Category: Financial Institutions

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Volume 60, Issue 5 (June 2013)

Volume 60, Issue 5 (June 2013)
Articles

First Amendment Constraints on Copyright After Golan v. Holder Neil Weinstock Netanel 1082
Intraracial Diversity Devon W. Carbado 1130
When to Overthrow your Government: The Right to Resist in the World’s Constitutions Ginsburg et al. 1184
Interbank Discipline Kathryn Judge 1262

Comments

A Proposal for U.S. Implementation of the Vienna Convention’s Consular Notification Requirement Nicole M. Howell 1324

Market Efficiencies Come to Legal Practice

Dustin A. Zacks has posted a fascinating article on the role of “foreclosure mills” in bringing a more corporate, bottom-line oriented mentality to law firms:

The recent housing crisis increased demand for attorneys to process foreclosures through state courts. [High volume foreclosure firms developed; they] differ in makeup from traditional large law firms. Notable characteristics of these foreclosure firms include lenders and servicers’ relentless demand for increased speed and low costs, lack of firm-specific capital at foreclosure law firms, and a factory-like atmosphere of legal practice.

[As they developed] the fastest and cheapest legal services available. . . .these firms consistently generated complaints about their conduct, including questions about their ethical decision-making and about the veracity of the pleadings and documents they filed. . . . The Article accordingly examines the curiously muted reaction from state bar associations, judges, and state legislators.

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Stanford Law Review Online: Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture

Stanford Law Review

The Stanford Law Review Online has just published an Essay by Professors Paul Rose & Christopher J. Walker entitled Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture. Professors Rose and Walker argue that Dodd-Frank regulators should consider more
seriously the democratic accountability concerns at play when regulating the financial markets.

The lack of attention to accountability is particularly troubling in the Dodd-Frank con-text, where most regulators are independent agencies and thus less demo-cratically accountable via presidential oversight. In particular, independent agencies are not required to submit proposed rules and accompanying eco-nomic analyses for presidential review. Nor are their high-ranking officials subject to plenary presidential removal authority. Without another means of accountability—e.g., a robust cost-benefit analysis embedded in notice-and-comment rulemaking—independent agencies are more vulnerable to agency capture.

They conclude:

Despite decades-long bipartisan support for cost-benefit analysis, regu-lators of financial markets (whose rulemaking is not subject to presidential review) have been slower and more haphazard in adopting this method than their executive agency counterparts. Especially now that Dodd-Frank has exponentially increased the amount of financial rulemaking and considera-bly raised the stakes for regulating the financial markets, financial regula-tors can and should ground their rulemaking in a proper cost-benefit analy-sis to arrive at more rational decisionmaking and more efficient regulation. Conducting a rigorous cost-benefit analysis via notice-and-comment rule-making also makes for good governance. Without such public transpar-ency—especially in the context of independent agencies—democratic accountability suffers, and agency capture becomes a greater threat.

Read the full article, Dodd-Frank Regulators, Cost-Benefit Analysis, and Agency Capture at the Stanford Law Review Online.

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The New York Fed and the Rule of Law

In Sunday’s New York Times, business columnist Gretchen Morgenson reported a piece of investigative journalism that is transcendently important, but whose complexity may have obscured that. It concerns secret dealings of the Federal Reserve Bank of New York. Morgenson explains the importance of her topic in terms of the threatened erosion of social trust that can occur when central banking officials engage in dubious behavior.

I would add that her topic, dubious dealings of central bankers, is of vital importance because those who run the FRBNY have enormous power in the field of banking regulation. They oversee the largest banks and provide direct input into the Financial Stability Oversight Council, the interagency government organization created by the Dodd Frank Act to oversee the financial system. It is empowered to intervene when the next financial crisis occurs, which could be later this year or five years or ten or what have you.

As with the financial crisis of 2008, these government actors, dominated by the FRBNY, will call all the shots about which institutions to save, sell or seize, on the one hand, and which creditors and shareholders to pay, wipe out or shortchange, on the other. How they exercise these powers is thus a matter of the utmost national interest. How they exercised them in the 2008 crisis remains both obscure and questionable. Read More

What’s Wrong with the Financial Services Industry?

I tried to answer this question at length in a review of Robert Shiller’s Finance and the Good Society. But if you want the short version, look no further than Barry Ritholtz’s list. One could easily expand it into an ever-growing wiki, but sometimes succinctness is supreme. Here’s Ritholtz on the multiple intermediary problem:

Too many people have a hand in your pocket[.] The list of people nicking you as an investor is enormous. Insiders (CEO/CFO/Boards of Directors) transfer wealth from shareholders to themselves, with the blessing of corrupted Compensation Consultants. Active mutual funds charge way too much for sub par performance. 401(k)s are disastrous. NYSE and NASDAQ Exchanges have been paid to allow a HFT tax on every other investor. FASB and accountants have done an awful job, allowing corporations to mislead investors with junk balance statements. The media’s job is to sell advertising, not provide you with intelligent advice. The regulators have been captured.

