Tag Archives: The Wall Street Journal

SCALIA’S VACANCY — NEWS v. OPINION

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The battle lines are drawn: President Obama will name his choice to succeed Justice Antonin Scalia on the U.S. Supreme Court; Senate Republicans are determined to block it. One aspect has become striking: Which side has the better argument that history supports its position? It turns out, there’s another battle happening there: news versus opinion.

On the same day, February 16, 2016, two of the most widely read newspapers in the world, carried these contradictory headlines:

“In Court Fight, History Backs Obama” appeared in The New York Times.

“No Clear Confirmation Parallels in Recent Court History,” said The Wall Street Journal.

Who’s Right?

Unless you read both newspapers, you wouldn’t think there was any disagreement on the question of historical precedent for filling the current Supreme Court vacancy. The Times article appears on the paper’s op-ed page. But here’s the real kicker: The WSJ carries its version as a straight news item.

The Journal’s readers saw “news” declaring “no clear confirmation parallels” to the present situation. It cites and purports to distinguish only two earlier precedents.

In 1968, the Senate prevented President Lyndon Johnson’s lame-duck appointment of Justice Abe Fortas to succeed the retiring Earl Warren as Chief Justice and the naming of Judge Homer Thornberry to the Fortas seat. Eventually, President Nixon filled those vacancies. (The Journal doesn’t mention that it took Nixon two unsuccessful nominations — Haynsworth and Carswell — before getting Blackmun over the hump.)

The other Journal example is the oft-cited case of Justice Anthony Kennedy. A Democratically-controlled Senate approved him unanimously in 1988. Apparently believing that distinctions without a difference matter, WSJ reporter Brent Kendall notes that prior to Kennedy’s confirmation, the Senate rejected President Reagan’s first choice, Judge Robert Bork, and that his second choice, Judge Douglas Ginsburg, withdrew.

At the end of his article, Kendall identifies Jess Bravin — Wall Street Journal Supreme Court reporter with a bachelor’s degree from Harvard and a J.D. from University of California-Berkeley — as having “contributed to this article.”

Another Opinion

At best, The Wall Street Journal article is incomplete. Ironically, The New York Times op-ed includes more facts than the Journal’s news item. Professor Timothy S. Huebner notes: “On 13 occasions, a vacancy on the nation’s highest court has occurred — through death, retirement or resignation — during a presidential election year. This does not include the most recent and frequently cited example, Justice Anthony Kennedy, who was nominated by Ronald Reagan in November 1987 to fill a vacancy and won confirmation from a Democratic-controlled Senate in February 1988.”

Professor Huebner continues, “In 11 of these instances, the Senate took action on the president’s nomination. In all five cases in which a vacancy occurred during the first quarter of the year the president successfully nominated a replacement.”

What’s the Difference?

The distinction between news and opinion matters.  Editors have a responsibility to make that difference clear, especially in our age of political polarization. Due to the power of confirmation bias, consumers of media tend to limit themselves to views they embrace. It keeps people comfortable in belligerent adherence to an understanding that may, in fact, be incomplete or even wrong.

In October 2014, PEW Research reported, “Those with consistently conservative political values are oriented around a single outlet — Fox News — to a much greater degree than those in any other ideological group: Nearly half (47%) of those who are consistently conservative name Fox News as their main source for government and political news.” Both Fox News and The Wall Street Journal are parts of the Rupert Murdoch family’s media empire.

Liberals tend to be, well, more liberal in their choices of news sources. According to the PEW study, “On the left of the political spectrum, no single outlet predominates. Among consistent liberals, CNN (15%), NPR (13%), MSNBC (12%) and the New York Times (10%) all rank near the top of the list….”

The predispositions of their constituencies create a special obligation for the media. There’s money in fomenting divisiveness. Blurring the line between “news” and “opinion” might advance a political agenda or sell advertising space, but it’s making the country’s problems worse.

In my opinion.

THE BIG LAW FIRM STORY OF 2012: DEWEY & LEBOEUF

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Question #14.A. in the Wall Street Journal’s year-end quiz on December 28, 2012:

“True or False:

Before law firm Dewey & LeBoeuf LLP filed for bankruptcy in May, it was sued by a janitorial services company saying it was owed $299,000.”

