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Banking and Financial Expert Witness’s Insights on Systemically Important Financial Institution Litigation

Expert Witness: Don Coker
Renowned banking and finance expert witness consultant Don Coker calls on his experiences as a consultant and expert witness in high-stakes banking and financial institution litigation for over twenty years for clients including the U.S. Government, the IRS, financial services companies including over 105 banks, and others as he defines and explains some of the factors and important nuances that will be important in financial litigation that results from the recent MetLife SIFI court decision.

It was a mystery to the entire United States financial community – including myself - when the Financial Stability Oversight Council (“FSOC”) concluded that MetLife – a life insurance company – was a systemically important financial institution (“SIFI”); so it was not surprising that the Council’s “SIFI” stamp was overturned by a judge that apparently knows more about finance than does the FSOC.

Life insurance! What were they thinking? The FSOC has not given a definition of a Systemically Important Financial Institution that can be used as guidance, and it appears that the Council was simply falling back to
a “duck test” that was slanted against any type of large financial company. Well, no one disputes that MetLife is a large financial company; but it seems that it could only get into severe financial straits if a whole lot of its policyholders happen to die at the same time, which is, statistically and realistically, highly unlikely. Otherwise, a life insurance company sits there collecting monthly premiums, investing the premiums to make a profit, and paying claims as they occur at a fairly predictable statistical rate. It is not a very tricky business plan.

The Regulators’ Hazy Explanation

The banking regulatory authorities, including the Basel Committee, has chicken-stepped around the issue of what makes a financial institution systemically important; but there are some factors that have emerged that provide a skeletal description:

? Size – Well, obviously it has to be big in order to be systemically important; but how big? What about those non-financial companies that we see listed each year that have huge amounts of cash on hand and some even have more cash on hand than does the United States government? For example, Apple, Microsoft, Google/Alphabet, Cisco Systems, Oracle, GE, Pfizer, Amgen, Johnson & Johnson, Intel, Qualcomm, Berkshire Hathaway, et al. I wouldn’t want to be the one that had to break it to Warren Buffett that his company was going to be designated as a Systemically Important Financial Institution.

? Complexity – Complex by whose definition? Given what I just explained about MetLife’s simple business plan, why was Met Life considered complex? Wouldn’t just about every financial company in the country be more complex than MetLife? Not much insight revealed here.

? Interconnectedness – Wouldn’t this include all large businesses? It seems to me that it is impossible for a large business to be an island unto itself. And making use of sophisticated funding sources, as are available to any large business, does not make a business an SIFI.

? Lack of readily available substitutes for the financial infrastructure it provides - I can’t think of a financial product for which there is no readily available substitute. It is a very competitive marketplace out there in the financial services world.

? Cross-jurisdictional (read “Global”) activity – Almost all large, complex organizations spill over national boundaries. Again, not much guidance offered here.

Given these hazy guidelines, it is no wonder that the geniuses in Basel, Switzerland, have dithered for years trying to divine what Chris and Barney had in mind. And it is no wonder that Chris and Barney left the scene of the crime after they dumped this mess on us.

The alphabet soup gets a little thicker here. It is important to note that the US Treasury Department and the Federal Reserve both are members of the Basel-based Financial Stability Board (“FSB”) that was created by the G-20 seven or so years ago, and is largely European oriented. So the result is that the US Treasury Department and the Federal Reserve are members of both the FSB and the FSOC and absorb a lot of the thinking of the FSB by osmosis and bring it over to the US.

Why we think that it is a good idea to place the control over large segments of our economy in the hands of Europeans who fail year after year to perform up to the level of our economy is a mystery to me. I ran and regulated, and had a hand in running, several financial institutions for many years, and never once had to call Europe to ask for money or advice; and everything went just fine. Europeans should be calling us for advice. (In fact, they do call me from time to time; and I do give them advice.)

How to Handle the Problem

Any financial institution that is considering trying to shake off – or avoid - the SIFI designation will need to prepare a detailed expert analysis of its operations that addresses at least the five bullet points cited above as well as any other obvious characteristics that may apply to the particular company.

This analysis should be similar to an economic substance analysis but go further in its explanations of how the company’s operations do not fit the mold that Dodd-Frank says warrants the SIFI designation. Demonstrating, in plain understandable business terms, how the company makes money and how the company’s operations do not fit the requirements for the SIFI designation will provide the best chance of avoiding or ending the designation.

Note that this should not be an accounting exercise since the FSOC doesn’t really care what you have to say, and the final decision will be made, as it was in the Met Life case, by a Judge who will understand a well thought out business analysis that is written in non-technical terms that a layman will understand.

It adds an important layer of credibility if the analysis is completed by an independent third-party rather than by the company itself.

Choose the writer of your analysis carefully, and keep it simple and logical, and you will have the best shot at achieving your goal.

© 2016 by Don Coker.

615 cases, 150 testimonies, plaint. & defend. All areas of banking, finance, real estate, business & IP valuation, damages, embezzlement. Listed in expert databases recommended by DRI, AAJ members.

Clients: individuals, 68 of top 400 law firms, 105 banks, 50 insur. cos., government clients incl. IRS, FDIC. Clients in 37 countries, work in 64 countries.

Previous Citicorp officer + other banks & 2 years as a high-level governmental bank regulator.

BA, postgrad, executive ed.- Alabama, Houston, SMU, Spring Hill, Harvard Business School.

Published: 1 book, 100 articles. Quoted often.

Copyright Don Coker

Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer.For specific technical or legal advice on the information provided and related topics, please contact the author.

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