According to Richard Squire, bankruptcies and bailouts are a necessary part of the American way.
Say you lend your family’s money to two very different people: one has a questionable reputation, the other is an old family friend. The shady character pays you back on time and with interest. The family friend returns only some of the principal. If both approach you again for another loan, to whom do you give the money? Do you give either a loan at all? How do you justify a loan to the rest of the family? For the U.S. government, these questions are not hypothetical. They illustrate by analogy a complex issue for the U.S. financial system, one that Fordham Law Professor Richard Squire examines in his forthcoming book, Getting Ready for the Next Bailouts (Columbia University Press, 2016).
As the title implies, there’s no avoiding the next financial crisis, but Squire, an expert in corporate law and corporate bankruptcy, isn’t in the business of soothsaying.
“I’m not out to play Nostradamus,” he says. “It’s not a predictive book in the sense that I know the next crisis will happen in 2019 or 2030.”
His book begins with the assumption that the financial sector is built to crash every so often. The more troubling issue is that any one crash can take down the economy with it—that is, if the government doesn’t put safeguards in place. Among these safeguards are bailouts, offers of financial support that help companies live, and earn, another day. Squire says the Wall Street bailouts, though controversial, were essential after the 2008 financial crisis, and they will be just as necessary to deliver us from the next one.
Wall Street: Alone and Misunderstood?
Though financial services companies paid back their bailout money in full and with interest, the American public largely viewed the financial sector as the villain of the story. Banks and investment companies were blamed for causing the whole mess in the first place.
“In the popular press at the time, the story was that Wall Street, the very people responsible for this, were getting a wealth transfer and the taxpayers were paying the bill,” Squire says.
Meanwhile, the media praised GM, Chrysler, and other American carmakers for repaying their bailout loans, but the automakers never actually returned all the money. The government had to call it a wash. Essentially, Wall Street respected its IOUs and was pilloried for its trouble while beloved underdog Detroit shirked its responsibilities and was hailed as a hero.
“The narrative that Wall Street fleeced Main Street is simply factually inaccurate,” says Squire. “I’m not defending Wall Street; I’m just saying that calling them the bad guys may not serve us the next time around.”
Part of the misunderstanding may lie in the way the public perceives the worth of a particular industry. Wall Street haters understand the value of a car, but they don’t always fully grasp what financial banks and investment companies do.
“Making a car is very tangible, though banking produces a service comparable in value to a car,” says Squire.
Yet many Americans consider the car industry, not the financial industry, as culturally important as apple pie and baseball. “You have to be far outside the mainstream to think Goldman Sachs is what America is all about,” Squire notes.
Squire harbored misconceptions of his own as he began researching the crisis. His initial articles examined the plight of Wall Street from the perspective of a bankruptcy lawyer. He assumed it was a problem of insolvency, in which a company’s liabilities exceed its assets. That may have been the case with Detroit, but not for Wall Street. As Squire investigated further, he realized the challenge for the finance companies wasn’t the raw amount of debt but rather the debt’s due date—an issue of liquidity.
“A company with a liquidity problem can pay back debts in full if given time, so the financial services companies were better suited to pay back loans,” he says. “The automakers on the manufacturing side, however, had a solvency problem. A company like that gets in too much debt and will never be able to pay it back.”
Painted into a Corner
Future bailouts will have more pressing against them than a hostile and misinformed public; the law is no longer as friendly to bailouts as before. The 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, passed in part to mollify angry voters, is a prime example of antibailout legislation. The act cut spending authorized by the government’s Troubled Asset Relief Program and put the kibosh on 2008-style loans. Under the law, any financial firm that takes a government loan can no longer make payouts to private investors until it repays its debts. The act also prevents the Federal Reserve from tailoring a loan to a specific company the way it did with AIG.
Squire says these tighter constraints don’t give the government much leeway in jump-starting the economy. The Fed might hesitate to dole out emergency loans on a wide scale without first getting political cover from Congress through a program like TARP. However, Congress itself may be too afraid of the fallout with voters and therefore hesitate in doing anything.
