Banking Law Prof Blog

George Soros and the Financial Crisis

  It's not bedtime reading, but well worth considering:  THE CRASH OF 2008 AND WHAT IT MEANS by George Soros.  If you aren't already an adherent, you should ponder Soros' theories of "reflexivity" and "radical fallibility." 

Reflexivity, fully described in his earlier book, THE ALCHEMY OF FINANCE, is discussed again in his current work.  Reflexivity distinguishes two aspects of human interaction with financial markets (and reality in general):  the cognitive function and the participating or manipulative function. 

He says, "I came to realize that market participants cannot base their decisions on knowledge alone, and their biased perceptions have ways of influencing not only market prices but also the fundamentals that those prices are supposed to reflect.  ...Participants' thinking plays a dual function.  On the one hand, they seek to understand their situation. . .the cognitive function.  On the other hand, they try to change the situation. . . .the participating or manipulative function."  [p. viii]

 "Reflexivity can be interpreted as a circularity, or two-way feedback loop, between the participants' views and the actual state of affairs.  People base their decisions not on the actual situation that confronts them but on their perception or interpretation of that situation.  Their decisions make an impact on the situation (the manipulative function), and changes in the situation are liable to change their perceptions (the cognitive function).  The two functions operate concurrently, not sequentially." [p. 10]

Radical fallibility, as applied to financial markets, says that "instead of being always right, financial markets are always wrong.  Markets have the ability, however, both to correct themselves and occasionally to make their mistakes come true by a reflexive process of self-validation. . . . .To be specific, financial markets cannot predict economic downturns accurately, but they can cause them."  [p. 77]

His perspective on market fundamentalists and financial regulation are equally intriguing:

"Market fundamentalists blame market failures on the fallibility of the regulators, and they are half right:  Both markets and regulators are fallible.  Where market fundamentalists are totally wrong is in claiming that regulations ought to be abolished on account of their fallibility.  That happens to be the inverse of the communist claim that markets ought to be abolished on account of their fallibility. . . .The fact that regulators are fallible does not prove that markets are perfect.  It merely justifies reexamining and improving the regulatory environment." [p. 78]

(ag) Aug. 31, 2009, in Economy

Consumer Information about Credit Cards and Mortgages

FDIC's Consumer News highlights information for the public about recent changes to credit card rules, prohibitions against abusive lending practices, and revised consumer disclosures.

Link:  http://www.fdic.gov/news/news/press/2009/pr09158.html

(ag) Aug. 31, 2009, in Consumer Protection

Edge Act Jurisdiction

Here's a forthcoming article to watch for:

"The 'Technicalities' of Edge Act Jurisdiction: Advocating for the Federal Courts' Adoption of and Adherence to a Uniform and Narrow Interpretation of 12 U.S.C. § 632," by Elizabeth Sheyn --  to be published in the University of Toledo Law Review. 

Abstract:  This article proposes a new (uniform and narrow) standard for interpreting the Edge Act of 1919, which provides a basis for original federal district court jurisdiction over civil suits arising out of “transactions involving international or foreign banking” or “out of other international or foreign financial operations."  Under the Edge Act, any defendant in a suit mentioned above may remove the suit from state court to federal district court.  This standard will remedy the federal courts’ recent adoption of a broad construction of the Edge Act, which has resulted in the consideration of cases that would ordinarily have no business being before a federal court, such as suits involving purely state law claims without any diversity of citizenship.

The abstract is available on SSRN: http://ssrn.com/abstract=1461823.

(ag) August 30, 2009, in International Banking

Washington Post & Too Big To Fail

On Friday, the Washington Post ran a feature on the "too big to fail issue," complete with data to demonstrate that the big have gotten bigger as a result of the bailouts.  Will this issue be addressed in the regulatory reform legislation working its way through Congress?  It's sure to meet well-organized, well-funded opposition to any "breakups" a la Ma Bell and the Baby Bells.  Antitrust is a dead language. And "free market" only means "let me do what I want until I get in trouble, just bail me out if I stumble." 

Link:  http://www.washingtonpost.com/wp-dyn/content/discussion/2009/08/28/DI2009082801337.html

(ag) August 29, 2009, in Economy, Financial Regulatory Reform

SEC, Bank of America, and Executive Compensation

The SEC is now saying that Bank of America acted in good faith but essentially made a careless error by not disclosing to investors its plans to pay bonuses to Merrill Lynch executives. (You won't be surprised to learn that B of A has said all along that it did nothing wrong.)

So why is the SEC backtracking?  Well, Federal District Judge Jed Rakoff is balking at approving SEC's quick $33 million settlement with Bank of America.  He thinks that if the problem is as bad as SEC initially claimed that they shouldn't be so quick to settle for so little.  He thinks SEC's enforcement should be more agressive.  SEC's puzzling response is that the bad behavior wasn't THAT bad?????

