Banking

Banking Law Fundamentals: “How Did We Get Here and Where Have We Gotten” – A Paradigm For Assessing the Future of Banking

By Ana Amodaj, J.D. Candidate 2014 | Posted on

Edward J. McAniff, one of the nation’s leading banking lawyers, shared his insights on navigating the banking regulatory landscape in a series of lectures at the Banking Law Fundamentals (BLF) seminar hosted by Berkeley Center for Law, Business and the Economy from September 25-27.

The lectures stemmed from a common notion that it is impossible to anticipate and recognize what consequences regulatory changes will have on the banking industry without looking through the prism of our past.  Throughout the seminar McAniff convincingly and eloquently demonstrated that the only framework capable of explaining this complex and fascinating body of law is one that is built upon awareness of how the U.S. banking regulation came to be in its present confused state.  The structure of regulation is then best understood as a reflection of the interplay between the nature of banking activities, themes underlying the American culture, and historical developments.

At the outset McAniff acknowledged that the astonishing complexity of rules governing banks, comprising the most intensive and extensive body of U.S. regulation, is in part due to the critical role that banks play in operating the economy.  “Banks are central to the economy – they provide liquidity, transfer wealth immediately, act as intermediaries, the Fed uses them to distribute the national debt…  Clearly there is no way to run a modern economy without a banking system.”  However, while the significance of banks can justify the need for regulation of on their activities, themes prevalent in American history explain its illogical, internally inconsistent, fragmentized, and reactionary structure.

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U.K. Files Suit Over Banker Bonus Caps

By Wendy Lily Wang, J.D. Candidate 2016 | Posted on

Britain, home of Europe’s biggest financial center, is challenging a recent decision by European lawmakers to begin capping banker’s bonuses in 2014. The cap affects bankers with a salary of 500,000 euros a year or more. Bonuses would be limited to a banker’s fixed pay, or twice that amount with the approval of a majority of the shareholders.

The British Banker’s Association, which requested the caps on bonuses be postponed, projected that about 35,000 bank employees around the world would be affected by the new rules—the vast majority located in London.

In response to widespread public anger over the financial crisis, European legislators moved to rein in outsize banker’s bonuses with the proposed cap. A spokesman for the Treasury objected to the cap, saying that it will actually push banker’s fixed pay upward, ultimately making the banking system riskier and failing in the original objective of limiting banker’s compensation. Britain has also repeatedly warned that tighter regulation could push banks toward moving their business to the U.S. or Asia.

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Recap: “Change in Financial Services Regulation? You Can Bank on it!”

By Alex Petersen, J.D. Candidate 2016 | Posted on

On September 25, the Berkeley Center for Law, Business, and the Economy (BCLBE) and Berkeley Business Law Journal (BBLJ) co-sponsored the talk: “Change in Financial Services Regulation? You Can Bank on it!” Featuring two prominent legal practitioners with a combined 70 years in the field, the discussion revealed the challenges and rewards of navigating the complex world of financial regulation. Sara Kelsey and Karol Sparks gave valuable advice and told their life stories.

Sara Kelsey described her unorthodox and impressive journey through the fast-evolving world of financial regulation. Dubbed the “Forrest Gump” of the banking bar, she evolved from a teargas-dodging Berkeley undergraduate into the General Counsel of the Federal Deposit Insurance Corporation (FDIC). Kelsey’s accomplishments illustrate the power of her motto: “always read the statute with fresh eyes – don’t listen to anyone else.”

Kelsey boldly advocated for the approval of one of the largest mergers in history while at Skadden Arps in the 1990’s, forming Citigroup from Travelers Group and Citicorp.  While nearly everyone thought the merger was illegal and insane, Kelsey’s precise understanding of the Glass-Steagall Act and the Bank Holding Company Act gave her confidence that Citigroup would have a 2-5 year window for divestment of its prohibitive assets. In addition, the national political environment suggested imminent legislation that would cause major regulatory change. The gamble paid off in 1999 with the passage of the Gramm-Leach-Bliley Act, removing barriers between banking, securities, and insurance companies.

