Banking Law Prof Blog

What Happens If Congress Doesn't Raise the Debt Ceiling?

Jamie Dimon, JP Morgan Chase CEO, addressed that question this week at Fifth Annual Capital Markets Summit, sponsored by the U.S. Chamber of Commerce Center for Capital Markets Competitiveness.

While Congress debates whether to act on raising the debt ceiling, global capital markets recognize and are concerned by the fact that if Congress does not act, the U.S. will reach its $14.29 Trillion legal debt limit between April 15 and May 31, 2011.  If that happens, Dimon warned that companies and investors will lose access to markets and short-term credit will dry up.  

“If the United States actually defaults on our debt it would be catastrophic,” Dimon said.  

Link to story:  http://www.bloomberg.com/news/2011-03-30/jpmorgan-s-dimon-says-u-s-debt-default-would-be-catastrophic-.html 

Thanks to Rebecca Christie at Bloomberg News for forwarding this story to me.

(ag) March 31, 2011, in Economy, Global Markets

Dodd-Frank "Living Wills"

FDIC and the Federal Reserve Board have jointly proposed a rule to implement Dodd-Frank provisions that require financial institution holding companies with assets greater than $50 Billion as well as systemically important nonfinancial companies supervised by the Federal Reserve to submit "resolution plans" (sometimes known as "living wills") and to report credit exposure. 

About the requirement for the largest financial institutions and interconnected non-financial companies to file resolution plans, FDIC Chairman Sheila Bair had this to say: 

"The ability to plan in advance for the orderly resolution of a systemic entity is key to ending Too Big To Fail. Viable resolution plans will require systemic institutions to conduct a strategic analysis on how they could be resolved under the bankruptcy code as well as evaluate significant credit exposures and other key information across the entities and their affiliates.  These plans will be instructive to institutions as a way for them to better understand how their business lines interact and how to mitigate the effects of failure risk. The plans also will help inform the FDIC on how to lessen the systemic ripple effects in the event one of these companies must be resolved under the new Orderly Liquidation Authority."

The comment period will be open for 60 days following publication in the Federal Register.  After a final regulation is adopted, Resolution Plans would have to be submitted within 180 days and Credit Exposure Reports would be filed within 30 days after the end of each quarter. 

LInk to Press Release:  http://www.fdic.gov/news/news/press/2011/pr11060.html

(ag) March 30, 2011, in Financial Regulatory Reform, Too Big to Fail

More About QRMs: Banking Agencies' Proposed Rule Forthcoming

From the FDIC Press Release: 

"The staffs of the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission, the Federal Housing Finance Agency, and the Department of Housing and Urban Development (together, the agencies) announced that the agencies this week are considering for approval a notice of proposed rulemaking that addresses section 941 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. All of the agencies participating in this joint rulemaking process are expected to consider the rule this week and a detailed announcement will be made when this process is complete. If approved, the agencies will publish in the Federal Register a notice of proposed rulemaking for public comment."

"Section 941 requires the agencies to prescribe rules to require that a securitizer retain an economic interest in a material portion of the credit risk for any asset that it transfers, sells, or conveys to a third party. The chairperson of the Financial Stability Oversight Council is tasked with coordinating this rule making effort."

Linnk to FDIC Press Release:  http://www.fdic.gov/news/news/press/2011/pr11059.html 

Link to NPR Story: http://www.npr.org/2011/03/29/134960865/FDIC-Unveils-New-Mortgage-Rules

(ag) March 30, 2010, in Secondary Mortgage Market

 

Asset Quality: Have U.S. Banks Turned the Corner?

The Federal Reserve Bank of St. Louis publishes a quarterly newsletter, The Central Banker.  An article in the Winter 2010 issue suggests that the answer to the question about whether U.S. Banks are recovering from the subprime mortgage crisis is a qualified "maybe" but maybe not for community banks and not for all banks in the St. Louis Federal Reserve's district.

Here's what Gary S. Corner's article says:

"While still significantly elevated, the volume of nonperforming loans—those loans 90 days or more past due or in nonaccrual status—has declined for many banks across the country. The largest banks in the United States are signaling they have turned the corner on asset quality issues, evidenced by their shrinking provision expenses (or charges against earnings to build loan loss reserves) and rising profits."

"The exposure of Eighth District and community banks to commercial real estate and related loan losses remains high. Weakness in economic factors that underlie commercial real estate fundamentals, such as employment and income growth, also remain elusive. In some cases, the passage of time could force further recognition of difficult lending relationships as borrowers exhaust their remaining options and collateral cash flows weaken.  As such, without clear, sustained improvement in the present and future quarters, it appears that many community and Eighth District banks will continue to experience significant asset quality problems well into 2011."

