ProfessorBainbridge.com

Claiborne & Churchill Dry Gew�rztraminer Alsatian Style (Central Coast)

Pretty pale straw-gold. Spicy clove and peach aromas. Pineapple and peach flavors. A nice everyday wine, which is a great value at $12, which bumped up its score. Grade B.

Thinking about Ridge and Paul Draper

Long time readers know that I?m an unabashed Ridge fan. Yet, I?m hardly uncritical. As the Wine Spectator also notes, Ridge sometimes veers off into strange directions, especially with its single vineyard Zinfandel-based blends. Usually I attribute such deviations to master winemaker Paul Draper?s insistence on fully ripe grapes. Because Zinfandel often ripens unevenly and can spurt into over-ripeness with astonishing speed, Draper?s Zinfandels can often end up as high alcohol monsters, with funky flavors and even some residual sugar, which is definitely not my cup of tea. The funky/sour off-flavors may also result from Draper?s insistence on using the wild yeasts that come in with the grapes rather than inoculating the grape juice with tame yeasts that would produce more predictable flavor results. Finally, I frequently detect the sweaty saddle flavor and aroma typical of brett contamination (caused by the presence of wild Brettanomyces yeasts on the grapes or in the cellar). The 2000 vintage, for example, was plagued with all of these problems; in 2000, Draper produced a ton of wines plagued by residual sugar, funky/off flavors, and uncertain aging prospects. I'd like to see Ridge become more flexible in its winemaking and vineyard management techniques, so as to produce a more consistent product; I'd especially like to see Draper rein in the alcohol levels and be more willing to inoculate with tame yeasts instead of relying on unpredictable indigenous wild yeasts. Why then do I keep coming back? Because even though Ridge?s quality has a very high standard deviation, the mean is at a remarkably high level of quality. The high standard deviation, moreover, applies at both ends of the distribution. When Ridge gets its really right in the vineyard, the year, and the winery, the results can be spectacular. Top Monte Bellos, Lytton Springs, and Geyservilles can be among the best wines in the world (and at remarkably reasonable prices for the quality).

Pine Ridge Chenin Blanc-Viognier (Napa Valley) 2002

The 2002 Chenin Blanc-Viognier?s unusual blend of varieties produces a tasty, pale yellow wine. Tropical fruit flavors dominate, which is off because those are not flavors I particularly associate with either variety. Pineapple on the nose; pineapples, melons, and grapefruit on the palate. Grade: B- (mostly because its pretty pricey for what you get). Grade: B-

Why I Wouldn't Have Done it that Way

Alan Kellogg got a bit worked up by my critique of the WWII Memorial:

Speer built to exalt the state over Man. The Memorial is built to honor Man, and all that Man can be if given the chance. In time the Memorial will become a part of the landscape, part of your world. Something Speer's work could never be. The Memorial will be part of daily lives, with picnics, children playing, lovers meeting. Young and old will visit, to remember and to wonder at the young gods honored there, given a small measure of divinity by the sacrifices they made.

But how will they get there?

What's more, Feldman says, "no one is asking the hard questions about what happens to that 89-year-old veteran (who visits) when the medical tents come down and the Memorial Day hoopla is over." She notes that the new memorial is "a good 15-minute walk" from the closest subway station and several blocks from the nearest public parking garages.

Heh. Okay, that was a bit snarky, but it is a small part of a larger point. The WWII Generation deserves a memorial. No dispute about that. (Although I suspect the veterans of 1776 and 1861 would have a few words to say about this greatest generation stuff.) Yet, precisely because I honor their sacrifice, I think their memorial should have been appropriate - and this memorial is far from it. Neither sentimentality nor the good motives of the memorial's proponents can immunize the project from criticism. In my view, both the location and the design were highly inappropriate. Nor am I alone in this view; even a Memorial proponent like James Pinkerton admits:

A few critics denounced the boldly assertive design. It was "watered down Albert Speer," snapped The New Yorker. It was "fascist" heckled the National Committee to Save Our Mall. To be sure, the World War Two memorial makes use of pillars and vistas in a way that Hitler and his favorite architect loved.

Although Pinkerton goes on to defend that choice, I still find it a pretty damning admission. I find it hard to believe that the GIs who blew up so many of Speer's facades would feel honored by this burst of neo- fascist architectural design.

The WWII Memorial

I do not begrudge the "Greatest Generation" their memorial in DC. After all, they kicked Nazi ass. Not to mention shredding the Greater East Asian Co- Prosperity Sphere. But I do begrudge their memorial's location smack in the middle of the beautiful and historic vista between the Lincoln and Washington Memorials. And I still think their memorial looks like something Albert Speer might have dreamed up. Sigh.

