Random Walk Through Law and Finance

2004-05-03T13:12:00.000-07:00

This article makes it sound like law firm associate jobs in transactional work are the most cyclical and uncertain positions in a cyclical and uncertain field (albeit with big potential rewards). It is an interesting study of a field most people might have thought was relatively secure. Seems like people would rather work for banks or similar institutions rather than law firms, and when the economy gets tight those jobs dry up, which means people stay at their firms longer, which means the entry-level law firm jobs dry up. Of course, there are few entry-level legal jobs on the in-house side, so new transactional lawyers seem to get whip-sawed around as the economy moves.

2004-04-30T12:55:00.000-07:00

Here's an interesting article about schools considering work experience as a plus for applicants.

Unfortunately, there is no real conclusion in the article. It's interesting to note a mainstream publication suggesting that law school may be a 'professional degree of least resistance' for many exceptionally bright students. I found it even more surprising that the article would implicitly suggest that three years and $150k of education would be the path of 'least resistance'.

2004-04-30T12:35:00.000-07:00

The great career advice column at law.com has a slightly disturbing article about being a 'blacklisted' by major law firms. The gist of it is that if you work at a law firm for the summer after your 2L year but don't get a job then every other potential employer is going to see a huge black mark on your resume. I just can't believe that it is such a big deal, and I think this particular column only reinforces the anxiety most law students already have about getting jobs. I see a couple things wrong with the columnist's advice.

1) Great summer law firm jobs are not super easy to come by, and not all of the summer candidates get a full-time offer. So, there are tons of strong candidates who neither get a summer associate position or a follow-up offer. Viewing the failure to get either as a huge negative seems like an over-reaction.

2) The candidate referenced in the column is going to do two years of clerkships before going back to the law firm market. If they do a good job in their clerkships and get good references there is no way that the failure to get a job 2 1/2 years before that is going to impact their job search. Maybe a few firms would go back to the summer associate job, but most would be convinced by the clerkships and references from judges.

3) Frankly, the candidate does not need to explain why they 'didn't get an offer'. All they need to say in subsequent interviews is that the firm wasn't a good fit. Now, I'm sure they'll have to explain that position, but it shouldn't be tough - unless they're trying to work at a firm that aspires to be just like the firm where they got dinged.

Overall, the column tends to reinforce people's fears that they must be perfect to get a good job. I find that hard to believe. I am sure there are a few firms where only the most perfect candidates get hired, but there are plenty of other options for people with a few gray marks on their resumes. I fear that this kind of attitude that assumes perfection is the only way to have a good career is the type of attitude that leaves many lawyers feeling unhappy and depressed about their lives.

2004-04-12T10:53:00.000-07:00

This article is a great reason why I do not listen to Suze Orman. If you don't know Suze, she is a relatively famous talking-head personal finance commentator. I was watching pbs the other day and they were showing a speech Suze was making to a packed theater about personal finance. I bet the people paid to attend the speech, which would have been good for Suze's personal finances.

Now, back to the article. One of the major premises is that it is important to make an extra payment on your mortgage each year to pay it off faster. Now, that sounds like pretty good advice, but Suze glosses over the fact that paying down low-interest debt might not be the best use of your money. The truth is that if you've got a big loan then it might be better to put that extra yearly payment into savings rather than pay down the loan. Paying down the loan might make you feel good, but do lawyers really have feelings?

Here's a quick example of why Suze isn't the final authority here, and I'll use student loans rather than a mortgage. Now, let's say that a student graduates with $120k in loans, and the interest rate is 5.5%. That is about $1300/month in payments. If our hypothetical student makes an extra payment every year the loan will be paid off in a little over 9 years. However, if the student takes the extra payment and puts it someplace with an 8% return (index fund?), then after the same time period they will have enough to pay off the loan balance, plus they will have $1,700 in pocket money left over. Hello Bahamas!. If the student gets an 11% return then they could pay off the loan two months earlier than our extra-payment-sender and still have over 800 bucks left for a year of Starbucks. Taxes might close the gap, but not if the loan interest is also deductible. Investing the money would also entail more risk, but could have more reward if the return is higher.

