American Enterprise Institute

January 19, 2006

[Edited transcript from webcast]

1:45 p.m.	Registration
2:00	Introduction:	Ted Frank, AEI
2:15	Discussion:	Lester Brickman, Cardozo Law School
		Patrick M. Hanlon, Goodwin Procter, LLP
		Kevin A. Hassett, AEI
	Moderator:	Ted Frank, AEI
4:00	Adjournment

Proceedings:

TED FRANK: Hello, I’m Ted Frank, director of the AEI liability project. We have a very interesting program for you here this afternoon. The asbestos litigation crisis, of course, has had a huge impact on the American economy, over tens of billions of dollars over the last few decades. And it's spread well past suing asbestos manufacturers to thousands of other defendants who used or are barely affiliated with asbestos.

There have been reforms in recent years. Texas, Ohio, Georgia have all passed legislation. The Illinois Supreme Court, the Mississippi Supreme Court have taken steps to make those jurisdictions much less of litigation tourism destinations. And the field is changing greatly. And it's at this point that we have an omnibus bill, almost phone book sized, being presented in the Senate, Senate 852, the FAIR Act, with a proposed $140 billion trust fund contributed to from insurance companies and manufacturers to change the field and take this out of the litigation system and into the trust fund world. Does it even do that? How well does it do it? These are all questions we're going to be looking at here today. And we have a great panel here to talk about it.

To my right, immediate right is Professor Lester Brickman of the Benjamin Cardozo School of Law. He's an expert on mass litigation who has written widely on asbestos litigation. At the far end we have Patrick Hanlon of Goodwin, Procter, an expert on the FAIR Act, who will be speaking mostly in support of it, I believe. And in the middle cleaning up we have Kevin Hassett, director of economic policy studies here and he has written on the economic impact of the FAIR Act and the trust fund approach.

We're going to start with Professor Brickman, who is going to talk about the asbestos mess, sort of lay out the groundwork and the scope of the problem. We'll hear the pros and cons. We'll have some talk amongst the panelists. And then we'll open it up to questions. And we look forward to all of that. Professor Brickman?

LESTER BRICKMAN: No doubt everybody here is acquainted with the near illimitable parameters of asbestos litigation. I won't dwell on them, somewhere close to 900,000 claimants, over 8,400 different defendants. By my estimate, at least 50 million individual claims, that's a claimant times a defendant maybe more like 60 million. Estimates are that more than one million new claimants will emerge over the next 45 years.

In a number of the articles I have published, I have provided the findings of research I've been doing on asbestos litigation over a 15-year period. And I have set out the parameters of what I call the entrepreneurial model of asbestos claiming that has evolved some time beginning in about the mid-1980s, the elements of which I'll briefly summarize here. It begins with a massive client recruitment effort, so-called screenings. I estimate that over 750,000 construction workers, former shipyard workers, industrial workers have been screened by this entrepreneurial process. The second element is the manufacture of specious medical evidence in support of these claims--conclusions that I wrote, perhaps a year and-a-half, two years ago, even three years ago, which are now supported, if not validated, by the findings of U.S. District Court Judge Janis Jack in the silica MDL that I presume most of you have familiarity with. The third element is the use of entrepreneurial witness preparation techniques, of which the most well known is the so-called script memo that surfaced about ten years ago in the case of Baron & Budd. Before his mass filings of claims in a small number of jurisdictions, a comparatively small number, perhaps twenty, where the outcome of claims is generally known before the cases are filed and where jurisdictions have developed something that I call special asbestos law, which I won't go into here, but which I've set out in some extensive detail. Leading to judicial aggregations and other procedural devices to process the mass filings, which have had the effect of precluding defendants from having their day in court. Leading, in turn, to mass settlement strategies, so-called inventory and matrix settlements of claims, some of which, maybe many of which lack merit, including a lack of credible evidence of injury, let alone causation; inexorably leading to bankruptcies and, remarkably, at least to my naive eyes when I first started looking at this six, seven, eight years ago, at least as phenomenon, the continuation of entrepreneurial claiming within the bankruptcy process. Although there have been some recent decisions in the bankruptcy courts, particularly the 3rd Circuit that suggests that maybe business as usual will not continue.

Now, Ted adverted to efforts to eliminate or at least cabin some of the most serious abuses of the entrepreneurial claiming model that have gained a purchase through state litigation in Ohio, Texas, Georgia, Florida, and even--dare I say--West Virginia. Plaintiff’s lawyers, of course, are entrepreneurially inclined and are seeking replacement jurisdictions. And it's pretty well known that they're making a serious investment in Delaware to see if that will qualify as a worthy successor to Texas and Mississippi as favored locations for bringing these suits.

There has, therefore, been significant asbestos tort reform at the state level, but the long term effects of these reforms is open to some question. And there are constitutional issues yet to be resolved at the level of state supreme courts. And then there's the bypass issue that is will the plaintiff’s lawyers be able to come up with successor magic jurisdictions to substitute for those that are closed down from this perspective by tort reform legislation.

Attempts to deal with the elephantine mass of asbestos litigation through federal legislation began about almost 30 years ago. The current effort began some time in 2002 with Senate Judiciary Committee hearings which led to S. 1125 in 2003, which was to be funded at a lever of about $108 billion. That led to S. 2290. And that has led, in turn, to S. 852, the current bill which is past the Senate Judiciary Committee and which Pat tells me is likely to come before the Senate some time in early to mid-February.

S. 852 will take asbestos claims out of the courts and substitute a no-fault administrative claims handling system. Its funding level is $140 billion created entirely by imposing a sort of a tax, I guess, on insurers and defendants and the capture of funds in asbestos bankruptcy trusts.

I have read the bill, or attempted to read the bill. It's not a page turner. It's perhaps the most complicated piece of litigation that I have ever read. I think it approaches in complexity the tax code. And you think about how many years went into creating the complexity of the tax code. And this S. 852 has just leap-frogged, you know, in a matter of a few years into one of the most complex pieces of litigation ever devised.

There are substantial benefits that can be realized by adoption of an administrative mechanism in place of the tort system. As I've set out in an article that's been distributed to you, you can provide for substantially uniform compensation to similarity situated claimants that would replace the lottery-like nature of asbestos litigation as it currently exists. And an added benefit is that those with injuries which merit substantial compensation, such as mesothelioma, will not be adversely affected by the insolvency of particular defendants as can occur in the current tort system.

Second, the inclusion of appropriate medical and exposure criteria in legislation could limit eligibility for compensation to only those claimants with actual injuries substantially caused by exposure to asbestos-containing products. That could eliminate or severely limit compensation to the hundreds of thousands of mostly unimpaired claimants that have received billions of dollars in settlements and jury verdicts and judgments over the past fifteen, twenty years.

Third, by adopting appropriate limits on attorneys fees. I note, for example, S. 852 limits plaintiff’s lawyer fees to five percent. I estimate that the "market rate" in asbestos litigation today is forty percent legislation could significantly reduce the intolerably high transaction costs associated with asbestos litigation where claimants realize less than 42 cents of each dollar paid out by defendants and their insurers.

And finally, legislation that would liquidate the costs of future asbestos-related liability at an appropriate level, whatever that would be, could provide a substantial benefit to the economy enabling capital markets to accurately assess the cost to individual businesses and insurers, which would reduce the cost of capital for these businesses. And that would lead to increased productivity and investment.

Now, whether S. 852 accomplishes these objectives I think is partly the subject of today's conference. Another issue is the total cost of resolving personal injury asbestos claims. In the article that I referred to, I have estimated that the cost that will have to be borne by insurers and defendants, those paying into the trust fund, in addition to the 140 billion could range from approximately 37 billion to 60 billion. I eagerly await hearing from our two very knowledgeable panelists whether S. 852 properly achieves the objectives for legislation, those that I have set out, as well as others, and as well whether my in addition to the trust fund calculation, in addition to the 140 billion is regarded as valid. That's it.

MR. FRANK: Okay. Mr. Hanlon?

PATRICK HANLON: Thanks, Ted.

Before getting into the slide show that you'll see behind me, which when you're used to dealing with bills that big, you get used to props that are designed to keep people awake and keep their eyes on something at least while you drone through it, it's complicated and it's difficult. It's more complicated than it should be. And, in part, that's because of the role that the insurance companies had in writing a lot of the language. You may all be familiar that insurance company language is very complicated. But a lot of it is because the issues are hard and because there are a lot of compromises that are folded into this bill.

Ted sort of has it right that I'm mostly going to defend the bill. It may be a subtitle for this presentation could be one-and-a-half cheers for the FAIR Act. And there are two parts to this. One is, should we have a trust fund or should we have something other than a trust fund? And the primary other contender in the field is to extend medical criteria. And I want to strongly support the notion that the trust fund is the right approach to solving the asbestos litigation problem.

The question then is whether S. 852 is, in its current form or in a form that's reasonably foreseeable, sufficient to be the trust fund that's worth supporting. And there all I can say is it's a work in progress. There are a lot of difficulties with the bill. Some of them Lester has pointed out and I'm sure some of them that Kevin will point out and that I would agree with that those are big problems and they will need to get fixed. Fortunately, we have a bicameral legislature. We're still at the point where something is coming to the Floor of the Senate probably next month. There's some time left before it receives full consideration in the House. And there's a lot of work that needs to be done in addition to all the work that's been done over the last two years.

