ProfessorBainbridge.com

The Humpty Dumpty Approach to Explaining Obamacare

"When I use a word," Humpty Dumpty said, in a rather scornful tone, "it means just what I choose it to mean—neither more nor less."

"The question is," said Alice, "whether you can make words mean so many different things."

"The question is," said Humpty Dumpty, "which is to be master—that's all."

Andrew Sabl claims that Obamacare is not a mandate:

“If you or your family aren’t getting health insurance through your job, the government will pay to get you private insurance coverage, just as an employer would. You’ll have to contribute something—but the law guarantees, with specific numbers, that it will be no more than you can afford. It’ll be less than three percent of your paycheck if your family makes $33,000 a year, less than ten percent if you make as much as $88,000. Pre-existing conditions won’t matter. The government will still pay for your insurance, with the same affordable contribution from you.”

This is just nonsense on stilts. Set aside the question of whether an insurance policy costing up to 10% of your income is "affordable." If the government orders you to buy X, it is still a mandate even if the government pays part of the cost. "To mandate something means to make it mandatory." The fact that part of the cost of the mandate will be picked up doesn't change the mandatory nature of the obligation.

Compare the terminology used when the federal government mandates that states provide certain benefits. This is an example of the well-known (although actually rare) "unfunded mandate." When the federal government pays part of the cost of providing the benefit, that's called a partially funded mandate. See, e.g., Edward A. Zelinsky, Unfunded Mandates, Hidden Taxation, and the Tenth Amendment: On Public Choice, Public Interest, and Public Services, 46 VAND.L.REV. 1355, 1378 (1993). And it's still a mandate.

Update: Kevin Drum doesn't think Sabl's framing is going to work:

Another Godwin's Law Award Winner

Kelly Kleiman on the threats some lawmakers received after Obamacare passed:

... when a political group’s response to legislation comes in the form of coordinated window-smashing, only the willfully forgetful can fail to think “Kristallnacht.”

To the contrary, only someone complete lacking in a sense of proportion would "think 'Kristallnacht.'"

This matters. Inappropriate Holocaust comparisons like this one diminish and trivialize the degree of the Nazis' crimes against humanity, and the annihilation of six million Jews as well as millions of others who perished in the Holocaust.

Citing to Cases Pulled From Google Scholar

Josh Camson takes a look at the issue and concludes that the correct format for the url one should use when citing cases found in the Google Scholar database is:

http://scholar.google.com/scholar_case?case=CASENUMBER

Unfortunately, that is not the URL that will appear in the address bar when you first found the case. He cites, as an example, a search for commerce clause cases that kicked up US v. Lopez. The address bar will read:

http://scholar.google.com/scholar_case?case=18310045251039502778&q=commerce+clause&hl=en&as_sdt=800000000003

Instead of just copying and pasting the address bar url, you thus have to identify the case number (the number after the first equals sign and before the ampersand) and manually insert it into a manually typed citation using the correct url format. I guess you could short cut part of the process using autotext, but it still looks to be a pain in the ass. Why not just stick to Lexis or Westlaw (setting aside cost)?

My biggest complaint about citing internet sources, however, remains the unwieldy length of most urls. It inevitably messes up the appearance of the page when using fully justified fonts.

Hacking and Insider Trading

BNA Securities Regulation and Law Report:

The U.S. District Court for the Southern District of New York March 24 granted summary judgment to the Securities and Exchange Commission in the case involving Ukrainian computer hacker Oleksandr Dorozhko (SEC v. Dorozhko, S.D.N.Y., No. 07 Civ. 9606 (NRB), 3/24/10).

In the closely watched proceedings, the SEC had argued that hacking into computer systems to obtain confidential, internal information that is later used to trade securities violates 1934 Securities Exchange Act Section 10(b) and Rule 10b-5 even in the absence of a breach of fiduciary duty.

