Fisher v. Texas: Affirmative Action for Whites Only?

On September 19, I had the great privilege of speaking at Kansas State University as the Dorothy L. Thompson Lecturer on Civil Rights. KSU is one of the finest universities in the nation (with one of the most attractive college campuses I have seen). KSU students are simply top-notch. So, it was a great opportunity to have a serious conversation about civil rights in America today, with a more conservative audience than the norm in Chicago.

My topic was Fisher v. Texas, the upcoming Supreme Court Case re-addressing affirmative action programs designed to achieve a diverse learning environment. The Supreme Court settled this issue in 1978, in Board of Regents of the Univ. of California v. Bakke, and again in 2003, in Grutter v. Bollinger. In both cases, conservative appointees ruled that diversity in higher education is a compelling state interest justifying narrowly-tailored measures that consider race or ethnicity, in careful and balanced decisions. Justice Powell wrote the key opinion in Bakke and Justice O'Connor wrote the key opinion in Grutter.

The video of my lecture is available here, and includes shots of my entire PowerPoint presentation.

Here is a summary of my key points:

1) The drafters of the Equal Protection Clause of the Fourteenth Amendment, which the Supreme Court uses to limit affirmative action, intended to protect former slaves, not to protect those with the resources to attain equal protection on their own. According to the Supreme Court in 1880 the purpose of the clause was:

"to assure to the colored race the enjoyment of all the civil rights that under the law are enjoyed by white persons, and to give to that race the protection of the general government, in that enjoyment, whenever it should be denied by the States."

It is historically incorrect to read the clause to limit the power of the government to address continuing racial oppression in our country. For example, 40 percent of African American children live in poverty as do 35 percent of Hispanic children.

2) The meritorious contributions diverse students make to a diverse learning environment constitutes a compelling state interest as demonstrated by the continuing accumulation of empirical data of the educational benefits of diversity, as well as the manifest needs of our business sector and military for more diverse leaders. Because we still live in a highly racialized society, using race as one factor (in accordance with the Grutter mandate of an individualized and holistic analysis of diversity contributions) for unlocking those diverse contributions is a narrowly tailored means of achieving the compelling state interest in diverse leadership and diverse educational environments.

3) The most non-meritorious and morally suspect affirmative action benefits rich and powerful whites. As The Economist states:

"No less than 60% of the places in elite universities are given to candidates who have some sort of extra “hook”, from rich or alumni parents . . . . The number of whites who benefit from this affirmative action is far greater than the number of blacks. The American establishment is extraordinarily good at getting its children into the best colleges. In the last presidential election both candidates—George Bush and John Kerry—were “C” students who would have had little chance of getting into Yale if they had not come from Yale families. Al Gore and Bill Frist both got their sons into their alma maters (Harvard and Princeton respectively), despite their average academic performances. Universities bend over backwards to admit “legacies” (ie, the children of alumni). Harvard admits 40% of legacy applicants compared with 11% of applicants overall. Amherst admits 50%. An average of 21-24% of students in each year at Notre Dame are the offspring of alumni. When it comes to the children of particularly rich donors, the bending-over-backwards reaches astonishing levels. Harvard even has something called a “Z” list—a list of applicants who are given a place after a year's deferment to catch up—that is dominated by the children of rich alumni."

This 60 percent set-aside does not contribute to enhanced learning environments but instead just populates our elite universities with scions of privilege--almost always white privilege.

If the Supreme Court overturns the affirmative action plan of the University of Texas (involving 3 percent of entering slots) while remaining willfully blind to the 60 percent of the slots that entrench white privilege at our elite universities, they will effectively re-write the Fourteenth Amendment to mean: "When it comes to affirmative action, whites only need apply." That would pervert the whole purpose of the Fourteenth Amendment.

4) While one may speculate that race neutral measures may suffice to secure classroom diversity (such as living in poverty or a low income household), such measures are virtually never implemented. Indeed, the fact that so many universities use race or ethnicity as a "plus factor" suggests that it holds some degree of political plausibility that other alternatives do not. Conjuring-up other mechanisms of achieving diversity when such mechanisms enjoy little or no political viability hardly furthers the compelling state interest identified in Grutter.

5) Stare Decisis matters. The principle that courts should be guided by precedent in resolving disputes (and therefore restrained from indulging their personal preference, political goals and ideological preferences) forms the bedrock of our common law system. Judges are appointed, not elected, and in a system that values democratic rule-making they should say what the law is, not rewrite the law. Bakke and Grutter extend back 35 years. Only an activist Court pursuing politics rather than law would reverse such longstanding precedents. In the end, it is not appropriate for unelected judges to destabilize the rule of law and render it up for grabs based upon transient political preferences of the judiciary, unless the precedent is egregiously wrong or times have changed to such an extent that the precedent is simply too costly to maintain. Bakke and Grutter do not fit that bill.

Consequently, it seems extreme to just reverse 35 years of precedent and eliminate all affirmative action seeking to diversify American universities through the consideration of race or ethnicity. The students at Kansas State largely agreed with the idea that expanded educational opportunity for disadvantaged students made sense; yet, they evinced real discomfort with the use of race to address this concern or as a means of achieving educational diversity. At the end of the evening an informal poll found support for continued affirmative action based upon race (but in accordance with Grutter) by nearly a two to one ratio.

