Banking Law Prof Blog

Congress Will Have to Develop a Back Bone to Get Past Turf Wars

NPR attributes delays in regulatory reform legislation to turf battles among the Federal Reserve, the OCC, and the FDIC.  I'm not surprised about that -- it's business as usual:  One part substance, three parts "enlarge and preserve my territory."  Can Congress get past the turf wars and pass meaningful regulatory reform legislation?  We'll see.

Link: http://www.npr.org/templates/story/story.php?storyId=111392530

(ag) July 30, 2009, in Financial Regulatory Reform

American Express Buys Out the Government

American Express repurchased the last of the TARP warrants for $340 Million, yielding a return on taxpayer investment of 26% on an annualized basis.

When Goldman Sachs repurchased the last of its TARP warrants, the annualized yield to taxpayers was 23%.

So far, so good.  For these transactions, institutions-at-risk last fall were bolstered until their financial condition and the stability of the market in general permitted repayment.  The taxpayers have been compensated for these expenditures and these two companies are now back in the hands of private shareholders.

Link to Bloomberg story by Peter Eichenbaum:  http://www.bloomberg.com/apps/news?pid=20601087&sid=abwk3ZXiWVS4

(ag) July 30, 2009, in Economy

Why Unbridled Capitalism Needs Reasonable Restrictions -- And Some Memory Aids

How soon they forget!  We're still in the middle of a Wall-Street induced recession, yet the hue and cry goes up from the very entities who benefited from bailouts that government should get out of their business.  If these were children (and they're acting like it), you'd explain that they can have more freedom when they demonstrate that they can act responsibly.  Let's just call them ungrateful and shortsighted -- and they're "banking" on their ability to put out spin that ignores their past misdeeds and on the public's very short memory even though it's our money bailing them out. 

LInk to Allan Sloan's article in Fortune Magazine, "Wall Street's Selective Memory":  http://money.cnn.com/2009/06/29/news/economy/wall_street_government_regulation.fortune/index.htm?postversion=2009062903

(ag) July 29, 2009, in Economy

Wake Up and Smell the Roses -- or Whatever -- at OCC!

I continue to be appalled but not surprised that Comptroller John Dugan can still argue against state consumer protections because the costs "will be ultimately be borne by consumers."  As if consumers are not bearing the costs of the OCC's shameless history of focusing only on standardization for national banks, preemption of state law regardless of purpose, and maximization of short-term bank profit whatever the long-run consequences! 

This agency is part of the problem we are living with today.  The current administration and Congress need to take this agency and its senior staff to the woodshed.  What will it take for them to recognize that all banking agencies must refocus and that consumer protections cannot continue to be disregarded?  A national banking crisis?  Oh, we have that -- well then, what????   It is clear that without a good housecleaning, this agency will not "get it."  There is no reason -- other than short-term greed -- why national banks cannot comply with reasonable state consumer protection laws.  There is also no reason -- other than arrogance and agency capture -- why the national banking supervisor cannot cooperate with state regulators to assure consumer protections.  

Link to OCC Statement about "Regulatory Reform as long as the OCC gets to keep doing exactly what it has been doing":  http://occ.treas.gov/ftp/release/2009-88.htm

(ag) July 28, 2009, in Consumer Protection, Economy, OCC, Dual Banking System, Financial Regulatory Reform

An Aggressive Timetable for Regulatory Reform

Congress is diligently holding hearings and the Treasury Department urges passage of financial regulatory reform by year end.  We need reform, no doubt about it.  However, there are many plans on the table and no consensus.  If Congress acts in haste, we may repent at leisure.  I'd like to see more persuasive data on:

• Whether a new and separate Consumer Financial Protection Agency is the best way to go -- or whether it is better to keep consumer protection linked to safety and soundness regulation but to add a strong mandate to regulators concerning the importance of consumer protection;
• How to maintain and strengthen the dual banking system in order to provide a counterweight to excessively concentrated power in a single national charter and a single national prudential regulator.  Monopolistic regulation is a sure-fire recipe for disaster!!!
• How much and what types of power to give the Federal Reserve to address systemic risk across industries beyond banking.
• How to end expectations that some institutions are "too big to fail."  This is moral hazard at its apex.  Market giants create their own rules and decry government regulation -- until they need a bailout.  I've said it before:  Too big to fail is too big!
• How to structure capital requirements that really do buffer losses appropriately.
• What international financial regulatory structures should look like.

