Banking Law Prof Blog

FOMC Projections Released

The Federal Reserve Board and the Federal Open Market Committee (FOMC) have released summaries of the economic projections and the target federal funds rate projections made by Federal Reserve Board members and Federal Reserve Bank presidents for the January 24-25 FOMC meeting.

Link:  http://www.federalreserve.gov/newsevents/press/monetary/20120125b.htm

In the January 24-25 meeting, the FOMC voted to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

Link:  http://www.federalreserve.gov/newsevents/press/monetary/20120125a.htm

The FOMC also issued a press release explaining "principles regarding its longer-run goals and monetary policy strategy."

Link:  http://www.federalreserve.gov/newsevents/press/monetary/20120125c.htm

(ag) Jan. 27, 2012, in Economy/Interest Rates

Financial Stability Oversight Council Should Investigate Whether Bank of American Needs to Be Broken Up

Today, Public Citizen filed a petition and a number of economists and law professors signed a letter asking the Financial Stability Oversight Council (FSOC) to use Section 121 of the Dodd-Frank Act to investigate and possibly to break up Bank of America (BofA).  The issue is "Too Big to Fail."

If regulators are serious about ending the presumption and the practice of bailing out large financial institutions, BofA's current size, complexity, and deteriorating financial condition indicate that Bof A is the place to start.  

At 10:00 A.M. today, a panel of experts (including Public Citizen's David Arkush; Lawrence Baxter, Professor of Law at Duke University School of Law; Art Wilmarth, Professor of Law and Executive Director, Center for Law, Economics & Finance The George Washington University Law School; Bill Black, Professor of Economics and Law at University of Missouri-Kansas City School of Law as well as former bank and thrift regulator; and Dean Baker, Co-director, Center for Economic and Policy Research) conducted a telephone conference call, open to members of the press, in which they succinctly presented the case for investigating splitting BofA into business components that would be capable of more efficient management -- or capable of being liquidated more effectively, should that become necessary.  Either way, preparing in advance should mean avoiding another big bank bailout on TBTF grounds. 

Calling BofA a "ticking time bomb,"  David Arkush pointed out that because BofA holds assets equal to one-seventh of the U.S. GDP and because of the complexity and international reach of its operations, "orderly liquidation" will not work.  "Regulators need to get ahead of this problem," he said. "Why Bank of America? Because it is the most dangerous of the systemically significant institutions."

Lawrence Baxter characterized the requested action by FSOC to investigate and possibly to break up BoA as a "stress test" of the new Dodd-Frank machinery.  To date, FSOC has recommended using exceptions to size caps if that should be needed for future rescues.  Baxter pointed out that this sends the wrong message and continues the highly undesirable TBTF presumption.

Art Wilmarth seconded Baxter's point that regulators appear to have been "moving in exactly the wrong direction," exemplified by the informally reported action (not denied by the Federal Reserve) that allowed BofA to transfer a large portfolio of OTC derivatives from a broker/dealer subsidiary to the FDIC-insured bank.  The effect was to allow BoA to avoid putting up required reserves and transferred risk of loss to the deposit insurance fund -- and ultimately to the taxpayers.  In addition, BoA holds a large portfolio of second mortgages that are, for practical purposes, worthless.  Almost-certain losses in this portfolio are not yet reflected.

Bill Black emphasized that any regulatory approach "must start with calling things what they really are:  Systemically Dangerous Institutions (SDIs) rather than Systemically Significant Institutions," a phrase which masks the problem.  These SDIs:  A.  Provide no benefits because they are too large to be efficient; and B.  Constitute a serious danger and destroy markets.

Dean Baker reminded the audience that the existence of TBTF Banks is "against market principles."  Government support to prevent such an institution from failing promotes "misallocation of the country's capital."

BoA holds large liabilities arising from its acquisition of Countrywide, the worst of the mortgage fraudsters, as well as from its own robo-signing problems and other problems caused by its own mismanagement.

The panelists all pointed out that BofA stock had lost 90% of its value as measured from peak.  Shareholders, employees, and customers could be better off if BoA were split into smaller units more capable of being operated profitably.

Link to Letter to Regulators Requesting Investigation and Possible Action under Section 121 of Dodd-Frank Act:  http://www.citizen.org/documents/Letter-to-Regulators-re-Inquiry-and-Action-on-LCFIs.pdf

Link to Petition:  http://www.citizen.org/documents/Public-Citizen-Bank-of-America-Petition.pdf

(ag) Jan. 25, 2012, in Too Big to Fail, Dodd-Frank

 

Significant Corporate Law Opinions in 2011

In BUSINESS LAW TODAY, Paul Brown and Tyler O'Connell identify and provide concise summaries of "Key 2011 Corporate Law Decisions."  Each of these cases merits careful analysis.

