Saturday, January 29, 2011

More on the FCIC Report

As Professor cummings noted the FCIC report has been released. Initial reactions to the report can be found here, here, here. Reaction to the rebuttals to the report can be found here. If you have been reading the Corporate Justice Blog, you won't be surprised at the findings of the committee. If you have been following the passage of the Dodd-Frank financial reform bill many of these findings were addressed, even if the sufficiency of some of those measures might remain in question. The commission found:

There was an explosion in risky sub-prime lending and securitization, an unsustainable rise in housing prices, widespread reports of egregious and predatory lending practices, dramatic increases in household mortgage debt, and exponential growth in financial firms’ trading activities, unregulated derivatives, and short-term “repo” lending markets, among many other red lags. Yet there was pervasive permissiveness; little meaningful action was taken to quell the threats in a timely manner.

What is more telling about the report is what the commission found were not causes of the financial collapse. These causes, having been used by conservatives to advance their free market and deregulation prerogatives, have NOT found a welcome home with the commission. Here are some examples:

1) Fannie Mae and Freddie Mac were the cause of the financial crisis. The commission writes, "We conclude that these two entities contributed to the crisis, but were not a primary cause. Importantly, GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. " The commission goes on to say that rather than leaders in the sub-prime market that the GSEs were followers and that the delinquency rates on sub-prime loans purchased by the GSEs was less than other financial firms. While certainly the GSEs were not innocent in the crisis, as this blog has noted the performance of Fannie Mae and Freddie Mac were much more a symptom than the illness that was the financial crisis.

2) The Community Reinvestment Act played a role in the financial crisis. The commission finds "the CRA was not a signiicant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans—a proxy for subprime loans—had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law." While the commission goes on to question the national priority of homeownership, one President George W. Bush called the "American Dream," it doesn't place the blame on poor Americans looking for help entering the middle class.

3) The deficit. One of the now popular conservative arguments, and one that has enveloped the mainstream media, is that the deficit is the cause of our economic problems. Unsurprisingly, the deficit does not receive a mention in the commission's report. While many conservative leaders propose harsh austerity measures, they fail to note that these very measures in the United Kingdom have them headed towards a double dip recession, while the stimulative measures initiated by President Obama has the US on a slow but steady course of growth.

4) Excessive regulation and failure to let the free market work was the cause of the crisis. One thing you have undoubtedly heard is that "uncertainty" and "hostility" towards business is the reason that the economy fails to grow. The commission found, "The sentries were not at their posts, in no small part due to the widely accepted faith in the self-correcting nature of the markets and the ability of inancial institutions to effectively police themselves. More than 30 years of deregulation and reliance on self-regulation by financial institutions, championed by former Federal Reserve chairman Alan Greenspan and others, supported by successive administrations and Congresses, and actively pushed by the powerful financial industry at every turn, had stripped away key safeguards, which could have helped avoid catastrophe." The commission has harsh words for those who believe that just letting the free market work is an acceptable strategy for a functioning economy. The belief of those on Wall Street that they were "market makers" and "wealth creators" who had found ways to remove all risk from their transactions and could "beat the market" has ended up to be unfounded. This culture remains on Wall Street and is the reasoning behind the still excessive bonuses received on Wall Street.

Friday, January 28, 2011

Financial Crisis Inquiry Commission Report

The Financial Crisis Inquiry Commission, formed by a 2009 Congressional enactment, has at last issued its final report, despite a fractured and divided committee. Charged with examining the underlying causes of the financial market crisis of 2008, the bipartisan FCIC spent hundreds of hours interviewing dozens of market actors and poured over thousands of pages of reports with the end goal to provide a comprehensive picture of the root causes of the market collapse of 2008. In its 545 page book-report, the FCIC concluded that the crisis was "avoidable" and that "warning signs" had developed years prior to the meltdown.

According to the Wall Street Journal, the report found that:

"Twelve of the 13 largest U.S. financial institutions 'were at risk of failure' at the depth of the 2008 financial crisis, while at least 50 hedge funds tried to capitalize on it, according to a report released Thursday [January 27, 2011] by a U.S. panel investigating how the financial system unraveled."

In several future posts, the Corporate Justice Blog will drill down into the report, examine the contentious nature of the bipartisan committee debate, and discuss the defecting committee members separate report filed last month, December 15, 2010, by the Republican Commissioners of the FCIC styled the "Financial Crisis Primer."

Wednesday, January 26, 2011

From Wall Street to Main Street Symposium

On Thursday and Friday, January 27th and 28th, 2011, the Chapman Law Review will host its annual symposium "From Wall Street to Main Street: The Future of Financial Regulation." The symposium will analyze the Dodd-Frank Financial Reform Act as speakers and panelists will describe various provisions of Dodd-Frank and opine on the potential that this new financial industry regulation will be successful. A cutting edge group of legal scholars, regulators, practitioners, and bankers will tackle the financial market crisis of 2008 from a variety of perspectives through the lens of the new Dodd-Frank regulation.

The event will be podcast live. Go here, and scroll down to "webcasts." Further, each panel has its own weblink as indicated below:

Panel I: Into the Bog: An Introduction to Dodd-Frank

Panel II: Congress Punts; Administrative Agencies Receive; Welcome to a Decade of Rulemaking

Keynote: Steven Schwarcz: Ex Ante Versus Ex Post Approaches to Financial Regulation

Panel III: The Return of the Rating Agencies: Rerun or Redemption?

Panel IV: Who's the Boss: Re-writing the Rules of Corporate Governance

Thursday, January 13, 2011

Rhetoric Matters. . .

People should take responsibility for their words and this prophetic video should be watched by anyone participating in public discourse:

The bottom line is that demonizing people simply is not costless. In the final analysis we are all citizens of this great nation and while we may disagree on policy we should be mindful of the powerful ties that bind us together. When we were attacked on 9/11 the terrorists drew no distinction between conservatives and liberals. Both Democrats and Republicans stormed Omaha Beach. We Americans are all on the same side.

Wednesday, January 12, 2011

From Wall Street to Main Street Symposium

The Chapman University School of Law and the Chapman Law Review will host a Symposium on Thursday and Friday, January 27th and 28th, 2011 entitled "From Wall Street to Main Street: The Future of Financial Regulation." The Symposium aims to examine the Dodd-Frank Wall Street Reform and Consumer Protection Act featuring keynote speaker Professor Steven Schwarcz and panels focused on deciphering the content and implications of new Wall Street regulations.

Corporate Justice Blog contributors Steven Ramirez, Jill Barclift and andré douglas pond cummings are among the participants that will appear on panels scheduled for 1.28.11 including (a) Into the Bog: An Introduction to Dodd-Frank; (b) Congress Punts; Administrative Agencies Receive; Welcome to a Decade of Rulemaking; (c) The Return of the Rating Agencies: Rerun or Redemption?; and (d) Who's the Boss: Re-writing the Rules of Corporate Governance.

The Symposium promises to be a cutting edge event. For more information and registration instructions, click here. Wall Street reform is something that this blog has and will examine surgically in coming weeks and months.