Bank Lawyer's Blog

The Latest, If Not Greatest

Updating a couple of stories we've been following:

Marc Dann resigned today, proving that even someone devoid of shame can read the handwriting on the wall when it's spray painted on the wall with HUGE CAPITOL LETTERS. Ohio Democrats wanted him out, filed articles of impeachment on Tuesday and on the same day the Governor authorized an investigation by Ohio's Inspector General, which got rolling this morning.  Good bye Crusader Dann, The Mortgage Cop (paid subscription required). You can always join your role model, Eliot Mess, as an associate in his law firm, Spitzer & Dupre Associates. Maybe you'll even make your own Top Ten List.

TJX, the subject of a massive security breach that resulted in the theft of 90 million stolen credit card account numbers and hundreds of millions of dollars in claims, has recently "suffered" from increased sales (paid subscription required). Ben Worthen of The Wall Street Journal's Business Technology Blog isn't happy about it.

For those of us who care about tech security – admittedly a smaller group than those who care about cheap clothes – the results are disheartening. And they raise two questions: 1) Why don’t customers avoid businesses that mishandle their personal data? 2) Why should businesses care about protecting customer information if the public doesn’t care?

We think we know the answer to the first question: It’s not customers who suffer when someone uses their credit cards — it’s the bank that issued the card. Sure, a customer has to go through the hassle of getting a new card, but this doesn’t cost any money. We recently spoke to one man who’s had his credit-card number stolen seven times. He now views getting a new card as routine.

We don’t know what to do about the second question, though. Breaches are bad PR, and the business leaders we’ve spoken to whose organizations have lived through one make it sound like an ordeal that they wouldn’t ever want to repeat. But it’s hard to see how businesses that haven’t gone through a breach would look at TJX’s numbers and conclude that they need to spend more on security technology and train employees to behave differently.

Yep, it's the banks that suffer and it's the banks that have been suing (well, along with every other aggrievede party that class action lawyers can dig up). Bank Litigation: a growth industry. This is a great country, is it not?

As to Worthen's second worry, that TJX's example will make businesses less concerned about security technology, that's not an option for banks. First, their business depends on being secure. A leaky bank bleeds customer goodwill, and reputational risk is a safety and soundness consideration, too. Which leads us to the more important consideration, that bank regulations and guidelines require banks to be concerned about technology security, whether or not they'd otherwise be interested. Finally, since banks, especially credit card banks, are often on the hook for costs associated with replacing compromised credit cards, they have an incentive for making sure that the merchants they do business with give a hoot about technology security.

Still, consumers can be "sheeple" on occasion, can't they?

Not So Astonishing

Law professors Elizabeth Warren and Adam Levitin over at Credit Slips have got themselves worked up about "a new idea," an "astonishing" one (according to Professor Levitin), concocted by those dastardly  national banks and federal thrifts: "They  shouldn't have to obey state law when they foreclose on someone's home." That would exercise me, too, if it were true. I'd even agree with Professor Levitin that it demonstrates plenty of chutzpah and with Professor Warren that "the scope of this argument is stunning," except I don't see that national banks and federal thrifts are making that argument, at least not based upon the source cited by the professors.

The article, written by the American Banker's Cheyenne Hopkins, states that national banks are considering a challenge to changes to state foreclosure laws that would, in fact, severely impair the lenders' contractual rights under the loan documents. Foreclosure moratorium laws, for example, would likely not generate a  challenge unless the moratorium period was excessive (an eye-of-the-beholder judgment, I acknowledge). However, some states are going well beyond traditional foreclosure matters.

Some of these measures would go further than delaying foreclosures and include changes to a loan's terms or underwriting standards — provisions that are more easily preempted by federal regulators.

The state measure causing the industry the most angst is a Minnesota one that, in addition to allowing a year delay in foreclosure proceedings, would allow a struggling borrower to make monthly payments equal to the minimum monthly payment when the loan was originated or 65% of the monthly payment at the time of the default, whichever is smaller.

Many industry representatives say that would be going too far, since it would affect how a bank can do business — a criteria that more clearly falls under preemption power.

"There comes a point where states and localities are using foreclosure laws as a pretext or to impair the enforceability of lawful loans, and that's the point where preemption may come back into the picture," said Laurence Platt, a lawyer at Kirkpatrick & Lockhart Preston Gates Ellis LLP. "A little bit of breathing room for the borrower is not going to trigger preemption, but if they in fact choke the lender to death by effectively declaring the loan unenforceable with its terms, that will trigger constitutional and preemption issues."

