Banking Law Prof Blog

Arthur Wilmarth Interview on Cuomo Decision

National Public Radio talked with George Washington University Law Professor Arthur Wilmarth yesterday.  He is a highly regarded proponent of the dual banking system and an opponent of aggressive federal preemption in the financial institutions arena, as well as a prolific author of Law Review articles in the banking law field. 

Link to interview:  http://www.npr.org/templates/story/story.php?storyId=106062165

(ag) June 30, 2009, in Federal Preemption/Dual Banking

Analysis of the Cuomo Opinion

Today, the U.S. Supreme Court delivered its opinion in Cuomo v. Clearing House Association, upholding the power of States to enforce their own non-preempted consumer protection laws by bringing suit against national banks and their affiliates.

This opinion was one of the very last to be published before the end of the Supreme Court’s 2008 term.  Justice Scalia authored the majority opinion, joined by Justices Stevens, Souter, Ginsburg, and Breyer.  Justice Thomas filed an opinion concurring and part and dissenting in part, joined by Chief Justice Roberts and Justice Alito.

The majority opinion finds that the Office of the Comptroller of the Currency (“OCC”), the chartering authority and federal regulator of national banks, promulgated a regulation and an interpretation of its regulation that do not comport with the National Bank Act and are, therefore, invalid. 

States do have the power to sue national banks for violation of state consumer protection laws.  

 The background of the case involved an investigation by the New York Attorney General, triggered by data indicating racial disparities in loans by national banks headquartered in New York made to white borrowers and loans the same banks granted to African-American borrowers.  Rather than respond to the Attorney General’s request for information that might explain these racial disparities, the national banks, including Wells Fargo, HSBC, J.P. Morgan Chase, and Citibank, and others that are members of the financial institution trade group, Clearing House Association, L.L.C., filed suit to block his investigation.  The OCC and the national banks agreed that state consumer protection and anti-discrimination laws in this case were valid and not preempted, but they said the State could not enforce its laws against national banks.  The OCC claimed that lawsuits against national banks were preempted because only the OCC had “visitorial power” over national banks and their operating subsidiaries.

The Supreme Court declared that the OCC’s regulation purporting to preempt State law enforcement is not a reasonable interpretation of the National Bank Act.  The majority opinion makes a distinction between “visitorial powers,” which the National Bank Act gives exclusively to the OCC, and the State’s power to enforce the law.  The majority opinion gives cursory acknowledgment to the Chevron Doctrine, under which courts defer to reasonable agency interpretations of statute, but goes on to say that “the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act.  We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history.  [Visitorial powers] do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law.”

Justice Scalia’s majority opinion recognizes that when a State sues a national bank, the normal rules governing litigation protect against overbearing.  The majority opinion did find that the State’s power to issue subpoenas under its own authority, rather than that of the court, is preempted.  As a result, the Attorney General’s letter request for information was preempted to the extent that it was a veiled threat to exercise subpoena power the Supreme Court declares preempted.  

The majority opinion turns on the term “visitorial powers” in the National Bank Act, coupled with the Supreme Court’s extensive analysis of the historical reach of “visitorial powers” and prior Supreme Court opinions, such as Guthrie v. Harkness, 299 U.S. 148 (1905) and First National Bank in St. Louis v. Missouri, 263 U.S. 640 (1924) , which upheld the right of a private citizen and the right of a State Attorney General, respectively, to bring suit against national banks to enforce State law.  The majority did not engage in a formal Chevron analysis and did not flatly say that the OCC’s interpretation was “unreasonable,” although that is the implication.  The Supreme Court says that “the presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act.”   The majority opinion does not invoke the presumption against preemption and finds it “unnecessary to do so in giving force to the plain terms of the National Bank Act.”  On the other hand, the Court says, “Neither should the incursion that the Comptroller’s regulation makes upon traditional state powers be minimized.”  The majority opinion also notes that, “The consequences of the regulation also cast doubt upon its validity.”  It is reassuring to note that the Court does look at context and effect and does not merely rubberstamp an agency’s regulations.  The Court endorses cooperation between federal and state regulatory structures, saying, “This system echoes many other mixed state/federal regimes in which the Federal Government exercises general oversight while leaving state substantive law in place.”  

 The reach of Watters v. Wachovia, 550 U.S. 1 (2007), is strictly limited by Cuomo:  “The sole question was whether operating subsidiaries of national banks enjoyed the same immunity from state visitation.  The opinion addresses and answers no other question.”

