postings by Adam Levitin

Dodd-Frank 2.0: The Unfinished Business of Financial Reform

posted by Adam Levitin

Our former co-blogger, Senator Elizabeth Warren, delivered an incredibly important speech yesterday laying out the work still to be done on financial reform. This speech is a bigger deal than Senator Warren's Antonio Weiss speech or her famous Citibank speech. This speech is a blueprint for Dodd-Frank 2.0.  It lays out a detailed vision of the challenges for reform work going forward:

  • break up the big banks;
  • a 21st Century Glass-Steagal Act that promotes narrow banking;
  • a targeted financial transactions tax to reduce unnecessary volatility from excessive arbitrage;
  • elimination of the tax system's preference for debt over equity financing, a limit on the Fed's emergency lending authority;
  • a simplification of the financial regulatory system (does this as presaging a reduction in the number of bank regulators? The SEC should certainly feel the heat from this speech...);
  • reforms aimed at the various types of short-term debt that are the hallmark of the shadow banking sector (money market mutual funds, repo). 

There are three remarkable things about this speech.  First, what is truly groundbreaking is that Senator Warren recognizes that the problems in the financial regulatory space are not just technocratic ones but political, and that technocratic fixes will never work until and unless the political structure of financial regulation is reformed.  Senator Warren's speech says exactly what needs to be said:  the power of large financial institutions not only threatens our economy, it threatens our democracy. Senator Warren has picked up the mantle of Teddy Roosevelt. 

Second, as a political matter this speech announces a reform offensive. Since the high-water mark of Dodd-Frank's passage in 2010 we have seen a steady push for deregulation. For Senator Warren to take the offensive here, particularly when her party is in the minority in both houses of Congress shows real moxie. That this speech is credible in such political circumstances is also a testiment to its substantive strength. 

Third, this speech presents the only vision for financial reform in the policy space. (OK, I guess the "deregulate 'em all" approach is a vision of sorts, but come on...) There isn't a competing right or left alternative out there.  No one else has a cohesive reform platform.  I think that makes Senator Warren's speech all the more important because this is the speech that will shape the policy field going forward into 2016.  This is the yardstick against which all presidential candidates, Democratic and Republican will be measured. It will be interesting to see which ones endorse what parts of Warren's vision and how enthusiastically. Silence will be particularly telling, as it is a vote for the dysfunctional status quo that leaves the Too-Big-To-Fail banks intact and growing. 

Read the speech.  This is important. 

 

Insurance Capital Games and PMI Reinsurance Kickbacks

posted by Adam Levitin

The New York Times carried an important story about the risky investment moves of life insurance companies. There's a lot of good stuff in the story, but it missed an important angle, namely the consumer harm that has already resulted from bank affiliation with captive reinsurers in the private mortgage insurance space, namely inflated and unecessary private mortgage insurance premiums because of illegal kickback arrangements. 

Continue reading "Insurance Capital Games and PMI Reinsurance Kickbacks" »

Clickwrap Contracts and the Federal Government

posted by Adam Levitin

The government is a major player in the marketplace as a buyer of goods and services, but legal scholars seldom pay attention to the law governing federal acquisitions. As it turns out this nearly completely ignored branch of contract law is actually way ahead of the curve, at least on the question of shrinkwrap and clickwrap contracts.  Title 48 of the Code of Federal Regulations contains the Federal Acquisition Regulations promulgated by the General Services Administration. Among them is a true gem that was promulgated in 2013 that addresses contracts that purport to bind the government to indemnify the government contractor in violation of the Anti-Deficiency Act:

If the EULA, TOS, or similar legal instrument or agreement is invoked through an “I agree” click box or other comparable mechanism (e.g., “click-wrap” or “browse-wrap” agreements), execution does not bind the Government or any Government authorized end user to such clause.

If such a provision is good enough for Uncle Sam himself, shouldn't it be good enough for the taxpayers who would ultimately foot the bill? Contract law went off on a very bad trajectory when courts began to uphold clickwrap contracts based on arm-chair economics efficiency theories. It may well be that such contracts are efficient, at least in some cases, but contract law has never been solely about efficiency. Absent some meaningful evidence of a meeting of the minds between counterparties, it is hard to conclude that we are getting the mutual gains from trade we hope contracts produce, and a mere click isn't very good evidence of assent to particular terms. Hopefully the Restatement-in-Progress of the Law of Consumer Contracts will take note. 

Rodgin Cohen: Pay No Attention to That Man Behind the Curtain

posted by Adam Levitin

The Wall Street Journal ran a story today about H. Rodgin Cohen, the Senior Chairman of Sullivan & Cromwell and "one of Wall Street's top lawyers" decrying "the myth of regulatory capture." All I can say is wow. That's some chutzpah. 

For Rodgin Cohen to downplay regulatory capture is a like the scene in the Wizard of Oz when the Wizard says, "Pay no attention to that man behind the curtain." It's hard to think of an individual more at the center of the regulatory capture phenomenon than Rodgin Cohen.  Cohen plays a particular and unique role in the regulatory capture problem. Cohen is not just "one of Wall Street's top laywers". He is the top bank lawyer. He's a node through which all sorts of connections happen. Cohen is the eminece grise of financial services law and is an institution unto himself. Think of him as a sort of super-consiglieri or Mr. Wolf. There's no one who quite plays the role of Cohen in the world of financial regulation, and he's rightly greatly respected. 

I don't think of Cohen as an anti-regulatory ideologue (heck, regulation is how he earns a living), but he is deeply implicated in the regulatory capture problem because his strong suit is mediating between financial institutions and regulators. His job is to convinece regulators that they are on the same team as the banks and to get issues resolved quietly and out of the spotlight. Cohen, for example, was a drafter of the little noticed 1991 amendment to section 13(3) of the Federal Reserve Act that enabled the Fed to bailout non-banks like AIG and Goldman Sachs. Cohen's skill in persuading regulators to advance the financial services' industry's agenda is part of why Cohen is so respected and valued. But it also means that for him to admit that there's a capture problem of any sort would be to admit that financial institutions and regulators do not have aligned interests and to recognize that he's an advocate for financial institution clients, whose interests are not those of the public. And that would undercut the very sort of cozy relationship between banks and regulators that he aims to foster. Cohen's success is based in part on capture, so he's the last person who'd want it to go away. 

