The Senate is expected to convene Sunday to decide whether to permit the lapse of a surveillance program that authorizes the government to collect en masse information about Americans’ telephone calls.
Amid news coverage of the debate, I reread relevant portions of reports by several panels within the executive branch that have assessed the effectiveness of the program, which, according to the panels, has never been instrumental in any investigation of terrorism.
At issue is Section 215 of the USA Patriot Act, which authorizes the National Security Agency to harvest telephone numbers and other details of calls made or received in the US. By its terms, Section 215 will sunset on June 1. A federal appeals court in New York ruled recently that the collection of so-called metadata in bulk as the government currently gathers it is illegal.
Though collection of telephone records by the government predates the September 11 attacks, the Patriot Act broadened the types of records the government can gather. As the appeals court found, the government has collected telephone metadata in bulk for at least the past nine years.
A report on the telephone records program published in January 2014 by the Privacy and Civil Liberties Review Board, an independent bipartisan agency established by law in 2007, concluded that Section 215 “has shown minimal value in safeguarding the nation from terrorism.” According to the board:
“Based on the information provided to the Board, including classified briefings and documentation, we have not identified a single instance involving a threat to the United States in which the program made a concrete difference in the outcome of a counterterrorism investigation. Moreover, we are aware of no instance in which the program directly contributed to the discovery of a previously unknown terrorist plot or the disruption of a terrorist attack. And we believe that in only one instance over the past seven years has the program arguably contributed to the identification of an unknown terrorism suspect. Even in that case, the suspect was not involved in planning a terrorist attack and there is reason to believe that the FBI may have discovered him without the contribution of the NSA program.”
A report published roughly a month earlier by The President’s Review Group on Intelligence and Communications Technologies arrived at a similar conclusion. According to that panel:
“Our review suggests that the information contributed to terrorist investigations by the use of section 215 telephony meta-data was not essential to preventing attacks and could readily have been obtained in a timely manner using conventional section 215 orders. Moreover, there is reason for caution about the view that the program is efficacious in alleviating concern about possible terrorist connections, given the fact that meta-data captured by the program covers only a portion of the records of only a few telephone service providers.”
The Department of Justice’s Office of Inspector General, which reviewed the FBI’s use of Section 215 for surveillance generally over a two-year period starting in 2007, also found the provision to be of limited value in tracking terrorists. “The agents we interviewed did not identify any major case developments that resulted form the records obtained in response to Section 215 orders, but told us the authority is valuable when it is the only means to obtain certain information,” the Inspector General wrote in a report released May 22.
Based on the findings of these panels, it seems reasonable to conclude that no terrorism investigations have turned on bulk collection of telephone metadata by the government.
As a practical matter, the imminent sunset of Section 215 leaves the Senate with two choices: pass a measure that narrows the government’s authority to collect telephone call metadata or do nothing and allow Section 215 to expire. Of course, allowing Section 215 to lapse would not preclude Congress from legislating a replacement.
A recent piece by Jill Lepore in The New Yorker sheds a fascinating light on legal arguments in support of same-sex marriage, the constitutionality of which the Supreme Court is expected to decide by late June.
Lepore traces the development of theories that underpin the Court’s rulings on matters ranging from contraception and abortion rights to marriage. As she elucidates, the battles for reproductive and gay rights turned on the Court’s finding guarantees of privacy and equal protection of the law enshrined variously in the Fourth, Fifth, Ninth and Fourteenth Amendments, the latter of which denies states the ability to discriminate.
Still, as Lepore explains, equal protection has provided the way forward for marriage equality notwithstanding the court’s precedents that find protection for both contraception and choice in constitutional guarantees of privacy.
“When the fight for equal rights for women narrowed to a fight for reproductive rights, defended on the ground of privacy, it weakened,” Lepore writes. “But when the fight for gay rights became a fight for same-sex marriage, asserted on the ground of equality, it got stronger and stronger.”
Reading that conclusion sent me to an exchange during oral argument in April between Justice Alito and Mary Bonauto, a lawyer for the Gay & Lesbian Advocates and Defenders who argued the case for the petitioners in the same-sex marriage appeal.
Amid the back-and-forth, Justice Alito asked Bonauto whether, if the Court were to overturn state bans on same-sex marriage, the justices might later have a basis for denying a marriage license to a group consisting of two men and two women.
Bonauto answered yes, that the state might reasonably question whether such an arrangement constitutes marriage, which, she noted, is between two people. A foursome also might raise concerns about consent and coercion, she added.
“Let’s say they’re all consenting adults, highly educated,” Alito pressed, referring by reference to an observation by Justice Roberts that marriage between two people of the same sex did not exist in the U.S. until two decades ago. “They’re all lawyers. What would be the logic of denying them the same right?”
Again, Bonauto replied that marriage is between two consenting adults who pledge their commitment to each other. “I assume there’d be lots of family disruption issues, setting aside issues of coercion and consent and so on that just don’t apply here, when we’re talking about two consenting adults who want to make that mutual commitment for as long as they shall be,” said Bonauto. “So that’s my answer on that.”
That may be true but what Bonauto didn’t say during the exchange, and what Lepore underscores indirectly, is that one reason for denying a marriage license to four people is that numbers, by themselves, do not raise a question of equal protection of the law. Distinctions between people based on race or sex do.
Lepore cites a decision in 2003 by the Supreme Judicial Court of Massachusetts that established the commonwealth as the first to guarantee same-sex marriage as a constitutional right. In that case, Chief Justice Margaret Marshall tied the right to marry to equal protection. As Lepore writes, describing Marshall’s opinion:
“Marshall also cited Loving v. Virginia, the 1967 Supreme Court Case that struck down a ban on interracial marriage, drawing an analogy between racial discrimination (if a black person can marry a black person but cannot marry a white person, that is discrimination by race) and sex discrimination (if a man can marry a woman but cannot marry a man, that is discrimination by sex).”
Of course, both are inconsistent with what Marshall described in her decision as “equality under law.” The observation by Lepore fills in what seemed to be missing the first time I read the exchange between Justice Alito and Bonauto.
