Thursday, September 25, 2008

The Financial Crisis--A Comment on Lucien Bebchuk and Our Boom Days for Academic Theorizing

The present financial crisis has gotten everyone energized--from the political, to the media to the economic sectors--everyone seems to believe that this is the point of instability in which might be seized for advantage at home or abroad. Academics too sense the upside potential of participating in this market. The first academic out of the gate with a new idea might dominate the field. See Pierre Bourdieu, The Field of Cultural Production (New York: Columbia University Press, 1993).

And, at a critical juncture in the present election cycle, might also leverage the production of an academic consumable across markets to the political markets in ideas. It was with this in mind that I read the excellent twelve page analysis recently circulated by Lucien Bebchuk recently. Lucien Bebchuck, A Plan for Addressing the Financial Crisis, Harvard Law School, National Bureau of Economic Research (Sept. 24, 2008). The paper is worth a careful read, both for its subtlety of its analysis and for the limits of the current frames of analytical reference that tend now to over bind American thinking about the current states of finance.

My purpose in this short discussion is to focus very generally on the later point by looking at the four general suggestions that are at the heart of his proposal. These are, in his own words:
* No overpaying for troubled assets: The Treasury's authority to purchase troubled assets should be limited to doing so at fair market value.
* Addressing undercapitalization problems directly: Because the purchase of troubled assets at fair market value may leave financial firms severely under-capitalized, the Treasury's authority should be expanded to allow purchasing, again at fair market value, new securities issued by financial institutions in need of additional capital.
* Market-based discipline: to ensure that purchases are made at fair market value, the Treasury should conduct them through multi-buyer competitive processes with appropriate incentives.
* Inducing infusion of private capital: to further expand the capital available to the financial sector, and to reduce the use of public funds for this purpose, financial firms should be required or induced to raise capital through right offerings to their existing shareholders.
Bebchuck, supra, Abstract. Let's look at each of these in turn.

The first point (Bebchuk, supra, at 2-3) focuses on two things--the identity of the assets targeted for purchase by a state (or public) entity and the pricing formulas to effectuate those public purchases of private debt. There are a number of issues here that merit some focused attention. It is not clear what assets are troubled. Bebchuk identifies "the presence of “toxic” real-estate paper on the balance sheets." (Bebchuk, supra, at 2). But that is hartdly helpful. The trouble might exist at the level of particular debt instruments--mortgages and other financial instruments evidencing a primary debt obligation. On the other hand, as appeared to be the case with AIG (see Larry Catá Backer, AIG and American Corporatist Socialism, Law at the End of the Day, September 16, 2008), the trouble might be in those entities created to exploit large aggregations of such primary debt instruments. If the trouble is at the level of individual debt instrument, then the nature and complexity of the purchase program becomes tremendously great. There are a lot of loans out there that might be troubled. And the bureaucracy necessary to purchase them would be large, complex and inefficient. The alternative would be block purchases, but then the focus would no longer be on troubled loans but on troubled entities once happy enough to exploit these loans and now less happy about the prospect. If the trouble exists at the entity level, then a different set of interests are involved. At this level of trouble, the better option might be to effect a purchase of profitable assets (and their reorganization in profitable operating companies) or the purchase of the entire portfolio of such entities (effectively through public asset purchase mechanisms at aggregate fair value of the business) for later sale, and provide a streamlined process for resolving the ensuing bankruptcy of those entities, effectively passing the loss (and settling the risk of loss) on those who had bargained for that privilege. Then a focus on troubled loans at the principal debtor level might be more interesting.

Bebchuk, though, focuses on pricing. For that purpose he offers both a carrot and a stick. The stick is the proposition that assets be purchased at fair market value. The carrot is that the fair market value be calculated under presumptions of healthy markets. "Thus, the fair market value that the Treasury would pay would be one that would reflect market outcomes under conditions of adequate liquidity." Id., at 3. So one must conceive of pretend markets for the affectation of purchases for those whose actions produced what is viewed as a distorted market because of the disappearance of capital. But capital has not disappeared--it has migrated someplace else. While the invocation is to the market, the mechanics look elsewhere.

The last point suggests a criticism of the second element of Bebchuk's proposal. (Bebchuk, supra, at 4-8). Bebchuk understands that capital has not disappeared, it is just elswhere. He suggests liquidity through the addition of a power in government to invest in new instruments offered by those firms whose offer of old instruments was critical to the process of market threat. (Id., at 4-5). He sensibly limits the suggestion to still solvent entities (id., at 6); but why subsidize solvent firms directly when they might be able to access capital on their own? Of course, he might argue, that is the problem--inducing capital to fund fund able entities. If so, then the focus should be on inefficient entities. If the problem is entity inefficiency resulting in insolvency (or its near cousins), then selective financing might not prove to be enough to jump start a collective sense of market integrity necessary for liquidity. Thus it may be true that new capital must be injected in order to save the underlying industry. But does that man that new capital must be directed to the old firms? Perhaps permitting new securities to be issued by new firms would make better sense. In that case the United States would serve, in effect, as the "market" for the industry and provide the framework within which such transfers and infusions could occur. That would serve the public purpose--preserving market integrity and capital liquidity--and provide a safe environment in which the individual discipline of the market could be elaborated (on the bodies of those persons and entities that took the risk, enjoyed the rewards and now must absorb the downside of their risk taking strategies). Entities like these are reconstituted all the time. And there are a great number of smart ambitious and able managers at the middle levels both eager enough and talented enough to take over without causing the sort of panic engendered by the idea that bureaucrats and bureaucratic thinking (the American nomenklatura--even if drawn from financial sector cadres) would take over this sector. Now is the perfect time to encourage middle level management LBOs and purchases of viavble operating entities, or the sale of aggregations of profitable debrt to such entities. That is the sort of activity that might require cooperation from the state (the Treasury and the SEC perhaps most importantly) but hardly requires an intrusive oversight by the State. From this perspective the other shoe dropping--Bebchuk's suggestion of bailouts for insolvent firms while encouraging direct investment in solvent ones, is unconvincing--though a better idea than the government's proposal Bebchuk criticizes.

Thus market based discipline is possible (Bebchuk's third point)--not through the ossified mechanics of state takeover and resale to those who engaged in behavior that caused the fuss in the first place but through others. For that purpose, Bebchuk suggests the lesser of two evils--the purchase of the services of financial sector middlemen to effect the government's intervention in (and for the salvation of the integrity of) the market. (Bebchuk, id., at 8-9). He is right, as far as he goes. People whgo know what they are doing, and who can be disciplined by the market for their services are always to be preferred to someone whose incentive structure and experience do not. But so what? On the plus side Bebchuk's ideas might serve to unfreeze the market by paying off its middlemen (an argument that Bebchuk makesmore elegantly, Bebchuk, id., at 10-11). And Bebchuk is right to suggest that shareholders of middlement entities risking insolvency ought to look to their shareholders for more money to avoid a greater risk to their investment. (Bebchuk, supra, at 11, nicely citing Raghuram Rajan, Desperate Times Need the Right Measures,”, September 19, 2008). But the reconfiguration of assets into attractive packages might serve the same ends. The ultimate service performed but the market is a ruthless disciplining of those persons and entities that take risks that provide no reward. Bebchuk, like the current Administration's personages would invert that purpose to subsidize not markets but classes or elements of that sector. And for all the best reasons of course--stability, fairness and preservation of markets and liquidity. But this traditional focus is both unnecessary and unnecessarily inefficient--except in preserving class position. But that is not the purpose of markets--even markets in ideas.

And thus to the heart of the matter, the infusion of capital, Bebchuk's last point. And of course, reduced to its essence this is the only thing that matters if the goal is the preservation of market integrity (and confidence) and its consequence a necessary minimum of liquidity trickling down to all social sectors. It is at this point that everyone turns to the Treasury. And why not?--it is an open pasture richly provisioned and controlled. The right mix of media suggestion, pronouncements of highly paced members of strategic elites (economic, political and academic) and presto! Funds. But there is a lot of money out there that is neither governmental nor necessarily thoroughly public in character. And here I speak of sovereign wealth funds. It seems odd that at this time neither the financial sector elites nor the political elites have thought much about the pool of money represented by those funds. I can think of some reasons--those funds might be too effectively disciplining. A government can be controlled in the methods and exactions it will seek in return for setting things right. If one controls the saving entity one can save oneself with less bother. Who better than Mr. Paulson to use the power of the state to salvage the financial markets (in general) and firms and the entities they spawned (in particular) by infusing inefficient economic actors with funds (one way or another) and preserving the leadership role of those entities and their officers and directors. It is not clear though, that is approach is more or less market distorting.

But sovereign wealth funds, one might suggest, are also governmental (public) and thus more dangerous to both market and state. There is a certain allure to that argument. See Larry Catá Backer,State Subsidies and the Character of the Market Transactions of Sovereigns: The Case of EADS Law at the End of the Day, May 29, 2008. Yet it may be more effective as scare tactic than as reality. It represents a failure to understand an emerging reality of financial markets and the character of its participants, as well as the conflation of public and private activity. I have suggested that when sovereign wealth funds invest, they might best be understood as public entities acting in a private capacity--as market participants rather than as regulators. This is especially the case where such investment occurs outside the territory over which the governments funding these entities can legislate. See, e.g., Larry Catá Backer,Sovereign Wealth Funds And Hungry States: Adjusting the Borders of Public and Sovereign Activity Across Borders, Law at the End of the Day (June 6, 2008). As private investors they are as subject to regulation and the discipline of the markets as any other entity. Now here is a possibility for infusions of capital that are finely disciplinary and not essentially interventionist from a regulatory perspective. But the cost for those who are now responsible for the financial services sector might be too harsh for them to bear. Markets work best when they work to discipline others. That is perverse effect indeed.

Lucien Bebchuk has put his finger on the problem. He has effectively sought to find some sort of middle ground that stays true to some semblance of the market ideology to which Americans elites are meant to subscribe. But ideology must be made palatable to those with the power to effect its policy implications and the systems spawned thereby. And where the discipline of those systems means to discipline those at the top, then one faces the truest test of the system. And that, perhaps, is the most fundamental of the issues to be tackled--will the salvage plan privilege system or individual actors, the market or certain entities.

Bebchuk means to split the baby. He focuses on pricing and efficiency. And he is willing to accept the Treasury's focus on the financial market, writ large, rather than the housing crisis that is said to underlie it. "Because the Treasury’s plan would infuse capital through overpaying for troubled assets, it would impose massive costs on taxpayers and might not channel needed capital to its most valuable uses." Bebchuk, supra., at 12. And he is willing to accept the Treasury's focus on the financial market, writ large, rather than the housing crisis that is said to underlie it. Id., at 12-13. "Thus, additional government intervention in connection with the housing market may be warranted alongside the intervention in the financial markets that has been the focus of this short paper. Whether and what intervention would be warranted is a question that is beyond the scope of the present paper, however, and I plan to consider it in separate work." Government intervention in the housing market--and the difficulties of squaring economic theory with a public policy that has sought to subsidize home ownership for several generations is, as Scarlett O'Hara used to say, a problem for another day.

That approach is sensible from the perspective offering advice. It provides the means both for "staying in the game"--the market for influence and producing highly values commodities in the market for academic discourse and prestige. Perhaps that is the best we can hope for now. But it might have been better had we been able to envision a financial market globally integrated in fact as well as form, in which capital could move freely from public and private funds, in which investment remains private even when undertaken by public entities, in which the focus is on liquidity and integrity of markets rather than on the entities and players currently in control of inefficient business ventures and profitable operating entities. There is an important role for the state in all of this. First as a regulator to protect the integrity of the market and then as a participant to make liquidity real. But the welfare of the current crop of financial entities, their instruments and the middlemen that made their financially irresponsible ventures (in retrospect at least) happen is not the business of the state as either regulator or participant. On the other hand, the welfare of householders and the stability of the real estate market might be. But not as a matter of preserving the advantages of the commodification of mortgage instruments, or their packaging for the benefit of investors, but as a matter of state policy about public welfare. The ultimate problem of the financial crisis--and one that cannot be adequately answered either by the Government's current proposal or Bebchuk's imporvements thereto is that it is ony partially a problem of markets, and more foundationally a problem of social policy. Until both elements of the crisis are unpacked and dealt with properly the crisis will con tinue to morph and the unintended consequences grow.

Wednesday, September 24, 2008

Jiyo to Hanei no Ko: Japan's New Prime Minister Taro Aso

The conservative turn in Japanese politics continues unabated. In a mockery of the American obsession with youth, and the American media's criticism of one of the current crop of presidential contenders for having survived to seventy two, sixty eight year old Taro Aso was elevated to the post of Prime Minister of Japan. Joseph Coleman, Straight-talking conservative elected Japanese PM, Daily Yomiuri Online (from AP sources), September 24, 2008. "In his first news conference as premier, he also vowed to rescue the ruling party from disaster in parliamentary elections. He stacked his Cabinet with fellow right-leaning veterans and pledged to go head-to-head with the resurgent opposition. "I appointed the right people in the right jobs so that we can live up to the people's expectations," Aso said. "We will head into the elections with this lineup, and will have a fair fight."" Id.

Aso is an interesting choice--he is conservative, even by Japanese standards. Aso "served as foreign minister for nearly two years in the Cabinets of former Prime Ministers Junichiro Koizumi and Shinzo Abe" Cabinet picks show Aso's stripes / New prime minister aims to leave mark in diplomatic, economic policies, Yomiuri Shimbun Online, Sept. 25, 2008. He speaks fluent English (id.). He is a Roman Catholic, in a Buddhist and Shinto country. Straight-talking conservative elected Japanese PM, supra. Aso is said to be a populist as well. "Aso has a reputation as a straight-talking conservative with a fighter's instinct: He triumphed Wednesday after a seven-year struggle to become prime minister. Aso has also managed a rare feat among LDP members - he's popular among the young. He's an avid fan of "manga" comic books, and has spent years arguing that Japan should use its pop culture as a diplomatic tool."Straight-talking conservative elected Japanese PM, supra.