So I'm not going to come before you as a zealot saying, eureka, S. 852 is the response to, or the appropriate response to all of our problems because I don't believe that it is. I think there are a number of things that need to be done. But I do think it's the sort of thing that can be fashioned into an appropriate trust fund bill. And I trust that that will happen on the Floor of the Senate, in the House, and in the Conference Committee, and eventually a bill will be reported out of the Conference Committee that my group can support.

Now, I've had the advantage of being involved not just in legislation, but asbestos litigation for nearly 30 years. For legislation almost that long, since I, at least as a young associate, went down and listened to hearings on one of the interminable early bills and was given an exposure to this when my head of hair was still red instead of the white that it is today. And I've been involved in the cases. My firm was the one that developed the Georgine case that was reported to be a global settlement of asbestos cases that was invalidated by the Supreme Court.

And in 1998 I was asked to begin to focus on legislation. My job was supposed to be to actually deal with the Georgine settlement after the Supreme Court remanded it. But it never did.

There was an effort in the period from 1998 to 2000 to enact a bill that was reported favorably out of the House Judiciary Committee. That went no where on the floor. And then we had the election. A lot of people came together after the election to see if maybe there was a way of solving this problem.

But I've had the advantage, too, of my original predilection was for a medical criteria bill. Some of you may know there have been negotiations between a number of companies and plaintiffs lawyers in an attempt to come up with some sort of a workable trust fund. And there was not sufficient interest in doing that. And I was the one who negotiated with the plaintiff’s trial bar the basic framework of the medical criteria bill that essentially became the basis for the Nickels Bill, became the basis for the American Bar Association recommendations in 2003 and is the basis for most of the state legislation that has been discussed so far.

When our group, the NAM Alliance, first began approaching this, we were advocating the medical criteria approach. And Senator Orrin Hatch in 2003 decided that a different approach would be better. And at that point, it wasn't our choice, but we wanted some solution rather than no solution. And we've been working loyally on this bill ever since.

So now I've described the period of time before I saw the light back in the days when I was still benighted and I had not yet been reborn into the faith of the FAIR Act. But it was true that after the last election, 2004, when everything had changed or seemed to have changed in Congress, our group got together again and thought, well, do we still support the trust fund approach? Maybe we should rethink this. And we went back to a zero-base consideration. And it was quite amazing to me that there was essentially no one--I couldn't say absolutely no one, our group is very diverse, but hardly anyone--who was interested in going back to a medical criteria approach. And the reason was, it just didn't do enough. The reason was is that with all that had changed in the tort system in the intervening years, it didn't solve the problem. And that is why our group is continuing to support a trust fund approach.

Now, with that as background, I want to sort of spend a little bit of time explaining that and then get into some of the details of the FAIR Act. But I hope that I will be able to whip through this fast enough that you'll hardly notice that I'm only scratching the surface.

Okay. I'm going to start with where today's reality is. And this slide is something that has been described by lots of people. And I wanted to stress several things. One is the future cost is estimated at about $140 billion to $195 billion if there's no legislation at all. The FAIR Act will cost about $140 billion in terms of just what the contributions to the fund is. And that is one reason why it is that we don't really believe that we've got an under-funded program.

The percentage of total spending that is reaching claimants is only 42 percent. That means that every dollar that is spent on the litigation, only 42 percent is making it to the claimant. Much of it is being spent on transaction costs. I have educated my children through the transaction costs of asbestos litigation. But again, that, too, was before I saw the light.

The number of defendants is around 8,400. And that is continually getting bigger. And there are 75 to 80 bankruptcies. Now, what is it that causes all of this? How is it that this could happen? Well, part of it is that the tort system is designed to match compensation and responsibility to harm. It involves individualized determinations typically, and there comes a high price tag for that. But the underlying thought is to maintain that linkage. And asbestos litigation has essentially pushed that apart so that it has really crumbled. Part of it is all the back bankruptcies. If we were sitting back in 1970 and we were saying, how should this work? Well, the answer would be, there are probably maybe ten to twenty companies who ought to be paying a huge amount of money to poor people who are genuinely sick because they were exposed to a very nasty carcinogen. And out of millions and millions of people who were exposed, those companies really ought to have paid it. There were a number of other companies who had very minor involvement who might have been expected, in those days, to contribute something, and a large number of others who had no fault in it at all.

Well, all of those 20 companies, the ones, incidentally that were involved in the famous Burrell case in 1973, all of them have gone bankrupt. And they have not left enough money to pay even a tiny fraction of the claims that are perfectly legitimate that will be brought and have been brought and will be brought over the next forty years. So that money isn't there.

At the same time there's a social consensus that you can't turn to the people who are dying of a dismal cancer and say, I'm sorry, the tort system is based upon matching responsibility in injury, and you've got the injury but the guy who is responsible is long gone and, therefore, you should just rely on Social Security disability and your health insurance and Medicare and we're sorry. But that just is the way it works. Nobody is willing to say that.

In fact, those very hearings that happened that started all of this in 2002 were focused primarily on the fact that there are all kinds of people who are going to have mesothelioma and lung cancer and some of them, at least, will not be compensated because there's no solvent defendant to pay them. That is a huge problem. And because you have that mismatch, because the people who are now in the tort system and who are paying the bill today are not really the responsible parties. The responsible ones have all gone off into post-bankruptcy-land and they're enjoying whatever they can get out of the economy free and clear because of 524(g) injunctions, we are left with the situation of a huge responsibility that's got to fall on somebody. And the tort system says, well, if it doesn't fall on the people who are responsible, we'll get the people who are next in line. And through the principles of joint and several liability and through the extreme difficulty of defending yourself against these claims, because they all relate to situations that happened long before you kept any records on them, so you, yourself, have hardly any information as to whether you exposed any of these people, it becomes almost impossible to defend these claims in the tort system.

Now, as an overlay to that, we have the problem that Lester has done a wonderful service in exposing to the light of day. And that is the problem of the unimpaired, the medical screenings that began in the early 1980s, they've been with us for a long time. They reached totally scandalous proportions in the period from around 2000 to 2002, and they have been subsiding. They began to subside even before the FAIR Act was introduced. They began to ebb. But it has accelerated ever since then partly because of the publicity, partly because of what courts are doing in terms of deferral dockets, not yet much because of state medical criteria legislation, which is usually too new to have had a big effect. But that problem is largely on its way to being solved.

And that is why a medical criteria approach, when we went back to look at it in 2004, was not very attractive to us because already, real life had solved most of that problem. But when we looked at the situation, it was still just as bad as it was before. The costs had not been going down. They have been shifting from what used to be called and still should be called the junk cases, which are not getting very much money anymore, to the high value cases where people are genuinely injured and are genuinely sick.

And if we can't get that whole system under control by establishing something rational, then we're not going to be able to solve the problem that exists for American companies. And what is that problem? Well, partly it's paying all the money, but partly it's dealing with your financiers, partly it's the litigation that happens with your insurers, partly it's having your executives constantly absorbed with this problem rather than the problems of running their business.

Companies are looking at huge verdicts. And when they happen, as they have been happening periodically since then, it immediately drives up their financing and their ability to operate their businesses. To some extent insurance companies care less about that and companies who are industrial companies who have got to maintain good relations with Wall Street, but the industrial companies find it very important to achieve the relative level of certainty that you can get through a trust fund. And for that reasons, it was argued that we need to stick with a trust fund approach. Basically, medical criteria solves yesterday's problem. Some general counsel of an industrial company told me recently, if there's any company that's a major defendant that's paying any substantial portion of its money to unimpaired companies, they need to find a different defense lawyer. That is not where the problem is today.

But the fraud is still there. If you remember, the product identification fraud that Lester talked about, that wasn't just a question of the unimpaired. That's a question that applies to mesothelioma cases and lung cancer cases and every other kind of case. So the problem is still going to exist. The fraud still exists. The manipulation of the courts still exist. Most of the problems that we've seen over the last several years are still going to exist. There are fewer cases, but just as much money as ever before.

So that gets me through my harangue as to why a trust fund. And so the question becomes, why, what about this trust fund?

As it's been described, it's a privately-funded government-administered no-fault program. It has strong audit and anti-fraud elements. It has medical criteria that screen out non-malignant claims--with one exception, which we will talk about in a minute--it basically serves as a medical criteria bill. It provides for individualized review of claims that pose special problems, particularly the claims in some of the cancer criteria--cancer categories that have been controversial. And the cost is distributed among insurers, defendants, and bankruptcy trusts.

All of that makes it seem like it should be easy. But you can tell by the weight of the bill that it's not easy. There are a number of really difficult problems that have yet been only partially solved. One is, who is going to get how much money? And there you have a question of what the medical eligibility criteria are and how many people are going to come forward. And let me just sort of focus on the eligibility in awards.

I don't know if you can see the ones that are different colors. The standard categories here, we start with level two, because level one are all the unimpaired who have medical monitoring if they choose to get it. There is a list of the disease categories on the left-hand side or non-malignant, that is to say, non-cancer diseases, and on the right-hand side are cancer diseases.

There's really not much controversy over the level 3, 4, and 5, which are essentially your asbestosis categories. And there is some controversy over whether the medical criteria for level 2, which would be mixed disease, somebody who is very seriously impaired but possibly that's predominantly due to smoking and has a relatively small amount of recovery. That's not a big ticket item, but it is an issue to be concerned about.