Interestingly, Justice Ginsburg authored the Watters opinion, which upheld an OCC regulation invoked against a State banking commissioner attempting to enforce a state registration requirement against a state-chartered mortgage lender which became an operating subsidiary of a national bank to evade state consumer protection regulation.  Justices Breyer, Souter, Kennedy, and Alito joined the majority in the Watters case.  Justice Stevens filed a blistering dissent in Watters, joined by Justices Scalia and Chief Justice Roberts.  Justice Thomas took no part in the Watters case.

Justice Thomas’s dissenting opinion in Cuomo would have found the term “visitorial powers” ambiguous and allowed the OCC free rein to interpret that statutory term under the Chevron Doctrine.  The dissent relied on National Cable & Telecommunications Association v. Brand X Internet Services, 545 U.S. 967 (2005), for the proposition that:  “A court’s prior judicial construction of a statute trumps an agency construction otherwise entitled to Chevron deference only if the prior court decision holds that its construction follows from the unambiguous terms of the statute and thus leaves no room for agency discretion.”  Justice Thomas thus dismissed Guthrie and St. Louis, discussed above.  Justice Thomas would not require a clear statement from Congress before allowing a federal agency to preempt state consumer law.

My analysis:  The Cuomo opinion must be read in light of the subprime lending crisis which has bloomed into a recession after the commencement of this case.  This case was brought for the express purpose of blocking State investigation into abusive lending.  Unchecked abuse is exactly what happens when a powerful federal agency crusades to enlarge its own jurisdiction and protect rather than regulate the industry it oversees.  Common sense has indicated for at least the last five years that the OCC has neither the staff nor the inclination to enforce consumer protection laws.  How could it not have been apparent to Congress and the courts that acquiescing in this agency’s aggressive efforts to prevent any other entity doing so would have disastrous results for consumers and for the economy?

As Congress now turns its attention to designing the optimal regulatory structure for financial institutions, one can hope that they will not ignore these lessons: 

• The dual banking structure, with equal standing for state and national charters, is an essential balancing component within our national economy.  
• State and federal agencies can and do cooperate in consumer protection and in bank regulation.  The long history of successful cooperative regulation should preclude any suggestion that the federal government should stand in the way of state consumer protection laws and enforcement. 
  
• No federal agency should be allowed to market a charter as a get-away-with-it-free card providing immunity from state consumer protection laws. 
  
• If the state/federal balance is restored, it will provide checks against any one agency or any one type of charter ignoring consequences for consumers and for the economy.
  

The Cuomo opinion reassures us that States can adopt and enforce consumer protection laws evenhandedly with respect to all financial institutions, regardless of charter.  Federal agency and financial institution resources that have, until now, been devoted to fighting consumer protection laws should now be invested in protecting consumers from financial abuse.

(ag) June 29, 2009, in Federal Preemption

Supreme Court Overturns OCC's Preemptive Regulation in Cuomo v. Clearing House Association

The U.S. Supreme Court released its opinion in Cuomo v. Clearing House Association this morning.  The good news for States and for consumer protection is that the decision invalidates an Office of the Comptroller of the Currency ("OCC") regulation to the extent it would have prohibited a State Attorney General from going to court to enforce valid state consumer protection and anti-discrimination statutes against national banks.

Finally, the Supreme Court has found that there is some "outer limit" to the OCC's preemptive authority, which has proceeded over the past 10 years to aggressively undercut the dual banking system and the power of the States to protect their own citizens from abusive lending practices.

Link to Supreme Court opinion:  http://www.supremecourtus.gov/opinions/08pdf/08-453.pdf

A more complete analysis of the Cuomo opinion and a comparison with Watters v. Wachovia will follow later today.

(ag) June 29, 2009, in Federal Preemption/Supreme Court

Extending Full FDIC Coverage for Payroll Accounts

FDIC is proposing two alternatives for phasing out the Transaction Account Guarantee Program, originally set to expire December 31, 2009.

Option One:  The program, which provided full FDIC coverage of non-interest-bearing accounts such as payroll accounts (which often exceed insured limits just before payday), would be terminated on December 31, 2009, as originally scheduled.

Option Two:  The TAG Program would be extended for an additional six months, until June 30, 2010.  Insured depository institutions currently participating in the TAG Program would be offered a one-time opt-out opportunity.  Those that opt-out would have to disclose the fact that they are no longer participating.  Those that continue coverage would be subject to increased fees.

