Business Law Prof Blog

Speech at Graduation of the Class of 2005

2005 Class Speech
May 13, 2005

I. Opening:

Thank you Dean Rogers for your kind words.   [And thank you for the almost but not quite as good as Professor Shipman Teaching Award.]  It is wonderful to see the Class of 2005 all in one place with your families.  It is a glorious day for celebrating.  I am bit nervous to see the faculty all in one place, however, a faculty meeting may break out. [I imagine my colleagues are also a bit nervous -- with me up here in front of an open mike.]

II. Class History:

The Class of 2005 went though 3 years together and, in so doing, developed quite a reputation.  You folks are a sociable, relaxed group, slow to rile.  [Earnestness?  That’s for those 2Ls.]  When riled, however, you will step up and put your name on a petition or two to the Dean.   

Let’s do a quick review: 

In Your First Year:
You chuckled when an over-enthusiastic Safety Officer greeted you at orientation telling you that you would either be assaulted or have your computer stolen and those of you lucky enought to have your computer stolen repurchase it in Dayton.  You showed Professor Bronstein how to party -- at his house no less.  You endured the faculty’s version of Cod Liver Oil:  a class called “Legislation” [it tastes bitter going down, day I say it? The Funnel, but it’s good for you.]

In Your Second year:
I arrived in town and met 88 of you in Business Associations;   you were the veterans of Drinko Hall and I the rookie.   Stephany Cokes greeted me on the first day class with a question:   “There is a rumor going around that you went to Michigan; is it true?”    Nick Brannick, the second week of class, told me my teaching style would never work here; I held too many – well-- unusual opinions.  [Then you discovered that I relish a good sharp counterpunch, one that pulls one’s classmates away from a free cell game for a moment of joint mirth -- and we got along better;  I passed over into the “he’s a character” category]. 
I have taught at ten or so schools in four countries and by my second month here I told my wife “Something about the students here is unique and I cannot put my finger on it.”  The next day in BA, arranging my materials for class from the podium,  I looked up to see 87 students [ John McMillin was not there; are you out there John?] I looked up to see 87 students in animated conversation, laughing and smiling.    Then I understood:  Despite the inevitable competitive pressures of law school, the Class of 2005 genuinely enjoyed each other and, dare it say it, enjoyed conversing with their professors. What a delightful group you are and how lucky the staff and faculty were to have you here.   
Moreover, I can to appreciate that members of the class 2005 are not one-dimensional.  You introduced me to the largest and best run student organization, the Wednesday Night bowling league organized by Jason Job, so he could win.  The breath of your extra-class activities is both heartwarming and amusing. Diana Parker threw her energy into volunteer work for children as did Bret Jortlan, Denise Pleska, Sheryl Trzaska and Justin Tyack.   Andre Porter as you have seen is an accomplished R& B singer; Chris Reis owns and races thoroughbred horses; Chris Geigner has a blog (and thankfully I am not featured in it, yet);  Kara Wolke who won a trip to the Grammies, can juggle balanced on a unicycle;  Jack Saxbe produced experimental TV pilots;  Dave Gillespie earned tuition dollars from poker. 

Then In Your Third year:            
Like marathon runners in the final stages of a race you grew weary.   And you participated in our own version of a survivor reality show, “The MoPD”  (to the families: our placement office)  In my class, securities regulation, there was a not-so-tongue in cheek public discussion of interviewing for a job at a gas station listed on Monster.com.

Many of you have found work and those who have not, will.  We are very fortunate to live in a country where persistent effort pays huge rewards; in country in which failure with a clean reputation is called experience.  So, if you persist and maintain a personal reputation for integrity you will find that you can use your legal education to feed your families in a socially useful and personally rewarding way -- and this is what law school is all about. 
This advice applies also to those who now have jobs; most of you will move 3 or 4 times in your professional career and several of you may change your profession. 
In this regard my life has been a disorganized but wonderful wander:  I have changed jobs five times and my wife, originally a lawyer, changed professions at age 50 (she is now a Methodist minister and I one of her most difficult projects). 
So get up when you fall; look around when you are dissatisfied; nurture your reputation for honesty, conscientiousness, and professionalism; and take the opportunities when they present themselves. 

In any event today you have broken the tape at the finish line and are happy just to be done.  Your family knows and the faculty knows what you will come to appreciate more fully in time, that this is a grand personal achievement.  Your family and, yes, the faculty, the faculty is very, very proud of you.  We all wish you moments of joy to offset the inevitable sorrows of life.   

The schooling is over; let the learning begin.      

Bless you all.
      

