive World Trends

Latin America

Gay marriage has arrived in Mexico City (as well as the District of Columbia, in both cases by legislative action), and Mexico has developed a multi-party democracy after generations of dominant party rule. Latin America is no longer dominanted by military regimes. Major earthquakes in Haiti and Chile struck at time when those countries have had their political affairs in better order than in much of their recent histories. A long overdue thawing of U.S. relations with Cuba is in progress.

Eastern Europe and Central Asia

The Ukraine, which was on the brink of civil war a few years ago, has managed to muddle through with the democratic process with peaceful elections and a political arrangement that seems stable. Looking back a little further, the Soviet Union and communist Eastern block are no more, and the totalitarian communism that prevailed is gone or at least greatly scaled back in much of that region. Germany has been reunited in a way that has put East Germany on the fast track toward rejoining a larger world community. A genocidal civil war in the former Yugoslavia has simmered down to chilly federal government deadlock in a Bosnian successor state and a dispute over the full independence of a de facto independent Kosovo region in a successor Serbia; some of the worst offenders of that war were convicted and sentenced by international tribunals for their war crimes. The war and terrorism offensive in Russia related to Chechnyia has cooled down.

Post-Soviet Russia is not one of the countries that is rushing as fast as it can to Westernize. Shedding Soviet communism has brought Russia a declining standard of living, crime, corruption, terrorism, decreased international clout, and political instability. But, despite all of that, the emerging Russia is also not the totalitarian monolith that it was before the Soviet Union fell. Rather than being commited to rolling back history, Russia is a nation at an ambivalent moment in its history deciding what to do next.

Russia is slouching towards the Western economic and political model, as much as anything, because it lacks any other well defined alternatives. Implementing the amophorous Asian brand of Communism emerging in countries like China and Vietnam, would require an even more dramatic upheaval than adoption of a Western style economic and political system. Likewise, it is absurd for Russia to try to buy into Islamist theocracies on the model of Iran, Algeria, the Taliban and Saudi Arabia, to which new constitutions in Afghanistan and Iraq have paid lip service, and Northern states in Nigeria have sought to emulate.

Simply by virtue of the reduced economic scale, geographic scope, population size and political unity of Russia and the hard line remnants of the old Communist block and Soviet empire, it has fewer resources to devote to serving as a military adversary to the larger and increasingly unified block of Western nations. Rather than focusing on global conflicts, Russia has used its military might to intervene in tiny local separatist conflicts in Moldova and the Caucuses, and to politically support potential allies in the Baltic states, Belarus, Eastern Ukraine, Serbia, former Soviet Central Asia and Iran. The once seemingly monolithic alliance of China and Russia is no longer a united front.

Countries like Serbia, Romania, Bulgaria and Belarus have likewise not been rushing headlong towards Westernizing reforms, but like Russia, have few alternatives to latch on to. As much as anything else, each of these countries seem to be starting over from where they left off when communists gained the upper hand in the Russian Revolution and this movement spread across Eastern Europe, leaving the age of monarchy behind, but still vague on the kind of post-monarchical regime that they will put in place.

Western Europe

Notwithstanding the severe impact of the financial crisis on Iceland and Greece, Europe has come a long way, establishing free trade within most of the European continent, and free immigration and a common currency within a large part of this free trade zone. A treaty to give the European Union a sustainable and workable governance structure for its expanded scope looks like it will be adopted. Europe's mostly sound financial regulatory structure also mitigated the intensity with which the financial crisis hurt its member nations. Many former Eastern bloc countries like Estonia, Latvia, Lithuania, Poland, the Czech Republic, Slovakia, Hungary, Slovenia, Croatia and Macedonia are eagerly rejoining the Western European economic and political sphere. Turkey too is making major efforts to be the most economically Western oriented Islamic country in Southwest Asia.

East Asia

China, which makes use of the death penalty relative to its population about ten times as frequently as the most death penalty prone state in the United States (Florida), is instituting reforms to significantly reduce its death penalty use. China is continuing a program of economic and political liberalization: local elections are being held, property rights are emerging, political issues receive guarded discussion but public discussion nonetheless, the effects of double digit GDP growth year after year are starting to become apparent. Detente is the current trend in the often bellicose relationship between mainland China and Taiwan. The Chinese takeover of Hong Kong did not destroy this pocket of East Asian prosperity. North Korea is increasingly isolated even from one time Chinese and Russian allies. The United States and communist Vietnamese regime, once at war, now have trade relations and exchange tourists, trade relations have also been restored with Laos whose communist regime leaders have handed over the party and the nation to a younger generation of leaders.

Japan is emerging from its post-war period of dominant party government and become a genuinely multi-party system that is focused on economic rather than military expansionism, and finding its place for itself as a developed, rather than a developing country. South Korea too is emerging into the ranks of relatively political stable civilian democracies with a developed economy.

South Asia and Southeast Asia

India is also showing notable signs of progress: an Indian automobile company bought luxury brand from U.S. companies, modern plumbing is reaching its hinterland, a rising professional class there, enabled by telecommunications, is exporting services to the United States, once epidemic disease like polio are on the verge of eradication there, the government is developing practical social welfare programs like a guaranteed job system that seems to finally be circuumventing a long history of corruption. Decades of civil war in Sri Lanka have ended. India and Pakistan are cooperating in the wake of a terrorist attack in India, and the U.S. and Pakistan are cooperating in addressing violent Islamist forces near its Afghan border. Pakistan's system of civilian rule survived a crisis that errupted when its leader with ties to the military tried to oust its supreme court. The elected civilian government in Bangladesh has ended a two year state of emergency and put down a mutiny by one of its military units.

Indonesia, which not so long ago was under the grip of a many decades old dictatorship, has seen democracy restored. A separatist conflict in Aceh, Indonesia ended in 2005 the deal that ended it has held for four years. Relative peace has helped Indonesia cope with a serious tsunami and major earthquakes. This has also made possible independence for East Timor.

