Random Thoughts: Coffee and Tips

I had an interesting week. I stayed up late writing motions on a case where a public company is suing some ex-employees. The company is "pink-listed," or traded OTC (over the counter), at three cents a share. The company claims that my clients took their trade secrets. California case law requires "trade secrets" to have independent economic value, and this fabless semiconductor company's IC chips appear antiquated. (They have plenty of money to pay lawyers rather than R&D, apparently.) One line in my brief compared their product to the Gutenberg Press and how it couldn't be a "trade secret," even if a company makes its employees sign an agreement promising not to disclose the Gutenberg Press. The other side had no response to that line in their reply brief. As scintillating as all this might sound, the lawsuit is one example of how the big guys can crush or bankrupt small guys because it's usually more cost-effective for individuals to settle even frivolous cases than to pay for all the motions and depositions that come with any case (only 5 to 10% of civil cases actually get to trial, at least in Santa Clara County). In this case, my clients have decided to fight the good fight...and I guess I'll see how much debt I have to write off this year. Anyway, we'll get back to how my case is relevant to the economy.

First, I discovered this great foot massage place in San Jose, along Story Road (Little Vietnam/Saigon area). I talked with the owner, and we discussed how different cities deal with massage places. The vice squad of the local PD always vets these businesses--I represented some acupunture places before, so I am somewhat familiar with the licensing process. This San Jose owner has a great operation. He partnered with an educated Chinese immigrant who's been in California for many years. I am guessing she's the hard worker and connections, and he's the capital (he was perusing some bylaws as we spoke). They hire grads from massage schools in S.F. and L.A., probably pay them minimum wage, and the workers get to keep their tips. All of the workers are professional and appear to be Chinese immigrants. Customers are around each other in a relaxing, open area. Massages are only 20 dollars for an hour, an incredible bargain (massages are usually $40 to $60 an hour here, but those massages allow full body contact).

The massuers and massueses rely on tips in this business structure. After my massage, I gave my massuese a 4 dollar tip. I don't usually carry cash and use my credit cards to rack up points (paying off the balance each month). Realizing a 4 dollar tip was not enough, I asked my friend to provide me with two more dollars, thinking a 30% tip was sufficient. But in between receiving the additional dollars and giving it to my masseuese, I saw that she was clearly upset over receiving just a four dollars (20%) tip. When she received the 6 dollars, she appeared to be fine, or at least not insulted. Two thoughts came to mind:

1. There might be some relationship between how much it costs to buy one cup of coffee and tips. Coffee is ubiqitous and an everyday product. Everyone, rich, poor and even homeless, expects to be able to buy it. Pre-Starbucks, a cup of joe cost about a buck. In those days, a 2 dollar tip when the underlying service cost 20 dollars or less (e.g., bellhops, a few drinks) was sufficient. Now, even when the underlying cost for a service is 20 dollars or less, people expect more than just a few dollars as a tip. Psychologically, times have changed. A reasonable minimum tip might be calculated by how much it costs to buy two cups of coffee (in this case, around six dollars). Coffee prices might be a good indicator of inflation.

2. There's a greater lesson here than just how much to tip. A service economy relies on workers getting adequate tips, which shifts salary costs from businesses to customers. I did a service this week, too. I didn't get paid a tip, but I got paid $190/hr (a discounted rate, and I "no-charged" several hours also). The American economy has catapulted certain service professions from tip status into non-tip status. The non-tip jobs are usually the better ones, because the lack of tip means that the full price of the service is included, and the price is less elastic due to the greater bargaining power of the seller. I had to wonder, as I received my massage--who was contributing more to the economy and wellness? Me, with my motions and oppositions in a frivolous case filed by a three-cents-a-share company, or the masseuse?

I came to the conclusion that American society has arbitrarily vaulted my job into the non-tip column because theoretically, my job requires the use of other positions--paralegal, court clerk, judge, process server, and even a law school professor. The masseuse, while offering a more benign skill, gets paid less in the American economy because her job does not create other jobs. That appears to be the benchmark for getting paid in a capitalist system--make sure your job theoretically requires several other jobs, or is interlinked with a diverse set of jobs.

In reality, my job, at least this week, was less important or useful than the masseuse's. That's the problem with having a service-based economy--it arbitrarily makes certain positions better than others not based on output, but on expected total consumption. Other countries appear to be positioning their economies on output, i.e. paying persons who produce things more money. (Neither the masseuse nor I produce anything in the classical sense.) So in China, the jobs go to people who produce clothing, shoes, motorcycles, etc. People can make a living producing things. In India, the jobs go to people who produce generic drugs, steel, and computer products. Of course, all countries have a service and manufacturing sector, but until recently, most service-based jobs paid similarly, regardless of status. Doctors in Russia many years ago did not make much money. Lawyers certainly don't make as much money anywhere else in the world as they can in America. In Singapore, I interned in a firm's corporate legal division--almost all the lawyers in that division were women making about 45,000 U.S. annually. Looking at the American economy in this way, it appears to be based on pure air, just like our money post-Bretton Woods. Meanwhile, other countries are basing their service jobs on selling products to Americans. I don't have the time now or the mental energy to think these ideas through, but there is something dangerous lurking in the shadows (and no, I did not deliberately try to make that sound as ambiguous as possible).

I am off to Reno in eight hours for a short three day trip. I got a great deal on Southwest Airlines. The key to getting their cheaper internet fares seems to be buying a flight at least two weeks in advance. Speaking of Reno, there are two public companies in Reno that might be decent investments: 1) IGT, in which I own shares; and 2) SRP, or Sierra Pacific Resources.