Continue reading "Rodgin Cohen: Pay No Attention to That Man Behind the Curtain" »

Community Banks and the CFPB

posted by Adam Levitin

I'm testifying before the House Financial Services Committee on Wednesday at a hearing entitled "Preserving Consumer Choice and Financial Independence." I'm the only non-industry witness (no surprise there). For those interested, my testimony is linked here.  Here's the highlight:  

Community banks face a serious structural impediment to being able to compete in the consumer finance marketplace because they lack the size necessary to leverage economies of scale. The CFPB has repeatedly acted to ease regulatory burdens on community banks in an attempt to offset this structural disadvantage. While community banks continue to face serious problems with their business model, their profits were up nearly 28% in the last quarter of 2014 over the preceding year, which strongly indicates that they are not being subjected to stifling regulatory burdens.

Ultimately, if Congress wants to help community banks, the answer is not to tinker with the details of CFPB regulations... Instead, if Congress cares about community banks it needs to take action to break up the too-big-to-fail banks that receive an implicit government guarantee and pose a serious threat to global financial stability. Until and unless Congress acts to break up the too-big-to-fail banks, community banks will never be able to compete on a level playing field. 

SPOE: Backdoor Bailouts and Funding Fantasies?

posted by Adam Levitin

I'm thrilled that Jay Westbrook has finally come into blogosphere with his posts on Single-Point-of-Entry.  I've blogged a little on SPOE already, but I want to highlight what I still think are two critical problems with SPOE.  In keeping with Jay's spirit, let's call them "Backdoor Bailouts" and "Funding Fantasies". 

Continue reading "SPOE: Backdoor Bailouts and Funding Fantasies?" »

Translating the Warren-Yellen Exchange

posted by Adam Levitin

Senator Elizabeth Warren surprised a lot of people by laying into Federal Reserve Board Chair Janet Yellen as hard as she ever laid into Timothy Geithner. I think this was a really important exchange. But it's easy to miss exactly what's being communicated in it. Senator Warren's comments can basically be translated as follows:  

"Janet, I like you, but let me level with you. You need to replace your General Counsel, pronto. He's not on the same page about regulatory reform, and it's a problem. There's really no place for obstruction by Fed staffers, even the General Counsel. It's time for him to go."

There was a further subtext, though, that I think should be highlighted, and that's "What you do about your GC is a shibboleth about whether you're serious on regulatory reform."

Continue reading "Translating the Warren-Yellen Exchange" »

A 21st Century Trust Indenture Act?

posted by Adam Levitin

MBS investors suffered a serious legal blow a couple of months back when the Second Circuit held that the Trust Indenture Act of 1939 doesn't apply to MBS

The Second Circuit's decision hinges on treating a "mortgage" as a "security." That's rather counterintuitive.  The Trust Indenture Act doesn't define "security," but refers to the Securities Act's definitions. The Securities Act defines "security" to include "any note" but the definition bears the caveat "unless the context otherwise requires." I'd think that the context would have pretty easily counseled for reading "note" not to include residential mortgages. What the Securities Act is trying to pick up are issuances of corporate notes.

Frankly, I think the Second Circuit's reading (and the resulting decision) are absurd.  First, it is hard to see any context in which "note" should be read to include "residential mortgage" (especially in light of all of the other things that constitute a "security" under the Securities Act, when Congress could easily have included a "mortgage" in the definition).  Second, the Second Circuit's reading arrives at an absurd policy result.  It excludes from the Trust Indenture Act the very sort of securities (proto-MBS) that were the driving force behind the creation of the Trust Indenture Act of 1939 (and the NY state Trust Indenture Act of 1935 before that).  The groundwork for the federal Trust Indenture Act was a 1936 SEC report authored by William O. Douglas, Jerome Frank, and Abe Fortas (among others) that documented in incredible detail the abusive role of trustees in mortgage bond reorganizations.  (While bankruptcy scholars have tended to focus on the railroad reorganizations chapter of the report, the real estate chapter is just as important, and goes a long way to understanding why Douglas was such a champion of the absolute priority rule.)

The point here isn't to belabor a questionable decision by the Second Circuit (which did not mention the policy issues in its decision, but I don't know if they were argued), but to underscore the ruling's consequence. At least in the 2d Circuit, it's now clear that MBS investors are not protected by the Trust Indenture Act, and that's a bad thing. This decision means that there's very little (if anything) protecting investors from wrongdoing by MBS trustees, whether acts of omission (e.g., failing to police servicers) or commission (e.g., entering into sweetheart settlements of rep and warranty liability). This is exactly what the Trust Indenture Act was supposed to prevent. If Congress cares about investor protection, it's time to devise a 21st century Trust Indenture Act. 

[Update:  A state securities regulator emailed me to draw my attention to the Supreme Court's 1990 decision in Reves v. Ernst & Young.  That decision expressly adopted an older 2d Circuit case's test regarding what is a security. That case excluded residential mortgage loans from the definition of "security" in the context of a securities fraud action. The 2d Circuit cited to its older decision (but not the Supreme Court's subsequent adoption of its test), but said that the context was different. Unfortunately, the 2d Circuit didn't think it was necessary to explain what about that context was sufficiently different to merit a different result. I can't see any plausible contextual distinction. There's really no context in which loans made for personal, family, or household purposes should ever be considered securities. They are subject to entirely different regulatory regimes, they are part of different markets, and no one would ever think to refer to such loans as securities. Except, apparently the 2d Circuit. It's one thing to arrive at the wrong conclusion after a serious analysis, but I am troubled that the 2d Circuit didn't bother to explain itself in this context.]  

 

Hacking and Systemic Financial Risk (Encore)

posted by Adam Levitin

The data breach stories just don't seem to stop. (And why would they?). The latest (I think) is about a massive and sophisticated multi-million dollar hacking of several banks.  If you read down through the story, one of the things the hackers did was manipulate the balances of real accounts.  They'd change a real $1,000 balance to $10,000 and then have $9,000 wired to an account at another institution.  

