Monday, December 30, 2013

Important Stories to Close Out the Year

As 2013 draws to a close, two important events have occurred in December that bear mentioning as the world prepares to usher in 2014.  In connection with America's epic failure, the War on Drugs:

First, A Divided Federal Court Rules Crack Cocaine Sentencing Reforms Do No Apply to Those Already in Prison:
In a blow to those sentenced under grossly unfair crack cocaine versus powder cocaine sentencing requirements, the Sixth Circuit Court of Appeals ruled in early December that the new sentencing regime ushered in under the 2010 Fair Sentencing Act does not apply retroactively to those currently sitting in prison.  From the NAACP release: "[A] sharply divided Sixth Circuit Court of Appeals ruled that the Fair Sentencing Act (FSA), which reduced the unfair, unjustified, and racially discriminatory crack cocaine/powder cocaine sentencing ratio from 100-to-1 to 18-to-1, does not apply to thousands of individuals who are currently incarcerated pursuant to sentences imposed under the discredited 100-to-1 regime.  Seven judges concluded that the FSA should apply to those serving sentences under the 100-to-1 federal sentencing structure, and ten judges declared that it should not."

"'We are deeply disappointed in the outcome of this case. Thousands of people, the majority of whom are African-American, are still serving time under an unfair drug sentencing regime that has destroyed individuals, families and communities. Today’s decision demonstrates that those who are working to eliminate the impermissible role of race in criminal prosecutions and sentences still have much more work to do. We will continue to press this issue in the court,' said Sherrilyn A. Ifill, President and Director-Counsel of the NAACP Legal Defense and Educational Fund, Inc., a leading civil rights law firm and a separate entity from the NAACP."

President Obama, Congress, Federal Courts, and the United States Supreme Court must act immediately to  begin commuting the sentences of those individuals imprisoned under the grossly unfair 100:1 sentencing disparity between crack and powder cocaine.

Second, President Obama Commutes the Sentences of Eight Crack Cocaine Offenders:
President Obama, recognizing that thousands of inmates are jailed under patently unfair sentencing policies in connection with crack cocaine and powder cocaine sentences, began what can fairly be hoped for as the beginning of righting past wrongs, commuted the sentences of eight crack cocaine offenders who have served prison time for more than 15 years, and would be out of prison, had they been sentenced under powder cocaine guidelines.

Congress passed the Fair Sentencing Act in 2010 which, according to The Root, "reduced the disparity in sentencing between offenses for crack and powder cocaine from 100:1 to 18:1. The 100:1 ratio meant that people involved in offenses for crack cocaine faced longer sentences that those involving the same amount of powder cocaine."  The New York Times reports that President Obama released the following statement: 

"'This law began to right a decades-old injustice, but for thousands of inmates, it came too late,' the president said in a release given to the media. 'If they had been sentenced under the current law, many of them would have already served their time and paid their debt to society.  Instead, because of a disparity in the law that is now recognized as unjust, they remain in prison, separated from their families and their communities, at a cost of millions of taxpayer dollars each year.'"

Let's hope for much more of the same in 2014.

Sunday, December 29, 2013

Volcker Rule Melting Fast

The almost toothless Volcker Rule imposed earlier this month seems poised to be further defanged. Apparently some banks hold a certain type of CDO that is not permitted under the new rule. They do not have to dispose of it anytime soon, mind you, but they can no longer pretend that they intend to hold it to maturity. That means it must be marked to market. Banks therefore must recognize losses and take hits to capital. Thus, Zions Bank recognized a $387 million loss on CDOs it previously marked at cost but now must be marked to market due to the fact that sooner or later (especially later) they may not be able to continue holding such securities in the future. Apparently many banks are in the same position as Zions and they too would rather not acknowledge their market losses.

I would argue the rule is actually beneficial here. Accounting rules should reflect reality not fantasy. The market losses are real and these securities would not be valued so low if they were safe and would pay-off in due cross. Losses also signal to banks that they cannot escape accountability for poor investment decisions by pretending the losses do not exist.

But, the American Bankers Association would have none of it and sued to challenge the rule. Given the natural proclivities of the judicial system in favor of the most wealthy and powerful (who can afford to hire hoards of lawyers) a judicial challenge to the Volcker Rule in not likely to result in an economically sound ruling.

Worse, however, it appears the regulators simply intend to fold. They recently announced that they intend to  review the rule in light of the ABA's complaint.

Wednesday, December 11, 2013

Volcker Rule: Still Much Ado About Nothing

So a few days after Dodd-Frank became law I posited that the so-called Volcker Rule would do little to solve excessive speculation by banks subsidized by the federal government through deposit insurance, or otherwise. Here is what I said then.

Yesterday, the Fed released its final rules on the Volcker Rule. Compare their release with my summary from 2010, here.

The bottom line is that megabanks may still engage in all kinds of speculative activities. Here is the money quote from the Fed:  "Like the Dodd-Frank Act, the final rules provide exemptions for certain activities, including market making, underwriting, hedging, trading in government obligations, insurance company activities, and organizing and offering hedge funds or private equity funds. The final rules also clarify that certain activities are not prohibited, including acting as agent, broker, or custodian." In other words the megabanks can be investment banks with government backing.

The rules take effect July 21, 2015. This can be extended by the Fed.

Frankly, I cannot see how these rules change anything. More to come. . .