August 22, 2014 1:54 PM
“Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” declared a government official in a Department of Justice press release announcing yesterday’s record settlement in which Bank of America agreed to fork over $16.65 billion to settle charges it and companies it had purchased had deceived investors.
Back in Washington from Ferguson, Mo., Attorney General Eric Holder announced at a press conference: “As part of this settlement, Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch, and Countrywide sold billions of dollars of RMBS [residential mortgage-backed securities] backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors.”
Yet how much from this settlement goes to the investor victims? Nada! In fact, the settlement takes billions from the very investors who were defrauded.
More than $9 billion from this settlement goes to the federal and various state government coffers. And, as Holder proclaimed at the press conference: “Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers, and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue.”
But whatever Bank of America’s misdeeds – and there were many by the company and those it purchased (Countrywide and Merrill Lynch) – it is certainly not “appropriate” to take from the investors the government itself says were victims to give to homeowners that the government never alleges were defrauded.
August 19, 2014 3:19 PM
Last month, the New York State Department of Financial Services (NYDFS) announced its proposed regulations for businesses engaged in “Virtual Currency Business Activity.”The Department defines these businesses as being involved in the following types of activities, according to provision 200.2n:
“(1) receiving Virtual Currency for transmission or transmitting the same;
(2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;
(3) buying and selling Virtual Currency as a customer business;
(4) performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or
(5) controlling, administering, or issuing a Virtual Currency.”
It is worth noting at the start that provision 200.3c2 would exempt “merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services,” from needing to obtain a license and thus being subject to these regulations. This is helpful, as otherwise these regulations would probably have prevented any widespread adoption of virtual currency by merchants. However, there are certain other non-consumer functions of virtual currencies that are not covered by this provision, such as charitable donation. It should therefore be broadened.
The proposals were received with much skepticism and dismay among the virtual currency community, particularly after NYDFS head Benjamin Lawsky had said in January, “Our objective is to provide appropriate guardrails to protect consumers and root out money laundering -- without stifling beneficial innovation.” Unfortunately, the proposed regulations have provisions that will almost certainly stifle beneficial innovation while not doing much to protect consumers. Four provisions in particular stand out as problematic.
August 12, 2014 12:12 PM
One of the weakest arguments against free trade is the "unilateral disarmament" fallacy--that a country should refuse to liberalize its trade policies until other countries liberalize theirs. If your opponent uses it, you almost automatically win the debate. The Export-Import Bank's defenders must be getting desperate, because they are now having to resort to the unilateral disarmament fallacy. Here's a letter I sent to the Cleveland Plain-Dealer setting the record straight:
Editor, Cleveland Plain-Dealer:
George Landrith’s argument that the U.S. should subsidize certain businesses because other countries subsidize some of their businesses is equivalent to saying the U.S. government should stop ripping off its citizens only when foreign governments stop ripping off their own citizens (“Why keep the Ex-Im Bank? Unilateral economic disarmament is as unsound as unilateral defensive disarmament,” August 10).
The Export-Import Bank’s special favors make U.S. businesses less competitive by rewarding political connections over customer service, and have led to 74 corruption allegations during the last five years. If other countries want such problems, fine. But the U.S. can, and should, do better by closing the Ex-Im Bank this fall, regardless of what other countries do.
Fellow, Competitive Enterprise Institute
Author of the study, “Ten Reasons to Abolish the Export-Import Bank.”
August 8, 2014 11:34 AM
Over at American Banker’s BankThink blog, I have a piece making the case for closing the Export-Import Bank, mostly on corruption grounds:
The Wall Street Journal reported on June 23 that four Ex-Im employees have been removed or suspended in recent months, "amid investigations into allegations of gifts and kickbacks."
Former Ex-Im employee Johnny Gutierrez allegedly accepted cash payments from an executive of a Florida-based construction equipment manufacturer that has received Ex-Im financing on multiple occasions. In a July 28 congressional hearing, Gutierrez chose to plead the Fifth Amendment rather than deny the allegations. The other cases involve two "allegations of improperly awarding contracts to help run the agency" and another employee who accepted gifts from an Ex-Im suitor.
July 31, 2014 7:00 PM
Complying with regulations is part of the cost of doing business. For bigger businesses that can absorb those costs (or rather, pass them on to the consumer), it means armies of compliance officers and hefty fees. But for smaller businesses, like community banks, the costs can be so great that it means ceasing operation.
Typically, this scenario works to the larger institutions’ advantage, as they are better placed to handle regulatory compliance costs than are their smaller competitors. But large financial institutions are also subject to certain regulations to which smaller banks are not. The Wall Street Journal cites a new study that estimates the cost to these larger banks of complying with these regulations at roughly $70 billion.
Some of these costs are fair, such as, for example, premiums charged by the Federal Deposit Insurance Corp for insuring deposits. Others seem less fair, such as the $2.06 billion lost to interchange fee restrictions—which incidentally, have led to more and more banks to stop offering free checking in order to compensate for this loss of income.
July 28, 2014 9:58 AM
A recent piece in American Banker magazine explores how Bitcoin and other cryptocurrencies can help the underprivileged, particularly the millions of unbanked people who do not have bank accounts. This is an area where digital currency could do much good.
In fact, the online microfinancing platform Kiva has already begun a peer-to-peer service, known as Kiva Zip, whose model resembles some of the features in Bitcoin. Microfinancing is a form of lending for lower-income people that provides smaller loans than commercial banks are typically able to offer. Kiva Zip’s peer-to-peer structure means that users interact directly with each other, without administrators or other institutions acting as a middleman.