But why take out only $9,000?  The hackers were being nice, I suppose, in that they didn't steal any actual depositor's funds (as far as we know). And that was also probably smart, because if they zeroed out an account, there might be a bounced transaction that would alert the consumer and then the bank to the theft.  But I don't know that we can count on future hackers being so polite, considerate, or careful. Indeed, they might actually want to create havoc by messing with account balances.  

I raised this scenario several months ago, and before that a couple of years ago. I think today's news confirms that the financial Armageddon via hacking scenarios I have nightmares about aren't totally farfetched. Between state-sponsored hacking (I'm looking at you DPRK), terrorist hacking (ISIS and Newsweek), and rogue individuals, I think we're looking at a matter of when, not if, we see consequences from financial hacking that go beyond a few hundred million in losses and result instead in institutions failing. 

Man Bites Dog! Regulatory Edition

posted by Adam Levitin

I woke up this morning to see an abstract of a paper entitled Is Regulation to Blame for the Decline in American Entrepreneurship? When I saw that one of the co-authors was on the George Mason University economics faculty, I said to myself, "Well I know how this plays out." But then I read the abstract, which concludes: Federal regulation has had little to no effect on declining dynamism."

I wonder what the same commentators who trumpeted the "Dodd-Frank is killing community banks" stuff will think of this paper. I'm personally skeptical that one can measure the stringency of regulation in any quantifiable way, much less for different industries, but I'll just flag that this paper is out there.

Size Matters: Community Banks' Real Problem

posted by Adam Levitin

Community banks are ailing.  Over the past decade many of them have failed or been gobbled up by larger banks. What's going on? 

A new study by a fellow and a masters student at the Harvard Kennedy School of Government thinks it has found the culprits:  Dodd-Frank!  The CFPB!  Regulation! Not surprisingly, this paper is already getting circulated by bank lobbyists as a prooftext for their anti-regulatory agenda. 

Let me make no bones about this study. It is gussied up to look like serious academic research, with footnotes and working paper series cover page, but don't let looks fool you. The study doesn't conform with basic norms of scholarship, such as discussing contrary evidence and having conclusions flow from evidence. Instead, the study is really a mouthpiece for a big bank anti-regulatory agenda that pretends to really be looking out for community banks.  

I'm not going to spend the time on a full-blown Fisking of this piece, but let me point out some serious problems and then talk about the real problem facing community banks and how big banks exploit community banks' problems to advance their own agenda. 

Continue reading "Size Matters: Community Banks' Real Problem" »

Sh*t In, Sh*t Out? the Problem of Mortgage Data Corruption & Empirical Analysis

posted by Adam Levitin

Empirical economic analysis is a powerful tool. It can elucidate correlations and sometimes even get us to causual explanations. But it has a serious weak-spot:  its value is entirely dependent upon the integrity of the data analyzed. To put the problem succinctly: sh*t in, sh*t out.

This brings us to analyses of the housing bubble. There's a sizeable academic literature on the housing bubble (and relatedly also expert witness reports on loss causation in MBS litigation) that rely on loan-level data. The problem is that a lot of that loan-level data is suspect. That should hardly be a surprise: the industry even referred to some products as "liar loans". And there were also FBI Mortgage Fraud reports indicating an uptick in mortgage fraud. But it was easy for economists to ignore the data integrity problem as long as the problems were merely anecdotal (e.g., the mariachi musician with the six-figure income), and could be blissfully assumed to only affect a small number of loans.

No longer. It's hard to show mortgage fraud empirically, but there's a growing empirical literature about mortgage fraud. There are now a couple of academic studies demonstrating significant inflation of borrower income on loan applications (here and here and here and here and here). (To be clear, this does not mean that the income was inflated by the borrowers. It could be inflated by either borrowers or lenders, including loan brokers.) There's also a Fitch Ratings report from late 2007 that shows questionable stated income, employment, FICO scores, property occupancy status, and appraisals on a large percentage of a small sample of subprime loans. 

I want to emphasize that this literature does not undermine all empirical work on the housing market during the bubble years. But it should give us pause when considering any analysis that relies on either loan-level or pool-level loan characteristics such as income, DTI, FICO, occupancy status, and LTV/CLTV. I suspect that the empirical mortgage fraud literature will not deter many economists from plowing ahead whenever their data produces a regression with statistical significance. And the studies might well be right in the end. But it should tell the rest of us to consume the studies with a grain of salt.

The Disappearance of HOEPA Loans

posted by Adam Levitin

While I'm on the subject of dead markets, what about HOEPA loans? HOEPA loans are super-high-cost loans that qualify for special consumer protections under the Home Owners Equity Protection Act of 1994. (Yes, that's the one that directed that the Fed "shall" implement a rule on abusive lending, which the Fed understood to be discretionary until 2008.) 

HMDA data has previously been a bit of a pain to manipulate to get summary statistics--big data sets and annoying variable labels.  No longer. The CFPB has an amazing on-line HMDA data tool that is a lot of fun to explore. The CFPB's created the Rolls-Royce LoPucki-BRD of HMDA data.  It's a real public service. My only complaint is that the CFPB only has data going back to 2007. Hopefully the Bureau will add in 2005-2006, at least (there was a reporting change in 2004). The Urban Institute also has a nice HMDA data page, but it's really more for power users. 

OK. So what's gone on with HOEPA loans? HOEPA status was always a kiss of death, but in 2005, there were 35,980 HOEPA loans made. In 2013 (still under the same definitions), there were just 1,873. That's a 95% decline in HOEPA lending. Now it might well be that lenders are making lots of loans just under the HOEPA reporting thresholds. But there's little reason to think that they suddenly started doing that in 2013--that trick's been around for a while. Instead, what we're seeing is that high-cost mortgage lending has simply disappeared in the United States, much more so than lending has contracted in general.

Just How Dead Is the Private-Label MBS Market?

posted by Adam Levitin

Pretty darn dead. In 2014, there were all of 22 private-label RMBS deals. These deals provided $5.67 billion in financing for 7,342 mortgages. Let that sink in for a second. The private-label market financed fewer home mortgages than were made in the District of Columbia last year.  