Answer: True.”

This small item brought to mind reports of a January 2012 meeting where Dewey & LeBoeuf’s former chairman Steven H. Davis is said to have described the firm’s financial condition: profits in 2011 of $250 million, but more than half was already committed to pension obligations and IOUs to partners for shortfalls in prior years’ earnings. Together, partners would have to devise an action plan. “You have to own this problem,” he allegedly told them.

Who owns the problem now?

One simplistic narrative suggests that Davis himself should bear most of the blame for everything that went wrong with the firm. But in Dewey docket filing #654, his attorneys recently cautioned against such a rush to judgment.

For example, they assert that during the 12-month period immediately preceding the firm’s bankruptcy filing, “fifty-one partners received a higher distribution than Mr. Davis,” who, the say, got $1 million. Is that the behavior of a self-aggrandizing villain?

No names, please

The firm’s July 26, 2012 “Statement of Financial Affairs” (docket filing #294) identifies Dewey partners only by employee number, but it offers a window into some of those 51 highly paid partners. The dollars that some received as the firm imploded contrast sharply with Davis’s January admonition that they should “own the problem.”

For example, Dewey partner 06780 received more than $6 million in draws and distributions between May 31, 2011 and May 21, 2012. Starting in January 2012 alone, that partner received the following:

1/3/12:     $391,667,67 – Partner Distribution

1/3/12:       $25,000.00 – Partner Draw

1/11/12:    $250,000.00 – Partner Distribution

2/3/12:       $25,000.00 – Partner Draw

3/1/12:        $25,000.00 – Partner Draw

3/14/12:     $391,666.67 – Partner Distribution

4/4/12:       $264,166.67 – Partner Distribution

4/4/12:         $25,000.00 – Partner Draw

5/21/12:      $264,166.67 – Partner Distribution

5/21/12:       $25,000.00 – Partner Draw

The May 21 payments totaling $289,000 occurred shortly after the firm’s cleaning service had filed its complaint seeking approximately that amount for services rendered through April 30. A week later, Dewey filed for bankruptcy.

Dewey Partner 06512 received distributions of $2.8 million in January 2012 alone, accounting for a big chunk of the more than $6.5 million in draws and distributions that this partner received between May 31, 2011 and May 21, 2012.

Dewey Partner 86059 received $3.4 million in draws and distributions from May 30, 2011 to May 8, 2012, including more than $1 million after January 30, 2012.

Overall, 25 top Dewey partners received $21 million during the final five months of the firm’s existence. During the last seven months of 2011, the same group of 25 had already received another $49 million.

Stated another way, of the $234 million distributed to all partners during the 12 months preceding the firm’s bankruptcy, the top 25 (out of 300) received more than $70 million. Someday, we might learn how much this select group also received from the proceeds of the firm’s $150 million bond offering in April 2010.

Fungible money

Complementing the “Davis-as-sole-villain” narrative, another current theme is that the recently approved partner compensation plan proves that former partners are, in fact, “owning the problem.” That may be true for most of the more than 400 who will return a combined $71 million to the Dewey estate. But consider another set of facts.

Back in May, former Dewey partner Martin Bienenstock had just resigned from the firm when he gave a wide-ranging interview to the Wall Street Journal. Reporters Jennifer Smith and Ashby Jones asked him whether “it was safe to say that the firm used credit lines to pay partners, at least in part.”

Bienenstock answered: “Look, money is fungible. The $250 million in profits [for 2011] were real profits. Instead of using it to pay partners, a lot of it went to pay other things, like capital that other partners were due, and pension payments to retired LeBoeuf lawyers.”

In the same interview, Bienenstock said that at the end of December 2011 the firm had drawn down $30 million of its $100 million revolving bank credit line. As the firm disintegrated during the first five months of 2012, it tapped another $45 million.

You may be wondering whether any former Dewey partner’s contribution under the recently approved “clawback” plan may be, at least in part, simply returning money that the firm borrowed and then distributed to that partner as the firm collapsed. Perhaps one answer is Bienenstock’s retort that “money is fungible.”

