Email to ALEC Board members and state chairs

From: RDShatt
To:
Sent: 12/8/2008 ______. Central Standard Time
Subj: ALEC- Greed, anger, reform, repair, lawyers, judges

Greed, anger, reform, repair, lawyers, judges

Dear Rep. _________,

Our county is surveying the wreckage in its financial system and a serious threat to its economic functioning, and it is learning unhappy lessons.

One theme coming out is how compensation structures led to abusive disregard for the property of other parties and resulted in great harm.

The culprits that gave the country subprime included banks and mortgage companies that ginned up gobs of current income for themselves without due regard for whether the home purchaser could afford the house in the long run. This was enabled by investment banks and bankers who, for large underwriting fees and personal compensation, engineered the packaging of mortgage loans into securities that could be sold to investors around the world, which took the risk off the banks and mortgage companies, and offloaded it onto distant investors who, as things turned out, did not understand what they bought. Not all the packaged loans could be sold off, and in order to make their underwriting deals work and get their fees and hefty personal compensation, the management at investment banks used their shareholders' equity to take up some of the securities and stuck that undue risk on their shareholders. The subprime people also included the rating agencies that compromised their ratings work for the compensation they received from the underwriters. In Washington, the executives at Freddie Mac and Fannie Mae, in order to grow their exhorbitant compensation packages, were more than happy, using the taxpayer's nickel, to have Freddie Mac and Fannie Mae inflate the bubble that burst and that became the debacle.

The foregoing litany, which could be extended, has focused anger on compensation structures for corporate executives, managers and other persons that resulted in commercial banks, mortgage companies, investment banks and other parties doing things without proper regard for the assets, property and value belonging to other parties, such as home buyers, investors, shareholders and taxpayers, and that ultimately did trillions of dollars of financial damage and put the nation's economy at risk.

As the country looks for ways to dig out of its problems, and as a new administration comes to Washington to lead the effort, the country is getting immersed in a new economic regimen of governmental investment and oversight that was inconceivable a year ago. The government, investors and public are taking a close look at compensation structures that led to damage to the economy. Where public funds have been brought to bear, the government has dictated limitations on executive compensation and the payment of dividends to stockholders.

With with all this attention to trying to understand the causes of the crisis, including the role of compensation structures, and how best to repair and rebuild the economy, this review should include looking at the country's legal system, the costs it imposes on the country, the compensation structures for plaintiffs' lawyers, and how the same has harmed the economy in the past and will hinder its rebuilding.

For many years, there has been strenuous contention that the legal system has been exploited by the plaintiffs lawyers to enrich themselves by imposing unjustifiable costs for the economy. For an excellent chronicle of this, see http://www.overlawyered.com/. Further consider how the plaintiffs' lawyers compensation structure has resulted in undermining the inculcation of ethical conduct by employees of corporations (see Does the Law Undermine Business Ethics? ). Consider also the destruction of shareholder value in Citigroup that was in the news last week. Citigroup shareholders who are angry at Citigroup executives for having compensation structures that led them to expose the shareholders to inappropriate risk in order to get underwriting business and thereby justify management paying themselves exhorbitant compensation should consider how something similar took place related to Citigroup's involvement with Enron earlier in the decade, and how the plaintiffs' lawyers, fueled by their compensation structure, complicitly enabled Citigroup's management and piled on to inflict even more damage on the hapless Citigroup shareholders. See Enron's smartest guys, crooks, victims and other saps.

With the Obama administration coming to Washingon, there is concern that the lawyers are going to be better positioned to promote their exploitive ways for enriching themselves at the expense of the rest of the society. With much repair work needed for the economy, and with the change in the national administration, now is more important than ever to bolster publicity and scrutiny of how the plaintiffs lawyers exploit the existing legal system to enrich themselves by imposing wasteful costs on the rest of the society and the need to lessen the economic drag of these costs that will hinder the country in repairing its economy and regaining the jobs and personal income that all of the citizens want.

Further, judges are the immediate overseers of the legal system. Just as other government regulators are under scrutiny for how well they performed in their oversight of activities that contributed to the current crisis, so judges ought to be scrutinized for how they have performed in overseeing the legal system and the costs that have been imposed on society. Primary attention should be given to the compensation structure of plaintiffs' lawyers and the deleterious effects of that. If those compensation structures were changed, and the amount of wasteful litigation lessened, the benefits would include savings of defense lawyers fees. Also judges could be more hard nosed about the fees they allow in bankruptcy cases, which would provide aid in rehabilitating and recycling business assets during the period of economic repair.

Robert Shattuck
3812 Spring Valley Circle
Birmingham, AL 35223
(205) 967-5586