Tag Archives: David Reiss

The FHFA’s @Pulte Acts on X Alone

Posted on by
Reply

Adam Fagen Attribution-NonCommercial-ShareAlike 2.0 Generic

Business Insider quoted me in Mortgage Regulator Bill Pulte Has Posted at Least 13 Agency Orders on His Personal X Account (behind a paywall). The story reads, in part,

Until he became the head of the Federal Housing Finance Agency and a warrior in President Trump’s fight with the Federal Reserve, Bill Pulte was mostly known for posting on X. Under the handle @pulte, the businessman frequently sent groceries and gas money to people in need.

In his governmental role, which he assumed in March, Pulte has continued to use X as a megaphone. Over the last six months, he has posted at least 13 official orders on his personal account — and they don’t appear to be posted publicly anywhere else.

The practice is unusual for the head of an agency that regulates Fannie Mae and Freddie Mac, the two housing-finance companies under federal conservatorship central to the $21 trillion residential mortgage market.

*    *     *

“This is very abnormal,” said David Reiss, a law professor at Cornell University who focuses on housing policy and real-estate finance. “I don’t know what a court would do if someone sued based on an order that he only posted on X.” He added by email that impacted parties might argue that carrying out official acts by an X post doesn’t comply with the Administrative Procedure Act.

The FHFA did not respond to questions about Pulte’s posts. Pulte didn’t respond to a request for comment.

Using AI in Transactional Law Practice

Posted on by
Reply
The Role of AI in Legal Decision-Making: Opportunities and Ethical Concerns

© Romain Vignes CC BY-NC-SA 3.0

Celia Bigoness and I published a column in Law360, What 2 Profs Noticed As Transactional Law Students Used AI (behind a paywall). It reads,

We teach entrepreneurship law clinics in which our students do transactional work on a wide range of matters, including business formation, contracts, intellectual property protection and regulatory compliance.

This past semester, we had access to generative artificial intelligence tools from Lexis, Westlaw and Bloomberg Law, as well as those that are more broadly available to the general public, including ChatGPT and Perplexity.

While we have not done a rigorous study of these tools, we have some early observations about how AI is changing how transactional lawyers do their jobs, particularly new transactional lawyers. Our own experience has been mostly positive, when these tools are used responsibly. But there are many caveats that experienced and new practitioners should be aware of.

Potential Applications

For a transactional lawyer, one tempting potential use case for legal AI tools is to provide first drafts of transactional documents, such as contracts or company bylaws. Most lawyers love to start with a draft — any draft — rather than starting from scratch.

In our experience, though, using an AI-generated draft provides, at best, only an incremental benefit over starting with a precedent and modifying it oneself. Asking an AI tool to come up with a first draft is more like having a junior colleague take a stab at drafting the document, given the extensive review and editing that the draft will require.

There may be some value to this approach in the rare circumstance in which the lawyer does not have access to any relevant precedents, but the lawyer will need to be extremely diligent in reviewing the AI-produced draft.

One AI query that we have found to be more helpful has been to ask whether an existing draft or standard form is missing any important provisions. The AI tool may generate a list of a half-dozen suggested clauses to consider adding to the draft. For instance, it might suggest adding a force majeure clause if your draft does not contain one.

Again, this is not like waving a magic wand over your document: You need to understand what a force majeure clause is, whether it makes sense in your draft and what type of force majeure clause makes the most sense in it.

Also, the suggestions can range from not helpful to redundant to downright useful. But it generally doesn’t take long to parse through the suggestions, and the process can be an efficient way of testing the strength of a document.

Bloomberg Law’s Clause Adviser tool has the very useful ability to evaluate whether a particular clause favors one side in a transaction — e.g., pro-buyer or seller, or pro-tenant or landlord — drawing from thousands of real-life examples that can be found on the U.S. Securities and Exchange Commission’s Electronic Data Gathering, Analysis and Retrieval database.

A transactional lawyer can find comparable market analysis otherwise — for example, Lexis’ and Westlaw’s annotated forms will often indicate provisions that may sway in favor of one party or another — but Bloomberg’s tool is unique in that it is based on actual, negotiated transaction documents on EDGAR.

