As Mehrsa observes, the largest problem for middle and working-class access to the benefits of banking concerns the perceived cost of catering to such small time financiers. They simply do not borrow or lend enough to make it worthwhile. One question addressed in the second half of her book concerns some alternatives to banks that might be willing to enter a market that the big national banks have largely exited, in her telling.
But of course, fixes that can market efficiently to low dollar depositors might well have some competitive advantages when it comes to high dollar depositors as well. To me, the interesting question is whether the innovation here will be one of financial technology or one that requires a regulatory blessing. Mehrsa considers microfinance, which Christine has discussed (and so I won't), or community minded banking, which looks like a triumph of hope over experience. But she also surveys debit cards, Walmart, mobile banking, and peer-to-peer lending; they all offer the prospect of inexpensive credit, or at least efficient access to the financial system, without necessarily requiring the use of algorithms or robots.
Leaving aside mobile banking and the Wealthfronts and VenMos of the world, it is worth noting that the problems for debit card issuance, by the post office or whoever, banking at Walmart, and P2P are regulatory ones, rather than technological ones. The question has been whether these institutions are enough like banks to be trusted with deposits. Much of the answer to that question is tied up in bad old competition avoidance by the already extant banks, who lobby against potential competitors. But some of it lies in the idea that few can be trusted to hold other people's money. Bank charters, as Omarova and Hockett can tell you, require the institution to act in the public interest. Other holders of funds have fiduciary obligations to the owners. And the regulatory question is whether Walmart or Joey8359 on the internet will feel the same way, or, put another way, whether we should care that they obviously will not.
Mehrsa's fine book is an appealing combination of history and policy. On the one hand, the book reviews the way that the poor and middle-class have accessed the finance system in the United States over decades, and how that access has been a story of changing institutions. On the other, policy, hand, the book features an appealing recommendation, not for a return to the community banking days of yore, but rather for a supplementation of our current national banking system with a reanimated postal bank. While community banks, for a variety of reasons, handled the banking needs of the poor and middle class (or so she argues; I'm not entirely convinced about that), national banks are unwilling to chase small depositors, for profit lies only in servicing big ones. A postal bank might at the very least be able to provide the unbanked with debit cards, and at best might be able to give them the sorts of financial services that are now being provided by shadow banks such as payday lenders, title loan companies, and the like.
I could see assigning this book to the class of business school or law school students interested in how the banking system has changed and what it does today.
One of the things it does, and has always done, according to Mehrsa, is dependent on the government. On page 16, she posits that "government support is the only reason depositors trust banks, and without trust from depositors, banks don't exist." One of the interesting memes that I have noticed in law and finance scholarship is that, in marked contrast to corporate law scholarship, many of the authors agree with Mehrsa that finance, by some measures the largest component of the economy, is almost entirely a creature of regulation. For other examples of this sort of work see here and here. As someone interested in regulation generally, I see why I've grown particularly interested in financial regulation, though I suspect that an important component of financial intermediation is not purely an example of regulatory beneficence. Indeed, the whole regulatory arbitrage story that plagues financial oversight suggests that regulatory fixes to fundamental finance problems, like banking the unbanked, will always be challenging.
Creating a continent wide deposit insurance program is interesting because of its American antecedent. The FDIC is one of two ways that America's entirely state-regulated banking system became, in essence, entirely federalized (the other one emerged through the Fed's oversight of bank holding companies). Once you have an insurer on the hook for making your depositors whole if you disappear, you have an institution that is going to want to inspect your books and interview your executives. And the EU commissioner who proposed it is British, one of the countries least enamored of the emerging EU agencies who are taking over from local banking regulators. It is quite the rejection of federalism.
One of the amazing things that has happened in the wake of the financial crisis is that international bank regulators have moved from measuring two things - capital adequacy and the leverage ratio of banks - to measuring a lot of different things which must be computationally hard to keep in balance. In addition to the two extant measures, banks have to establish a net stabled funding ratio (NSF) designed to deal with long term assets, a liquidity coverage ratio (LCR) designed to deal with short term assets, and let's not forget the work being done in the US by the stress tests, labelled DFAST and CCAR, or Europe's MiFID.