Missing to me, that is, not from the argument. Later in the session, Donald Verrilli, Jr., the solicitor general, underscored the significance of equal protection as a legal theory that supports same-sex marriage. As it happens, the solicitor general advanced only that theory, reasoning that it alone provides a basis for the Court to uphold same-sex marriage. As Verrilli explained:
“We think… this issue really sounds in equal protection, as we understand it, because the question is equal participation in a state-conferred status and institution. And that’s why we think of it in equal protection terms… what these gay and lesbian couples are doing is laying claim to the promise of the Fourteenth Amendment now.”
The argument seems insurmountable based on the history that Lepore delineates. It also seems likely to be the basis upon which a majority of justices will decide the appeal.
Over this Memorial Day weekend, I’ve tried to learn a bit about the recent debate over trade, including legislation that would authorize President Obama and his successor to negotiate trade agreements without the prospect of the deals being dismantled by Congress.
The issue arises most recently in connection with the so-called Trans-Pacific Partnership (TPP), a regional free-trade pact being negotiated among 12 countries: the U.S., Australia, Brunei, Japan, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam and, possibly, South Korea and Taiwan. (Note that the U.S. currently has trade agreements with Australia, Chile, Peru and Singapore.)
One hears a great deal of wrangling over trade. Do the pacts strengthen the U.S. economy and add jobs, as supporters say, or send jobs overseas and threaten the environment, as opponents charge? I knew little about the subject so I set out to learn more.
What the Senate passed on Saturday
The Senate approved a measure on Saturday that would grant the president trade-promotion authority (TPA)—sometimes referred to as fast track—by a vote of 62 to 37. The bill now goes to the House of Representatives, which is expected to debate the measure as early as next month.
TPA outlines a series of procedures for moving trade legislation through Congress. Such legislation, which Congress first passed in 1974, limits legislative debate on trade deals the president negotiates. Because Congress cannot amend such deals, both the House and Senates must vote either up or down on trade pacts, which means the deals can pass with a simple majority (as opposed to the two-thirds majority needed to bring up legislation for a vote in the Senate).
TPA empowers the president to enter into trade agreements with foreign nations, provided, among other stipulations, that at least 90 days prior to entering into an agreement, the president notifies Congress of his intention to do so and publishes the text of the agreement at least 60 days prior to the U.S. entering into the deal. That way Congress can examine the treaty and consider implementing legislation subject to the limitations on debate and amendments.
The latest grant of trade promotion authority would tie to a series of trade deals that, besides the TPP, include Trans-Atlantic Trade and Investment Partnership, a pact that is being negotiated between the U.S. and the European Union; the Trade in Services Agreement, a trade pact being negotiated by the U.S. and 22 other countries, including the EU; and the Environmental Goods Agreement, a trade agreement the U.S. and 13 countries that among them represent roughly 86 percent of global trade in solar panels, wind turbines or advanced batteries.
“Today, our businesses export more than ever, and exporters tend to pay their workers higher wages. But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and our businesses at a disadvantage. Why would we let that happen? We should write those rules. We should level the playing field. That’s why I’m asking both parties to give me trade promotion authority to protect American workers, with strong new trade deals from Asia to Europe that aren’t just free, but are also fair.”
Support for trade promotion authority scrambles party lines. Only two Republicans in the Senate—Senator Rand Paul, the Kentucky Republican and White House hopeful; and Senator Richard Shelby of Alabama—joined 35 of the chamber’s 44 Democrats and two Independents to oppose the measure. Shelby said in a statement that he fears “that Alabama could lose a significant number of jobs if President Obama agrees to an unfair agreement.” Meanwhile, Majority Leader Mitch McConnell of Kentucky predicted that TPA would create “new opportunities for bigger paychecks, better jobs and a stronger economy.”
Opponents, who include senators from manufacturing states, say the negotiating objectives contained in the bill are insufficient. “Trade Promotion Authority will green light a deal that will not advance wage growth in Pennsylvania or our manufacturing sector,” Senator Bob Casey (D-Pa.) said in a statement.
Senator Debbie Stabenow, a Democrat from Michigan who opposed the bill, contends that manufacturers in her state see the competitiveness of their exports weakened by countries that manipulate their currencies. Senator Elizabeth Warren, the Massachusetts Democrat who leads the party’s populist wing, charged that big banks will use trade deals “to water down financial regulations.”
That’s because, as Paul Krugman opined recently in the Times, the TPP “could force the United States to change policies or face big fines, and financial regulation is one policy that might be in the line of fire.” Krugman points to the example of Canada’s foreign minister recently telling bankers in the U.S. that the so-called Volcker Rule, which bars banks from certain forms of risky trading, may violate the North American Free Trade Agreement.
The economic impact of the TPP, which was proposed by President George W. Bush and later taken up by President Obama, may depend on several factors, including the extent of trade liberalization achieved in the agreement and, of course, the trade and investment that develops among members, according to a report last March by the Congressional Research Service (CRS).
Taken together, countries that are party to the agreement represent about 40 percent of the global economy and the largest U.S. trading partners, accounting for 41 percent of total U.S. goods traded in 2014 and 24 percent of total U.S. services trade a year earlier, according to CRS. The treaty has 29 chapters that cover such industries and issues as financial services, labor, plant and food safety, telecommunications, intellectual property and the environment.
Estimates of the TPP’s potential impact on the U.S. economy suggest that the effect might be modest. According to David Rosnick, an economist with the Center for Economic and Policy Research, a progressive think tank, the gains to the U.S. economy from the TPP will be “meaninglessly tiny” while workers whose wages fall in the middle of the wage spectrum “are likely to lose” as a result of the deal.
An analysis by Peter Petri and Michael Plummer for the Peterson Institute for International Economics that was published in June 2012 predicts that the U.S. will gain $78 billion annually—a bump in income of 0.19 percent—from the TPP. A study in 2012 by the National Bureau of Economic Research projects a gain of 0.22 percent of GDP provided that the signatories remove non-tariff barriers.
Though the gains don’t seem that significant compared with the size of the U.S. economy (gross domestic product stands at nearly $17 trillion), there are other objectives at stake. “For the United States, the TPP’s overriding purpose is not to contain China but to create a counterweight to its rise,” Robert Samuelson wrote recently in The Washington Post.
