Friday, September 11, 2009

Hearing on Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance(Jui Kai Li)

On Sept 10th, the US Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Oversight of the SEC’s Failure to Identify the Bernard L. Madoff Ponzi Scheme and How to Improve SEC Performance.

Testifying were H. David Kotz, Esq. - Inspector General SEC, Harry Markopolos- Chartered Financial Analyst and Certified Fraud Examiner, Robert Khuzami, Esq - Division of Enforcement SEC, John Walsh, Esq - Office of Compliance Inspections and Examinations SEC

The testimony is summarized below and copies of the written statements are available at;

Madoff's alleged Ponzi scheme is the biggest fraud held by a person in the US history. By definition, a Ponzi scheme is a fraudulent investment operation that pays returns to separate investors from their own money or money paid by subsequent investors, rather than from any actual profit earned. Although investors may be able to feel something wrong with the unlikely consistent returns Madoff provided, without an independent agency to stop the problematic trading activities, investors could only continue to suffer from Madoff’s tricks.

Poor oversight of the government will cause high corporate governance risk. In this case, the failure of SEC’s early detection of Madoff’s fraud caused investors’ countless losses and victims. See the victim list below(sources: WSJ):

Results of the IG Report
SEC’s Failure
“Our report concluded that notwithstanding these six complaints and two articles, the SEC never conducted a competent and thorough examination or investigation of Madoff for operating a Ponzi scheme and that, had such a proper examination or investigation been conducted, the SEC would have been able to uncover the fraud” said Mr. Kotz.

Not Conflict of Interest Found
“We did not, however, find evidence that any SEC personnel who worked on an SEC examination or investigation of Madoff or his firms had any financial or other inappropriate connection with Madoff or the Madoff family that influenced the conduct of the examination or investigatory work. We also did not find that former SEC Assistant Director Eric Swanson’s romantic relationship with Bernard Madoff’s niece, Shana Madoff, influenced the conduct of the SEC examinations of Madoff and his firm. We further did not find that senior officials at the SEC directly attempted to influence examinations or investigations of Madoff or the Madoff firm, nor was there evidence any senior SEC official interfered with the staff’s ability to perform its work” said Mr. Kotz.

Mr.Kotz recommended that "so that appropriate action ... is taken, on an employee-by-employee basis, to ensure that future examinations and investigations are conducted in a more appropriate manner and the failures aren't repeated."

Why no one found it?
If there is truly no conflict of interest in the SEC’s investigation, the only reason why the SEC failed to uncover the fraud earlier is its inefficiency and incompetence in the agency. The lack of communication among SEC offices cleared the way for Madoff to continue his scheme for nearly two decades. "The entire SEC should be held accountable for what happened," Mr. Kotz said. Mr. Markopolos testified that the agency's staff "was not capable of finding ice cream in a Dairy Queen."

According to the transcript, Madoff dismissed an SEC investigation as a "fishing expedition" and highlighted how investigators develop cozy relationships with firms they are supposed to regulate.

"The guys ... ask a zillion different questions and we look at them sometimes and we laugh, and we say are you guys writing a book?" Madoff said. "These guys, they work for five years at the commission then they become a compliance manager at a hedge fund now."

Changes needed to be made
However, no SEC employees have been fired specifically in relation to the bungled investigations of Madoff, though the heads of the agency's enforcement division and inspections office, which conducted the probes, have left the SEC in recent months.
Mr. Khuzami, who joined the agency in March, said he has started the most extensive restructuring of his division in at least 30 years."We will thoroughly examine all of the conduct and take appropriate action," SEC spokesman John Nester said in a statement after the hearing. "The pace of reform is rapid but (the SEC) needs to keep that pace going." said Mr. Markopolos.

Thursday, August 27, 2009

FDIC revises rules on private equity investments

According to the New York Times, "The Federal Insurance Deposit Corporation imposed(new rules governing investments by) private equity firms seeking to buy failed institutions, although they eased more onerous proposals in hopes of luring them to the table." The new rules are designed to address concerns that "private equity buyers might engage in aggressive practices that could put its deposit insurance fund at risk."

"The rules..require private equity-controlled banks to pour enough capital into a failed bank so that it has a cushion of at least 10 percent of its assets for three years. The F.D.I.C. dropped a requirement that private equity firms supply additional capital in the event of a severe downturn, required private equity firms not sell an acquired bank for at least three years, imposed restrictions barring the acquired bank from lending to companies affiliated with the private equity buyer, and exempted private equity firms from complying with the higher capital standards if they joined forces with a traditional bank buyer."

The new rules apply "only to future deals, and (will be reviewed) in six months."

The article stated that "Private equity firms said the new rules would make them less likely to buy a failed institution on their own."

But another article in the same paper noted that:

"Billionaire investor Wilbur L. Ross..said he plans to invest further in banks under the new regulations.

'We will now be able to be a bidder,' Mr. Ross said. 'We’ll be in the game..' "

Thus, concern that these new federal rules would reduce the number of private equity firms buying banks can be seen as a private equity industry negotiating tactic used to minimize the application of common sense public interest risk controls.

For minority banks, this means that investors will be encouraged. We continue to believe that value in this sector is growing, and note new interest in our website

We also note several new black banking initiatives:
a. The Black Bank Initiative.
b. “National Community Reinvestment Day” on September 4, 2009. Urging individuals to open accounts at black owned banks.
c. Atlanta Black Banking Initiative. Sponsored by the Overground Railroad.

