TBTF and the $7 Trillion Question

The Wall Street Journal ran a disturbing story this weekend. The story featured Thomas Hoenig, President of the Federal Reserve Bank of Kansas City. He adds yet another angle on Dodd-Frank and the TBTF problem.

According to Hoenig, a handful of megabanks hold over $7 trillion in derivatives exposure--a number that dwarfs all other sectors combined. Hoenig argues that the concentrated nature of this exposure means that the megabanks cannot be permitted to fail because the failure of one would still cause the entire financial sector to collapse as each bank would have to write off the amount owed by other banks under derivative agreements.

"Mr. Hoenig doesn't buy the idea that better supervision, higher capital levels and powers granted by the Dodd-Frank Act to wind down a tottering institution will take care of the too-big-to-fail problem. The biggest firms, he noted, can't be wound down because 'there are too many connections that will bring down other institutions.'"

I have long argued that Dodd-Frank did not end TBTF, but instead institutionalized it. Hoenig highlights another reason why that is so. The only remaining question revolves around the behavior of the derivatives markets if oil surges, prompting a nasty bout of stagflation that could well cause losses to the financial system that feed into the derivatives markets and land who knows where.

The Politics of the Financial Market Crisis

In May of 2009, the Fraud Enforcement and Recovery Act (FERA) was signed into law. The bill created the Financial Crisis Inquiry Commission, a panel of 5 Democrats, 1 Independent, and 4 Republicans whose task was to “examine the causes, domestic and global, of the current financial and economic crisis in the United States” and to issue a bipartisan report by December 15, 2010. As was previously noted on this blog, the official 545 page report was delayed and just recently released on January 28, 2011.

The FCIC’s investigations were marred with partisan bickering, finger-pointing and infighting, highlighted by the votes cast by the commission’s 4 Republican members during December 2010 to ban the words “deregulation,” “shadow banking,” “interconnection” and amazingly, “Wall Street," from the final report. After being voted down 6 to 4 on banning "Wall Street" from the final report, the Republican commissioners defected from the FCIC and issued their own 9 page dissenting report on December 15, 2010 (which does not include the terms "deregulation," "Wall Street," and "shadow banking"). The Republicans have since complained about the commission’s leadership and management, claiming they were often kept in the dark about witness interviews and other important information.

The Republican report, originally issued on December 15, 2010, details the large housing bubble and government sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac’s “contributions to declining lending standards,” and the Community Reinvestment Act’s role in the meltdown by “mandate[ing] the extension of credit to high-risk borrowers,” all in stark, partisan contrast to the official report’s conclusions released on January 28, 2011. One possible aim of the defecting Republican commissioner's dissent was to attempt to undermine the official report by discrediting it as hyper-partisan. Following the release of the official FCIC report, three of the Republican commissioner's dissented anew, while the fourth attempted to place blame for the entirety of the financial market meltdown on governmental social engineering. This Republican attention grab “makes it easy to chalk this up as just another chapter in the divisive politics in Washington,” commented one law professor. Another financial market scholar added, “The most likely outcome seems to be that this report gets put on a shelf to collect dust.”

Strangely, the official FCIC report may end up doing little more than collect dust. Because the Dodd-Frank Act was passed before the FCIC report was completed, new legislation was passed before official word was delivered as to the causes and underlying failures of the crisis. Now that the badly flawed Dodd-Frank Act is law, there seems to be little political will to carefully consider the FCIC official report in order to consider new regulation or necessary legislation. As to whether the Dodd-Frank Act will do anything to prevent a future meltdown, several commentators at various symposia believe that it most definitively will not.

Racially hostile work environments

Approximately 250 African American workers are suing Turner Industries Group LLC, a large industrial construction company based in Baton Rouge, Louisiana. The workers allege that they have been forced to work in a racially hostile work environment. They complain about the use of racist epithets, nooses in the workplace, and discriminatory employment practices relating to promotion and pay.

Turner Industries denies the allegations even though The Equal Employment Opportunity Commission issued a “reasonable cause” finding against the company, and even though the company settled similar allegations made by several workers at its plant in Paris, Texas.

James Vagnini, a partner at Valli, Kane & Vagnini, is representing the plaintiffs. According to Vagnini, some members of the community believe that Turner Industries’ treatment of its employees is a private matter since Turner is a closely-held private limited liability company. But Turner Industries was formed under state limited liability company law. The fact that the Turner family enjoys limited liability because the state law allows them to do business this way makes this very much a public matter.

