March 11, 2016
The Newman Insider Traders Are Going After Their Prosecutors
Posted by David Zaring

And they are doing well.  They - implausibly, by my reading - got a judge not to dismiss claims that Anthony Chiasson's business partner had suffered due process violations, based on the taking of his property, on the fact that their hedge fund was searched based on a misstatement in an affidavit that the business partner knew about the alleged insider trading, and that the supervisors of the lawyers and investigators who brought the claim failed to rein in the unconstitutional conduct of their subordinates.  The judge wants discovery.

To me, this order looks bound for a quick reversal, and, as it is a qualified immunity claim that is being rejected, it should be immediately appealable.  I'm no expert on searches and seizures.  But it would be reasonable to assume that the government, with reason to believe that one of the co-founders of a hedge fund was engaging in insider trading, would search the papers of the hedge fund, including those of the hedge fund's other co-founder, and if the government made a mistake in one of the affidavits supporting the search, that mistake would be immaterial.  The defendants in the case are all but absolutely immune prosecutors and law enforcement officials, and the court doesn't even address that issue.

I don't think the interesting thing about the decision is the legal analysis.  Instead, it's interesting:

  • because Manhattan judges and its US Attorney are in a repeat-player relationship.  In this order, one of those judges basically instructed the US Attorney to prepare to be deposed, which is apocalyptically out of the ordinary.  It suggests that the judges are really angry about prosecutorial overreaching, or at least that one of them is.
  • because this is the sort of relief that judges can uniquely order in business law enforcement.  I doubt that the government will ever have to pay Level Global's owners a penny for essentially shutting it down because it thought one of its principals was an insider trader.  But courts can force the government to worry about that prospect with intrusive injunctive relief like this, and angered scolding.  That's a real remedy, even if the usual remedy - money damages - won't work!


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March 08, 2016
The Battle Over International Insurance Standards
Posted by David Zaring

Over at DealBook, I've got a column on international insurance regulation and its discontents.  A taste:

The globalization of the rules that govern insurance companies has been extremely quick — too quick for the tastes of many American insurers. They are fighting back by asking for process, process and more process.

I think that the protections sought would be unnecessary, and even counterproductive. But they are classics. The insurers are asking for more notice and comment and more trial-type procedures. Administrative process, and how much of it someone should get, lacks a bit of glamour. But it is something that the government and the financial industry will always fight about.

Go give it a look!

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March 04, 2016
Chris Brummer Will Be Great On The CFTC
Posted by David Zaring

Noted financial institutions professor and friend of the Glom Chris Brummer has been nominated to the CFTC, something that just keeps happening to people in and around this blog.  He'd be an excellent commissioner, and we all hope he gets confirmed quickly.

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March 01, 2016
Ben Bernanke Just Guested On The Big Bang Theory
Posted by David Zaring

Apparently, he loves the show, and is keeping his check as a memento forever.  Central bankers, they're just like us!  HT: Matt Levine.

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February 26, 2016
Testimony on the Impact of International Regulatory Standards on the Competitiveness of U.S. Insurers
Posted by David Zaring

I testified yesterday before the House Financial Services Committee on the increasingly internationalized subject of insurance capital requirements, about which Congress and the more modestly sized firms in the insurance industry, have some concerns.  If that's the sort of thing that interests you, you can download the testimony here.

Permalink | Administrative Law| Globalization/Trade | Comments (0) | Bookmark

February 25, 2016
Are Corporate Profits Unimportant for American Prosperity?
Posted by David Zaring

Justin Fox thinks that the answer may be yes:

Some of the biggest names in U.S. business are particularly dependent on overseas markets. Apple, for example, got 59.8 percent of its revenue and 62.8 percent of its operating income from outside the Americas in its 2015 fiscal year. In the most recent fiscal year for which numbers are available, Exxon Mobil got 67.3 percent of revenue from outside the U.S., Alphabet 57.3 percent, Microsoft 54.1 percent, Facebook and General Electric 52.5 percent.