Squire says he hopes his book will help dispel lingering myths around the bailouts and help people realize how valuable they can be in a pinch. “We have to remove the stigma around cash assistance to banks in a crisis,” says Squire. “We have to make politicians more open to modifying the current regulatory structure so that it can be more nimble when a crisis happens again. The term ‘bailout’ implies a wealth transfer, and a reward for bad behavior. Structured correctly, however, liquidity assistance for banks can keep the financial sector operating in a crisis with minimal risk that taxpayers, rather than the banks’ shareholders and bondholders, will foot the bill for any losses.”
Hardly Bankrupt of Ideas
It’s anyone’s guess what will happen the next time the economy plunges, but this kind of risky business keeps Squire fascinated with bankruptcy and corporate law. He is the first to admit that he holds a minority viewpoint. “I’m afraid I’m jinxing myself when I say my book is for the popular press,” he says. “When I say I study corporate reorganization at cocktail parties, people tell me they don’t even know how to ask a question about that.”
Nevertheless, he has a rapt audience in academia, which has heaped awards on his scholarship for the way it approaches legal questions from the perspective of an economist as well as a lawyer. He considers corporate restructuring the focus of his research, but he regularly tackles other aspects of corporate law, such as an upcoming paper (co-authored with Zohar Goshen of Columbia Law School) on shareholder activism, the growing trend of shareholders devising ways to gain power in a company and push for change. His articles “How Collective Settlements Camouflage the Costs of Shareholder Lawsuits,” “Shareholder Opportunism in a World of Risky Debt,” and “The Case for Symmetry in Creditors’ Rights” have been recognized by the Corporate Practitioner Commentator as among the “Ten Best Corporate and Securities Articles of the Year.”
As much as he enjoys writing articles, Squire says having the breathing space of a book has been liberating. “There’s more freedom in the book format,” he says. “Articles have to be shorter and focus on the legal questions. That’s great, but in a book, if you want to talk about economics, you have the space—as long as you keep up the momentum.”
Squire never imagined he would become an expert in corporate law, or bankruptcy for that matter. (“It alarms my students to learn I’m teaching them a class that I, in law school, didn’t see the need to take myself,” he says.) He didn’t even plan on studying business or law in the first place. A native of Ohio, he went east to major in English at Bowdoin College in Maine, where he dreamt of “being Ernest Hemingway.” It turned out he had no ideas for novels, but he did discover a new passion (and major) when he took an economics class on a whim. “I found in economics a way to look at and understand the world that made more sense to me than any other theory or model I’d heard before,” he says. “Many people study economics to prepare for careers in business or other areas. I took it simply for the sake of learning about economics.”
What Ma Bell Has to Teach
After college Squire worked as a management consultant for telecommunication companies at Deloitte (then known as Deloitte & Touche). It was 1994 and the telecomm giants were still dealing with the gradual unspooling of their old business model after the government had broken up the Bell System monopoly a decade before. Whereas before executives had schmoozed Washington to obtain favorable regulation, they now had to focus on keeping their customers happy with better service and cheaper rates due to the increased competition. As he worked with the companies, Squire realized he was less interested in the business itself than he was in the laws that had changed the industry so profoundly. “Some people like to help the mice through the maze to get the cheese,” he says. “I was more intrigued by how the maze itself could be altered to make them run differently.”
Seeing firsthand how the law shifted the system, Squire realized if he wanted to understand economic policy better, he needed to go to law school. He attended Harvard Law School and Harvard Business School at the same time, using his concurrent degrees to focus on how the law influences the economy. Along the way, he taught an undergraduate class in economics, and he worked on a research paper that contributed to an article that he later co-authored with Professors Henry Hansmann and Reinier Kraakman. Academia, he discovered, was the place to be. “The main activities of a law professor were teaching and writing, and I loved them both,” he says.