Similarly, the legal databases’ AI tools can review whether a draft contract or set of bylaws complies with relevant laws — state, federal and foreign jurisdictions. Again, this is helpful, but Lexis’ and Westlaw’s annotated forms already provide a lot of the same guidance.

One excellent use of legal AI tools is to summarize and compare documents. This feature is helpful when you are summarizing one document, but it can be really useful in summarizing a bunch of documents, perhaps pulling all of the assignment clauses out of a bunch of agreements to understand how they differ from each other.

We used to do this in a more labor-intensive way — hours and hours of reading and cross-referencing — and getting almost instantaneous results can feel like AI magic. But again, junior lawyers need to understand that they are responsible for checking the AI work product for accuracy. So we’d consider any summary or comparison to be merely a starting point for the lawyer’s own analysis.

Based on our experience so far, we believe the current suite of legal AI tools may be most useful to transactional lawyers in developing general skills, like contract drafting and analysis. For example, we can design exercises for our law students in which we give the students a few precedents of a particular contract, and ask them to compare the precedents and figure out what they’re missing.

Using both legal AI tools and conventional research, this type of exercise could help the students learn about how the particular provisions of a contract fit together. But we would be much more hesitant about using these AI tools to draft documents from scratch.

Challenges

Given these potential use cases and their limitations, in our view, the biggest challenge is to train junior transactional lawyers to approach these AI tools with a healthy skepticism.

The law students we work with are increasingly comfortable outsourcing aspects of their daily lives to ChatGPT — our students regularly ask ChatGPT to draft or summarize emails, or even to take on more nuanced tasks, such as proposing an itinerary for a post-bar exam trip. They understand that ChatGPT’s output can be a mixed bag when it comes to quality, and they seem to spend a fair amount of time double-checking the results.

But when a law student or junior lawyer is given an AI tool branded by a trusted source such as Bloomberg, Lexis or Westlaw — let alone a tool funded and hosted by that individual’s own law firm — they can become overly confident about that tool’s capabilities. We’ve seen that our students, unless specifically instructed by us, can be too deferential to the drafting and analysis produced by a legal AI tool.

So, whether in a law clinic or a law firm setting, transactional lawyers will face the dual task of staying up-to-date on potential applications for these tools, without abdicating our professional responsibilities to our clients.

Another related concern presented by these AI tools — and particularly by how law students and junior lawyers use them — relates to the disclosure of confidential client information.

Any law student who has taken a professional responsibility course or spent a semester representing clients in a law clinic understands that a lawyer cannot disclose confidential client information without getting the client’s informed consent. But that same law student may not realize that putting client information into a ChatGPT prompt, for example, may constitute disclosure.

The American Bar Association noted in July 2024 that the extent of this disclosure, and the corresponding requirement to obtain the client’s informed consent, will vary from one AI tool to the next, depending on each tool’s policies and practices.

Client Relationships

While we and our students were using AI this past year, so were our clients. Save for a few technology companies, most of our clients have no particular AI expertise. Accordingly, their AI usage is fairly representative of how small businesses around the U.S. are using AI.

The biggest challenge that we are encountering with our clients’ use of AI is the potential for interference with the attorney-client relationship. As business advisers, we build long-term relationships with clients, and the advice we provide is customized and iterative. For law students who are learning how to represent business clients, one key learning outcome of the clinic is the skill to curate legal advice for a client’s particular circumstances.

For example, at the start of the semester, a new startup client founded by a team of graduate students might ask our team to advise on the appropriate equity allocations for the founding team. We may have several conversations with the clients, learning more about each founder’s role within the company and about the company’s future plans. We might learn that one founder is planning to leave the company after graduation, but the others are planning to stay. This fact would necessarily influence our recommendations about the founders’ equity allocations.

This past year, for the first time, we found that a few clients were — without telling us — feeding legal advice that we had provided to them into AI tools and responding to us, again without telling us, with the AI-generated content.