For its part, the Obama administration says the TPP aims to set standards for trade, not to put China on the defensive. “TPP is open architecture, and TPP is really meant to be about setting high standards for trade — standards that aspire to be equivalent to the United States’,” Commerce Secretary Penny Pritzker told the Times last spring.
The White House terms the Trans-Pacific Partnership “the most progressive trade agreement in history.” According to the Obama administration, the deal would reduce or eliminate tariffs for American goods and make foreign state-owned companies compete fairly with U.S. businesses. The deal also would ensure, among other things, the rights of workers to form unions and bargain collectively, protect wildlife and the environment, and remove tariffs and other impediments to an open Internet and the sale of high-tech products, the administration says.
Some disagree. According to Public Citizen, a nonprofit group that champions citizen interests before Congress, the TPP would, among other ills, offshore U.S. jobs and expose Americans to unsafe food and products. Public Citizen, the AFL-CIO, the American Association of Retired Persons and Doctors Without Borders all have charged that patent protections in the TPP will hike the cost of medicines by delaying cheaper versions from entering the market. For its part, the Obama administration says the pact will expand access to generic versions of patented drugs.
According to the Electronic Frontier Foundation, the TPP also would enshrine laws that restrict fair use of copyrighted material, diminish competition in businesses ranging printer cartridge refills to mobile phones, and subject journalists to criminal penalties for revealing or accessing information via a computer system that is allegedly confidential.
Robert Reich, who served as labor secretary under President Bill Clinton, wrote recently that despite the administration’s push to counter the influence of China, the TPP “will also allow American corporations to outsource even more jobs abroad.”
According to Reich, corporations “want more international protection when it comes to their intellectual property and other assets… But they want less protection of consumers, workers, small investors, and the environment, because these interfere with their profits. So they’ve been seeking trade rules that allow them to override these protections.”
As for public opinion, 58 percent of Americans view trade as a opportunity for U.S. economic growth through more exports, while 33 percent view trade as a threat to the economy from imports, according to a poll last February by Gallup. Sixty-one percent of Democrats trade mainly as an opportunity for the U.S., compared with 51 percent of Republicans. According to Gallup, Americans’ support for free trade may correlate with their confidence in the economy.
An investor who wants to force a financial firm to arbitrate a dispute must first establish that she is a customer of the firm, a federal court in Brooklyn has ruled.
Sagepoint Financial, an investment firm based in Phoenix, cannot be compelled to arbitrate a claim filed by Marcia Small, who allegedly lost $870,000 after investing with Robert Henry Van Zandt, Sr., a financial adviser from the Bronx who in November pleaded guilty to a Ponzi scheme that stole $4.8 million from 29 investors.
Small invested with Van Zandt in 2008, when Van Zandt was registered with GunnAllen Financial, a Tampa-based brokerage firm that shuttered in 2010.
In December, Small filed papers with the Financial Industry Regulatory Authority (FINRA) against brokerage firms that Van Zandt was associated with during the decade that his scheme unfolded. Among them was American General Services, Inc. (AGSI), which Sagepoint acquired in 2006, roughly two years after Van Zandt ended his registration with AGSI.
Small charged that Sagepoint, as successor to AGSI, bears responsibility for AGSI’s failure to supervise Van Zandt with regard to investments he sold, for misreporting the reasons that Van Zandt left the firm, and for the company’s alleged failure to report Van Zandt’s activities properly to regulators. Those obligations, according to Small, required Sagepoint to arbitrate Small’s claim in a forum provided by FINRA.
The court disagreed, pointing to the absence of either a relationship between Sagepoint and Small that would constitute Small’s being a customer of Sagepoint or an agreement between the parties to arbitrate disputes.
“Here, any customer relationship between [Small] and Van Zandt based on investment activity in 2008 arose almost four years after Van Zandt ended his affiliation with AGSI,” U.S. District Judge Dora Irizarry wrote in a ruling published May 15. “Further, [Small’s] claims in the arbitration, whether based on AGSI’s alleged supervisory failures or on Van Zandt’s own misconduct, do not allege any time during which [Small’s] investment activity with Van Zandt coincided with Van Zandt’s affiliation with AGSI.”
“Absent any such temporal nexus, [Small’s] investment relationship with Van Zandt does not provide a basis to compel arbitration against AGSI, or against [Sagepoint] as AGSI’s alleged successor,” Irizarry added.
The ruling illustrates at least one limit on investors’ ability to compel arbitration, which is a contractually agreed-upon procedure to resolve disputes. When one party resists arbitration as part of a push to move a dispute into court, a judge will, as in Small’s case, decide whether the arbitration should proceed.
Small charged Sagepoint with seeking to avoid arbitration because the firm disliked the outcomes of other arbitrations that stemmed from Van Zandt’s conduct. However, Sagepoint’s experience in other cases had no bearing on Small’s charges, according to Irizarry.
Though Irizarry acknowledged Small’s contention that federal law has a presumption in favor of arbitration, Small and Sagepoint were battling over the existence of an obligation to arbitrate, according to the court, and not the scope of an arbitration clause.
An actress who lost a lawsuit to force Google’s YouTube to remove an anti-Muslim video from its site pursued the wrong claim against the wrong party.
That’s one conclusion from a decision by 9th Circuit U.S. Court of Appeals, which ruled on Monday that Cindy Lee Garcia cannot compel YouTube to take down “Innocence of Muslims” because she cannot copyright her five-minute performance in the video, which disrespects the Prophet Muhammad and sparked death threats against Garcia.
“In this case, a heartfelt plea for personal protection is juxtaposed with the limits of copyright law and fundamental principles of free speech,” U.S. Circuit Judge Margaret McKeown wrote for a majority of the court. “The appeal teaches a simple lesson—a weak copyright claim cannot justify censorship in the guise of authorship.”
The decision represents a win for free speech. Though the First Amendment does not shield copyright infringement, Garcia could not claim a copyright in her performance. According to the court, granting a copyright to an actor based solely on her performance—a work for hire—would put distributors such as YouTube in the position of having to obtain licenses from everyone who appears in a film, as opposed to obtaining the permission of the work’s author, in this case Youssef.
The alternative would render distribution of movies unworkable, the court found. As McKeown noted:
“Treating every acting performance as an independent work would not only be a logistical and financial nightmare, it would turn cast of thousands into a new mantra: copyright of thousands. That leaves Garcia with a legitimate and serious beef, though not one that can be vindicated under the rubric of copyright.”