Before becoming a professor, he worked for three years at New York City firm Wachtell, Lipton, Rosen and Katz as a litigation associate, though not for the usual reasons people take up the role. “I wanted to be a litigator because litigators write,” he says. He specialized in mergers and acquisitions, gaining experience he considers invaluable to his growing facility with the ins and outs of corporate law. “Lawyers are more useful to their clients if they have some understanding of what life is like outside the law, and this outside perspective applies to scholars and their work’s usefulness in influencing the law,” he says. “Working with these firms made me aware of how businesses experience the law, how it helps and impedes them.”
Bankruptcy: An American Heritage
Fordham Law hired Squire in 2006, and he dove into teaching corporate law classes such as Corporate Reorganization and Restructuring. He also started co-authoring more papers with Hansmann and Kraakman, helping them explore complicated issues surrounding the legal rights of creditors. “I was intimidated about joining that team because they’re like John Lennon and Paul McCartney,” Squire recalls.
Since the kinds of creditor rights cases Squire wrote about with the pair usually involved bankruptcy, he started digging into the subject and got hooked. The consumer side of the field—mortgage and credit card problems— did not interest him, but commercial bankruptcy did. “It’s a fascinating conflict when a firm is in distress,” he says. “Is it better to let the company that can’t pay its debt die, or to help it so the company has a chance to thrive again and help the economy as a whole?”
He notes that America is a great place to explore bankruptcy because it has pioneered some of the world’s most progressive laws in the field. Bankruptcy might even be considered an American institution (perhaps as much as the car industry).
“When a company stops paying its debts, the next step isn’t just to liquidate the company and fire the employees and deliver the dead carcass,” says Squire. “In America, we have a unique approach that gives the company a second chance at life.”
Teaching Near-Death Experiences
As Squire completes Getting Ready for the Next Bailouts, he is also putting the final touches on the second book he will publish in 2016, a corporate reorganization casebook (Aspen Publishers), for which he has compiled all the original materials he uses in his classes at Fordham Law. For this book, he has had an unconventional set of editors, critics, and test marketers—his students—devoting time each week to the contents. “Over the years I’ve been able to improve the material immensely thanks to them,” he says. “I’m grateful for their input.”
The services of a curious focus group each semester is just a side benefit to the thrill Squire gets out of teaching. He says he loves the challenge of making complex concepts sound intuitive and less intimidating. It’s not so hard for him since he is sharing a subject he is so passionate about.
“I couldn’t teach anything I wasn’t interested in, and I find corporate law intuitively interesting.”
Squire has won teaching awards since that first class in economics he taught at Harvard while still a graduate student, when his glowing student evaluations earned him the Allyn Young Teaching Prize in 2000. Fordham Law awarded him back-to-back Teacher of the Year awards in 2010 and 2011. In their evaluations, students often praise his ability to present tricky material in a clear and organized way.
“Some professors think it’s important to be entertaining and funny,” says Squire, who’s been known to call his bankruptcy class “Death and Resurrection” and “Corporate Near-Death Experiences.” “That’s great, but the important thing is clarity. That’s what I emphasize more than anything else. I don’t understand how anyone can learn if the teacher is not accomplishing that goal.”
Squire spent parts of 2012 and 2013 as the Joseph F. Cunningham Visiting Professor of Commercial and Insurance Law at Columbia Law School and as a Florence Rogatz Visiting Professor of Law at Yale Law School. Once he returned to Fordham, he noticed a big difference in students: Fordham Law students just seem happier than students at other schools. He assumes the atmosphere at Fordham may have something to do with it.
“Fordham students enjoy and appreciate the classroom and meeting each other,” he says. He has also noticed a greater number of students at Fordham who’ve already seen something of the world, many of them having worked before enrolling. “That makes them more well-rounded individuals,” he says. “I find there’s a real resilience and confidence in their ability to be successful. That’s one of the reasons it’s such a joy to teach at Fordham.”