This interesting but somewhat technical post discusses an important issue: Why has there not been more prosecution of financial fraud in this crisis? This is i large part due to the tradition of appointing trustees for the failed institution, instead of appointing receivers. This again is related to the US Bankruptcy law and legal tradition, which mistakenly has avoided appointing receivers when there are clear signs of fraud against unsecured creditors. As the post notes …
There are a number of examples where a receiver function plays an important role in fighting fraud. In case of The Stanford Group, an Article III receiver was appointed by a federal District Court without any bankruptcy to pursue a wide ranging investigation, which included efforts to conserve customer funds and pursue third parties via criminal and civil means.
He goes on to note that the FDIC is a good example of who such receiver powers could be used …
The FDIC is another excellent example of how receivership powers enable that bank agency to limit losses to the mutual insurance fund supported by insured banks and also pursue claims against bank officers, directors and other parties. Unlike a trustee in a bankruptcy, the FDIC acting as receiver has broad authority to seize assets, sue officers and directors, reject contracts and even make criminal referrals related to a failed bank.
More frequent appointments of receivers whenever fraud is suspected should restore some of the balance for unsecured creditors and lead to more prosecution in obvious fraud cases.
March 5, 2012
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FT reports today that only one out of the 29 global banks that have been requested to have “living wills” ready by year end have finalized a draft recovery and resolution plan. Some more have completed just the recovery part, but progress here is uneven. The big European banks are lagging furthest behind. According to FT this may in part be due to regional differences, as supervisors are adopting different approaches towards banks.
FT also notes that banks find it particularly hard to foresee the regulatory reaction to a crisis situation, and they therefore have to guess for example how a particular national regulator will approach a branch in a crisis; will it be resolved locally or will it be resolved by the home supervisors. As long as these important issues remain unsettled (and they have been for many decades!), it is hard for banks to complete their living will process.
January 4, 2012
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While we are at conspiracies, this incredible article in the New York Review of Books just before Xmas shows that DSK probably was subject to a “set-up” while in NY on his way to Europa last year. This in no way excuses his behavior, but tells something about the sinister world we are living in and the strong interest groups that resist changes that could hurt their power bases. A must read article! I cannot but wonder what could have been the economic outcome of 2011 if he had still been at the IMF. (Sorry, but CL is no match)
December 12, 2011
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This is an interesting post as we are drawing closer to crunch time in Europe. I agree in principle, but think it will be hard to imagine an orderly closure of any of the TBTF banks.
Meanwhile, the EU is churning on with its new crisis management directive, which will be out soon – here. From reading the early draft it doesn’t look too bad, sort of FDIC resolution type directive. So perhaps, if the real crisis can simmer for another year or so, the tools will be available for an orderly TBTF wind down?