Congress could make things a lot worse with speedy, but poorly designed legislation. 

 Link to Voice of America story about Geitner's timetable:  http://www.voanews.com/english/2009-07-24-voa43.cfm

Link to Obama Plan:  http://www.financialstability.gov/docs/regs/FinalReport_web.pdf

Link to Group of Thirty Plan:  http://www.group30.org/pubs/pub_1460.htm

Link to Committee on Capital Markets Regulation Plan:  http://www.law.harvard.edu/news/2009/06/16_scott.html

LInk to Financial Services Roundtable Plan:  http://www.fsround.org/policy/regulatory/pstatements/pdfs/Regulatory_reform_principlesandarchitecture_Jan29.pdf

(ag) July 27, 2009, in Economy, Financial Regulatory Reform

Getting Past Too Big To Fail

John Kay's July 21, 2009 FT.com article, "Too Big To Fail:  Wall Street We Have A Problem," presents the case for making complex systems -- like the U.S. and global financial structures -- robust.  He draws on engineering wisdom that says,

"Since failures are inevitable, it is equally important to try to ensure that the consequences of such failures are contained.This observation is as relevant to economic and financial systems as to technological ones.  Designing them with components too important to fail is a prelude to disaster . . . ."

Link:  http://www.ft.com/cms/s/0/4eae7246-762b-11de-9e59-00144feabdc0.html

(ag) July 27, 2009, in Economy

Bribe 'Em to Save?

Good grief!  FDIC is having a meeting to discuss how to encourage "prize-linked savings accounts" for underserved and low income consumers.  Some of these programs are described as being like a lottery pool, giving savers a "chance" to win big interest. 

Link to Harvard Business School article on "Innovative Ways to Encourage Personal Savings":  http://hbswk.hbs.edu/item/5908.html

Link to FDIC Announcement of July 30, 2009, meeting:  http://www.fdic.gov/news/news/press/2009/pr09128.html

(ag) July 26, 2009, in FDIC

No More Too Big To Fail

FDIC Chairman Sheila Bair testified Thursday before the Senate Committee on Banking, Housing and Urban Affiars.  I could not agree more with her view that "too big to fail" is a concept we need to dispense with.

"We must find ways to impose greater market discipline on systemically important institutions. In a properly functioning market economy there will be winners and losers, and when firms -- through their own mismanagement and excessive risk taking – are no longer viable, they should fail. Actions that prevent firms from failing ultimately distort market mechanisms, including the market's incentive to monitor the actions of similarly situated firms. Unfortunately, the actions taken during the past year have reinforced the idea that some financial organizations are too big to fail. The solution must involve a practical, effective and highly credible mechanism for the orderly resolution of these institutions similar to that which exists for FDIC-insured banks. In short, we need an end to too big to fail."

Link:  http://www.fdic.gov/news/news/speeches/chairman/spjuly2309.html

(ag) July 25, 2009, in Economy, FDIC, Financial Regulatory Reform

SEC Uses Sarbanes Oxley "Clawback" Provisions

Section 304 of the Sarbanes Oxley Act of 2002 (SOX), referred to as the "clawback" provision because it authorizes a company to get back certain executive bonuses and stock profits, states that:

"If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer for—

(1) any bonus or other incentive-based or equity-based compensation received by that person from the issuer during the 12-month period following the first public issuance or filing with the Commission (whichever first occurs) of the financial document embodying such financial reporting requirement; and

(2) any profits realized from the sale of securities of the issuer during that 12-month period."

The SEC has announced that is it using this provision for the first time against a CEO who is not charged with any other violation.  The SOX requirement to reimburse the company for compensation and stock-sale profits is based on the fact that the CEO is running the company at a time when its financial statements are fraudulently misleading and have to be restated. 

The former CEO of CSK Auto Corporation,  Maynard L. Jenkins, is being required to reimburse to the company and its shareholders more than $4 million in bonuses and stock sale profits received while the company was committing accounting fraud.