SRP sells electricity and also natural gas. Once I get more funds available in my retirement accounts, I will look more closely at SRP and its dividend.

IGT sells gaming systems, better known as slot machines or electronic games, to casinos and Indian reservations. It's got a wide moat. No one is going to risk going with a newer, cheaper competitor in this area.

Due to my trip, I won't be posting anything new until at least June 24, 2008. I will update readers on the NVDIA shareholder meeting when I return. Good night, and wish me luck.

Stocks Update

This is a condensed version of the Stocks Update. I sold PPS today at a loss of 2.8%. My actual loss was only 50 dollars. Goldman Sachs came out with a "neutral" rating on PPS two days ago. At the time, the stock was selling for around 35 dollars a share. Goldman's report established a price target of 32 dollars a share. The stock dropped to 34 dollars a share. Now, if Goldman thought the price should be 32 dollars/share, then why didn't it issue a "sell" rating? This strange rating system makes no sense. Some conspiracy theorists allege that Goldman Sachs' research arm knows that its brokerage arm has shorted certain stocks and will issue reports depressing a particular sector, allowing Goldman to cover its shorts. Maybe Tim Donaghy knows something about this. The SEC and DOJ might want to work together. I'm just sayin'.

In some semblance of sanity today, PFE went up on a down day for the market, which is what defensive pharma plays should do.

I added to my GE position, and also added 200 shares of Intel (INTC). Right now, my major positions are only in PFE and GE. See you in five years or more, while I collect my dividends. If I see some share price increase, that's just ice cream on the pie slice, as far as I'm concerned (I hate gravy, so I won't perpetuate that colloquilism).

Closed Position
PPS (-2.8%)

Dick Armey's Axiom Number One

Dick Armey's Axiom Number One: "The market is rational. The government is dumb."

His entire speech, printed in Imprimis, can be found by searching here:

http://www.hillsdale.edu/news/imprimis.asp

Mr. Armey goes on to say, "George Washington might have become our king, but he chose not to. His governing idea was that government is our servant because we are inherently free. It is an idea too many in government today forget."

Dick Armey is perhaps most famous for a statement made during the Monica Lewinsky scandal in 1998. A reporter asked him what he would do if he were in President Bill Clinton's position. He replied "If I were in the President's place I would not have gotten a chance to resign. I would be lying in a pool of my own blood, hearing Mrs. Armey standing over me saying, 'How do I reload this damn thing?'"

Stocks Update

I don't usually like giving a Stocks Update right before the market closing, but I have some more closed positions I wanted to add (ICE and WYE). I couldn't handle ICE's volatility, and WYE went up 4% today. But as you can see, CNB has been a major disappointment today. I picked up another 250 shares, bringing my total to 750 shares. It's not a major investment, and most of the regional banks went down today (e.g., Regions Financial, etc.), but for the first time, I am starting to have doubts about CNB. It is quite possible it will need to raise more capital due to its mid-2007 acquisition of Citrus & Chemical Bancorporation, Inc. Where is Citrus Bank located, you might ask? (Cue ominous music...) Lakeland, Florida, one of the states affected most by the subprime mess. In any case, my only "major" position continues to be PFE.

Remember the days when banking and pharma companies were "widows and orphans" stocks? Grandma could buy some shares, not expecting any major upswing in price, but collect a consistent dividend check. The banks looked out for the savers back in the day, knowing how many shareholders were depending on their dividends. Now, this unusual economic environment has made savers into buffoons, and speculators into heroes. More important, how long will this unusual market continue? The theoretically risky stocks--like technology, where a company product can become worthless overnight due to failure to innovate--are safe havens, and the theoretically necessary stocks--like banking and medicine--are the most dangerous. There's only one explanation for this--the technology companies, like Intel, acted liked conservative banks, saved their profits and now have very healthy balance sheets. Meanwhile, the banks went loco and decided they were growth companies, Grandma's dividend check be damned. And so it goes.

Update: for what it's worth, here is CNB's response to an email I sent their Investor Relations:

We acquired Citrus and Chemical Bank in December of 2007. As part of the purchase accounting, at the date of acquisition, the assets and liabilities are marked to fair value. This mark would have happen in December of 2007 and therefore has been reflected in our capital ratios for two quarters now. Our board of directors meets in mid July at which time they will vote on the dividend. At this point, we have enough capital to maintain the dividend at its current level of $.095/quarter. We filed an 8k a couple of weeks ago which shows our excess capital and good liquidity position. This material can be accessed from our website at www.colonialbank.com.

Open Positions
CNB = -11.53
EQ = -3.19
EWM = -0.45 (excluded from totals due to insignificant gain or loss)
GE = -4.52
IF = -6.24
PFE = -7.74
PNK = +4.74
PPS = 0 (excluded from totals due to insignificant gain or loss)

Average: losing/negative average of 4.74%

Closed Positions:
Held more than seven days but less than one year:
WYE = +2.4%

Held less than 7 days:
ICE (+2.0%), MMM (0.5%), MRK (0.1%), PFE (1.3%), SCUR (15%) (Overall record in this category is a 3.78% average gain)

Daytrades:
PFE = +0.5%

Average of all sub-categories, except for Daytrades: up/positive 3.09%

Funny: Dilbert Has a Great Blog

This is one of the funniest things I've read in a long time, so I had to share:

http://dilbertblog.typepad.com/the_dilbert_blog/2007/03/worlds_most_ann.html

If the link doesn't work, do a search for "Dilbert" and "World’s Most Annoying Man." Here is one short excerpt:

Mr. Clean on crack was rocking out to his iPod and sniff-snorting so loudly every few seconds that the flight crew kept looking out the window to see if a pterodactyl was attacking the fuselage...