In July, the U.S. Court of Appeals for the Second Circuit agreed with the SEC, concluding that a computer hacker who trades on material nonpublic information can be held liable for insider trading even if the hacker did not violate any fiduciary duty in obtaining the information (41 SRLR 1410, 7/27/09). The appellate court remanded for the district court to determine “whether the computer hacking in this case involved a fraudulent misrepresentation that was ‘deceptive’ within the ordinary meaning of Section 10(b).”

In February, the SEC moved the district court for summary judgment. Dorozhko's counsel Charles A. Ross, of Charles A. Ross & Associates LLC, New York, did not oppose the motion, telling the court that his efforts to reach his client for instructions have been unsuccessful (42 SRLR 519, 3/22/10).

I continue to think the case was wrongly decided, for the reasons I explained in my essay RULING ON HACKERS AS INSIDE TRADERS: RIGHT IN THEORY, WRONG ON THE LAW:

Should Underwriters Sell CDSs on Their Client's Bonds?

Dealbook reports that:

California’s state treasurer, Bill Lockyer, has sent a letter to six big banks that underwrite the state’s municipal bond sales, asking about the banks’ involvement in selling credit-default swaps on California debt, Reuters reports.

The letter to Bank of America-Merrill Lynch, Barclays, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley expresses concern that the spreads on the California credit-default swaps are mispricing the state’s credit risk and inflating interest costs.

More from Reuters:

“I have no preconceived notions about the effect of C.D.S. trading on California (general obligation) bond prices, or about your firm’s activities in the California C.D.S. market,” Mr. Lockyer said in his letter, released late Monday.

“I do, however, worry about firms selling our bonds, on one hand, and trading C.D.S. on our bonds, or otherwise participating in that market, on the other.”

Taxpayers have a right to know, Mr. Lockyer added — and others in the municipal debt market agreed.

“If anybody has the right to ask the question it’s probably the state of California,” said Michael Pietronico, chief executive of Miller Tabak Asset Management in New York, which oversees $250 million in assets,

“The state pays out substantial underwriting fees because it’s one of the top issuers in the country and it has a right to know if they’re working on its behalf,” Mr. Pietronico said.

I certainly think California's entitled to disclosure here. Sunshine being the best disinfectant, and all that. By analogy to agency law, underwriters ought not earn secret profits on their dealings on behalf of the principal. But I'm not sure I see a serious conflict of interest here. As long as the underwriters are charging California market rate commissions and using their best efforts to sell all the bonds offered, how does selling CDSs on those bonds conflict with California's interests?

I suppose under some circumstances the CDS market could affect the market for California bonds, but why should that per se disqualify these underwriters? So long as they disclose, California's no worse off than it would otherwise be. After all, somebody's going to sell those CDSs. So why shouldn't California's underwriters get to wet their beaks?

Accounting for Obamacare

Megan McArdle:

Accounting basics:  when a company experiences what accountants call "a material adverse impact" on its expected future earnings, and those changes affect an item that is already on the balance sheet, the company is required to record the negative impact--"to take the charge against earnings"--as soon as it knows that the change is reasonably likely to occur.

This makes good accounting sense.  The asset on the balance sheet is now less valuable, so you should record a charge.  Otherwise, you'd be misleading investors.

The Democrats, however, seem to believe that Generally Accepted Accounting Principles are some sort of conspiracy against Obamacare, and all that is good and right in America.  

Here's the story:  one of the provisions in the new health care law forces companies to treat the current subsidies for retiree health benefits as taxable income.  This strikes me as dumb policy; there's not much point in giving someone a subsidy, and then taxing it back, unless you just like doing extra paperwork.  And since the total cost of the subsidy, and any implied tax subsidy, is still less than we pay for an average Medicare Part D beneficiary, we may simply be encouraging companies to dump their retiree benefits and put everyone into Part D, costing us taxpayers extra money.

But this is neither here nor there, because Congress already did it.  And now a bunch of companies with generous retiree drug benefits have announced that they are taking large charges to reflect the cost of the change in the tax law.