That hardly seems like an "astonishing" position to take, nor does it demonstrate much chutzpah, unless refusing to stand by, drooling, while your contractual rights are abrogated by a change of state law, when settled federal preemption principles would prevent that from occurring, now constitutes chutzpah. It seems more like sechel to me, but then my Yiddish is a bit rusty. 

My friend and former partner Joe Lynyak also correctly notes in the article the practical risks of national banks taking an aggressive position vis-a-vis state foreclosure laws.

"If someone is going to take an aggressive stance regarding preemption, the concerns are reputational risk in front of the public for taking the legal position, and the the legal risk that ultimately the claimed preemption is either not found to be valid or the validity of the foreclosures are then called into question," said Joe Lynyak, a partner at Buckley Kolar LLP. "This is really right at the edge of the battle on preemption and is a very, very complicated analysis."

Joe's now with Venable LLP, by the way, but I doubt that change would change his position on the issues. By "very, very complicated analysis" I think he means "very, very expensive." At least, that's what I meant when I used the term back when I was an equity partner in "Big Law."

Perhaps the professors have access to other articles or court cases where these "astonishing" threats of federal preemption of local foreclosure laws have been made by national banks or federal thrifts. If so, they should cite them, because based upon the lone article they do cite as the basis for their concern, I'd say they're exercised about a non-existent threat.

To be fair, however, I have to admit that the OCC's quest for power is insatiable. I've previously warned that the OCC's need for lebensraum will eventually compel it to make a bid for universal domination. Therefore, I can appreciate why the professors, both apparent consumer champions, might assume the worst. Eventually, they'll be correct. On the other hand, I plan on joining the OCC stormtroopers right before the final blitzkrieg that will be launched to wipe out the National Association of Realtors and bring all consumers everywhere (even on that frozen rock, the former "planet" Pluto) under the jackbooted heel of the OCC. I'm superficial enough to always back the winner, but cautious enough not to jump on board while the outcome's still in doubt. I'll know the time is right to start sucking up to the OCC when we finally repeal that pesky Tenth Amendment.

Sheila's Singing The Same Old One-Note Samba

Sheila Bair won't quit. Like the Everyready Bunny, she just keeps going, and going, and going, on and on, singing the same old tired, sad, off-key tune. The fact that her intended audience continues to passively-aggressively ignore her when she talks to them and, when her back's turned, to give her a derisive middle finger, not only doesn't discourage her, it apparently energizes her. Obviously, she's deep into the D/S scene, and not on the "dominant" side of role playing.

In today's The Wall Street Journal, reporter Michael Crittenden faithfully reports yet another public yap-fest by Sheila in which she berates "[p]olicymakers, banks and other players in the housing market" for continuing to review loan portfolios "loan-by-loan" instead of just grabbing huge fistfuls of subprime loans and implementing "a more systematic approach to moving homeowners into more affordable loans." In other words, damn the facts and rational analysis, damn concepts of equity, damn what people in the mortgage business might consider to be in their own best financial interest, full speed ahead!

A normal, rational person who heads a powerful government regulatory agency might actually start to rethink a position if those who are supposedly subject to her influence pay her lip service, then continue doing things the old fashioned way.  Obviously, the "players in the housing market" have decided something: Sheila's not a player, or, if she is one, she can go play with herself.

Since we're talking about a career pol and academic, however, here's an idea for Sheila to chew on. Since she obviously knows better than other market participants what's in their own best interests, her position on wholesale loan modifications MUST BE the path to safety and soundness for the financial institutions the FDIC insures. As to those market participants who are subject to the FDIC's regulatory control, which, frankly, since she's so obviously right, would include all FDIC-insured institutions, even those whose primary federal regulator might not be pushing the same agenda as Sheila, she should be forcing them to adopt wholesale loan modification programs. Since the OCC, the OTS and the Federal Reserve don't know slime-from-shinola about this issue, and state bank and thrift regulators are equally ignorant and/or ineffectual, the FDIC should use its primary and backup enforcement authority to force the issue, to make these cretins fall in line. Any rational person would have to agree that a loan-by-loan analysis is not acceptable, right, so force those participants that you can reach to do what you want them to do.

In other words, Sheila, put up or shut up. The jawboning isn't working and is making you look not only foolish, but weak, which in D.C., is the bureaucratic kiss of death.