Link:  http://stlouisfed.org/publications/cb/articles/?id=2035 

(ag) March 28, 2011, in Lending Issues, Economy

 

 

What's a QRM?

QRM is a "qualified residential mortgage,"  an important concept in secondary mortgage market reform.  Regulators are expected soon to set parameters for QRMs.  

Generally speaking, QRMs are mortgages that have underwriting and terms that have had a low historical default rate and so are considered less risky than other mortgages.  Under Dodd-Frank, Congress sought to prevent banks from over-investing in high-risk residential mortgages.  Therefore, Dodd-Frank requires lenders and investors in mortgage-backed securities to have "skin in the game" by retaining 5% of the value of "non-qualified residential mortgages" (NQRMs).  We won't know exactly what a high-risk NQRM is until regulators finalize the parameters for QRMs.

The definition of QRM will strongly affect the future of the secondary mortgage market.  If the definition is too strict, the secondary mortgage market for NQRMs sold without any government guarantee could be severely curtailed.

Link to article:  http://www.cutimes.com/2011/03/28/new-mortgage-regulation-could-strongly-impact-mark

Link to another article:   http://www.calculators4mortgages.com/blog/buying-a-new-home-will-you-need-20-percent-down-payment 

(ag) March 28, 2011, in Secondary Mortgage Market

Reg Z Amendments Implementing Credit Card Act

The Federal Reserve Board has adopted amendments to Regulation Z (Truth in Lending) to clarify prior Federal Reserve rules implementing the Credit Card Accountability Responsibility and Disclosure Act of 2009 (Credit Card Act).

• Credit card issuers must rely on credit-related information about the individual applying for the card and may not use household income as a factor for individual credit.
• Promotions that waive interest charges for a period of time are subject to the same rules as promotions offering reduced interest rates for a period of time:  A card issuer that offers to waive interest charges for six months will be prohibited from revoking the waiver and charging interest during the six-month period, unless the account becomes more than 60 days delinquent.
• Application fees and other charges before a credit card is issued are subject to the same limitations as fees charged during the first year after the account is opened. The total amount of these fees cannot exceed 25 percent of the account's initial credit limit.  An example is a card issuer that charges a $75 fee to apply for a credit card with a $400 credit limit.  The new Reg Z amendments make it clear that in such a case, the issuer generally will not be permitted to charge more than $25 in additional fees during the first year after account opening.

Link to Federal Reserve Rule: 
http://www.federalreserve.gov/newsevents/press/bcreg/20110318b.htm

(ag) March 27, 2011, in Credit Cards

Commentary on Credit Card Interchange Fees

On December 16, 2010, the Federal Reserve issued a Proposed Rule to Limit Debit Card Interchange Fees.  The idea is to save merchants from paying interchange fees unrelated to the banks' costs, with the further thought that consumers would reap some of the savings.  Under one proposal, there would be a safe-harbor for interchange fees of seven cents per transation and a cap of twelve cents per transaction.  Banks stand to lose substantial fee income.  Although the effective date is July 21, 2011, the Federal Reserve may revisit this proposal. 

Link to commentary about interchange fees:  http://www.depositaccounts.com/blog/2011/03/the-12-cents-that-will-kill-your-debit-card.html

Link to Federal Reserve Debit Card Interchange Fee Proposed Rule:  http://www.federalreserve.gov/newsevents/press/bcreg/20101216a.htm 

(ag) March 26, 2010, in Federal Reserve

Fed Governor Speaks About the Effect of the Financial Crisis on Those Near Retirement and on Small Business Owners

 
Federal Reserve Governor Elizabeth A. Duke spoke yesterday on "Changed Circumstances: The Impact of the Financial Crisis on the Economic Condition of Workers Near Retirement and of Business Owners."

Here are some of her conclusions:

• "Among the preretirement age group, those who gained and those who lost wealth during the financial crisis generally appear to act as if they had lost wealth--in that there are signs of delayed retirement and greater desire to save and to avoid risk."
• "Business owners had much wider changes in wealth than those reported for the general population and the changes were related to the conditions of the industries in which the businesses operated."
• "Although business owners who experienced decreases in wealth were more likely to have been denied or to fear denial of personal credit, actual denial rates for business credit were about the same regardless of wealth outcomes." 