The Near East

The Iraqi civil war from which we are planning to withdraw significantly this spring, is also winding down with the key milestone of national elections completed this past weekend. Afghanistan may be at war, but that nation has spent eight years mostly outside the oppressive rule of the Taliban and a fragile civilian political structure and network of public services is emerging.

The Israeli-Palestinian conflict continues, but the once frequent suicide bombings in Israel are now rare. The peace deal brokered by President Carter between Israel and Egypt after thirty years of war, has now held for more than thirty years. The peace deal between Israel and Jordan brokered by President Clinton likewise remains in force. Massive influxes of refugees from Iraq into Syria and Jordan have not destabilized those governments.

Africa

One of the messy civil wars in Sudan (it has more than one of them) is about to reach a permanent resolution with the likely creation of the independent nation of South Sudan this year. Long civil wars are over in Sierra Leone, Liberia, Ethiopia, Angola and Mozambique (which is seeing solid economic growth despite multiple rounds of crippling floods). A fragile political truce in Kenya ended political violence that threatened to errupt into war there after a disputed 2007 election. South Africa's apartheid regime is no more and interracial politics are functioning at least as well as politics do in most of the developing world, and Namibia likewise has a post-apartheid independent civilian government.

While Uganda's recent history has been dotted with many troubling incidents of genocide, involvement in an ugly multi-polar war in Congo, and the near adoption of draconian anti-gay laws, its legislature also adopted massive legal reforms granting rights to women, has provided refuge to people fleeing conflicts in neighboring countries and has been a host to international war crime tribunals.

Problems For A New Era

We live in a world that still has totalitarian regimes, that still has ugly civil wars and ethnic violence raging, that still has many places where peace and democracy are fragile. But, a world no longer inclined to fight Cold War struggles by proxy has made resolution of myriad little wars and the creation of democratic civilian governments possible.

Some of the problems the world faces today are relatively new, like the intense drug war in Mexico and the flare up of ethnic violence in the Sahel. Others, like some of the repressive regimes in post-Soviet Central Asia, look bad only because they have maintained a status quo that other post-Soviet republics improved upon. The international community has an ability now that it once lacked to focus attention on domestic government abuses in countries like Burma, Iran and Darfur, and an ugly war in the Congo.

Traffic Deaths Reach Record Lows In 2009

Traffic deaths reached their lowest level (in absolute numbers) since 1954 in 2009.

[T]otal traffic deaths declined nearly 9 percent in 2009 — to 33,963. That's the lowest toll since 1954. In 2008, an estimated 37,261 people died on the roadways. The newest numbers fit into a trend of steady decreases since 2005, when an estimated 43,510 people were killed.

Adjusted for population, miles traveled, or any other reasonable factor to reflect how much more driving there is now than there was then, they are probably at their lowest level since the car was invented.

Important factors in the decline probably include increased seat belt use, a decline in drunk driving, better trauma care, recession driven decreased traffic volumes and vehicle safety features.

Suburban Ghettos

Until the advent of the automobile, city fringes were were the poor lived, and the better off people lived closer to the core of the city. This situation hasn't vanished. There are currently many cities that have refused to annex low income neighborhoods, leaving them in unincorporated areas with minimal government services despite their urban nature, as discussed in the linked article.

We Own GMAC

What ever happened to GMAC, the former lending arm of General Motors?

The federal government has so far spent $17.2 billion to bail out GMAC and now owns 56.3 percent of the company. Both GMAC and Treasury insist that the company is solvent and will not require any additional bailout funds, but taxpayers already bear significant exposure to the company, and the Office of Management and Budget (OMB) currently estimates that $6.3 billion or more may never be repaid.

A Congressional oversight panel for GMAC isn't impressed with how the situation has been handled so far, or by the company's lack of plan going forward.

The National Balance Sheet

What do households and the non-profit sector (combined) own, and what does it owe in the United States?

Where is the breakdown as of the fourth quarter of 2009?

Assets $68.2 Trillion
- Real Estate $18.2 Trillion
- Other Non-Financial Property $4.8 Trillion
- Financial Assets $45.1 Trillion
-- Cash and Equivalent $7.7 Trillion
-- Bonds and Loans Payable $4.2 Trillion
-- Corporate Equity $7.7 Trillion
-- Mutual Funds $4.4 Trillion
-- Life Insurance Reserves $1.2 Trillion
-- Pension Reservers $11.8 Trillion
-- Closely Held Businesses $6.5 Trillion
-- Other Financial Assets $1.5 Trillion

Liabilities $14.0 Trillion
- Mortgages $10.3 Trillion
- Consumer Credit $2.5 Trillion
- Other $1.2 Trillion

Net Worth $54.2 Trillion.

For comparison's sake, the richest man in the world according to the issue of Forbes released today, has a net worth of $54 billion (about 1/1000th of the total for the United States).

Of course, there is huge variation in household net worth. Wealth is highly concentrated. We are a long way from equality. For example:

[W]hite women in the prime working years of ages 36-49 have a median wealth of $42,600 (still only 61% of their white male counterparts), the median wealth for women of color is only $5.

Once they get past their childbearing/rearing years, single black women do better. Their net worth rises to nearly $60,000 for the 50 to 65 cohort. But single white women show a greater increase in net worth across the two age groups, of nearly $70,000. . . .

Black women, in general, were more likely to have participated in the subprime loan crisis with upper-income black women being five times more likely to have received a high-cost mortgage than upper-income white men.

Detroit Still Downsizing

Mayor Dave Bing is proposing to abandon large swaths of the city, move the few people remaining to more functional neighborhoods, tear down the buildings left behind and let what's left become forests, pastures and farmland.
The consolidation, aside from eliminating square miles of eyesores, would cut the cost of services like police, fire, snow removal, water and sewage.