On the other hand, level 6 and level 7 are very difficult. Level 6 is other cancers, like colon cancer or stomach cancer or tracheal cancer, and so forth. There's a lot of debate as to whether or not any of those cancers are really caused by asbestos. And there is currently underway a study by the Institute of Medicine that's designed to provide a determination of general causation. It's my belief, at least, that that study will probably knock out most, if not all, of those cancers.

Those are all cancers where you have a high level of exposure as part of the requirement, and in addition for pleural changes; that may or may not be the appropriate criteria especially as the imaging techniques improve for pleural changes. But it roughly approximates the kind of things that happens in the tort system.

A point you need to remember about this for all the controversy that has existed is that anybody in the tort system who can meet the medical criteria under the FAIR Act has a valuable claim that will be settled by defendants. That these are not new claims. Anybody in the tort system who meets these criteria will get a settlement in the tort system.

And so what that means is that we've brought them into this system, but the same plaintiff’s lawyers who are out there generally being the entrepreneurial lawyers to gin them all up will have the same difficulties with a fifth of the fees or less than a fifth of the fees that they would have in the tort system. And these are all subject to individualized review.

The level 7 cases are lung cancers where you don't have asbestosis. Again, without belaboring the point here, this is based upon lengthy exposure plus pleural plaques. And, again, the reason why it is that we're not looking at an additional number of cases here is that all of these cases, if you meet these requirements, you will get a settlement in the tort system.

Maybe you shouldn't. Maybe if you took them to trial, you'd win half of them. Maybe you'd win more than half of them. You'd get your head handed to you in the remainder. And nobody is willing to do that. So these are all valuable cases. Whether this line is drawn in the way it ought to be or not, is something that we need to look at. But it does not lead to an underestimate of the number of future claims, as a recent study from Bates White suggests. And that's the reason why this congressional budget office essentially rejected the Bates White conclusions.

Right now you have an engine of claimants' lawyers who are out there looking for these claims. It was a fear under medical criteria bills that if you adopted them, you'd have more lung cancer claims. The same thing happens here. It's something you need to address one way or another. But it's not something that leads to an unexpectedly large number of claims.

In terms of financing, that's really been described so far. The important thing to note here is that there's no federal share. So that the taxpayer is never on the hook for this. And we'll get to in a minute to the controversial reason why. And there's also a possibility for step-downs and funding holidays if the bill turns out to be over-funded. And I think that there's a very substantial reason to imagine that the bill will be over-funded because of the reduction of transaction costs and because it strictly limits the damages that people have so that the explosion that you sometimes have in the tort system and the effect that that has on people on settlement values is firmly kept under control and is matched to the rate of inflation. Again, a I started off saying, is that the future costs, the maximum amount that's allowable under the program of $140 billion is comparable on the low end of what the estimates are of what it would cost if you, if you stay.

Now, on the defense system, somehow that $140 billion has to be allocated. $4 billion is supposed to come from bankruptcy trust. And one of the controversial areas is how it's allocated among defendants. The general system is that it's allocated by looking primarily at your past asbestos expenditures so that the bigger players pay the largest share. And within various tiers, the bigger companies pay the larger share. Now, you should realize that the tiers are not by size of companies. So there are a lot of big companies in low tiers and there are some small companies in high tiers. And that's one of the sources of controversy.

There's a provision that if these are sort of life-threatening or seriously adversely affect the finances of a company for providing an unlimited amount of adjustments, that ultimately would be made up by other defendants better able to pay them. And there's a provision for a cap level for an equity adjustments that can be done on a case-by-case basis.

Is this perfect? No. Is perfect even definable? It seems to me the answer is no. There is no single standard that you could get everybody to agree on to decide what's fair. Everybody who is currently involved in asbestos litigation believes it's fundamentally unfair that they should be involved. And they all have good reasons as to why it is that's true. And most of those reasons are really good reasons. And it is true because they shouldn't be involved, but they are.

And you have to have some kind of a rough and ready way of dealing with the allocation of costs. This system sort of has the advantage of existing. You can think of ways to improve it. Some people will think anything you do to improve it makes it worse. And it is a matter of achieving a reasonable, steady state. But it's one of the most controversial provisions of the bill, and one thing that is going to have to be addressed going forward because of the significant amount of dissatisfaction that exists.

Now, the insurers have managed to duck this problem by not having an allocation system. They basically have a commission which they say, at least, they would rather die than actually let solve their allocation problems. And so, trust me, if you pass the bill, they will come up with a voluntary mechanism that will allocate it all for themselves. In the meantime there's a provision for interim payments so that while they work that out, they can at least make the initial payments that they're suppose to make under the bill.

Now, a minute ago I promised to tell you why it is the Federal Treasury is not on the hook. And the reason that it's not on the hook is because there's a sunset provision in case the bill is under-funded. Now, that's not popular. It wasn't popular with my group and it's not popular with the insurance companies either. But there's really no choice.

If there isn't enough money, there's only three places to get it. One is to take it out on the claimants and say, well, you all should get less. Nobody's going to do that. In fact, nobody trusts a future congress to make that decision even if you thought that was the right decision to make. So the other choice is the insurers and the defendants should write a blank check. Well, they're not going to do that either. Because if you can't pay this off with $140 billion there's something going wrong. And they're not willing to put in more money until they see what that is and see that it's fixed.

So the only other person who would stand to pay this would be the Federal Government. And that's a non-starter. And so what are you going to do? Well, if you can't finance it, you've got to take another look then. Maybe you can reauthorize it or have a new kind of deal then, change the program, whatever. But failing that, you have to give people back the rights that they already had.

With any luck all, even if there is a funding shortfall, it would happen at a fairly long distance into the future. And who knows what the situation will be in thirty of forty years. And if you have bad luck, it could happen soon and you might be back to the tort system sooner than you think.

The underlying point is we'd all like to have certainty and we'd all like to be able to say, this is it, I'm walking away from the asbestos problem. I never have to confront it again. But that's simply not attainable. And so, consequently, the only thing you can really do is to provide for some way of dealing with the situation if expectations are upset. And that's the way you deal with it.

The other major problem I wanted to address has to do with a start-up. Again, it's one of the problems that's difficult in reality. On the one hand, insurers and defendants don't want to be paying a lot of money outside the system. And on the other hand, the people who are dying and have less than a year to live, don't want to have to wait until the administrator has got this program up and running. They've been reading all the stuff that has been published by the American Enterprise Institute about the efficiency of government, and they believe that, and they're looking for an alternative. Somehow you've got to solve that problem. The way the bill does it now is Byzantine.

Lester challenged me to say whether I thought his calculations of the excess costs were right, and I think they're not. Partly, I think they're not because I think he misreads the bill. And that, in fact, the amounts that would be paid by defendants and insurers outside the fund would all be credited towards their overall obligations. But if I'm wrong about what the bill actually says, I certainly have every reason to believe that by the time the bill passes it will say that because it's not a controversial issue on the Hill. And that is a large portion, if not all of the extra costs that Lester is talking about.

A second major point of extra cost is principles of the bill on subrogation. Right now, and I'm sure if you want to take a sip of coffee, this is a good time to do it. Workers' comp law, there's something that sends you off. Workers' comp law normally provides that if an employer or the employer's insurance carrier provides benefits to an injured employee, and the employee then sues a defendant and gets a recovery, then the employer or the insurance carrier is entitled to get reimbursed for the amount that the insurance carrier put out from that award. That's called a workers' compensation lien. And what this bill does is it prohibits workers' compensation liens against awards from the fund. And what that means is that the employers and the workers' comp carriers have to eat that cost themselves. At least, that's what I think it means. There's a lot of other possibilities that people will be arguing about.

In any event, in principle that's wrong. It is potentially very expensive. Nobody knows how expensive it is because there are very few asbestos work comp claims because nobody bothers to bring them because they know that when they have their court action they'll just have to pay the money over to their employer. So they don't, they don't bother suing twice when they can get it in one stop shopping.

But once you get to the point where you can both keep your award under the FAIR Act and you can get workers' compensation benefits, some portion of the people who are eligible to do that (a lot of people are retirees and they're not) are going to be doing it. And that's going to be a substantial increased cost that nobody can predict. But that's really hard to accept and that I'm sure we will be working and have been supporting the insurance interest all along in attempting to fix.

So that scratches the surface of things that need to be fixed. I have a long, long list and I'm perfectly willing to talk to you about it all afterwards. But this is probably enough for now.

MR. FRANK: Patrick, if I can raise one question, there are already a number of trusts out there through bankruptcy from earlier manufacturers. And a lot of them are complaining about the bill saying that this takes away rights of the existing beneficiaries of those trusts and, and is a taking that would be unconstitutional. Do you have anything to say about that?

MR. HANLON: Let me postpone the discussion of the constitutional law question here and sort of look at it, first of all, in whose interest are we talking about here?

We're not talking about the interest of the beneficiaries. If the trust got what they wanted in an lock-down, that would mean that somebody who has mesothelioma would have to go to the Manville trust and they have to go to the Solartex trust and all the other trusts and they all get their fraction on the dollar, and it would all be offset against their award against--for the FAIR Act, which they'd have to go to anyway in order to get their money. And so at the end of the day what happens is instead of going just to one place, they go to have a dozen different places to get awards that all end up to be the same thing.

