457 posts categorized "Financial Institutions"

In a Sea of Doubt

posted by Stephen Lubben
Questions about OLA after SPE (or SPOE if you prefer), over at Dealb%k.

Is Federal Preemption Assignable?

posted by Adam Levitin

Gretchen Morgenson had an interesting column today about judicial frustration with banks.  One of the opinions she references is a recent order by Judge William Young (Dist. Mass.) in a predatory lending suit.  The defendant Wells Fargo, as successor in interest to the lender, Wachovia FSB, argued that the state law causes of action on which the suit were based were preempted by a federal statute that governs federal savings banks.  Judge Young agreed, but ordered that:

Wells Fargo, within 30 days of the date of this order, shall submit a corporate resolution bearing the signature of its president and a majority of its board of directors that it stands behind the conduct of its skilled attorneys and wishes to avail itself of the technical preemption defense to defeat [the plaintiff homeowner's] claim.

In other words, the Judge wants to make sure that Wells CEO and board are aware of how it is evading liability.  This isn't the first time Judge Young has expressed his frustration with the mortgage industry. He authored one of the most colorful (and apt) descriptions of MERS:  the "wikipedia of land registration systems." Alas, as in this case, it was all in dicta. 

Putting aside the optics, I think there's an interesting legal issue possibly raised by the present case, Henning v. Wachovia:  does federal preemption under the Home Owners Loan Act (HOLA) apply to a mortgage that was made by Wachovia FSB, but is now owned by Wells Fargo, N.A.?  HOLA preemption only applies to federal savings and loans, not to national banks. So if a federal S&L makes a loan and holds it on balance sheet, it would seem clear that HOLA preemption would be relevant. But what if that federal S&L sold the loan to, say, me? Could I invoke HOLA preemption? That is, does HOLA preemption travel with the loan or is it personal to the federal S&L? 

I've got to think that the answer is that preemption is not assignable, but the law here is not as clear as it might be. The reason I think it has to be non-assignable is that it can produce a regulatory vacuum of preemption without regulation and because were preemption assignable, we'd face a problem of preemption laundering. I've written about this, at length, in an article considering, among other things, whether preemption rights travel with a loan when it is securitized (and is no longer held by a federally chartered depository of some sort, but by a state law entity, such as a trust). 

It was not clear to me from Judge Young's order whether the loan is currently owned by Wells Fargo directly or whether it is still held by Wachovia FSB as a Wells Fargo subsidiary or by some other entity. As far as I can tell, however, Wachovia FSB no longer exists.  The OCC's list of federal savings associations, as of August 31, 2013, does not lit a Wachovia FSB.  Therefore, it would seem that the loan is not currently owned by any entity that is regulated by HOLA and therefore entitled to HOLA preemption. 

There may still be a timing issue--is HOLA preemption determined at the time the cause of action arises or at the time litigation is brought or at the time of the decision?  I don't know what, if any, law exists on this.  Again, however, I don't know all of the facts of the case; I don't know if the attorneys for the plaintiff raised the question of whether Wells Fargo gets HOLA preemption via Wachovia, and don't know whether the issue is waived if they did not raise it. Preemption aside, it will be interesting to see how the order to the Wells Fargo board plays out.  

Crisis books

posted by Alan White
I recently stumbled on this excellent compendium of more than 300 books on the financial crisis.  It also includes a list of 25 or so books that predicted the crisis, as well as a useful link to an annotated list of individuals who can be given credit for predicting various aspects of the crisis.

Banks in Bankruptcy

posted by Stephen Lubben
Or bank holding companies, to be precise, over at Dealb%k.

Why Is the Fed Chairman a Bank Regulator (or an Economist)?

posted by Adam Levitin

The NY Times has a pretty significant error in its reporting on the Summers vs. Yellen Fed Chair race. It says that Yellen was the head of the Federal Reserve Bank of San Francisco, which was Countrywide's regulator. That's wrong. FRBSF was never Countrywide's primary regulator. That was the OCC and then OTS. The regional Feds are not anyone's primary regulator, not least as they are private entities, not government agencies. They arguably have a secondary quasi-regulatory role, but that's it. They are not the same as the Board of Governors of the Federal Reserve System, which is a federal regulator. Yellen really can't be tagged with any of the blame for Countrywide, at least based on what's reported. The NYT should correct this point, which comes off as a bit of a smear on Yellen.

Continue reading "Why Is the Fed Chairman a Bank Regulator (or an Economist)?" »

The Rule of Law in the Financial System

posted by Adam Levitin

Felix Salmon has a depressing blog post about the Fab Tourre verdict and a criminal conviction in another Goldman Sachs-related case.  Felix concludes, "I’m increasingly coming to the conclusion that America’s system of jurisprudence simply isn’t up to the task of holding banks and bankers accountable for their actions." 

