safe banking

a blog on banking, corporate governance, and financial market reform.

June 13, 2017

A Blueprint for Banking Deregulation

Yesterday, Monday, June 12, the Treasury Department released this white paper entitled “A Financial System That Creates Economic Opportunities Banks and Credit Unions.”

This 159-page report was made to the president in response to his Executive Order 13772 on Core Principles for Regulating the United States Financial System. The authors are Secretary Steven T. Mnuchin and Craig S. Phillips, Counselor to the Secretary.

 

 

 

February 13, 2017

New Hopes and Hazards for Social Investment Crowfunding

Happy to be included in Law and Policy for a New Economy: Sustainable, Just, and Democratic, edited by Melissa K. Scanlan, forthcoming in 2017.

What follows is an excerpt from my chapter on “New Hopes and Hazards for Social Investment Crowdfunding.”

In his chapter on the “Joyful Economy,” (Chapter 2), Gus Speth contends that building a new economy requires a redefinition of the corporation and its goals. He advocates for shifting it from an enterprise designed primarily to provide profits for shareholders to one concerned about a broader set of values and stakeholders. To develop what he deems a joyful economy, he suggests that people, place and planet must be prioritized. Perhaps those who bring leadership to businesses that focus on social and environmental concerns–––social entrepreneurs–––can answer the call by reorienting the corporations that they create. Such localized efforts to transform individual firms could inspire widespread change.

 
The timing is good for such a transition, as social entrepreneurs have promising new options available for widely soliciting like-minded investors and organizing their business enterprises to include social goals. Yet, due to distrust of the existing system, some may not explore these opportunities. Not attuned to mainstream matters, they may be unaware of the recent legal changes that make it easier for them to engage within the existing financial and corporate governance systems to fund their enterprises and to organize them with a social or environmental mission in mind.

 

These recent legal developments are significant. Now in the US, those seeking to fund an enterprise using securities offerings can forgo a complex, time-consuming full federal registration process with the Securities and Exchange Commission (SEC) while still reaching out to solicit a wide group of potential investors. This general solicitation can take place in a variety of media include advertising online through crowdfunding portals and other platforms. The ability to bypass the full SEC registration process is the result of recent legal reforms that streamline how businesses can raise money through the offering and sale of securities. These legal reforms impact social entrepreneurs because the law covers the methods they might use to attract funding. Unlike a donation made through a site like Kickstarter or Go Fund Me, which is not subject to the securities laws, investments made with an expectation of profit typically are subject to securities regulation at the federal or state levels (or both). This is because as a matter of law, securities include investments of money in a common enterprise with the expectation of profit as well as more common financial instruments like stocks and bonds.

 

Taken together, these federal and state legal and regulatory updates make it easier for startups, including socially or environmentally-focused enterprises to raise capital and for members of the general public to channel their savings into such investments. These changes can provide space for those social entrepreneurs who believe they do not fit within the current system.

 

]With these hopeful legal developments, however, come hazards. The usual concerns around fraud and mismanagement endure. Moreover, less sophisticated members of the public may not have the skills to assess the investment opportunities. And, they may not fully understand that the majority of startups fail and may invest more in individual startups or even in a diversified portfolio than they can stand to lose. Streamlining the offering process and eliminating traditional federal registration and disclosure requirements may result in investors not obtaining information essential to their investment decisions. These streamlined offering processes may also attract the unscrupulous and reckless issuers seeking a quick buck without sufficient skill or realistic business plans. Indeed, in some cases, given the combination of the perceived virtue of or affinity with a local and mission-driven enterprises and unsophisticated investors, fraud could be even more prevalent.

December 11, 2016

the #divestdonald movement

Inspired by a bipartisan group of legal ethicists and Constitutional scholars including Kathleen Clark, Norm Eisen, Richard Painter, Stephen Schooner, Zephyr Teachout, and Laurence Tribe, on November 20, 2016, I launched the hashtag #DivestDonald. In the morning I informed friends on Facebook that I planned to use it later that day on Twitter. A few headed over first.