Background Info:  FDIC originally extended insurance coverage of these non-interest-bearing accounts for participating institutions that paid additional fees because of analysis that indicated that the financial crisis was causing uninsured depositors to remove their funds from any institution that might be troubled.  FDIC's analysis showed that, "A five percent reduction in uninsured deposits
would reduce Gross Domestic Product growth by 1.2 percent per year in a normal economy and 2.0 percent per year in a stressed economy. With U.S. economic growth currently stressed, a run of this magnitude could result in, or deepen and prolong, recession. FDIC data indicate rapid and substantial outflows of uninsured deposits from institutions that are perceived to be stressed. The systemic nature of this threat is further evidenced by the increasing number of bank failures."

Link to Proposal, which has a 30-day comment period which is now open:  http://www.fdic.gov/news/board/june2309no6.pdf

(ag) June 28, 2009, in Deposit Insurance

Proposed Amendments to CRA Rules - The Comment Period is Open

The federal banking agencies (OCC, FRB, OTS, and FDIC) are proposing amendments to their Community Reinvestment Act regulations.  The comment period will extend for 30 days after publication in the Federal Register.

Changes incorporate a statutory requirement that the banking agencies consider low-cost education loans to low-income borrowers as a factor in evaluating a financial institution's record in meeting community credit needs.

Other proposed changes to the relevant factors include:  capital investment, loan participation, and other ventures undertaken with minority and women-owned financial institutions and minority credit unions.

Link to Proposed Regulations:  http://www.fdic.gov/news/board/june2309no8.pdf

(ag) June 28, 2009, in CRA

Madoff Sentencing Tomorrow

Bernie Madoff appears for sentencing on Monday and is expected to receive a life sentence.  This guy goes down in the annals of white collar crime and SEC oversight failures as the mastermind of one of the most spectacular Ponzi schemes in recent memory -- good news only for business law professors who will be using him as the poster child for financial greed and investment fraud. 

Link to story:  http://news.yahoo.com/s/nm/20090628/bs_nm/us_madoff

(ag) June 28, 2009, in Securities Law

Bank Compliance Officer Gallows Humor

Check out the compliance officer's viewpoint on financial institution-related regulatory changes, courtesy of the West Texas Compliance Officers' Association:

Link: 

Download Compliance Officer - Run Over by Regulations

State Officials Testify About Obama Plan and State Consumer Protection

The House Financial Services Committee held its first hearing on President Obama's Plan for the Restructuring of the American Financial Regulatory System. 

As expected, the proposed independent Consumer Financial Protection Agency is garnering attention -- pro and con.  Testimony from State officials supports the President's plan to restore balance to the Dual Banking System that represents a cornerstone of the U.S. financial system by rolling back some inappropriately aggressive attempts to exclude national banks and their affiliates from the reach of state consumer protection laws. 

The House Financial Services Committee website carries a webcast of the hearing and the Conference of State Bank Supervisors (CSBS) reported on the hearing in its weekly bulletin, quoting Massachusetts Secretary of the Commonwealth William Galvin as saying that,  "Investors and consumers have been harmed when the states have been preempted from protecting their interests. . . .States remain the regulators that are closest to the investing public, and they have demonstrated they can respond quickly and effectively to help investors.” He also discussed the good track record states have in coordinating their regulatory efforts with federal examination and enforcement.    

Link to Hearing:  http://www.house.gov/apps/list/hearing/financialsvcs_dem/fullhr_061109.shtml

(ag) June 26, 2009, in Consumer Protection/Dual Banking

The Supreme Court on Age Discrimination

The Supreme Court says that the plaintiff in an Age Discrimination in Employment Act (ADEA) "disparate treatment" lawsuit must prove, by a preponderance of the evidence, that age was the “but-for” cause of the challenged adverse employment action. The burden of persuasion does not shift to the employer to show that it would have taken the action regardless of age, even when a plaintiff has produced some evidence that age was one motivating factor in that decision.

The standard under the ADEA differs from that applicable to "mixed-motive" lawsuits brought under Title VII of the Civil Rights Act.

This June 18, 2009, five-to-four opinion was written by Justice Thomas joined by Chief Justice Roberts and Justices Alito and Scalia, with Justice Kennedy as the swing vote for the majority.

Link to Opinion in Gross v. FBL Financial Services, Inc.: http://www.supremecourtus.gov/opinions/08pdf/08-441.pdf

(ag) June 26, 2009, in General Banking/Employment Law

Credit Cards: Getting Hurt When It's Not Your Fault

Credit card companies have a new business practice that damages credit ratings for customers who have done nothing wrong.  Many cardholders with excellent credit ratings and no late payments are receiving notices that their credit limits are being reduced.  Because FICO scores are based in part on credit-balance-to-credit-limits ratios, this can affect a consumer's credit rating and therefore the ability to get a mortgage or car loan at all, or at least make the interest rate obtainable significantly higher.