SEC issues investor warning

According to the Chicago Sun Times, "Exchange-traded funds that leverage their holdings could lead to outsized losses, the Securities and Exchange Commission said. It said brokers and financial advisers should warn people away from them unless they plan to hold them for just a day. The problem with leveraged ETFs comes down to the magic and mystery of compounded returns. If you leave your money in a leveraged ETF over time, your return can differ drastically from the fund's stated goal, especially in volatile markets. "

Sunday, August 9, 2009

Wells Fargo sued for racially biased lending, again..

As we noted in June, Wells Fargo has a real issue.

Now, they have been sued by the State of Illinois. According to recent news reports,

"Illinois filed a lawsuit on Friday against Wells Fargo & Co. accusing it of discriminating against black and Latino homeowners by employing racially biased lending practices.

San Francisco-based Wells Fargo & Co. allegedly sold high-cost subprime mortgage loans to minorities while white borrowers with similar incomes received lower-cost loans, according to the lawsuit, filed in Cook County Circuit Court by Illinois Attorney General Lisa Madigan.

'As a result of its discriminatory and illegal mortgage-lending practices, Wells Fargo transformed our cities' predominantly African-American and Latino neighborhoods into ground zero for subprime lending,' Madigan said."

Wednesday, August 5, 2009

Hearing on Examing Proposals to Enhance the Regulation of Credit Agnecies(Jui Kai Li)

On Aug 5th, the US Senate Committee on Banking, Housing, and Urban Affairs held a hearing on Proposals to enhance the Regulation of Credit Rating Agencies.

Testifying were Michael S. Barr-U.S. Department of the Treasury, Professor John C. Coffee, Jr.-Columbia University Law School, Dr. Lawrence J. White-New York University ,Mr. Stephen W. Joynt-Fitch Ratings, Mr. James Gellert-Rapid Ratings, Mr. Mark Froeba-PF2 Securities Evaluations, Inc.

The testimony is summarized below and copies of the written statements are available at;

Credit Rating Agency blamed for Financial Stress

In credit markets, borrowers often know more than lenders. While lenders may buy a portion of debt issued, borrowers often issue debt to many borrowers. Thus, rating agencies are traditionally assumed to address this information asymmetry. They help lenders evaluate the credit worthiness of borrowers. However, many researches show that investors’ over reliance on these rating agencies causes financial stress. These researchers believe that a severe conflict of interest and lack of transparency in the rating process led to overly optimistic ratings. A wave of sudden CDO downgrades in July 2007 not only led investors to lose confidence in rating agencies but also led to an increase in risk aversion and to low liquidity afterwards.

Conflicts of interest and a lack of transparency have led to increased Corporate Governance risk, a key factor socially responsible investors examine. Due diligence issues, accountability and liability factors aroused a lot of debate at the hearing. In highlights from the testimony, we will see how the administration proposes to regulate credit rating agency and gain different perspectives on the proposal.

Highlights from Testimony:
Senators’ Support for the Proposal

Most Senators think reform is necessary. “I strongly believe that the credit rating agencies played a pivotal role in the collapse of our financial markets. Any regulatory reform effort must take that into consideration,” said Senator Shelby.

The Senators agree to give SEC more authority to regulate disclosures and conflicts of interest, as well as unfair and abusive practices. However, the agreement between the Senators and the Administration is not a coincidence. Before the Administration’s proposal was submitted, the Banking Committee proposed and helped passed the Credit Rating Agency Reform Act of 2006. The act gives the SEC more authority to regulate credit rating agencies. According to the Assistant Secretary’s testimony, “This Committee, under the leadership of Senator Shelby, Senator Dodd and others, took strong steps to improve regulation of rating agencies in 2006. That legislation succeeded in increasing competition in the industry, in giving much more explicit authority to the SEC to require agencies to manage and disclose conflicts of interest, and helping ensure the existence and compliance with internal controls by the agencies.”

Industry’s Perspective on the Proposal
On the other hand, from an industry perspective, many disagree with key points in the proposal. They do not believe that due diligence and greater liability should be the responsibility of credit rating agencies.

“In that regard, we support the concept that issuers and underwriters ought to be required to conduct rigorous due diligence on the underlying assets that comprise asset backed and mortgage backed securities….. Congress ought not to hold rating agencies responsible for such due diligence or for requiring that others do it,” said Stephen W. Joynt, President and Chief Executive Officer, Fitch Ratings. “Unlike other gatekeepers, the credit rating agencies do not perform due diligence or make its performance a precondition of their ratings. In contrast, accountants are, quite literally, bean counters who do conduct audits,” said Professor John C. Coffee, Jr.
,Professor of Law Columbia University Law School.

Both industry and academic perspectives point out that rating agency should not be held to a standard that might lead to greater credit rating agency liability. “A credit rating is an opinion about future events – the likelihood that an issue or issuer will meet its credit obligations as they come due. Imposing a specific liability standard for failing to accurately predict the future in every case strikes us as an unwise approach,” said Mr. Joynt. “Also, Professor Coffee maintained that”We have to face the simple reality that the rating agencies have a built-in bias: they are a watchdog paid by the entities they are expected to watch. “

Monday, August 3, 2009

Dwelling House, a 119 year old Black bank, rallies

According to an article in the American Banker Newspaper,

"With public sentiment running so hard against the banking industry these days the story of Dwelling House Savings and Loan Association, a $13.4 million minority-controlled mutual in Pittsburgh, is nothing short of amazing.

