Hat tip to one of my students – Kimberly Chen – who alerted me to this July 25, 2016 article by Bloomberg. The article rests on an academic paper discoverable here. Essentially, the article contains arguments that the Fed could have rescued Lehman under its emergency powers and political considerations were immeasurably important. These arguments are plausible and agreeable. However, like many articles on the public (U.S. Treasury), quasi-public (Federal Reserve System), and private (cf. Bear Stearns, JPMorgan Chase) sector treatment of the Lehman problem, which was superficially one of liquidity and/or solvency origin – a financial circumstance readily solvable by a lender with the resources of the FRS. The author of the paper was so close to imagining and conceiving the primary reason why Lehman was not rescued with this quote from p. 3:

“…policymakers did not fully anticipate the damage from the bankruptcy.” As we used to say in law school: Res ipsa loquitur.

The paper omits a discussion of the centrality of then newly enacted Chapter 15, which was designed to improve the administration of U.S. bankruptcy cases that involved international jurisdictions (e.g., Lehman and Australia). Policymakers needed to understand how the courts would interpret Chapter 15, especially in light of the superpriority given derivatives transactions, under which Lehman was a party / counterparty. 

Here is my summary using my grading rubric:

1. Timeliness – the nature of the conclusions reached in the paper, the path for which allegedly took four years, was not surprising. Making these general and specific conclusions public after these years diminishes the force and suasion of the paper and is not an exceptionally powerful set of statements.
2. Accuracy – the paper scores high marks here. It’s hard to disagree with the author’s contentions, given their limited reach.
3. Completeness – not touching Chapter 15 is a critical omission. Whether God plays dice with the universe may be debated, however I can assure the reader(s) that creditors, especially those with millions sitting atop billions of U.S. dollars and other financial resources and currencies, do not (at least with their own resources – see AIG and Other People’s Money). Domestic and international procedures for administering bankruptcies implicating Chapter 15 needed development. Lehman was the test case.
4. Creativity – again, Chapter 15. An essential skill in fraud examination, financial forensics, and inspection and oversight generally is to infer what nobody is telling you. If the author expected his interviewees and advisers to tell him some cold and calculating truths, then…, especially in light of the author’s own observation:

“Fed officials have not been transparent about the Lehman crisis.” (p. 210.) Cui bono?

The Panama Papers investigation provides much (course) material, and its publishers are justifiably proud (e.g., see this TED talk). Using a grading rubric for some of my courses, I offer the following brief assessment without summary numerical scores, especially reminded of the power of the U.S. DoJ in the Zarrab indictment:

1. Timeliness – the story broke, peaked, and is presently ebbing outside of the U.S. election cycle. The U.S. matters a lot. See Zarrab for the potential reach of its prosecutors. Where U.S. dollars are used, the DoJ may lurk nearby, rightly or wrongly.
2. Originality – Panama has long been under the purview of the DEA. Its notorious acceptance of U.S. dollars to facilitate transactions has been especially helpful to those (inside and) outside of law and regulation. Concealment as a means to further wrongdoing is not new.
3. Accuracy – this is the publishers’ highest level of achievement. The documentation and follow-up, including making the files available online in the public domain are admirable actions.
4. Completeness – the results and outcomes from the Panama Papers publication have not to date approached its publicity. See the anonymous whistleblower’s statement. The mainstream focus on venues outside of the U.S. masks what should be the key finding of the Papers: U.S. dollars are used and concealed globally (i.e., domestically and internationally from the perspective of the U.S.) in nefarious schemes lacking transparency notwithstanding the apparent involvement of public officials with the private sector.

As such way more could be done, including rewriting laws and regulations and dedicating more public sector resources in inspection and oversight to provide assurance that ethics and integrity (e.g., honest services) in the provision of public and private sector goods and services characterize the winners (cf. official conduct) in the socioeconomic games commonly known as development and redevelopment.

From Working Paper #51 by Aren, DeLuca, Ni, and Bates (Nov. 2015):

“While most variation in district fiscal stress is explained by factors largely outside local decision-makers’ control, local decision-making does matter. Our results indicate several ways in which local resource allocation decisions (larger class size, lower teacher salaries, lower administrative spending) increase district fund balances and thereby reduce fiscal stress. We do not, however, attempt to assess the impact of such measures on the quality of education services.” (pp. 25-26)

This academic paper is helpful in many respects, including indicating how financial management and accountability may be used to rank and rescue (or allow to sink) public schools, however the relationship between expenditures and quality of education was not examined. This, of course, is not due to perceived difficulties in measuring expenditures, which are generally and initially fairly transparent, but likely due to the complexity and controversial issue of measuring quality of education.