Already people are said to hunt pheasants in abandoned neighborhoods, and Detroit-grown produce is sold in farmers markets. The markets are important because not one national grocery chain has a store in the city. Soon, if the city wants to have food, it may have to grow its own. . . .

Between 1970 and 2000, 161,000 buildings were demolished. There is estimated to be 40 square miles of vacant property, with 33,500 empty houses and 91,000 vacant lots.

From here.

Detroit has a city budget deficit of about $350 per person, an average house value of under $80,000, below average incomes and lots of resiidents who live the city to shop, all making it very hard to bridge the tax gap.

Greater Denver, meanwhile is having more success attracting grocery stores. A California chain is snapping up half a dozen former Albertson's sites in Colorado from Longmont to the South suburbs and Sunflower, a small natural foods grocer, is looking into a new grocery store in North Denver which lacks them.

A former Cub foods location in Glendale, Colorado (which is surrounded entirely by Denver) is still a big vacant hole in that urban village.

Military Procurement's One Size Fits All Disease

The United States military is close to trying to start the process of developing a major new weapons system called the Ground Combat Vehicle (GCV) Infantry Fighting Vehicle. Initial proposals are due in April. The proposal has deep conceptual flaws and should be scrapped before it starts.

Big

There has been discussion of it being as heavy as 70 tons, about the same as an M1 Abrams heavy tank, and 50 tons is well within the range of possibility. The draft request for proposal requires that it be transportable on a C-17 or C-5 military transport, which is an effective cap on its size of about 70 tons. But, it would not be required to be small enough to be C-130 transportable (like the Stryker or most models of the MRAP (mine resistant ambush protected) vehicle, or like a previously planned Future Combat system manned ground vehicle (MGV)). There isn't even a requirement that two of them could be fit on a C-17 (i.e. 35 tons), which would double the number that could be moved to places with only air transportation and make it more capable of being shipped by rail or crossing civilian bridges.

M1 Abrams tanks have been left behind in places like Afghanistan and Kosovo, but it is hard to get them to the scene in a timely fashion and they are hard on local infrastructure once they arrive.

Multiple Expectations

The temptation to make it big will be great, however, because it is supposed to have a great many capabilities.

The expectations for the vehicle are also perhaps more than should be expected of a military vehicle. While it isn't expected to be amphibious like the troubled Marine Expeditionary Fighting Vehicle, a lot is asked of this proposed next generation Bradley infantry fighting vehicle. According to an Army General in charge:

Our goal is for the GCV, carrying an infantry squad, to equal or surpass the under-belly protection offered by MRAP, the off-road mobility and side protection of the Bradley Fighting Vehicle, and operational mobility of the Stryker.

The planned crew is three to run the vehicle and nine Army soldiers as passengers. It is also supposed to have a more powerful canon, active defenses as well as armor, an integrated non-lethal weapons system, air conditioning and more speed than an Abrams tank or a Bradley.

Realistically, given the demands for off road capabilities, it must have tracks rather than wheels. A major motivation for the program is the limited off road capability of wheeled MRAP and Stryker vehicles.

Positive Points

One key idea behind the program isn't necessarily a bad one. The vehicle is supposed to be designed to take extra armor when circumstances warrant, and to shed it when they don't.

The requirements that the vehicle have air conditioning and be "networked" also seem reasonable.

Other procurement ideas in this program are also not bad. The plan is to have at least three bids and to have at least three competing designs until late in the design process, "all GCV technologies must be . . . proven to work in a simulated operational environment" and it is supposed to be operational in seven years.

Conceptually Flawed

The problem with the Ground Combat Vehicle program is that it simply tries to do too much in one vehicle. A vehicle with integrated non-lethal technologies has its place; but not in the same vehicle that is capable of withstanding on onslaught of fire from autocanons, provides 360 degree protection from rocket propelled grenades and has defenses against heavier anti-tank guided missiles and sabot rounds.

The need to have all nine members of an infantry squad in a single vehicle (in addition to three vehicle crew) is not obvious.

Speed and the kind of off-road capabilities that you can only get in a tracked vehicle aren't good companions.

The strong desire for off-road capabilities doesn't seem to be a good fit with how the Army uses its vehicles in practice. The primary design feature of the Humvee was off-road capability comparable to that of tanks and Bradley fighting vehicles. It delivered, but in practice was almost always driven on road anyway, even in places like Iraq where there are extreme threats of bombs buried in roads.

A focus on a bigger canon doesn't necessarily make sense against the backdrop of a military environment where the trend has been heavily towards missiles for technological reasons. For example, in the Gulf War, Bradleys which have infantry squad sized anti-tank missiles instead of the heavy tank round of the Abrams tank, proved just about as effective as Abrams tanks which are designed for anti-tank warfare, at destroying Iraqi tanks.

Too Hard For Army Procurement?

The simple truth is that U.S. military has a hard enough time making single purpose vehicles. The Army's non-line of sight launch system (NLOS-LS), which was salvaged from the Army's old Future Combat System, is far less complex than the proposed Ground Combat Vehicle. It is supposed to be an easily deployable guided missile system, no armor, no infantry squads, just missiles.

But, the current design, after six years of development efforts, is widely inaccurate. Its infrared target seeker doesn't work. And, it costs $466,000 a missile, far more than anything even remotely comparable in service today.

Its older laser designated target system works better but can be done with far less expensive technology. Yet, we already have GPS guided artillery shells in the field, smart bombs in the Air Force, guided missiles deployed by fixed wing aircraft, helicopters and drones, and guided missiles that are deployed from ships.

The last time the Army tried to design an active defense system from scratch it ultimately gave up and modified one that the Navy had managed to make work for its ships instead.

The truth of the matter is that the Army has been utterly vexed at even much less ambitious projects like upgrading the M4 carbine and M16 rifle using commercial off the shelf technologies.