Tignanello (Tuscany) 1999

A blend of Sangiovese, Cabernet Sauvignon, and Cabernet Franc, aged in French oak, Tignanello is one of the original super-Tuscans. The 1999 Tignanello is a very pretty ruby-garnet. On the nose, one whiffs licorice, damp earth, and leather, but also plums and black cherries. Good acidity makes this a very food friendly wine, while the smooth tannins make it drinkable right now. Grade: A-

Abolishing LLC Veil Piercing

My paper on veil piercing in LLCs is now available for downloading at SSRN. Here's the abstract:

Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is insupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to effect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.

A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question - did the defendant - LLC member do anything for which he or she should be held directly liable?

Using Chesterton to Reply to Solum on the Martial Virtues

In response to my post on the martial virtues, Larry Solum quotes a description of the trial of Socrates, from which he then poses the following excellent questions:

Are the martial virtues true human excellences? How do the martial virtues relate to the virtues of justice and beneficience? These are deep questions, but surely there are no easy answers.

I certainly agree that there are no easy answers, but in the spirit of continuing the discussion (always an enjoyable task when Larry is in the mix), let me quote an apropos passage from G.K. Chesterton's essay on Rudyard Kipling (which a reader was kind enough to pass along):

Now, Mr. Kipling is certainly wrong in his worship of militarism, but his opponents are, generally speaking, quite as wrong as he. The evil of militarism is not that it shows certain men to be fierce and haughty and excessively warlike. The evil of militarism is that it shows most men to be tame and timid and excessively peaceable. The professional soldier gains more and more power as the general courage of a community declines. Thus the Pretorian guard became more and more important in Rome as Rome became more and more luxurious and feeble. The military man gains the civil power in proportion as the civilian loses the military virtues. And as it was in ancient Rome so it is in contemporary Europe. There never was a time when nations were more militarist. There never was a time when men were less brave. All ages and all epics have sung of arms and the man; but we have effected simultaneously the deterioration of the man and the fantastic perfection of the arms. Militarism demonstrated the decadence of Rome, and it demonstrates the decadence of Prussia.

I take it that Chesterton's point is that the evils of militarism tend to arise when the martial vitues cease to be civic virtues. Alternatively, I suppose, the disconnect between martial and civic virtues may put a society in the position of, say, late Roman Gaul, powerless to resist the engulfing tide. Either way, while not claiming there are easy answers, I would claim that the growing disconnect between the martial and civic virtues is cause for grave concern. I would further claim that the legitimacy of such concern can be found in the mores of the American Founding. Clayton Cramer has unearthed a very interesting report sent by President George Washington to Congress on the necessity of a militia:

An energetic national militia is to be regarded as the capital security of a free republic, and not a standing army, forming a distinct class in the community.

It is the introduction and diffusion of vice, and corruption of manners, into the mass of the people, that renders a standing army necessary. It is when public spirit is despised, and avarice, indolence, and effeminacy of manners predominate, and prevent the establishment of institutions which would elevate the minds of the youth in the paths of virtue and honor, that a standing army is formed and riveted for ever.

Is this not an appeal to ensuring a perpetual linkage between the martial and civic virutes, grounded on much the same concerns as motivated Chesterton? Is not the final sentence of Washington's report a call to action for our own times, of which I fear he has given a precise account?

Bartlett on SOX

Bruce Bartlett's scat hing critique of Sarbanes-Oxley is available at NRO. Among other good points, he quotes someone familiar to readers of this blog:

Stephen Bainbridge, professor of corporate law at UCLA, thinks Sarbanes-Oxley was completely unnecessary. He says all economic booms inevitably breed their financial scandals. The scandals at Enron et al. would likely have occurred even if Sarbanes-Oxley had already been in effect. The scandals simply gave statists a new excuse to regulate business. ?Corporate scandals are always good news for big-government types,? Bainbridge notes.

Max Boot on Iraq and the Problem of Martial Virtue

Max Boot makes an interesting point in the LA Times ($):

The panic gripping Washington over the state of Iraq makes it clear we have been spoiled by the seemingly easy, apparently bloodless victories of the last decade. From the Persian Gulf War of 1991 to the Afghanistan war of 2001, we got used to winning largely through air power. There were casualties, of course, but few of them were on our side. In Kosovo, we managed to prevail without losing a single person. We forgot what real war looks like. Iraq is providing an unwelcome reminder of how messy and costly it can be.