Into the mix the Financial Stability Board has added a total loss absorbing capacity rule, or TLAC. The best way to think of this rule is as an alternative measure of the capital adequacy of very big banks, with an eye to the moment of failure; it requires banks, in addition to holding common stock and cash, to hold financial instruments like convertible bonds (or maybe plain old unsecured debt) that can be used to bail-in the bank - bail-in means that the bank looks to its creditors to provide it with resources to stabilize it, bailout means it looks to the government to provide those resources. Or, if you like, here's the FSB:
G-SIBs will be required to meet the TLAC requirement alongside the minimum regulatory requirements set out in the Basel III framework. Specifically, they will be required to meet a Minimum TLAC requirement of at least 16% of the resolution group’s risk-weighted assets (TLAC RWA Minimum) as from 1 January 2019 and at least 18% as from 1 January 2022. Minimum TLAC must also be at least 6% of the Basel III leverage ratio denominator (TLAC Leverage Ratio Exposure (LRE) Minimum) as from 1 January 2019, and at least 6.75% as from 1 January 2022.
Without going too far down this road, I think that these varied sorts of capital measurement are basically supposed to discourage regulatory arbitrage, though it also suggests how puissant big banks must be in handling their regulatory requirements. Not a place for a financial startup. TLAC is also a tax on big banks, of course, and a disincentive to become one of the thirty largest institutions in the world. Here's the WSJ with an explainer.
This all has to be adopted by the G20 at its next meeting, proving once again that in finance, the rules that really matter are set by an international, non-treaty based form of administration.
I've expressed some sympathy for the whistleblowing bank examiner Carmen Segarra in the past, and I wrote up my concerns over at DealBook. A taste of the argument:
The bank whistle-blower statute was part of the changes passed after the savings and loan crisis of the 1980s, when hundreds of financial institutions had to be “resolved” – that’s bank terminology for taken through a quick bankruptcy – by the Federal Deposit Insurance Corporation. The statute covers a “person who is performing, directly or indirectly, any function or service on behalf” of the F.D.I.C. The appeals court said that it was “frankly silly” to suggest that Fed employees were working for the F.D.I.C.
But I don’t think it is frankly silly. The purpose of the statute is to protect whistle-blowers who work at, among other places, Federal Reserve banks who bring information to light about mismanagement in a way that performs a service to the F.D.I.C. Moreover, the statute is supposed to be broadly construed.
Goldman Sachs is a bank holding company, but it does not have depositors.
Nonetheless, the F.D.I.C. is a full voting member of the Financial Stability Oversight Council, which has designated Goldman a systemically important financial institution, subject to heightened supervision and its particular attention. Moreover, the F.D.I.C. would play a role in resolving Goldman, if it came to that, under the Dodd-Frank law’s overhaul of the government’s resolution powers.
So I do think that supervising Goldman counts as performing a service to the F.D.I.C.
Do go over there and give it a look.
Here's the Second Circuit decision on the Carmen Segarra case. She alleged that the Fed was too soft on Goldman Sachs, and secretly taped meetings between regulators and the bank in an effort to prove it. And in some ways, she has influenced the policy debate more than you'd think any low level, very briefly employed bank examiner would, so she's already won something.
She lost her whistleblower suit, but that's not even a huge indictment of her. She lost it because she tried to pull herself within the confines of the bank whistleblower statute by alleging that the Fed, and her supervisors (and her), were performing a service for the FDIC when they examined Goldman Sachs. The statute says, in the court's words, "if an individual is subject to liability under this statute, he or she must be '[a] person who is performing, directly or indirectly, [a] function or service on behalf of the [FDIC]." The court said that it was "frankly silly" to suggest that Fed employees were working for the FDIC. Put that way, it sort of sounds silly.
Is it so obvious, though? In a complaint? The purpose of the statute is to protect whistleblowers who work at among other things "Federal reserve bank[s]" who bring information to light about "gross mismanagement" in a way which performs a service to the FDIC, which (I think, the court didn't say) might insure Goldman (but wouldn't, I guess, if it doesn't have depositors; it is a bank holding company), would be involved in any trigger of orderly liquidation authority under Title II of Dodd-Frank, and, as a voting member of the Financial Stability Oversight Council, arguably oversees SIFIs, of which Goldman is one. Segarra alleges that Goldman Sachs didn't have a conflict of interest policy, and her job was to examine the firm for safety and soundness. The statute is supposed to be broadly construed. Although I haven't yet been too convinced by Segarra, her argument is plausible enough. One judge, who maybe agreed, but may be worried about the prospect of every bank examiner reporting, quitting, and suing, once wrongdoing is uncovered uttered a terse "I concur in the result."