Link to SEC Announcement:  http://www.sec.gov/news/press/2009/2009-167.htm

Link to SOX:  http://fl1.findlaw.com/news.findlaw.com/cnn/docs/gwbush/sarbanesoxley072302.pdf

(ag) July 24, 2009, in Executive Compensation, Securities Law, and SOX

Hey Noah, There's a New Q&A on Flood Insurance

The federal banking agencies have published a new set of Questions and Answers on Flood Insurance.  This may sound mundane in comparison to issues relating to the financial crisis and proposed restructuring of the nation's regulatory framework, but let me assure you that bank examiners still think this is very important.  If a bank loses its collateral to uninsured flood damage, that's a real loss. 

The agencies are also seeking comment on additional questions and answers.

Link:  http://www.fdic.gov/news/news/press/2009/pr09127.html

(ag) July 23, 2009, in Lending Issues

The U.S. Treasury and Bernie Madoff - Separated at Birth?

The U.S. Treasury Department is racking up serious criticism for its administration of the $700 Billion bailout of the financial system.  Michael Crittenden's July 21,2009, Wall Street Journal article entitled "U.S. Treasury Criticized Sharply on Watchdog Report," quotes U.S. Representative Darrell Issa (R-CA):  "Both Bernie Madoff and Treasury are saying just trust me without showing us the books."

Link to story:  http://online.wsj.com/article/BT-CO-20090721-712535.html

(ag) July 22, 2009, in Economy

Summer Reading about the Financial Crisis

Here's a link to a New York Times book review of IN FED WE TRUST: BEN BERNANKE'S WAR ON THE GREAT PANIC by David Wessel.  He's the Wall Street Journal's Economics Editor. 

I love this quote from the book:  "“Every time officials at the Treasury or the Fed thought they finally had gotten ahead of the Great Panic, they turned out to be insufficiently pessimistic."

The same reviewer also critiques A COLLOSAL FAILURE OF COMMONSENSE: THE INSIDE STORY OF THE COLLAPSE OF LEHMAN BROTHERS By Lawrence G. McDonald.

Link to review, "Inside the Meltdown:  Financial Ruin and the Race to Contain It" by Michiko Kakutani:  http://www.nytimes.com/2009/07/21/books/21kakutani.html?pagewanted=1&_r=1&bl&ei=5087&en=8e083e798c9a5e66&ex=1248321600

(ag) July 21, 2009

 

Financial Crisis Inquiry Commission

Congress has named a 10-member Financial Crisis Inquiry Commission to investigate the domestic and global causes of the financial crisis, including studying financial institutions that failed.  A report from the commission is due December 15, 2010.

  House and Senate Democrats selected 6 members and Republicans named four members.  They are:

1. Phil Angelides, California State Treasurer - Chairman of the Commission (named by the Democrats - House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid)
2. Bill Thomas, Former U.S. House Ways and Means Committee Chairman to serve as Vice Chairman of the Commission (named by the Republicans - House Minority Leader John Boehner and Senate Minority Leader Mitch McConnell)
3. Brooksley Born - former CFTC Chairman (Pelosi appointment)
4. John W. Thompson - Chairman of Symantec Corp. (Pelosi Appointment)
5. Peter Wallison - Co-Director for Financial Policy Studies at American Enterprise Institute (Boehner Appointment).
6. Doug Holtz-Eakin - former Director of the Congressional Budget Office (McConnell Appointment)
7. Keith Hennessey - former Director of the National Economic Council (McConnell Appointment)
8. Bob Graham - former U.S. Senator and former Governor of Florida (Reid Appointment).
9. Heather Murren - retired managing director of Global Securities Research and Economics at Merrill Lynch (Reid Appointment)
10. Byron Georgiou, President of Georgiou Enterprises (Reid Appointment).

Link to Story: http://www.fxstreet.com/fundamental/analysis-reports/us-update-financial-crisis-inquiry-commi/2009-07-17.html

(ag) July 17, 2009, in Congress, Economy

Financial Calculators and Other Info from FINRA

The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the U.S.  This industry self-regulatory body was formed in 2007 through consolidation of NASD (the National Association of Securities Dealers) and the member regulation, enforcement, and arbitration sections of the New York Stock Exchange (after NYSE became a publicly traded company).  It also conducts market regulation for NASDAQ and the American Stock Exchange.

FINRA's website contains excellent investor education and information materials, including its "Risk Meter" and "Scam Meter" - short interactive programs that demonstrate "if it's too good to be true, it probably IS a scam."  Could be useful teaching aids! 

