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Banking and finance roundup

by Walter Olson on December 17, 2014

  • House Oversight Committee report finds evidence FDIC used Operation Choke Point to strangle access to banking for lawful but disliked businesses [St. Louis Post-Dispatch, Bloomberg, report, Kevin Funnell, HalfWheel (cigar shops), Pete Kasperowicz, The Blaze (guns), Joe Adler/American Banker (critical views)]
  • “Fallout for the S.E.C. and the Justice Dept. From the Insider Trading Ruling” [Peter Henning, NYT DealBook, on challenges to previous cases; earlier]
  • Congress finally trims Dodd-Frank, with a nose hair clipper. Imagine what Sen. Warren will say if it takes up a scalpel or axe [Michael Greve]
  • Did tax policy set out to make life tough for American expatriates, or does it just seem that way? [Neil Gandal, WSJ on FATCA, FBAR, etc.]
  • “Like other federal agencies, the SEC has long been good at publicizing its initial accusations of wrongdoing …not so good at letting the public know when those accusations turn out to be unfounded or an overreach” [Russell Ryan via Bainbridge, more on SEC press releases on enforcement actions]
  • A market with next to no entry: “If Primary Bank, Mr. Greiner’s proposed firm, wins approval, it would be only the second new bank the FDIC has cleared in the U.S. since 2010.” [WSJ]
  • “The only people who benefit from shareholder litigation over M&A deals are lawyers. Period. End of discussion.” [Stephen Bainbridge; related, Steve Bradford via Bainbridge ("Delaware' entire fairness standard morphs into a tax on deals for the benefit of plaintiff lawyers"), earlier here, etc.]

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“Fox Business Network’s John Stossel interviews US Consumer Coalition’s Brian Wise and Kat O’Connor, owner of TomKat Ammunition LLC, on the Justice Department’s Operation Choke Point.” The Gaithersburg-based ammo seller was cut off from credit card processing services and suspects that the federal Choke Point program was the reason. [cross-posted from Free State Notes; earlier on Operation Choke Point].

P.S. There are signs that House Republicans may move to rein in Operation Check Point. Let’s hope so. [USA Today/Fond du Lac Reporter; HalfWheel (cigar news and reviews)]

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Banking and finance roundup

by Walter Olson on November 17, 2014

  • “How Operation Choke Point Hurts the Unbanked” [former FDIC chairman William Isaac, American Banker]
  • A nation of snitches: “U.S. rules would expand white collar crime informers” [Reuters]
  • Courts should stop giving deference to agency interpretations of criminal law: “Justice Scalia’s shot across the SEC’s bow re insider trading” [Bainbridge] Judge Rakoff criticizes SEC for bringing so many enforcement proceedings to in-house adjudicators [Reuters, earlier]
  • Monitor envy: “The biggest U.S. banks have 100 or more on-site examiners from an array of regulators” and now New York’s financial regulator wants to get into the act [WSJ]
  • Seventh Circuit finds Bank of America entitled to ask loan applicants about expected continuing entitlement to disability benefits, but in the mean time bank agrees in DoJ settlement to cease such inquiries [Easterbrook opinion in Wigginton v. Bank of America, see last page]
  • Two SEC commissioners warn that campaigned-for “fair fund” to compensate investors in CR Intrinsic inside trading case “likely to benefit only class-action attorneys and the fund’s administrators” [Daniel Gallagher and Michael Piwowar, WSJ]
  • “U.S. veterans sue [major European] banks, claim they should pay for Iraq attacks” [Alison Frankel, Reuters]

Throwing its Chicago regional director under the bus, the Federal Deposit Insurance Corporation (FDIC) has disavowed a February 2013 letter in which the director had told an Ohio bank, “It is our view that payday loans are costly, and offer limited utility for consumers, as compared to traditional loan products … Consequently, we have generally found that activities related to payday lending are unacceptable for an insured depository institution.” Critics have charged that the federal government has not been forthright about the extent to which it discouraged banks from providing services to lawful but frowned-on businesses in such lines as payday lending and ammunition sales. [Kevin Funnell, earlier on Operation Choke Point]

Cato’s Caleb Brown interviews Larry Salzman of the Institute for Justice in this podcast about the federal practice of seizing and keeping small businesses’ bank accounts when it claims to find a pattern of deposits below the $10,000 reporting threshold. Earlier here, etc.

“’How can this happen?’ [Arnolds Park, Iowa restaurant owner Carole] Hinders said in a recent interview. ‘Who takes your money before they prove that you’ve done anything wrong with it?’

The federal government does.”

For years I’ve been writing about the injustice of federal deposit-structuring law, from the South Mountain Creamery case in Maryland on up, and more recently the Institute for Justice has embraced the issue. Now that the New York Times has put a reporter on the case [Shaila Dewan, Oct. 25], the IRS says it will roll back its enforcement of the law to cases where there is other criminality — an excellent first step, although only a first step, since other federal agencies can also generate cases that result in seizures and prosecutions under structuring law.