Felix's observation underscores that we cannot and will not see sufficient and durable financial regulatory reform without political reform. This core Brandeisian insight (e.g., Other People's Money) has been lost during the course of the 20th century and its turn to technocratic financial regulation. (Add two parts capital and one part co-cos, mix with risk retention requirements and garnish with macroprudential regulation...) Notice that the one piece of the Dodd-Frank Act that changed the politics of financial regulation--the CFPB--is also where the pushback has been the strongest.  We need to stop seeing financial regulation as a matter of technocracy and start seeing it as a matter of political importance of the first order.  At stake is nothing less than the rule of law. 

Don't Fancy Games (For Your Kids' Financial Education)? How About The Theatre?

posted by Melissa Jacoby

MoneyTree"Make it fun and they will come," Lauren Willis discussed in the instructive post that evaluated the pros and cons of "The Gamification of Financial Education." Meanwhile, in London, a live show has been designed for children as young as five to teach them about the financial system. Interesting story on the show in The Guardian here. Tickets to "Bank On It" (running through the 14th of July) and other information here.   

Money tree image courtesy of Shutterstock 

Fed Board Couldn't Be Bothered to Vote on Multi-Billion Foreclosure Settlement

posted by Adam Levitin

The foreclosure fraud settlements were already farcical, but it just gets worse and worse. Now we learn that the Fed approved the amendments to its consent orders with mortgage servicers without it actually going before the Board of Governors for a vote.  

I get that Fed regulations permit delegation of this sort to the Fed's staff, but the foreclosure fraud settlement wasn't some Mickey Mouse enforcement action against a community bank's holding company for a minor know-your-customer rule infraction. As far as I'm aware, this was by far the largest settlement of any sort in the Fed's history. This settlement was a policy statement as much as an individual settlement. The fact that the Fed's Board didn't even bother formally deliberating and voting on the settlement is indicative of how seriously the Fed's Board takes the foreclosure fraud issue:  the Board doesn't think that it's worth their time.  Not even a single Board member requested review of the action. Yet another exhibit for why consumer protection cannot be left in the hands of prudential bank regulators. 

Regulating Bank Governance: Mandating CEO-Chairman Division at Too-Big-to-Fail Banks

posted by Adam Levitin

For a while, the battle over whether to split the JPMorgan Chase CEO and Chairman positions looked like the corporate governance battle of the year, but seems to have ended with a whimper, rather than a bang. The media coverage of the issue, however, largely overlooked the unique, bank-specific aspects of corporate governance. Specifically, what's at stake in the corporate governance of a too-big-to-fail bank like JPMorgan Chase is not just the share price, but also the public fisc.  There is a strong federal regulatory interest in having good governance at too-big-to-fail banks because of our explicit (FDIC) and implicit (bailout) insurance of too-big-to-fail banks. This suggests that federal bank regulators and Congress should be pushing to ensure that too-big-to-fail banks conform with best practices in corporate governance. To the extent good governance at a too-big-to-fail bank includes division of the CEO and Chairman positions, ensuring such a division should be on the regulatory agenda. Financial regulation may need to include governance regulation.

Continue reading "Regulating Bank Governance: Mandating CEO-Chairman Division at Too-Big-to-Fail Banks" »

On the Valuation of Hedge Funds (or Hedge Fund Managers)

posted by Stephen Lubben

So Felix Salmon has taken a justifiable swipe at some oddish Bloomberg articles on Citibank's spinoff of its internal hedge fund, as required by the Volcker Rule.

But in doing so, it seems as though he may have hit his own wicket.  (OK, I'll admit to wishing I was here, rather than grading Con Law exams).

For example, he argues that "all future income is reliant on both the investors and the managers sticking around, which means that the value of a hedge fund to its managers is always going to be higher than the value of a hedge fund to an outside investor with little ability to keep the managers in place."

First off, I assume he is referring to the manager, rather than the fund itself. And if value is reliant on the managers sticking around – why is a hedge fund that much different than any other company? Even a company with a large amount of fixed assets depends on the quality of its management to give those assets real value (e.g., GM) and companies with slight physical assets don't disappear when a key manager departs (e.g., Apple).

He also says "almost nobody buys and sells stakes in hedge funds as an investment" and thus suggests that hedge fund "valuation should start at zero, rather than with some academic discounted-cash-flow analysis."

Well there is the case of Och-ZIff, a publicly traded hedge fund manager. Its outside shareholders do seem to think that there is some value in the future cashflows there, despite the fact that the managers might up and leave at a moment's notice. Either that or investors are buying the stock regardless of price. That seems likely.

Who is Mel Watt?

posted by Jean Braucher

On May 1, President Obama nominated Rep. Mel Watt (D-N.C.) to be the director of the Federal Housing Finance Agency, the conservator for the mortgage giants Fannie Mae and Freddie Mac.

These two entities together currently back a large majority of new mortgages and hold or guarantee about half of all U.S. mortgages. Like other entities immersed in the mortgage market, Fannie and Freddie suffered great losses in the mortgage meltdown and were taken over by the federal government at the end of the Bush administration in September 2008.