And yes, apparently, Scott Adams has a blog (http://dilbert.com/blog/), and he understands economics:

http://dilbertblog.typepad.com/the_dilbert_blog/2008/05/the-economics-p.html

Enjoy!

Colonial Bancgroup Inc. (CNB) Bolstering its Dividend?

[Note on November 13, 2008: this post was popular because it was published during an extremely volatile time in CNB's stock price. CNB stock has since declined along with the rest of the market, and I sold my shares at a profit. Readers who followed this blog and bought on the way down had a brief opportunity for out-sized gains. See this 07/16/08 entry (CNB Entry), just one month after the 6/15/08 entry below.

Note on August 28, 2009: what a long, strange ride it's been for CNB. The bank became insolvent, and the FDIC brokered a takeover by another bank, BB&T. CNB shares now trade only on the OTC market under the symbol CBCGQ.PK.]

I was immediately attracted to Alabama's Colonial Bancgroup Inc. (CNB), because its stock symbol reminds me of "CMB," or Cash Money Brothers, from the classic film New Jack City (where Chris Rock played a crack addict a little too well). Acronyms aside, CNB recently indicated it might switch from a national charter to a state charter. What does that mean? For reasons discussed below, I believe this is good news for people like me, who bought CNB stock for its dividend.

First, it is generally less onerous to operate as a state chartered bank than a federally chartered bank. For example, a state chartered bank can more easily pay dividends than a federally chartered bank. To understand why, we need to go back in American history. Many of the Founders of the United States viewed the notion of a federally-supervised banking system with skepticism. They had just come from a centralized, tyrannical British system and did not want to grant their federal government equivalently broad powers in the form of money-monopoly. But Alexander Hamilton pushed for a central banking system and in 1791, help set up the First Bank of the United States in Philadelphia, as well as the U.S. Mint (also in Philly). Perhaps because of the initial difficulty in setting up a centralized banking system, the federal government later passed laws that forced federally-chartered banks to operate under more strict arrangements, creating an Office of the Comptroller and other regulatory banking agencies.

The restrictions on a national (or federally chartered) bank’s ability to pay dividends arise from two statutes: 12 U.S.C. § 60(b) and 12 U.S.C. § 56.

12 U.S.C. 60(b) states:

Approval required under certain circumstances:

A national bank may not declare and pay dividends in any year in excess of an amount equal to the sum of the total of the net income of the bank for that year and the retained net income of the bank for the preceding 2 years, minus the sum of any transfers required by the Comptroller of the Currency and any transfers required to be made to a fund for the retirement of any preferred stock, unless the Comptroller of the Currency approves the declaration and payment of dividends in excess of such amount.

In short, a national bank has to get approval from the federal government if the total of all dividends it declares is more the total of its “net profits,” including net profits from the last two years, and excluding any required transfers to maintain liquidity and pay off higher priority creditors. The point is that there is a restriction on paying dividends that doesn’t necessarily exist under a state charter.

12 U.S.C. § 56 (titled, “Prohibition on withdrawal of capital; unearned dividends”) states:

No association, or any member thereof, shall, during the time it shall continue its banking operations, withdraw, or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital. If losses have at any time been sustained by any such association, equal to or exceeding its undivided profits then on hand, no dividend shall be made; and no dividend shall ever be made by any association, while it continues its banking operations, to an amount greater than its undivided profits, subject to other applicable provisions of law. But nothing in this section shall prevent the reduction of the capital stock of the association under section 59 of this title.

Basically, if a federally chartered bank ends up with bad loans, they cannot exclude those loan losses when determining their “net profits.” This accounting restriction affects its ability to pay dividends and attract shareholders, who typically buy bank stocks for their dividends. In contrast, if a non-federally-chartered bank is losing 100 million dollars because of bad loans but makes a profit of 99 million dollars elsewhere, they might not be forced to mark-to-market their bad loans, meaning they might be able to report a net profit of 99 million dollars (oh, pro forma, how Wall Street loved you). However, a federally chartered bank, under that simplified scenario, could not pay any dividends whatsoever. This § 56 accounting restriction means that in bad years, federally chartered banks would probably have to reduce or eliminate their dividends. In addition, because a federally chartered bank has to pay dividends from “net profits,” rather than some other capital account (“prohibition on withdrawal of capital”), a bank with two consecutive bad years might not be allowed to pay any dividends at all for a long time, even if it is financially healthy overall.

What does this mean now that CNB’s application to become converted into a state chartered bank has been approved? I interpret it to mean the relatively hefty dividends are going to keep coming. In the absence of financial irregularities--never a sure bet these days--the state conversion application should be good news for Cash Nabob Bulls, er, CNB shareholders (sorry, Mario van Peebles--I couldn't resist, especially not when you have an economics degree from Columbia University.)

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

The Most Significant U.S. Supreme Court Decision this Century

After seven long years, America’s credibility has been restored by a much too close 5-4 U.S. Supreme Court decision. The Boumediene v. Bush (2008) decision can be found at this link:

Supreme Court Decision (PDF file)

The transcript of oral argument can be found here:

Supreme Court Oral Argument

Seth Waxman argued on behalf of the detainees--his profile is here. (There are some people who are great advocates, but Mr. Waxman is in a class by himself. While he is well-known in legal circles, it’s quite possible that American history students years from now will not know Seth Waxman’s name. That would be a mistake. Mr. Waxman should be in every new history book published as one of the greatest Americans who ever lived.)