Perhaps the private-label market's defenders will finally accept that it is a seriously broken market and that fixing it isn't just a matter of interest rates moving a few basis points. This is a market that needs to take major steps to restore investor confidence, and that means, among other things, a total redesign of servicing/trustee compensation structures and roles and a major standardization of deal documentation so that investors won't have to worry about what language got snuck in on page 73 of a 120 page indenture.

Bankruptcy Valuations: A Pair of Modest Proposals

posted by Adam Levitin

I want to take up Michelle Harner's call for "innovation and new approaches to valuation". Valuation may well be the most important issue in bankruptcy, and it is also the issue that is least subject to meaningful judicial review. Imagine a Court of Appeals trying to parse through discounted cash flow models or what are proper comparables. The lack of meaningful appellate review makes it all the more important that we get valuation right. 

Continue reading "Bankruptcy Valuations: A Pair of Modest Proposals" »

Second-Liens and the Leverage Option

posted by Adam Levitin

Susan Wachter and I have a new (short!) paper up on SSRN. It's called Second-Liens and the Leverage Option, and is about the curious absence of negative pledge clauses in US home mortgages, which enabled enormous amounts of second-lien leverage (much more than anyone realized) during the housing bubble. We have a very simple, narrowly tailored legislative fix that should make additional mortgage leverage via junior liens a bargained-for matter between the borrower and the senior lienholder(s), rather than an absolute right of the borrower. 

Abstract is below the break:

Continue reading "Second-Liens and the Leverage Option" »

Antonio Weiss Nomination Post-Mortem

posted by Adam Levitin

There've been a bunch of post-mortems of the Antonio Weiss nomination in the press the last few days (see, e.g., here, here, and here). When I read them I often feel like I'm reading a story about a kid who went to a fancy eastern boarding school, where he was head of the literary society, lettered in three sports, and did lots of charity work, but didn't get into the Ivy League school where all of his family and family friends went. The result: shock and outrage that the kid was denied his birthright! 

Being nominated for Undersecretary of the Treasury isn't quite like getting into Harvard (or even Yale). Yet reading Weiss's defenders' (and their all-too-willing jouralist abetters), one would think that's the story. And that underscores precisely what the problem was with the Weiss nomination, and what Weiss's defenders just don't get (or want to admit they get): the assumption that Wall Street success entitles someone to an important policy position for which they have no apparent qualifications.

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Betting on the House: The Dueling Caesar's Bankruptcies

posted by Adam Levitin

It's turning into a wild week in Chapter 11 with the dueling bankruptcy petitions for Caesar's Entertainment.  On Monday, an involuntary petition was filed in Delaware against Caesar's by some of its Second Lien noteholders. Today, Caesar's filed a voluntary petition in the Northern District of Illinois. It's not the year of the Four Emperors yet, but it is the year of the Two Caesar's petitions.  

So what's going on? Here's the story, at least as I've been able to figure out so far.  It's a sordid and quite fascinating tale of private-equity vs. hedge funds grappling in an age-old bankruptcy dance: the squeeze play. 

Continue reading "Betting on the House: The Dueling Caesar's Bankruptcies" »

Corporate Recidivism? Ocwen's Charter Problems

posted by Adam Levitin

Last month mortgage servicer Ocwen (that's NewCo backwards) was mauled by the NY State Department of Financial Services. Now the California Department of Corporations is seeking to revoke Ocwen's license to do business in that state. 

Here's the thing that is often forgotten:  this ain't the first time!  Ocwen used to be a federal thrift. In 2005, however, Ocwen "voluntarily" surrendered its thrift charter in the face of predatory lending/servicing investigation. And here we are, a decade later. What's changed?  By the NY and California allegations, not much. In other words, we're looking at a potential case of corporate recidivism. I'll refrain from commenting on the merits of the allegations, but there should be zero tolerance for corporate recidivism. 

Continue reading "Corporate Recidivism? Ocwen's Charter Problems" »

Safe Banking

posted by Adam Levitin

Just in time for the new year, I've got a new article called Safe Banking up on SSRN. The article is a first principles reexamination of the industrial organization of financial services. It identifies the institutional combination of deposits and lending as the key problem in our financial system. We've developed an enormous financial regulatory state to attempt to hold these lending and deposits together, but it might be time to admit that bank regulation just doesn't work and can't. Our bank regulatory system is simply too complex and too politicized to work flawlessly as it must.

My solution is a radical, yet conservative structural change that has become possible because of recent technological and market changes: mandate the institutional separation of deposits from lending in both traditional and shadow banking markets, a reform I call "Pure Reserve Banking". Pure Reserve Banking means 100% reserve banking plus withdrawal of the entire panoply of government support and subsidization of shadow banking products. There's a host of financial stability and political economy benefits that would flow from such a change, but at core Pure Reserve Banking means ending the subsidization of a volatile growth economy in which gains are privatized and losses socialized and shifting to a more stable—and inherently equitable—growth economy.

The abstract is below the break:

Continue reading "Safe Banking" »

Daaaaaaa-rryl...

posted by Adam Levitin

We're talking softball, from Maine to San Diego...  

We're talking Homer,

Ozzie and the Straw...

281574-Strawberry

The IRS is auctioning off a deferred annuity the Mets owe to Darryl Strawberry (yup, the Mets are still paying for Darryl).  What does this have to do with the Slips besides our love of the Simpsons? The annuity had been subject of a bankruptcy dispute between the Service and Strawberry's ex-wife. And, let's not forget the Wilpon family's experience with the Madoff bankruptcy.

Mortgage Servicer Privity with Borrowers

posted by Adam Levitin

A lot of the mortgage servicing litigation over the past seven years has faltered on standing issues. Does the borrower have standing to sue the servicer? This has been a problem for RESPA and HAMP suits, where there are questions about whether there is a private right of action, as well as for plain old breach of contract actions. The point I make in this post is that borrowers almost always have standing to sue the servicer for a breach of contract action arising out of the mortgage loan contract itself because the servicer is an assignee of part of the mortgage note. This was an issue that lurked in the background of a case I recently testified in, and I think it's worth highlighting for the Slips readers.  

