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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Judicial “Opinion”: SDNY enjoins Apple for Violation of Antitrust Practices in E-Book Pricing

By Valerie Jon Ramos, J.D. Candidate 2015 | Posted on

On September 6 of this year, U.S. District Judge Denise Cote, from the Southern District of New York, enjoined Apple after having issued a judgment against Apple over antitrust practices in e-book pricing. Accompanying this judgment, Cote issued an injunction restricting Apple’s interactions with publishers for the next five years and ordered the appointment of special compliance auditors to ensure that Apple complies with the order of the injunction.

The State of the Empire: Amazon’s Monopoly

Up until the launch of Apple’s iPad and iBookstore, Amazon had dominated the e-book retail market, having sold nearly 90% of all e-books. Amazon launched its first e-reader, the Kindle, in 2007, which gained widespread acceptance. Amazon quickly became the market leader in the sale of e-books and e-readers.

Amazon maintained its leadership by adopting a “$9.99 or lower” retail price, making it difficult for competition within the e-book industry. At the time, Amazon had a wholesale pricing model with publishers referred to as the “Big Six” (Hachette Book Group, Inc., HarperCollins Publishers LLC, Holtzbrinck Publishers LLC, Penguin Group (USA), Inc., Simon & Schuster, Inc. and Random House, Inc.). 

Amazon’s wholesale pricing model made it difficult for competition by allowing Amazon to purchase e-books from publishers at the wholesale price and then sell the e-books at a price of its choosing. This model allowed Amazon to sell New Releases and New York Times Bestsellers at a “$9.99 or lower” retail price, which often matched or was below the wholesale price. Amazon took the loss and kept its e-book retail prices at “$9.99 or lower.” 

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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: Is Venture Finance in China Possible?

By Nahal Bahri, JD Candidate 2015 | Posted on

On October 2, 2013, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a lunchtime talk on venture finance in China by Arman Zand, Senior Vice President of SPD Silicon Valley Bank in Shanghai, China. Zand, a Haas MBA (class of ‘09), spent the last four years in Shanghai establishing Silicon Valley Bank’s (SVB) joint venture with Shanghai Pudong Development Bank (SPD).  Unlike other banks, SVB is a financial institution designed to serve entrepreneurial and early stage tech companies.

In his presentation titled “Is Venture Finance in China Possible? The View from Silicon Valley,” Zand spoke about recent developments in China’s economy, some challenges he faced in developing China’s first venture capital bank and lessons he learned along the way.

Before delving into the main issues with developing a venture capital bank in Shanghai, Zand gave a brief explanation of recent developments in China’s economy.  He explained that China’s economic development is rapidly moving forward with the hopes of transitioning from a labor economy to an innovation economy that embraces SMEs, or small and medium-sized enterprises.

Subsequently, Zand explained some of the challenges he faced while in China, including working with Chinese banks that are primarily mortgage lenders.  The majority of all bank loans in China require real assets to serve as collateral; however, entrepreneurial companies only have IP collateral: trademarks, patents, software code and the like.  The lack of real estate makes venture finance “extremely challenging.”

Nevertheless, a recent development in which Shanghai announced a new free trade zone (FTZ) could create a superior environment for venture finance. (more…)

The Government Shut Down, The Revival of High Frequency Trading, And What The SEC Is Doing To Keep Up

By Roxana Guidero, J.D. Candidate 2016 | Posted on

The government shut down continues while the American public anxiously awaits a resolution.  Unless Congress raises the debt ceiling by October 17, the U.S. government will default on its debt.  For the securities markets, this means market chaos, which provides a feeding ground for high frequency traders.

High frequency trading (HFT) uses complex computer algorithms to analyze multiple markets and trade high volumes of stocks, moving in and out of trades in fractions of a second.  For high frequency traders, fortune favors the speedy.  Computers generate returns in a manner that human beings simply cannot, leaving ordinary investors aghast.  The question remains, does high frequency trading help or hurt our markets?  On one side of the debate, proponents of this practice argue that HFT provides liquidity in the market.  On the other side, critics blame HFT for market disruption and see the sophisticated technology as providing an unfair advantage to traders.

The Securities and Exchange Commission has been fighting to keep up with the technological advancements on Wall Street and research just how much of an advantage traders acquire through the use of such technology.  The SEC is planning to release a public website containing data-driven analysis of trading patterns, increasing accessibility to the obscure patterns of high frequency trading. The data collected will also aid the SEC in closing the technological gap between this regulatory agency and high frequency traders.  Although the SEC continues to weigh the actions it should take, if any, against high frequency traders, it is not as quick to blame HFT for market crashes as some of its critics are.  SEC Chairman, Mary Jo White, in a speech on October 2nd, noted that although there is an increased risk of technology failure as trading systems become faster and more complex, high frequency traders are not to blame for the market problems of the last few years.