Business Week reports that "about 11% of customers who saw their limits cut had no "risk triggers" during that period and generally had very high credit scores. Risk triggers include late payments, excessive cash advances, check bouncing, collecting unemployment, or having a mortgage in an area where property values are plummeting."

So, who are the customers on the receiving end of this practice?  Borrowers with low-balance or inactive accounts.

What could be the reason for doing this?  Perhaps it's to get ahead of future requirements to give cardholders more notice before raising rates.  Or, perhaps the card companies think today's stellar customer might in the future lose employment and start drawing on unused credit lines, even though there's no sign that in the customer's profile today.

Here's another possibility not suggested by the Business Week article:  Perhaps card companies want to cut credit limits now and make the customer agree to a higher interest rate if they seek a higher credit limit in the future OR maybe, after the card company cuts the credit limit to a point just above the current credit balance, the customer will be more likely to inadvertently exceed that new limit and have to pay overlimit fees.

Credit card companies may explain this as a risk reduction measure, but where's the real risk?

What do you think?

Link to story:  http://finance.yahoo.com/banking-budgeting/article/107232/credit-card-companies-who-qualifies-now?mod=bb-creditcards

(ag) June 24, 2009, in Economy

 

Federal Open Market Committee Statement Today

The Federal Open Market Committee (FOMC) of the Federal Reserve, the group responsible for setting target federal funds interest rates issued a statement today, announcing that the target interest rate would remain unchanged -- between 0 and 1/4 %.  Rates are expected to stay "exceptionally low"  for "an extended period." 

The vote for this FOMC decision was unanimous.  Members of the FOMC are:  Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

The FOMC statement also states that "the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn."

In the FOMC's estimation, "the pace of economic contraction is slowing."

Link to Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20090624a.htm

(ag) June 24, 2009, in Economy/Interest Rates

Judge Sotomayor: Pro-Banking or Anti-Banking?

Confirmation hearings begin July 13, 2009, for President Obama's nominee to the U.S. Supreme Court, Second Circuit Court of Appeals Judge Sonia Sotomayor.

Two significant cases give some insight:
A.  In re Visa Check/MasterMoney Antitrust Litigation, 280 F. 3d 124 (2001).  Judge Sotomayor authored the opinion in  this class action antitrust case brought by retail stores against credit card companies Visa and Mastercard.  The lawsuit alleged illegal tying based on a requirement that retailers which accepted a company's credit cards also had to accept the company's debit cards.  The District Court for the Eastern District of New York certified the class and Judge Sotomayor upheld the class certification, finding that: 

1. Retail merchants had established that their alleged overcharge theory was amenable to common proof;
2. Causation could be proven on class wide basis;
3. Individualized issues did not predominate due to associations' defense of mitigation of damages by steering;
4. The class would be manageable;
5. The district court was not required to determine which of two available techniques for measuring damages would be used before certifying class; and 
6. Certification was warranted in spite of its possible effect of coercing settlement.

Financial institutions and other businesses are usually strongly opposed to class action lawsuits because of the potential for massive damages.  This case is no exception.  The American Bankers Association opposed class certification here.  The result was a $3 Billion settlement by Visa and Mastercard.  The opinion itself, however, is dispassionate and carefully reasoned.

B.  Dabit v. Merrill Lynch, 395 F. 3d 25 (2005).  This case also involved class action claims.  The issue was whether the Securities Litigation Uniform Standards Act of 1998 (SLUSA) barred a securities fraud case from being brought in state court or whether these particular claims fell within an exclusion from the preemptive provisions of SLUSA.

Judge Sotomayor considered this case as one of first impression for the Second Circuit Court of Appeals.  SLUSA clearly preempts securities fraud actions "in connection with the purchase or sale" of covered securities.  Relying on a prior 1975 Supreme Court case, Blue Chip Stamps v. Manor Drug Stores, as well as the language of the Securities Exchange Act and Rule 10b-5, Judge Sotomayor found that these claims involving fraudulent inducement not to purchase or sell securities but rather to hold them were not barred by SLUSA from being brought in state court.

The U.S. Supreme Court overturned the Second Circuit decision at 547 U.S. 71 (2006), based on a broad policy underlying the Private Securities Litigation Reform Act (1995) and SLUSA (1998) that all class action lawsuits alleging securities fraud must be brought in federal court, with a much higher pleading standard and other restrictions designed to curb frivolous "strike" suits, rather than in state court.