Link to speech:  http://www.federalreserve.gov/newsevents/speech/duke20110324a.htm

(ag) March 25, 2011, in Economy

 

CSBS Reports on ICBA Annual Meeting

Today's CSBS Examiner, the weekly publication from the Conference of State Bank Supervisors (CSBS), gave the following report from the Independent Community Bankers of America (ICBA) annual meeting in San Diego this week.

"Speaking to reporters, ICBA President and CEO Camden Fine indicated the biggest banks in the country remain “too big to fail,” but he is hopeful the Dodd-Frank Act can lessen the threat these firms pose to the entire financial industry in the future.  Fine called these institutions a “cancer on the body of the financial system” which pose tremendous risks to the system because of their size, the significant risks they take, and their inability to effectively manage those risks."

"In her presentation, FDIC Chairman Sheila Bair asserted her belief that Dodd-Frank gave regulators needed tools to address the too-big-to-fail problem “by extending the FDIC’s resolution process to large, systemically important financial institutions.”  Bair received a warm welcome from the ICBA, and gave credit to the organization for its participation and accomplishments during the legislative debate around Dodd-Frank.  “Dodd-Frank is not a perfect law,” Bair said.  “There are many things in it that I would like to change.  But, on balance, it is a good law and one which I think will strengthen, not weaken, community banks.”

"Elizabeth Warren, White House and Treasury Department special adviser, also addressed the group and assured community bankers that the Consumer Financial Protection Bureau (CFPB) would focus its efforts not on community banks, but on nonbank financial companies.  “I often make the point that the financial crisis began one lousy mortgage at a time,” Warren said.  “You and I know that those mortgages were seldom originated by America’s community banks.”"

"Federal Reserve Chairman Ben Bernanke also spoke at the convention and strove to assure the audience that the Fed would attempt to protect community banks as it finalizes its debt-interchange rule.  “In our rule-writing we will do everything we can and use all the powers we have to try and make sure that the carve-out [for community banks] is effective,” he said."

(ag) March 25, 2011, in Banking, Financial Regulatory Reform
 

Richard Fisher Speaks About Government Responsibility

 
 Richard Fisher, President and CEO of the Federal Reserve Bank of Dallas, is one of the most interesting, thought-provoking speakers on economic issues today.  He presents complex ideas in a way that is accessible to an every-day audience. 

His speech entitled "The Limits of Monetary Policy: ‘Monetary Policy Responsibility Cannot Substitute for Government Irresponsibility’" is well worth reading.

Link to speech:  http://dallasfed.org/news/speeches/fisher/2011/fs110112.cfm 

(ag) March 24, 2011, in Economy

FDIC Teleconference on Overdraft Protection Guidance

FDIC Financial Institution Letter FIL-16-2011 announces that FDIC will host a teleconference on Tuesday, March 29, 2011, to discuss FDIC's Final Overdraft Payment Supervisory Guidance.

This will be an opportunity to send questions in advance and hear FDIC Staff responses.  The Final Guidance was issued on November 24, 2010, and can be accessed in full on the FDIC website.  The issuance is FIL-81-2010.  Effective date for compliance is July 1, 2011.

The Guidance raises many serious questions, not the least of which is why FDIC is creating an unlevel playing field for the bank's it supervises:  State-chartered banks that are not members of the Federal Reserve System.  These will be the only banks subject to this "Guidance."  A better approach would seem to have been for all the bank supervisory agencies to discuss and issue a Joint Proposed Regulation, take comments, then issue a Joint Regulation.  Another approach would have been to leave this consumer protection issue to the Consumer Financial Protection Bureau (CFPB).

The fast-approaching effective date is another problem.  Banks are still absorbing the Federal Reserve's changes to Regulation DD and Regulation EE, issued last summer.

Defining "excessive and chronic customer use" of overdraft protection as "more than six occasions where a fee is charged in a rolling 12-month period" is unrealistic according to most bankers.

The idea that the bank should contact each customer who exceeds this trigger amount (6 occasions in a rolling 12-month period) by telephone or in person will be patently offensive to customers.  After reaching the trigger number of overdrafts, must the customer be recontacted by telephone or in person upon each successive overdraft?  This would be very unwelcome harrassment.

The guidance appears to say that the only reasonable order of check clearing is by order received or by check number is an unnecessary change from the previous requirement only that banks not manipulate the order of check payment so as to maximize fees.

What is a de minimis overdraft amount for which it is "suggested" that fees should be waived?

What are "appropriate daily limits" on number of transactions in a single day or dollar amount of fees in a single day?