Education functions in many ways:

• As a signalling device to society at large, including prospective employers (e.g., wearing the badge of the Ivy League);
• As a means of leveling the playing field (e.g., practicing legally approved preferences), or
• As something else (e.g., a means of imparting vocational skills to students).

If education’s contents and delivery were fairly reducible to a known and accepted set of affordable across-the-board means and methods such that the poor through the rich received an otherwise adequate education independent of whether the student lived in Detroit, MI or Mountain Lakes, NJ, variations in spending would hopefully be of secondary concern. As education tends to be assessed by outputs and outcomes, including performance scores on standardized tests, the process often gets measured and tainted or praised by the ends. Adding to the complexity of tying quality of education to outcomes is the nature of scarcity in the context of the U.S. economy: If everyone were to become adept in maths, possessing the demonstrable skill of statistical analysis would be monetarily worth a lot less.

In practice, knowing which variables and inputs to use in an Excel spreadsheet goes a long way, especially as the GIGO principle seems ignored, deliberately, recklessly, or negligently in many (cheerleading) contexts. What is obvious to many, should be obvious to a lot more, but as a student of mine recently noticed – butler lies are not limited to instant messaging.

The NYT and vertical prosecution from July 13, 2016:

“…many see vertical prosecutions as an efficient management tool because when a prosecutor is heavily invested in a case, it is less likely to get overlooked or lost in a pile of other cases.”

Vertical prosecution demands that an experienced assistant prosecutor (AP) assume significant managerial control over the development and management of a case as it proceeds through the stages of the prosecution process. It becomes his/her (work) product. This may be contrasted with division of prosecution into several stages managed by different APs (e.g., bail hearings, pretrial interventions, grand juries, etc.) Having an AP heavily invested in a case is questionable for many reasons, including the following (by way of illustration and not exhaustion):

• Turnover in the prosecutor’s office (e.g., where individuals do not commit to a career in the office, the institutional chaos risk would be increased from reshuffling cases among managing APs)
• Professional development of staff (e.g., where inexperienced APs are held down too long below the managerial position, turnover would likely increase and morale and cooperation would likely decrease)
• Professional development of managerial APs (e.g., institutional tendency towards specialization is hard to resist and given APs would tend to get quickly tied to specific types of cases notwithstanding the initial plan)
• Confirmation bias (e.g., institutionally compelled to become invested in the case at hand, the managerial AP may wrongfully cling to the ‘first suspect’)
• Lack of objectivity (e.g., with confirmation bias effects, the managerial AP would focus on his/her case and long desired positive outcome – conviction through plea or trial – and not the interests of justice, which may demand dismissal or alternative treatments)
• Judicial calendar (e.g., trial schedules cannot consistently accommodate a given managerial AP’s availability for trial)

Where root causes are not addressed (e.g., overuse of criminal law as a remedy for social ills such as drug use, lack of proportionality in assessing potential criminal cases such as following the headlines, professional and political tendency to show how tough one is on crime for positions beyond the AP-level, etc.) the caseloads of prosecutors offices grow well beyond the remedial means of the surrounding environment (e.g., tax base, employment base, etc.) While vertical prosecution offers some positive ideas (e.g., potentially allowing and encouraging APs to become more familiar with a given case), the overall office-wide caseload would likely continue to increase without the necessary financial and human resources support from other institutions (e.g., police, corrections, alternative criminal justice treatments) to address the effects and required just solutions for these caseloads: Shifting work assignments among the fairly static number of APs would not likely materially improve the care required for APs to further the interests of justice unless broader policy changes are designed and implemented.

Moreover, the assumption that what is primarily wrong with prosecution is the risk of inattention from APs is not an accurate diagnosis of the causes of the problems (though it may be too often provided as an excuse). Development of a sense of proportionality in the administration of criminal justice – from the writing to the application of law and regulation – is necessary.

Per the online NYT of July 13, 2016:

“In arbitration, the rules tilt toward businesses, employment experts say. Instead of judges, cases are decided by arbitrators who sometimes consider the companies that routinely bring them business their clients, according to interviews with arbitrators…. Of 3,945 employment cases decided by arbitrators from one of the nation’s biggest arbitration firms, plaintiffs won about 31 percent of them when employers had only one case before the arbitrator, according to (the) study. The win rate plummeted by more than half when companies had multiple cases before the same arbitrator.”

