Banking Law Prof Blog

Republican Senators Ease Opposition to Financial Reform

With public outrage over the financial crises exacerbated by the SEC's charge that Goldman Sachs engaged in fraud, the SEC's questions to 19 large banks about whether they used the "Lehman accounting trick" to avoid disclosing debt levels, and Congressional testimony this week by ex-Lehman CEO Richard Fuld, Republican Senators seem more inclined to agree to bipartisan financial reform legislation.

Financial reform legislation could reach the Senate floor next week.

LInk to April 21, 2010, Wall Street Journal article, "Once Critical of Financial Regulation Bill, Republicans Change Their Tone:"   http://www.washingtonpost.com/wp-dyn/content/article/2010/04/20/AR2010042005311.html?wpisrc=nl_politics 

Link to April 20, 2010, Fox Business article, "Former Lehman CEO Fuld Faces Congress:"  http://www.foxbusiness.com/story/markets/lehman-ceo-fuld-faces-congress/

Link to April 20, 2010, MSNBC article, "SEC Probing Lehman Accounting Trick:"  http://www.msnbc.msn.com/id/36649691/ns/business-economy_at_a_crossroads/

(ag) April 21, 2010, in Congress, Financial Regulatory Reform, Securities Law

Greed is Back

"Someone reminded me I once said 'Greed is good.'  Now it seems it's legal." -- Gordon Gekko

Remember the 1987 movie Wall Street?  It's still so close to current events that it's a scary commentary.
Here's a trailer for Wall Street 2:  Money Never Sleeps:

http://www.youtube.com/watch?v=lPCSAAtyLW8&NR=1

(ag) April 20, 2010, in Securities Law

Toyota, Tylenol, and the Corporate Lawyer

On Monday, Toyota agreed to pay a $16.4 Million fine assessed by the National Highway Traffic Safety Administration.  According to the U.S. Transportation Secretary, "Toyota put consumers at risk by failing to report safety problems related to the defective accelerator pedals."  Toyota denied that charge and claimed that it settled to avoid protracted litigation.  Toyota still faces investigations by the SEC and the New York Attorney General.

Link to Toyota story:  http://www.moneycontrol.com/news/world-news/toyota-to-pay-36164-million-us-fine_452509.html

As I tell my Corporate Governance class, corporate lawyers are almost always called upon to assist in crafting crisis response.  The best advice is:  Face the Problem, Fix It, and Move On.  The last thing a corporation needs is to be seen conducting a cost-benefit analysis with people's lives.

Here's a link to analysis of Tylenol's Effective Crisis Management in 1982:  http://iml.jou.ufl.edu/projects/Fall02/Susi/tylenol.htm

(ag) April 20, 2010, in Corporate Governance

The SEC Goes After Goldman Sachs

The SEC's April 16, 2010, Press Release outlines charges against Goldman Sachs for fraud in connection with a collateralized debt obligation (CDO ) that was related to the performance of subprime residential mortgage-backed securities (RMBS). 

"The product was new and complex but the deception and conflicts are old and simple," said Robert Khuzami, Director of the Division of Enforcement.

"Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party."

Link to SEC Press Release:  http://www.sec.gov/news/press/2010/2010-59.htm

(ag) April 19, 2010, in Securities Law

International Swaps & Derivatives

Here's an interesting new paper analyzing International Swaps & Derivatives Association (ISDA) Master Agreements.  ISDA is a trade organization of over-the-counter derivatives market participants, headquartered in New York.  ISDA has created two versions of standardized contract (the ISDA Master Agreement) for derivatives transactions:  the 1992 version and the 2002 version.

See:  Dr. Rupert Macey-Dare   

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1545290

 

 Analysing Market Quotation, Loss and Set-Off in the 1992 ISDA Master Agreement

 

Abstract:     
This paper analyses key clauses relevant to valuation in the 1992 ISDA Master Agreement. The paper focuses principally on the section 14 definitions of: Market Quotation and Loss and on ISDA’s Basic Set-off Provision which is frequently added via the Master Agreement Schedule. Additional clauses considered relate to: First and Second Method, Payments on Early Termination, Settlement Amount, Pre-Estimate, Terminated Transactions, Affected Transactions, Termination Events, One and Two Affected Parties, Reference Market-makers, Unpaid Amounts, Calculations and Settlement. The paper highlights both the richness and complexity of specific valuation-related clauses in the 1992 ISDA Master Agreement and in the structure and interpretation of the Master Agreement as a whole. The paper concludes with c.20 additional student drafting questions.

 

Keywords: ISDA, Valuation, Derivative, Market Quotation, Loss, Set-Off, Master Agreement

(ag) April 14, 2010, in Securities Law

 

More Lehman Shenanigans

It's Enron all over again!  The New York Times today reports that Lehman Brothers used a hidden affiliate called Hudson Castle to shift  risky investments off its balance sheet and to conduct  apparently "arms length" transactions.  Hudson Castle was used to  "give the bank and its clients access to financing while preventing “headline risk” if any of its deals went south."

See:  "Lehman Channeled Risks Through 'Alter Ego' Firm":  

http://www.nytimes.com/2010/04/13/business/13lehman.html?hp

The more we know about the complete disregard of law and commonsense demonstrated by TBTF players in the run-up to the current financial crisis, the more we can see a need for:

1.  Ending TBTF.

2.  Reducing the size of the largest financial conglomerates.

3.  Going forward  with financial reform legislation now pending in the Senate.

4.  Making sure  there is a strong  systemic risk regulator.

5.  Making sure there is a strong, independent, comprehensive Consumer Financial Protection Agency.

6.  Adopting the Volcker Rule to separate the business of banking from proprietary securities activities.

(ag) April 13, 2009, in Financial Regulatory Reform

Ending Too Big to Fail

One key purpose of financial reform legislation is to avoid a future financial system collapse that drives the U.S. to the point of severe recession or even depression.  Much of the cost of the recent financial institution  rescues is attributable to bailing out institutions that were deemed Too Big to Fail. 