Judge Sotomayor's opinion, although reversed, appears firmly grounded in statutory language and judicial precedent rather than in any ideological viewpoint in favor of class action lawsuits.

D.  Commentators have found Judge Sotomayor to be even-handed on the issue of federal preemption, ruling in favor of preemption about 50% of the time and against preemption in the other 50% of cases that have raised the issue.  LInk to article:  http://www.businessweek.com/bwdaily/dnflash/content/may2009/db20090526_819200.htm?campaign_id=rss_daily

E.  Judge Sotomayor has gained valuable experience and experience through her tenure on the Second Circuit Court of Appeals.  This is America's business court, with the greatest number of business-related cases.

F.  Financial institutions and other employers may want to examine Judge Sotomayor's employment law opinions.  That practice area, however, is not my expertise, so I leave that research to others.

Link to Law Library of Congress articles by Judge Sotomayor, as well as her two prior confirmation hearings, and other web resources:  http://www.loc.gov/law/find/sotomayor.php

(ag) June 23, 2009, in Supreme Court/General Banking

New Rules for Information Your Bank Furnishes to Credit Reporting Agencies

The Federal Banking Agencies (OCC, FDIC, OTS, FRB, NCUA) and the Federal Trade Commission will publish in the Federal Register Joint Final Rules concerning the accuracy and integrity of consumer financial information banks and other businesses furnish to credit reporting agencies. At the same time, the agencies will publish questions for possible future additions to the regulations.  All financial institutions should consider submitting comments in response. 

In 2003, Congress passed the Fair and Accurate Transactions Act ("FACTA" or the "FACT Act").  The new Final Regulations address the accuracy and integrity of information in consumer reports

The new FACTA rules also set up a framework for the consumer to communicate directly with the business that provided the information rather than having to go through the credit reporting agency to investigate and correct errors in a consumer's credit report.

Compliance Officer Alert:  Banks must adopt policies and procedures required by these new regulations.  The regs allow flexibility for the scope, size and complexity of the financial institution or business.

Link:  http://www.occ.treas.gov/ftp/release/2009-64.htm

(ag) June 22, in Credit Rating Agencies

Federal Reserve Posts Annual Report for 2008

The Federal Reserve Board's 95th Annual Report (2008) is now available on the agency's website.  This will be worth spending some time with to review the unprecented steps taken to address the economic crisis.

Link:  http://www.federalreserve.gov/boarddocs/rptcongress/annual08/default.htm

(ag) June 21, 2009.

Banks Just Keep Failing

Friday, three banks failed:

• First National Bank of Anthony, Anthony, Kansas - Deposits:  $142.5M
• Cooperative Bank, Wilmington, North Carolina - Deposits $774M

• Southern Community Bank, Fayetteville, Georgia - Deposits $307M

• Each of these was resolved by a Purchase and Assumption Transaction, with another bank buying the deposits and certain assets of the failed bank.  Locations of the failed bank reopen under the acquiring bank's name so that customer impact is minimized.

• This brings the total number of bank failures this year to 40.

(ag) June 21, 2009, in Economy, FDIC

What's on FDIC's Agenda?

FDIC's Board of Directors meets on Tuesday next week and here are some items they will cover

• IInteragency Interim Rule on Capital Maintenance: Residential Mortgage Loans Modified Pursuant to the Making Home Affordable Program of the U.S. Department of Treasury.
• Proposed Rulemaking regarding Proposed Interagency Guidance - Funding and Liquidity Risk Management.
• Proposed Rulemaking on the Transaction Account Guarantee Program.
• Community Reinvestment Act Regulation Amendments.
• Final Rule on Annual Audit and Reporting Requirements (Part 363) and Related Technical Amendment to (Part 308, Subpart U).

Link to FDIC's website:  www.fdic.gov

(ag) June 21, 2009, in FDIC

 

"Financial Regulatory Reform" - A White House White Paper

President Obama announced his administration's plan to overhaul U.S. financial regulation today at 1 p.m. EDT.  Here's a link to his statement:  http://www.whitehouse.gov/the_press_office/Remarks-of-the-President-on-Regulatory-Reform/

The White Paper "Financial Regulatory Reform - A New Foundation:  Rebuilding Financial Supervision and Regulation" outlines the following goals:

I.  To promote robust supervision and regulation of financial firms.

    A.  A new Financial Services Oversight Council, including the Secretary of the Treasury as Chairman of the Council, the Chairman of the Federal Reserve, the Director of a new National Bank Supervisory agency, the Director of a new Consumer Financial Protection Agency, the Chairman of the SEC, the Chairman of the CFTC, the Chairman of the FDIC, and the Director of the Federal Housing Finance Agency (FHFA).  The Council will have a full-time staff at the Treasury Department and will have authority to gather information from any financial firm.