By comparison with the wars of the last decade, what's happening in Iraq appears to be a terrible failure. Things look a little different if you compare it with earlier conflicts.

I would argue that the problem goes deeper than Boot suggests. It is not just that we have become spoiled, it is that we as a people have largely lost the martial virtues. The United States, of course, historically has a far more ambivalent attitude towards those virtues than did, say, the Romans of the Republic or the hoplite Greeks. Admittedly, there is a strong streak of pacifism and isolationism in our history. Yet, even so, it is hard to deny the claim made by Geoffrey Perret that we are A Country Made By War . Americans have waged war often and, usually, effectively. If it were not so, we would still be British colonists clinging to a narrow strip of Atlantic coastline. Today, however, a far different ethic holds:

"Personal peace and affluence." Those would be the only values left, predicted Francis Schaeffer, as American culture drifted further and further from its biblical foundations. Americans would be willing to sacrifice their faith, their morality, their families, and even their freedoms, as long as they could feel peaceful inside and enjoy the luxuries of material prosperity.

Now we are faced with an enduring choice: will we really sacrifice all that for a false peace or will we rediscover the martial virtues? Can we again expouse the Western Way of War? I do not know the answer, but I fear that we cannot. And, I feel constrained to lay some of the blame at the feet of President Bush. His Pentagon hides away our honored dead at Dover air base, as though we should be ashamed of them. He does not call upon those of us who are too old to serve to make other sacrifices. He tries to avoid huring anybodys feelings by denying that this war is a clash of civilizations and cultures, not a border dispute. Indeed, I cannot name one thing Bush has done that seems intended to restore the martial virtues. Granted, I do not believe John Kerry would be any better. To the contrary, since the modern American left is overtly hostile to the martial virtues, a Kerry administration doubtless would be even worse. Yet, I cannot help but wonder where we could find an Abraham Lincoln or a Teddy Roosevelt when we need one.

Al Hunt on the Eucharist Controversy

In today's WSJ ($), Al Hunt complains that plans by some US bishops to withhold the Eucharist from Catholic politicians who publicly dissent from Church teaching are causing hurt feelings:

Forty-eight House Democrats, including several pro-life lawmakers, recently wrote Cardinal McCarrick to express their dismay at these calls to sanction Catholic politicians for particular policy views, warning of a backlash against the church. Rep. Rosa DeLauro, who ... initiated this move, she says, because of the "deep personal hurt" this controversy has caused among many Catholic lawmakers.

Aw, poor baby. You know, however, I am unaware of any Biblical passage or Church teaching promising that following Christ would be easy or pain-free. To the contrary, how about:

"Do not think that I have come to bring peace upon the earth. I have come to bring not peace but the sword. For I have come to set a man 'against his father, a daughter against her mother, and a daughter-in-law against her mother-in-law; and one's enemies will be those of his household.'"

"Whoever loves father or mother more than me is not worthy of me, and whoever loves son or daughter more than me is not worthy of me; and whoever does not take up his cross and follow after me is not worthy of me." (Matt. 10:33- 38.)

Besides which, what is the "deep personal hurt" of a few pro-abortion legislators compared to the slaughter of millions of innoncent unborn children every year?

Spitzer v. Grasso

My latest TCS Daily Column

In light of the filing of New York Attorney General Eliot Spitzer's long-awaited suit against former New York Stock Exchange CEO Richard Grasso, two thoughts come to mind:

(1) The government has no business setting executive compensation. Granted, Spitzer has authority to bring compensation suits against New York not-for-profits like the NYSE. Even so, it is bad policy for the government -- more precisely, an elected official with aspirations to higher office -- to be deciding how much money a corporate executive should be paid.

How much you get paid depends in large part on the thickness of the market for your services. In a thick market, wages tend to be low because there are many potential employees -- all more or less fungible -- competing for jobs. In a thin market, however, wages tend to be high because many employers are competing to hire a small number of eligible workers. The market for burger flippers is very thick. The market for law professors is relatively thick, to my considerable regret. The market for CEOs of Fortune 500 companies (which is what the NYSE essentially is) is thin. I'd guess the number of people who have what it takes to run a Fortune 500 company isn't much larger than the number of people who can run an NBA fast break. So even though much executive pay seems excessive, it's just supply and demand. Eliot Spitzer is unlikely to do a better job than competitive markets.