Collateral damage

Another answer is that any time a bankrupt’s liabilities exceed its assets, the shortfall comes from somebody. Those victims wind up “owning the problem,” too. In addition to partners who lost their capital and didn’t receive a fair share of distributions in 2011 and 2012, unsecured creditors became involuntary lenders who will never be repaid in full.

Which takes us back to Dewey’s cleaning service. Even with their outstanding April invoice of $299,000, ABM Janitorial Services apparently kept working into May. According to Dewey’s July 26, 2012 “Schedule of Creditors Holding Unsecured Nonpriority Claims,” ABM’s claim had grown to $346,000 by May 28.

How much will ABM  recover? Dewey & LeBoeuf’s December 31, 2012 “Amended Confirmation Plan Disclosure Statement” predicts that general unsecured debtors will get between a nickel and 15 cents on the dollar.

The saga of Dewey & LeBoeuf isn’t over, but it’s the big law firm story of the year. And it’s a sad one.

The Most Unfortunate Comment Award to Date

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The words seem so innocuous — “federally guaranteed student loans.” But what do they mean when someone actually defaults and the government has to make good on its guarantee? A recent article in The New York Times provides the answer.

A brief review of the business model

This post is the latest in what became my unintended series on the law school business model. It began with The Wall Street Journal’s misrepresentation in a lead op-ed piece. The Journal claimed that Congress made student loans non-dischargeable in 1976 because of widespread abuse. That is, graduates benefited from government loans and then declared bankruptcy on the eve of lucrative careers to avoid their debt. There’s no delicate way to put this: The WSJ was perpetuating a thirty-five-year-old myth.

Then I considered law schools that offer tuition discounts in the form of merit scholarships. There’s no mystery there: a secretive process of awarding money facilitates an individualized approach to pricing that maximizes tuition revenues while enhancing a school’s U.S. News ranking.

Most recently, I turned to yet another element of the current law school business model: raising the list price of tuition while reserving the flexibility to move lower as needed to attract particular candidates.

Follow the money

Now consider the source of all that tuition money. Some people are able to pay their own way, regardless of the cost. But they’re in the minority. Matt Leichter reports that the 44,000 law graduates in the class of 2010 took on $3.6 billion in debt, up sharply from $3.1 billion only two years earlier. The number is climbing as tuition goes up.

The chances that recent graduates will secure a job requiring a law degree are about 50-50. Although others will get non-legal jobs that pay reasonably well, the ranks of new lawyers with loans they can’t afford to repay is growing.

So what?

Students now have an income-based repayment (IBR) option for federal loans; that may afford some relief. But as Professor William Henderson explains in “The Law School Tuition Bubble,” two problems arise. First, dedicating fifteen percent of income for the requisite twenty-five years of a total IBR plan is akin to a permanent tax on the already low incomes of those lawyers. Forget about saving for retirement or funding their own kids’ higher education.

Second, those IBR participants who make it all the way to the end of the twenty-five years will have their remaining loan balances forgiven. That will add more debt that that the federal treasury will bear — for anyone who worries about such things.

Default

For recent graduates with limited job prospects, IBR is better than nothing. But some will default on their loans, just as their predecessors have. This poses no problem for law schools; they’ve already collected their tuition money and don’t have to return it.

Default poses no problem for lenders, either. That’s because educational debt is not dischargeable in bankruptcy, except in rare cases that satisfy the “undue hardship” requirement.

Moreover, the federal guarantee kicks in for private lenders, at which point the government foots the bill. But that’s not the end of the story. As the Times article explains, the newest growth industry is student loan debt collection. Last year, the government paid more than $1.4 billion to debt collection organizations it hired to track down student defaulters.

A Most Unfortunate Comment

For anyone who doubts that this is unapologetic intergenerational exploitation of the young by the old, consider these comments from Jerry Ashton, a consultant for the debt collection industry and the winner of the most Unfortunate Comment Award to date:

“As I wandered around the crowd of NYU students at their rally protesting student debt at the end of February [2011], I couldn’t believe the accumulated wealth they represented – for our industry. It was lip-smacking.”

Ashton included a photograph of several students to which he added these details: “a girl wearing a t-shirt emblazoned with the fine sum of $90,000, another with $65,000, a third with $20,000 and over there a really attractive $120,000 was printed on another shirt.”