LInk:  http://apps.americanbar.org/buslaw/blt/content/2012/01/article-2-brown-oconnell.shtml

(ag) Jan. 24, 2012, in Corporate Governance

More Transparency at the Fed

Last week, the Federal Reserve released blank templates showing the format of the two charts it will use on January 25 to report Federal Open Market Committee (FOMC) participants' projections of the appropriate target federal funds rate. It also released a draft of an explanatory note that will accompany the projections.

Link to FRB Press Release:  http://www.federalreserve.gov/newsevents/press/monetary/20120120a.htm

This is particularly interesting given the recent disclosure of how far off the mark the FOMC members were in 2006, when they completely failed to understand the approaching Great Recession.  

Link to article:  http://www.nytimes.com/2012/01/13/business/transcripts-show-an-unfazed-fed-in-2006.html?pagewanted=all

Rather than having to wait 5 years, we will have access to more information about FOMC deliberations in real time.  The form still does not provide the whole story, but it is a step toward greater transparency.

(ag) Jan. 23, 2012, in Economy, Economy/Interest Rates

 

 

Consider the Source: "Research for Hire" on the Volcker Rule

This week Congress reviewed the Volcker Rule provisions of the Dodd-Frank Act which would limit proprietary trading by the largest banks.  The House Financial Services Committee Subcommittees on Capital Markets and Government Sponsored Enterprises and Financial Institutions and Consumer Credit Joint Hearing focused on “Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation.”  

In the New York Times "Economix" section, Simon Johnson points out that the Oliver Wyman report prepared for Securities Industry and Financial Markets Association (SIFMA), presenting negative impact which could flow from implementation of the Volcker Rule, is prepared according to SIFMA's engagement requirements and adheres to "form expressly required thereby."  Let's review the SIFMA's big bank members:  Barclays Capital, Morgan Stanley, Société Générale, UBS, BNP Paribas, HSBC, Deutsche Bank, Goldman Sachs, Citigroup, Royal Bank of Scotland, JPMorgan Chase, Credit Suisse, Royal Bank of Canada and Merrill Lynch -- all of which would be required to divest their proprietary trading activities under the Volcker Rule.  

As with all Congressional testimony, we should fully take account of a study's funders, its assumptions, and its biases rather than blindly giving it full credence as "expert" analysis. 

With respect to the Volcker Rule, let's also not forget that the purpose is to restrict "Too Big to Fail" banking entities from "innovating" us into another financial crisis -- and government bailout.  That should be in all of our interests. 

 LInk:  http://economix.blogs.nytimes.com/2012/01/19/should-we-trust-paid-experts-on-the-volcker-rule/

LInk to House Financial Services Committee Hearings:  http://financialservices.house.gov/Calendar/EventSingle.aspx?EventID=274322

LInk to SIFMA Study:  http://financialservices.house.gov/UploadedFiles/HHRG-112-BA-WState-SIFMA-20120118.pdf  

(ag) Jan. 21, 2012, in Too Big to Fail, Dodd-Frank, Volcker Rule, Congress

U.S. Chamber of Commerce Won't Sue Over CFPB Appointment - At Least for Now!

The U.S. Chamber of Commerce has been highly critical of President Obama's recess appointment of Richard Cordray to head the Consumer Financial Protection Bureau (CFPB).  Today, however, the Chamber reportedly has decided to wait and see how the CFPB performs.

Link:  http://money.cnn.com/2012/01/12/news/economy/chamber_consumer_bureau/

(ag) Jan. 12, 2012, in Consumer Protection, CFPB

NY Investigates Big Banks for Steering Homeowners to Expensive Force-Placed Insurance

JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo are under investigation by the New York Department of Financial Services.  The investigation has uncovered examples of mortgage servicing units of large banks steering distressed homeowners into high-priced home insurance offered by affiliates. 

Lenders have the right to "force place" insurance when borrowers let their insurance lapse.  Insurance on the collateral (the home) normally protects both the borrower and the lender from damage to the property.  Borrowers in financial distress may stop paying insurance premiums.  In that case, the lender may secure insurance to protect only the lender's interest if the property is damaged.  The cost of this "force-placed" insurance is added to the borrower's obligation.  

The New York investigation has found instances in which the "force-placed" insurance cost up to 10 times more than the homeowner/borrower's original insurance policy.  In some instances, the "force-placed" insurance was issued by an affiliate of the lender, raising issues of conflict of interest and kick-backs.

