~ Archive for Uncategorized ~

Don’t bug the mansion in Greenwich in August…

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….because the suspect is probably in the Hamptons. That’s what I learned from reading “The Empire of Edge,” a New Yorker story about the government’s investigation of insider trading at one of America’s biggest hedge funds. There are three main characters in the story. One made about $100,000. One made about $10 million. One made billions. Guess which ones were imprisoned and/or had a career destroyed.

The billion dollars of premarital property Oklahoma divorce

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Friends of mine who know that I’m working with co-authors on a book about divorce laws in the 50 states have been emailing me for thoughts on Harold Hamm’s $1 billion loss after a trial in Oklahoma (nytimes story).

Certainly the case proves what one lawyer told us, i.e., that it is “the American dream” to marry someone with money and then sue them for divorce.

The New York Times article is interesting because of the subhead: “Harold Hamm to Pay One of the Biggest Divorce Settlements in History”. The implication from the subhead is that there was a “settlement,” i.e., a voluntary payment from the defendant to the plaintiff in this lawsuit. In fact, there was a nine-week trial in the lawsuit started by Ann Hamm and the $1 billion is what the court ordered the defendant to pay. Somehow Americans don’t seem to understand that a divorce is a lawsuit, albeit one where the defendant is guaranteed to lose (since nearly all states have no-fault divorce) and one where the defendant is, in many states, much more likely to be ordered to pay the plaintiff’s legal fees (which enables the case to proceed until both parties’ assets are exhausted).

Angie Hallier, a top Arizona divorce litigator, explains this in the new book The Wiser Divorce:

the legal process itself is still designed to make divorce a battleground. Existing divorce law in the United States says the only way to end your marriage is for one party to file a lawsuit against the other. … you have to sue the person who has shared your bed, trusted you with life’s deepest secrets, and maybe even made babies with you. Divorce, by law, starts as an adversarial act. File a lawsuit. With that as the starting point, it’s easy to think the only outcome is: you will win, or you will lose.

Our legal system was set up to address wrongs. It deals with criminals. It decides who’s in the wrong when there’s a car wreck, or whether someone is guilty of medical malpractice when healthcare goes awry. When divorce laws were first written, somebody had to be in the wrong before a divorce could be granted. Somebody had to be cheating or abusing or otherwise be some kind of evil scoundrel before the other person — who was presumed to be the innocent victim — could file a lawsuit to be released from their marital hell. So historically divorce, like most other legal proceedings, addressed a wrong. Today, the litigation model of divorce still stands, despite the fact that no-fault divorce is the norm. … for the most part, the legal system, families, communities, and society still tend to treat the act of ending a marriage like something to be won or lost. This adversarial system helps no one in the end.

(Ann Hamm, with an additional $1 billion in her checking account after two years of litigation, might disagree with that last sentence…)

The Times article is also interesting for its misleading presentation of the legal issue:

The money a spouse earns while married can be part of a divorce settlement if it is made through skill. If, on the other hand, the increase is attributable to “changing economic conditions, or circumstances beyond the parties’ control,” as the state’s Supreme Court put it in a 1995 case, then that money is off the table.

If in fact he had earned this money while married in a conventional W-2 sense, there would have been no question that the petitioner (what Oklahoma calls the person who starts a divorce lawsuit; a “plaintiff” in most states) was entitled to a substantial share. From reading the Memorandum Order (linked to from the Times article) the issue seems to be that the property which the plaintiff sought a share of was acquired prior to her marriage. In Germany, a simple checkbox at the time of marriage would have sufficed to keep this separate at the time of the divorce. In Wisconsin, on the other hand, Ann could have married Harold on a Sunday morning and sued him for 50% of his pre-marital savings on the following Monday morning. Oklahoma is like a lot of other Western states in saying that generally the separate property should remain separate but appreciation in that property can be divided. Oklahoma has an addition exclusion that if the appreciation is purely due to market forces then it can’t be divided (see paragraphs 409-413 of the Memo).

Under these rules, inflation and market volatility can lead to tremendously increased profits for a plaintiff. Let’s consider volatility first. Here’s a section from our forthcoming book:

Attorney John Eckelberry of Colorado: “In a divorce case the court has to consider an increase in separate property. If it goes up $500,000 she is entitled to an equitable share. If it goes down $500,000 the court can just look at it as an economic circumstance. In reality the court doesn’t take the loss into account. Another way to look at it is the $500,000 in appreciation has to be on a property spreadsheet but an equivalent loss cannot be placed on the property spreadsheet.”