As part of the lecture event, I also did an interview with Richard Baker of KSU, for his outstanding Perspective series on Kansas Public Radio, which also summarizes the key points of the lecture: Play Interview

Will Obama Finally Stop the Scourge of the Megabanks?

As I have long argued, the most important question of this election is who will stop the scourge of the megabanks. By any measure more money is at stake here than any other issue in this campaign, as evidenced by non-partisan tallies of the cost and damage of the last financial crisis--ranging from up to $13 trillion (primarily in lost GDP) to nearly $30 trillion (in government outlays).

As discussed in my last two posts Mitt Romney is the candidate of the megabanks, including the foreign megabanks. For Romney to stop the megabanks, he would need to turn on his base. But, he would need their continuing support for reelection. Romney cannot be expected to stop the megabanks. Simply put, Romney is no Jon Huntsman, who was the one major party candidate who got this issue right. Romney gets an "F" on likelihood of stopping the megabanks.

Historically, there is clear reason to be skeptical of President Obama. But, Obama has been cut off from Wall Street support this election cycle. Mr. Wall Street--Timothy Geithner--has already announced his expectation of exiting after the election. The President will be a lame duck, empowered to follow his instincts on the megabanks--and according to Ron Suskind in Confidence Men Obama ordered Geithner to bust up Citigroup. President Obama gets a "B-" and for the first time in years we may have a political  reality conducive to real reform in the financial sector.

Of course, much can change in the next 6 weeks, and the debates in particular will shed light on the position of Romney and Obama on this critical issue. Domestic issues will be the focus of the October 3rd debate.

Government guarantees for the megabanks guarantees failure. The megabanks become too insensitive to risk because their managers know that government will make good any losses. They will gorge on too much credit because creditors know that the government guarantees megabank debt. Thus, banks backed by the government will naturally take on too much leverage and too much risk at the same time, all but insuring their demise. Further their government guarantee makes them attractive derivative counter-parties. So they will naturally be tempted to push the envelope on the extent to which they can generate illusory profits and hide risks in fundamentally dark derivatives markets. For an excellent overview of the economic hazards of Too Big To Fail banks, see this outstanding publication from the Federal Reserve Bank of Dallas.

The stakes here could not be larger. It boils down to this: Is the USA prepared to once again transfer trillions in bank welfare to a handful of megabanks at the expense of all other government services ranging from fire protection to teachers to Pell Grants to Defense? We are one financial crisis away from such bailouts. This is the reality in the Eurozone today. The federal government would become a vassal state of the banks and state and local government would be consigned to an even more dramatic contraction in resources. We are literally talking a huge portion of American economic wealth.

How much money? Since the crisis began in late 2007, the US government debt to GDP ratio increased from under 60 percent of GDP to over 100 percent of GDP, or by about 45 percent of GDP--representing an additional debt burden of about $6.75 trillion. So, if we add the additional debt burden to the $7.6 trillion in forgone GDP, as quoted above, we end up pushing nearly $15 trillion in lost GDP plus additional debt burden. Then, US household net worth took an additional $7.7 trillion hit between its 2007 peak and the beginning of 2011. So the last crisis easily cost Americans $20 trillion.

We as a society simply cannot afford to spend another $20 trillion saving the megabanks.

Stout on "Increasing Shareholder Value" as Injurious

Professor Lynn Stout, Cornell Law School

Professor Lynn Stout at Cornell Law School argued last week in the Los Angeles Times, that the corporate law maxims of "profit maximization" and "increasing shareholder value" have taken on lives of their own in the past thirty years and in so doing have visited positive harm on corporations, employees, and the public at large.  In her Op-Ed "'Maximizing Shareholder Value' Is Ill-Conceived Concept," Stout essentially argues that prior to the 1980s, corporate leaders focused on promoting long-term growth for the benefit of employees, shareholders, the community at large and society as a whole.  But she posits, dating back to Milton Friedman and the rise of the Chicago School of free-market economists, the idea that shareholders "owned" corporations and that businesses existed solely to maximize shareholder profit began to take root.  Stout writes that the federal government has now embraced maximizing shareholder value as near religion today.  This embrace, per Stout, has led to calamity and disappointment:  "It's now become clear, however, that a relentless focus on share price can hurt not only employees, taxpayers and society, but shareholders too. Managers who are pressured to raise stock price quickly often resort to tricks — selling assets, cutting payroll and investment, draining cash through dividends and share repurchase programs — to bump up stock price for a year or two. But such strategies often hurt a company's long-term ability to grow and prosper."


Is it possible that the "profit maximization" maxim which has taken hold in corporate law can actually harm taxpayers, shareholders, employees and society in general?  Stout supports this by arguing that: "In 1993, Congress changed the tax code to require companies to link executive pay to 'performance' (typically stock price). The Securities and Exchange Commission over the last two decades has adopted rules to make corporate directors ever more 'accountable' to shareholders. And hedge funds have used these rules to harass companies into selling assets, cutting expenses and paying out large dividends to 'unlock shareholder value.'   How has this worked out for American investors and the American economy? Not well."