Segarra's lawyers don't look classy, and her damages request was nuts, but I'm not quite sure why her claim has been given the back of the hand quite so tersely, in a per curiam opinion that doesn't enjoy the the support of all three members of the court. And do let me know if I've missed something.
Post updated to clarify the FDIC-Goldman relationship
Another update - here's the district court opinion, which is more articulate about the problems with the complaint. Courts don't like to regulate banking supervision, and the district court depends on a conclusion that banking regulation is very informal, which would make a claim that a bank is ignoring a recommendation from supervisors not the same thing as a bank violating the law. It would have been nice if the Second Circuit had evaluated that part of the opinion, given that banking regulation is generally extremely informal. It's not clear to me that Congress didn't want whistleblowers to police this sort of supervision.
It's an interesting mix of law professors and business professors, empirical projects, and the opposite. And bitcoin! Ranked by most downloads since being filed in the last 60 days.
|1||1,822||Hedge Funds: A Dynamic Industry in Transition
Mila Getmansky, Peter A. Lee and Andrew W. Lo
University of Massachusetts at Amherst - Eugene M. Isenberg School of Management - Department of Finance, AlphaSimplex Group, LLC and Massachusetts Institute of Technology (MIT) - Sloan School of Management
Date posted to database: 29 Jul 2015
Last Revised: 29 Jul 2015
Hilary J. Allen
Suffolk University Law School
Date posted to database: 17 Aug 2015
Last Revised: 17 Aug 2015
|3||141||Law on the Market? Evaluating the Securities Market Impact of Supreme Court Decisions
Daniel Martin Katz, Michael James Bommarito, Tyler Soellinger and James Ming Chen
Illinois Tech - Chicago Kent College of Law, Bommarito Consulting, LLC, Michigan State University - College of Law and Michigan State University - College of Law
Date posted to database: 24 Aug 2015
Last Revised: 24 Aug 2015
|4||137||Opportunism as a Managerial Trait: Predicting Insider Trading Profits and Misconduct
Usman Ali and David A. Hirshleifer
MIG Capital and University of California, Irvine - Paul Merage School of Business
Date posted to database: 24 Jul 2015
Last Revised: 25 Jul 2015
|5||94||Towards Sovereign Equity
Stephen Park and Tim R. Samples
University of Connecticut - School of Business and University of Georgia - Terry College of Business
Date posted to database: 15 Jul 2015
Last Revised: 13 Aug 2015
|6||81||Strategic News Bundling and Privacy Breach Disclosures
University of Chicago - Department of Economics
Date posted to database: 15 Aug 2015
Last Revised: 15 Aug 2015
|7||80||Risk, Uncertainty, and 'Super-Risk'
Jose Luis Bermudez and Michael S. Pardo
Texas A&M University (TAMU) - Department of Philosophy and University of Alabama School of Law
Date posted to database: 28 Jun 2015
Last Revised: 28 Jun 2015
|8||80||How Corporate Governance Is Made: The Case of the Golden Leash
Matthew D. Cain, Jill E. Fisch, Sean J. Griffith and Steven Davidoff Solomon
U.S. Securities and Exchange Commission, University of Pennsylvania Law School - Institute for Law and Economics, Fordham University School of Law and University of California, Berkeley - School of Law
Date posted to database: 24 Jul 2015
Last Revised: 10 Aug 2015
|9||80||The Unsophisticated Sophisticated: Old Age and the Accredited Investors Definition
Tao Guo, Michael S. Finke and Chris Browning
Texas Tech University, Texas Tech University and Texas Tech University
Date posted to database: 25 Jul 2015
Last Revised: 25 Jul 2015
|10||77||Regulating Equity Crowdfunding in India - A Response to SEBI's Consultation Paper
Arjya B. Majumdar
Jindal Global Law School
Date posted to database: 26 Jun 2015
Last Revised: 3 Jul 2015
I'm enjoying Philip's guest blogging with us. I think I particularly like this part of his last post:
If it sounds condescending to suggest that the government barely even thought about legitimacy issues during the last crisis, perhaps it is fitting that I end with an obligatory presentation of Wallach’s Law, which is that everything is more amateurish than you think, even after accounting for Wallach’s Law. Everything: financial crisis responding and post-response analysis are no exceptions.