What if Garcia had grounded her complaint in the threats to her reputation and privacy that followed Youssef’s using Garcia’s performance in a way that was different than she had authorized? Though she appeared knowingly in “Desert Warrior,” Youssef allegedly overdubbed that performance to make her appear to ask if Muhammad were a “child molester” as part of a film that he disseminated widely.
Under California law, a person’s right to privacy may be violated in varied ways, including by acts that cast someone in a false light. “Innocence of Muslims” portrayed Garcia in a light that was highly offensive to millions of people worldwide, judging by the outrage the film has provoked.
False light can be difficult to prove in California without a showing of financial damages. Moreover, even were Garcia able to prevail against Youssef for portraying her in a false light, it’s unlikely that would authorize her to order YouTube to take down the video because, as the trial court noted, the harm from the trailer’s appearance on the Internet already has occurred.
Garcia sued both Google and Youssef initially in state court, where she alleged a series of wrongs, including violation of her privacy and intentional infliction of emotional distress, that she later dropped against Google when she sued the company in federal court for copyright violation.
Note that Garcia could not sue Google for Youssef’s alleged defamation. Federal law shields online services from liability for information they host that’s created by third parties.
Thus, to the extent Garcia has a remedy, it lies in a wrong to her reputation instead of copyright. As McKeown explained:
“We are sympathetic to her plight. Nonetheless, the claim against Google is grounded in copyright law, not privacy, emotional distress, or tort law, and Garcia seeks to impose speech restrictions under copyright laws meant to foster rather than repress free expression.
Privacy laws, not copyright laws, may offer remedies tailored to Garcia’s personal and reputational harms. On that point, we offer no substantive view. Ultimately, Garcia would like to have her connection to the film forgotten and stripped from YouTube. Unfortunately for Garcia, such a ‘right to be forgotten,’ although recently affirmed by the Court of Justice for the European Union, is not recognized in the United States.”
Garcia’s claims may have a shot but it’s a long one. It’s also a reminder that you may have less dominion over your image than you think. As the ruling demonstrates, what’s workable for content creators and distributors can be at odds with the expectations we have in how our likenesses appear online.
As Matthew Schruers, a vice president of law and policy at the Computer and Communications Industry Association, which supported Google and YouTube in the case, told Wired, “Everything you and I and the rest of the world upload to YouTube, is protected the moment we hit record.”
If you’ve ever wondered about the magnitude of deception that caused the financial crisis of 2008, read no further than a recent ruling by a federal court in New York that orders Nomura Holdings and Royal Bank of Scotland to pay a combined $806 million in damages to the government-owned mortgage agencies for misleading them about the quality of securities backed by residential mortgages.
The ruling, by the U.S. District Court in Manhattan, resolves one of 17 lawsuits filed by the Federal Housing Finance Agency (FHFA) in September 2011 against some of the nation’s biggest banks to recover losses on behalf of Fannie Mae and Freddie Mac, the government-sponsored entities that purchased residential mortgage-backed securities (RMBS) in the run-up to the financial crisis.
The lawsuit, which FHFA filed in its role as conservator of Fannie Mae and Freddie Mac, charged Nomura and RBS with misrepresenting, among other things, the underwriting and origination of the loans that backed the RMBS, the variation between the value of houses that secured the loans and the amounts of indebtedness, compliance with standards of appraising the properties, occupancy of the homes themselves and the assessments of the securities by ratings agencies.
The trial presented the court with a straightforward question. “Did defendants accurately describe the home mortgages in the offering documents for the securities they sold that were backed by those mortgages?” U.S. District Judge Denise Cote wrote in a 361-page opinion that instructs readers on practices that prevailed at Nomura and RBS. “Following trial, the answer to that question is clear. The offering documents did not correctly describe the mortgage loans. The magnitude of falsity, conservatively measured, is enormous.”
The ruling leaves little question about the extent of the deception that occurred among lenders that originated mortgages, the firms that appraised loans and the financial institutions that bundled the loans for sale to investors. Though by now the financial crisis has been well chronicled, few accounts rival Cote’s for its description of the failures, abuses and outright fakery that occurred.
It’s not as if no one warned of the crisis, which led to the longest recession since the Great Depression. As Cote recounts, 90% of real estate appraisers in a national survey fielded in late 2006 said they felt pressure from lenders to inflate values.
A year later, 11,0000 licensed and certified appraisers petitioned Congress and the Federal Financial Institutions Examinations Council to ask for assistance in ending pressure on appraisers to match or top a predetermined value on properties. “We believe that this practice has adverse effects on our local and national economies and that the potential for great financial loss exists,” the court quotes the group as warning. “We also believe that many individuals have been adversely affected by the purchase of homes which have been over-valued.”
FHFA charged that over a two-year period starting in 2005 the GSEs had purchased seven sets of RMBS underwritten by one or both of the defendants that had an unpaid principal balance of roughly $2.05 billion.
The court found that the group within Nomura that the company charged with reviewing the quality of the loans that the firm bought “was too small to do an effective job” and “lacked independence” from traders at the firm who held sway.
“The Diligence Group was too leanly staffed to do any careful review of the data,” according to Cote. “Over and over again, it simply ‘waived in’ and purchased loans its vendors had flagged as defective.
The group also was beholden to Nomura’s trading desk, which “was seemingly oblivious to the very serious risks associated with some of its decisions,” wrote Cote. “For example, it proposed that Nomura purchase loans whose files were missing critical documents… and enter a side-letter agreement allowing the seller to produce the missing forms later.”
The problem was greed or, more specifically, the pressure to compete in a market that had become a free-for-all. That led to Nomura buying mortgages from such firms as The Mortgage Store, which originated loans that failed consistently to comply with Nomura’s guidelines. As Cote explained:
The reason for Nomura’s lackluster due diligence program is not hard to find. Nomura was competing against other banks to buy these subprime and Alt-A loans and to securitize them. As its witnesses repeatedly described and as its documents illustrated, Nomura’s goal was to work with the sellers of loans and to do what it could to foster a good relationship with them. Given this attitude, it is unsurprising that even when there were specific warnings about the risk of working with an originator, those warnings fell on deaf ears.
