Banking Law Prof Blog

CFPA - Will it be a toothless tiger?

Consumer groups are disappointed in the House Financial Services Committee's plans to weaken the proposed Consumer Financial Protection Agency in response to powerful industry wishes.  A recent article from the consumer perspective refers to the new version of CFPA as "watered down," "less powerful," and "declawed."

Link to story:  http://consumerist.com/5367103/consumer-financial-protection-agency-gets-watered-down

(ag) Sept. 7, 2008, in Consumer Protection, Financial regulatory reform

New President for Minneapolis Fed

The Federal Reserve Bank of Minneapolis has named a new President to replace Gary Stern, who recently retired.  Effective Oct. 8, the new President and CEO is Dr. Narayana Kocherlakota (the website even tells us how to pronouce it:  Nair-ah-yah-nah Koach-er-lah-ko-tah).   Dr. Kocherlakota is currently a professor of economics at the University of Minnesota.

Link to Announcement: http://www.minneapolisfed.org/news_events/rel/2009/093009.cfm

(ag) Sept. 7, 2009, in FRB, Economy

Merrill Lynch . . . It's Back!

The more things change, the more they don't -- even with a government bailout or maybe especially with a government bailout.

Reuters reports that Bank of America is "relaunching" Merrill Lynch's name and bull logo.

Of course, Bank of America is still searching for a CEO in the wake of bailout-related scandal (as in why should I tell B of A shareholders anything about bonuses for Merrill Lynch execs?) but one of their spokespeople "called the Merrill Lynch operations and the U.S. Trust business, the other main unit, two of the industry's 'crown jewels,' adding that she feels the industry is beginning to rebound."  Either that or she feels (correctly) that the American public is beginning to develop amnesia as usual.

LInk to story:  http://news.yahoo.com/s/nm/20091005/bs_nm/us_bankofamerica_merrill

(ag) Oct. 5, 2009, in Economy

The Minneapolis Fed - Great Source for TBTF Research Papers

The Federal Reserve Bank of Minneapolis, under the leadership of recently-retired President Gary Stern, has a long list of papers addressing the issue of "Too Big to Fail."

Evolution of Minneapolis Fed Thought:

• Macrostability Ratings: A Preliminary Proposal, Gary Stern and Ron Feldman, June 16, 2009.
  Addressing the Too Big to Fail Problem,
• Gary Stern Testimony before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, Washington D.C., May 6, 2009 [PDF]
• Addressing TBTF by Shrinking Financial Institutions: An Initial Assessment Gary Stern and Ron Feldman, April 17, 2009, revised May 20, 2009
• Better Late Than Never: Addressing Too-Big-To-Fail,
  Gary Stern Speech, Washington D.C., March 31, 2009
• Banking Policies and Too Big To Fail,
  Gary Stern Speech, Minneapolis, Minnesota, March 26, 2009
• Prospects for Macro- and Financial Policy,
  Gary Stern Speech, St. Paul, Minnesota, February 5, 2009
• Prospects for Macro- and Financial Policy,
  Gary Stern Speech, Cedar Rapids, Iowa, January 14, 2009
• Too Big to Fail: The Way Forward
  Gary Stern Speech, November 13, 2008
• Policy and the Economy in the Wake of the Shock,
  Gary Stern speech, October 21, 2008
• Limiting Spillovers Through Focused Supervision, The Region, September 2008
• Message from the President
  Introducing the 2007 Annual Report Essay
• Managing the Expanded Safety Net, 2007 Annual Report Essay
• Repercussions from the Financial Shock, Gary Stern speech,
  August 14, 2008
• Too Big To Fail: The Hazards of Bank Bailouts, Excerpt from book by Gary H. Stern and Ron Feldman, The Region, December 2003
• More Information on Too Big To Fail: The Hazards of Bank Bailouts is available from Brookings Institution Press.

Link to Minneapolis Federal Reserve:  http://www.minneapolisfed.org/publications_papers/studies/tbtf/index.cfm

(ag) Oct. 5, 2009, in Financial Regulatory Reform, Economy

Bank Consolidation - Big Fish Gobbling Up Smaller Fish

Bank consolidation research led me to the graphical representation of bank consolidations to date which have produced the four largest U.S. banks:  Bank of America, JP Morgan Chase, Wells Fargo, and Citibank.