This simple phrase, #divestdonald, is designed to draw public attention to how Donald Trump is poised to violate the Constitution on day one of his presidency. In particular, the foreign Emoluments Clause, found in  Article I, Section 9, Clause 8 of the Constitution forbids a President from taking any payment from a foreign government or official unless Congress first approves. This would include payments for hotel rooms and licensing fees. It would also include any of the joint ventures Trump’s operations have with foreign governments. Because he is either the sole or principal owner of his numerous global businesses, when he operates them he is in direct violation.

This is a case of both monumental corruption and historical significance.  When a President takes the oath of office, he solemnly swears to “faithfully execute the Office of President of the United States, and will to the best of  [his] ability, preserve, protect and defend the Constitution of the United States.” Yet, Trump would be defying the Constitution. For more details, please read this bipartisan letter, sent to Donald Trump on December 9, 2016.

Quite quickly following the November 20th launch, many adopted the hashtag. For example, on November 21, Larry Tribe tweeted: #divestdonald is a constitutional mandate not just of the Emoluments Clause but also of the Faithfully Execute Clause.

What follows is a Facebook post from December 7, 2016. That was Day 29 following the Presidential election. I have been maintaining the habit of writing a status each day with inspiration and calls to action. This will last at least until January 20, 2021, which will be Day 1,534.

* * * * * * *

Day 29: Are you wondering how I find joyful purpose in #DivestDonald. What is the endgame. How do we measure success? Should we feel defeated when Trump takes office and continues to help his family profit off the presidency. When he continues to be a walking, talking violation of the Constitution? Here are my answers to those questions.

The endgame: I believe #DivestDonald it’s not a game, it’s a marketing message and a political movement.

By using it every day, we brand Trump as the monumentally corrupt person he is. It reminds us that he is our crony capitalist in chief. The words #DivestDonald are a constitutional imperative and a demand for what he needs to do with his business.

The hashtag #DivestDonald has another meaning too. It signifies that We the People need to divest of him as president and put someone better in office.

The Better Vision: When America finally divests of Donald. What will we get? We must begin to shape that now. For me, this vision involves five key things.

Shared prosperity & a living wage
Equal rights and dignity
Debt-free higher education
Healthcare through single-payer
Banking that is not too big to fail

To realize this vision, I believe we must #DivestDonald who plans to privatize the gains and socialize the losses in these key areas. He wishes to reward himself, his family, and his cronies.

June 13, 2016

The Madoff Loophole, Tire Shredders and More

On May 17th, was the witness invited by the Democrats to testify concerning three troublesome bills before a subcommittee of the House Financial Services Committee. Here’s a snippet of testimony and a link to the full remarks. A video is also available here.

“It’s odd. Just when private equity funds are in the sunlight thanks to Dodd-Frank and many have been exposed in SEC examinations as in violation of the law, you are now proposing that they be able to hide their tracks. . . [Also, this bill] would shockingly eliminate the annual independent audits of certain fund advisers to ensure they actually have the assets and securities they claim to hold. I call this the Madoff Loophole. . . Next, the SEC Regulatory Accountability Act would limit the agency’s ability to protect the investing public. Prior to issuing most regulations, the SEC would have to engage in a new cost-benefit process. Yet, the SEC already conducts economic analysis. And the securities laws already require the consideration of the promotion of efficiency, competition and capital formation. The SEC is also already subject to the Paperwork Reduction Act, the Regulatory Flexibility Act, and the Congressional Review Act. The existing requirements set out several speed bumps. The proposed requirements are tire shredders designed to bring progress to a crashing halt.”

