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Financial Literacy for Law Students: Part II

posted by Adam Levitin

Separate from the question of whether we should have financial literacy education for law students, there's the question of what should be included. I'm curious what readers think is important. Comments are open. I'd merely ask that if your comment relates to the "should," rather than the "what" that you post in response to the "should" post, and not here.  To get the ball rolling, let me throw out a few thoughts, that are not at all meant to be a complete list, but just ice-breakers:

(1) senior vs. junior (debt vs. debt, debt vs. equity, preferred vs. common)

(2) secured vs. unsecured, collateral, recourse, secured loan/finance lease/sale equivalency/distinction

(3) reading balance sheets and income statements

(4) options, futures, swaps and other derivatives (what they are, how they work, basic terms, e.g. "strike price")

(5) valuation issues:  present value/time value/rate risk /discounted cash flows / OID

(6) guarantees, insurance, subrogation

(7) limited vs. unlimited liability

Hopefully this will get the ball rolling. 


Reading a Note to calculate interest, when default interest begins accruing (late fees too), and understanding amortization schedules.

These are good.

As a lawyer who became a banker I'd recommend asking *why*. Why do companies issue debt instead of equity or vice versa? What characteristics make a good [debt / equity] issuer? What industries do more of which? Why would you issue secured or unsecured debt? How do investors think about the tradeoff between yield and security?

These are hard to do well or succinctly but learning unmotivated financial concepts is not that helpful.

Also for "valuation issues: present value/time value/rate risk /discounted cash flows / OID" - that is very finance-class; company valuation in the world is ~80% just multiples from comparable companies. Awareness of that is a first step toward financial literacy. Lawyers should have a deep feel for TEV, EBITDA, and how those two things relate; that's more important than DCFs.

most law students don't have a clue how consumer credit works. that is, credit scores, revolving debt, the ins and outs of credit cards, delinquencies and default. every one of them should have a class in basic personal finance, followed up with a class that ties the real world experience of consumer debtors into the laws that affect these matters, from debt management to debt settlement to consumer bankruptcy to collections, judgments, executions, garnishments, exemptions, etc.

As a financial analyst who works with internal and external counsel on contracts, I'd add domestic and international payment terms, plus a high level overview of cost accounting and cash flow. The wrong incoterm can cost millions.

I have five suggestions: accounting, accounting, accounting, accounting, and accounting.

Lawyers need to get a feel for how manipulable an income statement or balance sheet really is, and why these are manipulated. They have to grok that accounting resembles brief-writing with numbers: with strong norms of integrity that are irrelevant to most laypersons' concept of integrity.

I would also expand Chris M.'s suggestion from consumer credit in particular to consumer products in general: credit, investments, payments, insurance.

Finally, it is very hard to teach modern corporate finance properly. The problem is not that the ideas are complex: they're not. The difficulty is more in embedding the ideas in an institutional context. But the real problem is that much of corporate finance is bullshit. Efficient markets, anyone? It is very difficult to teach this to the young without also teaching cheapjack cynicism. I'd save the cheapjack cynicism for a course in corporate law. There is more to corporate finance theory than mere legitimation.

Most of these topics are part of my Corporate Finance class (and upcoming corp. fin. text). The only exception might be the last, which I figure is covered in BA.

@Matt 2:48: Second.

@Matt 2:51: And what is GAAP and why isn't EBITDA a GAAP?

@chris m: That is somewhere in the neighborhood of profoundly depressing. We knew a lot of that in high school. Of course, we lived in farm country, which is all about debt.

@Hillary: Especially since they just changed the incoterms in 2011, and many contracts use the 2000 version. I would add that, when I was practicing in Seattle, it never ceased to amaze me how many attorneys were surprised to learn the UCC did not apply in Canada and they needed to look into a little thing called the CISG.

@Ebenezer Scrooge: I would say fraud, fraud, fraud, fraud, and fraud, because that's the usual interface between law and accounting. Which leads me to GAAP (Generally Accepted Accounting Principles) vs. CRAP (Cleverly Rigged Accounting Principles).

@Stephen: Bloody good for you. Really.

@Adam: And if you want to have a topic that's a potential , academic football, you can examine when "preferred stock" should be recharacterized as debt.

1) External Auditors 101. Parse out the following:

We have audited the accompanying balance sheet of [COMPANY] as of [EOFY] and the related statements of income, retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of [EOFY], and the results of its operations and its cash flows for the year then ended in accordance with accounting principles generally accepted in the United States.


2) Anatomy of an all-cash business: how sketchy contractors move money around and keep it off the grid.

Advantages/risks of leveraging.
Restructuring alternatives.
What bankruptcy can achieve.

How about who has authority to collect consumer debt and what supporting evidence should be provided vs. what is really happening today?

The comments to this entry are closed.


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