In states where a divorce plaintiff is entitled to a share of any increase in the value of a premarital asset during the marriage, random movements in asset prices can lead to large profits. Consider a plaintiff who marries a defendant with three $1 million investments. In a zero-volatility and zero-inflation environment, if she sues him for divorce after five years she gets nothing from these assets. However, suppose that the value of the investments is volatile. One goes to zero. One stays at $1 million. The third goes up to $2 million. After five years, the plaintiff gets 50 percent of the $1 million in appreciation or $500,000 net. This is much more lucrative even though the defendant’s three investments are worth a total of $3 million in both cases. Judson Kidd of Arkansas said “If I were representing the defendant I would argue that the losses should be figured against the profits, but it could go either way.”

Inflation is helpful to plaintiffs because courts work with nominal dollars, not real dollars. If an asset goes from $1 million to $10 million during a marriage but is actually worth less in real terms, that means 90 percent of the asset can be divided.  So a plaintiff who would have gotten nothing in a zero-inflation environment gets $4.5 million in an inflationary environment. How did inflation play a role here? Oil was about $12 per barrel in 1988 when these litigants were married. At the time of the trial it was about $90 per barrel.

An interesting angle here is the care with which money is handled by America’s family courts compared with what happens to children. Attorneys told us that custody cases, in which a child may essentially lose one parent (once a court declares that Parent A is “primary” (the modern name for “custodial”), a typical outcome, the officially “secondary” Parent B usually begins to fade from the child’s life (according to academic psychologists’ studies)), are decided in motion hearings as short as 10 minutes. No witnesses testify, just attorneys speaking on each side.  Assuming that a nine-week trial was 30 hours per week on the record, as much time was devoted to figuring out exactly how rich these two rich people should be as would be devoted to the custody decisions for about 2000 children (1620 motion hearings; assume just over 1 child per hearing (sometimes siblings are disposed of together)).

[Note that if the custody decisions were made in Massachusetts, using the child support guidelines, this would be about the same amount of court time per dollar in dispute. If the average custody and child support defendant in Massachusetts was earning $100,000 per year (higher than average, but it is hardly sensible to sue someone who earns less than average), the children would yield about $20,696 (tax-free) per year times 23 years, or $476,000 total. The cash value of the disputed children would then be $952,016,000, pretty close to the $995 million in "property division alimony" that Ann Hamm won from her lawsuit. In Oklahoma, however, obtaining custody of a child is not as profitable. The same $100,000 per year defendant yields about $11,172 per year in tax-free child support (table) and only for 18 years, a total of $201,096 for one child. So the 2000 children that the Oklahoma court could have allocated in nine weeks of judge time would have had a total value of about $402.2 million.]

I don’t think this case is too surprising. There was a lot of money and, due to the length of the marriage and Oklahoma’s subjective statutes, ownership of the money was uncertain.

What has been more surprising to us (authors) is the amount of resources that family courts will devote to the question of child support to be paid to from one rich or high-income person to another rich or high-income person. Here are a couple of excerpts from our book:

Maryanne Sorge sued her husband Joe Sorge [later the director of the movie Divorce Corp.] in Wyoming in 2000. She got assets that were worth about $14 million, joint custody of children, and $96,000 per year in child support. Seven years later Maryanne, who had remarried (to a husband of unknown wealth and income), sued her ex-husband in California seeking “to modify the child custody and visitation arrangement” for a 14-year-old (i.e., a child who had only 4 more years in the child support system in Wyoming and California). Part of her lawsuit was that the former husband should have been disclosing to her, on a continuing basis, any changes in his income. After three years of litigation, in 2010, Maryanne won an order for $216,000 per year in child support plus payment of $200,000 in her legal fees. Assuming the child support order was retroactive, and compared to the $48,000 per year that she had been receiving for the single child, she netted $672,000 on the lawsuit. In upholding this award, the appeals court noted “California has a strong public policy in favor of adequate child support” and talked about the “needs of the child.” The IN RE: the MARRIAGE OF Joseph and Maryanne K. SORGE case was finally decided in 2012, when the child yielding the support payments was presumably 19 years old and no longer a child. I.e., the litigation over how much money a person with $14 million in assets (and a new husband) needs to support a part-time child lasted longer than the kid’s childhood.