Another service known as Swarm is already proposed to implement crowdfunding based on the Bitcoin protocol. Crowdfunding is a service where persons or companies propose a project or service they wish to develop and create a campaign to solicit funds for development. It is typical for campaigners to offer prize incentives for larger contributions, such as earlier access to the product or other perks.
These new innovations represent just the initial adaptations of the Bitcoin protocol. In order for these technologies and services to continue to develop—and to help people—it is imperative that new regulations not be prematurely implemented. Otherwise, it will not be just Bitcoin businesses that suffer. Those at the bottom of the economic ladder could suffer as well, as they would lose precious opportunities to access capital.
July 25, 2014 1:19 PM
Should we worry about a crisis in subprime auto loans? That question has been asked in the financial media lately.
My answer is yes, with caveats. While there are important differences in the auto and mortgage markets, there are similar government interventions that have the potential to fuel a bubble in car loans the same way they did for home loans.
First, the differences. So far, thankfully, there is no auto equivalent of a Fannie Mae, Freddie Mac, or other government-sponsored enterprise to inflate the car loan market. Sure, there have been lots of bailouts in the auto industry in general, but the secondary market in car loans has developed largely on its own.
And without a government backstop, it is much smaller than the mortgage market ever was. An otherwise alarmist front-page story this week by The New York Times conceded, “the size of the subprime auto loan market is a tiny fraction of what the subprime mortgage market was at its peak, and its implosion would not have the same far-reaching consequences.”
Also, unlike with mortgages, there is no expectation among the vast majority of lenders of borrowers that a car’s value will appreciate. Most folks know that a car will be “underwater” the minute it is driven off the lot, and the loans are priced with that reality in mind.
Yet, there are some striking similarities. But not the ones the NYT or other nannyists point to.
July 8, 2014 10:02 AM
Over at Rare, I have a piece on the cronyism angle of the Export-Import Bank debate. The Senate will likely vote this on month on whether or not to end the bank:
[I]f government is going to dole out corporate welfare, the most efficient way to do it is to hand out cold, hard cash. Straight subsidies don’t distort international markets or invite corruption the way export subsidies do.
But most cash gifts to corporations are political non-starters. They’re a little too obvious. So companies and allied politicians need cover stories. The Export-Import Bank fits the bill.
An official logo, sophisticated-sounding economic rhetoric, and appeals to American jobs and patriotism are designed to make people feel good about the special favors Ex-Im performs for businesses.
Read the whole thing here.
July 7, 2014 1:48 PM
“If you like your life, home, and auto insurance, you can keep them.”
President Obama didn’t make this promise when he signed into law the Dodd-Frank financial overhaul on July 21, 2010, as he did regarding the health insurance law – Obamacare – that he signed into law a few months earlier that year. But as syndicated columnist Jay Ambrose points out, “if the Dodd-Frank regulatory law does what is now plotted, though he will still share responsibility for the insurance provision that, along with others, could bloody lots of noses.”
As Dodd-Frank approaches its fourth anniversary, Obama is singing its praises. He told National Public Radio on July 2 that Dodd-Frank is “an unfinished piece of business, but that doesn't detract from the important stabilization functions” it has provided
Yet even to lawmakers from Obama’s own party, this “financial reform” legislation is looking more and more like a destabilizing force – much like the so-called “reform” of health insurance. Even at the outset, there were many similarities. Both Obamacare and Dodd-Frank contained about 2,500 pages that were rammed through a Democrat-controlled House and Senate at breakneck speed. Because of the length of the law and speed of passage, many did not understand and/or hadn’t read the bills.
Also as with Obamacare, unintended consequences of Dodd-Frank almost immediately began to surface. First, there was a sharp reduction in free checking due to the price controls on debit card transactions from the Durbin Amendment. Then, community banks and credit unions – including some with close to zero foreclosures – found the “qualified mortgage” rules so costly and complex that they slowed down or stopped altogether the issuance of new mortgages. Then, with regard to a provision with no plausible connection to sound banking and finance, domestic manufacturers found themselves having to trace back numerous materials they utilize to determine if they had originated as “conflict minerals” from the Congo.
But the latest unintended consequence may be the one that bears the most striking similarity to Obamacare. Just as health insurance premiums and deductibles skyrocketed due to Obamacare’s many mandates, so too may those of life, home and car insurance due to provisions of Dodd-Frank. Life insurance rates alone could soar by $5 billion to $8 billion a year, according to the respected economic consulting firm Oliver Wyman. And as with Obamacare, choices of policies will be more limited and some policies may even be canceled.
July 2, 2014 4:11 PM
If you wanted to encourage wastefully run colleges to ratchet up their tuition at taxpayer expense, you couldn’t come up with a better way than the Obama administration’s recent expansion of the Pay As You Earn program. That program limits borrowers' monthly debt payments to 10 percent of their discretionary income. The balance of their loans is then forgiven after 20 years—or just 10 years, if the borrower works for the government or a nonprofit.
It will cost taxpayers a bundle, while doing nothing for most student borrowers (who may experience tuition increases as a result), and it will favor imprudent borrowers over prudent borrowers.
Most students chose inexpensive colleges or otherwise borrowed modestly, meaning “the average graduate’s debt level of $27,000” is no more than “the price of a car.” They will not choose to participate in this program, since they would pay more, rather than less, by paying ten percent of their income for years, which could add up to much more than $27,000 over a 20-year period.
But imprudent borrowers who borrowed much more than that, for a major that does not lead to a high-paying job, will now be able to limit their payments to a fixed percentage of their discretionary income, and then have the unpaid balance remaining after 20 years (or just 10 years, if they go to work in the federal bureaucracy) written off at taxpayer expense, no matter how huge the unpaid balance is.