Community leaders have rallied around the thrift for the past few months after cyber thieves took more than $3 million through fraudulent automated clearing house transactions, leaving the thrift with a $1 million capital hole.

Residents campaigned to boost the thrift's deposits, and it ultimately received pledges of cash injections from four local foundations and the $5.6 billion-asset Dollar Bank of Pittsburgh, just in time for a June 30 deadline that regulators imposed for getting the thrift adequately capitalized."

As was noted in the article, "Observers said the outpouring of support for the bank was primarily because of its age. 'It goes to show their importance to the community that can't be divorced from their age,' said William Michael Cunningham, social investing adviser with Creative Investment Research Inc., which invests in minority-owned banks. 'They have such a long history in the community that it doesn't surprise me they are rallying around the institution.' "

Wednesday, July 29, 2009

The Future of Public Housing (Hsiu Jui Chang, William Cunningham, Jui Kai Li)

On July 29th, the Subcommittee on Housing and Community Opportunity held a hearing on Academic Perspectives on the Future of Public Housing. Testifying were Dr. Thomas D. Boston, Professor, School of Economics, Georgia Institute of Technology, Orlando Cabrera, Chief Executive Officer, National Community Renaissance and Nixon Peabody, Dr. James Fraser, Associate Professor, Department of Human and Organizational Development, Vanderbilt University, Dr. Edward Goetz, Director, Center for Urban and Regional Affairs, University of Minnesota, Dr. Laura Harris, Assistant Professor, School of Urban Affairs and Public Policy, University of Memphis, Mr. David R. Jones, President and Chief Executive Officer, Community Service Society of New York, Dr. Mark Joseph, Assistant Professor, Mandel School of Applied Social Sciences, Case Western Reserve University, and Dr. Susan Popkin, Director, Program on Neighborhoods and Youth Development, The Urban Institute.

In the opening statement, several representatives expressed their views on public housing. The chairwoman maintained that there are problems with public housing such as neglecting the needs of existing public housing residents and underfunding. Rep. Lynch noted the shortage of staff required to maintain the quality of public housing. One congressman said flexibility in public housing programs is important. Most of the testimony concerned the HOPE VI program. The testimony is summarized below and copies of the written statements are available at;

Highlights from Testimony:

One recurring problem identified had to do with the screening process. People receiving public housing are selected by private sector agents who may unfairly restrict applicants’ access to public housing services by the imposition of irrelevant credit requirements. Industry representatives responded that credit guidelines served to protect investors’ interests. Social responsible investors might counter by pointing out that credit guidelines imposed on subprime mortgage borrowers were also supposed to protect investors’ interests. They did not do so leaving some to question their relevance and fairness.

In general, fully evaluating the benefit of a public investment by simply looking at returns to a narrow group of people is inappropriate. One of the suggested program improvements involved making sure that HOPE VI program participants did not experience increased isolation as a result of participating in the program. In the table below, we show the interaction between isolation and improved housing. Thus, the most likely program outcome is a decline in quality of life for program participants.



No Change

Slightly Better

Much Better

No Change


Quality of Life improves

Quality of Life improves

Slightly Worse

Quality of Life declines

Quality of Life declines

Quality of Life improves

Much Worse

Quality of Life declines

Quality of Life declines

Quality of Life declines

Wednesday, July 22, 2009

U.S. lost 53% supporting Goldman Sachs

According to, "The U.S. government made a 23% return supporting Goldman Sachs during the global financial crisis, the investment bank said Wednesday as it unwound one of the last taxpayer-funded investments it received last year." This is incorrect. If you include the $13 Billion that Goldman received through AIG (to make Goldman whole on Credit Default Swap transactions) we lost around 53%.

Tuesday, July 21, 2009

Humphrey Hawkins Hearing on Monetary Policy(Jui Kai Li)

On July 21st , Federal Reserve Chairman Ben Bernanke testifies before the Full committee of the House Financial Services Committee for his semiannual Humphrey Hawkins Hearing on Monetary Policy.

Mr. Bernanke’s testimony is summarized as follows and copy of the written statement is available on the committee’s web site at:

Mr. Bernanke’s early responses to the Wall Street Journal (wsj) were cited by Barney Frank (D., Mass.), the Committee’s chairman as his opening statement. Mr. Bernanke’s quotes on the WSJ also became some of the lawmakers concerns.

Expansion of GAO audit
According to the WSJ’s article “Bernanke Heads to Congress Battling Calls to Tame the Fed”, Mr. Bernanke strongly opposed the proposal to audit the Fed, calling it "self-defeating and dangerous." He said that the risk is that if investors see the Fed facing new political oversight, they will doubt its ability to take unpopular steps to fight inflation -- one of the Fed's top jobs. Fearing inflation, bond investors will push interest rates up, hurting the weak economy.

The first firework quickly came when Rep. Texas, Ron Paul asked Mr. Bernanke to respond to his quotes. Also, according to Mr. Bernanke’s testimony, he expressed his concerns that the legislation could compromise Fed’s independence. “In doing so(expand the audit authority of the GAO), the Congress carefully balanced the need for public accountability with the strong public policy benefits that flow from maintaining an appropriate degree of independence for the central bank in the making and execution of monetary policy,” said Mr. Bernanke.