My Question:  Where is the voice of State Bank Supervisors and State Insurance Regulators on this Council?

    B.  To implement heightened consolidated supervision and regulation of all large, interconnected financial firms ("Tier 1 FHCs"), with the Federal Reserve Board having authority for this.  Prudential standards -- including capital, liquidity and risk management standards -- should be stricter and more conservative than those applicable to smaller firmsto account for greater systemic risk.  Consolidated supervision of a Tier 1 FHC should cover the parent and all of its subsidiaries, regulated and unregulated, U.S. and foreign.

My Comment:  This is a 180 degree turn-around from suggesting that large financial institutions be able to tell the regulators how much capital they need based on their own risk models.

  C.  To strengthen Capital and other prudential standardsfor all banks and BHCs. 

        Treasury will lead a working group that will conduct a fundamental reassessment of existing regulatory capital requirements and issue a report by Dec. 31, 2009.  Capital requirements must extend not only to the depository institution but all affiliates.

        Firewalls between banks and affiliates should be strengthened.  This suggests rolling back some of the GLBA provisions that eliminated Glass Steagall barriers.  The proposal calls for more separation between banking and commerce.  Loopholes in the Bank Holding Company Act for thrift holding companies, industrial loan companies, credit card banks, trust companies, and grandfathered "nonbanks" would be eliminated.

        Treasury will also lead a working group to conduct a review of bank supervision and issue a report by Oct. 1, 2009.

        Federal regulators are charged with issuing guidelines for executive compensation and the administration supports "say on pay" legislation that would give shareholders non-binding resolution authority to comment on executive pay packages and make compensation committees more independent.

  D.  To Close Loopholes in Bank Regulation.

        The administration's plan would create a new National Bank Supervisorwith prudential supervision and regulation of all federally chartered depository institutions.  The federal thrift charter and the OTS would be eliminated. 

My comments:  This sensible consolidation of OCC and OTS is overdue -- but expect a turf war.  My most serious concerns about a super-agency that would create the problems of regulatory monopoly, overreaching and unresponsiveness have been allayed to some extent by provisions of the White Paper that allow the Fed and the FDIC to retain their supervisory authority over state-chartered banks.  There is also no provision for an office of state bank oversight within Treasury, which I had feared would further erode this significance of the state bank charter and state financial institution regulation.  I can only hope that this new agency will be charged with respecting the dual chartering and regulatory system.

This would have been the perfect time to reiterate the importance of a robust DUAL BANKING SYSTEM.

Another comment:  Why not go ahead and merge SEC and CFTC? 

E.  To eliminate the SEC's Programs for Consolidated Supervision.

This was the oversight for Bear Stearns and Lehman Brothers, so obviously it did not work.  Responsibility for consolidated supervision of investment banking firms would be given to the Federal Reserve.

F.  To require Hedge Funds, Private Equity Funds, and Venture Capital Funds to register with and report to the SEC.

G.  To establish a new Office of National Insurance within Treasury to modernize and coordinate insurance regulation.

My comment:  State Insurance Regulators will oppose this tooth and toenail.  AIG has been used to suggest that regulation of insurance needs to be federalized, but the primary regulatory failure here was by OTS.  In light of good cooperation among the state insurance regulators and the many other more pressing reform needs, this suggestion could easily be tabled.

H.  To determine the future role of the GSEs (Fannie Mae, Freddie Mac, and the Federal Home Loan Bank system).

My comment:  We need a very careful reexamination of the secondary mortgage market.  

II.  To Establish Comprehensive Regulation of Financial Markets.

A.  Federal banking agencies are charged with regulating securitization markets more stringently, including requiring originators to retain an economic interestin a material portion of the credit risk of securitized credit exposures, align compensation with long-term performance of underlying loans, and increase transparencyof securitization markets.  Regulators should not rely so heavily on credit ratings.

My comment:  A tall order, but very much needed.  This ties in with reexamination of the secondary mortgage market.

B.  Credit comprehensive regulation of all OTC derivatives, including Credit Default Swaps.

My comment:  Brooksley Born, we hear you now!

C.  "Harmonize" Futures and Securities Regulation.

My comment:  Just combine them already.

D.  Strengthen oversight by the Federal Reserve of systemically import payment, clearing and settlement systems. 

My comment:  A very important pro-active measure. 

