Category Archives: Banking Regulation

The Latest JP Morgan Chase Lawsuit

On August 9, JP Morgan Chase & Co. agreed to cover almost 20 percent of a $6.05 billion deal to settle a price-fixing case brought over credit-card swipe fees.  JP Morgan is the second-largest U.S. credit card issuer according to the Nilson Report.  In 2005, the plaintiffs, merchants and retail industry associations, filed fourteen actions, namely alleging that JP Morgan & Chase Co. conspired with MasterCard and Visa to rig credit-card processing fees.  In order the settle the lawsuit, Visa and MasterCard, along with a handful of U.S. banks agreed to pay $6.6 billion and reduce credit-card swipe fees temporarily.  The deal includes cash payments of $6.05 billion for the class action participants and $525 million to individual plaintiffs.

It’ll be interesting to see how many of the plaintiffs agree to participate in class action lawsuit and how the settlement affects JP Morgan’s stocks, as the shares were down 0.4% in recent trading.

 By Jenna Hennig

Federally Appointed Trustees: Helping or Hindering?

Tensions between failing companies and federally appointed Trustees in Bankruptcy have created challenges for federal bankruptcy courts across the nation. While companies that file for Chapter 11 bankruptcy tend to choose a venue that will be more favorable to their restructuring objectives, federally appointed Trustees are increasingly resistant to grant such accommodations.

The most common form of bankruptcy is Chapter 7, which serves to provide immediate relief of outstanding debts to creditors by halting company operations and liquidating existing assets in their entirety. Chapter 7 bankruptcies are supervised by federally appointed Trustees who are responsible for gathering debtors’ non-exempt assets, managing the sale of those assets, and distributing the proceeds to outstanding creditors. In contrast, Chapter 11 governs the process of reorganization of a debtor in bankruptcy proceedings. Chapter 11 enables businesses to undergo a financial reorganization, also supervised by a court appointed Trustee in Bankruptcy. Chapter 11 typically empowers the Trustee with the ability to operate the debtor’s business, and affords the debtor various mechanisms to restructure its business with the goal of eventually emerging from debt. Recent notable Chapter 11 bankruptcies include both Lehman Brothers Holdings Inc. and Washington Mutual during the heart of the financial crisis of 2008.

Failing businesses argue that the U.S. Trustees’ lack of leniency regarding choice of venue will leave them with potentially no way out of bankruptcy. The Trustees counter that their responsibility is “to preserve the integrity of the bankruptcy system, [and that sometimes] in doing so, it will not be in the best interest of a particular company.” As the debate continues, it will be interesting to see whether a trend begins to develop in favor or against the U.S. Trustees’ devotion to uphold stringent standards for American companies filing Chapter 11.

For more information on this issue see:

Wall Street JournalTesting Chapter 11’s Limits – U.S. Watchdogs Square Off With Companies over Venue, Executive Bonuses. By: Rachel Feintzeig and Jacqueline Palank

Assessing TARP Strategy Report from COP

100_dollar_billElizabeth Warren, the chair of the Congressional Oversight Panel (created to oversee the expenditure of TARP funds, and to “review the current state of financial markets and the regulatory system”) was on The Daily Show with John Stewart this week to talk about TARP and the recent report on TARP strategy released by the Panel.

On April 7, six months after the passage of the Emergency Economic Stability Act, the Congressional Oversight Panel released a report titled “Assessing TARP Strategy.” The report, relying on historical responses to past banking crises, reviews methods for evaluating the programs created to assuage the current financial crisis. The Panel identified 4 elements that were critical to historical banking crises programming: Transparency, Assertiveness, Accountability, and Clarity.

The first half of Stewart’s interview with Warren illustrated that some of these elements don’t seem to be a part of the current programs. Warren stumbled her way through questions about how much money has been spent, and what exactly that investment was worth – rather, what it wasn’t worth. She did manage, though, to point out that this general uncertainty was due in large part to Paulson’s “don’t ask, don’t tell,” policy of distribution in relation to the first $350 billion of expenditures. Warren said the Panel is calling for more transparency, more accountability, and more clarity; they want a better articulation of policy and an explanation of what exactly is going on in the current expenditure programs.

Warren also took the opportunity to advocate a need for smart regulation to bring about economic stability and prosperity. She noted that before the great depression our economic history followed a boom and bust cycle every 10-15 years. After the implementation of regulations like the FDIC, SEC, and Glass-Steagall, though, we had a long period with no financial crisis. But those regulations began to unravel, according to Warren, and we ended up where we are today. (Bonus: check out this post on Geithner’s regulatory plan).

So check out the the interview (part 1, part 2), and the report and let me know what you think…

Credit Default Swaps to the Rescue?

Oliver Hart, professor of economics at Harvard University, and Luigi Zingales, professor of finance at University of Chicago’s Booth School of Business make the case that credit-default swaps could be the key to getting banks out of the very trouble these instruments helped create. In short, the professors state that to prevent systemic risk, large financial institutions should have to increase their capital reserves when assets the institutions hold lose value, and that the best way to track the value of these assets is provided by the market through credit default swaps. But could turning CDS prices into a trigger for a mechanism that lowers the likelihood of default corrupt the effectiveness of CDS asset pricing? And didn’t these swaps already fail to accurately value mortgage-backed securities in the first place?

Thanks a Lot, Mr. Greenspan

The Wall Street Journal Opinion section devoted a full page to articles arguing for and against the idea that Alan Greenspan’s Fed played a major role in causing the housing bubble by keeping interest rates too low. Only one article appears to back Greenspan’s claim that interest rates were low thanks to increased consumer saving; the other articles all fault the Fed, and one even seems to insinuate that the Fed should be replaced by a return to the gold standard.

Treasury Announces Public-Private Investment Funds

As I discussed as a possibility in a previous post, the Treasury has officially announced its plan to create public-private investment funds (PPIFs) for the purchase of toxic bank assets. The plan calls for five funds with the possibility of more based on the quality of the applications received by the Treasury for the fund manager positions. Details of the plan include private control over fund asset management with FDIC oversight, FDIC guarantees on qualified assets purchased by the PPIFs, a 6-1 leverage limit, and a 50-50 split of private and public fund equity capital. Notably the Treasury has not provided any indication of how the private fund managers will be compensated. Apparently the market is satisfied with the level of detail provided by the Treasury this time around as the Dow is currently up over 250 points. See this link for Treasury Secretary Geithner’s piece about the plan in the Wall Street Journal.

[UPDATE] The Dow has closed with a gain just shy of 500 points.

Bank of America Exec Challenges "Misinformation"

The Wall Street Journal ran an opinion piece by Bank of America President and CEO Kenneth Lewis today in which Mr. Lewis challenges common claims about the current state of the banking world. Topics addressed include current lending activity, bank insolvency, and the effectiveness of TARP.