It might be that Ms. Bair realizes that she's on the sidelines and is not attempting to do anything other than conducting a PR campaign to build up her gravitas for her next job as the head of ACORN, a professor of finance at Bryn Mawr, or the Consumer Credit Commissioner of a state of her choice. Colorado's in the process of turning from red to purple, which ought to make it an attractive (or at least tolerable) destination for someone like Sheila (plus, she'd be only an hour away from radical snowboarding venues). So no one misunderstands where Ms. Bair's coming from in this "hurry-up-and-modify" world she lives in, she "demolished" the entire idea that there are any borrowers who might not be entitled to a loan modification.

She stressed the need for consumers to contact counseling groups and their lenders to try and prevent foreclosures. But describing a recent foreclosure prevention event she attended in California, Bair said policymakers need to better address the plight of consumers.

"I think we miss the human side of how this is impacting borrowers," Bair said, criticizing efforts by some policymakers to cast troubled borrowers as investors or speculators.

  "I didn't see a lot of house flippers," Bair said of the California event.

Ms. Bair attended an event in California and did not see "a lot of house flippers" there. Which is evidence of nothing, except that Ms. Bair views the world through a glass darkly.

Is it 2009 yet? Is there a new administration in the White House yet?

What We Have Here Is A Failure To Truncate

The Wall Street Journal's Law Blog had an update last Friday about the status of class action lawsuits filed by aggrieved consumers (in other words, by class action attorneys who've "discovered" lead plaintiffs) to punish merchants who left too much information on electronically-printed credit card receipts in violation of the Fair and Accurate Credit Transactions Act (FACTA). Oddly, the Law Blog's link to FACTA ties to a Yahoo article by Chris Kelleher ("an award-winning small-business advisor and attorney") about the disposal requirements of FACTA, not the truncation requirements. Oh well, "close" is enough in horseshoes and law blogging, right?

The latest post is an update of a post earlier in April that discussed a split in lower courts, with one trial court denying class action status partly on the basis of an "annihilation defense" (class action damages would "annihilate" the defendant), and another court declining to strike down class certification on that basis. One commenter to that post points out that the "overwhelming majority" of the 300 class action lawsuits filed involve the failure to delete the expiration date of the consumer's credit card on the receipt, not all but the last five digits of the credit card number. The commenter alleges that "[t]he expiration date is of NO benefit to an identity thief..." I'm not certain that's correct, since it's one piece of information that, taken with others, can aid an identity thief. Moreover, its elimination is technically required by FACTA, and the failure to delete it exposes these defendants to between $100 and $1,000 per class plaintiff (and, of course, the always-beneficial-to-society class action attorneys' fees), so there you have it. If the plaintiffs can prove reckless or willful disregard for the law, then the upper limit of damages is a real possibility.

A commenter to the earlier post who claims to be an attorney whose firm is defending some of these suits makes the claim that the liability should be covered by the retailer's liability insurance, and, therefore, "so as long as we can keep the settlements reasonable, it won’t spell the end of the companies (just their ability to acquire reasonably-priced insurance in the future)." That's certainly a very practical take on the problem. Once again, the insurance company pays over the short run, but everybody pays over the long run through higher premiums, although this isn't an issue that's likely to be recurring, is it?

It might be because I followed FACTA so closely for some of my clients, but I'm not sympathetic to the ignorance of retailers, especially some of the large ones, who claim ignorance of the law (never a sufficient excuse in any event). In an article in last April's WSJ, an attorney for a retailers trade group blamed credit card companies for doing a lousy job of notifying retailers. I thought that was the job of retailers trade groups.  I simply don't see the equities lying in favor of the businesses in this case. With identity theft such a high profile crime, and with the  lead time provided to businesses to comply, the stick-your-head-in-the-sand approach doesn't seem to garner much sympathy, notwithstanding the fact that, once again, it's our favorite punching bag, class action plaintiffs' attorneys, trolling town for consumers with "nontruncated" credit card receipts.

At least one commenter claimed that class action litigation caused companies to change their practices, which is undoubtedly true, and which is used a justification for class actions. Ironically, a publication from September 2007 on this topic by Jones Day offers "prompt corrective action" as a tactic for defeating class action status.

At least two federal district court judges have denied class certification for these types of cases. When comparing the plaintiffs' failure to show any actual harm against the potential harm to the defendants in the tens of millions to hundreds of millions of dollars, the court determined that class actions were not the best method to adjudicate these claims...That both defendants immediately corrected their error upon filing of the complaints served as a major consideration behind these decisions...

Maybe an indication as to how much of a non-issue this hubbub might eventually turn out to be is demonstrated by the settlement outlined in the most recent Law Blog post.

