Category: Financial Institutions

Gilchrist on “The Special Problem of Banks and Crime”

Law professors are beginning to get to grips with the massive amount of wrongdoing at American financial institutions. Here’s part of the abstract for Gregory M. Gilchrist’s article on “The Special Problem of Banks and Crime:”

Federal prosecutors face increasing criticism for their failure to indict large banks and bankers for serious criminal conduct, including allowing violent drug cartels to launder hundreds of millions of dollars, willfully conducting business with rogue nations and terrorists, and manipulating the LIBOR to defraud investors. This Essay argues that the non-prosecution of banks is often justified by proper consideration of externalities and that the non-prosecution of bankers is often justified by lack of evidence. Nevertheless, the result is that extremely serious criminal conduct is penalized by mere fines and negotiated terms of probation, and this introduces deterrence and expressive costs to the legal system.

The idea that “non-prosecution of bankers is often justified by lack of evidence” is particularly interesting in a post-fusion center, post-PRISM world. If robbery suspects are demanding NSA phone records for exoneration, how soon might authorities consult them to finger paladins of peculation?

This is part of a series on crime and scandal at financial institutions. Prior posts include:
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Big Rig? Libor & Beyond

BankstersTo inaugurate a series of posts about scandals and crime in the financial sector, I wanted to highlight John Lanchester’s work in the London Review of Books on “banks’ barely believable behaviour.” He mentions the still unwinding Libor scandal up front:

Libor is the single most important number in international financial markets, used as a reference point throughout the global financial system. It is a range of interbank lending rates, set after consultation between the British Bankers’ Association and two hundred and fifty-odd participating banks. During the daily process, each bank is asked the rate at which it could borrow money from other banks, ‘unsecured’ i.e. backed only by its own creditworthiness rather than by specific collateral. The question is, in effect: what would your credit be like today, if you had to ask? . . . .

It seems bizarre that something so central to the global markets – $360 trillion of deals are pinned to Libor – should have such a strong element of invention or guesswork. The potential for abuse is immediately apparent. As Donald MacKenzie prophetically said, ‘the obvious risk to the integrity of the calculation is that a bank on a Libor panel might make a manipulative input, trying to move Libor up or down so as to influence interest rates or the value of its swaps portfolio.’ Surprise! After the crisis, when investigators were taking an energetic interest in Libor, it turned out that that was exactly what had been happening, not just at one or two banks but across an entire swath of the industry.

Lanchester only brings up LIBOR as the opening act for what he considers a far deeper scandal in Britain—PPI. And guess what—it’s not just LIBOR where we’re seeing these concerns about privileged access to information turning into profit. Here are some other “rigging” scandals of recent vintage:
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Volume 60, Issue 5 (June 2013)

Volume 60, Issue 5 (June 2013)

First Amendment Constraints on Copyright After Golan v. Holder Neil Weinstock Netanel 1082
Intraracial Diversity Devon W. Carbado 1130
When to Overthrow your Government: The Right to Resist in the World’s Constitutions Ginsburg et al. 1184
Interbank Discipline Kathryn Judge 1262


A Proposal for U.S. Implementation of the Vienna Convention’s Consular Notification Requirement Nicole M. Howell 1324

Market Efficiencies Come to Legal Practice

Dustin A. Zacks has posted a fascinating article on the role of “foreclosure mills” in bringing a more corporate, bottom-line oriented mentality to law firms:

The recent housing crisis increased demand for attorneys to process foreclosures through state courts. [High volume foreclosure firms developed; they] differ in makeup from traditional large law firms. Notable characteristics of these foreclosure firms include lenders and servicers’ relentless demand for increased speed and low costs, lack of firm-specific capital at foreclosure law firms, and a factory-like atmosphere of legal practice.

[As they developed] the fastest and cheapest legal services available. . . .these firms consistently generated complaints about their conduct, including questions about their ethical decision-making and about the veracity of the pleadings and documents they filed. . . . The Article accordingly examines the curiously muted reaction from state bar associations, judges, and state legislators.

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Stanford Law Review Online: Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture

Stanford Law Review

The Stanford Law Review Online has just published an Essay by Professors Paul Rose & Christopher J. Walker entitled Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture. Professors Rose and Walker argue that Dodd-Frank regulators should consider more
seriously the democratic accountability concerns at play when regulating the financial markets.