Overall, corporate earnings have become less dependent on the health of the U.S. economy. The big question is whether this also means that the U.S. economy has become less dependent on them.

It's an interesting thesis, if true.  Many American regulators have expanded their efforts to coordinate with their foreign counterparts because of the idea that globalization means that things that happen abroad can have real effects at home.  But if Fox is right, the fact of globalization could reduce the influence of foreign shocks on the domestic economy.  I think the jury's out on this, but file it under food for thought.

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February 11, 2016
Financial Regulation By Deal, Again
Posted by David Zaring

How should we regulate the derivatives markets?  Dodd-Frank gave the CFTC (and SEC, for securities derivatives) the power to act.  But how should they act?  Again, Dodd-Frank offered guidance, but the terms of regulation, in particular of the clearinghouses that are supposed to centralize derivatives trading has been set not by statute, or by CFTC rule, but by a just-concluded agreement with European regulators on how to oversee the market.  That's increasingly how capital markets regulation works, given the mobility of capital and need for standardization.  But it is certainly idiosyncratic, both as a method of domestic regulation and international governance, because it constitutes rule by agreement, not by law, which is something I've written about in the past.

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February 05, 2016
The Financial Crisis Penalties Will Never End
Posted by David Zaring

Today the Fed issued a $131 million penalty against HSBC for playing fast and loose with some of the evidence designed to support its mortgage foreclosure documentation, which it amped up in the wake of the financial crisis.  It got the bank to agree to a consent order to stop doing that in 2011, and took its sweet time in assessing a fine.  But don't worry, it wasn't just HSBC:

The terms of the monetary assessment against HSBC are similar to those that were part of the penalties issued by the Board in February 2012 and July 2014 against six other mortgage servicing organizations that reached similar agreements with the U.S. Department of Justice and the state attorneys general.

Matt Levine observed only yesterday that "The supply of pre-crisis mortgage misconduct seems limitless, the statutes of limitations are flexible, and the mortgage-lawsuit industry may be too large and lucrative ever to really end."  It turns out that we are still in business on post-crisis foreclosure dodginess, too.

I wrote an article that was meant to serve as a pretty comprehensive overview of the way that the crisis has played out in the courts.  And I still like the article.  But it turns out that I wrote it in media res.

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January 22, 2016
The Resource Extraction Rule and Requiring Cost Benefit Analysis At The SEC
Posted by David Zaring

There's talk in the Senate of imposing new rulemaking restrictions on the SEC, and over at DealBook, I take a look:

The legislation would require more math and permit less flexibility by those regulators. But it would also limit Congress’s own ability to require the government to embrace good governance values like “transparency” and “honesty,” if the S.E.C.’s most recent rule-making is any guide.

The senators have suggested that they would impose cost-benefit analysis requirements on America’s financial regulators. No important rule could be passed without establishing that the dollar impositions on the financial industry would not be outweighed by the dollar benefits created by the rule.

The S.E.C. has, because of a series of adverse court decisions, grudgingly embraced a version of this sort of cost-benefit analysis in its rule-making proposals.

Now you can take a look too!

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The Battle To Unionize WalMart
Posted by David Zaring

I'm no expert on labor law, we leave that to Matt, but one pays attention when the decision of an Administrative Law Judge makes the paper.  You can't fire workers for trying to unionize, and I really don't understand WalMart's defense of its decision to fire workers who tried to unionize.

Most of the allegations related to a coordinated set of strikes collectively referred to the "Ride for Respect" because they involved traveling by bus to the company's headquarters in Arkansas for protests at its shareholders' meeting in June 2013.

WalMart called this an unexcused absence and disciplined or terminated the workers who went on the Ride.  To me it looks like an effort to unionize, and I didn't think that was a legal firing offense.  But it sounds like the firm prefers to fire workers who try to unionize and face the consequences.

