Wednesday, November 11, 2009

The Bear Stearns Acquittals - A Causation Versus Blame View

Posted by Jeff Lipshaw

Images-1 I've given talks now twice in the last two weeks, once to a group of faculty and students at the Brooklyn Law School, and once to the faculty at Suffolk, based on my article The Epistemology of the Financial Crisis.  One of my colleagues just sent me a note with a newspaper quote from one of the jurors who acquitted the Bear Stearns hedge fund managers who seemed to be of two minds (one private and one public?) regarding the future of the investment funds under their management:  "The entire market crashed. You can't blame that on two people." Giving the talks on the paper helped me refocus on what I think is its central thesis, namely that the paradigm of causation in law is blame-seeking, not explanation. As I said in the article about forward-looking regulation:

The overriding theme is that regulation needs to have an epistemological modesty about it, a certain lack of presumptuousness, all of which is belied by disciplines that think that complex causes can be reduced to (a) simple and singular utility functions (rational actor economics), (b) complex functions that can actually model the world's almost infinite contingency (behavioral economics), or (c) an after-the-fact ascription of blame (law). The right answer, I suggest, is that broad policy requires relatively simple models, the necessary downside being there is only so much regulation of a complex world can accomplish. The crisis of epistemology in 1755 was that even after Newton's accomplishments in physical science, an earthquake still destroyed Lisbon, and the crisis of epistemology in 2009 is that all the algorithms in the world are not going to stop financial bubbles. The problem is endemic to all forward-looking judgments. Nobody knows until after the fact whether the entrepreneur is a peerless visionary or a self-deluded wacko, any more than I really know until after the fact that today is the day I should jump ship from the public securities markets because today they became a bubble.

My response to my colleague this morning was that I had a similar take on what had happened in the Bear Stearns trial. The jurors understood intuitively the distinctions between causation as scientists and ordinary people consider it, and blame (as causation) as lawyers consider it.  And the seeming inconsistencies of the managers loving and hating the market are precisely the uncertainties we all live with looking forward rather than backward. 

Larry Ribstein suggests this is a problem with the application of the criminal law to business; I think it's something slightly different, particularly as a number of us try to construct an approach to teaching students what they need to know in order to practice law in transactions versus law in litigation.  The profession is vested in the job of blame-finding and it's something of a rigged game.  That is, a common justification for the presence of transaction lawyers is to anticipate the blame-finding that they can expect their sibling professionals to be undertaking once the deal is done.  This is always a tricky position for me to take and defend, because the immediate response is that I'm suggesting quietism or passivity in the face of wrongdoing.  No.  It's that there's more of a "shit happens" world out there than our teleological (purpose-inferring or end-inferring) instincts would like to admit, and the line between misfortune and injustice (as my friend Linda Meyer puts it) doesn't map very well against the line drawn by FRCP 11 or its equivalents on meritorious legal allegations.

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