423 posts categorized "Financial Institutions"

HARA$$ the CFPB: Omnibus Edition

posted by Adam Levitin

It's appropriations season and efforts to harass the CFPB seem to be going into overdrive. The latest scheme:  hit the CFPB with financial reporting requirements unparalleled for any government agency.  This little nugget of petty harassment is found in section 504 of the House Financial Services Appropriations bill being considered for inclusion in the final budget package. 

The bill would require the CFPB to submit quarterly reports to Congress that detail its obligations by object class, office and activity; an estimate of the same information for the coming quarter; the number of full-time equivalents in each office the previous quarter and an estimate for the coming quarter; and actions taken to achieve the goals, objectives and performance measures of each office. This level of reporting detail required is unprecedented for other agencies, as is the reporting timeline: two weeks after the close of each quarter. 

It's hard to see what the point of section 504 is other than to harass the CFPB, tie up the agency in bureaucratic redtape, and distract from its mission.  

Now you might note that the CFPB IS required under section 1017(a)(4)(A) of the Dodd-Frank Act to make quarterly budget reports to OMB and under section 1017(e)(4) to submit annual reports to the appropriations committee. But these reports do not require the level of detail mandated by section 504 and do not have a specific deadline, much less a two-week turnaround. There's also an annual Comptroller General audit and report to Congress.  All of which is to say, the CFPB is subject to standard financial controls and oversight. There haven't been any budget scandals, etc. that merit closer scrutiny. It's hard to see any reason for the additional level of scrutiny in section 504 other than animus toward the CFPB's mission. 

How Backpage Is Different from Choke Point

posted by Adam Levitin

The Seventh Circuit Court of Appeals recently slammed Cook County Sheriff Thomas Dart for his actions trying to get Mastercard and Visa to stop processing payments for Backpage, an advertising website whose ads include various adult services (some legal, some not). The Backpage decisions has been taken as an indication of the strength of the legal case by some payday lenders against the FDIC, OCC, and Fed over Operation Choke Point

Unfortunately, Judge Posner got it wrong in Backpage because he incorrectly assumed facts not in the record. But even if he got it right, there's a lot that differentiates Operation Choke Point (whose name does, unfortunately, sound like it might be from an adult ad on Backpage). 

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Glass-Steagall Is Campaign Finance Reform

posted by Adam Levitin

The financial wonkosphere just doesn't get it about Glass-Steagall.  Pieces like this one by Matt O'Brien concentrate on the questions of whether Glass-Steagall would have prevented the last crisis or whether it is better than other approaches to reducing systemic risk.  That misses the point entirely about why a return to Glass-Steagall is so important. No one argues that Glass-Steagall is, in itself, a cure-all.  Instead, the importance of a return to Glass-Steagall is political. But totally absent in much of the wonkospheric discussion is any awareness of the political impact of busting up the big banks.  

Let's be clear about why Glass-Steagall matters:  the route to campaign finance reform runs through Glass-Steagall.

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The Ibanez Property Ring

posted by Adam Levitin

There’s an interesting new article out on the celebrated Massachusetts U.S. Bank v. Ibanez case that suggests that the defendant, Antonio Ibanez, was at the center of a property fraud ring. It's not clear to me that there was anything illegal about Ibanez's activities, but even if there were, I don't think it much matters.  

Continue reading "The Ibanez Property Ring" »

The Promise and Limits of Postal Banking

posted by Adam Levitin

It’s easy for Progressives to get excited about the idea of postal banking: a public option for banking! What’s not to love?

I’m glad to see the idea of public options in financial services getting some play of late; it’s something I’ve championed for a while in payments and housing finance. But I think it’s necessary to recognize some of the limits to postal banking. In particular, it's not at all clear to me why we would want to involve the Post Office in the public provision of financial services. What the Post Office offers is a way to recreate a brick-and-mortar branch bank network. This really doesn't make a lot of sense for 21st century banking. Additionally, postal banking is often pitched as an alternative to payday and title lenders. Before we go running down that path, we should think about what it means to have the government in the payday lending business.

Continue reading "The Promise and Limits of Postal Banking" »

Recycling News

posted by Stephen Lubben

2015-10-16 09.07.31    Catching up on some posting in other places:

  • The Columbia Blue Sky Blog recently featured a summary of my article on the treatment of failed clearinghouses under Dodd-Frank. Interestingly, the EU recently opened the door to something similar to what I've been suggesting. Thanks to Colleen Baker for pointing that out.
  • And over at Dealb%k, I look at LSTA's recent rejection of the ABI's chapter 11 reform proposals in light of two recent retail bankruptcy cases.