In a settlement approved on Tuesday in the Western District of Pennsylvania, Kings Family Restaurant agreed to offer the plaintiff-class one of the following four options:

• a free ‘appeteaser’ and a free mini-sundae, with a retail value of up to $ 4.68; or

• a free homemade bowl of soup and a free slice of apple or pumpkin pie, with a retail value of up to $ 4.78; or

• a free cup of soup and a free ‘appeteaser,’ with a retail value of up to $ 4.38; or

• a free dinner salad and a free single scoop of Kings Premium Ice Cream, with a retail value of up to $ 4.38.

According to the opinion, defendant has further agreed to donate 500 gift certificates for kids’ soft drinks, with a retail value of $ 0.99 per drink, to First Tee, a non-profit organization which offers underprivileged children the opportunity to play golf. Defendant also agreed to pay plaintiffs attorneys fees and costs not to exceed $75,000.

The Law Blog states that only 165 class members (less than 1% of the class) obtained "coupons" (I assume the author meant the right to obtain the free "goodies" offered by the restaurant), which meant that the attorneys fees exceeded the recovery by 100 to 1. That's a relatively sweet deal for the lawyers, but not much reward for the class members, unless you're into "appeteasers."

As a parting observation, you have to love the comment by one anonymous person, presumably a lawyer: "I say 75 k is not worth my time." No wonder so many people hate lawyers.

A Bi-Partisan Roll Back? Don't Bet On It

Since the US Congress spends a great deal of its time making life miserable for financial institutions in this country, your ears perk up when legislators on both sides of the aisle make noises about easing the regulatory compliance burden on banks, especially when the bi-partisan effort concerns legislation that was passed relatively recently.

Members of the U.S. House Committee on Financial Services are trying to pass legislation that would stop the federal government from implementing regulations requiring financial institutions to police Internet gambling.

Committee Chairman Barney Frank, D-Mass.; ranking member Ron Paul, R-Texas; and committee members Luis V. Gutierrez, D-Ill., and Peter King, R-N.Y., sent a letter to all members of Congress seeking support. They said that representatives from the regulatory agencies have admitted there are "substantial problems" with creating regulations under the Unlawful Internet Gambling Enforcement Act of 2006 without hindering payment systems.

The UIGEA requires civil and/or criminal penalties for banks, credit card companies, and others who process Americans' payments to gambling Web sites. Supporters say it would prevent underage and compulsive gambling. Opponents argue that it violates U.S. citizens' constitutional rights and sets a dangerous precedent for Web commerce by criminalizing the transfer of funds if the end result is illegal.

Frank and Paul introduced H.R. 5767 earlier this month. The bill would stop the Department of the Treasury and the Federal Reserve System from proposing, prescribing, or implementing regulations required by UIGEA. Frank, Paul, Gutierrez, and King also asked the Treasury and Federal Reserve System to stop creating and enforcing regulations related to UIGEA.

"Given the many other priorities that are pending at your agencies ... we believe it would be imprudent for you to devote additional agency resources to this Sisyphean task," they explained in letters to the leaders of the Treasury and Federal Reserve.

Bankers and their trade groups have been moaning about this expected burden for some time. It's bad enough that the government expects banks to be cops where terrorists and organized (and disorganized) criminals are using the financial system to commit serious crimes, but expecting them to crack down on college kids playing No Limit Texas Hold 'Em over the Internet with the likes of Phil Laak and Jennifer Tilly is too much. At least, Ron Paul and Barney Frank agree that it's too much. We'll see where this goes. 

It's obvious that the US Government would like to sing its fangs into the neck of online gambling in some fashion, and it's obvious why.

PricewaterhouseCoopers predicted that regulated Internet gambling could generate between $8.7 billion and $42.8 billion in federal tax revenue during the first 10 years.

You could fund a lot of pork with such a tidy sum.

Just think how much they could raise if they decided to legalize and regulate Internet sales of weed?

Even if Congress fails to launch the "final solution" to the subprime mortgage "crisis" before the election, let's hope that they can at least continue a bi-partisan effort to gut this bad  piece of legislation before banks actually have to comply with it.

MMMMMMM! Chocolate!

Two years ago we reported on the views of law professor Fred Cate that when it comes to privacy protection, banks cannot rely on consumers to do the right thing.