From “Men Receiving Alimony Want A Little Respect” (Anita Raghavan, April 1, 2008, Wall Street Journal): “Sara Lee Chief Executive Brenda Barnes is paying no alimony to her ex-husband … Until their youngest child recently turned 18, Ms. Barnes, who earned a total of $8.7 million in fiscal 2007, was receiving child-support payments from her former husband, according to court records.”

Why is the Sorge case is more interesting than the Hamm case? You have two parents each of whom is worth literally tens of millions of dollars. Yet somehow the divorce industry was able to keep them as customers (albeit one of them unwillingly) for 12 years to answer the question of “Who will pay for a 14-year-old’s T-shirts and skateboard?” And legislators and judges will tell you that it is “in a child’s best interest” to have a system where the child can generate enough cash to interest someone with $14 million and where the parents can continue to fight over who owns the cash generator (using time, energy, and money that, in an intact family, would be devoted to actual child-rearing).

 

Ivy League professor on the priority given to teaching undergrads

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Doug McKee, a thoughtful economist (oxymoron?) at Yale, has published an article regarding the extent to which it is possible to balance teaching and research. When young people tell me about their aspiration to attend a top research universities, such as Harvard, I typically respond with “You say that you’re smart and you tell me that you want to pay $50,000 per year to go to a college where every minute that a professor is talking to an undergraduate he or she is damaging his career?” [A look at this page reveals that I need to update this to $60,000 per year.]

The Children Act by Ian McEwan

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The Children Act is the latest from Ian McEwan. It concerns a divorce judge in England who is being ground down by the cases she hears. Here are some samples of the writing style:

It was the larger estates that came to the High Court. Wealth mostly failed to bring extended happiness. Parents soon learned the new vocabulary and patient procedures of the law, and were dazed to find themselves in vicious combat with the one they once loved.

There was a judgment to approve before tomorrow for publication in the Family Law Reports. The fates of two Jewish schoolgirls had already been settled in the ruling she had delivered in court, but the prose needed to be smoothed, as did the respect owed to piety in order to be proof against an appeal.

many Haredim were of modest means. But not the Bernsteins, though they would be when their lawyers’ bills were settled. A grandparent with a share in a patent for an olive-pitting machine had settled money on the couple jointly. They expected to spend everything they had on their respective silks, both women well known to the judge. On the surface, the dispute concerned Rachel and Nora’s schooling. However, at stake was the entire context of the girls’ growing up. It was a fight for their souls.

Parents choosing a school for their children—an innocent, important, humdrum, private affair which a lethal blend of bitter division and too much money had transmuted into a monstrous clerical task, into box files of legal documents so numerous and heavy they were hauled to court on trolleys, into hours of educated wrangling, procedural hearings, deferred decisions, the whole circus rising, but so slowly, through the judicial hierarchy like a lopsided, ill-tethered hot-air balloon. If the parents could not agree, the law, reluctantly, must take the decisions. Fiona would preside with all the seriousness and obedience to process of a nuclear scientist. Preside over what had begun with love and ended in loathing. The whole business should have been handed to a social worker, who could have taken half an hour to reach a sensible decision.

Still, she buried deep in a private mental domain, but never let it affect her decisions, a puritan contempt for the men and women who pulled their families apart and persuaded themselves they were acting selflessly for the best.

The judge loses interest in sex with her husband:

Holding her gaze he said, “You know I love you.” “But you’d like someone younger.” “I’d like a sex life.”

She was not going to dedicate herself under pressure to revive a sensual life she had at that moment no taste for.

And then there is the question of whether or not the judge will become herself a customer of the divorce industry.