To the law students’ frustration — and ours — the responses generated by the AI tools invariably took no account of the clients’ particular factual circumstances. So when our clients reacted to our advice, their reactions were completely disconnected from the relationship we had built up with them, and were often incongruous with the conversations we’d had before rendering our advice.

One question is whether this dynamic is unique to, or at least particularly acute in, a context where clients are receiving pro bono legal services. If our clients were paying for legal advice, would they invest more time in digesting and responding to that advice?

Perhaps. But with all of the recent discussion about how generative AI will change how lawyers work, we believe there has been insufficient attention paid to how generative AI is going to affect the lawyer-client relationship in the coming years.

Takeaways

This article just touches on the surface of our use of AI in the clinic, and the opportunities and challenges it presents to transactional lawyers — and new transactional lawyers, in particular.

Our main takeaway after a semester is that legal AI tools are an incremental improvement upon the sophisticated tools available to lawyers already. While some uses may be transformative, many just speed up legal tasks, reduce mistakes and provide a second set of virtual eyes to the drafting process. No doubt there are many uses we have not yet considered, but these early experiences may be illuminating.

Bullying the Fed

Posted on by

Fed Chair Jerome Powell

Central Banking quoted me in Economists Denounce Trump’s ‘Bullying’ of Fed Chair (sign up required). It opens,

Economists have attacked what they regard as US president Donald Trump’s bullying of Federal Reserve chair Jerome Powell, describing it as dangerous for the central bank’s continued independence.

On June 30, Trump posted on his social media platform a copy of a handwritten letter to Powell showing interest rates around the world. In the letter, Trump had written: “Jerome, you are as usual, too late. You have cost the USA a fortune, and continue to do so. You should lower the rate by a lot. Hundreds of billions of dollars being lost. No inflation.”

Along with the note, Trump posted that “Jerome ‘Too Late’ Powell, and his entire Board, should be ashamed of themselves for allowing this to happen to the United States. They have one of the easiest, yet most prestigious, jobs in America, and they have FAILED — And continue to do so”.

He added: “If they were doing their job properly, our Country would be saving Trillions of Dollars in Interest Cost. The Board just sits there and watches, so they are equally to blame. We should be paying 1% Interest, or better!”

On July 1, Powell said the Fed would probably have lowered rates already had it not been for the tariffs and trade policies introduced by the Trump administration.

Ralf Fendel, professor of economics at WHU – Otto Beisheim School of Management in Germany, says Trump’s note bears all the hallmarks of political interference.

“Handwritten personal correspondence is traditionally reserved for heartfelt gratitude or strategic diplomacy, but not for exerting pressure on an independent central bank,” he tells Central Banking. “In resisting such pressure, Mr Powell is upholding the Fed’s institutional credibility and responding appropriately to a macroeconomic environment clouded by trade policy uncertainty and various economic risks.”

Fendel adds that Fed decisions must be guided by economic data and not the demands of the White House.

William English – professor of economics at Yale University, and a former director of the Fed’s monetary affairs division and secretary to the Federal Open Market Committee (FOMC) – says that having a president who is so publicly critical makes the Fed’s job more complicated. “But they have their mandate and will do their best to achieve that,” he says. “We’ll see how it goes!”

Francesco Bianchi, professor of economics and department chair at Johns Hopkins University, says the most recent remarks by Trump represent a turn for the worse.

“Such a confrontational stance cannot be good for central bank independence,” he says. “Powell probably feels that he needs to push back against the pressure and that he has a bit more freedom given that his second term is coming to an end.”

Fed historian Robert Hetzel adds that Trump appears to want to return to a time when the central bank was subservient to the US Treasury.

David Reiss, professor of law at Cornell University, says there is an extensive history of presidents “jawboning” the Fed chair to lower rates. However, he says central banks work better when “insulated from the political exigencies of political leaders”.

“Paradoxically, bullying the central bank can lead to interest rates increasing, as markets demand a higher risk premium as trust in the central bank’s decision-making decreases,” he says. He also concurs with Powell’s assessment that tariffs are inflationary through many channels.