One of the other points that Cate made in his speech, if not in his articles, is that privacy legislation (such as Gramm-Leach-Bliley) and security breach notification legislation makes the assumption that decisions concerning, and control of, personal information is best left to the consumer. In one study cited by Cate, the vast majority of consumers approached on the street who were offered a discount card to Starbucks in return for revealing the user name and password to their workplace computer willingly made the exchange. Another fact cited by Cate is that the vast majority of identity theft is the result of negligent actions or omissions of consumers.

Recent reports confirm that Cate's view is sound.

A survey out today by the organizers of the tech-security conference Infosecurity Europe found that 21% of 576 London office workers stopped on the street were willing to share their computer passwords with a good looking woman holding a clipboard. People were offered a chocolate bar in exchange for the information. More than half of the people surveyed said they used the same password for everything.

As depressing as the survey may be for the security pros whose job it is to keep corporate networks safe, the results are a substantial improvement over last year. That was when 64% of people were willing to give away their passwords. But there were other disturbing signs this year: 61% of workers surveyed shared their birthdates and a similar number – 60% of men and 62% of women – shared their names and telephone numbers.

This doesn’t sound particularly damaging, but cyber criminals could use this information to craft so-called phishing emails that install malicious computer code when opened or try to convince people to cough up more damaging information like a bank account number.

It’s easy to dismiss this kind of threat as more imagined than real, but consider that this week, around 20,000 corporate executives received phishing emails that purported to be a subpoena. The emails seemed authentic because they addressed the execs by name and included their phone numbers, the Washington Post reports. By clicking on the link in the email and following the directions supposedly required to view the subpoena, the executives installed software on their computers that can steal usernames and passwords. So far, the scam has netted around 2,000 victims, according to the Post.

Stupid is as stupid does, right Forrest?

Big Law Feasts On Subprime

I don't know about my readers, but when I see a headline like this one from a recent issue of the Houston Business Journal ("Law Firms Brace For Subprime Fallout"), I envision  a gaggle of shysters locked in an office, hard hats perched on heads to shield their big brain pans, grasping two-by-fours that brace the ceiling against an onslaught of subprime turkeys plummeting to their doom from a helicopter hovering above, like in that old episode of WKRP in Cincinnati ("Oh, the humanity!" "As God is my witness, I thought turkeys could fly."). But, no, that would be inaccurate. Instead, large law firms, in Houston at least, are merely licking their chops over what's for dinner: litigation, bankruptcy, and various other forms of plague and pestilence.

Fulbright & Jaworski LLP's six-month-old global subprime practice numbers 100 attorneys. Most firms are starting small with units of 10 to 20 litigators, corporate bankruptcy specialists and white-collar crime lawyers.

Andrews Kurth LLP has assigned 13 lawyers on an ad hoc basis to the firm's newly formed subprime and distressed assets group.

"It's something we've been talking about a while," says Tom Perich, Houston managing partner for Andrews Kurth. "Our thought was that we're big in all these areas that were impacted, it seems like we know all aspects of this thing, and we've got the lawyers and finance experts."

[...]

Perich says the group likely could grow to dozens considering all signs indicate there will be plenty of work to go around.

"The front-line action is going to be lawsuits," he says. "People are going to be suing each other, so you've got to have front-line litigators. They need the subject expertise behind them."

The article doesn't note it, but I'm convinced that he punctuated his remarks about these joyful prospects with just the littlest line of drool running down his chin. When so many carcasses are being broiled over an open flame, the smell can drive you wild. You know you're in nirvana when it smells like subprime spirit.

And when it comes to economic disasters involving banks and real estate loans, where better to find your hired guns than The Great Republic?

The transition into subprime practice was not difficult. Many Texas law firms saw significant work in similar areas during the bust years of the 1980s and savings and loan scandals of the 1990s.

"We had probably our greatest growth spurt in the '80s," Perich says, noting the firm grew by 50 percent.

"A lot of those guys are still here," he says.

Ah, the good old days! As for "a lot of those guys" still being here, what he didn't add was the sentiment "and maybe we can squeeze another 3000 billable hours out of them before they flame out."

The article lists the plethora of potential defendants, which offers ample opportunity for "bet-the-firm" litigation, the kind that can suck the life out of paralegals, associates and contract attorneys, leaving them dried husks to be tossed on the fire of the equity partner pyramid, to be replaced by a never-ending supply of young suckers up-and-comers. Investment banks, mortgage companies, title companies, home builders, and investors are all candidates who can look forward to spending quality time with litigation and bankruptcy counsel, after which they can end their existence as biodegradable suicide bombers in a theater of action of their choice, because that's all they'll be fit for.