Stout continues:  "In the name of increasing shareholder value, public companies have sold key assets (Kodak's patents), outsourced jobs (Apple), cut back on customer service (Sears) and research and development (Motorola), cut safety corners (BP), showered CEOs with stock options (Citibank), lobbied Congress for corporate tax loopholes (GE) and drained cash reserves to repurchase shares until companies teetered on the brink of insolvency (much of the financial industry). Some corporations even used accounting fraud to raise share price (Enron and WorldCom). Public companies employed these strategies even though many executives and directors felt uneasy about them, sensing that a single-minded pursuit of higher share prices did not serve the interests of society, the company or shareholders themselves."

Stout concludes:  "It's time to recognize that the philosophy of 'maximize shareholder value' is just such a defunct economist's idea. Let's throw off our intellectual chains so our corporate sector can do a better job for shareholders — and the rest of us too."

Law professors and corporate practitioners would do well to re-consider what they are teaching and/or practicing when they support the "new-ish" legal principle of "profit maximization."  Surely a corporation exists to do more than simply provide profits for its shareholders.


And finally today, we wish to take a moment to reflect on and remember those who lost their lives and those who continue to grieve their losses of 9.11.01.

MITT AND THE FOREIGN MEGABANKS

Perhaps the most offensive US government bailouts during 2008-2009 were the billions and billions spent keeping foreign megabanks afloat. The foreign megabanks benefited from two major government bank welfare programs that collectively dwarf any prior government spending program with the possible exception of World War II ($3.9 trillion in 2008 dollars): i) secret Fed loans ultimately uncovered by Bloomberg pursuant to a FOIA lawsuit; and, ii) the huge bailout of AIG which then turned around and paid 100 cents on the dollar to counterparties around the world on the infamous AIG credit default swaps.

Let's start with the secret emergency loans. In late 2008 and early 2009 the Fed (backed by the US taxpayer) lent a total of $16 trillion to save the global financial sector pursuant to seven publicly-announced programs. Until Bloomberg sued under FOIA, the identity of the borrowers under these programs was a closely guarded Fed secret. According to Bloomberg: "Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS, which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees." Without these loans, which peaked on December 5, 2008 at $1.2 trillion, the entire global economy likely would have collapsed. These amounts boggle the mind. With virtually zero democratic negotiation (no congressional vote, no election outcome, etc.) the Fed rescued the entire European financial sector, through trillions in outlays. Outrageous!

Next, the government paid billions more than necessary, much of it to foreign banks, when it jumped in and rescued AIG. None of the beneficiaries of that bailout bargained for a US government guarantee on the obligations that AIG owed--yet, the government made good on all of AIG's commitments. So, counterparties to AIG enjoyed a government guarantee for free. In all, foreign megabanks took in at least $50 billion in taxpayer supplied funds (according to this spreadsheet compiled by the Guardian) courtesy of the Federal Reserve.

So, next time, and there will be a next time, would a President Romney put a stop to US funded bailouts of foreign banks? I highly doubt it.

First, take another look at the OpenSecrets data on his top supporters: Credit Suisse gave $427,560; Barclay's gave $349,400; and UBS gave $259,200. These firms do not just give money away. And a President Romney simply would not have any incentive for turning on such major donors. To the contrary, he would need these kind of massive donations to fund his re-election campaign.

Second, Romney has sought out this source of donors; indeed, the global megabanks are his base. For example, he hosted a fundraiser just last month in London. Tickets to the fundraiser cost up to $75,000 a plate. According to the Washington Post, attendees included the CEO of Credit Suisse, a managing director of London-Based HSBC, a lobbyist for Barclay's, and a managing director from Deutsche Bank.

Finally, consider Romney's relationship with Barclay's, the London-based megabank. Barclay's received $8.5 billion in taxpayer funds as part of the AIG bailout. In 2011, Barclay's paid Romney a $50,000 speaker's fee. According to the London Telegraph, Barclay's raised so much money for Romney ($1 million) that members of Parliament signed a motion demanding that Barclay's stop spending so much on supporting Romney and instead focus on resolving the bank's troubles related to rigging Libor.

It is simply inconceivable that Romney would ever stop any bailout of banks, foreign or otherwise.

MITT ROMNEY: CANDIDATE OF THE MEGABANKS

According to a recent poll, 84 percent of Americans oppose any more bank bailouts. Yet, Mitt Romney appears to be the candidate most likely to shower billions or even trillions on the megabanks at the first sign of trouble. Indeed, it is fair to say that Mitt Romney is the candidate of, by, and for, the megabanks.

For example, according to OpenSecrets.org Romney's top contributors are all megabanks: Goldman gave $676,080; JP Morgan gave $520,299; Morgan Stanley gave $513,647; BOA gave $510,728; Credit Suisse gave $427.560; Citi gave $363,015; Barclays gave $349,400; and so on and so forth.  Amazingly, the top eight Romney contributors are all global megabanks.

The same source, however, shows that the megabanks have abandoned President Obama. Not a single megabank has given his campaign more than $200,000 and only megabank appears among his top 15 contributors.

