Here are news stories from the week that were easy to miss, but may have some lasting impact.
FIRREA Fires Back
The DOJ has found a new use for an old tool. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) was passed in 1989 and was just about ready for retirement until it was dusted off recently by some inventive prosecutors. The Act was designed to rein in abuse within the savings and loan industry, creating the Office of Thrift Supervision and the Resolution Trust Corporation, both now defunct. But, almost as a postscript, the Act created less stringent standards for establishing commercial fraud.
The Act, which gives the government broad authority to bring civil claims and has less stringent requirements to establish liability than traditional commercial fraud statutes, has recently been used to allege that banks allegedly misrepresented the quality of loans sold to the Federal Housing Administration. The Act is limited to acts of fraud affecting federally insured depository institutions – so, when a case was brought against a bank for selling misrepresented loans to Fannie Mae and Freddie Mac, non-federally insured institutions, the court accepted the prosecution’s reasoning that the bank was committing fraud affecting itself. Since banks are federally insured, the Act was found applicable.
Now armed with a broader interpretation of FIRREA (and its 10-year statute of limitations) will more prosecutors attempt to bring actions against sub-prime lenders? Leads us to ask… is FIRREA for real? The answer to both questions appear to be yes.
Bloomberg: Eric Holder Finally Gets Tough on Banks
Big Bankers Thinking Small
What do Dick Kovacevich, Vikram Pandit, John Mack, and Sandy Weill all have in common, besides running mega-banks in the past? They seem to share a vision of the future that includes disintermediating their former institutions. Pandit, former Citi CEO, has recently invested in a Brooklyn-based lending start-up that lends to MBA students from funds raised from alumni of that business school—a job previously reserved for banks. Weill, former Citi Chairman, has invested in Level, a Silicon Valley startup that aims to help young people manage their money—a role long coveted by traditional lenders. Mack, former Morgan Stanley honcho, is on the board of a new company called Lending Club, a peer-to-peer lender. Finally, Kovacevich, former head of Wells Fargo is on the board of a rival peer-to-peer called Daric. Do these former pin-striped bankers simply want to dabble in the world of startups or are they betting that the model that made them all wealthy is past its prime?
The New York Times: Lending Start-Up CommonBond Raises $100 Million, With Pandit as Investor
Liquidity Coverage Ratio – America Speeds Ahead of Basel
Basel III will impose tougher capital requirements on large banks, and now at least part of the process has been speeded up. The newly proposed rules include a Liquidity Coverage Ratio (“LCR”). The LCR has been anticipated by the large banks, and the new rules may start in 2015 and be fully implemented by 2017. If imposed, authorities estimate that banks will face a $200 billion shortfall in the high-quality assets necessary to meet the LCR. Where will banks produce this capital? Not clear. Some have even argued that requiring the branches of foreign banks operating in the U.S. to meet the tough standard will put those foreign banks, (currently operating under the relatively more relaxed Basel III requirements) at a distinct disadvantage. Some will say that LCR stands for “Looks Certain to Rile.” Only time will tell.
The Street: Fed Proposes Tougher Basel III Liquidity Rules
Hounding the Watchdogs
Sen. Elizabeth Warren (who recently denied reports that she may run for president in 2016) has been questioning the adequacy of key regulators including the Fed, OCC and SEC, making repeated reference that no top Wall Street executive has been criminally charged in connection with the 2008 crisis. Execs at smaller institutions have faced criminal charges, many for seriously egregious frauds. Sen. Warren has asked the supervisors to respond to the following questions:
- The number of individuals your agency has charged criminally, including the number of senior officials you have charged
- The number of criminal convictions your agency has obtained
- The number of prison sentences your agency has secured
- The number of individuals your agency has charged civilly, including the number of senior officers you have charged
- The number of individuals your agency has suspended or permanently banned from working in the financial industry or elsewhere
- The total amount of funds your agency has obtained through civil judgment or orders of restitution
I wonder how the Fed, OCC and SEC will react to Sen. Warren’s independent investigation.
Confused About Digital Currencies? Aren’t We All!
Bitcoin has become the leading digital currency and the current darling of the press. However, a truly offshore digital currency presents incredible money-laundering risks (as well as potential tax avoidance opportunities and a number of other nefarious threats). But the scale of interest around the world makes them hard to ignore. A friend at Promontory, Adam Shapiro, has written a concise 12-page summary of what is going on with the development of digital currencies. If you are curious about what is going on in the world of Bitcoin and the like… this is a good place to start.
Promontory: The Way Forward for Digital Currencies (PDF)