Banking Law Prof Blog

Suspicious Activity Report News

FDIC Financial Institution Letter FIL-32-2008 (April 10, 2008) notifies banks that they can access the Financial Crimes Enforcement Network (FinCEN) publication "The SAR Activity Report by the Numbers."

Highlights of the report include the following:
1.  During 2007, Depository Institutions filed 324,694 SARs, down from more than 500,000 in both 2005 and 2006.
2.  In the first six months of 2007, Check Kiting filings increased 58% from the corresponding six months in 2006.
3.  Mortgage Loan Fraud SARs increased 35% from 2006.
4.  Identity Theft SARs are increasing.
5.  Texas depository institutions ranked third in number of filings for 2007, behind California at #1 (740,553 SARs) and New York (341,426).  Texas depository institutions filed 191,600 SARs in 2007).

List of top 10 categories of SARs for 2007:
1.  BSA/Structuring/Money Laundering - 48.02%
2.  Check Fraud - 10.54%
3.  Other - 8.87%
4.  Counterfeit Check - 4.93%
5.  Credit Card Fraud - 4.79%
6.  Mortgage Loan Fraud - 3.90%
7.  Check Kiting - 3.34%
8.  Identity Theft - 2.41%
9.  False Statement - 2.38%
10.  Defalcation/Embezzlement - 1.91%

Link to FinCEN Report:  http://www.fincen.gov/sars/sar_by_numb_09.pdf

(ag) April 22, 2008, in BSA/AML

LIBOR - Is It Reliable & What Does It Say About the Current Financial Crisis?

A disturbing article in the WSJ last week suggested that the London inter-bank offered rate (Libor) may be less than fully reliable because some troubled banks may not be reporting the high interest rates they must pay to secure loans from other banks.  Libor is calculated daily on the basis of information reported from banks worldwide.  Troubled banks might have been reporting that they are paying a lower interest rate than they actually are because they don't want to 'fess up that their financial condition is so bad that they must pay an extremely high rate to borrow funds from other banks.

Libor is the base rate for calculating the interest on all sorts of loans, so if Libor is reported to be artificially low, then borrowers whose loans bear interest at Libor plus a specified percentage rate will be paying an artificially low rate.  That would be good for borrowers in the short run, but if there's a readjustment of Libor those borrowers could get hit with a sudden increase and the economy would suffer commensurately.  In addition, if Libor is artificially low, it misrepresents the severity of the financial crisis because it hides the fact that, in actuality, more banks are having to pay a substantial risk premium because of their troubled condition than we can see reflected in Libor.

Link to April 16, 2008, Wall Street Journal Page 1 Article, "Bankers Cast Doubt on Key Rate Amid Crisis" by Carrick Mollenkamp:  http://online.wsj.com/article/SB120831164167818299.html?mod=todays_us_page_one

In response to concerns about Libor, the British Bankers' Association (BBA) which oversees Libor "fast-tracked" an investigation into Libor accuracy. 

(ag) April 22, 2008, in Economy

Hedge Funds Driving Up the Price of Gasoline & Other Commodities

My Corporate Governance class at the Texas Tech University School of Law was discussing Institutional Investors, including hedge funds, as a potential monitor for the boards of directors of publicly traded companies.  In the course of the discussion, we also talked about a big negative impact hedge funds and pensions funds are having on the current price of gasoline, corn, and other basic commodities.

Thanks to Tadd Tobkin for this controversial article which raises the argument that even Calpers, which most people think of as one of the most socially concerned institutional investors, must assume some blame for the fact that food prices in third world countries have risen to the point that people are starving -- a result of institutional investors "pushing a wall of money  into the $200bn  commodity index funds."

(ag) April 16, 2008, in Economy

Texas Steps Out with a NEW ID THEFT MEASURE

The 2007 Texas Legislature passed a bill establishing a new Closed Account Notification System ("CANS") -- the first example of this type of anti-ID theft measure in the U.S. 

The Texas Department of Banking administers CANS, which launched on March 1, 2008.  In an effort to combat identity theft, financial institutions such as banks and credit unions operating in Texas are required to submit information, at the request of their customer, concerning suspected compromised deposit accounts to a secure electronic notification system which then alerts all of the major check verification companies to the potential fraudulent activity.

Other states and the federal banking agencies will be watching this new system. 

Thanks to Stefan L. Jouret, with the law firm of Donovan Hatem LLP, Boston, MA, for calling this to my attention.

Link to Texas Dept. of Banking information about CANS: http://webarchive.loc.gov/lcwa0015/20080501220847/http://www.banking.state.tx.us//cve/memo03-18-08.htm

(ag) April 15, 2008, in Identity Theft

Fish Don't Know They Are Wet

Federal Reserve Governor Kevin Warsh delivered a speech entitled "Financial Market Turmoil and the Federal Reserve:  The Plot Thickens" to the New York University School of Law Global Economic Policy Forum today.

Warsh identifies excessive liquidity as the root cause of our current financial problems. He says,

"Some believe the story of the current market turmoil began in August, and will end when the housing market stabilizes. But, in my view, the narrative actually began in a seemingly more benign time with underpinnings more fundamental than the value of the housing stock. Financial institutions and other market participants grew increasingly dependent on the extraordinary liquidity around them. When liquidity faltered, the weaknesses of the existing architecture abruptly revealed itself."

"A metaphor, perhaps, is instructive: Fish don't know they are wet. And they don't learn unless their memories are long or the water is gone."

My take:  With all due respect, excessive liquidity is only one factor in a deepening disaster.  Warsh concludes this speech with a call to make liquidity a key consideration in the proposed reorganization of the financial regulatory structure.  I'm just not sure what that means, but here's what he says: 

"A new financial architecture, born of the forces of creative destruction, is early in the process of construction with the aid of the Federal Reserve and other public authorities. But for the new paradigmatic architecture to be enduring, market-supplied liquidity must come to predominate."