There are not many times in life when you get extraordinarily cheap money. Law school is one of those times, especially if you can consolidate the loans at a low rate after graduation. Now, if you have enough money to save an extra thousand or two every year, would you rather invest it in a guaranteed return at your low student loan rate or try to build your wealth by taking advantage of the cheap government loans?

2004-04-07T08:38:00.000-07:00

The New York Times has a great article about using computers to create mathematical proofs, which is sort of related to law because the computers really only provide evidence that a mathematical proof is true, but can't show that it MUST be true. However, the researchers still pretty much accept the computer analysis as proof even though it is too hard to check every last calculation.

The article makes me wonder whether some fields of evidence might be so complicated and/or difficult to verify that they don't get enough scrutiny. The NYT article mentions other computer-assisted proofs were found to have significant errors, but it took a long time and lots of experts to find them. I wonder how much scientific legal evidence that is accepted as near-fact would stand up to the kind of long-term and intensive peer review used by the mathematicians.

2004-04-07T05:25:00.000-07:00

This is one of my favorite articles at Motley Fool, and might be timely for anyone saving for school. I won't recap the whole thing, but it basically comes down to the fact that keeping your savings in a Roth IRA (if you're eligible) is a no-lose prospect, even if you want to tap some of it before retirement. I know that if interest rates stay low while I'm in school then I'll borrow a little extra so I can be sure to top off my Roth every year. It may seem silly to save and borrow at the same time, but I figure that as long as interest rates are low I should take advantage of the higher returns likely available elsewhere. Plus, because the Roth money goes in after taxes you can always pull out your original contribution amount at any time without tax liability! What a deal. So, let's say I put $3,000/year into my Roth during law school and borrow to make up the difference. I'll pay about 5% on the borrowed money, which would be about $900 during school. If I can invest in something that earns about 11% (not crazy - maybe a dividend-paying stock that pays 3% and appreciates 8%) then my roth will increase by $1,980. At the end of law school I can take out the $9,000 I put into the Roth and pay back the original debt, and all I have left to pay is the $900 in capitalized interest. In return I'll get nearly $2,000 in retirement savings that will be completely tax-free when I turn 59 1/2. If I'm 29 when I graduate then that $1,980 will be worth over $45,000 when I retire (again, 11% returns).

2004-04-06T14:40:00.000-07:00

This article is one of the most comprehensive critiques I've seen of the U.S. News ranking system. Unfortunately, the author ruins a perfectly nice critique with a wildly inaccurate logical leap. She posits that schools can game the system to a 'meteoric rise' or experience an unrealistic 'dive' that has nothing to do with quality. Except for cases like the UW instance I linked to below I don't think her leap makes sense. The article explains that the ranking depends mostly on reputation and incoming students' LSAT scores, with the reputation counting more. It seems hard to understand how a school can 'game the system' to significantly improve their reputation and thereby earn an undeserved 'meteoric rise'. The author has some good points about how law schools can manipulate their position in the rankings, but the small manipulations probably don't add up to big changes. So, I'll stick with my assertion below that the rankings are good, but maybe a little too precise - let's see the top 100 broken into unranked tiers!

2004-04-06T11:09:00.000-07:00

More rankings madness! I think if I was a UW law student I would ask for a partial tuition refund, since apparently they inadvertently reduced their own ranking by reporting erroneous data. Ouch.

I think this article also helps highlight what the rankings provide, and what they definitely do not provide. The article mentions the quality of their new law school building as a significant positive for the law school in question. It is clear that the U.S. News rankings are not evaluating the coolest, prettiest, most modern, cleanest, or any other aesthetic-ist law schools. It is also clear that there are a lot of factors other than the rankings that might be important to people, but that doesn't mean they ALL have to be included for a set of rankings to be valid. I think that students can actually make better decisions if everything isn't lumped together into one number. For instance, I would rather use my own judgment to decide what mix of climate, facilities, and reputation (a.k.a. U.S. News Rankings) is best for me. I think all the complaints about how the U.S. News rankings don't include certain information are silly. I can't believe anyone honestly believes that the rankings are a numerical value of the totality of law school attributes.