Link:  http://www.nytimes.com/2012/01/11/business/big-banks-facing-inquiry-over-possible-insurance-fraud.html

(ag) Jan. 11, 2012, in Consumer Protection, Lending Issues

A "Cottage Industry"? The Business of Buying Foreclosed Properties

Federal regulators are developing a program to sell government-owned foreclosures in bulk to investors.  With the need to dispose of foreclosed properties in a way that will speed economic recovery, investors are positioning to take advantage of this opportunity -- and are already buying foreclosed properties at auction and from banks.

Link:  http://www.cnbc.com/id/45945390

(ag) Jan. 10, in Economy

Looking at the Federal Reserve's Finances - $76.9 Billion as a dividend to Treasury

According to Bloomberg's , Craig Torres: 

"The Federal Reserve will pay $76.9 billion to the U.S. Treasury as part of an annual dividend it remits after covering its own expenses from interest on its ballooning bond portfolio and other gains."

Link:  http://www.bloomberg.com/news/2012-01-10/fed-s-rising-balance-sheet-generates-76-9-billion-for-treasury-department.html

(ag) Jan. 10, 2012, in Economy

An Intriguing Alternative to the Efficient Capital Markets Hypothesis

According to Andrew Lo's Adaptive Markets Hypothesis (first proposed in 2004), markets are not always efficient.  Although the Efficient Capital Markets Hypothesis or Efficient Markets Hypothesis (EMH) may have applied during the "Great Modulation," identified as "the seven decades spanning the mid-1930s to the mid-2000s in which equity markets exhibited relatively stable risk and expected returns," key assumptions underlying EMH have broken down in the past decade.  Those assumptions include "rational investors, stationary probability laws, and a positive linear relationship between risk and expected return."

Lo proposes the Adaptive Markets Hypothesis (AMH), "an evolutionary perspective on market dynamics in which intelligent but fallible investors learn from and adapt to changing environments. Under the AMH, markets are not always efficient, but they are highly competitive and adaptive, and can vary in their degree of efficiency as the economic environment and investor population change over time. The AMH has several new implications for financial analysis, including the possibility of negative risk premia, the transformation of alpha into beta, and the importance of macro factors and risk budgeting in asset-allocation policies."

Abstract and Article posted on SSRN:  Dec. 30, 2011 

(ag) Jan. 8, 2012, in Economy, Securities, Global Markets

Analyzing a Likely Settlement between State AGs and Mortgage Servicers

According to Housingwire, a likely $25 Billion settlement between State Attorneys General and mortgage servicers may include the following elements described by DBRS structured finance analyst Kathleen Tillwitz:

• Approximately $17 Billion would be allocated for principal reductions; 
• $3 Billion would be designated to cover the costs of refinancing for current, underwater borrowers;
• The remaining $5 Billion would be delivered in cash, $3.5 Billion of which will help fund state and federal foreclosure mediation programs and $1.5 billion will go to borrowers who suffered foreclosure abuses. The compensation payment to each borrower is estimated to range between $1,500 and $2,000.

However, strong criticisms of the proposed settlement that may delay the proposed settlement for several more months include:

• Likelihood that costs of principal reductions will be borne by investors in the residential mortgage backed securities, not mortgage servicers; and
• Likelihood that some borrowers may default in order to qualify for principal reductions under the settlement.

Link:  http://www.housingwire.com/2012/01/04/debt-forgiveness-likely-to-dominate-ag-mortgage-servicing-settlement

(ag) Jan. 5, 2012, in Lending Issues, Predatory Lending, Consumer Protection

President Uses Recess Appointment to Name Cordray as Head of CFPB

President Obama today named Richard Cordray as the first Director of the Consumer Financial Protection Bureau (CFPB).  His decision to use a recess appointment to avoid the stalled Senate confirmation process is already controversial.

The U.S. Chamber of Commerce wasted no time in issuing an opposition statement.

The White House emphasized the need under the Dodd-Frank Act for a Director in order to trigger the CFPB's authority beyond already highly regulated financial institutions to previously unregulated non-financial entities that engage in predatory consumer financial tactics.

