In Corporate Crimes, Individual Accountability Is Elusive

News

The Department of Justice has filed over 46,000 cases against individuals for mortgage fraud since the Great Recession. Aside from Lee B. Farkas, former Chairman of Taylor, Bean & Whitaker serving a 30-year sentence, all of the other cases have been against low level employees who do not have any name recognition or even any responsibilities for much of their organizations.

http://lemonlimemoon.blogspot.com/2010/10/bailing-out-sunken-ships.html
from Leom Lime Moon at Blogspot

Explanation

The main take away is that managers really have no liabilities. The rationale seems to be that managers are not licensed professionals, so they don’t have a higher standard to meet. The main higher standard might be that a lack of knowledge absolves them of accountable because they do not have a professional’s training and certification. How could a non-professional be accountable for knowledge s/he has no knowledge about? A professional would be liable for knowing certain things about their work and if s/he doesn’t know, then the professional is accountable for not doing his/her job correctly.

Opinion

Here’s my stance on all this. The solution isn’t to prosecute non-professional managers for things they should have known. There is nothing in corporate charters that require managers to be professionals. (Here, I’m using the word professional in the traditional sense, a person who is licensed to practice a certain craft or use certain knowledge.) The solution is to make managing professionals a profession. Currently, banks are managed by people who don’t really know how to operate their own banks; they know how to manage the people who do. But shouldn’t they know how their bank operates? The answer, in my opinion, is “yes.”

So, while I don’t believe that bank holding companies need to be managed by professionals because what is needed at that level is quite different than individual bank units, these individual units should be managed by professionals in and of that field. Projecting out, what will happen in the future with this standard in place would be that future bank holding company executives will be a banker from those units.

A small group of people have argued that bank executives are professionals because almost all of them come from investment banking backgrounds and they hold Series licenses from FINRA. The problem there is that taking away their license to sell securities does not bar them from managing a people who do, let alone other bank units. My solution would solve this for the most part because people will not be allowed to climb the ladder of another bank unit without that license required to practice in that bank unit.

Economically, what will happen is that this will allow large bank holding companies to exist. But this standard will force units to shrink and many more units be created. The pyramid will be at the state-level, and executives will be plucked from those levels. Large national banks may have multi-state regions but those will also be led by former state-level unit managers, making them at least accountable for maintaining the professional standards of one profession. Eventually, the only qualified national bank managers will be people who used to run banks.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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FFIEC Means Federal Financial Institutions Examination Council

The Council is a formal interagency body empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions by the Board of Governors of the Federal Reserve System (FRB), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), the Office of the Comptroller of the Currency (OCC), and the Consumer Financial Protection Bureau (CFPB), and to make recommendations to promote uniformity in the supervision of financial institutions. In 2006, the State Liaison Committee (SLC) was added to the Council as a voting member. The SLC includes representatives from the Conference of State Bank Supervisors (CSBS), the American Council of State Savings Supervisors (ACSSS), and the National Association of State Credit Union Supervisors (NASCUS). – FFIEC

FFIEC, recently, has been very much focused on information technology and cybercrime resilience.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


CAR Mean Capital Adequacy Ratio

Capital Adequacy Ratio is both a calculation and a standard. The calculation is:
(Tier 1 Capital + Tier 2 Capital) ÷ Risk Weighted Assets

The standard is 10%.

Accounting becomes very important in the final steps of this calculation because of the classification defined by Basel III.

  • Tier 1 Capital are common stock, retained earnings and non-redeemable preferred stock.
  • Tier 2 Capital are subordinated debt, hybrid instruments, revaluation reserves and undisclosed reserves.
Photoshopped image of Alan Greenspan, former Chairman of the Federal Reserve Board

Essentially, Tier 1 are what most people think of as shares of a corporation and what the bank has earned and retained over the years. Retaining the earnings rather than using it to provide dividends is a way to increase the assets of the organization, build a reserve to be deployed when needed. Tier 2 are preferred equity and long term debt the bank borrows, leverage.