2004-04-06T07:23:00.000-07:00

Attend a school with great weather and a dean with a warm personality. Kenneth Star is going to be the new Dean at Pepperdine, according to this article. Do you think he will learn how to surf? I hear the waves in Malibu are great.

2004-04-06T05:34:00.000-07:00

Can your classmate hijack your perfect solitaire game? The Financial Times says that maybe they can, if you're on a wi-fi network in class and don't have your computer secured. Sounds like it might also be possible to grab files from classmate's computers. Who's got the best outline?

It is ironic that this story of espionage is brought to you by the Financial Times, since the FT is reportedly the paper favored by anyone setting up a covert meeting with an unknown contact. The distinctive pink color makes it easy to spot your unknown counterpart in a crowd of otherwise unremarkable news junkies.

2004-04-05T17:27:00.000-07:00

Another article with a cautionary tale on debt loads. Just something to think about.

In fact, while I was thinking, I decided to see how much money it would take to make law school essentially 'free', or cash-flow neutral. I assumed that the student would have to borrow $120,000 over three years, and pay a 5.5% annual interest rate. Plus, I assumed they would get an 11% return on their initial investment, which was a lump sum invested when they started law school. Interest and returns were compounded monthly. Ten years after law school the student would have paid off all the loans and the initial investment would be drawn down to zero.

This hypothetical student needed about $78,000 on the first day of law school to make the $120k in loans 'free', or cash-flow neutral. I excluded the tax effect, but capital gains rates are pretty low, and will drop to zero for 2007 unless the law changes. It makes you think hard about trying to save as much as you can BEFORE law school begins, so you can really benefit from the different returns of stocks (assets) and bonds (borrowing). However, there's a lot of risk involved in that proposition, since the asset prices could go down in any year, but those debts will still be due.

2004-04-05T15:28:00.000-07:00

Back-of-the-envelope return on investment for law school: I thought I'd post a quick ROI for anyone who's not that familiar with the economics of graduate education. Here are some numbers you can run with a handheld calculator. First, take the interest rate for student loans and multiply it by 6 (I would use .05 - this is the in-school interest), then add 1 and multiply by the total amount you will borrow for school. Now, add the amount you could save during school if you worked instead - a conservative number would probably be about $10k, which is equivalent to contributing to an IRA for 3 years. Write the number down - this is roughly equal to the present value of attending school. Now, figure out what you're likely to earn when you graduate. Subtract how much you could be earning at the same time (i.e. 3 years from now) if you did not attend school. Multiply that number by 9. That is roughly the present value of the benefit from education. Subtract the cost and you've got the net benefit. Now, divide by 30 (years, the length of your career). Now, multiply by .65, since you have to pay taxes. Now you have a VERY rough estimate of the net benefit per working year.

Here's a brief example for a student with $120k in loans, who could be earning $50k if they didn't go to law school and $95k when they graduate from law school: .05*6=.3+1=1.3*$120k=$156k+$10k=$166k total cost.
$95k-$50k=$45k*9=$405k/30=$13,500*.65=$8,775.

Of course, there are lots of assumptions in there. I discounted future income at about 11%, but didn't discount the debt because of the interest you'll owe on top of the debt after graduation. I also assumed that your income would grow at the same rate whether you attend school or not, which might be a little pessimistic, but I didn't count the reduced standard-of-living you'll likely experience in school as a cost.

I think you will find that taking on a lot of debt to pay for an education has some reward, but not as much as many people might think. The debt is expensive, and the reward is uncertain. Now, this is all a very long-winded way of saying that money alone is not a great reason to get an education - the return is just not going to be enough to compensate you if you don't like it. I think if you've read any of the unflattering posts on Vault, Princeton Review, etc. about how terrible it is to be a lawyer and how miserable you'll be then this might help explain it. Maybe people have unrealistic expectations. I am hoping that I won't have one of those miserable attitudes in 3 or 5 years because I'm going in with eyes open. I'm crossing my fingers.

2004-04-05T12:07:00.000-07:00

If you're an undergrad thinking of law school, it might be worthwhile to think about working for a couple of years first. I noticed this article that U.S. News has posted for the past couple of years and realized how much a few years of work experience helped me think about the 'is it right for me?' question.

