December 28, 2013
AALS Annual Mtg.: Financial Inst. & Consumer Financial Services/European Law Program
Posted by Erik Gerding

The AALS Section on Financial Institutions & Consumer Financial Services and Section on European Law are pleased to invite you to attend their joint program, Taking Stock of Post-Crisis Reforms: Local, Global, and Comparative Perspectives on Financial Sector Regulation, at the AALS 2014 Annual Meeting in New York City, on Friday, January 3, at 10:30 a.m. – 12:15 p.m.

The program will feature three paper presentations:

  • Arthur Wilmarth (George Washington University), Citigroup: A Case Study in Managerial and Regulatory Failures, available at
  • Hilary Allen (Loyola University New Orleans), Why Wall Street Isn’t in Jail: The Unpunishable Moral Failures that Helped Cause the Financial Crisis, and How to Address Them in the Future, available at
  • Kazi Sabeel Rahman (Harvard University), Managerialism, Structuralism, and Moral Judgment: Law, Reform, Discourse, and the Pathologies of Financial Reform in Historical Perspective, available at

Anna Gelpern (Georgetown) and Robert Hockett (Cornell) will serve as panel discussants, and Peter Lindseth (University of Connecticut) will moderate the discussion.

Immediately following the joint program, at 12:15 p.m. on January 3, 2014, The Section on Financial Institutions & Consumer Financial Services will host a luncheon with keynote remarks by Sean Hagan, General Counsel of the International Monetary Fund. 

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December 16, 2013
Your Peer Review As Financial Regulation Case Study
Posted by David Zaring

Last week, the Basel Committee enforced the way it does best - through peer review.  Indeed, that's about the only sort of enforcement it has, given that there is no international tribunal around to help it out, like the WTO AB, and it expressly declaims legal status.  So how come the world's banks all follow Basel?  You can check out its review of Brazil's financial regulators to see why.

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December 13, 2013
Turf Building Or Common Sense
Posted by David Zaring

I'm at a banking conference in Hong Kong, but noticed that the Treasury Department has urged a greater federal role in the regulation of insurance in a long-awaited report issued by its Federal Isurance Office.  It's a role that the large insurance firms, always unethusiastic about 50 state regulation, would no doubt welcome.  Some observations:

  • The report does not seek to end state insurance supervision, but would like some direct federal regulation of the sector (for example, for mortgage insurers), and the capacity to threaten states with supplanting regulation if the states do not shape up in various ways.
  • The report justifies the need for a federal role in part on the internationalization of isurance, and, to some degree, through IAIS, the internationalization of insurance regulation.
  • The rationale for state supervision is that insurance doesn't really need to be regulated for capital adequacy (but see AIG), but rather for consumer protection (your policy doesn't pay out, you get sold insurance you don't need).
  • This, like the Volcker Rule, is a product of Dodd-Frank, which created the FIO.
  • A report is, as a matter of law, meaningless.  Indeed, Congress would have to act to give the FIO some of what it wants.

A wrap on the report is here.  It will be interesting to see whether this lands with anything more than a thud.

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December 04, 2013
In Europe, All Regulation Is Antitrust Regulation
Posted by David Zaring

The multibillion dollar fine imposed by the EU for rigging the LIBOR and other rates was doled out not because the rate rigging was deemed a form of market fraud, but because it was collusive, anti-competitive conduct.  Indeed, the EU doesn't have a regulator who can police that kind of fraud.  Instead it has antitrust, the seminal European worry, and a font of regulation that has quite literally been used to further the European project (dethroning national champions, removing internal trade barriers, defending important European companies, like Airbus, against foreign competitors, you name it).  So it's a good thing for Europe that this could be fit within the antitrust rubric.

It gives some lie to the idea that Europe hopes to become the world's regulatory superpower though (see this talk by Moravcsik, or this for an overview of that school of thought).  Clearly the continents super powers are not distributed evenly.

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December 02, 2013
The Chamber Of Commerce Wants To Overhaul The FSOC
Posted by David Zaring

One of the things the FSOC is supposed to be is a task force keeping an eye on financial stability.  But it is also, to that end, supposed to be a noodge.  It keeps threatening to do something about money market funds in an effort to force the SEC to do more, for example.  And it has designated two insurance companies and GE Capital as systemically significant because their primary regulators had not done so.