The Marines have pretty much failed at coming up with a light armored troop carrier capable of crossing water at landing craft speeds by itself, called the Expeditionary Fighting Vehicle, comparable in clout to the Army's Stryker vehicle, despite seemingly endless efforts to make it work.

The Navy ultimately had to abandon the advanced gun system railgun concept that was to be a central feature of its Zumwalt class destroyer and had to kill the ship design after only a couple of units because it was so far overbudget.

The F-35 joint strike fighter program was designed to replace all of the various Air Force, Marine and Navy fixed wing fighter programs. The result is far overbudget, struggling to meet the existing short takeoff, vertical landing capabilities that the Marines and foreign navies want in their F-35B version, not a top priority for the Navy, and a plane that the Air Force doesn't like as much as the more narrowly focused air dominance fighter, the F-22. And, on top of that it is a poor substitute for the A-10 which proved its worth as a robust purpose built air to ground aircraft in Iraq. Just because stealth and jet speed are sometime desirable does not mean that they need to be capabilities of every single fighter jet; those are very expansive capabilities that often aren't needed. The Ground Combat Vehicle is coming perilously close to replicating the problems of the F-35 by trying to fit too many missions into one vehicle.

We are learning the same thing about the Marine's V-22 Osprey. A vertical takeoff and landing medium transport that can convert to a fixed wing mode has its place in niche applications like special operations insertions and evacuating expatriots from countries gone to hell. But, that niche is pretty narrow. Most of the time, a comparably sized fixed wing helicopter, or a comparable sized short takeoff and landing fixed wing aircraft, is a perfectly good alternative. A short takeoff and landing fixed wing aircraft with the Osprey's modest cargo capacity can manage with a surprising short and primative field airstrip.

Asking the impossible with conflicting priorities is a way to be certain that a project will come in above budget and behind schedule. One size fits all doesn't make sense for the nation with the world's largest military budget and fewest concerns about economies of scale, particularly for Army vehicles which aren't nearly as expensive as aircraft or ships.

The Case For A Less Ambitious Approach

Rather than ask for everything in a single vehicle, the Army should consider how the tasks it is requesting can be distributed. This is the whole point of having a networked force, after all.

Urban terrain and transportability should put a practical limit of 35 tons on the new vehicle even when fully armored, perhaps with C-130 transportability when its heavy duty armor and full suite of active defenses, designed to be modular, are removed. The non-lethal weapons suite could be designed for use only as an alternative to removable armor in the infantry carrier vehicles. It also needs to have smaller dimensions than the Abrams tanks to fit the reality that urban and mountainous terrain in much of the world doesn't fit extra-wide vehicles.

Why not use four vehicles per squadron of infantry deployed instead of one?

Three vehicles could carry three soldiers as passengers each. One could carry the heavy offensive weapon that the DOD wants, which wouldn't be restricted to a canon.

It doesn't necessarily make sense to have a light version of a heavy offensive weapon vehicle at all; situations that require heavy firepower rarely call for light armor. It has been forty years since the U.S. military has made use of a medium weight tank that is not expected to carry an infantry squadron, and perhaps the time has come to add that kind of vehicle to our arsenal.

Rather than insisting that every vehicle have off-road capability, the Army should consider buying a small number of slower, off-road capable tracked vehicles, and a large number of faster, more fuel efficient wheeled vehicles, not necessarily with shared designs.

Perhaps we the modular armor feature doesn't even make sense. The Army is simultaneously commissioning a more lightly armored, mined resistant vehicle to replace interim solutions like the armored humvee and the MRAP. Perhaps the Army should simply stick to the less ambitious project a creating a vehicle that is always heavily armored, rather than a modular design. The integrated non-lethal weapons capability could be made a version of the already in the works lighter vehicle proposal.

Yes, that means more (perhaps four) smaller, less versatile programs: a thirty-five ton or less three soldier carrying heavy infantry fighting vehicle with off road capability with heavy armor; a thirty five ton or less three soldier carrying heavy infantry fighting urban vehicle with heavy armor; a thirty five ton or less medium tracked tank; a thirty five ton or less medium wheeled tank.

Each of those program would have a greater chance of producing something useful, on budget, in a reasonable time frame. And, all four could be built by different contractors if different contractors came up with the best proposals in different categories. There is no reason for different military vehicles to have particularly high levels of parts compatibility, beyond having compatible fuels.

Also, rather than mandating capabilities, which ultimately depending on the ability of engineers to develop new technologies, the Department of Defense should consider mandating weight and price and delivery dates and general purpose, and letting the most capable and feasible proposal win.

Seven years is too long. It assumes significant R&D effort, rather than something that can be built with current technology. The technology we have already in 2010 is pretty good. If something better comes along in 2015, we can buy more vehicles in a new model. Car companies introduce new models every few years. The U.S. military could do the same. If there is less of an R&D commitment, the need to commit to a large buy of the vehicles isn't as great.

Anyway, realistically, many important technologies are simply a product of advances that would be made anyway in the civilian sector, rather than technologies developed specifically for the military. One of the main networking tools of the first Stryker battalions was Microsoft Outlook. Defense contractors hadn't come up with better solutions. Similarly, civilian satellite phones, cell phones and GPS systems proved at least as well suited to the needs of the battlefield as purpose built military designs.

One of the problems in F-22 and F-35 development and ship based active defense systems in the Navy has been that civilian computer systems had grossly outstripped the original military designs in the time the elapsed from the start of the project to the end.

How much force protection and speed can you get in a thirty-five ton diesel fueled tracked vehicle that costs less than $4 million a unit that can be delivered in four years or less? Let's find out, instead of presupposing an answer.

If a contractor can do the job with three vehicles of under thirty-five tons, two with five carried soldiers each, and one medium weight tank, let them propose it as an alternative. Let contractors put more than one set of vehicles into the competiton so that procurement officials have more choices closer in time to the final decision point with vehicles that are closer to viable.