Presumably, employees won approximately 15% of the arbitration cases where there was more than one case against the given employer before the given arbitrator. Like some statistical analyses (e.g., profiling), this begs the question: How many cases should the employees have won? 50%? What would an impartial system look like; how would it behave?

Nonetheless, the big picture is public transparency. How can an inspection and oversight system, including arbitration that decides the economic and social circumstances of so many complainants about the conditions and practices of their (former) employment, a situation in which employee power and resources are generally overwhelmed by employer power and resources, be assessed in a manner deeper than broad statistical measures of outcomes?

In the field of fraud examination and financial forensics the whistleblower would ordinarily be deemed a key player on any relevant task force (e.g., PCAOB). However, whistleblower observations could be concealed under the confidentiality of arbitration. Who benefits?

Per the Executive Summary of the U,S, House of Representatives on July 11, 2016:

“Approximately three years after its initial inquiries, the Committee finally obtained copies of internal Treasury records showing that DOJ has not been forthright with Congress or the American people concerning its decision to decline to prosecute HSBC.” See p. 1.

Where the public prosecutor is confronted with private sector business plans and decisions (cf. split-second decisions of LEOs in my earlier post of today), its calculus of second-guessing becomes different, though politics and social concerns remain. How could a supervised individual within a supervised entity within a supervised enterprise within a supervised set of industries err criminally in the conceivably simple and long-practiced exercise of accepting deposits and making transfers of funds, especially with the elaborate and overlapping networks of reviews and approvals internally and inspection and oversight externally (e.g., public auditors, regulators)?

Reminds me of my days as a financial investigator in the private sector: Generally, the idea that someone could be cheating (aka committing fraud or perpetrating irregularities) in a big way was inconceivable to many in senior management (often, framed with the language ‘can’t happen here!’) This illustrates in part why the most irreplaceable attribute of a fact-finder in the context of fraud examination and financial forensics is neither independence nor impartiality – it is imagination. Without unbridled and informed imagination, completing checklists and even asserting that ‘one has engaged in the due care of brainstorming and higher order thinking’ is more routine than revelation – a sort of internalized and socially acceptable recklessness. However, vigorous imagination may upset the high levels of discipline, cooperation, and obedience expected under many bureaucracies. Imagination may be messy and uneconomical; comparatively, ‘yes’ men and women are tidy and efficient.

Per the electronic NYT of July 11, 2016:

““Here’s the challenge,” … a former federal prosecutor from Brooklyn said. “You have a split-second decision by a police officer on the street in the exercise of his official duties. It’s extremely difficult to say what is and isn’t a willful violation of someone’s civil rights.””

Without commenting on whether criminal charges should be brought by the public prosecutor, I advise that further consideration be given to assessment and interpretation of split-second decisions. Daily, many individuals make oodles of split-second decisions (e.g., while driving a car to work). Granted that deciding whether and if so, how much, physical force to apply in a given situation is not like writing a legal brief or research paper packed with statistical analyses and reasoned arguments, it is not a decision that cannot be understood, interpreted, and assessed by public prosecutors and other law enforcement agents, as well as lay people (e.g., prospective jurors).

Perhaps, a useful analogy is consideration of the criminal charge of death by auto (aka vehicular homicide). See the June 14, 2004 N.J. judiciary jury charges for this crime without the attendant circumstance of drunk driving. Risk assessment is key: If the defendant were reckless (i.e., consciously embarking on a course of conduct that created an unjustifiable risk that was consciously disregarded by the defendant), he/she could be deemed to have had the guilty mind / culpability satisfying the charge of vehicular homicide (e.g., changing lanes without inspecting the flow of traffic).

Understanding the attendant circumstances is a necessary threshold requirement. This is where policing is often materially different from soldiering: Generally, the soldier’s risk assessment rests on qualitatively different assumptions and estimates than the civilian police officer (though conditions of riot may merge these assumptions and estimates). Public prosecutors get paid to second-guess, and the senior executives within the public prosecutor’s office get paid even more, especially to make difficult assessments. Occasionally, the public prosecutor does not enjoy the luxury of making decisions in a social and political environment where all reasonable (assistant) prosecutors would agree on his/ her decision. Commonly, consensus would be obtained, and many would still be dissatisfied notwithstanding reliance on the reasonableness standard, which should have led to convergence of opinion and not its divergence.