Enjoy:  http://www.creditloan.com/blog/the-great-bank-consolidation/

(ag) Oct. 4, 2009, in Economy

G-20 Becomes the Group to Watch

The Group of Seven (G-7) comprises the Finance Ministers of the U.S., U.K, France, Germany, Japan, Italy, and Canada.  G-8 includes these countries plus Russia.

The Group of Twenty (G-20) represents both developed and developing nations, including:  Argentina, Australia, Brazil, Canada, China, France, Germany, India , Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, U.K., U.S. and the EU.

The U.S. recently hosted the G-20 meeting in Pittsburgh.  G-7 Finance Ministers and Central Bankers are concluding a meeting in Istanbul, Turkey.  Their Statement issued Oct. 3, 009, commits to working with the other nations of the G-20. 

The G-20 brings together important industrial and emerging-market countries from all regions of the world. Together, member countries represent around 90 per cent of global gross national product, 80 per cent of world trade (including EU intra-trade) as well as two-thirds of the world's population.

See story:  World leaders relaunch G-20 as top economic forum:  http://www.guardian.co.uk/world/2009/sep/25/g20-reform-pittsburgh-developing-nations

See G-7 Statement:  http://www.g8.utoronto.ca/finance/fm091003.htm

Home Page for the G-20:  http://www.g20.org/

(ag) Oct. 3, 2009, in Economy

Point of Personal Privilege -- My Birthday!

It's My Party & I'll Cry If I Want To:

http://www.youtube.com/watch?v=WRbsz1Ha7Zo

Consumer Financial Protection Agency Legislation

Here's what the Conference of State Bank Supervisors (CSBS) reports today about the Consumer Financial Protection Agency (CFPA) debates on the Hill: 

"Chairman Frank Revises Consumer Protection Bill
 
Prior to Wednesday's hearing to gather additional viewpoints on the proposed Consumer Financial Protection Agency (CFPA), House Financial Services Committee Chairman Barney Frank (D-Mass.) released revised draft legislation (H.R. 3126) reflecting a number of changes in response to concerns raised by industry and consumer groups.

CSBS has analyzed the revised bill, noting provisions of interest to state bank regulators. The revised legislation changes the structure of the agency from a five person board to a single director, advised by an oversight board to include the Fed, FDIC, national bank supervisor, NCUA, FTC, HUD, and state representation by the chair of the FFIEC State Liaison Committee.

In  his revised bill, Chairman Frank inserted specific exemptions for certain types of non-financial firms such as retailers, accountants, tax preparation services, real estate brokers and agents, etc.

He also added registration requirements for nonbanks that provide consumer financial products.

The revised bill also changes funding requirements from appropriations and fees and other assessments to having the Federal Reserve transfer 10 percent of total expenses and sets up separate funds within Treasury to cover CFPA expenses for banks vs. nonbanks.

He also set up a dispute resolution mechanism and removed the original requirement that mandated financial institutions providers to offer "plain vanilla" products.

The revised bill maintains the original version's elimination of federal preemption of state consumer protection laws and allows states to go beyond federal standards.

CSBS's support of the measure is contingent on these provisions (elimination of federal preemption and preservation of the "floor not ceiling" provisions) and maintaining a significant role for state regulators in terms of coordination and consultation in rulemaking and examinations.  Additionally, CSBS supports examination by the prudential regulator.  Chairman Frank has indicated he plans to mark up the bill the week of October 12. "

Link to CSBS Examiner:  http://www.csbs.org/Content/NavigationMenu/PublicRelations/CSBSExaminer/Examiner.htm

(ag) Oct. 2, 2009, in Consumer Protection, Financial Regulatory Reform, Federal Preemption
 

Mortgage Electronic Registration System Threatened by Kansas Supreme Court Opinion

The Kansas Supreme Court recently found the the Mortgage Electronic Registration System (MERS), which is in the chain of title of approximately 60 Million real estate secured loans could not challenge a foreclosure action by a senior creditor.  The Kansas Court held that, although MERS is recorded as a mortgagee, it is not entitled to be served or joined as a party to the foreclosure of a senior mortgage because it is a mere nominee, and not a true obligee under the debt or holder of rights under the mortgage.

The case is Landmark National Bank v. Kesler.  This case and other challenges to MERS threaten banks in second lien positions.

