Here are news stories from the week that were easy to miss, but may have some lasting impact.
1. Getting Dodd-Frank Back on Track
It will be five years ago next month that the largest bankruptcy in U.S. history, Lehman Brothers, brought the U.S. economy to the brink. Since then, a massive 848-page bill called Dodd-Frank was drafted, debated, and passed. In the interim a whopping 13,800 pages of related rules and regulations have been imposed on the financial industry. As a result of the seeming tidal wave of regulation, regulators have, in fact, missed 60% of the congressionally imposed deadlines for establishing the new rules mandated by the Act.
This week, President Obama met with Fed Reserve Chairman Bernanke and seven of the top agency heads to emphasize his desire for comprehensive new rules. Former FDIC Chair Sheila Bair says of Dodd-Frank, “some of the rules have been proposed, they’re highly complicated, they’re riddled with exceptions, they’re watered down.”
Both Republican and Democratic leaders are clear that financial reform has not gone as planned. The President and others are hoping to reinvigorate the reform process – but that may be difficult in light of the massive Dodd-Frank requirements exhausting resources and energy. I am reminded of Will Rogers’ famous saying “Even though you are on the right track – you will get run over if you just sit there”.
2. Excessive Bank Fees Not Covered By Professional Liability Says Federal District Court
Fidelity Bank of Georgia sued Chartis when the insurer denied its claim seeking indemnification. Fidelity sought to recover for losses resulting from a class action lawsuit that had established Fidelity’s overdraft fees to be usurious.
The Chartis “Management and Professional Liability for Financial Institutions” policy stated: “This policy shall pay the Loss of [the] Insured arising from a Claim …. for any Wrongful Act of the Insured in the rendering of or failure to render Professional Services.” The policy excluded claims arising out of disputes over fees charged by the bank. Chartis agreed to pay defense costs but denied any duty to indemnify. Fidelity sued Chartis seeking recovery of its settlement. The court held that requiring the insurer to pay restitution would result in a windfall for Fidelity and the policy explicitly excluded disputes over fees. Fidelity’s claim was denied.
Disputes over customer fees and insurer language regarding its coverage and indemnification obligations are likely to become more heated. Decisions like Fidelity Bank and recent Consumer Financial Protection Bureau (CFPB) pronouncements may be the beginning of a trend for consumers to pursue additional claims over fees. Time to check the old Professional Liability “disputes over fees” language?
Class Action Lawsuit Defense: Class Action Claim for Excessive Fees is Not Covered by Bank’s Liability Policy
3. CFTC Steps to Center Stage – How Will They do in the Limelight?
While the civil suit against Jon Corzine, former CEO of MF Global, is notable for many reasons, one of the most striking elements is who is bringing the suit. The Commodity Futures Trading Commission is not known for bringing high-profile white collar civil suits. Generally such claims are left for the SEC. So why the CFTC? MF Global was one of the largest players in the commodity markets. Certainly, filing the action was well within the authority of the CFTC as primary regulator of the market. But it will be interesting to watch as CFTC takes center stage in what will be their most visible performance to date.
4. When Does Hiring Become a Bribe?
Early in my career I worked in Emerging Markets at Citibank. My colleagues were from Philippines, Venezuela, Peru and various developing places. They were without exception well-educated, sophisticated young people. They were, in fact, privileged. Many were from the wealthiest, most politically connected, families in those countries – and therein lies the trouble. Financial institutions operating abroad are coming under increasing scrutiny for hiring the offspring of political leaders. The Foreign Corrupt Practices Act prohibits U.S. companies from bribing politically exposed persons (PEPs). But employing offspring? When is such hiring a bribe and when is it just shrewd recruiting? The answer is rather unclear, as indicated by JPMorgan’s recent issues in China. What is clear is that firms operating overseas are going to want to document their hiring process and hiring rationales very carefully.
The New York Times: Hiring in China by JPMorgan Under Scrutiny
5. Alan > Ben > ? Who Will be the Next Fed Chairman?
Ben Bernanke’s term as Chairman of the Federal Reserve Bank ends on January 31st. It is well accepted that he will be stepping down at that time. Who will replace him is one of the hottest topics around Washington water coolers these days. Bill Clinton’s Former Secretary of the Treasury, Robert Rubin, is a serious contender, as is Janet Yellen, the current vice-chair of the Federal Reserve. Others have suggested that the CEO of TIAA-CREF, Roger Ferguson, may be a contender. Whoever gets the nod could be taking the reins at a turbulent time as the central bank is expected to end its policy of quantitative easing around the time of the appointment. Ben, like every chairman before him, is hoping that markets are calm during his last few months so that he can make a graceful exit.