A lot of courts have misunderstood the nature of the servicing relationship vis-a-vis the borrower and assumed that because the servicer is not expressly a party to the note and security agreement that there is no privity between the borrower and servicer and hence the borrower cannot maintain a breach of contract suit.  That's wrong. The servicer is not on the note or the security agreement, but the servicer is an assignee of the note, just like the securitization trust, and that provides all the privity needed for a breach of contract suit.  

Continue reading "Mortgage Servicer Privity with Borrowers" »

For the Soul of the Party: the Budget Showdown and Financial Reform

posted by Adam Levitin

Will we have an appropriations bill before a government shutdown? The fight over the 2015 Appropriations Bill is now focused on one of the non-appropriations measures stuck onto the bill by the House GOP. That provision would repeal section 716 of the Dodd-Frank Act, which prohibits bailouts of swap entities and pushes certain types of particularly risky swaps out of insured depositories. Section 716 might be thought of as the "Banks Aren't Casinos" provision of Dodd-Frank.

On the surface, the fight about section 716 looks like a partisan squabble. But the real issue is the internal Democratic Party struggle going on because if the Democratic leadership doesn't force party discipline in opposing the appropriations bill with this provision, the appropriations bill will likely pass. The outcome of the internal Democratic debate is frankly more important than whether section 716 gets rolled back. (I write that because I don't think the no-bailouts prohibition in section 716 is credible or that any prohibition on bailouts can be credible. When things get hairy, we'll bail, law be damned.) No, what matters here is how Democrats line up. The fight over section 716 is a struggle for the soul of the Democratic Party.

Continue reading "For the Soul of the Party: the Budget Showdown and Financial Reform" »

Why the World Hates Lawyers

posted by Adam Levitin

Why does the world hate lawyers?  Because of stuff like this.  You can't make this up:  the on-line menu prices for a Chinese restaurant weren't up-to-date, and a customer was overcharged $4. I get being pissed about that.  But what would most people do?  Just lump it, stop patronizing the restaurant, ask the restaurant for a refund, or complain to the credit card issuer. But in this case, the customer has a JD (and to make it more delicious, happens be a Harvard Business School professor). The professor decides to go all legal on the restaurant, demanding $12, as treble damages under Massachusetts' unfair and deceptive acts and practices (UDAP) statute, MGL 93a (even citing the statute!).  

I get why people would be hating on the professor for that alone. But here's what really peeves me. He gets MGL 93a wrong!!!  (I happen to teach this statute.) The professor is demanding something that he almost assuredly cannot get under law.

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What Qualifies an Investment Banker to be a Regulator?

posted by Adam Levitin

As the Antonio Weiss nomination contest heats up, I'd like to pose a question that seems to be taken for granted by Weiss's supporters, namely that he's obviously qualified for the job.  As far as I can tell, Weiss's chief qualifications are that (1) he's an investment banker and (2) he's a major Obama donor, who (3) professes Progressive sympathies. (It's awesome that he bankrolls the Paris Review, but surely that's not what qualifies him.)  

Weiss isn't Obama's only donor, and his Progressive bona fides seem to consist of co-authoring a Center for American Progress piece in favor of progressive (small p) taxation.  So really the case for Weiss's qualification comes down the the fact that he's an investment banker. His investment banking experience appears to be in mergers and acquisitions, and at an investment bank that does not have a depository.  Why on earth does that qualify him to be the Undersecretary for Domestic Finance?  

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Zombie Debt and the Metaphysics of Discharge

posted by Adam Levitin

The NYT has a piece about credit reporting of so-called "zombie debt"--debt that has been discharged in bankruptcy.  Apparently the US Trustee Program is investigating various creditors in connection with this debt.

The reporting obscured a bit of very subtle bankruptcy metaphysics. The discharge of debt in bankruptcy does not void the debt. The debt is still owing. But it cannot be collected except if the debtor volunteers to repay it. The discharge is an injunction against the enforcement of the debt against the debtor as a personal liability. The discharge voids judgments on the debt, but not the debt (and it does not prevent the enforcement of liens).  In other words, the debt still exists post-discharge.  It just isn't enforceable.

That means that there is nothing per se inaccurate about the debt being reported to a credit reporting agency as owing, provided that the debt is also reported as discharged in bankruptcy. (Different story altogether under Fair Credit Reporting Act and Fair Debt Collection Practices Act if the discharge is not reported.)   

As far as I can glean from the reporting, the problem seems to be less the continued reporting of the debt than creditors saying that they will only cease reporting it as owing if the debt is paid.  Is that a violation of the discharge injunction?  I'm not sure.  It is fine for a private party to require payment as a condition of future dealings:  "pay up if you want to do another deal with me." But that's not quite this situation. The purpose of continuing to report a discharged debt is not to invite a condition of future dealings.  Instead, its purpose (other than if continued reporting were the default) would seem to be to extract payment, which would be an "act to collect, recover, or offset any such debt as a personal liability of the debtor."  It'll be interesting to see more about how this plays out. 

QRM's Missed Opportunities for Financial Stability and Servicing Reform

posted by Adam Levitin

There are three major new regulations shaping the housing finance market:  QM (qualified mortgage), QRM (qualified residential mortgage) and Reg X.  QM is a safe harbor from the statutory ability-to-repay requirement that applies to all mortgages.  QRM is a safe harbor from the statutory risk retention requirement that applies to mortgage securitization.  And Reg X are the new mortgage servicing regulations.  It's important to understand how these three regulations interact and how they're going to affect the housing finance market.  (There's also new TILA/RESPA disclosure stuff, but I don't think that's particularly impactful, in part because I don't think disclosure regulation is especially effective in most real world circumstances.) 