Bernanke asserts that the Fed’s program to purchase Treasury securities isn’t an active intervention but a common open market operation aimed at making it easier for the government to issue debt. But, Mr. Paul worried that the program would cause inflations.

Macroeconomic Report
Although there are a lot of critics of Fed’s efforts in the credit crisis, Mr. Bernanke started his report by giving some good news. “More recently, the pace of decline (the U.S. economy) appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization…. Consumer price inflation, which fell to low levels late last year, remained subdued in the first six months of 2009.” Also, Mr. Bernanke indicated “Consumer spending has been relatively stable so far this year, and the decline in housing activity appears to have moderated.”

Some improvement has been seen in the credit markets. “Interest rate spreads in short-term money markets, such as the interbank market and the commercial paper market, have continued to narrow. The extreme risk aversion of last fall has eased somewhat, and investors are returning to private credit markets.”

However, the high unemployment rate is still a headache of the Fed. “Job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. The possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook,” said Mr. Bernanke.

Small Business Concerns
To ease the consumer and small business tight credit, the Fed implemented the Term Asset-Backed Securities Loan Facility (TALF), an unusual Fed program. The loan facility will support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA).

Mr. Bernanke was asked if the Fed plan to extend its $1 trillion TALF to back securitizations for commercial real estate loans. Mr. Bernanke said that there is a significant amount of commercial real estate loans coming up for refinance “and they may not get done.”

The most common criticism of the program was the lack of clarity around the requirement that any underlying ABS collateral be "newly or recently issued exposures to US-domiciled obligors." Although Mr. Bernanke noted that “the Fed is urging banks to help creditworthy borrowers refinance”, some critics worried that unclear credit requirement will repeat the mistake of the credit crisis.

Consumer Protection

Several lawmakers expressed their concerns about the role of the Fed. Although the Obama administration has proposed promoting the Fed to the role of systemic risk regulator, the Fed’s power to regulate consumer products will be placed by a new consumer protection agency. Mr. Bernanke implicitly mentioned some conflicts of power of shift. Mr. Bernanke tells lawmakers that the Fed “would be interested” in keeping its consumer-protection responsibilities.

“If I were writing it, I would keep the consumer protection with the federal banking agencies, with additional measures to ensure a strong commitment,” he said, arguing that the Fed is “well-placed” to regulate consumer products offered by the financial firms it supervises. “I’m proud of the work we’ve done,” he added.

Investment Concerns

Although stocks dropped first right after Bernanke’s testimony, Mr. Bernanke proved to help stocks push higher today. The Dow Jones industrial average extended its longest rally in two years, climbing 68 points, or 0.8 percent, to close at 8,916.(sources Google Finance).

Bernanke's History

Looks like they got that one wrong.

On January 17, 2008, the Chairman of the Federal Reserve Board, Mr. Bernanke, testified that "A recession is probably not on the horizon, but quick passage of an economic-stimulus package plus aggressive action by the Federal Reserve are the appropriate prescription for the ailing economy.."

What we got wrong.

We note that on June 18, 1998, in a letter to Betsy White, Senior Vice President at the NY Fed, we said:

"Finally, it is our continuing belief that the Federal Reserve Board should be designated a 'Superregulator,' with broad responsibility for overseeing the activities of banks, thrifts, pension funds, insurance companies, mutual fund companies, brokerage firms and investment banks. We note our belief that financial institution convergence, driven by recent advancements in financial and computer technology, requires the creation of such a 'Super-regulator.' "

We, and others, no longer believe the Federal Reserve independent or objective enough to serve as "Superregulator" or as "Systemic Regulator." They are, thus, unqualified for the role, which should be filled by an entirely new entity.

Thursday, July 16, 2009

Hearing on the Community and Consumer Advocates' Perspectives on the Obama Administration's Financial Regulatory Reform Proposals(Jui-Kai Li)

On July 16th , the Full committee of the House Financial Services Committee held a hearing on community and consumer advocates’ perspectives on the Obama administration’s financial regulatory reform proposals. Testifying were Joseph L. Flatley- Massachusetts Housing Investment Corporation, Oliver Ireland- Morrison & Foerster LLP, Edmund Mierzwinski-U.S. Public Interest Research Group, Janet Murguia, National Council of La Raza, Travis Plunkett-Consumer Federation of America, John Taylor- National Community Reinvestment Coalition, and Nancy Zirkin- Leadership Conference on Civil Rights.

In his opening statement, Chairman Barney Frank replied to yesterday’s arguments on the “plain vanilla” mortgages. There were concerns that “plain vanilla” mortgage product would have the impact of reducing consumer choice and hurt financial innovations. He explained that the innovations are important. But, innovations should be in the context of regulations. He claimed that although excessive regulations are problems, appropriate regulations provide safety and soundness to the financial environment. Thus, he anticipated that the congress and the private sectors can work together to make suitable regulations.

The testimony is summarized below and copies of the written statements are available on the committee’s web site at

Two consecutive hearings are held to present the views both from the banking perspectives and community and consumer advocates’ perspectives. However, the community and consumer advocates spoke in different voices contrary to the banking perspectives. Most of the witnesses support the establishment of the CFPA.