 

 

December 2, 2015

Going Soft on White Collar Crime

Tucked into the bipartisan criminal justice overhaul package, the language could hamper federal prosecutors’ deployment of statutes that have been used for more than a century against fraudsters from Charles Ponzi to Bernard L. Madoff.  Read more of this DealBook column here:

 

July 23, 2015

Dodd-Frank at Year Five

On July 22, I was honored to join experts Simon Johnson (MIT) and Mark Calabria (Cato) on a panel moderated by Marc Jarsulic of the Center for American Progress. Our group followed an earlier panel of distinguished guests Senator Sherrod Brown (Ohio) and Representative Maxine Waters (California) moderated by CAP executive director Neera Tanden.  Click here for a link to the video. Quoting the CAP website:

“In response to the worst financial crisis since the Great Depression, Congress passed a major financial reform bill known as the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law, signed by President Barack Obama on July 21, 2010, made significant changes to the structure of financial regulation in the United States. It gave increased regulatory responsibility and power to the Federal Reserve Board; Federal Deposit Insurance Corporation; U.S. Securities and Exchange Commission; and U.S. Commodity Futures Trading Commission. It also created the Consumer Financial Protection Bureau to rein in abuse of households in financial markets, established the Financial Stability Oversight Council to provide macroprudential supervision of the entire U.S. financial system, and significantly overhauled the rules of the road for mortgage lending. The implementation of these mandates has produced substantial changes in the operation of our financial markets and in the activities of regulators.”

“The Center for American Progress Action Fund is pleased to host an extended conversation about the Dodd-Frank Act, its overall implications for financial market performance and financial stability, and the ongoing debate on whether more change is needed. The event will feature a discussion with congressional leaders who were involved in the creation of the Dodd-Frank Act and who have monitored its implementation for the past five years, and then a panel of experts will discuss how the law has worked and where to go from here.”

 

 

May 13, 2015

Still Too Big to Fail: Opportunities for Regulatory Action Seven Years after the Bear Stearns’ Rescue

Avoiding another meltdown depends on the will of federal regulators to use the new powers they were granted in the Dodd-Frank Wall Street Reform and Consumer Protection Act. If they behave as if they are beholden to the banks, we will likely face a more severe crisis in the future. There are six important steps that regulators can take right now without the need for further Congressional action. For more information, read my latest report, “Still Too Big to Fail: Opportunities for Regulatory Action Seven Years after the Bear Stearns’ Rescue,” published by the Corporate Reform Coalition.

January 24, 2015

Banks Urge Supreme Court to Weaken Fair Housing Law

Why has the banking industry urged the Supreme Court to take away key tools to fight housing discrimination? I shared my thoughts this week in a New York Times DealBook column:

“In the wake of a recent winning streak with Congress in rolling back reform, the banks now seek a fresh victory at the Supreme Court. The much-anticipated Fair Housing Act case . . . which was argued on Wednesday, does not directly involve banks or even borrowers. It stems from an arcane dispute over the allocation of federal tax credits to low-income housing developments in Dallas. The impact, however, could be much broader. . . .The court’s decision, expected before July, may greatly reduce liability for unfair mortgage financing practices nationwide and limit the ability for the government to combat predatory lending.”

Read more here.

December 13, 2014

New Policy Goes Only Partway in Helping Struggling Homeowners

In DealBook this week, I wrote about how the the Federal Housing Finance Agency has directed Fannie and Freddie to allow people who have lost their homes to buy them back from the enterprises at fair market value.

Prior to this directive, former owners had to pay off the full principal balance on their loan, which for underwater homeowners often was significantly more than fair market value.  This policy change is a good start, however it does not go far enough. It  does not prevent families from losing their homes to foreclosure in the first place. What should be done? Read more.

September 17, 2014

Post-Lehman: Is Money Market Fund Reform Still Too Weak?

Think the kind of run on Lehman Brothers that kicked off a financial panic six years ago is a thing of the past? Now that the S.E.C. issued its final rule in July, is money market fund reform complete?

Having tackled the persistence of repo run risk in an earlier N.Y. Times DealBook guest column, here’s a take on money market fund reform. Today’s piece revisits the role of money market funds in Lehman’s collapse and contagion. It also highlights a new proposal by University of Pennsylvania Law School Professor Jill E. Fisch — that sponsors of funds with fixed net asset values be required to guarantee the NAV — in other words to “back the buck.” Click here to read.

Other People's Houses

Other People's Houses

In the wake of the financial meltdown in 2008, there were many who claimed it had been inevitable, that “no one saw it coming,” and that subprime borrowers were to blame.