Bank Lawyer's Blog

SARs: They're Not Just For Goats

We've speculated for years that when a financial institution files a SAR, it's fed to FinCen's pet goat. However, NAFCU Regulatory Compliance Counsel Bernadette Clair reminds us today that a few SARs aren't lodged firmly in a goat's gullet, but actually generate some law enforcement firepower ("Book 'em, Dan-O! Five Counts, Using Campaign Funds To Buy A 'Date'"!). Bernadette lists a representative sampling of criminal actions that resulted from SAR filings, as profiled in FinCen's most recent SAR Activity Report - Trends, Tips & Issues.

My personal favorite? That would be the SAR that led to the smackdown on the illicit importation of human growth hormone. Sure, Ponzi schemes and our old friend, "Mr. Blow," may grab the nefarious glamour, but nothing says "Threat To Western Civilization" more than men and women who look like this:

 

So, keep up the good work, FinCen. We'll all sleep better knowing that our SARs are forcing bodybuilders to make muscles the way they had to make them before HGH ruined the "sport": picking up 98-pound weaklings by their ankles and stuffing them into gym lockers.

Peaceful Coexistence With The CFPB

According to a recent article by Paul Muolo in National Mortgage News, the CFPB met with a group of mortgage industry professionals and told them (1) the days of anything other than flat fee compensation are at and end; (2) if you pay anything to an affiliate, life will be a source of unending grief and agony for both you and the affiliate; and (3) "like it or lump it." Paul states that participants in the meeting also told him that "the CFPB doesn’t care that its mortgage compensation proposal will destroy the lending industry and hand the business over to the nation’s largest banks."

According to Paul's sources, trade group representatives weren't allowed to sit at the table with the CFPB and industry representatives, although the trade groups got to nominate a handful of lucky folks who were allowed to sit at the "Adults Table." They also said Recess Richie Cordray "phoned it in" and went into dial tone mode after five or ten minutes.

Sounds like a fun time was had by one and all. Paul warns that his sources might be exaggerating how bad it was. "Believe what you like," says Paul.

Being a cockeyed optimist, I believe that it was merely a case of honest misunderstandings and unjustified suspicion that the CFPB is interested in concentrating the single family mortgage business in a few large (over $10 billion) banks over which it has direct supervisory authority, so that it can more easily stop practices such as charging origination fees and interest on residential loans. You know, the "abusive" stuff. With only a few big Elephants to herd, the CFPB can concentrate its behavioral economic engineering agenda with a laser-like intensity to make the world safe for bureaucratic micro-managers of what's fair and what's unfair by training the elephants to sit up, stand on their heads, follow one another around the ring trunk-to-tail, and trumpet loudly on command, in return for which the surviving pachyderms will have all the peanuts they can manage pick up from the floor with their trunks.

If I were a cynic, I might take a dimmer view.

From The Mailbag: Gripes About The OCC

An interested reader emailed me and offered a couple of thoughts about the United Western Bank/OCC litigation that was the subject of last night's post. First, he focused on the fact that the OCC's "statement of facts" (which the plaintiff has moved to strike) makes much of the fact that the bank "voluntarily" stipulated to the entry of a Cease and Desist Order against the bank, and that the stipulation contains "findings of fact" that concluded that the bank engaged in unsafe and unsound practices and violations of law. My correspondent found that disingenuous, inasmuch as the third recital to the stipulation provides that the bank does not admit or deny any statements or conclusions in the C&D other than two that relate to jurisdiction. This is typical of many consent orders entered into with the federal banking agencies. The bank does not agree that the stipulations of fact or the conclusions drafted by the OCC are correct. My correspondent thinks that the OCC is attempting to construe such "voluntary consent" into a consent that conditions exist that justify the appointment of a receiver. If so, that will have a negative impact on the willingness of banks to sign such agreements in the future.

I agree that there apears to be an attempt to use the bank's consent to the entry of the C&D as an argument that the facts and conclusions contained in the order, such as that the bank is in an unsafe and unsound condition, are somehow "true" and incontestable. I doubt whether that suggestion will have an impact on the judge. As to the willingness of banks to sign such stipulations in the future, it's too early to tell. However, a few more banks in the future might be inclined to fight a C&D rather than stipulate. As my correspondent also wryly observes, if Maxine Waters has her way, the era of consent orders may be coming to an end in any event. If that's the case, the administrative law judges are going to be awfully busy.

