Attraverso Commentary - Tarullo on Basel III and Short Term Wholesale Funding

By Professor Jeffery Atik

The Federal Reserve's Dan Tarullo has been a key player in post-Crisis U.S. bank reform and in the negotiation of Basel III, the set of international banking rules that guides regulation in major financial centers. In a speech made last Friday (May 3, 2013) Tarullo expressed some satisfaction with the U.S. and Basel III reforms -- and identified a risk needing further regulatory attention: runs on short-term wholesale funding.

Short-term funding has always constituted a vulnerability to the banking system. The traditional magic of banking involves the transformation of maturities -- banks borrow on a short-term basis and lend for the medium- or long-term. In ordinary times this works out splendidly -- as the short-term rates banks pay tend to be lower (over the long term) than the long-term rates they earn. And in ordinary times, short term funding is quite stable.

The dominant form of short-term funding was traditionally bank deposits. Deposits are essentially loans made to a bank by its depositors. Deposits are legally short-term, but practically rest in the hands of banks for substantial periods. Short-term funding becomes problematic, of course, when depositors systematically demand repayment: this is the old-style bank run. Post-Depression era deposit insurance has largely eliminated bank runs, at least in the United States, and so the ordinary insured bank deposit is (from the perspective of the bank) a trusty source of short-term funding.

The bank deposit no longer forms the core of short-term funding for many banks (particularly larger banks) -- and other systematically important financial institutions (hedge funds, money-market funds, broker-dealers) lack the ability to take insured deposits. The mix of short-term funding has changed -- and with this change, there are new vulnerabilities.

Attraverso Review: The Future as Cultural Fact: Essays on the Global Condition by Arjun Appadurai

By Professor Jeffery Atik

In this collection of essays, Arjun Appadurai links his role as leading globalization scholar to his practice as activist on behalf of the slum dwellers in his native city of Mumbai (or Bombay, the abandoned name Appadurai seems to prefer). Appadurai redeploys globalization theory (and more generally modernization theory, of which globalization is a part) as an ethical practice. He calls for cultivating the capacity to aspire among the world's poor -- an unabashedly cultural project with political and developmental implications. Appadurai argues that the poor must be enabled to aspire -- these aspirations will, in turn, define new and different trajectories from those promised by the passé globalist.
Globalization has failed in its predictions -- and so has failed as science. Globalization, it was thought, would lead to convergence and homogenization, more democracy and tolerance and less nationalism and violence. Yet the world we now see displays strong (and growing stronger) national states and continued developmental disparities. Those enabled by knowledge migrate; their home countries capture disappointing returns from their educational investments. New digital capacities have been harnessed by jealous ethnic groups to reinforce local identities; they can encourage aggression and conflict.

These phenomena play out in Mumbai, as elsewhere. In the central essays on Mumbai, one sees Appadurai's personal disappointments and hopes for the city he left many years ago. His portrait of Bombay -- the wonderfully cosmopolitan possibility of his youth -- is a new city, where peoples from many parts of India and elsewhere mix. The clearest example of Bombay's promise of co-existence is the presence of large and intermixed Hindu and Muslim communities -- but there are Parsis, Jews, Armenians, Syrian Christians and the ever-charming British colonialists adding flavor to the stew. Appadurai insists on the inherent capitalist foundation of the Bombay of his youth -- built on the production of textiles and other industrial goods for export markets. Bombay is thus twice cosmopolitan -- by the inner composition of its multi-ethnic population and by Bombay's full engagement with (and  dependence on) international trade and capital investment.

Appadurai captures this fading Bombay in three delightful depictions. The first is his portrait of Bombay as the City of Cash. Cash in Bombay is not a cold technical concept -- rather it is the species of sociability, displayed and celebrated. The value of cash lies in cash's flashy visibility. One of the functions of cash, of course, is forging social linkages -- and this it does spectacularly well in Bombay. His second Bombay sketch renders the strange linguistic brew spoken there: Marathi at base, but filled with exotic elements provided by the various sub-groups arriving from other parts of India. And the third image of Bombay is colored via the neverland of Bollywood (a name that still incorporates the discarded Bombay) where most of India's ethnicities are featured (though not the local Maharastrians as such), either denatured ("vaguely North Indian") or stereotyped. The music of Bollywood -- its defining element -- flows from the northwest and its traditional ghazal into the streets of Mumbai.

This Bombay exists no more. And so Appadurai asks "What killed Bombay?" The renaming of Bombay marked more than a rejection of a colonial style; Mumbai, the new name, is an artifact of the Shiva Sena, the ruling party that projects a Marathi primacy at odds with Bombay's cosmopolitan past and multicultural present. Mumbai has been scarred by the 1992-1993 Hindu-Muslim riots. One of the thematic challenges of raising the hopes of Mumbai's poor is overcoming these divides.