It is easy to see why the megabanks love Romney. His own campaign website claims he will seek to repeal Dodd-Frank (a rather mild regulatory initiative given the woeful misconduct of the megabanks in trashing our economy). His website does not even mention the TBTF problem or bank bailouts. According to American Banker magazine (published by the American Bankers Association) Romney is a free market believer who is against regulation and intervention except when the whole banking sector faces collapse; then, he favors (pragmatic) bailouts. I kid you not--just watch the video above. And, in this campaign Romney was the only GOP candidate who did not rule out future bailouts. Again, watch the video.

This is how the American Banker put it: "In the 2012 campaign, Romney has not spoken as forcefully against bailouts as some of his GOP rivals. During an October 2011 debate, Romney said he didn't like the idea of another Wall Street bailout, but he did leave the door open to that possibility." Or, in Romney's own words: "There's no question … that the action that President Bush and that Secretary Paulson took was designed to keep not just a collapse of individual banking institutions, but to keep the entire currency of the country worth something and to keep all the banks from closing and to make sure we didn't all lose our jobs. . . .Was it perfect? No. . . .But … this approach of saying, 'Look, we're going to have to preserve our currency and maintain America and our financial system' … is essential."

So, it makes sense that the entire megabank sector (even foreign megabanks like Credit Suisse, Barclay's and UBS) are backing Romney. He will let them run wild again and bail them out again.

Judicial Elections and Citizens United

With record spending expected in the 2012 election cycle, what impact is Citizens United having on electioneering and influencing the electorate?  Two state supreme court judges believe that it is having a deleterious effect on the election of state judges. From the National Law Journal: "Speaking at an August 13[, 2012] panel on corporate spending in judicial elections, Montana Supreme Court Justice James Nelson and former Mississippi Supreme Court Justice Oliver Diaz Jr. warned that the growth of corporate interest spending is hurting public confidence in the courts, scaring lawyers away from seeking judgeships and raising the specter of corruption"

In an article I wrote for the Iowa Law Review called "Procuring Justice: Citizens United, Caperton and Partisan Judicial Elections," I detailed recent empirical evidence that judges elected in partisan judicial elections are significantly more likely to favor employers in employer/employee disputes than are appointed judges, or judges elected in non-partisan campaigns. In that article I asked the question:  "Will judges who are elected in a partisan manner, where corporations can now more directly influence the result of judicial elections by contributing large cash electioneering outflows, manufacture outcomes that are biased toward those contributing corporations?"

My article answers:  "The early returns are not good.  That is to say, contemporary empirical evidence suggests that the answer to the inquiry posed above is “yes.” Apparently partisan elected judges are unable to sit neutrally when large corporate expenditure ushered them to the bench. Or stated differently, when corporations are able to manipulate the judicial election process through significant cash disbursement, a judge that is unfriendly, if not hostile, to employee rights will be the likely result.  The Supreme Court’s decision[] in Citizens United . . . stand[s] poised to exacerbate this disheartening empirical implication."

Others share this concern.  In an Op-Ed for the Washington Post, E.J. Dionne, Jr. wrote the following about Citizens United:

"If ever a court majority legislated from the bench (with Bush’s own appointees leading the way), it was the bunch that voted for Citizens United. Did a single justice in the majority even imagine a world of super PACs and phony corporations set up for the sole purpose of disguising a donor’s identity? Did they think that a presidential candidacy might be kept alive largely through the generosity of a Las Vegas gambling magnate with important financial interests in China? Did they consider that the democratizing gains made in the last presidential campaign through the rise of small online contributors might be wiped out by the brute force of millionaires and billionaires determined to have their way?"

The 2012 election cycle will prove to be a fascinating one as Citizens United will carry full sway during a presidential election.

Citizens United and the 2012 Presidential Election

For the second month running, Mitt Romney has raised more than $100 million for his Presidential Campaign bid, thanks in large part to conservative leaning Super PACs (political action committees) and individual donors.  President Obama raised $75 million in July where 98% of his donors contributed less than $250 per contribution (average donation $53).

United States Supreme Court

With the Citizens United case squarely on point in this 2012 presidential election, several stories of note have emerged in recent weeks.  Citizens United, a U.S. Supreme Court case decided in 2010, provides first amendment free speech protections to corporations allowing unfettered electioneering contributions to specific candidates or causes directly from a corporation's general treasury funds.  As we watch the November 2012 election unfold, it will be very interesting to see whether Citizen's United ushers in an era of unprecedented election spending and negative campaigning, which many have predicted.

Two excellent articles showcase Citizens United and its apparent impact on the 2012 election.  The first is an exposé on the behind the scenes maneuvering engaged in primarily by Chief Justice John Roberts in getting the Citizens United result he sought in 2010:

Money Unlimited:  How Chief Justice Roberts Orchestrated the Citizens United Decision, by Jeffrey Toobin in The New Yorker.

The second is an examination of Citizens United impact on the current election:

How Much Has Citizens United Changed the Political Game? by Matt Bai in The New York Times Magazine.

