- The $160 million paid by Merrill Lynch to settle its bias case is in some ways a landmark, and in other ways puts the whole fine culture on Wall Street in mysterious perspective. It's the largest such settlement ever, and yet a much larger ($550 million) settlement by Goldman Sachs in the wake of the Abacus case was thought to be a slap on the wrist. I eagerly wait an explanation of the transitive properties of settlement penalties.
- The international financial regulatory deals realize their enforcement through peer review and reports to the G20. Here's Basel's latest example, assessing the state of compliance with its capital accords. The US is assessed to be only semi-compliant with Basel II, and making progress on implementing Basel III. If you want to know the three elements of Basel III that the Basel Committee thinks are the important ones, then you can find out here; the table that comprises the bulk of the report focuses on only three elements. It reports on compliance with the G-SIB process (identifying and adding capital requirements to Global Systemically Important Banks), the Liquidity Coverage Ratio (requiring banks to keep a percentage of assets in cash or very short term debt), and the Leverage Ratio. The capital requirements are monitored through compliance with Basel II and what the committee calls 2.5.
If you didn't see it, the Wall Street Journal brings word, straight from Eric Holder's mouth, that yes, there will be some financial crisis cases brought. The AG said:
....anybody who's inflicted damage on our financial markets should not be of the belief that they are out of the woods because of the passage of time. If any individual or if any institution is banking on waiting things out, they have to think again.
The only thing is, the passage of time is beginning to hem in DOJ. The world went crazy in September, 2008 - five years ago next month. And the ordinary statute of limitations for federal cases is five years. What can we surmise from this?
- Some people really can start to breathe easier. Although the crisis became spellbinding with the collapses of Fannie, Freddie, AIG, and Lehman Brothers, the securitization markets had already pretty much ground to a halt by 2007. Bear Stearns had fallen. There are some statutes - criminal mail and wire fraud, for example - that, unless I'm missing something, cannot be invoked for matters that happened then.
- Those people do not include those who committed bank fraud, or fraud "affecting a federally insured financial institution." Under FIRREA, these defendants are covered by a ten year statute of limitations, lashings of time. FIRREA can get the government civil monetary penalties, but not criminal ones.
- So if Holder is planning some press conferences, he's likely doing so for criminal cases that would be associated with the events of the fall of 2008, or civil cases that have a much broader scope, but probably do not involve a hedge fund lying to a money market fund, or something that does not involve FDIC insurance.
It is because, to channel Nietzsche, the Fed "writes such good books." The good book-length rule* it wrote on Friday puts companies overseen by the Financial Stability Oversight Council (the Dodd-Frank committee of agencies, remember) on the hook for $440 million annually - to be paid to the Fed itself. Those are supervision fees, and the Fed is the FSOC's designated supervisor. Banks with over $50 billion in assets and nonbanks designated as important by the FSOC have to pay for that additional FSOC supervision, and the Fed has now told them how much it will cost.
The SEC, which is on the FSOC, can only be jealous. It's been after self-funding for forever. And the Fed doesn't even need this new stream of income. It already makes banks pay for supervision, and of course it also makes money on currency trades.
*Okay, the rule's not so long. A trim 31 pages, with the key decision being that the assessments are basically going to be apportioned by size, rather than by complexity, dangerousness, or some other criteria - a fact that has not pleased the American Bankers Association.
In DealBook, Steve Davidoff and I have a take on Perry Capital's interesting, and Ted Olson led, suit against the government after it changed the dividend payment rules for unextinguished but unresolved Fannie and Freddie shares that remained outstanding during the financial crisis. A taste:
[B]y 2012, Fannie and Freddie unexpectedly turned back into profitable firms. Seeking a way to keep the common and preferred stock worth nothing, the government changed the way the two paid their dividends in a fashion that meant all dividends went directly to Treasury – that any remaining common and preferred-stock holders would receive nothing.
Perry Capital has accumulated both common and preferred stock in the two entities before this change, and now wants those dividends to be paid to those shareholders once the government’s priority preferred stock has received its 10 percent. It argues that the government failed to justify the change in dividend payments.
Do give it a look. Let us know your thoughts, either over here or over there.