First, I think working for a while helps most college students understand the financial aspects of law school more than they can in college. Unless you worked your way through undergrad it's unlikely that you have a good sense of how much money you need to live in a certain city or at a certain lifestyle. It probably took two years for me to get a good handle on how much I need to plan on spending on 'typical' expenses, 'splurges', and 'emergencies', plus how much I need to save for the future. Understanding these things is important if you want to, say, set a budget for how much income you need to earn after law school to pay the bills, make student loan payments, and maybe take vacations or get a car or whatever. That kind of information can help you figure out if it's realistic to follow a given career path after law school given your personality and goals.

Second, I think it helps to teach time management in a way that you don't usually get in college. I know that the pressure of work put more immediate deadlines than college ever did, and I'm sure the time management skills I picked up will be the difference between being overwhelmed as a 1L and being pretty sane and reasonable.

Finally (well, for now), working will give you a chance to get some mistakes out of the way early. Would you rather have your boss tell you that you shouldn't wear sandals (for men) even if it is causal Friday during your first job right after college, or during your first job at a law firm/government agency/whatever you do after law school?

2004-04-05T06:11:00.000-07:00

My head is spinning with comment and response to the U.S. News rankings, but Jeremy Blachman is the first person I've heard use the magic words: 'opportunity cost'. I've heard a lot of people wax about how there are so many factors to consider when choosing a school and how no rankings system can measure whether a school will be good for a particular person. Let's face it though - law schools are professional schools. The point for most people is to build a career, either in private practice or the public sector or some genetically engineered cross not allowed in all states (with an added bonus that a career in law can also have an academic track, which is much more difficult for other professional school graduates). So, if a law school costs $xxx,000 then I want to make sure that 1) I would rather spend $xxx,000 at law school A than law school B, and 2) I will be better off/happier/better looking if I spend $xxx,000 at law school A rather than NOT GOING AT ALL. I think the rankings help on both points, because they educate people about the relative value of a law degree from law school A in the labor market (although there are probably some exceptions).

Jeremy mentions that he doesn't have a clear picture of the opportunity cost of attending law school. I have been fortunate enough to have a relatively solid early career, and the opportunity cost is very clear. I think the rankings help people determine whether the schools they can attend are worth the cost. It seems likely that without good information to compare different schools prospective students would be left paralyzed by uncertainty in the face of a huge investment. Would you plunk down $xxx,000 for a house without knowing whether the neighborhood was safe, the schools were good, the prices were rising, or termites didn't eat through the walls? There may be individuals who just 'fit' the house anyway, and wouldn't care about those little details. However, most people would run screaming if their realtor told them not to worry about whether their house was going to be a better investment than the one three blocks down.

Final thought - the one major flaw in the rankings is probably the level of precision. There is no way U.S. News can consistently measure whether a school is 18th or 20th. They seem to have mitigated the issues with precision by placing schools in 'tiers', but it still doesn't get rid of the problem. I think the rankings might serve students better if they were broken into smaller 'tiers', with schools listed alphabetically within each. It would probably also free up some law school administration resources that might be spent on making sure law school A doesn't drop from 17 to 19. So, if you're agonizing over a choice between two similarly ranked schools, then maybe it is worth creating your own tiers and the picking the school you like best in the tier you want to attend.

2004-04-02T13:07:00.000-08:00

Last night's episode of 'The Apprentice' says a lot about the value of education when dealing with big business. I'm sticking with my 'is it worth it' theme here and drawing on the genius of Mark Burnett and Donald Trump for some anecdotal evidence. If you didn't watch last night's episode I'll tell you that it basically came down to a guy with tons of potential and a guy with tons of education. Guess who Trump kept in the running for his apprentice?

The outcome was tough to call in advance, but Trump's reasoning here was pretty illuminating. He made it clear that hiring someone to deal with multi-million, or even billion-dollar businesses is more about risk aversion than maximum upside. Troy and Kwame were both clearly talented, but Troy was a wild card - he probably could be a stunning success, but also had the potential to really implode. Kwame was much more steady, and had sterling credentials to back it up. I think it speaks volumes about what people value in American business (and that includes law). I am sure Troy will make boat loads of money, but if you're not willing to really step out on a limb in your career I think it pays to find a friend with Tivo and check out last night's episode of the Apprentice.