Most surprising is Justice Antonin Scalia’s switch-a-roo in Boumediene. As a so-called true conservative, he should have understood the overarching theme of the Constitution--that the Constitution limits the government’s actions and exists to hold government accountable to the public. As such, secretive criminal tribunals and detentions, like the one in Guantanamo Bay, directly contravene constitutional principles such as the separation of powers doctrine.

In fact, Justice Scalia had dealt with a somewhat similar issue in Hamdi v. Rumsfeld, where his dissent was joined by the most liberal Justice on the bench, John Paul Stevens. Scalia even referred to his Hamdi opinion during the Bush oral argument. In an interesting slip, when Scalia demanded to know whether there was any precedent for extending constitutional habeas corpus to non-citizens, and the detainees’ counsel offered examples, Scalia said, “Okay, try them. I mean, line them up.” Somewhere in Scalia’s brain, he must have subconsciously understood that forcing a government to provide a speedy trial to all persons it detains on U.S. soil and/or under complete U.S. jurisdiction and control is an essential check on corruption and power.

In Hamdi, Justice Scalia advocated the most restrictive interpretation of the Executive’s power of detention. The other Justices said that so long as the government allowed some kind of process accompanying detention that provided for meaningful notice of the factual grounds for detention, and a meaningful opportunity to present evidence before a neutral tribunal with the assistance of counsel, the Court would defer to the Executive branch. Scalia, however, rejected this half-way measure (I call it “habeas corpus lite”) and said that the government had only two options when it detained Hamdi: a) either Congress had to suspend the right to habeas corpus, an option only in times of “invasion” or “rebellion,” or b) the government had to provide a normal, open criminal trial to Hamdi, a U.S. citizen. Scalia argued that the Court had no legal basis for telling the Executive or the Legislative branches how to establish new procedures in Hamdi’s situation; instead, the Court’s ambit was limited to declaring the government’s procedure unconstitutional and ordering Hamdi’s release, or declaring the government’s procedure constitutional. What is so stunning about Scalia's dissent is that it fails to realize that Kennedy is saying exactly what Scalia himself wrote in Hamdi, meaning that the logic is the same, and the difference is that one case dealt with a U.S. citizen while the other did not.

Usually, Scalia's unyielding type of interpretation--i.e., either the document says what it says, or it doesn’t, and it’s not my business to make up things I think it should say--gets Scalia points for his self-restraint. Indeed, this was Scalia’s time to shine, to show the public that his brand of interpretation may not be the most compassionate, but the one that could be counted on in hard times, when its unbending steel backbone would not melt under public pressure. In short, Scalia choked, and Justice Kennedy has an opinion that will shape his legacy in the years to come.

I met Justice Kennedy several years ago when I was a law school student. He is a tall, affable man with a distinguished but not standoffish demeanor. After his speech, he kindly signed my Constitutional Law textbook on the front inside cover. Before he signed the cover, he flipped through the book, trying to find one of his opinions. He saw none of his opinions had been published prominently and thus could not sign next to an opinion he had written. I am not sure whether he was looking for a particular case, but it was then that I realized Justice Kennedy was concerned about establishing a legacy and disappointed that his contributions to the Court were not as famous as some of his colleagues. For a moderate conservative, it was somewhat incongruent to hear him tell the audience that his favorite Justice was Justice Thurgood Marshall. But combine Kennedy's statement with his search for one of his opinions in my textbook, and you see that this is a man that wants a legacy. He now has it, and it’s a damn fine one. If you ever see him and want his autograph, flip to your Con Law book and present him with Boumediene v. Bush.

The Court’s oral argument and opinion are a joy to read, in stark contrast to the tragic underlying facts. The United States has detained persons in Guantanamo Bay for six years without a trial, much less a speedy one. The United States argued that no Constitutional violation existed because it was good enough that Congress had established other processes for habeas corpus under the Detainee Treatment Act (DTA), awarded jurisdiction for habeas corpus review only to the D.C. Circuit, and, through the Military Commissions Act (MCA), had created another tribunal for persons believed to be enemy combatants. The Supreme Court’s summary of its decision shows the Court quickly rejected the government’s other argument that American courts have no jurisdiction over detainee treatment because detainees are held in Cuban territory:

"Although the United States has maintained complete and uninterrupted control of Guantanamo for over 100 years, the Government’s view is that the Constitution has no effect there, at least as to noncitizens, because the United States disclaimed formal sovereignty in its 1903 lease with Cuba. The Nation’s basic charter cannot be contracted away like this. The Constitution grants Congress and the President the power to acquire, dispose of, and govern territory, not the power to decide when and where its terms apply. To hold that the political branches may switch the Constitution on or off at will would lead to a regime in which they, not this Court, say 'what the law is.' Marbury v. Madison, 1 Cranch 137, 177."

We are then left with the government’s remaining argument, which doesn't sound too convincing: the Court should not intervene because the detainees in Guantanamo have “habeas corpus lite”--where the government can accuse someone of affiliating with a known Al-Qaeda operative and detain him on that basis but refuse to disclose the name of the operative so that a proper defense can be made. The gist of the detainees’ argument (and frustration) is beautifully encapsulated by Justice Breyer in this brief, eye-opening exchange:

JUSTICE BREYER: On that question, suppose that you are from Bosnia, and you are held for six years in Guantanamo, and the charge is that you helped Al-Qaeda, and you had your hearing before the CSRT [Combatant Status Review Tribunal].

And now you go to the D.C. Circuit, and here is what you say: The CSRT is all wrong. Their procedures are terrible. But just for purposes of argument, I concede those procedures are wonderful, and I also conclude it reached a perfectly good result.