The View from Mumbai is the core of the book. It reflects the engaged nature of Appadurai's intellectual projects and many of his convictions. Appadurai recounts the actions and practices of a constellation of slum-based NGOs devoted to improving housing for the city's poorest residents. He sees housing as a primary social need, the key to citizenship. Yet Appadurai rejects elite-controlled planning in favor of spontaneous design by the poor themselves -- the model children's toilet celebrated by Kofi Annan being a prime example.

Appadurai notes the internal innovations of the Mumbai NGOs: their patience, their "bias against 'projects'", their nonhierarchical styles, their strategies of precedent. He sees these groups fostering improvement to the lives of Mumbai's slum-dwellers. The central contribution of these housing activists in Appadurai's estimation is increasing the poor's "capacity to aspire."

Improvements in the capacity to aspire can result from deliberate political and social action -- by and on behalf of Mumbai's poor (and by extension the world's poor). These hopeful possibilities result from modernization/globalization -- they depend on e-mail and cell-phones, and the formation of transnational networks of activists, which distribute notions and celebrate achievements. The Future as Cultural Fact is a hopeful book; it suggests that social science can indeed contribute, in a modest manner, to social progress.

Follow me on Twitter @jefferyatik

California State Bar Driving Solutions to Crisis in the State Courts

By Patrick Kelly, Guest Alumni Blogger

Regarding the crisis in the courts that I discussed in my previous blog post, I have been asked "What is the Bar doing about it?" The answer is: The Bar as an agency of the government can only take limited action; however, it is strongly supporting the work of the Bench-Bar Coalition and the Open Courts Coalition that exist for the sole purpose of keeping the courts open for the public through increased funding. I am on the steering committee of the latter group, chaired by Paul Kiesel and Naill McCarthy, and we are working together to facilitate budget discussions between the various departments of the court.

More importantly, we have been regularly meeting with court officials, representatives of the executive branch and legislators. For example, on March 11, both the BBC and the OCC traveled to Sacramento to meet with legislators and support the court by attending the Chief Justice's State of the Court address. I personally met with many legislators, including the chair of the Assembly Judiciary Committee, to underscore the crisis and secure full funding for our courts. I am pleased to say that everyone with whom we met understands the importance of the issue to their constituents and agrees we are at risk of losing many of the benefits of our justice system. To a person they support increased funding for the courts.

The question remains, "Where do we get the money?" That can be answered in part by using part of the budget surplus we have been told will exist. However, the real answer is for the executive and legislative branches to elevate the judicial branch to the very top of their priority scale. Why? The answer is simple: The court system is the gatekeeper for the rights of all Californians. It provides the only vehicle to enforce their rights under all of the other programs and agencies the legislature funds. All of the bills and laws in the world make no difference if there is no viable court system to enforce them. Thus the separate branch of government that is our justice system is integral to all other laws and programs, and indeed they cannot exist without it. Stated otherwise, although only taking 1 percent of the state's general fund, the courts must remain available to enforce 100 percent of the rights of 100 percent of Californians no matter what the right or law they are seeking to enforce.

What can you do to help ameliorate this crisis? We must come together to reach out to the legislature and the executive branch and to enlist the aid of community organizations in this quest. Now is the time to call your assembly members and senators and let them know how important this issue is to their constituents who even now are being denied their constitutional right to access to justice. Your voice will count.

Patrick Kelly is the Western Region Managing Partner at Wilson Elser Moskowitz Edelman & Dicker LLP and president of the California State Bar. A recipient of Loyola's Distinguished Alumni Award, he sits on the board of the Law School's Advocacy Institute and was elected to the Law School's Board of Overseers.

And That's What 'Glee' Missed on 'Glee'

By Associate Dean Michael Waterstone

This op-ed originally appeared in the April 24, 2013 edition of the Daily Journal.

Last week's episode of the popular TV show "Glee" dealt with the issue of gun violence. At the high school where the show is set, two random gun shots are fired. Terrified, everyone shelters in place until the SWAT team gives the all clear. Police search for the culprit. Later, it is revealed that the shots were inadvertently fired by Becky, a character with Down's syndrome. Scared and frustrated that her high school experience was ending, and facing what she believed to be an uncertain future, she decided to bring a gun to school.

"Glee" has received praise and awards for how it contributes to society's understanding of people with disabilities. One of the main characters on "Glee," Artie, uses a wheelchair (although the actor who plays Artie does not). The show has gracefully managed the line between highlighting how thoughtless socially constructed barriers can make Arnie's life difficult, but for the most part, he is just one of the gang going through what all the characters go through: falling in love, deciding what he wants to be, and always singing and dancing. Similarly, having Becky, a character (and actor) with Down's syndrome, allows an exploration of the sometimes stigmatizing ways in which people perceive her, while also allowing her to be a high school student trying to find her way in life. The show does not revolve around these disabilities, but neither does it ignore them.