What they see and expect in the new agency are as follows:

Community Reinvestment Act (CRA)
“The Administration’s proposed CFPA contemplates a massive, unprecedented shift in oversight of Federal laws involving consumer protection.” said Joseph Flatley, President and Chief Executive Officer, Massachusetts Housing Investment Corporation on behalf of NAAHL. But, he also expressed his concern on the transfer of CRA to CFP. “NAAHL bankers have raised concerns about splitting the “Siamese twins” of CRA evaluation (going to CFPA) and the diminished influence of CRA in the regulatory application approval process (retained with the banking regulatory agencies),”said Mr. Flatley.

“Since CRA is a central component of consumer protection and CFPA will be the central agency to protect consumers, CFPA must be charged with enforcing CRA,” said John Taylor, President and Chief Executive Officer, National Community Reinvestment Coalition.

“Regardless of where jurisdiction over the CRA is ultimately placed, LCCR believes that strengthening the law is absolutely vital to ensuring that our communities have access to fair, responsible sources of credit,” said Nancy Zirkin, Executive Vice President, Leadership Conference on Civil Rights.

Credit Rating Agencies
“One disappointing area of the administration’s proposal is its failure to propose robust reforms of the Credit Rating Agencies,” said Edmund Mierzwinski, Consumer Program Director, Public Interest Research Groups.

“The plan’s provisions on credit rating agencies, in particular, are weak considering the central roles these agencies played in causing the current crisis,” said Travis B. Plunkett, Legislative Director, Consumer Federation of America.

Corporate Governance Reforms
“The President’s plan, which includes only two proposals on corporate governance...We believe it would be a grave error to miss yet another opportunity to adopt more far-reaching reforms. Among the top priorities should be legislation giving the SEC clear authority to reform the proxy access rules to make it easier for shareowners to nominate directors,” said Mr. Plunkett.

Opposing CFPA
On the other hand, there is still opposition of the creation of the CFPA. “I believe that creating a separate stand-alone agency for this purpose ignores the increasingly vertically integrated nature of the market for retail financial services and the role that retail financial transactions play in the overall economy of the United States,” said Oliver I. Ireland, Partner, Morrison & Foerster LLP. He worried that “bifurcating regulation of the market as is contemplated by the creation of a dedicated agency that focuses only on the consumer protection aspects of the mortgage lending process, at a minimum, is likely to create conflicts with prudential supervisors.”

Wednesday, July 15, 2009

Hearing on the Banking Industry Perspectives on the Obama Administration’s Financial Regulatory Reform Proposals(Jui-Kai Li)

On July 15th , the Full committee of the House Financial Services Committee held a hearing on the banking industry perspectives on the Obama administration’s financial regulatory reform proposals. Testifying were Steve Bartlett-Financial Services Roundtable, John A. Courson- Mortgage Bankers Association, Chris Stinebert- American Financial Services Association, Steven I. Zeisel- Consumer Bankers Association, Professor Todd J. Zywicki- George Mason University, Denise M. Leonard- National Association of Mortgage Brokers, Edward L. Yingling- American Bankers Association, R. Michael S. Menzies- Independent Community Bankers of America.

In his opening statement, Chairman Barney Frank explained that there are lots of opinions and complaints with regard to the Obama administration’s financial regulatory reform proposals. He believes that these opinions and complaints are important during the establishment of this new regulation. He anticipated today’s discussion from the banking industry perspectives could contribute to the better regulation. The testimony is summarized below and copies of the written statements are available on the committee’s web site at

The witnesses are the recognized voices on banking, securities, insurance companies and mortgage broker industry. Most of the witnesses support “the bold, comprehensive financial regulatory reform to strengthen the ability of our financial markets to serve consumers and support the economy.” said Steve Bartlett, President and Chief Executive Officer, The Financial Services Roundtable.

However, the witnesses also offered their opposing points on Obama administration’s proposal:

Consumer Financial Protection Agency

Most of the witnesses strongly oppose the establishment of the new agency. “We strongly oppose the creation of a separate, free-standing Consumer Financial Protection Agency” because in part he believes that “consumer protection and safety and soundness should not be separated.” said Mr. Bartlett.

“Establishment of a regulator along the lines proposed would worsen the patchwork of federal and state laws resulting in uneven protection and increased costs for consumers.” said John A. Courson, President and Chief Executive Officer, Mortgage Bankers Association. Also, he worried that the CFPA could not give enough attention to mortgage products. “Because the new regulator would not be solely focused on mortgage regulation and products, there is a very real danger that mortgage products may not receive sufficient priority.” said Mr. Courson.

“There is no evidence that consumer ignorance was a substantial cause of the crisis or that the existence of a CFPA could have prevented the problems that occurred.” said Professor Todd J. Zywicki, George Mason University Foundation Professor of Law and Senior Scholar, Mercatus Center at George Mason University. “I have no affiliation with the “banking industry” except as a customer.” said Mr. Zywicki.

Sophisticated, Customized Derivatives
“The Roundtable recommends that standardized derivatives are cleared through a regulated clearinghouse to provide more transparency and to reduce systemic risk within the industry. However, clearing sophisticated, customized derivatives should not be required because they allow flexibility for institutions to meet their customers’ needs.” said Mr. Bartlett.