But there's a difference. There's a difference. There's a five percent attorney fee limitation when you go to the FAIR Act, but some trusts have 25 percent, but most have none. And so whose interest is it in having them go to the trust? Who benefits from that? It's not the claimant. And at the end of the program, I'll give you multiple choice and we can see how many of you are guessing whether it's the trial lawyers or not. The trial lawyers are very closely associated with the governance of those trusts; the trial lawyers, I think, have done a great deal to encourage that. And it's not hard to see why.

Now, who else benefits? Well, there's also the people who don't qualify under the FAIR Act, like the people Lester talks about, but who do qualify under the trust. And so what we're talking about here is what is asserted to be the constitutional right of unimpaired people who have not brought their lawsuits already because the act doesn't retroactively deal with any of that, but on into the future they keep on going out and finding unimpaired people who, at the very least, can get their money from the trusts. Now, as a matter of policy, I think that's total nonsense. And as matter of constitutional law, I have an opinion and I can go into that, but I'm not the expert on that and I would defer to a former solicitor general who knows more about it than I do.

MR. FRANK: Thank you. Kevin?

KEVIN HASSETT: Thanks a lot, Ted, for organizing this. And thanks to Patrick and Lester for showing up. I really enjoyed your presentation. In fact, it covered a lot of the ground that I was hoping to cover which will allow me to fast forward a little bit.

What am I doing talking about asbestos? I'm an economist, director of economic policy and studies here and have been sort of watching asbestos for a long time. I started for the first time when my father-in-law passed away from asbestos-related disease about 20 years ago. And my wife, it turned out, ended up working at a firm that was national counsel for a firm that had significant asbestos issues. And so she basically practiced asbestos law for a number years. Now since our second child's born, she's home practicing martial law.

[Laughter]

Mr. HASSETT: But, I was watching it from there. And then last year, the Coalition for Asbestos Reform asked me to analyze the economics of asbestos reform in a kind of general way. As my wife is no longer practicing asbestos law, I'm no longer in any way associated with anyone with an interest in this bill. But I did do some work for these guys last year.

And so what I'd like to do is just talk about what I think the economic consequences of the current asbestos tort problem are and whether I think that the bill sort of lines up with what I think the asbestos problems are. And I can sort of fast forward to my conclusion, which is that there are a number of things that make me anxious. But in the end, you know, I'm not a lawyer and as you guys have said, it's one of the longest, most complicated bills that we've seen. And the only thing I can say about it is that when I hear lawyers talk about the bill, it often seems to be the case that they both say that the other one is misreading the bill. So I won't attempt to.

But I can say that if you think the bill accomplishes the following things, then you should like the bill because then it's got its economics right. And if you think that it doesn't, then you should oppose it. And that's the spirit of my presentation because I'm not an expert attorney or attorney at all to tell you whether the bill really does it or not.

First of all, I think if I had to write a headline for a column, answering, what's the asbestos problem? Patrick alluded to this too, I think that you might say that there are just too many cases. And Lester helped us understand why. It's because of entrepreneurial trial bar doing mass screenings in the late nineties. By one estimate that I think I pulled from Lester, about 90 percent of the claims filed were classified as non-malignant.

The reason this happens is, of course, that you could be exposed to asbestos and it could take forty years for it to do anything, and it might not do anything at all. And so there's a question of, when do you get to claim that there's damage? And it seems like by inundating the courts with cases and then consolidating them, there's been a concern that a lot of the money basically shouldn't necessarily be forced to pay and also that the money is going to the wrong folks. And I don't think that analysis is really under dispute.

But if you ask yourself, why is it that there are too many cases, then an economist will tell you it's got to be one of two things. It's got to be either that from society's perspective the benefits of launching a case are too high or the costs are too low. And in the asbestos case, it could be a little bit of both. But it's certainly the case that the entrepreneurial of the trial bar has made it really a low cost thing, at least until recently, to get yourself into the asbestos litigation game. And, in fact, for many people without any impairment, it's almost kind of like playing the lottery to get in asbestos, or least it has been in the past.

Now, if you think that the problem is one where there's basically just too many cases because the costs of getting out there and launching a case when you don't actually have identifiable impairment, then the economist will tell you something that sounds like incredibly crass, but it's that, “Oh, well, the logical policy response is to increase the cost of launching a case.” In fact, in law and economics literature, there's a lot of evidence that when the costs of engaging in tort action go up, people do less of it.

And so the first question I would ask myself is, if you want to form your own judgment about the bill, do you think that the bill raises or lowers the cost of trying to make a claim? Do you think that they're going to be a whole bunch of new claims that we didn't think about that are suddenly going to come out of the woodwork as soon as we have this national trust fund that's heavily advertised that's relatively easy to sign up for money?

And I think that the people who are writing this bill, you know, they've thought of this too. And they would say, well, sure, you know, maybe if you don't have to go into litigious process--there have been some studies that say Americans actually really hate to sue anybody. They feel like it's the wrong thing to do. And there have been some estimates that there are a heck of a lot of damaged people that don't ever go into the process. But if you have this trust fund, then they'd be more willing to do it. So you'd have to be concerned that they'd come out of the woodwork. But the flip side of that, the response to that would be, well, yeah, but if you have the medical criteria really right then what you could do is make sure that that wasn't a problem.

And so for me, what are the things that I'm anxious about in the bill? The question is, do you think that the medical criteria are so good that you won't increase the supply of cases because you've actually streamlined, you've lowered the costs of actually getting involved in the process by having this national trust fund? So that's my concern, number one.

My concern number two relates to something that Lester has worked on. And in some sense it has the headline that the trust fund’s estimated costs are probably around $140 billion. My guess is that that's going to end up being low because there's going to be some extra supply of cases. The standard of what the trust fund is going to cost has got to be very large, everyone has to concede. But estimates that I was reading back when I really started boning up on asbestos a few years ago were saying the expected future cost of asbestos was around $130 billion. You list 140 to 190. And, you know, maybe there's a study that I like says just as much says 190. I'm sure, again, that's another thing with a big standard error.

But the back of the envelope idea that I had in my head when I started looking into this issue was that the costs of the trust fund of $140 billion are more or less about what I thought we were going to have pay anyway if we just let the thing go. And it could be that we save 40 or 50 billion if we take your 190 and we only have to spend 140, and the 140 works out. But let's just say that it looks like what we're doing is we're kind of locking into this liability that we thought we had anyway.

Now, there are those who would say, well, by making that certain, that that's somehow helpful. But that's not really an economically attractive argument. And to understand why, suppose that you had a choice of two worlds that you could live in. One where you owe me 100 bucks and the other where you flip a coin and if it comes up heads, you have to give me 100 bucks. Would you like the certain world or the uncertain world?

So in the asbestos world there are these firms that have a liability that's expected in the future. I don't think that there are a lot of firms that are publicly traded that expect to make money in the future off of asbestos, so it's a liability. And to the extent that the liability is uncertain, then that could actually be good because they might not have to pay it. They might get off.

So why do I say this? Well, that relates, for me, to the stuff that Lester has written about, about Judge Jack. During a suit before her, it was established that many of the claims of silicosis before the court were fraudulent. I guess that's the kind of word that I'm suppose to ask my lawyers if I can use it before I do. I didn't. So I guess you can sue me if you're in the audience and offended.

But moreover, 60 percent of the silicosis claimants previously filed asbestosis claims. And for many of the individuals, their claims of asbestosis were attested to by the same specialists who are now attesting to the silicosis. Again, I'm not a lawyer, but that sounds kind of crummy. And it sounds like there's a lot of sort of bad stuff that's going to happen to people who were engaged on the plaintiff's side in silicosis and I think by extrapolation in asbestos as well. Or, you know, it could be that if we look at the history of asbestos 50 years from now we will look back and say, “That Judge Jack thing, that was a real important moment. That really had a big effect on what happened.”

My concern is that this bill could well happen, even if were a bad bill because what it's doing is it's locking in the $140 billion the trial bar thought that it was going to get before Judge Jack. That's my concern.

So do you think that the fact that Judge Jack shed light on this thing that Lester talked about years ago, but now we really know through the discovery process, that it is going on, we know the people who are doing it, do you think that that is going to have a chilling affect on the ability of the trial bar to hold America's industry hostage in the future? If you do, then how big is that effect? I don't know. I don't know, but I'm a little wary of locking in the $140 billion that I thought I was going to pay anyway back since I formed that expectation before Judge Jack might have changed the dynamic.

Finally, the other thing I'm anxious about gets back to something that I totally agree with you on, which is that there's this problem where there are these people who really have legitimate damage that you can point to being exposed to asbestos and there's no one to compensate them because everybody's gone bankrupt. And that that's society's problem. I actually accept that 100 percent.

But then I ask as a public finance tax economist, okay, so we're society and we think that there are all these people out here who are maybe owed $140 billion and we ought to pay. And the people who really ought to pay, they're not there anymore. So how am I supposed to raise that money? Now, I can tell you that there's not a paper in the history of economics that says the way you're supposed to raise that money is the way that it's done in this bill. For one thing, the U.S. is right now the highest corporate tax country on earth. And effectively what we're doing in the corporate tax raises about $200 billion a year, and what we're doing is we're raising this $140 billion from companies. And we're starting, we're motivating that by the statement that it's something that we all should pay. And I just think that any optimal tax discussion if you had a bunch of tax economists here--We should have done that, by the way. It would have really livened things up, I think--I think if we had a bunch of tax economists here, there would be great concern about doing it that way as opposed to just throwing it into the general revenues and taxing it the way we do everything else. Because, you know, the whole idea of optimal taxation is that you spread the liability as widely as you can.