One of the more interesting actions taken in the first days of his leadership was to seek the beginnings of an amalgamation of the Finance Ministry and the Financial Services Agency. "
Aso explained he put one minister in charge of both the Finance Ministry and the Financial Services Agency because it was feasible and to bring the nation more in line with other countries." Cabinet picks show Aso's stripes / New prime minister aims to leave mark in diplomatic, economic policies, Yomiuri Shimbun Online, Sept. 25, 2008. This represents a retreat from the Government's institutional reaction to the great bank crisis of the 1990s, a reaction that played well to national stakeholders and the media, all anxious for palpable signs of actions from an ossified state apparatus, but which effectively served little substantive purpose.
Former Prime Minister Ryutaro Hashimoto started splitting the operations of the fiscal and monetary policies under his administrative reform drive in the 1990s, when the Finance Ministry came under criticism over its protective measures for the financial industry. In 1998, the now defunct Financial Supervisory Agency, the current Financial Services Agency, was established to tackle the serious financial crisis after a string of major Japanese banks collapsed. Now the Finance Ministry shoulders fiscal and international monetary policies, while the FSA handles domestic monetary policies. Under the administration of former Prime Minister Junichiro Koizumi, the FSA, led then by Heizo Takenaka, state minister in charge of financial services, set about disposing of nonperforming loans.
Cabinet picks show Aso's stripes / New prime minister aims to leave mark in diplomatic, economic policies, supra. The interesting question will be whether Aso is engaging in more window dressing or if he is preparing to meet the financial crisis as its washes over Japan in the next several weeks. "Japan in August recorded its first trade deficit in seven months, partly because exports to the U.S. suffered their sharpest drop on record, while pricey global oil continued to inflate the country's import bills, the government said Thursday." Takashi Nakamishi, Japan Trade Deficit Feeds Slowdown Fears, The Wall Street Journal Online, Sept. 25, 2008.
"Consumer spending in the U.S., as we have been worried about, is deteriorating" amid the nation's banking and housing-market turmoil, said Kaori Yamato, an economist at Mizuho Research Institute. "Since there's no sign the U.S. economy will pick up soon, exports are likely to keep falling at least until (the end of) the first half of next year. Japan's recession is also likely to persist until then." Id.
The importance of the United States and its consumption habits of course is well known. U.S. Census Bureau, Foreign Trade Statistics, Trade in Goods With Japan. Japan will have to get ready to shore up its banks. The issue will be whether it is seek to save its profitable working entities and the value of underlying performing assets within the financial sector or if he will attempt, like the American President, to protect individuals and entities. on the basis of the ceding of virtually dictatorial powers to the executives and his creatures.

More interesting still, at least from the perspective of the competition for Japan's allegiance between the United States and China, is Jiyu to Hanei no Ko.
"In his diplomatic vision titled "Jiyu to Hanei no Ko" (Arc of Freedom and Prosperity), released while he was foreign minister, Aso wrote of the need to provide aid to countries that share the same values as Japan, such as democracy and market economy. Some pundits who take this viewpoint as an indication of his intention to contain China and Russia wonder how far Aso will follow through on this stance as prime minister."
Cabinet picks show Aso's stripes / New prime minister aims to leave mark in diplomatic, economic policies, supra. This policy formulation, published in book form "in 2007-- "Jiyu to Hanei no Ko" (Arc of Freedom and Prosperity, Gentosha Inc.)--has sold 30,000 copies." Book income lifts earnings of politicians, Daily Yomiuri, July 1, 2008, reprinted in Asiathisweek, Sept. 25, 2008. Book publication has become an important element inelectoral politics in Japan as in the United States, at least in the minds of publishrers and politicians. It was noted, for example, that Aso "published a book three months before the election titled "Totetsumonai Nippon" (Incredible Nippon, Shinchosha Publishing Co., Ltd.). The book has sold 171,000 copies, and is now in its 12th edition." Id. American presidential candidates have also used the form of book publication as a means of elaborating their views for the electorate in a form that seeks to use the legitimizing form of book publication as a cover for political activity. Indeed, such was the view among Japan's media. For example, it was noted that "While serving the key position in Abe's Cabinet, Aso has published three books this year — a move seen as a demonstration of his readiness to become prime minister. One book is about his vision for Japan; another is about his grandfather, the late Prime Minister Shigeru Yoshida." Reiji Yoshida, Is Blunt Speaking Aso Next Act After Abe?, Japan Times, July 27, 2007.

But the ramifications are greater than the simpleminded assessment of tilting toward the United States and away from China. First, the tilting will not affect Japan's pursuit of a fundamentally profitable relationship with China. Recall that Aso participated in the Abe government's overtures ot both China and Russia during its brief year long tenure. See Richard C. Bush III, Abe Foreign Policy: A Good Start But Challenges Ahead, Brookings No. 64:5-8, Winter 2007. The Chinese understand this and did their part to convey their willingness to participate in relations of that sort. ""Premier Wen Jiabao has sent a congratulatory message to Japan's new Prime Minister Taro Aso," Foreign Ministry spokesman Liu Jianchao said in a statement. Stressing that China and Japan were important neighbors, Liu said it was in the fundamental interests of both nations and their citizens to maintain long-term, healthy and steady bilateral ties." China congratulates Japan's Aso on becoming prime minister, People's Daily Online, Sept. 24, 2008. The quoted language and the report suggests both a willingness to continue relations and a warning about any turn in Sino Japanese relations."Sound China-Japan ties will also be of great significance to the peace, stability and prosperity of Asia and the world, the spokesman said. " Id. A few days earlier the top leadership of China had emphasized this point indirectly.
China would deepen economic and trade cooperation and step up strategic and mutually beneficial relations with Japan, Chinese President Hu Jintao said on September 21. "China hopes the two sides would work together to enhance economic and trade cooperation, aiming at realizing mutual benefit and development," Hu told members of a delegation from the Japan-China Association on Economy and Trade (JCAET)."
Chinese president pledges closer economic ties with Japan, News of the Communist Party of China, September 22, 2008.

But Jiyu to Hanei no Ko is likely to have a greater impact on Thailand, Burma, Malaysia, and Korea than it will on China. It would not be unexpected to see a greater push for regional trade ties grounded in a common set of core values. And form a certain perspective the idea makes sense. As much sense, for example, as Brazil's attempts to unite Latin America into a regional trading block to aggregate economic power against the great power concentrations of the United States, China, India, and the E.U. The difficulty for Japan will be to show that Jiyu to Hanei no Ko is different from the Greater East Asian Co-Properity Sphere (大東亜共栄圏 Dai-tō-a Kyōeiken) without a military presence. Too great an emphasis in the wrong direction could backfire with jittery neighbors with long memories and greater flexibility on choosing friends.

And its neighbors might be either made less comfortable or reassured by the way in which Aso handles Japan's increasing willingness to project its military power. Yes, its military power. For there is little to suggest that Japan's participation in global anti-terrorism operations will not aid its military operations in the long run. News reports stated that at his first foreign speech, before the United Nations, "Aso will say the nation plans to continue contributing to U.S.-led antiterrorism operations in and around Afghanistan. He will refrain from promising the continuation of the Maritime Self-Defense Force's Indian Ocean refueling mission to support those efforts, because it is uncertain whether the government can pass a bill to revise the Antiterrorism Law authorizing the MSDF undertaking." Aso to tout antiterrorism policies in U.N. speech, Daily Yomiuri Online, Sept. 25, 2008.

Aso, it seems, has put yet another gloss on Japanese policy that is now almost 200 years old. See Sato Nobujiro, A Secret Strategy for Expansion(宇内混同秘策). Not that there is anything wrong with policies favoring naitonal development and the elaboration of policies that make it possible for states to project power. All states do that, and indeed that was one of the foundational ideas underlying the Japanese approach, though of course couched in the terms of the times. But that history creates substantial transaction costs to Japan in terms of its ability to provide leadership for any sort of East Asian regional trade or political grouping. The same, of course, is true of all great states--the Chinese, for example, mst still be careful in its dealing with Viet-Nam. But Aso is right in the eseence of Jiyu to Hanei no Ko. He is just misdirected. Taking a lesson from his Chinese neighbors, Aso might well seek to project the notions of Jiyo to Hanei no Ko not to Japan's east Asian neighbors, but to those countris with sizeable Japanese expatriot commiunities. If Japan wants to create a system of mutual benefit grounded on Japanese values and trade, it might look to Peru and Brazil before focusing on Thailand and Malaysia. For the Japanese that would make a tremendous amount of sense--reassuring its neighbors of its pacific intent while cobbling together a grouing of states that together would provide advantageous and mutually reinforcing markets for each other's productive capacities. If Japan does not quickly, though, the leading force in this greater economic system might well be China.

Saturday, September 20, 2008

Corporate Global Citizenship

I recently had the privilege of reading an advance copy of a working paper written by Grahame Thompson, to appear as a Copenhagen Business School Working Paper. The following are some observations generated from the insights developed in that paper.

The convergence of public and private law has emerged as one of the great legal issues of the 21st century. (Backer 2008c). It touches everything from the regulation of state activity, to the character and effect of the activities of non-state actors—and particularly those amalgamations of authority organized as juridically distinct persons. At its core, it implicates issues of the character and nature of the state, the state system, and the division of power—political, economic, religious, social and cultural—among a number of actors of which the state is only one. Though for the moment the state—and legitimate amalgamations of political authority—remains the dominant expression of coercive power in the organization of political governance, its role within emerging systems of governance both above and below the state level have been changing dramatically. Economic entities are increasingly seen as state-like actors requiring regulation at a transnational level (Backer 2006a; Backer 2008b), states seek to participate in domestic and foreign markets as economic rather than as political actors (Backer 2008c). Large multinational enterprises are increasingly able to self regulate (Backer 2007). Simultaneously, the nature of the legal order among states and the principles within which states may constitute themselves have become increasingly regularized—the community of nations has begun to move from an acceptance of constitution as a means of organizing political communities to constitutionalism as a system for the regulation of the constitution of communities with political authority. (Backer 2008). In this context, law has become unmoored and the old discussions about the nature of law and its relationship to the state have reemerged in new form. (Backer 2008a).

It is with this in mind that I read Grahame Thompson’s excellent article, “Corporate Citizenship: Corporate Activity in Context,” CBP Working Paper No. – (August 2008). Thompson interrogates the idea of “corporate citizenship” both as trope and in the context of emerging and competing frameworks of governance above and beyond the state. For this purpose Thompson nicely weaves together complex strands of developing theories of private and public governance, of transnational institutionalism and of the juridicalization and constitutionalization of public and private law beyond the state. Drawing together insights from economic and political theory, he suggests both convergence—one can no longer speak of separate spheres of closed governance sub-systems communicating through law, and fracture as economic-political power is diffused among a larger group of actors. It from the mechanics and consequences of this convergence and fracture that Thompson extracts “several unpalatable implications and dilemmas that will not be easy to resolve.” (Thompson August 2008, 2).

Thompson starts with an analysis of the phenomenon of “corporate citizenship.” (Id., 2-9). This is a significantly under theorized area with significant legal implications. Thompson’s great contribution here is to interrogate the relationship between corporate “citizenship” and corporate “social responsibility.” He is right to suggest that “corporate citizenship is a distinct category with it own modalities and dynamic.” (Id., 1). Corporate citizenship is a political stance. It is born of a sense of vulnerability “of their general business position.” (Id., 7). The threat is not private but a consequence of the power of large aggregations (public and private) of investment wealth. (Id., 6). In effect, Thompson suggests, the perception that even the largest economic actors cannot escape commodification at the hands of other forms of economic actors whose objective is to buy and sell such companies drives them to seek a reconstitution of their organization—from private to public. And in that re-characterization they seek protection against their commodification for the noblest purposes: the protection of markets for the “little people,” transparency, and the robust supervision of liquid financial markets that only the state can regulate. (Id., 6-7). No longer merely an amalgamation of economic power, corporations as citizens suggest the public purpose of such entities. And the attainment of the public objectives of such entities might well serve as a break on the power of markets to discipline these entities by privileging their non-public performance. For this purpose, they might well be willing to trade one sort of scrutiny—that of markets (with their perils)—for a “different—and possibly intrusive—kind of scrutiny.” (Id., 7). But the benefits may be worth the burden. Thompson identifies several: enhanced social and political power as “partners” of states, and expanded marketing opportunities. (Id.).

Still, corporate citizenship as a concept is an elite fabrication. Few, but important companies are furthering the notion. (Id., 6). But which companies are likely to wish to advance notions of citizenship? Here the relationship between corporate social responsibility and corporate citizenship is made clearer. Thompson develops a framework for understanding the development of a taste for corporate citizenship based on two factors: (1) a belief that social, environmental and ethical values are central to their business activities and (2) a belief that those values enhance their financial position. (Id., 3-6). And it is within this framework that the relationship he posits between corporate citizenship and corporate social responsibility is nicely extracted: corporate social responsibility is an aggregate of those acceptable and legitimating actions that together constitute the expression of corporate citizenship. They are the acts that in the aggregate constitute and legitimate claims to citizenship. (Id., 9). “It is a voluntary activity, associated with their behavior in taking responsibility for the sv & ev [social, environmental and ethical] aspects of their business operations.” (Id.).

And in this insight between act and characterization is revealed the lubricant—wealth maximization. Thompson illustrates these relationships between the importance of corporate social responsibility to economic actors and those actors’ desire to advance the political idea of corporate citizenship. Notions of economic welfare maximization inform the framework. Companies who for reasons of their own values or a sense of their financial best interests are invested in acts of corporate social responsibility are also most likely to embrace corporate citizenship as important for reasons that are either values based or promise financial gain. (Id., 4-6 & Figures 1-2).

If corporate social responsibility serves as the legitimating actions of citizenship, then what of the legal and political consequences of that citizenship in power and institutional senses? Thompson devotes the second half of his study to those issues. (Id., 9-18). Here Thompson suggests that changes in the legal and institutional framework of governance beyond the state have created a significant space within which the idea of corporate citizenship might assert public (political/governance) power. First, he argues that international law, in general, and private international laws in particular (identified as private, customary and administrative law) have increased in importance and relevance to even everyday activity. “In the global context of commercial activity it is mainly private law and administrative law that are brought into focus.” (Id., 10). He then suggests that this increase in pertinence is shored up critically by a drive to constitutionalize the international arena. He suggests that substantive constitutionalism (Sozialstaat notions), has become the gateway for both process constitutionalism (Rechtsstaat notions) and the boundaries of the power ceded to the state apparatus, and that “this pattern of expectations is mirrored in a whole host of other institutional contexts that deal with social governance: witness the UN system as a conspicuous example.” (Id., 11).