From Matt Bai's How Much Has Citizens United Changed the Political Game?:  "Conservative groups alone, including a super PAC led by Karl Rove and another group backed by the brothers Charles and David Koch, will likely spend more than a billion dollars trying to take down Barack Obama by the time November rolls around. The reason for this exponential leap in political spending, if you talk to most Democrats or read most news reports, comes down to two words: Citizens United. The term is shorthand for a Supreme Court decision that gave corporations much of the same right to political speech as individuals have, thus removing virtually any restriction on corporate money in politics. The oft-repeated narrative of 2012 goes like this: Citizens United unleashed a torrent of money from businesses and the multimillionaires who run them, and as a result we are now seeing the corporate takeover of American politics." 

But, according to Bai:  "Legally speaking, zillionaires were no less able to write fat checks four years ago than they are today. And while it is true that corporations can now give money for specific purposes that were prohibited before, it seems they aren’t, or at least not at a level that accounts for anything like the sudden influx of money into the system. According to a brief filed by Mitch McConnell, the Senate minority leader, and Floyd Abrams, the First Amendment lawyer, in a Montana case on which the Supreme Court ruled last month, not a single Fortune 100 company contributed to a candidate’s super PAC during this year’s Republican primaries. Of the $96 million or more raised by these super PACs, only about 13 percent came from privately held corporations, and less than 1 percent came from publicly traded corporations."

In what appears to be an unprecedented era of election spending, these two articles are interesting reads.

(photo is in the public domain)

Austerity Bites Big in Europe--With More to Come

The above photo (from the ECB website) shows the ECB's Governing Council which just met to address the Eurozone crisis. Unfortunately, they clearly opted to impose more Eurozone austerity despite overwhelming evidence that austerity will not stem the crisis.

Austerity is failing all over the world now and is predictably wrecking economic havoc on the global economy. People are protesting the unlimited largesse shown the megabanks while ordinary citizens bear extraordinary unemployment and deep cuts to social services all at once. Thus, in Spain, where banks were recently bailed out to the tune of $120 billion, dozens of people were recently injured in Madrid while protesting the cuts and the bank bailouts. Spain has now endured an apparently endless economic contraction and unemployment of nearly 25 percent (over 50 percent for youths).

In the UK, where similar austerity measures took hold in the aftermath of the Great Recession the Brits have now suffered three straight quarters of economic recession. Austerity led directly to the worst four year economic performance in Britain in over 100 years.   A new study finds that UK suffered total output losses of about $400 billion from its excessive and ill-timed austerity.

Now this misguided and dogmatic austerity has infected the Eurozone generally, Unemployment for the entire Eurozone now exceeds 11 percent, a Euro era record. Unemployment now has expanded for 14 months in a row since the onset of austerity. Manufacturing is contracting throughout Europe. It has now contracted for 11 consecutive months. Indeed, even Germany is now seeing the most dramatic contraction of manufacturing in three years.

No let-up is in sight. According to the BBC, Spain is slated to slash spending by another 16.9 percent across the board going forward on top of an 8 percent cut from last year. In the UK "at the start of its term in 2010, the Conservative-Liberal Democrat coalition government announced the biggest cuts in state spending since World War II." These cuts are slated to peak in the next few years amounting to a 19 percent across the board cut. These are indeed savage cuts in the pipeline. 

Then, last week ECB President Mario Draghi, after the meeting of the Governing Council, announced that the ECB "may undertake outright open market operations of a size adequate to reach its objective" of stemming the crisis but only if Spain and Italy agree to bailouts with accompanying "strict and effective conditionality." In other words, the ECB will not act without more austerity.

This puts Spain and Italy in an impossible dilemma. They either cede sovereignty and submit to a Greek economic tragedy or they face a high risk of default due to spiraling interest costs. The first choice may well be politically impossible as growing resentment in the south may simply lead to political repudiation of the Euro. In Italy they already are referring to Germany as the "Fourth Reich." The second choice will make Lehman look like a warm-up act. Either way it will be ugly.

One fact is clear: regardless of the outcome in Spain and Italy, the ECB's insistence on more austerity before it acts will certainly feed the deflationary fire spawned by austerity. As I have argued for years only debtor relief and rapid growth will relieve a debt crisis.

NYPD Fail - Report Finds Stop and Frisk Harms, Not Helps

New Yorkers protesting "stop and frisk" including NYC Comptroller John Liu

As a follow-on to an earlier CJB post this week regarding police brutality at Occupy Wall Street protests by the New York Police Department, a report from the Center for Constitutional Rights finds that New York's "stop and frisk" policy has been applied in a racially discriminatory manner, and has by and large, failed as a policy.  The CCR report indicates that more than 85% of New Yorkers stopped and frisked under its policy are minority.  Stunningly, the report finds that in the "stop and frisk" context, where police officers are supposed to be motivated by a reasonable suspicion before frisking, contraband or weapons are found only in 1.14% of the stops.  This is an abysmal statistic for such an intrusive policy.

The CCR report further details the terrible effect "stop and frisk" is having on the lives of New Yorkers:

Racial Discimination:  The NYPD "is conducting stops and frisks in record numbers – roughly 685,000 in 2011 and on track to reach over 700,000 this year. Black and Latino people are consistently and intentionally stopped at a hugely disproportionate rate: nearly 85 percent of all stops. These alarming statistics speak volumes on their own – the overwhelming racial disparity and the low rate of lawful arrests or discovery of contraband that result from stops and frisks raise serious questions about the purpose or usefulness of this practice." 