E.  Strengthen settlement capabilities and liquidity resources the Federal Reserve provides, such as the discount window.

My comment:  It's apparent that we need good legal underpinning for emergency liquidity measures to be available to a wider range of financial institutions.  This is a key point going forward.

III.  To Protect Consumers and Investors from Financial Abuse.

My comment:  Although this sounds like "motherhood and apple pie", it's likely to be one of the most controversial sections of the Obama plan.

A.  To create a new Consumer Financial Protection Agency, an independent agency with stable funding, broad jurisdiction, and sole rule-making authority for consumer financial protection statutes.  This new agency would have supervisory and enforcement authority over all entities covered by the consumer protection statutes it deals with, regardless of charter.

My comment:  Although I still have reservations about creating a new agency, I am comforted by the Obama plan's intent to take the existing consumer protection divisions from the federal banking agencies and give them a strong voice to counterbalance what has previously, in the OCC at least, a clear preference for maximizing the short-term bottom line of financial institutions and the agency over protecting the consumer.  FDIC has done a much better job of balancing these twin objectives that assure the long-term success of our financial system. 

Two bullet points in the Obama plan are so significant that I quote them here in full, starting at page 14:

"7.  The CFPA's strong rules would serve as a floor, not a ceiling.  The states should have the ability to adopt and enforce stricter laws for institutions of all types, regardless of charter, and to enforce federal law concurrently with respect to institutions of all types, also regardless of charter.

8.  The CFPA should coordinate enforcement efforts with the states."

My comment:  These provisions would overturn the Supreme Court opinion in Watters v. Wachovia, which allowed a state-chartered nonbank mortgage lending corporation to deliberately escape state consumer protection registration requirements by becoming a subsidiary of a national bank.  These provisions would also answer the questions currently pending before the Supreme Court in Cuomo v. Clearing House Association about whether a state is preempted from enforcing its non-preempted consumer protection laws with respect to national banks. 

These proposals would restore a much-needed balance to the dual banking system which is at the heart of our financial system.  They would also put an end to marketing the national bank charter as a way to escape consumer protection laws. 

Nationwide financial institutions and the American Bankers Association are sure to complain that these proposals would undercut their ability to standardize products and increase their compliance costs which they will pass along to their customers.  My counter to that is what prudent community bankers say:  If you serve your customers well, their loyalty assures solid, long-term viability of a financial institution, and I would add, our financial system.  We need to get back to a healthy balance of consumer protection and capital maximization.  These business concepts should be complementary, not contradictory.

Surely we've learned that it simply does not work to marginalize consumer protection.  We've also learned that the OCC has neither the will nor the resources to enforce consumer protection.  States have a legitimate interest in protecting their citizens from financial predators and can respond more quickly and tailor their actions to their own situations.  Coordination between the states and the new consumer protection agency builds on a long history of joint state-federal banking examinations conducted by the Federal Reserve and State regulators and by the FDIC and state regulators.  This respectful coordination of enforcement responsibility has a successful track record.

The Federal Trade Commission will retain authority over identity theft and privacy.

B.  To reform consumer protection.

Simplified consumer disclosures and the option of "plain vanilla" financial products, as well as serving underserved communities are significant points within the proposal.

The White Paper emphasizes that: "The CFPA should give consumer protection as independent seat at the table in our financial regulatory system.  Consumer protection is a critical foundation for our financial system.  It gives the public confidence that financial markets are fair and enables policy makers and regulators to maintain stability in regulation.  Stable regulation, in turn, promotes growth, efficiency, and innovation over the long term.  Consumer protection cannot live up to this role, however, unless the financial system develops and sustains a culture that places a high value on helping responsible consumers thrive and treating all consumers fairly."

"The spread of unsustainable subprime mortgages and abusive credit card contracts highlighted a serious shortcoming of our present regulatory infrastructure.  It too easily allows consumer protection values to be overwhelmed by other imperatives -- whether short-term gain, innovation for its own sake, or keeping up with the competition.  To instill a genuine culture of consumer protection and not merely of legal compliance in our financial institutions, we need first to instill that culture in the federal regulatory structure."

C.  To strengthen SEC's investor protection powers.

IV.  To provide the government with the tools needed to manage financial crisis.

1.  To create a resolution regime for failing BHCs whereby the Treasury has primary authority but would appoint the FDIC as receiver (capitalizing on FDIC's experience, expertise, and staff).

2.  To amend the Federal Reserve's Emergency Lending authority.

V.  To raise international regulatory standards and improve international cooperation.

1.  To strengthen the international capital framework (Basel II).

2..  To improve the oversight of global financial markets.