Glass-Steagall: It's the Politics, Stupid!

posted by Adam Levitin

It was like eight nights of Chanukkah in one for me watching the Democratic debate last night. There was a Glass-Steagall lovefest going on. But here's the thing:  no one seems to get why Glass-Steagall was important or the connection between Glass-Steagal and the financial crisis. The importance of Glass-Steagall was not as a financial firewall between speculative investment activities and safe deposits. It was as a political Berlin Wall keeping the different sectors of the financial industry from uniting in their lobbying efforts and disturbing the peace of the nation.

Until and unless we realize that the importance of Glass-Steagall was political, we're going to continue wasting our time debating insufficient half-measures of financial regulation like the Volcker Rule, which has the financial, but not the political benefits of Glass-Steagall. More critically, we're going to pass regulations like the Volcker Rule and then wonder slack-jawed why they don't work, as the financial industry undermines them through the regulatory implementation and legislative amendments. Financial regulation is just not that complex technically, even if if has a lot of technical rules (it's the capital, stupid!). The problem we face is not technical, but political.

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Covenant Banking

posted by Adam Levitin

A new book out by University of Minnesota Law Professors Claire Hill and Richard Painter proposes a really intriguing proposal for disciplining wayward financial services firms: "covenant banking." The problem, as Hill and Painter observe, is that when things go badly at a financial institution, the burden is borne by shareholders, not by the managers, who have portable human capital and whose compensation is not typically subject to clawback. In essence the problem, as Hill and Painter see it, is that bankers lack "skin in the game." And Hill and Painter have a plan to fix it. 

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Interchange Evidence?

posted by Adam Levitin

Both sides in the interchange fee debate have pointed to a recent Richmond Fed study as evidence supporting their position (here and here). Frankly, it's hard to tell without agreeing on a baseline for analysis: pre-Durbin interchange fees or what the fees would have been but for Durbin or the anticipated post-Durbin drop in fees? The finding that most merchants didn't notice a change in their merchant fees (which, of course, aren't the same as interchange fees) means very different things depending on the baseline used: that Durbin is pointless, that Durbin saves merchants money, or that Durbin isn't working as intended because of a defective rulemaking by the Fed.

In the midst of the race to claim vindication based on the study, however, no one seems to have noticed that a least some of the data used in the study—which comes from a merchant survey conducted by Javelin Strategy and Research—seems a little screwy.

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Pie and Mash

posted by Stephen Lubben

Or a bit of this this and that. I've totally neglected cross-posting my writings on Dealbook here on IMG_8988Slips, so I give you two recent columns:

  • The first, on Chase's living will, version 3.0 or thereabouts.
  • The second, on the confusing Baha Mar bankruptcy case. Since I wrote that one, the Bahamian court has rejected a petition to recognize the Delaware chapter 11 case under the Bahamian equivalent of chapter 15.

Dodd-Frank's Constitutionality

posted by Adam Levitin

I'm testifying tomorrow before Senate Judiciary Committee's Subcommittee on The Constitution (yes, that's the official capitalization), about the constitutionality of the Dodd-Frank Act.  

Short version: nothing to see here folks.

Slightly longer version: really nothing to see here.

Even longer version:  the plaintiffs in State National Bank of Big Spring v. Lew have a totally non-Originalist interpretation of the Bankruptcy Clause, namely that "uniform laws" apparently requires equal treatment of all similar creditors, so title II Orderly Liquidation Authority is unconstitutional.  Yes, that's the sound of me shaking my head.

My written testimony is available  here.  

More on AIG: Between Hysteria and Complacency

posted by Anna Gelpern

I agree with Adam about all that post-Starr hyperventilation. No, it does not mean that bailouts are over, that the Fed has been slapped down, or any of that lurid stuff. (Though tabloidness does feel strangely gratifying in financial journalism.) Nevertheless, we should be careful not to dismiss the AIG decision as a realist vignette. Its implications for crisis management will become clearer over time, and may well turn out to be important.

At first blush, Starr feels like a stock crisis move by the Court of Claims, evoking the Gold Clause cases in 1935, where the U.S. Supreme Court held that the Congress violated the 14th amendment when it stripped gold clauses from U.S. Government debt, but denied Court of Claims jurisdiction because the creditors suffered no damages. Had they gotten the gold, they would have had to hand it right over to the Feds. And if you measured the creditors' suffering in purchasing power terms, getting their nominal dollars back still put them way ahead of where they had been in 1918 thanks to all the deflation.