Henry Waxman thinks that's mean, and he's summoning the heads of those companies to Washington to explain themselves.  It's not clear what they're supposed to explain.  What they did is required by GAAP.  And I've watched congressional hearings.  There's no chance that four CEO's are going to explain the accounting code to the fine folks in Congress; explaining how to boil water would challenge the format.

See also The Washington Examiner.

Top Gear Caravan Airship

If you caught Top Gear on BBC America this week, you saw the episode in which James May flies a caravan that's been converted into an airship. Here's the bit:

I figured it was done with models, but it turns out they actually made a working airship. Here's the video of how it was done:

Very cool.

Matt Bodie on the Carney Kerfuffle

Matt Bodie weighs in:

Larry Ribstein and the good Professor Bainbridge are bemoaning last week's firing of John Carney from Business Insider.  Ribstein, Bainbridge and others are all citing this story by Foster Kamer as to the reason for the firing:

Blodget wanted more sensational, pageview-grabbing posts and click-friendly features like galleries, while Carney wanted to put forth breaking news scoops that told a longer narrative. It was also speculated that Carney, one of the highest paid members on the Business Insider staff, wasn't bringing the traffic numbers to sufficiently satisfy Henry Blodget, given his high profile within the financial reporting world, but that Clusterstock's homepage had the highest traffic of all the verticals at Business Insider during Carney's tenure, and that his own stories generated "tons of [unique visitors]."

This version of the story is obviously highly sympathetic to Carney; he wanted "breaking news scoops that told a longer narrative," while Blodget wanted "more sensational, pageview-grabbing posts."  But from my perspective, Carney's problem was that "longer narrative": he consistently tried to bend news stories around to an extremely conservative/libertarian perspective.  ...

Just to be clear, I'm not saying Carney should have been fired.  And I'm not saying he won't come back and be very popular at another site -- he probably will.  I'm just pointing out that some readers may have been turned off by the overly-politicized message ....

So I assume Matt would be okay with the NY Times finally firing Gretchen Morgenson for being a vapid, knee-jerk pro-regulation doofus?

In an era in which business reporters typically share the left-liberal pro-government and anti-market sentiments of the journalistic horde, Carney stands out as a voice of common sense, pro-market views. It was precisely that strong voice that made him, in the opinion of many of us, the only thing at TBI worth reading. He's the John Stossel of financial news and that's a very good thing.

Jones v. Harris Decided

The Supreme Court today issued a unanimous decision in Jones v. Harris, a case in which a mutual fund investor challenged allegedly excessive advisory fees.

Regulatory Background

• Congress enacted Investment Company Act of 1940 to mitigate conflicts of interest inherent in relationship between investment advisers and the mutual funds they create
• Section 36(b) imposes on investment advisers a fiduciary duty with respect to the receipt of compensation for services
• Authorizes fund shareholders to bring claims for breach of fiduciary duties
• Approval by the board of directors is not conclusive…shall be given consideration by the courts as deemed appropriate under all circumstances

The Second Circuit decision in Gartenberg v. Merrill Lynch Asset Management, Inc. set prevailing standard for more than 25 years:

• Does the fee schedule represent a charge within the range of what would have been negotiated at arm's-length; or
• Are the fees so disportionately large that it bears no reasonable relationship to the services rendered
• Gartenberg found that fees paid to other fund advisers were not dispositive
• A court should rely on its own business judgment to determine whether the fee is inconsistent with the investment advisers fiduciary duty under Section 36(b)

Courts should consider six factors:

• Nature, extent and quality of services provided to fund shareholders
• The profitability of the fund’s fees to the adviser
• Fallout benefits to the adviser
• Whether fee levels reflect economies of scale as the fund grows
• Fee structure of comparative funds
• The independence and conscientiousness of the trustees

The Seventh Circuit Opinion in Jones v. Harris Associates Easterbrook's majority opinion held that

• Harris had not violated the Act because the fees were ordinary
• Rejects Gartenberg approach ("because it relies too little on markets")
• Disclosure plus fee-setting market will regulate itself
• Investors vote with their feet and dollars
• Market competition rather than a "just price" administered by the courts is appropriate
• Judge Posner issued dissent and chided the panel for rejecting Gartenberg

SCOTUS Opinion (per Alito)

The syllabus of the SCOTUS decision informs us that:

Based on §36(b)’s terms and the role that a shareholder action for breach of the investment adviser’s fiduciary duty plays in the Act’s overall structure, Gartenberg applied the correct standard.