Link to White House statement:  http://www.whitehouse.gov/blog/2012/01/04/president-obama-discusses-richard-cordray-shaker-heights

Link to Chamber of Commerce statement:  http://thehill.com/blogs/blog-briefing-room/news/202367-chamber-of-commerce-disappointed-by-recess-appointment-a-gross-understatement

(ag) Jan. 4, 2012, in Consumer Protection, CFPB, Financial Regulatory Reform, Dodd-Frank

Looking Ahead to the SEALS Conference Next Summer

Message for Banking Law Professors:

Please let me know if you are going to the Southeastern Association of Law Schools (SEALS) Conference this summer and would be interested in participating in a discussion group on the following topic:

"Current Issues in Consumer Financial Protection and Financial Regulation"

 
The discussants will cover issues surrounding the Consumer Financial Protection Bureau (CFPB), including efforts to restrict funding, to change the agency leadership from a single director to a board, and to increase Congressional oversight, as well as the impact of vocal industry opposition to this new agency and blocking Senate confirmation of a director.  The original intent of the Dodd-Frank Act was to bring previously unregulated entities providing financial services and protects under CFPB jurisdiscion and create a level playing field with banks.  Discussants will consider whether this can be achieved.  Panelists/discussants will also review new consumer financial protection regulations and enforcement actions since passage of the Dodd-Frank Act.  

In addition, the U.S. Supreme Court has heard several cases that will impact fair lending enforcement, including:  First American Financial Corp. v. Edward, Gallagher v. Magner, and  AT&T Mobility, LLC v. Conception.  

Discussants will also consider other financial regulatory structure issues, including Secondary Mortgage Market Reform and Federal Preemption. 

The idea is to have 10 or more "discussants" who prepare a three to five page summary of a discussion point within the topic (circulated ahead of time) and then a very short intro of the idea, with discussion to follow.

The SEALS conference is July 29-Aug. 4, 2012.

Link to SEALS website:  http://sealslawschools.org/

(ag) Jan. 3, 2012, in Consumer Protection, CFPB, Financial Regulatory Reform, Secondary Mortgage Market Reform, Federal Preemption, Supreme Court

 

 

Recovery or Recession in 2012?

Here's a disturbing prediction from Reuters:

"The European debt crisis is raising the odds of a U.S. recession, with economic contraction more likely than not by early 2012, according to research from the San Francisco Federal Reserve Bank."

Link to article:  http://www.reuters.com/article/2011/11/14/us-usa-fed-recession-idUSTRE7AD1PR20111114

Link to SF Federal Reserve Bank study:  http://www.reuters.com/article/2011/12/19/us-usa-fed-europe-idUSTRE7BI1VG20111219

(ag) Jan. 2, 2012, in Economy

Happy New Year? Reviewing Economic Forecasts

Dallas Federal Reserve President Richard Fisher delivered a speech in mid-December.  While acknowledging that according to Economist John Kenneth Galbraith,  “the only function of economic forecasting is to make astrology look respectable,” Fisher nevertheless reviews the 

The good news:  

• Businesses’ cash flow is at an all-time high, both absolutely and as a percentage of GDP;
• Access to capital is widely available and attractively priced;
• Financial institutions have excess liquidity.  

The bad news:

• We need to reduce unemploment, create jobs and put people back to work.
• Low interest rates and "monetizing the government's debt" are not enough to achieve this goal.
• Uncertainty in Europe, slowing growth in emerging economies like China and Brazil, and concerns about capital surcharges and other regulatory issues lead to caution.

As Fisher says,  "No matter how much cash you have on your balance sheet, or how compliant your banker might be, or how cheap the cost of money, you will not commit substantial capital to expanding your payroll or investing significant amounts to expand plant and equipment until you know what it will cost you to run your business; until you know how much you will be taxed; until you know how federal spending will impact your customer base; until you know the cost of employee health insurance; until you are reassured that regulations that affect your business will be structured so as to incentivize rather than discourage expansion; until you have concrete assurance that the fiscal “fix” the nation so desperately needs will be crafted to stimulate the economy rather than depress it and incentivize job creation rather than discourage it; or until you are reassured that the sinkhole of unfunded liabilities like Medicare and Social Security that Republican- and Democrat-led congresses and presidents alike have dug will be repaired so that our successor generations of Americans will prosper rather than drown in dark, deep waters of debt."

Link to Speech:  http://www.dallasfed.org/news/speeches/fisher/2011/fs111216.cfm

(ag) Jan. 2, 2012, in Economy

Uniform Commercial Code Issues in Mortgage Foreclosures

The Permanent Editorial Board for the Uniform Commercial Code (UCC) has issued a report discussing the applicability of UCC Article 3 (Negotiable Instruments) and Article 9 (Secured Transactions) to certain issues in judicial and non-judicial foreclosures, including:

• Who is the person entitled to enforce a mortgage note?
• How is the transfer of a property interest (ownership or a security interest to secure an obligation) in a mortgage note accomplished?
• What effect does the transfer of a mortgage note have on the related mortgage?
• How can a person enforce a mortgage note by foreclosing non-judicially if the person does not have a recordable assignment of the mortgage?