Putting this history together with Starr, I wonder about two implications. First, it would have to be awfully hard for a firm getting federal rescue funds in a systemic crisis to prove damages. See also the car bailout stuff. By definition, the firm's best case is the gray zone between illiquidity and insolvency (I called it "illiquency" back then). If you accept that a court is unlikely to enjoin a caper like AIG in the middle of a crisis, this gives the government a fair amount of scope to act, even if it turns out to be off on authority after the fact.

Second, the Greek mess makes me think that the real concern in crisis is not with ex ante constraints on bailouts working as planned, but rather with accidental institutional malfunction. At some point (not yet), all the sand in the wheels will create enough friction that policy makers will not be able to respond to a tail event in a sensible way. No institution would have the authority to do "whatever it takes," and no decision-maker would be willing to take the risk. Maybe this is as it should be, but it does give me pause. 

Mixed Messages Regarding OLA

posted by Stephen Lubben

Over at Dealb%k I talk about the confusing state of affairs regarding Dodd-Frank Orderly Liquidation Authority and the FDIC's new "single point of entry" (SPOE) approach to OLA. 2015-04-28 09.23.39 HDR

In short, since OLA expressly excludes depository banks, it is not clear that a SIFI can be placed into OLA based on the failure of its insured bank. One way around that problem might be to use the "source of strength" doctrine to trigger a default at the parent-company level.

Trick is that the the regulators have done nothing to develop the source of strength power Dodd-Frank gives them, and doing so is also in tension with their general disapproval of parent company guarantees and cross-default provisions. They argue that guarantees and cross-default provisions will undermine SPOE.

Lessons For Consumer Protection From The World Of Inclusive Capitalism

posted by David Lander

Lately I have been teaching courses with names such as "Global and Economic Justice" and "History, Impacts and Regulation of Consumer Credit" instead of "Bankruptcy," "Secured Transactions" and "Chapter 11 Reorganizations." So I have been reading different books and listening to different speakers. A lecture I attended recently by Xav Briggs  here brought to my mind a couple of books that I use in one of my courses, “Borrow” and “Debtor Nation” both written by Louis Hyman. In many ways Hyman's books remind me of "Credit Card Nation" the outstanding and "ahead of its time" book by Robert Manning which I used extensively when I created my consumer credit course in 2002. 

Part of the wisdom I find in each of these books is the caveat that you cannot understand consumer protection without understanding the nature of American capitalism or the drive for an above-market return. This was never clearer or more of a "blow to the side of the head" than during the frenzy in the early 2000's, and perhaps nothing demonstrates it more crassly than the rating agencies covering their eyes as they rated subprime securitizations allegedly in order to "keep the business." 

Continue reading "Lessons For Consumer Protection From The World Of Inclusive Capitalism " »

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. 

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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. 

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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". 

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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."

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TBTF and The Single Point of Entry (SPOE): Part Two

posted by Jay Lawrence Westbrook

In an earlier post I described the FDIC’s proposed SPOE approach to resolution of SIFI banks and other financial institutions under Title II of Dodd-Frank. That post discussed two of the three components of SPOE: control of the process by the regulator and no bailout for management or owners. This post lays out the role of the third component, the “forlorn hope” debt. Shutterstock_95970961

That debt is unsecured debt owed to a bank holding company (BHC) and predestined to get little or nothing in case of the failure of the BHC. It serves in effect as a debt reserve to buffer the financial distress of the bank group. By being dumped, it would make the group as a whole solvent. By contrast, legislation already passed by the House would ignore the need for the reserve, thus setting up another bank bailout. The reserve debt component of SPOE awaits a strong rule from the Fed to make it a reality. This post discusses what the rule must do.

Continue reading "TBTF and The Single Point of Entry (SPOE): Part Two" »

Busted Banks: TBTF and the Single Point of Entry

posted by Jay Lawrence Westbrook

Shutterstock_95970961A Single Point of Entry (SPOE) sounds like the route of a returning astronaut or perhaps a building’s security plan or even a sex guide, but actually it is the FDIC’s proposal for saving the financial system when a giant financial institution strikes out on the derivatives market or discovers it has a school of London Whales. SPOE is important because the FDIC and the Bank of England have agreed on it as the best approach to a global resolution of a failing SIFI, the polite term for a TBTF bank. That agreement is crucial, because the largest banks can only be resolved on a global basis.