What on earth does it mean for an account balance to be "at risk" of generating a fee for nonsufficient funds?  Will customers be getting a "text message, e-mail, telephone or cell phone" contact every time their account drops below, let us say, $100?  Harrassment again!  What about customers who keep small balances but never overdraw their accounts?

This "Guidance" has big teeth:  "Overdraft payment programs will be reviewed at each examination."  If the examiner determines that the program poses "unacceptable safety and soundness or compliance risks," that will be "factored into examination ratings and corrective action will be taken."

Link to Teleconference announcement:  http://www.fdic.gov/news/news/financial/2011/fil11016.html

Link to Final Overdraft Payment Guidance:  http://www.fdic.gov/news/news/financial/2010/fil10081.html

(ag) March 24, 2011, in Consumer Protection

Secondary Mortgage Market Reform

One of my points of focus over the next few weeks is Secondary Mortgage Market Reform.  I'll begin by posting a link to the Obama Administration's Report to Congress:  Reforming America's Housing Finance Market.

The Report traces U.S. housing finance from the Great Depression to the Great Recession.  It details fundamental flaws in the housing finance market and the failure of Fannie Mae and Freddie Mac.

The Obama Administration's Secondary Mortgage Market Reform Plan has three parts:

"1.  Pave the way for a robust private mortgage market by reducing government support for housing finance and winding down Fannie Mae and Freddie Mac on a responsible timeline.

2.  Address fundamental flaws in the mortgage market to protect borrowers, help ensure transparency for investors, and increase the role of private capital.

3.  Target the government's vital support for affordable housing in a more effective and transparent manner."

Link to Report:  http://www.treasury.gov/initiatives/Documents/Reforming%20America's%20Housing%20Finance%20Market.pdf

(ag) March 23, 2011, in Secondary Mortgage Market

Goldman Sachs' CEO Testimony in the Galleon Litigation

The Galleon insider trading case makes a great story:  High-profile companies and individuals, nefarious insider trading for personal gain, and the SEC's pursuit of truth and justice.  It could be a novel.

Lloyd Blankfein, CEO of Goldman Sachs, told the jury in the SEC's Galleon litigation that "former Goldman board member Rajat Gupta violated the firm’s confidentiality policies by allegedly telling Raj Rajaratnam about the firm’s earnings and strategic plans." 

The SEC charges that Raj Rajaratnam, the Galleon Group LLC hedge fund co-founder, traded on inside information about Goldman Sachs he obtained from Rajat Gupta. Gupta is alleged to have passed insider trading tips to Rajaratnam in exchange for personal gain of $1 million in September 2008 and avoiding millions of dollars in losses in October 2008.

Blankfein further testified that "Gupta had confidential information about Warren Buffett’s $5 billion investment in Goldman Sachs in October 2008, Goldman’s earnings projections for that quarter and strategic discussions the firm had about acquiring a commercial bank or insurance company in late June 2008."

Link to story:  http://www.bloomberg.com/news/2011-03-23/goldman-s-lloyd-blankfein-will-testify-today-in-galleon-trial.html

(ag) March 23, 2011, in Securities Law 

So That's Operational Risk

Douglas Robertson, "So That's Operational Risk! (How operational risk in mortgage-backed securities almost destroyed the world's financial markets and what we can do about it)," Office of the Comptroller of the Currency, Economics Working Paper 2011-1, March 2011, is available on the OCC website: http://www.occ.gov/publications/publications-by-type/economics-working-papers/2011-2009/working-paper-2011-1.html

Here's a brief description of the article:

"We describe the economic crisis that began in the U.S. mortgage market in late 2006 as a consequence of cascading operational failures linked to the securitization process. Operational risks including mortgage fraud, negligent underwriting standards and failed due diligence combined with modern finance to initiate a nearly catastrophic crisis in financial markets and a painful recession.

To avoid a repetition of such a crisis, we propose an asset inspection methodology that employs simple random sampling and direct verification of loan-level information."

(ag) March 22, 2011, in Economy

SEC's Insider Trading Litigation Against Galleon

SEC v. Galleon Management, LP, et al., 09-CV-8811 (SDNY) (JSR), was filed by the SEC on October 16, 2009, against Raj Rajaratnam, Galleon Management, LP, and others, alleging a widespread and repeated insider trading scheme involving hedge funds, industry professionals, and corporate insiders.

The New York Times reports that the SEC will call LLoyd Blankfein, CEO of Goldman Sachs, as a witness in the insider-trading trial of Raj Rajaratnam, the Galleon Group hedge fund manager.