Watt could be a key figure in the late stages of the mortgage crisis and in redefining the role of Fannie Mae and Freddie Mac going forward.  So who is this eleven-term congressman and what does he care about most?

Probably the most important points to stress are these:  He rose from humble beginnings through the meritocracy and is a Yale-educated lawyer who likes to immerse himself in the facts.  He is broadly respected at home in Charlotte, N.C., and represents a safe district where he has biracial support.  He carefully listens to the financial services industry, a major player in his community, and one that has supported his campaigns.  Most important of all, he has made working for the economic well-being of African Americans his life’s work, whether as a lawyer in private practice representing minority businesses or as a lawmaker seeking to shore up consumer protection, particularly to strengthen the legal basis for challenging predatory lending, often used against racial minorities and other vulnerable populations.

Continue reading "Who is Mel Watt?" »

Obama to Replace DeMarco at FHFA

posted by Alan White

with Mel Watt, according to an AP story today. Congressman Watt of North Carolina was a moving force behind Miller-Watt-Frank, the mortgage reform legislation that eventually found its way into Dodd-Frank financial reform. Given that our all-but-nationalized housing finance system is directed by this somewhat obscure agency, the occupant of this post can have a huge influence on the future direction of credit, housing and the economy.

If he is confirmed, Watt can be expected to make major changes to Fannie and Freddie policies, for example on principal write-downs and cracking down on mortgage servicer errors and abuses. Perhaps he could also begin to envision a more rational future assignment of the public and private roles in financing homes, in which public subsidy serves a public purpose and private capital carries the burden of its own credit risk.

MF Again

posted by Stephen Lubben
The MF Global trustee filed his lawsuit against Jon S. Corzine and other former MF Global executives.

But the complaint itself, while quite well done, makes for rather strange reading upon further reflection.

Continue reading "MF Again" »

IFR Scandal: Magnitude of Mortgage Servicing Failure

posted by Alan White
Screen shot 2013-04-14 at 9.56.52 AM

A remarkable tabulation of the more than 3 million homeowners found to have been victims of mortgage servicing errors or fraud was released last week by the Fed and other bank regulators.  About 25,000 foreclosures were started while homeowners were in bankruptcy, nearly 200,000 foreclosures were completed on homeowners in approved modification plans, and another 168,000 foreclosures sales were conducted while modification requests were pending. 

Recall that these wrongful foreclosure tallies include only servicing in 2009 and 2010, and that the 3 million estimated violations by 11 banks are out of a nationwide total of about 50 million mortgages outstanding, about 7 million of which were delinquent at any given time in that period. 

Worse, Senator Warren extracted an admission from bank regulators and the "independent consultants" at a hearing on Thursday (short version here) that neither the regulators nor the consultants checked the tally, which was produced by the bank servicers themselves.  The Fed and OCC also declined to release bank-by-bank tallies, or to share their investigation results with consumer victims who might want to seek compensation from the civil justice system.  If the large bank servicers are too big for the Fed and OCC to regulate, perhaps the CFPB can tackle this job when its mortgage servicing rules go into effect next January.

A Final Pet Peeve: The Right to Consumer Financial Industry Data

posted by Lauren Willis

Thank you to the Credit Slips team for allowing me to use their soapbox for the last few weeks.  I leave you with a final pet peeve: Why does the government have to rely on commercially-collected financial industry data sets or voluntary surveys of financial firms to discover the effects of policies the government has put in place? This is just embarrassing. The U.S. government has so little power over the financial industry – an industry that only exists by virtue of the full faith and credit, payments systems, FDIC insurance, etc. provided by the U.S. government – that it cannot demand data from banks and financial firms, but instead must ask politely for voluntary survey answers or search the data market and pay for information like a commoner? 

Continue reading "A Final Pet Peeve: The Right to Consumer Financial Industry Data" »

When a Billion Dollars has Eight Digits; Taking Authorization Seriously

posted by Melissa Jacoby

CloudytitleMove over, two ships Peerless. Even in legal regimes that prioritize substance over form, errors in the execution of formalities can produce significant consequences and the risk of transactional failure. And even chapter 11 cases featuring quick asset sales can generate litigation over such formalities for years to come. A recent example illustrates both points.  

On March 1, 2013, the United States Bankruptcy Court for the Southern District of New York issued and certified a judgment for direct appeal to the United States Court of Appeals for the Second Circuit. The decision grants summary judgment in Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. et al, adversary proceeding 09-00504, in the GM bankruptcy. The decision already has received in-depth summaries, at least in some law firm bulletins. If the Second Circuit accepts a direct appeal, I aspire to watch the oral arguments, but hope it will be easier to find a seat in the courtroom than in NML v. Argentina.   

Continue reading "When a Billion Dollars has Eight Digits; Taking Authorization Seriously" »

Me Too

posted by Stephen Lubben
Some thoughts on Cyprus, over at Dealb%k.