Rent Freezes in NYC

Posted on by

Zohran Mamdani, Democratic Nominee for Mayor of NYC

The New York Times quoted me in Free Buses and Billions in New Taxes. Can Mamdani Achieve His Plans? It reads, in part,

A major pillar of Mr. Mamdani’s economic plan is housing: He wants to build 200,000 units of affordable housing and freeze rent on the city’s nearly one million rent-stabilized apartments.

But to build, he has said the city will have to borrow $70 billion, exceeding its debt limit by some $30 billion. Going over the limit would require state approval.

Freezing rent, on the other hand, is relatively straightforward and has precedent. But there are consequences.

Mayors cannot freeze rent on their own, but they do appoint the nine members on the Rent Guidelines Board, which sets rents on the city’s rent-stabilized units.

David Reiss, who served on the board under Mr. de Blasio, said that before it voted, members generally considered the overall state of housing in the city, including affordability, landlord expenses and economic conditions.

He said that members could decide that affordability was the most important factor and vote to freeze rents, as they did in 2015, 2016 and 2020.

“A rent freeze would meet the needs of a lot of people who are having a hard time keeping up with their rent,” Mr. Reiss said, “but it’s an unsustainable operation.”

Landlords, including those whose buildings have a large majority of rent-stabilized units, are increasingly saying that they are not collecting enough rent to maintain units.

“Are we going to be pushing a distinct portion of the housing market into great distress because their expenses are outstripping their income?” Mr. Reiss said.

Fannie, Freddie and Trump

Posted on by
Profile picture for William J. Pulte

FHFA Director Bill Pulte

Central Banking quoted me in Fannie, Freddie . . . and Donald. It reads, in part,

IIn a client note on May 13, investment management firm Pimco said any privatisation of Fannie and Freddie would be a solution in search of a problem.

“If the GSEs are released but the government remains accountable to come to their rescue, wouldn’t taxpayers ultimately be the biggest loser, once again, by seeing GSE gains privatised but losses socialised?” it said, adding: “Don’t fix what’s not broken.”

David Reiss, professor at Cornell Law School, says Pimco’s view reflects the fact that the mortgage market has been functioning “pretty smoothly” since Fannie and Freddie were nationalised. According to this viewpoint, there is “no need to release them from conservatorship”.

However, Reiss says he does not like to see so much power and influence concentrated in the GSEs, and he believes the private sector would do a better job of evaluating credit risk.

“Some people – mostly investors in Fannie and Freddie securities – think [privatisation] is the right thing to do because the conservatorships were supposed to be temporary and the companies should be returned to private control and investors should be able to get some kind of return on their investments,” he says.

Reiss adds that some members of the Trump administration think privatisation would generate hundreds of billions of dollars in revenue that could be used to help pay down the national debt, offset tax cuts and seed a sovereign wealth fund.

Joe Tracy, senior fellow with think-tank the American Enterprise Institute and a former official with the Federal Reserve banks of New York and Dallas, agrees with Reiss. “The problem is that they are in conservatorship limbo, so the government has effectively nationalised a large segment of mortgage finance,” he says. “This should be carried out by the private sector.”

    *     *     *

Lawrence White, professor at New York University and co-author of Guaranteed to Fail: Fannie Mae, Freddie Mac and the Debacle of Mortgage Finance, says the GSEs are unlikely to become boring unless they are broken down. He believes that if Fannie and Freddie are privatised in their current form, each enterprise will be likely to pose a systemic risk from a financial stability perspective.

“The implication is that their regulator, the Federal Housing Finance Agency [FHFAI, will need to have strong powers of examination and supervision and will need to impose substantial, risk-adjusted capital requirements,” he says.

“It is unclear whether there will be implications for the Fed as lender of last resort, since the Fed’s lending function is currently limited to banks.”

Reiss agrees that the two lenders are systemically important. If they “had to significantly scale back their lending, it would likely cause a crisis in the financial markets”, he says. “If that crisis were not quickly addressed it would cause a crisis in the real economy as well, freezing up credit for new construction and resales.”