Okay? So you concede it for argument's sake. But what you want to say is: Judge, I don't care how good those procedures are. I'm from Bosnia. I've been here six years. The Constitution of the United States does not give anyone the right to hold me six years in Guantanamo without either charging me or releasing me, in the absence of some special procedure in Congress for preventive detention.

That's the argument I want to make. I don't see anything in this CSRT provision that permits me to make that argument. So I'm asking you: Where can you make that argument?

GENERAL CLEMENT: I'm not sure that he could make that argument.

JUSTICE BREYER: Exactly.

While this proposition--that if the government detains someone in a place where it has total jurisdiction and control, then the person detained is entitled to a lawyer with access to the facts against his client and a speedy trial--may sound simple, Scalia is correct that it may open a can of worms. Scalia talks about the history of this country to demonstrate the complexity of the issues. First, the American government detained 400,000 Germans during WWII–did all of them have to get a speedy trial or be released? Second, what about POWs that Americans capture abroad, like in Vietnam? Do all of them get a speedy trial? (McCain may want one, and the American and Vietnamese governments may agree between themselves to provide trials, but doesn’t that mean that the Court is interfering in international affairs?) As you can see, the issues are complicated when extending the rights of habeas corpus to non-citizens, and Scalia believes that there is no decision ever made that has granted such rights to non-citizens. In typical Scalia fashion, he ends his written opinion with a bang, not a whimper: “The Nation will live to regret what the Court has done today. I dissent.”

Since I’ve given you Scalia’s ending, let’s go to Kennedy’s:

Security subsists, too, in fidelity to freedom’s first principles. Chief among these are freedom from arbitrary and unlawful restraint and the personal liberty that is secured by adherence to the separation of powers...Because our Nation’s past military conflicts have been of limited duration, it has been possible to leave the outer boundaries of war powers undefined. If, as some fear, terrorism continues to pose dangerous threats to us for years to come, the Court might not have this luxury...[But] [t]he laws and Constitution are designed to survive, and remain in force, in extraordinary times. Liberty and security can be reconciled; and in our system they are reconciled within the framework of the law. The Framers decided that habeas corpus, a right of first importance, must be a part of that framework, a part of that law. pps. 68-70.

So Kennedy is telling Scalia to calm down--we can work through this, and if times change, the law and Americans can adapt.

In any case, Kennedy's opinion gets right to the point. Kennedy disagrees that the Constitution allows him to approve the government's request for "habeas-corpus lite":

We hold that those procedures are not an adequate and effective substitute for habeas corpus. Therefore §7 of the Military Commissions Act of 2006 (MCA), 28 U. S. C. A. §2241(e) (Supp. 2007), operates as an unconstitutional suspension of the writ. We do not address whether the President has authority to detain these petitioners nor do we hold that the writ must issue. These and other questions regarding the legality of the detention are to be resolved in the first instance by the District Court.

Kennedy, on page 9, stresses the importance of the writ of habeas corpus: "The Framers viewed freedom from unlawful restraint as a fundamental precept of liberty, and they understood the writ of habeas corpus as a vital instrument to secure that freedom." Kennedy takes us through a history of the writ, and why it was so important. He talks about the Magna Carta, and how we moved away from a monarchy-centered legal system to our current one:

As the writers said of Magna Carta, “it means this, that the king is and shall be below the law.” 1 F. Pollock & F. Maitland, History of English Law 173 (2d ed. 1909); see also 2 Bracton On the Laws and Customs of England 33 (S. Thorne transl. 1968) (“The king must not be under man but under God and under the law, because law makes the king”).

But Kennedy is building up to his key point--that separation of powers must be preserved, lest the Court invite tyranny:

This history was known to the Framers. It no doubt confirmed their view that pendular swings to and away from individual liberty were endemic to undivided, uncontrolled power. The Framers’ inherent distrust of governmental power was the driving force behind the constitutional plan that allocated powers among three independent branches. This design serves not only to make Government accountable but also to secure individual liberty. See Loving v. United States, 517 U. S. 748, 756 (1996) (noting that “[e]ven before the birth of this country, separation of powers was known to be a defense against tyranny”); cf. Youngstown Sheet & Tube Co. v. Sawyer, 343 U. S. 579, 635 (1952) (Jackson, J., concurring) (“[T]he Constitution diffuses power the better to secure liberty”); Clinton v. City of New York, 524 U. S. 417, 450 (1998) (KENNEDY, J., concurring)

Go back and read that paragraph again--if you truly understand it, you understand America and you understand its founding principles. It was about time that someone in another branch of government stood up to George W. Bush and his expansion of the Executive power. Reading the words above, knowing that they are now enshrined as the supreme law of this land, was almost worth the wait.

Kennedy then goes even further, pointing out that the doctrine of separation of powers isn't just to protect citizens, but to protect non-citizens ("persons"). While he doesn't say it clearly, the point is that the Constitution is designed as a check against government action, and because that is the first step in any analysis of constitutionality, the law does not necessarily turn on the accident of someone's place of birth (page 12):

Because the Constitution’s separation-of-powers structure, like the substantive guarantees of the Fifth and Fourteenth Amendments, see Yick Wo v. Hopkins, 118 U. S. 356, 374 (1886), protects persons as well as citizens, foreign nationals who have the privilege of litigating in our courts can seek to enforce separation- of-powers principles, see, e.g., INS v. Chadha, 462 U. S. 919, 958–959 (1983).

(I expect the paragraph above will produce more litigation than the Court intended, especially with respect to immigration law issues.)

Kennedy also indicates the Founders believed the writ of habeas corpus was designed to prevent "tyranny" and "arbitrary government." He cites Federalist No. 84.

