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 01, 2013
What Happened To Goldman Sachs?
Posted by David Zaring

A former trader with Goldman Sachs, Steven Mandis, is now spending time at Columbia Business School, and has written a very business schooley book about change at the company.  It might be the kind of thing you'd like, if you like that sort of thing.  Peter Lattman provides the overview:

Mr. Mandis said that the two popular explanations for what might have caused a shift in Goldman’s culture — its 1999 initial public offering and subsequent focus on proprietary trading — were only part of the explanation. Instead, Mr. Mandis deploys a sociological theory called “organizational drift” to explain the company’s evolution.


These changes included the shift to a public company structure, a move that limited Goldman executives’ personal exposure to risk and shifted it to shareholders. The I.P.O. also put pressure on the bank to grow, causing trading to become a more dominant focus. And Goldman’s rapid growth led to more potential for conflicts of interest and not putting clients’ interests first, Mr. Mandis says.

It's coming out from and Havard Business Press Books, which is basically an arm of HBS's distinctive revenue generator.  Most of that revenue comes from cases sold for b school classes, to be sure, but Mr. Mandis can hope that he will have a hit on his hands.

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September 18, 2013
Worth Reading
Posted by David Zaring

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September 16, 2013
The Failed Reserve Primary Settlement And The Argument That No One Is Paying For The Financial Crisis
Posted by David Zaring

Lehman Brothers failed five years ago, and the statute of limitations for most federal crimes is five years, so the restrospectives are full of recountings of the fact that no one important has been prosecuted over what happened.  Here's an example, and, look, I'm surprised as well.  If you could convict Ken Lay over things his subordinates did and his own "we won't stop trying to save this company and I'm confident we will succeed" statements, it's pretty surprising that not a single banking CEO has faced a similar fate.  

But no jail time doesn't mean nothing, and the SEC's decision to reject a settlement over the mutual fund that broke the buck after Lehman failed, basically destroying the whole asset class until the Fed jerry-rigged an insurance scheme to save it, is an example of this.  It shows that the government is looking to civil, rather than criminal penalties.  It isn't clear to me that those cases are more winnable.  But that appears to be the strategy.  Along those lines, here's a nice argument that the government has changed some things since the crisis unfolded.

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August 26, 2013
DOJ Still Thinking About Some Financial Crisis Cases
Posted by David Zaring

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. 

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August 20, 2013
The Fed Shows The SEC Why It Is So Wise
Posted by David Zaring

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. 

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August 07, 2013
Observations About US v. BofA
Posted by David Zaring

The United States, per the USAO in Charlotte, sued BofA for false statements under FIRREA, the statute passed to rein in financial institutions after the S&L crisis.  The complaint is here, here's DealBook.  The SEC added its own civil suit alleging '33 act violations for missatements made to the investors who bought residential mortgage backed securities packaged by the bank.  And Matt Levine has an excellent wrap here; his takeaway is that there was a lot of disclosure in prosepctus, and not much evidence of actual fraud, though plenty of evidence of a lack of care that we really shouldn't like. Some additional observations.

  • Paragraphs 130 et seq. of the DOJ complaint document a failed effort to put bad mortgages into the RMBS.  Twice someone tried to do that, twice a BofA employee rejected the request.  But, DOJ says, that employee "did not have any such success (or opportunity) with respect to the bulk of the collateral pool, which was already formed prior to December 3, 2007."  That really doesn't sound like fraud.
  • Paragraph 122 puts this lawsuit in the same category as others by DOJ that object to the oversight being offered. "while the market was demanding more Loan Level Due Diligence on RMBS deals, BOA-Securities and BOA-Bank decided to conduct less Loan Level Due Diligence." Which is one of those "fair, but tough to make a jury care" kinds of arguments.
  • The misstatements were made in Jan/early Feb 2008.  Which is over five years ago - and most civil statutes of limitations expire in five years.  That may explain the resort to FIRREA, which has a ten year statute, because, it was decided, financial fraud cases take a long time to put together.
  • I'm kind of surprised no one from Main Justice was on the brief.  Clearly Washington was involved, via the SEC (though it looks like the Atlanta branch did the investigating), but this may mark the beginning of an enforcement effort realized through delegations to the various US Attorneys' offices.  There is some coordination; the SEC observed that the lawsuits "were coordinated by the federal-state RMBS Working Group that is focused on investigating fraud and abuse in the RMBS market that helped lead to the financial crisis."

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July 29, 2013
The Fannie/Freddie Suit Against The Government
Posted by David Zaring

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.


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July 02, 2013
Brummer On Using Foreign Cooperation To Save Dodd-Frank
Posted by David Zaring

Georgetown's Chris Brummer has a pretty interesting take on realizing the potential of Dodd-Frank over at the Huffington Post.  Here's a taste:

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.