Continue reading "QRM's Missed Opportunities for Financial Stability and Servicing Reform" »

Credit Risk Retention Rules and QRM

posted by Adam Levitin

The long awaited credit risk retention rules for securitization are out. The big question--whether the qualified residential mortgage or QRM exemption would be narrower than the CFPB's qualified mortgage or QM safe harbor to the Ability to Repay requirement for mortgages is no. QRM=QM. The short version is that the rule doesn't require meaningful credit risk retention where it counts, and imposes significant market-shaping safe-harbor requirements where skin in the game isn't so important.

Continue reading "Credit Risk Retention Rules and QRM" »

Are You Sure That's Your Testimony?

posted by Adam Levitin

Yves Smith has had some great coverage of the AIG bailout trail over on Naked Capitalism.  While the litigation, as Yves has characterized it, is a bit like a brawl between the ugly stepsisters, it's telling us all kinds of stuff we didn't know (or at least couldn't document) about the 2008-09 bailouts.   

Today's coverage is a must-read piece by Matt Stoller about the civil service regulatory capture at the Fed, as personified by its general counsel.  The AIG trial has highlighted some of the worldview problems at the Fed. It has also included some jaw-dropping exchanges like the following:

Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?
A: I don’t know.

You can't make this stuff up.  I'll let readers draw their own conclusions. 

Unseal the Doomsday Book!

posted by Adam Levitin

When I first heard about the NY Fed's Doomsday book, my initial thought was, "Wow, they've got a comprehensive survey of land titles, so MERS really isn't an issue!" Then I realized it was a Doomsday book, not a Domesday book. Apparently the Doomsday book is some sort of "in case of emergency" do-it-yourself bailouts manual that outlines the steps the NY Fed believes it can legally take to stave off economic Armageddon. 

I'm rather puzzled by the NY Fed's claim that it should be kept under seal.  I guess we'll find out more of the Fed's reasoning soon enough, but it hardly seems to be particularly sensitive of secret information.  This isn't the Coca-Cola recipe or some sort of trade secret. It's hard to believe that we didn't see the full panoply of the Fed's bailout powers on display in 2008, and perhaps then some. (A colleague has suggested that they might be developing some sort of secret, stress-tested, boilerplate clad bailout machine in the basement of the NY Fed. Of course such a bailoutbot would exercise its own free-living-will. Its only vulnerability would be following a haircut.)

The fact that the Doomsday book apparently contains legal advice is not a seal issue--that's a privilege issue. Once that privilege is waived (I'm guessing it has been), I can't see why the fact that the document includes legal advice presents cause for remaining under seal. 

Courts have a lot of discretion in what they can allow to remain under seal, but I just don't see the Doomsday book as fiting into traditional categories of sealed documents. But as I said, we will see.  

Hacking and Systemic Financial Armageddon

posted by Adam Levitin

The revelation that 76 million JPMorgan Chase consumer accounts were compromised by hacking should be scaring the heck out of us. The Chase hacking is a red flag that hacking poses a real systemic risk to our banking system, and a national security risk as well. Frankly, I find this stuff a lot scarier than either ISIS or our still largely unregulated shadow banking space.  

Consider this nightmare scenario:  what if the hackers had just zeroed out all of those 76 million Chase accounts and wipes out months of transaction history making it impossible to determine exactly how much money was in the accounts at the time they were zeroed out? The money wouldn't even have to be stolen.  Just the account records changed.  What would happen then?

Continue reading "Hacking and Systemic Financial Armageddon" »

Flagstar Servicing Enforcement Order

posted by Adam Levitin

The CFPB entered into a Consent Order with Flagstar Bank regarding its default mortgage servicing practices. This order is really important. It's the first enforcement action of the CFPB's new servicing rules, and its "benching" remedy that prevents Flagstar from most default servicing until it demonstrates compliance shows that the Bureau is serious about cleaning out the Augean stables of servicing. (The Ocwen order had a much larger dollar figure attached, but was about pre-2014 conduct).

The details given in the consent order tell an all-too-common picture about mortgage servicing.  

In 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them. For a time, it took the staff up to nine months to review a single application. In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. And Flagstar’s loss mitigation application backlog numbered well over a thousand. 

And we wonder why loss mitigation hasn't been more effective?

Continue reading "Flagstar Servicing Enforcement Order" »

Digital Wallets

posted by Adam Levitin

Interesting op-ed on digital wallets by Edward Castronova and Joshua Fairfield in the NYT. I'm a little more skeptical. Thoughts follow the break.

Continue reading "Digital Wallets" »

Apple Pay and the CFPB

posted by Adam Levitin

Apple Pay has been getting a lot of attention, and I hope to do a longer post on it, but for now let me highlight one possible issue that does not seem to have gotten any attention. I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a "service provider" for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP. 

Continue reading "Apple Pay and the CFPB" »

Isis Wallet Mobile Payments

posted by Adam Levitin

One of the competitors in the Great Mobile Payments Race is changing its name. Isis Wallet, a mobile payments joint venture of AT&T, Verizon, and T-Mobile is changing its name to Softcard for fairly obvious reasons. Isis Wallet operates by having the consumer store his/her payment card information on a "secure element"--tech speak for a tamper resistant chip that safely stores encrypted information.  (The particular secure element for Isis Wallet depends on the phone model.) That payment information is then communicated with merchants using NFC (near field communications, i.e., contactless).  Isis Wallet also integrates various loyalty programs and merchant offers (including some that are proximity based). As Apple's Apple Pay platform shows, mobile payments is becoming a crowded field with some real heavyweights. Yet, as I'll blog shortly, there are some real challenges ahead for anyone in the field. 

Is Housing Such a Bad Investment? Maybe Not...

posted by Adam Levitin

One of the post-bubble conventional wisdom stories that has gotten a lot of traction is that housing is a bad investment and that consumers would do better to rent and invest in the stock market.  The problem is that it's wrong.

The prooftext for the idea that housing is a bad investment is a straightfoward comparison of the returns on stock market indices with those on housing market indices.  If one compares the return on the S&P500 index vs. the S&P/Case-Shiller Composite 10 index from the beginning of the Case-Shiller data (1987) to present, one sees that the S&P500 went up 630%, while the Case-Shiller went up only 197%.  Even if one uses an average return (averaging the monthly index values, relative to the starting value), S&P500 is 244%, while Case-Shiller is 98%.  Ergo housing is a bad investment compared to the stock market, right?