The next part of the opinion deals with historical precedent. Kennedy is in a bind, because he knows Scalia has him over a barrel. Kennedy has no case law on point that supports an expansion of the writ of habeas corpus to non-citizens, so he goes through some legal history relating to British-India relations, Scottish law, and even British-Canadian relations. It's not terribly exciting, because Kennedy is really trying to satiate Scalia and insulate himself and the majority from a scathing dissent. The way Kennedy deals with the issue is by saying that neither side has any precedent on point, because all the facts in similar cases are completely distinguishable one way or another. The parties themselves apparently made that argument: "Each side in the present matter argues that the very lack of a precedent on point supports its position." (page 21)

And here's where Kennedy drives the knife home against Scalia, logically--he says that the historical record is incomplete (plus, America has only been around 200+ years), and we've never seen a problem like this one in our ever-changing society, so the principles of the Constitution trump the lack of historical record:

Both arguments are premised, however, upon the assumption that the historical record is complete and that the common law, if properly understood, yields a definite answer to the questions before us. There are reasons to doubt both assumptions. Recent scholarship points to the inherent shortcomings in the historical record. See Halliday & White 14–15 (noting that most reports of 18th century habeas proceedings were not printed). And given the unique status of Guantanamo Bay and the particular dangers of terrorism in the modern age, the common-law courts simply may not have confronted cases with close parallels to this one. We decline, therefore, to infer too much, one way or the other, from the lack of historical evidence on point. (page 22)
Kennedy returns to this theme that this is a unique situation, limiting the value of prior decisions:

It is true that before today the Court has never held that noncitizens detained by our Government in territory over which another country maintains de jure sovereignty have any rights under our Constitution. But the cases before us lack any precise historical parallel... (page 41) The gravity of the separation-of-powers issues raised by these cases and the fact that these detainees have been denied meaningful access to a judicial forum for a period of years render these cases exceptional. (page 43)

Having dealt with Scalia, Kennedy can move on to the government's next argument, i.e. "that Guantanamo is not within its sovereign control." He disposes of that argument by assessing what "sovereignty" means, and smartly quotes Black’s Law Dictionary 1568 (4th ed. 1951) (defining “sovereignty” as “[t]he supreme, absolute, and uncontrollable power by which any independent state is governed.” (page 33) It's quite clear that the U.S. does indeed have sovereignty over Guantanamo Bay under any basic or reasonable definition of sovereignty. Kennedy also states that no other country has made a claim on Guantanamo, and along with the treaty and lease, it's clear that the U.S. does have de facto sovereignty:

The United States has maintained complete and uninterrupted control of the bay for over 100 years. At the close of the Spanish-American War, Spain ceded control over the entire island of Cuba to the United States and specifically “relinquishe[d] all claim[s] of sovereignty . . . and title.”

The "We don't have de jure sovereignty over Cuba, so you're interfering in international affairs" argument is the government's weakest one, but had to made because its technical aspect appeals to lawyers. Still, the idea that the government's lawyers tried to rely on this weak argument probably upset the Court, leading to the following rebuke from Kennedy, where he says, "Our basic charter cannot be contracted away like this [through loopholes]."

Kennedy is most effective when he acts as a statesman, using his soothing style to remind everyone of the plain facts:

The Court [in another situation] was right to be concerned about judicial interference with the military’s efforts to contain “enemy elements, guerilla fighters, and ‘were-wolves.’ ” 339 U. S., at 784. Similar threats are not apparent here; nor does the Government argue that they are. The United States Naval Station at Guantanamo Bay consists of 45 square miles of land and water. The base has been used, at various points, to house migrants and refugees temporarily. At present, however, other than the detainees themselves, the only long-term residents are American military personnel, their families, and a small number of workers. (page 40)

In that one simple paragraph, Kennedy has responded to any who would dare say that he has made it difficult for the military to combat terrorism. Kennedy clearly thinks that this is a simple issue. And after you hear him explain it, it does sound simple: there are people being held someplace under the U.S.'s control; these people are not in the middle of a war zone; Cuba won't mind if we give these people a trial ("There is no indication, furthermore, that adjudicating a habeas corpus petition would cause friction with the host government." page 41); there is no threat to anyone if these people get a trial; habeas corpus is an essential Constitutional right; and by denying these persons a speedy trial, the executive branch is violating the Constitution.

Kennedy reminds everyone that his ruling is limited and does not apply to combat zones or where other countries can claim competing sovereignty over a particular parcel of land where persons are held:

While obligated to abide by the terms of the lease, the United States is, for all practical purposes, answerable to no other sovereign for its acts on the base. Were that not the case, or if the detention facility were located in an active theater of war, arguments that issuing the writ would be “impracticable or anomalous” would have more weight.

Now here is where there is some concern that Kennedy has crafted a hollow opinion. Can't the U.S. just bypass the ruling by moving anyone it deems an "enemy combatant" or a non-citizen to Egypt or some other country where human rights violations aren't viewed with the same kind of scrutiny as they are in the U.S.? It seems that if the U.S. does that, they are in the clear and can revert to "habeas corpus lite." The supreme law of the land can therefore be trumped by using a loophole of an alliance with a country that has lower standards. It would allow picking up an Israeli illegal immigrant in San Diego, sending him to Saudi Arabia, and locking him up forever without a trial. I suppose logistical and financial realities would prevent such a scenario from happening, but the existence of such a wide loophole concerns me. Still, there must be limits to how much a court can order an executive branch to enforce laws, and Kennedy has drawn the line where he feels is appropriate. He comes back to this troubling issue later on page 65, saying,

In cases involving foreign citizens detained abroad by the Executive, it likely would be both an impractical and unprecedented extension of judicial power to assume that habeas corpus would be available at the moment the prisoner is taken into custody. If and when habeas corpus jurisdiction applies, as it does in these cases, then proper deference can be accorded to reasonable procedures for screening and initial detention under lawful and proper conditions of confinement and treatment for a reasonable period of time. Domestic exigencies, furthermore, might also impose such onerous burdens on the Government that here, too, the Judicial Branch would be required to devise sensible rules for staying habeas corpus proceedings until the Government can comply with its requirements in a responsible way.