The Authority of Federal Reserve Board
“We must emphasize, however, that the Board should not be an additional super-regulator. Rather, it should work with the prudential regulator in non-emergencies to address potential systemic risks. Moreover, the Board also should not publicly identify systemically significant institutions (“Tier 1 Financial Holding Company”), as proposed by the Administration; it should focus its priorities and focus on activities and practices across the entire financial system, not individual institutions.” said Mr. Bartlett.

“Further, requiring each Tier 1 FHC to comply with the nonfinancial activity restrictions of the Bank Holding Company Act does not address a cause of the current credit crisis or threat to the safety and soundness of the financial system.” said Mr. Bartlett.

Resolution Regime for Insolvent Nonbank Financial Institutions
“The Administration’s legislative draft, relies too heavily upon the FDIC to act as a receiver or conservator for such institutions…We also oppose funding such an authority with assessments of all systemically significant institutions.Furthermore, the FDIC's Deposit Insurance Fund, the Securities Investor Protection Corporation, and the state insurance guarantee funds should be retained and protected for their original intended uses.” said Mr. Bartlett.Clearly,there are concerns that under the requirement of the proposal the deposit insurance fund of FDIC will be jeopardized.

Restriction of the Activities of Financial Institutions

“The Roundtable supports increased regulatory oversight of the financial affiliates of commercial companies to assure that such finance companies continue to provide this much needed credit in a safe and sound manner, but cautions against proposals that eliminate or severely restrict the activities of such institutions.” said Mr. Bartlett.

Plain Vanilla Mortgage
“The proposed regulator has the potential to roll back the clock 30 years, when consumers only had plain vanilla borrowing options.” said Chris Stinebert, President and Chief Executive Officer, American Financial Services Association.

“However, mandating the offering of some type of “plain vanilla” mortgage product would have the impact of reducing consumer choice and increasing costs for consumers. A better approach would be to continue to improve and clarify the current effort to ensure strong underwriting by ensuring the ability to repay a loan by prospective consumers. Strengthening underwriting is a more effective approach than attempting to proscribe specific products for consumers.” said Mr. Bartlett.

“NAMB is worried about the unnecessary additional costs of developing new products, questionnaires, and opt-in disclosures that would likely be passed-on to consumers if institutions’ product offerings are overregulated.” said Denise M. Leonard, Vice President, Government Affairs, National Association of Mortgage Brokers.

Industrial Bank Charter
“We do not believe that the elimination of the industrial bank charter is warranted to benefit customers. To the contrary, it would be the worst time to eliminate the charter, as this would lead to further job loss.” said Mr. Stinebert.

The financial reform proposes that companies that own an FDIC-insured thrift, industrial loan company (ILC), credit card bank, trust company, or grandfathered depository institution are required to become BHCs. However, lots of conflicts of interest involved in the industrial bank charters. Bankers can use bank charters primarily to access payment systems and avoid state usury laws.

“The CFPA grants broad authority to impose fees and assessments on “covered persons.” NAMB is concerned that those regulated on the state level, such as mortgage brokers, may be forced to pay more to do business, which will place such entities at a competitive disadvantage and will ultimately increase costs for consumers.” says Ms. Leonard.

Thrift Holding Companies
“Thrift institutions have taken the lead in re-establishing economic growth – whether it is the thrifts that are lending to help rebuild New Orleans, or those that are leading community development plans from coast to coast to put Americans back to work.” said Edward L. Yingling, President and Chief Executive Officer, American Bankers Association.

On the other hand, the elimination of thrift holding companies may hurt the bankers's profits.Financial reform proposes to eliminate thrift holding companies because “significant differences between thrift holding company and BHC supervision and regulation have created material arbitrage opportunities. “

Friday, July 10, 2009

Hearing on the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market (William Cunningham, Jui-Kai Li, Hsiu-Jui Chang)

At 10:00 a.m. on Friday, July 10, 2009, in 1100 Longworth House Office Building, the Full Committee of the House Agriculture Committee and the House Financial Services Committee conducted a hearing titled "A Review of the Administration’s Proposal to Regulate the Over-the-Counter Derivatives Market." Timothy F. Geithner, Secretary, U.S. Department of the Treasury, was the only witness.

The hearing began with a consideration of the risk to taxpayers from the over the counter derivatives market. According to Wikipedia,

"Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. According to the Bank for International Settlements, the total outstanding notional amount is $684 trillion (as of June 2008)."

Upon opening of the hearing, the Chair of the Ag Committee stated that: "Government should not be the one to judge risk." Among other topics, members of the Committee and the Secretary discussed the fact that new regulation is being driven by the a recognition that the OTC market provides a broader set of investment options, but capital requirements and other protections need to be strengthened to better reflect the true riskiness of these options. The Secretary reiterated that this was the purpose of the proposal.

The need for international cooperation among regulators was discussed at several points. A recurring worry was regulatory arbitrage. Influencing this concern was the ability of new technologies, like the Internet, to act as a powerful disintermediation engine, thereby making it easier for OTC derivative market customers to move trading activity to the exchange that is the least regulated.

Another topic of discussion concerned standardized versus customized OTC derivative products or contracts. Note that the Financial Reform Plan released by the Obama Administration calls for the use of more "plain-vanilla" derivatives.

One Committee member suggest banning Credit Default Swaps (CDS) outright, but the Secretary rejected this suggestion, calling instead for higher CDS capital requirements.

