Banking Law Prof Blog

A Bad Year for Bank Failures

More banks failed during 2010 than in any year since 1992, the height of the S&L crisis.

Check out the story:  http://www.washingtonpost.com/wp-dyn/content/article/2010/12/28/AR2010122803649.html?hpid=topnews

(ag) Dec. 28, 2010, in Banking/Economy

Money Talks: How Financial "Reform" Catered to Wall Street

Today's Wall Street Journal has an interesting article entitled "Out of Lehman's Ashes Wall Street Gets Most of What It Wants."

The story notes that the biggest U.S. banks may not have been so good at avoiding financial crisis, but they were very good at politics.  Financial reform has been halfhearted, in part because of expert lobbying and the revolving door between industry and administration. 

"The last two years have been the best ever for combined investment-banking and trading revenue at Bank of America Corp., JPMorgan Chase & Co., Citigroup, Goldman Sachs Group Inc. and Morgan Stanley, according to data compiled by Bloomberg."

Link:  http://www.washingtonpost.com/wp-dyn/content/article/2010/12/28/AR2010122800322.html?wpisrc=nl_pmpolitics

(ag) Dec. 28, 2010, in Financial Reform 

Happy Holidays!

Best wishes to all for a New Year!

Federal Banking Agencies Expand CRA to Support Communities with High Foreclosure Rates

The Federal Bank Regulatory Agencies have announced changes to Community Reinvestment Act (CRA) regulations designed to support communities affected by high foreclosure levels.The final rule is substantially the same as the proposal published for comment on June 24, 2010.

The Final CRA Rule encourages depository institutions to support eligible development activities under the Neighborhood Stabilization Program (NSP) administered by the U.S. Department of Housing and Urban Development (HUD).  Under NSP, HUD has provided funds to state and local governments and nonprofit organizations for the purchase and redevelopment of abandoned and foreclosed properties.

The new final rule encourages depository institutions to make loans and investments, and provide services to support NSP activities in areas with HUD-approved plans. NSP-eligible activities will receive favorable consideration under the new rule if conducted within two years after the date when NSP program funds are required to be spent.

Link:  http://www.federalreserve.gov/newsevents/press/bcreg/20101215a.htm

(ag) Dec. 18, 2010, in CRA

Bank of America Sued Over Loan Modifications

Arizona and Nevada Attorneys General filed civil suits against Bank of America, "alleging that the lender is misleading and deceiving homeowners who have tried to modify mortgages in two of the nation's most foreclosure-damaged states."

Arizona's Attorney General says that BofA violated the state's consumer fraud law by falsely telling mortgage holders that their loans were being modified.

Link to story:  http://finance.yahoo.com/news/Arizona-Nevada-sue-BofA-over-apf-2331899513.html?x=0

(ag) Dec. 17, 2010, in Consumer Protection

Fed Proposes Debit Card Interchange Fee Cap

Provisions of the Dodd-Frank Bill limiting debit card interchange fees will be implemented by Federal Reserve Board regulation.  The Fed has requested comment on a proposed rule to set debit card interchange fee standards and prohibit network exclusivity arrangements and routing restrictions.

Debit card interchange fees are set by card network and paid by merchants to card issuers for each transaction.  Under Dodd-Frank, those interchange fees must be "reasonable" and proportional to the cost incurred by the issuer for the transaction.

The new standards will apply to issuers that, together with their affiliates, have assets of $10 billion or more. Certain government-administered payment programs and reloadable general-use prepaid cards would be exempt from the interchange fee limitations.

 
The Fed requests comment on two alternative interchange fee standards that would apply to all covered issuers:

1. A cap based on each issuer's costs, with a safe harbor (initially set at 7 cents per transaction) and a cap (initially set at 12 cents per transaction); OR
2. A stand-alone cap (initially set at 12 cents per transaction).

Under both alternatives, circumvention or evasion of the interchange fee limitations is prohibited.

Comments are also requested on adjustments to the interchange fees for an issuer's fraud prevention costs. 

Under either of these proposed standards, the maximum allowable interchange fee received by covered issuers for debit card transactions would be more than 70 percent lower than the 2009 average, once the new rule takes effect on July 21, 2011. 