And so for these reasons I think that I have significant questions as to whether the bill is necessarily going to make things a lot better. I'm worried that it's locking in an uncertain liability that maybe was better when it was uncertain. And it might be locking in a number that's significantly too large. It might end up making us pay a lot more money if we don't do a good job making sure the medical criteria are really wonderful. I sort of wonder why we can have faith in the medical criteria in this bill, but then not like medical criteria bills. That's something that we can talk about in the discussion.

And I think that if we did decide we wanted to do it this way, then we should use an optimal tax design to pay for it. So thank you.

MR. FRANK: Okay. I'd like to throw it open to the panel to talk about things that they've heard from other panelists.

MR. HANLON: If it's okay, I'll answer the question that Kevin just asked. I indicated that in my prior life I was a big proponent of medical criteria bills. And this is a medical criteria bill. Almost all medical criteria bills and deferral registries and all the other things that do the same thing are aimed at people who are not impaired. They may have pleural plaques, which is a scarring on the tissues on the outside of the lung, the pleural tissues, or they might have slight asbestosis, but there's nothing really wrong with them. They breathe fine. And they're really being compensated, if at all, for the worry.

And that's where the problem of the unimpaired is. It's pretty easy to go out and just find people at random who aren't sick but who manage to, given the x-ray readers that they have, to have enough to get in line to get a lot of money. The FAIR Act has pretty much the same medical criteria that you find in state legislation. It was all modeled on that. I think that's not really the problem. What happens with the FAIR Act is they're the level one claims. They get medical monitoring if they want to. It's a service so you don't get to cash it out in terms of money. So the unimpaired claims are the ones who are clearly eliminated both by the medical criteria approach and by the FAIR Act.

The medical criteria in the FAIR Act that go beyond that are the criteria that allow for gradations of different degrees of impairment when you have asbestosis and they allow for determining what standards you have to meet in order to be able to recover for cancer.  There are some exceptions, vaguely ones in state statutes that attempt somehow to deal with the lung cancer issue. But by and large that's all left up to a battle of experts, even in states which have adopted medical criteria. And what the FAIR Act does that goes beyond that and where the controversy is, is that by taking criteria which are out there in terms of past practices, nobody just invented them, but by taking criteria and fixing them then they create a kind of entitlement that means that the plaintiff's lawyers who now, when they get to keep 40 percent, go out and recruit lung cancer cases, that somehow the change, with the criteria in the FAIR Act they will only get 5 percent, they're going to recruit a lot more of them. And, you know, for our way of thinking, at least, it's highly unlikely that's going to happen.

And the other thing that the FAIR Act has that the tort system doesn't have is a complicated series of powers for auditing claims, for auditing the x-rays and the pulmonary function tests and the cat scans, and so forth, and very anti-fraud provisions that make it very hazardous to engage in this program in the kind of behavior that Lester has described and that has been typical of the tort system.

And so the question really is, which medical criteria do you like better: the ones that can be written into a federal statute and enforced by an agency of experts, or the medical criteria that are de facto applied by juries in state courts all over the country, most of which have been selected by plaintiffs' lawyers who are close friends with the judge.

MR. BRICKMAN: I have a few other comments to respond to Kevin's economic arguments or economic criteria that I think, in some cases at least, really either do not apply or apply in different ways.

For example, even though perhaps the cost of bring a mesothelioma claim under the S. 852 would be somewhat less than in the tort system, first as already pointed out by Pat, a five percent fee is a far lower incentive for lawyers to ferret them out. But more importantly, under the bill it caps meso’s at $1.1 million. And while I haven't done an economic analysis of a meso claim in the tort system today, my seat of the pants sense is that it's much higher in the tort system than 1.1 million today. It's certainly higher in New York. It certainly was higher in Madison County, although that problem is largely solved by a new asbestos judge saying that forum non conveniens will now apply in Illinois, or at least in Madison County.

So in addition, virtually all meso cases today generate claims in the tort system because they're too valuable not to. The single most valuable word on Google today is mesothelioma. I don't remember the last number. It's a couple hundred dollars that the lawyer will pay if you click on that word. So you're not going to see any significant increase, even moderate increase, I don't think, in mesothelioma claims under the bill because all the claims are out there already in the tort system.

Moreover, with regard to some of the other claim categories, the dollar amounts are capped. There are some spreads in some cases, but these are capped for the specific categories. That is a vast difference from the tort system. It's important to understand that in the tort system today we don't know, we have no idea how much some of these claims are worth because plaintiff lawyers bring these claims against 60, 70, 80 defendants over a spread of 20 years. I mean, the same claimant might have first entered the tort system in 1991 and, yet, in 2005 up that person pops in the Thorpe bankruptcy, in another bankruptcy, as a claimant. And so how much has that person already received? And the answer is, only the plaintiff’s lawyer knows. And he or she isn't telling. And that could be a substantial sum. And often it could be a lot more than the amount set forth in the FAIR Act. I'm not making an argument for the act, but I'm just pointing out one of the artifacts of the act is that it limits the amounts paid out. Whereas, in the current tort system it is almost always impossible for a defendant to know how much has already been paid out to that plaintiff.

Another fact or factor to be taken into consideration is that currently plaintiff lawyers have inventories--that’s the word they use--of claimants. And these inventories have, like all inventories, a certain value. Well, the FAIR Act would significantly depreciate those values because of the caps. So if they've already got X thousand dollars for that claimant, and that's more than the amount set forth in the FAIR Act, that reduces the value of that inventory to zero, at least to that specific item.

Another fact to take into account: there's probably $50 billion in attorney fee savings in that $140 billion. That's $140 billion that's going to go to claimants for the most part. I mean, there are administrative costs as well, but a five percent maximum to plaintiff attorneys. That's $50 billion more than if that same money were to be disbursed through the tort system in terms of money in claimant's pockets. That's a very powerful argument that goes both ways in our political system.

MR. HASSETT: The thing is--I remember this paper I read in grad school that said that some University of Chicago professors looked and found that in only 10 percent of would-be cases does someone actually decide to become a plaintiff, because people hate litigation, Americans hate litigation. And so I have this memory of the law and economics literature that there are a lot of cases out there that people haven't launched because of the emotional distress associated with involving yourself in that process. And so I agree with some of what you said, but I'm worried that people will think, oh, if I just, you know, mail this letter to the government I get some money, it's different and that that will have a bigger effect. And I could be completely fixed from worrying about that if I thought that the medical criteria were wonderful, and so there's only stuff that we really knew this person deserves some money is getting some money.

Which brings me to the Bates White analysis, suppose you thought that the Bates White analysis was correct. Is there some change in the medical criterion in the bill that would fix the problem? And the second thing is, how should a person like me, who is not a doctor, figure out whether the medical criteria are so tight that I don't have to worry about really expanding the liability?

MR. HANLON: Well, that's actually an interesting question. I think it would be very difficult, but let me just sort of back up for a second. What the Bates White analysis is, it basically takes those other cancers, like colon cancers, and the lung cancers where you have a lot of exposure in pleural plaques which serve just as a validation of your exposure. It's not an independent, causative agent. And you could attribute lung cancer on the basis of that. But you don't actually have an underlying asbestosis. The Bates White analysis is premised on the notion that those claims aren't made now in the tort system, but they would be if you reduced the transaction cost, including the psychological transaction cost we've just been talking about, the sort of reluctance that people have to get involved in the tort system.

Well, two points on that. One thing that you're sort of overlooking here is the function of the plaintiffs' bar, because, as Lester points out, that's all entrepreneurial and to some extent you're not really talking about bunch of consumers who are out deciding whether to take advantage of the possibility of legal services. You have a very active sense of recruiting that goes on. So there's a question as to how big the psychological barrier actually is in the area of asbestos litigation as opposed to what it might be in, say, medical malpractice or auto litigation, or whatever. So that sort of is another issue which we'll put aside.

There's always some level of criteria that, any medical criteria you pick is going to be both over-inclusive and under-inclusive. There will always be some people who qualify who really probably shouldn't, especially in cancer where it's a risk sort of thing and nobody really could ever say with certainty whether any given cancer was caused by asbestos or not, at least for these certain kinds of cancer. And you can either make it looser, in which case you'll have more people who are over-compensated along with those who will get compensation that deserve it. Usually the way the administrative structure that does that would compensate for it is they reduce the amount compared to what you might otherwise get, taking into account that you're spreading a pool of dollars over a larger group. On the other hand, you can make it more exclusive. You can say, well, instead of doing that I'll keep the values relatively high but then I'll have tighter and tighter criteria that will have fewer and fewer people who can qualify for it.

There's always some level of tightness that would actually make it almost impossible to bring a claim. But I think over the range of reasonable possible medical criteria the Bates problem, if it exists, is probably not fixable. That is to say, unless you take things that deliberately under-compensate people and say, you're out of luck, it would be very difficult to solve that problem.

Now, if you happen to be one of the doctors who takes a very strict view and says, for example, you have to have asbestosis to have lung cancer, then your problem is easy. But that's not the majority view in the medical profession. And figuring out a way of sort of having a proxy for exposure is always difficult. It's always going to be subject to more or less. It always could, and it's always going to have to strike some balance between some people will be excluded improperly and some people will be included improperly. And there's no right answer to that.