Into the mix of internationalization and constitutionalization, Thompson suggests an additional three trends. The first is the growth of governance through heretofore private law mechanisms. The second is juridicalization of governance beyond the state. The third is the uncontrolled character of constitutionalization and the creation of effective global communities. (Id., 11-12). This last trend appears critical to the analysis.

It is within this dynamic process of change in both law and state that corporations find both a space for their reconstitution as actor rather than as object. Thompson suggests that “companies are caught up in these wider processes: the idea of corporate citizenship and global corporate citizenship finds a convenient home amongst these linked processes.” Id., 12). We can now better appreciate Thompson’s central argument:

That companies are tapping into this trend. They want to have their rights and obligations more clearly articulated and formally recognized like everyone else. They want recognition for the civic duties and social obligations being thrust upon them or for which they are voluntarily taking responsibility. They want to become more openly political, to operate more transparently as public actors and be recognized as such. They are tentatively moving in this direction, quietly exploring the implications of claims to the capacity of citizenship that these moves entail, but at the same time opening themselves to a different type of scrutiny.

(Id., 11).

In the face of these movements, what becomes critical to Thompson is an understanding of the possibilities of constitutionalism as a factor in the construction of the character of corporate citizenship. Thompson looks to four models: neo-liberal, autopoietic, pragmatic-customary, and governance. (Id., 13-17). Thompson perhaps gives short shrift to the neo-liberal model. He suggests greater value in both the autopoietic and governance models. But both also suffer what for Thompson are critical defects. The cultural polycentrism, functional differentiation, diffusion and overlapping systemic communication of networked systems horizontally as well as vertically deployed—that is, its polycontextualism—is dismissed as “little more than an interestingly imaginative flight of fancy.” (Id., 14). It might even serve as a cover for an internationalization of Anglo-American privatizing institutionalization of informal networks of law. And that criticism is closely tied to the defects of the last model. Governance models suffers a lack of verticality; a defect that suggests a criticism of the vacuum at the center of the European Union, form which this model is said to be drawn. Thompson asks, “how do we ensure at least some elementary conformity to the RoL in a system where there is no competent authority with the means to enforce whatever ‘administrative law’ there may be in the making?” (Id., 17).

This leaves the third model. Thompson appears to favor this model, said to be grounded in the realities of British constitutionalism. The model has appeal because it is not grounded in a catechism—its theoretics are antitheoretical. And it is grounded in the will of the subject populations as memorialized by those institutions charged with guarding the legitimacy of government. (Id., at 15). For Thompson, British constitutionalism

is very much like the international quasi-constitutional process discussed so far: it is an assemblage of practices rather than a set of fundamental laws; it is a political constitution, based on an evolving political compromise, rather than a legal constitutional settlement based upon a firm written document; it involves a combination and coordination of public and private rule making designed so as to preserve both the social autonomy and public interest; it represents a structural coupling between diverse and fragmented social discourses.” (Id., 15).

Its focus on rule of law is important as a grounding principle of any international legal or institutional order. (Id.). Its Sozialstaat and Rechtsstaat principles, as guarded by the governance elites are assured by adherence to the famous Diplock Principles (proportionality, reasonableness, process fairness and due process). (Id., 16). Thompson suggest that these principles “could offer an effective set of criteria to be imported into the arena of quasi-constitutionalization so as to open up a discussion of the legitimacy of that rule making and power distribution system.” (Id.).

And thus the problem for Thompson. It is not clear that this third way is going to have a chance at contributing strongly to the construction of the new international order—and to discipline the place of economic actors within it. Thompson states: “”The RoL is effectively being given away and there seems to be little that can be done to stop it.” (Id., 17). Thompson fears the privileging of process—what he calls rule by law—over basic substantive government limiting principles (rule of law). Thus for him the problem: “how do we ensure at least some elementary conformity to the RoL in a system where there is no competent authority with the means to enforce whatever ‘administrative law’ there may be in the making.” (Id., 17).

Legitimacy, if it comes at all, might be possible through the importation of something like the Diplock Principles. (Id., 17). Thompson summarizes the resulting potential families of potentially legitimate global governance into four types falling within a matrix , one axis of which includes types of democracy (from popular top Constitutional/Republican), and along the other axis of which include the character of institutionalized government (from representative to governmental). (Id.). Thompson’s personal favorite—representative, constitutional/republican governance of a type characterized by intergovernmentalism and multilateralism, like the World Trade Organization. (Id., 18). “Unfortunately, this is the poor cousin of governance models in the debate about ‘global governance’, because it is thought increasingly redundant in an age of transnational, transterritorial and transformative relationships.” (Id.). And worse, the constitutionalist context in which these discussions are had are likely to remain chaotic. “This might make it a durable disorder of sorts (rather than a non-durable disorder—a decidedly uncomfortable prospect.”). (Id., 18-19). Within this durable disorder, there will be a place for corporate citizens, but its scope and character remain unknowable for the moment. And perhaps worse, what space is obtained shall be taken by corporate citizens rather than received.

In this essay Thompson is at his best in unpacking concepts of corporate citizenship from those of corporate social responsibility and in developing a conceptual framework from which to theorize this notion of citizenship as a political rather than an economic phenomenon. It is clear that corporate social responsibility is better conceived as action rather than as status. It is also right to believe that corporate action ought to have grounding in status concerns. That focus on status concerns was at the heart of the great debate between Adolph Berle (1931) and E. Merrick Dodd (1932) over the nature of the corporation. (Dallas 1988, 73-77). Social responsibility has at least been subliminally understood as a manifestation of the underlying debate about status and the nature of corporations as economic political or social actors, and the appropriate mix of the three. (Backer 2006a). The relationship between corporate citizenship and corporate social responsibility nicely demonstrates the difficulties of miscausation in analysis. (Nietzsche 1972 (1889), 492- 501). For example, Thompson classifies corporate taste for citizenship as a function of a set of values and of financial gain. Yet corporate values reflect the values of the greater society, and values based choices targeting financial gain also suggests a proxy for such values. Where such a strong nexus exists, then both should reflect each other—values will shape economic choice. (Backer 2007; Backer January 12, 2008). As such, the taste for corporate social responsibility as a manifestation of a taste for corporate citizenship among corporations may in turn reflect similar tastes within the non-economic elites, or at least within the communities of investors and consumers. It is for that reason, for example, that I have suggested that these actors sometimes form closed communities with significant governance power. (Backer 2007). Each affects the others’ tastes for values and conduct that in welfare maximizing in the context of those shared values.

Additionally, miscausation might affect the discussion of the claims for the benefits of global citizenship discourse as well. Thus, for example, are the rebranding potentialities of corporate citizenship claims, as Thompson suggests, an explanation of the reasons for the development of a taste for corporate citizenship because of its economic effects (and thus another proxy for corporate social responsibility) or because of its political benefits (the recasting of brand loyalty into something closer to political patriotism. There is a history of the latter that is worth deeper interrogation. For example, the American automobile manufacturers effort to induce Americans to buy American cars from the 1970s seems to implicate both economic and political elements. And the response—the immigration of foreign manufacturers to the United States—suggests the difficulties of politically based branding in an age of free movement of capital and globalization.

Indeed, the discussion of the rationale for corporate citizenship is important and insightful. It’s greatest contribution is the drawing of links between economic and political behavior. (Roe 2003). In one sense, Thompson is suggesting that the push to corporate citizenship is the ultimate defensive tactic for public corporations. It essentially represents a means of end running the elaborate system of regulation for sales of control that have been created in market economies like those of the United States (cf. Williams Act) and the European Union. This is a powerful insight that deserves careful development. Equally interesting is the discussion of market differentiation for money that has great political consequences. Thompson is right to point out the differences between liquid markets and markets based on private equity financing. It would have been useful to elaborate on the suggestion that the latter has political consequences for democratic and open governance. This is particularly important in the context of sovereign wealth investors, whose power conflates public and private welfare maximization modalities that may have implications for governance. (Backer 2008c).

Lastly, the relationship between corporate social responsibility and corporate citizenship concepts suggest a more complex relationship between acts and status citizenship. As I read it, the recharacterization of corporate social responsibility as the aggregate of those acts that legitimate corporate claims to citizenship status were compelling. But it did not necessarily suggest the second order ‘acts citizenship’ Thompson posits. Instead, it suggested to me a basis for status citizenship the way that voting and military service suggest the acts necessary to legitimate the status citizenship of individuals. Again miscausation rears it head. Are corporations citizens because they act within the legitimating parameters of corporate social responsibility, or do they act within those parameters because of their citizenship status? It seems to me that either is plausible, but the differences are significant. Yet neither detracts from the crucial distinction between acts of corporate social responsibility and the condition of citizenship.

And thus, I do not believe, as do Thompson and Crane et al. (2008), that companies claim citizenship on the basis of their acts and that such an ‘act-citizenship’ context essentially limits the character of the citizenship available to corporations. Rather, it is possible to suggest that, at the international level, corporations have begun to define the scope and nature of their citizenship rights as grounded in the basic principle of free movement of capital. (Backer 2006b). As a consequence the citizenship status is not downward looking (that is, to an accumulation of rights within a particular host polity) but upward looking (to the rights of public organizational status at a supra national level, where states and other public actors all interact in a more horizontal plane). Thus, the citizenship that is at the heart of Thompson’s paper might be better understood as both status oriented and political, rather than directly economic and grounded in the constant production of certain acts (corporate social responsibility). If that is so, a richer and more complex analysis follows. That analysis suggests the creation of a networked space above the state level in which a variety of actors may exercise public and private power to the extent of their limited competences. For corporations, of course, this would have extensive welfare maximizing effects—usually translatable into economic terms. Thus the value of corporate citizenship at the international level is neither dependent on acts (miscausation) nor essentially economic. Rather, in a politically reshaped global governance system above the state, corporations might seek to assert citizenship as a means of legitimating their right to interact with other juridical persons on similar terms. Might state corporations be given rights to enter into treaties? Are these entities corporations? (Backer July 30, 2008). Does corporate citizenship require or permit particular kinds of scrutiny? (Backer 2008b) These are some of the core questions that will require substantial debate in the coming decades.

As such, when the discussion turned to the constitutionalization portion of the paper, I had hoped for an elaboration of citizenship and the possibilities of its naturalization (or regulation) within the competing constitutionalizing frameworks currently advanced for understanding the rising shape of global governance. (cf. Backer 2004). Thompson did an excellent job of setting the stage. I would have profited from an elaboration of the constitutionalization of international global governance within the corporate citizenship debate.

Constitutionalization is itself a tricky issue. In its form of constitutionalism, it reflects a wide range of understanding that touch on both state construction and the relationship between states, the community of nations, and the supra national system (to the extent such may in turn be constituted). (Backer July 22, 2008). It also implicates powerful substantive alternatives. (Backer 2008). But corporate actors unsettle the usual framework within which constitutionalism is discussed. It adds a critical additional element that is only slowly being absorbed at the level of the nation state. For example, Bolivia’s recent effort to turn ethnic collectives into constitutional citizens is a case in point. (Backer December 9, 2007). But what of economic collectives? Religious collectives? That addition to the mix of citizens subject to the domestic dynamics of constitutionalism compounds the difficulties of considering the corporation as a subject (citizen) of international law. In a sense, then, within constitutionalist discourse, issues of corporate citizenship exist on two levels—first at the domestic level and dealing with the social and political position of the corporation within the polity; second at the international level and dealing with the issue of the public or private status of the entity. It is one thing to suggest domestic corporate citizenship for purposes of domestic policy, it is quite another to suggest corporate citizenship for purposes of international norm making, responsibility and the like.

Moreover, the parallels between the mechanics of an elaboration of corporate citizenship, and that of the elaboration of emerging principles of international governance might be usefully explored here. Thus, for example, it should not be surprising that the development of corporate citizenship principles is an elite affair. It should be even less surprising that elites might shape the concepts to maximize their own idiosyncratic welfare. And it is no surprise at all that thus benchmarked, the concept should have a strong effect (eventually on the rest of the community). Similar patterns apply in the construction of rules of political community. Thus, for example, it might be worth exploring the ways in which the corporate citizenship conversation, like the globalization conversation that preceded it, is essentially a Western and elite conversation in which European and American states and their corporations will play a disproportionately important role. Indeed, it might be possible to suggest that, like international law, corporate citizenship and social responsibility are effectively a western conversation with global consequences. (Backer May 28, 2008).

Like Thompson, I am drawn to the ancient customary law system represented by British constitutionalism. It suggests, as applied to the international plane, a possibility for an open weave governance that might well permit all sorts of juridical constituted persons—ethnic groups (the Welsh for instance), economic collectives and individuals—to participate in the construction of a pragmatic set of constitutional norms. I wonder, though, whether the Diplock Principles that Thompson advances are also something of a miscausation. It is not clear whether those principles work because they preserve the legitimacy of the values underlying the system, or that they work because they assume the adherence to those underlying principles as immutable, which are then applied. And indeed, I wonder whether the description of British constitutionalism doesn’t begin to sound like the sort of networked spaces within which polycentric and polycontextual law is not now being framed—all within the boundaries of global competence.

As such, it might be possible to suggest that what appears to be emerging on the global stage is “the construction of an amalgamated community based on a set of commonality from which political union is possible, while supporting subsystems of communal organization operating within tolerable levels of difference. This last characterization implicates the autopoietic approach to understanding human collective systems. Autopoiesis refers to systems, and particular legal and social systems, which produce and reproduce their own elements by the interaction of their elements. (Teubner 1987, 3; Luhmann 1989, 136).

“Social systems cannot exist in splendid isolation from their environment. This point is conceded even by ardent proponents of regime specialization. . . . Similarly, legal subsystems coexisting in isolation from the remaining bulk of international law are inconceivable. There will always be some degree of interaction, at least at the level of interpretation.” (Simma & Pulkowski 2006, 492).