LInk to WSJ story:    http://www.washingtonpost.com/wp-dyn/content/article/2009/08/27/AR2009082703818_pf.html

Congress should be watching this watchdog.  It didn't bark when it should have and now it appears toothless.

(ag) August 28, 2009, in Executive Compensation

Texas Association of Bank Counsel - 33rd Annual Convention

The Texas Association of Bank Counsel (TABC) will hold its 33rd Annual Convention in Ft. Worth, TX, on Oct. 8 and 9, 2009.  Great topics and a great networking opportunity!

Link:  http://texasbankers.informz.net/texasbankers/data/images/2009_tabc_conf_bro.pdf

Guaranty Bank - Second Largest Bank Failure for 2009

Last Friday, the Office of Thrift Supervision (OTS) closed Guaranty Bank, Austin, TX, and appointed FDIC Receiver.  This is the 10th largest failure in U.S. history.  Cost to the deposit insurance fund is estimated at $3 Billion.  BBVA Compass, headquarted in Birmingham, AL, bought all the closed thrift's deposits and $12 Billion of its assets. 

Link:  http://www.fdic.gov/bank/individual/failed/guaranty-tx.html

(ag) August 27, 2009, in FDIC

Identity Theft: It Can Happen to Anyone

Today's story is that Federal Chairman Ben Bernanke has been a victim of identity theft.  His wife's purse was stolen and identity thieves began using the family checkbook.

Link:  http://news.yahoo.com/s/afp/20090826/pl_afp/uscrimefinancebankbernankenewsweek_20090826232518

Remind banking law students that the Federal Trade Commission (FTC) website has great information about how to prevent and respond to identity theft.  The motto is "Deter, Detect, Defend."

Link:  http://www.ftc.gov/bcp/edu/microsites/idtheft/

(ag) August 27, 2009, in Identity Theft

The Pathology of Too Big to Fail

Chairman of the Dallas Federal Reserve Bank Richard Fisher says that if we don't want to repeat the current unfortunate economic situtation in the future, we must "think long" and "exorcise the notion that an institution is too big to fail and remove all incentives for any institution to risk infecting the health of the financial system. If we make some enemies in the process, so be it. The object is to get it right."

I could not agree more!!!

Link to speech:  http://dallasfed.org/news/speeches/fisher/2009/fs090723.cfm

(ag) August 26, 2009, in Economy

Link to Fisher's speech: 

Will FDIC Need a Loan from Treasury?

AP Business Writer Stevenson Jacobs' article, "Agency That Insures Bank Deposits May Need Help," notes that tomorrow the FDIC will publish the amount of reserves it holds to satisfy deposit insurance claims. 

Only once before, during the Bank and S&L crisis of the 1980s and early 1990s did FDIC's reserves dip into the negative column.  If this does appear imminent, FDIC could borrow from Treasury and pay back the loan with interest or it could raise deposit insurance assessments on banks.

Link:  http://news.yahoo.com/s/ap/20090826/ap_on_bi_ge/us_fdic_shrinking_fund/print 

(ag) August 26, 2009, in Economy, FDIC

National Economic Update

On Monday, the Federal Reserve released its report on the "National Economic Update."  Here's the summary:

" A New Beginning?

Recent data revisions show that output fell much more steeply last year than was first thought. Newly available monthly indicators suggest, though, that the downturn will soon end, or has in fact already ended. Production is stabilizing, new orders are rising, and firms are making progress in controlling their inventories. Long-leading financial indicators signal that growth is likely through at least the end of 2009.

A Deeper Hole Than We Thought

Estimates of real gross domestic product (GDP) released late last month show a much steeper decline in economic activity during the 2008–09 recession than was previously indicated. . . . .

Economic Activity Begins to Stabilize

The latest monthly indicators suggest that output declines may be ending. After hitting lows late last year, the Institute for Supply Management’s composite manufacturing and nonmanufacturing indexes both have risen to levels consistent with expansion of the overall economy."

Link to Report:  http://dallasfed.org/research/update-us/2009/0905.cfm

(ag) Aug. 25, 2009, in Economy
 

Bernanke Renomination

Federal Reserve Chairman Ben Bernanke has been renominated by President Obama for a second term.  Senate confirmation is required.  Here's a link to Bernanke's nomination acceptance message posted today:

Link:  http://www.federalreserve.gov/newsevents/press/other/20090825a.htm

(ag) Aug. 25, 2009, in Economy

New RESPA FAQs

The Department of Housing and Urban Development (HUD) has posted new FAQs for its RESPA (Real Estate Settlement Procedures Act) regulations.