My correspondent also opined that the OCC's motion displays a clear bias against private equity investors. Although he didn't clarify the specific provisions of the motion that supported this contention, I assume they were the provisions that discussed the OCC's rejection of the conditions precedent imposed by the potential investors, including the waiver of certain restrictions of the C&D and other "unacceptable supervisory concessions." To me, this bias has been obvious in not only the OCC, but in the FDIC and the FRB, for the last several years. We've discussed this issue previously. The requests for supervisory concessions were normal (and sane) protections that any knowledgeable private equity group would impose before they infused hundreds of millions of dollars into a bank that had "issues."

PE legend Wilbur Ross told the American Banker last week (paid subscription required) that he's had it with the "Big Three." He's now focused on investing in European banks. From my discussions with private equity investors recently, others are following his lead overseas, even to Eastern Europe. It's a heck of a state of affairs when the Ukraine looks rosier than Utah, but there you have it.

United Western: The OCC Responds

Over the weekend, I had a chance to read the opposing motions for summary judgment filed by United Western Bank and the OCC in the lawsuit filed by the bank to overturn the order of the Acting Director of the OTS to place the bank into an FDIC receivership in 2011. Late last week, the bank filed a motion to strike the OCC's entire statement of facts on the grounds that it was a back-door attempt to circumvent local rules on the length of pleadings in this particular type of case. However, I'm basing my personal bloviations on the entire motion and accompanying statement of facts filed by the OCC.

In my comments on the plaintiff's motion, I stated that I thought that the OCC would have to rebut the facts as alleged by the plaintiffs in some detail , not merely focus on the high bar the law sets to overturn the decision of the OTS. The OCC did that, although we'll see what happens to those "facts" when the judge rules on the plaintiff's motion to strike. Regardless, the judge has access to the entire administrative record and isn't bound by a party's selective inclusions, omissions, and spin. Unfortunately, at this stage, I am.

Given my personal experiences in dealing with the OTS, the FDIC, the FRB, and the OCC over the past five years, and with the OTS in connection with a strikingly similar situation ten years ago, I believe the plaintiff's allegations that there were no serious criticisms of the bank's business plan, which involved a focus on institutional deposits as a major source of low-cost funding that the bank used to invest in mortgage backed securities and other mortgage-related assets, until the economy slowed and then crashed. Although earlier reports of examination (ROEs) may have mentioned the liquidity risk posed by a concentration on such funding sources, I suspect that the ROEs also stated that the bank was aware of and adequately managing that risk. It wasn't until the economy tanked that the senior management and directors of the bank transformed themselves, in the eyes of the OTS, from geniuses to cud-chewing bovines. At that time, the business plan suddenly made no sense, was unsafe and unsound, and had to be changed as quickly as possible in the face of the worst recession since the 1930s. While the bank's management and board was trying to steer the bank in a new direction, you can't turn an aircraft carrier as quickly as you can a cigarette boat, especially when the current is flowing strongly against you and icebergs are bearing down from the windward side.

Of course, that wasn't the concern of the OTS. It's concern was the fact that the bank's risk profile had suddenly turned unfavorable because of outside circumstances, and that if it failed, the OTS supervisory personnel responsible for overseeing the bank might be criticized by the Office of the Inspector General of the FDIC for not acting forcefully enough, early enough. Bureaucratic butt-covering trumped all other considerations. From then on, the OTS made sure that it didn't cut the bank any slack. That attitude led to aggressive mandated writedowns in the value of securities and other real estate-related assets, increases to reserves, and hits to capital.

I also accept the plaintiff's allegation that the OTS decided long before the bank actually failed that it was doomed, but allowed the bank's management to go through a Chinese fire drill of ultimately fruitless capital-raising and liquidity-stabilizing efforts in order to give the ultimate dropping of the hammer on the bank's head a patina of inevitability. Although it's not alleged in any of the pleadings, and I have no information from outside sources, I suspect that the OTS personnel with decision-making authority may have decided that they simply didn't "like" the ownership and senior management of the bank, didn't want them in "the business" any longer, and weren't going to approve any recapitalization plan that involved any concessions on the part of the OTS (such as waiving certain conditions of the Cease and Desist Order and agreeing to a non-standard holding company guarantee). I think that if it had desired to do so, the OTS could have worked with the bank to structure a recapitalization plan, including certain waivers of the C&D's terms, but chose not to do so for reasons that may not be expressly revealed by the administrative record.