2004-04-02T08:53:00.000-08:00

Given today's employment report I've been wondering about ways to minimize my exposure to rising interest rates in law school. Law school debt is probably the single largest financial obligation for most students, and also probably dwarfs any assets the student holds. Unfortunately, the debt is also a bit of an unknown quantity because the interest rates can fluctuate. Now, if you believe that diversification minimizes risk (which is a pretty easy sell), most law students should be cringing at their exposure to interest rate fluctuations. It's like having all your wealth in one stock, just in reverse.

Unfortunately, I have yet to find a really attractive way to minimize interest rate risk with the resources available to most students or young professionals (i.e. relatively small asset bases). DISCLAIMER: I am not a licensed investment professional, and the following observations are my own opinion and not an offer or suggestion to take any particular action with respect to any security or investment vehicle. One option might be to 'outrun' the interest rates by investing in equities for longer periods. The long-run return to equities should be higher than student loan interest rates, so investing in equities might help people 'grow' out of the debt with relatively small asset bases. I also think that based on this chart, which shows the changes in the yield on 10-year treasury bonds and the price of the Dow and S&P 500 index, equities could also provide some intermediate-term hedge against rate changes. You can see that over the last five years 10-year treasury rates and the price of equities have pretty much moved in the same direction. If you held stock and loans you would have seen an increase in your wealth at the same time your loan rates were rising (although the student loan rates might not exactly track the 10-year bond yield in the chart). It seems like the Dow would be a better hedge, although I'm not sure why - probably because the Dow has more cyclical stocks, and interest rates are basically cyclical as well.

The best hedge would probably be a currency trade, since if interest rates are rising the value of the dollar should go up. Unfortunately, I haven't figured out a good way to do that with a smaller investment.

2004-04-02T08:02:00.000-08:00

This article about satellite programs at Michigan raises some interesting questions about what it takes to be a lawyer. Should it be just a professional certificate that can be widely distributed like the ubiquitous Microsoft networking classes you hear advertised on pop radio stations? Or, does it require an intensive educational process including research and working side-by-side with leaders in the field. I don't think many medical degrees are granted via satellite campuses. Whether or not the ABA is correct in this case with Michigan, I have to be nervous about making legal study a commodity that is more like 'job training' than 'education'.

2004-04-02T07:31:00.000-08:00

In case you are the last person in the world to see the new Law School Rankings from U.S. News, here they are.

2004-04-02T07:08:00.000-08:00

The real cost of choosing a higher-ranked school - you decide if it's worth it. I noticed this post from consultant Ann Israel linked through JD2b. She almost always advocates picking the higher ranked school when choosing where to attend, and I generally agree with the philosophy. However, the case mentioned in her post was particularly interesting, since it seems to be a case where the cost might not be worth the benefits. I did some quick math on the cost of attending Cardozo v. Temple as Ann suggested. The student said the cost difference was about $70k, but some quick math shows that $70k is really more like $95k worth of loan payments. Plus, loans must be paid back with after-tax income, so the $95k is worth about $150k in pre-tax income (assuming 33% federal and 4% state tax). All of a suddent that moderate difference looks fairly large. I wonder if the Cardozo education is worth an extra $10k/year for 15 years. Plus, the Cardozo program was an extra semester, which would have a big opportunity cost in terms of lost income. I think that Ann's 'higher-rank' choice method works most of the time because higher ranked schools probably do result in higher earnings, but it is worth thinking about whether the particular schools you are considering are worth the cost difference based on your likely career path.

2004-04-02T06:02:00.000-08:00

Today's employment report makes me a little nervous about taking on significant loans over the next few years. The report is mixed, with payroll employment up strongly, but a slightly shorter average work week. The employment increase might suggest the labor market is getting tight, but the slowing work week suggests that it isn't all that tight, since producers would be asking people to work longer if they don't have enough staff to do the job. Good news in the big gain for professional services (42,000 new jobs), but no mention of lawyers. One thing is nearly certain though - the Federal Reserve board members have been pretty clear (in their special way) that they will start to consider raising interest rates when employment growth picks up. You might note the sentence about 'slack resource use' allowing an 'accomodative' monetary policy. Tighter labor markets will put a big dent in 'slack resource use', which means it is just a matter of time before that 'accomodative policy' becomes a little less so. Unfortunately, when the Fed starts to tick up the Fed Funds rate most student loans will get more expensive, especially the private loans that are tied to the prime rate or LIBOR. So, student loan borrowers, it might be time to plan for an extra percentage point or two on those loans in the next 6-12 months, which probably means a couple thousand in additional interest payments every year. Great.