At the end of my review of his book, I said:
one of the reasons I like thinking about the financial crisis, and like reading books like Wallach’s about it, is because it was an enormous almost-disaster that was averted for thousands of different, interlocking reasons. The government’s response to it was both wise, unreflective, tremendously unfair, and highly successful, and a million other things as well.
We may never sort out what exactly happened, and we'll certainly never know whether it was the best possible approach, or three removed from best, or 17, or whatever. Given so many inputs, what can we say about the legal output?
I think we can say a few things. First, that the law mattered, and provided constraints, even when it shouldn't have or was just used as an excuse (ahem, Lehman Bros.). Second, one of the ways it mattered is because it cabined the government's thinking of precisely how it could get creative. We can't save a bank through X, so let's push through a merger to save it that way. We may never want the government too cabined in the middle of a crisis, but there is room to impose constraints afterwards, too. So if you're inclined, for whatever reason, to look at the world through "law only" glasses, I think you can gain some useful perspectives on what happened during that hectic period six years ago.
Though, as we found out today, they're still litigating it all!
My colleague Peter Conti-Brown is interested in Philip Wallach's legal history of the financial crisis, as am I. He's got a post up on it over at the Yale J. on Reg. blog, and go give it a look. They've debated, over there, whether the Fed had the authority to rescue Lehman Brothers; it rather famously claimed that it did not, only to give AIG a massive bailout a couple of days later:
One of the features of Philip’s stint here was a debate we had on the Fed’s claim that it lacked the legal authority to save Lehman Brothers. I say that’s a post-hoc invention; Philip thinks it’s not, or at least,not so obvious. What do we learn from this fascinating exchange?
I still think those inside the Fed—whether at the Board of Governors or the Federal Reserve Bank of New York—had the authority to do whatever they wanted with Lehman. And given the political maelstrom they faced, I’m not sure I would have done a thing differently than they did. My critique of their legal analysis is not a critique of their crisis decision-making. But the legal arguments are distracting from the bigger question, about the appropriate levels of discretion that a central bank should have in using its lender of last resort authority. What the debate with Philip has shown me is that, even if I’m not wrong—and, well, I’m not—the law is something of an omnipresence in the way the government faced the financial crisis. That omnipresence may even have brooded from time to time.
Over at the New Rambler Review (which I'm really enjoying), I've got a review of Philip Wallach's legal history of the financial crisis. The kick-off offers a riff on the crisis:
The government’s response to the financial crisis was an example of messy policymaking that occasioned a happy ending, although not everyone sees it that way. Some are unsure about the ending – they have decried the very modest meting out of punishment that followed the recovery of the economy. Others are unsure that the policymaking was messy – they are likely to think of the government’s response to the financial crisis as an inevitable manifestation of executive preeminence as the doer of last resort, institutionally capable of acting when courts and legislatures cannot.
But I will take a stable economy over a few prison sentences, especially when it is possible that you can’t have both at the same time. And you won’t convince me that the things government officials did during the crisis – last minute deals, concluded late at night and paired with creative reimaginings of underused statutes and regular resorts to Congress for more legislation – was the mark of the smooth progress of an imperial presidency.
Go over there and read the whole thing!
My colleague Peter Conti-Brown has an op-ed in the Times today regarding the Fed's crazy regional bank system. A taste:
Congress should let the Board of Governors appoint and remove the 12 Reserve Bank presidents, as they may do with other employees of the board. The 12 regional Feds would then become branch offices of our central bank, continuing to do research and data analysis, while leaving policy making to Washington.