Failing as a Policy:  "The use of stops and frisks has grown at an astounding rate – a more than 600 percent increase over the past ten years. The number of stops in 2011 was the largest on record and 2012 is on track to be higher still, with over 203,500 stops in the first three months alone – an average of 2,200 stops per day. These numbers are all the more significant in light of evidence that an alarming number of these stops, frisks, and searches are illegal, in part because they are not based on the required level of suspicion of criminal activity. Despite the City’s attempts to justify the program as aimed at confiscating illegal weapons, a 2010 expert report by Professor Jeffrey Fagan that CCR submitted to the court in Floyd found that the weapons and contraband yield from stops and frisks hovered around only 1.14 percent – a rate no greater than would be found by chance at random check points."

(photo courtesy of Thomas Good via WikiMedia Commons)

Police Abuse and Occupy Wall Street

A report out today from NYU Law School and Fordham Law School documents lawless policing by the New York Police Department in connection with the Occupy Wall Street protests last year.  The report, "Suppressing Protest: Human Rights Violations in the U.S. Response to Occupy Wall Street" catalogs the repeated and systematic violations of constitutional and human rights of protesting United States citizens.  According to the Executive Summary of the 195-page report:

"Government responses to Occupy Wall Street in the United States have varied significantly, both within and across cities. Indeed, there have been examples of good practice . . .  But across the United States, abusive and unlawful protest regulation and policing practices have been and continue to be alarmingly evident. This report follows a review of thousands of news reports and hundreds of hours of video, extensive firsthand observation, and detailed witness interviews. In New York City, some of the worst practices documented include:

• Aggressive, unnecessary and excessive police force against peaceful protesters, bystanders, legal observers, and journalists

• Obstruction of press freedoms and independent legal monitoring

• Pervasive surveillance of peaceful political activity

• Violent late-night raids on peaceful encampments

• Unjustified closure of public space, dispersal of peaceful assemblies, and kettling (corralling and trapping) of protesters

• Arbitrary and selective rule enforcement and baseless arrests

• Failures to ensure transparency about applicable government policies

• Failures to ensure accountability for those allegedly responsible for abuses

These practices violate assembly and expression rights and breach the U.S. government’s international legal obligations to respect those rights. In New York City, protest policing concerns are extensive and exist against a backdrop of disproportionate and well-documented abusive policing practices in poor and minority communities outside of the protest context. . . .

For protesters who previously had little interaction with police, these abusive practices have
radically altered worldviews about the role of police in protecting citizens. For others who
had long experienced official discrimination and abuse, especially those from minority and
economically disadvantaged communities, protest experiences have simply reinforced
existing negative perceptions."

The Pain in Spain. . . .Turns Violent

On 20 June 2012, I marched in a massive peaceful demonstration in Madrid. The vivid and clear gist of the demonstration: the megabanks were stealing from the public and no more cuts in social spending to feed the banks would be tolerated. The peaceful protesters marched along Paseo del Prado to Plaza de Cibeles to Puerta Del Sol. Those familiar with Madrid know that these landmarks constitute the heart of Madrid and the center of the tourist district.

I fully supported the main message of the demonstrations: that it is morally and economically reprehensible to allow the megabanks to consume all the resources of the state and to crowd out all other more productive spending such as education, health care and public welfare. We marched with teachers, nurses, firefighters, and union members in support of this message.

This was a middle class protest, with only a very small fringe of apparent extremists (anarchists, communists, etc.). While the demonstration attained only scanty media coverage worldwide, I advise governing political and economic elites to take note, and modify their relentless aggregation of massive wealth at the very tip top of the western economic order. These middle class peaceful protests will turn ugly as the economic reality worsens for the vast majority of world citizens. As I have emphasized in the recent past, and as more and more economists note, Europe is headed for a massive economic crash. Extremism will follow almost as certainly as night follows day.

This reality is readily apparent throughout European history. And, history also shows that extremism leads to mass death, bloodshed, pain and misery, and, almost by definition, the destruction of individual rights (property rights included).

Frankly, the worldwide credit crunch is rooted in North America and the US policy of massive financial deregulation. Further, the US was the primary architect of the reigning model of globalization, with its highly deflationary bias stemming from its goal of endless cheap labor as well as its structural compulsion for developing nations to hoard currency reserves and subsidize developed world debt. The global debt crisis results from globalization's pro-debt and anti-middle class construction.

Certainly, the Eurozone too has erred. Specifically, it too has favored its banks too much and neglected the need to foster growth through unified fiscal policy and middle class development.

But once one considers the prospects of political extremism in Europe, fault is irrelevant. All that matters is that governing elites realize that the cost-benefit calculus for allowing an economic collapse in Europe is deeply, almost infinitely, negative.

Spain, once again, foretells an historic storm. And, these images and reports of recent violence in Spain do not bode well for governing elites as the monster of their creation--a bank centric and cheap labor version of globalization--spins out of control.

Yesterday, Spanish debt yields soared to Euro era records. Despite the rhetoric of Eurozone leaders the storm churns on and gains more destructive power. Spain is sinking fast and may be beyond rescue, and that implies a  major Eurozone crack-up.

