Legal Commentary

Hall of Shame: Analysts Who Were Wrong About Lehman

Posted on August 03, 2010
Some more of my favorite documents from the Lehman Examiner's Report. This time, analysts who were wrong about Lehman ? some spectacularly so. It's hard to top the Buckingham Research Group note, but Morgan Stanley, Citi, and (of course) Moody's give them a run for their money...

Hank Paulson's Foresight, and Vikram Pandit's Ignorance

Posted on August 02, 2010
During my long slog through the entire Lehman Examiner's Report, I came across lots of interesting-but-not-terribly-important bits of information, and I'm going to try to highlight my favorite ones. These two both come from the handwritten notes of Thomas Fontana, head of risk management in Citi's Global Financial Institutions group...

Why the Fed Isn't Doing More

Posted on August 01, 2010
I've suspected this for a few months now, but Dallas Fed president Richard Fisher's recent speech ? which Paul Krugman takes apart here ? may provide some actual evidence to back up my suspicions. One big question has been why the Fed doesn't seem willing to do more to stimulate the economy, even in the face of persistently high unemployment and looming deflation...

Anatomy of Lehman's Failure, and the Importance of Liquidity Requirements

Posted on July 29, 2010
Remember the Lehman Examiner's Report? The 4000+ page report by the court-appointed examiner was lauded for a couple of weeks after it was released, and then largely forgotten. The media and blogosphere quickly moved on to the next outrage-du-jour (among others, the SEC's suit against Goldman), and never looked back...

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A Plea for the Technical Corrections Bill

Posted on July 24, 2010
As I noted on Twitter the other day, Dodd-Frank unfortunately did not address my #1 issue for financial reform: the fact that 12 C.F.R. Part 212 isn't called "Regulation L." I'm only half-joking, because this has been bothering me for years. You see, the banking regulations are divided into different subparts, and the subparts are known as "Regulation A," "Regulation B," "Regulation C," all the way through Reg Z (the last one is actually Reg GG)...

Let's Play "Name that Investment Bank"!

Posted on July 10, 2010
I'm going to post a few pages of an internal presentation at a major investment bank (from November 2007) and you try to guess the identity of the bank. (I've whited-out all the identifying portions.) Very savvy! Clearly, this bank was no fool ? they saw the problems in subprime coming, understood the implications for CDOs, and positioned themselves accordingly...

Revisionist History on Financial Reform

Posted on July 08, 2010
I'm going to push back against this post from Mike Konczal, which is heavy on the rhetoric: [W]henever [Treasury] got involved with Congress, they pushed for less structural reforms. They pushed for the solution that embraced the status quo with arms wide open...

On Dodd-Frank: Major Swap Participants, Swap Execution Facilities, and Block Trades

Posted on July 06, 2010
More on the derivatives title in Dodd-Frank: Major Swap Participants (MSPs) This will be a huge issue for hedge funds. And unfortunately, this is an area where Dodd-Frank is a total mess. For some reason, Barney Frank and Chris Dodd allowed Blanche Lincoln's definition of "major swap participant" (MSP) to remain in the bill, despite the fact that it was widely panned by, well, everyone (including regulators)...

On Dodd-Frank: An Overlooked Provision, Section 716, and the Volcker Rule

Posted on July 06, 2010
So what do I think of Dodd-Frank? I'm glad you asked. Before I get to some of the specifics, let me just say that in terms of broad policy, I am, unlike the vast majority of commentators, quite happy with the way the bill turned out. Barney Frank and Chris Dodd deserve a tremendous amount of credit for shepherding such a massive and impactful bill through Congress, and I think naming the bill "Dodd-Frank" is much deserved...

Clearing up misinformation about Section 716

Posted on June 17, 2010
There?s been quite a lot of drama this week surrounding Blanche Lincoln?s swaps desk spin-off, known as ?Section 716.? Ultimately, I don?t think it will amount to anything ? Lincoln doesn?t have the support of a majority of either the House or Senate Dems on the conference committee (certainly not the Senate Dems), so yeah, I still think it will be stripped out...

Yes, Merkley-Levin Is Still a Joke

Posted on May 22, 2010
Even though Merkley-Levin didn't make it into the Senate bill, there's still a chance that the Merkley-Levin language will make it into the conference report, so I want to respond to the defenses of the amendment that were offered. (My original post is here...

And On To Conference We Go...

Posted on May 21, 2010
An anticlimactic ending in the Senate tonight. Neither of the big post-cloture amendments ? Brownback's auto-dealer CFPA exemption and the Merkley-Levin amendment? ended up getting votes. Brownback will get a vote on a motion to instruct the Senate's conferees on Monday...

Financial Reform Update

Posted on May 19, 2010
Cloture vote at 2 p.m. today, which would start the 30-hour clock, and put the final vote on financial reform at 8 p.m. tomorrow. Yes, I think Reid has the votes on cloture. I know Dorgan, Levin, and Cantwell have suggested that they won?t vote for cloture unless they get a vote on their respective amendments, but when it comes down to it, I don?t think they?ll have the stomach to vote against cloture on Wall Street reform...

Merkley-Levin Is a Joke

Posted on May 16, 2010
The Merkley-Levin Amendment (SA 3931) is a version of the Volcker Rule. The Volcker Rule, if you'll recall, is a ban on proprietary trading at banks and bank holding companies (BHCs). If you ask Merkley and Levin's offices, they'd no doubt tell you that their amendment significantly strengthens the existing Volcker Rule language in the Dodd bill (Section 619 of S...