That's certainly what a bunch of smart people have argued. (I won't link or name names, but Google isn't coy.) There are two problems with this line of argument.

First, it fails to account for the leveraged nature of housing investment.  Most homes are purchased on leverage, and housing is the only leveraged investment broadly available to the middle class. When one factors in leverage, housing massively outperforms stock market mutual funds, making it a pretty sensible investment in most cases.   

Second, the simple return comparison fails to account for the indirect benefits of housing, such as school districts, commuting time, quality of life etc. I'm not going to try to quantify the indirect benefits, although some of them definitely translate into pecuniary terms (schooling, for example).

If you'll indulge me with some number play below the break, you'll see that the leverage point alone blows the "housing is a bad investment" argument out of the water. Leverage is not without its complications, though.  

Continue reading "Is Housing Such a Bad Investment? Maybe Not..." »

Single-Point-of-Entry: No Bank Left Behind

posted by Adam Levitin

Last December the FDIC put out for comment a proposal for a Single-Point-of-Entry (SPOE) Strategy to implement its Orderly Liquidation Authority (OLA) under Title II of Dodd-Frank. Single-Point-of-Entry has gotten a lot of policy traction. The Treasury Secretary supports it and there’s huge buy-in from Wall Street.  And it’s an approach that is likely to ensure financial stability in the event that a systemically important financial institution gets into trouble.  There’s just one problem with it.  SPOE means “No Bank Left Behind”.  

Continue reading "Single-Point-of-Entry: No Bank Left Behind" »

Duties to Serve in Housing Finance

posted by Adam Levitin

Mark Fogarty has a nice write-up in National Mortgage News of a book chapter about duties to serve in housing finance that I wrote with Jannecke Ratcliffe for a volume entitled Homeownership Built to Last (Brookings/Joint Center on Housing Studies 2014).  It's a real pleasure to realize that someone has actually read our chapter! 

MBS Settlements--Following the Money

posted by Adam Levitin

Financial crisis litigation has been going on for several years now and has been resulting in lots of piecemeal settlements. As a result, it's easy to miss the big picture.  There's actually been quite a lot of settlements covering a fair amount of money.  (Not all of it is real money, of course, but the notionals add up).  

By my counting, there have been some $94.6 billion in settlements announced or proposed to date dealing with mortgages and MBS.  

Continue reading "MBS Settlements--Following the Money" »

Toward a Universal Ability to Repay Requirement

posted by Adam Levitin

The latest consumer financial product to come under the regulatory microscope is subprime auto lending, which has seen a boom in the last few years.  The subprime auto market's boom underscores a real problem in consumer financial regulation: different consumer financial products have developed different substantive regulatory regimes that are not justified by differences in the products. Most fundamentally, we have an ability-to-repay requirement for mortgages, a different ability-to-pay requirement for credit cards, and nothing else for other products. In light of the changes in all consumer finance markets, in which securitization and sweatbox lending have undermined the traditional lender-borrower partnership that encouraged responsible lending, it is time to consider a universal ability-to-repay requirement for consumer credit. 

Continue reading "Toward a Universal Ability to Repay Requirement" »

A National Debt Registry?

posted by Adam Levitin

There's a fascinating long magazine piece in the NYTimes about consumer debt sales and collection. The piece ends by asking why we don't have a national debt registry, as if that were the solution to all debt collection problems.  Unfortunately, the author only asked the FTC about this issue (and acknowledges that it isn't in FTC jurisdiction), not the CFPB, and the author doesn't consider any of the problems with creating and implementing a debt registry.  (I'm guessing Dalie will have something to say about this...) As the case of MERS shows, it isn't so easy to create a well-functioning registry of property rights of any sort.  Let me illustrate a few challenges to creating a debt registry:  

Continue reading "A National Debt Registry?" »

Feeling Vindicated

posted by Adam Levitin

My Consumer Finance students used to think I was wasting their time by spending a whole class session on usury laws and taking them into the nitty-gritty of their application (or non-application). I think usury is important conceptually (but for the Marquette decision and its fallout, our regulation of consumer credit would likely be very different), has a lot of neat statutory reading twists and turns, and it actually can matter for non-bank lenders.  Among other things I cover is the NY state usury statute, including its criminal provisions. Cyrus Vance's prosecution of payday lenders under the usury statute would seem to vindicate my choice of class materials. 

Whose Fault Is the Argentina Debacle?

posted by Adam Levitin

I name names and point fingers in the Wall Street Journal.  NML gets some blame for overplaying its hand, but the fault primarily lies with the federal courts for letting the case go forward. I understand the courts being angered by an unrepentant debtor thumbing its nose at them, but the federal courts should know better than to get into a pissing match with a foreign sovereign. Federal judges are possessed of awesome powers, but not that awesome. It's not at all clear to me how Judge Griesa's going to get this case out of the hole he dug, and the recent reporting on the case indicates that he doesn't have any idea either. "We're in the soup."  Indeed. 

Operation Choke Point Hysteria: Are Choke Point's Critics Responsible for the Account Closings?

posted by Adam Levitin

At today's House Judiciary Committee hearing on Operation Choke Point it seemed that Choke Point's critics are conflating a fairly narrow DOJ civil investigation with separate general guidance given by prudential regulators.  In particular, Rep. Issa attempted to tie them together by noting that the DOJ referenced such guidance in its Choke Point subpoenas, but that's quite different than actually bringing a civil action on such a basis (or on the basis of "reputational risk"), which the DOJ has not done.  

There is a serious issue regarding the bank regulators' use of "guidance" to set policy. Guidance is usually informal and formally non-binding, but woe to the bank that does not comply--regulators have a lot of off-the-radar ways to make a bank's life miserable.  This isn't a Choke Point issue--this is a general problem that prudential bank regulation just doesn't fit within the administrative law paradigm.  There are lots of reasons it doesn't and perhaps shouldn't, but when it is discovered by people from outside of the banking world, it seems quite shocking, even though this is how bank regulation has always been done in living memory:  a small amount of formal rule-making and a lot of informal regulatory guidance.  By the same token, however, compliance with informal guidance is enforced informally, through the supervisory process, not through civil actions, precisely because the informal guidance is not actionable.  Yet, that is what Choke Point critics contend is being done--that DOJ is using civil actions to enforce informal guidance.  