(All photos and videos courtesy of Professor Mary K. Ramirez)

Yahoo Tabs Marissa Mayer as CEO

The Corporate Justice Blog has long advocated for diversity amongst corporate leadership.  The recent naming of Marissa Mayer as CEO of Yahoo has sparked significant attention and debate.  Mayer's gender (female), relative youth (37 years old), current pregnancy (six months pregnant), and announced pay package (estimated at somewhere between $71 and $100 million over five years) have each separately garnered praise and criticism.  Still, after many years leading and innovating at Google, Mayer seems poised to bring exciting leadership and stability to struggling Yahoo.

Mayer's appointment as CEO of Yahoo makes her the 19th female CEO of a Fortune 500 company, and the first ever pregnant CEO of a Fortune 500. Mayer will have the unique opportunity to start a family and lead a Fortune 500 company at the same time. Although, one should ask why this is particularly newsworthy. Certainly there have been hundreds of male CEOs of Fortune 500 companies that have become fathers, some for the first time, while simultaneously leading a Fortune 500. That this is news personifies the double standard that attaches to females when they become important leaders in corporate America.

From ThinkProgress: "Board members at Yahoo were aware that Mayer was expecting during the hiring process, and treated her pregnancy with a respect and deference very few women get to enjoy in the workplace. According to Mashable, an anonymous source said, 'It was not part of the consideration. …Like every other professional woman, she has to weigh all the factors in doing her job and having a family':  Mayer also expressed that she was pleased the Yahoo board was not concerned, telling Fortune their actions 'showed their evolved thinking.'  And as far as maternity leave goes, don’t expect Mayer to be out of the office for long. The new CEO plans to return to the office after a few short weeks and will be working throughout her time off. Yahoo’s scheduled September board meeting will be in Sunnyvale, Calif., rather than New York, to accommodate for the expecting mother-to-be."

(photo courtesy of wikimedia)

1931?

Sometimes events seemingly outstrip human influence leading to worldwide catastrophe. August 1914 led to 16 million deaths (and ultimately World War II) all triggered by the assassination of an obscure Archduke from the Austro-Hungarian Empire on June 28, 1914.

1931 was such a year, when the failure of Credit Anstalt in Vienna triggered a world wide bank run and flight to safety that transmogrified the Crash of 1929 into the Great Depression. As BusinessWeek recently stated:

"In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable. The bank not only made loans; it acquired ownership stakes in all kinds of companies throughout the sprawling empire, from sugar producers to the new automobile makers. Its headquarters city, Vienna, was a place of wealth and splendor, famous for its opera, balls, chocolate, psychoanalysis, and the extravagant architecture of the Ringstrasse. The fall of Credit-Anstalt—and the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S.—wasn't just the failure of a bank: It was a failure of civilization."

The end result of this bank failure in far away Vienna was massive bank runs around the world, first, in Berlin (because banks there had deposits in Credit Anstalt), then in London (because banks there lent to German banks) and ultimately the US (because who knows what bank is safe if all the European banks go down the tubes). The Great Depression then took full hold around the world leading to 25% unemployment in the US and a 30% plunge in economic output. Soon thereafter political extremism in Europe led to the horrors of World War II.

Today, mainstream economists are raising the specter of a 1931 type of event, where an economic shock in Europe leads to a global panic resulting in a massive and sudden withdrawal of credit from the global economy. Paul Krugman:

"As in 1931, Western nations have the resources they need to avoid catastrophe, and indeed to restore prosperity — and we have the added advantage of knowing much more than our great-grandparents did about how depressions happen and how to end them. But knowledge and resources do no good if those who possess them refuse to use them. And that’s what seems to be happening. The fundamentals of the world economy aren’t, in themselves, all that scary; it’s the almost universal abdication of responsibility that fills me, and many other economists, with a growing sense of dread."

From the University of California, Brad De Long and Barry Eichengreen:

"The parallels between Europe in the 1930s and Europe today are stark, striking, and increasingly frightening. We see unemployment, youth unemployment especially, soaring to unprecedented heights. Financial instability and distress are widespread. There is growing political support for extremist parties of the far left and right." As shown above, political extremism is on the march in places like Spain.


Nouriel Roubini and Niall Ferguson:

"Is it one minute to midnight in Europe? We fear that the German government’s policy of doing “too little too late” risks a repeat of precisely the crisis of the mid-20th century that European integration was designed to avoid. We find it extraordinary that it should be Germany, of all countries, that is failing to learn from history. Fixated on the non-threat of inflation, today’s Germans appear to attach more importance to 1923 (the year of hyperinflation) than to 1933 (the year democracy died). They would do well to remember how a European banking crisis two years before 1933 contributed directly to the breakdown of democracy not just in their own country but right across the European continent."

Obviously, we have reached a major danger point in economic history. I first wrote about the parallels of the Eurozone crisis to 1931 and Credit Anstalt in late 2011. Since then the European Central Bank flooded the system with liquidity--but liquidity never solves a crisis based upon insolvency. And, in Europe too many nations and banks are simply insolvent. So, the sugar high is about over and massive capital is fleeing Europe in favor of safe havens. That is why Treasury yields are so low. 