Even if the above assumptions and outright speculations might be correct, the problem for the plaintiff is that, ultimately, all the OTS has to show in order to prevail is that there was a rational basis for the Acting Director's determination that one of the following three grounds existed for the appointment of a receiver: (1) the bank was in an unsafe and unsound condition to transact business; (2) the bank was likely to be unable to pay its obligations or meet its depositors' demands in the normal course of business; or (3) the bank was undercapitalized and failed to submit a capital restoration plan that was acceptable to the OTS. The court must defer to the opinion of the Acting Director of the OTS on these matters unless the court determines, based solely on the administrative record, that the decisions of the Acting Director were arbitrary or capricious or lacked any rational basis. The plaintiff must overcome the presumption that the decisions of the director were not arbitrary or capricious by a preponderance of the evidence, again as reflected solely in the administrative record. As I've observed previously, this a high hurdle for a plaintiff to jump and is one important reason that few such lawsuits are brought.

All three grounds for the appointment of the FDIC as receiver seem to hinge on the rejection by the OTS of the bank's capital restoration plan, the undercapitalized status of the bank (albeit at a 5% core capital level), and the perceived "instability" of the commitments of the remaining institutional depositors not to withdraw their funds. The OTS articulated seven grounds for the rejection of the capital plan, all of which the plaintiff alleges are without a rational basis. The OCC, on the other hand, articulates in its motion several reasons to support its decision to reject the capital plan (including, for example, disapproval of the acquisition by the bank of a securities clearing business, "excessive" planned growth of the bank, and requirements by investors that certain requirements of the Cease and Desist Order be waived by the OTS). The alleged instability of the institutional depositors is also an issue where the OCC appears to have demonstrated a rational nexus between the facts as shown in the administrative record and the Acting Director's determination that a potential "liquidity crisis" could occur in the near future due to the OTS' rejection of the capital plan. While the plaintiff argues that there was no evidence that the remaining institutional depositors were likely to withdraw their deposits in the near term, the OCC alleges that the administrative record shows that the largest depositor had given the bank until February 15, 2011 to recapitalize, following which date, if recapitalization did not occur, the depositor would withdraw its funds (in an amount which exceeded the entire liquidity of the bank, according to the OCC). 

My concern for the plaintiff's case is that while knowledgeable bankers can conclude that if the OTS was interested in working with the bank's management to reach an accommodation with outside investors that would have addressed their concerns and permitted the bank to be recapitalized and to survive, it could have done so, the OTS can articulate reasons for its decisions not to do so that are based solely on the administrative record to prevent the plaintiff from meeting its burden. This case appears to be a prime example of why it's so tough to overturn a receivership decision. You can think that the OTS made a series of bad judgments, but it's difficult to prove that those judgments were made without a rational basis.

The case is not over. Each side gets another shot at replies. Moreover, I'm not being paid to parse the nuances, so the views expressed in this post are not finely honed. However, at this point, no matter what my heart tells me, my head tells me not to bet against the OCC.

CFPB: In Search Of A Search Bar

With my recent travel and work schedule, I'm just catching up with some of my regular reads from the past week. One of them, a post on The NAFCU Compliance Blog last week by Steve Van Beek, has a good compilation of, and links to, residential mortgage-related actions of the CFPB. Included are those related to mortgage origination and servicing and TIL/RESPA disclosures. It's necessary to track these issues, because, as Steve puts it, "[t]he CFPB will be pretty much changing every aspect of mortgage lending within the next couple of years." As we all know by now, Dodd-Frank is one of those changes we were all waiting for back in 2008, and, as we also know, all these thousands of pages of new regulations will ensure that nothing like what happened in the years leading up to the crash of 2008 will EVER happen again.

There's another reason that Steve's compilation and links are so useful.

It is truly amazing that a 21st century agency has not included a search bar on either the first or second design of their website. 