Link:  http://www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm

(ag) December 17, 2010, in Financial Regulatory Reform

Arrests for Insider Trading

Several Advanced Micro Devices Inc. employees were arrested today as part of a nationwide investigation of illegal trading at hedge funds by Manhattan U.S. Attorney Preet Bharara, the FBI and the SEC.

“A corrupt network of insiders at some of the world’s leading technology companies served as so-called consultants who sold out their employers by stealing and then peddling their valuable inside information,” Bharara said.

Link to Story:  http://www.bloomberg.com/news/2010-12-16/fbi-is-said-to-arrest-five-people-as-part-of-u-s-insider-trading-inquiry.html

(ag) Dec. 16, 2010, in Securities Law 

Dodd-Frank, Systemic Risk, and Too Big to Fail

Commentators frequently ask whether Dodd-Frank has put an end to "Too Big to Fail."  My answer is emphatically negative.  In fact, by designating large institutions for special treatment, Dodd-Frank has simply identified TBTF institutions.

On the other hand, viewing Dodd-Frank provisions in the best possible light, it would be helpful if the systemic risk provisions actually worked to identify the next wave of systemic risk.  The Financial Services Roundtable has a helpful report on how to implement the Dodd-Frank systemic risk provisions.

The report highlights the following recommendations, spelled out in greater detail in the report itself:

Recommendation 1 – Define Systemic Risk 

Recommendation 2 – Adopt Guiding Principles that Balance Financial Stability with Economic Growth and Innovation

Recommendation 3 - Establish an Industry Advisory Committee to Engage in an Ongoing Dialogue with the Financial Stability Oversight Council

Recommendation 4 – Leverage Existing Financial Regulatory Reporting to Develop Financial Crisis Early Warning Signs and Focus Data Collection on Systemic Risk

Link to report:  http://www.fsround.org/publications/pdfs/2010/SystemicReportFINAL-NEW.pdf 

(ag) Dec. 16, 2010, in Financial Regulatory Reform

The Grinch and a Professor's View of "Turn in Your Grades"

Sound familiar?  http://www.youtube.com/watch?v=fYFV3cv3wlU&feature=player_embedded

Now at Hamline University School of Law

Great career announcement: 

Effective Jan. 1, 2011, I will be joining Hamline University School of Law in St. Paul, MN, as tenured Professor of Law and Founding Director of their new Business Law Institute!

Interagency Proposed Rulemaking to Implement the Collins Amendment

Section 171 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Section 171 is more commonly known as the Collins Amendment.

Section 171 provides that the capital requirements generally applicable to insured banks shall serve as a FLOOR for other capital requirements the agencies establish. The advanced approaches of Basel II allow for reductions in risk-based capital requirements below those generally applicable to insured banks, and accordingly need to be modified to be consistent with Section 171.

FDIC Chairman Sheila Bair says, "The Collins Amendment, in my view, will do more to strengthen the capital of the U.S. financial system than any other section of the Act. Large financial institutions need the capital strength to stand on their own without government assistance. The Collins Amendment appropriately ensures that large institutions operate with at least as much capital in proportionate terms as is required of thousands of Main Street banks nationwide."

Link:  http://www.fdic.gov/news/news/press/2010/pr10266.html

(ag) Dec. 14, 2010, in Capital

 

What Does S&P Say About the U.S. Banking Industry?

Standard & Poors has an interesting report out on the forecast for the U.S. banking industry as it copes both with the slow economy and with Dodd-Frank implementation.

Here's the introduction:

"With sluggish growth in lending, persistently high unemployment, an ongoing crisis in the residential mortgage markets, and the onset of federal banking reform, Standard & Poor's Ratings Services believes that U.S. banks are preparing themselves for another challenging year in 2011. Although we've seen some generally positive indicators--including stabilizing asset quality, moderate growth in deposits, lower loan loss reserve provisions, and higher levels of capital--we don't believe they'll be enough to offset some the headwinds including the weak economy and the accompanying low interest rates, which depress revenue growth and squeeze margins. We expect U.S. bank profitability to improve slowly as credit costs subside."