The lack of attention to accountability is particularly troubling in the Dodd-Frank con-text, where most regulators are independent agencies and thus less demo-cratically accountable via presidential oversight. In particular, independent agencies are not required to submit proposed rules and accompanying eco-nomic analyses for presidential review. Nor are their high-ranking officials subject to plenary presidential removal authority. Without another means of accountability—e.g., a robust cost-benefit analysis embedded in notice-and-comment rulemaking—independent agencies are more vulnerable to agency capture.

They conclude:

Despite decades-long bipartisan support for cost-benefit analysis, regu-lators of financial markets (whose rulemaking is not subject to presidential review) have been slower and more haphazard in adopting this method than their executive agency counterparts. Especially now that Dodd-Frank has exponentially increased the amount of financial rulemaking and considera-bly raised the stakes for regulating the financial markets, financial regula-tors can and should ground their rulemaking in a proper cost-benefit analy-sis to arrive at more rational decisionmaking and more efficient regulation. Conducting a rigorous cost-benefit analysis via notice-and-comment rule-making also makes for good governance. Without such public transpar-ency—especially in the context of independent agencies—democratic accountability suffers, and agency capture becomes a greater threat.

Read the full article, Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture at the Stanford Law Review Online.


The New York Fed and the Rule of Law

In Sunday’s New York Times, business columnist Gretchen Morgenson reported a piece of investigative journalism that is transcendently important, but whose complexity may have obscured that. It concerns secret dealings of the Federal Reserve Bank of New York. Morgenson explains the importance of her topic in terms of the threatened erosion of social trust that can occur when central banking officials engage in dubious behavior.

I would add that her topic, dubious dealings of central bankers, is of vital importance because those who run the FRBNY have enormous power in the field of banking regulation. They oversee the largest banks and provide direct input into the Financial Stability Oversight Council, the interagency government organization created by the Dodd Frank Act to oversee the financial system. It is empowered to intervene when the next financial crisis occurs, which could be later this year or five years or ten or what have you.

As with the financial crisis of 2008, these government actors, dominated by the FRBNY, will call all the shots about which institutions to save, sell or seize, on the one hand, and which creditors and shareholders to pay, wipe out or shortchange, on the other. How they exercise these powers is thus a matter of the utmost national interest. How they exercised them in the 2008 crisis remains both obscure and questionable. Read More

What’s Wrong with the Financial Services Industry?

I tried to answer this question at length in a review of Robert Shiller’s Finance and the Good Society. But if you want the short version, look no further than Barry Ritholtz’s list. One could easily expand it into an ever-growing wiki, but sometimes succinctness is supreme. Here’s Ritholtz on the multiple intermediary problem:

Too many people have a hand in your pocket[.] The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. Active mutual funds charge way too much for sub par performance. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and accountants have done an awful job, allowing corporations to mislead investors with junk balance statements. The media’s job is to sell advertising, not provide you with intelligent advice. The regulators have been captured.

And while we’re on the topic of the personal consequences of finance, do take a look at Helaine Olen’s Pound Foolish. Olen has been making the intellectual podcast rounds, and offers a devastating portrait of a personal finance industry warped by ideology and greed.

Squatter in BofA’s Boca Mansion

Bank of America (BofA) is moving to evict a squatter in one of its many foreclosed Florida properties:

Andre Barbosa’s days of stylish squatting in a $2.5-million Boca Raton mansion may be numbered. . . . Adverse possession is a state law which allows someone to move into a property and claim the title — if they can stay there seven years. Barbosa, who calls himself “Loki boy,” posted a signed copy of his “adverse possession” note in the home’s front window.

I’m sure Florida’s efficient judicial system will put this to right forthwith. And if they mess up a bit of paperwork along the way, no worries—independent reviewers can investigate. BofA has been the conscience of the finance community. It would be a grave injustice to see it facing losses due to people claiming title to property they don’t really own.


Young Business Law Scholar Call for Papers

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School has announced its third annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes.  This year’s Workshop will be held on April 5-6, 2013 at GW in Washington.

The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty. By providing a forum for the exchange of creative ideas in these areas, C-LEAF aims to encourage new and innovative scholarship.

I’ve participated in both previous Workshops and can attest that participants have benefited from the exchange of ideas and getting acquiainted with newer scholars.  About 100 papers are submitted and the C-LEAF faculty select about 10 for presentaiton.  At the Workshop, senior scholars comment on each paper, followed by a general discussion.

Three papers receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively. All prize winners will be invited to become Fellows of C-LEAF.  C-LEAF makes no publication commitment, but chosen papers are featured on its website as part of the C-LEAF Working Paper series.   Read More