Thus, the system suggests the notion of structural coupling from autopoiesis. (Luhmann,1992; Teubner 1998). Law serves as both communicative vehicle and as a system in its own right as it both communicates and serves as the means to communication, the tight and loose coupling between law and its social context in the interactions between legal and social systems. At the same time it suggests law as detached from political as well as economic collectives, even within common law based constitutional theory. (Backer 2008a).

Moreover, rule of law need not necessarily have a strictly public law context to be effective. I have sought to show the development of substantive rule of law based governance principles within the supply chain governance organization of large multinational corporations. (Backer 2007). Thompson prefers intergovernmentalism to other forms of engagement with global constitutionalization in general, and by implication with the problem of corporate citizenship in particular. Intergovernmentalism suggests the continued privileging of politically constituted states, even in a world in which large economic actors might be treated as invested with a public character (and consequentially vested with public power at the supra national level). Were states to be constituted as strictly political entities, then such a privileging might be plausible. But it is clear now that states are as strictly political and regulatory as corporations are strictly economic and participatory entities. (Backer 2008c).

Just as lawmaking might have become unmoored from the state, the state has itself become unmoored. And so, to my mind, the issue of corporate citizenship serves as a proxy for the equally important converse issue—that of the private rights of states as participants in global markets. At the international level, states and other collectives might well have to meet more as equals, even as they interact within vertical hierarchies in particular contexts. But even those localized hierarchies are now unstable. Corporations negotiate “agreements” with small states; nations negotiate treaties. Large corporations can coerce small states in ways that mimic the ways in which larger states can do the same to smaller and more vulnerable ones. States and corporations are now capable of deploying forces in the field—sometimes states hire corporations that serve as mercenary armies for hire. The clear lines of public and private authority, and even the once clear lines of its Marxist Leninist opposite, have become blurred. (Backer 2006). In that context, constitutionalism and the constitutionalization of governance have become more complex concepts. More importantly, the range and capacity of players has substantially increased as well. Thompson has produced an excellent analysis of the contribution of corporate public ambitions to this mix. This paper deserves careful and thoughtful attention.

Reference List

Larry Catá Backer, On the Convergence of State and Corporation in a Post Stalinist Russia: The Russian State Corporation, Law at the End of the Day, July 30, 20908, available

----------, Theocratic Constitutionalism Part II: From Constitution to Constitutionalism, Law at the End of the Day, July 22, 2008, available

----------, Neo Colonialism in Civil Society Clothing or the Rise of Human Dignity as the First Supra National Principle of International Law?, Law at the End of the Day, May 13, 2008 available

----------, Values Economics and Theology: The Contribution of Catholic Social Thought and its Implications for Legal Regulatory Systems, Law at the End of the Day, January 12, 2008, available

----------, God(s) Over Constitutions: International and Religious Transnational Constitutionalism in the 21st Century, 27 Mississippi College Law Review 11 (2008).

----------, Symposium: Law and the State in the Transnational Legal Order: Reifying Law: Understanding Law Beyond the State, 26(3) Penn State International Law Review 521 (2008a).

----------, From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations, 39 GEORGETOWN JOURNAL OF INTERNATIONAL LAW – (forthcoming 2008b).

----------, The Private Law of Public Law: Public Authorities As Shareholders, Golden Shares, Sovereign Wealth Funds, And The Public Law Element In Private Choice of Law, 82(5) TULANE LAW REVIEW 1801 (2008c).

----------, Economic Globalization and the Rise of Efficient Systems of Global Private Law Making: Wal-Mart as Global Legislator, 39(4) University of Connecticut Law Review 1739 (2007).

----------, Democracy Part VII: Constitutionalism and Indigenous Peoples in the Bolivian Constitution, Law at the End of the Day, December 9, 2007, available

----------, The Rule of Law, The Chinese Communist Party, and Ideological Campaigns: Sange Daibiao (the “Three Represents”), Socialist Rule of Law, and Modern Chinese Constitutionalism, 16(1) Journal of Transnational Law & Contemporary Problems 29 (2006).

Multinational Corporations, Transnational Law: The United Nation’s Norms on the Responsibilities of Transnational Corporations as a Harbinger of Corporate Social Responsibility as International Law, 37 COLUMBIA HUMAN RIGHTS LAW REVIEW 287 (2006a).

----------, The Autonomous Global Corporation: On the Role of Organizational Law Beyond Asset Partitioning and Legal Personality, 41(4) TULSA LAW JOURNAL 541 (2006b).

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Adolf A. Berle, Jr., Corporate Powers as Powers in Trust, 44 Harv. L. Rev. 1049 (1931).

A. Crane, et al., Corporations and Citizenship: Business, Responsibility and Society (Cambridge: Cambridge University Press, 2008).

Lynne L. Dallas, Two Models of Corporate Governance: Beyond Berle and Means, 22 Mich. J. L. Reform 19, 73-77 (1988).

E. Merrick Dodd, For Whom are Corporate Managers Trustees?, 45 Harv. L. Rev. 1145 (1932).

Nikolas Luhmann, ‘Law as a Social System’ 83 Nw. U. L. Rev. 136 (1989).

----------, Operational Closure and Structural Coupling: The Differentiation of the Legal System, 13 CARDOZO L. REV. 1419 (1992).

Friedrich Nietzsche, Twilight of the Idols, in THE PORTABLE NIETZSCHE 464 (Walter Kaufmann, trans., Viking Press, 1972) (DIE GÖTTER-DÄMMERUNG, 1889).

Mark J. Roe, Political Determinants of Corporate Governance: Political Context, Corporate Impact (2003).

Bruno Simma and Dirk Pulkowski, Of Planets and the Universe: Self-Contained Regimes in International Law, 17 EUR. J. INT'L L. 483, 492 (2006).

Gunther Tuebner, ‘Introduction to Autopoietic Law’, in G. Tuebner (ed.), Autopoietic Law: A New Approach to Law and Society 1 (1987).

----------, Gunther Teubner, Legal Irritants: Good Faith in British Law or How Unifying Law Ends Up in New Divergencies, 61(1) MODERN LAW REV. 11 (1998).

Tuesday, September 16, 2008

AIG and American Corporatist Socialism

By now the dust has settled on the "salvation" of the corporation American International Group, AIG, the multinational insurance giant through the last minute intervention of the American government, which generously opened its coffers for the benefit of this private multinational entity.

There has been much commentary about the necessity of the rescue, much of it focusing on the form of a government issued quickie (no review of credit worthiness, no market based pricing of loan, extremely favorable terms) non-market based loan. Much additional focus has been either to shill justification (salvation of the free market private economic system by these sorts of selective interventions), or criticism (free markets and reasonable behavior within such markets can only be disciplined efficiently only if entities are required to bear the downside of risk to the same extent that they are able to reap the upside rewards). And it is true, to some extent, that there appears to be emerging a good old fashioned corporatist socialist variant of American free enterprise--it seems that for some entities (selected by federal regulators based on factors that are hardly transparent) free market ideology means that they are encouraged to aggressively work in the market to acquire the rewards of risk but are heavily subsidized against loss form those risks. And the American people, though they do not participate in the rewards of free enterprise behavior, will bear the expense of that behavior on the downside. The irony, of course, is that the very people who have transferred wealth to the entity in the form of revenues now also transfer wealth (in the form of taxes) to support the same entities. This sort of system of double revenue sources mimics the much hated system of double corporate taxation in a perverse way.

Indeed, there appears to be something to the criticism of the loan. And AIG itslef supplies the argument. Consider the purpose, context and effect of the loan in AIG's own words:

Addresses Liquidity Issues and Policyholder Concerns

NEW YORK--Sept. 16, 2008--The Board of Directors of American International Group, Inc. (NYSE:AIG) issued the following statement in response to today's announcement by the Federal Reserve Board that the Federal Reserve Bank of New York is providing a two-year, $85 billion secured revolving credit facility to AIG that will ensure the company can meet its liquidity needs:

"The AIG Board has approved this transaction based on its determination that this is the best alternative for all of AIG's constituencies, including policyholders, customers, creditors, counterparties, employees and shareholders. AIG is a solid company with over $1 trillion in assets and substantial equity, but it has been recently experiencing serious liquidity issues. We believe the loan, which is backed by profitable, well-capitalized operating subsidiaries with substantial value, will protect all AIG policyholders, address rating agency concerns and give AIG the time necessary to conduct asset sales on an orderly basis. We expect that the proceeds of these sales will be sufficient to repay the loan in full and enable AIG's businesses to continue as substantial participants in their respective markets. In return for providing this essential support, American taxpayers will receive a substantial majority ownership interest in AIG.

"We commend the Federal Reserve and the Treasury Department for taking this decisive action to address AIG's liquidity needs and broader financial market concerns. We thank them for their leadership during this critical time for the global financial markets. We also thank Governor Paterson, Commissioner Dinallo, Commissioner Ario, the other state Commissioners, and the Office of Thrift Supervision for their willingness to assist AIG.

"Policyholders of AIG companies around the world can rest assured that AIG's commitments will continue to be honored."

It should be noted that the remarks made in this press release may contain projections concerning financial information and statements concerning future economic performance and events, plans and objectives relating to management, operations, products and services, and assumptions underlying these projections and statements. It is possible that AIG's actual results and financial condition may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and statements. Factors that could cause AIG's actual results to differ, possibly materially, from those in the specific projections and statements are discussed in Item 1A. Risk Factors of AIG's Annual Report on Form 10-K for the year ended December 31, 2007, and in Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations of AIG's Quarterly Report on Form 10-Q for the period ended June 30, 2008. AIG is not under any obligation (and expressly disclaims any such obligations) to update or alter its projections and other statements whether as a result of new information, future events or otherwise.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

Press Release, AIG Statement on Announcement by the Federal Reserve Boardof $85 Billion Secured Revolving Credit Facility, Sept. 16, 2008. From AIG's perspective, the loan was perfectly reasonable given the company's financial condition in the long term as they see it. And indeed there has been a suggestion that AIG's problems might be more one of credit rating agency mismanagement than of the actual financial condition and credit worthiness of the entity. See Walden Siew, Swift Cuts on AIG Signal Wave of Downgrades Ahead, Reuters, Sept. 19, 2008 ("Credit rating agencies, criticized for moving too slowly in cutting ratings on Wall Street firms and the complex instruments they devised, are now accused of acting too quickly. As the credit crisis enters a new phase, the pendulum has swung too far back, critics argue. The agencies are still missing the mark, only now they are too aggressive, adding to market volatility, or changing their views within days or weeks."). See generally Larry Catá Bacer, Global Panopticism: States, Corporations and the Governance Effects of Monitoring Regimes, Indiana Journal of Global Legal Studies, Vol. 15, 2007; Larry Catá Backer, Surveillance and Control: Internal, External and Governmental Monitoring of Corporate Insiders After Sarbanes-Oxley, 2004 MICHIGAN STATE DCL LAW REVIEW 327 (2004).

On the other hand, the credit rating agency problem is one endemic to the industry as a whole, and it is one well known to borrowers as big and as sophisicated as AIG. More importantly, however, was the reminder by the board of its slew of profitable and well run operating subsidiaries. Under classical free market theory, as the AIG Board ought to well know, where a sloppily managed conglomerate creates inefficiency and drag on profitability at the top, to the point of market abandonment, a company fails. But failure does not mean collapse. In the case of companies like AIG it means that within bankruptcy the company is reorganized--and the "profitable, well-capitalized operating subsidiaries with substantial value" continue operatng--either sold to other concerns or made independent. As long as the operating entities--the real source of wealth creation, arepreserved and reorganized on more efficient bases, the idea of collapse appears overstated. It is true that the system of large inefficient conglomerates that do not pay sufficient attention to their profitable operating entities might end, and the careers of those who have extracted wealth operating those entities might end as well. But that is supposed to be the ultimate disciplinary vehicle of the free market system.

But instead, AIG suggests a free market nomenklartura system in which discipline is theoretical and inapplicable to either the largest state supported concerns or those who run them (into the ground) playing by the rules that served them weell during the "good times." Thus, for example, again focusing on AIG, the only governance effect of the collapse and governmental save was a cosmetic reshuffling of the controlling organs. In the words of AIG:

NEW YORK--Sept. 18, 2008--American International Group, Inc. (AIG) today announced that its Board of Directors has elected Edward M. Liddy Chairman and Chief Executive Officer. Mr. Liddy, 62, succeeds Robert B. Willumstad. Stephen F. Bollenbach, who was named lead independent director in June 2008, continues in that role.

Mr. Liddy joined the private equity firm of Clayton, Dubilier & Rice, Inc. this year after serving as Chairman of The Allstate Corporation since January 2007. Prior to that, he was Allstate Chairman and Chief Executive Officer from 1999 until 2006 and President and Chief Operating Officer from 1994 until 1998. He led the initial public offering and 1995 spin-off of Allstate from Sears, Roebuck and Co. At Sears, Mr. Liddy served as Senior Vice President and Chief Financial Officer and as Senior Vice President-Operating. Prior to that, Mr. Liddy was Chief Financial Officer of G. D. Searle & Co. Mr. Liddy is Chairman Emeritus of Northwestern Memorial Hospital and serves on the boards of Northwestern University and the Museum of Science and Industry. He is a Life Trustee and former national Chairman of the Boys & Girls Clubs of America. He holds a B.A. from Catholic University of America and an M.B.A. from George Washington University.

American International Group, Inc. (AIG), a world leader in insurance and financial services, is the leading international insurance organization with operations in more than 130 countries and jurisdictions. AIG companies serve commercial, institutional and individual customers through the most extensive worldwide property-casualty and life insurance networks of any insurer. In addition, AIG companies are leading providers of retirement services, financial services and asset management around the world. AIG's common stock is listed on the New York Stock Exchange, as well as the stock exchanges in Ireland and Tokyo.