Similar problems plagued RBS. “Its due diligence team had no role in reviewing the accuracy of representations in prospective supplements and did not understand that its work was in any way connected to the representations that would be made in prospectus supplements,” according to Cote. “As was true for Nomura, there was no one at RBS who acted to ensure that the representations in the prospectus supplements that are at issue in this case were truthful.
At trial, Nomura and RBS charged that the loans they underwrote constituted a relatively small share of RMBS sold in the years that preceded the meltdown. The firms also contended that factors in the larger economy—from government policies to fluctuations in housing market—also fueled losses that Fannie and Freddie incurred.
The court rejected those assertions. Instead, it tied the practices that prevailed at the underwriters directly to the crisis that ensued. As Cote explained:
The evidence at trial, including expert testimony, as well as common sense drive a single conclusion. Shoddy origination practices that are at the heart of this lawsuit were part and parcel of the story of the housing bubble and the economic collapse that followed when that bubble burst.
While that history is complex, and there are several contributing factors to the decline in housing prices and the recession, it is impossible to disentangle the origination practices that are at the heart of the misrepresentations at issue here from these events. Shoddily underwritten loans were more likely to default, which contributed to the collapse of the housing market, which in turn led to the default of even more shoddily underwritten loans.
Thus, the origination and securitization of these defective loans not only contributed to the collapse of the housing market, the very macroeconomic factors that defendants say caused the losses, but once the collapse started, improperly underwritten loans were hit hardest and drove the collapse even further. The evidence at trial confirms the obvious: Badly written loans perform badly. In short, defendants could not propound a cause unrelated to the alleged misrepresentation.
That’s the financial crisis in a nutshell. “While the vulnerabilities that created the potential for crisis were years in the making, it was the collapse of the housing bubble—fueled by low interest rates, easy and available credit, scant regulation, and toxic mortgages—that was the spark that ignited a string of events, which led to a full-blown crisis in the fall of 2008,” the Financial Crisis Inquiry Commission concluded in a report published in January 2011.
Yet while others have chronicled the causes of the crisis. Cote’s decision shows, in the case of two financial firms, the extent of the wrongdoing that occurred.
As the court noted, during the two years beginning in 2003, the number of subprime loans nearly doubled, to 1.9 million. By 2005, subprime loans made up one fifth of all new mortgages. According to Cote:
The ability of originators to quickly sell and shift the risk of subprime loans off their books reduced their incentive to carefully screen borrowers. They approved loans that did not comply with stated underwriting guidelines and they misrepresented the quality of those loans to purchasers. Appraised values were overstated, owner occupancy was misreported, credit risk was hidden, and second liens were undisclosed. In short, these shoddy practices contributed to the housing price boom.
Though prospectuses told investors that the loans that backed the securities at issue were underwritten in conformity with the originators’ standards, the prospectuses failed to inform investors that the originators has disregarded their own standards. “In sum,” wrote Cote, “notice that loans were not being extended to borrowers who had a less-than-perfect credit history through the adoption of relaxed underwriting guidelines was not notice that originators would ignore even those guidelines.”
That, as the court concluded, shows the problem that led to liability for at least two financial firms that sold securities that turned out to be toxic.
Cote noted that in the middle of the Great Depression, Congress passed the Securities Act, which obligates issuers of securities to disclose fully information that a reasonable investor might rely on in deciding whether to invest. “Now, in the aftermath of our great recession, FHFA seeks to vindicate those principles,” writes Cote. “For the reasons stated here, it is entitled to judgment.”
For its part, Nomura said in a statement that it “will review the judgment and consider all options, including appeal,” and that the judgment would have an “insignificant” impact on the company’s performance. RBS said in a securities filing that “it intends to pursue a contractual claim for indemnification against Nomura with respect to these damages.”
Like many things, legal arguments can have an elegance about them.
Look no further than the arguments advanced by the plaintiffs in the lawsuit that led a federal appeals court to rule last week that the government’s collection of information about the telephone calls of Americans violates the USA Patriot Act.
The decision, which was reported widely, marks the first time an appeals court has declared the surveillance program that the National Security Agency has used to harvest telephone numbers and other details of calls made or received in the US for at least the past nine years to be illegal.
Besides invalidating the bulk collection of so-called metadata, the decision reveals some terrific lawyering by the American Civil Liberties Union, which filed the lawsuit on June 11, 2013, six days after The Guardian, reporting on leaks by former government contractor Edward Snowden, published an order from the FBI to Verizon directing the company to hand over metadata for all calls on its network that either began or ended in the US.
Under the Constitution, federal courts only have the power to resolve actual disputes between real parties. Thus, to sue, a plaintiff must show a concrete personal stake in the outcome of the case, a requirement known as standing. It’s not enough to dislike a law. You have to show injury.
For its lawsuit, the ACLU needed a Verizon customer whose phone records had been collected by the government. A customer who might claim that the government’s collecting his or her phone records harmed the plaintiff in some way. For that, the ACLU looked no further than its own offices.
As the ACLU charged in court papers, the organization was itself a customer of Verizon, which provided the ACLU with landline, Internet and wireless services throughout the period covered by the order. The NSA’s harvesting of the ACLU’s metadata exceeded the government’s authority and constituted a seizure in violation of the Fourth Amendment, the group charged.
In court papers, the ACLU described its standing as follows:
The information collected includes plaintiffs’ numbers, the numbers of their contacts, the time and duration of every single call they placed or received, and the location of plaintiffs and their contacts when talking on mobile phones. This information could readily be used to identify those who contact plaintiff for legal assistance or to report human-rights or civil liberties violations, as well as those whom plaintiffs contact in connection with their work. The fact that the government is collecting this information is likely to have a chilling effect on people who would otherwise contact plaintiff.
In other words, the ACLU communicates with people about matters that are sensitive or privileged and who depend, as the group noted, “on their ability to keep even the facts of their discussions” with the ACLU confidential.
The trial court determined that the ACLU had standing to file the lawsuit.
On appeal, the government took issue with the ruling, charging that the ACLU had failed to demonstrate that the NSA had reviewed any of the metadata collected from the group. Thus, the government charged, the ACLU had failed to allege an injury sufficiently concrete to support standing.