One of my pet peeves about the entire sales pitch of a "subprime practice group" has been that this isn't anything special. It's the same old skill sets applied to the latest segment of our economy to falter. Craig Weinstock of Locke Lord Bissell & Liddell LLP gets it.

"Nobody was born a subprime lawyer," Weinstock says. "These are folks who have depth of experience representing in the securities fraud area, financial institutions, white-collar crime -- expertise that is now being turned to these current problems."

My favorite line is from Wayne Kitchens of Hughes Watters Askanase LLP.

"Our entire default servicing group and a large part of the litigation group deal with subprime issues, lenders and borrowers on a day-to-day basis and has for years," says Partner Wayne Kitchens.

Hughes Watters is continuously in a subprime mode.

Says Kitchens: "Subprime is already such an intrinsic part of our practice that we felt no need to start any new group or section."

How strange are these times when a firm is described a being "continuously in a subprime mode" and that's a compliment.

Welcome to the Roadkill Cafe, boys and girls. Our steaks are Grade A (sub)Prime. And there's plenty for everyone.

Wise Counsel

Mark Treanor's run as general counsel of Wachovia Corp. will end with his retirement this summer. Before he rides into the sunset, he's sharing his thoughts on what in-house and outside lawyers to banks ought to do and not do. Bank lawyers should pay heed.

Mark Treanor said corporate lawyers often focus too much on roadblocks and end up slowing down business as a result. "It breeds resentment, and I don't think it gets the businesses where they need to go," he said.

Instead, lawyers need to work on identifying problems early and coming up with solutions quickly, said Treanor, who is retiring from the company this year. To find those solutions, lawyers need to get involved in transactions and business issues earlier, and they need to make more of an effort to learn the business, particularly lawyers at outside firms, he said.

At the same time, Treanor said, lawyers must avoid becoming "pleasers" and ignoring potential risks. That means recognizing when something is technically legal yet ill-advised and taking the appropriate action to head it off, even if that means going over someone's head to alert management. "Admittedly, sometimes that takes guts -- we all want to be popular with our clients," he said.

Having served as both in side and outside counsel counsel to banks for a few decades, I'd like to add a bit to Mark's observations. The importance of lawyers understanding the banking business generally and the client's business gaols and methods of operation specifically, cannot be overemphasized. When I started on the in-house staff of a large financial institution over 30 years ago, senior management made me sit as a member of the senior loan committees (residential and commercial) and then rotate for a period of time between various departments within the bank. Not only did this permit me to develop personal relationships with the people who would seek my advice (it's always nice to put a face to the name of the person who annoys you), it gave me a real appreciation of the client's business so that when I considered an issue, I understood how the legal advice I might render would impact the business operations and strategic plan of the client or, if I apparently didn't understand those impacts, the business officer seeking the advice could explain it to me and I wouldn't sit there in slack-jawed incomprehension.

As Mark notes, it is especially important for outside lawyers to understand the business. Often, outside counsel are perceived as "deal killers" by bank officers. Much of this perception is fueled by fights between attorneys over issues that are not important to the client, or are ones where the implications are not properly understood by the client because the lawyer can't explain (inasmuch as he or she doesn't understand) how the legal issue impacts the business of the client on a practical level. Another problem often caused by a failure to understand the client's business is that the lawyer overestimates his importance in a transaction. I starkly recall a client telling the opposing side of a transaction about it's counsel that it always amazes him when the tail tries to wag the dog. The lawyer sputtered, turned red and glared at my client while the opposing deal maker raised one eyebrow, then adjourned the meeting to speak with his lawyer privately. The deal went much more smoothly when we reconvened. The fact that the lawyer didn't look first at his client's reaction to my client's statement told both parties all they needed to know about the lawyer's flawed perceptions of his role. Arrogance is an occupational hazard, and nothing cures it better than a realistic understanding of how the business views the legal function and the lawyer's role.

On the other hand, Mark correctly observes that there will be times when the lawyer will be called upon to "do the right thing" when his client (or, more frequently, certain interested employees of the client) want to do otherwise. Understanding not just the legal issue in isolation, but how it affects the client's business, makes the lawyer a more effective "counselor" and his "counsel" more valuable. It also makes him or her a more effective risk management tool, and when he or she spots the risk, he or she has to have the temerity to bring it to the attention of those who won't ignore it. On rare occasions, you may even have to cut the cord. As Mark rightly puts it, this may take "guts." On the other hand, in a highly regulated business like banking, where the regulators have the power to "shock and awe," courage has an additional wellspring in a sense of self-preservation. Although not a commercial bank, Enron serves as an example of a situation where some had "the right stuff" and some did not.