Per the electronic NYT of July 8, 2016:

““It’s (scandal at Yale) about a lot of things,” he said. “But really it’s about ethics.””

And from another NYT article of the same date:

“A federal judge ruled that the county (Westchester) had “utterly failed” to meet its obligations.”

What these cases involving the independent and public sectors illustrate is, among other things, the effect of bias in assessment and the exercise of professional judgment. Anyone can review daily dozens of articles published in the press that highlight failures of process in reaching independent and impartial judgment. These processes involve interpretation, flexibility, and ambiguity. They are political, yet they need to project the appearance of objectivity and fairness to retain legitimacy. However, these processes fail and do so without publication of a scientifically determined error rate.

Consider the difference between an accusation that one has acted unethically against an indictment that one has violated the law. The obligation to obey the law is enforced (at least in the U.S.) by millions upon millions of financial resources and thousands upon thousands of human resources. Enforcement of ethics lacks this inspection and oversight layer. One may readily get the impression that ethics is generally voluntary, at least when compared to the force, effect, and operation of law, especially where the stakes are high (e.g., getting the public / private sector contract).

Children basically familiar with specialized statistical metrics can render informed opinions about the comparative performances and talents of modern baseball players based on professionally accepted statistics. The underlying acts seem uncontroversial (e.g., how many hits in how many at-bats?) The scoring rubric (i.e., the specs) is transparent and verifiable, and the concept of omitted variable bias seems unimportant. However, in the cases of star professors, influential taxpayer bases, etc. the process and assessment get muddied and tilted, especially from the perspective of those perceiving that they have been harmed by the result. Since the stakes are high, the path is uneven. As I was (accurately) told at Quantico, VA in F.B.I. training in the autumn of 1985 – the worst corruption risks among us were those that had admitted of no potential for personal corruption: The person without an admitted / contemplated price would inexplicably have the lowest price (!?)

Per the NYT on January 8, 2016:

““… Sales and marketing concerns influencing the production of ratings. Credit ratings agencies that didn’t have policies and procedures in place to manage issuer-pay conflicts. These are the exact same deficiencies that caused the 2008 financial crisis,” he added, “and that the Dodd-Frank Act was supposed to address.””

If only assessment (e.g., credit default risk) could be as independent and impartial as other assessments (e.g., those in academic settings)…. More than a scoring rubric seems required. Generally, assessment is not entirely automated and free of individual discretion and management override. However, management by policy and procedure is not a panacea for bias, especially where individual interpretation and discretion are required. Moreover, those who believe that an entirely automated process without the biasing hazards of the inspection and oversight provided by individuals would be superior to policies and procedures requiring interpretation, decision-making, and assessment by informed individuals are right and wrong. It’s just that we don’t know in advance when and how much individual inspection and oversight is necessary, though education, training, experience, and reflection help a great deal in this predicament.

Consider an analyst reviewing audited financial reports of a publicly reporting entity: He/she does not know directly, specifically, and precisely how much, if any, the independent registered public accountant’s judgment was adversely influenced by management of the reporting entity. The analyst is also unaware of a generally applicable error / irregularity rate, and the analyst is unaware of the quantitative and collective measure of various incentive compensation plans in operation at the reporting entity. Expert opinion is not a warranty or guarantee. It results from a process akin to abduction; thus, neither wholly deductive (like maths) nor wholly inductive (like hard sciences).

For an article that illustrates, among other things, how the purchaser of distressed debt at a steep discount (and which does not provide any funds or relief to the debtor) should be in a legal position different from the original lender, see the NYT of June 26, 2016:

“To prevent potential conflicts, (the company) said it keeps its servicing employees separate from the auction staff. They work in different buildings and use separate email systems, the company said.”

This so-called legal independence need not be pondered for long to identify its ineffectiveness. In this age of globalization (at a minimum, see What’s App) one need not obtain oodles of empirical data to conceive of the structural weakness of defining independence so loosely and fecklessly. Regulation needs information linking all of the related parties to a given entity, including and especially the benefiting individuals, such that the economic enterprise is accurately defined and captured (cf. regulatory capture). The ability to fragment and isolate economic activity in entities unlinked to the directing mind(s) results in regulators chasing the arm of the octopus (q.v. autotomy). Thus, the persistence of regulatory failure that itself breeds further shrinking of confidence in the public mind of the benefits of regulation.