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Week in Review: JPMorgan Returns to the Hot Seat

By Christopher Hammond, J.D. Candidate 2015 | Posted on

Once again, JPMorgan found itself discussing yet another settlement and facing bad publicity linked to excessive risk-taking.  Last week, news broke that the bank had agreed to a $920 million settlement in the “London Whale” derivatives trading case; plus, the Consumer Financial Protection Bureau ordered JPMorgan to refund over $300 million to customers based on alleged wrongdoing in its credit card and debt collection procedures. 

Another settlement deal surfaced this week—and its numbers are much larger.  The U.S. Department of Justice is seeking $11 billion (with a ‘B’) in compensation for JPMorgan’s actions leading up to the Financial Crisis, including selling mortgage backed securities the bank knew were essentially worthless.  According to the Washington Post, it would be “the biggest settlement a single company has ever undertaken.”  On Thursday, the bank’s visible CEO Jamie Diamond flew to Washington, D.C., to meet with Attorney General Eric Holder for nearly an hour.  Instead of lobbying for looser restrictions on Wall Street, Diamond was seeking an end to federal and state probes (which still represent a large liability to the bank) and, perhaps more importantly, attempting to avoid criminal charges.

All of the rhetoric and press releases notwithstanding, the Administration’s handling of numerous JPMorgan investigations has been properly criticized for missing an opportunity to charge top Executives.  The S.E.C., D.O.J., and other regulators have thus far failed to press criminal charges, even when financial disclosures have misrepresented the bank’s business or mortgage-backed products.  To be sure, the government has charged front-line traders in the London Whale case, but those tasked with overseeing the bank’s actions have escaped indictment—perhaps for the very reason that Mr. Diamond is willing to personally negotiate with the nation’s top law enforcement official on their behalf. 

While the financial penalties being discussed are stiff, they represent only a small fraction of the damage done to the global economy, JPMorgan shareholders, and (ultimately) dinner tables across the country.  Columbia Law School professor John C. Coffee Jr. provided some insight to the back-and-forth.  He told the Post:  “If I was in [Holder’s] position, I would be concerned about my legacy. . . .  There’s been a lot of criticism of officials in Justice being much too soft, timid.”

Stocks Hit Record High As Fed Keeps Bond Buying At $85B A Month

By Sydney Ryan, J.D. Candidate 2016 | Posted on

The Federal Reserve announced on Wednesday that it would continue its current quantitative easing policies indefinitely, despite the unanimity on Wall Street that a scale-back was imminent. This announcement sent the Dow and S&P 500 to record highs.

According to Bernanke, with the federal funds rate remaining in the 0 – 0.25% range and unable to decrease any further, the central bank’s measures to stimulate the economy have been focused on complementary methods of “asset purchases and forward guidance about short-term interest rates.” For example, in September 2012, the Federal Open Market Committee (FOMC) initiated a stimulus plan to purchase $40 billion per month in agency mortgage-backed securities in addition to the $45 billion per month in longer-term securities that it was already acquiring as part of its Maturity Extension Program (MEP). In December 2012, the Fed announced that it would maintain its $85 billion per month asset purchase program, even after the MEP had ended, by continuing to purchase $45 billion per month in longer-term Treasuries.

However, in June 2013, the Federal Reserve suggested that it would begin a modest reduction in the pace of its purchases by as early as September 2013, and possibly end the program around mid-year 2014. This caused some turmoil on Wall Street over the summer, as the markets tried to adjust to the idea of a departure from the asset purchase program, and consequently lead to a decrease in stock prices and an increase in interest rates.

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City Council Votes in Richmond, CA, Mortgage Eminent Domain Proposal and UPDATE

By Christopher Hammond, J.D. Candidate 2015 | Posted on

After a seven-hour meeting that dragged into early Wednesday morning, the Richmond City Council voted 4-to-3 to continue pursuing its plan to condemn underwater mortgages using the city’s eminent domain power.  The development is just the latest in an ongoing and high-stakes dispute over a novel property law argument. 