Steve, if the CFPB installed a search bar, it would be easier to track its sausage making. If it was easier to track its sausage making, we might have a clue to what it's really up to. If we had a clue to what's it's really up to, we'd pack up and move to Belize.

Ignorance is bliss. After all, too much knowledge in the hands of the wrong people can turn a "New Sheriff" into a "Spouting Bull."

Both Sides of the Coin

Although I don't ordinarily publish "guest posts," I've made an occasional exception for one or two friends, including former community bank president (and current banking consultant and mortgage lender) Pat Dalrymple. His recent "Banker's Hours" column in the Glenwood Springs (CO) Post Independent is republished here with permission. I think it may "resonate" with more than one community banker.

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"Getting to See the Heads and Tails of Bank Supervision"
---Pat Dalrymple

This week I got to watch the flip of the regulatory coin and see both heads and tails of bank supervision.

One side, we all saw: the two billion plus snafu at J. P. Morgan.  Despite purportedly dramatically more stringent oversight, as mandated by the Dodd-Frank act, it’s “Deja Vu all over again” (to quote Yogi Berra) on Wall Street.

The other side involved an all too common tale these days: a retired  executive, living in a free and clear luxury home in one of the best enclaves of a front range city, who got relieved of his life savings by a Bernie Madoff type.  Even in the currently depressed market the property was probably worth a couple of million.

In this instance, the owner simply wanted to take out some cash equity to live on for a few years until it might be timely to sell the property.  He wanted more than he could get from an FHA reverse mortgage, and certainly had the collateral to support the request.

He offered to put all of the interest in escrow in advance, and just draw the remainder over a five to seven year period.  The proposal even included a provision for an annual appraisal, with draws curtailed if the property value should drop to cause the loan to value to exceed 50%.

Two banks turned it down because of lack of income and amortization (reduction) of the principal balance.  Both agreed that it was a deal that they would have competed fiercely for, say, six years ago.  Neither thought it was a bad loan.

But they couldn’t make it because the regulators would almost certainly criticize it.

Why do bank regulators show such disparity in oversight?  Well, for one thing, because they can.  It’s easy to rip a single little loan to a homeowner.  On the other hand, they don’t understand what J.P. Morgan does half the time, any more than J.P. Morgan does.

The lady with the ultimate accountability for the JPM fiasco made $31,000,000  over the past two years. (Disclaimer:  this is not a sexist statement.  Most of the corporate poobahs responsible for the demise of Bear Stearns, Merrill Lynch, Lehman Brothers, et al were male members in good standing of the Old Boys Club.  It just shows that, given an opportunity, gender is no barrier to being egregiously overpaid to perform incompetently)

And this highlights a continuing problem in our financial infrastructure.  In the rarified air of Wall Street, the City of London, the Bourse, ordinary people are paid extraordinary, even obscene amounts to make big bets with other peoples’ money. Overpaid execs should probably have half of their over-compensation deferred pending big losses from bad decisions.

It probably won’t change though, despite Congressional dithering and candidate posturing.  There’s too much money involved to turn off he spigot; the darn faucet’s broken.

So, small business people, scammed retirees, and other deserving people, good loan risks, will continue to walk into banks with hat in hand, walking out with empty pockets, while people like James Dimon (JPM CEO) continue to roll in so much cash that they could be sued for the next 20 years and still have enough to live on through three lifetimes after legal fees.

We’ve heard a lot of discussion about certain banks being too big to fail.  It’s uncertain whether that’s true or not. 

But one thing is certain:  they’re too big to control.

Hedges and Hedgehogs

I'm traveling for the next couple of days and will be off the air. Some interested readers have written to me and asked what I think about the OCC's memorandum in support of its motion for summary judgment, filed last Friday, in the ongoing lawsuit by United Western Bank to overturn the FDIC receivership into which it was placed over a year ago. A couple of people sent me copies of the memorandum, and I thank them for it. However, I was traveling over the weekend and will be again tomorrow, and given my schedule and typical commitments in the week before a holiday, I won't review all 87 pages of it until this weekend. I know it comes as a shock to those readers who expect me to shoot from the lip, but I'd like to take some time to parse this one and see how it responds to the plaintiff's motion and supporting memorandum. That shocking desire to be prudent in my analysis won't likely be repeated frequently.

