John Devaney delivered what was clearly an extemporaneous rant about the state of the subprime market. "It was incredible," said Charlie. "Stream of consciousness.
He went on about how the ratings agencies were whores. How the securities were worthless. How they all knew it. He gave words to what we were just suspecting. It was like he was talking out of school.
When he finished there was complete silence. No one specifically attempted a defense. They just talked around him. It was like everyone pretended he hadn't said it."
Michael Lewis, The Big Short
I've now heard from people at three different law schools that total applications during this admissions cycle are likely to be down significantly relative to last year. Let's put these numbers in perspective:
Total applicants, 2003-2004 cycle: 98,700
Total first year enrollment: 48,239
Percentage of ABA law school applicants who ended up enrolling in that cycle: 48.9%
Total applicants, 2011-2012 cycle: 68,000
Total first year enrollment: 48,697
Percentage of applicants who ended up enrolling last cycle: 71.6%
I'm not normally a big fan of predictions, but I'm going to make one: We're about to see the Crash. This is the spring of 2007 for the subprime CDO market. This is the moment when the anxiety that replaced denial is in turn replaced by panic.
The Crash will look something like this:
(1) Within the next three months or so, it will become evident to most if not all schools who worry about LSAT medians and the like that the only way not to cut class size again is to just give up on trying to hold class medians. (Check out the stats for American's entering class for a sneak preview). Even the T-14 won't be completely immune, but once you get below the GULC Line you're going to see widespread panic.
(2) A lot of law school budgets won't be able to absorb either another reduction in class size, or another reduction in real as opposed to nominal tuition (through attempts to buy matric numbers via "scholarships"), or, especially, any combination of these two strategies, which were so widely employed during the last cycle. The problem with cutting class size two years in a row is that the effect is cumulative: Now you're not just getting less revenue from your 1L class, you'll be getting less from two-thirds of the school's entire enrollment. Law schools spend all the money they plan to bring in: there's no rainy day fund.
2012 was the Year of Trying to Hold On. 2013 will be the Year of Real Cuts (to admissions standards, to law school budgets, or both).
(3) Meanwhile in the third tier, where most schools have already abandoned any pretense to any admissions "strategy" other than filling their classes by hook or by crook, somebody is going to go out of business. Quite a few bad law schools happen to be sitting on very valuable pieces of real estate, that could be re-purposed quite profitably to other uses. Some of these schools aren't affiliated with a central university, which means there's no one to bail them out should their credit lines get cut. Law schools have no real assets beyond their physical plants (which again can be converted easily to other uses) and their human capital, which at proprietary schools can, unlike Alex Rodriguez's contract, be dumped at any time. If a proprietary school can't meet its bills, can't get more credit, and can't restructure fast enough, it goes out of business then and there.
(4) When the first school goes under, several more will follow in fairly short order. Then the hard questions will really start getting asked and answered, all over legal academia.
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