The Obama Administration Stimulus Plan was discussed, with one Committee member saying that recent increases in the unemployment rate showed the Plan to be a failure. The Secretary countered by saying that decreases in unemployment lag increases in economic growth at this point in a recovery.

Several Committee members discussed the need for a central OTC derivatives clearinghouse. One member suggested the creation of an electronic clearinghouse. The Secretary suggested that this would increase transparency and make price discovery more efficient. The Secretary also noted that this increased transparency will require closer cooperation and coordination by the SEC and the CFTC, but no decision appears to have been made yet about merging the two regulatory bodies.

The only fireworks came when one committee members asked the Secretary to guarantee that today's derivative buyer will not be tomorrow's bailout recipient. The Secretary declined to offer any such assurance.

Wednesday, July 1, 2009

Central Pacific versus OneUnited

According to the Washington Post, "Sen. Daniel K. Inouye's staff contacted federal regulators last fall to ask about the bailout application of an ailing Hawaii bank that he had helped to establish and where he has invested the bulk of his personal wealth."

While we have seen this before, I think the Senator's case differs significantly from the OneUnited case. Black-owned OneUnited "sought aid as community 'beacon'", had few inner city loans, and still "got $12 million from the US bank bailout fund."

The cases are different because:

"Regulators in October (2008) concluded in a cease-and-desist order that OneUnited.. had poor standards for qualifying and documenting loans, and gave top executives excessive pay and perks. Two of the perks regulators targeted were a $6.4 million beachfront Santa Monica mansion (1% of OneUnited's assets) that management used while in California and a Porsche SUV driven on company business in Boston."

The bank the Senator helped, "Central Pacific, was founded in 1954 by a group of World War II veterans including Inouye who were emerging leaders in Hawaii's Japanese American community. Inouye, who became the bank's first secretary, said that he initially invested $3,000, the minimum amount possible. Central Pacific is Hawaii's fourth-largest bank, holding about 15 percent of the state's deposits."

The Senator asked about the application. He did not facilitate a meeting between bank management and the Secretary of the Treasury (as was the case with OneUnited). Central Pacific had no cease-and-desist orders pending and was too significant (and too responsible) to fail.

Monday, June 29, 2009

Another minority bank fails - Mirae Bank, Los Angeles, CA

According to the FDIC, "On Friday, June 26, 2009, Mirae Bank (Asian), Los Angeles, CA was closed by the California Department of Financial Institutions, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. All deposit accounts have been transferred to Wilshire State Bank, Los Angeles, CA ("assuming institution") and will be available immediately. On Monday, June 29, 2009, the former Mirae Bank locations will reopen as branches of Wilshire State Bank."

Wednesday, June 24, 2009

Black neighborhoods, churches targeted for "ghetto loans."

According to recent news reports,

"One of the nation's largest banks allegedly set up a special sales office to steer risky subprime loans to residents in Prince George's County, Baltimore city and other predominantly black communities..Wells Fargo Bank employees allege in a lawsuit. According to the sworn statements by two former loan officers filed June 1 in U.S. District Court of Maryland as part of a lawsuit being pursued by the City of Baltimore against Wells Fargo alleging discriminatory and predatory lending, bank employees targeted black neighborhoods and churches for the escalating-interest mortgages, which some in the office called 'ghetto loans.'

Many customers with sufficient income, credit and savings to qualify for fixed, lower-interest mortgages were still urged to take subprime loans..because the higher rates meant bigger profits for the bank: 'If a loan officer referred a borrower who should have qualified for a prime loan to a subprime loan, the loan officer would receive a bonus.' "

Tuesday, June 23, 2009

Hearing on the New Markets Tax Credit Program - Jui-Kai Li

On June 18th, the Subcommittee on Select Revenue Measures of the House Committee on Ways and Means held a hearing on the New Markets Tax Credit Program (NMTC). Testifying were Donna J. Gambrell - CDFI Fund, Michael Brostek - GAO, Ron Phillips - CEI, Blondel A. Pinnock - Carver Bank, Joseph Haskins, Jr. – Harbor Bank, William Michael Cunningham – CIR, and James R. Klein - Ohio Community Development Finance Fund.

In his opening statement, Chairman Richard E. Neal (D-MA) explained that the Subcommittee on Select Revenue Measures is beginning its hearing process with the Subcommittee on Domestic Monetary Policy and Technology of the Financial Services Committee on issues involving the New Markets Tax Credit program. He pointed to a recent GAO report showing that minority-owned or controlled entities are less successful than non-minority owned or controlled entities in the NMTC application process. He emphasized the importance of the New Markets Tax Credit program as a way to encourage investments in low income communities. He added that fairness in the application process is vital to its success. At the request of the Chairman, the CDFI Director and experienced applicants provided their recommendations with regard to changes to improve the program. The testimony is summarized below and copies of the written statements are available online at


During the hearing, two contrasting points of view were offered with respect to GAO’s findings of a lower success rate of non-minority owned or controlled entities in the NMTC application process. Members who support NMTC and criticize GAO’s findings

“The CDFI Fund agrees with the GAO’s conclusions that, within this highly competitive application environment, organizations that have identified themselves as minority-owned CDEs have not received allocation awards in proportion to their representation in the application pool. The CDFI Fund does not believe that this lower rate of success for minority CDEs, or for that matter the success rate of any other category of CDE, is attributable to biases in the application review or selection process.” said Donna J. Gambrell, Director, Community Development Financial Institutions Fund, United States Department of the Treasury. “Each applicant CDE is required to ‘check a box’ indicating whether it, or its parent company, is minority-owned or controlled…It could be the case that many non-profit organizations which have significant minority executive control fall within the CDFI Fund’s definition of a minority-owned entity, but perhaps have not been checking the box.”