(a) A consensus has developed regarding the standard Gartenberg set forth over 25 years ago: The standard has been adopted by other federal courts, and the Securities and Exchange Commission’s regulations have recognized, and formalized, Gartenberg-like factors. ...

(b) Section 36(b)’s “fiduciary duty” phrase finds ts meaning in Pepper v. Linton, 308 U. S. 295, 306–307, where the Court discussed the concept in the analogous bankruptcy context: “The essence of the test is whether or not under all the circumstances the transaction carries the earmarks of an arm’s length bargain. If it does not, equity will set it aside.” Gartenberg’s approach fully incorporates this understanding, insisting that all relevant circumstances be taken into account and using the range of fees that might result from arm’s-length bargaining as the benchmark for reviewing challenged fees. ...

(c) Gartenberg’s approach also reflects §36(b)’s place in the statutory scheme and, in particular, its relationship to the other protections the Act affords investors. Under the Act, scrutiny of investment adviser compensation by a fully informed mutual fund board, see Burks v. Lasker, 441 U. S. 471, 482, and shareholder suits under §36(b) are mutually reinforcing but independent mechanisms for con-trolling adviser conflicts of interest, see Daily Income Fund, Inc. v. Fox, 464 U. S. 523, 541. In recognition of the disinterested directors’ role, the Act instructs courts to give board approval of an adviser’s compensation “such consideration . . . as is deemed appropriate under all the circumstances.” §80a–35(b)(1). It may be inferred from this formulation that (1) a measure of deference to a board’s judgment may be appropriate in some instances, and (2) the appropriate measure of deference varies depending on the circumstances. Gartenberg heeds these precepts.

(d) First, since the Act requires consideration of all relevant factors, §80a–35(b)(2), courts must give comparisons between the fees an investment adviser charges a captive mutual fund and the fees it charges its independent clients the weight they merit in light of the similarities and differences between the services the clients in question require. In doing so, the Court must be wary of in-apt comparisons based on significant differences between those services and must be mindful that the Act does not necessarily ensure fee parity between the two types of clients. However, courts should not rely too heavily on comparisons with fees charged mutual funds by other advisers, which may not result from arm’s-length negotiations. Finally, a court’s evaluation of an investment adviser’s fiduciary duty must take into account both procedure and substance.Where disinterested directors consider all of the relevant factors, their decision to approve a particular fee agreement is entitled to considerable weight, even if the court might weigh the factors differently. Cf. Lasker, 441 U. S., at 486. In contrast, where the board’s process was deficient or the adviser withheld important information, the court must take a more rigorous look at the outcome. Id., at 484. Gartenberg’s “so disproportionately large” standard, reflects Congress’ choice to “rely largely upon [independent] ‘watchdogs’ to protect shareholders interests,” Lasker, supra, at 482.

So Easterbrook's opinion is reversed. Posner's position (more or less) prevails. As for the debate between the two, however, the bottom line expressed by Justice Alito's unanimous decision was that "The debate between the Seventh Circuit panel and the dissent from the denial of rehearing regarding today’s mutual fund market is a matter for Congress, not the courts."

John Carney Fired

Well, this sucks:

Gawker Media owner Nick Denton Tweeted earlier this evening, asking if the rumors he'd heard about Business Insider editor John Carney's firing were true. Well, Nick, here's your answer: John Carney, managing editor of financial news and gossip vertical Clusterstock at Business Insider, was let go this afternoon by B.I. owner Henry Blodget, we've confirmed with sources familiar with the matter.