Link to article:  "Setting the UCC Record Straight on Mortgage Foreclosures" by Steven Weise:  http://apps.americanbar.org/buslaw/blt/content/2011/12/keepingcurrent.shtml

(ag) Dec. 22, 2011, in Banking, Lending Issues, Real Estate, Foreclosures

Corporate Governance: The Option to Incorporate Outside the U.S.

NY Times DealBook has an intriguing note about the recent decision by the New York Stock Exchange listed fashion company, Michael Kors Holdings, to reincorporate in the British Virgin Islands.

Reasons to incorporate outside the U.S. include:  avoiding unfavorable U.S. tax laws and securities laws aimed at transparency, disclosure, and investor protection -- as well as a desire to avoid the intensely litigation-focused approach to problem-solving in the U.S.

What's the impact on U.S. investors who expect legal protections?

LInk to "The Benefits of Incorporating Abroad in an Age of Globalization" by Deal Prof. Steven Davidoff:  http://dealbook.nytimes.com/2011/12/20/the-benefits-of-incorporating-abroad-in-an-age-of-globalization/?nl=business&emc=dlbka33

(ag) Dec. 21, 2011, in Corporate Governance, Securities Law, Global Markets

FinCEN is Serious: No Disclosing SARs

The Financial Crimes Enforcement Network (FinCEN) announced that it assessed of a $25,000 civil money penalty against an individual for violation of Bank Secrecy Act (BSA) prohibitions against disclosing suspicious activity reports ("SARs").

The individual contacted the subject of a bank SAR, disclosed existence of the report, and extracted bribes from the subject of the report.  The individual was convicted in a criminal case of bribery and unlawful SAR disclosure in the U.S. District Court for the Central District of California.

LInk to FinCEN announcement:  http://www.fincen.gov/news_room/nr/pdf/20111215.pdf

(ag) Dec. 20, 2011, in BSA/AML

SEC Sues Former GSE Execs -- But Will the Agency Follow Through?

Last week the SEC filed two civil lawsuits against six former executives of Fannie Mae and Freddie Mac:  Former Fannie Mae CEO Daniel Mudd, former Fannie Mae chief risk officer Enrico Dallavecchia, and former Fannie Mae EVP Thomas Lund; and, former Freddie Mac CEO Richard Syron, former Freddie Mac chief business officer Patricia Cook, and former Freddie Mac EVP Donald Bisenius. The SEC seeks disgorgement of profits and financial penalties in addition to a permanent bar against serving as an officer or director of a public corporation.

The SEC sued under Rule 10b-5 for securities fraud, alleging that the named defendants intentionally misled investors by understating the GSEs exposure to "subprime loans."  The litigation will turn on the definition of "subprime loan"  -- so the SEC's ultimate success is far from assured.

Law Professor Peter Henning, writing for the New York Times DealBook says that by filing this litigation, the SEC signals "an aggressive turn in the pursuit of cases tied to the subprime mortgage crisis."

Link to article:  http://dealbook.nytimes.com/2011/12/19/closer-look-at-s-e-c-s-mortgage-fraud-charges/

I wish I could be as optimistic about the ultimate outcome of this litigation.  

• Remember that the SEC desperately wants to settle the Citigroup litigation for peanuts compared to the initial amount claimd.  (See my previous blog posts.)
• Remember also that the Justice Department has not pursued criminal actions against either GSE. 
• Note that these GSE execs are likely entitled to insurance coverage for these claims. In the meantime, the GSEs in conservatorship (so translate: the U.S. taxpayers) are obligated to front litigation expenses incurred by these defendants unless and until they are found guilty of wrongdoing.
• Even Professor Henning recognizes that:  "Filing fraud charges creates a big splash, but like any enforcement action, a number of questions remain."   My biggest question is whether the SEC has the will to see this litigation through.  The proof is in the pudding.

(ag) Dec. 19, 2011, in Securities Law, Subprime/Predatory Lending, Secondary Mortgage Market, Fannie Mae/Freddie Mac, SEC 

SEC Appeals Rakoff Rejection of Settlement

The Securities and Exchange Commission (SEC) has appealed Judge Jed Rakoff's rejection of the proposed $285 Million settlement between the SEC and Citigroup.  

This seems like a no-win for the SEC.  If they win the appeal, they look like enforcement wimps.  If they lose the appeal, there's a clear indication that other judges could require admission of fault or proof of alleged misdeeds before approving settlement.  

SEC, of course, says that it settles to avoid years of litigation.

OK, but what about sending a strong message to wrongdoers in the aftermath of the financial crisis? 

Link:  http://m.ibtimes.com/sec-citigroup-appeal-rakoff-268053.html

(ag) December 15, 2011, in Enforcement, Securities Law, SEC