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January 13, 2016
Financial Firms Really Hate Being SIFIs
Posted by David Zaring

For those who believe that bank regulators are totally captured, I give you MetLife's very grudging decision to maybe break itself up in an effort to get undesignated as a systemically important financial institution, subject to extra capital requirements and Fed supervision.  GE hated being a SIFI so much that it got out of of the business of finance.  MetLife was so outraged by its designation that it sued.  And the enormous asset managers, such as BlackRock, watching this must be terrified that they will be designated next.

The exception?  Very large banks, who were already subject to Fed supervision, aren't trying to get smaller, or at least haven't so far.  It could be that one of the things that they consider to be part of their skill set is dealing with regulators.  For those who grew into prominence with other skills, regulatory management is clearly not worth the candle.  But that's what big banks do.


The giant insurer MetLife said on Tuesday that it was exploring spinning off its retail life and annuity business in the United States because of financial pressures it is facing under regulations put in place in the wake of the financial crisis.

The decision was made two years after the Financial Stability Oversight Council, a group created by the 2010 Dodd-Frank regulatory legislation, named MetLife a systemically important nonbank financial institution, or SiFi. That designation carries requirements to set aside more capital as a cushion against a substantial decline in the nation’s financial markets as occurred in 2008, potentially limiting its earnings.

MetLife is considering several options, including an initial public offering to create a company that would, presumably, be better able to compete with smaller life insurance and annuity providers who are not subject to the same regulatory restrictions.

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January 04, 2016
Regulatory Consultancies Now Come In Democrat and Republican Flavors
Posted by David Zaring

Daniel Gallagher has announced that he will be joining Patomak Partners, a company that is going to do the same thing that Promontory and PWC does - accumulate regulators who can get banks and broker-dealers out of regulatory trouble, partly by relying on the expertise and contacts of their principals, who tend to have run the agencies regulating the banks.  It's a huge growth industry in banking regulation, sometimes dubbed shadow regulation, and a controversial one, because revolving door etc.  I, however, am all in favor of the revolving door, and see nothing particularly wrong with this one.

However!  Patomak is new and young and small, but what it represents is the politicization of these sorts of firms.  Promontory invented the genre, and it was started by Democrats, but it reads as relatively non partisan.  A review of the masthead of Patomak reveals a litany of Republican former political appointees at the SEC and CFTC, starting with the president and CEO, Gallagher, and Paul Atkins, probably the most aggressively conservative SEC commissioners ever, surely at a cost to their standing with the agency staff.

It makes you wonder what the play is.  Trent Lott successfully created a Republican K Street, annoyed at the liberal dominance of lobbying firms, and thinking that the existence of a parallel more conservative DC ecosystem would benefit his party.  Those firms do fine, I think, but being able to seriously negotiate with enforcement officials usually requires a vaguely non-partisan hue; that's one reason why law firm white collar practices generally don't sort into liberal and conservative.  I'm not sure that a right wing financial regulation consultancy makes a ton of sense from a business perspective.  So maybe you think this is like a think tank - a place where politicians hang out and make a little money before accepting their next appointment.  Except that the next appointment for SEC and CFTC commissioners, other than chair, never usually happens.  Instead, they go to law firms or academia, and become wise old people of capital markets regulation.

I suspect that the assumption is that even independent agency work is getting increasingly politicized, and so the next time there's a Republican presidency, the SEC and CFTC appointees are going to listen to Patomak, and aren't going to listen to anyone else.  That will make for some feast and famine years for the business, and isn't an entirely appetizing prospect for regulation in general.  It's also a big bet by Atkins and Gallagher, et al, on President Trump, or whoever.  But maybe they were having a hard time getting hired by less partisan firms.


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December 23, 2015
Bernie Sanders On Reforming The Fed
Posted by David Zaring

He's got an interesting op-ed in the Times.  One proposal - to get rid of the reserve bank structure - is one that I associate with Peter Conti-Brown, of this parish.

The chief executives of some of the largest banks in America are allowed to serve on its boards. During the Wall Street crisis of 2007, Jamie Dimon, the chief executive and chairman of JPMorgan Chase, served on the New York Fed’s board of directors while his bank received more than $390 billion in financial assistance from the Fed. Next year, four of the 12 presidents at the regional Federal Reserve Banks will be former executives from one firm: Goldman Sachs.

