The Illinois Business Law Journal

The U.S. Financial Crisis: Is Legislative Action the Right Approach?

[A few short years ago, there was a country experiencing significant prosperity.  The flow of credit within the economy was fluid, stock prices were at all time highs, and many people were becoming wealthy in due part to real estate speculation and appreciation.  As the economic outlook in the real estate market was bright, banks began granting increasingly risky loans.  Eventually the bubble burst.  Inflated real estate market values began to decline, lendees found themselves unable to pay back their risky loans, and the credit markets froze.  As a result, government intervention came in the form of subsidizing failing banks and businesses.]

 In the middle of this financial crisis facing our country, one would assume this passage is referring to the United State of America.  However, this is the story of the Japanese housing bubble that burst and led to what is known as the “the lost decade.”  This article will briefly describe the legislative responses taken by the Japanese government to address their crisis, compare those to any similar one’s being taken by the US government, and comment which legislative actions may succeed or fail, and why.

Sovereign Wealth Funds-The Newest Danger Facing the U.S. Economy

I.  Introduction

Amidst a global economic ‘credit crunch,’ world economies are desperately seeking dependable sources of investment into their financial institutions, in an effort to regain liquidity into their markets, enabling lending institutions to continue their day-to-day activities. One source of such income is derived from an emerging investment tool known as a sovereign wealth fund (also known as an SWF). This article will briefly explore the development of SWFs, explain the relevance they play in the U.S. and world economy today, raise national security issues that stem from SWFs, and address recent and developing legislation in response to the growing presence of SWFs in the U.S. economy.

Sovereign wealth funds are government investment funds composed of financial assets such as stocks, bonds, real estate, or other financial instruments that are financed by foreign currency reserves.[1] Some experts have referred to SWFs as oil or natural resource funds, because a majority were created with countries excess budgets from exports of oil and natural gas.[2] Many SWFs have developed because of the rising success of emerging economies, specifically in the Middle East and Asia.[3] In recent years, growing concerns have developed over the stake that these state-owned investment funds have in the private market of the U.S. These concerns are echoed by economists and government officials over the national security of the United States, which may be compromised because of the possibility these government owned investments might be securing a stake in vital economic institutions of the country for political rather than financial gain.[4]

And the Walls Came Tumbling Down: Deregulation & the Current Financial Crisis

I. Introduction

While intellectuals, economists, bankers, and pundits try to explain the ins and outs of the economic downturn we are currently facing, many on "main street" are asking "what happened to make my 401k retirement savings account diminish so much in value since I looked at it in August?" The fact is that many hard working individuals have no idea what happened to cause the global economic downturn we are currently facing, and the explanations being put forth by most media outlets simply do not make sense to many people.

In trying to understand the situation, there are without question many factors that played a role. Trying to identify one overwhelming factor would be futile, however, this article will look specifically at the role deregulation played in the financial crisis.

The Government Response to the Wall Street Crisis

I. Introduction

In the past few weeks, the media has been bombarded with news about the events on Wall Street.  The failure of such large entities as Washington Mutual, Bear Stearns, and IndyMac has left many people bewildered and afraid.[1]  Naturally unsettled by deepening concerns over the financial markets, many people are worried about both their financial assets and the future of the economy.  While these events are unexpected, the government seems fully preparing to take charge and protect the financial market.  In addition to the consumer protections now in place, the government has also planned a $700 billion dollar bail-out plan to bolster the financial market.[2]  This article looks at the guarantees government agencies provide to consumers, some of the effects this crisis is having, and finally at the intervention measures that government is currently planning.