Joint Meeting of the Southeast/Southwest and Mid-West People of Color Legal Scholarship Conferences

Nova Southeastern University Shepard Broad Law Center in Fort Lauderdale, Florida, will be hosting the 2011 Joint Southeast/Southwest and Mid-West People of Color Legal Scholarship Conference from March 31st through April 3rd. The theme or title for this years conference is "The Role of the Lawyer in Fostering Social, Political, and Economic Equality." The conference will include a New Law Teachers Pipeline Program sponsored by the Society of American Law Teachers (SALT) and an alumni reception for southeast Florida. Nova Southern University Shepard Broad Law Center and John Marshall School of Law (Chicago) are co-sponsors of the conference. You may access information about the conference at the following link: http://seswpocc.org/

The Rise of American Market-Driven Education System in the United Kingdom, But Interestingly Not In Germany

In December I traveled a few hours, well perhaps a little more than a few hours, to a lovely city in Lower Saxony, Germany—Osnabruck, to teach U.S. corporate law to German law students at Universitat Osnabruck. The students were eager to learn about the U.S. common law legal system, and agreed to enhance their German civil code legal education by adding an English common law component including studying certain aspects of British and U.S. laws. The program is part of Universat Osnabruck’s extensive commercial law program that exposes students to laws of jurisdiction throughout the European Union and North America. The program also provides fairly impressive transnational externship placements with public and private institutions as a requisite part of the law curriculum. As a result, the laws students receive doctrinal theory as well as real world practical experience. Universat Osnabruck has been operating on this model for approximately the last ten years. In addition, the law school offers an extensive comparative law summer program with partners in Europe, Canada, and the American Institute. Viva German law schools!

The commercial law program is really quite well run by Prof. Dr. Martin Schmidt-Kessel, a German attorney, who has spent some time in New York working at Rogers & Wells in the heyday of the technology stock explosion just prior to the industry’s implosion. Lecturer Matt LeMieux, an American attorney, former ACLU litigator, who has been living in Germany for the past five years all for the love of German culture, is an integral component in securing American law professors to make the journey to Osnabruck. They are an interesting legal team and offer a wealth of American ideology and legal know-how to aspiring German law students. The German law students are an industrious lot. After all, it takes a special type of law student to not only study a foreign jurisdiction’s laws but to do it in a foreign language. The class is taught you guessed it—in English. The students’ primary language is German. I would have loved to have taught the class in French, but some well meanings folks may have thought it rather odd that an American law professor was teaching U.S. corporate law in French. Oh, well c’est la vie.

It is from this perspective that I was surprised to read about the student protest turn riot in London over the increase in student tuition and fees. Nothing in the German law students’ reaction indicated that anything was amiss. There were no student riots in Germany. No outrage expressed in the local German news coverage. I didn’t even hear German student raise their voices in anger, in solidarity with their British cohorts. When I raised the issue in class, I was hoping for a robust discussion on American capitalism, market driven decision-making, and the violation of the public trust. After all isn’t Germany the land of Karl Marx and Martin Luther? Viva the sinful proletariat, and the dutifully religious common working man and woman! The students simply stared at me. Finally, a brave student shared that German students “do not pay very much for their legal education and the costs in America for education is way too much. Then the American students have a BIG debt. How do American student repay their loans when they cannot find a job,” he asked? Interesting. I had crossed the Atlantic to teach U.S. corporate law to German students, and here I was being lectured by German students about the market-driven U.S. legal education system, which ladens recent graduates with a huge debt burden that probably take years to repay, if at all.


After class, I inquired as to how much do German students pay for their legal education. “Approximately, 600 Euros, “I was told. “For books,” I confirmed. “No for one year’s tuition.” “What! At the current currency exchange rate that is less than $1,000 American dollars,” I stammered. As I continued discussing the issue with a number of Germans, an intriguing philosophy began to develop, in essence--the German Government believes that Germans should be well educated in order for Germany to remain a competitive commercial and manufacturing powerhouse on the international scene. As such, the German Government heavily subsidizes the education system –at the undergraduate and graduate levels to encourage Germans to attend university. It seems to have worked pretty well when we compare Germany’s literacy rate, employment rate, college-graduate rate, commercial preeminence, et cetera. The Germans are not only competitive; they are arguably in certain sectors doing remarkably better than us market-driven Americans. Perhaps it is time that we Americans rethink our market-driven education system, and learn a few lessons from our German colleagues across the Atlantic.

Lydie Nadia Cabrera Pierre-Louis