Attorneys don't operate in a vacuum. If the culture of the business is rotten, being its in-house (and in many cases outside) legal counsel could be an excursion through a little shop of horrors. A candidate for an in-house counsel's position should do as much due diligence on the bank as the bank should do on the candidate. If it appears that the bank's "philosophy" is to view legal and regulatory compliance as a necessary evil that should be circumvented whenever possible, run for your life (looking both ways before you dash across any streets, of course).

Mark's comments on legal fees echo those of another Mark, Cisco's general counsel Mark Chandler. These days, every bank (and every savvy business) is "always looking for the best service at the best price." While Mark discusses making arrangements with a smaller number of firms to offer discounted hourly billing rates, I'm certain that he and his staff also look at the overall price of the service (after all, the firm can simply bill more hours for the same work) as well as the quality of the services rendered. Such evaluations of "quality" are always more subjective than are reviewing hard numbers, but like pornography, most astute in-house counsel "know it when they see it." In any event, the days of awarding legal work to those outside firms who provide the most (and best) seats to the Dallas Cowboys' games seem a distant memory. Thank heaven for that.

Many lawyers can learn a lot from the tidbits that people like Mark Treanor drop. For those of you who already know it all, this post was another utter waste of time, wasn't it?

A Bank? Just Kidding!

I suppose that every few years, the Texas Department of Banking has to remind businesses that you can't claim to be a "bank" unless, you know, YOU ARE A BANK!

State regulators have taken steps to sanction a Houston firm describing itself as a bank.

Houston Petroleum Bank LLC had been advertising services on a Web site and was soliciting customer "deposits" from clients with a minimum $250,000 to invest in a wealth management account administered by Wachovia Securities LLC.

On March 11, the Texas Department of Banking issued a cease and desist order against the bank and its principals, John Gallagher, chairman and CEO, and William Smith, president.

The banking department order states: "Gallagher and Smith have used and are using the term 'bank' in their name and Web site in a manner that implies to the public that HPB, Gallagher and Smith are engaged in the business of banking in Texas, in violation of Texas law."

[...]

Serena Kuvet, assistant general counsel for the state's banking department, says a consumer inquiry led to the investigation.

[...]

Kuvet claims that the Web site wording was clearly misleading. The name Houston Petroleum Bank LLC was displayed in bold letters along with the phrase, "Customer deposits are never at risk because we don't make loans."

[...]

The state's filing says Houston Petroleum Bank made an application with the Texas Secretary of State to register the firm as an out-of-state financial institution that would "issue loans ... take demand deposits and expand money."

The application states that Houston Petroleum Bank was incorporated in Nauru, a Pacific island off the coast of Australia in 1999, but maintains a Houston office.

Let's hope this isn't merely the tip of the spear of a Naru-led invasion of bad banking behavior in Tejas. Those dreaded Naruvians have a bad attitude, although, certainly, plenty of "street cred." On the other hand, if we Texans handle this correctly, we might be able to enlist them in our ongoing battles with Mexican drug cartels and any current or future Miley Cyrus tour. I break out in a cold sweat contemplating either of those evils.

Whatever the Petroleum Not-A-Bank was doing didn't thrill Wachovia Securities, either.

At the same time, attorneys representing Wachovia also contacted the Houston firm in response to the Web site allegation that Houston Petroleum Bank had "formed a strategic partnership with Wachovia Securities LLC ..." Joe Stroop, vice president of corporate communications for Wachovia Central Banking Group, says the firm did not receive permission to make such a statement on the site. "While Wachovia cannot confirm or discuss client relationships, when we discovered that Houston Petroleum Bank was using Wachovia's name on its Web site without authorization we demanded that they cease doing so, and they did," Stroop says.

Well, that prompt compliance must have pleased the Department of Banking. The last time we ran into this situation, the offending party put up a bit of a scrap, and got a tad defensive about it, although it eventually settled with the Department of Banking and stopped using the awful "B Word." After this blog posted about it, the author received a tense voice mail message from someone who alleged that he was connected with the defendant and who used the words "ass" and "kick" in the same sentence, or maybe it was in more than one sentence. Time dulls the memory.

Let's hope that history doesn't repeat itself. If it does, I must thank all that is right and holy with this country that (A) the US Constitution has the Second Amendment, and (B) the Lone Star State has a concealed carry law. This might be the only state where blogging about bank law and keeping a 9mm Glock at the ready go hand-in-hand.