Primary Dealers Credit Facility: Changes for Market Liquidity

I. Introduction

On March 17, 2008, Bear Stearns, one of the oldest and largest global investment firms on Wall Street unexpectedly collapsed and was sold to J.P. Morgan Chase & Co at a fire-sale price of $2 a share in stock, approximately $236 million.[1]  With the rumors about Bear Stearns' losses in the mortgage industry circulating in the market, investors pulled their money out, the firm was short on cash, and the deepening losses left Bear Stearns with no other choice but to sell to their white knight, J.P. Morgan Chase & Co.[2]  With the help of the Federal Reserve, the acquisition price was later revised to approximately $10 per share, totaling $1 billion; however, even the revised deal was still much lower than the company's value of $20 billion in January 2007.[3]

In response to the ongoing credit crisis and the sudden crash of Bear Stearns, the Federal Reserve ("Fed") took several measures to help ease the market.  Wanting to ensure that other investment banks can avoid a crash like Bear Stearns, on March 16, 2008, the Fed Board of Governors announced a new loan program and established the "Primary Dealer Credit Facility"  ("PDCF").[4] This new program is designed to help struggling investment banks avoid a liquidity crisis.[5] 

Unauthorized Aliens and Credit Cards: Are Banks Violating Federal Law?

I. Introduction

An estimated 11.6 million unauthorized aliens [1] are currently in the United States.  [2]  This growing population has not gone unnoticed by American financial institutions.  For years banks have offered checking and some savings accounts to aliens without requiring them to prove valid immigration status.  [3]  In recent years, however, banks have widened the scope of financial products available to aliens who do not have a Social Security Number.  [4]  While the intent of these products was to provide services to green card holders and legal nonimmigrants, fairly relaxed identification requirements and the overly general specifications of the USA PATRIOT Act ("Patriot Act") allow unauthorized aliens to take advantage of these products in many situations.  [5]  Although some have argued that banks are violating the Patriot Act's Customer Identification Program ("CIP") requirement by agreeing to accept non-traditional identification to establish new accounts, this argument does not appear to be consistent with the language of the statute.  [6]   A more intriguing legal argument is the possibility that banks are violating the Immigration and Nationality Act ("INA")  by offering these products that are, at least in theory, available to unauthorized immigrants.  Specifically, some have asserted that banks are unlawfully encouraging and inducing aliens to reside in the United States in violation of section 274 of the INA.  [7]  Regardless of whether or not banks are acting in violation of immigration law, legislation has been proposed that would close the loophole allowing unauthorized aliens to take advantage of these products.  [8]  By requiring proof of a valid visa by way of an identification card issued by the Department of Homeland Security ("DHS"), Congress can allow the enormous population of legal immigrants and nonimmigrants access to financial products without also extending these benefits to unauthorized aliens. 

Fannie Mae and Freddie Mac: Setting the Industry Standard

I. Introduction

After the six year housing boom ended in the summer of 2006, home sales and prices have fallen dramatically.[1]  Overall home sales in 2007 dropped 26.4% from 2006, making it the biggest drop since the Commerce Department began keeping track in 1963.[2]  New home sales fell 18.1% in 2006 and by the end of 2007, sales dropped 56.5% from July 2005's peak home sales.[3]  In 2007, new home sales dropped 26.4%: 32.2% in the West, 26.7% in the Midwest, and 26.3% in the South.[4]  Aside from lacking sales, in areas like Las Vegas and San Diego, more than 40% of home sales in recent months were related to foreclosures.[5]  Over the past couple of years, the number of forclosures increased, home building declined, the number of empty homes increased, and the domino effect is now spreading to other areas of consumer spending.[6]  With a depressed housing market, many believe that changes in the financial and lending industry can help the market get back on track. 