I interpret the above paragraph to indicate that the Constitution requires some form of trial within a reasonable time, but my reading may be reasonably disputed. Kennedy also allows another loophole--he reminds everyone that Congress, under the Suspension Clause, can suspend the writ of habeas corpus if it wants to do what it's doing now. Of course, the writ has been suspended only once in American history, during the Civil War (a "rebellion" or "invasion" is required).

Kennedy turns to the standards that lower courts and tribunals must have when dealing with writs of habeas corpus, and ends with a broad statement that basically says, "It depends":

We do consider it uncontroversial, however, that the privilege of habeas corpus entitles the prisoner to a meaningful opportunity to demonstrate that he is being held pursuant to “the erroneous application or interpretation” of relevant law. St. Cyr, 533 U. S., at 302. And the habeas court must have the power to order the conditional release of an individual unlawfully detained—though release need not be the exclusive remedy and is not the appropriate one in every case in which the writ is granted...depending on the circumstances, more may be required. (page 50)

The opinion eliminates the legality of CSRTs (Combatant Status Review Tribunals) and DTA courts. See pages 57-58 of the opinion--Kennedy says that minimally respectable tribunals in history "had an adversarial structure that is lacking here [in the military court systems]. He is essentially calling the CSRTs and DTA courts "kangaroo courts." See page 66: "the DTA review procedures are an inadequate substitute for habeas corpus." But in typical Kennedy fashion, where Kennedy has faith that the system will work things out once the Court provides a broad outline, he avoids delving too far into exactly what is required in a tribunal accepting writs of habeas corpus. He says,

The extent of the showing required of the Government in these cases is a matter to be determined. We need not explore it further at this stage. We do hold that when the judicial power to issue habeas corpus properly is invoked the judicial officer must have adequate authority to make a determination in light of the relevant law and facts and to formulate and issue appropriate orders for relief, including, if necessary, an order directing the prisoner’s release... (page 58) It bears repeating that our opinion does not address the content of the law that governs petitioners’ detention. That is a matter yet to be determined. (page 69)

So what's the real result of Justice Kennedy's decision? "To be continued..." by the other two branches and the will of the people. Kennedy's deference to the other two branches--within the reasonable framework set forth in his opinion--makes the dissenters' arguments sound hollow.

Justice Roberts wrote a dissent, joined by Scalia, Thomas, and Alito. The gist of it is in the very first paragraph, which tells you all you need to know about what Roberts thinks of the decision:

Today the Court strikes down as inadequate the most generous set of procedural protections ever afforded aliens detained by this country as enemy combatants. The political branches crafted these procedures amidst an ongoing military conflict, after much careful investigation and thorough debate. The Court rejects them today out of hand, without bothering to say what due process rights the detainees possess, without explaining how the statute fails to vindicate those rights, and before a single petitioner has even attempted to avail himself of the law’s operation. And to what effect? The majority merely replaces a review system designed by the people’s representatives with a set of shapeless procedures to be defined by federal courts at some future date.

Roberts continues in his typical confrontational and adversarial style on page 8, saying,

Simply put, the Court’s opinion fails on its own terms. The majority strikes down the statute because it is not an “adequate substitute” for habeas review, ante, at 42, but fails to show what rights the detainees have that cannot be vindicated by the DTA system.

Justice Souter (with Ginsburg and Breyer) most likely wrote their short concurrence to respond to Justice Roberts, stating,

A second fact insufficiently appreciated by the dissents is the length of the disputed imprisonments, some of the prisoners represented here today having been locked up for six years...[I]t is enough to repeat that some of these petitioners have spent six years behind bars. After six years of sustained executive detentions in Guantanamo, subject to habeas jurisdiction but without any actual habeas scrutiny, today’s decision is no judicial victory, but an act of perseverance in trying to make habeas review, and the obligation of the courts to provide it, mean something of value both to prisoners and to the Nation.

After Kennedy's grand words, what it boils down to is the following: some Justices thought that Congress had acted with the appropriate urgency and crafted new legal systems in good faith to deal with captured combatants. Other Justices believed that the profound delay in trying the people held in Guantanamo Bay with appropriate safeguards proved that Congress was disrespecting a fundamental Constitutional right.

Justice Roberts ends his dissent with this seemingly crushing rebuke:

So who has won?...Not the Great Writ, whose majesty is hardly enhanced by its extension to a jurisdictionally quirky outpost, with no tangible benefit to anyone. Not the rule of law, unless by that is meant the rule of lawyers, who will now arguably have a greater role than military and intelligence officials in shaping policy for alien enemy combatants. And certainly not the American people, who today lose a bit more control over the conduct of this Nation’s foreign policy to unelected, politically unaccountable judges.

Justice Roberts' words sound like music to a libertarian's ears because they invoke the principle of self-restraint. But once you remember that the people in Guantanamo Bay had waited six years, and the D.C. Circuit court judges had basically denied them due process for those six years while also accepting a non-adversarial, closed trial system as sufficient, Justice Roberts sounds unconscionably naive.

There is a time and place for the Supreme Court to intervene in politically charged issues. When the Executive and Legislative branches are violating the Constitution by enacting into law and then enforcing kangaroo courts and Kafkaesque tribunals, the Court's intervention was justified.