IMHO, John's one of the best--if not the best--financial bloggers out there. So why did Blodget pull such a bone headed move?

We're told Carney was fired by Blodget this afternoon, and it was speculated that this was the result of the last few weeks of disagreements between Blodget, publisher Julie Hansen, and Carney over how to best run Business Insider: Blodget wanted more sensational, pageview-grabbing posts and click-friendly features like galleries, while Carney wanted to put forth breaking news scoops that told a longer narrative. It was also speculated that Carney, one of the highest paid members on the Business Insider staff, wasn't bringing the traffic numbers to sufficiently satisfy Henry Blodget, given his high profile within the financial reporting world, but that Clusterstock's homepage had the highest traffic of all the verticals at Business Insider during Carney's tenure, and that his own stories generated "tons of [unique visitors]."

"Maybe Henry thought that the rewards for giving him the freedom he had didn't pay out enough," one source noted. "But the good will, the connections Carney had, we're going to have a hard time compensating for that kind of thing. How can you?"

Carney will be fine, of course. Someone with his talent is bound to get snapped up quickly.

Indeed, in the long run, he may be better off. There's an old saying that if you lie down with dogs, you get up with fleas. Blodget got himself into sufficient trouble as an investment analyst that he ended up having to settle securities fraud charges by agreeing to a ban from the securities industry, had to pay a $2 million fine, and disgorge an additional $2 million. I always found Carney's association with Blodget to be a bit unsavory.

Meanwhile, Felix Salmon has some interesting thoughts on the firing and the flaws in Blodget's business model.

Godwin's Law Award of the Week

Frank Rich, NY Times, for his op-ed on slurs and threats thrown at a few Democrats by some loons:

How curious that a mob fond of likening President Obama to Hitler knows so little about history that it doesn’t recognize its own small-scale mimicry of Kristallnacht.

For those inclined to think that that's a remotely relevant analogy, Kristallnacht was a government "coordinated attack on Jewish people and their property, 91 Jews were murdered and 25,000 to 30,000 were arrested and placed in concentration camps. 267 synagogues were destroyed, and thousands of homes and businesses were ransacked." It's a slanderous comparison.

Can a State Take Federal Land by Eminent Domain?

Apparently, Utah is trying to do just that:

...  as reported by the AP: Utah Governor Gary Herbert on Saturday authorized the use of eminent domain to take some of the U.S. government’s most valuable parcels.

Yes, LBers, you’ve read that correctly: a state has invoked eminent domain in order to take back land from the feds.

According to the AP, Herbert signed a pair of bills into law that supporters hope will spark similar legislation throughout the West. Many contend that federal ownership of wide parcels of land restricts economic development in an energy-rich part of the country. Many people in Utah are still angry that President Clinton designated a large area in Utah as a national monument in 1996, a move that stopped development on the land.

More than 60 percent of Utah is owned by the U.S. government, and policy makers here have long complained that federal ownership hinders their ability to generate tax revenue and adequately fund public schools.

I have no idea whether this could work either under the facts of the case at bar or, more generally, under any set of circumstances. But some quick Westlaw research kicked up a seemingly relevant case, which --oddly enough--also comes from Utah; namely, Utah Power & Light Co. v. U.S., 243 U.S. 389 (U.S. 1917), in which we find that:

Should't a Reasonable Investor Have a Smidgen of Common Sense?

BNA Securities Regulation and Law Reports relates that:

Sean David Morton, a self-described “natural psychic, trained Remote Viewer, [and ] intuitive consultant,” was charged March 4 in the U.S. District Court for the Southern District of New York over his alleged role in a multi-million dollar offering fraud in which he touted his psychic ability to predict stock market movements (SEC v. Morton, S.D.N.Y., Civil Action No. 10-CV-1720, 3/4/10).