The SEC "failure to supervise" claim against Steven A. Cohen is an administrative one; it goes before an admnistrative law judge, insulated agency employees that preside over trial-type hearings (but can dispense with the rules of evidence, etc), appeal from which is made to the commission, and after that to the federal courts. Court review is likely to be most searching where the commission reverses the ALJ; and SEC ALJs in my view, have the most fun (or are tied for that honor with ITC ALJs who hear seriously big money disputes). Most ALJs work for the Social Security Administration, but a small number occupy specialized niches in other agencies (in the 90s, the SEC relied on all of three ALJs to do their administrative adjudications). These judges, because of a very strong veterans' preference, are very likely to have military backgrounds, which makes them in turn very likely to be men.
Will they rule in favor of the agency they work for? Here's John Carney on the early defense being put together by Cohen's lawyers:
First, they say Cohen didn't read the email. Like most of us, Cohen gets far too many emails to read them all. According to the paper, he gets roughly 1,000 emails each day. This is highly plausible for someone in Cohen's position. Let's call this the "Email is Broken" defense.
The second response is the "Hamptons Pool" defense. When the email was sent to Cohen, at 1:29 in the afternoon, Cohen was in the middle of a 19 minute telephone call with SAC's head of business development. A minute and a half after the conclusion of that phone call, at 1:37:46, Cohen got a call from a research trader, discussing something or other (no one is certain what). At 1:39:11, an order to sell shares of Dell in Cohen's personal account at SAC was placed.
And here's Matt Levine on the claim that Cohen should have realized he was being told to sell Dell stock based on inside information:
here’s the obvious paradox of “I was too busy not reading emails to not supervise.” ... [A] billionaire businessman who gets 1,000 emails a day can probably afford an employee to screen those emails and flag the most important ones for him. And Cohen did that. There was “a SAC employee whose duties included forwarding to Cohen trading-related information worthy of Cohen’s attention (the ‘Research Trader’).” And that employee forwarded the relevant Dell email to Cohen’s office and home email addresses. And then called to follow up. And talked to Cohen for 48 seconds. And then Cohen sold Dell. But: he never opened the email. Imagine the priority that he gave to emails that the Research Trader didn’t flag.
One the one hand, those prices are set by a commodity exchange, which, in theory, the firm would have to corner to set prices. And getting around a "you must deliver 3000 tons of aluminum to the market every day" rule by delivering it to other warehouses in Detroit that you own hardly seems like effective subterfuge. If anything, it is too dumb a regulatory compliance strategy to be possibly what the firm had in mind.
On the other hand, since GS bought the firm that stores 25% of the nation's aluminum, the market has changed. That is,
Before Goldman bought Metro International three years ago, warehouse customers used to wait an average of six weeks for their purchases to be located, retrieved by forklift and delivered to factories. But now that Goldman owns the company, the wait has grown more than 20-fold — to more than 16 months, according to industry records.
If lengthy delivery delays began the second that Goldman bought the firm, that's something. And if the idea is that creating delivery delays makes the future price of alumninum higher than the present price, there could be a reason to create those delays.
But in my view, the jury is still out. Maybe that's only because it is inherently pretty hard to write about these sorts of trades in a way that makes sense in New York Times levels of space. We'll see if the hearings are more revealing, as well as if the very busy CFTC has the resources to chase the story.
That mineral payments rule reversal is something worth thinking about, as it is the early days of the Dodd-Frank rulemaking, and no agency wants to be constantly reversed in its efforts to implement a healthy grant of authority. Nonetheless, outsourcing yields its own dividends. From Corp Counsel:
The SEC's loooong losing streak in major cases continues. Yesterday, Judge John Bates of the US District Court for DC vacated the SEC's resource extraction rules and remanded the case back to the SEC (just before he leaves for another job). This case was brought jointly by the Chamber and the American Petroleum Institute. Oxfam America had joined the SEC as a defendant to defend the rule.