3.  To enhance supervision of internationally active financial firms.

4.  To expedite improvement of cross-border crisis prevention and management.

5.  To improve compensation practices globally.

6.  To strengthen money-laundering regulation globally.

7.  To improve accounting standards.

8.  To tighten regulation of Credit Rating Agencies.

Link to White Paper:  http://www.financialstability.gov/docs/regs/FinalReport_web.pdf

Link to White House Press Release and Fact Sheets:  http://www.whitehouse.gov/the_press_office/President-Obama-to-Announce-Comprehensive-Plan-for-Regulatory-Reform/

(ag) June 17, 2009, in Economy

Obama's Plan for Regulatory Restructure . . . to be announced tomorrow; My words of caution today

Advance reports about the Obama Administration's plan for Regulatory Restructure have been appearing all week -- but tomorrow we get to hear the real deal.  I'll post my analysis promptly.  Of course, the plan as announced won't be the end of the story, by any means.  There's already a GOP plan out and we can expect several Congressional hearings this summer before Congress gets down to brass tacks.

About every ten years for the past half-century, blue ribbon panels have published extensive reports calling for regulatory overhaul.  These recommendations had no economic impetus behind them and so they died a quiet death.  We are still in the throes of a series economic push to reexamine failed regulatory structures and do something different.  Congressmen and women could hardly face their constitutents if they do nothing.  So, I do think we'll get restructuring of some sort this go around.

Here's are some maxims I hope Congress will keep in mind as we go through this process:

• First, do no harm.  Please don't rush out and make things worse.
• Beware of unintended consequences.
• The quick fix costs more in the long run.
• Don't reinvent the wheel.  Take the time to understand the beneficial structures and expertise we already have in place before starting up a new agency that will have a steep and expensive learning curve.
• Too big to fail is too big. 

• Regulate the unregulated.  Much of the mortgage lending industry, the creative and risky financial products, and substantial players like hedge funds were operating under the radar screen, to our global sorrow.  Get these guys under control, even if they kick and scream about it.

• Don't succomb to "inside the beltway" myopia or be blinded by big players, big PACs, or even big agencies.  By the numbers, the vast majority of banks in this country are conducting safe and sound business as usual, serving their communities as they always have.  Don't forget about middle America, community banks, and the dual banking system!!!

• Finally, remember that our economy and regulatory system don't operate in a vacuum.  Carefully evaluate the two-way impact of global regulation and coordinate needed changes in capital requirements and regulation. 

• (ag) June 16, 2009, in Economy

FDIC's Supervisory Insights

FDIC's Summer 2009 "Supervisory Insights" Bulletin, released today, reviews a year of crisis and highlights areas of supervisory focus going forward.  FDIC's Director of Supervision and Consumer Protection Sandra Thompson recognizes the impact of increasing mortgage foreclosures and emphasizes new anti-predatory lending, consumer protection changes to Regulation Z ("Truth in Lending") and HOEPA (the "Home Ownership and Equity Protection Act").

My view:  As we debate regulatory reform, many commentators find an irreconcilable conflict within banking agencies between safety-and-soundness and consumer protection.  In my observance throughout the years of crisis, FDIC -- particularly under Sheila Bair's leadership -- has views these two important concepts as complementary rather than contradictory.  Here's what the report says:

"This crisis also has demonstrated the linkages between safe-and-sound banking, and banking that complies with the letter and spirit of laws designed to protect consumers and investors." 

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New technology to streamline check processing, Remote Deposit Capture, is the subject of an informative article in the Bulletin.  Paper check processing is declining dramatically, with attendant cost savings.  An understanding of RDC capabilities and applications is worth reading about.

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Link to "Supervisory Insights":  http://www.fdic.gov/regulations/examinations/supervisory/insights/sisum09/si_sum09.pdf

(ag) June 16, 2009, in FDIC

Gloom and Doom: Accurate Forecast or Attention Getter?

Analyst Robert Prechter did make good on his prediction of the 1987 stock market crash, but will his current gloomy forecasts come true?  Only time will tell.  Prechter opines that the U.S. will lose its AAA credit rating by the end of 2010, that the economy is "obviously headed toward a depression", and that the S&P stock index will drop below its March 6, 2009, intraday low of  666.79  by the end of 2009 or early 2010. 

Link to Reuters news story by John Parry, "U.S. likely to lose AAA Rating - Prechter":  http://in.reuters.com/article/businessNews/idINIndia-40351420090616?pageNumber=2&virtualBrandChannel=0&sp=true

(ag) June 15, 2009, in Economy