SPOE is a method of resolution of a SIFI in financial distress without having to choose between a government bailout or the collapse of the global financial system. By contrast, legislation passed by the House would privatize the SPOE process and likely result in future bailouts. The legislation is being marketed under the term SPOE, but bears little relationship to the FDIC proposal. The three key aspects of the FDIC plan are that a) the resolution process will be controlled by the regulator; b) there will be no bailout of the SIFI’s owners and management; and c) the creditors of the parent holding company will be tossed overboard, returning the bank group to solvency by erasing debt and lessening the need for government money to make the process work. This post discusses the first two points, control and no bailout, while a second post will talk about the debt dump. 

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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.]  

 

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" »

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.

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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A Good Question

posted by Stephen Lubben

In today's Short View Column, Dan McCrum examines falling oil prices and the futures market, and then concludes:

But the point of this story is not that some think they know what will happen next. Rather, it is that the price of one of the most widely used and heavily traded commodities has been able to halve in a matter of months.

The oil price is not some arcane derivative tied to dodgy mortgages, or a stake in an internet start up. It is the price of an industrial input paid by thousands of large and well-informed buyers. Low oil prices are not an unimaginable abstraction, merely something not seen for a while.

So, a question presents itself: if financial markets can be so wrong about the price of oil, what else are they missing?

 

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" »

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" »

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?  

Continue reading "What Qualifies an Investment Banker to be a Regulator?" »

Local and State Treasurers Can Build Wealth in Struggling Communities

posted by Nathalie Martin

Sometimes you can beat the door down with efforts to get Federal and State officials to tackle problems, but at the end of the day, locals can best get the job done, quietly and quickly. A story in Monday’s New York Times bears this out.  For example, San Francisco City Treasure Jose Cisneros noticed that families who finally took advantage the of the earned income credit, the country’s largest public benefit program, often had no bank accounts in which to deposit their refunds. This meant losing a portion of this important public benefit to check cashers and others.

Because of this problem, Treasurer Cisneros started a program called Bank On, that helps people on the financial fringes open bank accounts and develop credit histories. This model has spread across the country, leading the Treasury Department to conclude that Bank On has “great potential” to “create a nationwide initiative that attends to the needs of underserved families and works to eradicate financial instability throughout the country.” In 2010, Mr. Cisneros also started Kindergarten to College, a program that automatically opened a bank account with $50 ($100 for low-income families) for every kindergartner in public schools. The city pays for the administration and initial deposits, while corporate, foundation and private donations provide matching money to encourage families to save more. His office even figured out how to open bank accounts for thousands of children without social security numbers.

These and similar effort have now been replicated in more than 100 cities, showing that even mundane public races might make a big difference in the health and well-being of citizens, if not the entire U.S. economy.

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" »

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.  

Would it Surprise You to Know

posted by Stephen Lubben

That I still think the "safe harbors" as currenlty drafted are a bad thing?

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" »

Markets?

posted by Stephen Lubben

Some thoughts on how much faith we should have in the debt markets, and whether they are actually markets at all, over at Dealb%k.

Rants and Book Recommendations

posted by Stephen Lubben

IMG_4527Just back from European Law and Economics, where the big topics at the coffee breaks were the Scottish vote, until that was resolved, sort of, Argentina, which is widely seen as a self-created mess for the U.S. courts, and the Air France strike, which caused presenters and chairs to miss sessions at random throughout the conference.

I also came home to find that the Financial Times had revised its paper format to make everything look like a "Special Advertising Section." Sigh.

But the flight home was helped along by a good read:  Money and Tough Love, by Liaquat Ahamed. It's an inside look at the IMF in action, and while not quite as intimate as some of the other books in the same series from publisher Visual Editions, it was a great read. The second third of the book provides a very nice overview of the Irish situation in particular.

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" »

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" »

Lessons From Postal Banking's Past

posted by Pamela Foohey

Post OfficeMehrsa Baradaran (University of Georgia) has a short piece in Slate tracing the history of the U.S. Postal Banking system. In sum, post offices once were banks, the system was in place for over 50 years, and post offices can be banks again. Indeed, at its height, the postal banking system was used by millions of Americans. Then banks moved into the majority of cities and towns and offered customers a more attractive option than using postal savings depositories. But when these banks began leaving low-income neighborhoods in the 1970s, the postal banking system already had died a quiet death, leaving the market open to payday lenders and check cashing operations. As Adam pointed out in his op-ed in American Banker from earlier this year, and as Mehrsa's piece highlights, postal banking may be the key to the current lack of financial inclusion. The piece is a quick and interesting read.

Post office building image courtesy of Shutterstock.

The Problem of Centrality

posted by Stephen Lubben

The Harvard Law School Forum on Corporate Governance and Financial Regulation has a feature on my new paper about the resolution of CCPs (aka clearinghouses).