And while we’re on the topic of the personal consequences of finance, do take a look at Helaine Olen’s Pound Foolish. Olen has been making the intellectual podcast rounds, and offers a devastating portrait of a personal finance industry warped by ideology and greed.

Squatter in BofA’s Boca Mansion

Bank of America (BofA) is moving to evict a squatter in one of its many foreclosed Florida properties:

Andre Barbosa’s days of stylish squatting in a $2.5-million Boca Raton mansion may be numbered. . . . Adverse possession is a state law which allows someone to move into a property and claim the title — if they can stay there seven years. Barbosa, who calls himself “Loki boy,” posted a signed copy of his “adverse possession” note in the home’s front window.

I’m sure Florida’s efficient judicial system will put this to right forthwith. And if they mess up a bit of paperwork along the way, no worries—independent reviewers can investigate. BofA has been the conscience of the finance community. It would be a grave injustice to see it facing losses due to people claiming title to property they don’t really own.

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Young Business Law Scholar Call for Papers

The Center for Law, Economics & Finance (C-LEAF) at The George Washington University Law School has announced its third annual Junior Faculty Business and Financial Law Workshop and Junior Faculty Scholarship Prizes.  This year’s Workshop will be held on April 5-6, 2013 at GW in Washington.

The Workshop supports and recognizes the work of young legal scholars in accounting, banking, bankruptcy, corporations, economics, finance and securities, while promoting interaction among them and selected senior faculty. By providing a forum for the exchange of creative ideas in these areas, C-LEAF aims to encourage new and innovative scholarship.

I’ve participated in both previous Workshops and can attest that participants have benefited from the exchange of ideas and getting acquiainted with newer scholars.  About 100 papers are submitted and the C-LEAF faculty select about 10 for presentaiton.  At the Workshop, senior scholars comment on each paper, followed by a general discussion.

Three papers receive Junior Faculty Scholarship Prizes of $3,000, $2,000, and $1,000, respectively. All prize winners will be invited to become Fellows of C-LEAF.  C-LEAF makes no publication commitment, but chosen papers are featured on its website as part of the C-LEAF Working Paper series.   Read More

Private Equity Achieves Extraordinary Numbers in Health and Education

The N.Y. Times has recently profiled a chain of for-profit hospitals known as HCA. The two articles are well worth reading, particularly for insights into the manipulation of medical billing and coding:

At HCA in 2006, slightly more than a quarter of the payments it received from Medicare were for patients classified in the two highest-paying categories, far behind the 58 percent reported at other hospitals, according to an analysis of Medicare payments by The Times, using data provided by the American Hospital Directory. During that time, HCA was still operating under a corporate integrity agreement resulting from its Medicare fraud settlement, and an independent reviewer was scrutinizing its billing.

By late 2008, however, just as the agreement with federal regulators was ending, HCA introduced a new coding system for its emergency rooms. HCA said the system, based on a method developed by the American College of Emergency Physicians, was less complicated and better captured the time and resources used by the hospital. Nearly overnight, HCA’s patients appeared to be much, much sicker. By 2010, HCA had surpassed other hospitals, with 76 percent of its payments coming from the two most expensive classifications, versus 74 percent for other hospitals.

Perhaps some Freakonomist will conclude that independent reviewers are vital to improving public health. But the better explanatory variable appears to be the role of private equity firms in reshaping HCA after buying it in 2006. They are revolutionizing the service sector. Just consider the miraculous work of a private equity group in getting “50 full-time faculty members to teach 90,000 online students” at a university it controls. Truly the business model of the future.

Lies and Libor

It’s fashionable for some finance experts to dismiss reporters like Matt Taibbi as hyperbolic. How dare he compare a muni bond rigging scandal to Mafia tactics? But the more one digs into high finance’s behavior, the clearer a pattern of criminality and recklessness emerges. Taibbi was on a cordial and enlightening panel with Gillian Tett back in 2009, and if any finance reporter’s work is considered impeccable by the establishment, it is hers. Consider her perspective on the latest outrage regarding the setting of Libor:

Five long years ago, I first started trying to expose the darker underbelly of the Libor market. . . .At the time, this sparked furious criticism from the British Bankers’ Association, as well as big banks such as Barclays; the word “scaremongering” was used. But now we know that, amid the blustering from the BBA, the reality was worse than we thought. As emails released by the UK Financial Services Authority show, some Barclays traders were engaged in a constant and pervasive attempt to rig the Libor market from 2006 on, with the encouragement of more senior managers. And the British bank may not have been alone.

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