AALS Section on Financial Institutions and Consumer Financial Services

The section program at the Annual Meeting of the Association of American Law Schools in San Francisco on January 7 this year focused on the "post-crisis" landscape. The Call for Papers panel featured papers by William Birdthistle, Jim Hawkins, Adam Levitin, Alan White and Sarah Woo.

One of my favorites on this panel was James Hawkins' (University of Houston) paper on Regulating the Fringe: Reexamining the Link Between Fringe Banking and Financial Distress forthcoming in the Indiana Law Review. Basically Jim argues that products like payday loans, pawn loans, and rent-to-own leases— might not cause as much financial distress to consumers because of the finality involved in these transactions and the amount. As such, perhaps we might reconsider whether regulators should lump these types of transactions with others. At the heart of this is what constitutes financial distress. While I am not a fan of the fringe banking products, Jim's argument that they might require differing treatment in terms of regulation is worth serious consideration. For my part, I part with him in some of the ideas regarding monetary valuation. I remain unconvinced that one person's financial distress is the same as another's due to relative economic means as a whole. For instance, a person of very limited means may experience serious financial distress when their $750 auto is repossessed and they cannot get to work, then loose their employment, etc. While the event of losing the car may have a finality in and of itself that does not continue to plague the consumer, even smaller dollar transactions can have great impact on the lives of many consumers. That aside, the finality of the transaction is worth further thought when considering regulation of fringe banking products, as is the differing impact of the size of these transactions.

- JSM

What are they teaching kids about finance and budgeting?

My eighth grade daughter just participated in a program on finances and budgeting sponsored by Junior Achievement. A Junior Achievement teen personal finance survey reports that more than half of teens are not confident that they will make sound choices in terms of credit. Moreover, nearly all teens think they should have a credit card by age 21. The survey observes:

“Teens are admitting that they don’t have knowledge of some of the basic money management skills around investing, budgeting and using credit. Despite the alarming numbers, teens overwhelmingly have high hopes for future financial stability. The poll shows we need to do a better job of ensuring our youth are financially literate. JA offers a broad range of age-appropriate financial literacy curricula, from kindergarten through grade 12.”

So, all of this sounds a little dire. Making the work of Junior Achievement even more important, of course. And perhaps a few basic tips from Suzi Orman are in order? Not surprisingly, we talk to our daughter about making wise choices and living within her means. This would include everything from buying items on sale to purchasing used items on sites like Craigslist. We also talk to her about being a good citizen in terms of the environment as well, including walking and biking when possible. That is, not everyone (particularly college students) needs a car.

I was ready to embrace the Junior Achievement concern to educate teenagers, until my daughter started asking me questions about the workbooks her teacher assigned. She understood her profile to be a college student who has a job earning about $30,000 per year. A little unrealistic for a college student, but all right. The program has the student fill out budgets. This is where my daughter had many questions and I simply could not support the choices the program expected. For instance:

1. The workbook not only mandated that she purchase a car (whether she could afford it or not), but also required her to take out a five year loan on the car. In the summer Oprah magazine, Suzi Orman yet again blasted this practice advising against car loans more than 36 months or less (7 Deals You Should Never Make). Basically, perhaps one needs to shop for a less expensive car.


2. The workbook also mandated that she replace $650 of household furnishings and that she must put it on a credit card and pay for it that way. Apparently, no option to save up and buy in cash or to purchase something used.


3. The workbook required an apartment. While the student could get roommates, there was no easy way for the student to select a less costly alternative of living in a college dormitory where utilities, rent and food are typically included.

In the end, I advised her on how to best fill out her worksheets making the least devastating decisions. She did budget for buying household furnishings with cash and saving most of the money as a down-payment for the car. While I might have been fine with this if it was designed to teach teens the devastating impact of debt, there were no comparisons to other models or advise on better decisions. I also wrote a note in the workbook for the teacher asking him not to teach our children that it is fine to enter into these types of credit and financial situations.

The result of all this? The teacher was angry with her when he saw the worksheets and gave her a D for not following the program requirements. She had waited until the last minute to finish this, so her work was not as neat as it should have been, but really? Maybe the teacher will reconsider. In the end, I'd rather her get a D on the junior achievement and an remain solvent for a lifetime. Isn't all this debt part of what lead to the financial crisis?

- JSM

Nice Teaching Case: Home Sold Twice

Ben Davis sent this link out to the contracts professors list serve. http://www.msnbc.msn.com/id/39381416/. The case involves a home sold twice . . . apparently by mistake: once as a short sale and then at foreclosure days later. The new owners, thankfully, recorded their deed and bought title insurance, but it has been quite a headache for them. The lender, not surprisingly, is claiming no wrong-doing in the matter.