So I think that if it's true that these cases are not brought today because of whatever inhibitions there are, notwithstanding the efforts of the trial bar to bring all those cases, that it would be very difficult to arrive at any reasonably acceptable medical criteria that would wholly fix that problem.

MR. FRANK: We have the experience of the black lung trust fund and to a lesser extent the phen phen trust fund. And in both of those cases, claims just completely outstripped any initial estimates. Do we really think asbestos is going to be different in that regard?

MR. HANLON: Well, I, I do sort of. All of these things are on their own.

But you remember--I actually do remember personally--when they adopted the black lung program. It was not really a compensation program. It was a welfare program for coal country. They just had some bad years and there was a lot of sympathy in the press as a result of a mining accident that was similar to the one we just saw. And this was a way of steering money in there.

They had no experience with compensating coal miners’ pneumoconiosis. And, in fact, they hadn't even invented the word “black lung” yet when they adopted the program. There were no criteria for doing it and no experience for figuring out how many claimants there would be. And there was a huge amount of pressure from Congress to tell the Administration not to take seriously the medical criteria that originally been put in the bill because they kept on missing the point that the idea was not to not pay people because they didn't qualify, but to pay them because they wanted to get some more money in West Virginia. And that produced a huge, huge deficit in the first ten years. That was largely fixed in 1982. And if you could, if you could cut out the first 10 years, from 1969 to 1982, and just look going forward, you don't see anything that's that surprising or that alarming.

In asbestos there's a lot of experience with claims. And although there's been a lot of variation with the claims forecasting, they've been on the non-malignant claim side. And much of that, under the FAIR Act and anything other medical criteria act, are ruled out because of the medical criteria that don't give substantial monetary compensation to those claims.

If you look at the cancer claims, that's been fairly predictable over time. It varies, and nobody knows exactly how many cancer claims there are. But except insofar as you can say, none of our past experience is relevant because an administrative system cannot be predicted by what happened by the claiming behavior in the tort system, then I think it's reasonably predictable. And to some extent I think that the predictions that you've seen from CBO, and so forth, are somewhat on the high side.

But it doesn't have the uncertainty, either, that you expected when you saw this Manville Trust and the notorious predictions that were all completely wrong. It was at a different time and at a point which deals with a different claimant base. The ones that will dominate this program, your lung cancers and your mesotheliomas have been stable and reasonably predictable for years.

MR. FRANK: I want to raise one more question, and I hate to keep picking on you, but I thought Kevin had a very good point which is that for years now just billions and billions of dollars being paid by corporations in small sums essentially because they're being held up. They're not the ones who are really responsible for the asbestos problem, but they're the next in line. And we've allowed notions of tort responsibility to expand to sort of keep them in so that somebody is compensating these people who have been grievously injured. But is it really right for Congress to sort of memorialize that in a statute, to compound the earlier injustice?

MR. HANLON: Well, I don't know if it exactly compounds it. It sort of controls it and makes it more rational. The tort system itself decided without the conference of economists that Kevin suggested that it had rules about what you did when the people who are primarily responsible couldn't pay, and those were the rules of joint and several liability.

And a lot of what's gone on isn't really special, I mean, there is special asbestos law and all kinds of things that happen in that way. But a lot of what's gone on is just a normal way in which our legal system. It's an application of well-established principles that were thought of applying to a certain range of circumstances, and then applying them to them as tort with three quarters of a million claims. And it's only halfway done. And the result of that is something that normally is part of the give and take of the legal process, but that in respect to asbestos turns out to be huge.

Well, that's your starting point. Those companies will have those liabilities if you do nothing about it. They will have the uncertainty that we've talked about and that Lester has talked about. They have the potential explosive verdicts in meso claims or lung cancer claims. They've got to deal with their Wall Street problems, and so forth. It wasn't right to put them in that situation to begin with, maybe, but they're in it. And it may be that if we were able to sort of go even higher up than the U.S. Senate to decide what the best way to arrange this would be, we'd figure out a better way to do it. And I certainly welcome all the conferences in the world and would love to sit and watch them.

But in the meantime we've got a lot of companies, some of them with potentially life threatening problems, and they can't wait. This group of people, this entity, is where the liability falls now. And, you know, they're going to pick it up one way or the other. If you do nothing, they're still going to pick it up. And if I'm right, they're not paying much money anymore in the non-impaired claims, then they're not going to be saved much by deferral dockets and by the kind of tort reform bills that we currently see.

They have got to do something. And when you're looking for the people to pay, the first place to look are the people that if you don't do anything, that group of companies are going to pay anyway. Then you can try to make it rational and you can try to limit it and you can try to make it more certain. I'd love to be able to start all over again, but I can't do that.

MR. HASSETT: I have a problem with the logic, though, because basically it seems like you're saying, “Well, the asbestos system is broke so we need to fix it. But when we fix it, we need to respect what it accomplished before.” Right? So it allocated these liabilities the way it did and, yet, it was broke when it did that. And so for fixing it, then shouldn't we just try to make the best fix? If you say they need to fix it now, then just change the way the financing for the fund works. You, yourself, mentioned that there's a lot of dispute over how to do it between now and when you pass the bill--

MR. HANLON: Well, that's two different things. I suspect that when you were talking earlier about the rational way of funding this, you didn't have in mind taking the list of existing asbestos defendants and trying to slice and dice it to get more precise as to who should bear what liability. And that's what I'm talking about.

You know, defendants don't have time to wait while we all work out who the social engineer in the sky would allocate this to, and have this terrible feeling that they might come back with some name like Uncle Sam, in which case everybody would run for the halls. And at that point you need to do something. And, yes, it would be great to figure out a different way to finance it. And, yes, there's a certain degree of unfairness that's being codified into the future, but it's the unfairness that's inherent in the system. And nobody, at least the people that I'm talking about, don't feel that they can afford to wait for a perfect solution. And they're willing to pay for an imperfect provided it's not too imperfect and provided it doesn't cost too much. I mean, it's obviously a question of judgment.

MR. BRICKMAN: Ted's sense that we should not reward the fruits of fraud is one that I have long entertained. I became convinced, however, that the sense of justice doesn't really work in the real world. In the real world they shoot real bullets and they have a broken tort system. When I've testified on occasion as an expert witness in bankruptcy proceedings and pointed out the broken tort system, the bankruptcy judge says, “Ah ha! You acknowledge the tort system is broken, all we're doing in the bankruptcy process is acknowledging the existence of that broken tort system. Thank you very much for confirming my understanding as a judge that the system is broken, and that that's the system that I have to deal with.” Which is to say that's the system that determines the values, etcetera, that will be awarded under the bankruptcy system.

So however much your sense of justice may be offended, relief from a broken tort system is a very expensive proposition. And however much you may wish for a different world, you have to deal with the reality of the world you're in. And that doesn't only apply to the tort system.

MR. HASSETT: The reality is that there's going to be an implicit huge tax on a bunch of manufacturing companies, precisely at a time when our high manufacturing tax rate is causing concerns about outsourcing and everything else. And, you know, I share your frustration with Congress's ability to do the right thing, but it just seems kind of loopy to pile,--I haven't done the estimates, maybe you have. But how big is the tax rate that some of these firms are going to be effectively be paying if you look at what their profits are and how much they're paying into the fund? I mean, it's probably a big number.

MR. BRICKMAN: Pat is a better person to answer that. But let me just quickly interject. Most of the impetus for the bill doesn't come from the plaintiffs or the plaintiffs' bar. It comes from the defendants. They're the ones who are paying the tab and saying, please, let me pay this tab and not stay with the current tort system.

MR. HANLON: There's no easy way to answer the question about how this relates to profits because it's not really based on that. So depending on what size company you are and what you're currently paying, and so forth, it would have a different impact.

The real controversies that happen on the defense allocation side really have to do with how their insurance assets are taken into account and how much they will have to pay under the bill compared to how much they're paying now or how much they expect to pay over time. And, generally speaking I think it's fair to say that most companies are reasonably comfortable with it. Remember, the alternative, the practical alternative is not the best system that we may someday have if we have enough conferences to figure it out. The practical alternative is either having the present system where that tax is already being paid by those companies. It may not be exactly the same amount by each one, but it's all falling on the same companies we're talking about here. And they're all paying that. That transfer is occurring. And so what they're getting out of this is probably a savings because, again I believe that 140, which is the maximum end of the fund, is at the low end of what would happen in the tort system. And they're getting a great deal more efficiency for it. There's a hope over the long term is that the average amount of money is less.

But for those companies who calculate it differently, and there are some, that's why it is we have the controversy and why it is this is so hard to solve. There are some people who think they're paying more than they would expect to under the bill compared to the tort system. And those people perfectly legitimately say that they wish the system were different.

And, you know, again as I tried to say at the beginning, there's no absolute, or not even relative perfection. Everybody has a reason why they might pay more, they might pay less. Everybody feels differently about how much insurance they have. Policy holders routinely have a different view of that from the insurers. And it's really impossible to figure any of that out.

There's no way with 8,400 defendants that you're going to make it work out perfectly. So the issue is whether you make it work out well enough. But whatever it is, that group of companies are going to be bearing the cost of asbestos litigation whether you have the bill or not. The question is simply which ones are going to pay how much of it and how uncertain and controllable it's going to be.

MR. FRANK: Let's open it up to the floor. We do have a microphone. So please wait for the microphone. And do identify yourself and your affiliation.