Link to story:  http://dealbook.nytimes.com/2011/03/22/goldman-chief-expected-to-testify-at-galleon-trial/?ref=business

(ag) March 22, 2011, in Securities Law

FOMC Says Economy Is Improving

In the Federal Open Market Committee (FOMC) Statement released March 15, 2011, the Federal Reserve said that "the economic recovery is on a firmer footing."  The labor market is improving gradually. Household spending and business investment in equipment and software continue to expand. The housing sector continues to be depressed. Commodity prices have risen significantlyand concerns about global supplies of crude oil have contributed to a sharp run-up in oil prices in recent weeks.

Although the FOMC concluded that longer-term inflation expectations have remained stable and underlying inflation has been subdued.  The FOMC determined to maintain the target federal funds rate at 0 to 1/4 percent.

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20110315a.htm

(ag) March 21, 2011, in Economy/Interest Rates

Top 10 Consumer Complaints

The Federal Trade Commission (FTC) has released its list of the top ten categories of consumer complaints received by the FTC in 2010.  For the eleventh straight year, identity theft tops the chart.

Top 10 Consumer Complaints for 2010

1. Identity Theft
2. Debt Collection
3. Internet Services
4. Prizes, Sweepstakes and Lotteries
5. Shop-at-Home and Catalog Sales
6. Impostor Scams
7. Internet Auctions
8. Foreign Money/Counterfeit Check Scams
9. Telephone and Mobile Services
10. Credit Cards

Link to FTC Press Release: http://www.ftc.gov/opa/2011/03/topcomplaints.shtm

(ag) March 21, in Consumer Protection 

FDIC Chairman Sheila Bair Delivers Candid Remarks to ABA Government Affairs Summit

 
FDIC Chairman Sheila C. Bair spoke to the American Bankers Association (ABA) Government Relations Summit on March 16, 2011.  She noted that this might be her last opportunity to address the group before her term ends in June 2011.

Among her candid remarks, Chairman Bair said:

"I would like to propose to you a radical-sounding notion. And it is that increasing the size and profitability of the financial services industry is not – and should not be – the main goal of our national economic policy. Yes, as we found out in the Fall of 2008, banking is critically important to the ability of our economy to function. And in the wake of the crisis, it looks like bank lending will have to be an even more important ingredient in financing economic activity than it was just a few years ago.

But, in policy terms, the success of the financial sector is not an end in itself, but a means to an end – which is to support the vitality of the real economy and the livelihood of the American people. What really matters to the life of our nation is enabling entrepreneurs to build new businesses that create more well-paying jobs, and enabling families to put a roof over their heads and educate their children. In our national economic life, your contribution as bankers, and ours as regulators, can only be measured against this yardstick. And let's be completely honest – in the period that led up to the financial crisis we did not get the job done." 

Link to Remarks:  http://www.fdic.gov/news/news/speeches/chairman/spmar1611.html

(ag) March 20, 2011, in FDIC

 

The New ARMs

Adjustable Rate Mortgages (ARMs) were one of the easily abused loan products during the subprime lending heyday.  "Teaser rates" and payment options too complicated to understand left many unsophisticated borrowers facing loan interest rate repricing that could send their monthly mortgage payments skyrocketing beyond their ability to pay.

The New York Times reports that now lenders are making more conservative ARMs, without the gimmicks.

 "Mortgage brokers and lenders say the loans most in demand are the “5/1” and “7/1,” in which the initial interest rate is fixed for the first five or seven years — after which many homeowners typically think about selling or refinancing anyway — then adjusted annually at a capped rate toward a maximum level."

Link to story:  http://www.nytimes.com/2011/03/20/realestate/20Mortgages.html?_r=1&ref=business

(ag) March 19, 2011, in Lending Issues 

Congressional Oversight Panel Findings about the TARP Program

The Congressional Oversight Panel (COP) released its Final Report on the Troubled Asset Relief Program (TARP).  Congress initially approved $700 Billion for TARP in fall of 2008.  Although the final cost of the program is very much less than that, the report highlights other problems with TARP, including:

• Continued distortions in the market because of TARP
• Public anger towards government officials who designed and administered TARP
• Lack of transparency and accountability on the part of TARP
• Exascerbating "too big to fail" by protecting large banks from failure
• Magnifying moral hazard
• Higher cost of funds for smaller banks than for the largest banks

Link to Report:  http://cop.senate.gov/documents/cop-031611-report.pdf

(ag) March 18, 2011, in Congress, Financial Crisis