Given that the two GSEs issue more than 70% of the outstanding $9 trillion of mortgage-backed securities in the US and, if privatised, would be two of the country’s largest publicly traded companies, the financial stability risks are clear, he says.

Reiss adds that if the privatisations were poorly planned, and if this were priced in by the markets, it would lead to “higher mortgage rates, with all of the knock-on effects that would have”. This, he says, would “increase the magnitude of a financial crisis if the two companies were to report poor financial results down the line”

Reiss’s interpretation of the Fed’s role is different to that of White, and he believes history may end up repeating itself. He says that although the FHFA is Fannie and Freddie’s primary regulator, the Housing and Economic Recovery Act of 2008 requires the Fed to be consulted about any federal government processes related to the companies.

“The Fed may also co-ordinate with other parts of the federal government in responding to a financial crisis, such as purchasing Fannie and Freddie securities, as they did during the financial crisis of 2007-08,” he says. “One could well imagine the Fed playing a similar role in future crises involving Fannie and Freddie.

Cornell’s Entrepreneurship Center Expands in Its First Year

Posted on by

modern office space looking out at new york city skyline

Cornell Law School just posted this about the new Entrepreneurship Law Clinic on Roosevelt Island:

In the summer of 2024, with a transformative gift from Franci J. Blassberg ’75, J.D. ’77, and Joseph L. Rice III, Cornell formally launched a center for entrepreneurship law in New York City. Bridging Cornell Law and Cornell Tech, the Blassberg-Rice Center for Entrepreneurship Law has continued to grow in the months since, establishing a new Entrepreneurship Law Clinic on Roosevelt Island, welcoming its first cohort of J.D. and LL.M. students, and hiring a second faculty member, David Reiss, clinical professor of law and research director, to lead the New York City program.

“We are thrilled to have David on board,” says Celia Bigoness, director of the Blassberg-Rice Center and clinical professor of law, who continues to lead the Entrepreneurship Law Clinic at the Ithaca campus. “This is the first time we’ve been able to offer a clinical experience that’s entirely embedded in the technology ecosystem of Cornell Tech, and there’s been tremendous demand among students and clients for the work that we’re doing.”

The upstate and downstate clinics operate in parallel, with the two halves meeting together throughout the semester to share lessons and progress. In both locations, students represent entrepreneurs in setting up the business entities for their startups, representing them on a range of matters involving commercial contracts, data privacy, employment, equity allocation, founders’ agreements, governance, intellectual property, and real estate.

student working at a computer with New York City in the background

Alex Cho ’25 is working with social entrepreneurs, including one that has released an AI-powered chatbot that helps tenants navigate their relationship with their landlords.

“We’re giving students an exposure to the breadth of knowledge that is key to serving entrepreneurs,” says Reiss, who began teaching in January. “Just as important, we’re spending time on the soft skills that will help students not just understand the law, but understand how to effectively counsel their clients. Every student who passes through these programs will come out with hands-on transactional skills that can best be learned in a clinical setting.”

In Ithaca, seven of Bigoness’ twelve current students are continuing from the fall semester, working on increasingly challenging questions for startups in biomedical engineering, food services, product development, technology, and youth sports. In New York City, where the spring semester’s clients are drawn from Cornell Tech, Weill Cornell Medicine, and the Queens Chamber of Commerce, Reiss’ six students are counseling clients in the early stages of creating startups in climate tech, software, and transportation.

“It’s been a great experience, and I think the thing I have gained the most from it is confidence,” says Maria Hatzisavas, LL.M. ’25, who is attending Cornell Tech in the year between earning her J.D. and beginning her first job in corporate law. “At Notre Dame, I developed as a law student, and here, I’m developing more as a lawyer. I’m learning skills I’ll use throughout my career, and I’m gaining new insights into the practice of law because so many attorneys come in to teach us.”

“As someone who wants to do transactional work but hasn’t had an extensive background in accounting or finance, this clinic has shown me the legal side of business,” adds Kylee Nguyen ’25, whose 3L year in the Ithaca clinic has given her a taste of life as a general counsel. “It’s sharpened my soft skills, taught me how to think in the real world, and helped me make a tangible difference in the lives of my clients. I’m taking everything I’ve learned in this clinic into my practice, and I’m not leaving anything behind.”