Other points of interest:

• Weaker earnings are ahead for big banks.
• Regional banks show signs of improvement.
• Resolving residential mortgage issues may prove costly.
• Asset quality should improve.
• 2011 promises more challenges:  new government regulations, reduced profitability, weak economic recovery, limited loan growth, troubled mortgage and housing markets.

Link to report:  http://www.standardandpoors.com/ratings/articles/en/us/?assetID=1245264297636

(ag) Dec. 14, 2010, in Banking, Economy

Poor State Finances Deepen Recessionary Hole

Dallas Federal Reserve Bank economist Jason Saving points out that, while California is the poster child for poor state finances and recessionary problems, even Texas, with a strong economy, struggles with poor management of state finances. 

According to his report:

"Texas stands out as a state that faced only modest fiscal pressure over the past two years but now confronts more significant headwinds. It entered recession months later than the nation and created more jobs during 2008 than all the rest of the country, bolstering revenue at a time when much of the country struggled. But the lingering aftereffects of recession have ramped up demand for health services through the Medicaid program and other social welfare expenditures. The needs are particularly acute in Texas, which has the greatest proportion of uninsured individuals in the nation. Coupled with a revamped franchise tax bringing in $3 billion per year less than expected from business, a big drop in energy prices and the expiration of roughly $12 billion in stimulus monies, the state now faces a shortfall for the next biennium estimated at up to $21 billion—or 11.5 percent of its $180 billion budget."

LInk to report:  http://www.dallasfed.org/research/swe/2010/swe1004c.cfm

(ag) Dec. 13, 2010, in Economy

Forecast Not So Good For British Banks

Moody's Investors Service announced that it is "maintaining a negative outlook on the U.K. banking system due to the uncertain direction of the U.K. economy as well as declining support for the banking sector from the government."

Link to story:  http://www.marketwatch.com/story/moodys-maintains-negative-outlook-on-uk-banking-2010-12-13-1324380?reflink=MW_news_stmp

(ag) Dec. 13, 2010, in Global Markets, Economy

How Wars End - A New Book

Here's my current book recommendation: 

 
 

Because the current wars have such a great economic impact on the U.S. and therefore on the global economy, it's important to review what happens when the shooting stops.

How Wars End:  Why We Always Fight the Last Battle,  
Author:  Gideon Rose, Editor, Foreign Affairs, and Peter G. Peterson Chair, Foreign Affairs
Publisher:  A CFR Book. Simon & Schuster - ISBN 978-1416590538

A Review from the Council on Foreign Relations website:

 "In 1991 the United States trounced the Iraqi army in battle only to stumble blindly into postwar turmoil. Then in 2003 the United States did it again. How could this happen? How could the strongest power in modern history fight two wars against the same opponent in just over a decade, win lightning victories both times, and yet still be woefully unprepared for the aftermath?

Because Americans always forget the political aspects of war. Time and again, argues Gideon Rose in this penetrating look at American wars over the last century, our leaders have focused more on beating up the enemy than on creating a stable postwar environment. What happened in Iraq was only the most prominent example of this phenomenon, not an exception to the rule.

Woodrow Wilson fought a war to make the world safe for democracy but never asked himself what democracy actually meant and then dithered as Germany slipped into chaos. Franklin Roosevelt resolved not to repeat Wilson's mistakes but never considered what would happen to his own elaborate postwar arrangements should America's wartime marriage of convenience with Stalin break up after the shooting stopped. The Truman administration casually established voluntary prisoner repatriation as a key American war aim in Korea without exploring whether it would block an armistice--which it did for almost a year and a half. The Kennedy and Johnson administrations dug themselves deeper and deeper into Vietnam without any plans for how to get out, making it impossible for Nixon and Ford to escape unscathed. And the list goes on."

(ag) Dec. 12, 2010, in Economy

 

Should the regulators give banks time to earn their way out of trouble?