As always, if you’re a small merchant fearful of this law, don’t go to your bank expecting helpful advice:

In May 2012, the bank branch Ms. Hinders used was acquired by Northwest Banker. JoLynn Van Steenwyk, the fraud and security manager for Northwest, said she could not discuss individual clients, but explained that the bank did not have access to past account histories after it acquired Ms. Hinders’s branch.

Banks are not permitted to advise customers that their deposit habits may be illegal or educate them about structuring unless they ask, in which case they are given a federal pamphlet, Ms. Van Steenwyk said. “We’re not allowed to tell them anything,” she said.

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Banking and finance roundup

by Walter Olson on September 21, 2014

  • SEC regs suppress small business capital formation and that’s a shame [Commissioner Daniel Gallagher via Bainbridge]
  • Federally sponsored gripe site for financial institutions not likely to end well [Hester Peirce and Vera Soliman, Mercatus via Kevin Funnell]
  • Alleged terror payments “routed through” sued bank also went through major New York banks, which shouldn’t be surprising [Fisher]
  • Did mid-level managers in securitized mortgage finance know they were in a housing bubble but cynically go ahead? Evidence against [Cheng et al., American Economic Review via MR]
  • Shareholder litigation: “New ‘loser pays’ standard could curb abusive lawsuits” [Examiner editorial] Delaware take note: corporate by-law changes that cut off fee-seeking opportunism deserve acclaim [Keith Paul Bishop via Bainbridge]
  • NYT was hot on “Goldman Sachs manipulated aluminum market” allegations but judge wasn’t [Reuters, July 2013 NYT]
  • CFPB might shrug off discrimination and retaliation charges, but many of the firms it regulates could not afford to [Hans Bader]

“The Justice Department has a suggestion for banks hoping to avoid criminal charges: Rat out your employees.” By agreeing to throw individuals under the bus, the company as a whole will qualify for valuable cooperation credits. [Ben Protess, New York Times "DealBook"] On a similar culture-of-informants theme, Eric Holder is proposing to further boost bounties for Wall Street informants into more massive contingency-fee territory: “Mr. Holder will urge Congress to allow bigger whistleblower rewards under the 1989 Financial Institutions Reform, Recovery and Enforcement Act…. Current law caps any Firrea whistleblower payment at $1.6 million.” [Wall Street Journal, earlier coverage and specifically]

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“…is bad for the rule of law and for capitalism,” opines The Economist, saying regulation-through prosecution has become “an extortion racket,” from hundreds of millions in Google drug-ad settlement money spread among Rhode Island police departments, to New York Gov. Andrew Cuomo’s muscling in to extract money from BNP Paribas in a settlement of legal offenses against U.S. foreign policy as distinct from New York consumers:

Who runs the world’s most lucrative shakedown operation? The Sicilian mafia? The People’s Liberation Army in China? The kleptocracy in the Kremlin? If you are a big business, all these are less grasping than America’s regulatory system. The formula is simple: find a large company that may (or may not) have done something wrong; threaten its managers with commercial ruin, preferably with criminal charges; force them to use their shareholders’ money to pay an enormous fine to drop the charges in a secret settlement (so nobody can check the details). Then repeat with another large company. …

Perhaps the most destructive part of it all is the secrecy and opacity. The public never finds out the full facts of the case, nor discovers which specific people—with souls and bodies—were to blame. Since the cases never go to court, precedent is not established, so it is unclear what exactly is illegal. That enables future shakedowns, but hurts the rule of law and imposes enormous costs.

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Via Politico, a WSJ news item from last month that should not pass unremarked:

New York’s banking regulator is pushing to install government monitors inside the U.S. offices of Deutsche Bank and Barclays … as part of an intensifying investigation into possible manipulation in the foreign-exchange market … The state’s Department of Financial Services notified lawyers for the two European banks earlier this month that it wanted to install a monitor inside each firm, based on preliminary findings in the agency’s six-month currencies-market probe … Negotiations are continuing over the details of the monitors’ appointments, but New York investigators expect to reach an agreement soon.

The regulatory agency has selected Deutsche Bank and Barclays for extra scrutiny partly because the records it has collected so far from more than a dozen banks under its supervision point to the greatest potential problems at those two banks, the people said. Plus, Deutsche Bank and Barclays are among the dominant players in the vast foreign-exchange market, so investigators hope a close-up view into their businesses will help them observe other players and trading patterns [emphasis added -- W.O.].