Thoughts/Predictions on Financial Reform

Posted on May 16, 2010
I'm no longer worried about Blanche Lincoln's Section 716 proposal (i.e., the swaps desk spin-off). One way or another, it will get taken out. I'm satisfied on that front. I'm maintaining my earlier prediction that the Dems will end up stripping Section 716 in a post-cloture amendment...

The Origins of Blanche Lincoln's Disastrous "Section 106" Proposal

Posted on May 08, 2010
Bloomberg has an excellent story on the origins of Blanche Lincoln's disastrous swaps proposal (the infamous "Section 106") ? Bloomberg: How ?Hard to Fathom? Derivatives Rule Emerged in U.S. Senate. Short version: The idea arose from a mix of policy debate, campaign politics and personal relationships -- and little consideration of the business or economic implications, according to interviews with Senate aides, administration officials and industry lobbyists...

Republican Opposition to the Orderly Liquidation Fund

Posted on April 20, 2010
The thing that annoys me most about Republicans' new-found opposition to the $50bn orderly liquidation fund is that they are, without question, doing Wall Street's bidding on this. Killing a "pre-funded" resolution fund ? which would be used to help pay for resolutions under the new resolution authority ? is the Street's #1 issue in financial reform...

Blanche Lincoln's Derivatives Bill: Amateur Hour (But Probably Fixable)

Posted on April 19, 2010
So it turns out that Blanche Lincoln's derivatives bill (pdf) is a bizarre mix of solid and utterly insane. The bill understandably punts on what is far and away the most important issue in derivatives reform: the scope of the clearing requirement, which is left to the discretion of the CFTC...

Quick (and, alas, non-substantive) word about the Goldman case

Posted on April 18, 2010
I'm still not sure if I want to write a full post about the Goldman charges, because (a) I don't have the offering docs, and (b) it's pretty clear that people are going to believe whatever they want to believe, facts/law be damned. But reading over the SEC's complaint yesterday, I was stunned by how weak their case is...

Derivatives End-User Exemption

Posted on April 18, 2010
Ezra Klein discusses the end-user exemption issue: The expectation is that if derivatives move onto a more transparent, competitive market, fees for financial firms will go down, which should be good for end users. But the end users have been very worried about derivatives reform...

WaPo Editorial Just Making Things Up (Shocker)

Posted on April 14, 2010
Washington Post editorials have long been a goldmine for unintentional comedy, so I wasn't at all surprised to see an editorial bemoaning that "partisan politics is getting in the way" of derivatives reform. How is partisan politics making it into something as pure as the derivatives reform debate? Why, it's the White House's doing, of course! Now the White House, convinced that it has a winning issue -- go ahead, Republicans, side with Wall Street if you dare -- is discouraging Democratic senators from working with any Republicans who might still be so inclined...

Exchanges vs. Clearinghouses (This is Important)

Posted on April 14, 2010
(I wrote this post a while ago, but for some reason I never got around to publishing it. I was reminded of it when I read Felix Salmon's post on derivatives reform from this morning, in which Felix gives a quick-and-dirty explanation of clearing vs. exchange-trading...

Regulatory Discretion and Prompt Corrective Action

Posted on March 30, 2010
I think this, from Mike Konczal, is the exact wrong way to think about regulatory discretion in the context of prompt corrective action (PCA): So this risk council [in the Dodd bill] will come up with rules, and the Federal Reserve will carry them out...

What Living Wills Can Do (Part 2 of 2)

Posted on March 29, 2010
Instead of providing a plan for the financial institution's own resolution, we should instead use living wills as a way to force financial institutions to provide regulators with all of the information they'd need to actually carry out a rapid and orderly resolution...

What Living Wills Can't Do (Part 1 of 2)

Posted on March 29, 2010
I suppose I should say something about "living wills," since the idea doesn't seem to be going away. It's hard to critique the idea, since no one seems to be willing to define living wills. The Dodd bill simply requires financial institutions to periodically submit: [A plan] for rapid and orderly resolution in the event of material financial distress or failure...

Preemption of State Anti-Gambling Laws

Posted on March 28, 2010
I have to roll my eyes every time someone points out that the proposed OTC derivatives reforms still preempt state anti-gambling laws. This is generally presented as some sort of obviously-ridiculous exemption that proves that Dodd, or Geithner, or whoever, is in the pocket of Wall Street...

On Clearinghouses

Posted on March 25, 2010
Now that the financial reform debate is heating up again, I want to caution people against viewing a wider clearing requirement for OTC derivatives as necessarily better. Clearinghouses are not a panacea by any means, and pushing instruments that aren't mature enough or sufficiently liquid for clearing onto clearinghouses would be a very bad idea...

Surprising provision in Dodd's proposed resolution authority

Posted on March 16, 2010
I hope to get time to write a full post on Sen. Dodd's financial reform bill in the next couple of days, but I do want to highlight one significant provision in the proposed resolution authority (which very much surprised me). In normal commercial bank resolutions, the derivatives safe harbor doesn't apply for the first 24 hours ? that is, counterparties to a failed bank's derivatives contracts (and repos, etc...

Memories

Posted on March 09, 2010
Simon Johnson, a year ago, on a resolution authority: Imagine what happens when these powers are passed. The U.S. Treasury and FDIC would immediately have the tools [they] need to walk into America?s largest financial institutions, such as Citibank or Bank of America, and liquidate them, or rewrite their contracts and capital structures...

Yes, Compromise on the CFPA

Posted on March 07, 2010
Some progressives, Paul Krugman chief among them, want to draw a line in the sand on the CFPA, accepting only a fully independent agency. This is understandable after the year-long health care debate, in which progressives were, at the end of the day, forced to accept a severely diluted and distasteful compromise bill...

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