Here is the background:  The city of Richmond, California, has long-faced deteriorating property values.  Once a shipbuilding powerhouse for the U.S. Navy during World War II, the region’s declining industrial based has hit Richmond particularly hard.  City leaders have struggled to attract redevelopment capital, as businesses have largely opted for other booming Bay Area locations.  And when the mortgage crisis hit, Richmond’s communities experienced rampant foreclosures.

In response, the City has considered a novel move:  mortgage condemnations through the power of eminent domain.  That is, the City’s proposl would condemn the underwater mortgage obligations, but not the real estate itself.  If implemented, banks would be forced to write down large portions of a borrower’s principal.  The Network has previously covered the mortgage eminent domain proposal and Mortgage Resolution Partners, which had backed Richmond’s plan.  And last September, the Berkeley Center for Law, Business and the Economy and Berkeley Business Law Journal hosted Adjunct Professor Bill Falik—who is a partner at MRP—to discuss the innovative (though controversial) scheme.  The Network covered counterarguments as well.

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Basel Committee and IOSCO Publish Policy Framework

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s note:  The following post is authored by Goodwin Procter LLP.]

The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) jointly issued a final policy framework (the “Policy Framework”) establishing minimum standards for margin requirements for non-centrally cleared derivatives.  The Policy Framework is a result of a 2011 G20 agreement calling upon BCBS and IOSCO to develop, for consultation, global standards for margin requirements for non-centrally cleared derivatives; BCBS and IOSCO released two consultative versions prior to releasing the current final version of the Policy Framework.

The Policy Framework requires the exchange of both initial and variation margin between so-called “covered entities” that engage in non-centrally cleared derivatives.  The document explains that margin requirements for such derivatives “would be expected” to reduce systematic risk by ensuring the availability of collateral to offset losses caused by a counterparty default, and would also promote central clearing by reducing the perceived cost benefits of engaging in uncleared derivatives transactions.  The Policy Framework further explains that margin requirements have certain benefits over capital requirements, such as being allocated to individual transactions rather than being shared across an entity’s full range of activities.  Margin is also, in the words of the document, “defaulter-pay” in the sense that the margin provided by the defaulting party is used to absorb the losses caused by the default, as opposed to capital’s “survivor-pay” model in which the non-defaulting party bears losses out of its own assets.

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SEC Adopts Amendments to Broker-Dealer Financial Responsibility, Reporting and Audit Requirements

By Christopher Hammond, J.D. Candidate 2015 | Posted on

[Editor’s Note: The following update is authored by Davis Polk & Wardwell LLP]

The SEC recently adopted amendments to its financial responsibility, reporting and audit rules applicable to registered broker-dealers.  While some of the amendments will affect all firms, the amendments are particularly significant for those that carry customer accounts or act as clearing brokers.

The amendments to the broker-dealer financial responsibility rules (the “Financial Responsibility Rules Amendments”) were originally proposed in March 2007, prior to the financial crisis. The amendments address a number of technical issues, including protections associated with “sweep programs” for customer free credit balances, proprietary accounts of broker-dealers that are held at other broker- dealers and limitations on banks eligible to hold special reserve accounts.

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Guidance Update for Default on Tri-Party Repos

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

The SEC Financial Stability Oversight Council (FSOC) recently issued a guidance update on counterparty risk management practices for Tri-Party Repurchase Agreements.  The update “provides the Staff’s views on the types of legal and operational considerations that a MMF and its investment advisor should consider if a counterparty fails and defaults on its obligations under a Tri-Party Repo.”  The update stresses the importance of advance planning in case of default.  (more…)

Problems With CFTC Cited at Re-Authorization Hearing

By Sarah G. Nowland, J.D. Candidate 2014 | Posted on

Yesterday a hearing was held to determine whether the House and Senate Agriculture committees will re-authorize the Commodity Futures Trading Commission (CFTC).  The hearing is one in a series of reauthorization hearings scheduled to occur every five years.  The biggest complaint is that the CFTC is behind schedule on implementing Dodd-Frank rules.  Specifically, commissioners cited problems with the issuance of no-action letters and the confusion surrounding swap dealer definitions.  (more…)