Either the SEC will appeal or it will conduct new rulemaking which takes into account the Judge's twin concerns of public disclosure of individual payments to foreign governments and lack of an exemption for countries that have laws that bar disclosure of payment information. If the agency goes the rulemaking route, it may simply revise its existing rules or go through an entirely new rulemaking process (bear in mind the SEC has a new Chair and two new Commissioners coming in). Either way, the deadline of reporting payments starting October 1st is bound to be substantially delayed. The SEC can't simply drop the rulemaking since adopting a rule is mandated by Dodd-Frank.
This does not bode well for the future of the conflict minerals rules, since a similar case is pending before the same court with a decision expected soon (oral argument took place two days ago in that case, as noted in this article). Nor does it bode well for federal agencies in general trying to promulgate rules, even though the Chamber lost one of these "cost-benefit analysis" cases against the CFTC last week...
It's not, in my view, a very persuasive opinion, though it might make a smidgen of sense in a world where firms operating in countries that prohibit the public disclosure of payments made to governments have to choose between meeting their reporting requirements and continuing to operate their overseas plants.
The problem is that Dodd-Frank requires mineral extraction companies to file annual reports of payments made to these governments. The SEC, in its rule, concluded that requirement obviously meant that the reports would have to be disclosed to the world, not just to the agency. And if that isn't clear from the plain language of the statute, it is at the very least a reasonable reading of it. Is it crazy to conclude that the following language means that companies must disclose to investors their payments to governments? For that is what the opinion holds:
Under the heading “Disclosure,” and the subheading “Information required,” section 13(q) provides that “the Commission shall issue final rules that require each resource extraction issuer to include in an annual report of the resource extraction issuer information relating to any payment made” to a government for “the commercial development of oil, natural gas, or minerals.”
One of the early rules pased by the SEC under Dodd-Frank, and one of the first to go down. Commentary, and opinion. It wasn't even the DC Circuit that was to blame - this fell before a district court judge.
The new policy, however, will make pursuing the big fish draining. For the large cases, it will mean that there are only two possible outcomes: a civil trial with a verdict, or an admission of guilt by the defendant, which will lead to serious follow-on litigation.
It is particularly troubling given that the new S.E.C. chairwoman, Mary Jo White, has said she would like to prioritize securities fraud cases. Those cases are hard enough to win to begin with. They frequently involve large public companies that may balk rather than make an admission and face litigation from plaintiffs’ lawyers who did not discover and bring cases on their own before the S.E.C. action.
One can also assume that making the price of admissions high will make the price of fines correspondingly low.
Dodd-Frank is already under attack--and not just from the usual suspects like special interests, but also from globalization itself. Because of the international nature of today's financial markets, many of the objectives embraced in Dodd-Frank--from trading OTC derivatives on exchanges and centralized clearing to hiving off or limiting the activities of too-big-to-fail banks--require international cooperation to actually be effective. Without it, the United States can certainly try to unilaterally regulate the world. But chances are, go-it-alone strategies will just force still dangerous transactions offshore, or push some of our closest trading partners to retaliate against us, or just as damaging, ignore the US government when it asks for help pursuing its own objectives abroad.
And you know where to find the rest.
Over at Opinio Juris, I have an essay up reviewing Katerina Linos's excellent book on The Democratic Foundations of Policy Diffusion. It is part of an online symposium with lots of august participants, as well as an august author, so do give it a look. Here's a taste:
Katerina Linos knows the – always surprising to me, but repeatedly tested by political scientists – fact that countries adopt the policies of their similar, often nearby, neighbors. In The Democratic Foundations Of Policy Diffusion, she argues that there is good news underlying this trend of cross-border adoption. Rather than being a function of bureaucrats forcing, say Swiss health care models down the throats of American citizens, she shows that, across countries, and even among Americans themselves, 1) citizens prefer policies that are proposed with evidence of foreign and international organization endorsement; and 2) politicians invoke this sort of evidence when trying to mobilize support for their programs.
This might strike your average American, who, if she is anything like me, is hardly maximally cosmopolitan, as implausible. How many voters, let alone the median American voters political scientists think about the most, care about how they do things in Canada, or can be bothered to find out? Will they really choose the suite of policies proposed by the leader who does the best job invoking the recommendations of the United Nations on the campaign trail?