The US Court of Appeals for the 2nd Circuit disagreed, noting that the ACLU had alleged injury from the very collection of metadata, regardless whether the government reviewed the information.
“Whether or not such claims prevail on the merits, appellants surely have standing to allege injury from the collection, and maintenance in a government database, of records relating to them,” wrote US Circuit Judge Gerard Lynch for the majority. “Appellants’ records (among those of numerous others) have been targeted for seizure by the government; the government has used the challenged statute to effect that seizure; the orders have been approved by the [Foreign Intelligence Surveillance Court]; and the records have been collected.”
The appeals court observed that the government admitted that when it searches its database its computers search all of the information stored in it. That means the government searches the ACLU’s records, which are among the millions of records stored in the database, electronically.
Finally, the court noted that the ACLU also had standing to challenge a violation of its right to freedom of association guaranteed by the First Amendment. As the court observed, the government’s forcing a group that’s engaged in advocating for the civil liberties of its membership to disclose its members can itself violate the right to associate freely.
“When the government collects appellants’ metadata, appellants’ members interests in keeping their associations and contacts private are implicated, and any potential ‘chilling effect’ is created at that point,” Lynch added.
It’s Sunday, about 1:30 pm, and I’ve been to three wireless stores since noon.
The journey has taken me from 125th St. in Harlem to 86th and Broadway to 71st Street.
Reason for my trip: to activate an iPhone 4 that I’ve had for the past four-and-a-half years, the last two of which it occupied a shelf above my desk.
My girlfriend is visiting from South Africa. She uses a US phone on this side.
She had a phone that ran on Verizon—one of those clamshell designs—that she lost on a recent visit. She kept the number, which her sister paid for monthly. My girlfriend says she has no attachment to the number except that her boss knows it. He calls her on it.
For a week she went without a phone. To reach her, I texted her via Skype to her MacBook. But today she’s off to Boston, which her employer calls home.
She needs a phone that works. Cue the iPhone 4, which I charged in anticipation of her visit.
I misremembered that I had bought the phone from AT&T, thinking instead that it came from Verizon Wireless. That mistake explains everything that ensued.
The saga began a day earlier, at a T-Mobile store at 96th and Broadway. We brought the iPhone there to buy a SIM card that would activate the phone on T-Mobile’s network, where we—or more accurately T-Mobile—would carry over my girlfriend’s number from Verizon.
The sales representative at T-Mobile snapped a new SIM card off from credit card-sized piece of plastic, inserted it into the phone and turned on the device. We brightened momentarily before realizing the phone would not work.
“It’s locked by Verizon,” the representative told us, repeating the misinformation I had supplied inadvertently. “There’s nothing we can do. You have to take it to Verizon.”
“What’s the lowest-priced phone you have?” my girlfriend asked him. He showed her a phone that runs on Android and cost $20.
“I’ll take it,” my girlfriend said. At least she would have a phone, no matter how little it resembled a phone that she might want.
At home Saturday night, my girlfriend’s sister, a different sibling than the one who preserved the phone number, and I researched how to unlock a phone from Verizon.
On Sunday morning, equipped with the information, I called Verizon. The first representative I reached told me that Verizon cannot unlock a smartphone that ran on its network. That didn’t seem right.
I called again. A different representative gave me two six-digit codes that he said I could use to unlock the phone. “These will cost you money if you go online to sites that sell unlocking,” he offered before directing me to an article in Gizmodo about how to unlock an iPhone 4.
That didn’t help either.
I decided to take the phone to the Verizon Wireless outpost on 125th St. The place opened at noon. I resolved to be first in line.
I arrived at the store, located at the corner of 125th St. and Adam Clayton Powell Jr. Blvd, about 10 minutes early. While I waited, I met AGR, a rapper who was hawking “King of the Industry,” his latest disc. “I’m working with RZA of Wu-Tang,” AGR told me, without commenting on the symmetry between the number of initials in their monikers.
For $10, I could own a copy of AGR’s latest, which, he explained to me, contains no references to sex or drugs. “But aren’t drugs and sex subjects for art too?” I asked him.
“Yes, but what am I going to do, rap to the kids about using crack?” he replied. Rather than press the point, I forked over $10 in exchange for the disc, which AGR autographed to my girlfriend.
I hope she likes it.
By then it was noon and I saw the manager at Verizon Wireless kneel to unlock the double doors to the store. I construed the gesture as a metaphor for what awaited my phone.
I bounded inside. She asked how she could help.
“I’d like to ask you to please unlock a Verizon phone that I haven’t used in at least three years,” I explained. “I used to have a contract but that was then. I think you can unlock it now.”
“We can’t unlock the phone unless you are on Verizon,” she replied.
“Isn’t the point of unlocking the phone so that I don’t have to be on Verizon?” I asked. “Besides, refusing to unlock a phone unless I’m on Verizon sounds illegal.”
I imagine the last thing someone who works at a Verizon store on Sundays wants to hear is that what they’re doing is unlawful.
“Companies do it all the time,” she said.
As if that would persuade me.
“Tell you what, maybe you can confirm that the phone is a Verizon phone,” I offered. “Maybe my recollection is wrong.”
“But you told me it’s a Verizon phone,” she said.
“Yes, I did, but perhaps my memory is faulty,” I answered. “It can happen to any of us,” I added, gesturing toward the pedestrians on the street outside.
I held up the phone to her while pressing an icon on the display that flashes the phone’s International Mobile Station Equipment Identity (IMEI number), the 15-digit number that identifies most mobile phones.
The manager gave a look that signaled a mixture of annoyance and resignation. “Please, just confirm that this is a Verizon phone,” I pleaded.
The manager gazed at the number. “It’s a Verizon phone,” she said. “That’s our number, it begins 040.”
I looked at the IMEI, which began 0240.
“Are you sure?” I asked, repeating back to her the digits. “I’m sure,” she replied. “Verizon phones start with 0240.”
I noted her confusion but attributed it to her wanting to be rid of me.
I thanked her and plopped down on a bench at the entrance to the store to map out my next move. I approached the counter again to ask another representative how much it would cost to activate the phone on Verizon’s network.
“That would be $45 a month, for unlimited talk and texts, plus one gigabyte of data,” he told me, looking up from his smartphone.