In a release that day, the Securities and Exchange Commission said that beginning in 2006, Morton solicited investors in companies he and his wife controlled—the entity defendants—by claiming he would use his “psychic expertise to provide investment guidance to his investing team.”

In order for statements to be actionable as securities fraud, they must be material. Facts are material if there is a substantial likelihood the reasonable investor would consider them to be important in making decisions about investments. Granted, the SEC complaint identifies a number of statements that purport to be factual. E.g., "'I have called ALL the highs and lows ofthe market, giving EXACT DATES for rises and·· crashes over the last 14 years.' (emphasis in original."

But shouldn't context matter? Consider, by way of analogy, the bespeaks caution doctrine. The doctrine, in its simplest form, says that statements are to be read in context. In practice, courts posit that corporate statements alleged by plaintiffs to be materially misleading must be read in the context of relevant cautionary statements the company has made elsewhere. Take a statement by a CEO saying something like, “I am confident that our earnings this year are going to be much better than those in the past.” Let us say that the facts suggest that the company was doing badly at the time the CEO made the statement, or at least not showing any signs of outdoing its past performances. A court using the bespeaks caution doctrine might point to other language in the prospectus and registration statement along the lines of “this company exists in a volatile marketplace and there are no guarantees that our stock price will consistently increase” and say that, in the context of the warning, the CEOs statement is immaterial as a matter of law.

Here, the relevant other language is not cautionary in the traditional sense. If Morton in fact was telling investors that he was using "his 'psychic expertise to provide investment guidance to his investing team,'" shouldn't that have alerted a reasonable investor to take any other statements made by Morton with more than just a grain of salt? A reasonable investor presumably does not make decisions using a Magic 8 ball. Yet, one of Morton's investment vehicles was named "Magic Eight Ball Distributing."

The SEC complaint claims that we can infer materiality from the fact that some investors invested with Morton. But this is bootstrapping, at best. The mere fact that some investors are idiots does not tell us anything about what the proverbial reasonable investor would have done in these circumstances. After all, as PT Barnum put it, there's a sucker born every minute. See See Hillson Partners L.P. v. Adage, Inc., 42 F.3d 204, 213 (4th Cir.1994)(courts need not ascribe “childlike simplicity” to reasonable investor, but should ask whether investors would have considered information significant).

Wine Lists: Can They be Too Big?

My favorite restaurant in Los Angeles is Valentino. The size of its wine list is near the top of the list of reasons I love it. It's hundreds of pages long with thousands of choices. Perusing it over a glass of sparkling wine and an appetizer is a joy.

Yet, there's also something to be said for a small list. When Helen and I had dinner earlier this week at Savann in NYC (on Amsterdam just south of 80th Street), we were presented with a concise list of a few dozen wines, all of which were very reasonably priced, but which also clearly had been chosen to match up brilliantly with the French/Mediterranean bistro cuisine. By presenting us with a limited range of impeccable choices, the restaurant made life very simple. Do we want red or white? French or New World? Big or small?

Behrens & Hitchcock Merlot (Napa Valley) 2001

I've recently had a string of 2001 California Merlot wines that were over the hill, including examples from usually age worthy houses like Duckhorn and Etude. This Behrens & Hitchcock '01 Merlot was still in the window of drinkability, but perhaps just barely. There was a definite whiff of VA and a general flatness on the palate that suggested its remaining time will be brief.

Maybe I'm just having a run of bad luck, but it does strike me as odd that the Merlots from '01 should be over the hill when many of the Cabernets from the very same houses are still going very strong. Granted, I don't expect California Merlot to age all that well, but it still seems odd. By the way, if it hadn't been a general problem, I might have been tempted to blame B&H's use of synthetic corks. As I wrote a while back in a TCS column on wine closures, "there is growing evidence that wines sealed with synthetic corks tend to oxidize after only about two years in bottle." I'm still a skeptic.

Anyway, despite some faults, the wine was still drinkable. Plums, prunes, and black cherries. Coffee and toffee. Grade: C+/B-