What's at stake in Metrish v. Lancaster

By Associate Visiting Clinical Professor Lara Bazelon

In the Supreme Court case of Metrish v. Lancaster, the state appeals the finding of the Sixth Circuit's grant of habeas relief to Burt Lancaster (no relation to the actor), who was twice tried and found guilty for the murder of his girlfriend. In the first trial, Lancaster raised both insanity and diminished capacity defenses. The jury rejected both, but because of an unrelated constitutional error, the conviction was set aside.

At the second trial, Lancaster again sought to raise the insanity defense. In the interim, however, the Michigan Supreme Court abolished the defense. That decision was applied to Lancaster retroactively. Lancaster was once again convicted and sentenced to life in prison.

After exhausting his state court appeals, Lancaster filed a writ of habeas corpus in federal court. Lancaster lost in the district court, but prevailed before a divided panel of Sixth Circuit judges, which granted the writ after finding that Lancaster's due process rights were violated.

To find in Lancaster's favor, the panel had to clear two exceptionally high hurdles erected by the United States Supreme Court's retroactivity and habeas jurisprudence. On the retroactivity front, the court of appeals had to find that the Michigan courts' abolition of the diminished capacity defense was "unexpected and indefensible." On the habeas front, the bar was even higher: the Sixth Circuit had to find that the Michigan courts' decision to apply retroactively to Lancaster its "unexpected and indefensible" decision was "so lacking in justification that there was an error well understood and comprehended in existing law beyond any possibility for fairminded disagreement" among reasonable jurists.

You may be wondering exactly what kind of habeas petitioner could possibly prevail under either standard, much less both. I'm not sure I know the answer, but I'm pretty sure it isn't Lancaster.

The dissenting judge on the Sixth Circuit panel laid bare the shaky foundations of her colleagues' opinion. Simply put, the majority could not overcome a standard of review so highly deferential that it allowed federal judges to grant relief to state court petitioners only in cases of "extreme malfunctions in the states' criminal justice systems."

My take: This dissent, coupled with SCOTUS' decision to grant cert, signals swift reversal.

Attraverso Review: Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb

By Professor Jeffery Atik

Nassim Nicholas Taleb is back, and in his new book he asserts that his signature idea was not The Black Swan (that was so last book), but rather Antifragility. This second idea shares a viral quality with the first; like the Black Swan, once you catch the notion of antifragility, it's hard to get rid of it.

Antifragility is the characteristic of certain systems to grow stronger when stressed; it is the mirror concept to fragility (where stress destroys). Exercise stresses our muscles, and so renders us stronger. As Taleb insists, antifragility is not robustness -- robustness is merely resistance to stress. Stress improves the antifragile. And in a world where stresses cannot be avoided, it is better to be antifragile.

I admit to being a Taleb fan -- and not everyone is. Most all -- critics and admirers -- agree he is an engaging and imaginative thinker. But he does seem to go out of his way to be, shall we say, difficult. Antifragile is an odd book -- it is a collection of personal essays mixed with some rather formal decision theory. That said, the personal (and the fictional) do serve the argument.

Taleb sees antifragility everywhere. Indeed, he is an avid antifragility spotter -- which results in no small amount of quirkiness in his personal life. At times Taleb convinces, at times he doesn't -- as his examples (or speculations) range from finance to picking bar fights to drinking too much wine. And so we get views of Taleb's various cantankerous postures. Physicians by and large do more harm than good (as they are compelled to do something) -- and so should be avoided outside of dire emergency. Universities are dangerous -- better to wander in a library.

As Taleb would concede, there are many more instances of fragile systems than antifragile ones. So a large part of the book is exploring the roots of fragility -- and possible moves to avoid fragility's dangers. Taleb provides a host of tantalizing heuristics -- take small over large, simple over complex, acute stress over chronic stress, the natural over the artificial. Old technologies are to be prefered over new ones -- as those technologies that have already survived the stresses of experience are more likely to remain viable (this is an example of the Lindy effect). It is no surprise that Taleb writes with a fountain pen. Of course Taleb may be wrong in particular instances. I suppose his cardiologist (if he has one) is horrified by his binging diet and his disdain for statins.

Introducing Guest Alumni Blogger Pat Kelly

I am excited to introduce our second guest alumni blogger. We are proud to welcome Pat Kelly '69 to our Summary Judgments blog. In addition to being a Western Region Managing Partner at Wilson Elser Moskowitz Edelman & Dicker LLP, Pat is the current President of the California State Bar. He is also a member of the Law School's Board of
Overseers. We are looking forward to having Pat blog about many of the important issues facing the bar, including the court funding crisis.

-Associate Dean Michael Waterstone