Banks, Governments and Cyprus

posted by Anna Gelpern

A key point is at risk of getting buried in all the din surrounding Cyprus's deposit levy (apparently poised for parliamentary defeat). To me it comes through most clearly in the latest from the tornado-chasing (or front-running?) duo, Lee Buchheit and Mitu Gulati. 

One message of the Cyprus program is that bank liabilities must not become sovereign liabilities. It is consistent with Europe's imperative of breaking the bank-government cycle. The approach implies that banks' creditors may suffer while the sovereign's creditors are spared--even in a systemic crisis. This might happen on purely ideological grounds (No Bailouts, Ever), or when the sovereign has no money/no appetite to nationalize the banks, or when government debt is a huge portion of the banking sector's assets. Proponents of the levy believe that going after the government's creditors here is both pointless and bad for incentives. Best to keep the banks separate, and to attack the problem at the source.

My hunch is that this entire line of argument is farcical, because banks and governments are, and always have been, joined at the hip. The purported separation is an accounting cover-up.  The fact that the separation is accomplished by means of mega-financial repression underlines the irony.

Continue reading "Banks, Governments and Cyprus" »

Cyprus: Is the Precedent Worth $7.25B?

posted by Adam Levitin

Stepping back from the Cyprus bail-in, I'm wondering if it is penny-wise, pound-foolish. The depositor tax is only supposed to raise about $7.25 billion (5.8 billion Euros).  Given the risks created by a bailout being rejected and the risk of runs created in other countries, does it really make sense to demand the depositor tax?  $7.25 billion seems like a really cheap price for avoiding the problems that the Cyprus depositor tax is making. Indeed, in the big picture, the whole Cyprus bailout package is only around $23 billion.  It makes me wonder why the EU doesn't just lump the whole thing.  (Easy for me to say when I'm not paying...)

There is, of course, a strong equity argument for parallel treatment of all bailed-out countries, and that suggests that Cyprus should have to pay like any other country. But that argument cuts both ways:  it means no freebies, but it also means just austerity measures, rather than a bail-in. 

Cyprus as Precedent: Will There Be Bank Runs Elsewhere?

posted by Adam Levitin

Anyone want to take bets on whether there will be runs on Italian, Spanish, and Portugese deposits? That's my bet. I'm not sure that we'll see small retail depositor runs, but I would predict that high dollar deposits in all of those countries will start flowing abroad very fast before any capital controls can catch up with them. And that will push up borrowing costs for those banks if they want to retain high-dollar deposits.

Cyprus Bailout: What Happened to Absolute Priority?

posted by Adam Levitin

Cyprus seems to be the next European domino to fall to bailoutitis.  Here's the situation as I understand it. Cyprus has unmanageable government debt, not least because of the liabilities that stem from supporting the insolvent banking sector. The EU will put in money to pay off Cyprus's bondholders, but only if there is a copay from Cypriot taxpayers.  Cyprus seems to have decided that the best way to do this co-pay is a (supposedly) one-time tax on all bank deposits. The tax is slightly progressive, with a higher rate on big Euro deposits.  

There is, of course, always the issue of whether there should be a bailout. But putting that aside, the problem with the Cypriot bailout, as I see it, is that it is a bail-in that does not comply with absolute priority because being done through the tax system, rather than through an insolvency proceeding. The problem isn't that Cypriot depositors have to make a co-pay, but that the co-pay costs are not being divvied up among Cypriot depositors and the other creditors and equityholders of Cypriot banks either per absolute priority or ratably. For all of the complaints about absolute priority violations with GM and Chrysler's bankruptcies, the Cypriot situation looks much worse. 

Continue reading "Cyprus Bailout: What Happened to Absolute Priority? " »

TBTF or Maybe WT-?

posted by Stephen Lubben

So the financial industry got a surprising amount of press over their obviously ridiculous statement that too big to fail no longer exists. Thankfully most saw this for what it was.

If I announced that bankruptcy professors are underpaid would the press cover that too?

But the actual claim made in press release is pretty interesting and easily overlooked. The bankers assert

since the passage of Dodd-Frank, any cost of funding advantage has been dramatically reduced or even eliminated.  In fact, two recent studies conclude that markets are now imposing a cost of funding premium on large banks of up to 35 basis points.

Read closely, the first sentence means (a) "we still get a subsidy, just not so much as before" or (b) "somehow Dodd-Frank precisely eliminated our subsidy without going too far, who knew Congress could be so precise?"

Or perhaps the second sentence suggests that Congress was not so precise after all?  That is, does the funding premium (if it really exists – Bloomberg casts doubt on that) suggest the business model of TBTF is no longer viable ... oh dear, better not say that in the press release!

Why the Independent Foreclosure Reviews Were Doomed to Fail

posted by Adam Levitin

Apparently part of the bank flaks' talking points regarding the foreclosure reviews is that to the extent homeowners harmed by wrongful foreclosures, they were actually drug dealers. The message: we didn't foreclose on anyone who didn't deserve it. We were just foreclosing on some scumbags and doing you all a favor by getting the meth lab out of the neighborhood before it blew up. We're part of the war on drugs. 