That is why it is kind of interesting that the Chamber of Commerce has urged that the noodge factor be tamped down.  Currently the FSOC can just vote to designate a financial institution as systemtically signficant over the objection of their primary regulator.  As Reuters reports on the Chamber's proposal:

"If the primary regulator or independent council member does not vote in favor of designating a non-bank financial company for which the council member has industry expertise... then a second vote shall be scheduled within 45 days," the Chamber wrote. "The primary regulator shall issue a report to the FSOC within 30 days of the initial vote explaining its rationale as to why a firm should not be designated."

It's not a dramatic change - it would slow, rather than end, the council's designation role - but it does suggest that regualted industry is worried about what the FSOC is doing.  And that is worth noting, because it wasn't clear that the committee would be able to accomplish much at all, considering that it is a jammed together new federal entity, without totally obvious powers to forces its members to do anything (not always - Jake Gersen has a nice article on the entity that characterizes some of its powers to require as a "Mother-May-I" approach - the cite to that is here, and after the jump).

Jacob E. Gersen, Administrative Law Goes to Wall Street: The New Administrative Process, 65 Admin. L. Rev. 689, 711 (2013)

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November 25, 2013
More on Bank Consultants
Posted by David Zaring

Here's a wrap on the OCC's consulting guidance from Law360, about which we opined earlier.  Parts quote yours truly, so you can identify mistakes in the comments, if so inclined.

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November 13, 2013
The OCC's Consultants Guidance
Posted by David Zaring

Banking regulation is increasingly being done through private contractors - these days, the OCC will require a bank in trouble to hire a consultant, usually composed of former OCC employees, to set things straight, or expect a bank to come to it with that sort of proposal.  There are plenty of worries about conflicts of interest in this practice, while at the same time, bank consulting is a business really growing in value, making, for example, former OCC head Eugene Ludwig, who has founded the consultancy Promontory, dynastically wealthy.

Yesterday, the OCC issued guidance - not a rule, nothing binding, so no lawsuit over this is in the offing - to banks on how they should handle requests from the agency to hire consultants.  Here's a nice take on the context, from DealBook.  The document is short; and it doesn't really constrain the agency.  But it does suggest the values that the agency thinks is important when taking on a consultant.  

One is competence - that is, the competence of both the bank and the consultant.  From the guidance:

When determining whether to require an independent consultant, the OCC considers, among other factors,

  • the severity of the violations or issues, including the impact of the violations on consumers, the bank, or others.
  • the criticality of the function requiring remediation.
  • confidence in management’s ability to perform or ensure that the necessary actions are taken to identify violations and take corrective action in a timely manner.
  • the expertise, staffing, and resources of the bank to perform the necessary actions.
  • actions already taken by the bank to address the violations or issues.
  • services to be provided by an independent consultant (for example, a full look-back or a validation of the bank’s look-back).
  • alternatives to the engagement of an independent consultant.

Another is independence:

When evaluating the independence of a consultant, including whether an actual or potential conflict of interest exists, the bank’s assessments should address, and the OCC considers, among other things, the following factors:

  • Scope and volume of other contracts or services provided by the independent consultant to the bank. As part of its submission to the OCC, a bank should disclose all prior work performed by the consultant for the bank for at least the previous three years. This information allows the bank and the OCC to assess the nature of the contracts and whether the consultant has been involved in any work closely related to the engagement under consideration. The information also allows the bank and the OCC to assess whether the number of contracts or services the consultant has had or has with the bank may pose an inherent conflict of interest.
  • Specialized expertise of the consultant and availability of other consultants, i.e., whether the bank evaluated other consultants with the requisite expertise and independence.
  • Proposed mitigants to address any potential conflict or appearance of conflict. For example, when the proposed consultant already has a contractual relationship with the bank, a mitigant could include the creation or maintenance of effective barriers to the exchange of information by different teams of the proposed consultant with differing responsibilities to the bank. Any proposed mitigant must be well established and documented in the engagement contract as well as in ongoing documentation and practice.
  • Any financial relationship, including the amount of fees to be paid, or previously paid to the person or company as a percentage of total revenue of that person or company, and any other financial interest between the bank and the proposed consultant.
  • Any business or personal relationship of the consultant, or employees of the consultant, with a member of the board or executive officer of the bank.
  • Prior employment of consultant staff by the bank.
  • Other relevant facts and circumstances.