Steven Lubben reviews the lawsuit by Fannie and Freddie shareholders against the government for bailing out the firm in a way that killed the value of their investment (true, it certainly did that). Once again, you can see how the Takings Clause is basically the only way that the government's financial crisis actions are being reviewed by the courts. And, by the way, these sorts of claims have been brought in the past by bank shareholders against European governments that bailed out banks and zeroed out shareholders - you can imagine the case to be made by someone just pointing at the breakup value of those branches, ATMs and so on as a better deal for shareholders than a bailout.
In the US, however, Lubben identifies a potential problem:
The conservator process was enacted as part of the Housing and Economic Recovery Act of 2008. That law does not indicate which power Congress was using when it enacted the act. Arguably, the conservatorship provisions might be deemed an exercise of power under the Bankruptcy Clause, which gives Congress the power to enact bankruptcy laws.
While the Supreme Court has held that laws enacted under the Bankruptcy Clauseare subject to the limits of the Fifth Amendment, it has done so only in cases involving secured creditors. Our plaintiffs here are not even unsecured creditors; they are shareholders, meaning that they are at the bottom of the capital structure in the event of a bankruptcy.
Therefore, it’s not even clear that the plaintiffs have an interest in “property” that is protected by the takings clause of the Fifth Amendment. That would seem to be kind of important if one is bringing a takings claim.
It will be interesting to see how the Court of Claims rules on this - it has let takings claims by AIG shareholders and GM auto franchisees go forward.
Mario Draghi is the head of the European Central Bank, and he will go down as an epochal head, for good or ill, given the severity of the crises that have occurred on his watch. It's an exciting day job.
But he just picked up a new gig for his nights and weekends:
The Group of Governors and Heads of Supervision (GHOS) has selected Mario Draghi, President of the European Central Bank, as its new Chair after consultations among its members.
The GHOS has been around for a little while, and it's an example of what I see as the increasing institutionalization of, and effort to provide oversight to, the international financial regulation done by the Basel Committee. As the press release announcing Draghi's appointment put it, parsimoniously:
The Group of Governors and Heads of Supervision (GHOS) is the governing body of the Basel Committee on Banking Supervision.
The GHOS consists of central bank Governors and (non-central bank) Heads of Supervision from the following countries: Argentina, Australia, Belgium, Brazil, Canada, China, France, Germany, Hong Kong SAR, India, Indonesia, Italy, Japan, Korea, Mexico, the Netherlands, Russia, Saudi Arabia, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States, and it includes the President of the ECB.
We don't really know what the GHOS does - the Basel Committee is nothing if not secretive about governance. But congratulations to Draghi. As far as I know, neither Bernanke nor Greenspan ever served as head of the GHOS. Perhaps that will change when Draghi rotates out.
This Thomas Edison quote comes from Paul Volcker in a short interview in the Washington Post Wonkblog. The source of Tall Paul's consternation: the decline of schools of public administration in universities and the shift in many of these schools from "public administration" to "public policy." (Here is one example of what Volcker describes: the lawsuit (over 5 years ago) brought against Princeton by the heirs to the A&P fortune that alleged that the Woodrow Wilson School was not using an endowment to educate students for careers in government).
Everybody likes to talk about big issues of war and peace and how we take care of poor people and what we do about other social problems in the United States or elsewhere. They do all this talking but they too seldom know how to implement what they’re talking about.
The legal academy ought to take heed. Much of the interesting spadework in financial regulation scholarship involves questions of institutional design rather than substance. That is, not what is the right legal rule, but how do make sure agencies have the capacities and incentives to write, interpret and enforce rules in the right way and over the long haul.
In terms of education, should law schools look to fill part of the gap in teaching public administration that Volcker identifies?
Increasing the space for public administration or public policy in the law school curriculum faces some challenges. One challenge is economic: how much gold is in them hills? Will this help students find jobs and build careers? A more daunting challenge is philosophical. Law schools largely teach rhetoric. Public administration/policy programs are about making decisions. Just because the first word is the same doesn't mean that policy arguments and policy analysis belong to the same genus.
Still, there are some pearls for law schools even in Volcker's short interview, for example, teaching statistics and how statistics should and should not be used.