This talking point is particularly revealing, I think, both about how seriously our largest financial institutions take sanctity of contract, and about the nature of the whole independent foreclosure review sham.  

Continue reading "Why the Independent Foreclosure Reviews Were Doomed to Fail" »

Con Law Lessons

posted by Stephen Lubben
Uniting my current teaching load with Dodd-Frank, over at Dealb%k.

Pawnbroking: The Hot New (Ancient) Credit Market

posted by Paige Marta Skiba

Thanks for having me back at Credit Slips! This week I’ll be blogging about two forms of credit that are increasingly popular: auto title lending and pawnshops.

Pawnbroking is back, and in a big way. Recent television shows like Pawn Stars and Hardcore Pawn are a testament to the resurging interest in this ancient form of lending. In a new paper with Susan Payne Carter and Marieke Bos, "The Pawn Industry and Its Customers: The United States and Europe,"we document important facts about the pawn business. Pawnbrokers take collateral or a “pledge,” (anything from jewelry to tools to dental implants!) in exchange for about 50 percent of the item’s resale value, plus interest.

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Too Big to Regulate? The Warren Debut

posted by Adam Levitin

Elizabeth Warren’s questioning of financial regulators at her first Senate Banking Committee hearing got a lot of attention for her pointed question about when was the last time any of their agencies had taken a large bank to trial.  It was a telling exchange, but I think the attention it received overshadowed her even more interesting second question (here at 04:29):  why is the market capitalization of the major banks lower than their book value?

Typically companies' market cap is above their book value, but for many large banks, it has been below since 2008. JPMorgan Chase, however, has a book value of $195 billion, but a market cap of just $186 billion.  (Market:Book of 95%)  And Bank of America has a book value is $218 billion, but the market cap is only $129 billion.  (Market:Book is just 59%.)  What accounts for the staggering $89 billion gap? To put things in perspective, a bank with $89 billion in assets would be the sixth largest in the US, just behind Goldman Sachs, and just ahead of MetLife and Morgan Stanley. 

Senator Warren proposed two possible (and possibly consistent) answers: that investors think the banks have inflated books or that they're too big to manage. 

Continue reading "Too Big to Regulate? The Warren Debut" »

Who Owns the MBS Claims? AIG or the Fed?

posted by Adam Levitin

Alison Frankel has a great column today on the fight going on between AIG and the NY Fed about who owns the securities fraud claims associated with the MBS that AIG sold to the NY Fed (or more precisely, its Maiden Lane SPV) as part of its bailout. 

I have no idea who is right in this dispute, but as Frankel observes, if the NY Fed is correct, it raises the question why the NY Fed has failed to prosecute the MBS fraud claims. The argument that there aren't meritorious claims is rather hard to swallow given that other regulators (FDIC, FHFA, NCUA) and institutions have brought fraud claims relating to MBS and some of those claims have resulted in settlements (including the still not finalized $8.5 billion settlement with BoA/Countrywide).  

A Rock and a Hard Place Await for Me

posted by Stephen Lubben
Some thoughts on the tough spot AIG's board finds itself in, and how it could have handled the PR angle better, over at Dealbook.

Small Bank Exemptions

posted by Adam Levitin

Community banks and credit unions are the darlings of Congress in the financial services industry. This is quite understandable--they play an important economic role in their communities and have a much greater civic presence than the big banks. The president of the local community bank is much more likely to be involved in major civic organizations than the Bank of America branch manager. As a result, a parallel regulatory system has developed for community banks and credit unions.  Small banks and CUs (net assets of less than $10 billion) are exempt from CFPB examination and from the Durbin Amendment's regulation of their interchange fees. They're subject to regular FDIC seizure, rather than OLA, and are not subject to SIFI regulation with higher capital requirements. And they would have been exempted from the proposed cramdown legislation.

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Hackers, Bank Records, and Going Paperless

posted by Adam Levitin

The traditional allocation of losses at a bank was first loss bank, second loss government, but never losses to insured depositors. To wit, if Willie Sutton robs a bank, the money lost is the bank's, not that of any particular depositor.  If bank fails, then the FDIC steps in pays out the insured depositors. It does so on the basis of the bank's books and records.  

The phenomenon of hacking strikes me as changing this loss allocation paradigm:  the hacker might steal from individual customers' accounts, not from the bank vault. If the hacking can be identified, then the traditional loss allocation kicks in. But this depends on the bank having an uncorrupted set of books and records that the hacker hasn't accessed. If the hacker can both grab money from the account and mess with the bank's books and records, then there's a royal mess.  

Continue reading "Hackers, Bank Records, and Going Paperless" »

OCC Review Whistleblower

posted by Alan White
Adam Levitin predicted here that the "independent" review of banks' foreclosure files ordered by the OCC in the wake of the robosigning scandals would be a sham, based among other things on the adverts to hire the reviewers.  Now, one apparently overqualified reviewer has told his story at Naked Capitalism, and it is worse than Adam predicted.  The banks are actively and successfully suppressing efforts  by reviewers to identify foreclosure errors and abuses and to identify and compensate victims.  Perhaps this could be the subject of a hearing for the newly constituted Senate Banking Committee...

