The Federal Reserve has operated almost entirely behind closed doors as it rewrites the rule book governing the U.S. financial system, a stark contrast with its push for transparency in its interest-rate policies and emergency-lending programs, the Wall Street Journal reported today. Since the Dodd-Frank financial overhaul became law in July 2010, the Fed has held 47 separate votes on financial regulations, and scores more are coming. In the process it is reshaping the U.S. financial industry by directing banks on how much capital they must hold, what kind of trading they can engage in and what kind of fees they can charge retailers on debit-card transactions. Rather than discussing rules and voting in public, as is done at other agencies with which the Fed often collaborates, Fed Chairman Ben Bernanke and the Fed's four other governors have held just two public meetings since July 2010. On 45 of 47 of the draft or final regulatory measures during that period, they have emailed their votes to the central bank's secretary. Read more. (Subscription required.)
COMMENTARY: THE VOLCKER DIVERSION
The biggest problem with the Volcker rule controversy is that it furthers the perception that the financial crisis was caused by a lack of strict financial rules, and so can be fixed by still more rules, according to a Wall Street Journal editorial yesterday. Volcker himself understands this is not true and has acknowledged that his rule, even if someone could figure out how to draft it, would specifically not have prevented the 2008 disasters at AIG and Lehman Brothers. No banking rule can protect against a credit mania fueled by bad policy, according to the editorial. As the public comment period ended last week on the draft federal rule to prevent commercial banks from trading for their own account, Volcker submitted his own public letter to the bureaucrats. According to the former Federal Reserve Chairman, "simplicity and clarity are challenging objectives, which for full success, require constructive participation by the banking industry. As I have suggested elsewhere, there should be a common interest in an approach that, to the extent feasible, is consistent with the banks' broader internal controls and reporting systems." Volcker's basic idea—to place Wall Street trading outside the taxpayer safety net—remains as sound as ever, according to the editorial. However, the draft rule with its hundreds of questions and thousands of ambiguities leaves room for doubt that regulators are capable of executing the Volcker rule. Read the full editorial. (Subscription required.)
SOME DOUBT SETTLEMENT WILL END MORTGAGE ILLS
Even as government officials prepare to unveil new standards this week for how banks treat millions of Americans facing foreclosure, housing advocates and homeowners are skeptical the rules will be able to do something past efforts have not: provide a beleaguered borrower with one individual to help them navigate the mortgage maze, the New York Times reported today. The promise of a single point of contact has emerged as a crucial element in the much-ballyhooed $26 billion settlement reached earlier this month involving state attorneys general, the federal government and the five biggest mortgage servicers. Last April, the industry made many of the same pledges under a consent order with the Office of the Comptroller of the Currency and since then, consumer representatives say, there has been barely any improvement, adding that loan files continue to be handed off from one agent to another, sometimes weekly, and that even when a single person is assigned to a case, one phone call after another goes unreturned. The architects of the new settlement say they are keenly aware of these complaints, and the secretary of the Department of Housing and Urban Development, Shaun Donovan, alluded to them when he announced the deal with Bank of America, JPMorgan Chase, Wells Fargo, Citigroup and Ally Financial on Feb. 9. Besides improved servicing standards to be released in the next few days, the deal is also supposed to provide one million underwater borrowers with reductions in what they owe on their mortgages or the ability to refinance at lower rates. An additional 750,000 people who lost their homes to foreclosure from the beginning of 2008 to the end of 2011 are eligible to receive checks for up to roughly $2,000 each. Read more.
COMMENTARY: IN ALABAMA, A COUNTY THAT FELL OFF THE FINANCIAL CLIFF
Jefferson County, Ala., is now considered a place where government finances, and government itself, have simply broken down, according to a New York Times commentary on Sunday. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison. Taking a broad view, the trouble really began with the Constitutional Convention of the State of Alabama in 1901, according to the commentary. Local taxing power rests with the state, though state lawmakers are loath to wield it today in an age of anti-tax populism. Last summer, the Supreme Court of Alabama struck down a tax that was a crucial source of revenue for Jefferson County, finally pushing the county over the brink. Read more.
ANALYSIS: INVESTORS TURNING ONCE AGAIN TO "TOXIC" DEBT
Some of the same investors who made big profits betting against mortgage bonds before the 2007 housing bust have started snapping up the toxic assets, according to a Bloomberg News analysis today. Hedge fund manager Kyle Bass, who made $500 million when subprime debt cratered, is raising a fund to buy them. He is joining John Paulson, who made $15 billion in 2007 thanks to the housing bust. Goldman Sachs Group has bought the bonds this year. Remarkably, so has American International Group —the insurer that had to be rescued by the U.S. government in 2008 after its wagers on risky mortgages went bad. These investors are jumping in as the $1.1 trillion market for mortgage bonds without government backing joins a global rally in everything from stocks and commodities to corporate loans. They are attracted to the riskiest mortgage bonds by their high potential yields. Typical prices for a type of mortgage bond tied to option adjustable-rate mortgages (ARMs) rose to 55¢ on the dollar in the second week of February from 49¢ in November, according to Barclays Capital. The securities are bouncing back “almost like a coiled spring,” says Clayton DeGiacinto, chief investment officer of hedge fund Axonic Capital. Option ARMs allowed borrowers to pay less than the monthly interest due with the shortfall added to the balance and were among the toxic debt that the Financial Crisis Inquiry Commission said helped fuel the housing boom and subsequent bust. About 45 percent of the option ARM loans that are in bonds are delinquent, according to JPMorgan Chase data. Read more.
ABI IN-DEPTH
LATEST ABI PODCAST FEATURES CONSTITUTIONAL EXPERT DISCUSSING ISSUES STEMMING FROM STERN V. MARSHALL
Prof. Erwin Chemerinsky, the current and founding dean of the University of California, Irvine School of Law, joins ABI Resident Scholar David Epstein to discuss some of the constitutional issues of the Supreme Court's ruling last year in Stern v. Marshall. Chemerinsky, one of the leading scholars on constitutional law, talks about the decision and issues surrounding when bankruptcy courts will be able to issue a final decision in a case. Click here to listen.
LATEST CASE SUMMARY ON VOLO: BULLOCK V. BANKCHAMPAIGN, N.A. (IN RE BULLOCK; 11TH CIR.)
Summarized by T.J. Frasier of Niesen Price Worthy Campo Frasier & Blakey
The 11th Circuit ruled that defalcation under 11 U.S.C. 523(a)(4) "requires a known breach of a fiduciary duty, such that the conduct can be characterized as objectively reckless." The debtor, as trustee, should have known that he was engaging in self-dealing since he benefitted from the loans, according to the ruling. Further, the debtor's affirmative defense of unclean hands was not effective although the court agreed with the bankruptcy court that the trustee of the constructive trust was "abusing its position of trust by failing to liquidate the [property]."
More than 400 appellate opinions are summarized on Volo. Click here regularly to view the latest case summaries on ABI’s Volo website.
NEW ON ABI’S BANKRUPTCY BLOG EXCHANGE: EXAMINATION OF WASHINGTON MUTUAL'S REORGANIZATION PLAN
The Bankruptcy Blog Exchange is a free ABI service that tracks 35 bankruptcy-related blogs. A recent blog post examines Washington Mutual's reorganization plan, which was confirmed on Friday.
Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.
ABI Quick Poll The requirement that all individual debtors receive credit counseling as a prerequisite for discharge should be repealed. Click here to vote on this week's Quick Poll. Click here to view the results of previous Quick Polls.
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