May 14, 2020

Federal Deposit Insurance Commission (FDIC)

Federal Deposit Insurance Commission (FDIC)

Practical Aspects of the Deposit Insurance System
      Thad Grundy, Jr., 44(1): 169–210 (Nov. 1988)
With financial institutions closing at a pace not seen since the Depression, deposit insurance has become a significant concern for millions of depositors at banks and savings institutions. This Article examines the origins of the deposit insurance system, the enabling statutes, and the FSLIC and FDIC deposit insurance regulations.

Enforcing Agreements with Failed Depository Institutions: A Battle with the FDIC/RTC Superpowers
      Robert J. Stillman, 47(1): 99–125 (Nov. 1991)
With bank failures on the rise, this timely Article discusses the added rights and protections given to the FDIC and RTC when they take over failed depository institutions. Among other things, these protections estop customers of failed banks from enforcing otherwise valid agreements and give the FDIC and RTC power to disaffirm and repudiate such agreements or to enforce agreements that otherwise would terminate on the bank's insolvency.

Advising Corporate Directors After the Savings and Loan Disaster
      Harris Weinstein, 48(4): 1499–1507 (Aug. 1993)
The savings and loan and bank failures of recent years have generated extensive litigation testing theories of liability applicable to directors of depository institutions. The author, formerly Chief Counsel of the Office of Thrift Supervision, argues that the traditional business judgment rule should prevail over simple negligence theories advanced by the FDIC and the RTC. By resting on post hoc reexaminations of business decisions, the simple negligence theory fails to take adequate account of the risk inherent in business decisions and unduly inhibits the service of qualified persons as corporate directors.

How Safe Are Institutional Assets in a Custodial Bank’s Insolvency?
     Edward H. Klees,68(1): 103 - 136 (November 2012)
It is a widely held belief among institutional investors that custody accounts are protected against a bank's insolvency in the United States. This assumption undergirds trillions of dollars of assets held in custody in U.S. banks. However, despite the 2008 financial crisis, little if any attention has been paid to analyzing whether this belief is, indeed, valid. This article argues that while the FDIC, as receiver of almost all failed banks in the United States, will likely protect custodied assets to the extent permitted by law, clients bear several significant legal and operational risks that could limit recovery of their custodied assets. While investors can protect against some risks, others may be outside their control. The article outlines these risks and proposes ameliorative steps for institutional investors.

Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
     70(2): 319-320 (Spring 2015)

Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
     Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.

As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.

As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.

As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.