Creative Destruction At Work In Colorado

The phase "Creative Destruction" coined by Schumpeter, a big picture economist, refers to the fact that those who lead new economic revolutions are rarely the ones who were the leaders before those revolutions.

As a case in point, the tech bust of 2001 utterly overhauled the ranks of Colorado's big businesses. About two-thirds of their combined lost value came from reduced shares prices for Qwest and Level 3. Many others have ceased to exist.

In 2000, 32 public companies in Colorado traded at a market value of $1 billion or more. Measured at their peak values, those Colorado companies, some of which traded on exchanges other than the Nasdaq, had a combined value of $369.3 billion. As of Friday, there were 30 Colorado public companies with a market value of $1 billion or more. But as a group, they had a combined market value of $161.4 billion. . . . In 2000, Qwest Communications, laying fiber-optic strands across the country, crested above a remarkable $100 billion in market value. Qwest is now worth about $8.2 billion. . . . [Broadband company] Level 3 Communications, once valued at nearly $50 billion, is worth $2.6 billion. . . .

Half of the 32 companies in 2000 on the $1 billion-plus list . . . aren't around anymore as independent companies. Most went bankrupt, got delisted or fell to valuations so low that stronger players took them out. . . .

[I]n 2000 thought Rhythms Netconnections was worth $4 billion. By the summer of 2001, the DSL provider was in a bankruptcy liquidation. [Also gone are] New Era of Networks, ICG Communications, McData, Tanning Technologies and FirstWorld Communications.

"Liberty Media, a media and entertainment holding company with interests in QVC, Ticketmaster and DirecTV" is one of the few companies from that list to retain a high value now.

The world of high tech start up companies that thrived before the tech bust still hasn't recovered a decade later. "The Nasdaq composite index peaked at 5,048.62 on March 10, 2000. . . . On Tuesday, the index closed at 2,340.68, still 53.6 percent below that high mark."

Hands On Homelessness Prevention

Colorado public radio's KCFR program Colorado Matters had an interview (audio only) today with Liesl Begnaud about a homelessness prevention program of the Homelessness Prevention Coalition that she manages targeted at families in financial distress in the metro Denver area.

The program focuses on weekly counseling sessions with the families, usually at their homes, designed to help them access resources available to them, identify ways to produce income, and manage their finances. These families are often not aware of the resources available to them and are often so overwhelmed with the issues that they need to address, so having an individual available to provide guidance can make a real difference.

It also spends up to an additional $3,000 per family to assist financial with costs from GED application fees to mattresses for children to sleep on and more. Begnaud notes that the traditional shelter based homelessness response system costs about $12,000 per year per person, which is dramatically more expensive.

According to Begnaud, of the 110 families in the program (about 90 at any one time), all manage to stay in their homes for three months and 94% manage to do so for six months.

Traditional, more bureaucratic programs, are rarely narrow in scope rather than providing a holistic, pro-active approach that may work better.

Colorado Springs Gazette Files For Bankruptcy

The Denver Post reports (in a buried short on the business page) that the holding company for the Colorado Springs Gazette has filed for bankruptcy. Reportedly, secured creditors will take about 60 cents on the dollars.

The details of the plan's impact on other creditors and shareholders was not discussed. Normally, in a bankruptcy where secured creditors do not receive payment in full, non-priority general creditors other than trade creditors get nothing and existing shareholders lose their shares. The story did not discuss who would control the new entity.

It appears that the publication will continue to be open for business without interruption.

This news, combined with the earlier bankruptcy of the holding group for the Denver Post and Boulder Daily Camera (among others), and the demise of the Rocky Mountain News, means that a very large share of all of the newspapers have either liquidated or gone bankrupt in a very short period of time.

The Denver Post and Colorado Springs Gazette are the only two newspapers in the state (other than one for the Associated Press generally) with dedicated state house bureaus. Thus, it is possible that the change media control environment in the state could meaingfully impact the character of state political reporting in Colorado.

UPDATE: Editor and Publisher has more detail:

[The[ reorganization plan . . .would give key lenders ownership of the company. In exchange, the company's secured lenders, led by JPMorgan Chase, would cut the amount of debt Freedom owes them to $325 million, a nearly 60 percent reduction from $770 million.

Burl Osborne, who was named interim chief executive officer last June" [will continue to be the CEO.]. . . The new company's board would consist of Osborne and five newly appointed independent directors.

Freedom Communications Holdings Inc., which publishes The Orange County Register in California and more than two dozen other dailies and owns eight television stations, filed for bankruptcy protection in September. . . . [it will sell] the East Valley Tribune in Arizona and several other Phoenix-area publications for a base price of about $2 million to 1013 Communications LLC, an affiliate of Thirteenth Street Media. Thirteenth Street publishes the Explorer, a weekly in suburban Tucson, and the Telluride (Colo.) Daily Planet. . .

[U]nsecured creditors [who objected to an original plan that would have left the shareholders of the company with some equity] stand to recover far more than the $5 million they would have shared under the initial plan, possibly as much as $56 million. . . . The plan leaves nothing for the former family and investment firm shareholders[.] . . . vendors and suppliers with claims against Freedom would get about $5 million. Pension holders would get about $12 million, representing 70 percent of their original pensions.

Other unsecured creditors, including plaintiffs in a lawsuit brought by newspaper carriers against the Register, would be the beneficiaries of a $14.5 million trust fund, part of which would be used to fund a lawsuit in which they could recover an additional $25 million. Feinstein said the lawsuit likely would allege that certain Freedom officers and directors breached their fiduciary duties in the run-up to its bankruptcy filing. . . . Most of the creditors covered by the trust fund are newspaper carriers for the Register who reached a $28.9 million settlement last year over claims that they should have been considered employees instead of contractors. The settlement was to have been finalized in September but was interrupted by the company's bankruptcy filing.