“This launch is incredibly exciting. I’m grateful to Celia Bigoness, Franci Blassberg, Joe Rice, Jens Ohlin, Eduardo Peñalver, and Shawn Gavin for their vision and to all involved for the hard work it took to bring this about,” says Beth Lyon, clinical professor of law and associate dean for experiential education and clinical program director.

What Happens if Fannie and Freddie Go Private?

Posted on by
Photo by <a href="https://stockcake.com/i/burglar-at-night_1027750_1000871">Stockcake</a>

AI Generated from StockCake

I was quoted in Fintech Nexus’ Home Invasion: What Happens if Fannie and Freddie Go Private. It reads, in part,

The Trump Administration has telegraphed significant changes to GSE mortgage lenders — with massive implications for the industry

Since his swearing in on March 14 as the fifth Director of the Federal Housing Finance Agency (FHFA), construction mogul William J. Pulte has executed major policy and personnel changes. Among other moves, Pulte has named himself board chair of the Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac, removed 14 of the GSEs’ 25 sitting board members, fired most of the companies’ audit boards, generally slashed headcount, and rescinded several Biden-era oversight-related advisory bulletins.

According to Professor David Reiss of Cornell Law School, a scholar of real estate finance and housing policy, Pulte’s simultaneous leadership of the FHFA in addition to roles at the GSEs, which have been under federal conservatorship since the 2008 financial crisis, is not normal.

“The whole point of regulation is you have somebody who’s overseeing an industry,” he told Fintech Nexus. “This is like the left hand [knowing] what the right hand is doing: You’re overseeing yourself, so it’s … kind of inconsistent with the notion of a supervisory regulator.”

Fintech Nexus contacted the FHFA, requesting that it comment on the impetus behind Pulte’s simultaneous self-appointments to Fannie and Freddie. The FHFA did not respond.

*     *    *

CAPITAL IDEAS

One idea percolating is for the Trump Administration to use Fannie and Freddie as a pool of capital to inject into a sovereign wealth fund. An op-ed in the Financial Times by Stifel CEO Ronald Kruszewski suggested this reconfiguration could provide “continued government backing,” “stabilize investor confidence,” and “pave the way for a $1 trillion sovereign wealth fund by 2040.”

However, in a letter to the editor in the Financial Times, Dini Ajmani, Former Deputy Assistant Secretary of the US Treasury, suggested the idea would fail, as any privatization of the GSEs would require proper capitalization, taxpayer compensation, and adequate confidence of securities investors.

“I believe the difficulty in meeting all three conditions is why [the] status quo has persisted,” Ajmani told Fintech Nexus. “To build capital, Fannie/Freddie must retain earnings, which means the taxpayer is not compensated. If the taxpayer is compensated through dividend payments, private capital will be uninterested because the agencies will be undercapitalized.”

To this end, FHFA Director Pulte may continue to atrophy many forms of GSE oversight as a way to prime the pump: Pre-empting congressional activity by deregulating Fannie and Freddie can accelerate their transition toward open-market frameworks.

The Trump Administration may see it as its only viable short-term  avenue, as many members of Congress are uninterested in bringing Fannie and Freddie out of conservatorship; Senator Elizabeth Warren (D-MA), member of the Senate Committee on Banking, Housing, and Urban Affairs, called the move “Great for billionaires, terrible for hardworking people.”

Should the Trump Administration succeed in its quest, we may see states attempting to fill in the gaps on regulatory accountability, rhyming with blue-state attorneys-general’s litigiousness in the wake of the Consumer Financial Protection Bureau’s de-clawing, though this is unlikely.

“State regulators do not generally play a role similar to the two companies (except to some small extent state Housing Finance Agencies),” Reiss of Cornell Law School said. “I could imagine state agencies trying to increase consumer protection for mortgage borrowers, if the federal regulatory environment changes, but we would have to see how that plays out to understand how the states would respond.”