Legal Commentary

Dick Fuld's Fuzzy Memory, and Thoughts on the FCIC

Posted on February 25, 2011
1. This is a totally random, largely inconsequential discrepancy that I just happened to notice in Dick Fuld's testimony to the FCIC. But since this is, after all, my blog, I'm going to point it out anyway. After telling of a failed attempt to call Tim Geithner on Saturday, September 13th, Fuld told the FCIC (per Dealbook): ?From that weekend to this day I have not had a conversation with Chairman Geithner,? Mr...

Davidoff on TBTF

Posted on February 25, 2011
Steven Davidoff (a.k.a. "The Deal Professor" on Dealbook) is one of my favorite commentators, but I thought his recent piece on "systemically important" financial institutions was an unusually poor effort. He starts the article with a rather brazen assertion: The Dodd-Frank Act deliberately did not end the era of too-big-to-fail institutions...

Andrew Haldane and Big Banks' Capital Cushions

Posted on February 23, 2011
Yves Smith disagrees with my take on Andrew Haldane's op-ed in the FT. After reading the op-ed, I wrote: Strange op-ed by Andrew Haldane in the FT. No one is really pushing the argument that he's trying to shoot down.The specific argument that Haldane was trying to shoot down, in his own words, was: Regulators want big, complex banks to hold larger buffers of capital to protect the financial system...

A Paul Krugman Post [Template]

Posted on February 15, 2011
I'm troubled by this statement from Obama: "[Insert extremely broad, generic presidential statement about the economy.]"In effect, what Obama is saying is: [insert Ridiculous Proposition, completely unrelated to above statement by Obama]. Let me explain why this is so ridiculous: [insert brutal, utterly devastating takedown of Ridiculous Proposition]...

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Misconstruing Geithner

Posted on February 14, 2011
David Dayen is upset because, he claims, Tim Geithner "thinks that there's a great 'financial deepening' about to take place where the demand for sophisticated financial innovations will jump. Therefore, the financial sector will need to grow and become the most reliable spur of the US economy...

Morgan Stanley's Liquidity Pool

Posted on February 09, 2011
It?s now official: the week of September 15, 2008 was a really bad week to work in Morgan Stanley?s prime brokerage. And the next week wasn?t so hot either. Various internal documents released with the FCIC report provide a fairly detailed picture of Morgan Stanley?s liquidity position during the crisis, and it?s not pretty...

More on the Volcker Rule Study

Posted on January 28, 2011
A bit more on the FSOC?s Volcker Rule study (pdf). The FSOC makes a number of recommendations for designing an enforcement mechanism for the Volcker Rule ? some better than others. As an initial matter, the FSOC recommends that banks be required to give regulators certain information about each trading desk, most importantly: - a listing of the types of products approved for transactions; - a description of how positions are hedged; and - a description of the activity typical of the customer base...

"Major Swap Participants" ? Taking Apart the CFTC's Proposed Rule

Posted on January 23, 2011
One of the most important issues in the derivatives title of Dodd-Frank is who qualifies as a ?major swap participant? (MSP). These are supposed to be entities that aren?t swap dealers, but are still big enough players in the swap markets that their failure could cause serious problems...

The Volcker Rule Study: Key Takeaways

Posted on January 19, 2011
As I expected, the FSOC?s Volcker Rule study (pdf) doesn?t provide a ton of guidance on the key issues, which are the definitions. It does provide some clues though. I don?t have a ton of time, but here?s what I think are some of the key takeaways: 1...

The Volcker Rule Study: Don't Get Too Excited

Posted on January 18, 2011
You shouldn?t expect too much from the Volcker Rule study that the Financial Stability Oversight Council (FSOC) is releasing today. It almost certainly won?t get into the weeds of the definitions, which is where all the action in the Volcker Rule fight will be...

Geithner Wins, Pundits Lose

Posted on January 12, 2011
Peter Schroeder of The Hill points out that ?Treasury Secretary Timothy Geithner has fended off repeated calls for his resignation to become the last man standing from President Obama?s original economic team.? To which I say, ?hurrah!? I held Geithner in high regard before the crisis, and I think his performance as Treasury Secretary has been superb...

In Defense of the Dodd-Frank Resolution Authority, Part 2: The Actual Defense

Posted on December 30, 2010
Title II of Dodd-Frank creates a new resolution authority, called the Orderly Liquidation Authority (OLA), for systemically important financial institutions ? which, crucially, includes financial holding companies (all the major US banks are organized as FHCs now)...

In Defense of the Dodd-Frank Resolution Authority, Part 1

Posted on December 28, 2010
This post started out as a defense of Dodd-Frank?s resolution authority, and a description of what the liquidation of one of the major US banks would likely look like under the new law. But I quickly realized that in order to understand how a resolution of one of the major banks would work in practice, you really have to have an understanding of how the major banks/investment banks are structured, legally, and why that structure causes so many problems in bankruptcy...

An Enforcement Mechanism for the Volcker Rule

Posted on December 06, 2010
I wish I could take credit for this, but I can't. A colleague came into my office today with a proposed enforcement mechanism for the Volcker rule, and when I opened my mouth to disagree with him, nothing came out. I just laughed. The proposal: If a trader is found by regulators to have violated the Volcker rule more than once in a calendar year, his pay cannot be more than $100K for that year...