IT WAS HER impression, though the facts did not bear it out, that in the late summer of 2012, marital or partner breakdown and distress in Great Britain swelled like a freak spring tide, sweeping away entire households, scattering possessions and hopeful dreams, drowning those without a powerful instinct for survival. Loving promises were denied or rewritten, once easy companions became artful combatants crouching behind counsel, oblivious to the costs. Once neglected domestic items were bitterly fought for, once easy trust was replaced by carefully worded “arrangements.” In the minds of the principals, the history of the marriage was redrafted to have been always doomed, love was recast as delusion. And the children? Counters in a game, bargaining chips for use by mothers, objects of financial or emotional neglect by fathers; the pretext for real or fantasized or cynically invented charges of abuse, usually by mothers, sometimes by fathers; dazed children shuttling weekly between households in coparenting agreements, mislaid coats or pencil cases shrilly broadcast by one solicitor to another; children doomed to see their fathers once or twice a month, or never, as the most purposeful men vanished into the smithy of a hot new marriage to forge new offspring.

McEwan is one of my favorite writers and he manages to deploy his craft to create a convincing tour inside the mind of what we would call a family court judge.

If you’re not familiar with Ian McEwan, I recommend starting with Enduring Love.

Disney’s private airspace gets some press coverage

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The Los Angeles Times has  November 10, 2014 article “No-fly zones over Disney parks face new scrutiny” on the private airspace that the U.S. Congress granted to Disney. My favorite quotes are

Richard W. Bloom, director of terrorism, intelligence and security studies at Embry-Riddle Aeronautical University in Prescott, Ariz., said although the no-fly zones were “certainly not foolproof,” they “definitely have a deterring value” as one of many layers of security designed to protect American airspace.

“No building or wall protects bare flesh from the impact of even a small plane. No window or duct tape protects lungs from the invasion of airborne chemicals or germs,” wrote two federal attorneys, one from the Justice Department in Washington and the other an assistant U.S. attorney in Florida. Disney’s place in the American psyche, they argued, warranted the three-mile protective space.

A federal judge threw out the Family Policy Network’s arguments, writing that combating terrorism required “unquestioning adherence” to Congress’ action.

(I.e., all of these folks are asserting or assuming that a would-be terrorist is going to be deterred by a regulation on an FAA Web site. If so, maybe the FAA should also publish some regulations against ISIS taking over Syria and Iraq and against Iran putting nuclear weapons into aircraft or missiles.)

Does it make sense for a country with a second-rate school system to absorb immigrants?

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The economist Tyler Cowen has published “A Strategy for Rich Countries: Absorb More Immigrants” in the New York Times. The assumption behind the article is that a larger GDP is essential even if most of the growth is due to population growth. Let’s assume that Americans do want to share the country with 640 million people instead of 320 million, with associated intensified traffic jams, higher real estate prices, and longer waits in line for everything. Given our second-rate school system, does the idea of prosperity through immigration still make sense?  It seems safe to assume that an adult immigrant, on average, cannot earn as much as a native-born American, if only due to the fact that the immigrant is not a native speaker of English, an important skill for most jobs (data from Pew confirms this). Thus the only way to get a long-term boost in per-capita GDP from immigration is if our school systems are really good at educating immigrants. But based on the book The Smartest Kids in the World (see my summaries of the America section and the Finland material), American schools are not good at educating students and public school employees have particularly low expectations for immigrants (and use those expectations as an excuse for not having taught them very much).

So maybe Finland could realize some long-term economic benefit from immigration but how could the U.S.? It only seems possible if native-born Americans are, on average, remarkably lazy. Data from Pew Research seems to indicate that we native-born folks are actually pathetic. The children of immigrants earn just as much as we do. They graduate from college at a higher rate. They are less likely to have an income below the poverty line.

Note that the grumpy folks at the Heritage Foundation have a different point of view in their 2006 report “Importing Poverty: Immigration and Poverty in the United States: A Book of Charts”: “In recent years, these factors have produced an inflow of some ten and a half million immigrants who lack a high school education. In terms of increased poverty and expanded government expenditure, this importation of poorly educated immigrants has had roughly the same effect as the addition of ten and a half million native-born high school drop-outs.”

Regardless of whether Pew or Heritage is correct, I think that it makes sense for a country to look at the quality of its school system, especially the schools’ success at educating immigrants, before looking to immigration for a boost in per-capita GDP.

[Note that I am not making an anti- or pro-immigration argument. There might be other reasons to want to boost immigration, or to discourage immigration. I'm just saying that I didn't think Cowen's main assumption, that immigration can make us, on average, wealthier, was obvious.]