Press Release, AIG Elects Edward M. Liddy Chairman and Chief Executive Officer, Sept. 18, 2008. One wonders, however, why the board itself did not resign for leading the company to this current mess. More importantly, it is not clear why AIG's corporate officers were not all terminated, as well. Again, a nomenklaura theory, straight from the Stalinist playbook would explain the reflex to retain corporate commisars who fail, while extracting payment from lower level employees and public stakeholders. But one might have thought that the theoretics of free markets would have predicted a different result. An aggressive corporate and securities lawyer might wonder:

1. Whether the board of directors is not now exposed to liability for breach of their fiduciary duty of care. It is likely hard to imaging liability on a transactional theory of breach of duty (Smith v. Van Gorkum, 488 A.2d 858 (Del. Sup., 1985)). But it may be more difficult ot excuse what might be a failure to reasonably monitor. That failure to monitor might be asserted as a failure on one of two levels--first a failure to adequately monitor the activities and decisions of AIG officers; second a failure to either implement or appropriately use reasonable systems of monitoring corporate activity (In re Caremark International Inc Derivative Litigation, (Del. Ch. Sept. 25, 1996). For general discussion, see Larry Catá Backer, Surveillance and Control: Internal, External and Governmental Monitoring of Corporate Insiders After Sarbanes-Oxley, 2004 MICHIGAN STATE DCL LAW REVIEW 327 (2004).

2. Whether corporate officers are liabile for failure to comply with the requirements of the SEC regulations implementing Sarbanes Oxley Act (2002) Section 404. For general discussion, see Larry Catá Backer, The Sarbanes-Oxley Act: Federalizing Norms for Officer, Lawyer and Accountant Behavior, St. Johns Law Review, Vol. 76, pp. 897-952, 2002; Larry Catá Backer,

3. If there is a breach of the reporting or underlying monitoring obligations under the regulations issued pursuant to Sarbanes Oxley Act Section 404, is it possible that this failure gives rise to liability on the part of the appropriate gatekeepers--the outside lawyers and auditors with obligations under that provision. For general discussion, see Larry Catá Backer, The Duty to Monitor: Emerging Obligations of Outside Lawyers and Auditors to Detect and Report Corporate Wrongdoing Beyond the Securities Laws, St. John's Law Review, Vol. 77, No. 4, p. 919, 2003.

4. More interesting, still, is the system that appears to preserve the positions and employment of people who, having taken risks with the wealth of others, fails to produce desired results (the increase in the wealth of the entity). I have argued before that there appears to be two systems of labor markets in the United States. One, limited ot the lower orders, is based on a ruthless application of free market theories of open and fiercely competitive markets with no subsidies for risky behavior that goes bad. The other, available only to the elite members of the the employment workforce, appears to be a highly regulated and protected environment. While there is fierce competition to reach its ranks, once in, however, there is substantial proteciton against abor market discipline for failure. See Larry Catá Backer, Redefining Market Failures: Bear Stearns and the Class Element in Market Discipline, Law at the End of the Day (March 15, 2008).

5. One wonders why it is that AIG is able to keep the fruits of the income from those transactions that caused it be reach the equivalent of insolvency, while being able to take advantage of the favorable loan terms from the American government. Otherwise, it appears that the government loan serves to subsidize the sort of risky behavior with private capital that the private markets would discipline. In other words, the governmenbt loan encourages risk taking not tolerated (or discplined) by private markets. If there is no fear of the discipline inherent in rsk then the market system will be even more ditorted than it might have been had AIG been permitted to faikl and its profitable operations sold to those who might do better with them.

The case of AIG might strike one as strange given the rhetoric of free markets and the value of its disciplinary techniques that has serve as the basis for instituting global private governance over the last decade. This ought to strike one as a strange result. But in the strangeness one can begin to see the contours of American Corporatist Socialism.

From Cuba to the United States: Santería and the Construction of Religious Liberty in the United States, the Untold Story

This is the untold story of the way in which the religion of Cuban slaves, forged within the crucible of Spanish intiolerance and cultural marginalization in the homeland, played a critical role in the evolution of the protection of religious liberty in the United States. It is the story of religion, migration, race, culture, assimilation. It is a story tinged with irony. It is the untold story of the road from a a modest Church in suburban Miami to the American Supreme Court. and the opinion in The Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 508 U.S. 520 (1993).

In the 1930s, a white, well off American citizen, well travelled and sympathetic to the culture of Cuba, might have run across ñañigos.
They are the devotees of voodooistic worship who celebrate their orgiastic rites in remote huts or in forest retreats. The appeal of this cult is, of course, to the lowest type of intellect and the basest passions. Practically all of the celebrants are negroes, though a few degenerate whites mingle with them. . . . But the black gods of Africa constitute the real passion of most ñañigos. While they respect the Christian God and Jesus and the Virgin. . . it is the jungle gods that drive them to ecstasies. Sacrifice occupies an important place in their rites and until fairly recently it was not at all uncommon for them to sacrifice white infants at their alters to win the favor of black gods. Fear of the police has now all but stamped out this practice in Cuba. One still hears horrible rumors of the occasional isolated cases, but in general chickens are now sacrificed in place of stolen babies. (Clark 1936, 274-75).
This American view reflected the thinking of important elements of the social and cultural elites in Cuba itself—white, economically well off, politically powerful, influential, well educated and well travelled and formally Catholic for the most part. Between 1959 and 1980 waves of all strata of Cuban society migrated to the United States, many settling in South Florida. They brought little with them but themselves and the socio-cultural norms that had marked them as Cuban, including ideas about race, class, religion and the use of state power to protect those norms.

But in the United States, race, class, ethnicity, migration, assimilation, and religion proved to be a highly combustible mix. And it was that mix which was ignited in 1987, when a group of Cuban immigrants who had stepped into elective leadership roles in a predominantly Latino (and principally Cuban) city—Hialeah, Florida—sought to assert their legislative authority to apply the standards of their country of origin to the residents of that city. The flash point was religion, with a healthy dose of class, race, and assimilation thrown in.

The United States has been fertile soil for the growth of many religious sects. It has also been an important place for the birth of new forms of religious expression—from new sects of Judaism, Buddhism, Hinduism and Christianity, to entirely new forms of worship as either organized religious communities, like Scientology, or more amorphous sects. Another set of ancient religions have flourished here as well—the religions of Africa, brought to the Americas on the slave ships from Africa. These religions, derived principally from those of the Yoruba in present day Nigeria and the Bantu peoples of the Kongo regions, in present day Republic of the Congo, were preserved, reordered and enriched by a contact with the Catholicism of the Spanish and Portuguese and the Protestantism of the Americans to produce new and powerful religious communities that flourished in the Caribbean and Latin America. Yet, like the Protestants dissenters of 17th century England, the practitioners of what became Santería, Lukumi, Umbanda, Candamblé, Palo Mayombé, Voodoo and other sects of Amero-African religions, were sometimes and to different degrees persecuted or more often than not driven underground in many places. In others they were left unmolested but marginalized. Arriving in the United States with other migrants from those regions, members of these religious communities each found in this country a place where their religions could flourish openly. But not without struggle.

This is the story of the way that the practitioners of one sect of Santería or Lukumi, the devotees of the deity or guardian spirit (or in the language of Santería, the orisha) Babalu Aye, moved from persecution and secrecy in Cuba to a begrudging tolerance in the United States. In one respect it is the story of conflict within a well organized, sophisticated and ancient ethnic community whose foundations became deeply affected by the political values of a host nation. But it is also the story of assimilation, the religious politics of race, and the reordering of the values of immigrant communities within the United States. Most importantly, though, it is the story of the way in which an intra-ethnic religious dispute served as the basis for a great movement in the discussion about the character of an important constitutional value within the national community. The followers of the path of the Babalu Aye achieved something remarkable from out of a modest church in a small city in South Florida—an important turning point for the protection of religious expression in the United States available to all religious sects.

A. Why this case is important then and now.

Church of the Lukumi Babalu Aye, Inc. v. Hialeah (1993) was important then as the first application of the newly announced and highly controversial analytical framework of Employment Division v. Smith (1990), in which the Supreme Court revamped the standard for determining whether governmental action violates the “Free Exercise” Clause of the U.S. Constitution.

The case is still important as the source for the current legal framework—neutrality and general applicability—for determining whether the rational basis standard or the strict scrutiny standard applies to analyze claims under the Free Exercise Clause. It also serves to influence application of statutory protections of “free exercise” under federal and state law.

B. Setting the Stage: Environment of the Times: Political , Legal, Cultural and Economic.

The religions brought to Latin America by African slaves were as varied as the regions from which slaves originated. In the Caribbean the religions essentially became grouped in two major traditions. One, known as Santería or Lukumi or Regla de Osha’s origin can be traced to a historical accommodation between Yoruba and Catholicism in the slave culture of Cuba. The Yoruba people live in what is now the southwestern part of Nigeria and eastern Benin. The other, known as Palo, Palo Mayombé and other names can be traced to the Kongo regions of central Africa and the Luba, Kuba, and other Bantu speaking peoples.

In the New World, Spanish colonists, who were overwhelmingly Catholic, showed little tolerance of Africans religiosity, considering it to be form of paganism. As a consequences, African slaves seeking to preserve what they could hide the oral traditions and practices of their faith within the religion of their European masters. In the parlance of academics and theologians, the African religions brought from Africa were syncretized principally with the outward forms of Roman Catholicism. The idea was to hide what could be preserved of the original religions of the slaves within the iconography and practices of the colonial masters. Though outwardly Catholic, the syncretization was based on African religious conceptions rather than Christian notions of theology or structures of hierarchies of divine power. Thus, for example, male deities or guardians (orishas) could be syncretized with female saints—the connection was the relation of the life or symbolism of that saint with the powers traditionally associated with an African guardian or deity in African theology. As a result, the name given to the religion in the Caribbean, Santería—Spanish for “saint worship”—refers to the outward appearance rather than to the content and cosmology of the religion itself. The name Santería hides as much as it reveals—paralleling the way the syncretism hid as well as revealed the religious practices of Caribbean slaves and their descendants. In this new form, and when practiced discretely by slaves and their descendants, these African religions developed a rich oral tradition and important institutional structures. Santería, Lukumi or Osha was eventually adopted by portions of the white population in Cuba, though usually discretely. Membership rolls were kept only in memory, however, since Osha continued to be a loosely organized religion practiced in private homes rather than in churches or public institutions of any kind. As it had in Africa, its rituals, beliefs and traditions, including its core ideas and practices, have passed from generation to generation mainly as oral history.

As a primarily oral tradition based religion, much of Santería cosmology, theology and practice structures evidence some variation among members of the community. Because there is no strongly centralized governance structure, further variation between practitioners and over time emerged. But there are a set of core beliefs for which there is general agreement. Within the Santería community believe in a hierarchy of divinities—orishas—over which presides a higher power, Olodumare (sometimes Olorun, Eledumare, Eleda and Olofin-Orun). The orishas represent specific manifestations of Olodumare, and are powerful as such within the scope of their powers. In the Caribbean region, the most important orishas (and their syncretized “saints”) attracted large communities of worshipers. Each of these orishas have many aspects (“caminos”) that vary according to the religious community. The usual pantheon of important orishas include:

Elegua/Esu/Legua, represented by “El Nino de Atocha" or Saint Anthony, guardian of the crossroads, beginnings and opportunity; he is the necessary intercessor between people and orishas, but he is also a trickster, a causer of confusion, and the messenger to God;

Obatala, represented by an aspect of the Virgin Mary, “Our Lady of Mercy,” is the guardian of creativity and justice, he is sometimes said to have been charged with the making of humans as a punishment for being drunk when he should have been making the world;

Orunmila, divination and wisdom through his priests (santeros or babalawos);

Ochosi, represented by Saint Norbert, is the guardian of the hunt, dispenser of justice;

Ogun, represented by Saint Peter or Saint Santiago, is the guardian of justice and oaths, related to industry and work, he is sometimes associated with prisons;

Oshun, represented as an aspect of the Virgin Mary, “La Virgen de la Caridad del Cobre” (and in this aspect is revered as the patron of Cuba), is guardian of rivers and fresh waters, has been given a variety of aspects, including curing the sick, fertility, love luxury, and money;

Shango, is represented by Saint Barbara, is the guardian of thunder and lightening, the warrior orisha;

Yemaya, represented as aspect of the Virgin Mary—“La Virgen de Regla” (and an important figure in Cuban Catholicism), is the guardian of the oceans and seas, protector of the family, mother of life;

Oya, the unseen guardian of the wind, weather, and cemeteries, she is connected sometimes to ancestors, watcher of the doorway between life and death;

Babalu Aye, represented by St. Lazarus, is the guardian of healing, protection against infections and epidemics.

The foundations of Santería are grounded in the belief in a strong personal relationship between an individual and their guardian orisha(s). The relationship between individual and orisha must be nurtured through worship. In addition, orishas can be invoked through appropriate ritual when their particular powers are required to aid the suppliant. Thus, for example, individuals seeking protection against epidemics, like tuberculosis, might seek to invoke the aid of the orishas Babalu Aye. The invocation of orishas and their worship requires ritual, offerings and sacrifice. Communication with the orishas, to determine their will, or to seek their advice or prediction for the future, is accomplished through divination. For that purpose a variety of instruments might be used—through common are pieces of coconut or cowerie shells. The mechanics of divination can range from simple throws and readings to complex procedures under the auspices of an appropriate priest.

The forms of worship, invocation, and divination are undertaken through the offices of a priest (known as a santero or a babalawo) dedicated to the particular orishas. There is a rich and complex oral tradition on the steps to priesthood, the limitations on candidacy for certain priestly offices the rituals to be used to confer office, and the hierarchy of priestly authority. Generally there is a twelve month period in which the person seeking priesthood must comply with a number of ritual commands. The initiate (iyawó) is usually compelled to wear white and refrain from certain activity—both in his personal and religious life. The Church of the Babalu Aye in Hialeah had issued in June 1989, a “Decree on Standards Governing Iyawó Vestments and Safety Matters,” in which the traditional rituals were standardized and elaborated for use by its adherents. However, written statements like those produced by the Church of the Babalu Aye are rare within Santería communities. Many still fiercely adhere to the oral traditions and look with suspicion on attempts to reduce the faith to writing.