However, I will respond in typical fashion to several requests for comment on the recent hedging loss by JPMorgan Chase. Jamie Dimon is still taking heat for it and rightly so. It was a public relations disaster and a black eye for banks of all sizes due to the fact that so much of the bank-hating public wants to occupy everything other than a library, and lumps community and regional banks in with the largest of the large on Wall Street. That said, the financial effect on the bank was not earth-shattering. It temporarily hurts profits, but does not imperil the bank. It's puzzling to me that a purported "hedging" position could suffer a $2 billion to $5 billion loss. That sounds like a speculative trade, to me, although it appears that Chase's public spin is that it was a horrendously executed epic fail of a botched hedge.

Whatever the intended transaction might have been, hedges aren't designed to "eliminate" risk, they're designed to "reduce" risk. If properly considered and executed, they should cap losses at predetermined limits assuming certain worst-case scenarios occur. If those scenarios do not occur, then in many cases the bank has paid for protection it didn't ultimately "need," just like insurance. On the other hand, some perfectly proper hedges can result in some gain for the hedger if circumstances turn out to be go the other way. It shouldn't be a huge profit (if the transaction is a true hedge of downside risk), but there can be gains realized. The only hedge that completely "eliminates risk" is "don't make any investments." You have to take some risk to make some return.

Someone should tell that to Barney Frank. He was interviewed by MarketWatch last Friday and displayed a woeful lack of knowledge.

Q: Another area some lawmakers are concerned about is the way the Federal Reserve and other regulators interpret the Volcker rule, which is designed to prohibit speculative trading by big banks. Some senators say the regulators’ proposal allowing for portfolio hedging is a large loophole for continued speculative trading.

A: A portfolio hedge is not a hedge; it is a speculative bet. A hedge is aimed at being neutral on a particular asset, aimed at neither losing or gaining. They are trying to make money. The hedge is to take the risk out. I agree that is a problem.

It is so much more complicated than that, Barney. However, a simple answer to your simple answer is to tell you that you wouldn't know a hedge from a hedgehog. In that respect, however, we'll have to give Barney the fact that he's no different than most members of Congress. That lack of knowledge never stops them from opining, though, does it?

Community Banks to Congress: You're Crushing Us

According to community bank chairman William Grant, the burden of compliance with many tons of new regulations is crushing community banks. As a result, he claims, everyone should prepare for the phenomenon of the incredible shrinking bank biz. According to a recent Bank Safety & Soundness Advisor article (paid subscription required), Mr. Grant's recent testimony before Congress on behalf of the American Bankers Association was the polar opposite of "sunny."

“Without quick and bold action to relieve regulatory burdens we will witness an appalling contraction of the banking industry, at a pace much faster than we’ve witnessed over the last decade,” Grant said. “It is not unusual to hear bankers—from strong, healthy banks—say they are ready to sell to larger banks because the regulatory burden has become too much to manage. These are good banks that for decades have been contributing to the economic growth and vitality of their towns, cities, and counties but whose ability to serve their communities is being undermined by excessive regulation and government micro-management. Each bank that disappears from the community makes that community poorer.”

Perhaps anticipating the argumenht of the disintellctually dishonest pundits from the left of the political spectrum that bankers of all stripes want absolutely no regulations of their business, Mr. Grant claims that a basic problem with the deluge of regulations promulgated (and to be promulgated) in the wake of the abuses of the last decade is that their cost to banks outweighs their benefit to anyone.

“Banks appreciate the importance of regulation that protects the safety and soundness of the bank and protects the interests of our customers,” he said. “We know that there will always be regulations that control our business – but the reaction to the financial crisis has layered on regulation after regulation that does nothing to improve safety or soundness and only raises the cost of providing credit to our customers.”

[...]

“During the last decade the regulatory burden for community banks has multiplied tenfold, with more than 50 new rules in the two years before Dodd-Frank. Over the last decade 1,500 community banks have disappeared from communities. Each new law or regulation in isolation might be manageable, but wave after wave, one on top of another, will certainly over-run many more community banks.”

Grant also warns of something that other community bankers lay awake at night sweating: Dodd-Frank trickle down. Grant alleges that such fears are justified, and gives a specific example.