Ms. Gambrell said the lower rate of success does not result from biases but from undercounting of awardees that are minority-owned CDEs by GAO. Failing to self- identify the status of minority bank is regarded one of the reasons of the lower rate. “Our knowledge of the allocatees suggests there is greater participation…We think the reason for the discrepancy between our numbers and those of GAO is because this information is not required by the application, but rather is one of several characteristics on which applicants may or may not choose to self-identify.” said Ron Phillips, President of the New Markets Tax Credits Coalition. Mr. Phillips is also the president of a private non-profit community development corporation and CDFI.

Given the success of applying NMTC, some minority banks think the asset size is another reason to cause their competitors’ lower rate of success. “Again, minority CDEs are by nature smaller so it is not their minority status that lowers their success rate. This is obvious in our opinion given there are no large minority CDEs to use as a basis for comparison.” says Blondel A. Pinnock, President, Carver Community Development Corporation. “Local minority and non‐minority organizations are usually smaller with limited assets and capacity to deal with the complexity of public programs... they generate projects that are smaller and businesses with little or no assets enabling access to private commercial capital. Because projects are smaller, impacts are small when compared to larger single purpose transactions.” says James R. Klein, Chief Executive Officer, Ohio Community Development Finance Fund. But still no sufficient statistical evidence was provided by these banks to explain why minority status lowers the probability of success more than CDE’s asset size.

Doubts concerning the fairness of the NMTC

On the other hand, some minority companies not funded by the NMTC doubt the fairness of the allocation process. “We believe our applications may not have been funded, in part, because we are an African American firm.” said William Michael Cunningham, Social Investing Advisor, Creative Investment Research, Inc. Mr. Cunningham says he partnered with a few minority and non-minority companies to apply for the NMTC. But projects which he thinks are competitive were not funded. He worries that the NMTC does not achieve its original intent to help the development of the low income communities. “The NMTC may be operating in a discriminatory and unfair manner, contrary to Congressional intent… the bulk of the societal and monetary benefits derived from the program are being captured by real estate developers, accountants, lawyers, and consulting firms, not low income community residents.”

Recommendations concerning the NMTC Program

Although contrasting opinions were offered as to whether status as minority-owned or controlled lowers the rate of NMTC application success, members provided recommendations about NMTC program. These are summarized below.

Continued outreach to minority-owned CDEs.
Encouraging partnerships between minority CDEs and experienced Allocatees

Training and technical support from the NMTC Coalition

Make small CDFI banks a priority for CDFI Fund financing

Streamline the application process

Modify the scoring and approval process
· Increase the tax credit for the qualified active low income community business(QALICB)
· Increase the tax credit for the QALICB’s located in very low income areas
· Increase the tax credit for equity investments in QALICBs.

Posting by: Jui-Kai Li[1], Intern, Creative Investment Research, Inc.
[1] Master of Science in Finance candidate, May, 2010, George Washington University.

Monday, June 15, 2009

Family Office & Private Wealth Management Forum

Two of our favorite conferences are back:

"Opal Financial Group’s annual Family Office/Private Wealth Management Forum will return to the Hyatt Regency in beautiful Newport, Rhode Island in 2009. The family office conference will explore the challenges and opportunities associated with investing in emerging markets, alternative investments, distressed real estate, direct energy and numerous other asset types."

At the same time and place, Opal sponsors the:

"Public Funds Summit East. Opal Financial Group’s annual public funds conference will address issues that are most critical to the investment success of senior public pension fund officers and trustees. The Summit will cover how surplus returns should affect employee benefit plans, the processes for selection and evaluation of investment managers, legal concerns with fund investment and management policies as well as the benefits and pitfalls of a wide variety of investment strategies."

Family Office & Private Wealth Management Forum
July 8-10, 2009
Hyatt Regency Newport, Newport, RI

Public Funds Summit East.
July 8-10, 2009
Hyatt Regency Newport, Newport, RI

The best set of conferences. Outstanding value. Highly recommended.

Wednesday, June 10, 2009

Black Banks Are Feeling the Pinch

Black Banks Are Feeling the Pinch

Friday, June 5, 2009

Upcoming Testimony before the House Ways and Means Committee

We expect to testify soon before the Committee on Ways and Means of the US House concerning the NEW MARKETS TAX CREDIT PROGRAM and why "Minority Entities Are Less Successful in Obtaining Awards Than Non-Minority Entities." According to a report issued by the Government Accountability Office (GAO), "From 2005 through 2008, minority-owned CDEs were successful with about 9 percent of the NMTC applications that they submitted to the CDFI Fund and received about $354 million of the $8.7 billion for which they applied, or about 4 percent. By comparison, non-minority CDEs were successful with about 27 percent of their applications and received $13.2 billion of the $89.7 billion for which they applied, or about 15 percent." We expect that the hearing will be held mid-June, and will note the date and location in a blog post.