Cubans fleeing the country in the aftermath of the 1959 Cuban Revolution first brought significant numbers of members of Santería, Lukumi or Osha communities to the United States. Their numbers were considerably increased with the arrival of larger numbers of working class Cubans ands Afro-Cubans to South Florida in the wake of the Mariel boatlift of the late 1970s. This second wave of immigrants brought Cubans from all classes in Cuban life, and included substantial numbers of Osha practitioners (and, to the faithful, the orishas who followed the priests). Although the religion has been practiced underground, the region was covered with evidence of its existence: the remains of animals were found in streets and parks and there were many shops, called botanicas, that sold ritual paraphernalia and filled prescriptions from Santería priests.

C. The Players:

1. The Plaintiffs. Ernesto Pichardo and the Church of the Lukumi Babalu Aye brought the lawsuit.

A. Ernesto Pichardo: According to accounts of his life currently circulating (Frohock 2001: Fausset 2008), Ernesto Pichardo was born in Havana, Cuba to a white middle-class family. His mother was introduced to Osha (a religion known also as Lukumí or Santería) as a child through a first generation olorisha (priest) who was the family cook. The father's side of Ernesto’s family was socially prominent with an economic history that included ownership of some sugar plantations. They were known for being active in both Catholic and Spiritualism groups. Pichardo recalls no conflict in these religious activities, except that the Spiritualism activities were kept private for social reasons. One story has it that the family’s move away from its original faith to Lukumi began following a miscarriage during Pichardo’s mother’s second pregnancy. The doctors were unable to treat her toxic reactions and warned her that a third pregnancy could kill her. This episode helped turn the family towards the Osha as a source of protection and guidance, but discretely. The family moved to the United States in the early 1960s and settled in the "Little Havana" area of Miami, an area with a great concentration of Cuban immigrants, especially recent arrivals. Like many of these immigrants, when the family acquired sufficient funds they sought to better their lives in the suburbs. In the case of the Pichardo family, that led Ernesto to Hialeah. It was here that Pichardo first encountered Santería for himself and exhibited those personal characteristics that would mark him as the head of the Church of the Lukumi Babalu Aye. “At the time, administrators were trying to drum him out of high school for associating with the wrong crowd. They eventually succeeded. He never finished.” (Fausset 2008). For Pichardo, the entry into the religious life was the great shaper of his life. "My entire life as I knew it was disrupted at age 16," he said. "And all of a sudden, here's this explanation for everything." (Fausset 2008). The reaction to his religious choice had social consequences. “His friends' parents, he said, shunned him for joining what they considered a cult.” And these consequences have racial implications as well. Even years after the litigation, Americans, like Cubans tend to see Santería in racial terms. “Pichardo sees nothing odd about a white man defending a religion with roots in West Africa. Many whites have adopted Santería since slaves imported it to the New World.” (Fausset 2008). Pichardo and his brother Fernando served as the founders of the Church of the Lukumi Bablu Aye in Hialeah in 1973. At the time of the lawsuit, Pichardo served as president of the Church, and was also the Church's priest with the religious title of Italero, “the second highest in the Santería faith.” (Church of the Lukumi Babalu Aye, Inc. v. Hialeah 1993, 525).

B. The Church of the Lukumi Babalu Aye. The Church of the Lukumi Babalu Aye was incorporated by Ernesto Pichardo in 1973. (Church of the Lukumi Babalu Aye, Inc. v. Hialeah 1993, 525). According to its website, the Church claimed to be the first of its kind established in the United States as a religious corporation. (Church of the Lukumi Babalu Aye CLBA History). It began its operations in earnest in the 1980s, when it sought to bring the practices of Santería into the open and demand treatment like other mainstream religious communities. The Church came to the attention of city officials in 1987, when it took possession of the site of a former garage in Hialeah which it intended for its church, and sought relevant operating permits. (Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah 1989, 1477-78). In 1988, during the pendency of the litigation, the Church moved its headquarters to a site across the street from Hialeah City Hall, which became the site of much highly publicized political activity, including protests in support and against the Church by religious, animal rights and other groups. According to the Church, “Pending litigation in Federal Court, this location was vandalized numerous times. Law Enforcement entered Church premises daily. Members were stopped leaving the Church. Christian denominations protested frequently, and its activists implemented a hate campaign, joined by several animal rights organizations.” (Church of the Lukumi Babalu Aye, History CLBA Resume 1974-1999).

2. The Defendants— Named as defendants were city of Hialeah and its mayor and members of its city council in their individual capacities.

A. The City of Hialeah: In its own words:

From a population of 1,500 in 1925, Hialeah has grown at a rate faster than most of the ten largest cities in the State of Florida since the 1960’s and holds the rank of Florida’s fifth-largest city, with more than 236,000 residents. The city is also one of the largest employers in Dade County. Predominantly Hispanic, Hialeah residents have assimilated their cultural heritage and traditions into a hard-working, diverse community proud of its ethnicity, as well as its family oriented neighborhoods. (City of Hialeah website).

The City occupies about 20 square miles in northwest Miami-Dade County. It is organized on a strong mayor model, with a city council of seven members. In the mid to late 1980s, the City of Hialeah was on the receiving end og unfavorable scrutiny by the local major South Florida newspaper, the Miami Herald. In 1985, for example, the Miami Herald ran a story suggesting some unsavory characteristics of city government:

“In Hialeah, the self-proclaimed City of Progress, public office often means personal profit. It is a city where government decisions are clouded by open talk of bribery. Councilmen often use their votes to grant favors. Conflicts of interest are commonplace. It is a city where long-range development plans are altered regularly, often enriching city officials, their relatives and business associates.” (Lowe & Betancourt 1985).

The local papers reported that the focus of investigation at the time involved land deals and zoning issues. (Id.). The media characterized Hialeah, at the time, as a working class Hispanic city, a place where Cuban immigrants looking to improve their lives nd preserve the culture of their homeland might move. (Cubanization Was Foreshadowed Early, 1999). But also a City where public officials might too closely mix personal and pubic affairs. (Mayor and Council are Indicted in Hialeah 1990; Hialeah Journal, Where Politics is Down and Dirty 1991).

B. The Mayor of Hialeah: Raul Martinez, was the first Cuban-born mayor of Hialeah. (Hialeah Journal, Where Politics is Down and Dirty 1991). During his tenure there had been allegations of misconduct. Those allegations blossomed into an indictment. In March, 1991, as the case was winding it way up to the Supreme Court, the mayor was convicted of extortion and racketeering in after a jury found he had accepted cash and property from land developers. (U.S. v. Martinez 1994).

C. The Hialeah City Council: The members of the Hialeah City Council both reflected the diversity of the community and functioned as a place where the traditionalism of the City’s constituents could be given legal expression.

i. Silvio Cardoso: Cardoso immigrated to Hialeah from Cuba with his family at age five. (Bulecza). He received his education from public schools and later earned a full scholarship to the University of Miami (UM) to play football, where he was a running back from 1970-1974. Cardoso has been in the building business since 1972, operating a residential housing construction enterprise, United Homes International. His business focused on starter homes, town homes. At the time of the litigation he was quoted as saying “They (Santería practitioners) are in violation of everything this country stands for. I believe this council has the authority to stop these people," in regards his position on the Lukumi Babalu Aye matter. (Dickerson 1987).

ii. Salvatore D'Angelo: Mr. D’Angelo was a real estate agent with offices in Hialeah.

iii. Herman Echevarria: Mr. Echevarria was in the marketing and advertising business, an enterprise he was setting up with others outside of Hialeah city government during the course of the lawdsuit.

iv. Julio Martinez: Julio Martinez was the Hialeah City Council President at the time the Mayor Martinez and Councilman Mejides were indicted. (Mayor and Councilmen are Indicted in Hialeah 1990). He was then sworn in as Acting Mayor. Two of his supporters found cow's tongues at their office door, another received a fish head in his mailbox, and a severed and muzzled goat's head was discovered in a police department parking lot. (Hialeah Journal Where Politics is Down and Dirty 1991). During his first few days in office, someone broke into Hialeah City Hall and left a mysterious message on the door to acting Mayor Julio Martinez's office: two rows of nails, staggered one under the other and another set forming a triangle. (Hialeah’s Mayor Gets Bizarre Message 1991). "Someone who is supposed to know about these things says it's the devil's triangle -- whatever that means," Martinez said. (Id.). The intruder, who apparently had a key to City Hall, also ripped off Martinez's nameplate from the door and spread some white cream over his secretary's phone. This came a week after someone spray-painted City Hall with a message urging the return of then suspended Mayor Raul Martinez. And no wonder; Martinez had been the council member that introduced the ordinances at issue in the case and had heatedly debated Pichardo on local radio. (Burgos & Harrison 1987). He was quoted in the local paper as saying at the time: “I personally do not want to go back in time. . . . These practices belong in the 14th or 15th century. Nighty-nine percent of the people in this city don't agree with sacrificing an animal to a god. . . . I represent those people.” (Id.).

v. Andres Mejides: Mr. Mejides was a land developer in Hialeah during the 1980s. (Lowe & Betancourt 1985). He was indicted by a Federal grand jury on charges that he conspired with Raul Martinez to extort payoffs from developers in exchange for approving zoning changes. (Mayor and a Councilman are Indicted in Hialeah 1990).

vi. Paulino Nunez: Mr. Nuñez came to Hialeah with the first strokes of revolution in 1959 and became the city's fifth Cuban councilman in 1981. (Cubanization Was Foreshadowed Early 1999). Prior to his election he had served as a member of the Hialeah Housing Authority Board. (Lowe & Betancourt 1985).

vi. Ray Robinson: Was a close friend of Hialeah Mayor Martinez. In the 1980s he had served as a vice president of a local bank. (Lowe & Betancourt 1985). He played a minor role in the corruption case against the Mayor. (U.S. v. Martinez 1994).

D. Setting the Stage: The Dispute.

Mr. Ernesto Pichardo, an Oba priest, founded and incorporated the Church of Lukumi Babalu Aye, as a Florida non-profit corporation in 1973. (Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah 1988). In April 1987, Mr. Pichardo, attempted to establish and open site in the city of Hialeah, Fl, where the Santería religion could be practiced. Mr. Pichardo indicated that the Church's goal was to bring the practice of the Santería faith, including its ritual of animal sacrifice, into the open. The Church began the process of obtaining utility service and receiving the necessary licensing, inspection, and zoning approvals. Although the Church's efforts at obtaining the necessary licenses and permits were far from smooth, it appears that it received all needed approvals by early August 1987.

The prospect of a Santería church was distressing to many members of the Hialeah community. The local paper reported that the “Hialeah City Council and Mayor Raul Martinez passed the laws after they were flooded with complaints from residents who thought sacrificing animals is barbaric. Church leaders contend the ordinances abridge their religious freedom and has hurt the church financially.” (Hialeah City Council Tentatively Approves Property Tax, Garbage Fee Hikes 1988). Lurking beneath was a prejudice against the African origins of the religion and the race of many of its practitioners. The local newspaper, the Miami Herald, covered the event in a series of articles in 1987. (May 1987). In this atmosphere, that the City Council first acted in an emergency session in June 1987.

The city council adopted Resolution 87-66, which noted the “concern” expressed by residents of the city “that certain religions may propose to engage in practices which are inconsistent with public morals, peace or safety,” and declared that “[t]he City reiterates its commitment to a prohibition against any and all acts of any and all religious groups which are inconsistent with public morals, peace or safety.” The council had also approved an emergency ordinance, Ordinance 87-40, which incorporated in full, except as to penalty, Florida's animal cruelty laws. (Fla.Stat. ch. 828 (1987). Among other things, the incorporated state law subjected to criminal punishment “[w]ho[m]ever ... unnecessarily or cruelly ... kills any animal.” (Fla. Stat. § 828.12).

But the city council wasn’t done. It wanted to take stronger action but thought it was prohibited from enacting more detailed animal cruelty statutes by Florida law. The city council sought to undertake further legislative action, but Florida law prohibits a municipality from enacting legislation relating to animal cruelty that conflicts with state law. (Fla. Stat. § 828.27(4)). To obtain clarification, Hialeah's city attorney requested an opinion from the attorney general of Florida as to whether § 828.12 prohibited “a religious group from sacrificing an animal in a religious ritual or practice” and whether the city could enact ordinances “making religious animal sacrifice unlawful.” The attorney general responded in mid-July. Te office fo the Attorney General concluded that the “ritual sacrifice of animals for purposes other than food consumption” was not a “necessary” killing and so was prohibited by § 828.12. (State of Florida, Annual Report of the Attorney General 1998, 146, 147, 149). The Attorney General’s Report appeared to define “unnecessary” as “done without any useful motive, in a spirit of wanton cruelty or for the mere pleasure of destruction without being in any sense beneficial or useful to the person killing the animal.” (Id., 149, n. 11). He advised that religious animal sacrifice was against state law, so that a city ordinance prohibiting it would not be in conflict. (Id., 151).

On the basis of this response, the city council adopted Resolution 87-90. The resolution drew attention to the Council’s sense of City residents’ “great concern regarding the possibility of public ritualistic animal sacrifices” and drew attention to the state-law animal cruelty prohibition. The resolution emphasized Hialeah’s policy “to oppose the ritual sacrifices of animals,” and announced that any person or organization practicing animal sacrifice “will be prosecuted.”

In September 1987, the city council adopted three substantive ordinances addressing the issue of religious animal sacrifice. Ordinance 87-52 defined “sacrifice” as “to unnecessarily kill, torment, torture, or mutilate an animal in a public or private ritual or ceremony not for the primary purpose of food consumption,” and prohibited owning or possessing an animal “intending to use such animal for food purposes.” It restricted application of this prohibition, however, to any individual or group that “kills, slaughters or sacrifices animals for any type of ritual, regardless of whether or not the flesh or blood of the animal is to be consumed.” The ordinance contained an exemption for slaughtering by “licensed establishment[s]” of animals “specifically raised for food purposes.” Declaring, moreover, that the city council “has determined that the sacrificing of animals within the city limits is contrary to the public health, safety, welfare and morals of the community,” the city council adopted Ordinance 87-71. That ordinance defined sacrifice as had Ordinance 87-52, and then provided that “[i]t shall be unlawful for any person, persons, corporations or associations to sacrifice any animal within the corporate limits of the City of Hialeah, Florida.”