We’ve covered the expanding role of settlement and litigation monitors in past posts, and noted the seemingly arbitrary and unaccountable powers these monitors may exercise during their stay within the enterprises to which they are embedded. But there’s something novel (isn’t there?) about the installation of monitors loyal to state overseers whose mission includes watching other firms and market players besides the one that has admitted misbehavior (or has been found by a court to have misbehaved). When you have dealings with a company, and perhaps decide to entrust your sensitive personal or business data to it, should you be worried that it wind up crossing the screen or desk of a quietly emplaced monitor reporting back to Albany, or perhaps Washington?

Operation Choke Point

by Walter Olson on July 31, 2014

Cato event held earlier this month with Rep. Darrell Issa (R-Calif.) and Cato senior fellow Mark Calabria. Here’s the description:

Launched in early 2013, “Operation Choke Point” is a joint effort by the Department of Justice (DOJ) and the bank regulators to limit access to the bank payments system by various businesses. Initially targeted at small-dollar nonbank lenders, Choke Point has grown to cover a variety of legitimate, legal businesses that just happen to be unpopular with DOJ, such as gun dealers and porn stars. Initial responses from DOJ claimed such efforts were limited to illegal businesses committing fraud. A recent report by the U.S. House Committee on Oversight and Government Reform reveals DOJ’s claims to be false. In today’s economy, almost any economic activity depends on access to the payments system; allowing DOJ, without trial or a right to appeal, to arbitrarily limit access represents an almost unprecedented abuse of power.

Earlier here. More: House hearing; Funnell.

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WSJ editorial this morning: “We hold no brief for Citi, which has been rescued three times by the feds…. [But] good luck finding a justification for [the $7 billion figure] in the settlement agreement. The number seems to have been pulled out of thin air since it’s unrelated to Citi’s mortgage-securities market share or any other metric we can see beyond having media impact.

“This week’s settlement includes $4 billion for the Treasury, roughly $500 million for the states and FDIC, and $2.5 billion for mortgage borrowers. That last category has become a fixture of recent government mortgage settlements, even though the premise of this case involves harm done to bond investors, not mortgage borrowers.” More: Bloomberg. And the settlement directs Citigroup to hire former Eric Holder associate Thomas Perrilli, now at Jenner & Block, for a monitorship that is likely to prove an extremely lucrative plum [Reynolds Holding, Alison Frankel] Also: Ira Stoll.

  • In banking and FCPA cases, targets of DOJ prosecution are disproportionately firms domiciled abroad, and other countries do notice that [Jesse Eisinger, NYT "DealBook"]
  • “Los Angeles’ Confused Suit against Mortgage Lenders” [Mark Calabria, Cato] Providence also using disparate impact suits in hopes of making banks pay for its housing failures [Funnell]
  • Podcast discussion on Operation Chokepoint with Charles J. Cooper, Iain Murray, and Todd J. Zywicki [Federalist Society, earlier]
  • New round of suits against banks based on ATMs’ imperfect wheelchair accessibility [ABA Journal, earlier here]
  • Walgreen’s could save billions in taxes if it moved to Switzerland from U.S. Whose fault if anyone’s is that? [Tax Foundation]
  • “Left unmentioned: how fed regulation and trial lawyers deter banks from protecting themselves with overdraft fees.” [@tedfrank on NYT report about banks' use of databases to turn down business from persons with records of overdrawing accounts, a practice that now itself is being targeted for regulation]
  • Scheme to seize mortgages through eminent domain stalling as cities decline to come on board [Kevin Funnell]

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  • Payday lenders sue federal agencies over Operation Choke Point [Bloomberg News, Business Journals, earlier; more, Funnell]
  • Speaking of those lenders: “California Supreme Court to review ‘rent-a-tribe’ arrangement for payday lenders” [CL&P, more]
  • “If someone starts trying to blame the Global Financial Crisis on ‘de-regulation’, you can stop reading…” [Lorenzo via Arnold Kling]
  • Can we just admit that the feds’ real target in the Credit Suisse case was the bank’s customers? [ABA Journal]
  • Maryland does not approve of Bitcoin [my Free State Notes via Kevin Funnell]
  • Behind Halliburton v. Erica P. John Fund, SCOTUS’s big case on securities class actions, two lawprofs are jousting [Alison Frankel, Reuters, and there's a Cato connection; earlier]
  • For expats, FATCA raises “prospect of being discriminated against as an American for all things financial” [Peter Spiro/OJ; Sophia Yan, Money] More renounce U.S. citizenship [Yahoo] A Canada-based FATCA resource [Isaac Brock Society] Earlier here, etc.

Report from Rep. Darrell Issa’s oversight committee blasts Operation Choke Point [The Hill, earlier here, here]

P.S.: More from Todd Zywicki at Volokh and Glenn Reynolds at USA Today; and earlier from American Banker and from the Washington Times (gun dealers say Operation Choke Point, FDIC guidelines squeezing their access to banks)]

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