Corporate Governance

The Financial Turmoil and Judicial Responsibility (Part 1)

By J. Robert Brown

The House Oversight Committee held a hearing last week on hedge funds. It is an industry that cannot even be readily identified. One study defined hedge funds as “any pooled investment vehicle that is privately organized, administered by professional managers, and not widely available to the public.”  In fact, the sin qua non of hedge funds is a lack of transparency.  This brought to the fore an issue that has rarely garnered attention in the current turmoil, the role played by a "deregulatory" judiciary in the current crisis.

The existing crisis has caused any number of proponents of dergulation to recant, whether Henry Paulson or Alan Greenspan.  An article in the New Yorker captured the new found consensus:

• Barack Obama’s decisive defeat of John McCain . . . brings to a close another conservative era, one that rose amid the ashes of the New Deal coalition in the late sixties, consolidated its power with the election of Ronald Reagan, in 1980, and immolated itself during the Presidency of George W. Bush. Obama will enter the White House at a moment of economic crisis worse than anything the nation has seen since the Great Depression; the old assumptions of free-market fundamentalism have, like a charlatan’s incantations, failed to work, and the need for some “new machinery” is painfully obvious.

Perhaps this is true of the politicians, but it remains to be seen whether it is true of the courts.  With "deregulatory" presidents holding the White House for most of the last quarter of a century, the federal bench has been populated by judges with the same philosophy.  As of October 2008, 56% of the 179 judges at the court of appeals were appointed by Republican presidents; only 35% by Democrats (the rest are open positions).  With republican majorities, the courts have been able to implement the deregulatory philosophy in a sometimes more effective manner that the politicians.

Thus, while the political wind has shifted and Barack Obama will enter the White House with large majorities not implacably hostile toward regulation (albeit smart regulation rather than more regulation), he will, as President Roosevelt discovered, have to confront a court system that is full of people who do not share his philosophy.  We will relate this to the financial markets and talk about it a bit more in the next post.

Full post as published by The Race to the Bottom on November 18, 2008 (boomark / email).