Fight Terrorism Without a Gun

When it's not working on revamping regulation of financial products and markets in the U.S., the Treasury Department is quietly fighting terrorism. Yesterday, the Senate Finance Committee held a hearing to gather information about the progress Treasury is making in tracking and disrupting terrorists' financial support networks.

The Treasury Department Office of Terrorism and Financial Intelligence (TFI), formed in 2004, gathers and uses financial intelligence to identify individuals, charities or other groups that help channel money to terrorist groups. Stuart Levey, undersecretary for TFI reported that it has made "significant progress" in exposing terrorist networks by following the money. TFI has designated about 50 charities worldwide as terrorism supporters and increased awareness among charities of the possibility that they may be used as conduits to support terrorist. TFI works through the Financial Action Task Force (FATF), an inter-governmental body whose purpose is the development and promotion of national and international policies to combat money laundering and terrorist financing.

The photo is U.S. Army Spc. Brian Stubbs of Apache Troop, 1st Squadron, 33rd Cavalry Regiment, 3rd Brigade Combat Team, 101st Airborne Division, searching a home during a downpour in Sadr City, Iraq, April 30, 2006. Army photo by Staff Sgt. Russell Lee Klika.

"I'm Shocked, Shocked"

Consumer advocacy group U.S. PIRG last week released "Campus Credit Card Trap," a survey of more than 1,500 students at 40 colleges in 14 states. More than half of the respondents reported using credit cards to help pay for books. Almost one quarter reported using them to help pay for tuition. Twenty five percent said they (or their parents) had paid at least one late fee.

George Miller (D-Calif.) Chair of the House Education & Labor Committee is shocked. "This report shows the extent to which credit card companies are using aggressive marketing tactics to take advantage of college students faced with increasing prices for tuition, textbooks, and other college-related expenses," Miller said a statement last week. Congress should make sure that students "are fully aware of their federal college loan borrowing options before turning to private loans and credit cards."

I wonder how Hon. Miller would react if he learned that credit card debt is dischargeable in bankruptcy but student loans are not. Shocked?

You Can't Handle the Truth

This Sunday, the State Theatre, a rehabbed old time cinema in downtown State College is featuring A River Runs Through It (1992). Showtimes: 4 and 7 PM. The film is based on a novella (1976) of the same title by Norman McClean. The story is set in western Montana on the Blackfoot River. It follows two sons of a Presbyterian minister as they come of age in the early twentieth century. The film and the book are also, perhaps mainly, about fly fishing. State College is famous among the fly fishing crowd as the heart of some of America's best fly fishing. The film is presented byTCO FlyShop, a a local fly fishing supply business, as part of the State Theatre's "favorite movie" series.

If PSULaw presented a favorite movie night at the State Theatre, what would be our favorite law movie?

These are my nominees to get the project started:



A Few Good Men
I've seen this so many times I can recite most of the dialog. My favorite line? Demi Moore: "I object, I strenuously object. . . ."

My Cousin Vinnie
Yes, this is exactly what it feels like to pass from an ordinary person to a lawyer. My favorite line? Joe Pesci: "Oh, a counter-offer. That's what we lawyers - I'm a lawyer - we lawyers call that a counter-offer. This is a tough decision here. Get my ass kicked or collect $200. Let me think... I could use a good ass-kickin', I'll be very honest with you... nah, I think I'll just go with the two hundred."

The Verdict
Paul Newman is glorious as a lawyer who sees a big malpractice trial as the path to personal redemption.

May 1 is Law Day in which lawyers in America celebrate our heritage of liberty under law. If we can agree on a film, I'll see about getting the State Theatre for a PSULaw Law Day event. All you need to do is to add your nomination as a comment below.

The Fed's Fine Print

The Federal Reserve Bank of New York in a statement on March 24 explained its role in JPMorgan's acquisition of Bear Stearns. It will take control of a portfolio of Bear Stearns' assets in the form of illiquid mortgage-related securities as of March 14. (According to an unnamed analyist, the securities are not collateralized subprime mortgages. ) The portfolio will be held by a special purpose limited liability company formed for this purpose. Blackrock Financial Management Inc. will manage the portfolio under guidelines established by the NYFed to minimize disruption to financial markets and maximize recovery value.