“We thought that the Volcker rule was something that only our colleagues in the largest banks had to attend to,” Grant said. “Instead, the regulators have proposed to implement the Volcker rule in a way that requires even a bank of our size to carefully examine any security we buy to manage our mix of assets and liabilities so that we do not accidentally do something that the implementing rule may not permit. We will also have to review every community investment we make for the same reason.”

The bank not only has to keep a close eye on securities and investments, but it also has to pay more attention to bank policies, he argues.

“Both asset and liability management and community reinvestment are basic banking activities that our regulators expect us to do day-to-day,” he says. “Now we have to develop policies and procedures to make sure we are evaluating those activities regularly in light of some 300 pages of technical regulatory guidance that is intended to address activities it wouldn’t even occur to us to conduct. These and other changes will have a pernicious impact on banks and their communities. They raise credit costs and litigation costs (for even minor compliance issues), lead to less hiring or even a reduction in staff, make hedging risks more difficult and costly, and restrict new business outreach. In fact, banks’ biggest risk has become regulatory risk.”

Personally, I expect regulators and some in Congress (primarily, those with strong ties to constituents in the community banking business) to pay some lip service to the need for a two-tired system of regulations to address this concern and to attempt to alleviate the "trickle down effect." I also expect that nothing substantial will be done to actually ensure that the crushing regulatory burden is alleviated. Talk is cheap and plentiful in the nation's capital. Effective action is a scarce commodity in a town where the acquisition and retention of power trumps all other considerations, especially a notion as outdated as "principle."

There's the additional problem that there is a strong desire by many in the federal regulatory agencies, in the political arena, and in some corners of the banking industry itself, to see a drastic reduction in the number of banks in this country. Proponents of a smaller industry include not only those afflicted with the nervous condition commonly referred to as "Socialistic Hysteria," but by banks who already have achieved a certain hefty size and think all this competition is bad for squeezing the most blood out the veins of consumers and business customers alike. If only we had fewer banks, the remaining banks would be more profitable. We've heard this argument for, literally, decades. I won't name names, but the singers of this ditty include some very, very high-priced lawyers who are currently being paid by the same community banks they think ought to be "down-sized."

Perhaps this view is overly cynical. However, if community banks (and I'm including credit unions in this category, because they have a stake in this regulatory burden crunch, and bigger banks have as little use for them as any other smaller competitors) want to derail this train, they'd better give it the cooperative, focused attention it deserves. They need to tell their legislative representatives that they're as mad as hell and they're not going to take it any more.

Or, they can decide that they've had enough, no longer want the cheese, and merely want out of the trap. Surrender is always an option.

A High Water Mark For American Lawyers

Some great news for the American public was revealed recently: there is now one lawyer for every 257 Americans. I sure hope my 257 Americans can afford my hourly rate. As Edward Tan at Findlaw's Greedy Associates Blog opines, "If you're looking to hire an attorney, it's definitely a buyer's market."

Why so many shysters attorneys, you ask? Tan has a likely answer: Big Law (not to be confused with Big Love). "A combination of 'inept management and the weakness of the partnership model' were crucial factors in inflating the legal market, Bloomberg News reports."

Starting in the 1960s, big law firms grew bigger and along with the growth in numbers came a growth in hourly rates.

[F]rom 1985 to 2010, hourly rates began to skyrocket, especially in the top 50 law firms. Normal combined revenue for these firms based on the rate of inflation at the time should've been $6.9 billion. Instead they earned $48.4 billion.

Big law firms became big pyramid schemes, with a small number of partners at the top leveraging a larger number of (relatively) low paid associates. Of course, a starting salary of up to $160,000 per year plus a bonus and benefits may not seem like a pauper's wage to most Americans. Thus, law school admissions soared, and young people with the intellectual firepower to do a number of useful things for society instead decided to grab for the brass ring via treading the law firm gerbil wheel. Law schools became money-makers for many universities, and they were only too happy to keep up the charade that the good times in the private practice of law would roll on, in the same way that for many of us, residential real estate values would never head in any direction than straight up.

Unfortunately (for Big Law), big law firms have big fixed overhead costs, including those large associate salaries. When the economy took a tumble in recent years, that fixed overhead (and the inability to adjust quickly enough due to size and the conservative nature of many lawyers, among other factors) became an millstone around the neck of many big law firms. In addition, partners who are imbued with an "I-got-mine" mentality are not receptive to taking one for the team, so quickly imposing a shared sacrifice survival plan on a group of self-centered large egos is a hard task to accomplish. Tan mentions a half-dozen failed Mastodons, and more are on the way.