It isn't clear whether this marks the onset of new oversight of a new set of gatekeepers in financial regulation, or is meant to head off alterantive forms of regulation coming from elsewhere, notably the state of New York.  But it's an important development in compliance, I think.

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November 06, 2013
Why Wouldn't An MBA Join A Financial Firm?
Posted by David Zaring

Here's a fun chart discussing one possible reason while the hypothesized MBA at a school like mine might be less interested in Wall Street, and more in Silicon Valley.

Entirely unrelated: Wharton now has a section of the full-time MBAs meet in San Francisco.

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November 02, 2013
The Sunny Side Of Dodd-Frank
Posted by David Zaring
I suspect my view of how Dodd-Frank is doing is different than yours.  But you'll have to head over to DealBook to see if I'm right.

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October 23, 2013
Assessing Dodd-Frank At GW
Posted by David Zaring
There's a nice symposium shaping up over at GW on the financial crisis next week on October 31.  Gary Gensler, who has been making the academic rounds lately, Eugene Ludwig (the former head of OCC who founded Promontory, the government's banking shadow-regulator, and Dodd-Frank critic Tom Hoenig, formerly Fed Kansas City chair, and now vice-chair of the FDIC.  Government regulators do not always have a lot of freedom to speak candidly about what they do in government, but that lot is a pretty outspoken pick of the financial regulatory bunch.  I'll be interested to hear what there is to be learned.

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October 15, 2013
If Treasury Prioritizes Debt Repayments After Reaching The Debt Ceiling, Can Anyone Sue?
Posted by David Zaring

With the possiblity of debt ceiling default arising quarterly these days, it is worth thinking through the Article III consequences of prioritizing debt payments over its other obligations.  Can Treasury do that without facing a ton of big, fat, lawsuits?

Or, to put it another way, why can't it?  As Felix Salmon observes:

[W]hy is Matt Yglesias so convinced that prioritization is impossible? He gives four reasons.

The first is that prioritization is illegal: “Treasury is not authorized to unilaterally decide to pay certain bills and not others”. This is true — but also a bit irrelevant. Treasury is under unambiguous Congressional orders to pay lots of bills — all of them, in fact. If it fails to pay those bills, it will be violating the law as laid down by Congress. Hence the 14th Amendment argument that the president should simply ignore the debt ceiling entirely, if it comes to that. But underneath it all, it’s hard to credit any argument which says “Treasury isn’t allowed to pay its own bonds”. If that’s what Treasury wants to do, then surely it can do so. Besides, who would even have standing to sue?

I can think of some people who would have standing to sue - they would suffer a concrete and particularized injury, caused by the government, and fairly traceable to its actions if Treasury took a dwindling pot of money, and stiffed General Dynamics on contracts due for submarine repair or whatever, while instead paying interest on maturing sovereign debt.  But that doesn't mean that they could sue and win; here, I agree with Felix Salmon.  The courts have found - unless Congress has provided otherwise in its statutory guidance - that managing lump sum budgets is committed to agency discretion by law.  Under the logic of Lincoln v. Vigil, the leading case for this proposition, I accordingly think that lawsuits against Treasury for prioritizing debt repayments would be unlikely to succeed.  As the Supreme Court said then:

an agency's allocation of funds from a lump-sum appropriation requires “a complicated balancing of a number of factors which are peculiarly within its expertise”: whether its “resources are best spent” on one program or another; whether it “is likely to succeed” in fulfilling its statutory mandate; whether a particular program “best fits the agency's overall policies”; and, “indeed, whether the agency has enough resources” to fund a program “at all.” Heckler, 470 U.S., at 831, 105 S.Ct., at 1655. As in Heckler, so here, the “agency is far better equipped than the courts to deal with the many variables involved in the proper ordering of its priorities.” Id., at 831–832, 105 S.Ct., at 1656.
Lincoln v. Vigil, 508 U.S. 182, 193, 113 S. Ct. 2024, 2032, 124 L. Ed. 2d 101 (1993)


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October 10, 2013
Britain As America's Financial Regulatory Shadow
Posted by David Zaring

Britain and the United States are increasingly matching one another stride for stride when it comes to supervision of the financial markets.  Today, the meme was copying - Britain has announced a qui tam whistleblower program that may work like the one rolled out by the SEC.  Earlier this year, it was about improving a flawed model; sick of being subjected to American deferred prosecution agreements, Britain came up with its own DPA scheme - and actually passed a law and went through notice and comment before doing so.  And at times in the past, the model has been harmonization through a deal, which was the case for the first Basel capital adequacy accord, which only developed after the US and UK concluded a tentative arrangement on bank reserves that threatened to shut the rest of the world out of those then dominant financial markets.