(2) Yet, Grasso and the NYSE are a special case. According to the WSJ ($), Spitzer alleges that Grasso abused his position as Wall Street's top regulator:

"The 54-page filing paints Mr. Grasso as an iron-fisted ruler, intimidating Wall Street titans that he regulated and manipulating the pay process to enrich himself. It portrays the board and its compensation committee as dysfunctional and its governance structure as conflict-ridden before it was overhauled in the aftermath of Mr. Grasso's ouster last September to strip its chief executive of regulatory authority. ...

"The complaint accuses Mr. Grasso, as the NYSE's chief regulator, of leaving some board members with the impression that if they opposed his pay packages, it would be at their peril. One unnamed board member from Wall Street told investigators that Mr. Grasso 'confronted' him after he expressed concern about his proposed 2000 pay to a staffer, the suit says. The member voted in favor of that year's package and later recalled thinking, 'Thank God I escaped that one. This man was also our regulator [so] you have to be careful,' the suit says.

"It also alleges that Mr. Grasso took actions that benefited firms run by executives determining his compensation, at one point calling the National Association of Securities Dealers on behalf of Mr. Langone [a NYSE board member] as the regulatory organization was investigating his boutique investment bank, Invemed. The NASD eventually sued the bank for improperly sharing profits with favored clients but not Mr. Langone. A NASD spokeswoman said Mr. Grasso's call took place "after the complaint was finalized."

Although Grasso was nominally subject to evaluation by the NYSE board, that board was comprised in large part of ceremonial "public" directors who did not take the job as seriously as they should have and representatives of Wall Street firms who had various conflicts of interest.

The solution, however, is not to make Eliot Spitzer the czar of executive compensation. After all, the problem at the NYSE is a creature of government regulation. The NYSE is a government-created hybrid. On the one hand, it is a private corporation that creates a securities market for the benefit of the specialist brokers who own it; on the other hand, the NYSE is a quasi-public regulator with the primary responsibility for ensuring that its various stakeholders comply with SEC and exchange rules.

This duality has long insulated the NYSE from outside accountability. Its quasi-government status insulates it from discipline by markets and investors. The NYSE is part of a trading market oligopoly with very high barriers to entry, moreover, most of which are attributable to SEC rules. (The SEC, for example, long let the NYSE get away with listing standards making it almost impossible for a firm to de-list.)

Part of the solution is privatization. The NASD and NASDAQ went their separate ways after repeated problems with the SEC over inadequate supervision of its member broker-dealers. It is time for the NYSE to follow their lead.

Privatization, however, is not a complete solution. As the NYSE is organized today, there is an obvious conflict of interest given that the Exchange is owned by the very people who it needs to investigate when there are concerns about trading ahead or front running. In some respects, that conflict of interest would be lessened if the Exchange were owned by public shareholders rather than the specialists. Yet, public ownership might just introduce a different set of conflicts. What if maximizing shareholder returns required the Exchange to overlook misconduct by specialists or others with floor trading privileges, for example?

The answer, it seems to me, is to follow the NASDAQ model. The NYSE's roles as a regulator and a market should be separated. The regulatory functions could be assumed by the SEC, a new SRO, or maybe even the NASD (or some combination thereof). The market then could be spun off through an IPO.

Privatization and reallocation of the exchange's regulatory function have been resisted by virtually all the relevant players. Yet, it is the only solution that addresses both the current governance problems and the longstanding conflicts that are inherent in the Exchange's dual roles.

Ribstein on Spitzer v Grasso

Larry Ribstein has a typically cogent analysis of the mess at the NYSE, which concludes with a typically idealistic "solutio n":

The solution? Not, as Professor Bainbridge suggests, a simple NASDAQ-style restructuring, with a split of the trading and regulatory arms. The answer is, to put it bluntly, deregulation of the securities industry.

Which will happen about the same time pigs fly. My proposed solution is a second-best one, which is founded on the notion that politics is the art of the possible. A NASDAQ-style restructuring seems (just barely) plausible under current conditions. Deregulating the SROs and the industry is a non-starter. To the contrary, one of the various securities law newsletters (I forget which one, but I think it was BNA's) found it newsworthy that Senator Sarbanes merely implied that there would be no new securities legislation during this Congress. (In retrospect, this post reads in a more testy tone than intended, for which I apologize to Larry.)