I don't think that's correct (or at least it hasn't been shown).  But the conflation of DOJ action with prudential regulatory guidance may be creating the very problem Choke Point's critics fear.  

Bank compliance officers may be hearing what Choke Point critics are saying and believing it and acting on it.  If compliance officers believe that the DOJ will come after any bank that serves the high-risk industries identified by the FDIC or FinCEN, not just those that knowingly facilitate or wilfully ignore fraud, they will respond accordingly.  The safe thing to do in the compliance world is to follow the herd and avoid risks.  The attack on Operation Choke Point may well have spooked banks' compliance officers, who'd aren't going to parse through the technical distinctions involved.  

What matters is not what the DOJ actually does, but what compliance officers think the DOJ is doing, and they're likely to head the loudest voice in the room, that of Choke Point's critics.  So to the extent that we are having account terminations increasing after word got out of Operation Choke Point it might be because of Choke Point's critics' conflation of a narrowly tailored civil investigation with broad prudential guidance.  Ironically, we may have a self-fulfilling hysteria whipped up by Choke Point critics, who shoot first and ask questions later.  

Operation Choke Point: Payday Lending, Porn Stars, and the ACH System

posted by Adam Levitin

Pop quiz:  what do payday lenders have in common with on-line gun shops, escort services, pornography websites, on-line gambling and the purveyors of drug paraphrenalia or racist materials?  

You can read my testimony for this Thursday's House Judiciary Committee, Subcommittee on Regulatory Reform, Commercial, and Antitrust Law's hearing on Operation Choke Pointo find out. Or you can just keep reading here.  

Continue reading "Operation Choke Point: Payday Lending, Porn Stars, and the ACH System" »

Can Argentina Not Pay Yet Not Default? Perhaps. And Maybe There's Still a Route to NY State Court...

posted by Adam Levitin
A footnote to Mark's recent post on Argentina's remaining options got me thinking about what an Event of Default actually is under the exchange bond indenture. From a reasonably quick look at the (lengthy) documents, I think there might be a non-default route open to Argentina, and possibly also a procedural route to getting the pari passu clause interpretation in front of a New York State court. The exchange bond indenture para. 3.1 obligates the Republic to pay principal and interest "to the Trustee". The Republic is not obligated to pay the bondholders directly. That's the trustee's duty, if it is paid by the Republic, although the Republic has the option of directly paying the bondholders. Now, there is language in the Prospectus Supplement (page S-67) that:
Notwithstanding the foregoing, Argentina's obligations to make payments of principal and interest on the New Securities shall not have been satisfied until such payments are received by registered holders of the New Securities.
However, when one looks at the Indenture, this language appears only in the form of the debt security itself (exhibit C-2), not in the actual Indenture. The context of the language makes clear that it is an anti-mailbox rule provision making the obligation discharged upon receipt, not mailing because the preceding sentence explains that Argentina has the option of either paying the trustee or paying the registered noteholders directly. The "shall not have been satisfied" language immediately follows the direct payment option, which indicates that its purpose is to prevent Argentina from claiming that its obligation was discharged by putting the check in the mail. The "shall not have been satisfied" language does not apply when Argentina pays the trustee itself, which is the obligation in paragraph 3.1 of the Indenture.

Continue reading "Can Argentina Not Pay Yet Not Default? Perhaps. And Maybe There's Still a Route to NY State Court..." »

Consumer Finance Movie: Spent: Looking for Change

posted by Adam Levitin
I just saw Spent: Looking for Change, a documentary about the financial challenges of the unbanked. The film was funded by American Express, but there is no marketing of Amex products in the film. (Amex does offer one of the best non-DDA account options for the unbanked, however.) You can watch the movie for free on YouTube. The movie really puts a human face on the problems of the unbanked. It doesn't get into solutions (that would take a Peter Jackson trilogy), but it does a great job of setting forth what life is like for the unbanked. Highly recommended.

Does Bad Research Beat No Research? Durbin Amendment Data

posted by Adam Levitin

Todd Zywicki, Geoff Manne and Julian Morris have an article on the effect of the Durbin Amendment.  Sigh.  No surprises here.  Zywicki et al. are making claims beyond what their data can support and in fact directly contradicted by their own data, which shows that some of the "effects" of Durbin preceded the enactment and effective date of the Amendment.   

Continue reading "Does Bad Research Beat No Research? Durbin Amendment Data" »

Did Law v. Siegel Sound the Death Knell for the Equity Powers of the Bankruptcy Court?

posted by Adam Levitin

Did Law v. Siegel Sound the Death Knell for the Equity Powers of the Bankruptcy Court?  Mark Berman thinks so.  I'm skeptical (fuller version of my argument here).  But it depends what we mean when we refer to "equity", which is often used as a rubric for an array of different non-Code practices.  More complete coverage at the Harvard Law School Bankruptcy Roundtable.

Larry Summers' Attempt to Rewrite Cramdown History

posted by Adam Levitin

Larry Summers has a very interesting book review of Atif Mian and Amir Sufi's book House of Debt in the Financial Times. What's particularly interesting about the book review is not so much what Summers has to say about Mian and Sufi, as his attempt to rewrite history. Summers is trying to cast himself as having been on the right (but losing) side of the cramdown debate. His prooftext is a February 2008 op-ed he wrote in the Financial Times in his role as a private citizen. 

The FT op-ed was, admittedly, supportive of cramdown. But that's not the whole story. If anything, the FT op-ed was the outlier, because whatever Larry Summers was writing in the FT, it wasn't what he was doing in DC once he was in the Obama Administration.

Let's make no bones about it.  Larry Summers was not a proponent of cramdown.  At best, he was not an active opponent, but cramdown was not something Summers pushed for.  Maybe we can say that "Larry Summers was for cramdown before he was against it." 

Continue reading "Larry Summers' Attempt to Rewrite Cramdown History" »

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