My take again:  ?????

(ag) April 14, 2008, in Economy

IRS Stats

Today's WSJ carries an article worth noting on Page B3:  "IRS Corporate Tax Audits Fall," by Jesse Drucker.  Surprisingly, the rate at which the IRS audits large corporations hit a 20-year low in 2007.  The audit rate for small businesses, however, is sharply increasing. 

(ag) April 14, 2008, in Economy

Economic News - Bad to Worse

Thanks to Sally Thompson for this intriguing look at the question, "Are Bernanke's Hands Tied? -- Eight Reasons Why the U.S. May Be in Worse Trouble Than You Think."

Link:  http://www.currencytrading.net/2008/are-bernankes-hands-tied-8-reasons-the-us-may-be-in-worse-trouble-than-you-think/

(ag) April 14, 2008, in Economy

Excessive Executive Compensation

All the scoop on current issues in Executive Compensation: 

http://www.nytimes.com/2008/04/06/business/06comp.html?_r=1&scp=2&sq=executive+compensation&st=nyt&oref=slogin

(ag) April 9, 2008, in Economy

OCC's Views on FHA Housing Stabilization & Homeownership Retention Act of 2008

Comptroller John Dugan presented the agency's views on the FHA Housing Stabilization and Homeownership Act of 2008 before Congress today.  This is basically a voluntary loan workout program with the lender taking a write-down and the borrower getting a refinanced FHA-guaranteed loan at the reduced principal amount. 

Link:  http://www.occ.gov/ftp/release/2008-38.htm

(ag) April 9, 2008, in Congress/Lending Issues

Housing Bubble? What Bubble?

Alan Greenspan denies all.  He claims that "the U.S. bubble was close to median world experience and the evidence that monetary policy added to the bubble is statistically very fragile."  He makes this disclaimer with a straight face, although under his leadership, the Federal Reserve reduced interest rates from 6.5% in late 2000 to 1% in June 2003 -- and kept rates at 1% through May 2004.  At 1%, it's almost like giving money away instead of lending it.

Link:  http://www.cnbc.com/id/23948760

(ag) March 7, 2008, in Economy

When the U.S. Sneezes - Effect of U.S. Financial Markets Problems in Latin America

Federal Reserve Governor Randall Krozner delivered a speech today highlighting an aspect of global economic issues we don't often see reported these days because we're so focused on our own U.S. troubles.

Link to speech to the Annual Meeting of the Board of Governors of the Inter-American Development Bank, Miami, Florida, "Global Economic and Financial Challenges: Implications for Latin America":

http://www.federalreserve.gov/newsevents/speech/kroszner20080404a.htm

(ag) April 4, 2004, in Economy

Credit Default Swaps -- and other issues relating to the Subprime Mortgage Collapse Explained

Yesterday, NPR interviewed Law Professor Michael Greenberger, who provided an explanation of the complex derivatives, such as credit default swaps, which are not transparent and, as a result, create a "shadow" economic impact which we still can't fully evaluate.

Link:  http://www.npr.org/templates/story/story.php?storyId=89338743

(ag) April 4, 2008, in Economy

The "R" Word

Federal Reserve Chairman Ben Bernanke finally said it.  He is quoted in today's WSJ as testifying before Congress' Joint Economic Committee on Wednesday that, "A recession is possible."

Of course, a rose by any other name would smell . . . and many have been thinking the same thing even before Chairman Bernanke named our fear.

Links to other news reports:  http://www.bloomberg.com/apps/news?pid=20601087&sid=aKXpOkaCuAy4&refer=home

http://www.msnbc.msn.com/id/23917696/

http://news.yahoo.com/s/ap/20080402/ap_on_bi_ge/bernanke_congress

(ag) April 3, 2008, in Economy

Revamping the US Financial Institution Regulatory System

Everyone's in the midst of reviewing the Paulson Report but here's a viewpoint we don't see adequately expressed in that report:  How does federal agency dependence on charter revenue and the power that flows from number and asset size of entities regulated influence the quality of regulation?

Check out Ed Mierzwinski's Blog.  He's with the U.S. Public Interest Research Group.  He says that his inspiration for this graphic was "March Madness" -- or maybe it was subprime madness.

Ed's representation of federal regulator as industry cheerleader: 

Link to Ed's blog:  http://static.uspirg.org/consumer/archives/2008/03/former_occ_bank.html

(ag) April 3, 2008, in Federal Banking Agencies

Warren Buffett Comments on the Subprime Mortgage Lending Crisis

Excerpt from Warren Buffett's current Letter to Berkshire Hathaway Shareholders: 

"Some major financial institutions have, however, experienced staggering problems because they engaged in the “weakened lending practices” I described in last year’s letter. John Stumpf, CEO of Wells Fargo, aptly dissected the recent behavior of many lenders: “It is interesting that the industry has invented new ways to lose money when the old ways seemed to work just fine.”

You may recall a 2003 Silicon Valley bumper sticker that implored, “Please, God, Just One More
Bubble.” Unfortunately, this wish was promptly granted, as just about all Americans came to believe that house prices would forever rise. That conviction made a borrower’s income and cash equity seem unimportant to lenders, who shoveled out money, confident that HPA – house price appreciation – would cure all problems. Today, our country is experiencing widespread pain because of that erroneous belief.

As house prices fall, a huge amount of financial folly is being exposed. You only learn who has been swimming naked when the tide goes out – and what we are witnessing at some of our largest financial institutions is an ugly sight."

Link:  http://www.berkshirehathaway.com/letters/2007ltr.pdf

(ag) April 2, 2008, in Lending Issues