Cafta

    President Bush’s efforts to sign a free trade agreement, CAFTA, with five small Central American countries (Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua) are in their final stages and stalling.  The administration is struggling to find the votes in Congress to pass the agreement, signed over a year ago.  Cafta would cut tariffs on American exports and make permanent the tariff-free status of Cafta countries on American imports.
     Democrats in Congress want the agreement renegotiated to include labor and environmental protections.  Several Republicans are protecting local businesses and industries from the increased competition that come from the Central American countries.
    Cafta difficulties are sobering.  First, these five countries have a very small part in the United States trade picture.  If labor and environmentalists are stall these agreements it bodes very poorly on future negotiations with larger trading partners in this hemisphere (Brazil) and in the world at large (China and Japan).  Second, the impact on these countries is dramatic:  Their economies are much more affected than ours by the agreement.  It could provide an economic boom in countries struggling to establish sound government and healthy living conditions for their citizens.  Third, some of the Cafta provisions are in place and they will expire without the agreement.  The results of the temporary provisions have not been threatening to American industry or labor.
    These should be an easy call; the fact that is may not pass with a pro-trade President and his own party in control of both houses of Congress is troubling.  I hope it is just a bump in the road on America’s integration into the world’s economic community but it could portend a major shift in American attitudes against free trade agreements and towards protectionism.. 

Icahn and Blockbuster

     The success of Carl Icahn in electing himself and two others to the board of directors of Blockbuster Inc. is front page news.  Mr. Icahn has posted a rare victory over management incumbents in a contested proxy contest. (See Article)

     Astute observers have noted that Mr. Icahn’s success is due to a loose coalition of hedge funds, which took positions in Blockbuster stock and voted for his dissident slate.

     There is an irony here, an application of the old maxim: “Be careful what you wish for you may get it.” 

      In the 1990s academics sought to empower the shareholder voice in publicly traded firms to offset the power of incumbent managers.  Since individual, dispersed shareholders did not have the financial incentive to organize, academics turned to “institutional investors” – mutual funds and pension plans, among others – hoping that they would have large enough positions in the firm to justify an active monitoring and disciplining of managers.  The institutional investors were, however, largely passive.  They found that friendly relations with managers opening up channels of communications that facilitated success stock trading, often ahead of the general market.  SEC Regulation FD, forcing companies to talk to all investors at once, significantly altered but did not eliminate the benefits of these cozy relationships.

     Now hedge funds have appeared on the scene.  They are not into cozy relationships; they are into fast money.  If they can make fast money by changing corporate practice or structure, the funds will run over incumbent managers to do it.  Are these the “empowered shareholders” for whom we wished?  Do we want fast money restructuring corporate operations?  We would be more comfortable with the “empowered,” “long-term” shareholder, but it has not happened. 

United and the Railway Labor Act

           On May 10, 2005 a Chicago bankruptcy court sanctioned the largest pension plan default in American corporate history.  UAL Corporation will shift United Airlines’ $6.6 billion pension liability to a federal agency, the Pension Benefit Guaranty Corporation.  The default may led to similar defaults by other struggling airlines, American, Continental, Delta and Northwest, which now must compete on fares with a United that is not encumbered with old pension plan obligations.

           The hidden issue in the financial struggles of the airlines, and the country’s railroads too for that matter, is the role of the Railway Labor Act.  The RLA provides significantly more protections to organized unions than does the more general National Labor Relations Act. The difference is historical; the bloody railway worker strikes at the turn of the century convinced Congress that railway unions deserved special, elevated protections.  The special protections, applied in current economic conditions, have forced railroads and airlines to overpay and under-employ workers and disabled these companies from engaging in normal restructurings (both at the firm and industry level) in response to changing economic conditions.

     Since most the the companies covered by the RLA are struggling to operate in the black, perhaps it is time to revisit the RLA.

             

Regulating Hedge Funds

            Hedge funds have been in the news this year.  They made more news on May 10^th when the Dow Jones Industrial Index, a measure of the health of the stock market, lost over 100 points.  Insiders attributed much of the drop in market prices to rumors of hedge fund losses.

            Should the government regulate the trading activity of hedge funds to reduce market volatility?  No, but the government should look at the publicly traded institutional investors that lend or contribute money to the funds.

            A hedge fund has three characteristics.  First a hedge fund invests large sums of money with very short-term return horizons.  It is “fast money” that when in, soon wants out – at a profit.  Second, the money is pooled from a small number of wealthy individuals and institutional investors.  A hedge fund is a “private” organization, free from regulation under the Investment Company Act of 1940.  It is not, therefore, a mutual fund, which is heavily regulated by the Act. The funds are secretive and many are headquartered offshore. And third, a hedge fund uses extreme leverage to maximize returns.  A fund borrows heavily from banks and others to add to the size of its investment positions.  If the returns on a given investment (say 10%) exceed the interest rates owed the banks on the borrowed money (say 8%), the hedge funds returns exceed the investment returns (they make 18% or so rather than the 10%). 

            On May 10^th rumors spread that the hedge funds had taken heavy losses in their investments in stock and bond positions in General Motors.  According to the rumor, several large funds had shorted the stock and were long in the bonds.  If so, the funds bet wrong.  A tender offer for GM stock by Kirk Kerkorian kept stock prices high and a downgrade of the bonds’ to “junk” status by credit rating agencies dropped the bond prices.