I am getting ready to start methods of avoidance in the next couple of weeks and will be sure to mention this one to the class.

- JSM

Opportunity for Self Regulation?

The Financial Crisis Inquiry Commission is examining the causes underlying our current financial crisis. The National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling is charged with examining the causes and circumstances surrounding the BP oil spill in the Gulf this year. The Consumer Financial Protection Agency's job might be so large that we can only guess what it might tackle first, including credit scoring, student loans, overdrafts and payday loans (See, Six Problems the Consumer Financial Protection Agency Should Tackle First). Business interests oppose government involvement and oversight pretty broadly across the board (see, Fight Over Consumer Agency Looms, Business Groups, Obama Administration Spar Over Corporate Governance, The Case Against Corporate Social Responsibility, Businesses Buy Ads vs. Health Overhaul, US Must Control Deficit).

Yet, isn't there an opportunity here for businesses to engage in increased self oversight and regulation? One of those the best offense is a defense line of thinking. The Financial Services Forum states relative to financial oversight "[t]he Forum will continue to work constructively with the regulators charged with implementation of the legislation to create a financial supervisory framework that ensures institutional safety and soundness and systemic stability, while also meeting the financial needs of American businesses, workers, consumers, and investors." The Business Roundtable's list of Initiatives stresses outright that corporate leadership is the best way to foster trust in corporations. The Business Roundtable's list includes health care and retirement, education, fiscal policy, globalization and environmental concerns.

An aggressive list of priorities without dispute. But has business come through on these fronts? And, I mean not individual companies, but as a group? Despite the commissions investigating, new agencies and increased regulation, there is always an opportunity for business to head off looming problems, whether it is speculation, an innovation like credit derivative swaps poised to cause the next financial crisis or plain overreaching by businesses with consumers.

Self regulation and coordination is not unknown to business generally or to specific industries. Anil Gupta and Lawrence Lad commented "Researchers generally have viewed non-market regulation of firm behavior as synonymous with direct regulation by the government." Industry Self-Regulation: An Economic, Organizational, and Political Analysis. See also, Toffel, Industry Self-Regulation: What's Working (and What's Not)?. The whole idea, of course, is that self-regulation can either supplement or take the place of government regulation. While industries can engage in self-regulation more or less and in different manners, it has its effectiveness.

When I hear of businesses opposed to government regulation of a perceived problem, a common complaint is that government regulation hampers business growth generally, costs a lot and stifles innovation. While I understand that businesses want to make money off of the newest innovation, self regulation would seem to allow the financial community for instance to head off some of the systemic risks of the "innovation," such as the credit derivative swaps. Just because there is money to be made does not mean that it should be made if the "innovation" will lead to over-speculation causing a financial crisis. Yet, government regulation would not seem to always be the most efficient in these cases due to the time involved in establishing oversight of newer financial products.

Michael Toffel argues there are four main facets to self-regulation: "how the rules are designed, who adopts them, whether and how compliance is monitored, and whether these rules actually achieve what they purport to achieve." I agree that these considerations dictate whether the laudatory goals of the Business Roundtable and Financial Services Forum will have any effect on market participant behavior. Self regulation must be meaningful. While the door is open for financial services companies to show leadership on many open regulatory issues, movement is slow. With so much attention being given to opposing Elizabeth Warren as the new head of the Consumer Financial Protection Agency, perhaps business might be better served by turning to the issues (See, Warren's New Job).

- JSM

Obama Weekly Address on Financial Regulation

In case you missed Obama's address this past weekend on financial regulation, here it is:

No more taxpayer bailouts because a financial company is too big to fail was one of the key messages. Can this really happen? I am skeptical, but I guess we'll have to wait and see what the politicians agree to. Obama is correct in his assertion that something has to change in order to prevent the same crisis from reoccurring. Apparently, there will be much more coming on this issue in the near term.

- JSM

Bankers Without a Clue?

Paul Krugman wrote a nice op ed piece in today's New York Times titled Bankers Without a Clue. Krugman observes disappointingly that the bankers just don't get it. In truth, comments like the financial crisis was just a perfect storm (Goldman Sachs’s Lloyd Blankfein) and that no one could have predicted its coming (Jamie Dimon of JPMorgan Chase & Co.) are pretty unbelievable. I hope that the executives of these large financial insitutions aren't and weren't really that clueless. That said, I agree with Krugman that I don't expect the banks to give much concrete advice on financial reform. The distrust the banks have of regulators (and desire to protect their own pocketbooks) has resulted in many of the banks repaying the TARP funds as soon as possible.

Bill Thomas who is Vice Chairman of the Financial Crisis Inquiry Commission has assured us that at least the questions will be asked. Question is, whether any meaningful financial overhaul will come from this?

-jsm