MR. BOEHM: Thanks. Ken Boehm, National Legal Policy Center. I have a question: CBO last month released a report and they were addressing the question of how the FAIR Act would impact the influx of new cases. And I believe their finding was essentially that it would reduce the number of new cases and mostly because of the cap on litigation expenses, trial lawyers, etcetera. And I was just wondering if that's consistent with what the panelists think?

MR. FRANK: What do the panelists think?

MR. HANLON: Well, I think generally that's probably true. As we've been discussing, there are a lot of factors that go both ways. If you get at the entrepreneurial lawyers that generates the vast majority of those claims, that's a powerful factor that goes in favor of the CBO's determination.

There's obviously the point that Dr. Bates points out and that we've talked about here, that there's some psychological barrier that may go down and there's some lower transaction costs. And in some categories it's a quicker no more automatic process, those tend to go in the other way. So at least from my point of view, I think that CBO has it right on balance, and actually the thing that I think that it's not so important but that mostly can be criticized is that they still believe a million medical monitoring claims, and that seems to me to be surprising. But it has more of an impact on administrative costs because those are relatively small amounts. In the more serious cases I think CBO is generally right, and they have, themselves, balanced all the considerations. I can guarantee you they've heard all the things we've said here and they heard it over and over again from lots and lots of people.

MR. BRICKMAN: CBO vastly over estimates the number of non-malignant claims. They stopped looking at data in 2002. That is, the last data they looked at is from 2002. A lot's happened since 2002 of significance with regard to non malignant litigation. That said, that major error is harmless error, as the court's say, because there's no money there. So it don't matter that they got that wrong.

The joker in the deck, I think, are the lung cancer cases and maybe the other cancers. Because a lot of that depends on events yet to transpire, on what a medical commission is going to find, and so on. And we already know how many meso cases there will be: the Nicholson data, and so on, the projections are very, very close to reality. There are over 150,000 lung cancer deaths that present every year. That's a huge number. Only a small number, only a small percentage of that get reflected in the tort system as asbestos claims. How will the bill impact that I think is one of the most important questions you can possibly pose. And I think there's some degree of uncertainty about that. Now, you're talking about numbers that are significant.

MR. HASSETT: There's some chance, and I don't know what it is, that it's low by a factor, a big factor like two or something. And then, you know, there's some chance that it's correct. But there's not much chance at all that it's high, the CBO analysis. That's the way I read it.
MR. FRANK: Here in the front?

MR. CARLSTROM: Hi. I'm Bob Carlstrom, of Navigant Consulting and I'm here on behalf of the Financial Institutions for Asbestos Reform, which is a significant segment of the investment management community in New York.

Specifically looking at the whole tax issue and just probably more of a comment, but I think it leads to that. And that is under the present system we clearly have what's called a litigation tax which manifests itself in several ways, not only in your defense legal costs or plaintiff legal costs. If you're a targeted company and red lined, you have an increased cost of capital by 100 to 150 basis points. You also become red lined in terms of any potential mergers and acquisitions because joint and several liability can grab something that you're acquiring that may have produced at one time and you're not going to acquire it now. So it really hurts companies that are already red lined in terms of their ability to expand.

I think also particularly in terms of when you look at the footnoting in 10(k)s and that by companies that are afflicted in their SEC reports, they’re footnoted because they don't want to draw attention to their future exposure. They cite the Wall Street analyst have their companies devalued, have shareholders' stocks devalued. And what the trust fund allows you to do is to shift all that uncertain, unmeasured or very difficult to measure liability into long term debt, which can be incorporated part of your long term debt restructuring and refinancing over the years and allow you to focus back again, as Patrick said, and run your company.

So when you look at the economics of this and whether or not it's a tax, it's perhaps the least costly option for the afflicted community. It really is something that, in fact, is going to apply to only those who have a demonstrated liability under the current law, joint and several liability however imperfect. And I think that's important. I think there can be a lot of confusion in saying that this is a new tax. Well, it really isn't. It's an assessment for a special purpose fund that's going to be privately financed. And so I just offer that as a supplementary comment to some of the discussion.

MR. HASSETT: I guess, very important points that you raise. For me I'd be really persuaded if I observed sort of all the relevant firms, therefore, were just like 100 percent behind this bill. But I have at least the casual empirical observation that there are probably some that seem like they're paying less than they thought they were going to and they're really behind it. And then there's some that feel like they're paying more than they were going to and they really don't like it. So I actually would love to know what the people who think they break even think. And that would help us assess how important the factors that are genuine that you just mentioned would be.

MR. [Unknown]: Actually, it sort of fits right in with that and the previous comments. But there is a free rider problem or a moral hazard problem in the people who assert that they don't have or have a fear of asbestos exposure in the future. And it is in their interest to say that they have this thing they call an insurance asset and therefore they're going to pay more into the fund than the system. So there is a free rider problem, just in people even purposely ineffectively discounting that risk is to them.

And I'll just suggest a couple things about why this might be attractive from a conservative point of view. Number one, whether it's certain or uncertain, one thing is certain is that the tort system has a lot of flaws. And they've all been alluded to. And so it really is comparing something that is, from a conservative's point of view, is unregulated trial bar is making use of state power to take money from one individual and give it to another at huge transaction costs, and more to the point, huge uncertainty. And your 50/50 coin example would work if you could get insurance for the 50/50. I do not know of any insurance companies today who will write asbestos insurance. I think that's over. And they're in business to make money. And they'd be doing it if it was as simple as discounting that you suggest.

And so then the question is, can you, from a sort of societal point of view, speak to where any individual company faces this uncertainty. And I can tell you that hedge funds are making more calls today about the future of this bill and affecting their decisions about what they invest in than anything else that's going on in town. Which suggests that the market is not happy with assuming the uncertainty that exists that somebody could become a target, you know, at the trial bar. And one of the things that we know about the trial bar is they're never going to run out of a desire to make money. So they don't want to ever run out of defendants who they can claim that they ought to make a claim against. And because of all the ways it works, leverage, brand damage, and everything else, they're hoping to sort of extort more payments out of people whose liability is pretty tenuous.

MR. FRANK: All right. I think hedge funds interest can equally be attributed to their desire to arbitrage the plus or minus value of the bill. But do any of the other panelists want to comment?

MR. HASSETT: Hedge funds want to know who the winners and losers are right now. And there's probably a lot of money to be made on that. But, see, actually, in fact, you might argue that argument goes against your point because there would be no interest from hedge funds if this bill were just sort of making all these guys better off because then you just buy the market.

So the reason they're making all these calls is they're trying to figure out should I buy this company or should I buy that company because I need to understand this bill because, you know, once everybody figures it out, then they're going to say well, this company is going to go up a lot, but these guys are actually going to go down because they're paying more than they were supposed to. And so there's a lot of money to be made on figuring that out. And so they're working really hard on that.

And I'm saying that if you had, like, the perfect bill, which is probably impossible to have, you know, we probably shouldn't even use the example, then you just say, well the whole market would go up when you did it, because everybody would be better off. You'd have figured out, like, they'd all be paying their present liability.

MR. [Unknown, cont’d]: Well, unless they're already long, which a number of small [inaudible]--the value of the investment is going to be affected by the bill. In a perfect world you're right, people in the markets really don't care. They [inaudible]. But these are people who are deciding about whether the long, I think, is affecting their decisions.

MR. FRANK: For the other hedge funds investors in the audience, do any of the panelists have any political insights about the likelihood of that?

[Laughter]

MR. HANLON: Well, I'm certainly not going to say that. Actually, I first thought that this would be refreshing because there wouldn't be very many people from Wall Street here. I've often--usually when I give this, I'm very much concerned about major movements in the market immediately afterwards. They certainly do watch. And I think there's a great deal of, it's focused a lot, obviously, in the building products industry.

One interesting fact to keep in mind. If the FAIR Act fails, within a year roughly what, 11, 12, 13 major bankruptcies will come to consummation. And somewhere between 25 and 50 billion dollars will be paid into trust funds where over the years the plaintiffs lawyers will get 30 to 40 percent of. That's a huge consequence to happen all at once. And, of course, the hedge funds have invested in the money in the stock of many of those companies. And there won't be any stock. The stock will be owned by the plaintiff's trial bar.

One of the things that if you talk to some of the people who are in the building products industry is the serious concern that the plaintiff's trial bar, at least indirectly, will end up controlling the vast majority of the American building products industry within a year or so after this. Much of that has been sort of held in abeyance because the FAIR Act has been pending. But that and a whole wave of other bankruptcies can be expected once--if that should ever come up the way. And Wall Street is certainly looking at that.

MR. BRICKMAN: Pat, who would they then sue?

MR. HANLON: Who would they then sue? If they controlled the building products industry? Well, they would sue the automobile companies and they would sue the plumbing companies who treated the valve, you go into the bathroom and see who--you know, those numbers that you see on the equipment there didn't used to think they were asbestos defendants, but they are now, all of them.

Asbestos was used not just in fire retardant stuff, but in practically everything because it's non corrodible. And the number of potential defendants that are out there is even bigger than the 8,400 companies that have already been sued. Many of them have sort of lived comfortable lives while companies that many people love to hate have been fighting on their behalf for a long time. But once they go into bankruptcy, the litigation spreads. And it spreads until the plaintiffs just can't make the case anymore. And given the way asbestos is, it's really hard to see that coming to rest any time soon. And that's one of the reasons why it is that so many people who are on the periphery are in favor of a bill like this because it builds a moat between them and a litigation that they know can be life threatening. And this is like a small business situation. They know it can be life threatening as soon as their creditors, and so forth, get the idea they have an asbestos problem. And the who-knew syndrome is an important source of political support for the bill.