It is indisputable that large financial institutions currently perceived as Too Big to Fail receive a market subsidy in the form of lower interest rates charged to them for borrowing money because they are perceived to carry lower risk.  After all, they can't fail; the government won't let that happen.  This subsidy is not based  on any assessment of risky activities.  That does not matter.  No matter how risky, no matter how poorly managed these large Too Big to Fail institutions are, the government simply will not let them fail. 

And if the government should be brave enough to try the "just let 'em fail"  approach, one has only to recall Lehman Brothers to conclude that the markets will force the government back into Too Big to Fail mode.  The interest rate subsidy comes at the expense of smaller, well-managed banks who are too small to qualify for Too Big to Fail.

See my article, which will appear in the next issue of Villanova Law Review -   "Bringing to Heel the Elephants in the Economy:  The Case for Ending Too Big to Fail."  The article is posted on SSRN:  

SSRN Author page:

http://ssrn.com/author=391481

(ag) April 12, 2010, in Financial Regulatory Reform

Supreme Court Justice John Paul Stevens Announces Retirement

Justice John Paul Stevens today announced his plans to retire at the end of this Supreme Court term.  Justice Stevens was appointed to the High Court by President Gerald Ford in 1975.  He is the longest serving of the current justices and is counted in the "liberal wing" of the Court.

Link to Washington Post article discussing Justice Stevens's retirement announcement and his possible successor:  http://www.washingtonpost.com/wp-dyn/content/discussion/2010/04/09/DI2010040902546.html

Link to Time Line of dates of service for U.S. Supreme Court Justices:  

http://www.supremecourt.gov/about/members.aspx

(ag) April 9, 2010, in Supreme Court

The "Orderly Liquidation Fund" - An Invitation to Continue TBTF

The Senate Banking Committee version of the financial regulatory reform legislation would create "The Orderly Liquidation Fund,"  with funding of $50 Billion. 

My review of the “Orderly Liquidation Fund” provisions of the financial reform bill passed by the Senate Banking committee leads me to conclude that restrictions on how the funds are to be expended are broad, permissive, and vague.  The funds are available to the FDIC to pay for anything related to orderly liquidation of large financial corporations, including planning, assessments, and administrative expenses, as well as  liquidation of covered financial companies and the payment of principal and interest by FDIC on obligations issued to fund "orderly liquidation" operations. 

Any tie to assisting large troubled institutions or agency administrative costs which could relate to actual or anticipated use of expansive powers to deal with large troubled institutions will permit FDIC to tap the Orderly Liquidation Fund maintained at the U.S. Treasury. 

The $50,000,000,000 fund is available with few clear guidelines and no accountability measures.  The existence of such a fund codifies the “Too Big to Fail Doctrine,” even after we have witnessed the expensive, unfair, and ineffective impact of TBTF in the current crisis.

(ag) April 8, 2010, in Financial Regulatory Reform

More about CFPA

"The Consumer Financial Protection Agency: Love It or Hate It, U.S. Financial Regulation Needs It", was recently listed on SSRN's Top Ten download list for LSN: Administrative Enforcement (Topic) and LSN: Enforcement of Consumer Laws (Topic).

SSRN at http://ssrn.com/author=391481.

(ag) April 8, 2010, in Consumer Protection, Financial Regulatory Reform

Refund Anticipation Loans - Watch for Snakes

Refund anticipation loans (RALs) are a bad deal for consumers because of the high up-front fees.  Nevertheless, many consumers on the financial edge ask for this type of credit extension from their tax preparers.  Both the IRS and the banking regulators plan to take a hard look at RALs -- but probably after this tax season.

Link to American Banker article about Refund Anticipation Loans:  Maria Aspan, "Tightening the Screws on Tax Refund Anticipation Loans":  http://www.financial-planning.com/news/IRS-Tax-Refund-2665367-1.html

Link to National Consumer Law Center's 2010 Refund Anticipation Loan Report:  

http://www.consumerlaw.org/issues/refund_anticipation/

Link to Consumer Complaints about H&R Block Refund Anticipation Loan Program:  

http://www.consumerlaw.org/issues/refund_anticipation/

(ag) April 8, 2010, in Consumer Protection

Senator Shelby & the CFPA

Before the Spring Recess, the Senate Banking passed financial reform legislation on March 23 -- along party lines.  Republican Senators decided to reserve objections for the Senate floor. 

Link to:  David Cho & Brady Dennis, "Senate panel passes sweeping financial-regulation bill" (Mar. 23, 2010):  http://www.washingtonpost.com/wp-dyn/content/article/2010/03/22/AR2010032202151.html

Apparently, Senator Richard Shelby, the Senate Banking Committee's Ranking Republican, has been busy over his spring break.  Today's reports indicate that his office has delivered a proposal to Senate Democrats that would restore independent agency status to the Consumer Financial Protection Agency (rather than a Bureau within the Federal Reserve, as the Senate Banking Committee version would have it).  As the article notes, however, " it is unclear what other concessions Shelby might be seeking in return for his support of a new consumer agency."

Link to:  Brady Dennis, " Banking panel's top Republican proposes consumer financial protection agency" (Apr. 7, 2010).

(ag) April 7, 2010, in Consumer Protection, Financial Regulatory Reform

Back from Spring Break

I'm back from Spring Break & the U.S. Senate will also get back to business next week after their break.  Financial Regulatory Reform Legislation is high on their agenda.