Once More, With ... Something

posted by Stephen Lubben

So we are again treated to what has become an annual tradition:  the analysis of Dodd-Frank on its anniversary.  The Republicans trot out a report critical of the Act, and the Democrats defend it.  Yawn.

Actually, this year the Republican report is not half bad.  Sure it contains the usual rubbish about the Community Reinvestment Act, which really had nothing to do with the crisis.

But in many respects, it raises good points and real concerns about whether Dodd-Frank actually solved the "too big to fail" problem, and whether regulators got off too easy by saying they needed new powers, while barely using the ones they already had.

The name on the cover will scare off some Slips readers – Chairman Hensarling's politics are rather strident, to put it mildly.  But the report deserves to be read.

On the other hand, former Congressman Frank's retort that "[t]he Dodd-Frank Act is clear:  Not only is there no legal authority to use public money to keep a failing entity in business, the law forbids it" is something of a head scratcher.

The law against bailouts is binding on Congress in the same way that Conan Doyle was bound by his decision to send Holmes to Reichenbach Falls.  

Dodd-Frank was a start, but we should not pretend it is perfect.  The Republican report raises some very important questions – I likely disagree with them about how to address those questions, but that does not take away from their importance.

A Bubble in Deceptive, Abusive Subprime Auto Lending?

posted by Jean Braucher

In a long story in today's edition, the New York Times is reporting a bubble in often deceptive and abusive subprime auto lending on unaffordable terms, including very high rates of interest.  Although not quite the threat to the overall economy that the subprime mortgage bubble created eight or nine years ago, this apparent new bubble in lending for used vehicles has some similar features (targeting vulnerable consumers, lax underwriting, securitization, investors seeking high returns) and is causing significant pain for low income and unsophisticated borrowers.  A few regulators are mentioned in the story, but oversight so far seems to have been lax.

CFPB: Let Consumers Make Their Complaints Public; All Rejoice

posted by Dalié Jiménez

CFPBcomplaintsbyproductThis week the CFPB announced it's seeking public comments on a proposed policy that would allow consumers who file a complaint with the agency to share all of the (non-personally identifying) details of that complaint with the public as part of its Consumer Complaint Database. (Right now the database only identifies the financial product complained about, name of the company, and a category identifying the topic of the complaint).

As a researcher, I am beyond thrilled at the possibility of being able to drill down into the details of complaints. This might allow us to go even further than the CFPB or Ian Ayres and others did last year in analyzing the complaint database. 

Good players in the consumer finance space should be thrilled too: more data will allow us to really separate those who are doing right by consumers from those who aren't. It would allow the public or researchers to decide for themselves whether someone was making a mountain out of a molehill or if was identifying a real problem in their complaint. The fact that we currently don't have transparecy into complaints is a common (and justified) complaint by the debt collection industry. The CFPB is also proposing to make public the institution's response to the complaint (at their option). Anyone could then evaluate whether they think particular industries/institutions are responding appropriately to complaints. 

Continue reading "CFPB: Let Consumers Make Their Complaints Public; All Rejoice" »

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" »

Me in DC

posted by Stephen Lubben

A quick note on a couple of events today that might be of interest to Slips readers:

First, I'm participating in an ABI webinar about "chapter 14" and related topics.

Second, I'll be testifying in front of the House Judiciary Committee on proposed legislation to add a subchapter V to chapter 11, for financial institutions.

Otherwise, resume your summer and I'll bother you no more.

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" »

Book Review: Jennifer Taub's Other People's Houses (Highly Recommended)

posted by Adam Levitin

I just read Jennifer Taub's outstanding book Other People's Houses, which is a history of mortgage deregulation and the financial crisis. The book makes a nice compliment to Kathleen Engel and Patricia McCoy's fantasticThe Subprime Virus. Both books tell the story of deregulation of the mortgage (and banking) market and the results, but in very different styles. What particularly amazed me about Taub's book was that she structured it around the story of the Nobelmans and American Savings Bank.

The Nobelmans?  American Savings Bank? Who on earth are they? They're the named parties in the 1993 Supreme Court case of Nobelman v. American Savings Bank, which is the decision that prohibited cramdown in Chapter 13 bankruptcy. Taub uses the Nobelmans and American Savings Banks' stories to structure a history of financial deregulation in the 1980s and how it produced (or really deepened) the S&L crisis and laid the groundwork for the housing bubble in the 2000s.

Continue reading "Book Review: Jennifer Taub's Other People's Houses (Highly Recommended)" »

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