MR. FAY: I'm Bill Fay, with the Coalition for Asbestos Reform. And I just thought maybe we could throw a little cold water on the market expectations for the bill.

Interestingly enough, politically I don't know if I've ever seen--it's almost inconceivable to think that not just the plaintiffs’ lawyers oppose this bill, but conservative groups like the National Taxpayers Union, the Americans for Tax Reform, the Labor Unions, insurance companies have told Congress that they believe that the current system is preferable to S. 852. And business groups; a number of businesses vehemently oppose this bill because it's going to put them out of business.

Where is the fairness in a bill that has GE, which made $150 billion in 2002, pay just $27.5 million a year and have Hopeman Brothers, which made $100 million, 1500 times less than that, pay $16.5 million a year, and go out of business the day the bill is signed? If this bill is ostensibly to prevent bankruptcies and, yet, it creates them, there's a tremendous irony there.

Most importantly, though, and this is a huge question I have for the panel, and that is whether or not this bill is survivable. It was interesting that the last slide on sunset was in there. Because I would actually I defy you to find a bill that provides more thoroughly for its own failure than this bill does. That sunset provision is very clear. And twelve of the eighteen members of the Judiciary Committee, including seven who voted to report it to the floor, said they have serious reservations about the survivability of this trust fund. Now, for the companies that lose their insurance, they don't get that insurance back when all of a sudden the bill sunsets. For the victims that have to re-file their claims, for the businesses that have to re-defend them, there's going to be some jeopardy there.

Now, I have one thing for you, Pat: GAO said that with every trust fund that they've surveyed, the four trust funds that they surveyed that had great similarity to this trust fund, they said they were cheerleaders who all got the numbers wrong. And in all cases the numbers were too low. When you take a look at that and couple it with the concerns that twelve of the eighteen members of the committee have expressed about the financial viability of this trust fund, it raises some tremendous concerns I think that need to be addressed.

MR. HANLON: Well, let me--there were a bunch of questions there, but I want to just focus on two. One is the fairness question.

I think that you know that Hopeman, for example, and there are several other companies who are small companies in high tiers, would qualify for a reduction in the amount of their contributions on the basis of a proposal the NAM has made and that I think will be ultimately favorably considered on the floor. And you also know that there is unlimited relief for any person, any company who is really in the position of going bankrupt.

I recognize that some of the members of the Coalition for Asbestos Reform are small companies who have those concerns. As you know, we've been talking to some of those companies and are attempting to address those concerns.

It is a little bit troubling, however, that the balance of the Coalition for Asbestos Reform--and correct me if I'm wrong--seems to be the major insurance companies you've been talking about and some other huge companies who, some of them are also complaining that they are paying more under the bill but they are in the multi billion dollar category themselves. So there's a certain degree of hiding behind the princes here. And I think that we'll be able to solve the problem with the princes. And for the rest of it, you'll have to just come on out into the open.

On the question of the financial viability of the fund, let me just stress to you that we don't think we're stupid. If we believed for two seconds that Charlie Bates was right, we'd be joining the folks in the Coalition for Asbestos Resolution. This isn't an advocacy point of view. People are making their judgments as to whether this makes sense for them.

Now, I do agree that there are some major improvements that need to be made in the medical criteria and we haven't even talked of the exposure criteria. I think that there's an opportunity to make those. There's a long process left ahead of us. But even if those were not made, it seems to me, our assessment is that this program would last if not to the very last claim, at least very far out into the future where you've got something manageable you could deal with when you deal with it then.

If we did not believe that, if we thought that this was going to crater in the short term, if we even thought there was a substantial probability that it would crater in short term, we would not support the bill. And if we are ever convinced that there is a substantial probability that it would crater within a few years, we would stop supporting the bill.

So we're putting our money where our mouth is. We're taking that chance. We don't think it's a very high chance. We think that on all of the projections that we have made that this will last if not all the way till the end, which I think it will do, at least out into the thirty or forty year period. And we'll be able to figure out what to do in light of what the experience is over that period of time.

Now, with respect to the predictions that GAO had gone wrong in the other fund, I've talked about that with respect to black lung already. Bill may not have been here when I addressed that one. I don't believe that the others, most of the others are, in fact, comparable. The vaccine program is a wholly different kind of program, for example, from anything we have here. The closest is the energy workers program. And there the GAO said that that was pretty much on target for the Department of Labor part. Eventually Congress, in its wisdom, decided to take a different part of the program that was not originally federal responsibility that was originally supposed to be through state workers compensation, and threw that into the Department of Labor's responsibility because DOE wasn't doing very well and that wasn't working the way they wanted it to do. And if there's an increased cost, it's not because of a flood of new claims that people didn't expect, it's because Congress decided to adopt essentially a new federal program to run alongside the program they had already done. But GAO found that the costs were pretty much on target for the original one that they did. And you remember the energy workers program is a program that essentially is dealing with people who are employed by contractors of the U.S. Government in the weapons program. And there's a certain Federal responsibility that is certainly much stronger than it is here, and a sense that since their indemnification really if provisions between the Department of Energy and those contractors, the workers' compensation costs eventually largely come back to the Federal Government anyway. So it's a complicated way of saying that what they've done there is some sort of a new different way of slicing and dicing a cost that they always expected to have. But I reject the view that the GAO found that the program that they originally adopted generated more claims than they expected.

MR. FAY: Do you think that [inaudible] Goldman Sachs study which was the analysis that under which this bill's cost was estimated should be made public? Because senators have been calling for it and they can't get that study. And they want to know this because there are actually only two studies out there that really have assessed the cost of this. One is Charlie Bates, which is really out in the open. And the other is this mysterious Goldman Sachs study that nobody has been able to see.

MR. HANLON: Well, I'm not sure that I know what you mean by this Goldman Sachs study. I do know that CBO has looked at this. They've looked at all kinds of studies on this program. They've had people coming in from all points of view, whether they're Mark Peterson, who represents largely the plaintiff's lawyers, and I know they've had Andy Kaiser from Goldman Sachs run model productions for them. I know that some of the senators that you've talked to have had private conversations with Mr. Kaiser and have seen what he has. I don't know what it is. I certainly do not have any study from Goldman Sachs, or anyone else, on claims projections that the senators don't have.

MR. HASSETT: I want to--although it seems like these guys have talked about this before. I want to just transport us to the AEI lunchroom. If we were in the AEI lunchroom right now, I'd ask you, if we mess this up, can we fix it? So suppose it turns out that Bates was right and then two years from now there's all these claims coming in that we didn't expect that it's costing as much as we thought, then what could be done?

MR. FRANK: I think it depends on whether there's the political will to have the American taxpayer end up contributing to the fund. Otherwise, I think there is the problem you have a leaky fund. You have this money going out and then the problem is still there. And then the question is, is whether what's there is manageable or unmanageable. And if there isn't the political will to have these sort of efficient economic method of making this part of the general tax fund.

MR. HANLON: I guess, I mean, I don't necessarily fully disagree with that, but I put it a little bit different way. If Bates were to be right and you would have a huge number of lung cancers in the short time, in a short period that threatens the financial viability of the fund, I do not believe that there's an appetite on the part of the Federal Government, anywhere in the Federal Government, either party to have the government essentially step in and rescue a failed program. That's what the sunset provision would be about. We would not then pay $140 billion but people would be down whatever, whatever amount they had. If it could not get started at all, it would be cancelled before the claims actually got paid. If it did sunset, then you'd be back into a tort system that would have venue controls, because that's part of what happens after sunset. You would have at least general applicability of the Daubert rule on expert testimony which some, which should to some extent improve things.

So there's a certain element of the normal, of some of the medical criteria of tort reform agenda. And if you went back to the tort system and you were in Texas and Ohio and all of those states, those tort reform packages that have already been adopted, would continue to be in effect. And they would probably be an impetus to do even more of that. But, of course, nobody's ever really worked out the contingency so nobody knows exactly what would happen. But financially the problem is there would be a certain commitment of resources that might be hard to recover either through an offset in future awards or through a direct refund to the people who contributed. And that wouldn't be $140 billion but it would be enough that, again, I would say my members would be complaining if they had to do it.

MR. COLEMAN: I'm Bill Coleman and I'm with O’Melveny & Meyers. If the bill gets to the floor, what's your judgment of the chance of the bill passing the Senate?

MR. HASSETT: He's the one to ask.

MR. HANLON: Well, I'm obviously going to be reserved on that. I think that there is a--I think that the most important--there are a lot of procedural things that can happen when it gets to the floor. I think the bill would have a majority. And the question obviously is whether it has the 60 votes that are necessary to get passed the procedural obstacles, cloture votes and other potential obstacles.

I think it's close. I think that there is a reasonable likelihood that it will be favorably voted out of the Senate. I believe that some people who will support the bill would support the bill in the hope that problems they have with it will be addressed in the House of Representatives or in a conference committee and that the bill that finally gets through conference and to the President's desk will be better from their point of view than the bill that they now see.

I think that the problem when you go into the House of Representatives is that as you may have guessed, everybody is going to be looking for a Christmas tree there because anyone who has any discontent with any provision of the bill is going to be asking the Ho