Reading the New FDIC/Bank of England Resolution Paper

posted by Stephen Lubben

Which is available here.  Slow going:


What I Love about Kiva.org

posted by Alan White

Kiva.org is the on-line microlending network that allows anyone to lend $25 or more to individual low-income borrowers around the world for micro-enterprise and housing.   Kiva is an entirely different way of thinking about credit and financial intermediation. While it may be small, it is an example of the real utopias described by Erik Olin Wright in his 2012 presidential address to the American Sociology Association.

Through kiva’s web site, anyone wishing to make a loan can browse the descriptions of borrower projects. For example, a woman in Central America has applied for $350 to buy bricks, cement, wire, sand, gravel and iron to build on to her house, and proposes to repay over 15 months. NGOs prepare the loan descriptions, disburse and collect loans and provide support services to borrowers. 

The interest paid by the borrower covers the costs of payment transfers, underwriting and supervision of the loans and the administration of the program.  Lenders receive no interest.  Those of us with some surplus wealth can put it to productive use without insisting on enriching ourselves as a reward for being (at least relatively) wealthy.   This is especially painless at the moment when interest rates for savers in the conventional retail banking sector are low, but it can also give us an opportunity to reflect on the deep capture of contemporary economic thinking by the idea that capital is entitled to, and must always, earn interest for being put to use.

With its capacity to connect thousands of individual lenders with thousands of individual borrowers, kiva also points one way to solving to the maturity mismatch that creates so much risk for conventional banks.  An individual lender/saver can browse a list of thousands of potential loans of varying maturities, and match his or her own cash needs with the borrower’s.  There are no 30-year mortgages on kiva (yet) but the possibility is there. 

Whether microlending and microfinance generally are a net welfare benefit foScreen shot 2012-12-08 at 10.22.10 AMr poor borrowers is a complex and controversial question, to which there are a variety of empirical and theoretical responses.  Other peer-to-peer lending and crowdfuding experiments without the social mission have raised a host of problems, including high default rates.  I can say, though, that I experience more happiness browsing my kiva.org portfolio (see picture) than any of my other account statements.

Where Are the Foreclosures?

posted by Adam Levitin

Bloomberg has a story Foreclosure Wave Averted as Doomsayers Defied. I think it's a great example of defining deviancy downward. There's no question that we haven't seen a foreclosure tsunami in the wake of the federal-state servicing fraud settlement. But there was little reason to expect one and let's not lose sight of the big picture--foreclosure levels are still incredibly high. 

Continue reading "Where Are the Foreclosures?" »

CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection

posted by Jean Braucher

The Consumer Financial Protection Bureau is doing something promising with its anti-abuse authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.  It is going after credit industry exploitation of consumers, particularly when business models involve using confusing terms that disclosure cannot adequately address.  See my paper on this topic. So I was not surprised to see George Will attacking this development.   We can't have smart, effective consumer protection, no matter how popular it might be.

In a column published in many newspapers this week,Will wrote: “The CFPB's mission is to prevent practices it is empowered to ‘declare’ are ‘unfair, deceptive, or abusive.’ Law is supposed to give people due notice of what is proscribed or prescribed, and developed law does so concerning ‘unfair’ and ‘deceptive’ practices. Not so, ‘abusive.’”

The flaws in Will's critique are legion. First, the CFPB has given lots of notice of what it is doing, in a detailed examination handbook.

Continue reading "CFPB's Anti-Abuse Authority: A Promising Development in Substantive Consumer Protection" »

What’s Up With “Independent Foreclosure Review”: Boondoggle for Consultants and More Foot-Dragging by Servicers

posted by Jean Braucher

After the robo-signing scandal broke in the fall of 2010, followed by a huge bureaucratic in-fight, a federal interagency review produced the Independent Foreclosure Review Program, announced with great fanfare in April 2011. See here and, here.

The program contemplated that mortgage servicers would have to employ consultants for independent review of their foreclosure and related modification processing errors and then pay compensation to homeowners who suffered financial loss as a result, with awards of up to $125,000.  

So how’s that been going? As of now, the “independent” consultants are racking up bills for hundreds of millions of dollars (by September, a quarter billion to PricewaterhouseCoopers alone), while homeowners—according to American Banker—have so far gotten nothing!

Continue reading "What’s Up With “Independent Foreclosure Review”: Boondoggle for Consultants and More Foot-Dragging by Servicers" »

Race and the Housing Bubble

posted by Jean Braucher

While we wait to see if the second Obama administration will do anything new to help homeowners hit by the lingering mortgage crisis (finally replace Bush-holdover Ed DeMarco at FHFA to make way for debt relief?), there’s time to review a recent development that didn’t get the full attention it deserved.

