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The Silver Lining

profs turn financial crisis into classroom currency

in closing

By Paulus Rusyanto

By Arthur Kimball-Stanley '10

Autumn’s headlines were not pleasant: bankruptcy at Lehman Brothers; bailout at AIG; break in the stock market. Late in the semester big names like Ford, General Motors, and Citibank were in serious trouble. And when the world is falling apart, working out the Rule Against Perpetuities becomes a little harder.

But, one of the great things about professional school, law school in particular, is that classroom conversation is often reflected in the real world. And though they say it’s important to strike a balance, many Boston College Law School professors are using failures on Wall Street to show how and why rules matter.

“I think this kind of crisis absolutely makes teaching corporations and other areas of the law richer,” Kent Greenfield, a professor who teaches various business law courses, said. “Often students go into these courses and think in terms of this false dichotomy between free markets and regulation. In reality, markets are about rules, which we can develop to create the kind of market we want.”

Car safety is an easy example, according to Greenfield. At one time, the government didn’t mandate safety requirements in cars. Back then, safety devices like airbags and seatbelts didn’t make it into designs. When the government started imposing safety rules, those devices became standard, which made driving safer.

“Every manufacturer had to do it, so nobody worried about suffering a comparative disadvantage,” Greenfield said. “The market doesn’t oftentimes force sellers to internalize risks inherent to those markets. Now that we have airbags in cars nobody wants to go back to a regime where cars are bought and sold without any safety requirements. People realize that some products can be too dangerous to be sold.”

Recent financial headlines, for Greenfield, provide a great starting point for reexamining a lot of the rhetoric about markets. The herd mentality that led many bankers to disregard the risks their firms took in the housing market, he explained, is one example of how those we assume to be rational actors can turn out to be acting in irrational ways. This behavior, according to Greenfield, brings into question many of the assumptions made by neo-classical economics, until recently the dominant ideology in many business and law schools.

“One of the things regulation can be good for is to counter that irrationality,” he said. “You hear a lot about the free market when things are good, but when you see a crisis, the business community is among the first in line asking for government help.”

Other professors have used the bad financial news to highlight the kind of environment that produces many of the rules law students study. Professor Brian Quinn, who taught Corporations last semester, handed out the last three chapters of Frederick Allen’s Only Yesterday: An Informal History of the 1920’s. For the last seventy years, historians used the book for its lucid description of American society in the years leading up to the Great Depression.

The last three chapters deal exclusively with the 1920s bull market, the crash, and its aftermath. The most ominous parallel to our own predicament is Allen’s portrayal of the surprise with which the market crash caught most people. Having a historical understanding of what hit our great-grandfathers is helpful for understanding what’s happening today, Quinn explained.

“Securities law got its start following the crash at the end of the 1920s,” Quinn said. “One of the big reactions to the crash happened when people started to see what insiders were doing. The solution was requiring disclosure. The connections are not direct, but it gives students a chance to see where some of the rules come from.”

All law school classes can’t seamlessly integrate today’s news with building an understanding of a legal framework. For Frank Garcia, who taught International Trade Law last semester, it’s the reaction to a market crash that ends up being on point.

Garcia’s class focuses mainly on the interpretation of multi-lateral trade agreements and their implications. These are the kinds of agreements that were supposed to create prosperity and keep crashes from having prolonged effects. After all, there is nothing like a little free trade between nations to keep prices low and profits high.

When things get bad, as Garcia is quick to point out, much of the progress made between countries regarding international trade agreements is reexamined. Sometimes that reexamination ends up making things worse.

For example, in 1930 Congress passed the Smoot-Hawley Tariff Act, drastically raising prices on goods imported into the United States. The tariff was supposed to boost the competitiveness of domestic products, demand for which had been dropping due to rising unemployment. Countries around the world retaliated by putting tariffs on American goods, reducing international demand for American products. As trade between nations declined, so did industry and jobs. Many historians credit the act as having pushed the world deeper into depression.

This time around, Garcia said, it’s the developing world that might make the move towards protectionism first. The reason? They can. Under the existing treaties, many countries are given a range within which they can move tariff schedules. The developing world has a lot more room to legally raise rates than the developed world because their rates are now relatively lower, according to Garcia. This means that if things get worse, developing nations might have an international trade tool at their disposal that rich countries like the United States don’t.

Those students looking for a course that deals directly with the issues surrounding Wall Street will likely sign up for this spring’s new Banking Law. Taught by Richard Whiting, executive director and general counsel of the Washington, DC based Financial Services Roundtable, a financial services lobbying group, the class will focus on the structure of banking regulation in the United States. Whiting, a Boston College Law School graduate, said he wants to help students understand how these regulations influence the decisions banks make. In other words, the class will help students understand why Goldman Sachs, Morgan Stanley, and American Express decided to turn themselves into bank holding companies.

“For this course, it’s fairly easy to incorporate all that’s been going on,” Whiting said. “I try to put a lot of this in terms of the policy issues on the table. Our financial system has developed on an ad hoc basis and a lot of the decisions look arbitrary. I want to help students understand the choices we’ve been making.”

Another spring offering born of the economic failure is the aptly named Financial Crisis, conceived by Dean John Garvey and alumnus and former Fidelity executive David Weinstein. Guest lecturers from the field will examine the causes, implications, and outcomes of the crisis.

Despite these examples, law school still remains removed from the real world. The point of legal education, as Garcia explained, is to teach students how to think like lawyers. It’s a skill, he said, that should remain valuable and somewhat constant no matter what the state of the world in which Legal Eagles find themselves practicing.

Quinn put it more simply: “We still have to prepare you for the bar exam.”

Arthur Kimball-Stanley is a former writer for the Providence Journal and Dow Jones.