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July 01, 2013
Financial Linkfest
Posted by David Zaring

Two bits of news, and one interesting take:

1.    How do you privatize a taken-over bank?  In Britain, they are turning to the investment bankers for advice:

Some British lawmakers have called for the shares to be sold directly to retail customers to allow them to benefit from any potential increase in the firms’ future share prices. A similar process in the 1980s led many British taxpayers to buy shares in former state-owned companies like the energy utility British Gas.

Lloyds is likely to be the first to be privatized, as its current share price is above the government’s breakeven price of 61.20 pence, or 93 cents. Shares in the Royal Bank of Scotland, however, are still trading 33 percent below what the British government says it needs to recoup its investment.

It is interesting how much faster this sell off process was in the United States.

2.    Here's a nice profile, and perhaps also a source-greaser, of Mark Carney, the Canadian being brought in to head the Bank of England.   It just about inconceivable that something similar would happen in the United States, but this look-abroad-for-your-central-banker thing is a new thing, as Israel, Britain, and Canada can tell you.

3.     Here's Daniel Drezner on whether the FOMC statement that sent the markets into a tizzy and has had the board issuing plenty of nervous clarifications since, was due to an adoption of the perspective of the Basel Committee.


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June 17, 2013
It's The Takings Clause Again That's The Vehicle For A Financial Crisis Suit
Posted by David Zaring

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.

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June 12, 2013
Call for Papers: AALS Fin. Institutions & European Law Sections
Posted by Erik Gerding

Call for Papers

AALS Joint Program of the Financial Institutions & Consumer Financial Services Section and the European Law Section

Taking Stock of Post-Crisis Reforms: Local, Global, and Comparative Perspectives on Financial Sector Regulation

AALS Annual Meeting, January 3, 2014

New York, New York


    The AALS Section on Financial Institutions & Consumer Financial Services and Section on European Law are pleased to announce that they are sponsoring a Call for Papers for their joint program on Friday, January 3, at the AALS 2014 Annual Meeting in New York, New York.

    The topic of the program and call for papers is “Taking Stock of Post-Crisis Reforms: Local, Global, and Comparative Perspectives on Financial Sector Regulation.” The financial crisis of 2008 was truly a global crisis, and the world continues to face a wide range of post-crisis economic and political challenges. Today, several years after the market turmoil began, both the United States and the European Union are in the midst of major regulatory reforms in the financial services sector. The effects of these financial regulation reforms however, remain unclear. Structural reform in the U.S. is thus far limited to a yet-to-be finalized "Volcker Rule," while in the U.K. and the Eurozone, respectively, Vickers- and Liikanen-style "ring-fencing" remain incomplete if not inchoate. Debate in the U.S. still rages around whether and how smaller "community banks" should be regulated differently from megabanks, while the E.U. continues to debate whether to form a "banking union" at all and, if so, what it might or could entail, given various political constraints. Meanwhile, the U.S. Federal Reserve continues to innovate in the realm of monetary policy in the absence of functional fiscal policy, while the European Central Bank moves furtively toward acting as a full Fed-style central bank capable of backstopping sovereign debt instruments and providing real liquidity. Where might these multiple developments be ultimately heading, and what might the Americans and Europeans learn from each other as they grope tentatively forward? What broader implications do they raise for political accountability and legitimacy in a post-crisis world?

Form and length of submission

     The submissions committee looks forward to reviewing any papers that address the foregoing topics. While the preference will be given to papers with a clearly comparative focus, the committee’s overall goal is to select papers that will facilitate discussion of, and comparisons between, American and European approaches to various aspects of financial services regulation. Potential topics include macro-prudential regulation, consumer protection, monetary policy, regulation and supervision of financial intermediaries, structural reforms, and related issues of political accountability and legitimacy.

    Abstracts should be comprehensive enough to allow the committee to meaningfully evaluate the aims and likely content of papers they propose. Eligible law faculty are invited to submit manuscripts or abstracts dealing with any aspect of the foregoing topics. Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.

    The initial review of the papers will be blind. Accordingly the author should submit a cover letter with the paper. However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school. The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes.

    Papers may be accepted for publication but must not be published prior to the Annual Meeting.

Deadline and submission method

    To be considered, papers must be submitted electronically to Saule Omarova at omarova@email.unc.edu and Peter Lindseth at peter.lindseth@law.uconn.edu.

    The deadline for submission is September 3, 2013.

    Papers will be selected after review by members of a Committee appointed by the Chairs of the two sections. The authors of the selected papers will be notified by September 30, 2013.

    The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.


    Full-time faculty members of AALS member law schools are eligible to submit papers. The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.

    Please forward this Call for Papers to any eligible faculty who might be interested.