Fannie Mae and Freddie Mac, the two mortgage investment giants, have undergone many changes in the past few months.  Many are relying on these regulatory changes to help ease the current housing crisis.  Three major changes projected to have a positive impact on the housing market and other financial institutions are: the new appraisal rules, the lowered capital surplus requirement, and the the temporary increase in loan limits.[7]

The Roberts Court and the Neutralization of McCain-Feingold's Corporate Finance Restrictions

I. Introduction

For over a century legislatures have struggled with the issue of how to curtail the efforts of corporations seeking to substantially influence political campaigns.  [1]  Although campaign finance regulation has taken numerous forms throughout the years, loopholes and exceptions inevitably surface despite the intentions of Congress.  [2]  Corporations have also wrestled with the conflict of advancing their own political interests at the expense of alienating potential consumers.  [3]  Congress and the courts have sent ambiguous and, at times, contradictory messages regarding the proper role of industry in the political arena--at times conspicuously leaving a route open for corporations to fund candidates and sometimes expressly speaking out against those very same methods.  [4]  The enactment of the Federal Election Campaign Act ("FECA") in 1971 [5] (and subsequent amendments in 1974, 1976, and 1979) [6] along with the Supreme Court's landmark 1976 decision in Buckley v. Valeo [7] drastically changed the permissibility of corporate involvement in political campaigns.  [8]  The controversial decision by the Buckley court to allow certain soft money "issue advocacy" while disallowing "express advocacy" [9] along with the Internal Revenue Service's ("IRS") lack of campaign contribution disclosure requirements for certain tax exempt organizations [10] created a safe haven for corporations to anonymously donate to political campaigns.  [11]  In 2002, Congress attempted to close the corporate campaign finance loophole left open by issue advocacy with the Bipartisan Campaign Reform Act ("BCRA" or "McCain-Feingold").  [12]  The BCRA withstood initial judicial review, [13] but the appointments of Chief Justice John Roberts and Justice Samuel Alito to the Supreme Court in 2005 and 2006 [14] created a shift in the Court, which has re-opened the loopholes created by the Internal Revenue Code ("IRC").  [15]  The Roberts Court should defer to Congress and disallow issue advocacy by tax exempt trade organizations, creating greater campaign transparency and closing this loophole which facilitates corporate political financing.

Shades of Gray: A Perspective Behind the Skrobot Indictment

    The old legal maxim proceeds, ignorantia juris non excusat or, "ignorance of the law, is no excuse!" This ancient truism, thought to have its origins in Roman law, was eventually folded into the American legal system through the early English colonialists. The maxim reflected a common reality that much of law, particularly criminal law, was understood to be based on the natural and eventually, Canon law. A knowledge of such laws was thought to be held generally by all in common, the law written on the heart, so they have no excuse, as St. Paul refers to it.[1] However, much of that common traditional understanding, and particularly the natural law, has been jettisoned by modernity. To fill the void for our pluralistic and disjointed world, we have adopted a sterile, strict, and exclusive form of legal positivism. Reams and reams of state and federal statutes, municipal codes, administrative decisions, executive decisions--and yet the maxim, ignorantia juris non excusat, lurks in the shadowy background like a phantom from the past. Congress, state legislatures, and even hoards of bureaucrats all tinker with or develop laws and rules that are potentially enforceable against people who have presumed knowledge of the law, as well as its interpretation through case law. 

Payday Lenders: Luring the Elderly into the Debt Trap

I. Introduction

During the past few months, the credit crunch has spread to all areas of the credit market, including: commercial real estate mortgages, student loans, and even auction-rate securities that are considered as safe as cash.[1]  In attempt to prevent further loss, many lending industries have tightened lending standards to the extend that some consumers have found obtaining a loan or even a credit card more difficult.[2]  At a time where borrowing money has become harder, people with bad credit and low income are flocking to lenders that are willing to fill their wallets with no questions asked. The “payday” loan industry is growing rapidly and is known for its quick and easy lending.[3]  Although the quick and easy money may seem attractive, the outrageously high interest rates are leading payday loan users into an inescapable debt trap.[4] Aside from high interest rates, another critical problem surrounding the payday loan industry is its practice of targeting the elderly and other recipients of government benefits.[5]  The elderly falling victim to these predatory lenders has only grown over the years, and this exploitation calls the need for regulation and strict enforcement.