Link to NY Times article:  http://www.nytimes.com/2009/09/27/business/27gret.html 

Link to blog posting by University of Missouri - Kansas City School of Law Professor Patrick A. Randolph, Jr. about the case:  http://dirt.umkc.edu/SEP2008/DD_09-18-08.htm

Thanks to Frisco, TX, attorney Roger Hood for bringing this case to my attention!

(ag) Oct. 1, 2009, in Lending Issues/Secondary Mortgage Market Issues

Conference on Piercing the Corporate Veil

Business lawyers and law professors should consider the "Conference on Corporate Separateness," to be held at Vanderbilt School of Law on November 6, 2009.

Presentations include:

Alan Dignam, School of Law, Queen May College, University of London
Abdicating Risk Allocation: The Changing Nature of Veil Lifting in the United Kingdom

Martin Gelter, Fordham University Law School,
Corporate Separateness in Continental Europe

Hideki Kanda, University of Tokyo,  
Tax and Other Determinants of the Barriers of the Corporate Box

Ciyun Zhu, School of Law, Tsinghua Univeristy
From Regulatory to Relief: Comments on the 2005 China Corporation Law and Disregard of the Corporate Entity

Keynote Speaker: Henry Hansmann, Yale Law School
   Legal Entities as Transferable Bundles of Contracts.

Panel Discussion: Margaret Blair, Vanderbilt University; Albert Choi, University of Virginia (visiting at Harvard Law); Ed Iacobucci, University of Toronto.

Response: Professors Hansmann and Kenneth  Ayotte, Northwestern University

Christina Boyd, University of Buffalo (political science) & David Hoffman,  Temple Law School, A Closer Look at Veil Piercing in Federal District Courts  (forthcoming Northwestern Law Review).

Peter Oh, University of Pittsburgh Law School, An Empirical  Analysis of Piercing the Corporate Veil in the United Kingdom and the United States

Alan Palmiter, Wake Forest Law School, Reflections on the Wake Forest Empirical Study, 43 Wake Forest L. Rev. 341 (2008) and Other Empirical Studies of Piercing the Veil

 Commentators: Cindy Schipani, University of Michigan, Stephen M. Ross School of Business; Randall Thomas, Vanderbilt University

Thanks to Professor Robert B. Thompson, Vanderbilt School of Law for calling this to my attention.

(ag) Oct. 1, 2009, in Corporate Governance

FDIC Proposes Requiring Banks to Prepay Deposit Insurance Premiums through 2012

The FDIC Insurance Fund will be insolvent this week -- but Chairman Sheila Bair has a plan:  Under the pending proposal, FDIC-insured banks would be required to prepay deposit insurance premiums through 2012.  That's enough to wipe out all earnings by the banking industry this year.  Besides that, assessments will increase substantially in 2011. 

Oh, and there's some funny accounting to go with the proposal:  Banks don't have to record the prepayment as an expense until it would have come due originally.  So, for "regulatory accounting purposes" (should still be a bad word from the S&L regulatory forbearance days of the 1980s crisis), these payments will show up on all banks' financial statements as an "asset" called "prepaid expense." 

The deposit insurance fund deficit, caused by the high number of bank failures and bailouts, could have been fixed by:  1. assessing the banks a higher amount right now, 2. getting a loan from some of the biggest banks, or 3. drawing on FDIC's line of credit at Treasury.  FDIC didn't want to choose the third option because it would have looked like another taxpayer bailout -- even though the loan would eventually be repaid through bank assessments.

Link to story: http://www.nytimes.com/2009/09/30/business/economy/30regulate.html?em=&adxnnl=1&adxnnlx=1254348103-/c2jE77CHL9r/1moKKOxnw

(ag) Sept. 30, 2009, in FDIC

What the IMF Says About the Global Financial System

Today, the International Monetary Fund said that "the global economy has turned a corner."  But we still need a thorough restructuring of the international financial system.

According to the IMF, the bank rescues and the stimulus package are workin.  However, problems in commercial real estate could present additional problems.

Link to NY TIMES article on the IMF's "Global Financial Stability Report":  http://www.nytimes.com/2009/10/01/business/global/01imf.html?_r=1

(ag) Sept. 30, 2009, in Economy

Executive Compensation - "Say on Pay"

The September issue of CFO Magazine has an article entitled "The Crackdown Continues" by Josh Hyatt.  It's referring to "say on pay" legislation that could give shareholders a referendum vote on executive compensation. 

I'm quoted!