Justice Scalia's dissent is less interesting than usual. He keeps harping on the lack of historical basis to grant habeas corpus to non-citizens, which was adequately addressed by Justice Kennedy. But Scalia loses credibility when he begins his dissent with the idea we are currently in such a state of terror that we cannot provide a speedy trial to persons locked up for six years who are under complete American control:

America is at war with radical Islamists. The enemy began by killing Americans and American allies abroad: 241 at the Marine barracks in Lebanon, 19 at the Khobar Towers in Dhahran, 224 at our embassies in Dar es Salaam and Nairobi, and 17 on the USS Cole in Yemen...The game of bait-and-switch that today’s opinion plays upon the Nation’s Commander in Chief will make the war harder on us. It will almost certainly cause more Americans to be killed.

I usually love Scalia's opinions, but have serious problems with this one. He is basically accusing the Court of killing Americans. He goes on to say that the Court is making a mistake because the Executive branch relied on a legal memo saying that if detainees were transferred to Guantanamo Bay, they would have no rights to habeas corpus:

Had the law been otherwise, the military surely would not have transported prisoners there [Guantanamo Bay], but would have kept them in Afghanistan, transferred them to another of our foreign military bases, or turned them over to allies for detention.

Scalia is saying that not only is the Court trumping the opinions of the President's legal staff, the President would never be in this position if he had kept the detainees in squalid conditions elsewhere. Scalia sounds like he's more concerned with John Yoo's malpractice insurance than the Constitution. He goes on to say,

What competence does the Court have to second-guess the judgment of Congress and the President on such a point? None whatever. But the Court blunders in nonetheless. Henceforth, as today’s opinion makes unnervingly clear, how to handle enemy prisoners in this war will ultimately lie with the branch that knows least about the national security concerns that the subject entails.

This echoes Roberts' comments that the Court's decision seems politically motivated, i.e. intended to increase the power of the judiciary rather than complying with common sense. However, as I said before, there is a time and place for court intervention, and six years of detention based on secret evidence seems like a reasonable time to intervene. No dissenter mentions this simple fact: that had the Executive and Legislative branches worked together to provide an adequately adversarial legal system within a reasonable time to the detainees, all issues before the Supreme Court would have been moot. The inaction of the other branches, not some plot to increase judicial power, is what allowed Justice Kennedy to finally have his legacy.

In addition, the text of the Constitution refers to due process being given to the "accused" and to "persons," indicating that no citizenship requirement exists for due process. For example, the Bill of Rights prohibits Congress from making any law respecting establishment of religion and prohibits the federal government from depriving any person of life, liberty, or property, without due process of law. The Constitution does not use the word "citizen" very often. Even the 6th Amendment uses the term, "accused," rather than "citizen":

Sixth Amendment: In all criminal prosecutions, the accused shall enjoy the right to a speedy and public trial, by an impartial jury of the State and district where in the crime shall have been committed, which district shall have been previously ascertained by law, and to be informed of the nature and cause of the accusation; to be confronted with the witnesses against him; to have compulsory process for obtaining witnesses in his favor, and to have the Assistance of Counsel for his defense.

The case before the court dealt with Article I, Section 9 of the Constitution, not the Bill of Rights. The specific clause is as follows: "Clause 2: The Privilege of the Writ of Habeas Corpus shall not be suspended, unless when in Cases of Rebellion or Invasion the public Safety may require it."

It's interesting that Scalia, of all people, would be reading something (i.e., a citizenship requirement for due process) into the Constitution that isn't supported by the four corners of the document. Also, as all lawyers know, "shall means shall." Article I is very straightforward--it states that habeas corpus "shall" not be suspended except in two scenarios. What makes the Supreme Court's ruling confusing is that no Justice really defines whether 9/11 constitutes an invasion or rebellion, and if so, who has the authority to determine whether an "invasion" has occurred. The Supreme Court bypassed the issue of providing guidance on what constitutes a "rebellion" and "invasion," because Congress is the entity with the power to suspend the writ of habeas corpus, and because it had not done so, that specific issue was not before the Court.

Senator Barack Obama praised the ruling as "an important step toward re-establishing our credibility as a nation committed to the rule of law, and rejecting a false choice between terrorism and respecting habeas corpus." I'm with Obama--and apparently, the four corners of the Constitution--on this one.

copyright Matthew Mehdi Rafat (2008)

Update on June 16, 2008:

One of my former law professors was kind enough to offer some brief thoughts on my post--I don't have his/her permission to include his/her name, but his/her words clarify my post substantially:

1. I don't think the Court has ever held that the full panoply of the Bill of Rights applies to noncitizens held outside the United States, particularly in the context of hostilities towards the U.S. Indeed, Hamdi seemed to hold otherwise. So that might explain the 6th Amendment issue.

2. Remember that Congress has NOT suspended the writ. So the question of whether we have had an "invasion" to threaten "public safety" is not yet relevant, at least legally. The issues were (1) whether the detainees could invoke the protection of the Suspension Clause, and (2) whether the MCA and DTA procedures were an adequate substitute for habeas. And the answers were (1) yes and (2) no, respectively.

3. I think Scalia has been consistent on this point. I think he has consistently stated that the writ does not extend to noncitizens held outside the United States. Notice, also, that the Suspension Clause says nothing about "persons" or "citizens." So, for Scalia, it is a question of what the common law required in 1789.

Update on January 8, 2009: here's an excellent documentary ("Torturing Democracy") on the Guantanamo detainees

http://www.gwu.edu/~nsarchiv/torturingdemocracy/program/