The Illinois Business Law Journal

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.

USA PATRIOT Act, Title III: The Efficacy of Anti-Terrorism Financing Measures

I. USA PATRIOT Act, Title III

On October 23, 2001 President George W. Bush signed into law the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA PATRIOT Act," or "Patriot Act"). [1] Since its enactment in 2001 and subsequent partial reauthorization in 2005, many financial institutions have struggled with the high cost of complying with Title III of the Patriot act and the stiff civil and criminal penalties for those who fail to comport to its requirements. [2] The Act's adoption of an expansive definition of the phrase "financial institution" has increased its range of regulation with portions of the Patriot Act affecting a profusion of entities ranging from commercial banks to travel agencies to casinos. [3]

Of primary concern for financial institutions is Title III of the Patriot Act, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001 ("Title III"). [4] Title III substantially amends the Bank Secrecy Act of 1970 ("BSA") by enhancing reporting obligations, toughening standards for transaction structuring, and requiring the implementation and oversight of customer identification and anti-money laundering programs. [5] While Title III has certainly increased law enforcement's ability to investigate the records of individuals and organizations suspected of financing terrorist organizations, its capacity to thwart an attack similar to the disaster of September 11, 2001 is debatable.

Release the Hounds: NY Attorney General's Office Pursues Wall Street (Again)

    As common as it is to find thin greasy pizza in Brooklyn, it is just as common to hear that the New York Attorney General's office is launching a zealous high-profile prosecution of Wall Street. One need only whisper the name "Spitzer" in lower Manhattan to receive a response of colorful epithets and conjure up a regime that has been described as, "the most egregious and unacceptable form of intimidation we've seen in this country in modern times."[1] That is quite a statement considering some of the actions undertaken by the U.S. Justice Department in recent years. However, Mr. Spitzer is safely ensconced in the N.Y. Governor's office; are not the days of feasting on Wall Street over? Not so fast, this past week current Attorney General Andrew Cuomo's office indicated it will pursue firms suspected of "mortgage abuses" linked to the national subprime mortgage fiasco.[2] This article will explore the legal and substantive basis of the AG's interest in these Wall Street firms.

IPO of China Construction Bank

     The Initial Public Offering (“IPO”) of Industrial and Commercial Bank of China (“ICBC”) set the record for the amount of money raised among all IPOs ever made over the world. The IPO of ICBC was actually one of the steps the Chinese government had taken to privatize (or at least partially privatize) its four major commercial banks: ICBC, China Construction Bank (“CCB”), Bank of China (“BoC”) and Agriculture Bank of China. CCB and BoC already performed IPOs during the last two years and the IPO of Agricultural Bank of China (“ABC”) is scheduled at 2008. ICBC, established in 1984 when China began its capitalist turn, boasted $724 billion in deposits, 355,000 employees and 18,038 branches, more than three times as many as Bank of America, the USA's largest bank.” In this article, we focus on the listing choices of CCB, as it was the first of the four big banks to have listed itself on public stock exchanges.

Three Banks and Their SIV "Superfund" Baby

Introduction

    Over the weekend of October 13, 2007, the U.S. Treasury hosted talks with some of the largest U.S. banks with the aim of creating a "superfund" that would be used to provide stability to the shaky credit markets.[1] The meeting included some of the biggest banking institutions such as Citigroup, Bank of America, and J.P. Morgan Chase.[2] This summer brought turmoil in the credit markets as the subprime mortgage fiasco began to bear fruit, and the goal of the proposed superfund is to hedge off fears of future bank defaults as well as invigorate demand for commercial paper, which has since this summer frozen up.[3] This article will review the details of the proposed superfund, its aims, and address some criticism leveled at it as well as the government's role in the process.