follow the money

A blog on business law, politics, and white collar crime

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.

July 27, 2014

For Better or For Worse? The Fourth Anniversary of Dodd-Frank

Chiming in on the N.Y. Times DealBook blog to mark this anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act.  See  here  “Taking Stock of Four Years of Dodd-Frank.”

June 17, 2014

A Second Chance to Help Families Save Their Homes

Pleased to share my latest New York Times DealBook column, titled, “A Second Chance to Help Families Save Their Homes,” published June 13, 2014. Here’s the lede:

“It’s a familiar story. Regulator sues mortgage firms, demanding that they stop abusing homeowners facing foreclosure. This time, however, it’s different. The defendants in this case are not banks. Instead, they are the government-sponsored enterprises Fannie Mae and Freddie Mac.”


May 15, 2014

Comments, Clarifications & Corrections for “Other People’s Houses”

As the on-sale date for OTHER PEOPLE’S HOUSES nears, I have noticed a few points that deserve clarification and minor typographical errors to correct. Instead of silently storing-up a list of changes to make to the paperback edition, I plan to address them here first. Periodically, I will move up this post up to the top of the blog and add any relevant comments, clarifications and corrections:

Chapter 6, p. 93:  The sentence describing when President Ronald Reagan left office, should state January 1989, not January 1987.

Chapter 12, p. 204:  The observation that the Fed “was supposed to use its emergency lending powers to support traditional banks” was meant normatively. As a matter of law since 1932, under Section 13(3) of the Federal Reserve Act, the Fed had the power “under unusual and exigent circumstances,” to lend to “any individual, partnership, or corporation” when such borrower is “unable to secure adequate credit accommodations from other banking institutions.” However, it had not done so since the Great Depression.  As noted in this chapter and later in the book, the Fed once again used this emergency power during our recent crisis, including in the rescue of Bear Stearns and the bailout of AIG.

Thank you

May 7, 2014

What Tim Geithner Got Right

Next week, with the release of his book “Stress Test,” former Treasury secretary Timothy Geithner will follow fellow bank bailout-era officials whose books seek to shape our views of the financial meltdown by detailing what they and their peers got right — and wrong — in their responses. Here’s my opinion.  Published on May 6, 2014, on the New York Times DealBook blog.

April 4, 2014

Time to Reduce Repo Run Risk

The financial system is safer, but not safe enough. For details, check out my (first) opinion column for the New York Times DealBook,  published on April 4, 2013. Here.

March 25, 2014

Does Your Mutual Fund Have a Religion?

Does your mutual fund have a religion?  If so, how would you find out what it is? If it changes, would the fund’s investment adviser have to inform you? These questions came to mind after reading the transcript for today’s argument in the Hobby Lobby and Conestoga Wood cases. Don’t get me wrong. None of the justices or attorneys mentioned mutual funds. But let me explain why they should have.

Mutual funds own approximatley 25 percent of U.S. equities. Thus if a Supreme Court majority determines that corporations may have religious beliefs (for purposes of the Religious Freedom Restoration Act and/or the Free Exercise Clause of the First Amendment), it will be necessary to come up with a methodology for determining what a given corporation’s religion is. If the Court decides that the religion of the shareholders (as opposed to that of its employees, for example) dictates the religion of the corporation, one would need to know who the shareholders are as of the particular point in time when the sincerity of the religious belief is being measured.

Of course this poses challenges in a world of high-frequency trading. But that would not be insurmountable as a practical matter; we do have record dates for other purposes. But it would make a mockery of religious beliefs if they can shift in fractions of a second. And, it becomes additionally complicated when the owners of shares are not real people, but instead institutional investors. About 70 percent of U.S. equities are owned by institutional investors (with mutual funds taking up a large slice).

If religion is determined by shareholder vote, would that be acquired through a management resolution on the proxy ballot? What would happen when even a single corporation in an index held such a vote?  Would the funds abstain? Or would the fund that held that corporation’s shares vote in support of management’s religious resolution? If so, would that single vote establish the religion for that fund, thus precluding it from voting in favor of a different corporation’s suggestion religion? Or, can a single fund be one religion for purposes of one stock in its portfolio and a different religion for another? And who decides? Do fund shareholders get a say on the fund’s religion?

This line of thought may seem far-fetched, given that the parties in this case are closely-held corporations owned by family members. Yet Justice Roberts acknowledged that a decision that a for-profit corporation has religious beliefs and rights could go beyond the facts presented today. He said:

“Whether it applies in the other situations is a question that we’ll have to await another case when a large publicly­ traded corporation comes in and says, we have religious principles, the sort of situation, I don’t think, is going to happen.”

But these are the very real concerns. And, it was associated practical questions that Justice Sotomayor raised with Paul Clement, counsel for the corporations. Sotomayor asked him:

“[H]ow do we determine when a corporation has that [religious] belief? Whos says it? The majority of shareholders? The corporate officers? The––is it 51 percent? What happens to the minority? And how much of the business has to be dedicted to religion? 5 percent 10 percent? 3 percent?”

Clement responded:

“You look to the governance doctrines. . .And I think that’s a really critical question, which is ultimately, I think this line of questioning goes to a question of sincerity.”

Am I sincere? This is a thought exercise, and a scary one at that. The idea that the Court may actually permit a for-profit corporation to pierce the veil for purposes of gaining benefits that deprive its employees of rights under federal law, but use the veil to shield its shareholders from personal liability is, in my sincere opinion, absurd.

Update: In response to Ron’s insightful response, I should note that I was referring to “mainstream” mutual funds and not SRI funds. I should have made that more clear, particularly given that I have written about them in the past.

That said, the existence of SRI funds or shareholder activists that invest in or engage with corporations to encourage them to pursue envriomental, social, and/or governance agendas, whether motivated by religious views or otherwise is separate from the problem presented by the case at hand. As noted above, if this door opens, there will be a need to determine whether a corporation’s religious beliefs are sincere and to the extent that involves polling the shareholders, this is fraught with challenges, not the least of which is shareholder turnover. In contrast, the current system which does allow for SRI funds and other activists to influence corporate governance does not require the fiction of a consistent adherence to a particular religious belief system for a legal entity with fluctuating shareholders.

(Cross-posted on the Conglomerate Blog here)

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.