“Will the number remain in effect if my girlfriend only uses the service a few times a year when she’s in the states?” I asked.
“No,” he said. “The number cancels out at the end of 30 days unless you renew it.”
By now it was 12:15 pm. I had promised my girlfriend I would be home by 3:00 pm with a phone that worked and that she could take with her to Boston later that afternoon.
At 125th St. and Adam Clayton Powell, I hailed a taxi to take me to the Apple Store at 66th and Broadway. I would buy a new iPhone 6 and give my girlfriend my iPhone 5c. I’ve dithered about whether to go with a larger phone. Now seemed like the time.
As the taxi rolled along Central Park West, I gazed out at the buildings on my right. At 102nd St., we passed an apartment building where seven years ago I took guitar lessons from a musician who lived there. He once played in the band for the show “Rent.” He also liked to play tennis and would regale me with stories about matches he played on the red-clay courts in Riverside Park.
At around 96th Street a better idea came to me. Rather than buy a new phone, I would return to Verizon and activate the iPhone 4 on the carrier’s network. My girlfriend could bring both the T-Mobile phone and the iPhone with her to Boston. She would have to tote two phones but at least one of them appealed to her.
After her business trip, I would hold onto the iPhone 4. That way I could have a phone to use for calls and another—my iPhone 5c—for podcasts, music and all the rest of the things we do with those devices. All for $45 a month, which, while not free, beat the cost of a new phone.
I asked the driver to let me out at 86th and Broadway. Rather than return to Harlem and the manager whom I was persuaded hated me, I would find a Verizon Wireless store on the Upper West Side.
First, I had to use the restroom. I walked north along Broadway, expecting to find one of the Starbucks locations that litter Broadway what seems like every five blocks. Sure enough, I found one after about three.
Inside, a man who appeared to be about 60 years old waited for the restroom, the door to which displayed the red dial that signaled it was occupied. He had close-cropped silver hair and wore shorts and a t-shirt with something that I couldn’t decipher printed on it.
“You’re in line, right,?” I offered.
“I am,” he answered smiling, seemingly appreciating my checking with him.
After about 30 seconds I spoke up.
“The city needs more public restrooms,” I said. “It’s ridiculous that we all wait on line in Starbucks.”
The man brightened.
“I agree,” he said. “You wonder what people do in there. The guy who was in line before me gave up and left.”
“I don’t get why people take so much time,” I volunteered. “The last place I want to be is holed up is in a bathroom at Starbucks.
By then another gentleman, an African-American man who appeared to be about 50, had joined the line.
“We think someone’s taking a shower in there,” I said to him
“It’s terrible,” he said. “The way some people stay in there so long.
“Right, that’s what we were just discussing,” I replied, gesturing to the man ahead of me in the queue.
The three of us waited silently for about five minutes. Then the African-American man walked forward and rapped solidly on the door. No reply.
“Maybe someone should check to see if the person inside is conscious,” I offered.
“This is ridiculous,” said the man, returning to the queue.
“Have you seen the public restroom they installed recently on the east side of Union Square,” I asked them, proud of my offering some information that might be of value in the future. “We need more of that. Or like the restrooms at Bryant Park. Standing in line at Starbucks is hardly a substitute.”
Both men nodded in agreement.
I was on a roll. “I should run for City Council on a platform to add restrooms across the city,” I said.
“You’d have my vote,” said the man in front of me.
Just then we heard the handle of the bathroom door rattle. A woman, about 50 emerged, looking pale and exasperated.
She shook her head and looked at the man in front of me, as if he alone had interrupted her stay.
“I’ll be fast,” he told me.
“I’ll be fast too,” I told the man behind me.
The man kept his promise. He was in and out in what seemed like 20 seconds. I did the same.
“Take care, man,” I said to the African-American gentlemen as I left.
“You too,” he said, cementing our bond.
I stepped outside and onto Broadway, where Google Maps told me there was a Verizon Store at 80th St.
I walked south, glad to be outside on a mild spring afternoon. It was early enough that people seemed happy it was Sunday. They had yet to retreat to their apartments to steel themselves for the week.
A man passed me walking north, carrying an air conditioner that he had purchased at P.C. Richard & Sons, judging by the box. A block later, a young woman drifted over to a shelf of books that a bookseller had pushed onto the sidewalk to attract browsers.
As I approached 80th St., I saw the Verizon store on the opposite side of Broadway. Inside the store, the greeter asked for my name, which he logged on an iPad before telling me that I would be next in line.
I sat down on what I later realized to be the same style of bench that stood near the door at the Verizon store in Harlem. It’s hardly news that parts of Manhattan are being overrun by banks, nail salons and mobile phone stores. I shuddered as I realized that I had experienced the phenomenon from the inside.
In about 10 minutes, a man whose name tag read Jordan sat down next to me, smiled and asked how he could help.
“I would like to sign up for some prepaid Verizon wireless,” I told him, holding out the iPhone 4.
“Great, how do you anticipate using the phone?” he asked.
“For calls, mostly, I think,” I answered, feeling happy that we seemed to be getting somewhere.
Jordan told me the best plan would be one that costs $45 a month. Of course, I knew that already, but I thanked him anyway. By now it was nearly 1:00 pm and I began to calculate how much time I had left before I had to get back to my girlfriend in Harlem.
“May I see your ID?” Jordan asked.
I handed him my driver’s license and hoped that concluding the purchase would be as easy as his swiping my credit card.
“Is this your home address,” Jordan asked, holding the license.
“Yes, it is,” I replied, feeling satisfied with my deciding to update my license after moving last year.
Jordan excused himself to speak with a co-worker, whom I imagined to be a supervisor. I watched the men huddle for about a minute before Jordan returned.
“You say this is a Verizon phone?” he asked me. “Because as far as I can tell it’s not one of ours.”
“But the manager at your other store tells me it’s Verizon,” I replied.
“I’m sorry but it’s not,” he said. “Have you checked with T-Mobile, or with any other carrier. Maybe it’s AT&T or Sprint.”
Suddenly, I remembered.
“Oh, wow, it’s AT&T,” I said as the realization dawned. “Look, Jordan, you know that I wanted to buy Verizon service—you know that I was ready to sign up for prepaid wireless—but if I can unlock this my girlfriend can use her T-Mobile SIM with this phone.”