            Because hedge funds are privately held they are not required to make information about their activities public.  The lack of information fueled the rumors.  Reporters and market professionals scrambled to phone hedge funds and check on the source of the rumors.   

            The rumors caused sharp price declines in the stock price of investment banks, which are publicly-held and publicly-traded.  Traders connected the banks to the hedge funds because it was also rumored that the banks had lent money to the funds to enable the funds to leverage their positions in GM.  It was the drop in the price of the banks’ stock that led to the drop in the Dow Jones Index.

            The events of May 10^th will no doubt increase the pressure on the SEC and Congress to regulate hedge funds.  They should resist.  Regulation will not only drive more of the headquarters of hedge funds offshore but drive their investment activity offshore as well.  The London Stock Exchange will be the winner and our stock exchanges the losers.

            The SEC can, however, reduce the effect of hedge fund rumors on publicly-traded banks in the

United States

.  The SEC can require those institutions that are publicly-traded to disclose more detail on their exposure to specific hedge fund positions.  Investors will be able to better price the bank’s exposure to changes in market conditions that affect their hedge fund clients.  An increase in regulation should, therefore, focus on the public lending institutions that deal with hedge funds, not the hedge funds themselves.    

Lawyers As Investment Bankers

    Morgan Stanley has just hired a lawyer from Sherman & Sterling to be a vice chairman.  His salary?  $20 million or so for the "rest of the year."  Lawyers have always done well in investment banking in mainline management positions.  Add a sophisticated understanding of finance to a law degree specializing in business and law student can pursue a career in investment banking. 

Conference on What Makes for a Favorable Business Environment

     The students of Ohio State Law School (known as the Moritz School of Law) have sought faculty approval for a new Journal, the Ohio State Entrepreneurial Business Journal.  There first conference will be March 17, 2006 and feature the question:  What Government Strategies are Successful in Developing a Local Entrepreneurial Community?  One panel will focus on legal rules and the second panel will focus on government initiatives.  Law professors will dominate the first panel and business professor will dominate the second.  The proceedings will be publised in on-line and print versions.  Please contact me if you would like to participate or want more information.

Kerkorian Tender Offer for GM

   Kirk Kerkorian has announced a tender offer for 5% of the outstanding common stock of GM.  If successful he will control close to 9% of the stock, making him one of the largest shareholders. 

    Only in America could an 87 year old fellow publicly claim that he is in for the long haul as an investor.  In his public statements he has stated that he has not intention of attempting to control or influence the management of GM.  This will strain the definition of "influence."  If asked by GM management as to what he would suggest for the company is that "influence"?  If he makes unsolicited suggestions but does not attempt to run for or put a nominee on the board is that "influence"?  The legal line between normal investor oversight and investor "influence" has yet to be drawn by a court or by the SEC. 

Law School Graduation

   The act of sending one's graduates out into the market should have a sobering effect on law school faculties.  It should be a time for evaluating whether a school's education adds value. 

    Many schools are pursuing an "interdisciplinary" approach.  Like chocolate cake some, for dessert, is tasty but it ought not be the main course.  Those schools dominated by the approach favor hiring faculty members with PhD's in non law subjects, stuff their upper class curriculum with courses on cultural analysis, and staff faculties with members who teach "main-line doctrinal" courses only as a "teaching load" filler so they can do research in other, more policy-laden, subjects.  Skills courses turn into courses on cultural analysis.  Seminars are -- well -- a mess.  Students game their upper class years for good grades, attend fewer classes and read even less.    Law firms respond by focuing on first year grades, to the exclusion of the upper class grades, as the preferred measure of a law student's capabilities.  First year courses are more or less standarized and contain an emphasis on traditional doctrinal skills.  And students who become lawyers report back from work that they could have been better prepared.

    Business schools are ten years ahead of law schools in addressing the problem.  Ten years or so ago a study showed that MBAs did not do any better in business than those without MBAs and business schools have since taken major steps to "become more relevant."  Their efforts have not all succeeded but at least they are trying.    

Duke Energy Deal

     Duke Energy announced a stock for stock deal with Cinergy.  Each share of Cinergy stock is converted into  1.56 shares of Duke Energy. Based on pre-announcement closing prices, Cinergy shareholders receive a 13.4% premium in the deal.  Cinergy shareholders will hold about 24% of the surviving company.  Post announcement stock prices were less generous however, as Duke Energy's stock fell, reducing the Cinergy shareholder premium as well.  Duke Energy, anticipating an adverse stock reaction perhaps, has also promised to increase dividends on its stock.  This is the old story;  a company attempts to buy its way out of difficulty in an acquisition.  The buyer however cannot convince the market that the buyer will benefit more than what the buyer has paid more for the target.  Even a "sweetener" promise of higher dividends does not help.  The boards of buyers should reject such deals.  It should not be a sign of "disloyalty" to reject a CEO's proposal to do a deal.