Some new requirements were effective January 16, 2009.  Other very significant changes involving revised Good Faith Estimates (GFEs) and HUD-1 Settlement Statements will be effective January 1, 2010.  The time to prepare is now!

Link:  http://www.hud.gov/offices/hsg/ramh/res/faqfinalrev4.pdf

(ag) August 23, 2009, in Lending Issues

Bernanke Reviews the Past Year of Crisis

Federal Reserve Chairman Ben Bernanke spoke today at the Kansas City Federal Reserve Bank's Annual Economic Symposium in Jackson Hole, Wyoming.  His review of significant crisis points during the past year as well as the policy responses provides an instructive look-back at "the most severe financial crisis since the Great Depression."  He optimistically concludes that we are "beginning to emerge" from the "deep global recession." 

Link to Speech:  http://www.federalreserve.gov/newsevents/speech/bernanke20090821a.htm

(ag) August 21, 2009, in Economy

Fiction -- Or Is It?

A CONSPIRACY OF PAPER by David Liss is set in early 18th Century London, immediately before the South Sea Bubble burst.  The intrigue of "stock jobbers" and the lengths to which companies will go to preserve an image of profitably suggest parallels with Bernie Madoff and the Enron/World Com scandals. 

School starts next week, but for banking law nerds this is a quick read.  The author was polishing a dissertation on how the mid-eighteenth-century novel shapes the modern idea of personal finance when he wrote this fast-paced murder mystery.  His research gives the story's details the ring of truth -- then and now.

(ag) August 20, 2009, in Economy

The Federal Reserve's Discount Window

The Federal Reserve announced new collateral margin requirements for institutions that borrow at the discount window.  The new Collateral Margins Table will be effective October 19, 2009, which allows institutions time to adjust their collateral portfolios.

I'm providing a link to the Fed's announcement of the new collateral margin requirements, with a comparison between the new and the existing requirements.  I'm also posting a link to the Fed's Q&A about the Discount Window in general as a source of liquidity.  If an institution borrows at the discount window, it must put up collateral according to the collateral margin requirements.

LInk to Announcement:  http://www.frbdiscountwindow.org/20090819margins_announcement.cfm?hdrID=21

Link to Q&A:  http://www.frbdiscountwindow.org/Newmargins_faqs.cfm?hdrID=21&dtlID=#n1

(ag) August 19, 2009, in Federal Reserve

Squam Lake Working Group on Financial Regulation

An excellent resource for current financial topics from pension reform to the optimal financial intitution regulatory structure can be found at the website indicated below.  Fifteen academics from different schools and think tanks meet to discuss financial issues and produce thoughtful working papers.

LInk:  http://www.cfr.org/project/1404/squam_lake_working_group_on_financial_regulation.html

(ag) August 18, 2009, in Economy

Comparative Analysis: The Recession in Germany and in the U.S.

The Brookings Institution's Douglas J. Elliott provides an interesting comparision of the worldwide recession effects and public opinion in Germany and the U.S.  Germany's economy may be harder hit because of its dependence on exports; however, the German public seems less troubled about it.  Germany's economy, described as "social capitalism," has limited unemployment -- a big factor in public pain in the U.S. 

Link:  http://www.brookings.edu/papers/2009/0728_recession_elliott.aspx

(ag) August 17, 2009, in Economy

GAO Suggests More HMDA Reporting Needed

The Government Accountability Office (GAO) has submitted a report to Congress entitled "Fair Lending:  Data Limitations and the Fragmented U.S. Financial Regulatory Structure Challenge Federal Oversight and Enforcement Efforts." 

One of the key recommendations is that Congress require financial institutions to submit more underwriting-related data, including credit scores, loan-to-value and debt-to-income ratios, and personal characteristics such as race, ethnicity, and sex, as well as requiring data for nonmortgage loans. 

GAO says the purpose for requiring more data is "To facilitate the capacity of federal enforcement agencies and depository institution regulators as well as independent researchers to identify lenders that may be engaged in discriminatory practices in violation of the fair lending laws."

(ag) August 15, 2009, in Fair Lending/Lending Issues, HMDA

The Time Eater Clock - Fall Semester Approaches

This afternoon, I was preparing my Syllabus for Fall 2009 Banking Law and had occasion to consult my "Cambridge in America" wall calendar.  The image for the month of August showed an amazing clock installed at Corpus Christi College, Cambridge University -- The Time Eater or Chronophage Clock.  The clock was designed by Dr. John Taylor, cost one million pounds, and features a grasshopper-like creature with sharp teeth moving forward to devour each minute.  You really have to see this disturbing creation to appreciate it, so I've included a link to a YouTube video. 

Link:   http://www.youtube.com/watch?v=VsMwueAj2QU

I'm thinking I'll post this in "Economy."  Something gobbled up our economy -- maybe this is it!

(ag) August 13, 2009, in Economy