Economically, the pain of a financial crisis is a function of the volume and rapidity of the withdrawal of capital from an economy into safe havens. For a picture of economic pain projected for the Eurozone given its current path, see this graph from Der Spiegel out of Berlin. As I have repeatedly argued, these numbers, which must be added to already grim economic realities, portend a calamity worse than Lehman. Indeed, these numbers promise a global depression.

But, that may not be the worst of it. Painful economic disruptions historically lead to painful political extremism, especially in Europe. And, unfortunately, signs abound that severe political disruptions loom once again in Europe, as I will highlight in my next post.

Conference and Book on Implicit Bias Elevate the Discourse on Race

I attended a conference last week at Harvard Law School launching a book entitled “Implicit Racial Bias Across The Law” edited by Justin Levinson and Robert Smith.  I moderated one of the concurrent sessions on implicit bias and organizations where the presenters discussed the racial climates and cultures of private corporations, law firms and academic institutions.  Typically, discussions about organizations and how they deal with issues of race are constrained and confined by the discourse itself.  Spokespersons for universities and private firms rarely speak of bias, discrimination, or racism.  Instead, they typically talk about diversity, affirmative action, inclusion, access and equal opportunity.  These relatively cheerful words obscure the reality of the abysmal prospects for workers, suppliers, consumers, and students of color in the business world and the university setting.  Justin and Robert’s book and the panel on organizational bias forced conference presenters to move beyond diversity doublespeak to explore the continuing and pervasive problem of racial bias.  I applaud Justin and Robert for elevating the discourse about twenty-first century racial bias.

Pain in Spain Falls on All but the Megabanks

 

So, the media is full of stories that the Eurozone is bailing out Spain--but it is not and will not work. My objection is this: in fact, Spain is not being bailed out. The Spanish people are bailing out the Eurozone megabanks by undertaking $125 billion of new indebtedness so that the Spanish banks can continue to pay Eurozone banks interest and principal and Spanish bankers can continue in power.

Let me explain, using the FDIC Resolutions Handbook for failed banks. According to the FDIC resolution manual, when the FDIC takes over a failed bank it only protects the depositors. Senior management gets sacked (p. 85) and unsecured creditors only get "receivership certificates." A receivership certificate "entitles its holder to a portion of the receiver’s collections on the failed institution’s assets." (p. 5). In other words, the unsecured creditors get any positive net worth remaining after resolution--which is usually nothing because healthy banks with positive net worth are generally not placed in receivership. Simply put, neither managers nor unsecured creditors get deposit insurance, backed by the full faith and credit of the United States Government (see official FDIC teller decal, above).

On the other hand, the Eurozone guidelines for EFSF bailouts, like that for Spain, are only available for systemically important financial institutions and do not preclude payments to unsecured creditors. Indeed, the whole point of the Eurozone bailout for systemically important institutions is to assure protection of the financial system--that is payment to other big banks in Europe. (As the EFSF guidelines state: "A candidate for recapitalisation will have to be a distressed financial institution systemically relevant or posing a threat to financial stability."). Thus, while shareholders do appropriately suffer losses under an EFSF bailout--general unsecured creditors do not necessarily face pain of loss, particularly if "contagion" could result. Finally, the Eurozone guidelines allow each nation-state to indulge its financial elites by failing to mandate their dismissal (much less investigation leading to possible indictment or civil liability). Derivatives counter-parties get protection as do megabanks more generally (under the rubric of "contagion").

This is nuts! Sovereign nations now effectively guarantee derivatives contracts involving megabanks. At a cost of hundreds of billions of Euros the Eurozone now stands behind every derivatives contract involving a Eurozone bank. Overstatement?

Well, the depth of the Eurozone commitment to saving the big banks is evident in the pain it tolerates for the people of Spain. Spain has Great Depression levels of unemployment approaching 25%. Over 50% of its youth is unemployed.  The government continues to push extreme austerity on its people with wage freezes and deep cutbacks for public sector employees. Health and education expenditures face high cuts. And, now Spain promises more austerity ahead. Yet, here in Spain, I see no evidence that the banking elites that caused this crisis face any loss of power, prestige, position or money. (Although the Socialist Party is stirring).

None of this makes economic sense. When I worked at the FDIC we worked to maintain rational economic incentives for bankers. Those committing bankicide were served subpoenas and it was my job to make criminal referrals or to sue to recover damages. I recall bankers breaking down in tears under questioning about how their bank had failed. It was on many levels unpleasant work. But rational banking incentives matter. Today, these bailouts send an inescapable message: bankers may speculate all they want because the governments will bankroll their folly to the tune of billions or even trillions. The only way to stop bank failures is to stop guaranteeing bank failures and to make the failure of a bank very painful for senior managers and unsecured creditors like bond holders or derivatives counter-parties. 

So, the Eurozone now provides hundreds of billions to protect the megabanks from their own speculative excess and pain and economic misery for people who foot the bill. It is difficult to imagine a more destructive economic reality or a more morally reprehensible policy. This new policy of giving megabanks an unlimited and first claim on public wealth will doom us all.

As in World War II, perhaps Spain is again a prelude for the challenges coming to the US.