A Proposal for Money Market Fund Reform

Posted on November 28, 2010
There were two major areas of financial regulation that Dodd-Frank left rather conspicuously unaddressed: the GSEs, and money market funds (MMFs). The reason they omitted GSE reform is obvious: GSEs are a fiercely partisan issue, and including GSE reform could easily have ? and, I think, almost certainly would have ? killed the entire financial reform package...

What Makes a Nonbank Firm ?Systemically Important??

Posted on November 27, 2010
As I discussed in my previous post, the Dodd-Frank Act subjects "systemically important" nonbank financial firms to enhanced prudential standards and consolidated supervision by the Fed. All bank holding companies with over $50bn in assets ? of which there are currently 36 ? are also subject to the heightened Fed supervision...

"Systemically Important" Nonbank Financial Firms

Posted on November 22, 2010
Interesting story in Dealbook about how large nonbank financial firms are arguing to the Financial Stability Oversight Committee (FSOC) that leverage should be the key consideration in determining which nonbank firms should be deemed "systemically important," and thus subject to increased regulation by the Fed...

The Volcker Rule, Merkley-Levin, and Loopholes (Gory Details Edition)

Posted on November 06, 2010
Continuing my Volcker rule theme, the current issue of Risk has an article titled, ?Dealers Confident on Volcker Exemptions,? which quotes various banking lawyers talking about how easy it will be to get around the final Volcker rule language in Dodd-Frank...

Michael Lewis Embarrasses Himself on the Volcker Rule

Posted on November 06, 2010
There?s been a lot of discussion recently about the Volcker rule in the popular press, and how it?s going to be implemented. Most prominently, Michael Lewis wrote a widely-read column last week about how the banks are simply shifting their prop trading to market-making desks...

The Latest Basel III Controversy

Posted on October 11, 2010
In my post on Basel III's liquidity requirements, one thing I didn't cover was the controversy over "committed credit and liquidity facilities." And since I know how disappointed you all were about that, here's my take on the issue. (Sarcasm aside, it's actually a pretty big controversy...

Geithner's Foresight

Posted on October 11, 2010
Here's another interesting email from Lehman Weekend, which shows that Tim Geithner was anticipating the need to go to Congress for additional authorities even before the Barclays deal started to fall apart. (The email is from the FCIC's hearing binder, which unfortunately yielded very few interesting documents...

Steve Rattner on Sheila Bair

Posted on October 10, 2010
As I noted in my review of Overhaul, Steve Rattner absolutely savages Sheila Bair. I think Rattner treats Bair a little too harshly, but I agree that in this case, Bair was extremely unprofessional, and almost comically petty to boot. But I'm posting the full excerpt of Rattner's experience with Bair below the fold (it's long), so that you can make up your own mind...

Steve Rattner's "Overhaul"

Posted on October 10, 2010
When I first heard that Steve Rattner was writing an "insider's account" of his time as the Obama administration's Car Czar, my first thought was, "Wow, I'm surprised Rattner would be so disloyal." After reading the book, my view has moderated a little ? I think Rattner gave an honest and accurate account, and everyone involved was treated quite fairly...

Corker and Payday Lenders

Posted on October 08, 2010
Timothy Noah of Slate has an article on payday lending whose heart is in the right place, but which unfortunately says this: Indeed, one of the sketchier provisions in Dodd-Frank affirmatively prohibits Warren's new agency from setting a maximum interest rate on payday loans...

Some Unsolicited Advice for Regulators

Posted on September 17, 2010
As the Dodd-Frank rule-making process begins in earnest, I?d like to offer some unsolicited advice to regulators, and specifically the Fed. I spent many years at a large dealer, so I have some thoughts on how an effective supervisory regime for large dealer banks needs to be structured...

Reliving Lehman Week (and beyond)

Posted on September 15, 2010
I dug these up a while ago, but since this is the anniversary of Lehman?s failure, here, for your viewing pleasure, are the front pages of the major U.S. newspapers (the WSJ, NYT, and Washington Post) on various days of the financial crisis. I was unfortunately never able to find PDFs of the FT from the financial crisis...

A Scary Thought

Posted on September 12, 2010
Here's a scary thought: Let's say the European sovereign debt crisis flares up again, and one or two Euro banks fail. (Not a bank like UBS or Deutsche Bank, but a medium-sized bank like Bank of Greece or a Landesbank.) That, in turn, causes a U.S. money market fund ? many of which have large exposures to Euro banks ? to "break the buck," which leads to another run on money market funds...

The Fed's Backup Plan(s) for Lehman

Posted on August 15, 2010
Here are the last of the documents from the Lehman Examiner's Report that I found interesting. The first is a list of the top 25 Lehman counterparties by exposure. (CCE is current credit exposure; MPE is maximum potential exposure.) The two counterparties with the highest exposure to Lehman? The Italian government, and Berkshire Hathaway (BH Finance LLC is a Berkshire sub)...

Basel III Liquidity Requirements

Posted on August 15, 2010
As I noted in my post on Lehman's liquidity pool, the financial crisis of 2008 ? and the Lehman episode in particular ? highlighted the pressing need for formal liquidity requirements. Fortunately, the Basel Committee has made a new liquidity regime a focus of Basel III...

More Lehman Documents: The NY Fed's Blow-by-Blow Account

Posted on August 04, 2010
Since people seem to like the bits of information from the Lehman Examiner's Report, I'll keep going. I've got plenty more where that came from! This is probably my favorite document from the Examiner's Report ? it's a compilation of the daily reports from the NY Fed's on-site examiners at Lehman...

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