Link to article:  http://www.cfo.com/article.cfm/14292511

(ag) Sept. 30, 2009, in Executive Compensation

Consumer and Banking Law Professors Support Consumer Financial Protection Agency

On September 30, 2009, the House Financial Services Committee, chaired by Representative Barney Frank, will hold hearings on H. 3126, titled “the Consumer Financial Protection Act” which would create an independent Consumer Financial Protection Agency.

Today more than seventy law scholars who teach in fields related to consumer law and banking law have signed a detailed Statement of Support demonstrating their strong views about the importance of this legislation.

I am one of the signatories to this letter urging Congress to put some teeth into consumer financial protection.

Link to Press Release:  http://law.hofstra.edu/NewsAndEvents/PressReleases/pressreleases_20090928_consumer.html

(ag) Sept. 29, 2009, in Consumer Protection/Financial Regulatory Reform

Systemic Risk Regulation for the EU

The European Union is proposing to establish a new European Systemic Risk Board (ESRB), an independent multi-member board to focus specifically on identifying risk to the stability of the EU financial system as a whole. 

 

This contrasts with proposals currently circulating in the U.S. to concentrate systemic risk regulation in the Federal Reserve, which already has a lot on its plate with regulating monetary policy.  Further, concentrating systemic risk regulation in the hands of one agency forfeits the benefits of different viewpoints and increases the risk that the Fed, acting alone, will miss the mark – as it did on former Federal Reserve Board Chairman Alan Greenspan’s watch when it held interest rates too low for too long, contributing to easy credit which fueled the subprime lending orgy.

 

LInk to Speech by Link to Speech by
Lucas Papademos, Vice-President of the European Central Bank, "Financial Stability and Macro-prudential Supervision: Objectives, Instruments and the Role of the European Central Bank, Address at Center for Financial Studies Conference on the ECB and Its Watchers XI, Goethe University, Frankfurt, Germany (Sept. 4, 2009), http://www.bis.org/review/r090908c.pdf

 

(ag) Sept. 28, 2009, in Financial Regulatory Reform

 

Lessons in Bank Consolidation Issues

From today's CSBS Examiner:

"For every problem, there is a solution that is simple, neat -- and wrong." – H.L. Mencken

"Dateline Perth, Australia - This just in. The continent "down under" has seen such consolidation in its 17-bank financial system that it's now dominated by four big banks. This doesn't sit well with former Prime Minister Paul Keating, who this week publicly chastised his successor for not doing more to preserve competition in the banking sector. According to a report in Perth Now, "Mr. Keating also warns that the growth of the big four banks during the global financial crisis presents a ‘systemic risk’ to the Australian economy."

Sound familiar? A world away, we find ourselves fighting the same "too big to fail" battle but with little evidence of the will in Washington that’s needed to resolve its root causes.    While painful to acknowledge, a handful of the biggest banks and Wall Street firms have become the new GSEs with implicit government backing and are competing against the 8,000 other banks whose lifelines are their own bootstraps.  Let’s hope that the lessons of Fannie and Freddie haven’t been lost in Washington."

(ag) Sept. 25, 2009, in Financial Regulatory Reform

Regulatory Turf Wars Impede Comprehensive Financial Reform

In the wake of the current financial crisis, the U.S. financial regulatory structure needs dramatic overhaul.  Following the Market Crash of 1929, the U.S. adopted many sweeping reforms that worked well for at least half a century.  We stand at another such crossroads.

It would be admirable if current regulators could look at the big picture instead of guarding their own territory.  Shilling for the status quo is not good for the country as a whole.

My review of OCC testimony before the House Financial Services Committee on September 23, 2009, yields stong concerns that the focus at OCC is much too self-centered.

1.  The OCC opposes giving the Fed, as systemic regulator, the power to override OCC.  Wait a minute, we would be talking about a situation that could affect the entire economy.  Why should national banks be exempt from nation-wide systemic regulation? 

2.  The OCC supports the proposed Consumer Financial Protection Agency (CFPA) in principle, but again argues that this new national approach should exempt national banks and allow OCC to enforce consumer protection laws.  The OCC did not have the resources or the will to do this job in the past.  What has changed?