Spitzer v. Grasso and the Future of the NYSE

In light of the filing of NY AG Eliot Spitzer's long-awaited suit against former NYSE CEO Richard Grasso, it is time to revisit two dominant themes of this blog: (1) The government has no business setting executive compensation. Granted, Spitzer has authority to bring such suits. Even so, it is bad policy for the government - more precisely, an elected official with aspirations to higher office - to be deciding how much money a corporate executive should be paid. How much you get paid depends in large part on the thickness of the market for your services. In a thick market, wages tend to be low because there are many potential employees – all more or less fungible – competing for jobs. In a thin market, however, wages tend to be high because many employers are competing to hire a small number of eligible workers. The market for burger flippers is very thick. The market for law professors is relatively thick, to my considerable regret. The market for CEOs of Fortune 500 companies (which is what the NYSE essentially is) is thin. I’d guess the number of people who have what it takes to run a Fortune 500 company isn’t much larger than the number of people who can run a NBA fast break. So even though much executive pay seems excessive, its just supply and demand.

(2) Yet, Grasso and the NYSE are a special case. According to the WSJ ($), Spitzer alleges that Grasso abused his position as Wall Street's top regulator:

The 54-page filing paints Mr. Grasso as an iron-fisted ruler, intimidating Wall Street titans that he regulated and manipulating the pay process to enrich himself. It portrays the board and its compensation committee as dysfunctional and its governance structure as conflict-ridden before it was overhauled in the aftermath of Mr. Grasso's ouster last September to strip its chief executive of regulatory authority. ...

The complaint accuses Mr. Grasso, as the NYSE's chief regulator, of leaving some board members with the impression that if they opposed his pay packages, it would be at their peril. One unnamed board member from Wall Street told investigators that Mr. Grasso "confronted" him after he expressed concern about his proposed 2000 pay to a staffer, the suit says. The member voted in favor of that year's package and later recalled thinking, "Thank God I escaped that one. This man was also our regulator [so] you have to be careful," the suit says.

It also alleges that Mr. Grasso took actions that benefited firms run by executives determining his compensation, at one point calling the National Association of Securities Dealers on behalf of Mr. Langone [a NYSE board member] as the regulatory organization was investigating his boutique investment bank, Invemed. The NASD eventually sued the bank for improperly sharing profits with favored clients but not Mr. Langone. A NASD spokeswoman said Mr. Grasso's call took place "after the complaint was finalized."

Although Grasso was nominally subject to evaluation by the NYSE board, that board was comprised in large part of ceremonial “public” directors who did not take the job as seriously as they should have and representatives of Wall Street firms who had various conflicts of interest.

The solution, however, is not to make Eliot Spitzer the czar of executive compensation. After all, the problem at the NYSE is a creature of government regulation. The NYSE is a government-created hybrid. On the one hand, it is a private corporation that creates a securities market for the benefit of the specialist brokers who own it; on the other hand, the NYSE is a quasi-public regulator with the primary responsibility for ensuring that its various stakeholders comply with SEC and exchange rules.

This duality has long insulated the NYSE from outside accountability. Its quasi-government status insulates it from discipline by markets and investors. The NYSE is part of a trading market oligopoly with very high barriers to entry, moreover, most of which are attributable to SEC rules. (The SEC, for example, long let the NYSE get away with listing standards making it almost impossible for a firm to de-list.)

Part of the solution is privatization. The NASD and NASDAQ went their separate ways after repeated problems with the SEC over inadequate supervision of its member broker-dealers. It is time for the NYSE to follow their lead.

Privatization, however, is not a complete solution. As the NYSE is organized today, there is an obvious conflict of interest given that the Exchange is owned by the very people who it needs to investigate when there are concerns about trading ahead or front running. In some respects, that conflict of interest would be lessened if the Exchange were owned by public shareholders rather than the specialists. Yet, public ownership might just introduce a different set of conflicts. What if maximizing shareholder returns required the Exchange to overlook misconduct by specialists or others with floor trading privileges, for example?

The answer, it seems to me, is to follow the NASDAQ model. The NYSE’s roles as a regulator and a market should be separated. The regulatory functions could be assumed by the SEC, a new SRO, or maybe even the NASD (or some combination thereof). The market then could be spun off through an IPO.

Privatization and reallocation of the exchange's regulatory function have been resisted by virtually all the relevant players. Yet, it is the only solution that addresses both the current governance problems and the longstanding conflicts that are inherent in the Exchange’s dual roles.

My "Director Primacy" Makes Top 10 List

My article, Director Primacy: The Means and Ends of Corporate Governance, 97 Northwestern University Law Review 547 (2003), available in draft here, has been named one of the 10 best corporate and securities law review articles published in 2003.