The final Ordinance, 87-72, defined “slaughter” as “the killing of animals for food” and prohibited slaughter outside of areas zoned for slaughterhouse use. The ordinance provided an exemption, however, for the slaughter or processing for sale of “small numbers of hogs and/or cattle per week in accordance with an exemption provided by state law.” All ordinances and resolutions passed the city council by unanimous vote. Violations of each of the four ordinances were punishable by fines not exceeding $500 or imprisonment not exceeding 60 days, or both.

The city maintained that it enacted the ordinances primarily to prevent cruelty to animals. Hialeah officials also alleged that they were concerned about public health because of the disposal of animal remains. The Hialeah law specifically prohibited the sacrifice of any animal, which it defined as killing ''in a public or private ritual not for the primary purpose of food consumption.'' The city argued that the effect of the law was not to single out Santería, which could make the measure unconstitutional. Rather, it was intended only to curb abuse of animals.

Mr. Pichardo and his church alleged that Hialeah enacted the ordinances to keep the followers of Santería from practicing their religion. Mr. Pichardo argued that Hialeah officials were not concerned about cruelty to animals but about the city's image. When Santería sacrifices and rituals were conducted discretely and out of the public eye, no official seemed to mind. It was only when the Church sought to come out of the shadows that the city officials acted.

1. Pichardo Versus the City Round 1 (Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 688 F. Supp. 1522 (S.D. Fla. 1988): With the positions now starkly drawn, Mr. Pichardo and the Church acted. They filed suit against the City of Hialeah, and the mayor and city council in their individual capacities. The suit alleged deprivation of the church’s First, Fourth, and Fourteenth Amendment rights, arising out of enactments of ordinances and adoption of resolutions relating to ritual sacrifice of animals, and certain actions taken by police, the city sanitation and electric companies.

In support of its suit, the plaintiffs emphasized the conduct of city officials suggesting bias against their religion. These included: causing a city council meeting to be held as to the issue of granting the church a city permit to use land as a place of worship; establishing a police perimeter at the boundaries and entrance to the church; publicly inciting persons to appear at a public hearing of the City Council for the purpose of presenting protests against the Santería religion; adopting Florida Statutes Chapter 828 (Cruelty to Animals) as an emergency city ordinance; passing resolution number 87-66, reiterating the City of Hialeah’s commitment to a prohibition of acts of any and all religious groups which are inconsistent with public morals, peace or safety; passing resolution 87-90, declaring a policy to oppose ritual sacrifice of animals; and proposing three criminal ordinances relating to the possession, sacrifice, and slaughter of animals within the City of Hialeah, one of which became a law.

Because the petitioner sought relief against the councilmen and the mayor in their individual capacities, the case turned on whether the acts complained of where legislative. Defendants would be absolutely immune from prosecution if the acts were deemed legislative. In deciding whether the passage of the resolutions was a legislative act, the court had to determine whether the action resulted from the nature and execution of the official’s legislative duties. A legislative act involves public-policy making as opposed to mere administrative application of existing policies.

The court held that the enactment of the ordinances was in accordance with a legislative function thus providing absolute immunity to both the councilmen and the mayor. Similarly the court held that in order to impose personal liability on the defendants for the acts of the police and the city sanitation, it was not enough to plead that they may have created an atmosphere antagonistic to Santería worshippers through their adopted legislative ordinances and resolutions. Rather, plaintiff had to show some causal connection between an act of the official and the alleged violations. The defendants could not be held liable as supervisory officials for the actions of the police and city sanitation unless they directed such actions or had personal knowledge of the wrongdoings.

The court thus held that the defendants were entitled to absolute legislative immunity in their individual capacities for their activities and dismissed the suit. In reaching this conclusion, however, the court did not decide whether Plaintiff’s first, fourth and fourteenth amendment rights were violated by any of the alleged activities. The court also did not decide whether the City of Hialeah could be held liable for the activities.

2. Pichardo Versus The City Round 2 (Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 723 F. Supp. 1467 (S.D. Fla., 1989): After being unsuccessful in his attempt to hold the council members and mayor personally liable for their actions, Mr. Pichardo and the Church filed suit under 42 U.S. C. §1983 alleging that the city’s enactment of ordinances regulating animal sacrifice violated their rights under the Free Exercise Clause of the First Amendment. The case was tried before Judge Spellman.

The court embraced the Cuban elite’s traditional views of Santería in framing its analysis of the constitutional claims. Judge Spellman explained

Santeria remains an underground religion and the practice was not, and is not today, socially accepted by the majority of the Cuban population. Additionally, Santeria has lost some contact with its own past in Cuba. Most religious activity takes place in individual homes by extended family groups. There is little or no intermingling of the groups, and few practitioners know others outside their own group that practice Santeria. Santeria has remained underground because most practitioners fear that they will be discriminated against. The religion has taken on a private, personal tone that is very different than the way that it is practiced in Nigeria. Although Pichardo feels that the religion would become more open if the Church was allowed to practice its rituals openly, Dr. Lisandro Perez, a sociologist, testified that in his opinion, the outcome of this case would not necessarily affect the degree of which Santeria was practiced in private. (Church of the Lukumi Babalu Aye, Inc. v. Hialeah 1989, 1470).

It was on the basis of this understanding that Judge Spellman sought to apply the Eleventh Circuit’s version of the pre-Smith balancing standard for considering the Free Exercise claims. (Grosz v. City of Miami Beach 1983). On that basis, the district court held that although the ordinances were not religiously neutral but were intended to stop the practice of animal sacrifice in the City of Hialeah, the ordinances were not passed to interfere with religious beliefs, but rather to regulate conduct. The court held that the ordinances had three compelling secular purposes: (1) to prevent cruelty to animals; (2) to safeguard the health, welfare and safety of the community; and (3) to prevent the adverse psychological effect on children exposed to such sacrifices. The court also dismissed Plaintiff’s §1983 claim because the government, as an entity, can only be held liable when execution of a municipality’s official policy or custom inflicts the alleged injury.

The Court of Appeals for the Eleventh Circuit affirmed the district court’s decision in a “Table of Decisions Without Reported Opinions.” (Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah 1991). Interestingly, the appellate court panel found it unnecessary to consider the effect of Employment Division v. Smith (1990), delivered after the district court decision, because, according to the petitioners, “the District Court “employed an arguably stricter standard” than that applied in Smith.” (Church of the Lukumi Babalu Aye v. City of Hialeah 1993, 529, citing App. to Pet. for Cert. A2, n. 1). The Supreme Court granted certiorari.

E. Rules of law that emerged from the case.

Church of the Lukumi Babalu Aye v. City of Hialeah (1993) provides a basis for applying the baseline rule established in Employment Division v. Smith, 494 U.S. 872 (1990) by emphasizing the “neutrality” and “general applicability” limits of Smith. In effect, while Smith accords free exercise protection against neutral and generally applicable laws only on the basis of the lenient “reasonable basis” test, Lukumi Babalu Aye imposes a standard for determining neutrality and general applicability that permits a court to look to the intent, impact and alternatives to achieving the statutory objectives—ironically enough in a manner that mimics the Sherbert/Yoder style analysis rejected in Smith. (Sherbert v. Verner 1963; Wisconsin v. Yoder 1972) By signaling that neutrality and general applicability analysis could be broadly conceived, the Supreme Court’s Lukumi Babalu Aye opinion made it possible for courts to begin to narrow the applicability of Smith and broaden the set of ordinances under which the pre-Smith standards could continue to be applied.

Like many current Supreme Court decisions interpreting the Religion Clauses, this one divided the justices in ways that showed the reluctance of some judges to participate in the elaboration of the analytical framework of Smith, with its presumption of a reasonable basis test framework. Justice Kennedy delivered the opinion of the Court. The Court’s opinion was divided into three parts. Part I sets out the facts and procedural history of the case. Part II develops the constitutional interpretive standards to be applied to the case derived from the majority’s reading of Smith, focusing on the rule that the reasonable basis test is available only to test legislation that is neutral and generally applicable. Part II-A elaborates principles and standards of a neutrality analysis. Part II-A.2, in particular, suggests the relevance of equal protection analysis to application of neutrality principles in Free Exercise cases. Part II-B applied the developed the form of analysis under the general applicability prong of Smith. Having determined that the ordinances at issue were neither neutral nor generally applicable, the majority opinion applied the more rigorous “strict scrutiny” review of those provisions in Part III. Seven Justices, including Chief Justice Rehnquist, and Justices White, Stevens, Scalia, Souter, and Thomas, joined that majority opinion with respect to Parts I, III, and IV. Part II of the opinion, in many respects the most important section of the Court’s opinion, proved the more difficult to garner stronger support. Six Justices, including the Chief Justice and Justices White, Stevens, Scalia, and Thomas joined the opinion of the Court with respect to Part II-B. Of that group, five Justices, all but Justice White, joined Parts II-A.1 and II-A.3 of the opinion. Joining Justice Kennedy on Part II-A.2, however, was only Justice Stevens. Concurrences were filed by Justices Blackman, Souter and Scalia.

As is common in these cases, Justice Kennedy starts Part II’s discussion “neutrality” starts with the general analytical framework as gleaned from his reading of Smith:

our cases establish the general proposition that a law that is neutral and of general applicability need not be justified by a compelling governmental interest even if the law has the incidental effect of burdening a particular religious practice. . . . A law failing to satisfy these requirements must be justified by a compelling governmental interest and must be narrowly tailored to advance that interest. These ordinances fail to satisfy the Smith requirements. (Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah 1993, 531-532).
Justice Kennedy notes that though he distinguishes between neutrality and general applicability standards, the failure to satisfy one is likely to indicate that the other will not be satisfied either. The majority opinion grounds neutrality analysis on the determination that “the object of the law is to infringe upon or restrict practices because of their religious motivation.” (Id., 533). To prove suppression, courts are to examine the text of the ordinance at issue. “A law lacks facial neutrality if it refers to a religious practice without a secular meaning discernable from the language ort context.” (Id.). Reference to “sacrifice” and “ritual” were insufficient to show a lack of facial neutrality because the words “admits also of secular meanings.” (Id., 533-534).

But “facial neutrality is not determinative.” (Id., at 534). Subtle departures from neutrality and covert suppression also suggest the sort of lack of neutrality that would invoke a strict scrutiny test. “Official action that targets religious conduct for distinctive treatment cannot be shielded by mere compliance with the requirement of facial neutrality.” (Id.). The purpose of determining this other form of non-neutrality, Justice Kennedy indicated a power to engage in a broad and searching scrutiny, including the use of circumstantial evidence of intent, the legislative record, the likelihood of adverse impact given the peculiarities of the construction of the ordinance, and its over inclusiveness. (Id., 534-538). To be balanced against this evidence are the “legitimate governmental interests in protecting the public health and preventing cruelty to animals.” (Id., 538). Especially important is an analysis of the existence of less restrictive alternatives to meeting governmental objectives.

A determination of lack of neutrality, then, can be made to depend on an analysis of the gravity of the government’s interest, the relation of that interest to the actual form and effect of the regulation, and to a determination of available less burdensome alternatives—an analysis suspiciously like the strict scrutiny analysis rejected in Smith. Ironically, it is possible to suggest that Justice Kennedy is suggesting that in order to determine whether the “rational basis” test of Smith can be applied, the court would first have to apply a perhaps milder strict scrutiny test to determine the question of neutrality. But the majority of the Justices preferred this insight unstated. None but Justice Stevens joined in that portion of Justice Kennedy’s opinion suggesting that equal protection analysis—focusing on “the historical background of the decision under challenge, the specific series of events leading to the enactment or official policy in question, as well as the legislative or administrative history, including contemporaneous statements made by members of the decisionmaking body. . . . bear on the question of discriminatory object.” (Id., at 540).

Justice Kennedy’s discussion of general applicability, like that of neutrality, starts from insights drawn from Smith. Acknowledging that all laws are selective to some extent, the focus shifts to those laws whose effect incidentally burden religion, the starting point for pre-Smith Free Exercise Clause analysis. Here, again, Justice Kennedy picks up the thread of the language of equal protection, explaining that “inequality results when a legislature decides that the governmental interest it seeks to advance are worthy of being pursued only against conduct with a religious motivation.” (Id., 542). But Justice Kennedy saw no need to define “with precision” the standard for determining the difference between provisions of general applicability and those which impose “burdens only on conduct motivated by religious belief.” (Id., 543). Justice Kennedy argued that the Hialeah ordinances fell “well below” any minimum. (Id.). Justice Kennedy determined that the ordinances were under inclusive in relation to their purported object—the protection of public health and the prevention of animal cruelty. On that basis, Justice Kennedy concluded, for the Court, that the ordinances were not of general application but meant to target the Santería practices of the Church of the Lukumi Babalu Aye, without the necessary narrowly drawn countervailing governmental interest.

On that basis, the general standard of Smith was no longer applicable and the older “strict scrutiny” test applied in Part III of the majority opinion. (Id., 546). The majority opinion determined that even if the governmental interests were compelling, the ordinances were not narrowly drawn. But even if the ordinances had been narrowly drawn, the interests advanced by the City of Hialeah, in the context of the case, were not compelling. Ironically, Justice Kennedy relied, in part on the analysis of “general applicability” to buttress the argument that the ordinances could not survive strict scrutiny. (Id., 546).

Justice Scalia’s concurrence forgave Justice Kennedy a certain perceived flabbiness in reasoning. (Id., 557). Justice Scalia that one can distinguish better between neutrality—that focused analysis on the terms of a provision—with general applicability—that focused analysis on the effects of the provision. Justice Scalia, however, drew the line when it came to the use of the subjective motivation of the legislators for determining the character or effect of the ordinances. Justice Souter also concurred but used the occasion to make a case for the abandonment of Smith. (Id., 559). Justice Blackman also concurred, suggesting that the Hialeah ordinances were facially discriminatory, without mentioning Smith. (Id., 577).

For all that, the elaboration of Smith’s neutrality and general applicability requirements—and their application to find that the ordinances did not meet either standard, has proven to be quite important. It provided a template that encouraged lower courts, especially those uncomfortable with the application of the reasonable basis standard presumption of Smith, to narrow the circumstances under which Smith would be applicable and expanding those circumstances under which a court could find that an ordinance failed to satisfy neutrality or general applicability rules. As a consequence, Lukumi Babalu Aye provided an important mechanism for getting around the Smith standard without appearing to do so.