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June 01, 2013
Me, In DealBook, On The FSOC And Money Markets
Posted by David Zaring

Prompted by an excellent conference at Chicago organized by William Birdthistle and Todd Henderson, I've been thinking about how the FSOC, exactly, is going to persuade agencies to do its bidding.  The result is up at the Times/DealBook, do give it a look:

The Financial Stability Oversight Council has the power, under Section 120 of Dodd-Frank, to review and make recommendations related to a member agency’s regulation of a systemically significant sector of the financial system. Ms. Schapiro and Mr. Geithner successfully persuaded it to urge the S.E.C. to adopt a floating net asset value rule or to require money market funds to hold extra capital to deal with shocks.

But the problem with the council’s Section 120 powers is that they are not paired with the ability to force a member agency to act. If the S.E.C. does not want to regulate money market funds in the way the the council suggests, it need not do so. Under Section 120, it only has to provide an explanation to the council as to why it is not adhering to the council’s recommendation.



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March 29, 2013
Cyprus As A Eurofailing
Posted by David Zaring

The resolution of the Cyprus crisis - no bailout, resolution of one bank, huge losses for depositors aboved the insured amount, and capital controls - has been received pretty well by banking types, who think that bailouts lead to moral hazard.  Well, except for the capital controls bit (Cypriot euros don't really seem like euros if you can't remove them from Cyprus).  But others aren't so sure, and Peter Lindseth has a nice post why up on the EuropeUS blog.  It's an interesting blog, if you're interested in Europe, so give it a look:

The situation in the EMU today reflects the perversely ‘partial’ character of banking integration in the Eurozone.  I say ‘partial’ because Eurozone banks have apparently been well ‘Europeanized’ in terms of deposits and lending (very much consistent with the single market aspiration) but apparently not much else that is necessary to make such a single banking market a durable functioning reality. Despite the conveniently exculpatory critiques from the likes of Angela Merkel that the problem was the ‘Cyprus business model’, that model is arguably different only in magnitude but not in kind from what prevails in many other member states. As Gavyn Davies nicely put it in the FT, Cyprus is simply a ‘microcosm of the entire eurozone crisis, if a microcosm on steroids’: ‘an over-leveraged banking system, with insufficient capital and reliance on foreign funding,” all of which “is familiar territory in the Eurozone’.

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March 20, 2013
Gulati & Bucheit on Cyprus
Posted by David Zaring

I do international financial regulation, but you really have to turn to others for sovereign debt.  Here's Buchheit and Gulati's three page long solution to the Cypriot debt crisis.  Here's Felix Salmon on it:

Their plan is simple:

First, leave all deposits under €100,000 untouched. Hitting those deposits was by far the biggest mistake of the Cyprus plan as originally envisaged, and everybody would be extremely happy if guaranteed depositors could be kept whole.

Second, term out everybody else by five years, or ten if they prefer.

That’s it! That’s the whole plan, and it’s kinda genius. If you have bank deposits of more than €100,000, they will be converted into bank CDs, with a maturity of either five years or 10 years — your choice. If you pick the longer maturity, then your CD will be secured by future Cypriot gas revenues, which could amount to hundreds of billions of dollars.

And if you have sovereign bonds, they too will be termed out by five years, giving Cyprus a bit of breathing room to get its act together.

Do that, say Buchheit and Gulati, and you manage to reduce the size of the needed bailout bymore than the €5.8 billion that Cyprus is currently planning to raise with its tax on bank deposits — and you don’t touch anybody’s principal at all. To be sure, the new CDs, which would be tradable, would surely trade at less than par: there would be a present-value haircut on deposits over €100,000. But that’s going to happen anyway. And at least in this case patient depositors will have a chance of getting all their money back in full — with interest. And, most importantly, guaranteed depositors will remain unscathed.

And here's Matt Levine on how the crisis is so strange.

The various reasons to object to this boil down to its violations of absolute priority; the way things are supposed to work is more or less:

  • When a bank goes bad its equity holders lose,
  • If zeroing the equity holders doesn’t cover the losses, then the bondholders lose,
  • If zeroing the bondholders doesn’t cover the losses, then the depositors lose,
  • But even there deposits under €100,000 shouldn’t lose, since they’re government guaranteed under the EU deposit insurance scheme.

In Cyprus sort of the opposite happened: equity holders are being diluted but not confiscated,1bondholders weren’t touched (there are essentially no bonds),2 and depositors under €100,000 were haircut in order to limit the damage to depositors over €100,000. The reasoning for this is unclear; a leading theory is that softening the blow on over-€100,000 deposits was viewed as necessary to retain Cyprus’s status as a haven for offshore deposits by tax-dodging Russian oligarchs. This is an odd theory; losing 9.9% of their money is no doubt a more pleasant proposition than losing 15% though it’s not what you’d call absolutely pleasant and they don’t seem particularly pleased with it

It is strange, but I agree with Andrew Sorkin that haircuts, in this case, aren't supremely terrible to contemplate.

By the way, if you’re wondering why investors left so much money in troubled Cypriot banks, here’s a trivia question: Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?

The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year.

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