These are clear conflicts of interest, the kind that would not be allowed at other agencies. We would not tolerate the head of Exxon Mobil running the Environmental Protection Agency. We don’t allow the Federal Communications Commission to be dominated by Verizon executives. And we should not allow big bank executives to serve on the boards of the main agency in charge of regulating financial institutions.

If I were elected president, the foxes would no longer guard the henhouse. To ensure the safety and soundness of our banking system, we need to fundamentally restructure the Fed’s governance system to eliminate conflicts of interest. Board members should be nominated by the president and chosen by the Senate. Banking industry executives must no longer be allowed to serve on the Fed’s boards and to handpick its members and staff. Board positions should instead include representatives from all walks of life — including labor, consumers, homeowners, urban residents, farmers and small businesses.

That change makes a ton of sense.  But there's also a call by Sanders, duplicated by Rand Paul and others, to "audit the Fed."

In 2010, I inserted an amendment in Dodd-Frank to audit the emergency lending by the Fed during the financial crisis. We need to go further and require the Government Accountability Office to conduct a full and independent audit of the Fed each and every year.

I don't even know what this means.  Audit how?  To what end?  Does someone think that the Fed fails to accurately report its assets and liabilities?  A GAO report on the Fed would differ from what we already know about the Fed's finances not one whit.  When confronted with avidly pursued meaningless policy claims, my assumption is that it's a means to some other end.  In Paul's case, that end would be to eliminate the Fed.  Sanders can't possibly want the same thing, can he?


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December 22, 2015
Bebchuk and Jackson on Political Spending Disclosure
Posted by David Zaring

If you missed it, Lucian Bebchuk and Robert Jackson are in the Times today decrying the budget bill's one year prohibition on the SEC's issuance of political spending disclosure requirements rules.  That's pretty micro-managey, and you can't imagine the legislature getting so involved in the details of banking regulation.  Bebchuk and Jackson are, as proponents of regulation here, displeased:

The rider also undermines the standing of the S.E.C. It reflects a judgment that the commission and its staff, which have served the investing public well for generations, cannot be trusted to reach an appropriate decision about whether and how to develop rules in this area. Legislators should not tie the hands of independent and expert regulators and prevent them from doing their job.

And the rider undermines the critical premises on which the Supreme Court has relied in its Citizens United decision. In this consequential decision, the court reasoned that “the procedures of corporate democracy” would ensure that political spending by public companies does not depart from shareholder interests. Without disclosure to investors, however, such procedures cannot be expected to limit or prevent such departures.

Under a Carolene Products theory, this would be the sort of case that could call for judicial involvement; it involves legislators legislating for opacity about who gives to their own campaigns - a self interested effort that undermines the democratic process.  

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December 17, 2015
ICYMI: Using the Fed to Fund Highways
Posted by David Zaring

Earlier this week, while on the road, I had a column in DealBook on the use of the Fed's balance sheet to fund the bipartisan highway bill.  I'm skeptical:

The bill exemplifies a new trend of legislative hostility toward the agency, which has expressed itself in Republican-sponsored bills calling for audits of the central bank, efforts to limit the Fed’s discretion in setting monetary policy and even calls for its dissolution.

Those bills had never gone far. But now, the tax-averse legislature has chosen to pay for new highway funding through two raids on the Fed’s budget. If this bill becomes law, it will represent a new and troubling interference by Congress in the affairs of the central bank.

The first raid drains the central bank’s “rainy day fund,” money set aside from revenue earned from its trading operations – it trades government debt to set monetary policy — to deal with the possibility of market losses.

The second raid reduces the dividend that the Fed has paid to its member banks. Since 1913, that dividend has been set at 6 percent. Under the highway bill, the new, lower dividend would track the rate of return on the 10-year Treasury note, currently around 2.2 percent, with the difference being used for highway funding.

Reactions and corrections welcome!

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