Ladies Night Promotes Public Health

Some people are aggressive mean drunks. Overwhelmingly, these people are not women. These people are also disproportionately men who weight 215 pounds. (FWIW, the study used screwdrivers to get the subjects drunk.)

There is even more good news for women who drink alcohol from a study of the drinking habits and weight of 19,220 women over age 38 who started the study at a normal weight:

[A]fter almost 13 years about 41 percent of the women were overweight or obese. Women who reported drinking no alcohol — 38 percent of the entire sample — gained the most weight. A statistical analysis showed that women who did not drink could expect to gain 3.45 to 3.80 kg during the 13-year study. In contrast, women who drank moderately — about one to two glasses of wine a day — could expect to gain between 2.13 and 2.99 kg.

The trend held true up through moderate drinking levels, but researchers didn’t have enough heavy drinkers in their sample group to analyze. Only 3 percent of their sample group reported drinking two to three drinks per day or more.

The type of alcohol didn’t much matter. . . . Red wine, white wine, beer and liquor all showed the same trend.

This could be because drinking often leads to dancing in women: "Women of normal weight . . . tend to burn more calories after drinking alcohol than the alcohol itself provides."

Beyond GDP

The standard mindset of economics is to see the point of everything to be maximizing productivity (as measured by the inputs to Gross Domestic Product), and the maximize GDP itself.

As a first order goal, it isn't a bad approach.

But, productivity fails to capture important measures relevant to quality of life (e.g. the benefits of having diverse products produced on a small scale rather than homogeneous mass produced products) and economic resilience (e.g. the benefits to technology growth and economic ability to deal with hard times that comes from having lots of businesses capable of making sophisticated things).

GDP also has its faults beyond those associated with problems with productivity itself as a measure of quality of life. A good example of that is the role that inventory plays in the measure.

The U.S. had GDP growth at a 5.9% annual rate in the fourth quarter of 2009, which was better than the 5% annual rate of growth experienced by the Candians in the fourth quarter of 2009. This sounds great until you learn that most of the American GDP growth came from building up inventories that weren't sold in the quarter. In contrast, the Canadians actually reduced their inventory levels.

Without considering changes in inventories, U.S. GDP growth in the 4th quarter of 2009 had a much more modest 2.0% annual growth rate, while the Canadian's GDP annual growth rate was more than 5.0% and included health growth in all other sectors of GDP.

In this context, GDP inclines one to the same mistake about economics that the Soviets made in their regime. Productivity is good, but it is actually only good when you are making something that people want to buy.

Bainbridge Does Fantasy Law

Professor Bainbridge on Corporations: "shareholders do not own the corporation."

Nice theory, if you are a CEO. Bad law. Ownership of corporate shares is collectively ownership of the corporation. The corporation as a nexus of contracts is a nice theory, but simply isn't the law and isn't even a very realistic description of how corporations work.

There are large, contract based entities, like Franchise, that bind together little firms. But, a firm and a contract are different economic realities.

Alas, Narrowed Bankruptcy Gag Rule Lives

The U.S. Supreme Court has upheld a provision of the 2005 bankruptcy reform act that prohibited attorneys from giving certain kind of advice, by making clear that it should be read narrowly to prohibit only advice that a client abuse the bankruptcy system, rather than any advice that a client take on more debt when permitted by law to do so.

The decision is unanimous on all points that matter. Justice Scalia writes a concurring opinion to quibble over the inclusion of a legislative history footnote of the opinion of the court that is dicta. Justice Thomas offers a concurring opinion with a different analysis of the reason the court should rule in a particular way on a secondary point in the case.

In essence, the change relegates advice to take on more debt solely because the cilent is filing for bankruptcy to the some realm as the prohibition of attorney participation in crimes, frauds and frivolous lawsuits.

Lower courts had invalidated the law as an infringement on free speech which deserved special protection in an attorney-client relationship that was fundamental to providing a client with due process.

The trouble with the case is that it has indirectly rendered improper client conduct in bankruptcy that was not clearly improper before this case went to the court in a way that is far that leaves the boundaries of proper conduct far less clear than the court suggests.

The Holding

The U.S. Supreme Court explains in its synopsis of the case (which is for ease of use only; the opinion itself is what counts):

Section 526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose. The statute’s language, toether with its purpose, makes a narrow reading of §526(a)(4) the natural one. . . . [T]he controlling question [is] . . . whether the impelling reason for “advis[ing] an assisted person . . . to incur more debt” was the prospect of filing for bankruptcy. In practice, advice impelled by the prospect of filing will generally consist ofadvice to “load up” on debt with the expectation of obtaining its discharge. The statutory context supports the conclusion that §526(a)(4)’s prohibition primarily targets this type of conduct. The Court rejects . . . arguments for a more expansive view of §526(a)(4) and its claim that the provision, narrowly construed, is impermissibly vague. Pp. 9–18.

The devil, of course, is in the details. How broad is broad? Reading from the opinion itself (citations omitted, paragraph breaks added):

The Court of Appeals concluded that “§526(a)(4) broadly prohibits a debt relief agency from advising an assisted person . . . to incur anyadditional debt when the assisted person is contemplating bankruptcy.” Under that reading, an attorney is prohibited from providing all manner of “beneficialadvice—even if the advice could help the assisted person avoid filing for bankruptcy altogether.” . . .The Government contends that §526(a)(4)’s re-striction on advice to incur more debt “in contemplation of” bankruptcy is most naturally read to forbid only advice toundertake actions to abuse the bankruptcy system. Focus-ing first on the provision’s text, the Government points tosources indicating that the phrase “in contemplation of”bankruptcy has long been, and continues to be, associated with abusive conduct. . . .