Jordan said he understood, and that he was happy to help. I wanted to run to the AT&T store, but I paused long enough to thank him again. We shook hands.
Back on Broadway, I headed south, past the Apthorp and Fairway, across the street at Gray’s Papaya, to 71st St., where an AT&T store occupies the northeast corner.
I entered to find two representatives helping customers at the counter while two ladies sat on a window ledge in the far corner of the store that faced the street.
“I imagine you’re waiting,” I said to them, smiling.
“I’ve been waiting for about 30 minutes,” said the younger of the two.
“Have they taken your names?” I asked.
“We think so,” said the other woman.
I approached the counter. “How do we register our visit?” I asked one of the two representatives. She wore a powder-blue polo shirt emblazoned with an AT&T.
She looked up at me distractedly. Just then, a representative in a royal blue polo shirt—a manager I hoped—emerged from the back room.
“How do we register for our visit?” I repeated, this time to him. “There are four of us back here,” I said, motioning to the two women. “We’re wondering.”
“There aren’t four of you,” said the manager.
“I count four—those women, me and this gentleman, here,” I said, gesturing toward a 60-something man hunched over some kind of self-service terminal.
“Have you registered?” I asked a 20-something man whom I had seen when I entered.
“I have,” he said in a European accent, smiling. “Thank you.”
I felt like an organizer. After three wireless stores in 90 minutes, the bureaucracy and procedures started to make sense to me.
The manager asked my name, which he entered into an iPad.
I retreated to the corner to take my place alongside the two women in the queue.
My turn came about 15 minutes later. A 20-something representative—she wore a navy polo shirt, the shades of blue seemed to darken with each representative—approached and asked how she could help.
“I would like to unlock this iPhone 4 that I got from AT&T several years ago,” I told her. “The contract has long lapsed. I don’t even have a phone number of it.”
“You have to put in a request online to do that,” she replied.
“What?” I replied, set back.
“This is the third wireless store I’ve visited today, and now you’re telling me I have to go online? Please, can’t we do this from here?” I implored.
The representative hesitated. Then she escorted me over to an iPad and punched up an online site at AT&T for unlocking phones.
“Go ahead and enter your information here,” she instructed.
I entered the IMEI, my name and email address. Three times I mistyped the captcha, which seemed especially tough to transpose.
After three tries, the representative nudged me aside and entered the phrase.
That produced a message telling me to check my in-box for an email that would confirm the unlocking.
I opened the email on my phone. “Click ok,” the representative told me, enrolling now.
I clicked. A second email arrived telling me that my request for an unlocked phone would be processed within two days.
“They say two days but it can be much faster,” said the representative. “Mine was unlocked the same day.”
That meant I might not be able to unlock the phone for my girlfriend in time for her trip but that eventually we’d get the phone working.
After thanking the representative and leaving the store, I imagined I could ship the phone to my girlfriend in Boston as soon as it worked.
On Broadway, I flagged a taxi to take me home. It was 1:45 pm and I didn’t want to risk the vagaries of weekend subway service.
As the taxi made its way up the West Side Highway, I happened to check my in-box, to see a third message from AT&T, this one congratulating me on my phone being unlocked.
According to the message, to complete the unlocking I needed to connect the phone with its original SIM card to iTunes.
Problem was, I no longer have the original SIM card.
Damn, I thought. Three stores and all that energy and I still may be unable to unlock the phone.
I resolved not to stress about it and to enjoy the ride along Riverside Park on a lovely day.
I called my sister to wish her happy Mother’s Day. I listened to a report by the BBC World Service about the new leader of South Africa’s main opposition.
I settled into the taxi, feeling assured by my effort and the initiative of the driver, who suggested a route that I knew made sense.
At home, my girlfriend gazed up from her work when I entered the apartment. I had stopped at a salad place and brought us both lunch.
I told her that I felt we were close to unlocking the phone, that I needed to try one more thing at the computer.
I went to my desk, inserted my girlfriend’s SIM card from T-Mobile into the iPhone and attached the phone to my computer. I double-clicked on iTunes. A message popped up to tell me that new settings from the carrier were available for download.
That seemed like a good sign. A few seconds after I accepted the settings a screen appeared. “Congratulations, your iPhone is unlocked,” it read.
I ejected the phone, adjusted the brightness of the display and walked into the living room to where my girlfriend sat on the couch, typing on her MacBook.
“Here’s your iPhone,” I said, handing the device to her.
She stood and embraced me. A breeze came through the window
Say what?Alex Rodriguez said so long to the Say Hey Kid.
The Yankees slugger bashed a two-run homer in the third inning against Baltimore on Thursday, passing Willie Mays to claim sole possession of fourth place on baseball’s all-time home run list.
The home run, which came in the third inning against Baltimore, marks the 661st of A-Rod’s career. Rodriguez had been tied with Mays, who turned 84 on Wednesday, since hitting his 660th last Friday against Boston.
Only Barry Bonds (762), Hank Aaron (755) and Babe Ruth (714) have hit more.
After Rodriguez returned to the dugout, fans continued to cheer, eliciting a curtain call from the slugger, who sat out last season after being suspended by the league for using performance-enhancing drugs. As the Daily News’ John Harper observes:
The way the fans roared for the curtain call, you’d have thought Derek Jeter had hit home run No. 661. OK, well, that may be a stretch, but you get the idea. The same fans who never really warmed up to A-Rod over the years are suddenly showering him with affection, and that may be more remarkable than his comeback itself.
The Yankees have said they would forego the option A-Rod’s contract gives them not to pay Rodriguez a $6 million bonus in return for the rights to market the achievement.
As one who attended Thursday’s game, I can report that the team is upholding its end of the pact. Had you not known A-Rod’s home run tally, you might have missed the moment. The LED display that fills the stadium above center field said nothing of A-Rod’s chase or the significance of the moment.
“The Yankees could have added to the excitement had they told fans that Rodriguez was poised to overtake Mays,” my girlfriend commented afterward.
Instead, we walked back over the bridge to Manhattan on a lovely May night, talking about why a player as gifted as Rodriguez had used PEDs and whether he had already alighted in the helicopter that we imagined whisks him home.