JPMorgan has provided $1 billion in financing in the form of a subordinated note at the primary credit rate plus 475 points (currently 7.25%) of any losses associated with the portfolio. ( It also guarantees Bear Stearns' existing debt to the NYFed). The LLC pledges the portfolio as security for $29 billion in ten year renewable term financing from the NYFed at current prime (2.5%). The NYFed secured loan is without recourse to JPMorgan. Any realized gains on the portfolio will accrue to the NYFed . Losses after the first $1 billion (which JPMorgan will bear under its subordinated note) will be the NYFed's. The NYFed's action is pursuant to its authority under section 13(3) of the Federal Reserve Act.

Track the Movement of the Bear

The restructuring of the JPMorgan/Bear Stearns deal was provided for in section 6.10 of the Merger Agreement. The Amended Guaranty Agreement and Amended Merger Agreement are here.

Read Prof. Gordon Smith's (BYU, Conglomerate) thinking about the JPMorgan guaranty, and the Deal Professor's (Steven Davidoff, Wayne State) analysis of the new terms.

Faster than the SEC

Why didn't the SEC see the Bear Stearns collapse coming and do something? On March 11, three days before the Fed's action, reporters asked SEC Chair Christopher Cox if he was concerned about the Bear Stearns group. "We have a good deal of comfort about the capital cushions at these firms at the moment."

Jesse Westbrook for Bloomberg.com reports that in a statement issued three days later, the day the Fed stepped up to the plate, the SEC reiterated that as of March 11 Bear Stears had "a substantial capital cushion.''

Then all hell broke loose.

"Beginning on that day [] and increasingly throughout the week, lenders and customers [] began to remove funds from the firm,'' the SEC said. "As a result, Bear Stearns' excess liquidity rapidly eroded.'' In other words, Bear Stearns experienced an old-fashioned run. Its clients wanted their money and its usual sources of liquidity wanted nothing to do with it.

Bear Stearns Chief Executive Officer Alan Schwartz blamed dirty rumors for triggering the run.
He said: "We have tried to confront and dispel these rumors and parse fact from fiction.'' But, that didn't work. Once the stink is in, it's in.

Where was the SEC? It was "working closely'' with the Fed and the Treasury Department to ensure "orderly and liquid markets.''

"Criticizing SEC examiners is unfair,'' said Robert Neff, a former Bear Stearns risk manager. "They've become every bit as strong and vigilant as the Fed. The SEC just doesn't have the ultimate power of the checkbook.''

That's right Jimmy, this was a job for SuperFed. (I just checked. Providing a quick source of non-recourse liquidity is not among Superman's super powers.)

Faster Than a Speeding Bullet?

Red Lion was out of pocket when the deal went down but don't worry, I'm on it now. Before you get your knickers in a knot from reading media coverage, read what JPM told its shareholders about the deal.

Here's how the terms sheet describes the Fed's participation: Special Fed lending facility in place; non-recourse facility to manage up to $30B +/- of illiquid assets; largely mortgage related.

I wish I could write like that. Here's the dealio for realio: The Fed guaranteed around $30 million of debt to Bear Stearns on a non-recourse basis, meaning with no recourse to Bear Stearns if the debt is worthless. The total tab to the Fed will depend on how "illiquid" the "largely mortgage related assets" really are. Loren Steffy described the assets as a "toxic debt pool." The sun may come out tomorrow and if capital markets rebound, the debt may pay out, reducing or even reversing the Fed's exposure.

Is the Fed's guarantee a moral hazard-creating big government bailout? Or was it necessary to avoid an even bigger whollop to an already shaky capital market? As the media coverage attests, those are not yes/no questions. 'Bailout' is in the eye of the beholder.

Former Fed Chair, Paul Volcker added another question (LATimes blog, LALand):

Why is the Fed rescuing a non-bank [Bear Stearns -- really, Bear Stearns shareholders] that it does not regulate? Isn't that a job for Congress? Why is the Fed guaranteeing bad loans? The Fed regulates -- and lends to -- banks, not investment houses. . . . .

Volcker answers his own question: [T]he government ought to be taking responsibility for that kind of action, not the Federal Reserve, which is an independent agency designed to provide an ample supply of liquidity to the economy but not too much, protect against inflation, not to protect particular sectors of the economy from bad loans.

The Fed is fast-- way faster than Congress. It's fast because its shaded from the relentless glare of CNN cameras and November elections. No need for focus groups and subcommittee hearings. The Fed just does it. Here's what it had to say in a press release posted to its website on March 14:

The Federal Reserve is monitoring market developments closely and will continue to provide liquidity as necessary to promote the orderly functioning of the financial system. The Board voted unanimously to approve the arrangement announced by JPMorgan Chase and Bear Stearns this morning.