I am referring to a lawsuit, Adkins v. Morgan Stanley, filed in the Southern District of New York in October by the ACLU. We don’t usually associate the ACLU with consumer protection in mortgage finance, and not surprisingly, it has brought a fresh perspective on the abuses that led to the housing bubble, highlighting race disparity in subprime originations.

Together with the National Consumer Law Center, the ACLU has brought a class action against Morgan Stanley charging that it financed a major subprime mortgage originator, dictated the nasty terms offered, and bought up a big portion of the resulting junk to feed its securitization maw.  The originator was New Century Mortgage Corp., which filed in bankruptcy in 2007.

The plaintiffs are African-American homeowners in Detroit who were sold New Century mortgages and who have ended up facing foreclosure. Also joining as a plaintiff is Michigan Legal Services, which has been swamped with mortgage cases in foreclosure ground zero, Detroit.

The legal theories used include the Fair Housing Act and the Equal Credit Opportunity Act, which are promising because these federal laws cover purchasing loans and also make disparate racial impact sufficient to make out a discrimination case. The 71-page complaint presents data that Detroit-area African-American customers of New Century were 70 percent more likely to end up in subprime loans than white borrowers with similar financial characteristics. The suit seeks a jury trial and disgorgement of ill-gotten gains, among other relief including appointment of a monitor (a good idea given the constancy of race discrimination in US housing finance practices).

Continue reading "Race and the Housing Bubble" »

While You Wait

posted by Stephen Lubben

As somebody who has dabled in empirical legal studies, and recently noted the tendency among academics and policymakers to ignore inconvient data, I'm quite eager to see how the models hold up. After all, one guy might have to eat bugs if this goes poorly.

But in the interim, over at Dealbook I give you a summary of my latest paper (co-written with Rajesh P. Narayanan of Louisiana State University) on CDS and restructuring. In short, we argue that something like the Williams Act should apply in workouts to require disclosure of CDS positions.

Its forthcoming in the Journal of Applied Corporate Finance, and available in draft here.

Shakin' Things Up

posted by Stephen Lubben

In my most recent Wiley lecture, given in connection with the chair I hold, I argued that boards, particularly in financial institutions, should think outside the box with regard to new board appointments, if they really want to improve corporate governance.

So this morning we get the word that Barclays' big board purge might consist of appointing people from

  • Lloyd's
  • Standard Chartered
  • Morgan Stanley
  • Merrill Lynch

Read This

posted by Stephen Lubben
An important post about the great industry bugaboo – "regulatory uncertainty" – and the issue of "qualified mortgages," which, as Adam has noted, has become something of a political football.


posted by Adam Levitin

A few very quick impressions about the NYAG's suit against JPMorgan.  

Continue reading "NYAG MBS Suit" »

Subtly TBTF

posted by Stephen Lubben
An important post over at Dealbook (no, it's not by me) about the difference between the Volcker Rule and general TBTF regulation of SIFIs under Dodd-Frank.

And the wind blows wild again

posted by Stephen Lubben
Me, over at this place called The New York Times, on the safe harbors in the Code, again.

EU Update (And FI Reality)

posted by Stephen Lubben

If you've been tuning out the Euro situation, despite Gelpern's periodic updates, today's Times magazine has a since summary of where things stand.

I also think the end of this bit nicely captures the extant cynicism regarding financial institutions.

4. Is Europe a Lehman in waiting? About 20 percent of U.S. foreign trade is with the E.U. That’s significant, but if the European economy collapses, it’s quite likely that China, India, Brazil and several gulf states will pick up much of the slack. And a truly collapsed euro would mean discounts on everything from French wine to Italian shoes to Greek yogurt. More worrying is if a) the euro zone faces an abrupt financial panic, and b) it turns out that many American banks are overly invested in those suddenly defunct European banks. There is a general assumption that U.S. banks are prepared for the worst. But many in the financial world thought they were prepared for the collapse of Lehman Brothers too.

Importantly, my sense from talking with people who work at FIs is that they don't understand this is how they are perceived by the vast bulk of people.

Why Housing?

posted by Adam Levitin

Susan Wachter and I have a new paper out, entitled Why Housing?  The paper is a critical review of scholarly theories of the housing bubble.  It focuses on the question of what made housing vulnerable to a bubble and why it has been so hard to resuscitate the market.  

The article also lays out in concise form the theory of the bubble that Susan and I have been propounding for a while namely that the key to understanding the bubble is the shift in the financing channel from Agency securitization to private-label securitization, an asset class rich in information and agency problems.  Our short version of the bubble is that financial intermediaries exploited private-label securitization's information problems to inflate a bubble that produced short-term gains for them through fee-based income.  In other words, this was a man-made bubble, not the product of government affordable housing policy, macroeconomic policy, irrational exuberance, or ineluctable forces of supply and demand.  The abstract is below the break.  