Over the long haul, "creative destruction" is good for any "business" or "profession." At least, that's what free market theorists tell us. In the interim, the lawyers (and would-be lawyers) being "creatively destroyed" are in for a lot of pain.

My wife always tells me it's better to be lucky than smart (although being both is occupying the sweet spot). In that case, I'm lucky that almost exactly twenty years ago, I decided that the big firm business model made no sense to me and I went in a different direction. While--believe or not--I feel sorry for many of the people strapped to the outside of this crushing wheel as it rolls forward (especially the young people), I also feel something else entirely for more mature folks who are bright enough to have seen something like this coming and, because they were too busy milking a cash cow, chose to do nothing.

We may never return to the ratio of 1:709 we had in 1950, but 1:257 seems to me to be the "high water mark," and there's nowhere to go from here but down.

Let Me Just Clarify That Point

My post of the day before yesterday, concerning a "warranty" offered by Greenway Solutions that would cover a portion of losses suffered by a bank's business customer by reason of an online account takeover (provided the customer uses an approved online security product from a third-party vendor), caused Jon Meyer of Greenway Solutions to reach out to me. Jon wanted to discuss some points I raised in my story and to provide some clarification. After a very pleasant telephone conversation, I offered to supplement my previous post with additional information and clarification.

As to my question about the fees paid by the customer and the bank to Greenway Solutions, Chartis, and the security software providers, Jon informed me that Greenway Solutions will launch this solution with $24.95 per-month "all-in" pricing. In other words, the cost of the service is a total of $24.95 a month. The customer would pay that cost to Greenway Solutions, and that would be the only cost paid. Of course, the customer's bank could decide to pay that cost, if it wished to do so, for competitive reasons.

Jon also wanted to emphasize that business customers do not have the equivalent protection afforded to consumers by Regulation E (no liability for unauthorized funds transfers provided the customer reports the unauthorized nature of the transfer within time limits established by Regulation E). He also made the point that Article 4A, Section 202, of the Uniform Commercial Code provides little practical protection for unauthorized "payment orders," because in the vast majority of cases of account takeover, (1) the customer has expressly agreed in writing with the bank to be bound by any payment order, whether or not authorized, issued in its name and accepted by the bank in compliance with a security procedure chosen by the customer, which, under the Code, makes the security procedure "commercially reasonable"; and (2) the unauthorized payment order is usually made in compliance with such security procedure because the crooks have penetrated the customer's computer system and gained access to the information needed to compromise those security procedures. You'll continue to have lawsuits brought by victimized customers that allege that the security procedures of the bank were not "commercially reasonable," notwithstanding the terms of the applicable account agreement (perhaps because the security procedures do not comply with the mutli-factor authentication guidance of the FFIEC), but  that fight is in most cases an uphill battle for the customer. Counting on banks to settle in order to avoid reputational risk is cold comfort. Therefore, I agree that there is value in "incentivizing" business customers to add additional software security solutions and to cover at least some of the financial risk with "insurance." Although I'm not endorsing Greenway Solutions' specific product, I'm in favor of exploring creative answers to a problem is that is not going to be resolved anytime soon.

As to my wisecrack about vendor's collecting fees and denying liability, Jon wanted me to point out that this stance is not unusual in the software security vendor "space" given the "price point" ($24.95 a month). I agree that it's not unusual. Technology service providers, especially those that collect relatively low monthly fees for providing a standardized product, will generally provide indemnification against intellectual property infringement claims that arise out of the use of their technology within the limitations on use contained in their license agreement, but generally aren't going to take on additional liability for indemnifcation that could result in the vendor incurring "bet-the-company" damages. Whether or not this is a reasonable position to take, my intent was to point out to banks that because of it, they need to make certain they aren't going to be on the hook for liability caused by the acts or omissions of the vendor or its product.

Plus, I was going for the cheap laugh. It's what I do.

I hope I've now clarified the pertinent points and can return tomorrow to my customary menu of ill-considered snark and off-the-cuff, half-baked opinions of inconsequentiality that my readers have come to expect from this blog.