The OCC opposes giving the CFPA any ability to check on compliance with consumer protection rules.  Again, why exempt national banks?  Each federal banking agency now has a special team of examiners who conduct "compliance exams" separate from "safety and soundness exams."  So there is no logical reason to oppose granting the agency responsible for writing all consumer protection regulations the power to examine all financial institutions, including national banks, for compliance with those same regulations.  Discussions about staffing the new agency suggest that the existing compliance examiners from all federal banking agencies, including OCC, would simply move to the new agency.  Why not assume that CFPA would cooperate with state and national agencies responsible for safety-and-soundness?  There is already a well-established, successful model for cooperation between Federal Reserve examinations and state bank examinations.  Surely the national bank regulator, whatever that may look like in the future, could also cooperate with others.     

3.  The OCC opposes any rollback of federal preemption that would allow states to address problems like predatory lending within their borders.  There's no mention of the fact situation in Cuomo v. Clearing House Association, in which national banks and the OCC stonewalled efforts to get more information about apparent racial discrimination in residential loans made by national banks in New York.  There's also no mention of the fact situation in Wachovia v. Watters, in which a nonbank state corporation engaged in mortgage lending purposefully escaped state regulation by becoming a subsidiary of a national bank.  Not a great track record of enforcing any kind of consumer protection or of cooperating with the states.  Absent dramatic changes, the OCC is not the place to lodge any kind of consumer protection powers.  As Congressional testimony indicates, OCC's only concerns focus on the fact that different standards in different states would cut into the profitability of national banks. 

4.  Of course, they support merging OTS into OCC.  Not that reasonable minds differ on this point, but it would be informative for the record to show the rationale, other than enlarging regulatory territory.  This gets one line in OCC's Congressional testimony:  "And we support the proposal to effectively merge the OTS into the OCC."

The purpose of this post is to express concern that all existing regulators should do what is best for the economy and financial institution regulation as a whole instead of shielding their own turf and their own regulated entities at the expense of a comprehensive financial regulatory structure.  No agency and no charter is an island.

Congress needs to take the difficult but statesman-like path to well-reasoned, comprehensive regulatory reform.  Otherwise, we'll be in the middle of the next financial crisis before we can fully recover from this one.

LInk to Testimony:  http://www.occ.gov/ftp/release/2009-110a.pdf

 (ag) Sept. 25, 2009, in Financial Regulatory Reform

 

Hot Off the Press: FOMC Statement Today

The Federal Reserve's Federal Open Market Committee (FOMC) met today and announced a unanimous vote to keep the target federal funds interest rate where it its:  0% to 1/4%.

The FOMC Statement indicated that economic activity has picked up after the severe downturn. 

The announcement also discussed current steps anticipated with respect to the Fed's assistance to the U.S. housing market through purchasing mortgage-backed securities:

"To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt.  The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010.  As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009." 

Link to FOMC Statement:  http://www.federalreserve.gov/newsevents/press/monetary/20090923a.htm  

Link to AP Story:  http://news.yahoo.com/s/ap/20090923/ap_on_bi_ge/us_fed_interest_rates

(ag) Sept. 23, 2009, in Economy/Interest Rates

The Bailout Makes a Full Circle? FDIC May Borrow Money from Banks to Stay Afloat

Well, if this doesn't beat all as a proposal!  FDIC needs to replenish the insurance fund it has drained to deal with bank failures.  In the past, FDIC has imposed fees or assessments on the surviving banks in the industry to build the fund back up.  Now, however, the American Bankers Association has endorsed a proposal (not a done deal yet) whereby large banks would loan money to the FDIC -- even though they themselves are still relying on FDIC guarantees and emergency subsidies.  This would allow FDIC to avoid drawing on a line of credit from Treasury and would keep this rebuilding of the insurance fund within the industry rather than tapping taxpayers. 

Link to story:  http://news.yahoo.com/s/ap/20090922/ap_on_bi_ge/us_banks_fdic_bailout

(ag) Sept. 22, 2009, in Economy, FDIC

Bank Overdraft Charges - Called on the Carpet Again

Many banks see overdraft charges as a great souce of fee income now that interest margins are slim.  The positive side of overdraft protection for customers is that they don't have to worry about bouncing the mortgage check.

Many customers, however, are livid about overdraft fees that they don't know they will incur and charges that are outrageously disproportionate to the amount of the overdraft itself.

Congress is sure to take up this hot topic.

Link to story:  http://www.washingtonpost.com/wp-dyn/content/article/2009/09/20/AR2009092002879.html?wpisrc=newsletter&wpisrc=newsletter&wpisrc=newsletter

(ag) Sept. 21, in Banking