A Blueprint For A Structure That Will Never Be Built

On Monday, David Milstead, the Finance Editor of The Rocky Mountain News, circulated a list of questions to an assortment of heavy hitters in financial services in Colorado (although he appears to have left off a number of others), about the just-announced "Paulson Blueprint" for the reorganization of regulation of financial institutions at the federal level. On April Fool's Day, he published the responses.

Here are the questions:

* Is this necessary? Was the current system really broken?

* Will it be more effective than the current system?

* Is it "too easy" on Wall Street, as some critics have said? Who is being protected in this proposed system?

* What are the perils and pluses of moving, in some cases, away from state regulation to federal regulation?

* Should regulators be competing to be the 'regulator of choice' for the subjects of regulation?

* Is it too early in the current problem environment to try to craft an overhaul plan?

In light of the act that the respondents had not been given sufficient time to review the plan in detail and give it any thought, I'm not sure what, if anything, of value Mr. Milstead was trying to accomplish, other than to fill space. I think Phil Feigin, former Colorado Securities Commissioner and now toiling like many of us in the sweat shop of private practice, got off the best opening line:  "I have certainly not had the time to digest the whole report."

Many of the answers are interesting, if predictable given the roles of each of the respondents.

Ray Friedlob, an attorney with a firm where I once toiled back before Caesar had conquered Gaul, threatened to bloviate but then, thankfully, backed off.

Since I deal with this so much I could take pages and hours to answer but will only relate a few top of mind observations.

I fought off an attack of narcolepsy and read the rest of his comments. In private practice, we only grind out pages and hours when we're paid by the page or the hour, so I knew he was all hat and no cattle with those threats. Unless you're being paid to spend time, efficiency rules the day.

Ultimately, Ray kicked a corpse while he was down by blaming it all on Greenspan. I guess Ray either doesn't know Hillary Clinton's plans to resurrect Alan from the dead or he doesn't care.

Jeff Wilson used the term "Subprime Tsunami," and should be fined, beaten, and left in a ditch for that infraction. Otherwise, his line "the regulators don't prevent problems. At best, they manage them, and in some cases, they actually manufacture them," is a keeper, which I intend to steal and use repeatedly without any attribution. Being a sociopath has its rewards.

I also loved credit union CEO Doug Ferraro's bon mot.

This reactionary proposal is like cleaning a bug off your windshield with a fire hose. It is an entirely misplaced attempt to fix a real issue by creating 100 bigger problems.

As that guy in the Chevy truck commercials says: "Sweet!"

Taylor Kirkpatrick admitted in his opening sentence that he is an investment banker, thereby destroying his credibility for all that followed, as sage as it might be. I immediately switched to YouTube and watched the latest "Girls Gone Wild" video.

Phil Feigin had a number of good lines, in addition to the one noted above, including  "I have a hard time believing this proposal will go anywhere." To that I give a hearty thumbs up and an approving inflection of "Dude!"

David Peterson, another investment banker, smacked down the regulators.

It is very difficult to take these regulators pleas seriously when it appears that they are more concerned with protecting their turf than fulfilling their public service roles.

I assume that David's taken the same approach as the authors of Bank Lawyer's Blog: what can they do to us: eat us? I also assume that he hasn't got any applications pending with any regulatory agencies at the moment.

Proving that I'm not completely suicidal, I'll leave Colorado Banking Commissioner Richard Fulkerson alone. However, I have had experience with Richard in his prior life as a Supervisory Agent with the OTS, and I will give him the ultimate compliment: he's no Sheila Bair.

Don Childears, the CEO of the Colorado Bankers Association, makes the following telling point, echoing Phil Feigin:

Despite some merit to the proposals I can’t see anything passing in the next year – due to a GOP President negotiating with Democrats in Congress (who think they will have the White House in a year), and regulated entities having differing views among their ranks and with regulators who also are jockeying for position.

Unlike Don, who's salaried, I bill by the hour and blog for free (try living off of click-through ad revenues from a blog that discusses bank laws), and, therefore, I'd have to say that spending a great deal of time parsing the nuances of the "Paulson Plan" is a non-starter. The "Blueprint" is going nowhere this year, so why spend a lot of time worrying about it when we've got more urgent issues to occupy us? It's a lame proposal by a lame duck administration, and the Democrats, who control both houses of Congress, have already pronounced it DOA.

Nevertheless, we've managed to squeeze one MSM newspaper column and a lowly blog post out of it, so it's served a higher purpose, hasn't it? Now, back to Jessica Simpson's kidneys.