Link to FINRA:  http://www.finra.org/AboutFINRA/index.htm

Link to Risk Meter: http://www.finra.org/Investors/Subscriptions/InvestorNews/P118079

(ag) July 16, 2009, in Securities Law, Corporate Governance

Regulatory Disputes Over Restricting the Size of Our Biggest Financial Institutions

Today's Bloomberg news story by Craig Torres and Alison Vekshin, "Bair, Bernanke Want Tougher Curbs on Biggest Banks," highlights the differences of regulatory opinion over future restrictions on the largest financial institutions.  FDIC Chairman Sheila Bair and Federal Reserve Chairman Ben Bernanke want to impose strict measures to curb the size and risk-taking of the nation's biggest financial firms, including more fees on the biggest bank holding companies for activities outside of traditional lending -- for example, proprietary trading. 

Bair says she favors "financial disincentives for size and complexity."  Bernanke says that "restricting size is a 'legitimate' option."  Treasury Secretary Timothy Geithner disagrees.  He would tax financial firms only after they have to be bailed out, expressing concern that pre-funded bailouts would create inappropriate expectations.  The Obama plan would allow financial institutions to expand if they meet higher capital and liquidity requirements.

Link to Story:  http://www.bloomberg.com/apps/news?pid=20601087&sid=aB4OVrCHNQmE

(ag) July 15, 2009, in Capital, Economy, Financial Regulatory Reform

Alive and well, maybe. . . . . . at FinCEN

Just when I was beginning to think the whole agency had gone AWOL, three new items appeared from FinCEN - two not so interesting and one to consider:

1.  Director Freis gave a very basic talk to the Association of Certified Fraud Examiners on July 13, 2009.  Really, if they didn't know this stuff already, they should look for another line of work.

2.  FinCEN announced that electronic filers of Suspicious Activity Reports can now get acknowledgment of their filings.  Makes you wonder what was happening to filings before.

3.  Here's the interesting item:  FinCEN Seeks Comments on AML Plan for Non-Bank Mortgage Lenders and Originators.  This is noteworthy first because they're still only proposing to make non-banks comply with AML requirements -- and second, for financial institution lawyers who have struggled with the paperwork burden for so long, we remark on this only because "misery loves company."

(ag) July 15, 2009, in BSA/AML

Causes and Cures: Why Did the Financial Crisis Develop and How Can We Prevent Future Crises?

 

Donald Kohn, Vice Chairman of the Federal Reserve Board of Governors, gave a speech to the BIS Annual Conference on "Financial System and Macroeconomic Resilience Revisited" in Basel, Switzerland, that is definitely "economist-speak."  Nevertheless, if you can slog through it, it contains some insightful analysis.

In his comments on "Financial Intermediation and the Post-Crisis Financial System," Kohn addresses issues raised in articles by Hyun Shin.  Here are some of Kohn's thoughts:

Certain widespread practices within our financial system increased risk-taking and heightened the effects felt as institutions and individuals pulled back from risky positions, including: 

1. Too much leverage (borrowing) at all levels;
2. Lengthening of intermediation chains - meaning adding too many steps to the lending process: borrower to broker to lender to secondary market to securitizer to investors in securitized loans and derivatives; and

3. Reliance on short-term financing that could become unavailable when needed.

Two remedies going forward would be to keep debt levels lower even in good times and cut out some of the steps in the intermediation chain -- or at least make the risks more transparent at each stage and try to keep incentives appropriate to risk. 

Too much borrowing may have been a symptom as much as an underlying cause of the current crisis.  Kohn says that, in his opinion, "the root cause of the problems was the underpricing of risk as the financial sector interacted with the nonfinancial sectors." 

What does that mean?  Well, lenders did not charge high enough interest rates for the risk that their loan collateral (homes) would decline in value or that their borrowers would be unable to pay.  Individuals who held assets like mutual funds did not understand that shares in these funds could decline rapidly because of problems with their investments and that they would be unable to access their savings in mutual funds when needed.  When households and businesses tried to get money quickly to pay off their borrowings, they had to accept firesale prices.  Lenders were trying to pay off borrowings also and so either had less money to lend or were reluctant to lend, thinking to protect their liquidity in case it was needed and wanting to avoid making loans to borrowers who were having problems, or might have problems.  So when banks and individuals scrambled to reduce their debt ("deleveraging"), they generated problems for others in our economic system.