These different approaches - copying, improving, negotiating - are distinctions that matter; but the consistent transmission of American rules into British financial markets is pretty interesting, given that we used to be talking about how Sarbanes-Oxley had made America distinctively bad, and Britain distinctively attractive, to public issuers.

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October 08, 2013
Jeremy Stein Is No Fan Of Money Market Funds
Posted by David Zaring

The Fed board member finished off a speech on October 4 by laying into money market funds:

I would be remiss if I did not remind you of another, highly complementary area where reform is necessary: the money market fund sector. Money funds are among the most significant repo lenders to broker-dealer firms, and an important source of fire-sale risk comes from the fragility of the current money fund model. This fragility stems in part from their capital structures--the fact that they issue stable-value demandable liabilities with no capital buffer or other explicit loss-absorption capacity--which make them highly vulnerable to runs by their depositors. I welcome the work of the Securities and Exchange Commission on this front, particularly its focus on floating net asset values, and look forward to concrete action. Another source of fragility arises from money funds investing in repo loans collateralized by assets that they are unwilling or unable to hold if things go bad. This feature creates an incentive for them to withdraw repo financing from broker-dealers at the first sign of counterparty risk, even if the underlying collateral is in good shape. 

For those reading between the lines, this "I care what the SEC is doing with MMFs" might be viewed as a threat, both to the industry and the agency.  The Fed may be telling the SEC that it will step in, via the FSOC process, to regulate the funds as systemtically destabilizing (and therefore in need of SIFI designation), if the SEC doesn't sort them out itself.  One thing is clear: Stein has no doubt that the funds are fraught with danger.

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October 07, 2013
Financial Crisis For You, Not I
Posted by David Zaring

Bloomberg has done the arithmetic, and it appears that US banks have paid over $100 billion in legal costs in the wake of the financial crisis.  Half of that is going to mortgage settlements, a number that must increase, if JPMorgan's impending $11 billion settlement is for real.

Those burdens have not been spread equally:

JPMorgan and Bank of America bore about 75 percent of the total costs, according to the figures compiled from company reports. JPMorgan devoted $21.3 billion to legal fees and litigation since the start of 2008, more than any other lender, and added $8.1 billion to reserves for mortgage buybacks, filings show.

Most of this constitutes compliance fines and contract damages - and the latter presumably would have been paid if the contracts had been executed correctly.  But the costs of processing these payments suggest that there is at least one legal sector with plenty to do.  HT: Counterparties.

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October 02, 2013
Chicago Gets A Law And Business Gift
Posted by David Zaring

Dan Doctoroff is giving $5 million to the law school in Hyde Park to develop a law and business curriculum, which isn't exactly a vast amount of money, but congratulations to UC nonetheless.  Like Wharton, Chicago has a 5-years-in-4 MBA-JD program already; there is a lot of happiness about the program in these parts, but it does require students to pay a ton of tuition, and compresses their schedule flexibility massively.  It sounds the Doctoroff donation will permit law students to take classes at Booth, or maybe buy out some Booth teachers to teach a class exclusively comprised of law students on asset valuation, managerial economics, and &c.

One bridge that must be crossed for such classes concerns the basic level of knowledge of the law students.  Some Wharton students are coming from the army or Teach For America, but most have been spending a few years working on spreadsheets and going through quarterly statements.  This sort of thing provides a critical background (and a culture spreadable to those who are abandoning their careers in ballet or publishing) that just being smart and eager does not, and my case study for that would be the accounting for lawyers classes you might have taken in law school, and promptly forgot about.  Good luck to Chicago as it seeks to deliver classes that law students can find instructive; oddly enough, it might be easier to focus on undergraduate finance offerings rather than on the MBA program.

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