[W]e are persuaded that a narrower reading of §526(a)(4) is sounder,although we do not adopt precisely the view the Govern-ment advocates. The Government’s sources show that the phrase “in contemplation of” bankruptcy has so commonly been associated with abusive conduct that it may readily be understood to prefigure abuse. As used in §526(a)(4), however, we think the phrase refers to a specific type of misconduct designed to manipulate the protections of the bankruptcy system. . . . [W]e conclude that §526(a)(4) prohibits a debt relief agency only from advising a debtor to incur more debt because the debtor is filing for bankruptcy, rather than for a valid purpose. . . .

[A]dvice to incur more debt because of bankruptcy, as pro-hibited by §526(a)(4), will generally consist of advice to “load up” on debt with the expectation of obtaining itsdischarge—i.e., conduct that is abusive per se. . . .

Code provisions predating the BAPCPA already sought to prevent the practice of loading up on debt prior to filing. Section 523(a)(2), for instance, addressed the attendant risk of manipulation by preventing the discharge of debts obtained by false pretenses and making debts for purchases of luxury goods or services presumptively nondischargeable. See §§523(a)(2)(A) and (C) (2000 ed.).

The BAPCPA increased the risk of such abuse, however, by providing a new mechanism for determining adebtor’s ability to repay. Pursuant to the “means tes[t],”§707(b)(2)(D) (2006 ed.), a debtor’s petition for Chapter 7 relief is presumed abusive (and may therefore be dismissed or converted to a structured repayment plan under Chapter 13) if the debtor’s current monthly income exceeds his statutorily allowed expenses, including payments for secured debt, by more than a prescribed amount. See §§707(b)(2)(A)(i)–(iv). The test promotes debtor accountability but also enhances incentives to incur additional debt prior to filing, as Unlike the reasonable financial advice the Eighth Circuit’s broad reading would proscribe, advice to incur more debt because of bankruptcy presents a sub-stantial risk of injury to both debtors and creditors. See Hersh, 553 F. 3d, at 760–761. Specifically, the incurrenceof such debt stands to harm a debtor if his prepetitionconduct leads a court to hold his debts nondischargable, see §523(a)(2), convert his case to another chapter, ordismiss it altogether, see §707(b), thereby defeating his effort to obtain bankruptcy relief. If a debt, althoughmanipulatively incurred, is not timely identified as abu-sive and therefore is discharged, creditors will suffer harm as a result of the discharge and the consequent dilution of the bankruptcy estate. By contrast, the prudent advicethat the Eighth Circuit’s view of the statute forbids would likely benefit both debtors and creditors and at the very least should cause no harm. See id., at 760; 541 F. 3d, at 800 (Colloton, J., concurring in part and dissenting inpart). For all of these reasons, we conclude that §526(a)(4) prohibits a debt relief agency only from advising an as-sisted person to incur more debt when the impelling rea-son for the advice is the anticipation of bankruptcy.payments on secured debts offset a debtor’s monthly income under the formula.

Other amendments effected by the BAPCPA reflect a concern with this practice. For instance, Congress amended §523(a)(2) to expand the exceptions to discharge by lowering the threshold amount of new debt a debtormust assume to trigger the presumption of abuse under §523(a)(2)(C), and it extended the relevant prefiling win-dow. See §310, 119 Stat. 84. In context, §526(a)(4) is best understood to provide an additional safeguard against the practice of loading up on debt prior to filing. . . .

Unlike the reasonable financial advice the Eighth Circuit’s broad reading would proscribe, advice to incur more debt because of bankruptcy presents a substantial risk of injury to both debtors and creditors. Specifically, the incurrence of such debt stands to harm a debtor if his prepetition conduct leads a court to hold his debts nondischargable, see §523(a)(2), convert his case to another chapter, or dismiss it altogether, see §707(b), thereby defeating his effort to obtain bankruptcy relief.

If a debt, although manipulatively incurred, is not timely identified as abusive and therefore is discharged, creditors will suffer harm as a result of the discharge and the consequent dilution of the bankruptcy estate. By contrast, the prudent advice that the Eighth Circuit’s view of the statute forbids would likely benefit both debtors and creditors and at the very least should cause no harm. . . . For all of these reasons, we conclude that §526(a)(4) prohibits a debt relief agency only from advising an assisted person to incur more debt when the impelling reason for the advice is the anticipation of bankruptcy. . . .

Section 526(a)(4) by its terms prevents debt relief agencies only from “advis[ing]” assisted persons “to incur” more debt. Covered professionals remain free to “tal[k] fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case.”

Section 526(a)(4) requires professionals only to avoid instructing or encouraging assisted persons to take on more debt in that circumstance. Cf. ABA Model Rule of Professional Conduct 1.2(d) (2009) (“A lawyer shall not counsel a client to engage, or assist a client, in conduct that the lawyer knows is criminal or fraudulent, but alawyer may discuss the legal consequences of any proposed course of conduct with a client and may counsel or assist a client to make a good faith effort to determine the validity, scope, meaning or application of the law”). Even if the statute were not clear in this regard, we would reach the same conclusion about its scope because the inhibition of frank discussion serves no conceivable purpose within the statutory scheme. . . .

Under our reading of the statute, of course, the prohibited advice is not defined in terms of abusive prefiling conduct but rather the incurrence of additional debt when the impelling reason is the anticipation of bankruptcy. Even if the test depended upon the notion of abuse, however, Milavetz’s claim would be fatally undermined byother provisions of the Bankruptcy Code, to which that concept is no stranger. As discussed above, the Code authorizes a bankruptcy court to decline to discharge fraudulent debts, see §523(a)(2), or to dismiss a case orconvert it to a case under another chapter if it finds thatgranting relief would constitute abuse, see §707(b)(1). Attorneys and other professionals who give debtors bank-ruptcy advice must know of these provisions and their consequences for a debtor who in bad faith incurs addi-tional debt prior to filing. Indeed, §707(b)(4)(C) states that an attorney’s signature on bankruptcy filings “shall constitute a certification that the attorney has” determined thatthe filing “does not constitute an abuse under [§707(b)(1)].” Against this backdrop, it is hard to see how a rule thatnarrowly prohibits an attorney from affirmatively advising a client to commit this type of abusive prefiling conduct could chill attorney speech or inhibit the attorney-clientrelationship. Our construction of §526(a)(4) to prevent only advice principally motivated by the prospect of bankruptcy. . . .