Uncertainty also made our economic problems worse.  Loans were not on the balance sheet at their true value, but what was their true value.  Kohn says, "Financial market participants didn't know the value of assets, the financial health of counterparties, or the likelihood that they themselves to unexpected hits to their capital or liquidity."

What should we do going forward? Kohn suggests:

1. Making financial products simpler to understand;
2. Requiring more accurate disclosure of value and risk involved in balance sheet assets from financial institutions, recognizing that determinig value and risk is no easy assignment;
3. Looking more closely at market aggregates to see buildup of risk;
4. Using central counterparties to focus risk information;
5. Holding large banks to higher capital, liquidity, and risk management standards;

6. Setting out clear authority to liquidate large financial institutions;

Kohn says we need to understand why unstable financial structures like excessive leverage, long intermediation chains, poor risk-pricing, and inadequate information developed so that we can how to prevent them in the future.

Link to Speech:  http://www.federalreserve.gov/newsevents/speech/kohn20090710a.htm

(ag) July 14, 2009, in Economy

American Banker ViewPoint Articles on Supreme Court Preemption Opinion

We'd rather litigate than adopt consumer protections.  That's what some of these opinion pieces are saying, including today's American Banker article by Cheyenne Hopkins, "A Preemption of Clarity," a collection of remarks by lawyers. 

Of course, one or two comments and opinion letters do go beyond whining to look at how banks can use the Cuomo v. Clearing House opinion to foster their business and their image.  Stephan L. Jouret, in his July 10, 2009, ViewPoint piece, "Ruling in Cuomo Can Be Pro-Industry," reminds us that "banking isn't a zero sum game, and what's good for states and consumers isn't necessarily bad for the financial institutions industry." 

The flip side of that is also true.  Just because the OCC "won" a series of court cases on preemption, doesn't mean they were doing the right thing for the national economy, for the banking industry, or for consumers.  Lawyers, including those at big law firms and at the OCC who pursued these cases and who are now griping about the Cuomo decision, seem to have lost sight of the world beyond the courthouse and outside the Beltway. 

In my opinion, the best response to Cuomo from national banks and the OCC would be to start beefing up their consumer protections, instead of looking for ways to pick apart Cuomo and see how little they will have to do for the benefit of consumers.  A bank's best defense against litigation is to serve all of its customers well and to make that a prominent part of its mission.  And for those lawyers who really want to serve their clients' long-term best interests, it would be refreshing to see them helping banks do that.

(ag) July 14, 2009, in Federal Preemption, Supreme Court

Partisan Politics - Fiddling While Rome Burns

It's political-grandstanding-as-usual in Washington.  My grandmother's phrase for this was "just talking to hear your teeth rattle."  When issues facing all of us in this country are so complex, why can't our elected officials work together for positive solutions?  That's a rhetorical question, I know.

Here's a link to an AP story about confirmation hearings for Sonia Sotomayor:  http://news.yahoo.com/s/ap/20090713/ap_on_go_su_co/us_sotomayor_senate

(ag) July 13, 2009, in Economy, Supreme Court

FinCEN MIA??

If you check the Financial Crimes Enforcement Network (FinCEN) website, you won't find a lot of current substance.  There are three links to statements justifying all the paperwork involved in filing Suspicious Activity Reports (SARs):  "Bank SARs Lead to Discovery of Predatory Certificate of Deposit Fraud Scheme," "Bogus Life Insurance Investment Vehicles Identified through SAR Filing," and "Case for Mortgage Fraud Involving Straw Buyers Supported by SARs."  OK.  That's three examples out of how many expensive pieces of paper filed and submitted into a black hole??

On the site, you'll also find statistics (SAR Activity Review - By the Numbers) issued in July to back up their May 2009 SAR Activity Review - Trends, Tips, and Issues.  There's a lot of mortgage fraud -- well, that's informative.

In 2009, Director James Freis has given one speech back in March and provided testimony to the House Committee on Financial Services Subcommittee on Housing and Community Opportunity on May 6, 2009, that is mostly background about FinCEN and fluff about working with law enforcement and the states.  That's all for speeches and testimony this year.  No News Releases since March. 

No mention at all that I can find about the UBS tax issues.  Wouldn't you think that would relate to moneylaundering on a big scale?

Just wondering about this agency . . . . 

Link to FinCEN Home Page: http://www.fincen.gov/

(ag) July 13, 2009, in BSA/Anti-Money Laundering