Critically, the task left unfinished by Justice Kennedy—the definition of the standard to be “used to evaluate whether a prohibition is of general application,” (Id., 543) has been taken up with some gusto by the appellate courts, which have used the opportunity as an invitation to more narrowly define the characteristics of statutes of general applicability. The future of the applicability of this approach may be hinted at in an opinion of Justice Alito writing as a judge of the third Circuit in Fraternal Order of Police v. Newark, 170 F.3d 359 (3rd Cir., 1999) in which that court, at least, was willing to broaden the “generally applicable” standard of Smith to include categorical as well as individual exceptions, and thus broadly defined, applied a revivified compelling interest standard to the rule at issue.

F. Aftermath.

On remand from the Supreme Court, the 11th Circuit remanded, in turn, to the district court. (Church of the Lukumi Babalu Aye, Inc. v. Hialeah 11th Cir. 1993). “A one-dollar compensation was paid to CLBA by acting Mayor Julio Martinez as a symbol of re-conciliation.” (Church of the Lukumi Babalu Aye, History CLBA Resume 1974-1999).

Much has changed to both the Church and in the Hialeah political scene since the Supreme Court’s decision. There is still a bit of negative sentiment among the Church’s neighbors that flared if briefly at the time of the Supreme Court’s decision that was reported in the local newspapers. (Morcate 1993). In 1995, the “first historic group of forty senior Ifa, Oriate, Iyalosha, and Babalosha, priests and priestesses became officially certified as "Clergy" members of the Lukumi/Ayoba religion through CLBA.” (Church of the Lukumi Babalu Aye, History CLBA Resume 1974-1999). The next year a radio program was established with transmission to Cuba. By 1998, Church had relocated again, now serving its community a block away from Hialeah City Hall. In the same year, an article from that year in a local paper reported:

since their court victory, modernization and expansion of their religion have been their principal goals. . . . Lukumi Babalu Aye lists people of seventeen nationalities in its congregation, which is mostly Latin but includes Italian, British, and Russian immigrants as well. It offers for the first time ever in the United States Santería baptism, marriage ceremonies, and funerals in an institutional setting; burial plots were recently contracted for at Woodlawn West Cemetery in West Dade. The Pichardos also visit inmates in local prisons for religious ceremonies and counseling. (Lantugua 1998).

More importantly, the article noted how many local people now more openly sought the services of the local Santeros—politicians, and local elites.

By 2007, Pichardo might be said to have joined that elite himself—lecturing as an Honorary Africana Research Fellow at Florida International University in Miami. (Florida International University, News Release 2007). In early 2008 he was a leading force in a decision to reveal a basic text of the Lukumi religion— The Book of Diagnosis in Ifa Divination—which represents an attempt to preserve the oral traditions of the religion. It “was drawn from the religion’s oral tradition and first published in the 1940s. The original text and its copies were kept from the public until the present day.” (Beras 2008).

Yet, acceptance has also accentuated rivalry and contests for power to speak for the religion and to chart its course. “But those contacts also expose bitter and vituperative divisions among some high-profile practitioners, rifts that have emerged since they all celebrated the Supreme Court decision. It is a power struggle that appears to be tied to the process of modernization and institutionalization of a religion said to be 5000 years old. But there are also accusations that behind the bad blood is competition for the money spent on rituals -- millions of dollars each year in Dade County.” (Lantigua 1998). Pichardo and his Church are at the center of this controversy.

The city of Hialeah remains overwhelmingly Latino. Based on 2000 Census information updated through 2004, a little over 62% of the City’s population identified themselves as Cuban or of Cuban ancestry. ( Ancestry Maps). But since 1988 the city’s population has seen substantial growth by immigrants from other parts of the Caribbean region and Central America.

The Mayor of Hialeah also fared well. Mayor Martinez’ 1991 conviction “was overturned on appeal, two subsequent trials ended in hung juries and a federal prosecutor ultimately dropped the charges.” (Rejtman 1996). In 1999, again as Mayor, he was involved in a brawl with a Cuban protestor that was caught on tape. “Mayor Raul Martinez leads the charge to create Hialeah county, a battle temporarily sidetracked by an actual brawl. During a traffic-blocking protest, the burly mayor pummels slender butcher Ernesto Mirabal - landing a left and at least five right uppercuts as police officers also jump Mirabal. Prosecutors drop charges against Mirabal after news videos prove he didn't start it.” (Morgan 2000). Martinez continued as mayor until 2005. In 2004 he served as Parliamentarian of the Democratoc National Convention in Boston. (Democratic National Committee 2004). In 2008 he sought to unseat another Cuban-American in a race for a U.S. congressional seat. (Chardy & Figueroa 2008).

Most of the members of the Hialeah City Council resumed their lives, some quite successfully. Herman Echevarria remained on the Council for a while, pushing through a term limits proposal in 1997. “At the time, Echevarria was running against Martinez for mayor, a bid he eventually lost.” (Figueroa 2008). He became the Chairman/CEO of BVK/Meka (a marketing firm targeting Latino markets) and was recognized in 2001 by Miami Business Review as one of the top 100 most influential leaders in South Florida. (Hispanic PR Wire 2005). He is active in public service, serving on a variety of local public and private organizations. In 2000, Echevarria became Chairman of the Miami-Dade 2000 Marketing Initiative, and in 2002 he was appointed by the U.S. Small Business Administration (SBA) as a member of the SBA's National Advisory Council (NAC) where he served a 2 year-term. He remained a political foe of former Mayor Raul Martinez into the 21st century. (Wakefield 2001). Another Council member, Salvatore D’Angelo is currently a real estate agent with offices in Hialeah. Silvio Cardoso became the President of the Builders Association of South Florida (BASF). Cardoso has been named Builder of the Year by BASF, won numerous awards from the Latin Builders Association, and Florida’s BEST Awards in several categories. (Bulecza). He, along with Mr. Echevarria were among the invited to attend a reception for the King and Queen of Spain in 2001 in Miami. (Wakefield 2001). Julio Martinez served as acting mayor of Hialeah at the time of the end of the lawsuit. .

Bibliography & Suggested Additional Reading


Church of Lukumi Babalu Aye v. City of Hialeah, 688 F. Supp. 1522 (SD. Fla. 1988).

Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 723 F. Supp. 1467 (S.D. Fla. 1989).

Church of Lukumi Babalu Aye v. City of Hialeah, 936 F.2d 586 (Table) (11th Cir. 1991).

Church of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 508 U.S. 520 (1993).

Curch of the Lukumi Babalu Aye, Inc. v. City of Hialeah, 2 F.3d 369 (11th Cir., 1993).

Employment Div., Dept. of Human Resources of Ore. v. Smith, 494 U.S. 872, 110 S.Ct. 1595, 108 L.Ed.2d 876 (1990).

Grosz v. City of Miami Beach, 721 F.2d 729 (11th Cir. 1983), cert. denied, 469 U.S. 827, 105 S.Ct. 108, 83 L.Ed.2d 52 (1984).

Sherbert v. Verner, 374 U.S. 398, 83 S.Ct. 1790, 10 L.Ed.2d 965 (1963).

U.S. v. Martinez, 14 F.3d 543 (11th Cir, 1994).

Wisconsin v. Yoder, 406 U.S. 205, 215, 92 S.Ct. 1526, 1533, 32 L.Ed.2d 15 (1972).

Primary and Secondary Source Materials:

William Bascom, Sixteen Cowries (Bloomington, IN: Indiana University Press, 1993).

Erika Beras, FIU Fellow Unveils Sacred Book Of Santería, The Miami Herald, Jan. 18, 2008.

Jade Bulecza, Florida Home Builders Association, Leadeship and Staff: Silvio Cardoso.

Frank Burgos And Carlos Harrison, Hialeah May Ban Animal Sacrifices: 3 Ordinances Aimed at Santeria Church, THE MIAMI HERALD, September 8, 1987.

Lydia Cabrara, Koeko Iyawo -Aprende novicia: pequeño tratado de Regla Lucumí (Miami, FL: Ediciones Universal, 1980).

----------, La Regla Kimbisa Del Santo Cristo Del Buen Viaje (Coleccion Del Chichereku En El Exilio) (Miami, FL: Ediciones Universal, 2nd ed., June 1986).

----------, La Lengua Sagrada De Los Ñañigos (Coleccion Del Chichereku) (Miami, FL: Ediciones Universal, March 1988).

----------, El monte (Miami. FL: Ediciones Universal; 7th ed., August 8, 1995)

----------, Reglas de Congo/ Palo Monte Mayombe (Coleccion Del Chichereku En El Exilio) (Ediciones Universal, 2 edition, June 21, 2005).

Raul Canizares, Walking with the Night: The Afro-Cuban World of Santería (Rochester, Vt.: Destiny Books, 1993)

----------, Babalu Aye : Santería and the Lord of Pestilence (New York: Original Publications, October 2000).

Alfonso Chardy And Laura Figueroa, Martinez, Diaz-Balart congressional race turns nasty, The Miami Herald, Jan. 23, 2008.

Church of the Lukumi Babalu Aye, Decree on Standards Governing Iyawó Vestments and Safety Matters Revised and Adopted by the Board of Directors Promulgated by Oba Ernesto Pichardo June term 1989.

----------, CLBA History.

----------, History CLBA Resume 1974-1999.

City of Hialeah, History of the City of Hialeah: Hialeah, The City of Progress.

Sydney A. Clark, Cuban Tapestry (New York: Robert M. McBride & Co., 1936).

Julio Garcia Cortez, The Osha: Secrets of the Yoruba-Lucumi-Santería Religion in the United States and the Americas : Initiation, Rituals, Ceremonies, Orishas, Divination, Plants (Brooklyn, NY: Athelia Henrietta Press, 2000).

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Democratic National Committee, America 2004, The Democratic National Convention, Convention Officers (2004).

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Afolabi A. Epega and Philip John Neimark, The Sacred IFA Oracle (Brooklyn, NY:, Athelia Henrietta Press, 2nd ed., 1999)., Ancestry Maps, Ethnic Groups, Cuban Community.

Richard Fausset, Santería Priest Won't Let Religious Freedom Be Sacrificed, Los Angeles Times, Aug. 11, 2008, availableía11-2008aug11,0,7248211.story.

Laura Figueroa, Hialeah Voters Preserve Term Limits, THE MIAMI HERALD (August 29, 2008).

Florida International University, News Release: Santería Priest to present Lukumi-Yoruba religious ceremony at FIU, October 10, 2007.

Fred M. Frohock, The Free Exercise of Religion: Lukumi and Animal Sacrifice, ICCAS Occasional Paper Series (Nov. 2001).

M. González Wippler, Santería: The Religion 3-4 (1989).

Hialeah Journal; Where Politics is Down and Dirty, The New York Times (Nov. 1, 1991).

Hialeah’s Acting Mayor Gets Bizarre Message, The Miami Herald (March 28, 1991, p. 4 (Neighbors NW)), available

Hialeah City Council Tentatively Approves Property Tax, Garbage Fee Hikes, The Miami Herald, September 15, 1988, p. 2-D.

Hispanic PR Wire, Herman Echevarria, Chairman/CEO of BVK/MEKA Appointed to U.S. Small Business Administration, 'SBA' National Advisory Council, 'NAC' in Washington, D. C., 2005.

Jo Anna Hunter, Oro Pataki Aganju: A Cross Cultural Approach Towards the Understanding of the Fundamentos of the Orisa Aganju in Nigeria and Cuba, in ORISA YORUBA GOD AND SPIRITUAL IDENTITY IN AFRICA AND THE DIASPORA (Toyin Falola and Ann Genova, eds., New Jersey: Africa World Press, Inc. 2006).

Scott C. Idleman, The Underlying Causes Of Divergent First Amendment Interpretations, 27 MISS. C. L. REV. 67 (2007-08).

Akinkugbe Karade, Path to Priesthood (Classical Writings on the Ifa/Yoruba Traditional Religion) (Brooklyn, NY: Kanda Mukutu Books, June 28, 2001).

Ronald J. Krotoszynski, Jr., If Judges Were Angels: Religious Equality, Free Exercise, And The (Underappreciated) Merits Of Smith, 102 NW. U. L. REV. 1189 (2008).

John Lantigua, Holy Wars, Inc., Miami New Times News, April 9, 1998.

Ócha'ni Lele, The Diloggun: The Orishas, Proverbs, Sacrifices, and Prohibitions of Cuban Santería (Rochester, VT: Destiny Books, 2003).

Bob Lowe And Marie Betancourt, Hialeah Officials Mix Votes, Private Deals, The Miami Herald, p. 1, Jan. 27, 1985, available

Patrick May, Santería Opens Church In Hialeah, The Miami Herald (May 18, 1987) at 1B+.

Mayor and a Councilman are Indicted in Hialeah, The New York Times (April 5, 1990).

Chrity McKerney, Finding Faith, Exploring America’s Religious Landscape: Two Roosters, Two Hens, Palm Oil. . . , The Washington Post, February, 2008.

Daniel Morcate, Let Animals Live Free From Cruelty, The Miami Herald (June 24, 1993) at 1B+.

Curtis Morgan, Another Year In Miami: A Review of 1999, The Miami Herald, Jan. 2, 2000.

Luis M. Nuñez, Santería, A Practical Guide to Afro-Caribbean Magic, Chapter 2: Ceremonies.

Fernando Ortiz, Los Negros Brujos (Miami, FL: Ediciones Universal, November 1998).

Jack Rejtman, Hialeah Mayor Is Acquitted Of Extortion, The Tampa Tribune, May 14, 1996.

B.A. Robinson, Religious Tolerance, Onterio Consultants on Religious Tolerance, Santería: A Syncretistic Caribbean Religion; Beliefs and Practices (March 2007).

State of Florida, Annual Report of the Atty.General (1988).

Rebecca Wakefield, You Are Cordially Invited: So You Weren't Among Those Lucky Few Who Dined With The King And Queen? Consider It A Compliment, MIAMI NEW TIMES NEWS, April 19, 2001.