When Does Too Much Regulation Tip The Scale?

Tuesday, June 30, 2009 - 01:00

Editor: Could you tell us about your corporate career as a banking lawyer?

Podvin: I have been practicing banking law for 17 years, joining the Office of the Comptroller of the Currency in Washington, D.C. right after law school in 1991. Following the OCC, I joined Bracewell & Patterson (now Bracewell & Giuliani), where I spent nine years representing banks and their holding companies in various aspects of banking law. I later joined Guaranty Bank in Texas, where I was the deputy general counsel, chief compliance officer and chief privacy officer. I joined Haynes and Boone in February 2009.

Editor: Do you feel that the government's response to the financial crisis is effective?

Podvin: The jury is still out - there is no "how-to book" for this crisis, but everybody is working through this crisis as best he or she can. I believe that so far the response has been a combination of initiatives from both the Bush Administration and the Obama Administration, who were both attempting to stem the tide of this economic tsunami, which hit in September and October of 2008. There has been some improvement in housing, but we are also looking at signs of deteriorating asset quality in commercial real estate as well as the threat of inflation.

Editor: Are certain programs working better than others?

Podvin: Yes. The Emergency Economic Stabilization Act, passed in October, created the TARP (Troubled Asset Relief Program). It also increased the FDIC deposit insurance amount to $250,000 per account per institution, which has had a tremendous impact on calming depositors' liquidity concerns. An unrelated act by the FDIC created the Temporary Liquidity Guarantee Program consisting of a debt component and a deposit account component. The deposit account component also calmed liquidity fears by essentially guaranteeing deposit insurance in an unlimited amount on non-interest bearing transaction accounts. The FDIC's deposit insurance actions had a great impact, as did TARP, by putting capital into the banks. The AIG bonus flap and the Congressional reaction to it produced a setback from these positive acts, which has spilled over into the P- PIP (Public-Private Investment Program) by limiting the enthusiasm of private equity and hedge funds in getting involved in buying toxic assets. The P-PIP investment programs haven't really gotten started yet; the jury is still out as to effectiveness. I am also concerned about the 10 healthy banks who were part of the stress test repaying TARP funds - it may be a bit too early because of future commercial real estate issues. Finally, there is the TALF (Term Asset-Backed Securities Loan Facility) program that the New York Fed has promoted, which has slowly built some momentum in assisting the market for student loans, auto loans and credit card loans. We are going to find out in July whether it is going to help the legacy commercial mortgage-backed securities market. I would hope that sometime in the future the TALF will be expanded to include legacy mortgage-backed securities backed by consumer mortgages as well.

Editor: Why do you think the P-PIP program has not yet come into play?

Podvin: Banks are not sure they want to sell the assets and take the capital hit. Also, there is a tremendous amount of uncertainty, particularly on the Legacy Loans Program, where the process could be set up by banks for putting loans up for sale; bidders could bid on the pools of loans, but if the bank didn't like the price, it could decline to sell them. The FDIC has put the Legacy Loans Program more or less on hold for now. It is going to try to sell some receivership assets in the next month or so. We are waiting on Treasury to release more details on the Legacy Loans Program.

Editor: Will the Obama Administration's efforts to restructure financial regulation help to avoid future crises?

Podvin: This is a subject of much debate in Congress. The Obama Administration had suggested there be one bank regulator, but there has been push-back from the banking industry and from key members of Congress. Regulating systemic risk will be an important step in preventing another financial crisis. Establishing a resolution authority for systemic institutions will also help. The first significant volley on these topics came from the Obama Administration in its white paper on Financial Regulatory Reform. The effort to regulate derivative products such as credit default swaps is another area needing a solution. Congress has already passed legislation to tighten up regulation on non-bank mortgage companies and mortgage brokers, which should have an impact in at least solving some of the mortgage issues and consumer protection issues. However, the Obama Administration is also proposing a new federal consumer protection regulator for mortgage products, credit cards and other financial products.

Editor: In your view what are the biggest threats to the economy right now?

Podvin: Continued job losses and their consequence is probably the number one threat. Also, commercial real estate deterioration has a potentially significant impact on the U.S. economy and the international economy as well. One of my fears is that the regulatory pendulum may swing too far, producing excessive regulation. We must be mindful of this as a country in our public policy decisions going forward.

Editor: Has the government's response gone too far in some areas?

Podvin: While I repeat that there is no how-to book and everyone is trying to do the best he or she can, in my opinion government has gone too far in some cases. The Congressional reaction to the AIG bonuses with the proposed 90 percent tax on their proceeds, Senator Kerry's response to the bank sponsorship of sporting events and the accompanying publicity have set us back in my opinion. It is the fear of the unknown concerning what Congress will do next that is the potential stumbling block. Having some public policy discussion to encourage capital investment as opposed to frightening it away would be a good step forward. I also believe that the talk of nationalizing banks, or frankly any industry for that matter, is going the wrong direction. We want to be the land of the free and the home of the brave - we don't want companies to be owned by the state and run by the bureaucrats. I think we need to think long and hard before we go in that direction.

One other piece of information that is important to understand as we undertake the debate to reform our financial regulatory structure is our history. The OCC was formed during the Civil War; the Federal Reserve was formed during World War I; the FDIC was formed in the 1930s and after that the successor to the Office of Thrift Supervision. These regulatory organizations were formed during very tumultuous times in our history and have been around for a very long time. It is also significant that the OCC and the OTS are bureaus of the Treasury Department, reporting to the Secretary of the Treasury, even though they are technically independent and semi-autonomous. We need to understand the constituencies and history involved in order to really understand how difficult it is going to be to resolve some of these issues. What has happened to us in the past 18 months to two years really has demonstrated that we probably need to change our system because it has not served us well during that time.