6 The hypothetical questions Milavetz posits regarding the permissibility of advice to incur debt in certain circumstances, see Brief for Milavetz 48–51, are easily answered by reference to whether the expectation of filing for bankruptcy (and obtaining a discharge) impelled the advice.

We emphasize that awareness of the possibility of bankruptcy is insufficient to trigger §526(a)(4)’s prohibition. Instead, that provision proscribes only advice to incur more debt that is principally motivated by that likelihood. Thus, advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor’s interest rates or improve his ability to repay is not prohibited, as the promise of enhanced financial prospects, rather than the anticipated filing, is the impelling cause.

Advice to incur additional debt to buy groceries, pay medical bills, or make other purchases “reasonably necessary for the support or maintenance of the debtor or a dependent of the debtor,” §523(a)(2)(C)(ii)(II), is similarly permissible.

The Problem With The New Rule

This isn't the ruling I would have liked, but it is better than it might have been.

Here's the real issue:

1. The bankruptcy system, particularly the means test, often makes it beneficial to a client to incur more debt prior to bankruptcy. This can make the difference for example, between not qualifying for the means test and having to engage in a five year payment plan under Chapter 13, and being permitted to file under Chapter 7 and making no payments into the estate out of post-petition income.

2. It is exceedingly rare that lawyers are prohibited from recommending to a client that a client take action that is lawful which would benefit the client. Generally, an attorney does not have a duty to prevent his client from causing financial harm to adverse parties in a lawsuit through pre-suit financial planning.

Instead, generally, in bankruptcy, creditors have a duty to look out for themselves knowning that they could lose the ability to be repaid if they make a bad credit decision. Debtors have a duty to be truthful in the face of a creditor's inquiry about present facts, but not a duty to affirmatively disclosure opinions about what the debtor will do in the future, or to refrain from acts that could cause a creditor future financial harm. Debtors and creditors are not generally fiduciaries for each other.

There reason that there are so many mechanical rules in bankruptcy about how claims are handled is to let everyone know precisely how far they can go without having to think about their actions in a big picture sense.

3. Prior to Milavetz, Gallop & Milvetz, P. A. v. United States, it is not at all clear that incurring debt in response to an incentive created by the bankruptcy code itself would be a abuse of the bankruptcy process that would genuinely cause a court to hold a debtor's debts nondischargable, convert the case to another chapter, or dismiss it altogether, thereby defeating the effort to obtain bankruptcy relief.

4. This concern is mitigated by the holding that covered professionals remain free to talk fully and candidly about the incurrence of debt in contemplation of filing a bankruptcy case. Thus, presumably, a lawyer can lay out for a client all of the client's options and the consequences of doing so, so long as the option to incur more debt solely for a bankruptcy case related benefit is not recommended by the lawyer.

5. But, the fact that a lawyer can be sanctioned for certifying that conduct is not abusive, and the fact that the U.S. Supreme Court has defined incurring more debt to take advantage of Congressionally created incentives in the bankruptcy code to incur more debt prior to bankruptcy as abusive removes much of the comfort that I lawyer might otherwise have had in laying out a client's options.

6. It is also not at all clear how this issue comes up procedurally, because the very fact specific and language specific inquiry necessary to determine if an attorney has violated the provisions have to be presented to someone in position to take action in the context of a waiver of attorney-client privilege or a permission to make inquiries notwithstanding the existence of an attorney-client privilege.

The former creates an incentive for a client to use accurate advice given to a client that would cause the client to be better off to be used against the lawyer. The latter creates an opportunity for others to ask about otherwise privileged communications in a situation where publicly available information makes it impossible to know with any certainty what an attorney recommended or discussed that produced an action by a client.

The core issue is really point 3 above. The conduct that lawyers were prohibited from talking about was not likely to be considered abusive prior to this case, and the situations when it is legal for a client to incur more debt in advance of a bankruptcy, without it constituting abuse, is now much less clear than it was before this case was decided.

Under prior law, a "pigs get fat, hogs get slaughtered" concept prevailed. If incurring a small amount of additional debt could provide a client with a significant bankruptcy advantage, it would generally not be considered abusive. If a client incurred a large amount of additional debt simply so that it could be discharged, that would generally be considered abusive.

The prior law was particularly muddy in cases where the debtor hurt was not the one to whom additional debt was incurred.

For example, taking out new secured debt prior to bankruptcy may be unlikely to harm the secured creditor (who has the collateral to insure total repayment), but could harm other creditors, by allowing a debtor to file under Chapter 7 rather than Chapter 13. The harm from incurring more debt is thus quite indirect.

Indeed, as a general rule, incurring more debt will often be better for one creditor and worse for another, and frequently the debt who will be better off is not the one to whom new debt will be owed.

The good news, is that the benefits to a debtor of incurring more debt are often modest in a typical bankruptcy case, and often a debtor contemplating bankruptcy won't be able to incur more credit in an case, or can offer at least a mix of bankruptcy and non-bankruptcy reasons for incurring more debt.

Moreover, the clients for whom the rule is a problem tend to be sophisticated enough too draw their own conclusions without having their attorney spell the issue out for them.

If the U.S. Supreme Court had found the provision unconstitutional, Congress would have been free to put better incentives into the law, rather than asking attorneys' who are in the business of being vigorous advocates from their clients best interests, to cease to use legal rights for fear that they could be abusive.

As it is, counseling all clients facing financial distress who have to consider the possibility of bankruptcy is materially less easy in a significant subclass of cases, although usually the burden will not be insurmountable if an attorney is clever about it.