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Week in Review: Government Shuts Down, Twitter Ramps Up

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

Twitter, Inc. publicly filed its IPO documents on Thursday, revealing the microblogging company’s financials for the first time.  Analysts expect the seven-year-old site to be valued in the $10- to $15-billion range, although it is still unprofitable.  Rapid growth has been outmatched (for now) by accelerated expenses:  in the first half of this year, revenue doubled to $254 million but net loss increased by 40% to $69 million.  Twitter, which has chosen the ticker symbol TWTR, is still behind the pace set by Facebook.  By comparison, Facebook’s IPO sales pitch showcased a $1 billion annual profit in 2011 and 845 million active users (Twitter has 215 million).  Twitter’s co-founder and former CEO Evan Williams will expect the largest payout once the liquidity event is completed; he owns 12 percent of the company.  Co-founder Jack Dorsey owns 4.9 percent.

The federal government is paralyzed as lawmakers have failed to agree on the nation’s budgetary priorities.  Divided government in hyper-partisan Washington, D.C., has proven to be a recipe for stalemate.  While most of the coverage has focused on House Republicans’ objection to funding the Affordable Care Act, the debate will likely be viewed as a much broader battle on federal spending.  Two storms will soon converge—the current battle over a Continuing Resolution (essentially legislative authorization to write certain checks from the U.S. Treasury) and the imminent necessity to raise the federal government’s $16.7 trillion debt ceiling (to further add to the nation’s debt).  Treasury Secretary Jack Lew has estimated that the U.S. government will need to raise the ceiling before October 17th, less than two weeks away.  For lawmakers, resolving the current shutdown by passing a “clean CR” will solve little unless the deal also addresses the debt ceiling—thus, the conversation for congressional leaders of both parties appears to have shifted to a grand bargain or large-scale budget deal.  For now, Wall Street has remained mostly apathetic, but prolonged brinksmanship is likely to change the market’s attitude in a hurry.

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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Banking Law Seminar: Dodd-Frank and the Golden Age of Lawyers and Consultants

By Richard Andrews, J.D./M.B.A. Candidate 2015 | Posted on

On September 23, 2013, the Berkeley Center for Law, Business and the Economy (BCLBE) hosted a lunchtime talk on banking law given by Wells Fargo & Company’s Chief Regulatory Counsel, John D. Wright. Wright’s talk was part of Banking Law Fundamentals, BCLBE’s comprehensive, 2-1/2 day introduction to banking law for attorneys, consultants, regulators, and bank professionals, hosted at UC Berkeley’s International House from September 23-25.

Wright presented an overview of post-Dodd Frank financial institutions’ “new normal,” characterized by a “highly operationalized, risk-averse, bureaucratized culture.” According to Wright, “the golden age for lawyers and consultants has finally dawned.”

Wright, who has worked with financial institutions for 25 years, described the major events that led to the current state of affairs. As an associate practicing securities and banking law at Brobeck, Phleger & Harrison in San Francisco, he often analyzed Wells Fargo’s commercial loan files. At that time, law firms were the primary directors of banks’ legal work.

Wright joined Crocker Bank in early 1980, at the beginning of the next 20 years’ deregulatory winds, which culminated in the Gramm-Leach-Bliley Act of 1999. The resulting consolidation among financial institutions greatly expanded the role of banking lawyers and sparked the growth of large in-house legal departments.

Turn of the millennium events such as “Y2K” and 9/11 further expanded the banking lawyer’s role into operations risk management. With this expansion came the breakdown of the former rigid separation between banks’ lawyers, compliance officers, and risk managers. Wright described the role of the chief regulatory counsel today as heavily focused on enterprise risk management, and consequently, as similar to a consultant’s role. At the same time, law firms representing financial institutions have moved away from strategic advice-giving, and toward the more specialized areas of litigation, regulatory enforcement, and transactional work.

By far the most significant recent change has been the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act. (more…)

Nokia’s Misleading Information about CEO Compensation Means Windfall for Elop

By Willi Künzli, LL.M. Candidate 2014 | Posted on

One of the biggest recent deals in the mobile phone market reveals a curious case of misleading information about Nokia’s former Chief Executive Officer, Stephen Elop, and Microsoft’s “acquisition” of its possible future CEO.

Nokia’s Chairman Risto Siilasmaa announced that Mr. Elop’s service contract with Nokia had “essentially the same” bonus structure as the one of its previous CEO. However, the Finnish Newspaper “Helsingin Sanomat” searched SEC filings and uncovered evidence that fundamental changes to the referred service contract were implemented in 2010.

As a result, Mr. Siilasmaa was later forced to correct the previous information and announced that Mr. Elop’s contract also contained an immediate share price performance bonus, which would be paid in case of a “change of control” situation.

The chain of events that would trigger Mr. Elop’s payout seemed unlikely to happen at the time of the change in his contract. Microsoft’s €5.44billion purchase of Nokia mobile phone business changed this scenario. The deal triggered the “change of control situation” in Mr. Elop’s contract, entitling him to a payout of approximately US$25million.

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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.”