1. Criminal Prosecution Not the Answer to the Credit Crisis
The DOJ has spent considerable resources and worked hard for the last couple of years to find ways to criminally prosecute high-level financial executives. It now appears, however, that most government prosecutors have come to the hard realization that they need to focus their efforts on civil prosecutions. While this might not appease the Occupy Wall Street movement, civil cases carry a lower burden of proof and the potential for a successful prosecution is much higher. With limited resources, the outgoing assistant director of the FBI has admitted that prosecutors are increasingly inclined to leave prosecution of financial matters to regulators and the civil courts. While the SEC has negotiated nearly $2 billion in civil settlements, there have been virtually no successful criminal prosecutions of executives from larger financial firms and none are expected in the immediate future. It has always been difficult for prosecutors to prove criminal intent when dealing with corporate employees. Federal prosecutors may be inclined to agree with the cynical economist Howard Scott who said, a criminal is a person with predatory instincts who has not sufficient capital to form a corporation.”
In 2008 many of the largest banks took federal bailout money under the TARP program. As part of the program they agreed to work with the Home Affordable Modification Program (HAMP) and when practicable arrange loan modifications for struggling homeowners. However, banks are being chastised for declining applications for loan modifications and foreclosures being forestalled by judges who demand banks produce clear criteria for the rejections. Banks are reluctant to approve every loan modification because every mortgage holder would then be incented to apply for an adjustment to the terms of their loans. But banks would be wise to create unambiguous requirements for loan modifications or else face continuing litigation and bad press resulting from blocked foreclosures. This is a useless headache for the banks and a well-drafted HAMP program is a way to avoid needless litigation.
3. Not All Settlements Are Equal
Last week Federal Judge Rakoff of the Southern District of New York caused considerable controversy by rejecting the proposed $285 million settlement agreement between the SEC and Citibank. This week the good judge (cheekily nicknamed “Judge Dread” because regulators allegedly fear him) is expected to accept the proposed settlement of a class-action suit involving BofA and investors in mortgage-backed securities sold by Merrill Lynch. The $315 million proposed settlement is different in one important aspect: The BofA settlement involves private parties. Judge Rakoff cited numerous reasons why the Citi settlement was rejected (see Ann Longmore’s article on the topic). But judges rarely interfere when private parties come to a settlement. So next time you want to settle an issue for $315 million, you probably don’t need to fear judicial intervention.
4. Banks Need More Capital and Safe Assets Like…Government Bonds?
What happens when sovereign debt becomes a dodgy investment? The Basel Committee on Banking Supervision coordinates banking regulation in most developed countries. One of the basic tenets of capital determination has been the risk-weighting of the assets held by the institution. Certain assets are deemed risk-free. These assets include the sovereign debt of most major countries, and such debt may be used to meet the capital requirements of local regulators. But as members of the European Union struggle to meet debt payments, regulators are questioning whether they can allow even sovereign debt to be qualified as risk-free. An Italian bank can meet its regulatory requirements by holding Italian debt – but is that the same as holding US or Japanese or Singaporean Debt? There is no easy solution, but the issue may cause delays or adjustments in the implementation of the latest Basel Accord as American banks and others push back against the stringent capital requirements. Personally, my money is in risk-free Star Trek memorabilia.
5. Wait…Bloggers Can Be Liable?
Bloggers (yours truly included) should be nervous by the recent Oregon decision that bloggers are not journalists protected by the First Amendment. However, the facts of the recent Oregon case were quite extraordinary. A blogger named Crystal Cox was fined $2.5 million for defamation of an investment firm named Obsidian Financial. Ms. Cox opened myriad websites defaming the firm, calling the CEO a liar and a thief amongst other insults. The CEO later claimed that his business dropped by 50% as a result of the online harangue. The lesson here is that financial firms can be severely damaged by online defamation, and the cost of creating such online havoc may be minimal. This case should make bloggers aware that a website is not a license to libel.
And a Senior Moment…
Even politicians can have memory lapses they would rather forget. Last week at a House hearing, Rep. Steve Pearce from New Mexico, member of the House Financial Services Committee, asked one regulator, “I’m still wondering about the big fish. Are we still doing anything on Madoff? Is he, [are] we investigating him? [Did we] put him in jail? Is he gone?”
Madoff is currently serving a 150-year sentence in federal prison.