DS News

16 DEBATE OVER 'TOO BIG TO FAIL' CONTINUES INTO THE NEW YEAR e question as to whether "too big to fail" no longer exists or is being codified by the government continued to be a hot button topic as 2015 wound down—and the debate isn't slowing as 2016 begins. e Dodd-Frank Wall Street Reform Act of 2010 contained a provision limiting the Fed's ability to engage in emergency lending and lending to programs with "broad based" eligibility, and was billed as the end of "too big to fail." e Dodd-Frank prohibits the Fed from lending to insolvent entities. However, the Fed issued a final rule in November 2015 that expanded the definition of insolvency to include borrowers who fail to pay undisputed debts as they become due 90 days before borrowing—or borrowers who are determined to be insolvent by the Fed or lending Reserve Bank. Some in the industry were skeptical that the Fed's final rule issued in November would be effective at ending emergency bailouts of large financial institutions. Among the skeptics was Ed Delgado, President and CEO of the Five Star Institute, who stated, "While the clarification of 'broad-based lending' is designed to limit the types of bailouts the industry realized in 2008, at the same time, the Fed expanded the definition of 'insolvency' ostensibly, given the circumstance, permitting lending to entities that may actually be insolvent. So I question how much of an impact this new rule will really have?" Too big to fail has been heavily debated in the House Financial Services Committee, most recently in early December when the Committee held a hearing to discuss whether or not the Financial Stability Oversight Council (FSOC) is codifying "too big to fail" by designating certain financial institutions as "systemically important." e FSOC's criteria for such a designation has also been greatly contested. e FSOC is an agency created by Dodd-Frank that consists mostly of the heads of government regulatory agencies. House Financial Services Committee Chairman Jeb Hensarling stated in late November, "Designation (of an institution as systemically important) anoints institutions as "too big to fail," meaning today's SIFI designations are tomorrow's taxpayer-funded bailouts." e topic of whether or not "too big to fail" still exists was at the forefront once again on Friday, January 22, when the Hoover Institution and the Bipartisan Policy Center hosted an event in Washington, D.C., titled "Ending Too Big to Fail: Reform and Implementation." e event feature remarks by Hoover Institution Senior Fellow John Taylor and the University of Rochester's President Emeritus omas Jackson, and included a panel of experts discussing the effectiveness of new capital requirements toward preventing short-term liquidity shortage, what changes are necessary to the Bankruptcy Code to limit financial distress, and whether or not proposals by the FDIC ensure that a resolution is certain. e event is a follow-up to the Bipartisan Center's white paper, "Too Big to Fail: e Path to a Solution" and coincides with the release of the Hoover Institute's book, (Making Failure Feasible: How Bankruptcy Reform Can End Too Big to Fail.) In September 2015, a study by Norbert J. Michel, Research Fellow in Financial Regulations, the Institute for Economic Freedom and Opportunity at the Heritage Foundation, concluded that Dodd-Frank still allows the Fed to engage in the type of emergency lending that the industry saw back in 2008 despite its claims that the controversial law had ended "too big to fail." WILL ROYAL BANK OF SCOTLAND BE THE NEXT TO SETTLE RMBS FRAUD CLAIMS? e recent settlement between Gold- man Sachs and several regulators, including the U.S. Department of Justice, for $5 billion to resolve claims of RMBS fraud has fueled speculation among analysts that the Royal Bank of Scotland (RBS) will reach a settle- ment soon to resolve claims. e British-based RBS is one of 18 financial institutions sued by the Federal Housing Finance Agency (FHFA) in 2011 to recoup U.S. taxpayer costs following the government's $187.5 billion bailout of Fannie Mae and Freddie Mac in 2008. e RBS suit is the last of 18 cases not resolved either through trial or settlement. Out of the 18 lenders sued, 16 of them settled for a combined total of about $17 billion. Nomura Holdings took FHFA to trial in March for a case in which RBS was also a defendant. After a two-month bench trial, Nomura was found liable for deceiving the GSEs in the sale of $2 billion worth of mortgage-backed securities and was ordered to pay $839 million in penal- ties. Nomura has appealed the verdict. FHFA sued RBS in the U.S. District Court in Connecticut over the selling of approximately $32 billion worth of faulty mortgage-backed securities to Fannie Mae and Freddie Mac before the crisis. FHFA claims that the GSEs relied on false and misleading statements made by RBS when purchasing the mortgage-backed securities, causing the Enter- prises to suffer massive losses. Reports surfaced in early July that the FHFA, conservator of Fannie Mae and Freddie Mac since 2008, is seeking up to $13 billion in damages from RBS in the lawsuit. e bank had set aside about $3 billion for a possible settlement. RBS did not immediately respond to a request for comment on whether or not there will be a settlement or if the bank plans to take FHFA to trial. Analysts believe regulators would like to have the case resolved before the presidential race heats up in the coming months. Last year, RBS attempted to have the lawsuit dismissed on the grounds that the FHFA waited too long to sue. In August 2015, however, a federal judge denied RBS' attempt to have the suit thrown out. RBS has settled with the FHFA before over mortgage-backed securities. In June 2014, RBS agreed to pay $99.5 million to settle a separate FHFA suit claiming that the bank sold more than $2 billion worth of faulty mortgage-backed securities to Fannie Mae and Freddie Mac between 2005 and 2007. Several large financial institutions have settled with the U.S. Justice Department and state regulatory agencies to resolve claims of mortgage-backed securities fraud: Citigroup for $7 billion in July 2014, JPMorgan Chase for a then-record $13 billion in November 2013, and Bank of America for a record $16.65 billion in August 2014.

• Cover