My friend’s new job with the Commonwealth of Massachusetts

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A friend proudly showed me his new business card. He is a now a full-time senior official with the Commonwealth of Massachusetts. A few minutes later his wife told me about the painful cost of buying health insurance through COBRA. The state tells employers with more than 11 workers that they must provide employees with health insurance, so surely they would be providing it to their own employees? “It’s not a permanent position so they don’t provide it,” explained the wife.

Haiti After the Earthquake

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I’m just about done listening to Haiti After the Earthquake as a book on tape. One thing that Americans could take away from this book is how much we over-invest in central government and housing. As noted in my previous posting, the earthquake had little long-term effect on Haiti’s GDP despite the fact that Haiti’s central government was mostly destroyed (ministry buildings in the capital city flattened; civil servants killed while at their desks) and approximately 1.5 million were rendered homeless. What have Americans invested in during the last few decades? A bigger central government (state governments count too, since a lot of states are roughly comparable to Haiti in population (10 million)) and fancy houses. Haiti’s GDP didn’t shrink; should we be surprised that the US GDP is growing only slowly?

Farmer is not a believer in the old saying “If the government is big enough to give you everything you want, it is big enough to take away everything you have.” He wants governments in rich countries all over the world to raise taxes so that more money can be given to Haiti’s government (not spent directly by NGOs in the country). At the same time he decries traditional Big Government policies such as agricultural subsidies that render Haitian agriculture uncompetitive (thus requiring more people in Haiti to live on hand-outs from the countries that are providing hand-outs to their domestic farmers). Farmer doesn’t explain how governments can be as big as he wants them to be and at the same time immune from lobbying by farmers and other competing domestic groups looking for hand-outs. The U.S. provides a good example here. When Congress raised taxes on American workers and investors, it spent the money to subsidize the U.S. health care industry (“Obamacare”) rather than to help poor people around the world get better health care, clean water, etc.

Who has something heavy on top of a new-generation Steelcase file cabinet?

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Folks:

In one of my offices I have two Steelcase 42″ lateral filing cabinets, purchased back in the 1990s, supporting a 120-gallon aquarium (rule of thumb is that an acrylic aquarium weighs 10 lbs. per gallon, including the tank and gravel):

2014-11-05 16.12.22

I’m setting up a new office and thought it would be nice to replicate the set-up. I contacted Red Thread, the Steelcase retailer in Massachusetts, and the saleswoman, Jessica Andrews, responded with “… that will not work.  That is far too heavy for these lateral files, we don’t recommend it.” I replied with the photo above. She answered with “The particular file you have under that tank currently, is a work horse.  Unfortunately, Steelcase no longer has that series.  Their files have come a long way over the years, they are more environmentally friendly…less metal.  Therefore, we cannot say that these files will support that tank.”

So I asked how much the new cabinets weighed. The answer was over 300 lbs. each. Given that a 96 lb. wooden cabinet can support a 220-gallon tank, was it really the case that 600 lbs. of steel couldn’t support a 120-gallon tank? I’m asking the Steelcase cabinets to handle 1/11th of the load per lb. of stand. I asked her if she could repeat the test that I did before placing a heavy aquarium on these cabinets: Have three 6′-tall guys sit on them and see if the drawers still function normally. She responded “we are not going to have employee’s sit on a lateral file” and then Frank Tenaglia, VP of Sales for Red Thread, added in a separate email “As Jess stated earlier, our 3 drawer lateral files are not intended to hold 120 gallon fish tanks. We want no part of this.”

Do any readers work in an office with a 42″-wide Steelcase lateral file (2- or 3-drawers high) of recent vintage? Have a trio of 200-lb. guys available and willing to sit on top for a test? If so, please let me know what you find! Alternatively, if you have some of these newer, supposedly wimpier cabinets from Steelcase and something heavy on top, please let me know how it has worked out.

Thanks in advance for any help.

Proof that being straight and gay are not treated the same in the world of business

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Tim Cook, the CEO of Apple, wrote “I’m proud to be gay, and I consider being gay among the greatest gifts God has given me.”

Could it be that the positive business press coverage is proof that straights and gays are treated differently in the business world?

Imagine if Rex Tillerson, the CEO of Exxon, had written “I’m proud to be straight, and I consider being straight among the greatest gifts God has given me.”

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