Continue reading "Why Housing?" »

Why No Prosecutions

posted by Adam Levitin

The NYTimes had a very good editorial today bemoaning, with resignation, that there will not be any serious prosecutions of senior bank executives or institutions for the financial crisis.  The biggest fish to be caught was Lee Farkas. Who? That's the point. There have been prosecutions of some truly small fry fringe players and some settlements that are insignificant from institutional points of view (even $500 million, the SEC's record settlement with Goldman over Abacus was a yawn for Goldman), but that's it.  

The NYT editorial incorrectly states that the relevant statute of limitations have expired.  The usual statutes of limitations have or will shortly expire, but not those under FIRREA (for frauds that affect federally insured banks), which are 10-years long. So there is still theoretically the possibility of prosecutions (and remember that Mozilo's deal, for example, was with the SEC, not with the states...). But don't count on it happening.

My prediction is that when the history of the Obama Administration is written, there will be some positive things to say about it, but also two particular blots on its escutcheon.  First, the failure to act decisively to help homeowners avoid foreclosure, and second, the failure to hold anyone accountable for the financial crisis. These two failures are intimately tied, of course. Both are explained by the "Obama administration’s emphasis on protecting the banks from any perceived threat to their post-bailout recovery." 

The logic here is that financial stability and economic recovery are more important than rule of law. There's an argument to be made that law has to give way to basic economic needs.  I, however, would reject the choice as false. Instead, the best way to restore confidence in markets is to show that there is rule of law.  The best route to economic recovery was through rule of law, not away from it. (Yes, I realize there are those who would argue that the GM/Chrysler bankruptcies and cramdown aren't rule of law, but rule of law can include flexible systems like bankruptcy, rather than just rigid rules.)

The Administration, however, determined that it wasn't going to rock the boat via prosecutions, even though there is no person in the banking system who is so indispensible to economic stability as to merit immunity from prosecution, and as the experience of 2008-2009 shows, recapitalizing institutions isn't rocket science. In any case, the Administration's policy has produced the worst of all worlds, where we have neither justice nor economic recovery. This is our new stagflation. Call it injusticession.  

Do Your Research, Ezra Klein!

posted by Adam Levitin

Ezra Klein has joined the melee over the Obama Administration's housing policy failure with an apologia for the Administration.  Klein argues: 

The right question on housing, then, is not whether the administration’s policies proved insufficient. They did. It’s what would have been better. And that’s not a question that either Appelbaum or Goldfarb conclusively answer. It’s not even a question that the most credible critics of the Obama administration’s housing policies conclusively answer.

In making this claim, Klein ignores a long list of the Administration's critics who pushed hard and vocally for more pro-active policy alternatives.  (I'm going to ignore the "conclusive" part of Klein's restatement of the issue. If he wants critics to prove "conclusively" that an alternative would have been better, then nothing will suffice.  We're not dealing with a pick-your-own-adventure book where you can go back and try out different decisions.)  

As far as what would have been better:  gosh, there's a list of potential interventions that very credible people were proposing.  Here are a few:

Continue reading "Do Your Research, Ezra Klein!" »

Zywicki's Interchange Settlement Balderdash

posted by Adam Levitin

I was really hoping that I would be able to go at least a year without having to call Todd Zywicki out for his comments on some consumer finance issue.  But it's not to be. Zywicki has weighed in on the interchange settlement, proclaiming it to be great thing for consumers.  Mission accomplished.  

How does Zywicki reach his conclusion?  By claiming that:

[the settlement] does affirm the core principle that interchange fees should be set by free markets and consumer choice rather than by judges or politicians, thereby preserving the engine behind one of the marvels of the modern age: the evolution of a 24-hour globally-connected system of instantaneous, secure, and ubiquitous payments system.

Let's put aside the fact that other countries have more advanced, more secure, faster, and more ubiquitous payment systems than the United States without oppressive card network rules and price-fixing.  Apparently this is an ideological matter. The settlement affirms the primacy of free markets and consumer choice, Zywicki claims. How? Zywicki isn't long on the details, but the answer would be that it preserves the current interchange fee system.  In short, the settlement is a victory for consumers because it accomplishes next to nothing.  

Continue reading "Zywicki's Interchange Settlement Balderdash" »

The Interchange Settlement

posted by Adam Levitin

Moved to top from 8/15.  

I've held my tongue for a while on the proposed class settlement in the multidistrict credit card interchange fee litigation (MDL 1720).  I'm weighing in on it now.  I've written up an analysis of the proposed settlement.  It's available here.  [N.B.:  this is substantially expanded 8/21 revision of the original 8/15 analysis.]  It's worthwhile noting that the settlement is not a done deal yet--at this point it is a deal between lead counsel for the proposed plaintiff class and the defendants--the settlement must still be accepted by the named plaintiffs (or at least some of them) and approved by the court, and it appears that at least several of the named plaintiffs will reject the proposed settlement.   

The short version of my analysis is that the settlement is an exceedingly bad deal for merchants and not in the public interest.

Continue reading "The Interchange Settlement" »

When Stone Is Dust and Only Air Remains

posted by Stephen Lubben

Some thoughts on customer protection at brokerages, following MF Global, over at DealBook.


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