The Capital is there to fund the business when business takes a sudden downturn. The 10% standard means that business can suddenly take a 10% dive and the bank will still be solvent. When CAR is 0%, the bank must start selling its assets to pay for its debts. One way to reduce the likelihood of avoiding this level is to be able to deploy borrowed funds that are due later to pay for the ones that are due currently. While this doesn’t mean the bank is healthy, but this gives the bank time to rebuild its reserves.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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CCAR Means Comprehensive Capital Analysis and Review

The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress and that they have robust, forward-looking capital-planning processes that account for their unique risks.
As part of this exercise, the Federal Reserve evaluates institutions’ capital adequacy, internal capital adequacy assessment processes, and their individual plans to make capital distributions, such as dividend payments or stock repurchases. – United States Federal Reserve

Regions covered by the Federal Reserve Banks
Regions covered by the Federal Reserve Banks

There is no one who has had a career is CCAR because it was only created in 2010 and first performed in 2011. Previous to this exercise, a similar assessment was done under the name of Supervisory Capital Assessment Program (SCAP). It was performed once in 2009. SCAP was inspiration for CCAR, which is not performed yearly in the first quarter. The Federal reserve are in constant discussions about the test during the process and provides a previous of the assessment in March to the banks that are involved in the assessment. There are 31 banks that must participate in CCAR. Participation primarily has to do with size and market reach because CCAR is testing the financial system’s ability avoid a bank crisis.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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Hybrid Securities are debt securities with traits borrowed from equities

Hybrid securities are securities that have features of both debt and equity.

Wall Street 1929
Wall Street 1929

The classic example of a hybrid instrument is a convertible bond. This is, generally, a corporate bond with a condition attached to it. This condition states that if the equity shares of the corporation issuing the bond hits a certain valuation in the market, the bondholder will be allowed to exchange the bond for a certain number of shares. The number of shares is determined by the bond’s principal value, which is almost always $1000, and how many shares that principal could buy. For a buyer of bonds, this reduces the risk of losing out on exposure to equity if the issuing corporation does very well, without losing the status of a bond, which, as a debt, will be paid back before assets are distributed to non-debt liability holders. For the issuing corporation, usually the bonds hold a slightly lower interest rate than it would otherwise.


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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RWA Mean Risk Weighted Assets

http://corpoinsider.blog.com/2012/11/04/credit-suisse-going-under-extreme-model-makeover/
Suisse 1 Kilo Fine Gold

Risk Weighted Assets is more of a concept than an asset. When a bank lends money, there is a chance some of it will not be paid back. The “some” that might not be paid back is the RWA. The Capital Adequacy Requirement (CAR) requires banks to maintain a Risk-Based Capital Ratio. This is a simple calculation of dividing Regulatory Capital with RWA. Regulatory Capital is the amount of Tier 1 and 2 capital a bank is required to possess at all times. Ideally, a bank would like to have a high Regulatory Capital and low RWA. The risk weights inflate bank assets. While larger assets are considered a good thing on the balance sheet, generally, in this case it is not. RWA valuation is not used to meet the SEC filing requirements. It is used to meet the Basel III requirements. There are 26 classifications of assets with varying risks. Each classification requires the bank to multiply assets by a Basel II prescribed risk weight.

Conceptually, here is what RWA looks like:
The bank lends $100 to a borrower. This particular type of loan with this type of borrower has a significant chance of getting but just $95. Because the risk of lose if $5, the $100 is multiplied by 105%. For this $100 loan, it is a $105 RWA. Banks are required to hold 1/10 in the Risk-Based Capital Ratio. Without the RWA, the bank would have to hold $10 (1/10=$10/$100). But since the $100 is being changed to an RWA of $105, the bank now has to hold $10.50 (1/10=$10.5/$105).

Resources


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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DFAST Means Dodd-Frank Annual Stress Test

Dodd-Frank Annual Stress Test is a simulation that tests the financial system’s ability to remain solvent. It was enacted when Congress enacted Dodd-Frank Wall Street Reform and Consumer Protection Act, commonly know as the Dodd-Frank Act, named for its sponsors Senators Chris Dodd (Connecticut) and Barney Frank (Massachusetts).

Scenarios simulated are not arbitrary. There are 28 variables and they are based on historical economic crises. The variables are such things as rise in unemployment, rise in oil prices, rise in interest rates, fall of the GDP or a sudden equity market crash. National banks and federal savings associations are categorized into two for the simulation: those with more that $50 Billion in assets and those with less. Those with less than $10 Billion are exempt from participating in the Test.

Dodd-Frank Update.com Logo
Dodd-Frank Update.com Logo

Resources


About the Author: Marcus Maltempo is a compliance professional with more than a decade of experience helping banks, law firms and clients manage investigations and regulatory responses.


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