2004-04-02T05:53:00.000-08:00

What are the chances of actually getting a great job after law school? Not bad, according to this study from BLS, but not great either. Although job growth for lawyers is projected to be about average, competition is 'keen' (in BLS code that means the job seekers exceed job openings). However, median private sector salary 6 months after graduation is $90k, so not all bad news. Plus, even the bad news is good, since lawyers who don't come out on top after their 'keen' competition for job openings might end up better off anyway: pay for management occupations is higher, and those occupations include a lot of non-practicing attorneys. Overall, seems like a pretty strong case for the value of a law degree, but it might be worth keeping an eye on non-legal jobs you would find interesting.

2004-04-01T15:20:00.000-08:00

How much does it pay to get a graduate degree? I know a lot of you might be considering whether to attend law school (or some other graduate school) in this period of economic uncertainty and a quick glance at this report from the BLS might help clarify your thinking. It certainly seems like a professional or other graduate degree is a pretty compelling proposition, to the tune of a million or two dollars. Now, there are all sorts of problems with this study, especially the fact that it was completed in 1997-1999. If you remember 1997-1999, it was the year newly minted MBAs received signing bonuses roughly equal to the value of a house in any of the middle states. Plus, there were the stock options. So, looking at that period probably overstates the potential of a professional degree, but the difference is still too large to ignore.

2004-04-01T12:36:00.000-08:00

Well, I can't help but jump in with an opinion on this email exchange that supposedly occured between a young associate at Skadden and various people in that firm's administrative staff. I suggest you open the link in a new window, and then come back to see why I am pretty sure it's a phony (thanks to jd2b.com for finding this gem).

1) The entire tone of the associate's response makes no sense. The expense admin person just wanted to know if the meals were delivered or not, and expressly stated that if the meals were delivered then they would be covered. So, if the fellow was working in the office why didn't he just say they were delivered? Instead, we get a rant about working on Christmas. If he wanted the reimbursement enough to rant and rage about it, why not just claim it was delivered (not that I'm condoning such ethical confusion)?

2) The staff names for the admin people are muddled. 'Lena', who responds to the first message, references an 'expense coordinator' named 'Debra'. A different response fron 'Lena' references her supervisor 'Nancy'. So, if we assume that the expense coordinator is the lowest level staffer and 'Nancy' is the highest level staffer we have a three-person heirarchy to process expenses. That just doesn't make sense. The most that seems reasonable is a two-person heirarchy - the admin person and the supervisor.

3) The final email in the exchange is also strange. It sounds like an email from the expenses complainant to one of his/her friends at another firm or company. If it is, why didn't the complainer send an email to their friend earlier, when they found that the expense would not be reimbursed. The complainer clearly felt pretty upset about the expense, but didn't email their friend until someone had told the complainer they were being 'monitored'. I assume the conversation about being monitored happened after the email exchange, so why the delay between finishing the email exchange and telling the friend? Moreover, why send such a bitter email from the Skadden account after someone told the person their behavior would be monitored?

There are just too many inconsistencies here to believe this exchange really happened, unless the expense complainant was pretty irrational. The lopsided tone, inconsistent admin structure of the expense department, and use of work email to gripe even after being warned of future scrutiny just don't add up to a person who thinks things through. I'm sure the complainer learned to think analytically at law school, so I have to believe this exchange is highly embellished or an outright fabrication.

2004-04-01T07:35:00.000-08:00

Welcome to a brand-new weblog on law, policy, and finance. I don't have much time today, so not a lot to report. Check back for thoughts on law school (I'll be at Harvard Law next year), economics, and investing. The payroll employment report gets released tomorrow (4/2/04), so check back for thoughts on whether the economy is really going to be on the up-and-up in 2004.