This plan has several benefits. First, the next time the Fed makes an egregious mistake — like failing to predict the meltdown of the housing market — we would know for certain whom to hold accountable. Second, it would allow the Fed to modernize the distribution of the 12 Reserve Banks. There is strong evidence that the cities for the 12 banks were chosen as much for politics as economics. In 2015, do we really need two regional Feds (Kansas City and St. Louis) in Missouri, but only one (San Francisco) west of Texas?
Everything Peter writes about the Fed is worth reading, and this is no exception. Give it a look here.
I was looking at Dan Scwarcz's lastest paper on Shadow Insurance, which is a thing:
Shadow insurance – defined as life insurers’ reinsurance of policies with captive insurers that are not “authorized” reinsurers and do not maintain a rating from a private rating agency – creates important risks to policyholders, the insurance industry, and potentially even the broader financial system. Although the standard state regulatory safeguards help mitigate some of these risks, they leave other hazards of shadow insurance largely unchecked. Even granting that shadow insurance likely helps reduce the cost of insurance associated with the excessive conservatism of some state reserving rules, the practice ultimately undermines insurance markets by impeding accurate risk assessments and tradeoffs by policyholders, regulators, and other market participants.
Of course, there may be a real world reason for this - shadow institutions are in theory nimbly entering markets that heavily regulated incumbents can't serve well. This is the regulation is bad story of the growth of shadow finance.
Banco Santander's American sub is in trouble. Big trouble with the government. Supervisors think it is undercapitalized, doesn't adequately keep track of its money, and is led badly. The Wall Street Journal put the story about their concerns on A1.
So, what's next? A takeover? A fine? A lawsuit?
The Federal Reserve issued a stinging lecture to Spanish bank Banco Santander SA,faulting the lender’s U.S. unit for failing to meet regulators’ standards on a range of basic business operations.
Oh. A lecture. Well that doesn't...
The Fed didn’t fine the bank but reserved the right to do so later and required the bank to write a series of remedial plans.
So a warning or whatever...
the Fed had already scolded Santander for paying an unauthorized dividend earlier in 2014 without the Fed’s required permission.
[Santander CEO] Ms. Botín spoke for 15 minutes by phone with [Fed Governor] Mr. Tarullo on Nov. 10.
She met with him again in Washington on Dec. 10, when they talked privately for an hour
Oh, and meetings. Still, there have been resignations and promises to change the whole governance structure of the company. So these talking-tos must have been absolutely hair-raising. For drama, you really can beat bank supervision, amiright?
My article on the administrative law and practice of the FOMC is available on SSRN, and has come out as part of a great symposium in Law and Contemporary Problems, with articles by Jim Cox, John Coates, Kate Judge, and many other people smarter than me. Do give the paper a download, and let me know what you think. Here's the abstract:
The Federal Open Market Committee (FOMC), which controls the supply of money in the United States, may be the country’s most important agency. But there has been no effort to come to grips with its administrative law; this article seeks to redress that gap. The principal claim is that the FOMC’s legally protected discretion, combined with the imperatives of bureaucratic organization in an institution whose raison d’etre is stability, has turned the agency into one governed by internally developed tradition in lieu of externally imposed constraints. The article evaluates how the agency makes decisions through a content analysis of FOMC meeting transcripts during the period when Alan Greenspan served as its chair, and reviews the minimal legal constraints on its decisionmaking doctrinally.
In addition to being your one stop shop for the legal constraints on the FOMC, the paper was an opportunity to do a fun content analysis on Greenspan era transcripts, and to see whether any simple measures correlated with changes in the federal funds rate. In honor of Jay Wexler's Supreme Court study, I even checked to see if [LAUGHTER] made a difference in interest rates. No! It does not! But more people may show up for meetings where the interest rate is going to change, tiny effect, but maybe something for obsessive hedge fund types. Anyway, give it a look.
The AIG suit is over, and the shareholder who was zeroed out by the government won a judgment without damages. These kinds of moral victories are cropping up against the government: a Georgia judge just ruled that the SEC's ALJ program was unconstitutional, but easily fixed. The Free Enterprise Fund held that PCAOB was illegal, but not in any way that would undo what it had achieved. And now AIG. A right without a remedy isn't supposed to be a right at all, but it is true that this is incremental discipline of the government for business regulation excesses. That won't make any of these plaintiffs happy, however.