Someday this will all come crashing down. I fear that people like Ashton — and merger/acquisitions specialist Mark Russell, who described student loans as the debt collection industry’s “new oil well” — will make money on that event. too. Shame on them. Shame on all of us.

WHEN FACTS GET IN THE WAY

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Facts should matter, especially to newspaper editors. On July 25, The Wall Street Journal based its lead editorial on a factually incorrect premise. I happened to notice the Journal’s error because I’m writing a book about the legal profession’s current crises, one of which is exploding law school debt. But the WSJ blunder raises an important question: How often does the truth lose out to editors’ ideological convictions?

“You Don’t Owe That” suggested that current bankruptcy law proposals to modify the impact of burdensome student loans would “reverse a hard lesson learned during the 1970s.” The editors claimed that provisions barring the discharge of educational loans in bankruptcy occurred “[a]fter a surge in former students declaring bankruptcy to avoid repaying their loans.” For that reason, the WSJ continued, “Congress acted to protect lenders beginning in 1977.”

Not true. There was no such 1970s surge. There was no empirical record of abuse to support the legislative change that began a 30-year slide down a slippery slope, culminating in an even more unfortunate 2005 amendment to the bankruptcy laws.

Perpetuating myths

Old misconceptions die hard. Prior to 1976, all educational debt was dischargeable. That year, Congress amended the Higher Education Act of 1965 to prohibit the discharge of federal educational loans until at least five years had passed since the beginning of the repayment period. Why?

More than 20 years ago, a thorough examination of what some critics characterized as a “loophole” that “allegedly allowed graduating students to discharge their loan obligations through bankruptcy on the eve of lucrative careers” was “more myth and media hype than reality.” More recently, the Congressional Research Service noted that the 1997 Bankruptcy Commission found “no evidence to support the assertion that when student loans were dischargeable the bankruptcy system was ‘systematically abused.’”

Fear and anecdotes — not facts or evidence — resulted in federal student loans joining the same bankruptcy category as child support, overdue taxes and criminal fines. Except for rare exceptions based on undue hardship, a person paid those debts or died, whichever came first.

Bipartisan blame

The Bankruptcy Reform Act of 1978 continued the new five-year rule, even though statistical analyses from the General Accounting Office and a House report confirmed that earlier claims of abuse were “virtually nonexistent.” In 1990, Congress and the first President Bush extended that period to seven years. In 1998, Congress and President Clinton decreed that debtors would never discharge their federal educational loans. In 2005, Congress and the second President Bush extended that protection to private lenders as well.

The recent Journal editorial worries about those private lenders. No one has been able to identify the author of the 2005 amendment giving financial institutions that huge break. It also gave them something else: a new incentive to lend money with less concern for how debtors would repay it.

Framing the question

The WSJ position seems somewhat paradoxical for the otherwise libertarian-leaning newspaper. On the one hand, personal responsibility is an easy argument to make when focusing on young people who incur debt: “They should be careful and make better choices.”

On the other hand, what entitles such students’ older, wiser and more knowledgeable bankers to put the government’s heavy thumb (in the form of granting special creditor status to lenders) on the scale?  For some law school graduates, the result is enormous educational debt for degrees that won’t lead to jobs necessary for repayment. Shouldn’t lenders feel the consequences of their poor decisions? Might everyone be better off if lenders sat down with pre-law students and asked them what they planned to do with their J.D. degrees before approving loans for tuition?

Moreover, from the debtor’s perspective, the underlying issue involves the exercise of a constitutional right. Against the backdrop of eighteenth century debtors’ prisons, the founders empowered Congress to enact uniform national bankruptcy laws so that a debtor didn’t risk losing all assets in one state only to be thrown in jail for not paying debts in another.

Accountability

Perhaps questions of accountability and personal responsibility turn on the characterization of the issue — and who should be accountable to whom. The Wall Street Journal is accountable to more than two million daily readers. Those readers assume the honesty of editors who include purported facts in an op-ed piece on important policy questions.

This time, readers got what an important newspaper’s editors would like the facts to be, instead of what they are. Even worse, most of them will never know it.