One of the key problems from the last financial institution crisis was "regulatory forebearance," unjustifed delays by regulators, especially the FHLBB and FHLIC.  Many S&Ls stayed open long after they were insolvent, for many reasons including:  their insurance fund itself was insolvent, regulators did not have the manpower or expertise to deal with the magnitude of failures, regulators had a "not on my watch" mentality about failures, regulators dreamed up phony "good will" regulatory accounting that masked true financial condition, and simple,outright fraud. 

In the current crisis, some are suggesting that regulators should allow distressed institutions time to earn their way out of insolvency.  Regulatory actions complained about include:  Mark-to-market accounting for assets that cannot be accurately valued in a distressed market and too-rigid application of charge-off rules, coupled with the Prompt Corrective Action legislation stemming from the last crisis which required regulators to close institutions when capital falls below a 2% trigger level.

It's something to think about.  Here is a letter forwarded to me by former FDIC Regional Counsel Steve Woodrough encapsulating that point of view:

Download Open_Letter_to_Georgia_Bankers_-_The_Demise_of_Community_Banks_[1]

(ag) Dec. 11, 2010, in Enforcement, Capital

Turkey's Top Banks to Move from Ankara to Istanbul

Today's Wall Street Journal ran a story announcing that Turkish Prime Minister Recep Tayyip Erdogan and his government will move Turkey's top public financial institutions from Ankara, the country's capital, to Istanbul.  The move is designed to promote Istanbul as an international financial center.  Erdogan made the announcement in a speech commemorating the 25th anniversary of the Turkish stock exchange.

Banks that will move are TC Ziraat Bankasi AS, Turkiye Vakiflar Bankasi TAO, and Turkiye Kalkinma Bankasi.  The prime minister did not say whether the central bank will move to Istanbul.

The announcement is further indication of the split between Turkey's old guard secularists and the current Islamic-leaning government.  The founder of modern Turkey, Mustapha Kemal Ataturk, moved the capital from Istanbul to Ankara to distinguish his government from the former Ottoman Empire.

(ag) Dec. 10, 2010, in Global Markets 

Spencer Bachus Is New Chair of House Financial Services Committee

Spencer Bachus (R-AL) fought off a challenge to become chairman of the House Financial Services Committee for the 112th Congress.  His goals:  Ending "too big to fail,"  preventing unlimited bailout of Fannie Mae and Freddie Mac, and "going title by title through the 2,300 page Dodd Frank Act to correct, replace, or repeal the job killing provisions that unnecessarily punish small businesses and community banks that did nothing to cause the financial crisis."

LInk:  http://republicans.financialservices.house.gov/index.php?option=com_content&task=view&id=1457&Itemid=43 

(ag) Dec. 10, 2011, in Congress, Financial Regulatory Reform, Fannie Mae and Freddie Mac

New Types of Identity Theft Scams

Drawing on a report from the Identity Theft Assistance Center, American Banker reporter Jeremy Quittner reports on new types of fraud and security attacks to watch for:

•  "Social engineering scams," in which criminals exploit fear to get people to provide user names and passwords.
• Even more sophisticated scams playing on greed, such as sweepstakes scams using letters with fake checks bearing the logos of financial services companies.
• Scams are using mobile phones in text-message form
• An increase in fake readers and cameras at automated teller machines to skim card data for cloned cards.
• Small businesses targeted more often as criminal rings using stolen information create counterfeit checks.

(ag) Dec. 8, 2010, in Identity Theft

 

Justice Department Goes After Financial Fraud

Attorney General Eric Holder, speaking for the Interagency Financial Fraud Enforcement Task Force, which includes the Justice Department, SEC, IRS, CFTC, and U.S. Postal Service, announced that a nationwide enforcement program targeting investment fraud had brought enforcement actions against 343 criminal defendants and 189 civil defendants for fraud schemes that harmed more than 120,000 victims throughout the country. The operation’s criminal cases involved more than $8.3 billion in estimated losses and the civil cases involved estimated losses of more than $2.1 billion.   Operation Broken Trust is the first national operation of its kind to target a broad array of investment fraud schemes that directly prey upon the investing public.    

Link:  http://www.justice.gov/opa/pr/2010/December/10-ag-1390.html

(ag) Dec. 8, 2010, in Enforcement